Precedent Lev 2ukr 2012

UkraineA Level Two- General Country ReportPetitioned bywww.precedent-ilf.com

Reference work completed byIuliya Alexandrovna Ustimenko

This report was prepared as an account of work sponsored by Precedent ILF. Precedent ILF, nor any of their employees, makes any warranty, expressor implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of any information, apparatus, product, orprocess disclosed, or represents that its use would not infringe privately owned rights. Reference herein to any trademark, manufacturer, or otherwise,does not necessarily constitute or imply its endorsement, recommendation, or favoring by Precedent ILF thereof. The views and opinions of authorsexpressed herein do not necessarily state or reflect those of Precedent ILF. The entire works contained in this report have been gained from theinternet and other sources and work is cited where possible. If any work is not cited and you are the originator of said work please send a letter toPrecedent ILF for reference.

April 2012

http://precedent-ilf.com/

UkraineLevel Two Report

TopReport Petitioned by International Legal Firm Precedent

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Figure 1 Mobile operators (as of March 2008) ...................................................................................................... 8Figure 2 Key telecom parameters - 2010-2012.................................................................................................... 10Figure 3 Key Statistics ......................................................................................................................................... 11Figure 4 Structure of Equipment for ATS Operating in Local Telephone Networks.......................................... 18Figure 5 Teledensity compared with population ................................................................................................. 20Figure 6 Rates for telecommunication services ................................................................................................... 20Figure 7 CIS Member States (USD) .................................................................................................................... 20Figure 8 Telecommunication Services Provided to Foreign States (USD) ......................................................... 21Figure 9 Revenues from rendering telecommunication services in Ukraine, bln UAH ...................................... 24Figure 10 Structure of the revenues from rendering telecommunication services in Ukraine. ........................... 24Figure 11 Financial highlights of Ukrtelecom ..................................................................................................... 26Figure 12 Market Value of 1 Ukrtelecom JSC share, UAH ................................................................................ 28Figure 13 Ukrtelecom’s share in the fixed telephony market and internet market in terms of the revenues earned.............................................................................................................................................................................. 29Figure 14 Revenues from rendering telecom services ......................................................................................... 30Figure 15 Structure of the revenues(Ukrtelecom) ............................................................................................... 30Figure 16 Kye investment sectors, Ukrtelecom ................................................................................................... 31Figure 17 Number of Ukrtelecom's Wi-Fi hot spots, pcs .................................................................................... 34Figure 18 Number of mobile subscribers, ths ...................................................................................................... 34Figure 19 Number&Revenues from the high-speed Internet access services, mln UAH.................................... 35Figure 20Number of fixed telephone lines .......................................................................................................... 36Figure 21 Core services: revenues, structure and total amount. .......................................................................... 38Figure 22 Transport Telecommunication Network of Ukrtelecom JSC.............................................................. 40Figure 23 Multiservice Packet Network of Ukrtelecom JSC............................................................................... 41Figure 24 International Connections of Packet Network..................................................................................... 41Figure 25 Trunking communication .................................................................................................................... 44

TABLE OF CONTENT...Communication...................................................................................................................................................... 7Transportation .................................................................................................................................................... 110Banking System Services................................................................................................................................... 152Medical Services ................................................................................................................................................ 204Entry and Exit Visa Requirements for US & Non-US Citizens ........................................................................ 230Required Steps to Create a Business.................................................................................................................. 270Licensing of a Foreign Business ...................................................................................................................... 274Labor Code/Law ................................................................................................................................................ 303Revenue Department Tax Guidance .................................................................................................................. 319Bibliography ...................................................................................................................................................... 346




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Figure 26 Subscription rate (without regard to traffic) ........................................................................................ 45Figure 27 Regional levels of mobile penetration, Q3 2007 ................................................................................. 46Figure 28 Effective mobile price per minute in a sample of Eastern and Central European countries, 2007 ..... 47Figure 29 Mobile penetration and Total Outgoing Minutes of Use in Ukraine................................................... 47Figure 30 Economic Impact of the mobile communications industry in Ukraine. .............................................. 48Figure 31 Mobile value chain in Ukraine in 2007(UAHs millions) .................................................................... 49Figure 32 Productivity impact of mobile communication ................................................................................... 50Figure 33 Increasing Intangible benefits enjoyed by consumers in Ukraine. ..................................................... 50Figure 34 Mobile operators' market shares over time.......................................................................................... 52Figure 35 Mobile connections and mobile penetration in Ukraine over time. .................................................... 52Figure 36 Percentage of prepaid and postpaid customers for each operator (2007)............................................ 53Figure 37 ARPU levels over time, UAHs............................................................................................................ 53Figure 38 Earnings and Subscriber base .............................................................................................................. 54Figure 39 Operators Rating.................................................................................................................................. 56Figure 40 Increase in subscribers, mobile market (January 2012)…………………………………………… 56Figure 41 Mobile Market shares .......................................................................................................................... 56Figure 42 Mobile Industry and market trends...................................................................................................... 57Figure 44 Ukrainian mobile market (revenue & share in nominal GDP) ............................................................ 57Figure 43 Expected penetration Growth .............................................................................................................. 57Figure 45 Mobile market revenue forecast .......................................................................................................... 58Figure 46 Rates of Kievstar mobile operator ....................................................................................................... 59Figure 47 Part 1 KyivStar's Analytical information 2008-2010 .......................................................................... 60Figure 48 Figure 47 Part 2 KyivStar's Analytical information 2008-2010.......................................................... 61Figure 49 Figure 47 Part 3 KyivStar's Analytical information 2008-2010.......................................................... 61Figure 50 MTS Rates ........................................................................................................................................... 62Figure 51 MTS strategy ....................................................................................................................................... 63Figure 52 MTS Ukraine revenue dynamics ......................................................................................................... 63Figure 53 MTS Ukraine capital investments in 2004 -2009E ............................................................................. 64Figure 54 MTS Ukraine backbone network......................................................................................................... 64Figure 55 Key strategic priorities for MTS Ukraine in 2010-2012 .................................................................... 65Figure 56 MTS Strategy: Direction-tactics-benefits............................................................................................ 65Figure 57 MTS Ukraine Highlights ..................................................................................................................... 66Figure 58 Operating Income Before Depreciation and Amortization (OIBDA) and OIBDA margin of the MTCUkraine................................................................................................................................................................. 66Figure 59OIBDA margin ..................................................................................................................................... 66Figure 60 MTS Ukraine financial highlights in 2011 .......................................................................................... 67Figure 61 MTS Ukraine operating indicators ...................................................................................................... 68Figure 62 MTS Ukraine revenue indicators......................................................................................................... 69Figure 63 Internet and major social networks penetration in selected countries as of Q2 2011 ......................... 75Figure 64 Vkontakte.ru overview. ....................................................................................................................... 78Figure 65 Odnoklassniki.ru overview.................................................................................................................. 78Figure 66 Twitter overview. ................................................................................................................................ 79Figure 67 Facebook overview............................................................................................................................. 79Figure 68 Ukr.net overview. ................................................................................................................................ 80




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Figure 69 Livejournal overview........................................................................................................................... 80Figure 70 Number of Credit cards. ...................................................................................................................... 81Figure 71 Web money.......................................................................................................................................... 81Figure 72 Ukraine Subscriber Numbers for fixed, mobile and Internet services ................................................ 83Figure 73 Ukraine Penetration Rates ................................................................................................................... 83Figure 74 EC assistance to Ukraine ..................................................................................................................... 89Figure 75 Total revenues from the broadband internet services in Ukraine, mln 3Q2010-3Q2011 ................. 100Figure 76 Number of Subscribers and the level of penetration for the broadband internet, 2Q2010-4Q2011 . 100Figure 77 Main broadband internet providers, ths 1Q2011 - 3Q2011............................................................... 101Figure 78 Programming languages in Ukraine. ................................................................................................. 104Figure 79 UkrPoshta – key data......................................................................................................................... 105Figure 80 Tariff indices for post and communication services for enterprises, institution, organizations in 2011(to the corresponding month of the previous year,%)........................................................................................ 105Figure 81 Tariff indices for post and communication services for enterprises, institution, organizations in 2011............................................................................................................................................................................ 106Figure 82 Tariff indices for post and communication services for enterprises, institution, organizations in 2011(to December of the previous year)(percent) ..................................................................................................... 106Figure 83 Revenues from services provided by post and communication, 2011 .............................................. 107Figure 84 Communication subscribers, 2011 .................................................................................................... 108Figure 85 Ukraine Communication Sector - World Bank Report ..................................................................... 109Figure 86 Mitigation policies/measures with high potential to deliver reductions in transport GHG emissions............................................................................................................................................................................ 112Figure 87 International contribution .................................................................................................................. 113Figure 88 International LPI results .................................................................................................................... 114Figure 89 Domestic LPI results, time and cost data. ......................................................................................... 114Figure 90 LPI ranking and scores 2010 ............................................................................................................. 114Figure 91 Clearance overview ........................................................................................................................... 115Figure 92 Key indicators of transport sector (Part 1) ........................................................................................ 116Figure 93 Key indicators of transport sector (Part 2) ........................................................................................ 117Figure 94 Projects set in operation from the beginning of 2008........................................................................ 118Figure 95 Innovation and investments perspectives. ......................................................................................... 118Figure 96 Map of current, being under construction and designed warehouse projects in Kiev region. .......... 119Figure 97 Freight and Passenger Transportation Statistics ................................................................................ 120Figure 98 Transport Services (% of commercial services exports) ................................................................... 120Figure 99 Cargo transportation, 2011 ................................................................................................................ 120Figure 100 Passenger transportation, 2011 ........................................................................................................ 121Figure 101 Railway map of Ukraine.................................................................................................................. 124Figure 102 Railway transport performance separate indicators, 2011 .............................................................. 124Figure 103 Tariff indices for cargo transportation by rail in 2011 (to the previous quarter) (percent) ............. 125Figure 104 COMBINED STATEMENT OF FINANCIAL POSITION ........................................................... 127Figure 105 Road corridors ................................................................................................................................. 130Figure 106 Tariff indices for pipeline cargo transportation in 2003–2011....................................................... 131Figure 107Road map of Ukraine........................................................................................................................ 132Figure 108 Odessa port ...................................................................................................................................... 136




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Figure 109 Ancillary transport services of sea and river ports and wharfs on freight processing, 2011 ........... 136Figure 110 Turnover of Odessa in 1996 - 2011 years. ...................................................................................... 137Figure 111 Import/Export Turnover of Odessa in 1996 - 2011 years, TEU...................................................... 137Figure 112 The share of transit cargo in the port's container turnover, thousand tons ...................................... 138Figure 113 Total Assets ..................................................................................................................................... 152Figure 114 Ukrainian Banking System Assets Growth & Structure. ................................................................ 153Figure 115 Western-Owned banks..................................................................................................................... 154Figure 116 Banks under NBU Temporary Administration................................................................................ 155Figure 117 Bank closed since 01-Oct-2008....................................................................................................... 155Figure 118 Loans and Structure ......................................................................................................................... 156Figure 119 Assets/Liabilities Imbalances .......................................................................................................... 157Figure 120 Income and Expenses ...................................................................................................................... 158Figure 121 Income and Expenses charts............................................................................................................ 159Figure 122 The structure of income and expenditures of banks as of 01.03.2012 ............................................ 160Figure 123 The structure of the Department for Financial Monitoring of the NBU ......................................... 161Figure 124 Financial Monitoring in the Banking System of Ukraine ............................................................... 161Figure 125 Financial monitoring in a Bank ....................................................................................................... 162Figure 126 Gross External Debt, By Sectors ..................................................................................................... 167Figure 127 Ukraine's External Debt Service Needs........................................................................................... 167Figure 128 Non-performing Loans in Selected Emerging Markets................................................................... 168Figure 129 Non-performing loans, right scale ................................................................................................... 168Figure 130 Stock of Bank Credit ....................................................................................................................... 169Figure 131 Dynamics of Income, expense and profit of the banking sector of Ukraine ................................... 171Figure 132 Deposits by sectors of economy ...................................................................................................... 172Figure 133 Deposits by types of currency ......................................................................................................... 173Figure 134 Credits by sectors of economy ........................................................................................................ 175Figure 135 Credits by types of currency............................................................................................................ 176Figure 136 Number of initial payments and electronic settlement notices carried out ..................................... 178Figure 137 Share of cash outside banks in narrow money ................................................................................ 178Figure 138 Number of cardholders .................................................................................................................... 179Figure 139 Number and value of operations on payment cards issued ............................................................. 180Figure 140 Average turnover on one card ......................................................................................................... 181Figure 141 Some indicators of the National System of Mass Electronic Payments .......................................... 181Figure 142 Card payment infrastructure in Ukraine .......................................................................................... 182Figure 143 Number of payment cards per capita............................................................................................... 183Figure 144 Number of card payments per capita in several CEE and Central Asia .......................................... 184Figure 145 Share of credit cards ........................................................................................................................ 184Figure 146 Number and volume of payment card operations in Ukraine.......................................................... 185Figure 147 Types of payment cards issued by Ukrainian banks ....................................................................... 185Figure 148 Structure of payment card transactions ........................................................................................... 186Figure 149 Ukrainian card market ..................................................................................................................... 187Figure 150 Some indicators of settlement and cash servicing of customers ..................................................... 189Figure 151 The dynamics and structure of first -time registered disease in Ukraine in 2010 ........................... 205Figure 152 Medical insurance in Ukraine.......................................................................................................... 210




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Figure 153 Overview of the health system ........................................................................................................ 215Figure 154 Health care financing flowchart ...................................................................................................... 220Figure 155 Health expenditures as a share (%) if GDP ..................................................................................... 222Figure 156 Health expenditures in US$ PPP per capita in the WHO ................................................................ 223Figure 157 Percentage of total expenditure on health according to source of revenue ..................................... 225Figure 158 Vaccination Coverage Trends ......................................................................................................... 242Figure 159 Estimated Total Fertility Rate per Woman...................................................................................... 243Figure 160 Infant mortality rates ....................................................................................................................... 244Figure 161 Picture of visa ................................................................................................................................. 264Figure 162 Ranks ............................................................................................................................................... 270Figure 163 How Ukraine ranks on Doing Business topics ................................................................................ 270Figure 164 What it takes to start a business in Ukraine..................................................................................... 271Figure 165 How Ukraine and comparator economies rank on the ease of starting a business .......................... 272Figure 166 The ease of starting a business in Ukraine ...................................................................................... 272Figure 167 Has starting a business become easier over time? (part 1) ............................................................. 273Figure 168 Has starting a business become easier over time? (part 2) ............................................................. 274Figure 169 How has Ukraine made starting a business easier - or not? ............................................................ 275Figure 170 Standardized company..................................................................................................................... 275Figure 171 Summary of procedures for starting a business in Ukraine—and the time and cost....................... 277Figure 172 The differences between two types of AT....................................................................................... 287Figure 173 Capital structure dynamics .............................................................................................................. 293Figure 174 JSC requirements............................................................................................................................ 294Figure 175 Quick comparison of joint stock companies and limited liability companies ................................. 295Figure 176 Type of mandatory social security .................................................................................................. 308Figure 177 Tax collection. ................................................................................................................................. 319Figure 178 How Ukraine and comparator economies rank on the ease of paying taxes ................................... 321Figure 180The ease of paying taxes in Ukraine over time ................................................................................ 322Figure 181 Has paying taxes become easier over time?(part1) ......................................................................... 323Figure 182 Has paying taxes become easier over time?(part2) ......................................................................... 324




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Communication

Basic Facts

Telephones - main lines in use:13.026 million (2009)country comparison to the world: 20

Telephones - mobile cellular:55.333 million (2009)country comparison to the world: 20

Telephone system:general assessment: Ukraine's telecommunicationdevelopment plan emphasizes improving domestictrunk lines, international connections, and the mobile-cellular system domestic: at independence inDecember 1991, Ukraine inherited a telephone systemthat was antiquated, inefficient, and in disrepair; morethan 3.5 million applications for telephones could notbe satisfied; telephone density is rising and thedomestic trunk system is being improved; about one-third of Ukraine's networks are digital and a majorityof regional centers now have digital switchingstations; improvements in local networks and localexchanges continue to lag; the mobile-cellulartelephone system's expansion has slowed, largely dueto saturation of the market which has reached 120mobile phones per 100 people international: countrycode - 380; 2 new domestic trunk lines are a part ofthe fiber-optic Trans-Asia-Europe (TAE) system and

3 Ukrainian links have been installed in the fiber-optic Trans-European Lines (TEL) project thatconnects 18 countries; additional international serviceis provided by the Italy-Turkey-Ukraine-Russia(ITUR) fiber-optic submarine cable and by anunknown number of earth stations in the Intelsat,Inmarsat, and Intersputnik satellite systems

Broadcast media:TV coverage is provided by Ukraine's state-controllednationwide broadcast channel (UT1) and a number ofprivately-owned television broadcast networks;Russian television broadcasts have a small audiencenationwide, but larger audiences in the eastern andsouthern regions; multi-channel cable and satellite TVservices are available; Ukraine's radio broadcastmarket, a mix of independent and state-ownednetworks, is comprised of some 300 stations (2007)

Internet country code: .ua

Internet hosts:1.098 million (2010)country comparison to the world: 42

Internet users:7.77 million (2009)country comparison to the world: 38

https://www.cia.gov/library/publications/the-world-factbook/rankorder/2150rank.html?countryName=Ukraine&countryCode=up&regionCode=eur&rank=20#up






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Mobile Operators (as of March 2008)

Rank Operator TechnologySubscribers

(inmillions)

Ownership

1 Kyivstar GSM 23 Telenor (56.51%), Alfa Group(43.49%)

2 MTS GSM,CDMA 19 MTS (100%)

3 life:) GSM 9 Turkcell (54.2%), SCMHoldings (45.8%)

4 Beeline GSM 2 VimpelCom

5 Utel UMTS 0.3 Ukrtelecom

6 PEOPLEnet CDMA 0.3 Telesystems of Ukraine

7 Intertelecom CDMA 0.3 Intertelecom company

8 CDMAUkraine CDMA 0.3

InternationalTelecommunication Company(ITC)

9 Velton CDMA ? Velton Telecom

10 GoldenTelecom GSM 0.05 Golden Telecom Inc. (GLDN)

Figure 1 Mobile operators (as of March 2008)

Radio broadcast stations: 524, station types notavailable (2006)

Radios: 45.05 million (1997)

Television broadcast stations: 647 (plus 21 repeaterstations that relay broadcasts from Russia) (2006)

Televisions: 18.05 million (1997)

Telephone system: Ukraine's telecommunicationdevelopment plan, running through 2005, emphasizesimproving domestic trunk lines, internationalconnections, and the mobile cellular system. Atindependence in December 1991, Ukraine inherited atelephone system that was antiquated, inefficient, andin disrepair; more than 3.5 million applications fortelephones could not be satisfied; telephone density isnow rising slowly and the domestic trunk system isbeing improved; the mobile cellular telephone system

is expanding at a high rate. Two new domestic trunklines are a part of the fiber-optic Trans-Asia-Europe(TAE) system and three Ukrainian links have beeninstalled in the fiber-optic Trans-European Lines(TEL) project that connects 18 countries; additionalinternational service is provided by the Italy-Turkey-Ukraine-Russia (ITUR) fiber-optic submarine cableand by earth stations in the Intelsat, Inmarsat, andIntersputnik satellite systems.

Telecom Trade AgreementsWTOUkraine is currently in negotiations to join the WTO,but is not a signatory to the Information TechnologyAgreement (ITA).

Leading Service ProvidersUkrtelekomhttp://www.ukrtelecom.uaUkrainian Mobile Communications (UMC)http://www.umc.uaGolden Telecom Ukrainehttp://www.goldentele.comKyivstarhttp://www.kyivstar.net/en/Astelit (Digital Cellular Communications)

ContactsRegulatoryUkraine National Commission for CommunicationsRegulationshttp://www.nkrz.gov.ua/

http://en.wikipedia.org/wiki/ITUR_%28cable_system%29

http://en.wikipedia.org/wiki/Intelsat

http://en.wikipedia.org/wiki/Inmarsat

http://en.wikipedia.org/wiki/Intersputnik

http://en.wikipedia.org/wiki/Kyivstar

http://en.wikipedia.org/wiki/Telenor

http://en.wikipedia.org/wiki/Alfa_Group

http://en.wikipedia.org/wiki/Mobile_TeleSystems

http://en.wikipedia.org/wiki/Mobile_TeleSystems

http://en.wikipedia.org/wiki/Life:%29_Ukraine

http://en.wikipedia.org/wiki/Turkcell

http://en.wikipedia.org/wiki/SCM_Holdings

http://en.wikipedia.org/wiki/SCM_Holdings

http://en.wikipedia.org/wiki/Beeline_%28telecommunications%29

http://en.wikipedia.org/wiki/VimpelCom

http://en.wikipedia.org/wiki/Ukrtelecom

http://en.wikipedia.org/wiki/Utel_%28telecommunications%29

http://en.wikipedia.org/wiki/PEOPLEnet

http://en.wikipedia.org/wiki/Golden_Telecom

http://en.wikipedia.org/wiki/GSM





http://en.wikipedia.org/wiki/CDMA



http://en.wikipedia.org/wiki/UMTS




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Overview

One of Eastern Europe’s largest countries,Ukraine enjoyed strong economic growth inthe early part of the century, though incommon with its neighbors the country hasbeen adversely impacted by the globaleconomic turmoil. It was obliged to turn tothe IMF for assistance in late 2008, and hassince worked to restore economic health. Thetelecoms sector has not fared as badly asother areas, but since 2008 revenue growthhas been minimal. This is likely to continueinto 2012 at least though thereafter theprospects are likely to improve as liquidityissues lessen and the economy as a whole

improves. Although Ukraine has important economic ties with Russia, reflected in Russian investment in thecountry’s telcos, it has sought an increasingly close relationship with the EU, and the government activelypursues a policy of EU integration. This would have significant implications for Ukraine’s telecom sector, notonly in terms of tighter regulation but also in its capacity to cope with competitive pressure and market forceswithin the Union. Ukraine’s large population supports a significant telecom market which has grown steadily inrecent years, weathering the economic demise better than almost all other market sectors. The market grewmore than 6% in 2011, to some UAH50.3 billion, but growth in 2012 may reach only 4%, partly due tosaturation in the mobile market and low growth in fixed-line services. The telecom market and regulatoryregime will be influenced by the country’s prospective membership to the EU. However, recent internalpolitical events have been criticized by Europe’s political leaders. This may jeopardize the free-trade agreementbetween Ukraine and the Union, and delay further progress towards accession.

As for telecoms, the sector desperately needs the regulatory clarity which the EC’s telecom framework candeliver. The influence of the EU, as well as the regulatory conditions which Ukraine must meet, would go farto promoting market competition. Until recently, the lack of an independent regulator and transparentregulatory system had discouraged investment from the major Western European telcos looking foropportunities beyond their highly competitive domestic markets, and thus contributed to market stagnation. TheEU, as well as Western European and Russian telcos, will be looking for some political, judicial and regulatorycertainties to encourage them to make further ties to the country. Fixed broadband take up in Ukraine isgrowing quickly on the back of increased competition and the flexibility of cross-platform availability. FttB-based broadband services are increasingly available, though thus far restricted to the main towns. Kyivstar’sfibre network now connects a large number of apartment buildings in over 100 towns, serving more than 3.8million units. Ukraine’s competitive mobile market is looking to develop mobile broadband services as the nextgrowth opportunity in the wake of operator investment in newer technologies such as HSPA. Demand forcontent is expected to grow significantly in coming years as falling mobile data tariffs lead to increasednumbers of mobile Internet users. However, thus far the major GSM operators have been hampered by lack oflicences to offer 3G services. However, the sale of the incumbent Ukrtelecom has meant that the company’sunprofitable mobile unit will be offloaded, with its spectrum likely to be reassigned.




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Key telecom parameters – 2010 – 2012

Sector 2010 2012 (e)Broadband:

Fixed broadband subscribers (million) 3.66 3.90Fixed-line telephony (million) 12.2 12.1

Mobile phone (million) 52.5 54.9Subscribers to telecoms services:

Fixed-line penetration 26% 25%Broadband penetration 9.9 10.4

Mobile SIM penetration (population) 112% 118%Figure 2 Key telecom parameters - 2010-2012

Key Highlights

Broadcasting revenue reached UAH2.1 billion in 2011 as DTTV services achieved national coverage.However, the sector continues to suffer from poor channel line-up, to the advantage of the CATV andsatellite sectors.

Ukrtelecom transferred mobile assets to a new unit, TriMob, in preparation for its sale later in 2012. In mid-2011 Kyivstar began selling excess base stations decommissioned as a result of its integration

with Beeline Ukraine: Kyivstar planned to remove two-thirds of Beeline’s former base stations. During 2011 Datagroup increased the capacity of its network in the Western direction to from 36Gb/s to

58Gb/s and in the Eastern direction from 139Gb/s to 229Gb/s. By the beginning of 2012 Kyivstar had expanded its FttH network to more than 100 cities, covering

some 3.8 million households.

Military and civilian government departments have agreed on a compromised version of a plan to convert a100MHz block of spectrum in the 2.1GHz band, costing UAH2.5 billion, of which a third is to come from theprivate sector mobile network operators and two-thirds from government funds. The move will fast-trackmobile broadband availability in remote areas in coming years. Ukraine’s possesses a significant telecomsmarket due to its large population. Competition is improving as alternative operators engage in infrastructure-based competition due to lack of an effective last mile network access regime. Wireless local loop and fibreoperators have been most active in this area. However the incumbent remains the dominant player, with theregulatory environment more likely to improve once privatization of the incumbent is completed. Drawingupon numerous statistics, this report provides a concise overview of the Ukrainian telecoms market, includingbrief profiles of major operators, telecom network infrastructure in the country and network developmentswhich are underway.Unfortunately, with the second largest population in Europe, Ukraine is one of the most underdevelopedmarkets for information and communications technology (ICT) in Europe. According to the Ukrainian Ministryof Transport and Telecommunications (MTT), by the midpoint of 2006, total revenues for thetelecommunications market were approximately $3.2 billion. One of the main impediments to the marketsdevelopment and growth has been the delayed privatization of the government owned incumbent operatorUkrtelekom. Mainly a result of political instability, the slow process to fully privatize the incumbent operatorhas delayed the upgrading of the fixed-line network infrastructure, and inhibited the mass deployment of wire-




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line telephone and data services. The highlight of the Ukraine telecom industry is the mobile and wirelesssector. There are over 41 million mobile phone subscribers in Ukraine. The mobile market is a highlycompetitive and quickly evolving environment. Most of the coverage is still concentrated in major urbancenters, but wireless carriers are aggressively investing in infrastructure to achieve countrywide servicecoverage and deliver value added services over next generation networks. Additionally, merger and partnershipactivity has been high throughout 2005 and 2006 as domestic and foreign investors attempt to establishstronger competitive positions. If the government of Ukraine can achieve sustainable stability, the Ukrainiantelecom market should emerge as one of the most attractive in Europe. As the investment in new equipmentcontinues, and the remaining government shares of Ukrtelekom are eventually sold, Ukraine presentssignificant business opportunities throughout the ICT industry.The Ukrainian communications sector reported total revenues at UAH 47.4 billion in 2010, up by 2.4 percent,year-on-year, according to the information from state communications agency Gossvyaz. Fixed telephonyrevenues declined by 6.8 percent to UAH 8.364 billion, BizLigaNet reported. Local telephony revenuesincreased by 1.7 percent to UAH 4.234 billion while DLD/ILD telephony revenues dropped 14.1 percent toUAH 4.130 billion. Mobile connection revenues reached UAH 28.837 billion, up 1.1 percent year-on-year,while internet access revenues grew 32.6 percent to UAH 3.799 billion and cable-TV revenues lifted 5.7percent to UAH 1.358 billion.

Key StatisticsPopulation 45,994,288 (July 2008 est.)GDP $140.5 billion (2007)Per capita GDP $1,750 (2005)Telecom revenue $ 3.2 billion (July 2006)Main lines 12.858 million (2007)Main line Penetration 30% (2005)Mobile subscribers 55.24 million (2007)Mobile penetration 88.3% (2006 est.)Internet users 10 million (2007)Internet User Penetration 12.2% (2005)Broadband Subscribers 50,000 (2005)

U.S. equipment exports to market $4.5 million (2005)Figure 3 Key Statistics

Sources: CIA World Factbook, Primetrica, USITC, and Business Monitor International

Ukrainian Telecommunications Sector Overview

The sector of telecommunications is one of the most essential fields of the infrastructure of the state, which isdesigned to satisfy public needs in the means and services of communications. The development oftelecommunication networks in Ukraine proceeds with allowance for the world-wide tendency towards theintegration of networks, systems and the service communications. This tendency requires to build and improvethe networks on the basis of equipment, which meets international standards and recommendations and renders




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the first quality services. The condition of the COMMUNICATIONS sector as of the end of 1997 and theextent to which it satisfies the needs of services in general is characterized by the following:

the greatest volume of services in the sector are provided by telephone communication, and on thewhole the progress of telecommunications is determined by the level of telephony, which is defined bythe density of phones. Currently this density is 18 telephones per 100 citizens, as against level 40-60phones per 100 citizens in the developed economies;

the technical condition of communication networks is suggested by the fact that existing telephonenetworks of communication are mainly analog and mainly built with utilization electromechanical(94%) commutation equipment, cables with copper wires and partly radio relay lines of communication,multiplexed analog systems of transmission; networks are insufficiently accommodated for transmittingdiscrete information, whose share in the overall interchange is persistently increasing;

the transmission of documentary information is realized basically by means of telegraphiccommunication; international telex communication is implemented via the central international station,which is located in Kyiv, the capital of Ukraine;

wire broadcasting covers all the country and ensures the voice transmission on three programs in theoblast centers and cities, and mainly on one program in the countryside;

hardware in the COMMUNICATION sector is outdated and to an appreciable extent physically worn.

It is necessary to mention that the sector does not provide in full the scope of services that are commonlyprovided in advanced economies of the world and are extremely indispensable for the progress of the economy,such as: bureau fax, ISDN services; some services are in their infancy: e-mail, data transmission for computers,telefax, radiotelephone communication. In terms of the overall level of provision with telephonecommunication, Ukraine lags significantly behind advanced countries, and in terms of other types ofcommunication (data transmission, cellular communication, etc..) the backlog is far greater. The sectoroperates nearly without loss-making enterprises, has no fiscal indebtedness and wage arrears. As per 1997, theconsolidated balance profit of state-owned enterprises engages in communication totaled 619 mln UAH. Nearly780 mln UAH was collected to the state budget and extra-budget funds. The state budget received 133.7 mlnUAH as fees for the issuing of licenses authorizing to fulfill different types of activities and for the utilizationof radio frequencies. Reasoning from the achieved volume of services and the development of the means ofcommunication in 1997, one can conclude that associations and enterprises provided services to all consumersworth 2.5 billion UAH. This index exceeds 4.9% the last-year's volume in relative terms. This increment wasachieved in the first place on account of the services of local telephone networks, distant and internationaltelephone communications. The profitability of the principal activity in the domain was 27.3%.The program ofthe sector's development domain was implemented both for the account of own financial sources (first of all, ofthe sectoral development fund), banker's credits (nearly 60%) and the funds of legal and physical personsattracted on a contractual basis and sale of securities. Since 1996, the fulfillment of the second phase of thecreation of the National Single Communication System of Ukraine has begun. In 1997, the "Concept of theDevelopment of National Networks of Electrical and Postal Communication for Public Use and the Formationof the Market for communication services in Ukraine for the Period ending 2010" was developed. The Conceptadjusts the goals of the sector development. This document defines also the sector's policy in restructuring andprivatization. At present, 952 communication operators with different forms of ownership are present on thecommunication market of Ukraine; in many cases non-state-owned operators offer services of better qualityand on more beneficial terms compared to state-owned enterprises. With the goal of adapting the state




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communication associations to market conditions, a program for restructuring of UKRAINIAN TELECOMassociation is approved by the Cabinet of Ministers Resolution #1 of 4.04. 98. This is a very important phase ofthe sector's development, because about 78 per cent of earnings from all communication services in Ukrainefalls to UKRAINIAN TELECOM.

Development history

Development of the Ukrainian telecommunications market can be divided into three major periods: beforemobile communications, establishment of the mobile segment and finally replacement of traditional telephoneservices by mobile communications. It all started at the beginning of the 90s last century when after thecollapse of the Soviet States Ukraine faced the need to build national telecommunications market. AfterUkraine was recognized as an independent state in 1991 national government fixed three priorities in telecomsector: international and inter-city, mobile communication and access to Internet and data transmission. Lateron these priorities materialized in three joint ventures: «UTEL», «UMC» and «INFOCOM» respectively. Inthose times national legislation restricted foreign capital share to 49%, so major investors were regional“telecoms” that later on were incorporated into “Ukrtelecom”. During the past time all three segments passedtheir unique way. UTEL was founded by Ukrtelecom, major investor, and equally American AT&T, GermanDeutsche Telekom and Dutch KPN. After launch of the first international telephone station in Kiev in 1992Ukraine received its own national code +380. To avoid growing competition between Ukrtelecom and Utelnational government decided to buy out foreign investors’ stake. De facto Utel was incorporated with itsparent-company in 2005 only after the decision was approved by Ukrtelecom’s shareholders.1991 Infocom was founded in by Ukrtelecom (51%) and German Controlware to build the first in Ukraine datatransmission network – UkrPack. After many years of co-exhistance during which Infocom built up thegeography of its services based on Ukrtelecom’s infrastructure time came when the conflict of interestsappeared as Ukrtelecom started to develop its own network for Internet access and data transmission. Difficultto say what will be the future of Infocom, the government will hardly insist on 49% stake buy-out.1992 A joint venture Ukrainian Mobile Communications, that started to provide services under the UMCbrand, was founded Ukrainian- German-Dannish-Dutch. 51% was owned by the Ukrtelecom, remaining stakewas equally divided between German Deutsche Telekom, Dannish TeleDanmark and Dutch KPN. On 1 July1993 the first mobile call in NMT (Nordic Mobile Telephone) standard was made. At that time there was lackof funds for clearance of 900 MHetrz frequencies used by defense and other special services. This resulted inspread of the NMT standard in Ukraine.1993 «Bankomsvyaz» (later on – «Golden Telecom») was set up;1994 «Kyistar» was founded,1995 – «Ukrainian Radiosysytems» (WellCOM trade mark, Kiev) and «Digital Cellular Communications(DCC, Donetsk).1996 30 thousand UMC users could use advantage of the national coverage. DCC started development of fixedradio access network in Donetsk in fact providing mobile services in the D-AMPS standard. «GoldenTelecom» started to develop GSM-1800 network in Kiev. Appearance of «Telesystems of Ukraine», foundedby American Quallcomm, that patented digital CDMA (Code Division Multiple Access) standard, 800 MHertz.1997 GSM era in Ukraine. State Telecom Department held tender on the most popular standard in the world –GSM licenses, which were won by UMC, Kyivstar and Ukrainian Radiosystems. UMC was first to launch itsGSM-netiwork, Kievstar was second. After appearance of the GSM standard mobile users were not any longertied to one phone, as with NMT, thanks to SIM-cards (Subscriber Identity Module) used in GSM phones.




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1998 Telesystems of Ukraine imported equipment for development of the CDMA network, however the launchdidn’t happen. Same year GSM-1800 license was acquired by a Ukrainian-Italian company Astelit that in thefollowing 7 years fails to start commercial operations. At the end of 1998 the last GSM-operator – UkrainianRadioSystems - came to market with network coverage limited to Kiev in the several few years. SMS servicebecame available to Ukrainian users. 1998 resulted in almost 150 thousand mobile users in Ukraine, more than100 thousand among them were the UMC users.1999 passed under the sign of prepaid mobile services: Sim-Sim by UMC, UNI by Golden Telecom GSM andAce&Base by Kievstar.Mobile communications became mass and extremely popular, the number of mobile users doubled and reached300 thousand.2000 Ukrainian government launched privatization of Ukrtelecom, UMC’s major shareholder. It took decisionthat Ukrtelecom should be offered for sale without its corporate stake in the mobile company. The year 2000was marked by seconds-tariffication of mobile calls and cancellation of obligatory license fromUkrchastotnaglyad (Ukrainian Frequency Use Control Committee) for a mobile phone use. Mobile companiesbegan to offer mobile internet access to their users with a help of WAP (Wireless Application Protocol)technology.The mobile harvest exceeded most optimistic expectations in 2000 - 800 thousand mobile users in Ukraine.2001 Biggest Ukrainian operators switched to GSM-1800 standard, which differs from the previous GSM-900by higher capacity ready to service 2,2 mln mobile users. CDMA operators – Velton Telecom (Kharkiv),International Telecommunication Company (ITC, Kiev) and International Telecommunications (Intertelecom,Odessa) – that appeared in 2001 got licenses for fixed access and use of fixed phones only. Biggest Turkishmobile company Turkcell took first attempt to enter Ukrainian market by registering its daughter companyNovacell. Due to the conflict between Ukrainianand South Korean shareholders of Ukrainian Radiosystems in 2002 Daewoo stepped out of URS. Privat groupand Optima Telecom gotcontrol over URS.2002 Biggest CIS mobile operator Mobile Telesystems (MTS) announced its intention to buy out 100% sharesof the UMC and receivedconsent of the parties. DCC from Donetsk started to look for possibilities to enter GSM market and acquiredAstelit together with GSM-1800 license. Both UMC and Kievstar started testing high-speed cordless datatransmission technology called GPRS (General Packet Radio Service), providing other than voice services totheir consumers.2003 First mobile virtual network operator Jeans appears in Ukraine. Jeans used technical base and network ofthe UMC and was oriented at young people. The most important developments of the year – introduction offree coming calls principle, which pushed further development of the national mobile market.2004 The amount of mobile users exceeded number of fixed phones users.2005 DCC managed to implement its GSM plans, when Astelit started providing services under Life:) brand. Itwas preceded by establishment of a joint venture between Turkish Turkcell and System Capital Management(before the venture was established SCM was major DCC’ owner). Number of users of the two market leaders– UMC and Kievstar – exceeded 10 mln each. Second biggest after MTS Russian mobile operator Vympelcom(Beeline), which bought out 100% shares of URS came to Ukraine. Norvegian Telenor, major shareholder ofKyistar and minority shareholder




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of Vympelcom, opposed the acquisition. However Alpha Group (Altimo), shareholder of both Kyistar andVympelcom succeeded to insist on URS acquisition. Disagreement between shareholders became reason of along lasting international conflict that is not yet over.2006 Beeline brand appeared in the Ukrainian market. Fierce competition caused by newcomers Life:) andBeeline, resulted in price wars in the mobile communications market. Number of mobile users exceeded thesize of Ukrainian population, mobile penetration today is around 117%. Another important development wasrescheduling by UMC of remaining from the NMT standard frequencies for CDMA-450 format which allowsdeveloping third generation (3G) mobile services.2007 New market strategy was announced by UMC which set new development trend and saved the marketfrom collapse. The company refused from price wars and shifted its policies to client retention, serviceexcellence and stimulating consumption. Major telecommunication event in 2007 became rebranding of theUMC into MTS, UMC became part of one of the world biggest international mobile brands, uniting 79 mlnusers in 6 countries. Already under new brand MTS the company offered to the market not just new tariffs butsuch technologically new services as BlackBerry (immediate mobile e-mail that provides access to e-mail andcorporate data banks) and high speed cordless internet access based on CDMA-450 standard which became thefirst step in Ukraine to introduction of 3G services.

Network overview

Ukrainian telephone network stayed practically undeveloped till recently. The situation is being changed withinlast years and old equipment has been updated. The results are noticeable in big cities and their suburbia, wherenew digital telephone exchanges have appeared. At the same time, the part of old equipment remains non-upgraded and quality of the connection can vary very much. In little towns and countryside the connection canbe very poor. Some villages might have only one telephone to serve the whole built-up area. Phone usagecharge at hotels is often 2-3 times higher than phone companies’ tariffs. With Ukrtelecom still a de facto statemonopoly, the situation regarding interconnection is so heavily regulated that the cost of calls from fixedphones to mobile phones is decided by Government decree and the redistribution of incomes from such calls isbased on agreements between Ukrtelecom and the mobile operators. This rate is currently 0.6UAH per minute(or approximately 0.10 Euro). These agreements between Ukrtelecom and mobile operators are signed on ayearly basis. At the present time, it is difficult to obtain data on interconnection between telephony operatorsbecause all sides have an interest in not revealing the actual conditions of their agreements. There is also nopublic information available regarding the existence of complaints regarding interconnection regulation.Interconnection is governed by Chapter IX of the 2003 Law on Communications and the subsequent draftNCCR Order on Interconnection and Calculation among Operators. The Law on Communications requiresoperators to provide other operators willing to conclude an interconnection agreement with the informationrequired for negotiation and to offer interconnection terms that are at least equivalent to those proposed to otheroperators (Art. 58). The NCCR is authorized to intervene in cases of failure by parties to negotiate (paragraph19, Art. 18). For fixed-to-mobile interconnection, the termination fee is 0.25 UAH (0.04 Euro) per minute. Theprice of call termination in the mobile-to-fixed market is decided by commercial agreement between theparties, but the tariff cannot be more than 0.25 UAH (0.04 Euro). Mobile to mobile interconnection is purely amatter for commercial negotiation. Charges for call origination and other telecommunication services aresubject to the control of the Antimonopoly Committee (AMC) of Ukraine in cases where the charges aredeemed to have a significant social impact. For instance, on 28 October 2005 the AMC adopted a decisionrecommending mobile operators abolish sign-up charges for users. The fact that the number of mobile




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subscribers exceeds the number of fixed subscribers in Ukraine was the basis for the argument that thisintervention was needed. This issue of interconnection is being addressed by the NCCR as a matter of priority,in order to deal with non-transparency in the interconnection regime. According to Article 59 of the Law onCommunications, the incumbent operator is required to publish an RIO annually in the official journal of theNCCR. The offer should include the current list of interconnection points, technical requirements andeconomic terms. However, Ukrtelecom has not yet published an RIO, as the Law on Communications requiresit to, since the Rules on Interconnection have not been adopted yet by the NCCR. The NCCR is drafting theRules of Interconnection and these are currently available for public discussion on the NCCR website(http://www.nkrz.gov.ua/ua/docs/pravila_v3.zip (Ukrainian language only)). Until Ukrtelecom’s monopoliesare weakened (and a decision on this issue is expected in the near future), there is little possibility of theintroduction of carrier selection and carrier reselection. Running parallel to Ukrtelecom’s monopoly are theillegal international voice services. As early as 2001, some estimates put the percentage of illegal internationalvoice services in Ukraine as a percentage of total voice traffic as high as 10 percent. Such problems oftenindicate issues with regulation or competition in the marketplace. However, this situation is changing and thereare now several private operators, such as Optima, that are in the process of developing their owninfrastructure. Ukrtelecom revenues from the different services on offer were as follows: Long distance callsrevenue – 2,633.9 billion UAH (427.39 million Euro) or 49.86 percent of total revenue; local fixed callsrevenue – 1,317 million UAH (213.71 million Euro) or 24.3 percent of total revenue; international call revenue– 950.7 million UAH (154.27 million Euro) or 18 percent of total revenue; IP – 156.417 million UAH (25.38million Euro), or 2.96 percent of total revenue.17 Other services such as paging made up the remainder. Noattempt has been made to calculate losses from the illegal termination of voice calls in Ukraine. Ukrtelecomoffers a termination rate for IP calls of 0.75/0.77 US$ (0.62/0.63 Euro). It is not known how many (if any) IPtelephony companies avail of this offer. Ukrtelecom sold to Epic Services Ukraine for UAH10.57 billion;telecom revenue expected to grow 5% for 2011; EU concerns of independent judiciary; regulator market datato August 2011; operator data to June 2011.Fixed telephony penetration has been steadily rising, and currentlystands at 23.2 percent, with mobile at 84.9 percent. As these figures are significantly lower than in developedcountries, there appears to be significant growth potential. Ukrtelecom has been working extensively withCisco to upgrade IP services on its network, including for VoIP functionality, and is developing a nextgeneration network. Fixed line telephone density was 24.3 percent as of 1 January 2006. However, this figureconceals a large urban/rural digital divide. Tele densities range from 45 percent in Kyiv to 9 percent in villagesand small towns, and even less in more remote regions.

Numbering

The Department of Communications and Informatisation (part of the Ministry of Transport andCommunications) develops and manages technical policy for numbering allocation. The NCCR provides amanagement function for numbering policy through liaison with operators. Under the 2003 Law onCommunications, administration of numbering resources is divided between the “Central body of the executivegovernment in the communications sphere,” which is responsible for legislation and policy regardingnumbering, and the NCCR, which is responsible for assessing requests for numbering resources and ensuringthat the relevant rules on use of numbers are respected and has the power to withdraw numbers, if necessary.Planning work is currently underway to overhaul both the fixed and mobile numbering resources used inUkraine in order to take account of increased use of both networks. The number allocation procedure isregulated by the Law on Communications.




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According to Article 70, “numbering resources are provided to [a] telecommunications operator for the periodof validity of its licence without the right to sub-allocate these numbers to other operators.” The sub-allocationof numbers has been used in other countries to facilitate the use of geographic numbers for VoIP, an option thatis therefore not available in Ukraine. Nevertheless, telecommunications providers are able to exchangenumbering resources amongst themselves, based on contractual agreements. Before the development ofindependent private telecommunications operators, Ukrtelecom had an exclusive right to telephone numberingresources. However, this situation is changing and now there are several private operators, such as Optima, thatare in the process of developing their own infrastructure, and obtaining their own numbering resources directlythrough the NCCR.Neither fixed nor mobile number portability is currently available, although all of the main mobile operatorshave expressed support for mobile portability to be implemented. Non-geographic numbers, such as nationallocal call or premium rate services, have not yet been developed in Ukraine. In the near future the subscribersof mobile operators will be able port their number between operators if Bill N 2047 is successful. This bill aimsto amend the list of obligatory services provided in the context of the Law on Telecommunications. Whether ornot consumers will be charged a fee to port their numbers is not yet clear.

Telecommunication infrastructure

The basis for telecommunication infrastructure of Ukraine is the primary network that ensures the organizationof standard channels for interconnection of the commutation stations of the telephone network and thesatisfaction of the users' needs. The primary network of Ukraine utilizes cable, radio relay and air links.Automatic telephone stations (ATS) apply air communication links (40%), cable links (58%), radio relay links(2%). The high priority direction of the progress of the primary network is the building of main fiber-opticcommunication links (FOCL). Now the share of these links is less than 1% of the overall volume of cablecommunication links (for comparison the share of symmetrical cable is 74%, and the share of coaxial cable is25%). During 1997, 2,433 km of distant cable communication lines was built as against 1,118 km in 1996year. The construction of the following FOCLs on the territory of Ukraine is accomplised: Kyiv-Lviv ("West"),Kyiv - state border with Byelorus (North), Kyiv-Odesa - coastal station ITUR "South" , Chernivtsi - stateborder with Moldova. When finished, these FOCLs will give a possibility to furnish a number of oblast andrayon centers of Ukraine with a sufficient number of qualitative digital channels. The main 'South-North" lineof the international Italy-Turkey-Ukraine-Russia (ITUR) line is put into operation. In 1997, 425.9 km of zonecable communication lines was put into operation, 1,835,400 chan/km of operating communication lines werereconstructed.

At present, the following FOCLs operate in the primary network:

Uzhhorod - Slovakian state border, Uzhhorod - Hungarian state border, Lviv - Polish state border, Kyiv - Chernihiv - Byelarussian state border ("North"), Kyiv - Odesa ("South"), Kyiv - Lviv ( "West" ), Chernivtsi - Romanian state border;




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Chernivtsi - Moldovian state border, Sumy - Kharkiv.

Digital radio relay lines (DRRL) in operation include:

Kyiv - Zhitomir - Rivne - Lutsk - Lviv - Uzhhorod; Lviv -Uzhhorod - Ivano-Frankivsk - Chernivtsi - Romanian stateborder,

Kyiv - Cherkasy - Sumy.

These lines are portions of the international TAE (Tans-Asian-European) FOLC communication system thatunites European countries with the countries of Asia, TEL (Trans-European line) and ITUR (Italy-Turkey-Ukraine-Russia). In total, more then 3,500 km of distant main and zone cable communication lines are inoperation in the primary network of Ukraine. Currently, digital communication ( FOLC and DRRL) cover 18oblasts of Ukraine.

Development and re-equipment of urban telephone communication networks on the basis of application ofadvanced technologies, digital systems of commutation determined the necessity to restrict the commutationtelephone equipment manufacturers. Based in the results of a tender arranged by the Cabinet of Ministers ofUkraine, it was decided to utilize the following types of commutation equipment in publicly used networks:

5ESS (manufactured by "Chezara - Lusent Technologies") EWSD (Manufactured by "MKM TeleCom - Siemens") 1000E10 (manufactured be "Alkatel - NSU") DTS3100 (manufactured by "Dnieper - DAEWOO") C32 (manufactured by Dnipropetrovsk Machine-building Plant)

Since 1996, the networks of Ukraine has begun to apply new up-to-date signaling systems ZKS -7 on R2D.This allowed new kinds of services to be put into practice and to maintain them on the network level, upgradethe reliability and rapidity of the establishing of connections, etc. UTEL joint venture has put ISDN servicesinto practice since 1997. Due to this, subscribers are provided with a number of accessory telephone and non-telephone services (conference-communication, data transmission, fax-messages, and others). On the basis ofdigital telephone stations, the publicly-used telephone network and ISDN networks, the rendering of theaccessory intellectual communication services began, such as "service 800" and others. In accordance with theplanned development of the sector's information potential and telecommunication infrastructure of enterprisesin the regions and with the goal to provide the active development of information networks in Ukraine, theconstruction of many-purpose so-called "backbone" data transmission network began.

Rights of Way and Facilities Sharing/Collocation

Figure 4 Structure of Equipment for ATSOperating in Local Telephone Networks




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Every three years, the Parliament of Ukraine approves the activities proposed under the National Program forInformatisation, which includes infrastructure development decisions taken at national and local levels. TheReport of the Parliament No. 3075-IV, adopted on 4 November 2005, concerning the approval of tasks of theNational Program for Informatisation for 2006-2008, obliged the Cabinet of Ministers to provide an economicanalysis of the financial resources needed for the planned projects, so that the costs to the state could beincluded in the State Budget. The 2003 Law on Communications offers the NCCR a variety of tools to ensurecompetitive neutrality with regard to building communications infrastructure. According to current legislation,all telecommunications operators have the right to build telecommunications networks in accordance with aPlan that has been approved by the Ministry of Transport and Communications (MTC).The procedure for approving the Plan is the following:• The telecommunications operator should develop a Plan for the building of the telecommunications network;• The Plan should be sent to the MTC for review and approval;• After the plan has been approved, the operator should ask the owner of the cable man-hole (Ukrtelecom or thelocal government) to approve the construction.The procedure applies equally to all communications companies regardless of size. However, as therequirements are somewhat complex, there is a risk that only larger companies, with the resources to tacklethese requirements, are in a position to build telecommunications networks cost effectively. Once the procedurefor approving the Plan has been completed, the telecommunications operator needs to secure buildingpermission. The procedure for obtaining permission to build a network is set out in Article 10 of the Law onTelecommunications, and includes:• Having the relevant communications license;• Obtaining permission for land use;• Obtaining permission from the local authority to build the network (based on the decisions approved by thelocal communications, architecture, and health authorities).Often, rather than rolling out their own networks, telecommunications operators and providers use the networksbuilt by local community companies, particularly TV providers, which also provide low cost Internet services.

Tariff Policy

Article 67 of the 2003 Law on Communication sets clear rules regarding the cost orientation of services,meaning that the legal basis for bringing about a competitive market in the local call and international marketsis in place.The Law states that:“Tariff regulation on the telecommunication market of Ukraine shall be based on the following principles:• Tariffs shall be based on the cost of these services and considering the profit earned; Tariffs shall depend onthe quality of telecommunication[s] services;• Telecommunication[s] operators/providers shall not set dumping or discriminatory prices;• Cross funding of one telecommunication service [to the benefit] of another shall be avoided.”




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NCCR has drafted extensive rebalancing measures, with a70 percent reduction in the cost of international calls andan increase in local rates. Line rental is set to increase bybetween 200 and 300 percent (up to 18UAH/3 Euro to28UAH/4.5 Euro).International tariffs are being reducedby between 17 and 69 percent, while national long-distance calls are being reduced by between 13 and 17percent. Despite these price adjustments, tariff rebalancingper se has not been implemented in Ukraine.Theincumbent telecommunications operator (Ukrtelecom)fulfils its universal service obligations through its low

fixed prices (prices for local and regional calls are belowcost for Ukrtelecom subscribers) and the development of

its fixed network to cover the entire territory of the country. The profit from international calls covers lossesfrom local and regional calls and ensures the company’s viability. Mobile operators’ prices are not regulated, asthe market is deemed to be competitive.

Cost Accounting

In the absence of liberalization and requirements for cost-based access to the monopoly provider’s network,there is little need for an efficient cost accounting system at present, as Ukrtelecom calculates all costs.However, as mentioned above, the 2003 Law on Communications does require services to be based on costorientation in order to ensure the possibility of fair competition in the market. Therefore, the NCCR will needto develop some form of consistent methodology to ensure that this aspect of the law is respected. However,nothing has yet been published at the time of writing.

Rates for telecommunication services

Distant telephone calls per minute of call. (inhryvnias)

Payable by enterprises,establishments andorganizations

Payable by the public

within oblast 0.12 0.07within Ukraine 0.24 0.14

Figure 6 Rates for telecommunication services

CIS Member States (USD)

Telephone calls beyond Ukraine Payable bythe public

Payable bybusinesses

Payable by government agencies funded at theexpense of the budget

Distance up to 3000 km 0.29 0.58 0.36Distance more than 3000 km 0.43 0.72 0.60

Figure 7 CIS Member States (USD)

Figure 5 Teledensity compared with population




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Telecommunication Services Provided to Foreign States (USD)

Rate area ordinaryservice

ordinary service provided onbusiness days between 9:00 p.m.

and 6.00 am (week-ends andholidays round-the-clock)

top-qualityservice

payable bygovernment

agencies

Eastern Europe 0.60 0.50 1.00 0.30Central/Northern Europe 1.00 0.80 1.90 0.50Western Europe 1.50 1.20 2.50 0.75Central Asia and Middle East 2.00 1.60 2.90 1.00North America 2.50 2.00 3.10 1.25Eastern Asia 2.80 2.25 3.30 1.50Africa, Southern and CentralAmerica 2.80 2.25 3.50 1.75

Australia, Oceania 2.80 2.25 3.80 2.00Satellite communicationnetwork INMARSAT 9.20

Figure 8 Telecommunication Services Provided to Foreign States (USD)

Universal Service

By “universal” services the Law on Communications understands “a minimum set of services of standardizedquality determined by the Law, accessible by all the consumers on the whole territory of Ukraine” (Article 1).The exhaustive list of the universal services in Ukraine comprises: “landline telephone (local, long-distance andinternational) communication services, (except for services provided using wireless access facilities), includingemergency call services, information services, communications that use payphones and trunk-call offices,facsimile and telegraph communication” (Article 62).According to the Law on Communications, specific services should be available for all consumers living onUkrainian territory. These universal services include fixed telephone connection for local, long distance andinternational calls, emergency and directory services, payphone services, and facsimile and telegraph services.The approach with regard to universal service is based on the Concept for a Universal Services Fund, which isoutlined in the draft Report (No. 8448 of 14 November 2005) of the Parliament on the Approval of theRecommendations of the Parliament Hearings on Information Society Development in Ukraine held on 21September 2005 and the Concept on Telecommunications Development. According to the Law onTelecommunications (Article 64), the development of universal services should be outlined in the Concept onTelecommunications Development, subject to approval by the Cabinet of Ministers. The latest version of thedraft Concept on Telecommunications Development, dated 1 August 2005, was prepared by the UkrainianResearch and Scientific Institute of Communications and submitted to the Cabinet of Ministers. The approvalprocess was disrupted by preparations for Parliamentary elections in Spring 2006. Universal service is based ontariffs fixed by the Government. While the legal basis for universal service is clear, the implementation of thislegislation has not been prioritized to date. A universal service fund has not yet been established and themethodology for funding any such initiative has not yet been developed. It is worth noting that mobileoperators are already subject to a levy on their income to contribute to the national pension fund. The Ukrainian




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authorities are addressing universal service in a pragmatic way, not dissimilar to the approach taken in Russianlegislation. They are taking measures to ensure at least communal access to communications networks,providing a basic level of access to citizens before building up to more comprehensive universal servicemeasures. Pilot projects have been launched, the experience from which should form the basis of future work inthis area. In addition, plans were announced to provide low-cost access to the Internet in the major cities ofUkraine using WiMAX technology. Three national and two regional 5.74Ghz-5.67Ghz licenses are in theprocess of being auctioned. Directory services and access to emergency services (fire, police and ambulance)are only available for fixed network users. Mobile networks are not connected to emergency call centers.Universal services for disadvantaged users are not yet included in Ukrainian law. The right to receive aninvoice for telephony services was introduced by the 2003 Law on Communications. Tariffs for universalservices are to be regulated by means of introducing either maximum or fixed rates (according to Article66(2)(1) of the Law on Telecommunications). Under legislation in force since 1 January 2005, the NCCR hashad the right to impose the obligation on companies with nationwide monopoly status, and on companieslooking to develop services to consumers in regions needing universal service support, to develop and provideuniversal services to consumers. The mechanism for the compensation of losses incurred as a result of fulfillingthis obligation is to be determined by the Cabinet of Ministers of Ukraine (Article 64(5)).

Local Loop Unbundling

At present, there appears to be little likelihood that local loop unbundling will be mandated by the Ukrainiancentral government, as there are other priorities which are considered more urgent.

Leased Lines

Official statistics regarding the use and availability of leased lines in Ukraine are not currently available, asthese data are not collected from market players by state authorities. Alternative telecommunications providersare dependent on leased lines as Ukrtelecom owns the majority of the infrastructure and many alternativeproviders do not have sufficient resources to build their own networks and consequently have to rely onUkrtelecom’s network. This is particularly true for the lower-cost end of the market. Private operators usuallydevelop their own networks for business customers and they are not generally interested in the less lucrativeresidential market because of the high cost of building communications channels. According to data fromoperators in Kyiv, installation costs can range from 420 Euro in areas with above average (by Ukrainianstandards) infrastructure to 2,500 Euro in more underdeveloped regions. Individuals or smaller businessesobviously cannot pay for such services at these rates. At present, only cable television distributors provide theopportunity for smaller entities to have a comparatively fast, always-on connection to the Internet. Such aconnection costs approximately 25 US$ (20.6 Euro) per month. This comparatively low price is due to the factthat this service can be provided with relatively low levels of additional investment by the cable ISPs.Local experts report that, “99 percent of providers rent [leased lines] from Ukrtelecom, and only some carrytheir own lines. However, a customer will feel the difference, if he/she tries the channels of different providers.Carrying capacity, external channel quality, the “last mile” (meaning quality of a cable laid to the customer),as well as technology for signal transmission in the cable and the equipment used all have an impact on theInternet quality. The qualifications of the provider’s personnel also play a big role.One supplier of services to mobile phone operators in Ukraine told the study team that difficulties (cost, inparticular) of using leased lines in Ukraine have resulted in other options being sought, such as wireless




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backhaul services which, while expensive to install, are an attractive option when long-run costs are taken intoaccount. Interconnection with the public switched network is subject to state regulation governed by the Orderof the State Telecommunication Committee of 7 June 2002, No. 120. The price for the provision of aconnecting line is 333.33 UAH (54.09 Euro) per month. Prices for long distance and international calls of localoperators made via Ukrtelecom lines are regulated by the Order of the Ministry of Communications of 21November 1996, No. 234, on the basis of revenue sharing. This depends on the number of lines, equipmentused, and administrative costs.In Ukraine, DSL is used by Internet Service Providers as high speed leased lines. HDSL is the most widespreadtechnology used for this purpose, reaching 2Mbps data exchange speeds in both directions. A new company inthe Ukrainian market, Datagroup, is building out a 1,800km fibre optic network, which it will use as the basisto provide wholesale services to other communications operators and ISPs, taking advantage of Ukrtelecom’sproblems in dealing with current demand. Eurotranstelecomm has also recently joined the wholesale market.This new level of competition has lead to significant price reductions, by up to 90 percent in some cases (notreflected in the table above). Datagroup and Ukrtelecom deny suggestions that prices are now below cost.

Analytical survey of the Ukrainian telecommunication market

The volume of the Ukrainian telecommunication services market constituted 44.057 billion UAH, which is by806 million UAH more than in 2009. The structure of market revenues: 65.4% – cellular communicationservices; 18.6% – fixed telephony services; 9.6% – data transmission and Internet services. The revenues fromthe mobile communication services remained almost the same as in 2009. The revenues from the fixedtelephony services decreased by 6.9% against 2009. The highest growth rates were observed in the market ofcomputer communication services: the revenues growth constituted 26% against 2009. At the same time, themarket of Internet access services increased by 33%. Three key operators dominate the market: Kyivstar, MTSand Ukrtelecom, which, in terms of the aggregate revenues earned, control nearly three quarters of the market

Fixed-Line Network and Service Market

The fixed-line market in Ukraine is still dominated by the government owned incumbent, Ukrtelekom. ThroughUkrtelekom and its subsidiaries, the government maintains control of 99% of the local, DLD, and ILD markets.Political instability has been a main factor in the delayed sale of the government’s 93% stake in the incumbent,and has undermined the ability of the company to upgrade and expand the network to offer new services towider areas of the country. Even though the fixed-line market did grow by 5% to a penetration rate of almost30% between 2004 and 2005, the delay in privatizing Ukrtelekom is expected to inhibit further significant ratesof growth.

Despite the monopoly held by Ukrtelekom, alternative operators are emerging to offer competitive services.The main competitors in the fixed-line market are Golden Telecom Ukraine, Optima, and Kyivstar. As is thecase in most of the emerging markets in the region, however, the dominant competitive services are expected tocome from the wireless sector.




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Figure 9 Revenues from rendering telecommunication services in Ukraine, bln UAH

Figure 10 Structure of the revenues from rendering telecommunication services in Ukraine.

Main trends of the telecommunication market

Starting from the second half of 2009 and in 2010, the national economy was gradually getting out of crisis andbegan to recover. The market of Internet and cable TV services continued to grow steadily. The mobileservices market got stabilized both in terms of the amount of the revenues earned and the number ofsubscribers. Penetration of this kind of communication constitutes about 120%. Price competition and nationalcoverage of almost all operators made mobile communication available for each citizen of Ukraine. Theincrease of the subscriber base has stopped, and now the market reached the stage of saturation. Owing to theoperators’ marketing activity, the subscriber base is regularly redistributed between them. The competition,including the price one, is getting more intense in the market of fixed broadband access. In the regions,




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expansion of the major market players and exclusion of small regional providers is observed. The high-speedInternet access services become a priority trend in the development of the mobile communication market. Thevolume of the fixed telephony market continues to decrease due to the replacement of fixed telephonyby mobile communication.

Fixed Operators

The main fixed-line operator in Ukraine is state-owned Ukrtelecom. The total market share of all private fixed-line operators was under 20% in 2002. Alternative operators include Golden Telecom, Optima, Farlep and anumber of Fixed Wireless Access (FWA) operators. Optima and Farlep commenced operations in theDnipropetrovsk and Odessa regions, respectively.

Ukrtelecom

Ukrtelecom was created in 1993 when the Ministry of Communications merged several telecom departmentsand regional PTTs into the Ukrainian State services. It was re-registered as a state enterprise in 1998 when theregional operators comprising Ukrtelecom were converted into affiliates. It was then transformed from astate enterprise into a joint stock company as a prerequisite of privatization. The state owns a 92.86% stake.Ukrtelecom owns all transmission facilities and administers the national fixed-line infrastructure. Interestingdetail is that it offers voice services for free for people that cannot afford. It obtains around 85% of its revenuefrom long-distance telephony and is responsible for implementing the government’s telecommunicationsstrategy. During 2001 it moved to further expand its dominant position taking majority control of the secondlargest fixed-line operator, Utel, after purchasing the stakes held by AT&T and Deutsche Telekom AG Variousefforts to privatize Ukrtelecom have been continuously postponed or delayed and Ukrtelecom still remainsunder nearly full government ownership.The Ukrtelecom Joint Stock Company is one of Ukraine’s largest telecommunication operators that providesall kinds of telecommunication services throughout Ukraine, including the UMTS/WCDMA (3G) mobileservices. 1,134 thousand subscribers, all regional and district centers of Ukraine, as well as many ruralsettlements are united by the OGO! fixed broadband Internet access service as of the beginning of 2011.Over 150 settlements and 631 thousand mobile subscribers are covered by the Ukrtelecom mobilenetwork. In 2010, Ukrtelecom serviced 10.126 million telephone lines. The Company comprised 33 branchesas of the beginning of 2011. Being the most high-capacity fixed communication operator in Ukraine,Ukrtelecom cares about the country’s social vulnerable groups of population and is the only operator thatprovides socially important services, such as rural telephony, wire broadcasting, and payphonecommunication. To render services of communication with foreign countries as well as those of transit transferof the traffic both in Ukraine and abroad, Ukrtelecom takes an active part in international telecommunicationprojects. This ensures an access to the digital telecommunication systems of Europe, Asia, Africa and NorthAmerica. In terms of revenues, Ukrtelecom covers 18% of the telecommunication market*, including: 73% ofthe Ukrainian fixed telephony market; 33% of the Ukrainian Internet-access services market. Our transportnetwork is a basis of the telecommunication infrastructure of the state. Ukrtelecom is the only carrier thatprovides fixed telephony services throughout the country to all categories of subscribers. In 2010, the numberof Ukrtelecom mobile subscribers grew 1.67 times (from 378 ths to 631 ths). The number of subscribers of thehigh-speed fixed Internet access (OGO! TM) grew by 34.5% (from 843 ths to 1,134 ths). In 2010, the share ofthe sales of computer communication services in the total Ukrtelecom revenues grew up to 17.25% (+3.75%




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against 2009). The advantageous geographical location of Ukraine and the powerful transport network with ahigh level of reliability and redundancy enable us to provide services on derivation of high-speed transitcircuits for international carriers. The Company is a member of the TEL and TAE projects, and a co-owner of14 international submarine communication systems, such as ITU R and BSFOCS The Ukrtelecom’s strategicobjective is to ensure steady growth of the market share in the most progressive markets of high-speed fixedand mobile Internet access services.The Company renders a full range of high-speed fixed and mobile Internet access services throughout thecountry, i.e.:• high-speed and dial-up Internet access for fixed telephony subscribers;• Internet access through a dedicated line;• Wi-Fi Internet access;• mobile Internet access;• hosting services.

Figure 11 Financial highlights of Ukrtelecom

Significant contracts of 2010




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• A contract was concluded with the Raiffeisen Bank Aval JSC for construction of the virtual private network(VPN) over the whole territory of Ukraine, which provides connection of about 1000 points.• 55 PRI streams, 95 Internet points and 65 VPN points were connected for the “Sberbank Rosii” (SavingsBank of Russia) JSC.• A new project was launched for the National Bank of Ukraine for connection of the VPN service throughoutUkraine.• For the State Treasury of Ukraine, a united data transmission network (650 VPN points) was created tomeet the requirements of the program for modernization of Ukraine’s state finance management system.• A contract was signed with the divisions of the Ministry of Labor and Social Policy of Ukraine for creation ofVPN throughout the country.• A contract was concluded with and telecommunication services (PRI, Internet, telephony) have been providedfor the State Institution “Government Contact Center”.• 20 owners of business centers all over Ukraine got involved in cooperative efforts.• The agency network of the Branch of centralized sales of services sold the VPN services to the corporatecustomer “Information Judicial Systems”. Under the project, it is planned to build the data transmissionnetwork for 100 points.• Information telecommunication services were provided for the Euro-2012 city organizing committeein accordance with the UEFA requirements. The contract makes provision for the “turn-key” integrationof all works and rendering the following services: local area network, IP services (VPN, Internet, IP equipment,corporate IP telephony, Wi-Fi); voice fixed and mobile services; hardware and software support; technicalsupport and management of all services.• In 2010, a new contract was signed with the mobile operator Kyivstar GSM PrJSC for providing the nationalroaming services.• 10 contracts were concluded for providing international roaming services. 39 destinations (voice roamingservices), 31 destinations (data roaming services) and 9 destinations (CAMEL roaming services) were put intoservice.

Recognition and awards in 2010

10th place in the rating of “The Ukraine’s MostReputable Companies”. (The Reputation Capital Company incooperation with the TNS Ukraine Marketing Agency) A leader in the rating of “Top-100. Business Leaders ofUkraine. Ten Years of Development of the Economy of Ukraine”. (The “Ukrainian Investment Newspaper” andthe Credit-Rating Agency). The study in the form of a set of rankings of the largest companies was conductedover 10 years of development of the economy of Ukraine.

Securities and equity capital

The Ukrtelecom JSC equity capital comprises 18,726,248,000 common registered shares with a nominal valueof 0.25 UAH each. This equals 4,681,562,000 UAH. As of the end of 2010, 92.79% from the equity stake wasowned by the State, and the remaining 7.21% belonged to other shareholders, natural persons and legal entities.The number of Ukrtelecom’s shareholders amounted to 60 thousand persons. Over the period 2001-2007, theCompany annually paid out the dividends to its shareholders, in the total amount of approximately 2 billionUAH. Against the background of the global and national financial crisis in 2008, a crash of the stock market ofUkraine and a considerable drop in the cost of securities took place, which terminated only at the beginning of




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March 2009. This process affected the market value of our Company’s shares: at the start of 2010 it dropped to0.45 UAH per share. However, trading in the Ukrtelecom’s securities on stock exchanges never stopped, andby the end of 2010 the value of the Company’s shares grew to 0.54 UAH per share. The reason for the positivedynamics of growth of the Company’s securities value is a leadership of the Ukrtelecom JSC in the promisingmarket segments and its unceasing technological development. In compliance with the Resolution No. 1948-pof the Cabinet of Ministers of Ukraine, dated October 12, 2010, the State Property Fund of Ukraine, on October13, 2010, announced the tender for the sale of 92.79% of the shares of the Ukrtelecom JSC. According to anindependent expert evaluation, the above package of shares cost 10.5751 billion UAH.

Figure 12 Market Value of 1 Ukrtelecom JSC share, UAH

Market standing of Ukrtelecom

In 2010, the share of the Ukrtelecom JSC in the telecommunication services market somewhat decreased ascompared with 2009 and constituted 18.0% (against 18.6% in 2009). This can be accounted for by continuedreduction of the revenues from fixed telephony and slowdown of the rate of revenues growth from computercommunication. In the market of Internet access services, which is the key one for the Company, theUkrtelecom standing remained invariably high. The Company’s position in the fixed telephony market, interms of the amount of revenues, increased in 2009 and somewhat decreased in 2010.




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Dynamics of revenues and expenses

Revenues from computer communicationservices grew 1.26 times (by 278 mln UAHagainst 2009) Revenues from mobilecommunication services grew 1.74 times (by 93mln UAH against 2009). Revenues from localtelephony services grew by 2.5% (by 77 mlnUAH against 2009).Revenues from export transactions decreased

by 15.4% (by 116 mln UAH against 2009).Revenues from wire broadcasting andtelegraphy services grew by 4 mln UAH(against 2009). Revenues from internationaltelephony services decreased by 20.1% (by 151mln UAH against 2009). 7,936 mln UAH is theUkrtelecom’s revenue from thetelecommunication services provided in 2010,which is 126 mln UAH (-1.6%) less than in2009 Despite a considerable increase in therevenues from new services (Internet access andmobile communication services), the Companyfailed to fully compensate for the reduction inthe revenues from rendering the long distanceand international telephony services. Theamount of revenues from the local telephonyservices slightly grew due to the revision oftariffs for the respective services. Decrease ofthe revenues (in Hryvnya equivalent) fromexport transactions as well as from outgoinginternational communication services occurredas a result of reduction of the volume ofinternational telephone traffic and replacementof this kind of services by the means ofcommunication within the Internet network.Revenues of the Ukrtelecom JSC fromrendering long distance telephony services aswell as from the calls to subscribers of the

mobile operators decreased in 2010 by 318 mln UAH (by 19%) against 2009. Decrease of the revenuesoccurred due to the replacement of the fixed telephony services by the mobile ones.

Figure 13 Ukrtelecom’s share in the fixed telephony market and internet market interms of the revenues earned




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Figure 14 Revenues from rendering telecom services

Figure 15 Structure of the revenues(Ukrtelecom)




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Expenses

According to the results of 2010, the operating expenses constituted 7,018 mln UAH (excluding expenses forthe currency sale and those related to the exchange difference charges). Notwithstanding the inflation processesand continuous growth of the prices for the energy carriers and, fuel and lubricants, the total expenses incurredthis year decreased only by 4 mln UAH against 2009. This result was achieved owing to introduction of toughausterity measures. Expenses for the purchase of spare parts, raw materials and other supplies, and for currentrepairs and maintenance increased by 8% against the previous year. Owing to the Company’s staff reduction in2010, the payroll fund and the charges thereon decreased by 1.7%. Other operating expenses decreased by10.6% and amounted to 1,833 mln UAH.

Strategy of intensive Development

Investments

The investment activity of the Ukrtelecom JSC in 2010 was aimed at the implementation of its strategyprovisions: expansion of the network of fixed broadband access and mobile communication, as well asupgrading of the packet network. Capital investments channeled into the implementation of thetelecommunication infrastructure development program constituted 597.5 mln UAH. The fixed assets whichwere put into use equal 540 mln UAH.

Figure 16 Kye investment sectors, Ukrtelecom




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Development of the backbone telecommunication network

The backbone telecommunication network of the Ukrtelecom JSC is the basis of the network of fixedbroadband access, fixed telephony and mobile communication. Rapid growth of the number of OGO! andmobile service subscribers, and increased information content transmitted through the telecommunicationnetwork require its intensive development. Total investments in the backbone telecommunication networkamounted to 105.9 mln UAH. Overall length of the fiber-optic communication lines constituted 38.7 ths km bythe end of 2010. The work on digitization of the zone primary telecommunication network has been practicallycompleted. As of January 1, 2011, 550 99.64%) of 552 cities and district centers of Ukraine were connected tothe fiber-optic communication lines. The capacity of 69 zone rings was increased from 1up to 10 GE on thebasis of the CWDM technology. Owing to the use of the DWDM technology, the speed of connection with 20regional centers is from 2 to 10 Gbps.

Development of the fixed broadband Internet access network

In view of the fact that the Internet access services market is the most promising and rapidly growing segmentof the national telecommunication market, the main direction of our investment policy in 2010 was furtherexpansion of the multiservice packet network. Nearly 206 mln UAH (34.4% of the total investment outlay)were channeled into its development: 129.2 ths ADSL ports were introduced.The installed capacity of theUkrtelecom JSC broadband access network increased by 13% and constituted 1,316 ths ports. Transmissioncapacity (bandwidth) of the data network international connections increased up to 180 Gbps (2.25 times moreagainst 2009). In 2010, a considerable volume of investments was channeled into expansion of the capacity ofthe Company’s IP/MPLS network. The year 2010 saw completion of the work and commissioning of thestartup complexes of the fifth stage of the carry-over project “Modernization of the Ukrtelecom JSC IP/MPLSnetwork”. The system of external power supply of the IP/MPLS complex in the cities of Dnipropetrovsk andDonetsk was modernized. Also upgraded were the project “Reconstruction of the backup power supply systemof the Kyiv City Data Center”, as well as the complex of expansion of the Ukrtelecom’s Data ProcessingCenter. In order to provide passing of the Internet users’ traffic, the work was done on expansion andconstruction of the urban transport networks between the existing Metro-Ethernet nodes. The project forconnecting the mobile communication base stations to the multiservice Ethernet network was implemented.

Development of the mobile network

During the reporting period, we channeled 132 mln UAH into the mobile network development. As a result, 93mobile communication base stations were put into operation in the territory of the Kyiv, Dnipropetrovsk,Zaporizhya, Kirovograd, Luhansk, Odessa, Poltava, Sumy and Kharkiv regions. In 2010, the software of theswitching and radio network equipment was updated, which made it possible to increase both the maximumspeed of the data transmission service and its capacity, as well as to use IP transport for connection of themobile network equipment. The process of switching the network elements to IP transport continued. In 2010,534 base stations were switched in this way. In order to increase the radio network capacity throughredistribution of the voice and packet traffic to different radio frequencies, two-frequency plan was introducedat the majority of the base stations. The Company modernized and expanded the packet switching system toprovide transmission capacity up to 6 Gbps, introduced the Direct Tunnel functional, and expanded the homelocation register (HLR) up to 1.5 mln subscribers. The IP network was switched to a new IP/MPLS network




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kernel, including the use of 10 Gbps interfaces. 108 destinations of international roaming were opened, 16 ofwhich are meant for the subscription services subscribers and 65 for data transmission. In 2010, the Companybegan to introduce the roaming management platform and send information messages (Welcome Message/Bonvoyage), and also started upgrading of the text messages center (SMSC).

Development of the regional (service) network

Among the Ukrainian operators, Ukrtelecom has built the largest telecommunication network, which, atthe beginning of 2010, comprised 1,085 Telecom service offices and other points of public use. At the majorityof such points of service the customers are offered a full range of different services: they can receive competentadvice, conclude a contract for services, have an access to the Internet, use local, long-distance or internationaltelephony services, send a fax or a telegram, pay for services, and buy telecards and subscriber equipment.Those who wish to be connected to the Ukrtelecom mobile services or buy the subscriber equipment may useany of the 37 Company’s outlets/shops (full range of sales and services), 46 points of service operating out ofthe Telecom service offices (servicing and contract connection), 235 multipurpose points of sale of servicesoperating out of the Telecom service offices (contract connection (mobile), OGO! Contract connection (fixed),sale of the OGO!START and mobile communication starting packages, sale of subscriber equipment), and 850Telecom service offices where a customer can buy the mobile communication starting package. Along with thedevelopment of its own sales channels, the Company ensured further development of the networks of salesagents and distributors. The number of the agent sales outlets increased from 608 to 819, while the number ofdistributor agreements amounted to 338. The number of points for collecting payments for mobilecommunication services increased up to 13.5 ths. Receipt of online payments for mobile communicationservices was provided via Portmone.com site. Taking into account the increasing demand for the Internetaccess services, in 2010 we opened 31 new points of public Internet use. As of January 1, 2011, theUkrtelecom’s service network comprised 420 points of public Internet use with 2,124 work stations.

Improvement of business processes

The competition existing in the telecommunication market requires that Ukrtelecom should make efforts topreserve its leading positions therein. With the view of optimizing management and improving the performanceresults, the Company incessantly works to establish and further perfect the system of business processes, basedon the experience gained by the leading world carriers that, like our Company, are members of theTeleManagement Forum. During the last year, major consideration was given to the processes that have tomeet the needs of the customers and increase their satisfaction with the services and servicing provided by theCompany. With the view of unification of the above processes, the standardized schemes have been introduced,which serve as a template for the development of processes for various services and different consumersegments. Control of those processes allows effecting the assessment of satisfaction of the customers anddecreasing their outflow. To achieve this, the indicators and their target values, based on the benchmarkingstudies, are used. The use of such studies resulted in revision of the system of business processes andsupplementing them with the corresponding process execution indicators.

Scientific and technological support of the development

Ukrtelecom pursues an effective scientific and technological policy aimed at introducing the state-of-theart




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and innovation technologies, as well as modern services for theconsumers. Together with the leading research institutions inthe sphere of telecommunication, the Company establishes thepriorities of development, works out measures and actions toincrease the efficiency of operation of the telecommunicationnetworks, elaborates normative technical documents, and is acustomer of a number of innovative research developmentsIn 2010, the main directions of the research effort were asfollows:• Development of new generation networks (NGN),includingfurther expansion of the access network based onthe FTTx technology;• Development of the 3G third generation mobilecommunication based on the UMTS technologies;• Provision of interaction between the IP segment of the NGNnetwork and the public telephone network (PTN);• Enhancement of the efficiency of operation of the line-cable facilities, data transmission networks, andtelecommunication equipment;• Introduction of the IP-television (IPTV) services.In order to ensure further effective development of the Company, the priority issues of the Ukrtelecomdevelopment strategy are considered during the meetings of the company’s Scientific and Technical Council,which contributes to the establishment of closer ties between the divisions and broad involvement of theemployees in the innovation activities. The Ukrtelecom JSC creates modern bases of knowledge andinformation resources. Conferences, workshops and symposia in the sphere of telecommunication are heldregularly under the aegis of the Ukrtelecom JSC experts. Specifically, the Company is a co-organizer ofvarious scientific-andtechnical events together with the magazines “Merezhi ta biznes” (Networks andBusiness) and “Merezhi ta telekomunikatsii” (Networks and Telecommunications); our experts take part in themeetings of the scientific and technical councils of the State Committee of Ukraine for Communications andNCRC, dealing with planning the further strategy of development of the Ukraine’s telecommunicationnetworks. In its activities, the Company applies international, state, and branch standards, participates in their

elaboration, cooperates with the research committees of theInternational Telecommunications Union. In particular, theUkrtelecom JSC is a member of the ITU development sector.

Best state-of-the art Ukrtelecom’s services

Internet access

In 2010 we focused our investments and marketing activitieson the high-speed fixed Internet access services(OGO! trade mark). As a result, in 2010 the number ofsubscribers grew 1.35 times and the Company consolidated itsleadingposition in the market of the above-mentioned servicesin terms of the main parameters:

Figure 17 Number of Ukrtelecom's Wi-Fi hot spots, pcs

Figure 18 Number of mobile subscribers, ths




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• number of users – 1,134 ths OGO! subscribers as of the beginning of 2011;• network geographical coverage – the whole territory of Ukraine;• revenues from the high-speed fixed Internet access services – 1,178 mln UAH

Figure 19 Number&Revenues from the high-speed Internet access services, mln UAH

Evidence of intensive development of the Internet access services:Two new services were introduced:- OGO!Telephony – VoIP-based telephone communication using the national numbering system, whichenables the user to communicate with Ukraine’s subscribers at a reduced charge irrespective of his/herwhereabouts (provided an access to the Internet is available);- OGO!Wi-Fi – providing to all OGO! service subscribers an access to the Internet at all Company’s hot spotswith a volume up to 10 GB/month without any additional charges.For a number of localities, the Internet access speed was increased twofold for all tariff plans without anychange in their cost. The number of hot spots increased 1.55 times, and the geographical coverage by the Wi-Fi-based Internet access service was substantially expanded. At the end of 2010, Ukrtelecom’s wireless accessnetwork covered all regional and the majority of district centers. It comprised 2,581 hot spots (3,661 accesspoints) installed in educational establishments, at railway stations, in hotels, restaurants, cafes, and otherrecreational facilities




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Mobile communication

Ukrtelecom actively introduces the 3G mobile services, expand the existing sales channels and create newones. The number of the Ukrtelecom mobile subscribers ran to 631 ths in the reporting period. The mobileservice sales network comprises 37 exhibition shops, 46 points of service sales, 235 fullservice points of sale,and 850 Telecomservice offices. The affiliate sales network comprises over 800 agent sales points and 338contracts signed with distributors. The users were offered a set of unique tariff plans with an unlimited mobileInternet access. Ukrtelecom’s customers in addition to the traditional mobile services (VoIP, SMS and MMSservices, access to content) can also enjoy the innovative ones

High-speed mobile access to InternetThis allows surfing WEB/WAP pages, browsing through e-mail, and uploading/downloading large files whenaway from home or office. The speed of data transmission within the Ukrtelecom JSC mobile network canreach 3.6 Mbps depending on the area of coverage, support of the HSDPA technology by the subscriberterminal, and the uploaded site capacity.For the Internet access the following can be applied:• a modem (USB, PCMCIA) connected to PC;• a tablet computer (IPad);• a smartphone;• a mobile phone used as a modem connectedto PC;• a mobile phone with WEB/WAP browser

Video call

This service with a mobile phone is available only within the Ukrtelecom JSC mobile network

Voice and video mail

This service enhances functionality of a regular answering machine and allows both listening to voicemessages and looking through the video events received.

SMS to fixed telephone numbers

For the first time within the territory of Ukraine, Ukrtelecom’s mobile subscribers can send textmessages to fixed telephone numbers. An SMS message is sent to a telephone number, and its usercan receive it in Russian or English.

Fixed telephony

Ukrtelecom possess 83% of the total number of fixed telephone lines in Ukraine*. At the end of 2010Ukrtelecom served more than 10.126 mln lines, 87% of which were owned by individual subscribers and 13%belonged to legal entities. In 2010 the total number of telephone lines served by the Company decreased by 154ths.

Figure 20Number of fixed telephone lines




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This is a result of replacement of the fixed telephony services with the mobile ones, which is a typical case theworld over. However, rendering the fixed telephony services remains the basis of our business, and in 2010these services accounted for almost 80% of the total amount of revenues. That is why we work to make thefixed telephony service more attractive. By the end of 2010, about 80 ths Ukrtelecom’s subscribers used the“Long talks” tariff plan that was introduced in 2009. For the customers who do not have a possibility to usefixed or mobile telephone, Ukrtelecom has created and supports an extensive payphone network comprising27.3 ths payphones located all over the territory of the country, including remote and sparsely populated areas.

Best state-of-the-art services for corporate and business customers

For legal entities Ukrtelecom offers the most extended in Ukraine list of opportunities for effective business.

Complete list of the fixed telephony and mobile communication services throughout the country;• a wide range of package proposals and tariff plans;• round-the-clock technical support for the IP services.That is the reason why, even under the economic crisis conditions in 2010, the number of business customersof the Ukrtelecom JSC grew by 10% and ran to 18.9 ths at the end of the year. Revenues from providingservices in the corporate segment amount to 418 mln UAH, which is 6.5% more than in 2009. Ukrtelecombecame the winner of the tender for rendering telecommunication services within the Euro-2012 project, whichis regarded as an evidence of recognition of the Company’s status as one of the leading operators in the marketof services for business customers.

MPLS-based virtual private network (VPN)

Infocalls (transfer of data packets) via Ukrtelecom’s MPLS network between offices that belong tothe same administrative structure. We provide creation and round-the-clock functioning of the virtual privatenetwork with random topology (including polygrid networks), based on the public network infrastructure.

Mobile access to VPN

Staff members, remote offices, ATM and terminals are provided with access to VPN based on the mobilecommunication technology.Frame Relay

Aggregation of logical channels between offices allows transferring of data, voice and video via the samelogical channel.

Assignment of communication channels

Allotment of voice-band channels and digital channels for transfer of various types of data between officesvia fixed point-to-point connections.




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Figure 21 Core services: revenues, structure and total amount.

Digital telephony (ISDN PRI and ISDN BRI)

Assignment of digital telephone lines providing the possibility of simultaneous use of two (BRI) or thirty (PRI)independent communication channels for voice, data, and video transfer. Connection of PBX, creation of asingle telephone network, and dynamic expansion of the telephone number database are possible.




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Analogue telephony

Assignment of telephone lines that are directly connected to a digital PBX and which ensure high quality ofvoice and data transmission. Besides, these lines are the platform for other services (Internet, 800 service) andadditional services (forwarding, new incoming call messages, local, long-distance and international calls usingpasswords, call transfer to the automatic informer, and line identification).

Anytime Internet access via Ethernet/SHDSL/ADSL 2+

This service is provided all over the territory of Ukraine ensuring effective business of the corporate customers.

Mobile communication and Internet

We are the only mobile communication operator in Ukraine rendering the UMTS/WCDMA (3G) standardservices, which ensures higher quality of both usual voice communication and especially data transfer services.The data transfer rate may reach up to 3.6 Mbps depending on the area of coverage, support of the HSDPAtechnology by the subscriber terminal, and the site capacity.

DNS services

Assignment and allocation of primary and secondary domain name systems. Possibility to register one’s ownprimary and secondary DNS (in this case the e-mail address does not include the customer’s ISP address),as well as one’s own WWW and/or FTP server

Assignment of IP address blocksSupport of fixed static IP address.Toll-free (800) service

Assignment of a telephone number with a dialing format 0-800-50ХХХХ with free calls of fixed telephonysubscribers from any place of Ukraine.The service allows arranging of the line for support of customers,promotion of services and products, and conducting marketing research.

Toll (900) service (Audiotex)

Assignment of a telephone number with a dialing format 0-900-30ХХХХ with charged calls of fixed telephonysubscribers from any place of Ukraine. The service allows providing paid information and entertainmentservices, as well as voting-associated services.

Contact Center

Highly skilled experts of the Contact Center can provide round-the-clock processing of telephone calls, faxesand e-mail messages from and to the clients of a customer. The Contact Center operates following a specialscenario and can welcome the clients on behalf of the service customer. The service allows creating a virtualoffice, arranging TV-sales of products and services, and conducting marketing research.




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Data Center

Basic and professional web-hosting, provision of virtual servers, customer’s hardware hosting, hardwarehosting with leasing the Ukrtelecom’s servers

Figure 22 Transport Telecommunication Network of Ukrtelecom JSC




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Figure 23 Multiservice Packet Network of Ukrtelecom JSC

Figure 24 International Connections of Packet Network




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UKRAINIAN TELECOM association includes:

24 oblast telecommunication enterprises; Crimean republican telecommunication enterprise; Kyiv and Sevastopol city telecommunication enterprises; The Ukrainian state-owned enterprise of international and distant communication and television

"UkrTech"; Kyiv city radio broadcasting network and Kyiv telegraph; Center for informational telecommunication technologies "InfoTel"; State institutes engaged in designing of means, constructions and objects of communication

"DniproZvyazok" and "UkrZvyazok Project".

UKRAINIAN TELECOM is a founder of the following telecommunication joint ventures: "UTEL", "UMC" -Ukrainian Mobile Communication, "InfoCom", "ElsaCom-Ukraine", "TeleCom Invest", "TelesystemsUkraine". UKRAINIAN TELECOM accounts for about 78 percent of the gains from all the combinationsservices in Ukraine.

Utel

Utel is the long-distance fixed-line operator. In 2001 and 2002, Ukrtelecom bought back all foreign-ownedshares in Utel. Utel had been established in 1992 as a joint stock company with ownership divided betweenKPN of the Netherlands with a 10% share, AT&T and Deutsche Telekom each with 19.5% and Ukrtelecomwith 51%. With the major share of Ukraine’s long-distance market, Utel has been very profitable. It holds a 15-year licence to offer long-distance and international telephony. It has two international exchanges, in Kiev andL’viv, and has directconnections with more than 50 international telephony operators in 45 countries. Utelcarries nearly all international traffic. The company has 22 affiliates in the oblasts of Ukraine and theAutonomous Republic of Crimea. UTEL invested more than 140 mln USD in the development ofcommunication networks in Ukraine. UTEL's incomes were nearly 250 mln USD in 1996 and 300 mln USD in1997; and profits amounted to 29 mln USD in 1996 and 33 mln USD in 1997. As of the early 1998, there was27 digital automatic distant telephone stations in Ukraine, 2 of which were owned by UKRAINIAN TELECOM(Zaporizhya and Sevastopol), and the other 25 were owned by UTEL

Golden Telecom

Golden Telecom Inc became sole owner of Golden Telecom Ukraine in late 2002, paying US$5.2 million tobuy out its partners, Brig Telecom (with a 10.5% share) and Agat Telecom (with a 20.5% share). GoldenTelecom Inc is a Russian alternative telecoms operator whose largest shareholder is the Alfa Group. The Kiev-based telco commenced operations in January 1997. In late-2002, the company expanded its presence intoDnepropetrovsk, offering local access and prepaid VoIP services. In early 2003, local access, VoIP and dial-upInternet services were launched in Lviv and in Zaporizhya in early 2004. In October 2006, Golden Telecomannounced a major initiative to roll-out FMC (Fixed-Mobile-Convergence) services across Ukraine. Accordingto a company statement, Golden Telecom will partner with Alcatel and Huawei for the networkimplementation. Alcatel will supply a new generation softswitch as well as an intellectual platform upon whichthe core of the FMC network will be constructed. Huawei will supply a system of base stations, as well as high-




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speed data transfer equipment required to construct the wireless component of the FMC network. The companyrenders services of mobile communication in the DCS-1800 standard. Services are rendered in Kyiv andBoryspol. It is planned that Golden TeleCom will organize mobile communication in Odessa, Kharkiv,Donetsk, and other large cities of Ukraine. At present, Golden TeleCom provides rouming services withSwitzerland and Great Britain. The company's services are used by 2,200 people.

"Digital Cellular Communication of Ukraine" (DCC) Joint Venture

The JV was founded in 1995. It operates using a D-AMPS standard. The network is established in Donetsk. Itis planned to develop the system in Donetsk, Kharkiv, Odessa, Dnipropetrovsk regions, in the Crimea and inthe city of Kyiv. For the expansion of the system and construction of the network for Donetsk oblast, Kharkiv,Odessa, Dnipropetrovsk, Crimea and the city of Kyiv an agreement was signed with Sweden "Erixson"amounting to 50 mln USD.

"Ukrainian Radiosystems" Joint-stock Company

One of the founders is Concern of Radio Communication, Radio Broadcasting and Television. The companyholds the right to provide mobile communication services in the GSM-900 standard, but has not begunoperation as yet. A national radio frequencies license has been paid. The license is effective for 15 years. After"Motorola" has renounced partnership, it was substituted by "DAEWOO".

Paging (Search) Communication

Services related to search communication has been provided since 1995 in Ukraine. At present, networks ofsearch communication in standards RDS, POCSAG are created in all the oblast centers of Ukraine. In 1997,Ukraine was the first among the CIS member states to introduce the ERMES standard. Services of searchcommunication are provided by more than 40 operators to 45 thousand subscribers. A bilateral searchcommunication (FLEX standard) is now put in practice.

Major operators include:

"RadioCom" joint-stock company - standards RDS and POCSAG "Beeper" - standards POCSAG, FLEX. "Link TeleCom" - standard POCSAG. "UkrPage" - standard ERMES

Monthly subscription charged by various operators ranges within 25-50 USD depending on the type ofservices. According to experts' estimates, nearly 50% of equipment used in this type of communication isproduced by Philips, 45% by Motorola, and nearly 5% by NEC.

Trunking Communication

Services of trunking communication in Ukraine are provided by the following companies.




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"Admerka" Ukrainian-Swiss joint venture

The JV was created in 1992. "Admerka" is an operator of the all-Ukrainian trunking network named“RADIUS". The system acts in Kyiv, Bila Tserkva, Cherkasy, Zhitomir, Zaporizhia, Sumy, Kryvy Rih,Dnipropetrovsk, Luhansk and adjacent districts within the radius of 85 km. The network applies theSmartTrunk II standard. It deals with the frequencies of the VHF range. "Admerka" JV is the officialdistributor of "Motorola " in Ukraine. Main users are UKRAINIAN TELECOM association, departments of thegas sector, government agencies of different regions, and commercial organizations.

"Beeper"

This type of communication applies StarSite protocol. It exploits "Beeper Trunking" system that ismanufactured by "Motorola" for about one year.

Average rate USDConnection of radio station 50Monthly subscription rate 25Per minute cost of radio conversation 0.1-0.2Per minute cost of conversation with a telephone subscriber 0.4

Figure 25 Trunking communication

"Eastward Bound" Joint Venture

The network applies SmartTrunk II standard, operates in Kyiv, Odessa, Vinnytsia, Chernihiv, and Zhitomir. Inthe Kyiv oblast, the system provides high-quality radio communication within the range of 30-50 km from thecenter of the city. It is planned to extend the network to cover Donetsk, Sumy, Poltava, Kremenchug. Theassigned range of frequencies is UHF. The coverage of "radio shadow" areas is fulfilled for account of theallocation of two basic stations in Pechersk and Podil television tower. All the telephone numbers forcommunication between the radio station city ATS are milti-channel. Costs of subscriber equipment(Kenwood, Motorola, Alinco, ICOM) are one of the lowest in Kyiv. Subscription is to be paid no less than fortwo month in advance.

"OmTech" Company

The company was set up in 1991. It is an operator of the single all-Ukrainian network "OMITECH--RUNKING-UKRAINE " throughout the territory of Ukraine. For realization of such a global project, thecompany was assigned radio frequencies ranging 403-407 MHz on all the territory of Ukraine. Basic stations inthe SmartTrunk II protocol operate in Kyiv, Dnipropetrovsk, Odessa, Lviv, Uzhhorod, Rivne, Kryvy Rih,Slavutych, Vinnytsia, and adjacent oblasts. "OmTech" has 14 dealers in different regions of Ukraine. Softwarefor second-by-second traffic calculation has been developed; protection against non-permitted access system;the system for optimization of guaranteed connection from different city ATS to radio subscribers of thenetwork.




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"UkrTekhZvyazok" Joint-stock Company

The company has operated on the market for 2 years. Services related to trunking communication are providedin the city and oblast of Kyiv. The operation frequency range is VHF and UHF. Basic protocol applied isSmartTrunk II. The joint-stock company in one of the largest Motorola distributors in Ukraine. It offers aflexible system of rates.

"Sakura" Mobile Communication (SMZ) LLC

The company was established in March 1996. It provides services of trunking communication for more than sixmonths. The operation frequency range is VHF. Basic protocol applied is SmartTrunk II. Basic stations applyequipment manufactured by "Motorola". The system covers the territory of Kyiv practically without "shade"areas. In the Kyiv oblast, the coverage in the north direction is 90-100 km, in other directions - 100 km.Subscription is fixed 90 USD per month.

"SZVYAZ" Joint-stock Company

The company provides services of trunking communication for nearly 1 year. The operation frequency range isVHF. Basic protocol is SmartTrunk II. The equipment is provided by "Motorola ". The territory covered is thecity of Kyiv with small " "shade" areas. In the southern direction the coverage reaches the town of Obukhiv.

"Alex" Concern

It has been in operation since 1993. The operation frequency range is VHF and UHF. The basic protocolapplied is SmartTrunk II. Communication is provided in the city and oblast of Kyiv.

Subscription rate (without regard to traffic)

Average rate USDSubscription (without regard to traffic) without access to telephone network 40Subscription (without regard to traffic) with access to telephone network 80Time limit 4 minutes

Figure 26 Subscription rate (without regard to traffic)

Mobile Phone Networks

Ukraine’s mobile market has experienced exponential growth since 2002. Mobile subscribers increased from3.7 million in 2002 to over 57 million in 2007, growing at an average 70% per year. Penetration levels are oneof the highest in the region and mobile connections now outnumber fixed line connections by 5 to 1.




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Figure 27 Regional levels of mobile penetration, Q3 2007

Mobile services are the preferred method of communication in a country where fixed line penetration stood at23% of population in 2005. Mobile services have therefore contributed to overall telephony penetration andhave helped bridging the communication gap between rural and urban areas. In addition, by providing auniversal and reliable telephony services, mobile services have promoted economic development and directinvestment in the country. Mobile coverage is now effectively universal as 99% of the country’s territory isserved by at least one operator and Minutes of Use (MOU) peaked at 150 per month in 2007. There arecurrently five mobile operators in Ukraine, competing to deliver low tariffs and innovative services toconsumers. The average price of an outgoing call has dropped by nearly 80% in the last five years. Effectivemobile prices per minute are among the lowest in Eastern and Central Europe. However, in 2007 subscribergrowth declined significantly due to a saturated market: five million new connections are estimated for 2007,compared to over 18 millions in 2006.




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Figure 28 Effective mobile price per minute in a sample of Eastern and Central European countries, 2007

Figure 29 Mobile penetration and Total Outgoing Minutes of Use in Ukraine

The maturing voice market has caused voice average revenue per user (ARPU) to decrease by over 70% in thelast four years. In response, operators have shifted focus towards the mobile data market, with EDGE-technology services recently introduced and MMS services. 3G (third generation) has yet to be launched by theMNOs. Licenses were awarded to the fixed line operator UkrTelecom in 2005, which launched 3G services inNovember 2007 in five cities. Ukraine lags behind most of other countries in Eastern and Central Europe interms of the development of 3G networks and the take-up of services. However, this situation could be reversedfollowing the issuing of 3G licenses and a swift network build out. Issuing additional 3G licenses may alsospeed up the roll out of mobile broadband and could assist the Ukrainian government in achieving higherinternet penetration.




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The Ukrainian communication market has benefited from foreign investors taking a long term interest inUkraine. Their presence increases the likelihood of additional investment as:• Foreign mobile operators bought technical expertise and attracted business partners, for example networkequipment suppliers, to register businesses in Ukraine;• Mobile operators have contributed to raise the quality of services allowing investors to rely on optimalcoverage in a country with low fixed lines penetration. The presence of a reliable communication system isregarded as a factor in attracting foreign investment; and• Foreign investors have a “signaling effect” of generally increasing investors’ confidence about Ukraine.Mobile operators face a high level of direct and indirect taxation in Ukraine. Operators are subject to mobilespecific pension fund contributions of 7.5% of subscriber revenues. This contribution does not apply to fixedlines. In addition a similar type of pension fund tax applies to handset revenues (1.5%) and, along with therequired $2 per handset permit necessary to import handsets, is a tax ultimately paid by consumers.The economic impact of the mobile sector in Ukraine in 2007 is UAH 37bn, representing 5.9% of total GDP. In2003 the estimated impact represented 2.9% of the GDP.

Figure 30 Economic Impact of the mobile communications industry in Ukraine.

Figure 40 shows the three different effects of the mobile industry’s economic impact:• Supply-side effects: value-add and employment from direct and indirect firms in the value chain;• Demand side effects: productivity increases resulting from people using their phones for business purposes;and• Intangible benefits: the social benefits enjoyed by consumers.

In addition, the contribution of the mobile sector has been significantly increasing over the last four years andthat the mobile industry employs almost 120,000 Ukrainian full time employees (FTEs). This compares with75,000 FTEs in 2003. Employment directly by MNOs is estimated to have increased by around 9000 FTEs in 4years. These workers receive work shadowing, apprenticeships and other formal training and receive theopportunity to work in a competitive environment. Kyivstar has been named the best employer in 2006 bybusiness magazine Dilavoi and by an international consultancy firm.




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Supply side impact of mobile communications

The supply side impact of mobile communication is formed of three components:• Direct effects: the value added and employment created by the MNOs themselves;• Indirect effects: the value add and employment created by other parties in the value chain; and• Multiplier effects: the knock-on impact of the direct and indirect effects on the rest of the economy.

Figure 31 Mobile value chain in Ukraine in 2007(UAHs millions)

Government revenues under the form of direct taxation, regulatory fees and mobile-specific pension fundcontributions constitute 75% of the value add. This proportion is higher than for other countries due to themobile-specific taxes and pension fund contributions which apply to subscribers’ revenues and to importedhandsets, as well as to the high level of social contributions. Kyivstar is the biggest taxpayer within the Kievregion.

Demand side impact




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Labour productivity increases in both urban and rural areas as workers can communicate continuously withtrade partners. The mobile phones have had a strong impact on the following sectors:• Small trade and import/export businesses, for example in the Odessa seaport. Mobile communications proveda powerful tool to estimating demand, updating estimates and finding new customers;• Logistics for large companies, in particular for internal communications and transportation;• Transport sector in urban areas: a number of cab drivers companies have started coordinating actions throughmobile phones.

Consumer benefits

Figure 33 Increasing Intangible benefits enjoyed by consumers in Ukraine.

Figure 32 Productivity impact of mobile communication




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The intangible benefits of mobile communications enjoyed by consumers can be estimated using a ‘willingnessto pay’ analysis. By combining data on usage and data on prices, we find that usage increase and pricedecreases create growing net benefits for consumers over time.Social benefits generated by mobile communications in Ukraine include:• The contribution of mobile communications to the democracy development and to the openness of society;• The contribution to developing interpersonal and family communications;• The promotion of social cohesion through the use of Location Base Services (LBS) and child trackingdevices;• The extension of communications to users with low education and literacy, particularly elderly people livingin rural areas; and• The extension of communications to those on low incomes.

Other benefits

In addition to the benefits estimated above, MNOs in Ukraine contribute to various groups in society through anumber of Corporate Responsibility projects. Charity related programmes organized by MNOs includeschemes aimed at helping orphan children, particularly in the Chernobyl area, by providing administrative helpto orphanages and by funding IT courses. Other projects provide help to social centers for invalids, such as theKiev Polytechnical Institute, and to elderly people in retirement homes, particularly in rural areas, whoare provided with opportunities of communication.

Conclusions

The Ukrainian mobile sector has experienced exceptional subscriber growth since 2002 and creates asubstantial and increasing proportion of the country’s economic value. It estimated to have contributed 2.9% ofGDP in 2004, increasing to 5.9% in 2007. In 2007, approximately 119,000 FTEs were employed directly andindirectly by the industry. The impact of the communications is demonstrated through supply side andproductivity impacts. However, consumers have also benefited from an increased range of services and fallingprices. The average price per minute is estimated to have fallen 50% in 3 years. The fall in prices has beenaccompanied by an increase in coverage levels and this has contributed to the general accessibility of mobileservices. By continuing to grow its subscriber base and provide new services, the mobile sector may be able toincrease its GDP contribution. A regulatory and licensing regime that combines international best practice withlocal considerations would be supportive of this growth opportunity25. For example, the issuing of additional3G licenses would allow for further service innovation including the delivery of data connectivity to largerproportion of the Ukrainian population. In addition, the government could further support the sector’sdevelopment through fiscal policies consistent with the remainder of the economy, notably a review of thecurrent pension funding requirements.

Background to the mobile market

Ukraine’s mobile market has experienced exponential growth since 2002. Mobile subscribers increased from3.7 million in 2002 to over 57 million in 2007, representing an annual growth rate of over 70%. Penetrationrates are above the average in the region. There are several companies serving cellular connection in Ukraine:




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UMC(MTC) - National operator of cellular connection. Standard: GSM 900 Kyivstar GSM - National operator of cellular connection. Standard: GSM 900/GSM 1800 DCC - covers Kyiv, Odesa, Crimea, Donetsk, Kharkiv, Dnipropetrivsk, Zaporizhzhya and some other

regions of Ukraine. Standard: D-AMPS Golden Telecom - covers Kyiv and Odesa. Standard: GSM 1800 WellCom - Kyiv only. Standard: GSM 900 Beeline - covers some Ukrainian regions. Standard: GSM Life:) - covers some Ukrainian regions. Standard: GSM

Figure 34 Mobile operators' market shares over time.

Figure 35 Mobile connections and mobile penetration in Ukraine over time.

Mobile services are the preferred method of communication in a country where fixed line penetration hasalways been low. Fixed line penetration was 23% of population in 2005, when mobile penetration started to




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increase, and today mobile connections outnumber fixed lines by 5 to 1. Mobile coverage is now effectivelyuniversal: 99% of country’s territory is served by at least one operator. Usage has increased to over 150minutes of use per user per month in 2007 and is generally higher than in other countries in the region.Aggressive competition in the mobile market has delivered low tariffs and increasing innovation to consumersin a very short time. Mobile prices dropped by around 80% in the last five years. However, the Ukrainianmobile market is maturing and penetration reached 100% in 2006. Mobile operators began offering prepaidservices in 2003 and by 2007 prepaid connections represented 93% of all subscribers. Prepaid SIM cards haveproved more popular than fixed line or postpaid subscriptions. They do not require a bank account to receiveaccess and customers can buy low value vouchers once to activate and use a prepaid SIM. This practice iscommon in Ukraine for most pre-paid customers.

Figure 36 Percentage of prepaid and postpaid customers for each operator (2007)

Figure 37 ARPU levels over time, UAHs.

Falling prices have caused voice average revenue per user to decrease. The figure below shows that ARPUlevels have decreased by over 70% in the last four years. The drop in ARPU levels and the mature voice market




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has caused operators to shift focus towards the mobile data market, with EDGE-technology services recentlyintroduced and with MMS services launched.

Figure 38 Earnings and Subscriber base

As was previously stated, Ukraine’s mobile market is highly competitive due to a number of mobile operatorsoffering services via GSM, CDMA and WCDMA/HSDPA networks. Mobile broadband services present thenext growth opportunity given the saturated mobile voice market although the major GSM operators arehampered by lack of licenses to offer 3G services. Into this market opportunity has stepped Ukraine’s CDMAoperators, which initially offered fixed-line services but have since moved into the mobile market, launchingmobile broadband services. Ukraine is also home to a nascent mobile content and applications market, withfuture growth largely dependent on mobile data uptake. Russia’s Vimpelcom announced on 11 November 2005that it had bought the mobile operator Ukrainian Radiosystems (URS) for 231.3 US$ million (191.16 millionEuro). The subscriber base of URS amounted to 51,200 people at the end of 2005, or less than 1 percent ofmobile users in Ukraine. URS has a GSM900 license that covers the entire territory of Ukraine, which has apopulation of approximately 47.8 million. URS also has a GSM 1800 license that covers 23 of Ukraine's 27administrative regions (excluding the city of Kyiv and the Kyiv, Dnipropetrovsk, and Odessa regions).Ukrainian radio systems (URS) provides services in GSM-900 under the brand names WellCom and Мoby.The NCCR has decided to limit the number of licenses available to new subscribers for the CDMA standard inthe 800 waveband. There are four companies in Ukraine operating in the CDMA standard: ITC, CST-invest,Velton Telecom and Intertelecom. All of these operators are working in CDMA-20001x and they offer, inaddition to telephone services, a full range of digital telephone communication services and fast datatransmission. According to the CDMA Association, the total subscriber base for CDMA rose by 43 percent inthe year to June 2005. Mobile users of Astelit’s network (marketed under the trademark “life:)”) will have theopportunity to be the first in Ukraine to experience 3G services. An EDGE service offering connection speedsof 236kbps is already on the market. Such offerings will also help life:) to better understand user expectationsfor high-end services. For life:), EDGE is a transitional migration step to 3G.46 According to life:)’s strategy,EDGE based services will be available in the largest cities, in areas of heavy data usage and in city centers.EDGE was made available in Kyiv, Odesa and Dnipropetrovs’k on 25 March 2005. life:) intends to continue itsexpansion of EDGE coverage in Ukraine. UMC recently awarded a tender to the Kyiv company Priocom todevelop its IP/MPLS infrastructure to boost its capacities for GPRS, EDGE, advanced IP services and inpreparation for the launch of 3G services. A range of 2.5G and 2G data services are also available on the




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market. However, prices are somewhat prohibitive bearing in mind the income levels in the country (WAP perminute 0.30UAH or 0.04Euro; GPRS per megabyte 5UAH or 0.81Eur at peak times, and 1UAH (0.16 Euro)off peak).48 No statistics regarding the take-up of such services are available. As an indication of the extent ofmobile coverage, Kyivstar claims a territorial coverage of 97 percent, with a population coverage of 98 percent.Mobile phone penetration is growing at a precipitous rate in Ukraine, increasing from 42.48 percent (based onindustry figures) at the end of 2004, to 64 percent50 at the beginning of 2006, and rose to 84.9% by 30September 2006. The standard methodology for calculating subscriber numbers in Ukraine is to count contractcustomers together with prepaid customers who have had at least one piece of incoming or outgoing traffic ontheir phone in the preceding three or six months (depending on the operator).

Mobile and Wireless Networks Conclusions

With a penetration rate of over 88%, the mobile telephony market is the strongest sector in the Ukrainiantelecom industry. Additionally, the issuance of 3G and WiMax licenses will further enhance the rapid growthand development of the wireless sector. Even though the Ukrainian government has been slow to fully privatizeUkrtelekom, the wireless sector has developed into an intensely competitive market and the most progressive inbringing next generation services to the market. The mobile telephony market is fairly segmented. The majorplayers are Kyivstar, UMC, and Astelit, controlling approximately 45%, 42%, and 11% respectively. GoldenTelecom Ukraine and URS control the remaining shares of the market. For most of the major operators, theprepaid customer segment dominates the customer base. It is anticipated that the wireless carriers cannoteffectively push new value added services until the prepaid customer base is converted to post-pay contracts.Nevertheless, the wireless sector is aggressively deploying infrastructure to deliver broadband services overnext-generation networks. Five licenses are expected to be issued for WiMax services in late 2006. Also, all themajor operators are investing in their networks to deliver 3G data and telephony services. The aggressive newinvestments will further solidify the wireless sector as the leader of Ukraine’s telecommunications market.

Mobile-specific taxation

The mobile sector in Ukraine is subject to heavy sector-specific taxation. Mobile specific taxes in Ukraineinclude:• A pension fund contribution of 7.5% of an operator’s subscriber revenues. This contribution acts de facto as asecond VAT on mobile revenues. This tax applies across other goods in Ukraine, such as alcohol and tobacco,which have very different features to mobile services. However, a similar contribution does not apply to thefixed operator. As a result this tax distorts competition between fixed and mobile operators, potentiallyaffecting areas of the country where mobile network operators act as universal service providers.• Handset-specific taxes. These are a pension fund contribution of 1.5% of the value of the handsets imported,paid by handset importers and a $2 permit paid on each handset imported in the country. These taxes contributeto inflate the price of handsets and cause a large number of handsets to be imported through parallel andunofficial channels.




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MAIN MOBILE OPERATORS

Ukraine has five mobile operators, whitKyivstar and UMC being the two main nationaloperators controlling about 90% of the mobilemarket. Penetration rates have significantlyimproved over the last year, reaching morethan 60% in early 2006. Throughout 2010,trends in Ukrainian mobile business continuedto improve, led by macroeconomic recovery, amore stable competitive environment, an

increase in subscriber base, higher roamingusage, and marketing spend to adapt to the new

market realities. Revenues declined 0.3 % on a pro forma basis for the year, but improved in the second half ofthe year, reflecting the recovery in the business. After the Ukrainian Anti-Monopoly Committee’s finaldecision to approve the Kyivstar transaction on October 19, 2010, we began actively integrating our Ukrainianoperations. The integration of our Ukrainian operations continues to progress well with independently validatedsynergies of approximately US$ 52 million in 2010, exceeding our initial targets .

Figure 40 Increase in subscribers, mobile market (January 2012) Figure 41 Mobile Market shares

Ukrainian mobile market demonstrated double digit growth prior to the global economic crisis Telecomindustry’s share in GDP remains significant despite some deceleration of its growth in 2006-2008 and expectednegative growth in 2009 8% decline is expected in mobile market’s revenues in 2009 on the back of lowerconsumption of services as a result of economic recession and deterioration of business activity – however, thisis smaller than the 14% decrease in real GDP projected for 2009

Figure 39 Operators Rating




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Figure 42 Mobile Industry and market trends

Figure 44 Ukrainian mobile market (revenue & share in nominal GDP)

Overall revenues in Q2 2009 were down by 8% y-o-y reflecting unfavorable macroeconomic conditions - Corporate clients quickly reacted to the crisis and adjusted their levels of consumption downwards. Revenue from mass market pre-paid customers was slightly below the level of previous year in Q1

2009, however, at the end of Q2 2009 their consumption rebounded In Q2 2009 overall revenue grew by 6% vs. Q12009 that was 2 percentage points greater (in absolute

figures as well) than in the same period of previous year

Figure 43 Expected penetration Growth




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Market outlook

Although the mobile market is close to saturation and is approaching maturity, growth is expected to turnpositive once economy and consumption recover�The pace of growth will depend to a large degree on the macroeconomic environment and overall businessactivity� Introduction of products and services based on UMTS could further boost overall market growth andincrease its revenues�Pace of UMTS network roll-out by major operators as well as an introduction of VAS and data products andservices will determine the development of the mobile market

Figure 45 Mobile market revenue forecast

Kyivstar

The company was created in 1994 as a closed-end joint-stock company, and in January 1995 was reorganizedinto an open joint-stock company. The founders are "Storm" (31%), "Omega" (20%), Norwegian "Telenor"(35%), US investment fund, Sputnik (14%). The enterprise invested funds in the tests of a frequency for the




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GSM-900 standard. KyivStar won a tender and became a full-fledged operator of GSM-900 standard mobilecommunication in Ukraine. It is a member of the International Association of Mobile CommunicationOperators. At the first phase KyivStar intends to provide mobile communication on the territory of the city ofKyiv and adjacent districts. At the second phase, the network is to expand in the big cities of Ukraine,including Lviv, Donetsk, Odessa, Simpheropol. In the course of the third phase, it is planned to extend theactivity throughout Ukraine. An agreement on rouming the company concluded only with Hungary. Accordingto preliminary estimates, the rates for services rendered will be higher than in Europe.

Types of calls Charge (hryvnia) Per minuteLocal and distant calls within the territory of Ukraine 0.75CIS member states 1.68-1.85Europe 1.83-3.08

Figure 46 Rates of Kievstar mobile operator

National mobile operator Kyivstar provides a coverage of 97% of Ukraine’s territory inhabited by 98% ofUkraine’s population. Kyivstar network covers all large cities and towns, over 27 thousand settlements, allmain national and regional highways, and the majority of sea and river coasts of Ukraine.

Highlights first half 2010 Kyivstar maintained its position as the market leader in Ukraine, with a stable estimated revenue market

share around 49.2 % for six month of 2010. The organic number of subscriptions decreased by 275,126 during the year to June 30th, 2010 due to

the continued pressure from competitors and overall market decline. Estimated subscription marketshare have fallen to 39.9 %.

ARPU in local currency decreased by 1 % vs Q2 2009 due to lower pricing to combat competitors’activities, slightly offset by higher MOU.

Total revenues in local currency decreased by 3 % vs Q2 2009 primarily as a result of decreased ARPUand also reflecting the lower subscription base.

In local currency, EBITDA decreased by 6 % vs Q2 2009 driven by the decline in revenue and rise inopex. The EBITDA margin decreased to around 58% for the 2nd quarter of 2010.

YTD Capital expenditure in local currency increased by 43 % vs 6 months of 2009 as a result ofadjusting network investments to the market situation and growth of traffic volumes.




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Figure 47 Part 1 KyivStar's Analytical information 2008-2010

(1) EBITDA is defined as income before financial and other income/(expenses), provisions for income taxes and depreciation and amortization expense.(2) Equity RATIO is determined by dividing the amount of shareholder’s equity at the end of the period by the amount of total assets at the end of the period.(3) At period end and including fair value adjustment of hedged item.(4) Net debt/ EBITDA is determined by dividing the total amount of net debt at the end of the period by the amount of EBITDA for the four most recent quarters. Net debt is defined asinterest bearing debt, including fair value adjustment of the hedged item, less cash and cash equivalents at period end.




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(1) EBITDA/Net interest expenses is determined by dividing EBITDA by the amount of interest expenses, net of capitalized interest and excluding interest income/expense from derivativefinancial instrument, for the quarter.(2) EBITDA/Interest expenses is determined by dividing EBITDA for the four most recent quarters by the amount of interest expenses, including capitalized interest and interestincome/expense from derivative financial instrument, for the four most recent quarters.(3) Funds from operations/Net debt is determined by dividing the amount of net income adjusted for depreciation and amortization expenses for the period by the amount of netdebt. Net debt is defined as interest bearing debt, including fair value adjustment of the hedged item, less cash and cash equivalents at period end.(4) Free operating cash flow/ Net debt is determined by dividing the amount of the operating cash flow for the period adjusted for cash used in investing activities and dividendspayments by the amount of net debt, including fair value adjustment of the hedged item, less cash and cash equivalents at period end.(5) Net debt/Shareholders equity is determined by dividing the amount of net debt by the amount of shareholders equity at the end of the period. Net debt is defined as interestbearing debt, including fair value adjustment of the hedged item, less cash and cash equivalents at period end.(6) Subscriber acquisition cost is determined by dividing the amount of advertising and marketing expenses, dealers’ discounts and fees on start packages and scratch cards, and dealers’ feesfor contract subscribers connection incurred during the period by the number of new subscribers connected to the network during that period.

Figure 49 Figure 47 Part 3 KyivStar's Analytical information 2008-2010

(1) End of period.(2) Churn rate represents a percentage of the total number of churned subscribers to the average number of subscribers during a certain period. Contract subscribers with negative accountbalance and prepaid subscribers are considered to have churned after three months of inactivity, contract subscribers with positive account balance - after four months of inactivity.

Figure 48 Figure 47 Part 2 KyivStar's Analytical information 2008-2010




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(3 Monthly Average Minutes of Use per User (MOU) is calculated by dividing the total number of minutes of usage for incoming and outgoing calls during the relevant period (excluding guestroamers) by the average number of mobile subscriptions during the period and dividing by the number of months in that period.(4) Monthly Average Revenue per User (ARPU) is calculated by dividing service revenue during the relevant period, including roaming revenue and interconnect revenue, but excludingrevenue from connection fees, sales of handsets and accessories and other non-service revenue, by the average number of subscriptions during the period and dividing by the number ofmonths in that period. Total ARPU is calculated using IFRS reported figures reviewed by auditors

MTS(former Ukraine Mobile Communication)

It was created in 1992. The founders are 17 oblast enterprises of UKRAINIAN TELECOM association (51%),Deutsche TeleCom (16.33%), PTT Pelecom (Netherlands) (16.33%), and TeleCom Denmark (16.33%). UMChas 27 branch offices. It is the most potent operator since it controls 90% of the market. UMC is the soleoperator of NMTi-450 cellular network. It has nearly 38,000 subscribers. The NMTi-450 cellularcommunication network covers the major part of the territory of Ukraine with 42% of the county's population(over 20 million). Network is established in 93 cities of Ukraine, including all the oblast centers. Cellularcommunication covers more than 4,000 km of main highways. Subscribers may make local, distant, andinternational calls, use facsimile, transmit data. Since September 1997, services in the GSM-900 standard havebeen put into practice. UMC plans to gradually develop the GSM-900 network: in the direction Kyiv - Boryspil- Brovary, Dnipropetrovsk, Odessa - Illichivsk, Kharkiv, Donetsk - Makiivka - Horlivka.

MTS Rates

Types of CallsCharge

(USD) perminute

Local and distant calls within the territory of Ukraine

(not business time)

0.600.30

Incoming calls

(not business time)

0.400.20

CIS member states 1.30Eastern Europe 1.80Central and North Europe 2.60Western Europe 2.70Western and Central Asia 3.40Eastern Asia 3.70North America 4.00Africa, Southern and Central America 4.40Other countries 4.80

Figure 50 MTS Rates

MTS claims a coverage of more than 91% of Ukrainian territory where 95% of population live. This means formost parts of the country, as least sufficient outdoor coverage is available.




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Figure 51 MTS strategy

Starting in July 2007, MTS Ukraine successfully implemented a number of strategic measures that contributedto the overall strengthening of subscriber base quality, improvement in brand perception and an increase insubscriber activity levels

MTS Ukraine capital investmentsMTS is one of the largest investors in Ukraine with $2.7 billion of total investments in the past 5 years . In2004-2007 investments were allocated mostly to radio-subsystems (coverage extension and network capacity). Sincemid-2007 and to date investments have been mostly targeted atIT systems, switching sub-system capacity and back-bonenetwork to prepare for 3G roll-out and introduction of newservices. Investment attractiveness of Ukrainian mobile markethas worsened because of economic recession and significantnational currency devaluation. While 2G network Capex ismoving to a maintenance level, MTS Ukraine plans to continuereasonable investments in network development and qualityimprovement. Future level of capital investments couldincrease should we obtain a UMTS license.

Developing own backbone to decrease cost of services

Company’s backbone network currently covers the whole

territory of Ukraine (MTS invested over $180 mln in 2006-2008). An own backbone network creates a number of benefits

Figure 52 MTS Ukraine revenue dynamics




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for MTS Ukraine: Reduction of dependence on leased lines

and protection against rates increases Build-up of back-up capacity Ability to plan network capacity

according to the level of traffic load Renting out free capacity to gain

additional revenue Ability to use network for convergent

services for large corporate clients Decrease of OPEX and cost of services

(in Q2 2009 leased lines expenses at MTS

Ukraine per unit of traffic were almost zero)

Figure 54 MTS Ukraine backbone network

Figure 53 MTS Ukraine capital investments in 2004 -2009E




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Figure 55 Key strategic priorities for MTS Ukraine in 2010-2012

Figure 56 MTS Strategy: Direction-tactics-benefits




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Figure 57 MTS Ukraine Highlights

Mobile TeleSystems OJSC ("MTS") is the leading telecommunications group in Russia, Eastern Europe and Central Asia, offering mobile and fixed voice, broadband, pay TV as well ascontent and entertainment services in one of the world's fastest growing regions. Including its subsidiaries, the Group services over 100 million mobile subscribers. The Group has beenawarded GSM licenses in Russia, Ukraine, Uzbekistan, Armenia and Belarus, a region that boasts a total population of more than 230 million. Since June 2000, MTS' Level 3 ADRs havebeen listed on the New York Stock Exchange (ticker symbol MBT). Additional information about the MTS Group can be found at www.mtsgsm.com.

Figure 58 Operating Income Before Depreciation and Amortization (OIBDA) and OIBDA margin of the MTC Ukraine.

Figure 59OIBDA margin

MTS Ukraine financial highlights in 2011

Revenue dynamics reflective of seasonal factors and steady subscriber growth. OIBDA growth faster thanrevenue due to on-going efficiency measures and market focus on increasing customer value and cash flowmaximization.




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Figure 60 MTS Ukraine financial highlights in 2011

MTS Ukraine operating indicators

ARPU reflective of seasonal factors and sustained efforts to monetize subscriber base:

Strong year-over-year usage growth due to the efforts aimed at stimulating subscribers’ activity toenhance customer loyalty

Decline in yearly churn attributable to Company efforts to improve customer loyalty Revenue from VAS impacted by positive seasonality and New Year promotional campaigns




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Figure 61 MTS Ukraine operating indicators

Key initiatives in Q4 2011:–Promo campaigns on Good’OK RBT service–Launch of new SMS quizzes and LBS games–Launch of the first MTS-branded Android MTS-916–Launch of the MTS-branded tablet PC




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Figure 62 MTS Ukraine revenue indicators

Satellite Services

There are a number of companies providing Internet access via satellite technologies in Ukraine. These includeUkrsat, Infocom-SK, Spacegate, Adamant, LuckyNet, Ukrnet, and Itelsat. Excluding Infocom-SK, these areall private operators (several of these companies are resellers). Ukrchastotnagliad, the Ukrainian frequenciessupervisory centre, reports that 86 operators have licences to provide satellite communications services inUkraine. Despite the large number of operators on the market, however, satellite telecommunications inUkraine may be limited due to low income levels. The Government is nevertheless deploying a digital satellitetelevision and radio broadcasting system, which will also be used for Internet services. Ukraine has joined theInmarsat, Intelsat, Global Star, Thuraya and Orbcomm satellite networks. Currently, there are five licenses fordirect satellite communications services. In Ukraine, access to satellite communication is divided into receptionand transmission of information. The reception of information by satellite is available to anyone, without therequirement for a license or permission for use of radio frequency. The necessary receiving equipment isavailable to anyone willing to invest in it. For the transmission of information (for example, the use of anInternet access service), it is necessary to have permission to use the frequency, which acts as a brake on the




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development of this market sector. Furthermore, satellite communications equipment is subject to certif ication,which takes around half a year to process by the authorities. This market is not considered promising for thoseproviding services to the private or small business user, since data link bandwidth is limited and InternetService Providers that use this method cannot compete in terms of price or speed. The narrowness of themarket is explained by the fact that full uplink and downlink services via satellite communications arecomparatively expensive for the end user, because users have the option of purchasing Internet access servicesat significantly lower prices from cable operators. For this reason, satellite communications services aregenerally targeted at large corporate clients. The Ukrainian Research and Academic Network (URAN)connects 90 universities and research institutions. The main operators of the network are the EuropeanIntegration Centre Ltd and public enterprise, UARNet. The network includes access points in 16 oblast(regional) centers and uses Ukrtelecom leased lines with data rates of 64kbits/s to 8Мbits/s.

Status of the National Regulatory Authority (NRA)

The National Committee for Communications Regulation (NCCR) was set up in April 2005 as the independentnational communications regulatory authority of Ukraine. As it is not possible under the Ukrainian legal systemto have an executive body that operates completely outside Government, the NCCR functions under theauthority of the President of Ukraine, thereby, in principle, ensuring its independence from Government. Aftersome uncertainty regarding the sources of funding for the NCCR up until the end of 2005, a budget of 23.1million UAH was allocated for regulatory activities for 2006, with a further 2.6 million UAH allocatedspecifically for the management of the reorganization of spectrum (see the section on spectrum below). As theNCCR has not been in operation for very long, it is difficult to say with certainty whether it has, or will have,sufficient funds to carry out its assigned tasks.The key tasks of the NCCR are to:

introduce proposals to governmental bodies regarding legislation, other normative legal acts andstandards in the sphere of telecommunications;

develop and approve Regulations and other normative legal acts within the limits of its authority andoversee their implementation;

supervise the telecommunications market;

issue licenses and registrations in the scope of telecommunications services; distribute, assign and keep records of number resources, issue and cancel permits to use numbering

resources, and manage the use of number resources; oversee the quality of telecommunications services and satisfy users’ demands; regulate telecommunications tariffs and settle disputes among telecommunications operators, as

appropriate; issue permits to telecommunications operators and providers to set specific tariffs for disabled and

socially disadvantaged persons for public telecommunications services; support the legal provision of public telecommunications services; obtain statistical reports from telecommunications providers and operators as established by legislation; obtain documents, statistics and other data, as established by legislation, from central and local

executive Governments, the executive Government of the Autonomous Republic of Crimea, and localGovernments;




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adopt decisions within the limits of its authority, which must be adhered to by providers/users of thetelecommunications market;

apply administrative penalties to providers/users of a telecommunications market in a manner describedby legislation;

submit materials to the Anti-Monopoly Committee of Ukraine in cases of violation of the legislation onthe protection of competition;

take legal action following complaints regarding violations of telecommunications legislation bybusiness entities who operate in the telecommunications sector;

regulate the interaction of operators when telecommunications networks interconnect; create favorable organizational and business conditions for attracting investment in

telecommunications; ensure equal terms and conditions for all market players; ensure dispute settlement among telecommunications operators and providers with interconnected

telecommunications networks; keep a register of telecommunications operators and providers; cooperate with corresponding regulatory bodies in other countries; publish an official bulletin, which includes normative legal acts, news and other information; and fulfill other responsibilities, envisaged by the Law on Communications, other laws, and normative-legal

acts.There does not appear to be any overlap between the administration of telecommunications by the Governmentand that of the NCCR. Again, it is difficult to tell at this early stage if there will be any practical issuesregarding the division of labour between the Ministry and the NCCR, or the speed with which they will beaddressed should they arise. The study team is not aware of any staff from the telecommunications incumbentbeing seconded to work for the NCCR, although (somewhat inevitably and not necessarily causing a problemfor the independence of the commission) there are former incumbent staff working at the top levels of theNCCR. Until the NCCR has been in operation for more time and has dealt with significant consultations ordisputes, it is difficult and possibly misleading to speculate on its likely effectiveness.

Cable Services

According to data provided by the Cable TV Union of Ukraine, there are approximately 300 cable operatorsproviding services to approximately 12 percent of Ukrainian households. Only 10 percent of these have accessto broadband services and only half of these actually avail of it. Annual growth is, according to this data, only 3percent. However, against this lackluster background, cable provider Volia is already offering advanced “tripleplay” services (television, Internet and telephony), with a subscriber base of over 735,000.

Cable Networks

Despite the fact that the regulatory environment (see licensing above) is somewhat difficult for cableoperators, there are cable networks available in most large cities in Ukraine. The Kyiv operator Volia, whichhas been offering advanced “triple play” services for some time now, being a significant example of the




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potential for the sector. According to the State Statistics Committee, the revenue of the cable operatorsincreased by 5.6 percent from 42.099 million UAH (6.8 million Euro) to 44.448 million UAH (7.2 millionEuro) in 2005.

Cable Regulation

Despite the extensive powers of the NCCR, the regulation of cable communications has not been put squarelyand unequivocally into its remit. Ukraine has an extensive cable television network (when compared with otherCIS countries). However, the further development of cable television has been hampered by a lack of relevantlegislation, meaning licensing and overall management of the industry is very complex. Based on currentlegislation, the Ukrainian cable television industry is administered by several government entities. The divisionof authority and responsibilities is a nebulous issue not only for foreign investors but also for industryspecialists. There are at least four government agencies that exercise direct control over the industry:

The Department for Communications of the Ministry of Transportation (the former State Committee forCommunications);

The National Council for Television and Radio Broadcasting; The Ukrainian Centre for Control of Radio Spectrum; The National Commission for Communication Regulation;

Ambiguous and outdated legislation leads to confusion and conflict; for instance, cable television services arecurrently licensed by the National Council for Television and Radio Broadcasting, although the latestlegislation delegates this authority to the NCCR. However, because the NCCR has not yet taken over all of itsresponsibilities, its functions are supposed to be performed by the Department for Communications of theMinistry of Transportation. Numerous court hearings, decisions and counter decisions do not make thesituation better. Moreover, the Antimonopoly Committee of Ukraine views cable television operators as naturalmonopolists, and delegates regulatory authority over their industry tariffs to local administrations. Averagemonthly tariffs established by city authorities vary from 0.85 Euro to 5 Euro. Based on the above user fees,cable television companies say that they cannot afford to produce their own programming as well as paytelevision companies for the programmes they distribute. Operators can also offer individual packages thatcould include more channels or other value-added services (Internet, security, etc.). In these cases the fee is notlimited.

Licensing and Authorization

The procedure for the licensing of telecommunications services is regulated by the 2003 Law OnTelecommunications, as well as by additional guidelines issued by the NCCR. The Law specifies that local,inter-city and international telecommunications services, as well as mobile telephone communications andtelevision and radio broadcasting, must be licensed. Under the Law On Telecommunications, the basicprinciples for the licensing of telecommunications service provision are as follows: creating open marketconditions; acting in the best interests of society and service providers; equal access; efficient use of resources;promotion of new technologies; and the attraction of investment. The NCCR is responsible for establishing theterms and conditions of licenses and ensuring compliance.

Licensing for fixed telephone communications costs as follows: International (covering the whole territory) – 1,700,000US$ (1,404,958 Euro)




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Intercity - 68,000US$ (56,200 Euro) Domestic: With network capacity of up to one thousand telephone numbers – 320 US$ (264 Euro) With network capacity of up to ten thousand telephone numbers – 1,600 US$ (1,322 Euro) With network capacity above ten thousand telephone numbers – 9,600 US$ (7,934 Euro) With use of wireless access – 19,600 US$ (16,198 Euro) With use of wireless access based on DECT technology -1,000 US$ (826 Euro) In rural areas – 730 US$ (603 Euro) Audio-text – 700 US$ (579 Euro)

A license for mobile telephone service provision varies in accordance with the frequency involved and the sizeof the region in question. Prices range from 170,000 UAH (27,500 Euro) for the cheapest region in the 300-470MHz band to 340,000 UAH (55,171 Euro) for Kyiv in the 1.7-2.2GHz band. On 16 May 2001 the UkrainianGovernment introduced licensing of VoIP with 15-year operational licenses at a cost of up to 899,300 UAH(146,000 Euro). The term of the license (except for VoIP, which is as described above) is determined by theNCCR and cannot be less than five years. For each type of telecommunications service, the NCCR is obliged toissue special instructions on the technical and bureaucratic parameters the enterprise should respect and whatdocuments would be needed to confirm that the parameters have been met. The CDMA operators have askedthe NCCR to issue them with a license for national roaming. Victor Frolov, the director of the executivecommittee of the CDMA Association of Ukraine, says that CDMA is available in 11 regions of Ukraine and theoperators are ready to work together. When compared with the previous situation, the 2003 legislation onlicensing has greatly improved certainty for operators, as it is now impossible for the NCCR not to respond(actively or passively) within the time period specified in the law (one month) to license applications. Thisreplaces the system where businesses had to wait indefinite periods to get responses from official bodies.In April 2006, the NCCR decided not to grant further GSM-900 and GSM-1800 licenses, meaning that GoldenTelecom will not be able to operate in the Kharkov, Lvov and Dnipropetrovs’k regions, although Astelit,Kyivstar and UMC do have licenses to provide services there. A range of licenses were awarded to URS,Kyivstar, Astelit and UMC for GSM-1800 services in a number of regions. Market players in the telecomssectors are divided by the Law on Communications into “operators” and “providers”. Under Article 1 of theLaw, “providers” do not have the right to maintain or operate networks. Operators are divided into mobileoperators, fixed operators and fixed wireless operators. Mobile operators need to obtain a license for theactivity of provision of phone services and for the frequencies they use, fixed operators must have a license forlocal, national and international services and fixed wireless providers need the same licenses as fixed operatorsas well as a frequency license. The legal status of VoIP providers has so far been neglected. Within the contextof the current definitions, they could be judged to be “operators” and therefore be liable to the same licensingprocedures as the categories of operators listed above. This obviously creates a degree of uncertainty in themarket.

Spectrum

Radio spectrum is managed in Ukraine by the Ukrainian State Centre for Radio Frequencies (also referred to as“Ukrchastotnaglyad”), under the authority of the State Committee on Communications and Information. Theoverall management of spectrum in Ukraine is in a state of flux, however. In due course, a body called the StateTelecommunications Inspection (STI) will be established, under the supervision of the NCCR, to oversee




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spectrum management. Until this happens, the State Centre for Radio Frequencies will continue in its presentrole. Radio spectrum is managed in line with the Radio Regulation annexes to the Convention of theInternational Telecommunication Union, which was ratified by the Ukrainian Parliament in 1994, as well asthrough some national regulations such as the Radio Frequency Resource Act of 2000. Frequencies are licensedin compliance with the 7 February 2001 Cabinet of Ministers resolution number 112 on the Procedure forIssuing Licenses for the Use of Frequency Resources in Ukraine. According to Article 20 of the 2004 Law OnRadio Frequency Resources of Ukraine, the National Frequency Distribution Table (NFDT) governs thedistribution of radio frequency for general (regular) and special usage.The list of special subscribers of radio frequency resources in Ukraine consists of:

Departments and organizations in the Ministry of Internal Affairs; The Ministry for Emergency Situations and the Chernobyl disaster; The State Administration for Border Control; The Administration for State Security; The State Department for Corrections; and The Ministry of Transport of Ukraine, for the use of radio electronics by joint civilian and military

management systems for flight traffic and flight support. Non-state subscribers of radio frequency resources in Ukraine are divided into the following groups: Commercial entities that are using radio frequency resources in order to provide telecommunications

services, except for the purpose of television broadcasting; Commercial entities which are broadcasting television programmes by using their own or rented radio

electronics means; and Technology and amateur radio users (private individuals and registered businesses, which are using

Ukrainian radio frequency resources without providing telecommunications services).The NFDT currently in force, which was adopted by the Cabinet of Ministers on 12 October 1995 (order no.803), distributes frequency as follows:

0.4 percent - for civil usage; 27 percent - for military usage; 72.6 percent - for joint military and civil usage (in practice – for military usage).

According to the Ministry of Transportation and Telecommunications’ press-release of 22 November 2005, theCabinet of Ministers approved the decision for the usage of 76 percent of previously military radio spectrumfor the provision of 3G services by civil operators. Additional 3G licenses will be sold by the NCCR to privateoperators on a competitive basis, although these may not be issued for some time. Currently there arecommercial Wi-Fi networks that provide services to the public. Technologies using standards IEEE 802.11aand IEEE802.11b are being used in Ukraine, according to the licenses issued by the State CommunicationsCommittee of Ukraine, and permissions are granted by the "Ukrchastotnagliad" (Ukrainian FrequenciesSupervisory Body). Equipment needs to be certified in compliance with Ukrainian legislation. Each piece ofequipment is subject to technical evaluation, in accordance with the 5 October 2000 Order 154 of the StateCommunications Committee. Ukraine is not planning allow use low-power devices for Wi-Fi technologieswithout licenses and corresponding permits.Ukraine has not allocated and is not planning to allocate radio frequencies for the unlicensed use of Wi-Fi orsimilar technologies. Today Wi-Fi networks, operating in the 2400-2483,5 MHz frequency, are used in Ukraineto provide the public with wireless access to the Internet. More than 200 Wi-Fi licenses have been issued in




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recent years and all oblast regions have now exhausted their resources in the 2400-2483.5 range. The 3400-3700 MHz frequency range is used by Ukrtelecom and RRT Consortium for radio relay.

Internet

Overview

Internet is developing fast in big cities of Ukraine. Plenty of cyber cafes and clubs provide Internet connectionat 1-2 USD per hour. Some hotels offer Internet connection in the rooms, delivered to the room via Ethernetnetwork usually. It is recommended to keep a twisted-pair Ethernet cable with RJ-45 connectors with you ifyou plan to connect your laptop to the hotel network. Dial-up access is about 0.50 - 1.00 USD/hour. Usually,connection speed is a bit slow and depends much on the quality of telephone line. In some cases, Internetaccess is barely possible if using an old-fashion analogous phone line. Computer penetration is limited by thelow average wage, since a computer costing 420 Euro would cost approximately 19 percent of an averageannual gross salary, for example.

Figure 63 Internet and major social networks penetration in selected countries as of Q2 2011

While the government has passed legislation regarding the expansion of e-government services, little progresson practical implementation has been made. However, the development of e-government is part of the EU-Ukraine Action Plan, along with other information society initiatives, such as e-health and e-education. TheITU also supports the development of e-health in Ukraine, as part of its wider efforts on this issue. Ukraine’sscore dropped from 3.79 (out of 10) to 3.51 from 2004 to 2005 in the Economist e-readiness rankings,achieving its best mark for business environment (5.49) and worst for consumer and business adoption (1.8). In2006, Ukraine improved slightly, up to 3.62, while dropping a further four places, down to 61st (from 57th in




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2005 and 2004). The IT outsourcing market accounts for USD 544 million. There are 800 IT outsourcingcompanies employing 14,000 IT specialists. Since 2000, the Ukraine has become an attractive outsourcingdestination in Eastern Europe providing software development services to clients in the US and WesternEurope. Ukraine is also an attractive location for offshore/near-shore companies, home to many subsidiaries ofinternational companies like IBM Ukraine, Comarch, Microsoft, SAP, Aricent, ISM eCompany, Magento andCiklum. Ukraine has several home-grown ICT companies. Whereas initial outsourcing investment focused onKyiv (40 percent of FDI projects) companies_ are now focusing on second tier cities such as Lviv and Kharkivas potential investment destinations. The Ukrainian Hi-Tech Initiative and IT Ukraine are the associationsrepresenting the IT-BPO industry in the country. The proposed National “e-Ukraine” Programme went throughits first reading in Parliament in February 2006. The previous draft Law on the Enforcement of the National “e-Ukraine” Programme for 2006-2015, developed by the Government of Mr Yanukovich, failed to receive thenecessary majority in Parliament at the hearings held on 15 December 2004, possibly due to the politicalupheaval taking place at the time. While little concrete progress on implementing the Programme has beenmade until recently, there is range of legislative instruments in place to support it once it is adopted.These include:• The 1998 Law on the National Programme of Informatisation;• The Cabinet of Ministers Decision of January 2005, appointing the Minister of Transport andCommunications as the National Executive Manager of the National Programme on Informatisation;• The Cabinet of Ministers Decision of April 2005 on the National Strategy for Development of ElectronicCommunications, the Establishment of the Commission for Telecommunications Regulation and the Adoptionof the e-Ukraine Programme;• The Cabinet of Ministers Decision of May 2005 on the Fulfillment of the EU Ukraine Action Plan in theInformation Society field;• The Parliamentary Recommendations of September 2005 on Information Society Development;• The Presidential Decision of October 2005 on Urgent Tasks for the Implementation of Advanced InformationTechnologies;• The adoption in November 2005 by the Parliament of the National Programme of Informatisation Tasks(which lists the tasks but does not assign budgets);• The Government Decision of December 2005 on theNational Programme on ICT in Education and Science2006-2010. The total budget for this programme is 1855million UAH (30 million Euro). The new plan for 2006-2015 covers the development of the network,development of human potential and the propagation ofinformation technology. Key priorities of the new planinclude the introduction of the most up-to-datetechnologies into all aspects of life in Ukraine,improvement of computer literacy levels and thecreation of a communications infrastructure to integratethe country more effectively into global networks. TheNational Informatization Program, agreed each yearsince 1998, serves more as a short-term planningexercise than a national development plan.




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We can see that many sites that are a popular or have high traffic in Ukraine are in fact Russia originated.Russia websites have located themselves according to these developments to close the gap in Ukraine. Thereason is that Ukrainian people write and speak Russian as I have mentioned.In the years 2001-2008, the growth rate of internet in CIS countries was 400%, while internet growth inUkraine is around 2500%. In 2008, the money spent for Online Advertising in Ukraine was $ 23 Million.Number of Skype users is 4 million. Every month, more than 200 thousand users are registered.

According to Bigmir.net’s October report;

total internet users in Ukraine:: 13 Million 138 Thousand (In September: 12 Million 338 Thousand) Internet population is mainly gathered in 8 regions. Kiev city has the highest rate with 58.8%. the total time spent on the internet In October: 4 billion 538 million 358 thousand minutes Search engine usage: 62% Google, 28% Yandex and 4% Mail.ru constitute the first 3. However, when

we look only at Ukrainian users Google’s use of rate is at around 75%. The internet population mostly searches cars and related content that are in the top 30. In general, we

most searched words link to listing website. (Automobile, real estate, business Portals, etc.)

Social Network Penetration

Vkontakte.ru (vk.com)

Number of total users: 46 Million, Number of Ukrainian users: 5 Million (every second 1 user signs up)




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Figure 64 Vkontakte.ru overview.

Odnoklassniki.ru

Number of total users: 40 Million, Number of Ukrainian users: 2,1 Million

Figure 65 Odnoklassniki.ru overview.




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Twitter

Number of total users: 50 Million, Number of Ukrainian users: 25 Thousand

Figure 66 Twitter overview.

Facebook

Number of total users: 288 Million, Number of Ukrainian users: 175 Thousand

Figure 67 Facebook overview.




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Ukr.net

Number of total users: 4 Million, Number of Ukrainian users: 3.5 Million

Figure 68 Ukr.net overview.

Livejournal

Number of total users: 23 Million, Number of Ukrainian users: 3.5 Million

Figure 69 Livejournal overview.




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Overview of E-Commerce

Number of Credit Cards

Date 1 transaction at least Active, not expired01.10.2008 – 31.12.2008 38.5 Million 45.3 Million01.01.2009 – 31.03.2009 30.6 Million 44 Million01.04.2009 – 31.06.2009 29.6 Million 44.3 Million

Source: National Bank of Ukraine (NBU)Figure 70 Number of Credit cards.

Web Money

Figure 71 Web money.

Graphic: UAH trading volume and turnover rate by years.

In 2008 700 million UAH trading volume was done by 1 million 370 thousand registered users via theWeb Money.

Number of users who have made Minimum 100 and over processes, Kiev: 62,000 Ukraine: 255.000 Web Money access points, Kiev: 3681 Ukraine:15.756 Commission rate is 0.8% per transaction and money transfer to the account takes 1 business day.

Portmone

Monthly number of transactions: 500,000 They are not working like PayPal. You do not have to pay to register and can pay with all credit cards. Commission rates are between 4% and 5% and change according to products sold. Money transfer to the account takes maximum 2-3 days.




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If high trade volume is reached, commission rates are arranged again. 3D Secure (optional) use is available. You can make your interface design for payment screen

Portmone User Penetration

81% Male, 19% Female Age range; 24-32: 32%, 30-35: 30%, 36-40: 12% 66% Married, 29% Single 33% does not have any children. 20% has children between 1-5 ages. 37 % Senior/Manager, 24% Professional/Specialist/Director, 15% Owns a workplace, 11% are

Engineer 24% work in large companies in Ukraine and 23% work in international companies 64% own their own apartment, 15% live in rental flats 90% use the Internet every day

Mobile Penetration

2009 September the number of mobile users: 55.5 million (70.4% increase compared to August) according to UKR Telecom (UMTS) reports, in September internet access via mobile phones has

increased by 50%.• The number of mobile phones sold in Ukraine in the 3. Quarter is 1.21 millionunits. (30% increase compared to 2008)

The number of active mobile users in Ukraine is 30 million. 97% of individuals between the ages of 16-55 in Kiev use mobile phone. 19% of them use internet using mobile devices every day.

Revenues of Internet providers in July are 1.8 billion UAH (44% increase compared to 2008) Totalearnings are 999.7 million UAH (80% increase compared to 2008)

Mobile operators have begun to make investment as Internet Providers after September. Governmentopens 3G tender (15-year license, renewal) for 400 million UAH in order to give support. In addition, itgives 25 MHz Spectrum Radio Signal as incentive gift.

Mobile operators’ income in July-August is 18.6 billion UAH (5% increase compared to 2008

ICT-SPECIFIC INDICATORS

Ukraine ranks near the bottom in terms of Internet-based opportunities worldwide. Within eastern Europe,Ukraine came in 12th out of the 14 countries covered, ahead of only Kazakhstan and Azerbaijan. Ukraine’stelecoms infrastructure remains underdeveloped, as a result of slow privatization progress and insufficientinvestment. The government’s slow progress in privatizing Ukrtelecom, the state-owned former monopoly thatstill dominates the fixed-line sector, is the main reason for underinvestment in the fixed-line sector.

Subscriber and Penetration Numbers

Only recently, mobile telephony has grown rapidly, with penetration now above 60%. The relatively lownumber of fixed lines continues to hold back growth in the market for Internet services. High call charges andlow levels of ownership of PCs have also hampered expansion. Only 30% of Ukraine’s fixed networks are




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digital, and fixed-line penetration remain slow, thus limiting the access to Internet or broadband services viaxDSL.

Figure 72 Ukraine Subscriber Numbers for fixed, mobile and Internet services

According to Telas, the Ukrainian Network Operator Association, out of 48 million Ukrainians onlyapproximately 5 million use Internet (10-12% penetration). 70% of all Internet access is based on dialup.Broadband access (based on DSL technology) is approximately 3 times more expensive than dialup. 50% of theInternet users are in the city of Kiev. The cheapest Internet package is 70 Hryvna per month(approximatelyUS$14) for a 128 kbps access line with a 500 MByte data limit. There are 11M fixed line telephone and 2.7MCable TV connections in Ukraine

Figure 73 Ukraine Penetration Rates

According to the NCCR, the national regulator, there are currently 400 licensed operators. However, only a fewhave significant market share. The main mobile and fixed operators are introduced in the following sections




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Rural ICT

In rural Ukraine the overall access to communications services is severely limited. According to the NCCR(national Ukrainian regulator), about 2,000 villages have no telephone lines at all, 15,000 villages have only 2or 3 telephone lines. Internet access is only available in smaller rural cities, mostly based on dialupconnections. In smaller rural cities, people still have no broadband access and don’t know what it is. In villagesInternet access could be made available in schools and clubs (based on private initiatives). However, there areno teachers or trainers in rural areas who are knowledgeable in computers. Most people may have seen acomputer only once or twice in their life and are far from adopting it. There are no initiatives for establishingPIAP’s (Public Internet Access Points). However, Ukrtelecom has been connecting 500 rural centers (85% oftotal) with fiberoptic links. These rural centers are therefore easily upgradeable to provide broadband, as onlythe “last mile” is still missing. According to Telas, the association of Ukrainian operators, the main issuesregarding Rural ICT are:• Rural initiatives need financial support• As a starting point for Rural ICT, Telas suggests to avoid the eastern (industrial) or western (rural) regions,but focus on the central regions in the middle of Ukraine• Currently, the EU does not support Rural ICT initiatives• Currently, the Government provides limited support: in some schools computers are being introduced.• Option: bring second hand computers from businesses to rural areas

Main findings on Rural ICT

In summary, the main findings in the area of Rural ICT in Ukraine are:• There is no telephony service in many rural villages.• Computers are too expensive (One computer typically costs 5 monthly salaries in rural areas) and need to beshared• ICT knowledge is very scarce in rural areas• Local content and applications are absent• The government does not seem to have a targeted policy on Rural ICT

ICT policy and Regulatory Regime

ICT policy

General

During the fact finding mission for this study we found that ICT development is hardly on the political agendain Ukraine. There are some initiatives, but there is not a real ‘champion’ within the government for this subject.Rural ICT development is even further down on the political agenda. Initiatives from de-central governmentsare not very likely since the use of ICT and computers in rural governmental organizations is limited. Eventhough the telecoms sector accounts for 10% of Ukrainian GDP and over 7% of all profits (Source: NCCR)there is no stand-alone Ministry for Communications. Communications is mainly governed by the Ministry ofTransport and Communications. Regional Development is governed by the Ministry of Finance.




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Ministry of Finance

The Ministry of Finance currently works on a policy to introduce a more decentralized budget. Local counselswill set priorities on how and where to spend budgets, central government approves. The total budget to bespent in 27 decentralized regions is 1 billion Hryvna (US$200 million). In 2007, there will be a budget of anextra 100 million Hryvna (US$20 million) to be spent on depressed regions. Local government budgets arecomposed of:a. income taxes from natural persons, collected locally: plusb. decentralized budgets from the Ministry of Finance

Ministry of Transport and Communications

The Ministry of Transport and Communications has started some initial work on Rural ICT: the NationalProgram for Information (NPI). According to this Ministry, the main challenge of Rural ICT is to addressoverall spending power in rural areas, before initiating broadband access. Ukrtelecom was set up in Soviettimes, destined to provide rural telephony. In Western Europe, the incumbents were privatized after completionof national telephony rollout. In Ukraine rural rollout has not yet been completed. The Ministry therefore keepsquestioning if it is wise to privatize Ukrtelecom now. The Ministry co-operates closely with Ericsson in a pilotproject in the city of Sumy (600,000 inhabitants) called “city of the future”. Aim of this pilot project, alsocalled “Electronic Government” is to show the benefits of broadband to local government bodies. They applyWimax and Wifi technologies. The pilot customers are libraries, schools, clubs and local governments.Ericsson is co-operating with the operator Adamant. The project operates within the framework of which anumber of social services are supposed to be fulfilled.

World Summit on Information Society

Ukraine was a participant in the World Summit on the Information Society in Tunis. Together with theRepublic of Armenia, the Republic of Kazakhstan, the Kyrgyz Republic, the Russian Federation and theRepublic of Tajikistan, Ukraine contributed a joint proposal containing the following items:

A Access to information and ICTs1 All persons must have equal opportunities to have access to information, worldwide information resourcesand ICTs, without distinction of sex, age, nationality, religious belief, social status or residence. All persons,wherever they are, should have an opportunity to participate in the global information society, and no oneshould be deprived of its benefits and services.2 The right conditions must be created to ensure universal and affordable access to ICTs and development ofICT applications and services, particularly in urban, rural and remote areas; this being one of the biggestchallenges in bridging the digital divide. Particular importance must be attached to satisfying the basic needs ofdeveloping countries and countries with economies in transition.B Social applications of ICTs1 At the heart of the concept of the information society is the human being, with the full range of his or herinterests and needs. ICTs must become a significant factor in efforts to improve the quality of life of all citizensaround the world and develop information services in socially relevant domains, in particular health, education




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and culture. ICTs must be turned into catalysts for human development, professional training and the creationof new employment opportunities, primarily through improved access to education and training while fullyrespecting cultural and linguistic diversity.C Security and ICTs1 It is necessary to deal with the potential for abuse of ICTs for purposes that are inconsistent with theobjectives of maintaining international stability and security and may adversely affect the integrity of theinfrastructure within States, to the detriment of their security in both civil and military fields. It is alsonecessary to prevent the use of information resources and technologies for criminal or terrorist purposes. Thisproposal for the Draft Declaration clearly indicates that Ukraine sees the importance of ICT access for “allpersons, wherever they are”.

Regulatory Environment

Main Issues of Regulatory Environment

A recent report by Frontier Economics provides a detailed review of the current regulatory framework fortelecommunications in Ukraine. The Frontier report examines the current situation in Ukraine against bestpractice principles. In this section we briefly highlight some main findings, which are relevant in the context ofRural ICT.

Institutional Design

The three best practice principles in institutional design for regulators are:• Simplification and clarity of roles and responsibilities• Adequate funding and resources that guarantee the independence of the regulator• Rules for appointment and dismissalSimplification and clarity of roles and responsibilities is a key element of a sound institutional framework,which should be based on a formal separation between policy making, regulation and operations. Currently, theUkraine has a rather complex system with no clear separation between policy, regulation and operations. Theindependence of the regulator can only be guaranteed by ensuring sufficient and independent sources offinancing, which could e.g. come from industry fees. Currently, the financing of the regulator is insufficientand financing comes directly from the State Budget. Also, salaries are low in comparison to industry averages,which makes it difficult to attract highly-qualified staff. The independence of a regulator is supported by clearrules on appointment and dismissal, which minimize political interference. According to the FrontierEconomics report, Ukraine needs to empower NCCR to establish its dominance as an independent institution,improve the funding of NCCR and establish more open procedures for appointment and dismissal ofcommissioners.

Regulatory framework

The four best practice principles regarding the regulatory framework are:• Regulation should be justified and limited to the necessary minimum




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• Technology neutrality• Transparency and public consultation• Dispute resolutionIn the area of regulatory framework, the situation in Ukraineis non-optimal. Regulation is mainly based on an ad-hocbasis, rather than based on clearly described processes forthe assessment of markets and the design of regulatoryremedies. While the principle of technology neutrality iscontained in the legislations, service definitions and USOregulations do not fully promote this principle. Also theprocesses of public consultation and dispute resolution arenot fully implemented in Ukraine. The importance of havingfunctioning regulatory institutions and well-definedframeworks in place is underlined by pre-conditions ofinternational supportprograms.

Findings from NCCR Fact Finding Mission

Many issues described in the previous section have beenconfirmed during a fact finding mission to the NCCR. Inaddition, we have learnt that plans to create a Universal

Service Fund (USF) are in draft and currently under revision at the Supreme Council. The draft plan proposesto add a 2% USF contribution to all end user telecommunications revenues. During the fact finding mission wehave asked the NCCR what issues the Regulator sees in the Ukraine market:1) Currently the Regulator is not properly housed, understaffed and underpaid: urgent need for additional staffand housing2) The Regulator would like to arrange for common access to telecoms services for all Ukrainians withoutexceptions. Currently, the regulator does not have the authority and tools to make this happen3) Main problem for rural services: The Ukrainian market was liberalized before the infrastructure was fullydeveloped. There are two powerful mobile players now operating without any obligations. Ukrtelecom hasbeen left behind by this competition. Ukrtelecom has limited resources to invest in their old (70% analog)infrastructure.4) Ukrtelecom owns the ‘last mile’ (i.e. copper lines to their end customers). They should have more funds andbe modernized and restructured. They cannot deliver upon the USO. The regulator is strongly supportingprivatization5) With the absence of Local Loop Unbundling, Ukrtelecom might exploit their current monopoly position inproviding DSL access services.




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6) The Regulator and Ministry of Transportand Communications are discussing whoshould manage the Universal Service Fund.As an external option to support Ukraine inovercoming these regulatory issues, theEU might be interested in supporting the set-up of proper regulatory functions. Also,twinning with a recently joined EU membermight be helpful.

International Support for ICT Initiatives

EU Initiatives

The EU and Ukraine have elaborated the e-Ukraine Action Plan. This action plan dealsmainly with improvements in the informationsector. No actions have been taken yet, mainly because of the present political situation in Ukraine. Under thenew European Neighborhood Program (ENP) Sector Wide Assistance Programs (SWAP’s) will be developed.The Information Society (IS) is one of these sectors. However, it should be regarded as a horizontal program,as it touches on almost all other sectors. The SWAP for IS has not yet been approved. For the EU it is a pre-condition for approving the SWAP-IS and implementing actions, that the regulator will function properly. Thismeans that laws on licensing and free market rules will have to be adopted by the Ukrainian government. Alsoa well functioning monitoring system has to be in place. For the EU the development of the IS in rural areas isa very interesting and serious subject. Estonia may serve as a good example. Counterparts for the EU are theMinistry of Transport, Ministry of Education, the Regulator, as well as third sector members (Telas, theAssociation of Ukrainian Telecommunications Operators). Disbursement of the ENP budget will not beimplemented before 2008. According to EU estimates, there can be a budget (depending on co-financing byUkraine) of 100-300 mln. Euro for the 2007-2013 period. Under the SWAP-regime it is possible to makecombinations, for example, Agriculture and rural developments in combination with IS, or Education with IS.

Tacis Program

Launched by the EC in 1991, the Tacis program provides grant-financed technical assistance to 12 countries ofEastern Europe and Central Asia (Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova,Russia, Tajikistan, Turkmenistan, Ukraine and Uzbekistan), and mainly aims at enhancing the transitionprocess in these countries. This project is still ongoing.




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Figure 74 EC assistance to Ukraine

When Tacis was initiated, technical assistance was a stand-alone activity, whereas the program is now part of acomplex and evolving relationship with each of the 12 countries concerned. politicians and officials from thepartner countries and the EU meet now on a regular basis. Tacis more and more becomes a strategic instrumentin the co-operation process between the EU and partner countries.Under the national Tacis program assistance, over the period 2002-2006, has focused on three priority areas:i) support for institutional, legal and administrative reform

ii) support to private sector and economic developmentiii) support in addressing the social consequences of transition.The regional assistance under the TACIS program addresses in particular issues related to• increased inter-state cooperation in transport• energy and sustainable management of natural resources focusing mainly on water.• In the area of Justice, Liberty and Security priorities include enhanced integrated border management,combating organized crime and international terrorism and improving migration and asylum management.Support for cross-border cooperation focuses on economic and social development of border areas, efficientborder management and people-to-people contacts. However, no specific attention has been paid to ICTDevelopment in Ukraine.




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European Neighborhood Policy (ENP)

In the context of the European Neighborhood Policy (ENP), assistance will be provided under the newEuropean Neighborhood and Partnership Instrument (ENPI) starting from 2007. ENPI will replace the currentTacis program as well as a number of thematic activities. Ongoing Tacis projects will of course continue to rununtil their planned dates of completion. Under ENPI assistance will not be limited to Technical Assistance butcover a wider range of instruments and delivery mechanisms including Twinning and TAIEX:Twinning: through twinning the European Commission is encouraging partnerships between theadministrations of Member States and candidate countries to enable the latter to adopt the acquiscommunautaire.TAIEX (Technical Assistance Information Exchange Office) has been designed to provide five main services:1. documentation, information and advice on Single Market Legislation2. workshops and seminars3. study visits to the European Commission and Member States4. expertise to provide the beneficiary countries5. the creation of databases on the deployment and results of technical assistance provided.

EU – Ukraine Action Plan

The EU-Ukraine action plan states, that the enlargement of the European Union on 1 May 2004 has brought ahistorical shift for the Union and Ukraine in political, geographic and economic terms. The EU and Ukrainenow share a border and, as direct neighbors, will reinforce their political and economic interdependence.According to this plan, the enlargement offers the opportunity for the EU and Ukraine to develop anincreasingly close relationship, going beyond co-operation, to gradual economic integration and a deepening ofpolitical cooperation. The European Union and Ukraine are determined to enhance their relations and topromote stability, security and well-being. The approach is founded on shared values, joint ownership anddifferentiation. It will contribute to the further stepping up of our strategic partnership. The European Unionand Ukraine are determined to work together, through the implementation of this European NeighborhoodAction Plan, to help ensure that no new dividing lines are drawn in Europe. The action plan contain onespecific section regarding ICT policies towards the development of an Information Society:Accelerate progress in electronic communications policy and regulation• Adopt and start implementing the national concept for the development of electronic communications.• Adopt regulations concerning licensing, interconnection, numbering and generally• Accessible telecommunications services in accordance with the Law of Ukraine on Telecommunications.• Establish the National Communications Regulatory Commission in accordance with the Law of Ukraine ontelecommunications.• Ensure fair competition in the electronic communications markets.Accelerate progress in the development of Information Society services and in the integration of Ukraine intothe IST research program• Adopt the State Program “e-Ukraine” for the development of the Information Society and explore possiblesupport by the EU for its implementation• Promote the widespread use of the new technologies by business and administration, in particular in thehealth and the education sectors (ecommerce, e-government, e-health, e-learning), via the provision of




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advanced infrastructures, the development of local content and the introduction of pilot projects, e.g. for themutual recognition of electronic signatures.• Improve the use of Internet and online services by the citizens via computer training• programs for the general public.

• Adopt a specific plan to promote the participation of Ukraine in the IST part of the 6th Framework Program.• Develop EU – Ukraine co-operation regarding the preparation of the second phase of the World Summit onthe Information Society in Tunisia in 2005.

European Investment Bank (EIB)

On 22 December 2004, the EU Council approved a new EIB mandate authorizing lending operations in Russia,Ukraine, Moldova and Belarus up to a ceiling of €500 million. The mandate covers the period 2005-06.Eligible sectors include those where the EIB is considered to have a “comparative advantage”: environment aswell as transport, telecommunications and energy infrastructure, with priority given to the Trans-Europeannetwork (“TEN”) axes having a cross-border aspect with the EU. Furthermore, the GAERC conclusions of 21February 2005 on Ukraine indicated that, in the framework of the implementation of EU-Ukraine ENP ActionPlan, a share of up to €250 million of the total €500 million envelope could be earmarked for Ukraine.On 23 May 2005 the Commission informed the EIB on the fulfillment by Ukraine of the political and economicconditionality provided for by the mandate. The EIB and Ukraine signed a framework agreement on 14 June2005; this has now been ratified, thus enabling the EIB to start lending operations with Ukraine.

UNDP Projects and other International Initiatives

Innovations Springboard

The Innovations Springboard is an initiative focusing on “Leveraging Information and CommunicationsTechnologies for Ukraine’s Prosperity”. This is already closed. The main focus has been on brining ICT toschools and other educational institutes. The Innovations Springboard focused on the following results:• Government services accessible on the Internet by the end of the program• ICT being used on a regular basis to enhance civil society participation, governmental policy formulation andimplementation• State monopolies in ICT and communications sector privatized and restructured successfully in accordancewith best international practice and standards• National “e-readiness” assessment carried out (on connectivity, policy frameworks, and human andinstitutional capacity)• The number and proportion of the population with access to the Internet, desegregated by gender and income,will have increased by 50%• The number of, and employment in, small-scale enterprises in the ICT sector, desegregated by gender, willhave increased by 50%• Ukrainian educational sector actively uses ICT in its work, with an estimated number of distance learningprograms available on-line being created• Increase number of medical services (consultations) from the special centers available on-lineMeans of achieving these results have been focusing on:




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• Providing policy formulation and strategic advisory services aimed at assisting the Government and relatedUkrainian institutions in making informed policy choices that stimulate entrepreneurship, boost humandevelopment, strengthen democratic governance, and broaden digital opportunities• Enhancing and developing access to the Internet to link all areas of Ukraine through distance learning foreducational purposes, rural network access for disadvantaged communities, and development of a CivicInternet Portal for civil society• Developing, distributing, and exchanging knowledge through ICT technology, with the development of aUniversity Innovation Center to provide business incubator-like facilities within higher learning institutions, aModel UN scheme for dialogue on ICT among the youth of Ukraine, an Early Warning Network for unifyacademic and research groups• Enhancing social and economic opportunities for improved wellbeing, with the development of an onlineTele-medicine system for medical information exchange purposes, and an ICT Business Incubator andInnovation Net to promote entrepreneurship and business development. The main partners in this initiativehave been Ukrtelecom, Kyiv City Administration, National Academy of Science of Ukraine , Kyiv NationalTaras Shevchenko University and the International Renaissance FoundationBudget: approx. U$ 3 million

ICTD in Ukraine

This initiative is also closed already. International ICTD Partners have been:UNESCO, ITU,WB, International Renaissance Foundation (Soros Network), Global Internet Policy Initiative(GIPI); National partners have been: State Committee of Communications and Informatization, JSC“Ukrtelecom”, Kyiv National Taras Shevchenko University, National Academy of Science, Ministry ofEducation and Science of Ukraine, Ukrainian Association of Computer ClubsICTD Activities focused on:• E-policy development: National Round Tables process, E-Readiness Assessment, “Green Paper: ICT ineducation,” Strategic advisory services to the Government of Ukraine and related Ukrainian institutions• Equal country-wide access to ICT, especially in rural and depressed areas: Upgrade of the national ICTinfrastructure, Network of public Internet access points, 'GEANT' connection and Ukrainian National Researchand Education Network• E-services support within the framework of strategic public-private partnership and sustainable business-driven environment: National Distance Learning Platform, Civic Internet Portal, National Electronic Networkof Ukrainian Libraries, Regional Academy for Advanced Network Administration and Design (RAANAD),Regional Academy for Computer-Assisted Teaching and Learning (RACATAL)• Total funding of the UNDP in Ukraine ICTD projects has been around: $4mln

Pipeline Programs

Various other initiatives of UNDP in Ukraine are:• Development of equal countrywide access through Public Internet Access Points: establish the PIAP on thebasis of developing, testing and promoting packages, including case study, best practices, training materials,technical requirements and specifications, model budget and legal framework, as ready-to-use products for




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further replication; enhance increased capacity and awareness in ICT sector among the rural and low-incomeurban community and support increasing rural opportunities to use ICT potential (Tentative Budget: US$3,000,000)• Consultation and support for “e-Ukraine”: assist the Government of Ukraine to elaborate the national programin the sphere of ICTD on the basis of the results of the “E-Readiness Assessment of Ukraine”; adjust “e-Ukraine” with the government strategy on the Millennium Development Goals approved by Ukraineat the UN Millennium Summit to be achieved by 2015; to present to the wide public the draft of this programand to approve this document in the Parliament of Ukraine (Tentative Budget: US$ 75,000)• Policy and social-partnership development for information society: promote the development of effectivemechanisms to be used by civil society; strengthen civil society for enhancing public involvement into thedecision-making and policy process (Tentative Budget: US$ 1,000,000)• Privatization and restructuring of the biggest national telecommunication operator JSC “Ukrtelecom”: providethe Government of Ukraine with the relevant expertise and support the government in a national strategy andaction plan elaborating of the demonopolization of state telecommunications monopoly; enhance themodifications in legislative base to implement the liberalization process (Tentative Budget: US$ 50,000)

Transfer of IT Technology to Ukraine

The aim of the project is to answer the rapidly growing demand for qualified technology specialists in Ukraineby developing high-quality distance learning programs in computer science. This will be achieved bytransferring to Ukraine the Japanese IT technology, and innovative expertise and successful experienceacquired by the Polish-Japanese Institute of Information Technology (PJIIT). Because of the distance-basedcharacter, studies over the Internet will make it possible to develop joint high-quality study programs in

computer science with universitiesfrom Japan, Ukraine and Poland.PJIIT has both the resources, in theform of its didactic and researchstaff, and necessary experience inrunning similar projects, to provideeducationto Ukraine in computer science.Duration: 2004-2007

US AID, Agricultural MarketingProgram (agricultural marketinginformation web-site)

The AMP (Agricultural MarketingProgram) is still ongoing. Itsmechanism is pretty simple: Afarmer calls a regional projectoperator and places a bid by phone.The operator puts it on the website,




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indicating not only the size and price of the bid, but also the farmer’s contact information. Processors andwholesalers review the information online and get in touch with farmers. After the price and product qualityissues are agreed upon, the contract is signed. In the first weeks after its launch, the website only had about 10visitors per day. In six months, it has become the number one food and agricultural information source inUkraine, attracting from 350 to 400 companies per day. Today www.lol.org.ua is well-known to all fruit &vegetable agribusinesses in Ukraine. More than 1,000 companies utilize it frequently updated, exclusiveinformation on a daily basis, generating about 35,000 visits and 170,000 hits per month.

Rural ICT in Ukraine

In the situation of the Ukraine, a vast country with a wide variety of natural conditions, big differences inregional economic development (jobs, income, labor force etc.) and still in transition, one should keep a coupleof things in mind:• Connecting the whole country including small villages in remote areas to the Internet could take a long timetaking into account that budgets are often limited. In Part III of this report, we show, how a cost-effectivetechnology could be used to accelerate the roll-out of ICT services and what levels of investments would berequired. The first priority is however a long term strategic action plan for IT-development in the rural areas;• This strategic action plan should be a joint plan from all relevant ministries and institutions: Ministry ofTransport/State Department of Communication and Information, Ministry of Agriculture, Ministry of Finance,Ministry of Education, Ministry of Health, Ministry of the Interior and the Regulator.• Apart from the fact that joint actions will be more efficient, it is also about the ‘bundling of budgets’: aconcentrated effort will produce faster and better results for less money per ministry. Regional authoritiesshould be involved for their own regions. It is also recommended to involve international organizations andinstitutions (EU, World Bank, other financing sources), as there are also possibilities to gain economies ofscale.• The strategic action plan should also contain the phasing of the roll-out. Given the size of Ukraine and thedispersed location of the villages this roll-out should start from the already connected regional centers andspread out like waves into the region. This however should be decided region by region, based on specificregional characteristics.• In order to build up experience it is recommended to start with one or two pilot regions. Part III provides ahigh-level business case for 2 selected regions.General policy thus should mainly focus on:• addressing the problem and the objective;• developing a Rural ICT-strategy on the national level with all partners involved, thus ensuring the mostefficient use of budgets:

setting priorities and measures; attaching budgets from the appropriate sources to the measures; describing responsibilities for each of the partners; a time table; a monitoring system.




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REGULATORY ENVIRONMENT FOR ONLINE SERVICES

Digital Signatures

Electronic signatures in Ukraine are governed by the Law on the Electronic Digital Signature and the Law onthe Electronic Document (both from 2003). However, up until mid-2005, these laws proved generallyineffective due, inter alia, to the fact that the certification of e-signature verification centers, which is requiredby these laws, was so complex that it was impossible for businesses to be accredited. In addition, thecertification of such centers was delegated to the Security Service of Ukraine (SBU). On 1 July 2005, thecentral National Electronic Digital Signature certification body was established. Ukraine is the first among thecountries of the CIS to introduce a central certification body. This carries out accreditation of key certificationcenters. Commercial and State certification centers can now provide electronic digital signature services forcitizens, the state, private establishments and enterprises. Within the first six months of the new body cominginto operation, ten centers had applied to be accredited, with the Ukrainian National Information Centre beingthe first body to be officially accredited. It is hoped that electronic digital signatures will allow citizens to savetime when dealing with state authorities, and allow the state authorities to provide services more efficiently. E-signatures from government bodies are offered as an option for signing official documents: citizens can choosewhether to receive a digital signature with the help of the Internet or to use traditional signatures. The roll-outof digital signatures by state authorities is still at a very early stage.

Payment Systems

Electronic commerce is still undeveloped in Ukraine, partly due to the lack of adequate electronic paymentsystems. However, the population does show signs of moving away from a cash-dominated society. At thebeginning of 2006, the number of credit cards issued totaled 12,196,527 Mastercard credit cards and18,243,259 Visa credit cards.78 The annual turnover on Visa cards was $10,8 bn (8.9 bn Euro), twice as muchas in 2005. Maestro card payments in Ukraine also show significant growth. The number of Maestro cards incirculation reached 8.15 million at the end of June 2005, representing a 53.2 percent growth over 2004. Debitcards using the Maestro payment system are now accepted in over 40 thousand shops. Despite this recentgrowth in electronic payment systems in Ukraine, innovative online payment systems, such as those whichhave been developed in Armenia, have not yet been developed or adopted in Ukraine. Nevertheless, accordingto the Cabinet of Ministers Report on the implementation of the National Programme for Informatisation, 18million dollars (14.9 million Euro) worth of goods were sold via the Internet in Ukraine in 2004. The purchaseof computers and computer parts/consumables accounted for over half this figure.

Internet Access

Internet usage is growing, albeit from a low base, and is hindered by the comparatively high cost of dial-upaccess and limited PC ownership. The Economist Intelligence Unit has suggested that, while Internet usage isnormally assessed at about 8% in Ukraine, the most recent research available suggests that this figure may besignificantly higher. Internetworldstats.com puts the figure at 11.4%. Official statistics for August 2006 put thenumber of Ukrainians who accessed the Internet in the course of the previous month at 10.9%. The most usedsearch engines are google.com (37,85 percent) and yandex.ru (32,0 percent). According to Bigmir.net researchin 2006, half of Ukrainian Internet users from Kyiv, with inhabitants of the other main cities counting for over




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half of the remainder. Users from other large Ukrainian cities with a population of one million or more(Dnepropetrovsk, Odessa, Kharkov, L'vov, Donetsk, Zaporozh'ye) represent 32.16 percent of UkrainianInternet usage (not including Kyiv). Users in the remaining regions of Ukraine equal 14.21 percent of Internetvisitors. The region with the lowest level of Internet use, at 0.21 percent, is the Rivnenskaya region. Users inKyiv also generate a significantly higher amount of traffic in terms of page views. Most of the top 10 websitesin Ukraine are search engines (Google, Yandex and Meta being the top three, the rest being trafficmeasurement sites). Top searches are focussed on academic and leisure activities. The number of hosts inUkraine is now more than 94,000. Regarding Internet usage, according to research conducted by Volia cablecompany, most Ukrainians use the Internet for business purposes. Volia’s research showed that:

87.6 percent of respondents consider Internet usage for business purposes as justified from acommercial point of view;

48.9 percent of enterprises have already been connected to the Internet for one or two years, 34.6percent for more than three years, and 15.4 percent for less than a year;

62.2 percent of enterprises are currently working online using dial-up and only 32.4 percent use always-on connections.

54.3 percent use their sole phone line for dial-up Internet access.Ukrtelecom has recently taken concrete steps to encourage the mass take-up of broadband services. In March2005, there were only 10,000 DSL lines in Ukraine. At that time, DSLAMs had been installed in 450 locationsin Ukraine, and work was underway with Cisco to provide capacity to permit a 1000 percent increase in DSLsubscribers by the second half of 2006.

Public Internet Access Points (PIAPs)

Various efforts have been made to boost Internet access via PIAPs. For example, the US Embassy gave grantsof over 1.4 million US$ (1.17 million Euro) to libraries for this purpose in the period from 2001-2004. Also,the UN Development Programme and the German International Migration and Development Centre havejoined forces with local organizations to develop training and support for the creation of PIAPs in Ukrainianschools, the intention being to boost both ITin education and improve the level ofInternet access in schools. Pilot projects havealso been launched in an effort to improveuniversal service provision in remote areas.There are over 3,000 computer clubs andcafes in Ukraine (equating to one for every16,000 people in Ukraine)

Wireless Internet Access

Wireless Internet access is developing slowlyin Ukraine, partly due to the fact that Wi-Fiis licensed spectrum. Ukrtelecom is planningto launch Wi-Fi services in the larger towns




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and cities in Ukraine, while other ISPs are beginning to launch WiMAX services. Luckynet, provides a rangeof high-speed wireless broadband access services. A Wireless Internet Association was established in order todeal with a wide variety of perceived problems with launching wireless services in Ukraine including conflictresolution, legal framework, illegal content, and harmonization of standards and norms. According to feedbackfrom the Ukrainian Mission to the EU, the Ukrainian Government is keen to support the roll-out of WiMAXservices, in order to ensure low-cost Internet access for as many citizens as possible.A new plan for the management of spectrum was adopted in April 2006, detailing the management of resourcesfor Wi-Fi, WiMAX, 3G and other relevant technologies. Services are being launched by a joint venture ofNetworks by Wireless (UK) and PAN Telecom (Ukraine)/PAN Wireless. On 9 October 2006, Kyivstar beganoffering Wi-Fi services to its customers via smartphone, laptop or pocket PC. UMC has also shown interest inproviding Wi-Fi services. The maximum data transfer rate is 54 kb/sec. The consumer sends a premium rateSMS, either for a “sample access”, allowing just one Mb of download capacity, or full access, which is sold inincrements of 5Mb. Ukraine is one of the few countries prohibiting or prohibitively taxing IP telephony, Wi-Fi,and WiMAX networks, both public and private. The restrictions on advanced communications technologies inUkraine are very unusual. The provision of advanced communications services in Ukraine is difficult.Providers of VoIP have to engage in a complex and costly process of obtaining a license, as do Wi-Fiproviders. Some analysts argue that these laws emanate from Ukrtelecom lobbying to curb or eliminatecompetition in the ISP and voice telephony markets. Wireless local loop (WLL) operator Telesystems ofUkraine is planning to invest around 180 US$ million (149 million Euro) to roll out CDMA2000 1xEV-DOtechnology in the next three years. Telesystems already offers WLL connections using EV-DO on a trial basisin Kiev, following a rollout in partnership with Chinese equipment provider Huawei Technologies. It hassigned contracts with LG, Pantech, ZTE for the construction of a nationwide network, with the aim oflaunching commercial services in Kiev, Odessa and Dnepropetrovsk in the near future.The NCCR is in the process of auctioning five licences for WiMAX broadband services, following interest bythirty operators. Technological Systems (a subsidiary of Comstar– United) has received a licence for theprovision of WiMAX-based services in the 5.4 –5.7 GHz range through a regional tender. It is believed thatthis licence cost $0.8m (0.66 million Euro). Ukrtelecom has chosen Nokia to provide network equipment for itsplanned 3G service. Nokia will also provide equipment for Utel’s W-CDMA network, which will initially belaunched in Kiev.

AVAILABILITY OF ONLINE SERVICES

The EU-Ukraine Action Plan for 2005 foresees the widespread use of electronic communications services bybusiness and administration, in particular in the health and education sectors (e-Commerce, e-Government, e-Health, e-Learning), via the provision of advanced infrastructures, the development of local content and theintroduction of pilot projects initiatives. Ukraine ranked second highest among the four countries in this studyincluded in The Economist E-readiness rankings 2005, with a total score of 3.51, scoring best in businessenvironment and worst in consumer and business adoption. In 2006, Ukraine improved its score and achieved3.62 points, albeit while dropping from 57th to 61st overall in the table of 68 countries.

E-Commerce




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E-Commerce is developing very slowly in Ukraine. The low level of Internet penetration in the country is a keyproblem, with the most optimistic estimates suggesting that there are 6.5 million Internet users,115 whichequals approximately 13 percent of the population. Finally, the legal framework for e-commerce is also stilllacking, although improvements are being made. The leading Ukrainian online retailer city.com.ua receivesapproximately 8,000 hits daily.

Domain name registrations

Apart from the 47 geographical (such as kiev.ua) domains, there are seven generic suffixes for organizationsregistered in the .ua domain, according to their type: com.ua - commercial organizations; gov.ua-governmentagencies; net.ua - suppliers of network services; edu.ua – educational organizations; org.ua - otherorganizations (not commercial), in.ua for individuals and dominic.ua for the community of Dominican friars.The .ua domain is managed by the UA NCG (Network Coordination Group). There has been a steady increasein the number of domains registered under .ua. For example, under .com.ua, the total number of domainsincreased from 31,153 in 2004 to 42,489 in 2005 and reached 54,187 by September 2006. The overall numberof domains under .ua increased from 133,907 in 2004 to 169,644 in 2005 and had already reached 211,478 bySeptember 2006

E-Government

One of the key aims of the National Informatisation Programme, which is prepared by the Ministry ofTransport and Communications each year, is to develop the use of ICT in central governmental bodies. Overallcoordination is exercised by the Ministry of Transport and Communications. The Cabinet of MinistersResolution of 24 February 2003 (N208) on the Development of Electronic Government and the Order of theState Telecommunications Committee of Ukraine of 15 August 2003 govern the development of access to e-government services by citizens and businesses. The list of e-Government legislation passed in Ukraine, albeitall under previous regimes, is very long. The Government portal lists a total of over forty different acts passedin the course of the past seven years, half of which were passed in 2003 and 2004. Since 1998, the UkrainianGovernment has produced a number of legal documents requiring state bodies to publish information abouttheir activity on the Internet. There is a functioning Government portal, which is a gateway to the existing sitesof state departments, but much work still needs to be done. For example, only 12 percent of city authoritieshave websites. Legally, all state departments are supposed to have websites on the Internet. These websites arenot currently interactive, focusing instead on information provision about the department, its leaders andoperational procedures. With recent developments in the use of electronic signatures in Ukraine, possibilitiesare increasing for more user-friendly interaction with government services. For the moment, however, mostgovernment websites are “one way”, with functionality improving. An example of the planned improvements isthat the Ukrainian tax authorities are planning a new improved web based service. The tax administration ofUkraine is undertaking a pilot project which allows company tax account reports to be accepted in electronicformat. These reports are provided on floppy diskettes, as there is still no online submission. One basicproblem is that in Ukraine there has been little or no practical implementation of the Law on Electronic DigitalSignatures, which makes the introduction of online e-government services more difficult. This situation iscurrently undergoing change (see above on digital signatures). The government of Ukraine does not havenationwide programs governing the use of software in public administration, including regarding the use ofopen source software. Microsoft has signed an agreement with the government of Ukraine, under which it will




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provide software to government institutions at one-third of the market price. The agreement reflects a long-term preferential pricing scheme for government bodies.

E-Health

E-Health has a long history in Ukraine: there is a long tradition of e-health theory development in Ukraine,although it is still not very widespread in practice. The Ukrainian telemedicine website, maintained by theDonetsk Institute of Traumatology and Orthopedics lists fourteen telemedicine centers, twenty-threeinstitutions which carry out “teleconsultations”, and five online pharmacies. The Department of Informaticsand Telemedicine of Donetsk has also developed a distance-learning tool. The Centre for Telemedicine ofUkraine has provided half of the best practice models listed on the website of the International Society forTelemedicine and e-Health.

E-Learning

E-learning is somewhat limited in Ukraine, although this is one of the items that are being addressed by theEU-Ukraine Action plan, and EU funding is already being used to establish some resources. For example, anElectronic Media Resource Centre is being established with the help of the EU Tempus programme. The onlyUkrainian member of the European Distance and E-Learning Network is the Inter-regional Academy ofPersonnel Management. Approximately 52 percent of secondary schools have computer equipment, while only14 percent of them have Internet access. There are wide regional variations regarding access to IT in schoolsStatistics from official sources indicate that there are 30 million mobile users, which indicates an averagepenetration rate of approximately 64 percent.

Internet Access Networks

As mentioned above, Ukraine’s score in the Economist e-readiness rankings was 61st in the list of 68 countries.Within the Eastern European area, Ukraine was 12th out of the 14 countries covered, ahead of only Kazakhstanand Azerbaijan. Bytemobile, Inc., a global provider IP service provider for mobile networks, is working withAstelit to develop its EDGE+ and GPRS+ services. This will provide accelerated Internet access, which Astelithopes will provide it with the fastest available Internet access without using 3G technology. Opportunities forADSL have been very limited to date and, to the extent that they are available, this is usually through theincumbent. In 2005, Cisco and Ukrtelecom announced a major programme of upgrading IP links between thecapital and regional centres as well as of further extending the upgrading of Ukrtelecom’s capacity to provideADSL. A range of independent companies offer dial-up Internet access, in addition to Ukrtelecom.Furthermore, in June 2006, the NCCR launched a tender for use of WiMAX frequency. There is already oneWiMAX provider on the market – Ukrainian High Technologies – providing services in Kyiv and Kharkiv. Thecompany has plans to roll-out services nationwide.

Internet market estimation

With an estimated 5.8 million Internet users, the Internet services market continues to be underdeveloped.Furthermore, the penetration rate for broadband is estimated to be just over .1% of the population. The




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dominance of the fixed-line network by Ukrtelekom is likely to limit the spread of Internet service, and willpush more of the market toward wireless data services.

Figure 75 Total revenues from the broadband internet services in Ukraine, mln 3Q2010-3Q2011

Figure 76 Number of Subscribers and the level of penetration for the broadband internet, 2Q2010-4Q2011




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Company/NetworkNumber of the subscribers(broadband internet), ths1Q2011 2Q2011 3Q2011

1 Ukrtelecom 1 189 1 215 1 2602 Volya 440 442 4653 «KyivStar» 248,5 306 3444 Triolan 160 180 2055 Vega 131 135 1366 Datagroup 80,3 104,5 126,77 Tenet 70 75 808 Airbites 64,8 67,4 709 FREENET 60,9 64,3 68,510 Fregat 48 51,1 55,711 IPNet 41 43,5 44,5

Figure 77 Main broadband internet providers, ths 1Q2011 - 3Q2011

Internet Network

Internet access services became the most dynamic direction of business activities in Ukraine. Today this is themost and the only booming market in the country. Internet service providers pop up every day in all cities, andthe number of users grows manifold. Experts estimated Internet market in Ukraine in 1997 as USD 9 000 000and forecast USD 20 000 000 for 1998. The year 1997 marked the point of Internet reaching traditionallyconservative and huge state administration sector. That in turn catalyzed the process of connection for the stateown sector of Ukrainian economy. The number of providers reached recently 200 but more than a half of themdo not possess licenses and act as resellers. The expensive licenses fec - UAH 5,100 is one of the factorsbarring the development of the industry. The year 1998 marked the new quality level of "netization" reaching100 000 users in Ukraine. At the same time the number of corporate users is still very low with 10 to 20% ofcompanies having at least some level of access (including via personal logins of employees). Of those only 5%access Internet via dedicated channels versus bad quality Ukrainian telephone lines (Dial Up). The latestdevelopment of Internet commerce and advertising, web sites construction and security level as well as theintroduction of new user-friendly interfaces of browsers software changed that ratio to the corporate favor.

Main broadband internet providers, ths 1Q2011 - 3Q2011




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New Internet technological services as Internet phone, or Internet video conferences, introduced by severalleaders including first of all Global Ukraine, resulted in extension of ISP into the traditional market oftelephone and video companies, as well advertising agencies. Internet services are better widespread in thecapital and several large industrial cities first of all because of the general financial situation in the country, andalso because of the lack of the communication backbone connection all over the country, which is expected tobe accomplished at the best by the end of this year. Nevertheless cities located along the communication routeshave very high figures of the growth of Internet consumption. There are only two major Internet serviceproviders that can pretend for the national status:

Infocom - based on the state property with up to 2Mbps capacity of external channels; Global Ukraine - fully private company, providing the whole range of Internet services and Intranet

integration for corporate users, with over 4Mbps capacity of external channels to the USA and WesternEurope;

These two companies control the major part of the whole Ukrainian Internet traffic. They both are situated inKiyv but have a wide network of branches and reselling partners. Global Ukraine is still the first and the onlycompany in Ukraine that guarantees the ratio between external and internal channel capacity as below 1:3.

Other large Internet service prjviders in Kyiv include:

Relcom Ukraine - up to 2Mbps Lucky net - over 1Mbps Adamant - 1Mbps Monolit, ELVisti and SOVAM - with a history of presence at the Ukrainian market but smaller

capacities.

Ukrainian regional Internet networks grow fast in such as Dnepropetrovsk, Odessa, Donetsk, Kharkiv, Lvivand Zaporizhya where a competition makes those services cheaper and of better quality. The further investmentinto Internet may result in keeping Ukraine at the same level of information consumption as the Western world

Satellite Operators

Satellite providers such as Lucky Link provide Internet access services. Lucky Link offers connection speedsof 512kbps, and VSAT connections at a speed of 256kbps downstream and 64kbps upstream. In addition,Thuraya offers satellite telephony and GPS services.

Production of IT Services

Ukraine’s information technology market is valued at between 800 million US$ (660 million Euro) to $1billion US$ (826.5 million Euro).There is a perceptible, ongoing increase in demand for the production of ITproducts for export. Exported Ukrainian IT services totaled 70 million US$ (57.85 million Euro) in 2003 and100 US$ (82.64 million Euro) in 2004. By the end of 2005, this figure was estimated to have reached 150million US$ (123.97 million Euro). Telecommunications market revenues constituted 6.8 percent of GDP in




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the first nine months of 2005, according to the State Statistics Committee. The State Statistics Committee ofUkraine has also conducted an analysis of the operating systems used by almost 70,000 organizations inUkraine. Their findings are as follows: 71.9 percent use Microsoft Windows; 20.7 percent use DOS; 5.9percent use Linux; 1 percent use Unix/Fix; 0.1 percent use Os/2; 0.1 percent use OC EC/CBM EC; and theremaining 0.4 percent use other operating systems. Ukraine is slowly emerging as a low cost hub for highquality software development. The producers work mostly alone or in small groups on outsourced projectsordered from abroad. These activities are usually not reflected in official statistics. There is growing interestamong Ukrainian computer companies to establish software production centres that could participate ininternational software development projects.

Financial Development of the ICT Sector

Communications

Investment in fixed capital in the communications sector continues to grow. The Ukrainian State StatisticsCommittee reports a growth of 19.8 percent in fixed capital investment between the first nine months of 2005and 2006. Incomes from mobile services in the first ten months of 2006 were 49.5% up on the same period inthe previous year, while fixed services (urban, rural and long-distance) decreased by a little over one percent.This decrease was mainly due to a decline of 6 percent of the largest part of that market, long distance andinternational telephony.Revenue from the telecommunications market from January – September of 2006 can be broken down asfollows:

Urban telephone network services – 2086,8 million UAH (338.6 million Euro); Rural telephone services – 162,1 million UAH (26.3 million Euro); Long distance & international – 4657,5 million UAH (755.8 million Euro); Mobile services – 14279,4 million UAH (2317 million Euro).

Information Technology

No Ukrainian companies have made a significant impact on the international technology industry. Siemens,Ericsson and Nokia are leading suppliers of network equipment for the fixed and mobile markets. With anestimated total turnover of 450 million US$ (372 million Euro) in computer hardware sales and 125 millionUS$ (103 million Euro) in ICT services, the information technology industry is comparatively small. Theindustry provides ICT products and services through several distinct economic activities, including consultingservices, software development, data processing, database development, technical support and repair, and othercomputer-related services. The most common IT activities include: enterprise resource planning, customerrelationship management software, specialized management and accounting software, antivirus software, e-commerce applications, and industry-specific solutions. According to the Ukrainian Association of SoftwareDevelopers (UASWD), over 1,300 legal entities are engaged in activities connected with softwaredevelopment, production, and distribution with another 900 companies involved in the import, assembly,distribution, and support of computer hardware. Multinational companies now reflect a much larger percentageof the industry, representing approximately 60 percent. Local registered firms make up about 30 percent of themarket, and the remaining 10 percent comprises small, shadow market groups working primarily on small




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offshore orders for software development. The IT industry in Ukraine complains about a range of structuralproblems that prevents it from developing further. These include competitiveness problems cause by low-costRussian imports, an alleged lack of government leadership to prioritize and support the sector, and inadequateinfrastructure. The leaders of the programming languages remain the same. C#, Java, PHP. JavaScript arebecoming important. Development on pure C becomes marginalized while Scala is showing a great future.Here are the complete results.

Figure 78 Programming languages in Ukraine.

Mail

Services of the Ukrainian State Mail are inexpensive but prove again the name of"snail". Delivery within Ukraine takes 3-7 days, mail to/from foreign countries reachaddressee in about 2 weeks. Therefore, it might be a good idea to use a courierdelivery for faster and more effective services. The majority of International couriershave Ukrainian branches. The most popular here is DHL. When sending a parcel toUkraine it is worthwhile considering that valuables, cassettes, floppies, compactdisks, etc. are subject for Customs' clearance. Therefore, it is advisable to avoidsending the above objects. Customs clearance may cause lots of bureaucratic troublesand monetary expenses as a result of Custom's taxes. Food, plants and animals areprohibited content for mailings to Ukraine, unless the recipient has a specialpermission from state authorities. Having been a part of the Soviet Union, Ukrainehad a unified mail system.




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UkrPoshta – key data

Dispatched, mln. Long-distancetelephone calls

(includinginternational), mln.

newspapers andmagazines letters telegrams parcels

moneyremittances and

pension payments1980 9070,3 1769,2 83,7 40,8 153,6 304,91981 9330,8 1778,6 85,4 40,1 156,9 334,81982 8999,2 1781,4 85,3 39,99 159,98 361,21983 9342,1 1735,7 74,5 36,5 160,5 383,51984 9644,0 1698,6 71,1 36,1 163,0 414,51985 9935,8 1678,2 71,5 38,5 165,0 447,11986 10387,7 1573,4 70,4 40,2 168,3 487,41987 11454,9 1537,9 70,7 44,5 171,7 530,51988 11514,5 1538,6 70,3 43,6 171,7 567,41989 11693,5 1527,6 70,5 44,3 172,3 608,41990 11656,8 1472,5 72,6 42,5 177,9 656,91991 7626,6 1358,3 68,7 33,6 189,3 688,61992 3576,1 1061,1 47,4 14,3 226,5 595,71993 2551,2 856,8 43,8 6,4 218,7 677,41994 1624,5 702,3 34,0 5,1 197,5 710,61995 1594,9 608,8 25,0 3,4 280,5 797,51996 1356,0 448,7 20,0 2,1 256,6 913,91997 1270,4 359,2 17,4 2,3 263,4 1080,61998 1383,8 326,0 14,3 2,5 211,7 1184,41999 1370,3 286,9 12,4 2,8 226,1 1214,12000 1250,4 299,0 11,8 4,6 224,3 1374,92001 1276,7 315,3 11,3 6,7 179,6 1632,02002 1316,2 326,0 10,1 6,0 173,9 1832,72003 1278,5 317,1 8,8 6,7 168,4 2276,02004 1393,2 346,5 7,5 7,2 186,4 3793,02005 1453,5 380,9 6,4 10,3 177,6 4503,02006 1409,6 389,8 5,7 13,2 152,2 3970,12007 1257,6 380,4 4,0 16,4 151,3 5138,62008 1273,0 390,8 3,2 17,8 160,2 8536,42009 1203,9 301,1 2,0 15,4 142,3 6379,82010 1088,6 311,1 1,6 17,5 149,3 5570,12011 1005,75 320,0 1,4 18,5 126,4 5520,6

Figure 79 UkrPoshta – key data

Tariff indices for post and communication services for enterprises, institution, organizations in 2011 (tothe corresponding month of the previous year,%)

January February March April May June July August September October November December

Total 110,1 110,1 110,1 110,1 110,7 100,3 100,3 100,3 100,5 101,3 101,3 101,3includingpost office services 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 106,3 106,3 106,3local telephone services 100,0 100,0 100,0 100,0 110,0 110,0 110,0 110,0 113,3 113,3 113,3 113,3long-distance and internationaltelephone services 97,7 97,7 97,7 97,7 97,7 97,7 97,7 97,7 97,7 100,0 100,0 100,0mobile services 114,4 114,4 114,4 114,4 114,4 100,0 100,0 100,0 100,0 100,0 100,0 100,0

Figure 80 Tariff indices for post and communication services for enterprises, institution, organizations in 2011 (to the corresponding month of the previous year,%)




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Tariff indices for post and communication services for enterprises, institution, organizations in 2011(to the corresponding period of the previous year,%)

January

January-

February

January-March

January-April

January-May

January-June

January-July

January-August

January-Septembe

r

January-

October

January-Novembe

r

January-

December

Total 110,1 110,1 110,1 110,1 110,2 108,4 107,2 106,3 105,6 105,1 104,8 104,5includingpostofficeservices 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,6 101,1 101,6localtelephoneservices 100,0 100,0 100,0 100,0 102,0 103,3 104,3 105,0 105,9 106,7 107,3 107,8long-distanceandinternationaltelephoneservices 97,7 97,7 97,7 97,7 97,7 97,7 97,7 97,7 97,7 97,9 98,1 98,3mobileservices 114,4 114,4 114,4 114,4 114,4 111,7 109,9 108,5 107,5 106,7 106,1 105,5

Figure 81 Tariff indices for post and communication services for enterprises, institution, organizations in 2011

Tariff indices for post and communication services for enterprises, institution, organizations in 2011 (toDecember of the previous year)(percent)

January February March April May June July August September October November DecemberTotal 100,0 100,0 100,0 100,0 100,6 100,6 100,6 100,6 100,8 101,3 101,3 101,3including

post officeservices 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 106,3 106,3 106,3local telephoneservices 100,0 100,0 100,0 100,0 110,0 110,0 110,0 110,0 113,3 113,3 113,3 113,3long-distanceandinternationaltelephoneservices 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0mobile services 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0

Figure 82 Tariff indices for post and communication services for enterprises, institution, organizations in 2011 (to December of the previous year)(percent)

Source SSC of Ukraine, 1998-2012Date of the Last modifications: 10/01/112




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Revenues from services provided by post and communication, 2011Revenues, total

mln. UAH1

including, forservices provided

to population

% of 2010

total population

Post and communication services,total 50280,7 18449,1 103,1 101,5

includingpost 3091,8 594,1 103,0 98,9telegraph 38,2 9,7 82,7 74,9telephone urban 4179,3 2758,8 95,3 96,7telephone rural 315,0 280,0 102,2 102,4intercity telephone (includinginternational) 3481,3 906,0 90,8 54,7IP-telephony 161,2 0,0 101,9 43,5courier activity 364,3 8,9 118,7 122,3wire radio broadcasting 184,8 152,5 91,7 91,5special communication service 131,3 – 102,3 –TV and radio broadcasting, wirelessradio 2092,9 1436,9 109,2 107,1

of whichcable TV 1466,0 1424,9 108,1 107,3satellite TV-radio broadcasting 32,5 2,2 96,0 86,2

supervision and technical control ofradio frequencies use 463,4 0,1 103,1 66,0computer 4749,3 2646,2 112,1 116,2

of which Internet access 4260,0 2640,7 112,0 116,3mobile 31027,9 9655,9 104,1 107,5

of whichcellular 31009,3 9654,6 104,1 107,5trunk 13,6 0,7 93,2 97,5satellite 0,3 – 28,4 –wireless communication of distributingsystem (broadband access) 2,6 0,3 112,3 201,8digital wireless telephony 2,1 0,3 – –

Figure 83 Revenues from services provided by post and communication, 2011

1Including value added tax.

© SSC of Ukraine, 1998-2012Date of the Last modifications: 24/01/112




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Communication subscribers, 2011

(thsd.)

As of April 1, 2011 As of July 1, 2011 As of October 1, 2011 As of January 1, 2012

total includinghome total including

home total including home total includinghome

Mobilesubscribers 53142,3 29166,6 53600,1 29110,7 54862,1 30113,4 55576,5 52852,4

cellular 53132,1 29163,7 53589,7 29107,9 54851,8 30110,8 55566,9 52850,4trunking 7,7 1,2 7,9 1,1 8,0 1,0 7,9 0,9paging 0,0 - 0,026 - - - - -Altai star-

type 0,4 0,2 0,4 0,2 0,4 0,2 0,4 0,2Cable TVsubscribers 3458,4 3444,7 3441,8 3426,5 3465,6 3450,0 3492,4 3481,5Internetsubscribers 3961,1 3267,2 3570,3 2932,6 3818,4 3146,2 4178,0 3821,4

Figure 84 Communication subscribers, 2011


Installation of telephones as of January 1, 2012

Communication networkurban rural

Main telephones, thousands 10563,6 1594,1of which: home 8628,6 1457,0

Local monetary telephones, units 43 -Universal monetary telephones, units 22067 638

of which: those with credit cards 21695 629





Page 109Figure 85 Ukraine Communication Sector - World Bank Report




Page 110

Transportation

Basic Facts

Airports:425 (2010)country comparison to the world: 19

Airports - with paved runways:total: 189over 3,047 m: 122,438 to 3,047 m: 511,524 to 2,437 m: 24914 to 1,523 m: 5under 914 m: 97 (2010)

Airports - with unpaved runways:total: 2362,438 to 3,047 m: 31,524 to 2,437 m: 7914 to 1,523 m: 12under 914 m: 214 (2010)

Heliports:7 (2010)

Pipelines:gas 36,493 km; oil 4,514 km; refined products 4,211km (2010)

Railways:total: 21,684 kmcountry comparison to the world: 12broad gauge: 21,684 km 1.524-m gauge (9,854 kmelectrified) (2010)

Roadways:total: 169,496 kmcountry comparison to the world: 30paved: 165,844 km (includes 15 km of expressways)unpaved: 3,652 km (2010)

Waterways:2,185 km (most on Dnieper River) (2010)country comparison to the world: 41

Merchant marine:total: 160country comparison to the world: 40by type: bulk carrier 4, cargo 123, chemical tanker 1,passenger 5, passenger/cargo 5, petroleum tanker 9,refrigerated cargo 11, specialized tanker 2foreign-owned: 1 (Iran 1)registered in other countries: 197 (Belize 6,Cambodia 37, Comoros 10, Cyprus 2, Dominica 2,Georgia 15, Liberia 16, Malta 30, Marshall Islands 1,Moldova 12, Mongolia 1, Panama 11, Russia 12,Saint Kitts and Nevis 10, Saint Vincent and the









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Grenadines 12, Sierra Leone 5, Slovakia 7, Tuvalu 1,Vanuatu 3, unknown 4) (2010)

Ports and terminals:Feodosiya (Theodosia), Illichivsk, Mariupol',Mykolayiv, Odesa, Yuzhnyy

Overview

With an underdeveloped transport and communication infrastructure, Ukraine has not managed to capitalize on itsunique geographic location as a transit country between various importers and exporters. As such Ukraine continuesto underutilize its transit potential. Despite the high degree of coverage, the quality of the transportationinfrastructure235 and equipment is not in line with international standards. Since November 2009, a draftcomprehensive transport sector development strategy up to 2020 is being developed. The draft strategy envisagesthat the Ministry will elaborate and submit to the Cabinet of Ministers shorter-term strategy implementationprograms until 2015. A railway reform program for the period 2010-2015 was approved in December 2009 andprovides for a separation of the government's regulatory function from the operational function of the national state-owned railway company. The Ministry of Transport and Communications is currently elaborating a nationalmaritime safety concept, which should be approved in 2010. The subsequent development of a detailedimplementation plan is expected to take until 2012. Regulatory alignment with international standards progressesslowly; the Ukrainian flag was still on the 2008 black list of the Paris Memorandum of Understanding on Port StateControl. Ukraine plays a strategic role concerning integration into trans-European transport corridors in the region.Ukraine has also shown interest in establishing a common aviation area between Ukraine and the EU, thenegotiations on which are ongoing. Transport sector development in Ukraine in the light of movement of goods andpeople is also closely linked with cross border and customs related issues as Ukraine is an important transit countryconnecting the EU with Russia, the South Caucasus and Central Asia (TRACECA corridor).

Key trends in the transport sector

The Ukrainian transport network can be characterized by a well-developed rail infrastructure and anunderdeveloped road infrastructure. All modes of transport are significantly below modern standards in termsof quality, safety, energy efficiency and environment. The whole sector is in a state of neglect due to the lack ofinvestments in the last 20 years. In Soviet times public transport was the core of passenger transport. A longrailway network and modern urban public transport systems, such as tram, trolleybus, bus and metro, weredeveloped at that time. The national and urban road networks could manage the low traffic demand.




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In the last 20 years the level of car ownership has risen and passengers have shifted from public transport toroad transport. The state and capacity of the road network, especially in larger urban areas, has not been able tofollow the increase in demand. The quality of public transport on the other hand has decreased. The amount offreight transport dropped significantly since 1990. Due to the state of the road network rail, pipelines accountfor most of the long distance freight transport. Road transport dominates short distance movements. Thenational, regional and municipal level cannot provide the financial means to modernize the transport system.World Bank, EBRD and other donors provide financial assistance to improve the national and urban transportnetwork. The European football championship in 2012 induces investments and changes on a national andregional level. There is a National Action plan for the realization of the requirements of the Kyoto protocol.The Concept of the National Environmental Policy of Ukraine for the period till 2020 does not contain anyparticular measures on transportation. In general, the country follows the international trends in climate policy,but there is a significant lack of implementation, mainly due to lack of coordination between national, regionaland local level institutions.

Mitigation policies/measures with high potential to deliver reductions in transport GHG emissions

Policy/measure Explanation (brief) StatusReform of the nationalrailway system

This is a organizational and structural reform of the railwaytransport to meet the traffic needs of national economy andpopulation and improve its quality..

Current

Public transportimprovement (Odessa)

This includes the reconstruction of approximately 16 km oftracks and related infrastructure and trams.

Current

Passenger and freighttraffic managementsystem (Kyiv)

This policy encourages development of an automatic trafficmanagement system for passengers and freight to improve andoptimize traffic flows.

Current

Traffic managementsystem

This policy encourages the design and implementation of anActive Traffic Management System.

Current

Strategy for the urbantraffic in the city Lviv

This plan includes the development of a transportation modelfor the city, preparing a feasibility study for a new tram routes,assessment of a infrastructure measures and implementationstrategy in Lviv.

Current

Mobility concepts forEURO 2012

This policy includes the development of mobility concepts forthe cities of EURO 2012 with special focus on publictransport, walking and cycling and long term improvement ofurban transport.

Current

Figure 86 Mitigation policies/measures with high potential to deliver reductions in transport GHG emissions

Good practice

Reform of the national railway system. The primary objective of this organizational and structuralreform is to improve the quality of the current railway network. This would involve developing new andexisting infrastructure to meet the traffic needs of national economy and population and improve itsquality.




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International contributions

Finance Capacity Building Technology TransferUkraine would benefit fromfinancial support for upgrading thenational rail system, urban publictransportation, and alternativefuels.

Ukraine would benefit from capacity building inareas such as:

Metro systems Alternative fuels Integrated transport planning

encouraging the use of public transportand NMT.

Ukraine would benefit fromtechnology transfer, for example, inalternative fuels.

Figure 87 International contribution

The country suffers from insufficient transport infrastructure. There are high costs associated with the limitedand poorly maintained road network, the financial conditions and governance of the state railways, and theweak capacity and reliability of the ports. Moreover, the poor logistics and cumbersome and time consumingborder crossing procedures represent significant additional barriers to trade that keep Ukraine far below itspotential as a transit hub and impose significant economic costs given the country’s dependence on foreigntrade. Key logistics and border related obstacles include:

Unreliable and costly logistics services; Scarce and expensive warehousing capacity (including cold storage), which in turn is hampered by land

policy and construction permits problems; Cumbersome border crossing and customs clearance procedures; Complexity of regulations relating to exports and imports, including numerous pre-customs permits,

registration licenses, technical regulations, and certification which generate high compliance costs; and Corrupt practices at the border.

The World Bank’s Logistics Performance Index (LPI) in its latest survey (2010) places Ukraine on 102nd placeout of 155 countries. For comparison Poland ranked 30th, Romania 50th, and Russia 94th. The ranks are basedon assessments made by freight forwarding/logistics professionals and based on six areas of performance suchas efficiency of the clearance process by customs and other border agencies, infrastructure for transportlogistics, ease and affordability of arranging international shipments, competence of the local logistics industry,ability to track and trace international shipments, and timeliness of shipments in reaching.The Ukraine Trade and Transit Facilitation Assessment analyzes in more detail the barriers in each of thesedimensions. Addressing these barriers would yield rapid gains in trade and logistics performance andconsequently in international competitiveness. The most important areas to be addressed include:

Investing in transport infrastructure under a comprehensive multi-modal transport policy umbrella toensure the most efficient use of investments.

Encouraging investments in logistics facilities in key geographic areas to enable cost savings and tofacilitate exports and transit.

Streamlining of border–crossing operations and customs clearance procedures. Combating unofficial payments in the process of border-crossing.




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Figure 88 International LPI results

Figure 89 Domestic LPI results, time and cost data.

Figure 90 LPI ranking and scores 2010




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Figure 91 Clearance overview




Page 116Figure 92 Key indicators of transport sector (Part 1)




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Figure 93 Key indicators of transport sector (Part 2)

The share of transport in the economy of Ukraine

The share of the transport sector in Ukraine's gross domestic product (according to Goskomstat) as of 2009 was11.3%. The number of workers employed in the sector is almost 7% of total employment. The transportationinfrastructure of Ukraine is adequately developed overall, however it is obsolete and in need of majormodernization. A remarkable boost in the recent development of the country's transportation infrastructure wasnoticed after winning the right to host a major continental sport event the UEFA Euro 2012.The transport sector is of considerable importance for Ukraine’s transition to a market economy and, given thecountry’s size and its key location as a gateway between east and west, for the development of diversifiedtrade. Ukraine has a vast network of railroads and roads, several airports for domestic and international airtraffic, ports on the Black Sea and an elaborated sea and river transport system. National and regionaltransportation infrastructures are inadequate. Particularly noticeable are the low quality of domestic air serviceand poor road conditions. Much of the infrastructure is in urgent need of modernization and severalrestructuring projects are being implemented. When economic ties with western Europe intensify, upgrading ofthe East-West Road Corridor will become essential. The need for organizational reform in the sector andrevised policies has been recognized, but presents major challenges.

http://en.wikipedia.org/wiki/UEFA_Euro_2012




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Figure 94 Projects set in operation from the beginning of 2008.

Figure 95 Innovation and investments perspectives.




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Figure 96 Map of current, being under construction and designed warehouse projects in Kiev region.

Recent perspective

Today the transport sector in Ukraine generally meets only the basic needs of the economy and population. Thelevel of safety, quality and efficiency of passenger and freight transport, as well as the infrastructure's amountof energy usage, and the technological burden it places on the environment do not meet modern-dayrequirements. For example in 2009, Ukrainian infrastructure provided for the transportation of 1.5 billion tonsof cargo and 7.3 billion passengers. As the global financial crisis took hold and demand for major exportcommodities in 2009 fell, the volume of freight traffic decreased by 17,6% when compared with figures from2008; passenger transport fell by 12,7%. Due to the low level of demand, the country's existing transit potentialand advantageous geographical position is not fully utilized. There is thus a lag in the development of transportinfrastructure, transport and logistics technologies and multimodal transport. All this has made Ukraineuncompetitive as the high costs of transport across the country make the cost of production in the countryuncommonly high. The Ukraine’s transit rating – 3.11 – is one of the highest in Europe. Ukraine is on theroute of the 3 out of 10 European transport corridors. In 2009, Ukrainian infrastructure provided for thetransportation of 1.5 billion tons of cargo and 7.3 billion passengers. As the global financial crisis took holdand demand for major export commodities in 2009 fell, the volume of freight traffic decreased by 17,6% whencompared with figures from 2008; passenger transport fell by 12,7%. Today the transport sector in Ukrainegenerally meets only the basic needs of the economy and population. The level of safety, quality and efficiencyof passenger and freight transport, as well as the infrastructure's amount of energy usage, and the technologicalburden it places on the environment do not meet modern-day requirements. Due to the low level of demand, thecountry's existing transit potential and advantageous geographical position is not fully utilized. There is thus a




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lag in the development of transport infrastructure, transport and logistics technologies and multimodaltransport. All this has made Ukraine uncompetitive as the high costs of transport across the country make thecost of production in the country uncommonly high. With an underdeveloped transport and communicationinfrastructure, Ukraine has not managed to capitalize on its unique geographic location as a transitcountry between various importers and exporters. As such Ukraine continues to underutilize its transitpotential. Despite the high degree of coverage, the quality of the transportation infrastructure andequipment is not in line with international standards. Since November 2009, a draft comprehensive transportsector development strategy up to 2020 is being developed. The draft strategy envisages that the Ministry willelaborate and submit to the Cabinet of Ministers shorter-term strategy implementation program until 2015

Freight and Passenger Transportation StatisticsTransported tons of

freightsFreight kilometers

(thousand)Transported passengers

(thousand)Passenger kilometers

(thousand)2000 938 916,1 19 281 619,3 2603 804,6 29 381 541.22002 947 263,8 20 593 133,1 3069 136,3 35 812 231.12004 1027 396,3 28 847 143,4 3720 326,4 47 490 401.32006 1167 199,6 40 566 469,9 3987 982,2 53 981 705.32008 1266 598,1 54 877 223,3 4369 125,5 61 302 884.5

Figure 97 Freight and Passenger Transportation Statistics

Figure 98 Transport Services (% of commercial services exports)

Cargo transportation, 2011Freight shipped Freight turnover

mln.t in % to 2010 mln.t/km in % to 2010

Total shipment 811,7 107,4 426427,7 105,7

of which, byrailway trains 468,4 108,2 243556,4 111,7motor vehicles 178,3 112,6 38438,9 99,1water 9,9 89,3 7365,2 81,8pipelines 155,0 101,0 136700,4 99,6aircraft 0,1 102,8 366,8 96,8

Figure 99 Cargo transportation, 2011




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Passenger transportation, 2011Passengers transported Passenger turnover

mln. pas in % to 2010 mln. passengers/ km in % to 2010Total transportation, 6972,9 101,9 134254,0 103,3

of which, byrailway1 430,1 100,7 50837,4 101,2motor vehicles 3604,6 96,7 51396,2 98,7water 8,0 105,2 91,7 96,2aircraft 7,5 122,7 13761,0 125,6tram 798,0 111,8 4431,6 111,5trolleybus 1346,4 111,9 7810,6 113,4underground (metro) 778,3 102,3 5925,5 102,4

Figure 100 Passenger transportation, 2011

1 Including transportation by urban electric train Source: SSC Ukraine

All transportation in Ukraine except for automobile transportation is regulated by the Ministry of Infrastructure,formerly the united Ministry of Transportation and Communications. The automobile transportation isregulated by the State Automobile Inspection (DAI) of the Ministry of Internal Affairs. The Ministry ofInfrastructure includes several transportation and communication related administrations and inspections thatsupervise various specialized state companies. The public transportation within cities are regulated by theirlocal administrations which are appointed by the President of Ukraine, while submitting their reports to therelated ministries of the Cabinet of Ministers of Ukraine. Some of the non-military transportation is alsoregulated by the special State Space Agency of Ukraine (DKAU). The energy-related transportation such as apipeline gas is regulated by the Ministry of Fuel and Energy. The share of the transport sector in Ukraine'sgross domestic product (according to Goskomstat) as of 2009 was 11.3%. The number of workers employed inthe sector is almost 7% of total employment. The transportation infrastructure of Ukraine is adequatelydeveloped overall, however it is obsolete and in need of major modernization. A remarkable boost in the recentdevelopment of the country's transportation infrastructure was noticed after winning the right to host a majorcontinental sport event the UEFA Euro 2012. The approval and implementation of a national transportstrategy is a pre-condition for a EUR 65 million EU budget support program in the transport sector. Theadvantageous geographical position of Ukraine allows for the location of a number of International TransportCorridors on its territory, in particular:

Pan-European transport corridors № 3, 5, 7, 9; Rail Co-Operation Corridors (ORC) № 3, 4, 5, 7, 8, 10 and European Transport Corridors - Caucasus - Asia (TRACECA) and Europe - Asia.

Main obstacles towards success

A number of issues are preventing Ukraine from fully benefiting from its infrastructure and location anddeveloping a competitive and efficient market for transport services.These issues are the following:




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Legal and Regulatory Inefficiencies. The existing procedures and documentation affecting commerce,trade and transport are complex, incomplete, not aligned to international practices, lengthy, costly,constantly changing, and insufficiently known by users. It leads to rent seeking behaviors from thosewith discretionary power. Business cost (official and shadowed) and uncertainty are discouraging theestablishment of new businesses, the expansion of new businesses, and foreign investment. Thisprecludes the development of transport services the industry and retail businesses look for, i.e. timely,reliable, flexible, secure, and cost effective delivery through and within the Ukraine. Therefore, creationof global production and supply chains that would integrate Ukraine as an element of the globaleconomy cannot take place. Excessive regulation and forms of taxation hamper the private sector, andencourage the move towards the unrecorded economy.

State Interference in Transport Operations. The sector still operates under many of the organizationaland policy structures of earlier days. Practically all transport enterprises and infrastructure sub-sectors,including the national road network, the railway system, the ports, the airports, some airlines, the Metrosystems, as well as many organizations involved in transport-related maintenance and construction, arestill State-owned units reporting to the Ministry of Transport. Most of them do not operate asautonomous, self-financing and commercially viable entities. This strong state presence coupled withlimited investment capacity, limits technical innovations in transport.

Constraining Macroeconomic Framework. The existing macroeconomic framework impedes efficienttrade by imposing restrictive practices. Currency exchange and foreign exchange access are strictlycontrolled; the tax system is complex, heavy and rather confiscatory. Prices and the banking sector areinsufficiently developed, to support commerce and trade still partially controlled by the State. Propertyrights and titling remain unclear despite the efforts started.

Insufficient Cost Recovery. Existing user charges, tariffs and fares are often insufficient orinappropriate to cover the cost of maintenance and renewal of the core assets required. The financialperformance of transport entities is declining. Tariff regulation and exception prevent the determinationof market-determined tariffs and cost recovery.

Inappropriate Financial Management Systems. Transport enterprises in Ukraine are operating atpresent in an environment, lackingtransparency, with very little disclosure offinancial information and virtually noaccountability. The use of the formerimproved soviet accounting system does notgive a fair and realistic picture of financialflows and financial situation in an entity. TheState cannot decide knowingly the amount ofsubsidies to be allocated to railwaycomputers since the accounting system doesnot allow for it. Current transport accountingsystems are a major obstacle to correctingstructural and operational inadequacies.Costs cannot be isolated and analyzed, andpast-over investment cannot be rationalizedwithout properly structured operational and




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financial information. There is virtually no confidence in reported information, when available, andinvestors have little basis on which to make investment decisions and/or monitor investmentperformance.

Slow Pace of Reform. The sector needs to move towards restructuring and privatization of operationsand to a much greater use of the market mechanisms than what was previously done. The currenteconomic situation provides a convenient time in which to implement the necessary structural andinstitutional changes. The period until the economy recovers may be limited; and the sector needs to berestructured to be able to handle growing traffic volumes under increasing competitive pressures.Officials are beginning to accept the logic and inevitability of the changes that will be needed.

Erosion of the Asset Base. The asset base of the transport sector is eroding. Mounting maintenance,rehabilitation, and renewal backlogs as well as technical innovation and equipment upgrading are notbeing addressed. Little, if any, maintenance is being done. The impression is that the transport systemis existing on its capital stock. Throughout the sector, repair facilities and rolling stock are in need of asubstantial overhaul. The situation may, within the next five years, deteriorate to the point at whichmaintenance and rehabilitation are no longer possible. If this occurs, the only option will be costly andcomplete reconstruction.

Misallocation of Revenues. A large part of the funds generated by the transport sector are allocated tofinance inefficient and non-competitive non-core activities. For example, the railway employs about200,000 people to produce, on a force account basis, agricultural products, social services, or industrialproducts like locomotives. Officially, these non-core activities are shown as profit making, but sincethey provide services or goods under noncompetitive conditions, the real cost of all these activities isunknown. A large part of actual transport generated surplus is also misallocated to non-core activities.

New Modal Split. Traffic, which has contracted sharply, will be showing a different modal split than thetraditional one. Reliance on road transport for international trade will increase when the economyrecovers, following this worldwide trend. Current infrastructures have not been designed to take thisfactor into account.

Oversupply of Transport Infrastructure. With an infrastructure designed to handle seven times itscurrent traffic, Ukraine faces a very high level of maintenance compared to its traffic levels. Twentyfour airports receive less than 100,000 passengers annually, 80 percent of the road network has fewerthan 300 vehicles per day. Without well-established prioritization techniques, the allocation of thescarce resources is subject to the action of pressure groups.

Railways

Ukraine has a developed railway network. The length of the railway network Ukraine ranks third in Europe(21.7 thousand kilometers of railways). Ukrainian trains are usually capable of speeds up to 160 kilometers perhour, as the number of railway passengers and freight climbs, the country expects to see a significantimprovement in the quality of railway transport. In addition to this the government expects to make hugeinvestments in the railways in preparation for Euro 2012. However, there is currently not enough line capacityprovided on routes to the south and the Crimea. There is also a network of suburban and regional train routesfor type of local transportation connecting smaller settlements with big cities. A railway reform program for theperiod 2010-2015 was approved in December 2009 and provides for a separation of the government'sregulatory function from the operational function of the national state-owned railway company.




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Two third of Ukrainian railway lines are heavyworked, equipped with modern management facilities,dispatcher's centralization and automatic block system.Ukrainian railway directly borders and cooperates withrailways of Russia, Byelorussia, Moldova, Poland,Romania, Slovakia, Hungary and ensures the workwith 40 international railway cross-walks, and alsoserves 18 Ukrainian seaports of the Black Sea and Seaof Azov basin. The administration of public railwaytransport is The State Administration of RailwayTransport of Ukraine "Ukrzaliznytsia", which wasestablished in december 1991. Ukrzaliznytsiaaccomplishes centralized management of thetransportation process in inland and interstatecommunication regulates railway industrial andeconomic activity. Note that industrial railways andmetros in cities are managed locally on a regionallevel.

KEY INDICATORS OF THE RAILWAY PERFORMANCE

Railway transport performance separate indicators, 2011Fulfillment, mln. t % of 2010

Freight 468,4 108,2of which, shipped 388,7 108,6

of which, by cargo nomenclaturecoal 104,0 106,3coke 11,3 107,9oil and oil products 11,2 95,0iron and manganese ore 76,1 106,1ferrous metals 31,4 108,4scrap ferrous metals 6,5 104,2timber freight 4,9 106,6chemical and mineral fertilizers 8,0 141,2grain and milled products 14,2 116,6cement 6,8 104,8construction material 54,0 117,1other fright 60,3 108,0

Figure 102 Railway transport performance separate indicators, 2011

Figure 101 Railway map of Ukraine




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Tariff indices for cargo transportation by rail in 2011 (to the previous quarter) (percent)I quarter ІІ quarter ІІІ quarter ІV quarter

All cargoes 102,1 106,7 106,6 106,6Coal 102,1 106,8 106,7 106,7Iron ore 102,1 106,8 106,7 106,7Mineral-construction cargoes 102,1 106,8 106,8 106,8Black metals 102,2 106,8 106,7 106,8Oil and oil black processed products 102,3 106,7 106,8 106,7Light oil processed products 102,2 106,8 106,7 106,8Chemical and mineral fertilizer 102,1 106,8 106,7 106,8Coke 102,3 106,7 106,8 106,7Chemical cargoes1 102,2 106,7 106,8 106,7Grain and processed products 101,5 104,4 104,5 104,4Forest cargoes2 102,3 106,7 106,8 106,7Cement 102,1 106,8 106,7 106,8

Figure 103 Tariff indices for cargo transportation by rail in 2011 (to the previous quarter) (percent)

1 Paintwork materials, gum, oxides, carbohydrate-containing, etc.2 Round, fixing timber, converted timber, etc.

Today and History of Ukrzaliznytsia

Ukrzaliznytsia (State Administration of Railway Transport of Ukraine) – public railway authority, that enablescentralized management of the transportation process in inland and interstate communication, regulates railwayindustrial and economic activity. The management sphere of Ukrzaliznytsia covers the railways of Donetsk,Lviv, Odessa and Pivdenna (Southern), Pivdenno-Zakhidna (Southwestern) and Pridniprovska Railways, andalso other enterprises and organizations of integrated industrial-engineering complex, that enable freightand passengers transportation. Ukrainian railway transport is key branch in the road transport complex thatprovides 82% freight transport and nearly 50% passenger traffic, accomplished by all kinds of transport. TheUkrainian railway working network amounts to nearly 22 000 km, 45% of it is electrified. In terms of trafficflow Ukrainian railways occupies the fourth place in Eurasia, ranking below to railways of China, Russia andIndia. Ukrainian rail traffic volume (year flow of traffic on 1 km) exceeds in 3-5 times corresponding figures ofdeveloped European countries. The field of activity of Ukrzaliznytsia includes 210 enterprises, institutions,organizations, among them are 6 railways, 7 open joint-stock companies, 106 medical and health-improvingfacilities, car-repair plants, engineering research institutions and other enterprises, where work over 400thousand employees. 1497 railway station, 55 engines and 48 wagon depots, 110 permanent way division, 69warning and communication division, 44 energy supply communication are functioning on the railways.Ukrainian railways cooperates directly with the railways of Russian Federation, Byelorussia, Moldova, Poland,Romania, Slovakia, Hungary and by means of train ferry with Illitchivsk - Varna - with Bulgaria. Through theterritory of Ukraine go 3 railway transport corridor - № 3,5,9. Ukrainian ports Izmail and Reni cooperate withpan-European corridor №7, which goes through the Danube river. Today the length of national network oftransit railway corridors in Ukraine amounts 3162 km. These are mainly double track electrified, equipped withroad automatic block system, that is characterized by use of high level technical equipment. Moreover,transportation by ITC TRACECA (Europe — Caucasus - Asia) is developed. Ukrzaliznytsia is one of thefounder of the Railway Council of the member countries of Commonwealth.




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Statistical data: Total length of main track —

21705,2 km Electrified tracks — 9878 km (45 %) Width of the tracks — 1520 mm The number of the railway

stations — 1497 railway terminals 128, among them

31 – of the first rank and upper railway crossings – 5574;

particularly, equipped withautomatic highway crossing signal– 4191, among them with asignalman – 1441

Freight car fleet — 132,500 units Carriage rolling stock — 7217 units cargo carriage and 60% of passenger

carriage in Ukraine thus representing major contribution to national economy. The total of assetsinvolved in the railway activities, represents more than 40% of the total national transport assets, allmodes together totaling 9% of all assets of Ukraine.

Diesel locomotive stock — 2447 units Electric locomotive stock — 1863 units Inventory rolling stock of the suburban traffic accounts for 1547 sections of the electric locomotives

(particularly, 14 sections of the rail buses), among them 1340 – in service. Inventory rolling stock of the diesel-multiple unit train — 528 sections, among them 247 – in service Number of employees — more than 525,000 people: nearly 400,000 were involved in Railway

Transport Services (including industrial activities, mostly manufacturing), 11,000 in urban metroservices, 10,000 in schooling activities, 36,000 in health services, 35,000 in railway industry operations,21,000 in trade

transactions. About 300,000 employees are involved in the Railways core-business. UZ is constituted ina large number of enterprises and establishments. Average salary in 1997 was 200 Hr ($US 100) amonth and is higher than in most of Ukrainian public services

Density of passenger traffic in 2011 — 427000 000 passengers

Transportation volume in 2011 —about 468 300 000 ton

The number of deluxe passenger train —63 units




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COMBINED STATEMENT OF FINANCIAL POSITIONas at 31 December 2010 (in thousands of Ukrainian Hryvnia)

Figure 104 COMBINED STATEMENT OF FINANCIAL POSITION

Investment Projects

1. Purchasing of high-speed inter-regional dual-system electric multiple-unit trains. Estimated valueof the project amounts to $ 480 000 000. This project provides purchasing of 12 high-speed inter-regional dual-system electric multiple-unit trains for Ukrainian railway with the purpose of improvingpassenger service and 2 diesel-multiple unit trains.

2. Complex modernization of diesel locomotive 2М62 and ЧМЕ-3 series. Estimated value of theproject amounts to $ 135,700 000. The purpose of the project - deep modernization of diesel locomotive2М62 and ЧМЕ-3 series with increasing its serviceability, improving technical state of the operationalpark of the diesel locomotives.




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3. Reconstuction of the passenger railway station complex in Mykolaiv (realization in 2010-2013).Estimated value of the project amounts to $ 7,5 million. The purpose of the project – to increasecompetitiveness of the rail transport in passenger traffic, to improve the quality of passenger service, tocreate proper conditions for passengers on the railway terminals.

4. Construction of suburban railway station in Odessa (realization of the project in 2018-2022).Estimated value of the project amounts to $103,900 000. The purpose of the project – construction ofsuburban railway station for ensuring demand in Odessa for commuter traffic in direction Odessa –Bilgorod-Dnistrovskyi, Odessa – Pomoshna, Odessa – Vapnyarka. The increasing demand for suburbanservice in connection with the development of health resort and touristic complex is predicted.

Common project with the World Bank "Increasing capacity of highway of railway directionZnamyanka – Dolynska – Mykolaiv – Kherson – Dzhankoi". Technical-economic projectargumentation: "Introduction of the energy saving technologies during railway transportation in thedirection Znamyanka – Dolynska – Mykolaiv – Kherson – Dzhankoi"Districts:

Znamyanka – Vadym, Odessa railway Dzhankoi – Vadym, Near-Dnipro railway

Dropping Productivity.

Organizational and technical capacity of UZ, which reached its optimum (defined as FSU railways and industrystandard) by 1990 and was designed to accommodate 500 billion ton-km and 70 - 80 billion passenger-km, hasnot been adjusted to the significantly lower (3.5 times) level of services remanded by the market today. Inaverage, only 12% of employees in core activities and 15 - 20% of rolling stock have been laid off; spin-off ofinfrastructure is insignificant. As a result of idle capacity and heavy and inefficient organization, performanceindicators continue to grow less.

Railway Assets.

While railway assets exceed current demand, there is a need for technological upgrading. UZ has assets valuedat approximately US$16 billion spread over its six geographically subordinated (not organized by corridors)regional railways. These assets, acquired to serve the high traffic level of 1990, have not been right sized to fitto present traffic demand. On the one hand, UZ can operate from a technical perspective another 10 yearswithout ma(or investments carried out in infrastructure and rolling stock. The assets includes interlay 1,800stations, 22,700 km of main track and 555 km of European gauge track, 801 locomotives for freight and 933 inpassenger services, 200,000 freight wagons and I10,000 passenger wagons. 8,400 km (3 5%) of track iselectrified. On the other hand, UZ telecommunication network is old fashioned (95% analog lines) andobsolete. UZ is insufficiently computerized and is no different from most of the FSU railways. EDP andavailability of EDI instruments are only represented in centralized in-house statistical production. Any largeinvestment in railways should be preceded by upgrading the data processing capability and decision makingtool available in UZ.

Good Technical Capacity.




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General quality of technical capacity of UZ remains good and clearly above average compared to most of theother FSU railways. Average and high end speeds for both passenger (50 - 60 km/h) and freight services (40km/h) are satisfactory for FSU railway standards despite shortage in investment resources and budgetaryfunding during last five years. UZ is still driven by engineers and not by managers with economic and financialbackground. UZ has remarkable hidden reserves available and idle technical capacity, which could allow theState and management of the company to economize and rationalize UZ activities without a risk to jeopardizecurrent performance levels. It would provide a solid ground for successful launch of radical restructuring,commercialization and privatization activities for UZ.

Controversial Legal Status of UZ.

The current legal framework prevents UZ from performing either defacto or dejure as a company on themarket. The institutional status of UZ is defined in the Ukrainian Railway Law from 4 July, 1996. UZ is a Stateadministrated institution under the MOT. The General Director of UZ is also first deputy Transport Ministerand a cabinet member. The above law, designed to accommodate rapidly changing economic situation, enablesthe State to influence tariffs, interfere in negotiation between UZ and its client, and forces UZ to offer socialbenefits to a wide part of the population. UZ is an entity of governmentally planned losses.

Social Burden.

UZ is required to offer social benefits to its employees, cross-subsidize passenger services with freight services,to allow privileged and/or discounted fares to a large part of the population and support to the economy. Inaddition, the political agenda of the Ukrainian government has forced UZ to accept and carry indebtedness (inthe form of dubious collectable receivables) from the industrial sector (coal) to support it. It is notable thatMinistries instead of companies are in charge of handling settlement of overdue receivables and indebtednessbetween large state companies.

Environmental Impact.

Environmental pollution and its economic side-effect defined as cost to others is not recognized by UZ. Totalcontribution to pollution levels by UZ is significant due to its: size, aging equipment and FSU standards. In asituation in which low priority is given to environmental and other "soft" matters, and in the absence ofinvestment funds in general, UZ's contribution to environmental pollution will continue to grow in theforeseeable future.

Traffic Levels

Traffic Drop and Shift Central command economies used too much rail transport. UZ role in servicingtransit flows to Russia and Asia has decreased as a result of intense FSU competition. Nonethelessinternational traffic represents 60% of UZ traffic. The most important traffic components in recent yearsremain coal and cokes, ores, black metals and construction materials, mostly on high travel distance




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(470 km on average). Container transport has dropped considerably, due to rather high cost, long leadtime, lack of supporting logistical services and lack of consumer capacity.

Regional Railways. Regional railways are organized geographically and contribute a little to each otherin terms of industrial and operational synergy. All regional railways are consolidated economically.Regional railways differ significantly both in terms of physical characteristic and performance. The sixrailways are confronted with similar economic difficulties.

Transport corridors and international integration

The advantageous geographical position of Ukraine allows for the location of a number of InternationalTransport Corridors on its territory, in particular:

Pan-European transport corridors № 3, 5, 7, 9; Rail Co-Operation Corridors (ORC) № 3, 4, 5, 7, 8, 10 and

European Transport Corridors - Caucasus - Asia (TRACECA) and Europe – Asia

Figure 105 Road corridors

Ukraine plays a strategic role concerning integration into trans-European transport corridors in theregion. Ukraine has also shown interest in establishing a common aviation area between Ukraine and

http://en.wikipedia.org/wiki/Pan-European_corridors

http://en.wikipedia.org/wiki/TRACECA




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the EU, the negotiations on which are ongoing. Transport sector development in Ukraine in the light ofmovement of goods and people is also closely linked with cross border and customs related issues asUkraine is an important transit country connecting the EU with Russia, the South Caucasus and Central Asia(TRACECA corridor). The transit cargo traffic between Europe and Russia through Belarus is fivetimes higher than that through Ukraine. Ukraine ranks 102nd among 155 countries as per logistic efficiencyindex of the World Bank, in this regard the main problem area is inefficiency of customs procedures (135thplace out of 155) As regards infrastructure investments, Ukraine signed a loan agreement with the WorldBank, in April 2009, for a project on roads and safety improvements (EUR 370 million), and a railwaymodernization project (EUR 653 million) is still in the pipeline. EBRD has provided loans for financing publictransport projects in Kyiv and Odessa. Ukraine ranks 79th among 155 countries as per transportationinfrastructure quality, according to the World Bank rating. The surface/pavement of roads requiresconstant repairing, there is no high speed railroad communication, the technological re-equipment in thesea ports is necessary, in particular, the development of container terminals, the airports modernizationis required as well as the air navigation service.

Tariff indices for pipeline cargo transportation in 2003–2011(ІV quarter to ІV quarter of the previous year) (per cent)

2003 2004 2005 2006 2007 2008 2009 2010 2011All cargoes 83,5 101,8 100,1 141,4 105,8 120,6 107,3 166,6 120,3Oil 112,0 98,1 100,2 96,1 97,2 124,3 116,8 124,8 110,2Gas 81,0 102,2 100,0 146,4 106,4 120,0 106,1 171,0 120,6

Figure 106 Tariff indices for pipeline cargo transportation in 2003–2011

Public Roads

The development of public roads in Ukraine is currently lagging behind the pace of motorization in thecountry. During 1990-2010 the length of the highways network hardly increased at all. The density ofhighways in Ukraine is 6.6 times lower than in France (respectively 0.28 and 1.84 kilometers of roads persquare kilometer area of the country). The length of express roads in Ukraine is 0.28 thousand km (in Germany- 12.5 thousand kilometers in France - 7.1 thousand kilometers), and the level of funding for each kilometer ofroad in Ukraine is around 5,5 - 6 times less than in those locations. This is due to a number of objectivereasons, including that the burden of maintaining the transport network per capita is significantly higher than inEuropean countries because of Ukraine's relatively low population density (76 people per square kilometer),low purchasing power of citizens (1/5 of the Eurozone's purchasing capacity), relatively low car ownership anda the nation's large territory. The operational condition of roads is very poor; around 51.1% of roads do notmeet minimum standards, and 39.2% require major rebuilds. The average speed on roads in Ukraine 2 - 3 timesis lower than in Western countries.




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Figure 107Road map of Ukraine

The approximately 172,000 km road network (main roads 31,078 km and local roads 141,637 km) which is theresponsibility of the Road Corporation (UKRAVTODOR) has continued to deteriorate over much of its length.The same may be said of the urban network of about 86,000 km and an unspecified length of agricultural andfarm-to-market roads. The geographical coverage of the road system is generally adequate, the mainexceptions concerning the need for by-passes. A study undertaken in 1997, indicated that approximately 6,900km of the main road network were in fair to moderate condition (roughness index averaging about 4.3) and itwas also estimated that the remaining 24,000-km were in poor condition (roughness index 5 - 6). Although nomeasurements have been undertaken, the visual inspection suggests that paved local roads have a roughnessindex between 5 and 8, while for the remaining estimated 45,000-km of unpaved local road, roughness levelsranging between 7.5 and 12 (verging on impassable) are often observed. Urban roads present a similar pictureto the main and local paved road systems. There are also about 16,000 bridges of which an estimated 60% aresubstandard and in need of repair and strengthening. With the increasing number of heavy European truckstransiting through the country this is an issue deserving attention, especially on the main corridors. Withadequate maintenance these main corridors should provide enough capacity for some time but it should berealized that without improved customs formalities at the border, any upgrading on these corridors would bewasted.

Road Expenditures

Due to the very limited resources made available for road maintenance, the position continues to deterioratewith much of the network now requiring expensive reconstruction rather than maintenance. In 1997, it wasestimated that actual funds allocated to main road maintenance and rehabilitation amounted to 48 percent ofneeds and to only 21 percent of the needs on local roads with an overall shortfall on state roads of 72 percent.In the case of urban roads, actual funds available were estimated at 20 percent of requirements. In 1997,approximately US$440 million equivalent were allocated for road maintenance, including rehabilitation, and in1998, US$550 million were budgeted compared with an estimated US$1.5 billion needed annually.




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The state road authorities are to be commended on their concentration of resources on routine maintenance, butthis has only been possible at the expense of important periodic maintenance, which has led to a growingbacklog of rehabilitation and reconstruction. Despite the tight budgetary constraints, the budget allocation ismade on the basis of pre-established norms in each oblast without the support of economic evaluation orproven warrants. The share of maintenance of the state road network in expenditures increased progressivelyfrom 64 percent in 1993 to 75 percent in 1997, leaving 36 percent in 1993 to 25 percent in 1997 ofexpenditures for new construction or reconstruction. .

Road Financing

The existing mechanism of road financing primarily based on a tax on enterprise turnover shows some signs oferosion. Since 1991, the road system has been financed from a Road Fund established under the Law ofUkraine "On the Sources of Financing of Road Maintenance in Ukraine". The Road Fund has six major sourcesof revenue including budget contributions from the central and supplementary budgets. Road user chargesreflecting the use of the network represent less than 12 percent of road financing. The collection of the tax onenterprise turnover has become increasingly difficult as a result of the economic situation.

Road Traffic Data.

Road traffic data in Ukraine are currently scarce and unreliable. Apart from a few special project relatedstudies, few traffic counting are carried out as a result of economic constraints. It is strongly recommended thata statistically valid program of traffic counting is reintroduced - possibly, initially, using an "N-Point" censussystem of about 60 sites. Traffic at border crossings is recorded but these data, although identifying the size ofthe potential source of transit taxes, can cast very little light on general road usage. Furthermore, it has provedimpossible to obtain up-to-date official data on the size of the vehicle fleet - this being regarded as a statesecret.

Traffic Trends

Enquiry among participants in the transport industry and some government officials indicates that the size ofthe vehicle fleet given in Table 3 is of the right order and an official estimate for 1996 gives a total vehicle fleetof 8.91 million, which would back up this enquiry. The exception to this last point may be on some of thetransit routes.

Impact of Road Condition on Transport Cost

The serious deterioration of the system has led to considerable increase in transport costs, which, in turn, maywell create an important barrier to economic activity. In the case of agricultural access roads, it is estimatedthat as much as 40 percent of production may be lost in some years due to the poor level of access.

Road Safety

Ukraine appears to have an exceptionally bad record as regards road safety. Not only is the rate of accidents,whichever way it is measured, very high but also, if official statistics are correct, the severity of accidents is




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alarming. In 1993, 7462 fatalities occurred (equivalent to a jumbo-jet crashing every 12 days) and 43,453people were severely injured in Ukraine. The fatality rate per accident was about 0.18 or about four times therate in the United Kingdom. m

Road Construction Industry

The structure of the construction industry is in a stage of transition from entirely state control to much greaterprivate participation. The state road maintenance structure is also being rationalized and it is possible that thenumber of oblast/regional road maintenance units will be reduced from about 40 to 32. There are now 658 jointstock companies of various size and reputedly capable of carrying out road works maintenance. Of thesecompanies, 45 were originally state owned whilst the remainder were attached to other organizations andformed joint stock companies partly in order to protect their positions in a low demand situation. At present,with the low level of investment and economic activity, it would be unrealistic to expect quick progress inprivatization although the authorities accept that privatization will, eventually, be the route to follow.Maintenance and construction costs in the roads sub-sector are higher than would be expected and, althoughsome of this may be due to the over-sizing of some road geometry, increased privatization and competitionwould lead to lower prices. This applies in both the state and urban road sectors. Apparently no companiesfrom CIS or FSU states operate in Ukraine, although it is proposed to introduce competitive bidding for roadworks when resources and the size of the road program permit. The introduction of foreign contractors mayrequire changes in legislation

URBAN TRANSPORT

Current Situation of Surface Transport

In the larger cities, where 80 - 90% of thepopulation regularly uses public transport(mainly trolley buses), private buses arebecoming common. In Kiev,approximately 85 percent of the buses areprivate and provide a higher standard ofservice at premium flat rate fares of 50kopecks compared with 30 kopecks forthe city services of buses, trams andtrolley buses. The city services continueto lose money since revenues cover only50% of cost. There is a steady physicaldepreciation of capital assets of vehiclesand infrastructure. If this continues therewill eventually be a breakdown ofservices, which will impact upon usersmuch more than an increase in the level

of fares, especially those with limitedresources. Simultaneously, private




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companies suffer different kinds of constraints: various licensing procedures, illegal "technical" checks at theirsites (as a result buses cannot be used for days), 100% import tax for new buses and equipment, forcedpayments to different funds. The regulatory framework is very confusing. A tender committee has beenestablished, but the system never worked in practice. Actual ownership of buses and material is required forpotential candidates that provide services (without knowing that their bid is successful). From the city ofIzmail, it was reported that operators with winning bids again lost their license afterwards. Operators also hadto deal with licenses which were suspended as long as no payments were made to police funds (business report,21-12 1997). In Kiev, the situation remained chaotic after tendering procedures granted exclusive rights.Everybody owning a vehicle could still provide services on routes "exclusively granted". The current situationin Kiev with no licensing system at all, is not satisfactory.

Metro

Currently the metro (underground) systems are part of the Ukrainian railways and their standard of service hasbeen maintained at a satisfactory level. The financial position also appears to be healthier than other forms ofpublic transport although very few data are available. Arrangements are currently being made for the metro tobe transferred to the responsibility of the municipalities who will provide management and finance foroperations should this be needed. New construction will be financed by the central government. During thisreorganization, consideration should be given to some degree of privatization. It is unlikely that completeprivatization would be accepted, but the option of franchising the services whilst the municipalities retainedcontrol of the infrastructure may be possible.

Poor Financial Performance

Since Independence, financial resources for the urban transport have declined sharply. Fare-box revenues are adeclining fraction of operational costs, leaving provisions for appreciation, rehabilitation and/or renewal of thefleet uncovered. Actual fare-box revenues taking into account nonpayment of fares and privilege travel areestimated to cover less than 50% of the actual normalized operating costs of urban transport for Trolley-Buses,Tramways and Buses, at the national level. The financial situation for the Metro transport services, which,managed by the Railways, cover three major cities in the country (Kiev, Dnepropetrovrsk and Kharkov), isslightly better. Tariffs allow for coverage of the actual operating cost but do not contribute sufficiently to asound and sustainable assets replacement and modernization policy.

Main Financial Issues

The poor financial performances are due to four main issues. First, fares were not increased in proportion withactual costs, in particular for fuel expenses. Second, the protected exemption system leaves about an estimatedhalf of the urban passengers free of any financial contribution. Third, general subsidy funding systems inUkraine have prevented users from perceiving the true cost of an efficient transport service and, therefore, havecreated a business climate, which is not a catalyst for private transport operator involvement. Finally, centraland local governments' subsidies have shrunk drastically in the recent years, accelerating the deterioration ofthe financial and physical situation of the sector.




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Waterways

Ukraine has well-developed sea and river transportation systems. Thelargest ports are on the Black Sea (Odessa, Ilyichevsk and Nikolaev) andhandle bulk cargo and container traffic. Ukraine is planning to establisha 40-vessel oil tanker fleet with a terminal near Odessa as a long-termmeans of meeting its energy needs. Regular ferry services run betweenOdessa and Novorossiysk and Sochi ports in Russia and Batumi andSukhumi in Georgia. Izmayil is the main port on the Danube. Recently, a

ferry service was stablished between Ilyichevsk and the Georgian port of Poti, to link up the EU sponsoredTRACECA (Transport Corridor Europe-Caucasus- Asia) rail and road transport route with the Trans-EuropeanNetworks (TEN), and in particular Corridor IX. The rail ferry terminal was inaugurated in April 1999.Ukraine has 4,400 km (2,734 mi) of navigable waterways on 7 rivers, most of them are on Danube, Dnieperand Pripyat rivers. All Ukraine's rivers freeze over in winter (usually December through March) interruptingnavigation. The river transportation is supervised by the Ukrrichflot (http://www.ukrrichflot.com/) whichcombines four major and one minor river ports along the Dnieper river and its estuaries.The major part of sea connection is made via the Black sea ports of Odessa, Sevastopol and Yalta. Thepassenger vessels sailing between the Crimea peninsula and Odessa do not have stable schedule and rates,currently. Therefore tickets for these cruises and ferries are hardly bookable. The major part of ferries servesIstanbul, Turkey destination. They provide with several categories of accommodation, meals, entertainmentprograms, etc. On the top of it, ferries make cargo transportation including cars, vans etc.

Total: 193 ships (1,000 gross register tons (GRT) or over) totaling 862,690 GRT/963,550 metric tonsdeadweight (DWT)

Ships by type: bulk carrier 6, cargo ship 145, container ship 3, passenger ship 6, passenger/cargo ship 4,petroleum tanker 9, refrigerated cargo ship 11, roll-on/roll-off 7, specialized tanker 2 (2007)

The Ministry of Transport and Communications is currently elaborating a national maritime safetyconcept. The subsequent development of a detailed implementation plan is expected to take until 2012.Regulatory alignment with international standards progresses slowly; the Ukrainian flag was still on the 2008black list of the Paris Memorandum of Understanding on Port State Control.

Ancillary transport services of sea and river ports and wharfs on freight processing, 2011Total

of which:exports imports transit intra transportation

Freights shipped through, thsd. t 161647,0 85997,5 19692,2 47616,4 8340,9sea ports 155052,0 84895,0 19417,4 47599,2 3140,4

% to 2010 104,7 101,0 111,4 107,8 127,1river ports 6595,0 1102,5 274,8 17,2 5200,5

% to 2010 106,2 81,8 95,1 159,3 113,9Figure 109 Ancillary transport services of sea and river ports and wharfs on freight processing, 2011

Figure 108 Odessa port




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Turnover of Odessa in 1996 - 2011 years.Year Ths tons TEU1996 578,8 64 6111997 491,3 51 5201998 460,0 47 3211999 619,0 49 7802000 879,0 69 4872001 881,0 75 6062001 1 242,0 111 1752003 1 675,0 158 8702004 2 263,6 201 4282005 2 850,0 288 3492006 3 689,0 395 5642007 4 473,5 523 8812008 5 045,5 572 1422009 2 835,9 255 4612010 3 910,9 351 5682011* 5 257,8 455 552

Figure 110 Turnover of Odessa in 1996 - 2011 years.

Import/Export Turnover of Odessa in 1996 - 2011 years, TEUYear Import Export1996 32 332 32 2791997 25 910 25 6101998 23 195 24 1261999 25 379 24 4012000 34 780 34 7072001 37 527 38 0792001 53 818 57 3572003 81 971 76 8992004 109 781 91 6472005 154 068 134 2812006 219 755 175 8092007 276 206 247 2692008 304 116 268 0262009 121 429 121 808

2010 166 452 169 380

2011* 214 934 206 894Figure 111 Import/Export Turnover of Odessa in 1996 - 2011 years, TEU




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The share of transit cargo in the port's container turnover, thousand tonsYear Total ths tons Transit, ths.

tons% of

Transit2003 1674,6 196,7 11,75%2004 2263,7 174,3 7,70%2005 2850,7 193,7 6,79%2006 3688,1 208,2 5,65%2007 4473,5 249,2 5,57%2008 5045,5 280,0 5,55%2009 2835,9 154,8 5,46%2010 3 910,9 219,9 5,63%2011* 5 257,8 422.9 8,04%

Figure 112 The share of transit cargo in the port's container turnover, thousand tons

MARITIMEAND RIVER TRANSPORT

Overview

In the FSU, the entire maritime transport was managed by the State. The Merchant Marine Ministry(MINMORFLOT) was in charge of shipping lines, to which both the river and seaports were subordinated. TheMinistry was in charge of: (i) development and implementation of policy and legislation in connection withnational and international maritime sector; (ii) regulation and control of navigational safety and environmentalprotection; (iii) management and funding of operations and infrastructure for navigational channels and portaccesses; (iv) regulation of prices and tariffs, regulation of foreign currency earnings; and (v) provision ofhousing and social services to its subordinated organizations. The ports had no autonomy and were mainlyresponsible for cargo handling operations. The rigid organization of command and control, deprived managersfrom taking initiative in independent decision making and accountability, prevented introduction of moderntechnologies, encouraged mediocre productivity and, high labor costs.

Organizational Structure

Department of Maritime and River Transport. The Department of Maritime and River Transport, created bya decree in the MOT, is responsible for defining the strategy for development of seaports, maritimetransportation, and shipyards. In connection with maritime transport and ports, its main function consist of (i)exercising control over the use of state property; (ii) overseeing safety of navigation; (iii) establishing andmodifying tariffs; (iv) ensuring labor protection; (v) registering ships; (vi) securing release of crew fromarrested Ukrainian ships; (vii) ensuring marine ecological protection; and (viii) collecting sector data. TheDepartment does not interfere with day to day operations of ports and shipping lines.

Problem Areas

The existing institutional structures prevent liberalization of the waterborne sector, primarily because theGovernment still retains the ownership and control of sea ports and maritime shipping, to the extent that evenappointments of senior management of the enterprises is MOT's prerogative.




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River Ports and River Shipping

Main River and River Ports.

Navigable rivers in Ukraine are: Dnieper, Pripat, Desna,Sula, and Southern Bug Danube. Total length ofnavigable rivers in Ukraine is 4,900 kIn, of which 3,000 km have guaranteed depths of water for navigation.The most important river for transportation in Ukraine is Dnieper with a total length of 2,200 km, of which1,851 km is navigable, and 1038 is within the borders of Ukraine. There are seven major ports20 on theDnieper river.

River Ports Evolution

River ports before the independence of Ukraine were under the jurisdiction of Ukrechflot, the river shippingcompany. In 1993, river ports were privatized. However, privatization has not been fully implemented. Whileall of the stocks of Zaparojie port have been sold to the private sector, in Kiev 35% of shares are still owned bythe Government. After privatization, personnel in river ports were drastically reduced e.g. by two thirds inZaparojie port, and from 2,236 persons down to 480 in Kiev ports. Social sector infrastructure and activitieshave also been disposed of by the river ports. In recent years cargo handling on the river declined significantly.

River Maintenance

Ukrechput is the public sector organization responsible for the safety of river navigation. It carries out dredgingof the navigable rivers with its own fleet, marks navigation channels, and maintains river locks. Governments'budget allocations finance Ukrechput's operations.

Traffic Evolution

Traffic on the Dnieper River has dropped to 2 million tons in 1997 and traffic composition has changedsignificantly. Kiev port handled up to 30 million tons in 1980. Cargo on the Dnieper River used to consistmainly in construction materials (80%). Due to drastic reduction of construction in Ukraine, demand forconstruction materials also dropped. By type of cargo handled, 57% was metal and 25% consisted of variousores and coal. Zaporozh'ye port handled 52% of the total and Dnepropetrovsk, and Kherson and Nikolayevriver port ports handled 44% of the total. Kiev port handled only 2% of the total. Due to this situation, Kievport is trying to diversify its activities by building open and covered custom bonded storage.

River Shipping Evolution

Under the FSU, Ukrechflot managed river transportation on the Dnieper River and the Danube shippingcompany (UDP) on the Danube. These organizations were administratively and institutionally independent andsought support from Moscow for funding major capital expenditures and technical assistance. Afterindependence, Ukrechflot was privatized. Both shipping companies broke their ties with river ports andprogressively entered the more lucrative maritime transport. In 1997, of the 5.0 million tons carried by




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Ukrechflot, only 0.3 million tons accounted for transportation on Dnieper river, and of the 1997 income ofabout Hrv 90.0 million, about Hrv 85.0 million were earned from transport outside Ukraine.

Problem Areas in River Ports and River Shipping

Handling Equipment and Procedures. River ports have sufficient cargo handling capacity, but havenot necessarily the right type of equipment, since existing equipment is old and inefficient. On average,equipment utilization is about 50%. Due to the use of direct loading/unloading, river vessels spend toomuch time in the ports -55% of total time. For this type of operation, the arrival of ships is to becoordinated with the arrival of the trains, which has proven very difficult in practice. According to theexperience of Ukrechflot, moving cargo on pusher-barge convoys on the Dnieper river is not efficientdue to a large number of locks, requiring breaking up of convoys. Container traffic on the river is alsoconstrained by the absence of modem container handling equipment.

Inappropriate Financing Mechanism. MOT has not yet established the collection of port dues onriver ports, causing a significant loss of income to river ports. On the other hand payments, both officialand unofficial, collected from ships for canal and lock usage, as well as for lifting of bridges,discourages the use of river transportation due to high costs incurred. An unreasonable financial burdenis put on ports via property taxes charged at the same rate as for prime city property.

Rocky Bed. The rocky bed between Dneprodzerzhinsk and Dnepropetrovsk, causes toward the end ofthe shipping season, a reduction in water depths below 2.9 m, preventing ships to take a full load on thebasis of depth of water of 3.65, which is guaranteed in other locations of the Dnieper river. Therefore,unless this reach is dredged, a significant development of river transport from the upper and middlereaches of the Dnieper river is unlikely.

Unfair Rail Competition. The diversion of cargo from river to rail transportation is due to dumpingtariffs for ponderous materials. Over the years, construction materials have replaced typical river longhaul type of cargo consisting of coal, grain, ore, and petroleum. The energy consumption for moving aton of cargo on inland waterways is about 6 to 10 times less expensive than on railways. Potentialproductivity and costs of waterways in transport of bulk cargo can be matched by other modes oftransports, but under the current circumstances, competition with rail is not possible.

Insufficient River Maintenance. Governments' annual budget allocations for the work carried out byUkrechput is not sufficient. Maintenance of the existing locks is mediocre. In case of a lock gate failuredue to insufficient maintenance, the reaches below the locks would be flooded with disastrous results.Also due to lack of funds, insufficient dredging of channels mray result in serious ship accidents,blocking river navigation.

Pseudo Monopoly on the Dnieper. Currently Ukrechflot benefits from a pseudo monopoly thatprevents active competition on the Dnieper River. In 1992, foreign flag ships were allowed to sail onthe Ukrainian inland waterways. This was beneficial for the trade in the Black sea with access all theway up to Kiev. However, in 1997 the Government decided to change the law, allowing only thecarriers from countries with which Ukraine had a bilateral agreement on the basis of a 50-50 split. Sincelocal companies are too small to compete, Ukrechflot assunmes control over the Dnieper rivertransports. However Ukrechflot is not operating its vessels on the upper and middle Dnieper, whichresults in the inability for a port like Kiev to serve waterway transport. To be able to handle its cargo,Kiev port is planning to procure four river-sea ships, thus ensuring transportation of its cargo to theMediterranean Sea. It would be cheaper to open the river system to international river shipping.




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Seaports

Ports operated according to plans worked out by the Central Government authorities. The FSU system wasorganized under the premise of specialization with each carrier and ports developed to manage a specific partof all-union trade, (e.g., Yuzhny, for coal and chemicals). In 1990, about 40% of the FSU cargo (about 400million tons) was Passing through ports in the Black Sea and the Azov Sea, mainly belonging to Ukraine. AfterIndependence, ports separated legally from shipping lines and became autonomous, creating incentives forports to improve their operations. However, with the significant reduction in cargo, improvement has beenlimited. Ukraine has a total of 31 seaports with an annual cargo handling capacity of about 135 million tons.75% of the capacity is concentrated on seven ports: Odessa, Ilyichevsk, Yuzhni, Reni, Izmael,Nikolaev,Kherson, and Mariupol. Ports' handling capacity could easily be increased by 30% with improved operationsand even further with modernization of cargo handling equipment. The ports with best nautical accesses areOdessa, Ilyichevsk and Yuzhny, which have water depths varying from 14.0 m. to 10.5 m.

Type of Traffic.

Most of the cargo volumes have decreased significantly with the exception of steel products. Ukrainian coalwith high sulfur content and long hauled Russian coal are no longer competitive on international markets.Demand for iron ore fell drastically. Volume of construction materials reduced by at least by six times due tolimited construction activities and to ecological considerations disallowing extraction of sand from the sea.Import of grain has been curtailed. The sea trade traffic is mainly constituted by export goods (in 1997, 25million tons or about 45% of total traffic) and goods in transit (in 1997, about 27 million tons or about 50%oftotal traffic). Approximately 70% of this traffic is still linked to CIS countries.

Seaports-Problem Areas

Overview Some important issues prevent an industry that is subject to international and regionalcompetitive pressure to become efficient and financially sustainable on a long term prospective. Theport system as a whole is over-dimensioned (number of ports, assets and staff). The financial burden ofsocial and ancillary activities imposed on the port management dilutes a lot of the medium and longterm financial resources. Public sector monopolies having privileged access to various resources in theports still exist. The tariffs regulation and lack of financial autonomy have generated a lack of financialdiscipline. The regulatory regime is not suited to private participation in the provision of port services.There is also, probably, a lack of consensus with the key decision-makers in the sector on the bestapproach to resolving all these issues.

Regulated Tariffs. The port tariffs are fixed by the Maritime and River Transport Department. Theofficial nonintervention of the Ministry in the ports economic activity conflicts with the lack of freedomof ports to set their own tariffs (a single tariff system is set for all ports). In this regard, relationship withthe Department of the Maritime and River Transport is unclear.

Management Issues. Client interest is not represented in the port board. Half of the board members arenominated by the port manager and the other half by the port workers. The port manager is appointedby the Ministry of Transport, and to that effect a contract is signed between them. The heavyinvolvement of port workers in the management of the port may not promote ports operations to take




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place in a competitive environment. On the contrary, shippers and ship owners, the main clients of theports, as well as the towns and the regions where the port is located, are not involved in the decisionmaking process affecting the ports.

Inappropriate Legal Framework. Several issues stem from the existing legal framework. Ports'administration under the "Industrial Law" creates problems. For example, ports are unable to enter into"joint ventures" with, or leasing land to stevedoring companies. Ports are controlled through centralizedGovernment activities, and cannot function as efficiently if they were decentralized, corporatized ,andprivatized. The dock labor unions are governed by the FSU law. The Maritime and River TransportationDepartment should resolve disputes arising between port workers and port management, but in theabsence of relevant laws, it is difficult to find acceptable solutions for all parties concerned. Finally,engagement of temporary workers on a daily basis according to the demands of cargo handling, is notfeasible according to existing laws and regulations.

Social Issues. Despite their large social burden, ports fail to provide an appropriate social protection totheir employees. Ports are grossly over staffed. As a result, existing pension payments are not sufficientto cover the needs of port workers in old age, and staff medical coverage against accidents in the portsis not comprehensive enough. Despite this, social and cultural services, not related to the actual portoperations, cost ports around 20% of their total expenditures.

Ineffective Procedures and Equipment. An estimated 30% of efficiency gain could be achieved byimproving current procedures. Ports engagement in direct loading, results in long ship service time.Ports storage areas are not used effectively. Customs clearance procedures, especially for transit cargo,need to be simplified. Complex procedures in place cause significant delays in onward movement oftransit cargo, resulting in such cargo being moved to other ports. Productivity in cargo handlingoperations, in many ports is below acceptable limits. Equipment in many ports is old, outdated, andinefficient.

Investment Priorities. The need for construction of a new oil facility in Yuzhni is not clear, since theOdessa Oil Terminal appears to have sufficient capacity for oil imports to Ukraine in the immediatefuture. Financial Performances and Issues. Good Performance of Odessa and Ilyichevsk Ukraine's mainports traditionally had a positive cash flow because tariffs were centrally set high enough to cover costsand because there was no competition among ports in the FSU. Despite important deficiencies, over-staffing and all loss making non-operating activities such as social activities, the working ratio is good.The financial situation is characterized by high profit and cash flow level.

Maritime Shipping

Before Independence in the FSU, the merchant marine fleet operated in a highly protected environment andwas responsible for meeting the needs of each port rather than the country's overall needs in international trade.The Government obliged all national forwarders to transport cargo on national shipping lines. Domesticexporters were forced to arrange international cargo transactions on CIF terms, and importers were to executefreight contracts on FOB terms to maximize the use of national carriers. After Independence Ukraine ended upin 1991 with 30 % of the ships of the FSU, or a total of 400 ships with a total deadweight of 5.5 million tons.Most of these ships were of the type, size, configuration, and age, not well suited for international competitionin sea transport. The shipping lines, which existed in the FSU, were retained: the Black Sea Shipping Company(Blasco), the Danube Shipping Company (UDP), and the Azov Shipping Company (AZSCO) In 1997, by theorder of the MOT, additional shipping companies were created: Ukrferry, Ukrtanker, Ukrainian Maritime




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Shipping (UMS), the Kerch Ferry, and ships operated by some of the seaports. AZSCO and Ukrferry are lease-hold enterprises. While the shipping lines are responsible for management of their operations, ownership of theships remains with the Government and is not subject to privatization.

Erosion of assets

The state owned shipping lines are going through a difficult financial situation, that of Blasco being the worst.The shipping lines are using outdated old ships and are unable to replace them with new ones. Merchant marinefleet is not competitive in international maritime transport, arrests of ships by the creditors still continuecausing heavy financial losses to the shipping lines, and financial standing of most of the shipping lines isprecarious. The Department of Maritime and River Transport is trying to improve the critical situation of theshipping lines, especially of Blasco, and has prepared a program of financial stabilization.

Aviation

The aviation section in Ukraine is developing very quickly, having recently established a visa-free program forEU nationals and citizens of a number of other 'Western' nations, the nation's aviation sector is handling asignificantly increased number of travelers. Additionally, the granting of the Euro 2012 football tournament toPoland and Ukraine as joint hosts has prompted the government to invest huge amounts of money intotransport infrastructure, and in particular airports. Currently there are three major new airport terminals underconstruction in Donetsk, Lviv and Kiev, a new airport has already opened in Kharkiv and Kiev's BoryspilInternational Airport has recently begun operations at Terminal F, the first of its two new internationalterminals. Ukraine has a number of airlines, the largest ofwhich are the nation's flag carriers, Aerosvit and UIA.Antonov Arilines, a subsidiary of the Antonov AerospaceDesign Bureau, is the only operator of the world's largestfixed wing aircraft, the An-225. Major airports are: BoryspilAirport, Dnipropetrovsk Airport, Donetsk Airport, OdessaAirport and Simferopol Airport. Majority of big cities inUkraine has air connection with Kiev. Tickets for domesticflights for non-Ukrainians might be more expensive than forUkrainians. Best air connection with other countries goesvia Kiev. Some domestic flights are not very reliable interms of schedule - it is a good idea to make sure that theflight you have chosen is made on regular basis. Please,note most domestic air tickets can be obtained in Ukraineonly. Refurbishment of Borispil was concluded in 1995 at acost of US$ 14.8 million, supported by credits from the EBRD, First Ukrainian International Bank and thegovernment. Odessa, Lviv and Kharkiv are the second, third and fourth international airports. They are nowinthe process of being refurbished with the assistance of IFIs. In February 1998, the EBRD provided a loan ofUS$ 25.4 million to the Ukrainian State Air Traffic Services Enterprise to finance the installation of modern airtraffic control equipment. The project helps to ensure aviation safety in Ukrainian air space and to attractadditional overflight traffic, which will generate increased revenue. State-owned Air Ukraine, one of thesuccessor airlines to Aeroflot, is the national carrier with mostly Soviet planes and serving a number of cities in




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Russia and elsewhere in the CIS. In 1996, Air Ukraineentered into a joint venture with an Israeli company to formAeroSweet. Ukraine International Airlines (UIA)wasestablished in 1992 as an Irish-Ukrainian joint venture.In December 1996, Austrian Airlines and Swissair paid US$9 million for an 18.4 per cent stake in UIA, which serveswestern airports. UIA is introducing the new AN-140(Antonov) passenger plane into its domestic flights service, aUkrainian-Russian 52-seat passenger and cargo aircraftproduced at the Kyiv-based Aviant plant. The projectedprice per aircraft is US$ 7 million. For cargo flights abroadUIA is considering the introduction of the AN-74TK andAN-70 models. The Kyiv-based Ikar Airlines company wasthe first owner of the new AN-140 aircraft. Ikar Airlines, aninternational carrier, was founded in 1993 and conducts regular flights on 15 routes in Ukraine and the CIScountries, as well as charter flights to Turkey, Syria, Hungary, Yugoslavia and Italy.

Prior to Independence.

Under the FSU, all air transport operations were centralized under one organization - Aeroflot. Passenger airtransportation was one of the most heavily subsidized services and accounted for 37% of all intercity passengertraffic in 1990, a remarkably high proportion compared to western countries. The high dependence of airtransport in FSU resulted from a combination of factors: (i) the vast distances of the country, (ii) low air fares(50 to 60% less than international flights), and (iii) the relative scarcity of intercity bus and automobiletransportation. In 1990, about 22% of FSU traffic (about 30 million passengers) was passing through Ukrainianairports. An important share of leisure traffic was also stimulated by allowances granted by the State-ownedemployers to their staff for annual vacations.

Current Situation

Since the collapse of the FSU, traffic has fallen by almost 90%. The drop in CIS countries has been slightlycompensated by the development of the routes towards western countries. Aeroflot was broken into nationalentities. Management functions and investment funding which used to be undertaken from Moscow weretransferred to entities which were not structured accordingly. Air Ukraine was Aeroflot's successor in Ukraine,inheriting part of its physical assets as well as a share of its operating and institutional structure. Airlines haveto face scarce revenue, leading to financial difficulties. Flights are often canceled, either because of lack ofpassengers or because of cash shortage, preventing the airline from buying sufficient fuel for their flights andfrom paying airport charges.

Incomplete Reform

Reforms have been attempted, but sometimes diverted from the final objective to create an orderly, sustainable,and safe institutional framework complying with ICAO standards and recommended practices, and compatiblewith a market-driven sector. Although those objectives are clearly shared by the Ukrainian administration,




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some technical assistance seems necessary in order to set up a reform program of the sector supported by atimely implementation schedule.

Institutional Organization of the Sub-sector

Regulatory Framework

Several reforms have been implemented since the breakdown of the former geographic department of Aeroflot,the more recent being the adoption of Law#8 1 5 on the Civil Aviation Administration of Ukraine, on June 8,1998. Ukraine was one of the first CIS countries to join ICAO (1992), and further integration to otherinternational civil aviation bodies is on its way. The Air Code adopted as soon as 1993 and the following Lawof Transport adopted in 1994, provided the institutional basis of the State Air Transport Department (SATD)placed under the responsibility of the Ministry of Transport. A Ukraine Civil Aviation Development Conceptdefining the main guidelines of the Government's aviation policy was adopted in 1996. The Law #815transforms the Department into a Civil Aviation Administration The main innovation lies in the mergingbetween SATD and Ukrainavigatsia. This new structure should put an end to the responsibility conflicts, whichhad emerged when the former organization was created and which could have had an impact on the global levelof safety of the whole sector. In revised the regulatory framework in certain industries, aviation being one ofthem. The new Air Code of Ukraine was finally passed by the parliament on May 4th, 2011 and came into legaleffect on September 17th, 2011 (the "Air Code"). The prior Air Code of Ukraine existed for over 18 years and,after lengthy debates, it was modernized based on the current international norms and practical requirements ofthe aviation business. However, certain norms of the new Air Code demonstrate the recent trend of Ukrainiangovernmental authorities to exercise hands-on management of certain business areas and control overcooperation of private companies. The revised Air Code also introduced several important features andinnovations that are outlined in the overview below.

New Authorities and Powers

The Air Code provided for establishment of a new agency — the Expert Agency on Investigation of AviationAccidents and Incidents (the "Investigation Agency"). This Agency is expected to be independent from theState Aviation Agency of Ukraine (the "SAA") and deal exclusively with review and investigation of variousaviation accidents and incidents. The independence of the Investigation Agency is expected to guarantee theobjective and unbiased review of cases; however, it seems rather doubtful considering that the Agency will befunded primarily from the State Budget. The Investigation Agency together with the SAA are scheduled to setup the system and criteria for mandatory notifications that airline companies must submit in relation to aviationincidents or accidents that require further review and analysis by the authorities. The Air Code envisagedcreation of the Investigation Agency by January 1, 2012, although it did not happen until now, and no newrules were adopted as yet. It is also worth noting that until the Investigation Agency is established, the SAAwould exercise the functions and rights of the Agency. The other important news is that the Air Codesignificantly expands the authority of the SAA and vests it with a variety of discretionary powers. For instance,the SAA is authorized to develop and approve the new Aviation Regulations of Ukraine (the "ARU"). TheARU is supposed to be a complex document based on the international and European Union ("EU") standardsof the aviation industry; however, it also should be in compliance with applicable Ukrainian laws andregulations. From the practical standpoint, this balance is often impossible to archive. The Air Code also




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contains an interesting provision about the applicability of ARU to all aviation market companies doingbusiness in Ukraine. It particularly states that the Head of the SAA may waive certain technical or proceduralrequirements of the ARU for a particular aviation company15,1 provided that such waiver does not impact theaviation safety and is made "in the interests of the society." While the detailed process for such a waiver shallbe set up by the ARU itself, such discretionary authority allowed to the Head of the SAA might be viewed ascreating an unfair treatment for certain aviation market players. The SAA also has discretionary powers toreview compliance of existing and new Air Operator Certificates162with the ARU. In this regard, the SAA canassign certain state-owned or private companies that would have authority to perform various inspections,checks, assessments or prepare expert reports necessary for obtaining or validating of the Air OperatorCertificates. The Air Code does not refer to any limitations of this authority of the SAA which may also lead tounfair competition. Moreover, given the market practice, it is very likely that airline companies would berequired to cover the cost of services rendered by inspection companies assigned by the SAA. Foreign investorsor companies doing business in Ukraine should be particularly careful in relations with such appointedcompanies and ensure proper vetting of these contracts in light of international anti-bribery compliancerequirements. Further on, the Air Code provides discretionary powers to the SAA in matters of regular andirregular audits and inspections. The SAA seems to have an absolute discretion to defining grounds forirregular inspections. Unless the ARU would set up certain limitations to this provision, it may create theadditional basis for unfair treatment of airline companies and other aviation market players. On the positiveside, the Air Code requires that airport services operators ensure equal treatment of all airlines and otheraviation related companies (i.e., technical maintenance, ground handling, fuel supplies, etc.). It is expected thatgovernmental authorities would review the market of aviation related services and define some ground rules forso called natural monopolies of airport services. These ground rules should ensure transparent and equaltreatment of all airlines and other businesses that operate or are willing to operate in a particular airport. On arelated note, the airport operators should also establish special "airport committees" that would allowrepresentatives of airport management, airlines based in the airport, ground handling and other servicescompanies to meet and negotiate common terms and conditions of services provided in the airport. These basicrequirements were long-awaited by the market players as they are staging the foundation for furtherdevelopment of the aviation services in Ukraine on a competitive basis.

Tariffs and Route Permits

The Air Code establishes new ground rules for air carriage tariffs and granting of route permits. The clearmessage is that the tariff cannot constitute price dumping or be discriminatory. On this basis, the SAA has theauthority to cancel "too high tariffs if there is no adequate competition level or too low tariffs in case they are,inter alia, lower than net costs of the carriage." In order to exercise this clause, the SAA can request that theairline company provides the information necessary for adequate evaluation of its tariffs, including theinformation on the net costs. Failure to provide such information in time or in full may result in the tariffcancellation. While having good motives, this provision of the Air Code raises many concerns. The informationabout net costs of the tariff normally constitutes the commercial secret of the airline company. Thus, whensubmitting this data to the SAA the airline company may risk losing its commercially sensitive information asthe Air Code does not set up any rules for ensuring the confidentiality of the commercial secrets transferred tothe SAA. The SAA is also authorized to manage airspace and use it "based on the interests of the nationaleconomy and safety." Given the broad definitions for this authorization, the SAA would likely to have practicaldiscretion in influencing airspace use which may result in unequal distribution of airspace permits between




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different airline companies. While the detailed rules and procedures for issuance of Route Permits17,1 approvalof flight schedules, etc. should be defined by the ARU, the Air Code provides that when deciding on the RoutePermit application the SAA shall consider "the social importance for such air carriage and need fordevelopment of the transportation system." The SAA also has the authority to decline the Route Permitapplication or limit the issued Route Permit based on "the need to ensure cost-effectiveness (profitability) onthe existing routes." From these provisions of the Air Code, it looks obvious that the SAA would have theultimate discretion to manage Route Permits on the ad-hoc basis, including their issuance, limitation orrevocation. It also seems that this discretion would apply to competing routes, e.g., flights to main andsecondary airports of the same designation point that could be limited or revoked for the benefit of ensuring thecost-effectiveness (profitability) on the main airport route. One of the other important innovations of the AirCode is that it provides the possibility for foreign airline companies to get the Ukrainian Route Permits forregular flights on international or domestic routes not only on the basis of the bilateral agreements as was truebefore, but also based on the reciprocity principle, i.e., if Ukrainian airline companies enjoy the same rights incountries where such foreign airline companies are registered. The Air Code also allows foreign airlinecompanies to obtain Ukrainian Route Permits for non-regular flights, if no Ukrainian airline is willing toperform such flights. These clauses significantly ease the possibility of foreign airline companies to accessUkrainian domestic routes and obtain better permits for international routes. The Air Code also provides aseparate regulatory framework for issuance of Route Permits for so-called socially important routes i.e., routeswith low traffic, although important for the development of a city or region) (the "Social Routes"). Whenapplying for a Social Route, the airline company should negotiate with the SAA and fix certain serviceconditions, i.e., route tariff, flights quantity, etc. In exchange, the SAA may grant to the airline company theexclusive right to operate such Social Route for the term up to three (3) years. If no airline company applies forthe Social Route, the SAA can announce an open tender for Ukrainian and foreign airline companies. In suchcase, applicants can claim that the SAA provides certain compensations or benefits for their operations on theSocial Route and the SAA is supposed to select the most reasonable compensation claim.

Compensations and Penalties

The Air Code also provides the extensive list of new rules and procedures that govern compensations due topassengers in case of a flight delay or cancellation. These compensations are based primarily on relevant EUstandards, so a majority of airline companies are already used to these requirements on flights originating fromEU cities. What is important, however, is that these requirements are now applicable to all international anddomestic flights operated by Ukrainian and foreign airlines. The Air Code also sets out an extensive list ofpenalties for various violations of its provisions and requirements. Given the limited scope of this publication,it is difficult to provide an overview or analyze all such violations, but it should be noted that the Air Codeprovides economic sanctions which, depending on the violation, may vary from UAH 510 (approx. USD 65) toUAH 136,000 (approx. USD 17,000). As a result of the implementation of the new Air Code theAdministrative Offences Code of Ukraine was amended with increased penalties for violations of the aviationsafety rules, rules of conduct on-board of the aircrafts and rules of the international flights from UAH 85(approx. USD 10) to UAH 8500 (USD 1,000). In addition, a separate criminal offence was introduced to theCriminal Code of Ukraine — performance of professional duties by aviation personnel under the influence ofalcohol, drug or other psychotropic or psychoactive substance. This crime is subject to correctionalcommunity) works for up to two (2) years or sentencing up to three (3) years. On a related matter, after heateddiscussions, the Air Code also explicitly intense that airline companies shall be liable for verification of the




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passenger documents that are necessary for entering to the destination country. In particular, the airlinecompany shall decline the carriage of a passenger who does not have necessary documents. Failure to complywith this requirement may result in a penalty that ranges from UAH 8,500 to 17,000 (approx. USD 1,000–2,000) per passenger.

Practical Implications

The 2011 Air Code is a clear step forward in the development of a regulatory framework for the aviationindustry. It creates practical ground rules for foreign airlines and aviation services companies to accessUkrainian aviation market and even to operate on domestic routes. The new Air Code’s other positive messageis the review of monopolistic arrangement that currently exist in Ukrainian airports or on certain air carriageroutes. The passengers would also benefit from implementation of EU based compensation norms andprocedures. On the other hand, the Air Code vests the SAA with many discretionary powers and authorities.While this approach appears to confirm the general trend for hands-on management and control that the currentgovernment has taken in relation to several industries, the practical implications of SAA’s discretionaryauthorities may have an adverse effect on the business. The SAA’s manual control over route permits andtariffs can put additional regulatory pressure on airline companies and other unrestricted powers may causeunfair treatment of aviation services providers. Clearly, every airline or aviation services company shouldrevise its policies and procedures in line with requirements of the new Air Code and many companiesapparently already did so. However, what is more important is the further monitoring of the practicalimplementations of certain Air Code provisions that raise business concerns. Obtaining of regulatory approvalsand permits was never easy in Ukraine. However, in the new legislative environment it might become even amore challenging task. International and local companies should also keep in mind requirements of Ukrainianand foreign anti-bribery compliance requirements when dealing with governmental authorities or companiessuggested or appointed by such authorities

Economic regulations

While most technical regulation aspects have been dealt with, economic regulations have not yet beenfinalized. Regulation covering airlines' economic licensing procedures and requirements, market access rules(routes), and air fares approval procedures (and when fares can be set freely, with dumping or abuse ofmonopoly situation safeguard clauses) need to be completed.

Resources

The new CAA consists of 112 positions, which, considering that 168 people worked for SATD represents animportant effort in staff downsizing. Some additional 65 inspectors in charge of technical inspections andcertification at airports and airlines are employed by the CAA. Headquarters staff is paid through the nationalbudget, while the inspectors are paid from the Civil Aviation Development Fund which raises its revenues fromfees collected upon issuing certificates, and authorizations in the aviation field. The large difference ofremuneration between civil servants and the personnel from the newly created state enterprises endangerswhole sector organization.

Air Transportation




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Fragile Air Operators

After independence, the Aeroflot system split into more than 50 airlines but only six of them provide scheduledservices. These are, ordered by increasing traffic (1997): Odessa Airlines, Dniproavia, Aerosweet, Crimea Air,Ukrainian International Airlines and Air Ukraine, which holds under its umbrella 11 airlines. The industry is infact highly concentrated, since Air Ukraine flies 51 percent of all passengers carried by Ukrainian airlines, itsBorispol based subsidiary company representing more than 40 percent of its whole traffic. Many carriers arevirtually bankrupt and, and for those apparently profitable under CIS accounting procedures, generated profitwhich is comparable to the western definition of cash flow is too low to allow airlines to build provisions forreplacing their aging fleet. This situation is also the consequence ofthe lack of regulation, which, based on aclear definition of a National Aviation Policy, should, inter alia, set the financial criteria to be met by applicantairlines in order to ensure a safe and sustainable national aviation industry

Air Ukraine

The main national operator is in critical condition. The structure of Air Ukraine has considerably evolvedmaking comparison difficult. Its current traffic has dropped to 910,000 passengers but staff level remain high(9,000). It has an active fleet of 100 FSU made aircraft, which flies only 700 hours per year compared tointernational standard of 2,500 to 3,000 hours per year. Its obsolete fleet affects adversely its maintenance andoperating expenses (twice the fuel consumption of modern aircraft, large crew needed, long ground time). Mostof the fleet needs to be replaced as it reaches the end of its life cycle and will soon be non-compliant with E U

and US standards.

Problem issues

Partial International Integration. Ukraine has alreadysigned 36 and ratified 19 bilateral air agreements but competitionremains limited. Most Western Airlines have flights to and fromUkraine, linking the country with most European economic centers.

Restriction to Entry. Bilateral agreements are based onshared capacity, with frequency and/or aircraft capacity restrictions,which limit new entries. Several attempts to serve the country byforeign charter or scheduled airlines seem to have been discouragedby the bureaucratic procedures and the high level of royalties (15percent of revenues) required by the Ukrainian side. These proceduresintroduce discrimination based on carrier nationality, and support thecurrent oligopoly set up between Western Europe carriers andUkrainian International Airlines, rather than promoting competition.It explains to some extent, high fares to and from Ukraine.




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Inappropriate Tax System. The tax system applied to localairlines is prejudicial to the national airlines and makes themless competitive on international markets. Many costs are notconsidered as tax deductible. These include insurance, pilottraining when performed abroad, spare parts for aircraftmaintenance which have to be depreciated. Provisions forexpensive planned maintenance costs (D-check) are notallowed, and aircraft depreciation rules are not consistentwith economic reality. The compulsory tax for the road fund(1.6% of revenues) represents in itself an important share ofthe average margin usually expected in the internationalindustry. Aircraft leases are heavily taxed when they arecontracted with off-shore lessors, preventing the use of thisinternationally attractive tool.

Transport strategy of Ukraine for the period until 2020

At the end of 2009 the EU-Ukraine Association Agenda wasadopted. Also, for 2010, a list of priorities for action was jointlyagreed by Ukraine and the EU. And transport priorities include thefollowing - implementation of EC acquis in transport legislationthrough development of new comprehensive national transportstrategy of Ukraine. To prepare the strategy, the EU activelysupported Ukraine by introduction of such projects – Twinning“Support to Transport Policy Design and Implementation inUkraine” and “Support to the Integration of Ukraine in the Trans-European Transport Network TEN-T”. As aresult, sector Ministry and representatives of the EU elaborated a document – Transport strategy of Ukraine forthe period until 2020 – that was adopted by the CMU on October 20, 2010. It defined the main developmentgoals for transport sector of Ukraine for the period until 2020. They are:

modernization of transport system and increase in its efficiency; satisfaction of transport needs of national economy and population, improvement of quality and access

to transport services; guaranteed on-time goods delivery; improvement of transport sector governance; increase of capacity of transport network; higher safety in transport; reduction of polluting substances emissions in the air by 30%; reduction of energy consumption in transport by 15-20%; and faster integration of national transport system into European and world transport systems. Also, priorities for development were defined for each mode of transport. In general, the document is a

good attempt to define main development goals for transport sector, in general, and for sub-sectors,separately, in the middle-run. However, it has just remained the attempt. It is too general, chaotic anddeclarative. Implementation of the Strategy, based on defined principles, will not allow changes in




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current destructive trends and problems oftransport sector of Ukraine. Strategic goalsand operational tasks are mixed up in theconsidered document. And goals, which areset, often do not show strategic intentionsand partially reflect current problems. That’swhy their solution won’t lead to lastingconsequences. At the same time, nomechanism and way is foreseen to resolvesystemic problems

Also, declared intentions sometimescontradict with adopted transportdocuments, e.g. programs of sector reforms,as well as with Program of economicreforms and schedule of its implementation.In addition, foreseen for different sub-sectors measures are described in differentmanner, which reflects the EU priorities anddoes not meet requirements for strategicdocument for Ukraine. E.g., sections forroad and air transport are described withmore depth and details. And integration torespective European organizations andinstitutions is widely emphasized there. Atthe same time, the EU principles are notadequately integrated in other sub-sectors.In particular, priorities for EU transportpolicy include development of rivertransport as more environment-friendly one.And Ukrainian strategy almost does not pay attention towards this mode of transport. In the end,attempts to define expected results of the Strategy’s implementation in quantitative measurements arehighly estimated. However, according to the document, hierarchy of objectives is not clearly defined.Therefore, ways to achieve set results are also not defined. And those expected results again are not thesame as ones set in the Program of economic reforms. The latter shows that visions of problems andways of sector development greatly vary among different governmental bodies. In general, Transportstrategy in current variant won’t change the situation in transport sector of Ukraine.

Though, such document should exist to help orient state policy in the sector according to set priorities.However, its current variant is an evidence of somehow different aims of the state bodies. The thing is itsadoption and implementation are prerequisites for EUR 65 m budget support from the EU to Ukraine. Thus, atthe moment we can draw the conclusion that adoption of this necessary strategic document won’t lead toexpected strategic consequences for development of transport of Ukraine.




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Banking System Services

Banking Sector overview

The Ukrainian banking sector dominatesthe financial sector, concentrating nearly 95percent of total financial sector assets, or 96percent of GDP. As of March 2010, 175banks operated in Ukraine. Foreign-ownedbanks have gradually increased their share ofassets as well as capital. The share of the non-banking financial sector was less than 10percent of GDP in 2008 and further shrank in2009, owing to bankruptcies and closure ofnumerous insurance and leasing The marketfor mobile and Internet services was openedfor private domestic and foreign investmentand has displayed impressive growth rates of

125 percent year-on-year in the mobile and 130 percent year-on-year growth in the Internet market segment(data from NCRC). The concentration of the banking system remains relatively low, with the top 10 banks(excluding Ukrprombank, which is now in liquidation) holding 58 percent of loans, and 57 percent of deposits asof March 2010.

Figure 113 Total Assets




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Figure 114 Ukrainian Banking System Assets Growth & Structure.

As of October 1st, 2011 Ukraine has 175 active banks (Russia: ~1000). Total Assets of the banking system asof October 1st, 2011 amounts to 1,029bn UAH (USD 129bn eq.). Since the beginning of the year growth ofassets was +87bnUAH or 9 percent. Top 50 banks represent ~90 percent of assets and 86 percent capital of thebanking system. Top 10 banks constitute ~55 percent of the banking system assets and capital concentrationlevel is stable over past 3–5 years and lags behind EU zone and neighboring Poland and Russia, where ~50percent are covered by Top 5 banks. Assets growth in 2011 was driven mostly by extensive lending to bigcorporate clients (+12 percent), including big state corporations. Otherwise the banks continued to use spareliquidity to buy Ukrainian Government T-bills. Two banks are historically state-owned: theU savings bank —Oschadny and UkrExImbank, an ex-part of USSR Vnesheconombank, now a universal bank with a focus onexport/import operations and a financial arm of the Ukrainian government in relations with internationalfinancial institutions. 3 more banks — Rodovid Bank, UkrGaz-Bank and Bank Kyiv — have been saved by thegovernment to calm crisis waves on the market in 2008. Strategy of privatization, merger for each of them isstill being discussed by government and regulator. Historically, Credit Agricole CIB came in 1993 (at that timeunder Credit Lyonnais brand). Six other western banks came during the late 1990s: ING, Citibank, Raiffeisen,HVB, Unicredito and PKO. If ProCredit Bank Ukraine started in 2001, as MicroFinance bank, a wave startedin 2005: SEB purchasing Bank Aggio, Raiffeisen purchasing Aval, BNPP purchasing 51 percent ofUkrSibbank (now controlling 85 percent, 15 percent in the hands of EBRD) Credit Agricole purchasing in 2006Index Bank, OTP purchasing the “historical” Raiffeisen. In 2007 Swedbank purchased two banks of TASGroup, merged by the end of 2009 into Swedbank. In 2011 the bank abandoned SME & retail business andfocuces on bigger clients. In 2008 Commerzbank entered Ukrainian market via purchase of 60 percent of BankForum, still operating under such name but 100 percent are in Commerzbank’s hands. Two Italian bankinggroups — Intesa and Unicredit — purchased in 2008 Pravex Bank and UkrSotsbank respectively. 2007 and2008 have been marked by massive coming of regional and neighboring countries banks with a business modelsimilar to previously mentioned Western banks dwelling on cheap external funding for further development ofconsumer, car and mortgage lending. Such banks established presence via 2nd Tier banks like Universalbank(EFG Eurobank Ergasias), Piraeus Bank, Astra Bank, Marfin Bank, Bank of Cyprus (both — Greece), CreditEurope Bank, Credit West Bank (Turkey). Separate group is represented by leading Russian banks that movedto Ukraine to follow their clients, get market share and touch the ground in retail business outside Russia (Alfa-Bank, VTB Bank and Sberbank). Two banks are now in Top 10 (Alfa — # 7, VTB — # 10). VEB, Russianstate-owned bank, entered the Ukrainian market at the end of 2008 by purchasing the “troubled”




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Prominvestbank (# 8 at the moment) that focuses on corporations. Current dynamics in foreign banks explicitlyreflects the global credit and liquidity crises as well as Ukraine’s low attractiveness, today. Some banks eitherconsider exit from non-strategic markets or scaling down their business. The consequences of decisions takenby international banks to mitigate global risks should be most probably seen in Ukraine in 2012. 2011 has seenthe resolution of the most burning issue of banking sector — the future of the banks in NBU receivership,Nadra and Rodovid. Bank Nadra has got powerful private investor — Mr. Firtash, owner of businesses in gas& energy, agriculture and chemistry. In its turn Rodovid is poised to become government’s “bad” bank fortoxic assets of Ukrainian banking system.

Figure 115 Western-Owned banks.




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Figure 116 Banks under NBU Temporary Administration

Figure 117 Bank closed since 01-Oct-2008

Assets EvolutionIn 2010–2011 Banks experienced modest growth of loans portfolio and assets. Total assets growth was +7.9percent in 2010 (+69bn UAH), and may reach +12 percent by the end of 2011 (+9.2 percent or + 87bn UAH byOctober 2011). This “adjustment” is coming after the period of boom and bust: during 3 pre-crisis years totalbank assets grew from +/- 42bn USD (December 2005) to 120bn USD (December 2008). Overall 3 timesgrowth (USD), peak reached in October 2008 –155bn USD (just before UAH devaluation). Commercial loansgrew up even faster between 2006 and 2009: 3.7 times — loans in UAH; 4.6 times — loans in foreigncurrencies, from USD 12bn in 01/2006 to 60bn USD in October 2008.Development of loans portfolio in 2009–2011:

• UAH denominated loans total amount continued to grow in 2009, mainly driven by massivestate support of state companies and banks: +9 percent in 4Q 2008, +14 percent in 2009, +15percent in 2010, +17 percent in 2011 so far.

• FC loans, if accounted in USD eq., show slide of -6 percent (-24 percent p.a.) in 4Q 2008 and -16 percent in 2009, and -6 percent in 2010, just -1 percent in 2011 so far.




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Figure 118 Loans and Structure

Overall Commercial loans in USD terms increased 8 percent since the beginning of 2011. Loans are massivelyprolonged when borrowers appear to be incapable to repay them in the current market slide of activity, orrestructured in exchange for partial repayment. Some FC loans to individuals, on advice and with the support ofthe National Bank of Ukraine, are converted into local currency to ease the burden of interest payments. Ratingagencies mention that as of mid of 2010 the banks that they rate have restructured loans on average for morethan 35 percent. On top of such loans, overdue loans exceed 10 percent of the loans. It is not a single case whenforeign banks sell their loans portfolio to collection companies.




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Assets/Liabilities Imbalances

Figure 119 Assets/Liabilities Imbalances

~60bn UAH to reach 275bn UAH as of January 1st, 2011, and almost half of that amount has been depositedby individuals in 2011. During the same period (Year-to Date 2011) corporate accounts are up 38bn UAH andtotal 136bn UAH. But some banks achieved it at a price…their funding became expensive! Lending did notrestart really: banks still have to provision their assets, the economy is progressing at a small pace, the legalenvironment remains a plague for banks. In 2011, however, loans to individuals have almost stabilized (first 9months: -1.2 percent, –2bn UAH, to 203bn UAH). This is the result of a significant increase in UAH loans(+24 percent to 77bn UAH) and continuing decrease of “old” foreign currency loans (-12.5 percent to UAH126bn). Banks do not lend in foreign currencies since the 2008 crisis. Loans to corporations increased to606.5bn UAH as of October 1st, 2011 or + percent, +UAH 66bn, since January 1st, 2011. The increase over thelast 10 months is the result of loans to Naftogaz, Ukrainian Railways, Ukravtodor, Energoatom… The banks’




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loans to deposits ratio is improving: 2.19 as of January 1st, 2010, at 1.85 on January 1st, 2011 (but at 2.05 inFC!) now at 1.61 as of October 1st, 2011. To be noted that the FC borrowing from banks abroad decreasedfrom 42bn USD at the start of the crisis to + 30bn USD now, Western-owned banks being the biggestbeneficiaries of such funding. Excess of funds went in 2010 into securities market where banks’ outstandingshave grown twice from 38.5bn UAH at the end of 2009 to 83.7bn UAH by the end of 2010. In 2011 liquiditydeficit was such that total portfolio of securities held by banks even decreased to 80.6bn UAH.

Income and Expenses

Figure 120 Income and Expenses




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Figure 121 Income and Expenses charts

Net Banking Income at banks stagnated in 2010: +1.6 percent, 71.8bn UAH vs 70.7bn UAH for 2009. Year2011 should see a 1 to 10 percent growth: as of October 2011 NBI reached 57.5bn UAH versus 50.8bn UAH inOctober 2010, i.e. +6.8 percent on per annum basis. Operating expenses surge despite closure and re-locationof offices and staff expenses control. Operating Expenses’ growth in 2010 -39.1bn UAH vs -36.6bn UAH in2009 (+6.8 percent) would be extended in 2011: as of October 2011 Administrative & Staff expenses were –UAH 34.4bn (compare to –25.8bn UAH in October 2010). Cost-to-income ratio estimation deterioratestowards around 60 percent. Net Result remains negative as loans loss provisions continue to eat into banksearnings, although slowly decreasing, showing the way out of the 2008 crisis: -28.8bn UAH for 9 months 2011,compared to –36bn UAH for 9 months of 2010, improved from –48.8bn UAH for 9 months of 2009. Capitalincrease was a big concern for the banks. After urgent and “emergency” capital infusion of 35bn UAH in 2009,the banks continued the pace in 2010 by adding 27bn UAH in 2010 and further 22bn UAH in 2011. But banksare adequately capitalized today.




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Income and expenditures of Ukrainian banks over two months of 2012:

The banks’ incomes have increased by 3.1% 2011 as compared with the respective period of theprevious year, totaling UAH 23.1 billion. The banks’ expenditures have shrunk by 1.5% over therespective period, amounting to UAH 21.9 billion. The banking system made a net profit of UAH 1.2 billionover two months of 2012 (the banking system saw a loss of UAH 0.2 billion over the respective periodof 2011).

The structure of income and expenditures of banks as of 01.03.2012

Indicators Total(hryvnias mln)

%

1 INCOME 23 124 100,0

1.1 Interest income 18 571 80,3

1.2 Fee and commission income 2 976 12,9

1.3 Trading income 514 2,2

1.4 Other operating income 781 3,4

1.5 Other income 94 0,4

1.6 Written off assets recovery 188 0,8

2 EXPENDITURES 21 889 100,0

2.1 Interest expense 10 314 47,1

2.2 Fee and commission expense 461 2,1

2.3 Other operating expenses 1 693 7,7

2.4 General administrative expenses 5 534 25,3

2.5 Provision for reserves 3 681 16,8

2.6 Income tax expense 206 1,0

3 Net PROFIT (LOSS) 1 235 хFigure 122 The structure of income and expenditures of banks as of 01.03.2012

Market Regulator

The National Bank of Ukraine (NBU), staffed with more than 11000 employees, regulates since 1991 thebanking activity, banks being subject to very significant constraints in theirday to day activities, reporting“everything”, but the NBU enforcement capacity is not perfect. As the NBU highlights it also, the Bankingsector is faced, mostly for its non-westernowned portion, with challenges and issues such as fragmentation,including many small banks (whose minimum regulatory capital will have to be at 120m UAH as of January1st, 2012), capital adequacy, insider loans, tax games and insufficient provisioning. The change in the politicallandscape in 2010 led to a change also of the management team of the NBU. Thanks to the IMF support, somepositive changes were decided, as minimum capital already mentioned, reinforcement ofthe NBUindependence (a challenging task), the obligation to reveal beneficiary owners (in December 2011), a necessity




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to focus on inflation management and less on the “peg” between the UAH and the USD, which unfortunately isstill being kept, and the capacity to transmit the foreign exchange risk to the economic sectors thanks todevelopment of forwards, that was made possible mid-2011, but in very restrictive way, for a very smallmarket which is one way so far.

Financial monitoring arrangements

Figure 123 The structure of the Department for Financial Monitoring of the NBU

Figure 124 Financial Monitoring in the Banking System of Ukraine




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Figure 125 Financial monitoring in a Bank

Conclusions

1. As of the end of November 2011, the Ukrainian banking sector remains one of the worst rated bythe rating agencies. Its operating environment is “weak” because of its slow growth and could be hitby a possible recession in the west. Its profitability remains weak. The nonperforming loans, as well asrestructured loans account for +/- 40 percent of its gross loans still. And the UAH currency funding ismade difficult, because of devaluation fears and the decision by the authorities to prevent such event.All those reasons led all banks to stop to increase their loans for the time being. Banks have evidencedtheir resilience in the 2008 crisis and have been provided with the required capital, their capitalizationtoday being adequate. Banks have developed again in 2011 their loans to the population, but in UAHonly. And the western banks present in Ukraine have continued to decrease their relative presence,having achieved a 10 percent market share drop over the last 3 years. 2012 will be a challenging yearfor banks in Ukraine, the increase of their lending activity being very probably limited.

2. Currency Control In Ukraine, Currency Control is very strict and complex. It is governed by laws andby regulations of the National Bank of Ukraine (NBU). Regulations frequently change; therefore pleaseconsult your banker. The purpose of Currency Control is to prevent the illegal export and import of




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valuables, goods, services, and the transfer of funds abroad, as well as to control the timely settlementof payments for goods and services under external trade contracts.

For individuals

Import/Export of cash: Residents and non-residents may export and/or import without declaration the equivalent of 10 000

EUR. Amount exceeding equivalent of 10 000 EUR should be accompanied with a written declaration.For amount exceeding 10 000 EUR the confirmation from the bank evidencing that funds werewithdrawn from the individual’s account should be presented.

Funds at disposal (possibility to withdraw cash wired from abroad without account opening): disposablefunds are limited per transaction and per day to the equivalent of 50 000 UAH (applicable for residentsand non-residents).Non-commercial transactions:

Wire transfers in foreign currency are limited to equivalent of 15 000 UAH per day without accountopening for residents and non-residents. But for residents — without supporting documents; for non-residents — with confirmation of the source of money.

Wire transfers in foreign currency in amount which exceeds the equivalent of 15 000 UAH per day canbe done by residents and nonresidents from the current account (for residents with supportingdocuments, for nonresidents — without supporting documents). For more details, please ask yourbanker.

For commercial operations/companies

The following administrations are involved in the currency control process:• Customs — it controls the export/import of goods and valuables.• Banks — authorised by the National Bank of Ukraine, control all operations and inform the

NBU and State Tax Service (STS) in case of violations and are liable if such control is notexecuted properly.

Main types of activities subject to Currency Control and some key rules or constraints:• Export/import of valuables, goods and services:• Exporting companies should receive payment within 180 days after shipment of goods.• Importing companies can pre-pay 100 percent but should receive goods or services within 180

days.• Capital market operations (sale/purchase by non-residents of domestic securities;sale/purchase

by residents of foreign securities; dividend payments abroad, etc.).• Cross-border loans (loans granted by nonresident lenders).• Currency purchases.

Main documents used to perform Currency Control: For sales/purchases of goods: trade contracts, customs declarations, invoices.




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For services (including royalties): contracts and documents proving that services were provided. When such services provided by same foreign supplier exceed equivalent of 100 000 EUR it is required

to obtain in addition from a designated state entity (Derzhzovnishinform) a certificate on pricerelevance.

For capital market divestments incl. dividend payments: investment agreement and a document provingthat investment was made and registered in Ukraine. If shares are sold by a non-resident, or if adivestment originally was made in kind and the proceeds are to be repatriated, an “estimationcertificate” issued by a licensed Ukrainian appraiser is required. In addition, cash divestments ofinvestments made in kind must have been made possible by a treaty between Ukraine and the divestor’scountry.

For cross-border loans: loan agreement, NBU registration notice, and local bank's consent to servicesuch a loan.

For currency purchases: contracts, invoices and custom declarations as mentioned above. Purchased Foreign Currencies must be transferred within ten banking days.

3. Anti-money laundering set-up in Ukraine. Anti-Money Laundering measures are regulated by a newLaw “On prevention and counteraction to the legalization (laundering) of the proceeds from crime” ofMay 18th, 2010, #2258-VI (hereinafter the Law) and for the banks by NBU Regulation #189 “Onperformance by the banks of financial monitoring” in the edition of NBU resolution #22 dated January31st, 2011 and registered in the Ministry of Justice of Ukraine on April 7th, 2011 (hereinafter theResolution). In the context of the Law “legalization (laundering) of the proceeds from crime” are anyactions related to funds (property) received as result of a crime aimed at the concealment of the originof said funds (property) or assistance to a person who is accomplice in said crime. The Law excludestax crimes from the list of crimes subject to it. Laundering in Ukraine is related to prostitution, drugs,arms, terrorism and other crimes. This “understanding” of the Law is still not perfect, i.e. authorities areinclined to include tax crimes also. The system of financial monitoring consists of two levels: the initialand the state levels.

The following entities are involved in/subject of the initial level of financial monitoring:• banks, insurance (reinsurance) companies, credit unions, pawn-shops and other financial

institutions;• payment organizations, members of payment systems, acquiring and clearing institutions;• commodity, stock and other exchanges;• professional operators in securities market;• asset management companies;• postal operators and other institutions executing the financial operations of funds transfers;• branches and representative offices of the foreign subjects of economic activity rendering

financial services in Ukraine;• subjects of entrepreneurial business rendering the intercessory services during the execution of

sale-purchase real estate operations;• subjects of economic activity executing the trade of precious metals, precious stones and related

goods for cash in case the amounts of related operations equal or exceed 150 000 UAH or itsequivalent in foreign currencies;




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• subjects of economic activity conducting lotteries and gambling games including casinos andelectronic (virtual) casinos;

• notaries, law firms, auditors, audit companies, physical persons-entrepreneurs rendingaccounting services, subjects of entrepreneurial business rendering legal services; a 2010novelty!

• physical persons-entrepreneurs and legal persons executing financial operations with goods(rendering services, performing works) for cash in case the amounts of said operations equal orexceed 150 000 UAH or its equivalent in foreign currencies; new in 2010!

• other legal persons rendering the financial services which are not financial institutions by theirlegal status. A 2010 novelty also!

The following entities are involved in the state level of financial monitoring:• National Bank of Ukraine• Ministry of Finance of Ukraine• Ministry of Justice of Ukraine• Ministry of Transport and Communication of Ukraine• Ministry of Economy of Ukraine• State Ukrainian Commission of Securities and Stock Market• State Ukrainian Commission of Regulation of Financial Services Markets• State Committee of Financial Monitoring or Financial Monitoring Unit (hereinafter FMU) FMU

is a 237 persons staffed central body of executive power whose head is nominated by theCabinet of Ministers of Ukraine. FMU activity is directed and coordinated by the Cabinet ofMinisters of Ukraine via the Minister of Finance of Ukraine.

Financial transactions subject to compulsory financial monitoring:

A financial transaction shall be subject to compulsory financial monitoring if its amount equals or exceeds 150000 UAH or its equivalent in foreign currencies (for subjects of economic activity conducting lotteries andgambling games — 13 000 UAH or its equivalent in foreign currencies) and if such financial transaction alsohas one or more of the specific features stipulated in the Article 15 of the Law, i.e. if certain objective criteriaare being met. When both conditions are fulfilled, reporting to FMU is compulsory. All insurance relatedincomings or payments above 150 000 UAH must be reported, for instance.

Financial transactions subject to internal financial monitoring:

• A non-standard or a complicated financial transaction or several related financial operations thathave no evident economic sense or obvious legal purpose.

• A financial transaction that is not compliant with the activity of the client of the subject of theinitial level of financial monitoring.

• Repeated financial transactions the nature of which gives the grounds to believe that theirpurpose is to evade the procedures of compulsory financial monitoring.

• Financial operations defined by the typologies of the international organizations fighting againstmoney laundering.




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Internal financial monitoring (article 16 of the Law) can also be applied to other financial transactionswhen subjects of the initial level of financial monitoring have grounds to believe that such financialtransactions are aimed at legalization of “laundered” proceeds. Subjects of entrepreneurial businessrendering the intercessory services during the execution of sale-purchase real estate operations have toperform internal financial monitoring in case the amounts of said operations equal or exceed 400 000UAH or its equivalent in foreign currencies Reporting to the FMU on a financial transaction subject tointernal financial monitoring is the result of an assessment by the reporting institution, which is basedon defined subjective criteria. FMU has right to stop for up to five business days all debit operations ona customer’s accounts in case said customer’s operations are suspected to be related to moneylaundering. Subjects of the initial level of financial monitoring are obliged to “know their customers”and able to prove it. I.e. in their files there should be the evidence that their customers legal persons,physical persons, banks and other financial institutions have been identified according to theidentification rules defined by the Law and, and for banks by the Resolution that includes alsoidentification of the ultimate/beneficial owners (“controllers”, >=50 percent ownership) of thecustomers, the shareholders (“owners of essential participation”, >=10 percent ownership) and themanagers/authorized persons of the customers. Identification rules also prescribe to identify non-resident politically exposed persons (PEP) among customers, their “controllers”, their “owners ofessential participation” and their managers/authorized persons. Banks that are subjects of the initiallevel of financial monitoring are obliged to classify the customers by their risk appreciation for suchcustomers to perform money laundering operations. Such classification has to be performed inaccordance with the Resolution requirements considering the criteria defined by FMU. The Resolutionalso requested the banks to classify the customers by their reputation. The Resolution requires from thebanks the compulsory maintenance of electronic KYC forms (“anketas”) of prescribed format inUkrainian. Said “anketas” are to be stored and must contain all historical data of the banks’relationships with the customers. The levels of the customers’ risk and reputation must be indicated inthe customers’ “anketas”. The Resolution also requested the banks to analyze quarterly the customers’operations as to their correspondence to the customers’ financial state and activity nature. Results ofsuch analyses must be fixed in the customers’ “anketas”.

The Resolution obliged the banks:• to put into correspondence with the Resolution requirements their internal documents regarding

financial monitoring (programs, rules etc.) within 1 month after the Resolution becameeffective;

• to make the identification of the customers with high risk in accordance with requirements of theLaw and the Resolution within 2 months after the Resolution becomes effective;

• to make the identification of the customers with other risks in accordance with requirements ofthe Law and the Resolution within 6 months after the Resolution became effective. The Law andthe Resolution cover also “terrorism” related activities. Based on a list of terrorists provided bythe FMU the subjects of the initial level of financial monitoring are required to prevent for up totwo days a financial operation to be executed, if a participant or a beneficiary of a transaction isa person included in such list. FMU has the rights to extend such time to up to twelve businessdays. The Law and the Resolution in many aspects respect international AML practice (forinstance, the extension of the entities to be subjects of the initial level of financial monitoring,identification of PEP, customers risk-based classification) but they substantially increase, first,




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the volume of transactions that are subject to compulsory financial monitoring and mandatoryreporting to FMU, and, second, the volume of processing work related to the customers’identification and their “anketas” maintenance. This is a questionable move for Ukraine, wherecounter powers need still to be developed, where the rule od law is not prevalent, and where theindependence of State Regulators and Supervisors still is questioned.* * *

After more than eight years of implementation, the anti-money laundering set-up in Ukraine resulted in 6 471299 transactions reported to the FMU by the subjects of the initial level of financial monitoring as ofDecember 31st, 2010. As of December 31st, 2010 among the subjects of the initial level of financialmonitoring registered by FMU there were 176 banks as well as6329 non-bank institutions. In 2010 819 542 transactions werereported to FMU, of which 787 912 (96.14 percent) transactionswere reported by banks. 72 percent reported transactions weresubject to the compulsory financial monitoring. In 2010 188 857reports received by FMU were taken into active work andresulted in the creation of 1706 dossiers. Following to furtheranalyses only 667 dossiers were delivered to Ukrainianenforcement bodies in 2010. In 2010 only 106 criminal caseswere initiated and delivered to the courts as a result of reportingto FMU. As of December 31st, 2010 the courts considered only65 cases. Court decisions led to the arrest of funds and propertyfor the amount of 198.2m UAH and to the confiscation of fundsand property for the amount of 15.2m UAH. The efficiency of suchset-up is to be improved.

External Debt Burden

In the last two years total external debt grew by 100%reaching $114 billion by end-2008, a lot of which is short-term private debt (about $45 billion).

Ukraine’s external debt (at more than 60% of GDP and120% of current account receipts) is now above themedian value (40% and 84% respectively) of countries insimilar credit rating categories (before the downgrade inFebruary 2009).

In 2010, Ukraine's gross external debt added USD 13.9billion or 13.5 percent and, as of January 1, 2011, reachedUSD 117.3 billion (85.7 percent of GDP).Dynamics of the external debt of Ukraine, in 2010, weredefined by the following factors:

– material net external borrowings of the government(USD 7.0 billion) and long-term

loans of the real sector of economy (USD 3.5 billion);

Figure 126 Gross External Debt, By Sectors

Figure 127 Ukraine's External Debt Service Needs




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– substantial accumulation of short-termdebt of other sectors, including trade creditsand past due (USD 4.7 billion);

– a decrease in long-term liabilities ofUkrainian banks to nonresidents (USD 2.5billion).

During 2010, the largest increase in debt (by USD8.5 billion, up to USD 32.5 billion or 23.7 percentof GDP) was showed by the government sector andmonetary authorities. Debt of the banking sectorand other sectors (including inter-corporate debt)grew by USD 5.5 billion and totaled USD 84.9billion (62 percent of GDP). In 2010, short-termexternal debt with residual maturity less than a yearrose by USD 8.5 billion and, at the end of the year,totaled USD 47.3 billion. Its coverage with theinternational reserves grew up to 73 percent (at thebeginning of the year it accounted for 68 percent).

Ability to Cover External Financing Needs

Ukraine is no longer a low-debt country withexternal debt at 75% of GDP (compared to 35%average for emerging countries) Gross externaldebt (public & private) stood at $123 bn at end-September 2011. In 2012, external debt servicepayments will remain high, estimated at about$64 billion or 36% of GDP. Ukraine mustmaintain investors’ confidence to keep rollover

ratios high.Banking Sector Weaknesses In Ukraine, bank credit grew by 70% pa

over 2006-2008, supported by a 40% paincrease in money supply and largecommercial banks borrowings fromabroad.

Figure 128 Non-performing Loans in Selected Emerging Markets

Figure 129 Non-performing loans, right scale




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Many studies in EMs have shown that high rates ofcredit growth lead to high levels of non-performing assets(sub-standard, doubtful and loss loans - NPLs). According to the NBU, the share of doubtful and loss

loans grew from 2.5% at the beginning of 2008 to almost 4%at the end of the year. Including sub-standard loans, the share of NPLs is

higher than in other countries. A flight in deposits started in Sep-2008, and by Feb-

2009, about $12 bn had flew out of the banking system. Bank weaknesses and loss of confidence will make

more difficult for banks to roll-over foreign short term debt,putting more pressures on the Hryvnia exchange rate. Credit growth was mainly financed by foreign

borrowings, with 50% of total loans issued in foreigncurrency. All this created uncertainties and about ¼ of bankdeposits were lost in late 2008 - early 2009.

Although the deposit base was stabilized in mid-2009, in 2009 the banking sector as a whole made $3.9 billion

in loses.Recovery of the Banking Sector and Credit

Banking credit growth has been reviving: the highest credit increase was for state-owned companies during most of 2011; consumer credit expanded at a robust 34% yoy in 2011, supporting consumption but also fuelling

imports; Credit growth to private companies has been sluggish - 14% yoy in Dec 2011.

Large lending to SOE may complicate the ongoing process of cleaning commercial banks balance sheets fromNPLs (~40% of total loans). The substantial presence of European banks in Ukraine’s banking sector is

another source of vulnerability, given the Eurozone’s crisis.CAPITAL MARKETS

Commercial banks

In 2010, activity of the banking sector of Ukraine was characterized by a stable inflow of funds in the bankingsystem, crediting revival, augmentation of the banks' regulatory capital and enlargement of its adequacy,reduction, as compared with the previous year, of losses and a decrease in the number of loss-making banks.For 2010, total assets of the banks of Ukraine (not adjusted to provisions under active operations) enlarged by8.8% (for 2009 – by 2.9%) and as at 1 January 2011 amounted to UAH 1 090.2 billion. At that, assets of thebanking sector grew for 2010 by 7.0% – to UAH 942.1 billion in comparison with the curtailment by 4.9% in

Figure 130 Stock of Bank Credit




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2009 (primarily due to growth of the input into securities). Thus, the share of input into securities within thetotal assets increased 2.0 times (by 3.8 percentage points). The share of loans, that remained the maincomponent of assets, reduced by 5.3 percentage points. For 2010, an increase in the negatively classified creditoperations by 13.0% (in 2009 –3.3 times) took place, and their share within the total credit indebtedness grewfrom 13.1% to 14.9% as at 1 January 2011. For the reporting year, the total liabilities of banks grew by 5.1%(for 2009 – lowered by 5.2%) and as at 1 January 2011 accounted for UAH 804.4 billion. Within the banks'liabilities, deposits made up over a half, their share enlarged for the year by 9.1 percentage points. At the sametime, the share of inter-bank loans and deposits reduced by 3.8 percentage points (to 21.5%), the loans,received from international and other financial organizations – by 0.6 percentage point to 4.9%), the funds ofthe National Bank of Ukraine – by 2.2 percentage points (to 8.8%). In 2010, noted was reduction of the ratio ofbanks' total assets to the GDP, that as of 1 January 2011 amounted to 99.6% (as of 1 January 2010 – 109.7%).The ratio of banks' assets to the GDP diminished to 86.1% (as at 1 January 2010 – 96.4%), liabilities to theGDP – 73.5% (as at 1 January 2010 – 83.8%) and equity – remained at a level of 12.6%. For 2010, the equityof banks of Ukraine enlarged by UAH 22.5 billion, or by 19.6% (in 2009 – reduced by 3.4%) and by the end ofthe year accounted for UAH 137.7 billion. The equity share within the banks' liabilities as at 1 January 2011amounted to 14.6% (as at 1 January 2010 – 13.1%). The paid-in registered authorized capital for 2010increased by UAH 26.7 billion, or by 22.4% – to UAH 145.9 billion, which enlarged the capitalization level ofthe banking sector. For 2010, the portion of foreign capital in the registered authorized capital of banks ofUkraine incremented by 4.8 percentage points to 40.6%. The regulatory capital of the banks of Ukraine rosefor 2010 by 18.5% – to UAH 160.9 billion, mainly thanks to the most stable part of it – the authorized capital.During 2010, changes took place within the regulatory capital structure. Specifically, the share of actually paid-in registered authorized capital (the fixed capital component) within the regulatory capital enlarged to 66.1%from 62.7% as at 1 January 2010, and the share of subordinated debt (the additional capital component) grew to15.0% from 13.6% as at 1 January 2010. The adequacy level of regulatory capital of the banking sectoraugmented for 2010 to 20.83% from 18.08% as at 1 January 2010. In 2010, the process of concentration ofassets, capital and liabilities in the banks of Group І continued, where, as at 1 January, 2011, 66.8% of theassets of banks of Ukraine, 66.4% of the equity and 66.8% of the total liabilities were concentrated. Theincome of banks of Ukraine as at 1 January, 2011, amounted to UAH 136.8 billion, or reduced for the year by4.3%. The interest income, as before, remained the main income item – UAH 113.3 billion. Its volume, visa-vis the previous year, reduced by 6.4% (primarily, due to the curtailment of income from crediting theindividuals), and its portion within the banks' income reduced to 82.8% against 84.7% as at 1 January 2010. Atthe same time, the commission income diminished for the year by 5.8% – to UAH 15.3 billion, and its portionwithin the total income amounted to 11.2%. The result of trade operations reduced by 24.5% – to UAH 2.2billion.




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Figure 131 Dynamics of Income, expense and profit of the banking sector of Ukraine

In 2010, in comparison with the previous year, the expenditures of banks of Ukraine decreased by 17.4% andas at 1 January, 2011, equaled UAH 149.9 billion. The interest expenses made up UAH 61.4 billion (by 7.8%less than as at 1 January 2010) and their share continued to enlarge – to 41.0% (versus 36.7% as at 1 January2010). It took place against the background of curtailing the volume of deductions to form reserves thatreduced for the year by 38.8% and as at 1 January 2011 accounted for UAH 46.2 billion, or 30.8% of allexpenses of banks. In comparison with 2009, the total administrative expenses grew by 3.0% and amounted to19.4% of the expenses. The expense to income ratio of banks equaled 109.5% (versus 126.9% in 2009). By theresults of 2010, fixed was the negative financial result of activities of the banking sector to the amount of UAH13.0 billion, that was nearly three times less than for 2009.

Deposit market

In 2010, the positive tendency towards enlargement of the deposit base of other deposit corporations renewed.As at 1 January 2011, the balances of funds attracted from residents amounted to UAH 416.6 billion andincreased for the year by 24.4% against the curtailment by 6.9% in 2009. This was contributed by gradualrecovery of the economic growth, stable dynamics of the foreign exchange rate during the year and higherconfidence of the economic entities in the banking system.Funds of the households sector remained the largest portion of deposits attracted by banks, and secured themain increment of deposits in 2010. As at 1 January, 2011, the households sector's deposits totaled UAH 275.1billion. The growth was noted during the whole of the year, being favored by an increase in the real wages andpractically stable exchange rate of hryvnia against the US dollar. For 2010 as a whole, the deposits ofhouseholds sector enlarged by UAH 61.0 billion, or by 28.5% versus the curtailment by UAH 3.8 billion, or by1.7%, in 2009. The balances of funds of the non-financial corporations sector in 2010 increased by UAH 21.3billion, or by 22.5% (versus the curtailment by 19.8% in 2009). Their dynamics during the year were uneven,




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which became the main factor of fluctuations of the deposit balances as a whole. After the mentioned reductionin January – February, since March 2010 the non-financial corporations' deposits enlarged, except June (whenthe balances of deposits in foreign currency diminished due to the significant repayment of foreign loans) andNovember (owing to tax payments and excess of import volumes over the export ones). As at 1 January 2011,the deposits of non-financial corporations sector totaled UAH 116.1billion, out of them the state non-financialcorporations sub-sector – UAH 14.0 billion, or 12.0%.

Figure 132 Deposits by sectors of economy

The balances of funds of the other financial corporations' subsector, attracted by banks enhanced for the yearby UAH 3.4 billion (or by 21.8%), primarily at the expense of funds of other financial intermediaries andauxiliary financial organizations – by UAH 2.7 billion, or by 33.3% (specifically, their short-term deposits inhryvnia). Among the main factors of such dynamics there was an increase in the stock market indicators duringthe year and enlargement of the economic entities' solvency. The balances on deposits of the generalgovernment sector in 2010 diminished by UAH 4.5 billion (or by 51.9%) to UAH 4.1billion as at 1 January2011, including at the expense of central government bodies – by UAH 4.2 billion, or by 51.8%. The depositstructure by sectors of the economy changed: the portion of deposits of the households sector as at 1 January2011 augmented to 66.0% of the total deposits (versus 63.9% as at 1 January 2010), the general governmentsector – decreased from 2.6% to 1.0%, the non-financial corporations sector – from 28.3% to 27.9% , the otherfinancial corporations' sub-sector – from 4.7% to 4.6%. The growth rate of deposits in national currency in2010 (38.3%) substantially exceeded the rate of their growth in foreign currency (9.6%).




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Figure 133 Deposits by types of currency

The growth rate of deposits in national currency in the annualized terms during the year gradually accelerated(of both the non-financial corporations and households). In the 4th quarter 2010, the growth started toslowdown, however by the end of the year the increase in funds remained significant – 38.3% (versus reductionby 14.2% in 2009). The dynamics of balances of funds in foreign currency were characterized by relativestability that was favored by insignificant fluctuations of the exchange rate of hryvnia versus foreign currenciesduring the year and was secured by an increase in the households' deposits (enlarged for the year by 16.9%).The foreign currency deposits of the non-financial corporations diminished for the year by UAH 0.5 billion, orby 1.3% (in particular, due to the excess of payments on import contracts over the receipts on exports). For2010, the deposit structure by types of currencies changed: the share of deposits in national currency enlargedby 5.7 percentage points to 57.4%.During the year, against the background of recovery of the economic activity, noted was the deposit structureimprovement by terms. Moreover, the interest rate policy of other deposit corporations (banks) underconditions of sufficient liquidity was aimed at creating the stimuli for enlargement of volumes of the long-termdeposits. Thus, by terms of attraction, in 2010, the curtailment of short-term and growth of long-term depositsand demand deposits took place. The largest was the increase in deposits with a term from 1 year to 2 years –by 76.6%. The demand deposits during the year enhanced by 27.3%, over 2 years – by 23.6%. At the sametime, the short-term deposits in the annualized terms diminished by 1.4%. Within the regions, as at 1 January,2011, the largest volumes of deposits were attracted by banks of the city of Kyiv and Kyiv region (41.1%), theDonetsk region (9.7%) and the Dnipropetrovsk region (8.9%). The growth of the deposit base of banksmotivated the downward dynamics of the deposit value during 2010. The increase in the interest rate ondeposits in national currency by the end of the 1st quarter of the reporting year was intended to prevent theoutflow of these funds, to support the banks' liquidity and was compensated by a simultaneous reduction of thevalue of deposits in foreign currency. Since April, the interest rates were stably decreasing both on deposits innational currency and those in foreign currencies. Small increase in the deposit value in December was due tothe season factor and the growth of deposits with a larger value within the deposit structure. The average-weighted interest rate on deposits for 2010 equaled 9.4% per annum versus 11.8% per annum in 2009,including in the national currency – 10.3% against 14.0% per annum, respectively.




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Credit market

Overview of Lending Practices

Despite explosive growth in lending over the past several years, bank lending in Ukraine is still relativelyscarce as compared with lending in Western Europe and the size of Ukraine’s population. In relative terms, amid to large-sized European bank’s total assets are greater than the total assets of the entire Ukrainian bankingsector. Loan terms vary depending on the client’s ability to repay, prior relationship with a bank or creditunion, availability and liquidity of collateral, personal references and other factors. Loans tend to be short termand carry high rates of interest – which makes it difficult to impossible for some clients to take out a loan; oftenmonthly payments exceed the ability of the person to repay the loan with existing cash flows. The absence ofcredit histories has complicated the entire process of lending on an unsecured basis. Banks generally extendcredit for short periods of time ranging from one (1) to three (3) years. Given the generally short maturities andrelatively high interest rates, the large monthly payments are very often beyond an individual’s ability to pay.Since many individuals are unable to meet these conditions, they are unable to borrow. The availability ofcollateral and the assessment of its value and liquidity play a critical role in a bank’s decision to extent credit toan individual. Secondary source of repayment often becomes the basis for extending credit rather than theprimary source – which is cash flow. Loan underwriting procedures in the retail sector are substantially similarfor banks and credit unions. In principle, a client fills out an application and submits the standard set ofdocuments: passport number, driver’s license, employment certificate (indicating income), as well as otheridentification and personal data. Credit Unions have flexible underwriting requirements and tend to rely oninterviews with a prospective client. Some credit unions charge interest up to 100% to compensate for a lack ofknowledge about a client and competition within and beyond the sector. Over the past year, competition in theautomotive and mortgage markets has significantly intensified. Depending on the bank product, on average,from “application” to “sale”, the entire underwriting process can take from 1 day to 5 days. As of 1st quarter2005, Privatbank seems to have the quickest underwriting procedures as evidenced by their popular product“Autoloan in 30 minutes”. Other banks active in the auto market include Index Bank, Bank Aval, Pravex-bank,Ukrsibbank and Nadra. Fraud, like in many other countries, is not insignificant in Ukraine. While there aremany forms of fraud, identification fraud (passport forgery or use of stolen passports and forgery of certificateson salary) seems to be the most widespread at this time. One of the major functions of the credit bureau will beto provide products and services that help the financial sector prevent various different kinds of fraud.

Market overview

The downward dynamics in the residents' crediting that were noted in 2009 and the 1st half of 2010, in the 2ndhalf year stopped. Since June, under conditions of expanding the resource base, and, thus, reduction of thecredit value (in national currency), the process of a monthly increment of the balances of indebtedness startedunder the credits extended (except December). Owing to this, their total volume for 2010 enlarged by UAH 9.5billion, or by 1.3% to UAH 732.8 billion (for 2009 – diminished by 1.5%). The loans extended to the non-financial corporations sector remained the largest component within the structure of crediting the residents andensured the main increment in 2010. Upward dynamics of the balances on credits to these borrowers wereobserved during nearly all 2010, and for the year they grew by UAH 38.7 billion, or by 8.4% (in 2009 – by4.2%). Above all, such dynamics were reasoned by positive tendencies towards expansion of the banks'resource base, as well as by improvement of the financial situation of some enterprises, specifically those of




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trade and industry. By the end of December, the indebtedness on credits to non-financial corporationsamounted to UAH 501.0 billion. Within the structure of credits under the target investments, the creditsprovided for the non-financial corporations' activity prevailed. The share of these credits in the total balances ofcredits extended to the non-financial corporations sector, due to reduction of activation in the investmentcrediting, had the tendency towards an increase (for the year – by 2.1 percentage points – to 83.0%).

Figure 134 Credits by sectors of economy

Alongside the increase in balances on credits extended to the non-financial corporations sector, the growth ofbalances on overdue credits took also place – to UAH 65.6 billion. For 2010, their increment was UAH 13.2billion (in 2009 – by UAH 42.1 billion) and it was reasoned by enlargement of overdue credits both in nationalcurrency (by UAH 3.4 billion), and in foreign currency (by UAH 9.8 billion). The share of problem credits inthe total balances on credits extended to the non-financial corporations sector continued gradually to rise andfor the reporting year grew from 11.3% to 13.1%. In 2010, noted was an increase in the credits given to thegeneral government sector – by UAH 3.1 billion, or 1.5 times – to UAH 8.8 billion, including at the expense ofthe general government – by UAH 2.9 billion, or 1.6 time. Under conditions of the instable financial situationof borrowers and a high level of problem indebtedness in 2010, further monthly curtailment of balances oncredits extended to the households sector occurred. By the year results, they diminished by UAH 31.7 billion,or by 13.1% (in 2009 by 14.0%) and as at 1 January 2011 equaled UAH 209.5 billion. This was due toreduction of the consumer credits – by UAH 14.2 billion, or by 10.3%,credits for acquisition, construction andreconstruction of property – by UAH 16.8 billion, or by 17.0%, and other credits – by UAH 0.7 billion, or by13.1%. Balances on credits to other financial corporations reduced for the year by UAH 0.6 billion, or by4.2% – to UAH 13.4 billion, solely at the expense of short-term credits, given to other financial intermediariesand auxiliary financial organizations – by UAH 1.4 billion, or by 16.5%. The main source of the creditinggrowth was enlargement of credits in national currency, the indebtedness under which was practicallyincreasing every month and for the year as a whole rose by UAH 40.0 billion, or by 11.2%. This improved the




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structure of credits by types of currencies – the share of credits in national currency within the total credits toresidents increased for the year from 49.2% to 54.0%. The positive dynamics of balances under credits innational currency in the reporting year were secured by the enlargement of credits extended to the non-financialcorporations sector – by UAH 39.0 billion, or by 14.4%. Credits, given to the households sector in nationalcurrency, diminished by UAH 1.9 billion, or by 2.9%.

Figure 135 Credits by types of currency

The policy of the National Bank of Ukraine with regard to limiting the credits in foreign currency caused thedownward dynamics of indebtedness on these credits in all sectors of the economy. Balances under the creditsin foreign currency were growing only in July and September which did not compensate for their decreaseduring other months of the year, and by the results of 2010, they reduced by UAH 30.5 billion, or by 8.3%. Thereduction took place both under the credits to the nonfinancial corporations sector (by UAH 0.3 billion, or by0.1%), and the households sector (by UAH 29.8 billion, or by 17.1%). Considering a prudent credit policy ofother depository corporations (banks), in 2010, the residents' crediting was performed for shorter terms. In theannual estimate, the credits with a term up to 1 year grew by 5.1%, with a term from 1 year to 5 years – by3.3%. At the same time, the credits, extended for a term over 5 years in the annualized terms, diminished by5.0%. Within the regions, as at 1 January, 2011, the largest volumes of credits were extended by banks of theKyiv region and the city of Kyiv (50.0%), the Dnipropetrovsk region (13.4%), the Donetsk region (6.4%), andthe Odessa region (5.5%). A sufficient level of liquidity ensured reduction of the credit value in the 2nd – 3rd

quarters. With some revival of credit activity, the descending trend of interest rates under the credits in nationalcurrency (noted from March to August) changed by the upward one in September – December. For the year asa whole, the interest rate dropped by 5.9 percentage points – to 14.6% per annum. During the year, thedynamics of interest rates under the credits in foreign currency were differently directed and fluctuated within9.5%–11.4% per annum. For the year, the interest rate under these credits enlarged by 0.7 percentage point to10.6% per annum.




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PAYMENT SYSTEMS AND SETTLEMENTS

THE SYSTEM OF ELECTRONIC PAYMENTS OF THE NATIONAL BANK OF UKRAINE

During 2010, the System of Electronic Payments of the National Bank of Ukraine (hereinafter, SEP) exercisedsuccessfully its functions of the national inter-bank settlements, timely servicing the SEP members and at thesame time ensuring a high level of safety and reliability of the transfers made. In 2010, 98.2% of the inter-banktransfers in the national currency were made within Ukraine applying the SEP and only 1.8% of the similartransfers were carried out through the correspondent accounts of the banks opened with other banks. As of 1January 2011, the total number of institutions being the SEP members was 977, including 175 banks ofUkraine, 736 bank branches, 28 State Treasury bodies of Ukraine (hereinafter, the State Treasury), 37institutions of the National Bank of Ukraine and the Private Joint-Stock Company "Ukrainian SecuritiesDepository". During 2010, 336.9 million of the initial payments and the payment orders totaling UAH 7 909billion were processed in the SEP, and that was by 8% and 28% more, respectively, as compared with theprevious year. Out the said payments, 336.7 million were the file mode payments of UAH 7 112 billion and0.2 million were the real time mode payments of UAH 797 billion; and as regards the previous year, it was by8% and 25% more, respectively, in the file mode and by 3% and 70% more, respectively, in the real time mode.Major portion of the initial payments in the file mode were processed in the SEP in December (33 million), andthe least portion was marked in January 2010 (20 million). Such distribution of payments by months tends tofollow the situation of 2009. In 2010, the initial payment transactions processed in the SEP by banks amountedto 90.5%, those made by the State Treasury formed 9.4% and 0.1% were made by the National Bank ofUkraine. As regards the structure of the initial payment amount, the trend of 2010 was similar to the previousyears and major portion of the initial payments, namely, 234 million, comprised payments of up to UAH 1 000;however, such payments amounted to only UAH 51 billion (less of 1% of the total funds transferred). Thedaily average balance of the SEP members' accounts in 2010 formed UAH 25.9 billion. The daily averageamount under the initial payments was UAH 31.5 billion. On average, 1.3 million of the payment documentswere processed daily. Turnover factor of the accounts of the SEP members (calculated as a ratio of averagedaily amount of initial payments made by the SEP members to the average daily balance of funds on the SEPmembers' accounts) for the year equaled 1.2 versus 1.1 in 2009.




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Figure 136 Number of initial payments and electronic settlement notices carried out

Development of the payment card market

Development of payment card market in Ukraine as well as other countries is determined by its competitionwith other forms of retail payments as well as investment in its infrastructure. Payment cards are the main retailnon-cash payment instrument in Ukraine while the use of direct banks transfers, e-money and paybox terminalsis relatively rare. Nevertheless cash is a prevalent instrument of settling retail economic transactions and themain com-petitor of payment cards in payments market. In comparison transferable bank balances that may beused for retail payments are relatively low. Use of cash is stimulated by high share of shadow economy.Significant share of transactions areconducted by informal busi-nesses.Besides, unofficial wage payments areprevalent and also paid in cash. Retailshops also have incentives to acceptonly cash to simplify tax avoidance.

As a result we can see on Figure 2.1that share of cash in narrow moneysupply in Ukraine is almost twothirds. This is much higher than inEuro area (17%) and CEE countries(17-40%) as well as in Kazakhstanand Belarus. This reflects a relativelylow role of non-cash payments inUkraine. Moreover, this ratio doesn'tinclude tens of billions of US dollarsthat are also used in shadow economyof Ukraine.

Figure 137 Share of cash outside banks in narrow money




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Nevertheless, payment card market in Ukraine experienced rapid growth over the last decade, although from alow starting point. Introduction of national currency in 1996 and macroeconomic stabilization after 1998 crisisset the stage for almost 10 years of economic growth and helped financial sector development. Banking sectorboom that started in 2005 and rising incomes induced most Ukrainian banks to participate in payment cardissuance. Between 2006 and 2008 banks increasingly sold cards for wage and social benefit payments as wellas made direct marketing efforts.

Figure 138 Number of cardholders

As we can see, in the end of 2001 less than 10% of adult Ukrainian population had access to payment cardswhile in 2008 and 2009 the number of cardholders exceeded adult population meaning that most Ukrainianshad at least one payment card while some had several cards issued by different banks. In 2011, there was somedecrease in number of cardholders as cards issued before the crisis expired. In sum, over 2001-2011, thenumber of commercial banks that are members of card payment systems more than dou-bled and the number ofcardholders has increased tenfold from 3.2 million in 2001 to 34 million by the end of September of 2011. Overthe last ten years payment card infrastructure also developed rapidly. Between 2002 and 2007 the number ofactive payment cards has grown by the factor of 12, equivalent to 50% CAGR over six years. By 2009, thenumber of active payment cards issued fell by 28% compared with the end of 2007, following the crisis in thebanking sector. Due to the crisis many banks cancelled or cut back credit limits on payment cards as wellmarketing efforts. Consumer demand also fell and banks restricted issuance of payment cards while consumersceased to use some of the cards. During 2010, the number of banks being the payment system membersreduced by 5 banks and as of 1 January 2011, it consisted of 141 banks (81% of the total number). Totalnumber of the payment cards which remained effective as of 1 January 2011 amounted to about 46.4 millionpieces. Total number of the payment cards issued by the banks of Ukraine (payment cards against which atleast one operation per year was performed) increased by 1% in the reporting year forming 29.4 million pieces.Out of the total number of Payment cards, the share of personal cards was 98.9%, that of the corporate cards –




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1.1%. In 2011, the number of active cards grew again as banks restarted marketing of bank cards. Out of thetotal cards issued by banks, the share of magnetic strip cards prevailed (93.3%). Chip function cards and cardswith the combined magnetic strip and chip functions formed about 2.1% and 4.2%, respectively; amount ofpayment cards used for the Internet settlements was equal to 0.4%. Regarding the payment model, the debitfunction cards prevailed (80.9%), while the credit function cards formed over 19% and the electronic moneycards amounted to about 0.1%. During the reporting period, the number of automatic telling machines servicingthe payment card holders grew by 4.1% (up to 30.2 thousand units), and those of the payment terminalsincreased by 4.7% (to 108.1 thousand units). The number of transactions using the payment cards issued by thebanks of Ukraine grew by 17% in 2010, coming to 692.6 million, while the amount of transactions rose by 28%(to UAH 450.7 billion). In 2010, the major portion of operations (87.0%) was made by the holders of thepayment cards of Ukrainian banks within the own network of the issuing bank, 12.2% operations wereperformed in the network of other resident banks and the rest of operations were performed abroad.

Figure 139 Number and value of operations on payment cards issued

During 2010, the amount of operations on cash delivery grew by UAH 86.4% billion as compared with 2009,and was equal to over UAH 421.2 billion (93.5% of the total operations performed with applying the paymentcards); non-cash payments rose by UAH 11.1 billion (to an amount of almost UAH 29.5 billion that formed6.5% of the total operations performed with applying the payment cards). As compared with 2009, the numberof transactions on cash delivery in 2010 rose by 57.9% coming to 571.2 million transactions (82.5% of the totaloperations with applying the payment cards); non-cash payments grew by 44 million and formed almost 121.4million transactions (17.5% of the total transactions with applying the payment cards). During 2010, theaverage annual turnover per one payment card grew by UAH 5.0 thousand as compared with 2009 andamounted to UAH 15.4 thousand. Within the international payment systems such as VISA it was equal to UAH16.2 thousand, with MasterCard – UAH 14 thousand, and within the group of the domestic one- issuer systemsit rose to UAH 10.6 thousand.




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Figure 140 Average turnover on one card

The highest average annual turnover per one payment card appeared to belong to the NSMEP – UAH 19.5thousand. During 2010, the National System of Mass Electronic Payments for goods and services for thepeople with applying the NSMEP cards showed its stable operation. Particular attention was focused on thefinancial situation of the members and on the prevention of the possible adverse effect on the operation of theNSMEP, on a whole, and its other members. In 2010, 3 more banks joined the NSMEP, namely: PJSC"PROMECONOMBANK" (Donetsk-city), PJSB "Ukrainian Bank for Development" (Kyiv-city) and PJSC"Terra Bank" (Kyiv-city). In addition, the permission to join the NSMEP was received for Public Corporation"Global Money" in the capacity of the technical acquirer. As of 1 January 2011, the NSMEP comprised 57members (including the National Bank of Ukraine and the Ukrainian State-Owned Company "UkrPost") and 7participants. According to the data of the NSMEP Main Processing Centre during 2010, the banks being theNSMEP members issued 239.3 thousand cards. As of 1 January 2011, the NSMEP cards totaled 2.9 millionpieces. In 2010, the NSMEP turnovers went beyond UAH 25.9 billion as compared with UAH 42 million in2001.

Figure 141 Some indicators of the National System of Mass Electronic Payments




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Owing to the NSMEP payment cards, "The Ukrainian Railway Company" and JSB "Express-Bank" realizedthe possibility to acquire electronic railway tickets through the Internet(automated self-servicing system "e-Ticket"). The introduction of the pilot project "Student Payment Card" was finalized on the basis of thenational information and production system "Education" using the NSMEP knowhow. Within the aboveproject, a multi-functional student (pupil) payment card combined the functions of both the student (pupil)card and the payment card. Starting from September, step-by-step implementation of the "Student (Pupil)Payment Card" was launched together with the amendments to be made to the effective norms and regulationsregarding the description of the student (pupil) card standard. As of 1 January 2011, the number of the testparticipants amounted to almost 50 educational institutions of Ukraine and number of the student paymentcards issued was over 100 thousand pieces. Based upon the NSMEP know-how, the formation of the automatedsystem for the Insurance Fund of Deposits for Individuals got start, which would provide with the possibility tointroduce the non-risk compensation procedure, to substantially speed up the beginning of payments, to refusefrom tenders on selecting the authorized banks and to simplify money receiving procedure for depositors.During the year, the National Bank of Ukraine continued its work on the development of the functional,technological and technical facilities for the NSMEP. In addition, the work on providing the operation of theNSMEP hardware and software components took place.

Figure 142 Card payment infrastructure in Ukraine

The number of retail POS terminals before crisis grew slower than the number of credit cards until the end of2008. This happened as small volume merchants installed man-ual imprinters to process card payments. Thenumber of retail POS terminals fell measurably during the economic crisis in 2009 and stagnated in 2010. Thereason for this was: Liquidation of many traders; Reduction in income and termination of the majority of bank lending programs; Due to recession some retailers began to move their business into shadow, refusing to accept card

payments.Over the three quarters of 2011 the situation stabilized, and the total number of terminals exceeded pre-crisislevels. At the same time banks continued to install new ATMs even during crisis. As a result Ukrainiannetwork of ATMs is comparable in density to some of the EU countries: in Ukraine it was 659 ATMs permillion inhabitants vs 800-870 ATMs per million in France, Italy, Russia and Switzerland. Overall, despite




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high growth in numbers of payment cards and POS terminals, Ukraine is lagging in market infrastructuredevelopment. This presents technical constraint on number and volume of transactions processed.

Figure 143 Number of payment cards per capita

Ukraine has a lower penetration of payments cards compared to developed countries. Nevertheless, it is aheadof a number of emerging economies and close to the level of Italy. This situation indicates that penetration ofpayments cards is considerable but there is potential for further increase of payment cards in circulation as wellas for higher competition. When analyzing payment infrastructure in Ukraine it is useful to consider not onlyavailability of hardware but also a rate to which it is put to use by population. It shows, in practice, potentialreturn from developing infrastructure. Based on the latest available data from CPSS, ECB and from centralbanks of several CIS countries, we see a huge difference be-tween some of developed economies, where thenumber of card payments is 100-200 per year per capita (Australia, Canada, U.S., U.K., Denmark, Sweden,France, Finland, Nether-lands, Belgium, Korea, Portugal), and several Eastern European countries where thenumber of card operations per capita does not exceed 10 per year.




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Figure 144 Number of card payments per capita in several CEE and Central Asia

In this group Ukraine overtook Bulgaria and is ahead of Moldova, Kazakhstan and Georgia out of CIScountries represented. However even in this modest group card payments are more frequent in Romania, Russiaand Armenia than in Ukraine. Thus we see that although the gap in payment infrastructure with developedeconomies may be overcome with in-creased investment Ukraine will still have to go far to decrease the role ofcash as a main payment instrument. Another feature of Ukrainian payment card market is relatively low, butrapidly growing penetration of credit cards and prevalence of cards with magnetic stripe. In 2010, credit cardsaccounted for only 19.3% of the total number of issued payment cards, which is much higher than in mostCPSS countries excluding Russia, India and China. This may be explained by three factors. First, the majorityof payment cards in Ukraine were issued for transfer of salaries and social benefits. There the low cost of

production and ser-vice of the cards was the mostimportant priority. This facilitated expansion ofpayment cards but also limited the number ofservices available for holders of cards. Anotherfactor is a relatively late development of creditcards as mass market product and limitedoffering by banks. Finally, the crisis led to awidespread closing of credit cards by banks dueto sharp increase in defaults on consumer loans.In the three quarters of 2011, the number of cardswith credit function increased by 40% as banksrealized that credit card debt in Ukraine per-formed much better than other consumer loansduring the crisis and resumed consumer lending.Focus on low-cost salary projects alsoconstrained the share of technologicallyadvanced types of payment cards on theUkrainian market. Thus the share of chip (EMV)

Figure 145 Share of credit cards




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payment cards was only 6% of the total inSeptember 2011 despite incentives from globalpayment companies. This probably happened dueto relatively low rate of fraud on magnetic stripecards. Switch to chip cards is likely to happenrelatively quickly as soon as consumer protectionlegislation is improved and retail card paymentsare used more widely. Corporate business cards areanother undeveloped segment as corporate cardsare only 1.4% of the total. Use of corporate cardsis limited by legislation as well as by theirunsuitability for shadow economy transactions.Currently the market is divided betweeninternational payment systems (Visa and Master-card) and domestically created systems. The shareof domestically created systems is relatively small.Currently there are two domestic payment cardsystems in Ukraine. In 2001, the NBU created its

own payment card network called National system of mass electronic payments (NSMEP). Currently, it is stillowned and operated by the NBU. By the end of 2010, NSMEP enlisted 57 banks to participate although mostof them are second- and third-tier banks (with the exception of state-owned banks). In 2010, there were onaverage 1.3 million cards in circulation used to make UAH 25.9 bn of payments or 3.7% of the total in 2010.The NBU does not provide the number of ATMs and POS terminals compatible with NSMEP separately (onlya total of 6000 is reported which contradicts other NBU publications). Bringing together NBU data we canestimate that there were 1200-1500 NSMEP ATMs and 4000 POS terminals compatible with NSMEP in the

end of 2010. The main problems with spreadingNSMEP cards were absence of adequateinfrastructure and incompatibility of NSMEP chipcards with EMV global standard. The secondpayment card system is “Ukrcard” but it iscurrently working primarily as processing centerfor a number of banks while the number of its owncards in circulation is slightly above 100,000.Several banks also issue one-bank cards acceptedonly in their ATM and POS network. Now we'dlike to focus on what cardholders do with theircards. At the moment, in Ukraine they mostlywithdraw cash. And between 2002 and 2008 theystarted to withdraw a lot more cash. It happenedboth thanks to the development of marketinfrastructure and to sharp increase in nominal in-comes over the period. The number of cardsincreased by a factor of eight while nominal

Figure 147 Types of payment cards issued by Ukrainian banks

Figure 146 Number and volume of payment card operations in Ukraine




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disposable income grew 4.5 times and cash withdrawals multiplied by 18 times. At the same time, the averagenumber of cash withdrawals per card didn't change much. It corresponds to withdrawals once or twice permonth. Moreover, the number and volume of POS payments grew broadly similar to cash withdrawals.However, the number of POS payments grew faster than the volume meaning a relatively smaller average sizeof POS payment. As a result, in 2008 the share of POS payments was 4.6% by volume (in UAH bn) and 10.6%by number. Between 2009 and 2011 the balance shifted to POS payments as the volume of cash withdrawalsfell in 2009 and increased slower than POS payments in 2010 and 2011. At the same time, the number of POSpayments over three quarters of 2011 is more than double the number over the whole 2008. As a result, theshare of POS payments by number reached 23.3% over three quarters of 2011 and by volume increased to7.9%. In 2012, the share of POS transactions will likely exceed 25% and will continue to grow rapidly. Takinginto consideration experiences of the Western and Central Europe markets, this process will continue into thefuture, especially with efforts of MasterCard and Visa in promoting payments at POS.

Figure 148 Structure of payment card transactions

Overall, we may conclude that Ukrainian payment card market developed rapidly over the last ten years. It ledto expansion in number of payment cards and cardholders, significant investment in the infrastructure.Although market felt the crisis it mostly recovered in 2011. At present we also see a rapid increase in thenumber of POS transactions where they may overtake ATM use in a few years. This indicates large shift inconsumer behavior. The card market continues to actively develop and continued growth is expected over thenext several years. Credit card applications are expected to be a large source of business for the credit bureau.Over 90% of the cards are currently guaranteed by the enterprises at which these individuals are employed orare cash collateralized. In most cases, salaries are directly deposited to their bank accounts. Debit cards serve asthe vehicle to withdraw deposited monies. Privatbank, Aval, Nadra and Prominvestbank are the largest playersin the card market.




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Figure 149 Ukrainian card market

BASIC RESULTS OF THE OPERATION OF THE NATIONAL AND INTERNATIONAL SYSTEMS FORTRANSFER OF FUNDS IN 2010As of 1 January 2011, in Ukraine there were operating the following systems: 4 systems for transfer of fundsestablished by the banks of Ukraine (including 2 international systems); 3 systems for transfer of fundsestablished by the non-banking institutions (including the state-owned company "UkrPost") and 22international systems for transfer of funds established by non-residents. During the reporting year, the amountof funds transferred with applying the mentioned payment systems was equal to:– within Ukraine: UAH 16.4 billion, USD 14.3 million, EUR 0.9 million, and RUR 0.25 million;




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– to Ukraine: USD 3.3 billion (in the equivalent);– outside Ukraine: USD 0.6 billion (in the equivalent).Systems for the transfer of funds established by the banks of Ukraine:National systems for the transfer of funds:– "Aval-Express" consisting of 10 resident members was established by the JSC "Raiffeisen Bank Aval" and"SOFT" system established by JSC "Ukrsotsbank" (10 resident banks);International systems for the transfer of funds:– "AVERS" established by the JSC "Finance and Credit Bank" (25 resident members and 5 non-residentmembers) and "PrivatMoney", established by the PJSC CB "PrivatBank" (25 resident members, 26 non-resident members).In 2010, the amount of funds transferred with applying the national and international payment systemsestablished by the banks of Ukraine was equal to:– within Ukraine: UAH 10.8 billion, USD 14 million, and EUR 0.8 million;– to Ukraine: USD 0.4 billion (in the equivalent);– from Ukraine: USD 81 million (in the equivalent).Systems for the transfer of funds established by the non-banking institutions:– "Financial World" established by Public Corporation "Ukrainian Payment System" (2resident members);– "InterPayService" established by PJSC "Zaporizhzviazokservice" (1 resident member).In 2010, the amount of funds transferred within Ukraine with applying the above two systems formed UAH186 million. In addition, the transfer of funds was carried out by the Ukrainian State-Owned Post Company"UkrPost" through the payment system "Post Transfer" established by the company. In 2010, the amount oftransfers within Ukraine processed by the "Post Transfer" system was equal to UAH 5.2 billion including theurgent transfers of UAH 70 million. According to the Agreement on the post payment services with the WorldPost Union and agreements with the post services of other countries, the Ukrainian Post Company "UkrPost"carried out the trans-border transfers. During 2010, the amount of transfers made in Ukraine with applying the"Post Transfer" system was equal to USD 215 million, including USD 213 million (in the equivalent) of theelectronic transfers. Outside Ukraine the fund transfers amounted to USD 132 million, including the electronictransfers of USD 40 million (in the equivalent).International systems for the transfer of funds established by the non-residentsMembers of 22 international systems for the transfer of funds established by the non-residents appeared to beabout 150 banks of Ukraine, JSC "Ukrainian Financial Group" and the national operator of the postal service"UkrPost". In 2010, the total trans-border transfers received in Ukraine with applying the international transfersystems, that were established by non-residents, increased by 16.0% as compared with the previous year andamounted to USD 2.6 billion (in the equivalent), while the amount of funds transferred outside Ukraine grewby 27% to USD 0.4 billion (in the equivalent). The largest amounts of funds were transferred to Ukraine withapplying the following international transfer systems: Western Union (USA) – 41.0%, "Unistream" (RussianFederation) – 13%, MoneyGram (USA) – 10.0%, Migom (Russian Federation) – 8%, CONTACT (RussianFederation) – 6%. The largest amounts of funds came to Ukraine with applying the international transfersystems, that were established by the non-residents, from Russia (50.0%), USA (9.0%), Italy (7.0%), Spain(5.0%), and Great Britain (3.0%) of the total funds received. The largest amounts of funds transferred fromUkraine were sent to Russia (42.0%), Georgia (6.0%), Armenia (4.5%), Uzbekistan (4.5%), and the USA(4.0%) of the total funds transferred. In addition to carrying out the trans-border transfers, the individuals usedthe international transfer systems that were established by non-residents, for transfer of both the foreign andnational currencies within Ukraine. In 2010, with applying the international transfer systems, that had been




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established by the non-residents, the amount of funds transferred within Ukraine was equal to UAH 148million, USD 0.3 million, RUR 0.25 million, and EUR 0.06 million.

SETTLEMENT AND CASH SERVICING OF THE CUSTOMERS BY THE BANKS OF UKRAINE

As of 1 January 2011, 175 banks were providing services to 127.6 million customers (during 2010, the numberof customer rose almost by 0.4 million) including the legal entities and individuals (both residents and non-residents), who opened the current and deposit accounts. Out of the mentioned, 125.6 million were the naturalpersons and 2 million were the business entities, including 17.6 thousand of non-banking institutions and 6thousand of budget institutions.

Figure 150 Some indicators of settlement and cash servicing of customers

According to the reporting data as of 1 January 2011, all banks as the legal entities proposed the remoteservicing of accounts for their customers. Number of customers being the business entities which used thesystem of remote servicing of their accounts amounted to 699 thousand (34.6% of the total customers being thebusiness entities). During 2010, the total number of accounts opened by the customers grew by 6.8% up to166.3 million, including the following:– current accounts – 108.7 million (65.4% of the total accounts opened with the banks), including 100.5 millionAccounted in the national currency and 8.2 million Accounted in the foreign currency;– deposit accounts – 57.6 million (34.6%), including 55.4 million Accounted in the national currency and 2.2million Accounted in the foreign currency.

Regulation of payments industry of Ukraine




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Regulation of payments industry of Ukraine is quite complex. It includes a number of Laws, primarily, "On theNational Bank of Ukraine"(NBU law); "On Banks and Banking"; "On Payment Systems and Fund Transfer inUkraine" (Payment system law) as well as the regulations of the NBU. It also includes internal NBUregulations, since the only inter-bank payment system available to the Ukrainian banks is SEP (System ofElectronic Payments) which is an internal unit of the NBU. The NBU has no clear authority to regulatepayments market in Ukraine. Authority of NBU to “control payment systems” is foreseen in art. 41 of Paymentsystem law while art. 13 of this law authorizes NBU to make regulations regarding the usage of paymentinstruments including payment cards. In the NBU law sec.6 and sec.7 of art. 7 allow the NBU to “determinesystem rules and form of payments” as well as “to direct, control, and supervise creation of electronic paymentinstruments and payment systems”. These provisions clearly give the NBU authority over the payment industryin Ukraine. However, the ambit of the NBU authority in the law is ambiguous. For example the basis forregulations on the use of payment cards is clear. At the same time what exactly the law means by the “controlover payment systems” and how this control extends to non-bank participants of payment industry is less clear.Thus in this area NBU was left to interpret its authority by itself. Over the last several years the NBU decidedto increase its engagement with payment systems and devoted more time to issuing regulations for paymentindustry. NBU regulation expands on basic rules provided in the legislation. For example, banks are requiredto register their contracts with payment systems while NBU also approves operating rules of payment systemsfounded in Ukraine. Operating procedures of the payment card system must include a number of requiredelements. Also international payment card systems cannot include exclusivity provisions in their contracts withbanks. Law also has several general provisions on issuance of payment cards. In particular, domes-tic cardpayments must be made in hryvnia, issuance of payment cards has to be done in accordance with NBUregulations and payment system rules. Interesting peculiarity of Ukrainian law is that it requires merchants toaccept cards from at least three payment card systems. However, this provision is subject to regulations issuedby the Cabinet of Ministers and so far was not enforced. NBU regulation of interest is Resolution NBU #223from 30.04.201059. It is a relatively new regu-lation that defines conditions of issuance and usage of paymentcards. While it deals mostly with technical details of payment card usage in Ukraine it has several notableprovisions: Added consumer protection requirements that limit liability for operations on pay-ment card to UAH

1.500 if they are unauthorized or conducted outside of physical presence of cardholder. Banks were alsorequired to inform cardholder about the exact sum of com-mission charged on ATM operation before itis completed;

Requirement for international payment system to receive payments for its services in hryvnias throughUkrainian bank as well as maintain guarantee deposits in hryvnias in Ukrainian bank;

Requirement to processing center of international payment card system to be a resident or if non-resident to provide assurances in the contract on providing processing services that it will comply withmoney laundering legislation of Ukraine. When Resolution #223 has come into force, it turned out thatsome of its provisions were applied in uneven manner. For example, one international payment systemhas decided to change its operational mode in Ukraine and charge its Ukrainian client banks for part ofits services in UAH. In contrast, another major company continued to charge its client banks in USDonly. Also non-residents currently cannot receive payments in UAH without individual license of NBU.Thus Ukraine's commitment to permit full market access for cross-border supply of payment servicesunder GATS comes into question. Requirement for the banks to display the complete commission forthe ATM withdrawal also turned out to be hard to implement. Changes to consumer protection




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requirements were also hard to enforce as mechanisms of consumer protection are mostly set inspecialized law.

Another major regulatory change in 2010 was approval by the Cabinet of Ministers of the re-viseddeadlines for acceptance of payment cards by retailers. As was mentioned earlier Payment Systems Lawrequires all merchants to accept payment cards since 2004. However, the Cabinet of Ministers had to issueregulations on what merchants will be subject to this rule and on its enforcement. Cabinet of Ministers in200662 approved such regulations requiring all merchants to accept payment cards on varying schedulefrom July 2007 to January 2009 depending on the category of merchant with exception of retailers withannual sales under UAH 5 m. However, government didn't provide for the enforcement of this regulationand it was ignored by those retailers that didn't wish to accept cards. In September 2010, the governmentapproved a new resolution that required all companies selling goods and services to population to acceptcard payments with the exception of shops with area less than 20 sq. m or companies located in towns andvillages with population less than 25,000. Medium and large enterprises working in towns and cities withpopulation over 100,000 were required to comply until July 1, 2011 and the rest have until December 31,2011 to start accepting card payments. However, neither the law nor the government provided mechanismfor enforcement of this provision. Thus it is likely to be inefficient in stimulating wider acceptance of cardpayments. Indeed the latest statistics on the number of POS terminals does not show rapid increase thatwould have been expected if companies were complying with the resolution. Thus either the resolution ismostly ignored or most shops in larger cities already accept payment which we doubt based on anecdotalevidence. However, it is too early to make conclusive statements on effectiveness of this resolution.Overall, changes in regulation approved in 2010 are unlikely to have much positive or negative influenceon financial sector due to lax enforcement. At the same time they highlighted ambiguities in legislation andnegative effects of unclear legal basis for operations on business climate in Ukraine.

Analysis of recent legislative and regulatory initiatives

In 2011, the NBU continued to work on expansion of its regulation of payment market. In Au-gust, NBUrequested public comments on the Draft law "On Amending Certain Legislative Acts of Ukraine (concerningpayment systems and the development of non-cash settlement)". In September, the period for public commentended and NBU is currently preparing a draft law for submission to the Verkhovna Rada. Later it requestedcomments for draft resolution on “Over-sight of the payment systems” (Oversight resolution). Later versions ofthe Draft law and over-sight resolution may differ from the initial draft rendering some of our comments non-applicable. Nevertheless, our analysis is based on the latest publicly available version. The main purpose of theDraft law is to define NBU authority over the payment industry more clearly. In particular, it will makepayment systems clearly subject to NBU regulation and oversight as well as provide the NBU with instrumentsfor the enforcement. Oversight resolution sets out how the NBU intends to use the new authority. It should benoted that oversight of payment systems as well as of other financial market infrastructure is one of “inherentfunctions of the modern central bank”64 necessary to ensure financial stability. At the same time, focus ofcentral bank oversight is usually concentrated on “systemically important” and “prominently important” whichare then required to comply with “Core principles for systemically important payment systems (SIPS)”approved by Committee on payment and settlement systems. In Ukraine there is only one SIPS which is theNBU SEP, and it is currently managed by the central bank. Card payment schemes are generally not regardedas SIPS65 nor as “prominently important payment systems” and subject to smaller set of principles such asformulated for example by ECB66. Thus NBU’s goal to conduct oversight of payment systems in Ukraine




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should be encouraged. This means that changes to the law that would clarify NBU’s role in this important taskare necessary. At the same time, oversight must also reflect principles of proportionality, risk-based regulationand international cooperation. The main focus of the oversight should be to ensure that SEP system conformsto principles foreseen by Com-mittee on Payment and settlement systems (CPSS) and forthcoming “Principlesfor financial market infrastructures”. At the same time, draft Oversight regulation foresees relatively lowthresholds that make other payment systems subject to SIPS oversight by the NBU. Also more attention has tobe devoted to joint oversight of international payment systems with other regulators while internationalcooperation may lead to further harmonization of the oversight principles as well as resource sharing.Otherwise, over-sight may lead to unjustified expenditure of NBU resources as well as disproportionalregulatory burden. When exercising the oversight function, the NBU should also consider that currently USdollar may be the largest retail payment instrument in Ukrainian economy. At the same time, the share ofcashless payments remains quite low. Also while a large part of official wage payments is made through bankcards, wages are then cashed through ATM withdrawals or bank branches while the use of POS terminalsremains a relatively unusual occurrence. This situation complicates monetary policy and threatens financialstability. Thus goals of oversight will have to be balanced with the need to promote the development ofelectronic payments. Also NBU as the owner of NSMEP card payment scheme will have to make necessaryarrangements to ensure that conflicts of interest are avoided between interests of NBU as NSMEP owner andthe oversight function of the NBU. This can be achieved through privatization, spinning off NSMEP as aseparate legal entity or ring-fencing NSMEP within the NBU with the segregated budget. Summing up,introduction of the oversight over the payment systems is a salutary goal. But if oversight regulation is adoptedas it is, this goal will not be achieved completely. The NBU may expend large part of its resources for intensiveoversight of non-systemic payment sys-tem while devoting less attention to most critical parts of financialmarket infrastructure. It can lead to disproportional burden on less crucial payment systems and hamper thedevelopment of electronic payments. Other concerns include: possible conflict of interests between NBU’s desire to develop NSMEP and over-sight of payment

systems; possible problems with implementation of the regulations including institutional capacity and

inconsistent application as evidenced by previous experience of new regulations in Ukraine.Aside from the chief goal to provide oversight over the payment systems, the Draft law introduces a number ofprovisions in areas of: Consumer protection of cardholders; Promotion of electronic payments; Operation of international payment system.

In area of consumer protection NBU proposes to require banks to notify consumers about changes in fees,interest rates and other terms at least 60 days in advance. Banks will be required to notify cardholders aboutoperations on their account (probably online or through SMS or email). NBU also tried to establish division ofliability for fraudulent transactions between bank and cardholder more clearly. In particular, liability ofconsumer for disputed transactions is capped at two minimal wages: if he wasn't reckless with his card, if he informed the bank about disputed transactions as soon as possible and if either his card was stolen or payment was made without using the original card.

Bank is also responsible for losses if it fails to inform the consumer about the operation. Expanded consumerprotection will benefit cardholders without imposing undue burden on banks. Limitation of the consumerliability is a common provision of legislation in UK, US, EU and other countries. For example, EU Payment




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Services Directive limits liability for disputed transactions to 150 euro while allowing member states to setlower cards. In US, liability for unauthorized use of debit card is limited to USD 50 if the owner informed thebank that the card was stolen within 2 days. Cardholder is not responsible for unauthorized use of credit cardnumber if the credit card was not stolen. Advance notice about changes of payment card terms is also acommonly accepted international practice although a 60-day notice requirement may be excessive for mostchanges in terms. The 60-day notice may be appropriate for changes in interest rate on credit card debt but itmay be shortened to 30 days for other changes in terms. Mandatory notification of consumers about theiroperations is a more novel proposition. The banks may be forced to increase charges to consumers or retailersto recoup additional costs. On the other hand, increased awareness about operations with payment cards mayreduce fraud. Overall, new consumer protections may somewhat increase costs of servicing payment cards butwill help to protect consumers and will improve competition. Provision on notification about operations needsclarification on the form of notification, possibility of opt-out by consumer and maybe some relief for smallerissuers.To promote electronic payments the NBU offers to expand the mandate to accept payment cards to allcompanies that accept cash payments with cash register machines. Another provision of the draft law allowsTax service and Consumer protection authority to enforce this provision. Finally, companies would beforbidden to charge different prices depending on payment instrument. Improved enforcement of provisionrequiring universal acceptance of payment cards will help to increase the share of non-cash transactions withpayment cards, increase useful-ness of payment cards and decrease cash in circulation. This in turn will help todecrease the role of shadow economy and increase economic growth. At the same time, competition authoritiesshould be vigilant to maintain competition between banks for acquiring services to prevent increase in fees dueto legal requirement to accept cards. Competition should also be maintained between suppliers of POSterminals to merchants. Prohibition on surcharges by retailers for accepting payment cards is also a useful toolto promote non-cash payments. On the downside, Ukrainian tax service is not famous for even-handedenforcement of the law. Thus new enforcement mandate may become another “club” for tax service to wieldwithout positive effects on penetration of electronic payments. Also added requirement for the merchants tosupport NSMEP (or “Ukrcard”) will increase acquiring costs and violate promise of national treatment madeunder GATS to payment card schemes. Recent WTO case against China shows that this may also lead to tradesanctions against Ukraine or com-plicate ongoing free trade negotiations. Draft law also proposes to radicallychange the way how international payment companies operate in Ukraine. Draft law proposes that: NBU itself provides settlement, processing and clearing for all domestic interbank card payment

regardless of payment system. Currently this sector is open for competition and both internationalpayment systems and local payment systems provide this service.

Draft law also requires international card systems to accept payment for their services rendered on theterritory of Ukraine only in hryvnias. Similar requirement was previously introduced in Resolution.Currently some of the payments are made in USD and some in hryvnias.

Guarantee deposits by banks should be placed in the NBU or domestic clearing bank in hryvnias. Thisrequirement also was foreseen in regulation. Another provision allows banks - members of domesticand international payments systems - to issue co-branded cards. Current law provides that design of thecard should be approved by payment system. From economic point of view, these changes if they areaccepted by international card companies, will be detrimental to competition and will have significantcosts that will be borne by the con-sumers. NBU currently provides settlement and clearing for NSMEPpayment system which com-petes with two international payment systems. After changes are adoptedclearing and settle-ment for all domestic interbank payments will be concentrated in the NBU.




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This will remove competition in this segment of the market and make the NBU single provider of the services.In the medium term, it is unclear what incentives the NBU will have to improve the quality of service andintroduce innovations in the market. In the short-term, creation of a clearing center by the NBU will requirecapital outlays that will be financed by either end-users or subsidized by the NBU. In the latter case these costswill be ultimately financed by the budget as the NBU will transfer to the budget reduced profits68. Experiencealso shows that NBU is unlikely to provide more efficient clearing and settlement services than internationalpayment card systems. In the beginning of 2000s, the NBU tried to operate national processing center TOPAZwhich later was closed due to low reliability and inability to handle peak volumes of transactions. After that theNBU created NSMEP system which was intended to become a dominant payment card system and which waslaunched when only few Ukrainians had payment cards. Nevertheless, market share of NSMEP remained lowover years of its existence despite presumably low charges and a number of regulatory incentives to adoptNSMEP. International experience on the issue is mixed. Some domestic card processing networks have lowerprices than international networks69 while others are going out of business as they lose competition70. Somedomestic networks restrict competition and innovation on the market and limit interoperability while others aremore open. In EU absence of inter-operability between domestic payment card schemes led to fragmentation ofthe market and hampered development of single market. It should be noted that most countries have dominantdomestic processing due to historic reasons. Domestic card processing was established as banks started to issuepayment cards or as new interbank payment system was established. Countries that moved to establish thedomestic processor in the country at a later stage usually did this on competitive basis71 with notable exceptionof China. Also this process may be quite long72 and consequently costly. Overall, international experienceseems to show that ability to process payments domestically may improve competition and contain costs onpayments market. However, exclusive domestic processing is rarely advantageous. Economic utility of otherproposed changes is also unclear and will likely introduce additional inefficiencies through increased forexcosts and decreased competition. From legal point of view proposed changes are likely to violate a number ofinternational treaty obligations. These include GATS and TRIPS. They also contradict Ukraine’s foreign policygoal to harmonize legislation with EU acquis communautaire.Under GATS Ukraine promised national treatment and full market access for foreign companies providingwide variety of services including the most of financial ones. NBU responsibility for processing, routing andsettlement will preclude non-residents from providing these services. Other proposed changes also decreasemarket access for non-residents and are likely to be contrary to GATS. While GATS does not limit actionsnecessary for prudential reasons such as financial system stability73 and protection of depositors it is hard tosee such justification in this case. Moreover, prudential motives have to be well justified and cannot be used toavoid commitments under GATS. Under TRIPS agreement compulsory licensing of intellectual property isforbidden. Although the Draft law does not explicitly state that payment systems are compelled to license theirtrademarks for co-branded cards, it may be understood as requiring just that. To remove legal uncertainty draftlaw should be modified to make it clear that any co-branding arrangements require consent of all partiesconcerned. Breaches of WTO obligations are frequently ignored if there are no foreign companies com-planning to their governments or when countries want to maintain their good relations with the countryconcerned. However, in case of payment market US and EU are currently interested in enforcing WTO rulesand they are unlikely to refrain from WTO proceedings. While WTO dispute resolution takes several yearsnegative decision usually is enforced quite quickly and with immediate impact on external trade. As for IMFarticles of agreement, we discussed Ukraine’s obligations under Article VIII. Thus if adopted unchanged draftlaw will complicate negotiations with IMF as absence of currency restrictions was constantly present as a




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condition for IMF assistance over the last several years. From business point of view if draft law is adoptedinternational payment card companies will have to choose: Either to accept the reduced revenues from Ukraine and face the risk that the ef-fect of similar decisions

in other countries will lead to larger losses Or abandon Ukrainian market and wait until Ukrainians ask them back while setting the precedent for

other markets. Both decisions have pros and cons and it is hard to predict what decision will be chosenbut there is a large probability that Visa and Master card will simply pack up and leave accepting short-term losses for longer-term gain. In this case Ukrainian economy may lose part of the revenues fromtourism while Ukrainians will be forced to purchase larger amounts of cash foreign currency to fundforeign vacations and will be limited in using e-commerce sites. Overall economic losses will besignificant while political pressure will also be felt as several millions of Ukrainians visit foreigncountries and shop on the internet every year. Overall, the draft law and oversight regulation needsignificant improvement and will cause more harm than good if approved in the current state.

Credit Unions

Credit Unions as an industry support data sharing and the creation of a credit bureau. There are a total of 619Credit Unions in Ukraine of which 600 are licensed as of end of third quarter 2004. The National AssociationsCredit Unions of Ukraine (NACUU) has approximately140 members who, collectively, account for over 50%of this market. While it is not clear how many loans all credit unions collectively make on a monthly basis, thenumber of applications is in the thousands each day and their business has doubled over the past two years.According to the NACUU, total assets of its membership stand at UAH 261.6 million as of 3rd quarter 20004.See Exhibit 14. Over the first 9 months of 2004, the total assets of its membership increased by UAH 88.3.Credit unions focus their business at the retail level –and often tends to be seasonal i.e., linked to harvests andto holiday periods. The NACUU does not have a central loan database although its members granted over500,000 loans in 2004 with an average loan size of approximately 2000 Hrv. Credit unions largely depend ondeposits from its membership to fund their portfolios. During this period, over 45% of the credit union’smembership received loans. Credit Union membership is approaching 785,000 as of 1st quarter 2005. ThreeCredit Unions (total assets exceed 200 million Hrv) are not members of the Ukrainian National Associations ofSavings and Credit Unions. They represent approximately 40 % of the total market. Credit Unions directlycompete for business with commercial banks engaged in retail lending. The following additional points are useful in assessing the importance of credit unions within Ukraine

and to the business strategy of a credit bureau: a) Membership in Credit Unions continues to grow rapidly. b) Product lines include: mortgages, various micro, retail, social and agricultural loans. c) 50 % of all loans are made in rural areas. d) Many loans are based on the applicant’s salary. Many other loans add tangible security and/or

guarantors. e) Loan investigation includes checking the applicant’s previous borrowing history. The credit unions

will verify employment by reviewing employment record books and/or directly with an employer. Mostlending is on a secured basis.

f) An unknown number of credit unions have databases in which individuals have given their consent(signed) to have their personal information shared.




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g) Credit unions have proprietary databases of their own that could be converted to a standard formatand ultimately provided to a credit bureau. Many credit unions maintain historical information in thesedatabases. The senior management of the NACUU has indicated that many of its members would beinterested in being shareholders of a credit bureau. It is not yet clear that credit unions would shareinformation with non-credit unions.

LEGAL ENVIRONMENT OF THE BANKING SYSTEM

During the reporting period the National Bank of Ukraine was energetic in the area of the legislative regulationof problem issues in the banking activities and activities of the National Bank of Ukraine; such activities wereaimed at overcoming the negative effects of the financial crisis and at recovery of the steady operation of thebanking sector, as well as at ensuring the fulfillment of the liabilities of Ukraine to the IMF in accordance withthe Memorandum on the economic and financial policies that was signed within the Stand-by Program. In2010, there was restored the right of the legislative initiative for the National Bank of Ukraine which stimulatedthe active work on elaboration of the legislative proposals (Resolution No. 20-pn/2010 of the ConstitutionalCourt dated 30.09.2010). Starting from October 2010, the National Bank of Ukraine submitted 4 draft laws tobe considered by the Parliament of Ukraine:– "On Amendments to Some Laws of Ukraine" (regarding the supervision on the consolidated basis). The draftlaw was adopted in the first reading;– "On Amendments to Some Legislative Acts of Ukraine regarding the Harmonization of the Budget LawProvisions". The provisions were included in the Law of Ukraine "On Amendments to the Budget Code ofUkraine and Some Other Legislative Acts of Ukraine". It was approved on 23 December 2010;– "On Amendments to the Law of Ukraine "On Collections for the Obligatory Pension Insurance" (cancellingcollections (fees) for the obligatory pension insurance from operations of the sales-purchase of non-cashcurrency). It was approved on 13 January 2011;– "On Amendments to Article 75 of the Law of Ukraine "On Banks and Banking" (regarding the period ofpowers for the provisional administration). It was approved on 4 February 2011. Before October 2010 thelegislative proposal work of the National Bank of Ukraine was concentrated on the elaboration of draft lawsand regulations and submission of the legislative proposals for consideration by the Parliament of Ukraine (thatwas exercised through the subjects of the legislative initiative, namely: the Cabinet of Ministers of Ukraine,people's deputies of Ukraine and the President of Ukraine). The National Bank of Ukraine elaborated andsubmitted proposals to 70 draft laws worked out by the people's deputies, the Cabinet of Ministers of Ukraineand other government agencies. In line with the Plan of preparing the draft regulatory acts in 2010, theNational Bank of Ukraine elaborated 7 normative and legislative acts attributed to the regulatory acts, out ofthem 2 were approved. Moreover, Resolution No. 223 "On Approval of the Rule for the Procedure of Holdingthe Special Legal Tenders and Performance of Operations with their Use" (planned for 2009), was adopted on30 April 2010. Regulatory activities of the National Bank of Ukraine in 2010 were carried out according to therequirements of the Law of Ukraine "On the Principles of the State Regulatory Policy in the Economic Area".During the year, the effectiveness of 5 regulatory acts was monitored. In the reporting year, the National Bankof Ukraine issued 107 normative and legal acts (resolutions of the Board of the National Bank of Ukraine,instructions, rules, provisions), out of them 40 were registered with the Ministry of Justice of Ukraine. TheNational Bank of Ukraine kept on to work on the adjustment of the banking laws to the laws of the EuropeanUnion. That work was performed in conformity with the Plan of Actions for 2010 on the fulfillment of theNational Program for Adjustment of the Laws of Ukraine with the legislation of the European Union. In 2010,




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the National Bank of Ukraine, its regional branches and structural units kept on to submit claims andcomplaints. 149 claims totaling UAH 487.6 million and EUR 0.22 million were directed to the court, out ofthem 1 claim of the non-property origin was rejected and the others were settled in favor of the National Bankof Ukraine or remained under consideration. In 2010, the National Bank of Ukraine, its regional branches andstructural units were raised 214 claims totaling UAH 3.05 million, out of them 4 claims of UAH 0.03 millionwere satisfied and the others were settled in favor of the National Bank of Ukraine or remained underconsideration. The National Bank of Ukraine was called as the third party in 886 cases. Major portion of suchcases comprised the bank customer claims on acknowledging the credit agreements in the foreign currencies tobe non-valid; some cases were related to the compensation of deposits, or to specifying the credit agreementsand security deeds to be non -valid. In 2010, 43 court suits were initiated for the benefit of the state and theNational Bank of Ukraine upon the prosecutors' claims. In the reporting year, the National Bank of Ukrainesubmitted 398 claims of UAH 26.3 million. Out of the mentioned, 393 claims of UAH 26.0 million weresatisfied, including 1 claim on acknowledging the National Bank of Ukraine to be the creditor of UAH 25.8million; 4 claims remained under consideration. The National Bank of Ukraine was claimed 4 times of UAH0.028 million. The claims were rejected.

FINANCIAL MONITORING ON PREVENTION OF USING THE BANKING SYSTEM FORLEGALIZATION (LAUNDERING) OF PROCEEDS OBTAINED FROM CRIME

During the reporting year, the National Bank of Ukraine fulfilled all measures stipulated by the Plan of Actionsfor 2010 (joint with the Cabinet of Ministers) on prevention and counteraction of legalization of criminalproceeds. The National Bank of Ukraine officials together with the profile Committee of the Parliamentactively participated in the elaboration and finalization of the new edition of the law of Ukraine "On Preventionand Counteraction to the Legalization of Proceeds Obtained from Crime and Terrorism Financing". The draftstipulated for the introduction of a differentiated approach to the identification and learning of the customersbased on assessment of the appropriate risks and introduction to the laws of Ukraine of the current edition of 40Recommendations and 9 Special Recommendations of the FATF and norms of the relative EU Directives. Inorder to keep to the requirements of the said law, the appropriate draft normative and legal acts of the NationalBank of Ukraine have been prepared. Also developed and implemented were the Methods for the assessment ofrisk of violation by banks of the law requirements in financial monitoring. In 2010, the system for preventionof legalization of proceeds obtained from crime and terrorism financing forwarded 0.8 million notices from thebanking institutions to the Specially Authorized Body informing of the financial operations subject to financialmonitoring. During the reporting period, the officials of the National Bank of Ukraine performed 218scheduled inspections and 16 out-of-plan inspections of the banking institutions as regards their keeping to thelaw requirements. In order to support and improve the information provision of the National Bank of Ukraineactivities related to exercising the regulatory and supervisory functions, the National Bank of Ukraine andclosed-type JSC "First Ukrainian Agency of Credit Histories" concluded an agreement on obtaining theautomated access to the "Lost Passport Base". In view of ensuring the appropriate level of cooperation in thearea of prevention and counteraction to legalization of criminal proceeds and terrorism financing at theinternational level, the representative of the National Bank of Ukraine participated in a number of FATFmeetings and European Council Expert Committee on the joint assessment of measures aimed at counteractionto money laundering (MONEYVAL). By results of the measures realized, the positive dynamics were achievedin settlement of the relevant issues, in particular, as regards avoiding the procedure of intensive monitoring ofUkraine from the part of FATF. With the purpose of improving the theoretical and methodological base for




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performing the financial monitoring of the banking activities, the officials of the National Bank of Ukraine tookan active part in the numerous scientific and educational events.

Banking Supervision Developments and Future Risks’

The National Bank of Ukraine exercises regulation and banking supervision in accordance with the provisionsof the Constitution of Ukraine, the Law of Ukraine “On Banks and Banking”, the Law of Ukraine “On theNational Bank of Ukraine” and other legislative acts of Ukraine and regulations of the National Bank ofUkraine. The purpose of banking supervision is stability of the banking system and protection of interests ofdepositors and creditors as to the safekeeping of client’s funds on banking accounts. Supervisory activity of theNational Bank of Ukraine covers all banks, their subdivisions, affiliated and related parties of the banks on theterritory of Ukraine and abroad, offices of foreign banks in Ukraine, as well as other legal entities andindividuals in their compliance with the requirements of the Law of Ukraine “On Banks and Banking” as toperforming banking activity. In order to exercise its functions, the National Bank is entitled to obtain free ofcharge from the banks, bank unions (associations) and legal entities that have been granted a license by theNational Bank to perform certain banking transactions, as well as from the persons whose activities aresupervised by the National Bank pursuant to the Law of Ukraine “On Banks and Banking”, the information oftheir activities and explanations with regard to the obtained information and effected transactions. The obtainedinformation shall not be disclosed, except in the cases prescribed by the laws of Ukraine. In the course ofbanking supervision, the National Bank of Ukraine has the right to require that the banks and managers thereofeliminate banking legislation violations, fulfill NBU regulations in order to avoid or to overcome undesirableconsequences, which could jeopardize safety of the funds, entrusted to these banks or inflict damage on aproper banking activity. The National Bank of Ukraine carries out the banking supervision in the form of on-site inspections and off-site supervision.

Financial monitoring

The following laws constitute the legal framework in the sphere of prevention and counteraction to thelegalization (laundering) of the proceeds from crime or financing terrorism:- Law of Ukraine “On Prevention of and Counteraction to the Legalization (Laundering) of the Proceeds fromCrime, or Financing Terrorism”;- Law of Ukraine "On Banks and Banking";- Criminal Code of Ukraine;- Code of Ukraine on Administrative Offenses.

The National Bank of Ukraine is the entity of state financial monitoring which exercises state regulation andsupervision in the sphere of prevention and counteraction to legalization (laundering) of the proceeds fromcrime or financing terrorism with regard to banks, payment institutions and members of payment systems beingbanking institutions. In order to prevent using the banking system to legalize (launder) the proceeds from crimeor finance terrorism the Resolution of the Board of the National Bank of Ukraine #189 of 14 May 2003approved the Regulation on Implementing the Financial Monitoring by Banks.




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INTERNATIONAL COOPERATION OF THE NATIONAL BANK OF UKRAINE WITH CENTRALBANKS AND BANKING INSTITUTIONS OF OTHER COUNTRIES

In 2010, cooperation of the National Bank of Ukraine with central banks and banking institutions of othercountries was further developing. Management and officials of the National Bank of Ukraine participated inmore than 40 international events. Thus, cooperation of the National Bank of Ukraine with the Central Bank ofthe Republic of Belarus was in progress. During the year, the Tenth and Eleventh meetings of the AdvisoryBoard of the central banks of Ukraine and Republic of Belarus were arranged. Moreover, within the frameworkof the Ukrainian-German cooperation the twelfth meeting of the working group "Banks" of the German-Ukrainian Top Level Group in the economic cooperation issues was arranged in June 2010. In order toexchange the experience and get to know the current economic situation and progress of the banking system,meetings of the National Bank of Ukraine management and officials took place with the representatives ofcentral and commercial banks of other countries, namely: representatives of the National Bank of the Republicof Belarus, People's Bank of China, National Bank of Moldova, the embassies of Austria, USA, FRG, theNetherlands, Canada, France, Luxembourg, public corporation "Deutche Bank Ukraine", the InternationalFinancial Corporation, German Consultative Group, rating agencies Fitch Ratings and Standard & Poors, PJSC"Erste Bank", the representative office of "Commerzbank AG" in Kyiv, etc. In general, almost 400 jointmeetings with participation of the foreign persons have been arranged. Constant work advanced in the jointbilateral inter-governmental commissions and also in the discussions as regards entering the internationalagreements, in particular, between Ukraine and the Republic of Singapore, Canada, Iceland, Brazil, BurkinaFaso, Philippines, Israel, etc. During 2010, the National Bank of Ukraine was active in the elucidation ofmajor measures realized with regard to development of the banking system of Ukraine and the relevantexchange of information with management of the central banks of the European countries, CIS and the People'sRepublic of China.

COOPERATION OF THE NATIONAL BANK OF UKRAINE WITH THE INTERNATIONALFINANCIAL AND OTHER ORGANIZATIONS

Similarly to the previous years, the international activities of the National Bank of Ukraine in 2010 were aimedat the extension of cooperation with the international organizations.

Cooperation with the International Monetary Fund

One of the important factors in order to form the investment climate of our country, as well as the indicator toestablish the relationships with other international financial organizations and foreign investors appears to bethe cooperation with the International Monetary Fund (hereinafter, IMF). During the reporting year, theNational Bank of Ukraine cooperated with the IMF in the issues related to observing the commitments ofUkraine within the context of realization of the Stand-by Program; facilitating the work of the IMF missions, inparticular, within the framework of the Stand-by Program realization, the assessment of security mechanismsas well as other technical missions; working out the IMF papers that resulted from the Ukraine membership inthe IMF; providing recommendations as to the position of Ukraine in any question, in particular, during votingprocedures, etc. Also, the management of the National Bank of Ukraine took part in the Annual IMF Meeting,Spring Meeting, meetings of the World Bank Constituency Group Governors headed by the Netherlands andUkraine, other bilateral and multilateral meetings with the IMF representatives and also in preparation of the




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information and analytical papers for such meetings. In 2010, the primary area of cooperation of the NationalBank of Ukraine with the IMF was purposed at realization of the new Stand-by Program. In July 2010, the 29-month program of SDR 10 billion (nearly USD 15 billion in the equivalent) was launched. Within thisprogram on 30 July 2010 Ukraine received the first tranche of SDR 1.25 billion (about USD 1.9 billion), out ofthem the Government of Ukraine received SDR 675 million (about USD 1.0 billion) and the National Bank ofUkraine received SDR 575 million (about USD 879.0 million). Within the terms of reference, the NationalBank of Ukraine met all commitments of the mentioned program and implemented all measures aimed atproviding the steady and long-term economic growth, reduction of the inflation rate, recovery of the investortrust to the banking system and its stabilization, etc. In December, the IMF Executive Directors finished thefirst revision of the Ukraine fulfillment of the Stand-by Program. By its results it was decided to disburse thesecond tranche that came to Ukraine on 29 December 2010 in the amount of SDR 1 billion (about USD 1.5billion), out of them the Government of Ukraine received SDR 655 million (about USD 978 million) and theNational Bank of Ukraine received SDR 345 million (about USD 521 million). The 14th general revision ofthe quota holdings and reforming the IMF management system approached the final stage. By the results of afew years' work, the member states including Ukraine, voted in favor of the new distribution of quotas in theIMF and also of the new IMF management system.

Cooperation with the World Bank

In 2010, the cooperation of the National Bank of Ukraine with the World Bank Group (hereinafter, WorldBank) advanced within the framework of realizing the Strategy for Partnership of the World Bank and Ukrainefor 2008–2011. During 2010, the measures purposed to receive money to the state budget within "The 2ndFinancial Sector Adjustment Loan" were carried out (it is expected to receive USD 350 million). The project isintended to consolidate the joint efforts of the Cabinet of Ministers of Ukraine and the National Bank ofUkraine aimed at the introduction of a complex system for capitalization of the problem banks withparticipation of the state, consolidation of the banking system, strengthening the insurance deposit system andincreasing the trust of the society to the banking system. Also, the joint realization of the project“Development of the State Statistics System for Monitoring of the Social and Economic Transformations" wasin progress. The National Bank of Ukraine kept on the agent servicing of the Credit Lines provided by theWorld Bank for the Ministry of Finance of Ukraine in support of the micro-, small and medium-sizedenterprises in the regions where the coal industry mines had been closed (35 projects of USD 33.7 million wereapproved under the Credit Line ) and to support the local executive bodies which took on their balance sheetsthe social infrastructure objects in the regions where the coal mines had been closed (26 projects of USD 7.2million were approved under that credit line). As of 1 January 2011, the residual debts under the credit linesamounted to USD 3.7 million and USD 1.2 million, respectively. The World Bank Technical AssistanceProject (funds from the Netherlands Grant TF 055212) was provided by the program for reforming thefinancial sector of Ukraine.

Cooperation with the European Bank for Reconstruction and Development

The cooperation between the National Bank of Ukraine and the European Bank for Reconstruction andDevelopment (hereinafter, EBRD) went on within the framework of promoting the development of privatebusiness initiative. In the reporting year, the implementation of the project "The 2nd Credit Line for small and




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medium-sized enterprises (SME-2)" was finalized. In November 2010, the National Bank of Ukraine paid theresidual debts under SME-2. In December the final audit report of the Project was prepared by the independentauditor PricewaterhouseCoopers. In 2010, the implementation of the EBRD grant of EUR 1.2 million wasfinalized. The grant was given in conformity with the agreement between the National Bank of Ukraine and theEuropean Bank for Reconstruction and Development in order to compensate a part of costs for the diagnosticexamination of the Group 3 and Group 4 banks that was intended to determine their current and future financialsoundness (solvency). In current and future financial soundness (solvency). In August 2010, 117 banks ofGroup 3 and Group 4 were compensated the cost for the diagnostic examination totaling EUR 0.5 million.Among the factors of cooperation with the EBRD, the issues of improving the activities of the said institutionin our country still remain. Among them one can emphasize the question of carrying out transactions in thenational currency to be introduced by the said institution.

Cooperation with the Bank for International Settlements

One of the important areas of the international activities in 2010 appeared to be the cooperation with the Bankfor International Settlements (hereinafter, BIS), that was realized through participation of the National Bank ofUkraine in the measures of the above institution and in the regular talks on the entry of the National Bank ofUkraine into the BIS.

Cooperation with the CIS Inter-state Bank

In order to provide the constantmonitoring of the reforming andre-organization processes of theCIS Inter-state Bank(hereinafter, the Inter-stateBank) and to follow thepositions of other member statesin 2010, the representatives ofthe National Bank of Ukraineparticipated in the meetings ofthe CIS Inter-state BankCouncil. During the reportingyear, the National Bank ofUkraine took part in theelaboration of the newconstituent papers of thatinternational organization,namely, draft Agreement on theInter-state Bank and Articles ofAssociation, developed inconformity with the resolutionof the Board of Heads of theStates (Presidents) and Board of




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the Heads of Governments (Prime-Ministers) on a more precise definition of the Inter-state Bank functionsunder the current conditions. Also there was worked out the draft Concept for Development of the Bank for2010–2015. In addition, the draft Agreement on the procedure and rules of the banking activities on theterritory of Ukraine and the draft Agreement on the conditions of residence on the territory of Ukraine(developed by the Inter-state Bank in order to stimulate its activities in Ukraine) were analyzed. During thereporting year, the officials of the National Bank of Ukraine worked eagerly in the area of establishment of thepayment/settlement system for the member states of the Inter-state Bank based upon the use of the nationalcurrencies of the CIS countries. In 2010, the National Bank of Ukraine participated in working out the issuesrelated to specifying the Ukraine position as a member state of the Inter-state Bank on further format ofcooperation with the said international institution. The cooperation with the Black-Sea Bank for Trade andDevelopment kept on.

Cooperation with the German-Ukrainian Fund

In order to follow the "Grant Agreement" signed by the National Bank of Ukraine and the GermanReconstruction Credit Institution (KfW), the program of the German Ukrainian Fund (hereinafter, GUF) wasrealizing. During 2010, within the framework of the agreements concluded by the banks participating in theGUF Program for granting micro-credits, 126 credits of over EUR 4.2 million were granted, which was almostthree times more than the amount of credits given in 2009. As of 1 January 2011, 5 credit agreements enteredbetween the GUF and participating banks of EUR 10.4 million were effective. During the whole period of theGUF program in force, starting from 2001, 34 agreements totaling EUR 43.5 million were entered between theGUF and participating banks. Within the agreements concluded by the banks participating in the GUF Programon granting micro-credits, 161 thousand credits of more than EUR 680 million have been granted. As of 1January 2011, 260 credits of over EUR 5.6 million remained outstanding.

Cooperation with other international institutions

Taking into consideration the fact that European integration remains the priority of Ukraine in its foreign anddomestic policies, in 2010 the National Bank of Ukraine paid substantial attention to the cooperation withEuropean Union (hereinafter, EU). The key issue of the agenda in the Ukraine – EU relationships was thenegotiating process on entering the Agreement of Association (in place of the valid Agreement on thepartnership and cooperation between Ukraine and European Union) that should also include an integrationcomponent, namely, the Agreement on the establishment of the free trade zone. Similarly to the previous years,the National Bank of Ukraine took an active part in preparing the negotiating materials and the positiondocuments, as well as in elaboration of the said draft agreements and in the XI–XIII rounds of negotiations. Inaddition, in 2010 worked out were the issues related to the following:– obtaining by Ukraine of the macro-financial assistance from EU; in particular, the draft Memorandum ofUnderstanding between Ukraine and EU as well as the draft Credit Agreement between Ukraine and EU wereworked out;– draft agreements between Ukraine and EU on financing the program "Support of the Implementation of theEnergy Strategy of Ukraine in the area of Energy Efficiency and Recoverable Energy Resources" and theprogram "Fostering Mutual Trade through the Removal of Technical Barriers in the Trade between Ukraineand EU";




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– draft Agreement on the establishment of the free trade zone between Ukraine and Canada, as well asfinalizing the elaboration and preparation for signing of the Agreement on the establishment of the free tradezone between Ukraine and the European Association for Free Trade. During the reporting year, therepresentatives of the National Bank of Ukraine went on to work actively in the organizational structures whichprovided cooperation with EU in the different areas, such as: the Committee on cooperation between Ukraineand EU, its industrial sub-committees and the Board in the Ukraine – EU cooperation issues. Also, the NationalBank of Ukraine participated in the preparatory events on attraction of the macro-financial assistance from EUin the amount of EUR 610 million.

During the year, the active work advanced on realization of the EU Twinning Project "Improving the NBUpotential through approaching the EU standards of activities of central banks". Within the framework ofbilateral talks between Ukraine and the countries striving to acquire the WTO membership, the officials of theNational Bank of Ukraine considered documents regarding the Ukraine access to the markets of services ofBosnia and Herzegovina, the Islamic Republic of Iran, the Libyan Republic and the Republic of Serbia. Theissues related to looking for the optimal format of cooperation with such financial organizations as the Euro-Asian Bank for Development, the Anti-crisis Fund of the Euro Asian Economic Community were thoroughlyexamined, namely: the activities of the said institutions, possible membership of Ukraine in those structuresand obtaining the economic benefits from participation in their work as compared with other internationalfinancial organizations, etc.




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Medical ServicesHealthcare Policy Insights

During the 20 years of Ukraine’s independence the lifeexpectancy of Ukrainians at birth has deteriorated: from70 years in 1990 to 68 in 2008, although it has returned to70. Ukraine is the only country among its neighbors wherethis indicator in 2008 is the same as it was back in 2000.Moreover, Ukraine shares with Russia the lowest lifeexpectancy value in Europe. It seems obvious thatUkraine’s healthcare policy has to be significantlyimproved.

Reimbursement system and compulsory medicalinsurance system

Each year almost 33 million Ukrainians turn to hospitalsfor help. In up to 45 percent of all cases it is for arespiratory disease. Diseases of the circulatory andgenitourinary systems, as well as injury, poisoning, andcertain other consequences of external causes, eachrepresent 7 percent of the total number of illnesses (seeFigure 1). However, this figure does not make clear that in2008 Ukraine was in 188th place out of 193 countries

according to number of estimated total deaths per capita caused by cardiovascular diseases. In addition,Ukraine has the second highest percentage of HIV prevalence among adults aged 15 to 49 in Europe and thehighest among the CIS countries; in 2009 it took 131st place among 145 counties in number of deaths due toAIDS, coming in between Ghana and China. According to the World Health Organization, Ukraine andMoldova were in 2009 the countries with Europe’s highest numbers of deaths due to tuberculosis among HIV-negative people: 26 people per 100 000 population. The market for medical services and the medical caresystem in general remain significantly underdeveloped. This is due, first of all, to lack of financing from stateand local budgets and inefficient use of available funds. this indicator in 2008 is the same as it was back in2000. Moreover, Ukraine shares with Russia the lowest life expectancy value in Europe. It seems obvious thatUkraine’s healthcare policy has to be significantly improved. Moreover, the government’s unclear vision andthe lack of open discussion concerning a strategic plan for healthcare system development and declared reformshold back sector competitiveness. While formally a country with free medical care, Ukraine remains the onlyEuropean country without any reimbursement system in terms of expenses for ambulatory treatment andrelated medicines. This does not provide for the existence of facilities for improving quality of life or forincreasing Ukrainians’ life spans. We believe that step-by-step implementation of a reimbursement system onthe basis of the experience of both post-communist countries and major world democracies will create thegrounds for developing the system. Moreover, introduction of compulsory medical insurance shouldsubstantially improve the situation as regards financing healthcare.




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Figure 151 The dynamics and structure of first -time registered disease in Ukraine in 2010

IPR and a transparent system of market authorization for medicines

Since 2008, when Ukraine became a WTO member, its legislation protecting the rights of intellectual propertyowners has developed significantly. This has been an important step towards the Ukrainian market’s beingcompetitive and attractive for foreign investors in the pharmaceutical and healthcare sector. In addition, thecurrent market authorization (registration) system for medicines is acknowledged as advanced. Taking intoaccount the recently announced plans to adopt the new version of the Law on Medicines, it is crucial to ensurea high level of intellectual property protection in the sector, the efficiency of enforcement mechanisms and thefull transparency and efficiency of the market authorization system in the country. This protection should ofcourse be in line with a modern approach to access to medicines and medical treatment, the sort of approachused in countries with market economies (which Ukraine has been for many years).

A transparent and efficient quality control system

Equal treatment and non-discrimination principles with respect to both locally produced and importedmedicines should form the cornerstone of the quality assurance system for medicines in Ukraine. Despitenumerous rumors that there is a significant amount of counterfeit products on the domestic market, there is nocompelling evidence for that opinion. The role of the state as regulator, which is without a doubt veryimportant, must in no case replace its role as a guarantor of the physical accessibility of medicines. Neithertechnical barriers to import nor unjustified bureaucracy or overregulation should start to characterize the




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Ukrainian market in terms of its quality control system. Moreover, increasing transparency in this sphere willstrengthen Ukraine’s competitiveness on global markets even more.

Medicine import substitution

There are certain risks to implementing an inadequate medicine import substitution policy for foreignpharmaceutical companies specializing in R&D based on the Draft Concept of the State Target Program“Development of Import Substitution Production in Ukraine and Substitution of Imported Medicinal Productsby National, Including Biotechnological, Products and Vaccines” for 2011–2021. It is important that theprogram protect the intellectual property rights of foreign pharmaceutical companies and improve patients’health by guaranteeing their access to quality and safe medicines. The Draft Concept should exclude anypossibilities for corrupt schemes in state procurement tenders and unjustified discrimination against foreignmanufacturers. The criteria to be applied in the governmental import substitution program are also important.Foreign companies are ready to provide price discounts at state procurement tenders; this document, however,does not provide for transparency in the realization of import substitution policy. Draft Law #7412 “On theAmendments to Article 9 of the Law of Ukraine ‘On Medicinal Products’ Regarding Bringing the RegistrationProcedure for Medicinal Products into Correspondence with International Standards” (passed in the firstreading on April 19th, 2011) indicated heightened government pressure on the import market for medicinalproducts. It is important to include such terms as “data exclusivity” and “patients’ rights” into the State TargetProgram. There are also IPR risks involved in import substitution policy, in the plans for preferences fornational medicine producers, in violations of GATT/WTO rules, etc. The Chamber Healthcare Committeesupports the idea of import substitution, which should be openly discussed and developed with the involvementof experts and all interested parties. In its current version, however, the Draft Concept does not protect theinterests of patients or of foreign and Ukrainian pharmaceutical producers. It is important to establish afavorable climate for the development of a pharmaceutical market first. This is possible only after the adoptionof the corresponding Law “On Medicinal Products.”

HEALTH SECTOR

Despite initiation and partial implementation of numerous reforms of the health care system over the lastdecade, the system in general retained features which no longer harmonize with the overall market economyenvironment as such. As a consequence, Ukraine is at risk of losing, in many ways, its connection to progressin medical science and modern trends in health system development, as well as to benchmarking of healthperformance indicators with those of European countries.

HEALTH CARE SERVICE

Existing mainly budget-financed health care system has been reflecting insufficient level of medical servicebecause of insufficient resources, low performance and evaluation criteria for health institutions, and absenceof motivation for health care professionals and institutions for improvement of the quality of medical aid.Ukraine remains the last country in Europe lacking normal reimbursement system.




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PHARMACEUTICAL PRODUCTS

The system for preventing access of the low quality generic products to the Ukrainian market has to beimproved. Ukrainian heath care sector is suffering from access to the pharmaceutical market of the low qualitygeneric products with unclear effectiveness/safety profile. Those products are imported as ready-for-usepharmaceuticals or in bulk for future packaging and labeling as Ukrainian products. Existing system of marketaccess can not prevent entrance of such products because of division of quality control during products’expertise for authorization purposes and generally accepted evaluation of the level of production facilities andprocedures. Furthermore, such products with unclear quality/effectiveness are being promoted with violation ofgenerally accepted promotional practice making pharmacotherapy ineffective and, partially, dangerous.

Inappropriate Application of Import Customs Rules to Transiting Pharma Goods

Currently Ukrainian customs authorities request Ukrainian marketing authorization for pharmaceuticalscrossing the Ukrainian border, even if only for transit through local customs warehouses – from the EU to, forexample, the Caucasus or Central Asia. In other words, importation rules are being applied to transiting goods,which is not absolutely appropriate.

MEDICAL DEVICES

Import and Trade Barriers for CE Labeled Medical Devices

Due to the fact that Ukraine does not recognize the CE labeling for medical devices, the products with CE labelshould go through a very long and expensive procedure of registration, including technical, pre-clinical, clinicalexaminations and, in some cases, certification. The current procedure creates an additional trade barrier to freeaccess of the medical devices with the CE labeling to the Ukrainian market and contradicts the CouncilDirective 93/42/EEC dated 14 June 1993 concerning medical devices. At present there are some draftregulatory acts developed to be adopted as the Regulations of the Cabinet of Ministers focused on thefollowing: Technical Regulations on Medical Devices, Technical Regulations on Active Implantable MedicalDevices and Technical Regulations on In Vitro Diagnostic Medical Devices. The main difference from the EUMedical Devices Directives is that the draft regulations do not provide for recognition of the CE label onmedical devices after passing conformity assessment procedures established by the EU Medical DevicesDirectives. As envisaged by these regulations all medical devices (including CE labeled devices) are subject tothe repeated conformity assessment procedure in the Ukrainian certification centers and after that must belabeled with the Ukrainian National Conformity Mark. This is practically an unfeasible condition for theEuropean manufacturers due to technological reasons and it is probably not acceptable for the Ukrainianmanufacturers planning to sell their devices on foreign markets as well. Hence two problems arise: Problem 1:Non-recognition of CE mark by Ukraine and Problem 2: Ukrainian standards (including medical devicesstandards) are not harmonized with international ones.

Introduction of Medical Devices to the Market

At present there is no unified document that regulates medical device registration and turnover in Ukraine. Itresults in duplicating functions by different state bodies. The example of function doubling is confirmed by




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similar trails conducted by the State Service on Medical Drugs and Medical Devices and the State Committeefor Technical Regulation and Consumer Policy during the registration process and certification of the medicaldevices that are subject to compulsory certification.

Customs Classification of Medical Devices

At present medical devices in Ukraine are classified according to the codes (customs codes) under UkrainianClassification of Goods for Foreign Economic Activity that falls into conflict with the European Directive93/42/EEC where medical devices are classified as per safety classes. Though a safety class is determinedduring medical device registration process, this safety class determinations rather a formal action. Theclassification uncertainty causes the problems:• In the process of registration of medical devices;• Upon import of medical devices.Problem appearing during the process of medical device registration are as follows:If a medical device is not mentioned in the Order of the Ministry for Health on Approval of the List of MedicalDevices Subject to State Registration (Re-registration) in Ukraine No. 393, dated 4 August 2005, thatdetermines the list of medical devices which are subject to registration in Ukraine based on custom codeclassification system, it is absolutely impossible to register and import this device to Ukraine. Problems appearespecially with high-tech medical devices, which are introduced to Ukrainian market for the first time.Problem appearing during import of medical devices are as follows:Though a medical device code as per Ukrainian Classification of Goods for Foreign Economic Activity isdefined on the basis of the Chamber of Commerce and Industry evaluation decision and is indicated in themedical device registration certificate. Customs authorities have the right to change this code in the process ofcustoms clearance at each delivery of the product. Moreover, different customs offices could define differentcodes to the same medical devices. Thus if the customs code is changed, regulatory status of the medical devicealso might be changed that might result in necessity of its registration in other state authorities, certification andchange of customs tariffs. Such an approach creates obstacles to import of medical devices and makes theimport procedure non-transparent and unpredictable for manufacturers and suppliers.

Unpredictability of the Legislative Acts on Medical Product Circulation and Impossibility of TheirImplementation

The main problem of medical products circulation lies in the unpredictability of the changes introduced into thecurrent legislation that does not allow the medical device manufacturers to adapt the manufacturing processaccordingly and results in the blockage of their import to Ukraine. The example of such unpredictability is therequirement to include the Ukrainian registration certificate number to medical device labeling. Thisrequirement had initially been introduced on the basis of the letter from the State Service on Medical Drugs andMedical Devices to the customs authorities of Ukraine without preliminary notification of medical devicemanufacturers supplying products to the Ukrainian market. Moreover, according to the medical deviceregistration regulations the registration certificate is valid for 5 years in Ukraine. Every 5 years registrationnumber is going to be changed that requires a continuous adaptation of the labeling by the medical device andmedical equipment manufacturers. This requirement significantly impacts import of medical equipment




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whereas it is not possible to change the labeling because of manufacturing procedure standardization. As far asother medical devices are concerned it takes at least 6-12 months to adapt the labeling and get approvals for themanufacturing process. As a result it causes gaps in medical device and medical equipment supply to Ukraine.

PUBLIC PROCUREMENT

Insulin Procurement – Violation of Competitive Conditions

Procurement of insulin injections or tablets is an example of consistent violation of the Ukrainian Laws onProcurement of Goods, Works and Services using State Funds No. 1490-III, dated 22 February 2000, and onProtection of Economic Competition No. 2210-III, dated 11 January 2001. The violation is about favoring theformation of monopoly status for certain business entities, thus impeding the establishment of a healthycompetitive environment on the market.In particular, the following provisions in legislation are being disregarded:

Requirements of Article 5 of the Ukrainian Law on Procurement of Goods, Works and ServicesUsing State Funds prohibiting discrimination against participants in procurement conducted bythe state;

The procedure for procuring from a single contractor, as defined in the Ukrainian Law onProcurement of Goods, Works and Services Using State Funds (paragraph 5, Article 33) isregularly applied without grounds, favoring the monopolization of certain market segments anddiscriminating against other business entities. Procurement from one contractor is provided forby the Law only as exceptions in specific cases, which, as a rule, do not apply to pharmaceuticalpreparations. The above actions are defined in paragraph 3 of Article 15 of the Ukrainian Lawon Protection of Economic Competition as anticompetitive actions of state and local authoritiesand administrative and controlling bodies, and should be brought under control by the UkrainianAntimonopoly Committee – but in fact, this does not take place.

National List of Essentials and Clear Criteria for Public Procurements

The issue of forming the National List of Essential Medicines and Medical Devices has recently gained utmostimportance, since it will serve as a basis for the future health financing system. The procedure for forming theList and defining inclusion criteria for it has been developed by the former leadership of the Ministry forHealth and agreed with all important market players and experts in the industry. The National List of EssentialProducts was approved by the Cabinet of Ministers Resolution No. 400, dated 29 March 2006. The procedureof selecting medications for the List is regulated by Cabinet of Ministers Resolution No 1482, dated 16November 2001. The latter Resolution and its implementation system allow avoiding non-purposeful,discriminatory and non-transparent selection of products for future budget coverage, procurement ofmedications of doubtful efficacy and safety, and directing funds to procurement of medications not essential forthe health system. Furthermore, the Ministry for Health appears to distance itself from working out clearcriteria to determine efficacy and safety of products subject to state tenders. This makes purchases nopurposeful and non-transparent, and is finally reflected in purchasing products of low quality and low safetyprofile.




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Healthcare for foreigners

Emergency medical insurance

Foreigners are encouraged to buy emergency healthcare insurance from UkrInMedStrakh (or ProstoStrakhuvannya) for the duration of their stay in Ukraine. In some cases — for instance, in order to register withthe OVIR — this insurance is mandatory. Fortunately, the it is not terribly expensive (roughly $100 USD forone year). The insurance card includes a 24-hour hotline with English speaking staff, and the procedure fordetermining what sort of thing constitutes an "emergency" seems to be fairly lenient. For instance, the authorreceived a free check-up for a bad cold, as well as a knee X-ray for a minor knee injury from backpacking.However, after the initial visit you may have to pay for subsequent treatment, and definitely for mostmedications.

Medical insurance in Ukraine

Ukraine has a special emergency medical insurance policy for foreigners that mostvisitors to Ukraine are required by law to buy in Ukraine, either at the airport or at theinsurance company's office in town. Some sources say you are not required to buy theinsurance if you have an insurance policy of your own that covers you while inUkraine, See the Ukraine Minister of Foreign Affairs website for a list of countriesand diplomatic positions that are exempted from this requirement. In any case, thisinsurance is quite inexpensive, and all you need to do to sign up is present yourpassport and tell the worker the time period you need coverage for .

Standard free state healthcare

Theoretically foreign residents can obtain free healthcare at clinics associated withtheir place of temporary residence, but this might be restricted to foreigners who areregistered with the ZHEK and have a propiska, or registered address. This typically includes those who are inUkraine for studies, legal employment, or permanent residency. Some foreigners will find service throughstandard state channels to be sub-standard, especially if complex medical procedures are necessary.Furthermore, there will be much more checking of documents.

Private clinics

Ukraine has plenty of private clinics where one can get adequate healthcare with fast service, very littlewaiting, and no documents. You can just walk in and schedule an appointment. These clinics are generallyoriented towards the middle class. Here are some prices that seem to be fairly representative of Kiev in summer2010 (given in USD):

$19 - Visit to a general (family) doctor with an initial examination$36 - house visit of general doctor with initial examination$13 - Follow-up visit in office

Days ofcoverage

Price(USD),2008

30 $1260 $2390 $3491-120 $41121-150 $48151-180 $56356 $100

Figure 152 Medical insurance inUkraine

http://www.tryukraine.com/info/visas/registration.shtml

http://www.tryukraine.com/info/visas/registration.shtml

http://www.mfa.gov.ua/mfa/en/521.htm




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$19 - Visit to a gynecologist with an examination$9 - Applying stitches to a wound (price per stitch)$11 - Local anesthesia$13 - Thyroid ultrasound$5 - TB fluorography$11 - Back X-ray$9 - Certificate of health allowing you to visit swimming pools$6 - General blood test$4 - General urine test

It is important to find a clinic and doctors that you like. You can generally find a good clinic and good doctorsby talking to friends or by looking for reviews online (in Russian or Ukrainian). Many doctors know someEnglish, but probably very few are in a position to talk to you in English.

VIP clinics

This includes the American Medical Center and similar clinics where patients pay American prices for English-speaking staff and the very latest hi-tech equipment.

Health System of Ukraine - Organizational overview

In 1991, Ukraine inherited an extensive and highly centralized Semashko system, which it was not possible tomaintain through the economic downturn that followed independence. There has been considerabledecentralization in the system; however, in most other respects the system remains largely unreformed.Decentralization has meant deconcentration of functional and managerial powers at the regional andsubregional level. Regional and local health directorates are responsible for health facilities in their territoryand are functionally subordinate to the Ministry of Health, but managerially and financially answerable to theregional and local self-government. Only the State Sanitary-Epidemiological Service and the StatePharmaceuticals Quality Control Inspectorate, each with relevant facilities at the different levels ofadministration, remain fully centralized and vertically subordinated to the Ministry of Health. Consequently,while the Ministry of Health formally takes the lead in developing health policy, implementation is constrained.

Financing

Health care expenditure in Ukraine is low by regional standards and has not increased significantly as aproportion of GDP since the mid 1990s. The proportion of general government expenditure on health as aproportion of total health expenditure was 55.7% in 2007 (WHO, 2009). The bulk of government expenditurepays for inpatient medical services, with only a relatively small proportion (13%) going to outpatient services.Private expenditure primarily consists of out-of-pocket payments, which are high on account of the high cost ofpharmaceuticals; patients generally purchase them at full cost price. Officially, Ukraine has a comprehensiveguaranteed package of health care services provided free of charge at the point of use as a constitutional right;nevertheless “charitable donations” are widely levied in the Ukrainian health system. Government attempts todefine a more limited benefits package have left it to the individual facilities to determine which services arecovered by the budget and which are subject to user charges. This has led to a lack of transparency in the




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system, which has contributed to an increase in informal payments. Most health financing comes from generalgovernment revenues raised through taxation (value added taxes, business income taxes, international trade andexcise taxes). Personal income tax is not a significant contribution to total revenues. Out-of-pocket paymentsalso account for a significant proportion of total health expenditure, and there are some limited voluntary healthinsurance (VHI) schemes. Funds are pooled at the national and the local level, as local self-governments retaina proportion of the taxes raised in their territory. There are also inter-budgetary transfers to boost the coffers ofpoorer local authorities which cannot raise as much revenue. With the exception of a couple of pilot projects insmall rural districts, allocations and payments are made according to strict line-item budgeting procedures asunder the Semashko system. This means payments are related to the capacity and staffing levels of individualfacilities rather than the volume or quality of services provided.

Regulation, planning and management

The Ministry of Health plays the key regulatory role in the Ukrainian health system at the national, regionaland district levels. The Ministry is responsible for the accreditation of all health facilities regardless ofownership, but this is more of a formality than a tool for improving quality of services. Similarly,standardization efforts through the development of clinical guidelines and protocols have been ongoing, butthey are not generally evidence-based and their efficacy has not been monitored. Since 2007, improving thequality of health care has become a more systematic activity and there is a department in charge of assessingthe quality of health care services. As health facilities are owned by local authorities rather than the Ministry ofHealth, management of the system is decentralized, which impedes the implementation of plans developed atthe national level, and there is no central health planning agency. Approaches to capacity planning haveremained almost unchanged since Soviet times. The mechanisms currently in place neither reflect the healthcare needs of the population nor account for regional characteristics of health service provision. There is alsolittle incentive for rational use of resources or cost control over health facilities, which are predominantlyfunded from the national budget and out-of-pocket payments.

Physical and human resources

Ukraine has an extensive health care infrastructure despite a rapid reduction in the number of beds in 1997–1998 in response to severe economic crisis. Ukraine does not have a regular system for monitoring the upkeepof medical facilities and the conditions in which services are provided, but regular inspections by the StateSanitary-Epidemiological Service have found that, in 2007, only 29.6% of health facilities are on mains watersupply and only 21.1% have mains sewerage. Unsatisfactory sanitary conditions are found most often in ruralareas. The lack of systematic updates on the condition of medical facilities and the minimal financing of capitalcosts in the state health system are the two main reasons for the lack of planning in prospective development(construction, renovation) of medical facilities. The Ukrainian health system has also consistently encounteredsevere difficulties with the supply and maintenance of existing technological equipment. The number ofmedical human resources per capita has increased gradually since 1990, but this does not reflect a growth in thenumber of medical personnel so much as a decline in the total population, as the absolute number of doctorshas been falling. At the same time the medical workforce is ageing rapidly as new graduates choose to workoutside the state health system or seek opportunities abroad. The key staff shortages are in rural areas and inprimary care, which has a high turnover. The number of nurses has fallen much more rapidly due to the lowwages and low status of nursing, and the limited possibilities for professional development. This is a trend




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witnessed throughout the Commonwealth of Independent States (CIS) and one which runs counter todevelopments in EU countries.

Provision of services

Traditionally, primary care in Ukraine has been provided within an integrated system by district internists andpediatricians employed by state polyclinics. In 2000 the transition to a new model of primary care based on theprinciples of family medicine began. Family doctors/general practitioners (GPs) make up a third (32.9%) of allprimary care physicians. They work at family medicine polyclinics or in appropriate polyclinic departments,and the overwhelming majority of family doctor/GP facilities and departments are located in rural areas(70%).The inpatient system is a hierarchical system organized into three levels. The first (lower) level is that ofrural hospitals providing basic inpatient facilities. The second (middle) level is the true foundation of thesystem. Secondary inpatient care is provided in central district and municipal multi-profile hospitals, also inchildren’s hospitals, specialized clinics (dispensarii), and specialized hospitals which are located and governedat this organizational level. The third (higher) level is that of regional and supra-regional specializationprovided by regional hospitals, diagnostic centers and specialized clinics, and specialized clinical anddiagnostic centers at the national research institutes of the Ministry of Health and the National Academy ofMedical Sciences. These were originally designed to provide highly specialized medical care to patients withthe most severe and complicated conditions, but there has been some blurring of the lines between secondaryand tertiary care levels.

Health care reforms

The Ukrainian health system has preserved the fundamental features of the Soviet Semashko model against abackground of other changes, which developed on market economic principles. The transition from centralizedfinancing to its extreme decentralization is the main difference in the health system in comparison with theclassic Soviet Semashko model. Although no fundamental reform has taken place, many changes in the healthsector have been initiated and often realized since independence, although most of them were oriented nottowards meeting the health needs of the population but towards solving problems in the health sector. User feeshave been introduced to mobilize additional resources, and sickness funds and VHI have begun to develop. Toreduce government expenditure in circumstances where there was an acute shortage of funds, the stock ofhospital beds was cut by a third. The legal basis was also laid and measures realized which were directedtowards institutional reform of the health sector (for example, to reorient the system towards primary care andintroducing family medicine); and specific quality guarantees for health services were also introduced (thelicensing of medical practice, accreditation of health facilities, standardization of clinical practice).

Assessment of the health system

Despite changes since independence, the core challenges for Ukrainian health care are still the ineffectiveprotection of the population from the risk of catastrophic health care costs and the structural inefficiency of thehealth system, which is caused by the inefficient system of health care financing. Health system weaknesses arehighlighted by increasing rates of avoidable mortality. The recent political impasse has complicated healthsystem reforms and policy-makers face significant challenges in overcoming popular distrust and “fatigue” inthe face of necessary but as yet unimplemented reforms.




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Organizational structure

Overview of the health system

The Ukrainian health care system is still based on the integrated Semashko model. Officially the system isfinanced by general taxation and formally provides universal access to unlimited care free at the point of use inpublic medical facilities. The different levels of public medical facilities are funded directly by the respectivebudgets. But all levels of local budgets (regional, municipal, district and village budgets) are financed throughthe allocation of funds from the central budget according to special formula approved by the Cabinet ofMinisters of Ukraine. Formally, the health system in Ukraine is completely controlled by the state. In theory,management of the system and the coordination of its activities are provided by the Ministry of Health ofUkraine. In practice, however, the Ministry’s influence is significantly limited. The national Ministry of Healthcoordinates and governs the core health system through regional health authorities, which are structuralsubdivisions of local administrations but are functionally under the jurisdiction of the Ministry of Health. Atthe regional level the Ministry of Health of the Crimea AR, oblast (regions), and Kyiv and Sevastopol healthadministrations are accountable to the national Ministry of Health for national health policies within theirterritory. They are also responsible for regional health care facilities which primarily provide specialized andhighly specialized services. At the local level, primary and secondary care facilities and hospitals are owned bythe various tiers of local self-government – district administrations, municipal, city district, village and ruralcouncils. Most medicalservices are provided to thepopulation in facilitieswhich are under local self-government at the regional,district, municipal orvillage level and which aregenerally financed from thebudgetary resources of therelevant tier of thegovernment which areallocated transfers to thelocal self-governmentlevel. However, due topoor government financingof the health system, thepopulation is required topay for outpatient andinpatient pharmaceuticalsas well as provideunofficial remuneration tomedical personnel.




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Figure 153 Overview of the health system

The private sector of the health system is rather small in Ukraine and consists mostly of pharmacies, medico-prophylactic facilities (inpatient and outpatient), and privately practicing physicians. ). They receive theirfinancing mostly through direct payments from the population for medical services and devices. Apart from thedevelopment of a formal private sector, the basic organizational structure of the Ukrainian health system hasessentially remained unaltered since the Soviet period. The Verkhovna Rada (Parliament) sets the goals, majorobjectives, priorities, budget guidelines and regulatory framework for the health sector, and approves thetargeted national health programs. State health policy is then implemented by the Ministry of Health. ThePresident is responsible for ensuring that health policy is implemented in accordance with health carelegislation and the Constitution through the system of executive bodies. The Cabinet of Ministers coordinatesthe development and implementation of comprehensive and targeted national programs, and creates legal,economic and managerial mechanisms to promote the efficient operation of the health system. The Ministry of




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Finance prepares the draft state budget, which is then submitted to the Parliament for approval. This defines thepublic resources to be allocated to the health sector in any given year. The Ministry of Finance is also the bodywhich establishes the requirements for state institutions (including health care facilities) in formulating andimplementing budgets. The Ministry of Health is the leading body within the executive power branchresponsible for implementing health policy and administering state-owned health facilities. The health systemis managed by the Ministry of Health through the regional health authorities in the 24 regional administrationsand two city states of Sevastopol and Kyiv, where the departments are part of the city state administrations.There is also a separate Ministry of Health of the Crimea AR, which is part of the Crimean government. At thenational level, the Ministry of Health is responsible for setting national health policies, and directly managingand funding certain specialized health care institutions which are in state ownership, higher medicaleducational establishments, research institutes, and state-owned medico-prophylactic facilities. The Ministry ofHealth provides vertical management with basic command-and control institutions which provide regulatoryfunctions in the sphere of social health protection (for example, the State Sanitary-Epidemiological Service andthe State Pharmaceuticals Quality Control Inspectorate). The Ministry of Health is also responsible for theorganizational and methodological management of activities in the state medical catastrophe service. The latter,in essence, is a functional interagency body. It consists of medical forces, equipment and facilities at the centraland regional levels, which are independent of local self-government and are instead under the Ministry ofHealth in cooperation with the Ministry of Emergencies, the Ministry of Defense, the Ministry of InternalAffairs, the Ministry of Transport and Communications, the Council of Ministers for the Crimea AR, and stateadministrations for the oblast, Sevastopol and Kyiv cities. Besides this, the Ministry of Health also managesthe undergraduate and postgraduate medical education program, the medical research system and controls asignificant proportion of the centralized state purchase of pharmaceuticals, medical devices and equipment forthe relevant state programs. The Ministry of Defense, Ministry of Internal Affairs, Security Service and Ministryof Transport and Communications all have their own health care facilities for their employees and theirrelatives, which operate in parallel to the main statutory system under the Ministry of Health. The State PenalJurisdiction Department is responsible for the organization of health services within the prison system. TheMinistry of Labor and Social Policy is responsible, among other things, for providing long-term residential carefor elderly people and people with disabilities. The National Academy of Medical Sciences of Ukraine controlsthe research institutes which provide highly specialized medical services. These facilities are financed directlyfrom the state budget through a separate funding stream. Local authorities include district, city district, townand village councils and state administrations. These local authorities are important actors in the system as theyown and co-finance primary care services provided to their local populations. Many nongovernmentorganizations (NGOs) – professional medical associations and patient groups – are planned or in operation, butthey are not very influential actors in the health system. There is no self-governing of the medical profession inUkraine, although this is something that has proved important in ensuring quality and transparency in othercountries of Europe. There are many international organizations working in the Ukrainian health sector, buttheir activities are focused quite narrowly on specific areas such as sexual health, HIV/AIDS and TB.

Decentralization and centralization

In Ukraine, a highly centralized model of decision-making in the health system inherited from the Soviet erahas gradually been replaced by a system in which authority has been delegated to local administrations andself-governing bodies. As a consequence, many recent innovative activities in the health care sector wereinitiated at the regional and local levels rather than the national level. Today, the health system is a complex




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multi-layered system where responsibilities in the health care sector are fragmented among central government(the Ministry of Health and many other ministries and public authorities), as well as 27 regional administrationsand numerous administrative bodies at municipal, district and village levels. Decentralization has meantdeconcentration of functional and managerial powers at the regional and sub regional levels. Functionaldeconcentration means that the system is managed through the Ministry of Health of Crimea AR and the healthauthorities of regional administrations, which are financially and managerially independent, while functionallysubordinate to the national Ministry of Health. Only the State Sanitary-Epidemiological Service and the StatePharmaceuticals Quality Control Inspectorate, each with relevant facilities at the different levels ofadministration, remain fully centralized and vertically subordinated to the Ministry of Health. Deconcentrationof general managerial powers at the regional and subregional levels means that executive functions in theregions and districts are exercised by the relevant local (regional or district) administrations, the heads of whichare appointed by the President. The head of the government in Crimea AR is appointed by its Crimea ARParliament. As outlined earlier, the government of Crimea AR and the other regional administrations have toensure that decisions by local self-governments, including those relating to the health of the population,conform to current legislation. They also coordinate the activities of state services. The heads of localadministrations, in turn, with the approval of the Ministry of Health, appoint the heads of local healthadministrations and their deputies who participate in decision-making. The Minister of Health in Crimea AR isappointed to office by the Parliament, and approves the appointment of the heads of the health facilities as dothe heads of the other regional health authorities. With the enactment of the Law on local self-government inUkraine (1997), significant budgetary authority was delegated to regional and district councils, which pass onmanagement functions in health care to relevant local executive authorities. Somewhat similar relations areseen in Crimea AR between the Council of Ministers, the republic’s Ministry of Health and the representativebodies. At the community level these responsibilities are delegated to councils and their executive bodies,which are by law also responsible for managing the local health facilities and have certain additional powers,including the assurance of accessible health services that are free of charge, development of a network of healthservices, human resource planning, contracting for the training of specialists, provision of pharmaceuticals andmedical devices to certain disadvantaged population groups, accreditation of health facilities, and proposals forlicensing individual entrepreneurial activities in the health care sector. Once again, local self-governments facea division of accountability, to the Ministry of Health for compliance with norms and standards, and to thelocal administrations for funding and management. They are responsible for:• implementing national health policies at the local level;• drafting local budgets and proposals on health care financing and reporting to the councils on expenditureagainst budget;• funding and running public health care facilities;• pooling budgetary and other resources to invest into health care facilities; and• undertaking appropriate action to prevent and eliminate communicable diseases.In contrast, decentralization through privatization has been largely inhibited by provisions of the Constitutionprohibiting the reduction of the existing network of public health facilities. Instead the private sector isdeveloping mainly through the establishment of new private health facilities and medical practices. Localauthorities are given responsibility for organizing their health services subject to strict central regulation.Decentralization of financing, along with increasing recognition of the health care needs of the population, has,however, led to increasing inequalities between wealthier and poorer areas. Deprived regions have beenaffected by the lack of sustainable sources of income and health care has become a heavy burden on localbudgets. A number of communities have found it increasingly difficult to maintain health services in the public




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sector. However, with the passing of the Budget Code (2001), strict rules were established, allowing for inter-budget transfers as of 2002. The volume of transfers is based on a specific formula that takes account offinancial norms of adjusted budget allocations, the number of residents in the territory and an index of relativefiscal solvency. This mechanism has, to a certain degree, leveled differences in budget capacities amongregions and territories. In addition, the Budget Code explicitly defines the types of health facilities that can befunded by budgets at various administrative levels. However, public health care facilities may not be financedfrom more than one budget. The most notable changes have taken place in specialized health facilities. The lawhas provided for centralized financing and management of specialized health facilities at regional level. Theseprovide a range of mental health, TB, dermato - venereological and other services, generally involving lowtechnology but used by a substantial number of patients. The decision to concentrate these services at theregional level has raised concerns among health professionals and decision-makers, specifically in cities wherethese specialized services exist in independent structural units, as the changes may impede integration ofmunicipal health services. The transfer of these facilities to the regional level has also created problems forregional budgets. A number of municipal administrations have therefore decided to formally convert, that is, tore-designate specialized facilities as multi-specialty facilities. For example, one specialist psychoneurologyclinic in Dnipropetrovsk oblast was joined with the pulmonological department of a general municipal hospital.The newly created organization officially became a municipal hospital. The move to strict legislative regulationof public finding of health care facilities led to some streamlining of resource use but created problems inintegrating different levels of service provision.

Patient empowerment

Patient information, rights and choice

By law all citizens have the right to access information about their health and services available to them, butthe mechanisms for accessing such information are not transparent. Patients also have the right to access careof adequate quality, and this is recognized as part of the accreditation process for health facilities, but this hasnot thus far acted as a clear mechanism for quality improvement. Patients officially have a choice of doctor andfacility, but this is difficult to realize due to the way in which the system is financed. Overall, the health systemin Ukraine is not oriented towards the real health needs of patients.

Complaints procedures (mediation, claims)

There is no specific legal mechanism for patient complaints procedures within the health system. It is dealtwith in general legislation regarding complaints (Law on citizens’ appeals 1996) and thereafter to the Law onhuman rightsombudsman under the Parliament of Ukraine.

Patient participation/involvement

Although there are a number of legal provisions for public participation in the health sector and various patientgroups, they have not yet played an active role in policy-making. The necessity of protecting patient rights isnoted in many normative acts, for example in basic legislation about health care and criteria for theaccreditation of health facilities. However, patient rights in the Ukrainian health system are not protectedsystematically. In Parliament in 2007 there was a legislative project for protecting patient rights, which set up




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the legal basis for government policy and regulated relations in the provision and protection of patient rights.However, full consideration of the legislative project has not yet taken place. In Ukraine in recent years, amovement for creating community advisory boards in health care has begun. They are created under the localhealth authorities, medical facilities and independent social organizations, but their influence on the activitiesof the health sector is not yet significant (Angelov, 2007). The population of Ukraine is very critical of thecondition of health care in their country. In an international social survey conducted in 24 countries of Europein 2005, Ukrainians gave their health system the lowest marks of any country – just 2–3 on a scale of 1–10(Golovakha, Gorbachik & Panina,2006). Another piece of social research, conducted in Mykolayiv oblast in2006, found that most respondents felt the health service had poor accessibility and that services were of poorquality (Glukhovskii, 2007). The main source of dissatisfaction in patient complaints is the quality of medicalcare. The Ministry of Health alone receives around 5000 letters of complaint every year. This is only a smallfraction of the total volume of complaints, as the majority of them are sent to and dealt with at a lower level ofthe health system.

Financing

Health care expenditure in Ukraine is low by regional standards and has not increased significantly as aproportion of GDP since the mid 1990s. The proportion of general government expenditure on health as aproportion of total health expenditure was 57.2% in 2008 (WHO, 2009). The bulk of government expenditurepays for inpatient medical services, with only a relatively small proportion (22.7%) going to outpatientservices. Private expenditure primarily consists of out-of-pocket payments, which are high on account of thehigh cost of pharmaceuticals. These are generally purchased at full cost price by patients; significant informalpayments are also levied in the system. Officially, Ukraine has a comprehensive guaranteed package of healthcare services provided free of charge at the point of use as a constitutional right, nevertheless user charges arewidely levied in the Ukrainian health system. Government attempts to define a more limited benefits packagehave left it to the individual facilities to determine which services are covered by the budget and which aresubject to user charges. This has led to a lack of transparency in the system which has contributed to anincrease in informal payments. Most health financing comes from general government revenues raised throughtaxation (value added taxes, business income taxes, international trade and excise taxes). Personal income tax isnot a significant contribution to total revenues. Out-of-pocket payments account for a significant proportion oftotal health expenditure and there are some limited VHI schemes. Funds are pooled at the national and the locallevel, as local self-governments retain a proportion of the taxes raised in their territory. There are also interbudgetary transfers to boost the coffers of poorer local authorities which cannot raise as much revenue. Withthe exception of a couple of pilot regions, allocations and payments are made according to strict line-itembudgeting procedures as under the Semashko system. This means that payments are related to the capacity andstaffing levels of individual facilities rather than the volume or quality of services provided.




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Figure 154 Health care financing flowchart

Health expenditure

The State Statistics Committee of Ukraine is the main source of health expenditure data, but the official dataunderestimate total health expenditure, as they do not fully reflect unofficial payments for health services.National Health Accounts (NHA) have only recently been introduced to better summarize, describe andmonitor health care financing. Based on the approach to the creation of NHA developed by the OECD in 2000,an investigation was completed on total health expenditure from 2003–2004, with particular regard to the




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funding of services for people living with HIV/AIDS (Gotsadze et al., 2006). In this report, official data fromthe State Statistics Committee of Ukraine were used to investigate the expenditures of state and privatecompanies. To estimate donor activity in financing, data were collected through interviews with donors and theanalysis of various reports from national and international organizations. The investigation of out-of-pocketpayments used data from a special household survey undertaken in 2003–2004. The survey included 10 238households and 26 675 respondents. It covered the entire population except for servicemen, convicts,permanent residents of boarding schools and nursing homes, and the marginal population (homeless peopleetc.). Nevertheless, it was felt that the data on out-of-pocket expenditure were underestimated in this study(Gotsadze et al., 2006). Consequently, the State Statistics Committee of Ukraine was advised to revise itsmethods when conducting household surveys for future estimates in NHA. The NHA project materials formedthe basis for the Methodological recommendations on compiling National Health Accounts, which wasapproved by Order No. 137 of the State Statistics Committee of Ukraine on 10 May 2007. As a result, the StateStatistics Committee of Ukraine compiled a generalized table of NHA for the first time in 2005. This chapteruses primarily the official data of the State Statistics Committee of Ukraine. Data from before 1996 areimpossible to compare with the subsequent period. Health care expenditure increased rapidly in 2000 after theprolonged economic crises of the 1990s. Between 1999 and 2006, official health care expenditure per capitacalculated by the State Statistics Committee of Ukraine increased 5.1 times. NHA data showed that total healthexpenditure grew 3.4 times. However, trends in real expenditure levels, which take inflation into account, arelower (only 1.3 times higher for the period 2003–2008). In 1999, the annual increase in total health expenditurewas about 9% less than the previous year as a result of the 1998 financial crisis, which affected nearly all CIScountries. From 2000 to 2003, health care expenditure increased annually (by 9.3% in 2000 up to 24.9% in2003), which reflected the rapid growth of the Ukrainian economy. Political crisis in 2004 slowed economicgrowth and brought negative growth of health care spending in 2005 (by 2.6%). In 2006, the level ofexpenditure increased by 8.1% (and by 7.7% in 2007 and 4.3% in 2008) compared with the previous years (seeTable 3.1). Total health expenditure as a percentage of GDP remains comparatively low for a country in theWHO European Region. The expenditure in US$ PPP (purchasing power parity) per capita reveals trendssimilar to the real level of expenditures for health in national currency with the decline at the end of the 1990sand the following growth in the first decade of the 21st century. According to WHO estimates (WHO, 2010),the full scale of changes from 1996 to 2008 is slightly greater, with expenditures increasing from $176 PPP in2006 to $488 PPP in 2008.




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Figure 155 Health expenditures as a share (%) if GDP




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Figure 156 Health expenditures in US$ PPP per capita in the WHO

The exact level of total health expenditure in Ukraine is difficult to determine, mainly because of problems inobtaining data on health care spending in the informal sector. From 1998 to 2005, total health expenditurefluctuated between 5.0% and 6.5% of GDP, and was close to the average of the CIS countries. NHA data inUkraine show that total spending on health in 2003 and 2004 was 7.0% of GDP, and 6.4% of GDP in 2008.However, NHA data include under-the-table payments in total health care expenditure, whereas the rate ofGDP is calculated based only on official data without including the informal sector, which is substantial, so thismay overestimate the level of total health expenditure as a proportion of GDP. For example, in the first quarterof 2007, the integrated informal sector accounted for 26% of official GDP (Ministry of Economy, 2007).Official health expenditure data show that expenditure fluctuated between 4.5% and 6.0% of GDP between1996 and 2006, reaching its nadir in 1999–2000 (4.5–4.6% of GDP). Health expenditure increased from 2001




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to 2003, but in 2004–2005 it fell again from 7.0% to 6.4%. Overall, growth in total health expenditure as apercentage of GDP did not match the speed of economic growth in Ukraine. Total health expenditure as aproportion of GDP fell in most countries of the CIS following independence from the USSR, and in somecountries, including Ukraine, overall expenditure levels have remained low. In terms of PPP, healthexpenditure per capita in Ukraine is one of the lowest in the WHO European Region, which shows the lowpriority that health care has been afforded in the country. Based on official statistics, the share of publicrevenues in total health expenditure was over 80% in 1996, but fell to 62% from 2000 to 2002. Only between2003 and 2006 was there some increase in the share of government health expenditure in total healthexpenditure (66–68%). NHA, which include informal payments, show that government expenditure in 2003–2008 fluctuated around 60% of total health expenditure. This is low for countries of the WHO EuropeanRegion. More than half of total health care expenditure goes towards providing medical services. About aquarter of expenditure on health care goes to inpatient care; about 13–14% to outpatient care (includingprimary care and specialized outpatient consultations). Both types of services are financed primarily frompublic sources. Ukraine spends a relatively small proportion of current health expenditure on outpatient care incomparison with other countries in the WHO European Region. It has been argued that this reflects aninefficient use of resources as patients who could have been treated as outpatients are instead hospitalized(Gotsadze et al., 2006). Significant sums (about 7%) are spent on rehabilitation care provided primarily insanatoria – a remnant of the Soviet era – where patients spend their vacations and receive restorativetreatments. Ancillary services receive about 4.5% of total health care expenditure. Government sources coverabout half of spending on rehabilitation and a quarter of spending on ancillary services: laboratory tests, X-raysand other diagnostic procedures. This shows that three-quarters of ancillary services are covered by out-of-pocket payments. A relatively small proportion of spending goes to treatment in psychiatric facilities,addictions clinics and day-care hospitals, as well as long-term medical care, where almost all the expenses arecovered by public financing. Total health expenditure as a proportion of GDP fell in most countries of the CISfollowing independence from the USSR, and in some countries, including Ukraine, overall expenditure levelshave remained low. In terms of PPP, health expenditure per capita in Ukraine is one of the lowest in the WHOEuropean Region, which shows the low priority that health care has been afforded in the country. Based onofficial statistics, the share of public revenues in total health expenditure was over 80% in 1996, but fell to 62%from 2000 to 2002. Only between 2003 and 2006 was there some increase in the share of government healthexpenditure in total health expenditure (66–68%). NHA, which include informal payments, show thatgovernment expenditure in 2003–2008 fluctuated around 60% of total health expenditure. This is low forcountries of the WHO European Region.

Revenue collection/sources of funds

There are many different sources of financing for the health system in Ukraine. Since the lack of an appropriateaccounting system makes it impossible to analyze the structure of health expenditure from different sourcesover time, this chapter will deal primarily with data received after the introduction of NHA, that is, from 2003to 2008. However, even the NHA underestimate the population’s participation in direct health care financing(Gotsadze et al., 2006). Data from separate regional surveys indicate that the population’s share of healthsystem financing is higher by about 10% (Kryachkov, Bechke & Boyko, 2000; Litvak, Pogoreliy & Tishuk,2001; Lekhan, Kryachkova & Maximenko, 2007).




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Figure 157 Percentage of total expenditure on health according to source of revenue

Compulsory sources of finance

Central and local self-government budgets represent the major official source of financing for health care. Thetotal budget in Ukraine is derived chiefly from taxation revenues (more than 70% from all kinds of income),non-fiscal income, revenues from trade with capital and other sources. The majority of all fiscal revenues(value added taxes, business income taxes, international trade and excise taxes) goes to the national budget.Local budgets are derived mainly from the part of taxation that is raised in different administrative andterritorial units. This represents about 85% of their fiscal revenues. Local budgets are derived from smallbusiness taxes, land taxes, license fees on certain entrepreneurial activities, vehicle taxes, environmentalpollution payments and local taxes, dues and duties. National tax rates are set in accordance with taxation lawsas determined by Parliament (Verkhovna Rada). Local administrations set the rates for local taxes and dues.There are no taxes specifically earmarked for health financing and there is no system of tax relief for thepurchase of health cover. The tax administration system, comprised of the State Tax Administration of Ukraineand regional and municipal tax authorities, is responsible for enforcing the tax laws, ensuring correct amountsand the timeliness of charges. The Tax Administration coordinates its activities with fiscal authorities and theState Treasury. It reports all taxes received, as well as other charges and fees. Health care funding is considereda state responsibility. In accordance with Ukrainian law, the execution of state duties can be delegated tosubnational levels. In this case, the national budget must assign budget resources in the form of assignednational taxes, fees, mandatory payments or shares thereof to the relevant budgets, or perform transfers fromthe national budget. To determine the volume of inter-budgetary transfers, Ukraine uses the so-called FinancialStandard of Budget Sufficiency – that is, the guaranteed amount of resources transferred for theimplementation of assignments delegated by the state within the limits of budget resources. In reality, thegovernment underfunds allocations, forcing local authorities to use their own resources. In 2005, the revenuebasket of local authority budgets was used to support social programs, including health (Ganushchak, 2006).As financial resources are collected through a system of general taxation this should mean health care fundingis progressive. However, the Ukrainian system has a number of specific regressive traits. For example, the




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existence of two taxation subsystems – a standard and a simplified system – undermines the integrity of thetaxation system. Further, widespread tax evasion and the existence of tax benefits cause significantirregularities in the distribution of the tax burden; there is a single flat income tax rate for people with differentincomes. As a result, the Ukrainian taxation system is not as progressive as it could be and a number ofloopholes challenge the stability, administrative simplicity and efficiency of the system. On 13 June 2007,Ukraine passed the National plan for health care development by 2010 (Cabinet of Ministers Decree No. 815)to reform the health system. One chapter deals with strengthening the financial base of the sector through atransition to social health insurance. However, the problem of complementary sources of finance has not yetbeen resolved. There are multiple economic obstacles confronting the decision to introduce social healthinsurance. First of all, it is a heavy tax burden on employers (social insurance tax already accounts for 39% ofthe salary fund). Second, the price increase of utilities, particularly gas, has undermined the Ukrainianeconomy’s competitive ability and has thus reduced the chances of reaching a consensus regarding theintroduction of, what is in essence, a new income tax.

Out-of-pocket payments

According to NHA, the share of out-of-pocket payments in total health expenditure in 2003–2008 was almost40% (minimum 34.6% in 2007, maximum 42.5% in 2008). Out-of-pocket payments are consistently increasingin all main forms of spending: official service charges, drug and medical product purchases, and informalpayments. During the 1990s, the proportion of formal out-of-pocket payments in total health care expenditureincreased significantly (from 19% in 1996 to 38% in 2000). It stabilized at 38% from 2000 to 2002 and thendecreased slightly to 32–34% from 2003 to 2006. User charges make up a relatively small proportion (7.3–8.6%) of total spending or 19.7–22.5% of out-of-pocket payments for health care. Fees-for-service in publicand private health facilities account for only 2.9–3.1% of total spending. It is possible to estimate the share ofinformal payments in total health expenditure only from 2003, when NHA started being used; from 2003 to2005 informal payments accounted for 8–10% of total health expenditure. Out-of-pocket payments are mainlyfor the purchase of drugs and medical supplies for outpatient as well as inpatient care (19.7–21.8% of totalhealth care expenditure and 55.4–58.4% of the total volume of out-of-pocket payments between 2003 and2005) (Gotsadze et al., 2006). Retail pharmacies distribute 79% of all pharmaceuticals directly to thepopulation, while 21% go through hospitals. NHA data show that out-of-pocket payments on pharmaceuticalsand medical supplies at pharmacies accounted for 1.3–1.4% of GDP in 2006, but 2.1–2.2% in 2008, asignificant increase from 0.8% of GDP in 1996 (State Statistics Committee of Ukraine, 2010a). According tohousehold surveys performed by the State Statistics Committee of Ukraine in 2008–2009, 89.0–90.4% ofinpatients had to pay for their pharmaceuticals themselves. NHA surveys found that, as well as pharmaceuticalexpenditure, the share of direct private expenditure on dental care is quite large (32.9%), as is rehabilitationcare (19.3% of total expenditure on these types of services). This survey found a rather small percentage of out-of-pocket payments in outpatient and particularly inpatient care due to discrepancies in the way data werecollected. Other statistical publications have provided data on informal payments to medical professionals.Some cities even have unofficial price-lists for different types of services. In order to protect themselves frompharmaceutical costs, some patients use VHI and sickness funds as a complementary source of funding (seesection 3.3.3 VHI). They do not, however, have a significant influence overall. The only mechanism used toease the public burden of payments for pharmaceuticals is the exemption of sales of pharmaceuticals andmedical supplies from value added taxes. To protect socially vulnerable population groups and patients withsocially significant and serious diseases, there are certain benefits available for outpatient health services and




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pharmaceuticals. These groups can receive pharmaceuticals from the approved government list for free or for adiscount with a prescription. However, expenditure through this program does not exceed 2.7% of the totalspending on pharmaceuticals (Gordienko, 2003). Expenditure on medical benefit is covered by generalallocations to health care provided by the budgets. In reality, however, even socially vulnerable groups have topay out-of-pocket for guaranteed services. Some patients from vulnerable groups pressure doctors into givingthem more pharmaceuticals than required. This has caused the government to attempt to adjust the list ofgroups covered and introduce subsidies instead of benefits. The government has attempted to regulatepayments for health care services. The Cabinet of Ministers Resolution of 1996 introduced official user chargesfor health services and allowed local and regional governments to establish their own fees for health servicesprovided at state and community facilities. The Resolution applies to those paid services that medical facilitiesprovide in accordance with the approved services list and does not apply to these services that are required tobe provided to the population for free. In reality, however, there is no clear line between free and paid medicalservices. As a result, the government does not regulate prices for those services which are provided for a fee inreal life, but which are not yet included in the official list of paid services approved by the Cabinet ofMinisters. Additionally, there is no official method of determining the full costs of medical services. Accordingto NHA, the volume of informal payments is currently almost equal to the volume of formal payments, that is,8–10% of total health expenditure and 22% of household expenditure. But it is likely that the amount ofinformal payments is underestimated (Gotsadze et al., 2006). Informal payments existed in Soviet times, buttheir presence then was on a very small scale. Most informal payments were in the form of gratuities for aservice received (such as produce in rural areas, for example, or chocolate elsewhere). As a result of theeconomic downturn in the 1990s coupled with wage arrears, personnel in health facilities have introducedinformal payments in order to provide an acceptable wage for themselves. These payments are mostlymonetary and are made before the service is provided. Often, the necessity of such payments is indirectlyinitiated by medical staff: patients tell each other about the necessity and the amounts required. For additionalpayment, doctors offer different drugs and services which they claim are more modern and efficient (or fasteraccess to both). Payments in kind (gifts, produce) are still present in rural areas. It is extremely difficult togauge the true extent of informal payments in the total income of medical staff. According to the limited NHAdata, informal payments account for roughly 20% of the total salary funds. Their distribution is highly unevenas well, depending on location (rates are higher in the city than in the country), type of care (inpatient care ismuch more expensive than outpatient), the doctor’s qualifications (specialists receive higher payments thanfamily doctors/GPs), case complexity and so on. Informal payments persist due to several factors, includinglow pay for medical staff and the weak regulation of service providers, especially doctors and professionalsinvolved in decision-making. Further, the government is not ready to admit its incapacity to provide free healthcare in full, which breeds tolerance towards informal payments, despite regular loud campaigns againstcorruption.

VHI

VHI still plays a very minor role in health care financing in Ukraine. Despite the relative growth in the numberof insured people and insurance premiums, only 2.5% of the population use VHI, and its contribution to totalhealth care expenditure is 0.8%. About 1.6% of the population participates in sickness funds and contributesnearly 0.1% of total resources to the system. The introduction and development of VHI was only made legallypossible in 1996 when the Law on Insurance was passed. VHI in Ukraine is offered exclusively by privateinsurance companies that are often not specialized in health. According to the State Statistics Committee of




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Ukraine, there are currently nearly 100 private companies in the VHI market, offering various health carepackages (Kiselyev et al., 2004). Corporate (group) insurance, purchased by an employer, is the main form ofVHI. Individual cover insurance makes up only a small portion of VHI – individual clients make up only 10%of the total number of VHI contracts. Many companies purchasing VHI prefer to substitute insurance withoutactuarial settlements, thereby replacing paid services by various financial schemes. The majority of VHIcustomers receive health services in the same state and community facilities as uninsured patients. Moreover,the same medical equipment is used in treating both groups and often they receive the same level of care. Themain difference is that VHI offers partial coverage of pharmaceutical costs. The framework within which VHIoperates in Ukraine is not clearly defined. On the one hand it can be classified as a substitute, since it is used tocover expenses for drugs, laboratory work and other services that are not covered by the state health system inreality. However, these services are not officially excluded from the list of services guaranteed by thegovernment. In fact a VHI customer is often paying for what is supposed to be provided for free. VHI isintruding into the state health care domain by duplicating state commitments to a considerable degree, since theboundary between paid and free services is very unclear. On the other hand VHI can be classified ascomplementary since its customers receive the right to be treated in the best facilities. There are several seriousobstacles to VHI development in Ukraine. First, VHI premiums purchased by employers for employees do notcarry any tax benefits, which means employers do not have any incentive to include health insurance in abenefits package. The structure of financing public medical facilities is based on an expenditure estimate whichforbids using VHI resources to create incentives for medical personnel. Doctors (and particularly surgeons) inpublic medical facilities resent treating insured patients, since they refuse to pay informally. However, medicalfacilities sign contracts with insurance companies since it is now a legal way of selling medical services to thepublic. A significant proportion of VHI contracts are technically quasi-insurance, a disguise for patients payingfor health services themselves. Patients pay official premiums into VHI, but the insurance company often actsmerely as an agent, transmitting resources between the patient and the facility in purchasing health services.Also there is a noticeably low level of compensation from VHI, which fluctuates between 40% and 60%(Kapshuk, Sitnik & Pashchenko, 2007).

Health insurance for railway workers

There is a special part of the VHI system for insuring railway workers. It started as an experiment initiated bythe railway management in 2001. Now the entire sector is covered by health insurance. At first, this insurancecovered the rolling stock workers and the operations department. It is gradually spreading to cover othercategories of railway workers (Kiselyev et al., 2004). In 2001–2006, the program insured retired workers aswell; until 1 January 2001, health insurance for retirees was substituted by fixed payments during inpatient careat a rate of 20 hryvnya per day for no more than two hospitalizations per calendar year. The railway system andits workers pay premiums on an equal footing. The total amount of monthly premiums in 2001–2006 was 4hryvnya (a little more than US$ 9). In 2007, it was raised to 16 hryvnya per month (US$ 38) (Yavorskiy,2007). More than 600 000 people are covered, that is, 38% of railway workers. In 2009, more than 40 millionhryvnya in premiums was collected, making up 7% of additional revenues for the health care budget of theMinistry of Transport and Communications. A private insurance company provides insurance for the railwayworkers. This insurance covers inpatient care primarily in the parallel network of medical facilities. Theresources allocated to the medical facilities are designed to cover spending on pharmaceuticals, food andlaundry stocks for each individual patient to cover the portion underfunded by the government budget, but onlyto a fixed maximum amount. In 2007, additional compensations for inpatient and outpatient pharmaceuticals




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were introduced. Further, the insurance company makes payments to the medical facility for caseadministration. Medical facilities keep a personalized record of expenditures on each insured patient.

Sickness funds

As an alternative means to mobilize additional resources for the health system, a number of sickness funds andcredit unions are being established in Ukraine, along side various charitable institutions and funds. Sicknessfunds represent quite a well-developed network of non government organizations established on a voluntarybasis for complementary financing of the health system. Sickness funds function as VHI on a non-profit-making basis. While, legally, VHI companies are profit-making private organizations, sickness funds functionin accordance with the Law on charity and charitable institutions, as charitable non-profit-makingorganizations guided by a common interest to improve health care for their members. Membership in a sicknessfund is voluntary. It may comprise individuals as well as working collectives, enterprises, agencies andinstitutions paying premiums for their members. The performance of sickness funds depends directly on thenumber and nature of its members. For this reason, preference is given to corporate membership, whereworking collectives, enterprises, or institutions cover fees for their employees. However, the individualpremiums remain the main source of revenue. In 2009, individual premiums accounted for 95.7% of funds,while enterprises and institutions made up the remainder at 4.3%. Workers make up the majority of members insickness funds at 64%, while 20.6% are pensioners and 15.4% are other categories of non-working citizens.The major function of sickness funds is to provide pharmaceuticals to their members in case of insufficientcoverage from the government – in 2009, 79.8% of sickness funds’ expenditure was on purchasingpharmaceuticals and other medical devices. A number of sickness funds have also committed themselves tocontributing modern medical equipment to health facilities, developing targeted programs, training andretraining personnel, advocating for healthy lifestyles, protecting mother and child health, and many otheractivities. About 17% of collected funds are spent on administration. The income of sickness funds is derivedfrom a number of sources: founders’ and members’ premiums, charitable contributions, and donations andprofit from charity transactions. The premiums are determined by the sickness funds’ administration as apercentage of salary (usually no more than 5%) or fixed payment (7–9 hryvnya per month or US$ 10–14 peryear). According to Ministry of Health data, the number of sickness funds increased by 22 times between 1999and 2006, but in 2009 they shrank as a result of the economic crisis. In 2009, more than 750 000 people, or1.6% of the population of Ukraine, were covered by sickness funds. The popularity of sickness funds differsgreatly among various regions. In Ukraine, 17 out of 27 regions have a very small percentage of the populationcovered by sickness funds (1%), but in 7 regions, 1–4% is covered; in 2 regions, 6–10% is covered; and inZhytomyr oblast, the number of members exceeds 16% of the population. Since 1999, sickness funds’ revenueshave increased by more than 50 times, and in 2009 totaled 80 million hryvnya. Sickness funds reduce theoverall cost of drugs and medical devices to members and facilitate better monitoring of prescription practices.However, considering that sickness funds cover only a small proportion of the population, their impact onoverall health care spending is rather limited: 0.13% of total health care expenditure. In some regions, however,where municipal sickness funds have been established with the active support of local authorities, opinions aregenerally very positive about their performance, citing improved accessibility and quality of health care(Bondarenko et al., 2003; Popov et al., 2003). Some of these regions include Zhytomyr oblast, and small citiessuch as Komsomolsk in Poltava oblast, Priluki in Chernihiv oblast and Voznesensk in Mykolayiv oblast,among others. Further expansion of the VHI sector will depend on a number of conditions, primarily:




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• a clear boundary between state obligations and additional health services and drugs not paid forwithin state guarantees;

• an extension of tax incentives for individuals and legal entities aiming to purchase VHI; and• the creation of incentives for medical personnel involved in VHI.

However, even if these conditions are met, an immediate expansion of VHI is unlikely simply because it is notaffordable for the general public.

Parallel health systems

Many ministries and other government bodies have separate “parallel” health systems for their workers. Thelargest are in the Ministry of Transport and Communications, Ministry of Internal Affairs, Ministry of Defense,Ministry of Labor and Social Policy, and the National Academy of Medical Sciences, among others. Theseparallel systems are funded from the national budget and almost 42% of health expenditure from the nationalbudget is spent on parallel medical facilities and more than 11% of total public health expenditure. Accordingto data from 2008, the parallel health care network had 255 hospitals (10% of the total number of hospitals inthe country), and 435 outpatient polyclinics (5.9% of the total in the country). The number of inpatients in theparallel networks made up 7.7% of the total number of inpatients, and visits to polyclinics made up 6.9%. TheMinistry of Transport possesses the largest parallel network: 80 hospitals and 175 outpatient polyclinics. Dataon the number of people served by the parallel health system is unavailable, but 1.7 million people work for therailway system, which is the largest industry within the jurisdiction of the Ministry of Transport andCommunications.

External sources of funds

It is difficult to estimate the impact of external sources of financing in Ukraine. Overall donor activitycontributes very little to financing of the health sector; according to NHA, their contribution accounts for lessthan 1% of total health expenditure (0.3–0.7% in 2003–2008). Donors to the health sector include internationalorganizations (United Nations agencies, the EU, World Bank, the Global Fund) as well as governments ofindividual countries (Japan, Sweden, the United Kingdom, United States and others). Donations are usedmostly to provide technical assistance. For instance, the EU carried out several projects in Ukraine, includingPrimary Health Care Support (€2 million; 2002–2005), Health Financing and Management (€4 million; 2003–2006), Support for the Development of a System of Medical Standards (€4 million; 2004–2006) and Supportfor Secondary Health Care Reform (€4 million; 2007–2009). There are also major initiatives involved infighting infectious diseases such as TB and AIDS, and supporting maternal and infant health programs. In2006, the Global Fund approved a US$ 151 million grant to Ukraine to fund the program HIV-AIDSPrevention, Treatment, and Care for the Most Vulnerable Populations in Ukraine, 2007–2011. In 2007,however, the Global Fund denied Ukraine’s request for a US$ 94.6 million grant to fight TB, due to an unclearspending plan. The Global Fund had already denied a grant for fighting TB in 2004. In 2006, however, thecountry managed to secure a grant to fight HIV/AIDS. The resources were granted directly to the Ukrainiangovernment, but this was followed by a scandal over an increase in the price of medication. As a result, theGlobal Fund had to suspend financing, citing concerns over slow progress and management problems. Astatement issued by the Global Fund said it had taken the decision because of implementation bottlenecks, andmanagement and governance issues. Financing resumed after International HIV/AIDS Alliance, an NGO, was




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put in charge of the project. Following this, in 2009, the Global Fund approved a US$ 105 million grantrequested by Ukraine to combat TB.

Other sources of financing

The Ukrainian government mandates that it is the responsibility of the owners and administrators ofenterprises, agencies and institutions to protect the health of their workers. Employers, therefore, must providetheir own resources to fund compliance with safety techniques, sanitation in the workplace, recruitment andperiodic medical exams for certain categories of workers in labor-intensive, unhealthy or dangerous jobs. Theyare likewise responsible for providing thorough medical examinations and rehabilitation for workers withpotential professional or occupational diseases, and prophylactic medical examinations for groups of workers atrisk of developing occupational diseases. The State Sanitary-Epidemiological Service administers compliancewith sanitary requirements, within the limits of budget financing. In accordance with the Law on mandatorysocial insurance covering temporary disability, occupational accidents and occupational diseases, the SocialInsurance Fund against Occupational Accidents and Occupational Diseases uses its own resources to takemeasures against occupational accidents, to remove work-related threats to workers’ health and so on. The onlyavailable data show that the Social Insurance Fund spent 15.5 million hryvnya in 2003 (US$ 2.9 million or0.08% of total health expenditure) and 10 million hryvnya n 2004 (US$ 1.9 million or 0.4% of total healthexpenditure).

Pooling of funds

Pooling agencies and allocation

Pooling of funds for health care occurs within the budgetary process outlined by the Budget Code of Ukraine(Law of Ukraine No. 2542-III) issued 21 June 2001. The budget system is divided into 4 levels: (1)state/national budget, (2) regional budgets, (3) district and municipal budgets, (4) small town and villagebudgets, but it is still a “single payer” system. The Budget Code authorizes the financing of the health systemassigned to different levels of the budget system. The historic approach remains the primary strategy fordetermining health care budgets for different levels. A targeted program approach is used to solve acuteproblems in the health care sector. The national government and local self-governments at all levels areresponsible for pooling funds: the Ministry of Health and other ministries, regional and municipal healthauthorities, and rural self-governments. State budget resources allocated to health care in accordance with theLaw on the state budget approved by Parliament are distributed among numerous agencies controlling thebudget. The most important of these are the Ministry of Health and the National Academy of Medical Sciencesof Ukraine, as well as a number of other ministries and departments in charge of medical facilities. Each ofthese agencies is responsible for financing the medical facilities and programs allocated to them. As a result,the Ministry of Health is responsible for slightly more than half of the resources allocated from the statebudget. The process of calculating the level of inter-budgetary transfers and the estimated local budget healthcare expenditures depend directly on the local population size, with the exception of those who receive carethrough a parallel network. However the majority of parallel networks do not provide a full health care packageto their workers. Workers in these ministries and other bodies have the right to seek care in their localcommunity medical facilities, and they exercise this right – especially those workers with acute conditions.Therefore the pool of funds designed to finance parallel networks partially intersects with the regional financial




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pool. Citizens benefiting from access to parallel networks as well as regular medical facilities use a portion ofthe finances allocated to provide care to other people in the same region. The interaction between parallel andregional health systems faces a number of bureaucratic obstacles. This leads to the irrational use of combinedresources in the health system in general. The government’s National plan for health care development by 2010(Cabinet of Ministers Decree No. 815, issued 13 June 2007) outlines the steps towards the formation of aunified medical system under the Ministry of Health. This means that parallel health facilities would comeunder the community’s jurisdiction and be integrated into regional health systems. However, no practical stepshave been taken in this direction to make this happen. Final approval of local health budgets by localrepresentative authorities together with general budgets takes place not later than two weeks after thepublication of the Law on the state budget. Regional health budgets include the budgets of the Crimea AR, the24 oblasts and 2 cities (Kyiv and Sevastopol) which have the same status as an oblast. Regional healthadministrations finance their health facilities from their own budgets. Local health authorities or localadministrations (if they have no separate health authorities in their structure) finance health care facilities undertheir jurisdiction from the relevant municipal health budgets. At the rural level, local self-governments financemedical facilities under their jurisdiction: small rural hospitals, rural outpatient clinics, feldsher or feldsher andmidwife posts (FAPs). Splitting off the rural level in the budgetary system led to a catastrophic fragmentationof local health budget resources. On average there are fewer than 5000 people per local self-government inUkraine. Not more than 10 800 territorial and administrative entities and settlements out of 30 000 can beconsidered viable self-governing units. The Budget Code of Ukraine presents some possibilities to improve theeffectiveness of pooling the local health system’s financial resources. It allows municipal and localcommunities (settlements, villages and towns) to pool their funds on a contractual basis in order to fulfill theircommitments, transfer resources for these commitments to the upper budgets, and transfer subventions fromone budget to another for the maintenance of shared facilities. In reality, however, these options are not used.In 2005, efforts were made to centralize expenditures on primary care in rural areas at the district level withoutspecifying them in the budget of the actual communities. The appropriate amendments to the Budget Code ofUkraine (Law of Ukraine No. 2350-IV, issued 13 January 2005) were made, but the Cabinet of Ministers ofUkraine put the fulfillment of those amendments on hold. The political opposition to this decision claimed thatdepriving small communities of the possibility of financing their own primary medical care needs bytransferring these functions to the district budgets is in effect an attack on the rights of local self-governments.In 2008, the amendments to the Budget Code of Ukraine mentioned above were annulled.

Mechanisms for allocating funds among pooling/purchasing agencies

The financing of social needs including health care is a state duty, but often the execution of these duties isdelegated to the subnational level. Delegated assignments are financed through the system of inter-budgetarytransfers. The size of transfers is calculated with the goal that they would completely finance the regional andlocal levels. The regional budget gives part of the received transfers to the district and municipal budgets,which in turn direct part of these resources to the small community budgets. The volume of health careexpenditures in the regional, district and municipal budgets is determined by special formulas approved by theCabinet of Ministers (Decree No. 1195 issued 5 October 2001, amended 14 October 2005, On approving thedistribution of inter-budgetary transfers between state and local budgets and Decree No. 1782 issued 31December 2004, amended 29 December 2005, On regulation of inter-budgetary relations), which take intoaccount the gender and age specifics of the population. Inter-budgetary transfers are designed to finance allduties of the state, including public administration and social needs. Within the total volume of transfers, there




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are no specifications for resource allocation for separate state commitments such as health care. Regionaladministrations and local self-governments have the right to determine the structure of their expenditure andtherefore decide independently where to use the transferred resources. The rights of local authorities arelimited, however, by decisions passed at the national level, for example, to raise the salaries of budget systemworkers, as well as obligations imposed by the Budget Code to pass down part of the transfer. It is alsoforbidden to decrease the volume of spending on state programs targeting diabetes mellitus and diabetesinsipidus. Expenditure on these programs is included in the sums transferred. The structure of health careexpenditure distribution between the levels of the budget system within the amounts of transfers that are passeddown from the state budget is as follows:

• at the regional level, 35.4% of the total expenditure should be kept for health care;• at the municipal and district level, not more than 55.1% of total expenditure within the inter-

budgetary transfer must be kept for health care; and• community budgets must receive not less than 23% of the total health budget included in the

transfers passed by the state down to the municipal and district budgets mentioned above (or notless than 9.5% of the total health care budget included in the transfers passed by the state downto the regional budgets), but this money is not ring-fenced.

In practice, however, the planned expenditure does not always match the calculated figures during the passingof subnational budgets. A certain authority, for example, might decide to allocate more resources to theeducation system and cut the financing of the health system. For instance, during the drafting and passing ofthe budget in 2005, 17 out of 25 regions in Ukraine planned a smaller volume of health care expenditure intheir budgets than was foreseen in the figures calculated by the Ministry of Finance. No nationwide data areavailable, but a study of six regions found that the community budget resources allocated to health care makeup only 13–16% of the estimated health care expenditure within the transfer passed down from the state budgetto regional budgets, which is only half to two-thirds of the estimated 23%. State budget expenditure includessubventions to the subnational budgets for supplying medical equipment to rural outpatient clinics, feldsherposts and FAPs, and for the purchase of ambulances for rural medical facilities. In earlier years the Ministry ofHealth itself and other central agencies used resources from the national budget. Instead of transferring moneydown to the regional level, they purchased and sent equipment, drugs and so on. The majority of resourcescome from local budgets, however, and their share has increased in recent years, due to the decrease incentralized purchasing from the state budget. Municipal budgets play the main role in the consolidated healthcare budget structure, which is not surprising considering that 68.1% of the population in Ukraine is urban.Community budgets play the smallest role. The growing importance of local self-government in healthspending has been matched by the growing importance of input norms which determine the demand for fundsas opposed to the supply of funds.

State targeted programs

There are a large number of state targeted health care programs that address a wide spectrum of health careproblems such as immunization, fighting TB and HIV/AIDS epidemics, reproductive health, prevention andtreatment of cardiovascular and cerebrovascular diseases, prevention and cancer treatment, and so on. Theprograms are approved either by executive order or by law. The Ministry of Health orders, manages andcoordinates these programs. As the government passes these programs, it orders the Ministry of Finance and




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the Ministry of Economy to make provisions for these programs in drafting the state budget and forming a statepolicy of economic and social development for a given period. At the same time, the regional executiveauthorities receive recommendations for drafting and approving the corresponding regional programs that mustcontain directions and measures outlined by the appropriate state programs. They also receiverecommendations for using local budget funds and other legal resources for the execution of these programs.However, these recommendations almost always remain unfulfilled, and even if the regional programs takeplace they receive a very small portion of resources from local funds. For example, data from the Ministry ofFinance show that in 2004 the government allocated 580.1 million hryvnya from the state budget to financestate targeted programs, but all the regional and local budgets together allocated only 31.04 million hryvnya torun programs fighting TB and HIV, providing insulin to people with diabetes, immunization programs andcentralized measures for treating cancer. Within the limits of these state programs, the Ministry of Healthpurchases drugs for cancer, TB, HIV/AIDS and other illnesses, and delivers them to the regions. There are nospecial budgets for the development of human resources and mental health protection. The proper expenditureis calculated in drafting first a state budget and then local, primarily regional, budgets.

Purchasing and purchaser–provider relations

The organizational relationship between purchasers and providers is based on an integrated model. State andcommunity medical facilities (the providers of medical services) are under the administrative jurisdiction oftheir owners, that is, the corresponding state and local authorities (purchasers). Therefore in Ukraine the modelis based on the principles of appropriate budgetary payments for medical services but not on the purchasing ofmedical services, which would be based on strategic public procurement contracting. In financing health carefrom the budget, payments are made by state authorities, which are also established in the Budget Code as thechief administrators of budgetary resources. The chief health administrators of budgetary resources are theMinistry of Health and the National Academy of Medical Sciences of Ukraine, as well as a number of otherministries and departments. Each of these authorities finances the medical facilities and programs in itsjurisdiction – the list is approved by the Cabinet of Ministers (Decree No. 342, issued 15 April 2002, Onapproving the list of medical facilities and health programs financed from the state budget). The medicalagencies of ministries and departments receive their funding from the state budget. In calculating inter-budgetary transfers, the estimates of health expenditure from local budgets depend on the size of the localpopulation, excluding those who receive care through the parallel network. However the majority of parallelnetworks do not provide a full health care package to their workers. Workers in these departments have theright to seek care in their local community medical facilities, and they exercise this right – especially thoseworkers with acute conditions. The Ministry of Health finances the State Sanitary-Epidemiological Service,higher medical education institutions, the State Pharmaceuticals Quality Control Inspectorate and related localinspections, and approximately 50 national-level medical agencies under its control that provide everythingfrom primary to tertiary care. Additionally, the Ministry of Health funds state, interagency, and integratedprograms and measures related to health that are financed from the state budget. There are also certaincentralized procedures through which the Ministry of Health purchases pharmaceuticals, medical devices,immunobiological medicines, expensive medical equipment and hospital vehicles. The regional chiefadministrators of budgetary resources for health are the Ministry of Health of Crimea AR, along with healthauthorities in the regions, and the municipal administrations of Kyiv and Sevastopol, which finance medicalfacilities under their control. At the municipal level, the chief administrators of budgetary resources are thehealth authorities within the executive municipal powers. At the district level, there are no requirements




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regarding the existence of health authorities. On 11 May 2005, the Cabinet of Ministers added a healthauthority to the list of departments in the administration at the district level (Decree No. 328, On the structureof local state authorities, Appendix 3). However, its goals, functions and authorities were defined by theCabinet of Ministers only on 28 November 2007 (Decree No. 1364, On approving basic regulations for thehealth sector of district state authorities). Therefore, health authorities in district administrations are currentlyexceptions, not the rule. The district director fulfills the role of the chief administrator of budgetary resources.At the community level, local self-governments distribute budget resources to rural outpatient clinics, FAPsand feldsher posts. The activity of purchasers is controlled through this hierarchical management structure.

Payment mechanisms

Paying for health services

Payment mechanisms in the Ukrainian health system are prospective. The overwhelming majority of state andcommunity health care facilities are officially financed by the government. According to the Budget Code ofUkraine, they must be supported by the national or the relevant local budget. There is strict allocation ofresources between the budgets, and any given facility can receive financing from one budget only. The reallevel of resource allocations to government-financed facilities is based on historical budgeting adjusted forinflation and any budgetary increases. The Ministry of Finance and local fiscal authorities give the Ministry ofHealth, local health authorities and local self-governments the maximum health expenditure from the draftbudget for the following year. The Ministry of Health, local health authorities and local self-governments thendetermine the maximum expenditure for the health facilities funded by them, and the facilities produce costestimates for the next fiscal year. The Ministry of Health, local health authorities and local self-governmentsthen examine these estimates to ensure they include accurate projected income and expenses figures,justification for planned expenditure, and that they comply with established wages, norms, prices, limits andother indicators in accordance with the law. They then create the draft budgets. Based on the draft estimates,the Ministry of Health, local health authorities and local self-governments draft budget requests and submitthem to the financial authorities to be included into the appropriate draft budget. Once the draft budgets aredrawn up, the Ministry of Health, local health authorities and local self-governments make any necessarycorrections to the volume of budget funding to the facilities, before approving the drafts. The primary andmandatory responsibility of government-financed facilities is to provide budget resources for salaries,pharmaceuticals, food and the maintenance of facilities. Thus the purchase of equipment, renovations and otherexpenditure not considered priorities can receive financing only if the primary requirements are covered andthere are no other debts. In reality, salary expenditure accounts for more than two-thirds (70.8% in 2008) ofterritorial health care expenditure, followed by pharmaceutical expenditure and catering (19.8%), utilities(8.3%) and other expenditure (1.1.%) (Gotsadze et al., 2006). The allocation of budgetary funds is thus basedon a list of permitted line items, which in turn is based on norms set by the Ministry of Health defining inputssuch as staff, salaries, pharmaceuticals, catering and so on. The majority of these norms depend on the capacityof a health facility (number of beds in hospitals or number of visits in polyclinics). Many of these norms do notreflect real expenditure, for example on pharmaceuticals or hospital food. Facilities must spend resourcesexactly as allocated. They are not permitted to reallocate resources from one line item to another. Any changesin the facility’s income and expense estimates must be approved by the chief administrators of budgetaryresources and by the appropriate fiscal authorities, if the changes involve adjustments to the consolidated levelof budgetary expenditure. If there are any unspent funds at the end of the year, the fiscal authorities will cut the




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facility’s budget estimates for the next year by the same amount. Line-item budgeting is very straightforwardfor the fiscal authorities in planning expenditures and controlling the targeted usage of allocated resources.However, this approach has a number of drawbacks: (1) input-based financing encourages health facilities tomaintain excess capacity; (2) allocating resources for the maintenance of medical facilities, rather than thevolume of work, does not provide incentives to improve productivity; instead the incentive is given to increasethe infrastructure; (3) line-item budgeting limits the authority and responsibility of the management in medicalfacilities and does not provide incentives to look for more efficient ways to use resources. Therefore, resourceallocations based on expenditure estimates are not linked to the workload of those who receive the resources.There are no incentives for health facilities to use their resources more rationally, and this creates a cost-basedtype of management. Consequently, even a significant increase of resource allocations to health facilities doesnot guarantee better fulfillment of the government’s social commitments. Individuals and legal entities that arenot financed by the government may receive funds from the budget to contribute to state programs. They mustuse these funds in accordance with the budget resources usage plan, that is, they must distribute budgetallocations in accordance with line-item budgeting. The budget resources usage plans are approved by officialsin accordance with the chief administrators of budgetary resources, through which they receive the funds.Centralized purchasing is done by the chief administrators of budgetary funds for facilities under theirjurisdiction. Centralized purchasing includes items such as vaccines, pharmaceuticals to fight TB, for theprevention and treatment of HIV/AIDS, and for treating cancer, pacemakers, implants and other medicaldevices, expensive medical equipment, ambulances for rural medical facilities, and other items for fulfilling themeasures outlined in state programs. Centralized purchasing is conducted through tendering procedures byenterprises under the jurisdiction of the Ministry of Health (Ukrvaccine, Politechmed, Ukrmedsnab). Thepurchased pharmaceuticals and equipment are then distributed to the regions. The quantity, quality andassortment of purchased pharmaceuticals and medical devices often fail to satisfy the needs of medicalfacilities. Budget allocations do not cover all health care expenditure in public medical facilities, despite theconstitutional guarantees regarding free health care in state and community medical facilities. In reality, thereare many methods of payments, both formal and informal. The Budget Code stipulates that outpatient care(primary and specialized) can receive financing from different budget levels. There are therefore allocations forthese types of services in budgets at different levels; however most comes from municipal district health carebudgets and community budgets. Private payments (user fees) are funneled into special accounts (so-calledcommission accounts) and can be used at the discretion of the facility’s management as they supplementallocations according to line-item budgets; informal payments go directly to the medical staff involved.Inpatient care and dental care are purchased in a similar manner via local budgets. Formal private payments fordental services in public facilities go to special budget fund accounts, when declared. In private facilities,private resources come either in the form of fees-for-service from the patients or as contracts from private firmsand corporations that cover a package of services. The majority of drug purchasing from budgetary sources iscarried out by local or regional health authorities based on requests from medical facilities. Thepharmaceuticals are then distributed among facilities. Pharmaceuticals are partially purchased with resourcesfrom a special budget fund in accordance with health insurance company contracts and sickness funds. Theamount of these purchases is very small, however. Most pharmaceuticals are purchased directly by patientsthemselves, on the recommendation of their physician, and they pay out of pocket in full. Psychiatric care iscovered by local budgets through the line-item budget system. The prospective budget estimates do not takeinto account the cost of pharmaceuticals which patients purchase out of pocket in full. Only a small proportion(0.6%) is officially covered from public resources, usually for alcohol and substance abuse treatment in privateclinics. Long-term medical care is usually financed from local budgets in accordance with line-item budget




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estimates drafted by social protection agencies. Rehabilitation services are normally provided by resorts andsanatoria. About half of this treatment is financed from budget resources. The remainder comes fromemployers or is paid out of pocket by patients.

Experiments with new methods of financing

There have been several experiments in Ukraine involving the introduction of new financing mechanisms, suchas a global budgeting and payments on a per capita basis. These experiments are typically the result of localinitiatives, and they are supported by technical assistance projects run by international donor organizations. Forexample, in Komsomolsk (Poltava oblast, population 60 000) in 1997, the municipal authorities and medicalcommunity launched an experimental model of primary care organization. Trained family doctors signedcontracts with municipal authorities for the provision of primary care services financed on a per capita basis.Since there were no legal precedents for a project in which services provided by community medical facilitieswere purchased on a contracting basis, the city established family practices. Currently there are 11 privatefamily doctors who sign contracts with the municipal health authority and provide primary care to about 40%of the city’s population. Funds are allocated from the budget on a per capita basis according to the number ofcitizens assigned to a particular physician. The rest of the population received primary care at a polyclinic thatis government-financed according to line-item budgets. In 2003/2004, doctors in independent practices werebrought together into group practices, and the polyclinics were turned into primary care centers. In the earlystages of this experiment there was an attempt to introduce a scheme of partial fund-holding in purchasingservices from family doctors, but this mechanism was not supported by the local authorities. According to theresults of a public opinion poll in Komsomolsk, the delivery of primary care services by family doctors is morefinancially efficient than the current system (Nadutaya, Nadutiy & Zhalilo, 2003; Nadutaya, 2004). The qualityand accessibility of health care also improves. After the transition to the new model, the number of visits tomedical specialists decreased by 36%, the number of adult hospitalizations decreased by 16%, and the numberof emergency calls per 10 000 population decreased by 46.4%. Further, public satisfaction increased from 70–80% (within the traditional model of care by district internists and paediatricians in polyclinics) to 88% withhealth care provided by family doctors. In 2005, the EU-funded project Health Financing and Management inUkraine, conducted experiments aimed at changing the mechanisms of financing health care facilities. Twopilot rural regions were chosen in Kharkiv and Zhytomyr oblast with a population of about 35 000 in each. Inthese pilot medical facilities, line-item budgeting was replaced by global budgeting, meaning that the facilitywas financed based on the volume of care it provided, but, in contrast with the existing approach, resourceallocation was not itemized and the amount did not depend on the capacity of the facility. Facilities werefinanced within the limits of an agreement, which took the form of a simple block-contract for thegovernment’s purchase of services. District-level health authorities acted as health services purchasers,according to the provisions of the Civil, Economy and Budget Codes of Ukraine and the Law on thepublicprocurement of goods, works and services (No. 1490-III of 22 February 2000). The purchaser negotiatedwith health care providers (that is, the district central hospital) on the volume of allocated resources andinpatient and outpatient care that the latter was obliged to provide to the population over the course of one year.Once the resources were received, the hospital itself determined where to direct them, taking into account itscurrent needs and priorities. The hospital’s autonomy was secured by its transformation into a form of non-profitmaking communal enterprise as recognized by the Economy Code of Ukraine (Rudiy, 2005). Local fiscalauthorities resisted experimenting with new methods of paying medical care providers. In 2005, in a pilotdistrict in Kharkiv oblast, the local authorities divided the financing of primary and secondary care to create




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two independent health care providers. The plan was to sign separate contracts to purchase medical servicesfrom the newly created district primary care center (an independent non-profit-making community enterprise),and the central district hospital. In the contract for purchasing inpatient care and specialized outpatient carefrom the central district hospital, global budgets were the chosen method of payment. In the contract regardingthe purchase of primary care, payment was to be on a per capita basis based on the list of patients from everyfamily doctor/GP. In May–June 2006, however, when the project was scheduled for launch, authorities fromthe central district hospital, together with medical specialists from the inpatient care ward and the polyclinic,began strongly interfering with the launch. They used different methods to put pressure on the districtparliament, including street protests by the medical workers. Their main argument was the inevitablebreakdown of inpatient care and specialized outpatient care, claiming that the hospital would lose part of itsfunding. They also pointed out the difficulties of undertaking reforms during the period of state financialdeficit. The true cause of the hospital’s resistance lay in its unwillingness to lose resources and propertyearmarked for transfer to the primary care center. Inpatient doctors and the polyclinic’s medical specialistsworried that the reform would decrease demand for their services, leading to staff reductions for specialists andreducing both formal and informal income. As a result of their protests, the project launch was postponed.However, a different component of the same project had more success, where centralized financing of thedistrict health system was achieved. All rural medical facilities (rural outpatient clinics, FAPs, etc.) becamedistrict community property. A united community non-profit-making enterprise was created on the basis of thecentral district hospital. All rural facilities became subdivisions and lost their status as independent legalentities. Unifying financial resources and rural medical facilities at the district level created conditions for themore efficient utilization of budgetary resources allocated by local self-governments to health care. It alsostabilized financing and protected the health care budget from rural community leaders redistributing theresources to other community needs. In March 2006, after securing an agreement with the relevant regionalauthorities, the Ministry of Health issued an order assigning additional districts in Zhytomyr and Kharkivoblast to join the project. These new forms of financing are not widespread, however. The Ministry of Financeis the main opponent to reforming purchasing mechanisms for medical services. The Ministry expressedconcerns about new purchasing mechanisms potentially upsetting the balance between existing and requiredresources (Lekhan, Rudiy & Shishkin, 2007).

Paying health care personnel

Workers in government-financed agencies and institutions (including health care facilities) are paid accordingto the laws and regulations of Ukraine, and according to general, departmental and regional agreements, andcollective contracts between proprietors and work unions, within the limits of budget allocations and non-budgetary income. The health workers union has not had much success recently in their fight to increase salarylevels. Ukraine has also largely retained the Soviet practice of remunerating public sector health careprofessionals using fixed salary scales. The advantage of this method lies in the simplicity of calculating thecost of salaries and the lack of financial risks for health care professionals. The main disadvantage is that thereis no correlation between salary level and quality of work. Medical professionals do not have much incentive toincrease their work volume, efficiency or quality. One goal in the Concept of the development of health care inUkraine (2000) was to differentiate medical and pharmaceutical workers’ salaries based on their level ofqualification, and the quantity, quality, complexity and efficiency of their work, while also taking into accounttheir working conditions. Since then several attempts have been made to make payments to health workersmore flexible. These attempts retained the basic principle of salaried employment but took into account a




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system of stimuli to improve clinical quality, enhance the prestige of medical specializations in short supply,increase the volume of work and so on. A Cabinet of Ministers Decree (No. 1298, issued 30 August 2002)adopted the Unified Tariff System of categories and quotients for the remuneration of workers in institutionsand organizations of some government supported sectors. Official rates are calculated by multiplying the salaryof a worker of the first tariff category (in essence the minimum wage) by the appropriate tariff quotient. Thespecific conditions of remuneration for health workers are set by a joint order from the Ministry of Health andthe Ministry of Labor and Social Policy (No. 308/519 issued 5 October 2005, amended 2007, On regulatingremuneration of medical and social protection facilities workers). Professional salaries for the majority ofmedical personnel (medical doctors, mid-level health staff, pharmacists) are set in accordance with theirqualifications which reflects a worker’s professional level (no category, first category, second category andhighest category). Professional salaries (tariff rates) are the government’s guaranteed minimum wage to certaingroups of workers with professional qualifications in public and private health care facilities. Managers atgovernment-financed health care facilities have the right to raise salaries within the salary fund provided by theline-item budgets. Salaries can be increased for certain workers with hazardous or heavy working conditions, orfor surgeons, depending on the quantity, complexity and type of work they carry out. For example, inoutpatient and polyclinic facilities salaries can be increased up to 15%; in a day hospital specializing insurgery, they can be increased up to 25%; and in a hospital, the increase can be up to 40% of a professionalsalary. The list of facilities and jobs with higher wages due to hazardous or heavy work conditions isdetermined by a special addition to the joint order of the Ministry of Health and the Ministry of Labor andSocial Policy. The list of actual workers who have the right to receive higher wages is determined by theenterprise’s authorities in accordance with the union’s committee and depends on the tasks and the volume ofwork. Additional remuneration is granted for specializing in more than one area, substituting for a missingworker, increasing the amount of work or the area served, and working nights at an hourly rate of 35–50%extra. For certain staff, bonuses are given for working long uninterrupted hours, performing complex duties,excellent achievements or for the execution of particularly important tasks. Bonuses are also given for beingon-call at home, nursing duty, holding an honorary title and more. However, these bonuses can be decreased orremoved if problems with clinical quality or discipline are identified. In public facilities, the salaries ofdifferent categories of medical workers (medical doctors and mid-level medical staff) are virtuallyundifferentiated according to qualifications or the type of work. There are only two groups of specialists amongmedical doctors. The first group includes professionals whose qualifications are in demand and who havepriority in the recruitment process: surgeons of all kinds, anaesthetists, any medical doctors for rural areas, andprimary care physicians such as district internists, district paediatricians and family doctors/GPs. The salary forthese specialists is one category higher than for others. Public health care specialists (hygienists,epidemiologists, etc.), for example, are included in the second category: medical doctors of other specialties.The salaries of their support staff are equal to those of mid-level medical staff. The salaries of mid-levelmedical staff are 3–4 categories lower than that of medical doctors and there is no specialty gradation. In anattempt to reduce turnover in emergency care and outpatient care, doctors and mid-level medical personnel inthese sectors are paid bonuses for continuity of service. The largest bonuses for continuity of service areprovided for emergency care doctors (up to 60%) and doctors practicing in rural areas (up to 40%). Primarycare physicians in cities can receive up to 30% of base salary. Moreover, like other specialists, these specialistscan receive an additional bonus of up to 50% base salary for increasing the area served, substituting for amissing worker (which is important in understaffed facilities) and for a larger workload. There are nosignificant differences between inpatient sector medical personnel and other personnel, except for surgeons andanaesthetists, whose salaries can be increased by up to 40% for performing specific surgeries. In all medical




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facilities with hazardous or difficult work conditions (inpatient and outpatient care), all types of personnel arepaid higher salaries, including doctors as well as mid- and low-level medical staff. Salaries in psychiatric andaddictions clinics can be up to 25% higher, while primary care physicians in polyclinics can be paid up to 15%more; 15% more in infectious diseases clinics; and up to 60% more in HIV/AIDS treatment facilities. Salariesin auxiliary facilities such as physiotherapy and radiological facilities can be paid up to 15% more of theprofessional base salary. The remuneration of dental specialists does not differ from other specialists. Midleveldental workers and dental assistants have the same level of remuneration as other mid-level medical personnel.The base salary of medical facility managers and their deputies is the highest in comparison with other medicalpersonnel. Their salaries depend on the capacity of the facility. Additional payments (24–25%) are provided forspecific qualifications in health care organization and management. In Ukraine, social workers work primarilyin institutions for vulnerable groups, including special homes for retired and disabled people, territorial socialcare centers for senior citizens and single people, centers for home care, charity services, homeless centers,homeless shelters, centers for reintegration of the homeless people and so on. The base salaries of socialworkers are 1–2 times lower than the salaries of non-priority specialty doctors. As with doctors, their salariesare differentiated between categories of qualification. Social workers employed at long-term facilities forchildren with developmental disorders can receive an additional bonus up to 25%, as can social workers atlong-term care facilities for elderly or disabled people. There is a relatively small number of private medicalfacilities in Ukraine, but the proportion of full-time workers in private health facilities usually does not exceed50%, with the exception of dental practices and dental centers, which are mostly staffed by full-time workers.Other personnel are hired as contractors, since their primary work is at public health care facilities. They arepaid primarily on a contractual basis. A contract between the administration and an individual medical workerprovides either an hourly rate or a fixed sum for the total volume of work. Different forms of remuneration canbe used for different employees at the same facility. The fixed rate differs significantly from facility to facility,which causes a high turnover. The hourly rate is usually based on the categories of medical personnel ratesapproved by the Ministry of Labor and Social Policy and the Ministry of Health, although remuneration isbetween 10% and 15% higher for working at a private facility. The methods of remuneration give someflexibility in salaries for medical personnel at public medical facilities. However, this has not proved asignificant incentive to increase the volume or quality of services provided. In the majority of cases, theremuneration of labor in health facilities is related only to the hours of work, without real consideration of thevolume, quality or efficiency of work. Bonuses and additional payments (except for mandatory payments forsubstituting a missing worker, length of service or a qualification category) are extremely rare due to thechronic lack of funding. In cases where additional payments are awarded, the criteria are not transparent.Bonuses are given not necessarily to the best workers from a professional perspective, but to those who, forwhatever reason, are more pleasing to the facility’s administration. The lack of transparent bonus criteriaremoves any incentive to increase the efficiency or quality of work. Moreover, salaries are still very low. Forexample, a medical doctor with the highest qualifications, whose specialty is among the best paid, usually doesnot earn more than US$ 300 a month, including bonuses and additional payments. The average monthly salaryfor doctors in 2006 was 901.6 hryvnya (US$ 178.5), 610.6 hryvnya (US$ 120.9) for mid-level medical staff,and 507.5 hryvnya (US$ 100.5) for low-level medical staff. On average, salaries in the health sector are lowerthan those in other sectors of the economy. Salaries are 1.79 times lower than in industry and 1.22 times lowerthan in education. Such salaries do not attract personnel (particularly the young) to the health system andcertainly cannot retain them. To a certain extent, these low salaries provoked the appearance and spread ofinformal payments, which have negatively affected the general equity and accessibility of medical care. Thepoor have suffered especially. Another obstacle to the implementation of more effective forms of labor




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remuneration is the lack of a legal basis for contracting at medical facilities. This tool would stimulate thedevelopment of clear criteria for work evaluation. It would create more transparent regulation of mutualcommitments between the administration and staff, including the organization of labor remuneration.

Provision of services

Public health

Public health agencies and medical facilities are responsible for improving the population’s health in thecountry. Health education is the responsibility of doctors of any level of qualification, particularly physicians ofthe lowest rank. Special medical facilities known as health centers exist on paper to coordinate activities topromote a healthy lifestyle, involving nonmedical institutions and facilities interested in this process as well,but they have yet to be fully implemented. However, current activities do not have a significant impact onpublic and individual attitudes towards their own health. Unfavorable health tendencies aggravated bywidespread risk behaviors have increased the understanding that the traditional health care model (focusingprimarily on treatment) does not improve health in Ukraine. There is a lack of human resources capacity toimprove health communication in Ukraine, as well as organizational and financial barriers. The Cabinet ofMinisters Resolution On approving the intersectoral program “Health of the Nation for 2002–2010” (No. 14,issued 10 January 2002) was, among other topics, dedicated to the promotion of a healthy lifestyle. Theprogram it introduced aimed for a number of measures to be taken in different branches of the economy,including education, creating an infrastructure of healthy recreational activities and incentives to support ahealthy lifestyle. Unfortunately, the implementation of this part of the program proved to be ineffective. Themedia actively advertises products harmful for health, particularly alcohol and tobacco. Furthermore, the SocialAdvertisement Institute is practically inactive, and health education for young people is lacking (Ministry ofHealth of Ukraine and Ukrainian Institute for Strategic Research, 2006). Nevertheless, there have been anumber of indications of a breakthrough in the government’s attitude towards healthy lifestyle issues. In 2005,a law was passed On measures of prevention and reduction of tobacco products use and their harmful impacton the population health (Law of Ukraine No. 2899-VI, effective 25 October 2005). In 2006, the Parliamentratified the WHO Framework Convention on Tobacco Control. In 2008, amendments to the Law on advertisingwere issued, banning tobacco and alcohol advertising (Law of Ukraine No. 145-VI, effective 23 March 2008).Thus, from January 2009, there has been a ban on tobacco, alcohol and low-alcoholic beverages in “externaladvertisements” inside and outside of city limits. Further, the advertising or promotion of alcoholic beveragesis banned from television programs. From 1 January 2010, it is forbidden to advertise alcohol and tobacco in allprinted media except for specialist titles. Currently, the Government-approved Concept of the state targetprogram “Healthy Nation 2009–2013” (Special Resolution of the Cabinet of Ministers No. 731-p, issued 21May 2008) provides for the implementation of a series of coordinated intersectional measures to createfavorable conditions for a healthy lifestyle in Ukraine (including more physical activity, rationalized nutrition,hygiene, cessation of tobacco smoking, and alcohol and drug usage) and the prevention of accidents. Financingfor this program comes from the pooling of funds from the state, local communities, public institutions andprivate organizations. The State Sanitary-Epidemiological Service is the main structure in Ukraine that islegally responsible for public health protection. Its two main functions are the control of communicablediseases and environmental protection (monitoring the quality of water, air, soil and food). The State Sanitary-Epidemiological Service is organized hierarchically. It is financed exclusively from the state budget, whichgives it relative independence from local authorities. The infrastructure comprises 816 sanitary-epidemiological




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stations including stations in rural areas, municipal and district stations, regional, central and one republicanstation, as well as disinfecting stations and one anti-plague station. The facilities have laboratory capacity forphysical - chemical and microbiological analyses to identify the sources of infectious diseases. State Sanitary-Epidemiological Service facilities primarily employ medical professionals and mid-level medical staff.Specialists in the State Sanitary-Epidemiological Service are responsible for maintaining preventive androutine sanitary and epidemiological surveillance to ensure safe working conditions in public and privateenterprises, facilities and institutions, including community buildings, water-pumping and sewerage facilities,residential and public buildings, residential institutions for children and teenagers, and medico-prophylacticinstitutions, among others. Anti-epidemic work is performed by the epidemiological sector of the StateSanitary-Epidemiological Service in concert with medico-prophylactic institutions. The Service is alsoresponsible for monitoring the quality of drinking water: it is in charge of 19 290 centralized water supplysources. It also controls 101 252 decentralized water supply sources, including 96 813 wells, 1142 watercatchment systems and 3304 artesian wells.

Immunization

Immunization is the main part of the preventive work. Thereare 10 mandatory vaccines in Ukraine: TB, polio, diphtheria,pertussis, tetanus, measles, mumps, rubella, hepatitis B andHaemophilus influenza type b (Hib, since 2006). Dependingon the specifics of their job or industry, certain categories ofworkers are required to receive certain other vaccines. Theactual planning of activities and registration of childreneligible for immunizations is the responsibility of localpediatric services or family doctors/GPs. The immunizationof children is organized and performed by special units inchildren’s polyclinics (vaccination surgeries) or familydoctors/GPs, the polyclinic departments of hospitals, ruralhealth facilities, as well as nurseries and schools. The StateSanitary-Epidemiological Service monitors the organizationand regular administration of vaccines. Two nationalimmunization programs have been implemented in Ukraine(1993–2000, 2002–2006) to reduce the rate ofcommunicable diseases. In 2007 the percentage of thepopulation immunized against the main vaccine preventablediseases reached 95%, including measles – 98.8%;diphtheria –98.7%; and pertussis, polio and TB (amonginfants) – 97.8%. Implementing these programs allowed Ukraine to overcome the negative epidemiologicalsituation that appeared in the 1990s and reduce the number of infectious diseases, primarily diphtheria, rubellaand mumps. However, measles and pertussis levels remain undesirably high (there was an outbreak of measlesin 2001/2002 and another in 2005/2006). The Ministry of Health regards this problem as a consequence of thevaccine shortages between 1992 and 1994. Moreover, vaccines received via humanitarian aid were neverofficially registered in Ukraine, and had a low immunogenic factor. This led to raised levels of these diseases

Figure 158 Vaccination Coverage Trends




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among adults (Ministry of Health, 2007). An audit by the Accounting Chamber revealed a number of problemswith the vaccination period, particularly irregular and sometimes insufficient supplies of vaccines (whichcaused a decline in immunization coverage from 2001 to 2003), insufficient compliance with the immunizationschedule, disregard of contraindications in certain cases in order to reach coverage goals and insufficientmonitoring of post-immunization complications. Low levels of health education among the general populationaggravated the situation, leading to the mass refusal of vaccination (Flisak & unpublished document, Shakh,2008). The state immunization program was developed for the period 2007–2015 and was ratified by Law No.1658-VI of 21 October 2009. The program aims to raise the levels of vaccination and revaccination for childrenin order to create a post-vaccination immunity that can contain an epidemic spread.

Family planning

The family planning system is one of the youngest subsystems in the Ukrainian health system. It was created asa result of the consecutive implementation of two national programs, Family Planning (1995–2000) andReproductive Health (2001–2005). Refining the family planning system remains one of the main goals of thecurrent national program, entitled the National Reproductive Health Program to 2015. A network of familyplanning centers and offices has been created in the country. The service is headed by the Ukrainian StateFamily Planning Centre established at the Ukrainian Research Institute of Paediatrics, Obstetrics andGynaecology. Regional family planning centers and contraception clinics have been established withinobstetrical and gynecological services. These new measures have thus far been relatively successful, withabortion rates falling by almost 4.5 times. However, abortions continue to be the main method of birth controlin Ukraine. Government statistics suggest that modern contraceptive methods are utilized by only about 29% ofwomen of reproductive age. More frequent use of modern contraception is hampered not only by high costs butalso by low public awareness and the unsatisfactory family planning system. According to a sociologicalsurvey, only 61% of women who had undergone an abortion received further advice regarding contraception;only 15.6% received a prescription or actual contraceptives.

Figure 159 Estimated Total Fertility Rate per Woman




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Figure 160 Infant mortality rates

Routine examinations and screening

Ukraine regulates mandatory preliminary and routine medical examinations for certain categories of workers,including workers involved in public services which could lead to the spread of communicable diseases orcause food poisoning (food workers in community or children’s facilities and school teachers) and employeeswho do heavy labor or work in hazardous conditions. The responsibility for arranging and conducting theroutine mandatory medical examinations of employees lies with the owners of enterprises, facilities andinstitutions. Monitoring adherence is the responsibility of the State Sanitary-Epidemiological Service. Since themid 1980s, during the Soviet era, there have also been universal health examinations to provide dynamicmonitoring of public health. Preventive screenings took place in accordance with certain programs, the contentsof which differed according to the age of target population groups. These examinations revealed certain factorswhich had an impact on public health, and preventive work was based on these factors. Decreased health carefinancing had a pernicious effect on the preventive work of medical facilities, particularly concerningscreenings of the adult population, which were reduced and took on a mostly declaratory form. At the turn ofthe century, the Ministry of Health passed a number of resolutions proclaiming the resumption of mass healthscreenings and the monitoring of public health (for example, the Ministry of Health Order No. 327, issued 8December 2000, On the resumption of mass health screening and monitoring of public health). This work was




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to be accomplished in two stages: the mass health screening of vulnerable groups during 2001–2002, andprophylactic examinations to cover the remainder of the population during 2003–2005. However, due to a lackof resources (primarily financial), only the first stage was accomplished. Currently, only certain groupsundergo compulsory medical screenings: children (monthly during the first year, quarterly during the second,twice a year during the third and annually from age 5 to 14), pregnant women, teenagers, students, emergencyservices workers and victims of the Chernobyl disaster. The local authority area is traditionally in charge ofcommunity health monitoring. Screenings involve other medical specialists (otorhinolaryngologist,ophthalmologist, surgeon, neurologist, dentist and others depending on indications), laboratory work andequipment tests. Unfortunately, the clumsy and expensive model of compulsory mass health screenings by agroup of professionals without any proof that these screenings are effective is still present. There is stillexcessive attention paid to preventive screenings, alongside a formal attitude to health improvement andpreventive treatments. Along with mass health screenings in Ukraine, there are also targeted preventivescreenings aimed at the early detection of certain conditions and diseases. For example, the state oncologyprogram (Cabinet of Ministers Decree No. 392, issued 29 March 2002) provides for a number of screeningprograms: detection of cervical cancer (yearly cytological screenings of women aged 18–60 and colposcopy forwomen in risk groups), breast cancer (mammogram screenings for women aged 40–65 and early palpationexams for women starting age 15), and colon and prostate cancer (annual examinations for people over 50). Inorder to improve the timeliness and effectiveness of cervical cancer detection, the Ministry of Health launchedanother program for cervical pathology screening (Ministry of Health Order No. 766, issued 31 December2004). There is no special financing provided for screening programs; they are financed primarily from localbudgets from general resources allocated to health care. The lack of earmarked financing prevents theseprograms from acquiring sufficient equipment, and there is a catastrophic shortage of mammographs in thecountry. The cytological service is rather small, which has a negative impact on screenings for cervical cancer.There are organizational problems as well, with no coordinated system of preventive screenings for women,which interferes with planning and evaluating the true scale of screening coverage. As a result, screeningprograms are not overly effective. The mortality rate for cervical and breast cancer did not change significantlyfrom 2002 to 2006. The frequency of advanced breast cancer detection in 2007 was 27% (Medical StatisticsCentre, 2008a). In 2006, the National Reproductive Health Program (Cabinet of Ministers Decree No. 1849,issued 27 December 2006) made plans for lowering cervical and breast cancer rates by 2015 and madeprovision for the special financing for these goals. Ukraine pays special attention to screening women duringantenatal and postnatal periods. Screening is performed by family doctors/GPs and obstetricians/gynaecologistsat specialized outpatient clinics called women’s consultation clinics. These clinics provide dynamic monitoringof women’s health during the antenatal period from 12 weeks of pregnancy, and provide health education andmaternal care during the postnatal period. There are a number of screening programs for pregnant women,including early detection of congenital defects (two ultrasound tests before 22 weeks and a test for alpha-fetoprotein), and tests for syphilis and HIV. Ultrasound tests cover about 94.6% of pregnant women, while thealpha-fetoprotein test covers 29.6%, the syphilis test covers 96–98%, and the double test for HIV covers94.5%. Despite extensive screening, the morbidity and mortality rates for congenital defects are still very high:in 2007, 22.3 and 2.8 per 1000 live births respectively (Ministry of Health and Ukrainian Institute for StrategicResearch, 2008). The rate of HIV-infected pregnant women in Ukraine is one of the highest in Europe, at0.31% in 2006. The number of children born to HIV-infected mothers continues to grow and reached a recordhigh of 2736 in 2006. However, Ukraine has had significant success in lowering the rate of mother-to-childtransmission. In 2006, 93.4% of all HIV-infected pregnant women received antiretroviral treatment to preventtransmission. As a result, the rate of mother-to-child transmission has fallen by 4 times since 2001, from 28%




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to 7%. However, approximately 10% of HIV-infected pregnant women are not registered with women’sconsulting clinics and are not tested for HIV. Therefore they do not receive timely treatment. The optimalvertical transmission level (up to 1%) is possible only through universal HIV testing during pregnancy, andtreating all women with positive results with three-component antiretroviral therapy (Ministry of Health andUkrainian Institute for Strategic Research, 2007a). The HIV/AIDS and TB epidemics have become majorpublic health problems in Ukraine. A number of legislative and other acts have been passed to fight the TBepidemic (for example, Law of Ukraine No. 2586-III, issued 5 July 2001, On fighting TB; Presidential DecreeNo. 643/2001, issued 20 August 2001, On a national program of fighting TB for 2002–2005; Cabinet ofMinisters Resolution No. 143, issued 15 February 2006, Ordering mandatory prophylactic TB screening forcertain population groups; Law of Ukraine No. 3537-IV, issued 15 March 2006, On amendments to some lawsto strengthen the fight against TB). Mandatory fluorographic screening was introduced in 2002 for the entirepopulation, but especially for at-risk groups. In 2003, Parliament approved the use of the directly observedtreatment, short course (DOTS) strategy (Resolution of Verkhovna Rada No. 989-IV, issued 19 June 2003, OnParliament hearing of TB epidemics in Ukraine and their prevention). In 2005, the Ministry of Healthofficially adopted a new strategy for fighting TB in accordance with international DOTS standards (Order ofthe Ministry of Health No. 610, issued 15 November 2005, On adopting the DOTS strategy in Ukraine), andsigned a protocol regarding the treatment of TB patients (Order of the Ministry of Health No. 45, issued 28January 2005, On approving the regulations of medical services for TB patients). In 2006, a new legislativedecision required all patients with active TB to undergo mandatory treatment. All measures for fighting TBreceived designated funds from the state budget. Furthermore, external technical and financial aid arrived fromvarious sources. For example, in 2003 the World Bank issued a loan to strengthen the anti-TB and AIDSprograms. In 2007, a special agency was created within the Ministry of Health, the National Council toCounteract Tuberculosis and HIV/AIDS, which serves as the national coordination body for health facilitiesregardless of their affiliations. However, all these measures have not produced desired results. The TBepidemic has not been halted and there is a rapid spread of HIV-associated TB. The ineffectiveness of previousmeasures has been linked to insufficient systematic and coordinated organizational measures, the weaklaboratory basis for TB diagnostics, the lack of a clear system of planning, purchasing, distribution andmonitoring of anti-TB medications, creating problems with the regularity of their supply, the lack of a quality-control system for purchased medications, the insufficient qualifications of medical personnel at clinics for TBscreening, consulting and treatment, the widespread use of mass fluorography screenings, palliative care ininpatient settings and so on – as these are all ineffective medical practices, from clinical and economic points ofview (Barbova et al., 2006). To deal with these issues, in 2007 a state program for fighting TB in 2007–2011was developed and made law (Law of Ukraine No. 648-V, issued 8 February 2007, On approving the all-national program of struggle against TB for 2007–2011). The program aims to reduce TB incidence and TB-related deaths through improving laboratory TB diagnostics, raising the efficacy of treatment, preventing thedevelopment of resistant TB strains, and improving the system of personnel training and retraining. For theauthorities, the problem of HIV/AIDS prevention has been at the center of attention since the first Ukrainiancases, registered in 1987. In 1991, Parliament passed the Law on the prevention of AIDS and on socialprotection of the population. In 1992, the first national program on AIDS prevention was launched in Ukraine.The fifth national program on HIV prevention, care and treatment of HIV-infected and AIDS patients ran from2004 to 2008. However, this is only the second program with earmarked financing and the first program thatprovided 90% of the necessary financial coverage for HIV/AIDS prevention and treatment. This programreceived funding from state and local budgets, a loan from the World Bank, and a grant from the Global Fundto Fight AIDS, Tuberculosis and Malaria. A network of special facilities – AIDS centers – has been created




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throughout the country. They are responsible for epidemiological monitoring and control, clinical andlaboratory diagnosis of HIV/AIDS and opportunistic infections, organization and provision of necessary typesof medical, psychological and social help for people living with HIV/AIDS, as well as educating medicalfacilities about HIV/AIDS. However, the interaction between these centers and general health care facilities israther weak. Public and HIV-service institutions play a major role in solving the social, psychological andlogistical problems encountered by people living with HIV/AIDS. However, they are not able to fullyaccomplish this work due to financial and organizational problems. The worsening situation with HIV/AIDSled to the approval of the Sixth National Program on Prevention, Treatment, and Support for HIV/AIDSPatients for 2009–2013 (Law of Ukraine No. 1026-VI, issued 19 February 2009). The program puts forward acomplex approach to fighting the epidemics, including the evaluation and monitoring of the epidemic situation,mass education on HIV/AIDS, primary prevention and steps on fighting HIV/AIDS among high-risk groups.The program also creates effective working conditions for public organizations responsible for HIV prevention,respects and defends the rights of HIV/AIDS patients, and provides universal access to high-quality care,support and treatment for these patients. Also, in order to draw injecting drug users to antiretroviral therapy, aheroin-substitution program has been launched. An important step in overcoming the HIV/AID Sand TBepidemics is detection, prevention and treatment of HIV-associated TB. Currently, access to HIV screening atTB treatment facilities is offered free of charge; combined TB and HIV/AIDS treatment is provided ifnecessary.

Patient pathways

Patient pathways in Ukraine can be characterized as chaotic and uncontrolled, and often they do not correspondwith the gravity and course of the disease. A patient can see a doctor of any specialty at a polyclinic. Wherepatients self-refer to the wrong specialist, they are redirected to another specialist as necessary. Some patientsself-refer to inpatient facilities and some of them are hospitalized unnecessarily if there are empty beds thatneed to be filled. According to research on patients with arterial hypertension and related diseases, 41.2% ofpatients first sought help from their primary care physician, 29.5% from medical specialists, 9.2% from theinpatient department of a hospital, 3.2% from emergency care and 16.9% from hospitals of differentspecializations (Kryachkova, 2003). There were also several different ways patients reached primary care:44.2% seek district internists directly, 21% are referred to by medical specialists, 23.2% come from hospitals,4.6% from day and home care hospitals, and 7% come from other facilities. Only a third of such patients arereferred to primary care by specialized and highly specialized care in order to complete their treatment, whilethe remainder are referred to primary care due to the incompatibility of the patient’s health condition with thetype of care that was initially sought. The majority of patients circumvent their primary care physicians to seemedical specialists and self-refer to hospitals directly: 34.1% of patients who seek specialized help self-referand 31.3% of patients who come to general hospitals do so directly. Every third patient who seeks secondarycare directly makes a mistake in their choice of a specialist and is redirected to a different narrow specialist.Nearly half of all patients who self-refer to specialist care at hospitals do not have a condition compatible withthe hospital’s level or profile and are transferred to a different health facility. District internists only partiallycoordinate the movements of their patients in the health system: only 8% of patients received specializedoutpatient care based on a referral from their district internist, while 33.7% were admitted to multi-specialtyhospitals, and 61.5% went to day hospitals and home care hospitals (as a share of total visits to an appropriatelevel). On average, only a quarter of patients (26.5%) receive medical care at only one level and are nottransferred to other specialists or to different medical facilities. The location(level) of provided health care has




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been found to be compatible with the patients’ health condition only in a third of cases; in 43.2% of casespatients received care far beyond the level that was really necessary, and in 22.7% of cases patients needed ahigher level of medical care than they received. Problems in the organization of patient pathways sometimeslead to unjustified complications. Some pathways have “loops” in them, whereby patients return several timesto the same specialist or to the same facility at the different stages of their treatment. For example, it is typicalfor an arterial hypertension patient who goes to see a cardiologist at a specialized clinic to be redirected to hisdistrict internist who refers him back to the cardiologist. The main reason behind such chaotic patientmovement is the lack of coordination of patient pathways from primary care physicians. Moreover, there is nodistribution mechanism of patients to different levels of medical care, and there is an insufficient material andtechnical base for primary health care as well. The convoluted system of patient pathways leads to the irrationalusage of limited resources, compromises the quality of medical health and has a negative impact on populationhealth. Adequate referral mechanisms could prevent a significant portion of patients from developing moreserious conditions or complications.

Primary/ambulatory care

Traditionally, primary care in Ukraine has been provided within an integrated system by district specialists –district internists and paediatricians employed by state or community polyclinics. From 2000, familymedicine/GP models have also been a feature of the system. Currently, family doctors/GPs make up a third(32.9%) of all primary care specialists. They work at family medicine/GP clinics or in appropriate polyclinicdepartments. The overwhelming majority of family doctor/GP facilities are located in rural areas (70%). Thenumber of privately practicing family doctors/GPs is relatively small (0.8% of the total number of doctors inthis specialization). The majority of privately practicing physicians work under contracts either with the localauthorities or with insurance companies. District internists provide general medical care to the assigned adultpopulation living in their catchment area (dilnytsia) in outpatient clinics or during home visits they areresponsible for preventive work among the population, perform dynamic monitoring of patients with chronicdiseases, provide health education and immunization, and make referrals to medical specialists and hospitals.Primary care nurses perform mostly auxiliary functions: under doctors’ supervision they prepare and fill outmedical forms (except for the primary document, an outpatient patient’s medical record), perform certain testsduring a visit (take temperature, blood pressure, etc.) and explain the preparatory steps for diagnosticexamination to the patients. Depending on their qualifications, family doctors/GPs are responsible forproviding general medical care to an assigned population (children and adults) in outpatient settings and duringhome visits, including prevention, diagnosis, treatment and after-care/rehabilitation for common diseases. Aswith other primary care physicians, family doctors/GPs organize referrals to specialists and hospitalizations fortheir patients, provide immunization services according to the vaccination calendar, conduct examinations fortemporary work incapacity, issuing documents and verifying results, and promote healthy lifestyles and healtheducation for patients. However, they can also perform basic surgical treatment of wounds, the immobilizationof fractures and the dynamic monitoring of pregnant women with a normal course of pregnancy during theantenatal and postnatal periods. Family doctors/GPs work together with family medicine/general practicenurses. However, especially in urban areas, people are reluctant to bring very young children to familydoctors/GPs who are retrained adult district internists rather than retrained primary care paediatricians.Sometimes children are already 7 or even 12 years old before their first visit. The retraining program of sixmonths is viewed as inadequate and, unlike in rural areas where district internists and district paediatricians hadbeen de facto working as family doctors/GPs prior to retraining, a former district internist may have had very




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little contact with children. Consequently, in some areas, family doctors/GPs only work with children olderthan 3 or 7 years of age. The optimum number of patients is set at 1700 adults per internist and 800 children perpaediatrician. For family doctors/GPs it is set at1110–1200 adults and children in rural areas and 1500–1600 inurban areas. However, in practice, on average there are about 2500 patients per internist in an urban area. Thenumber of children per paediatrician is slightly lower than the set norm and there are about 1500 per familydoctor/GP. However, these averages hide significant fluctuations in workloads for different types of primarycare physicians. Nationwide, 13% of doctors working in primary care serve fewer than 1000 people (adults andchildren) and about one-fifth (20.4%) provide care for more than 2500 assigned patients. In rural areas thenumber of doctors serving more than 2500 patients comes close to a third (29.1%). Although FAPs provideprimary care services as well, the shortage of doctors in rural areas causes a number of problems with theaccessibility and quality of medical care. In some areas this is further aggravated by low population density of30–70 people per 1 km2. About 11.4% of rural communities have outpatient clinics and hospitals withoutpatient departments with a catchment area of between 2.5 and 9.5 km; 56% of rural communities haveFAPs. About a third of rural communities have no medical facilities on their territory. Moreover, in somemedical facilities located in rural areas not a single position is filled by a medical worker. The number of suchfacilities is growing. The organization of primary care delivery is based on the territorial-district principle bywhich the area served by a particular primary care unit is divided into catchment areas with a certain number ofresidents. Ukrainians have been granted free choice of primary care physician; however, this has not yet beenimplemented widely because, while a patient has the option to change their primary care provider, this isusually blocked by the receiving physician since it would stretch the territorial boundaries of their catchmentarea and complicate home visits. Developing primary care is considered the leading strategic direction and oneof the main goals of health system development. There are plans for implementing comprehensive primary carereforms in the upcoming years. The total number of outpatient contacts per citizen per year is rather high inUkraine and significantly higher than in the countries of Central and Eastern Europe and in EU countries. Thehigh rate of visits per capita is a result of the Ukrainian method of paying for services based on capacitymeasures. Out of the total number of outpatient contacts, visits to medical specialists account for 75%, whilehome visits account for about 9%. More than a third of visits (36.7%) to an outpatient clinic or a polyclinic arefor preventive checks. The number of preventive visits is influenced by two factors. First, there are strictrequirements for target screening coverage for certain population groups (cervical cancer, breast cancer and TBscreenings) and second, medical examinations are performed by a team of six or seven different specialists,using some tests the effectiveness of which have not been scientifically established. The number of outpatientvisits in rural areas remains significantly lower than in urban areas and the majority of them (61%) are visits tomid-level medical specialists. Access to secondary care is not regulated since there is no strict distinctionbetween primary and secondary care in Ukraine. In essence, the concept of primary care is applied to the entirepolyclinic – including the specialists working there – and not only its primary care unit. Patients may seek carefrom a specialist directly without a formal referral from their primary care physician and this option is usedwidely.

Secondary care (specialized ambulatory care/inpatient care)

Secondary outpatient care is provided within the integrated model primarily by specialized offices departments)of territorially based polyclinics and polyclinic departments of city hospitals, children’s hospitals, centraldistrict hospitals and the polyclinic departments of specialized clinics (dispensarii). The average urban multi-specialty polyclinic serving a catchment area of 25 000 residents will have six or seven specialists, such as




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surgeons, orthopaedists, traumatologists, neurologists, ophthalmologists and otolaryngologists, whereas largerpolyclinics may also have cardiologists, rheumatologists, gastroenterologists, urologists and others. As notedabove, since there is no strict distinction between primary and secondary care in Ukraine, specialists inmunicipal polyclinics provide services to patients referred to by primary care physicians and those who seekcare directly. The organization of secondary outpatient care is based on a territorial principle, with eachpolyclinic being assigned a defined area. Residents of that catchment area are entitled to full diagnosticexaminations and appropriate treatment, and may be referred to the tertiary level when necessary. The volumeof secondary outpatient care provided by private facilities is not very significant, although private dentalpractices are developing rapidly. Private practices such as clinics providing gynaecological care (reproductivehealth clinics and centers offering family planning and infertility treatment) and alcohol, tobacco and drugdependency treatment centers or services are also quite widespread. These units are usually separate from themain health system. Some of them have a contractual relationship with institutions or private insurancecompanies, but the majority provide services to patients based on an established price list. There are also verywell-equipped private facilities specializing in outpatient diagnostic services. Often, patients are referred tothese facilities by medical specialists in state and community medical facilities that do not possess theappropriate diagnostic infrastructure. However, the relationship between these state and private facilities is notformalized, thus patients pay out of pocket. The inpatient system is a hierarchical system organized into threelevels. The first (lower) level is that of rural hospitals. These are very basic inpatient facilities with an averageof 16 beds, providing general care for adults and children, chronic disease care, treatment of some infectiousdiseases, rehabilitation, completion of treatments, simple obstetric care, and more. The number of thesefacilities is decreasing. In 2008, they accounted for only 2.1% of beds. The second, middle level is the truefoundation of the system. Secondary inpatient care is provided in cities by inpatient wards in multi-profilehospitals, children’s hospitals, specialized clinics and hospitals (for communicable diseases, maternity care andso on). In rural areas, it is provided by the inpatient departments of district and central district hospitals, and byhospitals in parallel health systems. These facilities have 75% of the total number of beds, and most are inmulti-profile hospitals. Due to a general reduction in hospital beds, their capacity is gradually decreasing. Thus,in 2008, the average capacity of municipal hospitals was about 195 beds, while central district hospitals hadabout 210 beds. Hospitals offer several specialties usually in 7 to 12 units (general medicine, surgical,infectious diseases, maternity services, etc.), although the range of specialties covered is not regulated. In largecities there are also specialized clinics (most often for communicable diseases), maternity hospitals and highlyspecialized centers (for example, a burns center or a neonatal center) based at multi-profile hospitals. Inaddition, municipal specialized clinics provide inpatient health care for some socially significant diseases suchas TB, STIs, psychiatric illness, endocrine conditions and others. The third level is that of regional and supra-regional specialization provided by regional hospitals and specialized clinics, and specialized clinical anddiagnostic centers at the national research institutes of the Ministry of Health and the Academy of MedicalSciences. These facilities hold over 20% of the total number of hospital beds. They were originally designed toprovide highly specialized medical care to patients with the most severe and complicated conditions. Recently,however, the boundaries between secondary and tertiary inpatient care have become blurred. It has beenreported that about one-third of patients admitted to regional hospitals should, in fact, have been treated insecondary-level hospitals. There are very few private inpatient facilities and most of them are specialized,highly equipped centers for oncology and cardiology patients, among others. Despite the reduction in thenumber of beds, there is significant underutilization of secondary care beds. The total hospitalization rate and,in particular, hospitalization of patients with non-chronic diseases decreased by 21% between 1990 and 2000.However, both figures started to increase slightly in 2001. The average length of hospital stay and stays in




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hospitals for patients with non-chronic conditions show a steady decreasing trend. Total inpatient careutilization and acute inpatient care utilization fell considerably between 1990 and 2000, and have stabilized atthese levels. A high rate of hospital bed utilization combined with significant financial barriers to accessinginpatient care highlights the inefficiency of hospital financing based on the number of beds. This stimulatesfacilities to keep these beds and hospitalize patients irrespective of their medical needs. Based on regionalresearch from 2006–2007, almost a third of all hospitalizations (32.9%) were without specific indicationswhich would require hospitalization. This number fluctuates widely depending on the unit’s profile: cardiologydepartments for heart attack patients have 11–14% of unnecessary hospitalizations, while pulmonology andgastroenterology departments have 55–73% (Lekhan & Volchek, 2007). Inpatient facilities are notdifferentiated by the complexity of interventions carried out. The same beds are used for patients with verydifferent needs in terms of both services and equipment. Based on the same research, 74.6% of hospitalizedpatients required emergency care in the acute disease department, 14.9% required scheduled care in the chronicdisease department, 8.2% required medical and social aid, and 2.3% required medical rehabilitation (Lekhan &Volchek, 2007).

Day care

In Ukraine, day-care inpatient facilities are expected to provide quality medical care services (complexdiagnosis, intensive therapy using innovative medical technologies) to patients through their hospitalization asa day case where there are no actual indications for full-time medical observation. The Ministry of Health hasregulated that day hospitals can function only as a part of outpatient clinics and polyclinics. Primary care dayhospitals have gained the most popularity, followed by multi-profile day hospitals, which provide treatmentmostly for cardiovascular, respiratory and digestive diseases. Some facilities have day hospitals specializing incardiology, neurology, gastroenterology, surgery, urology, ophthalmology, trauma, gynaecology andpaediatrics, among others. Day hospitals, like outpatient clinics and polyclinics, are financed according to thenumber of visits. However, day hospital financing is even less adequate in terms of real expenditure than thefinancing of polyclinics. For example, the estimated average spending on pharmaceuticals is 0.35–0.5 hryvnyaor US$ 0.07–0.1 per case at a day hospital. This is not very different from the allocation for one admission at apolyclinic (0.3–0.5 hryvnya or US$ 0.05–0.06). However, the volume of services provided at a day hospital ismuch larger. Therefore, patients have to pay out of pocket for various pharmaceuticals and medical devices.Since independence, the number of day hospital beds has increased nine fold and the number of patients treatedat day hospitals grew to match the increase in bed capacity. In 2008, 25.1% of the total number ofhospitalizations received care at day hospitals, and day hospitals comprised 16.4% of the total number of bedsin the facilities under the Ministry of Health. Patients prefer this form of care and often favor it over a 24-hourhospital stay. However, the growth of alternative inpatient care has so far had only a small impact on theutilization of inpatient facilities, and inpatient facilities lack the possibility of substituting their 24-hour serviceswith day care, because of the way these services are financed.The national program for health care development outlines significant reforms of the inpatient sector, includinga reduction in the number of hospitalizations by:

developing clear indications for the involvement of inpatient care; lifting restrictions on the development of inpatient care substitutes and on outpatient care in

inpatient facilities; transferring facilities of the parallel systems to the Ministry of Health;




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reorganizing beds based on their functional differences; enlarging general hospitals to provide emergency inpatient care and creating service

coverage for 100 000 to 200 000 people; reorganizing some hospital departments into chronic disease facilities to provide medical

and social support, as well as palliative services; and reorganizing materials and equipment in health facilities based on their future use.

Furthermore, it has been proposed that, in order to provide the population with highly specialized and well-equipped medical care, university-based clinics must be established in the form of a holding union of medicaluniversities and regional hospitals.

Emergency care

Formally, emergency care is defined in Ukraine as a type of medical care in health- or life-threateningconditions at the scene of an accident, en route to or at a hospital. All medical workers and facilities arerequired to provide emergency care. In urgent cases, when medical help is unavailable, emergency care must beprovided by civil defense forces, militia, the fire department, rescue services, public transport drivers andothers. In such cases, enterprises, agencies, institutions and citizens are obliged to provide vehicles to transportvictims to the appropriate medical facility. In case of a life-threatening emergency, medical workers have theright to use any vehicle to reach victims or to get to hospital. In reality, the primary component in emergencycare is the emergency care service of physicians and feldshers. The emergency care service is responsible forproviding pre-admission care to patients and victims of accidents on-site and en route to the appropriatemedical facilities. Due to the lack of differentiation based on the intensity of medical care, emergency care isprovided at medical facilities along with other medical services. In 2007, the government approved a nationalprogram on emergency care development by 2010 (Cabinet of Ministers Decree No. 1290, issued 5 November2007). The program provided for the development of a unified emergency care system, strengthening material,technical and human resources in medical facilities, and training and retraining medical staff, rescuers andother workers who use a vehicle to provide high-quality emergency care. In 2007, the state’s emergency caresystem comprised 96 independent and 891 hospital-based ambulance stations. The ambulance stations aresupplied with appropriate equipment and special vehicles (primarily cars). Mobile emergency care is providedby 3114 mobile teams (0.71 per 1000 population). Since 1990, the number of teams has decreased by 14.5%,and the provision of care by 13.4%. Out of the total number of teams, 35% are general physician teams, 54%are feldsher teams and 11% are specialized (cardiology, intensive care, neurology, psychiatry, etc.). Specializedteams appeared during the period of increasing specialization of health care in the 1970s and 1980s, in order toraise the quality of pre-admission emergency care. These goals were not reached, however. Intensifying andnarrowing the specialization of teams created some positive results alongside negative consequences. Using thespecialized teams for their direct purpose significantly decreased their workload, which is now almost threetimes smaller than the professional workload of teams comprised of general physicians and feldshers. Therehave been attempts to increase the workload of specialized teams, which means that these teams have to makeso-called “non-profile” trips and be used as general emergency teams. Using specialized teams in such amanner has a negative impact on the quality of emergency care, however, due to each team’s narrowspecialization. A well-organized emergency care system would mean about 15–16 trips per 24 hours for oneteam. In fact, the teams are making 1.5–2 times fewer trips: physicians and feldsher teams make about 10–11trips, and specialized teams make 8.5 trips per 24 hours. This leads to the wasteful use of limited resources. The




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low workload of the teams is caused by general discrepancies in emergency care organization andadministration, as well as by problems beyond the health sector, primarily the unsatisfactory management ofroad traffic. There are no special lanes for public transport and vehicles performing important social functions.Ambulances are often stuck in traffic, which significantly prolongs each trip. In 2007, mobile emergency teamsresponded to 13.8 million calls, or 297 per 1000 population. The main reasons for calls were sudden acuteillnesses, accidents and traumas (77.2%). Among other reasons were births (6.8%), transportation of patientsand women in labor to hospitals (7.0%), and calls for diseases that did not require emergency care (7.0%).Since 1990, the frequency of calls has decreased by 13%. The reasons for calls have changed more drastically:the proportion of calls related to births and pregnancy complications has dropped significantly, due to a generalfall in the birth rate. There were fewer calls for common diseases, while calls for acute diseases increased. Atfirst glance, the calls structure for 2007 seems to correspond better with the main functions of emergency care.However, there was an increase not only in the number of calls related to acute diseases, but in the frequency ofthese calls as well. The frequency increased by 1.3 times between 1990 and 2007, from 153.8 to 206.9 per 1000population. This is caused not by organizational issues but by reduced access to emergency care, particularlyfor financial reasons. Officially, state and community facilities must be free for all patients regardless of theirorigins (Ukrainian citizens, foreigners or people without citizenship). At the same time, standard budgetallocations on pharmaceuticals per emergency call fluctuate from region to region, between 1.5 and 2.7hryvnya (US$ 0.3–0.5). This funding cannot cover even the minimum costs of pharmaceuticals and equipmentneeded for emergency services. Thus, patients themselves, or their relatives, are forced to search for life-savingmedicine at any given time of the day or night. There are a number of private emergency care services inUkraine. These services are usually established in larger cities and are well equipped for providing medicalcare and patient transportation. However, high costs (300–400 hryvnya or US$ 60–80 per call) mean that only asmall proportion of population can use them. Data about their quality or capacity are unavailable. One of themain qualities of emergency care is its timeliness. Emergency service timeliness in Ukraine is measured as thepercentage of all calls where the team is in attendance within 15 minutes after the call has been received.According to the data from the Medical Statistics Centre, overall in 2007, mobile teams arrived on the scene ina timely fashion 88% of the time in general, and 90% of the time for accidents, traumas and acute conditions.State and local budgets reserve funds to reimburse expenses that may arise from the provision of medical careto the victims of emergency situations.

Pharmaceutical care

According to the state law, drug provision is considered a part of the health service, and pharmaceuticals atstate and community medical facilities must be paid for from the government budget. However, even under theSoviet Semashko system, outpatients were obliged to pay for drugs out of pocket (with the exception of certaingroups entitled to benefits). Since independence, severe shortages in health care financing have forced patientsto pay out of pocket even for inpatient drugs. Currently, only 13.3% of all pharmaceuticals consumed areprovided through hospitals; 86.7% are purchased by the population at pharmacies. Certain population groupsare entitled to some benefits in receiving medical services and pharmaceuticals. So-called vulnerablepopulation groups and patients with socially significant and very serious diseases such as TB, cancer and so on,receive medical services either free of charge or with significant discounts. These benefits mostly includeoutpatient drugs. Drugs prescribed in the home which are on the government approved list must be providedfor free or with discounts. Benefits-related pharmaceutical costs are meant to be covered by state budgetallocations to health care. However, poor health care financing limits their availability. In reality, even




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vulnerable population groups have to pay for their medications out of pocket most of the time. In order toimprove pharmaceutical access for the population, the government approved a national list of essentialpharmaceuticals and medical devices in 2009 (Cabinet of Ministers Decree No. 333 of 25 March 2009, A fewissues with the state regulation of prices for pharmaceuticals and medical devices). The list was developedaccording to anatomic-therapeutic-chemical (ATC) classification based on international non-proprietary namesand includes 215 efficient, affordable and safe pharmaceutical drugs that are used in Ukraine in the prevention,diagnosis and treatment of the most common diseases. The list represents the foundation of a basic medicalentitlement package and, by an order of the Ministry of Health, is to be used for arranging tender procurementfor state purchases to support targeted programs, state veracity of these data is questionable since the majorityof emergency stations do not have the necessary equipment to automatically register the time when a call isreceived and when the team arrive on the scene. There are data showing that the number of late arrivals byemergency teams is very high and that sometimes patients have to wait for hours. In case of emergenciescaused by natural, man-made or social catastrophes, initial emergency care at the scene is provided by specialrescue units. Subsequent care outside of the rescue zone is provided by the State Service of CatastrophicMedicine. The service was created in 1997 and comprises the Republican Scientific and Practical Centre, aswell as 27 territorial centers of emergency care and catastrophic medicine, a mobile hospital, specializedmobile teams and brigades, and more than 780 teams of the regular emergency care service. The catastrophicmedicine service also includes 12 emergency care hospitals and 77 other medical facilities, which can expand,if needed, support of the domestic pharmaceutical industry, plans for benefits costs recovery, the creation ofclinical protocols and forms, and the monitoring of pharmaceutical supplies and price formation. However, in2007, pharmaceutical usage by the population was uncontrolled (Cabinet of Ministers assignment No.29029/1/1-07, issued 3 July 2007). As most pharmaceuticals are purchased both by outpatients and inpatients,the scope for influencing prescribing patterns is rather limited, and is further hampered by the liberalization ofpharmacy dispensing procedures. A list of prescription-only drugs has been developed by the Ministry ofHealth, but most of them can nonetheless be bought over the counter. In 2005, the Ministry of Health attemptedto regulate procedures for dispensing prescription drugs (Ministry of Health Order No. 360, issued 19 July2005). However, low levels of public education and poor preparation of the health system limited the attempt tomove towards greater regulation of prescription-only drugs. At the same time, pharmacies do maintain strictcontrols on the supply of psychotropic drugs and hormonal preparations, even though many others, such asantibiotics, can usually be bought without a prescription. Clinical protocols can have a certain influence onprescribing patterns as long as they contain a very clear definition of the medical indications for the use of aspecific drug. There is no national program promoting efficient generic drugs that are less expensive, asopposed to the more expensive brand names. Pharmaceutical companies have a significant influence onprescribing patterns. They have a very aggressive marketing policy, actively advertise pharmaceuticals in themass media (advertising for prescription-only drugs is banned in Ukraine), hold free seminars for medicalspecialists and reward doctors who prescribe their products. As a result, there is a high level of over-prescription among physicians, who often prescribe expensive brand name pharmaceuticals instead of lessexpensive generics and, in certain cases, disregard rational drug therapy. Doctors only prescribe generic drugsfrom the National Essential Drugs List to patients who are exempted from co-payments or who pay reducedprices for pharmaceuticals, which the patient then obtains from their local community pharmacy. Acombination of financial and educational measures could influence prescription patterns positively. Forinstance, the use of global funds that would at least partially cover the government’s pharmaceuticalexpenditure has been suggested (Rudiy, 2005), as has the introduction of a system of reimbursements forpharmaceutical expenses (Lekhan, Slabkii & Shevchenko, 2009). However, there has been no real




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implementation of these initiatives. In order to improve pharmaceutical provision, a national program has beendeveloped for 2004–2010 which outlined the selection of safe and efficient pharmaceuticals using pharmaco-economic analysis (Cabinet of Ministers Decree No. 1162, issued 25 July 2003). The program also introduces aformulary-based drug procurement system, improves tender procedures for state purchases of medications andidentifies state priorities for medication purchases.

Finally, the program introduces the state registration of wholesale prices, as well as the introduction ofappropriate laboratory, clinical, industrial and distribution practices based on such standards as GMP, goodlaboratory practice (GLP) and so on. A list of essential pharmaceuticals and medical devices was approved inaccordance with the program, and necessary preparations have been completed to launch a formulary-baseddrug use system by the State Pharmacological Centre under the Ministry of Health (Ministry of Health OrderNo. 173, issued 17 March 2009 and Ministry of Health Order No. 59, issued 28 January 2010). The formulary-based system should improve the quality of treatment and should provide clinicians with access to its unifiedteams of clinicians and other health care specialists with information on the use of pharmaceuticals registeredin Ukraine (their pharmacological properties, contraindications and distribution methods). The first NationalDrug Formulary of Ukraine for the supply of pharmaceuticals in health facilities was published in 2009.

Rehabilitation/intermediate care

In 2006, the government approved a model state program on the rehabilitation of disabled people whichprovides a list of rehabilitation services and medical devices that the government should provide free of chargeregardless of age, gender or type of disability (Cabinet of Ministers Resolution No. 1686, issued 8 December2006). The model state program serves as the framework for an individual rehabilitation program whichdefines the types, forms, quantity and timeliness of rehabilitation, aimed at the restoration of or compensationfor disabilities or lost bodily functions and capabilities as well as determining when and where rehabilitationshould take place. The government has assumed responsibility for developing a rehabilitation policy, which isdelegated to central authorities (the Ministry of Labor and Social Policy, the Ministry of Health, the Ministry ofEducation and Science, the Ministry for Family, Youth and Sport) as well as local authorities. Local authoritiesshould work in partnership with public organizations for disabled people to develop and implement programsfor the prevention of disability and provide for the alleviation or treatment of disabling conditions. Disabledadults and children are treated through medical, psycho-pedagogical, psychological and professional means, aswell as with physical therapies, sporting activities and social rehabilitation. Medico-social expert commissionsare responsible for diagnosing disabilities and establishing the level of health loss, as well as determining adisabled adult’s occupational capacity. They also develop individualized rehabilitation programs. Thesecommittees act as independent centers within the regional health authorities. There are more than 400 medico-social expert committees in the country. Treatment-and-consultation committees in medico-prophylacticinstitutions are responsible for establishing the degree of disability in disabled children. By law, therehabilitation sector in Ukraine is comprised of executive authorities, local self-governments and variousinstitutions such as rehabilitation facilities for disabled people, special and sanatorium-type preschools andschools for children requiring long-term treatment for physical and/or mental development problems, prostheticand orthopedic enterprises, sanatoria and health resorts for labor unions, social protection agencies, culturalactivities agencies and public organizations for disabled people. Rehabilitation facilities are composedprimarily of social rehabilitation centers for disabled children to correct developmental disorders and prepare




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them for education (services range from preschool to middle school, to technical, professional and highereducation), professional rehabilitation centers to restore a person’s capabilities and prepare them for work,medico-social rehabilitation subdivisions in social care centers for elderly people and single disabled people.These rehabilitation centers function as national and local specialized facilities, receiving financing fromnational or local budgets, or as nongovernmental, non-profit-making organizations that receive financing fromextra budgetary resources. Each center’s structure is determined by its specialization and can contain rooms foroccupational and social rehabilitation, laboratories, workshops, classrooms and so on. These centers are staffedby both medical and psychological assistants. Currently, there are more than 270 rehabilitation centers forchildren in the network, 72 professional rehabilitation centers, and more than 270 medico-social rehabilitationdepartments within territorial social care centers for elderly people. The Ministry of Labor and Social Policiesis responsible for the majority of rehabilitation facilities, and the Ministry of Education and the Ministry forFamily and Youth are responsible for the remainder. Despite the fact that the model rehabilitation programoutlines the basic medical rehabilitation services to be provided to disabled individuals, there are no medicalfacilities attached to organizations engaged in rehabilitation. To provide these services, the program referspatients to appropriate specialized departments of health facilities, the clinics of research institutes, andsanatoria and spas. For instance, people with locomotors and central nervous system problems can be providedwith medical rehabilitation, reconstructive surgery, prophylactic measures, and sanatorium and spa treatments.People with psychological disabilities can receive restorative treatments, psychiatric help, prophylacticmeasures, and sanatorium and spa treatments. Patients with serious vision or hearing impairment are eligiblefor restorative therapy, prophylactic measures, and sanatorium and spa treatments (hearing-impaired patientsare provided with hearing aids, reconstructive surgery and cochlear implants). Where disability is the result ofproblems with internal organs, patients can receive restorative therapy, prophylactic measures, and sanatoriumand spa treatments. Cancer patients are eligible for restorative treatment, prophylactic measures, medicalsupervision, reconstructive surgery, and sanatorium and spa treatments. Medical facilities are not differentiatedaccording to the intensity of care or treatment provided. Restorative treatments and medical rehabilitation aretherefore performed at practically all levels of health facility. The health system does include several facilitieswhose main priority is rehabilitation, however. Among inpatient facilities, these include a hospital for medicalrehabilitation, a physical therapy clinic and a center for children with impaired nervous systems. Amongsanatoria and spas, these include a balneotherapeutic health resort and a mud cure clinic. The number of suchfacilities is very small, rehabilitation services are limited and not many patients are served. The basic elementsof a modern rehabilitation system do exist in Ukraine. However, this system does not address the full spectrumof problems in rehabilitating and reintegrating people with limited physical abilities or psychological andmental problems. Only 10% of disabled children are in fact undergoing rehabilitation (Interfaks-Ukraina,2007). The majority of disabled children do not attend preschools. Individuals with limitations in physical andmental development account for only 1% of the students in vocational schools (Interfaks-Ukraina, 2007).According to the Ministry of Education, in the 2007/2008 school year, special classes were created for only14% of disabled children attending comprehensive secondary schools, and the rights of disabled children withtechnical or other rehabilitation devices are not respected. Disabled people make up only 0.4% of students inhigher education. The reason for such low coverage of rehabilitation care is the inconsistent interactionsbetween medical facilities, and labor and social protection agencies. In 2007, the government approved a stateprogram to develop the rehabilitation system by 2011 (Cabinet of Ministers Resolution No. 716, issued 12 July2007). The program provides for:

• improvement of the delivery system of rehabilitation services;• an increase of the production and supply of high-quality modern rehabilitation devices;




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• easier access to education, including correspondence, integrated and inclusive education forpeople with physical and mental disabilities;

• training, retraining and professional development of disabled people according to current marketdemands; and

• creating easy access to social infrastructure and public transport.The program also provides for a personal database of disabled individuals as well as a list of requiredequipment and literature for rehabilitation facilities. The reorganization of medico-social expert commissionsinto medico-social expertise and rehabilitation facilities appears to be a promising solution for rapiddevelopment of the rehabilitation facilities network. Within five years, the program should return 170 000disabled people to work and social life, and fully satisfy the demand for medical, technical and other means ofrehabilitation. This will save more than 100 million hryvnya, since there will be a reduced need to paydisability pensions, social benefits or compensation to the rehabilitated individuals. So far, a social protectionprogram has been adopted to provide easy access to public and private facilities for disabled people, and newstate construction standards have been approved to secure a convenient environment for people with limitedmobility. This includes the production of accessible public transport vehicles. However, the program lacksincentives to improve the medical rehabilitation system, despite the fact that the Ministry of Health acts as a co-executor on a number of tasks. At the same time, the National Plan of Health Care Development provides forthe establishment of rehabilitation hospitals by 2010 in compliance with the functional differentiation ofsecondary inpatient care facilities (Cabinet of Ministers Degree No. 815, issued 13 June2007). The Ministry ofHealth developed and publicly displayed on its web site the project for this Plan, which takes into accountinternational experience of running this kind of medical facility. It is intended that the hospitals will incorporateall modern approaches in the treatment of patients with trauma and various diseases that require rehabilitativemeasures for the prevention of disabilities and the rapid restoration of working capacity.

Long-term care

Long-term care in Ukraine is provided by facilities in the social care system (under the Ministry of Labor andSocial Policy) that provide medico-social care to certain population groups. These facilities include homes fordisabled children and nursing homes for elderly people and disabled people, as well as mental institutions andthe inpatient departments of territorial centers for elderly people and single disabled people. Homes forchildren are medico-social facilities designed to provide assisted living, education, upbringing and medicalservices for children aged between 4 and 18 with psychologically and physiologically impaired development.They are divided into four groups: (1) children of preschool and school age with normal intellectualdevelopment, whose physical impairment severely limits their movement; (2) children with severe mentaldisabilities who can move freely and attend to their own needs; (3) children with severe mental disabilities whocan move freely but cannot attend to their own needs; (4) children with various levels of mental disabilities andcomplex physical problems who cannot move freely or attend to their own needs. Currently, there are 58 homeswith more than 6000 children. The capacity of these schools fully covers demand, but their material andtechnical resources do not meet modern requirements (Yaskal, 2000). The deinstitutionalization of thesechildren and the prevention of their institutionalization have not as yet received any serious attention frompolicy-makers. Mental institutions are inpatient medico-social facilities that provide assisted living for patientswith psychoneurological disorders who need medical services and assistance with daily living. Theseinstitutions accept patients of retirement age and disabled people over the age of 18 with psychoneurologicaldisorders, regardless of whether they have relatives (who are generally required by law to care for them).




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Nursing homes for elderly people and disabled people are inpatient facilities with long-term stay for elderlypeople, war veterans, and disabled adults who need medical services and assistance with daily living. Thesefacilities accept individuals without relatives. If there are vacancies, however, they can accept patients withable-bodied relatives when all financial costs are paid in full. Nursing homes provide 24-hour medical servicesand advisory assistance. The inpatient departments of territorial centers for long-term or temporary assistedliving are designed for people who are unable to work and have lost mobility, cannot attend to their own needs,and need medical services and daily life assistance. According to the Ministry of Labor and Social Policy,currently there are 316 nursing homes with 55 000 beds, assisting 50 000 elderly and disabled people. Thereare also 270 inpatient departments of territorial centers for long-term and temporary assisted living. Nursinghomes and mental institutions receive their funding from local budgets, primarily through inter-budgetarytransfers from the state budget, social insurance funds and through patients’ pensions. However, with littlefunding available, these facilities are unable to provide proper sanitary conditions and enough food. Many ofthese facilities are situated in old buildings, poorly equipped and in poor condition. The quality of care is low.Moreover, these facilities do not have enough beds so there are waiting lists. The types of medical staffemployed at these facilities are determined by their areas of expertise. Thus, in nursing homes for elderlypeople, care is provided by geriatric and psychiatric specialists, while psychiatrists provide the care in mentalinstitutions, and so on. Social workers provide social support and every facility is required to have a dentist.Since rehabilitation services in these facilities are rather unsatisfactory, the state rehabilitation programprovides for the introduction of medical and physical rehabilitation specialists as well as medical psychologists.

Services for informal care

In Ukraine, many people use and participate in providing informal care services. There is no political orfinancial support from the government for this type of care, and there are no data available on the number ofpeople involved in providing it. There are different NGOs which are usually set up by people required toprovide care for relatives with certain conditions (for example, children with cerebral palsy etc.). Sometimes,these organizations receive grants from various funds.

Palliative care

There is great demand for palliative care in Ukraine, due to the high mortality rate and an ageing population.There are approximately 1.5 million people in Ukraine each year who need support from palliative careservices; that is, approximately 480 000 patients and family members who care for terminally ill patients.However, there is no developed palliative care system in the country. Medical services for terminally illpatients are usually provided by medical facilities of various specializations and levels, and they are treatedalongside other patients without specific consideration for the type of services needed during the terminal phaseof a disease. Primary care physicians and nurses bear the main burden of palliative care, including care forcancer patients, who make up the most prevalent group in need of palliative services. Hospitalization for thesepatients occurs in the acute phases only for a short period of time. The first hospices were initiated by localself-governments and NGOs. The first hospice was opened in 1994 in Lviv. Currently, there are about 20hospices and palliative care departments in multi-specialty hospitals with 650 beds for palliative care (Barmina,2008). Services are located in urban areas such as Donetsk, Zaporizhzhia, Luhansk, Lviv, Lutsk, Ivano-Frankivsk, Kherson, Kharkiv and Kyiv. Current capacity can satisfy only 10% of the demand for palliativecare. Most of these facilities are community-based and receive their small amount of funding from local




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budgets. They cannot provide the social side of palliative care as hospice staff do not include social workers,psychologists or attorneys. There is no developed networking between hospices and other medical facilities,social care agencies, public organizations and so on to assist continuity of care. There is still an acute problemin providing pain relief to patients in the terminal phase of a disease. Because of strict narcotics control, doctorsare significantly limited in their freedom to prescribe the correct type and dosage of opiate analgesics,especially to non-cancer patients, and for their use in home settings or social protection facilities. Anothersignificant problem in palliative care is that medical staff and social workers lack the necessary knowledge andskills in the methods and principles of pain relief and in relieving physiological and other somatic problems.The limited access to effective pain relief and essential medicines, the limited access to palliative care facilities,insufficient training of specialists and the limited capacity of NGOs all mean that the majority of patients donot receive adequate palliative care. There is still no government policy regarding the development of palliativecare. Even though the Ministry of Health legalized hospices in 1995 by including them in the list of medicalfacilities (Ministry of Health Order No. 114, issued 22 June 1995), and approved staffing standards for thesefacilities in 2000 (Ministry of Health Order No. 33, issued 23 February 2000), there is still no legislationregarding the activities of such facilities, with the exception of AIDS hospices (Ministry of Health Order No.866, issued 27 December 2007, On approving temporary regulations for hospice and palliative caredepartments for HIV/AIDS patients). The lack of government policies regarding palliative care slows itsdevelopment. There are insufficient institutional and human resources to create a palliative care facilitiesnetwork; there are no methodological grounds or delivery standards; and there is no training system for medicaland social workers engaged in palliative care. Many issues hamper the development of palliative care inUkraine, such as insufficient government knowledge regarding the scale of the problem and a lack of statepolicies regarding the development of palliative care for various groups of patients with incurable illness. Thereare also insufficient integration and coordination between the Ministry of Health, the Ministry of Labor andSocial Policy, NGOs, private providers, public associations for socio-medical protection and palliative care.This is compounded by a lack of resources and the use of outdated, inefficient technologies and models ofpalliative care (Ministry of Health of Ukraine and Ukrainian Institute of Public Health, 2008). Nevertheless,there have been some positive changes in the government’s attitude towards palliative care. In 2006, the All-Ukrainian Association of Palliative Care was created, along with the Inter-Departmental Work Group forImprovement of the Legal Basis of Palliative Care. In April 2008, in accordance with an order from the

Ministry of Health on the national program ofpalliative care development in Ukraine for 2010–2014, the Coordination Council on Palliative andHospice Care was created. The Council iscomprised of government members and publicorganizations. Currently, a program has beendrafted that provides for the development andimprovement of the legal basis for using opiates inpain relief, the development of a hospice network,the creation of palliative care delivery standards,and the formation of a national system of medicaland social staff training in palliative care.




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Mental health care

The 2000 Law on mental care (Law of Ukraine No. 1489-III, issued 22 February 2000) set out the legal andinstitutional basis for providing mental care based on principles of human and civil rights for the first time inthe Ukrainian context. It determines the responsibilities of executive authorities and local self-governments aswell as the legal and social rights of individuals suffering from mental illness, and regulates the rights andresponsibilities of physicians and other workers involved in providing psychiatric care. For instance, the lawprovides for mandatory consent from the patient and his relatives or legal guardians for receiving medical care,and the use of compulsory treatment can only be based on a court decision using measures approved by law.The law also establishes a patient’s right to receive limited psychiatric care according to the patient’s condition,preferably in home settings. Ukraine has also signed the Mental Health Declaration for Europe (2005) inHelsinki, and the Mental Health Action Plan. The openness of mental care to national and international NGOshas caused a shift in public attitudes towards both the providers and receivers of mental health care services.The mental health protection system consists of psychiatric hospitals and outpatient clinics, and the psychiatricdepartments of multi-profile hospitals that operate under the Ministry of Health. There are also low-capacitypsychiatric agencies that work under the jurisdiction of the security services, the Ministry of Internal Affairs,the Ministry of Transport and Communications, and the Ministry of Defense, providing services directly to theemployees of these departments and their families. There are a small number of private medical facilitiesproviding psychiatric, psychotherapeutic and drug treatment services. In 2007, the network of psychiatricfacilities under the Ministry of Health consisted of 88 psychiatric hospitals with an average capacity of 500beds, 29 specialized mental health clinics, as well as 656 psychiatric and 162 psychotherapeutic units inpolyclinics within the main health system. Mental health receives about 2.5% of total health care expenditure.It has been estimated that 89% of all resources are used on inpatient psychiatric care, while outpatient servicesreceive only 11%. It must be noted that psychiatric patients have to purchase their own medications, and lessthan 1% of patients receive the necessary psychotropic medication with up to 80% cost coverage. Neurolepticmedication would cost up to 10% of the daily minimum wage, and antidepressants would cost 3%. Therefore,the lack of a national system for supplying medication to psychiatric patients creates a heavy burden for thepatients’ families, reduces access to treatment and decreases its efficacy. In 2007, facilities under the Ministryof Health employed 3362 psychiatrists (7.2 per 100 000 population), and 422 paediatric psychiatrists (4.7 per100 000 children). Depending on the region, the supply of psychiatrists varies significantly: some regions havetwice as many psychiatrists as others; most are concentrated in the eastern part of the country, with very fewworking in the west. According to staffing standards, every psychiatric hospital department and every mentalhealth clinic is required to have at least one psychologist. In reality the numbers are much lower, which slowsthe humanization of psychiatric care and limits the implementation of psychotherapeutic measures. Staffingstandards do not provide for social workers in medical facilities, and social care nurses are responsible forproviding services to psychiatric patients(1 nurse per 150 beds). Each department for compulsory psychiatrictreatment is required to have a social care nurse on staff as well. There are 9.4 psychiatric beds per 10 000population, 10.4 per 10 000 for adults and teenagers, and 2.95 per 10 000 for children. Psychiatric beds accountfor 10.7% of the total number of beds under the Ministry of Health. The ratio of beds in inpatient facilities fornon-chronic and psychiatric conditions is 1:7.5, while the ratio for psychiatric beds and long-term stay beds is1:1. The overwhelming majority of psychiatric beds (96%) are in 106 specialized psychiatric facilities (88hospitals, 18 specialized clinics (dispensarii)), including 96% of beds for adults and teenagers, and 96.2% forchildren. The remaining beds are distributed among several multi-profile hospitals of different levels: 3regional hospitals, 20 municipal hospitals, 15 central district and district hospitals, 1 rural catchment area




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facility and 1 municipal children’s hospital. The conditions provided by the majority of specialized psychiatricfacilities are far below modern standards. The rooms contain 10 or more patients, and up to 24–30 patients incertain regions (Pinchuk, 2007). The number of beds for patients in psychiatric hospitals has dropped by 37%since Ukraine gained its independence. However, the related optimization capacity has not yet been exhausted,as between 10% and 30% of beds in mental hospitals are still being used as socio-medical or long-term carebeds. In some cases, beds are “re-allocated” rather than being closed. For example, in 2004, one psychiatrichospital became the property of Social Services and was then transformed into a psychiatric nursing home. Thishas not become a common practice, although the shortage of beds in mental health facilities is still an acuteproblem. The psychiatric health protection system has 105 day hospitals with 5137 beds – there are only 0.44beds per 100 registered psychiatric patients. In a number of regions, the number of day hospitals ranges from 1to 4. In general, the reduction in inpatient capacity has not been coordinated with development on thecommunity level of psychiatric health protection services. Moreover, the network of outpatient care facilities isshrinking, from 33 in 2002 to 29 in 2006. This deinstitutionalization of psychiatric care is also not supported bythe population. Since there is no parallel creation of adequate alternative services to meet local needs, these bedclosures serve to deprive a significant proportion of psychiatric patients of access to professional medical care(Strannikov, 2008). A state target program is being drafted to further develop the mental health protectionsystem. Its main goals will be:

a structural and functional reorganization of psychiatric care to increase the quality andaccessibility of services;

the integration of psychiatric care into the system of primary and secondary care; the development of prevention programs among children and adults; and implementation of measures to prevent the stigmatization of psychiatric patients.

This program was developed in 2006, but still has not been approved.

Dental care

Currently, most dental health servicesare commercial. Patients must pay outof pocket for diagnostic tests, fillingmaterials and so on, not only inprivate dental facilities – the numberof which is growing rapidly inUkraine – but also in state-ownedfacilities. State regulation of dentalcare prices is insignificant; the marketplays the primary role in settingprices. Dental care for children anddental prosthetics for certainpopulation groups remain free. Thereis limited quality control of dentalservices. According to data collectedby the Medical Statistics Centre underthe Ministry of Health, in 2007, in




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state owned facilities, the only aspects of care which are regulated are those related to routine screening, thepopulation examined during screening, the percentage of those examined who need check-ups, and thepercentage of those who need check-ups and who actually receive them. There is no systematic quality controlin the majority of private facilities. In the 1990s, the drop in the accessibility and quality of dental services ledto an increase in dental health problems, particularly among children. These factors prompted the approval ofthe State Program for the Prevention and Treatment of Dental Diseases, 2002–2007 (Presidential Decree No.475/2002, issued 21 May 2002). The main goals of the Program were to improve dental services, reinforce theprimary and secondary prevention of dental diseases, ensure that the resources and organization of dental carecomply with local needs and coordinate the activities among dental facilities. Some positive changes haveoccurred since the Program’s implementation. Each oblast created a registry of dental diseases (particularlytargeting areas with endemic fluorosis), and dental facilities began providing preventive and dental hygieneservices. However, the Program’s overall goals were not achieved due to a lack of specific financing, and poorcoordination between the departments involved in the program’s implementation. The population’s dentalhealth continues to worsen. According to the Dental Association, there are numerous factors responsible forthese negative tendencies. Dental equipment is in fairly poor condition in state-owned facilities, especially inchildren’s dental polyclinics, departments and practices. Also, techniques in use are incompatible with moderndental prevention and treatment standards. The disintegration of the national system of primary and secondaryprevention has played a role, as has the downsizing of the network of dental practices in preschools andschools. Moreover, there is a lack of coordination between state and private dental sectors, and a lack of properquality control for dental hygiene devices on the national market. Dental care reforms are currently underpublic discussion. The reforms suggest transforming state-owned dental facilities into lease-holding, local ornational companies, reorganizing the service model by providing equal conditions for facilities of differentforms of ownership. Moreover, the government must present the public with a standard package of guaranteeddental services, primarily for children and population groups who are subject to mandatory medical check-ups.Further, the reforms would include the introduction of an intersectoral system of health education, with furtherdevelopment of effective methods of primary and secondary prophylactic care, primarily for children andpregnant women.

Complementary and alternative medicine

Since the 1990s, Ukraine has been going through a social crisis, accompanied by a decline in the prestige ofscience and education. Combined with the compromised quality and accessibility of mainstream medical care,there was an explosion in alternative healing. A large number of fraudulent healers appeared and, during the1990s, these “healers” managed to obtain licenses or similar documents from the Ministry of Health, alongsidelegitimate specialists who use holistic approaches. As the massive uncontrolled spread of these healingpractices began negatively to affect the population’s health, the government began to react. In 1998, thePresident issued a special decree to bring this activity under public control (Presidential Decree No. 823/98,issued 31 July 1998, On the regulation of folk and alternative medicine). The decree commissioned theMinistry of Health to strengthen the licensing law for alternative medicine, and tasked the Ministry of InternalAffairs and the Ministry of Finance jointly to find and punish illegal “healers”. It commissioned the Ministry ofInformation and the State Committee on Nationalities and Religion to control the mass media, filtering outadvertisements for “medical” services that could harm public health. In fulfilling this decree, the Ministry ofHealth created a special Folk and Alternative Medicine Committee (reorganized in 2006 as a state enterprise)responsible for proposing state policies regarding the development of the field, creating a database of




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alternative practitioners, controlling their activity, and issuing special permits to practice folk and alternativemedicine to people without a degree in medicine. A permit can be issued on the basis of the UkrainianAssociation of Folk Medicine’s expertise and a positive decision by the special committee that includesspecialists from the Ministry of Health and other health authorities. Folk and alternative medicine practitionersare forbidden to treat cancer, infectious diseases including STIs, AIDS and contagious skin diseases, drugaddiction and mental disorders that require immediate hospitalization. They are forbidden to assesspsychological health, monitor and treat pregnancy complications, or perform surgical interventions includingabortion. They are also not permitted to perform mass healing sessions with the use of hypnosis or othermethods of psychic or bioenergetic influence. To a certain extent, the committee has organized the field ofalternative medicine, but a number of goals still have not been met. For instance, there is still no registry ofalternative practitioners, which makes it difficult to control their activities. Many individuals continue topractice and advertise services unrelated to medicine (removal of curses, fortune telling, etc.) under cover of alicense from the Ministry of Health, further discrediting legitimate folk and alternative medicine practitioners.This caused the Ministry of Health to issue another order in 2003, which mandated an analysis of theimplementation of legislation for folk and alternative medicine (Ministry of Health Order No. 267, issued 19June 2003, On controlling illegal medical practice in the field of folk and alternative medicine). Further, thisOrder mandated the recertification of practitioners with a new license from the Ministry. However, thenecessary legitimization of the field has still not been implemented, a situation aggravated by massive,uncontrolled advertisements of pseudo-healing practices in the mass media. According to the UkrainianFederation of Health Care Promotion, there are about 4000 alternative medicine practitioners in the country,but medical circles suggest a number at least 10 times higher. A small proportion of these practitioners aremedical professionals specializing in folk and alternative medicine. The remainder do not possess any medicaltraining. Moreover, according to the Ukrainian Federation of Health Promotion, up to 70% of these so-calledhealers are neither professionally nor morally affiliated with healing. About 5.5 million people receive servicesfrom these “healers”, and this number does not show any signs of decreasing. There are several reasons peopleseek care from healers, among which two are mentioned most often: the lack of positive outcomes from adoctor’s treatment and an unsatisfactory relationship with a doctor. The majority of patients seeking alternativetreatment from healers are elderly or have a low level of education, but there are significant numbers of patientswith specialized secondary education and higher education.

Health care for specific populations

Ukrainian law guarantees equal access to health care to all Ukrainian citizens, foreign citizens and peoplewithout citizenship who permanently reside in Ukraine. However the rights of foreign citizens and peoplewithout citizenship temporarily residing in Ukraine are determined ultimately by special laws and internationaltreaties (for example, Law of Ukraine No. 2801-XII, issued 19 November 1992, Principles of legislation onhealth care in Ukraine). Medical health care for prisoners is provided in accordance with the health care law aswith the population at large. Care is normally provided directly in a prisoner’s cell. In emergencies, prisonerscan be transported to a medical facility in the Department of Justice or to the medical facilities of the Ministryof Health with the appropriate security measures in place.




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Entry and Exit Visa Requirements for US & Non-US Citizens

Ukraine's 90/180 rule for visa-free entry

Upon entering or exiting Ukraine, your passport is looked over or scanned todetermine the number of days in the previous 180 that you have spent withinUkraine. (Note that 90 days is a little less than 3 months, and 180 a little lessthan 6 months.) If this number is above 90, you could be refused entry orfined. This is more likely at Kyiv Boryspil airport and less likely at someland border crossings, such as Schehyni-Medyka near Lviv, where the90/180 rule continues to be ignored 3 years after its official adoption.***NEWS: Citizens of the following countries can now visit Ukrainewithout a visa for periods of up to 90 days over a 180 day period with avalid passport:

AndorraAustriaBelgiumCanadaCubaCyprusCzech RepublicDenmarkEstoniaFinlandFrance

GeorgiaGermanyGreeceHungaryIcelandIrelandItalyJapanKazakhstanKorea (South)Kyrgyzstan

LatviaLiechtensteinLithuaniaLuxembourgMaltaMonacoMongoliaNetherlandsNorwayPolandPortugal

RussiaSan MarinoSlovakiaSloveniaSpainSwedenSwitzerlandTajikistanVatican CityUnited KingdomUnited StatesUzbekistan

*Note two countries that are conspicuously missing from this list: Australia and New Zealand

Citizens of these countries can stay in Ukraine for up to 90 days within any 180 day period without a visa. Forlonger stays a visa will be required. For a while there was no 180 day stipulation, which meant that foreignerscould simply cross the Ukrainian border every 3 months and avoid getting a visa. As of July 11, 2007 this is nolonger possible (link to decree in Ukrainian), though in practice it is still possible at certain border crossings. Ifyou intend to stay in Ukraine for more than 90 days out of any 180, you will need to get a visa.

Entry Requirements to Ukraine for U.S. Citizens

A passport valid for six months beyond the planned date of travel is required. According to UkrainianPresidential Decree #1008 dated June 30, 2005 (with amendment dated August 18, 2005), U.S. citizenstraveling to Ukraine on short-term tourist, business or private travel do not need a visa to enter Ukraine. Visas

Figure 161 Picture of visa

http://zakon1.rada.gov.ua/cgi-bin/laws/main.cgi?nreg=917-2007-%EF




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are still required of other categories of travelers including those who intend to study, reside, or work inUkraine. Short-term travelers entering Ukraine under the auspices of this decree can stay in Ukraine up to 90days. However, you still must have a passport with you to enter Ukraine!

If You Still Must Get a Visa to Ukraine

You will still need to get a Ukrainian visa in the following cases:

1. You are not a citizen of one of the countries listed above2. You are from one of those countries, but plan to be in Ukraine longer than 90 days, regardless of the

Getting a Ukrainian visa was never too difficult to begin with, and the past five years have seen newdevelopments that have made it easier for foreigners to arrive in Ukraine:

3. Now, citizens of many countries do not require a visa at all for visits to Ukraine of up to three months.

Where to get a Ukrainian visa

Visa descriptions and requirements can be found at the websites of Ukrainian consulates and embassiesabroad. Plan to send in your visa application no less than three weeks before you plan to visit Ukraine, thoughyou can pay more to get it done in three or four days' time. For U.S. citizens, which of the consulates (NewYork, Chicago, or San Francisco) or Embassy (D.C.) you send your passport and application to supposedlydepends on which state you live in, but they will process applications from any state. If you do not reside in theUnited States, find a listing of Ukrainian embassies and consulates around the world here, or, if you speakUkrainian or Russian, call the Ukraine Ministry of Foreign Affairs information bureau at (38-044) 238-17-37,or, more specifically, the visa department at 238-15-25. Note that you cannot get a Ukrainian visa inUkraine, even if you have come to Ukraine without a visa as a citizen of one of the visa-free countries in thelist at the top of this page. You must leave Ukraine and apply for a visa at any Ukrainian consulate abroad.Ukraine visa application forms can be downloaded in PDF format athttp://www.ukrconsul.org/visa/VISA.pdf or requested by mail. Also very useful is this example of filling outthe visa application form. Here is what you will need to mail to the embassy or consulate:

your passport (original, not a copy) one completed application form printed or written in block letters in black ink (visa application )

purpose of your journey3. You plan on being employed or studying in Ukraine, regardless of the length of your visit

1. Foreigners are no longer required to go through the hassle of registering at the local OVIR (Departmentof Visas and Registration, also called VVIR in Ukrainian) within three days after arriving in UkraineInstead, they only need to register their passports if they are in the country for more than three months(six months for U.S. citizens).

2. Invitation letters or any other supporting documents are no longer required for citizens of the UnitedStates, Canada, Japan, Switzerland, Slovakia, and Turkey, or citizens of the countries of the European

Union (but an invitation letter never hurts, and at some Ukrainian consulates abroad it is even required).

http://www.ukrconsul.org/

http://www.ukrconsul.org/

http://www.mfa.gov.ua/usa/en/news/top.htm

http://travel-2-ukraine.com/information/visa/consulates.htm

http://www.tryukraine.com/info/visas/consulates.shtml

http://www.ukrainesf.com/consular/blanky/visa_sample.pdf

http://www.ukrainesf.com/consular/blanky/visa_sample.pdf

http://www.ukrconsul.org/visa/VISA.pdf




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For a tourist visa you will need a letter of invitation from a travel agency that is registered in Ukraine.

Visa application pitfalls

As you can see the visa application procedure is really quite simple. Don't worry if you write "Kiev" instead of"Kyiv" or wrote your inviting party's address in cyrillic. Those things don't matter. However, it does matter thatyou have filled in the full name and address of your inviting party and that you have a temporary addressin Ukraine. Failing to fill in these boxes can cause your application and passport to be returned to you. I'veheard of this happening.

Extending Ukrainian visas

Visas can be extended in Ukraine within 4-5 business days at the city OVIR (office of visas and registrations)— not the neighborhood OVIR. Apply for an extension no sooner than 4-5 days before your visa expires.You cannot change the category of visa and are not allowed multiple entries back into the country during theperiod your visa has been extended for. In other words, if you have a multi-entry visa and extend it in Ukraine,you will only be allowed one more exit from Ukraine. As soon as you leave the country, the visa becomes void.Hence, if you plan to make multiple trips out of the country during the period you want to extend your visa for,it would make more sense to receive a new visa during your next trip abroad or even make a special trip to getthe visa (to Krakow or Budapest, for example) rather than extend your current visa. I know firsthand that theworkers at the Krakow, Poland consulate are cooperative and will have the visa done within a few hours if youvisit them in person. There are almost never lines, but be the first to be waiting at the door in the morning!

Letters of invitation

Invitation letters are NOT necessary for citizens of the US, Canada, Japan, Switzerland, Slovak Republic,Turkey, and citizens of the countries of the European Union for obtaining official, business, private, cultural,sports, and research visas. Note that for each of these countries (except Turkey!) visas are not necessary in thefirst place for stays of up to 90 days. If you need a visa and you require a letter of invitation for a tourist visato Ukraine, our partners at Discover Ukraine can provide you with a letter of invitation if you book a hotel withus. This letter of invitation can 'invite' you only for the period of time that you have booked a hotel. When youfill out the hotel booking form there is a place where you can state whether you need visa support service (i.e. aletter of invitation — you will still need to apply for the visa yourself).

Registering your Passport in Ukraine

Ukrainian law requires foreigners to register their passports in Ukraine after spending a certain period of timein the country. Your initial passport registration occurs at the time of crossing the Ukrainian border when yourpassport is stamped. The period of time for which this initial registration is valid is 90 days for citizens of non-WTO (World Trade Organization) countries and 180 months for citizens of WTO countries, which include theEuropean Union, United States, and most developed countries. Note, however, that the visa-free period is still90 days for citizens of the EU, USA, and some other countries. You can only stay in the country for longer thanthat if you hold a visa. Useful tip: If you are interested in staying in Ukraine for longer than 90 days, it is




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As stated above, as of fall 2009 "border runs" may still work, but eventually they may not, depending on howborder officials choose to interpret immigration regulations. To avoid having to register their passports, manyforeigners in Ukraine simply make sure they leave Ukraine every three months (or six, if they are from theU.S.). Upon entering Ukraine you automatically receive a stamp in your passport that is a substitute forregistration for a three or six month period. So, all you need to do to avoid registration is cross the border andget a new stamp in your passport. OVIR officers have said that it is perfectly fine to go to an internationalborder crossing (for example, between Lviv and Krakow, Uzhhorod and Kosice, or Chernivtsi and Suceava),cross by bus, car, bicycle, or by foot, and promptly re-enter the country a few minutes later from the other side(make sure you don't need a visa for the other country, though!). Your new entrance stamp allows you to be inthe country another three months (or six months) without registering. Ask OVIR officers which registrationperiod applies to citizens of your country. The registration period used to be three days (it still is in Russia)!

The registration process in Ukraine

recommended that you ask the border officials how long you'll be able to remain in the country with your visaor without any visa and when you will need to have your passport registered. Ask this whenever you enter orleave Ukraine. Once you get to the city or town where you will be staying, at some point within the first monthor two drop by the city OVIR (Office of Visas and Registrations, also termed "VVIR" in Ukrainian) and askthem the same questions. Because official regulations and de facto practice often differ in Ukraine, andregistration periods have been traditionally been a source of considerable confusion for foreigners. The purposeof passport registration is to loosely keep track of non-citizens in the country, to know their whereabouts, andto make sure there is a sponsor or inviting party who they can charge for our deportation if you break the law.In addition, for instance, you will need to have a passport registration to register as a private entrepreneur or tocreate other legal entities. If you are not conducting business in Ukraine and leave the country every 90 days orless, you may be able to avoid the hassle of registering your passport with the local OVIR. As of fall 2009 thereis still much confusion among expats in Ukraine as to whether this "border runs" to pick up a new entry stamp(which counts as registration) still work or whether they are "supposed" to sork.

Crossing the Ukrainian border to avoid OVIR registration

Passport registration within Ukraine, as far as we know, is only possible if you hold a visa. To begin theprocess, you will need to go to the local city office of the Department of Citizenship, Immigration andRegistration (commonly called the OVIR or "VVIR") and pick up the necessary forms and review anyadditional registration requirements for your type of visa with OVIR officers. Always bring your passport withyou when visiting the OVIR, as officers will almost always want to look at it, check your identity, and look atyour visa type and border crossing dates. The registration process should be started at least one week beforeyour previous registration expires, whether a border stamp or an OVIR registration. Registration can be time-consuming for you, your landlords, and/or your inviting party. It may require multiple visits to the OVIR,which typically have visiting hours scattered throughout the week. Find out the address of your district or cityOVIR office by calling the official 09 information service (Ukrainian speaking -- at least in Kiev). If you arelate registering, you will highly regret it! You will have to pay a fine and go through additional lengthybureaucratic procedures, and you will still have to go through the registration process all over again. Read moreabout this below. Your passport registration will take up a whole page of your passport. It will show theregistration period, the name of the inviting party, and your place of residence in Ukraine.




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Registration requirements

The registration forms you will need depend on the type of your visa. If you have a private visa, you will onlyneed forms for you and the person who invited you, or whose home you are living at. If you have a business orservice visa, you will need a form for you, for the person whose home you are living at, and for theorganization that invited you. Hopefully your landlord isn't out of town when you need to have him/her fill outthe form! This is a common problem for many expats, who have to decide at the last minute whether to beregistered a different address (where he/she does not actually live) or to attempt a "border run." Employers whohire foreigners and obtain work permits for them usually take care their passport registration as well. Inaddition, there are commercial services for foreigners that will take care of all the formalities for you, savingyou several visits to the OVIR and local utilities offices (the infamous "ZHEK"). To register your passportwhile holding a private visa, you will need:

2 photos a copy of your passport (including the page with visa and the most recent stamp of entry to Ukraine) a copy of the inviting person's passport your form and the inviting party's form a receipt of payment of the registration fee (probably 33 UAH, or $6.50 USD before the 2008 economic

crisis), which you can usually pay at a bank next to or inside the OVIR building

You will need to ask the officers at the OVIR the exact amount of the payment and where to make it. Therewill probably also be a minor bank processing fee of 5 UAH or less. Confirm the above requirements withOVIR officers before bringing in your documents for registration. It is possible they may require additionaldocuments, for example, a rental agreement or a stamp from the ZHEK on the inviting party's application.

Stamp from the ZHEK

The ZHEK is the local residential utilities office which manages utilities and building upkeep for a givenneighborhood. It also issues internal passports for Ukrainian citizens and handles matters of establishingresidency in a certain location. The purpose of the ZHEK stamp is to confirm that the ZHEK is aware thatsomeone else will be residing at that address. Trying to get through to the ZHEK may take several attempts andneeds to be done by the owner of the apartment you are living at. The ZHEK will likely request to see "theforeigner" together with his passport, and may or may not require the homeowner to fill out another formstating that you will be staying at their apartment through a certain date. The ZHEK needs to know the numberof people living at the apartment in order to calculate the cost of certain services for the apartment. Mostlandlords aren't excited about the idea of registering their tenants -- whether foreigners or Ukrainians -- at theZHEK office. As a result of registering an additional person at an address, their utilities bill may go up.Furthermore, they may have to pay income taxes on the rental sum recorded in the rental agreement registeredby the ZHEK during your visit. If you are in Ukraine on a business, service, or other kind of visa, in additionto the requirements listed above you will also need to submit:

a completed form from your inviting organization (obtained from the OVIR)




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a copy (non-notarized is fine) of the organization or firm's government registration certificate showingwhen and where the organization was registered, as well as its legal address and official name

a copy (non-notarized is fine) of the organization or firm's Bureau of Statistics certificate showing theorganization's declared fields of activity

IMPORTANT: One of the purposes of registration forms for inviting parties is to make sure there is someoneto pay for your deportation, if such became necessary. These parties do not necessarily have to be the sameparties who invited you for your visa. They can be any organization or private person who is willing to takeadministrative responsibility for you while you are in Ukraine. You do not even have to be working for theorganization (which would require a work permit) or have business relations with them. Since I know of nodeportees, I don't know what actually happens when a foreigner breaks the law and what consequences, if any,the inviting party may have to bear.

Extending your registration

To extend your registration without leavingUkraine and receiving a new entry stamp, you willneed to repeat the whole process described above.There is no procedural difference between gettingyour first registration and extending yourregistration. Start this process no later than oneweek before your registration period runs out.

What happens if you fail to register on time inUkraine

If you miss your mandatory registration date (90 or 180 days from your last entry into Ukraine, as stated attop), you and your inviting party will have to pay a fine (as of 2008, 340-680 UAH for the foreigner and 0-840UAH for the inviting party), even if you are just one day overdue. Technically you may be deported if you areway overdue or have been late to register more than once; however, in practice I have not heard of it. If you arelate for registration, you will need to go to the city OVIR along with your inviting party (private citizen whosehome you are living at or inviting organization, as the case may be) and write a statement (handwritten is fine)from each of you explaining the reason for your tardiness. The OVIR officers will take these statements andappoint a date for you and your inviting party to appear in "court" together. Most likely, the OVIR officersubmits his own comments along with the statements, based on his conversations with you. Your "trial" willlikely consist of a few questions from the judge in his or her office. The judge will decide the size of the fineyou are to pay. You will need to go to the nearest Sberkassa (state bank) and pay the fine, come back with thereceipt, give it to the judge's secretary, and come back to pick up a copy of the court decision several days later.Then, with this document, you will need to go back to the OVIR and complete the regular passport registrationprocedure, with the court decision attached. As you can see, resolving registration problems can take severalweeks, so make sure you keep track of your registration period and either register or re-enter Ukraine withinthe time limit. Note as well that you will need the signature of the owner of the apartment you are staying at, soif the owner is abroad you may have problems! So, plan well in advance.




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Required Steps to Create a Business

Figure 163 How Ukraine ranks on Doing Business topics

Formal registration of companies has many immediate benefits for the companies and for business owners andemployees. Legal entities can outlive their founders. Resources are pooled as several shareholders join forces tostart a company. Formally registered companies have access to services and institutions from courts to banks as

Figure 162 Ranks




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well as to new markets. And their employees can benefit from protections provided by the law. An additionalbenefit comes with limited liability companies. These limit the financial liability of company owners to theirinvestments, so personal assets of the owners are not put at risk. Where governments make registration easy,more entrepreneurs start businesses in the formal sector, creating more good jobs and generating more revenuefor the government.

STARTING A BUSINESS

According to data collected by Doing Business, starting a business there requires 9 procedures, takes 24 days,costs 4.4% of income per capita and requires paid-in minimum capital of 1.8% of income per capita.

Figure 164 What it takes to start a business in Ukraine

Globally, Ukraine stands at 112 in the ranking of 183 economies on the ease of starting a business. Therankings for comparator economies and the regional average ranking provide other useful information forassessing how easy it is for an entrepreneur in Ukraine to start a business.




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What are the changes over time?

While the most recent DoingBusiness data reflect how easy (ordifficult) it is to start a business inUkraine today, data over time showwhich aspects of the process havechanged—and which have not(table below). That can helpidentify where the potential forimprovement is greatest.

Figure 166 The ease of starting a business in Ukraine

Figure 165 How Ukraine and comparator economies rank on the ease of starting a business




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Equally helpful may be the benchmarks provided by the economies that today have the best performanceregionally or globally on the procedures, time, cost or paid-in minimum capital required to start a business.These economies may provide a model for Ukraine on ways to improve the ease of starting a business. Andchanges in regional averages can show where Ukraine is keeping up—and where it is falling behind.

Figure 167 Has starting a business become easier over time? (part 1)




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Figure 168 Has starting a business become easier over time? (part 2)




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Economies around the world have taken steps making it easier to start a business—streamlining procedures bysetting up a one-stop shop, making procedures simpler or faster by introducing technology and reducing oreliminating minimum capital requirements. Many have undertaken business registration reforms in stages—andthey often are part of a larger regulatory reform program. Among the benefits have been greater firmsatisfaction and savings and more registered businesses, financial resources and job opportunities.

What business registration reforms has Doing Business recorded in Ukraine?

Figure 169 How has Ukraine made starting a business easier - or not?

Underlying the indicators shown in this chapter for Ukraine is aset of specific procedures—the bureaucratic and legal steps thatan entrepreneur must complete to incorporate and register a newfirm. These are identified by Doing Business throughcollaboration with relevant local professionals and the study oflaws, regulations and publicly available information on businessentry in that economy. Following is a detailed summary of thoseprocedures, along with the associated time and cost. Theseprocedures are those that apply to a company matching the

standard assumptions (the ―standardized companyǁ) used byDoing Business in collecting the data (see the section in this

chapter on what the indicators measure)

Figure 170 Standardized company




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Summary of procedures for starting a business in Ukraine—and the time and cost

No. Procedure Time tocomplete

Cost tocomplete

1

Notarize company charter and execute premises (if needed)The notary fees range from UAH 30 to UAH 75 at the state notary andfrom UAH 500 to 800 UAH at the private notary. The exact fee dependson the number of participants for approval, the number of pages andcopies of registration documents, and the additional notary feesapproved by the Regional (Oblast) Department of Justice. To open atemporary bank account, the founders must submit evidence of theirdecision to appoint a person with signature authority to executetransactions on this account. The decision should be formalized by anotarized power of attorney.

1 day UAH 600

2

Open a bank account for initial capitalFounders must contribute 50% of their charter fund contribution beforeregistering the company. Founder contributions may be made in cash,including foreign currency, as well as in kind. Temporary accounts arerestricted to receiving the contributions of funds for the formation of thenominal (share) capital of the company being incorporated. No otheroperations are allowed. The following documents must be submitted tothe bank to open a temporary account: - Application for opening theaccount in the form established by Regulation No. 492. The applicationshould be signed by the person authorized by the founders of the legalentity (could be a separate power of attorney granted to the individualconcerned). - Original or notarized copy of the constituent documents(charter and, in some cases, foundation agreement). - The founders’decision to grant a power of attorney, which should be notarized if atleast one founder is an individual). - The signature specimen and theimprint of the seal (as specified in Regulation No. 492). The signaturespecimen should contain the signature of the person(s) authorized by thefounders to sign the bank account documents. While the company isunder formation, it does not have a corporate seal. Thus, at this point,the card should be submitted without the seal and signed by theauthorized bank employee.

1 dayno charge orup to UAH

100

3

Pay registration fee at the bankThe cost for regular procedure (5 days) is UAH 81 and for expeditedprocedure (3 days) is UAH 162. 1 day nominal

4

Register at the Registration OfficeFounders must submit the following documents when registering at theRegistration Office: - The charter (two copies). - Minutes of founders’meeting. - Application form (registration card). - Bank document,evidencing payment of registration fee. - Proof of payment of minimumcapital requirement, that is, either bank documents for cashcontributions or, otherwise, transfer acceptance act (executed betweenthe founders and the company) for in-kind contributions.

5 day UAH 170

5

Register at the State Statistics CommitteeCompanies must register with the State Statistics Committee, althoughthe Registration Office has already filed some information with theStatistics Office.

1 day UAH 25.94

6

Register VAT at the State Tax Authority and obtain a VAT numberA company with annual turnover of up to UAH 1 million is eligible forregistration as a 6% or 10% consolidated taxpayer. A 10% consolidatedtaxpayer may not register as a VAT payer. A company is automatically

10 day UAH 17




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registered as a profit taxpayer during primary registration (see Procedure4). However, those companies that must register as a VAT payer mustregister for this tax separately.

7 Prepare a seal 2 days

UAH 190-250,

depending onthe

complexityof a seal

8

Open a permanent bank accountAfter the company is registered with all relevant state authorities, atemporary bank account can be converted into an operational account,which under Ukrainian banking law, is designated as a "currentaccount." To change the account status from temporary to current, thebank must receive the following: - The set of company documentsstipulated by Ukrainian banking law (the same documents as those to beprovided by an existing company) to open a new bank account. One ofthese is the copy of the company’s certificate of registration, whichcontains the company's tax identification number. - A confirmation(reply) from the tax authorities that they have registered this bankaccount.

1 daybank’s

charge or nocharge

9

Notify the District Tax Inspectorate of the opening of the permanentbank accountBefore converting the temporary account to a permanent (current)account, the bank must receive a confirmation (reply) from the taxauthorities that they have registered the current account. To receive theconfirmation, the bank must notify the tax inspectorate in its district thatthe current account has been opened; this notification should be madevia a special email system of the National Bank of Ukraine. During thistransitional stage, some banks still provide notification by postal mail.The bank must provide this notification within 3 working days ofconverting the temporary account to current. Before sending thenotification, the bank must obtain prior written consent from the accountowner. Within 3 working days of receiving the bank notification, the taxauthorities must provide the bank (via email) the confirmation of theaccount registration (due to the transitional stage of implementing theconfirmation email, tax authorities may send the confirmation to thebank by postal mail). Upon receiving the confirmation, the bank mustchange the status of the account from "temporary" to "current." Afterthis change, both credit (deposit) and debit (payment) operations areallowed. Until the bank receives the confirmation, the account cannot beused for debit operations (withdrawal or transfer of funds). Owing to thetransitional period for implementing the bank e-mail notification to thetax authorities, currently some accountholders opt to notify, and toreceive the confirmation from, the tax authorities themselves and thenforward the confirmation to the bank.

2 days no charge

Figure 171 Summary of procedures for starting a business in Ukraine—and the time and cost

* Takes place simultaneously with another procedure.Source: Doing Business database.




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1.What is the minimum share capital of a Ukrainian TOB (Limited Liability Company)?

In Ukraine the Limited Liability Company is the most common business form used, mostly due to the lowincorporation fees and straight-forward procedures. The minimum capital required for such a company hasbeen reduced since 2009 to 870 UAH (80EUR) of which 50% must be paid up.

2. What is the minimum share capital for a Ukrainian Public AT (Joint Stock Company)?

A Ukrainian Joint Stock Company is designated for business at a larger scale and implies a more complexincorporation procedure. The minimum capital for such a company is UAH 500.000 (53.000 EUR).

3. Are there any special requirements for establishing a Private Limited Liability Company in Ukraine?

Limited Liability Companies in Ukraine are rather easy to incorporate, and foreign-owned companies aregenerally subject to the same regulations as Ukrainian ones. The founders can be enterprises, organizations aswell as citizens. Foreign citizens as well as international organizations can be founders of a Ukrainiancompany. Usually a Limited Liability Company can be established in Ukraine without the need of the founderstravelling to Ukraine. An authorized representative with power of attorney is able to carry on all the requiredprocedures to incorporate the company. However entrepreneurs that need to open a company bank account maybe required to travel to Ukraine to sign the bank deeds in person.

4. How can I register for VAT in Ukraine?

VAT registration is compulsory for all Ukrainian companies which qualify as VAT payers. Also foreigncompanies operating in production or other commercial activities subject to VAT taxation are considered VATpayers and must register with the Ukrainian TAX Authorities. In order to register for VAT companies need tofile a declaration form with the relevant tax authorities. Usually this can be done by a company representativeauthorized with power of attorney to carry out the registration procedures.

5. How can I open a bank account in Ukraine?

Ukrainian entities and foreign-owned companies developing their activity in Ukraine need to open a bankaccount in which to hold transactions and deposit their capital. Therefore an entrepreneur needs to open abank account at a Ukrainian bank or at a branch in Ukraine. However, most Ukrainian banks require thepresence of the entrepreneur in order to sign the contract in the bank's office. Some banks in Ukraine offer thepossibility for an entrepreneur to open a bank account at a bank situated in his or her own country, having abranch also in Ukraine. The founder of the company is advised to do a thorough documentation prior toopening a company in Ukraine.

6. How can I recruit personnel in Ukraine?

As the rate of unemployment is rather high it is easy for companies to find skilled and competitive employersfor their companies. There are plenty business websites where companies create company accounts and findemployees. Another method is working with a recruitment agency which offers the best suited solutions fordifferent companies.




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7. What is the average salary in Ukraine?

The workforce of Ukraine is capable and competitive and the unemployment rate is rather high, especially inthe last years. Therefore it is easy for a company to find qualified employees. The average salary in Ukraineis over 500 EUR.

8. What is the overall economical situation in Ukraine?

The economy of Ukraine can be classified as a developed economy given the level of industrial and agriculturaloutput. The country is benefiting from important natural resources. In the last few years Ukraine has beenorienting towards market economy going through a political and social transition. The process has becomemore difficult in the year 2008 as the global economic crisis struck, influencing a rise in the unemployment rateand a drop in the overall productiveness. However efforts to revive certain business sectors have been madeand the Ukrainian government offers incentives for foreign investors. The environment for foreign investors iswelcoming, non-discriminatory and generally there is no difference made between foreign companies andUkrainian ones.




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Licensing of a Foreign BusinessOverview

Despite more than 70 years of soviet rule, even its finalyears of “perestroika,” in over 20, years of independentdevelopment, Ukraine has moved significantly toward afree market economy. Today, the country is anindependent player at the international marketplace. Toachieve this, Ukraine has had to radically modify its legalsystem—an effort that is far from over—in order tomatch modern conditions, (including requirements thathave to be met as a WTO member). As a result, Ukrainehas quite a number of new and amended laws, which cancomplicate doing business. One of the first new laws, theLaw on Ownership, specifically recognizes privateownership and the right of both Ukrainian residents andforeign individuals and legal entities to own property in

Ukraine, to use such property for commercial purposes, to lease property, and to keep the revenues, profits, andproduction derived from its use. In addition, a new Civil Code, a (Commercial) Code, a Land Code, laws oncompanies, laws on foreign economic activity, on entrepreneurship and more have been adopted. These lawseffectively establish the basic framework for business activity in Ukraine. The process of privatization orselling off state commercial and other assets started in 1992. This process is governed by the laws onprivatization of state-owned property and a set of regulatory documents. Admittedly, the privatization processwas not an easy one and there were undoubtedly a number of irregularities. In 2005, the TymoshenkoGovernment began to counter such irregularities. This led to the high-profile re-privatization of KryvorizhStal,the country’s largest steel plant and one of the largest in the world. The result was a six-fold increase in theoriginal price and the arrival of a strong international investor, India’s Mittal Steel, in 2005. It sent out a signalto foreign investors that future privatization auctions would be held in a more honest, transparent manner thatwould not a priori exclude suitable buyers through the manipulation of tender conditions. Business activities inUkraine are often subject to licensing by different state agencies. Moreover, starting up a business usuallymeans registering with the tax and pension authorities, among others, and getting numerous permits andapprovals, such as fire safety, labor, sanitary, and so on. Since 2006, the state has been working to set up anetwork of “one-stop-shops” where entrepreneurs can register with all necessary entities in a single locationand cut down the amount of time required to set up shop. Before starting a project in Ukraine, an investorshould obtain qualified local advice since Ukrainian laws tend to be vague, allowing for differentinterpretations, particularly tax laws, which can carry different implications. In September 2008, Ukraineadopted the Law “On Joint Stock Companies,” which was a major step toward improving the investmentclimate in the country. The law introduces regulations to protect companies from illegal seizure. The law alsoprovides for a procedure for voting at general shareholders’ meetings that excludes any shareholders who havetried to illegally take-over a company. All joint stock companies with over 100 shareholders must vote usingballot papers signed by each shareholder individually. It also institutes a special procedure for the alienation ofshares. When a foreign company or individual plans to establish business presence in Ukraine, a number ofoptions are available.The forms of business most commonly used by foreign investors in Ukraine are the joint




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stock company or share corporation, the limited liability company and representative office. Other options areavailable under Ukrainian law, such as joint ventures, subsidiaries, partnership, limited partnership, additionalliability company, and non-corporate joint activity, but they are rarely used. The main laws that govern theestablishment and activity of legal entities in Ukraine are the Civil Code, the Commercial Code, the Law onCompanies and the Law on Joint-Stock Companies.

Foundation and registration

In Ukraine, a company may be founded by Ukrainian and/or foreign legal entities, individual citizens as well asforeign citizens and individuals without citizenship. A company acquires the status of a legal entity after stateregistration. Companies are established and act on the basis of their statutory documents, charter or foundationagreement. The foundation documents should contain information about the name of the company, the subjectand purposes of its activity, the founders and participants, the amount and nature of statutory capital, theprocedure for distributing profits and losses, the management structure and competence, the procedure forgoverning bodies to adopt decisions, the procedure for amending statutes, the procedure of dissolving thecompany, and other issues specifically defined for certain companies, based on their organizational form. Joint-stock companies, limited companies and additional liability companies act on the basis of a charter andpartnerships act on the basis of a foundation agreement. Although the conclusion of a foundation agreement isnot obligatory for the companies with certain organizational forms, the founders may choose to conclude afoundation agreement in order to establish procedure for contributing to statutory capital, to set out theconditions for joint activity in the foundation of the company, and so on.

Contributions to statutory capital

Founders can contribute to the company’s statutory capital both in monetary form and through in-kindcontributions such as:

• Structures and buildings;• Equipment and othertangible assets;• Securities (except forpromissory notes);• Rights of possession to land,water and other naturalresources; or• Other property rights(including intellectualproperty rights).

The use of Budget funds,borrowed funds or pledgedproperty to form




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statutory capital is prohibited.

Dissolution/Liquidation

Companies may terminate their activity through reorganization (merger, takeover, split-up, transformation) orthrough dissolution. When a company is dissolved, its property, rights and obligations are transferred to itslegal successors. A company may be liquidated based on (i) a decision by the participants/shareholders or (ii)court decision. Upon dissolution, the creditors’ demands, if any, are satisfied in the order established byUkrainian property left after all creditors’ demands have been settled is distributed among its participants inthe order provided by the foundation documents.

Company Formation in Ukraine

The state of Ukraine offers plenty incentives for traders who wish to incorporate business here. Advantages likea well instructed workforce and low taxes should convince entrepreneurs to take a chance and establishbusiness in Ukraine. The process of incorporation may seem complex, but it's straightforward and wellstructured and once completed it can be very rewarding.

Preliminary activities before registering Ukrainian joint stock and limited liability companies

Prior to registering Ukrainian joint stock and limited liability companies the founders must notarize thecompany's articles of association or the company charter. The next step implies opening a bank account, butbefore this can be taken care of a person with signature authority must be appointed in order to executetransactions. In order to open this temporary bank account the National Bank of Ukraine requests submission ofapplication for opening the account, original or notarized copy of constituent documents and the founders'decision to grant a power of attorney. After these steps are completed the founders have to pay the registrationfee and the company is ready to register at the Registration Office.

Registering Ukrainian limited liability and joint stock companies with the Registration Office

Every company that will engage in commercial activities should register at the Registration Office. In order todo that the applicants must submit copies of the company's charter, the minutes of founders' meeting, theapplication form, bank document certifying the payment of registration fee. The state registrar requestsadditional information or, in case of acceptance issues a certificate of registration which becomes thecompany's incorporation document. By implementing the one stop shop, the state of Ukraine has facilitatedregistration with the Social Insurance Fund, the Industrial Accidents Fund, Employment Fund and PensionFund and tax authorities, except for VAT.

Registering Ukrainian limited liability and joint stock companies with the State Tax Authority

Companies with certain annual turnovers have to register for VAT with the State Tax Authority. The processrequires an application form and the registration certificate, and may take up to 10 days to complete.




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Making a company seal

The state of Ukraine requests seals for all new companies. The founders of a company may find and purchaseseals at stationary shops, or may order a customized one. The price varies depending on the complexity of theseal.

Opening a permanent bank account

After the company is registered the temporary bank account can be converted into a fully operationalpermanent account. In order to do that the company's founders must provide the bank with a set of companydocuments, including articles of association, charter etc and registration certificate. The tax authorities need toconfirm the registration of the bank account.

Setting up an Ukrainian company from abroad

Foreign investment is thoroughly encouraged by Ukrainian authorities. Foreign investors do not requireinvestment permits, and generally there is no difference between Ukrainian companies and foreign companies.A Ukrainian company can be set through an assignee authorized to carry on with the incorporation procedures.

How long does it take to set up a Ukrainian company?

Prior to having a fully legal and operational company, there are a few procedures that need to be completed.However the whole incorporation process is straightforward and does not imply a great deal of work for theincorporators. Registering the company at the Registration Office is finished in 5 days and for VAT in 10. AUkrainian company is set up in almost a month, but may take less depending on the complexity of activitiesthat the company will engage in.

State Registrar of Ukraine

The State Registrar of Ukraine functions through a state institution, an agency for registration. The institutionwas established in 1998 and has the purpose to store and provide information on various commercial or othercompanies and legal entities. The main activities of the agency include creating and maintaining a database forinformation support of companies, maintaining a common database which is disclosed and published onofficial publications of the Verkhovna Rada of Ukraine, Cabinet Ministers of Ukraine, State Commission onSecurities and Stock Market. Also the agency managing the State Registrar of Ukraine handles disseminationof information which is disclosed pursuant to applicable law and regulations of the Commission, monitoring ofstock market analysis and business activities, maintaining an informational portal on the Internet andorganizing conferences, seminars, competitions etc. Registering a company in Ukraine is done bysubmission of an application at the Registration Office. The application must contain the company charter,minutes of founders meeting, application form, bank document certifying that payment of the registration feeand proof of payment of minimum capital requirement. The State Registration performs all due registrationswith State Committee of Statistics of Ukraine, state social funds and tax authorities. The registration procedure




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is completed in a short period of time, the company being issued a registration certificate. In some casesadditional information on the company may be requested. Anyone who is interested in information on certaincompanies, partnerships, legal entities may do so by making an inquiry or browsing through the onlinedatabase available online. The response is quick and the information reliable. Another advantage is thatcompanies which make significant changes in their organization are free to use the Agency managing the StateRegistrar of Ukraine to publish the new information. The State Registrar of Ukraine facilitatesinformational processes between companies, state authorities and public, offering a vast database of reliableinformation which is accessible to anyone.

Overview of the Types of companies in Ukraine

Ukrainian legislation encourages foreign investment offering great incentives, despite a rather unstableeconomy, due to the economic situation throughout the world. There are many reasons for thinking about thepossibility of setting up a Ukrainian company, beginning with a favorable environment and low taxes. Usuallyentrepreneurs establish Ukrainian limited liability companies and joint stock companies, as they are easy toform.

Ukrainian Limited Liability Company

The Ukrainian limited liability company is the most common form of business organization established byentrepreneurs. It can be established by at least one person. The partners of such a company do not own shares,unlike the traditional limited liability company, but have a percentage of the company's capital that is specifiedin the charter of the firm. The members are able to transfer their participation to third parties, only with fullconsent of other members. If the company doesn't have a single shareholder, board and shareholder meetingsare required. The members of a Ukrainian limited liability companies are liable to the company's name andobligations only to the extent of their contributions, as the entity's name suggests.

A limited liability company is a company with its statutory capital divided into participatory shares, asdetermined by the foundation documents. Participants are liable only to the extent of their contributions. Forexample, participants bear any risks related to the company’s activity only in proportion to their contributions.A participant who systematically breaches obligations before the company may be excluded from the companyif other participants holding more than 50% of the total amount of the company vote in favor of such adecision. The statutory capital of a limited liability company must be not less than the equivalent of 1 minimumsalary based on the rate effective at the time of company’s establishment. Effective April 4, 2011 the minimumwage was equal to UAH 960 per month. A limited liability company is governed by three bodies:

• The general meeting of participants, which is the company's highest body;• The Board of Directors and/or General Director, which are the executive body governing the

company's day-to-day operations;• The audit committee, which controls the financial and business activity of the executive body.

It is important to highlight the fact that the LLC can be found with 100 per cent of foreign investments and canbe owned either by the only one person or several persons. Following our practice we shall conclude that themost popular type of a legal entity with foreign investment is LLC. This form allows solving all typicalassignments of the foreign owner such as: conducting business in Ukraine through the company under control,




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repatriation of incomes, limitation of responsibility, etc. We would like to mark that the Ukrainian legislationon foreign investment provides protection of foreign investment independent from the type of the legal entity.

All business entities with the status of a legal entity shall be officially registered by the Registrar at the place ofresidence of a business entity.

The following documents, in particular, should be produced for registration:1. The statute;2. Registration card, serving as an application for official registration;3. A copy of the owner's decision to create a legal entity;4. Document attesting the payment of the official registration fees.In case an owner is a foreign legal entity, an extract from the trade, bank or court register must be produced tocertify registration of an investor in the country of origin. Also a company statute (articles of association) and apower of attorney (proxy) demonstrating the individual who will represent a company in Ukraine withreference to establishment of a legal entity are recommended to have. These documents must be duly approvedaccording to the legislation of the country of issue, translated into Ukrainian and legalized abroad. If the ownerof the LLC is a foreign natural person, such a person has to obtain a Ukrainian identification code of ataxpayer. This procedure can take about 10 days. The LLC share capital is equal to 100 minimal wages. To theend of 2007 this makes about 9000 USD. The LLC share capital can be formed either with property or withcash. The Ukrainian legislation prescribes that the 50 per cent of the share capital must be paid up before theofficial registration process is started. The LLC owners who have more than 60 per cent of the share capitalhave formal management power under the company. The capital must be fully formed during one year after theofficial registration. We should note that the PLC share capital doesn't have such legislative prescriptions. So,there are no legally binding obligations for the PLC to amount the share capital or period of its contributionsAs the practice shows the share capital shall be not less than the amount necessary to cover all the company'sexpenses (director's salary, office rent, telephones etc.) for a few months until the company becomes a self-supporting one.

Ukrainian Open Joint Stock Company

An open joint stock company may be established by two or more natural persons or legal entities becomingpartners that can be residents or not. The share capital of a Ukrainian joint stock company is divided into sharesof equal nominal value, and the liability of the members is limited to each one's investment. The shares of anopen joint stock company may be offered to the public, can be transferred freely and can ultimately be tradedon a stock exchange.

Ukrainian General Partnership

A Ukrainian general partnership may be established by at least two members, natural persons or legal entities.All the participants of this company type are jointly engaged in company business activity and hold unlimitedresponsibility for the company's debts and obligations. In exchange they distribute the profit and are in chargewith managing the partnership based on the foundation agreement.




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Ukrainian Limited Partnership

Two members may establish a limited partnership in Ukraine, and they may be natural persons or legalentities, Ukrainian or foreign. Unlike a general partnership, a limited one has two types of partners. At least oneis general, assuming all risks concerning the partnerships' debts and obligations and at least one partner is alimited partner, receiving profit proportionally with his contribution, being liable to the extent of his investmentmade in the partnership.

Joint-stock company or Aktsionerne tovarystvo in Ukrainian (AT)

Ukrainian Closed Joint Stock Company

The closed joint stock company can also be established by two or more natural persons or legal entities thatcan be residents or foreign and has a share capital divided into shares of equal nominal value. Anotherresemblance with the open joint stock company resides in the liability of the members which is also limited tothe amount invested by each in the company's capital. Unlike the open one the closed joint stock companycannot be publicly offered and the shareholders have pre-emptive purchase rights for shares offered for sale byother shareholders.

A joint-stock company is a company with statutory capital divided into a certain number of shares of definiteequal nominal value. Shareholders are liable for the company’s commitments only within the limits of theirshares, that is, shareholders cannot be required to make any further contributions beyond their contributions tothe statutory capital and cannot be liable for the company’s commitments. The statutory capital of a joint-stockcompany cannot be less than the equivalent of 1,250minimum salaries, based on the rate effective at themoment the company is establishment. EffectiveApril 4, 2011 the minimum wage was equal toUAH 960 per month.

All shares are nominal and exist only in a book-entryform.

The Law on Aktsionerni Tovarystva (joint stockcompanies) provides for two types of ATcompanies:

• Public joint-stock company or Publichneaktsionerne tovarystvo (PAT).

• Private joint-stock company or Pryvatneaktsionerne tovarystvo (PrAT).




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The differences between two types of AT are:Public AT Private AT

Number of shareholdersThere are no limits on the number of shareholders. The number of shareholders may not exceed 100.

Share placementPublic ATs can make both private and public placementsof shares.

Private ATs can make only private placements of shares.Should a decision be made to make a public offer ofshares, the company’s charter must be changed,including the type of the company, from private topublic.

The alienation of shares (Art. 7)The shareholders of a Public AT cannot alienate sharesthat belong to them without the consent of othershareholders and company management.

The Charter of a PrAT can offer a first right of refusal toshareholders and the company itself to buy sharesoffered by the owner to a third party at the same priceand terms proposed by a shareholder to a third party,pro-rated to the number of shares owned by each ofthem.

The circulation of securities (Art.24)A Public AT is obliged to go through a procedure to listand join a stock registry on at least one stock market.

The shares of a Private AT cannot be sold or purchasedon the stock market, except for a sale through auction.

Audit (Art. 75)Annual financial statements must be reviewed by anindependent auditor.

Annual financial statements must be reviewed by anindependent auditor.

Disclosure of information (Art. 78)A Public AT is obliged to have its own web-page on theInternet, where information to be disclosed pursuant tolaw, is provided, including such information:- The Charter and any changes to it, a Memorandum ofAssociation, a State Certificate of Incorporation;- provisions for General Meetings, the SupervisoryBoard, the Executive Board and the Audit Commission,and other internal documents and changes thereto;- provisions for each and every branch of the company;- the minutes of all General Meetings;- the conclusions of the Audit Commission and thecompany’s auditor;- annual financial statements;- accounting documents that are being submitted to therelevant authorities;- prospectuses, certificates of registration, of issuance ofshares and other security documents;- list of company affiliates with an indication of theamount, type and/or class of their shares;- specific information about the company required thelaw.

The Law does not require a Private AT discloseinformation.

Figure 172 The differences between two types of AT




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Additional liability company or Tovarystvo z dodanoiu vidpovidal’nistiu in Ukrainian (TDV)

An additional liability company is one whose statutory capital is divided into participatory shares as determinedby the foundation documents. Participants primarily become responsible for the company’s commitments to theextent of their contributions to statutory capital. However, if these sums are insufficient, participants shall bearadditional liability pro rata to each one’s contribution. The limits of this participant liability are provided in thestatutory documents. The Law on Companies provides for the same requirements regarding the minimumamount of statutory capital for additional liability companies as for limited liability companies.

General partnership or Povne tovarystvo in Ukrainian (PT)

A general partnership is a company where all participants are jointly engaged in company’s business activityand are jointly responsible for the company’s obligations with all of their assets. A general partnership ismanaged according to the foundation agreement among the partners. The activity of the general partnershipmay be carried out by all, one or some of the partners, who act on behalf of the partnership on the basis ofpowers of attorney issued by the other partners.

Limited partnership or Komandytne tovarystvo in Ukrainian (KT)

Limited partnership is a company in which one or more participants carrying out business activity on behalf ofthe partnership are held jointly responsible with all their property for the partnership’s commitments (generalpartners), while the responsibility of the remaining participant(s) who do not participate in the activity of thecompany is limited to their contributions to the company’s statutory capital (limited partners). In a limitedpartnership, only the general partners carry out the management of the partnership. Limited partners may notinterfere with the activity of the general partners in the management of the company. A limited partnershipmust terminate its activity when all general partners withdraw from the company.

Representative office or Predstavnytstvo in Ukrainian

A foreign company may set up a representative office in Ukraine. A representative office is not a legal entityunder the Ukrainian law but only acts for and on behalf of the foreign founder. In practice, representativeoffices of foreign companies may be of two types: (1) a representative office through which a non-residententity carries out its business activity in Ukraine and which is considered a branch office from the legalviewpoint and has the right to release payments for third party goods and services and receive payments fromlocal customers; (2) a representative office whose functions are generally limited to representing the interests ofthe foreign entity, performing marketing activities, and providing other support functions to promote thebusiness of the foreign founder, with the right to release payments, but funds from product sales must benefitthe account of the head office. Representative offices must be registered with state authorities under Ukrainianlaw. The mandatory state fee for registration is US $2,500.




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Open Representative Office orSubsidiary in Ukraine

There are many ways to investin Ukraine including settingup a company, or a branch ofa foreign company. There isno good or bad solution for acompany type, but mostlythere are better suitedcompanies for different needs.A Ukrainian branch mayrepresent a perfect solutionfor entrepreneurs wishing toundertake commercialactivities in the country. Thelegal status of the Ukrainianbranch is not the one of aseparate legal entity from the

parent company. The liability and responsibility for the branch remains the attribution of the parent company.However in Ukraine branches do not technically exist and foreign companies usually establish representativeoffices. The process of incorporation for such an entity is simple and straightforward, without any majordifference from setting up a regular Ukrainian company.

Preliminary activities prior to registering a representative office in Ukraine

A representative office in Ukraine must be registered with the Ministry of Economy of Ukraine, but prior toobtaining the registration certificate certain procedures must be completed. The articles of association of thecompany must be signed and notarized along with the list of managers' names and addresses and theirspecimen signatures. A representative office is set through a representative individual or legal entity whichmust be authorized to carry out the procedures through power of attorney. Also the representative office musthave a bank account and obtain a bank deed.

Registering a representative office of a foreign company in Ukraine with the Ministry of Economy

In order for the representative office to be able to carry out commercial activities it must register with theMinistry of Economy of Ukraine. For that purpose a file must be completed and it must contain the notarizedarticles of association, the list of managers with names and addresses and the power of attorney through whicha certain individual or legal entity is authorized to represent the Ukrainian office of the foreign company.Also some proof of the parent company must be provided. Usually it consists of the company's certificate ofregistration issued by the relevant institution of the respective country. Before submitting the application therepresentative office must pay a registration fee and must provide evidence of its payment. Usually theregistration certificate is issued in five days, and the institution forwards the company's information to the StateCommittee of Statistics of Ukraine, the state social funds and tax authorities.




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Setting up a representative office in Ukraine from abroad

The state of Ukraine is open for foreign investment encouraging it in many business sectors. In order to set up arepresentative office the parent company must name a representative who can carry out the incorporationprocedures through power of attorney. Also the representative office must have a permanent address in orderto function.

How long does it take to set up a representative office in Ukraine?

The incorporation process is rather simple and straightforward and does not imply many complex procedures.In fact setting up a representative office in Ukraine is more or less the same as incorporating a company, themain difference consisting of the more complex documentation required. Drafting the documents and preparingall that is necessary for the application may take up to two days, while the registration itself requires five daysmore or less. Al the other procedures, as registering for social security, statistics and tax authorities may takeup to one week. However the representative office comes into existence upon issuance of the registrationcertificate. Usually a representative office in Ukraine is set up in ten days.

Non-corporate joint activity

Non-corporate joint activity is one of the possible options provided by Ukrainian law for conducting businessin Ukraine. Joint activity is carried out via a contractual joint venture organized using a combination of fundsor assets from the participants or without a combination of contributions in order to achieve joint businessobjectives. The joint activity does not have the status of the legal entity. Moreover, there is no requirement fora minimum amount of capital to be contributed by the participants. The conditions of carrying out joint activityare established by written agreement among the participants. Joint activity is subject to registration with stateauthorities under Ukrainian law.

Business Entities - Investor considerations

For representation, information gathering and liaison activities, a non-commercial representative officeis likely to be an acceptable vehicle.

Establishing a legal entity is recommended for commercial activities, although a commercialrepresentative office may be effective for a limited range of activities.

For a 100% investment, a limited liability company (LLC) is usually recommended. It is cheaper andquicker to establish than a joint stock company (JSC), and is less regulated.

Unincorporated joint ventures and partnerships exist as investment vehicles, but are not widely used.

Branches of foreign entities are not explicitly recognized by law, and would prove difficult to establish.

Legal framework for business entities (effective from 1 January 2004)

The primary framework for establishing and operating legal entities in Ukraine is found in the Civil Code.Legal entities may be established in the form of joint stock companies, limited liability companies, additional




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liability companies, general partnerships or limited partnerships. The Civil Code and the 1991 law, OnBusiness Associations, also deal with such issues as shareholder rights and obligations, corporate governance,and minimum capital requirements.

Commercial law

The Commercial Code (also effective from 1 January 2004) governs business relationships, and was intendedto regulate issues that are not dealt with in the Civil Code. In reality, parts of the two Codes overlap, includinga number of provisions dealing with the establishment and operation of legal entities. Furthermore, the twoCodes do not always have consistent positions, and this creates uncertainty.

Choice of business entity

Establishing a legal entity in Ukraine involves registering with the local state registrar, the tax authorities, thestatistics office, and various pension and social funds, as well as opening a bank account and other formalities.From a foreign investor's perspective, the choice will tend to be either a LLC, a JSC, or in limitedcircumstances a representative office engaged in either commercial or non-commercial activities. For a 100%investment, using a LLC tends to be more convenient. It is easier and quicker to establish, has lower minimumcapitalisation requirements (approximately USD 9,000), and is less regulated. One potential issue with a LLCis that members may withdraw their contributions at any time by giving three month's notice. If anotherinvestor will be involved in an entity, establishing a JSC (or establishing a JV entity offshore) may be moreprudent. If an investor intends to carry out only preparatory or auxiliary activities in Ukraine, such asrepresentation, information gathering and liaison activities, establishing a non-commercial representative officeis a viable and convenient option, provided there is double tax treaty protection. It is not possible for foreignentities to conduct full commercial activities (executing contracts, selling and accepting payments for goods,etc.) through a commercial representative office. Nonetheless, a number of law firms and other serviceproviders have established their presence in Ukraine in this manner.

Net asset requirement

According to the law, if the value of a company's net assets at the end of the second and subsequent financialyear is less than its share capital, the company must decrease its share capital and make relevant amendments toits Charter. There is no provision for a JSC to increase its capital to achieve this objective. Furthermore, the lawstates that if the value of net assets falls below the statutory minimum capital, the company should beliquidated. There is no further clarification in respect of these articles, no explanation as to who may enforcethe provisions, and no major penalties for non-observance. The Securities Commission has recently indicatedthat JSCs (particularly banks and insurance companies) may need to follow the rules more strictly.

Limited liability companies with foreign capital

A limited liability company (LLC) does not have shares in a traditional sense. Instead, participants in a LLCown a percentage in the company's capital, as specified in its Charter. Because investors' interests in a LLC are




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not "securities," they are not subject to registration with the State Securities and Stock Market Commission.This means that a LLC can be established more quickly than a JSC, and is easier to maintain.

There are a number of key points that investors need to be aware of before establishing a LLC:

Participants of a LLC may transfer their participation in the company's capital to third parties (non-participants) only with the consent of all other participants.

A participant may withdraw from a LLC at any time by giving three month's notice. Upon withdrawal,a participant is entitled to his proportionate share of the assets of the LLC, although this will ofteninvolve cash settlement.

A participant who systematically ignores or improperly fulfils his duties, or whose actions interfere withreaching the aims of the LLC, may be excluded from the LLC by a majority vote. The excludedparticipant is entitled to his proportionate share of the assets of the LLC at the time of exclusion.

A participant's personal creditors may demand to withdraw the participant's share in LLC assets to settleobligations, if the participant's other property is insufficient to satisfy the creditors' claims.

Because a participant may withdraw from the LLC, it is unclear whether contributions to such LLCsshould be reported as equity or a liability from the LLC to the participant. This issue should not haveany implications from a tax or legal perspective, but may impact on the LLC's ability to obtain financefrom external sources, and could impact the IFRS accounting.

A LLC does not generally require a financial audit unless demanded by a participant holding greaterthan 10% of the capital.

If a LLC will be 100% owned by a foreign investor, these issues are likely to have little practical implication. Ifone of more investors will be involved, however, the issues will need to be addressed when the LLC is formed.Some issues, such as the length of notice required for withdrawal from the LLC and the method ofcompensation, could be addressed by including appropriate timeframes and constraints in the LLC's Charter.

Formation procedures

A LLC may be established by a single shareholder, provided that shareholder is not itself owned by a singleshareholder. The governing document of a LLC is its charter. The charter determines the company's objectivesand scope of activities, the size of its statutory capital, the composition and competencies of the governingbodies and the rules for decision-making. The distribution of shares of a LLC is set out in its charter. If sharesare transferred, the Charter will need to be amended to record the change. Generally, incorporation will takethree to four weeks from the day documents are filed with the registration authority. A LLC is deemed to existas a legal entity from the date of its state registration. LLCs may make "check the box" elections for US taxpurposes.

Capital structure

The minimum capital requirement for a LLC is the equivalent of 100 Ukrainian monthly minimum wages at thetime when the LLC is formed. The minimum salary increases on a regular basis. Based on the 2007 BudgetLaw, the following minimum capital requirements will apply for LLCs established in 2007.




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Established on or after Minimum wage (UAH) Minimum capital(UAH)

Est. minimum capital(USD)

1 January 2007 400 40,000 7,9001 April 2007 420 42,000 8,3001 July 2007 440 44,000 8,7001 October 2007 460 46,000 9,100

Figure 173 Capital structure dynamics

At least 50% of the share capital of a LLC must be paid before the company may register. The remainingcontributions must be paid within the first twelve months of the LLC's activity. A LLC must create a reservefund from net profits in the amount of at least 25% of its share capital. At least 5% of annual after-tax profitsmust be transferred to this reserve until the entire 25% fund is fully paid (this is not tax deductible). It ispossible for participants to contribute assets in kind to LLCs.

Relationship of participants, directors and officers

LLCs have two corporate bodies. The Participants' Assembly consists of the participants of the LLC, each ofwhom has votes proportionally to its interest in the company capital. Quorum for a participants' assemblyrequires the presence of participants holding at least 60% of votes. Most resolutions are approved by a simplemajority of the votes present at the Participants' Assembly, although resolutions amending the Charter and alimited number of other decisions must be approved by a majority of all participants' votes. The Board ofDirectors (or Director) is the executive body of a LLC, and is responsible for managing the day-to-dayactivities of the LLC and representing the LLC against third persons. There is no formal requirement to appointa company president, corporatesecretary or any other office holder.The structure of the Board, itsauthority, and its working proceduresare specified in the Charter of theLLC.

Liquidation, receivership

A LLC is liquidated if its participantsagree to liquidate the LLC, itscorporate term expires (if one isspecified in the Charter), or it isordered to be liquidated by the court.In a voluntary liquidation, preferencein distribution is given, in order, to:

1. Indemnification of lossescaused by disability, other




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health injuries or death, as well as creditors' demands secured by pledge or otherwise.2. Employees' demands connected with labor relations.3. Taxes and duties.4. All other demands.

The preferences are slightly different for liquidation through compulsory liquidation (bankruptcy).

Joint stock companies

A joint stock company (JSC) is a legal entity whose share capital is divided into a specified number of sharesof equal nominal value. The liability of shareholders in a JSC is limited to the value of their capitalcontribution. A JSC may be established as an "open" or "closed" JSC. Shares in an open JSC may be offered tothe public, freely transferred, and may ultimately be traded on a stock exchange. By contrast, shares in a closedJSC are distributed initially between its founding shareholders. Existing shareholders in a closed JSC also havepre-emptive purchase rights for shares offered for sale by the other shareholders. The legal framework for JSCsis similar to that for LLCs. Other points to note are:

Formation: The issued shares of JSCs (open and closed) must be registered with the State Securities and StockMarket Commission of Ukraine, which involves filing a set of documents prescribed by law. Processing of theapplication by the Commission may take up to two months.

Capital: The minimum capital requirement for a JSC is the equivalent of 1,250 Ukrainian monthly minimumwages at the time when the JSC is formed. Based on the 2007 Budget Law, the following minimum capitalrequirements apply for JSCs established in 2007

Established on or after Minimum wage (UAH) Minimum capital (UAH) Est. minimum capital(USD)

1 January 2007 400 500 99,0001 April 2007 420 525 104,0001 July 2007 440 550 108,9001 October 2007 460 575 113,9001 Jauary 2011 976 113,900

Figure 174 JSC requirements




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Quick comparison of joint stock companies and limited liability companies

Joint stock company (JSC) Limited liability company (LLC)Registration As for all entrepreneurs, legal and business entities,

primary registration is made with the StateRegistration Department. A JSC must registershares that it issues with the State Securities andStock Market Commission.

As for all entrepreneurs, legal andbusiness entities, primary registrationis made with the State RegistrationDepartment.

Minimum capital 1,250 Ukrainian monthly minimum wages(approximately USD 110,000).

100 Ukrainian monthly minimumwages (approximately USD 9,000).

Transfer of shares There are generally no restrictions on the transferof shares in an open JSC. For a closed JSC, othershareholders have a pre-emptive right to buy sharesbefore they may be transferred to third parties.

Unless the Charter says otherwise,other contributors have a first right ofrefusal before shares may be sold tothird parties.

Supervision Regular reporting with the State Securities andStock Market Commission.

No regular reporting, but annualaccounts must be filed.

Managementrequirements

Shareholders' Meeting. Supervisory Board (not required if there are

fewer than 50 shareholders). Management. Audit Committee.

Participants' Assembly. Management. Audit Committee.

Statutory audits There is an annual requirement to submit an auditreport to the State Securities and Stock MarketCommission.

Generally not conducted in practice.

Risks Liquidation if negative equity at end of thesecond or subsequent year of existence.

Liquidation if negative equityat the end of second orsubsequent year of existence.

Contributors may withdrawfrom LLC at any stage, giventhree moths notice.

IFRS Shares are treated as equity investment. Because contributors may withdrawcontributions at any time, financialreporting standards may requireinvestment to be reported as loans.

Figure 175 Quick comparison of joint stock companies and limited liability companies




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Reporting requirements: JSCs are required to submit quarterly and annual reports to the State Commission onSecurities and Stock Market. These reports include the annual audited financial reports, quarterly financialreports, reports on securities circulation, and details of any shareholders owning more than 10% of the shares.JSCs should also publish their annual report in the official media not later than 30 April of the following year.

Foreign directors

If a foreign national is appointed as a director of a Ukrainian company, local authorities will expect to see someform of contract relating to the individual. This will take the form of either an employment contract betweenthe director and the company, or a management service contract between the company and a foreign entity.Because of this, a foreign national that is to be appointed as a director of a Ukrainian company may need toobtain a Ukrainian Tax ID Code before the company is registered. To obtain a Ukrainian ID Code, the foreignnational or his/her representative should file with the tax authority a set of documents established by the law.Obtaining an ID Code can take up to ten calendar days. The foreign national may also be required to obtain aUkrainian work permit after the company's registration is completed.

Partnerships and joint ventures

The Civil Code allows for the establishment of general partnerships and limited partnerships as legal entities,but such vehicles are not widely used. Because partnerships are legal entities, there are no regulatory or legaladvantages to conducting business through a partnership. Taxation is also imposed at two levels - at thepartnership level and in the hands of the partners. Joint ventures typically involve establishing a separate legalentity (JSC or LLC) in Ukraine. However, the Civil Code enacted in 2004 does recognize the concept of a jointventure (including simple partnerships) without the need to establish a separate legal entity. The relationshipbetween the parties will generally be governed by the partnership agreement. Such agreements are commonlyreferred to as "joint activity agreements." The use of joint activity agreements is still relatively unexplored. Onthe face of it such agreements may offer benefits over a LLC. There are no minimum capital requirements andcapital impairment rules to contend with. A partner may still withdraw by giving three months notice, but thelaw contemplates that this could be treated as a breach of contract and damages paid. At the end of the daythough, aggrieved partners would still be faced with having to resolve issues through the Ukrainian courts.

Branches

In Ukraine, it is not currently possible to register a branch of a foreign legal entity.

Representative offices

A representative office is not a separate legal entity and operates in Ukraine on behalf of the foreign company itrepresents. From a tax perspective, local rules for representative offices are broadly in line with those found inother countries. The problem is that the broader legal framework has not been updated. This can createuncertainty when dealing with government agencies.




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Nonetheless, if the foreigncompany intends to carryout only non-commercialactivities, such asrepresentation, informationgathering and liaisonactivities, it should besufficient to establish arepresentative office,provided there is a doubletax treaty in place. Ifactivities are limited toservices, then acommercial/taxablerepresentative office may bea suitable option, and anumber of professionalservices firms, for example,operate under this structure.A representative officeshould be registered withthe Ministry of Economicsof Ukraine (currentlysubject to a registration feeof USD 2,500), the Statistics Department, the tax authorities, and pension and social funds. A representativeoffice should also obtain the right to use a seal from the Police department. Once the representative office isregistered with the tax authorities and obtained a permit for a seal, it may open accounts in hryvnia and foreigncurrency in a Ukrainian bank. Representative offices are subject to normal corporate income tax. However, anexemption may be available if the activities of the representative office are not sufficient to establish apermanent establishment under a relevant tax treaty. A non-commercial representative office is generally notsubject to VAT. A commercial representative office must register for VAT once its taxable sales for theprevious 12 calendar months exceed UAH 300,000, although it may also register voluntarily.

REPRESENTATIVE OFFICE TAXATION AND DOCUMENT FLOW

Legal and Economic Characteristics

A representative office is registered in Ukraine by way of being recorded in the register and registered with thetax authorities. Unlike the structural unit of a Ukrainian legal entity, the foreign parent entity has to apply to theMinistry of Economy for registration and pay an excessive fee, as compared to the Ukrainian counterpart,which only submits information to the administrator of the relevant state register. From the standpoint ofUkrainian economic law, the legal capacity of the head office entitles it to pay expenses and costs ofrepresentative office activities in Ukraine. Such payment may be effected at the head office’s own initiative orat the request of the representative office. Technically, expenses may be paid from the bank account of:




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a. the head office, upon request of the respective bodies of the economic entity;b. another representative office (including a Ukrainian one), upon instructions/request by the head office;c. a third party, on the basis of an agreement with the head office or another representative office.

Considering the Ukrainian currency control laws, not every bank would immediately agree to perform suchtransaction. Nonetheless, the corporate status of representative offices simplifies the process of confirming theintention to perform such operations. In all mentioned cases, from the legal and economic (intra-economic,corporate) standpoint the head office functions as a body (bodies) of the economic organization in which boththe representative office and head office are parts. The head office forms and delegates powers concerning theorganization and activities of permanent representative offices on the basis of the legislation of the respectivejurisdiction and/or foundation documents. The head office is entitled to vest a representative office withproperty and with the authority to manage such property or may rescind the abovementioned powers andmanage the vested property itself. Thus, these relations of the head office can be viewed as intra-economicrelations between an economic entity and its unit (representative office). Alternatively, if the relations of a headoffice and representative office would be qualified as horizontal (between quasi-independent economicentities), this approach would face difficulties. Initially, upon enactment of the Economic Code of Ukraine in2003 and until February 25, 2005,¹ structural units (branch, department, representative office, etc.) weregenerally considered economic entities, but even at that time their relations with the head office were regardedas intra-economic relations. Foreign trade activities belong to the economic relations too; however they are notusually divided into intra- and inter-economic relations. It is possible to assert that relations between arepresentative office and head office shall not constitute foreign trade relations, as they deviate in a number ofways from the legally binding principles of foreign trade activity. From the foreign trade entity’s viewpoint,classification of the relations with the head office is more complicated: the representative office remains anindependent player in the foreign trade activities under special law²; however, at the same time it is excludedfrom the list of such players under the Economic Code of Ukraine (Article 377)³. As the second wave ofargumentation in favor of relations’ intra-economic nature, one can alternatively argue that the authority of thehead of an economic entity (legal entity) to represent the entity in relations with other economic entities shallinclude the authority to represent each and all structural units of such economic entity. The relations between abody and an economic entity constitute representation by virtue of law or foundation documents (Article 65 ofthe Economic Code of Ukraine, Article 92 of the Civil Code of Ukraine) and are governed by correspondingregulations of economic and civil laws on representative offices4. From this point of view, a decision of thehead office to pay expenses of a representative office shall not require additional grounds, such as contracts,requests and other inter-economic documentation. Obviously, exceptions are those cases when the head officehas delegated powers to and obligated the representative office to apply for payment of expenses each time –for example for intra-economic reporting. Accordingly, under economic laws of Ukraine the actions of a headoffice would require the same documentation for payment of expenses when they relate to a representativeoffice’s activities (whether as general administrative costs or special projects) as if paying for expenses of thehead office itself. From the standpoint of economic obligations, transactions entered into by the head officeshall create, change or terminate economic rights and undertakings directly for the representative office.

Legal regulation of document flow

The laws of Ukraine impose a specific obligation on an economic entity to maintain primary records, toaccount the results of its activities, and to submit financial reports in due course5. As demonstrated above, as a




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representative office is not an economic entity, it appears that the cost and revenue accounting may be carriedout by the head office only. However, the requirements for the entities can be extended to representative officesby virtue of analogy (Article 8 of the Civil Code of Ukraine); and the Law of Ukraine "On Accounting andFinancial Reporting" also indirectly affects representative offices. Finally, although not an act of economic law,the Law of Ukraine "On Taxation of Enterprises’ Profit" directly obligates head offices to maintain accountingand conduct reporting7. Such extrapolation of the tax legislation has been practiced in Ukraine for aconsiderable time now. At the same time, there is no clear prospect for comprehensive economic lawenactment on activities of representative offices; therefore, the representative office in Ukraine has to use a webof laws and regulations of conflicting nature. The basis of the accounting of economic transactions consists ofthe primary records establishing the mere fact that such transactions were conducted. Law establishesrequirements as to the form of primary documents (hard copy or electronic copy) as well as the obligatorydetails of such documents, namely:

a. title of the document (form);b. date and place of execution of the document;c. title of the economic entity on whose behalf the document is executed;d. content and volume of the economic transaction, the unit of measurement thereunder;e. positions of the persons responsible for conducting the economic transaction and for its correct

execution;f. personal signature or other data based on which it is possible to identify the person who participated in

the economic transaction8.

Based on the above minimum requirements for primary accounting documents, a representative office’saccounting may reflect the expenditures paid by the head office, provided that it has the necessary documentsconfirming, in particular:

a. the material terms of the agreement with the (independent) third party for the supplied products (works,services, etc.); such terms usually refer to the price, quantity, calculations, liability, etc. Documents inconfirmation of the conditions include invoices or bills, agreements, correspondence, price lists, etc.;

b. the connection between the economic activity of the representative office and the expenses (costs) paid– for example, request or correspondence of the representative office, order (instruction) of the headoffice;

c. the fact of payment – payment order, statement of account, SWIFT copy, signed receipt, act on workscompleted, etc.; and

d. the fact of intra-economic distribution ("transfer") of costs for allocation as an alternative – evidence ofnon-inclusion of paid expenses into the gross expenditures of the head office9 – for example, copy ofthe relevant accounting register, act, order, regulation, etc. Standard documents of the head office maybe used provided that they comply with Ukrainian legislative requirements for primary documents.

Primary accounting documents of a representative office must be provided as originals or, if such originalscannot be provided, as duly certified copies, for example copies signed (and sealed) by officials of the headoffice. Thus, the internal accounting rules provide additional bureaucratic burden on the maintenance of thestructural units in Ukraine, which may expand depending on the approach taken by the monitoring agencies.




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The general pattern of the record-keeping procedures, however, follows the distributions of functions amongthe structural units of the legal entity, provided each unit is properly staffed to allow the paperwork.

Tax legislation approach

The Law of Ukraine "On Taxation of Enterprises’ Profit" provides that for tax purposes a representative officeshall be recognized as a resident of Ukraine and for taxation purposes shall be equal to a taxpayer conductingits business independently of the head office (it may even receive a dividend (?!)) Accordingly, arepresentative office shall be leveled with an independent economic entity. Thus, irrespective of the economicstatus, profit amounts gained by the representative office are determined and taxed in accordance with thegeneral rules, unless an international treaty of Ukraine provides otherwise.

The general rule for determining the taxable profit of a representative office is established by acts of the StateTax Administration ("Procedure"). The Procedure provides three alternative methodologies for assessment oftax liability:

a. Independent assessment – by the head office in accordance with intra-economic practice, or, if such isnot the usual practice then

b. Abstract assessment on the basis of a separate balance sheet of the financial and economic activities ofthe representative office subject to approval by tax authorities, or, when it is impossible to determinethe profit in any of the above manners then

c. as the difference between gross income (adjusted by multiplying to a factor of 0.7) and grossexpenditures.

According to the Procedure, only expenditures "incurred directly" by the representative office shall be includedin the representative office’s gross expenditures for taxation purposes. Although inexpedient for economicactivities, it is completely logical given that a representative office is presumed "independent." Following suchlogic, it is likely to expect application of the arm’s-length rules for transactions between the head office andrepresentative office. Moreover, the representative office would not be able to pay from its own account theexpenses of another representative office without incurring major tax liabilities for both – payer andbeneficiary. Bilateral double taxation treaties ("Treaties") allow, in spite of the Procedure, for certaindeductions while determining the profit of the representative office, in particular for expenses incurred by thehead office for purposes of the representative office. Such deductibles include management and generaladministrative expenses, regardless of whether such expenses were incurred in the country where therepresentative office is located or in any other place. In terms of legal effect, a Treaty has priority to law ofUkraine and the Procedure. In case a Treaty directly allows allocating expenses incurred by the head office togross expenditures of the representative office, the Procedure may not be taken into account as an instrumentsupplementing the Treaty. On the contrary, the Treaty contradicts the Procedure and therefore the Procedureshall not apply to the extent that can be pointed out by the contents difference of operations definitionscontemplated by the Treaty and the Procedure. The Procedure refers to "gross" expenditures, which can have afiscal connotation, whereas "expenditures" (Treaty) emphasizes economic content. The Treaties also specifythat expenditures include management and general administrative expenses. Some Treaties clarify thatdeductible expenditures do not include royalties, remunerations, other payments for patent use, commissions,other amounts paid, except for amounts paid for covering expenses that were actually incurred15. It is




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interesting that Treaties specifically emphasize the settlements between a head office and representative officeand therefore the Treaties are more consistent in maintaining the status of the representative office in itsentirety with the head office and preserving the integrity of the fiscal policy with taxpayer’s status undereconomic law.

Conclusion

The laws of Ukraine contain numerous conflicts as concerns the status of a representative office of a foreigneconomic organization. The approaches vary even at the conceptual level and restrict the head office operationsaimed at maintaining the economic activities of the respective representative office and in Ukraine generally.The desired trend in this situation would be to bring the tax legislation closer to the provisions on economicentities in the economic law, whereas the existing gap impedes the dynamic development of economicactivities through representative offices. The positive factor in this respect is the international obligation ofUkraine to unify the methodological approach to the avoidance of double taxation of income and property andto use the text of the model agreement in relations with the third parties under which "reasonable reallocationof documented expenses between an entity permanently represented in one Contracting State and its permanentrepresentative office in the other Contracting State is permitted." Such expenses include management andgeneral administrative expenses, research and development costs, interest and management fees, consultationsand technical assistance, incurred both in the country in which the representative office is located and in anyother place. It would be natural to expect such principle to be established in national legislation. The bad newsis that the obligation was assumed by the government of Ukraine as early as 1992; at the same time, the Law ofUkraine "On Taxation of Enterprises’ Profit" was adopted as early as 1994, not taking into account suchobligation. Subsequent amendments and versions of the Law (over 60 only since 2000), have failed to take intoaccount particularities of intra-economic relations

Conclusions

The main thing you should know, that there is neither the best nor the worst type of a legal entity. All companytypes are equal in conducting business and taxation in Ukraine. The circle of legal entities which can conductsome specific type of activities (for example, banking, securities activity and pawning) is strictly limited by theUkrainian legislation. The difference between the types lies in management, responsibility of owners, and theshare capital. The most popular and comfortable company types in Ukraine are Private Limited Company(PLC) and Limited Liability Company (LLC).

"How to govern a foreign capital company in Ukraine right?"

The Ukrainian legislation prescribes tangled management system for the LLC. The management system caninclude the Board of Directors, the Sole Director, and Revision Commission. Following our practice wecan conclude that cases when your director in Ukraine is to be dismissed can cause serious problems for thecompany. The matter is that your Ukrainian director is an employee under the local legislation and is protectedby the current practice in Ukraine. Often in the Ukrainian practice a director who doesn't agree with theowner's decision on dismissing holds the seal and original documents of the company, thereby, makesdifficulties for the company's work and the process of appointing a new director. Sometimes a directorenjoying rights uses the company's funds against the owner (for example, paying for his own legal services,




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advisers, etc.). In rare cases an unscrupulous director uses such methods of "corporate blackmail" as involvingclients and partners of the company into the conflict. Sometimes a director addresses mass media with thepurpose of extending the facts about "injustice and arbitrariness" from the owner's side. In every case acomplex of measures from the owner's side may be worked out, which aims at saving the work of the company.It is better to work up such “cautions” beforehand and fix them among the clauses of the employment contractconcluded with the director, paragraphs of your statute and other internal documents of the company inUkraine. In our practice we recommend owners to organize and ensure an access to the current papers of thecompany from the very beginning and on the base of these materials to provide control for the main aspects ofthe company's activity. In any way one can develop and choose forms and methods for the maximumprotection of the owner's interests and assets of the company in every specific situation. That's why we don'tsell companies, we open business.

"How to choose a business partner in Ukraine?"

If you want to be secured and provide proper obligation performance, it is reasonable to pay attention to thepreparatory stage of negotiations. We don't speak about due diligence which is a very good tool but not alwaysapplicable. Just find out some ordinary data about your possible Ukrainian partner that will assist you to make adecision. Let's see what official information can be given by the State Registrars in Ukraine:1. Full name and registration address.2. Share capital amount. Shareholders and year of incorporation.3. Officially registered moveable property and real estate.4. The amount of employees.5. Working capital circulation.6. Officials of the entity who have powers to act on itsbehalf.

We would recommend entrusting your contract toprofessionals. Experienced lawyer or auditor will helpto get all necessary information about your partnerand to secure proper contractual fulfillment. Note thatin Ukraine a usual arbitration clause that does notcontain all necessary information may be consideredinvalid, and you will lose a chance to protect yourinterests.




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Labor Code/LawGeneral labor regulation in Ukraine

The Ukrainian employmentlaw traditionally favorsemployees, a presumablyweaker party in labor relations.Nevertheless, quite a fewchanges have beenimplemented since lately,aimed at balancing theserelations and providingemployers with additionalpowers. The laws regardingemployment relations are setforth in a number of specificacts. The fundamentaldocument to regulateemployment relations inUkraine is the Labor Code,adopted in 1971 andextensively amended sincethan. There is a number ofother legislative acts effective

in this sphere: the Employment Act (Pro zainyatist naselennya), the Remunaration Act (Pro oplatu pratsi), theAct on vacations (Pro vidpustky), the Collective Labor Dispute Resolution Act (Pro poryadok vyrishennyakolektyvnykh trudovykh sporiv (konfliktiv), the Act on Collective Agreements and Accord (Pro kolektyvnidogovory ta ugody), the Act on Trade Unions (Pro profesiyni spilky, yikh prava ta garantiyi diyalnosti) andothers.As a member of the International Labor Organization (ILO), Ukraine has signed and ratified a number of ILOconventions that supersede conflicting provisions of Ukraine's domestic labor laws. The country has alsoentered into a number of bilateral and multilateral international agreements that contain provisions on labor,employment, and social protection. Ukraine guarantees to each citizen of working age the following rights:

• freedom to work and choose a profession;• protection from unreasonable rejection of an employment application or from illegal termination

of employment;• free assistance in locating a position according to the individual's education and professional

training;• severance pay when a job is lost due to reorganization, or the elimination of the position held by

an employee;• free training while unemployed;• unemployment compensation.




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The state provides additional employment guarantees to certain categories of citizens, including women withchildren under the age of six, single mothers with children who are disabled or under the age of 14, seniorcitizens of preretirement age, and persons released from prison. Primary responsibility for the implementationof state labor and employment policy rests with the Ministry of Labor and Social Policy of Ukraine (Ministryof Labor), the State Centre for Employment, the Research Centre for Employment of Population andEmployment Market of the National Academy of Sciences and their respective local branches. The Labor Codeis extremely proemployee, which reflects the socialist principles of employment. Grounds for dismissal arelimited and social guarantees to employees are generous. Individual employment in Ukraine is established byan employment agreement or an employment contract between an employer and an employee. The mainemployment terms and conditions may be summarized as follows:

1. The trial period is normally limited to three months, with a few exceptions of sixmonths.

2. The monthly wage may not be less than the statutory minimum wage (as of March 2008UAH 515 or approximately USD 102) and must be paid at least twice a month.(which isfar lower then it is existing minimum wage

3. An employer may not order an employee to undertake a job that is not included in theemployee's employment agreement.

4. Employers must notify employees at least two months in advance concerning employees'working location or conditions.

5. The working week may not exceed 40 hours.6. Overtime is capped at 120 hours per year and permitted only when expressly provided

by law.7. Vacations may not total less than 24 calendar days.

The Labor Code of Ukraine regulates all kinds of labor relations, including the rights and responsibilities ofemployees and employers, conclusion, modification, termination and invalidity of employment and collectiveagreements, settlement of employment disputes, labor safety rules, etc. All specific employment laws should bein line with the Code provisions.

CONCLUSION AND TERMINATION OF EMPLOYMENT AGREEMENTS

CONCLUSION OF EMPLOYMENT AGREEMENTS

Employment agreements with Ukrainian nationals, as a rule, are not made in the form of a single writteninstrument, but rather in the form of an employee's application and an administrative order signed by thegeneral manager of a company, both documents specifying the employee's position and salary. All othersubstantive terms and conditions of employment evolve from the provisions of the Labor Code, collectivebargaining agreement and employer's internal regulations. When entering into an employment agreement, anemployee must submit their passport (or other identification document) and labor book. In certaincircumstances, the employee may also be required to submit an educational or training diploma, a healthcertificate, or other documents. In certain cases when specifically stipulated by law an employee may berequired to comply with minimum requirements concerning age, education, or health. In addition, the LaborCode permits an employer to establish limitations as to employment of close relatives (such as parents,spouses, siblings, children of an employee) if such relatives and an employee are subordinated to each other.




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Generally, an employee must perform the duties under the employment agreement personally, and may notdelegate it to any other person unless otherwise provided by law.To conclude an employment agreement, an employee must be at least 16 years of age. However, people aged15 to 16 may enter into an employment agreement upon obtaining consent of a parent or a person acting as aparent (guardian). Minors aged 14 to 15 can also be employed, though this employment shall be subject tocertain strict conditions. Employment agreements can be concluded either orally or in writing. However,Ukrainian legislation stipulates for particular cases when written form is obligatory, i.e., if:

- employees are hired in an organized way;- an employment contract is concluded;- an employee insists on the written form of the employment agreement;- employment agreement is executed with minors (less than 18 years old);- in other cases provided for by the legislation;

Employment agreements may be entered into for an unlimited or limited period of time; however, fixed-termemployment agreements may be concluded only in certain cases, as specified by the legislation or when laborrelations cannot be established for an indefinite period of time due to the nature of work, conditions of itsexecution or interests of employee. Fixed-term agreements may, for example, be concluded with employees,who are employed for seasonal work, to replace an employee on a maternity leave, or to replace an employeethat has been granted some specific benefit, such as free schooling. The Ukrainian legislation provides for aspecific type of labor agreements that is a labor contract. It is concluded in a written form only, for a definiteperiod of time and only in cases, stipulated by the law. The main advantage of labor contract is that it gives apossibility to settle all rights and obligations of the parties in details, including liabilities, remuneration terms,organization of work and terms for termination of the agreement. It is advisable to use the form of laborcontract whenever appropriate in order to minimize any potential risk of disputes in the future. In order toavoid conflicts while entering into labor contracts we recommend the following provisions to be includedthereto:

- Reasonably phrased competition clause regulating the employee’s conduct during employmentand thereupon;

- Confidentiality clause, also surviving termination of the contract;

If required due to the particular nature of the activity, other obligations regarding the employee’s conductshould be spelt out in detail. To simplify the conclusion of employment agreements it is advisable to concludeemployment contracts that include only mandatory terms and to seek to specify other conditions as much aspossible in job descriptions and internal work regulations of the company.

The Labor Code distinguishes between an employment agreement and an employment contract. Anemployment contract is a special form of an employment agreement and may be used only where expresslypermitted by law. It must be executed in writing and may be entered into only for a definite term or until aspecific job is completed. An employment agreement, by contrast, may be concluded orally and may be enteredinto for an indefinite term. The law expressly permits the use of employment contracts with certain employees,including, without limitation, the managing director of an enterprise. Generally, an employment contract allowsthe parties more discretion in determining their respective rights and duties, including working conditions,termination, compensation and benefits. In other words, the parties to an employment contract may include




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provisions that differ from those prescribed by the Labor Code, e.g., a longer annual vacation and more flexibleworking hours. However, neither a contract nor an agreement may diminish the employment guaranteesprovided by the Labor Code, other labor laws and regulations, or applicable collective agreements.

TERMINATION OF EMPLOYMENT CONTRACT

According to Ukrainian legislation, an employment agreement can be terminated only based on statutorygrounds set forth in detail in the Employment Code. Article 36 of the Code provides an exhaustive list ofgrounds for such termination:

- agreement of the parties;- expiration of the term, except for the cases when factual labor relations continue and neither

party requests their termination;- draft call or employee’s entry to military service;- termination of the agreement at the initiative of an employee, at the initiative of an employer or

at the request of trade-union;- employee’s transfer by his consent to other enterprise or his transfer to an elective post;- employee’s refusal to relocate with the enterprise, as well as his refusal to continue to work due

to change of substantial labor conditions;- when a court verdict, providing for imprisonment of an employee, comes into force, except for

some cases;- the grounds set forth in the labor contract.

Termination on any other grounds than those prescribed by the Employment Code is null and void. To savetime and resources, employers should generally attempt to reach a mutual agreement with an employee beforepursuing termination on other statutory grounds. The procedure for terminating a valid employment agreementvaries depending on the type of the labor agreement, the party that initiates the agreement’s termination and thecircumstances surrounding such termination. Agreement termination at the initiative of employer may bejustified, inter alia, in the event of:

(1) changes in organization of production and labor, including liquidation, reorganization(bankruptcy) or reorientation of the enterprise, lay-off as a measure of downsizing;

(2) disclosed inadequacy of an employee to his position as a result of lack of qualification or healthcondition, impeding the continuation of work;

(3) systematic violation of work obligations specified in a labor contract on the part of theemployee, provided that disciplinary or civil penalties have been formerly imposed on thesubject employee;

(4) truancy, including absence from work without valid reason for more than three hours during anybusiness day;

(5) absence from work for more than four months running due to the employee’s temporarydisability, except for some particular reasons;

(6) renewal of an employee, who has previously held the relevant post;(7) appearance at work under the influence of alcohol, drugs or any other toxic substances;




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(8) theft (including pilferage) of the employer’s property as determined by a court of law or byresolution of the investigative body authorized to carry out administrative or civil penalties.

It should be noted that employees may be terminated for the reasons described in clauses (1), (2) or (6) only ifthey refuse to be transferred to other jobs. It is also forbidden to dismiss employees who are on vacation ortemporarily disabled, except for the cases specified in clause (5) above, as well as specific categories ofemployees (pregnant women or women with children of particular age). These limitations do not apply in thecase of company liquidation. There are also additional reasons, enabling an employer to terminate laboragreement at his own initiative vis-à-vis particular categories of employee. As a general rule, the employer isrequired to notify the employee of the termination of labor agreement in writing at least two month prior tosuch termination. Upon termination of a contract for the reasons that do not result from disciplinary misconductof the employee, the employer is generally obliged to make compensation payments (as a general rule, in theamount of one to three monthly salaries). With regard to probation periods (as a general rule, up to 3 months,and in particular cases – up to 6 months), it should be noted that the employer may terminate the employmentcontract up until the very last day of the probation period based on the unsatisfactory results of the probationperiod. As termination of an employment contract on that ground is much easier, the employers are urged touse probation periods in their employment contracts and the competence of the employee should be evaluatedbefore the probation time term expires. In general, employment contracts concluded for a fixed term expire onthe date agreed upon. However, a notification requirement (obligation of an employer to issue an order onemployee’s dismissal) applies here as well. The employer should pay the utmost attention to this procedure, asan employment contract concluded for a fixed term will be automatically transformed into a contract for anindefinite period of time, if an employee is admitted de facto to perform his functions on the day following thecontract expiration date. It is highly recommendable to seek professional advice before terminating anyemployment contracts. It is essential to comply with the formal requirements specified by the law. In case ofillegal termination (also including breach of formal requirements), the employer may face penalties or theemployee may be reinstated in his or her position and shall be paid average wages for the compelled absencefrom work. Considering that court actions may last one or more years, a situation might occur when theemployer, based on the court judgment, shall be bound to reinstate the employee at his previous position andpay the average wages for the whole year.

Labor Books

Labor books typically contain information about the type of work performed, any awards, the duration ofemployment, etc., and serve as a basis for ascertaining the employee’s length of service with reference to socialsecurity and pension rights upon retirement. Although representative offices of foreign companies may engageUkrainian employees, they are not permitted to make any entries in the labor books of such employees. Anyentries made directly by a representative office would be declared invalid. Rather, those books are submitted toand maintained by appropriate government agencies. In Kyiv, the relevant agency is the General Directoratefor Servicing Foreign Representations (commonly referred to by its acronym “GDIP”). A representative officemust enter into an appropriate service agreement with GDIP and compensate GDIP for its services.

Payroll Taxation




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Figure 176 Type of mandatory social security

Ukrainian law imposes a number of tax obligations on an employer in relation to the payroll of its employees asdescribed below. Under Ukrainian tax law, an employer is deemed to be a “tax agent” for its employees. Thismeans that the employer is obliged to withhold and remit to the state budget personal income tax (“PIT”) onsalary and on certain fringe benefits provided to its employees. Moreover, the employer must regularly file PITreports with the tax authorities. The standard PIT rate is 15%. The PIT base for payroll income is determinedas being gross salary less social security contributions payable at the expense of the employee. In addition toPIT, a Ukrainian employer is liable for paying relevant mandatory social security contributions for itsemployees and reporting to the relevant social security funds. Mandatory social security contributions apply topayroll salary payable by an employer to its employee.Social security contributions are split into two types:

(1) those payable at the expense of the employer; and(2) those payable at the expense of the employee.

Social security contributions payable at the expense of the employer are accrued on top of payroll. Conversely,social security contributions due from an employee are withheld by the employer from the employee’s payroll.The tax base for social security contributions is currently capped at UAH 10,035 (approximately – USD 1,600)per month per person. To explain, if a salary exceeds the payroll cap, social security contributions will notapply to the amount of salary that exceeds the payroll cap. For your reference, we summarize the rates forsocial security contributions in the table.

Disabled Persons- Employment Requirements

Ukrainian law sets requirements for the employment of a certain number of disabled persons by Ukrainianemployers. Specifically, a Ukrainian employer must employ disabled persons as 4% of its average number ofemployees per year. If a Ukrainian employer engages between 8 and 25 staff, at least one disabled person mustbe employed.

SALARIES

Salary related conditions include the rates of wages/salaries to be paid, the payroll system, the salary paymentterms, and regulations pertaining to additional remuneration. Only the rate of wages/salary must be included in




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the employment contract while other conditions may be set forth in internal work regulations or included in theemployment contract through reference to specific acts. The minimum salary rate is established by theParliament. As of December 1, 2006, the minimum monthly salary is UAH 400 (approximately 80 USD). Fromtime to time the minimum monthly salaries are occasionally revised to allow Ukrainian citizens to keep pacewith the spiraling cost of life. If an employer requires an employee to perform other duties during his or herworking time in addition to the duties prescribed in the employment contract (additional work), the employee isgenerally entitled to additional remuneration. Similarly, the Ukrainian Labor Code requires overtime, holidaysand nighttime work to be adequately compensated. Generally, an employee may be transferred to a lower-paidposition only after both parties reach an agreement or in exceptional circumstances specified by the law. Whenan employment contract is terminated, the employer may withhold the amounts paid for the vacation time inadvance. The employer withholds the income tax in the amount of 15% from all salaries, bonus payments andother remuneration paid to an employee. 15% is deducted from income after withholding all payments to thePension Fund and Social Securities Funds. The employer is bound to transfer collected tax amounts to the bankaccount of the local state revenue office on the date the payments were made. In addition to income tax, anemployer shall pay social insurance fees on employee’s payday. These payments constitute 36.66% to 49.6%of taxed salary of an employee to be paid to social insurance funds. Thus, payroll charges constitute 1,3% tothe fund of unemployment insurance, 1,5 % to the temporary disability fund and industrial accidents fund(from 0,66 % to 13,6%) based on the type of company activities and types of risks payments to Pension Fundfrom the payroll fund - 33,2%. On the date of allocation of payments, included in the work payment fund,levies of these payments shall be withheld to the unemployment insurance fund – 0,5%, social insurance fund –0,5 - 1% and Pension Fund – 0,5 - 2%. In most cases employees may not refuse from business trips to anotherlocality for a period not exceeding 30 consecutive days. However, pregnant women and mothers having a childunder three years of age cannot be sent on business trips, and mothers of a child under fourteen cannot be senton a business trip without their consent. The employer is obliged to pay per diem to an employee sent on abusiness trip, as well as compensation for travel related costs, accommodation and other related expenses. Thecurrent minimum per diem for domestic business trips is UAH 25 per day, and UAH 280 for business tripsabroad. Accommodation costs, transport expenses as well as a number of other costs, determined in the Law ontaxation of enterprises’ income may be exempt from income tax. In case a business trip involves travelingabroad, the costs of compulsory insurance and visa are reimbursed based on the receipts or a copy of the visa.Other expenses related to the business trip are reimbursed on the basis of receipts.

WORK TIME

Working in excess of the hours set forth in the employment agreement (internal acts) is overtime work. As arule, overtime work is not allowed. At the same time it should be noted that overtime work always impliesinitiative of employer. Work, performed by the employee at his or her initiative, even when employer is awareof it, is not considered to be overtime. Regardless of the grounds, each case of overtime work shall beadequately compensated for. Additional hourly rate as compensation for overtime work payable on top of theregular salary rate shall amount to at least 100% of the employee’s hourly salary. There are limits on overtimework. An employee cannot be engaged in overtime work in excess of four hours during two consecutive days.The total overtime work of an employee per year cannot exceed 120 hours. Pregnant women and women withchildren under 3 years (in some cases under 14 years), minors and employees who are studying and working atthe same time may not work overtime. According to the Labor Code, employees have work time limits, so thatan employee may not work in excess of 40 hours in a week. There are special rules governing work at




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nighttime (ten p.m. to six a.m.). The limitations on night time work are similar to those on overtime work.Stricter limits on the overtime and night time work may apply pursuant to collective (union) agreements. Nightwork must be compensated by payment of additional remuneration. Additional hourly remuneration fornighttime work must amount to at least 20% for night work calculated from the hourly salary. Work to beperformed on days off must be agreed on with the employee. The Labor Code of Ukraine prohibits work on aday-off and official holiday, except in certain exceptional circumstances, such as:

preventing or handling public or nature disasters and industrial accidents; preventing or handling accident, destructions, or damage of state or public property; urgent, unforeseeable work required for the normal functioning of the business

The Labor Code stipulates two possibilities to compensate for work performed on an employee’s days off:monetary compensation or compensatory time off. If the parties agree on monetary compensation, theadditional hourly salary for the time worked during the employee’s days off shall constitute 100% of the hourlysalary of the employee. Currently there are the following public holidays in Ukraine: New Year’s Day (1January), Christmas (7 January), International Women’s Day (8 March), the Day of International Solidarity ofWorkers (1 and 2 May), Victory Day (9 May), Constitution Day (28 June), Independence Day (24 August).Public holidays are days off. In addition to public holidays, the following are religious holidays whenemployees are off work: one day (Sunday) – Easter, one day (Sunday) – Trinity. An employee may be obligedto work on public holidays only when it is necessary to provide services to the public or as required by work(continuous operation process). Work on state holidays must be remunerated by at least double hourly salary ofan employee. The work on days-off and public holidays should be paid in double amount or compensated bythe time off should an employee give consent.

VACATION

The vacation system in Ukraine is regulated by the Labor Code of Ukraine and the Act on vacations (Zakon providpustky). Employees are entitled to annual vacation of 24 calendar days (the first one may be requested by anemployee after 6 months of employment commencement). For the second and subsequent work years, thevacation may be taken in the middle of the work year based on the schedule approved by an employer.Payments for vacation are equal to regular salary for the same period. In the event that an employment contractends and the employee has not used the remaining vacation, either this time must be compensated for or theremaining vacation time is to be granted to such employee, and the employment contract shall be deemedextended over the duration of the respective vacation. Compensation shall be calculated in the same wayvacation pay. There are the following basic types of vacation:

Annual vacations (including particular types of special annual vacations); Additional study-related vacations; Creative (art) vacations; Social vacations; Unpaid vacation.




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All employees working under an employment contract are entitled to primary annual vacation, whereasadditional annual leave is granted to employees having difficult work conditions. The list of professions, postsand jobs, entitling for additional annual leave is determined by the Government. Duration of primary annualvacation is 24 calendar days per working year. A working year is the period beginning on the first day ofemployment and ending on the day preceding this date of the next year.

Social leave can be defined as:

Pregnancy and maternity leave; Child nursing leave; and Additional child-care leave.

Pregnancy and maternity leave of 126 or 140 calendar days (70 days before the childbirth and 56 or 70 daysafter) shall be granted to a woman on the basis of a medical certificate. Additionally, a mother or father(grandmother or grandfather or other relatives that de facto take care of a child) shall be granted parental leaveat his or her request for raising a child to 3 years of age. An employed woman with two or more children under15 years of age as well as some other categories of parents are entitled to additional annual paid leave of 7 days(in some cases up to 14 days). Per Ukrainian legislation, it is necessary to pay benefits for the entire period(126 days) of maternity leave before this period of maternity leave had commenced. Such benefits must bepaid in the total amount only for the agreed upon 126 days, even if the pre-childbirth period had a longerduration than expected. The benefits must be allocated on the basis of a disability notice, which is issued for theentire period of maternity leave. The form, contents and validity of the information in the aforementionedletter is supervised by the Commission on Social Insurance. In order to pay the maternity benefits, thefollowing should be taken into account:

1. The funds may only be paid for missed business days during the maternity leave period;2. The total amount of such benefits depends on the amount of business days and the average daily

salary of the employee;3. The benefits have to be paid in the amount of the full average salary.

The Labor Code provides for a number of additional study related leave ranging from 10 days to four monthsdepending on a particular reason (such reasons can be, for example, preparation for and taking exams in schoolor in university, writing a diploma etc.);

An employer and employee may agree upon unpaid vacation. In certain cases the employer is obliged to givethis vacation upon request (e.g. in the event of an employee raising a child under 15 years of age alone oremployee’s preparation for taking university entrance examinations, or if the employee is working part-timeand the vacation from the full-time work place is longer than the vacation from the part-time work place at thesame time or to a husband whose wife is on maternity leave). According to the Labor Code of Ukraine, annualleaves must be calculated in calendar days (not working days). In addition, all employees must be providedwith no less than 24 days of annual leave with their positions and salary preserved during such leaves. TheCode provides for a longer duration of annual leave for specific categories of employees, such as thoseemployees working in hazardous conditions. Importantly, the duration of such leave may not be reduced in anycase. The Code requires monetary compensation for any unused annual leave. In case of dismissal, anemployee must be compensated for all unused days of annual leave, as well as for unused days of any




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additional leaves that would be provided to employees with children of a certain age. Per an employee’srequest a part of unused annual leave may be paid in cash. Note, however, that the duration of the providedannual leave, and other additional leaves, may not be less than 24 days. Moreover, temporary disability leavesand any leaves connected with pregnancy and maternity may not be included into regular annual leaves. Withrespect to unpaid leave, Article 25 of the Law of Ukraine “On Leaves” specifically provides a list ofexceptional circumstances when an employer (owner) is obliged to provide to an employee the right to take anunpaid leave, including:

(a) up to 14 calendar days annually for mothers or fathers (i) raising children without aspouse (including cases when a mother is undergoing lengthy treatment in a medicalinstitution), (ii) with two or more children under the age of 15 or (iii) with a handicappedchild;

(b) up to 14 calendar days for husbands or wives, who elect a post-birth leave;(c) mothers or other individuals (relatives, husbands, adoptive and foster parents, etc.) in

case a child needs nursing or care at home (for the duration determined in the relevantmedical findings, but only until the child reaches the age of six);

(d) up to 14 calendar days annually for war veterans, individuals with special privileges,and individuals to which the Law “On the Status of War Veterans and Guarantees oftheir Social Protection” applies;

(e) up to 21 calendar days annually for individuals with special labor-based privileges fromthe state;

DISPUTE SETTLEMENT

All major issues related to settlement of individual labor disputes are regulated by the Labor Code of Ukraineand those related to collective disputes - by Special Law of Ukraine on the Procedures for the resolution ofcollective labor disputes (conflicts) (Pro poryadok vyrishennya kolektyvnykh trudovykh sporiv (konfliktiv)).

a) individual disputes The parties to an individual dispute can refer either to a court of law or tothe Labor Dispute Commission within three months from the point of time when violations haveoccurred, or the point of time when an employee gained knowledge of or should have knownabout the violation. Disputes arising from employee’s renewal at work, compensation ofmaterial damage by employee to an enterprise as well as disputes arising from the applications,submitted by certain categories of workers, shall only be reviewed in courts.

b) collective disputes The Law on the Procedure for Collective Labor Dispute Resolution providesfor two major instances for dispute resolution: Conciliation Commission and Labor Arbitration.Both bodies are alternative mechanisms of labor dispute resolution. The ConciliationCommission handles disputes arising from execution/amendment of collective agreement orestablishment or adjustment of social economic labor conditions. It involves a simplified andtherefore quicker procedure. Labor Arbitration can be addressed if the Conciliation Commissionfails to deliver a decision on the case or dispute arising from non-compliance with labor safetylegislation or non-performance of collective agreement.

Employment of Foreign Nationals




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Due to the Ukrainian rules any foreign national intending to be employed in Ukraine must, before his or hercommencement of such employment, apply for and obtain a work permit. Work permits are issued to foreignnationals by the relevant Ukrainian employment center, provided that: there are no qualified Ukrainiannationals in the relevant sphere who are suitable for the position in question; or there are significant grounds forthe employment of foreign nationals as specialists. It should be noted that the applicable Ukrainian legislationdoes not provide a definition of the term “significant grounds”. At the same time, a document outlining suchgrounds should be filed, together with other required documents, with the relevant employment center.Presumably, the education and expertise of the foreign national in the relevant area will be taken into accountin evaluating whether to issue a work permit to such foreign national employee. It is important to know that theright to work is valid during a year.

An employment permit may be issued to a foreign national only if the following requirements are compliedwith:

• there are no Ukrainian nationals in the region (or, in certain cases, in the entire country) capableof performing the work for which the employment permit is requested; or

• there are sufficient other grounds for using foreign labor.An employment permit is issued by the State Employment Centre of the Ministry of Labor (the "EmploymentCentre") for a period of up to one year and may be extended with one month's prior written request. To applyfor an employment permit for a foreign employee, an employer must submit the following documents to theEmployment Centre:

• an application, stating the reasons for employing foreign citizens and demonstrating theemployer's readiness to provide all necessary working and living conditions;

• notarized copies of the company's charter and certificate of registration;• a list of foreign citizens, stating the full name, year of birth, sex, passport number, and

profession of each;• a copy of the agreement, if

any, between a foreign company and theUkrainian legal entity providing foremployment of foreign citizens;




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• a copy of thedraft employmentagreement between theemployer and the foreignemployee;

• copies of thedocuments that evidence theforeign citizens' educationor profession;

• theemployer's good standingcertificate from the state taxadministration;

• a power ofattorney for the employer'srepresentative; and evidenceof payment of the requiredapplication fee, equal to 10non-taxable income units

(UAH 170).The Employment Centre is required to issue its decision regarding an employment permit within 30 days of thesubmission of a completed application. The employer must inform the Employment Centre of thecommencement or termination of work by a foreign national within three days. The employer is also requiredto report the reign employee’s income and withheld taxes to the state tax administration on a quarterly basis.It is the employer ’s obligation to ensure that every foreigner working in their office obtains a work permit. Aforeign citizen employed without a work permit is subject to immediate deportation from Ukraine at theemployer ’s expense, and the passport of such foreign citizen will be stamped with “persona non grata”. Inaddition, the director of the employer company may be liable to an administrative financial penalty.Applications for work permits are submitted by the employer, and should include supporting evidence thatthere are no local employees who would be able to perform the work the foreigner would be performing inUkraine. There is no provision as to the maximum permissible period of uninterrupted stay for a foreign citizenin Ukraine for employment purposes.

Main Novelties in the Draft Labor Code of Ukraine

New realities pose serious challenges for labor laws, which first of all need to find a balance between thenecessity to protect the rights of employees and the necessity to ensure labor market flexibility and trigger anactive social dialogue. Apart from Poland, Ukraine is the only country among the Eastern European andCentral Asian countries, which maintains in force the old Code of Labor Laws, the Code of Labor Laws of theUSSR, dated December 10 ,1971 # 322VIII (the “CLL of Ukraine”). Radical changes in the whole system ofsocial relations that are taking place in Ukraine amid the formation of market relations and socioeconomictransformations and more or less related to labor make it necessary to adopt a new codified legal instrument inthis sphere. According to the agenda of the ninth session of the Verkhovna Rada of Ukraine (the UkrainianParliament) of the sixth convocation, which will continue until January 13 th , 2012, the Verkhovna Rada of




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Ukraine is planning to consider the Draft Labor Code under registration # 1108 (the “Draft Labor Code”) inthe second reading. This draft law is expected to be adopted at the current ninth session, i.e. in the nearestfuture. The Draft Labor Code consists of nine books; each divided into separate chapters, and contains 444articles. For the first time in Ukraine’s legislative history, the Draft Labor Code determines the goals,objectives, and scope of regulation of the labor laws (Articles 1, 2 of the Draft Labor Code). The DraftLabor Code, similarly to the CLL of Ukraine currently in force, prohibits the unreasonable refusal ofemployment (part 1 of Article 31 of the Draft Labor Code). The Draft Labor Code upholds the principles ofprohibition of forced labor and the nondiscrimination in employment, including in respect of thesuspected or actual HIV/AIDS disease (Articles 4, 5 of the Draft Labor Code). Part 2 of Article 4 of the DraftLabor Code expressly defines the notion of “gender discrimination”. It should also be highlighted that part 8 ofArticle 6 of the Draft Labor Code provides that labor laws shall not apply if any work is performed by anindividual entrepreneur on his/her own; any work is performed by members of an individual farm at such farm;or if an individual is engaged in any work under a civil law contract. In addition, the Draft Labor Code permitsthe execution of a civil law contract with officials of business companies and in those cases where anindividual performs his/her duties under a civil law contract that requires the performance by such individualof certain works for any other party to such contract. The Draft Labor Code establishes the categories offoreign nationals who do not need any employment permit. Thus, part 6 of Article 20 of the Draft Labor Codeassigns the following employees to such categories:

1) representatives of foreign maritime (river) fleet and foreign airlines that provide services to suchorganizations in the territory of Ukraine;

2) representatives of foreign mass media accredited in Ukraine;3) actors and art workers to be employed in Ukraine in accordance with their professional

qualification;4) employees of emergency rescue services for performance of emergency works;5) heads of representative offices of foreign business entities in Ukraine and chief executives of

enterprises with foreign investment;6) employees employed within and for the positions (areas of qualification) set out in a product

sharing agreement.One of the most significant novelties in the Draft Labor Code is introduction of quotas for employment ofpersons in need of social protection. Such quotas are set by local selfgovernment bodies subject to approvalby territory based social dialogue authorities (Article 35 of the Draft Labor Code). The foregoing provision ofthe Draft Labor Code raises serious concerns since і) it introduces 5 schemes of quotas covering a wide rangeof employees, and іі) it envisages a single standard for employers without any regard to industry, region orcompany size. Pursuant to part 2 of Article 38 of the Draft Labor Code, employment relations arise:

1) on the day the employee begins working according to an employer’s order or permit;2) on the day the employment begins according to an employment agreement (unless the employee

concerned fails to begin working on such day due to his/her disease or for other valid reasons);3) on the date set out in a court decision (if the court obliges an employer to employ a relevant employee).

Another new provision is part 2 of Article 39 of the Draft Labor Code, which provides that an employmentagreement may be executed at any time before the beginning of employment. In other words, unlike the CLL ofUkraine currently in force, the abovementioned provision entitles an employee to enter into an employmentagreement prior to his/her dismissal from his/her previous job. Other novelties of the Draft Labor Code relateto the content and form of the employment agreement. Thus, Article 40 of the Draft Labor Code provides




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for the following terms and conditions of the employment agreement: 1) binding, 2) additional, and 3) otherterms and conditions prescribed by applicable laws and by a collective bargaining agreement. Thus, as opposedto the currently effective CLL of Ukraine, the Draft Labor Code contains an exhaustive list of material termsand conditions of the employment agreement, failing which the employment agreement shall not be deemedexecuted. They, in particular, include the following terms and conditions: place of employment; effective dateof the employment agreement; job duties, or profession in which the employee will work; remunerationconditions; work and rest time; occupational safety and health. The Draft Labor Code provides that theemployment agreement must be made in writing (Article 41 of the Draft Labor Code), which should surelyimprove the social protection of employees. However, as provided by the Draft Labor Code, the violation ofthis rule may not affect the already existing employment relations. Thus, subject to the foregoing provision andconsidering that, as stated above, the employment relations arise, in particular, on the date the employmentbegins, the actual admission to work is equal to the execution of the employment agreement, whether or notsuch agreement has been executed in writing. Article 42 of the Draft Labor Code classifies the employmentagreements into typical agreements, which shall be approved in the cases envisaged by law by a centralexecutive authority in charge of employment issues and shall be legally binding, and model agreements, whichshall be approved by a central executive authority in charge of employment issues and shall be advisory innature. This novelty is hardly justified. New provisions also include a probation period for employment.Thus, according to part 1 of Article 46 of the Draft Labor Code, the condition of probation shall be deemedapproved if the agreement on this condition is set out in the employment agreement. Article 47 of the DraftLabor Code prohibits applying a probation period to the following additional categories of employeescompared to the CLL of Ukraine currently in force:

• employees elected to a relevant position;• winners of a competition to fill a vacant position and• employees who completed training on probation outside regular working hours in their primary

employment.Meanwhile, it should be noted that unlike the currently effective CLL of Ukraine, the Draft Labor Code doesnot prohibit a probation period for disabled employees. Furthermore, unlike the currently effective CLL ofUkraine, the Draft Labor Code provides a clear list of documents to be submitted by a newly hiredemployee (Article 58 of the Draft Labor Code). In addition to the passport, the employment record book andthe education related document currently required under the effective labor laws, the Draft Labor Code requiressubmission of the following additional documents: the application for employment (with the indication whetherthis will be fulltime or part time employment), the compulsory state social insurance certificate, the taxidentification number and medical examination results (for some positions). Like the currently effective CLL ofUkraine, the Draft Labor Code limits the scope of application of fixed term employment agreements andprovides that fixed term employment agreements should be executed when respective employment relationscannot be established for an indefinite period of time. In the employers’ opinion, in view of the reformscurrently underway in the global labor market, the Draft Labor Code should guarantee the right of the parties toemployment relations to freely agree on the execution of fixed term employment agreement regardless of thegrounds or the nature of the job. Meanwhile, since the limited scope of application of fixed term employmentagreements is one of the important guarantees of the employees’ labor rights, the position of the Ministry ofSocial Policy of Ukraine and the trade unions on this issue remains unchanged. At the same time, a positivedevelopment is that Article 69 of the Draft Labor Code provides for an expanded and clearer list of groundsfor establishing employment relations for an indefinite period of time. The Draft Labor Code also provides




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for an expanded list of grounds for terminating employment relations with an employee, as compared tothe currently effective CLL of Ukraine. Thus, such additional grounds are as follows:

• A gross violation of labor safety rules, fire safety rules or traffic safety rules (Clause 5 of part 1of Article 104 of the Draft Labor Code);

• Disclosure of a state or commercial secret (Clause 2 of part 2 of Article 104 of the Draft LaborCode);

• A violation by the director of the rules set by the founders (Clause 6 of part 2 of Article 104of the Draft Labor Code);

• The employee’s absence from work, with no information available as to the reasons behind suchabsence, for more than four months (Article 108 of the Draft Labor Code);

• Decease of the employer (Article 113 of the Draft Labor Code);• Death of the employee (Article 114 of the Draft Labor Code).

Evidently, such additional grounds for terminating employment relations as the decease of the employer andthe decease of the employee are purely technical in nature. The Draft Labor Code also introduces new rulesgoverning the procedure for dismissing employees. Thus, it imposes a ban on dismissal of employees whilethey are on a business trip (part 2 of Article 116 of the Draft Labor Code). Of great social importance are theprovisions of Article 120 of the Draft Labor Code providing for the employees’ right to protection fromunlawful dismissal. Thus, in accordance with the said Article, prior to their dismissal, employees should firstbe given an opportunity to provide evidence of their level of qualification, their work productivity, theirdiligent attitude towards the performance of their job duties, the legitimacy of their actions or omissions to act,and to give explanations regarding the committed violations or failures to properly perform their job duties.The Draft Labor Code provides for the employers’ obligation to give references at the employee’s request inthe event of his or her dismissal (part 1 of Article 125 of the Draft Labor Code), and a ban on provision to anythird parties of any information about the reasons behind the dismissal or any other information about theemployee (part 2 of Article 125 of the Draft Labor Code). Unlike the currently effective labor laws (Article 11and 14 of the CLL of Ukraine), the Draft Labor Code establishes the principle of voluntary collectivebargaining in line with international practice. Thus, in accordance with part 4 of Article 349 of the Draft LaborCode, collective bargaining shall be mandatory if proposed by either party. Meanwhile, part 3 of Article 356 ofthe Draft Labor Code provides that the parties, who have agreed to enter into a collective bargainingagreement, shall execute it annually not later than February 1 of the current year. Therefore, Articles 349 and356 of the Draft Labor Code allow the conclusion about the compulsory annual execution of a collectivebargaining agreement regardless of the parties’ will, provided that the parties agree to enter into suchagreement at least once. And therefore, the legislators of the Draft Labor Code have failed to pursue theprinciple of voluntary collective bargaining to the end. In the authors’ opinion, the term of a collectivebargaining agreement is, first of all, the prerogative of social partners, i.e. parties to the agreement, andtherefore, it should be determined by them. The same conclusion is also supported by the International LaborOrganization, which says in its comments to the Draft Labor Code that from a practical standpoint, it is notadvisable to create a situation where every 12 months the parties inevitably find themselves in a conflictsituation. The Draft Labor Code radically changes the legal status of the labor dispute commissionprovision, in particular, out of the primary authority for consideration of individual labor disputes, the labordispute commission has been transformed into a conciliation body set up for the purposes of “settlingindividual labor disputes through a search for mutually acceptable solutions and reconciling the parties to suchdisputes”. The only authority authorized to consider individual labor disputes in accordance with the DraftLabor Code is the court, while the labor dispute commission performs only conciliatory functions. In




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accordance with the Draft Labor Code, the general limitation period for judicial recourse has beenextended from three months to three years.

The limitation period for filing a statement of claim with the court against an unlawful dismissal has not beenchanged and is still set at one month. The same limitation period is prescribed by the Draft Labor Code forfiling claims regarding transfer to another job or unlawful refusal of employment. In the authors’ opinion, thepositive novelty introduced by the Draft Labor Code is its provision saying that no limitation period shall applyonly to the claims for recovery of accrued but delayed wages, and neither to any claims relating to laborremuneration (part 2 of Article 440 of the Draft Labor Code). Subject to the foregoing, the authors believe thata majority of the novelties proposed by the Draft Labor Code will help to find balance between the interests ofemployers and those of hired employees. However, a complex analysis of the provisions of the Draft LaborCode allows the conclusion that Ukraine still has not shifted towards the radical reforms suggested by theinternational experience of labor law reforms, such as the alleviation of overly strict labor law requirements tosimplify the procedures for hiring and dismissing employees, the extension of the term and the scope ofapplication of fixed term employment agreements, the provision of a variety of possible options for enteringinto employment agreements, the introduction of flexible work hours, and the introduction of apprenticeshipwages.




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Revenue Department Tax Guidance

Ukrainian Tax system

Ukraine has a volatile tax system, andlegislative amendments are frequent.

Residents are taxed on worldwide income.Non-residents are taxed only on income fromUkrainian sources.

Corporate profits are subject to 25% tax.Dividends are separately taxed at the shareholderlevel in the hands of individuals and foreignshareholders.

Ukraine has a relatively high VAT rate(20%), but a low flat rate of tax on individuals(15%).

With the exception of agricultural enterprises,the fiscal year for taxpayers follows the calendaryear.

The penalty for failing to deduct and remit withholding tax when required is 200%, plus interest. A recent World Bank study concluded that Ukraine was one of the most difficult countries in which to

pay taxes out of the 185 countries surveyed.

Ukrainian tax legislation is built on the principle of non-discrimination and equal terms of taxation for anybusiness entity in the Ukraine. Regarding foreign investors, in the scope of taxation they are treated under thenational regime. The following laws are the maintax laws in the Ukraine:

law on the System of Taxation law on Local Taxes and Duties; law on Taxation of Company Profits; law on Value-Added Tax; law on Unified Customs Tariffs; and laws on Excise Duty.

Under laws of the taxation system, only taxationlaws may introduce taxes and duties and their rates.Only taxes and duties stipulated by said law shallbe paid. Amendments to this law, as well as toother taxation laws, concerning rates and themechanism for calculating taxes, shall be made not

Figure 177 Tax collection.




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later than six months before a new budget year and will take effect from the beginning of the new budget year.The law on taxation of company profits (the “law”) fixes the corporate tax rates depending on the businessactivities.

Tax system

The Ukrainian tax system is evolving rapidly. The direction of reform is generally positive, although it issometimes unpredictable. Tax laws have been revised frequently, sometimes several times in one month, andthere are still many issues that need to be addressed. Tax law is often poorly worded, which results inambiguous interpretation and increases the risk of disagreements between taxpayers and tax authorities.Ukraine is not an easy country in which to pay taxes. In the recent "Paying Taxes" study released byPricewaterhouseCoopers and the World Bank, Ukraine was identified as one of the most difficult countries inwhich to pay taxes out of the 185 countries surveyed. Many companies employ tax accountants in addition tofinancial accountants as tax accounts are separate from financial accounts. The study estimated that a modest-sized domestic business would need to make 98 tax payments each year, and would require 2,185 hours peryear to comply with its tax compliance requirements. For several years, there have been discussions aboutconsolidating the various revenue laws into a single Tax Code, which should ease compliance andadministration. A new initiative is underway to have this introduced into Parliament sometime in 2007, and toapply from January 2008.An interesting feature of the Ukrainian tax system is a simplified or unitary taxavailable for many small businesses. Qualifying sole proprietors opting to use the system pay a fixed amount oftax, while eligible entities pay a fixed rate of tax based on their revenues. In both cases, the businesses areexempted from income tax, a number of other small taxes, and potentially value-added tax (VAT). OnTaxation System, the law that provides the general framework for taxation in Ukraine, provides for 28 nationaltaxes that may be imposed. The principal taxes and compulsory payments are:

Corporate income (profits) tax (CPT) Personal income tax (PIT) Value added tax (VAT) Pension Fund charge Excise tax and import duties Land tax Stamp duty

On Taxation System also provides for two taxes and 14 duties that may be levied at the discretion of localauthorities. The main local taxes affecting business are the advertising tax, municipal tax, and the charge forusing local symbols. All taxpayers are required to register with the STA and to obtain a tax number.Registration is undertaken through the local tax office where the individual or business is located. Without atax number, it is not possible to open a bank account in Ukraine. The tax system of Ukraine is composed ofmore than 30 taxes and levies charged on the base of the Law of Ukraine “On the Taxation System”, dated25.06.1991, # 1251-XII, with further amendments and includes national and local taxes and levies.




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The main national taxes andlevies paid by legal andindividual persons are:

1. Corporate Profit Tax;2. Personal Income Tax;3. Value Added Tax;4. Excise Duty;5. Compulsory State

Social Security Levies;6. Land Tax;7. Customs duties; and

others.

The main local taxes and leviesare the advertising tax,municipal tax, car-parkingcontribution, market levy, othertaxes and levies. National taxesand levies are adopted by theParliament of Ukraine(Verkhovna Rada) and aremandatory for payment on theentire territory of Ukraine.Local taxes and levies arecollected in the order established by the relevant municipalities. The rates of local taxes are established withinthe limits adopted by the Parliament of Ukraine in the relevant laws. Collection of taxes is controlled andadministered by the State Tax Administration while payment of customs duties is administered by the StateCustoms Service. All legal and individual persons that are engaged in business activities must register at thelocal tax administration and regularly report all taxable transactions and taxes paid. It should be noted that thelegislation of Ukraine (including the legislation on taxes) is subject to quite frequent amendments that makescertain difficulties even for the local taxpayers.

Taxation accounts for around 73% of government revenues. More than three-quarters of this is collectedthrough corporate income (profits) tax (CPT), personal income tax (PIT), and VAT. Tax collections haveincreased rapidly over the past five years. It can be seen that the reduction of the individual tax rate in 2004significantly increased the collection of individual taxation. A 15% increase in overall tax revenues is forecastfor 2007. While the most recent Doing Business data reflect how easy (or difficult) it is to comply with taxrules in Ukraine today, data over time show which aspects of the process have changed — and which have not.That can help identify where the potential for easing tax compliance is greatest.

Figure 178 How Ukraine and comparator economies rank on the ease of paying taxes




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Figure 179The ease of paying taxes in Ukraine over time

Equally helpful may be the benchmarks provided by the economies that today have the best performanceregionally or globally on the number of payments or the time required to prepare and file taxes. Theseeconomies may provide a model for Ukraine on ways to ease the administrative burden of tax compliance. Andchanges in regional averages can show where Ukraine is keeping up—and where it is falling behind.




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Figure 180 Has paying taxes become easier over time?(part1)




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Figure 181 Has paying taxes become easier over time?(part2)

Taxpayers’ Status

The payment of taxes depends on the residential status of taxpayers. The residential status of legal andindividual persons for the purposes of taxation is defined by the relevant tax laws regulating taxation of legaland individual persons, respectively. A legal person as well as a permanent establishment without the status ofa legal person (e.g. a representative office or a branch) is considered to be resident, if it is registered andconducts its business in accordance with the legislation of Ukraine. Determination of the residential status of anindividual is more complicated. Thus, an individual is considered to be resident, if his/her domicile is in theterritory of Ukraine. In case an individual is also domiciled in another country, he/she will be considered aresident if his/her place of permanent residence is situated in the territory of Ukraine. If an individual has aplace of permanent residence both in Ukraine and in another country, he/she will be considered resident ifhe/she has closer economic ties (the centre of vital interests) in Ukraine. If the residential status of a personcould not be defined with the help of the above rules a person will be considered resident if he/she stays inUkraine for the period of at least 183 calendar days during a tax year. If this rule cannot be applied, a personwill be considered resident if he/she is a citizen of Ukraine. If a person regardless of the provisions of the lawhas also a citizenship of another country, for the purposes of taxation this person will be considered a residentof Ukraine and will not be able to apply any privileges or exemptions envisaged by the internationalagreements signed by Ukraine. If a person is stateless, his/her status will be determined in accordance with therules of the international law.




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Legislative framework

Statute law

According to the Constitution, taxes and levies, as well as penalties for non-compliance, may only beestablished by laws enacted by Parliament. Parliament exercises this prerogative frequently, and it is quitecommon for more than twenty amendments to be made to the various Ukraine tax laws each year, sometimeswith potentially retroactive effect. Although many amendments are very minor, the frequent changes, as well asthe government's failure to proceed with declared intentions and schedules for tax reform, have earned Ukrainethe reputation of having an unpredictable tax system. Strictly speaking, the State Tax Authority (STA) does nothave discretion to amend the law, but in practice, the STA often issues tax clarifications that are not alwaysconsistent with the law, although this can be a function of ambiguities in the law as much as anything else.Nevertheless, it is prudent to consider STA interpretations and the risk of conflict with the STA before taking aposition based on the law.

Tax treaties

Ukraine has a broad network of tax treaties, with 60 treaties in force as at 1 January 2007. Rates are reduced toas low as 0% under some treaties for dividends, interest and royalties. Taxpayers do not require confirmationfrom the tax authorities before claiming relief under a treaty. However, the withholding agent must hold acertificate of residence from the treaty country for the person to whom income is paid. If the certificate isissued in a form prescribed by legislation of the treaty country it must be properly legalized (apostilled) andtranslated into Ukrainian language. The certificate is only valid for the calendar year of its issuance and must,therefore, be renewed annually. Currently, one of the most favorable treaties is the Ukraine-Cyprus treaty,which provides for 0% withholding tax on dividends, interest and royalties. However, the treaty has recentlybeen renegotiated (but not ratified), and increased rates will apply (10% on interest and royalties, 5/15% ondividends) after it has been ratified.

Administration of the tax system

National taxes are administered by the STA. Local taxes are administered by the various local governments.The allocation of revenues between national and local governments is set out in the annual budget law.Revenues are allocated based on source, rather than by amount. For example, revenues from personal incometax, although administered by the STA, are often allocated to local government. One consequence is thatpayments for some national taxes may need to be made to local government accounts.

Registration requirements

All taxpayers are required to register with the STA and to obtain a tax number. Registration is undertakenthrough the local tax office where the individual or business is located. Without a tax number, it is not possibleto open a bank account in Ukraine.




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TAXATION FOR THE FOREIGNERS

Under article 13 of the law, for the purposes of taxation, the following are treated as income received by aforeign company:

Interest (including interest paid under promissory notes) paid; Dividends; Royalties, engineering services and income from freight; Leasing fees; Profits from real estate sales; Profits from securities transactions; Profits from investment contracts; Fees from cultural, educational, religious, sporting and entertainment activities in the Ukraine; Brokerage, commission or agents’ fees received for services rendered in the Ukraine; Contributions and premiums for insurance or reinsurance of risks in the Ukraine (including

insurance of life risks) or insurance of resident companies from risks outside the Ukraine; and Other profits from business activities in the Ukraine, excluding compensation for goods, works

or services rendered to resident companies, including services for international communicationsor international information.

Double-taxation Relief and Tax Treaties

Under Article 20 of the law on the regime of foreign investment, the national regime applies to a foreigninvestor or its joint venture as regards taxation, unless otherwise stipulated by international treaties. Similarprovision is in the law. The Ukraine has entered into bilateral treaties on the avoidance of double-taxation withmore than 50 countries, including Austria, Belgium, Bulgaria, Great Britain, Finland, France, Germany, TheNetherlands, Norway, Poland, USA, etc. Ukraine imposes withholding tax according to Section 13 of the lawwhich provides for the mechanics of its collection and the rates at which it is payable. Withholding tax isimposed at a rate of 15%. This rate may vary subject to the operation of applicable double taxation agreementsentered into by Ukraine. The rate of withholding tax in the double taxation agreement will prevail over thestatutory rate.

Income from immovable

All double taxation treaties rule that income from immovable including income from agriculture or forestrysituated in the Ukraine is taxed here. The term "immovable property" include property accessory to immovableproperty, livestock and equipment used in agriculture and forestry, rights to which the provisions of generallaw respecting landed property apply, usufruct of immovable property and rights to variable or fixed paymentsas consideration for the working of, or the right to work, mineral deposits, sources and other natural resources;ships and aircraft shall not be regarded as immovable property. The rule is applied for any income derivedfrom the direct use, sale, letting, or use in any other form of immovable property.Thus, foreigner will pay corporate and VAT taxes from any income received from immovable in Ukraine. The




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taxes are paid by a representative office of the foreigner, if any, or a Ukrainian company (treated as fiscalagent) paid under a corresponding contract to the foreigner.

Shipping and Air Transport

Profits from the rental on a bareboat basis of ships or aircraft in international traffic and use, maintenance orrental of containers (including trailers and related equipment for the transport of containers), used for thetransport of goods or merchandise are traditionally exempted from withdrawing tax in Ukraine. This advantageis widely used by Ukrainian maritime and air companies which have possibility to take into leasing modernships or aircraft from foreigners.

Interests

Under the treaties with Germany and France, tax on interest shall not exceed: Two per cent of the gross amount of interest paid in connection with the rendering of loans by a bank or

financial institution, sale under credit conditions of industrial, commercial or scientific equipment or therendering of services or sale of goods; or

Five (for Germany) or ten (for France) per cent of the gross amount of the interest in other cases.Under the treaty with China the tax on interest shall not exceed 10 per cent of the gross amount ofinterest. The treaty with Belgium stipulates that tax shall not be more than 15 per cent of the grossamount of interest.

Interest is not taxed if: It is paid to the government of another contracting state or under loans guaranteed by another

contracting state or authorized body of a contracting state; It is paid under commercial loans connected with the leasing or supply of goods, products or services; It is paid under loans rendered by banks, excluding loans payable to the bearer; or It is paid on deposits with banks, including state-owned banks, except deposits payable to the bearer.

In determining interest withholding tax liability, a critical issue is whether a payment constitutes interest. Ingeneral, we may state that the definition of “interest” is clear under the Ukrainian law and there are noconflicting views as to its interpretation. But the law provides for certain peculiarities as to determination ofexpenses content, namely the interest, of a Ukrainian tax payer in which a foreign shareholding is equal orexceeds 50% of a statutory fund of such taxpayer. In general, the law provides that gross expenses of ataxpayer may include any expenses connected with accrue and payment of interest over a loan. If a maternitycompany which has 50 or more per cent shareholding in the Ukrainian taxpayer gave to the taxpayer a loan onwhich it accrued an interest, the law allows said taxpayer to decrease taxable income for an amount which doesnot exceed its own income received within reported period as interests from disposal of its own assets andincreased on an amount equal to 50% of taxable income. Thus, only profitable taxpayers may deduct accruedinterests from taxable income. The laws states that accrued interests, if were not treated as gross expenses forlast periods, may be deducted from taxable income of the next periods. Thus, the law allows for taxpayerstrading at a loss to use the advantage of the law later on. Taking into consideration above said limit of the lawshall be decided after careful study of the double taxation agreement. For example, double taxation agreement




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between Ukraine and France allows absence of any limits as to expenses content if the maternity company hasat least 20% shareholding in the Ukraine taxpayer.

Dividends

All double taxation treaties provide for lower withholding rate on dividends. For example, under the treaties ofUkraine with Germany, France or China, tax imposed upon dividends shall not exceed:

5% of the gross amount of dividends if the investor owns at least 20 per cent (for German and Frenchinvestors) or 25 per cent (for Chinese investors) of the capital of a company; or

10% of the gross amount of dividends in other cases for German and Chinese investors and 15% - forFrench investors.

When dividends are paid between resident companies, there is no dividend tax charged. At the sametime, if the dividends are paid to a nonresident company, the tax rate is 15%.

Royalties

Taxation of royalties is specially agreed upon in the double taxation treaties. Under the treaties, royaltiesarising in one contracting state and paid to an investor from another contracting state shall be taxed in the othercontracting state if the investor is the owner of the royalties. Where royalties are taxed in the first contractingstate, the tax shall not exceed five per cent (for German investors) or 10 per cent (for Chinese investors) of thegross amount of royalties.

Salaries

Ukrainian tax legislation stipulates the same procedure to accrue and to pay income tax both for citizens ofUkraine and foreigners, if the latter reside in Ukraine in total for 183 days per year. Income tax is calculatedunder the rate of 15% and paid in Ukraine. Directors' fees and other similar payments derived by the foreignerin Ukraine in his capacity as a member of the board of directors of the Ukrainian company are taxed inUkraine. Some bilateral treaties provide that income obtained by a foreign technical specialist shall be taxedonly in the country of his domicile but not in Ukraine. Pension and other similar remuneration paid to theforeigner in consideration of past employment in Ukraine are taxable in Ukraine according to its rates.Income derived by the foreigner as an entertainer, such as theatre, motion picture, radio or television artiste, ora musician, or as a sportsman, being that his personal activities exercised in the Ukraine is taxed in Ukraine.

Repatriation of profits

Ukraine has undertaken to guarantee unimpeded and timely transfer of monetary means connected withinvestments. Means connected with investments are treated under the bilateral treaties as to protection offoreign investments as:

a) monetary means to support or to increase the investment;




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b) profits, interests, dividends, etc.;c) royalty and other licensed payments;d) profits from liquidation or sale of the investmente) salaries of the natural persons employed abroad without the breach of the labor laws of Ukraine.

The same guarantees are repeated in the law on the regime of foreign investment adopted in 1996.Nevertheless, the National Bank of Ukraine has approved two regulations in 2005 which considerably limitunimpeded and timely transfer of foreigners’ profits or return of investments. Ukrainian company whichtransfers profit to the foreigner has to submit to its bank a set of documents which confirm reality of madeinvestment (swift payments or import customs declaration) and the fact of the foreign investment registrationwith official bodies of Ukraine.

EXCISE DUTY

Excise duty is a non-direct tax payable on some types of products produced in or imported into the customsterritory of Ukraine, and is included in the product cost. The payment of this tax is regulated by the Decree ofthe Cabinet of Ministers of Ukraine dated 26.12.1992, # 18-92. The rates of tax for particular excise productsare established by the special laws of Ukraine. Presently, the following products are subject to excise duty:

tobacco products; alcohol products and beer; certain motor vehicles; certain motor fuels.

PAYROLL TAXES (COMPULSORY STATE SOCIAL SECURITY LEVIES)

General Information

Salary and other salary like compensations payable to employees are subject to payroll taxes. The payroll taxesare payable by an employer and by an employee. An employer is responsible for calculation and payment oftaxes on salaries/compensations paid to employees and for withholding taxes from employees. The taxes arewithheld when the salary/compensation is accrued to an employee.

The payroll taxes include:

1. Payments to the State Pension Fund:1. 33.2% - payable by an employer;2. 0.5% (if the overall taxable income does not exceed cost of living – currently: 492 hryvnia) or

2% (if the overall taxable income exceeds cost of living – currently: 492 hryvnia) – payable byan employee.

2. Payments to the State Temporally Disability Fund:1. 1.5% - payable by an employer;




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2. 0.5% - payable by an employee (if the salary is lower than the cost of living officiallyestablished for the capable of working people – currently: 525 hryvnia) or 1% if the salary ishigher than the limit mentioned herein.

3. Payments to the State Unemployment Fund:1. 1.3% - payable by an employer;2. 0.5% - payable by an employee.

4. Payments to the State Professional Accident and Sickness Fund:o The rates depend on the profession (0.66% - 13.6% for year 2006) - payable by an employer.

Special lower rates are applied to handicapped employees and organizations employing handicapped persons.

Tax base

The taxes are calculated on the amount of an employee’s salary/compensation with cap of 7875 hryvnia (up to31.03.2007) the further increase afterwards.

LAND TAX

The land tax is payable by land owners and depends on the land value and location. The land tax for theestimated plots of land located in cities and towns is 1% of the total land plot value. If the plot of land is notevaluated, the tax is calculated in UAH per square meter depending on the number of population of thecity/town in which the land plot is situated. Those who rent land from land owners pay rents. The amount ofthe rent is agreed upon between the parties.

CUSTOMS DUTIES

The goods and products that are transferred through the customs territory of Ukraine are subject to customsduties and fees. The payment of customs duties is regulated by Law of Ukraine “On Unified Customs Rate”dated 05.02.1992, # 2097-XII, with further changes and by Decree of the Cabinet of Ministers of Ukraine “OnUnified Customs Rate of Ukraine” dated 11.01.1993, # 4-93, with further changes.

The documents establish the types of duties and the principles of levying the customs duties on goods andproducts.

The import customs duties are levied on the goods and products transferred into the customs territory ofUkraine and the rates of duty depend on the types of goods and product. The rates of import customs duties areestablished by Law of Ukraine “On Customs Rates of Ukraine” dated 05.04.2001, # 2371-III, with furtherchanges. The customs fees are levied on the customs processing of goods and products at the zones of customscontrol. The rates of customs fees are established by Resolution of the Cabinet of Ministers of Ukraine dated27.01.1997, # 65, and vary depending on the type of customs operations and the value of goods and productsprocessed.




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PERSONAL INCOME TAX

Payment of the personal income tax is regulated by Law of Ukraine “On Personal Income Tax” dated22.05.2003, # 889-IV, with further changes.

Tax payers

The tax is payable by the Ukrainian tax residents on their worldwide income and by non-residents on theirUkrainian source of income. Non-residents having diplomatic status and privileges are exempt from thepersonal income tax on their income received from such diplomatic activity.

Object of taxation

For residents of Ukraine the object of taxation is determined as the overall taxable income received in theterritory of Ukraine or abroad regardless of the fact if the income is received in cash or in-kind. If the income isreceived in-kind, fair market prices are applied in order to determine the taxable income. A fair market price ismagnified by the coefficient calculated by a special formula. For non-residents taxable income includes onlythe income received from the Ukrainian sources. If the Ukrainian source income is paid to a non-resident byanother non-resident, such payment should be effected though a bank account opened in an authorizedUkrainian bank. If the payment is effected in cash or in-kind, the non-resident who receives such paymentshould personally calculate and pay the tax to the budget within 20 calendar days after the receipt of suchpayment.

Non-taxable income

Amounts of state social insurance and state welfare payments; Income from the state bonds issued by the Ministry of Finance of Ukraine and from the state lotteries

winnings; Amounts of some charitable payments; Amounts of compulsory state social security levies; Some other payments.

Tax rate

Currently the basic tax rate is 15%. This rate is applied to the taxation of income of residents and to thetaxation of some type of income sourced by non-residents from the territory of Ukraine. The tax general ratefor non-residents is 30%. Reduced rates are applied to taxation of some income of residents. Gambling income,including income from lotteries (excluding state lotteries) gained by residents and non-residents is taxed at30%. Income from the sale of real estate has special order.Property inherited by the residents is taxed at the rates from 0% to 30% depending on the types of property andon the relation degree between the testator and the legatee. The gifts are taxed at the same rules as theinheritance.




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Assessment and payment of tax

The tax payable at the salary and other similar payments of the taxpayer is withheld by the employer at the timeof salary/other compensation payment. The following persons should withhold the tax from the taxpayer whilepaying the following types of income:

Renter/tenant of real estate while paying rents, if the renter/tenant is an individual, who is not registeredas an entrepreneur the tax should be calculated by the owner of the real estate;

A person paying interests, dividends or royalties while paying interests, dividends or royalties; A person paying winnings under lotteries or gambling while paying such prizes or winnings; Professional security traders while paying investment income on securities; Insurers while making insurance payments.

Other types of income should be calculated personally by the taxpayer and reported to the tax authorities on anannual basis no later than 1 April. The tax is paid to the budget personally by the taxpayer.

CORPORATE PROFIT TAX

The main direct tax paid by legal persons is a corporate profit tax, which is regulated by the Law of Ukraine“On Taxation of Enterprises’ Profit” (Corporate Tax Act) dated 28.12.1994, # 334/94-VR with furtheramendments.

Taxpayers

The tax is paid by legal persons and permanent establishments (like representative offices and branches) oflegal persons. Ukrainian residents are subject to taxation on their worldwide profit while non-residents aretaxable only on their income received from the Ukrainian sources.

Tax rate

The basic rate of the corporate tax is 23%. In 2011, it was the standard corporate tax rate in Ukraine, but itwill be reduced during the next three years. This way, the corporate tax is announced to be 21% in 2012, 19%in 2013 and 16% in 2014.

The law fixes the following rates of profit taxation for resident entities:

23% as basic rate; 3% on gross profit from insurance activities (except life insurance) of resident insurance companies; 0% on gross profit from long-termed life and pension insurance; 25% on dividends, which is paid when dividend payments are made to shareholders, with the same rate

and tax payment mechanism applying when net profits from joint investment activities (for example,production activities where no legal person is created) are paid to the parties;




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0% for gross profits of non-profitable entities received free of charge in the form of money or propertyas financial aid or charitable donations;

0% introduced temporarily up to 1 January 2009 for gross profits of publishing houses for production ofbooks on the territory of Ukraine;

6% on the gross profits of non-residents received as residents’ payments for freight on vehicles; 20% made on any payment made in favor of non-resident for rendered advertisement services.

Tax period

Taxable periods are considered to be a calendar quarter, half a year, three quarters, a year. A taxable periodstarts at the first calendar day of the tax period and ends at the last calendar day of the taxable period. Anexemption from this rule exists for the producers of agricultural products. The annual tax period begins onJanuary 1 st and ends on December 31 st.

Object of taxation

The object of taxation is the profit which is determined by deducting the permitted gross expenses andpermitted depreciation and amortization from the gross income.

Gross income

The gross income is the overall income received by a taxpayer in the territory of Ukraine or abroad from alltypes of activity in monetary, material or immaterial forms, within the reporting period. Some transactions arespecifically mentioned by the law as generating the taxable income. As well as some transactions arespecifically excluded from the ones that generate taxable income (exempt transactions).

Deductible expenses

As a rule, any business related expense is allowed for deduction. It means that any amounts paid by a taxpayeras compensation for goods, works, services used in its business activity could be deducted from the taxableincome. Some expenses are specifically permitted for deduction. Some expenses do not qualify for deduction/Some special rules are used for taxation of particular operations. This includes special rules for deduction ofsome expenses, e.g. deduction of interests paid, cost of inventories, labor cost, and cost of compulsory statesocial contributions.

Depreciation and Amortization

Any expenses in excess of 10% of the total book value of all capital assets connected with the acquisition ofcapital assets for the taxpayer’s production usage, including expenses for repairing, reconstruction,modernization and other improvements of the capital assets; expenses connected with personal creation of thecapital assets to be used for personal needs, including salary payments to employees who have been engaged insuch creation; capital land improvement that is not connected with construction, should be capitalized anddepreciated or amortized over time. Fixed assets or intangible assets that have been acquired with the purpose




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of their further sale to other persons cannot be depreciated and amortized. Expenses for such acquisition shouldbe deducted at the time of acquisition. Fixed assets include all tangible property that is intended for use in thetaxpayer’s business within a period exceeding 365 calendar days from the date of setting it into operation, if thevalue of such property exceeds 1000 hryvnia, and decreases in connection with wear and tear. For taxdepreciation purposes all fixed assets are divided into four groups where each group has its own permitted timeand rate of depreciation. The rates are applied to the net book value (declining balance method).

Losses

Losses accumulated within a reported quarter after 1 January 2003 can be carried forward without limitation tooffset taxable profits.

Withholding tax on non-residents

Non-resident legal persons are subject to withholding tax on all their income sourced from the territory ofUkraine. The basic rate of withholding tax is 15%. Some income is taxed at other rates raged from 0% to 20%.The tax is withheld before or at the time of paying the income unless the valid double tax avoidanceagreements (DTA) between Ukraine and other countries envisage otherwise. Due to application of the relevant




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double tax avoidance agreement signed with a country of a non-resident the tax rates mentioned above could bereduced. A DTA could be applied if a non-resident provides a reference from the authorized body of itsresident country proving that this legal person is considered to be tax resident of the country in terms of theDTA signed between Ukraine and the relevant country.

Transfer pricing

Prices used for transactions between the connected parties are subject to transfer pricing regulations. Theconnected parties should use fair market prices in their operations or otherwise the tax authorities may adjustthe actual prices to the market prices. Fair market prices are considered to be the arm’s length prices usedbetween non-affiliated parties.

Thin capitalization rules

Thin capitalization rules are applied only to banks, other types of financial institutions and securities traders.

PROPERTY TAX

There is no property tax in Ukraine.

VALUE ADDED TAX

Payment of the value added tax is regulated by the Law of Ukraine “On Value Added Tax” (VAT law) dated03.04.1997, # 168/97-VR, as amended. VAT is a tax on consumer expenditure. It is collected by sellers onbusiness transactions in the territory of Ukraine, imports of goods and concomitant services into the customsterritory of Ukraine . Business transactions at the territory of Ukraine include supplies of goods or services. Theconsumer pays VAT to the seller on top of the goods/works/services cost. The seller reports the collected tax tothe tax authorities and pays it to the budget.

Tax rate

The rate of VAT is 20%. Export (with certain exemptions) is taxed at zero rate. Zero rate for export is notapplied if the goods are exempt from taxation in accordance with the law. Some transactions within theterritory of Ukraine are also taxed at zero rate. It is announced to be reduced in 2014 to 17%. Export goods arezero VAT rated, while medical products, domestically prepared baby food products, publish periodicals andbooks are not subject to VAT rate.

So transactions could be:

VAT taxed at full rate of 20%; VAT taxed at 0% rate;




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Exempt from VAT; VAT non-taxable.

Exports are zero-rated in Ukraine. Some goods and services such as consulting, engineering, IT services,medical products, prepared baby food products or newspapers are not subject to VAT in Ukraine. Education,healthcare and religious services are exempt from VAT in Ukraine.

Reporting period

The VAT reporting period is 1 calendar month.

Taxpayers

The tax payers of VAT (persons who pay VAT to the budget) under the VAT law are:

Any person willing to be engaged in commercial activities and is voluntarily registered as a VAT payer; Any legal person, permanent establishment of a non-resident, joint venture or an entrepreneur that has

an aggregate value of 12 months domestic supplies of more than 300,000 hryvnia; Any person (legal or individual, resident or non-resident) that imports goods or concomitant services

into the customs territory of Ukraine in volumes above the exempt level; Persons engaged in sales of confiscated property; Any person performing e-trade in the territory of Ukraine. Non-residents could provide such operations

only through their permanent establishments duly registered in Ukraine.

Base of taxation

VAT is charged on the value of supplies of goods or services based on the contract price, but with applicationof the arm’s length prices, including excise, import duty and other national taxes and levies (but excludingVAT) that are included in the cost of goods and services sold.

Scope of VAT

Unless there is an express exemption in the law, VAT applies to:

Supply of goods and services where the place of supply is in Ukraine, including when supply is madewithout consideration; and

Importation of goods into Ukraine.

Place of supply for goods

The place of supply for goods is determined under the following rules:




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If goods are to be transported, the supply takes place where the goods are located when they aredispatched.

If the goods do not need to be transported, the supply takes place where the goods are located whenthey are sold.

When goods are sold that require assembly or installation, the supply occurs where the goods areassembled or installed. However, when it is not possible for the goods to be shipped in assembled form,supply occurs where the goods are located when they are dispatched.

The sale of real estate occurs in the place where the property is located. The supply of goods to sea, air or railroad vessels occurs at the place where the vessel will depart. For internet sales, goods are considered to be supplied in the place where the seller is located or is

resident.

Place of supply for services

The general rule is that services are supplied from the place where the supplier is registered. However, whenservices are provided by a non-resident:

The place of supply will be the location of its representative office or person exercising agencyfunctions for the non-resident.

If the non-resident has no representative office or agent, the place of supply is the location of the buyer.(The buyer is then required to account for VAT on the services under a reverse charge mechanism )

Specific place of supply rules apply to the following services:

The services of realtors and entities responsible for the preparation, co-ordination, supervision andperformance of real-estate construction and finishing work (e.g., architects and designers) are suppliedin the place where the relevant realty is, or will be, located.

Personnel services for servicing maritime, air and space facilities occur in the place where the servicesare provided.

Special place of supply rules also apply to the supply of intellectual property rights, advertising, accounting,legal, consulting and data processing services, and the leasing of movable property to non-residents:

If the non-resident recipient of such services has a permanent representative office, address or residencein Ukraine, the services are considered supplied at the location of that representative office, address orresidence, so will be subject to VAT.

if the non-resident does not have a permanent representative office, address or residence in Ukraine, theservices will treated as performed outside Ukraine, so will be VAT-exempt.

The legislation is not clear and the tax authorities tend to claim that the above services provided to non-residents should be subject to 20% VAT.




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VAT on importation

Unless expressly exempted under the law, imported goods are subject to 20% VAT during customs clearance.The taxable base is the higher of the contractual or customs value of the goods, plus the amount of any importduties and excise duties (if any). The imposition of VAT by Customs is not affected by whether the importer isVAT-registered.

Exempt supplies

Ukrainian law distinguishes VAT-exempt transactions from transactions that are outside the scope of VAT.From a practical perspective, however, the distinction is not important. In either case, a person making suchsales will not be entitled to claim an input tax credit against those sales. A number of transactions are "exempt"from VAT under Ukrainian law. Some of the more common exemptions are:

Some financial services and the transfer of certain financial instruments. However, as exemptions aredefined with respect to specific transactions, transactions must be reviewed individually to confirmwhether an exemption applies.

Depository, clearing and registrar activities in the securities market, as well as brokerage and dealerservices for securities transactions.

The issue, sale and exchange of securities and corporate rights and the payment of dividends androyalties in cash or securities.

The interest or commission element of payments under a financial lease, up to a maximum of 200% ofthe NBU prime rate. However, the transfer of property under a financial lease is treated as a taxablesale.

Insurance and reinsurance services supplied by licensed insurers, agents and brokers. The transit of cargoes and passengers through Ukraine.

Taxable amount

In most cases, the amount of VAT will be determined based on the transaction price for the supply of goods orservices. If the market price exceeds the transaction price by more than 20%, the seller must account for outputVAT based on the market price. For imported goods, VAT is based on the higher of the contract price orcustoms value stated in the bill of entry, increased by the amount of costs bringing those goods to Ukraine,excise taxes and duties payable at the time of importation, and any payments for the use of intellectual propertyincorporated into the goods. Where the place of supply is in Ukraine, VAT must be incorporated into the statedsale price.

Input tax credits

The general rules for VAT input tax credits are as follows:

VAT paid on goods and services that will be used to make taxable sales may be claimed as an input taxcredit.




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VAT incurred to purchase or import goods and services that will be used to make sales that are VAT-exempt or not subject to VAT may not be claimed as a credit.

When goods and services will be used to make partly taxable and partly non-taxable sales, the input taxcredit is apportioned between the taxable and non-taxable sales. Input tax credits are directly attributedto taxable and non-taxable sales. Any input tax credits that cannot be directly attributed would then beallocated based on the proportion of taxable sales to total sales for each month.

No input tax is available for the purchase of a car, unless it will be used as a taxi cab.

A claim for input tax must be supported by a valid VAT invoice issued by a VAT-registered person or a dulyexecuted import customs declaration. In most cases, input tax credits will be based on the transaction price.However, if the transaction price exceeds the market price by more than 20%, the input tax credit should bebased on the market price.

VAT compliance

Registration

A person qualifying as a taxable person is required to register with the tax authority at the place where itsbusiness is located and to obtain a VAT registration number. The local tax authority should issue a VATregistration certificate to the applicant within ten business days. VAT registration takes effect from the datespecified on the registration certificate. VAT registration in Ukraine is also compulsory for foreigncompanies that perform production and commercial activities which are subject to VAT inUkraine. Registration for VAT in Ukraine begins when a declaration form is submitted. If one of thecompany’s owners cannot go in person to the relevant tax authorities’ office, a representative may be appointedby power of attorney.

Accounting requirements

VAT-registered persons are required to keep separate accounts for taxable and VAT-exempt sales andpurchases.

Information on VAT invoice

If requested by the buyer, a VAT-registered person is required to issue a VAT invoice. The invoice mustinclude the following information:

The number of the tax invoice and the date the invoice is issued. The full name and registration number of both the buyer and the seller. The address of the seller. The type and quantity of the goods and services provided. The sales price (excluding VAT), the tax rate and amount of VAT, and the total amount payable.




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Separate invoices are required for taxable and exempt transactions. Invoices for exempt transactions mustinclude the words, "Без ПДВ" (bez PDV - without VAT). Buyers need to pay particular attention to theinformation contained in VAT invoices, particularly when significant amounts are involved. The tax authoritiespay close attention to the details on invoices when they conduct audits, and will disallow input tax credits evenif there are relatively minor defects in the invoice.

VAT liability

The VAT liability is calculated using the input-output method. The VAT liability in any accounting period willbe the total amount of output tax charged on sales, less the input VAT paid relating to taxable sales.

VAT is accounted for as follows:

VAT on the sale of goods is generally accounted for at the earlier of the date that goods are delivered tothe customer and the date that payment is received from the customer.

VAT on the sale of services is generally accounted for at the earlier of the time a document is executedevidencing delivery of the service and the receipt of payment from the customer. It is usual commercialpractice for both supplier and customer to sign a formal document evidencing the delivery of theservice.

The entitlement to an input tax credit for purchases arises on the earlier of the date of payment to thesupplier or the date on which the VAT invoice is received.

The entitlement to an input tax credit for imported goods or services arises on the date the tax is paid.

Reverse charge

Services acquired from non-residents are subject to the application of a VAT reverse charge. A person requiredto account for VAT on such transactions would report the VAT as output tax in a special line in the VAT returnfor the period in which the transaction is required to be recognised. The corresponding input tax would then beclaimed as a credit in the following period (if the buyer is entitled to a VAT credit).

Returns and payments

Generally, VAT-registered persons are required to file VAT returns on a monthly basis. The return must befiled within 20 calendar days of the last day of the month (or the next working day if the 20th day falls on aweekend or a public holiday).

VAT-registered persons with annual sales of less than UAH 300,000 may opt for quarterly filing instead.

VAT payments must be made within ten calendar days of the date on which returns are required to be filed.

How does intra-community VAT work in Ukraine?




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No intra-community VAT is applied in Ukraine, since Ukraine is not a member state of the European Unionand transactions with other countries that are EU members are not considered to be within community.

Refunds

A VAT-registered person may apply for a refund if they have been in a VAT credit position for twoconsecutive months. The refund is limited to the amount of input tax paid for the previous month. According tothe law, if an application for refund is filed, the tax authorities are required to check and confirm theentitlement within 35 days. In theory The State Treasury should then remit money to the applicant's bankaccount within five business days from receiving approval from the tax authorities. There is no liability for thegovernment if it does not issue VAT refunds on a timely basis. A VAT refund is only possible if the companyperforms its activity in Ukraine, after it has been registered as an establishment and VAT payer. The tax can berecovered by the company only if it meets the requirements of the tax authorities, including the presence of allinvoices that need to specify some information. Since the 1st July 2011, if the amount in a tax invoice exceeds100,000 UAH, the invoice has to be registered in the Unified Register of Tax Invoices. By the end of 2011,Ukraine will offer automatic VAT refund to all companies. Historically, obtaining VAT refunds has been amajor problem area for investors, and there is still uncertainty in this respect. Careful consideration is required.

VAT-registered persons are specifically not entitled to refunds if:

They have been registered for VAT for less than 12 calendar months before the month for which arefund is sought.

The amount of the refund claimed exceeds taxable sales for the last 12 calendar months. They have not carried on business activities during the last 12 calendar months.

It appears that the restriction under the first two tests should not apply to input tax arising from the constructionor acquisition of fixed assets. In practice, however, the authorities are applying a blanket rule that refundscannot be issued for the first 12 months following registration.

Tax returns and payments

Personal income tax returns are filed for each calendar year. Individual taxpayers whose entire income issubject to withholding tax at source (e.g., salaries) are not required to file income tax returns, although theymay choose to do so if they are entitled to a tax credit. The personal income tax return must be filed by 31March of the following year. Corporate income tax returns are filed on a quarterly basis, and returns must befiled within 40 calendar days of the end of each quarter. Resident companies and non-resident entities with apermanent establishment in Ukraine must keep records that comply with Ukrainian tax rules. Withholdingtaxes must be paid to the state not later than the date that the income is paid. Tax in respect of income that isaccrued but not paid to individuals should be transferred to the state within 20 calendar days of the last day ofthe reporting month. Value-added tax returns are generally filed on a monthly basis. The return must be filedwithin 20 calendar days of the last day of each month. As an exception, VAT-registered persons with annualsales of less than UAH 300,000 may opt for quarterly filing. If the filing date for any return falls on a weekendor a public holiday, the return should be filed on the following working day. Payment of tax must be made




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within ten calendar days from the day on which the return is required to be filed or the assessment is issued.Payments are normally made through designated bank accounts.

Assessments

Taxpayers make returns and payments on a self-assessment basis. However, if the tax authorities determine thatthe tax shown on the return is incorrect, they may assess taxes within 1,095 days (three years) from thedeadline for filing a return or the date on which the return is actually filed, whichever comes later. There is nolimit on the period in which an assessment may be made if a taxpayer has deliberately evaded tax (if proven incourt) or when a taxpayer fails to file a return. The tax authorities will also charge significant penalties for latefiling or understatement of tax liabilities.

Appeals

Assessments may be appealed administratively or through the court system. The initial appeal is made to thelocal tax office that issued the assessment. If an appeal is rejected, a taxpayer may appeal in turn to the regionaland national office. An administrative appeal must be filed to the relevant level of the tax administration withinten calendar days of receiving an assessment or official advice that an administrative appeal has been rejectedat a lower level. The tax authorities must respond to the appeal within 20 calendar days. If they fail to do so, theappeal is deemed to be decided in favor of the taxpayer. The 20-day period may be extended by up to 60 days,but only if the authorities advise the taxpayer in writing within the initial 20-day period. At any stage of theprocess, or if the national office rejects the appeal, a taxpayer is entitled to pursue an action through the courtsinstead. Submitting an appeal suspends the requirement to pay the assessed tax, as well as the accrual ofinterest and penalties. Interest and late payment penalties will apply only if the taxpayer fails to pay the taxesby a revised due date after the appeal is finally resolved.

Withholding taxes

It is very important to ensure that withholding taxes are properly deducted and accounted for. Businessesgenerally have an obligation to withhold tax on payments to individuals (including sole proprietors) andpayments to non-residents. Failure to withhold tax can attract a 200% penalty, as well as interest. Withholdingtax must be remitted to the authorities no later than the date when the payment is made to the income recipient.Passive income (dividends, interest, royalties) from Ukrainian sources that is paid to non-resident entities isgenerally subject to 15% withholding tax. Other payments, including "engineering services," lease payments,agency and brokerage fees, are also subject to 15% withholding tax, but payments for most other services arenot subject to withholding. In addition, 15% withholding tax applies to gain on the sale of property, includingreal estate and securities, when paid by a resident to a non-resident entity. All withholding tax rates may bereduced under a relevant tax treaty. Payments to non-resident persons for advertising services performed inUkraine are not subject to withholding. However, the resident payer is required to pay, from its own funds, a20% tax based on the value of such services. A resident payer is similarly required to pay, from its own funds a12% tax if a payment is made to a foreign insurer or reinsurer whose rating of financial reliability does notmeet requirements set by the authorized state agency. A 0% rate applies otherwise. As the taxes on advertisingand insurance are levied on the resident party, they cannot be relieved using a tax treaty.




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Tax audits

The tax authorities may carry out scheduled audits amaximum of once each year. Business entities must benotified of the audit in writing at least ten days beforethe scheduled audit. For normal business entities, thescheduled audit should be carried out within 20 businessdays, although the period may be extended by up to tendays. In addition, the tax authorities may perform out-of-schedule audits in any of the following circumstances:

A taxpayer does not respond within ten days to arequest for information from the tax authorities when thetax authorities are cross-checking information, the cross-audit of another business entity has revealed a violationby the taxpayer, or the data in a tax return is inadequate.

A business entity does not file tax returns on atimely basis;

A taxpayer initiates an appeal process against anassessment;

A business entity is reorganized or liquidated; A tax police investigation requires that a

taxpayer's accounts be audited; A taxpayer claims a VAT refund for an amount

exceeding UAH 100,000.

The duration of an out-of-schedule audit cannot exceedten business days. Before starting an audit, the taxinspector must present a written order to the taxpayer,outlining the scope and period of the tax audit.

Penalties

Penalties are often specified in terms of a multiple of themonthly "non-taxable allowances," which is currentlyUAH 17. Multiple penalties may be imposed, and totalpenalties may potentially exceed 150% of the tax.Liability is assessed by the tax authorities.

Late filing

In addition to a nominal penalty, if the tax authoritiesassess tax when a taxpayer fails to file a return, penalties




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could reach up to 50% of the tax assessed, depending on the period of delay.

Late payment of tax

If a taxpayer does not pay the amount of tax shown in its tax return on time, or fails to pay an assessmentwithin the time shown on the assessment notice (or if the taxpayer appeals the assessment, within ten days ofthe final resolution of the appeal), penalties are imposed as follows:

10% of the underpaid tax for delays of up to 30 calendar days; 20% of the underpaid tax for delays of 31 to 90 calendar days; 50% of the underpaid tax for delays exceeding 90 calendar days

Understated tax liabilities

If during an audit the tax authorities determine that the tax liability shown in the taxpayer's return isunderstated, they will impose penalties of up to 50% of the tax assessed, depending on the timeframe involved.Furthermore, a penalty of 50% of the tax assessed will be imposed if a taxpayer understates its tax liabilities bya "large" amount. The Criminal Code defines "large" to be any amount over UAH 600,000 for 2007.Consequently, a total penalty of 100% may apply.

Tax evasion

In addition to the above, if a taxpayer (or officials of the company) are convicted of tax evasion, a penalty of50% of the tax due will be imposed.

The individual taxpayer (or officials) may also be subject to penalties under the Criminal Code. For a firstoffence, fines of up to UAH 340,000, prohibition from occupying certain positions or engaging into certainactivities for up to three years, or imprisonment for up to five years may be imposed.

Failure to withhold and pay tax

If a taxpayer does not pay tax when it is a mandatory condition for the sale of goods, or a taxpayer fails towithhold tax when required, a penalty of 200% of the deficient tax is imposed.

Arithmetic or methodological errors in tax return

If the tax authorities determine during a "desk review" that arithmetic or methodological errors in a tax returnresulted in an understatement of tax liabilities, a penalty will be imposed of 5% of the additional tax assessed.

Interest for late payments

When tax is not paid on time, interest for late payment is charged on a daily basis in addition to the abovepenalties. The rate is 120% of the NBU prime rate that is effective at the date the payment was due or the date




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that payment was made, whichever is higher. For amounts calculated on the tax return, interest accrues fromthe date the tax was due. When the tax authorities assess tax, interest accrues from the due date for paymentshown on the notice. Interest is charged on the entire outstanding tax, including penalties.

Voluntary disclosures

If a taxpayer voluntarily discloses and pays the underpaid tax before the tax authorities commence an audit:

A 5% penalty should be paid based on the amount of under-declared tax. Interest will not be charged.

To benefit from this rule, a taxpayer must have filed an amended tax return. Normal penalties and interest willalso still accrue if a court rules that the taxpayer had evaded tax.

Penalties during appeal

Penalties and interest do not accrue during the appeal process

Tax clarifications

Tax clarifications may be sought from the tax authorities, and the tax authorities are required to issue suchclarifications. Tax clarifications are not legally binding and do not provide solid protection against taxassessments and penalties. However, in practice tax clarifications are useful in resolving disputes with local taxauthorities regarding uncertainty in the tax legislation.




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SigmaBleyzer President of the Board, The Bleyzer Foundation6. Business Environment in Ukraine International Finance Corporation, 20077. Ukraine Economic Performance Assessment US AID8. State Statistics Committee of Ukraine.9. World Development Indicators, 201210. NBU11. The Global Competitiveness Report 2011-2012 , 2011 World Economic Forum12. Highlights on health in Ukraine 2005 World Health Organization 200613. Ukraine Health system review Ukraine (2004g, 2010 Erica Richardson (Editor) and Martin McKee (Series

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INTERNATIONAL FINANCE CORPORATION COUNTRY PARTNERSHIP STRATEGY FOR UKRAINEFOR THE PERIOD FYO8-FY11 November 8,2007 Ukraine

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health care services? (Health Evidence Network, 2004)28. Ukraine Country Economic Memorandum Strategic Choices to Accelerate and Sustain Growth August 31, 2010

Poverty Reduction and Economic Management Unit (ECSPE) Europe and Central Asia Region29. Swot Analysis and planning for Cross-Border Co-operation in Northern Europe Prepared by ISIG for the Consil

of Europe 2008


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