Special report: Ukraine
3 December 2012 | By Ruth Green
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8 August 2013
Euro 2012 was a boost for troubled Ukraine but its benefits are unlikely to be felt in the longer term. However, prospects are emerging elsewhere
Ukraine benefited from the 2012 European football championships held jointly with Poland this summer. But now the teams have gone home, what opportunities remain for a country that remains politically unstable but full of promise?
2012 has been a milestone year for Ukraine, co-hosting the UEFA European Championship with Poland in the summer for the first time. It was an opportunity for Ukraine to shed its negative image abroad and welcome 1.8 million tourists to the country, but what longer term benefits have the Euro 2012 championships brought for the country?
“It was good for Ukraine and played well for the overall image of the country,” comments Vladimir Sayenko, managing partner of Sayenko Kharenko. “For a few weeks debates stopped, people were interested in talking about football, not politics, and it united the nation.”
After the whistle
But now the football euphoria has subsided and most lawyers are unconvinced that the championships have had a long-term impact.
“In terms of tourism the tournament was good and allowed a lot of people to see the country for the first time; but in terms of business, it hasn’t improved the investment atmosphere,” says Artur Yalovyy, head of the London office of Integrites.
Since the championships were financed predominantly by the Ukrainian government, along with money Ukraine borrowed on the international markets, the government put some exemptions in place to facilitate construction projects in the country, such as tax exemptions for hotel projects and on imported goods. However, these moves changed little in the longer term and did not promote foreign investment in the country.
“To be honest, the impact of the championships has been somewhat overemphasised,” notes Sayenko. “The government was trying to raise as much positive PR as possible out of the event and used this as an excuse to show some kind of progress. While we encourage the construction of hotels, no private business will build a hotel just to have the honour of having it fully booked with guests for one week.”
“Some of the exemptions have remained in place, such as the tax exemptions for hotels, but there’s generally a lack of hotels in large cities,” adds Oleg Batyuk, managing partner of Salans’ Kiev office.
“It’s been a little disappointing,” admits Asters’ senior partner Armen Khachaturyan. “We expected it to be more organised, but the impact of the political turmoil in Ukraine perhaps explains why we had to wait half a year for progress on many of the projects to speed up dramatically.”
However, most lawyers concede that in a bad year for progress in Ukraine, Euro 2012 was probably the best thing that could have happened to the country.
“We have achieved progress that would have been impossible at another time,” says Sayenko. “Normally, a number of construction approvals are required to commission a building, for example, and the fact that there’s been a lot of sympathy from government officials in granting exemptions has really helped to move things forward.”
“I’d say it’s been a boost for the Ukrainian economy in general,” agrees Khachaturyan. “It’s changed the face of the country and given
it a facelift that will remain for years to come, but that doesn’t negate the fact that in terms of foreign investment, in a nutshell we’re extremely limited and there’s been much less investment than expected this year and in recent years, despite Euro 2012.”
Foreign investment in Ukraine was only a quarter of the more than $200bn (£125bn) poured into Euro 2012 in co-host Poland.
In terms of the country’s future, many believe the political turmoil surrounding the imprisonment of former prime minister Yulia Tymoshenko and the question mark over the legitimacy of recent elections have impaired Ukraine’s prospects for investment.
“In terms of competition with other markets in the region, Ukraine is still the best in many spheres and huge for all oil and gas players. But my perception is that the investment climate really shows the attitude of state authorities and the tax authorities is not friendly to foreigners,” says Yalovyy. “There are no capital markets here, mostly bilateral financing, and there are numerous projects ready to develop but that still need a big push. There’s not much M&A in terms of inbound investment and the banks are struggling.”
Since 2009 a growing number of banks and financial institutions have opted to leave the country, including ING Bank, Home Credit Group, Credit Europe Bank, Société Générale, and Volksbank International. Sweden’s SEB and Swedbank have also closed down their retail operations; in July Germany’s Commerzbank said it had agreed to sell its 96 per cent stake in local subsidiary Forum to Ukrainian Smart Group; and in October Austria’s Erste Group Bank said it planned to sell its Ukrainian unit in the near future.
All these departures have done little to entice other financial institutions to set up shop in Ukraine, but Sayenko is optimistic that recent efforts by the government may improve the country’s prospects.
“Our stock market today is not as attractive as it was and we’ve also suffered a lot from the financial crisis, but the government is trying to encourage the development of an organised and functioning securities market, and there have been some developments in securities laws,” says Sayenko. “It’s also hoped that a draft of a prohibition on insider dealing will be implemented shortly.”
However, as Khachaturyan notes, most people are banking on the fact that if Ukraine plays to its strengths in the energy sector, things will start to improve.
“Historically Ukraine has been dependent on gas supplies from Russia, but the country has been trying to find some solutions in alternative energy sources, the most liberal move being the green tariff law that was introduced a few years ago,” he says. “Now, we’re looking into solar and other renewable energy sources.”
Another positive has been the Ukrainian government’s progress in finally launching two tenders to explore shale gas earlier this year and this is keeping a number of law firms busy.
There are also strong indications that the government is preparing for another wave of privatisation.
“We know the government has prepared a privatisation programme and it’s thought that a large number of companies have already been earmarked for this,” says Sayenko. “At the moment in Ukraine, the law inhibits the privatisation of companies that can’t be privately owned and therefore the government is planning to privatise almost 1,000 companies. This may change and the government may reduce the list, but it will be a significant privatisation process in any case.”
The work should mean that while the football may be over, there is plenty more for lawyers to work on over the coming months and even years.
Earlier this year the Ukrainian government launched a tender to develop the country’s Yuzivska, Oleske and Sfiska fields in order to develop its untapped resource of shale gas in a bid to help the country become less dependent on Russia for gas supplies.
Chevron won the tender to develop gas fields in Oleske in the west, while Royal Dutch Shell won the rights to develop gas fields in Yuzivska, in the eastern Donetsk region. Together it is thought that the two fields could provide the Ukraine with as much as 10 per cent of domestically consumed natural gas by 2020.
As a condition of the Production Sharing Agreement (PSA) Chevron and Shell have had to team up with local state-affiliated sister companies, Nadra Yuzovska and Nadra Oleska, which have been established specifically for the two projects and are 90 per cent owned by Ukrainian state partner Nadra Ukrayny and 10 per cent by private interest group SPK-Geoservice. As a result, law firms are advising only the local partners, Nadra Yuvoska and Nadra Oleska, respectively, on the projects going forward.
A team from Morgan Lewis & Bockius, led by partner Jonathan Hines and senior associate Alexander Marchenko, are providing ongoing advice to Nadra Yuzovska and Nadra Oleska on the joint operation agreement.
For Hines, the tenders are a huge leap forward for the Ukraine’s energy sector. “The Ukraine has had an unfortunate past in this sector with false start after false start after false start and each new government says it’s going to do something and then the next government annuls the deal,” he stresses.
“As a result, there have been hardly any large upstream projects in the Ukraine. Currently the government seems to be sticking with these projects and they’re attracting big foreign companies, which is a great and very important thing for the oil and gas sector here and from a commercial and legal point of view, everything is going forward as they should.”
A third tender for the Skifska gas fields in the Black Sea was won by a consortium led by Exxon Mobil and Royal Dutch Shell in August and is estimated to hold reserves of 200 to 250 bcm of gas and is tipped to produce up to 5bn cubic metres of gas a year.
Although the tender for legal services is still pending on this project, a number of firms, such as Morgan Lewis are likely to be part of the legal line-up.
Asters’ senior partner Armen Khachaturyan, partner Tamara Lukanina associate Yaroslav Petrov are involved in representing local partners and investors on all three projects and it is also understood that CMS Cameron McKenna’s Kiev office is also acting for the investors of two of the PSA projects.
Key figures: Ukraine
GDP (2011): $165.2bn
Inflation (2011): 15.6%
Population (2011): 45.7m
Life expectancy at birth: 70
Unemployment rate (2011): 7.9%
Source: World Bank
The great Russian language row
While recent elections have attracted widespread international concern that the state of democracy in the country is worsening, this has not been the only controversy to hit the country’s parliament.
In July it passed a bill to raise the status of Russian to a regional language in 13 out of 27 districts and also approved its use in many courts. Although Ukraine still has a large Russian-speaking population, news of the law provoked an outcry in the country.
“It was the big news of the summer,” says Asters’ Khachaturyan. “This issue is closely linked with politics, elections and discrimination against the Russian minority in Ukraine, which is substantial in number and makes up almost a third of the population.”
“It’s a sensitive political issue,” adds Batyuk of Salans. “Ukraine, as an independent state, needs its own language, and the language needs to be protected and developed. But in reality many people also speak Russian. This issue has always been complex
and recent attempts by the government to change the law
have not been too successful, while distracting people from other issues. We hope that after the dust settles common sense will prevail and these issues will be resolved.”
Despite the furore surrounding the new law, Integrites’ Yalovyy is sceptical as to whether Russian can ever have equal status with Ukrainian in the country.
“Language matters arise not because of people but because of politicians,” he says. “This is a question of politics and I doubt that Russian will ever be an official language in Ukraine.”
Where to eat in Kiev
Kiev boasts dozens of restaurants serving various world cuisines. Here are the best and most popular places that are must-sees for all visitors.
For traditional Ukrainian cuisine, Shchekavitsya is the most decorated national restaurant and is a must-see for lovers of authentic cuisine and Ukrainian national songs.
Tsarske Selo is the oldest and best-known national cuisine restaurant in town, conveniently located not far from Unesco world heritage sights as Saint-Sophia Cathedral and the related monastic buildings of Kyiv-Pechersk Lavra.
As for patisseries, Surprise is the oldest patisserie, where the French art of making chocolate has been practiced over a decade.
Wolkonsky is a Ukrainian brand for the French-based Eric Kayser network and there are seven Wolkonsky cafés across the capital.
For pre-partying, Safe is a posh and trendy restaurant in the city centre where the celebs go.
Buddha Bar is probably the trendiest establishment in Kiev and corresponds to all the demands of the world Buddha-bar network, though it is much larger than all the others. For a one-stop-all-inclusive-evening, this ranks high on the list of possibilities.
When it comes to top-priced restaurants, Stephano’s Food Factory is right up there with great food, a huge collection of expensive wines and fabulous decor.
Leo Restaurant is a reconstructed ‘Riviera’ restaurant of the 1930s. Today’s Leo is a large mansion with marvellous baroque-style interior design, fine cuisine and superb service.
Artur Yalovyy, head of Integrites’ London office