Precedent Lev 2ukr 2012

Ukraine
A Level Two- General Country Report Petitioned by
www.precedent-ilf.com
Reference work completed by Iuliya 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, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of any information, apparatus, product, or process 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 authors expressed herein do not necessarily state or reflect those of Precedent ILF. The entire works contained in this report have been gained from the internet 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 to Precedent ILF for reference.
April 2012
Report Petitioned by International Legal Firm Precedent
Ukraine Level Two Report

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TABLE OF CONTENT...
Communication...................................................................................................................................................... 7 Transportation .................................................................................................................................................... 110 Banking System Services................................................................................................................................... 152 Medical Services ................................................................................................................................................ 204 Entry and Exit Visa Requirements for US & Non-US Citizens ........................................................................ 230 Required Steps to Create a Business.................................................................................................................. 270 Licensing of a Foreign Business ...................................................................................................................... 274 Labor Code/Law ................................................................................................................................................ 303 Revenue Department Tax Guidance .................................................................................................................. 319 Bibliography ...................................................................................................................................................... 346
Figure 1 Mobile operators (as of March 2008) ...................................................................................................... 8 Figure 2 Key telecom parameters - 2010-2012.................................................................................................... 10 Figure 3 Key Statistics ......................................................................................................................................... 11 Figure 4 Structure of Equipment for ATS Operating in Local Telephone Networks.......................................... 18 Figure 5 Teledensity compared with population ................................................................................................. 20 Figure 6 Rates for telecommunication services ................................................................................................... 20 Figure 7 CIS Member States (USD) .................................................................................................................... 20 Figure 8 Telecommunication Services Provided to Foreign States (USD) ......................................................... 21 Figure 9 Revenues from rendering telecommunication services in Ukraine, bln UAH ...................................... 24 Figure 10 Structure of the revenues from rendering telecommunication services in Ukraine. ........................... 24 Figure 11 Financial highlights of Ukrtelecom ..................................................................................................... 26 Figure 12 Market Value of 1 Ukrtelecom JSC share, UAH ................................................................................ 28 Figure 13 Ukrtelecoms share in the fixed telephony market and internet market in terms of the revenues earned .............................................................................................................................................................................. 29 Figure 14 Revenues from rendering telecom services ......................................................................................... 30 Figure 15 Structure of the revenues(Ukrtelecom) ............................................................................................... 30 Figure 16 Kye investment sectors, Ukrtelecom ................................................................................................... 31 Figure 17 Number of Ukrtelecom's Wi-Fi hot spots, pcs .................................................................................... 34 Figure 18 Number of mobile subscribers, ths ...................................................................................................... 34 Figure 19 Number&Revenues from the high-speed Internet access services, mln UAH.................................... 35 Figure 20Number of fixed telephone lines .......................................................................................................... 36 Figure 21 Core services: revenues, structure and total amount. .......................................................................... 38 Figure 22 Transport Telecommunication Network of Ukrtelecom JSC .............................................................. 40 Figure 23 Multiservice Packet Network of Ukrtelecom JSC............................................................................... 41 Figure 24 International Connections of Packet Network..................................................................................... 41 Figure 25 Trunking communication .................................................................................................................... 44
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Figure 26 Subscription rate (without regard to traffic) ........................................................................................ 45 Figure 27 Regional levels of mobile penetration, Q3 2007 ................................................................................. 46 Figure 28 Effective mobile price per minute in a sample of Eastern and Central European countries, 2007 ..... 47 Figure 29 Mobile penetration and Total Outgoing Minutes of Use in Ukraine................................................... 47 Figure 30 Economic Impact of the mobile communications industry in Ukraine. .............................................. 48 Figure 31 Mobile value chain in Ukraine in 2007(UAHs millions) .................................................................... 49 Figure 32 Productivity impact of mobile communication ................................................................................... 50 Figure 33 Increasing Intangible benefits enjoyed by consumers in Ukraine. ..................................................... 50 Figure 34 Mobile operators' market shares over time.......................................................................................... 52 Figure 35 Mobile connections and mobile penetration in Ukraine over time. .................................................... 52 Figure 36 Percentage of prepaid and postpaid customers for each operator (2007)............................................ 53 Figure 37 ARPU levels over time, UAHs............................................................................................................ 53 Figure 38 Earnings and Subscriber base .............................................................................................................. 54 Figure 39 Operators Rating.................................................................................................................................. 56 Figure 40 Increase in subscribers, mobile market (January 2012) 56 Figure 41 Mobile Market shares .......................................................................................................................... 56 Figure 42 Mobile Industry and market trends...................................................................................................... 57 Figure 44 Ukrainian mobile market (revenue & share in nominal GDP) ............................................................ 57 Figure 43 Expected penetration Growth .............................................................................................................. 57 Figure 45 Mobile market revenue forecast .......................................................................................................... 58 Figure 46 Rates of Kievstar mobile operator ....................................................................................................... 59 Figure 47 Part 1 KyivStar's Analytical information 2008-2010 .......................................................................... 60 Figure 48 Figure 47 Part 2 KyivStar's Analytical information 2008-2010.......................................................... 61 Figure 49 Figure 47 Part 3 KyivStar's Analytical information 2008-2010.......................................................... 61 Figure 50 MTS Rates ........................................................................................................................................... 62 Figure 51 MTS strategy ....................................................................................................................................... 63 Figure 52 MTS Ukraine revenue dynamics ......................................................................................................... 63 Figure 53 MTS Ukraine capital investments in 2004 -2009E ............................................................................. 64 Figure 54 MTS Ukraine backbone network......................................................................................................... 64 Figure 55 Key strategic priorities for MTS Ukraine in 2010-2012 .................................................................... 65 Figure 56 MTS Strategy: Direction-tactics-benefits............................................................................................ 65 Figure 57 MTS Ukraine Highlights ..................................................................................................................... 66 Figure 58 Operating Income Before Depreciation and Amortization (OIBDA) and OIBDA margin of the MTC Ukraine................................................................................................................................................................. 66 Figure 59OIBDA margin ..................................................................................................................................... 66 Figure 60 MTS Ukraine financial highlights in 2011 .......................................................................................... 67 Figure 61 MTS Ukraine operating indicators ...................................................................................................... 68 Figure 62 MTS Ukraine revenue indicators......................................................................................................... 69 Figure 63 Internet and major social networks penetration in selected countries as of Q2 2011 ......................... 75 Figure 64 Vkontakte.ru overview. ....................................................................................................................... 78 Figure 65 Odnoklassniki.ru overview.................................................................................................................. 78 Figure 66 Twitter overview. ................................................................................................................................ 79 Figure 67 Facebook overview............................................................................................................................. 79 Figure 68 Ukr.net overview. ................................................................................................................................ 80
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Figure 69 Livejournal overview........................................................................................................................... 80 Figure 70 Number of Credit cards. ...................................................................................................................... 81 Figure 71 Web money.......................................................................................................................................... 81 Figure 72 Ukraine Subscriber Numbers for fixed, mobile and Internet services ................................................ 83 Figure 73 Ukraine Penetration Rates ................................................................................................................... 83 Figure 74 EC assistance to Ukraine ..................................................................................................................... 89 Figure 75 Total revenues from the broadband internet services in Ukraine, mln 3Q2010-3Q2011 ................. 100 Figure 76 Number of Subscribers and the level of penetration for the broadband internet, 2Q2010-4Q2011 . 100 Figure 77 Main broadband internet providers, ths 1Q2011 - 3Q2011............................................................... 101 Figure 78 Programming languages in Ukraine. ................................................................................................. 104 Figure 79 UkrPoshta key data......................................................................................................................... 105 Figure 80 Tariff indices for post and communication services for enterprises, institution, organizations in 2011 (to the corresponding month of the previous year,%)........................................................................................ 105 Figure 81 Tariff indices for post and communication services for enterprises, institution, organizations in 2011 ............................................................................................................................................................................ 106 Figure 82 Tariff indices for post and communication services for enterprises, institution, organizations in 2011 (to December of the previous year)(percent) ..................................................................................................... 106 Figure 83 Revenues from services provided by post and communication, 2011 .............................................. 107 Figure 84 Communication subscribers, 2011 .................................................................................................... 108 Figure 85 Ukraine Communication Sector - World Bank Report ..................................................................... 109 Figure 86 Mitigation policies/measures with high potential to deliver reductions in transport GHG emissions ............................................................................................................................................................................ 112 Figure 87 International contribution .................................................................................................................. 113 Figure 88 International LPI results .................................................................................................................... 114 Figure 89 Domestic LPI results, time and cost data. ......................................................................................... 114 Figure 90 LPI ranking and scores 2010 ............................................................................................................. 114 Figure 91 Clearance overview ........................................................................................................................... 115 Figure 92 Key indicators of transport sector (Part 1) ........................................................................................ 116 Figure 93 Key indicators of transport sector (Part 2) ........................................................................................ 117 Figure 94 Projects set in operation from the beginning of 2008........................................................................ 118 Figure 95 Innovation and investments perspectives. ......................................................................................... 118 Figure 96 Map of current, being under construction and designed warehouse projects in Kiev region. .......... 119 Figure 97 Freight and Passenger Transportation Statistics ................................................................................ 120 Figure 98 Transport Services (% of commercial services exports) ................................................................... 120 Figure 99 Cargo transportation, 2011 ................................................................................................................ 120 Figure 100 Passenger transportation, 2011 ........................................................................................................ 121 Figure 101 Railway map of Ukraine.................................................................................................................. 124 Figure 102 Railway transport performance separate indicators, 2011 .............................................................. 124 Figure 103 Tariff indices for cargo transportation by rail in 2011 (to the previous quarter) (percent) ............. 125 Figure 104 COMBINED STATEMENT OF FINANCIAL POSITION ........................................................... 127 Figure 105 Road corridors ................................................................................................................................. 130 Figure 106 Tariff indices for pipeline cargo transportation in 20032011....................................................... 131 Figure 107Road map of Ukraine........................................................................................................................ 132 Figure 108 Odessa port ...................................................................................................................................... 136
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Figure 109 Ancillary transport services of sea and river ports and wharfs on freight processing, 2011 ........... 136 Figure 110 Turnover of Odessa in 1996 - 2011 years. ...................................................................................... 137 Figure 111 Import/Export Turnover of Odessa in 1996 - 2011 years, TEU...................................................... 137 Figure 112 The share of transit cargo in the port's container turnover, thousand tons ...................................... 138 Figure 113 Total Assets ..................................................................................................................................... 152 Figure 114 Ukrainian Banking System Assets Growth & Structure. ................................................................ 153 Figure 115 Western-Owned banks..................................................................................................................... 154 Figure 116 Banks under NBU Temporary Administration................................................................................ 155 Figure 117 Bank closed since 01-Oct-2008....................................................................................................... 155 Figure 118 Loans and Structure ......................................................................................................................... 156 Figure 119 Assets/Liabilities Imbalances .......................................................................................................... 157 Figure 120 Income and Expenses ...................................................................................................................... 158 Figure 121 Income and Expenses charts............................................................................................................ 159 Figure 122 The structure of income and expenditures of banks as of 01.03.2012 ............................................ 160 Figure 123 The structure of the Department for Financial Monitoring of the NBU ......................................... 161 Figure 124 Financial Monitoring in the Banking System of Ukraine ............................................................... 161 Figure 125 Financial monitoring in a Bank ....................................................................................................... 162 Figure 126 Gross External Debt, By Sectors ..................................................................................................... 167 Figure 127 Ukraine's External Debt Service Needs........................................................................................... 167 Figure 128 Non-performing Loans in Selected Emerging Markets................................................................... 168 Figure 129 Non-performing loans, right scale ................................................................................................... 168 Figure 130 Stock of Bank Credit ....................................................................................................................... 169 Figure 131 Dynamics of Income, expense and profit of the banking sector of Ukraine ................................... 171 Figure 132 Deposits by sectors of economy ...................................................................................................... 172 Figure 133 Deposits by types of currency ......................................................................................................... 173 Figure 134 Credits by sectors of economy ........................................................................................................ 175 Figure 135 Credits by types of currency............................................................................................................ 176 Figure 136 Number of initial payments and electronic settlement notices carried out ..................................... 178 Figure 137 Share of cash outside banks in narrow money ................................................................................ 178 Figure 138 Number of cardholders .................................................................................................................... 179 Figure 139 Number and value of operations on payment cards issued ............................................................. 180 Figure 140 Average turnover on one card ......................................................................................................... 181 Figure 141 Some indicators of the National System of Mass Electronic Payments .......................................... 181 Figure 142 Card payment infrastructure in Ukraine .......................................................................................... 182 Figure 143 Number of payment cards per capita............................................................................................... 183 Figure 144 Number of card payments per capita in several CEE and Central Asia .......................................... 184 Figure 145 Share of credit cards ........................................................................................................................ 184 Figure 146 Number and volume of payment card operations in Ukraine.......................................................... 185 Figure 147 Types of payment cards issued by Ukrainian banks ....................................................................... 185 Figure 148 Structure of payment card transactions ........................................................................................... 186 Figure 149 Ukrainian card market ..................................................................................................................... 187 Figure 150 Some indicators of settlement and cash servicing of customers ..................................................... 189 Figure 151 The dynamics and structure of first -time registered disease in Ukraine in 2010 ........................... 205 Figure 152 Medical insurance in Ukraine.......................................................................................................... 210
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Figure 153 Overview of the health system ........................................................................................................ 215 Figure 154 Health care financing flowchart ...................................................................................................... 220 Figure 155 Health expenditures as a share (%) if GDP ..................................................................................... 222 Figure 156 Health expenditures in US$ PPP per capita in the WHO ................................................................ 223 Figure 157 Percentage of total expenditure on health according to source of revenue ..................................... 225 Figure 158 Vaccination Coverage Trends ......................................................................................................... 242 Figure 159 Estimated Total Fertility Rate per Woman...................................................................................... 243 Figure 160 Infant mortality rates ....................................................................................................................... 244 Figure 161 Picture of visa ................................................................................................................................. 264 Figure 162 Ranks ............................................................................................................................................... 270 Figure 163 How Ukraine ranks on Doing Business topics ................................................................................ 270 Figure 164 What it takes to start a business in Ukraine..................................................................................... 271 Figure 165 How Ukraine and comparator economies rank on the ease of starting a business .......................... 272 Figure 166 The ease of starting a business in Ukraine ...................................................................................... 272 Figure 167 Has starting a business become easier over time? (part 1) ............................................................. 273 Figure 168 Has starting a business become easier over time? (part 2) ............................................................. 274 Figure 169 How has Ukraine made starting a business easier - or not? ............................................................ 275 Figure 170 Standardized company..................................................................................................................... 275 Figure 171 Summary of procedures for starting a business in Ukraineand the time and cost....................... 277 Figure 172 The differences between two types of AT....................................................................................... 287 Figure 173 Capital structure dynamics .............................................................................................................. 293 Figure 174 JSC requirements............................................................................................................................ 294 Figure 175 Quick comparison of joint stock companies and limited liability companies ................................. 295 Figure 176 Type of mandatory social security .................................................................................................. 308 Figure 177 Tax collection. ................................................................................................................................. 319 Figure 178 How Ukraine and comparator economies rank on the ease of paying taxes ................................... 321 Figure 180The ease of paying taxes in Ukraine over time ................................................................................ 322 Figure 181 Has paying taxes become easier over time?(part1) ......................................................................... 323 Figure 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 telecommunication development plan emphasizes improving domestic trunk lines, international connections, and the mobilecellular system domestic: at independence in December 1991, Ukraine inherited a telephone system that was antiquated, inefficient, and in disrepair; more than 3.5 million applications for telephones could not be satisfied; telephone density is rising and the domestic trunk system is being improved; about onethird of Ukraine's networks are digital and a majority of regional centers now have digital switching stations; improvements in local networks and local exchanges continue to lag; the mobile-cellular telephone system's expansion has slowed, largely due to saturation of the market which has reached 120 mobile phones per 100 people international: country code - 380; 2 new domestic trunk lines are a part of the fiber-optic Trans-Asia-Europe (TAE) system and
3 Ukrainian links have been installed in the fiberoptic Trans-European Lines (TEL) project that connects 18 countries; additional international service is provided by the Italy-Turkey-Ukraine-Russia (ITUR) fiber-optic submarine cable and by an unknown number of earth stations in the Intelsat, Inmarsat, and Intersputnik satellite systems Broadcast media: TV coverage is provided by Ukraine's state-controlled nationwide broadcast channel (UT1) and a number of privately-owned television broadcast networks; Russian television broadcasts have a small audience nationwide, but larger audiences in the eastern and southern regions; multi-channel cable and satellite TV services are available; Ukraine's radio broadcast market, a mix of independent and state-owned networks, 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 Page 7

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Mobile Operators (as of March 2008)

Rank Operator Technology GSM GSM, CDMA GSM GSM UMTS CDMA CDMA CDMA CDMA GSM Subscribers (in millions) 23 19 9 2 0.3 0.3 0.3 0.3 ? 0.05 Ownership Telenor (56.51%), Alfa Group (43.49%) MTS (100%) Turkcell (54.2%), SCM Holdings (45.8%) VimpelCom Ukrtelecom Telesystems of Ukraine Intertelecom company International Telecommunication Company (ITC) Velton Telecom Golden Telecom Inc. (GLDN)
1 Kyivstar 2 MTS 3 life:) 4 Beeline 5 Utel 6 PEOPLEnet 7 Intertelecom 8 CDMA Ukraine
is expanding at a high rate. Two new domestic trunk lines are a part of the fiber-optic Trans-Asia-Europe (TAE) system and three Ukrainian links have been installed in the fiber-optic Trans-European Lines (TEL) project that connects 18 countries; additional international service is provided by the Italy-TurkeyUkraine-Russia (ITUR) fiber-optic submarine cable and by earth stations in the Intelsat, Inmarsat, and Intersputnik satellite systems. Telecom Trade Agreements WTO Ukraine is currently in negotiations to join the WTO, but is not a signatory to the Information Technology Agreement (ITA).
9 Velton 10 Golden Telecom
Figure 1 Mobile operators (as of March 2008)
Radio broadcast stations: 524, station types not available (2006) Radios: 45.05 million (1997) Television broadcast stations: 647 (plus 21 repeater stations that relay broadcasts from Russia) (2006) Televisions: 18.05 million (1997) Telephone system: Ukraine's telecommunication development plan, running through 2005, emphasizes improving domestic trunk lines, international connections, and the mobile cellular system. At independence in December 1991, Ukraine inherited a telephone system that was antiquated, inefficient, and in disrepair; more than 3.5 million applications for telephones could not be satisfied; telephone density is now rising slowly and the domestic trunk system is being improved; the mobile cellular telephone system
Leading Service Providers Ukrtelekom http://www.ukrtelecom.ua Ukrainian Mobile Communications (UMC) http://www.umc.ua Golden Telecom Ukraine http://www.goldentele.com Kyivstar http://www.kyivstar.net/en/ Astelit (Digital Cellular Communications) Contacts Regulatory Ukraine National Commission for Communications Regulations http://www.nkrz.gov.ua/
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Overview One of Eastern Europes largest countries, Ukraine enjoyed strong economic growth in the early part of the century, though in common with its neighbors the country has been adversely impacted by the global economic turmoil. It was obliged to turn to the IMF for assistance in late 2008, and has since worked to restore economic health. The telecoms sector has not fared as badly as other areas, but since 2008 revenue growth has been minimal. This is likely to continue into 2012 at least though thereafter the prospects are likely to improve as liquidity issues lessen and the economy as a whole improves. Although Ukraine has important economic ties with Russia, reflected in Russian investment in the countrys telcos, it has sought an increasingly close relationship with the EU, and the government actively pursues a policy of EU integration. This would have significant implications for Ukraines telecom sector, not only in terms of tighter regulation but also in its capacity to cope with competitive pressure and market forces within the Union. Ukraines large population supports a significant telecom market which has grown steadily in recent years, weathering the economic demise better than almost all other market sectors. The market grew more than 6% in 2011, to some UAH50.3 billion, but growth in 2012 may reach only 4%, partly due to saturation in the mobile market and low growth in fixed-line services. The telecom market and regulatory regime will be influenced by the countrys prospective membership to the EU. However, recent internal political events have been criticized by Europes political leaders. This may jeopardize the free-trade agreement between Ukraine and the Union, and delay further progress towards accession. As for telecoms, the sector desperately needs the regulatory clarity which the ECs telecom framework can deliver. The influence of the EU, as well as the regulatory conditions which Ukraine must meet, would go far to promoting market competition. Until recently, the lack of an independent regulator and transparent regulatory system had discouraged investment from the major Western European telcos looking for opportunities beyond their highly competitive domestic markets, and thus contributed to market stagnation. The EU, as well as Western European and Russian telcos, will be looking for some political, judicial and regulatory certainties to encourage them to make further ties to the country. Fixed broadband take up in Ukraine is growing quickly on the back of increased competition and the flexibility of cross-platform availability. FttBbased broadband services are increasingly available, though thus far restricted to the main towns. Kyivstars fibre network now connects a large number of apartment buildings in over 100 towns, serving more than 3.8 million units. Ukraines competitive mobile market is looking to develop mobile broadband services as the next growth opportunity in the wake of operator investment in newer technologies such as HSPA. Demand for content is expected to grow significantly in coming years as falling mobile data tariffs lead to increased numbers of mobile Internet users. However, thus far the major GSM operators have been hampered by lack of licences to offer 3G services. However, the sale of the incumbent Ukrtelecom has meant that the companys unprofitable mobile unit will be offloaded, with its spectrum likely to be reassigned. Page 9

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Key telecom parameters 2010 2012

2010 Broadband: Fixed broadband subscribers (million) 3.66 Fixed-line telephony (million) 12.2 Mobile phone (million) 52.5 Subscribers to telecoms services: Fixed-line penetration 26% Broadband penetration 9.9 Mobile SIM penetration (population) 112%
Figure 2 Key telecom parameters - 2010-2012
Sector
2012 (e) 3.90 12.1 54.9 25% 10.4 118%
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 and satellite 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 Beelines 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 a 100MHz block of spectrum in the 2.1GHz band, costing UAH2.5 billion, of which a third is to come from the private sector mobile network operators and two-thirds from government funds. The move will fast-track mobile broadband availability in remote areas in coming years. Ukraines possesses a significant telecoms market due to its large population. Competition is improving as alternative operators engage in infrastructurebased competition due to lack of an effective last mile network access regime. Wireless local loop and fibre operators have been most active in this area. However the incumbent remains the dominant player, with the regulatory environment more likely to improve once privatization of the incumbent is completed. Drawing upon numerous statistics, this report provides a concise overview of the Ukrainian telecoms market, including brief profiles of major operators, telecom network infrastructure in the country and network developments which are underway. Unfortunately, with the second largest population in Europe, Ukraine is one of the most underdeveloped markets for information and communications technology (ICT) in Europe. According to the Ukrainian Ministry of Transport and Telecommunications (MTT), by the midpoint of 2006, total revenues for the telecommunications market were approximately $3.2 billion. One of the main impediments to the markets development and growth has been the delayed privatization of the government owned incumbent operator Ukrtelekom. Mainly a result of political instability, the slow process to fully privatize the incumbent operator has delayed the upgrading of the fixed-line network infrastructure, and inhibited the mass deployment of wirePage 10

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line telephone and data services. The highlight of the Ukraine telecom industry is the mobile and wireless sector. There are over 41 million mobile phone subscribers in Ukraine. The mobile market is a highly competitive and quickly evolving environment. Most of the coverage is still concentrated in major urban centers, but wireless carriers are aggressively investing in infrastructure to achieve countrywide service coverage and deliver value added services over next generation networks. Additionally, merger and partnership activity has been high throughout 2005 and 2006 as domestic and foreign investors attempt to establish stronger competitive positions. If the government of Ukraine can achieve sustainable stability, the Ukrainian telecom market should emerge as one of the most attractive in Europe. As the investment in new equipment continues, and the remaining government shares of Ukrtelekom are eventually sold, Ukraine presents significant 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 telephony revenues declined by 6.8 percent to UAH 8.364 billion, BizLigaNet reported. Local telephony revenues increased by 1.7 percent to UAH 4.234 billion while DLD/ILD telephony revenues dropped 14.1 percent to UAH 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 5.7 percent to UAH 1.358 billion. Key Statistics
Population GDP Per capita GDP Telecom revenue Main lines Main line Penetration Mobile subscribers Mobile penetration Internet users Internet User Penetration Broadband Subscribers U.S. equipment exports to market
Figure 3 Key Statistics Sources: CIA World Factbook, Primetrica, USITC, and Business Monitor International
45,994,288 (July 2008 est.) $140.5 billion (2007) $1,750 (2005) $ 3.2 billion (July 2006) 12.858 million (2007) 30% (2005) 55.24 million (2007) 88.3% (2006 est.) 10 million (2007) 12.2% (2005) 50,000 (2005) $4.5 million (2005)
Ukrainian Telecommunications Sector Overview The sector of telecommunications is one of the most essential fields of the infrastructure of the state, which is designed to satisfy public needs in the means and services of communications. The development of telecommunication networks in Ukraine proceeds with allowance for the world-wide tendency towards the integration of networks, systems and the service communications. This tendency requires to build and improve the networks on the basis of equipment, which meets international standards and recommendations and renders Page 11

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the first quality services. The condition of the COMMUNICATIONS sector as of the end of 1997 and the extent 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 the whole the progress of telecommunications is determined by the level of telephony, which is defined by the density of phones. Currently this density is 18 telephones per 100 citizens, as against level 40-60 phones per 100 citizens in the developed economies; the technical condition of communication networks is suggested by the fact that existing telephone networks 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 transmitting discrete information, whose share in the overall interchange is persistently increasing; the transmission of documentary information is realized basically by means of telegraphic communication; 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 the oblast 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 commonly provided 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 telephone communication, Ukraine lags significantly behind advanced countries, and in terms of other types of communication (data transmission, cellular communication, etc..) the backlog is far greater. The sector operates nearly without loss-making enterprises, has no fiscal indebtedness and wage arrears. As per 1997, the consolidated balance profit of state-owned enterprises engages in communication totaled 619 mln UAH. Nearly 780 mln UAH was collected to the state budget and extra-budget funds. The state budget received 133.7 mln UAH as fees for the issuing of licenses authorizing to fulfill different types of activities and for the utilization of radio frequencies. Reasoning from the achieved volume of services and the development of the means of communication in 1997, one can conclude that associations and enterprises provided services to all consumers worth 2.5 billion UAH. This index exceeds 4.9% the last-year's volume in relative terms. This increment was achieved in the first place on account of the services of local telephone networks, distant and international telephone communications. The profitability of the principal activity in the domain was 27.3%.The program of the sector's development domain was implemented both for the account of own financial sources (first of all, of the sectoral development fund), banker's credits (nearly 60%) and the funds of legal and physical persons attracted on a contractual basis and sale of securities. Since 1996, the fulfillment of the second phase of the creation of the National Single Communication System of Ukraine has begun. In 1997, the "Concept of the Development of National Networks of Electrical and Postal Communication for Public Use and the Formation of the Market for communication services in Ukraine for the Period ending 2010" was developed. The Concept adjusts the goals of the sector development. This document defines also the sector's policy in restructuring and privatization. At present, 952 communication operators with different forms of ownership are present on the communication market of Ukraine; in many cases non-state-owned operators offer services of better quality and on more beneficial terms compared to state-owned enterprises. With the goal of adapting the state Page 12

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communication associations to market conditions, a program for restructuring of UKRAINIAN TELECOM association is approved by the Cabinet of Ministers Resolution #1 of 4.04. 98. This is a very important phase of the sector's development, because about 78 per cent of earnings from all communication services in Ukraine falls to UKRAINIAN TELECOM. Development history Development of the Ukrainian telecommunications market can be divided into three major periods: before mobile communications, establishment of the mobile segment and finally replacement of traditional telephone services by mobile communications. It all started at the beginning of the 90s last century when after the collapse of the Soviet States Ukraine faced the need to build national telecommunications market. After Ukraine was recognized as an independent state in 1991 national government fixed three priorities in telecom sector: international and inter-city, mobile communication and access to Internet and data transmission. Later on these priorities materialized in three joint ventures: UTEL, UMC and INFOCOM respectively. In those 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 passed their unique way. UTEL was founded by Ukrtelecom, major investor, and equally American AT&T, German Deutsche Telekom and Dutch KPN. After launch of the first international telephone station in Kiev in 1992 Ukraine received its own national code +380. To avoid growing competition between Ukrtelecom and Utel national government decided to buy out foreign investors stake. De facto Utel was incorporated with its parent-company in 2005 only after the decision was approved by Ukrtelecoms shareholders. 1991 Infocom was founded in by Ukrtelecom (51%) and German Controlware to build the first in Ukraine data transmission network UkrPack. After many years of co-exhistance during which Infocom built up the geography of its services based on Ukrtelecoms infrastructure time came when the conflict of interests appeared as Ukrtelecom started to develop its own network for Internet access and data transmission. Difficult to 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 UMC brand, was founded Ukrainian- German-Dannish-Dutch. 51% was owned by the Ukrtelecom, remaining stake was equally divided between German Deutsche Telekom, Dannish TeleDanmark and Dutch KPN. On 1 July 1993 the first mobile call in NMT (Nordic Mobile Telephone) standard was made. At that time there was lack of funds for clearance of 900 MHetrz frequencies used by defense and other special services. This resulted in spread 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 fixed radio access network in Donetsk in fact providing mobile services in the D-AMPS standard. Golden Telecom started to develop GSM-1800 network in Kiev. Appearance of Telesystems of Ukraine, founded by 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 its GSM-netiwork, Kievstar was second. After appearance of the GSM standard mobile users were not any longer tied to one phone, as with NMT, thanks to SIM-cards (Subscriber Identity Module) used in GSM phones. Page 13

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1998 Telesystems of Ukraine imported equipment for development of the CDMA network, however the launch didnt happen. Same year GSM-1800 license was acquired by a Ukrainian-Italian company Astelit that in the following 7 years fails to start commercial operations. At the end of 1998 the last GSM-operator Ukrainian RadioSystems - came to market with network coverage limited to Kiev in the several few years. SMS service became available to Ukrainian users. 1998 resulted in almost 150 thousand mobile users in Ukraine, more than 100 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 and Ace&Base by Kievstar. Mobile communications became mass and extremely popular, the number of mobile users doubled and reached 300 thousand. 2000 Ukrainian government launched privatization of Ukrtelecom, UMCs major shareholder. It took decision that Ukrtelecom should be offered for sale without its corporate stake in the mobile company. The year 2000 was marked by seconds-tariffication of mobile calls and cancellation of obligatory license from Ukrchastotnaglyad (Ukrainian Frequency Use Control Committee) for a mobile phone use. Mobile companies began 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-900 by 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 Turkish mobile company Turkcell took first attempt to enter Ukrainian market by registering its daughter company Novacell. Due to the conflict between Ukrainian and South Korean shareholders of Ukrainian Radiosystems in 2002 Daewoo stepped out of URS. Privat group and Optima Telecom got control over URS. 2002 Biggest CIS mobile operator Mobile Telesystems (MTS) announced its intention to buy out 100% shares of the UMC and received consent of the parties. DCC from Donetsk started to look for possibilities to enter GSM market and acquired Astelit together with GSM-1800 license. Both UMC and Kievstar started testing high-speed cordless data transmission technology called GPRS (General Packet Radio Service), providing other than voice services to their consumers. 2003 First mobile virtual network operator Jeans appears in Ukraine. Jeans used technical base and network of the UMC and was oriented at young people. The most important developments of the year introduction of free 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. It was 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 of Kyistar and minority shareholder Page 14

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of Vympelcom, opposed the acquisition. However Alpha Group (Altimo), shareholder of both Kyistar and Vympelcom succeeded to insist on URS acquisition. Disagreement between shareholders became reason of a long lasting international conflict that is not yet over. 2006 Beeline brand appeared in the Ukrainian market. Fierce competition caused by newcomers Life:) and Beeline, resulted in price wars in the mobile communications market. Number of mobile users exceeded the size of Ukrainian population, mobile penetration today is around 117%. Another important development was rescheduling by UMC of remaining from the NMT standard frequencies for CDMA-450 format which allows developing third generation (3G) mobile services. 2007 New market strategy was announced by UMC which set new development trend and saved the market from collapse. The company refused from price wars and shifted its policies to client retention, service excellence and stimulating consumption. Major telecommunication event in 2007 became rebranding of the UMC into MTS, UMC became part of one of the world biggest international mobile brands, uniting 79 mln users in 6 countries. Already under new brand MTS the company offered to the market not just new tariffs but such technologically new services as BlackBerry (immediate mobile e-mail that provides access to e-mail and corporate data banks) and high speed cordless internet access based on CDMA-450 standard which became the first step in Ukraine to introduction of 3G services. Network overview Ukrainian telephone network stayed practically undeveloped till recently. The situation is being changed within last years and old equipment has been updated. The results are noticeable in big cities and their suburbia, where new digital telephone exchanges have appeared. At the same time, the part of old equipment remains nonupgraded and quality of the connection can vary very much. In little towns and countryside the connection can be very poor. Some villages might have only one telephone to serve the whole built-up area. Phone usage charge at hotels is often 2-3 times higher than phone companies tariffs. With Ukrtelecom still a de facto state monopoly, the situation regarding interconnection is so heavily regulated that the cost of calls from fixed phones to mobile phones is decided by Government decree and the redistribution of incomes from such calls is based 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 a yearly basis. At the present time, it is difficult to obtain data on interconnection between telephony operators because all sides have an interest in not revealing the actual conditions of their agreements. There is also no public 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 draft NCCR Order on Interconnection and Calculation among Operators. The Law on Communications requires operators to provide other operators willing to conclude an interconnection agreement with the information required for negotiation and to offer interconnection terms that are at least equivalent to those proposed to other operators (Art. 58). The NCCR is authorized to intervene in cases of failure by parties to negotiate (paragraph 19, Art. 18). For fixed-to-mobile interconnection, the termination fee is 0.25 UAH (0.04 Euro) per minute. The price of call termination in the mobile-to-fixed market is decided by commercial agreement between the parties, but the tariff cannot be more than 0.25 UAH (0.04 Euro). Mobile to mobile interconnection is purely a matter for commercial negotiation. Charges for call origination and other telecommunication services are subject to the control of the Antimonopoly Committee (AMC) of Ukraine in cases where the charges are deemed to have a significant social impact. For instance, on 28 October 2005 the AMC adopted a decision recommending mobile operators abolish sign-up charges for users. The fact that the number of mobile Page 15

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subscribers exceeds the number of fixed subscribers in Ukraine was the basis for the argument that this intervention 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 on Communications, the incumbent operator is required to publish an RIO annually in the official journal of the NCCR. The offer should include the current list of interconnection points, technical requirements and economic terms. However, Ukrtelecom has not yet published an RIO, as the Law on Communications requires it to, since the Rules on Interconnection have not been adopted yet by the NCCR. The NCCR is drafting the Rules 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 Ukrtelecoms monopolies are weakened (and a decision on this issue is expected in the near future), there is little possibility of the introduction of carrier selection and carrier reselection. Running parallel to Ukrtelecoms monopoly are the illegal international voice services. As early as 2001, some estimates put the percentage of illegal international voice services in Ukraine as a percentage of total voice traffic as high as 10 percent. Such problems often indicate issues with regulation or competition in the marketplace. However, this situation is changing and there are now several private operators, such as Optima, that are in the process of developing their own infrastructure. Ukrtelecom revenues from the different services on offer were as follows: Long distance calls revenue 2,633.9 billion UAH (427.39 million Euro) or 49.86 percent of total revenue; local fixed calls revenue 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 (25.38 million Euro), or 2.96 percent of total revenue.17 Other services such as paging made up the remainder. No attempt has been made to calculate losses from the illegal termination of voice calls in Ukraine. Ukrtelecom offers 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) IP telephony 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 data to August 2011; operator data to June 2011.Fixed telephony penetration has been steadily rising, and currently stands at 23.2 percent, with mobile at 84.9 percent. As these figures are significantly lower than in developed countries, there appears to be significant growth potential. Ukrtelecom has been working extensively with Cisco to upgrade IP services on its network, including for VoIP functionality, and is developing a next generation network. Fixed line telephone density was 24.3 percent as of 1 January 2006. However, this figure conceals a large urban/rural digital divide. Tele densities range from 45 percent in Kyiv to 9 percent in villages and small towns, and even less in more remote regions. Numbering The Department of Communications and Informatisation (part of the Ministry of Transport and Communications) develops and manages technical policy for numbering allocation. The NCCR provides a management function for numbering policy through liaison with operators. Under the 2003 Law on Communications, administration of numbering resources is divided between the Central body of the executive government in the communications sphere, which is responsible for legislation and policy regarding numbering, and the NCCR, which is responsible for assessing requests for numbering resources and ensuring that 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 in Ukraine in order to take account of increased use of both networks. The number allocation procedure is regulated by the Law on Communications. Page 16

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According to Article 70, numbering resources are provided to [a] telecommunications operator for the period of validity of its licence without the right to sub-allocate these numbers to other operators. The sub-allocation of numbers has been used in other countries to facilitate the use of geographic numbers for VoIP, an option that is therefore not available in Ukraine. Nevertheless, telecommunications providers are able to exchange numbering resources amongst themselves, based on contractual agreements. Before the development of independent private telecommunications operators, Ukrtelecom had an exclusive right to telephone numbering resources. However, this situation is changing and now there are several private operators, such as Optima, that are in the process of developing their own infrastructure, and obtaining their own numbering resources directly through the NCCR. Neither fixed nor mobile number portability is currently available, although all of the main mobile operators have expressed support for mobile portability to be implemented. Non-geographic numbers, such as national local call or premium rate services, have not yet been developed in Ukraine. In the near future the subscribers of mobile operators will be able port their number between operators if Bill N 2047 is successful. This bill aims to amend the list of obligatory services provided in the context of the Law on Telecommunications. Whether or not 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 organization of standard channels for interconnection of the commutation stations of the telephone network and the satisfaction 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-optic communication links (FOCL). Now the share of these links is less than 1% of the overall volume of cable communication links (for comparison the share of symmetrical cable is 74%, and the share of coaxial cable is 25%). During 1997, 2,433 km of distant cable communication lines was built as against 1,118 km in 1996 year. 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 - state border with Moldova. When finished, these FOCLs will give a possibility to furnish a number of oblast and rayon centers of Ukraine with a sufficient number of qualitative digital channels. The main 'South-North" line of the international Italy-Turkey-Ukraine-Russia (ITUR) line is put into operation. In 1997, 425.9 km of zone cable communication lines was put into operation, 1,835,400 chan/km of operating communication lines were reconstructed. 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 state border, Kyiv - Cherkasy - Sumy.
Figure 4 Structure of Equipment for ATS Operating in Local Telephone Networks
These lines are portions of the international TAE (Tans-Asian-European) FOLC communication system that unites European countries with the countries of Asia, TEL (Trans-European line) and ITUR (Italy-TurkeyUkraine-Russia). In total, more then 3,500 km of distant main and zone cable communication lines are in operation in the primary network of Ukraine. Currently, digital communication ( FOLC and DRRL) cover 18 oblasts of Ukraine. Development and re-equipment of urban telephone communication networks on the basis of application of advanced technologies, digital systems of commutation determined the necessity to restrict the commutation telephone equipment manufacturers. Based in the results of a tender arranged by the Cabinet of Ministers of Ukraine, 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, upgrade the reliability and rapidity of the establishing of connections, etc. UTEL joint venture has put ISDN services into practice since 1997. Due to this, subscribers are provided with a number of accessory telephone and nontelephone services (conference-communication, data transmission, fax-messages, and others). On the basis of digital telephone stations, the publicly-used telephone network and ISDN networks, the rendering of the accessory intellectual communication services began, such as "service 800" and others. In accordance with the planned development of the sector's information potential and telecommunication infrastructure of enterprises in the regions and with the goal to provide the active development of information networks in Ukraine, the construction of many-purpose so-called "backbone" data transmission network began. Rights of Way and Facilities Sharing/Collocation Page 18

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Every three years, the Parliament of Ukraine approves the activities proposed under the National Program for Informatisation, which includes infrastructure development decisions taken at national and local levels. The Report of the Parliament No. 3075-IV, adopted on 4 November 2005, concerning the approval of tasks of the National Program for Informatisation for 2006-2008, obliged the Cabinet of Ministers to provide an economic analysis of the financial resources needed for the planned projects, so that the costs to the state could be included in the State Budget. The 2003 Law on Communications offers the NCCR a variety of tools to ensure competitive neutrality with regard to building communications infrastructure. According to current legislation, all telecommunications operators have the right to build telecommunications networks in accordance with a Plan 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 the local government) to approve the construction. The procedure applies equally to all communications companies regardless of size. However, as the requirements are somewhat complex, there is a risk that only larger companies, with the resources to tackle these requirements, are in a position to build telecommunications networks cost effectively. Once the procedure for approving the Plan has been completed, the telecommunications operator needs to secure building permission. The procedure for obtaining permission to build a network is set out in Article 10 of the Law on Telecommunications, 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 the local communications, architecture, and health authorities). Often, rather than rolling out their own networks, telecommunications operators and providers use the networks built 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 markets is 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 on the 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 a 70 percent reduction in the cost of international calls and an increase in local rates. Line rental is set to increase by between 200 and 300 percent (up to 18UAH/3 Euro to 28UAH/4.5 Euro).International tariffs are being reduced by between 17 and 69 percent, while national longdistance calls are being reduced by between 13 and 17 percent. Despite these price adjustments, tariff rebalancing per se has not been implemented in Ukraine.The incumbent telecommunications operator (Ukrtelecom) fulfils its universal service obligations through its low fixed prices (prices for local and regional calls are below cost for Ukrtelecom subscribers) and the development of its fixed network to cover the entire territory of the country. The profit from international calls covers losses from local and regional calls and ensures the companys viability. Mobile operators prices are not regulated, as the market is deemed to be competitive.
Figure 5 Teledensity compared with population
Cost Accounting In the absence of liberalization and requirements for cost-based access to the monopoly providers 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 cost orientation in order to ensure the possibility of fair competition in the market. Therefore, the NCCR will need to 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. (in hryvnias) within oblast within Ukraine Payable by enterprises, establishments and organizations 0.12 0.24
Figure 6 Rates for telecommunication services
Payable by the public 0.07 0.14
CIS Member States (USD)

Telephone calls beyond Ukraine Distance up to 3000 km Distance more than 3000 km Payable by the public 0.29 0.43 Payable by businesses 0.58 0.72 Payable by government agencies funded at the expense of the budget 0.36 0.60
Figure 7 CIS Member States (USD)
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Telecommunication Services Provided to Foreign States (USD)

ordinary service provided on business days between 9:00 p.m. and 6.00 am (week-ends and holidays round-the-clock) 0.50 0.80 1.20 1.60 2.00 2.25 2.25 2.25 payable by government agencies 0.30 0.50 0.75 1.00 1.25 1.50 1.75 2.00
Rate area Eastern Europe Central/Northern Europe Western Europe Central Asia and Middle East North America Eastern Asia Africa, Southern and Central America Australia, Oceania Satellite communication network INMARSAT
ordinary service 0.60 1.00 1.50 2.00 2.50 2.80 2.80 2.80
top-quality service 1.00 1.90 2.50 2.90 3.10 3.30 3.50 3.80 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 standardized quality 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 and international) communication services, (except for services provided using wireless access facilities), including emergency 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 on Ukrainian territory. These universal services include fixed telephone connection for local, long distance and international 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 is outlined in the draft Report (No. 8448 of 14 November 2005) of the Parliament on the Approval of the Recommendations of the Parliament Hearings on Information Society Development in Ukraine held on 21 September 2005 and the Concept on Telecommunications Development. According to the Law on Telecommunications (Article 64), the development of universal services should be outlined in the Concept on Telecommunications Development, subject to approval by the Cabinet of Ministers. The latest version of the draft Concept on Telecommunications Development, dated 1 August 2005, was prepared by the Ukrainian Research and Scientific Institute of Communications and submitted to the Cabinet of Ministers. The approval process was disrupted by preparations for Parliamentary elections in Spring 2006. Universal service is based on tariffs fixed by the Government. While the legal basis for universal service is clear, the implementation of this legislation has not been prioritized to date. A universal service fund has not yet been established and the methodology for funding any such initiative has not yet been developed. It is worth noting that mobile operators are already subject to a levy on their income to contribute to the national pension fund. The Ukrainian Page 21

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authorities are addressing universal service in a pragmatic way, not dissimilar to the approach taken in Russian legislation. 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 service measures. Pilot projects have been launched, the experience from which should form the basis of future work in this area. In addition, plans were announced to provide low-cost access to the Internet in the major cities of Ukraine using WiMAX technology. Three national and two regional 5.74Ghz-5.67Ghz licenses are in the process 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 an invoice for telephony services was introduced by the 2003 Law on Communications. Tariffs for universal services are to be regulated by means of introducing either maximum or fixed rates (according to Article 66(2)(1) of the Law on Telecommunications). Under legislation in force since 1 January 2005, the NCCR has had the right to impose the obligation on companies with nationwide monopoly status, and on companies looking to develop services to consumers in regions needing universal service support, to develop and provide universal services to consumers. The mechanism for the compensation of losses incurred as a result of fulfilling this 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 Ukrainian central 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, as these data are not collected from market players by state authorities. Alternative telecommunications providers are dependent on leased lines as Ukrtelecom owns the majority of the infrastructure and many alternative providers do not have sufficient resources to build their own networks and consequently have to rely on Ukrtelecoms network. This is particularly true for the lower-cost end of the market. Private operators usually develop their own networks for business customers and they are not generally interested in the less lucrative residential market because of the high cost of building communications channels. According to data from operators in Kyiv, installation costs can range from 420 Euro in areas with above average (by Ukrainian standards) infrastructure to 2,500 Euro in more underdeveloped regions. Individuals or smaller businesses obviously cannot pay for such services at these rates. At present, only cable television distributors provide the opportunity for smaller entities to have a comparatively fast, always-on connection to the Internet. Such a connection costs approximately 25 US$ (20.6 Euro) per month. This comparatively low price is due to the fact that 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 carry their 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 the Internet quality. The qualifications of the providers personnel also play a big role. One supplier of services to mobile phone operators in Ukraine told the study team that difficulties (cost, in particular) of using leased lines in Ukraine have resulted in other options being sought, such as wireless Page 22

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backhaul services which, while expensive to install, are an attractive option when long-run costs are taken into account. Interconnection with the public switched network is subject to state regulation governed by the Order of the State Telecommunication Committee of 7 June 2002, No. 120. The price for the provision of a connecting line is 333.33 UAH (54.09 Euro) per month. Prices for long distance and international calls of local operators made via Ukrtelecom lines are regulated by the Order of the Ministry of Communications of 21 November 1996, No. 234, on the basis of revenue sharing. This depends on the number of lines, equipment used, and administrative costs. In Ukraine, DSL is used by Internet Service Providers as high speed leased lines. HDSL is the most widespread technology used for this purpose, reaching 2Mbps data exchange speeds in both directions. A new company in the Ukrainian market, Datagroup, is building out a 1,800km fibre optic network, which it will use as the basis to provide wholesale services to other communications operators and ISPs, taking advantage of Ukrtelecoms problems 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 (not reflected 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 by 806 million UAH more than in 2009. The structure of market revenues: 65.4% cellular communication services; 18.6% fixed telephony services; 9.6% data transmission and Internet services. The revenues from the mobile communication services remained almost the same as in 2009. The revenues from the fixed telephony services decreased by 6.9% against 2009. The highest growth rates were observed in the market of computer communication services: the revenues growth constituted 26% against 2009. At the same time, the market of Internet access services increased by 33%. Three key operators dominate the market: Kyivstar, MTS and 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. Through Ukrtelekom 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 governments 93% stake in the incumbent, and has undermined the ability of the company to upgrade and expand the network to offer new services to wider areas of the country. Even though the fixed-line market did grow by 5% to a penetration rate of almost 30% between 2004 and 2005, the delay in privatizing Ukrtelekom is expected to inhibit further significant rates of 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 the case in most of the emerging markets in the region, however, the dominant competitive services are expected to come from the wireless sector. Page 23

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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 and began to recover. The market of Internet and cable TV services continued to grow steadily. The mobile services market got stabilized both in terms of the amount of the revenues earned and the number of subscribers. Penetration of this kind of communication constitutes about 120%. Price competition and national coverage of almost all operators made mobile communication available for each citizen of Ukraine. The increase of the subscriber base has stopped, and now the market reached the stage of saturation. Owing to the operators 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, Page 24

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expansion of the major market players and exclusion of small regional providers is observed. The high-speed Internet access services become a priority trend in the development of the mobile communication market. The volume of the fixed telephony market continues to decrease due to the replacement of fixed telephony by mobile communication. Fixed Operators The main fixed-line operator in Ukraine is state-owned Ukrtelecom. The total market share of all private fixedline operators was under 20% in 2002. Alternative operators include Golden Telecom, Optima, Farlep and a number of Fixed Wireless Access (FWA) operators. Optima and Farlep commenced operations in the Dnipropetrovsk and Odessa regions, respectively. Ukrtelecom Ukrtelecom was created in 1993 when the Ministry of Communications merged several telecom departments and regional PTTs into the Ukrainian State services. It was re-registered as a state enterprise in 1998 when the regional operators comprising Ukrtelecom were converted into affiliates. It was then transformed from a state 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. Interesting detail is that it offers voice services for free for people that cannot afford. It obtains around 85% of its revenue from long-distance telephony and is responsible for implementing the governments telecommunications strategy. During 2001 it moved to further expand its dominant position taking majority control of the second largest fixed-line operator, Utel, after purchasing the stakes held by AT&T and Deutsche Telekom AG Various efforts to privatize Ukrtelecom have been continuously postponed or delayed and Ukrtelecom still remains under nearly full government ownership. The Ukrtelecom Joint Stock Company is one of Ukraines largest telecommunication operators that provides all kinds of telecommunication services throughout Ukraine, including the UMTS/WCDMA (3G) mobile services. 1,134 thousand subscribers, all regional and district centers of Ukraine, as well as many rural settlements 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 mobile network. In 2010, Ukrtelecom serviced 10.126 million telephone lines. The Company comprised 33 branches as of the beginning of 2011. Being the most high-capacity fixed communication operator in Ukraine, Ukrtelecom cares about the countrys social vulnerable groups of population and is the only operator that provides socially important services, such as rural telephony, wire broadcasting, and payphone communication. To render services of communication with foreign countries as well as those of transit transfer of the traffic both in Ukraine and abroad, Ukrtelecom takes an active part in international telecommunication projects. This ensures an access to the digital telecommunication systems of Europe, Asia, Africa and North America. In terms of revenues, Ukrtelecom covers 18% of the telecommunication market*, including: 73% of the Ukrainian fixed telephony market; 33% of the Ukrainian Internet-access services market. Our transport network is a basis of the telecommunication infrastructure of the state. Ukrtelecom is the only carrier that provides fixed telephony services throughout the country to all categories of subscribers. In 2010, the number of Ukrtelecom mobile subscribers grew 1.67 times (from 378 ths to 631 ths). The number of subscribers of the high-speed fixed Internet access (OGO! TM) grew by 34.5% (from 843 ths to 1,134 ths). In 2010, the share of the sales of computer communication services in the total Ukrtelecom revenues grew up to 17.25% (+3.75% Page 25

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against 2009). The advantageous geographical location of Ukraine and the powerful transport network with a high level of reliability and redundancy enable us to provide services on derivation of high-speed transit circuits for international carriers. The Company is a member of the TEL and TAE projects, and a co-owner of 14 international submarine communication systems, such as ITU R and BSFOCS The Ukrtelecoms strategic objective is to ensure steady growth of the market share in the most progressive markets of high-speed fixed and mobile Internet access services. The Company renders a full range of high-speed fixed and mobile Internet access services throughout the country, 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
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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 (Savings Bank of Russia) JSC. A new project was launched for the National Bank of Ukraine for connection of the VPN service throughout Ukraine. For the State Treasury of Ukraine, a united data transmission network (650 VPN points) was created to meet the requirements of the program for modernization of Ukraines state finance management system. A contract was signed with the divisions of the Ministry of Labor and Social Policy of Ukraine for creation of VPN throughout the country. A contract was concluded with and telecommunication services (PRI, Internet, telephony) have been provided for 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 corporate customer Information Judicial Systems. Under the project, it is planned to build the data transmission network for 100 points. Information telecommunication services were provided for the Euro-2012 city organizing committee in accordance with the UEFA requirements. The contract makes provision for the turn-key integration of 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; technical support and management of all services. In 2010, a new contract was signed with the mobile operator Kyivstar GSM PrJSC for providing the national roaming services. 10 contracts were concluded for providing international roaming services. 39 destinations (voice roaming services), 31 destinations (data roaming services) and 9 destinations (CAMEL roaming services) were put into service. Recognition and awards in 2010 10th place in the rating of The Ukraines MostReputable Companies. (The Reputation Capital Company in cooperation with the TNS Ukraine Marketing Agency) A leader in the rating of Top-100. Business Leaders of Ukraine. Ten Years of Development of the Economy of Ukraine. (The Ukrainian Investment Newspaper and the Credit-Rating Agency). The study in the form of a set of rankings of the largest companies was conducted over 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 value of 0.25 UAH each. This equals 4,681,562,000 UAH. As of the end of 2010, 92.79% from the equity stake was owned by the State, and the remaining 7.21% belonged to other shareholders, natural persons and legal entities. The number of Ukrtelecoms shareholders amounted to 60 thousand persons. Over the period 2001-2007, the Company annually paid out the dividends to its shareholders, in the total amount of approximately 2 billion UAH. Against the background of the global and national financial crisis in 2008, a crash of the stock market of Ukraine and a considerable drop in the cost of securities took place, which terminated only at the beginning of Page 27

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March 2009. This process affected the market value of our Companys shares: at the start of 2010 it dropped to 0.45 UAH per share. However, trading in the Ukrtelecoms securities on stock exchanges never stopped, and by the end of 2010 the value of the Companys shares grew to 0.54 UAH per share. The reason for the positive dynamics of growth of the Companys securities value is a leadership of the Ukrtelecom JSC in the promising market segments and its unceasing technological development. In compliance with the Resolution No. 1948-p of the Cabinet of Ministers of Ukraine, dated October 12, 2010, the State Property Fund of Ukraine, on October 13, 2010, announced the tender for the sale of 92.79% of the shares of the Ukrtelecom JSC. According to an independent 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 as compared with 2009 and constituted 18.0% (against 18.6% in 2009). This can be accounted for by continued reduction of the revenues from fixed telephony and slowdown of the rate of revenues growth from computer communication. In the market of Internet access services, which is the key one for the Company, the Ukrtelecom standing remained invariably high. The Companys position in the fixed telephony market, in terms 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 communication services grew 1.26 times (by 278 mln UAH against 2009) Revenues from mobile communication services grew 1.74 times (by 93 mln UAH against 2009). Revenues from local telephony services grew by 2.5% (by 77 mln UAH against 2009). Revenues from export transactions decreased by 15.4% (by 116 mln UAH against 2009). Revenues from wire broadcasting and telegraphy services grew by 4 mln UAH (against 2009). Revenues from international telephony services decreased by 20.1% (by 151 mln UAH against 2009). 7,936 mln UAH is the Ukrtelecoms revenue from the telecommunication services provided in 2010, which is 126 mln UAH (-1.6%) less than in 2009 Despite a considerable increase in the revenues from new services (Internet access and mobile communication services), the Company failed to fully compensate for the reduction in the revenues from rendering the long distance and international telephony services. The amount of revenues from the local telephony services slightly grew due to the revision of tariffs for the respective services. Decrease of the revenues (in Hryvnya equivalent) from export transactions as well as from outgoing international communication services occurred as a result of reduction of the volume of international telephone traffic and replacement of this kind of services by the means of communication within the Internet network. Revenues of the Ukrtelecom JSC from Figure 13 Ukrtelecoms share in the fixed telephony market and internet market in rendering long distance telephony services as terms of the revenues earned well as from the calls to subscribers of the mobile operators decreased in 2010 by 318 mln UAH (by 19%) against 2009. Decrease of the revenues occurred due to the replacement of the fixed telephony services by the mobile ones.
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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 for the currency sale and those related to the exchange difference charges). Notwithstanding the inflation processes and continuous growth of the prices for the energy carriers and, fuel and lubricants, the total expenses incurred this year decreased only by 4 mln UAH against 2009. This result was achieved owing to introduction of tough austerity measures. Expenses for the purchase of spare parts, raw materials and other supplies, and for current repairs and maintenance increased by 8% against the previous year. Owing to the Companys staff reduction in 2010, the payroll fund and the charges thereon decreased by 1.7%. Other operating expenses decreased by 10.6% 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 strategy provisions: expansion of the network of fixed broadband access and mobile communication, as well as upgrading of the packet network. Capital investments channeled into the implementation of the telecommunication infrastructure development program constituted 597.5 mln UAH. The fixed assets which were 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 fixed broadband access, fixed telephony and mobile communication. Rapid growth of the number of OGO! and mobile service subscribers, and increased information content transmitted through the telecommunication network require its intensive development. Total investments in the backbone telecommunication network amounted to 105.9 mln UAH. Overall length of the fiber-optic communication lines constituted 38.7 ths km by the end of 2010. The work on digitization of the zone primary telecommunication network has been practically completed. As of January 1, 2011, 550 99.64%) of 552 cities and district centers of Ukraine were connected to the fiber-optic communication lines. The capacity of 69 zone rings was increased from 1up to 10 GE on the basis of the CWDM technology. Owing to the use of the DWDM technology, the speed of connection with 20 regional 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 segment of the national telecommunication market, the main direction of our investment policy in 2010 was further expansion 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 the Ukrtelecom JSC broadband access network increased by 13% and constituted 1,316 ths ports. Transmission capacity (bandwidth) of the data network international connections increased up to 180 Gbps (2.25 times more against 2009). In 2010, a considerable volume of investments was channeled into expansion of the capacity of the Companys IP/MPLS network. The year 2010 saw completion of the work and commissioning of the startup complexes of the fifth stage of the carry-over project Modernization of the Ukrtelecom JSC IP/MPLS network. The system of external power supply of the IP/MPLS complex in the cities of Dnipropetrovsk and Donetsk was modernized. Also upgraded were the project Reconstruction of the backup power supply system of the Kyiv City Data Center, as well as the complex of expansion of the Ukrtelecoms Data Processing Center. In order to provide passing of the Internet users traffic, the work was done on expansion and construction of the urban transport networks between the existing Metro-Ethernet nodes. The project for connecting 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, 93 mobile 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 the switching and radio network equipment was updated, which made it possible to increase both the maximum speed of the data transmission service and its capacity, as well as to use IP transport for connection of the mobile 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 through redistribution of the voice and packet traffic to different radio frequencies, two-frequency plan was introduced at the majority of the base stations. The Company modernized and expanded the packet switching system to provide transmission capacity up to 6 Gbps, introduced the Direct Tunnel functional, and expanded the home location 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 of which are meant for the subscription services subscribers and 65 for data transmission. In 2010, the Company began 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, at the beginning of 2010, comprised 1,085 Telecom service offices and other points of public use. At the majority of such points of service the customers are offered a full range of different services: they can receive competent advice, conclude a contract for services, have an access to the Internet, use local, long-distance or international telephony 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 use any of the 37 Companys outlets/shops (full range of sales and services), 46 points of service operating out of the Telecom service offices (servicing and contract connection), 235 multipurpose points of sale of services operating 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 850 Telecom service offices where a customer can buy the mobile communication starting package. Along with the development of its own sales channels, the Company ensured further development of the networks of sales agents and distributors. The number of the agent sales outlets increased from 608 to 819, while the number of distributor agreements amounted to 338. The number of points for collecting payments for mobile communication services increased up to 13.5 ths. Receipt of online payments for mobile communication services was provided via Portmone.com site. Taking into account the increasing demand for the Internet access services, in 2010 we opened 31 new points of public Internet use. As of January 1, 2011, the Ukrtelecoms 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 to preserve its leading positions therein. With the view of optimizing management and improving the performance results, the Company incessantly works to establish and further perfect the system of business processes, based on the experience gained by the leading world carriers that, like our Company, are members of the TeleManagement Forum. During the last year, major consideration was given to the processes that have to meet the needs of the customers and increase their satisfaction with the services and servicing provided by the Company. 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 consumer segments. Control of those processes allows effecting the assessment of satisfaction of the customers and decreasing their outflow. To achieve this, the indicators and their target values, based on the benchmarking studies, are used. The use of such studies resulted in revision of the system of business processes and supplementing 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 Page 33

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and innovation technologies, as well as modern services for the consumers. Together with the leading research institutions in the sphere of telecommunication, the Company establishes the priorities of development, works out measures and actions to increase the efficiency of operation of the telecommunication networks, elaborates normative technical documents, and is a customer of a number of innovative research developments In 2010, the main directions of the research effort were as follows: Development of new generation networks (NGN),including further expansion of the access network based on the FTTx technology; Development of the 3G third generation mobile communication based on the UMTS technologies; Figure 17 Number of Ukrtelecom's Wi-Fi hot spots, pcs Provision of interaction between the IP segment of the NGN network and the public telephone network (PTN); Enhancement of the efficiency of operation of the line-cable facilities, data transmission networks, and telecommunication equipment; Introduction of the IP-television (IPTV) services. In order to ensure further effective development of the Company, the priority issues of the Ukrtelecom development strategy are considered during the meetings of the companys Scientific and Technical Council, which contributes to the establishment of closer ties between the divisions and broad involvement of the employees in the innovation activities. The Ukrtelecom JSC creates modern bases of knowledge and information resources. Conferences, workshops and symposia in the sphere of telecommunication are held regularly under the aegis of the Ukrtelecom JSC experts. Specifically, the Company is a co-organizer of various scientific-andtechnical events together with the magazines Merezhi ta biznes (Networks and Business) and Merezhi ta telekomunikatsii (Networks and Telecommunications); our experts take part in the meetings of the scientific and technical councils of the State Committee of Ukraine for Communications and NCRC, dealing with planning the further strategy of development of the Ukraines telecommunication networks. In its activities, the Company applies international, state, and branch standards, participates in their elaboration, cooperates with the research committees of the International Telecommunications Union. In particular, the Ukrtelecom JSC is a member of the ITU development sector. Best state-of-the art Ukrtelecoms services Internet access In 2010 we focused our investments and marketing activities on the high-speed fixed Internet access services (OGO! trade mark). As a result, in 2010 the number of subscribers grew 1.35 times and the Company consolidated its leadingposition in the market of the above-mentioned services in terms of the main parameters:
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, which enables the user to communicate with Ukraines subscribers at a reduced charge irrespective of his/her whereabouts (provided an access to the Internet is available); - OGO!Wi-Fi providing to all OGO! service subscribers an access to the Internet at all Companys hot spots with 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 any change in their cost. The number of hot spots increased 1.55 times, and the geographical coverage by the WiFi-based Internet access service was substantially expanded. At the end of 2010, Ukrtelecoms wireless access network covered all regional and the majority of district centers. It comprised 2,581 hot spots (3,661 access points) installed in educational establishments, at railway stations, in hotels, restaurants, cafes, and other recreational facilities Page 35

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Mobile communication Ukrtelecom actively introduces the 3G mobile services, expand the existing sales channels and create new ones. The number of the Ukrtelecom mobile subscribers ran to 631 ths in the reporting period. The mobile service 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 338 contracts signed with distributors. The users were offered a set of unique tariff plans with an unlimited mobile Internet access. Ukrtelecoms customers in addition to the traditional mobile services (VoIP, SMS and MMS services, access to content) can also enjoy the innovative ones High-speed mobile access to Internet This allows surfing WEB/WAP pages, browsing through e-mail, and uploading/downloading large files when away from home or office. The speed of data transmission within the Ukrtelecom JSC mobile network can reach 3.6 Mbps depending on the area of coverage, support of the HSDPA technology by the subscriber terminal, 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 connected to PC; a mobile phone with WEB/WAP browser Video call
Figure 20Number of fixed telephone lines
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 voice messages and looking through the video events received. SMS to fixed telephone numbers For the first time within the territory of Ukraine, Ukrtelecoms mobile subscribers can send text messages to fixed telephone numbers. An SMS message is sent to a telephone number, and its user can 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 2010 Ukrtelecom 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 154 ths.
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This is a result of replacement of the fixed telephony services with the mobile ones, which is a typical case the world over. However, rendering the fixed telephony services remains the basis of our business, and in 2010 these services accounted for almost 80% of the total amount of revenues. That is why we work to make the fixed telephony service more attractive. By the end of 2010, about 80 ths Ukrtelecoms subscribers used the Long talks tariff plan that was introduced in 2009. For the customers who do not have a possibility to use fixed or mobile telephone, Ukrtelecom has created and supports an extensive payphone network comprising 27.3 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 customers of the Ukrtelecom JSC grew by 10% and ran to 18.9 ths at the end of the year. Revenues from providing services in the corporate segment amount to 418 mln UAH, which is 6.5% more than in 2009. Ukrtelecom became the winner of the tender for rendering telecommunication services within the Euro-2012 project, which is regarded as an evidence of recognition of the Companys status as one of the leading operators in the market of services for business customers. MPLS-based virtual private network (VPN) Infocalls (transfer of data packets) via Ukrtelecoms MPLS network between offices that belong to the same administrative structure. We provide creation and round-the-clock functioning of the virtual private network 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 mobile communication technology. Frame Relay Aggregation of logical channels between offices allows transferring of data, voice and video via the same logical channel. Assignment of communication channels Allotment of voice-band channels and digital channels for transfer of various types of data between offices via fixed point-to-point connections. Page 37

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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 a single telephone network, and dynamic expansion of the telephone number database are possible. Page 38

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Analogue telephony Assignment of telephone lines that are directly connected to a digital PBX and which ensure high quality of voice and data transmission. Besides, these lines are the platform for other services (Internet, 800 service) and additional services (forwarding, new incoming call messages, local, long-distance and international calls using passwords, 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) standard services, 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 HSDPA technology by the subscriber terminal, and the site capacity. DNS services Assignment and allocation of primary and secondary domain name systems. Possibility to register ones own primary and secondary DNS (in this case the e-mail address does not include the customers ISP address), as well as ones own WWW and/or FTP server Assignment of IP address blocks Support of fixed static IP address. Toll-free (800) service Assignment of a telephone number with a dialing format 0-800-50 with free calls of fixed telephony subscribers 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 0-900-30 with charged calls of fixed telephony subscribers from any place of Ukraine. The service allows providing paid information and entertainment services, as well as voting-associated services. Contact Center Highly skilled experts of the Contact Center can provide round-the-clock processing of telephone calls, faxes and e-mail messages from and to the clients of a customer. The Contact Center operates following a special scenario and can welcome the clients on behalf of the service customer. The service allows creating a virtual office, 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, customers hardware hosting, hardware hosting with leasing the Ukrtelecoms 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", "Telesystems Ukraine". UKRAINIAN TELECOM accounts for about 78 percent of the gains from all the combinations services in Ukraine. Utel Utel is the long-distance fixed-line operator. In 2001 and 2002, Ukrtelecom bought back all foreign-owned shares in Utel. Utel had been established in 1992 as a joint stock company with ownership divided between KPN of the Netherlands with a 10% share, AT&T and Deutsche Telekom each with 19.5% and Ukrtelecom with 51%. With the major share of Ukraines long-distance market, Utel has been very profitable. It holds a 15year licence to offer long-distance and international telephony. It has two international exchanges, in Kiev and Lviv, and has directconnections with more than 50 international telephony operators in 45 countries. Utel carries nearly all international traffic. The company has 22 affiliates in the oblasts of Ukraine and the Autonomous Republic of Crimea. UTEL invested more than 140 mln USD in the development of communication networks in Ukraine. UTEL's incomes were nearly 250 mln USD in 1996 and 300 mln USD in 1997; and profits amounted to 29 mln USD in 1996 and 33 mln USD in 1997. As of the early 1998, there was 27 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 to buy out its partners, Brig Telecom (with a 10.5% share) and Agat Telecom (with a 20.5% share). Golden Telecom Inc is a Russian alternative telecoms operator whose largest shareholder is the Alfa Group. The Kievbased telco commenced operations in January 1997. In late-2002, the company expanded its presence into Dnepropetrovsk, offering local access and prepaid VoIP services. In early 2003, local access, VoIP and dial-up Internet services were launched in Lviv and in Zaporizhya in early 2004. In October 2006, Golden Telecom announced a major initiative to roll-out FMC (Fixed-Mobile-Convergence) services across Ukraine. According to a company statement, Golden Telecom will partner with Alcatel and Huawei for the network implementation. Alcatel will supply a new generation softswitch as well as an intellectual platform upon which the core of the FMC network will be constructed. Huawei will supply a system of base stations, as well as highPage 42

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speed data transfer equipment required to construct the wireless component of the FMC network. The company renders services of mobile communication in the DCS-1800 standard. Services are rendered in Kyiv and Boryspol. 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 with Switzerland 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. It is planned to develop the system in Donetsk, Kharkiv, Odessa, Dnipropetrovsk regions, in the Crimea and in the 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 company holds the right to provide mobile communication services in the GSM-900 standard, but has not begun operation 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 of search 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 search communication are provided by more than 40 operators to 45 thousand subscribers. A bilateral search communication (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 of services. According to experts' estimates, nearly 50% of equipment used in this type of communication is produced by Philips, 45% by Motorola, and nearly 5% by NEC. Trunking Communication Services of trunking communication in Ukraine are provided by the following companies. Page 43

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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 the SmartTrunk II standard. It deals with the frequencies of the VHF range. "Admerka" JV is the official distributor of "Motorola " in Ukraine. Main users are UKRAINIAN TELECOM association, departments of the gas sector, government agencies of different regions, and commercial organizations. "Beeper" This type of communication applies StarSite protocol. It exploits "Beeper Trunking" system that is manufactured by "Motorola" for about one year.
Average rate Connection of radio station Monthly subscription rate Per minute cost of radio conversation Per minute cost of conversation with a telephone subscriber
Figure 25 Trunking communication
USD 50 25 0.1-0.2 0.4
"Eastward Bound" Joint Venture The network applies SmartTrunk II standard, operates in Kyiv, Odessa, Vinnytsia, Chernihiv, and Zhitomir. In the Kyiv oblast, the system provides high-quality radio communication within the range of 30-50 km from the center of the city. It is planned to extend the network to cover Donetsk, Sumy, Poltava, Kremenchug. The assigned range of frequencies is UHF. The coverage of "radio shadow" areas is fulfilled for account of the allocation of two basic stations in Pechersk and Podil television tower. All the telephone numbers for communication 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 for two 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, the company was assigned radio frequencies ranging 403-407 MHz on all the territory of Ukraine. Basic stations in the 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. Software for 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 the network. Page 44

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"UkrTekhZvyazok" Joint-stock Company The company has operated on the market for 2 years. Services related to trunking communication are provided in the city and oblast of Kyiv. The operation frequency range is VHF and UHF. Basic protocol applied is SmartTrunk II. The joint-stock company in one of the largest Motorola distributors in Ukraine. It offers a flexible system of rates. "Sakura" Mobile Communication (SMZ) LLC The company was established in March 1996. It provides services of trunking communication for more than six months. The operation frequency range is VHF. Basic protocol applied is SmartTrunk II. Basic stations apply equipment 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 is VHF. Basic protocol is SmartTrunk II. The equipment is provided by "Motorola ". The territory covered is the city 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 protocol applied is SmartTrunk II. Communication is provided in the city and oblast of Kyiv. Subscription rate (without regard to traffic)
Average rate Subscription (without regard to traffic) without access to telephone network Subscription (without regard to traffic) with access to telephone network Time limit
Figure 26 Subscription rate (without regard to traffic)
USD 40 80 4 minutes
Mobile Phone Networks Ukraines mobile market has experienced exponential growth since 2002. Mobile subscribers increased from 3.7 million in 2002 to over 57 million in 2007, growing at an average 70% per year. Penetration levels are one of the highest in the region and mobile connections now outnumber fixed line connections by 5 to 1. Page 45

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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 at 23% of population in 2005. Mobile services have therefore contributed to overall telephony penetration and have helped bridging the communication gap between rural and urban areas. In addition, by providing a universal and reliable telephony services, mobile services have promoted economic development and direct investment in the country. Mobile coverage is now effectively universal as 99% of the countrys territory is served by at least one operator and Minutes of Use (MOU) peaked at 150 per month in 2007. There are currently five mobile operators in Ukraine, competing to deliver low tariffs and innovative services to consumers. The average price of an outgoing call has dropped by nearly 80% in the last five years. Effective mobile prices per minute are among the lowest in Eastern and Central Europe. However, in 2007 subscriber growth 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 the last four years. In response, operators have shifted focus towards the mobile data market, with EDGEtechnology services recently introduced and MMS services. 3G (third generation) has yet to be launched by the MNOs. Licenses were awarded to the fixed line operator UkrTelecom in 2005, which launched 3G services in November 2007 in five cities. Ukraine lags behind most of other countries in Eastern and Central Europe in terms of the development of 3G networks and the take-up of services. However, this situation could be reversed following the issuing of 3G licenses and a swift network build out. Issuing additional 3G licenses may also speed up the roll out of mobile broadband and could assist the Ukrainian government in achieving higher internet penetration. Page 47

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The Ukrainian communication market has benefited from foreign investors taking a long term interest in Ukraine. Their presence increases the likelihood of additional investment as: Foreign mobile operators bought technical expertise and attracted business partners, for example network equipment suppliers, to register businesses in Ukraine; Mobile operators have contributed to raise the quality of services allowing investors to rely on optimal coverage in a country with low fixed lines penetration. The presence of a reliable communication system is regarded 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 mobile specific pension fund contributions of 7.5% of subscriber revenues. This contribution does not apply to fixed lines. In addition a similar type of pension fund tax applies to handset revenues (1.5%) and, along with the required $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. In 2003 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 industrys 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 and that the mobile industry employs almost 120,000 Ukrainian full time employees (FTEs). This compares with 75,000 FTEs in 2003. Employment directly by MNOs is estimated to have increased by around 9000 FTEs in 4 years. These workers receive work shadowing, apprenticeships and other formal training and receive the opportunity to work in a competitive environment. Kyivstar has been named the best employer in 2006 by business magazine Dilavoi and by an international consultancy firm. Page 48

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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 fund contributions constitute 75% of the value add. This proportion is higher than for other countries due to the mobile-specific taxes and pension fund contributions which apply to subscribers revenues and to imported handsets, as well as to the high level of social contributions. Kyivstar is the biggest taxpayer within the Kiev region. Demand side impact
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Figure 32 Productivity impact of mobile communication
Labour productivity increases in both urban and rural areas as workers can communicate continuously with trade 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 proved a 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 through mobile phones. Consumer benefits
Figure 33 Increasing Intangible benefits enjoyed by consumers in Ukraine.
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The intangible benefits of mobile communications enjoyed by consumers can be estimated using a willingness to pay analysis. By combining data on usage and data on prices, we find that usage increase and price decreases 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 tracking devices; The extension of communications to users with low education and literacy, particularly elderly people living in 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 a number of Corporate Responsibility projects. Charity related programmes organized by MNOs include schemes aimed at helping orphan children, particularly in the Chernobyl area, by providing administrative help to orphanages and by funding IT courses. Other projects provide help to social centers for invalids, such as the Kiev Polytechnical Institute, and to elderly people in retirement homes, particularly in rural areas, who are provided with opportunities of communication. Conclusions The Ukrainian mobile sector has experienced exceptional subscriber growth since 2002 and creates a substantial and increasing proportion of the countrys economic value. It estimated to have contributed 2.9% of GDP in 2004, increasing to 5.9% in 2007. In 2007, approximately 119,000 FTEs were employed directly and indirectly by the industry. The impact of the communications is demonstrated through supply side and productivity impacts. However, consumers have also benefited from an increased range of services and falling prices. The average price per minute is estimated to have fallen 50% in 3 years. The fall in prices has been accompanied by an increase in coverage levels and this has contributed to the general accessibility of mobile services. By continuing to grow its subscriber base and provide new services, the mobile sector may be able to increase its GDP contribution. A regulatory and licensing regime that combines international best practice with local considerations would be supportive of this growth opportunity25. For example, the issuing of additional 3G licenses would allow for further service innovation including the delivery of data connectivity to larger proportion of the Ukrainian population. In addition, the government could further support the sectors development through fiscal policies consistent with the remainder of the economy, notably a review of the current pension funding requirements. Background to the mobile market Ukraines mobile market has experienced exponential growth since 2002. Mobile subscribers increased from 3.7 million in 2002 to over 57 million in 2007, representing an annual growth rate of over 70%. Penetration rates 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 has always 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 effectively universal: 99% of countrys territory is served by at least one operator. Usage has increased to over 150 minutes 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 consumers in a very short time. Mobile prices dropped by around 80% in the last five years. However, the Ukrainian mobile market is maturing and penetration reached 100% in 2006. Mobile operators began offering prepaid services in 2003 and by 2007 prepaid connections represented 93% of all subscribers. Prepaid SIM cards have proved more popular than fixed line or postpaid subscriptions. They do not require a bank account to receive access and customers can buy low value vouchers once to activate and use a prepaid SIM. This practice is common 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 ARPU levels 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 recently introduced and with MMS services launched.
Figure 38 Earnings and Subscriber base
As was previously stated, Ukraines mobile market is highly competitive due to a number of mobile operators offering services via GSM, CDMA and WCDMA/HSDPA networks. Mobile broadband services present the next growth opportunity given the saturated mobile voice market although the major GSM operators are hampered by lack of licenses to offer 3G services. Into this market opportunity has stepped Ukraines CDMA operators, which initially offered fixed-line services but have since moved into the mobile market, launching mobile broadband services. Ukraine is also home to a nascent mobile content and applications market, with future growth largely dependent on mobile data uptake. Russias Vimpelcom announced on 11 November 2005 that it had bought the mobile operator Ukrainian Radiosystems (URS) for 231.3 US$ million (191.16 million Euro). The subscriber base of URS amounted to 51,200 people at the end of 2005, or less than 1 percent of mobile users in Ukraine. URS has a GSM900 license that covers the entire territory of Ukraine, which has a population of approximately 47.8 million. URS also has a GSM 1800 license that covers 23 of Ukraine's 27 administrative 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 oby. The NCCR has decided to limit the number of licenses available to new subscribers for the CDMA standard in the 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, in addition to telephone services, a full range of digital telephone communication services and fast data transmission. According to the CDMA Association, the total subscriber base for CDMA rose by 43 percent in the year to June 2005. Mobile users of Astelits network (marketed under the trademark life:)) will have the opportunity to be the first in Ukraine to experience 3G services. An EDGE service offering connection speeds of 236kbps is already on the market. Such offerings will also help life:) to better understand user expectations for 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 Dnipropetrovsk on 25 March 2005. life:) intends to continue its expansion of EDGE coverage in Ukraine. UMC recently awarded a tender to the Kyiv company Priocom to develop its IP/MPLS infrastructure to boost its capacities for GPRS, EDGE, advanced IP services and in preparation for the launch of 3G services. A range of 2.5G and 2G data services are also available on the Page 54

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market. However, prices are somewhat prohibitive bearing in mind the income levels in the country (WAP per minute 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 of mobile 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 on industry figures) at the end of 2004, to 64 percent50 at the beginning of 2006, and rose to 84.9% by 30 September 2006. The standard methodology for calculating subscriber numbers in Ukraine is to count contract customers together with prepaid customers who have had at least one piece of incoming or outgoing traffic on their 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 Ukrainian telecom industry. Additionally, the issuance of 3G and WiMax licenses will further enhance the rapid growth and development of the wireless sector. Even though the Ukrainian government has been slow to fully privatize Ukrtelekom, the wireless sector has developed into an intensely competitive market and the most progressive in bringing next generation services to the market. The mobile telephony market is fairly segmented. The major players are Kyivstar, UMC, and Astelit, controlling approximately 45%, 42%, and 11% respectively. Golden Telecom Ukraine and URS control the remaining shares of the market. For most of the major operators, the prepaid customer segment dominates the customer base. It is anticipated that the wireless carriers cannot effectively 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 over next-generation networks. Five licenses are expected to be issued for WiMax services in late 2006. Also, all the major operators are investing in their networks to deliver 3G data and telephony services. The aggressive new investments will further solidify the wireless sector as the leader of Ukraines telecommunications market. Mobile-specific taxation The mobile sector in Ukraine is subject to heavy sector-specific taxation. Mobile specific taxes in Ukraine include: A pension fund contribution of 7.5% of an operators subscriber revenues. This contribution acts de facto as a second 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 the fixed operator. As a result this tax distorts competition between fixed and mobile operators, potentially affecting 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 contribute to inflate the price of handsets and cause a large number of handsets to be imported through parallel and unofficial channels.
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MAIN MOBILE OPERATORS

Ukraine has five mobile operators, whit Kyivstar and UMC being the two main national operators controlling about 90% of the mobile market. Penetration rates have significantly improved over the last year, reaching more than 60% in early 2006. Throughout 2010, trends in Ukrainian mobile business continued to improve, led by macroeconomic recovery, a more stable competitive environment, an increase in subscriber base, higher roaming usage, 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 of the year, reflecting the recovery in the business. After the Ukrainian Anti-Monopoly Committees final decision to approve the Kyivstar transaction on October 19, 2010, we began actively integrating our Ukrainian operations. The integration of our Ukrainian operations continues to progress well with independently validated synergies of approximately US$ 52 million in 2010, exceeding our initial targets .
Figure 39 Operators Rating
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 Telecom industrys share in GDP remains significant despite some deceleration of its growth in 2006-2008 and expected negative growth in 2009 8% decline is expected in mobile markets revenues in 2009 on the back of lower consumption of services as a result of economic recession and deterioration of business activity however, this is smaller than the 14% decrease in real GDP projected for 2009
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Figure 42 Mobile Industry and market trends
Figure 44 Ukrainian mobile market (revenue & share in nominal GDP)
Figure 43 Expected penetration Growth
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
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Market outlook Although the mobile market is close to saturation and is approaching maturity, growth is expected to turn positive once economy and consumption recover The pace of growth will depend to a large degree on the macroeconomic environment and overall business activity Introduction of products and services based on UMTS could further boost overall market growth and increase its revenues Pace of UMTS network roll-out by major operators as well as an introduction of VAS and data products and services 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 reorganized into 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 mobile communication in Ukraine. It is a member of the International Association of Mobile Communication Operators. At the first phase KyivStar intends to provide mobile communication on the territory of the city of Kyiv 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 the activity throughout Ukraine. An agreement on rouming the company concluded only with Hungary. According to preliminary estimates, the rates for services rendered will be higher than in Europe.
Types of calls Local and distant calls within the territory of Ukraine CIS member states Europe
Figure 46 Rates of Kievstar mobile operator
Charge (hryvnia) Per minute 0.75 1.68-1.85 1.83-3.08
National mobile operator Kyivstar provides a coverage of 97% of Ukraines territory inhabited by 98% of Ukraines population. Kyivstar network covers all large cities and towns, over 27 thousand settlements, all main 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 market share 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 ARPU and also reflecting the lower subscription base. In local currency, EBITDA decreased by 6 % vs Q2 2009 driven by the decline in revenue and rise in opex. 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 of adjusting 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 shareholders 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 as interest bearing debt, including fair value adjustment of the hedged item, less cash and cash equivalents at period end.
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Figure 48 Figure 47 Part 2 KyivStar's Analytical information 2008-2010

(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 derivative financial 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 interest income/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 net debt. 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 dividends payments 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 interest bearing 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 fees for 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 account balance and prepaid subscribers are considered to have churned after three months of inactivity, contract subscribers with positive account balance - after four months of inactivity.
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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 guest roamers) 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 excluding revenue 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 of months 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%). UMC has 27 branch offices. It is the most potent operator since it controls 90% of the market. UMC is the sole operator of NMTi-450 cellular network. It has nearly 38,000 subscribers. The NMTi-450 cellular communication 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. Cellular communication covers more than 4,000 km of main highways. Subscribers may make local, distant, and international calls, use facsimile, transmit data. Since September 1997, services in the GSM-900 standard have been 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
Charge (USD) per minute 0.60 0.30 0.40 0.20 1.30 1.80 2.60 2.70 3.40 3.70 4.00 4.40 4.80
Figure 50 MTS Rates
Types of Calls Local and distant calls within the territory of Ukraine (not business time) Incoming calls (not business time) CIS member states Eastern Europe Central and North Europe Western Europe Western and Central Asia Eastern Asia North America Africa, Southern and Central America Other countries
MTS claims a coverage of more than 91% of Ukrainian territory where 95% of population live. This means for most parts of the country, as least sufficient outdoor coverage is available. Page 62

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Figure 51 MTS strategy
Starting in July 2007, MTS Ukraine successfully implemented a number of strategic measures that contributed to the overall strengthening of subscriber base quality, improvement in brand perception and an increase in subscriber activity levels MTS Ukraine capital investments MTS is one of the largest investors in Ukraine with $2.7 billion of total investments in the past 5 years . In 2004-2007 investments were allocated mostly to radiosubsystems (coverage extension and network capacity). Since mid-2007 and to date investments have been mostly targeted at IT systems, switching sub-system capacity and back-bone network to prepare for 3G roll-out and introduction of new services. Investment attractiveness of Ukrainian mobile market has worsened because of economic recession and significant national currency devaluation. While 2G network Capex is moving to a maintenance level, MTS Ukraine plans to continue reasonable investments in network development and quality improvement. Future level of capital investments could increase should we obtain a UMTS license. Developing own backbone to decrease cost of services Companys backbone network currently covers the whole territory of Ukraine (MTS invested over $180 mln in 20062008). 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 53 MTS Ukraine capital investments in 2004 -2009E
Figure 54 MTS Ukraine backbone network
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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 as content 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 been awarded 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 have been 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 than revenue due to on-going efficiency measures and market focus on increasing customer value and cash flow maximization.
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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 to enhance 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 GoodOK 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 include Ukrsat, Infocom-SK, Spacegate, Adamant, LuckyNet, Ukrnet, and Itelsat. Excluding Infocom-SK, these are all private operators (several of these companies are resellers). Ukrchastotnagliad, the Ukrainian frequencies supervisory centre, reports that 86 operators have licences to provide satellite communications services in Ukraine. Despite the large number of operators on the market, however, satellite telecommunications in Ukraine may be limited due to low income levels. The Government is nevertheless deploying a digital satellite television and radio broadcasting system, which will also be used for Internet services. Ukraine has joined the Inmarsat, Intelsat, Global Star, Thuraya and Orbcomm satellite networks. Currently, there are five licenses for direct satellite communications services. In Ukraine, access to satellite communication is divided into reception and transmission of information. The reception of information by satellite is available to anyone, without the requirement for a license or permission for use of radio frequency. The necessary receiving equipment is available to anyone willing to invest in it. For the transmission of information (for example, the use of an Internet access service), it is necessary to have permission to use the frequency, which acts as a brake on the Page 69

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development of this market sector. Furthermore, satellite communications equipment is subject to certification, which takes around half a year to process by the authorities. This market is not considered promising for those providing services to the private or small business user, since data link bandwidth is limited and Internet Service Providers that use this method cannot compete in terms of price or speed. The narrowness of the market is explained by the fact that full uplink and downlink services via satellite communications are comparatively expensive for the end user, because users have the option of purchasing Internet access services at significantly lower prices from cable operators. For this reason, satellite communications services are generally 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 European Integration 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 8bits/s. Status of the National Regulatory Authority (NRA) The National Committee for Communications Regulation (NCCR) was set up in April 2005 as the independent national communications regulatory authority of Ukraine. As it is not possible under the Ukrainian legal system to have an executive body that operates completely outside Government, the NCCR functions under the authority of the President of Ukraine, thereby, in principle, ensuring its independence from Government. After some uncertainty regarding the sources of funding for the NCCR up until the end of 2005, a budget of 23.1 million UAH was allocated for regulatory activities for 2006, with a further 2.6 million UAH allocated specifically for the management of the reorganization of spectrum (see the section on spectrum below). As the NCCR 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 and standards in the sphere of telecommunications; develop and approve Regulations and other normative legal acts within the limits of its authority and oversee 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 local Governments;
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adopt decisions within the limits of its authority, which must be adhered to by providers/users of the telecommunications market; apply administrative penalties to providers/users of a telecommunications market in a manner described by legislation; submit materials to the Anti-Monopoly Committee of Ukraine in cases of violation of the legislation on the protection of competition; take legal action following complaints regarding violations of telecommunications legislation by business 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 Government and that of the NCCR. Again, it is difficult to tell at this early stage if there will be any practical issues regarding the division of labour between the Ministry and the NCCR, or the speed with which they will be addressed should they arise. The study team is not aware of any staff from the telecommunications incumbent being seconded to work for the NCCR, although (somewhat inevitably and not necessarily causing a problem for the independence of the commission) there are former incumbent staff working at the top levels of the NCCR. Until the NCCR has been in operation for more time and has dealt with significant consultations or disputes, 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 operators providing services to approximately 12 percent of Ukrainian households. Only 10 percent of these have access to broadband services and only half of these actually avail of it. Annual growth is, according to this data, only 3 percent. However, against this lackluster background, cable provider Volia is already offering advanced triple play 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 cable operators, there are cable networks available in most large cities in Ukraine. The Kyiv operator Volia, which has 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 operators increased by 5.6 percent from 42.099 million UAH (6.8 million Euro) to 44.448 million UAH (7.2 million Euro) in 2005. Cable Regulation Despite the extensive powers of the NCCR, the regulation of cable communications has not been put squarely and unequivocally into its remit. Ukraine has an extensive cable television network (when compared with other CIS countries). However, the further development of cable television has been hampered by a lack of relevant legislation, meaning licensing and overall management of the industry is very complex. Based on current legislation, the Ukrainian cable television industry is administered by several government entities. The division of authority and responsibilities is a nebulous issue not only for foreign investors but also for industry specialists. 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 for Communications); 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 are currently licensed by the National Council for Television and Radio Broadcasting, although the latest legislation delegates this authority to the NCCR. However, because the NCCR has not yet taken over all of its responsibilities, its functions are supposed to be performed by the Department for Communications of the Ministry of Transportation. Numerous court hearings, decisions and counter decisions do not make the situation better. Moreover, the Antimonopoly Committee of Ukraine views cable television operators as natural monopolists, and delegates regulatory authority over their industry tariffs to local administrations. Average monthly 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 pay television companies for the programmes they distribute. Operators can also offer individual packages that could include more channels or other value-added services (Internet, security, etc.). In these cases the fee is not limited. Licensing and Authorization The procedure for the licensing of telecommunications services is regulated by the 2003 Law On Telecommunications, 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 and television and radio broadcasting, must be licensed. Under the Law On Telecommunications, the basic principles for the licensing of telecommunications service provision are as follows: creating open market conditions; 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 the terms 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 size of the region in question. Prices range from 170,000 UAH (27,500 Euro) for the cheapest region in the 300-470 MHz band to 340,000 UAH (55,171 Euro) for Kyiv in the 1.7-2.2GHz band. On 16 May 2001 the Ukrainian Government 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 the NCCR and cannot be less than five years. For each type of telecommunications service, the NCCR is obliged to issue special instructions on the technical and bureaucratic parameters the enterprise should respect and what documents would be needed to confirm that the parameters have been met. The CDMA operators have asked the NCCR to issue them with a license for national roaming. Victor Frolov, the director of the executive committee of the CDMA Association of Ukraine, says that CDMA is available in 11 regions of Ukraine and the operators are ready to work together. When compared with the previous situation, the 2003 legislation on licensing 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. This replaces 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 Golden Telecom will not be able to operate in the Kharkov, Lvov and Dnipropetrovsk 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 telecoms sectors are divided by the Law on Communications into operators and providers. Under Article 1 of the Law, providers do not have the right to maintain or operate networks. Operators are divided into mobile operators, fixed operators and fixed wireless operators. Mobile operators need to obtain a license for the activity of provision of phone services and for the frequencies they use, fixed operators must have a license for local, national and international services and fixed wireless providers need the same licenses as fixed operators as well as a frequency license. The legal status of VoIP providers has so far been neglected. Within the context of the current definitions, they could be judged to be operators and therefore be liable to the same licensing procedures as the categories of operators listed above. This obviously creates a degree of uncertainty in the market. 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. The overall management of spectrum in Ukraine is in a state of flux, however. In due course, a body called the State Telecommunications Inspection (STI) will be established, under the supervision of the NCCR, to oversee Page 73

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spectrum management. Until this happens, the State Centre for Radio Frequencies will continue in its present role. Radio spectrum is managed in line with the Radio Regulation annexes to the Convention of the International Telecommunication Union, which was ratified by the Ukrainian Parliament in 1994, as well as through some national regulations such as the Radio Frequency Resource Act of 2000. Frequencies are licensed in compliance with the 7 February 2001 Cabinet of Ministers resolution number 112 on the Procedure for Issuing Licenses for the Use of Frequency Resources in Ukraine. According to Article 20 of the 2004 Law On Radio Frequency Resources of Ukraine, the National Frequency Distribution Table (NFDT) governs the distribution 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, the Cabinet of Ministers approved the decision for the usage of 76 percent of previously military radio spectrum for the provision of 3G services by civil operators. Additional 3G licenses will be sold by the NCCR to private operators on a competitive basis, although these may not be issued for some time. Currently there are commercial Wi-Fi networks that provide services to the public. Technologies using standards IEEE 802.11a and IEEE802.11b are being used in Ukraine, according to the licenses issued by the State Communications Committee of Ukraine, and permissions are granted by the "Ukrchastotnagliad" (Ukrainian Frequencies Supervisory Body). Equipment needs to be certified in compliance with Ukrainian legislation. Each piece of equipment is subject to technical evaluation, in accordance with the 5 October 2000 Order 154 of the State Communications Committee. Ukraine is not planning allow use low-power devices for Wi-Fi technologies without licenses and corresponding permits. Ukraine has not allocated and is not planning to allocate radio frequencies for the unlicensed use of Wi-Fi or similar technologies. Today Wi-Fi networks, operating in the 2400-2483,5 MHz frequency, are used in Ukraine to 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 34003700 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 connection at 1-2 USD per hour. Some hotels offer Internet connection in the rooms, delivered to the room via Ethernet network usually. It is recommended to keep a twisted-pair Ethernet cable with RJ-45 connectors with you if you 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, Internet access is barely possible if using an old-fashion analogous phone line. Computer penetration is limited by the low average wage, since a computer costing 420 Euro would cost approximately 19 percent of an average annual 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 progress on practical implementation has been made. However, the development of e-government is part of the EUUkraine Action Plan, along with other information society initiatives, such as e-health and e-education. The ITU also supports the development of e-health in Ukraine, as part of its wider efforts on this issue. Ukraines score 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). In 2006, Ukraine improved slightly, up to 3.62, while dropping a further four places, down to 61st (from 57th in Page 75

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2005 and 2004). The IT outsourcing market accounts for USD 544 million. There are 800 IT outsourcing companies employing 14,000 IT specialists. Since 2000, the Ukraine has become an attractive outsourcing destination in Eastern Europe providing software development services to clients in the US and Western Europe. Ukraine is also an attractive location for offshore/near-shore companies, home to many subsidiaries of international companies like IBM Ukraine, Comarch, Microsoft, SAP, Aricent, ISM eCompany, Magento and Ciklum. Ukraine has several home-grown ICT companies. Whereas initial outsourcing investment focused on Kyiv (40 percent of FDI projects) companies_ are now focusing on second tier cities such as Lviv and Kharkiv as potential investment destinations. The Ukrainian Hi-Tech Initiative and IT Ukraine are the associations representing the IT-BPO industry in the country. The proposed National e-Ukraine Programme went through its first reading in Parliament in February 2006. The previous draft Law on the Enforcement of the National eUkraine Programme for 2006-2015, developed by the Government of Mr Yanukovich, failed to receive the necessary majority in Parliament at the hearings held on 15 December 2004, possibly due to the political upheaval taking place at the time. While little concrete progress on implementing the Programme has been made 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 and Communications 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 Electronic Communications, the Establishment of the Commission for Telecommunications Regulation and the Adoption of the e-Ukraine Programme; The Cabinet of Ministers Decision of May 2005 on the Fulfillment of the EU Ukraine Action Plan in the Information 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 Information Technologies; 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 the National Programme on ICT in Education and Science 2006-2010. The total budget for this programme is 1855 million UAH (30 million Euro). The new plan for 20062015 covers the development of the network, development of human potential and the propagation of information technology. Key priorities of the new plan include the introduction of the most up-to-date technologies into all aspects of life in Ukraine, improvement of computer literacy levels and the creation of a communications infrastructure to integrate the country more effectively into global networks. The National Informatization Program, agreed each year since 1998, serves more as a short-term planning exercise than a national development plan. Page 76

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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. The reason 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 in Ukraine 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.nets 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 Googles 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 01.10.2008 31.12.2008 01.01.2009 31.03.2009 01.04.2009 31.06.2009
Source: National Bank of Ukraine (NBU) Figure 70 Number of Credit cards.
1 transaction at least 38.5 Million 30.6 Million 29.6 Million
Active, not expired 45.3 Million 44 Million 44.3 Million
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 the Web 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 million units. (30% increase compared to 2008) The number of active mobile users in Ukraine is 30 million. 97% of individuals between the ages of 1655 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) Total earnings are 999.7 million UAH (80% increase compared to 2008) Mobile operators have begun to make investment as Internet Providers after September. Government opens 3G tender (15-year license, renewal) for 400 million UAH in order to give support. In addition, it gives 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. Ukraines telecoms infrastructure remains underdeveloped, as a result of slow privatization progress and insufficient investment. The governments slow progress in privatizing Ukrtelecom, the state-owned former monopoly that still 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 low number of fixed lines continues to hold back growth in the market for Internet services. High call charges and low levels of ownership of PCs have also hampered expansion. Only 30% of Ukraines fixed networks are
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digital, and fixed-line penetration remain slow, thus limiting the access to Internet or broadband services via xDSL.
Figure 72 Ukraine Subscriber Numbers for fixed, mobile and Internet services
According to Telas, the Ukrainian Network Operator Association, out of 48 million Ukrainians only approximately 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 the Internet users are in the city of Kiev. The cheapest Internet package is 70 Hryvna per month(approximately US$14) for a 128 kbps access line with a 500 MByte data limit. There are 11M fixed line telephone and 2.7M Cable 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 few have 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 2 or 3 telephone lines. Internet access is only available in smaller rural cities, mostly based on dialup connections. In smaller rural cities, people still have no broadband access and dont know what it is. In villages Internet access could be made available in schools and clubs (based on private initiatives). However, there are no teachers or trainers in rural areas who are knowledgeable in computers. Most people may have seen a computer only once or twice in their life and are far from adopting it. There are no initiatives for establishing PIAPs (Public Internet Access Points). However, Ukrtelecom has been connecting 500 rural centers (85% of total) with fiberoptic links. These rural centers are therefore easily upgradeable to provide broadband, as only the last mile is still missing. According to Telas, the association of Ukrainian operators, the main issues regarding 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 be shared 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 agenda in 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 governments are not very likely since the use of ICT and computers in rural governmental organizations is limited. Even though 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 of Transport 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 counsels will set priorities on how and where to spend budgets, central government approves. The total budget to be spent in 27 decentralized regions is 1 billion Hryvna (US$200 million). In 2007, there will be a budget of an extra 100 million Hryvna (US$20 million) to be spent on depressed regions. Local government budgets are composed of: a. income taxes from natural persons, collected locally: plus b. 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 National Program for Information (NPI). According to this Ministry, the main challenge of Rural ICT is to address overall spending power in rural areas, before initiating broadband access. Ukrtelecom was set up in Soviet times, destined to provide rural telephony. In Western Europe, the incumbents were privatized after completion of national telephony rollout. In Ukraine rural rollout has not yet been completed. The Ministry therefore keeps questioning if it is wise to privatize Ukrtelecom now. The Ministry co-operates closely with Ericsson in a pilot project in the city of Sumy (600,000 inhabitants) called city of the future. Aim of this pilot project, also called Electronic Government is to show the benefits of broadband to local government bodies. They apply Wimax 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 a number 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 the Republic of Armenia, the Republic of Kazakhstan, the Kyrgyz Republic, the Russian Federation and the Republic of Tajikistan, Ukraine contributed a joint proposal containing the following items: A Access to information and ICTs 1 All persons must have equal opportunities to have access to information, worldwide information resources and 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 one should be deprived of its benefits and services. 2 The right conditions must be created to ensure universal and affordable access to ICTs and development of ICT applications and services, particularly in urban, rural and remote areas; this being one of the biggest challenges in bridging the digital divide. Particular importance must be attached to satisfying the basic needs of developing countries and countries with economies in transition. B Social applications of ICTs 1 At the heart of the concept of the information society is the human being, with the full range of his or her interests and needs. ICTs must become a significant factor in efforts to improve the quality of life of all citizens around 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 creation of new employment opportunities, primarily through improved access to education and training while fully respecting cultural and linguistic diversity. C Security and ICTs 1 It is necessary to deal with the potential for abuse of ICTs for purposes that are inconsistent with the objectives of maintaining international stability and security and may adversely affect the integrity of the infrastructure within States, to the detriment of their security in both civil and military fields. It is also necessary to prevent the use of information resources and technologies for criminal or terrorist purposes. This proposal for the Draft Declaration clearly indicates that Ukraine sees the importance of ICT access for all persons, 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 for telecommunications in Ukraine. The Frontier report examines the current situation in Ukraine against best practice principles. In this section we briefly highlight some main findings, which are relevant in the context of Rural 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 dismissal Simplification 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, the Ukraine has a rather complex system with no clear separation between policy, regulation and operations. The independence of the regulator can only be guaranteed by ensuring sufficient and independent sources of financing, which could e.g. come from industry fees. Currently, the financing of the regulator is insufficient and 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 clear rules on appointment and dismissal, which minimize political interference. According to the Frontier Economics 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 of commissioners.
Regulatory framework The four best practice principles regarding the regulatory framework are: Regulation should be justified and limited to the necessary minimum Page 86

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Technology neutrality Transparency and public consultation Dispute resolution In the area of regulatory framework, the situation in Ukraine is non-optimal. Regulation is mainly based on an ad-hoc basis, rather than based on clearly described processes for the assessment of markets and the design of regulatory remedies. While the principle of technology neutrality is contained in the legislations, service definitions and USO regulations do not fully promote this principle. Also the processes of public consultation and dispute resolution are not fully implemented in Ukraine. The importance of having functioning regulatory institutions and well-defined frameworks in place is underlined by pre-conditions of international support programs. Findings from NCCR Fact Finding Mission Many issues described in the previous section have been confirmed during a fact finding mission to the NCCR. In addition, 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 proposes to add a 2% USF contribution to all end user telecommunications revenues. During the fact finding mission we have 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 staff and housing 2) The Regulator would like to arrange for common access to telecoms services for all Ukrainians without exceptions. Currently, the regulator does not have the authority and tools to make this happen 3) Main problem for rural services: The Ukrainian market was liberalized before the infrastructure was fully developed. There are two powerful mobile players now operating without any obligations. Ukrtelecom has been 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 and be modernized and restructured. They cannot deliver upon the USO. The regulator is strongly supporting privatization 5) With the absence of Local Loop Unbundling, Ukrtelecom might exploit their current monopoly position in providing DSL access services.
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6) The Regulator and Ministry of Transport and Communications are discussing who should manage the Universal Service Fund. As an external option to support Ukraine in overcoming these regulatory issues, the EU might be interested in supporting the setup of proper regulatory functions. Also, twinning with a recently joined EU member might be helpful. International Support for ICT Initiatives EU Initiatives The EU and Ukraine have elaborated the eUkraine Action Plan. This action plan deals mainly with improvements in the information sector. No actions have been taken yet, mainly because of the present political situation in Ukraine. Under the new European Neighborhood Program (ENP) Sector Wide Assistance Programs (SWAPs) 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 precondition for approving the SWAP-IS and implementing actions, that the regulator will function properly. This means that laws on licensing and free market rules will have to be adopted by the Ukrainian government. Also a well functioning monitoring system has to be in place. For the EU the development of the IS in rural areas is a very interesting and serious subject. Estonia may serve as a good example. Counterparts for the EU are the Ministry of Transport, Ministry of Education, the Regulator, as well as third sector members (Telas, the Association of Ukrainian Telecommunications Operators). Disbursement of the ENP budget will not be implemented before 2008. According to EU estimates, there can be a budget (depending on co-financing by Ukraine) of 100-300 mln. Euro for the 2007-2013 period. Under the SWAP-regime it is possible to make combinations, 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 of Eastern Europe and Central Asia (Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine and Uzbekistan), and mainly aims at enhancing the transition process 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 a complex and evolving relationship with each of the 12 countries concerned. politicians and officials from the partner countries and the EU meet now on a regular basis. Tacis more and more becomes a strategic instrument in 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 development iii) 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, efficient border management and people-to-people contacts. However, no specific attention has been paid to ICT Development in Ukraine. Page 89

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European Neighborhood Policy (ENP) In the context of the European Neighborhood Policy (ENP), assistance will be provided under the new European Neighborhood and Partnership Instrument (ENPI) starting from 2007. ENPI will replace the current Tacis program as well as a number of thematic activities. Ongoing Tacis projects will of course continue to run until their planned dates of completion. Under ENPI assistance will not be limited to Technical Assistance but cover a wider range of instruments and delivery mechanisms including Twinning and TAIEX: Twinning: through twinning the European Commission is encouraging partnerships between the administrations of Member States and candidate countries to enable the latter to adopt the acquis communautaire. TAIEX (Technical Assistance Information Exchange Office) has been designed to provide five main services: 1. documentation, information and advice on Single Market Legislation 2. workshops and seminars 3. study visits to the European Commission and Member States 4. expertise to provide the beneficiary countries 5. 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 a historical shift for the Union and Ukraine in political, geographic and economic terms. The EU and Ukraine now 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 an increasingly close relationship, going beyond co-operation, to gradual economic integration and a deepening of political cooperation. The European Union and Ukraine are determined to enhance their relations and to promote stability, security and well-being. The approach is founded on shared values, joint ownership and differentiation. It will contribute to the further stepping up of our strategic partnership. The European Union and Ukraine are determined to work together, through the implementation of this European Neighborhood Action Plan, to help ensure that no new dividing lines are drawn in Europe. The action plan contain one specific 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 on telecommunications. Ensure fair competition in the electronic communications markets. Accelerate progress in the development of Information Society services and in the integration of Ukraine into the IST research program Adopt the State Program e-Ukraine for the development of the Information Society and explore possible support by the EU for its implementation Promote the widespread use of the new technologies by business and administration, in particular in the health 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 the mutual 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 on the 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 as well as transport, telecommunications and energy infrastructure, with priority given to the Trans-European network (TEN) axes having a cross-border aspect with the EU. Furthermore, the GAERC conclusions of 21 February 2005 on Ukraine indicated that, in the framework of the implementation of EU-Ukraine ENP Action Plan, 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 economic conditionality provided for by the mandate. The EIB and Ukraine signed a framework agreement on 14 June 2005; 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 Communications Technologies for Ukraines Prosperity. This is already closed. The main focus has been on brining ICT to schools 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 and implementation State monopolies in ICT and communications sector privatized and restructured successfully in accordance with best international practice and standards National e-readiness assessment carried out (on connectivity, policy frameworks, and human and institutional 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, will have increased by 50% Ukrainian educational sector actively uses ICT in its work, with an estimated number of distance learning programs available on-line being created Increase number of medical services (consultations) from the special centers available on-line Means 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 related Ukrainian institutions in making informed policy choices that stimulate entrepreneurship, boost human development, strengthen democratic governance, and broaden digital opportunities Enhancing and developing access to the Internet to link all areas of Ukraine through distance learning for educational purposes, rural network access for disadvantaged communities, and development of a Civic Internet Portal for civil society Developing, distributing, and exchanging knowledge through ICT technology, with the development of a University Innovation Center to provide business incubator-like facilities within higher learning institutions, a Model UN scheme for dialogue on ICT among the youth of Ukraine, an Early Warning Network for unify academic and research groups Enhancing social and economic opportunities for improved wellbeing, with the development of an online Tele-medicine system for medical information exchange purposes, and an ICT Business Incubator and Innovation Net to promote entrepreneurship and business development. The main partners in this initiative have been Ukrtelecom, Kyiv City Administration, National Academy of Science of Ukraine , Kyiv National Taras Shevchenko University and the International Renaissance Foundation Budget: 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 of Education and Science of Ukraine, Ukrainian Association of Computer Clubs ICTD Activities focused on: E-policy development: National Round Tables process, E-Readiness Assessment, Green Paper: ICT in education, 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 ICT infrastructure, Network of public Internet access points, 'GEANT' connection and Ukrainian National Research and Education Network E-services support within the framework of strategic public-private partnership and sustainable businessdriven environment: National Distance Learning Platform, Civic Internet Portal, National Electronic Network of 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 the basis 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 Page 92

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further replication; enhance increased capacity and awareness in ICT sector among the rural and low-income urban 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 program in the sphere of ICTD on the basis of the results of the E-Readiness Assessment of Ukraine; adjust eUkraine with the government strategy on the Millennium Development Goals approved by Ukraine at the UN Millennium Summit to be achieved by 2015; to present to the wide public the draft of this program and 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 effective mechanisms to be used by civil society; strengthen civil society for enhancing public involvement into the decision-making and policy process (Tentative Budget: US$ 1,000,000) Privatization and restructuring of the biggest national telecommunication operator JSC Ukrtelecom: provide the Government of Ukraine with the relevant expertise and support the government in a national strategy and action plan elaborating of the demonopolization of state telecommunications monopoly; enhance the modifications 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 Ukraine by developing high-quality distance learning programs in computer science. This will be achieved by transferring to Ukraine the Japanese IT technology, and innovative expertise and successful experience acquired by the Polish-Japanese Institute of Information Technology (PJIIT). Because of the distance-based character, studies over the Internet will make it possible to develop joint high-quality study programs in computer science with universities from Japan, Ukraine and Poland. PJIIT has both the resources, in the form of its didactic and research staff, and necessary experience in running similar projects, to provide education to Ukraine in computer science. Duration: 2004-2007 US AID, Agricultural Marketing Program (agricultural marketing information web-site) The AMP (Agricultural Marketing Program) is still ongoing. Its mechanism is pretty simple: A farmer calls a regional project operator 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 farmers contact information. Processors and wholesalers review the information online and get in touch with farmers. After the price and product quality issues are agreed upon, the contract is signed. In the first weeks after its launch, the website only had about 10 visitors per day. In six months, it has become the number one food and agricultural information source in Ukraine, 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, exclusive information 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 in regional economic development (jobs, income, labor force etc.) and still in transition, one should keep a couple of things in mind: Connecting the whole country including small villages in remote areas to the Internet could take a long time taking into account that budgets are often limited. In Part III of this report, we show, how a cost-effective technology could be used to accelerate the roll-out of ICT services and what levels of investments would be required. 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 of Transport/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: a concentrated effort will produce faster and better results for less money per ministry. Regional authorities should be involved for their own regions. It is also recommended to involve international organizations and institutions (EU, World Bank, other financing sources), as there are also possibilities to gain economies of scale. The strategic action plan should also contain the phasing of the roll-out. Given the size of Ukraine and the dispersed location of the villages this roll-out should start from the already connected regional centers and spread out like waves into the region. This however should be decided region by region, based on specific regional characteristics. In order to build up experience it is recommended to start with one or two pilot regions. Part III provides a high-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 most efficient 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. Page 94

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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 on the Electronic Document (both from 2003). However, up until mid-2005, these laws proved generally ineffective due, inter alia, to the fact that the certification of e-signature verification centers, which is required by these laws, was so complex that it was impossible for businesses to be accredited. In addition, the certification of such centers was delegated to the Security Service of Ukraine (SBU). On 1 July 2005, the central National Electronic Digital Signature certification body was established. Ukraine is the first among the countries of the CIS to introduce a central certification body. This carries out accreditation of key certification centers. Commercial and State certification centers can now provide electronic digital signature services for citizens, the state, private establishments and enterprises. Within the first six months of the new body coming into operation, ten centers had applied to be accredited, with the Ukrainian National Information Centre being the first body to be officially accredited. It is hoped that electronic digital signatures will allow citizens to save time when dealing with state authorities, and allow the state authorities to provide services more efficiently. Esignatures from government bodies are offered as an option for signing official documents: citizens can choose whether to receive a digital signature with the help of the Internet or to use traditional signatures. The roll-out of 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 payment systems. However, the population does show signs of moving away from a cash-dominated society. At the beginning of 2006, the number of credit cards issued totaled 12,196,527 Mastercard credit cards and 18,243,259 Visa credit cards.78 The annual turnover on Visa cards was $10,8 bn (8.9 bn Euro), twice as much as in 2005. Maestro card payments in Ukraine also show significant growth. The number of Maestro cards in circulation reached 8.15 million at the end of June 2005, representing a 53.2 percent growth over 2004. Debit cards using the Maestro payment system are now accepted in over 40 thousand shops. Despite this recent growth in electronic payment systems in Ukraine, innovative online payment systems, such as those which have been developed in Armenia, have not yet been developed or adopted in Ukraine. Nevertheless, according to the Cabinet of Ministers Report on the implementation of the National Programme for Informatisation, 18 million dollars (14.9 million Euro) worth of goods were sold via the Internet in Ukraine in 2004. The purchase of 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-up access and limited PC ownership. The Economist Intelligence Unit has suggested that, while Internet usage is normally assessed at about 8% in Ukraine, the most recent research available suggests that this figure may be significantly higher. Internetworldstats.com puts the figure at 11.4%. Official statistics for August 2006 put the number of Ukrainians who accessed the Internet in the course of the previous month at 10.9%. The most used search engines are google.com (37,85 percent) and yandex.ru (32,0 percent). According to Bigmir.net research in 2006, half of Ukrainian Internet users from Kyiv, with inhabitants of the other main cities counting for over Page 95

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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 Ukrainian Internet usage (not including Kyiv). Users in the remaining regions of Ukraine equal 14.21 percent of Internet visitors. The region with the lowest level of Internet use, at 0.21 percent, is the Rivnenskaya region. Users in Kyiv also generate a significantly higher amount of traffic in terms of page views. Most of the top 10 websites in Ukraine are search engines (Google, Yandex and Meta being the top three, the rest being traffic measurement sites). Top searches are focussed on academic and leisure activities. The number of hosts in Ukraine is now more than 94,000. Regarding Internet usage, according to research conducted by Volia cable company, most Ukrainians use the Internet for business purposes. Volias research showed that: 87.6 percent of respondents consider Internet usage for business purposes as justified from a commercial point of view; 48.9 percent of enterprises have already been connected to the Internet for one or two years, 34.6 percent 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 alwayson 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 March 2005, there were only 10,000 DSL lines in Ukraine. At that time, DSLAMs had been installed in 450 locations in Ukraine, and work was underway with Cisco to provide capacity to permit a 1000 percent increase in DSL subscribers 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 grants of 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 have joined forces with local organizations to develop training and support for the creation of PIAPs in Ukrainian schools, the intention being to boost both IT in education and improve the level of Internet access in schools. Pilot projects have also been launched in an effort to improve universal service provision in remote areas. There are over 3,000 computer clubs and cafes in Ukraine (equating to one for every 16,000 people in Ukraine)
Wireless Internet Access Wireless Internet access is developing slowly in Ukraine, partly due to the fact that Wi-Fi is licensed spectrum. Ukrtelecom is planning to 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 range of high-speed wireless broadband access services. A Wireless Internet Association was established in order to deal with a wide variety of perceived problems with launching wireless services in Ukraine including conflict resolution, legal framework, illegal content, and harmonization of standards and norms. According to feedback from the Ukrainian Mission to the EU, the Ukrainian Government is keen to support the roll-out of WiMAX services, 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 resources for Wi-Fi, WiMAX, 3G and other relevant technologies. Services are being launched by a joint venture of Networks by Wireless (UK) and PAN Telecom (Ukraine)/PAN Wireless. On 9 October 2006, Kyivstar began offering Wi-Fi services to its customers via smartphone, laptop or pocket PC. UMC has also shown interest in providing Wi-Fi services. The maximum data transfer rate is 54 kb/sec. The consumer sends a premium rate SMS, either for a sample access, allowing just one Mb of download capacity, or full access, which is sold in increments 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 in Ukraine 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-Fi providers. Some analysts argue that these laws emanate from Ukrtelecom lobbying to curb or eliminate competition in the ISP and voice telephony markets. Wireless local loop (WLL) operator Telesystems of Ukraine is planning to invest around 180 US$ million (149 million Euro) to roll out CDMA2000 1xEV-DO technology in the next three years. Telesystems already offers WLL connections using EV-DO on a trial basis in Kiev, following a rollout in partnership with Chinese equipment provider Huawei Technologies. It has signed contracts with LG, Pantech, ZTE for the construction of a nationwide network, with the aim of launching 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 by thirty operators. Technological Systems (a subsidiary of Comstar United) has received a licence for the provision of WiMAX-based services in the 5.4 5.7 GHz range through a regional tender. It is believed that this licence cost $0.8m (0.66 million Euro). Ukrtelecom has chosen Nokia to provide network equipment for its planned 3G service. Nokia will also provide equipment for Utels W-CDMA network, which will initially be launched in Kiev. AVAILABILITY OF ONLINE SERVICES The EU-Ukraine Action Plan for 2005 foresees the widespread use of electronic communications services by business and administration, in particular in the health and education sectors (e-Commerce, e-Government, eHealth, e-Learning), via the provision of advanced infrastructures, the development of local content and the introduction of pilot projects initiatives. Ukraine ranked second highest among the four countries in this study included in The Economist E-readiness rankings 2005, with a total score of 3.51, scoring best in business environment and worst in consumer and business adoption. In 2006, Ukraine improved its score and achieved 3.62 points, albeit while dropping from 57th to 61 st overall in the table of 68 countries.
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E-Commerce is developing very slowly in Ukraine. The low level of Internet penetration in the country is a key problem, with the most optimistic estimates suggesting that there are 6.5 million Internet users,115 which equals approximately 13 percent of the population. Finally, the legal framework for e-commerce is also still lacking, although improvements are being made. The leading Ukrainian online retailer city.com.ua receives approximately 8,000 hits daily. Domain name registrations Apart from the 47 geographical (such as kiev.ua) domains, there are seven generic suffixes for organizations registered in the .ua domain, according to their type: com.ua - commercial organizations; gov.ua-government agencies; net.ua - suppliers of network services; edu.ua educational organizations; org.ua - other organizations (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 increase in the number of domains registered under .ua. For example, under .com.ua, the total number of domains increased from 31,153 in 2004 to 42,489 in 2005 and reached 54,187 by September 2006. The overall number of domains under .ua increased from 133,907 in 2004 to 169,644 in 2005 and had already reached 211,478 by September 2006 E-Government One of the key aims of the National Informatisation Programme, which is prepared by the Ministry of Transport and Communications each year, is to develop the use of ICT in central governmental bodies. Overall coordination is exercised by the Ministry of Transport and Communications. The Cabinet of Ministers Resolution of 24 February 2003 (N208) on the Development of Electronic Government and the Order of the State Telecommunications Committee of Ukraine of 15 August 2003 govern the development of access to egovernment services by citizens and businesses. The list of e-Government legislation passed in Ukraine, albeit all under previous regimes, is very long. The Government portal lists a total of over forty different acts passed in the course of the past seven years, half of which were passed in 2003 and 2004. Since 1998, the Ukrainian Government has produced a number of legal documents requiring state bodies to publish information about their activity on the Internet. There is a functioning Government portal, which is a gateway to the existing sites of state departments, but much work still needs to be done. For example, only 12 percent of city authorities have websites. Legally, all state departments are supposed to have websites on the Internet. These websites are not currently interactive, focusing instead on information provision about the department, its leaders and operational procedures. With recent developments in the use of electronic signatures in Ukraine, possibilities are increasing for more user-friendly interaction with government services. For the moment, however, most government websites are one way, with functionality improving. An example of the planned improvements is that the Ukrainian tax authorities are planning a new improved web based service. The tax administration of Ukraine is undertaking a pilot project which allows company tax account reports to be accepted in electronic format. These reports are provided on floppy diskettes, as there is still no online submission. One basic problem is that in Ukraine there has been little or no practical implementation of the Law on Electronic Digital Signatures, which makes the introduction of online e-government services more difficult. This situation is currently undergoing change (see above on digital signatures). The government of Ukraine does not have nationwide programs governing the use of software in public administration, including regarding the use of open source software. Microsoft has signed an agreement with the government of Ukraine, under which it will Page 98

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provide software to government institutions at one-third of the market price. The agreement reflects a longterm 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 the Donetsk Institute of Traumatology and Orthopedics lists fourteen telemedicine centers, twenty-three institutions which carry out teleconsultations, and five online pharmacies. The Department of Informatics and Telemedicine of Donetsk has also developed a distance-learning tool. The Centre for Telemedicine of Ukraine has provided half of the best practice models listed on the website of the International Society for Telemedicine and e-Health. E-Learning E-learning is somewhat limited in Ukraine, although this is one of the items that are being addressed by the EU-Ukraine Action plan, and EU funding is already being used to establish some resources. For example, an Electronic Media Resource Centre is being established with the help of the EU Tempus programme. The only Ukrainian member of the European Distance and E-Learning Network is the Inter-regional Academy of Personnel Management. Approximately 52 percent of secondary schools have computer equipment, while only 14 percent of them have Internet access. There are wide regional variations regarding access to IT in schools Statistics from official sources indicate that there are 30 million mobile users, which indicates an average penetration rate of approximately 64 percent. Internet Access Networks As mentioned above, Ukraines 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 Kazakhstan and Azerbaijan. Bytemobile, Inc., a global provider IP service provider for mobile networks, is working with Astelit to develop its EDGE+ and GPRS+ services. This will provide accelerated Internet access, which Astelit hopes will provide it with the fastest available Internet access without using 3G technology. Opportunities for ADSL have been very limited to date and, to the extent that they are available, this is usually through the incumbent. In 2005, Cisco and Ukrtelecom announced a major programme of upgrading IP links between the capital and regional centres as well as of further extending the upgrading of Ukrtelecoms capacity to provide ADSL. 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 one WiMAX provider on the market Ukrainian High Technologies providing services in Kyiv and Kharkiv. The company 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 will push 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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Main broadband internet providers, ths 1Q2011 - 3Q2011 Number of the subscribers (broadband internet), ths Company/Network 1Q2011 2Q2011 3Q2011 1 Ukrtelecom 1 189 1 215 1 260 2 Volya 440 442 465 3 KyivStar 248,5 306 344 4 Triolan 160 180 205 5 Vega 131 135 136 6 Datagroup 80,3 104,5 126,7 7 Tenet 70 75 80 8 Airbites 64,8 67,4 70 9 FREENET 60,9 64,3 68,5 10 Fregat 48 51,1 55,7 11 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 the most and the only booming market in the country. Internet service providers pop up every day in all cities, and the number of users grows manifold. Experts estimated Internet market in Ukraine in 1997 as USD 9 000 000 and forecast USD 20 000 000 for 1998. The year 1997 marked the point of Internet reaching traditionally conservative and huge state administration sector. That in turn catalyzed the process of connection for the state own sector of Ukrainian economy. The number of providers reached recently 200 but more than a half of them do not possess licenses and act as resellers. The expensive licenses fec - UAH 5,100 is one of the factors barring the development of the industry. The year 1998 marked the new quality level of "netization" reaching 100 000 users in Ukraine. At the same time the number of corporate users is still very low with 10 to 20% of companies 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 latest development of Internet commerce and advertising, web sites construction and security level as well as the introduction of new user-friendly interfaces of browsers software changed that ratio to the corporate favor.
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New Internet technological services as Internet phone, or Internet video conferences, introduced by several leaders including first of all Global Ukraine, resulted in extension of ISP into the traditional market of telephone and video companies, as well advertising agencies. Internet services are better widespread in the capital and several large industrial cities first of all because of the general financial situation in the country, and also because of the lack of the communication backbone connection all over the country, which is expected to be accomplished at the best by the end of this year. Nevertheless cities located along the communication routes have very high figures of the growth of Internet consumption. There are only two major Internet service providers 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 Western Europe;
These two companies control the major part of the whole Ukrainian Internet traffic. They both are situated in Kiyv but have a wide network of branches and reselling partners. Global Ukraine is still the first and the only company 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, Lviv and Zaporizhya where a competition makes those services cheaper and of better quality. The further investment into 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 speeds of 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 Ukraines information technology market is valued at between 800 million US$ (660 million Euro) to $1 billion US$ (826.5 million Euro).There is a perceptible, ongoing increase in demand for the production of IT products for export. Exported Ukrainian IT services totaled 70 million US$ (57.85 million Euro) in 2003 and 100 US$ (82.64 million Euro) in 2004. By the end of 2005, this figure was estimated to have reached 150 million 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 of Ukraine has also conducted an analysis of the operating systems used by almost 70,000 organizations in Ukraine. Their findings are as follows: 71.9 percent use Microsoft Windows; 20.7 percent use DOS; 5.9 percent use Linux; 1 percent use Unix/Fix; 0.1 percent use Os/2; 0.1 percent use OC EC/CBM EC; and the remaining 0.4 percent use other operating systems. Ukraine is slowly emerging as a low cost hub for high quality software development. The producers work mostly alone or in small groups on outsourced projects ordered from abroad. These activities are usually not reflected in official statistics. There is growing interest among Ukrainian computer companies to establish software production centres that could participate in international software development projects. Financial Development of the ICT Sector Communications Investment in fixed capital in the communications sector continues to grow. The Ukrainian State Statistics Committee reports a growth of 19.8 percent in fixed capital investment between the first nine months of 2005 and 2006. Incomes from mobile services in the first ten months of 2006 were 49.5% up on the same period in the 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 and international telephony. Revenue from the telecommunications market from January September of 2006 can be broken down as follows: 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 an estimated total turnover of 450 million US$ (372 million Euro) in computer hardware sales and 125 million US$ (103 million Euro) in ICT services, the information technology industry is comparatively small. The industry provides ICT products and services through several distinct economic activities, including consulting services, software development, data processing, database development, technical support and repair, and other computer-related services. The most common IT activities include: enterprise resource planning, customer relationship management software, specialized management and accounting software, antivirus software, ecommerce applications, and industry-specific solutions. According to the Ukrainian Association of Software Developers (UASWD), over 1,300 legal entities are engaged in activities connected with software development, 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 percentage of the industry, representing approximately 60 percent. Local registered firms make up about 30 percent of the market, and the remaining 10 percent comprises small, shadow market groups working primarily on small Page 103

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offshore orders for software development. The IT industry in Ukraine complains about a range of structural problems that prevents it from developing further. These include competitiveness problems cause by low-cost Russian imports, an alleged lack of government leadership to prioritize and support the sector, and inadequate infrastructure. The leaders of the programming languages remain the same. C#, Java, PHP. JavaScript are becoming 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 reach addressee in about 2 weeks. Therefore, it might be a good idea to use a courier delivery for faster and more effective services. The majority of International couriers have Ukrainian branches. The most popular here is DHL. When sending a parcel to Ukraine it is worthwhile considering that valuables, cassettes, floppies, compact disks, etc. are subject for Customs' clearance. Therefore, it is advisable to avoid sending the above objects. Customs clearance may cause lots of bureaucratic troubles and monetary expenses as a result of Custom's taxes. Food, plants and animals are prohibited content for mailings to Ukraine, unless the recipient has a special permission from state authorities. Having been a part of the Soviet Union, Ukraine had a unified mail system. Page 104

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UkrPoshta key data

Dispatched, mln. newspapers and magazines 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 9070,3 9330,8 8999,2 9342,1 9644,0 9935,8 10387,7 11454,9 11514,5 11693,5 11656,8 7626,6 3576,1 2551,2 1624,5 1594,9 1356,0 1270,4 1383,8 1370,3 1250,4 1276,7 1316,2 1278,5 1393,2 1453,5 1409,6 1257,6 1273,0 1203,9 1088,6 1005,75 letters 1769,2 1778,6 1781,4 1735,7 1698,6 1678,2 1573,4 1537,9 1538,6 1527,6 1472,5 1358,3 1061,1 856,8 702,3 608,8 448,7 359,2 326,0 286,9 299,0 315,3 326,0 317,1 346,5 380,9 389,8 380,4 390,8 301,1 311,1 320,0 telegrams 83,7 85,4 85,3 74,5 71,1 71,5 70,4 70,7 70,3 70,5 72,6 68,7 47,4 43,8 34,0 25,0 20,0 17,4 14,3 12,4 11,8 11,3 10,1 8,8 7,5 6,4 5,7 4,0 3,2 2,0 1,6 1,4 parcels 40,8 40,1 39,99 36,5 36,1 38,5 40,2 44,5 43,6 44,3 42,5 33,6 14,3 6,4 5,1 3,4 2,1 2,3 2,5 2,8 4,6 6,7 6,0 6,7 7,2 10,3 13,2 16,4 17,8 15,4 17,5 18,5 money remittances and pension payments 153,6 156,9 159,98 160,5 163,0 165,0 168,3 171,7 171,7 172,3 177,9 189,3 226,5 218,7 197,5 280,5 256,6 263,4 211,7 226,1 224,3 179,6 173,9 168,4 186,4 177,6 152,2 151,3 160,2 142,3 149,3 126,4 Long-distance telephone calls (including international), mln. 304,9 334,8 361,2 383,5 414,5 447,1 487,4 530,5 567,4 608,4 656,9 688,6 595,7 677,4 710,6 797,5 913,9 1080,6 1184,4 1214,1 1374,9 1632,0 1832,7 2276,0 3793,0 4503,0 3970,1 5138,6 8536,4 6379,8 5570,1 5520,6
Figure 79 UkrPoshta key data
Tariff indices for post and communication services for enterprises, institution, organizations in 2011 (to the corresponding month of the previous year,%)
January Total including post office services local telephone services long-distance and international telephone services mobile services 110,1 100,0 100,0 97,7 114,4 February 110,1 100,0 100,0 97,7 114,4 March April May June 100,3 100,0 110,0 97,7 100,0 July 100,3 100,0 110,0 97,7 100,0 August 100,3 100,0 110,0 97,7 100,0 September 100,5 100,0 113,3 97,7 100,0 October 101,3 106,3 113,3 100,0 100,0 November 101,3 106,3 113,3 100,0 100,0 Decembe r 101,3 106,3 113,3 100,0 100,0 110,1 110,1 110,7 100,0 100,0 100,0 100,0 100,0 110,0 97,7 97,7 97,7
114,4 114,4 114,4
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,%)
Januar y Total including post office services local telephone services longdistance and internation al telephone services mobile services January JanuaryJanuary January- January January January January January January January Septembe Novembe Februar -March -April -May -June -July -August December r October r y 110,1 110,1 110,1 110,1 110,2 108,4 107,2 106,3 105,6 105,1 104,8 104,5
100,0 100,0
100,0 100,0
100,0 100,0
100,0 100,0
100,0 102,0
100,0 103,3
100,0 104,3
100,0 105,0
100,0 105,9
100,6 106,7
101,1 107,3
101,6 107,8
97,7 114,4
97,7 114,4
97,7 114,4
97,7 114,4
97,7 114,4
97,7 111,7
97,7 109,9
97,7 108,5
97,7 107,5
97,9 106,7
98,1 106,1
98,3 105,5
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 (to December of the previous year)(percent)
Total including post office services local telephone services long-distance and international telephone services mobile services April May January February March June July August September October November December 100,0 100,0 100,0 100,0 100,6 100,6 100,6 100,6 100,8 101,3 101,3 101,3
100,0 100,0
100,0 100,0
100,0 100,0
100,0 100,0
100,0 110,0
100,0 110,0
100,0 110,0
100,0 110,0
100,0 113,3
106,3 113,3
106,3 113,3
106,3 113,3
100,0 100,0
100,0 100,0
100,0 100,0
100,0 100,0
100,0 100,0
100,0 100,0
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, 1998-2012 Date of the Last modifications: 10/01/112
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Revenues from services provided by post and communication, 2011

Revenues, total mln. UAH1 Post and communication services, total including post telegraph telephone urban telephone rural intercity telephone (including international) IP-telephony courier activity wire radio broadcasting special communication service TV and radio broadcasting, wireless radio of which cable TV satellite TV-radio broadcasting supervision and technical control of radio frequencies use computer of which Internet access mobile of which cellular trunk satellite wireless communication of distributing system (broadband access) digital wireless telephony including, for services provided to population % of 2010 total population
50280,7 3091,8 38,2 4179,3 315,0 3481,3 161,2 364,3 184,8 131,3 2092,9 1466,0 32,5 463,4 4749,3 4260,0 31027,9 31009,3 13,6 0,3 2,6 2,1
18449,1 594,1 9,7 2758,8 280,0 906,0 0,0 8,9 152,5 1436,9 1424,9 2,2 0,1 2646,2 2640,7 9655,9 9654,6 0,7 0,3 0,3
103,1 103,0 82,7 95,3 102,2 90,8 101,9 118,7 91,7 102,3 109,2 108,1 96,0 103,1 112,1 112,0 104,1 104,1 93,2 28,4 112,3
101,5 98,9 74,9 96,7 102,4 54,7 43,5 122,3 91,5 107,1 107,3 86,2 66,0 116,2 116,3 107,5 107,5 97,5 201,8
Figure 83 Revenues from services provided by post and communication, 2011

1
Including value added tax.
SSC of Ukraine, 1998-2012 Date of the Last modifications: 24/01/112
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Communication subscribers, 2011

(thsd.) As of April 1, 2011 total Mobile subscribers cellular trunking paging Altai star53142,3 53132,1 7,7 0,0 0,4 3458,4 3961,1 including home 29166,6 29163,7 1,2 0,2 3444,7 3267,2 As of July 1, 2011 total 53600,1 53589,7 7,9 0,026 0,4 3441,8 3570,3 including home 29110,7 29107,9 1,1 0,2 3426,5 2932,6 As of October 1, 2011 total 54862,1 54851,8 8,0 0,4 3465,6 3818,4 including home 30113,4 30110,8 1,0 0,2 3450,0 3146,2 As of January 1, 2012 total 55576,5 55566,9 7,9 0,4 3492,4 4178,0 including home 52852,4 52850,4 0,9 0,2 3481,5 3821,4
type
Cable TV subscribers Internet subscribers
Figure 84 Communication subscribers, 2011

Installation of telephones as of January 1, 2012
Communication network urban Main telephones, thousands of which: home Local monetary telephones, units Universal monetary telephones, units of which: those with credit cards 10563,6 8628,6 43 22067 21695 rural 1594,1 1457,0 638 629
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Figure 85 Ukraine Communication Sector - World Bank Report
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Transportation
Basic Facts Airports: 425 (2010) country comparison to the world: 19 Airports - with paved runways: total: 189 over 3,047 m: 12 2,438 to 3,047 m: 51 1,524 to 2,437 m: 24 914 to 1,523 m: 5 under 914 m: 97 (2010) Airports - with unpaved runways: total: 236 2,438 to 3,047 m: 3 1,524 to 2,437 m: 7 914 to 1,523 m: 12 under 914 m: 214 (2010) Heliports: 7 (2010) Pipelines: gas 36,493 km; oil 4,514 km; refined products 4,211 km (2010) Railways: total: 21,684 km country comparison to the world: 12 broad gauge: 21,684 km 1.524-m gauge (9,854 km electrified) (2010) Roadways: total: 169,496 km country comparison to the world: 30 paved: 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: 160 country comparison to the world: 40 by type: bulk carrier 4, cargo 123, chemical tanker 1, passenger 5, passenger/cargo 5, petroleum tanker 9, refrigerated cargo 11, specialized tanker 2 foreign-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 Page 110

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Grenadines 12, Sierra Leone 5, Slovakia 7, Tuvalu 1, Vanuatu 3, unknown 4) (2010) Overview
Ports and terminals: Feodosiya (Theodosia), Illichivsk, Mykolayiv, Odesa, Yuzhnyy
Mariupol',
With an underdeveloped transport and communication infrastructure, Ukraine has not managed to capitalize on its unique geographic location as a transit country between various importers and exporters. As such Ukraine continues to underutilize its transit potential. Despite the high degree of coverage, the quality of the transportation infrastructure235 and equipment is not in line with international standards. Since November 2009, a draft comprehensive transport sector development strategy up to 2020 is being developed. The draft strategy envisages that the Ministry will elaborate and submit to the Cabinet of Ministers shorter-term strategy implementation programs until 2015. A railway reform program for the period 2010-2015 was approved in December 2009 and provides for a separation of the government's regulatory function from the operational function of the national stateowned railway company. The Ministry of Transport and Communications is currently elaborating a national maritime safety concept, which should be approved in 2010. 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 2008 black list of the Paris Memorandum of Understanding on Port State Control. 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, the negotiations on which are ongoing. Transport sector development in Ukraine in the light of movement of goods and people is also closely linked with cross border and customs related issues as Ukraine is an important transit country connecting 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 an underdeveloped road infrastructure. All modes of transport are significantly below modern standards in terms of quality, safety, energy efficiency and environment. The whole sector is in a state of neglect due to the lack of investments in the last 20 years. In Soviet times public transport was the core of passenger transport. A long railway network and modern urban public transport systems, such as tram, trolleybus, bus and metro, were developed 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 to road transport. The state and capacity of the road network, especially in larger urban areas, has not been able to follow the increase in demand. The quality of public transport on the other hand has decreased. The amount of freight transport dropped significantly since 1990. Due to the state of the road network rail, pipelines account for most of the long distance freight transport. Road transport dominates short distance movements. The national, 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 transport network. The European football championship in 2012 induces investments and changes on a national and regional 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 any particular 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, regional and local level institutions. Mitigation policies/measures with high potential to deliver reductions in transport GHG emissions Policy/measure Explanation (brief) Reform of the national This is a organizational and structural reform of the railway railway system transport to meet the traffic needs of national economy and population and improve its quality.. Public transport This includes the reconstruction of approximately 16 km of improvement (Odessa) tracks and related infrastructure and trams. Passenger and freight This policy encourages development of an automatic traffic traffic management management system for passengers and freight to improve and system (Kyiv) optimize traffic flows. Traffic management This policy encourages the design and implementation of an system Active Traffic Management System. Strategy for the urban This plan includes the development of a transportation model traffic in the city Lviv for the city, preparing a feasibility study for a new tram routes, assessment of a infrastructure measures and implementation strategy in Lviv. Mobility concepts for This policy includes the development of mobility concepts for EURO 2012 the cities of EURO 2012 with special focus on public transport, walking and cycling and long term improvement of urban transport.
Figure 86 Mitigation policies/measures with high potential to deliver reductions in transport GHG emissions
Status Current
Current Current
Current Current
Current
Good practice Reform of the national railway system. The primary objective of this organizational and structural reform is to improve the quality of the current railway network. This would involve developing new and existing infrastructure to meet the traffic needs of national economy and population and improve its quality.
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International contributions
Finance Ukraine would benefit from financial support for upgrading the national rail system, urban public transportation, and alternative fuels. Capacity Building Ukraine would benefit from capacity building in areas such as: Metro systems Alternative fuels Integrated transport planning encouraging the use of public transport and NMT.
Figure 87 International contribution
Technology Transfer Ukraine would benefit from technology transfer, for example, in alternative fuels.
The country suffers from insufficient transport infrastructure. There are high costs associated with the limited and poorly maintained road network, the financial conditions and governance of the state railways, and the weak capacity and reliability of the ports. Moreover, the poor logistics and cumbersome and time consuming border crossing procedures represent significant additional barriers to trade that keep Ukraine far below its potential as a transit hub and impose significant economic costs given the countrys dependence on foreign trade. 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 Banks Logistics Performance Index (LPI) in its latest survey (2010) places Ukraine on 102 nd place out of 155 countries. For comparison Poland ranked 30th, Romania 50th, and Russia 94th. The ranks are based on assessments made by freight forwarding/logistics professionals and based on six areas of performance such as efficiency of the clearance process by customs and other border agencies, infrastructure for transport logistics, 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 these dimensions. Addressing these barriers would yield rapid gains in trade and logistics performance and consequently in international competitiveness. The most important areas to be addressed include: Investing in transport infrastructure under a comprehensive multi-modal transport policy umbrella to ensure the most efficient use of investments. Encouraging investments in logistics facilities in key geographic areas to enable cost savings and to facilitate exports and transit. Streamlining of bordercrossing operations and customs clearance procedures. Combating unofficial payments in the process of border-crossing. Page 113

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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
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Figure 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 was 11.3%. The number of workers employed in the sector is almost 7% of total employment. The transportation infrastructure of Ukraine is adequately developed overall, however it is obsolete and in need of major modernization. A remarkable boost in the recent development of the country's transportation infrastructure was noticed after winning the right to host a major continental sport event the UEFA Euro 2012. The transport sector is of considerable importance for Ukraines transition to a market economy and, given the countrys size and its key location as a gateway between east and west, for the development of diversified trade. Ukraine has a vast network of railroads and roads, several airports for domestic and international air traffic, ports on the Black Sea and an elaborated sea and river transport system. National and regional transportation infrastructures are inadequate. Particularly noticeable are the low quality of domestic air service and poor road conditions. Much of the infrastructure is in urgent need of modernization and several restructuring projects are being implemented. When economic ties with western Europe intensify, upgrading of the East-West Road Corridor will become essential. The need for organizational reform in the sector and revised policies has been recognized, but presents major challenges.
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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. The level of safety, quality and efficiency of passenger and freight transport, as well as the infrastructure's amount of energy usage, and the technological burden it places on the environment do not meet modern-day requirements. For example in 2009, Ukrainian infrastructure provided for the transportation of 1.5 billion tons of cargo and 7.3 billion passengers. As the global financial crisis took hold and demand for major export commodities in 2009 fell, the volume of freight traffic decreased by 17,6% when compared with figures from 2008; passenger transport fell by 12,7%. Due to the low level of demand, the country's existing transit potential and advantageous geographical position is not fully utilized. There is thus a lag in the development of transport infrastructure, transport and logistics technologies and multimodal transport. All this has made Ukraine uncompetitive as the high costs of transport across the country make the cost of production in the country uncommonly high. The Ukraines transit rating 3.11 is one of the highest in Europe. Ukraine is on the route of the 3 out of 10 European transport corridors. In 2009, Ukrainian infrastructure provided for the transportation of 1.5 billion tons of cargo and 7.3 billion passengers. As the global financial crisis took hold and demand for major export commodities in 2009 fell, the volume of freight traffic decreased by 17,6% when compared with figures from 2008; passenger transport fell by 12,7%. Today the transport sector in Ukraine generally meets only the basic needs of the economy and population. The level of safety, quality and efficiency of passenger and freight transport, as well as the infrastructure's amount of energy usage, and the technological burden it places on the environment do not meet modern-day requirements. Due to the low level of demand, the country's existing transit potential and advantageous geographical position is not fully utilized. There is thus a Page 119

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lag in the development of transport infrastructure, transport and logistics technologies and multimodal transport. All this has made Ukraine uncompetitive as the high costs of transport across the country make the cost of production in the country uncommonly high. With an underdeveloped transport and communication infrastructure, Ukraine has not managed to capitalize on its unique geographic location as a transit country between various importers and exporters. As such Ukraine continues to underutilize its transit potential. Despite the high degree of coverage, the quality of the transportation infrastructure and equipment is not in line with international standards. Since November 2009, a draft comprehensive transport sector development strategy up to 2020 is being developed. The draft strategy envisages that the Ministry will elaborate and submit to the Cabinet of Ministers shorter-term strategy implementation program until 2015 Freight and Passenger Transportation Statistics
Transported tons of freights 2000 938 916,1 2002 947 263,8 2004 1027 396,3 2006 1167 199,6 2008 1266 598,1 Freight kilometers (thousand) 19 281 619,3 20 593 133,1 28 847 143,4 40 566 469,9 54 877 223,3 Transported passengers (thousand) 2603 804,6 3069 136,3 3720 326,4 3987 982,2 4369 125,5 Passenger kilometers (thousand) 29 381 541.2 35 812 231.1 47 490 401.3 53 981 705.3 61 302 884.5
Figure 97 Freight and Passenger Transportation Statistics
Figure 98 Transport Services (% of commercial services exports)
Cargo transportation, 2011

Freight shipped mln.t Total shipment of which, by railway trains motor vehicles water pipelines aircraft 468,4 178,3 9,9 155,0 0,1 108,2 112,6 89,3 101,0 102,8 243556,4 38438,9 7365,2 136700,4 366,8 111,7 99,1 81,8 99,6 96,8 811,7 in % to 2010 107,4 mln.t/km 426427,7 Freight turnover in % to 2010 105,7
Figure 99 Cargo transportation, 2011
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Passenger transportation, 2011

Passengers transported mln. pas Total transportation, of which, by railway1 motor vehicles water aircraft tram trolleybus underground (metro) 6972,9 430,1 3604,6 8,0 7,5 798,0 1346,4 778,3 in % to 2010 101,9 100,7 96,7 105,2 122,7 111,8 111,9 102,3 Passenger turnover mln. passengers/ km 134254,0 50837,4 51396,2 91,7 13761,0 4431,6 7810,6 5925,5 in % to 2010 103,3 101,2 98,7 96,2 125,6 111,5 113,4 102,4
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 is regulated by the State Automobile Inspection (DAI) of the Ministry of Internal Affairs. The Ministry of Infrastructure includes several transportation and communication related administrations and inspections that supervise various specialized state companies. The public transportation within cities are regulated by their local administrations which are appointed by the President of Ukraine, while submitting their reports to the related ministries of the Cabinet of Ministers of Ukraine. Some of the non-military transportation is also regulated by the special State Space Agency of Ukraine (DKAU). The energy-related transportation such as a pipeline gas is regulated by the Ministry of Fuel and Energy. The share of the transport sector in Ukraine's gross domestic product (according to Goskomstat) as of 2009 was 11.3%. The number of workers employed in the sector is almost 7% of total employment. The transportation infrastructure of Ukraine is adequately developed overall, however it is obsolete and in need of major modernization. A remarkable boost in the recent development of the country's transportation infrastructure was noticed after winning the right to host a major continental sport event the UEFA Euro 2012. The approval and implementation of a national transport strategy is a pre-condition for a EUR 65 million EU budget support program in the transport sector. The advantageous geographical position of Ukraine allows for the location of a number of International Transport 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.
Main obstacles towards success A number of issues are preventing Ukraine from fully benefiting from its infrastructure and location and developing 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 those with discretionary power. Business cost (official and shadowed) and uncertainty are discouraging the establishment of new businesses, the expansion of new businesses, and foreign investment. This precludes 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, creation of global production and supply chains that would integrate Ukraine as an element of the global economy cannot take place. Excessive regulation and forms of taxation hamper the private sector, and encourage the move towards the unrecorded economy. State Interference in Transport Operations. The sector still operates under many of the organizational and 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 Metro systems, as well as many organizations involved in transport-related maintenance and construction, are still State-owned units reporting to the Ministry of Transport. Most of them do not operate as autonomous, self-financing and commercially viable entities. This strong state presence coupled with limited investment capacity, limits technical innovations in transport. Constraining Macroeconomic Framework. The existing macroeconomic framework impedes efficient trade by imposing restrictive practices. Currency exchange and foreign exchange access are strictly controlled; the tax system is complex, heavy and rather confiscatory. Prices and the banking sector are insufficiently developed, to support commerce and trade still partially controlled by the State. Property rights and titling remain unclear despite the efforts started. Insufficient Cost Recovery. Existing user charges, tariffs and fares are often insufficient or inappropriate to cover the cost of maintenance and renewal of the core assets required. The financial performance of transport entities is declining. Tariff regulation and exception prevent the determination of market-determined tariffs and cost recovery. Inappropriate Financial Management Systems. Transport enterprises in Ukraine are operating at present in an environment, lacking transparency, with very little disclosure of financial information and virtually no accountability. The use of the former improved soviet accounting system does not give a fair and realistic picture of financial flows and financial situation in an entity. The State cannot decide knowingly the amount of subsidies to be allocated to railway computers since the accounting system does not allow for it. Current transport accounting systems are a major obstacle to correcting structural and operational inadequacies. Costs cannot be isolated and analyzed, and past-over investment cannot be rationalized without properly structured operational and Page 122

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financial information. There is virtually no confidence in reported information, when available, and investors have little basis on which to make investment decisions and/or monitor investment performance. Slow Pace of Reform. The sector needs to move towards restructuring and privatization of operations and to a much greater use of the market mechanisms than what was previously done. The current economic situation provides a convenient time in which to implement the necessary structural and institutional changes. The period until the economy recovers may be limited; and the sector needs to be restructured 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 not being addressed. Little, if any, maintenance is being done. The impression is that the transport system is existing on its capital stock. Throughout the sector, repair facilities and rolling stock are in need of a substantial overhaul. The situation may, within the next five years, deteriorate to the point at which maintenance and rehabilitation are no longer possible. If this occurs, the only option will be costly and complete reconstruction. Misallocation of Revenues. A large part of the funds generated by the transport sector are allocated to finance inefficient and non-competitive non-core activities. For example, the railway employs about 200,000 people to produce, on a force account basis, agricultural products, social services, or industrial products like locomotives. Officially, these non-core activities are shown as profit making, but since they provide services or goods under noncompetitive conditions, the real cost of all these activities is unknown. 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 the traditional one. Reliance on road transport for international trade will increase when the economy recovers, following this worldwide trend. Current infrastructures have not been designed to take this factor into account. Oversupply of Transport Infrastructure. With an infrastructure designed to handle seven times its current traffic, Ukraine faces a very high level of maintenance compared to its traffic levels. Twenty four airports receive less than 100,000 passengers annually, 80 percent of the road network has fewer than 300 vehicles per day. Without well-established prioritization techniques, the allocation of the scarce 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 per hour, as the number of railway passengers and freight climbs, the country expects to see a significant improvement in the quality of railway transport. In addition to this the government expects to make huge investments in the railways in preparation for Euro 2012. However, there is currently not enough line capacity provided on routes to the south and the Crimea. There is also a network of suburban and regional train routes for type of local transportation connecting smaller settlements with big cities. A railway reform program for the period 2010-2015 was approved in December 2009 and provides for a separation of the government's regulatory function from the operational function of the national state-owned railway company.
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Two third of Ukrainian railway lines are heavy worked, equipped with modern management facilities, dispatcher's centralization and automatic block system. Ukrainian railway directly borders and cooperates with railways of Russia, Byelorussia, Moldova, Poland, Romania, Slovakia, Hungary and ensures the work with 40 international railway cross-walks, and also serves 18 Ukrainian seaports of the Black Sea and Sea of Azov basin. The administration of public railway transport is The State Administration of Railway Transport of Ukraine "Ukrzaliznytsia", which was established in december 1991. Ukrzaliznytsia accomplishes centralized management of the transportation process in inland and interstate communication regulates railway industrial and economic activity. Note that industrial railways and metros in cities are managed locally on a regional level.
Figure 101 Railway map of Ukraine
KEY INDICATORS OF THE RAILWAY PERFORMANCE Railway transport performance separate indicators, 2011
Fulfillment, mln. t
Freight of which, shipped of which, by cargo nomenclature coal coke oil and oil products iron and manganese ore ferrous metals scrap ferrous metals timber freight chemical and mineral fertilizers grain and milled products cement construction material other fright 468,4 388,7 104,0 11,3 11,2 76,1 31,4 6,5 4,9 8,0 14,2 6,8 54,0 60,3
% of 2010
108,2 108,6 106,3 107,9 95,0 106,1 108,4 104,2 106,6 141,2 116,6 104,8 117,1 108,0
Figure 102 Railway transport performance separate indicators, 2011
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Tariff indices for cargo transportation by rail in 2011 (to the previous quarter) (percent)
All cargoes Coal Iron ore Mineral-construction cargoes Black metals Oil and oil black processed products Light oil processed products Chemical and mineral fertilizer Coke Chemical cargoes1 Grain and processed products Forest cargoes2 Cement I quarter 102,1 102,1 102,1 102,1 102,2 102,3 102,2 102,1 102,3 102,2 101,5 102,3 102,1 quarter 106,7 106,8 106,8 106,8 106,8 106,7 106,8 106,8 106,7 106,7 104,4 106,7 106,8 quarter 106,6 106,7 106,7 106,8 106,7 106,8 106,7 106,7 106,8 106,8 104,5 106,8 106,7 V quarter 106,6 106,7 106,7 106,8 106,8 106,7 106,8 106,8 106,7 106,7 104,4 106,7 106,8
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 enables centralized management of the transportation process in inland and interstate communication, regulates railway industrial and economic activity. The management sphere of Ukrzaliznytsia covers the railways of Donetsk, Lviv, Odessa and Pivdenna (Southern), Pivdenno-Zakhidna (Southwestern) and Pridniprovska Railways, and also other enterprises and organizations of integrated industrial-engineering complex, that enable freight and passengers transportation. Ukrainian railway transport is key branch in the road transport complex that provides 82% freight transport and nearly 50% passenger traffic, accomplished by all kinds of transport. The Ukrainian railway working network amounts to nearly 22 000 km, 45% of it is electrified. In terms of traffic flow Ukrainian railways occupies the fourth place in Eurasia, ranking below to railways of China, Russia and India. Ukrainian rail traffic volume (year flow of traffic on 1 km) exceeds in 3-5 times corresponding figures of developed 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-improving facilities, car-repair plants, engineering research institutions and other enterprises, where work over 400 thousand employees. 1497 railway station, 55 engines and 48 wagon depots, 110 permanent way division, 69 warning 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 the territory of Ukraine go 3 railway transport corridor - 3,5,9. Ukrainian ports Izmail and Reni cooperate with pan-European corridor 7, which goes through the Danube river. Today the length of national network of transit railway corridors in Ukraine amounts 3162 km. These are mainly double track electrified, equipped with road 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 the founder of the Railway Council of the member countries of Commonwealth. Page 125

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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 with automatic highway crossing signal 4191, among them with a signalman 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 assets involved in the railway activities, represents more than 40% of the total national transport assets, all modes 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 metro services, 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 in a large number of enterprises and establishments. Average salary in 1997 was 200 Hr ($US 100) a month and is higher than in most of Ukrainian public services Density of passenger traffic in 2011 427 000 000 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 POSITION as 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 value of the project amounts to $ 480 000 000. This project provides purchasing of 12 high-speed interregional dual-system electric multiple-unit trains for Ukrainian railway with the purpose of improving passenger service and 2 diesel-multiple unit trains. 2. Complex modernization of diesel locomotive 262 and -3 series. Estimated value of the project amounts to $ 135,700 000. The purpose of the project - deep modernization of diesel locomotive 262 and -3 series with increasing its serviceability, improving technical state of the operational park of the diesel locomotives. Page 127

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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 increase competitiveness of the rail transport in passenger traffic, to improve the quality of passenger service, to create 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 of suburban railway station for ensuring demand in Odessa for commuter traffic in direction Odessa Bilgorod-Dnistrovskyi, Odessa Pomoshna, Odessa Vapnyarka. The increasing demand for suburban service 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 direction Znamyanka Dolynska Mykolaiv Kherson Dzhankoi". Technical-economic project argumentation: "Introduction of the energy saving technologies during railway transportation in the direction 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 industry standard) by 1990 and was designed to accommodate 500 billion ton-km and 70 - 80 billion passenger-km, has not been adjusted to the significantly lower (3.5 times) level of services remanded by the market today. In average, only 12% of employees in core activities and 15 - 20% of rolling stock have been laid off; spin-off of infrastructure is insignificant. As a result of idle capacity and heavy and inefficient organization, performance indicators continue to grow less. Railway Assets. While railway assets exceed current demand, there is a need for technological upgrading. UZ has assets valued at 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 fit to present traffic demand. On the one hand, UZ can operate from a technical perspective another 10 years without ma(or investments carried out in infrastructure and rolling stock. The assets includes interlay 1,800 stations, 22,700 km of main track and 555 km of European gauge track, 801 locomotives for freight and 933 in passenger services, 200,000 freight wagons and I10,000 passenger wagons. 8,400 km (3 5%) of track is electrified. On the other hand, UZ telecommunication network is old fashioned (95% analog lines) and obsolete. UZ is insufficiently computerized and is no different from most of the FSU railways. EDP and availability of EDI instruments are only represented in centralized in-house statistical production. Any large investment in railways should be preceded by upgrading the data processing capability and decision making tool available in UZ. Good Technical Capacity. Page 128

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General quality of technical capacity of UZ remains good and clearly above average compared to most of the other FSU railways. Average and high end speeds for both passenger (50 - 60 km/h) and freight services (40 km/h) are satisfactory for FSU railway standards despite shortage in investment resources and budgetary funding during last five years. UZ is still driven by engineers and not by managers with economic and financial background. UZ has remarkable hidden reserves available and idle technical capacity, which could allow the State and management of the company to economize and rationalize UZ activities without a risk to jeopardize current 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 the market. The institutional status of UZ is defined in the Ukrainian Railway Law from 4 July, 1996. UZ is a State administrated institution under the MOT. The General Director of UZ is also first deputy Transport Minister and a cabinet member. The above law, designed to accommodate rapidly changing economic situation, enables the State to influence tariffs, interfere in negotiation between UZ and its client, and forces UZ to offer social benefits 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. In addition, the political agenda of the Ukrainian government has forced UZ to accept and carry indebtedness (in the form of dubious collectable receivables) from the industrial sector (coal) to support it. It is notable that Ministries instead of companies are in charge of handling settlement of overdue receivables and indebtedness between large state companies. Environmental Impact. Environmental pollution and its economic side-effect defined as cost to others is not recognized by UZ. Total contribution to pollution levels by UZ is significant due to its: size, aging equipment and FSU standards. In a situation in which low priority is given to environmental and other "soft" matters, and in the absence of investment funds in general, UZ's contribution to environmental pollution will continue to grow in the foreseeable future.
Traffic Levels
Traffic Drop and Shift Central command economies used too much rail transport. UZ role in servicing transit flows to Russia and Asia has decreased as a result of intense FSU competition. Nonetheless international traffic represents 60% of UZ traffic. The most important traffic components in recent years remain 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 lead time, lack of supporting logistical services and lack of consumer capacity.
Regional Railways. Regional railways are organized geographically and contribute a little to each other in 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 six railways 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 International Transport 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 the region. Ukraine has also shown interest in establishing a common aviation area between Ukraine and
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the EU, the negotiations on which are ongoing. Transport sector development in Ukraine in the light of movement of goods and people is also closely linked with cross border and customs related issues as Ukraine 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 five times higher than that through Ukraine. Ukraine ranks 102nd among 155 countries as per logistic efficiency index of the World Bank, in this regard the main problem area is inefficiency of customs procedures (135th place out of 155) As regards infrastructure investments, Ukraine signed a loan agreement with the World Bank, in April 2009, for a project on roads and safety improvements (EUR 370 million), and a railway modernization project (EUR 653 million) is still in the pipeline. EBRD has provided loans for financing public transport projects in Kyiv and Odessa. Ukraine ranks 79th among 155 countries as per transportation infrastructure quality, according to the World Bank rating. The surface/pavement of roads requires constant repairing, there is no high speed railroad communication, the technological re-equipment in the sea ports is necessary, in particular, the development of container terminals, the airports modernization is required as well as the air navigation service.
Tariff indices for pipeline cargo transportation in 20032011
2003 All cargoes Oil Gas 83,5 112,0 81,0 (V quarter to V quarter of the previous year) (per cent) 2004 2005 2006 2007 2008 101,8 98,1 102,2 100,1 100,2 100,0 141,4 96,1 146,4 105,8 97,2 106,4 2009 107,3 116,8 106,1 2010 166,6 124,8 171,0 2011 120,3 110,2 120,6 120,6 124,3 120,0
Figure 106 Tariff indices for pipeline cargo transportation in 20032011
Public Roads The development of public roads in Ukraine is currently lagging behind the pace of motorization in the country. During 1990-2010 the length of the highways network hardly increased at all. The density of highways in Ukraine is 6.6 times lower than in France (respectively 0.28 and 1.84 kilometers of roads per square 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 of road in Ukraine is around 5,5 - 6 times less than in those locations. This is due to a number of objective reasons, including that the burden of maintaining the transport network per capita is significantly higher than in European 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 and a the nation's large territory. The operational condition of roads is very poor; around 51.1% of roads do not meet minimum standards, and 39.2% require major rebuilds. The average speed on roads in Ukraine 2 - 3 times is 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 the responsibility 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 and farm-to-market roads. The geographical coverage of the road system is generally adequate, the main exceptions concerning the need for by-passes. A study undertaken in 1997, indicated that approximately 6,900 km of the main road network were in fair to moderate condition (roughness index averaging about 4.3) and it was also estimated that the remaining 24,000-km were in poor condition (roughness index 5 - 6). Although no measurements have been undertaken, the visual inspection suggests that paved local roads have a roughness index between 5 and 8, while for the remaining estimated 45,000-km of unpaved local road, roughness levels ranging between 7.5 and 12 (verging on impassable) are often observed. Urban roads present a similar picture to the main and local paved road systems. There are also about 16,000 bridges of which an estimated 60% are substandard and in need of repair and strengthening. With the increasing number of heavy European trucks transiting through the country this is an issue deserving attention, especially on the main corridors. With adequate maintenance these main corridors should provide enough capacity for some time but it should be realized that without improved customs formalities at the border, any upgrading on these corridors would be wasted. Road Expenditures Due to the very limited resources made available for road maintenance, the position continues to deteriorate with much of the network now requiring expensive reconstruction rather than maintenance. In 1997, it was estimated that actual funds allocated to main road maintenance and rehabilitation amounted to 48 percent of needs 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 in 1998, US$550 million were budgeted compared with an estimated US$1.5 billion needed annually. Page 132

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The state road authorities are to be commended on their concentration of resources on routine maintenance, but this has only been possible at the expense of important periodic maintenance, which has led to a growing backlog of rehabilitation and reconstruction. Despite the tight budgetary constraints, the budget allocation is made on the basis of pre-established norms in each oblast without the support of economic evaluation or proven warrants. The share of maintenance of the state road network in expenditures increased progressively from 64 percent in 1993 to 75 percent in 1997, leaving 36 percent in 1993 to 25 percent in 1997 of expenditures for new construction or reconstruction. . Road Financing The existing mechanism of road financing primarily based on a tax on enterprise turnover shows some signs of erosion. Since 1991, the road system has been financed from a Road Fund established under the Law of Ukraine "On the Sources of Financing of Road Maintenance in Ukraine". The Road Fund has six major sources of revenue including budget contributions from the central and supplementary budgets. Road user charges reflecting the use of the network represent less than 12 percent of road financing. The collection of the tax on enterprise 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 related studies, few traffic counting are carried out as a result of economic constraints. It is strongly recommended that a statistically valid program of traffic counting is reintroduced - possibly, initially, using an "N-Point" census system of about 60 sites. Traffic at border crossings is recorded but these data, although identifying the size of the potential source of transit taxes, can cast very little light on general road usage. Furthermore, it has proved impossible to obtain up-to-date official data on the size of the vehicle fleet - this being regarded as a state secret. Traffic Trends Enquiry among participants in the transport industry and some government officials indicates that the size of the vehicle fleet given in Table 3 is of the right order and an official estimate for 1996 gives a total vehicle fleet of 8.91 million, which would back up this enquiry. The exception to this last point may be on some of the transit 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, may well create an important barrier to economic activity. In the case of agricultural access roads, it is estimated that 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 Page 133

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alarming. In 1993, 7462 fatalities occurred (equivalent to a jumbo-jet crashing every 12 days) and 43,453 people were severely injured in Ukraine. The fatality rate per accident was about 0.18 or about four times the rate 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 greater private participation. The state road maintenance structure is also being rationalized and it is possible that the number of oblast/regional road maintenance units will be reduced from about 40 to 32. There are now 658 joint stock companies of various size and reputedly capable of carrying out road works maintenance. Of these companies, 45 were originally state owned whilst the remainder were attached to other organizations and formed 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 in privatization 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, although some of this may be due to the over-sizing of some road geometry, increased privatization and competition would lead to lower prices. This applies in both the state and urban road sectors. Apparently no companies from CIS or FSU states operate in Ukraine, although it is proposed to introduce competitive bidding for road works when resources and the size of the road program permit. The introduction of foreign contractors may require changes in legislation
URBAN TRANSPORT
Current Situation of Surface Transport In the larger cities, where 80 - 90% of the population regularly uses public transport (mainly trolley buses), private buses are becoming common. In Kiev, approximately 85 percent of the buses are private and provide a higher standard of service at premium flat rate fares of 50 kopecks compared with 30 kopecks for the city services of buses, trams and trolley buses. The city services continue to lose money since revenues cover only 50% of cost. There is a steady physical depreciation of capital assets of vehicles and infrastructure. If this continues there will eventually be a breakdown of services, which will impact upon users much more than an increase in the level of fares, especially those with limited resources. Simultaneously, private
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companies suffer different kinds of constraints: various licensing procedures, illegal "technical" checks at their sites (as a result buses cannot be used for days), 100% import tax for new buses and equipment, forced payments to different funds. The regulatory framework is very confusing. A tender committee has been established, but the system never worked in practice. Actual ownership of buses and material is required for potential candidates that provide services (without knowing that their bid is successful). From the city of Izmail, it was reported that operators with winning bids again lost their license afterwards. Operators also had to 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 situation in 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 has been maintained at a satisfactory level. The financial position also appears to be healthier than other forms of public transport although very few data are available. Arrangements are currently being made for the metro to be transferred to the responsibility of the municipalities who will provide management and finance for operations should this be needed. New construction will be financed by the central government. During this reorganization, consideration should be given to some degree of privatization. It is unlikely that complete privatization would be accepted, but the option of franchising the services whilst the municipalities retained control of the infrastructure may be possible.
Poor Financial Performance Since Independence, financial resources for the urban transport have declined sharply. Fare-box revenues are a declining fraction of operational costs, leaving provisions for appreciation, rehabilitation and/or renewal of the fleet uncovered. Actual fare-box revenues taking into account nonpayment of fares and privilege travel are estimated 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), is slightly better. Tariffs allow for coverage of the actual operating cost but do not contribute sufficiently to a sound 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 with actual costs, in particular for fuel expenses. Second, the protected exemption system leaves about an estimated half of the urban passengers free of any financial contribution. Third, general subsidy funding systems in Ukraine have prevented users from perceiving the true cost of an efficient transport service and, therefore, have created a business climate, which is not a catalyst for private transport operator involvement. Finally, central and local governments' subsidies have shrunk drastically in the recent years, accelerating the deterioration of the financial and physical situation of the sector. Page 135

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Waterways Ukraine has well-developed sea and river transportation systems. The largest ports are on the Black Sea (Odessa, Ilyichevsk and Nikolaev) and handle bulk cargo and container traffic. Ukraine is planning to establish a 40-vessel oil tanker fleet with a terminal near Odessa as a long-term means of meeting its energy needs. Regular ferry services run between Odessa and Novorossiysk and Sochi ports in Russia and Batumi and Sukhumi in Georgia. Izmayil is the main port on the Danube. Recently, a
Figure 108 Odessa port
ferry service was stablished between Ilyichevsk and the Georgian port of Poti, to link up the EU sponsored TRACECA (Transport Corridor Europe-Caucasus- Asia) rail and road transport route with the Trans-European Networks (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, Dnieper and Pripyat rivers. All Ukraine's rivers freeze over in winter (usually December through March) interrupting navigation. The river transportation is supervised by the Ukrrichflot (http://www.ukrrichflot.com/) which combines 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. The passenger 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 serves Istanbul, Turkey destination. They provide with several categories of accommodation, meals, entertainment programs, 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 tons deadweight (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 safety concept. 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 2008 black list of the Paris Memorandum of Understanding on Port State Control.
Ancillary transport services of sea and river ports and wharfs on freight processing, 2011
Total Freights shipped through, thsd. t sea ports % to 2010 river ports % to 2010 161647,0 155052,0 104,7 6595,0 106,2 of which: exports 85997,5 84895,0 101,0 1102,5 81,8 imports 19692,2 19417,4 111,4 274,8 95,1 transit 47616,4 47599,2 107,8 17,2 159,3 intra transportation 8340,9 3140,4 127,1 5200,5 113,9
Figure 109 Ancillary transport services of sea and river ports and wharfs on freight processing, 2011
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Turnover of Odessa in 1996 - 2011 years.

Year 1996 1997 1998 1999 2000 2001 2001 2003 2004 2005 2006 2007 2008 2009 2010 2011* Ths tons 578,8 491,3 460,0 619,0 879,0 881,0 1 242,0 1 675,0 2 263,6 2 850,0 3 689,0 4 473,5 5 045,5 2 835,9 3 910,9 5 257,8 TEU 64 611 51 520 47 321 49 780 69 487 75 606 111 175 158 870 201 428 288 349 395 564 523 881 572 142 255 461 351 568 455 552
Figure 110 Turnover of Odessa in 1996 - 2011 years.
Import/Export Turnover of Odessa in 1996 - 2011 years, TEU

Year 1996 1997 1998 1999 2000 2001 2001 2003 2004 2005 2006 2007 2008 2009 2010 2011* Import 32 332 25 910 23 195 25 379 34 780 37 527 53 818 81 971 109 781 154 068 219 755 276 206 304 116 121 429 166 452 214 934 Export 32 279 25 610 24 126 24 401 34 707 38 079 57 357 76 899 91 647 134 281 175 809 247 269 268 026 121 808 169 380 206 894
Figure 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 tons
Year 2003 2004 2005 2006 2007 2008 2009 2010 2011* Total ths tons 1674,6 2263,7 2850,7 3688,1 4473,5 5045,5 2835,9 3 910,9 5 257,8 Transit, ths. tons 196,7 174,3 193,7 208,2 249,2 280,0 154,8 219,9 422.9 % of Transit 11,75% 7,70% 6,79% 5,65% 5,57% 5,55% 5,46% 5,63% 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. The Ministry was in charge of: (i) development and implementation of policy and legislation in connection with national and international maritime sector; (ii) regulation and control of navigational safety and environmental protection; (iii) management and funding of operations and infrastructure for navigational channels and port accesses; (iv) regulation of prices and tariffs, regulation of foreign currency earnings; and (v) provision of housing and social services to its subordinated organizations. The ports had no autonomy and were mainly responsible for cargo handling operations. The rigid organization of command and control, deprived managers from taking initiative in independent decision making and accountability, prevented introduction of modern technologies, encouraged mediocre productivity and, high labor costs. Organizational Structure Department of Maritime and River Transport. The Department of Maritime and River Transport, created by a decree in the MOT, is responsible for defining the strategy for development of seaports, maritime transportation, 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 and modifying tariffs; (iv) ensuring labor protection; (v) registering ships; (vi) securing release of crew from arrested Ukrainian ships; (vii) ensuring marine ecological protection; and (viii) collecting sector data. The Department 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 the Government still retains the ownership and control of sea ports and maritime shipping, to the extent that even appointments 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 of navigable 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 which 1,851 km is navigable, and 1038 is within the borders of Ukraine. There are seven major ports20 on the Dnieper river. River Ports Evolution River ports before the independence of Ukraine were under the jurisdiction of Ukrechflot, the river shipping company. In 1993, river ports were privatized. However, privatization has not been fully implemented. While all of the stocks of Zaparojie port have been sold to the private sector, in Kiev 35% of shares are still owned by the Government. After privatization, personnel in river ports were drastically reduced e.g. by two thirds in Zaparojie port, and from 2,236 persons down to 480 in Kiev ports. Social sector infrastructure and activities have 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 dredging of 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 changed significantly. Kiev port handled up to 30 million tons in 1980. Cargo on the Dnieper River used to consist mainly in construction materials (80%). Due to drastic reduction of construction in Ukraine, demand for construction materials also dropped. By type of cargo handled, 57% was metal and 25% consisted of various ores and coal. Zaporozh'ye port handled 52% of the total and Dnepropetrovsk, and Kherson and Nikolayev river port ports handled 44% of the total. Kiev port handled only 2% of the total. Due to this situation, Kiev port 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 shipping company (UDP) on the Danube. These organizations were administratively and institutionally independent and sought support from Moscow for funding major capital expenditures and technical assistance. After independence, Ukrechflot was privatized. Both shipping companies broke their ties with river ports and progressively 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 of about 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 have not 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 too much time in the ports -55% of total time. For this type of operation, the arrival of ships is to be coordinated with the arrival of the trains, which has proven very difficult in practice. According to the experience of Ukrechflot, moving cargo on pusher-barge convoys on the Dnieper river is not efficient due to a large number of locks, requiring breaking up of convoys. Container traffic on the river is also constrained by the absence of modem container handling equipment. Inappropriate Financing Mechanism. MOT has not yet established the collection of port dues on river ports, causing a significant loss of income to river ports. On the other hand payments, both official and 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 burden is 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 of the shipping season, a reduction in water depths below 2.9 m, preventing ships to take a full load on the basis 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 middle reaches of the Dnieper river is unlikely. Unfair Rail Competition. The diversion of cargo from river to rail transportation is due to dumping tariffs for ponderous materials. Over the years, construction materials have replaced typical river long haul type of cargo consisting of coal, grain, ore, and petroleum. The energy consumption for moving a ton of cargo on inland waterways is about 6 to 10 times less expensive than on railways. Potential productivity and costs of waterways in transport of bulk cargo can be matched by other modes of transports, but under the current circumstances, competition with rail is not possible. Insufficient River Maintenance. Governments' annual budget allocations for the work carried out by Ukrechput is not sufficient. Maintenance of the existing locks is mediocre. In case of a lock gate failure due 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 that prevents active competition on the Dnieper River. In 1992, foreign flag ships were allowed to sail on the Ukrainian inland waterways. This was beneficial for the trade in the Black sea with access all the way up to Kiev. However, in 1997 the Government decided to change the law, allowing only the carriers from countries with which Ukraine had a bilateral agreement on the basis of a 50-50 split. Since local companies are too small to compete, Ukrechflot assunmes control over the Dnieper river transports. However Ukrechflot is not operating its vessels on the upper and middle Dnieper, which results 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 the Mediterranean Sea. It would be cheaper to open the river system to international river shipping. Page 140

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Seaports Ports operated according to plans worked out by the Central Government authorities. The FSU system was organized under the premise of specialization with each carrier and ports developed to manage a specific part of all-union trade, (e.g., Yuzhny, for coal and chemicals). In 1990, about 40% of the FSU cargo (about 400 million tons) was Passing through ports in the Black Sea and the Azov Sea, mainly belonging to Ukraine. After Independence, ports separated legally from shipping lines and became autonomous, creating incentives for ports to improve their operations. However, with the significant reduction in cargo, improvement has been limited. 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 operations and even further with modernization of cargo handling equipment. The ports with best nautical accesses are Odessa, 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 coal with 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 to limited 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, 25 million 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 regional competitive pressure to become efficient and financially sustainable on a long term prospective. The port system as a whole is over-dimensioned (number of ports, assets and staff). The financial burden of social and ancillary activities imposed on the port management dilutes a lot of the medium and long term financial resources. Public sector monopolies having privileged access to various resources in the ports still exist. The tariffs regulation and lack of financial autonomy have generated a lack of financial discipline. 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 best approach to resolving all these issues. Regulated Tariffs. The port tariffs are fixed by the Maritime and River Transport Department. The official nonintervention of the Ministry in the ports economic activity conflicts with the lack of freedom of ports to set their own tariffs (a single tariff system is set for all ports). In this regard, relationship with the 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 are nominated by the port manager and the other half by the port workers. The port manager is appointed by the Ministry of Transport, and to that effect a contract is signed between them. The heavy involvement of port workers in the management of the port may not promote ports operations to take Page 141

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place in a competitive environment. On the contrary, shippers and ship owners, the main clients of the ports, as well as the towns and the regions where the port is located, are not involved in the decision making 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 centralized Government activities, and cannot function as efficiently if they were decentralized, corporatized ,and privatized. The dock labor unions are governed by the FSU law. The Maritime and River Transportation Department should resolve disputes arising between port workers and port management, but in the absence 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 not feasible according to existing laws and regulations. Social Issues. Despite their large social burden, ports fail to provide an appropriate social protection to their employees. Ports are grossly over staffed. As a result, existing pension payments are not sufficient to cover the needs of port workers in old age, and staff medical coverage against accidents in the ports is not comprehensive enough. Despite this, social and cultural services, not related to the actual port operations, cost ports around 20% of their total expenditures. Ineffective Procedures and Equipment. An estimated 30% of efficiency gain could be achieved by improving 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 of transit cargo, resulting in such cargo being moved to other ports. Productivity in cargo handling operations, in many ports is below acceptable limits. Equipment in many ports is old, outdated, and inefficient. Investment Priorities. The need for construction of a new oil facility in Yuzhni is not clear, since the Odessa Oil Terminal appears to have sufficient capacity for oil imports to Ukraine in the immediate future. Financial Performances and Issues. Good Performance of Odessa and Ilyichevsk Ukraine's main ports traditionally had a positive cash flow because tariffs were centrally set high enough to cover costs and because there was no competition among ports in the FSU. Despite important deficiencies, overstaffing 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 and was 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. Domestic exporters were forced to arrange international cargo transactions on CIF terms, and importers were to execute freight contracts on FOB terms to maximize the use of national carriers. After Independence Ukraine ended up in 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 competition in 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 the order 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 leasehold enterprises. While the shipping lines are responsible for management of their operations, ownership of the ships 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 marine fleet is not competitive in international maritime transport, arrests of ships by the creditors still continue causing heavy financial losses to the shipping lines, and financial standing of most of the shipping lines is precarious. The Department of Maritime and River Transport is trying to improve the critical situation of the shipping 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 for EU nationals and citizens of a number of other 'Western' nations, the nation's aviation sector is handling a significantly increased number of travelers. Additionally, the granting of the Euro 2012 football tournament to Poland and Ukraine as joint hosts has prompted the government to invest huge amounts of money into transport infrastructure, and in particular airports. Currently there are three major new airport terminals under construction in Donetsk, Lviv and Kiev, a new airport has already opened in Kharkiv and Kiev's Boryspil International Airport has recently begun operations at Terminal F, the first of its two new international terminals. Ukraine has a number of airlines, the largest of which are the nation's flag carriers, Aerosvit and UIA. Antonov Arilines, a subsidiary of the Antonov Aerospace Design Bureau, is the only operator of the world's largest fixed wing aircraft, the An-225. Major airports are: Boryspil Airport, Dnipropetrovsk Airport, Donetsk Airport, Odessa Airport and Simferopol Airport. Majority of big cities in Ukraine has air connection with Kiev. Tickets for domestic flights for non-Ukrainians might be more expensive than for Ukrainians. Best air connection with other countries goes via Kiev. Some domestic flights are not very reliable in terms of schedule - it is a good idea to make sure that the flight you have chosen is made on regular basis. Please, note most domestic air tickets can be obtained in Ukraine only. Refurbishment of Borispil was concluded in 1995 at a cost of US$ 14.8 million, supported by credits from the EBRD, First Ukrainian International Bank and the government. Odessa, Lviv and Kharkiv are the second, third and fourth international airports. They are nowin the process of being refurbished with the assistance of IFIs. In February 1998, the EBRD provided a loan of US$ 25.4 million to the Ukrainian State Air Traffic Services Enterprise to finance the installation of modern air traffic control equipment. The project helps to ensure aviation safety in Ukrainian air space and to attract additional overflight traffic, which will generate increased revenue. State-owned Air Ukraine, one of the successor airlines to Aeroflot, is the national carrier with mostly Soviet planes and serving a number of cities in Page 143

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Russia and elsewhere in the CIS. In 1996, Air Ukraine entered into a joint venture with an Israeli company to form AeroSweet. 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 serves western airports. UIA is introducing the new AN-140 (Antonov) passenger plane into its domestic flights service, a Ukrainian-Russian 52-seat passenger and cargo aircraft produced at the Kyiv-based Aviant plant. The projected price per aircraft is US$ 7 million. For cargo flights abroad UIA is considering the introduction of the AN-74TK and AN-70 models. The Kyiv-based Ikar Airlines company was the first owner of the new AN-140 aircraft. Ikar Airlines, an international carrier, was founded in 1993 and conducts regular flights on 15 routes in Ukraine and the CIS countries, 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 air transportation was one of the most heavily subsidized services and accounted for 37% of all intercity passenger traffic in 1990, a remarkably high proportion compared to western countries. The high dependence of air transport 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 automobile transportation. In 1990, about 22% of FSU traffic (about 30 million passengers) was passing through Ukrainian airports. An important share of leisure traffic was also stimulated by allowances granted by the State-owned employers 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 slightly compensated by the development of the routes towards western countries. Aeroflot was broken into national entities. Management functions and investment funding which used to be undertaken from Moscow were transferred 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 have to face scarce revenue, leading to financial difficulties. Flights are often canceled, either because of lack of passengers or because of cash shortage, preventing the airline from buying sufficient fuel for their flights and from 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 compatible with 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 a timely 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 other international civil aviation bodies is on its way. The Air Code adopted as soon as 1993 and the following Law of 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 Concept defining the main guidelines of the Government's aviation policy was adopted in 1996. The Law #815 transforms the Department into a Civil Aviation Administration The main innovation lies in the merging between SATD and Ukrainavigatsia. This new structure should put an end to the responsibility conflicts, which had emerged when the former organization was created and which could have had an impact on the global level of safety of the whole sector. In revised the regulatory framework in certain industries, aviation being one of them. The new Air Code of Ukraine was finally passed by the parliament on May 4th, 2011 and came into legal effect 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 of the aviation business. However, certain norms of the new Air Code demonstrate the recent trend of Ukrainian governmental authorities to exercise hands-on management of certain business areas and control over cooperation of private companies. The revised Air Code also introduced several important features and innovations 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 Aviation Accidents and Incidents (the "Investigation Agency"). This Agency is expected to be independent from the State Aviation Agency of Ukraine (the "SAA") and deal exclusively with review and investigation of various aviation accidents and incidents. The independence of the Investigation Agency is expected to guarantee the objective and unbiased review of cases; however, it seems rather doubtful considering that the Agency will be funded primarily from the State Budget. The Investigation Agency together with the SAA are scheduled to set up the system and criteria for mandatory notifications that airline companies must submit in relation to aviation incidents or accidents that require further review and analysis by the authorities. The Air Code envisaged creation of the Investigation Agency by January 1, 2012, although it did not happen until now, and no new rules were adopted as yet. It is also worth noting that until the Investigation Agency is established, the SAA would exercise the functions and rights of the Agency. The other important news is that the Air Code significantly 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"). The ARU is supposed to be a complex document based on the international and European Union ("EU") standards of the aviation industry; however, it also should be in compliance with applicable Ukrainian laws and regulations. From the practical standpoint, this balance is often impossible to archive. The Air Code also Page 145

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contains an interesting provision about the applicability of ARU to all aviation market companies doing business in Ukraine. It particularly states that the Head of the SAA may waive certain technical or procedural requirements of the ARU for a particular aviation company15,1 provided that such waiver does not impact the aviation safety and is made "in the interests of the society." While the detailed process for such a waiver shall be set up by the ARU itself, such discretionary authority allowed to the Head of the SAA might be viewed as creating an unfair treatment for certain aviation market players. The SAA also has discretionary powers to review compliance of existing and new Air Operator Certificates162with the ARU. In this regard, the SAA can assign 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 Operator Certificates. The Air Code does not refer to any limitations of this authority of the SAA which may also lead to unfair competition. Moreover, given the market practice, it is very likely that airline companies would be required to cover the cost of services rendered by inspection companies assigned by the SAA. Foreign investors or companies doing business in Ukraine should be particularly careful in relations with such appointed companies and ensure proper vetting of these contracts in light of international anti-bribery compliance requirements. Further on, the Air Code provides discretionary powers to the SAA in matters of regular and irregular audits and inspections. The SAA seems to have an absolute discretion to defining grounds for irregular inspections. Unless the ARU would set up certain limitations to this provision, it may create the additional basis for unfair treatment of airline companies and other aviation market players. On the positive side, the Air Code requires that airport services operators ensure equal treatment of all airlines and other aviation related companies (i.e., technical maintenance, ground handling, fuel supplies, etc.). It is expected that governmental authorities would review the market of aviation related services and define some ground rules for so called natural monopolies of airport services. These ground rules should ensure transparent and equal treatment of all airlines and other businesses that operate or are willing to operate in a particular airport. On a related note, the airport operators should also establish special "airport committees" that would allow representatives of airport management, airlines based in the airport, ground handling and other services companies to meet and negotiate common terms and conditions of services provided in the airport. These basic requirements were long-awaited by the market players as they are staging the foundation for further development 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 clear message is that the tariff cannot constitute price dumping or be discriminatory. On this basis, the SAA has the authority 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 the airline company provides the information necessary for adequate evaluation of its tariffs, including the information on the net costs. Failure to provide such information in time or in full may result in the tariff cancellation. While having good motives, this provision of the Air Code raises many concerns. The information about net costs of the tariff normally constitutes the commercial secret of the airline company. Thus, when submitting this data to the SAA the airline company may risk losing its commercially sensitive information as the Air Code does not set up any rules for ensuring the confidentiality of the commercial secrets transferred to the SAA. The SAA is also authorized to manage airspace and use it "based on the interests of the national economy and safety." Given the broad definitions for this authorization, the SAA would likely to have practical discretion in influencing airspace use which may result in unequal distribution of airspace permits between Page 146

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different airline companies. While the detailed rules and procedures for issuance of Route Permits17,1 approval of flight schedules, etc. should be defined by the ARU, the Air Code provides that when deciding on the Route Permit application the SAA shall consider "the social importance for such air carriage and need for development of the transportation system." The SAA also has the authority to decline the Route Permit application or limit the issued Route Permit based on "the need to ensure cost-effectiveness (profitability) on the existing routes." From these provisions of the Air Code, it looks obvious that the SAA would have the ultimate discretion to manage Route Permits on the ad-hoc basis, including their issuance, limitation or revocation. It also seems that this discretion would apply to competing routes, e.g., flights to main and secondary airports of the same designation point that could be limited or revoked for the benefit of ensuring the cost-effectiveness (profitability) on the main airport route. One of the other important innovations of the Air Code is that it provides the possibility for foreign airline companies to get the Ukrainian Route Permits for regular flights on international or domestic routes not only on the basis of the bilateral agreements as was true before, but also based on the reciprocity principle, i.e., if Ukrainian airline companies enjoy the same rights in countries where such foreign airline companies are registered. The Air Code also allows foreign airline companies to obtain Ukrainian Route Permits for non-regular flights, if no Ukrainian airline is willing to perform such flights. These clauses significantly ease the possibility of foreign airline companies to access Ukrainian domestic routes and obtain better permits for international routes. The Air Code also provides a separate regulatory framework for issuance of Route Permits for so-called socially important routes i.e., routes with low traffic, although important for the development of a city or region) (the "Social Routes"). When applying for a Social Route, the airline company should negotiate with the SAA and fix certain service conditions, i.e., route tariff, flights quantity, etc. In exchange, the SAA may grant to the airline company the exclusive right to operate such Social Route for the term up to three (3) years. If no airline company applies for the Social Route, the SAA can announce an open tender for Ukrainian and foreign airline companies. In such case, applicants can claim that the SAA provides certain compensations or benefits for their operations on the Social 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 to passengers in case of a flight delay or cancellation. These compensations are based primarily on relevant EU standards, so a majority of airline companies are already used to these requirements on flights originating from EU cities. What is important, however, is that these requirements are now applicable to all international and domestic flights operated by Ukrainian and foreign airlines. The Air Code also sets out an extensive list of penalties 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 Code provides economic sanctions which, depending on the violation, may vary from UAH 510 (approx. USD 65) to UAH 136,000 (approx. USD 17,000). As a result of the implementation of the new Air Code the Administrative Offences Code of Ukraine was amended with increased penalties for violations of the aviation safety 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 the Criminal Code of Ukraine performance of professional duties by aviation personnel under the influence of alcohol, drug or other psychotropic or psychoactive substance. This crime is subject to correctional community) works for up to two (2) years or sentencing up to three (3) years. On a related matter, after heated discussions, the Air Code also explicitly intense that airline companies shall be liable for verification of the Page 147

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passenger documents that are necessary for entering to the destination country. In particular, the airline company shall decline the carriage of a passenger who does not have necessary documents. Failure to comply with 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 aviation industry. It creates practical ground rules for foreign airlines and aviation services companies to access Ukrainian aviation market and even to operate on domestic routes. The new Air Codes other positive message is the review of monopolistic arrangement that currently exist in Ukrainian airports or on certain air carriage routes. The passengers would also benefit from implementation of EU based compensation norms and procedures. 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 current government has taken in relation to several industries, the practical implications of SAAs discretionary authorities may have an adverse effect on the business. The SAAs manual control over route permits and tariffs can put additional regulatory pressure on airline companies and other unrestricted powers may cause unfair treatment of aviation services providers. Clearly, every airline or aviation services company should revise its policies and procedures in line with requirements of the new Air Code and many companies apparently already did so. However, what is more important is the further monitoring of the practical implementations of certain Air Code provisions that raise business concerns. Obtaining of regulatory approvals and permits was never easy in Ukraine. However, in the new legislative environment it might become even a more challenging task. International and local companies should also keep in mind requirements of Ukrainian and foreign anti-bribery compliance requirements when dealing with governmental authorities or companies suggested or appointed by such authorities Economic regulations While most technical regulation aspects have been dealt with, economic regulations have not yet been finalized. 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 of monopoly situation safeguard clauses) need to be completed. Resources The new CAA consists of 112 positions, which, considering that 168 people worked for SATD represents an important effort in staff downsizing. Some additional 65 inspectors in charge of technical inspections and certification at airports and airlines are employed by the CAA. Headquarters staff is paid through the national budget, while the inspectors are paid from the Civil Aviation Development Fund which raises its revenues from fees collected upon issuing certificates, and authorizations in the aviation field. The large difference of remuneration between civil servants and the personnel from the newly created state enterprises endangers whole sector organization. Air Transportation Page 148

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Fragile Air Operators After independence, the Aeroflot system split into more than 50 airlines but only six of them provide scheduled services. 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 in fact highly concentrated, since Air Ukraine flies 51 percent of all passengers carried by Ukrainian airlines, its Borispol based subsidiary company representing more than 40 percent of its whole traffic. Many carriers are virtually bankrupt and, and for those apparently profitable under CIS accounting procedures, generated profit which is comparable to the western definition of cash flow is too low to allow airlines to build provisions for replacing their aging fleet. This situation is also the consequence ofthe lack of regulation, which, based on a clear definition of a National Aviation Policy, should, inter alia, set the financial criteria to be met by applicant airlines 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 evolved making 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 to international standard of 2,500 to 3,000 hours per year. Its obsolete fleet affects adversely its maintenance and operating expenses (twice the fuel consumption of modern aircraft, large crew needed, long ground time). Most of 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 already signed 36 and ratified 19 bilateral air agreements but competition remains limited. Most Western Airlines have flights to and from Ukraine, linking the country with most European economic centers. Restriction to Entry. Bilateral agreements are based on shared capacity, with frequency and/or aircraft capacity restrictions, which limit new entries. Several attempts to serve the country by foreign charter or scheduled airlines seem to have been discouraged by the bureaucratic procedures and the high level of royalties (15 percent of revenues) required by the Ukrainian side. These procedures introduce discrimination based on carrier nationality, and support the current oligopoly set up between Western Europe carriers and Ukrainian 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 local airlines is prejudicial to the national airlines and makes them less competitive on international markets. Many costs are not considered as tax deductible. These include insurance, pilot training when performed abroad, spare parts for aircraft maintenance which have to be depreciated. Provisions for expensive planned maintenance costs (D-check) are not allowed, and aircraft depreciation rules are not consistent with economic reality. The compulsory tax for the road fund (1.6% of revenues) represents in itself an important share of the average margin usually expected in the international industry. Aircraft leases are heavily taxed when they are contracted with off-shore lessors, preventing the use of this internationally attractive tool.
Transport strategy of Ukraine for the period until 2020 At the end of 2009 the EU-Ukraine Association Agenda was adopted. Also, for 2010, a list of priorities for action was jointly agreed by Ukraine and the EU. And transport priorities include the following - implementation of EC acquis in transport legislation through development of new comprehensive national transport strategy of Ukraine. To prepare the strategy, the EU actively supported Ukraine by introduction of such projects Twinning Support to Transport Policy Design and Implementation in Ukraine and Support to the Integration of Ukraine in the Trans-European Transport Network TEN-T. As a result, sector Ministry and representatives of the EU elaborated a document Transport strategy of Ukraine for the period until 2020 that was adopted by the CMU on October 20, 2010. It defined the main development goals 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 and declarative. Implementation of the Strategy, based on defined principles, will not allow changes in Page 150

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current destructive trends and problems of transport sector of Ukraine. Strategic goals and operational tasks are mixed up in the considered document. And goals, which are set, often do not show strategic intentions and partially reflect current problems. Thats why their solution wont lead to lasting consequences. At the same time, no mechanism and way is foreseen to resolve systemic problems Also, declared intentions sometimes contradict with adopted transport documents, e.g. programs of sector reforms, as well as with Program of economic reforms and schedule of its implementation. In addition, foreseen for different subsectors measures are described in different manner, which reflects the EU priorities and does not meet requirements for strategic document for Ukraine. E.g., sections for road and air transport are described with more depth and details. And integration to respective European organizations and institutions is widely emphasized there. At the same time, the EU principles are not adequately integrated in other sub-sectors. In particular, priorities for EU transport policy include development of river transport 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 Strategys implementation in quantitative measurements are highly 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 the same as ones set in the Program of economic reforms. The latter shows that visions of problems and ways of sector development greatly vary among different governmental bodies. In general, Transport strategy in current variant wont 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 its adoption and implementation are prerequisites for EUR 65 m budget support from the EU to Ukraine. Thus, at the moment we can draw the conclusion that adoption of this necessary strategic document wont lead to expected strategic consequences for development of transport of Ukraine. Page 151

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Banking System Services

Banking Sector overview The Ukrainian banking sector dominates the financial sector, concentrating nearly 95 percent of total financial sector assets, or 96 percent of GDP. As of March 2010, 175 banks operated in Ukraine. Foreign-owned banks have gradually increased their share of assets as well as capital. The share of the nonbanking financial sector was less than 10 percent of GDP in 2008 and further shrank in 2009, owing to bankruptcies and closure of numerous insurance and leasing The market for mobile and Internet services was opened for private domestic and foreign investment and 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 as
of 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 as of October 1st, 2011 amounts to 1,029bn UAH (USD 129bn eq.). Since the beginning of the year growth of assets was +87bnUAH or 9 percent. Top 50 banks represent ~90 percent of assets and 86 percent capital of the banking system. Top 10 banks constitute ~55 percent of the banking system assets and capital concentration level is stable over past 35 years and lags behind EU zone and neighboring Poland and Russia, where ~50 percent are covered by Top 5 banks. Assets growth in 2011 was driven mostly by extensive lending to big corporate clients (+12 percent), including big state corporations. Otherwise the banks continued to use spare liquidity 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 on export/import operations and a financial arm of the Ukrainian government in relations with international financial institutions. 3 more banks Rodovid Bank, UkrGaz-Bank and Bank Kyiv have been saved by the government to calm crisis waves on the market in 2008. Strategy of privatization, merger for each of them is still being discussed by government and regulator. Historically, Credit Agricole CIB came in 1993 (at that time under 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 started in 2005: SEB purchasing Bank Aggio, Raiffeisen purchasing Aval, BNPP purchasing 51 percent of UkrSibbank (now controlling 85 percent, 15 percent in the hands of EBRD) Credit Agricole purchasing in 2006 Index Bank, OTP purchasing the historical Raiffeisen. In 2007 Swedbank purchased two banks of TAS Group, merged by the end of 2009 into Swedbank. In 2011 the bank abandoned SME & retail business and focuces on bigger clients. In 2008 Commerzbank entered Ukrainian market via purchase of 60 percent of Bank Forum, still operating under such name but 100 percent are in Commerzbanks hands. Two Italian banking groups Intesa and Unicredit purchased in 2008 Pravex Bank and UkrSotsbank respectively. 2007 and 2008 have been marked by massive coming of regional and neighboring countries banks with a business model similar to previously mentioned Western banks dwelling on cheap external funding for further development of consumer, 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), Credit Europe Bank, Credit West Bank (Turkey). Separate group is represented by leading Russian banks that moved to Ukraine to follow their clients, get market share and touch the ground in retail business outside Russia (AlfaBank, VTB Bank and Sberbank). Two banks are now in Top 10 (Alfa # 7, VTB # 10). VEB, Russian state-owned bank, entered the Ukrainian market at the end of 2008 by purchasing the troubled Page 153

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Prominvestbank (# 8 at the moment) that focuses on corporations. Current dynamics in foreign banks explicitly reflects the global credit and liquidity crises as well as Ukraines low attractiveness, today. Some banks either consider exit from non-strategic markets or scaling down their business. The consequences of decisions taken by international banks to mitigate global risks should be most probably seen in Ukraine in 2012. 2011 has seen the 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 governments bad bank for toxic 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 Evolution In 20102011 Banks experienced modest growth of loans portfolio and assets. Total assets growth was +7.9 percent in 2010 (+69bn UAH), and may reach +12 percent by the end of 2011 (+9.2 percent or + 87bn UAH by October 2011). This adjustment is coming after the period of boom and bust: during 3 pre-crisis years total bank assets grew from +/- 42bn USD (December 2005) to 120bn USD (December 2008). Overall 3 times growth (USD), peak reached in October 2008 155bn USD (just before UAH devaluation). Commercial loans grew up even faster between 2006 and 2009: 3.7 times loans in UAH; 4.6 times loans in foreign currencies, from USD 12bn in 01/2006 to 60bn USD in October 2008. Development of loans portfolio in 20092011: UAH denominated loans total amount continued to grow in 2009, mainly driven by massive state support of state companies and banks: +9 percent in 4Q 2008, +14 percent in 2009, +15 percent 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. Page 155

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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 massively prolonged when borrowers appear to be incapable to repay them in the current market slide of activity, or restructured in exchange for partial repayment. Some FC loans to individuals, on advice and with the support of the National Bank of Ukraine, are converted into local currency to ease the burden of interest payments. Rating agencies mention that as of mid of 2010 the banks that they rate have restructured loans on average for more than 35 percent. On top of such loans, overdue loans exceed 10 percent of the loans. It is not a single case when foreign 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 deposited by individuals in 2011. During the same period (Year-to Date 2011) corporate accounts are up 38bn UAH and total 136bn UAH. But some banks achieved it at a pricetheir funding became expensive! Lending did not restart really: banks still have to provision their assets, the economy is progressing at a small pace, the legal environment remains a plague for banks. In 2011, however, loans to individuals have almost stabilized (first 9 months: -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 UAH 126bn). Banks do not lend in foreign currencies since the 2008 crisis. Loans to corporations increased to 606.5bn UAH as of October 1st, 2011 or + percent, +UAH 66bn, since January 1st, 2011. The increase over the last 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 in FC!) now at 1.61 as of October 1st, 2011. To be noted that the FC borrowing from banks abroad decreased from 42bn USD at the start of the crisis to + 30bn USD now, Western-owned banks being the biggest beneficiaries of such funding. Excess of funds went in 2010 into securities market where banks outstandings have grown twice from 38.5bn UAH at the end of 2009 to 83.7bn UAH by the end of 2010. In 2011 liquidity deficit 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. Year 2011 should see a 1 to 10 percent growth: as of October 2011 NBI reached 57.5bn UAH versus 50.8bn UAH in October 2010, i.e. +6.8 percent on per annum basis. Operating expenses surge despite closure and re-location of offices and staff expenses control. Operating Expenses growth in 2010 -39.1bn UAH vs -36.6bn UAH in 2009 (+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 deteriorates towards around 60 percent. Net Result remains negative as loans loss provisions continue to eat into banks earnings, 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. Capital increase 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 banks are adequately capitalized today. Page 159

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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 the previous year, totaling UAH 23.1 billion. The banks expenditures have shrunk by 1.5% over the respective period, amounting to UAH 21.9 billion. The banking system made a net profit of UAH 1.2 billion over two months of 2012 (the banking system saw a loss of UAH 0.2 billion over the respective period of 2011). The structure of income and expenditures of banks as of 01.03.2012
Indicators 1 1.1 1.2 1.3 1.4 1.5 1.6 2 2.1 2.2 2.3 2.4 2.5 2.6 3 INCOME Interest income Fee and commission income Trading income Other operating income Other income Written off assets recovery EXPENDITURES Interest expense Fee and commission expense Other operating expenses General administrative expenses Provision for reserves Income tax expense Net PROFIT (LOSS)
Figure 122 The structure of income and expenditures of banks as of 01.03.2012
Total (hryvnias mln) 23 124 18 571 2 976 514 781 94 188 21 889 10 314 461 1 693 5 534 3 681 206 1 235
% 100,0 80,3 12,9 2,2 3,4 0,4 0,8 100,0 47,1 2,1 7,7 25,3 16,8 1,0
Market Regulator The National Bank of Ukraine (NBU), staffed with more than 11000 employees, regulates since 1991 the banking 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 Banking sector 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 January 1st, 2012), capital adequacy, insider loans, tax games and insufficient provisioning. The change in the political landscape in 2010 led to a change also of the management team of the NBU. Thanks to the IMF support, some positive changes were decided, as minimum capital already mentioned, reinforcement ofthe NBU independence (a challenging task), the obligation to reveal beneficiary owners (in December 2011), a necessity Page 160

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to focus on inflation management and less on the peg between the UAH and the USD, which unfortunately is still being kept, and the capacity to transmit the foreign exchange risk to the economic sectors thanks to development of forwards, that was made possible mid-2011, but in very restrictive way, for a very small market 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 by the rating agencies. Its operating environment is weak because of its slow growth and could be hit by a possible recession in the west. Its profitability remains weak. The nonperforming loans, as well as restructured loans account for +/- 40 percent of its gross loans still. And the UAH currency funding is made 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 evidenced their resilience in the 2008 crisis and have been provided with the required capital, their capitalization today being adequate. Banks have developed again in 2011 their loans to the population, but in UAH only. 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 year for 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 and by regulations of the National Bank of Ukraine (NBU). Regulations frequently change; therefore please consult 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 settlement of 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 were withdrawn from the individuals account should be presented. Funds at disposal (possibility to withdraw cash wired from abroad without account opening): disposable funds are limited per transaction and per day to the equivalent of 50 000 UAH (applicable for residents and non-residents). Non-commercial transactions: Wire transfers in foreign currency are limited to equivalent of 15 000 UAH per day without account opening for residents and non-residents. But for residents without supporting documents; for nonresidents with confirmation of the source of money. Wire transfers in foreign currency in amount which exceeds the equivalent of 15 000 UAH per day can be done by residents and nonresidents from the current account (for residents with supporting documents, for nonresidents without supporting documents). For more details, please ask your banker.
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 not executed 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 price relevance. For capital market divestments incl. dividend payments: investment agreement and a document proving that investment was made and registered in Ukraine. If shares are sold by a non-resident, or if a divestment originally was made in kind and the proceeds are to be repatriated, an estimation certificate issued by a licensed Ukrainian appraiser is required. In addition, cash divestments of investments made in kind must have been made possible by a treaty between Ukraine and the divestors country. For cross-border loans: loan agreement, NBU registration notice, and local bank's consent to service such 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 new Law On prevention and counteraction to the legalization (laundering) of the proceeds from crime of May 18th, 2010, #2258-VI (hereinafter the Law) and for the banks by NBU Regulation #189 On performance by the banks of financial monitoring in the edition of NBU resolution #22 dated January 31st, 2011 and registered in the Ministry of Justice of Ukraine on April 7th, 2011 (hereinafter the Resolution). In the context of the Law legalization (laundering) of the proceeds from crime are any actions related to funds (property) received as result of a crime aimed at the concealment of the origin of said funds (property) or assistance to a person who is accomplice in said crime. The Law excludes tax 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 are inclined to include tax crimes also. The system of financial monitoring consists of two levels: the initial and 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 its equivalent in foreign currencies; Page 164

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subjects of economic activity conducting lotteries and gambling games including casinos and electronic (virtual) casinos; notaries, law firms, auditors, audit companies, physical persons-entrepreneurs rending accounting services, subjects of entrepreneurial business rendering legal services; a 2010 novelty! 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 or exceed 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 their legal 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 the Cabinet of Ministers of Ukraine. FMU activity is directed and coordinated by the Cabinet of Ministers 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 150 000 UAH or its equivalent in foreign currencies (for subjects of economic activity conducting lotteries and gambling games 13 000 UAH or its equivalent in foreign currencies) and if such financial transaction also has one or more of the specific features stipulated in the Article 15 of the Law, i.e. if certain objective criteria are being met. When both conditions are fulfilled, reporting to FMU is compulsory. All insurance related incomings 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 that have 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 the initial level of financial monitoring. Repeated financial transactions the nature of which gives the grounds to believe that their purpose is to evade the procedures of compulsory financial monitoring. Financial operations defined by the typologies of the international organizations fighting against money laundering. Page 165

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Internal financial monitoring (article 16 of the Law) can also be applied to other financial transactions when subjects of the initial level of financial monitoring have grounds to believe that such financial transactions are aimed at legalization of laundered proceeds. Subjects of entrepreneurial business rendering the intercessory services during the execution of sale-purchase real estate operations have to perform internal financial monitoring in case the amounts of said operations equal or exceed 400 000 UAH or its equivalent in foreign currencies Reporting to the FMU on a financial transaction subject to internal financial monitoring is the result of an assessment by the reporting institution, which is based on defined subjective criteria. FMU has right to stop for up to five business days all debit operations on a customers accounts in case said customers operations are suspected to be related to money laundering. 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 the identification rules defined by the Law and, and for banks by the Resolution that includes also identification of the ultimate/beneficial owners (controllers, >=50 percent ownership) of the customers, the shareholders (owners of essential participation, >=10 percent ownership) and the managers/authorized persons of the customers. Identification rules also prescribe to identify nonresident politically exposed persons (PEP) among customers, their controllers, their owners of essential participation and their managers/authorized persons. Banks that are subjects of the initial level of financial monitoring are obliged to classify the customers by their risk appreciation for such customers to perform money laundering operations. Such classification has to be performed in accordance with the Resolution requirements considering the criteria defined by FMU. The Resolution also requested the banks to classify the customers by their reputation. The Resolution requires from the banks the compulsory maintenance of electronic KYC forms (anketas) of prescribed format in Ukrainian. 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 in the 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 of such 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 became effective; to make the identification of the customers with high risk in accordance with requirements of the Law 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 of the Law and the Resolution within 6 months after the Resolution became effective. The Law and the Resolution cover also terrorism related activities. Based on a list of terrorists provided by the FMU the subjects of the initial level of financial monitoring are required to prevent for up to two days a financial operation to be executed, if a participant or a beneficiary of a transaction is a person included in such list. FMU has the rights to extend such time to up to twelve business days. The Law and the Resolution in many aspects respect international AML practice (for instance, 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, Page 166

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the volume of transactions that are subject to compulsory financial monitoring and mandatory reporting 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, where counter powers need still to be developed, where the rule od law is not prevalent, and where the independence 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 6 471 299 transactions reported to the FMU by the subjects of the initial level of financial monitoring as of December 31st, 2010. As of December 31st, 2010 among the subjects of the initial level of financial monitoring registered by FMU there were 176 banks as well as 6329 non-bank institutions. In 2010 819 542 transactions were reported to FMU, of which 787 912 (96.14 percent) transactions were reported by banks. 72 percent reported transactions were subject to the compulsory financial monitoring. In 2010 188 857 reports received by FMU were taken into active work and resulted in the creation of 1706 dossiers. Following to further analyses only 667 dossiers were delivered to Ukrainian enforcement bodies in 2010. In 2010 only 106 criminal cases were initiated and delivered to the courts as a result of reporting to FMU. As of December 31st, 2010 the courts considered only 65 cases. Court decisions led to the arrest of funds and property for the amount of 198.2m UAH and to the confiscation of funds and property for the amount of 15.2m UAH. The efficiency of such Figure 126 Gross External Debt, By Sectors set-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 shortterm private debt (about $45 billion). Ukraines external debt (at more than 60% of GDP and 120% of current account receipts) is now above the median value (40% and 84% respectively) of countries in similar credit rating categories (before the downgrade in February 2009). In 2010, Ukraine's gross external debt added USD 13.9 billion or 13.5 percent and, as of January 1, 2011, reached USD 117.3 billion (85.7 percent of GDP). Dynamics of the external debt of Ukraine, in 2010, were defined 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 127 Ukraine's External Debt Service Needs
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substantial accumulation of short-term debt of other sectors, including trade credits and past due (USD 4.7 billion); a decrease in long-term liabilities of Ukrainian banks to nonresidents (USD 2.5 billion). During 2010, the largest increase in debt (by USD 8.5 billion, up to USD 32.5 billion or 23.7 percent of GDP) was showed by the government sector and monetary authorities. Debt of the banking sector and other sectors (including inter-corporate debt) grew by USD 5.5 billion and totaled USD 84.9 billion (62 percent of GDP). In 2010, short-term external debt with residual maturity less than a year rose by USD 8.5 billion and, at the end of the year, totaled USD 47.3 billion. Its coverage with the international reserves grew up to 73 percent (at the beginning of the year it accounted for 68 percent). Ability to Cover External Financing Needs Ukraine is no longer a low-debt country with external debt at 75% of GDP (compared to 35% average for emerging countries) Gross external debt (public & private) stood at $123 bn at endSeptember 2011. In 2012, external debt service payments will remain high, estimated at about $64 billion or 36% of GDP. Ukraine must maintain investors confidence to keep rollover ratios high
Figure 128 Non-performing Loans in Selected Emerging Markets
Banking Sector Weaknesses In Ukraine, bank credit grew by 70% pa over 2006-2008, supported by a 40% pa increase in money supply and large commercial banks borrowings from abroad.
Figure 129 Non-performing loans, right scale
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Many studies in EMs have shown that high rates of credit 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 Feb2009, 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 foreign Figure 130 Stock of Bank Credit currency. All this created uncertainties and about of bank deposits 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 from NPLs (~40% of total loans). The substantial presence of European banks in Ukraines banking sector is another source of vulnerability, given the Eurozones crisis CAPITAL MARKETS Commercial banks In 2010, activity of the banking sector of Ukraine was characterized by a stable inflow of funds in the banking system, 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 by 8.8% (for 2009 by 2.9%) and as at 1 January 2011 amounted to UAH 1 090.2 billion. At that, assets of the banking sector grew for 2010 by 7.0% to UAH 942.1 billion in comparison with the curtailment by 4.9% in Page 169

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2009 (primarily due to growth of the input into securities). Thus, the share of input into securities within the total assets increased 2.0 times (by 3.8 percentage points). The share of loans, that remained the main component of assets, reduced by 5.3 percentage points. For 2010, an increase in the negatively classified credit operations by 13.0% (in 2009 3.3 times) took place, and their share within the total credit indebtedness grew from 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 same time, 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 of the National Bank of Ukraine by 2.2 percentage points (to 8.8%). In 2010, noted was reduction of the ratio of banks' 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 the GDP 73.5% (as at 1 January 2010 83.8%) and equity remained at a level of 12.6%. For 2010, the equity of banks of Ukraine enlarged by UAH 22.5 billion, or by 19.6% (in 2009 reduced by 3.4%) and by the end of the year accounted for UAH 137.7 billion. The equity share within the banks' liabilities as at 1 January 2011 amounted to 14.6% (as at 1 January 2010 13.1%). The paid-in registered authorized capital for 2010 increased by UAH 26.7 billion, or by 22.4% to UAH 145.9 billion, which enlarged the capitalization level of the banking sector. For 2010, the portion of foreign capital in the registered authorized capital of banks of Ukraine incremented by 4.8 percentage points to 40.6%. The regulatory capital of the banks of Ukraine rose for 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 paidin 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 to 15.0% from 13.6% as at 1 January 2010. The adequacy level of regulatory capital of the banking sector augmented for 2010 to 20.83% from 18.08% as at 1 January 2010. In 2010, the process of concentration of assets, capital and liabilities in the banks of Group continued, where, as at 1 January, 2011, 66.8% of the assets of banks of Ukraine, 66.4% of the equity and 66.8% of the total liabilities were concentrated. The income of banks of Ukraine as at 1 January, 2011, amounted to UAH 136.8 billion, or reduced for the year by 4.3%. The interest income, as before, remained the main income item UAH 113.3 billion. Its volume, visavis the previous year, reduced by 6.4% (primarily, due to the curtailment of income from crediting the individuals), and its portion within the banks' income reduced to 82.8% against 84.7% as at 1 January 2010. At the same time, the commission income diminished for the year by 5.8% to UAH 15.3 billion, and its portion within the total income amounted to 11.2%. The result of trade operations reduced by 24.5% to UAH 2.2 billion.
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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% and as 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 January 2010). It took place against the background of curtailing the volume of deductions to form reserves that reduced for the year by 38.8% and as at 1 January 2011 accounted for UAH 46.2 billion, or 30.8% of all expenses of banks. In comparison with 2009, the total administrative expenses grew by 3.0% and amounted to 19.4% of the expenses. The expense to income ratio of banks equaled 109.5% (versus 126.9% in 2009). By the results of 2010, fixed was the negative financial result of activities of the banking sector to the amount of UAH 13.0 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 and increased for the year by 24.4% against the curtailment by 6.9% in 2009. This was contributed by gradual recovery of the economic growth, stable dynamics of the foreign exchange rate during the year and higher confidence of the economic entities in the banking system. Funds of the households sector remained the largest portion of deposits attracted by banks, and secured the main increment of deposits in 2010. As at 1 January, 2011, the households sector's deposits totaled UAH 275.1 billion. The growth was noted during the whole of the year, being favored by an increase in the real wages and practically stable exchange rate of hryvnia against the US dollar. For 2010 as a whole, the deposits of households sector enlarged by UAH 61.0 billion, or by 28.5% versus the curtailment by UAH 3.8 billion, or by 1.7%, in 2009. The balances of funds of the non-financial corporations sector in 2010 increased by UAH 21.3 billion, or by 22.5% (versus the curtailment by 19.8% in 2009). Their dynamics during the year were uneven, Page 171

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which became the main factor of fluctuations of the deposit balances as a whole. After the mentioned reduction in January February, since March 2010 the non-financial corporations' deposits enlarged, except June (when the balances of deposits in foreign currency diminished due to the significant repayment of foreign loans) and November (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-financial corporations 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 year by UAH 3.4 billion (or by 21.8%), primarily at the expense of funds of other financial intermediaries and auxiliary financial organizations by UAH 2.7 billion, or by 33.3% (specifically, their short-term deposits in hryvnia). Among the main factors of such dynamics there was an increase in the stock market indicators during the year and enlargement of the economic entities' solvency. The balances on deposits of the general government sector in 2010 diminished by UAH 4.5 billion (or by 51.9%) to UAH 4.1billion as at 1 January 2011, including at the expense of central government bodies by UAH 4.2 billion, or by 51.8%. The deposit structure by sectors of the economy changed: the portion of deposits of the households sector as at 1 January 2011 augmented to 66.0% of the total deposits (versus 63.9% as at 1 January 2010), the general government sector decreased from 2.6% to 1.0%, the non-financial corporations sector from 28.3% to 27.9% , the other financial corporations' sub-sector from 4.7% to 4.6%. The growth rate of deposits in national currency in 2010 (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 to slowdown, however by the end of the year the increase in funds remained significant 38.3% (versus reduction by 14.2% in 2009). The dynamics of balances of funds in foreign currency were characterized by relative stability that was favored by insignificant fluctuations of the exchange rate of hryvnia versus foreign currencies during 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, or by 1.3% (in particular, due to the excess of payments on import contracts over the receipts on exports). For 2010, the deposit structure by types of currencies changed: the share of deposits in national currency enlarged by 5.7 percentage points to 57.4%. During the year, against the background of recovery of the economic activity, noted was the deposit structure improvement by terms. Moreover, the interest rate policy of other deposit corporations (banks) under conditions of sufficient liquidity was aimed at creating the stimuli for enlargement of volumes of the long-term deposits. Thus, by terms of attraction, in 2010, the curtailment of short-term and growth of long-term deposits and 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 same time, 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%), the Donetsk region (9.7%) and the Dnipropetrovsk region (8.9%). The growth of the deposit base of banks motivated the downward dynamics of the deposit value during 2010. The increase in the interest rate on deposits in national currency by the end of the 1st quarter of the reporting year was intended to prevent the outflow of these funds, to support the banks' liquidity and was compensated by a simultaneous reduction of the value of deposits in foreign currency. Since April, the interest rates were stably decreasing both on deposits in national currency and those in foreign currencies. Small increase in the deposit value in December was due to the season factor and the growth of deposits with a larger value within the deposit structure. The averageweighted 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. Page 173

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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 relatively scarce as compared with lending in Western Europe and the size of Ukraines population. In relative terms, a mid to large-sized European banks total assets are greater than the total assets of the entire Ukrainian banking sector. Loan terms vary depending on the clients ability to repay, prior relationship with a bank or credit union, availability and liquidity of collateral, personal references and other factors. Loans tend to be short term and carry high rates of interest which makes it difficult to impossible for some clients to take out a loan; often monthly payments exceed the ability of the person to repay the loan with existing cash flows. The absence of credit histories has complicated the entire process of lending on an unsecured basis. Banks generally extend credit for short periods of time ranging from one (1) to three (3) years. Given the generally short maturities and relatively high interest rates, the large monthly payments are very often beyond an individuals ability to pay. Since many individuals are unable to meet these conditions, they are unable to borrow. The availability of collateral and the assessment of its value and liquidity play a critical role in a banks decision to extent credit to an individual. Secondary source of repayment often becomes the basis for extending credit rather than the primary source which is cash flow. Loan underwriting procedures in the retail sector are substantially similar for banks and credit unions. In principle, a client fills out an application and submits the standard set of documents: passport number, drivers license, employment certificate (indicating income), as well as other identification and personal data. Credit Unions have flexible underwriting requirements and tend to rely on interviews with a prospective client. Some credit unions charge interest up to 100% to compensate for a lack of knowledge about a client and competition within and beyond the sector. Over the past year, competition in the automotive 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 1 st quarter 2005, 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 are many forms of fraud, identification fraud (passport forgery or use of stolen passports and forgery of certificates on salary) seems to be the most widespread at this time. One of the major functions of the credit bureau will be to 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 2nd half year stopped. Since June, under conditions of expanding the resource base, and, thus, reduction of the credit value (in national currency), the process of a monthly increment of the balances of indebtedness started under the credits extended (except December). Owing to this, their total volume for 2010 enlarged by UAH 9.5 billion, or by 1.3% to UAH 732.8 billion (for 2009 diminished by 1.5%). The loans extended to the nonfinancial corporations sector remained the largest component within the structure of crediting the residents and ensured the main increment in 2010. Upward dynamics of the balances on credits to these borrowers were observed during nearly all 2010, and for the year they grew by UAH 38.7 billion, or by 8.4% (in 2009 by 4.2%). 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 Page 174

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trade and industry. By the end of December, the indebtedness on credits to non-financial corporations amounted to UAH 501.0 billion. Within the structure of credits under the target investments, the credits provided for the non-financial corporations' activity prevailed. The share of these credits in the total balances of credits extended to the non-financial corporations sector, due to reduction of activation in the investment crediting, 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 of balances on overdue credits took also place to UAH 65.6 billion. For 2010, their increment was UAH 13.2 billion (in 2009 by UAH 42.1 billion) and it was reasoned by enlargement of overdue credits both in national currency (by UAH 3.4 billion), and in foreign currency (by UAH 9.8 billion). The share of problem credits in the total balances on credits extended to the non-financial corporations sector continued gradually to rise and for the reporting year grew from 11.3% to 13.1%. In 2010, noted was an increase in the credits given to the general government sector by UAH 3.1 billion, or 1.5 times to UAH 8.8 billion, including at the expense of the general government by UAH 2.9 billion, or 1.6 time. Under conditions of the instable financial situation of borrowers and a high level of problem indebtedness in 2010, further monthly curtailment of balances on credits 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 to reduction of the consumer credits by UAH 14.2 billion, or by 10.3%,credits for acquisition, construction and reconstruction of property by UAH 16.8 billion, or by 17.0%, and other credits by UAH 0.7 billion, or by 13.1%. Balances on credits to other financial corporations reduced for the year by UAH 0.6 billion, or by 4.2% to UAH 13.4 billion, solely at the expense of short-term credits, given to other financial intermediaries and auxiliary financial organizations by UAH 1.4 billion, or by 16.5%. The main source of the crediting growth was enlargement of credits in national currency, the indebtedness under which was practically increasing every month and for the year as a whole rose by UAH 40.0 billion, or by 11.2%. This improved the Page 175

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structure of credits by types of currencies the share of credits in national currency within the total credits to residents increased for the year from 49.2% to 54.0%. The positive dynamics of balances under credits in national currency in the reporting year were secured by the enlargement of credits extended to the non-financial corporations sector by UAH 39.0 billion, or by 14.4%. Credits, given to the households sector in national currency, 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 the downward dynamics of indebtedness on these credits in all sectors of the economy. Balances under the credits in foreign currency were growing only in July and September which did not compensate for their decrease during other months of the year, and by the results of 2010, they reduced by UAH 30.5 billion, or by 8.3%. The reduction took place both under the credits to the nonfinancial corporations sector (by UAH 0.3 billion, or by 0.1%), and the households sector (by UAH 29.8 billion, or by 17.1%). Considering a prudent credit policy of other depository corporations (banks), in 2010, the residents' crediting was performed for shorter terms. In the annual estimate, the credits with a term up to 1 year grew by 5.1%, with a term from 1 year to 5 years by 3.3%. At the same time, the credits, extended for a term over 5 years in the annualized terms, diminished by 5.0%. Within the regions, as at 1 January, 2011, the largest volumes of credits were extended by banks of the Kyiv region and the city of Kyiv (50.0%), the Dnipropetrovsk region (13.4%), the Donetsk region (6.4%), and the 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 national currency (noted from March to August) changed by the upward one in September December. For the year as a whole, the interest rate dropped by 5.9 percentage points to 14.6% per annum. During the year, the dynamics of interest rates under the credits in foreign currency were differently directed and fluctuated within 9.5%11.4% per annum. For the year, the interest rate under these credits enlarged by 0.7 percentage point to 10.6% per annum. Page 176

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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) exercised successfully its functions of the national inter-bank settlements, timely servicing the SEP members and at the same time ensuring a high level of safety and reliability of the transfers made. In 2010, 98.2% of the inter-bank transfers in the national currency were made within Ukraine applying the SEP and only 1.8% of the similar transfers were carried out through the correspondent accounts of the banks opened with other banks. As of 1 January 2011, the total number of institutions being the SEP members was 977, including 175 banks of Ukraine, 736 bank branches, 28 State Treasury bodies of Ukraine (hereinafter, the State Treasury), 37 institutions of the National Bank of Ukraine and the Private Joint-Stock Company "Ukrainian Securities Depository". During 2010, 336.9 million of the initial payments and the payment orders totaling UAH 7 909 billion were processed in the SEP, and that was by 8% and 28% more, respectively, as compared with the previous year. Out the said payments, 336.7 million were the file mode payments of UAH 7 112 billion and 0.2 million were the real time mode payments of UAH 797 billion; and as regards the previous year, it was by 8% 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), and the least portion was marked in January 2010 (20 million). Such distribution of payments by months tends to follow the situation of 2009. In 2010, the initial payment transactions processed in the SEP by banks amounted to 90.5%, those made by the State Treasury formed 9.4% and 0.1% were made by the National Bank of Ukraine. As regards the structure of the initial payment amount, the trend of 2010 was similar to the previous years 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). The daily average balance of the SEP members' accounts in 2010 formed UAH 25.9 billion. The daily average amount under the initial payments was UAH 31.5 billion. On average, 1.3 million of the payment documents were processed daily. Turnover factor of the accounts of the SEP members (calculated as a ratio of average daily amount of initial payments made by the SEP members to the average daily balance of funds on the SEP members' 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 competition with other forms of retail payments as well as investment in its infrastructure. Payment cards are the main retail non-cash payment instrument in Ukraine while the use of direct banks transfers, e-money and paybox terminals is relatively rare. Nevertheless cash is a prevalent instrument of settling retail economic transactions and the main com-petitor of payment cards in payments market. In comparison transferable bank balances that may be used for retail payments are relatively low. Use of cash is stimulated by high share of shadow economy. Significant share of transactions are conducted by informal busi-nesses. Besides, unofficial wage payments are prevalent and also paid in cash. Retail shops also have incentives to accept only cash to simplify tax avoidance. As a result we can see on Figure 2.1 that share of cash in narrow money supply in Ukraine is almost two thirds. This is much higher than in Euro area (17%) and CEE countries (17-40%) as well as in Kazakhstan and Belarus. This reflects a relatively low role of non-cash payments in Ukraine. Moreover, this ratio doesn't include tens of billions of US dollars that are also used in shadow economy of 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 a low starting point. Introduction of national currency in 1996 and macroeconomic stabilization after 1998 crisis set the stage for almost 10 years of economic growth and helped financial sector development. Banking sector boom that started in 2005 and rising incomes induced most Ukrainian banks to participate in payment card issuance. Between 2006 and 2008 banks increasingly sold cards for wage and social benefit payments as well as 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 cards while in 2008 and 2009 the number of cardholders exceeded adult population meaning that most Ukrainians had at least one payment card while some had several cards issued by different banks. In 2011, there was some decrease in number of cardholders as cards issued before the crisis expired. In sum, over 2001-2011, the number of commercial banks that are members of card payment systems more than dou-bled and the number of cardholders has increased tenfold from 3.2 million in 2001 to 34 million by the end of September of 2011. Over the last ten years payment card infrastructure also developed rapidly. Between 2002 and 2007 the number of active payment cards has grown by the factor of 12, equivalent to 50% CAGR over six years. By 2009, the number of active payment cards issued fell by 28% compared with the end of 2007, following the crisis in the banking sector. Due to the crisis many banks cancelled or cut back credit limits on payment cards as well marketing efforts. Consumer demand also fell and banks restricted issuance of payment cards while consumers ceased to use some of the cards. During 2010, the number of banks being the payment system members reduced by 5 banks and as of 1 January 2011, it consisted of 141 banks (81% of the total number). Total number of the payment cards which remained effective as of 1 January 2011 amounted to about 46.4 million pieces. Total number of the payment cards issued by the banks of Ukraine (payment cards against which at least 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 Page 179

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1.1%. In 2011, the number of active cards grew again as banks restarted marketing of bank cards. Out of the total cards issued by banks, the share of magnetic strip cards prevailed (93.3%). Chip function cards and cards with the combined magnetic strip and chip functions formed about 2.1% and 4.2%, respectively; amount of payment cards used for the Internet settlements was equal to 0.4%. Regarding the payment model, the debit function cards prevailed (80.9%), while the credit function cards formed over 19% and the electronic money cards amounted to about 0.1%. During the reporting period, the number of automatic telling machines servicing the payment card holders grew by 4.1% (up to 30.2 thousand units), and those of the payment terminals increased by 4.7% (to 108.1 thousand units). The number of transactions using the payment cards issued by the banks 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 the payment cards of Ukrainian banks within the own network of the issuing bank, 12.2% operations were performed 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 payment cards); non-cash payments rose by UAH 11.1 billion (to an amount of almost UAH 29.5 billion that formed 6.5% of the total operations performed with applying the payment cards). As compared with 2009, the number of transactions on cash delivery in 2010 rose by 57.9% coming to 571.2 million transactions (82.5% of the total operations with applying the payment cards); non-cash payments grew by 44 million and formed almost 121.4 million transactions (17.5% of the total transactions with applying the payment cards). During 2010, the average annual turnover per one payment card grew by UAH 5.0 thousand as compared with 2009 and amounted to UAH 15.4 thousand. Within the international payment systems such as VISA it was equal to UAH 16.2 thousand, with MasterCard UAH 14 thousand, and within the group of the domestic one- issuer systems it 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 19.5 thousand. During 2010, the National System of Mass Electronic Payments for goods and services for the people with applying the NSMEP cards showed its stable operation. Particular attention was focused on the financial situation of the members and on the prevention of the possible adverse effect on the operation of the NSMEP, 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 57 members (including the National Bank of Ukraine and the Ukrainian State-Owned Company "UkrPost") and 7 participants. According to the data of the NSMEP Main Processing Centre during 2010, the banks being the NSMEP members issued 239.3 thousand cards. As of 1 January 2011, the NSMEP cards totaled 2.9 million pieces. In 2010, the NSMEP turnovers went beyond UAH 25.9 billion as compared with UAH 42 million in 2001.
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" realized the possibility to acquire electronic railway tickets through the Internet(automated self-servicing system "eTicket"). The introduction of the pilot project "Student Payment Card" was finalized on the basis of the national information and production system "Education" using the NSMEP knowhow. Within the above project, 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 regulations regarding the description of the student (pupil) card standard. As of 1 January 2011, the number of the test participants amounted to almost 50 educational institutions of Ukraine and number of the student payment cards issued was over 100 thousand pieces. Based upon the NSMEP know-how, the formation of the automated system for the Insurance Fund of Deposits for Individuals got start, which would provide with the possibility to introduce the non-risk compensation procedure, to substantially speed up the beginning of payments, to refuse from 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 the NSMEP 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 of 2008. This happened as small volume merchants installed man-ual imprinters to process card payments. The number of retail POS terminals fell measurably during the economic crisis in 2009 and stagnated in 2010. The reason 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-crisis levels. At the same time banks continued to install new ATMs even during crisis. As a result Ukrainian network of ATMs is comparable in density to some of the EU countries: in Ukraine it was 659 ATMs per million inhabitants vs 800-870 ATMs per million in France, Italy, Russia and Switzerland. Overall, despite Page 182

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high growth in numbers of payment cards and POS terminals, Ukraine is lagging in market infrastructure development. 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 ahead of a number of emerging economies and close to the level of Italy. This situation indicates that penetration of payments cards is considerable but there is potential for further increase of payment cards in circulation as well as for higher competition. When analyzing payment infrastructure in Ukraine it is useful to consider not only availability of hardware but also a rate to which it is put to use by population. It shows, in practice, potential return from developing infrastructure. Based on the latest available data from CPSS, ECB and from central banks of several CIS countries, we see a huge difference be-tween some of developed economies, where the number 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 the number 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 CIS countries represented. However even in this modest group card payments are more frequent in Romania, Russia and Armenia than in Ukraine. Thus we see that although the gap in payment infrastructure with developed economies may be overcome with in-creased investment Ukraine will still have to go far to decrease the role of cash as a main payment instrument. Another feature of Ukrainian payment card market is relatively low, but rapidly growing penetration of credit cards and prevalence of cards with magnetic stripe. In 2010, credit cards accounted for only 19.3% of the total number of issued payment cards, which is much higher than in most CPSS countries excluding Russia, India and China. This may be explained by three factors. First, the majority of 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 most important priority. This facilitated expansion of payment cards but also limited the number of services available for holders of cards. Another factor is a relatively late development of credit cards as mass market product and limited offering by banks. Finally, the crisis led to a widespread closing of credit cards by banks due to sharp increase in defaults on consumer loans. In the three quarters of 2011, the number of cards with credit function increased by 40% as banks realized that credit card debt in Ukraine performed much better than other consumer loans during the crisis and resumed consumer lending. Focus on low-cost salary projects also constrained the share of technologically Figure 145 Share of credit cards advanced types of payment cards on the Ukrainian market. Thus the share of chip (EMV) Page 184

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payment cards was only 6% of the total in September 2011 despite incentives from global payment companies. This probably happened due to relatively low rate of fraud on magnetic stripe cards. Switch to chip cards is likely to happen relatively quickly as soon as consumer protection legislation is improved and retail card payments are used more widely. Corporate business cards are another undeveloped segment as corporate cards are only 1.4% of the total. Use of corporate cards is limited by legislation as well as by their unsuitability for shadow economy transactions. Currently the market is divided between international payment systems (Visa and Mastercard) and domestically created systems. The share of domestically created systems is relatively small. Currently there are two domestic payment card systems in Ukraine. In 2001, the NBU created its own payment card network called National system of mass electronic payments (NSMEP). Currently, it is still owned and operated by the NBU. By the end of 2010, NSMEP enlisted 57 banks to participate although most of them are second- and third-tier banks (with the exception of state-owned banks). In 2010, there were on average 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 (only a total of 6000 is reported which contradicts other NBU publications). Bringing together NBU data we can estimate that there were 1200-1500 NSMEP ATMs and 4000 POS terminals compatible with NSMEP in the end of 2010. The main problems with spreading NSMEP cards were absence of adequate infrastructure and incompatibility of NSMEP chip cards with EMV global standard. The second payment card system is Ukrcard but it is currently working primarily as processing center for a number of banks while the number of its own cards in circulation is slightly above 100,000. Several banks also issue one-bank cards accepted only in their ATM and POS network. Now we'd like to focus on what cardholders do with their cards. At the moment, in Ukraine they mostly withdraw cash. And between 2002 and 2008 they started to withdraw a lot more cash. It happened both thanks to the development of market infrastructure and to sharp increase in nominal inFigure 146 Number and volume of payment card operations in Ukraine comes over the period. The number of cards increased by a factor of eight while nominal Page 185
Figure 147 Types of payment cards issued by Ukrainian banks

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disposable income grew 4.5 times and cash withdrawals multiplied by 18 times. At the same time, the average number of cash withdrawals per card didn't change much. It corresponds to withdrawals once or twice per month. 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 size of 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 withdrawals fell in 2009 and increased slower than POS payments in 2010 and 2011. At the same time, the number of POS payments over three quarters of 2011 is more than double the number over the whole 2008. As a result, the share of POS payments by number reached 23.3% over three quarters of 2011 and by volume increased to 7.9%. In 2012, the share of POS transactions will likely exceed 25% and will continue to grow rapidly. Taking into consideration experiences of the Western and Central Europe markets, this process will continue into the future, 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 led to 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 the number of POS transactions where they may overtake ATM use in a few years. This indicates large shift in consumer behavior. The card market continues to actively develop and continued growth is expected over the next 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 or are cash collateralized. In most cases, salaries are directly deposited to their bank accounts. Debit cards serve as the vehicle to withdraw deposited monies. Privatbank, Aval, Nadra and Prominvestbank are the largest players in the card market. Page 186

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Figure 149 Ukrainian card market
BASIC RESULTS OF THE OPERATION OF THE NATIONAL AND INTERNATIONAL SYSTEMS FOR TRANSFER OF FUNDS IN 2010 As of 1 January 2011, in Ukraine there were operating the following systems: 4 systems for transfer of funds established by the banks of Ukraine (including 2 international systems); 3 systems for transfer of funds established by the non-banking institutions (including the state-owned company "UkrPost") and 22 international systems for transfer of funds established by non-residents. During the reporting year, the amount of 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-resident members) and "PrivatMoney", established by the PJSC CB "PrivatBank" (25 resident members, 26 nonresident members). In 2010, the amount of funds transferred with applying the national and international payment systems established 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 UAH 186 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 of transfers within Ukraine processed by the "Post Transfer" system was equal to UAH 5.2 billion including the urgent transfers of UAH 70 million. According to the Agreement on the post payment services with the World Post 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 the electronic transfers. Outside Ukraine the fund transfers amounted to USD 132 million, including the electronic transfers of USD 40 million (in the equivalent). International systems for the transfer of funds established by the non-residents Members of 22 international systems for the transfer of funds established by the non-residents appeared to be about 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 transfer systems, that were established by non-residents, increased by 16.0% as compared with the previous year and amounted to USD 2.6 billion (in the equivalent), while the amount of funds transferred outside Ukraine grew by 27% to USD 0.4 billion (in the equivalent). The largest amounts of funds were transferred to Ukraine with applying the following international transfer systems: Western Union (USA) 41.0%, "Unistream" (Russian Federation) 13%, MoneyGram (USA) 10.0%, Migom (Russian Federation) 8%, CONTACT (Russian Federation) 6%. The largest amounts of funds came to Ukraine with applying the international transfer systems, 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 from Ukraine 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 used the international transfer systems that were established by non-residents, for transfer of both the foreign and national currencies within Ukraine. In 2010, with applying the international transfer systems, that had been Page 188

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established by the non-residents, the amount of funds transferred within Ukraine was equal to UAH 148 million, 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 number of customer rose almost by 0.4 million) including the legal entities and individuals (both residents and nonresidents), who opened the current and deposit accounts. Out of the mentioned, 125.6 million were the natural persons and 2 million were the business entities, including 17.6 thousand of non-banking institutions and 6 thousand 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 remote servicing of accounts for their customers. Number of customers being the business entities which used the system of remote servicing of their accounts amounted to 699 thousand (34.6% of the total customers being the business entities). During 2010, the total number of accounts opened by the customers grew by 6.8% up to 166.3 million, including the following: current accounts 108.7 million (65.4% of the total accounts opened with the banks), including 100.5 million Accounted 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 2.2 million 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 the National Bank of Ukraine"(NBU law); "On Banks and Banking"; "On Payment Systems and Fund Transfer in Ukraine" (Payment system law) as well as the regulations of the NBU. It also includes internal NBU regulations, since the only inter-bank payment system available to the Ukrainian banks is SEP (System of Electronic Payments) which is an internal unit of the NBU. The NBU has no clear authority to regulate payments market in Ukraine. Authority of NBU to control payment systems is foreseen in art. 41 of Payment system law while art. 13 of this law authorizes NBU to make regulations regarding the usage of payment instruments including payment cards. In the NBU law sec.6 and sec.7 of art. 7 allow the NBU to determine system rules and form of payments as well as to direct, control, and supervise creation of electronic payment instruments and payment systems. These provisions clearly give the NBU authority over the payment industry in Ukraine. However, the ambit of the NBU authority in the law is ambiguous. For example the basis for regulations on the use of payment cards is clear. At the same time what exactly the law means by the control over 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 decided to increase its engagement with payment systems and devoted more time to issuing regulations for payment industry. NBU regulation expands on basic rules provided in the legislation. For example, banks are required to register their contracts with payment systems while NBU also approves operating rules of payment systems founded in Ukraine. Operating procedures of the payment card system must include a number of required elements. Also international payment card systems cannot include exclusivity provisions in their contracts with banks. Law also has several general provisions on issuance of payment cards. In particular, domes-tic card payments must be made in hryvnia, issuance of payment cards has to be done in accordance with NBU regulations and payment system rules. Interesting peculiarity of Ukrainian law is that it requires merchants to accept cards from at least three payment card systems. However, this provision is subject to regulations issued by the Cabinet of Ministers and so far was not enforced. NBU regulation of interest is Resolution NBU #223 from 30.04.201059. It is a relatively new regu-lation that defines conditions of issuance and usage of payment cards. While it deals mostly with technical details of payment card usage in Ukraine it has several notable provisions: 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 also required to inform cardholder about the exact sum of com-mission charged on ATM operation before it is completed; Requirement for international payment system to receive payments for its services in hryvnias through Ukrainian 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 nonresident to provide assurances in the contract on providing processing services that it will comply with money laundering legislation of Ukraine. When Resolution #223 has come into force, it turned out that some of its provisions were applied in uneven manner. For example, one international payment system has decided to change its operational mode in Ukraine and charge its Ukrainian client banks for part of its services in UAH. In contrast, another major company continued to charge its client banks in USD only. 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 services under GATS comes into question. Requirement for the banks to display the complete commission for the ATM withdrawal also turned out to be hard to implement. Changes to consumer protection Page 190

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requirements were also hard to enforce as mechanisms of consumer protection are mostly set in specialized law. Another major regulatory change in 2010 was approval by the Cabinet of Ministers of the re-vised deadlines for acceptance of payment cards by retailers. As was mentioned earlier Payment Systems Law requires all merchants to accept payment cards since 2004. However, the Cabinet of Ministers had to issue regulations on what merchants will be subject to this rule and on its enforcement. Cabinet of Ministers in 200662 approved such regulations requiring all merchants to accept payment cards on varying schedule from July 2007 to January 2009 depending on the category of merchant with exception of retailers with annual sales under UAH 5 m. However, government didn't provide for the enforcement of this regulation and it was ignored by those retailers that didn't wish to accept cards. In September 2010, the government approved a new resolution that required all companies selling goods and services to population to accept card payments with the exception of shops with area less than 20 sq. m or companies located in towns and villages with population less than 25,000. Medium and large enterprises working in towns and cities with population 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 mechanism for enforcement of this provision. Thus it is likely to be inefficient in stimulating wider acceptance of card payments. Indeed the latest statistics on the number of POS terminals does not show rapid increase that would have been expected if companies were complying with the resolution. Thus either the resolution is mostly ignored or most shops in larger cities already accept payment which we doubt based on anecdotal evidence. 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 influence on financial sector due to lax enforcement. At the same time they highlighted ambiguities in legislation and negative 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, NBU requested public comments on the Draft law "On Amending Certain Legislative Acts of Ukraine (concerning payment systems and the development of non-cash settlement)". In September, the period for public comment ended and NBU is currently preparing a draft law for submission to the Verkhovna Rada. Later it requested comments for draft resolution on Over-sight of the payment systems (Oversight resolution). Later versions of the Draft law and over-sight resolution may differ from the initial draft rendering some of our comments nonapplicable. Nevertheless, our analysis is based on the latest publicly available version. The main purpose of the Draft law is to define NBU authority over the payment industry more clearly. In particular, it will make payment systems clearly subject to NBU regulation and oversight as well as provide the NBU with instruments for the enforcement. Oversight resolution sets out how the NBU intends to use the new authority. It should be noted that oversight of payment systems as well as of other financial market infrastructure is one of inherent functions of the modern central bank64 necessary to ensure financial stability. At the same time, focus of central bank oversight is usually concentrated on systemically important and prominently important which are 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 the NBU SEP, and it is currently managed by the central bank. Card payment schemes are generally not regarded as SIPS65 nor as prominently important payment systems and subject to smaller set of principles such as formulated for example by ECB66. Thus NBUs goal to conduct oversight of payment systems in Ukraine Page 191

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should be encouraged. This means that changes to the law that would clarify NBUs role in this important task are necessary. At the same time, oversight must also reflect principles of proportionality, risk-based regulation and international cooperation. The main focus of the oversight should be to ensure that SEP system conforms to principles foreseen by Com-mittee on Payment and settlement systems (CPSS) and forthcoming Principles for financial market infrastructures. At the same time, draft Oversight regulation foresees relatively low thresholds that make other payment systems subject to SIPS oversight by the NBU. Also more attention has to be devoted to joint oversight of international payment systems with other regulators while international cooperation 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 disproportional regulatory burden. When exercising the oversight function, the NBU should also consider that currently US dollar may be the largest retail payment instrument in Ukrainian economy. At the same time, the share of cashless payments remains quite low. Also while a large part of official wage payments is made through bank cards, wages are then cashed through ATM withdrawals or bank branches while the use of POS terminals remains a relatively unusual occurrence. This situation complicates monetary policy and threatens financial stability. Thus goals of oversight will have to be balanced with the need to promote the development of electronic payments. Also NBU as the owner of NSMEP card payment scheme will have to make necessary arrangements to ensure that conflicts of interest are avoided between interests of NBU as NSMEP owner and the oversight function of the NBU. This can be achieved through privatization, spinning off NSMEP as a separate 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 adopted as it is, this goal will not be achieved completely. The NBU may expend large part of its resources for intensive oversight of non-systemic payment sys-tem while devoting less attention to most critical parts of financial market infrastructure. It can lead to disproportional burden on less crucial payment systems and hamper the development of electronic payments. Other concerns include: possible conflict of interests between NBUs 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 of provisions 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 about operations on their account (probably online or through SMS or email). NBU also tried to establish division of liability for fraudulent transactions between bank and cardholder more clearly. In particular, liability of consumer 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 consumer protection will benefit cardholders without imposing undue burden on banks. Limitation of the consumer liability is a common provision of legislation in UK, US, EU and other countries. For example, EU Payment Page 192

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Services Directive limits liability for disputed transactions to 150 euro while allowing member states to set lower cards. In US, liability for unauthorized use of debit card is limited to USD 50 if the owner informed the bank that the card was stolen within 2 days. Cardholder is not responsible for unauthorized use of credit card number if the credit card was not stolen. Advance notice about changes of payment card terms is also a commonly accepted international practice although a 60-day notice requirement may be excessive for most changes in terms. The 60-day notice may be appropriate for changes in interest rate on credit card debt but it may be shortened to 30 days for other changes in terms. Mandatory notification of consumers about their operations is a more novel proposition. The banks may be forced to increase charges to consumers or retailers to recoup additional costs. On the other hand, increased awareness about operations with payment cards may reduce fraud. Overall, new consumer protections may somewhat increase costs of servicing payment cards but will help to protect consumers and will improve competition. Provision on notification about operations needs clarification on the form of notification, possibility of opt-out by consumer and maybe some relief for smaller issuers. To promote electronic payments the NBU offers to expand the mandate to accept payment cards to all companies that accept cash payments with cash register machines. Another provision of the draft law allows Tax service and Consumer protection authority to enforce this provision. Finally, companies would be forbidden to charge different prices depending on payment instrument. Improved enforcement of provision requiring universal acceptance of payment cards will help to increase the share of non-cash transactions with payment cards, increase useful-ness of payment cards and decrease cash in circulation. This in turn will help to decrease the role of shadow economy and increase economic growth. At the same time, competition authorities should be vigilant to maintain competition between banks for acquiring services to prevent increase in fees due to legal requirement to accept cards. Competition should also be maintained between suppliers of POS terminals to merchants. Prohibition on surcharges by retailers for accepting payment cards is also a useful tool to promote non-cash payments. On the downside, Ukrainian tax service is not famous for even-handed enforcement of the law. Thus new enforcement mandate may become another club for tax service to wield without positive effects on penetration of electronic payments. Also added requirement for the merchants to support NSMEP (or Ukrcard) will increase acquiring costs and violate promise of national treatment made under GATS to payment card schemes. Recent WTO case against China shows that this may also lead to trade sanctions against Ukraine or com-plicate ongoing free trade negotiations. Draft law also proposes to radically change 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 international payment systems and local payment systems provide this service. Draft law also requires international card systems to accept payment for their services rendered on the territory 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. This requirement also was foreseen in regulation. Another provision allows banks - members of domestic and international payments systems - to issue co-branded cards. Current law provides that design of the card should be approved by payment system. From economic point of view, these changes if they are accepted by international card companies, will be detrimental to competition and will have significant costs that will be borne by the con-sumers. NBU currently provides settlement and clearing for NSMEP payment system which com-petes with two international payment systems. After changes are adopted clearing and settle-ment for all domestic interbank payments will be concentrated in the NBU. Page 193

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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 and introduce innovations in the market. In the short-term, creation of a clearing center by the NBU will require capital outlays that will be financed by either end-users or subsidized by the NBU. In the latter case these costs will be ultimately financed by the budget as the NBU will transfer to the budget reduced profits68. Experience also shows that NBU is unlikely to provide more efficient clearing and settlement services than international payment card systems. In the beginning of 2000s, the NBU tried to operate national processing center TOPAZ which later was closed due to low reliability and inability to handle peak volumes of transactions. After that the NBU created NSMEP system which was intended to become a dominant payment card system and which was launched when only few Ukrainians had payment cards. Nevertheless, market share of NSMEP remained low over years of its existence despite presumably low charges and a number of regulatory incentives to adopt NSMEP. International experience on the issue is mixed. Some domestic card processing networks have lower prices than international networks69 while others are going out of business as they lose competition70. Some domestic networks restrict competition and innovation on the market and limit interoperability while others are more open. In EU absence of inter-operability between domestic payment card schemes led to fragmentation of the market and hampered development of single market. It should be noted that most countries have dominant domestic processing due to historic reasons. Domestic card processing was established as banks started to issue payment cards or as new interbank payment system was established. Countries that moved to establish the domestic processor in the country at a later stage usually did this on competitive basis71 with notable exception of China. Also this process may be quite long72 and consequently costly. Overall, international experience seems to show that ability to process payments domestically may improve competition and contain costs on payments market. However, exclusive domestic processing is rarely advantageous. Economic utility of other proposed changes is also unclear and will likely introduce additional inefficiencies through increased forex costs and decreased competition. From legal point of view proposed changes are likely to violate a number of international treaty obligations. These include GATS and TRIPS. They also contradict Ukraines foreign policy goal to harmonize legislation with EU acquis communautaire. Under GATS Ukraine promised national treatment and full market access for foreign companies providing wide variety of services including the most of financial ones. NBU responsibility for processing, routing and settlement will preclude non-residents from providing these services. Other proposed changes also decrease market access for non-residents and are likely to be contrary to GATS. While GATS does not limit actions necessary for prudential reasons such as financial system stability73 and protection of depositors it is hard to see such justification in this case. Moreover, prudential motives have to be well justified and cannot be used to avoid commitments under GATS. Under TRIPS agreement compulsory licensing of intellectual property is forbidden. Although the Draft law does not explicitly state that payment systems are compelled to license their trademarks for co-branded cards, it may be understood as requiring just that. To remove legal uncertainty draft law should be modified to make it clear that any co-branding arrangements require consent of all parties concerned. Breaches of WTO obligations are frequently ignored if there are no foreign companies complanning to their governments or when countries want to maintain their good relations with the country concerned. However, in case of payment market US and EU are currently interested in enforcing WTO rules and they are unlikely to refrain from WTO proceedings. While WTO dispute resolution takes several years negative decision usually is enforced quite quickly and with immediate impact on external trade. As for IMF articles of agreement, we discussed Ukraines obligations under Article VIII. Thus if adopted unchanged draft law will complicate negotiations with IMF as absence of currency restrictions was constantly present as a Page 194

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condition for IMF assistance over the last several years. From business point of view if draft law is adopted international 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 chosen but there is a large probability that Visa and Master card will simply pack up and leave accepting shortterm losses for longer-term gain. In this case Ukrainian economy may lose part of the revenues from tourism while Ukrainians will be forced to purchase larger amounts of cash foreign currency to fund foreign vacations and will be limited in using e-commerce sites. Overall economic losses will be significant while political pressure will also be felt as several millions of Ukrainians visit foreign countries and shop on the internet every year. Overall, the draft law and oversight regulation need significant 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 619 Credit Unions in Ukraine of which 600 are licensed as of end of third quarter 2004. The National Associations Credit 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, the number 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 and to holiday periods. The NACUU does not have a central loan database although its members granted over 500,000 loans in 2004 with an average loan size of approximately 2000 Hrv. Credit unions largely depend on deposits from its membership to fund their portfolios. During this period, over 45% of the credit unions membership received loans. Credit Union membership is approaching 785,000 as of 1st quarter 2005. Three Credit Unions (total assets exceed 200 million Hrv) are not members of the Ukrainian National Associations of Savings and Credit Unions. They represent approximately 40 % of the total market. Credit Unions directly compete 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 applicants salary. Many other loans add tangible security and/or guarantors. e) Loan investigation includes checking the applicants previous borrowing history. The credit unions will verify employment by reviewing employment record books and/or directly with an employer. Most lending 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. Page 195

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g) Credit unions have proprietary databases of their own that could be converted to a standard format and ultimately provided to a credit bureau. Many credit unions maintain historical information in these databases. The senior management of the NACUU has indicated that many of its members would be interested in being shareholders of a credit bureau. It is not yet clear that credit unions would share information 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 regulation of problem issues in the banking activities and activities of the National Bank of Ukraine; such activities were aimed at overcoming the negative effects of the financial crisis and at recovery of the steady operation of the banking sector, as well as at ensuring the fulfillment of the liabilities of Ukraine to the IMF in accordance with the Memorandum on the economic and financial policies that was signed within the Stand-by Program. In 2010, there was restored the right of the legislative initiative for the National Bank of Ukraine which stimulated the active work on elaboration of the legislative proposals (Resolution No. 20-pn/2010 of the Constitutional Court dated 30.09.2010). Starting from October 2010, the National Bank of Ukraine submitted 4 draft laws to be considered by the Parliament of Ukraine: "On Amendments to Some Laws of Ukraine" (regarding the supervision on the consolidated basis). The draft law was adopted in the first reading; "On Amendments to Some Legislative Acts of Ukraine regarding the Harmonization of the Budget Law Provisions". The provisions were included in the Law of Ukraine "On Amendments to the Budget Code of Ukraine 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" (cancelling collections (fees) for the obligatory pension insurance from operations of the sales-purchase of non-cash currency). It was approved on 13 January 2011; "On Amendments to Article 75 of the Law of Ukraine "On Banks and Banking" (regarding the period of powers for the provisional administration). It was approved on 4 February 2011. Before October 2010 the legislative proposal work of the National Bank of Ukraine was concentrated on the elaboration of draft laws and regulations and submission of the legislative proposals for consideration by the Parliament of Ukraine (that was 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 and submitted proposals to 70 draft laws worked out by the people's deputies, the Cabinet of Ministers of Ukraine and other government agencies. In line with the Plan of preparing the draft regulatory acts in 2010, the National Bank of Ukraine elaborated 7 normative and legislative acts attributed to the regulatory acts, out of them 2 were approved. Moreover, Resolution No. 223 "On Approval of the Rule for the Procedure of Holding the Special Legal Tenders and Performance of Operations with their Use" (planned for 2009), was adopted on 30 April 2010. Regulatory activities of the National Bank of Ukraine in 2010 were carried out according to the requirements 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 Bank of 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. The National Bank of Ukraine kept on to work on the adjustment of the banking laws to the laws of the European Union. That work was performed in conformity with the Plan of Actions for 2010 on the fulfillment of the National Program for Adjustment of the Laws of Ukraine with the legislation of the European Union. In 2010, Page 196

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the National Bank of Ukraine, its regional branches and structural units kept on to submit claims and complaints. 149 claims totaling UAH 487.6 million and EUR 0.22 million were directed to the court, out of them 1 claim of the non-property origin was rejected and the others were settled in favor of the National Bank of Ukraine or remained under consideration. In 2010, the National Bank of Ukraine, its regional branches and structural units were raised 214 claims totaling UAH 3.05 million, out of them 4 claims of UAH 0.03 million were satisfied and the others were settled in favor of the National Bank of Ukraine or remained under consideration. The National Bank of Ukraine was called as the third party in 886 cases. Major portion of such cases comprised the bank customer claims on acknowledging the credit agreements in the foreign currencies to be non-valid; some cases were related to the compensation of deposits, or to specifying the credit agreements and security deeds to be non -valid. In 2010, 43 court suits were initiated for the benefit of the state and the National Bank of Ukraine upon the prosecutors' claims. In the reporting year, the National Bank of Ukraine submitted 398 claims of UAH 26.3 million. Out of the mentioned, 393 claims of UAH 26.0 million were satisfied, including 1 claim on acknowledging the National Bank of Ukraine to be the creditor of UAH 25.8 million; 4 claims remained under consideration. The National Bank of Ukraine was claimed 4 times of UAH 0.028 million. The claims were rejected. FINANCIAL MONITORING ON PREVENTION OF USING THE BANKING SYSTEM FOR LEGALIZATION (LAUNDERING) OF PROCEEDS OBTAINED FROM CRIME During the reporting year, the National Bank of Ukraine fulfilled all measures stipulated by the Plan of Actions for 2010 (joint with the Cabinet of Ministers) on prevention and counteraction of legalization of criminal proceeds. The National Bank of Ukraine officials together with the profile Committee of the Parliament actively participated in the elaboration and finalization of the new edition of the law of Ukraine "On Prevention and Counteraction to the Legalization of Proceeds Obtained from Crime and Terrorism Financing". The draft stipulated for the introduction of a differentiated approach to the identification and learning of the customers based on assessment of the appropriate risks and introduction to the laws of Ukraine of the current edition of 40 Recommendations and 9 Special Recommendations of the FATF and norms of the relative EU Directives. In order to keep to the requirements of the said law, the appropriate draft normative and legal acts of the National Bank of Ukraine have been prepared. Also developed and implemented were the Methods for the assessment of risk of violation by banks of the law requirements in financial monitoring. In 2010, the system for prevention of legalization of proceeds obtained from crime and terrorism financing forwarded 0.8 million notices from the banking institutions to the Specially Authorized Body informing of the financial operations subject to financial monitoring. During the reporting period, the officials of the National Bank of Ukraine performed 218 scheduled inspections and 16 out-of-plan inspections of the banking institutions as regards their keeping to the law requirements. In order to support and improve the information provision of the National Bank of Ukraine activities related to exercising the regulatory and supervisory functions, the National Bank of Ukraine and closed-type JSC "First Ukrainian Agency of Credit Histories" concluded an agreement on obtaining the automated access to the "Lost Passport Base". In view of ensuring the appropriate level of cooperation in the area of prevention and counteraction to legalization of criminal proceeds and terrorism financing at the international level, the representative of the National Bank of Ukraine participated in a number of FATF meetings and European Council Expert Committee on the joint assessment of measures aimed at counteraction to money laundering (MONEYVAL). By results of the measures realized, the positive dynamics were achieved in settlement of the relevant issues, in particular, as regards avoiding the procedure of intensive monitoring of Ukraine from the part of FATF. With the purpose of improving the theoretical and methodological base for Page 197

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performing the financial monitoring of the banking activities, the officials of the National Bank of Ukraine took an 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 provisions of the Constitution of Ukraine, the Law of Ukraine On Banks and Banking, the Law of Ukraine On the National Bank of Ukraine and other legislative acts of Ukraine and regulations of the National Bank of Ukraine. The purpose of banking supervision is stability of the banking system and protection of interests of depositors and creditors as to the safekeeping of clients funds on banking accounts. Supervisory activity of the National Bank of Ukraine covers all banks, their subdivisions, affiliated and related parties of the banks on the territory of Ukraine and abroad, offices of foreign banks in Ukraine, as well as other legal entities and individuals in their compliance with the requirements of the Law of Ukraine On Banks and Banking as to performing banking activity. In order to exercise its functions, the National Bank is entitled to obtain free of charge from the banks, bank unions (associations) and legal entities that have been granted a license by the National Bank to perform certain banking transactions, as well as from the persons whose activities are supervised by the National Bank pursuant to the Law of Ukraine On Banks and Banking, the information of their activities and explanations with regard to the obtained information and effected transactions. The obtained information shall not be disclosed, except in the cases prescribed by the laws of Ukraine. In the course of banking supervision, the National Bank of Ukraine has the right to require that the banks and managers thereof eliminate banking legislation violations, fulfill NBU regulations in order to avoid or to overcome undesirable consequences, which could jeopardize safety of the funds, entrusted to these banks or inflict damage on a proper banking activity. The National Bank of Ukraine carries out the banking supervision in the form of onsite inspections and off-site supervision. Financial monitoring The following laws constitute the legal framework in the sphere of prevention and counteraction to the legalization (laundering) of the proceeds from crime or financing terrorism: - Law of Ukraine On Prevention of and Counteraction to the Legalization (Laundering) of the Proceeds from Crime, 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 and supervision in the sphere of prevention and counteraction to legalization (laundering) of the proceeds from crime or financing terrorism with regard to banks, payment institutions and members of payment systems being banking institutions. In order to prevent using the banking system to legalize (launder) the proceeds from crime or finance terrorism the Resolution of the Board of the National Bank of Ukraine #189 of 14 May 2003 approved the Regulation on Implementing the Financial Monitoring by Banks.
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INTERNATIONAL COOPERATION OF THE NATIONAL BANK OF UKRAINE WITH CENTRAL BANKS AND BANKING INSTITUTIONS OF OTHER COUNTRIES In 2010, cooperation of the National Bank of Ukraine with central banks and banking institutions of other countries was further developing. Management and officials of the National Bank of Ukraine participated in more than 40 international events. Thus, cooperation of the National Bank of Ukraine with the Central Bank of the Republic of Belarus was in progress. During the year, the Tenth and Eleventh meetings of the Advisory Board of the central banks of Ukraine and Republic of Belarus were arranged. Moreover, within the framework of the Ukrainian-German cooperation the twelfth meeting of the working group "Banks" of the GermanUkrainian Top Level Group in the economic cooperation issues was arranged in June 2010. In order to exchange 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 of central and commercial banks of other countries, namely: representatives of the National Bank of the Republic of Belarus, People's Bank of China, National Bank of Moldova, the embassies of Austria, USA, FRG, the Netherlands, Canada, France, Luxembourg, public corporation "Deutche Bank Ukraine", the International Financial 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 joint meetings with participation of the foreign persons have been arranged. Constant work advanced in the joint bilateral inter-governmental commissions and also in the discussions as regards entering the international agreements, in particular, between Ukraine and the Republic of Singapore, Canada, Iceland, Brazil, Burkina Faso, Philippines, Israel, etc. During 2010, the National Bank of Ukraine was active in the elucidation of major measures realized with regard to development of the banking system of Ukraine and the relevant exchange of information with management of the central banks of the European countries, CIS and the People's Republic of China. COOPERATION OF THE NATIONAL BANK OF UKRAINE WITH THE INTERNATIONAL FINANCIAL AND OTHER ORGANIZATIONS Similarly to the previous years, the international activities of the National Bank of Ukraine in 2010 were aimed at 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 to establish the relationships with other international financial organizations and foreign investors appears to be the cooperation with the International Monetary Fund (hereinafter, IMF). During the reporting year, the National Bank of Ukraine cooperated with the IMF in the issues related to observing the commitments of Ukraine within the context of realization of the Stand-by Program; facilitating the work of the IMF missions, in particular, within the framework of the Stand-by Program realization, the assessment of security mechanisms as well as other technical missions; working out the IMF papers that resulted from the Ukraine membership in the IMF; providing recommendations as to the position of Ukraine in any question, in particular, during voting procedures, 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 and Ukraine, other bilateral and multilateral meetings with the IMF representatives and also in preparation of the Page 199

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information and analytical papers for such meetings. In 2010, the primary area of cooperation of the National Bank of Ukraine with the IMF was purposed at realization of the new Stand-by Program. In July 2010, the 29month program of SDR 10 billion (nearly USD 15 billion in the equivalent) was launched. Within this program on 30 July 2010 Ukraine received the first tranche of SDR 1.25 billion (about USD 1.9 billion), out of them the Government of Ukraine received SDR 675 million (about USD 1.0 billion) and the National Bank of Ukraine received SDR 575 million (about USD 879.0 million). Within the terms of reference, the National Bank of Ukraine met all commitments of the mentioned program and implemented all measures aimed at providing the steady and long-term economic growth, reduction of the inflation rate, recovery of the investor trust to the banking system and its stabilization, etc. In December, the IMF Executive Directors finished the first revision of the Ukraine fulfillment of the Stand-by Program. By its results it was decided to disburse the second tranche that came to Ukraine on 29 December 2010 in the amount of SDR 1 billion (about USD 1.5 billion), out of them the Government of Ukraine received SDR 655 million (about USD 978 million) and the National Bank of Ukraine received SDR 345 million (about USD 521 million). The 14th general revision of the quota holdings and reforming the IMF management system approached the final stage. By the results of a few years' work, the member states including Ukraine, voted in favor of the new distribution of quotas in the IMF 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, World Bank) advanced within the framework of realizing the Strategy for Partnership of the World Bank and Ukraine for 20082011. During 2010, the measures purposed to receive money to the state budget within "The 2nd Financial Sector Adjustment Loan" were carried out (it is expected to receive USD 350 million). The project is intended to consolidate the joint efforts of the Cabinet of Ministers of Ukraine and the National Bank of Ukraine aimed at the introduction of a complex system for capitalization of the problem banks with participation of the state, consolidation of the banking system, strengthening the insurance deposit system and increasing 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" was in progress. The National Bank of Ukraine kept on the agent servicing of the Credit Lines provided by the World Bank for the Ministry of Finance of Ukraine in support of the micro-, small and medium-sized enterprises in the regions where the coal industry mines had been closed (35 projects of USD 33.7 million were approved under the Credit Line ) and to support the local executive bodies which took on their balance sheets the social infrastructure objects in the regions where the coal mines had been closed (26 projects of USD 7.2 million were approved under that credit line). As of 1 January 2011, the residual debts under the credit lines amounted to USD 3.7 million and USD 1.2 million, respectively. The World Bank Technical Assistance Project (funds from the Netherlands Grant TF 055212) was provided by the program for reforming the financial 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 and Development (hereinafter, EBRD) went on within the framework of promoting the development of private business 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 the residual debts under SME-2. In December the final audit report of the Project was prepared by the independent auditor PricewaterhouseCoopers. In 2010, the implementation of the EBRD grant of EUR 1.2 million was finalized. The grant was given in conformity with the agreement between the National Bank of Ukraine and the European Bank for Reconstruction and Development in order to compensate a part of costs for the diagnostic examination of the Group 3 and Group 4 banks that was intended to determine their current and future financial soundness (solvency). In current and future financial soundness (solvency). In August 2010, 117 banks of Group 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 institution in our country still remain. Among them one can emphasize the question of carrying out transactions in the national 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 Bank for International Settlements (hereinafter, BIS), that was realized through participation of the National Bank of Ukraine in the measures of the above institution and in the regular talks on the entry of the National Bank of Ukraine into the BIS. Cooperation with the CIS Inter-state Bank In order to provide the constant monitoring of the reforming and re-organization processes of the CIS Inter-state Bank (hereinafter, the Inter-state Bank) and to follow the positions of other member states in 2010, the representatives of the National Bank of Ukraine participated in the meetings of the CIS Inter-state Bank Council. During the reporting year, the National Bank of Ukraine took part in the elaboration of the new constituent papers of that international organization, namely, draft Agreement on the Inter-state Bank and Articles of Association, developed in conformity with the resolution of the Board of Heads of the States (Presidents) and Board of Page 201

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the Heads of Governments (Prime-Ministers) on a more precise definition of the Inter-state Bank functions under the current conditions. Also there was worked out the draft Concept for Development of the Bank for 20102015. In addition, the draft Agreement on the procedure and rules of the banking activities on the territory 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 the reporting year, the officials of the National Bank of Ukraine worked eagerly in the area of establishment of the payment/settlement system for the member states of the Inter-state Bank based upon the use of the national currencies of the CIS countries. In 2010, the National Bank of Ukraine participated in working out the issues related to specifying the Ukraine position as a member state of the Inter-state Bank on further format of cooperation with the said international institution. The cooperation with the Black-Sea Bank for Trade and Development kept on. Cooperation with the German-Ukrainian Fund In order to follow the "Grant Agreement" signed by the National Bank of Ukraine and the German Reconstruction Credit Institution (KfW), the program of the German Ukrainian Fund (hereinafter, GUF) was realizing. During 2010, within the framework of the agreements concluded by the banks participating in the GUF Program for granting micro-credits, 126 credits of over EUR 4.2 million were granted, which was almost three times more than the amount of credits given in 2009. As of 1 January 2011, 5 credit agreements entered between the GUF and participating banks of EUR 10.4 million were effective. During the whole period of the GUF program in force, starting from 2001, 34 agreements totaling EUR 43.5 million were entered between the GUF and participating banks. Within the agreements concluded by the banks participating in the GUF Program on granting micro-credits, 161 thousand credits of more than EUR 680 million have been granted. As of 1 January 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 and domestic policies, in 2010 the National Bank of Ukraine paid substantial attention to the cooperation with European Union (hereinafter, EU). The key issue of the agenda in the Ukraine EU relationships was the negotiating process on entering the Agreement of Association (in place of the valid Agreement on the partnership and cooperation between Ukraine and European Union) that should also include an integration component, 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 position documents, as well as in elaboration of the said draft agreements and in the XIXIII rounds of negotiations. In addition, 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 of Understanding between Ukraine and EU as well as the draft Credit Agreement between Ukraine and EU were worked out; draft agreements between Ukraine and EU on financing the program "Support of the Implementation of the Energy Strategy of Ukraine in the area of Energy Efficiency and Recoverable Energy Resources" and the program "Fostering Mutual Trade through the Removal of Technical Barriers in the Trade between Ukraine and EU"; Page 202

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draft Agreement on the establishment of the free trade zone between Ukraine and Canada, as well as finalizing the elaboration and preparation for signing of the Agreement on the establishment of the free trade zone between Ukraine and the European Association for Free Trade. During the reporting year, the representatives of the National Bank of Ukraine went on to work actively in the organizational structures which provided cooperation with EU in the different areas, such as: the Committee on cooperation between Ukraine and EU, its industrial sub-committees and the Board in the Ukraine EU cooperation issues. Also, the National Bank of Ukraine participated in the preparatory events on attraction of the macro-financial assistance from EU in the amount of EUR 610 million. During the year, the active work advanced on realization of the EU Twinning Project "Improving the NBU potential through approaching the EU standards of activities of central banks". Within the framework of bilateral talks between Ukraine and the countries striving to acquire the WTO membership, the officials of the National Bank of Ukraine considered documents regarding the Ukraine access to the markets of services of Bosnia and Herzegovina, the Islamic Republic of Iran, the Libyan Republic and the Republic of Serbia. The issues related to looking for the optimal format of cooperation with such financial organizations as the EuroAsian Bank for Development, the Anti-crisis Fund of the Euro Asian Economic Community were thoroughly examined, namely: the activities of the said institutions, possible membership of Ukraine in those structures and obtaining the economic benefits from participation in their work as compared with other international financial organizations, etc.
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Medical Services
Healthcare Policy Insights During the 20 years of Ukraines independence the life expectancy of Ukrainians at birth has deteriorated: from 70 years in 1990 to 68 in 2008, although it has returned to 70. Ukraine is the only country among its neighbors where this indicator in 2008 is the same as it was back in 2000. Moreover, Ukraine shares with Russia the lowest life expectancy value in Europe. It seems obvious that Ukraines healthcare policy has to be significantly improved. Reimbursement system and insurance system compulsory medical
Each year almost 33 million Ukrainians turn to hospitals for help. In up to 45 percent of all cases it is for a respiratory disease. Diseases of the circulatory and genitourinary systems, as well as injury, poisoning, and certain other consequences of external causes, each represent 7 percent of the total number of illnesses (see Figure 1). However, this figure does not make clear that in 2008 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 the highest among the CIS countries; in 2009 it took 131st place among 145 counties in number of deaths due to AIDS, coming in between Ghana and China. According to the World Health Organization, Ukraine and Moldova were in 2009 the countries with Europes highest numbers of deaths due to tuberculosis among HIVnegative people: 26 people per 100 000 population. The market for medical services and the medical care system in general remain significantly underdeveloped. This is due, first of all, to lack of financing from state and local budgets and inefficient use of available funds. this indicator in 2008 is the same as it was back in 2000. Moreover, Ukraine shares with Russia the lowest life expectancy value in Europe. It seems obvious that Ukraines healthcare policy has to be significantly improved. Moreover, the governments unclear vision and the lack of open discussion concerning a strategic plan for healthcare system development and declared reforms hold back sector competitiveness. While formally a country with free medical care, Ukraine remains the only European country without any reimbursement system in terms of expenses for ambulatory treatment and related medicines. This does not provide for the existence of facilities for improving quality of life or for increasing Ukrainians life spans. We believe that step-by-step implementation of a reimbursement system on the basis of the experience of both post-communist countries and major world democracies will create the grounds for developing the system. Moreover, introduction of compulsory medical insurance should substantially improve the situation as regards financing healthcare. Page 204

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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 property owners has developed significantly. This has been an important step towards the Ukrainian markets being competitive and attractive for foreign investors in the pharmaceutical and healthcare sector. In addition, the current market authorization (registration) system for medicines is acknowledged as advanced. Taking into account the recently announced plans to adopt the new version of the Law on Medicines, it is crucial to ensure a high level of intellectual property protection in the sector, the efficiency of enforcement mechanisms and the full transparency and efficiency of the market authorization system in the country. This protection should of course be in line with a modern approach to access to medicines and medical treatment, the sort of approach used 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 imported medicines should form the cornerstone of the quality assurance system for medicines in Ukraine. Despite numerous rumors that there is a significant amount of counterfeit products on the domestic market, there is no compelling evidence for that opinion. The role of the state as regulator, which is without a doubt very important, must in no case replace its role as a guarantor of the physical accessibility of medicines. Neither technical barriers to import nor unjustified bureaucracy or overregulation should start to characterize the Page 205

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Ukrainian market in terms of its quality control system. Moreover, increasing transparency in this sphere will strengthen Ukraines competitiveness on global markets even more. Medicine import substitution There are certain risks to implementing an inadequate medicine import substitution policy for foreign pharmaceutical 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 Products by National, Including Biotechnological, Products and Vaccines for 20112021. It is important that the program 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 any possibilities for corrupt schemes in state procurement tenders and unjustified discrimination against foreign manufacturers. 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 the Amendments to Article 9 of the Law of Ukraine On Medicinal Products Regarding Bringing the Registration Procedure for Medicinal Products into Correspondence with International Standards (passed in the first reading on April 19th, 2011) indicated heightened government pressure on the import market for medicinal products. It is important to include such terms as data exclusivity and patients rights into the State Target Program. There are also IPR risks involved in import substitution policy, in the plans for preferences for national medicine producers, in violations of GATT/WTO rules, etc. The Chamber Healthcare Committee supports the idea of import substitution, which should be openly discussed and developed with the involvement of experts and all interested parties. In its current version, however, the Draft Concept does not protect the interests of patients or of foreign and Ukrainian pharmaceutical producers. It is important to establish a favorable climate for the development of a pharmaceutical market first. This is possible only after the adoption of the corresponding Law On Medicinal Products. HEALTH SECTOR Despite initiation and partial implementation of numerous reforms of the health care system over the last decade, the system in general retained features which no longer harmonize with the overall market economy environment as such. As a consequence, Ukraine is at risk of losing, in many ways, its connection to progress in medical science and modern trends in health system development, as well as to benchmarking of health performance indicators with those of European countries. HEALTH CARE SERVICE Existing mainly budget-financed health care system has been reflecting insufficient level of medical service because of insufficient resources, low performance and evaluation criteria for health institutions, and absence of 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. Page 206

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PHARMACEUTICAL PRODUCTS The system for preventing access of the low quality generic products to the Ukrainian market has to be improved. Ukrainian heath care sector is suffering from access to the pharmaceutical market of the low quality generic products with unclear effectiveness/safety profile. Those products are imported as ready-for-use pharmaceuticals or in bulk for future packaging and labeling as Ukrainian products. Existing system of market access 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 and procedures. Furthermore, such products with unclear quality/effectiveness are being promoted with violation of generally 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 pharmaceuticals crossing the Ukrainian border, even if only for transit through local customs warehouses from the EU to, for example, 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 label should go through a very long and expensive procedure of registration, including technical, pre-clinical, clinical examinations and, in some cases, certification. The current procedure creates an additional trade barrier to free access of the medical devices with the CE labeling to the Ukrainian market and contradicts the Council Directive 93/42/EEC dated 14 June 1993 concerning medical devices. At present there are some draft regulatory acts developed to be adopted as the Regulations of the Cabinet of Ministers focused on the following: Technical Regulations on Medical Devices, Technical Regulations on Active Implantable Medical Devices and Technical Regulations on In Vitro Diagnostic Medical Devices. The main difference from the EU Medical Devices Directives is that the draft regulations do not provide for recognition of the CE label on medical devices after passing conformity assessment procedures established by the EU Medical Devices Directives. As envisaged by these regulations all medical devices (including CE labeled devices) are subject to the repeated conformity assessment procedure in the Ukrainian certification centers and after that must be labeled with the Ukrainian National Conformity Mark. This is practically an unfeasible condition for the European manufacturers due to technological reasons and it is probably not acceptable for the Ukrainian manufacturers 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 devices standards) 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. It results in duplicating functions by different state bodies. The example of function doubling is confirmed by Page 207

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similar trails conducted by the State Service on Medical Drugs and Medical Devices and the State Committee for Technical Regulation and Consumer Policy during the registration process and certification of the medical devices 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 Ukrainian Classification of Goods for Foreign Economic Activity that falls into conflict with the European Directive 93/42/EEC where medical devices are classified as per safety classes. Though a safety class is determined during medical device registration process, this safety class determinations rather a formal action. The classification 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 Medical Devices Subject to State Registration (Re-registration) in Ukraine No. 393, dated 4 August 2005, that determines the list of medical devices which are subject to registration in Ukraine based on custom code classification system, it is absolutely impossible to register and import this device to Ukraine. Problems appear especially 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 is defined on the basis of the Chamber of Commerce and Industry evaluation decision and is indicated in the medical device registration certificate. Customs authorities have the right to change this code in the process of customs clearance at each delivery of the product. Moreover, different customs offices could define different codes to the same medical devices. Thus if the customs code is changed, regulatory status of the medical device also might be changed that might result in necessity of its registration in other state authorities, certification and change of customs tariffs. Such an approach creates obstacles to import of medical devices and makes the import procedure non-transparent and unpredictable for manufacturers and suppliers. Unpredictability of the Legislative Acts on Medical Product Circulation and Impossibility of Their Implementation The main problem of medical products circulation lies in the unpredictability of the changes introduced into the current legislation that does not allow the medical device manufacturers to adapt the manufacturing process accordingly and results in the blockage of their import to Ukraine. The example of such unpredictability is the requirement to include the Ukrainian registration certificate number to medical device labeling. This requirement had initially been introduced on the basis of the letter from the State Service on Medical Drugs and Medical Devices to the customs authorities of Ukraine without preliminary notification of medical device manufacturers supplying products to the Ukrainian market. Moreover, according to the medical device registration regulations the registration certificate is valid for 5 years in Ukraine. Every 5 years registration number is going to be changed that requires a continuous adaptation of the labeling by the medical device and medical equipment manufacturers. This requirement significantly impacts import of medical equipment Page 208

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whereas it is not possible to change the labeling because of manufacturing procedure standardization. As far as other medical devices are concerned it takes at least 6-12 months to adapt the labeling and get approvals for the manufacturing 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 on Procurement of Goods, Works and Services using State Funds No. 1490-III, dated 22 February 2000, and on Protection of Economic Competition No. 2210-III, dated 11 January 2001. The violation is about favoring the formation of monopoly status for certain business entities, thus impeding the establishment of a healthy competitive 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 Services Using State Funds prohibiting discrimination against participants in procurement conducted by the state; The procedure for procuring from a single contractor, as defined in the Ukrainian Law on Procurement of Goods, Works and Services Using State Funds (paragraph 5, Article 33) is regularly applied without grounds, favoring the monopolization of certain market segments and discriminating against other business entities. Procurement from one contractor is provided for by the Law only as exceptions in specific cases, which, as a rule, do not apply to pharmaceutical preparations. The above actions are defined in paragraph 3 of Article 15 of the Ukrainian Law on Protection of Economic Competition as anticompetitive actions of state and local authorities and administrative and controlling bodies, and should be brought under control by the Ukrainian Antimonopoly 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 utmost importance, since it will serve as a basis for the future health financing system. The procedure for forming the List and defining inclusion criteria for it has been developed by the former leadership of the Ministry for Health and agreed with all important market players and experts in the industry. The National List of Essential Products was approved by the Cabinet of Ministers Resolution No. 400, dated 29 March 2006. The procedure of selecting medications for the List is regulated by Cabinet of Ministers Resolution No 1482, dated 16 November 2001. The latter Resolution and its implementation system allow avoiding non-purposeful, discriminatory and non-transparent selection of products for future budget coverage, procurement of medications of doubtful efficacy and safety, and directing funds to procurement of medications not essential for the health system. Furthermore, the Ministry for Health appears to distance itself from working out clear criteria to determine efficacy and safety of products subject to state tenders. This makes purchases no purposeful and non-transparent, and is finally reflected in purchasing products of low quality and low safety profile. Page 209

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Healthcare for foreigners Emergency medical insurance Foreigners are encouraged to buy emergency healthcare insurance from UkrInMedStrakh (or Prosto Strakhuvannya) for the duration of their stay in Ukraine. In some cases for instance, in order to register with the OVIR this insurance is mandatory. Fortunately, the it is not terribly expensive (roughly $100 USD for one year). The insurance card includes a 24-hour hotline with English speaking staff, and the procedure for determining what sort of thing constitutes an "emergency" seems to be fairly lenient. For instance, the author received 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 most medications. Medical insurance in Ukraine Ukraine has a special emergency medical insurance policy for foreigners that most visitors to Ukraine are required by law to buy in Ukraine, either at the airport or at the insurance company's office in town. Some sources say you are not required to buy the insurance if you have an insurance policy of your own that covers you while in Ukraine, See the Ukraine Minister of Foreign Affairs website for a list of countries and diplomatic positions that are exempted from this requirement. In any case, this insurance is quite inexpensive, and all you need to do to sign up is present your passport 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 with their place of temporary residence, but this might be restricted to foreigners who are registered with the ZHEK and have a propiska, or registered address. This typically includes those who are in Ukraine for studies, legal employment, or permanent residency. Some foreigners will find service through standard 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 little waiting, and no documents. You can just walk in and schedule an appointment. These clinics are generally oriented towards the middle class. Here are some prices that seem to be fairly representative of Kiev in summer 2010 (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
Figure 152 Medical insurance in Ukraine
Days coverage 30 60 90 91-120 121-150 151-180 356
of Price (USD), 2008 $12 $23 $34 $41 $48 $56 $100
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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 doctors by talking to friends or by looking for reviews online (in Russian or Ukrainian). Many doctors know some English, 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 Englishspeaking 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 to maintain through the economic downturn that followed independence. There has been considerable decentralization 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 and subregional level. Regional and local health directorates are responsible for health facilities in their territory and are functionally subordinate to the Ministry of Health, but managerially and financially answerable to the regional and local self-government. Only the State Sanitary-Epidemiological Service and the State Pharmaceuticals Quality Control Inspectorate, each with relevant facilities at the different levels of administration, 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 a proportion of GDP since the mid 1990s. The proportion of general government expenditure on health as a proportion of total health expenditure was 55.7% in 2007 (WHO, 2009). The bulk of government expenditure pays 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 of pharmaceuticals; patients generally purchase them at full cost price. Officially, Ukraine has a comprehensive guaranteed 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 to define a more limited benefits package have left it to the individual facilities to determine which services are covered by the budget and which are subject to user charges. This has led to a lack of transparency in the Page 211

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system, which has contributed to an increase in informal payments. Most health financing comes from general government revenues raised through taxation (value added taxes, business income taxes, international trade and excise taxes). Personal income tax is not a significant contribution to total revenues. Out-of-pocket payments also account for a significant proportion of total health expenditure, and there are some limited voluntary health insurance (VHI) schemes. Funds are pooled at the national and the local level, as local self-governments retain a proportion of the taxes raised in their territory. There are also inter-budgetary transfers to boost the coffers of poorer local authorities which cannot raise as much revenue. With the exception of a couple of pilot projects in small rural districts, allocations and payments are made according to strict line-item budgeting procedures as under the Semashko system. This means payments are related to the capacity and staffing levels of individual facilities 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, regional and district levels. The Ministry is responsible for the accreditation of all health facilities regardless of ownership, 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, but they are not generally evidence-based and their efficacy has not been monitored. Since 2007, improving the quality of health care has become a more systematic activity and there is a department in charge of assessing the quality of health care services. As health facilities are owned by local authorities rather than the Ministry of Health, management of the system is decentralized, which impedes the implementation of plans developed at the national level, and there is no central health planning agency. Approaches to capacity planning have remained almost unchanged since Soviet times. The mechanisms currently in place neither reflect the health care needs of the population nor account for regional characteristics of health service provision. There is also little incentive for rational use of resources or cost control over health facilities, which are predominantly funded 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 upkeep of medical facilities and the conditions in which services are provided, but regular inspections by the State Sanitary-Epidemiological Service have found that, in 2007, only 29.6% of health facilities are on mains water supply and only 21.1% have mains sewerage. Unsatisfactory sanitary conditions are found most often in rural areas. The lack of systematic updates on the condition of medical facilities and the minimal financing of capital costs 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 encountered severe difficulties with the supply and maintenance of existing technological equipment. The number of medical human resources per capita has increased gradually since 1990, but this does not reflect a growth in the number of medical personnel so much as a decline in the total population, as the absolute number of doctors has been falling. At the same time the medical workforce is ageing rapidly as new graduates choose to work outside the state health system or seek opportunities abroad. The key staff shortages are in rural areas and in primary care, which has a high turnover. The number of nurses has fallen much more rapidly due to the low wages and low status of nursing, and the limited possibilities for professional development. This is a trend Page 212

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witnessed throughout the Commonwealth of Independent States (CIS) and one which runs counter to developments in EU countries. Provision of services Traditionally, primary care in Ukraine has been provided within an integrated system by district internists and pediatricians employed by state polyclinics. In 2000 the transition to a new model of primary care based on the principles of family medicine began. Family doctors/general practitioners (GPs) make up a third (32.9%) of all primary 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 of rural hospitals providing basic inpatient facilities. The second (middle) level is the true foundation of the system. Secondary inpatient care is provided in central district and municipal multi-profile hospitals, also in childrens hospitals, specialized clinics (dispensarii), and specialized hospitals which are located and governed at this organizational level. The third (higher) level is that of regional and supra-regional specialization provided by regional hospitals, diagnostic centers and specialized clinics, and specialized clinical and diagnostic centers at the national research institutes of the Ministry of Health and the National Academy of Medical Sciences. These were originally designed to provide highly specialized medical care to patients with the most severe and complicated conditions, but there has been some blurring of the lines between secondary and tertiary care levels. Health care reforms The Ukrainian health system has preserved the fundamental features of the Soviet Semashko model against a background of other changes, which developed on market economic principles. The transition from centralized financing to its extreme decentralization is the main difference in the health system in comparison with the classic Soviet Semashko model. Although no fundamental reform has taken place, many changes in the health sector have been initiated and often realized since independence, although most of them were oriented not towards meeting the health needs of the population but towards solving problems in the health sector. User fees have been introduced to mobilize additional resources, and sickness funds and VHI have begun to develop. To reduce government expenditure in circumstances where there was an acute shortage of funds, the stock of hospital beds was cut by a third. The legal basis was also laid and measures realized which were directed towards institutional reform of the health sector (for example, to reorient the system towards primary care and introducing family medicine); and specific quality guarantees for health services were also introduced (the licensing 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 ineffective protection of the population from the risk of catastrophic health care costs and the structural inefficiency of the health system, which is caused by the inefficient system of health care financing. Health system weaknesses are highlighted by increasing rates of avoidable mortality. The recent political impasse has complicated health system reforms and policy-makers face significant challenges in overcoming popular distrust and fatigue in the 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 is financed by general taxation and formally provides universal access to unlimited care free at the point of use in public medical facilities. The different levels of public medical facilities are funded directly by the respective budgets. But all levels of local budgets (regional, municipal, district and village budgets) are financed through the allocation of funds from the central budget according to special formula approved by the Cabinet of Ministers 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 of Ukraine. In practice, however, the Ministrys influence is significantly limited. The national Ministry of Health coordinates and governs the core health system through regional health authorities, which are structural subdivisions of local administrations but are functionally under the jurisdiction of the Ministry of Health. At the regional level the Ministry of Health of the Crimea AR, oblast (regions), and Kyiv and Sevastopol health administrations are accountable to the national Ministry of Health for national health policies within their territory. They are also responsible for regional health care facilities which primarily provide specialized and highly specialized services. At the local level, primary and secondary care facilities and hospitals are owned by the various tiers of local self-government district administrations, municipal, city district, village and rural councils. Most medical services are provided to the population in facilities which are under local selfgovernment at the regional, district, municipal or village level and which are generally financed from the budgetary resources of the relevant tier of the government which are allocated transfers to the local self-government level. However, due to poor government financing of the health system, the population is required to pay for outpatient and inpatient pharmaceuticals as well as provide unofficial remuneration to medical personnel. Page 214

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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, medicoprophylactic facilities (inpatient and outpatient), and privately practicing physicians. ). They receive their financing mostly through direct payments from the population for medical services and devices. Apart from the development of a formal private sector, the basic organizational structure of the Ukrainian health system has essentially remained unaltered since the Soviet period. The Verkhovna Rada (Parliament) sets the goals, major objectives, priorities, budget guidelines and regulatory framework for the health sector, and approves the targeted national health programs. State health policy is then implemented by the Ministry of Health. The President is responsible for ensuring that health policy is implemented in accordance with health care legislation and the Constitution through the system of executive bodies. The Cabinet of Ministers coordinates the 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 Page 215

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Finance prepares the draft state budget, which is then submitted to the Parliament for approval. This defines the public resources to be allocated to the health sector in any given year. The Ministry of Finance is also the body which establishes the requirements for state institutions (including health care facilities) in formulating and implementing budgets. The Ministry of Health is the leading body within the executive power branch responsible for implementing health policy and administering state-owned health facilities. The health system is managed by the Ministry of Health through the regional health authorities in the 24 regional administrations and 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 the national level, the Ministry of Health is responsible for setting national health policies, and directly managing and funding certain specialized health care institutions which are in state ownership, higher medical educational establishments, research institutes, and state-owned medico-prophylactic facilities. The Ministry of Health provides vertical management with basic command-and control institutions which provide regulatory functions in the sphere of social health protection (for example, the State Sanitary-Epidemiological Service and the State Pharmaceuticals Quality Control Inspectorate). The Ministry of Health is also responsible for the organizational 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 central and regional levels, which are independent of local self-government and are instead under the Ministry of Health in cooperation with the Ministry of Emergencies, the Ministry of Defense, the Ministry of Internal Affairs, the Ministry of Transport and Communications, the Council of Ministers for the Crimea AR, and state administrations for the oblast, Sevastopol and Kyiv cities. Besides this, the Ministry of Health also manages the undergraduate and postgraduate medical education program, the medical research system and controls a significant proportion of the centralized state purchase of pharmaceuticals, medical devices and equipment for the relevant state programs. The Ministry of Defense, Ministry of Internal Affairs, Security Service and Ministry of Transport and Communications all have their own health care facilities for their employees and their relatives, which operate in parallel to the main statutory system under the Ministry of Health. The State Penal Jurisdiction Department is responsible for the organization of health services within the prison system. The Ministry of Labor and Social Policy is responsible, among other things, for providing long-term residential care for elderly people and people with disabilities. The National Academy of Medical Sciences of Ukraine controls the research institutes which provide highly specialized medical services. These facilities are financed directly from the state budget through a separate funding stream. Local authorities include district, city district, town and village councils and state administrations. These local authorities are important actors in the system as they own and co-finance primary care services provided to their local populations. Many nongovernment organizations (NGOs) professional medical associations and patient groups are planned or in operation, but they are not very influential actors in the health system. There is no self-governing of the medical profession in Ukraine, although this is something that has proved important in ensuring quality and transparency in other countries of Europe. There are many international organizations working in the Ukrainian health sector, but their 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 era has gradually been replaced by a system in which authority has been delegated to local administrations and self-governing bodies. As a consequence, many recent innovative activities in the health care sector were initiated at the regional and local levels rather than the national level. Today, the health system is a complex Page 216

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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 administrations and numerous administrative bodies at municipal, district and village levels. Decentralization has meant deconcentration of functional and managerial powers at the regional and sub regional levels. Functional deconcentration means that the system is managed through the Ministry of Health of Crimea AR and the health authorities of regional administrations, which are financially and managerially independent, while functionally subordinate to the national Ministry of Health. Only the State Sanitary-Epidemiological Service and the State Pharmaceuticals Quality Control Inspectorate, each with relevant facilities at the different levels of administration, remain fully centralized and vertically subordinated to the Ministry of Health. Deconcentration of general managerial powers at the regional and subregional levels means that executive functions in the regions and districts are exercised by the relevant local (regional or district) administrations, the heads of which are appointed by the President. The head of the government in Crimea AR is appointed by its Crimea AR Parliament. As outlined earlier, the government of Crimea AR and the other regional administrations have to ensure 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 local administrations, in turn, with the approval of the Ministry of Health, appoint the heads of local health administrations and their deputies who participate in decision-making. The Minister of Health in Crimea AR is appointed to office by the Parliament, and approves the appointment of the heads of the health facilities as do the heads of the other regional health authorities. With the enactment of the Law on local self-government in Ukraine (1997), significant budgetary authority was delegated to regional and district councils, which pass on management functions in health care to relevant local executive authorities. Somewhat similar relations are seen in Crimea AR between the Council of Ministers, the republics Ministry of Health and the representative bodies. 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 health services, human resource planning, contracting for the training of specialists, provision of pharmaceuticals and medical devices to certain disadvantaged population groups, accreditation of health facilities, and proposals for licensing individual entrepreneurial activities in the health care sector. Once again, local self-governments face a division of accountability, to the Ministry of Health for compliance with norms and standards, and to the local 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 expenditure against 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 Constitution prohibiting the reduction of the existing network of public health facilities. Instead the private sector is developing mainly through the establishment of new private health facilities and medical practices. Local authorities 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 been affected by the lack of sustainable sources of income and health care has become a heavy burden on local budgets. A number of communities have found it increasingly difficult to maintain health services in the public Page 217

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sector. However, with the passing of the Budget Code (2001), strict rules were established, allowing for interbudget transfers as of 2002. The volume of transfers is based on a specific formula that takes account of financial norms of adjusted budget allocations, the number of residents in the territory and an index of relative fiscal solvency. This mechanism has, to a certain degree, leveled differences in budget capacities among regions and territories. In addition, the Budget Code explicitly defines the types of health facilities that can be funded by budgets at various administrative levels. However, public health care facilities may not be financed from more than one budget. The most notable changes have taken place in specialized health facilities. The law has provided for centralized financing and management of specialized health facilities at regional level. These provide a range of mental health, TB, dermato - venereological and other services, generally involving low technology but used by a substantial number of patients. The decision to concentrate these services at the regional level has raised concerns among health professionals and decision-makers, specifically in cities where these specialized services exist in independent structural units, as the changes may impede integration of municipal health services. The transfer of these facilities to the regional level has also created problems for regional budgets. A number of municipal administrations have therefore decided to formally convert, that is, to re-designate specialized facilities as multi-specialty facilities. For example, one specialist psychoneurology clinic 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 regulation of public finding of health care facilities led to some streamlining of resource use but created problems in integrating 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, but the mechanisms for accessing such information are not transparent. Patients also have the right to access care of adequate quality, and this is recognized as part of the accreditation process for health facilities, but this has not thus far acted as a clear mechanism for quality improvement. Patients officially have a choice of doctor and facility, but this is difficult to realize due to the way in which the system is financed. Overall, the health system in 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 dealt with in general legislation regarding complaints (Law on citizens appeals 1996) and thereafter to the Law on human 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 patient groups, they have not yet played an active role in policy-making. The necessity of protecting patient rights is noted in many normative acts, for example in basic legislation about health care and criteria for the accreditation of health facilities. However, patient rights in the Ukrainian health system are not protected systematically. 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, a movement for creating community advisory boards in health care has begun. They are created under the local health authorities, medical facilities and independent social organizations, but their influence on the activities of the health sector is not yet significant (Angelov, 2007). The population of Ukraine is very critical of the condition of health care in their country. In an international social survey conducted in 24 countries of Europe in 2005, Ukrainians gave their health system the lowest marks of any country just 23 on a scale of 110 (Golovakha, Gorbachik & Panina,2006). Another piece of social research, conducted in Mykolayiv oblast in 2006, found that most respondents felt the health service had poor accessibility and that services were of poor quality (Glukhovskii, 2007). The main source of dissatisfaction in patient complaints is the quality of medical care. The Ministry of Health alone receives around 5000 letters of complaint every year. This is only a small fraction of the total volume of complaints, as the majority of them are sent to and dealt with at a lower level of the health system. Financing Health care expenditure in Ukraine is low by regional standards and has not increased significantly as a proportion of GDP since the mid 1990s. The proportion of general government expenditure on health as a proportion of total health expenditure was 57.2% in 2008 (WHO, 2009). The bulk of government expenditure pays for inpatient medical services, with only a relatively small proportion (22.7%) going to outpatient services. Private expenditure primarily consists of out-of-pocket payments, which are high on account of the high cost of pharmaceuticals. These are generally purchased at full cost price by patients; significant informal payments are also levied in the system. Officially, Ukraine has a comprehensive guaranteed package of health care services provided free of charge at the point of use as a constitutional right, nevertheless user charges are widely levied in the Ukrainian health system. Government attempts to define a more limited benefits package have left it to the individual facilities to determine which services are covered by the budget and which are subject to user charges. This has led to a lack of transparency in the system which has contributed to an increase in informal payments. Most health financing comes from general government revenues raised through taxation (value added taxes, business income taxes, international trade and excise taxes). Personal income tax is not a significant contribution to total revenues. Out-of-pocket payments account for a significant proportion of total health expenditure and there are some limited VHI schemes. Funds are pooled at the national and the local level, as local self-governments retain a proportion of the taxes raised in their territory. There are also inter budgetary transfers to boost the coffers of poorer local authorities which cannot raise as much revenue. With the exception of a couple of pilot regions, allocations and payments are made according to strict line-item budgeting procedures as under the Semashko system. This means that payments are related to the capacity and staffing 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 data underestimate 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 and monitor 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 20032004, 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 from the State Statistics Committee of Ukraine were used to investigate the expenditures of state and private companies. To estimate donor activity in financing, data were collected through interviews with donors and the analysis of various reports from national and international organizations. The investigation of out-of-pocket payments used data from a special household survey undertaken in 20032004. The survey included 10 238 households 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 people etc.). 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 its methods when conducting household surveys for future estimates in NHA. The NHA project materials formed the basis for the Methodological recommendations on compiling National Health Accounts, which was approved by Order No. 137 of the State Statistics Committee of Ukraine on 10 May 2007. As a result, the State Statistics Committee of Ukraine compiled a generalized table of NHA for the first time in 2005. This chapter uses primarily the official data of the State Statistics Committee of Ukraine. Data from before 1996 are impossible to compare with the subsequent period. Health care expenditure increased rapidly in 2000 after the prolonged economic crises of the 1990s. Between 1999 and 2006, official health care expenditure per capita calculated by the State Statistics Committee of Ukraine increased 5.1 times. NHA data showed that total health expenditure grew 3.4 times. However, trends in real expenditure levels, which take inflation into account, are lower (only 1.3 times higher for the period 20032008). In 1999, the annual increase in total health expenditure was about 9% less than the previous year as a result of the 1998 financial crisis, which affected nearly all CIS countries. From 2000 to 2003, health care expenditure increased annually (by 9.3% in 2000 up to 24.9% in 2003), which reflected the rapid growth of the Ukrainian economy. Political crisis in 2004 slowed economic growth and brought negative growth of health care spending in 2005 (by 2.6%). In 2006, the level of expenditure increased by 8.1% (and by 7.7% in 2007 and 4.3% in 2008) compared with the previous years (see Table 3.1). Total health expenditure as a percentage of GDP remains comparatively low for a country in the WHO European Region. The expenditure in US$ PPP (purchasing power parity) per capita reveals trends similar to the real level of expenditures for health in national currency with the decline at the end of the 1990s and 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 in 2006 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 in obtaining data on health care spending in the informal sector. From 1998 to 2005, total health expenditure fluctuated between 5.0% and 6.5% of GDP, and was close to the average of the CIS countries. NHA data in Ukraine 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 of GDP is calculated based only on official data without including the informal sector, which is substantial, so this may overestimate the level of total health expenditure as a proportion of GDP. For example, in the first quarter of 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 between 1996 and 2006, reaching its nadir in 19992000 (4.54.6% of GDP). Health expenditure increased from 2001 Page 223

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to 2003, but in 20042005 it fell again from 7.0% to 6.4%. Overall, growth in total health expenditure as a percentage of GDP did not match the speed of economic growth in Ukraine. Total health expenditure as a proportion of GDP fell in most countries of the CIS following independence from the USSR, and in some countries, including Ukraine, overall expenditure levels have remained low. In terms of PPP, health expenditure per capita in Ukraine is one of the lowest in the WHO European Region, which shows the low priority that health care has been afforded in the country. Based on official 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 health expenditure in total health expenditure (6668%). 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 European Region. More than half of total health care expenditure goes towards providing medical services. About a quarter of expenditure on health care goes to inpatient care; about 1314% to outpatient care (including primary care and specialized outpatient consultations). Both types of services are financed primarily from public sources. Ukraine spends a relatively small proportion of current health expenditure on outpatient care in comparison with other countries in the WHO European Region. It has been argued that this reflects an inefficient 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 in sanatoria a remnant of the Soviet era where patients spend their vacations and receive restorative treatments. Ancillary services receive about 4.5% of total health care expenditure. Government sources cover about half of spending on rehabilitation and a quarter of spending on ancillary services: laboratory tests, X-rays and other diagnostic procedures. This shows that three-quarters of ancillary services are covered by out-ofpocket 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 are covered by public financing. Total health expenditure as a proportion of GDP fell in most countries of the CIS following independence from the USSR, and in some countries, including Ukraine, overall expenditure levels have remained low. In terms of PPP, health expenditure per capita in Ukraine is one of the lowest in the WHO European Region, which shows the low priority that health care has been afforded in the country. Based on official 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 health expenditure in total health expenditure (6668%). NHA, which include informal payments, show that government expenditure in 20032008 fluctuated around 60% of total health expenditure. This is low for countries 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 appropriate accounting system makes it impossible to analyze the structure of health expenditure from different sources over time, this chapter will deal primarily with data received after the introduction of NHA, that is, from 2003 to 2008. However, even the NHA underestimate the populations participation in direct health care financing (Gotsadze et al., 2006). Data from separate regional surveys indicate that the populations share of health system financing is higher by about 10% (Kryachkov, Bechke & Boyko, 2000; Litvak, Pogoreliy & Tishuk, 2001; Lekhan, Kryachkova & Maximenko, 2007). Page 224

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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. The total 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 and territorial units. This represents about 85% of their fiscal revenues. Local budgets are derived from small business taxes, land taxes, license fees on certain entrepreneurial activities, vehicle taxes, environmental pollution payments and local taxes, dues and duties. National tax rates are set in accordance with taxation laws as 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 the purchase of health cover. The tax administration system, comprised of the State Tax Administration of Ukraine and regional and municipal tax authorities, is responsible for enforcing the tax laws, ensuring correct amounts and the timeliness of charges. The Tax Administration coordinates its activities with fiscal authorities and the State Treasury. It reports all taxes received, as well as other charges and fees. Health care funding is considered a state responsibility. In accordance with Ukrainian law, the execution of state duties can be delegated to subnational levels. In this case, the national budget must assign budget resources in the form of assigned national taxes, fees, mandatory payments or shares thereof to the relevant budgets, or perform transfers from the national budget. To determine the volume of inter-budgetary transfers, Ukraine uses the so-called Financial Standard of Budget Sufficiency that is, the guaranteed amount of resources transferred for the implementation of assignments delegated by the state within the limits of budget resources. In reality, the government underfunds allocations, forcing local authorities to use their own resources. In 2005, the revenue basket 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 funding is progressive. However, the Ukrainian system has a number of specific regressive traits. For example, the Page 225

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existence of two taxation subsystems a standard and a simplified system undermines the integrity of the taxation system. Further, widespread tax evasion and the existence of tax benefits cause significant irregularities in the distribution of the tax burden; there is a single flat income tax rate for people with different incomes. As a result, the Ukrainian taxation system is not as progressive as it could be and a number of loopholes 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 a transition to social health insurance. However, the problem of complementary sources of finance has not yet been resolved. There are multiple economic obstacles confronting the decision to introduce social health insurance. First of all, it is a heavy tax burden on employers (social insurance tax already accounts for 39% of the salary fund). Second, the price increase of utilities, particularly gas, has undermined the Ukrainian economys competitive ability and has thus reduced the chances of reaching a consensus regarding the introduction 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 20032008 was almost 40% (minimum 34.6% in 2007, maximum 42.5% in 2008). Out-of-pocket payments are consistently increasing in all main forms of spending: official service charges, drug and medical product purchases, and informal payments. During the 1990s, the proportion of formal out-of-pocket payments in total health care expenditure increased significantly (from 19% in 1996 to 38% in 2000). It stabilized at 38% from 2000 to 2002 and then decreased slightly to 3234% from 2003 to 2006. User charges make up a relatively small proportion (7.3 8.6%) of total spending or 19.722.5% of out-of-pocket payments for health care. Fees-for-service in public and private health facilities account for only 2.93.1% of total spending. It is possible to estimate the share of informal payments in total health expenditure only from 2003, when NHA started being used; from 2003 to 2005 informal payments accounted for 810% of total health expenditure. Out-of-pocket payments are mainly for the purchase of drugs and medical supplies for outpatient as well as inpatient care (19.721.8% of total health care expenditure and 55.458.4% of the total volume of out-of-pocket payments between 2003 and 2005) (Gotsadze et al., 2006). Retail pharmacies distribute 79% of all pharmaceuticals directly to the population, while 21% go through hospitals. NHA data show that out-of-pocket payments on pharmaceuticals and medical supplies at pharmacies accounted for 1.31.4% of GDP in 2006, but 2.12.2% in 2008, a significant increase from 0.8% of GDP in 1996 (State Statistics Committee of Ukraine, 2010a). According to household surveys performed by the State Statistics Committee of Ukraine in 20082009, 89.090.4% of inpatients had to pay for their pharmaceuticals themselves. NHA surveys found that, as well as pharmaceutical expenditure, the share of direct private expenditure on dental care is quite large (32.9%), as is rehabilitation care (19.3% of total expenditure on these types of services). This survey found a rather small percentage of outof-pocket payments in outpatient and particularly inpatient care due to discrepancies in the way data were collected. 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 from pharmaceutical costs, some patients use VHI and sickness funds as a complementary source of funding (see section 3.3.3 VHI). They do not, however, have a significant influence overall. The only mechanism used to ease the public burden of payments for pharmaceuticals is the exemption of sales of pharmaceuticals and medical supplies from value added taxes. To protect socially vulnerable population groups and patients with socially significant and serious diseases, there are certain benefits available for outpatient health services and Page 226

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pharmaceuticals. These groups can receive pharmaceuticals from the approved government list for free or for a discount with a prescription. However, expenditure through this program does not exceed 2.7% of the total spending on pharmaceuticals (Gordienko, 2003). Expenditure on medical benefit is covered by general allocations to health care provided by the budgets. In reality, however, even socially vulnerable groups have to pay out-of-pocket for guaranteed services. Some patients from vulnerable groups pressure doctors into giving them more pharmaceuticals than required. This has caused the government to attempt to adjust the list of groups covered and introduce subsidies instead of benefits. The government has attempted to regulate payments for health care services. The Cabinet of Ministers Resolution of 1996 introduced official user charges for health services and allowed local and regional governments to establish their own fees for health services provided at state and community facilities. The Resolution applies to those paid services that medical facilities provide in accordance with the approved services list and does not apply to these services that are required to be provided to the population for free. In reality, however, there is no clear line between free and paid medical services. As a result, the government does not regulate prices for those services which are provided for a fee in real life, but which are not yet included in the official list of paid services approved by the Cabinet of Ministers. Additionally, there is no official method of determining the full costs of medical services. According to NHA, the volume of informal payments is currently almost equal to the volume of formal payments, that is, 810% of total health expenditure and 22% of household expenditure. But it is likely that the amount of informal payments is underestimated (Gotsadze et al., 2006). Informal payments existed in Soviet times, but their presence then was on a very small scale. Most informal payments were in the form of gratuities for a service received (such as produce in rural areas, for example, or chocolate elsewhere). As a result of the economic downturn in the 1990s coupled with wage arrears, personnel in health facilities have introduced informal payments in order to provide an acceptable wage for themselves. These payments are mostly monetary and are made before the service is provided. Often, the necessity of such payments is indirectly initiated by medical staff: patients tell each other about the necessity and the amounts required. For additional payment, doctors offer different drugs and services which they claim are more modern and efficient (or faster access to both). Payments in kind (gifts, produce) are still present in rural areas. It is extremely difficult to gauge the true extent of informal payments in the total income of medical staff. According to the limited NHA data, informal payments account for roughly 20% of the total salary funds. Their distribution is highly uneven as well, depending on location (rates are higher in the city than in the country), type of care (inpatient care is much more expensive than outpatient), the doctors qualifications (specialists receive higher payments than family doctors/GPs), case complexity and so on. Informal payments persist due to several factors, including low pay for medical staff and the weak regulation of service providers, especially doctors and professionals involved in decision-making. Further, the government is not ready to admit its incapacity to provide free health care in full, which breeds tolerance towards informal payments, despite regular loud campaigns against corruption. VHI VHI still plays a very minor role in health care financing in Ukraine. Despite the relative growth in the number of insured people and insurance premiums, only 2.5% of the population use VHI, and its contribution to total health care expenditure is 0.8%. About 1.6% of the population participates in sickness funds and contributes nearly 0.1% of total resources to the system. The introduction and development of VHI was only made legally possible in 1996 when the Law on Insurance was passed. VHI in Ukraine is offered exclusively by private insurance companies that are often not specialized in health. According to the State Statistics Committee of Page 227

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Ukraine, there are currently nearly 100 private companies in the VHI market, offering various health care packages (Kiselyev et al., 2004). Corporate (group) insurance, purchased by an employer, is the main form of VHI. 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 without actuarial settlements, thereby replacing paid services by various financial schemes. The majority of VHI customers 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. The main difference is that VHI offers partial coverage of pharmaceutical costs. The framework within which VHI operates in Ukraine is not clearly defined. On the one hand it can be classified as a substitute, since it is used to cover expenses for drugs, laboratory work and other services that are not covered by the state health system in reality. However, these services are not officially excluded from the list of services guaranteed by the government. In fact a VHI customer is often paying for what is supposed to be provided for free. VHI is intruding into the state health care domain by duplicating state commitments to a considerable degree, since the boundary between paid and free services is very unclear. On the other hand VHI can be classified as complementary since its customers receive the right to be treated in the best facilities. There are several serious obstacles to VHI development in Ukraine. First, VHI premiums purchased by employers for employees do not carry any tax benefits, which means employers do not have any incentive to include health insurance in a benefits package. The structure of financing public medical facilities is based on an expenditure estimate which forbids using VHI resources to create incentives for medical personnel. Doctors (and particularly surgeons) in public medical facilities resent treating insured patients, since they refuse to pay informally. However, medical facilities sign contracts with insurance companies since it is now a legal way of selling medical services to the public. A significant proportion of VHI contracts are technically quasi-insurance, a disguise for patients paying for health services themselves. Patients pay official premiums into VHI, but the insurance company often acts merely 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 by the railway management in 2001. Now the entire sector is covered by health insurance. At first, this insurance covered the rolling stock workers and the operations department. It is gradually spreading to cover other categories of railway workers (Kiselyev et al., 2004). In 20012006, the program insured retired workers as well; until 1 January 2001, health insurance for retirees was substituted by fixed payments during inpatient care at a rate of 20 hryvnya per day for no more than two hospitalizations per calendar year. The railway system and its workers pay premiums on an equal footing. The total amount of monthly premiums in 20012006 was 4 hryvnya (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 million hryvnya in premiums was collected, making up 7% of additional revenues for the health care budget of the Ministry of Transport and Communications. A private insurance company provides insurance for the railway workers. This insurance covers inpatient care primarily in the parallel network of medical facilities. The resources allocated to the medical facilities are designed to cover spending on pharmaceuticals, food and laundry stocks for each individual patient to cover the portion underfunded by the government budget, but only to a fixed maximum amount. In 2007, additional compensations for inpatient and outpatient pharmaceuticals Page 228

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were introduced. Further, the insurance company makes payments to the medical facility for case administration. 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 and credit unions are being established in Ukraine, along side various charitable institutions and funds. Sickness funds represent quite a well-developed network of non government organizations established on a voluntary basis for complementary financing of the health system. Sickness funds function as VHI on a non-profitmaking basis. While, legally, VHI companies are profit-making private organizations, sickness funds function in accordance with the Law on charity and charitable institutions, as charitable non-profit-making organizations guided by a common interest to improve health care for their members. Membership in a sickness fund is voluntary. It may comprise individuals as well as working collectives, enterprises, agencies and institutions paying premiums for their members. The performance of sickness funds depends directly on the number and nature of its members. For this reason, preference is given to corporate membership, where working collectives, enterprises, or institutions cover fees for their employees. However, the individual premiums 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 in sickness 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 insufficient coverage from the government in 2009, 79.8% of sickness funds expenditure was on purchasing pharmaceuticals and other medical devices. A number of sickness funds have also committed themselves to contributing modern medical equipment to health facilities, developing targeted programs, training and retraining personnel, advocating for healthy lifestyles, protecting mother and child health, and many other activities. About 17% of collected funds are spent on administration. The income of sickness funds is derived from a number of sources: founders and members premiums, charitable contributions, and donations and profit from charity transactions. The premiums are determined by the sickness funds administration as a percentage of salary (usually no more than 5%) or fixed payment (79 hryvnya per month or US$ 1014 per year). According to Ministry of Health data, the number of sickness funds increased by 22 times between 1999 and 2006, but in 2009 they shrank as a result of the economic crisis. In 2009, more than 750 000 people, or 1.6% of the population of Ukraine, were covered by sickness funds. The popularity of sickness funds differs greatly among various regions. In Ukraine, 17 out of 27 regions have a very small percentage of the population covered by sickness funds (1%), but in 7 regions, 14% is covered; in 2 regions, 610% is covered; and in Zhytomyr oblast, the number of members exceeds 16% of the population. Since 1999, sickness funds revenues have increased by more than 50 times, and in 2009 totaled 80 million hryvnya. Sickness funds reduce the overall 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 on overall 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 are generally 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 cities such 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: Page 229

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a clear boundary between state obligations and additional health services and drugs not paid for within 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 not affordable for the general public. Parallel health systems Many ministries and other government bodies have separate parallel health systems for their workers. The largest 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. These parallel systems are funded from the national budget and almost 42% of health expenditure from the national budget is spent on parallel medical facilities and more than 11% of total public health expenditure. According to data from 2008, the parallel health care network had 255 hospitals (10% of the total number of hospitals in the country), and 435 outpatient polyclinics (5.9% of the total in the country). The number of inpatients in the parallel networks made up 7.7% of the total number of inpatients, and visits to polyclinics made up 6.9%. The Ministry of Transport possesses the largest parallel network: 80 hospitals and 175 outpatient polyclinics. Data on the number of people served by the parallel health system is unavailable, but 1.7 million people work for the railway system, which is the largest industry within the jurisdiction of the Ministry of Transport and Communications. External sources of funds It is difficult to estimate the impact of external sources of financing in Ukraine. Overall donor activity contributes very little to financing of the health sector; according to NHA, their contribution accounts for less than 1% of total health expenditure (0.30.7% in 20032008). Donors to the health sector include international organizations (United Nations agencies, the EU, World Bank, the Global Fund) as well as governments of individual countries (Japan, Sweden, the United Kingdom, United States and others). Donations are used mostly to provide technical assistance. For instance, the EU carried out several projects in Ukraine, including Primary Health Care Support (2 million; 20022005), Health Financing and Management (4 million; 2003 2006), Support for the Development of a System of Medical Standards (4 million; 20042006) and Support for Secondary Health Care Reform (4 million; 20072009). There are also major initiatives involved in fighting infectious diseases such as TB and AIDS, and supporting maternal and infant health programs. In 2006, the Global Fund approved a US$ 151 million grant to Ukraine to fund the program HIV-AIDS Prevention, Treatment, and Care for the Most Vulnerable Populations in Ukraine, 20072011. In 2007, however, the Global Fund denied Ukraines request for a US$ 94.6 million grant to fight TB, due to an unclear spending plan. The Global Fund had already denied a grant for fighting TB in 2004. In 2006, however, the country managed to secure a grant to fight HIV/AIDS. The resources were granted directly to the Ukrainian government, but this was followed by a scandal over an increase in the price of medication. As a result, the Global Fund had to suspend financing, citing concerns over slow progress and management problems. A statement issued by the Global Fund said it had taken the decision because of implementation bottlenecks, and management and governance issues. Financing resumed after International HIV/AIDS Alliance, an NGO, was Page 230

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put in charge of the project. Following this, in 2009, the Global Fund approved a US$ 105 million grant requested by Ukraine to combat TB. Other sources of financing The Ukrainian government mandates that it is the responsibility of the owners and administrators of enterprises, agencies and institutions to protect the health of their workers. Employers, therefore, must provide their own resources to fund compliance with safety techniques, sanitation in the workplace, recruitment and periodic medical exams for certain categories of workers in labor-intensive, unhealthy or dangerous jobs. They are likewise responsible for providing thorough medical examinations and rehabilitation for workers with potential professional or occupational diseases, and prophylactic medical examinations for groups of workers at risk of developing occupational diseases. The State Sanitary-Epidemiological Service administers compliance with sanitary requirements, within the limits of budget financing. In accordance with the Law on mandatory social insurance covering temporary disability, occupational accidents and occupational diseases, the Social Insurance Fund against Occupational Accidents and Occupational Diseases uses its own resources to take measures against occupational accidents, to remove work-related threats to workers health and so on. The only available data show that the Social Insurance Fund spent 15.5 million hryvnya in 2003 (US$ 2.9 million or 0.08% of total health expenditure) and 10 million hryvnya n 2004 (US$ 1.9 million or 0.4% of total health expenditure). 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 village budgets, but it is still a single payer system. The Budget Code authorizes the financing of the health system assigned to different levels of the budget system. The historic approach remains the primary strategy for determining health care budgets for different levels. A targeted program approach is used to solve acute problems in the health care sector. The national government and local self-governments at all levels are responsible for pooling funds: the Ministry of Health and other ministries, regional and municipal health authorities, and rural self-governments. State budget resources allocated to health care in accordance with the Law on the state budget approved by Parliament are distributed among numerous agencies controlling the budget. The most important of these are the Ministry of Health and the National Academy of Medical Sciences of Ukraine, as well as a number of other ministries and departments in charge of medical facilities. Each of these 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 state budget. The process of calculating the level of inter-budgetary transfers and the estimated local budget health care expenditures depend directly on the local population size, with the exception of those who receive care through a parallel network. However the majority of parallel networks do not provide a full health care package to their workers. Workers in these ministries and other bodies have the right to seek care in their local community 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 Page 231

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pool. Citizens benefiting from access to parallel networks as well as regular medical facilities use a portion of the finances allocated to provide care to other people in the same region. The interaction between parallel and regional health systems faces a number of bureaucratic obstacles. This leads to the irrational use of combined resources in the health system in general. The governments 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 a unified medical system under the Ministry of Health. This means that parallel health facilities would come under the communitys jurisdiction and be integrated into regional health systems. However, no practical steps have been taken in this direction to make this happen. Final approval of local health budgets by local representative authorities together with general budgets takes place not later than two weeks after the publication of the Law on the state budget. Regional health budgets include the budgets of the Crimea AR, the 24 oblasts and 2 cities (Kyiv and Sevastopol) which have the same status as an oblast. Regional health administrations finance their health facilities from their own budgets. Local health authorities or local administrations (if they have no separate health authorities in their structure) finance health care facilities under their jurisdiction from the relevant municipal health budgets. At the rural level, local self-governments finance medical facilities under their jurisdiction: small rural hospitals, rural outpatient clinics, feldsher or feldsher and midwife posts (FAPs). Splitting off the rural level in the budgetary system led to a catastrophic fragmentation of local health budget resources. On average there are fewer than 5000 people per local self-government in Ukraine. Not more than 10 800 territorial and administrative entities and settlements out of 30 000 can be considered viable self-governing units. The Budget Code of Ukraine presents some possibilities to improve the effectiveness of pooling the local health systems financial resources. It allows municipal and local communities (settlements, villages and towns) to pool their funds on a contractual basis in order to fulfill their commitments, transfer resources for these commitments to the upper budgets, and transfer subventions from one 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 without specifying them in the budget of the actual communities. The appropriate amendments to the Budget Code of Ukraine (Law of Ukraine No. 2350-IV, issued 13 January 2005) were made, but the Cabinet of Ministers of Ukraine put the fulfillment of those amendments on hold. The political opposition to this decision claimed that depriving small communities of the possibility of financing their own primary medical care needs by transferring 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 is delegated to the subnational level. Delegated assignments are financed through the system of inter-budgetary transfers. The size of transfers is calculated with the goal that they would completely finance the regional and local 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 care expenditures in the regional, district and municipal budgets is determined by special formulas approved by the Cabinet of Ministers (Decree No. 1195 issued 5 October 2001, amended 14 October 2005, On approving the distribution of inter-budgetary transfers between state and local budgets and Decree No. 1782 issued 31 December 2004, amended 29 December 2005, On regulation of inter-budgetary relations), which take into account the gender and age specifics of the population. Inter-budgetary transfers are designed to finance all duties of the state, including public administration and social needs. Within the total volume of transfers, there Page 232

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are no specifications for resource allocation for separate state commitments such as health care. Regional administrations and local self-governments have the right to determine the structure of their expenditure and therefore decide independently where to use the transferred resources. The rights of local authorities are limited, however, by decisions passed at the national level, for example, to raise the salaries of budget system workers, as well as obligations imposed by the Budget Code to pass down part of the transfer. It is also forbidden to decrease the volume of spending on state programs targeting diabetes mellitus and diabetes insipidus. Expenditure on these programs is included in the sums transferred. The structure of health care expenditure distribution between the levels of the budget system within the amounts of transfers that are passed down 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 interbudgetary 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 not less than 9.5% of the total health care budget included in the transfers passed by the state down to 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 passing of subnational budgets. A certain authority, for example, might decide to allocate more resources to the education system and cut the financing of the health system. For instance, during the drafting and passing of the budget in 2005, 17 out of 25 regions in Ukraine planned a smaller volume of health care expenditure in their budgets than was foreseen in the figures calculated by the Ministry of Finance. No nationwide data are available, but a study of six regions found that the community budget resources allocated to health care make up only 1316% of the estimated health care expenditure within the transfer passed down from the state budget to regional budgets, which is only half to two-thirds of the estimated 23%. State budget expenditure includes subventions to the subnational budgets for supplying medical equipment to rural outpatient clinics, feldsher posts and FAPs, and for the purchase of ambulances for rural medical facilities. In earlier years the Ministry of Health itself and other central agencies used resources from the national budget. Instead of transferring money down to the regional level, they purchased and sent equipment, drugs and so on. The majority of resources come from local budgets, however, and their share has increased in recent years, due to the decrease in centralized purchasing from the state budget. Municipal budgets play the main role in the consolidated health care 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 health spending has been matched by the growing importance of input norms which determine the demand for funds as 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 care problems such as immunization, fighting TB and HIV/AIDS epidemics, reproductive health, prevention and treatment of cardiovascular and cerebrovascular diseases, prevention and cancer treatment, and so on. The programs are approved either by executive order or by law. The Ministry of Health orders, manages and coordinates these programs. As the government passes these programs, it orders the Ministry of Finance and Page 233

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the Ministry of Economy to make provisions for these programs in drafting the state budget and forming a state policy of economic and social development for a given period. At the same time, the regional executive authorities receive recommendations for drafting and approving the corresponding regional programs that must contain directions and measures outlined by the appropriate state programs. They also receive recommendations 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 take place they receive a very small portion of resources from local funds. For example, data from the Ministry of Finance show that in 2004 the government allocated 580.1 million hryvnya from the state budget to finance state targeted programs, but all the regional and local budgets together allocated only 31.04 million hryvnya to run programs fighting TB and HIV, providing insulin to people with diabetes, immunization programs and centralized measures for treating cancer. Within the limits of these state programs, the Ministry of Health purchases drugs for cancer, TB, HIV/AIDS and other illnesses, and delivers them to the regions. There are no special budgets for the development of human resources and mental health protection. The proper expenditure is calculated in drafting first a state budget and then local, primarily regional, budgets. Purchasing and purchaserprovider relations The organizational relationship between purchasers and providers is based on an integrated model. State and community medical facilities (the providers of medical services) are under the administrative jurisdiction of their owners, that is, the corresponding state and local authorities (purchasers). Therefore in Ukraine the model is based on the principles of appropriate budgetary payments for medical services but not on the purchasing of medical services, which would be based on strategic public procurement contracting. In financing health care from the budget, payments are made by state authorities, which are also established in the Budget Code as the chief administrators of budgetary resources. The chief health administrators of budgetary resources are the Ministry of Health and the National Academy of Medical Sciences of Ukraine, as well as a number of other ministries and departments. Each of these authorities finances the medical facilities and programs in its jurisdiction the list is approved by the Cabinet of Ministers (Decree No. 342, issued 15 April 2002, On approving the list of medical facilities and health programs financed from the state budget). The medical agencies of ministries and departments receive their funding from the state budget. In calculating interbudgetary transfers, the estimates of health expenditure from local budgets depend on the size of the local population, excluding those who receive care through the parallel network. However the majority of parallel networks do not provide a full health care package to their workers. Workers in these departments have the right to seek care in their local community medical facilities, and they exercise this right especially those workers 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 local inspections, and approximately 50 national-level medical agencies under its control that provide everything from primary to tertiary care. Additionally, the Ministry of Health funds state, interagency, and integrated programs and measures related to health that are financed from the state budget. There are also certain centralized procedures through which the Ministry of Health purchases pharmaceuticals, medical devices, immunobiological medicines, expensive medical equipment and hospital vehicles. The regional chief administrators of budgetary resources for health are the Ministry of Health of Crimea AR, along with health authorities in the regions, and the municipal administrations of Kyiv and Sevastopol, which finance medical facilities under their control. At the municipal level, the chief administrators of budgetary resources are the health authorities within the executive municipal powers. At the district level, there are no requirements Page 234

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regarding the existence of health authorities. On 11 May 2005, the Cabinet of Ministers added a health authority to the list of departments in the administration at the district level (Decree No. 328, On the structure of local state authorities, Appendix 3). However, its goals, functions and authorities were defined by the Cabinet of Ministers only on 28 November 2007 (Decree No. 1364, On approving basic regulations for the health sector of district state authorities). Therefore, health authorities in district administrations are currently exceptions, 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, FAPs and 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 and community health care facilities are officially financed by the government. According to the Budget Code of Ukraine, they must be supported by the national or the relevant local budget. There is strict allocation of resources between the budgets, and any given facility can receive financing from one budget only. The real level of resource allocations to government-financed facilities is based on historical budgeting adjusted for inflation and any budgetary increases. The Ministry of Finance and local fiscal authorities give the Ministry of Health, local health authorities and local self-governments the maximum health expenditure from the draft budget for the following year. The Ministry of Health, local health authorities and local self-governments then determine the maximum expenditure for the health facilities funded by them, and the facilities produce cost estimates for the next fiscal year. The Ministry of Health, local health authorities and local self-governments then 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 and other 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 submit them to the financial authorities to be included into the appropriate draft budget. Once the draft budgets are drawn up, the Ministry of Health, local health authorities and local self-governments make any necessary corrections to the volume of budget funding to the facilities, before approving the drafts. The primary and mandatory 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 other expenditure not considered priorities can receive financing only if the primary requirements are covered and there are no other debts. In reality, salary expenditure accounts for more than two-thirds (70.8% in 2008) of territorial 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 based on a list of permitted line items, which in turn is based on norms set by the Ministry of Health defining inputs such as staff, salaries, pharmaceuticals, catering and so on. The majority of these norms depend on the capacity of a health facility (number of beds in hospitals or number of visits in polyclinics). Many of these norms do not reflect real expenditure, for example on pharmaceuticals or hospital food. Facilities must spend resources exactly as allocated. They are not permitted to reallocate resources from one line item to another. Any changes in the facilitys income and expense estimates must be approved by the chief administrators of budgetary resources and by the appropriate fiscal authorities, if the changes involve adjustments to the consolidated level of budgetary expenditure. If there are any unspent funds at the end of the year, the fiscal authorities will cut the Page 235

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facilitys budget estimates for the next year by the same amount. Line-item budgeting is very straightforward for 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 to maintain excess capacity; (2) allocating resources for the maintenance of medical facilities, rather than the volume of work, does not provide incentives to improve productivity; instead the incentive is given to increase the infrastructure; (3) line-item budgeting limits the authority and responsibility of the management in medical facilities and does not provide incentives to look for more efficient ways to use resources. Therefore, resource allocations 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-based type of management. Consequently, even a significant increase of resource allocations to health facilities does not guarantee better fulfillment of the governments social commitments. Individuals and legal entities that are not financed by the government may receive funds from the budget to contribute to state programs. They must use these funds in accordance with the budget resources usage plan, that is, they must distribute budget allocations in accordance with line-item budgeting. The budget resources usage plans are approved by officials in 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 their jurisdiction. Centralized purchasing includes items such as vaccines, pharmaceuticals to fight TB, for the prevention and treatment of HIV/AIDS, and for treating cancer, pacemakers, implants and other medical devices, expensive medical equipment, ambulances for rural medical facilities, and other items for fulfilling the measures outlined in state programs. Centralized purchasing is conducted through tendering procedures by enterprises under the jurisdiction of the Ministry of Health (Ukrvaccine, Politechmed, Ukrmedsnab). The purchased pharmaceuticals and equipment are then distributed to the regions. The quantity, quality and assortment of purchased pharmaceuticals and medical devices often fail to satisfy the needs of medical facilities. Budget allocations do not cover all health care expenditure in public medical facilities, despite the constitutional guarantees regarding free health care in state and community medical facilities. In reality, there are 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 for these types of services in budgets at different levels; however most comes from municipal district health care budgets and community budgets. Private payments (user fees) are funneled into special accounts (so-called commission accounts) and can be used at the discretion of the facilitys management as they supplement allocations 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 for dental 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 firms and corporations that cover a package of services. The majority of drug purchasing from budgetary sources is carried out by local or regional health authorities based on requests from medical facilities. The pharmaceuticals are then distributed among facilities. Pharmaceuticals are partially purchased with resources from a special budget fund in accordance with health insurance company contracts and sickness funds. The amount of these purchases is very small, however. Most pharmaceuticals are purchased directly by patients themselves, on the recommendation of their physician, and they pay out of pocket in full. Psychiatric care is covered by local budgets through the line-item budget system. The prospective budget estimates do not take into 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 private clinics. Long-term medical care is usually financed from local budgets in accordance with line-item budget Page 236

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estimates drafted by social protection agencies. Rehabilitation services are normally provided by resorts and sanatoria. About half of this treatment is financed from budget resources. The remainder comes from employers 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, such as a global budgeting and payments on a per capita basis. These experiments are typically the result of local initiatives, and they are supported by technical assistance projects run by international donor organizations. For example, in Komsomolsk (Poltava oblast, population 60 000) in 1997, the municipal authorities and medical community launched an experimental model of primary care organization. Trained family doctors signed contracts 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 facilities were purchased on a contracting basis, the city established family practices. Currently there are 11 private family doctors who sign contracts with the municipal health authority and provide primary care to about 40% of the citys population. Funds are allocated from the budget on a per capita basis according to the number of citizens assigned to a particular physician. The rest of the population received primary care at a polyclinic that is government-financed according to line-item budgets. In 2003/2004, doctors in independent practices were brought together into group practices, and the polyclinics were turned into primary care centers. In the early stages of this experiment there was an attempt to introduce a scheme of partial fund-holding in purchasing services from family doctors, but this mechanism was not supported by the local authorities. According to the results of a public opinion poll in Komsomolsk, the delivery of primary care services by family doctors is more financially efficient than the current system (Nadutaya, Nadutiy & Zhalilo, 2003; Nadutaya, 2004). The quality and accessibility of health care also improves. After the transition to the new model, the number of visits to medical specialists decreased by 36%, the number of adult hospitalizations decreased by 16%, and the number of 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% with health care provided by family doctors. In 2005, the EU-funded project Health Financing and Management in Ukraine, conducted experiments aimed at changing the mechanisms of financing health care facilities. Two pilot rural regions were chosen in Kharkiv and Zhytomyr oblast with a population of about 35 000 in each. In these pilot medical facilities, line-item budgeting was replaced by global budgeting, meaning that the facility was financed based on the volume of care it provided, but, in contrast with the existing approach, resource allocation was not itemized and the amount did not depend on the capacity of the facility. Facilities were financed within the limits of an agreement, which took the form of a simple block-contract for the governments 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 the publicprocurement of goods, works and services (No. 1490-III of 22 February 2000). The purchaser negotiated with health care providers (that is, the district central hospital) on the volume of allocated resources and inpatient 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 its current needs and priorities. The hospitals autonomy was secured by its transformation into a form of nonprofitmaking communal enterprise as recognized by the Economy Code of Ukraine (Rudiy, 2005). Local fiscal authorities resisted experimenting with new methods of paying medical care providers. In 2005, in a pilot district in Kharkiv oblast, the local authorities divided the financing of primary and secondary care to create Page 237

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two independent health care providers. The plan was to sign separate contracts to purchase medical services from 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 care from the central district hospital, global budgets were the chosen method of payment. In the contract regarding the purchase of primary care, payment was to be on a per capita basis based on the list of patients from every family doctor/GP. In MayJune 2006, however, when the project was scheduled for launch, authorities from the 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 district parliament, including street protests by the medical workers. Their main argument was the inevitable breakdown of inpatient care and specialized outpatient care, claiming that the hospital would lose part of its funding. They also pointed out the difficulties of undertaking reforms during the period of state financial deficit. The true cause of the hospitals resistance lay in its unwillingness to lose resources and property earmarked for transfer to the primary care center. Inpatient doctors and the polyclinics medical specialists worried that the reform would decrease demand for their services, leading to staff reductions for specialists and reducing 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 the district health system was achieved. All rural medical facilities (rural outpatient clinics, FAPs, etc.) became district community property. A united community non-profit-making enterprise was created on the basis of the central district hospital. All rural facilities became subdivisions and lost their status as independent legal entities. Unifying financial resources and rural medical facilities at the district level created conditions for the more efficient utilization of budgetary resources allocated by local self-governments to health care. It also stabilized financing and protected the health care budget from rural community leaders redistributing the resources to other community needs. In March 2006, after securing an agreement with the relevant regional authorities, the Ministry of Health issued an order assigning additional districts in Zhytomyr and Kharkiv oblast to join the project. These new forms of financing are not widespread, however. The Ministry of Finance is the main opponent to reforming purchasing mechanisms for medical services. The Ministry expressed concerns about new purchasing mechanisms potentially upsetting the balance between existing and required resources (Lekhan, Rudiy & Shishkin, 2007). Paying health care personnel Workers in government-financed agencies and institutions (including health care facilities) are paid according to the laws and regulations of Ukraine, and according to general, departmental and regional agreements, and collective contracts between proprietors and work unions, within the limits of budget allocations and nonbudgetary income. The health workers union has not had much success recently in their fight to increase salary levels. Ukraine has also largely retained the Soviet practice of remunerating public sector health care professionals using fixed salary scales. The advantage of this method lies in the simplicity of calculating the cost of salaries and the lack of financial risks for health care professionals. The main disadvantage is that there is no correlation between salary level and quality of work. Medical professionals do not have much incentive to increase their work volume, efficiency or quality. One goal in the Concept of the development of health care in Ukraine (2000) was to differentiate medical and pharmaceutical workers salaries based on their level of qualification, and the quantity, quality, complexity and efficiency of their work, while also taking into account their working conditions. Since then several attempts have been made to make payments to health workers more flexible. These attempts retained the basic principle of salaried employment but took into account a Page 238

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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 institutions and organizations of some government supported sectors. Official rates are calculated by multiplying the salary of a worker of the first tariff category (in essence the minimum wage) by the appropriate tariff quotient. The specific conditions of remuneration for health workers are set by a joint order from the Ministry of Health and the Ministry of Labor and Social Policy (No. 308/519 issued 5 October 2005, amended 2007, On regulating remuneration of medical and social protection facilities workers). Professional salaries for the majority of medical personnel (medical doctors, mid-level health staff, pharmacists) are set in accordance with their qualifications which reflects a workers professional level (no category, first category, second category and highest category). Professional salaries (tariff rates) are the governments guaranteed minimum wage to certain groups of workers with professional qualifications in public and private health care facilities. Managers at government-financed health care facilities have the right to raise salaries within the salary fund provided by the line-item budgets. Salaries can be increased for certain workers with hazardous or heavy working conditions, or for surgeons, depending on the quantity, complexity and type of work they carry out. For example, in outpatient and polyclinic facilities salaries can be increased up to 15%; in a day hospital specializing in surgery, they can be increased up to 25%; and in a hospital, the increase can be up to 40% of a professional salary. The list of facilities and jobs with higher wages due to hazardous or heavy work conditions is determined by a special addition to the joint order of the Ministry of Health and the Ministry of Labor and Social Policy. The list of actual workers who have the right to receive higher wages is determined by the enterprises authorities in accordance with the unions committee and depends on the tasks and the volume of work. Additional remuneration is granted for specializing in more than one area, substituting for a missing worker, increasing the amount of work or the area served, and working nights at an hourly rate of 3550% 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 being on-call at home, nursing duty, holding an honorary title and more. However, these bonuses can be decreased or removed if problems with clinical quality or discipline are identified. In public facilities, the salaries of different categories of medical workers (medical doctors and mid-level medical staff) are virtually undifferentiated according to qualifications or the type of work. There are only two groups of specialists among medical doctors. The first group includes professionals whose qualifications are in demand and who have priority in the recruitment process: surgeons of all kinds, anaesthetists, any medical doctors for rural areas, and primary care physicians such as district internists, district paediatricians and family doctors/GPs. The salary for these 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-level medical staff are 34 categories lower than that of medical doctors and there is no specialty gradation. In an attempt to reduce turnover in emergency care and outpatient care, doctors and mid-level medical personnel in these sectors are paid bonuses for continuity of service. The largest bonuses for continuity of service are provided for emergency care doctors (up to 60%) and doctors practicing in rural areas (up to 40%). Primary care physicians in cities can receive up to 30% of base salary. Moreover, like other specialists, these specialists can receive an additional bonus of up to 50% base salary for increasing the area served, substituting for a missing worker (which is important in understaffed facilities) and for a larger workload. There are no significant differences between inpatient sector medical personnel and other personnel, except for surgeons and anaesthetists, whose salaries can be increased by up to 40% for performing specific surgeries. In all medical Page 239

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facilities with hazardous or difficult work conditions (inpatient and outpatient care), all types of personnel are paid higher salaries, including doctors as well as mid- and low-level medical staff. Salaries in psychiatric and addictions 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. Salaries in auxiliary facilities such as physiotherapy and radiological facilities can be paid up to 15% more of the professional base salary. The remuneration of dental specialists does not differ from other specialists. Midlevel dental 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 medical personnel. Their salaries depend on the capacity of the facility. Additional payments (2425%) are provided for specific qualifications in health care organization and management. In Ukraine, social workers work primarily in institutions for vulnerable groups, including special homes for retired and disabled people, territorial social care 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 social workers are 12 times lower than the salaries of non-priority specialty doctors. As with doctors, their salaries are differentiated between categories of qualification. Social workers employed at long-term facilities for children with developmental disorders can receive an additional bonus up to 25%, as can social workers at long-term care facilities for elderly or disabled people. There is a relatively small number of private medical facilities in Ukraine, but the proportion of full-time workers in private health facilities usually does not exceed 50%, 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 are paid primarily on a contractual basis. A contract between the administration and an individual medical worker provides either an hourly rate or a fixed sum for the total volume of work. Different forms of remuneration can be 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 rates approved by the Ministry of Labor and Social Policy and the Ministry of Health, although remuneration is between 10% and 15% higher for working at a private facility. The methods of remuneration give some flexibility in salaries for medical personnel at public medical facilities. However, this has not proved a significant incentive to increase the volume or quality of services provided. In the majority of cases, the remuneration of labor in health facilities is related only to the hours of work, without real consideration of the volume, quality or efficiency of work. Bonuses and additional payments (except for mandatory payments for substituting a missing worker, length of service or a qualification category) are extremely rare due to the chronic 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, for whatever reason, are more pleasing to the facilitys administration. The lack of transparent bonus criteria removes any incentive to increase the efficiency or quality of work. Moreover, salaries are still very low. For example, a medical doctor with the highest qualifications, whose specialty is among the best paid, usually does not earn more than US$ 300 a month, including bonuses and additional payments. The average monthly salary for 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 lower than those in other sectors of the economy. Salaries are 1.79 times lower than in industry and 1.22 times lower than in education. Such salaries do not attract personnel (particularly the young) to the health system and certainly cannot retain them. To a certain extent, these low salaries provoked the appearance and spread of informal payments, which have negatively affected the general equity and accessibility of medical care. The poor have suffered especially. Another obstacle to the implementation of more effective forms of labor Page 240

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remuneration is the lack of a legal basis for contracting at medical facilities. This tool would stimulate the development of clear criteria for work evaluation. It would create more transparent regulation of mutual commitments 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 populations health in the country. Health education is the responsibility of doctors of any level of qualification, particularly physicians of the lowest rank. Special medical facilities known as health centers exist on paper to coordinate activities to promote 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 on public and individual attitudes towards their own health. Unfavorable health tendencies aggravated by widespread risk behaviors have increased the understanding that the traditional health care model (focusing primarily on treatment) does not improve health in Ukraine. There is a lack of human resources capacity to improve health communication in Ukraine, as well as organizational and financial barriers. The Cabinet of Ministers Resolution On approving the intersectoral program Health of the Nation for 20022010 (No. 14, issued 10 January 2002) was, among other topics, dedicated to the promotion of a healthy lifestyle. The program 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 a healthy lifestyle. Unfortunately, the implementation of this part of the program proved to be ineffective. The media actively advertises products harmful for health, particularly alcohol and tobacco. Furthermore, the Social Advertisement Institute is practically inactive, and health education for young people is lacking (Ministry of Health of Ukraine and Ukrainian Institute for Strategic Research, 2006). Nevertheless, there have been a number of indications of a breakthrough in the governments attitude towards healthy lifestyle issues. In 2005, a law was passed On measures of prevention and reduction of tobacco products use and their harmful impact on the population health (Law of Ukraine No. 2899-VI, effective 25 October 2005). In 2006, the Parliament ratified the WHO Framework Convention on Tobacco Control. In 2008, amendments to the Law on advertising were 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 external advertisements inside and outside of city limits. Further, the advertising or promotion of alcoholic beverages is banned from television programs. From 1 January 2010, it is forbidden to advertise alcohol and tobacco in all printed media except for specialist titles. Currently, the Government-approved Concept of the state target program Healthy Nation 20092013 (Special Resolution of the Cabinet of Ministers No. 731-p, issued 21 May 2008) provides for the implementation of a series of coordinated intersectional measures to create favorable 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. Financing for this program comes from the pooling of funds from the state, local communities, public institutions and private organizations. The State Sanitary-Epidemiological Service is the main structure in Ukraine that is legally responsible for public health protection. Its two main functions are the control of communicable diseases and environmental protection (monitoring the quality of water, air, soil and food). The State SanitaryEpidemiological Service is organized hierarchically. It is financed exclusively from the state budget, which gives it relative independence from local authorities. The infrastructure comprises 816 sanitary-epidemiological Page 241

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stations including stations in rural areas, municipal and district stations, regional, central and one republican station, as well as disinfecting stations and one anti-plague station. The facilities have laboratory capacity for physical - chemical and microbiological analyses to identify the sources of infectious diseases. State SanitaryEpidemiological Service facilities primarily employ medical professionals and mid-level medical staff. Specialists in the State Sanitary-Epidemiological Service are responsible for maintaining preventive and routine sanitary and epidemiological surveillance to ensure safe working conditions in public and private enterprises, facilities and institutions, including community buildings, water-pumping and sewerage facilities, residential and public buildings, residential institutions for children and teenagers, and medico-prophylactic institutions, among others. Anti-epidemic work is performed by the epidemiological sector of the State Sanitary-Epidemiological Service in concert with medico-prophylactic institutions. The Service is also responsible for monitoring the quality of drinking water: it is in charge of 19 290 centralized water supply sources. It also controls 101 252 decentralized water supply sources, including 96 813 wells, 1142 water catchment systems and 3304 artesian wells. Immunization Immunization is the main part of the preventive work. There are 10 mandatory vaccines in Ukraine: TB, polio, diphtheria, pertussis, tetanus, measles, mumps, rubella, hepatitis B and Haemophilus influenza type b (Hib, since 2006). Depending on the specifics of their job or industry, certain categories of workers are required to receive certain other vaccines. The actual planning of activities and registration of children eligible for immunizations is the responsibility of local pediatric services or family doctors/GPs. The immunization of children is organized and performed by special units in childrens polyclinics (vaccination surgeries) or family doctors/GPs, the polyclinic departments of hospitals, rural health facilities, as well as nurseries and schools. The State Sanitary-Epidemiological Service monitors the organization and regular administration of vaccines. Two national immunization programs have been implemented in Ukraine (19932000, 20022006) to reduce the rate of communicable diseases. In 2007 the percentage of the population immunized against the main vaccine preventable diseases reached 95%, including measles 98.8%; Figure 158 Vaccination Coverage Trends diphtheria 98.7%; and pertussis, polio and TB (among infants) 97.8%. Implementing these programs allowed Ukraine to overcome the negative epidemiological situation that appeared in the 1990s and reduce the number of infectious diseases, primarily diphtheria, rubella and mumps. However, measles and pertussis levels remain undesirably high (there was an outbreak of measles in 2001/2002 and another in 2005/2006). The Ministry of Health regards this problem as a consequence of the vaccine shortages between 1992 and 1994. Moreover, vaccines received via humanitarian aid were never officially registered in Ukraine, and had a low immunogenic factor. This led to raised levels of these diseases
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among adults (Ministry of Health, 2007). An audit by the Accounting Chamber revealed a number of problems with the vaccination period, particularly irregular and sometimes insufficient supplies of vaccines (which caused a decline in immunization coverage from 2001 to 2003), insufficient compliance with the immunization schedule, disregard of contraindications in certain cases in order to reach coverage goals and insufficient monitoring of post-immunization complications. Low levels of health education among the general population aggravated the situation, leading to the mass refusal of vaccination (Flisak & unpublished document, Shakh, 2008). The state immunization program was developed for the period 20072015 and was ratified by Law No. 1658-VI of 21 October 2009. The program aims to raise the levels of vaccination and revaccination for children in 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 as a result of the consecutive implementation of two national programs, Family Planning (19952000) and Reproductive Health (20012005). Refining the family planning system remains one of the main goals of the current national program, entitled the National Reproductive Health Program to 2015. A network of family planning centers and offices has been created in the country. The service is headed by the Ukrainian State Family Planning Centre established at the Ukrainian Research Institute of Paediatrics, Obstetrics and Gynaecology. Regional family planning centers and contraception clinics have been established within obstetrical and gynecological services. These new measures have thus far been relatively successful, with abortion rates falling by almost 4.5 times. However, abortions continue to be the main method of birth control in Ukraine. Government statistics suggest that modern contraceptive methods are utilized by only about 29% of women of reproductive age. More frequent use of modern contraception is hampered not only by high costs but also by low public awareness and the unsatisfactory family planning system. According to a sociological survey, 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 or cause food poisoning (food workers in community or childrens facilities and school teachers) and employees who do heavy labor or work in hazardous conditions. The responsibility for arranging and conducting the routine mandatory medical examinations of employees lies with the owners of enterprises, facilities and institutions. Monitoring adherence is the responsibility of the State Sanitary-Epidemiological Service. Since the mid 1980s, during the Soviet era, there have also been universal health examinations to provide dynamic monitoring of public health. Preventive screenings took place in accordance with certain programs, the contents of which differed according to the age of target population groups. These examinations revealed certain factors which had an impact on public health, and preventive work was based on these factors. Decreased health care financing had a pernicious effect on the preventive work of medical facilities, particularly concerning screenings of the adult population, which were reduced and took on a mostly declaratory form. At the turn of the century, the Ministry of Health passed a number of resolutions proclaiming the resumption of mass health screenings and the monitoring of public health (for example, the Ministry of Health Order No. 327, issued 8 December 2000, On the resumption of mass health screening and monitoring of public health). This work was Page 244

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to be accomplished in two stages: the mass health screening of vulnerable groups during 20012002, and prophylactic examinations to cover the remainder of the population during 20032005. However, due to a lack of resources (primarily financial), only the first stage was accomplished. Currently, only certain groups undergo 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, emergency services workers and victims of the Chernobyl disaster. The local authority area is traditionally in charge of community health monitoring. Screenings involve other medical specialists (otorhinolaryngologist, ophthalmologist, surgeon, neurologist, dentist and others depending on indications), laboratory work and equipment tests. Unfortunately, the clumsy and expensive model of compulsory mass health screenings by a group of professionals without any proof that these screenings are effective is still present. There is still excessive attention paid to preventive screenings, alongside a formal attitude to health improvement and preventive treatments. Along with mass health screenings in Ukraine, there are also targeted preventive screenings aimed at the early detection of certain conditions and diseases. For example, the state oncology program (Cabinet of Ministers Decree No. 392, issued 29 March 2002) provides for a number of screening programs: detection of cervical cancer (yearly cytological screenings of women aged 1860 and colposcopy for women in risk groups), breast cancer (mammogram screenings for women aged 4065 and early palpation exams for women starting age 15), and colon and prostate cancer (annual examinations for people over 50). In order to improve the timeliness and effectiveness of cervical cancer detection, the Ministry of Health launched another program for cervical pathology screening (Ministry of Health Order No. 766, issued 31 December 2004). There is no special financing provided for screening programs; they are financed primarily from local budgets from general resources allocated to health care. The lack of earmarked financing prevents these programs from acquiring sufficient equipment, and there is a catastrophic shortage of mammographs in the country. 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, screening programs are not overly effective. The mortality rate for cervical and breast cancer did not change significantly from 2002 to 2006. The frequency of advanced breast cancer detection in 2007 was 27% (Medical Statistics Centre, 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 made provision for the special financing for these goals. Ukraine pays special attention to screening women during antenatal and postnatal periods. Screening is performed by family doctors/GPs and obstetricians/gynaecologists at specialized outpatient clinics called womens consultation clinics. These clinics provide dynamic monitoring of womens health during the antenatal period from 12 weeks of pregnancy, and provide health education and maternal 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 alphafetoprotein), and tests for syphilis and HIV. Ultrasound tests cover about 94.6% of pregnant women, while the alpha-fetoprotein test covers 29.6%, the syphilis test covers 9698%, and the double test for HIV covers 94.5%. 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 Strategic Research, 2008). The rate of HIV-infected pregnant women in Ukraine is one of the highest in Europe, at 0.31% in 2006. The number of children born to HIV-infected mothers continues to grow and reached a record high of 2736 in 2006. However, Ukraine has had significant success in lowering the rate of mother-to-child transmission. In 2006, 93.4% of all HIV-infected pregnant women received antiretroviral treatment to prevent transmission. As a result, the rate of mother-to-child transmission has fallen by 4 times since 2001, from 28% Page 245

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to 7%. However, approximately 10% of HIV-infected pregnant women are not registered with womens consulting clinics and are not tested for HIV. Therefore they do not receive timely treatment. The optimal vertical transmission level (up to 1%) is possible only through universal HIV testing during pregnancy, and treating all women with positive results with three-component antiretroviral therapy (Ministry of Health and Ukrainian Institute for Strategic Research, 2007a). The HIV/AIDS and TB epidemics have become major public health problems in Ukraine. A number of legislative and other acts have been passed to fight the TB epidemic (for example, Law of Ukraine No. 2586-III, issued 5 July 2001, On fighting TB; Presidential Decree No. 643/2001, issued 20 August 2001, On a national program of fighting TB for 20022005; Cabinet of Ministers Resolution No. 143, issued 15 February 2006, Ordering mandatory prophylactic TB screening for certain population groups; Law of Ukraine No. 3537-IV, issued 15 March 2006, On amendments to some laws to strengthen the fight against TB). Mandatory fluorographic screening was introduced in 2002 for the entire population, but especially for at-risk groups. In 2003, Parliament approved the use of the directly observed treatment, short course (DOTS) strategy (Resolution of Verkhovna Rada No. 989-IV, issued 19 June 2003, On Parliament hearing of TB epidemics in Ukraine and their prevention). In 2005, the Ministry of Health officially adopted a new strategy for fighting TB in accordance with international DOTS standards (Order of the Ministry of Health No. 610, issued 15 November 2005, On adopting the DOTS strategy in Ukraine), and signed a protocol regarding the treatment of TB patients (Order of the Ministry of Health No. 45, issued 28 January 2005, On approving the regulations of medical services for TB patients). In 2006, a new legislative decision required all patients with active TB to undergo mandatory treatment. All measures for fighting TB received designated funds from the state budget. Furthermore, external technical and financial aid arrived from various sources. For example, in 2003 the World Bank issued a loan to strengthen the anti-TB and AIDS programs. In 2007, a special agency was created within the Ministry of Health, the National Council to Counteract Tuberculosis and HIV/AIDS, which serves as the national coordination body for health facilities regardless of their affiliations. However, all these measures have not produced desired results. The TB epidemic has not been halted and there is a rapid spread of HIV-associated TB. The ineffectiveness of previous measures has been linked to insufficient systematic and coordinated organizational measures, the weak laboratory basis for TB diagnostics, the lack of a clear system of planning, purchasing, distribution and monitoring of anti-TB medications, creating problems with the regularity of their supply, the lack of a qualitycontrol system for purchased medications, the insufficient qualifications of medical personnel at clinics for TB screening, consulting and treatment, the widespread use of mass fluorography screenings, palliative care in inpatient settings and so on as these are all ineffective medical practices, from clinical and economic points of view (Barbova et al., 2006). To deal with these issues, in 2007 a state program for fighting TB in 20072011 was developed and made law (Law of Ukraine No. 648-V, issued 8 February 2007, On approving the allnational program of struggle against TB for 20072011). The program aims to reduce TB incidence and TBrelated deaths through improving laboratory TB diagnostics, raising the efficacy of treatment, preventing the development of resistant TB strains, and improving the system of personnel training and retraining. For the authorities, the problem of HIV/AIDS prevention has been at the center of attention since the first Ukrainian cases, registered in 1987. In 1991, Parliament passed the Law on the prevention of AIDS and on social protection 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 from 2004 to 2008. However, this is only the second program with earmarked financing and the first program that provided 90% of the necessary financial coverage for HIV/AIDS prevention and treatment. This program received funding from state and local budgets, a loan from the World Bank, and a grant from the Global Fund to Fight AIDS, Tuberculosis and Malaria. A network of special facilities AIDS centers has been created Page 246

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throughout the country. They are responsible for epidemiological monitoring and control, clinical and laboratory diagnosis of HIV/AIDS and opportunistic infections, organization and provision of necessary types of medical, psychological and social help for people living with HIV/AIDS, as well as educating medical facilities about HIV/AIDS. However, the interaction between these centers and general health care facilities is rather weak. Public and HIV-service institutions play a major role in solving the social, psychological and logistical problems encountered by people living with HIV/AIDS. However, they are not able to fully accomplish this work due to financial and organizational problems. The worsening situation with HIV/AIDS led to the approval of the Sixth National Program on Prevention, Treatment, and Support for HIV/AIDS Patients for 20092013 (Law of Ukraine No. 1026-VI, issued 19 February 2009). The program puts forward a complex 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, a heroin-substitution program has been launched. An important step in overcoming the HIV/AID Sand TB epidemics is detection, prevention and treatment of HIV-associated TB. Currently, access to HIV screening at TB treatment facilities is offered free of charge; combined TB and HIV/AIDS treatment is provided if necessary. Patient pathways Patient pathways in Ukraine can be characterized as chaotic and uncontrolled, and often they do not correspond with the gravity and course of the disease. A patient can see a doctor of any specialty at a polyclinic. Where patients self-refer to the wrong specialist, they are redirected to another specialist as necessary. Some patients self-refer to inpatient facilities and some of them are hospitalized unnecessarily if there are empty beds that need to be filled. According to research on patients with arterial hypertension and related diseases, 41.2% of patients first sought help from their primary care physician, 29.5% from medical specialists, 9.2% from the inpatient department of a hospital, 3.2% from emergency care and 16.9% from hospitals of different specializations (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 are referred to primary care by specialized and highly specialized care in order to complete their treatment, while the remainder are referred to primary care due to the incompatibility of the patients health condition with the type of care that was initially sought. The majority of patients circumvent their primary care physicians to see medical specialists and self-refer to hospitals directly: 34.1% of patients who seek specialized help self-refer and 31.3% of patients who come to general hospitals do so directly. Every third patient who seeks secondary care 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 with the hospitals level or profile and are transferred to a different health facility. District internists only partially coordinate the movements of their patients in the health system: only 8% of patients received specialized outpatient care based on a referral from their district internist, while 33.7% were admitted to multi-specialty hospitals, and 61.5% went to day hospitals and home care hospitals (as a share of total visits to an appropriate level). On average, only a quarter of patients (26.5%) receive medical care at only one level and are not transferred to other specialists or to different medical facilities. The location(level) of provided health care has Page 247

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been found to be compatible with the patients health condition only in a third of cases; in 43.2% of cases patients received care far beyond the level that was really necessary, and in 22.7% of cases patients needed a higher level of medical care than they received. Problems in the organization of patient pathways sometimes lead to unjustified complications. Some pathways have loops in them, whereby patients return several times to the same specialist or to the same facility at the different stages of their treatment. For example, it is typical for an arterial hypertension patient who goes to see a cardiologist at a specialized clinic to be redirected to his district internist who refers him back to the cardiologist. The main reason behind such chaotic patient movement is the lack of coordination of patient pathways from primary care physicians. Moreover, there is no distribution mechanism of patients to different levels of medical care, and there is an insufficient material and technical base for primary health care as well. The convoluted system of patient pathways leads to the irrational usage of limited resources, compromises the quality of medical health and has a negative impact on population health. Adequate referral mechanisms could prevent a significant portion of patients from developing more serious 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, family medicine/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 polyclinic departments. The overwhelming majority of family doctor/GP facilities are located in rural areas (70%). The number of privately practicing family doctors/GPs is relatively small (0.8% of the total number of doctors in this specialization). The majority of privately practicing physicians work under contracts either with the local authorities or with insurance companies. District internists provide general medical care to the assigned adult population living in their catchment area (dilnytsia) in outpatient clinics or during home visits they are responsible for preventive work among the population, perform dynamic monitoring of patients with chronic diseases, 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 out medical forms (except for the primary document, an outpatient patients medical record), perform certain tests during a visit (take temperature, blood pressure, etc.) and explain the preparatory steps for diagnostic examination to the patients. Depending on their qualifications, family doctors/GPs are responsible for providing general medical care to an assigned population (children and adults) in outpatient settings and during home visits, including prevention, diagnosis, treatment and after-care/rehabilitation for common diseases. As with other primary care physicians, family doctors/GPs organize referrals to specialists and hospitalizations for their patients, provide immunization services according to the vaccination calendar, conduct examinations for temporary work incapacity, issuing documents and verifying results, and promote healthy lifestyles and health education for patients. However, they can also perform basic surgical treatment of wounds, the immobilization of fractures and the dynamic monitoring of pregnant women with a normal course of pregnancy during the antenatal and postnatal periods. Family doctors/GPs work together with family medicine/general practice nurses. However, especially in urban areas, people are reluctant to bring very young children to family doctors/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 six months is viewed as inadequate and, unlike in rural areas where district internists and district paediatricians had been de facto working as family doctors/GPs prior to retraining, a former district internist may have had very Page 248

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little contact with children. Consequently, in some areas, family doctors/GPs only work with children older than 3 or 7 years of age. The optimum number of patients is set at 1700 adults per internist and 800 children per paediatrician. For family doctors/GPs it is set at11101200 adults and children in rural areas and 15001600 in urban areas. However, in practice, on average there are about 2500 patients per internist in an urban area. The number of children per paediatrician is slightly lower than the set norm and there are about 1500 per family doctor/GP. However, these averages hide significant fluctuations in workloads for different types of primary care physicians. Nationwide, 13% of doctors working in primary care serve fewer than 1000 people (adults and children) and about one-fifth (20.4%) provide care for more than 2500 assigned patients. In rural areas the number of doctors serving more than 2500 patients comes close to a third (29.1%). Although FAPs provide primary care services as well, the shortage of doctors in rural areas causes a number of problems with the accessibility and quality of medical care. In some areas this is further aggravated by low population density of 3070 people per 1 km2. About 11.4% of rural communities have outpatient clinics and hospitals with outpatient departments with a catchment area of between 2.5 and 9.5 km; 56% of rural communities have FAPs. About a third of rural communities have no medical facilities on their territory. Moreover, in some medical facilities located in rural areas not a single position is filled by a medical worker. The number of such facilities is growing. The organization of primary care delivery is based on the territorial-district principle by which the area served by a particular primary care unit is divided into catchment areas with a certain number of residents. Ukrainians have been granted free choice of primary care physician; however, this has not yet been implemented widely because, while a patient has the option to change their primary care provider, this is usually blocked by the receiving physician since it would stretch the territorial boundaries of their catchment area and complicate home visits. Developing primary care is considered the leading strategic direction and one of the main goals of health system development. There are plans for implementing comprehensive primary care reforms in the upcoming years. The total number of outpatient contacts per citizen per year is rather high in Ukraine and significantly higher than in the countries of Central and Eastern Europe and in EU countries. The high rate of visits per capita is a result of the Ukrainian method of paying for services based on capacity measures. Out of the total number of outpatient contacts, visits to medical specialists account for 75%, while home visits account for about 9%. More than a third of visits (36.7%) to an outpatient clinic or a polyclinic are for preventive checks. The number of preventive visits is influenced by two factors. First, there are strict requirements for target screening coverage for certain population groups (cervical cancer, breast cancer and TB screenings) 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 outpatient visits in rural areas remains significantly lower than in urban areas and the majority of them (61%) are visits to mid-level medical specialists. Access to secondary care is not regulated since there is no strict distinction between primary and secondary care in Ukraine. In essence, the concept of primary care is applied to the entire polyclinic including the specialists working there and not only its primary care unit. Patients may seek care from a specialist directly without a formal referral from their primary care physician and this option is used widely. 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, childrens hospitals, central district hospitals and the polyclinic departments of specialized clinics (dispensarii). The average urban multispecialty polyclinic serving a catchment area of 25 000 residents will have six or seven specialists, such as Page 249

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surgeons, orthopaedists, traumatologists, neurologists, ophthalmologists and otolaryngologists, whereas larger polyclinics may also have cardiologists, rheumatologists, gastroenterologists, urologists and others. As noted above, since there is no strict distinction between primary and secondary care in Ukraine, specialists in municipal polyclinics provide services to patients referred to by primary care physicians and those who seek care directly. The organization of secondary outpatient care is based on a territorial principle, with each polyclinic being assigned a defined area. Residents of that catchment area are entitled to full diagnostic examinations and appropriate treatment, and may be referred to the tertiary level when necessary. The volume of secondary outpatient care provided by private facilities is not very significant, although private dental practices are developing rapidly. Private practices such as clinics providing gynaecological care (reproductive health clinics and centers offering family planning and infertility treatment) and alcohol, tobacco and drug dependency treatment centers or services are also quite widespread. These units are usually separate from the main health system. Some of them have a contractual relationship with institutions or private insurance companies, but the majority provide services to patients based on an established price list. There are also very well-equipped private facilities specializing in outpatient diagnostic services. Often, patients are referred to these facilities by medical specialists in state and community medical facilities that do not possess the appropriate diagnostic infrastructure. However, the relationship between these state and private facilities is not formalized, thus patients pay out of pocket. The inpatient system is a hierarchical system organized into three levels. The first (lower) level is that of rural hospitals. These are very basic inpatient facilities with an average of 16 beds, providing general care for adults and children, chronic disease care, treatment of some infectious diseases, rehabilitation, completion of treatments, simple obstetric care, and more. The number of these facilities is decreasing. In 2008, they accounted for only 2.1% of beds. The second, middle level is the true foundation of the system. Secondary inpatient care is provided in cities by inpatient wards in multi-profile hospitals, childrens hospitals, specialized clinics and hospitals (for communicable diseases, maternity care and so on). In rural areas, it is provided by the inpatient departments of district and central district hospitals, and by hospitals in parallel health systems. These facilities have 75% of the total number of beds, and most are in multi-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 had about 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 large cities there are also specialized clinics (most often for communicable diseases), maternity hospitals and highly specialized centers (for example, a burns center or a neonatal center) based at multi-profile hospitals. In addition, municipal specialized clinics provide inpatient health care for some socially significant diseases such as TB, STIs, psychiatric illness, endocrine conditions and others. The third level is that of regional and supraregional specialization provided by regional hospitals and specialized clinics, and specialized clinical and diagnostic centers at the national research institutes of the Ministry of Health and the Academy of Medical Sciences. These facilities hold over 20% of the total number of hospital beds. They were originally designed to provide 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 been reported that about one-third of patients admitted to regional hospitals should, in fact, have been treated in secondary-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 the number 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 Page 250

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hospitals for patients with non-chronic conditions show a steady decreasing trend. Total inpatient care utilization and acute inpatient care utilization fell considerably between 1990 and 2000, and have stabilized at these levels. A high rate of hospital bed utilization combined with significant financial barriers to accessing inpatient care highlights the inefficiency of hospital financing based on the number of beds. This stimulates facilities to keep these beds and hospitalize patients irrespective of their medical needs. Based on regional research from 20062007, almost a third of all hospitalizations (32.9%) were without specific indications which would require hospitalization. This number fluctuates widely depending on the units profile: cardiology departments for heart attack patients have 1114% of unnecessary hospitalizations, while pulmonology and gastroenterology departments have 5573% (Lekhan & Volchek, 2007). Inpatient facilities are not differentiated by the complexity of interventions carried out. The same beds are used for patients with very different needs in terms of both services and equipment. Based on the same research, 74.6% of hospitalized patients required emergency care in the acute disease department, 14.9% required scheduled care in the chronic disease 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 (complex diagnosis, intensive therapy using innovative medical technologies) to patients through their hospitalization as a day case where there are no actual indications for full-time medical observation. The Ministry of Health has regulated that day hospitals can function only as a part of outpatient clinics and polyclinics. Primary care day hospitals have gained the most popularity, followed by multi-profile day hospitals, which provide treatment mostly for cardiovascular, respiratory and digestive diseases. Some facilities have day hospitals specializing in cardiology, neurology, gastroenterology, surgery, urology, ophthalmology, trauma, gynaecology and paediatrics, among others. Day hospitals, like outpatient clinics and polyclinics, are financed according to the number of visits. However, day hospital financing is even less adequate in terms of real expenditure than the financing of polyclinics. For example, the estimated average spending on pharmaceuticals is 0.350.5 hryvnya or US$ 0.070.1 per case at a day hospital. This is not very different from the allocation for one admission at a polyclinic (0.30.5 hryvnya or US$ 0.050.06). However, the volume of services provided at a day hospital is much 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 treated at day hospitals grew to match the increase in bed capacity. In 2008, 25.1% of the total number of hospitalizations received care at day hospitals, and day hospitals comprised 16.4% of the total number of beds in the facilities under the Ministry of Health. Patients prefer this form of care and often favor it over a 24-hour hospital stay. However, the growth of alternative inpatient care has so far had only a small impact on the utilization of inpatient facilities, and inpatient facilities lack the possibility of substituting their 24-hour services with day care, because of the way these services are financed. The national program for health care development outlines significant reforms of the inpatient sector, including a 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; Page 251

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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 wellequipped medical care, university-based clinics must be established in the form of a holding union of medical universities and regional hospitals. Emergency care Formally, emergency care is defined in Ukraine as a type of medical care in health- or life-threatening conditions at the scene of an accident, en route to or at a hospital. All medical workers and facilities are required to provide emergency care. In urgent cases, when medical help is unavailable, emergency care must be provided by civil defense forces, militia, the fire department, rescue services, public transport drivers and others. In such cases, enterprises, agencies, institutions and citizens are obliged to provide vehicles to transport victims to the appropriate medical facility. In case of a life-threatening emergency, medical workers have the right to use any vehicle to reach victims or to get to hospital. In reality, the primary component in emergency care is the emergency care service of physicians and feldshers. The emergency care service is responsible for providing pre-admission care to patients and victims of accidents on-site and en route to the appropriate medical facilities. Due to the lack of differentiation based on the intensity of medical care, emergency care is provided at medical facilities along with other medical services. In 2007, the government approved a national program on emergency care development by 2010 (Cabinet of Ministers Decree No. 1290, issued 5 November 2007). 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 and other workers who use a vehicle to provide high-quality emergency care. In 2007, the states emergency care system comprised 96 independent and 891 hospital-based ambulance stations. The ambulance stations are supplied with appropriate equipment and special vehicles (primarily cars). Mobile emergency care is provided by 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.). Specialized teams appeared during the period of increasing specialization of health care in the 1970s and 1980s, in order to raise the quality of pre-admission emergency care. These goals were not reached, however. Intensifying and narrowing the specialization of teams created some positive results alongside negative consequences. Using the specialized teams for their direct purpose significantly decreased their workload, which is now almost three times smaller than the professional workload of teams comprised of general physicians and feldshers. There have been attempts to increase the workload of specialized teams, which means that these teams have to make so-called non-profile trips and be used as general emergency teams. Using specialized teams in such a manner has a negative impact on the quality of emergency care, however, due to each teams narrow specialization. A well-organized emergency care system would mean about 1516 trips per 24 hours for one team. In fact, the teams are making 1.52 times fewer trips: physicians and feldsher teams make about 1011 trips, and specialized teams make 8.5 trips per 24 hours. This leads to the wasteful use of limited resources. The Page 252

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low workload of the teams is caused by general discrepancies in emergency care organization and administration, as well as by problems beyond the health sector, primarily the unsatisfactory management of road 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 teams responded to 13.8 million calls, or 297 per 1000 population. The main reasons for calls were sudden acute illnesses, accidents and traumas (77.2%). Among other reasons were births (6.8%), transportation of patients and 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 general fall in the birth rate. There were fewer calls for common diseases, while calls for acute diseases increased. At first 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 of these calls as well. The frequency increased by 1.3 times between 1990 and 2007, from 153.8 to 206.9 per 1000 population. This is caused not by organizational issues but by reduced access to emergency care, particularly for financial reasons. Officially, state and community facilities must be free for all patients regardless of their origins (Ukrainian citizens, foreigners or people without citizenship). At the same time, standard budget allocations on pharmaceuticals per emergency call fluctuate from region to region, between 1.5 and 2.7 hryvnya (US$ 0.30.5). This funding cannot cover even the minimum costs of pharmaceuticals and equipment needed for emergency services. Thus, patients themselves, or their relatives, are forced to search for life-saving medicine at any given time of the day or night. There are a number of private emergency care services in Ukraine. These services are usually established in larger cities and are well equipped for providing medical care and patient transportation. However, high costs (300400 hryvnya or US$ 6080 per call) mean that only a small proportion of population can use them. Data about their quality or capacity are unavailable. One of the main qualities of emergency care is its timeliness. Emergency service timeliness in Ukraine is measured as the percentage 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 in a 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 care to the victims of emergency situations. Pharmaceutical care According to the state law, drug provision is considered a part of the health service, and pharmaceuticals at state and community medical facilities must be paid for from the government budget. However, even under the Soviet Semashko system, outpatients were obliged to pay for drugs out of pocket (with the exception of certain groups entitled to benefits). Since independence, severe shortages in health care financing have forced patients to pay out of pocket even for inpatient drugs. Currently, only 13.3% of all pharmaceuticals consumed are provided through hospitals; 86.7% are purchased by the population at pharmacies. Certain population groups are entitled to some benefits in receiving medical services and pharmaceuticals. So-called vulnerable population 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 include outpatient drugs. Drugs prescribed in the home which are on the government approved list must be provided for free or with discounts. Benefits-related pharmaceutical costs are meant to be covered by state budget allocations 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 to improve pharmaceutical access for the population, the government approved a national list of essential pharmaceuticals and medical devices in 2009 (Cabinet of Ministers Decree No. 333 of 25 March 2009, A few issues with the state regulation of prices for pharmaceuticals and medical devices). The list was developed according to anatomic-therapeutic-chemical (ATC) classification based on international non-proprietary names and 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 medical entitlement package and, by an order of the Ministry of Health, is to be used for arranging tender procurement for state purchases to support targeted programs, state veracity of these data is questionable since the majority of emergency stations do not have the necessary equipment to automatically register the time when a call is received and when the team arrive on the scene. There are data showing that the number of late arrivals by emergency teams is very high and that sometimes patients have to wait for hours. In case of emergencies caused by natural, man-made or social catastrophes, initial emergency care at the scene is provided by special rescue units. Subsequent care outside of the rescue zone is provided by the State Service of Catastrophic Medicine. The service was created in 1997 and comprises the Republican Scientific and Practical Centre, as well as 27 territorial centers of emergency care and catastrophic medicine, a mobile hospital, specialized mobile teams and brigades, and more than 780 teams of the regular emergency care service. The catastrophic medicine 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 of clinical protocols and forms, and the monitoring of pharmaceutical supplies and price formation. However, in 2007, 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 of pharmacy dispensing procedures. A list of prescription-only drugs has been developed by the Ministry of Health, but most of them can nonetheless be bought over the counter. In 2005, the Ministry of Health attempted to regulate procedures for dispensing prescription drugs (Ministry of Health Order No. 360, issued 19 July 2005). However, low levels of public education and poor preparation of the health system limited the attempt to move towards greater regulation of prescription-only drugs. At the same time, pharmacies do maintain strict controls on the supply of psychotropic drugs and hormonal preparations, even though many others, such as antibiotics, can usually be bought without a prescription. Clinical protocols can have a certain influence on prescribing patterns as long as they contain a very clear definition of the medical indications for the use of a specific drug. There is no national program promoting efficient generic drugs that are less expensive, as opposed to the more expensive brand names. Pharmaceutical companies have a significant influence on prescribing patterns. They have a very aggressive marketing policy, actively advertise pharmaceuticals in the mass media (advertising for prescription-only drugs is banned in Ukraine), hold free seminars for medical specialists and reward doctors who prescribe their products. As a result, there is a high level of overprescription among physicians, who often prescribe expensive brand name pharmaceuticals instead of less expensive generics and, in certain cases, disregard rational drug therapy. Doctors only prescribe generic drugs from the National Essential Drugs List to patients who are exempted from co-payments or who pay reduced prices for pharmaceuticals, which the patient then obtains from their local community pharmacy. A combination of financial and educational measures could influence prescription patterns positively. For instance, the use of global funds that would at least partially cover the governments pharmaceutical expenditure has been suggested (Rudiy, 2005), as has the introduction of a system of reimbursements for pharmaceutical expenses (Lekhan, Slabkii & Shevchenko, 2009). However, there has been no real Page 254

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implementation of these initiatives. In order to improve pharmaceutical provision, a national program has been developed for 20042010 which outlined the selection of safe and efficient pharmaceuticals using pharmacoeconomic analysis (Cabinet of Ministers Decree No. 1162, issued 25 July 2003). The program also introduces a formulary-based drug procurement system, improves tender procedures for state purchases of medications and identifies state priorities for medication purchases. Finally, the program introduces the state registration of wholesale prices, as well as the introduction of appropriate laboratory, clinical, industrial and distribution practices based on such standards as GMP, good laboratory practice (GLP) and so on. A list of essential pharmaceuticals and medical devices was approved in accordance with the program, and necessary preparations have been completed to launch a formulary-based drug use system by the State Pharmacological Centre under the Ministry of Health (Ministry of Health Order No. 173, issued 17 March 2009 and Ministry of Health Order No. 59, issued 28 January 2010). The formularybased system should improve the quality of treatment and should provide clinicians with access to its unified teams of clinicians and other health care specialists with information on the use of pharmaceuticals registered in Ukraine (their pharmacological properties, contraindications and distribution methods). The first National Drug 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 which provides a list of rehabilitation services and medical devices that the government should provide free of charge regardless of age, gender or type of disability (Cabinet of Ministers Resolution No. 1686, issued 8 December 2006). The model state program serves as the framework for an individual rehabilitation program which defines the types, forms, quantity and timeliness of rehabilitation, aimed at the restoration of or compensation for disabilities or lost bodily functions and capabilities as well as determining when and where rehabilitation should take place. The government has assumed responsibility for developing a rehabilitation policy, which is delegated to central authorities (the Ministry of Labor and Social Policy, the Ministry of Health, the Ministry of Education and Science, the Ministry for Family, Youth and Sport) as well as local authorities. Local authorities should work in partnership with public organizations for disabled people to develop and implement programs for the prevention of disability and provide for the alleviation or treatment of disabling conditions. Disabled adults and children are treated through medical, psycho-pedagogical, psychological and professional means, as well as with physical therapies, sporting activities and social rehabilitation. Medico-social expert commissions are responsible for diagnosing disabilities and establishing the level of health loss, as well as determining a disabled adults occupational capacity. They also develop individualized rehabilitation programs. These committees act as independent centers within the regional health authorities. There are more than 400 medicosocial expert committees in the country. Treatment-and-consultation committees in medico-prophylactic institutions are responsible for establishing the degree of disability in disabled children. By law, the rehabilitation sector in Ukraine is comprised of executive authorities, local self-governments and various institutions such as rehabilitation facilities for disabled people, special and sanatorium-type preschools and schools for children requiring long-term treatment for physical and/or mental development problems, prosthetic and orthopedic enterprises, sanatoria and health resorts for labor unions, social protection agencies, cultural activities agencies and public organizations for disabled people. Rehabilitation facilities are composed primarily of social rehabilitation centers for disabled children to correct developmental disorders and prepare Page 255

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them for education (services range from preschool to middle school, to technical, professional and higher education), professional rehabilitation centers to restore a persons 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 from national or local budgets, or as nongovernmental, non-profit-making organizations that receive financing from extra budgetary resources. Each centers structure is determined by its specialization and can contain rooms for occupational and social rehabilitation, laboratories, workshops, classrooms and so on. These centers are staffed by both medical and psychological assistants. Currently, there are more than 270 rehabilitation centers for children in the network, 72 professional rehabilitation centers, and more than 270 medico-social rehabilitation departments within territorial social care centers for elderly people. The Ministry of Labor and Social Policies is responsible for the majority of rehabilitation facilities, and the Ministry of Education and the Ministry for Family and Youth are responsible for the remainder. Despite the fact that the model rehabilitation program outlines the basic medical rehabilitation services to be provided to disabled individuals, there are no medical facilities attached to organizations engaged in rehabilitation. To provide these services, the program refers patients to appropriate specialized departments of health facilities, the clinics of research institutes, and sanatoria and spas. For instance, people with locomotors and central nervous system problems can be provided with medical rehabilitation, reconstructive surgery, prophylactic measures, and sanatorium and spa treatments. People with psychological disabilities can receive restorative treatments, psychiatric help, prophylactic measures, and sanatorium and spa treatments. Patients with serious vision or hearing impairment are eligible for restorative therapy, prophylactic measures, and sanatorium and spa treatments (hearing-impaired patients are provided with hearing aids, reconstructive surgery and cochlear implants). Where disability is the result of problems with internal organs, patients can receive restorative therapy, prophylactic measures, and sanatorium and spa treatments. Cancer patients are eligible for restorative treatment, prophylactic measures, medical supervision, reconstructive surgery, and sanatorium and spa treatments. Medical facilities are not differentiated according to the intensity of care or treatment provided. Restorative treatments and medical rehabilitation are therefore performed at practically all levels of health facility. The health system does include several facilities whose main priority is rehabilitation, however. Among inpatient facilities, these include a hospital for medical rehabilitation, a physical therapy clinic and a center for children with impaired nervous systems. Among sanatoria and spas, these include a balneotherapeutic health resort and a mud cure clinic. The number of such facilities is very small, rehabilitation services are limited and not many patients are served. The basic elements of a modern rehabilitation system do exist in Ukraine. However, this system does not address the full spectrum of problems in rehabilitating and reintegrating people with limited physical abilities or psychological and mental 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 and mental 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 only 14% of disabled children attending comprehensive secondary schools, and the rights of disabled children with technical or other rehabilitation devices are not respected. Disabled people make up only 0.4% of students in higher education. The reason for such low coverage of rehabilitation care is the inconsistent interactions between medical facilities, and labor and social protection agencies. In 2007, the government approved a state program to develop the rehabilitation system by 2011 (Cabinet of Ministers Resolution No. 716, issued 12 July 2007). 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; Page 256

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easier access to education, including correspondence, integrated and inclusive education for people with physical and mental disabilities; training, retraining and professional development of disabled people according to current market demands; 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 required equipment and literature for rehabilitation facilities. The reorganization of medico-social expert commissions into medico-social expertise and rehabilitation facilities appears to be a promising solution for rapid development of the rehabilitation facilities network. Within five years, the program should return 170 000 disabled people to work and social life, and fully satisfy the demand for medical, technical and other means of rehabilitation. This will save more than 100 million hryvnya, since there will be a reduced need to pay disability pensions, social benefits or compensation to the rehabilitated individuals. So far, a social protection program has been adopted to provide easy access to public and private facilities for disabled people, and new state construction standards have been approved to secure a convenient environment for people with limited mobility. This includes the production of accessible public transport vehicles. However, the program lacks incentives to improve the medical rehabilitation system, despite the fact that the Ministry of Health acts as a coexecutor on a number of tasks. At the same time, the National Plan of Health Care Development provides for the establishment of rehabilitation hospitals by 2010 in compliance with the functional differentiation of secondary inpatient care facilities (Cabinet of Ministers Degree No. 815, issued 13 June2007). The Ministry of Health developed and publicly displayed on its web site the project for this Plan, which takes into account international experience of running this kind of medical facility. It is intended that the hospitals will incorporate all modern approaches in the treatment of patients with trauma and various diseases that require rehabilitative measures 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 and Social Policy) that provide medico-social care to certain population groups. These facilities include homes for disabled children and nursing homes for elderly people and disabled people, as well as mental institutions and the inpatient departments of territorial centers for elderly people and single disabled people. Homes for children are medico-social facilities designed to provide assisted living, education, upbringing and medical services 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 intellectual development, whose physical impairment severely limits their movement; (2) children with severe mental disabilities who can move freely and attend to their own needs; (3) children with severe mental disabilities who can move freely but cannot attend to their own needs; (4) children with various levels of mental disabilities and complex physical problems who cannot move freely or attend to their own needs. Currently, there are 58 homes with more than 6000 children. The capacity of these schools fully covers demand, but their material and technical resources do not meet modern requirements (Yaskal, 2000). The deinstitutionalization of these children and the prevention of their institutionalization have not as yet received any serious attention from policy-makers. Mental institutions are inpatient medico-social facilities that provide assisted living for patients with psychoneurological disorders who need medical services and assistance with daily living. These institutions accept patients of retirement age and disabled people over the age of 18 with psychoneurological disorders, regardless of whether they have relatives (who are generally required by law to care for them). Page 257

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Nursing homes for elderly people and disabled people are inpatient facilities with long-term stay for elderly people, war veterans, and disabled adults who need medical services and assistance with daily living. These facilities accept individuals without relatives. If there are vacancies, however, they can accept patients with able-bodied relatives when all financial costs are paid in full. Nursing homes provide 24-hour medical services and advisory assistance. The inpatient departments of territorial centers for long-term or temporary assisted living 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. There are also 270 inpatient departments of territorial centers for long-term and temporary assisted living. Nursing homes and mental institutions receive their funding from local budgets, primarily through inter-budgetary transfers from the state budget, social insurance funds and through patients pensions. However, with little funding available, these facilities are unable to provide proper sanitary conditions and enough food. Many of these 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 staff employed at these facilities are determined by their areas of expertise. Thus, in nursing homes for elderly people, care is provided by geriatric and psychiatric specialists, while psychiatrists provide the care in mental institutions, 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 program provides 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 or financial support from the government for this type of care, and there are no data available on the number of people involved in providing it. There are different NGOs which are usually set up by people required to provide 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 care services; 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 ill patients are usually provided by medical facilities of various specializations and levels, and they are treated alongside other patients without specific consideration for the type of services needed during the terminal phase of a disease. Primary care physicians and nurses bear the main burden of palliative care, including care for cancer patients, who make up the most prevalent group in need of palliative services. Hospitalization for these patients occurs in the acute phases only for a short period of time. The first hospices were initiated by local self-governments and NGOs. The first hospice was opened in 1994 in Lviv. Currently, there are about 20 hospices 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, IvanoFrankivsk, Kherson, Kharkiv and Kyiv. Current capacity can satisfy only 10% of the demand for palliative care. Most of these facilities are community-based and receive their small amount of funding from local Page 258

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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 problem in providing pain relief to patients in the terminal phase of a disease. Because of strict narcotics control, doctors are 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. Another significant problem in palliative care is that medical staff and social workers lack the necessary knowledge and skills 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 do not receive adequate palliative care. There is still no government policy regarding the development of palliative care. Even though the Ministry of Health legalized hospices in 1995 by including them in the list of medical facilities (Ministry of Health Order No. 114, issued 22 June 1995), and approved staffing standards for these facilities in 2000 (Ministry of Health Order No. 33, issued 23 February 2000), there is still no legislation regarding 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 care departments for HIV/AIDS patients). The lack of government policies regarding palliative care slows its development. There are insufficient institutional and human resources to create a palliative care facilities network; there are no methodological grounds or delivery standards; and there is no training system for medical and social workers engaged in palliative care. Many issues hamper the development of palliative care in Ukraine, such as insufficient government knowledge regarding the scale of the problem and a lack of state policies regarding the development of palliative care for various groups of patients with incurable illness. There are also insufficient integration and coordination between the Ministry of Health, the Ministry of Labor and Social 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 of palliative care (Ministry of Health of Ukraine and Ukrainian Institute of Public Health, 2008). Nevertheless, there have been some positive changes in the governments attitude towards palliative care. In 2006, the AllUkrainian Association of Palliative Care was created, along with the Inter-Departmental Work Group for Improvement of the Legal Basis of Palliative Care. In April 2008, in accordance with an order from the Ministry of Health on the national program of palliative care development in Ukraine for 2010 2014, the Coordination Council on Palliative and Hospice Care was created. The Council is comprised of government members and public organizations. Currently, a program has been drafted that provides for the development and improvement of the legal basis for using opiates in pain relief, the development of a hospice network, the creation of palliative care delivery standards, and the formation of a national system of medical and social staff training in palliative care. Page 259

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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 and institutional basis for providing mental care based on principles of human and civil rights for the first time in the Ukrainian context. It determines the responsibilities of executive authorities and local self-governments as well as the legal and social rights of individuals suffering from mental illness, and regulates the rights and responsibilities of physicians and other workers involved in providing psychiatric care. For instance, the law provides 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 patients right to receive limited psychiatric care according to the patients condition, preferably in home settings. Ukraine has also signed the Mental Health Declaration for Europe (2005) in Helsinki, and the Mental Health Action Plan. The openness of mental care to national and international NGOs has 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 psychiatric departments of multi-profile hospitals that operate under the Ministry of Health. There are also low-capacity psychiatric 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 the employees of these departments and their families. There are a small number of private medical facilities providing psychiatric, psychotherapeutic and drug treatment services. In 2007, the network of psychiatric facilities under the Ministry of Health consisted of 88 psychiatric hospitals with an average capacity of 500 beds, 29 specialized mental health clinics, as well as 656 psychiatric and 162 psychotherapeutic units in polyclinics 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 services receive only 11%. It must be noted that psychiatric patients have to purchase their own medications, and less than 1% of patients receive the necessary psychotropic medication with up to 80% cost coverage. Neuroleptic medication 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 the patients families, reduces access to treatment and decreases its efficacy. In 2007, facilities under the Ministry of Health employed 3362 psychiatrists (7.2 per 100 000 population), and 422 paediatric psychiatrists (4.7 per 100 000 children). Depending on the region, the supply of psychiatrists varies significantly: some regions have twice as many psychiatrists as others; most are concentrated in the eastern part of the country, with very few working in the west. According to staffing standards, every psychiatric hospital department and every mental health clinic is required to have at least one psychologist. In reality the numbers are much lower, which slows the humanization of psychiatric care and limits the implementation of psychotherapeutic measures. Staffing standards do not provide for social workers in medical facilities, and social care nurses are responsible for providing services to psychiatric patients(1 nurse per 150 beds). Each department for compulsory psychiatric treatment is required to have a social care nurse on staff as well. There are 9.4 psychiatric beds per 10 000 population, 10.4 per 10 000 for adults and teenagers, and 2.95 per 10 000 for children. Psychiatric beds account for 10.7% of the total number of beds under the Ministry of Health. The ratio of beds in inpatient facilities for non-chronic and psychiatric conditions is 1:7.5, while the ratio for psychiatric beds and long-term stay beds is 1:1. The overwhelming majority of psychiatric beds (96%) are in 106 specialized psychiatric facilities (88 hospitals, 18 specialized clinics (dispensarii)), including 96% of beds for adults and teenagers, and 96.2% for children. The remaining beds are distributed among several multi-profile hospitals of different levels: 3 regional hospitals, 20 municipal hospitals, 15 central district and district hospitals, 1 rural catchment area Page 260

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facility and 1 municipal childrens hospital. The conditions provided by the majority of specialized psychiatric facilities are far below modern standards. The rooms contain 10 or more patients, and up to 2430 patients in certain 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 care beds. In some cases, beds are re-allocated rather than being closed. For example, in 2004, one psychiatric hospital became the property of Social Services and was then transformed into a psychiatric nursing home. This has not become a common practice, although the shortage of beds in mental health facilities is still an acute problem. The psychiatric health protection system has 105 day hospitals with 5137 beds there are only 0.44 beds per 100 registered psychiatric patients. In a number of regions, the number of day hospitals ranges from 1 to 4. In general, the reduction in inpatient capacity has not been coordinated with development on the community level of psychiatric health protection services. Moreover, the network of outpatient care facilities is shrinking, from 33 in 2002 to 29 in 2006. This deinstitutionalization of psychiatric care is also not supported by the population. Since there is no parallel creation of adequate alternative services to meet local needs, these bed closures 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 protection system. Its main goals will be: a structural and functional reorganization of psychiatric care to increase the quality and accessibility 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 services are commercial. Patients must pay out of pocket for diagnostic tests, filling materials and so on, not only in private dental facilities the number of which is growing rapidly in Ukraine but also in state-owned facilities. State regulation of dental care prices is insignificant; the market plays the primary role in setting prices. Dental care for children and dental prosthetics for certain population groups remain free. There is limited quality control of dental services. According to data collected by the Medical Statistics Centre under the 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, the population examined during screening, the percentage of those examined who need check-ups, and the percentage of those who need check-ups and who actually receive them. There is no systematic quality control in the majority of private facilities. In the 1990s, the drop in the accessibility and quality of dental services led to an increase in dental health problems, particularly among children. These factors prompted the approval of the State Program for the Prevention and Treatment of Dental Diseases, 20022007 (Presidential Decree No. 475/2002, issued 21 May 2002). The main goals of the Program were to improve dental services, reinforce the primary and secondary prevention of dental diseases, ensure that the resources and organization of dental care comply with local needs and coordinate the activities among dental facilities. Some positive changes have occurred since the Programs implementation. Each oblast created a registry of dental diseases (particularly targeting areas with endemic fluorosis), and dental facilities began providing preventive and dental hygiene services. However, the Programs overall goals were not achieved due to a lack of specific financing, and poor coordination between the departments involved in the programs implementation. The populations dental health continues to worsen. According to the Dental Association, there are numerous factors responsible for these negative tendencies. Dental equipment is in fairly poor condition in state-owned facilities, especially in childrens dental polyclinics, departments and practices. Also, techniques in use are incompatible with modern dental prevention and treatment standards. The disintegration of the national system of primary and secondary prevention has played a role, as has the downsizing of the network of dental practices in preschools and schools. Moreover, there is a lack of coordination between state and private dental sectors, and a lack of proper quality control for dental hygiene devices on the national market. Dental care reforms are currently under public discussion. The reforms suggest transforming state-owned dental facilities into lease-holding, local or national companies, reorganizing the service model by providing equal conditions for facilities of different forms of ownership. Moreover, the government must present the public with a standard package of guaranteed dental 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 further development of effective methods of primary and secondary prophylactic care, primarily for children and pregnant women. Complementary and alternative medicine Since the 1990s, Ukraine has been going through a social crisis, accompanied by a decline in the prestige of science 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 the 1990s, these healers managed to obtain licenses or similar documents from the Ministry of Health, alongside legitimate specialists who use holistic approaches. As the massive uncontrolled spread of these healing practices began negatively to affect the populations health, the government began to react. In 1998, the President 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 the Ministry of Health to strengthen the licensing law for alternative medicine, and tasked the Ministry of Internal Affairs and the Ministry of Finance jointly to find and punish illegal healers. It commissioned the Ministry of Information and the State Committee on Nationalities and Religion to control the mass media, filtering out advertisements for medical services that could harm public health. In fulfilling this decree, the Ministry of Health 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 alternative medicine to people without a degree in medicine. A permit can be issued on the basis of the Ukrainian Association of Folk Medicines expertise and a positive decision by the special committee that includes specialists from the Ministry of Health and other health authorities. Folk and alternative medicine practitioners are forbidden to treat cancer, infectious diseases including STIs, AIDS and contagious skin diseases, drug addiction and mental disorders that require immediate hospitalization. They are forbidden to assess psychological health, monitor and treat pregnancy complications, or perform surgical interventions including abortion. They are also not permitted to perform mass healing sessions with the use of hypnosis or other methods of psychic or bioenergetic influence. To a certain extent, the committee has organized the field of alternative medicine, but a number of goals still have not been met. For instance, there is still no registry of alternative practitioners, which makes it difficult to control their activities. Many individuals continue to practice and advertise services unrelated to medicine (removal of curses, fortune telling, etc.) under cover of a license 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 the implementation of legislation for folk and alternative medicine (Ministry of Health Order No. 267, issued 19 June 2003, On controlling illegal medical practice in the field of folk and alternative medicine). Further, this Order mandated the recertification of practitioners with a new license from the Ministry. However, the necessary 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 Ukrainian Federation 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 are medical professionals specializing in folk and alternative medicine. The remainder do not possess any medical training. Moreover, according to the Ukrainian Federation of Health Promotion, up to 70% of these so-called healers are neither professionally nor morally affiliated with healing. About 5.5 million people receive services from these healers, and this number does not show any signs of decreasing. There are several reasons people seek care from healers, among which two are mentioned most often: the lack of positive outcomes from a doctors treatment and an unsatisfactory relationship with a doctor. The majority of patients seeking alternative treatment from healers are elderly or have a low level of education, but there are significant numbers of patients with 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 people without citizenship who permanently reside in Ukraine. However the rights of foreign citizens and people without citizenship temporarily residing in Ukraine are determined ultimately by special laws and international treaties (for example, Law of Ukraine No. 2801-XII, issued 19 November 1992, Principles of legislation on health care in Ukraine). Medical health care for prisoners is provided in accordance with the health care law as with the population at large. Care is normally provided directly in a prisoners cell. In emergencies, prisoners can be transported to a medical facility in the Department of Justice or to the medical facilities of the Ministry of 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 to determine the number of days in the previous 180 that you have spent within Ukraine. (Note that 90 days is a little less than 3 months, and 180 a little less than 6 months.) If this number is above 90, you could be refused entry or fined. This is more likely at Kyiv Boryspil airport and less likely at some land border crossings, such as Schehyni-Medyka near Lviv, where the 90/180 rule continues to be ignored 3 years after its official adoption. ***NEWS: Citizens of the following countries can now visit Ukraine
Figure 161 Picture of visa
without a visa for periods of up to 90 days over a 180 day period with a valid passport: Georgia Germany Greece Hungary Iceland Ireland Italy Japan Kazakhstan Korea (South) Kyrgyzstan Latvia Liechtenstein Lithuania Luxembourg Malta Monaco Mongolia Netherlands Norway Poland Portugal Russia San Marino Slovakia Slovenia Spain Sweden Switzerland Tajikistan Vatican City United Kingdom United States Uzbekistan
Andorra Austria Belgium Canada Cuba Cyprus Czech Republic Denmark Estonia Finland France
*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. For longer stays a visa will be required. For a while there was no 180 day stipulation, which meant that foreigners could simply cross the Ukrainian border every 3 months and avoid getting a visa. As of July 11, 2007 this is no longer possible (link to decree in Ukrainian), though in practice it is still possible at certain border crossings. If you 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 Ukrainian Presidential Decree #1008 dated June 30, 2005 (with amendment dated August 18, 2005), U.S. citizens traveling to Ukraine on short-term tourist, business or private travel do not need a visa to enter Ukraine. Visas Page 264

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are still required of other categories of travelers including those who intend to study, reside, or work in Ukraine. Short-term travelers entering Ukraine under the auspices of this decree can stay in Ukraine up to 90 days. 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 above 2. You are from one of those countries, but plan to be in Ukraine longer than 90 days, regardless of the purpose of your journey 3. You plan on being employed or studying in Ukraine, regardless of the length of your visit Getting a Ukrainian visa was never too difficult to begin with, and the past five years have seen new developments that have made it easier for foreigners to arrive in Ukraine: 1. Foreigners are no longer required to go through the hassle of registering at the local OVIR (Department of Visas and Registration, also called VVIR in Ukrainian) within three days after arriving in Ukraine Instead, 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 United States, 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). 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 embassies abroad. Plan to send in your visa application no less than three weeks before you plan to visit Ukraine, though you can pay more to get it done in three or four days' time. For U.S. citizens, which of the consulates (New York, Chicago, or San Francisco) or Embassy (D.C.) you send your passport and application to supposedly depends on which state you live in, but they will process applications from any state. If you do not reside in the United States, find a listing of Ukrainian embassies and consulates around the world here, or, if you speak Ukrainian 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 in Ukraine, even if you have come to Ukraine without a visa as a citizen of one of the visa-free countries in the list 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 at http://www.ukrconsul.org/visa/VISA.pdf or requested by mail. Also very useful is this example of filling out the 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 ) Page 265

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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 that you have filled in the full name and address of your inviting party and that you have a temporary address in Ukraine. Failing to fill in these boxes can cause your application and passport to be returned to you. I've heard 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 the period 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 get the visa (to Krakow or Budapest, for example) rather than extend your current visa. I know firsthand that the workers at the Krakow, Poland consulate are cooperative and will have the visa done within a few hours if you visit 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 the first place for stays of up to 90 days. If you need a visa and you require a letter of invitation for a tourist visa to Ukraine, our partners at Discover Ukraine can provide you with a letter of invitation if you book a hotel with us. This letter of invitation can 'invite' you only for the period of time that you have booked a hotel. When you fill out the hotel booking form there is a place where you can state whether you need visa support service (i.e. a letter 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 time in the country. Your initial passport registration occurs at the time of crossing the Ukrainian border when your passport is stamped. The period of time for which this initial registration is valid is 90 days for citizens of nonWTO (World Trade Organization) countries and 180 months for citizens of WTO countries, which include the European Union, United States, and most developed countries. Note, however, that the visa-free period is still 90 days for citizens of the EU, USA, and some other countries. You can only stay in the country for longer than that if you hold a visa. Useful tip: If you are interested in staying in Ukraine for longer than 90 days, it is Page 266

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recommended that you ask the border officials how long you'll be able to remain in the country with your visa or without any visa and when you will need to have your passport registered. Ask this whenever you enter or leave Ukraine. Once you get to the city or town where you will be staying, at some point within the first month or two drop by the city OVIR (Office of Visas and Registrations, also termed "VVIR" in Ukrainian) and ask them the same questions. Because official regulations and de facto practice often differ in Ukraine, and registration periods have been traditionally been a source of considerable confusion for foreigners. The purpose of 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 to create other legal entities. If you are not conducting business in Ukraine and leave the country every 90 days or less, you may be able to avoid the hassle of registering your passport with the local OVIR. As of fall 2009 there is 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 As stated above, as of fall 2009 "border runs" may still work, but eventually they may not, depending on how border officials choose to interpret immigration regulations. To avoid having to register their passports, many foreigners in Ukraine simply make sure they leave Ukraine every three months (or six, if they are from the U.S.). Upon entering Ukraine you automatically receive a stamp in your passport that is a substitute for registration for a three or six month period. So, all you need to do to avoid registration is cross the border and get a new stamp in your passport. OVIR officers have said that it is perfectly fine to go to an international border 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 in the country another three months (or six months) without registering. Ask OVIR officers which registration period applies to citizens of your country. The registration period used to be three days (it still is in Russia)! The registration process in Ukraine Passport registration within Ukraine, as far as we know, is only possible if you hold a visa. To begin the process, you will need to go to the local city office of the Department of Citizenship, Immigration and Registration (commonly called the OVIR or "VVIR") and pick up the necessary forms and review any additional registration requirements for your type of visa with OVIR officers. Always bring your passport with you when visiting the OVIR, as officers will almost always want to look at it, check your identity, and look at your visa type and border crossing dates. The registration process should be started at least one week before your previous registration expires, whether a border stamp or an OVIR registration. Registration can be timeconsuming 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 city OVIR office by calling the official 09 information service (Ukrainian speaking -- at least in Kiev). If you are late registering, you will highly regret it! You will have to pay a fine and go through additional lengthy bureaucratic procedures, and you will still have to go through the registration process all over again. Read more about this below. Your passport registration will take up a whole page of your passport. It will show the registration period, the name of the inviting party, and your place of residence in Ukraine. Page 267

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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 only need forms for you and the person who invited you, or whose home you are living at. If you have a business or service visa, you will need a form for you, for the person whose home you are living at, and for the organization that invited you. Hopefully your landlord isn't out of town when you need to have him/her fill out the form! This is a common problem for many expats, who have to decide at the last minute whether to be registered a different address (where he/she does not actually live) or to attempt a "border run." Employers who hire foreigners and obtain work permits for them usually take care their passport registration as well. In addition, there are commercial services for foreigners that will take care of all the formalities for you, saving you several visits to the OVIR and local utilities offices (the infamous "ZHEK"). To register your passport while 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. There will probably also be a minor bank processing fee of 5 UAH or less. Confirm the above requirements with OVIR officers before bringing in your documents for registration. It is possible they may require additional documents, 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 given neighborhood. It also issues internal passports for Ukrainian citizens and handles matters of establishing residency in a certain location. The purpose of the ZHEK stamp is to confirm that the ZHEK is aware that someone else will be residing at that address. Trying to get through to the ZHEK may take several attempts and needs to be done by the owner of the apartment you are living at. The ZHEK will likely request to see "the foreigner" together with his passport, and may or may not require the homeowner to fill out another form stating that you will be staying at their apartment through a certain date. The ZHEK needs to know the number of people living at the apartment in order to calculate the cost of certain services for the apartment. Most landlords aren't excited about the idea of registering their tenants -- whether foreigners or Ukrainians -- at the ZHEK 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 registered by the ZHEK during your visit. If you are in Ukraine on a business, service, or other kind of visa, in addition to the requirements listed above you will also need to submit:
a completed form from your inviting organization (obtained from the OVIR) Page 268

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a copy (non-notarized is fine) of the organization or firm's government registration certificate showing when 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 the organization's declared fields of activity
IMPORTANT: One of the purposes of registration forms for inviting parties is to make sure there is someone to pay for your deportation, if such became necessary. These parties do not necessarily have to be the same parties who invited you for your visa. They can be any organization or private person who is willing to take administrative responsibility for you while you are in Ukraine. You do not even have to be working for the organization (which would require a work permit) or have business relations with them. Since I know of no deportees, 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 leaving Ukraine and receiving a new entry stamp, you will need to repeat the whole process described above. There is no procedural difference between getting your first registration and extending your registration. Start this process no later than one week before your registration period runs out. What happens if you fail to register on time in Ukraine If you miss your mandatory registration date (90 or 180 days from your last entry into Ukraine, as stated at top), you and your inviting party will have to pay a fine (as of 2008, 340-680 UAH for the foreigner and 0-840 UAH for the inviting party), even if you are just one day overdue. Technically you may be deported if you are way overdue or have been late to register more than once; however, in practice I have not heard of it. If you are late for registration, you will need to go to the city OVIR along with your inviting party (private citizen whose home 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 and appoint a date for you and your inviting party to appear in "court" together. Most likely, the OVIR officer submits his own comments along with the statements, based on his conversations with you. Your "trial" will likely consist of a few questions from the judge in his or her office. The judge will decide the size of the fine you are to pay. You will need to go to the nearest Sberkassa (state bank) and pay the fine, come back with the receipt, 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 registration procedure, with the court decision attached. As you can see, resolving registration problems can take several weeks, so make sure you keep track of your registration period and either register or re-enter Ukraine within the time limit. Note as well that you will need the signature of the owner of the apartment you are staying at, so if the owner is abroad you may have problems! So, plan well in advance. Page 269

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Required Steps to Create a Business
Figure 162 Ranks
Figure 163 How Ukraine ranks on Doing Business topics
Formal registration of companies has many immediate benefits for the companies and for business owners and employees. Legal entities can outlive their founders. Resources are pooled as several shareholders join forces to start a company. Formally registered companies have access to services and institutions from courts to banks as
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well as to new markets. And their employees can benefit from protections provided by the law. An additional benefit comes with limited liability companies. These limit the financial liability of company owners to their investments, 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 revenue for 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. The rankings for comparator economies and the regional average ranking provide other useful information for assessing 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 Doing Business data reflect how easy (or difficult) it is to start a business in Ukraine today, data over time show which aspects of the process have changedand which have not (table below). That can help identify where the potential for improvement is greatest.
Figure 165 How Ukraine and comparator economies rank on the ease of starting a business
Figure 166 The ease of starting a business in Ukraine
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Equally helpful may be the benchmarks provided by the economies that today have the best performance regionally 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. And changes in regional averages can show where Ukraine is keeping upand 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 businessstreamlining procedures by setting up a one-stop shop, making procedures simpler or faster by introducing technology and reducing or eliminating minimum capital requirements. Many have undertaken business registration reforms in stagesand they often are part of a larger regulatory reform program. Among the benefits have been greater firm satisfaction 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 a set of specific proceduresthe bureaucratic and legal steps that an entrepreneur must complete to incorporate and register a new firm. These are identified by Doing Business through collaboration with relevant local professionals and the study of laws, regulations and publicly available information on business entry in that economy. Following is a detailed summary of those procedures, along with the associated time and cost. These procedures are those that apply to a company matching the
Figure 170 Standardized company
standard assumptions (the standardized company) used by Doing Business in collecting the data (see the section in this
chapter on what the indicators measure)
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Summary of procedures for starting a business in Ukraineand the time and cost
No. Procedure
Notarize company charter and execute premises (if needed) The notary fees range from UAH 30 to UAH 75 at the state notary and from UAH 500 to 800 UAH at the private notary. The exact fee depends on the number of participants for approval, the number of pages and copies of registration documents, and the additional notary fees approved by the Regional (Oblast) Department of Justice. To open a temporary bank account, the founders must submit evidence of their decision to appoint a person with signature authority to execute transactions on this account. The decision should be formalized by a notarized power of attorney. Open a bank account for initial capital Founders must contribute 50% of their charter fund contribution before registering the company. Founder contributions may be made in cash, including foreign currency, as well as in kind. Temporary accounts are restricted to receiving the contributions of funds for the formation of the nominal (share) capital of the company being incorporated. No other operations are allowed. The following documents must be submitted to the bank to open a temporary account: - Application for opening the account in the form established by Regulation No. 492. The application should be signed by the person authorized by the founders of the legal entity (could be a separate power of attorney granted to the individual concerned). - 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 at least one founder is an individual). - The signature specimen and the imprint of the seal (as specified in Regulation No. 492). The signature specimen should contain the signature of the person(s) authorized by the founders to sign the bank account documents. While the company is under formation, it does not have a corporate seal. Thus, at this point, the card should be submitted without the seal and signed by the authorized bank employee. Pay registration fee at the bank The cost for regular procedure (5 days) is UAH 81 and for expedited procedure (3 days) is UAH 162.
Time to complete
Cost to complete
1 day
UAH 600
1 day
no charge or up to UAH 100
1 day
nominal
Register at the Registration Office Founders must submit the following documents when registering at the Registration Office: - The charter (two copies). - Minutes of founders meeting. - Application form (registration card). - Bank document, evidencing payment of registration fee. - Proof of payment of minimum capital requirement, that is, either bank documents for cash contributions or, otherwise, transfer acceptance act (executed between the founders and the company) for in-kind contributions. Register at the State Statistics Committee Companies must register with the State Statistics Committee, although the Registration Office has already filed some information with the Statistics Office. Register VAT at the State Tax Authority and obtain a VAT number A company with annual turnover of up to UAH 1 million is eligible for registration as a 6% or 10% consolidated taxpayer. A 10% consolidated taxpayer may not register as a VAT payer. A company is automatically
5 day
UAH 170
1 day
UAH 25.94
10 day
UAH 17
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registered as a profit taxpayer during primary registration (see Procedure 4). However, those companies that must register as a VAT payer must register for this tax separately. UAH 190250, depending on the complexity of a seal
Prepare a seal
2 days
Open a permanent bank account After the company is registered with all relevant state authorities, a temporary bank account can be converted into an operational account, which under Ukrainian banking law, is designated as a "current account." To change the account status from temporary to current, the bank must receive the following: - The set of company documents stipulated by Ukrainian banking law (the same documents as those to be provided by an existing company) to open a new bank account. One of these is the copy of the companys certificate of registration, which contains the company's tax identification number. - A confirmation (reply) from the tax authorities that they have registered this bank account. Notify the District Tax Inspectorate of the opening of the permanent bank account Before converting the temporary account to a permanent (current) account, the bank must receive a confirmation (reply) from the tax authorities that they have registered the current account. To receive the confirmation, the bank must notify the tax inspectorate in its district that the current account has been opened; this notification should be made via a special email system of the National Bank of Ukraine. During this transitional stage, some banks still provide notification by postal mail. The bank must provide this notification within 3 working days of converting the temporary account to current. Before sending the notification, the bank must obtain prior written consent from the account owner. Within 3 working days of receiving the bank notification, the tax authorities must provide the bank (via email) the confirmation of the account registration (due to the transitional stage of implementing the confirmation email, tax authorities may send the confirmation to the bank by postal mail). Upon receiving the confirmation, the bank must change the status of the account from "temporary" to "current." After this change, both credit (deposit) and debit (payment) operations are allowed. Until the bank receives the confirmation, the account cannot be used for debit operations (withdrawal or transfer of funds). Owing to the transitional period for implementing the bank e-mail notification to the tax authorities, currently some accountholders opt to notify, and to receive the confirmation from, the tax authorities themselves and then forward the confirmation to the bank.
Figure 171 Summary of procedures for starting a business in Ukraineand the time and cost
1 day
banks charge or no charge
2 days
no charge
* 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 low incorporation fees and straight-forward procedures. The minimum capital required for such a company has been 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 complex incorporation 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 are generally subject to the same regulations as Ukrainian ones. The founders can be enterprises, organizations as well as citizens. Foreign citizens as well as international organizations can be founders of a Ukrainian company. Usually a Limited Liability Company can be established in Ukraine without the need of the founders travelling to Ukraine. An authorized representative with power of attorney is able to carry on all the required procedures to incorporate the company. However entrepreneurs that need to open a company bank account may be 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 foreign companies operating in production or other commercial activities subject to VAT taxation are considered VAT payers and must register with the Ukrainian TAX Authorities. In order to register for VAT companies need to file a declaration form with the relevant tax authorities. Usually this can be done by a company representative authorized 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 bank account in which to hold transactions and deposit their capital. Therefore an entrepreneur needs to open a bank account at a Ukrainian bank or at a branch in Ukraine. However, most Ukrainian banks require the presence of the entrepreneur in order to sign the contract in the bank's office. Some banks in Ukraine offer the possibility for an entrepreneur to open a bank account at a bank situated in his or her own country, having a branch also in Ukraine. The founder of the company is advised to do a thorough documentation prior to opening 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 employers for their companies. There are plenty business websites where companies create company accounts and find employees. Another method is working with a recruitment agency which offers the best suited solutions for different 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 in the last years. Therefore it is easy for a company to find qualified employees. The average salary in Ukraine is 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 agricultural output. The country is benefiting from important natural resources. In the last few years Ukraine has been orienting towards market economy going through a political and social transition. The process has become more difficult in the year 2008 as the global economic crisis struck, influencing a rise in the unemployment rate and a drop in the overall productiveness. However efforts to revive certain business sectors have been made and the Ukrainian government offers incentives for foreign investors. The environment for foreign investors is welcoming, non-discriminatory and generally there is no difference made between foreign companies and Ukrainian ones.
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Licensing of a Foreign Business

Overview Despite more than 70 years of soviet rule, even its final years of perestroika, in over 20, years of independent development, Ukraine has moved significantly toward a free market economy. Today, the country is an independent player at the international marketplace. To achieve this, Ukraine has had to radically modify its legal systeman effort that is far from overin order to match modern conditions, (including requirements that have to be met as a WTO member). As a result, Ukraine has quite a number of new and amended laws, which can complicate doing business. One of the first new laws, the Law on Ownership, specifically recognizes private ownership and the right of both Ukrainian residents and foreign 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, and production derived from its use. In addition, a new Civil Code, a (Commercial) Code, a Land Code, laws on companies, laws on foreign economic activity, on entrepreneurship and more have been adopted. These laws effectively establish the basic framework for business activity in Ukraine. The process of privatization or selling off state commercial and other assets started in 1992. This process is governed by the laws on privatization of state-owned property and a set of regulatory documents. Admittedly, the privatization process was not an easy one and there were undoubtedly a number of irregularities. In 2005, the Tymoshenko Government began to counter such irregularities. This led to the high-profile re-privatization of KryvorizhStal, the countrys largest steel plant and one of the largest in the world. The result was a six-fold increase in the original price and the arrival of a strong international investor, Indias Mittal Steel, in 2005. It sent out a signal to foreign investors that future privatization auctions would be held in a more honest, transparent manner that would not a priori exclude suitable buyers through the manipulation of tender conditions. Business activities in Ukraine are often subject to licensing by different state agencies. Moreover, starting up a business usually means registering with the tax and pension authorities, among others, and getting numerous permits and approvals, such as fire safety, labor, sanitary, and so on. Since 2006, the state has been working to set up a network of one-stop-shops where entrepreneurs can register with all necessary entities in a single location and cut down the amount of time required to set up shop. Before starting a project in Ukraine, an investor should obtain qualified local advice since Ukrainian laws tend to be vague, allowing for different interpretations, particularly tax laws, which can carry different implications. In September 2008, Ukraine adopted the Law On Joint Stock Companies, which was a major step toward improving the investment climate in the country. The law introduces regulations to protect companies from illegal seizure. The law also provides for a procedure for voting at general shareholders meetings that excludes any shareholders who have tried to illegally take-over a company. All joint stock companies with over 100 shareholders must vote using ballot papers signed by each shareholder individually. It also institutes a special procedure for the alienation of shares. When a foreign company or individual plans to establish business presence in Ukraine, a number of options are available.The forms of business most commonly used by foreign investors in Ukraine are the joint Page 280

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stock company or share corporation, the limited liability company and representative office. Other options are available under Ukrainian law, such as joint ventures, subsidiaries, partnership, limited partnership, additional liability company, and non-corporate joint activity, but they are rarely used. The main laws that govern the establishment and activity of legal entities in Ukraine are the Civil Code, the Commercial Code, the Law on Companies 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 as foreign citizens and individuals without citizenship. A company acquires the status of a legal entity after state registration. Companies are established and act on the basis of their statutory documents, charter or foundation agreement. The foundation documents should contain information about the name of the company, the subject and purposes of its activity, the founders and participants, the amount and nature of statutory capital, the procedure for distributing profits and losses, the management structure and competence, the procedure for governing bodies to adopt decisions, the procedure for amending statutes, the procedure of dissolving the company, and other issues specifically defined for certain companies, based on their organizational form. Jointstock companies, limited companies and additional liability companies act on the basis of a charter and partnerships act on the basis of a foundation agreement. Although the conclusion of a foundation agreement is not obligatory for the companies with certain organizational forms, the founders may choose to conclude a foundation agreement in order to establish procedure for contributing to statutory capital, to set out the conditions for joint activity in the foundation of the company, and so on. Contributions to statutory capital Founders can contribute to the companys statutory capital both in monetary form and through in-kind contributions such as: Structures and buildings; Equipment and other tangible assets; Securities (except for promissory notes); Rights of possession to land, water and other natural resources; or Other property rights (including intellectual property rights). The use of Budget funds, borrowed funds or pledged property to form Page 281

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statutory capital is prohibited. Dissolution/Liquidation Companies may terminate their activity through reorganization (merger, takeover, split-up, transformation) or through dissolution. When a company is dissolved, its property, rights and obligations are transferred to its legal 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 by Ukrainian property left after all creditors demands have been settled is distributed among its participants in the 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 like a well instructed workforce and low taxes should convince entrepreneurs to take a chance and establish business in Ukraine. The process of incorporation may seem complex, but it's straightforward and well structured 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 the company's articles of association or the company charter. The next step implies opening a bank account, but before this can be taken care of a person with signature authority must be appointed in order to execute transactions. In order to open this temporary bank account the National Bank of Ukraine requests submission of application 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 registration fee 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 to do that the applicants must submit copies of the company's charter, the minutes of founders' meeting, the application form, bank document certifying the payment of registration fee. The state registrar requests additional information or, in case of acceptance issues a certificate of registration which becomes the company's incorporation document. By implementing the one stop shop, the state of Ukraine has facilitated registration with the Social Insurance Fund, the Industrial Accidents Fund, Employment Fund and Pension Fund 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 process requires an application form and the registration certificate, and may take up to 10 days to complete. Page 282

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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 purchase seals at stationary shops, or may order a customized one. The price varies depending on the complexity of the seal. Opening a permanent bank account After the company is registered the temporary bank account can be converted into a fully operational permanent account. In order to do that the company's founders must provide the bank with a set of company documents, including articles of association, charter etc and registration certificate. The tax authorities need to confirm 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 require investment 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 the incorporators. Registering the company at the Registration Office is finished in 5 days and for VAT in 10. A Ukrainian company is set up in almost a month, but may take less depending on the complexity of activities that the company will engage in. State Registrar of Ukraine The State Registrar of Ukraine functions through a state institution, an agency for registration. The institution was established in 1998 and has the purpose to store and provide information on various commercial or other companies and legal entities. The main activities of the agency include creating and maintaining a database for information support of companies, maintaining a common database which is disclosed and published on official publications of the Verkhovna Rada of Ukraine, Cabinet Ministers of Ukraine, State Commission on Securities and Stock Market. Also the agency managing the State Registrar of Ukraine handles dissemination of information which is disclosed pursuant to applicable law and regulations of the Commission, monitoring of stock market analysis and business activities, maintaining an informational portal on the Internet and organizing conferences, seminars, competitions etc. Registering a company in Ukraine is done by submission 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 fee and proof of payment of minimum capital requirement. The State Registration performs all due registrations with State Committee of Statistics of Ukraine, state social funds and tax authorities. The registration procedure Page 283

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is completed in a short period of time, the company being issued a registration certificate. In some cases additional information on the company may be requested. Anyone who is interested in information on certain companies, partnerships, legal entities may do so by making an inquiry or browsing through the online database available online. The response is quick and the information reliable. Another advantage is that companies which make significant changes in their organization are free to use the Agency managing the State Registrar of Ukraine to publish the new information. The State Registrar of Ukraine facilitates informational processes between companies, state authorities and public, offering a vast database of reliable information which is accessible to anyone. Overview of the Types of companies in Ukraine Ukrainian legislation encourages foreign investment offering great incentives, despite a rather unstable economy, due to the economic situation throughout the world. There are many reasons for thinking about the possibility of setting up a Ukrainian company, beginning with a favorable environment and low taxes. Usually entrepreneurs establish Ukrainian limited liability companies and joint stock companies, as they are easy to form. Ukrainian Limited Liability Company The Ukrainian limited liability company is the most common form of business organization established by entrepreneurs. 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 specified in the charter of the firm. The members are able to transfer their participation to third parties, only with full consent of other members. If the company doesn't have a single shareholder, board and shareholder meetings are required. The members of a Ukrainian limited liability companies are liable to the company's name and obligations 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, as determined by the foundation documents. Participants are liable only to the extent of their contributions. For example, participants bear any risks related to the companys activity only in proportion to their contributions. A participant who systematically breaches obligations before the company may be excluded from the company if other participants holding more than 50% of the total amount of the company vote in favor of such a decision. The statutory capital of a limited liability company must be not less than the equivalent of 1 minimum salary based on the rate effective at the time of companys establishment. Effective April 4, 2011 the minimum wage 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 can be owned either by the only one person or several persons. Following our practice we shall conclude that the most popular type of a legal entity with foreign investment is LLC. This form allows solving all typical assignments 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 legislation on 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 of residence 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 to certify registration of an investor in the country of origin. Also a company statute (articles of association) and a power of attorney (proxy) demonstrating the individual who will represent a company in Ukraine with reference to establishment of a legal entity are recommended to have. These documents must be duly approved according to the legislation of the country of issue, translated into Ukrainian and legalized abroad. If the owner of the LLC is a foreign natural person, such a person has to obtain a Ukrainian identification code of a taxpayer. This procedure can take about 10 days. The LLC share capital is equal to 100 minimal wages. To the end of 2007 this makes about 9000 USD. The LLC share capital can be formed either with property or with cash. The Ukrainian legislation prescribes that the 50 per cent of the share capital must be paid up before the official registration process is started. The LLC owners who have more than 60 per cent of the share capital have formal management power under the company. The capital must be fully formed during one year after the official 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 contributions As the practice shows the share capital shall be not less than the amount necessary to cover all the company's expenses (director's salary, office rent, telephones etc.) for a few months until the company becomes a selfsupporting one. Ukrainian Open Joint Stock Company An open joint stock company may be established by two or more natural persons or legal entities becoming partners that can be residents or not. The share capital of a Ukrainian joint stock company is divided into shares of equal nominal value, and the liability of the members is limited to each one's investment. The shares of an open joint stock company may be offered to the public, can be transferred freely and can ultimately be traded on 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 unlimited responsibility for the company's debts and obligations. In exchange they distribute the profit and are in charge with managing the partnership based on the foundation agreement. Page 285

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Ukrainian Limited Partnership Two members may establish a limited partnership in Ukraine, and they may be natural persons or legal entities, Ukrainian or foreign. Unlike a general partnership, a limited one has two types of partners. At least one is general, assuming all risks concerning the partnerships' debts and obligations and at least one partner is a limited partner, receiving profit proportionally with his contribution, being liable to the extent of his investment made 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 that can be residents or foreign and has a share capital divided into shares of equal nominal value. Another resemblance with the open joint stock company resides in the liability of the members which is also limited to the amount invested by each in the company's capital. Unlike the open one the closed joint stock company cannot be publicly offered and the shareholders have pre-emptive purchase rights for shares offered for sale by other shareholders. A joint-stock company is a company with statutory capital divided into a certain number of shares of definite equal nominal value. Shareholders are liable for the companys commitments only within the limits of their shares, that is, shareholders cannot be required to make any further contributions beyond their contributions to the statutory capital and cannot be liable for the companys commitments. The statutory capital of a joint-stock company cannot be less than the equivalent of 1,250 minimum salaries, based on the rate effective at the moment the company is establishment. Effective April 4, 2011 the minimum wage was equal to UAH 960 per month. All shares are nominal and exist only in a book-entry form. The Law on Aktsionerni Tovarystva (joint stock companies) provides for two types of AT companies: Public joint-stock company aktsionerne tovarystvo (PAT). Private joint-stock company aktsionerne tovarystvo (PrAT). or Publichne
or
Pryvatne
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The differences between two types of AT are:

Private AT Number of shareholders There are no limits on the number of shareholders. The number of shareholders may not exceed 100. Share placement Public ATs can make both private and public placements Private ATs can make only private placements of shares. of shares. Should a decision be made to make a public offer of shares, the companys charter must be changed, including the type of the company, from private to public. The alienation of shares (Art. 7) The shareholders of a Public AT cannot alienate shares The Charter of a PrAT can offer a first right of refusal to that belong to them without the consent of other shareholders and the company itself to buy shares shareholders and company management. offered by the owner to a third party at the same price and terms proposed by a shareholder to a third party, pro-rated to the number of shares owned by each of them. The circulation of securities (Art.24) A Public AT is obliged to go through a procedure to list The shares of a Private AT cannot be sold or purchased and join a stock registry on at least one stock market. on the stock market, except for a sale through auction. Audit (Art. 75) Annual financial statements must be reviewed by an Annual financial statements must be reviewed by an independent auditor. independent auditor. Disclosure of information (Art. 78) A Public AT is obliged to have its own web-page on the The Law does not require a Private AT disclose Internet, where information to be disclosed pursuant to information. law, is provided, including such information: - The Charter and any changes to it, a Memorandum of Association, a State Certificate of Incorporation; - provisions for General Meetings, the Supervisory Board, 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 the companys auditor; - annual financial statements; - accounting documents that are being submitted to the relevant authorities; - prospectuses, certificates of registration, of issuance of shares and other security documents; - list of company affiliates with an indication of the amount, type and/or class of their shares; - specific information about the company required the law.
Figure 172 The differences between two types of AT
Public AT
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Additional liability company or Tovarystvo z dodanoiu vidpovidalnistiu in Ukrainian (TDV) An additional liability company is one whose statutory capital is divided into participatory shares as determined by the foundation documents. Participants primarily become responsible for the companys commitments to the extent of their contributions to statutory capital. However, if these sums are insufficient, participants shall bear additional liability pro rata to each ones contribution. The limits of this participant liability are provided in the statutory documents. The Law on Companies provides for the same requirements regarding the minimum amount 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 companys business activity and are jointly responsible for the companys obligations with all of their assets. A general partnership is managed according to the foundation agreement among the partners. The activity of the general partnership may be carried out by all, one or some of the partners, who act on behalf of the partnership on the basis of powers 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 of the partnership are held jointly responsible with all their property for the partnerships commitments (general partners), while the responsibility of the remaining participant(s) who do not participate in the activity of the company is limited to their contributions to the companys statutory capital (limited partners). In a limited partnership, only the general partners carry out the management of the partnership. Limited partners may not interfere with the activity of the general partners in the management of the company. A limited partnership must 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 entity under the Ukrainian law but only acts for and on behalf of the foreign founder. In practice, representative offices of foreign companies may be of two types: (1) a representative office through which a non-resident entity carries out its business activity in Ukraine and which is considered a branch office from the legal viewpoint and has the right to release payments for third party goods and services and receive payments from local customers; (2) a representative office whose functions are generally limited to representing the interests of the foreign entity, performing marketing activities, and providing other support functions to promote the business of the foreign founder, with the right to release payments, but funds from product sales must benefit the account of the head office. Representative offices must be registered with state authorities under Ukrainian law. The mandatory state fee for registration is US $2,500.
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Open Representative Office or Subsidiary in Ukraine There are many ways to invest in Ukraine including setting up a company, or a branch of a foreign company. There is no good or bad solution for a company type, but mostly there are better suited companies for different needs. A Ukrainian branch may represent a perfect solution for entrepreneurs wishing to undertake commercial activities in the country. The legal status of the Ukrainian branch is not the one of a separate 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 representative offices. The process of incorporation for such an entity is simple and straightforward, without any major difference 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 to obtaining the registration certificate certain procedures must be completed. The articles of association of the company must be signed and notarized along with the list of managers' names and addresses and their specimen signatures. A representative office is set through a representative individual or legal entity which must be authorized to carry out the procedures through power of attorney. Also the representative office must have 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 the Ministry of Economy of Ukraine. For that purpose a file must be completed and it must contain the notarized articles of association, the list of managers with names and addresses and the power of attorney through which a 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 of registration issued by the relevant institution of the respective country. Before submitting the application the representative office must pay a registration fee and must provide evidence of its payment. Usually the registration certificate is issued in five days, and the institution forwards the company's information to the State Committee of Statistics of Ukraine, the state social funds and tax authorities. Page 289

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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 a representative office the parent company must name a representative who can carry out the incorporation procedures through power of attorney. Also the representative office must have a permanent address in order to 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, the main difference consisting of the more complex documentation required. Drafting the documents and preparing all that is necessary for the application may take up to two days, while the registration itself requires five days more or less. Al the other procedures, as registering for social security, statistics and tax authorities may take up to one week. However the representative office comes into existence upon issuance of the registration certificate. 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 business in Ukraine. Joint activity is carried out via a contractual joint venture organized using a combination of funds or assets from the participants or without a combination of contributions in order to achieve joint business objectives. The joint activity does not have the status of the legal entity. Moreover, there is no requirement for a minimum amount of capital to be contributed by the participants. The conditions of carrying out joint activity are established by written agreement among the participants. Joint activity is subject to registration with state authorities under Ukrainian law. Business Entities - Investor considerations

For representation, information gathering and liaison activities, a non-commercial representative office is likely to be an acceptable vehicle. Establishing a legal entity is recommended for commercial activities, although a commercial representative 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 and quicker 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, On Business 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 intended to regulate issues that are not dealt with in the Civil Code. In reality, parts of the two Codes overlap, including a number of provisions dealing with the establishment and operation of legal entities. Furthermore, the two Codes 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, the statistics 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 limited circumstances 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 minimum capitalisation requirements (approximately USD 9,000), and is less regulated. One potential issue with a LLC is that members may withdraw their contributions at any time by giving three month's notice. If another investor will be involved in an entity, establishing a JSC (or establishing a JV entity offshore) may be more prudent. If an investor intends to carry out only preparatory or auxiliary activities in Ukraine, such as representation, information gathering and liaison activities, establishing a non-commercial representative office is a viable and convenient option, provided there is double tax treaty protection. It is not possible for foreign entities 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 service providers 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 financial year is less than its share capital, the company must decrease its share capital and make relevant amendments to its Charter. There is no provision for a JSC to increase its capital to achieve this objective. Furthermore, the law states that if the value of net assets falls below the statutory minimum capital, the company should be liquidated. There is no further clarification in respect of these articles, no explanation as to who may enforce the provisions, and no major penalties for non-observance. The Securities Commission has recently indicated that 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 LLC own a percentage in the company's capital, as specified in its Charter. Because investors' interests in a LLC are Page 291

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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 (nonparticipants) 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 often involve cash settlement. A participant who systematically ignores or improperly fulfils his duties, or whose actions interfere with reaching the aims of the LLC, may be excluded from the LLC by a majority vote. The excluded participant 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 settle obligations, 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 LLCs should be reported as equity or a liability from the LLC to the participant. This issue should not have any implications from a tax or legal perspective, but may impact on the LLC's ability to obtain finance from external sources, and could impact the IFRS accounting. A LLC does not generally require a financial audit unless demanded by a participant holding greater than 10% of the capital.
If a LLC will be 100% owned by a foreign investor, these issues are likely to have little practical implication. If one 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 of compensation, 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 single shareholder. The governing document of a LLC is its charter. The charter determines the company's objectives and scope of activities, the size of its statutory capital, the composition and competencies of the governing bodies and the rules for decision-making. The distribution of shares of a LLC is set out in its charter. If shares are transferred, the Charter will need to be amended to record the change. Generally, incorporation will take three to four weeks from the day documents are filed with the registration authority. A LLC is deemed to exist as a legal entity from the date of its state registration. LLCs may make "check the box" elections for US tax purposes. Capital structure The minimum capital requirement for a LLC is the equivalent of 100 Ukrainian monthly minimum wages at the time when the LLC is formed. The minimum salary increases on a regular basis. Based on the 2007 Budget Law, the following minimum capital requirements will apply for LLCs established in 2007.
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Established on or after 1 January 2007 1 April 2007 1 July 2007 1 October 2007
Minimum wage (UAH) 400 420 440 460
Minimum capital (UAH) 40,000 42,000 44,000 46,000
Est. minimum capital (USD) 7,900 8,300 8,700 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 remaining contributions must be paid within the first twelve months of the LLC's activity. A LLC must create a reserve fund from net profits in the amount of at least 25% of its share capital. At least 5% of annual after-tax profits must be transferred to this reserve until the entire 25% fund is fully paid (this is not tax deductible). It is possible 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 of whom has votes proportionally to its interest in the company capital. Quorum for a participants' assembly requires the presence of participants holding at least 60% of votes. Most resolutions are approved by a simple majority of the votes present at the Participants' Assembly, although resolutions amending the Charter and a limited number of other decisions must be approved by a majority of all participants' votes. The Board of Directors (or Director) is the executive body of a LLC, and is responsible for managing the day-to-day activities of the LLC and representing the LLC against third persons. There is no formal requirement to appoint a company president, corporate secretary or any other office holder. The structure of the Board, its authority, and its working procedures are specified in the Charter of the LLC. Liquidation, receivership A LLC is liquidated if its participants agree to liquidate the LLC, its corporate term expires (if one is specified in the Charter), or it is ordered to be liquidated by the court. In a voluntary liquidation, preference in distribution is given, in order, to: 1. Indemnification of losses caused by disability, other Page 293

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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 shares of equal nominal value. The liability of shareholders in a JSC is limited to the value of their capital contribution. A JSC may be established as an "open" or "closed" JSC. Shares in an open JSC may be offered to the public, freely transferred, and may ultimately be traded on a stock exchange. By contrast, shares in a closed JSC are distributed initially between its founding shareholders. Existing shareholders in a closed JSC also have pre-emptive purchase rights for shares offered for sale by the other shareholders. The legal framework for JSCs is 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 Stock Market Commission of Ukraine, which involves filing a set of documents prescribed by law. Processing of the application 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 minimum wages at the time when the JSC is formed. Based on the 2007 Budget Law, the following minimum capital requirements apply for JSCs established in 2007
Established on or after 1 January 2007 1 April 2007 1 July 2007 1 October 2007 1 Jauary 2011
Minimum wage (UAH) 400 420 440 460
Minimum capital (UAH) 500 525 550 575 976
Est. minimum capital (USD) 99,000 104,000 108,900 113,900 113,900
Figure 174 JSC requirements
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Quick comparison of joint stock companies and limited liability companies Joint stock company (JSC) Registration As for all entrepreneurs, legal and business entities, primary registration is made with the State Registration Department. A JSC must register shares that it issues with the State Securities and Stock Market Commission. Limited liability company (LLC) As for all entrepreneurs, legal and business entities, primary registration is made with the State Registration Department. 100 Ukrainian monthly minimum wages (approximately USD 9,000). Unless the Charter says otherwise, other contributors have a first right of refusal before shares may be sold to third parties. No regular reporting, but annual accounts must be filed.

Minimum capital 1,250 Ukrainian monthly minimum wages (approximately USD 110,000). Transfer of shares There are generally no restrictions on the transfer of shares in an open JSC. For a closed JSC, other shareholders have a pre-emptive right to buy shares before they may be transferred to third parties. Supervision Management requirements Regular reporting with the State Securities and Stock Market Commission.

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 audit report to the State Securities and Stock Market Commission.
Generally not conducted in practice.
Risks
Liquidation if negative equity at end of the second or subsequent year of existence.
Liquidation if negative equity at the end of second or subsequent year of existence. Contributors may withdraw from LLC at any stage, given three moths notice.
IFRS
Shares are treated as equity investment.
Because contributors may withdraw contributions at any time, financial reporting standards may require investment to be reported as loans. Page 295
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 on Securities and Stock Market. These reports include the annual audited financial reports, quarterly financial reports, 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 some form of contract relating to the individual. This will take the form of either an employment contract between the 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 to obtain a Ukrainian Tax ID Code before the company is registered. To obtain a Ukrainian ID Code, the foreign national 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 a Ukrainian 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 legal advantages to conducting business through a partnership. Taxation is also imposed at two levels - at the partnership level and in the hands of the partners. Joint ventures typically involve establishing a separate legal entity (JSC or LLC) in Ukraine. However, the Civil Code enacted in 2004 does recognize the concept of a joint venture (including simple partnerships) without the need to establish a separate legal entity. The relationship between the parties will generally be governed by the partnership agreement. Such agreements are commonly referred to as "joint activity agreements." The use of joint activity agreements is still relatively unexplored. On the face of it such agreements may offer benefits over a LLC. There are no minimum capital requirements and capital impairment rules to contend with. A partner may still withdraw by giving three months notice, but the law contemplates that this could be treated as a breach of contract and damages paid. At the end of the day though, 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 it represents. From a tax perspective, local rules for representative offices are broadly in line with those found in other countries. The problem is that the broader legal framework has not been updated. This can create uncertainty when dealing with government agencies. Page 296

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Nonetheless, if the foreign company intends to carry out only non-commercial activities, such as representation, information gathering and liaison activities, it should be sufficient to establish a representative office, provided there is a double tax treaty in place. If activities are limited to services, then a commercial/taxable representative office may be a suitable option, and a number of professional services firms, for example, operate under this structure. A representative office should be registered with the Ministry of Economics of Ukraine (currently subject to a registration fee of USD 2,500), the Statistics Department, the tax authorities, and pension and social funds. A representative office should also obtain the right to use a seal from the Police department. Once the representative office is registered with the tax authorities and obtained a permit for a seal, it may open accounts in hryvnia and foreign currency in a Ukrainian bank. Representative offices are subject to normal corporate income tax. However, an exemption may be available if the activities of the representative office are not sufficient to establish a permanent establishment under a relevant tax treaty. A non-commercial representative office is generally not subject to VAT. A commercial representative office must register for VAT once its taxable sales for the previous 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 the tax authorities. Unlike the structural unit of a Ukrainian legal entity, the foreign parent entity has to apply to the Ministry 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 of Ukrainian economic law, the legal capacity of the head office entitles it to pay expenses and costs of representative office activities in Ukraine. Such payment may be effected at the head offices own initiative or at 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 such transaction. Nonetheless, the corporate status of representative offices simplifies the process of confirming the intention 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 both the representative office and head office are parts. The head office forms and delegates powers concerning the organization and activities of permanent representative offices on the basis of the legislation of the respective jurisdiction and/or foundation documents. The head office is entitled to vest a representative office with property and with the authority to manage such property or may rescind the abovementioned powers and manage the vested property itself. Thus, these relations of the head office can be viewed as intra-economic relations between an economic entity and its unit (representative office). Alternatively, if the relations of a head office and representative office would be qualified as horizontal (between quasi-independent economic entities), this approach would face difficulties. Initially, upon enactment of the Economic Code of Ukraine in 2003 and until February 25, 2005, structural units (branch, department, representative office, etc.) were generally considered economic entities, but even at that time their relations with the head office were regarded as intra-economic relations. Foreign trade activities belong to the economic relations too; however they are not usually divided into intra- and inter-economic relations. It is possible to assert that relations between a representative office and head office shall not constitute foreign trade relations, as they deviate in a number of ways from the legally binding principles of foreign trade activity. From the foreign trade entitys viewpoint, classification of the relations with the head office is more complicated: the representative office remains an independent player in the foreign trade activities under special law; however, at the same time it is excluded from the list of such players under the Economic Code of Ukraine (Article 377). As the second wave of argumentation in favor of relations intra-economic nature, one can alternatively argue that the authority of the head of an economic entity (legal entity) to represent the entity in relations with other economic entities shall include the authority to represent each and all structural units of such economic entity. The relations between a body and an economic entity constitute representation by virtue of law or foundation documents (Article 65 of the Economic Code of Ukraine, Article 92 of the Civil Code of Ukraine) and are governed by corresponding regulations of economic and civil laws on representative offices 4. From this point of view, a decision of the head 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 office has 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 head office would require the same documentation for payment of expenses when they relate to a representative offices activities (whether as general administrative costs or special projects) as if paying for expenses of the head office itself. From the standpoint of economic obligations, transactions entered into by the head office shall 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, to account the results of its activities, and to submit financial reports in due course5. As demonstrated above, as a Page 298

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representative office is not an economic entity, it appears that the cost and revenue accounting may be carried out by the head office only. However, the requirements for the entities can be extended to representative offices by virtue of analogy (Article 8 of the Civil Code of Ukraine); and the Law of Ukraine "On Accounting and Financial 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 accounting and conduct reporting7. Such extrapolation of the tax legislation has been practiced in Ukraine for a considerable time now. At the same time, there is no clear prospect for comprehensive economic law enactment on activities of representative offices; therefore, the representative office in Ukraine has to use a web of laws and regulations of conflicting nature. The basis of the accounting of economic transactions consists of the primary records establishing the mere fact that such transactions were conducted. Law establishes requirements as to the form of primary documents (hard copy or electronic copy) as well as the obligatory details of such documents, namely: a. b. c. d. e. title of the document (form); date and place of execution of the document; title of the economic entity on whose behalf the document is executed; content and volume of the economic transaction, the unit of measurement thereunder; 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 transaction 8. Based on the above minimum requirements for primary accounting documents, a representative offices accounting may reflect the expenditures paid by the head office, provided that it has the necessary documents confirming, 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 in confirmation 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 head office; c. the fact of payment payment order, statement of account, SWIFT copy, signed receipt, act on works completed, etc.; and d. the fact of intra-economic distribution ("transfer") of costs for allocation as an alternative evidence of non-inclusion of paid expenses into the gross expenditures of the head office9 for example, copy of the relevant accounting register, act, order, regulation, etc. Standard documents of the head office may be 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 originals cannot be provided, as duly certified copies, for example copies signed (and sealed) by officials of the head office. Thus, the internal accounting rules provide additional bureaucratic burden on the maintenance of the structural 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 among the 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 office shall be recognized as a resident of Ukraine and for taxation purposes shall be equal to a taxpayer conducting its business independently of the head office (it may even receive a dividend (?!)) Accordingly, a representative office shall be leveled with an independent economic entity. Thus, irrespective of the economic status, profit amounts gained by the representative office are determined and taxed in accordance with the general 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 State Tax Administration ("Procedure"). The Procedure provides three alternative methodologies for assessment of tax liability: a. Independent assessment by the head office in accordance with intra-economic practice, or, if such is not the usual practice then b. Abstract assessment on the basis of a separate balance sheet of the financial and economic activities of the representative office subject to approval by tax authorities, or, when it is impossible to determine the 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 gross expenditures. According to the Procedure, only expenditures "incurred directly" by the representative office shall be included in the representative offices gross expenditures for taxation purposes. Although inexpedient for economic activities, it is completely logical given that a representative office is presumed "independent." Following such logic, it is likely to expect application of the arms-length rules for transactions between the head office and representative office. Moreover, the representative office would not be able to pay from its own account the expenses of another representative office without incurring major tax liabilities for both payer and beneficiary. Bilateral double taxation treaties ("Treaties") allow, in spite of the Procedure, for certain deductions while determining the profit of the representative office, in particular for expenses incurred by the head office for purposes of the representative office. Such deductibles include management and general administrative expenses, regardless of whether such expenses were incurred in the country where the representative office is located or in any other place. In terms of legal effect, a Treaty has priority to law of Ukraine and the Procedure. In case a Treaty directly allows allocating expenses incurred by the head office to gross expenditures of the representative office, the Procedure may not be taken into account as an instrument supplementing the Treaty. On the contrary, the Treaty contradicts the Procedure and therefore the Procedure shall not apply to the extent that can be pointed out by the contents difference of operations definitions contemplated by the Treaty and the Procedure. The Procedure refers to "gross" expenditures, which can have a fiscal connotation, whereas "expenditures" (Treaty) emphasizes economic content. The Treaties also specify that expenditures include management and general administrative expenses. Some Treaties clarify that deductible 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 incurred 15. It is Page 300

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interesting that Treaties specifically emphasize the settlements between a head office and representative office and therefore the Treaties are more consistent in maintaining the status of the representative office in its entirety with the head office and preserving the integrity of the fiscal policy with taxpayers status under economic law. Conclusion The laws of Ukraine contain numerous conflicts as concerns the status of a representative office of a foreign economic organization. The approaches vary even at the conceptual level and restrict the head office operations aimed 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 economic entities in the economic law, whereas the existing gap impedes the dynamic development of economic activities through representative offices. The positive factor in this respect is the international obligation of Ukraine to unify the methodological approach to the avoidance of double taxation of income and property and to use the text of the model agreement in relations with the third parties under which "reasonable reallocation of documented expenses between an entity permanently represented in one Contracting State and its permanent representative office in the other Contracting State is permitted." Such expenses include management and general administrative expenses, research and development costs, interest and management fees, consultations and technical assistance, incurred both in the country in which the representative office is located and in any other place. It would be natural to expect such principle to be established in national legislation. The bad news is that the obligation was assumed by the government of Ukraine as early as 1992; at the same time, the Law of Ukraine "On Taxation of Enterprises Profit" was adopted as early as 1994, not taking into account such obligation. Subsequent amendments and versions of the Law (over 60 only since 2000), have failed to take into account 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 company types are equal in conducting business and taxation in Ukraine. The circle of legal entities which can conduct some specific type of activities (for example, banking, securities activity and pawning) is strictly limited by the Ukrainian legislation. The difference between the types lies in management, responsibility of owners, and the share 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 can include the Board of Directors, the Sole Director, and Revision Commission. Following our practice we can conclude that cases when your director in Ukraine is to be dismissed can cause serious problems for the company. The matter is that your Ukrainian director is an employee under the local legislation and is protected by the current practice in Ukraine. Often in the Ukrainian practice a director who doesn't agree with the owner's decision on dismissing holds the seal and original documents of the company, thereby, makes difficulties for the company's work and the process of appointing a new director. Sometimes a director enjoying 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 involving clients and partners of the company into the conflict. Sometimes a director addresses mass media with the purpose of extending the facts about "injustice and arbitrariness" from the owner's side. In every case a complex 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 contract concluded with the director, paragraphs of your statute and other internal documents of the company in Ukraine. In our practice we recommend owners to organize and ensure an access to the current papers of the company from the very beginning and on the base of these materials to provide control for the main aspects of the company's activity. In any way one can develop and choose forms and methods for the maximum protection of the owner's interests and assets of the company in every specific situation. That's why we don't sell 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 the preparatory stage of negotiations. We don't speak about due diligence which is a very good tool but not always applicable. Just find out some ordinary data about your possible Ukrainian partner that will assist you to make a decision. 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 its behalf. We would recommend entrusting your contract to professionals. Experienced lawyer or auditor will help to get all necessary information about your partner and to secure proper contractual fulfillment. Note that in Ukraine a usual arbitration clause that does not contain all necessary information may be considered invalid, and you will lose a chance to protect your interests.
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Labor Code/Law
General labor regulation in Ukraine The Ukrainian employment law traditionally favors employees, a presumably weaker party in labor relations. Nevertheless, quite a few changes have been implemented since lately, aimed at balancing these relations and providing employers with additional powers. The laws regarding employment relations are set forth in a number of specific acts. The fundamental document to regulate employment relations in Ukraine is the Labor Code, adopted in 1971 and extensively amended since than. There is a number of other legislative acts effective in this sphere: the Employment Act (Pro zainyatist naselennya), the Remunaration Act (Pro oplatu pratsi), the Act on vacations (Pro vidpustky), the Collective Labor Dispute Resolution Act (Pro poryadok vyrishennya kolektyvnykh trudovykh sporiv (konfliktiv), the Act on Collective Agreements and Accord (Pro kolektyvni dogovory ta ugody), the Act on Trade Unions (Pro profesiyni spilky, yikh prava ta garantiyi diyalnosti) and others. As a member of the International Labor Organization (ILO), Ukraine has signed and ratified a number of ILO conventions that supersede conflicting provisions of Ukraine's domestic labor laws. The country has also entered 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. Page 303

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The state provides additional employment guarantees to certain categories of citizens, including women with children under the age of six, single mothers with children who are disabled or under the age of 14, senior citizens of preretirement age, and persons released from prison. Primary responsibility for the implementation of state labor and employment policy rests with the Ministry of Labor and Social Policy of Ukraine (Ministry of Labor), the State Centre for Employment, the Research Centre for Employment of Population and Employment Market of the National Academy of Sciences and their respective local branches. The Labor Code is extremely proemployee, which reflects the socialist principles of employment. Grounds for dismissal are limited and social guarantees to employees are generous. Individual employment in Ukraine is established by an employment agreement or an employment contract between an employer and an employee. The main employment terms and conditions may be summarized as follows: 1. The trial period is normally limited to three months, with a few exceptions of six months. 2. The monthly wage may not be less than the statutory minimum wage (as of March 2008 UAH 515 or approximately USD 102) and must be paid at least twice a month.(which is far lower then it is existing minimum wage 3. An employer may not order an employee to undertake a job that is not included in the employee'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 of employees and employers, conclusion, modification, termination and invalidity of employment and collective agreements, settlement of employment disputes, labor safety rules, etc. All specific employment laws should be in 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 written instrument, but rather in the form of an employee's application and an administrative order signed by the general manager of a company, both documents specifying the employee's position and salary. All other substantive terms and conditions of employment evolve from the provisions of the Labor Code, collective bargaining agreement and employer's internal regulations. When entering into an employment agreement, an employee must submit their passport (or other identification document) and labor book. In certain circumstances, the employee may also be required to submit an educational or training diploma, a health certificate, or other documents. In certain cases when specifically stipulated by law an employee may be required to comply with minimum requirements concerning age, education, or health. In addition, the Labor Code 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. Page 304

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Generally, an employee must perform the duties under the employment agreement personally, and may not delegate 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 aged 15 to 16 may enter into an employment agreement upon obtaining consent of a parent or a person acting as a parent (guardian). Minors aged 14 to 15 can also be employed, though this employment shall be subject to certain 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-term employment agreements may be concluded only in certain cases, as specified by the legislation or when labor relations cannot be established for an indefinite period of time due to the nature of work, conditions of its execution 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 employee that has been granted some specific benefit, such as free schooling. The Ukrainian legislation provides for a specific type of labor agreements that is a labor contract. It is concluded in a written form only, for a definite period of time and only in cases, stipulated by the law. The main advantage of labor contract is that it gives a possibility 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 labor contract whenever appropriate in order to minimize any potential risk of disputes in the future. In order to avoid conflicts while entering into labor contracts we recommend the following provisions to be included thereto: Reasonably phrased competition clause regulating the employees conduct during employment and thereupon; Confidentiality clause, also surviving termination of the contract;
If required due to the particular nature of the activity, other obligations regarding the employees conduct should be spelt out in detail. To simplify the conclusion of employment agreements it is advisable to conclude employment contracts that include only mandatory terms and to seek to specify other conditions as much as possible in job descriptions and internal work regulations of the company. The Labor Code distinguishes between an employment agreement and an employment contract. An employment contract is a special form of an employment agreement and may be used only where expressly permitted by law. It must be executed in writing and may be entered into only for a definite term or until a specific job is completed. An employment agreement, by contrast, may be concluded orally and may be entered into 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 allows the 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 Page 305

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provisions that differ from those prescribed by the Labor Code, e.g., a longer annual vacation and more flexible working hours. However, neither a contract nor an agreement may diminish the employment guarantees provided 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 statutory grounds set forth in detail in the Employment Code. Article 36 of the Code provides an exhaustive list of grounds 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 employees 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; employees transfer by his consent to other enterprise or his transfer to an elective post; employees 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 save time and resources, employers should generally attempt to reach a mutual agreement with an employee before pursuing termination on other statutory grounds. The procedure for terminating a valid employment agreement varies depending on the type of the labor agreement, the party that initiates the agreements termination and the circumstances surrounding such termination. Agreement termination at the initiative of employer may be justified, 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 health condition, impeding the continuation of work; (3) systematic violation of work obligations specified in a labor contract on the part of the employee, provided that disciplinary or civil penalties have been formerly imposed on the subject employee; (4) truancy, including absence from work without valid reason for more than three hours during any business day; (5) absence from work for more than four months running due to the employees temporary disability, 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 employers property as determined by a court of law or by resolution 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 if they refuse to be transferred to other jobs. It is also forbidden to dismiss employees who are on vacation or temporarily disabled, except for the cases specified in clause (5) above, as well as specific categories of employees (pregnant women or women with children of particular age). These limitations do not apply in the case of company liquidation. There are also additional reasons, enabling an employer to terminate labor agreement at his own initiative vis--vis particular categories of employee. As a general rule, the employer is required to notify the employee of the termination of labor agreement in writing at least two month prior to such termination. Upon termination of a contract for the reasons that do not result from disciplinary misconduct of the employee, the employer is generally obliged to make compensation payments (as a general rule, in the amount 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 employment contract up until the very last day of the probation period based on the unsatisfactory results of the probation period. As termination of an employment contract on that ground is much easier, the employers are urged to use probation periods in their employment contracts and the competence of the employee should be evaluated before the probation time term expires. In general, employment contracts concluded for a fixed term expire on the date agreed upon. However, a notification requirement (obligation of an employer to issue an order on employees dismissal) applies here as well. The employer should pay the utmost attention to this procedure, as an employment contract concluded for a fixed term will be automatically transformed into a contract for an indefinite period of time, if an employee is admitted de facto to perform his functions on the day following the contract expiration date. It is highly recommendable to seek professional advice before terminating any employment contracts. It is essential to comply with the formal requirements specified by the law. In case of illegal termination (also including breach of formal requirements), the employer may face penalties or the employee may be reinstated in his or her position and shall be paid average wages for the compelled absence from work. Considering that court actions may last one or more years, a situation might occur when the employer, based on the court judgment, shall be bound to reinstate the employee at his previous position and pay the average wages for the whole year. Labor Books Labor books typically contain information about the type of work performed, any awards, the duration of employment, etc., and serve as a basis for ascertaining the employees length of service with reference to social security and pension rights upon retirement. Although representative offices of foreign companies may engage Ukrainian employees, they are not permitted to make any entries in the labor books of such employees. Any entries made directly by a representative office would be declared invalid. Rather, those books are submitted to and maintained by appropriate government agencies. In Kyiv, the relevant agency is the General Directorate for Servicing Foreign Representations (commonly referred to by its acronym GDIP). A representative office must enter into an appropriate service agreement with GDIP and compensate GDIP for its services. Payroll Taxation Page 307

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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 as described below. Under Ukrainian tax law, an employer is deemed to be a tax agent for its employees. This means that the employer is obliged to withhold and remit to the state budget personal income tax (PIT) on salary and on certain fringe benefits provided to its employees. Moreover, the employer must regularly file PIT reports with the tax authorities. The standard PIT rate is 15%. The PIT base for payroll income is determined as being gross salary less social security contributions payable at the expense of the employee. In addition to PIT, a Ukrainian employer is liable for paying relevant mandatory social security contributions for its employees and reporting to the relevant social security funds. Mandatory social security contributions apply to payroll 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 employees 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 not apply to the amount of salary that exceeds the payroll cap. For your reference, we summarize the rates for social security contributions in the table. Disabled Persons- Employment Requirements Ukrainian law sets requirements for the employment of a certain number of disabled persons by Ukrainian employers. Specifically, a Ukrainian employer must employ disabled persons as 4% of its average number of employees per year. If a Ukrainian employer engages between 8 and 25 staff, at least one disabled person must be employed. SALARIES Salary related conditions include the rates of wages/salaries to be paid, the payroll system, the salary payment terms, 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 the employment contract through reference to specific acts. The minimum salary rate is established by the Parliament. As of December 1, 2006, the minimum monthly salary is UAH 400 (approximately 80 USD). From time to time the minimum monthly salaries are occasionally revised to allow Ukrainian citizens to keep pace with the spiraling cost of life. If an employer requires an employee to perform other duties during his or her working time in addition to the duties prescribed in the employment contract (additional work), the employee is generally entitled to additional remuneration. Similarly, the Ukrainian Labor Code requires overtime, holidays and nighttime work to be adequately compensated. Generally, an employee may be transferred to a lower-paid position only after both parties reach an agreement or in exceptional circumstances specified by the law. When an employment contract is terminated, the employer may withhold the amounts paid for the vacation time in advance. The employer withholds the income tax in the amount of 15% from all salaries, bonus payments and other remuneration paid to an employee. 15% is deducted from income after withholding all payments to the Pension Fund and Social Securities Funds. The employer is bound to transfer collected tax amounts to the bank account of the local state revenue office on the date the payments were made. In addition to income tax, an employer shall pay social insurance fees on employees 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% to the 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 Fund from 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 another locality for a period not exceeding 30 consecutive days. However, pregnant women and mothers having a child under three years of age cannot be sent on business trips, and mothers of a child under fourteen cannot be sent on a business trip without their consent. The employer is obliged to pay per diem to an employee sent on a business trip, as well as compensation for travel related costs, accommodation and other related expenses. The current minimum per diem for domestic business trips is UAH 25 per day, and UAH 280 for business trips abroad. Accommodation costs, transport expenses as well as a number of other costs, determined in the Law on taxation of enterprises income may be exempt from income tax. In case a business trip involves traveling abroad, 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 a rule, overtime work is not allowed. At the same time it should be noted that overtime work always implies initiative of employer. Work, performed by the employee at his or her initiative, even when employer is aware of it, is not considered to be overtime. Regardless of the grounds, each case of overtime work shall be adequately compensated for. Additional hourly rate as compensation for overtime work payable on top of the regular salary rate shall amount to at least 100% of the employees hourly salary. There are limits on overtime work. 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 with children under 3 years (in some cases under 14 years), minors and employees who are studying and working at the same time may not work overtime. According to the Labor Code, employees have work time limits, so that an employee may not work in excess of 40 hours in a week. There are special rules governing work at Page 309

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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. Night work must be compensated by payment of additional remuneration. Additional hourly remuneration for nighttime work must amount to at least 20% for night work calculated from the hourly salary. Work to be performed on days off must be agreed on with the employee. The Labor Code of Ukraine prohibits work on a day-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 employees days off: monetary compensation or compensatory time off. If the parties agree on monetary compensation, the additional hourly salary for the time worked during the employees days off shall constitute 100% of the hourly salary of the employee. Currently there are the following public holidays in Ukraine: New Years Day (1 January), Christmas (7 January), International Womens Day (8 March), the Day of International Solidarity of Workers (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 when employees are off work: one day (Sunday) Easter, one day (Sunday) Trinity. An employee may be obliged to 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 of an employee. The work on days-off and public holidays should be paid in double amount or compensated by the 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 pro vidpustky). Employees are entitled to annual vacation of 24 calendar days (the first one may be requested by an employee after 6 months of employment commencement). For the second and subsequent work years, the vacation 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 contract ends and the employee has not used the remaining vacation, either this time must be compensated for or the remaining vacation time is to be granted to such employee, and the employment contract shall be deemed extended over the duration of the respective vacation. Compensation shall be calculated in the same way vacation 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. Page 310

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All employees working under an employment contract are entitled to primary annual vacation, whereas additional annual leave is granted to employees having difficult work conditions. The list of professions, posts and jobs, entitling for additional annual leave is determined by the Government. Duration of primary annual vacation is 24 calendar days per working year. A working year is the period beginning on the first day of employment 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 days after) 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 leave at his or her request for raising a child to 3 years of age. An employed woman with two or more children under 15 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 be paid in the total amount only for the agreed upon 126 days, even if the pre-childbirth period had a longer duration than expected. The benefits must be allocated on the basis of a disability notice, which is issued for the entire period of maternity leave. The form, contents and validity of the information in the aforementioned letter is supervised by the Commission on Social Insurance. In order to pay the maternity benefits, the following 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 months depending on a particular reason (such reasons can be, for example, preparation for and taking exams in school or in university, writing a diploma etc.); An employer and employee may agree upon unpaid vacation. In certain cases the employer is obliged to give this vacation upon request (e.g. in the event of an employee raising a child under 15 years of age alone or employees preparation for taking university entrance examinations, or if the employee is working part-time and the vacation from the full-time work place is longer than the vacation from the part-time work place at the same time or to a husband whose wife is on maternity leave). According to the Labor Code of Ukraine, annual leaves must be calculated in calendar days (not working days). In addition, all employees must be provided with no less than 24 days of annual leave with their positions and salary preserved during such leaves. The Code provides for a longer duration of annual leave for specific categories of employees, such as those employees working in hazardous conditions. Importantly, the duration of such leave may not be reduced in any case. The Code requires monetary compensation for any unused annual leave. In case of dismissal, an employee must be compensated for all unused days of annual leave, as well as for unused days of any Page 311

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additional leaves that would be provided to employees with children of a certain age. Per an employees request a part of unused annual leave may be paid in cash. Note, however, that the duration of the provided annual leave, and other additional leaves, may not be less than 24 days. Moreover, temporary disability leaves and any leaves connected with pregnancy and maternity may not be included into regular annual leaves. With respect to unpaid leave, Article 25 of the Law of Ukraine On Leaves specifically provides a list of exceptional circumstances when an employer (owner) is obliged to provide to an employee the right to take an unpaid leave, including: (a) up to 14 calendar days annually for mothers or fathers (i) raising children without a spouse (including cases when a mother is undergoing lengthy treatment in a medical institution), (ii) with two or more children under the age of 15 or (iii) with a handicapped child; (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 relevant medical 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 of their Social Protection applies; (e) up to 21 calendar days annually for individuals with special labor-based privileges from the state; DISPUTE SETTLEMENT All major issues related to settlement of individual labor disputes are regulated by the Labor Code of Ukraine and those related to collective disputes - by Special Law of Ukraine on the Procedures for the resolution of collective 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 to the Labor Dispute Commission within three months from the point of time when violations have occurred, or the point of time when an employee gained knowledge of or should have known about the violation. Disputes arising from employees renewal at work, compensation of material 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 provides for two major instances for dispute resolution: Conciliation Commission and Labor Arbitration. Both bodies are alternative mechanisms of labor dispute resolution. The Conciliation Commission handles disputes arising from execution/amendment of collective agreement or establishment or adjustment of social economic labor conditions. It involves a simplified and therefore quicker procedure. Labor Arbitration can be addressed if the Conciliation Commission fails to deliver a decision on the case or dispute arising from non-compliance with labor safety legislation or non-performance of collective agreement. Page 312

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Due to the Ukrainian rules any foreign national intending to be employed in Ukraine must, before his or her commencement of such employment, apply for and obtain a work permit. Work permits are issued to foreign nationals by the relevant Ukrainian employment center, provided that: there are no qualified Ukrainian nationals in the relevant sphere who are suitable for the position in question; or there are significant grounds for the employment of foreign nationals as specialists. It should be noted that the applicable Ukrainian legislation does not provide a definition of the term significant grounds. At the same time, a document outlining such grounds 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 account in evaluating whether to issue a work permit to such foreign national employee. It is important to know that the right to work is valid during a year. An employment permit may be issued to a foreign national only if the following requirements are complied with: there are no Ukrainian nationals in the region (or, in certain cases, in the entire country) capable of 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 "Employment Centre") for a period of up to one year and may be extended with one month's prior written request. To apply for an employment permit for a foreign employee, an employer must submit the following documents to the Employment Centre: an application, stating the reasons for employing foreign citizens and demonstrating the employer'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 the Ukrainian legal entity providing for employment of foreign citizens;
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a copy of the draft employment agreement between the employer and the foreign employee; copies of the documents that evidence the foreign citizens' education or profession; the employer's good standing certificate from the state tax administration; a power of attorney for the employer's representative; and evidence of payment of the required application fee, equal to 10 non-taxable income units (UAH 170). The Employment Centre is required to issue its decision regarding an employment permit within 30 days of the submission of a completed application. The employer must inform the Employment Centre of the commencement or termination of work by a foreign national within three days. The employer is also required to report the reign employees 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. A foreign citizen employed without a work permit is subject to immediate deportation from Ukraine at the employer s expense, and the passport of such foreign citizen will be stamped with persona non grata. In addition, 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 that there are no local employees who would be able to perform the work the foreigner would be performing in Ukraine. There is no provision as to the maximum permissible period of uninterrupted stay for a foreign citizen in 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 the necessity to protect the rights of employees and the necessity to ensure labor market flexibility and trigger an active social dialogue. Apart from Poland, Ukraine is the only country among the Eastern European and Central Asian countries, which maintains in force the old Code of Labor Laws, the Code of Labor Laws of the USSR, dated December 10 ,1971 # 322VIII (the CLL of Ukraine). Radical changes in the whole system of social relations that are taking place in Ukraine amid the formation of market relations and socioeconomic transformations and more or less related to labor make it necessary to adopt a new codified legal instrument in this sphere. According to the agenda of the ninth session of the Verkhovna Rada of Ukraine (the Ukrainian Parliament) of the sixth convocation, which will continue until January 13 th , 2012, the Verkhovna Rada of Page 314

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Ukraine is planning to consider the Draft Labor Code under registration # 1108 (the Draft Labor Code) in the second reading. This draft law is expected to be adopted at the current ninth session, i.e. in the nearest future. The Draft Labor Code consists of nine books; each divided into separate chapters, and contains 444 articles. For the first time in Ukraines 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 Draft Labor Code, similarly to the CLL of Ukraine currently in force, prohibits the unreasonable refusal of employment (part 1 of Article 31 of the Draft Labor Code). The Draft Labor Code upholds the principles of prohibition of forced labor and the nondiscrimination in employment, including in respect of the suspected or actual HIV/AIDS disease (Articles 4, 5 of the Draft Labor Code). Part 2 of Article 4 of the Draft Labor Code expressly defines the notion of gender discrimination. It should also be highlighted that part 8 of Article 6 of the Draft Labor Code provides that labor laws shall not apply if any work is performed by an individual 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 permits the execution of a civil law contract with officials of business companies and in those cases where an individual performs his/her duties under a civil law contract that requires the performance by such individual of certain works for any other party to such contract. The Draft Labor Code establishes the categories of foreign nationals who do not need any employment permit. Thus, part 6 of Article 20 of the Draft Labor Code assigns the following employees to such categories: 1) representatives of foreign maritime (river) fleet and foreign airlines that provide services to such organizations 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 of persons in need of social protection. Such quotas are set by local selfgovernment bodies subject to approval by territory based social dialogue authorities (Article 35 of the Draft Labor Code). The foregoing provision of the Draft Labor Code raises serious concerns since ) it introduces 5 schemes of quotas covering a wide range of employees, and ) it envisages a single standard for employers without any regard to industry, region or company 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 employers 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 employment agreement may be executed at any time before the beginning of employment. In other words, unlike the CLL of Ukraine currently in force, the abovementioned provision entitles an employee to enter into an employment agreement prior to his/her dismissal from his/her previous job. Other novelties of the Draft Labor Code relate to the content and form of the employment agreement. Thus, Article 40 of the Draft Labor Code provides Page 315

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for the following terms and conditions of the employment agreement: 1) binding, 2) additional, and 3) other terms and conditions prescribed by applicable laws and by a collective bargaining agreement. Thus, as opposed to the currently effective CLL of Ukraine, the Draft Labor Code contains an exhaustive list of material terms and conditions of the employment agreement, failing which the employment agreement shall not be deemed executed. They, in particular, include the following terms and conditions: place of employment; effective date of the employment agreement; job duties, or profession in which the employee will work; remuneration conditions; work and rest time; occupational safety and health. The Draft Labor Code provides that the employment agreement must be made in writing (Article 41 of the Draft Labor Code), which should surely improve the social protection of employees. However, as provided by the Draft Labor Code, the violation of this rule may not affect the already existing employment relations. Thus, subject to the foregoing provision and considering that, as stated above, the employment relations arise, in particular, on the date the employment begins, the actual admission to work is equal to the execution of the employment agreement, whether or not such agreement has been executed in writing. Article 42 of the Draft Labor Code classifies the employment agreements into typical agreements, which shall be approved in the cases envisaged by law by a central executive authority in charge of employment issues and shall be legally binding, and model agreements, which shall be approved by a central executive authority in charge of employment issues and shall be advisory in nature. 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 deemed approved if the agreement on this condition is set out in the employment agreement. Article 47 of the Draft Labor Code prohibits applying a probation period to the following additional categories of employees compared 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 does not prohibit a probation period for disabled employees. Furthermore, unlike the currently effective CLL of Ukraine, the Draft Labor Code provides a clear list of documents to be submitted by a newly hired employee (Article 58 of the Draft Labor Code). In addition to the passport, the employment record book and the education related document currently required under the effective labor laws, the Draft Labor Code requires submission of the following additional documents: the application for employment (with the indication whether this will be fulltime or part time employment), the compulsory state social insurance certificate, the tax identification number and medical examination results (for some positions). Like the currently effective CLL of Ukraine, the Draft Labor Code limits the scope of application of fixed term employment agreements and provides that fixed term employment agreements should be executed when respective employment relations cannot be established for an indefinite period of time. In the employers opinion, in view of the reforms currently underway in the global labor market, the Draft Labor Code should guarantee the right of the parties to employment relations to freely agree on the execution of fixed term employment agreement regardless of the grounds or the nature of the job. Meanwhile, since the limited scope of application of fixed term employment agreements is one of the important guarantees of the employees labor rights, the position of the Ministry of Social Policy of Ukraine and the trade unions on this issue remains unchanged. At the same time, a positive development is that Article 69 of the Draft Labor Code provides for an expanded and clearer list of grounds for establishing employment relations for an indefinite period of time. The Draft Labor Code also provides Page 316

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for an expanded list of grounds for terminating employment relations with an employee, as compared to the 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 1 of 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 Labor Code); A violation by the director of the rules set by the founders (Clause 6 of part 2 of Article 104 of the Draft Labor Code); The employees absence from work, with no information available as to the reasons behind such absence, 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 and the decease of the employee are purely technical in nature. The Draft Labor Code also introduces new rules governing the procedure for dismissing employees. Thus, it imposes a ban on dismissal of employees while they are on a business trip (part 2 of Article 116 of the Draft Labor Code). Of great social importance are the provisions of Article 120 of the Draft Labor Code providing for the employees right to protection from unlawful dismissal. Thus, in accordance with the said Article, prior to their dismissal, employees should first be given an opportunity to provide evidence of their level of qualification, their work productivity, their diligent 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 employees request in the event of his or her dismissal (part 1 of Article 125 of the Draft Labor Code), and a ban on provision to any third parties of any information about the reasons behind the dismissal or any other information about the employee (part 2 of Article 125 of the Draft Labor Code). Unlike the currently effective labor laws (Article 11 and 14 of the CLL of Ukraine), the Draft Labor Code establishes the principle of voluntary collective bargaining in line with international practice. Thus, in accordance with part 4 of Article 349 of the Draft Labor Code, collective bargaining shall be mandatory if proposed by either party. Meanwhile, part 3 of Article 356 of the Draft Labor Code provides that the parties, who have agreed to enter into a collective bargaining agreement, shall execute it annually not later than February 1 of the current year. Therefore, Articles 349 and 356 of the Draft Labor Code allow the conclusion about the compulsory annual execution of a collective bargaining agreement regardless of the parties will, provided that the parties agree to enter into such agreement at least once. And therefore, the legislators of the Draft Labor Code have failed to pursue the principle of voluntary collective bargaining to the end. In the authors opinion, the term of a collective bargaining agreement is, first of all, the prerogative of social partners, i.e. parties to the agreement, and therefore, it should be determined by them. The same conclusion is also supported by the International Labor Organization, which says in its comments to the Draft Labor Code that from a practical standpoint, it is not advisable to create a situation where every 12 months the parties inevitably find themselves in a conflict situation. The Draft Labor Code radically changes the legal status of the labor dispute commission provision, in particular, out of the primary authority for consideration of individual labor disputes, the labor dispute commission has been transformed into a conciliation body set up for the purposes of settling individual labor disputes through a search for mutually acceptable solutions and reconciling the parties to such disputes. The only authority authorized to consider individual labor disputes in accordance with the Draft Labor Code is the court, while the labor dispute commission performs only conciliatory functions. In Page 317

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accordance with the Draft Labor Code, the general limitation period for judicial recourse has been extended from three months to three years. The limitation period for filing a statement of claim with the court against an unlawful dismissal has not been changed and is still set at one month. The same limitation period is prescribed by the Draft Labor Code for filing claims regarding transfer to another job or unlawful refusal of employment. In the authors opinion, the positive novelty introduced by the Draft Labor Code is its provision saying that no limitation period shall apply only to the claims for recovery of accrued but delayed wages, and neither to any claims relating to labor remuneration (part 2 of Article 440 of the Draft Labor Code). Subject to the foregoing, the authors believe that a majority of the novelties proposed by the Draft Labor Code will help to find balance between the interests of employers and those of hired employees. However, a complex analysis of the provisions of the Draft Labor Code allows the conclusion that Ukraine still has not shifted towards the radical reforms suggested by the international experience of labor law reforms, such as the alleviation of overly strict labor law requirements to simplify the procedures for hiring and dismissing employees, the extension of the term and the scope of application of fixed term employment agreements, the provision of a variety of possible options for entering into employment agreements, the introduction of flexible work hours, and the introduction of apprenticeship wages.
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Revenue Department Tax Guidance

Ukrainian Tax system Ukraine has a volatile tax system, and legislative amendments are frequent. Residents are taxed on worldwide income. Non-residents are taxed only on income from Ukrainian sources. Corporate profits are subject to 25% tax. Dividends are separately taxed at the shareholder level in the hands of individuals and foreign shareholders. 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 calendar year. 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 any business entity in the Ukraine. Regarding foreign investors, in the scope of taxation they are treated under the national regime. The following laws are the main tax 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 taxation laws may introduce taxes and duties and their rates. Only taxes and duties stipulated by said law shall be paid. Amendments to this law, as well as to other taxation laws, concerning rates and the mechanism 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 business activities. Tax system The Ukrainian tax system is evolving rapidly. The direction of reform is generally positive, although it is sometimes unpredictable. Tax laws have been revised frequently, sometimes several times in one month, and there are still many issues that need to be addressed. Tax law is often poorly worded, which results in ambiguous 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 by PricewaterhouseCoopers and the World Bank, Ukraine was identified as one of the most difficult countries in which to pay taxes out of the 185 countries surveyed. Many companies employ tax accountants in addition to financial accountants as tax accounts are separate from financial accounts. The study estimated that a modestsized domestic business would need to make 98 tax payments each year, and would require 2,185 hours per year to comply with its tax compliance requirements. For several years, there have been discussions about consolidating the various revenue laws into a single Tax Code, which should ease compliance and administration. A new initiative is underway to have this introduced into Parliament sometime in 2007, and to apply from January 2008.An interesting feature of the Ukrainian tax system is a simplified or unitary tax available for many small businesses. Qualifying sole proprietors opting to use the system pay a fixed amount of tax, while eligible entities pay a fixed rate of tax based on their revenues. In both cases, the businesses are exempted from income tax, a number of other small taxes, and potentially value-added tax (VAT). On Taxation System, the law that provides the general framework for taxation in Ukraine, provides for 28 national taxes 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 local authorities. The main local taxes affecting business are the advertising tax, municipal tax, and the charge for using 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 a tax number, it is not possible to open a bank account in Ukraine. The tax system of Ukraine is composed of more than 30 taxes and levies charged on the base of the Law of Ukraine On the Taxation System, dated 25.06.1991, # 1251-XII, with further amendments and includes national and local taxes and levies.
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The main national taxes and levies paid by legal and individual persons are: 1. 2. 3. 4. 5. Corporate Profit Tax; Personal Income Tax; Value Added Tax; Excise Duty; Compulsory State Social Security Levies; 6. Land Tax; 7. Customs duties; and others. The main local taxes and levies are the advertising tax, municipal tax, car-parking contribution, market levy, other taxes and levies. National taxes and levies are adopted by the Parliament of Ukraine (Verkhovna Rada) and are Figure 178 How Ukraine and comparator economies rank on the ease of paying taxes mandatory for payment on the entire territory of Ukraine. Local taxes and levies are collected in the order established by the relevant municipalities. The rates of local taxes are established within the limits adopted by the Parliament of Ukraine in the relevant laws. Collection of taxes is controlled and administered by the State Tax Administration while payment of customs duties is administered by the State Customs Service. All legal and individual persons that are engaged in business activities must register at the local tax administration and regularly report all taxable transactions and taxes paid. It should be noted that the legislation of Ukraine (including the legislation on taxes) is subject to quite frequent amendments that makes certain difficulties even for the local taxpayers. Taxation accounts for around 73% of government revenues. More than three-quarters of this is collected through corporate income (profits) tax (CPT), personal income tax (PIT), and VAT. Tax collections have increased rapidly over the past five years. It can be seen that the reduction of the individual tax rate in 2004 significantly increased the collection of individual taxation. A 15% increase in overall tax revenues is forecast for 2007. While the most recent Doing Business data reflect how easy (or difficult) it is to comply with tax rules 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.
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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 performance regionally or globally on the number of payments or the time required to prepare and file taxes. These economies may provide a model for Ukraine on ways to ease the administrative burden of tax compliance. And changes in regional averages can show where Ukraine is keeping upand 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 and individual persons for the purposes of taxation is defined by the relevant tax laws regulating taxation of legal and individual persons, respectively. A legal person as well as a permanent establishment without the status of a legal person (e.g. a representative office or a branch) is considered to be resident, if it is registered and conducts its business in accordance with the legislation of Ukraine. Determination of the residential status of an individual is more complicated. Thus, an individual is considered to be resident, if his/her domicile is in the territory of Ukraine. In case an individual is also domiciled in another country, he/she will be considered a resident if his/her place of permanent residence is situated in the territory of Ukraine. If an individual has a place of permanent residence both in Ukraine and in another country, he/she will be considered resident if he/she has closer economic ties (the centre of vital interests) in Ukraine. If the residential status of a person could not be defined with the help of the above rules a person will be considered resident if he/she stays in Ukraine for the period of at least 183 calendar days during a tax year. If this rule cannot be applied, a person will be considered resident if he/she is a citizen of Ukraine. If a person regardless of the provisions of the law has also a citizenship of another country, for the purposes of taxation this person will be considered a resident of Ukraine and will not be able to apply any privileges or exemptions envisaged by the international agreements signed by Ukraine. If a person is stateless, his/her status will be determined in accordance with the rules of the international law. Page 324

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Legislative framework Statute law According to the Constitution, taxes and levies, as well as penalties for non-compliance, may only be established by laws enacted by Parliament. Parliament exercises this prerogative frequently, and it is quite common for more than twenty amendments to be made to the various Ukraine tax laws each year, sometimes with potentially retroactive effect. Although many amendments are very minor, the frequent changes, as well as the government's failure to proceed with declared intentions and schedules for tax reform, have earned Ukraine the reputation of having an unpredictable tax system. Strictly speaking, the State Tax Authority (STA) does not have discretion to amend the law, but in practice, the STA often issues tax clarifications that are not always consistent 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 a position 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 to as low as 0% under some treaties for dividends, interest and royalties. Taxpayers do not require confirmation from the tax authorities before claiming relief under a treaty. However, the withholding agent must hold a certificate of residence from the treaty country for the person to whom income is paid. If the certificate is issued in a form prescribed by legislation of the treaty country it must be properly legalized (apostilled) and translated 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 recently been renegotiated (but not ratified), and increased rates will apply (10% on interest and royalties, 5/15% on dividends) 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 income tax, although administered by the STA, are often allocated to local government. One consequence is that payments 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 undertaken through the local tax office where the individual or business is located. Without a tax number, it is not possible to open a bank account in Ukraine. Page 325

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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 a foreign 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 communications or 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 foreign investor or its joint venture as regards taxation, unless otherwise stipulated by international treaties. Similar provision is in the law. The Ukraine has entered into bilateral treaties on the avoidance of double-taxation with more than 50 countries, including Austria, Belgium, Bulgaria, Great Britain, Finland, France, Germany, The Netherlands, Norway, Poland, USA, etc. Ukraine imposes withholding tax according to Section 13 of the law which provides for the mechanics of its collection and the rates at which it is payable. Withholding tax is imposed at a rate of 15%. This rate may vary subject to the operation of applicable double taxation agreements entered into by Ukraine. The rate of withholding tax in the double taxation agreement will prevail over the statutory rate. Income from immovable
All double taxation treaties rule that income from immovable including income from agriculture or forestry situated in the Ukraine is taxed here. The term "immovable property" include property accessory to immovable property, livestock and equipment used in agriculture and forestry, rights to which the provisions of general law respecting landed property apply, usufruct of immovable property and rights to variable or fixed payments as 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 derived from 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 fiscal agent) 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 or rental of containers (including trailers and related equipment for the transport of containers), used for the transport of goods or merchandise are traditionally exempted from withdrawing tax in Ukraine. This advantage is widely used by Ukrainian maritime and air companies which have possibility to take into leasing modern ships 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 the rendering 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 of interest. The treaty with Belgium stipulates that tax shall not be more than 15 per cent of the gross amount 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. In general, we may state that the definition of interest is clear under the Ukrainian law and there are no conflicting views as to its interpretation. But the law provides for certain peculiarities as to determination of expenses content, namely the interest, of a Ukrainian tax payer in which a foreign shareholding is equal or exceeds 50% of a statutory fund of such taxpayer. In general, the law provides that gross expenses of a taxpayer may include any expenses connected with accrue and payment of interest over a loan. If a maternity company which has 50 or more per cent shareholding in the Ukrainian taxpayer gave to the taxpayer a loan on which it accrued an interest, the law allows said taxpayer to decrease taxable income for an amount which does not exceed its own income received within reported period as interests from disposal of its own assets and increased on an amount equal to 50% of taxable income. Thus, only profitable taxpayers may deduct accrued interests from taxable income. The laws states that accrued interests, if were not treated as gross expenses for last periods, may be deducted from taxable income of the next periods. Thus, the law allows for taxpayers trading at a loss to use the advantage of the law later on. Taking into consideration above said limit of the law shall be decided after careful study of the double taxation agreement. For example, double taxation agreement Page 327

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between Ukraine and France allows absence of any limits as to expenses content if the maternity company has at least 20% shareholding in the Ukraine taxpayer. Dividends All double taxation treaties provide for lower withholding rate on dividends. For example, under the treaties of Ukraine 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 French investors) 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% - for French investors. When dividends are paid between resident companies, there is no dividend tax charged. At the same time, 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, royalties arising in one contracting state and paid to an investor from another contracting state shall be taxed in the other contracting state if the investor is the owner of the royalties. Where royalties are taxed in the first contracting state, the tax shall not exceed five per cent (for German investors) or 10 per cent (for Chinese investors) of the gross amount of royalties.
Salaries Ukrainian tax legislation stipulates the same procedure to accrue and to pay income tax both for citizens of Ukraine and foreigners, if the latter reside in Ukraine in total for 183 days per year. Income tax is calculated under the rate of 15% and paid in Ukraine. Directors' fees and other similar payments derived by the foreigner in Ukraine in his capacity as a member of the board of directors of the Ukrainian company are taxed in Ukraine. Some bilateral treaties provide that income obtained by a foreign technical specialist shall be taxed only in the country of his domicile but not in Ukraine. Pension and other similar remuneration paid to the foreigner 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, or a 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 with investments. Means connected with investments are treated under the bilateral treaties as to protection of foreign 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 investment e) 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 limit unimpeded and timely transfer of foreigners profits or return of investments. Ukrainian company which transfers profit to the foreigner has to submit to its bank a set of documents which confirm reality of made investment (swift payments or import customs declaration) and the fact of the foreign investment registration with 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 customs territory of Ukraine, and is included in the product cost. The payment of this tax is regulated by the Decree of the Cabinet of Ministers of Ukraine dated 26.12.1992, # 18-92. The rates of tax for particular excise products are 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 taxes are payable by an employer and by an employee. An employer is responsible for calculation and payment of taxes on salaries/compensations paid to employees and for withholding taxes from employees. The taxes are withheld 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 by an employee. 2. Payments to the State Temporally Disability Fund: 1. 1.5% - payable by an employer; Page 329

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2. 0.5% - payable by an employee (if the salary is lower than the cost of living officially established for the capable of working people currently: 525 hryvnia) or 1% if the salary is higher 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 employees salary/compensation with cap of 7875 hryvnia (up to 31.03.2007) 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 the estimated plots of land located in cities and towns is 1% of the total land plot value. If the plot of land is not evaluated, the tax is calculated in UAH per square meter depending on the number of population of the city/town in which the land plot is situated. Those who rent land from land owners pay rents. The amount of the 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 customs duties 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 On Unified 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 and products. The import customs duties are levied on the goods and products transferred into the customs territory of Ukraine and the rates of duty depend on the types of goods and product. The rates of import customs duties are established by Law of Ukraine On Customs Rates of Ukraine dated 05.04.2001, # 2371-III, with further changes. The customs fees are levied on the customs processing of goods and products at the zones of customs control. The rates of customs fees are established by Resolution of the Cabinet of Ministers of Ukraine dated 27.01.1997, # 65, and vary depending on the type of customs operations and the value of goods and products processed. Page 330

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PERSONAL INCOME TAX Payment of the personal income tax is regulated by Law of Ukraine On Personal Income Tax dated 22.05.2003, # 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 their Ukrainian source of income. Non-residents having diplomatic status and privileges are exempt from the personal 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 the territory of Ukraine or abroad regardless of the fact if the income is received in cash or in-kind. If the income is received in-kind, fair market prices are applied in order to determine the taxable income. A fair market price is magnified by the coefficient calculated by a special formula. For non-residents taxable income includes only the income received from the Ukrainian sources. If the Ukrainian source income is paid to a non-resident by another non-resident, such payment should be effected though a bank account opened in an authorized Ukrainian bank. If the payment is effected in cash or in-kind, the non-resident who receives such payment should personally calculate and pay the tax to the budget within 20 calendar days after the receipt of such payment. 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 the taxation of some type of income sourced by non-residents from the territory of Ukraine. The tax general rate for 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 at 30%. 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 and on the relation degree between the testator and the legatee. The gifts are taxed at the same rules as the inheritance. Page 331

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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 time of salary/other compensation payment. The following persons should withhold the tax from the taxpayer while paying the following types of income:

Renter/tenant of real estate while paying rents, if the renter/tenant is an individual, who is not registered as 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 an annual 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 further amendments. Taxpayers The tax is paid by legal persons and permanent establishments (like representative offices and branches) of legal persons. Ukrainian residents are subject to taxation on their worldwide profit while non-residents are taxable 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 it will 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 property as financial aid or charitable donations; 0% introduced temporarily up to 1 January 2009 for gross profits of publishing houses for production of books 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 period starts at the first calendar day of the tax period and ends at the last calendar day of the taxable period. An exemption from this rule exists for the producers of agricultural products. The annual tax period begins on January 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 and permitted 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 all types of activity in monetary, material or immaterial forms, within the reporting period. Some transactions are specifically mentioned by the law as generating the taxable income. As well as some transactions are specifically 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 taxpayer as compensation for goods, works, services used in its business activity could be deducted from the taxable income. 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 of some expenses, e.g. deduction of interests paid, cost of inventories, labor cost, and cost of compulsory state social contributions. Depreciation and Amortization Any expenses in excess of 10% of the total book value of all capital assets connected with the acquisition of capital assets for the taxpayers production usage, including expenses for repairing, reconstruction, modernization and other improvements of the capital assets; expenses connected with personal creation of the capital assets to be used for personal needs, including salary payments to employees who have been engaged in such creation; capital land improvement that is not connected with construction, should be capitalized and depreciated or amortized over time. Fixed assets or intangible assets that have been acquired with the purpose Page 333

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of their further sale to other persons cannot be depreciated and amortized. Expenses for such acquisition should be deducted at the time of acquisition. Fixed assets include all tangible property that is intended for use in the taxpayers business within a period exceeding 365 calendar days from the date of setting it into operation, if the value of such property exceeds 1000 hryvnia, and decreases in connection with wear and tear. For tax depreciation purposes all fixed assets are divided into four groups where each group has its own permitted time and 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 to offset taxable profits. Withholding tax on non-residents Non-resident legal persons are subject to withholding tax on all their income sourced from the territory of Ukraine. 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 avoidance agreements (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 be reduced. A DTA could be applied if a non-resident provides a reference from the authorized body of its resident country proving that this legal person is considered to be tax resident of the country in terms of the DTA signed between Ukraine and the relevant country. Transfer pricing Prices used for transactions between the connected parties are subject to transfer pricing regulations. The connected parties should use fair market prices in their operations or otherwise the tax authorities may adjust the actual prices to the market prices. Fair market prices are considered to be the arms length prices used between 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) dated 03.04.1997, # 168/97-VR, as amended. VAT is a tax on consumer expenditure. It is collected by sellers on business transactions in the territory of Ukraine, imports of goods and concomitant services into the customs territory of Ukraine . Business transactions at the territory of Ukraine include supplies of goods or services. The consumer pays VAT to the seller on top of the goods/works/services cost. The seller reports the collected tax to the 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 not applied if the goods are exempt from taxation in accordance with the law. Some transactions within the territory of Ukraine are also taxed at zero rate. It is announced to be reduced in 2014 to 17%. Export goods are zero VAT rated, while medical products, domestically prepared baby food products, publish periodicals and books 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 application of the arms length prices, including excise, import duty and other national taxes and levies (but excluding VAT) 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 made without consideration; and Importation of goods into Ukraine.
Place of supply for goods The place of supply for goods is determined under the following rules: Page 336

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If goods are to be transported, the supply takes place where the goods are located when they are dispatched. If the goods do not need to be transported, the supply takes place where the goods are located when they are sold. When goods are sold that require assembly or installation, the supply occurs where the goods are assembled 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, when services are provided by a non-resident:

The place of supply will be the location of its representative office or person exercising agency functions 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 and performance of real-estate construction and finishing work (e.g., architects and designers) are supplied in 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 services are 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 residence in Ukraine, the services are considered supplied at the location of that representative office, address or residence, so will be subject to VAT. if the non-resident does not have a permanent representative office, address or residence in Ukraine, the services 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 nonresidents should be subject to 20% VAT. Page 337

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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 import duties and excise duties (if any). The imposition of VAT by Customs is not affected by whether the importer is VAT-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 such sales 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 are defined with respect to specific transactions, transactions must be reviewed individually to confirm whether an exemption applies. Depository, clearing and registrar activities in the securities market, as well as brokerage and dealer services for securities transactions. The issue, sale and exchange of securities and corporate rights and the payment of dividends and royalties in cash or securities. The interest or commission element of payments under a financial lease, up to a maximum of 200% of the NBU prime rate. However, the transfer of property under a financial lease is treated as a taxable sale. 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 or services. If the market price exceeds the transaction price by more than 20%, the seller must account for output VAT based on the market price. For imported goods, VAT is based on the higher of the contract price or customs 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 property incorporated into the goods. Where the place of supply is in Ukraine, VAT must be incorporated into the stated sale 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 tax credit.
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VAT incurred to purchase or import goods and services that will be used to make sales that are VATexempt 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 tax credit is apportioned between the taxable and non-taxable sales. Input tax credits are directly attributed to taxable and non-taxable sales. Any input tax credits that cannot be directly attributed would then be allocated 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 duly executed 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 be based 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 its business is located and to obtain a VAT registration number. The local tax authority should issue a VAT registration certificate to the applicant within ten business days. VAT registration takes effect from the date specified on the registration certificate. VAT registration in Ukraine is also compulsory for foreign companies that perform production and commercial activities which are subject to VAT in Ukraine. Registration for VAT in Ukraine begins when a declaration form is submitted. If one of the companys owners cannot go in person to the relevant tax authorities office, a representative may be appointed by power of attorney. Accounting requirements VAT-registered persons are required to keep separate accounts for taxable and VAT-exempt sales and purchases. Information on VAT invoice If requested by the buyer, a VAT-registered person is required to issue a VAT invoice. The invoice must include 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 must include the words, " " (bez PDV - without VAT). Buyers need to pay particular attention to the information contained in VAT invoices, particularly when significant amounts are involved. The tax authorities pay close attention to the details on invoices when they conduct audits, and will disallow input tax credits even if 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 will be 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 to the 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 executed evidencing delivery of the service and the receipt of payment from the customer. It is usual commercial practice for both supplier and customer to sign a formal document evidencing the delivery of the service. The entitlement to an input tax credit for purchases arises on the earlier of the date of payment to the supplier 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 required to account for VAT on such transactions would report the VAT as output tax in a special line in the VAT return for the period in which the transaction is required to be recognised. The corresponding input tax would then be claimed 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 be filed within 20 calendar days of the last day of the month (or the next working day if the 20th day falls on a weekend 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? Page 340

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No intra-community VAT is applied in Ukraine, since Ukraine is not a member state of the European Union and 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 two consecutive months. The refund is limited to the amount of input tax paid for the previous month. According to the law, if an application for refund is filed, the tax authorities are required to check and confirm the entitlement within 35 days. In theory The State Treasury should then remit money to the applicant's bank account within five business days from receiving approval from the tax authorities. There is no liability for the government if it does not issue VAT refunds on a timely basis. A VAT refund is only possible if the company performs its activity in Ukraine, after it has been registered as an establishment and VAT payer. The tax can be recovered by the company only if it meets the requirements of the tax authorities, including the presence of all invoices that need to specify some information. Since the 1st July 2011, if the amount in a tax invoice exceeds 100,000 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 a major 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 a refund 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 construction or acquisition of fixed assets. In practice, however, the authorities are applying a blanket rule that refunds cannot 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 is subject to withholding tax at source (e.g., salaries) are not required to file income tax returns, although they may choose to do so if they are entitled to a tax credit. The personal income tax return must be filed by 31 March of the following year. Corporate income tax returns are filed on a quarterly basis, and returns must be filed within 40 calendar days of the end of each quarter. Resident companies and non-resident entities with a permanent establishment in Ukraine must keep records that comply with Ukrainian tax rules. Withholding taxes must be paid to the state not later than the date that the income is paid. Tax in respect of income that is accrued but not paid to individuals should be transferred to the state within 20 calendar days of the last day of the reporting month. Value-added tax returns are generally filed on a monthly basis. The return must be filed within 20 calendar days of the last day of each month. As an exception, VAT-registered persons with annual sales of less than UAH 300,000 may opt for quarterly filing. If the filing date for any return falls on a weekend or a public holiday, the return should be filed on the following working day. Payment of tax must be made Page 341

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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 that the tax shown on the return is incorrect, they may assess taxes within 1,095 days (three years) from the deadline for filing a return or the date on which the return is actually filed, whichever comes later. There is no limit on the period in which an assessment may be made if a taxpayer has deliberately evaded tax (if proven in court) or when a taxpayer fails to file a return. The tax authorities will also charge significant penalties for late filing or understatement of tax liabilities. Appeals Assessments may be appealed administratively or through the court system. The initial appeal is made to the local tax office that issued the assessment. If an appeal is rejected, a taxpayer may appeal in turn to the regional and national office. An administrative appeal must be filed to the relevant level of the tax administration within ten calendar days of receiving an assessment or official advice that an administrative appeal has been rejected at a lower level. The tax authorities must respond to the appeal within 20 calendar days. If they fail to do so, the appeal 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 the process, or if the national office rejects the appeal, a taxpayer is entitled to pursue an action through the courts instead. Submitting an appeal suspends the requirement to pay the assessed tax, as well as the accrual of interest and penalties. Interest and late payment penalties will apply only if the taxpayer fails to pay the taxes by 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. Businesses generally have an obligation to withhold tax on payments to individuals (including sole proprietors) and payments to non-residents. Failure to withhold tax can attract a 200% penalty, as well as interest. Withholding tax 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 is generally 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 are not subject to withholding. In addition, 15% withholding tax applies to gain on the sale of property, including real estate and securities, when paid by a resident to a non-resident entity. All withholding tax rates may be reduced under a relevant tax treaty. Payments to non-resident persons for advertising services performed in Ukraine are not subject to withholding. However, the resident payer is required to pay, from its own funds, a 20% tax based on the value of such services. A resident payer is similarly required to pay, from its own funds a 12% tax if a payment is made to a foreign insurer or reinsurer whose rating of financial reliability does not meet requirements set by the authorized state agency. A 0% rate applies otherwise. As the taxes on advertising and insurance are levied on the resident party, they cannot be relieved using a tax treaty. Page 342

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Tax audits The tax authorities may carry out scheduled audits a maximum of once each year. Business entities must be notified of the audit in writing at least ten days before the scheduled audit. For normal business entities, the scheduled audit should be carried out within 20 business days, although the period may be extended by up to ten days. In addition, the tax authorities may perform out-ofschedule audits in any of the following circumstances:
A taxpayer does not respond within ten days to a request for information from the tax authorities when the tax authorities are cross-checking information, the crossaudit of another business entity has revealed a violation by the taxpayer, or the data in a tax return is inadequate. A business entity does not file tax returns on a timely basis; A taxpayer initiates an appeal process against an assessment; 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 exceed ten business days. Before starting an audit, the tax inspector 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 the monthly "non-taxable allowances," which is currently UAH 17. Multiple penalties may be imposed, and total penalties 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 authorities assess 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 assessment within the time shown on the assessment notice (or if the taxpayer appeals the assessment, within ten days of the 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 is understated, 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 by a "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 of 50% of the tax due will be imposed. The individual taxpayer (or officials) may also be subject to penalties under the Criminal Code. For a first offence, fines of up to UAH 340,000, prohibition from occupying certain positions or engaging into certain activities 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 to withhold 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 return resulted 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 above penalties. 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 from the date the tax was due. When the tax authorities assess tax, interest accrues from the due date for payment shown 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 will also 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 such clarifications. Tax clarifications are not legally binding and do not provide solid protection against tax assessments and penalties. However, in practice tax clarifications are useful in resolving disputes with local tax authorities regarding uncertainty in the tax legislation.
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Bibliography
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.
16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29.
Ukr consul Basic Facts http://www.ukrconsul.org/BASIC_FACTS.htm CIA Wold Fact Book https://www.cia.gov/library/publications/the-world-factbook/fields/2010.html Ukraine Common CountryAnalysis CCA 2010 DOING BUSINESS IN UKRAINE 2012 Ukraine: Current Economic Situation and Prospects Dr. Edilberto Segura Partner and Chief Economist, SigmaBleyzer President of the Board, The Bleyzer Foundation Business Environment in Ukraine International Finance Corporation, 2007 Ukraine Economic Performance Assessment US AID State Statistics Committee of Ukraine. World Development Indicators, 2012 NBU The Global Competitiveness Report 2011-2012 , 2011 World Economic Forum Highlights on health in Ukraine 2005 World Health Organization 2006 Ukraine Health system review Ukraine (2004g, 2010 Erica Richardson (Editor) and Martin McKee (Series editor) were responsible for this HiT profile Country Programme Action Plan (2006-2010) between The Government of Ukraine and the UNDP INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND THE INTERNATIONAL FINANCE CORPORATION COUNTRY PARTNERSHIP STRATEGY FOR UKRAINE FOR THE PERIOD FYO8-FY11 November 8,2007 Ukraine Ukraine: Time for Action: Torture and Ill-treatment in Police Custody, AI Index: EUR 50/004/2005 Ukraine: Ten asylum-seekers forcibly returned to Uzbekistan, AI Index: EUR 50/001/2006 AI Ukraine Report (2011) Ageing and employment policies (OECD, 2004) What are the main risk factors for disability in old age and how can disability be prevented? (Health Evidence Network, 2003a) Managing newborn problems: a guide for doctors, nurses and midwives (WHO, 2003a) What is the efficacy/effectiveness of antenatal care? (Health Evidence Network, 2003b) What is the effectiveness of antenatal care? (Supplement) (Health Evidence Network, 2005) The WHO reproductive health library, version 6 (WHO, 2003b) A strategy to prevent chronic disease in Europe: a focus on public health action: the CINDI vision (WHO Regional Office for Europe, 2004a) Towards a European strategy on non communicable diseases (WHO Regional Office for Europe, 2004b) What are the advantages and disadvantages of restructuring a health care system to be more focused on primary health care services? (Health Evidence Network, 2004) 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 Region 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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Ukraine

A Level Two- General Country Report Petitioned by

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Ukraine Level Two Report

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Ukraine Level Two Report

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Ukraine Level Two Report

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Ukraine Level Two Report

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Ukraine Level Two Report

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Ukraine Level Two Report

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Ukraine Level Two Report

Mobile Operators (as of March 2008)

1 Kyivstar 2 MTS 3 life:) 4 Beeline 5 Utel 6 PEOPLEnet 7 Intertelecom 8 CDMA Ukraine

9 Velton 10 Golden Telecom

Figure 1 Mobile operators (as of March 2008)

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Ukraine Level Two Report

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Ukraine Level Two Report

Key telecom parameters 2010 2012

2012 (e) 3.90 12.1 54.9 25% 10.4 118%

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Ukraine Level Two Report

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Ukraine Level Two Report

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Ukraine Level Two Report

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Ukraine Level Two Report

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Ukraine Level Two Report

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Ukraine Level Two Report

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Ukraine Level Two Report

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Ukraine Level Two Report

Chernivtsi - Moldovian state border, Sumy - Kharkiv.

Digital radio relay lines (DRRL) in operation include:

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Ukraine Level Two Report

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Ukraine Level Two Report

Payable by the public 0.07 0.14

CIS Member States (USD)

Figure 7 CIS Member States (USD)

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Ukraine Level Two Report

Telecommunication Services Provided to Foreign States (USD)

Figure 8 Telecommunication Services Provided to Foreign States (USD)

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Ukraine Level Two Report

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Ukraine Level Two Report

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Ukraine Level Two Report

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

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

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