Shevchenko Society sponsors conference on law in Ukraine

by Dr. Orest Popovych

NEW YORK - Why is foreign investment in Ukraine still lagging below normally expected levels and is anything being done to correct this anomaly? These questions, the legal framework and administrative mechanisms that determine the present business climate in Ukraine were analyzed by legal experts from the United States and Ukraine at the second annual Law Conference held at the Shevchenko Scientific Society (NTSh) headquarters in New York on June 1.

Andrij Szul, Ph.D., J.D., international business trial lawyer and chairman of the NTSh Law Advisory Committee, organized and chaired the event. The marquee speaker of the conference was Judge Bohdan A. Futey of the U.S. Court of Federal Claims in Washington and author of the book "Establishing the Rule of Law: Ukraine 1991-2001," published in Kyiv in 2001 (in Ukrainian). Four speakers from Ukraine - a law librarian and three young jurists - shared with the audience the knowledge and insight into the complexities of Ukraine's business laws.

In his introductory remarks, Dr. Szul recalled the First Law Conference at the NTSh, held on December 2, 2000, that was dedicated to the memory of Dr. Jaroslaw Padoch, a jurist and a longtime president of the society. Dr. Szul offered a brief review titled "Business Law in Contemporary Ukraine: Challenges on the Road to Viability."

Dr. Szul noted that the conference is devoted to a timely topic because following the adoption of the Constitution of Ukraine on June 28, 1996, three years later Ukraine erected a second pillar of its modern jurisprudence - a new Civil Code. This code makes it possible, according to Ukraine's former Minister of Justice, Serhii Holovatyi, to establish an order of priorities in judicial policy that places the individual first, followed by family, society and the state - which is exactly the reverse order from that under Soviet jurisprudence. Now one can begin to speak of a realistic chance to build a civil society in Ukraine, said Dr. Szul.

In the past, foreign investment had faltered in Ukraine, in part because early laws regulating business activity sounded good, as vaunted though vague declarations, but were toothless in their practical applications, according to Dr. Szul. However, a number of improved investment laws have appeared in the last three years.

On the bright side, Dr. Szul cited the recent pronouncements of the World Bank, which gave Ukraine a favorable rating. Thus, in 2001, the annual growth of the gross domestic product (GDP) of Ukraine reached a record 9.1 percent, while during the first 120 days of 2002, it was still 4.1 percent. An improvement in the transparency of business activity as well as financial discipline in both the government and private sectors were credited by the World Bank for this turnaround.

The first guest speaker was Myroslava Kryvonos, an information specialist and librarian at the Ukrainian Legal Foundation in Kyiv, who is presently completing her research as a visiting scholar at the New York University Law School Library. Speaking on "Modern Information Science and Jurisprudence," Ms. Kryvonos observed that it is insufficient to have good laws on the books if they are not promulgated and applied in real life.

At the very least, people should have access to basic current legal information, she added. This is one of the objectives of the Ukrainian Legal Foundation, which has the only specialized legal library in Ukraine that is open to the public and is free of charge. It holds over 80,000 titles, including texts of all significant legislative acts, official documents, specialized magazines and teaching material dealing with legal issues. Ms. Kryvonos described the further need in Ukraine for an information service center based on the Internet, which could be supported by legal firms and civic organizations in Ukraine and abroad.

In his presentation, "Analysis: Ukraine's newest 'Law on the Judiciary'," Judge Futey outlined the organizational system of the courts of general jurisdiction in Ukraine. It comprises local courts, courts of appeal, a cassation court, higher special courts (including commercial courts), and the Supreme Court of Ukraine. There is a separate Constitutional Court, which has the right to pass on the constitutionality of laws and actions of the executive branch, and also to interpret laws. A positive step was the adoption last year of the Land Code, providing for private ownership of land. The new court system does represent progress as compared with the past.

A persistent problem for Ukraine's judiciary is the lack of a reliable mechanism for enforcing court decisions. Furthermore, there exists a possibility of conflict, as the State Court Administration, which administers the budget of the Judiciary, will be part of the executive branch. What Ukraine needs is the establishment of an independent, apolitical judiciary, without which there cannot be a state based on the rule of law, stressed Judge Futey.

According to Judge Futey, there are several reasons for the difficulties foreign investors have been experiencing in Ukraine, among them the absence of adequate legislation, e.g., civil and commercial codes, a tax code and a procedural code. Dr. Futey said he is optimistic that Ukraine's judiciary can be reformed, in particular with the aid of professional organizations of lawyers, judges and academic jurists.

Corporate management laws and a search for transparent mechanisms for the protection of investors' rights were the topics explored by Dr. Olena Scherbyna, a jurist from the Kyiv National University Law School, and a practicing attorney, whose specialty is corporate governance and international business law.

In the Ukrainian model, the general assembly of shareholders constitutes the supreme organ of corporate governance, while a monitoring council represents and protects the rights of investors. In reality, said Dr. Shcherbyna, the monitoring council is often appointed by the management, while a lack of provision for voting by proxy makes it difficult for shareholders' meetings to offer a counterbalance. As a result, shareholders have little control over the actions of the management.

What is indispensable for Ukraine, said Dr. Shcherbyna, is further substantive and procedural reforms of the legislative basis for corporate management, which would enact the necessary legal codes taking into account international experience.

"Ukraine's Developing Tax Laws vis-ä-vis Dynamic Stimuli for Business Development" was the subject discussed by Dr. Mykhailo Kharenko, a jurist from the Kyiv National University and the Columbia University Law Schools. Dr. Kharenko is an expert on Ukraine's financial and banking laws, and has practiced in Ukraine and London.

Dr. Kharenko traced the development of business in Ukraine as a function of the changing tax laws. The tax abatements for foreign and joint investments introduced in 1992 led to an increase in the investment activity, but they were repealed in 1996. Subsequent tax policy has focused on favoring small and medium-sized businesses. A positive innovation was the creation of free economic zones, which enjoy favorable treatment regarding taxes, import-export duties and currency exchanges.

The speaker called for a number of complex reforms in the area of taxation, especially the adoption of a tax code. Investors in Ukraine must be convinced that their capital is protected by a judicial system that serves as a reliable guarantor of stability, and a predictable taxation system, concluded Dr. Kharenko.

The last speaker was Dr. Olena Kibenko, associate professor of securities/corporate law at the Kharkiv National Law University and a senior visiting scholar at the law schools of both West Virginia University and the University of Baltimore. Dr. Kibenko, who serves as counsel to Ukraine's Monetary Fund and is a widely published expert on corporate and securities laws in Ukraine as compared to the common law systems in Great Britain and the United States, took polite issue with some of the negative depictions of Ukraine's current foreign investment climate that were offered by preceding speakers.

She stated that in the past decade Ukraine has conducted a progressively proactive legislative policy of attracting foreign investments into its national economy, as evidenced by some 300 legislative acts and 44 bilateral international agreements that were enacted to promote and protect domestic and foreign investment. The many favorable, but self-conflicting, laws affecting foreign investment in the early 1990s were mostly replaced by 1999, she explained, creating a bad investment image of Ukraine as a country that reneges on its legal obligations, and that image continues to linger.

The years 2000-2002, however, have seen a dramatic positive turnabout. Foreign investments have increased in various free economic zones, as well as in the majority of the territories and industries selected for priority development. Moreover, laws have been passed to allow participation by foreigners in the privatization process, added Dr. Kibenko. This development also included the lifting of the long-standing prohibition against foreign ownership of non-agricultural land.

Prof. Kibenko noted that as of January 2002 foreign investment in Ukraine amounted to only $4.4 billion, corresponding to $85 capita of the country's population - well below the corresponding figures for other East European countries and Russia. Nevertheless, in the year 2001 foreigners realized a 57.1 percent return on their investments in Ukraine, prompting the J.P. Morgan International Investment Bank to place Ukraine at the top of the list of most attractive countries for overall investment.

The current more favorable investment climate in Ukraine has led some financial analysts to compare Ukraine to the "Asian Tigers," referring to it as "Crouching Tiger II" - all cause for guarded optimism, concluded Dr. Kibenko.

Copyright © The Ukrainian Weekly, July 14, 2002, No. 28, Vol. LXX

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