Ukraine-Europe Economic Relations

MBA ESG Viktoriya Dronova
35 Avenue Philippe Auguste MBA MCI/IAI
75011 PARIS School year 2012/2013
Ukraine-Europe:
present and future of
economic relations
September 2013
Under the supervision of Pierre Deplanche, Stratégie et
consulting MBA-ESG director.

Ukraine-Europe: present and future of economic relations

Table of contents
INTRODUCTION 5
1. UKRAINIAN BUSINESS CLIMATE AND TRADE RELATIONS WITH THE EU 7
1.1. Major characteristics of the Ukrainian economy and business environment. 7
1.1.1. Ukraine key figures 7
1.1.2. Economic conditions in Ukraine 7
1.1.3. Ukraine’s economy strengths 8
1.1.4. Ukraine’s economy weaknesses 9
1.1.5. Ukraine’s Risk assessment 10
1.1.6. Business Climate 12
1.1.7. Foreign direct investments in Ukraine 13
1.2. The role of Ukrainian government in foreign business activities. 16
1.2.1. Issues affecting the business in Ukraine 16
1.2.2. Starting a Business in Ukraine 16
1.2.3. Custom procedures 17
1.2.4. Corruption 18
1.2.5. Court system 19
1.2.6. Technical barriers to trade 19
1.2.7. Taxes and VAT Refund 20
1.2.8. Land reforms 21
1.2.9. Foreign currency regulations 22
1.3. EU-Ukraine trade relations 24
1.3.1. Trade 24
1.3.2. EU foreign direct investments in Ukraine 25
2. MAIN ATTRACTIVE SECTORS ANALYSIS FOR EUROPEAN INVESTMENTS IN
UKRAINE 27
2.1. Agribusiness 27
2.1.1. Ukraine’s agribusiness sector at a glance 27
2.1.2. Competition in the Ukrainian agricultural sector 30
2.1.3. Investments opportunities for EU companies 31
2.2. Biomass-based energy production sector 33
2.2.1. Global trends 33
2.2.2. Ukraine competitiveness in production of biomass-based energy 33
2.2.3. European investments in biomass-based energy sector in Ukraine 34
2.3 The National Projects as practical tools of FDI attraction 35
3. POTENTIAL AND RISK OF THE EUROPEAN –UKRAINIAN COLLABORATION 37
3.1. Possibility and goal of the EU-Ukraine Association Agreement 37
3.1.1. Background of the Association Agreement 37
3.1.2. Ukraine’s interests in the Association Agreement 38
3.1.3. European Union’s interests in the Association Agreement 39

3.1.4. European Union’s expectations from Ukraine 40
3.2. Political reality in Ukraine: its influence on the relations with the European Union. 42
3.2.1. Ukraine between East and West 42
3.2.2. The risk for Ukraine for signing an Association Agreement with the EU 43
3.2.3. The lack of democratic freedom 44
CONCLUSION 46
BIBLIOGRAPHY 49

5
Introduction
The topic of this thesis is ―Ukraine-Europe: present and future of economic relations‖. The
choice of the subject was driven by the actuality of current affairs between Ukraine and the
European Union and in particular the preparation for the signing in November 2013 of the
EU-Ukraine Association Agreement and its core element, the Deep and Comprehensive Free
Trade Agreement. Presently, the question is debated actively in the press of Ukraine and the
EU Commission respectively. The possible ratification of these agreements would signify
closer economic integration, which would lead to a new historical stage in the development
of the EU-Ukraine relations.
This study is motivated by main problematic, which comprises the question whether Ukraine
and the European Union can be reliable economic and business partners to each other. In the
pages that follow, it will be argued that their existing relations may evaluate into a
trustworthy alliance.
This research may also contribute to the EU companies willing to implement their businesses
in Ukraine as conveniences and precautions of doing business in Ukraine are accurately
framed in the theoretical part.
The solution to the problem is to determinate the credibility of actual economic and business
partnerships and investigate future potential of the collaboration between the European Union
and Ukraine. This work is focused on three directions:
 Ukraine’s competitiveness features
 The EU-Ukraine present relations and existing potential
 Nearest future prospectivity
This research is divided into introduction, three chapters, conclusion and bibliography. Each
chapter is split into subchapters related to the section content.
To begin with, the first chapter ―Ukrainian business climate and trade relations with the EU‖
is the largest constituent of the thesis. It includes findings of major Ukraine’s economic
environment characteristics, internationally evaluated risk assessment and the government’s
importance in the business. Besides, the EU-Ukraine trade relations’ status is observed.
The second chapter ―Main attractive sectors analysis for European investment in Ukraine‖
begins by laying out the empirical dimensions of the research. On the assumption of deep
searching, it is understood that Ukraine is an emerging marketplace of compelling
opportunities to European investment. Two promising sectors, where the EU businesses can
generate profit, were identified.
The third chapter ―Potential and risk of the European-Ukrainian collaboration‖ sets out the
arguments in favor of further EU-Ukraine economic integration. Containing pioneering
aspects of cooperation, the EU-Ukraine Association Agreement is related to transition to a
high level economic partnership. The last chapter assesses the mutual interests of the EU and
Ukraine in deep economic cooperation. However, the ambitions of the EU and Ukraine to
approach economically and politically can end up due to unfinished democratic and judiciary
reforms on the part of the Ukrainian government and due to a strong outside pressure on
Ukraine from Russia.

6
Finally, this work underlines the progress of the EU’s foreign policy towards Ukraine, a
country of the Commonwealth Independent States accounting only twenty two years of
independence from the Soviet regime. The preference in these relations is given to the
priority fields, in particular trade and investment.
The EU is interested in improving the cooperation in Ukraine in the areas of justice, security
and home-affairs. Indeed, a country like Ukraine which has common borders with the
European Union represents a strong economical and security interest for the EU. On the other
hand, Ukraine has its own ambitious strategy of integration into the European economical,
legal and political spaces. Nevertheless, many domestic reforms remain necessary to improve
the business environment and develop strong economic ties with the European Union.

7
1. Ukrainian business climate and trade relations with the EU
1.1. Major characteristics of the Ukrainian economy and business
environment.
1.1.1. Ukraine key figures
 Population: 47 732 079 (25th
in the world, population density – 80 p/km2)
 Capital: Kiev
 Major languages: Ukrainian (official), Russian
 Major religion: Christianity
 Life expectancy: 64 years (men), 75 years (women) (UN)
 Monetary unit: 1 Hryvnya
 Main exports: Military equipment, metals, pipes, machinery, petroleum products,
textiles, agricultural products.
 Central Bank : National Bank of Ukraine (NBU)
 President: Viktor Yanukovitch
 Prime-minister: Mykola Azarov
 Major cities: Kharkiv, Lviv, Dnepropetrovsk and Odessa.
 Parliament: Verkhovna Rada.
 Human Development Index (Rank): 78/187
 GDP (current US$): 176.3 billion in 20121
1.1.2. Economic conditions in Ukraine
After years of important growth, Ukraine experienced in 2009 one of the worst recession in
Europe. The growth shrunked by 15% under the combined effects of the slowdown in the
economic activity, the diminution of the foreign funding and the drop in the world steel
demand. The country coped with a collapse of its industrial activity, a currency crisis, a rise
in inflation and a weakening of its banking sector leading Ukraine to call on the International
Monetary Fund (IMF). The country returned to a fragile growth in 2010 (3.7%) and in 2011
(+4.7%) due to a recovery of the foreign trade, the political stabilization of the country and
good harvests. Due to the recession in the euro zone that severely eroded its exportations,
Ukraine growth slowed in 2012 (2%). The government expects for 2013 a minimum growth
of 2.5% but the World Bank forecasts are much more modest (1%).
The Ukrainian economy is in a difficult period. In 2012, the external deficit widened, the
currency reserves are at their lowest level since 2010, the country access to credit is limited
whereas a 3.3 billion EUR debt expires in the end of 2013. The government priority is to
increase the social expenses to rise up the living standard of the population. The government
also continues the reforms necessary for an EU-Ukraine association agreement. Negotiations
are underway with IMF and they could lead to a new loan agreement of 15 billion USD, after
the suspension of the last agreement due the absence of significant progresses on the reforms
programme.
1
World Bank data

8
The economic crisis had important social consequences in Ukraine. The level of real wages
fell and the unemployment rate strongly increased, although it went down to 7.4% in 2012.
Table 1: Main Ukraine macroeconomic indicators
Economy Indicators 2009 2010 2011 2012 2013
(e)
GDP, current prices (billions USD) 117.23 136.42 163.42 176.24 181.6
GDP, constant prices (% change) -14.8 4.1 5.2 0.15 3.5
GDP per capita, current prices (USD) 2550 2980 3584 3877
(e)
4015
General government structural balance
(% GDP)
-2.1 -3.7 -2.8 -4.3 -4.4
General government gross debt (% GDP) 35.4 40.5 36.8 37.4 42.2
Inflation rate (%) 15.9 9.4 8.0 0.6 0.5
Unemployment rate (% total labor force) 8.8 8.1 7.9 8.0 8.2
Source: IMF - World Economic Outlook Database-
http://www.imf.org/external/pubs/ft/weo/2013/01/weodata/weoselser.aspx?c=926&t=1, [consulted the 7th
of
august 2013]
Note: (e) Estimated data
1.1.3. Ukraine’s economy strengths
Ukraine is the second largest country in Europe, strategically located at the crossroads
between Europe, Russia and Central Asia. The country has access to the Black Sea through
the ports of Odessa and Sebastopol and it is a key energy transit country for Russian oil and
gas exports to Western Europe (see Figure 1).
Figure 1: EU countries and Ukraine geography

9
Once called the ―breadbasket of Europe‖, Ukraine has traditionally specialized in agriculture.
It has 324 784 square kilometers of arable land, the largest such area in Europe. In the 1990s,
agriculture accounted for around 20% of GDP but its share gradually declined to 9% of GDP
in 2012 following a reallocation of labor from agriculture into the industry and services
sectors. Agriculture still accounted for 25% of total exports in 2009 (WTO, 2010), and the
country is the world’s largest exporter of barley and the seventh largest exporter of wheat.
However, agriculture exports consist mainly of goods with a low degree of processing.
Ukraine is the world’s eighth-largest producer and fourth-largest exporter of steel, and the
fifth-largest exporter of nitrogen-based fertilizers. Industry valued added accounted for 30%
of GDP in 2010 (World Bank, 2011), while the share of total exports represented by fuels and
mining products was 12.3% and that accounted for by manufactured products was 62%
according to the WTO.
The labor force is highly skilled, thanks to the legacy of the rigorous and scientifically
oriented education system of the Soviet Union, and relatively inexpensive. For instance,
Ukraine as universal literacy and high general school enrolment: the combined gross of
enrolment ratio in education of both sexes was 90% in 2009, higher than those of Czech
Republic (83.4%) and Poland (87.7%). According to the World Bank (2011), female labor
participation is also higher than the average for Europe and Central Asia (see Figure 2).
Figure 2: Ukraine’s labor force has a high level of tertiary education
Source: World Bank (2011), World Bank Development Indicators, http://data.worldbank.org
1.1.4. Ukraine’s economy weaknesses
Ukraine economy is poorly diversified and highly depends on steel and imported gas prices.
Indeed, steel accounts for more than one third of total good exports. In July 2008, the IMF
estimated that a 10% decline in steel prices would slow Ukraine’s annualized GDP growth by
between ½ and ¾ of a percentage point over a full year (IMF, 2008).
0
10
20
30
40
50
Ukraine Europe and Central Asia (all
income levels)
Europe and Central Asia
(developing only)
Labour force with tertiary education (% total) 2005

10
Ukraine is also vulnerable to gas price increases from its main supplier which is Russia. For
example in 2006, Ukraine had to pay almost twice the old price for Russian gas after Russia
stopped the gas supplies. However, Ukraine is trying to rectify this situation by switching
towards greater use of local coal.
Besides, the political insecurity makes it difficult to apply a consistent economic policy,
macroeconomic stability being a prerequisite to attracting foreign investment and switching
to a long term sustainable growth path.
Another main weakness of Ukraine is its banking system. Deposits from firms and
households as well as lending to the private sector are very tiny even when compared to very
poor countries. Empirical analyses demonstrate a strong positive link between the functioning
of the financial system and long-run growth (Ross Levine, 1997). In fact, empirical evidence
shows that the development of the financial system is a precursor and a necessary condition
for sustained growth and economic transformation, especially in transition economies like
Ukraine.
1.1.5. Ukraine’s Risk assessment
In a competitive commercial environment, payment facilities are a decisive factor in carrying
off a contract. It’s therefore essential for exporters to evaluate the Ukraine political and
commercial risks. Political risks include wars, riots, foreign currency shortages or arbitrary
government decisions. The commercial risk can be a non-payment after a buyer's arbitrary
decisions or bankruptcy.
Ukrainian economy is evaluated by several international rating agencies, well-known credit
insurers and foreign financial institutions in order to estimate of the average credit risk on
Ukraine’s businesses. Among them, we will consider two European credit insurers: the Office
national du ducroire (ONDD), the Belgian public credit insurer and Coface, a French
company specializing in export credit insurance.
According to the point of view of ONDD: ―The Ukrainian economy overheated and the
credit boom at home was becoming ever more financed by means of foreign debt. High
external financing needs pushed the country towards the extreme need of international help,
which was the only one option left.‖2
ONDD - Country risks synthesizing chart was made of
risk assessment for Ukraine. The relevant mark is given to two directions: export transactions
and direct investments (see Figure 3 below).
2 Stricter cover terms for medium and long term transactions on the Ukraine. ONDD. Retrieved from:
http://www.ondd.be

11
Figure 3: Ukraine’s risk assessment
Source: ONDD (July 2013), http://www.ondd.be
As far as Coface is concerned, they have a ranking system which is made up from seven-
levels. In ascending order of risk, these are: A1, A2, A3, A4, B, C and D. The rank attributed
to Ukraine in 2013 was: ―D‖ for the Country Risk Assessment, ―D‖ standing for high risk
profile of the economic and political environment, very bad payment record.3
Several factors explain these bad evaluations from ONDD, Coface and others. First of all,
there is a degradation of the economical situation that should result in a drop in economic
growth in 2013. In Q1 2013, the GDP decreased (-1.3% vs. Q1 2012), confirming the
recession observed since mid 2012. The Ukrainian economy suffers from a weak external
demand taking into account the bad economical performances of its partners (Euro zone,
Russia and other CEI countries) that should perpetuate a great part of the year 2013.
The private consumption is likely to be penalized by the rise in inflation expected in 2013
(notably the food price increase). This inflation should be increased by gas tariff increases
demanded by the IMF as a counter part of a new loan.
Another reason is the fragility of the public finances and the balance of payments. The public
expenses slightly increase, reaching 52% of the GDP in the Q1 2013 (46% in 2012).
The slowdown of the exportations and the surge in the imported gas prices largely
contributed to the rise in the deficit in 2012 and this deterioration should continue in 2013.
There is a high risk of devaluation in 2013 that would a negative impact on the household
consumption but also huge repercussions on the sovereign default and the risk of bank
default. Whatever the strategy chosen by the government in 2013 (rise in gas prices and/or
devaluation), the risk of social dissatisfaction is high.
3
Risk countries. Economic studies. Ukraine. Coface 2012. Retrieved from : http://www.coface.fr

12
On the political aspect, the Party of Regions from the president Viktor Yanoukovitch won the
legislative elections of October 2012. However, the main opposition parties didn’t recognize
this victory, accusing the Party of Regions of fraud. The continuing detention of Julia
Timoshenko and the president’s will to reinforce the links with Russia participate in the rising
dissatisfaction of the western part of the country, which is largely in favor of a rapprochement
with the European Union.
1.1.6. Business Climate
Ukraine’s business climate has always been very difficult, but the instability and uncertainty
triggered by the financial crisis have contributed to a further deterioration. The World
Bank’s ―Doing Business‖ project ranked Ukraine 137th out of 185 economies in 2013 (first
place was given to Singapore).4
This index is the averages of the country's rankings on 10
subjects with an equal weight to each subject. A high ranking means the laws and regulations
are more contributive to the creation and operation of local companies. In 2012, Ukraine was
ranked 152th. According to the World Bank’s assessment, Ukraine has improved the ease of
doing business across several areas of regulation: ―starting a business‖, ―getting electricity‖,
―registering property‖, ―paying taxes‖, ―enforcing contracts‖ and ―resolving insolvency‖ (see
Table 2).
Table 2: Ukraine’s business climate
Source: Doing Business in Ukraine (World Bank Group), http://www.doingbusiness.org/data/exploreeconomies/ukraine/
However, there is still a lot to do to be at least at the level of its regional peers (see Figure 4
below).
4
Doing business 2013. Smarter regulations for small and medium-size enterprises. A co publication of the
World Bank and the International Finance Corporation. ISBN: 978-0-8213-9624- 7. Retrieved from :
http://www.doingbusiness.org

13
Figure 4: How Ukraine and comparative economies rank on ease of doing business
Source: Doing Business (World Bank Group), Economy Rankings, http://www.doingbusiness.org/rankings
Ukraine trade policy doesn’t always remain within the limitation set by the international trade
rules. For example, in March 2013, the Ukrainian government unilaterally introduced
additional taxes on imported cars from the EU. Moreover, officials plan to give financial
compensations to consumers that would buy domestically-made vehicles only. If this measure
were adopted, it would be another step against the international trade rules.
Besides, the legal system is globally instable and remains inefficient. The judicial power may
indeed be pressured by the executive power or by some criminal organizations. It also suffers
from corruption. This one is almost everywhere in the economic system and it is one of the
main barriers to foreign investments (see sub-chapter 1.2.4).
Last but not least, the companies in Ukraine are not very transparent on their accounts. They
are also very vulnerable to external shocks, therefore maintaining a high risk on credit.
1.1.7. Foreign direct investments in Ukraine
In 2005, the United Nations Conference on Trade and Development (UNCTAD) categorized
Ukraine as a ―front-runner‖ country meaning it has high foreign direct investments (FDI)
potential and performance.5
This inward FDI performance index ranks countries by the FDI
they receive relative to their economic size. The FDI potential index evaluates the host
country ability to attract FDI flows comparing to other countries. The FDI potential index is
based on twelve economic indexes like the GDP per capita, the country risk, the
infrastructures, etc.
During the three last years, Ukraine did not attract a large amount of FDI in spite of its large
market. In 2010, its inward FDI stock was 58 billion USD (see Table 3). It represents 42% of
5
Investment country profiles 2012. Ukraine. UNCTAD. Retrieved from : http://unctad.org

14
the GDP which is lower than its neighbour countries. Ukraine suffered a lot from the crisis of
2009 but in 2010 the FDI inflows reached 6.5 billion USD.6
The failure in bringing Ukraine closer to the EU and the loss of the IMF support are certainly
two factors impacting negatively the investors’ confidence.
Besides, a corrupted and inefficient judicial system, the complexity of laws and rules, poor
contract enforcement and bad governance act as a disincentive to investment.
Table 3: Foreign Direct Investments (FDI) in Ukraine, 2010-2012
Source: United Nations Conference on Trade and Development (UNCTAD) –
http://unctadstat.unctad.org/ReportFolders/reportFolders.aspx - [consulted the 7th
of august 2013]
Note: * Greenfield investments are a form of foreign direct investment where a parent company starts a new venture in a
foreign country by constructing new operational facilities from the ground up.
Countries in the EU account for the majority of the inward FDI stock of the country (79% in
2010). Cyprus was the largest investor in 2010 (22%), followed by Germany (16%) and the
Netherlands (11%). Concerning the outward FDI stock, the EU is also the main destination
with 95% of FDI stock in 2010, Cyprus being the main destination. In 2012 the situation has
not changed. According to the State Statistics Committee of Ukraine still the European
Union was the biggest source for FDI into Ukraine (see Figure 5).
Figure 5: Foreign direct investment into Ukraine (by countries of origin)
Source: State Statistics Committee of Ukraine as for 2012. http://www.ukrstat.gov.ua/
6
Investment country profiles 2012. Ukraine. UNCTAD. Retrieved from : http://unctad.org

15
As for the structure of FDI in 2012, the financial activity sector represented the biggest part
of inward FDI in Ukraine. The second largest sector for FDI in 2012 was the Processing
Industry (manufacturing sector), which accounts for 12488, 1 USD million (see Figure 6).
Figure 6: Structure of foreign direct investments into Ukraine (by branches in USD million)
Source: State Statistics Committee of Ukraine as for 2012. http://www.ukrstat.gov.ua/

16
1.2. The role of Ukrainian government in foreign business activities.
1.2.1. Issues affecting the business in Ukraine
According to the survey of 144 European companies CEO’s , members of EBA in Ukraine,
the year 2013 saw a slight worsening of the situation with solving 7 strategic issues. Nothing
has changed for better if compared to Q4 2012 (see Figure 7 below).
Figure 7: Estimation of the situation of the solving issues
Source: EBA Investment Attractiveness Index 2013
1.2.2. Starting a Business in Ukraine
The legislation of Ukraine provides a wide variety of possible investments and business
conducting in Ukraine. There are two basic Codes in Ukraine allowing creation, maintenance
and liquidation of business legal entities, these are: The Civil Code of Ukraine and The
Commercial Code of Ukraine both dated January 2003. Moreover, the Law of Ukraine on
Companies adopted in 1991, the lately adapted law on Joint Stock companies Law from 2008
and the Ukrainian Law on State Registration of Legal Entities and Individual Entrepreneurs
effective from 2004.
As for the business registration, Ukraine has simplified rules for business registration starting
from July 1, 2013. That means that the functions of registration of legal persons and natural
persons-entrepreneurs will be delegated to the State Registration Service. Unified standards
of business registration will be in Ukraine with relevant control of the quality of state
registration terms. The majority of state registrars will be located in the same premises, where

17
people got accustomed to see them.
Ukrainian government has a strong influence on the foreign business activities, at the point of
conducting business in Ukraine; foreign companies have to face a number of obstacles such
as:
 custom procedures
 corruption
 court system
 technical barriers
 taxes/VAT refund
 land reforms
 currency regulation
1.2.3. Custom procedures
The quality of customs operations and simple customs clearance of goods are an inevitable
part of a country's trade potential. Adapting Ukraine’s customs laws is a main goal for the
Ukrainian state so that its legislation is aligned with the EU’s. Therefore, in March 2012, the
Ukrainian parliament (Verkhovna Rada) adopted the new Customs code of Ukraine. The
main improvements in the custom procedures compared to the previous legislation are
detailed below:
 the customs clearance becomes possible at any customs office, regardless of the
importer's place of registration (before, entities had to ask for permission for customs
clearance in a customs office different from the one they used to register);
 there is now the possibility to amend customs declarations within three years after
customs clearance without penalties;
 goods can be re-exported by non-residents if there is a failure to fulfill contractual
commitment and customs duty will be reimbursed;
 there is an imposed four hours time limit for customs clearance procedures
(previously customs clearance had to be finished within a day, but in reality it took
more time);
 the possibility of relevant experts and professionals to participate in the procedure of
customs is provided for;
 a list of documents to be submitted for customs clearance is established (at the level
of the Code);
 Full introduction of e-declarations by the end of 2013;
 In case there are different interpretations of laws, a decision will be taken in favor of
the importer.
The new Customs code has brought some improvements but customs treatment of royalties
remains unclear and international investor’s community underlines that the Customs Code is

18
still far from the standards of WTO7
. Notwithstanding the improvements, further positive
changes could be made in the following areas:
 implementation of the WTO’s Customs Valuation Decisions;
 responsibility for customs offences (the current fines are very high);
 introduction of centralized customs clearance;
 bringing foreign exchange control in line with new customs regulations.
1.2.4. Corruption
One of the biggest threats to the foreign business activities in Ukraine is the systemic
corruption. In May 2011 TORO, the Transparency International national contact group in
Ukraine, published an assessment of the institutions in the country, which concluded:
Corruption in Ukraine is a systemic problem existing across the board and at all
levels of public administration. Both petty and grand scale corruption are flourishing.
Among the institutions which are perceived by the public to be highly corrupt are
political parties, legislature, police, public officials and the judiciary. Ukrainian
society can be characterized as a society with a high tolerance for corrupt practices. 8
In particular, the corruption at the customs service is a major problem for the development of
foreign business activities. The custom authorities have been enjoying the right to
independently execute court rulings at the borders. In most of the cases, the EU companies
have to struggle against the unauthorized confiscation of some part of the goods upon the
arrival to the Ukrainian borders. The local official customs officers then demand a bribe to
allow the further circulation of the goods on the Ukrainian territory.
Other possible corruptions are linked with the every-day activities like the simple
registration-licensing to establish a plant or the opening of a restaurant or a shop. This may
include acquiring the permit and getting an approval from the sanitizing commission. For
example, the foreign companies are obliged to pass the administration bureaucratic offices,
most of them would propose an extra fee for their services to facilitate their life and save
time.
Ukraine presidents, the former one Viktor Yuschenko in 2005 and the current one Viktor
Yanuckovich in 2010 and 2012 made fighting corruption the top priority of their
administration. Under the pressure of the EU authorities and the IMF, the government made
steps forward to simplify the rules of conducting business in Ukraine for European
companies and not only European ones.
Anti-corruption efforts were notably held in 2010, when the public organization Anti-
Corruption Council of Ukraine (ACCU) was established. The purpose of the ACCU is to
7
Interfax-Ukraine (24 May, 2012). American Chamber of Commerce: New Customs Code promotes relaxation
of custom procedures. The Kyiv post. Retrieved from: http://www.kyivpost.com/content/politics/american-
chamber-of-commerce-new-customs-code-to-p-1-128160.html
8
Transparency International. Ukraine 2011. Retrieved from:
http://www.transparency.org/whatwedo/nisarticle/ukraine_2011

19
ensure transparency among Ukraine’s public central and local authorities.9
It has been
followed by the new Customs Code of Ukraine in April 2012 (see chapter above) with also
the purpose of reducing the level of corruption.
Despite of these governmental efforts, there is still a lot of area for improvements. Indeed,
Transparency International organization gave in 2012 a Corruption Perceptions Index rank of
144/175 and a score of 26/100. The Corruption Perceptions Index ranks countries based on
how corrupt a country’s public sector is perceived to be. Scores range from 0 (highly corrupt)
to 100 (very clean). 10
1.2.5. Court system
It has been only recently that court system has begun the transformation reforms. The Law of
Ukraine No. 2453-VI ―On the Court System and the Status of Judges‖ provided a new
judicial system of Ukraine.
In Ukraine, the constitutional court and the system of general jurisdiction courts are based on
the principles of territoriality. Generally speaking, the judicial system comprises four levels
of courts as follows:
 Local courts of general jurisdiction (combining criminal and civil jurisdiction);
 Appeal courts
 High courts with specialized jurisdiction
 The Supreme Court covering all cases11
.
The Highest Commercial Court of Ukraine is the supreme body for resolving economic
disputes but for the foreign entities it also advised to apply for the International Commercial
Arbitration Court at the Ukrainian Chamber of Commerce and Industry. It can be very
efficient to settle commercial disputes.
However, the judicial system of Ukraine is not very predictable for the businesses and system
of commercial courts is not always fair. It is also very well-known for being corrupted12
.
Therefore, both foreign and local firms don’t trust the judicial system in business matters as it
was underlined by the US Department of State in 201213
.
1.2.6. Technical barriers to trade
Technical Barriers to Trade (TBT) between the EU and Ukraine are technical regulations
referred usually to safety issues and national standards of Ukraine applied by the government
and its officials to ban the import of goods coming from the EU member states. In many
cases, the government is using the technical barriers to protect the local manufactures and
judge the foreign goods as unsuitable for the Ukrainian market. Until a new national
9
United Nations Office on Drugs and Crime. Anti-Corruption Council of Ukraine. Retrieved from :
http://www.unodc.org/ngo/showSingleDetailed.do?req_org_uid=21953
10
Transparency International: Corruption by country. Retrieved from:
http://www.transparency.org/country#UKR_DataResearch
11
Government portal of Ukraine : Judicial power. Retrieved from :
http://www.kmu.gov.ua/control/en/publish/article?art_id=246406533&cat_id=246405235
12
Klaus Schwab. World Economic Forum. Global Competitiveness report 2012-2013. Retrieved from :
http://www.weforum.org/issues/global-competitiveness
13
US Department of State. 2012 Investment Climate Statement – Ukraine. Retrieved from :
http://www.state.gov/e/eb/rls/othr/ics/2012/191257.htm

20
standards body is created, the standards adoption is under the responsibility of the Ministry
for Economic Development and Trade.
Unfortunately, regardless the standardization, Ukraine still remains in its transition state from
a soviet standardization model to an EU standardization model. In the soviet one, standards
are obligatory imposing a bureaucratic burden on the manufacturers. In the EU, standards are
voluntary.
In 2009, the EU launched a Sector Policy Support Program worth of 39 million Euros with an
end date in December 2013 in order to facilitate trade between EU member states and
Ukraine. The goal is also to eliminate trade barriers including the modernization of the
institutional framework for quality assurance. 14
This way, Ukraine will progressively adapt
its technical regulations and standards to those of the EU.
Due to its obligations as a member of the WTO and its responsibilities indicated on the WTO
Agreement on Technical Barriers to Trade, the Ukrainian Government adopted in 2012 the
Amendments which simplified the procedures for introduction of the products into Ukrainian
market by removing the obligation to register the declaration of conformity for the producers.
1.2.7. Taxes and VAT Refund
The hostile corporation tax legislation used to be the main cause explaining why international
companies refused to go to the Ukrainian market. The vote of the first Tax Code of Ukraine
in December 2010 was therefore a major event. It brought together Ukrainian tax legislation
in its entirety. The Code adjusted rates and benefits, and also the process of tax imposition.
The Prime-Minister of Ukraine, Mykola Azarov, while introducing the draft version of the
Code said: ―A new Tax Code in Ukraine will create one of the most attractive investment
regimes in Europe. We will set low taxes, probably the lowest taxes in Europe.”15
Among the reforms, one concerned the corporate income tax (CIT) rate that has been
gradually reduced from 25% in 2011 to 19% in 2013. A last rate decrease is planned for 2014
(16%). The Tax Code also introduced favorable regulations for a number of industries. For
example, until 1 January 2021, hotels as well as electricity and light industry companies,
shipbuilding and aircraft companies are simply exempted from CIT. Besides, until 1 January
2016, companies with an income not exceeding UAH 3 million per year, and whose staff
numbers not more than 25 employees, are not subject to CIT at all. There are a number of
other benefits and privileges, which are given to companies, which provide services in the
area of information technology.
The timely value-added tax (VAT) recovery is also a major issue. It’s one of the reasons that
discourage foreign companies from conducting business in Ukraine. In reality, with the
current procedure, it is almost impossible to get a VAT refund in Ukraine. In order to better
regulate the issue of VAT refunds, the Tax Code obliges the Ukrainian state to pay interest
14
EU Cooperation News. (2 April 2013) . Interview on legal and product safety with Stefanos Ioakeimidis,
Team Leader of an EU-funded project and with Dmytro Lutsenko, Legal Expert, Opening doors of EU-Ukraine
Trade. Newsletter of the delegation of the European Union to Ukraine. Retrieved
from: http://euukrainecoop.com/2013/02/04/eu-ukraine-trade/
15
Interfax-Ukraine (3 September, 2010). Azarov: Ukraine to have lowest taxes in Europe. The Kyiv post .
Retrieved from: http://www.kyivpost.com/content/business/azarov-ukraine-to-have-lowest-taxes-in-europe-
80962.html

21
for the late payment of refunds. In Ukraine the VAT rate is 20% and it is planned to decrease
it to 17% by 2014.16
Nevertheless, it is not enough to have a good legislation. Powerful institutions are also
necessary for the laws to work properly. In fact, Ukraine still copes with strong difficulties
for VAT collection and refund. A survey done by the American Chamber of Commerce in
Ukraine revealed that among its 26 member companies, the cumulative VAT arrears reached
almost UAH 3.4 billion in February 2012. More than half of this total was composed of
overdue VAT.
17
The European Union is aware of what the European companies have to tackle with in
Ukraine and some failed commitments of the Ukrainian government. José Manuel Pinto
Teixeira, Ambassador, Head of Delegation of the European Union to Ukraine on conducting
business in Ukraine said in July 2012:
Taxation difficulties, problematic VAT refund and tax losses carry forward as well as
pressure from state authorities (17%) still have the lead. Coming up next are
complaints over unstable political course and court system in Ukraine, hot-off-the-
press Law on Personal Data Protection, and destructive corruption (14%).
European businesses and members of EBA have not perceived any real improvements
in the business and investment climate in Ukraine in recent months. I am not
surprised but I find it disappointing that so many issues still remain unresolved,
despite frequent calls for action from the EU and the EBA, and commitments made by
the Ukrainian government to improve the business climate. 18
The government should tackle with the tax reforms, as they are part of challenge that serves
to create a business friendly environment both for Ukrainian entrepreneurs and for foreign
investors. A key undertaking is the effort to weed out regulations while encouraging growth
and discouraging corruption.
1.2.8. Land reforms
Since many years the land reform is a subject of discussion in Ukraine. After the
independence the first round of farm reforms initiated privatization of land. In 1992, all land
were owned by the state whereas in 2013, the state owned only 48.9% of land and 51% of
land were owned by private entities19
.
In the end of 2011, the primary draft bill on land market was voted. It precised the market
organization and its way of operating. The very important issue in the land reform principle is
avoiding the monopolization on the market by imposing the limitation of land ownership at
100 hectares regardless of location. The development of new land reforms is still an in-work-
16
Jaroslawa Z. Johnson and Anna Iakubenko. (06.11.2011) Ukraine adopts first Tax Code. Lexology. Retrieved
from: http://www.lexology.com/library/detail.aspx?g=41644abe-f8fb-42a6-8063-3d572535b8dc
17
The American Chamber of Commerce in Ukraine. Reforming the Ukrainian Tax System – Important for the
Country’s Future Prosperity. Retrieved from: http://blog.chamber.ua/2012/02/reforming-the-ukrainian-tax-
system-important-for-the-countrys-future-prosperity/
18
European Business Association Press-release (10.07.2012). Ukraine’s Attractiveness: Fair to Middling.
Retrieved from: http://www.eba.com.ua/en/press-room
19
ForUm. Land reform: to be or not to be? (11.06.2013). Retrieved from:
http://en.for-ua.com/analytics/2013/06/11/134501.html

22
process nowadays. For example, in 2012, the parliament voted some changes to the Land
Code and foreign companies were allowed to buy Ukrainian lands.
However, even if the government recognizes the necessity of land reforms, unfortunately for
the business entities, the second reading of this document is still frozen due to various
political forces. The President Viktor Yuschenko declared in April 2013: « We want to carry
out the reform without infringing the interests of land plot owners. This is the main issue ».20
If the Ukrainian government finally passes the reform, in some years, Ukraine may have a
real competitive land market. Then, it will maybe attract foreign investments into the
agribusiness industry.
1.2.9. Foreign currency regulations
There are numerous currency control difficulties faced by foreign investors in Ukraine.
Foreign currency operations are ruled by the 1993 Cabinet of Ministers decree, On the
System of Currency Regulation and Currency Control. They also follow numerous
implementation rules created by the National Bank of Ukraine (NBU). The key issues
regarding Ukraine’s current exchange control regulation are that:
 Payments under foreign trade contracts between resident and a non-resident should be
in foreign currency only;
 Payments in foreign currency between residents of Ukraine are forbidden (a specific
license is required);
 Salaries to Ukrainian staff must be paid un UAH currency (but expatriate employees
can be paid in hard currency);
 Foreign loans must be registered with the National Bank of Ukraine before funds are
transferred to Ukraine. A maximum interest rate may be applied to foreign currency
loans obtained from non residents;
 If a Ukrainian company makes an advance payment to a foreign company, this
company must realize the actual importation of the goods or services concerned
within 180 days following the date of the advance payment. This 180-day period may
be extended only based on an individual permission granted by the Ministry of
Economic Development and Trade. The non respect of this 180-day period may lead
to important fines for the Ukrainian company;
 Payments by Ukrainian companies for services given by nonresident for amounts
exceeding EUR 100,000 (annually) require confirmation from the Foreign Markets
Monitoring Center that the fee for the services doesn’t not exceed market prices.
Otherwise, the bank will disallow the transfer.
On November 2012, the Parliament of Ukraine has increased control over foreign currency
circulation in Ukraine. The National Bank of Ukraine introduced a temporary requirement on
mandatory conversion of a foreign currency transferred to Ukraine from abroad. The
Resolutions # 475 and # 479 were adopted that modify the settlement periods under export
and/or import agreements and put on a obligatory necessity for the foreign businesses to
20
Interfax-Ukraine (3 September, 2010). Viktor Yanukovich: Interests of land plot owners should be
considered in land reform, Yanuckovich says. Kyiv Post. Retrieved from:

23
convert the foreign currency revenues into national currency Hryvnia.21
These regulations
impact eventually all international businesses as well as individuals that receive foreign
currency from abroad.
21
Adam Mycyk, Inna Antipova (28 November 2012). Ukraine changes to foreign currency control regulation.
Lexology. Retrieved from : http://www.lexology.com/library/detail.aspx?g=4361bf46-4849-456b-8de0-
1019b5506d71

24
1.3. EU-Ukraine trade relations
1.3.1. Trade
The trade relations between EU and Ukraine really started in 1998 when a Partnership and
Cooperation Agreement entered in the force. It provides a comprehensive and ambitious
framework for cooperation between the EU and Ukraine, in all key areas of reform. Ukraine
is a priority partner country within the European Neighborhood Policy and the Eastern
Partnership.22
In 2012 Ukraine was the EU’s 22nd largest trading partner and the 19th largest export market
in value (23.79 million Euros).
In 2012, the EU was Ukraine’s first largest trade partner with 31% of the total trade with the
world. 21.8% of Ukrainian exports of goods went to the EU and 39.9% of import of goods
came from the EU.
Ukraine mainly exports iron, steel, mining products, cereals, and electric machinery. The
main goods the EU exports to Ukraine are machinery and transport equipment, chemicals,
textile and clothing and agricultural products (see Figure 8).
Figure 8: EU27 Merchandise Trade with Ukraine by product (2012)
Source: Eurostat (Comext; Statistical Regime 4)
Ukrainian exports to the EU are to a large extent already liberalised thanks to the Generalised
System of Preferences (GSP), granted by the EU to Ukraine since 1993. In 2011, total
preferential exports to the EU under GSP reached a level of 72.2% of the eligible product.
Preferential imports to the EU from Ukraine include machinery and mechanical appliances,
plants, oils, base metals, chemicals and textiles.
22
EU around the Globe. Countries. Ukraine. European Union External Action.
Retrieved from: http://www.eeas.europa.eu/ukraine/

25
Figure 9: EU trade in goods balance with Ukraine 2010-2012
1.3.2. EU foreign direct investments in Ukraine
In 2010, Europe’s share of actual FDI inflows was 26% (first place), which is equal to its
share of world GDP23
. The second place was occupied by Russia.
Figure 10: EU27 FDI with Ukraine
In 2010 Ukraine experienced a revival of inward foreign direct investment (IFDI) flows from
EU compared to 2009. At 8.3 billion Euros IFDI flows from EU to Ukraine in 2011 were
well above their level of 1 billion Euros in 2009 (see Figure 10). The increase in 2010 was
partly due to the difficult economic situation, which pushed many investors to sell their
businesses to willing buyers. The improved performances of the Ukrainian economy in 2010,
as well as the legislation changes in the financial industry also explain this increase. The fall
of IFDI in 2011 can be explained by the delay in concluding an association agreement with
the European Union (EU).
The EU countries that invest the most are Germany, Austria, the Netherlands, France and
Cyprus. The industrial companies are the one that catch the biggest mount of EU’s
23
"Global and Regional FDI Trends in 2010‖, Global Investment Trends Monitor, UNCTAD, 17 January 2011.

26
investments (34%). Financial institutions receive 32.4% of FDI. Then we can find the
companies engaged in real estate transactions, engineering, trade, vehicle repair, production
of household gods and personal goods.24
24
Worldwide News Ukraine: EU’s Direct Investments to Ukraine Grow 19.3 Percent Retrieved from:
http://wnu-ukraine.com/news/economy-business/?id=707

27
2. Main attractive sectors analysis for European investments in
Ukraine
2.1. Agribusiness
Agribusiness represents a comprehensive value chain that covers all aspects of agricultural
production (farming, seed, crop production, post-harvest handling and other agricultural
inputs), processing and distribution. World production, consumption and trade of agricultural
products are expected to increase sharply over the coming decade. Foreign agro-food
companies investing in emerging economies could play a significant role by improving
productivity while implementing the highest food safety and regulatory standards, allowing
access to developed markets such as the European Union.
Some emerging economies, such as Ukraine has a significant opportunity to strengthen its
important role in agribusiness thanks to global demand for food that is accelerating with the
worldwide population growth.“Today Ukraine is fully engaged in ensuring global food
security and meets the growing needs of humanity in food. Ukraine is ready to take an active,
enhanced and mutually beneficial cooperation”25
, said Mykola Prysyazhniyuk, Minister of
Agrarian Policy and Food of Ukraine in June 2013.
2.1.1. Ukraine’s agribusiness sector at a glance
Fertile land
Ukraine has over 40 million hectares of agricultural land; of which about 80 % (around 32
million hectares) is arable more than any other European country (see Figure 11 and Table 4).
The country is rich for black soil, which is one of the country's greatest resources. The
country is home to over 16 million hectares of ―chernozem‖ (black soil), a very fertile black-
colored soil with high content of humus and minerals that offers a high potential for
agricultural yields.26
25 Mykola Prysyazhniyuk, Minister of Agrarian Policy and Food of Ukraine. (13 June 2013) Panel discussion:
―Investment in the agricultural sector of Ukraine. Let’s feed the world together!‖ First Annual Business
conference ABC: Ukraine and partners. Retrieved from : http://www.ukraine-partners.org
26
OECD (2012), Competitiveness and Private Sector Development: Ukraine 2011: Sector Competitiveness
Strategy, OECD Publishing. ISBN 978-92-64-12878-1

28
Figure 11: Ukraine’s agriculture land structure
Source: The Ministry of Agrarian Policy and Food of Ukraine 2011
The table below demonstrates the comparison of the Ukrainian land to other countries on
total agricultural area with arable territories. According to the Food and Agriculture
Organization data, Ukraine has more arable land than some EU countries like France,
Germany, the United Kingdom or Poland.
Table 4: Agricultural land (millions ha)
Source: Food and Agriculture Organization (2011)

29
Climate
Climatic conditions are very favorable to the production of most agricultural products in
different areas of the country. The moderate climate gives agri producers strong competitive
advantages. Ukraine comprises three distinct climatic zones, which allows producers to vary
crop growth. The western regions are suited to crops that demand high humidity, specifically
vegetables and spring grains. The conditions in the central and north –eastern regions are
favorable for all kinds of grains. The southern regions are best-suited to winter crops as the
area is Ukraine’s warmest overall.
Cost-competitiveness
Ukraine’s average cost of production per ton of grain is lower than its competitors. Low
production costs, estimated 50% lower than of European producers like Germany, result from
low usage of input, low labor costs and a lack of proper equipment.
Ukraine’s production commodities
As it was mentioned before, excellent climate is very suitable for growing large-scale
production. Among production products there are: potatoes, cow and whole milk, sugar beet,
different grains, sunflower seeds, tomatoes, cabbages, soybeans.
Figure 12: Top ten commodities - Production quantity 2011
Source: FAOSTAT (2011), FAO Statistical database
Ukraine is already among the top five exporters of grain. In 2011 Maize was the most
cultivated grain, about 22,8 million tones harvested in 2011 (see Figure 12 above). Wheat is
the second largest grain produced with more than 22, 3 million tons harvested. Barley is the
third most important grain.
In 2011 Ukraine became the world’s largest producer and exporter of sunflower, globally
ahead of Argentina and Russia. In value terms, cow milk and sunflower seed are Ukraine’s
two most significant agricultural products (see Figure 13 below).
0
5000000
10000000
15000000
20000000
25000000
30000000
Quantity (t)

30
Figure 13: Top ten commodities - Production value 2011
Source: FAOSTAT (2011), FAO Statistical database
The red meat and dairy sectors are also an important part of agribusiness in Ukraine. Both
sectors suffered severe declines during the transition period from the planned economy. Even
though, the dairy sector is a major part of the global food chain, covering operations from raw
milk production to processing into a wide variety of products (milk, yogurt, cheese, butter
etc.) However, the quality standards of Ukrainian milk for food production do not match
those of the EU. Even the highest quality Ukrainian milk is not exportable to the Western
Europe.
2.1.2. Competition in the Ukrainian agricultural sector
Main players
Urkaine market is still dominated by small companies that have less than 1000 hectares with
poor equipment and run by farmers. Aggressive market leaders emerged during the last years
with land banks from 30 to 250 m ha. Some of them are vertically integrated in processing
and many of them are export oriented. Several of these companies attracted direct foreign
investments. The major agricultural companies in Ukraine are: Astarta, ED&F Man,
Agrotrade Group, UAC, Nibulon, Mriya Agroholding and Myronivsky Khliboprodukt.
Major constraints
Grain storage is one of the major constraints in the agro industry. Currently capacity deficit
exceeds 10 million tons. Besides, success of any agricultural enterprise is fully dependent on
relationships with local authorities and good contacts with villages. Moreover, local players
0
500000
1000000
1500000
2000000
2500000
3000000
3500000
Value (1000 USD)

31
are traditionally short of development capital and the local firms are poorly equipped. At
least, westernized management and quality control are only implemented by few companies.
2.1.3. Investments opportunities for EU companies
European companies should first invest in the grain sub-sector. It includes wheat, rice, maize,
barley, oats, millet and other grains. Indeed, market trends for the grain sub-sector are driven
by an expected increase in global consumption. World wheat consumption is projected to rise
by around 1.1 % annually during the next decade to reach 746 million tons in 2020
(OECD/FAO, 2011).27
The growth of grain demand will come mainly from middle-eastern,
African and South-Asian countries due to increasing GDP per capita, rising feed
requirements for fast-growing livestock sectors and dynamic population growth. As
consequence, prices are expected to increase, making the grain sector potentially more
attractive for investment. By 2020, nominal wheat prices are expected to approach USD 240
per ton. Corn prices might reach USD 203/t in 2020.
Ukraine already accounts for about 10 % of global grain exports. It supplies grain to Asia,
North Africa, and the Middle East. In 2012, Ukraine ranked seventh in the world, exporting
almost 23 million tons of grain. According to 2012 state statistics, revenue from agricultural
exports reached an amount of $18 billion (25 percent of total export revenue). In the same
time the sector attracted $800 million of foreign direct investment. At the end of 2013 the
amount of FDI is even expected to reach $3 billion28
(see Table 5).
The growth has been reinforced by continuous financial support on behalf of international
financial organizations, including the European Bank for Reconstruction and Development,
Ukraine's largest investor, and the International Finance Corporation. The EBRD provided
nearly $180 million to Ukraine's agribusiness sector as of April 2013.29
27
OECD (2012), Competitiveness and Private Sector Development: Ukraine 2011: Sector Competitiveness
Strategy, OECD Publishing. ISBN 978-92-64-12878-1
28
SSCU (2012), State Statistics Service of Ukraine. Retrieved from : http:// www.ukrstat.gov.ua
29
Economic News and Events. (13 May 2013) European Bank for Reconstruction and Development. Retrieved
from: http://www.ebrd.com

32
Table 5: Ukrainian agricultural sectors in numbers 2011 - 2013
Source: State statistics, Agriculture ministry of Ukraine
The port capacities of Ukraine are the key links in the logistic chain of export grain supplies
to the countries of the Middle East and North Africa.
The owners of agribusiness in Ukraine are foreseeing a strong growth of profitability in
future years. For example, Charles Beigbeder, the previous owner of the agricultural
company AgroGeneration that was created in 2007 and that now exploits 120 000 hectares of
farming land in Ukraine says that Ukraine has the largest potential in Europe.30
Investing in Ukraine farmland over the long-term could be profitable as land prices are still
low and the profile of investment return is stable. There are many niches and opportunities
for introducing new players and strengthening the positions of existing ones. Ukraine's
agribusiness sector has a great potential to grow and contribute to global food security. To
attract foreign investments in deep processing of grain, Ukraine has an access to low-cost
grain suppliers, in addition ice-free seaports (Odessa, Ilyichevsk and Nikolayev).
However, the quality remains an issue. The lack of equipment combined with limited use of
fertilizers make the seeds more sensitive to weather conditions and parasitic diseases. There
is a need to increase the number of combines and other harvesters, for example agricultural
machines.
European countries such as the Netherlands and the United Kingdom are already among the
principal foreign investors in Ukraine.
30
Ivan Ryabchiy. (August 30 2012). Interview with Charles Beigbeder. Ukrainian Week. Retrieved from:
http://www. ukrainianweek.com

33
2.2.Biomass-based energy production sector
2.2.1. Global trends
Renewable energy sources are playing an increasingly important role in meeting energy
needs across the world. They reduce dependence on fossil fuels and also help to protect the
environment by reducing greenhouse gas emissions, create new jobs and contribute to
economic development. In particular, heat and power production based on biomass was
identified as a pilot sub-sector. The OECD (2010) defines biomass as ―any organic material
of plant and animal origin, derived from agricultural and forestry production and resulting by-
products, and from industrial and urban wastes, used as feedstock for producing bio-energy
and other non-food applications‖.
It is estimated that the world demand for energy resources will more than triple before 2035
and China, India and the Middle East will count for 60% of this development.31
According to
the experts of International Energy Agency, the electricity and the biofuel based on biomass
will quadruple by 2035. Global bioenergy resources are more than enough to meet in the
same time the future demand for biofuel and for food.
2.2.2. Ukraine competitiveness in production of biomass-based energy
Ukraine’s abundant agricultural products and the rise in fossil energy prices are the two
elements that are likely to drive the future development of energy production based on
biomass.
Biomass resources are widely available in Ukraine. Biomass waste and residues are indeed
widely and conveniently available from the agriculture and forestry sectors. Straw, manure
and wood are especially promising as sources of heating. The economic potential of crop
wastes has been estimated by the National Academic of Sciences of Ukraine at 14 million
tonnes of coal equivalent per year. Therefore, the use of primary agricultural residue could
partly satisfy increasing heat consumption needs and replace traditional heat production
systems. In terms of regional distribution, all regions except the western part of the country
and the Crimean peninsula have high economic potential for development of energy
generation based on agricultural residues. This primarily correlates with production of wheat
and sunflowers, which are the primary sources of agricultural residues, however it is also
influenced by other factors, such as the quality of the soil and the region’s climate.
With natural gas prices expected to increase further as a result of the price reform in the
internal market, the use of natural gas for production of heat and power will become very
expensive. According to World Bank estimates, prices of natural gas might increase by more
than 400% from 2009 until 2017 in Ukraine.32
Global prices for other fossils fuels, such as oil
31
World Energy Outlook 2012. International Energy Agency (IEA). Retrieved from:
http://www.iea.org/aboutus/
32
World Bank. Bank Recommends Phased Increase in Ukraine Gas Price. Retrieved from:
http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/ECAEXT/0,,contentMDK:20775037~pagePK:
146736~piPK:146830~theSitePK:258599,00.html

34
and coal are also expected to rise in the future. In contrast, renewable sources of energy, such
as hydropower, geothermal, wind and solar energy and biomass energy, are nearly limitless
2.2.3. European investments in biomass-based energy sector in Ukraine.
Ukraine has the highest biomass potential in Europe. It brings many opportunities for
investments in local bioenergy production and in the export of bioenergy crops.
Here are the possible FDI in the bio-energy projects in Ukraine:
Among the European countries investing in the biomass-based energy sector in Ukraine,
Germany is the most active one. In 2013 both countries have put their cooperation into a new
level with plans to promote the production of biofuels in Ukraine. This collaboration includes
creation of pilot bio-energy complexes. Germany is very interested to increase the production
of thermal energy and biogas from agricultural waste in Ukraine by providing technical
assistance for the development of bioenergy production in Ukraine.33
Such projects are
already widely spread in Germany where 5.7% of the electricity is already coming from
the biomass in first half of 2012.34
Some European private companies producing alternative fuel already operate in Ukraine. For
example, Active energy group, a UK based company, operates in Ukraine since 2011 and is
currently one of the European leaders in providing of biomass to the European market. Active
Energy Ukraine has contracts for the purchase of wood, which it processes into chip fuel in
Ukraine and uses to replenish its supply to power facilities in Poland. Richard Spinks, the
chief executive at the Active Energy Group on the Ukrainian market: “The demand for wood
biomass is strong and expected to increase. We have the expertise and advantageous
geographic locations in Ukraine to procure, process and ship quickly and efficiently.”35
33
Ukrinform. Germany to help Ukraine produce biofuels. Retrieved from:
http://www.ukrinform.ua/eng/news/germany_to_help_ukraine_produce_biofuels_294845
34
CleanTechnica . Germany — 26% of Electricity from Renewable Energy in 1st Half of 2012. Retrieved from:
http://cleantechnica.com/2012/07/26/germany-26-of-electricity-from-renewable-energy-in-1st-half-of-2012/
35
Christopher J. Miller. Interfax-Ukraine. (June 4 2013). Active Energy Group acquires biomass exporter
Nicofesco Holdings. KyivPost. Retrieved from: http://www.kyivpost.com
Acquisition of grain or cattle farms or forestry companies
Acquisition of a bolier manufacturer with focus on biomass
technologies
Privatisation of dictrict heating companies and conversion of
fossil-fuell untits to biomass-based units

35
2.3 The “National Projects” as practical tools of FDI attraction
Today Ukraine is facing the task to create a new operating platform for a constructive
dialogue between the government, businesses and potential investors on the local and
national levels. As a component of the Investment reform introduced by the Ukrainian
government in 2010, the ―National Projects‖ initiative represents an attractive tool to improve
the investment climate in Ukraine.
The ―National Projects‖ are the strategic projects of Ukraine focused on development of
priority economic and social sectors by means of attracting foreign direct investments in the
infrastructural projects. The President of Ukraine, Viktor Yanukovich, set up the agency
responsible for the National Projects which is called the State Agency for Investment and
Management of National Projects of Ukraine (Invest Ukraine). Its activity is based on a
priority investment funds over the government budget funds and partnership with the world's
best companies.36
The ―National Projects‖ are based on the principles:
 Project management
 Partnership with top-ranked companies
The main sources of financing of the ‖National Projects‖ are:
 Private investments
 International Financial Institutions
 Loans and projects financing
As of October 2012, Ukraine has eleven ―National Projects‖. The list is the following:
1. ―LNG Terminal‖: sea terminal for liquefied natural gas
2. ―Air Express‖: construction of railway from Kyiv to ―Boryspil International Airport‖
3. ―Open World‖: introducing 4G technologies into educational management system
4. ―Clean City‖: update system of waste recycling complex
5. ―Affordable Housing‖: construction of affordable housing
6. ―Olympic Hope 2022‖: creation of sports and tourism infrastructure
7. ―New Life‖: presentation of maternity and childhood protection
8. ―Quality Water‖: ensuring Ukrainians with high quality potable water
9. ―Danube Corridor‖: development of transport connection in the Danube region
10. ―Energy of Nature‖: construction of solar hydropower station, production of
alternative fuel
11. ―FutureCity‖: formation of strategic plan and project system of the city
development.37
36
The National Projects. The Governmental Portal. Retrieved from: www.ukrproject.gov.ua
37
National Projects. Invest Ukraine 2012. Retrieved from : http://investukraine.com/investment-
opportunities/national-projects

36
Among the long-term projects, ―LNG Terminal‖ and ―Energy of Nature‖ are the two most
promising opportunities projects for European foreign direct investments. The table below
describes the two projects in brief.
Project name LNG Terminal Energy of Nature
Project summary Construction of a sea
terminal for liquefied natural
gas (LNG).
Develop a bioenergy industry
in Ukraine (wind energy,
biomass, solar energy, and
hydro energy).
Project timing Phase I: 2015
Phase II: 2016.
Estimated 1.5 years.
Level of investment US$ 1.5-2 billion. 7 million Euros.
Payback period 8-9 years 5 years
The ―National projects‖ offer for investors from around the world unique opportunities to
open Ukraine as a country with extraordinary investment opportunities and comfortable
investment climate. These development projects have to become a driving force for the
development of the economy, and their implementation will be a part of the structural reform
of the economy.
They are implemented under the innovative technologies and practically form some new
industries. Each national project has long-term strategic goals.

37
3. Potential and risk of the European –Ukrainian collaboration
3.1.Possibility and goal of the EU-Ukraine Association Agreement
3.1.1. Background of the Association Agreement
Being the major participant of the Eastern Partnership, Ukraine considers The Eastern
Partnership as an instrument for collaboration with the EU, namely within the strategic
directions of cooperation such as negotiation on the EU-Ukraine Association Agreement,
which is to be the successor agreement to the Partnership and Co-operation Agreement. The
Association Agreement it is the first agreement based on political association between the EU
and any of the Eastern Partnership countries. The first negotiation on the new EU-Ukraine
Agreement including the aspect of Free Trade Agreement (FTA) began in 2007.38
The idea
to negotiate a FTA with Ukraine is actually a part of the EU’ policy to create a prosperous
European neighborhood environment via closer economic relations.
Soon after Ukraine gained a status of a World Trade Organization’s member in February
2008, the negotiation on the Association Agreement were raised up during the EU-Ukraine
summit in Paris. The mutual understanding of the text of the Association Agreement was
achieved between the leaders of the EU and the President Viktor Yanukovich on 19
December 2011. The initialing of the Association Agreement between Ukraine and the
European Union was launched according to the agreements achieved by their leaders during
the EU-Ukraine Summit in Brussels on 30 March 2012. The two parties initialed the
statements in the text of the Association on establishment of a Deep and Comprehensive Free
Trade Agreement.39
The Association Agreement constitutes a wide range of sector cooperation which is focused
on progressive reforms. It contains a brand new philosophy of the relations between the EU
and Ukraine since it contains new economic and political integration principles.
Negotiations on the Association Agreement have been built with a "modular" approach. In
particular, the transition negotiation process took place within the following individual
workgroups:
 Foreign policy and security cooperation;
 Field of justice, freedom and security;
 Economic, sectoral issues and issues of human development;
 FTA.
Basically, the draft of the Association Agreement is based on three pillars:
38
Delegation of the European Union to Ukraine. Association Agreement. The European Union and Ukraine
have initiated an Association Agreement as part of a joint effort to further strengthen the ties and bonds between
them. Retrieved from:http://eeas.europa.eu/delegations/ukraine/eu_ukraine/association_agreement/index_en.htm
39
EU-Ukraine Action Plan. Mission of Ukraine to the European Union. Documents / Ukraine-EU bilateral
documents / Main instruments. Retrieved from: http://ukraine-eu.mfa.gov.ua

38
1. Wide range of cooperation: rule of law, good governance, human rights, core reforms
on economic recovery, sector cooperation in energy, transport, environment
protection, education, equal rights, SME cooperation.
2. Mobility: liberalizing the visa regime for Ukrainian citizens for short term travel to
the European Union.
3. Trade related matters: Deep and Comprehensive Free Trade Area (DCFTA) is an
important integral element of the Association Agreement goes that far beyond WTO
regulations. DCFTA will create business opportunities between the EU and Ukraine.
The DCFTA is much larger than a typical free trade agreement. It considers not only the
lifting of tariff and non-tariff barriers but also, more importantly, Ukraine adopting EU legal
solutions and standards in this area. The key elements of the DCFTA are the following:
 Market access for goods
 Trade remedies
 Technical barriers to trade
 Sanitary and phytosanitary (SPS) measures
 Customs and trade facilitation
 Establishment, trade in services and electronic commerce
 Trade and sustainable development
 Mediation mechanism
 Transparency
 Public procurement
 Intellectual property
 Competition
 Dispute settlement
3.1.2. Ukraine’s interests in the Association Agreement
In recent years, the share of the EU market has reached an average of 33% of the total exports
of Ukraine. Share of imports from the EU member countries averaged 35.6%. The EU market
differs significantly from others by its higher tariff protection especially on agricultural goods
and products. Under the agreements of the parties, liberalization will cover more than 97%
of tariff lines (or more than 95% of the volume of bilateral trade between the EU and
Ukraine). In this case, cancellation fees on importable EU goods will take place in the first
year of the agreement (on 99% of tariff lines).40
The establishment of a Free Trade regime with the EU member states would enhance the
export conditions of the Ukrainian products to the EU. Indeed, the EU market would become
open for Ukraine by removing or reducing import tariffs and quotas. It would also eliminate
non-tariff barriers by harmonizing laws, standards and regulations across all economic
40
Ihor Prasolov, Minister of Economic Development and Trade of Ukraine. Panel discussion report ―DCFTA
between Ukraine and the EU: prospects for business and investment‖. The First International Annual Business
Conference ―ABC Ukraine and Partners‖ on June 13-14, 2013. Retrieved from: http: www.ukraine-partners.org

39
sectors. It would therefore boost economic growth, increase trade, attract investments and
transform the Ukrainian economy to the European standard economy.
For Ukraine, the Association Agreement is the most effective tool for large-scale political and
economic reforms in the country. In fact, we can consider the Association Agreement as an
instrument to achieve the relevant criteria for EU membership. Ukraine as a European State
in accordance with the Treaties the EU has a full right to acquire the EU membership status,
if the both parties are ready. The relevant provisions supporting the European choice of
Ukraine are fixed in the draft of the Agreement.
The DCFTA included in the Association Agreement is based on the economic requirements
for EU membership. That makes this Free Trade Agreement different and highly important
for Ukraine which has future ambitious plans to access to the EU. Ukraine has to adapt its
current economy and legislation to the EU standards. Therefore, it is a kind of probation for
Ukraine: if, upon the conditions that all the DCFTA requirements are respected, the EU
would hardly refuse Ukraine in the membership.
3.1.3. European Union’s interests in the Association Agreement
Ukraine is the largest partner of the European Union within the Eastern Partnership initiative
but it represents only about 2% of trade for the EU so there is huge potential for growth. It
goes without saying that upon the signature of the DCFTA, the EU companies are expected to
obtain opportunities of investment in the Ukrainian business and enjoy the absence of custom
duties.
However, apart from the trade interest and the investment opportunities represented by the
Association Agreement, there is another less visible component which is the geopolitical
factor. Indeed, Ukraine borders with four EU’s member states: Poland, Romania, Hungary
and Slovakia. It is naturally for the EU to be concerned by creating a safe and strategically
reliable partnership on its East borders.
The EU authorities realized that Ukraine is a key intermediary in the transportation of energy
supplies to the EU. A strategically significant oil pipeline Odessa-Brody runs from Black Sea
to Brody, with Ukrainian-Polish border. The pipeline is transferring Caspian oil to the Central
Europe through the territory of Ukraine. The European Union is interested in reducing the
dependence on Russian oil and diversifying the suppliers as due to the unstable relations
between Russia and Ukraine. For example, in 2004 and 2010, Russia already blocked the
Caspian oil that was aimed to Poland through Ukraine.
Concerning the gas transit system, some opinions are shared about the EU vital interest in
reforms and modernization in Ukraine. The EU is interested in getting engaged with Ukraine
by the Association Agreement as it may give an access to management of the gas transit
system together with Russia. ―It is a kind a geopolitical game regarding the modernization of
the pipelines; Russia is willing to build more pipelines dispatching Ukraine. If the
modernization of Ukraine’s gas transit system proceeds, the EU would be a facilitator for

40
European investors to join the process.‖41
Balazs Jarabik, from the European Council on
Foreign Relations told to New Europe magazine.
The EU is aware of the Ukraine’s needs in diversifying its suppliers of gas as the price it pays
for Russian gas is more expensive than the price it can pay for the German gas for example. It
is also well known that Ukraine's gas transportation network includes extensive underground
reservoirs capable of holding over 30 billion cubic meters of natural gas. Consequently, it can
be a good gas reservoir for Europe.
This agreement bears a power level political character. Ukraine is demonstrating its
commitment to the European choice. Europe, as former Chancellor of Austria A. Gusenbauer
has said, wants to keep Russia from «getting its hands on Ukraine».42
The Association
Agreement between the EU and Ukraine is regarded as a guarantee that Ukraine will not
participate in any integration processes in the post-Soviet area, like the Customs Union of
Belarus, Kazakhstan and Russia for example.
3.1.4. European Union’s expectations from Ukraine
The EU-Ukraine Association Agreement is rather ambitious as it covers a wide range of
sector collaboration. The Association Agreement imposes a full respect for democratic
freedom, human rights and rule of law. Ukraine hopes to have the agreement signed at the 28-
29 November during the Eastern Partnership Summit, to be held under the Lithuanian EU
presidency. However, notwithstanding the mutual interests in Agreement’s ratification,
Ukraine still has to prove to the European Union that it is ready to sign it. The Ukrainian
government is highly expected to pass reforms aimed at improvement of investment climate
and preparation for the introduction of the free trade area with the EU. Also, the bills at
amending the Constitution of Ukraine, as well as the reform of the judiciary and the
Prosecutor’s Office should be adopted.
Mostly, there are three important areas in which Ukraine should stimulate efforts to achieve
progress for the signing of the agreement. These are:
 the reform of the judicial system;
 the reform of the electoral law;
 the issues of selective justice.
In order to sign the Association Agreement and DCFTA, Ukraine was given a list of criteria
to respect before the Eastern Partnership Summit in November 2013. These criteria were
named after the European Commissioner for Enlargement and European Neighborhood
Policy Štefan Füle, Füle’s criterias.43
Mainly, the Füle’s List foresees implementing sectoral
reforms and efficacy of Ukraine’s anticorruption campaign.
41
Kostis Greipoulos. (24 April 2013). EU-Ukraine play each other on pipeline. New Europe. Retrieved from:
http//: www.neurope.eu
42
Natalia Meden. (26 June 2013). What lies behind the idea of the EU-Ukraine Agreement. Strategic Culture
Foundation Online Journal. Retrieved from: http://www.strategic-culture.org
43
Milan Leilich. (21 February 2013). The « window of opportunity » for European Integration will be closed by
Ukraine. The Ukrainian Week. Retrieved from : http://ukrainianweek.com/Politics/72887

41
The President of Ukraine, Viktor Yanukovich, reassured the EU authorities saying in July
2013 that the parliament will vote all the necessary laws for the signing of the Association
Agreement with the EU before the summit that will be held in November 2013 in Vilnius: ―I
hope that these laws will be passed in September, along with the laws amending the
Constitution, which have already undergone necessary internal procedures.‖44
Nevertheless, the unsettled matter with former Prime Minister Yulia Tymoshenko’s
imprisonment remains a very sensitive point to the EU authorities. The Ukrainian authorities
are under intense pressure to release Yulia Tymoshenko. Shall Ukraine, in a name of political
freedom and democratic improvements, release Mrs.Tymoshenko before the Summit in
Vilnius or not? At which degree this issue may obstruct the possible signing of the
Association Agreement?
The President of Lithuania, Dalia Grybauskaite, said that the Ukrainian government must find
a solution to resolve the problem with jailed former Ukrainian Prime Minister Yulia
Tymoshenko for signing the Association Agreement with the European Union. In the
beginning of July 2013, she said during a press conference in Vilnius: ―As regards Ukraine,
there are still a lot of obstacles. Ukraine has to handle the Tymoshenko case. This is
absolutely necessary otherwise we won't be able to move forward towards the signing of the
Association Agreement.”45
The German Foreign Minister, Guido Westerwelle, noted in June 2013 a struggle of Ukraine
to the reforms for signing of the Association Agreement: “I see Ukraine as an integral part
of Europe and as a bridge between East and West. However, Ukraine still has much to do in
the reforms process, in particular in the legal and judicial fields.”46
The possibility of signing the Association Agreement in November 2013 will depend on the
accomplishment of Ukraine’s commitments to the EU. The European Union expects the
amelioration of democracy in the country and the rule of law concerning the imprisonment of
the former Prime Minister. If the « tasks » given by the EU would be implemented, the
Association Agreement and DCFTA could be signed and obviously it may be win-win
contracts.
44
Interfax-Ukraine. (03 July 2013). Yanukovich: Rada will pass European integration bills by deadline.
Kyivpost. Retreived from: http://www.kyivpost.com
45
Interfax-Ukraine. (July 04 2013). President of Lithuania Dalia Grybauskaite: Situation with Tymoshenko
must be resolved for signing the EU-Ukraine Association Agreement. KyivPost. Retrieved from:
http://www.kyivpost.com
46
Interfax-Ukraine. (22 June 2013) .German Foreign Minister hopes for signing of EU-Ukraine Association
Agreement in fall. Kyivpost. Retrieved from: http: www.kyivpost.com

42
3.2.Political reality in Ukraine: its influence on the relations with the
European Union.
3.2.1. Ukraine between East and West
Nowadays, Ukraine has to take a historic decision weather to sign an Association Agreement
with the EU or to join the Customs Union, which is part of the Eurasian Economic Union.
Ukraine's choice will determine the country's development over the next decade. Customs
Union within the Eurasian Economic Union, including Russia, Belarus, Kazakhstan and
Kyrgyzstan soon – is the alliance of a single customs territory, within which there is a duty-
free trade. Ukraine proposed only a status of observer in the Customs Union. Official Kiev
has repeatedly offered cooperation in the format "3 +1".47
However, the leader members of
the Customs Union rejected this proposal.
In fact, Ukraine doesn’t want to enter to the Customs Union as a full member because the
country’s authorities declared the European integration as a defining vector of Ukraine’s
foreign policy. European integration for Ukraine is more a geopolitical project, whereas the
Customs Union is primarily an economic project of post Soviet countries.
It is obvious that Ukraine’s integration into Western structures would change the strategic
balance in Europe. For Russia the priority is to build the Customs Union and further the
Eurasian union within the post-Soviet area. Thus, if Ukraine doesn’t join the Customs Union,
it is expected that it will not obtain any future economic concessions from Russia.
47
Roman Osharov.( 30 July 2013). Ukraine-European integration or Eurasian alternative. The Voice of
America newspaper. Retrieved from : http://www.golos-ameriki.ru/content/ro-russia-ukraine-eu/1713334.html
Ukraine’s political and economic orientation depends on the President and government at
power. The question to be pro-Western or pro-Russian has been always risen by the Ukrainian
government since the fall of the Soviet Union. Clearly, in terms of economic help, Ukraine's
biggest financial support has been Russia. However, Ukraine has recently been demonstrating
a pro-European direction in its foreign policy.
Russia is also one of the top trade partners for Ukraine. The volume of bilateral trade exceeded
50 USD billion in 2011, whereas it was only 6 USD billion with Poland.1

43
The result, relations between Russia and Ukraine are worsening every day. During last visit
late July, Putin met with Ukrainian President Viktor Yanukovych. Along with the issues of
gas sales and the new Ukrainian tax on car imports from Russia, on the agenda was the
concern of Moscow about rapprochement between Ukraine and the EU. The Russian answer
on Ukraine’s foreign policy inspiration concerning the European integration and the
Association Agreement negotiation was not waiting for a long delay.
On July 29, 2013 Russia imposed a ban over quality concerns on Ukrainian sweets Roshen.
Roshen is a brand owned by former foreign minister Petro Poroshenko.
Taking into consideration that the Roshen’s principal export markets are: Russia, Kazakhstan,
Uzbekistan, Kyrgyzstan, Azerbaijan, Armenia, Moldova, Estonia, Latvia, Lithuania, the
United States, Canada, Germany and Israel, it is more probably a politically motivated
decision.48
It is a tool of political and economic pressure on Ukraine. It is a demonstrative
punishment, a demonstrative flogging of Ukrainian oligarchs who support European
integration, a signal for the rest of the businessmen that the same thing could happen
with them.49
The Times magazine (31 July 2013).
3.2.2. The risk for Ukraine for signing an Association Agreement with the EU
The political conflicts inside the ruling Party of regions at the Ukrainian government don’t
cease to stop. The deputy members argue about country’s foreign policy direction, either
European or Russian one. Some of the party members claim that a number of points of
agreement with the EU, contrary to the Ukrainian Constitution. In fact, there is a very big risk
for not ratifying an Association Agreement in November because of inner governmental
fights.
The deputy, a Party of Regions member Oleg Tsarev in his interview to Forbes Ukraine: ―I
have a law firm conclusion that the six-point of the Association Agreement” are contrary to
the Constitution of Ukraine. If a group of deputies from the Party of Regions appeal to the
Constitutional Court, it will make a decision on the unconstitutionality of the agreement with
the EU.”50
This doesn’t imply that Ukraine will not be able to sign the Association Agreement; it might,
but not in November 2013, only after the amendments to the Constitution, and it is not a
quick process. According to the opponents to the European integration, joining the Customs
Union has a lot of benefits. A rejection from European integration in the near future will
allow Kiev to get a loan from Russia at 15 USD billion.51
Moreover, a price for Russian gas
48
Interfax-Ukraine. (6 August 2013). Ukraine hopes to start talks with Russia soon. Kyivpost. Retrieved from :
http// : www.kyipost.com
49
Ben Hoyle. (31 July 2013). Russian ban on chocolate is soar grapes. The Times Europe. Retrieved
from : http://www.thetimes.co.uk
50
Maria Djartovkskaya. Interview with Oleg Tsarev, member of Party of Regions (6 August 2013). Putin can
nominate his candidate against Yanukovich on the Presidential elections. Forbes Ukraine. Retrieved from :
http://forbes.ua/nation/1356267-sovetnik-azarova-putin-mozhet-vystavit-svoego-kandidata-protiv-yanukovicha
51
Maria Djartovkskaya. Interview with Oleg Tsarev, member of Party of Regions. (6 August 2013). Putin can
nominate his candidate to the against Yanukovich on the Presidential elections. Forbes Ukraine. Retrieved
from : http://forbes.ua

44
by Ukraine, often called excessive, may be reduced in the case of Ukraine's accession to the
Customs Union.
In case of Ukraine refusal to join Customs Union or give up control of its domestic gas
network, Moscow will go ahead with the new South Stream pipeline project and isolate
Ukraine’s energy economy from Europe, depriving it of any leverage on Russia and forcing it
into total dependence on Russia.52
Meanwhile the EU is very concerned about ensuring the
proverbial energy independence (from Russia, naturally) not for Ukraine, but for itself. That’s
why the EU is very concerned about that Ukraine raising awareness about the energy
security.
Some European companies very well realized the situation of a strong dependence from
Russia and high prices on gas for Ukrainian market. For example, the German company
RWE Supply & Trading GmbH has started selling gas to Ukraine. The volume of gas
supplied by Germany to Ukraine in the first 7 months (November 2012 – June 2013) was 420
million cubic meters for the 407 USD.53
Currently the European Commission is striving toward the unification of networks, which
requires colossal investments in the construction of connecting segments; therefore, the use
of Ukraine's already existing capacity for gas storage would be, from the European
Commission's point of view, an optimal solution.
Because of possibility of the commercial war with Russia and also because of political
closure of the Ukrainian parliament, Ukraine might prevent a chance to step toward the
European Union. Signing an Association Agreement would represent the failure of its
Partnership with Russia and ex-Soviet countries.
3.2.3. The lack of democratic freedom
The independence of the judicial system has significantly diminished since Viktor
Yanukovych was elected as the President of Ukraine in February 2010. The status of the
Ukrainian parliament decreased and the opposition remained fragmented.54
The imprisonment of the former Minister of Interiors Affairs Lutzeko and former Prime-
Minister Yulia Tymoshekno became the main problem in the Ukraine’s EU integration plan
and an obstacle in European-Ukrainian cooperation in general. The politically motivated
criminal case against Tymoshenko, was obviously evidence of a broadly antidemocratic
policy that have damaged Yanukovych’s relations with the United States and Europe. For the
EU authorities the persecution of political opponents is absolutely unacceptable.
In October 2011, Yulia Tymoshenko was condemned to seven years of prison and accused of
abuse of power and embezzlement. However, she claimed that her imprisonment was
commanded by Yanukovych in order to eliminate a dangerous opponent from political stage
52
Stephen Blank (22 January 2013). Ukraine between East and West. The Ukrainian Week. Retrieved from :
http://ukrainianweek.com/World/70377
53
Natalia Meiden. (26 June 2013) .What lies behind the idea EU-Ukraine Association Agreement. Strategic
culture foundation. Retrieved from: http://www.strategic-culture.org
54
Oleksandr Sushko. Nations in transit. Ukraine. National Democratic Governance 2013. Freedom House.
Retrieved from: http://www.freedomhouse.org/report/nations-transit/2013/ukraine

45
ahead of 2015 presidential polls. The situation with Yulia Tymoshenko in prison caused a
global response of Europe and USA. For example, Ukraine football matches were boycotted
by the European leaders during the EURO Football Championship held by Poland and
Ukraine in 2012.
However, the Ukrainian government zealously claimed that Tymoshenko’s verdict was
justified and had no political background.
Knowing that the EU authorities expect the progress of democratic reforms for signing the
Association Agreement, Viktor Yanukovitch pardoned a jailed opposition leader Yuri
Lutsenko. His release was the most significant political event of the first half of 2013. The
Western officials welcomed the move, but warned that it might not be sufficient for Ukraine
to secure the Association Agreement. The key barrier on the Ukraine's path to the political-
association and free-trade agreement with the EU remains the imprisonment of the former
Prime-Minister.

46
Conclusion
Finally, significant findings emerge from this study are explaining the thesis’s problematic
which stands for the comprehension if Ukraine and the EU can be reliable economic and
business partners for each other. This assignment set out to determine importance of the
mutual interests and risks in collaboration between the EU and Ukraine.
The analysis of Ukraine as an emerging free market country underlines the characteristics of
its economic conditions and business environment explaining the country’s major strengths
and weaknesses. The results of this research support the idea that Ukraine possesses
characteristics, which are attractive for the neighboring European Union. Most attractive
characteristics are:
 Large emerging market with 47 million populations growing in their purchasing
power.
 Strategic geopolitical location: second largest country in Europe which lies on the
crossroads of the trade routes between Europe, Russia, Central Asia and Middle East.
 Key intermediary in the transportation of energy supplies to the EU.
 GDP sustainable growth.
 Skilled and competitive labor force
 Rich natural resources
 Membership in several international organizations ( UNO, WTO, OSCE, IMF, World
Bank, ERBD, Council of Europe) and close cooperation with others (OECD, NATO,
IEA).
However, Ukraine’s business climate still remains challenging and includes a lot of
constraints. Political instability in the country caused by a race for power inside the
government, and also constant changes of the regulatory laws by the Ukrainian government
affect a lot the foreign businesses climate. The administrative barriers like corruption, tax
difficulties, complicated customs procedures and unpredictable judicial system strongly
hinder the business in Ukraine. European credit insurers like Coface and the Office national
du ducroire determine the country’s risk assessment as very high due to the trade security
weakness and a bad political environment.
Nevertheless, this research has shown that the EU-Ukraine economic relations and
partnership have developed deeply since the establishment of the official relations in 1998.
Ukraine has proved to be a priority partner country, mostly in energetic sphere, within the
European Union’s initiatives such as the European Neighborhood Policy and the Eastern
Partnership. The EU in its turn is Ukraine’s first largest trade partner and one of the major
financial supporter. The trade of manufactured goods and agricultural production
predominates. Nowadays, the European Union is the biggest source of FDI inflows into
Ukraine. The EU countries that invest the most in Ukraine are Germany, Austria, the
Netherlands, France and Cyprus mainly in the process industry and financial activity sector.
After Ukraine’s accession to the World Trade Organization in 2008, the economic relations
with the EU were enforced.
This work introduces a theoretical contribution to discovering existing potential for
deepening the collaboration between the EU and Ukraine by analyzing the investment
environment in Ukraine at a general level. The empirical findings in this study provide the

47
EU companies with some recommendations based on a sectorial assessment in two pilot
sectors that have been identified as the most promising ones: agribusiness and biomass-based
production energy. Suggestions were justified by global trends and future demand as well as
by Ukraine’s competitiveness sources. Both sectors have strong existing production
capabilities and benefit from favorable nature endowments.
Regarding the agribusiness sector, the results of this study confirm additional evidence
offering that emerging economy, as Ukraine is, draws a lot of attention for large-scale
investment in agricultural sector. This accounts for Ukraine’s rich agricultural resources with
fertile land. In addition, the EU agribusiness companies can benefit from significant cost
advantage, with production costs estimated at around half of those of other European
producers, such as Germany. Agribusiness companies in Ukraine are foreseeing a strong
growth of profitability in future years, especially in grain exports.
The other sector examination also proves actuality and necessity for the EU member states
for investing into Ukraine’s energy based on biomass production and development taking into
consideration country’s abundant agricultural and forestry wastes. But still, the transition to
these alternative energy sources will depend a lot on the government steps to establish
credibility and securing long-term stability demanded by domestic and European investors.
Returning to the question posed at the beginning of the thesis, let’s size up the following
situation. Actual economic relations between the EU and Ukraine demonstrate determination
to have a high-level partnership. A negotiation process launched for signing the advanced
EU-Ukraine Association Agreement can also confirm this. A new philosophy seized in this
agreement represents qualitatively new level of contact, more advanced, leading to political
and economic integration. This integration includes a DCFTA, which envisages an
establishment of a deep and comprehensive free trade zone between Ukraine and the EU.
This will result into opening to the Ukrainian businesses a market ten times larger than other
of the neighboring countries. For the EU, Ukraine, on its part, gives opportunities to become
a major trade partner and attractive place for investment where EU companies can enjoy the
absence of custom duties.
The EU and Ukraine, both members of the WTO, are in a process of development of a high
level partnership to extend their economic relations for deeper reasons. In general, it seems
that it is a win-win agreement as they both pursue their own political interests. Ukraine sees it
as a first step to future EU membership as it is the biggest goal of its foreign policy. On its
side, the European Union is interested to have a secure neighbor on its Eastern borders.
Ukraine can be a reliable partner to the EU in the energy sector thanks to its gas
transportation system and gas storage facilities. That’s why the Association Agreement also
contains issues concerning energy efficiency and security of supply. Ukraine’s energy
independence directly affects and concerns the EU.
The signing Association Agreement may be a defining moment in the history of the economic
relations of the EU and its non-member partner Ukraine. Its possible ratification is forecasted
coming November, during the Eastern Partnership Summit in Vilnius.
However, for implementing the Association Agreement with Ukraine, the EU wants to be
sure of its adherence to the European values and democratic standards. The last point is rather
sensitive considering the imprisonment of former Ukrainian political leaders, among them the
ex-Prime-Minister, Yulia Tymochenko, who was condemned to seven years of prison for
abuse of power and embezzlement. The EU authorities expect some progresses in

48
strengthening democracy, respect for rights of people and freedom of expression. The next
few months Ukraine will show how it moves towards the reforms of the judicial system.
Even if on the path to the European integration Ukraine risks to be involved into a
commercial war with its ―older brother‖ Russia, the engine of the train to Europe has already
been started and clearly Ukraine is not going to get off before the final destination.
The main limit of this study was the paucity of printed editions and surveys neither in English
nor in Ukrainian dated 2013 or 2012 on Ukraine and the European Union economic
relationship. Another issue that was not addressed in this study was whether aspiration of the
EU authorities and Ukraine’s government corresponds to the population expectation and
future hopes of both parties.
Future researches should therefore concentrate on the investigation of the upcoming months
situation with Ukraine’s accomplishment of the reforms and commitments in front of the EU,
which are necessary for signing the Association Agreement and DCFTA. It is recommended
that further studies be undertaken in the following area: prospective of the EU-Ukraine
relations after signing or failure of the Association Agreement.

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