Page 1

2017

middle year review

Turn to Growth

Investment Climate Outlook


Introduction

Yuliya Kovaliv

Head of the Office of the National Investment Council of Ukraine

Since 2016 Ukraine has achieved macroeconomic stabilization, the country switched its focus to supporting economic growth and modernization of the economy. The reforms started in 2014 in energy and financial sector, anticorruption, deregulation, corporate governance of state-owned companies and budget consolidation created a background for economic growth. With the DCFTA agreement started since 01 of January 2016 Ukraine opened export opportunities to European market and created a solid base for becoming European manufacturing base. The need for the new FDIs is crucial for further economic development and increase of peoples’ well-being. Together with day-to-day business environment improvement the state-backed investment attraction and promotion is a pivotal component of attracting FDI back to the country. The National Investment Council was established by the President of Ukraine to set a public-private dialog with key business leader on investment promotion, boosting FDI and tackling key obstacles of Ukrainian regulatory environment. The Office of the National Investment Council is a non-government organization which serves as a platform for public-private dialogue bringing together representatives of the business community, IFIs and Ukrainian officials. The Office of the National Investment Council provides analytical coverage of the key sectors of Ukrainian economy, highlighting sectors potential for investments, key regulation and issues related to investment in these sectors. We are focusing on practical steps needed to address investors’ needs and concerns enhancing public private dialogue and promoting actions to strengthen the business climate in the country. Our goal is to maintain a dialogue between foreign institutional and private investors, IFIs and government to promote Ukraine as an investment destination and to facilitate of development and implementation of legislation to improve business climate. This Report is a brief outlook which reflects the changes of the Ukrainian economy and investment climate in the first half of 2017, covering macroeconomic indicators, key improvements of business regulation as well as some of the trends of FDI coming to the country. As a special highlight, we picked out opportunities for investing in renewable energy sector. We hope that this report will become a useful tool for investors and all the stakeholders of Ukrainian economy and looking forward for your feedback.

Corestone 2017 | National Investment Counсil | Middle Year Report

1


Macroeconomic Overview

Corestone 2017 | National Investment CounŃ il | Middle Year Report

2


Macroeconomic Overview After stabilization, the economy is expected to grow by 2-4% per year in the next 4 years In 2016, Ukraine gradually emerged from the crisis, its economy stabilized and started to recover. In 1Q 2017, real GDP increased by 2.5% compared to 1Q 2016. Growth is expected to reach 2% annually in 2017 and 3.2% in 2018 (IMF forecast), supported by recovering consumer and investor confidence and a gradual recovery of the financial sector. The general government deficit remains close to 2.0% of GDP on a 12-month trailing basis, on track to reach the 2.7% of GDP annual target. The primary balance has been positive since 2015 after years of deficits. Much of this progress reflects the authorities’ efforts and proves the viability and prospects of the chosen path of economic reform. The government has pursued a policy aimed at deregulating entrepreneurial activity, improving the business climate, optimizing public sector governance, and ensuring the harmonization of national legislation with EU legislation (see «Improving business climate» section for details).

Real GDP Growth Rate Period: 1Q, 2010-2017 Score: %, YoY

2.4 5.5

-1.3

-1.0

4.5

2.5 0.1 -16.0 2010

2011

2012

2013

2014

2015

2016

2017

Source: Ministry of Economic Development and Trade of Ukraine, Derzhstat

GDP Growth Forecasts Period: 2017-2020 Score: %, YoY

Actual 2016 Government Forecast IMF Forecast

2.3

1.8 2.0

2016

2017

3.0 3.2

3.6 3.5

2018

2019

4.0 4.0

2020

Source: Ministry of Economic Development and Trade of Ukraine, IMF From 2014: Excluding the temporarily occupied territories of the Autonomous Republic of Crimea, the city of Sevastopol and part of the anti-terrorist operation zone.

Corestone 2017 | National Investment Counсil | Middle Year Report

3


Macroeconomic Overview The worst of the economic storm is over: ination is decreasing, hryvnia is largely stable and gross reserves are rising Weak demand, a relatively stable exchange rate, and tight monetary policy brought 6-month inflation down to 7.9% in June 2017. It is expected to fall to an annualized 10% by the end of the year - compared to 12.4% in 2016 (IMF forecast). Despite the negative impact on exports of severed economic ties with non-controlled parts of Donbas, the hryvnia has significantly appreciated since April, supported by strong agricultural exports, inflows of capital to the private sector and seasonal factors. The NBU purchased $1.3bn from the F/X market in 1H 2017, +6.7% YoY, and allowed the hryvnia to strengthen by 4.5% YtD to UAH 26.0 UAH per 1 USD.

Inflation Rate

Period: 1H, 2010-2017 Score: %, to December of the previous year

7.9 40.7

4.9

11.6 3.3 2010

5.7

0.0

0.1

2011

2012

2013

2014

2015

2016

2017

Source: Ministry of Economic Development and Trade of Ukraine, Derzhstat

Inflation Forecast

Period: 2017-2020 Score: %, to December of the previous year Actual inflation 2016 Government Forecast IMF Forecast

12.4

11.2 10.0

2016

2017

7.0

7.0

2018

5.9

6.0

2019

5.0

5.0

2020

Source: Ministry of Finance of Ukraine, IMF

Exchange Rate UAH/USD

22.07.20 13 12.08.20 13 03.09.20 13 24.09.20 13 15.10.20 13 05.11.20 13 26.11.20 13 17.12.20 13 05.01.20 14 23.01.20 14 13.02.20 14 06.03.20 14 28.03.20 14 17.04.20 14 14.05.20 14 04.06.20 14 26.06.20 14 18.07.20 14 08.08.20 14 01.09.20 14 22.09.20 14 13.10.20 14 03.11.20 14 24.11.20 14 15.12.20 14 03.01.20 15 22.01.20 15 12.02.20 15 05.03.20 15 27.03.20 15 20.04.20 15 14.05.20 15 05.06.20 15 26.06.20 15 20.07.20 15 10.08.20 15 01.09.20 15 22.09.20 15 13.10.20 15 04.11.20 15 25.11.20 15 16.12.20 15 13.01.20 16 02.02.20 16 23.02.20 16 16.03.20 16 06.04.20 16 27.04.20 16 23.05.20 16 13.06.20 16 06.07.20 16 27.07.20 16 17.08.20 16 08.09.20 16 29.09.20 16 21.10.20 16 11.11.20 16 02.12.20 16 23.12.20 16 19.01.20 17 09.02.20 17 02.03.20 17 24.03.20 17 14.04.20 17 12.05.20 17 01.06.20 17 23.06.20 17

35 30 25 20 15 10 5 0

Period: 2013-2017, forecast 2017-2020 Score: UAH/USD

30.5 31.0 27.2 29.3

2017

2018

2019

Source: NBU

Corestone 2017 | National Investment CounŃ il | Middle Year Report

4

2020


Macroeconomic Overview Supported by inflows of official international financing and F/X purchases, NBU reserves rose to $17.8bn in June (+15% YtD).

International Reserves

Period: 1H, 2010-2017 Score: billion USD

37.58 29.52

29.32 23.25 17.08

2010

2011

2012

2013

2014

10.26

2015

13.89

2016

17.79

2017

Source: NBU

Corestone 2017 | National Investment CounŃ il | Middle Year Report

5


Macroeconomic Overview Industrial output decline is slowing In 1H 2017 the decline in industrial production slowed to 0.4%. The decline was most notable in the production of intermediate goods (by 2.4%) and energy resources (by 6.3%) - because of the negative influence of military operations in parts of Donbas and the blockade of the rebel held area. All the other major industrial sectors demonstrated faster growth: manufacture of furniture and other manufacturing; repair and installation of machinery and equipment by 10.3%, textile industry, sewing of clothes, leather, leather articles and other materials by 8%, manufacture of rubber and plastic products, manufacture of other non-metallic mineral products by 7.6%, engineering by 7.4%, production of foodstuffs, beverages and tobacco products by 5.1%. Agricultural production decreased by 2.1% due to lower yields of crop production and due to the negative trend in cattle breeding and milk production. At the same time, retail trade turnover increased by 7.3%; wholesale trade turnover - by 1.5%; cargo turnover and passenger turnover - by 9.1% and 9.4% respectively; and construction product turnover rose by 20.8% (January-May).

Agriculture Industry Growth

Industrial Production Growth

Period: 1H, 2010-2017 Score: %, YoY

Period: 1H, 2010-2017 Score: %, YoY

8.5

1.5

16.8 -5.0

13.7

-3.9

-4.0 7.8 2.6 -20.0

2010

2011

2012

2013

2014

2015

2016

-0.4

3.7

2017

2010

Source: Ministry of Economic Development and Trade of Ukraine, Derzhtat

Industrial Production Annual Growth Forecast

2.8%

4.6%

2011

2012

2013

2014

2015

2016

2017

Source: Ministry of Economic Development and Trade of Ukraine, Derzhstat

Period: 2017-2020 Score: %, YoY

Government Forecast

3.9%

-2.1

3.2

Agriculture Industry Annual Growth Forecast

Period: 2017-2020 Score: %, YoY Actual 2016

-9.3 -0.3

5.0%

1.4%

2016 2017 2018 2019 2020 Source: Ministry of Economic Development and Trade of Ukraine

Actual 2016

6.3%

1.7%

2016

2017

Government Forecast

1.0%

1.3%

2018

2019

1.7% 2020

Source: Ministry of Economic Development and Trade of Ukraine

From 2014: Excluding the temporarily occupied territories of the Autonomous Republic of Crimea, the city of Sevastopol and part of the anti-terrorist operation zone.

Corestone 2017 | National Investment CounŃ il | Middle Year Report

6


Macroeconomic Overview Exporters are exploring and entering new markets The dynamics of foreign trade has improved due to the growth of prices on global markets for certain Ukrainian exports. Thus, at the end of January-May 2017, the value of exported goods increased by 25.9%. Agriculture still leads in the total volume of exported goods. The introduction of the Free Trade Agreement with the EU and the intensification of trade restrictions between Ukraine and Russia led to a gradual reorientation of Ukraine’s exports. In January-May 2017 the value of exports of goods to EU countries increased by 25.2% (share in the total volume of exports of goods - 39.2%).

Export Growth

Period: Jan-May, 2010-2017 Score: %, YoY

5.8 43.9

-3.5 -5.1 25.9

-35.9 -11.5 2011

2012

2013

2014

2015

2016

2017

Source: Ministry of Economic Development and Trade of Ukraine, Derzhstat

Export Commodity Structure Period: 2010, 2016 Score: %, YoY

2016

6%

3% 4% 5%

2% 7%

7%

11%

3%

19% 42%

Food and Agriculture

Chemical Industry

Metallurgy

Light Industry

Machinery

Other

Minerals and mining Wood

2010

13% 10% 11%

34%

23% Source: Derzhstat

From 2014: Excluding the temporarily occupied territories of the Autonomous Republic of Crimea, the city of Sevastopol and part of the anti-terrorist operation zone.

Corestone 2017 | National Investment CounŃ il | Middle Year Report

7


Macroeconomic Overview The NBU expects high growth in ore exports (by 41%) in 2017 due to the release of additional volumes because of the termination of shipments to metallurgical enterprises located in the occupied territory of Donetsk and Luhansk regions. The export of food products such as sugar will rise to new markets in Asia which were successfully entered in 2016. In addition, exports of engineered goods are expected to grow as a result of the gradual reorientation of products that were previously exported to Russia.

Geography of Ukrainian Exports Period: 2010, 2016 Score: % 2016 2010

EU

26.6% 9.9%

Russia Turkey

5.6% 5.9%

Italy

5.3% 4.7%

Belarus

2.5% 3.7%

Poland

6.1% 3.5%

Germany

37.1%

26.1%

3.9% 2.9%

India

5.2% 2.8%

Egypt

6.2% 2.6%

China

5.0% 2.6%

USA

1.2% 1.6%

France

1.2% 0.9%

Source: Derzhstat

From 2014: Excluding the temporarily occupied territories of the Autonomous Republic of Crimea, the city of Sevastopol and part of the anti-terrorist operation zone.

Corestone 2017 | National Investment CounŃ il | Middle Year Report

8


Macroeconomic Overview The volumes of imports of goods in January-May 2017 increased by 28.6%. The value of imports of goods from the EU increased by 21.3% (share in the total volume of imports of goods - 41.2%).

Import Growth

Period: Jan-May, 2010-2017 Score: %, YoY

7.4 52.5 -12.7

-18.0 28.6

-38.2 2011

2012

2013

2014

2015

-6.2

2016

2017

Source: Ministry of Economic Development and Trade of Ukraine, Derzhstat

Import Commodity Structure Period: 2010, 2016 Score: %, YoY

2016

6%

7%

22%

8% 7%

3%

4% 35%

9%

2010

10%

Minerals and mining

Polymers and plastics

Machinery

Metallurgy

Chemical Industry

Wood

Food and Agriculture

Light Industry

Transport

Other

17% 11%

20%

14%

13%

Source: Derzhstat

14%

From 2014: Excluding the temporarily occupied territories of the Autonomous Republic of Crimea, the city of Sevastopol and part of the anti-terrorist operation zone.

Corestone 2017 | National Investment CounŃ il | Middle Year Report

9


Macroeconomic Overview By the end of the year, growth in imports of goods is expected to increase by 11%. Import of energy is expected to rise by 33.5% due to the termination of coal and coke supplies from Donbas, as well as the rising prices for petroleum products and gas. Engineering products will remain the main driver of non-energy imports, primarily due to increased demand from farmers. The growth of imports of food products is expected as a result of the gradual recovery of consumer demand. The balance of trade in goods in January-May 2017 remains negative - minus $1,330.2 mln.

Geography of Ukrainian Imports Period: 2010, 2016 Score: %

EU

2016 2010

43.7%

28.3% 13.1%

Russia China

36.5%

11.9%

7.7%

11.0% 7.6%

Germany Belarus

7.1% 4.2%

Poland

6.9% 4.6%

USA

4.3% 2.9%

France

3.9% 1.8%

Italy

3.5% 2.3%

Turkey

2.8% 2.1%

India

1.2% 2.7% 0.1% 2.6%

Egypt Source: Derzhstat

From 2014: Excluding the temporarily occupied territories of the Autonomous Republic of Crimea, the city of Sevastopol and part of the anti-terrorist operation zone.

Balance of Payments

Period: 1H, 2010-2017 Score: mln USD (without IMF Loans)

4,428 2,181

1,795 2012 2010

2011

2014

2015

2013

2016

-1,119 Source: NBU

407

1,049 2017

-1,300 -4,282

According to the results of the first half of this year, the surplus of the consolidated balance of payments amounted to $ 1,049 million. The surplus of the balance of payments allows to increase the international reserves to $ 17.79 billion as of July 1, 2017, which provides import financing for the future period of 3.7 months.

Corestone 2017 | National Investment CounŃ il | Middle Year Report

10


Macroeconomic Overview Capital investments exceeded pre-crisis level The volume of capital investments is growing for the second year running, accelerating from 0.7% in 1Q 2016 to 21.4% in 1Q 2017. Key sectors of capital investment: industry (35%), agriculture (17%), construction (14%), transport (8%), trade (8%). The main source of capital investment is enterprises’ own funds - 77%, far exceeding 10% for the population's expenditures on housing construction, 5% of loans and 1,5% of foreign investors' funds.

Capital Investment Growth Period: 1Q, 2010-2017 Score: %, YoY

19.6 -3.9 21.4 13.0

-14.2

0.7 -14.8 2011

2012

2013

2014

2015

2016

2017

Source: Ministry of Economic Development and Trade of Ukraine

Capital Investment Structure by Industry Period: 1Q, 2013-2017 Score: mln UAH

total Industry

2013 51,943.5

2016 51,591.7

2017 64,754.4

24,904.0

17,048.6

22,473.8

2,562.5

Agriculture, forestry and fisheries

8,948.0

Construction Transport, warehousing, postal and courier activities Wholesale and retail trade; Repair of motor vehicles and motorcycles

2,476.9 4,843.9 2,500.4

Real estate operations

6,949.7 8,323.1

10,899.5 9,169.5

3 ,540.9

5,414.6

5,221.6

5,171.3

3,672.4

2,432.8

Activity in the field of administrative and auxiliary services

595.0

1,256.0

1,750.5

Financial and insurance activities

972.2

1,161.0

1,373.6

Public administration and defense; Compulsory social insurance

689.6

543.9

1,135.8

Professional, scientific and technical activities

551.7

562.4

668.0

Health care and social assistance

285,3

276.8

648.9

Arts, sports, entertainment and recreation

483.9

121.4

273.9

Source: Derzhstat

From 2014: Excluding the temporarily occupied territories of the Autonomous Republic of Crimea, the city of Sevastopol and part of the anti-terrorist operation zone.

Corestone 2017 | National Investment CounŃ il | Middle Year Report

11


Macroeconomic Overview Investors show cautious optimism The FDI inflow (net) in the 1H 2017 amounted to $ 1,156 million and was mostly directed towards the real sector of the economy. This explains the decline of FDI compared to 2016, when most investments (74%) were made by international parent banks in order to capitalize Ukrainian subsidiary banks. Increasing FDI inflows is one of Ukraine’s main goals for the next several years. The government expects inflows to rise to $ 5.5 bn by 2020.

Net Foreign Direct Investment

Period: 1H 2017 (according to the balance-of-payments methodology) Score: mln USD

3,302

3,282

2,119

1,578

1,304

2,126 1,156*

2014 2010

2011

2012

2013

2015

2016

2017

-984 Source: Ministry of Economic Development and Trade of Ukraine, Derzhstat

*The share of bank recapitalization in 1H 2017 declined more than 2 times comparing to 1H 2016 and amounted to $ 419 million (36%) (1H 2016: $ 1,765 million - 74%).

Net Foreign Direct Investment Period: 2017-2020 Score: %, YoY

2016 fact

3,300

Government Forecast

3,500

1,700

2016

2017

5,500

4,500

2018

2019

2020

Source: Ministry of Economic Development and Trade of Ukraine, Derzhstat

Foreign Direct Investment by Industry Period: 2016 Score: %

3%

3%

3%

3% 27%

5%

Total amount of foreign direct investments as of 01.01.2017 is $ 37,313.3 million which is $ 1,158.8 million more than as of 01.01.2016.

6%

Financial and insurance activities

Information and telecommunication

Industry

Activity in administrative and support service

Wholesale and retail trade; repair of motor vehicles and motorcycles

10%

15%

25%

Construction

Operations with real estate

Transportation, warehouse, storage and courier activities

Professional, scientific and technical activities

Other

From 2014: Excluding the temporarily occupied territories of the Autonomous Republic of Crimea, the city of Sevastopol and part of the anti-terrorist operation zone.

Corestone 2017 | National Investment CounŃ il | Middle Year Report

12


Ukraine in International Ratings

Corestone 2017 | National Investment CounŃ il | Middle Year Report

13


Ukraine in International Ratings Doing Business The ease of doing business index is an index created by the World Bank Group. Higher rankings (a low numerical value) indicate better, usually simpler, regulations for businesses and stronger protections of property rights. Empirical research funded by the World Bank to justify their work show that the economic growth impact of improving these regulations is strong.

Ukraine Doing Business Period: 2015-2017 Rate: 80/190 2015

2016

2017

+31 position in Protecting Minority Investors 20 in Starting Business № 20 in Getting Credit

80

81 96

/ 189

/ 189

/ 190 countries

EBA Investment Attractiveness Index Investment Attractiveness Index is the European business Association research project which reflects the status of the Ukrainian business climate and based on expert evaluations provided by top-managers from member-companies. This Index allows to keep abreast of the current economic trends as well as detect foreign investors’ mood.

positive

The EBA Investment Attractiveness Index is calculated as a simple average assessment based on five aspects indicating the investment climate. The EBA analyzes responses using 5 scale grade.

5

EBA Investment Attractiveness Index Period: 2009-1H 2017 Rate: 3.15/5

4

neutral value

2.6

3.3 3.2 3.3

3.4 3.4

3.15

3.0

2.9 2.7 2.7

2.6 2.6

2.6

2.2

2.4

2.6

2.5 2.5

2.9

3

2.7 2.6 2.6

2.2 2.2 2.2 2.1 2.1 2.1 2.2

2

negative

1.8

1 I

II III IV 2009

I

II III IV 2010

I

II III IV 2011

I

II III IV 2012

Corestone 2017 | National Investment Counсil | Middle Year Report

I

II III IV 2013

I

II III IV 2014

I

II III IV 2015

1H 2H 1H 2016 2017

14


Ukraine in International Ratings Global Innovation Index Ukraine Global Innovation Index Period: 2015-2017 Rate: 50/127 2015

/ 128

The Global Innovation Index provides detailed metrics about the innovation performance of 127 countries and economies around the world. Its 81 indicators explore a broad vision of innovation, including political environment, education, infrastructure and business sophistication.

2017

50

56

64

/ 141

2016

GII 2017 focuses on innovation in agriculture and food systems. In the coming decades, the agriculture and food sector will face an enormous rise in global demand, increased competition for limited natural resources, and the effects of climate change. Innovation is key to sustaining the productivity growth required to meet this rising demand and to helping enhance the networks ("food systems") that integrate sustainable food production, processing, distribution, consumption, and waste management.

/ 127 countries

Global Innovation Index Sub-Indexes Period: 2017

Innovation Output Sub-Index

1-20 21-40 41-46 61-80 81-100 101-120 121-128

40

77

Innovation Input Sub-Index

11 Innovation Efficiency Ratio

Human Capital Index Ukraine Human Capital Index Period: 2014-2016 Rate: 26/130 2014

2015

31

2016

26

64

/ 122

/ 124

The World Economic Forum’s Human Capital Report ranks 130 countries on how well they are developing and deploying their talent. The index takes a life-course approach to human capital, evaluating the levels of education, skills and employment available to people in five distinct age groups, starting from under 15 years to over 65 years. The aim is to assess the outcome of past and present investments in human capital and offer insight into what a country’s talent base looks like today and how it is likely to evolve into the future.

/ 130 countries

Corestone 2017 | National Investment Counсil | Middle Year Report

15


Ukraine in International Ratings Global Open Data Index Ukraine Global Open Data Index Period: 2014-2016 Rate: 31/94 2014

n/a

/ 122

2015

2016

31

54

The Global Open Data Index (GODI) is an independent assessment of open government data publication from a civic perspective. GODI enables different open data stakeholders to track government’s progress on open data release. GODI also allows governments to get direct feedback from data users. The Index gives both parties a baseline for discussion and analysis of the open data ecosystem in their country and internationally. The Global Open Data Index provides the most comprehensive snapshot available of the state of open government data publication.

/ 94 countries

Global Competitiveness Index Ukraine Global Competitiveness Index Period: 2014-2016 Rate: 85/138 2014

76

/ 144

/ 140

79

2015

2016

85

Global Competitiveness Index is a rank of the countries in the Global Competitiveness Report — a yearly report published by the World Economic Forum. The report assesses the ability of countries to provide high levels of prosperity to their citizens. This in turn depends on how productively a country uses available resources. Therefore, the Global Competitiveness Index measures the set of institutions, policies, and factors that set the sustainable current and medium-term levels of economic prosperity.

/ 138 countries

Corestone 2017 | National Investment CounŃ il | Middle Year Report

16


Improving Business Climate

Corestone 2017 | National Investment CounŃ il | Middle Year Report

17


Improving Business Climate Improving business climate through deregulation and SME promotion The Cabinet of Ministers (CMU) has approved Strategic Action Plan 2020 which includes a list of priorities in deregulation, state property management and privatization, public procurement, development of innovations, improvement of the investment climate and development of Ukrainian exports. A strategy of small and medium business in Ukraine by 2020 has been adopted.

The Parliament has ratified the Treaty between the Government of Ukraine and the EU on the participation of Ukraine in the EU Program “Competitiveness of small and medium enterprises” (COSME 2014-2020) with general budget of EUR 2.3 billion. The Cabinet of Ministers has approved a Strategy of the development of tourism and resorts by 2026.

President Poroshenko and the President of the World Bank Group Jim Yong Kim have signed a Cooperation plan 2017-2021 focused on reforms in Ukraine.

Government improved regulation of state inspections aiming to decrease the number and duration of inspections on businesses. The decision includes: Introduction of a public integrated inspection database, which will encourage more transparent, predictable and accountable activities by state bodies. The system will provide the public, businesses, state authorities and local governments with online access to information about state supervision measures. State authorities will be obliged to provide information about planned supervision measures by October 15. On October 17, the system will automatically publish a draft plan of comprehensive measures of state supervision. An approved methodology of determination of the authorized frequency of business inspections. The methodology will ensure a unified approach to the development of criteria for measurement of risk towards economic activity and determination of the frequency of planned state supervision. It will also determine the unified forms of acts, which are formed on the results of state supervision measures. Approved Procedure of Coordinated Planned State Supervision Measures, which determines that planned control measures should be performed in a coordinated manner, simultaneously with all supervisory bodies. The Ministry of Economic Development and State regulatory office have been granted the right to monitor the observance of the Law "On Principles of State Supervision of Economic activity” by regulatory authorities to protect business from unlawful pressure. Forty-four old regulatory documents imposing state control of business have been canceled. This will result in less checkups of companies. CMU has canceled state price regulation of food products from July 1st 2017, which will eliminate state control over market pricing and the risks related to potential penalties for food wholesale and the retail sector.

Corestone 2017 | National Investment Counсil | Middle Year Report

18


Improving Business Climate

Administrative Services are improving All applications will be processed during 10 days and all the approval procedures will be held without additional requests from applicants. Administrative service centers will be decentralized and established in small cities and villages. The Ministry of Justice has introduced a procedure of fast registration of information changes in registry of legal entities, private entrepreneurs, NGOs and political parties. The procedure can be as fast as 2 hours depending on type of applicant and service fee. The architectural licenses issuance procedure has been improved, the practice of recognizing the illegal prolongation of the license has been eliminated. This will ensure increased legal certainty; less court disputes related to conflicts of law and a 3-times shorter procedure. The electronic procedure of submitting documents to the licensing authority has been improved. According to the decision, a unified procedure is established - electronic documents (or scan copies in PDF format) are submitted to the licensing body through the Unified State Administration of Administrative Services portal. Electronic documents are no longer needed to be duplicated on paper. The Ministry of Regional Development has provided public access to urban planning documentation through its new web service. This decision will allow to get information about city planning documentation in a few minutes and quickly identify the prospective area for investment. Information will be available on 29.5 thousand locations. The State Boarder Guard Service of Ukraine has launched an online map with live information about the loads at border crossing points. (http://dpsu.gov.ua/ua/map) President Poroshenko has signed a Law which allows foreign investors to obtain a residence permit in Ukraine. The Government authorized the Ministry of Economic Development and Trade (MEDT) to issue intellectual property security documents (patents, certificates). This decision is another step towards the creation of a National Intellectual Property Authority.

President Poroshenko has signed Squeeze-out and Corporate Governance Laws. The document improves the mechanism of the acquisition of shares of a private joint-stock company as a result of the acquisition of a controlling stake and introduces a mechanism of acquisition of shares of a public joint stock company as a result of the acquisition of a controlling and significantly controlling stake. The law introduces a mechanism of the mandatory sale of shares by shareholders at the request of the shareholder that owns 95% of the company's shares and a mechanism of mandatory acquisition of shares at the request of shareholders by the owner of more than 95% of the company's shares.

Corestone 2017 | National Investment CounŃ il | Middle Year Report

19


Improving Business Climate Doing Business improvement Starting a business: The time for registration of an LLC by the state registrar has been reduced. Now the duration of this procedure is 1 day (compared to 3 days last year). Registration can also be done online (Law of Ukraine "On State Registration of Legal Entities, Individuals - Entrepreneurs and Public Associations"). A stamp is no longer necessary for legal entities. Officials can be fined for demanding a stamp imprint on a document. (Law of Ukraine "On Amending Certain Legislative Acts of Ukraine on the Use of Stamps by Legal Entities and Individual Entrepreneurs").

Access to the grid: A power transmission company is obliged to pay compensation to a consumer in case of more than 24 hours interruption of electricity supply. (Resolution of the National Energy and Utilities Regulation Commission "On Approval of the Procedure for Providing Quality Standards for Electricity Supply Services").

Property registration: An expert monetary valuation of a land plot is not required for a notarial certificate of a transaction between legal entities (Letter from the Ministry of Justice of Ukraine). Notaries have received direct access to the State Land Cadaster (CMU Resolution "Some Issues of Access to the State Land Cadaster for Notaries"). Entering information about the ownership of the seller in the Register of Property Rights is no longer necessary for the notary to certify the transaction. Information on the ownership of the buyer is immediately entered in the Register (Law of Ukraine "On the state registration of real rights to immovable property and their encumbrances"). A separate mechanism of administrative appeal of state registrars’ actions has been created (Law of Ukraine "On state registration of real rights to immovable property and their encumbrances”). Official statistics on the number of real estate transactions have been made public.

Minority investors protection: Public disclosure of information on a deal with interest has been made obligatory (Decision of the National Commission on Securities and Stock Market "On Approval of Changes to the Regulation on Disclosure of Information by Issuers of Securities").

Corestone 2017 | National Investment Counсil | Middle Year Report

20


Improving Business Climate Building permits obtaining: The share contribution to the development of the infrastructure location (in Kyiv) has been reduced to 2% compared with 10% last year The market value of technical supervision services in construction has been significantly reduced by the public procurement portal Prozorro. Now the cost of such services rarely exceeds 1.8% The necessity of receiving initial data from the State Emergency Service of Ukraine for architectural designing has been canceled (Law of Ukraine "On Amendments to Certain Legislative Acts of Ukraine Concerning Improvement of Construction Practices") Civil liability of the developer of the construction project and the technical supervision engineer has become insured (Standards of self-regulatory organizations of architects and engineers) The developer of the construction project and the engineer of technical supervision are required to have higher education (Law of Ukraine "On Amendments to Certain Legislative Acts of Ukraine regarding Improvement of Construction Conditions") Architectural and building control bodies have been obliged to carry out inspections based on a risk-oriented approach (CMU Resolution "On Approval of Criteria for Assessing the Risk of Economic Activity in the Area of Urban Development ...�) The declarations registration procedure has been canceled (Law of Ukraine "On Amendments to Certain Legislative Acts of Ukraine Concerning the Improvement of Urban Development") The deadline for technical specifications provision has been reduced (Law of Ukraine "On regulation of urban development activities") The registration procedure of ownership of a real estate object has been simplified (Law of Ukraine "On state registration of rights to immovable property and their encumbrances")

Corestone 2017 | National Investment CounŃ il | Middle Year Report

21


Improving Business Climate Moving to transparent and predictable taxation Automatic system of VAT reimbursement has been launched since April 1st 2017 Each business can track the status of its reimbursement online The State Fiscal Service generates all incoming information in the register on the basis of business applications and approves it with an electronic digital signature. The sum should be determined within 30 days. Refunds made chronologically and on a daily basis. Transparent and automatic registry prevents corruption during VAT reimbursement, restores business confidence, creates a level playing field for every entrepreneur and facilitates business climate improvement in Ukraine. During January - June 2017 VAT reimbursement rose by 60% compared to the same period in 2016 and amounted USD 1.98 billion.

Ministry of Finance of Ukraine reports that the VAT reimbursement procedure has become 54% faster.

Government debt on VAT reimbursement dropped from UAH 15.3 billion in April 2017 to UAH 1.9 billion as of mid-July 2017. The Law "On Amendments to the Tax Code of Ukraine on Improving the Investment Climate in Ukraine" came into force. Administration of all databases will be provided by the Ministry of Finance or the state enterprise under the Ministry of Finance (instead of the State Fiscal Service (SFS) and a single database of individual tax advice is planned to be introduced on the SFS website. A full-fledged taxpayer's electronic cabinet is planned to be introduced by the end of 2017 (access to all tax information about the payer, reconciliation of payments to the budget, filling out and submitting tax reports, managing overpaid funds, registration of tax and excise bills, informing about inspections and issuing acts or certificates of inspections, correspondence with the controlling body). The criteria for assigning taxpayers to the category of large taxpayers has been changed: The sum of payment to the state budget controlled by the SFS has increased from UAH 12 to 20 million; The criterion of income, which is taken into account when determining the object of taxation, is changed on the criterion of the total volume of delivery in the amount of UAH 1 billion. The Tax Police as a part of State Fiscal Service is planned to be replaced by the Financial Police, which will join investigation powers for all economic crimes, including part of functions of the National Police, Prosecutor's Office and State Security Service. The relevant draft Law is being discussed by the Government The Ministry of Finance has made the process of correction of customs declarations easier. Until 11.01.2017 there was no possibility to correct the information related to the additional payment or return of customs payments, including the cancellation of the decision of the customs authority. Custom offices are now obliged to correct the declaration if the decision of the Custom office has been canceled (for example when a court cancels the decision of the customs office about a customs price)

Corestone 2017 | National Investment CounŃ il | Middle Year Report

22


Improving Business Climate Businesses can now correct customs declarations to comply with the rules on transfer pricing. The Law "On Audit of Financial Reporting and Auditing" has been approved. It aims to improve the quality of audit services in Ukraine through the improvement of the regulatory system of audit activity in accordance with international standards. The Ministry of Finance has begun reforming the State Fiscal Service (SFS) in accordance with the concept developed jointly with international partners of Ukraine (International Monetary Fund, US Customs and Border Guard Service, US Treasury and European Commission): The project aims to optimize the processes, strengthen the main functions of the SFS, improve the efficiency and quality of tax administration services. The main goal is to reduce the level of corruption and improve the proper motivation of the SFS. Determining a model of the average value of the profitability indicator for the purposes of transfer pricing has been approved.

Corestone 2017 | National Investment CounŃ il | Middle Year Report

23


Improving Business Climate Reaching international markets The European Council approved the EU-Ukraine Association Agreement on July 11th. It is going to enter into force from September 1st 2017.

The Parliament has ratified the Ukraine – Canada Free Trade Agreement. It comes into effect from August 1st 2017.

From June 11th the visa-free regime with the EU came into effect, providing up to 90 days visa-free travel for Ukrainian citizens.

The WTO Agreement on Trade Facilitation has entered into force. Implementation of the Agreement by Ukraine will help to decrease costs for business by 14% and also attract foreign direct investments, improve the business climate, stimulate deregulation in foreign trade, and increase export volumes. The European Parliament has supported providing additional trade preferences to Ukraine in the form of additional volumes of duty-free quotas and cancellation of import fees. In particular, the following annual quotas have been set: for honey - 2.5 thousand tons, processed tomatoes - 3 thousand tons, wheat - 65 thousand tons, corn - 625 thousand tons, barley - 325 thousand tons. The Ministry of Economic Development and Trade has presented the "Export Strategy of Ukraine�. The main three goals of the Strategy are: Creating favorable conditions to stimulate trade and innovation for diversifying exports; Development of business and trade support services that can increase the competitiveness of enterprises; Strengthening skills and competencies of companies, required for participation in international trade. The Minister of Economy has signed the OECD Agreement on Ukraine's Accession to the Declaration on International Investments and Transnational Corporations. Accession to the Declaration will facilitate attraction of foreign direct investment to Ukraine, as it: Testifies to the introduction of international standards of investment activity by Ukraine; Contributes to the improvement of the competition and development of innovation; Promotes the implementation of the principles and standards of corporate social responsibility in accordance with OECD guidelines; Eliminates restrictions on sectors which are prohibited for foreign investments and provides a national regime for Transnational Corporation. Ukraine will benefit from changes to the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights that may facilitate access to medicines. A permanent mechanism for compulsory licensing of patented pharmaceutical products has been introduced. It provides access to essential generic medicines produced in other countries for the members of the WTO that are in need of it. Exporting countries will be able to issue a compulsory license to suppliers of such drugs (exclusively for the purpose of producing and exporting the necessary products to countries with limited capacity in the pharmaceutical sector) that will comply with WTO rules.

Corestone 2017 | National Investment CounŃ il | Middle Year Report

24


Improving Business Climate The Joint Committee of the Regional Convention on Pan-Euro-Mediterranean Preferential Rules of Origin (Pan-Euro-Med Convention) at its sixth meeting decided to formally invite Ukraine to accede to the Pan-Euro-Med Convention. The Convention establishes unified rules of origin for trade of goods in the Pan-Euro-Mediterranean region and thus enhances economic integration and trade relations. Ukraine and the GUAM countries have signed a four-party Protocol to enhance coordination within the FTA. The Protocol coordinates the actions of the parties on the establishment of a free trade area between GUAM countries. The Government has signed an Agreement on Promotion and Mutual Protection of Investments, creation of the Joint Commission on Economic, Trade and Technical Cooperation with the Government of Qatar. The Agreement on mutual protection of investments means additional safeguards against illegal expropriation and nationalization of investments, free transfer of payments, internationally recognized procedures for resolving disputes between investors. Qatar is exploring Ukrainian agricultural goods while Ukraine is analyzing Qatari petroleum products. The Parliament has ratified the Agreement on technical and financial cooperation with Norway. The Agreement allows to create the organizational and legal basis of Ukrainian-Norwegian cooperation in the field of attraction and use of international technical assistance and will promote the development of technical and financial cooperation between the two states. The Interdepartmental Commission for International Trade has adopted anti-dumping duties on import for some nitrogen fertilizers (urea and ammonium nitrate) from the Russian Federation. The Ukrainian Parliament has ratified the Agreement on economic cooperation between the Government of Ukraine and the Government of Croatia. The Agreement aims to develop mutually beneficial partnerships between Ukraine and the Republic of Croatia in the economic sphere, creating favorable conditions for trade between economic entities of the two countries by establishing contacts between the business community, promoting participation in exhibitions, fairs, organization of business events, seminars, symposiums and conferences. The Ministry of Economic Development and Trade signed an Investment promotion and protection agreement with The OPEC Fund for International Development. The signing of the Agreement will promote investment attraction from the Fund into the Ukrainian economy, as well as support of small and medium enterprises in various spheres – energy, infrastructure, agricultural complex, etc. The Government of Ukraine has signed a trade agreement and agreement of bilateral judicial support with the government of Thailand. The implementation of the measures regulated by signed documents will significantly facilitate the intensification of bilateral contacts between law enforcement officials and representatives of business community of the two countries. The National Bank of Ukraine has signed Memorandum of Understanding with the Central Bank of Turkey. The signing of the document will allow further exchange of information through consultations and sharing of experience at the expert level, conducting research activities and providing technical assistance.

Corestone 2017 | National Investment CounŃ il | Middle Year Report

25


Improving Business Climate On the way to invite investors for privatization of state assets The Cabinet of Ministers has introduced a Draft Law on Privatization. The classification of objects of privatization is simplified, it is planned to introduce only 2 types — objects of “large” and “small” privatization. The terms of preparation of an object for privatization are halved: from 2 years to one year for a “large” privatization, for a “small” privatization from 1 year to six months. “Large” objects will be sold with the mandatory involvement of an advisor, while “small” objects will be processed via the electronic platform. The procedure of privatization itself is simplified. Only two approaches are proposed (instead of the current 5): auction and redemption. The State Property Fund with the Ministry of Economic Development has identified the first 90 objects for “small” privatization to sell through the "Prozorro” electronic auction platform.

The State Property Fund has announced a tender for valuation of Odesa Portside Plant required to retry its privatization.

The Government plans to hold tender procedures for 4G network construction in Fall 2017. Starting price for licenses will be USD 153.8 million and USD 88.5 million for 2600 and 1800 MHz respectively. The State Property Fund hired EY as an independent sale adviser for the privatization of SOE Centerenergo. The main objective of the sale adviser is to increase the investment attractiveness of the company, to ensure the sale of shares to an effective owner and to obtain the maximum possible funds for the state budget. The procedure of the formation, organization and liquidation of the supervisory boards of state enterprises and the procedure for determining (conducting competitive selection) of independent members of supervisory councils has been approved. The first pilot Supervisory Board will be set in the biggest State-Owned Enterprises by the end of the year. The government has approved the proposal of the Ministry of Economic Development and Trade on the management of state-owned enterprises subordinated to central authorities. The adopted document (the so-called Triage), defines which state-owned enterprises (from 3,444 objects with total asset value of UAH 1,704 billion) should remain state-owned, be transferred to a concession, privatized or liquidated. According to the document, 15 of the most important state-owned enterprises and 363 objects ensuring that the State performs its functions (with total asset value of UAH 1,175 billion - 69% of the total value) should be left as state-owned property. These companies are state-owned natural monopolies (NJSC Naftogaz of Ukraine, PJSC "Ukrzaliznytsya" (Ukrainian Railways) and others) or perform publicly important functions in the defense sphere, healthcare, standardization and metrology, social policy, etc., thus providing the State with tools to perform its functions.

359 state-owned objects (UAH 14.5 billion in assets) should be transferred to a concession (the right of temporary use by private entities), which will significantly increase the overall economic effect of their activities. Such objects include airports, forestry, highways, etc. 1,255 objects (UAH 132.6 billion of assets) should be terminated by reorganization or liquidation. 893 objects (UAH 189.4 billion in assets) that do not meet the criteria of the above groups are subject to privatization. Reducing the number of state-owned enterprises will allow the state to reduce budget expenditures for support of a significant number of inefficient enterprises.

Corestone 2017 | National Investment Counсil | Middle Year Report

26


Improving Business Climate Energy and energy efficiency President has signed a Law “On the Electricity Market”, which introduces rules of the EU’s Third Energy Package. The Law sets a new competitive market model with bilateral contracts and a balancing market to replace the current wholesale electricity market model. According to the law, producers will have the opportunity to conclude bilateral agreements with market players (commercial consumers). Distribution companies (even those that are part of vertically-integrated structures) must be organizationally and managerially separated from producers and suppliers. The Law also provides guarantees of independence and free access to the networks for market players on the basis of public contracts. The Law presents signature of long-term Power Purchase Agreement (PPA) with a Guaranteed Buyer within the feed-in (“green”) tariff up to 2030. Parliament has adopted a Law “On an Energy Efficiency Fund”. The Energy Efficiency Fund will help to reduce the consumption of expensive gas by the population, complete renovation of buildings and save about USD 3 billion of energy resources annually. It will utilize funds from the state budget, donor and private investors' money and work through the monetization of subsidies. The institution will be run by a committee of the Government, donor countries and IFIs. Experts estimate the value of energy efficiency market in Ukraine at USD 50 billion. The need of modernization will be crucial for the next 10 years due to market tariffs for energy and utilities introduced in 2015. Ukrenergo has signed an Agreement on Ukraine's accession to the European energy system ENTSO-E. Together with the implementation of the new law on the electricity market, joining the European energy system will allow to unite markets with neighboring countries and will create market competition, fighting monopoly practices New rules for the development of oil and gas deposits in Ukraine have come into force, replacing the outdated Soviet documents of the 1970-80s. The rules regulate all stages of designing, drilling, development, studying, exploration, arrangement of gas, gas condensate and oil fields, hydrocarbon production, product accounting; determine the peculiarities of the control of the deposit developments, the documentation of the process, the main rules of occupational safety and security during the execution of all types of work. The rules regulate the division of wells in categories both according to the design purpose and their functions in the process of hydrocarbon deposits development; establish requirements for the testing and operation of wells at all stages of development of deposits.

Corestone 2017 | National Investment Counсil | Middle Year Report

27


Improving Business Climate Free capital flow

During January-June 2017 the NBU rate declined from 14% to 12.5%.

Ukraine’s international reserves have increased by 16% in the first half of 2017, amounting to USD 17.97 bn.

The NBU took steps for further liberalization of foreign currency operations. NBU decreased mandatory sale of inflows to Ukraine in foreign currency from now 65% to 50% since April 5th 2017. The NBU exempted inflows from non-residents from the mandatory sale of foreign currency, provided that such funds are received as monetary security (guarantee deposit, mortgage, deposit, guarantee) of participation in auctions or tenders conducted by residents. The NBU has introduced a simplified procedure of purchasing foreign currency to return the interest accrued on the investment account to foreign investors From May 31st 2017 the ban on the purchase of foreign currency for customers with an amount of funds available exceeding USD 100 thousand is canceled. Earlier, on condition that the above amount was exceeded, the client could not buy foreign currency. The NBU has abolished the temporary rule which reduced the maximum time limit for payment for export and import transactions to 120 days. From May 26th 2017 the maximum payment period is 180 days. The NBU has increased the maximum amount of prepayment for import contracts, which does not require a letter of credit (with the confirmation of a first-class bank) from USD 1 to 5 million. The NBU has raised the sum of restrictions on the sale of cash foreign currency to the population from UAH 12 thousand to UAH 150 thousand per person per day. Restrictions for individuals on transfer of funds outside Ukraine for non-trading transactions are removed. Previously, they were limited to an amount not more than UAH 150 thousand per month. The NBU has significantly simplified the conditions for conducting forward transactions for business. Companies will be able to carry out transactions on exchange of foreign currency using forward contracts without restrictions on the classifier group, the term and type of hedged transaction. They will also be able to conduct transactions for buying and selling foreign currency using forward contracts to hedge the risk of changing the foreign currency exchange rate for foreign trade operations without limitation on the group of classifier and the term of this transaction. Earlier, the period of such operations was up to 365 days. The NBU has allowed the repatriation of dividends accrued not only in 2014-2015, as it was before but also in 2016, and simplified the procedure for such payments. One person (issuer, depository institution or foreign investor) will be able to repatriate dividends during these years in a total amount of up to USD 5 million per month. Foreign investors will be able to repatriate funds invested in Ukraine. The National Bank allowed this after the previous restriction to buy and transfer foreign currency to repatriate funds received by foreign investors from the sale of corporate rights, certain types of securities, as a result of the reduction of authorized capital of legal entities, and the withdrawal of foreign companies' economic partnerships.

Corestone 2017 | National Investment Counсil | Middle Year Report

28


Improving Business Climate The NBU has simplified the procedure of registration of contracts for the attraction of loans in foreign currency by residents from non-residents. A new automated system of registration of loan agreements in foreign currency from non-residents will be introduced. Businesses have achieved the right to invest up to USD 2 million abroad in one calendar year. So far, the limit of the total amount of such operations was USD 50 thousand per month. For investments of less than USD 50 thousand, there will be simplified requirements for obtaining a license. It will suffice to provide an application and several other documents depending on the type of investment and the type of investor (investment agreement, documents on registration of the investment object, etc.). The NBU has introduced electronic currency licenses for Ukrainians. Individuals will be able to receive electronic individual licenses for the transfer of foreign currency abroad to perform currency transactions through authorized banks. With e-licenses an individual will be able to transfer foreign currencies abroad up to USD 50,000 during one calendar year for the following purposes: for investments abroad; for crediting funds to their own accounts outside of Ukraine; in order to fulfill obligations to non-residents under life insurance contracts. The NBU has simplified the procedure of foreign currency purchase and transfer of funds outside Ukraine. Customers of banks do not need to wait for the NBU's permission to carry out the specified currency transactions. Authorized banks will inform the National Bank of such client transactions after they occur. The NBU has revised approaches to licensing of operations of crediting funds to foreign accounts and investment abroad for individuals. From now on individuals will be able to credit foreign currency with a source of origin outside of Ukraine to foreign accounts without individual licenses from the NBU. The NBU has allowed business to purchase foreign currency with borrowed funds in UAH, if involved in state guarantees in order to implement programs related to defense and the security of the state.

Corestone 2017 | National Investment CounŃ il | Middle Year Report

29


Investment Overview

Corestone 2017 | National Investment CounŃ il | Middle Year Report

30


Investment Overview Foreign Direct Investment: 1H 2017 Macroeconomic stabilization and ongoing reforms are beginning to restore investor confidence in the Ukrainian economy. The 1H 2017 brought numerous significant transactions and announcements of new investments.

Agricultural sector The largest number of projects was attracted by the agricultural sector. Companies announced 15 deals amounting to over $600 million. The largest deal on the agrarian market was completed by Kernel, which purchased two companies Ukrainian agricultural Investments ($155 million)1 and Agroinvest Ukraine ($43 million2). This deal resulted in the Kernel land bank increasing from 385 000 to more than 600,000 hectares. In addition, Canadian Fairfax significantly increased its stake in Astarta - from 10% to 28% (two deals, $30.4 million and $37 million each3,4 and Delta Wilmar CIS announced the beginning of construction of a new soybean processing plant (total investment of $150 million). China National Complete Engineering announced plans for the construction of the first Chinese modernized agricultural park in Ukraine to attract Chinese investment. According to the Ministry of Agrarian Policy, only in 1Q17 Ukrainian farmers have spent UAH 10.9 billions of investment (about $420 million), which is 57.9% more than in 1Q 2016. The agricultural industry is traditionally considered one of the most investment-attractive in Ukraine. In 2017 it gained additional value, by a number of agreements which simplify access to new markets: the FTA with Canada, the expansion of trade preferences under the FTA agreement with the EU, entering new markets in Asia and Africa. For the first five months of 2017, Ukraine exported agrarian products totaling $7.5 billion, which is 31.% more than for the same period last year.

Energy sector Due to the gas market reform launched three years ago, which advanced the Ukrainian legislative base and tariffs to European levels, the largest world traders started to show interest in Ukraine. In 1H 2017 the Ukrainian offices of such companies, as Trafigura, DufEnergy and MET Holding were opened, while several more traders are considering Ukraine as a promising market. The reform of NJSC Naftogaz of Ukraine (the biggest state-owned oil&gas company) also brought the first positive results for private business. In April, Naftogaz, Ukrtransgaz, Snam (Italy) and Eustream (Slovakia) signed a memorandum of understanding on joint assessment of cooperation opportunities in the use and development of Ukraine's gas transmission system. Within the framework of this memorandum, the companies will conduct a joint assessment of the possibilities of using and enhancing the gas transmission system. Favorable "green tariffs" and legislative stimulation of renewable energy development (see Special Highlight: Renewable Energy) brought the sector to the attention of both Ukrainian and foreign investors. The launch of new projects in alternative energy were announced by DTEK, Rengy Development, Xi'an ShaanGu Power, Macro Solution, TIU Canada, Global Investment Holdings and Tres Energy. The amount of investments has not yet been disclosed.

http://www.kernel.ua/media/uploads/library/17/06/Current_report_23_2017_eng.pdf http://www.kernel.ua/media/uploads/library/17/07/Current_report_29_2017_eng.pdf http://astartakiev.com/en/for_investors/current-report-for-wse_1343905905/ current-report-no162017.htm 4 http://astartakiev.com/en/for_investors/current-report-for-wse_1343905905/ current-report-no102017.htm 1

2 3

Corestone 2017 | National Investment CounŃ il | Middle Year Report

31


Investment Overview Foreign Direct Investment: 1H 2017

Industrial sector The inflow of capital investments into industry in 1H 2017 was provided by two companies - Ferrexpo, which announced modernization of the Poltava Mining Processing Plant, totaling $500 million, and Arcelor Mittal, which completed an overhaul of its facilities costing $400 million. In addition, there was also the Alov asphalt plant built by a private Azerbaijani investor in the Lviv region. It is important that Ukrainian companies continue to build confidence with international institutional investors. In January, Wigmore Street Investments â„–3 exited Ferrexpo, which traded on the London Stock Exchange (LSE). On the following day, the shares were bought by American BlackRock Inc (5.68% of shares, or 33.5 million units) and British TT International (3.65% or 21.5 million units). The cost of Ferrexpo shares on the LSE at that time ranged from 1.4 to 1.5 British pounds. DCH group bought iron ore plant "Sukha Balka" in the Dnipropetrovsk region for $110 million5.

IT sector A simplified system of state regulation of the IT industry allowed the rapid development of both outsourcing projects and innovative start-ups. There are more than 100,000 IT professionals in Ukraine, and each year their number increases by 20%. 13 out of the 100 largest IT service partners in the world are Ukrainian. The sector according to estimations of PwC produces 3.3 % of the total GDP of Ukraine. In the 1H 2017 General Catalys investment fund invested $110 million in a startup named Grammarly. DroneUa attracted $4.7 million from private investors. K.Fund announced the creation of an innovative Unit.City park for $200 million, and Concorde Capital announced an $11 million investment fund for IT projects. Swiss Luxoft acquired Ukrainian IntroPro. Many smaller deals occur on the market every week. There were 87 investment deals with Ukrainian companies in 2016, which is 32% more than in 2015. Their total volume amounted to $88 mln. More than 40 startup-incubators, accelerators and venture funds are already operating in Ukraine. Institutional investors have already begun to work with the Ukrainian IT sector, e.g. last year the EBRD jointly with TMT Investments invested $5 million in DepositPhotos. The bank announced plans to continue investing in Ukrainian IT in 2017.

5

http://www.dch.com.ua/en/press-center/news/2017/05/news_1352.html

Corestone 2017 | National Investment CounŃ il | Middle Year Report

32


Investment Overview Foreign Direct Investment: 1H 2017

Financial sector In 2016, the banking market of Ukraine underwent significant changes. As a result of market cleansing, 21 banks that failed to meet the NBU requirements or considered it unfavorable to continue working in the market exited. In 1H 2017, seven more banks ceased operations. Marfin Bank (capital - $16.5 million) was bought by Saggarko, and UkrSib Capital Management, a subsidiary of Ukrsibbank BNP Paribas Group, was acquired by ICU. In 1H 2017, the main investment activity in the financial market was conducted by international institutional investors. The EBRD has invested $30 million in the Emerging Europe Growth Fund III fund, established by Horizon Capital investment company, and also provided OTP leasing company with the first hryvnia loan in its history, for the equivalent of $20 million. The first hryvnia loan was allocated by the World Bank to Auchan amounting to $15 million. The IFC also invested $20 million in the Emerging Europe Growth Fund III. German development bank KfW together with the National Bank of Ukraine has created a fund for financing small and medium-sized businesses. The investments are expected to total $11.5 million.

Infrastructure sector As economic activity in Ukraine resumes its growth, it is crucial for businesses to eliminate as many weak points and bottlenecks of their operations as possible. Weak infrastructure assets can slow business growth. Thus, companies who think in the long run understand that they have to participate in the development of infrastructure. Big agricultural traders like Cargill, Bunge and Louis Dreyfus started new construction projects in 2016. The total value of their investment in infrastructure reached more than $350 million. The projects are now in process and the Government is supporting them by liberalization and deregulation of the sector. The positive examples of big international companies in Ukraine show other businesses that investing in the country is a growing opportunity. Multinational port operators like DP World and Hutchison intend to enter the Ukrainian market. Institutional investors IFC, EBRD and Navigator Principal Investors provided financing of up to $137 million in 2017 for infrastructure projects. Large Chinese corporations are ready to build roads, bridges and railways in Ukraine. Development of transportation creates business opportunities for big international manufacturers. General Electric, Greenbrier, Amsted Rail, and Hyundai Corporation are considering joint ventures for railcar construction and modernization of wagon fleet of Ukrainian Railways.

Corestone 2017 | National Investment CounŃ il | Middle Year Report

33


Special Highlight:

Renewable Energy

Corestone 2017 | National Investment CounŃ il | Middle Year Report

34


Renewable Energy National renewable energy action plan Ukraine has committed to increase its share of energy output from renewable sources to 11%. The commitment is set by National Renewable Energy Action Plan. The Plan also sets more specific targets for renewable power generation by 2020:

Plan Targets for Renewable Power Generation by 2020 Period: 2016, 2020

2016

2020

7,977

Power plants installed capacity (MW)

10,900 18,726

Power generation (GWh)

26,000

Heat and Cooling 3,576

(thou. t.o.e.)

5,850 58,500

(thou. Gcal)

Transport (thou. t.o.e)

35,760

505 298

Source: National Renewable Energy Action Plan

Total amount of investment required for National Renewable Energy Action Plan implementation:

€6.4 bn – for electric power production €5.2 bn – for heating and cooling €0.4 bn – for transport The Investment flow would be targeted to the construction of the following facilities:

Corestone 2017 | National Investment Counсil | Middle Year Report

35


Renewable Energy “Green tariffs” Fort the stimulation of use of renewable energy source (RES), the Government has introduced feed-in tariffs (“green tariffs”) which are compatible to EU feed-in tariffs.

Max "Green Tarrifs" in Ukraine and EU-countries Period: As of June 2017 Score: eurocents/kWh

Wind

Ukraine

Solar

Geothermal

Biogas

Hydro

Biomass

11.63

18.09

15.03

12.39

17.45

12.39

8.38

12.7

25.2

23.14

12.4

14.42

10.3

11.5

11.5

11.5

11.5

7.1

9.7

12.2

10.5

10.1

12.1

Slovakia

4.42

8.5

10.87

10.2

11.12

9.21

Moldova

6.5

8.8

n/a

n/a

n/a

n/a

Turkey

5.3

10.3

8.1

10.3

5.6

10.3

Bulgaria

n/a

13.02

n/a

n/a

n/a

n/a

Germany Hungary

no stimulus

Czech Republic

Source: http://saee.gov.ua, http://www.res-legal.eu

The secured feed-in (“green”) tariff is provided till 2030 and defined in the Law “On Electric Energy” The tariff prices are fixed in Euros, and thus have zero UAH currency risk. The Law guarantees purchase of 100% of energy produced from RES by wholesale operator. The Law also determines that a premium for Ukrainian equipment usage is provided – 5-10% to the existing tariff. Producers of electricity from RES are granted special conditions of connection to the grid: Suppliers that transmit electricity to their own distribution grid do not have the right to refuse producers of electricity from RES connection to the grid. Connection to the power grid of stations that produce electricity from RES has favorable financing: 50% – from the tariffs for the transmission of electricity; 50% – from repayable financial assistance provided by the producer to the electricity transmission company. The term for returning financial assistance is to be determined by the National Energy and Utilities Regulation Commission resolution and does not exceed ten years. There is also tax incentive to stimulate production of electricity from RES: Zero value added tax and customs duties on imports of equipment related to the production of electricity from RES, which is determined in the list approved by the Government of Ukraine.

Corestone 2017 | National Investment Counсil | Middle Year Report

36


Renewable Energy Electricity market оf Ukraine On April 13th 2017 the Parliament adopted a new Law “On the Electricity Market оf Ukraine”. The Law sets a new competitive market model with bilateral contracts, and balancing market to replace the current wholesale electricity market model. The Law aims to create a competitive electricity market and provide reliable and uninterrupted power supply to customers. Key provisions of the Law regarding renewable energy: 1. Signature of long-term Power Purchase Agreement (PPA) with Guaranteed Buyer within feed-in tariff up to 2030. 2. Step-by-step introduction of payment for unbalanced power supply: 10% – in 2021 100% – in 2030 3. Establishment of a “range of tolerance" for an error in forecasting the volumes of electricity production from RES. Allowable variation of declared amounts of power production: for Wind Power Plants for Solar Power Plants for Small Hydro Power Plants

20% 10% 5%

4. Exemption from payment for imbalances of RES facilities put into operation before the adoption of the Law.

The Government is promoting usage of RES for heat generation:

Heat Tarrifs for Public Entities and Population Period: 2017 Score: eurocents/kWh

1,080 establishing tariffs for the heat produced from alternative sources at a level of 90% of the current tariff for heat producers from natural gas or average tariff in the region for public entities and population by local authorities;

972

from gas

average tariff for heat produced for the population and public authorities is calculated by the local authorities according to the Cabinet of Ministers Order.

from RES

Source: saee.gov.ua

Corestone 2017 | National Investment Counсil | Middle Year Report

37


Renewable Energy According to the quarterly report of the State Agency of Energy Efficiency and Energy Savings of Ukraineยน as of April 1, 2017, 316 renewable energy facilities which have a "green tariff" operate in Ukraine (excluding the occupied Autonomous Republic of Crimea), with a total capacity of 1,678.66 MW.

RES Facilities Capacity in Ukraine Period: 1Q, 2017 Score: MW

as of 01.01.2017

Q1 2017

60.0 937.9

525.5

2.5 90.0

Wind

Solar

Small Hydro

3.6

Biomass

38.7

20.4

Biogas

Source: saee.gov.ua

In the first quarter of 2017, 28 renewable energy facilities with a total capacity of 66.1 MW were introduced, of which: 23 solar power facilities with a total capacity of 60.0 MW; 4 small hydropower objects with a total capacity of 2.5 MW; 1 biomass power plant with a capacity of 3.6 MW.

ยน http://saee.gov.ua/uk/content/informatsiyni-materialy

Corestone 2017 | National Investment Counัil | Middle Year Report

38


Renewable Energy Electricity Generation Period: 1Q 2017 Score: %

4% 5% 15%

Biogas power plants

Biomass power plants

Small hydroelectric power plants

54%

Wind power plants

22%

Solar power stations

Source: saee.gov.ua

During the first quarter of 2017, renewable energy facilities which received a "green tariff" produced 486 million kWh of electricity, including: wind power plants – 260 million kWh; solar power stations – 109 million kWh; small hydroelectric power plants – 73 million kWh; biomass power plants – 23 million kWh; biogas power plants – 21 million kWh. From 28 renewable energy facilities introduced in the first quarter of 2017, one micro hydroelectric power station received a premium to the "green tariff" for the use of equipment, produced in Ukraine.

Corestone 2017 | National Investment Counсil | Middle Year Report

39


Renewable Energy As of 1st April 2017, the total number of rooftop solar power stations in private households stood at 1,309, of which 200 were installed in the first quarter of 2017.

Rooftop Solar Power Stations in Private Households (â„– of stations) Period: 2015 - 2017 Score: number, % growth

Number of private households Number of private households growth

1,309 1,109 135% 90% 40 1Q

2015

94 2Q

2015

40% 132 3Q

2015

85% 244 4Q

2015

625 298 22% 1Q

2016

430 44%

45%

2Q

3Q

2016

2016

77% 18% 4Q

2016

1Q

2017

Rooftop Solar Power Stations in Private Households (total capacity) Period: 2015 - 2017 Score: megawatt, % growth

Installed capacity, MW Installed capacity growth

233% 20.1

167%

16.7

50% 0.3 1Q

2015

0.8 2Q

2015

1.2 3Q

2015

83% 2.2 4Q

2015

55% 3.4 1Q

2016

49% 5.1 2Q

2016

7.9 56%

111% 20%

3Q

2016

4Q

2016

1Q

2017

Source: saee.gov.ua

In the first quarter of 2017, the total installed capacity of private households' rooftop solar power stations increased by 20% and amounted to 20.1 MW. The number of private houses eligible for solar panel installation is 6.5 million.

Corestone 2017 | National Investment CounŃ il | Middle Year Report

40


Renewable Energy Chornobyl Solar Power Plant Among all investment projects in the renewable energy sector, Ukraine has a unique opportunity with construction of a Solar Power Plant with capacity of 1.2 GW on the territory of the Chornobyl Nuclear Power Plant. After the disaster at the plant in 1986, the huge territory near the reactor became polluted and unsuitable for human inhabitation for hundreds of years. However, in 2016 the radiation source was localizing with the help of French engineers that constructed a shield around the station. Now the territory is suitable for short visits. The available grid of the Nuclear station and huge areas of uninhabited territories create a great opportunity for creation of a solar power plant. Photovoltaic solar electricity potential in Chornobyl Exclusion Zone is higher than in most parts of Europe situated on the same latitude.

Eggebeg 84 MW

Hawton/Newark 70 MW

Meuro 166 MW

Crucey 60 MW

Strasskirchen 54 MW

Toul-Rosieres 115 MW

Mykolayivka 70 MW

Livada 56 MW

Okhotnikove 83 MW

Ucea de Sus 82 MW Rovigo 71 MW

Cestas 300 MW

1,200 MW*

Neuhardenberg 152 MW

Ahlhorn 50 MW

MOD Lyneham 70 MW

Chornobyl

utow I-III 52 MW

Izvoarele 50 MW ABB Dobrich 14 MW

Montalto di Castro 85 MW

La Colle des Mes 100 MW

Pobeda 51 MW

Pryozerna 55 MW

Perovo 106 MW

Karadzhalovo 60 MW Skobelevo 5 MW

Olmedilla de Alaron 60 MW

Calzadilla de los Barros 400 MW

* Potential project under consideration

Global irradiation (kWh/m2) <600

1000

1400

1800

2000>

<450

750

1050

1350

1650>

Solar electricity (kWh/kWp)

Source: EasyBusiness, Chornobyl R&D Institute, EU Joint Research Center (Institute for Energy and Transport)

Estimated investments required â&#x20AC;&#x201C; $1.3 billion. Acquisition of 2,500 ha of land plots in the 10 km zone of Chornobyl Power plant in close proximity to roads and power lines can be performed with a special lease price. Total area available for solar power plants of first priority is 2,500 ha, which corresponds to 1.2 GW of capacity. The project has flexible scaling due to availability of easily acquirable land. Total capacity of approx. 1.2 GW can be divided into four stages, and will require construction of new substations, including investments into infrastructure and land clearance. Most of the infrastructure is in good working condition. Grid and connection including transformer substation, open switchgear and High-voltage power lines are available within close distances. Up to 1,500 GWh of annual energy output is expected.

Corestone 2017 | National Investment CounŃ il | Middle Year Report

41


Produced by the Office of the National Investment Council of Ukraine in partnership with Corestone Corporation. For any questions or comments please contact office@nicouncil.org.ua Corestone Corporation is an analytical group that is localized in Ukraine and unites specialists with with cross-industrial approach. By using modern technologies, an authentic methodology for researching the information sphere and expertise in various fields, the company creates brand-new forms of analytics that contribute to finding insights among its customers.

This report has been prepared by the Office of the National Investment Council for information purposes only. Although the information in this report comes from sources we believe to be reliable, and although we have made every effort to ensure its accuracy at the time of publication, we make no warranty, express or implied, of this report's usefulness in predicting the future performance. Nor should this report be regarded as a complete description of the macroeconomic situation and markets regulation in Ukraine. Office of the National Investment Council doesnâ&#x20AC;&#x2122;t do or seek to do business with companies covered in its research reports. Any investment decision made on the basis of this report shall be made at the investor's sole discretion, and under no circumstances shall Office of the National Investment Council or any of its employees or related parties be liable in any way for any action, or failure to act, by any party, on the basis of this report. This report, or any part of it, is free to reproduce, distribute and quote, referencing Office of the National Investment Council is required.

Ukraine. Turn to Growth. Investment Climate Outlook - Mid 2017  

2016 was a year of macroeconomy stabilization in Ukraine. This year shows the expected growth. Much of this progress reflects the authoritie...

Ukraine. Turn to Growth. Investment Climate Outlook - Mid 2017  

2016 was a year of macroeconomy stabilization in Ukraine. This year shows the expected growth. Much of this progress reflects the authoritie...

Advertisement