By Dr. Irina Paliashvili

Washington, D.C. and Kyiv, Ukraine, THURSDAY, March 10, 2005






By Dr. Irina Paliashvili

President and Senior Counsel

Russian-Ukrainian Legal Group, P.A.

Washington, D.C. and Kyiv, Ukraine


Washington, D.C., Thursday, March 10, 2005


In light of the fundamental and systematic economic reforms that our new President and new Cabinet are planning to undertake, their pronounced "rule of law" ("verkhovenstvo prava") policy, and the expected dramatic increase in foreign and domestic investment, it is imperative to ensure that our legal system is prepared to serve as a modern and adequate legal basis for the economy.


As a lawyer educated in Ukraine, practicing business law since the very first days of independence and having extensive experience in other CIS countries and in the West, I regret to say that the current legal basis is not only inadequate, but that to a large extent it sabotages the development of a market economy in our country.


Very often we hear: "the laws are good, but implementation is a problem".  Certainly, there are some good laws in Ukraine, and certainly there are problems with their implementation, but unfortunately there are many more bad laws, numerous outdated laws, and many gaps, inconsistencies and conflicts within the system.


Today, everybody, from small local entrepreneurs to giant multinationals, suffers from this "legal chaos", and no business can operate in Ukraine without being forced to violate one law or another on a regular basis, sometimes because of their conflicting provisions and sometimes because of their sheer absurdity.


It is well known that the new Government is currently conducting an inventory and evaluation of everything that has gone wrong with our economy, privatization, government and administrative structure, etc.  The good news with regards to the legal regime is that the evaluation part has, to a large extent, already been accomplished: the problems and the proposed solutions were identified in great detail in several major recent reports, including:


(i) the UNDP Blue Ribbon Commission for Ukraine's "Proposals for the President: A New Wave of Reform", which greatly influenced the new Government's Program. This report is available at;


(ii) the EBA Report on Barriers to Investment in Ukraine, available at;


(iii) the OECD Report on Improving the Conditions for Enterprise Development and the Investment Climate for Domestic and International Investors in Ukraine: Legal Issues With Regard to Business Operations and Investment, available at, and many others.


The main priority for the new Government, therefore, should be to act, and to act swiftly and decisively.  Fortunately, our legal system can be improved immediately and dramatically just by canceling the most archaic and damaging legislation, using the so called "guillotine" principle, which worked successfully in other countries that undertook modernization reforms.


The new Government should not engage in any debate on this; there has been enough debate already and the arguments collected by the business and investment communities are overwhelming.  Other improvements may take longer, but systematic work should start immediately.


What is also very important for this work is that the Government stays in constant contact with the business and investment communities, which have suffered enough already from the previous Governments' abuses and which are willing to work productively with the new Government.


To this end, I would suggest a number of practical measures, which basically center on opening up the Government and making it available for on-going dialogue with the business and investment communities, represented by various business groups (such as the European Business Association, AmCham, reputable industrial and trade associations, associations of small and medium-sized businesses, the business press, etc.).




(i) the Cabinet should designate a Vice Prime Minister and one Deputy Minister in each Ministry, and assign to them the responsibility to act as a liaison with the business and investment communities;


(ii) Government officials should actively participate in business conferences in Ukraine and abroad (which very rarely happened in the past);


(iii) Government officials should attend meetings of various business groups and take immediate action on their concerns;


(iv) the Government should create an analytical/monitoring body (perhaps on the basis of the current Committee on Entrepreneurship and Regulatory Policy) that will research, collect and summarize the problems that businesses are facing and swiftly react to them and hold Government bodies and individual officials accountable for violations;


(v) the practice of carrying out joint meetings of the Cabinet and representatives of the business community on specific issues should continue and expand (the first such meeting was carried out recently on the issues of customs control and customs fees).


Below, I outline just FIVE key substantive problems that we have in the current legal system and suggest solutions to them.  Obviously, there are many more problems, which cannot all be mentioned in the space of one article, but which still require the Government's immediate attention.





This problem was many years in the making and culminated on 1 January 2004, when two separate Codes took effect on the same day, becoming the new legal basis for civil and business relations in Ukraine.  On that day, the legal situation in Ukraine turned from bad into disastrous, and we have been functioning under these disastrous conditions for more than a year.


Both Codes were developed over the course of several years by two different drafting groups with very little or no coordination between them.  The Civil Code, which covers relations among both individuals and legal entities, was developed by a group of Ukrainian academics, who were generally market-oriented and tried to use the experience of other developed countries (unfortunately, many better provisions of the Civil Code were reversed by the Parliament in the process of its adoption).


The Commercial Code was also developed by a group of academics, but with strict socialist anti-market orientation, who seemed to rely in their work mostly on old Soviet laws and concepts.


Those of us who began our careers under the Soviet system are experiencing a surreal sense of déjà vu.  Suffice it to say that the Commercial Code severely restricts the freedom of contract and replaces such basic types of contract as sale-purchase with the archaic "supply" contract, which was used under the Soviet system.  Moreover, the Commercial Code specifies that "supply" contracts will be further regulated by decrees from the Cabinet of Ministers.

Needless to say, with the two opposing Codes, in practice, we ended up with two fundamental laws, regulating largely the same subject, but being conceptually opposite and containing numerous specific conflicts.  Moreover, each of these two Codes has many internal conflicts, and both of them conflict with other existing laws.


Today, drafting any simple contract in Ukraine is a frustrating and impossible exercise in reconciling artificially created irreconcilable differences.


Numerous other unnecessary obstacles and hidden charges (some of them are described below) were created by both Codes that make full compliance with the law virtually impossible.


This is a disaster, the real scale of which will not be known for some time, until half of the businesses operating in Ukraine find themselves in courts disputing opposing provisions of different laws. Such legal chaos will be an excellent breeding ground for corruption in the regulatory authorities and in the court system.


Based on a thorough study of both Codes and on more than one year of trying to apply them in practice, we have come to a firm conclusion, which is the same as the one made in the UNDP Blue Ribbon Commission Report's Key Recommendation #8 (out of 12): there is an urgent need "to abolish the anachronistic Economic [Commercial] Code and improve the market-oriented Civil Code".


The "guillotine" principle would work perfectly in this case, and should bring an immediate and unequivocal end to the long and fruitless academic debates about which Code is better and how to reconcile them.


The Civil Code should be quickly and substantively improved, based on the Dutch Civil Code, which in a slightly transformed format, has been successfully applied in Russia and Kazakhstan for the last 10 years (good quality civil and commercial legislation in Russia should not be associated with infamous cases of abuses by the Russian government, such as the Yukos case, which result from bad policies rather than from bad legislation).





Corporate legislation suffers from two major gaps: we badly need a Law on Joint-Stock Companies and a Law on Limited Liability Companies, which are the two most often used corporate structures in Ukraine.  Here I would like to again cite the UNDP Blue Ribbon Commission Report's Key Recommendations (#7), which calls on Ukraine to "improve corporate legislation".


The catch here is that good quality corporate laws cannot be developed until the problem of the irreconcilable Civil and Commercial Codes is resolved. Otherwise, we will have just another addition to our existing legal chaos.




The unnecessarily broad and ambiguous antimonopoly legislation of Ukraine, which regulates (actually over-regulates) coordinated actions and economic concentrations, and the formalistic and low monetary thresholds for transactions requiring prior approval from the Antimonopoly Committee of Ukraine ("AMC"), force companies to seek AMC prior approval of actions that really have no bearing on competition in the Ukrainian market at all.  It is no surprise that the AMC's prior approval requirement is frequently ignored, knowingly or unknowingly.


The problem is that the AMC has extensive instruments for applying large and often unjustified sanctions for even minor violations. The solution would be to remove the prior approval requirement in many cases altogether, or to replace it in some cases with notification requirement.





Under the previous political regime, Ukraine was notorious for its bureaucratic red tape, its unnecessary barriers and serious charges that were disguised as various fees, fines, mandatory intermediary and commission payments, etc.  The new Government has an excellent opportunity now to reverse this bad reputation, but it will require immediate and drastic measures.


One of the most outrageous examples here is the ongoing "war" of the National Bank of Ukraine ("NBU") against foreign investors.  This story probably deserves a separate article because it demonstrates how Ukrainian bureaucracy sabotages at least two key priorities declared by the President, which are to support foreign investment and the rule of law.


The NBU started this war in October 2004, i.e., under the previous regime, by adopting NBU Resolution 482, which created massive roadblocks to foreign investment in Ukraine and violated key laws and international treaties on foreign investment.


Without going into detail, suffice it to say that the Resolution demanded that:


  • All direct foreign investment into Ukraine (i.e., investment into Ukrainian companies from abroad) must be made first into separate foreign currency "investment" accounts that must be opened by foreign investors in Ukrainian banks, then converted into UAH, then placed in yet another separate UAH "investment" bank account and only thereafter transferred to the recipient company in UAH.  Not only did this multi-step operation place additional time and cost burdens (banking charges at each step, currency exchange losses, etc.) on making direct investment into Ukraine, but it also deprived foreign investors of all their rights, protections and guarantees because UAH investment cannot be registered as "foreign" and without such registration (which, by the way, the Commercial Code absurdly demands must be made within three days), all protections and guarantees are lost.


  • All other investment operations, including with securities between non-residents outside Ukraine, must be "domesticated" by the same procedure of opening "investment" accounts in Ukraine, converting foreign currency into UAH, etc.   Imagine how "happy" this made non-residents who had already invested in Ukrainian securities.  No less "happy" should be Ukrainian companies that are trying to list their securities on international stock exchanges.  If a Ukrainian company issues ADRs on the New York Stock Exchange, for example, trading even a small amount of such ADRs will require going through the "domestication" procedure.


It is indeed surprising and appalling how the new management of the NBU is rigorously defending this Resolution and adamantly refusing to repeal it.


While President Yushchenko spoke to major international investors in Davos last month about low foreign investment in Ukraine and tried to persuade investors to come to Ukraine, extending his hand to business, the "new" NBU was fighting in the courts against legitimate attempts by foreign investors to block Resolution 482, thus altogether paralyzing foreign investment into Ukraine for several weeks.


Numerous direct investments were stuck outside of Ukraine, ready to enter, but Ukrainian banks refused to accept them because it was not clear what the status of Resolution 482 was, and the NBU was not cooperating.  No foreign investment whatsoever came into Ukraine for several weeks!


This shameful saga continues because courts also demonstrated their devotion to the old ways and tried to dismiss legitimate claims by foreign investors on procedural grounds, and the NBU refuses to give up its illegal approach.


The investment community and business press (see the article in "Business" dated 21 February 2005: "Games of 'Patriots'") is declaiming this abuse and continues fighting in the courts.  The main and most urgent questions now are: how can this sabotage be immediately stopped and who will pay for the tremendous damage caused to the Ukrainian economy and its international reputation?


Other unacceptable hidden obstacles and charges include:


  • The artificial, unnecessary, overly expensive and steadily increasing involvement of notaries in many aspects of business relations.  For example, a mandatory notarization requirement was imposed on many routine transactions between legal entities for a notary fee of a hefty 1% of the value of the transaction.  Thus, the new Civil Code introduced an unnecessary rule that all lease agreements, including between companies, whose term is one year or longer, are subject to notarization, forcing all such lease agreements to carry a burden of an extra 1% for no added value.  Another problem, partially created by the new Civil Code and partially by subsequent regulations, is complications with issuing powers of attorney, which businesses use in their operations all the time.  First, an underlying contract is now required for a power of attorney to be issued  (a requirement that does not exist in most legal systems of the world) and second, a power of attorney no longer can be broad, but must be very specific.  Considering that the cost of notarizing each power of attorney is around UAH 50 ($10), this adds unnecessary complications and costs to doing business.


          The following measures are recommended for putting notarization under control:


          (i) immediate cancellation of all unnecessary notarization requirements;


          (ii) reducing notary fees for all remaining notarizations;


          (iii) returning to a simple power of attorney system with no underlying contract  requirement and reintroducing a possibility for giving broad authorizations.


  • 90-days rule.  This is a rule that was designed some time ago, allegedly to prevent capital flight, and which while failing this task, put a tremendous financial burden on legitimate business operations.  Specifically, the tax authorities impose severe fines and sanctions when a Ukrainian business fails to receive hard currency proceeds from sales (in case of export contracts), or goods (in case of import contracts), under its international contracts within 90 days of the due date.  Moreover, the fines are not limited to the amounts that the Ukrainian company in question failed to receive within 90 days, meaning that the imposition of fines continues indefinitely and can exceed the original unreceived amount by many times, and could theoretically bankrupt a company.  The best recommendation here would be to remove this outdated 90-days rule altogether, because it has proved incapable of preventing capital flight, and only serves as an absurdly heavy burden on doing legitimate business.


  • Outdated requirements as to the form of contracts.  Modern business operations are often conducted electronically; the contracts are signed via fax or electronic mail and corporate seals are not used in most developed countries.  It is interesting to note that in Ukraine, until the new Civil Code came into effect in 2004, the law only required that parties to a contract agree, in appropriate form, on certain essential terms and conditions.  The lack of an imprint of a corporate seal on a signed agreement in most cases did not constitute a violation of the form of the agreement. The new Civil Code, however, demands that all contracts, domestic and international (including addenda, amendments, and other contractual documents) be signed with an original corporate seal affixed.  Lack of a corporate seal can make the contract invalid.   This is a big step backwards and a major inconvenience, so businesses continue making contracts ignoring the corporate seal requirements, which obviously puts the validity of numerous contracts in doubt and provokes unnecessary disputes.  The recommendation with regard to this problem is to modernize the requirements as to the form of contracts, including accepting contracts made by fax and other electronic means of communication and removing the corporate seal requirement altogether.


  • Unnecessary obstacles and hidden charges in the areas of the currency regime and the financial sector, including:


          (i) overregulation of ordinary financial activities (for example, in order to issue a simple parent guarantee, a company needs to be registered with the State Commission of Ukraine for Regulation of Financial Services Markets of Ukraine);


          (ii) the requirement that any sale-purchase of Ukrainian securities (even outside of Ukraine between non-residents) must be carried out only with the participation of a Ukrainian securities trader;


          (iii) restrictions on inter-company loans;


          (iv) excessive licensing requirements by the NBU with regard to foreign currency transactions and payments outside Ukraine, including overly burdensome scrutinizing of transfers of foreign currency abroad in amounts exceeding  EURO 50,000; and many others.


·        Ongoing restrictions on land ownership for foreign investors, whereby Ukrainian subsidiaries of foreign companies still cannot acquire ownership of land plots in Ukraine.





Another tremendous problem, which affects all businesses operating in Ukraine at all times, is the chaotic, arbitrary, excessive and incredibly costly overregulation and interference by the authorities in all spheres of business.  It is loosely referred to as the "permits system", or by the broader, internationally known term "regulatory governance".  Several half-hearted attempts to "deregulate" were made by previous Ukrainian Governments, but in the absence of true political will, they generally resulted in more overregulation and more chaos.  In this regard, I would like again to refer you to Chapter 5.2 of the UNDP Blue Ribbon Commission Report.


The solution to the above problem has been proposed by the OECD which, as a first step, suggests adopting a framework Law on Fundamentals of the Permits System as soon as possible, which shall achieve two major goals:


          (i) stop the abuse of entrepreneurs; and


          (ii) give a head start to establishing a modern, transparent and liberalized permits system, setting up its principles and its framework, including for enforcement, monitoring, appeals procedure and liability (for the abuse of the system by Government officials) mechanisms.




It is clear that the legal regime for business and investment in Ukraine demands urgent and radical improvements.  Without them the current legal regime will remain a major obstacle to implementing the new Government's program and to creating a business- and investment-friendly environment in our country.   -30-  (The Action Ukraine Report Monitoring Service)





NOTE: Irina Paliashvili began her private practice in 1992 by founding one of the first private law firms in Kiev and expanded by co-founding a private law firm in Moscow. In 1995, she founded the Washington-based Russian-Ukrainian Legal Group, P.A., where she serves as the President and Senior Counsel.


Before going into private practice, Dr. Paliashvili served as General Counsel (International) to two major companies in Ukraine. In 1991, Dr. Paliashvili completed a six-month assignment with a prominent Chicago law firm as a part of the American Bar Association's Soviet Lawyer Internship Program followed by a four-month assignment in Frankfurt working with a leading German law firm on an EEC-sponsored project for restructuring the

banking system of Ukraine.


She has also served as a Professor of Law at the Kiev State University Law School. Dr. Paliashvili graduated with high honors from the Kiev State University School of International Law and received a Ph.D. in Private International Law from the same school. She also holds an LL.M. in International and Comparative Law from George Washington University.


Dr. Paliashvili frequently speaks at international conferences on the legal and business climates in Ukraine, Russia, and other newly independent states. Her articles regularly appear in leading professional publications in the United States and Europe.


Dr. Paliashvili is licensed to practice Russian and Ukrainian law as a Special Legal Consultant in the District of Columbia and is a member of the Russian International Law Association, the Kiev Bar, the American Bar Association, the Washington Foreign Law Society, the Committee on Non-Member Economies of the Business and Industry Advisory Committee to the OECD (BIAC), the Congress of Fellows of the Center for International

Legal Studies, the International Trademark Association (INTA), and other professional organizations. She was individually designated as a "recommended company and corporate transaction practitioner in Ukraine" by the Global Counsel 3000.


Dr. Paliashvili has special expertise in the area of commercial dispute settlement and mediation. She is a mediator trained and certified by the CPR Institute for Dispute Resolution in New York and a member of its International Panel of Distinguished Neutrals, a founding member of the Moscow Center for Dispute Resolution and a member of the INTA International Panel of Neutrals.


She also serves on the Board of Reporters of the Institute for Transnational Arbitration of The Center for American and International Law (ITA) as Reporter for Ukraine. Dr. Paliashvili is fluent in English, Ukrainian, Russian, Georgian, and Spanish. She divides her working time among Washington, Kiev, and Moscow. E-mail:, web:



FOOTNOTE:  We wish to thank Dr. Irina Paliashvili for writing this very important document at the request of The Action Ukraine Report.  We would encourage you to assist in giving this outstanding analytical article very broad distribution. The article may be republished with credits to Dr. Irina Paliashvili and The Action Ukraine Report.  Dr. Paliashvili is also a member of the Ukraine-U.S. Business Council.  Editor