AND RADICAL IMPROVEMENTS NEEDED IN
By Dr. Irina Paliashvili
ACTION UKRAINE REPORT" - Number 438
Washington, D.C. and Kyiv, Ukraine, THURSDAY, March 10, 2005
1. URGENT AND RADICAL IMPROVEMENTS
By Dr. Irina Paliashvili
President and Senior Counsel
Russian-Ukrainian Legal Group, P.A.
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.
often we hear: "the laws are good, but implementation is a
problem". Certainly, there are some
good laws in
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
the EBA Report on Barriers to Investment in
the OECD Report on Improving the Conditions for
Enterprise Development and the Investment Climate for Domestic and
International Investors in
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;
Government officials should actively participate in business conferences in
(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.
problem was many years in the making and culminated on
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.
drafting any simple contract in
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.
is a disaster, the real scale of which will not be known for some time, until
half of the businesses operating in
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).
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
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.
IV. UNNECESSARY OBSTACLES AND HIDDEN CHARGES
the previous political regime,
of the most outrageous examples here is the ongoing "war" of the
National Bank of
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:
It is indeed surprising and appalling how the new management of the NBU is rigorously defending this Resolution and adamantly refusing to repeal it.
President Yushchenko spoke to major international investors in Davos last month
about low foreign investment in
direct investments were stuck outside of
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.
investment community and business press (see the article in
Other unacceptable hidden obstacles and charges include:
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.
(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);
requirement that any sale-purchase of Ukrainian securities (even outside of
(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
tremendous problem, which affects all businesses operating in
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
Irina Paliashvili began her private practice in 1992 by founding one of the
first private law firms in
going into private practice, Dr. Paliashvili served as General Counsel
(International) to two major companies in
banking system of
has also served as a Professor of Law at the
Paliashvili frequently speaks at international conferences on the legal and
business climates in
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
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
also serves on the Board of Reporters of the Institute for Transnational
Arbitration of The Center for American and International Law (ITA) as Reporter
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