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Follow-up Report on the Investment Climate and Market Structure in the Energy Sector of Ukraine

Published in 2006


This study follows up on the initial Report on the Investment Climate and Market Structure in the Energy Sector of Ukraine, which was prepared and published by the Energy Charter Secretariat in 2002.

The purpose of the follow-up report is to describe the recent changes affecting the investment climate in the energy sector, reflecting also the implementation of the recommendations adopted by the Energy Charter Conference in June 2002. At that time, the Charter Conference encouraged Ukraine to pursue policies that could foster investment in the energy sector, notably through the privatisation process, improvements to the stability and transparency of the legal environment and tax regimes, and a streamlined procedure for upstream investments in the petroleum industry.

This follow-up report was prepared by the Ministry of Fuel and Energy of Ukraine and presented to the Energy Charter's Investment Group in October 2006.

Since 2002 Ukraine has adopted new legislation, regulations and procedures aimed at improving the investment climate in its economy in general and the energy sector in particular. Accession to the World Trade Organization and the European integration process are among the top priorities of Ukraine's foreign economic policy. These are considered systemic factors of national economic development, foreign trade liberalisation and a transparent environment for foreign investment.

Ukrainian strategic tasks continue to include a far-reaching reform of the energy sector as a constituent of the country's national security, as well as strengthening of the economic growth through the use of relevant economic policy instruments.

The efforts of the Government regarding the business environment and the investment climate in the country are beginning to bear fruit. Despite the political risks, investment grew in the first quarter of 2006 by almost 16%, 4.5 times more than during the corresponding period of 2005, and foreign direct investment was at its highest level since 1991.

However, these achievements are still below the levels of many of the other countries in the region. The energy sector as a whole, and in particular the upstream oil and gas industry, the main pipelines industry, and the heat and power sector still lag behind the overall economy in terms of positive investment climate, liberalisation and competitiveness.

Such problem areas as the regulatory and policy framework and policy coherence still require further detailed attention. Some of the more pressing issues include the respect of the rule of law, the protection of property rights, entry barriers, the possibility of retroactive de-registration of businesses, and arbitrary tax policy. Problems with the competitive environment and the degree of the Government's involvement in the energy market mechanisms raise concerns and risk impacting the investment climate negatively.

Ukraine's key energy policy tasks and priorities are defined in the Energy Strategy for the Period until 2030 as adopted by the Cabinet of Ministers in March 2006. The Strategy proceeds from the understanding that Ukraine has limited conventional energy resources and thus has to rely on imports, and that it also suffers from a lack of diversification of energy imports. For these reasons, the Strategy highlights the importance of rational use of energy, the promotion of domestic energy production, and switching to alternative energy sources.

The Follow-up Report on the Investment Climate and Market Structure in the Energy Sector of Ukraine is available in English and Russian.