12:00 01.03.2021


How to stop the outflow of foreign investment?

6 min read
How to stop the outflow of foreign investment?

Sergey Benedysiuk, Partner, Head of Corporate and M&A Practice, LCF Law Group


During 11 months of 2020 the outflow of foreign direct investment from Ukraine amounted to USD 200 million while the inflow of foreign investment reached USD 5.1 billion during the corresponding period of the previous year, of which USD 3.1 billion is the reinvested income of a direct investor. Bohdan Danylyshyn, the Chairman of the Council of the National Bank of Ukraine posted this on his Facebook page.

Of course, 2020 has become a crisis year for the global economy, and therefore the outflow of investment on the Ukrainian market is not a big surprise. The world is learning to live with the Sars-Cov-19 pandemic and many businesses are taking decisive steps to ‘recover’ from economic decline.

Now the problem is particularly acute for attracting financing and investment. As a result, the problems of the investment climate in Ukraine come to the fore: what should be done to retain existing and attract new investors?

According to our practice of structuring a foreign investment, we can make up the top 5 basic rules that serve as peculiar ‘red flags’ of security and attractiveness of investing in Ukraine. Such rules in different variations are common to any civilized country. Its implementation in practice, in our opinion, can play a significant role in solving the problem of the outflow of foreign investment.

  1.  Protection of property rights

At first glance, this rule is quite obvious. The Constitution of Ukraine guarantees the inviolability of property rights, and national legislation provides for various methods and levels of such protection.

In practice, however, foreign investors quite often fall under the influence of various negative factors that distort guaranteed protection mechanisms.

As an example, our experience in protecting a well-known foreign investor in the field of alternative energy could be given. The investor, without any experience in conducting business in Ukraine, created a joint venture with local partners. As a result of such a union, a corporate conflict arose.

The logical decision of our client was to introduce mechanisms for resolving corporate conflicts and protecting assets stipulated by the legislation of Ukraine. Despite this, due to shortcomings of the legislation and an insufficient level of guarantees for the protection of foreign investment as well as the corruption factor on the part of local partners, a foreign investor was at risk of losing his investment, which is unacceptable in civilized states.

  1. Stability and legal certainty

It is quite natural that the investor expects a certain result and the course of business by making investments.

Unfortunately, turbulent times in Ukraine are quite common. It has become noticeable for a long time that the elections of the president or people’s deputies give a red light for the implementation of agreements by investors due to the unpredictability of the situation, which may develop under the influence of certain political forces.

Also, the reduction of ‘feed-in’ tariffs in the field of alternative energy is a perfect example of the inconsistent policy of our state. International experience has repeatedly proved that by promising investors large profits and favorable conditions, the state is obliged to ensure compliance with such promises, especially when they are enshrined in legislation.

Otherwise, the state may be at risk of arbitration disputes and suffer reputational losses. Inconsistency and lack of legal certainty reduce the confidence of foreign investors. In particular, our clients quite often apply for asset withdrawal services from Ukraine due to unforeseen and unprecedented actions of the state in regulating the relevant industry.

  1. Effectiveness of legislation

Although the legislator is trying to adhere to the tendency of bringing the legislation of Ukraine into line with the EU legislation and harmonizing it, including for attracting investment, there are a large number of cases of the irrelevance of certain regulations. In particular, the current Labor Code and the Commercial Code.

In practice, the issue of various moratoriums, which over time prove their ineffectiveness and obsolescence, remains quite dangerous. Having lifted one moratorium (for example, opening a land market), others remain valid, for example, a moratorium on the recovery of property of state-owned enterprises. In our example, foreign investors are quite often interested in interacting with the state in the field of business, for example, when creating joint projects, public-private partnerships. However, by receiving information on the impossibility of recovering property from certain state-owned enterprises for violation and damage, even if there is a court decision, foreign investors start looking for other ways and places to invest.

  1.  Promoting investment at a global level

Well-known and reliable international investors can stop the outflow of foreign investment. For example, accompanying investment attraction from the European Bank for Reconstruction and Development, we observed the desire and interest of other foreign investors to repeat the positive investment experience. Thus, making an effort to attract large investors can set a positive example for others who did not dare to enter the Ukrainian business.

  1.  Transparent and fair court

The last on the list, although not the least, is the existence of a fair court that could effectively protect the violated rights of the investor. Our foreign clients almost never ask about the possibility of resolving disputes in Ukrainian courts, since the activities of national judges require significant improvement taking into account international experience in protecting the rights and interests of foreign investors, without any influence ‘from the outside’, which negatively affects the reputation of the judicial branch of Ukraine.

Factors such as distrust of the national judicial system and the awareness of foreign investors about the inefficiency of asset protection in Ukraine should only encourage national judges to develop and grow professionally. Even national business (as a rule, large-scale) in most cases artificially creates a foreign element in structuring transactions in order to create the possibility of protecting rights in international arbitration.

As a conclusion, it should be noted that by adhering to simple and transparent rules of regulation, protection of economic competition, policy consistency and maximum intolerance of any manifestations of corruption, Ukraine has the chance to create its own favorable investment climate.



Sergey Benedysiuk, Partner, Head of Corporate and M&A Practice, LCF Law Group