According to Andrey Astapov, managing partner of Astapov Lawyers, legislative progress had been made in recent years – particularly through the adoption of a “very modern” civil and commercial code – to shed the country’s historically unfavourable reputation as a destination for foreign investment. “It has been a high priority for Ukraine to stimulate investments,” he adds. Key sectors identified by the Government include metallurgy, electronics, IT, agriculture, alternative energy and pharmaceuticals.

The country has been party to the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), which provides minimum standards of intellectual property regulation and enforcement, since 2005. Ukraine has also been a contracting party to the Convention on the Settlement of Investment Disputes (ICSID) since 2000 and the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards since 1961. “The fact that Ukraine is party to these treaties creates a substantial basis for the enforcement of foreign investors’ rights,” says Ronald Marks, a partner at Konnov & Sozanovsky.

Ukraine’s accession to the World Trade Organisation (WTO) in August 2008, meanwhile, has brought into force a number of new laws covering industry sectors such as insurance, agriculture and scrap metal, as well as areas such as intellectual property and customs fees.

Yet further advances have been in the pipeline in recent times. For example, the Verkhovna Rada passed new corporate and corporate governance standards in September 2008 through a law on open joint stock companies, although it will not come into effect for another six months. Marks says: “This should trigger substantial improvements to the business environment.”

The legal system is still catching up

Nevertheless, Ukrainian lawyers acknowledge that, despite this progress, the country’s legal system has yet to catch up fully with its recent economic development. “The chronic political crises badly affect the Verkhovna Rada,” Marks says. “As a result, legislative work has slowed down.”

The legal environment retains an element of instability and unpredictability that increases the cost and risk of doing business, adds Armen Khachaturyan, senior partner of Asters. “The major points of concern are not only the multitudinous ambiguities and inconsistencies in the existing laws, but also radical changes in the legislation that can appear overnight, poor implementation of adopted laws into practice, and ineffective law enforcement,” he says.

According to Khachaturyan, this climate has helped in part to foster a growing practice known in the Ukraine as ‘illegal raidering’ – murky attempts to gain control of a company or undermine it. The number of such attacks has increased in the past two years.

“Before 2006, illegal raiders in Ukraine were primarily attacking enterprises owned by local investors, but in 2006 the situation changed dramatically,” Khachaturyan says. “Enterprises owned by several large international companies were also attacked. The situation is aggravated by the fact that so far the state authorities have not tried to counteract the illegal attacks, and sometimes have even been on the side of the raiders.”

Reform in this area is just one item on a lengthy wish list among many Ukrainian lawyers – new laws covering financial services, intellectual property, taxation, public-private partnerships and property are needed in particular, they argue.

“The imperfect land law is one of the greatest barriers to the attraction of foreign investment in Ukraine,” Khachaturyan says. “It appears to be rather inconsistent and there are multiple discrepancies between various laws and regulations.”

The problems created by poorly drafted, unclear or conflicting legislation are compounded by Ukraine’s courts. “Low quality judges and corruption within the judiciary have created a systemic inconsistency in interpretation of Ukrainian legislation,” Marks suggests.

Astapov hopes that the recent adoption of new transparency rules governing the judiciary may solve the problem, at least in part. “Corruption remains in the spotlight of politics and governmental actions, so we expect to overcome this problem in the mid-term,” he says.

Frustrations for foreign investors

But judicial corruption is part of a wider malaise within the country’s public administration. Asters’ Khachaturyan believes that any further reforms aimed at encouraging investment must be accompanied by a shake-up in this area. “Even promising initiatives aimed at improving the business environment may fail if the incentives system for public servants is not changed,” he says.

Alexander Minin, senior partner of KM Partners, adds that the general level of bureaucracy is high and can be a source of frustration for foreign investors. “Some easy things require a lot of effort to be done properly,” he says.

Despite these flaws, levels of foreign investment and cross-border M&A activity remained – until the second half of 2008 at least – pretty high. Along with a boom in areas such as real estate, they contributed to rapid growth in the Ukrainian legal services market.