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FDI screening in Ukraine

28 September 2021
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In this report, we review international experience on FDI (foreign direct investment) screening in leading countries and the current plans to implement such system in Ukraine. We also develop recommendations on how the system should be designed.

First, we discuss what an investment screening mechanism is and how it works in the USA, Canada, Australia, and the EU. As there is variation in practices within the EU, we focus on two countries in particular: France and Germany, to highlight any such differences. Finally, we review China as one of the largest FDI recipients in the world and as a country whose investors frequently become a target for such systems.

Next, we review the attempts to implement an investment screening system in Ukraine, the current legal framework, and political commitments. The current version of the respective draft law is also discussed. We investigate such topics as the institutional structure of the responsible body, investment definition, industry and country selection, procedures, and rejection criteria. We compare them with foreign legislation and reflect on what local experts say about these provisions.

Finally, we provide recommendations on how the current draft law should be improved to both reflect best international practices and account for risks that may arise.

What is FDI screening?

FDI screening is a government mechanism to monitor investment inflows in certain (or all) industries and block transactions when they are considered risky. According to UNCTAD, during 2011-2019, at least 13 countries introduced such systems, and 15 significantly modified existing ones (usually widening the scope).

Conclusions

Ukraine needs an FDI screening mechanism. Ukraine has even more reasons to have it because it has already faced the consequences of corrosive capital owning and controlling critical enterprises and industries. The risks of politically motivated money flowing from other non-democratic states intensify the urgency. However, the draft law developed by the government does not seem to be accounting for all nuances.

The status of the responsible body should be upgraded. It should not be a newly created underfinanced organization with limited institutional capacity and authority. The Cabinet of Ministers should have the right to block potentially harmful investments, and the Ministry of Economy should provide the analytical support. Other ministries responsible for the industries under screening should be involved, too (Ministry of Defense, Ministry of Internal Affairs, Ministry of Energy, and Ministry of Infrastructure).

All relevant procedures and especially criteria for investment rejection should be explicitly written in the FDI screening law. The current version of the draft law provides a general framework. The only details it contains are the list of strategic industries, the investment definition, and the documents required to make an application. The other parts lack elaboration and cannot be addressed with bylaws, as this would create additional corruption risks which are already high in Ukraine.

The list of industries must be falling under screening should be modified such that it will be based on some clearly defined criteria. Also, the list of industries should include finance. Government plans to eventually sell the largest Ukrainian bank, PrivatBank, to a private investor, increase the risks of eventually losing control
over the banking system. Among the 20 largest deals blocked by screening systems in other countries, three were related to financial services. The largest was a takeover of MoneyGram (USA) by Ant Group (financial subsidiary of Alibaba Group from China).

There should also be another cross-industry filter. The screening authority should have the right to check all investments made by state-controlled bodies, as the US and Canada do. State-owned enterprises usually do not pursue only commercial goals (profit making), but also political ones. Some states extensively use them
as a policy tool; such investments must be thoroughly checked for risks.

The last, but not the least is the general context of reforms and trust to authority. FDI screening is rather advanced instrument that could be easily manipulated if not accompanied by fighting with corruption, reforms of courts and law enforcements agencies, enforcing rule of law and better protection of property rights.

Тhis publication was produced with support from the Center for International Private Enterprise (CIPE) in Washington D.C. The document does not reflect CIPE’s opinions or any employee thereof. CIPE is not responsible for the accuracy of any of the information included. With the information support of the analytical system YouControl.

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