April 25, 2022

The Challenges of Running a Business in Ukraine

For years, Ukraine had been one of the largest emerging markets in Europe. It provided thousands of businesses to grow from scratch and expand their operations in central Europe. This was before the Russia-Ukraine war in 2022 that continues to wreak havoc on the country’s business landscape with no signs of the chaos coming to an end anytime soon.

However, even before the political tensions, running a business in Ukraine was an administrative disaster due to several issues, from costly procedures to an inefficient regulatory environment, harassment by tax officials, and limited financing resources. Even those who found a way to overcome these overhead challenges require local help and connections to survive and thrive.

In 2019, Ukraine ranked 64th place among 190 countries in terms of ease of conducting business activities. Although this was a massive step up from ranking 152nd in 2011, things haven’t gotten better, especially due to the pandemic and the ongoing crisis.

In this article, I’ll share the top 11 challenges of running a business in Ukraine. So, whether you’re a local looking to help rebuild the economy or a foreigner looking for lucrative investment opportunities, you can make a more informed decision.

11 Reasons Running a Business in Ukraine Is Difficult

1. The Russia-Ukraine War

Considering the events of 2022 so far, it’s safe to say that the Russia-Ukraine war is the biggest challenge of running a business in Ukraine. With the country trapped in political turmoil and thousands of soldiers on each side, it’s safe to say things are far from business as usual.

Many popular global companies have shown their support by pulling out of Russia, including Ford, Toyota, Boeing, Airbnb, Apple, Facebook, Burger King, and Coca-Cola, among others. Their Ukrainian counterparts have also experienced obvious challenges operating in the war zone.

As business leaders from these industries and more deal with the short-term effects of the conflict, financial-system ripple effects are imminent. The global sanctions have already caused a ripple through the financial markets worldwide, including Ukraine, with unprecedented pressure on lenders, investors, and derivatives counterparties.

However, essential services have seen a massive surge in demand. For instance, restaurants still operating are jam-packed with customers (stranded passengers, workers, etc.), overwhelming them with more rush than ever before. However, with consumer spending down to a record low, every major sector is taking a hit, and businesses are struggling to even open, let alone survive.

2. Several Pre-Registration Requirements

Even before the conflict, starting and running a business in the Kievan Rus region was no easy task. It involved seven legal procedures, which took 22 days on average to be completed. Moreover, contrary to legislation in both EU and other countries, local laws don’t permit investors to build a partnership in the country. Simply put, you can only register a limited liability entity to start a business.

3. Construction Permits

Ukraine ranks 182/190 worldwide in terms of relative ease in getting construction permits. In other words, shops, companies, warehouses, factories, and other entities have to go through 20 legal procedures before they can get a permit. What’s worse is that this process takes over 365 days, so if you have an instant opportunity you need to capitalize on, it’s probably not the best idea to invest in Ukraine.

Moreover, getting a permit costs around $1,262, which is nearly 15 times above the OECED average cost of around $78.7.

4. Electricity

Even if you have a business facility up and running, it takes nearly 9-10 months to get electricity, which costs 192% higher than the income per capita. Businesses have to wait 53 days for grid approval and design completion of the electrical system.

5. Property Registration

Even before the war, Ukraine ranked 149th worldwide for the ease of buying and registering an estate or property in the country. The process involves ten legal procedures and a wait time of 70 days on average. This is nearly three times longer and more difficult than other European countries.

6. Getting Credit

Getting credit is perhaps the biggest perk of running an entity in Ukraine compared to other procedures. Ukraine ranks 23rd worldwide in terms of business financing due to its highly developed financial systems. However, things have changed since the start of 2022. It may take a while for the country to return to offering generous loans to applicants.

7. Protecting Investors

Ukraine recently took measures to enhance the country’s reputation in Europe and other parts of the world by offering better protection to foreign investors. As per the World Bank, the country ranks 117th worldwide in terms of investor security. However, the government has been eager to adopt proactive data collection strategies that will help improve the legal infrastructure and relationship with foreign investors.

8. Tax Collection

Paying taxes is undoubtedly the most difficult obstacle when running a business in Ukraine. The government has a complex tax breakdown structure that requires businesses to make 28 payments every year with a wait time of 491 years on average.

9. Cross-Border Trading

Despite its geographically diverse location, cross-border trading in Ukraine is no simple task as it requires providing six documents and a wait time of 30 days for exports processing. More importantly, businesses have to pay heavily for exporting and importing containers. With the current situation, the costs have gotten steeper.

10. Enforcing Contracts

Although contract enforcement is among the most well-organized processes in the country, it still takes around 343 days. While this is much better than the 510-day average in the OECD, it carries a steeper cost which could force businesses to consider if the cost is worth it.

11. Insolvency Resolution

It takes around 2 years and 10 months to take care of insolvency issues in Ukraine. More importantly, it can cost owners 42% of their real estate, which makes it far more expensive than the OECD average.

Wrap It Up

With Ukraine currently in its worst state since its independence, it’s safe to say that no one is looking to start a business there until the situation unfolds. However, with the amount of support the country is receiving from all around the world, it could offer a ton of lucrative opportunities to investors looking to take a bold risk.

For more information on trending global events and business practices, visit Percento Technologies today. www.percento.us/trends-in-technology

by Bobby J Davidson

I love our companies  and we love what we do.  For more information on the Davidson Family of Companies, visit www.bobbydavidson.com/about.  Sign up for my Newsletter at the bottom of this page.