Ukraine: Rule of Law (or Law to Rule?)

Numerous stories circulate of foreign based businesspersons and multi-nationals alike awaking one morning in the 'newly emerging market' in which they operate to find that, despite considerable investment, they no longer are the legal owners of their venture or face criminal charges for activities they couldnt even fathom of undertaking.

The trial and conviction of the ex-Ukrainian Prime Minister, Yulia Tymoshenko has sparked concern in the European Union, the United States and other law-abiding nations.

In a prosecution widely believed to a politically motivated attempt by President Viktor Yanukovich to sideline his primary opponent, Tymoshenko received a sentence of seven years for exceeding her authority when, as prime minister in 2009, she reached a natural gas deal with Russia without winning full government approval. In such a politicized legal environment, can legitimate interests really be protected?

While the Tymoshenko verdict will have a significant impact in political circles, in particular in the dealings of the EU with Ukraine, the 'show trial' must leave a disquieting feeling amongst those contemplating undertaking a significant investment in the Ukrainian energy sector.

TNK-BP Ltd. and Shell have announced plans to invest $1.8 billion and $800 respectively in unconventional gas projects in Ukraine. ExxonMobil Corporation and Ukraine’s state energy firm Naftogaz Ukrainy have signed a preliminary agreement for cooperation in the development of gas from unconventional sources. Other majors including Chevron Corp and Eni have been reported to be examining investments in Ukraine.

For such significant investments to proceed, appropriate legislative and bureaucratic measures need to be implemented to address ownership, financial, and taxation matters and of course, a clear transparent resolution mechanism should disputes occur. 

While Ukrainian politicians have been acknowledging the need for such measures, very little action has been taken in their implementation.

Julian Lee, Senior Energy Analyst at the Centre for Global Energy Studies, says that uncertainty over legislative consistency and the unbiased rule of law are a major concern for long-term investors in Ukraine.

"Oil and gas investments, whether in conventional, or unconventional, hydrocarbons represent a long-term commitment and require a degree of comfort about long-term stability of the rule of law," commented Mr. Lee, who specialises in the oil and gas industries of the former Soviet Union.

"Perhaps the biggest worry for investors is that deals that they sign now, or have already signed, will be the focus of similarly politically-motivated interference in the future."

Lee says the Tymoshenko case can be seen as further evidence that the legal system is used as a tool to settle political scores.

If Ukraine is prepared to undertake dubious actions against such a high profile party despite the almost universal protest, what safeguards will be place to protect foreign investment and more importantly, will they matter anyways?

Editors Note:  Last December, the Kyiv Post published a very illuminating interview with Dmytro Marunych, formerly deputy head of the press office Naftogaz Ukraine for a number of years. (Read HERE)  The article portrays an environment where officials and their business backers put personal gain ahead of national interests, driving a profitable and a big contributor to the state budget to the verge of bankruptcy.  The wild, wild East............