PEST Analysis of Ukraine

August, 2008

PEST Analysis of Ukraine Page 1 of 13

August, 2008
 Table of Contents
PEST Analysis .............................................................................................................................................. 3
Political Factors ......................................................................................................................................... 3
Historical preview .................................................................................................................................. 3
Ruling Party ........................................................................................................................................... 3
Foreign Relations .................................................................................................................................. 4
VISAs ..................................................................................................................................................... 4
Financial Incentives Regulations ...................................................................................................... 4
Trade Partners and Agreements .......................................................................................................... 5
Economics Factors ................................................................................................................................... 5
Economic Growth .................................................................................................................................. 5
Inflation................................................................................................................................................... 6
Current Account Balance ...................................................................................................................... 7
Interest Rates ........................................................................................................................................ 7
FDI .......................................................................................................................................................... 7
Employment Growth, Income and Wages ........................................................................................... 8
Economic Ratings ................................................................................................................................. 8
Privatization of Property and Land ....................................................................................................... 9
Banking system and Lease Financing ................................................................................................. 9
International Trade and Capital ............................................................................................................ 9
Social Factors..........................................................................................................................................10
Demographics .....................................................................................................................................10
Households ..........................................................................................................................................11
Environmental Issues..........................................................................................................................11
Technological Factors.............................................................................................................................12
IT Sector...............................................................................................................................................12
R&D ......................................................................................................................................................13
Government Participation ...................................................................................................................13

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August, 2008
PEST Analysis
Political Factors
Ukraine is a republic ruled in accordance with the constitution originally adopted in 1996. All
fundamental governmental organisations are situated in the capital city of Kyiv. The country is under
a semi-Presidential system where the President is the chief of state and shares power with the
parliament. The Prime Minister is appointed by the President on the recommendation of the party or
parties holding a parliamentary majority. The Parliament approves the Prime Minister and appoints
and dismisses cabinet ministers as proposed by the Prime Minister. However, the President holds the
constitutional right to appoint the defense and foreign ministers, as well as the head of the security
service. The President also holds the right to veto legislation, with the exception of constitutional laws,
as well as to stop cabinet decrees.

Historical preview
Ukraine declared itself independent from the Soviet Union in 1991, which was followed by the election
of President Leonid Kravchuk, a former Communist leader. His term was characterized by severe
economic decline and runaway inflation, while the privatization processes of the economy hardly
progressed. Furthermore, Leonid Kuchma, a Soviet-era industrial manager and Ukraines President
from 1994 to 2004, advocated close ties with Russia.
The 2004 Presidential election was characterized by widespread violations of democratic norms,
including government intimidation of the opposition and of independent media, abuse of state
administrative resources, highly skewed media coverage, and numerous provocations. The runoff
between Viktor Yanukovych and Viktor Yushchenko included illegal expulsion of opposition
representatives from election commissions, multiple voting by busloads of people, abuse of absentee
ballots, reports of coercion of votes in schools and prisons, and an abnormally high number of mobile
ballot box votes. Hundreds of thousands of people took to the streets of Kyiv and other cities to
protest electoral fraud and express support for Yushchenko, and conducted ongoing peaceful
demonstrations during what came to be known as the "Orange Revolution." In the following three
years no stable President/Prime Minister cooperation was formed; the elections were held in line with
1
international standards for democratic elections.

Ruling Party

The current President, Viktor Yushchenko, was elected in late 2004, which marked the end of the
Orange Revolution. The head of government, Prime Minister Yulia Tymoshenko, began her official
duties in December 2007. Her First Deputy Prime Minister is Oleksandr Turchynov, and the vice-
Prime Ministers are Ivan Vasyunyk and Hryhoriy Nemyrya. The current political structure of the
Parliament is the following: Party of Regions has 175 seats; Yulia Tymoshenko Bloc 156; Our
Ukraine Peoples Self Defense Bloc 72; Communist Party (CPU) 27; Lytvyn Bloc 20. The
President and the Prime Minister cooperate constructively and undertake reforms towards the Euro-
Atlantic integration. 2 However, in a recent report, Emerging Europe Monitor defined the relations
between the President and the Prime Minister as volatile due to some disagreements regarding the
governments policies.3

1
http://www.state.gov/r/pa/ei/bgn/3211.htm
2
http://ukraine.suite101.com/article.cfm/ukraine_government_profile
3
http://www.emergingeuropemonitor.com/file/65962/political-risk---fractious-relations.html

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Foreign Relations

Ukraine maintains peaceful and constructive relations with all its neighbors; the country has
especially close ties with Poland and Russia. Relations with Russia are complicated as a result of
conflicting foreign policy priorities in the region concerning energy dependence, payment arrears, etc.
The government has declared Euro-Atlantic integration as its primary foreign policy objective. Ukraine
has signed The European Union's Partnership and Cooperation Agreement (PCA) and is included in
the European Neighborhood Policy. The EU and Ukraine are negotiating a "new enhanced
agreement," which could also incorporate a free trade agreement. Ukraine is part of the Organization
for Security and Cooperation in EuropeOSCE and of the North Atlantic Cooperation Council. In
January 2008 Ukraine requested a NATO Membership Action Plan. Ukraine is a founding member of
the Commonwealth of Independent States (CIS) and of GUAM (Georgia-Ukraine-Azerbaijan-
Moldova).

Ukraine is a member of the EBRD (European Bank for Reconstruction and Development),
International Monetary Fund, World Bank and since 2008 of the World Trade Organization (WTO).
Currently, it does not receive IMF financing. The World Bank and EBRD provide loans and grants to
support the development of the country and the implementation of reforms for improvement of the
investment climate, public administration, financial management, and social inclusion.

VISAs
Ukraine has a visa-free regime with the countries from the CIS, including Russia and Belarus.
Furthermore, visa facilitation agreement with most EU countries was successfully completed. Its
completion has eased the procedures for issuing short stay visas for Ukrainian citizens. Such visa -
free regime has been established for citizens of the following countries: United States of America,
Austria, Belgium, Canada, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany,
Greece, Hungary, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Malta, Poland, Portugal,
Principality of Andorra, Principality of Liechtenstein, Principality of Monaco, Republic of Iceland,
Slovakia, Slovenia, Spain, Sweden, The Holy See (State of the Vatican City), The Netherlands, The
Swiss Confederation, United Kingdom. Citizens of the above-mentioned countries do not need visas
to enter Ukraine or transit through its territory for the period of time of up to 90 days with a valid travel
passport. However, visas are required for citizens who enter Ukraine with the purpose of
employment, permanent residency, study and work at the diplomatic missions in Ukraine or with any
4
other purpose if they are going to stay in Ukraine for more than 90 days.

Financial Incentives Regulations

Ukraine encourages foreign trade and investment and has established Ukrainian Center for Foreign
Investment Promotion (Invest Ukraine). Foreigners have the right to purchase businesses and
property, to freely repatriate revenue and profits, and to receive compensation in the event that
property is to be nationalized by a future government. Ukraine has low tax rates. The top income tax
rate changed from a flat 13 percent to 15 percent in January 2007, and the top corporate tax rate is
25 percent. Other taxes include a value-added tax (VAT), a land tax, and a vehicle tax. In the most
recent year, overall tax revenue as a percentage of GDP was 35.4 percent.
rd
The Heritage Foundation Index of Economic Freedom 2008 places Ukraine on 133 place in the
world with a score much lower than the regional average. The report of the foundation says: Ukraine
is very weak in business freedom, government size, monetary freedom, investment freedom, property
rights, and freedom from corruption. Inflation is high, and government expenditures equal nearly two-
fifths of GDP. While foreign investment is officially welcomed, corruption and regulations are
deterrents to capital. The judiciary does not always enforce contracts and is tarnished with corruption.

4
http://www.mfa.gov.ua/mfa/en/509.htm

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Corruption is a major problem throughout the civil service, and bureaucratic inefficiency makes many
5
commercial operations difficult.

Trade Partners and Agreements

Ukraine is a Generalized System of Preferences (GSP) beneficiary with a number of industrialized
countries, a member of the Commonwealth of Independent States (CIS) and of a customs union
agreement, with Russia, Belarus, and Kazakhstan although the latter has not been fully implemented.
While the trade relationship with EU is currently defined by the Partnership and Cooperation
Agreement (PCA), however the planned EUUkraine Free Trade Agreement (FTA) is expected to
change the situation. Ukraine also started negotiating an FTA with Israel in November 2007.
Ukraines accession to the WTO was ratified in July 2008.6
The EU stated that WTO membership will bring significant benefits for Ukraine. It will provide it with
guaranteed access to the markets of all other WTO members, including the EU. It creates a degree of
certainty and stability in openness of the Ukrainian market that will help attract new trade and
7
investment. It will be a highly significant step in Ukraine's integration in the global economy.
As of July 2008, Ukraines major export partners are EU 28% and Russia 26%. Major import
partners are EU 37% and Russia 28%.8 The trade between EU and Ukraine trade has been
growing steadily in recent years. According to EU press releases, Ukraine is the 25th largest export
9
market of the EU and the EU is Ukraine's first trading partner, followed by Russia.

Economics Factors
Ukraine is granted a market economy status by the EU and USA. The sharp economic decline in the
90s resulted in deteriorating living standards for most citizens and widespread poverty. During the
st
21 century, some positive economic growth has been realized. The macroeconomic characteristics
of the country are stable, with the hyperinflation of the early post-Soviet period gone. Ukraine's
currency, the hryvnia, was introduced in September 1996 and has remained relatively stable.
The country has a well-developed scientific and productive basis with good industrial potential. It
produces heavy machinery and special vehicles such as light and cargo vehicles, agrarian
techniques, diesel locomotives, lathes, equipment for Electric Power Plants, turbines, aviation and oil
refinery equipment. Ukraine is a powerful energy producer.
Ukraine's long-term economic development depends on the implementation of market reforms. The
government undertakes measures against corruption and towards the acceleration of the privatization
process. Still, much remains to be done to restructure and privatize key sectors such as energy and
telecommunications, to allow the free sale of farmland, and to improve the law enforcement.

Economic Growth
The unstable political situation in Ukraine hardly influences its economic development. GDP has been
growing steadily since 2005 at an average growth rate of 7% and industrial production has been
expanding by 12%.10 The per capita GDP, at Purchasing Power Parity, in 2007 amounted EUR 5800
which is an 11% increase compared to 2006.11 Ukraine`s GDP growth continued in 2008 - 6.4% until
May. The GDP is divided in the following composition by sectors Industry 32.3%, Agriculture 9.1%,

5
http://www.heritage.org/Index/country.cfm?id=Ukraine
6
http://info.worldbank.org/etools/wti2008/docs/brief197.pdf
7
http://ec.europa.eu/trade/issues/bilateral/countries/ukraine/pr160108_en.htm
8
http://ierpc.org/ierpc/memu/memu_93_jul_08_en.pdf
9
http://europa.eu/rapid/pressReleasesAction.do?reference=IP/08/249&format=HTML&aged=1&language=EN&guiLanguage=en
10
http://www.investukraine.net/about/
11
http://www.wiiw.ac.at/e/ukraine.html

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and Services 58.7%.12 According to the Institute for Economic Research and Policy Consulting the
real GDP growth is expected to decrease in 2009 to 6.3% due to significant slowdown in final
consumption of households as a result of the higher inflation and low credit growth. Investment
activity is forecasted to speed up in 2009 due to large infrastructure projects aimed at preparing
Ukraine for the European Football Championship in 2012.

14
12.1
12

10
9.2 9.6 7.3
8
7.6
6
5.9 5.2
4
2.7
2

0
-0.2
1999 2000 2001 2002 2003 2004 2005 2006 2007
-2

Figure 1. Ukraine GDP Growth (1999 2007)13

Inflation
Inflation is a major threat for the development of the Ukrainian economy. In May, consumer price
inflation reached 31%. Although it is somewhat driven by foods, the major blame should be put on
loose fiscal and monetary policies over the last few years.

Growing budget spending 60

(30% per year in real terms
since 2004) notably 50
contributed to the build up of
inflationary pressures, giving 40
strong impetus to disposable
income growth. 30
30.2 31.1 29.3
Implementation of generous 28.2 26.2
social promises made during 20
22.7 13.5
early 2007 parliamentary
16.6
elections caused further 10 5.2
12 0.8 9
substantial fiscal loosening in 9.1
2008, though rallying inflation 0
as well as the widening 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2008 2008 2008
Q1 April May June
current account deficit have
CPI
called for fiscal tightening.
Monetary Base

Figure 2. Ukraine CPI/Monetary Base Trend (1999 2007)14

12
https://www.cia.gov/library/publications/the-world-factbook/geos/up.html
13
http://ierpc.org/ierpc/memu/memu_93_jul_08_en.pdf
14
http://ierpc.org/ierpc/memu/memu_93_jul_08_en.pdf

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In addition to the loose fiscal policy, the monetary policy framework of anchoring nominal exchange
rate stability along with large foreign capital inflows into the country has resulted in the rapid growth of
money supply. To defend the peg, the National Bank of Ukraine had to purchase large amounts of
foreign exchange, thus injecting large sums of Hryvnias into the economy. As a result, the monetary
base has been growing steadily and contributing towards inflation.

Current Account Balance

The current account deficit has been widening significantly during the last two years. The expansion
is attributed to the increased commodity trade deficit in the face of increasing imports. High foreign
capital inflows covered the most
of the current account deficit.
15.00%
10.60%
According to Emerging Europe 10.00%
Monitor, the deficit as a
percentage of GDP will narrow 5.00%
2.90%
beyond 2009. The analysts
believe that the shortfall does not 0.00%
pose a significant risk to 2004 2005 2006 2007 2008 Q1
macroeconomic stability, and will -5.00% -1.50% -4.20%
continue to be covered by the
financial account surplus going -10.00%
forward.15 -9.60%
-15.00%

Figure 3. Ukraine CA Balance as % of GDP Trend (2004 2008)16

Interest Rates

In the face of rising inflation and credit growth, the National Bank of Ukraine raised its discount rate
by 200 basis points from 10% to 12% at the end of April. Since the end of 2007, the National Bank of
Ukraine has been making efforts to contain rapid money supply and credit growth. It tightened
reserve requirements and performed sizable sterilization operations. However, rising interest rates
while keeping the exchange rate pegged will likely encourage higher inflows of foreign capital
(especially on the back of widening international interest rate differentials due to the accommodative
monetary policy of the major world central banks).17

FDI
Foreign direct investments in Ukraine have made a rapid increase from 2006 to 2007 coming to 9.2
bn USD. The largest share of FDI to Ukraine came from Germany, Cyprus, Austria, Netherlands, UK,
USA and Russia and went mostly to the banking and construction sectors. In 2007 the leading
sectors in attraction of the FDI were production 27.6%, financial sector 16% and commerce 10%.
18
According to the Institute of Economic Research and Policy Consulting the inflow of foreign direct
investment is expected to remain high in the following years, with the financial sector remaining the
key attractor of foreign capital.

15
http://www.emergingeuropemonitor.com/file/63739/ca-deficit-to-peak-in-2009.html
16
http://ierpc.org/ierpc/memu/memu_93_jul_08_en.pdf
17
http://www.unian.net/eng/news/news-257999.html
18
http://www.in.gov.ua/index.php?lang=en&get=news&id=983

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 10
9
9.2
8
6.5
7
6
5.3
5
4
3
1.4
2
0.5 0.6 0.8 0.7 1.7
1
0
1999 2000 2001 2002 2003 2004 2005 2006 2007

Figure 4. Ukraine Net Foreign Direct Investments in USD bn Trend (1999 2007 )19

Employment Growth, Income and Wages

Registered unemployment rate of the economically active population as of July, 2008 was 1.9%.
Unemployment rate for the period January-March 2008 was 7,6% on average.
In the face of the economic growth, real disposable income has increased significantly, by 16% for
the period January May 2008. Real wages have also increased by 11.9%.

25.00%
20.10%
20.00%
16.10% 16.00%
12.80%
15.00%

10.00%

5.00%

0.00%
2005 2006 2007 2008 (Jan-May)

Figure 5. Ukraine Growth of Real Disposable Income Trend (2005 2008) 20

Economic Ratings
On 12 June 2008, S&P downgraded Ukraine's long-term foreign currency rating from "BB" to "B+".
According to the agency "The downgrade reflects the failure of authorities to put into place adequate
policy measures to counter rising inflation in Ukraine's overheating economy," The analysts state that
the current situation makes the banking and financial systems vulnerable which brings concerns
about a deteriorating economic environment.21

19
http://ierpc.org/ierpc/memu/memu_93_jul_08_en.pdf
20
http://www.ukrstat.gov.ua/operativ/operativ2007/gdn/ndn/ndn_e/arh_ndn2007_e.htm
21
http://uninews.unicredit.it/en/articles/page.php?id=9489

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Fitch Ratings has also lowered its outlook for Ukraine's credit ratings from positive to stable as
inflation surges upwards. The agency affirmed Ukraine's long-term foreign and local issuer default
ratings (IDR) at 'BB-'. The countrys ceiling is affirmed at 'BB-' and the short-term foreign currency
IDR at 'B'.22

Privatization of Property and Land

During the first 3 years of the privatization process, which started in 1995, 45,000 small businesses
and 8,000 larger enterprises were sold off. By 2000, more than 67,000 enterprises had been
privatized, including more than 7,000 medium- and large-scale industrial enterprises. For the small-
scale enterprises, privatization is virtually complete. The sale of larger enterprises has been slowed
down because of a lack of supporting legislation for privatization, resistance from some local
authorities and the management of large enterprises, and extensive parliamentary opposition. The
main opposition to further privatization is the belief that such programs will result in higher
23
unemployment. However, in June, the government passed a Law on the State Privatization which
sets new priorities for privatization and foresees the facilitation and acceleration of the process.

Banking System and Lease Financing

The number of banks licensed by the National Bank of Ukraine for effecting banking transactions as
of year end 2007 was 175. Ukraine is one of the fastest growing countries in Eastern Europe by
assets, loans, deposits and profitability of the banking sector. The bank deposits in the Ukrainian
banking sector are projected to grow at about 45.8% (in terms of national currency) during 2008-2012
and the bank loans - at 66%. Economic entities account for the majority of bank loans in Ukraine. It is
forecasted that total number of payment cards will reach over 95 Million by the end of 2010 at a
24
CAGR of 31%.

International Trade and Capital

According to the State Statistics Committee, Ukraine`s exports of goods grew by a vigorous 31% in
the first four months of 2008. Favored by high world steel and chemical prices, export of metallurgical
and chemical products rose by 33.5% and 19% respectively.

Growth in CIS countries, the main destination of Ukraine`s machine-building exports, drove a 44.4%
increase in machinery and transport exports. High world food prices stimulated export of food
products, edible oil, mill products, milk and dairy products (including eggs). Despite favorable export
performance, much faster growth in imports resulted in rapid deterioration of the foreign trade deficit.
25

22
http://www.forbes.com/markets/feeds/afx/2008/05/14/afx5007255.html
23
http://www.nationsencyclopedia.com/economies/Europe/Ukraine-OVERVIEW-OF-ECONOMY.html
24
http://researchreport.wordpress.com/2008/07/23/ukraine-banking-the-thriving-banking-industry-in-south-eastern-europe/
25
http://www.unian.net/eng/news/news-257999.html

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Social Factors
Demographics
Ukraine has experienced the significant population decline of 10.5% since announcing its
independence from 51.838 billion in 1990 to 46372.7 billion in 2008. The birth rate has been
increasing since 2001 and reached 10.2/1000 in 2007. However, death rate has also increased to
16.4/1000, which accounts for the negative National growth of -6.2/1000. The average life-expectancy
at birth is measured to be 68.25 years in 2006-2007. The average population density in 2008 is 77
26
people per sq. km.
Rapid urbanization is a demographical challenge for Ukraine. Currently 68.3% of the population is
living in urban areas and 31.7% in rural ones. According to Emerging Europe Monitor by 2035, almost
two-thirds of Ukrainians will be city dwellers, rising to almost 80% by 2050. 27 International migration is
another issue causing population decline; the estimated net migration rate for 2008 is -
0.12migrants/1000 population.28

55000
50000
45000
40000
35000
30000 Rural
25000 Urban
20000
15000
10000
5000
0
2
0

6
3

8
200
199

199

199

199

199

199

199

199

199

199

200

200

200

200

200

200

200

200

Figure 6. Ukraine Population Trend and Distribution (1990 2008)

100%
90%
80%
70% 65 and more
60% 45-64
50% 25-44
40% 15-24
30% 0-14
20%
10%
0%
*
90

92

94

96

98

00

04

06

08
02
19

19

19

20
19

19

20

20

20
20

Figure 7. Ukraine Population Age Distribution (1990 2008)

26
http://www.ukrstat.gov.ua/operativ/operativ2007/ds/nas_rik/nas_e/nas_rik_e.html
27
http://www.emergingeuropemonitor.com/file/67421/demographic-timebomb-the-calm-before-the-storm.html
28
http://www.indexmundi.com/ukraine/net_migration_rate.html

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Ukraine faces another serious demographic problem concerned with both population decline and
population aging. The fraction of people over 65 reached 16%, while the fraction of people below 14
years has decreased to 14%. According to analysis of Emerging Europe Monitor for the second half
of the next decade, the situation will become much more critical - the proportion of elderly Ukrainians
starts to grow more quickly, moving to 19.2% in 2025 and 27.6% in 2050. The analysts forecast that if
the countrys economy continues to develop at the current pace, it will soon need to import additional
labor force to preserve such growth rates.29
For over a century before the independence, the official language of the country was Russian. The
official language now is Ukrainian; it is spoken by 67% of the population; still, large part of the
population speaks Russian as well, especially in the big cities. The official religion is Christian
Orthodox; however, a large proportion of the population does not profess any religious belief, largely
as a consequence of the official propagation of atheism during the Soviet era. In terms of ethnic
composition, the last available data as of the 2001 census shows 77.8% of the population as
Ukrainian and 17.3% as Russian. The literacy rate of the population is 99.7% for adults and 99.8% for
youth.

Households
According to information by the statistical institute of Ukraine, as of 2007, on average 81.1% of the
population income was spent on goods and services, 8.4% went into savings, and the rest - to other
expenses.30 In 2007, 29.3% of the population had an average per capita total income under the
subsistence minimum.31
The average size of a household is 2.6 people. The following table shows the exact distribution by
number of people.

Single
23.90% 24%
Tw o mem be rs

Three m embers
25% 27.10%
Four and more
mem bers

32
Figure 8. Ukraine Households by number of persons 2007
According to a study by UniCredit Bank, the home ownership rate is high and 63% of the Ukrainian
33
population lives in flats.

Environmental Issues
Ukraine has significant environmental problems, resulting from the Chernobyl nuclear power plant
disaster in 1986 as well as the industrial pollution. Chernobyl Nuclear Power Plant was permanently
closed in 2000 and the necessary measures for radiation safety have been taken. The disaster has

29
http://www.emergingeuropemonitor.com/file/67421/demographic-timebomb-the-calm-before-the-storm.html
30
http://www.ukrstat.gov.ua/operativ/operativ2008/so_ek_r_u/soekru_u_e/2007_e/page_14.htm
31
http://www.ukrstat.gov.ua/operativ/operativ2007/gdvdg_rik/dvdg_e/duf2006_e.htm
32
http://www.ukrstat.gov.ua/operativ/operativ2007/gdvdg_rik/dvdg_e/Har2006_e.htm
33
http://en.unicredit.com.ua/view.releases/mode.view/id.265/

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had huge negative social impact as of 2007, 2 526 216 people (which is 5.5% of the entire
population) have the status of victims.
Ukraine is interested in cooperating on regional environmental issues. Conservation of natural
resources is stated a high priority although implementation suffers from a lack of financial resources.
Ukraine established its first nature preserve, Askania-Nova, and has a program to breed endangered
species. Other environmental problems are inadequate supplies of potable water; air and water
pollution and deforestation.

Technological Factors
IT Sector

The Internet usage in the country has increased dramatically during the last years. As reported in a
document of the communication branch, "Reorganisation of a telecommunication network,
introduction of new technologies, increase of level of solvency of the population promoted growth of
34
number of the Internet audience in Ukraine which as of 01.07.2008 totals about 10 million persons".

25.0%
21.6%
20.0%

15.0%
11.5%
10.0%

5.0%
0.4%
0.0%
2000 2006 2008

35
Figure 9. Ukraine Percent of Population Using Internet (2000-2008)

Past achievements of Ukraine in space and military production have left solid traditions of working
through complicated projects that are IT dependent. Higher education remains strong in the areas of
mathematics and theoretical physics, which rely heavily on IT-technologies. Recently the international
IT-majors have begun to realize the opportunity posed by opening full affiliates in Ukraine and
engaging them in their global and complicated projects.

According to a local software development company Infopulse, the Ukrainian offshore software
outsourcing industry has great potential for integration in the worldwide IT industry. The local IT-
industry serving domestic clients has dominant positions in systems integration, accounting software
and Web development. These local providers are also beginning to expand into the international
36
market. The majority of software development companies today are located in the capital city of
Kyiv.

34
http://fin-forex.com/in-ukraine-the-internet-use-10-million-persons/
35
http://www.internetworldstats.com/euro/ua.htm
36
http://www.infopulse.com.ua/About+the+company/About+Ukraine/default.aspx

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According to the research company Gemius, nearly one third of Internet users from Ukraine use
online stores or auction portals as a place for purchasing various goods. Taking into account the
attitudes towards e-commerce, the agency forecasts that this number is most likely to increase in the
nearest future.37

R&D

Ukrainian companies have a strong advantage in R&D. It develops not only in the area of scientific
research, but also in the area of software development that requires creativity and strong skills in
adjacent domains. According to the Ukrainian Statistical Institute, 14.2% of all enterprises were
engaged in innovative activity and 11.5% introduced innovations during 2007.38

Ukrainian scientists have achieved world-class results in such fields as mathematics, physics,
computer sciences, engineering, biology, electric welding, new materials and space sciences. The
basis of the country's scientific and technological development is in the following branches of
Ukrainian economy: aircraft industry, shipbuilding, missile and tank engineering, bio-technologies,
radio-electronics, low temperatures physics, nuclear physics, communication and telecommunication.

The most acknowledged Universities in Ukraine are: National Polytechnic University of Ukraine (Kyiv
Polytechnic Institute), National Taras Shevchenko University, National Aviation University. 39

Government Participation

The Government is strongly encouraging innovations and technological development. The State
Agency of Ukraine for Investments and Innovation is the regulatory body responsible for the
implementation of the State innovation program. Technological Parks have been created on the
territory of the country, in which special treatment for investment and innovation activity is granted. It
includes introduction of tax benefits, and state support on implementation of investment and
innovation projects.40

37
http://www.gemius.com/pl/archives/2007-05-28/01
38
http://www.ukrstat.gov.ua/operativ/operativ2007/ni/iapp/iapp_e/iapp2007_e.htm
39
http://www.infopulse.com.ua/About+the+company/About+Ukraine/default.aspx
40
http://zakon.rada.gov.ua/cgi-bin/laws/anot.cgi?nreg=991-14

PEST Analysis of Ukraine Page 13 of 13

August, 2008