Ruslan Lenivsky: Investment law as a tool for bringing Chinese capital to Ukraine

 Lenivskyi Ruslan4

In 1998, while speaking at Washington University Law School, Secretary of State M. Albright shared the view that the global financial crisis required a focus not only on the rules governing international trade, but also on regulations governing regulation and governance. economy within states. "It is clear," sums up M. Albright, "that a lack of commitment to the rule of law in key countries has made the greatest contribution to the current crisis" (American Journal of International Law. Vol. 93. 1999).

Alarming trends in the political landscape and the global economy prove that this thesis has not lost its relevance in the early 2020s. Especially in terms of adherence to the rule of law. It is known that in the developed legal systems a special branch is gradually emerging - the Law of External Relations, which unites not only special laws but also the norms of other branches of law related to the implementation of external relations.

Investment law, as a complex component of the legal industry, needs further development, skilled solutions, and in Ukraine as a country that desperately needs external investment to overcome stagnation and sustainable development. The prerequisite for the formation of international investment law was the withdrawal of national capital far beyond the territory of its original origin. As you know, this phenomenon is objective economic in nature.

From theory to practice

International law is a system of legal norms, contractual and customary, created by states and other entities of international law governing international relations and aimed at promoting peace and enhancing international security, establishing and developing comprehensive international cooperation. The problems of legal regulation of international investments, as a type of international legal relations, show that they do not fully fit into the accepted doctrine of international law.

The subject of international investment law is not only the rules of international investment law and the social relations governed by them that arise in the course of entrepreneurial activity by a foreign investor. Equally important is the practice of legal regulation of the promotion, protection at the stages of emergence and formation of international legal support for attracting foreign capital.

International investment law consists of two types of legal regulation - national law and international law. Thus, investment law acts as a set of legal rules and principles governing the relations that are formed between different participants in investment activities.

In international law, the processes of interaction between states and international relations of a certain sphere of regulation are fixed and ensured. Legal regulation of investment relations means, first and foremost, the formation of stable legal guarantees for foreign investors, who, regardless of subjective reasons, should always encourage investment in production, that is, in investment activity.

Investment relations are first and foremost the relations of the owners. Therefore, improving the investment climate from the point of view of law is the creation of legal prerequisites for cooperation in the investment process of all types and forms of ownership and owners - subjects of investment relations, which include national and international legal forms and methods of regulation.

Creating favorable conditions for the investment process requires clear legal forms and methods of investment protection, but this is complicated by the two-tier nature of regulation. Perhaps recently, an attempt has been made to justify the allocation of international investment law to a separate sub-sector of international economic law.

The growing role of interstate investment cooperation is driven by its societal importance and the objective need to enhance economic integration at all levels. The current conditions in the international arena adequately reflect the greater interest of developing countries and countries with economies in transition in increasing foreign investment.

The expansion and deepening of international investment ties, the existence of powerful international growing investment flows, which play a major role in the globalization of the world economy, are all major factors in the contemporary social development of individual countries and the world community as a whole.

In this case, universal legal rules and regulations, directly or indirectly regulating the legal regime of foreign investment, are laid down, in particular, in the international legal acts of the World Trade Organization, the Statutes of the International Monetary Fund and the World Bank, OECD Model Codes, documents of non-governmental financial organizations located under the auspices of the London and Paris Clubs. And also in universal financial conventions adopted within the framework of international economic organizations (UNIDROW, UNCITRAL, UNIDO, UNCTAD, etc.).

Within the framework of international organizations the European Economic Community (EEC) and the Organization for Economic Co-operation and Development (OECD), a certain mechanism for regulating the transnational movement of capital was created, which facilitated the improvement of the mechanism of legal regulation of foreign investment on a multilateral basis.

It should be noted that decisions and resolutions adopted by international organizations are not strictly legal sources of international economic law in general and international investment law in particular. But their legal obligation stems from international practice. Moreover, their legal force is conditioned by the legislative consolidation of the provisions of these international instruments in numerous bilateral treaties, in the internal legislative acts of the states, as well as their application in arbitration and judicial practice.

The peculiarities of investment relations indicate that, given the heterogeneity of foreign investment entities, international investment law is organically and inseparably linked to international public and international private law, which confirms the complex nature of the industry. The rules of international investment law, because of the complex nature of the subject of their study, integrate theoretical knowledge of the legal regulation of foreign investment in a coherent system - international investment law.

The expansion and deepening of international investment ties, the existence of powerful international growing investment flows, which play a major role in the globalization of the world economy, are all major factors in the contemporary social development of individual countries and the world community as a whole. A convincing array of regulatory material of appropriate quality and quantity in the field of foreign investment speaks for itself.

Among the reasons for the low attractiveness to foreign investors of the countries of the so-called transitional economy to which Ukraine belongs, experts call imperfection (and sometimes presence of systematic gaps) of national legal regulation, inefficiency of financial and economic institutions in the conditions of more and more active functioning of the world financial system.

As for Ukraine, investors are still expecting real systemic reforms, based on the relevant legal framework. In their view, too many legal issues still need regulation and regulation. Ukraine needs to become increasingly accustomed to civilized norms of cooperation with foreign capital.

According to the overwhelming majority of experts, the best proof of our country's interest in direct investment (FDI) will be political stability, unyielding positions of law, low external debt, GDP growth, strengthening of the financial sector, favorable business climate and guaranteed protection over investment. EU.

China and the EU are improving their investment law

The Ukrainian state has been studying the successful experience of attracting investors for more than a year and is trying to promote the FDI event to Ukraine to the maximum. Against the backdrop of unfavorable trends, the country needs to catch up on time, respond promptly and accurately to new challenges.

Especially now that it is so obvious that the main players in addressing existing problems are relying not so much on international institutions as on bilateral interstate agreements and international coalitions. Therefore, the provision of investment law will require further development within national and international law.

Among the world's investors, China has some notable investment weight. Chinese investment law practitioners are well versed in international law and thoroughly study the national law of the countries to which they are investing, without relying on assistance. For example, the Hong Kong-based institute studies the legislation of the Silk Road countries and trains specialists for this Chinese initiative. Obviously, this approach allows Chinese businesses to make full use of both the rules of local laws and the weaknesses of partner countries' national laws.

China has, admittedly, achieved unprecedented success in attracting FDI and investing capital in the economies of nearly 100 countries. However, no less useful experience for Ukraine can be shared by China with regard to national legal rules for the protection of its manufacturer. Of course, our state in the legislative sphere is guided by European investment norms, which are currently being adjusted in the EU, but Chinese practice deserves a separate study.

Recently, it is the Chinese investments that are of major concern to the European Union and the US - they are aimed at strategically important "growth areas" of the European economy: high-tech, including dual-use goods, transport, energy (including NPPs) and infrastructure projects. Chinese investors are even suspected of buying companies not so much for profit but for using their intellectual property at home, and do not exclude - for influencing the strategic hubs of the European economy.

To regulate these processes, the EU leadership has for the first time ever seriously considered the legal restriction of one of Europe's basic freedoms: the free movement of capital. Free movement of capital is the most comprehensive of the freedoms of the EU single market. While the movement of goods, services and people is not restricted only within the EU, then freedom of investment extends both within and outside the EU and is still subject to almost no restrictions.

The European Court of Justice regards the freedom of movement of capital as practically unlimited and treats all restrictions on investment as narrowly as possible. Experts remember the well-known "golden share cases" when the European Court of Justice ordered the Netherlands government to waive part of the golden shares in KPN and TNT that would block the takeover of these companies. In fact, the only means of controlling foreign investment in the EU is the mergerclearance mechanism.

Depending on the turnover of participants, such permission is issued by either the European Commission or the antitrust authorities of individual EU Member States. They are concerned about the impact of the takeover on competition - but neither of these bodies checks the origin of the funds or the potential for damage to EU security. Therefore, in response to foreign takeovers, some EU Member States practice additional security audits.

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For example, the German government informally forced Chinese investors to withdraw their takeover bids for Aixtron, a dual-purpose chip maker, and Ledvance, a manufacturer of Osram light bulbs. In Belgium, after mass protests, a project of Chinese investment in the largest Eandis gas network failed. However, as European experts insist, the problem is the haphazardness of such a reaction.

The checks are carried out on the basis of the exceptions to the free movement of capital regime, which the TFEU provides for national security issues. In the case of Chinese investment, this is a rather shaky ground - it requires a "real and sufficiently serious threat" to national security, which does not involve merely negative economic consequences.

The Chinese side was still inclined to settle the case with the world, but in the case of a complaint to the European Court of Justice, a positive result for the European partners is not guaranteed - in fact the Court called the free movement of capital one of the most "free". This is despite the fact that European investment in China does not enjoy much freedom. Many sectors of China's economy remain closed to foreign investment (!).

Germany, the United Kingdom and France have in effect already introduced limited foreign investment controls. A proposal is now being made to harmonize the relevant rules within the EU. Experts say China is primarily concerned with the legal, economic and financial security of its own businesses, legal entities and investors.

As a rule of law, the PRC invests impressive amounts of money in setting up legal information exchange centers with different countries, so that their own entrepreneurs and citizens who wish to invest in another country are legally educated and at the same time more protected. In China, for the safety of their citizens and investors, they are forming a new legal base in conjunction with those countries with which they cooperate or plan investment activities.

China has only just begun to enter the Ukrainian market, and accordingly there is no such adapted legislation as with the European Union or the countries where it has for many years established a legal basis through international agreements and conventions. Ukraine still has to work with Chinese partners to develop a number of rules that will facilitate bilateral investment activity.

Experts believe that due to comprehensive discussion of the issue of trade and investment disparities between the EU and China and the beginning of the trade wars, the Foreign Investment Law entered into force in China on January 1, 2020. A landmark law that provides more secure protection and a more favorable environment for foreign investors.

It aims at enhancing the transparency of foreign investment policy and ensuring the participation of foreign-invested enterprises in the Chinese market. The law consists of six sections, a total of 42 articles, with unified rules for attracting, promoting, protecting and regulating foreign investment.

Prime Minister of the People's Republic of China Li Keqiang noted that measures to ensure China's openness will not be conducted on a one-off basis, but will stimulate the attractiveness of Chinese markets for foreign investments on a permanent basis.

Existing companies with foreign investments registered under the current legislation will be able to continue their activity for another five years after the new law enters into force. During this time, they will have to bring their founding documents and all activities in line with the new law on foreign investment.

Principles of investment promotion

National investment regime. The Chinese government will be equally positive about foreign investment and national investment, if such investment is aimed at developing China's economy.

Justice and equality. Companies with foreign investments will be granted the rights of full participants in the Chinese financial market.

The role of the Chinese government in attracting foreign investment. The Government will make every effort to facilitate the process of attracting foreign investment by providing policy measures and implementing the appropriate legal framework.

Investment protection

State expropriation and compensation. The law provides that, as a whole, foreign investors' investments are not subject to state expropriation. Only in special circumstances and in the public interest can the government expropriate or requisition its investments, but should promptly provide fair and reasonable compensation.

Money transfers. The law says that foreign investors' capital investment, profit and return on investment in China can be freely transferred outside China in yuan or in foreign currency. Existing laws also stipulate that the legitimate income of foreign investors in China can be freely transferred outside China.

Protecting Intellectual Property Rights and Forced Technology Transfer (forcedtechnologytransfer). Forced technology transfer occurs when foreign multinationals are forced to provide strategically important technologies to local entities that they do not control in order to gain access to the vast Chinese market. China has been criticized for protecting intellectual property rights and forcible transfer of technology.

The law now stipulates that the state will protect the intellectual property rights of foreign investors and foreign-invested enterprises and encourage technological cooperation on the basis of voluntariness and generally accepted commercial rules. Public authorities and officials will no longer be able to speed up technology transfer through administrative means. The law also obliges government agencies and officials to maintain the confidentiality of foreign investors and foreign-invested enterprises.

The role of government

The law stipulates that local authorities should not restrict the legitimate interests of foreign-invested enterprises or increase the burden on foreign-invested enterprises at the administrative level, and that local authorities should fulfill their obligations to foreign investors.

Ukrainian law goes to the investor

Ukraine also understands that it is necessary to create investment conditions that will be able to compete successfully with other countries. It is clear that while it is more profitable and safer to invest in other jurisdictions, Chinese investors will mostly do so. Ukrainian national investment law is only at the beginning of its development and, unlike the PRC, our country does not have such convincing legal and practical experience, but has a chance to use the best examples of legal norms not only of the EU but also of the Middle Kingdom.

Only in the last few years at the legislative level has Ukraine simplified the process of obtaining construction permits: eliminated the requirement to hire an outside observer and introduced an online notification system. In addition, obtaining a building permit has become less costly due to the reduction of the unit contribution.

Regulatory achievements include simplifying the conditions for obtaining electricity by optimizing the release of specifications and implementing a geographic information system. In addition, the state has increased the security of energy supply by introducing a mechanism for compensation for blackouts.

Simplified property registration due to increased transparency of the land management system. Minority investor protection is significantly strengthened by requiring more detailed disclosure of stakeholder transactions that may be associated with majority investors. Ukraine has also reduced import time by simplifying compliance requirements for auto parts, improving access to credit information through the creation of a national credit registry at the National Bank.

Our state is also making some efforts to simplify business registration, obtain loans, enforce contracts, improve the tax system, and resolve insolvency issues. In October 2019, the Bankruptcy Code entered into force.

The Verkhovna Rada of Ukraine approved the draft law "On Amendments to Certain Legislative Acts on Encouraging Investment Activity in Ukraine". It improves the following indicators: obtaining loans, obtaining building permits, enforcing contracts, resolving insolvency issues, registering property, protecting minority investors, registering businesses. The Law on Concession came into force, which provides for the possibility of effective attraction of domestic and foreign investments into the economy of Ukraine under the conditions of international practice.

Parliament has passed a number of laws establishing a single bill to pay taxes and fees and a single contribution to compulsory state social insurance since January 1, 2021. The documents provide simplification of customs formalities for high-confidence enterprises. This will happen through the creation of an authorized economic operator, as in the EU, with the prospect of their mutual recognition thanks to the adoption of the project "On Amendments to the Customs Code on Some Issues of Authorized Economic Operators".

In October 2019, the draft laws "On Building Regulations for Improvement of Building Regulations" were adopted, on the protection of property rights. The latter involves eliminating the major legal loopholes that pose problems for property and business owners.

The law provides for the termination of the activities of accredited entities, the introduction of mandatory notarization of contracts on the alienation of corporate rights, the introduction of the principle of simultaneous notarization and state registration of rights, increasing responsibility for violation of registration procedures.

The adoption of the law is expected to reduce the number of raider seizures of real estate and corporate rights, reduce the cost of citizens and businesses to protect property against unlawful encroachments.

Due to all these changes in the national legal field, Ukraine has risen to 64th place in the ranking of Doing Business-2020. But many powerful investors are not enough to come to the country. There is a lot of legal work ahead. Given that China continues to ramp up investment projects in Ukraine (China made more than $ 18 million in total investment in Ukraine's economy at the beginning of the year), special attention should be paid to cooperating with Chinese lawyers in improving investment law.


The right to negotiate on the right bank

Experts point out that Chinese investors' interest in Ukraine has grown significantly, with areas in which they have not previously been interested. China is now oversaturated with financial resources. Despite the imperfection of our investment law, investing in Ukraine becomes attractive to them, not even in terms of profitability, but in terms of territoriality. In particular, in connection with the signing of the Free Trade Area Agreement with the EU, Ukraine becomes a convenient platform for production and delivery of products to the European Union markets.

It should be reminded that Ukraine and the People's Republic of China have a plan of action on the implementation of the Chinese joint construction initiative "One Belt, One Way". According to this plan, the parties agreed on the basis of an effective mechanism of the Cooperation Commission between the Government of Ukraine and the Government of the PRC jointly to find and develop strategic touch points within the One Belt, One Way initiative, strengthen policy coordination, facilitate practical cooperation on the basis of mutual benefit principles.

Ukraine China

Ukrainian experts point out that investment law lawyers of Ukraine and the Middle Kingdom should pursue the legal support for the implementation of this joint plan. A legal package that would encourage, facilitate and facilitate bilateral and multilateral cooperation between Ukraine and the States Parties to the joint construction of the Economic Belt of the Silk Road and the Sea Silk Road of the 21st Century. will be a significant contribution to the further development of interstate relations and investment law in particular.

After all, the joint plan envisages the active promotion of investment cooperation by enterprises of both countries in the following fields: aviation, transport, energy, heavy machinery, food, chemical and electrical industries; creating value chains by deepening the processing of production in the extractive industries.

Ukraine and the PRC have agreed to develop industrial modernization co-operation on the basis of public-private partnerships and other innovative forms of co-operation, jointly create infrastructure facilities such as highways and railways, port infrastructure, energy-efficient construction and develop mortgage markets.

As we can see, the prospects for the Ukrainian government and business in cooperation with China are very attractive. China, as a country of advanced technology, could and would like to contribute to the modernization of technology and capacity building in Ukraine. But the Chinese investor expects positive changes in working with customs, law enforcement, tax authorities, exchange of information about investors and possibly creating favorable conditions for the yuan turnover in Ukraine.

Experts advise taking advantage of the fact that China has made a bid to export its capital - to provide investors and creditors from the PRC with reliable Ukrainian financial instruments for investment, as well as attractive business projects for the medium and long term. Our countries can jointly create an International Commodity Exchange Platform to provide organizational, technological, legal and other conditions for the functioning and development of exchange trade between the PRC and Ukraine markets. The powers and regulations for the operation of such a platform also need legislative regulation.

China can share the practical experience of providing legal support and organizing regional front offices to facilitate investment in Ukraine, which investors have long been waiting for. It is clear that it will take years to harmonize the legislation, but the task of the current authorities is to work consistently to create a new legal basis on a common basis, which would help expand the cooperation of our states.

In order to increase investment attractiveness, Ukraine may standardize the introduction of online registration of limited liability companies at the national level this year only with simplified authorization of a person (use of ID-passport, Bank ID), registration of a business entity with value-added tax payer during the day and cancellation of the rate of prior submission of the notification of employment of employees.

The state in a smartphone can provide legal innovations to regulate the entry of documents for ownership of land and real estate in the electronic register and merge the registers of ownership of real estate and land in one. It is also time to introduce administrative appeals against actions and decisions of state registrars regarding the registration of real estate and land. And the body that will handle such complaints should be separated from the Ministry of Justice and the State Land Cadastre.

There are also many pre-tax complaints. Experts recommend reducing payroll tax rates and replacing income tax with capital deduction. Concerning contract enforcement, it is proposed to file claims, explanations and petitions through a dedicated electronic platform. All these proposals require elaboration and legal support.

Ukraine is interested in the practice and internships of Ukrainian young investment law professionals in the PRC. At the same time, Chinese lawyers could study our law. Such mutual exchange will allow us to build joint business and further come up with proposals for our government, for our legislators: some joint bills that will be useful for the two states and will simplify the work of business.

The issue of training translators in the field of investment law of both countries is urgent. Given the bilateral interest in cooperation, there is much legal work ahead. But Ukraine should not only create new investment legislation, but also take care of its effectiveness and unconditional implementation.

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