Ukrainians will have the chance to become capitalists: a legislative initiative to that effect has already been drafted
23 June 15:04
ANALYSIS FROM 
Ukrainian citizens are being invited to become investors in the Ukrainian economy. The plan is to encourage them to participate by introducing personal investment accounts. "Komersant Ukrainian" investigated just how successful such an initiative might be .
The first steps from concept to implementation have already been taken. A few days ago, a corresponding bill was registered in the Verkhovna Rada. Among its sponsors are several well-known lawmakers, led by Danylo Getmantsev, head of the parliamentary committee on finance, tax, and customs policy. The draft was developed by the National Securities and Stock Market Commission. This increases the chances that this proposal will not be forgotten.
Oleksiy Semenyuk, Chairman of the National Securities and Stock Market Commission, commented on the bill’s introduction in parliament with the following words:
“We are creating conditions under which every Ukrainian will be able not only to save money but also to become an investor in the Ukrainian economy. I am convinced that every Ukrainian should become a capitalist—an owner of assets that work for their well-being and, at the same time, for the country’s development. This is a bill about trust, about long-term savings, and about ensuring that citizens’ money works for Ukraine’s development.”
The bill itself is titled “On Amendments to the Tax Code of Ukraine and Other Laws of Ukraine Regarding Support for National Investors,” which indicates that tax breaks and incentives are intended to be the main “carrot” for investors. But the effectiveness of this legislative investment will not depend solely on them.
Ambiguity of the Prerequisites
The initiators argue that the introduction of personal investment accounts is justified by the limited range of financial instruments available to Ukrainian citizens, as well as by the successful experience of many foreign countries, whose residents successfully invest in corporate stocks or bonds using similar individual investment accounts. However, all these countries have something that Ukraine effectively lacks: a developed domestic securities market. In other words, potential investors currently have virtually nowhere to invest their funds. And this is precisely what the publication’s interviewees drew attention to
Economist Boris Kushniruk:
“The idea of encouraging citizens to buy securities on the market isn’t a bad one. But where is our domestic market? The advantage is that it creates a mechanism to encourage investment, which serves as an alternative to bank deposits. Overall, in my opinion, this should be viewed from the perspective of the idea of so-called ‘people’s capitalism.’ This is when a company is owned by a huge number of small shareholders.”
Oleksandr Parashchiy, head of the analytical department at the investment company Concorde Capital:
“What’s important is that tax incentives are provided for those who open such accounts. And, accordingly, this could potentially lead to the emergence of long-term capital in the country. This is because loans are typically issued for fairly short terms, and bank deposits are also accepted for short terms. Consequently, our country lacks ‘long-term’ capital that businesses could invest not just for a year or two, but for longer periods. And if, at the same time as introducing these accounts, we were to consider where to invest the funds from them, perhaps it would start to work somehow.”
The Crucial Role of Tax Incentives
According to the initiators, interest in individuals opening personal investment accounts should be driven by a combination of simplified investment mechanisms and the aforementioned tax incentives. And it is precisely these incentives that are the main advantage. However, to take advantage of the tax benefit, an important condition must be met: the funds in the investment account must remain there for at least 1,095 calendar days. In this case, investment income earned through these accounts (dividends, interest, etc.) will not be subject to taxation and will not be included in the total annual taxable income. However, in the event of early withdrawal of funds, the standard personal income tax regime will apply—18% personal income tax and a 5% military levy.
Exemption from these taxes is intended to make transactions using personal investment accounts profitable enough to compete with the purchase of government bonds. Oleksandr Bondarenko, director and co-founder of the Bureau of Investment Programs, explains.
“We can buy the same corporate bonds right now, but currently such transactions are subject to taxes—18% plus 5%. And this 23% in taxes will ‘eat into’ the return. As a result, when compared to government bonds, it’s currently not profitable for us to invest in these same corporate bonds. But since lawmakers are proposing certain tax breaks for holders of investment accounts, I think their implementation will encourage the public to buy such corporate bonds,” the expert notes.
But where there is a “plus,” there is often, as is frequently the case, a “minus” as well. Economist Boris Kushniruk sees the downside in the lack of a systematic approach.
“This idea needs to be implemented as part of a clear, comprehensive tax reform to make the tax system more favorable and more liberal. And it should be done under more predictable conditions than we have now,” the expert emphasizes.
Limitations of the Proposal
The proponents of personal investment accounts envision that the funds held in these accounts will be invested “in securities freely traded within Ukraine, financial and agricultural commodity notes, as well as other financial instruments.” This sounds promising, but it’s not at all specific. Especially given the virtual absence of a developed domestic securities market in Ukraine.
To some extent, the “people’s IPO” (Initial Public Offering), announced in this year’s plans, could likely compensate for the supply shortage. This is a public sale of company shares—typically those of state-owned companies—to ordinary citizens. PrivatBank could become the pioneer in this nationwide initiative. Naftogaz of Ukraine and Energoatom have also been mentioned previously.
But is the list of “interesting offerings” limited to just these options? Oleksandr Bondarenko, director and co-founder of the Bureau of Investment Programs, believes that corporate bonds—that is, debt securities issued by private Ukrainian companies—may also attract the attention of holders of personal investment accounts. For example, bonds issued by NovaPay, the !FEST holding company, or the EVA chain.
“Of course, people are unlikely to be interested in old state-owned enterprises. But private companies with a good business reputation that already have a track record of growth—where entrepreneurs built their own businesses from scratch, such as Nova Poshta—could serve as an incentive. There is also, by the way, an instrument on the Ukrainian stock exchange known as municipal bonds. City councils issue them and use the proceeds to build various facilities. For example, in my hometown of Kharkiv, funds were raised—I believe—for the construction of a waste-processing plant. The Lviv City Council has also issued bonds,” the expert notes.
The introduction of individual investment accounts, combined with tax incentives, could indeed encourage the public to purchase such bonds. But there is one more caveat. Oleksandr Parashchiy, head of the analytical department at the investment company Concorde Capital, voiced this concern in a comment to the publication.
“People lack an understanding of the guarantees for the return on their investments. If something were to happen to a bank, there is the Deposit Guarantee Fund. With government bonds, the state generally pays out reliably, and there are no issues. However, if other instruments are introduced, there is a risk that people will perceive them as being just as reliable or guaranteed as government bonds or deposits, which may not be the case at all. And if this process is launched too early, when mechanisms—such as insurance or detailed regulatory scrutiny of the reliability of all these instruments—have not yet been established, there may be some failures, leading to disappointment,” the expert emphasizes.
Cautious optimism regarding this investment initiative stems from the fact that there are those whose experience can be drawn upon. Similar individual investment accounts have long been operating successfully in the United States, Canada, the United Kingdom, Japan, Australia, Germany, and many other countries. And in Poland, as the authors of the relevant Ukrainian legislative initiative point out, a separate category of investors—”individual investors”—has even emerged. Although it is unclear whether they have already come to see themselves as Polish capitalists.
