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Leasing in Ukraine, Quo Vadis?
.
. As all know, leasing is an extremely relevant and required service for the development of a country. However, as time drags on, leasing has not yet become popular for Ukrainian companies. In 2005, the leasing volume amounted to only 0,2% of the GDP. Let us look at some background figures:
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. Leasing in Ukraine
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. Business outlook on leasing:

The overall wear and tear on machinery equipment reaches nearly 50%, renewing the existing equipment therefore would require around 88 bln Euro. As per today, the real volume of the leasing market is slightly lower than 200 mln Euro, potential demand is estimated at around 13 bln Euro, a mere 1,5%.

What are the slow downs?

The main problem is shortness of funds and the tax burden, which prevents enterprises from using leasing services.

The State Financial Services Marker Regulatory Commission reported that bank loans have become the only source of financing of Ukrainian lessors. Since the lessors have to pay interest on loans, the set the commission for leasing higher than the average interest rate on loans. Additionally a rather interesting regulation was put into force. When commission and interest earned by leasing companies exceed the double discount rate of the NBU, set at 9,5%, the surplus is subject to VAT tax. This in turn steepens the leasing commission again to cover additional expenses.

Also there is no gain by using Western leasing companies, since lease payments to non-residents in Ukraine are subject to full income tax.

Another aggravation of the tax burden came as a result of changes to the Law on VAT concerning leasing of cars, when double taxation of leasing operations was introduced.

The last flaw in the taxation system is, that it still does not use accelerated depreciation, which in the end could reduce the income tax.

The second implication lies around the imperfection of Ukrainian legislation. There are too many contradictions in the Civil and the Economic Codes when it comes to defining leasing. In addition the Law on Financial Leasing does not fully comply with the codes, like:
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. . The issue of corporate rights and the protection of lenders is not defined
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. Conditions for the functioning of a mechanism for returning a leased object to the lessor if an agreement is violated are absent
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. The mechanism of conveying ownership rights to the object of leasing while the contract is valid needs definitely improvements
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. Finally, the financial instability, weakness of the private leasing market, the low level of qualifications of lessors and the fact, that enterprises do not know the advantages of leasing operations as a mechanism of investment, do not speed up the development of the leasing market.

What will speed up the development of leasing?

The Program for the Development of Leasing in Ukraine in 2006-2010, which has not been approved yet, should improve the leasing climate in the country. Industry experts believe that besides the program, foreign players possessing long-term and cheap resources will be the driving force on the leasing market.

Expansion of international capital in the banking system of a given country is now more frequently accompanied by the parallel creation of affiliated leasing companies. This affords an investor the possibility of optimizing potential risks. Naturally, Ukraine does not stand to lose from this. First and foremost, this applies to small and medium businesses, seeing as foreign investors will enter the market with high technology and a high level of corporate governance with a broad range of leasing services and great experience in the development of this particular financial instrument. It is absolutely logical that such conditions will spur healthy competition and small Ukrainian banks will feel regulatory inconveniences and will provide leasing services directly in order to survive on the market.

The following companies will clearly be the most active foreign players on the Ukrainian leasing services market:
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. . the French financial group Societe Generale, which acquired the largest company specializing in leasing of vehicles
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. the French BNP Paribas, which acquired a controlling share package in UkrSibbank together with the leasing company
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. Austria’s Raiffeissen International, which acquired Aval bank and decided to organize an affiliated structure specializing in leasing
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. the Scandinavian financial group SEB, which acquired Agio bank and founded the leasing company Agio Leasing
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. In addition, the famous manufacturers of foreign vehicles Peugeot, Scania, Volkswagen and Audi are willingly becoming involved in leasing mechanisms. After all, cooperation with lessors fosters an increase in their sales volumes.
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Swiss - Ukrainian Business Chamber - Seestrasse 42 - 8802 Kilchberg
Tel. +41 (0)43 377 5485 - Fax +41 (0)43 377 5486 - info@ukrcham.ch
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