Ukraine still stuck in pa­per world, lim­it­ing e-com­merce

Kyiv Post Legal Quarterly - - Contents - BY DENYS KRASNIKOV KRASNIKOV@KYIVPOST.COM

It’s been a good year for Ukraine’s elec­tronic com­merce mar­ket. The roll­out of third-gen­er­a­tion mo­bile telecom­mu­ni­ca­tions tech­nol­ogy, which has in­creased smart­phone use, means there are more e-cus­tomers on­line to sell to. And Ukraine’s first law on e-com­merce, which en­tered force in Septem­ber 2015, has made it con­sid­er­ably eas­ier to run an on­line busi­ness in Ukraine.

The most re­cent an­nual re­port by the Na­tional Bank of Ukraine shows that e-com­merce is on the rise: in 2015 goods and ser­vices worth nearly $700 million were sold on­line, with 300,000 trans­ac­tions be­ing con­ducted – 23 per­cent more than in 2014.

“Nowa­days it is pretty easy to start op­er­at­ing on the lo­cal e-com­merce mar­ket,” Irina Kholod, the CEO of e-com­merce con­sult­ing com­pany Ukrainian E-com­merce Ex­pert, told the Kyiv Post. “It’s nei­ther hard nor ex­pen­sive. But it’s also easy to be shut down – stop pay­ing for host­ing and that’s it.”

Le­gal fire­wall

But while an e-busi­ness that only op­er­ates in-coun­try can sell its wares over the In­ter­net eas­ily, avoid­ing ex­ces­sive bu­reau­cracy, any com­pany that wants to sell prod­ucts to cus­tomers abroad over the Web quickly runs into a le­gal fire­wall.

That’s be­cause any e-com­merce trans­ac­tion that is made from abroad is de­fined by Ukrainian leg­is­la­tion as for­eign eco­nomic ac­tiv­ity, so any e-busi­ness in

Ukraine that sells to for­eign buy­ers is sub­ject to Ukraine’s cur­rency con­trols.

For­eign­ers who buy Ukrainian goods over the in­ter­net and the Ukrainian sell­ers have to pro­vide doc­u­ments – an in­voice and a pur­chase/sale agree­ment – signed by both sides and ver­i­fied by a bank. Af­ter that, the bank re­ceiv­ing the pay­ment from abroad has to con­vert 75 per­cent of the in­com­ing pay­ment from for­eign cur­rency into hryv­nias, us­ing the cen­tral bank’s of­fi­cial ex­change rate. The re­main­ing 25 per­cent goes to a re­serve ac­count, and is held in for­eign cur­rency, but when with­drawn must also be con­verted into hryv­nias. The banks charge com­mis­sion on the with­drawal.

That’s not all: All the doc­u­ments for the e-trans­ac­tion have to be in pa­per form, and signed and sent by post by the buyer to the ven­dor, to­tally ne­gat­ing the whole point of e-com­merce’s con­ve­nient, pa­per­less busi­ness model.

“Who would do all that?” Kholod asked, and an­swered her­self: “A very few peo­ple – the most per­sis­tent ones.” Big for­eign e-com­merce mar­ket­places, like Ama­zon or ebay, and most Euro­pean and U.S. com­pa­nies use in­ter­net-based money trans­fer ser­vices such as Paypal, but this ser­vice is still lim­ited in Ukraine.

Ukraini­ans can send other Paypal users money, but they are not able to re­ceive pay­ments back, so any Ukrainian e-busi­ness that wants to sell prod­ucts on a for­eign vir­tual mar­ket­place and be paid us­ing Paypal has prob­lems to over­come.

Some Ukrainian banks now of­fer to cash money from a Paypal ac­count, au­to­mat­i­cally con­vert­ing the money into hryv­nia, but they charge an ad­di­tional 1540 per­cent com­mis­sion for the ser­vice.

Kholod said Ukrainian e-busi­nesses that sell to for­eign cus­tomers of­ten es­tab­lish of­fices in other coun­tries, ex­port their prod­ucts to those of­fices, and then work un­der those coun­tries’ e-com­merce leg­is­la­tion.

That al­lows Ukrainian e-busi­nesses “to gain ben­e­fits from the pay­ment sys­tems” avail­able in other coun­tries, Kholod said.

“This is the rea­son some Ukrainian com­pa­nies move abroad” or es­tab­lish their main head­quar­ters there, leav­ing the of­fice in Ukraine as an out­sourcer with an af­ford­able la­bor force, she said. The so­lu­tion would be to cre­ate a sim­i­lar law to the one that gov­erns do­mes­tic e-com­merce, but for e-com­merce that is car­ried out with for­eign buy­ers.

The cur­rent law on e-com­merce busi­ness was drafted in 2013, but ap­proved by par­lia­ment and signed by Ukrainian Pres­i­dent Petro Poroshenko Septem­ber 2015.

“And it works well within the coun­try,” Kholod said. “It has fully le­gal­ized the op­er­a­tion of In­ter­net shops here. The same law, but for for­eign op­er­a­tions, would make sell­ing Ukrainian goods abroad eas­ier.”

The first step to­wards es­tab­lish­ing an e-com­merce for­eign pay­ment sys­tem was taken ear­lier this year, when the Na­tional Bank of Ukraine in­tro­duced reg­u­la­tions that al­low cit­i­zens of other coun­tries to trans­fer elec­tronic money to ac­counts in Ukrainian banks.

That’s when the banks were al­lowed cash money from Paypal users’ ac­counts.

The amend­ments, ac­cord­ing to Ilia Kenigshtein, an ad­vi­sor to Lviv Mayor An­driy Sadovyi who is lob­by­ing Paypal to of­fer a full ser­vice in Ukraine, were a “lit­tle step closer” to at­tract­ing the in­ter­na­tional on­line pay­ment sys­tem to the coun­try.

Mean­while, Ukraini­ans will con­tinue to use the pre­sent work­arounds, or find new ones, ex­perts said.

Ukrainian E-com­merce Ex­pert’s Kholod said the Ukrainian mar­ket was used to “ex­ist­ing in the re­al­i­ties we have – our peo­ple are in­ven­tive.”

She said an e-com­merce sec­tion was some­thing ev­ery mod­ern busi­ness “must have,” and said she hoped Ukraine would soon learn how to do busi­ness over the In­ter­net with buy­ers that are out­side the coun­try.

Af­ter all, more and more Ukraini­ans are get­ting used to buy­ing on­line, and the mar­ket is only go­ing to grow from now on.

“Those who start buy­ing on­line usu­ally con­tinue,” Kholod said.

Irina Kholod, the CEO of e-com­merce con­sult­ing com­pany Ukrainian E-com­merce Ex­pert, speaks with the Kyiv Post at her com­pany's Kyiv of­fice on May 23. (Volodymyr Petrov)

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