- TREATMENT OF U.S. BUSINESS IN EASTERN AND CENTRAL EUROPE

[Senate Hearing 106-823]
[From the U.S. Government Publishing Office]

S. Hrg. 106-823

TREATMENT OF U.S. BUSINESS IN EASTERN AND CENTRAL EUROPE

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HEARING

BEFORE THE

SUBCOMMITTEE ON EUROPEAN AFFAIRS

OF THE

COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

__________

JUNE 28, 2000

__________

Printed for the use of the Committee on Foreign Relations

Available via the World Wide Web: http://www.access.gpo.gov/congress/
senate

U.S. GOVERNMENT PRINTING OFFICE
68-121 CC WASHINGTON : 2001

COMMITTEE ON FOREIGN RELATIONS

JESSE HELMS, North Carolina, Chairman
RICHARD G. LUGAR, Indiana JOSEPH R. BIDEN, Jr., Delaware
CHUCK HAGEL, Nebraska PAUL S. SARBANES, Maryland
GORDON H. SMITH, Oregon CHRISTOPHER J. DODD, Connecticut
ROD GRAMS, Minnesota JOHN F. KERRY, Massachusetts
SAM BROWNBACK, Kansas RUSSELL D. FEINGOLD, Wisconsin
CRAIG THOMAS, Wyoming PAUL D. WELLSTONE, Minnesota
JOHN ASHCROFT, Missouri BARBARA BOXER, California
BILL FRIST, Tennessee ROBERT G. TORRICELLI, New Jersey
LINCOLN D. CHAFEE, Rhode Island
Stephen E. Biegun, Staff Director
Edwin K. Hall, Minority Staff Director

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SUBCOMMITTEE ON EUROPEAN AFFAIRS

GORDON H. SMITH, Oregon, Chairman
RICHARD G. LUGAR, Indiana JOSEPH R. BIDEN, Jr., Delaware
JOHN ASHCROFT, Missouri PAUL S. SARBANES, Maryland
CHUCK HAGEL, Nebraska CHRISTOPHER J. DODD, Connecticut
LINCOLN D. CHAFEE, Rhode Island PAUL D. WELLSTONE, Minnesota

(ii)

C O N T E N T S

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Page

American Chamber of Commerce in Poland, letter from Mac
Raczkiewicz, chairman, to Hon. Joseph R. Biden, Jr............. 59
Article entitled ``Czech Recovery Hopes Grow,'' from the
Financial Times, June 27, 2000, submitted by Senator Gordon
Smith.......................................................... 33
Buzek, Prime Minister Jerzy, Republic of Poland, letter to Hon.
Jesse Helms.................................................... 8
Jenkins, Kempton, president, Ukraine-United States Business
Council, Washington, DC........................................ 33
Prepared statements.......................................... 38
Letter from Alan C. Frederickson, president, Die Casters
International, Inc......................................... 59
Lauder, Ronald S., chairman, Central European Media Enterprises,
New York, NY................................................... 16
Prepared statements and chronology of events on the TV Nova
scandal.................................................... 20
Ludolph, Charles M., Deputy Assistant Secretary for Europe,
International Trade Administration, U.S. Department of
Commerce, prepared statement with annexes submitted for the
record......................................................... 62
Nevitt, Peter K., chairman of the board, Greenbrier Europe, San
Francisco, CA.................................................. 46
Prepared statement........................................... 47
Shaub, Patricia, vice president, Government and Regulatory
Affairs, Entergy Corp., prepared statement submitted for the
record......................................................... 71
Singer, Paul, Elliott Associates, L.P., prepared statement
submitted for the record....................................... 74
Wayne, Hon. E. Anthony, Assistant Secretary of State for
Economic, Business, and Agricultural Affairs, Department of
State, Washington, DC.......................................... 2
Prepared statement........................................... 9
Responses to additional questions for the record from Senator
Gordon H. Smith............................................ 54
Response to additional question for the record from Senator
Chuck Hagel................................................ 57

(iii)

TREATMENT OF U.S. BUSINESS IN EASTERN AND CENTRAL EUROPE

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WEDNESDAY, JUNE 28, 2000

U.S. Senate,
Subcommittee on European Affairs,
Committee on Foreign Relations,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:15 p.m. in
room SD-419, Dirksen Senate Office Building, Hon. Gordon H.
Smith (chairman of the subcommittee) presiding.
Present: Senator Smith.
Senator Smith. Good afternoon, ladies and gentlemen. I will
call to order this hearing of the Subcommittee on European
Affairs of the Foreign Relations Committee. The topic is the
treatment of U.S. business in Central and Eastern Europe.
I would like to welcome our witnesses today who are here to
discuss this topic. In the decade that has passed since the
fall of communism American businesses have been in the
forefront of the emerging markets of the countries of Central
and Eastern Europe. The U.S. Government has matched the
business community in its support of these emerging markets
with resources to teach these new democracies such important
topics as the rule of law, trade promotion, market access, and
intellectual property rights.
I sought to hold this hearing to find out how successful
our endeavors have been in trying to help these former
Communist countries to join the global economy. As the owner of
a small business myself, I have actively sold products abroad
and know the importance of a favorable business climate.
This hearing will attempt to answer two questions: the
first, has our Government attempted to create a promising
business climate for interested Americans, the second, have
these emerging countries created a climate that allows a market
economy to work?
We hear horror stories all the time of capitalist systems
that are really not capitalist but are masquerading in some
form of cronyism. We do have a number of witnesses today both
from the Department of State and the private sector who will
comment on the business climate in Central and Eastern Europe.
I am a little concerned that the Department of Commerce has
chosen not to participate today with even an Under Secretary or
Assistant Secretary, or even Deputy Assistant Secretary to talk
about what they have done to support emerging democracies. I
assume something is being done, but no one from the Commerce
Department has decided it was important enough to come here
today.
I would like to invite the next Secretary of Commerce,
whoever he or she is, to come before this committee on another
occasion so that we can revisit this issue.
There are problems for some American businesses abroad. The
Greenbrier Companies from my State is one of the largest
manufacturers of railroad cars and is located in Lake Oswego,
Oregon. Greenbrier is actively involved in a joint venture in
Poland, and Peter Nevitt, chairman of Greenbrier Europe, is
here to give their view regarding doing business in Poland.
I am also happy to welcome former U.S. Ambassador Ron
Lauder, a pioneer in the emerging markets of Eastern Europe.
Mr. Lauder is here to testify on the ups and downs of his
company, Central European Media Enterprises Limited, and what
he has had in terms of experience in these countries.
I am also pleased to welcome Mr. Kempton Jenkins, president
of the Ukraine-United States Business Council. I look forward
to your thoughts on the business in the Ukraine.
I would also like to note for the record the testimony
submitted by Mr. Paul Singer on behalf of Elliott Associates.
For the record, I would like to state I am especially troubled
by reports of inappropriate pressure by the European Union on
countries in Central and Eastern Europe who aspire to become EU
members themselves.
It is well-known that EU has said quite clearly to
candidate countries that by choosing American companies over
European firms they place their EU membership in jeopardy. It
is critical to ensure that U.S. companies are competing on a
level playing field, and I certainly hope this administration
is making this point clearly and consistently to our friends in
the European Union.
It is now our pleasure to hear from the administration
Assistant Secretary, Tony Wayne, and we welcome you, sir, and
would turn the mike to you. Thank you for being here.

STATEMENT OF HON. EARL ANTHONY WAYNE, ASSISTANT SECRETARY OF
STATE FOR ECONOMIC, BUSINESS, AND AGRICULTURAL AFFAIRS,
DEPARTMENT OF STATE, WASHINGTON, DC

Mr. Wayne. Thank you, Mr. Chairman. It is my pleasure to be
here, and I want to commend you on taking the initiative to
have a hearing on this important topic. The transformation
going on in Central and Eastern Europe, as you know, is vital
to the national security of the United States. The role that
U.S. business has played and is playing in that is vital to our
prosperity and to the prosperity of the countries of that
region, and so again thank you very much for providing this
opportunity to talk.
I might just start off by reassuring you on your last point
that whenever we become aware of an EU member State making that
inappropriate argument we take it up directly with the member
State and with the country to which the argument may have been
made.
We do not accept that argumentation, as you can understand,
at all and in fact there should be no linkage between choosing
the best commercial partner for your country and the prospect
of EU membership, which we do support, but you can be assured
that I personally have many times made that argument, and I
know the Secretary of State has, and our ambassadors do also.
Senator Smith. Unfortunately you have to make it too often,
do you not?
Mr. Wayne. Well, people try to use any leverage they think
they might be able to use. That is a fact of what happens out
there, and so we remain vigilant, and we will continue to do
so.
Let me make a few introductory remarks, and I will try and
keep them to a few and I might cut back a little bit on some of
my oral remarks here if I go on too long, but clearly
attracting trade and investment to Central and Eastern Europe
is vital if that region is going to complete its transition to
free market prosperity and democracy.
It is equally vital and a similarly high priority for us to
support American business in identifying the opportunities that
are out there and overcoming the challenges, of which there are
many, that still fall in their path, and to assure that there
is, indeed, a level playing field for our businessmen and
businesswomen as they work to expand into these areas.
I think that Americans, from your State of Oregon all the
way here to Washington, DC, know how important trade has become
in today's world for our prosperity. Between 1994 and 1998 we
created 1.4 million jobs related directly to trade, and
American jobs which are involved in trade, I think as you
probably know, Senator, average a higher pay of 13 to 16
percent above the norm, so trade is very important, and I would
argue it has become more important as we move into what has
been called the new economy.
We are linked even more closely together than we were
before, so this is increasingly important, and we at the State
Department certainly place a very high priority in supporting
our firms in Central and Eastern Europe.
Now, where we are today in Central and Eastern Europe may
need just a little bit of setting the scene. Ten years after
the fall of the Berlin Wall many of these countries are still
seeking the prosperity that comes with free markets. The
transition has been a difficult one. Some places it has
progressed more quickly than others, but there have been
problems everywhere, and there are clearly lingering problems
throughout the region.
One of the key issues that we think about as we look at
this broadly is transparency. Justice Holmes once talked about
``sunshine being the greatest of all disinfectants.'' Well,
that certainly is true. In decisionmaking throughout the region
we very much want to encourage transparency in government
decisionmaking.
When an official makes a decision about a contract, about a
new regulation, about a business opportunity, we would like to
have it be clear why he made that decision, and we would like
to have the opportunity to be there to comment on it to make
sure that there is a level playing field. That is not often the
case in some of these countries.
Lack of transparency also relates to another problem that
you know is prevalent throughout the whole region, and this is
corruption and bribery. Worldwide bribery results in the loss
of tens of billions of dollars in lost American exports and
lost opportunities to invest. This is a very high priority for
us, as I mentioned in a number of our programs and in a number
of individual interventions that we make to try to support
American communities, or companies.
Related to that, of course, is criminal activity, which in
some of these societies is still a very serious problem, so we
are working, of course, not only with the economic authorities
but with law enforcement authorities in the region to try to
get a hold of this serious problem of illicit activities.
Physical infrastructure is a big problem throughout the
region, the ability to deliver goods. Roads, ports,
telecommunications systems are still below the standards in
Western Europe, let alone in the United States.
Institutional infrastructure, what relates to good
governance, remains a serious problem. In a number of the
banking systems there are still debts left over from the
previous Communist rule. There are out-of-date operating
procedures. There are supervisory structures that are woefully
lacking, often to ensure the right kind of regulation, the
regulation that we have come to expect in our own system.
Just recently I think you might have noticed there was a
bank that collapsed in the Czech Republic. A few weeks earlier
there was a serious banking crisis in Romania, and so these
remain problems that the countries have to deal with.
Finally, there is a problem of continued privatization.
Privatization has not gone forward completely in the great
majority of these countries, and that is part of the ongoing
structural reform that is required.
Not surprisingly, the countries that have made the most
progress toward free market institutions have attracted the
most American and other direct investment, and so getting the
right framework is very much important, and that is part of
what we have tried to do.
As well as addressing specific business concerns when they
have come up, and opportunities, we have tried to get the
countries of the region to adopt the right economic policy and
regulatory framework that will attract investment.
Now, there are some impressive results to date on the trade
front. In 1991, U.S. companies exported about $1.6 billion
worth of goods to the 15 countries of the region. By the end of
1999, U.S. exports had doubled to about $3.2 billion.
We have been working broadly through on the anti-bribery
and corruption front through the OECD. I think, Senator, you
know there is an OECD Anti-Bribery Convention which we have
gotten many of the countries of Western Europe to adhere to,
some of whom we have had to persuade to move in that direction.
That is dealing with one part of the problem.
We have also been working in Central and Eastern Europe in
a number of specific areas in the intellectual property,
working with the American Bar Association Central and Eastern
European law initiative to help these countries develop
stronger legal systems. We have been working also in some cases
with NGO's such as Transparency International and, as I
mentioned, we have been working on some specific anticorruption
programs in southeast Europe.
Our ambassadors in Central and Eastern Europe and all of
our embassy officers for the variety of economic agencies,
including the Commerce Department, of course, have been on the
front lines of this effort and the effort of supporting
American businesses. This has really been where we are often
alerted first to problems that come up, and then we can support
them both through higher level demarches from back here and in
visiting officials to those countries.
The opportunities are clearly substantial. American firms
have invested more than $7 billion in Hungary, for example,
$5.1 billion in Poland, $1.5 billion in the Czech Republic, as
reported by those countries. That is a substantial amount of
investment.
We have taken some specific approaches to certain regions.
In southeast Europe, following the fighting in Kosovo, we
developed with our European partners something that is called
the Stability Pact for Southeast Europe.
As a key part of that, we knew as a part of that that what
we have to do is create the right structure of where private
capital can come in and investment can flourish because,
Senator, as you know, it is not government capital these days
that really makes the difference. It is the flow of private
investment and capital, and that can move overnight, or quicker
than overnight from one corner of the world to another. There
are many choices out there, so you have to have the right
environment that will have people make the decisions to invest.
So we have really tried in the stability pact to lay out a
bargain to the countries of the region. We will support you in
attracting investment, we will provide seed money for you to
get investment going, we will provide risk insurance, but in
turn you need to undertake the reforms that are needed to
create a good business climate, to create good free markets
with good governance, with transparency that will invite
private investors to come in.
In that connection, we have established an anticorruption
initiative to which the countries of the region have signed up,
and an investment pact to which countries of the region have
signed up, and we have begun to put in place, country by
country, monitoring programs to see how these countries are now
going to carry out the commitments they have made, and we are
pulling together all of the donors, that is, the international
financial institutions as well as the donors, the
representatives of the local government, and also in liaison
with the private sector.
In this approach OPIC has been involved and has made
available several hundred million dollars of investment
guarantees to help mobilize private equity financing. We are
going to be working with the European Bank for Reconstruction
and Development in the same vein of making over $100 million
available to support small and medium enterprises.
On the trade side of this, there is an important initiative
that we were hoping we can get the support of the Senate for.
This is the Southeast Europe Trade Preferences Act, which one
of your colleagues, Senator, has introduced, that would extend
duty-free treatment for 5 years on a number of items for
Southeast Europe. We think this is a very important initiative.
It would help strengthen the economies of the region. It would
promote a robust private sector development in the region, and
encourage further the integration of the region.
It is also, I think, an important part of a lever that we
are working on with the European Union, because we, as part of
our initiative, have encouraged them to move forward with their
own unilateral one-way lowering of tariffs so goods from
Southeast Europe can move into the European Union without any
tariffs.
So I very much hope that you and your colleagues will
consider supporting and passing this legislation.
In the Baltic region, we have also taken a specific effort
to work with the Governments of Lithuania, Latvia, and Estonia
to remove specific investment barriers and to promote U.S.
investment in exports, and again there have been very good
results. Overall trade between the United States and the three
Baltic States has nearly doubled since 1996.
The United States has also undertaken strenuous efforts to
foster investment in other business ties with Russia. Russia's
new president, Vladimir Putin, has stated clearly that foreign
investment will be essential to improving the economic outlook
for Russia, and that significant progress on economic reform
will be necessary to attract investment.
The United States, I think as you know, Mr. Chairman, is
the leader in foreign direct investment in Russia, with over $2
billion invested in 1999 alone. During his meetings with
President Putin in Moscow recently President Clinton emphasized
that major new flows of foreign investment to Russia are
possible, but only if action on the necessary structural and
policy reforms is forthcoming.
Perhaps no other country in the region has experienced such
a large gap between economic performance and potential as
Ukraine, endowed with good natural resources, superb
agricultural land, and well-educated population, as well as a
strategic location, Ukraine is positioned to be one of the most
successful of the former Soviet States in attracting foreign
investment needed to restructure its economy, yet at $55 per
capita, Ukraine has one of the lowest rates of direct foreign
investments in the region.
The United States, with some $570 million out of $3 billion
total of foreign investment is the single largest source of
foreign investment in Ukraine. The United States, the IMF, the
World Bank and other donors have delivered the same message to
Ukraine for the past 5 years: market economics can only be
successful in Ukraine when the government reduces its role in
the economy and creates an environment conducive to investment,
foreign as well as domestic, deals with serious problems of
corruption, and gives freer reins to private enterprise.
These initiatives in Central and Eastern Europe benefit
Americans. They encourage peace and stability in that part of
the world, the part of the world that not long ago was an
alliance threatening the United States. These initiatives also
translate into economic opportunities for American workers,
farmers, and business people.
In 1998, for example, aggressive advocacy by our Ambassador
to Croatia and our Under Secretary of State for Economic and
Business Affairs resolved a number of obstacles with the
Croatian Government which resulted in Bechtel Corporation
signing a $600 million highway construction contract with the
Government of Croatia.
In Bulgaria over the past several years we aggressively and
successfully tackled severe levels of piracy of compact disks
and CD-ROM software. The joint efforts by Commerce, State, and
USTR, and our embassy in Bulgaria, resulted in stringent
Bulgarian enforcement programs, the closure of all factories
producing unauthorized CD's, and the protection of important
American intellectual property rights.
In all candor, Senator, I also would like to add that our
budget and our personnel are stretched very thin as we try to
undertake these activities both in Central and Eastern Europe
and around the world. In today's global economy, as I
mentioned, our capacity to defend our national security
interests and our capacity to defend our economic interests are
more closely linked than ever.
We work very hard to defend these interests, to be good
advocates for American commercial and economic interests, yet,
as you know, only 1 penny out of every $1 that the Federal
Government spends right now is on international affairs and, as
you well know, we are not talking about foreign aid here.
We are talking about the 44,000 export licenses that we at
State work to approve each year, worth $25 billion. We are
working for the 120,000 American jobs in the defense industry
and in the dual use industries that are tied to that, the many
more thousands or millions of jobs tied to other kinds of
exports.
When we negotiate in the State Department with our
colleagues our U.S. intellectual property rights that save
American film, music, and software industries from piracy, we
are talking about a total of maybe $200 billion a year that we
are working to save, so I think we are working hard to defend
America's national security and economic security interests,
and we appreciate your support in this effort.
It has been my pleasure to make this initial statement, and
I look forward to your questions, sir.
Senator Smith. Thank you, Mr. Secretary. I assure you we
are concerned about the budget for this 150 account. It should
be more if we are serious about protecting American business
interests as well as national security interests and waging
peace and spreading prosperity. It is not a budget I will
defend, and have tried to change.
I am going to include for the record a statement for the
Entergy Corporation. It is a statement of Patricia Schwab, who
is their vice president for Government and Regulatory Affairs.
It is testimony about their company's experience in Bulgaria,
which is a positive one, which is nice, so I am going to
include that in the record, and also a letter from Chairman
Jesse Helms to the Prime Minister of Poland.
[The Entergy Corporation statement can be found on page
71.]

[The letter from Chairman Helms follows:]

U.S. Senate,
Committee on Foreign Relations,
Washington, DC, May 9, 2000.

The Honorable Jerzy Buzek
Prime Minister
The Republic of Poland

Dear Mr. Prime Minister:

I have just learned that the government of Poland has taken steps
that may significantly undercut the ability of the Polish economy to
attract foreign investment, particularly American investment.
Poland's Ministry of Treasury has filed an action in a Polish court
to prevent one of the National Investment Funds (NIF's), Octava, from
exercising its full rights to amend its charter to permit share
redemptions. I understand that the Ministry has continued to pursue
this anti-market activity, even though Poland's Securities and Stock
Exchange Committee has expressly held that the proposed action by the
NIF is lawful.
Most disturbing of all, however, has been public statements by a
Deputy Minister of the Treasurer that Poland does not want to give
large shareholders, ``e.g. American investment funds, the possibility
to withdraw their money from the NIF's at a profit.'' This is
profoundly disappointing to those of us who have watched and supported
the market reforms that have been the foundation of Poland's great
economic growth over the last decade.
Mr. Prime Minister, our confidence in this progress, and the
partnership between the United States and Poland, will certainly be
shaken if your government chooses to disregard private rights and to
treat American investors unfairly. Unfair treatment, including the use
of state power to bring about dilatory lawsuits, betrays the promise of
privatization and will undercut Poland's standing in the international
marketplace.
I request your assistance to resolve an apparently dilatory lawsuit
against Octava and to allow it and other NIFs the freedom necessary to
exercise their full rights, including share redemptions. I would be
grateful if you would inform me of the steps the government of Poland
is taking to bring this matter to a fair and just close.
Sincerely,
Jesse Helms, Chairman.

Senator Smith. And in connection with his letter, Mr.
Secretary, I have this question that is directly related to the
letter. Are you aware of problems investors have had
withdrawing from the Polish national investment funds that were
originally created to back the transition of about 500 State-
owned business to privatize companies.
Are you aware of that? And it is my understanding that one
American investment corporation, Elliott Associates, is now
unable to withdraw its funds from these funds.
Mr. Wayne. Mr. Chairman, I will honestly admit I am not
aware of that, but I would be happy to get the information and
look into it and get back to you.
[A reply to Senator Smith's question and to additional
questions for the record can be found on page 54.]

Senator Smith. We will supply you with a copy of this
letter from the chairman. The European Union has repeatedly
stated that the Czech Republic is far behind the West in
dealing with corruption and crony capitalism. Do you agree with
their assessment of that?
Mr. Wayne. Well, Senator, I think there is a problem, I
think throughout the region in dealing with corruption and
crony capitalism.
Senator Smith. It is not unique to the Czech Republic?
Mr. Wayne. It is not unique. There are a few other
countries that might even have a more serious problem.
Senator Smith. My only other question is, are you helping
the Greenbrier Company, one of those that will be testifying
today who have run into a number of problems with the
Transportation Ministry? Are you aware of their circumstance,
and have you made any effort to be helpful to them?
Mr. Wayne. Yes; Senator, I am aware of it, and I can
happily say that we have been working very closely with the
Greenbrier Companies and have raised their difficulties
repeatedly with the Government of Poland at the very highest
levels. Not only has our Ambassador in place raised this a
number of times, but Deputy Secretary Eizenstat particularly
raised it with Deputy Prime Minister Vosorovek and with Foreign
Minister Gremek.
We have underscored that there needed to be in this case,
and in this case there needs to be all the time an open end
transparent public procurement procedure in Poland which, as I
understand, was part of the problem which the Greenbrier
Company faced.
I believe that in response to a number of these arguments
and other arguments the Government of Poland has, indeed,
issued a new tender recognizing that there was not an open
process here, that there has been progress made, and I know you
will get to hearing more detail probably from representatives
of the Greenbrier Companies in dealing with their concerns. We
hope that now these problems will be dealt with with a second
tender.
We also note that there is a process going on of
privatizing the Polish Railway System, of providing budgetary
sustenance to the railway system to buy some of the materials,
Greenbrier cars and other things Greenbrier makes, so this is
an ongoing process, but we certainly intend to stay active in
this process and to be as supportive as we can.
Senator Smith. Well, Mr. Secretary, I thank you for coming
and participating and answering questions. We appreciate very
much the work that you do, and those in the State Department,
to help our businesses in this country to reach markets abroad.
It is one of the best ways we can spread peace and prosperity,
so thank you, sir.
Mr. Wayne. Thank you very much.
[The prepared statement of Secretary Wayne follows:]

Prepared Statement of Hon. E. Anthony Wayne

INTRODUCTION
Thank you, Senator for inviting the Department of State to join you
in your probe of challenges and opportunities for the American business
community in Central and Eastern Europe. I am pleased to be here, and
would personally like to thank you for your leadership on this vital
topic. The Department shares your deep concern about the frequent
incidences of corruption and weak rule of law which impede free trade
in many of these emerging economies.
On behalf of Under Secretary Larson who, as you know, is in Japan
today, I would also like to thank you for your dedicated service as a
judge for the Ambassador Charles E. Cobb Awards--warm appreciation to
you and to your Chief of Staff for helping the Department select the
Ambassador and Economic Officer who exhibit the most dedication,
innovation and success in promoting U.S. exports and trade overseas.
Senator, I am pleased to have this opportunity to discuss the
current environment for business in Central and Eastern Europe. The
region's ability to attract private sector involvement, including trade
as well as investment, is critical to its ability to complete its
transition to free market prosperity and democracy. We have long stated
that as important as the assistance we give these countries is, private
sector involvement in their economies is essential.
The region provides opportunities to a wide variety of American
enterprises--small- and medium-sized enterprises as well as large
corporations, farmers as well as business people. At the same time,
supporting American business, identifying economic opportunities, and
leveling the playing field for American exporters and investors are top
priorities for the State Department and for our embassies in this
region and around the world.
Americans from Oregon to Washington, D.C. are increasingly aware of
the role trade is playing in our current economic prosperity and
overall growth. Data show that open markets helped make the United
States the fastest growing economy in the G-7 with an annual growth
rate of 3.9% from 1994-1997. Jobs supported by American exports grew by
1.4 million between 1994 and 1998 and statistics show these American
jobs supported by goods exports pay about 13% to 16% above the U.S.
national average.
We in the State Department play a central role in working with
American companies and with the firms, governments, and other
institutions in Central and Eastern Europe to create open markets and
rule of law. This has been a challenging process and one that will
continue to require our attention. The numbers show we will be
successful: Those countries that have made the most progress towards
open markets and democratic rule of law are the ones that have been
most successful in attracting private sector U.S. investment.

SITUATION IN THE REGION
Ten years after the fall of the Berlin Wall and the demise of
Communism, the countries of Central and Eastern Europe are continuing
their work to realize free market prosperity. The transition has been
difficult and has moved at different speeds in the different countries.
Although the situation varies from country to country, certain problems
remain all too common in the region.
One is the lack of transparency. ``Sunshine,'' as Justice Holmes
once remarked, ``is the greatest of all disinfectants.'' We find,
however, that governments and other institutions in the region are not
always open in their decision-making. Too often it is not apparent,
either to Americans or even to the citizens of that particular country,
why an official does what he does or what the reasons are behind the
government instituting a particular regulation or procedure. In some
cases, the governments do not publicize laws or regulations.
The lack of transparency feeds directly into another barrier to
trade and investment: bribery and corruption. Worldwide, bribery
results in tens of billions of dollars in lost exports for American
companies and, others that play by the rules. However, bribery and
corruption also impede governments from delivering the services their
citizens need and expect and undermine their confidence in their
governments and in democracy.
An additional problem in a number of countries in the region is the
high level of criminal activity. Domestic and transnational criminal
activity is a powerful deterrent to domestic, let alone international
investment in certain of the countries of Central and Eastern Europe.
Such criminal activity includes intellectual property rights piracy in
sectors including pharmaceuticals, audio recordings, and the optical
media.
Problems with infrastructure, physical as well as institutional are
further concerns. Roads, ports, telecommunications systems, and other
physical infrastructure are often not up to the standards we take for
granted in Western Europe or the U.S. The people of Central and Eastern
Europe and their present governments have inherited the results of
decades of mismanagement by Communist governments. Albania is perhaps
the most extreme example where the public still lives in decrepit
apartments and there is no rail link to the rest of Europe because of
the Hoxha paranoia. Estimates are that the imported Swedish concrete
used to build the more than 700,000 bunkers could have been used
instead to build as many two-bedroom apartments.
Institutional infrastructure also varies from country to country in
the region, but again in many cases its weakness constitutes yet
another challenge for investors, domestic as well as foreign. For
example, the banking systems in a number of these countries are saddled
with bad debts left over from the period of Communist rule or continue
to suffer from out-of-date, uncompetitive operating procedures.
Financial and regulatory supervision authorities in a number of these
countries also need to be strengthened. The banking system of the Czech
Republic was recently shaken by the collapse of the country's third
largest bank. A similar situation also occurred recently in Romania.
The failure of a number of countries in the region to complete the
process of privatizing state-owned entities not only perpetuates the
inefficiencies and economy-damaging distortions of the Communist era,
but raises questions in the minds of some as to how serious those
governments are about making the needed reforms. Again, the figures
show those countries that have made the most progress toward free
market institutions and good governance have attracted the most
American and other foreign direct investment.
The amounts of investment can be substantial. To date, American
firms have invested more than $7 billion in Hungary, $5.1 billion in
Poland, and $1.5 billion in the Czech Republic, according to data
published by the recipient countries.

WHAT THE UNITED STATES IS DOING
In partnership with the governments of the region, as well as with
our own private sector and with interested nongovernmental
organizations, the State Department and we in the Department's Bureau
of Economic and Business Affairs are working to address these concerns
and to help foster a framework that opens these countries further to
American business and investment. We remain convinced that such a
partnership will yield real benefits to both sides.
There are a number of overarching efforts, for example, our efforts
to battle corruption through encouraging countries in the region that
have signed the OECD Anti-Bribery Convention to ratify and fully
implement it. The Czech Republic and Hungary, both of which are members
of the OECD, have ratified and implemented the Convention, as have
Bulgaria and the Slovak Republic. Poland has signed, but has not yet
ratified or implemented. We are pressing governments in Central and
Eastern Europe, as we do elsewhere in the world, to take action to
protect intellectual property rights. We are working with the American
Bar Association's Central and Eastern European Law Initiative (CEELI)
to help these countries develop stronger legal systems.
We have worked with the governments of the region to strengthen
their IPR regimes. Bulgaria has been a particularly good example where,
working with us, the Bulgarian government authorities have taken
effective action to combat a serious problem with piracy of
intellectual property in that country.
We have pursued bilateral investment treaties (BITs) with many of
the countries in the region. The basic aims of the BIT program are to
protect U.S. investment abroad and, in particular, to guarantee
national treatment for U.S. investments; the free transfer of all funds
related to investment; access to international arbitration to settle
investment disputes with host country governments; freedom from
performance requirements, such as local content or export quotas; the
right to engage top managerial personnel of the investor's choice; and
expropriation only under internationally recognized standards and with
prompt, adequate and effective compensation. The BITs also encourage
adoption of market-oriented domestic policies that treat private
investment fairly and support the development of international legal
standards consistent with all these objectives. We currently have
signed BITs with 15 countries in the region, though not with Russia.
Twelve of these are now in force.
In addition, I must point out the State Department and our
embassies and consulates in the region constantly work hard on behalf
of American commercial interests. In Central and Eastern Europe--from
the Baltics to the Balkans--U.S. Ambassadors and our embassy officers
are the eyes, ears and in-country negotiators for U.S. commercial and
economic interests--from trade and investment to anti-corruption,
environmental safeguards, and cultural, people-to-people exchanges.
Furthermore, as experts on host-country markets and business practices,
these officials can and do identify opportunities for American firms
and advocate on their behalf, companies that range from small and
medium enterprises like bagel bakeries to major firms such as Enron and
Ford.
Exemplary business practices overseas and good corporate
citizenship are among the best exports that the United States can
offer. To emphasize this, the State Department initiated an annual
Award for Corporate Excellence, an award recognizing outstanding
corporate citizenship, innovation and exemplary business practices
overseas. America business leaders are frequently Ambassadors in
transition economies. They lead by their conduct: strict adherence to
the Foreign Corrupt Practices Act, high labor, environmental and human
rights standards; shared technology, training and professional,
exchanges with local firms; and, their own democratic values. In many
Central and Eastern European countries, business executives are close
and effective partners with our Ambassadors and Embassy teams.
I should point out that the European Union, as it pursues
enlargement to include most of the countries of the region, shares many
of our goals, and seeks many of the same reforms. We are consulting
closely with the EU on how our efforts can be coordinated to achieve
the best results. Still, from time to time, some in the EU try to
influence commercial decisions by saying that choosing a U.S. firm or
partner over a EU firm could harm the EU accession prospects of a
country. We rebut such assertions quickly and firmly to the EU and to
the recipient country.
In addition to these general policies and programs, there are a
number of specific initiatives geared to particular parts of the region
designed to improve the investment and business climate.
Southeast Europe
One such international partnership is the Stability Pact for
Southeast Europe. The Pact was announced at the July 30, 1999 Sarajevo
Summit with President Clinton and other leaders--both Western European
and from the region. The Pact is a straightforward bargain in which the
international community will work to integrate Southeast Europe into
the broader European and Transatlantic mainstream and the countries of
the region will implement the reforms that are necessary for such
integration to take place.Part of the Stability Pact is the Investment
Compact under which the region's countries take steps to improve the
investment climate. In return, the other Stability Pact members,
including the U.S. committed to help the region in this effort and to
work together with the international financial institutions to develop
appropriate vehicles to mobilize private finance and mitigate risk.
On the investment side, OPIC is using its investment guarantees to
mobilize up to $150 million in private equity financing by creating one
or more private sector investment funds which will provide a $200
million credit line for companies or commercial partnerships with
significant U.S. participation; and establish an OPIC on-the-ground
presence in the region to serve as a resource for the U.S. investment
community.
We are working with the European Bank for Reconstruction and
Development (EBRD) to develop an initiative for providing up to $130
million to support small- and medium-sized enterprises (SMEs) in this
region. A U.S. contribution of $10 million this year towards a total
U.S. contribution of $50 million is expected to leverage an additional
$80 million from the EBRD in debt financing for SMEs from other
European donors. Part of the U.S. contribution will provide technical
assistance to accelerate the transition of these countries to more
market-oriented economies. Specifically, EBRD teams will identify legal
and regulatory constraints for private sector development and provide
technical assistance to promote sound business practices and good
governance.
On the trade side, Stability Pact Partners underscored the
importance of Southeast Europe's integration into and access to the
European Union's more developed markets and the global trading system.
Connected with this is the proposed Southeast Europe Trade
Preferences Act (SETPA). President Clinton discussed SEPTA during the
July 1999 Sarajevo summit as an important mechanism to stimulate
economic growth in the region and to integrate countries of the region
into the broader European and Transatlantic mainstream. We note Senator
Moynihan has introduced legislation to create a preference system for
Southeast Europe.
The SETPA would demonstrate American commitment to the economic
development of Southeast Europe by extending duty-free treatment for
five years to a number of products that are currently ineligible under
the GSP program: iron and steel products, agricultural products,
footwear, glassware, ceramics, automobiles, bicycles, clocks and
watches. The only product area not to receive additional coverage under
SEPTA is textiles and apparel.
Through SETPA, the United States aims to strengthen the economies
of the region, promote the robust development of the private sector and
encourage further integration of countries of the region into
international trade regimes such as the WTO. The announcement of SETPA
also prompted the European Union to propose expanding its existing
autonomous trade preference package for western Balkan countries,
further boosting the region's economies and commitment to reform.
At the urging of the United States, the Stability Pact also
includes an anti-corruption initiative that brings together the United
States, the European Union, and regional countries in a common effort
to promote good governance and to combat official corruption. The
initiative will thereby help improve the environment for trade and
investment in the region.
Let me note as well that while we support Southeast Europe's
integration into the European Union's markets, we strongly believe this
should be done in a way that avoids commercial problems with the U.S.
Enlargement is not a zero-sum game, but rather should serve to
strengthen the transatlantic relationship through stronger linkages
between candidates for accession to the EU and the United States as
well as to the European Union. Enlargement Commissioner Verheugen
agrees and has argued strongly there is no contradiction between our
growing transatlantic partnership and enlargement.
Central Europe
Results on the trade front are already impressive. In 1991, U.S.
companies exported $1.6 million worth of goods to the fifteen countries
of Central and Eastern Europe. By the end of 1999, U.S. exports had
doubled, to $3.2 million.
We have a good and very active dialogue with Hungary, which, as one
of the most advanced of the EU accession candidate countries, is
progressing in its negotiations with the EU. At the same time, the
Hungarians are working very constructively with us on trade problems
associated with accession, including the issue of tariff differentials.
Hungary also ratified early the OECD Bribery Convention, and is now
working on its implementation.
Poland too is a leading candidate for EU accession, and we have
been successfully engaging the Poles in a number of economic areas
important to the U.S. On IPR, Poland is in the process of updating its
antiquated copyright law to bring it into compliance with its WTO
obligations. The Polish Government is also in the process of enacting
legislation to restructure and privatize the Polish Railways. We expect
this to result in a number of business opportunities for U.S. railroad
companies. In this connection, I note that Paul Nevitt, Chairman of
Greenbrier-Europe, will be testifying on the next panel. I would like
to point out that our embassy in Warsaw as well as senior officials
here in Washington have convinced Polish officials to take steps to
meet the concerns that Greenbrier had regarding the sale of rail cars
to Polish Railways.
United States investment in Poland continues to grow. Citibank, for
example, is in the process of becoming a major participant in the
Polish banking sector, with its acquisition of Bank Handlowy. Like
Hungary, Poland has ratified the OECD Bribery Convention; it still is
in the process of passing implementing legislation.
American firms are also active in the Czech Republic. Boeing is a
35% owner in a Czech fighter trainer manufacturer (called Aero
Vodochody) with Czech Airlines (CSA). Boeing will also be competing for
a number of civilian aircraft tenders by CSA. One problem we are
discussing with the Czech Government is eliminating the current 4.8
percent tariff on large civil aircraft so that Boeing can compete
fairly with Airbus which pays zero duty. The Poles and Bulgarians have
done so and the Hungarians have agreed to a waiver. We expect the Czech
Republic to do the same.
I note that Ronald Lauder, Chairman of Central European Media
Enterprises (CME) will be speaking on the next panel about the problems
his company encountered in the Czech Republic. American shareholders
have a significant investment in the Czech broadcasting sector through
CME. We have been very active in support of CME, and there is a process
underway in the context of our Bilateral Investment Treaty (BIT) to
resolve CME's BIT dispute through international arbitration.
Northern Europe Initiative
The U.S. is looking at trade and business development in the Baltic
Sea region as well, a key component of our Northern Europe Initiative
(NEI). NEI is a U.S. Government strategy to promote stability,
strengthen free market and democratic institutions and security
structures, and bolster U.S. trade and investment in the Baltic Sea
region. Two of the six priority areas for NEI activity are business
promotion and law enforcement. For FY 2000, we have allocated $1
million in regional Support for East European Democracy (SEED) Act
funds for NEI activities.
Working closely with American businesses, we established, a
business/government dialogue with the governments of Lithuania, Latvia,
and Estonia to remove specific investment barriers and to promote U.S.
investment and exports.
The NEI law enforcement programs have also targeted problems such
as IPR protection and contract enforcement. Among the results are NRG's
$500 million investment in Estonia's energy sector, which Estonia's
cabinet approved June 27. Overall trade between the U.S. and the three
Baltic states has nearly doubled since 1996.
Russia
The United States' efforts to foster investment and other business
ties with Russia deserve particular attention. Russia's new President,
Vladimir Putin, has stated that foreign investment will be essential to
improving the economic outlook for Russia, and that significant
progress on economic reform will be necessary to attract that
investment. However, Russia still lacks a genuine competitive
environment for investment, both domestic and foreign, and it lags far
behind Central Europe in attracting foreign investment. In the ten
years from 1988 to 1998, Russia received only $61 per-capita in foreign
investment, compared to $389 for Poland and $967 for the Czech
Republic.
The United States is the leader in foreign direct investment in
Russia, with over $2 billion invested in 1999 alone. Many household
names in the United States are now household names in Russia. However,
Russia has yet to realize the potential offered by its abundant natural
resources and educated workforce. The financial crisis of 1998 dealt
all investors in Russia a setback. During his meetings with President
Putin in Moscow this month, President Clinton emphasized that major new
flows of foreign investment to Russia are possible, but only if action
on the necessary structural reforms is forthcoming.
The United States Government has consistently urged the Russian
Government to institute reforms to improve the climate for doing
business in Russia, while continuously supporting U.S. investors who
have undertaken the risks of establishing businesses there and
encouraging the development of domestic Russian entrepreneurship. We
have used the U.S.-Russia Joint Commission and its Business Development
Committee to keep investment-oriented reform issues at the forefront of
our bilateral agenda. The U.S. has also supported the activities of the
international financial institutions in Russia, while insisting that
their assistance be additional to private sector resources and be
conditioned on structural reforms that benefit foreign and domestic
investors alike.
Reflecting the importance of Russia's vast reserves of oil and gas,
U.S. and other Western oil companies have been among the pioneers of
investment in Russia. The USG has long encouraged the development of
the legislative and regulatory framework for Production Sharing
Agreements (PSAs) in Russia, with the goal of establishing a stable and
transparent legal, financial and regulatory environment for investments
in the oil and gas sector. In Moscow, President Putin assured President
Clinton of his commitment to completing the framework for PSA's.
The election of many new Duma members last December opened an
opportunity, which we are pursuing, for the Duma's ratification of our
1992 Bilateral Investment Treaty with Russia. This treaty would ensure
treatment for U.S. investors no less favorable than that accorded to
Russian investors in many areas of the economy, provide protections
against expropriation, and set rules for adjudicating investment
disputes. Another avenue for reform is Russia's accession to the World
Trade Organization, a process that involves bringing Russia's regime
for trade and investment into line with internationally accepted
standards. We have actively encouraged and supported that process. We
are also encouraging the Organization of Economic Cooperation and
Development to deepen its dialogue with Russia on policy reforms to
improve its investment climate.
We are, moreover, committed to enhancing the rule of law and
protection of shareholder rights in Russia and have acted on this
commitment in a very tangible way. Late last year, Secretary Albright
made a difficult decision to delay $500 million in Ex-Im Bank
guarantees to the Russian oil company TNK, in order to give time for a
review of that company's business practices before the transaction was
completed. Also, advocacy by USG officials in Washington and our
Embassy in Moscow helped to convince Russian officials to terminate an
attempt to re-privatize the Lomonosov Porcelain factory near St.
Petersburg. It also blunted efforts to reduce the scope of foreign
investment in the Russian insurance industry. We have repeatedly
raised, at both the local and federal levels, the difficulties U.S.
investors have had in securing enforcement of favorable judgments made
by Russian courts.
The focus of our bilateral assistance in the economic area has
turned to the regions of Russia, where we support: the implementation
of international accounting standards; development of small- and
medium-sized enterprises; and improvement of legislation affecting
business. The U.S.-Russia Investment Fund makes equity investments in
Russian enterprises and Russian-American joint ventures, as well as
providing capital to business through Russian banks. We have funded
thousands of exchanges that give Russian citizens an opportunity to
develop their skills and establish valuable contacts with U.S.
counterparts.
Admittedly, progress toward a welcoming climate for investment in
Russia has been slow and the environment for doing business in Russia
remains extremely difficult. However, as President Clinton noted in his
speech before the Duma earlier this month, with a new President, a new
government and a new Duma, Russia has a new chance to build prosperity
and strength, while safeguarding democratic freedoms and the rule of
law. The President emphasized to both President Putin and the Russian
people that the United States welcomes a strong Russia that uses its
strength to promote economic development, reinforce the rule of law,
fight crime and corruption, defend democratic freedoms and build good
relations with its neighbors and the world. We will continue our
efforts to promote a better climate for investment in Russia as a means
to that end.
Ukraine
Perhaps no other country in the region has experienced such a large
gap between economic performance and potential as Ukraine. Endowed with
good natural resources, superb agricultural land, a well-educated
population, ethnic peace, and a strategic location in Europe, Ukraine
was positioned to be one of the most successful of the former Soviet
states in attracting the foreign investment needed to restructure its
economy.
Yet at $55 per capita, Ukraine has one of the lowest rates of
direct foreign investment in the region. The U.S., with some $570
million out of $3 billion total, is the single largest source of
foreign investment in Ukraine. These figures have both remained static
for several years and are very small for a country of 50 million people
with the resource base and economic potential of Ukraine. In contrast,
the figures for Poland, a country of 40 million which aggressively
embraced reform, are $5.1 billion and $30 billion.
The United States, together with the IMF, the World Bank, and other
donors, has consistently delivered the same message to Ukraine for the
past five years: market economics can only be successful in Ukraine
when the government reduces its role in the economy and gives freer
reign to private enterprise. When this happens, we will begin to see
investment rise again, and with rising investment will come sustained
growth.
Much of U.S. assistance, $200 million last year and, $2 billion
since independence, has been focused on helping Ukraine reform its
economy and its governing institutions. We remain committed to making
Ukraine's future a success and improving the climate for investment and
opening up Ukrainian markets is crucial to a positive outcome.
We are also seeking ways to support the reform efforts of Prime
Minister Viktor Yushchenko's government--leveraging resources and
cooperating with other international donors whenever possible. USAID
and other agencies continue to target economic reforms, privatization
efforts, private sector development (small and medium enterprises) and
civil society for crucial assistance.
As I have said, U.S. investors are the single largest source of
foreign investment in Ukraine. Their problems, both specific and
general, are a regular agenda item in all high-level bilateral
meetings, most recently during President Clinton's trip to Kiev on June
5. We have been pleased with the more business-friendly policies of the
Yushchenko government. Investors report they have encountered a more
cooperative, businesslike attitude when dealing with officials under
the new government.
We remain concerned, however, about U.S. investor problems that
remain unresolved, and more generally about Ukraine's poor investment
climate and slow pace of economic reform. In addition to resolving the
investment disputes, we have urged Ukraine's government to take
specific steps to improve its investment climate, including instituting
more transparent procurement and licensing requirements, implementing
regulatory reform, improving protection of shareholder rights,
improving enforcement of judicial decisions, and enforcing a strong
code of ethics.
Ukraine has a reputation as a difficult place to do business. In
its Corruption Perceptions survey of 85 countries, Transparency
International ranked Ukraine 69th. Corruption is a major obstacle to
genuine reform and long-term economic recovery in Ukraine, Russia, and
indeed throughout the former Soviet Union. Again, we have and will
continue to provide assistance, in this area. However, it is the
responsibility of Ukraine's government to tackle this problem, through
deregulation, legal reform, and greater transparency.

CONCLUSION
In closing, let me reiterate that these initiatives in Central and
Eastern Europe yield benefits to Americans in terms of peace and
stability in a part of the world that not so long ago was an alliance
threatening the United States. Moreover, these initiatives translate
into economic benefits for American workers, farmers, arid business
people. In 1998, for example, aggressive advocacy by the U.S.
Ambassador to Croatia and the Under Secretary of State for Economic,
Business, and Agricultural Affairs resolved a number of obstacles with
the Croatian Government. As a result, the San Francisco-based
corporation Bechtel was able to sign a $600 million highway
construction contract with the Croatian Government.
Since then, Bechtel has succeeded in concluding agreements to
commence work on the first stage of the project and renegotiated the
contract at greater value to provide a more extensive Croatian highway
than was first planned.
Bechtel's story is only one of many. In recent days, work by the
U.S. Ambassador in Sofia and others in the U.S. Government bore fruit
when the Bulgarian Government finalized for signature a loan agreement
with Citibank in connection with Westinghouse's $77 million contract to
upgrade the safety of the Kozloduy nuclear power plant. This project,
which involves the first Ex-Im bank loan to Bulgaria, will make a vital
contribution to improving nuclear safety in the region and improving
the environment there.
Another recent success is the decision by the shareholders of
Eastern Slovak Ironworks (VSZ) to endorse a deal by U.S. Steel to buy
all steel and related assets of VSZ Kosice, the Slovak Republic's
largest company. The deal will make U.S. Steel the largest U.S.
investor and largest private sector employer in Slovakia.
In all candor, however, I must say that our budget and our
personnel are stretched too thin to provide the protection American
business deserves in today's global economy. If anything, America's
economic well-being is becoming increasingly intertwined with decisions
and developments around the world. We must bolster our ability to
defend and promote our core interests overseas. U.S. diplomatic
programs defend these core national interests, including commercial
advocacy. Yet today only one penny out of every dollar the Federal
government spends is devoted to international affairs.
We are not talking about foreign aid. Every year, when the State
Department processes some 44,000 export licenses for defense articles
valued at more than $25 billion, we sustain 120,000 American jobs. When
the State Department negotiates agreements to safeguard U.S.
intellectual property rights to save America's film, music and software
industries as much as $200 billion a year, we do so not to aid others,
but principally to advance America's prosperity. Even when the State
Department promotes economic reform and good governance in Central and
Eastern Europe, we do so not only to help these countries, but to
promote America's economic and national security interests.
Thank you. I will be happy to respond to your questions.

Senator Smith. We will call up next our second panel that
will consist of Mr. Ronald S. Lauder, chairman of the Central
European Media Enterprises. He will be followed by Mr. Kempton
Jenkins, president of the Ukraine-United States Business
Council, and they will be joined by Mr. Peter K. Nevitt,
chairman of the board of Greenbrier Europe.
Welcome, gentlemen. Thank you all for coming and
participating in this hearing, and we hope we can shine a light
on some of the difficulties and make hopefully a better
business climate in the future for both sides of the Atlantic
and certainly for the prosperity of Central and Eastern Europe.
Mr. Lauder, welcome. The mike is yours.

STATEMENT OF RONALD S. LAUDER, CHAIRMAN, CENTRAL EUROPEAN MEDIA
ENTERPRISES, NEW YORK, NY

Mr. Lauder. Thank you, Mr. Chairman. My name is Ronald
Lauder, and the story that brings me here begins in 1986 when I
had the privilege of representing the United States of America
as the Ambassador to Austria in Vienna, in the heart of Central
Europe. Vienna is just across the border from the country that
was then called Czechoslovakia, a country that had been under
Communist rule since 1947.
Sitting where I was in Central Europe, I witnessed the
devastation that this part of the world had experienced from
the Second World War, the Holocaust and the failure of the
Communist system under which the Czech people had toiled for 40
years. Even before the fall of the Berlin Wall I set out to
make a positive contribution in this part of the world through
the Ronald S. Lauder Foundation by starting Jewish schools that
have educated more than 10,000 children, schools in 15
countries in Eastern Europe.
The Velvet Revolution of 1989 brought great hope to the
Czech people as they set out to create a democracy in a market-
based economy. The fall of communism was a watershed event in
the history of Central and Eastern Europe, and I was optimistic
that I could also make a significant, positive contribution by
establishing a free press.
Accordingly, I underwrote the establishment of independent
television stations in the new democracies of Central and
Eastern Europe. Under the Communist system, the government in
these countries owned and controlled all forms of media,
television, radio, and newspapers. I hoped to provide these
societies with the same kind of free press that we enjoy here
in this country.
The former Communist countries of Central and Eastern
Europe needed and still need enormous capital investment. It
was my hope that if my independent television stations were
successful I would thereby create an example for other private
investors who might in turn also want to invest in these
countries.
In 1994, I brought Central European Media, or CME, to the
United States capital markets and raised $66 million in initial
public offering. CME thereby became a public company with
shares traded on the NASDAQ Stock Exchange. The shares of CME
were traded by well-known U.S. brokerage firms such as Merrill
Lynch, Morgan Stanley, Dean Witter, Solomon Smith Barney, and
Prudential Securities.
CME's shares were purchased by thousands of U.S. citizens,
large and small, directly and indirectly, for their private
accounts, mutual funds, pension plans, IRA's, Keogh plans, and
for their children's education.
The first television station that Central European Media
launched was TV Nova in Prague, the capital of the Czech
Republic. TV Nova was an enormous success. Soon after its
launch in 1994 the station had revenues of approximately $100
million per year, and was proclaimed by the news media to be
the most successful launch of a TV station in history.
The success of TV Nova allowed Central European Media to
return to the U.S. equity markets in 1995 and 1996 to raise an
additional $220 million in equity and sell $170 million in
bonds in 1997. Much of these proceeds were used to finance
successful launches of stations in Romania, Slovakia, Slovenia,
and Ukraine. To this day, Central European Media's television
stations in Romania, Slovakia, Slovenia, and Ukraine are the
leading independent television stations in those countries.
So what went wrong? How did hundreds of American taxpayers
see their investments in Central European Media stock tumble,
despite the fact that this country built one of the most
profitable television stations in Europe? The answer is sad but
simple. TV Nova was stolen.
TV Nova, a television station that generated $100 million
of revenue every year in 1995, 1996, 1997, 1998, was stolen
from CME by the joint access of the Czech Media Council and
Vladimir Zelezny, CME's former business partner in TV Nova. The
Media Council stole TV Nova by repudiating its prior official
approvals on CME's position after TV Nova became successful.
This was done by initiating administrative procedures attacking
the business protections the Media Council had formerly
guaranteed when it was soliciting CME's capital in 1993. And by
affirmatively supporting Dr. Zelezny's acts, rather than
stopping him, when he violated obligations to CME that the
Media Council was required by law to protect.
Vladimir Zelezny stole TV Nova by renouncing his agreement
with CME and exercising improper influence on members of the
Media Council. Zelezny officially threatened Czech political
leaders with what was in many ways blackmail because of his
ability to control the press.
Yet the TV Nova scandal is about even more than the theft
of American investment. It is about the rule of law. This
country and our taxpayers invested heavily in the hope of
building a foundation for free markets behind the old Iron
Curtain. The dream was that capitalism would take root quickly
and secure freedom for the future. Sadly, the TV Nova scandal
proves in the Czech Republic only crony capitalism has sprung
up. The rule of law has been ignored in favor of insider
connections and back-door deals.
More than investment decisions are at stake here. American
foreign policy in the region must be reassessed in light of the
reality that corruption, not capitalism, is growing there. TV
Nova still exists and remains enormously profitable. However,
the Czech Government maintains that CME does not own it. The
advertising revenue of TV Nova no longer goes to the public
shareholders of CME, many of whom are U.S. citizens. Instead,
Vladimir Zelezny is pocketing TV Nova's $100 million of
advertising revenue.
The position of the Czech Government today is a far cry
from its position in 1993. When I considered making this
investment in 1993, the Czech Government went out of its way to
encourage U.S. investors to make an investment in a private
television station. The Czech Government pledged to protect any
investment U.S. investors would make in a television station.
They pointed out that such an investment would be protected by
the bilateral investment treaty between the United States and
the Czech Republic. Signed in 1991, the treaty is a sovereign
guarantee that specifically states that the U.S. investment in
the Czech Republic may not be expropriated.
In the 1991 bilateral investment treaty the Czech Republic
agreed to treat investments made by United States nationals
fairly and equitably, to provide such investments full
protection and security, not to impair the enjoyment of such
investments through arbitrary or discriminatory measures, and
not to expropriate such investments either directly or
indirectly.
In making our investment in TV Nova, Central European Media
took the bilateral investment treaty between the United States
and the Czech Republic at its word. We made this investment
with the knowledge that our television station was protected
unequivocally under the bilateral investment treaty. We had
every reason to expect that, should the Czech Government ever
attempt to expropriate our television station, the U.S.
Government would insist immediately that the Czech Government
reverse any such expropriations.
I must say that our U.S. Ambassador there, John Shattuck,
has been exemplary in this respect, speaking to the Czech
Government on our behalf, yet the Czech Government has ignored
his pleas and everyone else's pleas.
Almost one year ago on August 5, 1999, TV Nova's television
signal was illegally terminated. The termination of our signal
immediately deprived viewers of TV Nova's programming and our
company of the lifeblood of any television station, the
advertising revenue. On that day, Vladimir Zelezny began to
broadcast a competing television signal instead, despite being
legally bound to broadcast our signal under an exclusive
contract officially blessed by the Czech Government at the time
of our investment.
CME then immediately went before the Czech Media Council.
The Czech equivalent of our FCC it is the government entity
that officially blessed our exclusive contract at the time of
our investment. CME demanded that the broadcast of our signal
be resumed. The Czech Media Council refused. The Media Council
effectively said, quote: ``This is of no concern to us. This is
merely a business dispute. Go to the courts.''
CME has gone to the Czech courts. In fact, we recently
received a decision by the court that our contract is exclusive
and that Vladimir Zelezny must broadcast our television signal.
When we then returned to the Media Council and showed them the
court ruling that required Vladimir Zelezny to broadcast our
television signal. Sadly, the Media Council again refused,
saying we must await an appeal, a process that could take
years.
In the meantime, Vladimir Zelezny continues to broadcast
his television signal and pocket the $100 million per year of
revenues that belong to the shareholders of Central European
Media, many of whom are U.S. citizens.
The list of Zelezny's crimes is extensive. We have
submitted proof to the Czech police that he forged false
contracts to justify his illegal actions. We have submitted
those false contracts to the Czech courts as proof of these
crimes, including detailed expert reports demonstrating the
forgery. This has also been ignored.
We have submitted proof that Zelezny has engaged in tax
fraud and cut sweetheart deals with advertisers on TV Nova that
stole revenues from CME with companies that he owned, but this
proof, too, has been ignored by the Czech police. And on top of
this he has stolen copyrights and lied under oath.
The response CME has received to its proof has made it
clear that no matter what evidence CME presents, Czech
prosecutors will not go forward without improper inducement. I,
as a responsible businessman, operate under American law and
rule of ethics, and will not provide these inducements.
There have been private detectives hired to stalk and
intimidate CME employees and their families. It is rumored
also, and widely rumored in the Czech Republic, that there are
dossiers about the Czech Republic's leading politicians and
threats, should anything ever happen, that these dossiers will
be put on TV. And this has paralyzed many Czech politicians.
So what needs to be done? First, the State Department
should demand, immediately and publicly, that the expropriation
of TV Nova be reversed, not done in quiet diplomacy but
publicly.
Second, the State Department should insist that the $100
million of advertising revenue that Vladimir Zelezny has
pocketed over the last year be returned to CME. Make no mistake
about it, the Czech Government has the ability to follow the
rule of law. It is simply a matter of encouraging Prague to do
the right thing. Perhaps the best way to get Czechs' attention
is for the State Department to say loud and clear: Stop
stealing from American taxpayers!
Third, the Treasury Department should demand that the
international institutions funded by U.S. taxpayers cease
giving financial support to the Czech Republic until the
expropriation of TV Nova is reversed.
It is an insult to the American taxpayers that the European
Bank for Reconstruction and Development, the International
Monetary Fund, and the World Bank, funded by U.S. taxpayers,
continue to give U.S. taxpayers' money to the Czech Republic.
It is absolutely outrageous that the International Monetary
Fund and World Bank are planning to reward the Czech Republic
by holding their annual meeting in September in Prague.
American investors have already lost hundreds of millions
of dollars from the expropriation of TV Nova. It compounds this
crime to take tax dollars from the same investors to fund the
EBRD, the IMF, and the World Bank, when these institutions show
such little regard for U.S. taxpayers.
The future of former Communist countries of Central and
Eastern Europe is not yet written. The United States can make a
huge difference by insisting that our treaty be honored, that
the rule of law be upheld. We need to reverse what has happened
to TV Nova, not just for the sake of investors, but for the
good of the Czech Republic and the United States.
Our goals in the region are clear, peace and prosperity.
But history is also clear: peace and prosperity only follow the
rule of law. What happened to TV Nova is not only a scandal in
the region. Bribery and blackmail are commonplace in the
region. And if this is allowed to stand, countless others will
be inspired to follow the example. No one, be they Czech
citizens or American taxpayers, can afford to see the rule of
law ignored.
I thank you very much for the opportunity to tell the story
of what happened to TV Nova, and I will be happy to answer any
questions. Thank you.
[The prepared statements of Mr. Lauder follow:]

Prepared Statement of Ronald S. Lauder

Thank you, Mr. Chairman. My name is Ronald Lauder, and the story
that brings me here begins in 1986, when I had the privilege of
representing the United States of America as the ambassador to Austria
in Vienna, in the heart of Central Europe.
Vienna is just across the border from the country that was then
called Czechoslovakia, a country that had been under Communist rule
since 1947. Sitting where I was in Central Europe, I witnessed the
devastation that this part of the world had experienced from the Second
World War, the Holocaust, and the failure of the Communist system under
which the Czech people had toiled for forty years.
Even before the fall of the Berlin Wall, I set out to make a
positive contribution in this part of the world through the Ronald S.
Lauder Foundation by starting Jewish schools that have educated more
than 10,000 children in schools in fifteen countries.
The Velvet Revolution of 1989 brought great hope to the Czech
people as they set out to create a Democracy and a market-based
economy. The fall of Communism was a watershed event in the history of
Central and Eastern Europe, and I was optimistic that I could also make
a significant positive contribution by helping to establish a free
press.
Accordingly, I underwrote the establishment of independent
television stations in the new democracies of Central and Eastern
Europe. Under the Communist system, the governments in these countries
owned and controlled all forms of media: television, radio and
newspapers. I hoped to provide these societies with the same kind of
free press that we enjoy in this country.
The former Communist countries of Central and Eastern Europe
needed--and still need enormous capital investment. It was my hope that
if my independent television stations were successful, I would thereby
create an example for other private investors, who might, in turn also
want to invest in these countries. In 1994, I brought Central European
Media, (or CME), to the United States capital markets and raised $66
million dollars in an initial public offering.
CME, thereby, became a public company with shares traded on the
NASDAQ stock exchange. The shares of CME were traded by well-known U.S.
brokerage firms such as: Merrill Lynch; Morgan Stanley; Dean Witter;
Salomon; Smith Barney and Prudential Securities. CME shares were
purchased by thousands of U.S. citizens, large and small, directly and
indirectly for their private accounts, mutual funds, pension plans,
IRA's, Keogh plans, and for their children's education.
The first television station that Central European Media launched
was TV Nova in Prague, the capital of the Czech Republic. TV Nova was
an enormous success. Soon after its launch in 1994, the station had
revenue of approximately $100 million dollars per year and was
proclaimed by the news media to be the most successful launch of a TV
station in history. The success of TV Nova allowed Central European
Media to return to the U.S. equity markets in 1995 and 1996, to raise
an additional $220 million dollars in equity and sell $170 million
dollars in bonds in 1997.
Much of these proceeds were used to finance successful launches of
stations in Romania, Slovakia, Slovenia and Ukraine. To this day,
Central European Media's television stations in Romania, Slovakia,
Slovenia and Ukraine are the leading independent television stations in
those countries.
So what went wrong? How did hundreds of American taxpayers see
their investments as Central European Media's stock tumble despite the
fact that this company built one of the most profitable television
stations in Europe?
The answer is sad but simple: TV Nova was stolen.
TV Nova, a television station that generated $100 million of
revenue every year in 1995, 1996, 1997 and 1998 was stolen from CME by
the joint access of the Czech Media Council and Vladimir Zelezny, CME's
former business partner in TV Nova. The media council stole TV Nova by
repudiating its prior official approvals of CME's position after TV
Nova became successful, by initiating administrative and criminal
prosecutions attacking the business protections it had formally
guaranteed. When it was soliciting CME's capital in 1993, and by
affirmatively supporting Dr. Zelezny, rather than stopping him, when he
violated obligations to CME that the Media Council was required by law
to protect, Vladimir Zelezny stole TV Nova by renouncing his agreements
with CME, exercising improper influence on members of the media
council, and threatening Czech political leaders with blackmail.Yet the
TV Nova scandal is about even more than the theft of American
investment, it is about the rule of law. This country--and our
taxpayers--invested heavily in hope of building a foundation for free
markets behind the old Iron Curtain. The dream was that capitalism
would take root quickly and secure freedom for the future.
Sadly, the TV Nova scandal proves in the Czech Republic only crony
capitalism has sprung up. The rule of law has been ignored in favor of
insider connections and backdoor deals. More than investment decisions
are at stake here. American foreign policy in the region must be
reassessed in light of the reality that corruption, not capitalism, is
growing there.
TV Nova still exists and remains enormously profitable. However,
the Czech government maintains that CME does not own it. The
advertising revenue of TV Nova no longer goes to the public
shareholders of CME, many of whom are U.S. citizens. Instead, Vladimir
Zelezny is pocketing TV Nova's $100 million of advertising revenue. The
position of the Czech government today is a far cry from its position
in 1993, when I considered making this investment.
In 1993, the Czech government went out of its way to encourage U.S.
investors to make an investment in a private television station. The
Czech government pledged to protect any investment U.S. investors would
make in a television station, and pointed out that such an investment
would be protected by the bilateral investment treaty between the
United States and the Czech Republic, which was signed in 1991. This
treaty is a sovereign guarantee that specifically states that U.S.
investment in the Czech Republic may not be expropriated.
In the 1991 bilateral investment treaty, the Czech Republic agreed
to treat investments made by United States nationals fairly and
equitably, to provide such investments full protection and security,
not to impair the enjoyment of such investments through arbitrary or
discriminatory measures, and not to expropriate such investments either
directly or indirectly.
In making our investment in TV Nova, Central European Media took
the bilateral investment treaty between the United States and the Czech
Republic at its word. We made this investment with the knowledge that
our television station was protected unequivocally under the bilateral
investment treaty. We had every reason to expect that should the Czech
Government ever attempt to expropriate our television station, the U.S.
government would insist immediately that the Czech government reverse
any such expropriation. Unfortunately, this has not occurred.
Almost one year ago, on August 5, 1999, TV Nova's television signal
was illegally terminated. The termination of our signal immediately
deprived Czech viewers of TV Nova's programming and our company of the
life-blood of any television station advertising revenue. On that same
day, Vladimir Zelezny, began to broadcast a competing television signal
instead, despite being legally bound to broadcast our signal under an
exclusive contract officially blessed by the Czech government at the
time of our investment.
CME immediately went before the Czech Media Council, the Czech
equivalent of the FCC and the government entity that had officially
blessed our exclusive contract at the time of our investment, and
demanded that the broadcast of our signal be resumed. Sadly, the media
council refused. The Media Council effectively said: ``this is of no
concern to us. This is merely a business dispute. Go to the courts.''
CME has gone to the Czech courts. In fact, we recently received a
decision by the court that our contract is exclusive and that Vladimir
Zelezny must broadcast our television signal. We then returned to the
Media Council and showed them the court ruling that required Vladimir
Zelezny to broadcast our television signal. Sadly, the Media Council
again refused, saying that we must wait to appeal--a process that could
take years.
In the meantime, Vladimir Zelezny continues to broadcast his own
television signal and pocket $100 million per year of revenue that
belongs to the shareholders of Central European Media, many of whom are
U.S. citizens.
The list of Zelezny's crimes is extensive. We have submitted proof
to the Czech police that Zelezny has forged false contracts to justify
his illegal actions and has submitted those false contracts to Czech
courts. Our proof of these crimes, including detailed expert reports
demonstrating the forgery, has been ignored. We have also submitted
proof that Zelezny has engaged in tax fraud and cut sweetheart deals
with advertisers on TV Nova that stole revenues from CME, but this
proof, too, has been ignored by Czech police. On top of this, Zelezny
has stolen copyrights, lied under oath, and even broke into CME's
computer system in London.
The responses CME has received to its proof have made clear that no
matter what evidence CME presents, Czech prosecutors will not go
forward without inducements that I, as a responsible businessman
operating under American law and rule of ethics, cannot and will not
provide. Zelezny has hired private detectives to stalk and intimidate
CME employees and their families. Vladimir Zelezny has dossiers on the
Czech Republic's leading politicians, and his threats to expose on his
television station the unseemly details of these politicians' lives
have paralyzed the Czech government's ability to deal with this issue.
So what needs to be done? First, the State Department should demand
immediately and publicly that the expropriation of TV Nova be reversed.
Second, the State Department should insist that the $100 million
dollars of advertising revenue that Vladimir Zelezny has pocketed over
the last year be returned to CME. Make no mistake about it: the Czech
government has the ability to follow the rule of law here. It is simply
a matter of encouraging Prague to do the right thing. Perhaps the best
way to get the Czech's attention is for the State Department to say,
loud and clear: ``stop stealing from American taxpayers!'' Third, the
Treasury Department should demand that the international institutions
funded by U.S. taxpayers cease giving financial support to the Czech
Republic until the expropriation of TV Nova is reversed.
It is an insult to American taxpayers that the European Bank for
Reconstruction and Development, the International Monetary Fund and the
World Bank, funded by U.S. taxpayers, continue to give U.S. taxpayers
money to the Czech Republic despite the expropriation of TV Nova.
It is absolutely outrageous that the International Monetary Fund
and World Bank are planning to reward the Czech Republic by holding
their annual meeting in September in Prague' American investors have
already lost hundreds of millions of dollars from the expropriation of
TV Nova. It compounds this crime to take tax dollars from these same
investors to fund the EBRD, the IMF and World Bank when these
institutions show such little regard for U.S. taxpayers.
The future of the former communist countries of Central and Eastern
Europe is not yet written, and the United States can make a huge
difference by insisting that our, treaties be honored, that the rule of
law be upheld and by not rewarding criminals. We need to reverse the
expropriation of TV Nova. Not just for the sake of American investors,
but in the larger sense, for the good of the Czech Republic and the
United States. Our goals in the region are clear: peace and prosperity.
But history is also clear: peace and prosperity only follow the rule of
law.
Vladimir Zelezny is not the only thief in the region. Bribery and
blackmail are not his alone. If the expropriation of TV Nova is allowed
to stand, countless others will be inspired to follow his example. No
one, neither Czech citizens, nor American taxpayers, can afford to see
the rule of law ignored.
Thank you for the opportunity to tell the story of the
expropriation of TV Nova.
I would be happy to answer any questions.

* * *

In addition to the direct testimony Mr. Lauder has presented, the
following background information is offered as a more extensive
examination of the TV NOVA scandal. A chronology of the scandal's major
events is provided, as well.

As the Rule of Law has continued to be frustrated inside the Czech
Republic, Mr. Lauder and other American investors have been forced to
seek justice outside the Czech system. The following information
details the international arbitration Mr. Lauder has commenced that
seeks to hold the current government of the Czech Republic accountable
for its action.
It should be noted that while Mr. Lauder has personally initiated
this action, he has pledged that any proceeds from a favorable ruling
will be used to compensate other investors. In other words, Mr. Lauder
is seeking justice here, not personal profit.

I. INTRODUCTION TO THE ARBITRATION
Pursuant to Article 3 of the Arbitration Rules of the United
Nations Commission on International Trade Law (the ``UNCITRAL Rules''),
Ronald S. Lauder has commenced arbitration against the Czech Republic.
Mr. Lauder has launched this arbitration as a result of actions by the
Czech Republic in breach of the Treaty Between the United States of
America and The Czech and Slovak Federal Republic Concerning the
Reciprocal Encouragement and Protection of Investment, executed on
October 22, 1991 (the ``Treaty''). The Czech Republic has assumed the
rights and obligations of the Czech and Slovak Federal Republic under
the Treaty.
After having recognized the need for foreign investment to foster
the development of television broadcasting in the Czech Republic, and
after having actively solicited and received foreign participation in
its first nationwide private television station, the Czech Republic
breached its Treaty obligations by taking affirmative steps to
constrain the scope of the foreign investor's interest and by failing
to protect the foreign investment that it specifically approved. Once
the television broadcasting venture created with foreign capital became
established and successful, and while the local Czech participants in
the company organized to hold the foreign investment were arranging the
sale of their interests at a substantial profit, the Czech Republic
reversed its position on the fundamental nature of the foreign
investment in a manner that favored local investors and critically
undermined the value of the foreign investment. These actions have been
unfair, arbitrary, unreasonable and discriminatory against the foreign
investor, and have consequently constituted breaches of the Treaty.
The dispute between Mr. Lauder and the Czech Republic is an
``investment dispute'' as defined by Article VI(1) of the Treaty. As
such, it is subject to arbitration pursuant to Articles V.E (2) and (3)
of the Treaty.
The Treaty entered into effect in the Czech and Slovak Federal
Republic on December 19, 1992. (Decree of the Ministry of Foreign
Affairs No. 187/1993 Coll.) After the Government of the Czech and
Slovak Federal Republic ceased to exist on December 31, 1992, the Czech
Republic succeeded to the rights and obligations of the Czech and
Slovak Federal Republic under the Treaty. (Article 5 of Constitutional
Act No. 4/1993 Coll.)
As set forth in more detail below, the dispute arose on July 23,
1996. More than six months having passed without the settlement of the
dispute through consultation and negotiation, Articles V.1 (2) and (3)
of the Treaty provide that the dispute may be submitted to arbitration
after the complaining national consents ``in writing to the submission
of the dispute for settlement by conciliation or binding arbitration''
pursuant to any of the methods permitted by the Treaty.
Mr. Lauder has consented in writing to submit his dispute with the
Czech Republic for binding arbitration pursuant to the UNCITRAL Rules
(Letter from Ronald Lauder to the Ministry of Finance of the Czech
Republic, dated August 19, 1999.)
Pursuant to Article VI(3)(b) of the Treaty, the Czech Republic has
consented to submit the dispute to arbitration in a number of forums,
including before an ad hoc tribunal established pursuant to the
UNCITRAL Rules.

II. THE ARBITRATION CLAIM
A. The Czech Republic Undertook Obligations to Promote and Protect
Investments of U.S. Investors
The Treaty sets forth an array of undertakings by both signing
nations, designed to promote and protect investments in each nation by
investors of the other nation. Among others, the Czech Republic, acting
through the Council, has breached the following provisions of the
Treaty:

a. ``Investment shall at all times be accorded fair and
equitable treatment, shall enjoy full protection and security
and shall in no case be accorded treatment less than that which
conforms to principles of international law' (Article
II(2)(a));

b. ``Neither Party shall in any way impair by arbitrary and
discriminatory measures the management, operation, maintenance,
use, enjoyment, acquisition, expansion, or disposal of
investments'' (Article II(2)(b)); and

c. ``Investments shall not be expropriated or nationalized
either directly or indirectly through measures tantamount to
expropriation or nationalization (`expropriation') except for a
public purpose; in accordance with due process of law; in a
nondiscriminatory manner; upon payment of prompt, adequate and
effective compensation; and in accordance with the general
principles of treatment provided for in Article 11(2)''
(Article III).
B. Mr. Lauder's Investment in the Czech Republic is Protected under the
Treaty
Mr. Lauder indirectly controls zeska nezavisla televizni
spoleznost, spol. s r.o. (``CNTS''), a Czech corporation engaged in the
business of providing broadcasting services for TV Nova, the Czech
Republic's most popular and successful television station.
Mr. Lauder has direct voting control of Central European Media
Enterprises Ltd. (``CME Ltd.''), the leading commercial television
company in Central and Eastern Europe. One of CME Ltd.'s wholly owned
subsidiaries is CME Media Enterprises B.V. (``CME''). CME, in turn,
holds a 99% equity interest in CNTS through its wholly owned
subsidiary, CME Czech Republic B.V. Pursuant to Article I(1)(a) of the
Treaty, the CME and CNTS assets in the Czech Republic constitute an
``investment'' of Mr. Lauder, who exercises ultimate control over CNTS
and its operations in the Czech Republic, thereby entitling him to the
benefits and protections of the Treaty.
C. By Unreasonably and Discriminatorily Depriving Mr. Lauder of His
Investments, the Czech Republic Has Failed to Abide by its
Obligations Under the Treaty
1. Background of Mr. Lauder's Investment
On October 30, 1991, only eight days after the Treaty was signed,
the Czech Republic's Act on the Operation of Radio and Television
Broadcasting was adopted. (Act No. 468/1991 Coll, the ``Media Law'').
The Media Law empowered the Council to grant licenses for television
broadcasting. In spite of the Treaty provisions protecting American
investors from discrimination, the Council did not administer the Media
Law in a manner that presented a level playing field for a foreign
investor competing against Czech nationals.
In late 1992 and early 1993, the Council participated in
negotiations with, among others, (i) the Central European Development
Corporation GmbH (``CEDC''), a German company also controlled by Mr.
Lauder and the predecessor to CME; (ii) Dr. Vladimir Zelezny, a Czech
national, and (iii) CET 21, spol. s r.o. (``CET 21''), a Czech company.
The goal of the negotiations was the issuance of a license and the
formation of a company for television broadcasting in the Czech
Republic.
In order to encourage a substantial foreign investment while at the
same time preventing foreign ownership of broadcasting licenses, the
Council required and approved a structure that would permit CEDC to
obtain the use and economic benefit of a license issued to a Czech-
owned company--CET 21.
Thus, on February 9, 1993, when the Council issued a license to CET
21 to operate the first nationwide private television station in the
Czech Republic (the ``License''), the License acknowledged CEDC's
``substantial foreign capital participation'' and CEDC's partnership
with the holder of the License, CET 21. The Council's grant of the
License to CET 21 was made expressly subject to, among other things,
the condition that CET 21 form a joint venture with CEDC and use the
License through that joint venture. When the Council issued the
License, it knew that CET 21 and CEDC had explicitly agreed that
neither of them would be authorized to broadcast commercial television
without the other.
In April 1993, CET 21 and CEDC agreed on a Memorandum of
Association (``MOA'') for the creation of the required joint venture:
CNTS. Under the MOA, CEDC contributed 75% of CNTS's start-up capital,
and obtained a 66% ownership interest in return. The remaining 25% of
start-up capital was contributed by zeska spozitelna a.s., a Czech
bank, which obtained a 22% ownership interest. CET 21 contributed to
CNTS the right to use the License ``unconditionally, unequivocally and
on an exclusive basis,'' and obtained a 12% ownership interest in
return for this contribution. Dr. Zelezny served as the General
Director and Executive of CNTS and as the General Director of CET 21.
The MOA reflected the organizational structure that had been
negotiated with the intensive participation of the Council and under
its oversight. The concept behind the structure was that CNTS would be
the central and only operating company for the new television station.
CNTS was to pay all costs and keep all revenues associated with
operating the television station.
On April 20, 1993, the Council gave its formal approval to the MOA.
In February 1994, CNTS and CET 21 began broadcasting TV Nova under
the License. TV Nova quickly became the Czech Republic's most popular
and successful television station. In August 1994, CME took over CEDC's
interest in CNTS, which it has held since May 1997 through CME Czech
Republic B.V.
2. Commencement of Dispute and Attempt at Resolution
On July 23, 1996, citing a change in the Media Law, the Council
commenced administrative proceedings claiming that the arrangement
between CNTS and CET 21 amounted to an illegal transfer of the License.
This action was directly contrary to the structure that the Council had
approved a little more than three years previously for the express
purpose of fostering foreign investment within the framework of the
Media Law.
CME and CNTS opposed the Council's position in the administrative
proceeding as unfair and without any basis in law. An opinion from the
Institute of the State and Law of the Academy of Sciences of the Czech
Republic released on August 13, 1996 supported CNTS and CME's position
that the relationship initially approved by the Council was proper
under the Media Law, as amended. CME and CNTS nevertheless also began
negotiations to settle the dispute amicably. It was fundamental to
CME's position that any settlement could not substantively affect its
legal rights and the economics of its investment in the Czech Republic.
At the Council's insistence, CME was forced to accept a
modification of the terms of its MOA with CET 21. Under the new terms,
the language of the MOA in which CET 21 had contributed the ``right to
use'' the License on an exclusive basis was amended to provide that CET
21 contributed to CNTS the ``know-how'' connected with the License,
still on an exclusive basis. CME was repeatedly assured that this
change would not alter the basic economic position of the participants
in TV Nova.
At approximately the same time that the Council commenced
administrative proceedings against CNTS, the local investors in CNTS
began to sell their interests in CNTS to cash out their very
substantial profits from the early success of the venture. On July 17,
1996, zeska spozitelna a.s. sold its 22% interest in CNTS to CME,
raising CME's ownership share to 88%. Then, in December of 1996,
various local investors who indirectly owned a 5.2% interest in CNTS
through CET 21 sold that interest to CME. Dr. Zelezny, who acted as an
intermediary for that sale, further arranged for the pooling of all but
1% of the remaining Czech ownership of CNTS into a new entity known as
Nova Consulting a.s. (``Nova Consulting''). In conjunction with this
reorganization, Dr. Zelezny purported to increase his ownership
interest in CET 21 to a majority 60% share. On August 11, 1997, CME
purchased Nova Consulting's 5.8% interest in CNTS for US$ 28.5 million.
As a result of these transactions, CME had increased its ownership
interest in CNTS from 66% to 99%, and local investors, through CET 21,
retained only a 1% interest in CNTS.
In September 1997, having extracted the concessions regarding the
MOA from CNTS and CME, the Council dismissed the administrative
proceeding concerning TV Nova.
3. Continuation of Arbitrary and Discriminatory Actions by
the Czech Republic
Contrary to CME's belief in late 1997 that the revised arrangements
forced upon it by the Council would not adversely impact its investment
in the Czech Republic, the events that ensued proved the opposite. At
the instigation of influential Czech nationals (including principally
Dr. Zelezny), the Council has used its power unfairly and unreasonably
to undermine the value of the CNTS investment. In doing so, the Council
has discriminated against CME as a foreign investor by providing
favorable treatment for the business endeavors of the local investors
(and, in particular, Dr. Zelezny), who had sold their interest in CNTS
at great profit.
Relying on the changes in the MOA required by the Council, CET 21
and Dr. Zelezny, as the majority owner of CET 21, have recently taken
the position that CET 21 is not required to honor its partnership with
CNTS. In particular, they claim that CET 21 and CNTS do not have an
exclusive relationship. This claim is completely at odds with the
course of dealings the parties have followed from 1993 until October
1998, when CET 21 began to repudiate their longstanding arrangement.
CET 21 and CME always understood that CNTS, exclusively, would pay all
costs and provide all services associated with TV Nova. CET 21 and Dr.
Zelezny assert that a non-exclusive relationship is required by the
Council's reading of Czech law, and that the only right CNTS (or CME as
its 99% owner) has obtained as a result of contributing all of the
capital to create TV Nova is the right to compete with others for the
provision of services. For the past year, CET 21 and Dr. Zelezny have
been systematically repudiating all obligations to CNTS. These acts
culminated on August 5, 1999, when CET 21 ceased broadcasting TV Nova
with CNTS and announced that it would no longer obtain any services
from CNTS.
While Dr. Zelezny and CET 21 have been pursuing their campaign to
cripple CNTS for their own private profit, the Council has taken
actions and issued opinions that were supportive of and essential to
their efforts.
On March 3, 1999, Dr. Zelezny secretly wrote to the Council asking
it to confirm several legal opinions that CET 21 wished to advance, all
of which related to disputes between CET 21 and CNTS. On March 15,
1999, twelve days after Dr. Zelezny's letter, the Council responded. As
requested by CET 21, it took the unfounded position that agreements
between broadcast operators and service providers must be on a non-
exclusive basis. In issuing this opinion, the Council did not disclose
that it had received the secret communication from Dr. Zelezny or that
it was adopting almost word for word the views that Dr. Zelezny had
expressed in his March 3 letter. The Council's position in its March
15, 1999 letter was completely at odds with its 1993 approval of the
exclusivity arrangement that was the foundation for the investment of
foreign capital necessary to the formation of TV Nova.
As the scope of the rights of CNTS have become a matter of
increasing dispute, including much litigation over Dr. Zelezny's and
CET 21's entitlement to repudiate all rights of CNTS, the Council has
refused to take actions that responsibly address the situation it was
instrumental in creating. Its inaction has amounted to a failure to
protect the legitimate interests of the foreign investors. On July 26,
1999, the Council informed the Czech parliament that it considers the
current dispute to be of a merely commercial nature that should be
resolved privately between CNTS and CET 21, a position that improperly
takes no account of the critical role the Council has played by its
disavowal of its original formal approval of CNTS's exclusive right to
use the license.
The Council's actions have violated the Treaty and have contravened
its purpose. The terms to which the Council agreed in 1993 were pivotal
in leading CME to invest tens of millions of dollars into the Czech
Republic. Once the local investors cashed out their positions in CNTS,
causing their interests to diverge from Mr. Lauder's interests, the
Council further took steps to benefit the local investors at Mr.
Lauder's expense. As a result of the Council's earlier actions and its
current refusal to remedy the situation, CNTS's business activity has
come to a standstill, thus wholly undermining the value of Mr. Lauder's
investment in violation of the terms of the Treaty.
Despite the efforts made on behalf of Mr. Lauder, the dispute has
yet to be resolved satisfactorily. Mr. Lauder remains open to, and
would welcome, an amicable settlement of this dispute. However, in
light of the fact that the dispute has not been amicably settled over
several years to date, and given the urgency the dispute has taken on
as a result of the Council's recent behavior and the recent halt of all
business activities of CNTS, it has become necessary to file this
Notice of Arbitration.

III. WHAT ARBITRATION CAN DO
Mr. Lauder has requested that the Tribunal provide the relief
necessary to restore CNTS's exclusive rights to provide broadcasting
services for TV Nova and thereby restore to his the economic benefit
available under the arrangement initially approved by the Council. To
this end, the Tribunal has been requested to order the Czech Republic
to take such actions as are necessary to restore the contractual and
legal rights associated with the claimant's investments. Among other
things, the Czech Republic should:

a. be ordered to impose conditions on the License that
adequately reflect and secure CNTS's exclusive right to provide
broadcast services and its right to obtain all corresponding
income in connection with the operation of TV Nova;

b. be required to enforce such conditions, including by
revoking the License and reissuing it to CNTS or to such other
entity and under such other circumstances as would restore the
initial economic underpinnings of Mr. Lauder's investment; and

c. be held liable for the damages Mr. Lauder has incurred to
date, in an amount to be determined by the Tribunal, taking
into account, among other factors, the fair market value of Mr.
Lauder's investment prior to the breaches of the Treaty.

The relief requested comports with the international law of state
responsibility and is consistent with the calculation of expropriation
damages in the Treaty. Article 111(1) of the Treaty indicates the
compensation required in the event that an investment is expropriated
or nationalized (directly or indirectly) in a manner that is based on a
valid public purpose, accords with due process and is not
discriminatory. In such cases, the ``compensation shall be equivalent
to the fair market value of the expropriated investment immediately
before the expropriatory action was taken or became known; to be paid
without delay; include interest at a reasonable market rate; and be
freely transferable at the prevailing market rate of exchange on the
date of expropriation.''
1. In this case, while no official expropriation has been
announced, the Czech Republic, through the actions of the Council, has
deprived Mr. Lauder of the entire value of his investment without
complying with the standards of fairness, non-discrimination and due
process set forth in the Treaty. If an investor is entitled to the fair
market value of its investment for an expropriation that comports with
due process, is nondiscriminatory and serves the public interest, Mr.
Lauder must be entitled to at least the same remedy in the
circumstances presented here.

A Chronology of Events in the TV NOVA Scandal
------------------------------------------------------------------------

------------------------------------------------------------------------
Oct. 1991......................... Czechoslovakia enters a bilateral
investment treaty with the United
States.
1992.............................. Central European Development
Corporation (``CEDC''), a
predecessor company to CME,
negotiates an agreement with
Vladimir Zelezny (``VZ'') and
others prescribing a business
relationship between CEDC and CET
21, whereby the parties would
jointly apply for the Czech
Republic's first nationwide private
television license.
Feb. 3, 1993...................... CET 21 and CEDC enter into an
agreement entitled ``Overall
Structure of a New Czech Commercial
Television Entity.'' The agreement
provides for the formation of a new
company--CNTS--that would be the
``only'' company to run the
television station. In addition,
CET 21 and CEDC agree that
``neither party has the authority
to broadcast commercial television
without the other.''
Feb. 5, 1993...................... CET 21 and CEDC enter into a second
agreement on the structure of a
Czech Commercial Television Entity.
As with the Feb. 3, 1999 Agreement,
the Council for Radio and
Television Broadcasting (the
``Media Council'') is notified of
this Agreement and included in its
official file. Both the Feb. 3 and
the Feb. 5 Agreement are referred
to in the license granted to CET 21
and CEDC.
Feb. 9, 1993...................... The Media Council issues the Czech
Republic's first nationwide private
television license to CET 21. The
license acknowledges CEDC's
``substantial foreign capital
participation'' and CEDC's
partnership with the license
holder.
April 1993........................ CET 21 and CEDC agree on a
Memorandum of Association (``MOA'')
for the creation of CNTS. Under the
MOA, CET 21 contributes to CNTS the
right to use the license
``unconditionally, unequivocally,
and on an exclusive basis''; CEDC
contributes 75% of the capital that
CNTS needs; and Ceska sporitelna
(``CS'') Bank contributes the
remaining 25%. In return, CET 21
has a 12% interest in CNTS; CEDC
has a 66% interest; and CS Bank has
a 22% interest.
April 21, 1993.................... The Media Council approves the MOA.
1994.............................. CEDC transfers its interest in CNTS
to CME.
Feb. 2, 1994...................... CET 21 and CNTS begin broadcasting
TV Nova, which becomes the Czech
Republic's most widely watched and
successful television station.
Late 1995 or Early 1996........... VZ approaches CNTS claiming that a
modification of the MOA is
necessary because as written it
amounts to an illegal transfer of
the license from CET 21 to CNTS.
Jan. 1996......................... The Czech Parliament amends the
Media Law to more clearly
distinguish license-holders and
service providers.
July 23, 1996..................... The Media Council commences
administrative proceedings
concerning TV Nova, arguing that
the arrangement between CME and CET
21 is impermissible.
Aug. 1996......................... CME, at the request of CS Bank,
acquires CS Bank's interest in
CNTS. Resulting ownership of CNTS:
CME = 88%; CET 21 = 12%.
Oct. 4, 1996...................... VZ acknowledges, in a letter to the
Media Council, that CET 21 ``has no
authorization'' to broadcast
without the ``direct participation
of CEDC,'' pursuant to the
agreements reached when CNTS was
formed.
Nov. 14, 1996..................... VZ offers assurances that CET 21 and
CME can change the language of the
MOA to satisfy the Media Council
without affecting business
arrangements between the parties in
any way. Following negotiations
with the Media Council, CET 21 and
CME modify the MOA so that CET 21
now contributes the ``know-how''
connected with the license, still
on an exclusive basis.
February 1997..................... CET 21 amends its Memorandum of
Association to increase VZ's
ownership interest to 60%.
Aug. 96-Apr. 97................... With VZ acting as an intermediary,
CME purchases a 5.2% interest in
CNTS from owners of CET 21. During
this same time period, CET 21
owners pool an additional 5.8%
interest in CNTS and transfer this
to Nova Consulting. Resulting
ownership of CNTS: CME = 93.2%;
Nova Consulting = 5.8%; CET 21 =
1%.
May 21, 1997...................... As a result of pressure from the
Media Council and at the
recommendation of VZ, CNTS and CET
21 enter into a Services Contract,
which makes CNTS ``the exclusive
object of the rights and
obligations arising during its
activity.'' The contract provides
that CNTS shall incur all costs of
providing services to CET 21 and,
in return, shall collect all of TV
Nova's advertising, sponsorship and
other revenues, with 100,000 CzK
per month going to CET 21.
Aug. 1997......................... CME considers taking CNTS public in
the Czech Republic, but its
advisers later recommend against
doing so based on market
conditions, the likely valuation of
CNTS, and other considerations. VZ
concurs in this recommendation.
Aug. 11, 1997..................... CME and VZ enter into a Share
Purchase Agreement, pursuant to
which CME purchases for $28.5
million the 5.8% interest in CNTS
held by Nova Consulting. In the
discussions leading up to the
Agreement, VZ threatens that if CME
does not purchase this interest, he
will transfer it to third parties
of questionable repute. He also
refuses to accept payment in CME
shares. The agreement includes
broad non-compete and non-
solicitation covenants by VZ.
Resulting ownership of CNTS: CME =
99%; CET 21 = 1%.
Sept. 16, 1997.................... Acknowledging the execution of the
amended MOA and the Services
Contract, the Media Council
dismisses the administrative
proceeding concerning TV Nova.
Jan.-Apr. 1998.................... AQS, a competing program acquisition
company controlled by VZ, is
established. VZ causes CET 21 to
enter into an agreement with AQS
for the purchase of foreign and
domestic programs.
Sept.-Oct. 98..................... VZ represents TV Prima, TV Nova's
primary competitor in the Czech
market, in discussions involving
the possible acquisition of TV
Prima by SBS Broadcasting.
Sept.-Oct. 98..................... All employees in the CNTS program
acquisition department move to AQS.
VZ announces AQS as the ``exclusive
programme acquisition arm'' for TV
Nova, which would ``fully replace
CNTS.'' VZ issues an unauthorized
guarantee from CNTS, securing all
obligations incurred by AQS in
connection with program
acquisitions in the Czech Republic.
VZ grants AQS an unauthorized power
of attorney from CNTS to enter
acquisition agreements.
Late 1998......................... In negotiations with CME, VZ seeks
to replace the existing Services
Contract with multiple new services
agreements limiting CNTS
compensation for services provided
to CET 21.
Mar. 3, 1999...................... VZ writes to the Media Council
asking it to confinn several legal
opinions of CET 21, all of which
relate to disputes between CET 21
and CNTS.
Mar. 15, 1999..................... The Chair of the Media Council
writes back to VZ adopting
virtually all of the opinions in
VZ's letter, including the
assertion that relationships
between a broadcasting operator and
a service organization are built on
a non-exclusive basis.
April 1999........................ VZ personally signs and causes to be
filed with Czech Trademark Registry
nearly 200 certificates of transfer
purporting to convey, from CNTS to
CET 21, registered trademarks and
applications for trademarks for
various important products and
services owned by CNTS. Upon
objection by CNTS, VZ withdraws the
certificates.
April 19, 1999.................... VZ is dismissed as General Director
and Executive of CNTS.
April-May 1999.................... VZ works to establish a new company
to provide CET 21 with services for
the operation of TV Nova, making a
public announcement of his plans at
the beginning of June.
April 26, 1999.................... VZ's attorney writes to distributors
informing them that AQS is the sole
program acquisition entity for TV
Nova and stating that ``[o]nly
programming purchased by AQS, a.s.
will be broadcast on the channel TV
Nova.''
May-June 1999..................... VZ (personally and through his
agents) solicits CNTS employees,
telling them to tender their
resignations before June 30, 1999,
so as to be able to start work at
VZ's new services company by
September.
May-July 1999..................... VZ (through his attorney) writes to
CNTS stating that CET 21 should
receive all of TV Nova's
advertising revenue. VZ and his
attorney threaten to dissolve CET
21's contractual relations with
CNTS unless CNTS agrees to
relinquish advertising revenues by
August 15.
June 1999......................... VZ unveils ``magic contracts''
(previously unknown to CME),
including: (1) a purported Annex to
the CNTS-CET 21 Services Contract,
under which CNTS is only entitled
to receive advertising revenues
corresponding to the amount of
services CNTS provides to CET 21;
and (2) a ``General Agreement on
the Transfer of Copyrights''
between CNTS and CET 21, which
appears to have the purpose of
allowing CET 21 to re-invoice CNTS
for the fees paid to AQS for the
purchase of programs.
June 10, 1999..................... VZ announces the establishment of
Czech Production 2000 (``CP
2000''), a new services company
formed for the express purpose of
``stimulating competition'' with
CNTS. VZ obtains funding for CP
2000 through a loan from IPB Bank,
a Czech Bank that owns the license
holder for TV Prima.
June 11, 1999..................... CET 21 enters into an agreement to
transfer its 1% interest in CNTS to
Produkce, prompting legal action by
CNTS.
June 12, 1999..................... VZ causes the TV Nova broadcasting
signal to be diverted from CNTS
studios during the ``Call the
Director'' talk show, thus making
it temporarily impossible for CNTS
to broadcast TV Nova programming.
June 29-30........................ 147 out of 500 employees resign from
CNTS.
July 1, 1999...................... VZ causes CET 21's Memorandum of
Association to be amended; the
intended result of the change was
to reduce his control over the
company.
July 1999......................... VZ and CP 2000 announce that they
are nearly ready to take over CNTS'
entire role in TV Nova.
July 20, 1999..................... The Media Council announces that no
media laws have been broken to date
in the dispute over TV Nova.
Aug. 5, 1999...................... VZ, citing the failure of CNTS to
provide CET 21 with TV Nova's play
list for that day, cancels the
Services Agreement. VZ announces
that he will henceforth broadcast
TV Nova without CNTS and announces
that CP 2000 is now purchasing
advertising for TV Nova. (He later
announces that yet another company,
Mag Media 99, will assume these
functions.) CNTS employees are
idled.
Aug. 5, 1999...................... CNTS requests that the Media Council
call an extraordinary session to
address VZ's latest action. A
representative of the Media Council
publicly states that the Media
Council intends to consider the
dispute at its scheduled meeting on
August 17, 1999. Despite this
statement, the Council takes no
further action.
Aug. 6 and 13, 1999............... CNTS again requests that the Media
Council address the wrongful
conduct of VZ and CET 21. Among
other requests, CNTS calls on the
Council to commence proceedings to
revoke CET 21's license.
Aug. 23, 1999..................... Ronald S. Lauder, as a shareholder
with voting control over CME,
initiates an arbitration claim
against the Czech Republic based on
violations of the Bilateral
Investment Treaty between the
United States and the Czech
Republic.
Aug. 23, 1999..................... The Chairman of the Media Council
states that the dispute is merely a
commercial matter that must be
settled by the courts.
Sept. 9, 1999..................... As a result of VZ's repudiation and
the Media Council's continued
inaction, CNTS is forced to suspend
its technical and production
operations and dismiss over two
hundred employees. Fifty more
employees are dismissed several
weeks later.
Nov. 10, 1999..................... The arbitral tribunal in CME's
arbitration against VZ grants an
interim order directing VZ to take
steps to restore CNTS to its prior
position as an exclusive provider
of critical services for TV Nova.
Among other things, the order
requires VZ to sever all dealings
between CET 21 and other service
providers and to resume exclusive
relations with CNTS in the areas
where CNTS was previously providing
these services, including program
acquisition, programming and
broadcasting services, and
brokerage of advertising and
receipt of advertising revenues.
The order is to remain in effect
until the tribunal directs
otherwise.
Nov. 10, 1999..................... VZ begins a campaign trumpeting his
refusal to comply with the arbitral
tribunal's interim order.
Dec. 8, 1999...................... CME applies to the arbitral tribunal
for a partial final award embracing
the terms of interim order and
imposing substantial fines against
VZ for his non-compliance with the
order.
Dec. 21, 1999..................... The Media Council approves a scheme
to increase CET 21's share capital
that is subsequently implemented by
VZ and CET 21. As a result of the
scheme, VZ's interest in CET 21 is
reduced (at least on the surface)
from 60% to 11.8%, while his close
associates receive substantial
interests in the company in
exchange for token consideration.
The Media Council grants the
approval despite having received a
copy of the tribunal's interim
order, and despite the widespread
understanding that the purpose of
the scheme is to frustrate
enforcement of the interim order by
nominally divesting VZ of control
over CET 21, and to shield his
assets from any final award of
damages.
Jan. 19, 2000..................... The Czech State Attorney's Office
concedes that local police and
prosecutors have improperly handled
criminal complaints filed by CNTS
concerning, among other things,
VZ's fabrication of contracts
purporting to transfer valuable
CNTS assets to CET 21. At the same
time, the Office denies it has any
ability to direct the local offices
to take further action.
Feb. 22, 2000..................... CME (as a Dutch entity owning an
investment in the Czech Republic)
initiates an arbitration proceeding
against the Czech Republic based on
violations of the Bilateral
Investment Treaty between the
Netherlands and the Czech Republic.
------------------------------------------------------------------------

Senator Smith. Ron, that is an incredible story. I wonder
if you can tell me, is our Government, our State Department
beginning any of the steps you suggested? What efforts are
being undertaken to sort of go above, I guess, what--the delay
in the courts of the Czech Republic is, you are saying that is
sort of indefinite.
Mr. Lauder. I think the feeling of the Czech Government is
that they do not fear the State Department. I think what we are
seeing over and over again in Eastern Europe and other places
is that if something happens to an American citizen, if he is
put in jail, the State Department will immediately react. The
reaction is quite different when it is something economic. So
the question is, what can be done?
I know there have been many, many conversations the State
Department had with the Czech Government in private. I think it
is very important that it be said in public. Let us be a public
example. Also, there is nobody, no citizen today in the Czech
Republic that does not understand what is happening, and what
happened to TV Nova.
Senator Smith. Is this story about TV Nova widely known in
the Czech Republic?
Mr. Lauder. I would say that there is nobody in the Czech
Republic who does not know the story. It has been carried on
all the media. And what has happened is, they have said to
themselves this government is no different from the former
governments in that the rule of law does not apply. The right
people are above the law. Everyone knows what happened. And
they watch the U.S. Government not be able to make a change,
and they watch the Czech Government stand on the side. The
Czech Government could change this instantly if they wanted to.
Senator Smith. Your feeling is the popular opinion in the
Czech Republic does not support what happens, but perhaps feels
powerless to do something?
Mr. Lauder. I think the Czech people want to see excellent
television. And they do not care, frankly, who puts it on.
Senator Smith. And they are not seeing that any more?
Mr. Lauder. They are seeing excellent television, but it is
being put on by a stolen TV station. The result is that they
also have seen that somebody can ignore the law and be
successful. It sends a message. It sends a message not only in
the Czech Republic, it sends a message throughout the region,
and I think that is the critical element.
And frankly I think that in this region I am probably one
of the best-known people because I have been there first. And I
believe if this could happen to me, then it could happen to
many, many other companies and probably has. They have been
either too small, or they have had such excellent business
elsewhere to complain about it. But I believe if it is
happening here, it is happening all over.
Senator Smith. So you are not here to recommend more U.S.
investment in the Czech Republic today.
Mr. Lauder. I am here to recommend that the State
Department--I heard a few minutes ago about the CEPA, I guess
it is called, where the State Department is recommending giving
even more favorable terms to that region. I think instead of
rewarding them for what they are doing they should be--in fact
the money should be cut back from them.
I think at the same time that they are not following the
rule of law, it is a mistake to be putting money into EBRD and
putting money into one thing after another, funneling money
into it. We, after all, watched what happened in Russia
sometime ago. This is similar things happening on a smaller
scale in the Czech Republic.
The person from the State Department spoke about a bank
that just failed. The reason why that bank failed is--it is
called the IPB bank--was that money was tunneled out of it. It
was taken out. Literally, one asset after another was tunneled
out, with the government's knowledge, and the bank failed.
Again, there are many other examples.
Senator Smith. It is interesting, we received from the
Czech Embassy an article today that was run in the Financial
Times in the Czech Republic, and it says growth was driven by
exports to Western Europe as well as the first increase in
fixed capital investment for 11 quarters. Economists said
foreign direct investment was the force behind both
developments, with a record inflow expected again this year,
after last year's $4.8 billion, the highest per capita figure
in the region.
And there is a quote, ``we are still living in a two-speed
economy. One part is on the brink of bankruptcy, but a rising
group of companies with the help of foreign investors are now
performing reasonably well,'' and I will include that for the
record.
[The article referred to follows:]

[From the Financial Times (U.S. Edition), Tuesday, June 27, 2000]

Czech Recovery Hopes Grow

(By Robert Anderson in Prague)

The Czech economy is on the road to recovery, gross domestic
product figures showed yesterday, with strong west European demand and
record foreign direct investment making up for weak consumer spending
and long-delayed corporate restructuring.
GDP increased by 4.4 percent year-on-year in the first quarter--
double that expected by many economists--representing the first robust
period of growth since the economy began to pull out of recession in
spring last year. Compared to the previous quarter, seasonally adjusted
GDP grew 1.3 percent.
Alone among the leading economies of central Europe, the Czech
Republic went into recession in 1998-99 after a currency crisis and
subsequent tightening of monetary and fiscal policy exposed and
intensified structural problems in the financial and corporate sectors.
Yesterday's figures give hope that the economy will converge with the
European Union, rather than fall further behind.
However, economists warned that overall growth this year was still
likely to reach only 2.5 percent at best because the rise in the first
quarter was exaggerated by the low base last year, more working days
and increased inventories.
``There are some positive signals but I would not dare in saying
that we are back on track for strong sustainable growth,'' said Pavel
Sobisek, chief economist of Bank Austria Creditanstaft.
Growth was driven by exports in western Europe as well as the first
increase in fixed capital investment for 11 quarters. Economists said
foreign direct investment was the force behind both developments, with
a record inflow expected again this year after last year's $4.88bn, the
highest per capita figure in the region.
Although there is no sign yet of overheating, economists said the
precarious state of many large corporates and banks--as well as
institutional deficiencies such as the poor legal framework--would
continue to hamper growth.
``We are still living in a two-speed economy,'' said Mr. Sobisek.
``One part is on the brink of bankruptcy, but a rising group of
companies, with the help of foreign investors, are now performing
reasonably well.''
Kamil Janacek, chief economist of Komercni Banka, said the credit
squeeze and recession had accelerated industrial restructuring, with
productivity now rising four times faster than real wages. This should
help growth next year reach up to 4 percent. ``From next year there is
a strong probability we will again be catching up with the EU,'' he
said.

Senator Smith. Ron, thank you, and we will use the
influence of this committee to try and spur the interest of
American citizens and to make sure that everybody plays by
rules that we recognize as Western and as honest and available
to the light of day. Those are the things that will either
advance world prosperity or retard it, and we wish it to be
advanced everywhere in Eastern and Central Europe.
Mr. Lauder. All we want is transparency and the rule of law
and, frankly, our station back.
Senator Smith. And anything less than that will lead us
backward.
Mr. Jenkins, welcome, sir.

STATEMENT OF MR. KEMPTON JENKINS, PRESIDENT, UKRAINE-UNITED
STATES BUSINESS COUNCIL, WASHINGTON, DC

Mr. Jenkins. Mr. Chairman, thank you very much. It is a
poignant moment for me to be back in this august chamber. I
first came here to argue with Senator Fulbright about
maintaining Radio Liberty and Radio Free Europe. That was a few
years ago, as you can imagine.
I also want to take note immediately of your comments about
the Department of Commerce's absence, which I deeply regret. I
used to direct that part of the Commerce Department, and I know
there is a great reservoir of talent and knowledge about
Central Europe. It is their prime responsibility, not the State
Department's, to deal with business disputes, commercial
disputes such as Ron has experienced, which are not unique.
What he describes is particularly gruesome, I think, but there
are similar tales throughout the area.
I also want to comment on European Union pressure on the
countries of the area. I have experienced that in all of the
various responsibilities I have had in that area over the last
20 years. It is common practice for these governments to be
told by the Europeans, in some cases rather bluntly and in
others rather delicately, that you had better remember which
side your bread is buttered on when it comes to letting these
contracts.
I know that IBM had problems in Poland, and certainly I
have run into this in the Ukraine, where Ukraine, which aspires
to be an EU member, has been told in various ways in various
cases that these contracts better go to German or French
companies, not American companies. I guess that is competition.
I do not like it very much, and I am delighted that the State
Department representative said that they do weigh in and are
weighing in with the EU.
I am not sure that it does not need a somewhat higher level
initiative on our part to be sure that it gets the attention it
deserves. After all, we may be engaged in a more modified
effort to improve conditions in Eastern Europe today, but we
were the givers of the Marshall Plan who put the Europeans in
business, and occasionally I think they need to be reminded of
that.
Having said that, I want to introduce myself briefly, and
then I will make a few comments and submit my full statement
for the record.
Senator Smith. We will receive that, and we thank you, and
just for your notice I am told there are four stacked votes
beginning at 3:30, and that is 20 minutes away, which probably
means we have about 30 minutes for the balance of the hearing.
Mr. Jenkins. I will try to leave half of that for Peter.
I am Kempton Jenkins, president of the Ukraine-U.S.
Business Council. We have some 40 major U.S. corporations who
are doing or trying to do business in Ukraine. Our members have
had very varied experiences in Ukraine, which illustrate both
the potential of this entire rich market and the barriers and
the frustration of bringing that potential to fruition.
Ukraine is a country of 51 million people. It is 95-percent
literate. It possesses what is agreed to be the richest farm
soil in the world, and it has long experience as the Soviet
Union's aerospace center, with a concentration of scientific
talent.
Today, it is led by President Kuchma and Prime Minister
Yuschenko, and for the first time in its history a majority in
the legislature who are all committed to economic reforms. This
triad of political leadership came into being in December and
we have seen some very significant progress already and are
very hopeful that we are looking at the kind of blossoming in
Ukraine which the State Department representatives spoke of.
Prior to becoming president of the council, I was a
consultant to the Government of Romania, which had many of the
same problems, and I worked on them to try and get them to
introduce the rule of law and transparency and predictability
and so forth. I was a corporate vice president of ARMCO, which
is a major American steel company, for 10 years and I was
president of the former U.S.-Soviet Trade Council when I first
left government in 1980. For 30 years prior to that I was a
career Foreign Service officer, with more than 15 of those
years dealing with the Soviet Union and Eastern Europe.
In my written testimony I lay out both the region-wide
barriers and, in discussing Ukraine specifically, I provide
individual company-by-company score cards for some of the
successes and some of the failures, and there are many of both.
I am heartened by the successes, and I am discouraged by
the failures, but we have a very good ongoing dialog with the
Ukrainian Government and with the U.S. Government, and I am
optimistic that we are going to continue to see success
outnumber or eventually overcome the failures.
From my perspective, which is fairly broad and long, I
believe that Central and Eastern Europe today offer a very rich
opportunity for us to participate in the inevitable development
of these economies into a truly prosperous area. It seems clear
that it is very much in the national interest of the United
States to see that happen. After decades of irrational economic
policies, it is hardly surprising to me, and what Ron is
experiencing and I gather Peter, too, would have been almost
predictable.
The road to progress is erratic. It is going to be rocky.
It is, after all, only a decade since the Soviet Union
collapsed, and that is not much time for a transition from
Marxism-Leninism to free markets.
We believe, and I think I speak for all of my corporations,
and I know it is generally agreed within the U.S. Government,
that it behooves us to stay the course. Certainly our members
share the expectation that there is great potential out there.
I would like to simply stress a few additional points, and then
let the record speak to the details.
I want to praise the committee for its decision to focus on
this critical part of the world and the recognition that
foreign investment and the conditions which promote foreign
investment are, in fact, critical and central to the progress
we want to see in Central and Eastern Europe. Without it, in my
judgment, and I think everybody would agree, there is little
hope for real democracy, and all of the conditions that that
means, to grow.
There is a stark difference between individual countries.
This is not one area with a uniform set of problems. There is a
set of problems, and they do occur. Frequently they occur in
one country or another, or eventually in all of them, but there
is a big difference in the success and the progress they have
made.
I am distressed to anticipate what Peter's problems in
Poland may have been, and certainly the Polish performance in
the EU question, where they have been really pretty aggressive,
because they have had a dramatic economic recovery, and
comparing that to Byelorussia gives you the parameters of the
development in the area.
Byelorussia is still in the 18th century at this point, and
I do not see much hope under the present political leadership,
but the Poles really have accomplished a great deal, and their
economy has really grown a lot. The standard of living is up.
Politics are more open, predictable, and democratic.
I think it is also important to stress that we are talking
about investment, not domestic or foreign investment. Both are
necessary. If you have the rule of law in the Czech Republic
you will have Czech capital return to the Czech Republic. There
is more money out there for these countries which has flown
from them, especially in the case of Russia, than the
international institutions or the meager AID budget can ever
provide to these economies, so investment conditions both
domestic and foreign are what we are talking about.
Senator Smith. You really cannot fool the marketplace. That
is the thing I continue to impress upon European leaders. You
cannot kid the market. It will react and it will move if you do
not have transparency and a rule of law, things that we just
take for granted, but unfortunately that lesson has yet to be
learned, I guess.
Mr. Jenkins. Well, that is one of the points I wanted to
make. It is very difficult for these countries and the leaders
of these countries, and I know several of them, to really
ingest the reality that they are competing with Mexico and
Brazil and Korea. They are not just competing with Hungary and
Bulgaria. They come from such sheltered or limited backgrounds
that they have not really developed an appreciation of that
yet. It is coming. It takes time, and implementation is much
more difficult than actually understanding it.
President Kuchma in Ukraine fully appreciates this fact
today, and he is driving very hard to implement that
understanding within Ukraine. It is taking a long time, but
today's Ukraine is only 9 years old, and I think we have to
keep that in mind.
The other side of this is that Ukraine is also a huge
marketplace and in potential value to the United States and the
American business community it far exceeds a number of markets
in the rest of the world, where we tend to concentrate our
activities today. So I think Ron's foresight in moving into the
television market in that part of the world is to be commended,
and notwithstanding your Czech experience Ron I hope you are
still there. During President Clinton's recent visit to Kiev,
his speech was carried on the television station you have an
investment in.
Senator Smith. It is to be commended not to be confiscated.
Mr. Jenkins. That is true. I think it is very important
also to recognize that these markets are not for the timorous
or short-term investors.
Senator Smith. Can you tell me, Mr. Jenkins, in your
opinion would it be productive or unproductive for us to grant
permanent normal trade relations to Ukraine?
Mr. Jenkins. I am glad you raised that. I was going to
raise it if you did not. I think it borders on the obscene that
we have played such a political game with this issue. I think
it is very important to recognize and acknowledge and graduate
countries who in fact have lived up to the purpose of the
Jackson-Vanick amendment which was passed on my watch in the
State Department. I understand it completely. It played a
constructive role at a certain point.
Today, Ukraine is as free of anti-Semitism as the United
States is, in my judgment, and I think that needs to be
acknowledged. Not a lot of trade hard dollar effect would occur
from this. President Kuchma when he was here 8 months ago met
with members of the House International Relations Committee. He
said, I am embarrassed that here we are, an outpost of
democracy in Central Europe, but we are still treated as though
we were North Korea.
I am disappointed the President did not take that
``deliverable'' with him when he went to Kiev. I think it is
very important that we step up on that subject and move it. I
know there is support. I have talked to members of the House
Ways and Means Committee. I have talked to Members on the
Senate side, and my hope is that this will happen quickly, but
the administration should take the lead. I think what they are
doing is playing a little bit of politics. They do not want to
irritate Moscow by giving permanent MFN to Ukraine first.
Moscow continues to have a serious problem with anti-
Semitism, Ukraine does not, and I think it would incentivize
the Soviets--the Russians, excuse me, or the Soviets within
Russia who continue to pursue these terrible policies to see
Ukraine acknowledged by the United States. It is not a reward,
it is an acknowledgement, and so I am pleased you raised that.
I firmly believe that is a desirable thing to do.
Let me quickly wrap up, if I might, sir. I think basically
these markets are worth the candle. I do not think we cannot be
there. I think American corporations generally have recognized
that. I think it is important to be very hard-nosed and gradual
in the approach. Go in small. Develop relations. Train a staff.
Make a small investment and then grow it.
People who go in with a $300 million investment are going
to lose their shirts.
Senator Smith. You make an interesting point that we need
to be in there. Do they know we need to be in there, and does
that work to our disadvantage in their knowing that?
Mr. Jenkins. I think that varies from country to country. I
think the new members of NATO are now so self-satisfied that
they have made the cut that they do not have that same urgent
feeling of how important it is for the United States to be
actively participating in their investments. In the Ukraine,
that is not true.
Senator Smith. The point you make I wish I could broadcast
to the whole world, or at least all of Eastern and Central
Europe, is that they are competitors for American capital. I
mean, it is Brazil, it is Mexico, it is everywhere that you
have an emerging economy.
Mr. Jenkins. Well, I am convinced that on the whole we are
on the right path. I think the policies and actions and
implementation thereof by our own administration in partnership
with you, the Congress, could be more effective.
As Ron pointed out, he has found the State Department's
representation a little too delicate to be effective, and I
think that simple bureaucratic contradictions and policies and
legislation reflecting our own domestic political interests
frequently combine to undermine our overriding national
security interest in the economic development of the area. My
hope is we can improve the coherence of this policy and our
resources and harness them more effectively to promote the
investment climate in the entire area.
From our vantage point U.S. programs today are too diverse.
They are seeking a wide range of desirable goals, from
democracy and gender equality to child labor laws,
environmental and education goals. In reality, the climate for
such societal improvements must be based on economic progress,
for which investment both foreign and domestic is central, and
I would like to see--there are a number of steps other than
permanent MFN I would be happy to talk about, but for Peter's
sake I am going to save some time.
[The prepared statements of Mr. Jenkins follow:]

Prepared Statement of Kempton Jenkins

INTRODUCTION
Mr. Chairman, I am Kempton Jenkins, President of the Ukraine-U.S.
Business Council, a group of some 40 major U.S. corporations doing or
hoping to do business in Ukraine. Our members have had varied
experiences in Ukraine which illustrate both the potential of this
entire rich market and the barriers and frustration of bringing that
potential to fruition. Ukraine is a country of 51 million people, 95%
literate, possessors of what is agreed to be the richest soil in the
world, and with a long experience as the Soviet Union's aerospace
center with its concentration of scientific talents. And today is led
by President Kuchma, Prime Minister Yuschenko and for the first time a
majority in the legislature all committed to economic reforms.
Prior to taking the chair as President of the Council, I have been
a consultant to the Government of Romania, Corporate Vice President of
ARMCO a major American steel company, President of the former U.S.-
Soviet Trade Council, and for 30 years, a career Foreign Service
officer with more than 15 of those years dealing with the USSR and
Eastern Europe.
I firmly believe from this perspective that Central and Eastern
Europe offer a rich opportunity for U.S. and other Western corporations
to participate in the inevitable development of these economies into a
truly prosperous area. It seems clear that it is very much in the
national interest of the United States to see that occur. However,
after decades of irrational economic policies, it is hardly surprising
that the road to progress now is erratic and often very rocky. It has
only been a decade since the Soviet collapse--for a transition from
Marxism--Leninism to free markets. We believe it behooves us to stay
the course. Certainly our members share the expectation that there is
eventually a bright future.
I would like simply to stress a few additional points and submit my
detailed statement for the record.
I want to praise the committee for its decision to focus on this
critical part of the world and implicit recognition that foreign
investment, and the conditions which could create incentives for
investment constitute the most important key to producing viable,
democratic members of a new Europe. Without such investment, critical
economic development will continue to lag, and political commitment to
democracy will continue to be frustrated.

TREATMENT OF U.S. BUSINESS--INVESTMENT CONDITIONS--VARIES SHARPLY AMONG
THESE COUNTRIES
A stark contrast between Poland's unprecedented economic
development today and the stagnation in Byelorussia serve to emphasize
this point: Investment is the cardinal requirement for genuine economic
development. Governments do not invest, corporations do. The countries
of Eastern Europe and Central Europe succeed to the degree that they
effectively establish business conditions which attract corporate
investment, both foreign and domestic.
These nations are in fact in an intense global competition--to-date
few have acted to aggressively engage, such as Poland has so
successfully done.
Long-Term Outlook Essential
Engagement in these markets is not for the faint-hearted nor short-
termers. Predictability and transparency run directly contrary to the
Soviet culture which prevailed for decades. Western and especially
American businessmen are too prone to continue to pick a favorite
politician in a given country--a president who is accessible, while
ignoring the emerging array of businessmen and even legislators who
represent the future--in short, the need to build a diversified
business presence is very important.
U.S. Corporations Much More Sophisticated Today
Fortunately, U.S. corporations today are sophisticated and far-
sighted, in contrast to 20 years ago when as a U.S. Government official
I found our timorous companies often out-strategized by European and
Japanese competitors who inevitably benefited from their governments'
subsidies. Generally speaking, there is now recognition that one must
start small, build ties and access, create local management structures
and plan in a multi-year framework.
Challenges Not Really a Lot Different Than in Today's Third World
Market
It is important for us to recognize, as corporations have, that the
barriers and frustrations we experience in Central Europe, are often
even worse in other major markets where they have been operating--e.g.
India, Indonesia and Brazil.
Finally I wish to say that it is my firm belief that these markets
are decidedly worth the effort. As illustrated by Ukraine, basic
positives are impressive--large educated population, strategically
located and rich in natural resources. U.S. Government policy can
effect the problems at the margin, and more could be done. But, I
believe we will see economic progress in these countries, undergirding
democratic regimes which become valuable members of Western Society.
And I believe U.S. business will play a critical role in producing this
happy result.
In closing, Mr. Chairman, it is also my judgment that the policies,
actions, and implementation there of by our Administration in
partnership with our Congress could be more effective. In some cases
simple bureaucratic contradictions and in others, policies and
legislation reflecting special domestic political interests, often
combine to undermine our overriding national security interests in the
economic and political development of this critical area. My hope is
that we can improve the coherence of our policy and our resources and
harness them more effectively to promote the investment climate for the
entire area. From our vantage point, U.S. programs today are too
diverse, seeking a wide range of desirable goals, from democracy and
gender equality, to child labor laws, environmental, and education
goals. In reality the climate for such societal improvements must be
based on economic progress for which investment both foreign and
domestic is central.

______

Additional Statement of Kempton Jenkins

INTRODUCTION
Mr. Chairman, I am Kempton Jenkins, President of the Ukraine-U.S.
Business Council, a group of some 40 major U.S. corporations doing or
hoping to do business in Ukraine. Our members have had varied
experiences in Ukraine which illustrate both the potential of this
entire rich market and the barriers and frustration of bringing the
potential to fruition. Mr. Chairman, Ukraine is a country of 51 million
people, 95% literate, possessors of what is agreed to be the richest
soil in the world, and with a long experience as the Soviet Union's
aerospace center with its concentration of scientific talents.
Prior to taking the chair as President of the Council, I have been
a consultant to the Government of Romania, Corporate Vice President of
a major American steel company, President of the former U.S.-Soviet
Trade Council, and for 30 years, a career Foreign Service officer with
more than 15 years dealing with the USSR and Eastern Europe.
We firmly believe that Central and Eastern Europe offer a rich
opportunity for U.S. and other western corporations to participate in
the inevitable development of these economies into a truly prosperous
area. We also believe that it is very much in the national interest of
the U.S. to see that occur. We also are convinced that the barriers and
frustrations which I now concern myself with in Ukraine are often
common to the rest of the former Soviet Empire. After decades of
irrational economic policies, it is hardly surprising that the road to
progress is erratic and often very rocky. I believe it behooves us to
stay the course and certainly our members share the expectation that
there is eventually a bright future in front of us.

A TOUGH MARKETPLACE
Business problems, opportunities and successes in the entire area
are products, above all, of the historic emergence of new independent
states from the Soviet cocoon. It should not be a surprise to anyone
that it is not easy!
First, the former pieces of the Soviet Empire both historically
independent East European countries and the newly independent former
autonomous republics of the USSR itself are a collection of widely
varying governments, natural resources, cultures, and economies. There
is no single formula or laundry list which applies to all of them.
Second, notwithstanding these wide disparities, and the historic
adjustments involved, the entire area is a very important economic
piece of the global economy and offers perhaps more potential for
growth and progress than much of the rest of the world.
Third, U.S. corporations today are a far cry from 20 years ago when
I was working with them in dealing with the Communist world. U.S.
corporations are now sophisticated and strategically wise, a far cry
from 1980 when most corporations looked at ``long-term'' as two years
or in some cases three quarters! We have globalized perhaps better than
others, even though we started out well behind traditional European and
Japanese trading companies.
Fourth, this means that while U.S. corporations are not going to
jump in with large initial investments in recently converted Communist
economies, they are also not going to walk away from Eastern Europe
which has obvious lucrative potential: educated populations, rich
natural resources and impressive industrial know-how (even though it is
often encrusted with decades of Soviet mismanagement). U.S.
corporations have demonstrated impressive staying power in the entire
region.
Finally, it is very important to keep a realistic perspective on
the market choices U.S. corporations face in the global market place.
Dealing with the full array of barriers, problems and downright
hostility is not new to U.S. corporations. They have coped with
unpredictable and often bizarre behavior in countries like Brazil,
Indonesia, and India; all of which are major markets which cannot be
ignored, but which have always been very frustrating places to do
business.
And, if in acknowledging the traditional difficulties in these
third world major markets isn't enough, think for a moment of the
myriad difficulties U.S. companies have trying to do business--bid
processes, zoning requirements, petty corruption, licensing and
inspection barriers, supplier uncertainty and Government intervention,
in the U.S. Try dealing with local, state and federal officials on a
port, housing or agriculture project in New Orleans, Newark or Las
Vegas or any other major city in the U.S.

COMMON PROBLEMS
Soviet Mentality
To obviously varying degrees among these countries in the area the
basic instinct to preserve ``Government Control'' has made Western
investment impossible at worst or very slow at best. Letting ``the
market decide,'' especially in the politically sensitive area of
resource allocation, is a new concept and often perceived as unfair and
contrary to political stability (reads control).
Nationalism
Where the Soviet collapse has created a vacuum, the old centralized
non-market culture has often found a new political basis in old-
fashioned nationalism--protect our home industries, don't close
facilities because workers will lose jobs, do not permit foreign
ownership in general especially of our land, telecom and basic
industries.
Natural Resources
Raw material costs have no predictable supply and demand basis
because there has been no marketplace to provide it. U.S. companies
agree that the single most powerful market factor for Ukrainian
consumers is price. Coca Cola, an initially great sales success, has
steadily been undermined by lower cost and inferior concentrate so
that, today other (inferior in quality in the eyes of consumers)
beverages are taking market share from Coca Cola even though Coca Cola
is preferred by consumers.
Costs in genuine market economies are more or less predictable,
permitting producers to set price and plan ahead. In traditional non-
market economies there is little concept of pricing based on cost and
supply and demand. This is a hard lesson to learn and clearly it is
taking time to imbue these concepts.
Labor
Often underestimated, labor skills in most of the former USSR and
Eastern Europe are impressive and can be a significant advantage for
Western companies. On the other hand, Soviet labor practices created a
solid tradition based on security not incentives and today in most of
Eastern Europe it is extremely difficult, if not impossible, to pare
back on labor costs. Instead U.S. companies are faced with the
ingrained expectation that the government (or employer) will provide
all basic needs such as housing, health care, and transportation as
well as job security. This expectation is changing, but slowly.
There are numerous, encouraging examples of the value of young
skilled technical workers providing excellent bases for new
entrepreneurs. The renowned Hugo Boss clothing company now provides a
significant share of its ``up-market'' clothing in Ukraine for its
international market. An American investor recently told me that he has
found that for top quality, low-cost software engineers, Kiev is the
place to be. Computer parts producers are finding Bulgarian labor a
real ``gold mine'' in their words. In short, the younger workforce is
potentially a major asset.
Management Skills
Most U.S. Companies throughout the area are finding it very
difficult to build mid-level management. Virtually none of the 35-55
year old pool while technically impressive has the managerial instincts
required to produce on the basis of market demands, or develop such
things as advertising programs based on market surveys.
Many companies are hard at work developing in-country training
programs and in some cases bring mid-level and upper-level people to
the U.S. for training. These programs obviously are the road to long-
term success, but take time. Generally, young managers from Eastern
European countries are quick to learn and clearly more adept than most
of their third world counterparts, reflecting the superior technical
education traditions in their countries. On the other hand senior
management people have much more to overcome and often are less
successful in making the transition.
I must point out that U.S. company training programs are
complicated and even aborted by arbitrary U.S. consular treatment of
visa applications for trainees, especially for young, promising women.
I fully appreciate the immigration legislation restraints on American
consular officers--I was a vice consul in my first foreign service
assignment in 1951 and had to deal with waves of displaced persons from
Central Europe. However, there is clearly a need for reform of
Administration guidelines and the mentality of our consular officials
which often exceed legislative requirements in order to appear
``tough'' to the home office. U.S. policy to promote investment in
these countries needs to extend down to the consular appreciation of
the value of business training exchange.
Financial Infrastructure
Few Eastern or Central European countries began the last decade
with viable commercial financial institutions in place operating under
the rule of law. Central Banks were traditionally relatively well-
connected with their Western counterparts and viewed as islands of
``business and financial wisdom'' in the otherwise dismal economic
landscapes of Eastern European countries. However, commercial (as
opposed to macroeconomic) financial capacity was virtually non-
existent.
To varying degrees progress is unfolding in this arena, but once
again this is a subject which requires decades not years. And, in this
area, the former Soviet Empire is generally behind other third world
countries. It will be years before Ukraine and other former Soviet
Republics have established fmancial services in place. It is no
accident that much of today's news regarding oligarchs, corruption and
scandals in Russia and Central Europe centers on new bank based
empires.
Lack of Other Internal Business Structure
In most of the area, acceptable hotels, airline connections,
telecommunication, and adequate clerical help was not available as the
decade of freedom began. Today in the more successful countries, four
and five star hotels have sprung up, modern telecommunications and
bilingual support staff are available as well. However, there is a wide
disparity in availability of these services. In Ukraine, e.g., there is
a good pool of bilingual support staff, but no adequate hotel
accommodations. Most of the countries have adequate airline
connections, but not all. These factors may seem frivolous or bordering
on ``pampering U.S. executives.'' However in today's highly competitive
global market place, U.S. companies which have pared down their
executive staff to a Spartan level, consider ``executive time'' a
critical factor in investment decisions. What Vice President will
choose to visit a Central Asia capital if it is just as important to
visit Sao Paulo? As a practical matter, selections for investment are
often influenced by these amenity factors.
In practice the creation of reasonable hotel facilities has proven
especially subject to corruption and mismanagement. Power struggles and
the appetite for ``a piece of the pie'' have blocked or delayed many
obviously necessary hotel projects throughout the area.
Corruption
I give corruption a special section because symbolically it is so
critical. Even though ``corruption'' is a challenge for businesses
everywhere--including the U.S.--the extent and intractability of
corruption in the former Soviet Republics is one of the first things
one hears whenever business conditions are discussed. And, it is
generally perceived by businessmen that ``corruption'' is very serious
and largely uniform throughout the former Soviet Union. In the Eastern
European countries the problem while present is considered less of a
problem.
It is important to point out that corruption covers a wide range of
activities of varying seriousness. In some cases there is an actual
concern for individual safety. In some cases businessmen have been
roughed up by hired hooligans. More often the traditional shake down
process to compensate for pitiful salaries among customs, licensing,
and tax authorities and even senior officials is the problem. Oddly,
IMF and World Bank constraints have often worked against needed salary
increases, thereby unwittingly contributing to continuation of petty
corruption.
Arbitrary Political Leadership
American and other Western businessmen are not unacquainted with
the challenges in doing business in countries ruled by corrupt, violent
and unpredictable despots. Sukarno's Indonesia, the Shah's Iran, Papa
Doc's Haiti, Merciar's Slovakia and Lukashenko's Byelorussia illustrate
the international nature of the problem. Suffice it to say the ``the
personna at the top'' is a very serious factor. Shervardnadze clearly
is a major factor in attracting what little foreign investment has
occurred in Georgia. There is undeniably an immeasurable value to a
country's appeal to Western investors if the national leader is
respected and considered to be an effective executive as well as a true
patriot--if he is also committed to Democracy, that is icing on the
cake. Ukraine is fortunate in this regard.

AS AN ILLUSTRATION, LETS LOOK AT UKRAINE
In November 1999, Ukraine reached a watershed point in its 9 year
independent history. President Leonid Kuchma faced off--head to head--
with the leader of the Communist Party. Notwithstanding a discouraging
9 year history of steadily declining standards of living, the people of
Ukraine rejected the Communist appeals to turn back to Soviet ``good
old days'' and re-committed Ukraine to a market economy and democracy.
President Kuchma, fresh from his solid victory, committed Ukraine
to a new beginning and selected Central Bank President Viktor
Yuschenko--a highly regarded reformer--as his new Prime Minister.
In the first 6 months since the ``new beginning'' Ukraine has
racked up impressive increases in economic activity in the first
quarter including:

a. Capital investment has grown 26%;

b. Individual savings are up 130%;

c. Hard currency investment is up 20%;

d. GDP is up 5.5%; and

e. Industrial production is up 10%.

In addition the following reforms have moved ahead:

Most important, the creation of a pro-reform majority in the
legislature (Rada) and election of a new Speaker (Plyuishch)
and Deputy Speaker (Medvechuk) who support Kuchma's reform
agenda was accomplished;

The new Rada majority now includes key committee chairmen
who are themselves businessmen and are committed to attracting
investment;

Major Government restructuring was implemented. A
consolidation of Ministries, (35 to 17) has reduced
bureaucratic delays and tempting opportunities for corruption;

Combination of licensing and registration functions under
new leadership was carried out;

A Presidential decree was issued abolishing remaining
collective farms, privatization of grain silos has advanced and
is now virtually complete. Past farm debts to the government
were forgiven;

The new Rada passed a new balanced budget consistent with
IMF standards;

The Prime Minister succeeded in restructuring the commercial
debt with 100% subscription by Ukraine's commercial lenders;

The Rada, on May 18, adopted the enabling legislation (with
U.S. participation in the process) for oil and gas exploration
profit sharing by a solid majority vote;

On May 4, the administration submitted a major revision of
the tax code to the Rada which would dramatically reduce and
simplify tax rates and presumably lead to a significant
increase in tax collection;

The current tax code was a historic break with the Soviet past. It
is considered compatible with European codes and has produced
some increases in collections (47%). The new draft code which
would have been ``dead on arrival'' in the old Rada, has a good
chance to make it through the new reform minded Rada and could
add significant momentum to other economic improvements which
we have already seen.

UNFULFILLED GOALS--AGRIBUSINESS OPPORTUNITIES AND CONSTRAINTS IN
EASTERN EUROPE
(The non-profit agriculture investment organization Citizen's
Network for Foreign Affairs has assisted in the preparation of this
section.)
The markets of Eastern Europe, including Russia and Ukraine,
represent unprecedented opportunity for American agri-businesses,
particularly U.S. manufacturers of farm equipment, crop protection
products, seeds and food processing equipment. In Russia and Ukraine
alone, the market potential for large tractors and harvest combines is
enormous. It is estimated that for farm equipment suppliers, even for
the replacement of decaying field inventories only, these two markets
present a potential for 53,000 tractors and an estimated 14,000
combines, figures in excess of current U.S. production. The potential
annual market for seeds, fertilizers and crop protection products runs
anywhere from 6 to 10 billion dollars annually. Yet, with the exception
of Hungary, the promise of these potentially huge markets lies largely
unfulfilled.
The lack of privatization and reform in the agriculture sectors,
the lack of privatization of land and the restructuring of farms,
corruption, price controls, inept and ill-advised tax policies, and the
lack of credit and fmancial institutions have largely left American
companies not only frustrated, but in some cases the recipients of
substantial accounts receivable. In Ukraine alone, American
manufactures of crop protection products are facing bad debts amounting
to over $150 million.
This lack of reform which has limited the prospects of U.S.
agribusinesses has also resulted in depressing agriculture production,
particularly in Russia and Ukraine, greatly limiting these countries'
prospects for economic growth as well as threatening political
stability. Russia today is a recipient of U.S. food aid, and Ukraine,
once known as the bread basket of Europe, is producing at less than one
fifth of its potential and is facing the prospect of its worst harvest
since 1945.
Chief among the limitations facing American agribusiness companies
is the lack of access to adequate short- and medium-term financing,
whether through commercial finance channels or through guarantees.
While the U.S. ExIm Bank has provided some financing backed by
sovereign guarantees, it has been woefully inadequate and has been
essentially limited to two transactions. Local commercial bank
financing is also nonexistent, and the farms themselves remain
essentially unrestructured and often bankrupt.
The lack of farm restructuring, as well as the lack of
privatization of state input supply, has also been a severely limiting
factor. Land, largely still in the hands of collective agriculture
enterprises, cannot be bought or sold and, importantly, cannot be used
as collateral. What bank can lend where it cannot protect its exposure?
In Ukraine, commercial finance in the agriculture sector simply
does not exist, and the banking sector is weak and undercapitalized.
Interest rates are upwards of 60% and multi-year midterm finance (three
to five years) essential for financing large scale, high-priced
equipment such as tractors and combines is totally unavailable.
In Russia, the 1998 financial crash all but wiped out the few banks
engaged in providing agriculture loans. SBS Agro, the largest
agriculture bank, is essentially in government receivership, and the
relatively small financing provided by the government was decimated by
the ruble devaluation.
Also, U.S. agribusiness companies which have sought to finance
sales through commodity backed contracts where payment is made through
agriculture production have seen these efforts largely fail because of
high risk, high cost, as well as government interference and
corruption. This has particularly been the case in Ukraine where the
govermnent proclaimed supremacy in its claims on agriculture production
and has essentially confiscated production committed to the repayment
of American suppliers.
Ukraine has recently further limited the viability of commodity
backed credit transactions through ill-timed and unwise tax policy. In
order to protect a small number of politically well-placed owners of
Ukrainian sunflower processing facilities, Ukraine last year
implemented a 23% tariff on the export of sunflowers. The chilling
effect on all commodity backed credit transactions was substantial. The
export of sunflowers had been Ukraine's largest cash crop, and had been
the source of currency needed to pay U.S. and other Western suppliers.
Also, the tax has depressed sunflower production as farmers have been
forced to absorb the tax.
Similar situations have occurred in Russia where local oblast
governments have restricted the movement of commodities that have left
U.S. companies unable to export part of a crop as a method to pay for
inputs and equipment they have provided.
While arbitrary export taxes have hindered the ability to earn hard
currency to pay for imports of equipment and farm inputs, other flawed
tax policies continue to impede investment. A critical issue, for
example, is the VAT tax that in Ukraine is 20% and which applies up
front to the purchaser. This substantial penalty upon the purchaser has
had a chilling effect on the potential sales of high-ticket agriculture
equipment. The fact that these taxes apply to the import of ``the means
of production'' and that purchasers have to pay ``up front'' and are
not allowed to amortize over a three to five year term is a significant
hurdle.
The lack of privatization of state input and commodity monopolies
has also hindered opportunities for U.S. agribusinesses particularly in
Ukraine. Though headway has been made in recent months with the
privatization of grain storage facilities, the continued existence of
the Government monopoly, which attempts to maintain its control over
the distribution of commodities such as wheat, hinders competition and
threatens the emergence of new private distribution structures as well
as processors.
Prime Minister Yuschenko last week announced that the Government of
Ukraine will place top priority on agricultural reforms in the second
half of 2000.
INTERNATIONAL MONENTARY FUND
IMF assistance is critical to the efficacy of the often tough
reforms which are essential in the massive economic re-structuring of
the former Soviet empire. Russia is the most dramatic illustration of
these difficulties which have produced repeated suspensions of credits.
The IMF continues today to be central to Russia's economic struggles.
Ukraine's dependence on the IMF, like Russia and much of the region, is
also central.
Late last year, the IMF e.g., was seized with the problem that
Ukraine's National Bank (then led by current Prime Minister Yuschenko)
had misstated its reserves in order to meet IMF hurdles for additional
assistance to Ukraine. As a result the flow of IMF funding has been
suspended while an independent audit was undertaken. The results are
awaited.

ILLUSTRATIVE SPECIFIC PROBLEMS
While there is growing recognition of the importance of this major
market, corporate strategic vice presidents are all too often
disheartened, frustrated and cynical about promised reforms. To take
Ukraine, again, as an illustration, a partial list of American
complaints about business conditions in Ukraine is instructive:

More generally, past debts of Ukrainian farmers, state
collectives, and national entities totaling some $150 million
have led several major U.S. agro-industry providers to limit
sales of critically needed fertilizer, pesticides, and seed to
a cash on the barrel-head basis for businesses--which has
sharply reduced their inputs. As a result Ukraine's harvests
have steadily declined for over 5 years. If you are a major
agricultural society and have only very limited access to the
products of DuPont, Dow, Monsanto and others, it will and has
led to depressed productivity. The Prime Minister has
acknowledged this input debt and instructed that the back
payments be made--to date payments have not eventuated.

A very promising joint venture between United Technologies
(Otis Elevator) has been driven to the brink of bankruptcy
because municipal authorities throughout Ukraine have not
received pledged housing funds which permit them to pay the
Otis joint-venture.

Ukraine has become the number one producer and exporter of
pirated optical discs in Eastern and Central Europe. President
Clinton in his visit to Kiev last month raised the issue and
received reassurances that new tougher legislation will be
enforced. The two Presidents in fact issued a joint statement
approving an action plan calling for closure of pirate plants
and taking action against infringement.

Honeywell, a world renowned leader in energy efficiency and
airport systems has been a major investor in Ukraine. In May of
this year Ukrainian authorities placed a moratorium on all
payments for the modernization of Kiev's central airport--all
work is suspended and Honeywell's participation in Ukraine is
in jeopardy. This sort of problem is not new, but it produces a
great sense of frustration and has a chilling effect on
corporate interest in investment.

U.S. corporations (Phillip Morris and RJ Reynolds) have been
frustrated while new, presumably more efficient licensing
procedures are installed. The result has been the parking of
millions of dollars worth of product in expensive European
warehouses. This problem comes on top of years of contraband
and counterfeit problems, fostered by a Byzantine system of
licenses, fees, and regulatory bodies.

Ceres Terminals, a reputable container port management firm
from New Jersey was one of the most impressive success stories.
Working intelligently with Odessa customs officials and the
port authority, Ceres created a world class container operation
with dramatically increased volume and efficiency in Ukraine's
principle port.

Unfortunately, Ceres has just this month withdrawn in frustration
from this joint venture in Odessa. Basically this has occurred
because the Port Authority has squeezed Ceres for more expenses
and violated the terms of their joint venture agreement.
Frequent visits from health inspectors and tax officials were a
consistent irritant.

This tendency to milk any successful agreement, violating
contractual agreements in the process is all too typical throughout the
former Soviet empire.

SUCCESS STORIES
While the frustrations are wide-spread and serve as disincentives
for the vitally needed foreign investments, there are success stories
which clearly demonstrate that determined U.S. corporations with
reasonably patient time-tables can succeed:

John Deere has made major sales of over 1600 units of farm
equipment in transactions which have proven to be successful.
Just last month Deere and its joint venture partner in Ukraine
opened a $2 million facility to coordinate its distribution,
parts, and service network throughout Ukraine.

Pioneer, after more than two years finally collected
$400,000 in December and today expects to receive final
settlement of their $2 million claim. This will allow Pioneer
to proceed with a major investment to expand their seed project
in Ukraine.

Most recently Cargill after years of frustrating efforts to
resolve past input debts, completed negotiations to open a new
$50 million sunflower seed processing plant in Donetsk. The
plant will create 400 jobs, reliable income for Ukraine's seed
producing farms and valuable tax income for the Government.

Coca Cola, while suffering today from raw material cost
increases, has become a major presence in Ukraine with a
national bottling plant network.

BRIM, a University of Michigan Corporation, has successfully
set up a joint venture employing space based imaging to map
Chernobyl fall out movements from fires and floods, as well as
mapping natural resource deposits.

Morrison-Knudsen has been a major contractor in the joint
Ukraine-U.S. program to dismantle the infrastructure and
weapons from Ukraine's formerly formidable nuclear rocket
force. Morrison-Knudsen characterizes their cooperation--as
``outstanding'' as they carry out their strategically critical
efforts.

Boeing, in a unique joint venture (Sea-Launch) with Ukraine,
Russia, and the Norwegian ship building firm Kvaemer, has
successfully launched a commercial demonstration space
satellite and is now engaged in a regular production line in
this cutting edge activity. Boeing does point out that
additional improvement in the business climate, especially
protection of investors assets will be critical to foreign
investment. They continue to see Ukraine as a potentially
lucrative market for aircraft sales.

These are but a few of the successes and the problems which
illustrate the complexity and challenges of doing business in this
disparate area. I am firmly convinced that the entire region--from the
former Soviet zone of Germany to the Pacific Coast of Russia presents
an immense opportunity. And, when U.S. firms are resolute, patient and
politically sensitive, they stand a chance to reap the immense
benefits. For this to happen they need the full support of the U.S.
government. The contributions of U.S. corporations have been and
increasingly will be a critical factor to the evolution of the former
Soviet vassal states into prosperous participants in the new global
economy.

Senator Smith. Thank you very much. Peter.

STATEMENT OF MR. PETER K. NEVITT, CHAIRMAN OF THE BOARD,
GREENBRIER-EUROPE, SAN FRANCISCO, CA

Mr. Nevitt. Good afternoon, Mr. Chairman. Thank you for
taking the initiative to hold a hearing before this
distinguished subcommittee on the important subject of
investment in Eastern Europe, and with the chairman's
permission I will submit my testimony in writing and then just
summarize it quickly for the committee at this time.
My name is Peter Nevitt. I am chairman of Greenbrier-
Europe, which is a subsidiary of the Greenbrier Companies.
Greenbrier is one of the largest manufacturers of rail cars in
North America. We are headquartered in Lake Oswego, Oregon. Its
largest manufacturing facility is in Portland. We have about
1,400 employees. Last year's sales were about $619 million, and
our stock is traded on the New York Stock Exchange.
In 1997, Greenbrier decided to expand its operations.
Manufacturing operations to Europe. Our Portland plant had been
operating at capacity for several years. We wanted to move to
Europe to serve our customers and after a careful consideration
of all the relevant factors we selected Poland because of its
commitment to a free and open economy and to the rule of law.
The Polish Government assured us that our investment in
Poland would be welcomed, and that Greenbrier would be treated
fairly as a Polish company. Therefore, based on those
assurances, we decided to invest in Poland and acquired
controlling interest in a factory located in southwestern
Poland.
After acquisition, Greenbrier took a number of steps to
improve the factory and to improve the working conditions for
its employees. We increased the number of employees from 550,
who were mostly on furlough. There were only about 25, I think,
in the factory because I visited it at that time, to 880 active
employees today.
We increased the salaries of our employees by nearly 80
percent. We have invested heavily in training our workers, and
we have sent 61 workers to the United States and Canada for
training here, and we have invested an additional $20 million
in the factory itself to purchase equipment and to improve
working conditions for our workers.
We are pleased with our investment in Poland, and we have
been successful in winning contracts to manufacture rail cars
in Western Europe, and Greenbrier's exports of rail cars from
Poland to Western Europe is very important to Poland for its
foreign exchange. Our factory is now profitable and, as I
indicated, we are quite satisfied with our investment.
However, we have encountered one major disappointment, and
that disappointment is that Greenbrier has been, or had been at
least arbitrarily excluded from selling rail cars to the Polish
National Railroad, PKP, which is practically the only customer
for rail cars in Poland.
To make a long story short, PKP, certain individuals within
PKP conspired to form a consortium to monopolize the sale of
rail cars to PKP, to themselves, in effect. They arranged a
rigged bid, and they awarded the rigged bid to friends, and
this is a case, of course, of crony capitalism, to which the
chairman referred earlier in his remarks.
However, I am pleased to report that thanks to the help
provided by yourself, Senator Smith, and by other concerned
parties in the Government and Congress, and including the U.S.
Embassy in Poland, which has been quite helpful, communication
was made to responsible individuals in the Polish Government
and the unfair rigged bid of PKP was withdrawn and replaced
with a transparent bid and a level playing field.
I want to reiterate, Mr. Chairman, that Greenbrier is very
pleased with its investment in Poland. We are profitable, and
on behalf of Greenbrier's CEO, Bill Furman, who could not be
here today because of previous commitments, and on behalf of
the thousands of employees of Greenbrier, we want to extend a
heartfelt thank-you to you personally and to the U.S. Congress
and the administration for the superb assistance you gave to
Greenbrier as it established itself in Europe.
[The prepared statement of Mr. Nevitt follows:]

Prepared Statement of Peter K. Nevitt

I. INTRODUCTION
Good afternoon, Mr. Chairman, and members of the Subcommittee.
Thank you for inviting me to testify this afternoon before this
distinguished panel. My name is Peter Nevitt and I am the Chairman of
Greenbrier-Europe, a subsidiary of The Greenbrier Companies. Greenbrier
is one of the largest manufacturers of railroad freight cars in North
America.
Greenbrier is headquartered in Lake Oswego, Oregon. Its largest
manufacturing facility is in Portland, Oregon where it has 1,400
employees. Greenbrier operates additional facilities in the states of
Arkansas, Kansas, Texas, California and Washington. Greenbrier also has
factories in Canada, Mexico, and Poland, as well as an engineering and
design center in Germany. Greenbrier's total sales last year were $619
million. The company's stock is traded on the New York Stock Exchange.

II. GREENBRIER DECISION TO INVEST IN POLAND
In 1997 Greenbrier decided to expand its manufacturing operations
to Europe. This decision was based on a desire to serve the European
market, including certain American railroad companies that were
beginning to invest in Europe. The European market also offered an
opportunity to increase U.S. revenues through the export of technical,
engineering and design skills.
Greenbrier employment in the United States has been increased to
provide support services to Greenbrier's European activities. I should
note that it is impossible to export rail cars manufactured by
Greenbrier in the United States to Europe because of the high cost of
shipping such cars to Europe.
Greenbrier was very particular and selective in determining the
country in Europe that offered the best location for the start of its
European operations. After careful consideration of all relevant
factors, we selected Poland because of its stable government, its
geographic proximity to major commercial markets, its commitment to a
free and open market economy, its strong relations with its traditional
trading partners, and its dedicated, skilled workers. Furthermore,
Greenbrier received strong encouragement from Polish government
officials to invest in Poland. The Polish government assured Greenbrier
that its investment in Poland would be welcome and that Greenbrier
would be treated fairly as a Polish company.
After Greenbrier investigated a number of possible factory sites in
Poland, Greenbrier opted to acquire the WagonySwidnica factory, located
in Silesia, close to the German border. At the time of our acquisition,
the factory had little work, few employees, and practically no
customers. However, the city of Swidnica and the surrounding area
provided a pool of highly skilled workers. Therefore, based on the
assurances Greenbrier had received from the Polish government,
Greenbrier decided to invest in Poland and acquire a controlling
interest in WagonySwidnica.

III. THE GREENBRIER COMMITMENT TO WAGONYSWIDNICA HAS BEEN SIGNIFICANT
Greenbrier took possession of the WagonySwidnica factory on March
9, 1998. Since that time, Greenbrier has:

Increased the number of employees at WagonySwidnica from 550
(mostly on furlough) to 880 active employees.

Increased salaries of its workers by nearly 80%.

Invested heavily in the training of its workers and sent 61
workers to the United States and Canada for additional
specialized training.

Invested an additional $20 million in the factory to
purchase equipment and to improve working conditions for its
employees.

Increased the WagonySwidnica backlog of orders for rail cars
from about $3 million to $47 million.

Supported the local community through contributions to local
charities and sponsoring local civic functions.

Greenbrier is very pleased with its investment in WagonySwidnica.
Our employees at WagonySwidnica are highly skilled and have a solid
work ethic. Labor unions representing our workers in Poland have been
supportive of our efforts to improve production and increase economic
opportunity for all employees.
Under Greenbrier management and with Greenbrier investment,
WagonySwidnica has been successful in winning contracts to manufacture
and sell rail wagons in Western Europe. (``Rail cars'' are referred to
as ``rail wagons'' in Europe.) Our European customers report that the
quality of WagonySwidnica products is excellent.
Early this year, Greenbrier acquired the Adtranz freight wagon
supplier from Daimler-Chrysler. Adtranz is based in Siegen, Germany,
near Frankfurt. This acquisition makes Greenbrier one of the major
freight wagon suppliers in Europe and one of Europe's leading design
and engineering centers for freight wagons. As a result of this
acquisition, Greenbrier intends to expand its rail wagon manufacturing
in WagonySwidnica and possibly elsewhere in Poland. This acquisition
could result in a significant number of additional jobs for Poland, so
long as the political and economic environment rewards new investment
from companies such as Greenbrier.
Greenbrier exports of rail wagons from Poland provide Poland with
much needed foreign exchange. Unlike many foreign investors in Poland
that cater exclusively to the internal Polish market, Greenbrier has
significant sales to foreign markets. At the same time, Greenbrier
expects fair treatment and a level playing field to compete in the
Polish market.

IV. GREENBRIER HAS BEEN ARBITRARILY EXCLUDED FROM SELLING RAIL CARS TO
THE POLISH NATIONAL RAILROAD, PKP
Greenbrier's major disappointment in conducting business in Poland
has been the arbitrary action by certain individuals within the Polish
state-owned railroad, Polish National Railways (herein called PKP).
These improprieties have prevented WagonySwidnica and Greenbrier from
building wagons for PKP. This condition, which apparently has been
corrected, was unfair to Greenbrier and to its workers at
WagonySwidnica. The short history of Greenbrier's initially
disappointing relationship with the Polish state-owned railroad, PKP,
is as follows:
A. Conspiracy to Monopolize Sales to PKP: Certain individuals
within PKP conspired to form a consortium to monopolize the sale of
rail wagons to PKP. This consortium, known as Consortium Taborowa, is
composed of PKP and a number of companies in Poland including three
manufacturers of rail wagons. PKP owns about 90% of the stock of this
consortium, known as Consortium Taborowa. Certain key PKP officers that
control equipment acquisitions by PKP have always been and presently
are the principal officers of the Consortium Taborowa. At the direction
of these key officers, PKP granted this Consortium Taborowa the
exclusive right to issue tenders for rail wagons on behalf of PKP.
B. PKP Awarded an Order for Rail Wagons to its Friends Rather Than
Through a Transparent Bidding Process: In April of 1999, Consortium
Taborowa issued a tender for 4,500 rail wagons. This tender contained
requirements that made it impossible for any bidder to qualify to
participate in the tender except for the two rail car manufacturers
that were members of the Consortium Taborowa. Furthermore, the bids
were reviewed and awarded by officers of PKP who also were officers of
Consortium Taborowa, rather than by any independent party. Not
surprisingly, the Consortium Taborowa awarded the entire contract for
4,500 wagons to its own members. The bidding procedure adopted by PKP
in this case did not begin to meet the requirements for transparency
required by the United States, the European Union, and the
international financial institutions such as the World Bank and EBRD.
C. Greenbrier's Bid on the Tender Rejected on Arbitrary Grounds:
Greenbrier attempted, in good faith, to bid on the tender by submitting
a bid to the Consortium for 1,500 wagons. Greenbrier's pricing was
competitive and, in fact, somewhat lower than the pricing offered by
the factories that were awarded this work. The requested delivery dates
were within the time period requested by the Tender. Greenbrier merely
asked for a share of the 4,500 wagon order, not the entire order, so
that other Polish manufacturers and their workers might share in the
contract. Greenbrier's bid was rejected on the grounds that it did not
comply with the terms of the tender bid. As noted previously, the terms
of the tender made it impossible for any company to qualify other than
the members of the Consortium.
D. Greenbrier Has Appealed the Arbitrary Rejection of its Bid: When
Consortium Taborowa rejected Greenbrier's bid on grounds designed to
disqualify any manufacturer except members of Consortium Taborowa,
Greenbrier appealed the decision to the Public Procurement Office.
Greenbrier felt it was critically important that it try to protect its
workers' jobs. The Public Procurement Office was sympathetic to
WagonySwidnica's plight, and critical of the conduct of Consortium
Taborowa. The appeal, however, was denied on very narrow grounds
concerning the lack of jurisdiction of the Public Procurement Office,
because PKP represented that no State funding of the transaction was
involved.
During the hearing before the Public Procurement Office, Consortium
Taborowa represented that neither the credit of PKP nor the credit of
the Polish government would be utilized in financing the 4,500 wagons.
Since that time, however, the fact has become clear that the 4,500
wagons can not be financed without support from either (or) all of the
Polish government, PKP, the assignment of PKP receivables, the
Consortium (90% owned by PKP), or by some other State corporation. In
view of this misrepresentation of facts, further appeal by Greenbrier
to the Public Procurement Office is possible and appropriate.
Greenbrier also has argued that the Consortium Taborowa bid award
violates the Polish anti-monopoly laws. WagonySwidnica has filed an
appeal with the Polish Office for Competition and Consumer Protection,
which has commenced an aggressive investigation of this conspiracy.

V. GREENBRIER APPEARS TO BE ACHIEVING A RESOLUTION OF ITS PROBLEMS WITH
PKP
A. Intervention by Polish Government Officials Has Blocked the
Award of the Rigged Bid and Resulted in Transparency of a New Bid
Tender: I am pleased to report that the intervention of responsible
Poland government officials in the bidding procedure followed by PKP
appears to have resulted in the cancellation of the tender bid for the
4,500 rail wagons. We are told that PKP has no intention of
implementing the awards made pursuant to the 4,500 rail car tender. We
also are told that PKP will issue no further tenders through the
Consortium Taborowa. If this is true, Greenbrier is deeply grateful to
those Polish officials who insisted from the beginning that the
Consortium Taborowa and its rigged tender should have no role in a
modern, market-oriented Poland.
B. Greenbrier is Bidding on a New Tender by PKP: Currently
Greenbrier is bidding on a new tender by PKP for 1,000 freight wagons.
I am pleased to report that this bidding procedure appears to be
transparent. This bid request, however, contains a number of
requirements for financing terms that are not commercially acceptable
to anyone in light of PKP's precarious financial condition. To further
complicate things, the tender includes a provision that all of the
terms of the tender are ``non-negotiable,'' thus precluding even minor
changes typically necessary to meet the needs of lenders and lessors.
Therefore, in the tender's present form, it is impossible for anyone to
file a firm response.
Greenbrier is hopeful that the very stringent requirements of this
bid request are due to inexperience rather than intent. Consequently,
Greenbrier has asked PKP to eliminate the ``non-negotiable'' provision
from the tender. If that requirement is removed, a bidder can be chosen
on the basis of the merits of its bid as to specifications, price and
delivery dates subject to final negotiation of financing arrangements.
Because of the complexity of the financing and the need to involve
third party financial institutions, we believe that such a procedure is
the only feasible way to successfully conclude that tender.
C. Poland has Been Successful in Establishing a System of
Commercial Law: I am pleased to report that Poland has been generally
successful is establishing a commercial and legal environment conducive
to American investment. The Public Procurement Office and the Office
for Competition and Consumer Protection are examples of conscientious
agencies that offer protection from arbitrary and abusive conduct.
D. The Chairman of PKP has Been Particularly Helpful: The current
Chairman of the Management Board of PKP, Mr. Krzystof Celinski, is a
very capable executive. He has been sympathetic to Greenbrier's
experience with Consortium Taborowa. However, certain persons within
PKP seem to operate independently of supervision. Unfortunately, a
large state-owned company such as PKP is difficult for a responsible
Polish official to manage effectively, because of the social upheaval a
railroad strike would cause. Certain management people within the
present structure of PKP sometimes use their ability to ferment labor
unrest in order to achieve their own ends.
The PKP situation is further complicated by the fact that the
company is hemorrhaging money on a daily basis and needs to be
privatized as quickly as possible. Such privatization will require
large reductions in personnel. The Sejm, hopefully, will pass the
privatization legislation this summer. The Polish presidential election
is scheduled for early October and parliamentary elections are expected
by March or April next year. Failure to enact the PKP privatization
legislation this Summer probably would delay action until next Spring.
Financing for PKP and its freight car orders will be needed before
then. We understand that Citibank and Salomon Smith Barney are trying
to arrange this financing. The attitude toward this financing by Mr.
Bauc, the new Finance Minister, seems favorable, provided that the
pending privatization legislation is passed by the Sejm.

VI. NUMEROUS UNITED STATES OFFICIALS HAVE COME TO THE AID OF GREENBRIER
AND HAVE BROUGHT THE DISPUTE TO THE ATTENTION OF POLISH GOVERNMENT
OFFICIALS
As an American businessman with a major problem abroad, I was
immensely surprised and gratified at the assistance Greenbrier received
from the United States Government. Both the Legislative and Executive
branches made impressive efforts to help prevent an injustice from
being inflicted upon our company. Frankly, I had no idea that such
assistance was available and Greenbrier is immensely grateful for it.
A. Congressional Assistance: When this difficulty first arose just
over a year ago, Greenbrier brought the matter to the attention of the
fine Chairman of this body, Senator Gordon Smith. Senator Smith and his
excellent staff, including, in particular, Rob Epplin and Martha Cagle,
worked hard to ensure that the matter was brought promptly to the
attention of the Polish Ambassador here in Washington, to the United
States Ambassador in Warsaw and to key officials in the Administration
that deal with such disputes. He had the matter investigated thoroughly
and met repeatedly with the Polish Ambassador to obtain regular updates
on the progress of our discussions. He encouraged the Polish government
to address the matter promptly and fairly. Senator Smith's credibility
at the Polish Embassy and throughout the Polish government was
extremely high due to his long-standing friendship with the country and
his tireless efforts on behalf of Poland's membership in NATO;
throughout this dispute, we heard repeated statements of admiration for
the Senator from numerous Polish officials.
Other members of Congress also expressed their willingness to be of
assistance, particularly Senators Patty Murray and Max Cleland. We at
Greenbrier will always remember the tireless efforts of the Senator
from Georgia. He personally engaged the assistance of Vice President
Gore, the National Security Advisor, key officials at the Departments
of State, Commerce and Defense and made regular contact with the Polish
Ambassador here in Washington and the United States Ambassador in
Warsaw. Senator Cleland clearly was going to see that Greenbrier was
treated fairly in Poland. He never asked for special favors or special
treatment; he simply asked that American companies, including
Greenbrier, be given an opportunity to compete fairly and openly
abroad.
B. Assistance from the Clinton Administration: Again, I personally
was amazed and gratified by the assistance that Greenbrier received
from key representatives of the Clinton Administration. I simply had no
idea that our government was so willing to be of assistance to American
companies that attempt to seize new business opportunities abroad. I
couldn't possibly name here all of the hard-working individuals that
took an interest in Greenbrier's plight, but the following must be
noted:

1. U.S. Department of State: The assistance that we received
from Ambassador Daniel Fried and his excellent staff in Warsaw
(including the DCM, Michael Mozur; the Political Counselor,
Jeffrey Goldstein; the Economic Counselor, John Hoover) was
very impressive. Likewise, we received regular and valuable
assistance from then-Under Secretary Stuart Eisenstat and the
Poland Desk Officer, Jim Wojtasiewicz.

2. U.S. Department of Commerce: We received valuable
assistance from Under Secretary David Aaron, Assistant
Secretary Patrick Mulloy and Poland Desk Officer, Amy Zona.
Their assistance included numerous meetings with
representatives of the Polish Embassy and meetings in Warsaw
with key Polish officials.

3. U.S. Department of Transportation: Secretary Rodney Slater
and Federal Railroad Administrator, Jolene Molitoris, were
extremely helpful to Greenbrier's efforts to resolve this
controversy. They and their key staff (including DOT Chief of
Staff, Jerry Malone; Deputy Chief of Staff, Norma Krayem;
Associate FRA Administrator, Charles White; and Director of
International Policy, Ted Krohn) jumped immediately on this
issue and had numerous meetings in Warsaw, Swidnica and
Washington, D.C. with key Polish officials. Greenbrier is
indebted to the energetic efforts expended in its behalf by
these valued public servants.

4. So Many Others: Greenbrier received valuable assistance
and support from the U.S. Trade and Development Agency
(particularly from Director Joe Grandmaison), the Overseas
Private Investment Corporation (particularly from Managing
Director for Business Development, Joan Edwards) and from the
U.S. representatives at the World Bank and European Bank for
Reconstruction and Development. The hard work of these
individuals was extremely helpful to Greenbrier's efforts to
resolve this matter.

VII. POLISH GOVERNMENT OFFICIALS HAVE BEEN HELPFUL TO GREENBRIER
Poland is blessed by the fact that patriotic officials who are
concerned with the welfare and future of Poland lead its major
political parties. All the major political parties are pro NATO, pro
American, pro free enterprise, and anxious to meet the stringent
requirements for joining the EU. Whatever political party is in power
makes a real effort to place highly qualified individuals in positions
of responsibility. Encouraging foreign investment and particularly
American investment in Poland is a high priority of these individuals.
They are very concerned with the creation of a fair and efficient
political environment, the establishment of workable commercial laws,
and the dismantling of needless protectionism.
A. Polish Embassy: Greenbrier has been extremely gratified by the
support it has received from the Polish Embassy here in Washington D.C.
Then-Ambassador Jerzy Kozminski was extremely sympathetic to
Greenbrier's plight and worked hard to correct it. Greenbrier feels
deeply indebted to Ambassador Kozminski and his excellent staff,
including Krzysztof Wybieraiski, Mariusz Handzlik and Andrzej
Dziekonski.
B. Ministry of Finance: Greenbrier has been very impressed with Dr.
Leszek Balcerowicz, until recently Finance Minister and Deputy Prime
Minister, and the architect of the financial stability that has been
achieved in Poland. Dr. Balcerowicz expressed to PKP his dismay at the
tender procedure for the 4,500 rail cars described above.
The new Finance Minister, Jaroslaw Bauc, was a deputy minister to
Dr. Balcerowicz and hopefully will continue Dr. Balcerowicz' policies.
There is some concern in the financial community that Mr. Bauc was not
also appointed Deputy Prime Minister as was customary with previous
Ministers of Finance. We are pleased with our initial contact with
Minister Bauc and look forward to working with him in the months ahead.
Another avid defender of privatization and outstanding talent is
Mrs. Korniasiewicz, a Deputy Minister of the Treasury.
C. Office of the Prime Minister: Prime Minister Jerzy Buzek has
been a strong supporter of free enterprise and adherence to principles
of transparency in bidding. Mr. Buzek is said to have been re-energized
by the recent reorganization of the Polish government. His strong
support is expected to achieve passage by this September of needed
legislation to enable privatization of PKP.
D. Office of the President: President Aleksander Kwasniewski is a
strong supporter of American and other foreign investors in Poland. Mr.
Kwasniewski's political party is SLD, the successor to the old
communist party. However, as noted earlier, SLD and all the major
political parties favor free enterprise, NATO membership, entry into
the EU, and encouraging foreign and particularly American investment.
Mr. Kwasniewski is strongly favored to be re-elected President this
October.
E. Minister of Transportation: Mr. Jerzy Widzyk is the new Minister
of Transportation. His reputation is that of a trouble-shooter, and he
seems well fitted to help manage privatization of PKP. Greenbrier looks
forward to working with Minister Widzyk.
Deputy Minister of Transportation, Witold Chodakiewicz, has
provided fair consideration of Greenbrier issues.
Former Minister of Transportation, Boguslaw Liberadzki, who is now
Vice Chairman of the Transportation Committee of the Sejm, strongly
favors transparency.

VIII. CONCLUSION
Greenbrier is very pleased with its investment in Poland. Although
Greenbrier has experienced some difficulties in establishing its Polish
factory, responsible Polish government officials have made Greenbrier
feel welcome and have addressed problems that would otherwise
discourage American investment. Poland has great potential as a nation
and as a loyal ally of the United States. We look forward to expanded
operations and opportunities in Poland.
In conclusion, Mr. Chairman, on behalf of Greenbrier's CEO, Bill
Furman, who could not be here today because of other previous
commitments, and the thousands of employees of Greenbrier, we want to
extend a heartfelt ``thank you'' to the United States Congress and to
the Administration for the superb assistance you gave to Greenbrier as
it has established itself in Europe.

Senator Smith. Thank you. I am delighted to learn of your
overall satisfaction in your dealings in Poland. I am very
familiar with the bid that you describe. As you noted, we have
been trying to nudge things along and make them transparent,
and I am pleased it has turned out better.
I wonder if you have any reason to believe or suspect that
any of the U.S. companies in Poland have been singled out for
sort of discrimination under pressure from the European Union?
Do you have that sense?
Mr. Nevitt. Well, I have not heard it admitted by any
public officials. I think that that certainly is a possibility.
I do not know of any such instance, though, Mr. Chairman.
Senator Smith. I do not either. That is why I asked the
question. I got it in writing in other countries, which was
shocking.
Mr. Nevitt. The Poles love Americans, and they are very
anxious for American investment, and frankly more American
companies should go to Poland. The welcome mat is out, and
fortunately the political atmosphere in Poland, the politicians
on either of the three major parties are all pro-American and
pro-NATO, and welcome American investment, and are for the rule
of law.
There are always going to be groups somewhere, somehow, who
are going to try to set up their own little honey pot, so to
speak, but there is legal recourse available within Poland. It
is finding its way. It is new. It has only been in existence
for about 8 years.
Senator Smith. Do you sense any reluctance on the part of
the Polish Government to continue forward with more and more
privatization?
Mr. Nevitt. I think they are very anxious for
privatization, particularly privatization of companies that can
export, because they need foreign exchange. They do have a
balance of trade problem. Part of that is because they are
making investments in capital improvements that are being
imported into Poland. The government itself, under former
Finance Minister Balcerowicz, was running a very, very tight
economic ship, and I hope they continue to do so.
Senator Smith. Is there anything we should be doing as the
U.S. Government to encourage more transparency in Poland, or do
you think it is moving ahead at the right pace?
Mr. Nevitt. I think there is good communication with the
responsible individuals in government in Poland, and I think it
is working very well. I might also add that Poland is almost
key to Ukrainia. The Poles look forward to building trade with
Ukrainia, and they frankly look forward to Ukrainia getting
admission into NATO. They want somebody between them and Mother
Russia.
Senator Smith. You had a comment, Mr. Jenkins.
Mr. Jenkins. Yes, Mr. Chairman. In the catalogue of things
we would like to see the U.S. Government do better, one of them
is visa policy.
Our corporations, to succeed, must build mid-level
management cadres and that frequently requires bringing people
to the United States for training. Time and time again,
arbitrary policies and decisions by vice consuls--and I was a
vice consul, and I was engaged in this problem a long, long
time ago--result in the fact that there will be 10 people
invited over for a training course and four will be denied,
usually young women.
There is a very discriminatory attitude within the Consular
Service of the United States representing consular policy in
the U.S. Government that people will be brought over to the
United States only if they can be certain they will return, and
they just jump at the conclusion that young women are more
likely to stay. This has been very upsetting to our
corporations, who cannot operate effectively in that part of
the world if they cannot train people in the process.
Senator Smith. I thought we were trying to export, what was
it, some notions of political correctness. This does not
comport with that.
Mr. Jenkins. I am in trouble at home already on this, but I
think that is important, and I think it would be very helpful
if the committee and the Congress generally would call this up.
It conflicts directly with what we are trying to do at the
national policy level.
Senator Smith. Is this the State Department's
responsibility?
Mr. Jenkins. It is the State Department's responsibility. I
say that sadly, having spent 30 years of my life in the State
Department.
Senator Smith. You did not fix it while you were there.
Mr. Jenkins. It actually was running pretty good.
I would like, if I could, Mr. Chairman, to insert in the
record a classic case, at a much lower level than Ron's, of
essentially a foul-up bureaucratic snafu within our own
Government which has caused so far a defeat for an investment
effort involving the Defense Department and various elements
within the Defense Department. It illustrates the fact that we
do not have a coherent priority within our administration with
congressional support to move ahead on this issue, which is
such an important historic opportunity, in my judgment.
Senator Smith. We will receive that without objection and
include it in our record.
[The insert referred to, a letter from DCI, Inc., is on
page 59.]
Senator Smith. I think, Mr. Jenkins, somebody in Commerce
heard your comment, because we have just had delivered to us
some testimony from Charles M. Ludolf, who is Deputy Assistant
Secretary for Europe from the Commerce Department, so while he
is not here, we will include his testimony in the record.
[The statement referred to is on page 62.]
Senator Smith. We are glad they have at least showed up in
that way, and I know the Commerce Secretary is involved in a
political campaign, and whenever his replacement gets here we
will ask him to come up and talk to this issue as well.
Gentlemen, thank you very much. Part of the role of the
U.S. Congress is transparency, and this is about oversight, and
this is not just about what benefits Americans and American
capital but ultimately what benefits these other countries we
care about as well, because the market, free enterprise plays
by the rules of openness and fair play, and where it is not, it
will retard the development of these countries and take
opportunities away from Americans and Europeans. We do not want
that.
So that is the spirit in which this hearing has been held,
and we thank you for your contributions. The hearing is
adjourned.
[Whereupon, at 3:35 p.m., the subcommittee adjourned.]
----------

Additional Questions Submitted for the Record

Responses of Hon. E. Anthony Wayne to Additional Questions for the
Record From Senator Gordon H. Smith

Question. The European Union has repeatedly stated that the Czech
Republic is far behind the West in dealing with corruption and crony
capitalism. Do you agree?

Answer. There is some truth in such a view, but I would caution
that the difficulties of economic transition from socialism to a
market-based economy also far exceed the problems faced by most West
European economies.
Crony capitalism and corruption have been problems and, in fact,
have tarnished the view many Czechs have of capitalism and democracy.
Yet, I sincerely doubt that many Czechs would exchange their current
economic and political states for those of the old regime prior to the
``Velvet Revolution.''
In our bilateral contacts and in various multilateral organizations
the U.S. Government is encouraging our Czech counterparts to emphasize
good governance and transparency in economic processes in order to
relegate crony capitalism to the dustbin containing some other famous
``-isms.'' The Czech Government sent a high level delegation to the
Global Forum On Fighting Corruption hosted by Vice President Gore in
February 1999. The Czechs also attended a follow up Regional Conference
for Central and Southern European Nations hosted by the Romanians with
U.S. support in March of this year. We have urged them to participate
as fully as possible in the next Global Forum to be hosted by the
Netherlands in May 2001.
The Czechs have participated in regional anti-corruption seminars
conducted by the Department of Justice. I also am pleased to bring to
your attention that, as of January this year, the Czech Republic is now
a full party to the Bribery Convention of the Organization for Economic
Development and Cooperation (OECD). Although the Czech implementing
legislation has some weaknesses, this very positive step makes the
Czech Republic an ally in a broader effort to curb international
business bribery.
Another positive development, which the U.S. Government has had no
direct role in, is that in October 1999, the Czech Republic signed the
Council of Europe Criminal Law Convention Against Corruption. The
Convention is significant for the Czech Republic, and for the rest of
Central and East Europe, because the Council of Europe is the
organization that traditionally sets the criminal law norms for Western
Europe.

Question. The U.S. Government encourages investment abroad, and in
particular investment in countries formerly dominated by the Soviet
Union. What steps has the State Department taken to protect American
investors in Central Europe? What steps does the State Department plan
on taking in the future?

Answer. Continuing to expand the U.S. Bilateral Investment Treaty
(BIT) program is the single best action the U.S. Government can take to
protect U.S. investors abroad. The U.S. Government already has BITs in
force with numerous countries in Central Europe with the Czech
Republic, the Slovak Republic, Bulgaria, Poland and Romania, and we are
currently in BIT negotiations with Slovenia. In addition to the BITs
with the Central European countries formerly dominated by the Soviet
Union, the U.S. has negotiated BITs with Russia (not yet in force),
Ukraine (in force) and many of the newly independent states.
BITs ensure U.S. investors are entitled to be treated as favorably
as their competitors, establish clear limits on expropriation of
investments, prohibit various performance requirements, afford U.S.
investors the right to transfer funds freely, and give U.S. investors
the right to submit an investment dispute with the treaty partner's
government to international arbitration. This last aspect of the BIT is
the closest thing to an insurance policy ensuring that U.S. investors
will be treated fairly. However, it is the BIT's overall focus on
encouraging adoption in foreign countries of market-oriented policies--
especially related to improving investment regimes--and supporting the
development of international law standards that will benefit U.S.
investors the most in the long run. Countries' implementation of these
investment sector reform policies will not only improve their
investment climates, but should also create additional opportunities
for U.S. investors.
In addition to the protections afforded by our BITs, it is standard
practice for the U.S. Government to assist U.S. investors who are
interested in investing abroad or who have already invested abroad and
have run into problems. We are aware of ongoing investment disputes
involving U.S. investors in every Central European country. Several of
these disputes have gone to international arbitration under BITs. The
U.S. Government is monitoring such cases and is providing appropriate
assistance to the U.S. investors. In many instances, U.S. Government
officials have met with the appropriate host government officials to
insist that U.S. investors receive all due consideration under local
and international law. U.S. Government officials also actively support
U.S. investors in Central Europe by advocating at the highest levels a
level playing field for investment.

Question. The right to pursue international arbitration as a
dispute resolution mechanism is seen by foreign investors and creditors
alike as essential to any major infrastructure project. In fact, the
European Union requires such a mechanism in order to meet the
requirements of accession to the E.U. In this regard, what has the
government of Bulgaria done to move swiftly in adopting such a measure?
Are there any obstacles that you are aware of? In addition, what is the
United States Government doing bilaterally, or through its
participation in the Stability Pact, to encourage the immediate
adoption of international arbitration legislation?

Answer. The EU's identification in December 1999 of Bulgaria as a
candidate for accession followed the Bulgarian government's intensified
economic reform efforts in 1999, and since has provided impetus for
continued reform. Recent reforms have included taking initial steps to
improve investors' ability to use international arbitration to settle
disputes.
On March 21, 2000, Bulgaria became the 149th signatory of the
International Center for Settlement of Investment Disputes (ICSID)
Convention. Bulgaria has yet to ratify the Convention, but has taken
the first step toward fulfilling the commitment Bulgaria made under the
Stability Pact's Investment Compact on accession to international
conventions on arbitration and enforcement of arbitral awards. Bulgaria
was already a member of the 1958 New York Convention on the Recognition
and Enforcement of Foreign Arbitral Awards and the 1961 European
Convention on International Commercial Arbitration.
The U.S. Government is also pursuing several different avenues to
help Bulgaria improve its judicial system, including the use of
arbitration as a valid and available option to settle disputes. In
particular, we are supporting the American Bar Association's Central
and East European Law Initiative (ABA/CEELI), which is working with the
Bulgarian Judges Association to introduce Alternate Dispute Resolution
(ADR) to the court system.
We are also working actively with the Bulgarian Government on
fulfillment of Stability Pact commitments. To that end, we have been
instrumental in the establishment of mechanisms for coordinating and
monitoring progress on reform commitments in each of the signatory
countries. The Investment Compact commitments include agreements to
accede to international arbitration conventions, to increase
transparency of the legal and regulatory framework, to establish an
open and transparent government procurement process, and to fight
corruption. With respect to corruption, it is significant that the
Government of Bulgaria has both ratified and implemented the OECD
Bribery Convention.
Finally, after the U.S.-Bulgaria BIT went into force June 2, 1994,
Bulgaria committed to a range of dispute settlement procedures starting
with notification and consultations. Bulgaria accepts binding
international arbitration under ICSID rules in disputes with U.S.
investors. The U.S. is committed to ensuring that U.S. investors in
Bulgaria are able to achieve their rights under the BIT.
The U.S. Government has worked to encourage the adoption by the
Bulgarian Government of investment-sector related reforms that will
improve Bulgaria's investment climate. Through the Bilateral Investment
Treaty, the U.S. Government has ensured that U.S. investments in
Bulgaria are protected and U.S. investors have the right to take
investor-state disputes to international arbitration.

Question. In most of the infrastructure projects in Bulgaria,
particularly those in the energy sector, private investors are not
capable of securing financing for their projects unless the investment
is backed by a sovereign guarantee from the government of Bulgaria. We
understand that the Bulgarian Government is very limited in the
issuance of such guarantees through its program with the International
Monetary Fund. What is the U.S. Government doing to ensure that U.S.
companies that are seeking such guarantees are in a competitive
position with their European counterparts?

Answer. The U.S. Government has advocated actively for U.S.
companies that are interested in investing in the energy and other
sectors in Bulgaria in an effort to ensure they are able to compete
fairly. State, Commerce, and Energy Department officials have had
frequent discussions with Bulgarian Government officials, including
Prime Minister Kostov, in meetings here and in Sofia.
We are mindful of the importance of the Bulgarian Government living
up to its commitments with the IMF and maintaining litnits on debt. We
support the IMF program in Bulgaria and do not advocate that Bulgaria
undermine its hard-earned macroeconomic stability by assuming sovereign
guarantees in excess of the ceiling. At the same time, however, we are
maintaining close communication with the highest level Bulgarian
Government officials, to underscore the benefits of U.S. investments
and services, especially in the energy sector. These benefits include
improved environmental and nuclear safety and contributions to economic
growth (through capital and technology transfers and increased, energy
efficiency).
Our efforts have enabled U.S. companies to obtain highly-sought-
after contracts. The Bulgarian Government recently signed a $77 million
credit agreement with Ex-Im Bank for a contract with a U.S. company to
upgrade nuclear safety at Kozloduy nuclear power plant, the first Ex-Im
transaction in Bulgaria since 1967. The financing for this project is
included on the Bulgarian Government's priority list of projects for
which a government guarantee is available.
Projects on which U.S. exporters are competing do not necessarily
require Bulgarian Government guarantees. In addition to being open for
short, medium, and long-term transactions in the public sector, Ex-Im
Bank is also open for short and medium-term transactions in the
Bulgarian private sector. Ex-Im Bank is also prepared to consider
financing in support of U.S. exports for Bulgarian borrowers with
independent access to private international capital markets and their
own credit ratings from recognized rating agencies. Ex-Im Bank will
also consider projects that can be secured through the assignment of
hard currency earnings.
We will continue to pursue these and other ways to assist U.S.
companies interested in investing in Bulgaria. We will also continue to
urge high level Bulgarian Government officials to ensure fair and
equitable treatment for all foreign investors.

Question. I understand that you are aware of problems investors
have had in withdrawing funds from Polish National Investment Funds,
that were originally created to back the transition of roughly 500
state-owned businesses to privatized companies. Could you describe what
actions the U.S. Government has taken and will take to resolve this
issue, which affects the investments of many American citizens.

Answer. We are aware of a dispute involving the U.S. investors in
the Polish National Investment Fund (NIF) named Octava. We understand
that the dispute arose last year when a majority of Octava's
shareholders, including representatives of the U.S. investors, voted in
favor of authorizing a share buyback program. The buyback program would
allow interested shareholders to withdraw funds from (or more
specifically sell back their shares to) Octava.
The Polish Ministry of State Treasury (``Ministry''), which is both
a shareholder in and regulator of all the NIFs, opposed the share
buyback program and filed a lawsuit in an attempt to reverse its
decision. The Ministry argues that share redemptions are not permitted
under the 1993 law that created the NIFs, since actions that serve to
reduce the capital of a NIF could undermine the primary objective of
the funds, namely increasing the value of the privatized companies they
control. However, the Ministry is aware that investments in the NIF
funds are not performing as investors had hoped and that some
structural changes will be required; the Ministry reportedly wants such
changes to take place in a manner that will not result in an increase
in the Polish Government's stake in the NIFs, as this would run counter
to the goals of its privatization program.
The court case is still pending. In the meantime, the court has
prevented Octava from implementing the share buyback program.
Simultaneously, Octava's management, representatives of the U.S.
investors, and the Ministry have been holding negotiations to find a
compromise solution. It is our understanding that the parties recently
reached a working level agreement that is acceptable to all sides,
including the U.S. investors. Although we have not been able to learn
the exact details of the accord, we have been informed that it is
currently awaiting the signature of the Treasury Minister.
At this time we are unaware of any other instances of U.S.
investors facing difficulties in divesting from Polish NIFs. In the
case of Octava, Department of State and U.S. Embassy-Warsaw officials
have followed the dispute from the beginning. Embassy officials have
met with all the principals involved and have urged the Government of
Poland to seek a fair and rapid resolution to this case. We will
continue to provide all appropriate assistance to the U.S. parties in
this dispute, and will continue to raise our concerns with high-level
Polish government officials, and, as appropriate, encourage the
Government of Poland to bring this issue to closure.
______

Response of Hon. E. Anthony Wayne to Additional Question for the Record
From Senator Chuck Hagel

Question. You have outlined very effectively the problems that U.S.
businesses encounter with foreign governmental agencies, taxing
methods, power supply, etc., in setting up operations in NIS and former
Soviet bloc countries. Are you aware of any problems that have been
caused by our own governmental agencies in this part of the world? What
kind of cooperation have you experienced with the U.S. Government in,
for instance, establishing joint ventures between U.S. companies and
former Communist governments in privatization efforts and in advancing
mutually beneficial trade, economic development, and regional or
national security goals?

Answer. One area where the U.S. Department of State has cooperated
with the Department of Commerce and some 17 other agencies is the Trade
Promotion Coordinating Committee (TPCC). Over the last seven years, the
TPCC has responded to the immediate needs of U.S. businesses, large and
small, who are interested in entering or expanding into the countries
of the former Soviet Union. The TPCC Interagency Working Group on
Energy has worked towards the rapid, safe, and environmentally-
sensitive development of energy resources with the Newly Independent
States (NIS) of the former Soviet Union. Business Development
Committees (BDCs) with Russia, Ukraine, and Kazakhstan are working to
promote and facilitate U.S. trade and investment by identifying and
working to eliminate barriers.
In December 1999, the Commerce Department and State Department
successfully persevered in the forum of the U.S.-Kazakhstan BDC and
Joint Commission to overcome obstacles to trade and increase market
access. We have seen progress in customs, labeling regulations, and
currency restrictions.
In Russia, we have worked hard, together with Commerce, to relieve
some of the most onerous problems facing U.S. businesses in Russia. We
have made concrete progress through the Binational Commissions (an OVP
initiative jointly supported by State and Commerce) on tax, customs,
and regulatory issues. In the energy area, we have had a strong team
working together from State and Commerce (and Treasury) to push Russia
to pass Production Sharing Agreement (PSA) legislation and complete the
PSA framework. In sum, cooperation has been good, progress has been
made in some areas, and there is a clear game plan that we are all
working from to make real progress in the future.
Energy developments and transportation initiatives in the Caspian
Basin continue to be a central focus of interagency efforts that
support the expansion of mutually beneficial relations with the states
of the NIS. Recent discussions have focused on regional oil and gas
transportation, the improvement of legal frameworks necessary to
support enhanced U.S. commercial energy investment in Kazakhstan and
Uzbekistan, and with respect to the latter, currency convertibility
issues. Several outreach initiatives have been undertaken and
coordinated in the energy sector that support U.S. commercial ties in
the NIS. Other programs are outlined in the Report on Implementation of
Section 303 of the Freedom Support Act.
We in the State Department play a central role in working with
American companies and with the firms, governments and other
institutions in Central and Eastern Europe to create open markets and
rule of law to attract private sector U.S. investment. In partnership
with our colleagues at the Department of Commerce and governments of
the former Soviet Union, we are working to address U.S. business
concerns and help foster a framework that opens these countries further
to American business and investment.
There are a number of overarching efforts such as battling
corruption through our joint State-Commerce efforts to battle
corruption through encouraging countries in the region that have signed
the OECD Anti-Bribery Convention to ratify and fully implement it. The
Czech Republic and Hungary, both of which are members of the OECD, have
ratified and implemented the Convention, as have Bulgaria and the
Slovak Republic. We are working with other USG agencies to press
governments in Central and Eastern Europe to take action to protect
intellectual property rights. Bulgaria has made significant progress
here.
We jointly have pursued bilateral investment treaties (BITs) with
many countries in the region. The basic aims of the BIT program are to
protect U.S. investment abroad. We currently have signed BITs with 15
countries in the region. Twelve of these are now in force.
There are also a number of specific initiatives geared to
particular parts of the region designed to improve the investment and
business climate. One such international partnership is the Stability
Pact for Southeast Europe. The Pact was announced at the July 30, 1999,
Sarajevo Summit with President Clinton and European leaders.
Results on the trade front are already impressive in Central
Europe. In 1991, U.S. companies exported $1.6 billion worth of goods to
the 15 countries of Central and Eastern Europe. By the end of 1999,
U.S. exports had doubled, to $3.2 billion.
U.S. firms have made inroads with opportunities from Greenbrier's
investment to produce railroad cars in Poland to Bechtel's $600 million
highway construction contract with the Croatian Government.
Our embassies, with State officers and Department of Commerce FCS
personnel, constantly work hard on behalf of American commercial
interests. In Russia and Central and Eastern Europe--from the Baltics
to the Balkans--U.S. Ambassadors and Embassy Senior Commercial and
Economic Officers are the eyes, ears and in-country negotiators for
U.S. commercial and economic interests--from trade and investment to
anti-corruption, environmental safeguards, and cultural exchanges.
Furthermore, as experts on host-country markets and business practices,
these State and Commerce officials can and do identify opportunities
for American firms and advocate on their behalf, companies that range
from small and medium enterprises like bagel bakeries to major firms
such as Enron and Ford.
During the absence of an FCS officer from AMEMB Tashkent, for
example, Commerce relied on the State Department to support our
coordinated efforts to work for market access in the U.S.-Uzbekistan
Trade, Investment and Energy Committee.
In Washington, the State Department's Office of Commercial and
Business Affairs (CBA) is teamed with the Department of Commerce's
Advocacy Center (AC) and Market Access and Compliance (MAC) to help
individual American companies go after lucrative opportunities abroad.
The two offices conduct joint project advocacy on behalf of U.S.
business interests. At this time, we are currently collaborating on
updating the interagency Advocacy Guidelines that are used by Commerce
and State officers both in Washington and overseas. For large or
complex cases, Commerce and State Department staff routinely come
together with interagency backing for U.S. companies. CBA, AC and MAC
collaboration is producing numerous success stories ranging from
Williams in Lithuania; to Boeing in Russia, to NRG in Estonia (which
will be the biggest single foreign investment in Estonia's history) to
Westinghouse Electric's nuclear safety project in Bulgaria (which has
resulted in the first Eximbank transaction in that country since 1967).
In short, State and Commerce work together closely and quite
successfully both in Washington and abroad, to advance U.S. commercial
interests. It is a natural partnership.
----------

Additional Statements and Material Submitted for the Record

American Chamber of Commerce in Poland,
Warsaw Financial Center, ul. Emilli Plater 53, 00-113,
Warsaw, Poland, June 27, 2000.

Senator Joseph R. Biden, Jr., Ranking
Subcommittee on European Affairs,
United States Senate,
Washington, DC.

Dear Senator Biden:

It is our understanding that the Subcommittee for European Affairs
will hold a hearing on June 28th concerning the experience of American
investors in Central and Eastern Europe. It is our pleasure to add our
voice to the hearing through this letter.
The American Chamber of Commerce in Poland represents the largest
bloc of foreign direct investment in Poland through its over 300 member
companies. The rapidly rising level of investment by American firms in
Poland is a testament to the economic reform progress Poland continues
to make and the vision of our member firms. To date, American companies
have invested over $7.5 billion dollars with an additional $3.5 firmly
committed in the near term.
It is our experience that in every country there are individual
companies which experience problems due to a lack of transparency,
inefficient bureaucracies or unfair practices. We are pleased to say
that in Poland this is definitely the exception, rather than the rule.
The American Chamber of Commerce works diligently with the government
and opposition on continuing reform and on behalf of our member firms
when they experience any of the conditions mentioned. While some
occasional difficulties remain, we see strong evidence of improvement
from year to year in Poland.
Successive governments in Poland have continued their practice of
working closely with the American Chamber of Commerce in fiscal, tax,
labor market, macro-economic, licensing, concession, intellectual
property and public procurement areas--to name but several--with the
aim of using our organizations depth of expertise and experience to
further improve the attractiveness and competitiveness of the Polish
economy. Our involvement directly in the reform process allows us to
gauge the changes which have been made, are underway or planned. The
success of our member firms speaks strongly about the results achieved
to date.
More than eighty Fortune 500 companies have made investments in
Poland, along with many U.S. small and medium sized enterprises and a
growing number of entrepreneurs starting businesses in this dynamic
economy. Poland is continuing its solid growth, aided by American
investment and providing a dynamically growing market for American
companies, goods and services.
We would be pleased to provide any additional information on
American investment and our companies experience in the market if it
will be of assistance to the Subcommittee.
Sincerely,
Mac Raczkiewicz, Chairman.
______

Die Casters International, Inc.,
One Spruce Terrace,
Wayne, NJ, June 20, 2000.

The Honorable Kempton Jenkins
President, Ukraine-U.S. Business Council,
1615 L Street, N.W., Suite 900,
Washington, DC 20036.

Dear Kempton:

I understand that you have been invited to testify before the
Senate Foreign Relations Committee on the state of U.S. business
interests in Central Europe. In Ukraine, too often failures are
attributed to corruption, frequently by Ukraine government officials,
as well as to the onerous and numerous risks and instabilities inherent
within the business and legal environment in that region of the world
today. However, sometimes failures are created by the U.S. government.
Our project is a classic example of exactly the latter situation. The
following could be included in the record as to how one agency in the
Department of Defense has unilaterally decided to throw away $3 million
of public investment despite a decision to the contrary by the Office
of the Secretary of Defense and despite the continual support of the
Ukraine government.
For two and one-half years, Die Casters International, Inc. (DCI)
has had $3 million of high technology equipment, seventy percent
American that was designed and purchased with DCI and Nunn-Lugar funds,
uselessly warehoused in Kyiv, Ukraine and in Tiraspol, Moldova, while
DCI attempted to have available and assigned funding from the U.S.
Department of Defense (DoD) released to complete DCI's defense
conversion project. In May of this year, the Office of the Secretary of
Defense (DoD-Policy) reaffirmed a decision it made in January to
release $560,000 to DCI Last week, the Defense Threat Reduction Agency
(DTRA) took unilateral action contrary to this decision and informed
DCI that DTRA will not fund the project. DTRA now plans to close DCI's
contract as a failure. DCI is working hard to have this astonishing
decision by DTRA reversed with the help of the Ukraine government.
Background
In October 1995, DTRA (then known as the Defense Nuclear Agency)
awarded DCI a $4.1 million contract for Ukraine. Under the contract,
using $3 million of Nunn-Lugar funds and $1.1 million of DCI funds, DCI
was to establish a die cast manufacturing site in Ukraine through a
joint venture with a Ukrainian defense conversion partner, Meridian.
However, the Meridian project turned out to be a pure startup for which
required outside financing could not be obtained. So, in 1997, with the
support of the Ukraine government and approval of DoD, DCI and
Burevestnik agreed to work together to form a joint venture to produce
die castings. By the beginning of 1998, DCI had achieved most of the
project's objectives, including:

DCI designed and had manufactured $3 million of high-
techology, capital equipment to be contributed to the joint
venture with its Ukraine defense conversion partners,
Burevestnik and TechnoMet. Seventy percent of this equipment
was produced in the United States, thirty percent in Moldova
and Russia.

Under DCI's leadership, a former Soviet manufacturer and a
leading U.S. manufacturer collaborated to produce new machines
designed and built with American technologies for the Ukrainian
and Russian markets.

DCI developed and negotiated a joint venture agreement and
charter with its Ukraine partners, to form a Ukrainian closed
joint stock company where DCI will control the Board of
Directors and business flow.

DCI has organized a team of leading experts from America,
Ukraine and Russia that will help ensure the success of the
conversion project.

DCI's Ukrainian partners have agreed to contribute to the
joint venture buildings, manufacturing equipment and a strong
backlog of manufacturing orders. The current operations are
profitable, with over eighty percent of $2.2 million sales
exported to Europe and East Europe.

DCI had obtained agreements to transfer Russian furnace
technology to North America with General Signal and to transfer
to America Ukrainian metallurgical technology to recycle
manufacturing metal waste.
DCI's. Efforts to Complete the Project
However, DCI's original contract funds from DTRA ran out in 1998.
Since then, DCI has requested $730,000 in additional funds to complete
the project by registering the joint venture, upgrading the plant
facilities, installing the equipment, providing operator training and
incorporating quality control equipment and practices. DCI has
continued operations in order to obtain those funds. Meanwhile, the
following events have occurred:

June 1998: After identifying $750,000, DoD executed an
agreement with the Ukraine Ministry of Defense to fund the
additional needs of the DCI-Burevestnik conversion project. At
that time, $500,000 was allocated for DCI-Burevestnik and
$250,000 for a project that has never developed.

December 1998: Senator Strom Thurmond, then Chairman of the
Senate Armed Services Committee, wrote a letter to Secretary
Cohen requesting full funding of the DCI project. (See attached
letter).

February 1999: Secretary Cohen responded that DoD plans to
provide the additional funds to DCI, subject to negotiations
with DTRA. (See attached letter). Immediately after this
letter, DCI went to DTRA at DTRA's request to negotiate, but
DTRA did not negotiate then and has not negotiated since.

March-August 1999: DCI sent letters and used other means of
communication to reach key government officials, such as
Secretary Cohen, Vice President Gore, and Ambassador Pifer,
asking them to save the valuable DCI-Burevestnik project in
Ukraine. (See attached letter).

August 1999: Assistant Secretary of Defense Edward Warner
wrote to DCI that DoD shares DCI's interest but does not have
the $730,000 requested by DCI available and could not proceed
until some Defense Contract Audit Agency (DCAA) issues were
resolved first. Those issues have since been resolved, having
been determined to have no impact on the funding or the
project.

January-May 2000: Deputy Assistant Secretary of Defense
Susan Koch, who reports to Dr. Warner, decided to provide
$560,000. DCI adjusted its operating plans to complete the
project within those funds. Dr. Koch reaffirmed her decision in
early May 2000, and DTRA was tasked to implement her decision.

May 2000: DCI had to engage a Washington law firm to stop
DTRA from taking unilateral action to move $2 million of the
project's equipment to an undisclosed location without DCI's
consent. DTRA would not answer DCI's simple questions, such as
how it planned to move the equipment and how it planned to
ensure that supplier support and warrantees would remain
effective. The manner in which DTRA took such unilateral action
has caused additional project restart costs of approximately
$115,000.
DCI's Need for Relief
Throughout this time, DCI has received continued support from its
Ukraine partners and from the Ukraine government. Yet, after more than
a month following Dr. Koch's May decision and without negotiating, over
the past week DTRA has informed DCI that it will not provide either a
contract modification or a grant to complete the project. This
indicates that DTRA unilaterally plans to terminate the project as a
failure, something that should be unacceptable by all parties, American
and Ukrainian.
DCI needs to have DoD-Policy's decision implemented immediately,
with DTRA providing the $560,000 as a grant. In addition, DTRA should
pay directly the $115,000 costs caused by DTRA's conduct last month.
Only in this way can DCI save what can surely be a successful defense
conversion project.
Political Ramifications
There are several serious political ramifications if the project is
not completed, including:

Instead of producing $6 million of new export sales for a
severely depressed Ukraine economy, instead of providing an
additional 100 to 150 jobs in Ukraine, and instead of having
American technologies showcased in the capital of Ukraine for
export to Russia and Ukraine, the $3 million of equipment
purchased by DCI and DoD has been gathering dust in storage for
more than 2.5 years.

Instead of providing a model American-Ukrainian enterprise
to showcase how the two countries can work together, the only
showcase will be how DoD did not honor its June 1998
commitment.

Instead of one successful conversion project with an
American company, for the nearly $100 million of taxpayers'
Nunn-Lugar funds invested under the oversight of DTRA since
1994 ($20 million in Ukraine), DTRA and DoD will have a string
of failed projects. Compounding this is the loss of the future
prospect the DCI project presents. With the successful
completion of the first DCI model joint venture, DCI plans to
replicate that model, similar to franchising, into a string of
up to ten additional joint ventures that would provide for well
over 3,000 additional jobs in Ukraine and Russia, significant
hard currency cash flow, and considerable export sales of
American technology.

Instead of having a model industrial operation that could be
replicated in Kharkiv, Ukraine as part of the Kharkiv
Initiative, the failed DCI project will only support the broken
U.S. Government promises similar to those articulated in the
New York Times on June 6: ``Deprived Ukraine City Finds U.S.
Help No Help.''

Instead of allowing DCI to showcase a DoD defense conversion
project where American technologies can be exported into Russia
and Ukraine and where Russian and Ukrainian technologies could
be transferred to America, those technologies remain dormant at
the detriment of American industry.
The Key Players
The key DoD personnel involved with this project are:

Dr. Edward Warner, Assistant Secretary of Defense, Strategy
and Threat Reduction (STR).

Dr. Susan Koch, Deputy Assistant Secretary of Defense, STR/
Cooperative Threat Reduction.

Mr. Marc Palevitz, Administrator in Dr. Koch's office, and
lead policy person on the DCI project.

Brigadier General Thomas Kuenning, Ret., Director--Threat
Reduction Implementation Office, DTRA.

Mr. Edward Archer, Senior Contracts Officer, Contracts and
Acquisition Office, DTRA.
Conclusion
It is such a waste for DoD not to release funds that it has been
sitting on for five years and that were promised to the Ukraine
government two years ago, and thus preventing the United States and
Ukraine governments from demonstrating at least one successful
conversion project between American and Ukrainian companies. After
failures with over $100 million of Nunn-Lugar funds allocated to DTRA's
oversight and with the $70 million of Nunn-Lugar funds given to the
Defense Enterprise Fund, the chance for one success should be
absolutely and earnestly pursued by DoD. Yet, DTRA makes its own policy
decisions and takes unilateral actions that go against that logic.
Very truly yours,
Alan C. Frederickson, President.

______

Prepared Statement of Charles M. Ludolph, Deputy Assistant Secretary
for Europe, International Trade Administration, U.S. Department of
Commerce

I. INTRODUCTION
Mr. Chairman, I am pleased to be with you this afternoon to discuss
U.S. business activity in Central and Eastern Europe and to review what
the Commerce Department's International Trade Administration is doing
to advance U.S. commercial interests in this important region. In the
ten years that have passed since the countries of Central and Eastern
Europe (CEE) rid themselves of communism, considerable progress has
been made in the region to secure democracy and establish free-market
economic systems. The pace and depth of political and economic reform
has varied in Central and Eastern Europe and progress has sometimes
been uneven, but the course is clear. Democratic values are taking hold
and central planning has given way to free-market principles throughout
the region. The private sector in Central and Eastern Europe is vibrant
and growing and the countries are moving closer towards membership in
the European Union (EU).
The Commerce Department's International Trade Administration (ITA)
has been a very active player within the USG in encouraging and
supporting the economic transformation of Central and Eastern Europe.
We have a unique interaction with the U.S. business community, and have
been able to significantly expand America's commercial presence in the
region and to protect U.S. economic interests already there. As a
result, U.S. foreign policy objectives in Europe have been furthered
and peace has been made more secure. Today, I would like to review the
extent of U.S. commercial activity in Central and Eastern Europe, the
opportunities for American firms in the region, and the extensive
program of support that Commerce ITA offers to the U.S. business
community to help them compete, including efforts to overcome market
access problems that they confront. We have been very successful in our
efforts and we have several examples to relate to you.

II. STATUS OF U.S. EXPORTS AND INVESTMENT IN CENTRAL AND EASTERN EUROPE
During the last decade, U.S. firms have learned to view CEE not
only as an emerging market, but also as an emerging marketplace.
American companies have grown increasingly sophisticated in their
understanding of the opportunities, difficulties, and challenges of
doing business in the region. As a result, both U.S. exports and
investment in CEE have dramatically increased.
Trade: Since 1991, U.S. firms have dramatically increased their
trade and investment activities in Central and Eastern Europe. In 1991,
U.S. companies exported $1.6 billion of goods to the fourteen countries
of Central and Eastern Europe: Albania, Bosnia-Herzegovina, Bulgaria,
Croatia, Czech Rep., Estonia, Hungary, Latvia, Lithuania, FYR
Macedonia, Poland, Romania, Slovakia, and Slovenia. By the end of 1999,
U.S. exports had doubled to $3.2 billion. U.S. companies exported more
than $338 million of meat, $295 million of aircraft, and $295 million
of machinery in the first three months of 2000. Between 1991 and 1999,
imports from the region increased from $3.7 billion to $6.7 billion.
Poland, with a population of almost 40 million, is the largest
market in the region. In 1999, U.S. firms exported more than $825
million worth of goods to the Polish market. During this same year,
U.S. companies exported $610 million of goods to the Czech Republic and
$503 million worth of goods to Hungary. Together, these three markets
account for more than 60 percent of U.S. exports to Central and Eastern
Europe. In 1999, the United States imported $813 million worth of goods
from Poland, $754 million of goods from the Czech Republic, and $1.89
billion worth of goods from Hungary. Imports from these three countries
equaled 47 percent of total imports from the region (for detailed
export and import data by individual country, see Annex 1).
Foreign Direct Investment: U.S. investment in Central and Eastern
Europe also has risen dramatically over the past decade. By the end of
1999, U.S. companies had invested more than $16 billion in the region.
American firms have invested more than $7 billion in Hungary, $5.1
billion in Poland, and $1.5 billion in the Czech Republic. Together
these three markets have attracted 85 percent of all U.S. investment in
the region.
One clear indication of increased U.S. business presence in Central
and Eastern Europe is the exponential growth of membership in American
Chambers of Commerce (AmCham) in the region. In the 10 years since the
first AmCham was formed in Hungary, 1,885 individual companies have
joined the 11 separate AmChams established throughout the region. U.S.
Embassies in Albania and Macedonia are currently working with
representatives of local U.S. companies to open AmChams in their
respective countries; this would mean AmChams in 13 of the region's 15
countries. AmChams are important because they offer U.S. companies
active in these markets a vehicle to express their views and concerns
on doing business to host-country governments and they help build
confidence in the local market for prospective new U.S. commercial
partners.

III. BUSINESS OPPORTUNITIES IN CENTRAL AND EASTERN EUROPE
The appeal of the Central and East European markets to U.S.
exporters and investors stems from opportunities created during (1)
their transition from centrally-planned to market economies and (2) the
process of modernizing their economies in an effort to meet EU
standards as they vie for eventual EU membership. The transition period
has opened up these markets to Western goods, forced old industries to
retool and reshape themselves, and created entirely new companies and
industries in the region. The last decade has witnessed the massive
privatization of state enterprises and utilities and the modernization
of infrastructure. All of this change has increased the prospects for
U.S. companies.
The potential for future growth is a source of optimism about these
countries. In 1999, Poland's growth rate was 4.0 percent, the Czech
Republic's was zero, and Hungary's was 4.2 percent. The European Bank
for Reconstruction and Development forecasts real GDP growth for 2000
to be 4.5 percent for Poland, 2.0 percent for the Czech Republic, and
4.0 percent for Hungary. Their prospects for growth are expected to
rise further as economic reforms continue and as they approach EU
membership.
Trade: Part of the uniqueness of these markets is that Western
consumer products had very little penetration prior to 1989. Now, CEE
consumers' strong desire to take advantage of their new range of
choices and their growing purchasing power translates into market
opportunities for U.S. exporters. Additionally, the services sector in
these countries was virtually non-existent prior to the transition. In
the last decade, U.S. companies have successfully introduced services
ranging from insurance to consulting to dry cleaning.
During the transition, CEE companies have had to modernize
themselves to become competitive under free market conditions. They
have sought U.S. technology and inputs in their restructuring efforts.
Further, the CEE countries' drive to modernize their economies and
prepare for EU accession has resulted in great efforts to develop basic
infrastructure, such as telecommunications networks and roads. Strong
projections for increased energy demand in the future have resulted in
ambitious government plans to increase generation capacity and to
upgrade distribution networks. U.S. companies have been at the
forefront of both enterprise restructuring and infrastructure
development.
The environmental technologies sector has particularly strong
prospects for U.S. business. The environmental legacy of communist
industry was polluted air, water, and soil. Meanwhile, the EU accession
process has forced the CEE countries to bring their environmental
standards in line with those of the EU. The result is significant
opportunities for the sale of environmental technologies and services
in the CEE region.
As the CEE economies recover and grow, CEE government procurement
has become a significant source of opportunities. CEE governments are
in the process of procuring products as diverse as aircraft, municipal
water treatment systems, computer networks, and medical equipment. U.S.
companies are lead competitors in these procurements.
Finally, in Southeast Europe, internationally funded reconstruction
and development efforts are underway. New activities in the areas of
energy, transportation infrastructure (including roads, ports, and
bridges), and construction create opportunities for U.S. firms in this
relatively unexplored region. However, since the majority of the large
infrastructure projects will be funded by the EU, and implemented
through tenders limited to companies located in the EU, American
companies face a significant challenge when bidding on internationally-
funded projects.
Foreign Direct Investment: The U.S. is already a major foreign
investor in Central and Eastern Europe. American investors are taking
advantage of the strategic location, good infrastructure, skilled and
educated labor, and relatively low labor costs (compared to the EU), of
countries such as Hungary, the Czech Republic, and Poland. In some
cases, U.S. companies have invested to supply CEE domestic markets. In
other cases, U.S. companies are placing investment in CEE countries to
manufacture products which are then exported to the much larger EU
market. Industrial products manufactured in CEE countries enter the EU
duty-free as a result of the Europe Agreements--commonly referred to as
the association agreements--that the CEE countries have signed with the
EU. In addition, seven countries in the CEE region have entered into a
multilateral free trade agreement, the Central Europe Free Trade
Agreement (CEFTA). Those countries include Poland, Hungary, Czech
Republic, Slovakia, Slovenia, Romania, and Bulgaria.
U.S. investment has taken several forms. Massive privatization
efforts are attracting American companies to the telecommunications,
energy, and light and heavy manufacturing sectors, to name a few.
Further, CEE companies of all sizes are seeking U.S. joint venture
partners. American companies have formed many successful partnerships
with CEE companies, in particular, using the CEE companies' knowledge
of local market conditions. Finally, U.S. companies are building
greenfield manufacturing sites, and increasingly are investing in more
high-tech, value-added facilities in the electronics, information
technology and automobile parts sectors.
Overall, the prospects for doing business in the CEE region are
strong and diverse for both U.S. exporters and investors. If companies
are willing to be flexible to changing conditions, there are
significant emerging opportunities to pursue in this dynamic region.

IV. USDOC/INTERNATIONAL TRADE ADMINISTRATION (ITA) PROGRAMS
A. Market Entry
ITA supports U.S. companies interested in Central and Eastern
Europe both here at home and overseas through a variety of means.
Various ITA units help introduce American firms to the region's
markets. But ITA's efforts do not stop there. ITA counsels and supports
U.S. firms during the entire commercial undertaking, ensuring that the
playing field is level and that American companies are treated fairly.
Central and Eastern Europe Business Information Center (CEEBIC):
The heart of ITA's program for the region is our Central and Eastern
Europe Business Information Center (CEEBIC), located in ITA's Market
Access and Compliance unit. CEEBIC is a ten-year old program, funded by
USAID, that serves as the USG's central clearinghouse for all economic,
commercial, and financial information on 15 countries of Central and
Eastern Europe. In particular, CEEBIC's overseas network of 13 foreign
national trade specialists develops detailed information on new
commercial opportunities in Central and Eastern Europe. That
information is sent back to Washington where CEEBIC's headquarters
staff puts it on CEEBIC's website and in its several publications for
wide dissemination to the U.S. business community.
Our website--CEEBICNet--is a highly popular service receiving more
than 135,000 inquiries weekly. It contains not only trade and joint
venture leads for U.S. companies but a broad range of information
products including market research, information on sources of finance,
fact sheets, unclassified U.S. Embassy reporting cables from throughout
the region, and materials provided by the CEE countries themselves. It
also contains important links to other USG websites, as well as those
maintained by Central and East European countries and institutions.
CEEBIC maintains a database of over 11,000 U.S. companies which
regularly use its services (for a breakdown of the database by state,
see Annex 2). CEEBIC has a monthly publication--Commercial Update--and
a weekly internet publication--Southeast Europe Business Brief, both of
which offer timely and substantive information on CEE markets to
potential U.S. business partners.
CEEBIC also provides crucial support to the Administration's
efforts to secure peace, build democracy, and create long-term
prosperity in Southeast Europe in the aftermath of the Kosovo conflict.
CEEBIC is adding foreign national trade specialists in Kosovo and in
Northern Greece to serve the Balkan region. It also is the USG's
leading source of information on reconstruction and economic
development projects under the Stability Pact for Southeast Europe--a
multilateral initiative of the United States and other G-8 countries
designed to strengthen the war-torn Balkan region economically and
politically. In furtherance of this objective, CEEBIC will conduct
business seminars and briefings for U.S. firms to help them better
understand the new commercial opportunities stemming from the Stability
Pact and other projects being funded through international financial
institutions.
CEEBIC is much more than just an information service. It also
provides a highly effective business counseling and commercial
development function. Once U.S. firms have been given information about
the CEE markets and have begun to interact with their CEE counterparts,
CEEBIC continues to guide and counsel them through that initial
interaction and their negotiations with CEE companies and governments.
We vigorously advocate for them against foreign competition, and when
necessary, we work to protect their interests. This function is highly
important for U.S. companies which face the many uncertainties of the
CEE markets and their frequently difficult business climates.
U.S. Commercial Service: ITA's U.S. Commercial Service (CS) is
committed to assisting U.S. firms in realizing their export potential
by providing expert counseling and advice, information on markets
abroad, international contacts, and advocacy services. In Central and
Eastern Europe, 11 American CS officers provide in-country support and
expertise as for U.S. companies doing business in this dynamic market.
They also manage a network of 46 foreign national employees in the
region to provide U.S. firms with hands-on support and guidance in
these complex markets.
The U.S. Commercial Service provides timely and customized business
solutions to assist U.S. firms to enter the new markets of CEE. This is
done through a combination of cost effective basic and specialized
services, including the following:

Agent-Distributor Service: CS specialists locate potential
partner companies in Central and Eastern Europe that are
interested in distributing U.S. products overseas;

Gold Key Service: CS specialists identify and organize
individual meetings between U.S. companies and potential CEE
partners and/or key government officials.

International Company Profile: To address concerns about
potential partners, CS specialists perform background checks on
CEE companies to reduce the commercial risk of a transaction.

Showcase Europe: In support of increased U.S. exports to
Europe, the integration of Central and Eastern Europe into the
global economy, and the development of an export strategy that
views Europe as a single export market, CS offices throughout
the CEE region and Western Europe are working together to
promote export opportunities to U.S. companies.

Advocating for American Business: ITA's Advocacy Center acts as a
unique, central coordination point marshaling the resources of 19 U.S.
Government agencies in the Trade Promotion Coordinating Committee
(TPCC) to ensure that sales of U.S. products and services have the best
possible chance abroad.
Advocacy Center assistance in Central and Eastern Europe is broad
and varied, but most often involves companies that must deal with CEE
governments or government-owned corporations in some way. Assistance
can include: (1) visits to a key CEE minister or deputy minister by a
high-ranking U.S. government official; (2) direct support by U.S.
officials (including Commerce and State Department officers) stationed
at U.S. embassies in the CEE region; and (3) action coordinated by U.S.
government agencies to provide maximum assistance in a case. The
Advocacy Center is at the core of the President's National Export
Strategy; its goal is to ensure opportunities for U.S. companies
throughout the new markets of Central and Eastern Europe.
In the CEE region, the Advocacy Center has aggressively pooled the
strength of numerous U.S. Government agencies, including Commerce,
State, and Treasury, to support U.S. companies as they bid for major
projects. For example, in 1998, the Advocacy Center wrote highly
effective Secretarial letters on behalf of the U.S. company Parsons
Power Group Inc. to the Croatian government to support Parsons'
successful attempts to win a $96 million contract to upgrade a power
plant in Croatia. Parsons had been introduced to the Croatian market
during its participation in former Secretary Brown's trade mission to
Croatia in 1996.
The Advocacy Center is currently assisting 40 U.S. companies
pursuing projects in Central and Eastern Europe valued at $11.7
billion.
Trade Promotion Coordinating Committee (TPCC): Through the Trade
Promotion Coordinating Committee, other U.S. Government agencies also
are active in promoting U.S. commercial development in Central and
Eastern Europe. Specifically, the Trade Development Agency (TDA), the
Overseas Private Investment Corporation (OPIC) and Eximbank all are
working with ITA to increase U.S. commercial presence in the region.
For example, TDA and OPIC are co-located with our commercial office in
Zagreb, Croatia to identify new infrastructure projects of potential
interest to U.S. investors.
B. Assuring Market Access
While good opportunities exist, the CEE markets also pose
significant challenges. U.S. firms often face considerable obstacles
when investing in or exporting to Central and Eastern Europe. These
barriers usually stem from one of the following elements: (1) the
transition from a centrally-planned to a market economy and (2) the EU
accession process.
1.) Non-Tariff Barriers
A majority of the non-tariff barriers in Central and Eastern Europe
are a direct result of the region's inexperience with a market economy
and the immature legislative and regulatory environment that governs
market relations in the region. As the CEE countries develop, the
severity of many of these challenges is reduced and market forces
become a determining factor in business relations. Poland, Hungary, and
the Czech Republic have seen the most significant gains in this area,
while the countries in Southeast Europe, particularly Albania and
Bosnia and Herzegovina, still face severe market barriers. The primary
non-tariff barriers in CEE are:
Corruption: Corruption is cited often by American firms as the most
significant problem when doing business in the CEE region.
Specifically, many companies face difficulties: when processing goods
through customs, when applying for a business license, and when bidding
on government procurements.
In Southeast Europe, in particular, ITA is playing a lead role in
the U.S. Government's aggressive approach to combating corruption by
actively fighting corruption through various international fora. ITA's
Assistant Secretary for Market Access and Compliance Patrick Mulloy, as
one of.the U.S. Government's OSCE Commissioners, has championed the
involvement of the OSCE in the fight against corruption in Central and
Eastern Europe. Also, in cooperation with other members of the
Stability Pact, we have lobbied the countries of Southeast Europe to
adopt and implement the Stability Pact's Anti-corruption Initiative.
This program outlines numerous measures that must be implemented in
order to create an environment conducive to non-corrupt business
practices.
Lack of Transparency: A second problem, closely related to
corruption, that is prevalent throughout Central and Eastern Europe is
the lack of transparency in decision-making, tendering, and government
procurement. Decisions that affect legislation governing the business
climate, specific government tenders, regulatory decisions, and
judicial processes are often implemented in a non-transparent manner.
To tackle this specific problem, ITA has encouraged the CEE countries
to support U.S. Government efforts in the World Trade Organization that
focus on improving transparency, especially in the area of government
procurement. ITA is also actively engaged in the Stability Pact for
Southeast Europe's fight to improve transparency in the region. ITA
played an instrumental role in the drafting of the Stability Pact's
Investment Compact, which places significant importance on improving
transparency in the region.
Lack of Protecting Intellectual Property Rights (IPR) Protection:
Through the Special 301 process, the U.S. Government monitors the
enforcement of intellectual property rights around the world. In
Central and Eastern Europe, this program is especially important due to
high levels of IPR infringement, especially in the pharmaceutical,
audio recordings, and optical media sectors. In the Special 301 review
for 2000, five CEE countries (Czech Republic, Hungary, Latvia,
Lithuania, and Romania) were placed on the Special 301 Watch List,
while Poland was placed on the Priority Watch List for significant
copyright infringements on sound and video recordings.
2.) Tariff Barriers
Tariff Differentials: While the U.S. Government supports EU
enlargement into Central and Eastern Europe, one serious concern is the
tariff differentials arising from the Europe Agreements--commonly
referred to as the association agreements--that these countries have
signed with the EU. (See Annex 3 for list of countries that have signed
Europe Agreements.) Under these agreements, CEE countries give EU
exports duty-free treatment while still retaining Most Favored Nation
(MFN) rates for U.S. exports. Once the CEE countries enter the EU, they
will bring their tariffs in line with the EU's Common External Tariff
(CXT). For industrial tariffs, this will generally result in a
reduction of CEE tariffs to the CXT level.
This tariff differential problem could affect whether CEE countries
continue to receive U.S.-Generalized System of Preferences (GSP)
benefits. Under the GSP statute, GSP may not be extended to countries
that give more favorable tariff treatment to another developed country
(such as the EU) than they do to the United States, if such
preferential treatment has, or is likely to have, a significant adverse
effect on U.S. commerce. U.S. GSP law requires that a country affording
such preferential treatment be excluded from the U.S. GSP program if
the President determines that it is providing such adverse preferential
treatment.
In August 1999, the Senate Finance Committee raised its concerns
about this matter in the report on the bill which extended the GSP
statute for another three years. Chairman Roth of the Senate Finance
Committee, Senators Biden, Levin and Hollings, Chairman Archer of the
House Ways and Means Committee, Congressman Visclosky, and Congressman
Bliley have sent letters to Secretary Daley expressing their concerns
about the tariff issue.
The ITA, in conjunction with State and USTR, is encouraging CEE
countries to reduce their applied industrial tariffs to the level of
the E.U.'s CXT before full accession to provide relief to U.S.
exporters. In addition to consultations with CEE officials visiting
Washington, ITA Assistant Secretary for Market Access and Compliance
Patrick Mulloy traveled to Poland, Hungary and the Czech Republic in
June 1999 to press this issue and has written often to regional
officials to follow up. Assistant USTR Catherine Novelli traveled to
the those countries in March 2000 to press them to move on tariffs on
products of particular interest to U.S. trade. In April 2000, A/S
Mulloy returned to the Czech Republic and went to Slovakia and Slovenia
to urge immediate tariff reductions to the CXT. In all of these
meetings, the linkage of the tariff issue with GSP benefits was raised.
The President's Compliance Initiative seeks increased resources to
combat this and other market access issues in Central and Eastern
Europe and elsewhere in the world.

V. ITA SUCCESS STORIES
Since the collapse of communism in CEE, ITA has been extremely
successful in supporting U.S. companies as they take advantage of
market opportunities in the region. Working together, the Central and
Eastern Europe Business Information Center (CEEBIC), the U.S.
Commercial Service, the Advocacy Center, and other ITA offices, have
supported the presence of American firms and products throughout the
region.
CEEBIC has been especially successful at supporting small and
medium sized U.S. companies (SME's) as they expand into the region.
Since 1990, when CEEBIC was founded, the support from CEEBIC staff for
SME's has been considerable and successful, as evidenced by the
following examples.
A. Helping Small and Medium Companies Expand into Central and Eastern
Europe
CEEBICNET Leads to Exports for Illinois Manufacturer: Global
Development/Aaron Equipment is a small manufacturer based in Chicago,
Illinois, with offices in Portland, Oregon and Sarasota, Florida. The
company has been involved in environmental technology since 1960 and is
a supplier of environmental equipment to many major U.S. and
multinational firms.
In January 1998, Global Development's President, Dan Burda, e-
mailed CEEBIC informing that, ``We have been investing in the Czech
Republic in heavy industry and feel that it has been possible through
information we obtained by your site [on the World Wide Web].'' During
follow-up conversations with Mr. Burda, CEEBIC learned that Global
Development consults CEEBICNET regularly for both trade and investment
leads and current commercial and economic information. The company's
involvement with a Czech recycling and co-generation facility is the
result of a trade lead published on the CEEBIC web-site. Global
Development is exporting $25 million in environmental technology and
equipment to the Czech firm. Mr. Burda was very complimentary of CEEBIC
urging, ``Keep up the good work!''
CEEBIC assists Idaho firm with new-to-market Sales in Latvia: In
January 1998, Brian Page of Dome Technology, a small Idaho company
beginning its international expansion, was unable to find a shipping
company that could ship $2 million worth of construction materials to
Latvia. In a conversation with a CEEBIC Washington-based Trade
Specialist about Latvian tax rates, Mr. Page was pleased to learn that
CEEBIC provided a substantial amount of additional market and country
information, and was well informed about shipping companies that
regularly send goods to Central and Eastern Europe, including Latvia.
CEEBIC provided Mr. Page with a list of shipping companies with
services and experience in the region. According to Mr. Page: ``We went
with one of these lines. Thank you so much. We had no luck anywhere
else we turned to.''
Florida Investor Continues Airline Services in Croatia with CEEBIC/
FCS Assistance: John Barber invested over $750,000 in Croatia in 1992
to begin his own Airline, Ivan-Air, Ltd. This small firm provides
airline services in-country for tuna fishermen, among other Croatian
businesses, needing to get their goods to market. In the summer of
1997, the American investor experienced difficulty with the Croatian
Ministry of Communication in getting an Air Operator Certificate (AOC)
re-issued. Ivan-Air, Ltd. suspected unfair practices and approached the
Commercial Section of the U.S. Embassy in Zagreb for assistance. From
August to November 1997, Ivan-Air, Ltd. was losing $1,000 daily.
The Commercial Service's Patrick Hughes along with CEEBIC
representative Damir Novinic advocated on Ivan-Air's behalf and had
U.S. Ambassador to Croatia Peter Galbraith write a letter to Croatian
Minister Luzavec. Within ten days of this letter, on November 24, 1997,
the Air Operator Certificate was re-issued to Ivan-Air, Ltd. Mr. Barber
thanked the Embassy expressing his ``sincere appreciation in particular
to Patrick Hughes and Damir Novinic'' citing that their assistance
``made a significant difference'' in keeping his business alive. This
joint effort by FCS and CEEBIC allowed Mr. Barber to continue his
airline services in Croatia and illustrates how FCS and CEEBIC work
together on important market access issues affecting U.S. business.
B. Ensuring Market Access for U.S. Companies in Central and Eastern
Europe
Slovenia Reducing Industrial Tariffs to EU's Common External Tariff
(CXT): The ITA, working in conjunction with State and USTR, has
encouraged CEE countries to reduce their applied industrial tariffs to
the EU's common external tariff (CXT) prior to accession. This is the
best way to help minimize the tariff differentials that arise as part
of the Europe Agreements that the CEE countries have signed with the
EU. For example, in Slovenia, the trade weighted average MFN tariff
facing top 100 U.S. exports to Slovenia in 1998 was 8.12 percent. If
Slovenia adopted the CXT on those same products, the trade weighted
average would be 2.02 percent, an improvement of 6.10 percent.
During 1998 and 1999, the ITA and other USG officials met with and
wrote to senior Slovene officials about this issue. As a result, the
Slovene Ministry of Economic Relations and Development drafted a tariff
strategy to phase-in tariff reductions on all industrial products to
reach the level of the CXT by 2003. Slovenia began lowering tariffs on
a temporary basis in 1999. In April 2000, ITA's Assistant Secretary for
Market Access and Compliance Mulloy traveled to Slovenia to urge the
Slovene Government and Slovene parliamentarians to pass legislation
that would implement the comprehensive tariff reduction plan and make
tariff changes permanent. This legislation is moving forward in the
Slovene parliament.
Bulgaria Cracks-down on Optical Media Piracy: Working together with
the U.S. Trade Representative (USTR) and the State Department (State),
ITA was especially successful in pressuring the Bulgarian Government,
through the Special 301 program, to aggressively tackle the severe
levels of optical media (compact discs and CD-rom) piracy. In April
1998, Bulgaria, at that point the world's second largest producer of
counterfeit optical media, was elevated to the Special 301 Priority
Watch List and informed that they would be elevated even further, to
the Priority Foreign Country list, if substantial improvements were not
made in their enforcement regime. After significant pressure by ITA,
USTR, and the State Department, Bulgaria introduced a stringent
enforcement program and closed all factories that were producing
unauthorized optical media.
Southeast Europe: Commercial Opportunities and Partnerships: On
October 31-November 2, 1999, Secretary Daley led an interagency
delegation to Sofia, Bulgaria to host the ``Southeast Europe:
Commercial Opportunities and Partnerships Conference.'' The Conference,
which attracted more than 100 U.S. companies, achieved three
objectives: It (1) provided U.S. companies the most current information
about business opportunities in the region; (2) identified economic
reforms needed in Southeast Europe and ways to improve the region's
business environment; and (3) arranged more than 250 matchmaking
meetings between 76 American and 62 regional companies.
The Conference advanced the Stability Pact's goal of increasing the
role of Southeast Europe's private sector in the economic development
of the region. Regional companies forged partnerships with U.S.
companies and were briefed on current and future reconstruction and
development priorities for the region. The Investment Roundtable
furthered the Stability Pact's Investment Compact by encouraging
regional governments to improve the climate for investment in their
countries. Finally, the issue of corruption, which is a central theme
in the Stability Pact, was discussed at length during the Investment
Roundtable.
CEEBIC to Host a Central and Eastern Europe Open House and a
Business Forum on Southeast Europe: On July. 14, the Central and
Eastern Europe Business Information Center (CEEBIC) will celebrate its
10-year anniversary by hosting an open house for U.S. companies. CEEBIC
Washington staff and CEEBIC employees from twelve countries in Central
and Eastern Europe, will discuss new trade and investment opportunities
with interested U.S. firms. Earlier that day, CEEBIC will host the
Southeast Europe: Project and Financing Opportunities Forum. This
interagency forum will explore financing and project opportunities for
U.S. companies resulting from the multilateral Stability Pact for
Southeast Europe and the U.S. Government's Southeast Europe Initiative.
CEEBIC expects more than 300 U.S. firms to attend these events.

Annex 1

U.S. Trade With Central and Eastern Europe, 1991-1999--Total U.S. Exports
[In Calendar Year and Millions of U.S. Dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
1991 1992 1993 1994 1995 1996 1997 1998 1999
--------------------------------------------------------------------------------------------------------------------------------------------------------
World......................................................... 421,730 448,164 465,091 512,626 583,031 622,827 687,598 680,474 692,821
Albania....................................................... 18 36 34 16 14 12 3 15 25
Bosnia-Herzegovina............................................ 0 5 25 39 28 59 102 40 44
Bulgaria...................................................... 142 85 115 110 132 137 104 115 103
Croatia....................................................... - 91 103 147 140 106 139 97 108
Czech Republic................................................ - - 267 297 363 410 592 568 610
Czechoslovakia................................................ 123 413 - - - - - - -
Estonia....................................................... - 59 54 33 139 83 48 87 162
Hungary....................................................... 256 295 435 309 295 331 486 482 503
Latvia........................................................ - 55 90 101 89 165 219 187 218
Lithuania..................................................... - 44 57 41 52 63 87 62 66
Macedonia..................................................... - 4 11 14 21 14 34 15 59
Poland........................................................ 459 641 912 625 776 968 1,171 882 825
Romania....................................................... 209 248 324 340 256 266 254 340 177
Slovakia...................................................... - - 34 43 61 63 82 111 127
Slovenia...................................................... - 38 92 96 110 131 113 123 113
Federal Republic of Yugoslavia................................ - 39 2 1 2 46 49 74 59
Yugoslavia.................................................... 371 225 - - - - - - -
-----------------------------------------------------------------------------------------
Total Central Europe.......................................... 1,578 2,278 2,555 2,211 2,479 2,854 3,483 3,198 3,199
--------------------------------------------------------------------------------------------------------------------------------------------------------

Total U.S. General Imports--Customs Value
[In Calendar Year and Millions of U.S. Dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
1991 1992 1993 1994 1995 1996 1997 1998 1999
--------------------------------------------------------------------------------------------------------------------------------------------------------
World........................................................ 487,129 532,665 580,659 663,256 743,505 791,315 869,874 913,885 1,024,766
Albania...................................................... 3 5 8 6 9 10 12 12 9
Bosnia-Herzegovina........................................... - 10 7 4 3 10 8 7 15
Bulgaria..................................................... 56 79 159 215 183 126 172 219 200
Croatia...................................................... - 47 106 115 93 71 83 73 110
Czech Republic............................................... - - 277 316 364 482 610 672 754
Czechoslovakia............................................... 145 241 - - - - - - -
Estonia...................................................... - 12 20 29 62 60 77 125 237
Hungary...................................................... 367 347 401 470 547 677 1,078 1,567 1,892
Latvia....................................................... - 11 22 41 86 99 149 115 229
Lithuania.................................................... - 5 16 15 26 34 80 81 97
Macedonia.................................................... - 47 111 82 89 125 147 175 136
Poland....................................................... 357 375 454 651 664 627 698 783 813
Romania...................................................... 69 87 69 195 222 249 400 393 434
Slovakia..................................................... - - 65 131 129 124 166 166 169
Slovenia..................................................... - 101 229 265 289 290 277 287 276
Federal Republic of Yugoslavia............................... - 39 0 0 0 8 10 13 5
Yugoslavia................................................... 674 225 - - - - - - -
------------------------------------------------------------------------------------------
Total Central Europe......................................... 1,671 1,631 1,944 2,537 2,768 2,993 3,965 4,688 5,376

--------------------------------------------------------------------------------------------------------------------------------------------------------
Prepared by: U.S. Department of Commerce, Central and Eastern Europe Division, June 2000.

Source: U.S. Department of Commerce, Bureau of the Census.

Annex 2

CEEBIC Database by State
[As of June 15, 2000]
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Alabama....................... 53 Louisiana........ 45 Ohio............. 635
Alaska........................ 5 Maine............ 51 Oklahoma......... 64
Arizona....................... 109 Maryland......... 431 Oregon........... 116
Arkansas...................... 41 Massachusetts.... 507 Pennsylvania..... 527
California.................... 1,171 Michigan......... 276 Rhode Island..... 60
Colorado...................... 128 Minnesota........ 192 South Carolina... 73
Connecticut................... 324 Mississippi...... 27 South Dakota..... 9
Delaware...................... 22 Missouri......... 142 Tennessee........ 88
Florida....................... 471 Montana.......... 8 Texas............ 482
Georgia....................... 205 Nebraska......... 42 Utah............. 35
Hawaii........................ 18 Nevada........... 21 Vermont.......... 39
Idaho......................... 19 New Hampshire.... 75 Virginia......... 739
Illinois...................... 693 New Jersey....... 446 Washington....... 172
Indiana....................... 149 New Mexico....... 24 Washington, DC... 785
Iowa.......................... 65 New York......... 1,205 West Virginia.... 25
Kansas........................ 41 North Carolina... 205 Wisconsin........ 207
Kentucky...................... 60 North Dakota..... 14 Wyoming.......... 3
Total........ 11,387
----------------------------------------------------------------------------------------------------------------

Annex 3

CEE Europe Agreement with European Union
------------------------------------------------------------------------
Year Tariff
Year Signed Reductions (for EU)
Began
------------------------------------------------------------------------
Poland........................ 1991 1992
Hungary....................... 1991 1992
Czechoslovakia \1\............ 1991 1992
Romania....................... 1993 1993
Bulgaria...................... 1993 1993
Estonia \2\................... 1995 1995
Latvia \2\.................... 1995 1995
Lithuania \2\................. 1995 1995
Slovenia...................... 1996 1997

------------------------------------------------------------------------
\1\ Note: After their split at the end of 1992, the Czech Republic and
Slovakia signed separate Europe Agreements with the EU in 1993.
\2\ In the case of the Baltics, Free Trade Agreements were signed in
1995, which went into effect immediately. The FTAs were later
incorporated into Europe Agreements.

______

Prepared Statement of Patricia Schaub, Entergy Corporation

EXECUTIVE SUMMARY
It is a pleasure to submit this statement to the European Affairs
Subcommittee on the experience of the Entergy Corporation in doing
business in Central and Eastern Europe. Our statement will specifically
discuss Entergy's experience in the energy sector in Bulgaria. Entergy
will be rehabilitating an existing 840 MW lignite-fired electric power
generating facility located adjacent to Bulgaria's largest lignite mine
in the Southeastern part of the country.
In summary, we believe that Entergy's investment in Bulgaria is a
win-win situation. It enables the Entergy Corporation to position
itself in a strategic emerging energy market. On the Bulgarian side,
our investment provides much needed improvements to a facility that has
not been able to meet the environmental, health and safety standards
required by the European Union. The rehabilitation will allow the plant
to operate safely for many years, providing energy to a growing
economy. While there continue to be obstacles to finalizing this
project, we have been working as partners with the Bulgarian government
to remove remaining impediments--which will benefit not only Entergy,
but future investors, and ultimately, the Bulgarian economy.

ENTERGY CORPORATION
Entergy is a global energy company, headquartered in New Orleans,
Louisiana. The company is engaged in a wide range of power production
and distribution operations, as well as in a number of other
diversified service areas. The company is a leading provider of
wholesale energy marketing and trading services, as well as a
recognized leader world-wide in power development and nuclear power
operations.
Currently, Entergy owns, manages and invests in power plants with a
generating capacity of nearly 30,000 megawatts both domestically and
internationally and delivers electricity to about 2.5 million customers
in portions of Arkansas, Louisiana, Mississippi and Texas. In 1998,
Entergy ranked among the largest U.S. utility companies, with total
revenues of more than $8 billion dollars and total assets of more than
$22.9 billion dollars.
Entergy Wholesale Operations (EWO)--the wholesale power
development, trading and marketing unit of Entergy--is primarily
focused on emerging competitive markets of North America and Europe.
Its portfolio of assets currently includes roughly 12,700 megawatts of
gross generation capacity in operation, under construction or announced
development projects around the world. The portfolio includes fifteen
assets located in nine countries.
One of Entergy's most important priorities as a company is its
commitment to conduct its operations, both domestically and
internationally, in a manner that places a high premium on health,
safety and the environment. Entergy also places a high priority on its
ability to give back to the communities it serves. This commitment can
be seen in the company's sponsorship--at home and abroad--of a variety
of education and literacy projects, community and economic development
programs, health and social service projects and environmental
improvement programs.

THE MARITZA EAST III PROJECT
In October 1998, Entergy signed a joint development agreement with
the Bulgarian National Committee of Energy CoE (now called the State
Agency for Energy and Resources (SAEER)), and the National Electric
Company (NEK) to develop a project to own, operate and refurbish the
Maritza East III power plant in Bulgaria. Entergy sees the ``Maritza
East III project'' as the beginning of an important relationship
between the company and its Bulgarian partners.
The Maritza East III plant is a lignite-fired facility located in
south-central Bulgaria near the town of Stara Zagora. The facility is
currently owned and operated by the NEK and is located 37 miles from
the Turkish border. Lignite-burning plants currently supply 30-35% of
power in the country. Lignite reserves at the site are estimated at
approximately 2 billion tons and represent approximately 80 percent of
the country's domestic coal reserves.
The scope of work for the Russian-designed power plant, which was
originally commissioned between 1978 and 1981, consists of replacing
worn-out boiler parts and making a variety of additional upgrades to
turbines, plant control and pollution control systems. This work is of
critical importance to the Bulgarian people and to the residents of the
region. For example, like many other power plants in Eastern Europe,
the Maritza East III plant is not currently fitted with modern
pollution control equipment. Installation of new flue gas
desulphurization (FGD) equipment as part of the Entergy refurbishment
effort will reduce sulfur dioxide (SO2) pollution emissions by at least
ninety percent (90%), or by over 1000 tons of SO2 per day. This
reduction will mean that for the first time, SO2 emissions from the
Maritza East III plant will meet World Bank SO2 emission limits.
Furthermore, with the addition of this equipment, ground level
concentrations for SO2 emissions in the vicinity of the Maritza East
III plant will meet the E.U. and Bulgarian SO2 air quality standards
that were established to protect public health.
All electricity generated by the plant will be sold to the NEK in
accordance with Bulgaria's new energy law, which was passed in July
1999. The new law aims to bring the country in line with the E.U.
electricity directive and is part of Bulgaria's overall E.U. accession
program.

CURRENT STATUS OF THE PROJECT
Entergy has overall responsibility for the development of the
project and is also leading the development effort, with support from
NEK in several areas.
The total project cost is approximately $450 million dollars. The
rehabilitation work and the installation of the FGD equipment is
expected to take 36 months. However, during the rehabilitation program,
each unit will be rehabilitated in turn, while the remaining three
units will continue to operate. This will enable the total capital cost
to be partly offset by internally generated funds.
Much of the initial permitting and licensing work has already been
completed on the project. In addition, environmental approval for the
project has been granted by the Bulgarian Ministry of Environment and
Waters. Work to obtain the remaining approvals needed for the project
is underway.

BULGARIA AT A CROSSROADS
Bulgaria is at a critical point in its history. Under the
leadership of Prime Minister Ivan Kostov, Bulgaria has worked very hard
over the past two years to turn its economy around and recover from
years of mismanagement under socialist rule. The efforts of Prime
Minister Kostov and his pro-reform government have recently been
praised by a variety of world leaders. It is the goal of the Bulgarian
government to be admitted to the European Union by 2006.
Major government accomplishments to-date include: reversing the
country's economic decline; turning over 70 percent of the country's
economic assets to private hands; and restoring 95 percent of the
country's nationalized farmland under communism back to its original
owners. Inflation in the country dropped from triple digits to 6.2
percent in 1999 and the economy grew by 2.5 percent--with 4 percent
growth targeted for 2000. The government has pledged to continue its
tough anti-corruption and anti-crime programs, its judicial reform
programs and to find new ways to help alleviate widespread poverty and
unemployment in the country.
The government has also committed to continue its focus on:
privatization; attracting investment to Bulgaria's infrastructure
sector; improving the country's overall business environment; and
dismantling unnecessary licensing and regulatory barriers. In 1999,
Bulgaria concluded 1,100 privatization deals, with payments totaling
$587 million. Within the investment arena, Bulgaria's energy sector has
been called one of the most attractive investment opportunities for
foreign investors.
The energy sector is undergoing major restructuring to comply with
IMF targets and to meet the deregulation and environmental standards of
the European Union. The reforms, which will begin in earnest this year,
attempt to eliminate state subsidies, close inefficient production
facilities and encourage investment. An IMF-approved plan, which calls
for the separation of power generation, transmission and distribution,
will be submitted for government approval this year. Experts have noted
that a number of major safety and environmental upgrades and
improvements still need to be made in a number of Bulgaria's energy
facilities before the sector will be safe or ready for E.U. accession.

THE BOTTOM-LINE IMPORTANCE OF THE MARITZA EAST III PROJECT
The Maritza East III project is an important test case, as it is
the first privatization in the energy sector. If successful, it can
serve as a catalyst for attracting much-needed foreign capital to
Bulgaria. Moreover, the project is fully consistent with the efforts to
upgrade the energy sector in advance of E.U. accession, and helps the
country achieve the targets for energy restructuring set forth by the
IMF and the World Bank. Since the signing of the Entergy deal, another
U.S. investor, AES, has announced its intention to construct a thermal
plant of 600 MW.
The implementation of the Maritza East III project will help ensure
Bulgaria has sufficient, reliable electric capacity as it moves to
close down the four oldest units of the Kozloduy nuclear plant. These
four Soviet designed nuclear reactors have combined installed capacity
of 1,760 MWs. Kozloduy 1-4 have been deemed unsafe by E.U. standards.
As part of its commitment to join the E.U., Bulgaria has agreed to shut
down the first two units by 2003 and the second two units by 2006.
The project will also help bolster the Bulgarian economy in other
ways, as the Improvement Works contract includes more than $75 million
dollars worth of local goods and services and will lead to the creation
of 600 construction jobs. Over the long term, the number of staff
directly employed at the plant (currently 1,600) will be reduced.
However, the project upgrades will play a key role in securing the
future of the remaining workers at the plant and at the mines. To
assist the employees, who will lose their jobs, the project has
targeted $5 million dollars over a three-year period to assist in the
area of employee transition.
In addition to reductions in air emissions, the project will
deliver other significant environmental benefits as well. These
benefits include: reusing plant waste water and thereby substantially
reducing water withdrawals from the Rosov Reservoir; cleaning up past
land and water contamination; adding modern fugitive dust controls
throughout the plant and plant site; treating plant domestic waste
water; and improving treatment of plant oily waste water.
During the development of the project, Entergy will use its vast
experience to introduce international management techniques and
practices, drawing from its experience in similar projects in the U.S.
and the U.K.
Entergy is working with the communities surrounding the power plant
to identify priority projects for social investment and has set aside
$250,000 per year for such efforts. The first project identified in
this area is the installation of a central heating system in the
primary school located in the village of Glavan. Entergy worked with
the local municipalities to identify and fund this project which
represents the first such partnership between an American company and a
Bulgarian municipality.
Entergy is committed to making its investment in Bulgaria
successful and to continuing its efforts to make Bulgaria an important,
reliable and efficient energy hub in the Balkan region. In turn, the
Maritza East III plant was identified as one of four projects to move
forward in the energy sector in the recently published Governmental
Program ``Bulgaria 2001.''

CHALLENGES THAT REMAIN FOR THE COMPLETION OF THE PROJECT
1. Governing Law and International Arbitration
Bulgarian law requires that contracts between Bulgarian entities
must be governed by Bulgarian law and be subject to Bulgarian
arbitration. Such arrangements are not usually acceptable to lenders.
Bulgaria needs to adopt a law that guarantees companies like Entergy
the right to international arbitration as a dispute resolution
mechanism. The adoption of such a law is also a requirement for
accession to the European Union.
This issue will be critical for all foreign investment projects
undertaken on a ``project finance/limited recourse'' basis, and the
government has recently stated that it will make the necessary changes
to the law.
2. Ability of the Government to Provide a Government-backed Guarantee
NEK, the electricity off-taker, is a state-owned entity and by
itself does not have the credit capacity to stand behind this or other
similar large projects. Under this circumstance, lenders to Entergy are
insisting upon government support for project agreements. While the
government has the capacity to offer such guarantees, this capacity is
restricted by current budget commitments to the IMF. The process
therefore is very competitive, as other major investors in the
infrastructure sector may require similar commitments.
3. New Energy Law
In July of 1999, the government passed a new energy law aimed at
bringing the country in line with European Union electricity
directives. The law introduces a new State Agency for Energy and Energy
Resources and a new independent regulator. The law is now in force.
However, the secondary legislation, which will define the detailed
rules for the system's operation, is still being prepared. This task
should be completed by April 2000. Entergy is thus initiating its
project while the country's energy sector is still in a state of
transition. The challenge for Entergy is to ensure that its contract
agreements anticipate market changes.
4. Economy in Transition
Since the Maritza III project is the first privatization in the
energy sector, Bulgaria finds itself confronted with decisions it has
not previously had to make. This is compounded by the fact that its
political and decisionmaking structure is evolving. This is a difficult
situation for both Bulgaria and for power development. Efforts to
streamline decisionmaking processes and to boost the government's
capacity to deal with these types of transactions are critical to
Bulgaria's ability to attract the capital it needs.

CONCLUSION
Entergy is proud of its investment in and partnership with
Bulgaria--and believes that the work that the company is doing in
Bulgaria now--will ultimately lead to better lives for many future
generations of Bulgarians.
Entergy looks forward to working with its Bulgarian government
counterparts in coming months to resolve remaining project challenges
and to ensuring that the Maritza East III project moves forward as
quickly and as smoothly as possible.
______

Prepared Statement of Mr. Paul Singer, Elliott Associates, L.P.

``UNFAIR TREATMENT OF AMERICAN INVESTORS BY THE GOVERNMENT OF POLAND''
Mr. Chairman and Members of the Committee:
Thank you for allowing me to present today for the Committee's
consideration Poland's mistreatment of American investors in Poland's
Mass Privatization Program.
Let me say at the start that our company, as well as many American
companies, has welcomed Poland's entry into the world economy. These
are not mere words; Americans have invested heavily in Poland's future.
Elliott Associates, L.P., on whose behalf I appear, is one of many
American companies that have invested over $100 million in Poland's
Mass Privatization Program alone.
That is why we are particularly shocked by Poland's improper
efforts over the past year to prevent American investors from receiving
lawful profits on our investments. It is our hope--both that of Elliott
Associates and that of other American investors in Poland--that efforts
by the United States Government such as this hearing today will help to
dissuade the Polish authorities from discriminating against American
investors and interfering with lawful corporate activities. Poland's
current course harms both American investors and the future economy of
Poland.
For purposes of this Committee's inquiry into the treatment of
American investments throughout the new market economies of Central
Europe, I should add that Elliott Associates, like many other American
companies, has also invested elsewhere in the region. Although Hungary
has also faced a difficult transition from a centralized, state-owned
system to the free market, our investments in Hungary have not
encountered the same improper and discriminatory efforts to control
lawful corporate activity that have plagued our Polish investments. In
the case of Hungary, American investors are reaping the rewards earned
by their willingness to take on the risk of investing in a transitional
economy. We are confident that such rewards could accrue to American
investors in Poland, as well, if Poland will allow American investors
to profit from their investments.

BACKGROUND: POLAND'S MASS PRIVATIZATION PROGRAM
In the mid-'90s, the Polish government launched its Mass
Privatization Program to let free market forces reshape the face of
medium-sized industry in Poland. Under this Program, the Polish
government sought to privatize 512 medium-sized, grossly mismanaged
Polish businesses that had previously been wholly owned by the Polish
government. To this end, the Polish Parliament enacted a special law to
create fifteen National Investment Funds (``NIFs'') that would hold
shares in the 512 newly-privatized companies. The fifteen NIFs, which
are in effect mini-mutual funds, would themselves be publicly traded on
the Warsaw Stock Exchange.

AMERICAN INVESTMENTS IN POLAND'S PRIVATIZATION PROGRAM
To provide the capital and management skills needed to make this
ambitious program work, the Polish government actively sought Western
investors and managers. Attracting Western capital and bringing market
discipline to the previously mismanaged companies was a primary goal of
the Program. To encourage Western and Polish investors alike, the new
law creating the NIFs guaranteed that the funds would, with a few
exceptions not relevant here, be able to conduct business as normal
joint stock corporations with all of the protections and powers such
corporations normally have under the law.
Elliott Associates was one of the many American investment
companies that answered Poland's call and invested heavily in the NIFs.
Elliott Associates and other American firms believed that Poland was
truly committed to market reform. We saw investment in a free market
Poland as a ``win-win'' situation--American investors could earn a
profit, and the Polish economy would get a vital injection of foreign
capital and expertise to speed Poland's transition to a free-market
economy. As noted above, conservative estimates place American
investment in Poland's Mass Privatization Program in excess of $100
million.

ACTIONS BY THE POLISH TREASURY TO PREVENT AMERICAN INVESTORS FROM
RECEIVING PROFITS
One of the NIFs in which Elliott Associates invested was ``NIF
#8,'' known as ``Octava.'' Octava became one of the few NIFs to earn a
profit. On September 1, 1999, Octava shareholders voted overwhelmingly
to amend Octava's Charter to permit redemptions of its shares for
remuneration--a corporate practice commonly used throughout the United
States and Europe to enable companies to distribute profits to
shareholders by buying back shares. The resolution was passed with a
77% vote.
The proposed change to the Octava Charter was fully consistent with
Polish law. The Polish government's equivalent to our Securities and
Exchange Commission, the body charged with regulating securities
markets, recently ruled that the share redemption amendment was
perfectly consistent with Polish law. This opinion is seconded by
opinions of leading Polish legal counsel. The NIF law provides that
NIFs have the same power as other joint stock companies, except as
otherwise provided in the NIF law. Neither the NIF law nor other Polish
statutes contain any restrictions that would prevent an NIF from
amending its articles of incorporation to permit share redemption. The
Polish Commercial Code permits share redemptions, and in fact share
redemptions have been employed by several Polish companies traded on
the Warsaw Stock Exchange. Even the Prospectus, the document by which
the Ministry of the State Treasury officially offered shares in Octava
for public sale, referred to the lawful possibility of share
redemptions.
Nonetheless, on September 9, 1999, the Polish Ministry of State
Treasury moved to block Octava's steps to allow share redemptions. This
is particularly disturbing, because the Treasury Ministry is the agency
charged with leading Poland's privatization effort. Previously, the
Treasury Ministry had proposed that Octava distribute its profits
through a cash dividend. But the vast majority of shareholders,
including many small Polish investors, realized that this would work to
their disadvantage and voted to reject the Treasury plan. So the
Ministry changed its position completely and sought to enjoin the
distribution of profits, arguing for the first time that distributing
profits would violate the NIF law.
The primary reason for the Ministry's improper, anti-market
position soon became apparent. On Thursday, September 9, 1999, Deputy
Minister of the State Treasury Alicja Kornasiewicz stated that the MST
was opposed to the buy-back plan because it would allow ``large
shareholders, e.g. American investment funds, the possibility to
withdraw their money from the NIFs at a profit'' (Quoted by the Polish
Press Agency, 9/9/99).
The inability of NIF investors to have their shares redeemed has
been very damaging to the NIF shareholders and the value of their
investments. Since the stock of the NIFs, including Octava, trade on
the Polish market at a deep discount to their net asset value, this
method of distributing profits is the only meaningful way for foreign
investors to generate a significant return on their investment.
Additionally, the mistreatment of investors in the NIFs has caused many
investors to shun this asset class, leading to a distinct lack of
liquidity in NIF shares. Hence, by preventing NIFs from redeeming
shares, the Polish Treasury Ministry has effectively precluded large
investors from exiting their investments in the NIFs and de facto
confiscated their capital.
Since last fall, Elliott Associates has been in repeated contact
with the United States Embassy in Warsaw. Our Ambassador and embassy
personnel have contacted the Polish government, all to no avail.
Elliott is currently involved in settlement negotiations with the
Ministry in an attempt to avoid a drawn-out legal proceeding that will
itself serve Poland's improper--and ill-advised--purpose of tying up
American capital in Poland. We are told that the working level
officials in the Ministry are in full agreement with our current
proposal. We hope that higher Polish authorities, despite the current
governmental difficulties there, will see the wisdom of reaching an
agreement that will enable the shareholders of Octava to proceed on
their chosen, lawful course.

LONG TERM EFFECTS OF POLISH ABUSES OF LAW
Poland's clearly discriminatory action has the potential to do
immense harm to both foreign investors and the Polish market as a
whole. The Polish government, with American encouragement, established
the NIFs to attract foreign capital to Poland and help the state-
dominated economy transition to an open, free-market economy. If
American and other foreign investors cannot reasonably rely on Polish
law to permit investors to have access to a fair return on their
investments, all incentive to continue investing capital in Poland will
disappear. It was in part with this in mind that the United States and
Poland in 1990 agreed upon--and the U.S. Senate ratified--the bilateral
Treaty Concerning Business and Economic Relations that seeks to protect
each country's investments against discriminatory treatment.
The transition of the Central European states to Western economies
has not been without problems; nevertheless, the law creating the NIFs
was a step in the right direction for Poland. The action by the
Ministry of State Treasury, opposing the exercise of the legal rights
of shareholders, sends an ominous signal to potential future investors.
This harms Americans, but it will just as surely harm the future Polish
economy.

CONCLUSION
Elliott Associates hopes that this hearing, as well as continued
efforts by the United States Government and other friends of Poland in
other venues, will help to convince the Polish authorities to stop
their obstructionism and allow American and other investors to reap the
profits of their investments. If Poland will let the market work, the
market will work for Poland.
Thank you very much for allowing Elliott Associates to present this
testimony today, and we look forward to working with the Committee
further on this matter.