[Joint House and Senate Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
UKRAINE: MOVING BEYOND STALEMATE?
=======================================================================
HEARING
BEFORE THE
COMMISSION ON SECURITY AND COOPERATION IN EUROPE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
MARCH 16, 2010
__________
Printed for the use of the
Commission on Security and Cooperation in Europe
[CSCE 111-2-3]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available via http://www.csce.gov
________
U.S. GOVERNMENT PUBLISHING OFFICE
75-133 PDF WASHINGTON: 2016
_____________________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Publishing Office,
Internet: bookstore.gpo.gov. Phone: toll free (866) 512-1800; DC area (202) 512-1800
Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC 20402-0001
COMMISSION ON SECURITY AND COOPERATION IN EUROPE
LEGISLATIVE BRANCH COMMISSIONERS
HOUSE
SENATE
ALCEE L. HASTINGS, Florida, BENJAMIN L. CARDIN, Maryland,
Co-Chairman Chairman
EDWARD J. MARKEY, Massachusetts CHRISTOPHER J. DODD, Connecticut
LOUISE McINTOSH SLAUGHTER, SHELDON WHITEHOUSE, Rhode Island
New York TOM UDALL, New Mexico
MIKE McINTYRE, North Carolina JEANNE SHAHEEN, New Hampshire
G.K. BUTTERFIELD, North Carolina SAM BROWNBACK, Kansas
CHRISTOPHER H. SMITH, New Jersey SAXBY CHAMBLISS, Georgia
ROBERT B. ADERHOLT, Alabama RICHARD BURR, North Carolina
JOSEPH R. PITTS, Pennsylvania ROBERT F. WICKER, Mississippi
DARRELL E. ISSA, California
EXECUTIVE BRANCH COMMISSIONERS
Michael H. Posner, Department of State
Alexander Vershbow, Department of Defense
Michael C. Camunez, Department of Commerce
(ii)
UKRAINE: MOVING BEYOND STALEMATE?
----------
March 16, 2010
COMMISSIONERS
Page
Hon. Benjamin L. Cardin, Chairman, Commission on Security and
Cooperation in Europe.......................................... 1
Hon. Alcee L. Hastings, Co-Chairman, Commission on Security and
Cooperation in Europe.......................................... 7
WITNESSES
Daniel A. Russell, Deputy Assistant Secretary of State for
Russia, Ukraine, Belarus and Moldova, Department of State...... 2
Damon Wilson, Vice President, Atlantic Council................... 11
Anders Aslund, Senior Fellow, Peterson Institute for
International Economics........................................ 15
APPENDIX
Prepared statement of Hon. Alcee L. Hastings..................... 26
Prepared statement of Daniel A. Russell.......................... 28
Prepared statement of Damon Wilson............................... 33
Prepared statement of Anders Aslund.............................. 38
Material submitted by His Excellency Oleh Shamshur, Ambassador of
Ukraine to the United States of America........................ 43
(iii)
UKRAINE: MOVING BEYOND STALEMATE?
----------
March 16, 2010
Commission on Security and Cooperation in Europe
Washington, DC
The hearing was held from 10 a.m. in room Senate Visitor
Center 201/200, Washington, DC, Hon. Benjamin L. Cardin,
Chairman, Commission on Security and Cooperation in Europe,
presiding.
Commissioners present: Hon. Benjamin L. Cardin, Chairman,
Commission on Security and Cooperation in Europe; and Hon.
Alcee L. Hastings, Co-Chairman, Commission on Security and
Cooperation in Europe.
Witnesses present: Daniel A. Russell, Deputy Assistant
Secretary of State for Russia, Ukraine, Belarus and Moldova,
Department of State; Damon Wilson, Vice President, Atlantic
Council; and Anders Aslund, Senior Fellow, Peterson Institute
for International Economics.
HON. BENJAMIN L. CARDIN, CHAIRMAN, COMMISSION ON SECURITY AND
COOPERATION IN EUROPE
Mr. Cardin. Well, good morning everyone and welcome to the
hearing--the Helsinki Commission hearing on ``Ukraine: Moving
Beyond Stalemate?'' I am pleased to welcome you to this hearing
on Ukraine, an important partner for the United States and one
of the largest countries in Europe, both in terms of size and
population.
An independent, democratic and stable Ukraine is in
America's interest and vital to the security of the OSCE
region. Ukraine remains a country in transition, in part due to
its tragic history. To visit, as I have, the memorials to
Stalin's famine, Babi Yar and Chornobyl, is a stark reminder of
the history of Ukraine.
Despite this legacy, especially since the 2004 Orange
Revolution, there have been gains in political pluralism, media
freedoms and holding of free and fair elections. Additionally,
Ukraine is the only country among the 12 non-Baltic former
Soviet states to earn the assessment of free by Freedom House.
The country has recently witnessed Presidential elections,
which the OSCE assessed as having met international democratic
standards. Ukraine faces a myriad challenges. Clearly, the
President, along with the new Prime Minister and the Rada will
need to accelerate economic and political reforms, tackle
systematic corruption and overcome the rule of law deficits,
including building up an underdeveloped judiciary.
Will Ukraine, despite tangible progress and freedom and
democracy, be able to move beyond the stalemate that has
stymied its ability to grapple with these difficult problems
and slow this euro-Atlantic integration?
Nothing would be more important to strengthening Ukraine's
independence and reducing its vulnerability to outside
pressures, including strengthening its energy independence and
bringing it closer to its stated European aspirations. Despite
past disappointments, there is genuine desire in Washington
that Ukraine succeed as an independent, democratic, stable and
economically successful state.
Importantly, both the Congress and administration continue
to strongly support the right of Ukraine to decide its own
fate, consistent with the principles enshrined in the Helsinki
Final Act. Today, we will examine Ukraine's future course
following the February 7th elections, which the OSCE assessed
as having met international democratic standards.
Our witnesses will focus on policy implications for the
United States, examining how the U.S. can best continue to
encourage and assist Ukraine in the development of democracy,
rule of law and market economy at home as well as relationships
with its neighbors, the United States and the European
institutions. And we look forward to hearing from our
distinguished panel of witnesses.
For our first panel, I'm pleased to have with us today, Mr.
Daniel Russell, Deputy Assistant Secretary of State for Russia,
Ukraine, Belarus and Moldova. Since joining the Foreign Service
in 1983, Mr. Russell has held a variety of positions in
Washington and abroad, most recently, as Chief of Staff to
Undersecretary of State for Political Affairs Bill Burns. And
prior to that, the Deputy Chief of Mission in Moscow, Russia
and Kazakhstan. Mr. Russell, it's a pleasure to have you before
the Commission.
DANIEL A. RUSSELL, DEPUTY ASSISTANT SECRETARY OF STATE FOR
RUSSIA, UKRAINE, BELARUS AND MOLDOVA, DEPARTMENT OF STATE
Mr. Russell. Thank you very much, Mr. Chairman. I will
apologize in advance for my voice. It's part of the burden of
having two young children. But look, thank you very much for
your invitation to discuss Ukraine and its relations with the
United States in the wake of Presidential elections. Your
timing could not be better.
Let me begin by making three basic points about Ukraine and
the recent elections before sketching out our agenda for
engagement. My first point should be obvious. Ukraine matters.
Ukraine matters to the United States. Ukraine matters to
Europe. Ukraine has tremendous potential. It could become a net
contributor to global food security.
It could become self-sufficient in energy. Ukraine can also
serve as an example in a critical region. It has shown
leadership on the world stage, giving up its nuclear weapons to
become a non-nuclear state and contributing to peacekeeping
operations from the Balkans to Iraq. Ukraine serves--also
serves as a transit route through which nearly a quarter of
Europe's gas flows.
My second point is about Ukraine's leadership in democracy
in the region. Taken together, the conduct of its Presidential
elections received an overwhelmingly positive assessment from
international observers. I should add that among those
observers were Congressman Hastings and staff of your
Commission and I would like to commend their contribution.
The OSCE concluded that the Presidential elections showed
significant progress over previous elections and met most OSCE
and Council of Europe standards. The open competitive election
demonstrated respect for civil and political rights and offered
voters a genuine choice.
My third point is about the 2010 election--how we look at
it. It may have been a defeat for the Orange Revolution
leaders, but it's far from a defeat for the Orange Revolution.
Elections should be viewed, I think, as another step in
strengthening Ukraine's democracy and Ukrainians should take
pride in what they've achieved.
The post-election transfer of power has been orderly. Prime
Minister Tymoshenko initially challenged the results in court,
but withdrew her case. When formation of a political
parliamentary majority coalition appeared unlikely, President
Yanukovych and his Party of Regions sought and won passage of a
new law that allows coalition formation, not only with
political parties, but with independent deputies.
On that basis, Prime Minister Azarov and his Cabinet were
confirmed last week. The opposition questioned the new laws'
constitutionality and we were pleased to see that the Party of
Regions itself took the initiative to ask the constitutional
court to review the law and pledge to abide by its decision.
With the election now behind him, President Yanukovych
faces the challenge of governing. Obviously, he and his new
team need some time to organize themselves, but I think some
key elements of his approach are obvious. Economic recovery
will rightly be his top priority and he has inherited a
difficult situation at a difficult moment.
With regard to foreign policy, I think President Yanukovych
has been quite clear. He wants to continue Ukraine's strategic
partnership with the United States. He wants to improve
relations with Russia and he wants to pursue integration with
the European Union.
And as we look ahead to engagement with President
Yanukovych and his new team, it's, I think, worth reviewing the
underlying premises of U.S. policy toward Ukraine. Simply put,
the United States will not waver in its support for a strong
and independent Ukraine. We want to see, as you mention,
Ukraine succeed.
Our vision for Ukraine, I think, is the vision that most
Ukrainians want, a democratic and prosperous European nation
with an effective and accountable government. Charting the
course for Ukraine is of course, a decision to be made by
Ukrainians and their elected leaders. There has been
speculation over the past year that the Obama administration's
efforts to improve relations with Russia would somehow threaten
our relationship with Ukraine.
I think that was not correct and it is not correct. As we
reset relations with Russia, we have reaffirmed our commitment
to the sovereignty and territorial integrity of Ukraine and its
neighbors. We do not believe that a partnership with one
country comes at the expense of another.
The stronger our partners, the more effective our
partnerships. I would posit that a strong and independent
Ukraine is good for Russia, good for the region and good for
the world. There's also been speculation about Ukraine's
relationship with NATO during a Yanukovych Presidency. Let me
be clear that the United States continues to support Ukraine's
deepening ties to NATO and to the European Union.
But again, these are decisions to be made by Ukrainians and
their leaders. We recognize that how far and how fast to
proceed will be a Ukrainian choice. President Yanukovych has
said that he wishes to continue programs of cooperation with
NATO at existing levels but NATO membership is not on his
agenda. We respect that choice. But we want the Ukrainians to
know that NATO's door remains open.
We look forward to cooperating with Ukraine to meet its
objectives in the NATO-Ukraine Commission and its Annual
National Programme. Because of the importance that we attach to
our relationship with Ukraine, once the Central Election
Commission had announced the full electronic results of the
election, President Obama was among the first world leaders to
congratulate Viktor Yanukovych on his victory.
National Security Advisor General Jones led the U.S.
delegation at the Presidential Inauguration, where he met not
only President Yanukovych, but Prime Minister Tymoshenko. And
Mrs. Tymoshenko is obviously going to be one of the leaders in
the opposition in parliament and we are going to continue our
longstanding relationship with her.
At the same time, we also plan to work closely with
emerging leaders like Deputy Prime Minister Tigipko and Member
of Parliament Arseniy Yatseniuk. The development of new
democratic leaders is important for all parties in Ukraine. Let
me underscore that U.S. policy toward Ukraine will continue to
focus on strengthening our strategic partnership.
Our engagement and cooperation with Ukraine will continue
to be guided by the U.S.-Ukraine Charter on Strategic
Partnership. The charter outlines enhanced cooperation across
the full spectrum of mutual priorities, including economics,
trade and energy, defense and security, strengthening democracy
and people-to-people and cultural exchanges.
To advance the objectives of that charter, we now have a
strategic partnership commission, established during the Vice
President's visit to Kyiv last July. Our commitment to Ukraine
is also evidenced by our assistance program--$123 million this
year. The goals of our assistance are to bolster peace and
security, strengthen democratic institutions, promote economic
growth and energy efficiency, enhance security, secure
Chornobyl, fight AIDS and HIV and improve child health.
In the spirit of our strategic partnership with Ukraine,
I'd like to suggest five policy priorities that should be high
on our shared agenda with the Yanukovych Presidency. First, the
United States is committed to policies that contribute to a
democratic and prosperous Ukraine. And the United States stands
ready to help Ukraine reach agreement with the International
Monetary Fund as soon as possible.
The path to economic recovery and renewed prosperity runs
through agreement with the IMF, which can help provide Ukraine
a way out of the current crisis and open the door to lending
for other--from other international financial institutions in
the European Union. That will require resolute leadership and
hard decisions to undertake the critical reforms needed to fix
the budget deficit, revive the banking sector and phaseout
energy subsidies.
A second, and I would say equally important, policy area
for Ukraine's long-term prosperity and economic independence is
energy-sector reform. A gas sector based on transparency,
competition, realistic pricing and more energy-efficient gas
distribution and consumption will be key.
Third, the United States is ready to work to strengthen the
business side of Ukraine--U.S.-Ukraine relations, which
frankly, I think, are weaker than they should be. We welcome
President Yanukovych's remarks in favor of creating incentives
for investors such as lowering taxes and cutting red tape.
Our business community tells us that there is much more to
be done to make Ukraine attractive to investors, from greater
rule of law protection to serious action against corruption.
The payment of VAT--V-A-T--refunds would be a big step forward,
I think, and a sign to our investors.
A fourth area of cooperation in our relationship with
Ukraine lies in nuclear security. We look forward to building
on our successful record of nonproliferation with Ukraine at
the upcoming nuclear security summit here and we look forward
to President Yanukovych attending. Thanks to the leadership of
Sen. Lugar and former Sen. Nunn, we can point to vital
cooperation between Ukraine and the United States that has made
the world safer.
Finally, the United States wishes to strengthen bilateral
security and defense cooperation. As part of that effort, we
hope that the Ukrainian parliament will pass legislation to
allow joint military exercises on its territory this year.
While the challenges in U.S.-Ukrainian relations are complex
and demanding, I remain optimistic about the possibilities
before us.
It's important to both nations and both peoples to get this
relationship right. We have a chance at the beginning of a new
Presidency in Kyiv to redouble our efforts to do so. And I hope
that both Ukrainians and Americans both inside and outside of
government will take advantage of that opportunity.
Thank you very much and I'm happy to answer your questions.
Mr. Cardin. Well, Mr. Russell, thank you very much for your
testimony. We've been joined by the House Chair of the Helsinki
Commission Alcee Hastings. As you've already pointed out, Mr.
Hastings was present as an observer in the elections in Ukraine
and helped in the certification of Mr. Yanukovych's elections.
So we thank our House Chair for his active involvement and the
ability to give us a first-hand report as to the progress of
democracy in Ukraine.
I want to, I guess, ask you a fundamental question first
and then I'll turn it to my Co-Chair. You talk about Mr.
Yanukovych's desire to strengthen the ties with the West and
the East about developing stronger ties, certainly, with
Russia, but also with the United States and Europe. And then
you talk about our NATO desires, that we still believe that
this is a country that is important in our European security
arrangements.
How can he accomplish all that? How can he strengthen the
tie between Ukraine and Russia, which was stressed during the
Orange Revolution and which Mr. Yanukovych was not a supporter
of? Now, he's all of a sudden going to be able to maintain this
development with the West, with Europe and with Russia and also
perhaps be with us in NATO. How does he balance all that? It
seems like that's an impossible task.
Mr. Russell. Well, we're going to see how good he is at it.
I think it was interesting that he chose to make his first trip
abroad to Brussels. He talked about European integration and a
free trade agreement with the EU. Then, to go to Moscow and
create--finish the leg of his triad by coming here for the
nuclear assistance security summit.
So he clearly is going to try to balance these three
interests. And I don't think it's a bad idea, actually. I mean
nobody's going to move in their neighborhood. Russia's not
going to go away. Russia's Ukraine's second largest trading
partner after the European Union. And I think he's got a good
shot at making some progress on all of this. But like I said,
we're going to be there pushing for strategic partnership.
Mr. Cardin. Well, how much influence will Russia have in
the priorities that he places on the agenda for security?
Mr. Russell. It's an open book. He's just named his
government, so we're going to have to see. I mean he's trying
to be all things to all people like many leaders. We'll see if
he succeeds.
Mr. Cardin. Well, let me ask you just one more question on
a subject that the Orange Revolution was not successful in
dealing with and it's corruption. It's been a--we've seen
first-hand the consequences of corruption within Ukraine. It's
not unique for countries in transition, but certainly, the game
plan to deal with it has not been as successful as the United
States would like to see it. Do you have any view as to how
this new government will deal with the problems the country
faces in corruption?
Mr. Russell. Well, we agree with your assessment. It is a
major problem in practically, every field. Our human rights
report, which we just put out talks again about corruption,
which everybody knows. And I think it's going to be key. If
he's going to make progress on economic recovery, he's got to
deal with this because, if he's going to get ahead on economic
recovery, he's really got to start with sound fiscal policies
and pass the budget.
He's got to figure out how to get the private sector to
really fuel economic recovery and they need an effective
banking sector to provide the financing to do that. Well, if
you don't deal with corruption, you're just not going to get--
you're not going to get investors. And transparency and rule of
law are part of the keys. He's talked about this and we're
going to have to see how they do, but I agree, it should be a
priority and it's something the United States is going to push.
Mr. Cardin. I'll look at your five issues that you've
raised for priorities. Certainly, democracy and prosperity is
going to depend upon dealing with the corruption issues, the
energy sector reforms, very much so and we push the EITI as a
framework to deal with the energy sector issues.
On business, business and investment by the United States
or any country in Ukraine will be very much dependent upon a
comfort level as it relates to dealing with the issues of
corruption. So on every one of these areas, it's going to be
fundamental that they have to deal with this and their track
record's not very good.
Mr. Russell. I agree with you. I think they'll probably
have a new program with the IMF and I suspect that transparency
and rule of law are going to be a big part of that. I should
also mention that we're coordinating with the European Union
because I think if he wants to pursue European integration,
clearly all of these issues are going to be key to that as well
because the European Union's goals for integration are not
particularly different than our own bilateral goals in this
respect.
Mr. Cardin. So what is your advice to Congress? What would
be your top recommendations for what the Congress should do in
order to reinforce the goals that you laid out--with your goals
that we fully support and we certainly encourage the new
government to improve relations with all of its neighbors. That
is fundamental to your regional stability and it's fundamental
to U.S. interests. What would your advice be to Congress?
Mr. Russell. Well, I think, your Co-Chairman here has set a
good example for engagement early on with Ukraine and I think
it's important. I think it's important that the Congress is
dealing--this is a country where the Rada, their parliament is
very important, that you engage with the leadership there as
we're doing in the executive branch to try to push that
forward.
And we're going to look for your support, obviously, with
our assistance programs. And if, you can encourage some of the
private-sector businesses in your states that if Ukraine does
make some of these changes, to try to look and see if
investment there or business opportunities would be a
possibility.
Mr. Cardin. Well, as I said in my opening statement,
Ukraine is very important to U.S. interests. It's a high
priority of our Commission. We have spent a lot of time
visiting Ukraine because we thought it was important to do that
on many occasions and so clearly, it's just going to be a
continued focal point for our interest because we think it's
important to the entire OSCE region.
With that, let me turn to Congressman Hastings and again,
thank him for his leadership on the traveling to Ukraine and in
his continued leadership on this country and the place that the
Helsinki Commission has placed in following the events in
Ukraine.
HON. ALCEE L. HASTINGS, CO-CHAIRMAN, COMMISSION ON SECURITY AND
COOPERATION IN EUROPE
Mr. Hastings. Thank you very much, Mr. Chair. OK, it's on.
And Mr. Russell, thank you very much. Mr. Chairman, I'm sure
it's already been noted--my humble apologies for being delayed.
I had the distinct privilege and honor to participate in three
Ukrainian elections, including the first round of the just-
passed Presidential elections.
In addition to just being an election observer, I also like
to consider myself a good observer of people. And while I don't
speak the language, on two different occasions in Ukraine, one
during the Orange Revolution and on the very last visit, I took
it upon myself to walk into areas, first, during the Orange
Revolution that I had not been in and a second time, to go back
into those again.
And then of course, as you might know, Mr. Russell, a
considerable number of Ukrainians in the diaspora and those in
academia and the think tanks and in government all talk to us a
great deal about Ukraine. One thing, if I had to characterize
the residual from the Orange Revolution, it would be unfilled
promises. That would just be all that I would say.
The other things that I note is considerable frustration
among those that are supporters of the efforts that have been
put forward in Ukraine. Now, the United States doesn't have to
make any apologies to anybody and I'm not suggesting that they
ever would, but we have a solid record of standing with the
Ukrainian people over the decades in support of their struggle
for freedom and democracy.
I'll start by asking you how you assess the Prime
Minister's remarks last week and I'm paraphrasing what he said,
that their treasury is depleted. I'm reminded--that's very
similar to our nation at this time, a President, inheriting
some 30 years of transformation of an economy, is expected in 1
year to reverse it.
Mr. Yanukovych and his new coalition, in my judgment, have
a very high hill to hustle and they cannot do it, quite
frankly, without the United States and Russia and the European
Union and with some clear understanding of how the
international community that is experiencing a global crisis of
its own is going to be able to address it. So I guess I'd like
to know from you the status of Ukraine with respect to the
Millennium Challenge Account.
Mr. Russell. Well, the Millennium Challenge Account
threshold program didn't succeed. I mean, the Millennium
Challenge Corporation chose not to continue it in 2009 because
of Ukraine's performance. And I can't say where they'll go from
here. Corruption was one of the big issues, actually.
But to the broader point that you're making, which I agree
with, they've got a tough row to hoe. But I think that they've
got to try to reach agreement with the IMF has to be the first
priority because that's what's going to unlock the doors to the
other lending they need to survive.
In the longer term, I mean, the shorter your time horizon
with Ukraine, the more pessimistic you're going to be. The more
you stretch that out, the more optimistic. I mean they have gas
reserves. They have oil; they have a lot of coal. Their
manufacturing sector actually did pretty well before the
economic recession.
I think they've got to go back to basics. And frankly
Anders Aslund--it's always very difficult to talk about
economics when you have, actually, a real economist sitting
behind you--[laughter]--he can probably help you more than me
with most of this.
Mr. Hastings. All right. Looking ahead, in 2017, the lease
agreement with Russia in the Black Sea are going to become more
and more an issue. Attendant to that is the fact that we, the
United States, really have poured millions of dollars and
security assistance cooperation to Ukraine and yet, it seems
their armed forces are still in need of reform and
modernization.
So I guess, do we still look to try and bring them into
NATO? What's your take on the Black Sea as it pertains to Mr.
Yanukovych? And what are the substantive benefits of our
security cooperation with Ukraine beyond just building our
relationships?
Mr. Russell. Well, I think that defense and security
cooperation is a key part of our relationship. I think you're
right that there's a lot more to be done, but at the same time,
I mean, this is a country where you now have civilian control
of the military. You have an all-volunteer officer corps.
They've made some key reforms that they've got more to do.
I know our own military finds them very enthusiastic and
good to work with and they have an interest and we have an
interest in seeing them become a net contributor to global
security. They still have a pretty good-sized presence among
peacekeepers in Kosovo.
They've contributed to Iraq and Afghanistan and other U.N.
peacekeeping missions and NATO missions and I think that's
what's in it for us in the longer term. The question you posed
about the Black Sea fleet; I don't know what they're going to
do, but what we support is Ukraine's independence and
territorial integrity and their right to make their own foreign
policy choices. So whatever they do, we would support something
that obviously, they freely enter into.
Mr. Hastings. The last couple of questions that I have deal
specifically with what your sentiments are at this time and
what the administration, if anything, is picking up--if
anything--regarding Kyiv's desire to have a Euro-Atlantic
integration. Is that still viable? I heard you say that the new
President's first visit was to Brussels, but I hasten to add
that his second visit was to Moscow. And so where they'll go
with--[laughter]--Ukraine at this point?
Mr. Russell. Well, I think our approach as far as NATO is
that Mr. Yanukovych has said he wants to continue practical
cooperation. There's a lot that needs to be done, and can be
done through the NATO-Ukraine Commission, through the Annual
National Programme they have with NATO and all these good
things for a more modern, more professional military and
defense establishment. And I think they're worth continuing no
matter what they choose to do on the larger question of NATO
membership.
I think with European integration, it's pretty clear that
Mr. Yanukovych has already talked about a free trade agreement
with the European Union and liberalization of their visa
regime. And again, all of that's going to require some changes
we've been talking about toward meeting European Union
standards.
I think there's--in some ways, not much choice. I mean,
they want to become a modern, prosperous nation and that will
require being part of the international community in a
different way than they were in the past century.
Mr. Hastings. Well, you have a rather considerable
portfolio, but as it pertains to Ukraine, two of the neighbors
that are also in your portfolio, Belarus and Moldova--I'll
leave Russia to the side because I know that's overarching. But
just as it pertains to Belarus and Moldova, what do you see for
the future of Ukraine relations with those two countries?
Mr. Russell. Well, I mean, we hope to see a good
relationship in Ukrainian bilateral relations with both of
those countries. Moldova has had quite a change in its own
government, bringing in a new coalition that's committed to
European integration as its foreign policy and to rule of law
and democracy at home, which we see is a very, very good and
welcome development.
Ukraine can help to support that. There's some basic issues
about delineation of the border between the part of Moldova
that is Transnistria and Ukraine--Ukraine also plays a role in
the five-plus-two talks looking at a settlement to this
longstanding frozen conflict. So they can do quite a bit there.
Ukraine's always had a reasonably good relationship with
Belarus. As you know, the United States--Mr. Cardin knows from
his recent trip there--we have some real issues in our own
relationship with them and we would hope that Ukraine's
relationship would help to push toward a more open system there
and make some small steps toward a more open, pluralistic
government.
Mr. Hastings. Right. Well, finally, Mr. Chairman, time
won't permit us to explore the importance of Poland in all of
this as well, so I'll just leave that to the side. But let me
offer what I think are two things that help in our developing
better and building better relationships with countries.
And it's not ignored, but not enough emphasis is placed on
cultural and educational exchanges. And as policymakers,
Senator Cardin, my dear friend and Co-Chair of this Commission
and I have been active in pursuing funding in that arena. But I
believe Ukraine would benefit greatly by large student
exchanges and cultural exchanges. They have so much to offer
and in that regard, it would be helpful if we were to
participate.
Now, let me be a little more precise and I'll stop right
here. If I had to make a bet on where 19- and 20-year-olds are
going to go to college, that can with the support of their
families or however they manage to do so, I'll bet you Russia
is going to do more in the education arena having them come to
Russia than we are having them come to America. I'll stop right
there.
Mr. Cardin. Well, Congressman Hastings, thank you very much
for those observations. I would just observe I think the two
greatest challenges will be for Ukraine as to whether it really
can establish itself as an independent democracy in that
region, which is our goal and being able to establish relations
with all of its neighbors, including to the West. And second,
whether it can deal with corruption.
We've mentioned this a couple times, and the Millennium
Challenge grant is a good example. We just completed a hearing
in the Senate Foreign Relations Committee with President
Clinton and Bill Gates who are involved in two major
foundations that provide international assistance. And I was
very impressed with their commitment on accountability in
making sure the funds do not get sidetracked to help finance
corrupt activities.
We are looking at a change in our foreign assistance
programs and accountability's going to be part of that. So
Ukraine is a developing democracy that is--needs an independent
economy and they will have an independent economy, but it will
not happen at the pace that they want if they can't get
corruption under control.
So I think those two issues are critically important as we
watch Ukraine. And I agree with Congressman Hastings. We need
to look at its relationship with other countries; whether
Moldova or Belarus, Ukraine can play a very important role in
the development of other countries in transition in that
region.
So I think it's in all of our interests to continue our
focus on Ukraine and just observe with a great deal of, I
think, optimism, the recent elections being the expression the
people of Ukraine as to the future of their country. And we
certainly are impressed by the new government's ability to form
under very challenging circumstances. Thank you, Mr. Russell,
for your testimony.
Mr. Russell. Thank you.
Mr. Hastings. Thank you, Mr. Russell.
Mr. Cardin. I would want to observe that the Ambassador for
Ukraine had planned to be with us. He has taken ill. He must
have similar children that you have. [Laughter.] And maybe more
in number, so he's maybe more severely impacted. We're very
pleased to have two distinguished experts on Ukraine for our
second panel.
Damon Wilson is Vice President, Director of International
Security Programs at the Atlantic Council. Mr. Wilson
previously served as Special Assistant to the President and
Senior Director of European Affairs at NSC. We're among his
many responsibilities. He coordinated interagency policy in
support of Ukraine, including during the Orange Revolution. Mr.
Wilson also served in a variety of other governmental positions
at NSC and State Department including as Chief of Staff at the
U.S. Embassy in Iraq.
Anders Aslund is Senior Fellow at the Peterson Institute
for International Economics and has been deeply engaged with
Ukraine since 1985. Previously, Dr. Aslund was Director of the
Russian and Eurasia Program at the Carnegie Endowment and is
the author of nine books, including ``How Ukraine Became a
Market Economy and Democracy.'' And he has a copy here, willing
to sell it, I assume. [Laughter.] We have extra copies that
we'll make available.
Mr. Aslund. Free copy.
Mr. Cardin. Thank you. We'll start off with Mr. Wilson.
Mr. Wilson. Thank you very much, Mr. Chairman, Mr. Co-
Chairman.
Mr. Hastings. Press that button, Damon. See if it's on.
DAMON WILSON, VICE PRESIDENT, ATLANTIC COUNCIL
Mr. Wilson. Oh yes, thank you. Thank you, again. I'm
honored to speak to you today about our relationship with
Ukraine. I want to thank the Commission for the role that it's
taken in helping to raise the spotlight in Washington on the
issue.
Mr. Hastings. I apologize to you, but some of the people in
the back are still having difficulty hearing. Is that red light
on, on that mic?
Mr. Wilson. It's hard to see. Yes.
Mr. Hastings. All right. There, you're better now.
Mr. Wilson. All right, is that better?
Mr. Hastings. Yeah.
Mr. Wilson. All right. I want to thank you, again.
Mr. Cardin. That's three thank-you's. [Laughter.]
Mr. Wilson. Naturally. But I did want to thank the
Commission for taking the opportunity to help raise the
attention--the spotlight on Ukraine here in Washington. I think
that's an important function of the Commission and I applaud
that leadership. I also want to thank you, Mr. Co-Chairman, for
your personal leadership and the role that you've played in
elections in Ukraine over the years. I think that's been very
important. I commend my former colleague, Dan Russell, for some
excellent testimony.
Today, I'd like to underscore why the issue of Ukraine
should matter in Washington, outlining key benchmarks against
which to judge the policies of Ukraine's new President and
offer recommendations for U.S. policy. I agree that we should
not underestimate what has just happened in Ukraine this year.
This election is a victory for the consolidation of
democracy. And yet for most of us that follow Ukraine closely,
there is a sense of disappointment. Why is that? First, the
leaders of the Orange Revolution failed to deliver for Ukraine
that which those protestors on the Maidan were calling for back
in 2004.
Second, Ukraine's track record of good elections has yet to
translate into a track record of good governance. And third,
we've been disappointed by the timidity in the West to continue
to support Ukraine. So President Yanukovych, therefore, assumes
the Presidency in an atmosphere of pragmatism.
And a sober assessment of Ukraine's prospects is
appropriate. However, the vision of a democratic, free-market
Ukraine firmly anchored in Europe remains important as it
remains a motivator for tough policy decisions in Kyiv as well
as in Brussels and Washington. And we must not take this vision
for granted.
Why does all of this matter? First, it matters for the
quality of life of Ukrainian citizens, but it also matters
geopolitically. In some sense, Ukraine is untethered, if you
will. Its future is not certain. Although it is an ancient
nation, it is a young state. The history of conflict in Europe
is about uncertainty in the space between Germany and Russia.
And this would not matter if the Russia of today had
evolved and changed to become like the Germany of today. But
Russia has not. Ukraine's statehood remains fragile. If
Ukrainian democracy continues to succeed and helps produce good
governance and economic growth, it will serve as a powerful
example in a region that desperately needs positive examples.
And that is why Russia has a strategy, which in some terms
essentially is rollback. This strategy had been well
articulated by Russia's leaders, including President Medvedev's
declaration of privileged interests--the commitment to protect
Russian citizens wherever they may live--as well as in Russia's
new security strategy. In contrast, I'm not convinced that
either the West or Ukraine itself has a very clear strategy
about the way forward.
So let me first address Ukrainian policy, as what President
Yanukovych does will have more of an impact on Ukraine's place
in the world than any outside actor. He's off to a good start
with an early visit to Brussels followed by one to Moscow. He's
outlined his four top priorities of EU integration, returning
good neighborly relations with Russia, developing relations
with Ukraine's neighbors and pursuing strategic partnership
with the United States. I think as we look forward, we should
judge Ukrainian policy by several benchmarks.
First, Russia--how does Kyiv manage its relationships with
Moscow? A stable and positive bilateral dynamic requires
Ukraine to behave as and be treated as a sovereign, independent
actor. Key issues include whether Yanukovych maintains a non-
recognition policy toward South Ossetia and Abkhazia and
whether he opens the door to an extension on the Black Sea
fleet in Sevastopol.
Energy security--Russian interests have been keen to gain
control of Ukraine's energy structure. Will Yanukovych agree?
If he believes energy is a national security issue as I do, the
new government would pursue a serious energy efficiency
strategy.
International economics--The government's handling of the
IMF will be an early test of its credibility. I'll leave the
details of this to Anders, but similarly, a key question is how
Yanukovych handles the common economic space with Russia? Does
he do so in a way that negatively impacts Ukraine's WTO
membership or the prospects for a free trade agreement with the
EU?
Regional relations--Does Ukraine use its regional weight to
support Moldova and a resolution of Transnistria? How
Yanukovych handles ties with Belarusian leader Lukashenka and
Georgian President Saakashvili will offer insights into the
regional role that Ukraine will play, as well as the role that
it wants to assume within Guam.
The European Union--Will Yanukovych press as hard to grow
Ukraine's bilateral ties with the EU, as well as take advantage
of the Eastern Partnership? A free trade agreement and visa
liberalization are key practical steps which would help
Ukrainians actually be Europeans and move the country toward
Europe.
Nonproliferation--Ukraine had a spotty record of
nonproliferation under then-Prime Minister Yanukovych. Will
Ukraine's arms sales track record continue to improve given the
economic interests at stake?
And finally NATO--NATO is clearly not at the top of the
agenda, nor should it be. But NATO-Ukraine relations do need to
be on the agenda. Yanukovych, in fact, had a track record as
Prime Minister of advancing NATO-Ukraine ties. So while the
window has closed on rapid movement toward NATO, both sides
should ensure that there is substance to underpin the NATO-
Ukraine Commission. As NATO is a demand-driven bureaucracy, the
signals from Kyiv will determine the substance.
I believe it is an imperative to maintain the credibility
of the historic Bucharest summit decision that Ukraine will
become a member of the alliance. If we look back in 5 to 10
years and the Bucharest decision is seen as hollow, there will
be damaging implications for the alliance's credibility, as
well as for Ukraine.
In the face of Russian opposition and genuine divisions
within Ukraine, some have argued that we should aim for
Finlandization of Ukraine--independent, but not part of any
alliance. When applied to Ukraine, these analysts imply that
big powers taking decisions about Ukraine's future--I believe
Ukraine must be in a position to determine its own future,
including whether to pursue any membership in any alliance.
These issues provide benchmarks against which we can judge
the new government. I have modest expectations, but do believe
that Yanukovych can deliver on his campaign pledge to move--
continuing moving Ukraine toward Europe. His early visit to
Brussels and his reception in Brussels are good signs.
Yet the most important factor to achieve this foreign
policy goal is what the government does domestically.
Yanukovych's reception in Western capitals will be determined
by whether he governs effectively, protects democratic
advances, stabilizes and grows the economy and ensures Ukraine
is a reliable energy partner.
In terms of implications for U.S. policy, I'm not convinced
that the West as a unit yet has a coherent strategy, although
Vice President Biden's visit to Kyiv last year helped lay out
excellent principles for U.S. policy. We cannot afford to put
Ukraine on the backburner or accept the argument that U.S.
engagement is somehow provocative to Moscow. We should not
accept the argument that Ukraine is messy or too divided as an
excuse to not engage.
While changes in Ukraine are unlikely to be decisive in the
next few years, the trend lines could take Ukraine further away
from rather than closer to Europe. And we do not want to look
back at Ukraine's next election and wonder what happened. So
Mr. Chairman, as part of my effort to outline a way ahead for
U.S. policy toward Ukraine, I offer six recommendations to
conclude.
First, be in the game. Ukraine is in play and we need to
engage and be present. The appointment of John Tefft as our
Ambassador and the visits by Vice President Biden, National
Security Advisor Jones and President Obama's congratulatory
call to Yanukovych are key steps in this effort. This high-
level outreach should continue.
Second, articulate a vision. We need to recommit to
building a Europe whole and free, energizing the bipartisan
tradition behind this vision and making clear that Ukraine has
a place within this vision, as does Russia.
Third, maintain funding. We need to protect our funding for
transition in Ukraine, as the Freedom Support Act model of
graduation no longer applies in Europe's East in my view.
Higher per capita GDP does not necessarily translate into a
democratic Ukraine anchored firmly in Europe.
Fourth, reach beyond leaders. Unfortunately, Yushchenko was
a failure. Yanukovych is unlikely to bring decisive change. We
therefore need to ensure that our relations with Ukraine extend
beyond leaders. We should place emphasis on developing next-
generation leaders, ties with the Rada, engaging the regions
and fostering people-to-people ties.
Fifth, push energy efficiency. The United States and
Ukraine need to get serious about working with European
partners to support energy efficiency in Ukraine as a national
security strategy.
And sixth, enhance military-to-military ties. We must
ensure that close military-to-military ties continue and are
backed with funding from foreign military financing and foreign
military sales and we must push back when Russia tries to
portray military cooperation with Ukraine as provocative.
In the wake of Ukraine's election, Yanukovych is now
President and his party leads the government. Now is the time
to move beyond stalemate. Just as much as we hold Kyiv to that
standard, we must hold ourselves to that standard. Thank you,
Mr. Chairman, Mr. Co-Chairman. I look forward to your
questions.
Mr. Cardin. Mr. Wilson, thank you for your comments. Dr.
Aslund?
ANDERS ASLUND, SENIOR FELLOW, PETERSON INSTITUTE FOR
INTERNATIONAL ECONOMICS
Mr. Aslund. Thank you very much, Mr. Chairman. And I would
very much like to thank you for this opportunity to speak on a
topic that I consider very important: how Ukraine should move
beyond the stalemate--as you so rightly have put it in the
headline--in the sphere of economic reform. I leave the
political aspects to Dan Russell and Damon Wilson and just want
to concur with their statement and I'll focus entirely upon the
economic aspects.
Ukraine has established an open market economy with
predominant private ownership. And from 2000 to 2007, the
country had an average economic growth of 7.5 percent a year.
But then came the global financial crisis and last year, GDP
fell by no less than 15 percent. And this shows partly that
Ukraine is part of the world economy but it also shows that
it's not performing up to its potential. Its big problems, as
you pointed out, Mr. Chairman, is pervasive corruption and poor
business environment. And the question today is what and how
can be done about it?
I co-chaired an independent international expert commission
that has done a report on what the new government should do
during its first year in power. We call it, ``Proposals for
Ukraine 2010: Time for Reforms.'' And our contention is that
Ukraine today has a unique possibility to move ahead because a
new Presidential election with a new government is always a
good time to take reform. And on top of that, if you have been
badly beaten by an economic crisis and are coming out of it,
then you can act.
And our three main conclusions to put it first is that
Ukraine needs a new capacity for economic reform. Second, a
clear prioritization of what the top priorities are so that
they are really carried out. And third, it needs to utilize
international organizations as lighthouses or anchors to guide
its reforms.
So let me start with the first point. Ukraine needs to
establish a new capacity that is independent of the agencies to
be reformed. We recommended the creation of the reform
commission at the cabinet of ministers headed by a powerful
Deputy Prime Minister, such as Deputy Prime Minister Sergei
Tigipko has now been appointed. The reform commission should
have its own budget and a single goal to decide and implement
reform. This must come from above.
At the same time, President Yanukovych has now formed a
reform committee at the Presidential administration that he
chairs himself. And he did set this up on the second day of--
his second day in office. And he has also appointed the first
deputy head of his Presidential administration, Iryna Akimova,
who's an outstanding economic reformer, to be the executive
secretary of his reform.
Second point is that Ukraine needs to have clear reform
priorities. And the short of it is that they must improve the
effectiveness of a state, achieve financial stability, allow
private enterprise, the freedom of the market and make social
policy more effective.
And the government has adopted a coalition program that is
already out which is called ``Stability and Reform.'' By and
large, all the bullet points in this program are the right
ones. But of course, they are bullet points rather than clear
plans. So this looks promising. And it--to a considerable
extent--it reflects the views of our Commission.
The problem in Ukraine so far has not been what should be
done. There's a broad public consensus. The question is if it
should be done and who should do it. There's always a reason
not to do things.
And therefore we think that as everybody here has expressed
today, the United States, the IMF and other international
organizations need to help Ukraine to break through this
political logjam, which is very much created by the interests
of corruption. And naturally the United States should engage in
the promotion of reforms that are beneficial for Ukraine's
future governance and economic welfare.
To summarize our Commission report, we've found 10 top
priorities for this year: First, carry out gas reform. That's
vital. Second, make the national bank of Ukraine independent to
give a proper basis for the banking system. Third, move toward
inflation targeting with a floating exchange rate to stop
future high inflation. Fourth, cut public expenditures. There's
no way to run a country with a budget deficit of 8 to 10
percent of GDP in budget deficit.
Fifth, undertake comprehensive deregulation of enterprise
capital--this red tape. Sixth, conclude a European association
agreement, which would include a deep and comprehensive free
trade agreement. Seven, get privatization going again. Eight,
legalize private sales of agriculture land. Nine, adopt a law
of the public information to fight corruption. And 10, complete
the modern commercial legislation.
And all these measures are truly vital and they can be
implemented within a year. In most cases, they're already draft
laws lying ready to be adopted. And if I should pick a--point
out one thing that is absolutely key, that's the gas reform.
Currently Ukraine subsidizes the import of Russian gas to the
tune of 3 percent of GDP each year, which makes no sense
whatsoever. And this has to be changed.
As Dan Russell in particular pointed out, the IMF will be
the key in this process. The IMF will go out and start
negotiating a new agreement very soon indeed. And it will
contain a gas reform and sensible macroeconomic polices. And of
course, the European Union is also currently negotiating a
substantial association agreement and it is also involved in
the gas reform.
The role of the United States here as the biggest
shareholder in the IMF is, of course, push the IMF in action as
Dan Russell spoke about. And the U.S. also should engage in the
gas reform. I think that Congressman Hastings mentioned
something very important. Ukraine needs a new, broader educated
elite. And therefore, I think that the United States should
offer hundreds of student scholarships for Ukrainian scholars
to come to this country. Let me thank you with these words.
Mr. Cardin. Well, let me thank both of you for your
testimony. It was very specific on benchmarks and
recommendations. I think that's very helpful to us, but I hope
it's helpful also to Ukraine. I think that your lists there,
particularly on benchmarks, Mr. Wilson, and recommendations,
Dr. Aslund, were both very helpful to us.
So let me start off with Mr. Wilson if I might and try to
pose the question as to what you think Russia--[laughter]--will
be doing in regards to the new opportunities in Ukraine.
Congressman Hastings mentioned that the issues of stronger
exchanges between the two countries, whether its students or
else-wise, that I think many of us in the West thought the
history between Russia and Ukraine would serve the East--would
serve the West well in building a strong relationship with
Ukraine.
But looking forward, it's going to be based upon a mutual
interest going forward. And Russia certainly has the
geographical advantage over the West in developing a closer tie
with Ukraine. Now, again, I personally believe that the United
States needs to develop a closer relationship with Russia, so
this is not saying this in a hostile sense. But trying to
figure out the policies for the United States--how should we
anticipate Russia's response to the opportunities in Ukraine?
Mr. Wilson. That's right. I think you're absolutely right.
Ukraine and Russia should be expected to have good relations.
There's every expectation that that should be the case. I think
Russia and Russian leadership have learned some lessons in
Ukraine. In 2004, then-President Putin overplayed his hand with
pretty an outright, overt endorsement of candidate Yanukovych
at the time for President.
And I think that actually hurt Yanukovych in 2004 because
it was heavy handed. And I think the Ukrainian people who are
open and receptive to close ties with their northern neighbor
saw this as an overt effort to manipulate their political
process and didn't like that, responded to that.
I think it's been interesting to watch over time the way
that Moscow has related to Ukraine. In some respects, it become
somewhat disenchanted with Yanukovych as their candidate, if
you will, made more of an effort to develop a relationship with
Prime Minister--at the time--Prime Minister Timoshenko, but dug
in a hard line against President Yushchenko.
And I think some of the approach that Russia took over the
past years during President Yushchenko's tenure were actually
quite dangerous. The letter that Medvedev sent to Ukraine,
basically refusing to have an Ambassador until the President
was gone, President Putin's challenging of Ukraine's
sovereignty at the Bucharest summit, certain activities taking
place in Crimea--were downright potentially dangerous, laid the
seeds for a potentially dangerous future.
But I think Russia looks at the situation in their view,
they think they've had a bit of a victory, but I think it is a
tactical victory. In one respect, they've seen the defeat of
the Orange Revolution leaders, especially Yushchenko. Remember,
Yushchenko actually ran in this election.
If he had been a successful President, he could have had a
second term and delivered on a vision which had very much
irritated the Russians. He failed. He lost. Now, I don't think
Russia had the reason for why he lost. I think he lost on his
own merits. But Russia also sees themselves as having succeeded
in pushing NATO off the agenda. I do think these are tactical
victories because, I think, as Dan Russell began, the
principles of the Orange Revolution were not defeated in this
process.
So I think it's important to watch this relationship. If
Russia tries to exert, if you will, its sphere of privileged
interest and expect Ukraine to do things that are Russia's
bidding, such as open up the extension of the Black Sea Fleet
in Sevastopol, to move on recognition of South Ossetia and
Abkhazia--those would be very disconcerting signs. I think, for
the moment, we've seen President Yanukovych resisting that type
of pressure. He's given a nod toward issue like elevating the
status of Russian language in Ukraine but that's a fair issue
to have debated with inside Ukraine's polity. And I think the
important part of this from U.S. policy is that we need to help
support Ukraine as an independent actor, as a sovereign actor.
And we need to be very clear that when we talked about a
Russia reset policy, we need to articulate, just as powerfully,
the other side of that--that we pursue cooperative relations
with Russia but not at the expense of our values of our friend
or our friends. And I think when we see or sense this type of
pressure on Ukraine, we should work with our European partners
to push back and to push back very clearly on Moscow.
Mr. Cardin. I think your benchmarks are good ones for us to
follow because I really do think it's too early to tell not
only what Ukraine will do but what Russia will be doing----
Mr. Wilson. That's right.
Mr. Cardin [continuing.] And how it impacts on U.S.
interests. I think it's just something we need to deal with.
And I think the energy issue is probably going to be one of the
most fundamental. I mean, you raise a very good point about gas
prices in Ukraine are unrealistically low, which is having a
major impact on their economy because the government
subsidizing so much of the cost of energy. And we're not sure
what impact this has on market forces. And then put on top of
that the interest, internationally, on dealing with global
climate change and energy security issues within that region,
it is a matter that Ukraine could play a very positive role but
it requires reform.
And when you do reform, there're winners and losers. And
the current--I'm sorry, Dr. Aslund, if I get involved, a little
bit, in politics here but the business leaders' impact in
government decisions in Ukraine is well known. So the question
is, can they go forward with these market reforms in the energy
sector, not just from the point of view of the impact it has on
its economy but on its political structure. And will the
international organizations have enough impact, IMF, et cetera,
in the reform commission's recommendations and implementation.
What is your assessment on that?
Mr. Aslund. Thank you very much. This is exactly the
question that I wanted to get because I think that this is the
key issue. When the IMF makes an agreement, normally it
requires certain prior actions, the natural prior action for
the IMF to demand now is that gas prices should be increased
domestically before the IMF concludes any agreement. We can
discuss how much. My basic view is the faster, the better. And
then you provide social compensation for those who are really
suffering. Normally, the people are really suffering--they
don't use much gas.
So it's not so much you have to pay--from a state point of
view, you can save $3 out of $4 by raising the prices and
giving full social compensation. And I think that the Ukrainian
Government is ready for this because they realize that they
can't play an old game for too long. And what we are gradually
seeing is that these big businessmen, they prefer to be owners
of enterprises rather than sit and play in arbitrage, play
between low, controlled prices and the free, much higher
prices. So I think that this is the time to make the push. And
the IMF, the U.S. and the European Union are all highly aware
of this. And I do hope that they will hold firm and get that
done.
Mr. Cardin. Thank you. One of you mentioned the fact that I
didn't realize that Ukraine has a large coal reserve--which I
wasn't aware of. Is there a concern that you might find an
increase in the utilization of coal, which could also
compromise, then, our global climate change issues and deals
with security issues also, as far as the pipelines, et cetera,
as part of the way that Ukraine responds to the IMF's desires?
Is that on the table?
Mr. Aslund. I don't think that we should be much worried in
this regard. The coal price is half of what it should be and
the big states are----
Mr. Cardin. They're also subsidizing coal?
Mr. Aslund. Yeah. And there're big subsidies to the coal
mines. The coal mine owners say, we don't need any subsidies if
the prices are free. So if you have higher coal prices, the
consumption will go down. In Soviet times, Ukraine consumed 110
billion cubic meters of gas each year. Now, it's down to 50
billion cubic meters. So just let the market function and you
will get the reduction. Ukraine was the most energy intensive
economy in the world in Soviet times--even worse than Russia.
So therefore, you have huge benefits to get and Ukraine has
reduced its emissions enormously and they can do much more and
should do much more for their own benefit.
Mr. Cardin. Well, I thank both of you for your testimony. I
think it gives us a yardstick to judge what is happening in
Ukraine and it's very helpful for our Commission. I'm going to
turn the gavel over to Chairman Hastings. I have a commitment
on the Senate floor this morning in about 10 minutes. So to not
to be disruptive, I'll give him the gavel and thank you again
for your testimony.
Mr. Hastings. Thank you very much, Mr. Chairman. And I
agree with you that our witnesses were very specific and left
very little that needs to be asked. At the very same time, in
listening to your testimony I had a couple of takeaways and,
specifically, Mr. Wilson, when you commented about the thrust
to have a Europe whole and free, and we hear about Ukraine but
I think about so many other flashpoints. Two that come to mind
most immediately are Bosnia and Kosovo that have, kind of, like
dropped off of the radar screen in the minds of most
policymakers and a lot of folk in the administration.
And in my judgment, those two areas still pose considerable
problems. The global downturn took a heavy toll on a
considerable number of the areas of the former Soviet Union.
And nearby to all of this are those Central Asian countries
that have been laboring under what would be classified as
recessionary times for a very long time. And so when you say,
Dr. Aslund, right, that this is a unique opportunity to move
ahead, as you put it, I wonder how do you move ahead when you
don't have any money?
And put bluntly, if you look at the role--and we seem to
rely heavily upon the International Monetary Fund, perhaps it
would help me--and I'll start with you, well, Dr. Aslund, if
you would tell me how that works with Russia as a player? And
going even further into that, what tax consequences exist for
Ukraine's citizenry and just where would they all find a
revenue stream and how would they? Corrupt business persons--
and we use that term--I'm always fascinated how we in the
United States form a list of corruption and somehow--and I
understand how we do that but if I was in another country, and
I was looking at what happened on Wall Street the last 20
years, I'd wonder about the United States telling me about
corruption. And I really--that's a blunt statement but maybe
ours is just organized corruption some kind of way or another.
I'm reminded of a story, people were telling me how bad
organized crime was in south Florida--and this is 40 years
ago--and at that time, I had been robbed face-to-face with a
gun three times, my house had been broken into seven times, I
had three cars stolen--two from church--[laughter]--and I said
that I wasn't as worried about organized crime as I was
disorganized crime--[laughter]--that was about to kill me. So
and that's a real true story about my own life and when the
Prime Minister so rightly said the other day, Prime Minister
Azarov, that the debts that are owed to the population and, in
this case, Mr. Yanukovych rightly, as I'm sure Mr. Yushchenko
must have as well, said that we're going to take care of you.
Don't worry. We're going to be able to pay you. And then,
evidently, Azarov had done his own auditing and learned that he
doesn't have anything to pay them with. And so where do they go
from here, Dr. Aslund? And then I'll come back, Mr. Wilson, to
you on a couple of other matters. I hope there were a few
questions in there aside from personal ruminations. [Laughter.]
Mr. Aslund. Thank you very much, Mr. Chairman. Well,
certainly, I will start with one saying, booms are times of
corruption, depressions are times of moral rearmament. And
therefore, I think, that the crisis now is good. We see the
same thing in Ukraine as here. People tolerate corruption much
less when the times are bad than when they are good.
Mr. Hastings. I hear you.
Mr. Aslund. And therefore, they want to do something about
it. One area that this is very striking is in the red tape of
petty corruption in the bureaucracy. Here, there is a strong
general sense now in Ukraine, that we must do something about
it. And we have seen several countries in the former Soviet
Union--in particular, Georgia but also Azerbaijan and
Kyrgyzstan--have cleaned this up. If they can clean it up, why
shouldn't Ukraine be able to do that? Ukraine is today the
110th country in the world in terms of GDP per capita,
according to the IMF statistics which is far too low with a
generally educated labor force and two-thirds of young now get
some kind of higher education.
So you can say that human capital is hardly anywhere worse
used than in Ukraine. So the essential thing is just, free them
and give them possibilities to work. That doesn't cost money.
That saves you money--cutting down the bureaucracy. And that's
also reason why it should be possible to do the gas reform now
because the government has to listen to the IMF and this here
is rather limited number of corrupt people who are trying to
benefit from that. It's much more difficult to do that in bad
times. But, essentially, taxes in Ukraine are already high. Tax
collection is good, surprisingly. The problem is too big public
expenditures. I've already talked about the gas subsidies--or
energy subsidies more broadly.
The second is discretionary enterprise subsidies, which
are--(inaudible). The third big area is the pension
expenditures. Ukraine spends 16 percent of GDP--more than twice
as much as this country--on public pensions, which makes no
sense. It goes to people who retired in the '40s through
various early pension schemes. Their retirement age for women
is 55, for men, 60. It doesn't make sense. These people should
continue their work and so pension reform is a politically
difficult thing that needs to be done.
With regard to Russia, Russia has a positive attitude
toward IMF support for Ukraine and was interested in getting
IMF money for Ukraine also in December when the big Western
countries said no. With regard to the tax system, not that much
needs to be changed there. It's mainly unnecessary public
expenditures that go to the corrupt that should be stopped.
Thank you.
Mr. Hastings. Well, turning again just very briefly, to
Russia, it would seem to me that what they have done by cutting
off their gas resources last year to Ukraine was particularly
brutal in the dead of winter. And second, Ukraine pays the
highest prices for their supplies of all of the European
countries. And so Russia, whether they come, they get money
from the IMF or not, seems to be in a position of win-win. And
let's put something here on the table. I was at the first
election. And I read the words of Mr. Yushchenko and Ms.
Tymoshenko and Mr. Yanukovych and others whose names I can't
remember.
But I distinctly remember that Mr. Yanukovych, at that
time, was much more inclined to work with Russia than he was
with the United States. So is there an old Yushchenko and a new
one? Is--Yanukovych, I mean. And that's troubling to me. Don't
they have--Russia--a lot of leverage on what happens with the
energy resources in Ukraine? And if you are talking oligarch to
oligarch in the business world, then without knowing--and I
don't know anybody in Ukraine that's a rich man or woman that
is in this business and I don't know anybody in Russia that's a
rich man or woman in that business--every time I'm in both the
countries I hear about the oligarchs but I don't ever see any
or meet any--but I'll bet you they meet.
And therein lies the rub. How do you get crooks to not be
crooked when they're making a lot of money? And what role, Mr.
Aslund, does the shadow economy play? When I'm down in the
train system in Kyiv, I can see--just like if I walk over here
in Anacostia--I can see that shadow economy at work. And I'm
not decrying it. Americans don't quite understand that a large
part of the underpinning of this country is a shadow economy
and if it didn't exist, we'd be in worse shape than we are now.
For some strange reason, folk don't seem to want to accept
that. But you come go with me to Pentagon City and I'll show
you people--today--that are buying expensive garments and
perfume and what have you that don't have no job nowhere. And
didn't get it from welfare either.
So it's a strange environment that we live in, in this
world. I'm sorry. Perhaps, Dr. Aslund, not to keep you on the
spot--put those in the catalogue and then come back and talk to
me about it and I'll go to Mr. Wilson and maybe along in the
same vein. When we talk about reliable partners in energy--how
are you going to be a reliable partner when somebody else has
all of this leverage over you? And let's put something else on
the table. While there's an extraordinary Ukraine diaspora here
in the United States and elsewhere in the world, there are more
Russians in Crimea or Russian-sympathizing people in Crimea
than all of the diaspora combined.
So while it may very well be true that Russia did not
defeat Yushchenko, the turnout in Crimea suggest to me that
Russia may have helped Yanukovych. We do it on the straight up,
with nice words and narratives but there was some evidence and
talk on the streets of Russia's influence in the last election.
And I don't decry that. We have our nonprofit organizations
that work in an effort to try and make a difference for human
rights and transparency and all of the rule of law and those
fine things that we say and the other people just put money on
the ground and get it done. I don't know whether there's
anything for you to respond to. I think you and I are in
thorough agreement about people-to-people exchanges. But how
about you, Dr. Wilson?
Mr. Wilson. Sir, I will certainly pick up on a few of those
points. There are--I mean, Russian-speakers play a major role
in Ukraine and Ukrainian politics. But these Russian-speakers
are citizens of Ukraine and have loyalty to Ukraine and are
part of building a future of Ukraine. If Ukraine is to succeed,
it has to have a role where the Russian-speakers in the east
feel a part of that future.
Mr. Hastings. Agree.
Mr. Wilson. That is one of the areas where Yanukovych can
potentially make progress. The problem is when leaders in
Moscow look to manipulate and use Russian-speaking populations
to advance their own interests in other countries. That's
dangerous. That's interfering in the internal affairs of
Ukraine.
Mr. Hastings. And we see that in Lithuania and Latvia----
Mr. Wilson. That's right, that's right. And part of it----
Mr. Hastings [continuing.] Slovakia and Slovenia.
Mr. Wilson [continuing.] Is soft influence through the
power of Russian language media. So many of these folks getting
their media out of Moscow. And part of it's more concerning
where there're reports of folks acquiring Russian passports
that provide a bit more of a pretense. This was the pretense
that the Russians used in South Ossetia, Abkhazia--the
protection of Russian citizens there--which was, frankly, a
fabricated pretense. And I think that's something to keep an
eye on. You asked a little bit about Yanukovych's disposition.
And I think in 2004, 2005, it was essentially fair to say he
was a pro-Russian candidate. He was backed by the Kremlin in
that election. I think it's a little bit more nuanced now. And
I think he certainly has adopted a much softer position toward
Russia. He wants to pursue positive relations.
But he hasn't turned his back on Europe. He has pressed
back on a NATO agenda, very clearly so. And that obviously
pleases many in Moscow. But I think once you become President
of Ukraine, it's, kind of, nice to be President of an
independent, sovereign country. And I would hope that this
position of responsibility would make him think more about the
benefits to Ukraine of an independent streak, of an independent
decisionmaking process. So while I don't decry an effort to
develop a manageable relationship with Moscow, I think it is
important that there not be early concessions just for the sake
of it.
Mr. Hastings. Yeah, on the people-to-people exchange kind
of thing, obviously, an American President cannot do
everything. But it would seem to me--the Vice President has
visited Ukraine. But I'm wondering and if I were President of
the United States, I certainly would invite Yanukovych to come
to the United States. And I think that that would be,
singularly, just a Presidential visit would be particularly
important in these times.
I don't know whether the administration is thinking along
those lines or whether anything is planned but I see all sorts
of Presidents come through here and I guess because of
involvement in Europe, I have the attitude that I do, but if
you're going--when you talk about, now he's President and it's
an important thing to be President, then you have to give him
the feeling of being President. And what better way could that
be expressed than to have him come for a visit with the United
States? And I'll make that recommendation to the
administration.
Mr. Wilson. That's absolutely right. I concur with that.
And I think President Yanukovych has been to Brussels, he's
been to Moscow and he's planning to visit Washington as part of
the nuclear security summit which President Obama will host in
April. That's good because it gets him here to Washington at an
early stage. It's a bit of a distracted platform because there
will be a lot of foreign leaders here at the time. So I think
it's important to think about how to maximize the impact of
that particular visit.
But then also, how to follow that up because he will be
overshadowed by many other leaders. I don't want to downplay
the importance of it, but the power of having Ukrainians come
to Washington regularly, come to the United States regularly--
but also, even more importantly, it is very important for the
United States to be present in Ukraine. It would be terrific to
see President Obama make a trip to Ukraine in his first term.
We've had the Vice President there, we've had the national
security advisor. Secretary Clinton would be a natural
followup.
President Yanukovych and President Medvedev have already
agreed to, I think, three more meetings this year. They're
neighbors. That's natural. They're close. But it's important
for us to remember that we do need to be in the game. And that
requires--that's why your trips, your frequent trips to Kyiv,
have mattered so much. We need to have senior Americans showing
up in Ukraine, engaging their interlocutors, keeping these
issues on the agenda, cajoling, pressing but also exchanging
information, strengthening the ties here because they will be
having that on a very frequent basis with their Russian allies.
Mr. Hastings. I hear you. Dr. Aslund, I left all those
questions out there but I'm sure you have lots of answers for
those questions and you'll have the last word for us.
Mr. Aslund. Thank you very much. Were very good questions,
Mr. Chairman. If I start with Russia--of course, Russia has an
interest in selling gas to Ukraine and now it's spoiling that
market. Until 2008, Ukraine was actually the biggest purchaser
of Russian gas in the quantity. Now, with energy saving,
Ukraine could stop importing gas within a few years. Russia
should understand that that is not in their interest. The
biggest impact we see of Russian business in Ukraine is direct
investment.
The two biggest outside investors in Ukraine are Russian
businessmen who were actually born in Ukraine but now live in
Moscow. And I think that this is a normal thing and we are also
seeing that the people who invest in the worst depression are
big Russian businessmen, because they are used to handle risk
and are not afraid of it. In particular, the big Russian banks
are now expanding fast in Ukraine. How does one make crooks
honest? First, it's much better that they own companies because
when they defend their companies against criminal practices
rather than extort from other enterprises and second, it's good
if they get integrated into the outside world.
The people who make initial public offerings selling their
stocks abroad, they clean up the companies first, they bring in
international auditing companies and make the companies more
transparent. One of the cleanest sectors is actually the
banking sector because 40 percent of the banks are now owned by
foreign banks--mainly European banks but also Citi runs a good
bank in Ukraine.
About the shadow economy, I share your sympathy because the
shadow economy is to considerable extent small private plots.
Each Ukrainian family has a private plot. If they are doing
badly, they live on subsistence agriculture because they have
enough land so that they can live on the land if necessary. And
this is a quite important social safety net which is the
explanation why the social crisis has not been worse in this
very bad economic downturn. Thank you.
Mr. Hastings. Right, all right. I thank you both so very
much and also the previous witness. And I can assure you that
at the Commission that we will keep our interest level high as
we proceed and I will try to persuade many of my colleagues to
visit more and engage more and try best to gain greater
understanding. Thank you so very much.
Mr. Aslund. Thank you.
Mr. Wilson. Thank you.
[Whereupon, at 11:28 a.m., the hearing was adjourned.]
A P P E N D I C E S
PREPARED STATEMENT OF HON. ALCEE L. HASTINGS,
CO-CHAIRMAN, COMMISSION ON SECURITY AND COOPERATION IN EUROPE
Thank you, Mr. Chairman, for holding this important and
timely hearing. I had the privilege to serve as the Deputy Head
of the OSCE Parliamentary Assembly election mission to Ukraine
during the first round, January 17th elections. Judging by my
personal experience and those of my OSCE colleagues in both
rounds, these elections were largely free and democratic. This
does not mean they were perfect. There were some problems
stemming largely from the inadequate and confusing electoral
framework. So there is no doubt that these laws need fixing
before the next elections.
The ultimate victors in this election are the Ukrainian
people. This is not something we should take for granted--
regardless of whether or not one liked the outcome. To some
Western observers, this may seem odd, but the fact these
election results were not preordained is a success in itself.
The fact that voters do not know who will win a race is a new
and rare concept in the region and puts Ukraine in stark
contrast with some of its neighbors.
The world was enamored with the 2004 Orange Revolution,
which brought millions of Ukrainians into the streets to
peacefully protest election fraud, corruption and lack of rule
of law. Since then, Ukraine has developed an open and
pluralistic political system and media freedoms have expanded.
Although Ukraine has had good elections now for the last five
years--and I've had the opportunity to lead or otherwise
contribute to three OSCE election missions to Ukraine during
that time--I can tell you that you need more than good
elections to make a functioning democracy.
Unfortunately, despite the progress, Ukraine has also
witnessed poor governance, destructive infighting and political
instability--in part due to no clear delineation of powers
between the offices of prime minister and president. President
Yanukovych, along with the just-appointed Prime Minister,
Mykola Azarov, will need to seriously address long-standing
problems that undermine Ukraine's potential, including
corruption and the lack of an independent judiciary, which is a
key underpinning for the rule of law.
Ukraine's leadership also needs to reform and make more
transparent the troubled energy sector as well as a plethora of
issues involving Crimea, be it the Black Sea Fleet, Russian
influence, or inter-ethnic challenges, especially the plight of
the Crimean Tatars. Ukraine must vigorously fight hate crimes.
Ukraine has been especially hard-hit by the global financial
crisis. Unfulfilled promises of the Orange Revolution led to
disappointment and cynicism in Ukraine, as well as frustration
among Ukraine's supporters in the United States and Europe.
Obviously, the Ukrainian leadership's work is cut out for them.
President Yanukovych desires to improve relations with
Russia and is certainly more oriented in that direction than
his predecessor, but I don't believe would cede Ukraine back to
a bygone era, and judging from his initial statements and
visits, he clearly sees integration into the European Union as
a priority. At the same time, he appears to value the benefits
of a continued, strong relationship with the United States.
The United States has a solid record of standing with the
Ukrainian people over the decades in support of their struggle
for freedom and democracy. I look forward to hearing from our
witnesses as to how we can maintain and strengthen our
partnership with Ukraine.
PREPARED STATEMENT OF DANIEL A. RUSSELL, DEPUTY
ASSISTANT SECRETARY OF STATE FOR EUROPEAN AND EURASIAN AFFAIRS
Chairman Cardin, Co-Chairman Hastings, Members of the
Commission: Thank you for the invitation to discuss Ukraine and
its relations with the United States in the wake of
presidential elections. Your timing could not be better, as
Ukraine's new president took office last month and its new
government was confirmed last week.
Why Ukraine Matters
Let me begin by making three basic points about Ukraine and
the recent elections before sketching out our agenda for
engagement. My first point should be obvious: Ukraine matters
to the United States and it matters to Europe. Ukraine is one
of Europe's largest states, roughly the size of France with 45
million people. It serves as a transit route though which
nearly a quarter of Europe's gas imports flow, and it could
become self sufficient in energy, were its natural resources to
be fully developed. Ukraine has tremendous potential. It could
become a net contributor to global food security; its rich
black soil produced over one-quarter of the Soviet Union's
agricultural output. Ukraine can also serve as an example in a
critical region. It has shown leadership on the world stage,
giving up its nuclear weapons to become a non-nuclear state and
contributing to security and peacekeeping operations from the
Balkans to Iraq. And Ukraine's highly educated workforce is
probably now more connected with Europeans and Americans
through business, travel and education than ever before. Cell
phones outnumber Ukrainians; about one-quarter of the
population is on-line; and Ukrainians are travelling abroad in
record numbers.
My second point is about Ukraine's leadership in democracy
in the region, a role aptly illustrated by the conduct of its
presidential elections in January and February. Taken together,
the two rounds of voting received an overwhelmingly positive
assessment by international observers. Among those observers
were Congressman Hastings and Helsinki Commission staff
members, and I would like to recognize their contribution to
the OSCE Parliamentary Assembly's election observer mission.
The OSCE concluded that the presidential election showed
significant progress over previous elections, and met most OSCE
and Council of Europe commitments. The open, competitive
election demonstrated respect for civil and political rights
and offered voters a genuine choice among candidates
representing diverse political viewpoints. Candidates were able
to campaign freely, and the campaign period was generally calm
and orderly. The U.S. Senate, in fact, recognized the progress
represented by this election with its passage of Resolution
422.
My third point is that the 2010 presidential election may
have been a defeat for the Orange Revolution's leaders, but not
for the Orange Revolution. The peaceful expression of the
political will of Ukrainian voters should be viewed as another
step in strengthening democracy in Ukraine. Ukraine has
undergone rapid--and, I would suggest--irreversible, democratic
change, and Ukrainians should take pride in what they have
achieved. During the presidential campaign, Ukraine's vibrant
body politic and free press discussed and debated the poor
governance and chronic political infighting that has plagued
the country. Ukraine's economy contracted 15% in 2009, one of
the worst economic performances in the world. Voters, with
access to independent information and the candidates' views,
made up their own minds and turned out--and turnout exceeded
65% in each roundvote out the incumbents.
The post-election transfer of power has been orderly. After
the votes were counted and certified, President Yushchenko
stepped down and Viktor Yanukovych took the oath of office in
the parliament as Ukraine's fourth president since
independence. Prime Minister Tymoshenko initially challenged
the results in court but later withdrew her case. She left
office after a vote of no-confidence and President Yanukovych
set about assembling a parliamentary majority coalition. When
formation of a coalition appeared unlikely, threatening
stalemate or early elections, Yanukovych and his Party of
Regions sought and won passage of a new law that allows
coalition formation based on votes not only of political
parties but also independent deputies. On that basis, Prime
Minister Mykola Azarov and his cabinet were confirmed last
week. The opposition questioned the new law's
constitutionality. We were pleased to see that the Party of
Regions itself took the initiative to ask the Constitutional
Court to review the law and pledged to abide by the court's
decision. If the court rules against the new procedure, we
expect the Party of Regions will seek to form a new coalition
consistent with whatever the Court decides or seek early
parliamentary elections.
Ukraine's democracy is a work in progress. The electoral
process is contentious but as Vice President Biden told a
Ukrainian audience when we visited Kyiv last July: ``to those
cynics who have asserted for centuries that this part of the
world could never practice democracy because its culture and
values are different, Ukraine today stands as resolute rebuttal
. . .''
With the election behind him, President Yanukovych now
faces the challenge of governing. Obviously, he and his new
team need time to organize themselves and put policies and
programs in place, but some key elements of his approach are
already obvious. Economy recovery will rightly be the
Yanukovych Presidency's top priority, and he has inherited a
difficult situation at a difficult moment. Sound leadership and
tough measures will be needed if he is to succeed. With regard
to foreign policy, President Yanukovych has been quite clear.
He says he wants to continue Ukraine's strategic partnership
with the United States, improve relations with Russia, and
pursue integration with the European Union. President
Yanukovych made his first trip abroad to Brussels, his second
to Moscow, and he has been invited to Washington to attend the
President's Nuclear Security Summit in April. Let me add that
the United States enjoyed a productive working relationship
with Ukraine and with Mr. Yanukovych during his two previous
tenures as prime minister.
U.S.-Ukraine Strategic Partnership
As we look ahead to engagement with President Yanukovych
and his new team, it is worth reviewing the underlying premises
of our U.S. policy toward Ukraine. Simply put, the United
States will not waiver in its support for a strong and
independent Ukraine. We want to see Ukraine succeed; our vision
for Ukraine is the vision Ukrainians have for themselves--a
democratic and prosperous European nation with an effective and
accountable government. Charting the course for Ukraine is, of
course, a decision to be made by Ukrainians and their elected
leaders. President Obama, in his speech in Moscow last July
said, and I quote, ``State sovereignty must be a cornerstone of
international order. Just as all states should have the right
to choose their leaders, states must have the right to borders
that are secure, and to their own foreign policies. Any system
that cedes those rights will lead to anarchy. That is why this
principle must apply to all nations, including . . . Ukraine .
. . .''
There has been speculation over the past year that the
Obama Administration's efforts to improve ties with Russia
would somehow threaten our relationship with Ukraine. This was
not and is not correct. As we reset relations with Russia, we
have reaffirmed our commitment to the sovereignty and
territorial integrity of Ukraine and its neighbors. We do not
believe that a partnership with one country must come at the
expense of another. The United States, in fact, joined Russia
last December in re-affirming the security assurances provided
Ukraine in the 1994 Budapest Memorandum. Our larger goal is to
encourage the transition to a multi-partner world, in which
like-minded nations can make common cause on our common
concerns--the stronger our partners, the more effective our
partnerships. A strong and independent Ukraine is good for
Russia, good for the region and good for the world.
There also has been speculation about Ukraine's
relationship with NATO during a Yanukovych presidency. Let me
be clear that the United States continues to support Ukraine's
deepening ties to NATO and to the European Union. But again,
these are decisions to be made by Ukrainians and their elected
leaders. We recognize that how far and how fast to proceed will
be a Ukrainian choice.
President Yanukovych has said that he would continue
programs of cooperation with NATO at existing levels but NATO
membership was not on his agenda. We respect that choice and
want Ukrainians to know that NATO's door remains open.
Because of the importance that we attach to our
relationship with Ukraine, once the Central Election Commission
had announced the full electronic results of the presidential
election, President Obama was among the first world leaders to
congratulate Viktor Yanukovych on his victory. The President
wished Mr. Yanukovych success in carrying out his mandate and
commended the Ukrainian people on the conduct of the vote.
National Security Advisor General Jones subsequently led the
U.S. delegation to the presidential inauguration, where he had
a chance to meet not only with Ukraine's newly elected
President, but Prime Minister Tymoshenko. Mrs. Tymoshenko will
be one of the leaders of the opposition in parliament and we
will continue our longstanding relationship with her in that
new role. We also plan to work closely with leaders on the
political scene, among them Member of Parliament Arseniy
Yatsenyuk and Deputy Prime Minister Sergey Tigipko. The
development of new democratic leaders is important for all
parties in Ukraine.
Let me underscore that U.S. policy toward Ukraine will
continue to focus on strengthening the strategic partnership
between our two countries. The specifics of our engagement and
cooperation with Ukraine will continue to be guided by the
U.S.-Ukraine Charter on Strategic Partnership. The charter
highlights the importance of our bilateral relationship and
outlines enhanced cooperation across a broad spectrum of mutual
priorities including economics, trade and energy; defense and
security; strengthening democracy; and people-to-people and
cultural exchanges. During Vice President Biden's trip to Kyiv
last July, the U.S.-Ukraine Strategic Partnership Commission
was established in order to advance the objectives of the
charter. The commission now includes six autonomous working
groups and met in Washington in December. We look forward to
its next session in Kyiv.
Our commitment to Ukraine is evidenced by our assistance
program--$123 million in FY2010. The goals of our assistance
are to bolster peace and security, strengthen democratic
institutions, promote economic growth and energy efficiency,
enhance security and non-proliferation, secure Chernobyl, fight
AIDS and HIV, and improve child health.
U.S. Policy Priorities
In the spirit of our strategic partnership with Ukraine, I
would like to suggest five policy priorities, beyond
traditional foreign policy cooperation, that should be high on
our shared agenda with the Yanukovych Presidency:
First, the United States is committed to policies that
contribute to a democratic and prosperous Ukraine and stands
ready to help Ukraine reach agreement with the International
Monetary Fund as soon as possible. The path to recovery and
renewed prosperity runs through the IMF, which can help offer
Ukraine a way out of the current crisis and open the door to
lending from other international financial institutions and the
European Union. That will require resolute leadership and hard
decisions to undertake the critical reforms needed to cut the
budget deficit, revive the banking system and phase out energy
subsidies.
A second equally important policy area for Ukraine's long-
term prosperity and economic freedom is energy sector reform. A
gas sector based on transparency, competition, realistic
pricing, and more energy-efficient gas distribution and
consumption will be key, and the United States is coordinating
closely with the European Union on this issue. Ukraine uses
energy three times less efficiently than the EU average; the
country consumes 50-60% more gas than it should. The United
States is helping with a three-year pilot program designed to
increase energy conservation and efficiency at the municipal
level.
Third, the United States is ready to work to strengthen the
business side of U.S.-Ukraine relations, which is weaker than
we would like it to be. The United States remains Ukraine's 8th
largest foreign investor, with $1.4 billion in foreign direct
investment. We welcome President Yanukovych's remarks in favor
of creating incentives for investors, such as lowering taxes
and reducing red tape. Our business community tells us that
much remains to be done to make Ukraine more attractive to
investors, from tax code reform to increased transparency, from
greater rule of law protection to serious action against
corruption. The payment of VAT refunds would be a big step
forward. One area where the U.S. private sector could do more
is in Ukraine's nuclear power industry.
A fourth area of cooperation lies in nuclear security. The
United States and Ukraine must continue to work together to
reduce the threat of the spread of nuclear materials and
technology to dangerous regimes or terrorist groups, while
safeguarding the peaceful uses of nuclear energy. We look
forward to building on our successful record on non-
proliferation at the upcoming Nuclear Security Summit. Thanks
to the leadership of Senator Lugar and former Senator Nunn, we
can point to vital cooperation between Ukraine and the United
States that has made the world safer. We recognize Ukraine's
importance as a partner in the Global Initiative to Combat
Nuclear Terrorism, which brings our experience and expertise
together with those of over 70 other countries to fight nuclear
terrorism.
Finally, the United States wishes to strengthen bilateral
security and defense cooperation, which is an essential
component of our strategic partnership. We are grateful to
Ukraine for its contributions to international security. As
part of this effort, we hope that Ukrainian parliament will
pass legislation to allow joint military exercises on its
territory this year in order to facilitate mutually beneficial
military training activities. With regard to NATO, we look
forward to cooperating with Ukraine to meet its objectives in
the NATO-Ukraine Commission and in its Annual National Program,
regardless of Ukraine's intentions regarding membership.
Conclusion
While the challenges in U.S.-Ukrainian relations are
complex and demanding, I remain optimistic about the
possibilities before us. It is important to both nations and
both peoples to get U.S.-Ukraine relations right. We have a
chance, at the beginning of a new presidency in Kyiv, to
redouble our efforts. Let's ensure that Ukrainians and
Americans, both in and outside of government, make the most of
that chance.
Thank you. And I will be happy to answer your questions.
PREPARED STATEMENT OF DAMON WILSON, VICE PRESIDENT AND DIRECTOR
OF THE INTERNATIONAL SECURITY
PROGRAM, ATLANTIC COUNCIL
Mister Chairman, Mister Co-Chairman, Members of the
Commission, I am honored to speak before you today about our
relationship with Ukraine.
My perspective on Ukraine stems from years observing and
developing U.S. policy toward Ukraine. Most relevant to this
hearing, I served as Special Assistant to the President and
Senior Director for European Affairs at the National Security
Council in the run-up to the NATO Bucharest Summit during which
the Alliance debated a Membership Action Plan for Ukraine. I
also served as the NSC Director for Central, Eastern and
Northern European Affairs, responsible for coordinating policy
toward Ukraine in advance of the 2004 presidential election,
during the Orange Revolution and during the first years of the
Yushchenko presidency. My prior experience with Ukraine related
to my work at NATO, where I served as Deputy Director of the
Private Office of Secretary General Lord Robertson, as well as
my work on NATO policy within the Department of State. I
continue to follow Ukraine at the Atlantic Council.
Today, I would like to underscore why the issue of Ukraine
should matter in Washington, outline some key benchmarks
against which to judge the foreign and security policy of
Ukraine's new president and government, and offer some
recommendations for U.S. policy.
Progress Yet Disappointment
I believe it is important to begin our discussion by
stressing that we should not underestimate what has happened in
Ukraine this year. On January 17, Ukrainian authorities
conducted a successful first round of the presidential
election. Three weeks later, there was a very close run-off.
Nearly 70% of Ukrainian voters turned out for each round.
Domestic and international observers validated that the
election met key standards. Protests were lodged using legal
procedures. On February 25, a peaceful transfer of power
occurred.
This election is a victory for the consolidation of
democracy in Ukraine (even if the maneuvers in the Rada
required to bring a Regions-led government to office stretched
parliamentary practice).
Nonetheless, many of Ukraine's greatest supporters,
including myself, remain disappointed. Why?
First, a good election does not necessarily translate into
good governance. While Ukrainians have developed a track record
on free and fair elections, their representatives have not yet
demonstrated a track record of performance--a dynamic which
over time risks undermining support for democracy in Ukraine.
Second, many observers are disappointed because we were
buoyed by the vision Orange Revolution leaders offered of a
democratic, free-market Ukraine firmly anchored in the West. We
believed that there was a genuine opportunity to ensure that
this vision was not just a long-term goal, but a realistic
prospect. As Ukraine's partners, we responded rapidly to help
consolidate this vision by acting to lift Jackson-Vanik
restrictions, provide Market Economy Status, conclude World
Trade Organization (WTO) negotiations, offer a Millennium
Challenge Compact to combat corruption, and support closer ties
to both NATO and the European Union (EU). And yet President
Yushchenko and successive Ukrainian governments were not in a
position to deliver on their end because of their own
infighting and the refusal in some cases to confront entrenched
interests and battle corruption. A key window of opportunity
closed.
Third, we are disappointed because of the timidity in the
West to continue to support Ukraine. Indeed, at best, there is
much talk of Ukraine fatigue. At worst, there is a growing
acceptance that active support of Ukraine is considered
provocative in Moscow.
President Yanukovych assumes the presidency in an
atmosphere of pragmatism. And a sober assessment of Ukraine's
prospects is appropriate. However, the vision of Ukraine in
Europe remains important as it remains a motivator for tough
policy decisions in Kyiv, as well as Brussels and Washington.
We must not take this vision for granted. In the coming years,
there is a good possibility that Ukraine will move further away
rather than toward that vision. The most likely scenario is
that Ukraine will muddle along.
What Is at Stake?
Why does this matter? First, it matters for the quality of
life of Ukrainian citizens. But it also matters geopolitically.
In some sense, Ukraine is ``untethered.'' Its future is not
certain. Its future is being impacted by decisions being taken
today. I do not want to exaggerate the situation, but it is
potentially a dangerous period in Ukraine's history--an ancient
nation, but a young state.
The history of conflict in Europe is about uncertainty in
the space between Germany and Russia--that is the storyline of
European history and war. This would not matter if the Russia
of today had evolved and changed to become like the Germany of
today. But Russia has not. Last September at the Atlantic
Council, Senator Lugar warned against ``slid[ing] into . . . a
very ominous potential crisis'' in Ukraine. He cautioned that
``our inattention . . . could be disastrous.''
This ancient nation of Ukraine just elected only its fourth
president--its James Madison, if you will. Ukraine's statehood
remains fragile. If Ukrainian democracy continues to succeed,
and helps produce good governance and economic growth, it will
serve as a powerful example in a region that desperately needs
positive examples.
And that is why Russia has a strategy which is essentially
rollback. This strategy is well articulated by Russia's
leaders, including President Medvedev's declaration of
``privileged interests,'' as well as in Russia's new Security
Strategy. Neither the West nor Ukraine has a clear strategy.
Benchmarks for Ukraine's Policy
Let me first address Ukrainian policy, as what President
Yanukovych does will have more of an impact on Ukraine's place
in the world than any outside actor. As we seek to evaluate the
kind of partner we have in President Yanukovych, we should
consider key issues, which essentially serve as a test for
Ukrainian foreign policy.
Russia. How does Kyiv manage its relations with Moscow?
Many in the West are reassured by a Yanukovych presidency at it
augurs a more stable, positive relationship with Moscow. But a
stable and positive bilateral dynamic requires Ukraine to
behave as and be treated as a sovereign, independent actor. Key
issues on the agenda include whether Yanukovych maintains a
non-recognition policy toward South Ossetia and Abkhazia and
whether he opens the door to an extension of the Black Sea
Fleet in Sevastopol.
Energy Security. Russian interests have been keen to
gain control of Ukraine's energy infrastructure. Yanukovych
will have an opportunity to demonstrate whether he views energy
as a national security issue or simply as a transactional
issue. If he believes energy is a national security issue, the
new government would pursue a serious energy efficiency
strategy.
International Economics. The government's handling of
the International Monetary Fund will be an early test of its
credibility. Similarly, does Yanukovych pursue the Russian
proposal for a Common Economic Space in a way that negatively
impacts Ukraine's WTO membership or prospects for a free trade
agreement with the EU?
Regional Relations. Does Ukraine use its regional weight
to support the new pro-Western government in Moldova and adopt
a constructive position regarding Transnistria? How Yanukovych
handle ties with Belarusian leader Lukashenka and Georgian
President Saakashvili will offer insights into the regional
role Ukraine may play. Similarly, does Kyiv engage or neglect
GUAM (which groups Georgia, Ukraine, Azerbaijan and Moldova)
given Moscow's irritation with the organization?
European Union. During the campaign, Yanukovych played
up his support for Ukraine in the EU while downplaying NATO. In
office, will he press hard to grow Ukraine's bilateral ties to
the EU as well as take advantage of the Eastern Partnership? A
free trade agreement and visa liberalization are practical
steps which would help Ukrainians be Europeans and move the
country toward Europe.
Nonproliferation. Ukraine had a spotty nonproliferation
record under then-Prime Minister Yanukovych. Will Ukraine's
arms sales track record continue to improve given the economic
interests at stake?
NATO. NATO is clearly not at the top of the agenda. Nor
should it be. But NATO-Ukraine relations do need to be on the
agenda. Yanukovych in fact had a track record as prime minister
of advancing NATO-Ukraine ties. So while the window has closed
on rapid movement toward NATO, both sides should ensure there
is substance to underpin the NATO-Ukraine Commission. As NATO
is a demand-driven bureaucracy, the signals from Kyiv will
determine the substance.
I would like to make a broader point about NATO. I believe
it is an imperative to maintain the credibility of the historic
Bucharest summit decision that Ukraine will become a member of
the Alliance. If we look back in 5 to 10 years, and the
Bucharest decision is seen as hollow, there will be damaging
implications for the Alliance's credibility and for Ukraine.
And on this point, Russia is not quiet; Russia's national
security strategy commits it to undermining the Bucharest
commitment.
In face of Russian opposition and genuine divisions within
Ukraine, some have argued that we should aim for the
``Finlandization'' of Ukraine--independent, but not part of any
alliance structure. While Finland is an exemplary partner of
the Alliance and a possible future member, I believe the term
Finlandization has no utility beyond the Cold War. When applied
to Ukraine, analysts imply big powers taking decisions about
Ukraine's future. I believe Ukraine must be in a position to
determine its own future, including whether to pursue
membership in any alliance.
These issues provide benchmarks against which we can judge
the new government. I have modest expectations, but do believe
Yanukovych can deliver on his campaign pledge to continue
moving Ukraine toward Europe. Yet the most important factor to
achieve this foreign policy goal is what the government does
domestically. Yanukovych's reception in Western capitals will
be determined by whether he governs effectively, protects
democratic advances, stabilizes and grows the economy, and
ensures Ukraine is a reliable energy partner.
Implications for U.S. Policy
In the wake of the collapse of the Berlin Wall, ``Europe
whole, free and at peace'' was not just a vision; it was a
successful policy leading to the consolidation of democracy in
Central and Eastern Europe and integration of the region into
Europe's great institutions. This outcome was neither easy nor
obvious.
The same bipartisan leadership demonstrated over the past
20 years is required today to ``complete Europe''--that is, to
finish the unfinished business of integrating the western
Balkans and Eastern Europe into the European mainstream,
including ultimately the European Union and NATO.
However, at present, we are missing the vision and the
policy to extend this great success story to the south and
east.
Russia has a strategy--unfortunately, one of rollback. The
West does not yet have a coherent strategy, although Vice
President Biden's trip to Kyiv last year helped lay out
excellent broad principles for U.S. policy. We cannot afford to
put Ukraine on the back burner or accept the argument that
active U.S. engagement is somehow provocative toward Russia. We
should not accept the argument that Ukraine is ``messy'' and
too divided as an excuse not to engage. If so, we may lose
Ukraine. Ukraine's future is in play today. While changes in
Ukraine are unlikely to be decisive in the next few years, the
trend lines could take Ukraine further away rather than closer
to Europe. We do not want to look back at Ukraine's next
election and wonder what happened.
Mister Chairman, as part of my effort to outline a way
ahead for U.S. policy toward Ukraine, I offer six
recommendations:
1. Be in the Game. The United States needs to be in the
game. Ukraine is in play, and we need to engage and be present.
The Obama Administration has sent a top-notch Ambassador, John
Tefft, to Kyiv. The visits to Kyiv by Vice President Biden and
National Security Advisor Jones, as well as President Obama's
early call to congratulate Yanukovych, are key steps in this
effort. This high-level outreach should continue.
2. Articulate a Vision. We need to recommit to building a
Europe whole and free, energizing the bipartisan tradition
behind this vision and making clear that Ukraine has a place
within this vision, as does Russia.
3. Maintain Funding. We need to protect our funding for
transition in Ukraine, as the Freedom Support Act model of
``graduation'' no longer applies in Europe's East. Higher per
capita GDP does not necessarily translate into a democratic
Ukraine anchored securely in Europe.
4. Reach Beyond Leaders. Yushchenko was a failure.
Yanukovych is unlikely to bring decisive change in Ukraine. We
therefore need to ensure our relations with Ukraine extend
beyond leaders. We should place emphasis on developing next
generation leaders, engaging the regions, and fostering people-
to-people ties. In this area, the European Union can lead given
the prospect of visa-free travel.
5. Push Energy Efficiency. The United States and Ukraine
need to get serious about working with European partners to
support energy efficiency in Ukraine as a national security
strategy.
6. Enhance Mil-Mil Ties. We must ensure that close
military-to-military ties continue and are backed with funding
through Foreign Military Financing and Foreign Military Sales.
We should cultivate mil-mil links between Ukraine and NATO as
well as with Allied nations. And we must push back when Russia
tries to portray military cooperation with Ukraine as
provocative.
In the wake of Ukraine's election, Yanukovych is now
president and his party leads the government. Now is the time
to move beyond stalemate. Just as much as we hold Kyiv to that
standard, we must hold ourselves to that standard.
Thank you, Mister Chairman, Mister Co-Chairman, and Members
of the Commission. I look forward to answering your questions.
[Note.--The views expressed in this testimony do not
necessarily represent the views of the Atlantic Council.]
PREPARED STATEMENT OF ANDERS ASLUND, SENIOR
FELLOW, PETERSON INSTITUTE FOR INTERNATIONAL
ECONOMICS
Mr. Chairman,
I would like to thank you for this opportunity to speak on
an important topic, will Ukraine move beyond stalemate in the
sphere of economic reform. Geopolitically Ukraine is an
important country that has still not found its space and its
relations with the United States are entirely friendly.
Ukraine must be congratulated on having carried out a
series of free and fair elections. The country has undergone no
less than three democratic and peaceful presidential transfers
of power in sharp contrast to other countries in the former
Soviet Union. Since 2005 Freedom House has classified Ukraine
as a free country.
Ukraine's Predicament
Ukraine has established an open market economy with
predominant private ownership. From 2000 to 2007, the country
enjoyed an average economic growth of 7.5 percent, but the
global financial crisis hit it hard. The economic crisis has
illuminated the malfunction of the Ukrainian state and economy.
Last year, Ukraine's gross domestic product slumped by no less
than 15 percent, one of the biggest plunges in the world.
Economically, Ukraine is not performing up to its potential. In
2009, the International Monetary Fund (IMF) assessed that its
GDP per capita will be as little as $2,540 in current US
dollars, placing it 110th in the world.
Qualitative international comparisons present an even more
worrisome picture. I its 2009 overview, the World Economic
Forum ranked Ukraine 72nd among 131 countries. Ukraine is
lagging behind most in three areas: institutions, macroeconomic
stability, and goods market efficiency, while it is doing
comparatively well with regard to education, labor market
efficiency, and innovation. This impressive human capital does
not produce as much as it could because the state malfunctions,
not delivering macroeconomic stability while impeding the free
operation of private enterprise.
According to the European Bank for Reconstruction and
Development, Ukraine is a relative laggard among the post-
Soviet countries in terms of economic and institutional
reforms. A comparative World Bank study in 2005 assessed that
Ukraine was one of the post-Soviet countries with the least
amount of novel market economic legislation. Since then Ukraine
has adopted minimum new legislation, while another laggard,
Georgia, has forged ahead.
A more specialized international comparison, the World Bank
Doing Business index, shockingly ranks Ukraine 142nd out of 183
countries by business environment. It is particularly arduous
to obtain construction permits and carry out tax payments, but
it is also difficult to start and close a business, to register
property, and to trade across borders. Similarly, Transparency
International ranks Ukraine 146th out of 180 countries on its
2009 corruption perception index.
Because of the many years of neglecting reform, tasks have
in many ways become more difficult in Ukraine. First,
legislation is substandard. The common statement that Ukraine
has good laws but they have not been implemented is not true.
On the contrary, the country has few modern laws, and the
quality of new legislation is generally considered
unsatisfactory. Too much Soviet legislation has persisted for
too long, and it permeates many new laws. During the many years
of distorted markets, multiple vested interests have twisted
many laws to their advantage. Endemic corruption has bred
legislation that offers corrupt officials the opportunity to
reap more corrupt revenue. The competence to draft laws has
also been insufficient.
Second, not only the legislation but also the legislative
process is tilted to the advantage of vested interests. This
process is inordinately complex and non-transparent in Ukraine.
It should be opened up, abridged, and made more cohesive. It
must be made easier for the ruling political forces to have
legislation adopted in line with their design.
Third, the government's capacity to formulate and carry out
reforms is limited. The great bureaucratization and
centralization mean that central authorities are overwhelmed by
decision making on all kinds of current matters, leaving them
little time for reforms. Therefore, the Ministry of Finance or
the Ministry of Economy can hardly lead reforms as has been the
case in other countries.
On the other hand, because many other postcommunist
countries have already undertaken the necessary reforms,
Ukraine can learn from their successes and failures, which
renders it an advantage to be a laggard.
A Window of Opportunity for Economic Reform
At present, Ukraine faces an extraordinary window of
opportunity. The country has both a unique political
possibility and great economic need to launch a new wave of
reform that will lay the foundation for sustainable economic
growth. The new Ukrainian authorities need to act fast and
forcefully to shore up the state. A presidential election
offers a great opportunity for a new start. The new president
enjoys a political mandate and parliamentary majority. A new
government has just been formed and is ready to govern. But the
period of ``extraordinary politics,'' when the parliament and
public allow the president to act fast and radically, will
probably be brief.
So far, Ukraine has experienced two waves of substantial
reform. The first reform wave started in the last quarter of
1994, after Leonid Kuchma was elected president. The second
wave arose in the first quarter of 2000, when Kuchma was
reelected and Victor Yushchenko became prime minister. In these
two cases, reforms occurred immediately after a presidential
election and in the midst of financial and economic crisis,
underlining that Ukraine currently has a great chance to
reform. Today, Ukraine is once again in such a situation. It
badly needs to launch a new wave of substantial and
comprehensive reforms.
Seeing this situation arising last fall, I initiated and
served as co-chairman of an Independent International Expert
Commission on a reform program for Ukraine after the
presidential elections together with Ukrainian colleagues. It
was meant to be an action program for the first year of a new
presidency. Our proposal was endorsed by Ukraine's prime
minister last September and also the new administration has
expressed its appreciation. Half of the commissioners we
invited were Ukrainians and the other half foreigners. They
were prominent experts on different aspects of reform and
policy and independent of government, political parties, and
business. The work of the Commission was financed by the
Swedish and Netherlands Ministries for Foreign Affairs, with
additional support from the United Nations Development Program.
We have published our report ``Proposals for Ukraine: 2010--
Time For Reforms,'' and I would like to report to you our key
findings.
Reform Priorities for Ukraine in 2010
Mr. Chairman,
The new presidential mandate, the shock of a recent severe
economic crisis, and popular dissatisfaction with the status-
quo create ideal conditions for successful reforms. Our three
main conclusions are: Ukraine needs (1) new organizational
capacity for reforms, and (2) clear prioritization of reforms,
and (3) utilization of international organizations as
lighthouses to guide its reforms.
Our Commission's first conclusion was that Ukraine needs to
establish new capacity to carry out reforms that is independent
of the agencies to be reformed. We recommend the creation of a
Reform Commission at the Cabinet of Ministers, headed by a
Deputy Prime Minister with overarching authority. The Reform
Commission should have its own budget and a single goal: to
design and implement reforms. Together with the European
Integration Secretariat, it should lead Ukraine's reforms from
the Cabinet of Ministers. President Yanukovych formed a Reform
Committee at the Presidential Administration that he chairs
himself on his second day in office. He has also appointed a
Deputy Prime Minister for Economic Reform.
Our second conclusion was that Ukraine needs to formulate
clear priorities for reforms. First things need to be done
first. Ukraine must: (a) improve the effectiveness of the
state, (b) achieve financial stability, (c) allow private
enterprise freedom on the market, and (d) make social policy
more effective. Our selection is based on experts' views of
priorities that are also politically feasible within one year.
The new government has adopted a coalition program called
``Stability and Reform.'' To a considerable extent, it reflects
the views of our commission as Ukraine benefits from a broad
consensus on what needs to be done.
The problem in Ukraine has not been what to do but who
should do it, as far too often policymaking ends up in
gridlock. Our third conclusion is therefore that it is
necessary for Ukraine to use its international leverage or
external guidance to break through the domestic logjam on
reforms. The Commission has identified three anchors that can
guide Ukraine to realize its commitment to its reforms: The
IMF, the European Union and the World Bank. All these
organizations are ready to engage with the new Ukrainian
administration. Naturally, the United States should also engage
in the promotion of reforms beneficial for Ukraine's future
governance and economic welfare.
In the view of our commission, Ukraine's ten top priorities
for 2010 are:
1. Carry out gas reform!
2. Make the National Bank of Ukraine (NBU) independent!
3. Move toward inflation targeting!
4. Cut public expenditures!
5. Undertake comprehensive deregulation of enterprise!
6. Conclude a European Association Agreement!
7. Get privatization going again!
8. Legalize private sales of agricultural land!
9. Adopt a Law on Public Information!
10. Complete the modern commercial legislation!
All these measures have been chosen on the basis that they
are truly vital and can be implemented within one year. Some of
them are simple, such as the legalization of private sales of
agricultural land and the adoption of a law on public
information, while others require some explanation.
The top priority is to reform the gas sector. At present,
Ukraine is actually subsidizing imported Russian gas to the
tune of 3 percent of GDP a year. This must cease. The
government needs to adopt a realistic energy pricing policy.
All energy prices should be brought to the level of full cost
recovery plus a profit margin for operators as soon as
possible. The Cabinet of Ministers should develop and adopt a
Concept for Liberalization of the Gas Market in Ukraine, which
should lead to the adoption by parliament of a Law on
Principles of the Natural Gas Market Functioning to establish
the principles for the natural gas market so that it performs
transparently and efficiently, and stimulate competition. In
line with the EU-Ukraine Brussels Declaration on renovation of
the Gas Transit System of March 2009, the government should
develop a plan for renovation and modernization of the gas
transit system and attract financing from interested
international financial institutions. In parallel with the
price hikes, the Cabinet of Ministers should introduce a new
system of targeted social assistance for the least protected
groups of consumers who suffer because of high gas,
electricity, and coal prices. Gas reform must be an absolute
condition for international assistance.
In order to secure macroeconomic stability, it is essential
to minimize potential conflicts between the government and the
NBU. The independence of the NBU needs to be reinforced and its
governance improved, as it is currently seen as being unduly
influenced by both commercial and political forces. The NBU
Council, whose role is unclear and is dominated by prominent
business representatives and politicians, should be abolished
in its present form, while the NBU chairman and his/her
deputies should be given fixed terms. The political authorities
should refrain from enacting legislation that impinges on NBU
independence, such as proposals to finance various government
expenditures by advancing the payment of NBU profits. The
Ukrainian monetary policy should instead be governed by an
independent Monetary Policy Committee consisting of independent
professionals with well-defined powers and fixed terms. The NBU
should also raise its professional quality and include
prominent international expertise. A new law on the NBU
reflecting these elements should be drawn up and adopted.
Ukraine should move toward inflation targeting regime
within the next three years, which presupposes a floating
exchange rate. The transition period should offer the NBU
enough room to bring down inflation to the 2 to 3 percent range
and provide guidance to the public on the future development of
the exchange rate, as well as fostering a reduction of
dollarization. In the meantime, the NBU should proceed
expeditiously with streamlining its monetary policy instruments
and its decision-making process.
Ukraine needs to balance the state budget in the medium
term by cutting public expenditures. The government should
reconsider the obligations of the state in order to make them
financially affordable. The authorities should resist any
expansionary fiscal initiatives. Three public expenditures
stand out as excessive: price subsidies, enterprise subsidies,
and pension expenditures. Price subsidies and enterprise
subsidies should be minimized, while pension expenditures need
to be brought under control through a profound pension reform.
It appears both unrealistic and harmful to try to increase the
level of state revenues in Ukraine.
An overall aim must be a major improvement of the business
environment, which should entail the strengthening of the legal
base and property rights. The state's interaction with private
enterprises needs to be reduced and simplified. Starting a
business currently requires ten procedures that take 27 days,
according to the Doing Business in Ukraine report. This process
should be reduced to one procedure: registration of the
business with the tax authorities and receiving a taxpayer
number. It should take only one day and cost nothing as is the
case in New Zealand. A new law on the liquidation of
enterprises is needed to minimize the time needed as well as
the cost, while maximizing the recovery rate. The issuance of
construction permits is exceedingly difficult in Ukraine. The
goal should be to simplify the process from 30 procedures to a
small fraction and reduce the time required from 476 days to a
small fraction. Procedures for registering property can be
reduced from ten to probably three. The list of economic
activities subject to mandatory licensing should be minimized
to only those that are dangerous to human health and life,
environment, or national security. A new Law on Licensing
should establish firm legal limits of licensing. The
requirement of official permits should be reviewed and limited
to an exclusive list of economic activities, which should be
sanctified by law. The government should sharply reduce the
number of agencies entitled to undertake inspections as well as
slash the number of legitimate reasons for inspections to the
safeguarding life and health.
All these measures can be implemented within one year. The
IMF will play a central role in implementing the gas reform and
the macroeconomic policies in return for a two-year standby
agreement with substantial financing. The European Union is
currently negotiating a substantial association agreement
including a comprehensive and deep free trade agreement. The EU
is also deeply involved in the gas reform.
The United States plays a key role in the IMF as its
biggest shareholder, and it should also engage in the gas
reform which will be crucial not only for state finances and
energy efficiency but also for the improvement of governance in
Ukraine. The United States has a major interest in the economic
success of a democratic and friendly Ukraine.
MATERIAL SUBMITTED FOR THE RECORD BY HIS EXCELLENCY OLEH
SHAMSHUR, AMBASSADOR OF UKRAINE TO THE UNITED STATES OF AMERICA
Dear Chairman Cardin,
Dear Co-chairman Hastings,
Distinguished Members of the Commission
Let me start with expressing appreciation of the very
important work that is being done by the US Congress Commission
on Security and Cooperation in Europe. We value your consistent
support of Ukraine in her efforts to pursue the path of
democratic reforms and play an active role as contributor to
regional and European security.
Ukrainian presidential election that took place earlier
this year should be viewed within the context of the
developments that had been taking place in this country since
2005. In spite of considerable political turbulence and recent
acute economic problems, this period has been characterized by
further development of democratic institutions, strengthening
civil society and freedom of speech, emergence of the political
culture free from intimidation and harassment of opponents.
Thus, Ukraine has made substantial gains in her democratic
evolution. It was this environment and Ukrainian people's
strong commitment to democracy that enabled the conduct of free
and transparent parliamentary elections in 2006 and 2007 as
well as the last Presidential election. H. Tagliavini, Head of
the OSCE ODIHR observation mission concluded that this was ``a
well-administered and truly competitive election offering
voters a clear choice''. We highly appreciate the fact that Co-
chairman Hastings visited Ukraine as a Deputy Head of the OSCE
Parliamentary Assembly election observation mission.
New President and a newly formed Government of Ukraine are
facing a number of serious challenges. First and foremost they
are related to the pressing need to overcome the consequences
of the crisis that has hit Ukrainian economy. It is quite clear
that this goal cannot be achieved without a series of immediate
steps (the Government has already started the work on the new,
realistic budget) and systemic reforms aimed at rehabilitation
and improvement of national finances, overhaul of the energy
sector, including the emphasis on energy saving and energy
efficiency, large-scale modernization of Ukraine's industrial
base following innovation model of development, amelioration of
investment climate, reduction of fiscal pressure.
President Yanukovych stated his determination to carry out
structural economic reforms and get Ukrainian economy firmly
back on track. He called for the diminishing of the
Government's interference into economy and introduction of
clear and constant rules governing relationship between the
State and the private sector, reforms of pension and health
care systems. By one of his first decrees he has established
the Committee on Economic Reforms. It will serve as an advisory
body to the President focusing on devising the overall reform
strategy and the most urgent economic measures, elaboration of
the corresponding implementation mechanisms.
The President and the Government have also indicated their
willingness to resume active cooperation with all international
financial institutions, including IMF in the framework of the
stand-by arrangement for Ukraine.
Another set of pressing problems is defined by the need to
improve the system of governance, eliminate causes of frequent
conflicts between different branches of power that have led to
the political gridlock. In his inaugural speech new President
of Ukraine stressed that ensuring domestic stability and
overcoming corruption were at the top of his policy priorities
list. Both objectives cannot be achieved without reforming the
system of state management and raising its efficiency, that
include constitutional and judicial reforms, ensuring true
independence of the judiciary.
In the field of foreign policy, during his meetings in
Brussels with EU leadership President Yanukovych underscored
that European integration is a key goal for Ukraine. He
believes that the policy of European integration provides
Ukraine with a strategy of societal reforms, and as such it can
become a powerful factor uniting all Ukrainians.
Main efforts of Ukrainian diplomacy in relations with the
European Union are now concentrated on finalizing negotiations
process on the agreement on association and creation of the
free trade area, introduction of the visa-free regime and
cooperation in mitigating the consequences of the financial and
economic crisis in Ukraine.
It should be noted that creation of a comprehensive free-
trade area will enable Ukraine's gradual integration into the
EU internal market and open up new investment opportunities for
the European business in Ukraine, while Association Agreement
as a whole will mark a qualitative step forward in Ukraine's
cooperation with European institutions. Ukraine is also ready
for the constructive interaction with the European Union
through the EU's Eastern Partnership initiative.
In our quest for European integration we have been
encouraged by the recent resolution of the European Parliament
that for the first time has recognized that ``Ukraine is a
European state and, pursuant to Article 49 of the Treaty on
European Union, may apply for membership of the EU like any
European state that adheres to the principles of liberty,
democracy, respect for human rights and fundamental freedoms,
and the rule of law''.
Substantial attention of the new state leadership will be
drawn to the development of friendly, mutually beneficial and
pragmatic relations between Ukraine and the Russian Federation
in all spheres, including the sphere of energy. Ukraine will
tackle energy issues proceeding from her possibilities and
national interests.
There is no doubt that relations with the United States
will remain in the centre of the foreign policy of Ukraine. In
the course of the telephone conversation of 11 February 2010
Presidents Yanukovych and Obama confirmed their mutual
willingness to promote further development of Ukraine-USA
relations on the basis of the Charter on Strategic Partnership.
Signed in December 2008 the Charter states the intention of our
nations to deepen our partnership and expand our cooperation
across a broad spectrum of mutual priorities in the economic,
political, diplomatic, cultural, and security fields. We are
proud that our partnership is a relationship of two democracies
based on shared values and interests.
Ukraine is ready to enhance positive dynamic acquired by
bi-lateral cooperation in the course of the previous period.
First of all, we are looking forward to intensification of our
political dialogue, especially to organizing the meeting at the
highest level. We also expect productive outcome from the
forthcoming sessions of the major bilateral bodies--Commission
on Strategic Partnership, Working Groups on energy security,
non-proliferation and export control, science, technology and
education, consular issues, Defense Consultations and Council
on Trade and Investment. We hope that they will widen the scope
of practical, mutually advantageous projects to be implemented
by our two countries.
Ukraine, having voluntarily relinquished the third largest
nuclear arsenal in the world, continues to play a constructive
role in safeguarding global non-proliferation regime. Let me
use this opportunity to reiterate our support for the US
efforts in the field. We share the goals of the Prague
initiative of President Obama, and will continue to work
together with the USA and other nations to make future Nuclear
Security Summit in Washington a success.
This is an official publication of the
Commission on Security and
Cooperation in Europe.
* * *
This publication is intended to document
developments and trends in participating
States of the Organization for Security
and Cooperation in Europe (OSCE).
* * *
All Commission publications may be freely
reproduced, in any form, with appropriate
credit. The Commission encourages
the widest possible dissemination
of its publications.
* * *
http://www.csce.gov
The Commission's Web site provides
access to the latest press releases
and reports, as well as hearings and
briefings. Using the Commission's electronic
subscription service, readers are able
to receive press releases, articles,
and other materials by topic or countries
of particular interest.
Please subscribe today.