[Joint House and Senate Hearing, 115 Congress]
[From the U.S. Government Publishing Office]


115th Congress }                            Printed for the use of the             
2nd Session    }      Commission on Security and Cooperation in Europe                       

=====================================================================


	            High Crimes and Pipelines:
	                      
	             Curbing Corruption in
	                      
	            Ukraine's Energy Sector



[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]




                           June 18, 2018

                           Briefing of the
          Commission on Security and Cooperation in Europe
------------------------------------------------------------------------
                         Washington: 2017


               Commission on Security and Cooperation in Europe
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 Legislative Branch Commissioners



              HOUSE				SENATE
CHRISTOPHER H. SMITH, New Jersey 	ROGER WICKER, Mississippi,
          Co-Chairman			  Chairman
ALCEE L. HASTINGS, Florida		BENJAMIN L. CARDIN. Maryland
ROBERT B. ADERHOLT, Alabama		JOHN BOOZMAN, Arkansas
MICHAEL C. BURGESS, Texas		CORY GARDNER, Colorado
STEVE COHEN, Tennessee			MARCO RUBIO, Florida
RICHARD HUDSON, North Carolina		JEANNE SHAHEEN, New Hampshire
RANDY HULTGREN, Illinois		THOM TILLIS, North Carolina
SHEILA JACKSON LEE, Texas		TOM UDALL, New Mexico
GWEN MOORE, Wisconsin			SHELDON WHITEHOUSE, Rhode Island
                        
          
                 

               Executive Branch Commissioners
               
               
                    DEPARTMENT OF STATE
                   DEPARTMENT OF DEFENSE
                  DEPARTMENT OF COMMERCE
                            [II]


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ABOUT THE COMMISSION ON SECURITY AND COOPERATION IN EUROPE


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               High Crimes and Pipelines: 
                Curbing Corruption in 
                Ukraine's Energy Sector


                             June 18, 2018


                                  					Page
                              PARTICIPANTS


    Paul Massaro, Policy Advisor, Commission on Security and 
Cooperation in Europe                                                     1

    Ambassador William Courtney, Adjunct Senior Fellow, RAND              2

    Nataliya Katser-Buchkovska, Member of the Ukrainian Verkhovna Rada    4

    Ed Chow, Senior Fellow, Center for Strategic and International 
Studies                                                                   6

                                APPENDIX

    Prepared statement of Ambassador William Courtney                     20


High Crimes and Pipelines: Curbing Corruption in Ukraine's Energy Sector

                              ----------                              

                             June 18, 2018




    The briefing was held at 3:30 p.m. in Room G11, Dirksen Senate 
Office Building, Washington, DC, Paul Massaro, Policy Advisor, 
Commission on Security and Cooperation in Europe, presiding.
    Panelists present: Paul Massaro, Policy Advisor, Commission on 
Security and Cooperation in Europe; Ambassador William Courtney, 
Adjunct Senior Fellow, RAND; Nataliya Katser-Buchkovska, Member of the 
Ukrainian Verkhovna Rada; and Ed Chow, Senior Fellow, Center for 
Strategic and International Studies.

    Mr. Massaro. All right. It's 3:30 sharp so we're going to get 
started. Thanks, everybody, for coming today. Hello and welcome to this 
briefing of the U.S. Helsinki Commission. The commission is mandated to 
monitor compliance with international rules and standards across 
Europe, which include military affairs, economic and environmental 
issues, and human rights and democracy. My name is Paul Massaro, and I 
am responsible for economic and environmental issues, including 
anticorruption and energy security. This briefing will encompass both 
of these topics as we discuss Ukraine's energy sector reforms today--
what has been accomplished, what has yet to be accomplished, and what 
it means for the future of Ukraine.
    Ukraine currently finds itself at a pivotal moment in its history. 
Since the Euromaidan revolution in 2014, the country has embarked upon 
an ambitious reform program, meant to remedy decades of mismanagement 
and corruption that have plagued the country and prevented it from 
realizing its potential as a prosperous and democratic state. While 
some of these reforms have been implemented, others have stalled or 
failed to get off the ground. Notable successes include the 
establishment of a robust anticorruption architecture and reform of the 
energy sector, the focus of our discussion today.
    Ukraine's energy sector has historically been a focal point of 
corruption in the country. The practice of gas arbitrage--that is, the 
purchase of subsidized gas followed by the sale of that gas at market 
rates--was one of the most notorious schemes to make cash at the 
expense of the Ukrainian people. It was also a way for Russia to exert 
malign influence on the country through its gas leverage. This practice 
has since ceased thanks to the end of hidden energy subsidies. 
Moreover, Ukraine no longer purchases gas from Russia, putting a stop 
to that avenue of Russia's weaponization of corruption. Finally, 
Ukraine's state-owned gas company, Naftogaz, has gone through 
significant reform, transforming itself from a net burden on the state 
budget to a net contributor.
    However, much remains to be done. Corruption remains an everyday 
reality in Ukraine's energy sector, most notably in regional 
distribution companies, which Naftogaz must sell to under Ukrainian 
law. In addition, deregulation and privatization efforts have not been 
completed. Soviet-style bureaucracy remains a defining feature of 
Ukraine's energy sector. Russian interference complicates these 
reforms. Russian-led forces in Ukraine's east, and the immediate threat 
they pose to Ukrainian sovereignty, tends to draw attention away from 
necessary reforms that would fortify Ukraine against Russian 
aggression.
    Moreover, the development of Nord Stream 2, the expansion of the 
Baltic Sea Pipelines running from Russia to Germany, would deny Ukraine 
valuable transit revenues on gas exports to Europe. Still, we must 
acknowledge that Ukraine's greatest adversary is corruption. Energy 
sector reform is critical to combating corruption as a whole, and I 
look forward to examining it in-depth with our panelists today.
    So let me introduce those panelists. Ambassador Bill Courtney will 
be our first speaker. He is a career foreign service officer and has 
held a wide variety of posts, including serving as the U.S. Ambassador 
to Georgia and Kazakhstan. He has also served as a senior advisor to 
the U.S. Helsinki Commission, and we are glad to welcome him back.
    Ms. Nataliya Katser-Buchkovska will follow Ambassador Bill 
Courtney. She is a member of the Ukrainian Rada, where she serves as 
head of the Subcommittee on Sustainable Development, Strategy and 
Investments of the Committee on Energy, Nuclear Policy, and Security. 
We are extremely lucky to have her here with us today and look forward 
to gaining her insights.
    Finally, we will hear from Ed Chow, who just returned from a trip 
to Kyiv. Ed is a senior fellow in the energy and national security 
program at CSIS, and one of the foremost experts on energy sector 
reform. Thanks so much for joining us, Ed.
    Ambassador Courtney, the floor is yours.
    Amb. Courtney. Paul, thank you very much. I am honored to be with 
you today for this important Helsinki Commission briefing. To assist in 
setting the stage for speakers on Ukraine's energy security, I will 
briefly discuss the country's overall political and economic 
performance, and I will comment on Ukraine's security and Western 
support for it.
    In assessing Ukraine's performance, let's compare it with that of 
Ukraine's four most populous neighbors--Poland, Romania, Russia, and 
Turkey--according to three global indices that are proxies for 
political performance, and three global indices that are proxies for 
economic performance. They are, for political performance, the World 
Justice Project Rule of Law Index, the Freedom House Freedom in the 
World publication, and the Transparency International Corruption 
Perceptions Index. For economic performance, the three indices are the 
World Economic Forum Global Competitiveness Index, the World Bank's 
Ease of Doing Business Index, and the United Nations Development 
Program's Human Development Index. These are proxies for democratic 
performance, in the first instance, and economic performance in the 
second.
    To allow comparisons, rankings are normalized in percentiles and 
then averaged. A low percentile equates to better performance. And the 
results are: For political performance, Poland, 25th percentile. That's 
quite good. That's the best. Romania, 27th percentile; Ukraine, 61st 
percentile; Turkey, 63d percentile; and Russia, 82d percentile. For 
economic performance, again, Poland is the best, 20th percentile, 
followed by Russia at 24th percentile, Romania at 34th percentile, 
Turkey at 36th percentile, and Ukraine at 48th percentile.
    These comparisons allow several observations. First, Ukraine is 
mid-ranked in political performance, better than Turkey and Russia and 
worse than Poland and Romania. Ukraine's 21-point lead over Russia 
reflects, in part, Ukraine's experience of having held multiple 
national elections in which the opposition won and assumed power 
peacefully. The 30-plus point lead of Poland and Romania over Ukraine 
suggests that Ukraine has a long way to go to meet the democratic 
standards of European Union members. The second observation: Ukraine is 
the bottom economic performer. The next-worst, Turkey, has much higher 
productivity. Per capita income in Turkey, measured by the World Bank's 
purchasing power parity method, is just over three times higher than 
Ukraine's per capita income, which is $8,270. Russia's per capita 
income is also three times higher than Ukraine's.
    Third observation: Corruption, competitiveness, and the rule of 
law--dimensions of importance to investors--may be getting worse for 
Ukraine, at least in relative terms. In the Corruption Perceptions 
Index, Ukraine ranks 130th. But a decade earlier, it was 118th. In the 
Competitiveness Index, Ukraine ranks 80th, but a decade earlier was 
73d. In the Rule of Law Index, Ukraine ranks 77th, but in 2014 it was 
68th. This deterioration owes, in part, to poor governance associated 
with the rule of former President Viktor Yanukovych. But systemic 
factors also appear to be important. And the Poroshenko government has 
a mixed record on reform.
    At times, Ukraine seems to make reforms only at the urging of the 
IMF and Western donors. An example is the delayed establishment last 
week of the anticorruption court. At the same time, Ukraine deserves 
praise for progress on reform--perhaps more in the last 4 years than in 
the preceding 23 years. Ukraine's vibrant civil society is a driver of 
reform. According to the World Bank, reforms since 2014 include 
reducing large public spending, moving to a flexible exchange rate, 
reforming energy tariffs and social assistance, making public 
procurement more transparent, simplifying business regulation, 
restructuring banking, reforming health care, and establishing 
anticorruption agencies and asset disclosures for public officials.
    Ukraine's security plummeted in early 2014, when Russia seized and 
annexed Crimea, and launched a war in eastern Ukraine. Ukrainians 
quickly learned how to fight and began pushing back Russia's 
mercenaries. To stave off their defeat, the Kremlin in August 2014 
intervened with regular ground forces. They have remained in Donbas, 
and Russia continues to fund and control mercenaries and armed 
separatists. At a Helsinki Commission briefing on May the 5th, U.S. 
Special Representative for Ukraine negotiations, Ambassador Kurt 
Volker, rightly pointed out that the Donbas conflict will be resolved 
only if Russia decides to remove its forces.
    As it did with the Baltics in the cold war, the West is unlikely to 
recognize the forcible incorporation of Crimea into Russia. As it did 
with the Soviet military occupation of Afghanistan for a decade, the 
West is likely to continue opposing aggression in Ukraine. The West is 
largely unified in using sanctions to raise the cost to Russia of its 
actions. The West also provides military aid to Ukraine. Some observers 
urge that the West accept Russian control over Crimea, or that the West 
consign Ukraine and other in-between states in the post-Soviet space to 
permanent limbo, outside the European Union and NATO. This would 
unwisely tempt Russia and render its neighbors permanently vulnerable.
    The West has an interest in the sovereignty, independence, and 
territorial integrity of all countries in the post-Soviet space. The 
West also has an interest in a Russia that is at peace with its 
neighbors. In pursuit of these goals, the current direction of Western 
policy is sensible.
    Thank you.
    Mr. Massaro. Thank you very much, Ambassador Courtney, for that 
broad overview and setting the stage for our deep dive into Ukraine's 
energy sector.
    And we'll start that right now with Ms. Katser-Buchkovska.
    Thank you.
    Ms. Katser-Buchkovska. Thank you so much. Good afternoon to 
everyone, honorable guests. I'm very delighted and honored to be here 
and to discuss our energy reform, as well as our success and some 
impediments, why we are in this process and why we are not finished 
with some kind of reforms.
    First of all, I would like to start with the name of this hearing, 
``High Crimes and Pipelines: Combating Corruption in Ukrainian Energy 
Sector.'' To start with good news, that a few weeks ago our parliament 
enacted law on high anticorruption court, which means the end of 
anticorruption reform, which is actually a critical and very historical 
decision for our parliament. Last 4 years, we were full of different 
reforms, such as educational, medical reform. We cleaned our banking 
system, as well as rebuilt army, grounded previous regime with EU, as 
well as signed a few agreements--free trade agreements with EU and 
Canada, and other states.
    So we went through different reforms, but one of the most important 
reform is energy reform, of course. Why so? Because, first of all, 
since our independence--since last 25 years of our independence, we 
actually inherited post-Soviet Union energy system. And it hasn't been 
reformed. So we were dependent 100 percent on Russian gas supply. We 
were dependent on nuclear fuel supply. And actually, it means full 
political and economic dependence from one state. And the last 4 years, 
we are working on energy reform. And we actually set a lot of good 
frames to energy market development.
    First of all, I work in the energy committee and I'm responsible 
for sustainable development and energy security. And over the last 4 
years, we enacted gas market law which is systematic law. We enacted 
electricity market law, a law in independent energy regulator. We also 
enacted a law to support renewables--joint Paris climate agreement, and 
simplified rules for gas extraction, decreased royalties, I will be 
talking about a little bit later. So we set a very good frame for 
market transformation. But I couldn't say that the reform of energy 
market has been completed yet.
    First of all, I would start with gas market reform. So we 
introduced by this law--by energy--by gas market law we introduced 
competition on the industrial level. So now we have market price on 
industrial level, and Ukraine doesn't buy any cubic meter of gas from 
Gazprom. We are buying on market price--market price gas from different 
gas suppliers in Europe. But we are still missing competition on the 
consumer level. And this is a big problem because, first of all, we 
have a different price for--a fixed price for consumers, for a 
household, and we have a market price for the industry.
    I suppose it's a big impediment and which creates market 
inefficiency for consumerist-level market. And it should be fixed. 
First of all, we supported IMF. And it is a big environment of IMF to 
introduce one market price for consumers and for industry. And it would 
eliminate a very big and lucrative corruption field because this 
difference in price creates somehow inefficiency on this market. 
Second, we should eliminate from supply chain different intermediaries 
between suppliers and consumers. So I suppose this as well one of the 
critical point which should be fixed in nearest future to establish a 
real, competitive market.
    The third thing on the consumer level, as I mentioned, that a lot 
of our people are subsidized. More than 50 percent of our population 
are subsidized. It is very important to monetize subsidy. Monetization 
of subsidy will support consumers. They will receive money to introduce 
energy efficiency measures, as well as it also will show how many 
people consume gas on subsidized price. This is also a very important 
measure which should be implemented to create a competitive market on 
the consumer level.
    So this measure, to sum up, as far as bloc about markets--it's 
these three measures which allow us to finish gas market reform on the 
consumer and on the industry level, and eliminate some fields for 
potential corruption in this field.
    The second thing that I would like to tell you is the gas 
production. We also made reform in gas production sector. We made a 
very significant step toward energy independence by introducing 
competitive royalties for gas producers. First of all, we have very 
high royalties--29 and 12 percent depending on the well depth. And this 
year and last year we enacted a law to lower this rent up to 14 and 6 
percent, which makes our market very attractive for different 
investors.
    We are happy to invite investors around the world, and at the 
moment, few of American companies are interested in our market. But 
what is still missing is a transparent and competitive procedure of 
standards for license. And this is actually also the point when we 
should fix it in nearest future to increase gas production. It's likely 
increased now, but I suppose Ukraine has a very big potential and big 
gas fields. And we can actually be a net exporter of gas if the policy 
will be fixed.
    The third very important topic is gas transportation system. We 
have one of the biggest gas transportation system in the world, and the 
biggest one in Europe. It's vitally important for energy security in 
Europe, as 15 countries importing gas--transporting gas through Ukraine 
from Russian Gazprom. And security of supply is vitally important for 
our region. The second thing, Ukraine also owned 12 gas storages. And 
together with gas transportation system, we can be an Eastern European 
hub if this would be very well developed.
    But here we can, as Russian Federation design Nord Stream 2, a very 
topical issue, to bypass Ukrainian gas transportation system, which we 
actually accept as absolutely politically motivated project to make our 
economy weaker. And we also consider this project as a physical 
security threat for our region. Therefore, we are trying to invite 
European or even U.S. investor who can be our management partner in gas 
transportation system. And at this point, this partnership could create 
a very good result. And Ukraine could be an Eastern European hub, as I 
said. With the gas storages, with the biggest pipe, with access to 
Swinoujscie, and Klaipeda, which is the liquified natural gas [LNG] 
terminal in Lithuania, and Poland--we can also develop LNG market on 
our territory.
    If the Nord Stream 2 will be realized, this will be absolutely 
impossible because of 100 percent dominance of Gazprom over this 
region. So these three very important spheres for us are vitally 
important for our economy, for our physical security. And I hope all 
these positions will be fixed and developed in the near future.
    So, at this point I'll end and will be happy to answer your 
questions if you have any on these topics.
    Mr. Massaro. Well, thank you so much for that extremely in-depth 
and detailed dive into Ukraine's energy sector reforms. I'm sure there 
will be lots of good questions, including from myself, on all that's 
going on there.
    So we'll now turn to Ed. Ed, please.
    Mr. Chow. Thank you very much, Paul. I think it's really important 
to have this ongoing policy dialog between U.S. Congress and the 
Ukrainian Rada and parliament. And I feel privileged to be a part of 
this. And I would explain why the Rada is so important in the course of 
my short talk. I also come to this set of issues as an international 
oil and gas expert. So I tend to look at Ukraine from a comparative 
point of view on what the potential is and why it hasn't been realized 
up until now.
    And as Paul mentioned, I was in Ukraine for the better part of a 
week at the end of May, and I'll give you some of my takeaways from 
that trip. I think it's really important to emphasize how central 
energy plays in the Ukrainian economy and Ukrainian politics, and the 
great potential that Ukraine holds as to contribute as an asset to 
European energy security, as opposed to what has so far been seen as a 
liability to European energy security.
    First of all, for those of you who don't have the background, 
Ukraine was the birthplace of the Soviet gas industry. Up until the 
1970s, Ukraine exported gas to other republics of the Soviet Union. In 
talking to geologists the past 15, 16 years, including during this last 
trip, that potential is still there. I'm an economist by training, so I 
tend to discount geologists' estimations by about half. [Laughter.] So 
if they say Ukraine can produce 70 billion cubic meters a year, then I 
say, well, Ukraine probably could produce 35 billion cubic meters per 
year.
    But if it were to realize their potential, Ukraine becomes a gas 
exporter rather than a net gas importer at that point. And Ukrainian 
gas prices become European hub prices, minus transportation, as opposed 
to European hub price plus transportation. So that makes a huge 
difference. As Nataliya's already said, also a major transit corridor 
for both oil and gas, when independence came in the early 1990s. 
Ukraine has other energy assets--coal, nuclear, underutilized hydro, 
renewable potential. There are just considerable resources that are 
there, and the human capital to realize the energy projects for the 
Ukrainian economy.
    But corruption was what got in the way in the 1990s. It's without 
much exaggeration to say that every fortune made in the Ukrainian 
economy during the dirty privatization days of the 1990s were either 
directly or indirectly related to energy corruption. Either directly, 
though rent extraction of the assets that were put under private 
control, or indirectly with gas subsidies through the energy intensive 
industries, such as in the metals industry. Without energy corruption, 
a lot of the fortunes would not have been made.
    This is a well-known fact in Ukraine, among Ukrainian politicians. 
So eliminating energy corruption is not just substantively important, 
in terms of removing a liability, a penalty on the Ukrainian economy, 
it's politically symbolically very important because the Ukrainian 
population understands that energy corruption has been pervasive for 
the last 25 years, and that needs to be corrected in a very fundamental 
way.
    And what has changed since first the Orange Revolution and 
Euromaidan, the Revolution of Dignity, is that the expectations of the 
Ukrainian population have fundamentally changed, even if the political 
leadership has lagged somewhat to the need for reform. So I really see 
civil society and the Rada, the reformers in the Rada, as partners in 
making sure that the reform takes place, so we really would have a new 
Ukraine, rather than the old Ukraine that we're all frustrated by for 
the last 20-some years.
    I was in Ukraine for 6 days, talked to more than 50 people 
probably--individually or in small groups. Ukrainians in government, 
Ukrainians outside of government, many of the international agencies--
including our embassy of course, but also the European Bank for 
Reconstruction and Development [EBRD], EU officials, and so on--who are 
working on energy reform. So one of the takeaways is that there's still 
no unity of purpose inside the government on reform. And that is very 
troubling to me, that there still seem to be divisions over the 
direction, the pace, of reform. And we still have politicians 
commenting directly on what the gas price ought to be.
    In the 1970s American presidents decided that it was not a good 
idea to be responsible for gasoline prices. It's much better to 
complain about them and say it's someone else's fault than to actually 
take responsibility over what the gas price ought to be. And if you're 
trying to build a market economy, the last thing you want to do is to 
allow politicians to set what the gas price ought to be. It is the 
government's policy--it is the Rada's prerogative, first of all, to 
pass laws and make sure the regulations conformed to the laws, and for 
the Cabinet to execute policy, but not to decide whether the price of 
gas should be X or Y.
    And it seems like the Ukrainian politicians really haven't learned 
that lesson yet. As Bill mentioned, sometimes one gets the feeling that 
reforms only take place as a result of tough IMF or other international 
financial institution conditionality. So there's still a sense--and I'm 
just reporting here--that there is not the political will yet to 
proceed. The other point, and I think Bill also mentioned this in some 
of the rankings, is that reform is a process. I think in this room, or 
at least in this forum, I once compared it to rowing a boat upstream, 
that standing still is not an option. You either go forward or you're 
going to go backward.
    And so there is still the sense that politicians can leave--that, 
well, there's an election around a corner, we may need to slow things 
down a little bit, and that the need for a steady pace--not necessarily 
fast, but a steady, constant direction is really quite important, in my 
mind. But when you have disagreements over either policy or the pace of 
change in a political culture like Ukraine, the almost automatic 
natural question to ask is: Is this a difference over policy, or is it 
really a difference over control of assets? So has the business model 
actually changed, or are we just talking about shifting franchises from 
one to the other?
    Some of the franchises are still old. Nataliya mentioned 
intermediaries in gas distribution. Well, no, the person or the person 
who controls the company that controls most of the gas distributors to 
the population is a gentleman by the name of Firtash, who is under 
extradition request by the U.S. Justice Department to Austrian 
authorities because of accusations of corruption. And these are the 
signs that people look at--is change really happening as fast as they 
could be?
    And I think--since we are on the Hill--another question is to what 
extent the American assistance programs on energy has helped push 
things the right direction, whether we are working together at the 
Department of Energy, State Department, the Agency for International 
Development, in the direction that is necessary. Are we working closely 
with Ukrainian civil society, with the Ukrainian Rada, and not just 
talking to the executive branch? Are we working closely with EU and 
EBRD and World Bank and other partners in this or not? Because 
execution is everything. If there were political will, then Ukraine 
needs the capacity-building assistance that we can provide. But without 
the political will, adding capacity just to check a box may not do the 
good that is meant.
    On something like unbundling, for example, of the gas transmission 
system from Naftogaz--we don't want to get into the weeds too much--
but, this is 4 years after Euromaidan. The government should know what 
the program is for unbundling. There needs to be unity of purpose. 
There needs to be agreement on what the process is on inviting 
international companies to participate in the management of the transit 
system.
    These things need to be executed or coordinated well, otherwise 
Ukraine's admittedly most reliable, most flexible, the most economic 
transit route for Russian gas to Europe would go by the wayside one way 
or the other. If reforms don't take place, the unbundling process and 
inviting international companies to jointly operate the gas pipeline in 
order for European gas buyers to have the confidence to want to prefer 
the Ukrainian route, rather than Turkish Stream or Nord Stream 2, that 
would be missing.
    The last thing I want to say is that Ukraine really needs a big 
success story on energy reform. And the low-hanging fruit in having a 
success story on energy reform is gas production, which Nataliya has 
already mentioned. But as she also said, there needs to be fundamental 
reform of the licensing process by the ministry of ecology and natural 
resources, international standard bidding process that makes data 
available to everyone rather than you have to go talk to my cousin if 
you want the data, and doing a professional job in advertising the 
availability of acreage for exploration and production, including that 
those companies that are currently holding on to licenses but not 
working them very hard have to relinquish those blocs.
    I mean, this is international standard practice in the United 
States and elsewhere. There are lots of people sitting on licenses 
without working them. The conventional wisdom here is that you need to 
have connections in Ukraine to get the best blocs. And that's a 
reversal that needs to take place. But for that, you need a fundamental 
reform of that process. I have to tell you that I was sent by the 
American government to advise the post-Orange Revolution Ukrainian 
Government. And I had the same message. That was more than 10 years 
ago. So it's long overdue.
    At the same time, in order to have a competitive market with 
transparent regulation, we need to figure out what the transition 
period is and what to do with the incumbent companies that have taken 
advantage of monopoly market power. They're still providing services to 
the Ukrainian population. We need to figure out how to transition from 
a previously closed monopolized energy market to a competitive market 
with many market players and transparent regulation. And that's going 
to be the process that needs to take place over time as well. But you 
have to start the process. And then you have to hold a steady pace of 
change.
    Otherwise, the difficulty is that you go backward. And with an 
election coming up in the spring for president and in the autumn for 
parliament, there is no time to be wasted. Otherwise, we're going to 
have to wait another year and a half. And nothing good comes from 
waiting, particularly with an aggressor next door, it seems to me.
    Thank you.
    Mr. Massaro. Well, thanks so much, Ed, for those very, very 
interesting insights.
    We're also joined today by Vitalii Tarasiuk from the Ukrainian 
embassy, who is their key person on economics and energy. Could we get 
a microphone for him over here? He'd like to make a few comments before 
we go to the question and answer session.
    [Off-side conversation.]
    Mr. Tarasiuk. Well, thank you so much for this opportunity. I think 
this has been an excellent panel to discuss things in energy and 
Ukraine--this is a very important time to do that. The only thing is I 
think that even the answers of all of the speakers for the question 
about what the situation in energy about, more of things that are 
happening in Ukraine, about the things that are around you in the last 
4 years. And I just wanted to make a few comments to Ambassador 
Courtney.
    I mean, there are different ratings about what Ukraine has achieved 
for the last 4 years. Not only though--that you mentioned, that also 
are credible, like the Ease of Doing Business by the World Bank, where 
Ukraine actually has risen six to three positions for the last 4 years, 
but also it is true that things are changing, and the government is 
committed to free conditions for doing business in Ukraine.
    And since we are discussing the energy sector, the success of the 
new form of the Naftogaz, you mentioned--we have people from Naftogaz 
here in this room today--it clearly shows that--I mean, that was the 
company that consumed 3 percent of our state GDP, but actually now is 
the biggest taxpayer to the budget. So clearly demonstrating that there 
are changes in that sector.
    And the other thing I wanted to mention is that a lot of the 
problems in the energy sector, are still kind of--like we're still 
fighting the vicious circle of Russia's influence in the energy sector 
that, as Edward Chow said, in the 1990s was eliminated in all of the 
sectors, in oil and gas and then nuclear energy as well. And what 
Ukraine is doing is actually importing zero gas from Russia, so 
decreasing the influence or intermediaries, and also in nuclear sphere 
as well. We're working together with U.S. companies--Westinghouse for 
purchasing fuel and with Holtec for creating the storage facilities and 
building some new modern reactors of the future.
    So we are kind of going away from that and, like, fast. And the 
things that remain mostly show that there are some things that still 
remain, but the government is fighting them. And on the reform in 
general, I wanted to mention, Ukraine of course--I mean, we all would 
like to be moving faster with reforms. That's for sure. But as Edward 
Chow said, reform is a process. Maybe it's not that fast, as everybody 
wants it, but there are certain restrictions. And Ukraine is moving. 
And as Nataliya mentioned, the president signed the high anti-
corruption board, that now kind of finalizes the anti-corruption system 
in Ukraine, and hopefully when the board becomes operational it will 
help to eliminate those issues in the energy sector as well.
    On maybe just stronger market--I mean, also some laws have been 
passed for simplifying the energy sector in Ukraine. Actually on the 
1st of March, signed by the president, that makes the process of 
obtaining licenses much quicker--18 months quicker than it used to be.
    And since the beginning of the new royalties--and that's important, 
of course, for the companies to come to the country--and they're quite 
competitive. They can be almost halved what they used to be. And as 
experts in the energy sector say, this is quite a compatible royalties 
rate right now.
    So saying all that, and we here in the embassy are working very 
closely with U.S. companies in attracting them to the U.S. market. And 
I will not be going into specifics, but there are a lot of companies 
that are interested to go upstream and on shore, off shore. So a lot of 
interest right now to do more business in Ukraine in that sector.
    Thank you so much.
    Mr. Massaro. Thank you, Vitalii.
    Would any of our panelists like to make any comments? Please, 
Ambassador.
    Amb. Courtney. Just one correction. I did, in fact, include the 
World Bank Ease of Doing Business Index as one of the three measures of 
economic performance, along with the World Economic Forum's 
Competitiveness Index and the United Nations Development Programme's 
Human Performance Index. But even with that marked improvement--and 
you're quite correct about the improvement in Ease of Doing Business--
even with that included, the average for Ukraine is still at the bottom 
of the four other countries.
    Mr. Massaro. Any others? Okay. Fantastic.
    Well, thank you all so very much for your opening remarks. We're 
going to move on to the question and answer phase now, so please start 
thinking of your questions. I will go ahead and begin with a first 
question, and that's something that's often talked about in the United 
States, at least in the U.S. Congress, is U.S. LNG exports and the 
potential role for the United States to step in and assist with 
Ukraine's energy needs. It'd be very interesting to hear first Ms. 
Katser-Buchkovska's thoughts on that and then potentially Ed's. And, 
Ambassador, if you have anything to say on that please let me know.
    Ms. Katser-Buchkovska. As I said, we actually do have potential to 
create the Eastern European hub because, first of all, Ukraine has very 
big infrastructure, gas storages. And now we have a very high demand on 
gas. So we import gas from different European countries. So there is a 
place for additional volumes. And we actually consider LNG as one of 
the potential sources of diversification of gas flows. So for us, it's 
a very interesting question.
    What do we really need to create hub and to import LNG? First of 
all, I would say that we had the first attempt--successful attempt to 
import LNG through Poland, Swinoujscie, one of independent Ukrainian 
trade area. It's a very good example that market is working on 
industrial level. They already made a deal, and export LNG through 
Swinoujscie and made some swaps through Poland. So this was an example 
and it shows that it's possible, because a few years ago it looked 
impossible. So now we can actually import LNG from Poland and from 
Lithuania. What do we really need? We need more interconnectors and to 
make this market more liquid.
    So, first of all, we are very interested. And I suppose it's 
possible. We have a first good example. But what is the threat? I 
consider Nord Stream 2 a threat to the LNG market at home, because 
first of all Nord Stream 2 will eliminate any opportunities to other 
markets, like LNG, because of price and because of extra liquidity from 
the Russian side. So they will have monopoly, they will control the 
market, and there will be no place for any LNG from around the world. 
So it's possible, but we should develop this market, and there's 
actually opportunities and conditions for that.
    Mr. Massaro. Thank you.
    Ed, do you have anything to say on that?
    Mr. Chow. Well, first of all, on the whole question of U.S. LNG 
exports and European energy, of gas supply security, I think there's a 
lot of misunderstanding on the Hill on this subject. Yes, U.S. LNG 
exports--which has just started 2 years ago and will continue to 
increase--will have a positive impact on European gas supply. It adds 
volume and liquidity, as Nataliya mentioned, to the gas supplies for 
Europe. So you will lead to more spot trading in Europe than long-term 
contracts that are tied to oil prices, which is the traditional model 
of gas contracts in Europe, which is eroding already. But the addition 
of U.S. LNG will speed up that process.
    Now, of course, our gas--U.S.-sourced gas--is not linked to oil 
prices at all. So that's a positive. So in the case of U.S. gas, oil 
prices can go up and gas prices can come down, because we have gas and 
gas competition in North America. Well, they don't have that in Europe. 
They don't have that in East Asia, for that matter. So this would be a 
positive contribution to any part of the world that imports a lot of 
gas, including Europe. Saying that----
    Mr. Massaro. I'm sorry, specifically because it would bring in 
market forces? Like, it would----
    Mr. Chow. Right.
    Mr. Massaro. Okay.
    Mr. Chow. Right. Bringing competition--additional competition. 
Saying that is different than saying that U.S. gas can substitute for 
Russian gas imports into Europe. It would limit the market power of 
Russian gas, but the Russians have an option. They have low cost gas 
supply with pipeline exports. So if they want to protect market share, 
they can always cut their price. But if they cut their price, that's 
good for Europe, right? So whether U.S. gas molecule for molecule 
substitute for Russian gas or not, that's not the main issue, from at 
least an industry analysis point of view.
    The more LNG terminals--the utilization rate of European LNG 
terminals today are very low, by the way. Their utilization rate is 
about 25, 30 percent. So there's a lot of stranded investments. More 
LNG terminals from a U.S. point of view, that would be a good thing 
because we have more markets that we can sell into then. But are those 
projects bankable? So if you're talking about a new terminal in Croatia 
or elsewhere, Lithuania and Poland had decided for energy security 
reasons--which is perfectly legitimate--with the help of the EU to 
subsidize the building of LNG import terminals.
    Is Ukraine in the position of doing that? Does it need to do that? 
Or can it play with better interconnectors and utilizing gas storage--
which is very strategically located in the case of Ukraine and western 
Ukraine primarily--can serve the role of the gas market hub that 
Nataliya mentioned, then whether the LNG terminals is actually in 
Odessa or not--which requires a billion in investment, it's not the 
most critical question. Is Ukraine better linked to European gas 
markets in general? And for that, you need more reform.
    Mr. Massaro. Got it. Thanks.
    So I'm going to ask one more question here. And I'm going to start 
that out with a comment, and that is the CAATSA legislation, the 
Countering America's Adversaries Through Sanctions Act, includes a 
provision that says it's America's policy to support Ukrainian energy 
security and to oppose Nord Stream 2. And I'd be interested to hear 
from all of you, how the U.S. Congress can be a part of that, what the 
U.S. can do in this particular situation to achieve both of those 
goals. And maybe we can start with Ambassador Courtney, if you have 
anything to say on that.
    Amb. Courtney. Thank you, Paul. In the early 1980s, when I was a 
diplomat in the American embassy in Moscow, the United States--this is 
the early Reagan administration--decided that it had views about how 
much dependence Western Europe should have on Soviet gas. And the issue 
then was constructing pipelines for western Siberian gas to be sent to 
Western Europe. The United States imposed secondary sanctions, 
sanctions that would apply to some even European companies that would 
be involved in that activity. The Europeans had a very strong, very 
negative reaction. The Reagan administration had to backtrack and lift 
those secondary sanctions. It was not one of America's best, most 
successful policies in Europe at the time.
    And this is at a time when in the United States, the high priority 
was trying to maintain consensus in Western Europe for deployment of 
intermediate-range nuclear missiles to counter Soviet SS-20 missiles. 
So there were other issues at stake. And the United States had to 
balance its strategic interests and in the end decided not to apply 
secondary sanctions to our European allies. That was a long time ago. 
This is the first time now with the CAATSA legislation that this issue 
has come back. And the legislation authorizes, but not requires, 
imposition of secondary sanctions. So this is an issue that the United 
States had to think carefully about, because the United States has 
other interests with Europe.
    And those interests are economic interests in many respects. For 
example, trade issues are prominent right now. There are concerns in 
Europe about the political developments in certain countries, 
particularly most recently the turn in Italy. There is concern that 
Europeans are not spending enough on defense. This administration is 
trying to encourage them to spend more. So the United States will have 
to balance competing priorities. And applying secondary sanctions on 
the Europeans, at a time when in contrast to the early 1980s the 
Europeans have more options for energy, including especially LNG, and 
therefore the risk for excess dependence, if you will, or greater 
dependence on Russia is, at the margin, less, because of the other 
options.
    So the United States is going to have to balance all of these 
interests. Former Secretary of State Tillerson expressed opposition to 
Nord Stream 2, and certain other officials have done that. But at the 
same time, one does not see the United States making this the most 
important issue in its relations with Europe.
    Mr. Massaro. Ms. Katser-Buchkovska?
    Ms. Katser-Buchkovska. Yes. First of all, I will say that a lot of 
European countries, maybe most of European countries, are against Nord 
Stream 2. This is the first, because only a few countries express 
parliament made appeals against Nord Stream 2. And now this project is 
not only dangerous for Ukraine, as I said, because, yes, we lose 2 
billion [dollars] profit, we lose negotiation too with Gazprom. It's 
also a physical security threat for us, for our territories, as Russia 
can invade more territories, as we already experienced this invasion 
and annexation of our Crimea. But this project is divisive in Europe. 
So this project divides Europe toward countries who benefit from Nord 
Stream 2, and countries who are absolutely against this project. And 
most of Europe are against, first of all.
    Second, answering your question about what can be done, I suppose 
there is a lot of interest and a lot of opportunities in Ukraine. First 
of all is gas production. Second, Ukraine can be this European hub and 
there would be more opportunities for LNG. The third issue, we can also 
be a transit partner with the European companies, with the U.S. 
companies, who will express an interest to be a part of management 
system. So this market could be developed. And, first of all, I 
consider Ukrainian market as very good additional liquidity to European 
markets, as a base of European energy stability and security.
    Mr. Massaro. Ms. Katser-Buchkovska, I'm actually very interested in 
your view on this, specifically U.S. policy. From the Rada's 
perspective, what would you hope to see the U.S. Congress, or the 
United States do, rather than Ukraine?
    Ms. Katser-Buchkovska. Well, of course we call for additional 
sanctions not for European countries. I would say Europe has few 
companies which are in the Nord Stream 2 project. It's absolutely a 
project of one--belongs to Gazprom. So it's not against Europe. It's 
against companies who are in one politically motivated project, which 
is a hybrid war tool against independent states, like Ukraine and other 
states, who also suffer from these aggressors.
    Second, now we are really very central for those--for support you 
already provided for political guarantees--for political guarantees for 
independent investor. And we will welcome more investment in our energy 
sphere, in production, in transportation, to develop LNG. And I suppose 
this mutual beneficial corporations should be developed. And it would 
be a very good base to keep security in this region.
    Mr. Massaro. Thank you.
    Ed, do you have anything to say to that?
    Mr. Chow. I've got too much to say--[laughter]--than can be packed 
into a soundbite, I'm afraid. I would just say that, no, it's a 
complicated issue. You do have to weigh where it ranks among the 
priorities, including on our policy on Ukraine. As an energy person, I 
have to say that I don't see it as a life or death issue for Ukraine. 
Honestly, Russia has been trying to bypass Ukraine for the last 25 
years. I mean, the Soviet gas pipeline system was designed for, I don't 
know, some incredible amount--200 billion cubic meters, or something 
like that. And that volume has steadily eroded. The best defense 
against bypass pipelines of Ukraine is to demonstrate that you have the 
most reliable, cheapest way to transport gas to market. Unfortunately, 
Ukraine has not done that in the last 20-some years, and partly because 
corruption was--and I'm not talking today--but it used to be until 2014 
corruption was so inherent in the transit system. So Ukraine has hurt 
itself.
    But, it's now 4 years later. There needs to be, as I said earlier, 
a uniform strategy on how to do unbundling, how to invite European 
companies to cooperate in operating the transit system, and then you 
have to ask the European gas buyer, why do you want to use a more 
expensive transportation route?
    But those conditions don't yet exist. And as long as they don't, it 
helps justify Nord Stream 2, and also Turkish Stream, by the way.
    People hardly in this town mention Turkish Stream. And honestly, I 
don't really understand. From an energy security point of view, Turkish 
Stream is a lot more important than Nord Stream 2. Why? Because 
Southeastern Europe is almost 100 percent dependent on Russian gas as 
imports, whereas Northwestern Europe is more diversified than 
Southeastern Europe. So in terms of Gazprom's monopoly power, Turkish 
Stream is more important, in my mind, but yet this--we hardly talk 
about Turkish Stream. Mr. Putin just gave President Erdogan a $1 
billion gift before the elections on gas price--lowering the gas price 
in order to--the second line of Turkish Stream to go forward.
    There's so much talk in this town about Nord Stream 2, I think it 
can become a distraction rather than to see it as the be-all for energy 
security for Europe, or for Ukraine for that matter. It's just, to me, 
not as important as all of that.
    And what happens if we apply secondary sanctions and the Russians, 
along with the Germans, allow the pipe to enter, and still build it? 
What happens then to our policy? And then U.S. policy will be seen as 
feckless, it seems to me. The problem with the Russian pipeline 
strategy right now is at $70 oil they can afford to do a lot of 
economically suboptimal projects. At $30 oil, not so much. [Laughter.] 
And so we should be thinking about those things.
    Mr. Massaro. Vitalii, you mentioned you wanted to say something. 
Could we get a microphone up here? And then we'll open the floor to 
questions.
    Mr. Tarasiuk. Thank you. I wanted just to say a few words about the 
CAATSA legislation, because what, Paul, you asked is what is the role 
for Congress in implementing the CAATSA provisions. And before anybody 
mentioned, I just wanted to mention that of course there is a provision 
that envisages imposing sanctions on Russia's energy export pipelines. 
And it's kind of discretionary, because it has to be together with the 
European partners in design. But still, it's an important tool because 
it basically can really influence and change Russia's decisions, 
because what was the main point of CAATSA legislation? To change 
Russia's aggressive behavior toward its neighbors, toward Ukraine. So 
that's the most important, I think, provision of that legislation.
    So it's important that there is such a provision there for imposing 
possibly sanctions on Russia's export pipelines. But what you've asked 
about the role for Congress, is there is Article 257 that actually 
authorizes the Department of State, together with Department of Energy, 
and United States--USAID, to work together with the Ukraine on drafting 
a plan for enhancing Ukraine's energy security in different aspects of 
its existence. And so the first plan was submitted to the congressional 
committees in January. The next one should be in July. And I think 
there is of course the role for Congress to play because they submit it 
to Congress. And then Congress can, of course, examine those reports 
and make certain proposals to--[inaudible].
    Thank you.
    Mr. Massaro. Thank you very much.
    Okay, we'll take questions, please, from the audience. Anybody got 
a question? Right there, please.
    Questioner. Oleksandr Kharchenko, Ukraine think tank in the energy 
industry.
    And my question is to you. I just want to ask you, within the last 
5 years, could you give us any examples when Ukraine was an unreliable 
partner in gas transportation?
    Mr. Chow. Well, I think the cases are quite well known. I mean, 
look at the way Mr. Firtash monopolized the gas----
    Questioner. Gas transportation?
    Mr. Chow. Well, the gas transportation. Here's the problem, from a 
Ukrainian--I take your point. What you're saying is it was never 
Ukraine's fault that gas was interrupted. But if you're a European gas 
buyer, you don't care whose fault it is. You don't care whether it's 
Russia's fault or Ukraine's fault. All you care is whether the gas 
arrives on your border or not, because you don't pay for it until it 
arrives on your border, right? So as long as there's transit risk, and 
there's perceived transit risk--maybe you and I can agree on that--
there's presumption of transit risk, whether real transit risk exists 
or not--and someone gives you an alternative that avoids transit risk, 
there will be gas buyers who welcome that. That's the problem.
    So in order to avoid that, you have to demonstrate--and I went to 
Ukrtransgaz, you'll recall, and I have seen very good demonstrations of 
why the most reliable, flexible way of receiving gas for Europe, from 
the Russian direction, is through Ukraine. That case needs to be made 
and needs to be made in a positive way--not just stop Nord Stream 2, 
because it needs to be both, if you will, on the Ukrainian side.
    Mr. Massaro. Thank you very much. That's actually a really good 
point about the optimistic message of Ukraine.
    All the way in the back, please.
    Questioner. Hi there. So just along the lines of Firtash, I'm 
interested in the negative impact of oligarchs in general on Ukraine's 
progress toward regulatory reform. And I was aware of the fact that 
Ihor Kolomoyskyi is another one. I was wondering what the panel thinks 
the United States could do on the government side to assist the 
Ukrainian Government with combating this problem.
    Mr. Massaro. Anybody in particular?
    Questioner. The entire panel.
    Mr. Massaro. The whole panel. Ambassador Courtney, please begin, if 
you don't mind. [Laughs.] That's a big question to take on.
    Amb. Courtney. So the phrase ``tough love'' has an origin--a root 
in U.S. relations with Ukraine. The United States, IMF, World Bank, 
European countries all together, for years, have been applying tough 
love, if you will, or conditionality to encourage reforms in Ukraine 
that would weaken the power of the rentiers, those who earn profits in 
excess of what competitive markets would provide. And the oligarchs are 
clearly there. So, it's a full-court press from favoring anti-
corruption and privatization. We are now 4 years after the Maidan, and 
virtually nothing has been privatized in the state-owned or state-
controlled enterprises in Ukraine. That's really shocking, because 
corruption is highly correlated with the state's role in the economy. 
But the state's role in the economy has not diminished in Ukraine 
anywhere in the direction of what it needs to do if Ukraine wants to 
realize its European ambitions.
    Mr. Massaro. Please.
    Ms. Katser-Buchkovska. Well, to answer your question, I will show 
you one example. So it's not easy market and it's not easy to 
transform. It's from monopoly to competitive market or very well-
regulated market. But in some cases, we succeed. In some cases, we 
still have such an inefficiency, like for instance the biggest--you 
mentioned privatization--one of the biggest assets, gas distribution 
networks, which supply gas for final consumers, for households, is 
privatizing 2012. Before the reforms start it's privatized and owned by 
companies which operates, owned by--you mentioned Firtash. And this big 
state-owned asset, used free of charge, because--historically, he takes 
this asset and didn't pay for them.
    We enacted law--gas market law in 2015 to stop this scheme. And 
there is a clear provision that his state-owned asset wouldn't be used 
free of charge. Since 2015 we can change this because there is no 
execution. And there was a lot of discussion, roundtables, but still 
this--the biggest assets and state lost lot of money. So, we have this 
problem in our market. And it's very, very difficult. To answer your 
question, how you could help--somehow it is impossible to change from 
inside, because we file a lot of laws. We conducted a roundtable. We 
asked Q&A during Cabinet meetings, during Cabinet speak in parliament. 
But it doesn't work. At the moment, certainly I should say, that this 
is in our markets, this inefficiency.
    From the one side, I truly believe in markets. And if you are 
talking about positive sides, such as gas production, I believe that it 
will have a lot of investments, competition will cure this market 
inefficiency. And investors, independent companies, independent 
traders, will cure some inefficiency, and will make this market more 
transparent, more competitive. In such a way, we highly welcome 
investors. We create good frame for investments. We created good 
taxation system. And in this segment, I feel that we change a lot and 
we can make a difference and establish good competition.
    Mr. Chow. I think your question presupposes the Ukrainian 
authorities all want to remove corruption from the energy sector. And I 
would say the record is spotty there. The fact that the rent seekers 
have taken control, either because of a monopoly position or because of 
control over state assets--those are very well-known, well-documented 
cases in Ukraine. And the problem is not with the Rada, that has 
problems passing law but eventually does pass the laws. It's in the 
execution of the policy, and I think Bill's tough love needs to be 
delivered to the right parties.
    Ukraine totally is in the saturation--but it's very dependent on 
import of Russian petroleum products today, for example. And that's 
because there's certain special interests that are involved in that 
trade. It has practically destroyed its domestic refining industry. And 
there are other areas like that. Who controls Ukrnafta--Kolomoyskyi, 
the gentleman that you mentioned there. There are other cases in 
electricity and other areas. Even in renewables. I learned a new term 
when I was in Kyiv in May, the Kluryiev [ph] tariffs, I was told. They 
are feed-in tariffs that have been designed to be in the advantage of 
certain oligarchic interests.
    So, there needs to be an overhaul in the system. And I take 
Nataliya's point, that you cannot do this overnight. But it's important 
to have a transition. It's important to have an action plan that says 
over a course of 5 years, or whatever the right period of time is, 
these are the steps we're going to take. And Ukraine needs to be 
measured by the international financial institutions, as well as the EU 
or the U.S. Government, to the extent that we provide any assistance 
for these things, that those milestones are met.
    Mr. Massaro. Thanks so much. I know you wanted to make a comment on 
this point, so if we could give him the mic. And if everyone could 
please say their name and affiliation. Sorry, I'd forgotten to bring 
that up.
    Questioner. Vadym Glamazdin, Naftogaz of Ukraine.
    I really want to add a little bit of comment on this particular 
question, and probably to add a little bit of optimism. Of course, 
Ukrainian energy sector is pretty known for its corruption issues, and 
all parts of it. Literally, as Ed mentioned, even including the 
renewables. So considering we are speaking today about mostly the gas, 
a little bit oil, part of the business, I would say that those issues 
have very few, very particular names. One is Mr. Firtash. Another one 
is Mr. Kolomoyskyi, that you mentioned. And I have to say that while 
previously, for example, Naftogaz itself and everything that Naftogaz 
did was deeply controlled by Firtash himself, nowadays Naftogaz 
management, together with the government, kind of managed to get rid of 
Firtash from everything inside Naftogaz. And everything inside Naftogaz 
is doing it, including the transmission business, including the 
production business, and the rest.
    Unfortunately, we still have the case with intermediaries, which is 
definitely beyond the control of Naftogaz, because those private 
companies were 75 percent owned by Firtash himself. And this is the 
case where we very much welcomed some recent initiatives we've seen 
lately by Senator Wicker to the DOJ in order to find out what is going 
on with the extradition case, because--internally we did what we could 
do on that, even though well known for their not very big activity, 
although authorities like general prosecutor's office and NABU are 
currently having several investigations that include also [Vikor's?] 
company. So, we are doing what we can internally, but some things we 
cannot do inside Ukraine. And we would very much look for the 
finalization of the process of extradition of Firtash here, because 
that definitely will help us to defy this issue.
    Speaking of Kolomoyskyi, this is a slow approach. And though it's 
also ongoing, Naftogaz is managing to overtake back the control over 
Ukrnafta, the one that Ed mentioned. And I believe that if everything 
goes at least with the pace it goes now, already within this year we 
will restore this control, which will mean that at least from that part 
of the business once again we will get rid of that name as well. I am 
not commending this on the petroleum part of the business, which is 
absolutely different and that's nothing we can deal with. So that's why 
it's beyond my knowledge.
    Thank you.
    Amb. Courtney. It's really kind of ironic, given how pervasive 
energy corruption has been in Ukraine in the past--we're talking 
about--that the only active prosecutions we're conducting in the United 
States, first after Prime Minister Lazarenko and then Firtash, and not 
in Europe, where a lot of the money is or a lot of the beneficial 
interests have assets there, as well as in Ukraine itself.
    Mr. Massaro. Thank you. We have another question up here. Waited 
very patiently for the microphone. I appreciate that.
    Questioner. Hi. My name is Morgan. I'm from Congressman Kind's 
office.
    I just had a question related to general issues that have been 
presented by the breakup of the Soviet Union, dating back to the 1990s 
and the independence gained by Soviet countries. Is there any 
interdependence, and how does this interdependence play with the energy 
crisis that is faced by some of the Central Asian countries, 
particularly pertaining to their use of hydroelectric power? Because I 
was wondering if there's any interdependence between the issues and how 
greater energy independence from Ukraine could help solve some of those 
problems.
    Mr. Massaro. I think we have the perfect guy on this panel to 
answer this question. [Laughs.]
    Amb. Courtney. There is no close interdependence. And in fact, the 
largest oil venture--the largest energy venture in the Central Asian 
region is the Caspian energy in the western part of Kazakhstan 
primarily. But that also is pretty much unrelated to the Rogun Dam and 
the other hydroelectric. And we have seen most recently now, with the 
passing of Islam Karimov, this has brought into sharper relief that it 
was Karimov's strong opposition to exploitation of hydroelectric energy 
for fear of the downstream Amu Darya and Syr Darya impacts on 
Uzbekistan's cotton crop. That the emphasis on cotton in Central Asia 
has been a very costly subsidy, if you will. And it has been 
inefficient to a great extreme to hold back hydroelectric projects in 
order to benefit subsidized cotton growing in Uzbekistan.
    So hopefully now, with Mirziyoyev as the leader of Uzbekistan, he 
has reached out--or has a much more cooperative relationship, it 
appears now, with Tajikistan and Kyrgyzstan. So hopefully some of the 
hydroelectric projects will go ahead, and hopefully the Central Asian 
countries will work together to mitigate some of the impacts on 
downstream agricultural and other activities.
    Mr. Chow. Bill, if you don't mind my adding, putting my old 
professor's hat on, I think the linkage is that the Soviet system was a 
command and control system, where market signals were not allowed to 
play to allocate resources, including the allocation of capital or 
supply. And when the Soviet Union collapsed, that kind of a system was 
particularly susceptible to corruption because if you have command and 
control over certain assets, then you can convert that into real money 
in a nontransparent way. So, pricing of electricity, pricing of water 
and other resources, and not using market signals and, as I said, 
market-related pricing. Ukraine also suffered under that, but there is 
very little relationship between the situation in Central Asia and in 
Ukraine.
    Mr. Massaro. So we have time for one more question, if anyone else 
in the audience has a burning question. Right here, please.
    Questioner. Thank you. Hi. My name is Calli Crowder, and I'm a 
press intern with Senator Grassley.
    I have a question regarding U.S. sanctions and if it's benefited at 
all Ukraine--just from the energy standpoint, whether or not those 
sanctions that have been placed on Russia have made an impact either 
positively, negatively, or indifferently.
    Mr. Massaro. Let's start from the far left on that one.
    Amb. Courtney. The sanctions have had an impact on the Russian 
economy; I believe the IMF has estimated perhaps 1 percent of GDP per 
year or less. The sanctions have had a special impact on finance, on 
access to international finance, and on investment. Russia has low 
investment rates now as a fraction of GDP, and that is important for 
future economic growth. The financial sanctions have had a special 
impact on that. The sanctions on Arctic energy development, ironically, 
have been less important than otherwise expected because shale has 
become such a profitable and attractive alternative to Arctic activity.
    Have the sanctions been influential enough to cause Russia to pull 
out of eastern Ukraine? The economic sanctions were imposed because of 
the aggression in Donbas. It seems apparent that there's not a lot of 
popular support in Russia for the war in Ukraine as compared to the 
seizure and annexation of Crimea--people on the street, so to speak. 
There seems to be increasing sentiment in Russia that resources in 
Syria or eastern Ukraine, those military conflicts, ought to be spent 
at home improving people's lives, because after Russia went into 
Ukraine and also with the oil price drop, real disposable household 
incomes in Russia may have gone down 15, 16, 17 percent. So ordinary 
Russians are feeling the impact of that.
    There seems to be increased sentiment in Russia that economic 
priorities--in terms of popular opinion--economic priorities ought to 
be higher. So, the Western sanctions have contributed to that in the 
sense of raising the cost to the Kremlin of continuing its aggression 
in eastern Ukraine.
    Ms. Katser-Buchkovska. Yes, you're absolutely right. First of all, 
sanction was designed as a response of invasion of eastern Ukraine, as 
well as annexation of Crimea. And to your knowledge is that war is 
still going on. It's not freezing conflict. Every week we lost up to 
five soldiers, and they lost 10,000 soldiers, 25,000 are injured. First 
of all, sanction makes a cost for this invasion and this war on our 
sovereign territory is very high. Of course, it makes this cost very 
high, and honestly it protects us from further invasion because they 
spent a lot of money on these projects like Nord Stream, which is 
hybrid war tool against Ukraine on physical invasion to keep this war 
going on. And this is vitally important for our country, for our region 
to keep these sanctions, even to make them tougher, to stop this war 
and to back our territories and to settle peace on our territories.
    Moreover, we are asking for more sanctions, especially for energy, 
because it's not the simple war. It's not the war as it was before. 
This country uses energy as a weapon. So they have blackmail. They used 
to blackmail Ukraine because of energy prices. So there was one fixed 
price, very high, and Ukraine should--was on the political influence 
because of price of gas. So they use informational campaign known as 
propaganda against Ukraine, and not only in Europe. They interfere in 
free elections, in such a way impede democracy process in different 
countries. So there are a lot of things we can actually show as an 
example.
    And I like to say that war should make Ukraine indigestible because 
we protected the western border of Europe. So now we built our army to 
defend our eastern border. It's very, very important to make this price 
very high, up to the levels they will not have enough capacity to 
proceed.
    Mr. Chow. In strictly oil and gas or energy terms, the 2014 
sanctions were never designed to stop Russian exports of oil and gas in 
the short to medium term. That was a deliberate calculation at the 
time, partly because I think the Obama administration's calculation was 
that our European allies would never have gone along with that. So it 
was perceived, rightly or wrongly, at the time that Western unity was 
important in the 2014 sanctions.
    The financial sanctions, as well as sanctions on technology, were 
designed to affect investment and future supply of Russian oil and gas, 
not in the short to medium term. And I would say that the CAATSA 
sanctions are in part a reaction that hasn't sufficiently corrected 
Russian behavior, but there were other reasons--Syria and election 
meddling and other reasons--to sanction Russia.
    So the question is, to the extent that the political objective of 
getting Russia to negotiate properly for a peaceful settlement on its 
war against Ukraine in the east, if that hasn't happened as a result of 
the 2014 sanctions, what should we be doing now in terms of additional 
steps?
    Mr. Massaro. All right. Well, thank you all very much for coming. 
Fantastic briefing. Thank you so very much to our panelists. 
[Applause.]
    And we'll see you all next time.
    [Whereupon, at 4:57 p.m., the briefing ended.]
    
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