Contemplating the “Economic” Dimension

Ukraine’s Quest for Mature Nation Statehood Roundtable VI:
“Ukraine’s Transition to an Established National Identity”

In Search of Ukraine”s “Center of Gravity” – Physical Factors
Contemplating the “Economic” Dimension

E. Anthony Wayne

Remarks by Assistant Secretary for Economic and Business Affairs E. Anthony Wayne delivered during the Ukraine”s Quest for Mature Statehood Forum Roundtable VI: “Ukraine”s Transition to an Established National Identity” Tuesday, September 27, 2005.

It’s a great pleasure to participate in this panel today. We were all inspired by the courage of the Ukrainian people and the events that led last winter to the election of President Viktor Yushchenko. It was one of the most visible demonstrations in recent history of the hunger of people everywhere for democracy. We can be proud of the role the United States and our European partners played in support of the Ukrainian people to guarantee a free and fair election. The United States is strongly committed to helping ensure that the political and economic transformation of Ukraine continues to move forward.

There were certainly times in the past eight months when progress seemed to have stalled. Building consensus on the tough issues of transformation is never easy. We were concerned that infighting and disarray in decision-making was preventing the government from moving forward on the economic reforms it needed to undertake. But we are now optimistic that with the confirmation of Prime Minister Yekhanurov and other new cabinet members, the process of economic reform is back on track.

Progress in the Trade Agenda

I have been particularly impressed by the ability of the Ukrainian government to keep working toward President Yushchenko’s economic goals, even after the cabinet dismissal of September 8. In the last twenty days, we have seen significant progress on our bilateral trade agenda, including constructive discussions on Ukraine’s accession to the World Trade Organization and on enforcement of intellectual property rights.

WTO accession has understandably been one of President Yushchenko’s top economic priorities. That’s because he recognized that membership in the WTO shows a country’s commitment to conducting economic relations under a common rules-based system. Membership will lower barriers to exports of Ukrainian products around the world, it will help expand Ukraine’s markets, and it will give encouragement to investors.

Presidents Bush and Yushchenko jointly committed earlier this year to work together to conclude within 2005 a bilateral market access agreement – a necessary step toward Ukraine’s WTO accession. I have been glad to hear that tangible progress has been made toward this goal.

But other hurdles also have to be crossed to join the WTO. Most importantly, Ukraine must still undertake a number of commitments, for the most part in the form of passage of laws required to meet WTO norms. The Rada passed a few important pieces of WTO-related legislation in July. Upon returning from recess in September, it took up several other pieces of legislation needed to advance the process. It’s not politically easy, but it does need to be done, for the good of all Ukrainians. I hope that the new government will be able to muster the political will to complete this work quickly.

Protection of intellectual property has been a key issue for the United States in our economic relations with Ukraine for several years now. We were very glad to see the enactment on August 2 of amendments to Ukraine’s law on Laser-Readable Discs. We had been urging their passage for several years. With the passage of these amendments, the U.S. government was very pleased on August 30 to restore normal tariff levels on a range of Ukrainian products, lifting sanctions that we had put in place in 2002.

But effective protection of intellectual property does not end with passage of legislation. You need strong enforcement; you need vigilance and commitment. The U.S. government is in the midst of a three-month review of Ukraine’s efforts to strengthen its IPR enforcement through effective prosecution and penalties against piracy and counterfeiting, border controls, and other means. Among the important outcomes of the review will be a decision on whether to move Ukraine off the Priority Foreign Country designation and an assessment of its eligibility for benefits under the Generalized System of Preferences, or GSP. We have received some encouraging reports on the work of the Ukrainian government in IPR enforcement, and we very much hope that the government can document these good results and clarify some of the outstanding questions that we have.

The Ukrainian government has urged the U.S. Congress to lift provisions of the Jackson-Vanik Amendment to the Trade Act of 1974. For over a decade, we know Ukraine has had free emigration policies and practices, the original basis for Jackson-Vanik. This Administration strongly supports the termination of application of Jackson-Vanik to Ukraine and the establishment of Permanent Normal Trade Relations between our two countries.

Improving the Investment Climate

Beyond the trade agenda, we see an urgent need for Ukraine to address structural problems that discourage investment. These are perhaps the greatest challenges for Ukraine and other countries around the world. In meetings I have had with Ukrainian officials recently and in public events I attended in New York in which President Yushchenko spoke, I was encouraged to hear that the Ukrainian government is quite aware of some of the things it needs to do to tackle them.

Re-privatization of former state enterprises sold under questionable circumstances was one of the most contentious issues for the previous cabinet, in the end helping to precipitate its downfall. Mixed signals coming from the Ukrainian government during the first eight months of the Yushchenko presidency were some of the key problems in gaining investor confidence. The critical need now is for the government to establish a straightforward plan to resolve the issue and move on. President Yushchenko has now resolved to pursue speedy and amicable resolution of the most difficult cases. That’s encouraging.

    Other problems are deeply rooted and will require constant attention:

  • The new administration has to step up the fight against corruption. It pervades many levels of both government and the private sector and it seriously discourages investors. The 2004 Corruption Perception Index of Transparency International ranked Ukraine at 122nd place, near the bottom of the list, well below most other European countries.
  • But how do you fight corruption? Many of you know the answer. You start by publishing government budgets and revenues, disclosing official incomes, and rigorously investigating and prosecuting wrongdoing. These help eliminate opportunities for malfeasance. It isn’t easy but it’s very important.
  • Weak rule of law and a poorly-functioning judicial system have been largely responsible for the failure to resolve many longstanding commercial and investment disputes. The lack of resolution of at least some of these disputes is another major disincentive for increasing trade and investment.
  • There is a need to streamline regulations and make the rules of doing business more transparent. The recent World Bank report, “Doing Business,” ranks Ukraine in the bottom 25% for ease of doing business.
  • One of the priorities of legal reform should be reform of the old Soviet-style Commercial Code that conflicts with the modern Civil Code. Another is to adopt the law on Joint Stock Companies to strengthen corporate governance. It was very good to hear President Yushchenko in New York two weeks ago say that he wanted to deal with these issues.
  • The factionalism of the previous cabinet undermined coherent macroeconomic policy, leading to price controls and other forms of undue state interferen
    ce, along with frequent reversals of policies. It is essential that the new cabinet maintain a steady policy that minimizes state intervention and allows the market to function efficiently.

The U.S. government is providing advisors to the Ukrainian government in areas such as banking policy, tax administration, energy, and macroeconomic management. We are optimistic that this technical assistance will help the government develop the policies it needs to integrate successfully into the world market economy.

Energy Policy – Need for Independence and Efficiency It is no secret that Ukraine is highly dependent on subsidized gas and oil. But as we are all painfully reminded, the age of cheap fuel has an end. There are no short-term fixes to this, but the Ukrainian government urgently needs to develop a concerted energy diversification strategy.

American and other energy companies have expressed significant interest in possible hydrocarbon reserves in Ukraine’s Black Sea waters. The Ukrainian government has begun some discussions on exploration with foreign companies, but has not established clear rules. We strongly encourage Ukraine to partner with these international companies – especially American ones – because they have the expertise to develop offshore resources. But above all we encourage the Ukrainian government to establish clear rules of investment in the sector.

With its strategic location between Russian and Caspian oil and gas fields on one side, and European energy consumers on the other, Ukraine has greater potential to profit from the pipelines that pass through its territory. It could take better advantage of that position, for example, by developing a commercial plan for the Odesa-Brody pipeline – to transport Caspian crude to Central Europe – and working constructively with Russia to expand current gas transit infrastructure.

Alternative sources of energy also need to be developed, for example in coal bed methane and safe nuclear technologies. U.S. investors are ready to participate in these as well. Finally in the energy sector, Ukraine needs to pursue better energy conservation policies. Historically, the abundance of cheap Russian-supplied fuel caused Ukrainian industries to be highly energy-inefficient. Those industries will have to learn ways to conserve if they are going to compete in export markets.


The theme of today’s forum is “In Search of Ukraine’s Center of Gravity.” If the implication is that the country has to choose between closer ties to the West or re-integration with its former Soviet partners, that’s a false choice. As it builds on the success of the Orange Revolution, Ukraine will deepen its ties in both directions and increasingly serve as a bridge between regions. In its trade relations with the United States, we have already seen significant improvements this year, and we see good prospects for Ukraine’s WTO accession. We in the U.S. government stand ready to work with Ukraine to further strengthen our economic ties and support the important transformation going on.