MOVING UKRAINE FORWARD
By Morgan Williams for the Ukraine Analyst, Vol.1, No. 3
Strategic Intelligence On Ukraine's Politics and Economics
Dr. Taras Kuzio, Editor, Tuesday, October 14, 2008
The highest priority for Ukraine in 2008 has been to implement the critical legal and regulatory reforms necessary to increase the size of economy, promote domestic and international investment, create tens of thousands of new jobs, build the private wealth creation capacity, and integrate Ukraine into the world business and economic system. Moving Ukraine forward in the next few years means moving the economy forward.
(1) WTO MEMBERSHIP FIRST MAJOR STEP: The accession to the World Trade Organization (WTO) by Ukraine was a first major step forward in 2008 but only one of the many steps needed for Ukraine to continue building an independent, strong, prosperous, democratic nation for its citizens and taking its rightful place in the community of nations.
The United States-Ukraine Business Council (USUBC), since it was founded in 1995 in Washington D.C., has worked to support the development of Ukraine’s private business sector and especially Ukraine’s WTO bid. Working with business industry, NGO and government leaders, USUBC has become the largest private business membership organization that focuses on Ukraine, headquartered outside Ukraine.
The USUBC looks forward to Ukraine’s WTO membership as a major benefit not only for companies already doing business in Ukraine but also as a strong attraction for additional domestic and international direct investments. We congratulate Ukraine on this major achievement.
Ukraine’s Vice Prime Minister Hryhoriy Nemyrya, in addressing USUBC members and guests at a meeting in Kyiv earlier this year said that WTO accession is just a precursor to the next and perhaps even more important trade measure for Ukraine, the negotiation of a Ukraine-EU Free Trade Agreement.
Nemyrya said that preparations had already been made for the beginning of negotiations. He cautioned USUBC members that negotiation of the free trade agreement is likely to take a minimum of at least two years but that Ukraine must begin the process now.
2. NEW JOINT STOCK COMPANY LAW SECOND MAJOR STEP: On September 17th the Verkhovna Rada of Ukraine adopted The Joint Stock Company Law. The business community considers the legislation very relevant and important for the advancement of the investment climate.
Adoption of this law is a major step forward towards bringing Ukraine in line with world standards regarding corporate governance and ownership issues.
The law removes many problems in the current legislation in the sphere of establishing, operating, governing and the cessation of joint stock company activity.
As of Wednesday, October 15th the law had not yet been signed by President Yushchenko. There was an unusual delay regarding the amount of time the Parliament held the law before sending it to the President. It is not clear why the legislation has not been signed as it has the overwhelming support of the business community. USUBC hopes the President signs the new law immediately.
The law comes into force six (6) months after it is officially published. Existing joint stock companies must bring their statute documents into compliance with the law within two years after the date the law comes into force. The joint stock companies that are created after the law comes into force must of course be established in compliance thereof.
3. EXPANDING TRADE AND TRAVEL BETWEEN THE U.S. AND UKRAINE SHOULD BE THE THIRD MAJOR STEP: In June 2005, the United States Federal Aviation Administration (“FAA”) conducted a safety assessment of the Ukrainian State Aviation Administration (“SAA”) - the governmental authority that regulates and oversees civil aviation in Ukraine.
The FAA found that Ukraine's SAA was not in compliance with ICAO standards for oversight of its airline industry. As a result, the FAA downgraded SAA’s capability to Category II from Category I.
Under U.S. regulations, the Ukrainian airline serving the U.S. - AeroSvit Ukrainian Airlines - was allowed to continue to operate its flight from Kyiv to New York, but was not permitted to expand operations to the United States until the SAA addressed the discrepancies. In addition, no other Ukrainian airline may operate to the U.S. until Category I status is achieved.
As a result, travel and trade between the two countries is now limited. AeroSvit has indicated an interest in expanding the number of flights to New York and also in adding a non-stop flight to Chicago.
Following the downgrade to Category II, the SAA applied to the U.S. Trade and Development Agency (“TDA”) for assistance. A TDA grant was awarded to the SAA in 2006 and a U.S. contractor was selected to help SAA comply with international safety standards and return to Category I status.
The contractor provided the SAA in Kyiv a detailed action plan recommending specific steps for addressing the discrepancies and provided on-site support. However, progress has been particularly slow due to various governmental reorganizations.
U.S.-Ukraine Council on Trade and Investment Established
U.S. President George Bush traveled to Ukraine in April 2008, as a demonstration of political support for its leaders. In June, Secretary of Commerce Gutierrez signed a Trade and Investment Cooperation Agreement with his Ukrainian counterpart in the Ministry of Economy, Bohdan Danylyshyn.
The agreement established the U.S.-Ukraine Council on Trade and Investment (“Council”), comprised of government officials. Among other things, the Council is charged with “identifying opportunities for expanding trade and investment…and identify and work to remove impediments to trade and investment between the Parties….” The U.S. Trade Representative’s Office (USTR) chairs the U.S. delegation.
In light of the new Council’s mandate to “work to remove impediments to trade,” the U.S.-Ukraine Business Council (USUBC) proposed to the U.S. delegation for the first meeting held in early October in Kyiv- with the support of the U.S. FAA - that they raise this issue and impress upon the Ukrainian delegation the importance of their addressing the discrepancies found by the FAA so that Ukraine may reclaim Category I status as soon as possible.
Growth in aviation is directly tied to economic development. Addressing the discrepancies and reclaiming Category I status by the SAA will enable Ukrainian airlines to operate at higher levels to the United States and - with a large Ukrainian population in the U.S. and expanded interest from the U.S. business community - to expand trade and travel between the two countries. USUBC makes this proposal fully appreciating that aviation safety is paramount and must not be compromised for any reason.
4. RESOLVING THE OVERSEAS PRIVATE INVESTMENT CORPORATION (OPIC) ISSUE SHOULD BE THE FOURTH MAJOR STEP: Every Ukrainian government since 1999 has made promises and then failed to follow-up with the actions needed to resolve a small claim that could have allowed the U.S. government’s Overseas Private Investment Corporation (OPIC) to provide hundreds of millions of dollars in political risk insurance, loan guarantees and investment funds.
This is one of the greatest missed opportunities since Ukraine’s independence and needs to be solved now. The meetings chaired by the Ministry of Economy to resolve the issue just go on and on in Kyiv. It is time the Ukrainian government stepped up to the table and solved this issue.
Other issues USUBC is working on for the advancement of the business environment include:
1. Land privatization, particularly agricultural land, is a critical area. Certainly, some safeguards must be adopted but this thorny problem can and must be solved.
2. If Ukraine is to become a true partner in international trade, then it must deal honestly and effectively with intellectual property rights. This includes the whole spectrum in the IT area, genetics (seeds, etc), crop protection supplies and pharmaceuticals.
3. The National Bank of Ukraine is widely regarded as having some of the most restrictive and least reformed procedures of any central bank in the former Soviet Union. Serious regulatory reform is essential for business, industry and private interests.
4. The Ukrainian customs service is considered one of the most inefficient and corrupt parts of the entire government structure and must undergo top to bottom reform. The handling of express packages by the Ukrainian customs service is considered one of the five worst such services in the world. Many businesses rely on express packages and must have a quick turnaround. The customs service work is a real impediment to these businesses. This must change.
5. Much of Ukraine’s business and civil code is largely unchanged from Soviet times and requires urgent reformation.
6. Corporate raidership and other legal issues are a huge problem since the legal and court system does not work effectively and is subject to corruption.
Massive government reorganization must take place to improve the capacity to plan, make decisions and implement actions needed for reform.
7. Inflation is still too high and is a terrible burden. Inflation must be brought under control through means other than direct and indirect government price controls. Increased foreign direct investments, and the privatization of more government assets are needed for economic stability.
8. The government of Ukraine now has a new major problems on its hands as the international financial crisis has hit Ukraine hard. The government is acting rapidly and must continue to do so as many feel Ukraine could suffer a real and harmful blow to its financial system.
9. A section in the 2008 budget bill said that all public land that would be sold to private business must go through an auction. The President's office opposed this provision and thus the regulations for auction were not written. This has the movement of land into private hands for business offices, plants
and facilities stopped. This is a major blow to business and the government needs to resolve this issue immediately.
10. Many businesses are still not getting their VAT tax refunds back in a timely manner. The new government pledged to resolve this issue but not much
real progress has been made so far in 2008.
Work by the business sector, in cooperation with the governments of Ukraine and the United States, must continue and produce real results to move Ukraine’s economic growth forward. Assisting in the development and expansion of Ukraine’s private economic and business system is USUBC’s number one priority.
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NOTE: Morgan Williams has worked on issues related to the economic development of Ukraine since 1993; he is Director, Government Affairs, Washington Office, SigmaBleyzer Private Equity Investment Group and serves as President of the U.S.-Ukraine Business Council (USUBC).
UKRAINE ANALYST, Dr. Taras Kuzio, Editor
Ukraine Analyst is published bi-monthly except in July and December when monthly issues will be published. Each 8 page issue of Ukraine Analyst is devoted to current politics, international affairs, energy, business and trade in Ukraine.
Email: tkuzio@rogers.com; taraskuzio@kuzioassociates.com
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