Welcome to the U.S.-Ukraine Business Council

MONDAY, MARCH 29, 2010

Hearing before the U.S. Helsinki Commission, Wash, D.C.
U.S. Agenda for Engagement with Ukraine; Why Ukraine Matters
U.S.-Ukraine Business Council (USUBC), Monday, March 29, 2010

U.S. Agenda for Engagement with Ukraine; Why Ukraine Matters

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Testimony of Daniel A. Russell, Deputy Assistant Secretary of State
for European and Eurasian Affairs, U.S. Department of State
Hearing: "Ukraine: Moving Beyond Stalemate?  
Before the Commission on Security and Cooperation in Europe (CSCE)
(U.S. Helsinki Commission), U.S. Congress, Wash, D.C., Tue, Mar 16, 2010

Testimony by Damon Wilson, Vice President and
Director of the International Security Program, Atlantic Council
Hearing: "Ukraine: Moving Beyond Stalemate?"
Before the Commission on Security and Cooperation in Europe (CSCE)
(U.S. Helsinki Commission), U.S. Congress, Wash, D.C., Tue, Mar 16, 2010

Testimony of Anders Aslund, Senior Fellow 
Peterson Institute for International Economics
Hearing: "Ukraine: Moving Beyond Stalemate?  
Before the Commission on Security and Cooperation in Europe (CSCE)
(U.S. Helsinki Commission), U.S. Congress, Wash, D.C., Tue, Mar 16, 2010

Hearing: "Ukraine: Moving Beyond Stalemate?  
Before the Commission on Security and Cooperation in Europe (CSCE)
(U.S. Helsinki Commission), U.S. Congress, Wash, D.C., Tue, Mar 16, 2010

Testimony of Daniel A. Russell, Deputy Assistant Secretary of State
for European and Eurasian Affairs, U.S. Department of State
Hearing: "Ukraine: Moving Beyond Stalemate?  
Before the Commission on Security and Cooperation in Europe (CSCE)
(U.S. Helsinki Commission), U.S. Congress, Wash, D.C., Tue, Mar 16, 2010

Chairman Cardin, Co-Chairman Hastings, Members of the Commission: Thank you for the invitation to discuss Ukraine and its relations with the United States in the wake of presidential elections. Your timing could not be better, as Ukraine’s new president took office last month and its new government was confirmed last week.


Let me begin by making three basic points about Ukraine and the recent elections before sketching out our agenda for engagement.

[1] My first point should be obvious: Ukraine matters to the United States and it matters to Europe. Ukraine is one of Europe’s largest states, roughly the size of France with 45 million people.

It serves as a transit route though which nearly a quarter of Europe’s gas imports flow, and it could become self sufficient in energy, were its natural resources to be fully developed. Ukraine has tremendous potential. It could become a net contributor to global food security; its rich black soil produced over one-quarter of the Soviet Union’s agricultural output.

Ukraine can also serve as an example in a critical region. It has shown leadership on the world stage, giving up its nuclear weapons to become a non-nuclear state and contributing to security and peacekeeping operations from the Balkans to Iraq.

And Ukraine’s highly educated workforce is probably now more connected with Europeans and Americans through business, travel and education than ever before. Cell phones outnumber Ukrainians; about one-quarter of the population is on-line; and Ukrainians are travelling abroad in record numbers.

[2] My second point is about Ukraine’s leadership in democracy in the region, a role aptly illustrated by the conduct of its presidential elections in January and February. Taken together, the two rounds of voting received an overwhelmingly positive assessment by international observers.

Among those observers were Congressman Hastings and Helsinki Commission staff members, and I would like to recognize their contribution to the OSCE Parliamentary Assembly’s election observer mission.

The OSCE concluded that the presidential election showed significant progress over previous elections, and met most OSCE and Council of 2 Europe commitments. The open, competitive election demonstrated respect for civil and political rights and offered voters a genuine choice among candidates representing diverse political viewpoints.

Candidates were able to campaign freely, and the campaign period was generally calm and orderly. The U.S. Senate, in fact, recognized the progress represented by this election with its passage of Resolution 422.

[3] My third point is that the 2010 presidential election may have been a defeat for the Orange Revolution’s leaders, but not for the Orange Revolution. The peaceful expression of the political will of Ukrainian voters should be viewed as another step in strengthening democracy in Ukraine. Ukraine has undergone rapid – and, I would suggest – irreversible, democratic change, and Ukrainians should take pride in what they have achieved.

During the presidential campaign, Ukraine’s vibrant body politic and free press discussed and debated the poor governance and chronic political infighting that has plagued the country. Ukraine’s economy contracted 15% in 2009, one of the worst economic performances in the world. Voters, with access to independent information and the candidates’ views, made up their own minds and turned out – and turnout exceeded 65% in each round – to vote out the incumbents.

The post-election transfer of power has been orderly. After the votes were counted and certified, President Yushchenko stepped down and Viktor Yanukovych took the oath of office in the parliament as Ukraine’s fourth president since independence. Prime Minister Tymoshenko initially challenged the results in court but later withdrew her case. She left office after a vote of no-confidence and President Yanukovych set about assembling a parliamentary majority coalition.

When formation of a coalition appeared unlikely, threatening stalemate or early elections, Yanukovych and his Party of Regions sought and won passage of a new law that allows coalition formation based on votes not only of political parties but also independent deputies. On that basis, Prime Minister Mykola Azarov and his cabinet were confirmed last week. The opposition questioned the new law’s constitutionality.

We were pleased to see that the Party of Regions itself took the initiative to ask the Constitutional Court to review the law and pledged to abide by the court’s decision. If the court rules against the new procedure, we expect the Party of Regions will seek to form a new coalition consistent with whatever the Court decides or seek early parliamentary elections.

Ukraine’s democracy is a work in progress. The electoral process is contentious but as Vice President Biden told a Ukrainian audience when we visited Kyiv last July: "To those cynics who have asserted for centuries that this part of the world could never practice democracy because its culture and values are different, Ukraine today stands as resolute rebuttal…"

With the election behind him, President Yanukovych now faces the challenge of governing. Obviously, he and his new team need time to organize themselves and put policies and programs in place, but some key elements of his approach are already obvious. Economy recovery will rightly be the Yanukovych Presidency’s top priority, and he has inherited a difficult situation at a difficult moment. Sound leadership and tough measures will be needed if he is to succeed.

With regard to foreign policy, President Yanukovych has been quite clear. He says he wants to continue Ukraine’s strategic partnership with the United States, improve relations with Russia, and pursue integration with the European Union. President Yanukovych made his first trip abroad to Brussels, his second to Moscow, and he has been invited to Washington to attend the President’s Nuclear Security Summit in April.

Let me add that the United States enjoyed a productive working relationship with Ukraine and with Mr. Yanukovych during his two previous tenures as prime minister.


As we look ahead to engagement with President Yanukovych and his new team, it is worth reviewing the underlying premises of our U.S. policy toward Ukraine.

Simply put, the United States will not waiver in its support for a strong and independent Ukraine.

We want to see Ukraine succeed; our vision for Ukraine is the vision Ukrainians have for themselves – a democratic and prosperous European nation with an effective and accountable government. Charting the course for Ukraine is, of course, a decision to be made by Ukrainians and their elected leaders.

President Obama, in his speech in Moscow last July said, and I quote, "State sovereignty must be a cornerstone of international order. Just as all states should have the right to choose their leaders, states must have the right to borders that are secure, and to their own foreign policies. Any system that cedes those rights will lead to anarchy. That is why this principle must apply to all nations, including … Ukraine . . . ."

There has been speculation over the past year that the Obama Administration’s efforts to improve ties with Russia would somehow threaten our relationship with Ukraine. This was not and is not correct. As we reset relations with Russia, we have reaffirmed our commitment to the sovereignty and territorial integrity of Ukraine and its neighbors. We do not believe that a partnership with one country must come at the expense of another.

The United States, in fact, joined Russia last December in re-affirming the security assurances provided Ukraine in the 1994 Budapest Memorandum. Our larger goal is to encourage the transition to a multi-partner world, in which like-minded nations can make common cause on our common concerns – the stronger our partners, the more effective our partnerships. A strong and independent Ukraine is good for Russia, good for the region and good for the world.

There also has been speculation about Ukraine’s relationship with NATO during a Yanukovych presidency. Let me be clear that the United States continues to support Ukraine’s deepening ties to NATO and to the European Union. But again, these are decisions to be made by Ukrainians and their elected leaders. We recognize that how far and how fast to proceed will be a Ukrainian choice.

President Yanukovych has said that he would continue programs of cooperation with NATO at existing levels but NATO membership was not on his agenda. We respect that choice and want Ukrainians to know that NATO’s door remains open.

Because of the importance that we attach to our relationship with Ukraine, once the Central Election Commission had announced the full electronic results of the presidential election, President Obama was among the first world leaders to congratulate Viktor Yanukovych on his victory. The President wished Mr. Yanukovych success in carrying out his mandate and commended the Ukrainian people on the conduct of the vote.

National Security Advisor General Jones subsequently led the U.S. delegation to the presidential inauguration, where he had a chance to meet not only with Ukraine’s newly elected President, but Prime Minister Tymoshenko. Mrs. Tymoshenko will be one of the leaders of the opposition in parliament and we will continue our longstanding relationship with her in that new role.

We also plan to work closely with leaders on the political scene, among them Member of Parliament Arseniy Yatsenyuk and Deputy Prime Minister Sergey Tigipko. The development of new democratic leaders is important for all parties in Ukraine.

Let me underscore that U.S. policy toward Ukraine will continue to focus on strengthening the strategic partnership between our two countries. The specifics of our engagement and cooperation with Ukraine will continue to be guided by the U.S.-Ukraine Charter on Strategic Partnership.

The charter highlights the importance of our bilateral relationship and outlines enhanced cooperation across a broad spectrum of mutual priorities including economics, trade and energy; defense and security; strengthening democracy; and people-to-people and cultural exchanges.

During Vice President Biden’s trip to Kyiv last July, the U.S.-Ukraine Strategic Partnership Commission was established in order to advance the objectives of the charter. The commission now includes six autonomous working groups and met in Washington in December. We look forward to its next session in Kyiv.

Our commitment to Ukraine is evidenced by our assistance program -- $123 million in FY2010. The goals of our assistance are to bolster peace and security, strengthen democratic institutions, promote economic growth and energy efficiency, enhance security and non-proliferation, secure Chernobyl, fight AIDS and HIV, and improve child health.


In the spirit of our strategic partnership with Ukraine, I would like to suggest five policy priorities, beyond traditional foreign policy cooperation, that should be high on our shared agenda with the Yanukovych Presidency:

[1] First, the United States is committed to policies that contribute to a democratic and prosperous Ukraine and stands ready to help Ukraine reach agreement with the International Monetary Fund as soon as possible.

The path to recovery and renewed prosperity runs through the IMF, which can help offer Ukraine a way out of the current crisis and open the door to lending from other international financial institutions and the European Union. That will require resolute leadership and hard decisions to undertake the critical reforms needed to cut the budget deficit, revive the banking system and phase out energy subsidies.

[2] A second equally important policy area for Ukraine’s long-term prosperity and economic freedom is energy sector reform. A gas sector based on transparency, competition, realistic pricing, and more energy-efficient gas distribution and consumption will be key, and the United States is coordinating closely with the European Union on this issue.

Ukraine uses energy three times less efficiently than the EU average; the country consumes 50-60% more gas than it should. The United States is helping with a three-year pilot program designed to increase energy conservation and efficiency at the municipal level.

[3] Third, the United States is ready to work to strengthen the business side of U.S.-Ukraine relations, which is weaker than we would like it to be. The United States remains Ukraine’s 8th largest foreign investor, with $1.4 billion in foreign direct investment. We welcome President Yanukovych’s remarks in favor of creating incentives for investors, such as lowering taxes and reducing red tape.

Our business community tells us that much remains to be done to make Ukraine more attractive to investors, from tax code reform to increased transparency, from greater rule of law protection to serious action against corruption. The payment of VAT refunds would be a big step forward. One area where the U.S. private sector could do more is in Ukraine’s nuclear power industry.

[4] A fourth area of cooperation lies in nuclear security. The United States and Ukraine must continue to work together to reduce the threat of the spread of nuclear materials and technology to dangerous regimes or terrorist groups, while safeguarding the peaceful uses of nuclear energy. We look forward to building on our successful record on non-proliferation at the upcoming Nuclear Security Summit.

Thanks to the leadership of Senator Lugar and former Senator Nunn, we can point to vital cooperation between Ukraine and the United States that has made the world safer. We recognize Ukraine’s importance as a partner in the Global Initiative to Combat Nuclear Terrorism, which brings our experience and expertise together with those of over 70 other countries to fight nuclear terrorism.

[5] Finally, the United States wishes to strengthen bilateral security and defense cooperation, which is an essential component of our strategic partnership. We are grateful to Ukraine for its contributions to international security. As part of this effort, we hope that Ukrainian parliament will pass legislation to allow joint military exercises on its territory this year in order to facilitate mutually beneficial military training activities.

With regard to NATO, we look forward to cooperating with Ukraine to meet its objectives in the NATO-Ukraine Commission and in its Annual National Program, regardless of Ukraine’s intentions regarding membership.


While the challenges in U.S.-Ukrainian relations are complex and demanding, I remain optimistic about the possibilities before us. It is important to both nations and both peoples to get U.S.-Ukraine relations right. We have a chance, at the beginning of a new presidency in Kyiv, to redouble our efforts. Let’s ensure that Ukrainians and Americans, both in and outside of government, make the most of that chance.

Thank you. And I will be happy to answer your questions

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Testimony by Damon Wilson, Vice President and
Director of the International Security Program, Atlantic Council
Hearing "Ukraine: Moving Beyond Stalemate?"
Before the Commission on Security and Cooperation in Europe (CSCE)
(U.S. Helsinki Commission), U.S. Congress, Wash, D.C., Tue, Mar 16, 2010

Mister Chairman, Mister Co-Chairman, Members of the Commission, I am honored to speak before you today about our relationship with Ukraine. My perspective on Ukraine stems from years observing and developing U.S. policy toward Ukraine.

Most relevant to this hearing, I served as Special Assistant to the President and Senior Director for European Affairs at the National Security Council in the run-up to the NATO Bucharest Summit during which the Alliance debated a Membership Action Plan for Ukraine.

I also served as the NSC Director for Central, Eastern and Northern European Affairs, responsible for coordinating policy toward Ukraine in advance of the 2004 presidential election, during the Orange Revolution and during the first years of the Yushchenko presidency.

My prior experience with Ukraine related to my work at NATO, where I served as Deputy Director of the Private Office of Secretary General Lord Robertson, as well as my work on NATO policy within the Department of State. I continue to follow Ukraine at the Atlantic Council.

Today, I would like to underscore why the issue of Ukraine should matter in Washington, outline some key benchmarks against which to judge the foreign and security policy of Ukraine’s new president and government, and offer some recommendations for U.S. policy.


I believe it is important to begin our discussion by stressing that we should not underestimate what has happened in Ukraine this year. On January 17, Ukrainian authorities conducted a successful first round of the presidential election. Three weeks later, there was a very close run-off.

Nearly 70% of Ukrainian voters turned out for each round. Domestic and international observers validated that the election met key standards. Protests were lodged using legal procedures. On February 25, a peaceful transfer of power occurred.

This election is a victory for the consolidation of democracy in Ukraine (even if the maneuvers in the Rada required to bring a Regions-led government to office stretched parliamentary practice).

Nonetheless, many of Ukraine’s greatest supporters, including myself, remain disappointed. Why?

First, a good election does not necessarily translate into good governance. While Ukrainians have developed a track record on free and fair elections, their representatives have not yet demonstrated a track record of performance – a dynamic which over time risks undermining support for democracy in Ukraine.

Second, many observers are disappointed because we were buoyed by the vision Orange Revolution leaders offered of a democratic, free-market Ukraine firmly anchored in the West. We believed that there was a genuine opportunity to ensure that this vision was not just a long-term goal, but a realistic prospect.

As Ukraine’s partners, we responded rapidly to help consolidate this vision by acting to lift Jackson-Vanik restrictions, provide Market Economy Status, conclude World Trade Organization (WTO) negotiations, offer a Millennium Challenge Compact to combat corruption, and support closer ties to both NATO and the European Union (EU).

And yet President Yushchenko and successive Ukrainian governments were not in a position to deliver on their end because of their own infighting and the refusal in some cases to confront entrenched interests and battle corruption. A key window of opportunity closed.

Third, we are disappointed because of the timidity in the West to continue to support Ukraine. Indeed, at best, there is much talk of Ukraine fatigue. At worst, there is a growing acceptance that active support of Ukraine is considered provocative in Moscow.

President Yanukovych assumes the presidency in an atmosphere of pragmatism. And a sober assessment of Ukraine’s prospects is appropriate. However, the vision of Ukraine in Europe remains important as it remains a motivator for tough policy decisions in Kyiv, as well as Brussels and Washington.

We must not take this vision for granted. In the coming years, there is a good possibility that Ukraine will move further away rather than toward that vision. The most likely scenario is that Ukraine will muddle along.


Why does this matter? First, it matters for the quality of life of Ukrainian citizens. But it also matters geopolitically. In some sense, Ukraine is "untethered." Its future is not certain. Its future is being impacted by decisions being taken today. I do not want to exaggerate the situation, but it is potentially a dangerous period in Ukraine’s history – an ancient nation, but a young state.

The history of conflict in Europe is about uncertainty in the space between Germany and Russia – that is the storyline of European history and war. This would not matter if the Russia of today had evolved and changed to become like the Germany of today. But Russia has not. Last September at the Atlantic Council, Senator Lugar warned against "slid[ing] into… a very ominous potential crisis" in Ukraine. He cautioned that "our inattention… could be disastrous."

This ancient nation of Ukraine just elected only its fourth president – its James Madison, if you will. Ukraine’s statehood remains fragile. If Ukrainian democracy continues to succeed, and helps produce good governance and economic growth, it will serve as a powerful example in a region that desperately needs positive examples.

And that is why Russia has a strategy which is essentially rollback. This strategy is well articulated by Russia’s leaders, including President Medvedev’s declaration of "privileged interests," as well as in Russia’s new Security Strategy. Neither the West nor Ukraine has a clear strategy.


Let me first address Ukrainian policy, as what President Yanukovych does will have more of an impact on Ukraine’s place in the world than any outside actor. As we seek to evaluate the kind of partner we have in President Yanukovych, we should consider key issues, which essentially serve as a test for Ukrainian foreign policy.

       [1] Russia. How does Kyiv manage its relations with Moscow? Many in the West are reassured by a Yanukovych presidency at it augurs a more stable, positive relationship with Moscow. But a stable and positive bilateral dynamic requires Ukraine to behave as and be treated as a sovereign, independent actor. Key issues on the agenda include whether Yanukovych maintains a non-recognition policy toward South Ossetia and Abkhazia and whether he opens the door to an extension of the Black Sea Fleet in Sevastopol.

       [2] Energy Security. Russian interests have been keen to gain control of Ukraine’s energy infrastructure. Yanukovych will have an opportunity to demonstrate whether he views energy as a national security issue or simply as a transactional issue. If he believes energy is a national security issue, the new government would pursue a serious energy efficiency strategy.
       [3] International Economics. The government’s handling of the International Monetary Fund will be an early test of its credibility. Similarly, does Yanukovych pursue the Russian proposal for a Common Economic Space in a way that negatively impacts Ukraine’s WTO membership or prospects for a free trade agreement with the EU?

        [4] Regional Relations. Does Ukraine use its regional weight to support the new pro-Western government in Moldova and adopt a constructive position regarding Transnistria? How Yanukovych handle ties with Belarusian leader Lukashenka and Georgian President Saakashvili will offer insights into the regional role Ukraine may play. Similarly, does Kyiv engage or neglect GUAM (which groups Georgia, Ukraine, Azerbaijan and Moldova) given Moscow’s irritation with the organization?

       [5] European Union. During the campaign, Yanukovych played up his support for Ukraine in the EU while downplaying NATO. In office, will he press hard to grow Ukraine’s bilateral ties to the EU as well as take advantage of the Eastern Partnership? A free trade agreement and visa liberalization are practical steps which would help Ukrainians be Europeans and move the country toward Europe.

        [6] Nonproliferation. Ukraine had a spotty nonproliferation record under then-Prime Minister Yanukovych. Will Ukraine’s arms sales track record continue to improve given the economic interests at stake?

       [7] NATO. NATO is clearly not at the top of the agenda. Nor should it be. But NATO-Ukraine relations do need to be on the agenda. Yanukovych in fact had a track record as prime minister of advancing NATO-Ukraine ties. So while the window has closed on rapid movement toward NATO, both sides should ensure there is substance to underpin the NATO-Ukraine Commission. As NATO is a demand-driven bureaucracy, the signals from Kyiv will determine the substance.

I would like to make a broader point about NATO. I believe it is an imperative to maintain the credibility of the historic Bucharest summit decision that Ukraine will become a member of the Alliance.

If we look back in 5 to 10 years, and the Bucharest decision is seen as hollow, there will be damaging implications for the Alliance’s credibility and for Ukraine. And on this point, Russia is not quiet; Russia’s national security strategy commits it to undermining the Bucharest commitment.

In face of Russian opposition and genuine divisions within Ukraine, some have argued that we should aim for the "Finlandization" of Ukraine – independent, but not part of any alliance structure. While Finland is an exemplary partner of the Alliance and a possible future member, I believe the term Finlandization has no utility beyond the Cold War.

When applied to Ukraine, analysts imply big powers taking decisions about Ukraine’s future. I believe Ukraine must be in a position to determine its own future, including whether to pursue membership in any alliance.
These issues provide benchmarks against which we can judge the new government. I have modest expectations, but do believe Yanukovych can deliver on his campaign pledge to continue moving Ukraine toward Europe. Yet the most important factor to achieve this foreign policy goal is what the government does domestically.

Yanukovych’s reception in Western capitals will be determined by whether

       [1] he governs effectively,
       [2] protects democratic advances,
       [3] stabilizes and grows the economy, and
       [4] ensures Ukraine is a reliable energy partner.


In the wake of the collapse of the Berlin Wall, "Europe whole, free and at peace" was not just a vision; it was a successful policy leading to the consolidation of democracy in Central and Eastern Europe and integration of the region into Europe’s great institutions. This outcome was neither easy nor obvious.

The same bipartisan leadership demonstrated over the past 20 years is required today to "complete Europe" – that is, to finish the unfinished business of integrating the western Balkans and Eastern Europe into the European mainstream, including ultimately the European Union and NATO.

However, at present, we are missing the vision and the policy to extend this great success story to the south and east.

Russia has a strategy – unfortunately, one of rollback. The West does not yet have a coherent strategy, although Vice President Biden’s trip to Kyiv last year helped lay out excellent broad principles for U.S. policy. We cannot afford to put Ukraine on the back burner or accept the argument that active U.S. engagement is somehow provocative toward Russia.

We should not accept the argument that Ukraine is "messy" and too divided as an excuse not to engage. If so, we may lose Ukraine. Ukraine’s future is in play today. While changes in Ukraine are unlikely to be decisive in the next few years, the trend lines could take Ukraine further away rather than closer to Europe.

We do not want to look back at Ukraine’s next election and wonder what happened.

Mister Chairman, as part of my effort to outline a way ahead for U.S. policy toward Ukraine, I offer six recommendations:

        [1] Be in the Game. The United States needs to be in the game. Ukraine is in play, and we need to engage and be present. The Obama Administration has sent a top-notch Ambassador, John Tefft, to Kyiv. The visits to Kyiv by Vice President Biden and National Security Advisor Jones, as well as President Obama’s early call to congratulate Yanukovych, are key steps in this effort. This high-level outreach should continue.

        [2] Articulate a Vision. We need to recommit to building a Europe whole and free, energizing the bipartisan tradition behind this vision and making clear that Ukraine has a place within this vision, as does Russia.

       [3] Maintain Funding. We need to protect our funding for transition in Ukraine, as the Freedom Support Act model of "graduation" no longer applies in Europe’s East. Higher per capita GDP does not necessarily translate into a democratic Ukraine anchored securely in Europe.
        [4] Reach Beyond Leaders. Yushchenko was a failure. Yanukovych is unlikely to bring decisive change in Ukraine. We therefore need to ensure our relations with Ukraine extend beyond leaders. We should place emphasis on developing next generation leaders, engaging the regions, and fostering people-to-people ties. In this area, the European Union can lead given the prospect of visa-free travel.

       [5] Push Energy Efficiency. The United States and Ukraine need to get serious about working with European partners to support energy efficiency in Ukraine as a national security strategy.

       [6] Enhance Mil-Mil Ties. We must ensure that close military-to-military ties continue and are backed with funding through Foreign Military Financing and Foreign Military Sales. We should cultivate mil-mil links between Ukraine and NATO as well as with Allied nations. And we must push back when Russia tries to portray military cooperation with Ukraine as provocative.

In the wake of Ukraine’s election, Yanukovych is now president and his party leads the government. Now is the time to move beyond stalemate. Just as much as we hold Kyiv to that standard, we must hold ourselves to that standard.

Thank you, Mister Chairman, Mister Co-Chairman, and Members of the Commission. I look forward to answering your questions.

LINK: http://csce.gov/

NOTE: The views expressed in this testimony do not necessarily represent the views of the Atlantic Council.

USUBC FOOTNOTE:  Damon Wilson serves as a Senior Advisor to the U.S.-Ukraine Business Council (USUBC), Washington, D.C., www.usubc.org.
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Testimony of Anders Aslund, Senior Fellow 
Peterson Institute for International Economics
Hearing: "Ukraine: Moving Beyond Stalemate?  
Before the Commission on Security and Cooperation in Europe (CSCE)
(U.S. Helsinki Commission), U.S. Congress, Wash, D.C., Tue, Mar 16, 2010

Mr. Chairman,

I would like to thank you for this opportunity to speak on an important topic, will Ukraine move beyond stalemate in the sphere of economic reform. Geopolitically Ukraine is an important country that has still not found its space and its relations with the United States are entirely friendly.

Ukraine must be congratulated on having carried out a series of free and fair elections. The country has undergone no less than three democratic and peaceful presidential transfers of power in sharp contrast to other countries in the former Soviet Union. Since 2005 Freedom House has classified Ukraine as a free country.

Ukraine has established an open market economy with predominant private ownership. From 2000 to 2007, the country enjoyed an average economic growth of 7.5 percent, but the global financial crisis hit it hard. The economic crisis has illuminated the malfunction of the Ukrainian state and economy.

Last year, Ukraine’s gross domestic product slumped by no less than 15 percent, one of the biggest plunges in the world. Economically, Ukraine is not performing up to its potential. In 2009, the International Monetary Fund (IMF) assessed that its GDP per capita will be as little as $2,540 in current US dollars, placing it 110th in the world.

Qualitative international comparisons present an even more worrisome picture. I its 2009 overview, the World Economic Forum ranked Ukraine 72nd among 131 countries. Ukraine is lagging behind most in three areas: institutions, macroeconomic stability, and goods market efficiency, while it is doing comparatively well with regard to education, labor market efficiency, and innovation.

This impressive human capital does not produce as much as it could because the state malfunctions, not delivering macroeconomic stability while impeding the free operation of private enterprise.

According to the European Bank for Reconstruction and Development, Ukraine is a relative laggard among the post-Soviet countries in terms of economic and institutional reforms. A comparative World Bank study in 2005 assessed that Ukraine was one of the post-Soviet countries with the least amount of novel market economic legislation. Since then Ukraine has adopted minimum new legislation, while another laggard, Georgia, has forged ahead.

A more specialized international comparison, the World Bank Doing Business index, shockingly ranks Ukraine 142nd out of 183 countries by business environment. It is particularly arduous to obtain construction permits and carry out tax payments, but it is also difficult to start and close a business, to register property, and to trade across borders. Similarly, Transparency International ranks Ukraine 146th out of 180 countries on its 2009 corruption perception index.

Because of the many years of neglecting reform, tasks have in many ways become more difficult in Ukraine.

[1] First, legislation is substandard. The common statement that Ukraine has good laws but they have not been implemented is not true. On the contrary, the country has few modern laws, and the quality of new legislation is generally considered unsatisfactory. Too much Soviet legislation has persisted for too long, and it permeates many new laws. During the many years of distorted markets, multiple vested interests have twisted many laws to their advantage. Endemic corruption has bred legislation that offers corrupt officials the opportunity to reap more corrupt revenue. The competence to draft laws has also been insufficient.

[2] Second, not only the legislation but also the legislative process is tilted to the advantage of vested interests. This process is inordinately complex and non-transparent in Ukraine. It should be opened up, abridged, and made more cohesive. It must be made easier for the ruling political forces to have legislation adopted in line with their design.

[3] Third, the government’s capacity to formulate and carry out reforms is limited. The great bureaucratization and centralization mean that central authorities are overwhelmed by decision making on all kinds of current matters, leaving them little time for reforms. Therefore, the Ministry of Finance or the Ministry of Economy can hardly lead reforms as has been the case in other countries.

On the other hand, because many other postcommunist countries have already undertaken the necessary reforms, Ukraine can learn from their successes and failures, which renders it an advantage to be a laggard.


At present, Ukraine faces an extraordinary window of opportunity. The country has both a unique political possibility and great economic need to launch a new wave of reform that will lay the foundation for sustainable economic growth. The new Ukrainian authorities need to act fast and forcefully to shore up the state.

A presidential election offers a great opportunity for a new start. The new president enjoys a political mandate and parliamentary majority. A new government has just been formed and is ready to govern. But the period of "extraordinary politics," when the parliament and public allow the president to act fast and radically, will probably be brief.

So far, Ukraine has experienced two waves of substantial reform. The first reform wave started in the last quarter of 1994, after Leonid Kuchma was elected president. The second wave arose in the first quarter of 2000, when Kuchma was reelected and Victor Yushchenko became prime minister.

In these two cases, reforms occurred immediately after a presidential election and in the midst of financial and economic crisis, underlining that Ukraine currently has a great chance to reform. Today, Ukraine is once again in such a situation. It badly needs to launch a new wave of substantial and comprehensive reforms.

Seeing this situation arising last fall, I initiated and served as co-chairman of an Independent International Expert Commission on a reform program for Ukraine after the presidential elections together with Ukrainian colleagues. It was meant to be an action program for the first year of a new presidency.

Our proposal was endorsed by Ukraine’s prime minister last September and also the new administration has expressed its appreciation. Half of the commissioners we invited were Ukrainians and the other half foreigners.

They were prominent experts on different aspects of reform and policy and independent of government, political parties, and business. The work of the Commission was financed by the Swedish and Netherlands Ministries for Foreign Affairs, with additional support from the United Nations Development Program. We have published our report "Proposals for Ukraine: 2010 - Time For Reforms," and I would like to report to you our key findings. 


Mr. Chairman,

The new presidential mandate, the shock of a recent severe economic crisis, and popular dissatisfaction with the status-quo create ideal conditions for successful reforms.

Our three main conclusions are: Ukraine needs

       (1) new organizational capacity for reforms, and
       (2) clear prioritization of reforms, and
       (3) utilization of international organizations as lighthouses to guide its reforms.

[1] Our Commission’s first conclusion was that Ukraine needs to establish new capacity to carry out reforms that is independent of the agencies to be reformed. We recommend the creation of a Reform Commission at the Cabinet of Ministers, headed by a Deputy Prime Minister with overarching authority.

The Reform Commission should have its own budget and a single goal: to design and implement reforms. Together with the European Integration Secretariat, it should lead Ukraine’s reforms from the Cabinet of Ministers. President Yanukovych formed a Reform Committee at the Presidential Administration that he chairs himself on his second day in office. He has also appointed a Deputy Prime Minister for Economic Reform.

[2] Our second conclusion was that Ukraine needs to formulate clear priorities for reforms. First things need to be done first. Ukraine must:

       (a) improve the effectiveness of the state,
       (b) achieve financial stability,
       (c) allow private enterprise freedom on the market, and (d) make social policy more effective.

Our selection is based on experts’ views of priorities that are also politically feasible within one year. The new government has adopted a coalition program called "Stability and Reform." To a considerable extent, it reflects the views of our commission as Ukraine benefits from a broad consensus on what needs to be done.

The problem in Ukraine has not been what to do but who should do it, as far too often policymaking ends up in gridlock. Our third conclusion is therefore that it is necessary for Ukraine to use its international leverage or external guidance to break through the domestic logjam on reforms.

The Commission has identified three anchors that can guide Ukraine to realize its commitment to its reforms: The IMF, the European Union and the World Bank. All these organizations are ready to engage with the new Ukrainian administration. Naturally, the United States should also engage in the promotion of reforms beneficial for Ukraine’s future governance and economic welfare.

In the view of our commission, Ukraine’s ten top priorities for 2010 are:

       [1]   Carry out gas reform!
       [2]   Make the National Bank of Ukraine (NBU) independent!
       [3]   Move toward inflation targeting!
       [4]   Cut public expenditures! 
       [5]   Undertake comprehensive deregulation of enterprise!
       [6]   Conclude a European Association Agreement!
       [7]   Get privatization going again!
       [8]   Legalize private sales of agricultural land!
       [9]   Adopt a Law on Public Information! 
       [10] Complete the modern commercial legislation! 

All these measures have been chosen on the basis that they are truly vital and can be implemented within one year. Some of them are simple, such as the legalization of private sales of agricultural land and the adoption of a law on public information, while others require some explanation.

The top priority is to reform the gas sector. At present, Ukraine is actually subsidizing imported Russian gas to the tune of 3 percent of GDP a year. This must cease. The government needs to adopt a realistic energy pricing policy. All energy prices should be brought to the level of full cost recovery plus a profit margin for operators as soon as possible.

The Cabinet of Ministers should develop and adopt a Concept for Liberalization of the Gas Market in Ukraine, which should lead to the adoption by parliament of a Law on Principles of the Natural Gas Market Functioning to establish the principles for the natural gas market so that it performs transparently and efficiently, and stimulate competition.

In line with the EU-Ukraine Brussels Declaration on renovation of the Gas Transit System of March 2009, the government should develop a plan for renovation and modernization of the gas transit system and attract financing from interested international financial institutions.

In parallel with the price hikes, the Cabinet of Ministers should introduce a new system of targeted social assistance for the least protected groups of consumers who suffer because of high gas, electricity, and coal prices. Gas reform must be an absolute condition for international assistance.

In order to secure macroeconomic stability, it is essential to minimize potential conflicts between the government and the NBU. The independence of the NBU needs to be reinforced and its governance improved, as it is currently seen as being unduly influenced by both commercial and political forces.

The NBU Council, whose role is unclear and is dominated by prominent business representatives and politicians, should be abolished in its present form, while the NBU chairman and his/her deputies should be given fixed terms.

The political authorities should refrain from enacting legislation that impinges on NBU independence, such as proposals to finance various government expenditures by advancing the payment of NBU profits. The Ukrainian monetary policy should instead be governed by an independent Monetary Policy Committee consisting of independent professionals with well-defined powers and fixed terms.

The NBU should also raise its professional quality and include prominent international expertise. A new law on the NBU reflecting these elements should be drawn up and adopted.

Ukraine should move toward inflation targeting regime within the next three years, which presupposes a floating exchange rate. The transition period should offer the NBU enough room to bring down inflation to the 2 to 3 percent range and provide guidance to the public on the future development of the exchange rate, as well as fostering a reduction of dollarization. In the meantime, the NBU should proceed expeditiously with streamlining its monetary policy instruments and its decision-making process.

Ukraine needs to balance the state budget in the medium term by cutting public expenditures. The government should reconsider the obligations of the state in order to make them financially affordable. The authorities should resist any expansionary fiscal initiatives. Three public expenditures stand out as excessive: price subsidies, enterprise subsidies, and pension expenditures.

Price subsidies and enterprise subsidies should be minimized, while pension  expenditures need to be brought under control through a profound pension reform. It appears both unrealistic and harmful to try to increase the level of state revenues in Ukraine.

An overall aim must be a major improvement of the business environment, which should entail the strengthening of the legal base and property rights. The state’s interaction with private enterprises needs to be reduced and simplified. Starting a business currently requires ten procedures that take 27 days, according to the Doing Business in Ukraine report.

This process should be reduced to one procedure: registration of the business with the tax authorities and receiving a taxpayer number. It should take only one day and cost nothing as is the case in New Zealand. A new law on the liquidation of enterprises is needed to minimize the time needed as well as the cost, while maximizing the recovery rate.

The issuance of construction permits is exceedingly difficult in Ukraine. The goal should be to simplify the process from 30 procedures to a small fraction and reduce the time required from 476 days to a small fraction.

Procedures for registering property can be reduced from ten to probably three. The list of economic activities subject to mandatory licensing should be minimized to only those that are dangerous to human health and life, environment, or national security. A new Law on Licensing should establish firm legal limits of licensing.

The requirement of official permits should be reviewed and limited to an exclusive list of economic activities, which should be sanctified by law. The government should sharply reduce the number of agencies entitled to undertake inspections as well as slash the number of legitimate reasons for inspections to the safeguarding life and health.

All these measures can be implemented within one year. The IMF will play a central role in implementing the gas reform and the macroeconomic policies in return for a two-year standby agreement with substantial financing. The European Union is currently negotiating a substantial association agreement including a comprehensive and deep free trade agreement. The EU is also deeply involved in the gas reform.

The United States plays a key role in the IMF as its biggest shareholder, and it should also engage in the gas reform which will be crucial not only for state finances and energy efficiency but also for the improvement of governance in Ukraine. The United States has a major interest in the economic success of a democratic and friendly Ukraine.

LINK: http://csce.gov/

USUBC FOOTNOTE:  Anders Aslund serves as a Senior Advisor to the U.S.-Ukraine Business Council (USUBC), Washington, D.C., www.usubc.org.
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Hearing: "Ukraine: Moving Beyond Stalemate?  
Before the Commission on Security and Cooperation in Europe (CSCE)
(U.S. Helsinki Commission), U.S. Congress, Wash, D.C., Tue, Mar 16, 2010

WASHINGTON - In the first Congressional hearing on Ukraine in the wake of President Viktor Yanukovych’s February election, U.S. Helsinki Commission Chairman Senator Benjamin L. Cardin (D-MD) and Co-Chairman Congressman Alcee L. Hastings (D-FL) spoke in favor of continued democratic reforms in Ukraine.

“President Yanukovych will need to accelerate economic and political reforms, tackle systemic corruption and overcome the rule of law deficit, including building up an underdeveloped judiciary to strengthen its independence,” Chairman Cardin said. “Such reforms will reduce Ukraine’s vulnerability to outside pressures and bring it closer to its stated goals of European integration.”

“Ukraine has developed an open and pluralistic political system and media freedoms have expanded,” said Co-Chairman Hastings, who served as deputy head of the OSCE Parliamentary Assembly election observation mission in Ukraine in February and has observed two other national elections there. “Although Ukraine has had good elections now for the last five years, I can tell you that you need more than good elections to make a functioning democracy.”

Despite close ties to Russia, Yanukovych has declared integration into the European Union a top priority for his presidency. At the hearing -- “Ukraine: Moving Beyond Stalemate?” – the U.S. Helsinki Commission examined the scope of new challenges Ukraine faces and their implications for U.S. policy, hearing testimony from Daniel A. Russell, Deputy Assistant Secretary of State for Russia, Ukraine, Belarus and Moldova; Damon Wilson, Vice President and Director of the International Security Program, Atlantic Council; and Anders Aslund, Senior Fellow, Peterson Institute for International Economics.

A full hearing transcript will be available at www.csce.gov, photos on www.flickr.com/helsinkicommission and video on www.youtube.com/helsinkicommission.

The Commission on Security and Cooperation in Europe, also known as the U.S. Helsinki Commission, is an independent agency of the Federal Government charged with monitoring compliance with the Helsinki Accords and advancing comprehensive security through promotion of human rights, democracy, and economic, environmental and military cooperation in 56 countries.

The Commission consists of nine members from the U.S. Senate, nine from the House of Representatives, and one member each from the Departments of State, Defense, and Commerce.

LINK: http://csce.gov/
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