Ukraine A Net Assessment of 16 Years of Independence
A Report Prepared for the U.S.-EU Partnership Committee for Ukraine
Authors 1800 K Street NW | Washington, DC 20006 Janusz Bugajski Tel: (202) 887-0200 | Fax: (202) 775-3199 E-mail: [email protected] | Web: www.csis.org Steven Pifer Keith Smith Celeste A. Wallander
Foreword by Zbigniew Brzezinski Volker Rühe
February 2008
ISBN 978-0-89206-527-1
CENTER FOR STRATEGIC & Ë|xHSKITCy065271zv*:+:!:+:! CSIS INTERNATIONAL STUDIES Ukraine A Net Assessment of 16 Years of Independence
A Report Prepared for the U.S.-EU Partnership Committee for Ukraine
Authors Janusz Bugajski Steven Pifer Keith Smith Celeste A. Wallander
Foreword by Zbigniew Brzezinski Volker Rühe
February 2008 About CSIS In an era of ever-changing global opportunities and challenges, the Center for Strategic and Inter- national Studies (CSIS) provides strategic insights and practical policy solutions to decisionmak- ers. CSIS conducts research and analysis and develops policy initiatives that look into the future and anticipate change. Founded by David M. Abshire and Admiral Arleigh Burke at the height of the Cold War, CSIS was dedicated to the simple but urgent goal of finding ways for America to survive as a nation and prosper as a people. Since 1962, CSIS has grown to become one of the world’s preeminent public policy institutions. Today, CSIS is a bipartisan, nonprofit organization headquartered in Washington, DC. More than 220 full-time staff and a large network of affiliated scholars focus their expertise on defense and security; on the world’s regions and the unique challenges inherent to them; and on the issues that know no boundary in an increasingly connected world. Former U.S. senator Sam Nunn became chairman of the CSIS Board of Trustees in 1999, and John J. Hamre has led CSIS as its president and chief executive officer since 2000. CSIS does not take specific policy positions; accordingly, all views expressed herein should be understood to be solely those of the author(s).
© 2008 by the Center for Strategic and International Studies. All rights reserved.
Library of Congress Cataloging-in-Publication Data CIP information available on request ISBN 978-0-89206-527-1
The CSIS Press Center for Strategic and International Studies 1800 K Street, NW, Washington, DC 20006 Tel: (202) 775-3119 Fax: (202) 775-3199 Web: www.csis.org Contents
Foreword iv Executive Summary v 1. Introduction 1 2. Ukraine’s Achievements 2 3. Ukraine’s Shortcomings and Setbacks 14 4. Key Tasks and Recommendations 22 For Ukraine For the European Union For the United States Appendix A: Ukraine Facts and Figures 29 Appendix B: The U.S.-EU Partnership Committee for Ukraine 33 About the Authors 34
Executive Summary | iii Foreword
For Ukraine’s friends in the West, 2007 was and setbacks, both domestic and foreign, not the easiest year. We watched the political which the assessment details. leadership become mired in a months-long We believe that it is useful, when facing political crisis in the spring. We applauded the frustrations of day-to-day Ukrainian poli- the free and fair nature of the September Rada tics, to recall the long path that Ukraine has elections. But we then waited—along with the already successfully navigated. It gives hope Ukrainian people—for more than 11 weeks that the Ukrainian people, with focus and po- for confirmation of a new prime minister litical will, can complete the transformation of and cabinet. One result of the internal politi- their country into a modern and democratic cal turmoil was the sluggish development European state. of relations between Ukraine and the West. We also asked the authors to suggest pri- Like many Ukrainians, we found the politi- ority reform tasks for the Ukrainian govern- cal process agonizingly slow and frequently ment, as well as suggestions for the European frustrating. Union and United States as to how they might At times like these, it makes sense to step help Ukraine further develop its process of back and take a broader view of Ukraine’s de- reform and integration with European and velopment and gain some context for the news transatlantic institutions. We believe that this of the day. In the fall of 2007, we therefore assessment offers a strong set of recommenda- commissioned a net assessment of Ukraine’s tions that merit full consideration in Kyiv, the achievements and shortcomings since it re- EU capitals, and Washington. gained independence in 1991. The report was prepared for the U.S.-EU Partnership Com- Zbigniew Brzezinski mittee for Ukraine, an international initiative Volker Rühe that we cochair. The directors of the four task February 2008 forces supporting the committee authored the assessment. We feel it is a first-class product. While not necessarily agreeing with every rec- ommendation, committee members generally concur with the assessment’s analysis and the bulk of its conclusions. In the following pages, you will read about the numerous accomplishments of the Ukrai- nian people and their government over the past 16 years, both in terms of political and economic reform and in building constructive foreign relations with the West and Russia. The record is impressive, perhaps the most impressive of any state that emerged from the defunct Soviet Union, excluding the Baltic nations. There have also been many shortfalls
iv | Ukraine Executive Summary
This net assessment examines Ukraine’s ■■ Ukraine faces particular challenges in the accomplishments and shortcomings since energy sector, which is of crucial impor- regaining its independence in 1991. The as- tance to the economy and where depen- sessment concludes with recommendations dence on Russia creates a potential politi- targeted at the Ukrainian government, the cal vulnerability. European Union, and the U.S. administration. ■■ Russia’s more assertive foreign policy poses Progress other challenges for Ukraine. ■■ While opinion within Ukraine is coalesc- Ukraine has recorded significant achieve- ing in favor of integration with the Euro- ments since 1991: pean Union, the country lacks a unified ■■ The Ukrainian people have strengthened view on its ultimate relationship with their statehood and developed democratic NATO. institutions. Thus, Ukraine still has much to accom- ■■ The Ukrainians have laid the foundation plish, and the U.S. and EU governments have for a robust market economy and reversed much to do if they want Ukraine to consoli- the economic decline of the 1990s. date itself as a stable and prosperous country ■■ Ukraine has established itself as a sover- that helps shape a more stable and secure Eu- eign and internationally recognized state, rope, a goal that is in the interest of Ukraine, with a deepening engagement with the the United States, and Europe as a whole. European Union, a distinctive partnership with NATO, and a robust relationship with Key Tasks for Ukraine the United States. There are a number of key tasks for the new ■■ While relations with Russia remain both Ukrainian government and Rada (parliament) cooperative and conflictive, Ukraine has at the beginning of 2008. Kyiv should consider made progress in building a stable state-to- steps that will not only mean better policies state relationship with its eastern neighbor. but also signal Ukraine’s commitment to the path of integration with Europe. Priority measures to improve governance Shortcomings should include: Ukraine still has a significant path to travel to ■■ Constitutional reform. Ukraine’s constitu- complete its transformation: tion and associated laws must be changed ■■ Domestic political problems include an to eliminate ambiguities and draw clear inability to find political compromise, per- delineations of authority. vasive corruption, and lack of a generally ■■ Judicial reform. Ukraine needs a judicial accepted constitutional framework. branch that can be relied upon to make ■■ The country’s economic development has fair decisions in criminal cases, business been hindered by government intervention disputes, and other matters, as part of a in the markets, oligarchic interests, and con- broader effort to combat corruption. fusing and often-contradictory legislation.
Executive Summary | v ■■ Administrative reform. Ukraine requires a ■■ Charters. Ukraine should implement the modern bureaucracy, as well as territorial- transit protocol of the European Energy administrative reform, to make oblast and Charter and sign the Athens Energy Treaty local officials directly accountable to their to encourage more foreign direct investment. publics. Ukraine should pursue the following steps ■■ Greater transparency and responsiveness. in its foreign policy: All levels of government need to become ■■ WTO accession. Ukraine should complete more transparent and responsive to the remaining details for its accession to Ukraine’s citizens. the World Trade Organization (WTO). Priority economic reform measures ■■ Enhanced agreement with the European should include: Union. Ukraine should press for early ■■ Commercial code abolishment. The com- conclusion of an enhanced agreement with mercial code contradicts the more modern the European Union and then focus on civil code and interferes with the ability of implementation. businesses to operate. ■■ Focus on NATO relations. Kyiv must dem- ■■ Free sale and transfer of agricultural land. onstrate its commitment to transatlantic The Rada should pass legislation that will security and values and conduct an effec- facilitate creation of a land market. tive informational campaign to raise public ■■ A modern tax code. The government knowledge about NATO. should propose and the Rada should enact ■■ Greater activism in regional initiatives. a modern tax code to simplify taxes for Ukraine needs to be more actively involved both businesses and ordinary citizens. in regional initiatives such as Black Sea Priority measures to reform the energy Synergy and the Southeast European sector should include: Cooperation Initiative (SECI). ■■ Market prices. The government should ■■ Stable relations with Moscow. While move to use markets to set energy prices Ukraine pursues European integration, or, in the case of gas and electric power, Ukraine and Russia should work together move to full cost-recovery levels. Domestic to build a stable and constructive relationship. producers of gas and oil should receive the same prices as foreign suppliers. Key Tasks for the ■■ Restructuring of Naftogaz Ukrainy. The government should restructure Naftogaz European Union Ukrainy so that production, pipelines, and distribution are handled separately. A Ukraine committed to transformation into a modern European democracy deserves full ■■ Dealing directly with Gazprom. Ukraine EU support. Priorities for the European Union should end its contracts with the unnec- should include: essary intermediary RosUkrEnergo and ■■ Broader travel opportunities. The European negotiate gas purchase contracts directly Union should broaden travel opportuni- with Gazprom. ties for Ukrainians, including expanded ■■ Tax reductions. Taxes on exploration and exchange programs and visa facilitation. development projects should be reduced. ■■ Technical assistance in the energy field. The ■■ Privatization. Ukraine should restart the European Union should provide technical privatization of remaining energy assets. vi | Ukraine assistance to help Ukraine meet its goals in Key Tasks for the the energy field, reform its central resi- dential heating systems, and formulate a United States long-term energy strategy. The United States needs a reenergized policy ■■ Support for direct contract negotiations. that reflects the importance of a successful The European Union should support Ukraine to the U.S. goal of a broad, stable, and Ukrainian efforts to negotiate direct gas secure Europe. Priorities for the U.S. govern- purchase contracts with Turkmenistan ment should include: and Kazakhstan. ■■ High-level engagement. The United States ■■ An enhanced EU-Ukraine agreement. EU should resume active high-level engage- officials should negotiate an enhanced ment with Kyiv, including at the presiden- EU-Ukraine agreement that encourages tial and cabinet level. Ukraine’s adoption of European standards and includes a rapidly negotiated EU- ■■ Broader travel opportunities. The United Ukraine free trade agreement. States should broaden travel opportuni- ties for Ukrainians, including expanded ■■ Clarity on EU integration and process. An exchange programs. EU signal regarding Ukraine’s future mem- bership would greatly spur the country’s ■■ Dialogue with Europe. The United States transformation. While it is unrealistic to should continue its dialogue with the expect the European Union to reach con- European Union and NATO countries sensus on offering Ukraine a membership on how to foster stronger links between perspective in the next few years, EU offi- Ukraine and Europe and the Euro-Atlantic cials should consider other inducements to community. encourage Kyiv to pursue deeper reforms. ■■ Free trade agreement. The United States ■■ Enhanced ENP and CFSP engagement. should consider the merits of a bilateral The EU’s European Neighborhood Policy U.S.-Ukrainian free trade agreement. (ENP) with Ukraine should be enhanced, ■■ Assistance on long-term energy strategy. The and Ukraine’s involvement in the EU’s United States should encourage the World Common Foreign and Security Policy Bank and the International Energy Agency (CFSP) intensified. to help the Ukrainian government formu- ■■ NATO-Ukraine relations. Those EU mem- late a long-term energy strategy. bers that also belong to NATO should ■■ Support for direct contract negotiations. The support the alliance in enhancing its en- United States should support Ukrainian gagement with Ukraine. The allies should efforts to negotiate direct gas purchase con- extend a membership action plan (MAP) tracts with Turkmenistan and Kazakhstan. to Ukraine, recognizing that the objective ■■ NATO-Ukraine relations. The United States of a MAP is to create the preconditions for should support NATO in enhancing the consideration of membership but in no alliance’s engagement with Ukraine. The way prejudge a decision by Ukraine to re- allies should extend a membership action quest membership or by NATO to extend plan to Ukraine, recognizing that the ob- an invitation to join the alliance. jective of a MAP is to create the precondi- tions for consideration of membership but in no way prejudge a decision by Ukraine
Executive Summary | vii to request membership or by NATO to extend an invitation to join the alliance.
viii | Ukraine 1 Introduction
Ukraine has recorded significant achieve- plague the energy sector particularly: Ukraine ments since regaining its independence in wastes huge amounts of energy, retards 1991. The Ukrainian people have strength- domestic production, and faces a political ened their statehood. They have developed vulnerability due to its heavy dependence on democratic institutions. They have laid the Russia for much of its energy. Russia, in view foundation for a robust market economy and of its more assertive foreign policy, poses are well on the road of recovery following the other challenges to Ukraine’s sovereignty as severe economic contraction of the 1990s. well. Looking toward the West, while opinion Ukraine today is a very different country from within Ukraine increasingly favors integration the one that emerged from the wreckage of with the European Union, the country lacks a the Soviet Union. unified view on its ultimate relationship with Ukraine has established itself as a sover- NATO. eign and internationally recognized state. It Thus, Ukraine still has much to do, as has made substantial progress in reforming its have the U.S. and EU governments if they armed forces. It has fully developed relations want Ukraine to consolidate itself as a stable, with its neighbors, deepened its engagement prosperous country that helps shape a more with the European Union, forged a distinctive stable and secure Europe—a goal that is in the partnership with NATO, and established a ro- interest of Ukraine, the United States, and a bust relationship with the United States. While wider Europe. relations with Russia remain multifaceted, in large part due to historical legacies, Ukraine has made progress in building a normal state- to-state relationship with its large eastern neighbor. The assessment, however, is far from a picture of unmitigated success. Ukraine still has a significant path to travel to complete its transformation into a modern, democratic, European state. The inability to reach work- able political compromises, the pervasive cor- ruption, and the lack of a generally accepted constitutional framework hold back Ukraine’s political development. Government interven- tion in the markets, oligarchic interests, and confusing and often contradictory legislation impede the consolidation of a strong market economy. Corruption and poor policy choices
Introduction | 1 2 Ukraine’s Achievements
Developing the and religious ties to Russia; its brief history as an international subject separate from Rus- Ukrainian State and sia; the substantial Russian ethnic population in Ukraine; and the integration of Ukraine’s National Identity politics, economy, and military with Rus- Ukraine’s fundamental achievement in the sia as a consequence of the Soviet period. In 1990s was to establish a sovereign, indepen- fact, the U.S. intelligence community in 1994 dent, and internationally recognized state fol- produced a national intelligence estimate en- lowing the disintegration of the Soviet Union. titled “Ukraine: A Nation at Risk.” That study An overwhelming majority of the Ukrainian questioned whether an independent Ukraine population voted for independence in the would exist in 10 years. Today, no serious December 1991 referendum. Since then, each observer would ask that question. Ukraine successive administration in Kyiv—under the has developed independent, if flawed, state leadership of Presidents Leonid Kravchuk, institutions, and it has created a broadly rec- Leonid Kuchma, and Viktor Yushchenko—has ognized and accepted international identity. been committed to defending and consolidat- While the Ukrainian national and state ing the country’s statehood. State building is identity traditionally has been strongest in a long, complex, and arduous process, and western and central Ukraine, the popula- Ukrainians faced three principal challenges tion in the east has increasingly come to once they had regained their independence: share that identity. At the height of the 2004 (1) forming modern democratic institutions Orange Revolution, some local leaders in to govern Ukraine; (2) putting in place the in- eastern Ukraine suggested a referendum on stitutions of a sophisticated market economy autonomy. That call fell on deaf ears among to replace the previous command economy most eastern Ukrainians (where many of model; and (3) developing an international Ukraine’s ethnic Russians reside) and instead presence and independent foreign and provoked a countervailing backlash, as vari- security policies at a time of major transfor- ous local councils denounced any suggestion mation within Europe and Eurasia. Ukraine of separatism. Whatever problems Ukraine has achieved much progress in each of these faces today, its citizens will deal with them as areas. Ukrainians, even if ethnic heritage remains a The development of the Ukrainian state consideration. While differences persist be- was by no means a given. In 1991, many ana- tween eastern and western Ukraine, they have lysts and policymakers worried that Ukraine significantly decreased in the 16 years since would not survive as an independent entity. Ukraine regained its independence. Ukraine Skepticism about Ukraine’s sustainability was increasingly has appeared as, and acted as, one fueled by the country’s close ethnic, linguistic, country.
2 | Ukraine Central government authorities in Kyiv Ukraine has scored high marks for its have skillfully avoided or, when necessary, treatment of minority religions. Although managed ethnic tensions. When Ukraine many Jews left Ukraine for Israel or the United achieved independence in 1991, all residents, States in the 1990s, a number of Jewish com- regardless of ethnic background, were treated munities thrive in Ukraine. In recognition of as full and equal citizens. The largest non- Ukraine’s positive record on open emigration Ukrainian group consists of ethnic Russians, and creating conditions for the free practice of who now make up about 17 percent of the religion, the U.S. Congress passed legislation population, although many more Ukraini- in 2006 graduating Ukraine from the provi- ans speak Russian on a regular basis. While sions of the Jackson-Vanik Amendment. Ukrainian is the only official state language, Russian speakers face few practical difficulties Developing Modern in everyday life. Government offices deal in Russian, Russian-language schools are com- Democratic Institutions monplace, and many media outlets broadcast Ukraine has made considerable progress in or publish in Russian. The issue of conferring developing democratic institutions and con- official status on the Russian language arises solidating democratic practices. After years periodically, generally as an issue during elec- of being ranked “partly free” by the Freedom tion campaigns. While the Russian language House annual survey of political rights and question was raised during the summer 2007 civil liberties, Ukraine achieved a ranking of campaign leading up to the September Rada “free” in 2005, 2006, and 2007, the only post- preterm elections, it was not a hot-button is- Soviet state other than the Baltic countries sue. The Regions Party, whose power base lies to be so graded. In particular, free, fair, and in eastern Ukraine, made little effort to polar- competitive elections have been established as ize the electorate with it. the means by which the population chooses Crimea posed the single greatest challenge the president and the political parties seated to Ukrainian statehood. In 1994, Crimean in the Rada. leaders advocated autonomy from Kyiv and Ukraine’s election standards have im- closer linkages to Russia (prior to 1954, proved dramatically. Throughout the 1990s, Crimea was administratively part of Russia). they were marked by significant shortcom- The Ukrainian government deftly contained ings: abuse of administrative resources in the crisis, and separatist tensions on the favor of one candidate or party, pressure on peninsula abated. The Crimean Tartars, who opposition supporters (for example, through began returning from forced exile in Central tax audits), and restricted access to the media. Asia in the late 1980s, have made clear their Some of the worst examples occurred during support for remaining part of Ukraine. The the 2004 presidential election. Opposition Tartars’ return has raised a number of difficult candidate Yushchenko’s campaign faced con- issues, particularly the question of the return tinuous harassment; state resources were put of land and property appropriated by the So- at the disposal of his opponent, then–Prime viet regime when Stalin deported the popula- Minister Viktor Yanukovych; and during the tion in 1944, most of which has been occupied November 2004 runoff election, hundreds of by others for over 60 years. But these issues do thousands—perhaps as many as 1.5 million— not carry a charged interethnic edge. While fraudulent votes were added to the count. the ethnic situation in Crimea is complicated, This blatant fraud triggered a national at this point it poses no internal threat to awakening in the form of the Orange Revo- Ukrainian statehood. lution, when hundreds of thousands of
Ukraine’s Achievements | 3 Ukrainians took to the streets to assert their that directly attack senior political figures, right to elect their leaders. Demonstrations without fear of government retaliation. While broke out immediately after the runoff returns some papers and broadcasters adopt editorial were announced; the resolution achieved 17 lines that may skew or bias news coverage, days later provided for a rerun of the runoff publishers and owners generate those editorial ballot under an amended election law that lines, not government officials. reduced opportunities for fraud. In what Nongovernmental organizations (NGOs), was the most closely monitored election in especially those dedicated to civic activity, Ukraine’s history, Yushchenko won a vote that have flourished since 1991. They were the was assessed by credible domestic and foreign bedrock of support and organization leading observers as free and fair. up to the Orange Revolution, despite largely Since that election, Ukraine has held ineffectual attempts by the Kuchma govern- two more national ballots, also judged to be ment to curb their activities. In the past two free, fair, and competitive. In the March 2006 years, some offices of the Ukrainian govern- Rada elections, the opposition Regions Party, ment have set a good precedent and have headed by Yanukovych, was able to campaign welcomed the advice of civic organizations freely and won the largest number of seats and analytical centers in their work. In order in the Rada even though Yushchenko was to continue and strengthen the contributions president and controlled the government. The of Ukraine’s nascent civil society, the govern- September 2007 Rada preterm elections also ment should create a legal and tax-friendly scored positive assessments from domestic environment for NGOs of all kinds—from and foreign observers. This record of free and charitable service providers to analytical think fair elections contrasts markedly with the tanks and civic organizations. practices in neighboring Russia and Belarus. Ukraine has moved away from the The Ukrainian media has become increas- super-presidency model of government that ingly balanced and professional over the past evolved during the Kuchma years. The Rada 16 years, particularly since the Orange Revo- has gained power vis-à-vis the president in the lution. While the country has always enjoyed aftermath of the Orange Revolution, establish- a diverse media, cases of government abuse ing a more even balance of power between were common prior to 2004. These included the legislative and executive branches. The instances when the government closed op- Rada has also become a more coherent body. position press outlets, targeted tax inspections In the past, it was composed of many small at broadcasters or publishers who did not sup- parties, with often shifting alliances. As a port the government, and provided temniki— consequence, throughout the 1990s the par- state-authored themes—to guide major broad- liamentary scene bordered on political chaos. casters’ reporting on certain individuals or For example, 10 parties were represented in events. Most horrifically, several independent the Rada in 1997, grouped roughly into leftist, journalists were murdered. nationalist, and centrist factions, although To its credit, much of Ukraine’s media re- no faction controlled a majority of the 450 volted during the Orange Revolution, provid- seats. The largest party, with some 80 deputies, ing the population with continuous and un- was the Communists, who opposed market biased coverage of the protests and demands reforms, rejected European integration, and of the demonstrators. Since then, the media advocated closer ties with Russia. has enjoyed an open environment in which The Rada that was elected in 2007 con- reporters may freely pursue any story and stitutes a far more coherent body, comprising publishers may print them, including articles just five parties. And the three major parties
4 | Ukraine Figure 2.1. Rada Composition
Rada Composition, 2007 Rada Composition, 1997
1. Communists (86 seats) 1. Regions (175 seats) 2. Agrarian (38 seats) 2. Communists (27 seats) 12 3. Socialist (25 seats) 3. Lytvyn Bloc (20 seats) 1 5 11 4. Unity (37 seats) 4. Ty moshenko Bloc (156 seats) 5. Independent Deputies (25 seats) 1 5. Our Ukraine/PSD (72 seats) 10 2 6. Constitutional Center (56 seats) 9 7. Social Market Choice (25 seats) 8. Interregional Bloc (28 seats) 8 3 4 9. Reforms (29 seats) 4 10. Rukh (29 seats) 7 11. No Faction (39 seats) 2 56 12. Vacant (33 seats) 3 agree on key policy questions. The Regions 1990s: inflation, which hit 10,000 percent in Party, the Bloc of Yuliya Tymoshenko, and 1993. By 2001, inflation had dropped to single Our Ukraine/People’s Self-Defense, which to- digits, although it recently surged to 15 per- gether won almost 80 percent of the votes and cent. Both the Finance Ministry and the cen- control more than 400 of the 450 Rada seats, tral bank have learned the value of fiscal and all advocate a market economy, steps to im- monetary discipline. The recent spike in infla- prove the business and investment climate, and tion is not due to poor fiscal discipline (the integration into Europe, including member- state budget is close to being balanced) but to ship in the European Union. This represents the hryvnia’s peg to the dollar and a large in- a degree of agreement on Ukraine’s strategic flux of foreign currency that is monetized. The direction previously unknown in the Rada. price of imported natural gas, which rose from $130 per thousand cubic meters in 2007 to Developing a Robust $180 per thousand cubic meters in 2008, will Market Economy contribute to inflationary pressures. Demands are rising to let the exchange rate gradually Over its 16 years of independence, Ukraine appreciate, because Ukraine’s debt is small and has put in place important elements of a its international reserves, which now exceed market economy. Markets, not central plan- $30 billion, are deemed satisfactory. ners, now allocate and set prices for most Much of the economy has been privatized. goods and services. Ukraine’s borders are The private sector today generates an esti- open, and international trade flows are a key mated 65 percent of gross domestic product, source of economic growth and goods for up from 10 percent in 1991 and 55 percent in Ukrainian consumers and businesses. Ukraine 1999, according to European Bank for Recon- has rapidly developed a modern financial struction and Development (EBRD) assessments. system: following the patterns of Central Eu- Ukraine has turned around its macroeco- rope, Western European banks have acquired nomic performance over the past 10 years. substantial stakes in the Ukrainian banking The difficult post-Soviet economic situation system, integrating it with the European fi- and government reluctance to rapidly imple- nancial system. Ukraine’s regulatory and legal ment reform measures in the 1990s resulted systems have evolved, and many provisions in nearly a decade of economic decline. Of- are compatible with a market economy. ficially, the country’s gross domestic product Ukraine has established a stable national (GDP) in 1999 amounted to less than 40 currency, the hryvnia, and a competent cen- percent of the 1991 level, though this may tral bank, putting an end to the scourge of the overstate the level of decline. In any event,
Ukraine’s Achievements | 5 Figure 2.2. Ukraine’s Gross Domestic Product
600
500
400
300
200
100 Billion $s or Billion 2004 $s at PPP Rates 0 2007 2005 2003 2001 1999 1997 1995 1993 1991 1989
PPP Exchange Rates Market Exchange Rates
Source: State Statistics Committee of Ukraine, “National Accounts,” reprinted from Keith Crane and F. Stephen Larrabee, Encouraging Trade and Foreign Investment in Ukraine (Santa Monica, CA: RAND, 2007), p. 10. there has since been a notable turnaround: the is fortunate in that it has significant reserves of Ukrainian economy is now enjoying its eighth oil and natural gas, both on and offshore, mas- consecutive year of growth, with increases sive coal deposits (with Europe’s best coal-bed in GDP since 2000 averaging more than 7 methane prospects), and four nuclear power percent per year, making Ukraine one of the plants with 15 reactors, backed by a sophis- fastest growing economies in Europe and the ticated nuclear industry. There is increasing former Soviet Union. Ukraine’s GDP in 2006 awareness in Ukraine of the need to diver- stood at $103 billion, or $380 billion in pur- sify the country’s sources of energy, reduce chasing power parity terms. Ukraine’s econo- domestic consumption through increased my is projected to continue growing at 5 to 7 efficiencies, expand domestic production of percent per year over the next five years. This oil and natural gas, and consider the possibili- growth is stimulated in part by rising foreign ties of cleaner coal and new alternative energy direct investment, which was on a record pace technologies. in 2007, reaching $6.8 billion in the first nine This is important because the Ukrai- months of the year. Ukraine has a growing nian economy remains heavily dependent middle class, contributing to the increasingly on energy imports: more than 75 percent of high demand for consumer goods and auto- its natural gas, 80 percent of its oil, and 100 mobiles; in 2006 for example, Ukraine was the percent of its nuclear fuel is imported, virtu- sixth-largest market for new cars in Europe. ally all coming from or through Russia. With more enlightened energy policies and stronger Modernizing the Energy rule of law to support contracts, Ukraine has Sector the capability to cut its import dependency in half over the next 15 years and strengthen its Few parts of the Ukrainian economy are more position when negotiating energy import pric- important than its energy sector. The country es with Russia and Central Asian suppliers.
6 | Ukraine Despite widespread corruption, Ukraine New nuclear power plants are now gener- has had some major accomplishments in the ating most of the electricity previously pro- energy sector. Most of Ukraine’s electric pow- duced by the outdated RBMK-style reactors at er generation, regional distribution and power the Chernobyl plant. Ukraine’s robust nuclear companies, and oil-refining systems have been power industry fulfills about half of domes- successfully privatized since 1991. The steel tic electric power demand, and the country and chemical industries, important contribu- is set to become a net exporter of electricity. tors to gross domestic product and Ukrainian Poland and Belarus offer significant electric- export earnings, have achieved significant ity markets. Ukraine is close to completing increases in energy efficiency. As a result, the the nuclear fuel qualification project with country is about 20 percent more energy Westinghouse, an effort funded by the U.S. efficient today than it was in 1990. Recent government. Once completed, this project price increases for natural gas imported from will give Ukraine the ability to import fuel Russia and Central Asia—Ukraine paid $50 for its nuclear reactors from Westinghouse or per thousand cubic meters in 2005, with the qualify other suppliers, breaking the Russian price rising to $95, $130, and $180 per thou- monopoly. This will enhance Ukraine’s energy sand cubic meters in 2006, 2007, and 2008— security: even if Ukraine never buys fuel have prompted major industries to invest in elsewhere, it will have substantially greater new technologies, which will further boost bargaining leverage with its Russian supplier. energy efficiency. Ukraine has the potential to expand its A slow but growing use of meters to more domestic production of natural gas and oil. accurately gauge electric power consump- The offshore production-sharing agreement tion in some large municipalities can further between the American company, Vanco En- increase efficiency. Several cities are now ergy, and the Ukrainian government, signed putting meters in all new apartments, which in October 2007, was the culmination of the should result in significant energy savings country’s first offshore energy production and over the long term and assist in domestic tariff development tender. Encouraged in part by setting. Metering systems are also slowly being Vanco’s apparent success, Shell Oil Company constructed on the main gas lines from Rus- has tentatively agreed to commit at least $100 sia, which will help Ukrainians to measure the million for joint exploration and development real intake of natural gas coming from Russian activities, with the prospect of a considerably and Central Asian suppliers and to answer larger commitment once some of the present charges that gas is being illegally diverted. political and legal hurdles are overcome. The World Bank, the EBRD, and the Euro- Ukraine’s political elite favors retaining pean Commission are anxious to help Ukraine control of the pipeline system—at least until modernize its energy infrastructure, develop an open and transparent tender process can be a progressive tariff system, and integrate the put in place and Gazprom is prepared to play country’s energy sector with those of Western by internationally accepted rules of the energy Europe. This assistance, however, will require market and not exploit its monopoly power a greater degree of transparency than appears to gain control over Ukraine’s energy systems. desired by key elements of the political elite The Rada acted in 2007 to ban any sale or and those Ukrainian firms that have benefited transfer of control over the pipeline system from close ties to Gazprom, the giant, mo- without Rada approval. There is growing sup- nopolistic Russian gas company, and other port within the Rada for identifying addition- Russian businesses. al sources of revenue that could be earmarked
Ukraine’s Achievements | 7 for the much needed renovation of the main structure of its military away from the Soviet gas and oil pipelines, which have the potential model and toward European models and to move significantly greater volumes. Ukrai- standards. Ukraine quickly reduced its ground nians recognize that improved maintenance forces and streamlined its defense capacity and modernization of the pipeline system will to shed Soviet–Cold War military doctrine. undercut Moscow’s claims that only Russia Thus, Kyiv became better positioned to par- has the technical and financial ability to keep ticipate in modern peacekeeping and combat the pipelines in sufficiently good shape to operations than other post-Soviet militaries. guarantee smooth gas deliveries to Europe. Ukrainian officers actively engage in NATO Partnership for Peace programs, as Building an Independent well as military-to-military exercises, train- ing programs, and educational courses with Military Western militaries. As a member of the Con- Early in its development as an independent ventional Forces in Europe Treaty, Ukraine’s country, Ukraine achieved political and military has adopted modern European practical control over the military forces on standards of transparency and cooperation in its territory, which in 1991 were essentially a military affairs. This not only distinguishes the regional arm of the Soviet Red Army. Ukraine Ukrainian military from the Russian military, declined to subject its military forces to which remains mired in a post-Soviet limbo Russia’s proposed joint Commonwealth of In- between the Cold War and modern military dependent States military force in early 1992. practices, it has disentangled the Ukrainian Kyiv instead required officers and soldiers military from Russia’s and increasingly links to take a loyalty oath to Ukraine or to resign its future with Europe’s. While Ukraine’s from the Ukrainian armed forces; an over- future in NATO remains uncertain, there is no whelming majority chose Ukraine. question that Ukraine’s military is a distinct By July 1992, Ukraine’s military indepen- entity from Russia’s. dence was firmly established when the young Ukraine has no foreign military forces country contributed military forces to the UN deployed on its territory that are not accepted peacekeeping mission in Bosnia-Herzegovina. and regulated by international and Ukrainian In 1999, Ukraine also provided troops—in the law. This is in clear contrast to the challenges context of the Polish-Ukrainian peacekeeping to sovereignty faced by Ukraine’s neighbors, battalion—for the NATO-led stability force, Moldova and Georgia, which continue to host KFOR, in Kosovo. In 2003, the Ukrainian Russian military units despite their own gov- military deployed a chemical and biologi- ernments’ policies. Russia’s Black Sea Fleet is cal weapons defense unit to Kuwait and later based on Ukrainian territory, at the naval base contributed three battalions, under Polish in Sevastopol and other facilities in Crimea, command, to the U.S.-led coalition stabiliza- but this basing is regulated by a 1997 lease tion force in Iraq. agreement that provides for Russian lease pay- In conjunction with its establishment of ments and an end date of 2017. Although the authority and control over its defense forces issue occasionally is raised in Russian political in the international arena, Ukraine has made discourse, the Russian navy has begun prepa- significant progress in reforming its defense ration for an expanded base for its Black Sea forces. In contrast to the forces of Russia and Fleet in Novorossiysk, in the Russian Federa- other post-Soviet countries such as Belarus, tion, seeming to indicate Russia’s acceptance Ukraine has made dramatic advances in mod- that it will have to depart Crimea by 2017. ernizing the command and organizational
8 | Ukraine Ukraine’s International and most importantly, to receive security as- surances designed to bolster its sovereignty Standing and ability to withstand potential Russian pressure. In conjunction with its accession to Over the past 16 years, Ukraine has strength- the NPT in 1994, Ukraine formally received ened itself as a sovereign and independent security assurances from the United States, country with control of its territory and sov- the United Kingdom, and Russia regarding ereign membership in international organiza- its independence, sovereignty, and territorial tions. In pursuit of its own interests, Ukraine’s integrity in the Budapest Memorandum. That diplomatic stance on several key issues has document obligated the signatories to refrain increasingly diverged from that of Moscow. from the threat or use of force and from acts Ukraine had juridical independent member- of economic coercion that could undermine ship in the United Nations during the Soviet Ukraine’s sovereignty. France and China sub- period, a status of false independence meant sequently extended Ukraine parallel assurances. to bolster Soviet diplomatic positions. Today, Ukraine is a full and independent member of Regional Relationships the UN, as it is of other international bodies such as the Organization for Security and Co- Since regaining independence, Ukraine’s bi- operation in Europe (OSCE) and the Council lateral ties with most of its neighbors have de- of Europe. Ukraine has independent status in veloped positively. Overcoming their historic a number of important arms control agree- conflicts and animosities, Ukraine and Poland ments, including the Strategic Arms Reduc- established a close relationship in which War- tion Treaty (START), the Treaty on Non-Pro- saw has become the main promoter of Ukrai- liferation of Nuclear Weapons (NPT), and the nian interests within the European Union and Conventional Forces in Europe Treaty. NATO. Good relations have also been forged In January 1994, Ukraine demonstrated with other Central European countries that its role as a responsible international player by have entered the European Union and NATO. signing the Trilateral Statement and agree- Ukraine has no outstanding territorial dis- ing to transfer the strategic nuclear warheads putes with any of its neighbors, although sev- it inherited from the Soviet Union to Rus- eral land and maritime border demarcations sia for their elimination, a process that was still need to be finalized with Russia, Belarus, completed in 1996. With assistance from the and Romania. United States, Ukraine has also eliminated the At a multilateral level, Ukraine is a mem- intercontinental ballistic missiles, missile silos, ber of the Commonwealth of Independent and strategic bombers that were deployed on States (CIS), but it has resisted close military its territory, as it had agreed to do under the and security integration in the Russia-cen- terms of the 1992 START I Lisbon Protocol. tered organization. It does not take part in CIS Ukraine acceded to the NPT as a nonnuclear military structures and has considered cancel- weapons state in December 1994. By giving up ing its funding for the organization. Instead, what would have been the world’s third-largest Kyiv was instrumental in the mid-1990s in nuclear arsenal, Ukraine played a major role developing GUAM (Georgia, Ukraine, Azer- in promoting the NPT’s indefinite extension at baijan, and Moldova) as a Western-oriented the treaty’s 1995 review conference. grouping. At a GUAM summit in Kyiv in May Ukraine skillfully used the Trilateral 2006, Ukraine assumed the chairmanship; the Statement and its NPT accession to obtain as- organization was renamed GUAM–Organiza- sistance in eliminating its nuclear systems and tion for Democracy and Economic Develop- infrastructure, to broaden reform assistance, ment; plans to establish its headquarters in
Ukraine’s Achievements | 9 Kyiv were announced; and Ukraine proposed In February 2005, the EU-Ukrainian closer cooperation between GUAM and the Cooperation Council endorsed a joint EU- European Union and NATO. Ukraine Action Plan, and Ukraine was Kyiv has been a leader in developing included in the EU’s European Neighborhood other regional organizations, but Ukraine Policy (ENP), which is designed to draw sev- and its partners need to avoid overlap and eral countries closer to the European Union confusion, as may be the case with the deci- and promote democratic reform. In 2007, the sion by Yushchenko and Georgian president European Neighborhood and Partnership Mikhail Saakashvili to create the Community Instrument (ENPI) was launched to provide of Democratic Choice (CDC). There has been the framework for technical assistance in a lack of clarity on how CDC complements or trade, science, technology, and nuclear energy. contrasts with GUAM and what countries are In addition, the European Union has also to be included, as not every post-Soviet state contributed over €1 billion since 1991 in aid is a functioning democracy. to Ukraine. Ukraine has steadily involved itself with Relations with the NATO at both institutional and practical levels. Soon after achieving independence European Union and NATO in 1991, Ukraine joined the North Atlan- Ukraine’s leadership since 1991 has become tic Cooperation Council, later renamed the increasingly committed to EU integration and Euro-Atlantic Partnership Council. Ukraine has steadily deepened the country’s engage- has been an active participant in NATO’s ment with the European Union. Today, most Partnership for Peace program, being the first of the political spectrum in Kyiv supports post-Soviet state to join. Ukraine sought in EU integration and favors Ukraine’s ulti- the mid-1990s to develop a special relation- mate membership. Moreover, the majority of ship with NATO. The Charter on a Distinctive Ukrainian citizens support EU accession. An Partnership between NATO and Ukraine, EU-Ukraine Partnership and Cooperation signed in July 1997, recognized the impor- Agreement (PCA) was completed in 1994 tance of an independent and democratic and entered into force in 1998. The PCA has Ukraine for European stability. Among other formed the legal basis of EU-Ukraine rela- things, the charter identified areas for con- tions, providing for cooperation in a wide sultation and cooperation and established the range of arenas, including political dialogue, NATO-Ukraine Council. trade and investment, legislation, culture, and Ukraine has engaged in several peace- science. Talks on a new enhanced agreement, keeping operations led by NATO, including in the successor to the PCA, were launched in the Balkans, since the mid-1990s. In Novem- Brussels in March 2007, and several negotiat- ber 2002, the NATO-Ukraine Action Plan ing rounds have been held in Brussels and was approved at NATO’s Prague summit and Kyiv. In addition, Ukraine has won agreement established long-term objectives for broader from the European Union to begin negotia- cooperation. In April 2005, at the request of tions on a free trade agreement once Ukraine Yushchenko in the aftermath of the Orange has finalized its World Trade Organization Revolution, NATO launched an Intensified (WTO) accession process, which should hap- Dialogue with Ukraine, signaling that the pen in early 2008. Concluding a free trade allies were supportive of Ukraine’s integration agreement with the European Union will be aspirations and that NATO remained com- an important achievement for Ukraine. mitted to providing assistance and advice. In January 2008, Yuschenko, Prime Minister
10 | Ukraine Tymoshenko and Rada Speaker Yatsenyuk NATO. Of particular importance to Kyiv, in sent NATO secretary general Jaap de Hoop March 2006 the U.S. Congress passed legisla- Scheffer a letter requesting a membership tion to graduate Ukraine from the provisions action plan (MAP). However, the Intensified of the Jackson-Vanik Amendment and grant Dialogue and, if agreed, a NATO MAP do not permanent normal trade relation status. In guarantee Ukraine’s candidacy for member- November 2006, Ukraine was selected as an ship. An invitation to accession will be based eligible state to receive assistance from the on receipt of a request for membership from Millennium Challenge Corporation. Washing- Kyiv, which the Ukraine government has said ton has also consistently supported Kyiv in its will only follow a national referendum, and on civil-military reforms and in its overhaul and Ukraine’s performance in meeting key politi- modernization of the Ukrainian military. cal, economic, and defense reform goals. International Economic Relations with the Relations United States In March 2006, U.S. and Ukrainian negotia- Kyiv has viewed the United States as a strate- tors concluded bilateral negotiations on mar- gic partner that can strengthen Ukrainian ket access issues related to Ukraine’s pending security and assist the country in its progress WTO accession. The agreement confirmed toward Western institutions. In November Ukraine’s commitment to broad-based reform 1994, the Charter of American-Ukrainian and economic liberalization, as well as Kyiv’s Partnership, Friendship and Cooperation resolve to join the international trading sys- was signed during Kuchma’s visit to the tem. With the signing of its accession agree- United States. Washington offered support in ment, Ukraine is now at the final stage of the Ukraine’s transition to a democratic market WTO accession process; its entry will unblock economy and its integration into the global several avenues of economic development, economic system. In 1996, Ukraine achieved including negotiation and completion of a free U.S. agreement to establish a strategic rela- trade agreement with the European Union. tionship, and the Gore-Kuchma Binational Ukraine has also established itself as an Commission was created to oversee a broad independent international economic presence, range of foreign policy, economic, security, which increasingly trades globally and attracts and assistance issues. Unfortunately, the bi- foreign investment from a range of European lateral relationship was set back in 2002 when and American investors. The integration of the Kuchma administration violated impor- the Russian and Ukrainian economies in 1991 tant democratic norms, and evidence emerged was substantial. Russia was by far Ukraine’s suggesting that Kuchma had approved the main trading partner; perhaps the stron- transfer of the Kolchuga early-warning system gest argument at the time against Ukraine’s to Iraq. independence was the price the country might Relations markedly improved after the have to pay in shifting from a common cur- Orange Revolution. A Bush-Yushchenko rency and the freedom from normal interna- meeting in April 2005 produced an action tional trade costs such as customs, as well as plan to guide the development of U.S.- the potential loss of the Russian market. In Ukrainian relations, most of which had been fact, the Russian economic collapse affected fulfilled by summer 2006. At that meeting, the demand for Ukrainian imports, which President George W. Bush confirmed U.S. in turn contributed to Ukraine’s economic support for Ukraine’s eventual membership in contraction in the 1990s, with both economies
Ukraine’s Achievements | 11 Figure 2.3. Ukraine’s Exports and Imports
45 50
40 45 40 35 35 30 Russia Russia 30 25 EU EU 25 To tal 20 Total 20 15 15 (U.S. billions dollars) (U.S. billions dollars) 10 10 5 5 0 0 1994 1996 1998 2000 2002 2004 2006 1994 1996 19982000200220042006 experiencing GDP declines of more than 50 investment volumes. More generally, given percent. As late as 1998, the financial crisis Russian nontransparent business practices, in Russia generated a parallel mini-crisis in it is a fair bet that Russian investment in the Ukraine. Ukrainian economy is even higher. Nonethe- Yet Ukraine’s economy has diversified less, the third, fourth, and fifth sources of and become less dependent on Soviet-rooted foreign direct investment are European states. trade patterns and ties. Over the past six The United States (with 5.7 percent) occupies years, Ukraine’s main export partner has been sixth place (for tax reasons, some U.S. foreign the European Union. In 2006, the European direct investment also flows to Ukraine via Union took 25.6 percent of Ukraine’s total Cyprus). exports, while Russia was in second place, Thus, the overall trade and investment taking 21.3 percent. Despite the importance trends are toward a Western integration and of Russia as a source for Ukrainian energy orientation of Ukraine’s economy. This should imports (and the rising prices of Russian not only support economic modernization energy), the European Union by 2006 had and a shift from nonmarket practices, but overtaken Russia as Ukraine’s largest source of it will reduce the political vulnerability of imports. Ukraine’s important trading partners Ukraine to Russian policies. Ukraine’s eco- are diversifying, including China (source of 7.1 nomic independence from Russia will never percent of Ukraine’s imports), Turkey (recipi- be complete, but the trends suggest that the ent of 6.9 percent of Ukraine’s exports), and the relationship is moving toward a more normal United States (destination of 4.1 percent of balance of interdependence. Ukraine’s nego- Ukrainian exports). tiations for membership in the World Trade Investment patterns are shifting as well. Organization have proceeded independently The primary source of investment in the of Russia’s. Ukraine has not joined Russia’s Ukrainian economy is Germany, which had preferred Single Economic Space (SES); while 23.5 percent of total foreign direct invest- Kyiv has expressed interest in an SES free ment in Ukraine at the beginning of 2007. trade area, Moscow wants the SES to be a Russia had fallen to seventh on the list (at 5.1 customs union as well. The Ukrainian govern- percent), although one can assume that the ment indicated in 2006 that it would not join level of foreign direct investment provided by a customs union, as that would impede its Cyprus (17.1 percent, which puts it in sec- negotiation of a free trade agreement with the ond place) reflects some Russian-controlled European Union.
12 | Ukraine Relations with Russia one would be naïve to conclude that there is no Russian influence in Ukrainian politics, Relations with its large neighbor to the east the active involvement of Russian political have posed special challenges to Ukraine since “technologists,” reports of Russian financing 1991, but Kyiv has made significant progress. of anti-Orange candidates, and active direct Issues that once seemed to create core vulner- involvement in Ukrainian media were not abilities for Ukraine—including recognition of repeated in Ukraine’s 2006 and 2007 parlia- Ukraine’s territorial integrity, the status of the mentary elections, despite the considerable Russian language, and the Russian Black Sea stakes for Russia in Ukraine’s leadership Fleet presence in Crimea—have receded in orientation. Other than Ukraine’s achievement salience or been skillfully managed. of formal sovereignty, the country’s practical In the first years following the Soviet achievement of political sovereignty is among Union’s breakup, Russian leaders took a tough its most important accomplishments. approach to issues of sovereignty and political Ukraine’s political independence has been independence in negotiating with Ukraine. constructively supported by an active bilateral Moscow extended security assurances to Kyiv engagement at the official level. Ukraine and as part of the 1994 Trilateral Statement and Russia have established regular and institu- Budapest Memorandum, primarily driven by tionalized discussions between government Russia’s desire to secure the transfer of nuclear counterparts via the Russian-Ukrainian Inter- weapons and Ukraine’s accession to the NPT. state Commission. The commission has prov- The Russian authorities dragged their feet en a pragmatic mechanism for engagement on on signing an overall bilateral agreement a normal state-to-state basis between Russian recognizing Ukraine’s sovereignty and ter- and Ukrainian officials. The Russian foreign ritorial integrity. Although the two countries minister regularly meets with the Ukrainian agreed relatively quickly to a division of the foreign minister, and the Russian and Ukrai- ships belonging to the Black Sea Fleet, reach- nian presidents meet to discuss various issues ing agreement on basing part of the Russian and subsequently task their governments. This fleet in Crimea proved much more difficult, as is in contrast to the situation earlier in this de- Russia sought rights not just to basing facili- cade and the 1990s, when meetings occurred ties in Sevastopol but to all of Sevastopol itself. on an ad hoc basis, revolving around personal The Ukrainians held to their positions and in relationships and presumptions of close links spring 1997 achieved a bilateral agreement between Russian leaders and Russia-focused signed by Kuchma and Russian president Bo- Ukrainian leaders. ris Yeltsin that explicitly recognized Ukraine’s sovereignty and territorial integrity, as well as a basing agreement that provided for the lease of facilities to the Russian navy for 20 years, on terms acceptable to Kyiv. The Orange Revolution triggered consid- erable concern that such a popular revolution might be possible in Russia and generated intense Russian interest in Ukrainian politi- cal developments. The extraordinary Russian interference in Ukrainian politics during the presidential campaign of 2004 has not been replicated in subsequent elections. While
Ukraine’s Achievements | 13 Ukraine’s Shortcomings 3 and Setbacks
Political Shortcomings bidder. Parties to lawsuits commonly “shop” for courts that will produce decisions in their While Ukraine has made important strides interest. Ukraine’s judicial system is ripe for over the past 16 years, setbacks and lack of bribery since judges have tenure for life and progress on key political and economic ques- are almost impossible to remove, and because tions have hindered the country’s transforma- Ukrainian laws are often poorly written and tion into a modern, democratic European sometimes contradictory, leaving wide lati- state. Ukraine has not moved as rapidly as tude for judicial interpretation. many Ukrainians and the country’s supporters Ukrainian politics continues to suffer in the West had hoped. from the disinclination of the major political Successive governments have failed to parties and actors to compromise or coop- deal decisively with corruption, which re- erate. This problem plagued politics in the mains pervasive at virtually all levels of soci- 1990s, hindering the development of stable ety. Transparency International’s Corruption parliamentary coalitions and productive Perceptions Index in 2007 ranked Ukraine relations between the legislative and execu- 118 out of 179 countries. Ukraine’s ranking tive branches. The problem continues today: improved from 122 in 2004 to 107 in 2005 and following the 2006 Rada elections, it took 99 in 2006, before falling back in 2007. Free- Ukraine’s political leaders four months to dom House and the World Bank give Ukraine put in place a majority coalition and select similarly low marks for corruption. a prime minister. The “universal” document An unhealthy lack of transparency per- with key political principles signed in August sists in many areas of government operations, 2006 by Yushchenko, Yanukovych, and others creating broad opportunities for corruption in quickly lost relevance as a guide for coopera- government procurement, regulation of busi- tion among the Rada, cabinet, and presidential nesses, taxation, and privatization. The risk of administration. Similarly, the country endured exposure is low; virtually no major political or a months-long political crisis in the spring of business figures have been brought to trial for 2007. Coalition formation in the aftermath of corrupt activities. Anecdotal reports suggest the September 2007 preterm elections took that corruption increased in the handling of two months, and it took another three weeks value-added taxation in 2006–2007, as export- for the Rada to confirm Yuliya Tymoshenko as ers lacking connections often had to pay a prime minister. All this reflects the difficulty 20 to 30 percent fee to middlemen to obtain Ukrainian politicians continue to experience rebates they were legally due on value-added in setting aside differences and political con- taxes. siderations in order to compromise, cooper- Corruption poses a particular chal- ate, and enact good policy. lenge in the judicial branch, where courts Ukraine suffers from the lack of a clear, are broadly perceived as open to the highest generally accepted constitutional framework.
14 | Ukraine The 1996 constitution has been amended nu- Political parties are top-down organiza- merous times, including as part of the resolu- tions and remain based primarily on person- tion of the Orange Revolution. Unfortunately, alities, rather than representing platforms or the constitution contains ambiguous areas and large groups of people with shared political or contradictions. A key task must be to provide economic interests. Most have yet to develop clear legal rules for the functioning of govern- genuinely democratic internal structures. ment. In particular, the division of powers While the Communists can claim a party between the president and the Rada must be ideology, albeit one that is discredited in the clarified. For example, the constitution pro- eyes of most Ukrainian voters, the other four vides that the majority coalition in the Rada parties in the Rada (Regions, the Tymoshenko propose a candidate for prime minister to the Bloc, Our Ukraine/People’s Self-Defense, and president. In July 2006, the majority proposed the Lytvyn Bloc) center on party leaders and Yanukovych as prime minister and insisted the interests of the major business groups that that the president had no choice but to submit fund them. The influence of the senior politi- Yanukovych’s name. Presidential administra- cal and business leaders is amplified by the tion officials cited language in the constitution fact that the Ukrainian electorate votes on the giving the president 15 days to “consider” the basis of closed party lists; in other words, it majority’s proposed candidate and argued votes for the party list but without the oppor- that the revised constitutional language im- tunity to express a preference among those on plied the president could reject the nominee. the list. The Council of Europe’s Venice Com- Yushchenko submitted Yanukovych’s name, mission has recommended that, if Ukraine but constitutional ambiguities helped turn the keeps the party list system, it should convert 2007 political clash into a constitutional crisis to open party lists. Between elections, there that, in the end, was resolved on the basis of are few mechanisms by which the electorate a political agreement among three of the four can influence the Rada, individual deputies, or major political figures, not on the basis of the the political elite. constitution. The three major parties, moreover, are State institutions in Ukraine have yet limited in their geographic focus—Regions is to adapt to the requirements of a modern mainly an eastern party, Our Ukraine/People’s European democracy and market economy. Self-Defense a western party, and the Tymosh- Administrative reform remains a priority enko Bloc a party of the west and center—and requirement. Twinning Ukrainian ministries they reflect a division between Russophone with counterparts in EU countries could do and nationalist party identities. That said, both much to improve the situation. In particular, the Tymoshenko Bloc and Regions Party pur- Ukraine has failed to develop regional and lo- sued cross-regional campaigns in the last two cal governments that are accountable to their parliamentary elections, and the 2007 Rada citizens. Oblast governors are appointed by election produced some indications that the the president and not popularly elected. Their Tymoshenko Bloc and Regions have begun to accountability thus is to the president and not erode the political divide separating eastern the local electorate. Although Ukrainian po- and western Ukraine. litical leaders have talked about reforming the selection of oblast governors, there has Social Problems been no progress. In this context, both re- Ukraine suffers from unreformed and ineffi- gional and municipal governments should cient education, health, and pension sys- be given their own tax revenues and their tems. While the country inherited a talented own responsibilities. and highly educated population, chronic
Ukraine’s Shortcomings and Setbacks | 15 underfunding of the education system threat- has failed to abolish the commercial code, ens to erode this advantage. Allegations that which is Soviet in orientation and often students can buy entry into universities or contradicts the economic language in the purchase grades have further undermined the more modern civil code. Such contradic- system. The health care system, likewise poor- tions impose severe costs on businesses and ly funded, struggles to cope with the problems discourage investment. Frustration with this created by poor diet, heavy use of tobacco and can lead individuals or businesses to operate alcohol, and a lack of physical exercise. Rising in the informal economy, which is more vul- rates of infectious diseases such as tuberculo- nerable to corruption and denies the govern- sis and HIV/AIDS have contributed to shorter ment tax revenue. Yet another problem that life expectancies, especially for men, and a needs to be addressed is poor guarantees in sharp demographic decline that has seen legislation and weak protection in practice for Ukraine’s official population fall from almost property rights. 52 million in 1991 to 46 million today—some Ukraine has one-third of the world’s black analysts suggest the actual Ukrainian popula- earth and should be an agricultural power- tion is even lower. The pension system barely house. But the free sale and transfer of farm- meets the needs of a significant number of land is not permitted, hindering the develop- pensioners, even though it consumes as much ment of a rural land market and depriving as 14 percent of GDP, and the ranks of pen- poor Ukrainian farmers from taking advan- sioners will swell over the next 30 years. tage of their most important asset and limiting their participation in the broader economy. Economic Problems The inability to buy and sell land is a key fac- tor responsible for the undercapitalization of Although Ukraine has put in place the basic Ukraine’s potentially rich agricultural sector. institutions of a market economy and enjoyed Ukraine has achieved major progress in eight years of strong growth, the slow pace of privatization, but the momentum seems to regulatory and other economic reforms has have slowed, as little has been offered over the restrained the economy from achieving its past two years. Entities such as Ukrtelecom full potential. In particular, the government could attract great interest from investors, has intervened in markets, preventing prices generating significant sales revenues for the from sending the proper signals and thereby government and new investment into priva- reducing economic welfare. The government tized businesses. The government should act has periodically intervened when prices have to put such assets up for sale in open, trans- risen on key commodities, such as bread and parent, and competitive tenders. gasoline, creating shortages and forestalling Although Ukraine is in the final stage responses in supply. Energy prices remain of its World Trade Organization accession controlled, encouraging the wasteful use of process, it has taken far longer than expected. energy and reducing incentives for expand- WTO membership will integrate Ukraine ing domestic production of gas and oil. The more closely into the global economy and government has also imposed export bans give Ukrainian exporters the means to expand on wheat and other grains, impoverishing their market access. Ukraine should complete Ukrainian farmers and disrupting agricultural the process in early 2008. markets. And the economy remains plagued by extensive corporate raiding that goes be- yond the legally permissible. The government has passed two con- flicting codes of laws governing business. It
16 | Ukraine Vulnerabilities in the disincentive to investment in Ukraine’s energy sector. For example, Cardinal Resources, Energy Sector an American firm, found that the revenues received did not cover its costs and thus sold Ukraine remains a highly inefficient user of its interests in Ukraine to a Kuwaiti company energy. In fact, Ukraine has the highest ratio to avoid bankruptcy. The alleged rational for of energy use to per capita GDP in the world, the government decree imposing the prices making the country the world’s most energy- was to increase revenue to the state, but it has intensive economy. Ukraine uses, for example, led instead to a decrease in production and a more than twice as much energy per dollar of loss of overall revenue from the energy sector. GDP output as does Poland. It has also made other U.S. firms less willing Ukraine lags considerably behind other to invest in Ukraine. This decree has inflicted Eastern and Central European nations in long-term damage to Ukrainian efforts to at- modernizing its energy sector, particularly tract Western investment in the energy sector. those now in the European Union. Although Ukraine has become more dependent on tariff reform has started, gas and electricity energy imports. The number of automobiles prices are still in many cases below the cost in Ukraine is increasing very rapidly; while to the distributor, particularly for residential a strong indicator of the growing affluence household use. Prices are among the lowest of the middle class, this adds greatly to the in Europe, reducing incentives to conserve country’s energy import burden. There has energy. Urban heating remains particularly in- been little action on the part of the govern- efficient; absent individual apartment heating ment to decrease gasoline consumption. thermostats, an open window in winter serves Gazprom, acting through alleged joint as a principal method of regulating room stock companies, and with the acquiescence of temperature. An estimated 30 percent of the Naftogaz Ukrainy, has over the past two years energy for district heating is lost, primarily increased its control of Ukraine’s domestic due to lack of investment in maintenance and gas market. Indirectly, this has given Russia renovation, poor insulation of steam pipes, greater control over large parts of the Ukrai- low tariffs, and lack of metering. nian economy, adding to the disincentives for The energy regulatory framework remains Western competitors to invest in energy devel- weak and highly politicized. Favored indus- opment in Ukraine. trialists and some energy-intensive sectors Although Ukrainian officials sometimes receive subsidized energy rates. Greater busi- talk about importing oil from the Caspian, ness transparency, coupled with tariff reform most of Ukraine’s oil continues to come from and energy efficiency gains, would help reduce Russia. Ukraine has six major refineries, four or eliminate the constant buildup of payment of which are controlled by Russian oil compa- arrearages to Russian and Central Asian gas nies (TNK-BP, Lukoil, Taftneft, and Alliance suppliers. The country needs to gain and all own refineries). Refinery operators have maintain a reputation for paying its energy found themselves in a difficult position on the bills in a consistent and timely manner. Ukrainian market. On the one hand, Russian Over the past year, energy firms involved refineries receive cheaper crude oil because in joint ventures or joint activity agreements they do not have to pay the high export tariffs extracting gas or oil within Ukraine, including the Russian government imposes on crude foreign-owned energy companies, have had to exports going elsewhere. On the other hand, sell their oil and gas at government-imposed Ukrainian refineries are relatively unsophisti- prices that are significantly below produc- cated and inefficient, so they have a hard time tion cost. This understandably has been a
Ukraine’s Shortcomings and Setbacks | 17 competing with cheaper imported gasoline structure, including the major natural gas and and diesel fuel from Central Europe. oil pipelines to Europe. This adds credence to Ukraine’s energy sector benefits from, but Russian charges that Ukrainians are unable to is also complicated by, the country’s role as a efficiently manage the major pipeline systems transit point for some 80 percent of Russian to European markets and Moscow’s efforts to exports of oil and gas to the European Union. justify the construction of costly new pipelines More oil and gas flows traverse Ukraine than bypassing Ukraine as necessary to guaran- any other country in the world. The gas transit tee the delivery of Russian energy supplies trade is particularly opaque and open to cor- to Western Europe. Even Ukrainian energy ruption. In contrast to oil, where a number observers concede that Ukrainian business of Russian exporters compete with suppliers groups—often with the support of the Russian from the Middle East, a single state-controlled distributor—systematically “divert” gas flow- company, Gazprom, controls all the gas ex- ing into the trans-European pipeline system. ports flowing from and through Russia. In the As much as 22 percent of gas imported from case of Ukraine, Gazprom channels exports Russia is estimated to “leak” out of the system through a company, RosUkrEnergo, jointly in this manner. Some of the leakage may oc- owned by itself and a “Ukrainian company.” cur with the assistance of Gazprom’s subsid- RosUkrEnergo generates huge profits, but iaries operating in Ukraine. This diversion there is little transparency about its opera- creates enormous profits for both Russian tions, and the added value that it contributes and Ukrainian businessmen, but Ukraine is for its profits is unclear. Within Ukraine, assigned most of the blame by the European Gazprom collaborates with murky business consumer countries. interests to create a nontransparent energy distribution system that keeps out more Uncertainties in transparent Western competitors, damaging Ukraine’s energy and security interests. This Ukraine’s Relations system unfortunately has had the support of with the West key Ukrainian officials. As a result, Ukraine remains highly dependent on decisions made Despite Ukraine’s international achieve- in Moscow and has made far less progress ments, the authorities in Kyiv have failed to than it should have on improving energy ef- fully capitalize on their developing relations ficiency or developing competing supplies of with key Western institutions. The core of the gas and oil. problem during the Kuchma era (1994–2004) These vested interests, both political and was Ukraine’s self-imposed “multi-vectorism” business, have actively discouraged West- in its foreign and security policy. The evident ern investment in the energy sector, leaving search for balance between West and East was Ukraine with one of the lowest levels of for- increasingly seen as neutrality, an effort to eign direct investment in energy in the region. play one side off against the other, or even as Too many powerful individuals in Ukraine isolation from the major international institu- view foreign investment as a win-lose proposi- tions. Multi-vectorism became non-vectorism, tion, believing they and Ukraine would lose in which indecision and fence-sitting left the financially if Western firms were to increase country vulnerable to Kremlin pressures, their presence in the country’s energy sector. especially when faced with an assertive Rus- Even with the best intentions, Ukraine’s sia following Vladimir Putin’s assumption of unrealistic tariff system leaves little money power in 2000. with which to modernize its energy infra-
18 | Ukraine The period since the Orange Revolution explaining the benefits and costs of alliance has been marred by missed international membership. The government needs to take opportunities on the part of the Ukrainian an active hand in explaining what NATO is authorities, despite the openness exhibited by today and in countering Russian propaganda, Washington and Brussels after the democratic so that Ukraine’s citizens can make intelligent, breakthrough. Confusion over Ukraine’s stra- self-interested, and fully informed choices tegic orientation, especially after the appoint- about their country’s security relations. This ment of Yanukovych as prime minister in is of particular concern as NATO will want to August 2006, was compounded by the absence see evidence of public support, and the Ukrai- of decisive leadership and unified decision- nian public expects a national referendum on making among the presidency, cabinet, and NATO membership, before the government Rada. The ongoing struggle between different formally submits a request for membership. power centers over the role of the president Yushchenko, Tymoshenko and Rada Speaker in foreign policy—as evidenced by the strug- Yatsenyuk have called for conclusion of a gle over the firing of the foreign minister in membership action plan at the April 2008 early 2007—and disputes over a revised con- Bucharest NATO summit, but it is not clear stitution diminish Ukraine’s effectiveness in how much support this proposal has with the the international arena and undermine Kyiv’s broader Ukrainian public. Such divisions are security strategy. likely to prolong Kyiv’s indecisiveness and Kyiv has sent mixed signals on the ques- could be further exploited by opponents of tion of NATO membership. After a long NATO enlargement. period of favoring closer cooperation with Some of Ukraine’s international setbacks NATO, in May 2002 Kuchma announced are not solely Kyiv’s responsibility. In princi- Ukraine’s goal of eventual NATO member- ple, EU member states accept Ukraine as a Eu- ship. The Rada later approved a national se- ropean state; hence the country can qualify for curity strategy including NATO membership. accession. However, the EU approach toward This position was reinforced by Yushchenko Ukraine has contributed to stalling the prog- in the immediate wake of the Orange Revo- ress of integration. Union officials and some lution, when he specified NATO entry as a EU government leaders claim that Ukraine priority national goal. However, that strategic has not met the Copenhagen Criteria for EU choice was contradicted by Yanukovych dur- entry. In many respects Ukraine has reached ing his September 2006 visit to Brussels, when or even surpassed the level of some western he supported close cooperation with NATO Balkan states, which are on track for EU entry but said that he did not endorse early conclu- through their Stabilization and Association sion of a membership action plan as called for Agreements (SAAs), but the Ukrainian gov- by the president. ernment should devote close attention to full Strategic confusion has been accompanied implementation of the Copenhagen Criteria. by unfulfilled expectations. Even when lip ser- The differentiation between Ukraine and vice has been paid to NATO integration, this the western Balkans may not be primarily has not been underpinned by a commensurate the result of Kyiv failing to meet specific EU political commitment and an active public standards. Indeed, the Union itself appears relations campaign among Ukrainian citizens. unprepared and unwilling to give direct mem- Public support for NATO remains slender (20 bership prospects to a country of 46 million to 30 percent of those polled, little different people that would necessitate new internal from the level of support in the late 1990s), voting arrangements, a revamped agricultural and the government has not been active in policy, and other structural changes, as well
Ukraine’s Shortcomings and Setbacks | 19 as referenda on accepting Ukraine as an EU on Russian energy imports, as well as corrupt candidate in countries such as France. and nontransparent financial relationships. The European Neighborhood Policy, its This vulnerability is the single greatest Action Plan for Ukraine, the Partnership and threat to Ukraine’s sovereignty and security. Cooperation Agreement, and the EU-Ukraine Whereas traditional security analysis focuses enhanced agreement currently under negotia- on military threat and power balances, any tion are important mechanisms for promoting understanding of Ukraine’s security vulner- reform and institutional engagement, but they abilities must place at the center Ukraine’s elite have inbuilt limitations. Unlike the SAAs in entanglement in Russia’s own corrupt political the western Balkans, none of the Ukrainian economy. processes was designed to facilitate a path to The problem is not the economic relation- membership. In fact, the lumping together of ship itself. With an economy increasing in in- the EU’s Eastern and Southern Dimensions ternational integration and interdependence, placed Ukraine (as well as Moldova and Geor- Ukraine will always be vulnerable to normal gia) in a similar category with Morocco, Tuni- disruptions and shifts in trade. However, sia, and other states that are not European. the specific political vulnerability evident in The planned free trade agreement with the Ukraine’s energy relations with Russia, or the European Union following Ukraine’s WTO 2006 Russian boycott of Ukrainian meat and accession is an important incentive, but it may dairy products, stems not from the normal not be sufficient to attract Ukraine westward interdependencies of trade, but largely from in terms of consolidating efficient governance, nontransparent ownership and contract ar- institutional reform, and sustained economic rangements and the complicity of Ukraine’s performance. At the same time, Russia contin- political and business elites in corrupt owner- ues to be a major countervailing force, seeking ship and financial practices. a greater role in the Ukrainian economy and Ukraine would be vulnerable to Rus- in dominating Kyiv’s energy policy. sian political pressure if it were to be un- Ukraine has in recent years played a more able to bring trade disputes to international active role in trying to find a solution to the mediation, such as provided by the WTO, or Transnistria dispute. Kyiv can wield consider- international contract law. Failure to make able influence and should intensify its ef- substantial progress in anticorruption efforts, forts in this regard. Doing so would not only in establishing the rule of law in commercial increase the prospects for resolution, but also relations and contracts, and in advancing would burnish Ukraine’s credentials with the vigorously in integration with the European European Union and further the integration Union and other global economic arrange- of Ukraine (and Moldova) into Europe. ments, such as the WTO, do not merely constitute major setbacks in Ukraine’s in- Vulnerabilities in the ternational economic prospects (deterring Western investment and undermining mar- Relationship with ket mechanisms), they create fundamental Russia security vulnerabilities. It is also important to keep in mind that, ultimately, Russian national Although Ukraine has made progress in interests will be best served by transparent, developing its freedom for independent competitive, and commercially viable trade maneuver, the country remains unacceptably relations with Ukraine, because such relations vulnerable to Russian political and economic would help to further integrate Russia into pressure as a consequence of its dependence European and global markets.
20 | Ukraine The second major area of Ukraine’s ism, and modern ethnic conflict. Ukraine’s inadequate progression toward sovereignty past is no less complex and tortured than and independence in its relations with Russia other countries in the region that suffered or lies in an important set of unsettled disputes. allowed crimes arising from totalitarian rule First among these remains the problem of or extremist ideologies. border demarcation. Ukraine’s problems with Russia under President Putin seeks to Russia in the Sea of Azov and Kerch Strait deny the dark passages of its history, including are the clearest example, as illustrated by the Moscow’s own complicity in crimes against fall 2003 mini-crisis between Kyiv and Mos- its citizens during the Soviet period. Putin cow over Tuzla Island. The announcement in has sought to claim for Russia a status of November 2007 that Ukraine and Russia have aggrieved victim and to assert that Russia is agreed on a demarcation of their border in unjustly criticized and insufficiently appreci- the Sea of Azov is promising. If this specific ated for its role in World War II. An honest area is successfully negotiated, Ukraine should accounting would recognize Russia’s suffer- press for a comprehensive demarcation of ing and its role in defeating Nazism, but also its border with Russia. Among other reasons would acknowledge the Nazi-Soviet pact that for this priority, Ukraine’s future relationship carved up Eastern Europe, the millions killed with NATO could be affected by an unsettled by Soviet rule, and the tens of millions more border demarcation status. repressed and victimized before, during, and A related area where Ukraine has made after that war. Only an honest accounting can some progress in its relations with Russia, allow Russians to be proud of their contribu- but where there could yet be a challenge to tions yet hold the country accountable for the Ukraine’s sovereignty, is Crimea, home to a crimes of its leaders and some citizens as well. large number of ethnic Russians and, until Most importantly, Ukraine and other 2017, a significant part of the Russian Black European countries cannot allow Russia to Sea Fleet. Local ethnic Russian political manipulate the historical record in order to figures remain closely tied to Russia, actively claim the role of aggrieved victim for politi- seek Moscow’s involvement in local politics, cal advantage in pressing Russian claims and and receive financial and political support demands relating to security and political rela- from Russian sources. Ukrainian political and tions in Europe. If this were merely a matter of security authorities should not interfere in truth and history, the issues would be serious the legitimate political activities of Ukrainian enough. But establishing the truth about the citizens, but they should monitor and prevent Soviet Union and the Holodomor (the 1930s interference by Russian official sources in Stalinist state-engineered mass famine in Crimea. which millions of Ukrainians perished), as Ukraine has begun to make substan- well as Nazi Germany and the Holocaust, is tial progress on setting the historical record also about Ukraine’s ability to stand as a sov- straight in order to establish a sound basis for ereign and independent country. Ukraine has Ukraine’s political and security relationships, a special role to play in establishing the true but more work is necessary. History looms record on the collapse of the Soviet Union and large in Central and Eastern Europe, not least not letting Putin’s myth of the “greatest geo- because of the unwillingness of nations in the political catastrophe of the twentieth century” region to confront honestly their past relation- stand unchallenged. These historical interpre- ships. This is a complicated past, entangling tations are important because they are used to guilt and victimization in Bolshevism, fas- establish contemporary political legitimacies cism, the Holocaust, Stalinism, ultranational- and interstate relations.
Ukraine’s Shortcomings and Setbacks | 21 Key Tasks and 4 Recommendations
For Ukraine rule of law in general and public respect for law, and to improve the business and As the new Tymoshenko cabinet begins its investment climate. Key issues include: use first months in office, there are a number of of precedence in determining court cases; key tasks for the Ukrainian government and organizational reform to clarify the hierar- Rada at the beginning of 2008. No govern- chy between different courts; and comple- ment can do everything at once; the president tion of judicial code reforms. Measures to and the Tymoshenko cabinet must set pri- remove corrupt and incompetent judges orities. In view of its desire to integrate into are needed: while judges should be given Europe, Kyiv should consider steps that will secure tenure, they must be made account- not only mean better domestic and foreign able to the collegium of judges. Judicial policies, but that will also send a strong signal reform will be a long-term effort but needs to EU capitals of Ukraine’s commitment to to start immediately. reform and to the path of integration into ■■ Administrative reform. This is needed Europe, particularly as negotiations on an within the central government and enhanced EU-Ukraine agreement proceed. between Kyiv and the regions. Ukraine requires a modern central government bu- Political, Economic, and Energy reaucracy, staffed by a professional, honest Sector Recommendations civil service, to support a modern Euro- pean state and a robust market economy. Priority measures in the area of improving Territorial-administrative reform should governance should include: make oblast and local officials directly ■■ Constitutional reform. Ukraine’s constitu- accountable to their publics, producing tion and associated laws, such as the law more effective and responsive regional and on the cabinet of ministers, need to be municipal government. changed to eliminate ambiguities and draw clear delineations of authority between the ■■ Greater transparency and responsiveness. president and the prime minister, and be- All levels of government need to become tween the Rada and the executive branch. more transparent. Too many government Until this is done, future political clashes decisions are made behind closed doors, will carry the risk of evolving into paralyz- creating opportunities for corruption and ing constitutional crises. contributing to public cynicism about the fairness of state policy. Officials of all levels ■■ Judicial reform. Ukraine needs a judicial of government should demonstrate greater branch that can be relied upon to make fair responsiveness to Ukraine’s citizens and decisions in criminal cases, business dis- look for ways to empower civil society. putes, and other matters. Change is essen- tial to curb corruption, to strengthen the
22 | Ukraine Priority economic reform measures energy in Ukraine. The government should should include: set a schedule to move households to ■■ Commercial code abolishment. The code prices that cover costs, supplemented with interferes with the ability of businesses to policies to cushion the impact of higher operate. Due to its contradictions with the prices on the most vulnerable households. civil code, it creates a confusing legal envi- Domestic producers of gas and oil should ronment and discourages investment. receive the same prices as foreign suppliers. ■■ Free sale and transfer of agricultural land. ■■ Restructuring of Naftogaz Ukrainy. The The Rada should pass legislation that will government should immediately make facilitate creation of a land market and changes in the board of directors and man- open up access to mortgages. It should agement necessary to restructure Naftogaz stimulate an influx of private capital into Ukrainy so that production, pipelines, and the agricultural sector, which will help distribution are handled by independent alleviate poverty in rural areas and be an subsidiaries. Internal transfer pricing be- additional stimulus to the economy. tween these subsidiaries should be made at ■■ A modern tax code. The government market or full-cost recovery prices. Transit should propose and the Rada should enact and other prices should be set high enough a modern tax code. This would simplify to cover the cost of modernizing and reno- taxes for both businesses and ordinary vating the existing pipeline system. citizens, reduce possibilities for corruption, ■■ Dealing directly with Gazprom. Ukraine and eliminate assessments that unfairly should immediately repudiate its contracts fall on certain, less-well-off groups and, with RosUkrEnergo and negotiate gas in some cases, pose barriers to exports. purchase contracts directly with Gazprom. Significant work has already been done on This would increase transparency and the draft of a new code. weaken the power of oligarchs and poli- As the new government sets its gover- ticians who benefit financially through nance and economic reform priorities, it collaboration with Russian state-controlled should communicate those priorities clearly entities. to the European Union and the U.S. govern- ■■ Tax reduction.Taxes on exploration and ment. EU and U.S. assistance programs, while development projects should be reduced reduced from the levels of the 1990s, can be to bring them more in line with Western targeted to assist the identified priorities. levels. The law should also make it easier Priority measures to reform the energy for holders of exploration licenses to also sector should include: secure production licenses, thereby en- ■■ Market prices. The government should set couraging more foreign direct investment in motion a program to use markets to in the energy sector. set energy prices or, in the case of gas and ■■ Privatization. Ukraine should restart the electric power, move to full cost-recovery privatization of the remaining assets in the levels. Energy tariffs (prices) in both the energy sector through open tenders for all industrial and consumer sectors should re- assets. Such a program should draw the flect real import and domestic production interest of European and American com- costs. Only with appropriate price signals panies, thereby bringing investment and will producers, importers, and consum- more diversified ownership of Ukraine’s ers make the decisions that will result in energy infrastructure. the efficient utilization and production of
Key Tasks and Recommendations | 23 ■■ Charters. Ukraine should implement the bership action plan, but divisions remain transit protocol of the European Energy among the political elite, and public sup- Charter that stipulates the creation of a port for NATO membership is low. If they “common carrier” system. It should also wish to become a candidate for NATO, the sign and implement the Athens Energy Ukrainian authorities must demonstrate Treaty to encourage more foreign direct their long-term commitment to transat- investment in the energy sector. lantic security and values and explain to their citizens the nature and value of the Foreign Policy Recommendations alliance. ■■ NATO information campaign. An effec- The new government should pursue the fol- tive informational campaign needs to be lowing steps in the foreign policy arena: conducted to raise public knowledge about ■■ WTO accession. Ukraine should complete NATO. The advantages and obligations of the remaining details to finalize its acces- alliance membership must be explained to sion to the World Trade Organization. dissipate the Cold War stereotypes that still WTO accession will integrate Ukraine persist in Ukrainian society. While the al- more tightly into the global economy liance can help, a public information effort and reduce trade barriers for Ukrainian must be led by Ukrainian organizations in exporters. It will also satisfy the European order to be credible with the public. Union’s prerequisite for negotiation of an ■■ Greater activism in regional initiatives. EU-Ukraine free trade agreement, the con- Ukraine needs to be more actively involved clusion of which will open further oppor- in various regional initiatives, including tunities for Ukrainian businesses to export the EU’s newly launched Black Sea Syn- into Europe and for better and cheaper ergy, the Black Sea Economic Cooperation, products for Ukraine’s citizens. the South East European Defense Ministe- ■■ Enhanced agreement with European Union. rial, the South-East Europe Brigade, the Ukraine should press for early conclusion Southeast European Cooperation Initiative of a forward-looking enhanced agreement (SECI), Black Sea Harmony (the Turk- with the European Union that provides a ish-led maritime Black Sea exercises) and solid foundation for practical cooperation the Central European Visegrad initiative. as well as opportunities for deeper integra- All of these initiatives can enhance tion with the Union. Once the agreement Ukraine’s security, its regional role, and is signed, Ukraine should devote maxi- its engagement with both NATO and mum effort to implementation; few things the European Union. They can also help will make a stronger case in Brussels for reshape Ukraine’s image from a “post- creating a membership perspective than Soviet” to “Central European” state. Ukraine’s progress in consolidating a ■■ Stable relations with Moscow. While political and economic system compatible Ukraine pursues its course of European with those of EU member states. Ukraine integration, Ukraine and Russia should should strive for early completion of a work together for stable and constructive free trade agreement with the European relations. This includes pragmatic solutions Union. to bilateral problems and making clear ■■ Focus on NATO relations. In terms of its that, though Ukraine seeks to draw closer democratic and military reforms, Ukraine to Europe, this is not intended as an anti- is increasingly prepared for a NATO mem- Russian move.
24 | Ukraine For the European Union member states with efficient central resi- dential heating systems, such as Finland A Ukraine committed to transformation into and Sweden, to provide technical assis- a modern European democracy with a robust tance to Ukraine. This assistance should market economy deserves the full support include help in upgrading and metering of the European Union, as such a Ukraine is all multiunit residential systems and small exactly the kind of neighbor, and potential businesses tied into the energy system. member, that EU officials should want. A ■■ Assistance on long-term energy strategy. strong Ukraine, moreover, will be capable of The European Union should encourage the more stable and predictable relations with Rus- World Bank and the International Energy sia than a weak and undecided Ukraine that Agency to help the Ukrainian government remains adrift from international institutions. formulate a long-term energy strategy Priority tasks for the European Union and encourage the International Atomic should include: Energy Agency to help Ukraine develop a ■■ Broader travel opportunities. The European more robust program to increase efficiency Union should broaden travel opportunities and safety at all its nuclear plants. for Ukrainians to EU countries, including expanded exchange programs, particularly ■■ Support for direct contract negotiations. The educational exchanges and visa facilitation. European Union should support Ukrainian The better Ukrainians understand Europe, efforts to negotiate direct gas purchase con- its values and political and economic tracts with Turkmenistan and Kazakhstan. systems, the more they can do to accelerate ■■ An enhanced agreement with the European Ukraine’s progress on its path to Europe. Union. EU officials should negotiate an ■■ Technical assistance in the energy field. The enhanced EU-Ukraine agreement that European Union should provide technical strongly encourages Ukraine’s quick adop- assistance to Ukraine to meet goals in the tion of European political and economic energy field set by the International Energy standards. The centerpiece of the economic Agency, World Bank, European Bank for portion of this agreement should be a Reconstruction and Development, and rapidly negotiated EU-Ukraine free trade EU itself. The European Union can advise agreement. Ukraine on drawing up open tenders in ■■ Clarity on EU integration and process. line with international standards and con- An EU signal (perhaps in the enhanced taining provisions for Stockholm arbitra- agreement) regarding Ukraine’s future tion in awarding exploration, development, membership as a desirable and attainable and distribution rights. The European goal would spur the country’s political Union should fund and support twin- and economic transformation and provide ning programs and open audits involving additional international protection against representatives from the above organiza- countervailing trends and pressures from tions working alongside Ukrainians in the inside and outside Ukraine. While it is energy and industry ministries, in the state unrealistic to expect the European Union oil and gas companies, in Ukrtransnafta to reach a consensus on offering Ukraine and Naftogaz Ukrainy, and in the oversight a membership perspective in the next few committees in the Rada. years, EU officials should develop other ■■ Technical assistance on residential heating. inducements to promote deeper reform The European Union should encourage in Ukraine; not offering even a long-term
Key Tasks and Recommendations | 25 membership perspective is shortsighted way prejudge a decision by Ukraine to re- and costs the European Union significant quest membership or by NATO to extend leverage that could encourage Ukraine’s an invitation to join the alliance. more rapid transformation. EU officials must also clarify what delays to further For the United States enlargement are expected inside the Euro- pean Union as the Reform Treaty is ratified With a new Ukrainian government in place, and implemented and appropriate struc- the U.S. government needs to pursue a reen- tural changes are undertaken. EU officials ergized policy that reflects the importance need not invent new mechanisms and pro- of a successful Ukraine to the U.S. goal of a cesses for Ukraine, as these are more likely broad, stable, and secure Europe. The bilateral to be interpreted as means for keeping agenda is relatively free of problems at pres- Ukraine out of institutional Europe rather ent, which means that focus can be devoted to than drawing it in. promoting Ukraine’s accelerated transforma- tion and integration into the European and ■■ Enhanced ENP and CFSP engagement. The Euro-Atlantic institutions. Union’s European Neighborhood Policy Priority recommendations for the United with Ukraine must be enhanced with pro- States include: grams compatible with the SAA process ■■ High-level engagement. The U.S. govern- in the western Balkans. A clear distinc- ment should resume active high-level tion must also be made between the EU’s engagement with Kyiv, including at the “European neighbors” such as Ukraine and presidential and cabinet level, particu- “Europe’s neighbors” in the Middle East larly the secretaries of state, energy, and and North Africa. Intensifying engagement commerce. with Ukraine should also entail its closer involvement in the EU’s Common Foreign ■■ Broader travel opportunities. The U.S. gov- and Security Policy and participation in ernment should broaden travel opportuni- crisis management planning. ties for Ukrainians to the United States, including expanded exchange programs, ■■ NATO-Ukraine relations. Those EU mem- particularly educational exchanges, in bers that also belong to NATO should order to arm more Ukrainians with educa- support the alliance in enhancing its en- tion, expertise, and experience that will gagement and assistance programs in areas help them more rapidly transform their that will increase Ukraine’s security. The country. alliance has helped Ukraine in develop- ing civil emergency planning and disaster ■■ Dialogue with Europe. The U.S. govern- response capabilities. Further collaborative ment should continue its dialogue with the programs could be undertaken in such European Union and with NATO countries areas as security sector reform, coun- on how to foster stronger links between terterrorism, and countering organized Ukraine and Europe and the Euro-Atlantic crime. Such actions should be visible to community. the Ukrainian public so they can positively ■■ Free trade agreement. As Ukraine enters the impact on perceptions of NATO. The allies WTO and negotiates a free trade agreement should extend a membership action plan with the European Union, the U.S. govern- to Ukraine, recognizing that the objective ment should consider the merits of a bilat- of a MAP is to create the preconditions for eral U.S.-Ukrainian free trade agreement. consideration of membership but in no
26 | Ukraine ■■ Assistance on long-term energy strategy. The U.S. government should encourage the World Bank and the International Energy Agency to help the Ukrainian government formulate a long-term energy strategy and encourage the International Atomic Energy Agency to help Ukraine develop a more robust program to increase efficiency and safety at all its nuclear plants. ■■ Support for direct contract negotiations. The U.S. government should support Ukrainian efforts to negotiate direct gas purchase con- tracts with Turkmenistan and Kazakhstan. ■■ NATO-Ukraine relations. The U.S. govern- ment should support NATO in enhancing the alliance’s engagement and assistance programs in areas that will increase Ukraine’s security. The alliance has helped Ukraine in developing civil emergency planning and disaster response capabilities. Further collaborative programs could be undertaken in such areas as security sector reform, counterterrorism, and countering organized crime. Such actions should be visible to the Ukrainian public so they can positively impact on perceptions of NATO. The allies should extend a membership action plan to Ukraine, recognizing that the objective of a MAP is to create the preconditions for consideration of mem- bership but in no way prejudge a decision by Ukraine to request membership or by NATO to extend an invitation to join the alliance.
Key Tasks and Recommendations | 27
Appendix: Ukraine Facts A and Figures
General Total area 603,700 sq km
Land boundaries total: 4,663 km Border countries Belarus 891 km; Hungary 103 km; Moldova 939 km; Poland 526 km; Romania 169 km (south), 362 km (west); Russia 1,576 km; Slovakia 97 km Capital Kyiv (pop.: 2.6 million)
Administrative units 24 provinces (oblasts), plus Kyiv, Sevastopol, and Crimea
Natural resources iron ore, coal, manganese, natural gas, oil, salt, sulfur, graphite, titanium, magnesium, kaolin, nickel, mercury, timber, arable land
Population 46,299,862 (July 2007 est.)
Median age 39.2 yrs.
Population below poverty line 26.7% (2006 est.)
Age structure 0-14 yrs.: 14% (male 3.3 million / female 3.1 million); 15-64 yrs.: 69.6% (male 15.4 million / female 16.8 million); 65 yrs.+: 16.3% (male 2.6 million / female 5.0 million) (2007 est.)
Population growth rate -0.675% (2007 est.)
Languages Ukrainian 67%; Russian 24%; other 9% (Romanian, Polish, and Hungarian minorities)
Literacy 99.7%
Ethnic groups Ukrainian 77.8%; Russian 17.3%; Belarusian 0.6%; Moldovan 0.5%; Crimean Tatar 0.5%; Bulgarian 0.4%; Hungarian 0.3%; Romanian 0.3%; Polish 0.3%; Jewish 0.2%; other 1.8% (2001 census)
GDP by sector agriculture: 17.5%; industry: 42.7%; services: 39.8% (2006 est.)
Appendix A: Ukraine Facts and Figures | 29 Investment (gross fixed) 22.9% of GDP (2006 est.)
Industrial production growth 6.3% (2006 est.) rate
Current account balance -$1.933 billion (2006 est.)
Exports $38.88 billion (2006 est.)
Exports—commodities ferrous and nonferrous metals, fuel and petroleum products, chemicals, machinery and transport equipment, food products
Imports $44.11 billion
Imports—commodities energy, machinery and equipment, chemicals
Source: CIA, The World Factbook.
Economy, 2004–2008 2004 2005 2006 2007 2008
GDP growth 12.1% 2.7% 7.1% 5.0% 4.6%
GDP, U.S.$ billions 64.88 86.04 106.07 122.80 137.67
GDP per capita, U.S.$ 1,372 1,833 2,273 2,648 2,987
GDP, PPP per capita, U.S.$ 6,594 7,023 7,636 8,059 8,567
Inflation 9.0% 13.5% 9.0% 11.3% 10.0%
Source: International Monetary Fund; shaded cells are IMF estimates.
Political Type of government Parliamentary-presidential system
Chief of state (five-year term) President Viktor Yushchenko
Head of government Prime Minister Yuliya Tymoshenko
Governing parliamentary majority Our Ukraine/People’s Self Defense and Bloc of Yuliya Tymoshenko Independence day August 24, 1991
Parliament Verkhovna Rada, 5-year terms, 3% threshold
30 | Ukraine Party Representation in the Rada
Political Parties 2007 % Seats 2006 % Seats
Party of Regions 34.37% 175 32.14% 186
Bloc of Yuliya Tymoshenko 30.71% 156 22.29% 129
Our Ukraine/People’s Self Defense 14.15% 72 13.95% 81
Communist Party of Ukraine 5.39% 27 3.66% 21
Lytvyn Bloc 3.96% 20 2.44% --
Socialist Party of Ukraine 2.86% -- 5.69% 33
Others/Against All 8.56% -- 19.83% --
Total 450 450
2004 Presidential Election Results
First Round Final Round Candidates—Nominating Parties 10/31/2004 % 12/26/2004 % Viktor Yushchenko—self-nominated 11,188,675 39.90 15,115,712 51.99
Viktor Yanukovych—PR 11,008,731 39.26 12,848,528 44.20
Oleksandr Moroz—SPU 1,632,098 5.82
Petro Symonenko—KPU 1,396,135 4.97
Nataliya Vitrenko—Progressive 429,794 1.53
Source: Central Election Commission of Ukraine.
Appendix A: Ukraine Facts and Figures | 31 Largest Investors in Ukraine (percentage of total FDI)
2004 2005 Germany 7.2 33.6
Cyprus 12.2 9.5
Austria 4.0 8.7
United States 13.2 8.4
United Kingdom 10.6 7.1
Russian Federation 8.0 4.9
Netherlands 7.0 4.4
Virgin Islands (British) 6.4 4.2
Switzerland 4.9 2.7
Source: InvestUkraine.
Energy
Electricity consumption 181.9 billion kWh (2006)
Electricity exports 10.44 billion kWh (2006)
Electricity imports 20 billion kWh (2006)
Oil production 90,400 bbl/day (2006)
Oil consumption 284,600 bbl/day (2006)
Oil exports 17,880 bbl/day (2006)
Oil pipeline transmissions 934,000 bbl/day (2005)
Natural gas production 20.85 billion m3 (2006)
Natural gas consumption 73.94 billion m3 (2006 est.)
Natural gas exports 4 billion m3 (2006)
Natural gas imports 57.09 billion m3 (2006 est.)
Natural gas proven reserves 1.08 trillion m3 (2006 est.)
Sources: CIA, The World Factbook; and BP Statistical Review 2006.
32 | Ukraine Appendix: The U.S.-EU Partnership Committee B for Ukraine
The Center for Strategic and International task forces structured around four key chal- Studies (CSIS) announced on January 22, lenges facing Ukraine: political and economic 2007, the launch of the U.S.-EU Partnership transformation, energy security, Ukrainian- Committee for Ukraine. Cochaired by Zbig- Russian relations, and Euro-Atlantic integra- niew Brzezinski, CSIS counselor and trustee, tion. CSIS task force directors include Steven and Volker Rühe, former defense minister of Pifer, former U.S. ambassador to Ukraine Germany, the project supports the consoli- and CSIS senior adviser; Keith Smith, for- dation of Ukraine’s democracy and market mer U.S. ambassador to Lithuania and CSIS economy and encourages joint U.S.-EU poli- senior associate; Celeste Wallander, professor cies that enhance Ukraine’s integration into at Georgetown University and CSIS senior Euro-Atlantic institutions. associate; and Janusz Bugajski, director of the The Committee is composed of a select CSIS New European Democracies Project group of senior policymakers from the United and senior fellow in the Europe Program. In States and European countries, including addition to working with U.S. scholars, CSIS former U.S. secretary of state Madeleine Al- has reached out to experts in Europe, includ- bright, former Polish foreign minister Bronis- ing the German Council on Foreign Relations law Geremek, former Estonian prime minister (DGAP) in Berlin. CSIS also collaborates with Mart Laar, current ranking minority member Chatham House in London under the guid- of the U.S. Senate Committee for Foreign ance of its director, Robin Niblett, former Relations Richard G. Lugar, former U.S. secre- director of the CSIS Europe Program, to inte- tary of defense William Perry, former Nor- grate and coordinate European perspectives wegian foreign minister Jan Petersen, former on Ukraine. UK foreign secretary Sir Malcolm Rifkind, and former national security adviser Lt. Gen. Brent Scowcroft. The Partnership Committee has offered strategic advice and practical recommenda- tions to the governments of Ukraine, the United States, EU member states, and to EU institutions on the most effective policies for ensuring Ukraine’s progress toward political pluralism, the rule of law, market openness, and strong linkages with Euro-Atlantic insti- tutions, while also maintaining a constructive relationship with Russia. The Partnership Committee is supported by the analysis and policy advice of four CSIS
Appendix B: The U.S.-EU Partnership Committee for Ukraine | 33 About the Authors
Janusz Bugajski is director of the New Euro- Keith Smith is a senior associate with the pean Democracies Project and senior fellow Energy and National Security Program at in the Europe Program at CSIS. He chairs the CSIS. He retired from the U.S. Department South-Central Europe area studies program of State in 2000, where his career focused at the Foreign Service Institute (FSI) at the primarily on European affairs. From 1997 to U.S. Department of State. His books include 2000, he was U.S. ambassador to Lithuania. Atlantic Bridges: America’s New European Al- Additional posts in Europe included Hungary lies, with Ilona Teleki (Rowman & Littlefield, (twice), Norway, and Estonia. In addition to 2007); Cold Peace: Russia’s New Imperialism several other State Department assignments, (Praeger, 2004); Political Parties of Eastern he served as director of policy for Europe Europe: A Guide to Politics in the Post-Com- and senior adviser to the deputy secretary of munist Era (M.E. Sharpe, 2002); Ethnic Politics state for the SEED Program. His articles have in Eastern Europe: A Guide to Nationality Poli- appeared in the International Herald Tribune, cies, Organizations, and Parties (M.E. Sharpe, Economist, and Georgetown Journal of Inter- 1994); and Nations in Turmoil: Conflict and national Affairs, and he has appeared on BBC Cooperation in Eastern Europe (Westview, World, CNN, and CSNBC. His recent CSIS 1995). publications include “Russian Energy Pressure Fails to Unite Europe,” EuroFocus (January Steven Pifer is a senior adviser with the 2007) and “Current Implications of Russian Russia and Eurasia Program at CSIS. He has Energy Policies,” Issue Brief (January 2006). offered commentary regarding Russia and Ukraine on CNN International, Fox News, Celeste A. Wallander is a nonresident senior CNBC, BBC World, NPR, and VOA, among associate with the Russia and Eurasia Program others. A retired Foreign Service officer, his at CSIS, as well as a visiting associate professor more than 25 years with the State Depart- at the Center for Eurasian, Russian, and East ment included assignments as deputy assistant European Studies in the School of Foreign secretary of state in the Bureau of European Service at Georgetown University. She is the and Eurasian Affairs (2001–2004), ambassa- author of over 70 scholarly and public policy dor to Ukraine (1998–2000), and special as- articles on security affairs, in addition to Mor- sistant to the president and National Security tal Friends, Best Enemies: German-Russian Co- Council senior director for Russia, Ukraine, operation after the Cold War (Cornell, 1999.) and Eurasia (1996–1997). He also served at She is also the editor, with Eugene Rumer, the U.S. embassies in Warsaw, Moscow, and of Russia Watch: Essays in Honor of George London, as well as with the U.S. delegation to Kolt (CSIS, 2007) and, with Robert Legvold, the Intermediate-Range Nuclear Forces nego- of Swords and Sustenance: The Economics of tiations in Geneva. Security in Belarus and Ukraine (MIT, 2004).
34 | Ukraine