Welcome to the U.S.-Ukraine Business Council

Washington, D.C. (www.usubc.org)

USUBC Business Journal #5
Washington, D.C., Thursday, April 24, 2008


Clicking on the title of any article takes you directly to the article.               
Return to Index by clicking on Return to Index at the end of each article

1.  NEWS CONFERENCE: Dr. Anders Aslund In Kyiv Today
Dr. Anders Aslund, senior fellow of the Peterson Institute for
International Economics, Washington, D.C., and a long-time Senior
Advisor to the U.S.-Ukraine Business Council (USUBC) will hold
a news conference in Kyiv, Ukraine, on Thursday, April 24, 2008,
at 5:30 p.m. at the UNIAN News Conference Room, Khreshchatyk
4, to discuss the serious problem of inflation in Ukraine. Aslund said
in his e-mail yesterday, "This policy must stop."
U.S.-Ukraine Business Council (USUBC)
Washington, D.C., Thursday, April 24, 2008

Oxford Business Group, Online Economic & Political Briefings
United Kingdom, Tuesday, 22 April 2008

OP-ED: By Anatoliy Halchynskiy
Kyiv Post, Kyiv, Ukraine, Thursday, April 24 2008

Ukraine's inflation has got out of control. This inflation
crisis is Ukraine's most urgent economic problem.
OP-ED: By Anders Aslund, Senior Fellow of the Peterson
Institute for International Economics, Washington, D.C.
Kyiv Post, Kyiv, Ukraine, Thursday, April 03 2008

By Natalya Zinets, Reuters, Kyiv, Ukraine, Tuesday, April 22 2008

It is extremely significant that within the past half-year the council's
[USUBC] membership has nearly doubled. Now it includes over
60 American companies.
Interview with Ambassador Oleh Shamshur
Ukraine's Ambassador to the United States of America
By Mykola SIRUK, The Day #13, Kyiv, Ukraine, 8 April 2008

Morgan Williams, SigmaBleyzer
President, U.S.-Ukraine Business Council (USUBC)
Welcome to Ukraine magazine, Kyiv, Ukraine, March 2008

Ukraine - 2008 Article IV Consultation: Preliminary Conclusions
of the IMF Mission to Ukraine
International Monetary Fund (IMF)
Kyiv, Ukraine, Mon, Mar 31, 2008

WTO, Import Policies, Standards, Procurement, Export Barriers,
Intellectual Property Rights, Services Barriers, Investment
Barriers, Electronic Commerce
National Trade Estimate Report - Ukraine
Office of United States Trade Representative (USTR)
Washington, D.C., Friday, March 28, 2008

U.S. Government, Government of Ukraine
Washington, D.C., Kyiv, Ukraine, Tuesday, April 1, 2008
 NEWS CONFERENCE: Dr. Anders Aslund In Kyiv Today
"The policy of inflation must stop."

U.S.-Ukraine Business Council (USUBC)
Washington, D.C., Thursday, April 24, 2008

KYIV - Dr. Anders Aslund, senior fellow of the Peterson Institute for
International Economics, Washington, D.C., and a long-time Senior
Advisor to the U.S.-Ukraine Business Council (USUBC) will hold a
news conference in Kyiv, Ukraine, on Thursday, April 24, 2008, at
5 p.m. at the UNIAN News Conference Room, Khreshchatyk 4 to
discuss the serious problem of inflation in Ukraine. Aslund said in
his e-mail yesterday, "This policy must stop."
[return to index] [U.S.-Ukraine Business Council Monitoring Service]

Oxford Business Group, Online Economic & Political Briefings
United Kingdom, Tuesday, 22 April 2008

Ukraine's inflation continues to spiral out of control, becoming Ukraine's
most urgent economic worry. Ukraine's inflation rate hit 26.2% year-on-year
in March, up from 21.9% in February and 19.4% in January, according to
official statistics.

Ukrainian officials place much of the blame for the current spike in
inflation on rising global food prices, higher charges for imported gas and
an increase in budgetary spending. The price of bread has risen by more than
20% year-on-year in each of the last three months.

The price of eggs has risen by an average of 68% and the price of vegetables
by 57%, though the largest gains have been registered in the price of edible
oils and vegetables; the former rose by 115% in March and the latter by
100%. In 2007 Ukraine suffered and exceptionally poor harvest so these
issues have impacted Ukraine more so than most countries.

Gas prices have also played a major factor in Ukraine's inflationary surge.
Ukraine buys gas from Russia at the rate of $179.5 per 1000 cubic metres -
40% cheaper than global prices of $250 per unit but a lot higher than the
$70 it paid two years ago.

In 2006 Russian gas was $95 per 1000 cubic meters. Combine this with the
fact that Ukraine's fiscal policy has been expansionist over the past few
years, it appears that inflation will continue to plague Ukraine throughout

Annual inflation in 2007 hit 16.6% and the government of Prime Minister
Yulia Tymoshenko has pledged to contain the figure this year to 9.6%
through measures it has promised to unveil soon.

In an interview on Ukrainian TV, Prime Minister Yulia Tymoshenko vowed to
overcome inflation soon. "I made a commitment to the country when I became
prime minister that we would overcome the galloping inflation we inherited
from the previous government within five or six months," she said.

"This is a realistic forecast. And in five or six months time, I will report
to the country on the halting of inflation. In five or six months, there
will be no inflation in the country," she added.

Ukrainian and international experts are sceptical about the pledge of
Tymoshenko, with most predicting a rate for the year of 12-15%. According
to the International Monetary Fund's (IMF) forecast, average annual
inflation in Ukraine would hit 20-22% in 2008.

"I have to say there is an unusual amount of uncertainty about this
forecast," Robert Ford, IMF mission head for Ukraine, was reported as
saying. "If you ask me in two months' time, my forecast may be different."

While global food prices and rising energy costs have had a negative impact
on inflationary pressure, most of the inflation can be attributed to the
dollar falling in relation to the Euro. As of February 2008 the US dollar
had decreased in value by 12% against the Euro. As a result, Ukraine imports
the inflation of rising international food and energy prices through its
dollar peg.

The Hryvnia rate has been de facto pegged to the dollar since 2000,
fluctuating within a narrow corridor between 5.0 and 5.05 Hryvnia per one
dollar since 2005.

Although the National Bank of Ukraine (NBU) has plans afoot to relax the
band within which the currency fluctuates, the inflation pressure is set to
pervade and worsen if the dollar continues to plummet.

Many experts agree that it is time to liberalise the Hryvinia and allow it
to appreciate against the US dollar. The IMF, the Organisation for Economic
Cooperation and Development (OECD), and a range of international economists
have long urged Ukraine to alter its exchange rate policy in such a fashion.

Poland and the Czech Republic have long pursued a policy targeting
inflation, which has led to lower and predictable inflation rates.

The Governor of the National Bank of Ukraine (NBU), Volodymyr Stelmakh,
told local media, "The pre-conditions for strengthening the Hryvnia are now
in place." However, the Governor made similar comments last year and no
measures have been introduced.

There seems to be a psychological block preventing the NBU from pushing
ahead with the move. Ukrainians have grown accustomed to a stable exchange
rate and there is some concern about how economic agents, businesses,
households and investors will behave if the Hryvnia appreciates.

Immediate measures must be taken, but as Tymoshenko continues to pursue
a populist agenda leading up to the Presidential election in 2010, it is
unlikely she will reduce public spending, although the IMF recommends to
tighten the fiscal policy and aim for a balanced budget.
General Enquiries: enquiries@oxfordbusinessgroup.com
Editorial Enquiries: cmartin@oxfordbusinessgroup.com
LINK: www.oxfordbusinessgroup.com
[return to index] [U.S.-Ukraine Business Council Website: www.usubc.org]

OP-ED: By Anatoliy Halchynskiy
Kyiv Post, Kyiv, Ukraine, Thursday, April 24 2008

Unfortunately, our warnings, published in Dzerkalo Tyzhnia last October,
about the danger of Ukraine's entering an inflationary spiral, are proving

In the beginning of 2008, the prices for consumer goods rose by 9.7 percent
from the prior quarter and by 26.2 percent from the same year­ ago quarter.
To compare, Russia's consumer goods index rose at 1.2 percent while
Kazakhstan's was merely 0.6 percent.

The government forecast about inflation does not reflect the current
reality. Therefore, it is impossible to correctly define ant
policy mechanisms or take appropriate action.

The government commits a fundamental error by saying that the inflation was
caused in 2007, when the prices rose 17 percent. The inflationary model
being used is flawed.

[1] We have to answer the question of why between 2001 and 2004, the annual
average inflation was about 0.5 percent, yet between 2005 and 2008 the index
tripled. The reason is obvious. The acceleration is caused by escalating
distortions in socio­economic policy.

In 2001 to 2004, the growth of net remuneration exceeded Gross Domestic
Product (GDP) growth by 2.1 times (the optimal correlation is 1.4-1.5), in
2005 it exceeded the GDP growth by 11.7 times more. This year the practice
was repeated and the inflation pressure on the Ukrainian economy became

The inflation spiral can be solved only by lowering the social load on the
economy. Such steps need to be taken into account now with amendments
to the 2008 budget.

[2] Secondly, one should answer the question why the danger of price growth
ranges between 2 to 4 percent in the US, between 2 and 3.5 percent in the
EU, between 3.5 percent and 8 percent in Eastern Europe, but in Ukraine it
exceeds 20 percent.

Again the answer is obvious - the variance of market regulators. We have
finished the basic phase of market economy creation.

We can repeat the slogans of competition and intensification thousands of
times, but if the mechanisms of each unit of private property is
inoperative, a land market doesn't exist, the stock market and housing
market remain fledgling, and the post failed social policies remain
operative, in particular the policy on the provision of pensions, it is
nonsense to speak about competition efficiency and its ability to stabilize

The issue of market transformations has been ignored for three years.

[3] Thirdly, it's necessary to make the policy of macroeconomic
stabilization a priority. The position of National Bank of Ukraine (NBU)
officials who openly warn about the danger of strict monetary policy for
real economy is rather strange.

This reveals an incompetent misunderstanding of the fact that the inflation
spiral not only depreciates personal incomes but also devaluates investment
potential and stunts the prospects for economic growth.

We should also recognize the real complications of macroeconomic
stabilization policy. Such a policy means the organic unity of budget and
currency stability.

One of the fundamental instruments for decreasing inflation  from 501.2
percent to 19.1 percent in 1994 to 1999 was not only the commercial policy
but also the reduction of state consumption: the on expenditures were
reduced from 52.4 percent to 26.7 percent of GDP.

The budget deficit has reduced from 8.9 percent of GDP in 1994 to 1.5
percent in 1999. In 2000 and 2002, we had a budget surplus.

Today, government expenditures (consolidated budget expenditures plus
pensions) are nearly half of the GDP and the budget deficit is up to 2
percent. This fuels the current inflationary level. In such a situation, any
stabilizing actions of NBU will remain inefficient.

But this fact doesn't lessen the necessity of a fundamental reform in
monetary policy, where the focus is on controlling inflation based on the
world economic experience and deep liberalization of currency policy.

But such a policy has to take into account Ukraine's membership in the World
Trade Organization (WTO). The instruments of a currency policy in WTO are
extremely important for the defense of the national market, in particular
from import inflation.

Fourth, it's necessary to form a natural basis for no growth
of social payments - to provide the rate of labor productivity growth with
instruments of economic policy. The question is about transformation
mechanisms for increasing personal incomes of the population into efficient
demand, which is dominant in the Keynesian model of economic policy.

The realization of such an aim requires efficient economic and fiscal
mechanisms of an adjustment of the correlation between consumer and
investment demand with emphasis on the later.

The elements of such a policy are clear. They are, a significant decrease of
the tax load, stimulate innovation (first and foremost in energy
conservation), and intensification of the real property market (especially
housing construction).

The stimulation of agriculture is extremely important. Now it is impossible
to regulate the balance in the food market with the help of growing imports
as it was in 2005, because the world food prices are systematically rising.

Another prospect in Ukraine are institutional investment measures to
stimulate Ukrainian agro development, which can satisfy domestic
and international demand. We have no right to lose this chance. In such a
way, the partial re­orientation of money flows from social sphere to
agro­industrial complex would be a good step.

Agriculture and house are the most social and
disinflationary spheres of economy. Their development is to be stimulated
by the government.

There are other important directions of ant policy, which in
combination with each other can give positive results. The government has
to realize one obvious thing: today the professionalism and efficiency of
its policy are measured by effective action.

The society is fed up with political declarations. The price pressure is
evident everyday, every citizen feels it. So the traditional
information spin is useless.

What we need today is urgent action addressing the present situation and a
development of an efficient three ant policy with
short-term, mid­term and strategic long-term measures, which when used
together can stabilize inflation.

It's not about returning the inflation to the previous year's result, as
they say on Bankova, but about the prospect of 4 to 5 percent annual price
Anatoliy Halchynskiy was a macroeconomics advisor to former President
Leonid Kuchma for 10 years and serves as a professor at the Institute of
Strategic Evaluation sponsored by Kuchma's Ukrayina Presidential Fund.
LINK: http://www.kyivpost.com/opinion/oped/28890/
[return to index] [U.S.-Ukraine Business Council Monitoring Service]=========================================
Ukraine's inflation has got out of control. This inflation
crisis is Ukraine's most urgent economic problem.

OP-ED: By Anders Aslund, Senior Fellow of the Peterson
Institute for International Economics, Washington, D.C.
Kyiv Post, Kyiv, Ukraine, Thursday, April 03 2008

Let the hryvnia exchange rate appreciate to contain Ukraine's inflation.

Ukraine's inflation has got out of control. In February, it surged to no
less than 22 percent over February 2007, doubling from 11.6 percent in 2006.

This inflation crisis is Ukraine's most urgent economic problem. Unlike in
the 1990s, the problem is not the budget, which is close to balance.
Instead, the main culprit is the inept exchange rate policy.

Most of the inflation can be explained by the dollar falling in relation to
the euro by 12 percent in this period, and the euro is much more important
than the dollar in Ukraine's foreign trade. Ukraine imports the inflation of
rising international food and energy prices through its dollar peg.

The hryvnia rate has been pegged to the dollar since 2000, at a fixed 5.05
hryvnia per one dollar since 2005. The inflation will continue to rise if
the dollar plummets.

Strangely, many Ukrainian industrialists claim to be happy with Ukraine's
exchange rate policy. These businessmen harbor the dangerous illusion that
this is good for Ukraine's competitiveness and exports to maintain a low
exchange rate. In reality, this exchange rate policy harms Ukraine's
competitiveness and must be abandoned.

Such reasoning confuses the nominal exchange rate, which has been fixed,
and the real exchange rate that has risen sharply. For the last eight years,
Ukraine has enjoyed a real economic growth of 7.4 percent a year, but the
GDP measured in current dollars has risen by no less than 24 percent a year.

This means a real appreciation of the hryvnia in relation to the US dollar
of nearly 17 percent a year from 2000 until 2007, because the real
appreciation is the sum of nominal appreciation (which has been zero) and

The dollar peg does not only make Ukraine import inflation, it also breeds
additional inflation, which undermines the country's competitiveness. The
dollar peg forces the National Bank of Ukraine (NBU) to maintain a negative
real interest rate and pursue an extremely loose monetary policy, because
Ukraine's current discount rate is a paltry 10 percent a year.

With inflation of 22 percent per year, a normal interest rate yielding a
real interest rate of 3 percent per year would be 25 percent per year. But
such a high nominal interest rate in dollar terms is neither desirable nor
feasible with a dollar peg, because it would lead to a huge, short-term,
speculative inflow, which would flow out after an inevitable appreciation.

Because of its sharply falling real interest rates, Ukraine's money supply
(M3), which increased by 35 percent in 2006 exploded by 52 percent in 2007.
After the financial crises of the 1990s, such increases were permissible, as
the Ukrainian economy was undergoing a fast demonetization, but today the
result is massive inflation.

Ukraine needs to approximately halve its monetary expansion. Otherwise
inflation might rise toward 30 percent for no good reason. Such high
inflation will render economic calculation highly unpredictable, disorganize
the economy, and dampen growth.

Admittedly, many transition countries have had double-digit inflation for
years without apparent negative effects, because while converging with
European economies, their price levels are also converging, but no
inflation over 10 percent a year is permissible.

Ukraine's government and National Bank need to focus on getting inflation
under control. First of all, the exchange rate policy must be changed to
allow the hryvnia to appreciate. The standard advice is to broaden the
currency band.

Officially, the NBU has set it at 4.95­5.25 hryvnia per dollar, but until
mismatch it intervened and bought dollar when the hryvnia tended to
appreciate. The simplest policy change is to broaden the band further and
let the hryvnia rise.

Then, Ukrainians will quickly learn that it is uneconomical and insecure to
hold dollars, and they will exchange their dollars for hryvnia or euro. As a
result, the far-reaching dollarization of the Ukrainian economy will ease,
reducing the currency risk, to which many Ukrainian enterprises and
individuals are exposed.

After some time of controlled hryvnia appreciation, the NBU can move on to
a floating exchange rate, which presumably will rise substantially because
of the substantial capital inflows.

An alternative approach would be to follow Russia's example, by relating the
exchange rate to a basket of euro and dollar, which allowed for an effective
ruble appreciation of 7 percent in each of the last two years.

Considering how far the dollar has already fallen, however, and how high
Ukraine's inflation has soared, this step would be belated and insufficient.
Although its inflation stays at a more moderate 13 percent, Russia is on its
way toward free float. Ukraine needs faster improvement.

When Ukraine has adopted a floating exchange rate for the hryvnia, the
NBU can finally raise its interest rates, so that real interest rates become
positive without nominal rates skyrocketing. The NBU can restrain the
monetary expansion and contain inflation.

The International Monetary Fund, the OECD and a range of international
economists have long urged Ukraine to alter its exchange rate policy in such
a fashion. Poland and the Czech Republic have long pursued such a policy
of inflation targeting, which has led to low and predictable inflation.

Until recently, the cost of Ukraine's inappropriate exchange rate policy was
limited. But at least three things have changed with the current financial
crisis: the dollar is slumping, and the hryvnia with it; international food
and energy prices are soaring; and domestic inflation has doubled.

Therefore, Ukraine can no longer afford to pursue an exchange rate policy
that lacks intellectual underpinning.

Let the hryvnia exchange rate appreciate to contain Ukraine's inflation!
Anders Aslund, who is a senior fellow of the Peterson Institute for
International Economics, Washington, D.C., is the author of "How
Capitalism Was Built: The Transformation of Central and Eastern
Europe, Russia, and Central Asia." Aslund has served as a senior
advisor to the U.S.-Ukraine Business Council (USUBC) for several years.
LINK: http://www.kyivpost.com/opinion/oped/28759/
[return to index] [U.S.-Ukraine Business Council Monitoring Service]==========================================
U.S.-Ukraine Business Council Website: http://www.usubc.org

By Natalya Zinets, Reuters, Kyiv, Ukraine, Tuesday, April 22 2008

KIEV - Ukraine's government and central bank are taking proper action to
reduce inflation and can expect to see a decline in the rate from mid-2008,
the International Monetary Fund said on Tuesday.

Two IMF representatives, in an interview with Reuters, also praised the
central bank for allowing a degree of flexibility in the hryvnia currency's
movements on foreign exchange markets.

Year-on-year inflation in Ukraine hit 26.2 percent in March. Government
forecasts for the year still stand at 9.6 percent, though they are certain
to be revised.

Prime Minister Yulia Tymoshenko's government has promised to introduce
anti-inflation measures and the central bank this week raised its discount
rate from 10 to 12 percent.

"I would point out that both the government and the central bank have been
taking steps and many of those steps are, in our view, quite positive,"
Balazs Horvath, the IMF's permanent representative in Ukraine, said.

He said Tymoshenko was correct in saying the rate could decline from
mid-2008, provided the government and central bank worked in tandem.

"I believe Mrs Tymoshenko is correct...if the efforts of the central bank
and the government are sustained to tighten conditions and manage demand,"
he said.

"And more importantly, if the central bank and the government cooperate in
an effective manner, then certainly it is possible to attain inflation that
is significantly lower on a 12-month basis than it is at present."


The IMF, in a Regional Economic Outlook released on Tuesday, identified
increases in government social benefits, excess demand, surging money supply
and market rigidities as the main reasons for high inflation in Ukraine.

On foreign exchange, Horvath said the central bank's easing of a tight
corridor for the hryvnia could only help the economy.
"The recent steps indicate that the central bank has on some occasions
allowed the exchange rate to move more than in the past and we consider as
very positive steps in the right direction," he said.

The central bank has maintained a corridor of 5.0 to 5.06 to the dollar
since August 2005, but it has allowed the currency to rise to 4.8-4.9 in
recent weeks. The IMF and other Western institutions have long called for a
more flexible approach.

The IMF has said that diverging from the corridor will cause no harm to the
economy and, rather, enable the central bank to pursue a more efficient
monetary policy.

Dora Iakova, a senior IMF official dealing with Europe, said tighter control
over money supply and more expensive credits would allow Ukrainian banks
to improve efficiency.

"A slowdown in credit growth is really desirable for Ukraine. Up until now,
the goal of the banks has been just to gain a market share and there has
been quite aggressive lending,," she said.

"But from now on the emphasis will really shift to staying liquid, in good
financial shape. And more prudent lending could be emphasised as opposed
to just gaining market share." (Writing by Ron Popeski; Editing by Gerrard
[return to index] [U.S.-Ukraine Business Council Monitoring Service]
It is extremely significant that within the past half-year the council's
[USUBC] membership has nearly doubled. Now it includes over
60 American companies.

Interview with Ambassador Oleh Shamshur
Ukraine's Ambassador to the United States of America
By Mykola SIRUK, The Day #13, Kyiv, Ukraine, 8 April 2008

Some political forces in Ukraine say that the US is not fulfilling its
obligations vis-a-vis Ukraine and that Washington is controlling Kyiv. Do
such statements correspond to reality?

Did the first US president's visit to Ukraine in seven years meet the
expectations of the Ukrainian side? Is it important for us that the US
recognizes the Holodomor as an act of genocide against the Ukrainian nation?

These and other questions are raised in The Day's interview with Ambassador
Extraordinary and Plenipotentiary of Ukraine to the US Oleh SHAMSHUR,
who took a direct part in preparing for the US president's visit.


[THE DAY] With regard to the role of the United States in the world, one
can see that the US is not so invincible and that things have not always been
good with respect to its obligations.

Many people cite examples of Ukraine's rejection of nuclear weapons and the
advantageous contract to supply turbines to Iran's nuclear power plant in
Bushehr, yet Ukraine has not received any of the promised compensations
from the US.

On the other hand, some political forces say that Washington is controlling
our state. Could you comment on this?

[AMB SHAMSHUR] "I will start with the second question. The active and
dynamic character of Ukrainian politics, the presence of powerful political
forces and parties, a free press and developed civil society are probably a
guarantee of the fact that this is not happening. Under these conditions, it
is difficult to imagine any country exerting influence on the formulation of
critical decisions.

On the other hand, it is a positive thing that in all sorts of ways the US
has supported and continues to support the democratic character of the
development of Ukrainian society and economic reform, and is providing
assistance to resolve such questions as the struggle against corruption and
AIDS and overcoming the consequences of the Chornobyl catastrophe.

The US's contribution to Ukraine's economic development is positive and
corresponds with the main line of Ukraine's development.

As for the rejection of nuclear weapons, this was a correct and timely move.
Ukraine thus focused on resolving truly essential questions and did not
start living with illusions of grandeur because it possessed nuclear

The Bushehr situation is more complicated. But I would like to underline
that in our country people do not know that a number of important projects
for Ukraine have been completed.

The best example is Sea Launch. I would like to emphasize that the fact that
we have normal, constructive relations with the US does not mean that we
will not insist on resolving Ukraine's most important problems. We are
conducting a very intensive dialog with the US, one that is not always
simple, in those spheres where we see that our interests should be better

[THE DAY] Is there any progress on the question of utilizing rocket fuel at
the Pavlohrad Chemical Plant? This was also one of the US's obligations
vis-a-vis Ukraine.

[AMB SHAMSHUR] "The dialogue continues: that is all I can say here without
going into details because this topic is rather sensitive. The US has made
concessions on certain key questions, and where others are concerned we
still have to convince the American administration about them. This question
has been included in the Road Map at our proposal.

Thus, this is a guarantee that we will continue to defend our approach in
the constructive dialog. This also includes the question of fighting against
biological threats. Here we also have some differences of opinion. But we
are making joint efforts to overcome them."

[THE DAY] During the meeting between presidents Bush and Yushchenko
emphasis was laid on the partnership relations between our two countries.

So can one expect that for Washington we will be the same kind of partners
as Lithuania, Latvia, and the Czech Republic, which have signed a visa
waiver deal with the US?

[AMB SHAMSHUR] "The question of liberalizing the visa regime is on
the agenda. Our Road Map talks about the task of 'strengthening bilateral
cooperation through exchanges and visits.

It also says that the US and Ukraine agree to promote personal contacts
among citizens and to focus their attention on the sphere of cultural and
educational exchange programs. Thus, we are continuing to discuss the
question of liberalizing the visa regime with the Americans.

I want to emphasize that this question is among the most complicated ones.
We expect to prolong visas. There are some positive signals in this sphere.
I believe that one should not expect a visa waiver regime at this particular

This is not a reality for all the new members of the European Union either.
I think that the crucial argument will be the regularization of migrant
exchanges between Ukraine and the US.

Frankly speaking, the smaller the number of Ukrainian illegal migrants in
the US and the fewer visas refusals, although this process is a rather
subjective one, the more arguments there will be to insist on canceling

We regularly cite the example that on our side a 90-day stay does not
require a visa. I would like to assure you that we are working on this, and
this problem is a regular part of our negotiation agenda."


[THE DAY] When will the free trade zone with the US be created, as was
announced during the presidents' negotiations? More importantly, will
Ukraine benefit from this?

There are frequent reports in the international mass media about loud
protests in many protests against signing such an agreement, particularly in
South Korea.

[AMB SHAMSHUR] "Ukraine's accession to the WTO and the signing of
an agreement on cooperation in the sphere of trade and investments are the
first steps on the way to the possible creation of a free trade zone.

Without a doubt, such a zone will be created only if it is beneficial for
Ukraine and the US. Nothing will come of this unless there is mutual

I think that the competitiveness of the Ukrainian economy will be a key
factor for us, as well as the accessibility of Ukrainian goods reaching the
United States. So, I don't doubt that this will become a reality for us only
if there is mutual interest and it is mutually beneficial. Nobody is
foisting this zone on anybody.

Certainly, the US has a rather complicated attitude to this. In observing
the debates, especially the statements made by the candidates from the
Democratic Party, one can say that they treat this in a very cautious and
skeptical way.

On the other hand, there are many politicians and experts who assert that
NAFTA and other agreements are beneficial for the United States. So, this
is a long road but the prospect is present.

By the way, on April 1 the US president spoke about the free trade zone.
And this is very important."


[THE DAY] At the press conference Bush said that 10 months remain before he
leaves the White House. Speaking about the future relations between Ukraine
and the US, which of today's presidential candidates would be the best one
for Ukraine?

[AMB SHAMSHUR] "I consider myself a diplomat of the traditional school;
therefore I try to avoid giving commentaries on the domestic situation of
the country where I am accredited.

However, if you look at the personalities, knowledge of Ukraine, and even
contacts with Ukraine, we have a unique situation where all the presidential
candidates know about Ukraine, have contacts with our country, and have
already shown their eagerness to actively cooperate with Ukraine.

This was most evident in the support for Ukraine getting the MAP. Hillary
Clinton was the first to show her support, and the very next day Barack
Obama's statement appeared, and a statement was made by John McCain at
the Munich Conference. I had an opportunity to meet McCain as well as
Obama and Clinton several times when they were in Kyiv.

We are following their activity and I have no doubts that they will be
interested in developing productive relations with Ukraine in all spheres.

One can only guess which of them will be the most active. But in principle
I think that we have every reason to be optimistic about each of them."

[THE DAY] Let's talk about whether the recent visit of the leader of the
world's most powerful state met every expectation?

[AMB SHAMSHUR] "It met every expectation to a certain extent. They were
met from the point of view of the content of the political dialog, primarily
on the question of the MAP and other issues that were discussed. They were
justified from the point of view of the personal contact between the two

It was also important that several important agreements were signed during
the visit. President Bush's visit did not have a declarative nature; it was
filled with a lot of content. Moreover, some agreements were being developed
for a long time, so this visit gave the opportunity to accelerate the pace
of work.

The Road Map contains practically everything, starting with Ukraine's
Euro-Atlantic integration to the HIV-AIDS program: these are absolutely
practical things. The approach to them envisaged that this would be a
practical concrete document.

I can also mention the signing of important agreements on space and
cooperation in the sphere of trade and investments as well as a couple of
important contracts.

The agreement signed with the Westinghouse Company means a serious
diversification of energy supply, while the agreement signed with the Holtec
Company talks about creating conditions both for storing our power plants'
spent fuel and, what is very important, for their possible usage in the
future, which may become a 'gold reserve' for the development of a nuclear
power supply."


[THE DAY] Does this mean that after signing the agreement in the sphere of
trade and investments, large American investments will come to Ukraine? Do
big American investors still have fears about investing in Ukraine?

[AMB SHAMSHUR] "Will they come or not? Irrespective of President
Bush's visit, being in touch with American business structures, first of
all, with the American-Ukrainian Business Council [U.S.-Ukraine Business
Council (USUBC)] and the US Chamber of Commerce in Ukraine, I can
say that there is serious interest.

It is extremely significant that within the past half-year the council's
[USUBC] membership has nearly doubled. Now it includes over 60
American companies.

There is interest in different branches. There is eagerness to start working
intensively in Ukraine. Indisputably, the further improvement of the
investment climate is a crucial question. We can expect investments when
they are beneficial to business structures.

We are not living in Soviet times, when a political agreement would be
signed, say, to give access to Coca-Cola or Pepsi-Cola to the Soviet market.
Business structures should see clear benefits, transparent and clear
conditions, and stability.

The more the investment climate improves the larger the investments that
will come. It is important that the problems with VAT reimbursements have
been resolved."


[THE DAY] I would like to touch on the topic of the Holodomor. Even during
the Soviet period the US held sessions on the Holodomor in Ukraine and a
corresponding resolution was approved. Is it important for us that the
Americans move further and recognize the Holodomor as genocide against the
Ukrainian people?

[AMB SHAMSHUR] "In 2006 a law was approved in the US to grant Ukraine
a plot of land in Washington for the construction of a memorial. The text of
the law states: 'the construction of a memorial to the 'famine genocide in
Ukraine.' I hope we will succeed in laying the foundation for this monument
by the end of this year.

We have information that some Congressmen are considering the possibility
of submitting a new resolution. This is absolutely important for us.

We are doing everything necessary to bring the truth about the famine in
Ukraine to the attention of the American community. In my opinion, the
ceremony of laying flowers at the memorial by the US president was very

[THE DAY] Can one expect, then, that the US will assist in the process of
the UN's recognition of the Holodomor?

[AMB SHAMSHUR] "This is a complicated question that depends on many
factors. Incidentally, the Road Map says that Ukraine and the US will
cooperate closely with the goal of commemorating and increasing the level
of public awareness about the Holodomor, including within the framework
of international organizations."
LINK: http://www.day.kiev.ua/198899/
[return to index] [U.S.-Ukraine Business Council Monitoring Service]
Morgan Williams, President of the U.S.-Ukraine Business Council,
presents his views on economic challenges that Ukraine faces in
2008 and on the ways of responding to them. OPIC still closed.

Article by Morgan Williams, SigmaBleyzer
President, U.S.-Ukraine Business Council (USUBC)
Welcome to Ukraine magazine, Kyiv, Ukraine, March 2008

The highest priority for Ukraine in 2008 is to implement the critical legal
and regulatory reforms necessary to increase the size of economy, promote
domestic and international investment, create tens of thousands of new jobs,
build the private wealth creation capacity, and integrate Ukraine into the
world business and economic system. Moving Ukraine forward in the next
few years means moving the economy forward.

The recent accession to the World Trade Organization (WTO) is a major
step forward but only one of the many steps needed for Ukraine to continue
building an independent, strong, prosperous, democratic nation for its
citizens and taking its rightful place in the community of nations.

The United States-Ukraine Business Council (USUBC), since it was founded in
1995 in Washington D.C., has worked to support the development of Ukraine's
private business sector and especially Ukraine's WTO bid.

The USUBC looks forward to Ukraine's WTO membership as a major benefit
not only for companies already doing business in Ukraine but also as a
strong attraction for additional domestic and international direct investments.
We congratulate Ukraine on this major achievement.

On January 31 of this year, Ukraine's Vice Prime Minister Hryhoriy Nemyrya,
addressed over 75 USUBC members and guests at a meeting in Kyiv. This was
Nemyrya's debut presentation before any business organization since becoming
a leading player in the new government.

Nemyrya is one of a group of well-educated and reform-minded ministers who
have become the vital center of the new Tymoshenko government. Educated
both in Ukraine and the United States, Nemyrya has in his short tenure led
the negotiations that solved an impasse with the European Commission over
WTO accession issues related to Ukraine's penchant for export duties.

As Nemyrya pointed out at the January 31 USUBC meeting, WTO accession is
just a precursor to the next and perhaps even more important trade measure
for Ukraine, the negotiation of a Ukraine-EU Free Trade Agreement.

Nemyrya said that preparations had already been made for the beginning of
negotiations. He cautioned USUBC members that negotiation of the free trade
agreement is likely to take a minimum of at least two years but that Ukraine
must begin the process now.

The VPM emphasized what the government is calling the "Tymoshenko
Transparency Initiative (TTI)" and their "Contract With Investors," Nemyrya
said that as a part of TTI, he will head the Government Committee for
European and International Integration. "If we're serious about going
global, we have to be predictable, reliable and credible partners."

USUBC member companies appreciate the positive actions the new government
has already made and believe the serious and effective implementation of the
TTI and the "Contract with Investors" would allow the business community to
expand their operations and investments in Ukraine.

The international business community is very optimistic about Ukraine's
future. This is evident in the fact USUBC has been able to triple its
membership in the past 18 months.

Working with business industry, NGO and government leaders, USUBC has
become the largest private business membership organization that focuses
on Ukraine, organized outside Ukraine.

The USUBC is now a strong voice, working together with other business
organizations, for the implementation of reforms in Ukraine that will allow
the domestic and international business community to expand. The partial
solution of the VAT refund issue is a recent example of private business
organizations and the two governments working together.

The failure of previous governments to tackle the VAT refund problem had
allowed government indebtedness to balloon to well over one billion
Ukrainian hryvnya (UAH), long overdue to companies with export operations
in Ukraine.

The figures ranged from a few million UAH for some companies to one major
exporter that reportedly owed over $100 million.

VAT refund failure had crippled some company operations to the point that
investment decisions favorable to Ukraine had been delayed and in some cases

Within a matter of weeks after the Yulia Tymoshenko government took office,
the prime minister and minister of finance announced at a January 24 meeting
with the business community in Kyiv that a new round of refunds would be
made soon.

Just as important, there was an announcement that the process would be
operated very transparently and the practice of giving refunds first to
those who would accept heavily discounted payments or engaged in corruption
would be abandoned.

Within a matter of days several USUBC members reported they had received
settlements that were as high as 80 million UAH in one case. If the
government now follows through and operates the VAT refund program in
compliance with international standards, they will have gone a long way
towards solving one of the business communities' major problems.
[Note, another round of VAT refund payments were made in April, 2008]

Additional areas USUBC business members are working
on include:

Every Ukrainian government since 1999 has made promises and then failed to
follow-up with the actions needed to resolve a small claim that could have
allowed the U.S. government's Overseas Private Investment Corporation
(OPIC) to provide hundreds of millions of dollars in political risk insurance,
loan guarantees and investment funds. This is one of the greatest missed
opportunities since Ukraine's independence and needs to be solved now.

Government actions for the past two years to severely restrict the export of
agricultural commodities have cost Ukraine hundreds of millions of dollars.
These unnecessary controls need to be removed. Private markets should be
allowed to work for the benefit of Ukraine.

Land privatization, particularly agricultural land, is a critical area.
Certainly, some safeguards must be adopted but this thorny problem can
and must be solved.

As Ukraine approaches Euro-2012, the greatest travel and tourism opportunity
in its history, bringing the country's air safety law up to international
standards is essential. Additional huge investments in infrastructure must
be planned and implementation started in 2008.

If Ukraine is to become a true partner in international trade, then it must
deal honestly and effectively with intellectual property rights. This
includes the whole spectrum in the IT area, genetics (seeds, etc), crop
protection supplies and pharmaceuticals.

The National Bank of Ukraine is widely regarded as having some of the most
restrictive and least reformed procedures of any central bank in the former
Soviet Union. Serious regulatory reform is essential for business, industry
and private interests.

The government's notorious Regulation 31 and other barriers to private
energy development must be reformed as a precursor to any serious effort
toward attracting the major energy exploration investments that are needed
if Ukraine makes progress toward energy independence.

The Ukrainian customs service is considered one of the most inefficient and
corrupt parts of the entire government structure and must undergo top to
bottom reform.

A modern, internationally accepted law on joint stock companies needs to
be passed by the Parliament.

Much of Ukraine's business and civil code is largely unchanged from Soviet
times and requires urgent reformation.

Corporate raidership and other legal issues are a huge problem since the
legal and court system does not work effectively and is subject to

Massive government reorganization must take place to improve the capacity
to plan, make decisions and implement actions needed for reform.

Inflation is too high and is a terrible burden. Inflation must be brought
under control through means other than direct and indirect government price
controls. Increased foreign direct investments, and the privatization of
more government assets are needed for economic stability.

In reciting the successes and challenges, USUBC expresses its gratitude to
the U.S. Ambassador to Ukraine, William B. Taylor, Jr., and the U.S. Embassy
staff for their outstanding work to support an improved private business

Work by the business sector, in cooperation with the governments of Ukraine
and the United States, must continue and produce real results to move
Ukraine's economic growth forward. Assisting in the development of Ukraine's
private economic and business system is USUBC's number one priority.
Morgan Williams has worked on issues related to the economic development
of Ukraine since 1993; he is Director, Government Affairs, Washington
Office, SigmaBleyzer Private Equity Investment Group and serves as President
of the U.S.-Ukraine Business Council (USUBC).
LINK: http://www.wumag.kiev.ua/index2.php?param=pgs20081/42, photos
LINK: http://www.usubc.org/news/moving_ukraine_forward.php, photos
[return to index] [U.S.-Ukraine Business Council Monitoring Service]
Ukraine - 2008 Article IV Consultation: Preliminary Conclusions
of the IMF Mission to Ukraine

International Monetary Fund (IMF), Kyiv, Ukraine, Mon, Mar 31, 2008

KYIV - The IMF report below describes the preliminary findings of IMF
staff at the conclusion of certain missions (official staff visits, in most
cases to member countries).

Missions are undertaken as part of regular (usually annual) consultations
under Article IV of the IMF's Articles of Agreement, in the context of a
request to use IMF resources (borrow from the IMF), as part of discussions
of staff monitored programs, and as part of other staff reviews of economic


The Ukrainian economy has grown strongly since 2000, supported by a robust
international environment, stabilizing macroeconomic policies, including the
de facto currency peg to the dollar and low fiscal deficits, as well as
significant structural reforms.

By many measures, Ukraine has also become better insulated against shocks.
Reserves have increased substantially and now cover 170 percent of
short-term debt or four months of imports.

The underlying fiscal position is strong: government debt is only about 10
percent of GDP, and the deficit, if maintained at the present level, would
ensure fiscal sustainability under a wide range of scenarios.

The financial sector as a whole appears to be well capitalized and
profitable, and has been strengthened by the increasing importance of
foreign banks. WTO accession and the negotiations for an EU trade
agreement should spur structural reform efforts.

However, over the last three years expansionary fiscal and incomes policies,
rising terms of trade, surging capital inflows, and a credit boom and have
led to very strong domestic demand growth and a deteriorating current
account position.

Surging demand, along with rising food and gas prices, has raised inflation
to unacceptably high levels. Moreover, inflation may be increasingly
entrenched in expectations and wage setting, partly reflecting the legal
mechanisms determining the official subsistence level and minimum wage.

Amidst turmoil in global financial markets and volatility in world commodity
prices, the Ukrainian economy also faces significant external and financial

. On the external side, the real exchange rate is still broadly consistent
with fundamentals, but overvaluation could result if inflation persists and
the current account deficit continues to widen. Also, the terms of trade may
deteriorate as Ukrainian gas prices move to world levels and because steel
prices might soften as world economic growth slows.

. On the financial side, global turbulence has heightened external financing
risks, including for rising short-term debt rollover, as interest rate
spreads have widened (more than in many other emerging markets) and
euro-bond issues have dried up.

Very high domestic lending growth, including in foreign exchange to unhedged
borrowers, points to increased credit risks, and a number of smaller banks
seem to be weak. The potential reversal of high asset valuations, notably in
some urban real estate markets, poses further risks.

Against this backdrop, the mission expects growth to slow modestly toward
a more sustainable rate in 2008, and further in 2009, as weaker world growth
reduces export demand, terms-of-trade gains moderate, and ongoing
difficulties in international financial markets tighten financing conditions
and reduce the pace of credit expansion.

Still high domestic demand growth and rising gas prices will contribute to
a further widening of the current account deficit, financed by continued
inward direct investment. However, as the economy slows and food prices
begin to stabilize, inflation should fall gradually, reaching 17 percent
(December on December) by the end of 2008.

We would emphasize the large uncertainties of this projection. For example,
a fiscal expansion or greater steel price increases would raise growth, but
also inflation. Intensified global financial market turbulence that spilled
over into Ukraine could cut growth substantially.

Given still buoyant steel prices and domestic credit expansion, we assess
the risks in 2008 as somewhat on the upside for both inflation and growth.


The mission strongly supports fundamental structural reforms, which will be
essential to ensure higher output and living standards over the medium term.
However, these reforms will take time to raise aggregate supply.

Therefore, high inflation, rising vulnerabilities, and global financial
turbulence call for near-term measures to strengthen fiscal, monetary, and
financial policies.

In this connection, the mission welcomes calls in the authorities' recent
anti-inflation program for greater fiscal prudence and better use of the
exchange rate band.

Our policy recommendations focus on current macroeconomic policy needs
and, if implemented, would contribute to stabilizing the external position
andreducing inflation, which could fall to single digits by end-2009.


For this year, the burden of controlling demand and inflation must fall on
fiscal policy, because limits to exchange rate flexibility preclude
sufficiently effective monetary policy action. A general government deficit
reduction of 1½ percent of GDP in 2008, bringing it to near balance, would
ease pressures significantly.

Holding nominal spending to the level specified in the December budget and
saving all revenue overruns, including in social funds, would largely
achieve this deficit objective; excess privatization receipts should also be

Further cuts, if needed, should be implemented by restraining subsidies and
social transfers, because these feed directly into demand and inflationary

Other fiscal measures will be needed to ensure a sustained reduction in
inflationary pressure. Minimum wage, public sector wage, and social spending
growth should be held to rates consistent with single-digit inflation; the
current increases of 20-40 percent feed inflationary pressures and undermine
anti-inflationary policies. Restitution of lost savings should be spread
over a number of years or offset by spending cuts elsewhere.

Tax cuts, which are desirable as part of an overall reduction in the size of
government, should be fully offset with spending cuts or base broadening
(for instance, via improved tax administration, especially of the VAT; by
contrast, abolishing the VAT would risk increasing evasion and move
Ukraine away from European norms).

Given the large uncertainties regarding the prospects for output growth and
inflation, the authorities should stand ready to adjust the fiscal stance as
needed. If growth does not slow as we anticipate, inflation pressures would
be stronger and a still tighter fiscal stance would be needed.

Conversely, the sustainable medium-term fiscal position provides room to
ease the fiscal stance if downside risks materialize and inflation clearly

The fiscal framework also needs strengthening. Further improving
macro-fiscal analysis would clarify the macroeconomic impact of fiscal
policy, and integrating it into the budget process would help to prevent the
procyclical stance that has characterized fiscal policy in recent years.

A multi-year fiscal framework, including spending ceilings, would facilitate
monetary-fiscal coordination and help to guide budgets toward medium-term
fiscal goals (for example, gradually reducing the size of government, or
implementing pension reform). Broader fiscal coverage and closer monitoring
of public enterprises would identify and contain fiscal risks.

Reducing the use of administered prices would improve the fiscal position
and economic efficiency. In particular, gas price increases should be passed
through fully to final users, with vulnerable groups protected by better
targeted social programs.
Monetary policy

The mission welcomes recent NBU policies to tighten monetary conditions,
including by stepping up sterilization and broadening reserve requirements.
Until inflationary pressures ease, the NBU should continue such efforts to
the extent feasible. As this will be costly, the government should accept
profit transfers from the NBU that deviate from budget targets.

However, at some point short-term capital inflows and strains on financial
institutions will limit the scope for further tightening in the current
policy framework.

The de facto exchange rate peg is no longer adequate to contain inflation,
encourages dollarization, and prevents the nominal exchange rate from
cushioning activity against external shocks.

Therefore, as anticipated in the 2008 monetary guidelines, the current
monetary framework should be replaced by, first, a more flexible exchange
rate and, ultimately, by inflation targeting.

This transition, which we recommend begin now, will require a joint and
coordinated effort between the government and the NBU:

. Public and decisive government support for the proposed new monetary
policy regime is fundamental, since otherwise it will lack crucial political
credibility. A key part of this support is legislative and de facto
guarantees of central-bank independence to carry out monetary policy

In preparation for inflation targeting and to develop key asset markets for
monetary policy operation the government should abolish the tax on foreign
exchange transactions, convert its outstanding liabilities to the NBU into
tradable securities by mid-year, and issue more public debt in hryvnia.
Also, the extensive use of administered pricing should be scaled back to
provide monetary policy maximum leverage over inflation.

. The NBU, with government support, should as a first step establish and
fully use an exchange rate band that allows more scope for active monetary
policy. The 2009 monetary policy guidelines should indicate that the band
will be progressively widened as circumstances permit and policy needs
require, without specifying bands or timing in advance.

The NBU should continue its welcome efforts to strengthen its analytical
capacity and integrate macroeconomic analysis into its policy decisions.

Communication with the public and the markets needs to be improved,
including through publication of inflation reports and regular, transparent
announcements of policy intentions and actions.


In view of actual and possible strains, we urge the NBU to continue to
intensify its supervision of banks. Key measures are consolidated
supervision, increased transparency of bank ownership (the recent
publication by the NBU of bank ownership is welcome in this regard),
encouragement to banks to enhance their risk management capabilities,
strong guidance regarding stress testing, and intensified on-site

Bank secrecy provisions should be brought into line with Basel II standards.

Prudential measures might include, in addition to the recent welcome
increase in minimum statutory capital, greater risk weights for assets that
pose higher credit risk (notably unhedged foreign currency denominated
lending) and stronger prudential requirements for banks with deteriorating
liquidity positions. Finally, nonbank supervisors should be strengthened,
which would also foster the development of insurance and capital markets.

The mission supports the authorities' intention to implement a sequenced
liberalization of capital controls, including through a new foreign exchange
law. Safeguards should be retained, but used only in clearly specified and
exceptional circumstances.

The mission recommends greater attention be paid to bank resolution and
crisis management. On the former, problem banks need to be identified
earlier and bank exit options expanded to include rapid resolution
mechanisms, notably by increasing incentives of owners of weak banks to
agree to mergers.

On the latter, contingency planning should be further developed and refined,
to ensure an effective response in the event of unforeseen turbulence.
Ukrainian statistics have improved significantly, but heightened risks
underscore the need to improve data on foreign trade, notably trade prices,
and on external assets, liabilities, and investment flows.

The mission thanks the authorities for fruitful and useful discussions, and
looks forward to a continuation of close and constructive policy dialogue.
LINK: http://www.imf.org/external/np/ms/2008/033108.htm
[return to index] [U.S.-Ukraine Business Council Monitoring Service]==========================================
WTO, Import Policies, Standards, Procurement, Export Barriers,
Intellectual Property Rights, Services Barriers, Investment
Barriers, Electronic Commerce

National Trade Estimate Report - Ukraine
Office of United States Trade Representative (USTR)
Washington, D.C., Friday, March 28, 2008

The U.S. goods trade balance with Ukraine went from a trade deficit of $884
million in 2006 to a trade surplus of $121 million in 2007. U.S. goods
exports in 2007 were $1.3 billion, up 77.4 percent from the previous year.

Corresponding U.S. imports from Ukraine were $1.2 billion, down 25.6
percent. Ukraine is currently the 65th largest export market for U.S. goods.
The stock of U.S. foreign direct investment in Ukraine was $505 million in
2006 (latest data available).

WTO Accession
Ukraine has completed the process of negotiating terms of accession to the
World Trade Organization (WTO). On March 6, 2006, the United States and
Ukraine signed a WTO bilateral market access Agreement. Later that month,
the United States terminated the application of the Jackson-Vanik amendment
to the Trade Act of 1974 to Ukraine, providing Ukraine permanent normal
trade relations (PNTR) status.

Ukraine made significant progress during 2007 in adopting legislation and
regulations needed for compliance with WTO requirements. It also completed
its bilateral market access negotiations with all other interested WTO

Members of Ukraine's WTO accession Working Party, including the United
States, completed the multilateral Working Party process for Ukraine's WTO
accession in January 2008. (1)


Ukraine continues to maintain fees and licensing requirements and fees on
certain imports. Ukraine imposes several duties and taxes on imported goods:
customs/import tariffs, value added tax (VAT), and excise duties.
Additionally, imports into Ukraine are subject to customs processing fees, a
unified fee on vehicles crossing Ukraine's borders, and port fees.

Customs/Import Tariffs
Ukraine's tariff schedule provides for three rates of import duty: full
rates, Most Favored Nation (MFN) rates, and preferential rates. The full
rate of import duty can be from 2 times to 10 times higher than the MFN
rate. It currently is applied to a very small number of goods from 81
countries. In 2007, the number of goods still subject to the higher rates
was sharply reduced.

When it becomes a WTO Member, Ukraine would apply the MFN rate to all
goods originating from WTO Members, in accordance with Article I of the
GATT 1994, so the number of countries whose goods are subject to full
duties will decline sharply.

Preferential rates are applied to imports from countries with which Ukraine
has a Free Trade Agreement (FTA) or other preferential trade agreement.
Ukraine has an FTA with a number of CIS countries. Imports from the
United States are subject to the MFN rate.

Import duties are calculated in accordance with the law "On the Customs
Tariff of Ukraine." Their levels currently undergo annual changes already
provided for in the Customs Tariff Law, and Ukraine will implement
additional tariff liberalizations as a result of its negotiations on WTO
accession when it joins the WTO.

The customs tariff schedule comprises more than 11,000 tariff lines. Most
customs tariffs are levied at ad valorem rates, but 672 tariff line items
(5.97 percent) are subject to specific or combined rates of duty.

These specific and combined rates apply to approximately one-third of
tariff lines for agricultural goods, primarily those that are also produced
in Ukraine. These protected goods include grains, poultry products, sugar,
and vegetables such as carrots and potatoes.

For agricultural goods, the average applied tariff rate is 13.8 percent
(down from 19.7 percent in 2005). The number of tariffs lines subject to
combined rates of duty will be sharply reduced when Ukraine implements its
WTO accession tariff commitments and the average applied tariff rate will
drop to below 12 percent. By contrast, for industrial goods the average
applied rate is 4.4 percent (down from 8.3 percent).

High import tariffs on goods such as poultry act as a barrier to U.S.
exports. As a result of the March 2006 WTO bilateral Market Access
Agreement with the United States, tariffs on poultry and many other goods
will be reduced significantly when Ukraine becomes a Member of the WTO.

Excise Duties
Ukraine applies excise duties to a limited set of goods imported into
Ukraine, such as alcoholic beverages, nonfilter cigarettes, motor vehicles,
and petroleum products. Discriminatory excise duties still hinder U.S.
exports of wine and grape spirits and automobiles to Ukraine.

The excise duty rate on imported wine and grape spirits is 12 times and 13
times higher, respectively, than on domestically-produced products, and this
difference is likely to remain at that level until Ukraine becomes a Member
of the WTO and excise rates on imported and domestic goods are unified.

Although VAT and excise tax exemptions for locally-produced vehicles were
eliminated on March 29, 2005, excise taxes on automobiles remain high,
ranging from 0.02 euros/cc for automobiles with smaller engines to 3.50
euros/cc for those with larger engines.

The import tariff on fully assembled automobiles was raised from 15 percent
to 25 percent during 2005 to compensate local producers for the loss of VAT
and excise privileges. This increase has negatively impacted importers of
fully assembled automobiles. Application of a lower tariff rate on
"semi-knocked down" vehicles further discourages imports of fully assembled

Import Licenses
Import licenses are required for some goods. The list of goods covered by
the licensing regime and the license terms are decided annually by the
Cabinet of Ministers.

In 2007, the list included pesticides, alcohol products, optical media
production inputs, some industrial chemical products and equipment
containing them, official foreign postage stamps, excise marks, officially
stamped/headed paper, checks and securities, some goods that contain
sensitive encryption technologies, and ozone-depleting substances.

While the licenses themselves are granted automatically to applicants, some
products require a prior approval, which may or may not be automatic, from
the relevant administrative agency before receiving the necessary import
license from the Ministry of Economy.

In the WTO accession negotiations, the United States has sought assurances
from Ukraine that it will not impose restrictive import licensing
requirements without adequate WTO justification, (e.g., on imports of
mass-market, commercially-traded goods containing encryption that are
covered by the Information Technology Agreement).

In 2007, beef, pork, and poultry (fresh, chilled, or frozen) and related
live animals became subject to import licensing without prior approval.
Copper sulphate, optical polycarbonates for production of discs for
laser-reading systems, cane and beet sugar, and chemically pure sucrose
in solid form became subject to import licensing without prior approval.

For some goods, product certification is a prerequisite for an import
license. Importers can request that a foreign facility be certified as in
compliance with Ukraine's technical regulations that apply to imports. The
U.S. distilled spirits industry reports that this option usually involves a
burdensome and costly inspection visit by Ukrainian government officials.

If approved, the supplier receives a certificate of conformity valid for 2
years to 3 years and avoids the burden of certifying each shipment and
mandatory laboratory testing upon arrival in Ukraine.


For a number of years, U.S. investors have regarded Ukraine's product
certification system and standards regime as a significant obstacle to trade
and investment.

Recently, Ukraine has passed several new laws and governmental decrees
aimed at bringing Ukrainian practices in this area into line with the WTO
Agreement on Technical Barriers to Trade. As of October 2007, more than
4,000 of Ukraine's standards were harmonized with international standards,
and approximately 8,000 remained to be harmonized.

Standardization and Certification
Mandatory certification is required in Ukraine for many products. The
State Committee for Technical Regulation and Consumer Policy
(DerzhSpozhyvStandard) is the standardization and certification body
in Ukraine.

DerzhSpozhyvStandard has a network of 114 accredited product certifying
bodies, including 60 accredited certifying bodies for quality management
systems, as well as about 780 testing laboratories throughout Ukraine, 170
of which are accredited by the National Accreditation Agency as complying
with international standards. Appropriate resources, such as modern
analytical equipment and reactants, are not available in most laboratories.

DerzhSpozhynStandard's system includes 27 territorial departments for
consumer protection and 28 state centers for standardization, systematizing
weights and measures, and certification. Depending on the type of product,
testing, and applicable certification scheme, the certification process can
take from 3 days to 1 month.

Ukraine has both private certification bodies, which operate on a
profit-making basis and are more common in the area of technical regulations
compliance, and certification bodies affiliated with state agencies, which
are more common in ensuring compliance with sanitary and phytosanitary

Some certification agencies do much of their work with little or no
coordination with other Ukrainian bodies performing similar tests. Many
products require multiple certificates from different agencies, with local,
regional, and municipal authorities often requesting additional
documentation beyond that required by central bodies.

According to industry sources, numerous burdensome certification and
licensing procedures for equipment impede access to the Ukrainian market.
Experts allege that government officials responsible for issuing licenses
often require businesses to provide documents that are not mandatory
deliberately conceal information in order to confuse a potential licensee,
or delay issuing documents in order to induce licensees to offer a bribe.

These issues are being addressed during Ukraine's WTO accession
negotiations, and, as recently as September 13, 2007, Ukraine has reduced
the number of products subject to mandatory certification.

When it becomes a WTO Member, Ukraine will be obliged to apply such
mandatory requirements only in conformity with WTO provisions on technical
regulations, including ensuring that such measures are not more trade
restrictive than necessary to fulfill a legitimate objective, and reliance
on available scientific and technical information.

A May amendment to the law "On Standards, Technical Regulations, and
Conformity Assessment Procedures" helped to guarantee precedence of
international over regional standards and introduced provisions related to
conformity assessment recognition, although further amendments may be
needed to ensure that Ukraine's authorities will accept the results of
conformity assessment procedures performed in the United States.

Ukraine's National Accreditation Agency is taking steps to become a member
of the International Laboratory Accreditation Cooperation (ILAC),
anticipated in 2009. Once an ILAC member, Ukraine should significantly
increase the acceptance of test results of laboratories accredited with, and
notified by, ILAC member bodies.

Sanitary and Phytosanitary (SPS) Measures
Ukraine applies a range of SPS measures that restrict imports of a number of
U.S. agricultural products, among them, pork, beef, and poultry. Industry
has repeatedly complained that Ukraine's certification and approval process
is lengthy, duplicative, and expensive.

Over the past several years, Ukraine has passed amendments to several laws
and regulations, most importantly to the law "On Veterinary Medicine" and
the law "Quality and Safety of Food Products and Food Raw Materials,"
to bring its legislative and regulatory framework into compliance with
requirements of the WTO SPS Agreement.

The following potentially trade distorting issues are subjects of discussion
between the United States and Ukraine as part of the negotiations on
Ukraine's accession to the WTO:

Overlapping State Authorities: Ukraine has maintained a complex and
nontransparent oversight system for human and animal health measures that
involves overlapping authority by the Veterinary Service, Sanitary Service,
and DerzhSpozhyv Standard.

Amendments to the law on "On Standards, Technical Regulations, and
Conformity Assessment Procedures," passed in May, made some progress
but failed to solve entirely the problem of overlapping authority.

Additional legislative or regulatory amendments are needed. Further
legislation has been enacted in 2007 that strengthens the legal separation
of authority over testing for SPS and Technical Barriers to Trade (TBT) issues.

Beef, Beef Products, and Pork: A bilateral agreement with Ukraine negotiated
at the same time as the March 2006 WTO bilateral Market Access Agreement,
addresses the terms of U.S. exports of beef, beef products, and pork to
Ukraine. As agreed, Ukraine has allowed the entry of certified U.S. beef and
pork that meets veterinary certificate requirements. The United States
continues to monitor ongoing trade.

In the past, Ukraine blocked the importation of beef and beef products due
to concerns over the use of growth promoting hormones as well as Bovine
Spongiform Encephalopathy (BSE). The United States is working with Ukraine
to ensure that any requirements imposed by Ukraine are consistent with World
Organization for Animal Health guidelines.

Ukraine's law "On Veterinary Medicine" was amended in November 2006 in
order to address this issue, and in 2007 additional regulatory amendments
were enacted to address concerns over maximum residue levels, animal
identification requirements, and the definition of contaminants.

U.S pork exports to Ukraine have been hampered by regulations concerning
trichinae. The United States is working with Ukraine to align Ukrainian
standards for trichinae with international norms.

Biotechnology: Ukraine has not established an approval process for
agricultural biotechnology products. The absence of an approval process has
resulted in unpredictable sales conditions for corn products, soybeans, and

The United States is working with Ukraine to establish procedures governing
biotechnology that are supported by science-based risk assessment principles
and guidelines, including those of the WTO SPS and TBT Agreements, the
Codex Alimentarius, and the International Plant Protection Convention

In May, Parliament passed a new law establishing a framework for the
creation, testing, and use of products of biotechnology. Implementing
regulations for the law are under development and scheduled to take effect
prior to Ukraine's WTO accession.

Fish Shelf life: In Ukraine's WTO accession talks, Ukraine committed to make
changes to its technical regulation on shelf life for fish such as salmon,
sardines, and roe to bring it into conformity with the CODEX Alimentarius
guidelines on the labeling of prepackaged food products.


Ukraine is not yet a signatory to the WTO Agreement on Government
Procurement (GPA), but committed to become an observer to the GPA when
it  becomes a WTO Member, and to initiate negotiations for membership within
2 years after that. Ukraine's total government procurement stood at $4.11
billion for April through December of 2006.

All government procurement of goods and services valued at more than $10,000
and public works valued at more than $80,000 must be procured through
competitive tenders.

Open international tenders must be used when procurement is financed by any
entity outside of Ukraine. The Tender Chamber of Ukraine publishes
information on government procurement in the "State Procurement Bulletin."

Ukraine's recent amendments of the law "On Procurement of Goods, Works, and
Services Using State Funds" have moved it away from international norms. A
recent study on Ukraine by the Atlantic Council of the United States
concluded that "government procurement is one of the most corrupt spheres
of state activity."

Amendments to the procurement law in March 2006 transferred the authority to
coordinate government procurement from the Ministry of Economy to the
Antimonopoly Committee of Ukraine, a body with no particular expertise in
regulating public procurement.

The amendments also dispersed policy and oversight functions across several
bodies, including the Antimonopoly Committee, the Accounting Chamber of
Ukraine (reporting to Parliament), the State Control and Audit Unit (under
the Ministry of Finance), and the Tender Chamber of Ukraine.

The amendments have been criticized for creating an overlap in authority of
various regulatory agencies and decreasing the transparency of the system.

The 2006 amendments granted the Tender Chamber of Ukraine, purportedly
a nongovernmental organization, the authority to monitor the procurement
process, and to undertake key operational functions that are inherently
governmental. The Tender Chamber has exclusive authority to maintain a
catalog of bidders, consider claims of tender participants, and select
suppliers to be awarded contracts.

It also requires a UAH 7000 ($1,400) fee for bidders to be registered in the
catalogue, in contravention of the international practice of free listing
for all interested parties. The Tender Chamber has faced widespread
criticism as contributing to the procurement system's corruption and lack
of transparency.

Only the European Consulting Agency, a Ukrainian private enterprise with
links to the Tender Chamber has been allowed to operate a website announcing
tenders. Several observers have charged that this relationship fosters
corruption and decreases transparency.

In addition, the 2006 amendments introduced burdensome and lengthy
procurement procedures, and required all tender proposals to be secured by
collateral, limiting the number of tender participants and increasing the
cost of participation. For some procurement, the Tender Chamber assesses
fees of 4 percent of the value of the procurement, which is extremely high
by international norms.

Under the December 2006 amendments to the law, procurement rules do not
apply to some tenders of special public sectors, such as defense, postal and
telecommunications services, and railways.

The procurement law does not restrict foreign enterprises from participating
in government procurement, but in practice foreign companies claim that they
are rarely able to compete on an equal footing with domestic companies.
Foreign companies generally win only a tiny fraction of the total tenders
(0.01 percent during the first nine months of 2006).

Among the problems faced by foreign firms are:

   (1) the lack of public notice of tender rules and requirements;
   (2) covert preferences in tender awards;
   (3) the imposition of conditions that were not part of the original tender
   requirements; and
   (4) ineffective grievance and dispute resolution mechanisms, which often
   allow a losing bidder to block the tender after the contract has been

March 2007 amendments to the law eliminated preferences that favor domestic
bidders in tenders below certain values. However, some regulations still
exclude foreign bidders; for example, some firms report that there is a
practice in health sector procurement of only accepting bids from Ukrainian
resellers or Ukrainian producers of pharmaceuticals.


Exports of some categories of products are subject to registration by the
Ministry of Economy. Products that must be registered prior to export from
Ukraine include: precious metals and stones, rolled metal products exported
to the United States, textile products exported to the United States, scrap
metal, printer's ink, and paper with watermarks.

The government has eliminated most export duties, with the prominent
exceptions of natural gas, livestock, raw hides, some oil seeds, and scrap
metal. In the context of its WTO accession negotiations, Ukraine has
negotiated reductions in a number of these duties and the elimination of

Export Restrictions on Grains
Ukraine is the sixth largest wheat exporter in the world. The United States
continues to express its concern about the export restrictions that Ukraine
imposed on food and feed grain exports beginning in September 2006.

Ukraine readjusted the export restrictions in July, imposing
highly-restrictive quotas that served as a near export ban on each grain
type covered (wheat, barley, corn, and rye).

Ukraine plans to introduce somewhat more liberal quotas in January, 2008,
allowing more grain to be exported until April 2008. The measure will allow
traders to clear some stocks, but the level is approximately one-third of
what could be exported.

To date, Ukraine has not adequately justified the measures taken, i.e., it
has not convincingly explained how it faces a "critical shortage," as
required in order to maintain such a ban under Article XX of the GATT 1994.
Several studies point to the contrary.

The World Bank's November 2006 report titled "The Quotas on Grain Exports
in Ukraine: ineffective, inefficient, and nontransparent" states that the
introduction of the quota was not justified, as domestic grain supply was
amply adequate to cover all domestic needs. Data from the Food and
Agriculture Organization of the United Nations and industry confirm this

Further questions are raised by the scope of the measures: the quotas and
licenses are also being applied to corn and barley, which are not being used
for the production of bread in Ukraine, and to corn, barley, and wheat used
as feedstock.

More recently, Ukraine has sometimes argued that export restrictions are
needed to combat rising food prices. Ukraine has threatened to extend the
export restrictions to sunflower oil in order to combat rising domestic
prices of this product.

Industry reports that the initial mismanagement of the issuance of licenses
compounded the problem, leaving a large volume of grain in storage in
Ukraine's ports, where in some cases it deteriorated past the point where
it could be used for human consumption, or even animal feedstock.

The World Bank estimated that during the 2006/2007 marketing year the
costs to grain traders of demurrage and losses from rotting or otherwise
compromised grain that was not able to leave Ukraine's ports exceeded
$300 million.

The Ukrainian economy is sustaining some of these losses, including lost
export opportunities. These measures have tarnished Ukraine's investment
climate and damaged its reputation as a reliable grain exporter and a
country that upholds contracts. Ukraine has committed to remove its current
quotas prior to becoming a WTO Member, and to apply any future restrictions
in conformity with WTO provisions.

Live cattle, sheep, hides, and skins
Export duties have been in place on live cattle, sheep, hides, and skins
since 1996. For live calves the duty is 75 percent of the customs value (but
no less than 1500 euros/ton of live weight); for live cows it is 55 percent
(but no less than 540 euros/ton of live weight); and for live sheep it is 50
percent (but no less than 390 euros/ton of live weight).

For raw hides of cattle the duty is 30 percent (but no less than 400
euros/ton of live weight); for sheep hides it is 30 percent (but no less
than 1 euro/hide); and for pigskins the duty is 27 percent (but no less than
170 euros/ton of live weight).

In November 2006, Parliament enacted amendments to the law that will lower
these export duties gradually upon WTO accession. Export duties on live
calves, cows, and sheep will fall to 10 percent, 8 years after accession.
Export duties on raw hides will fall to 20 percent, 10 years after Ukraine
becomes a WTO Member.

Scrap Metal
Since January 2003, Ukraine has imposed an export duty of 30 euros/metric
ton on ferrous steel scrap and has had, in effect, a ban on exports of
nonferrous metals. The ferrous scrap export duty contributed to a decline in
scrap exports from Ukraine, when global demand and prices for steel scrap
were rising. Ukrainian metallurgical producers benefited from scrap inputs
at prices lower than world levels.

As part of its March 2006 bilateral WTO Market Access Agreement with the
United States, Ukraine agreed to significantly lower these export duties.

Laws passed in the fall of 2006, and amended in May, provide for staged
duty reductions to 10 euros/metric ton over a period of 6 years for ferrous
metals and reductions to 15 percent ad valorem over a period of 5 years for
nonferrous metals.

Sunflower Seeds
Sunflower seeds have been subject to an export duty since June 2001, to the
benefit of local sunflower oil producers. In July 2005, the export duty on
sunflower seeds was lowered to 16 percent of its customs value with further
1 percent annual reductions to be made upon WTO accession, reaching a final
duty of 10 percent, 6 years after accession.


Recent years have seen steady improvement in Ukraine's protection of
intellectual property rights, but problems remain. On January 23, 2006, the
United States reinstated GSP benefits for Ukraine and lowered Ukraine's
designation under Special 301 from Priority Foreign Country to Priority
Watch List.

Also in January 2006, Ukraine agreed to work with the U.S. Government
and with U.S. and domestic industry to monitor the progress of future
enforcement efforts through the IPR Enforcement Cooperation Group.

This bilateral group has conducted a series of successful dialogues, meeting
roughly once every 4 months, throughout 2007. Ukraine has also agreed to
meet biannually with European Commission officials as part of an EU-
Ukraine IP Dialogue.

Optical Media
Despite the significant reduction of illegal production of optical discs,
the retail sale of copyrighted goods in large markets - especially Kyiv's
well-known Petrivka market and similar markets in other large cities - is
still widespread. The transit of pirated goods also remains a serious

Internet Piracy
Internet piracy is a growing problem in Ukraine. Industry states that many
Ukraine-based websites offer pirated material for download with the full
knowledge of their Internet Service Providers (ISPs).

The United States continues to work with the Ukrainian government to monitor
and combat the spread of illegal download websites, and, at one meeting of
the IPR Enforcement Cooperation Group, GOU officials agreed to begin
monitoring suspected pirate sites jointly with industry.

Royalty Collecting Societies
Rights holders have complained repeatedly that some royalty collecting
societies collect fees for public use of copyrighted material without
authorization and do not properly return royalty payments to rights holders.
An initial draft amendment to the Copyright Law failed to address industry
concerns, and the draft is now being reworked.

Additional IPR Efforts
Ukraine has made some important revisions to its IPR laws as part of the WTO
accession process. Parliament passed amendments to its Customs Code in
November 2006 that provide customs officials the ability to use ex officio
authority to seize suspected pirated or counterfeit goods.

Parliament also passed a law amending the Civil and Criminal Codes of
Ukraine in order to provide for the seizure and destruction of
IPR-infringing goods and equipment, in line with Article 46 of WTO Agreement
on Trade Related Aspects of Intellectual Property Rights (TRIPS).

As a result of commitments agreed to as part of its March 2006 WTO bilateral
Market Access Agreement with the United States, Ukraine amended its law
"On Medicinal Drugs" in November 2006 to provide a 5 year period for the
protection of pharmaceutical test data that is submitted to government
authorities to obtain marketing approval. The Ministry of Health issued a
regulatory act to ensure implementation of this law and to clarify some

Pharmaceutical industry representatives complain that implementation of the
law remains a problem, however. Parliament also passed an amendment to the
law "On Pesticides and Agrochemicals" in November 2006 that provides a 10
year period of protection for agricultural chemicals. In September, the
Cabinet of Ministers issued a regulation to abolish discriminatory fees on
the testing and registration of plant varieties.

Parliament also passed an amendment to the law "On Protection of Rights for
Indications of Origin of Goods" in November 2006, but Ukraine recognizes
that further amendments are necessary in light of TRIPS provisions.

Patent and Trademark
Trademarked and copyrighted goods must be registered for a fee in the
Customs Service's rights holder database in order to be guaranteed
protection. Industry has reported instances of production of counterfeit
cigarettes within Ukraine as well as growth in the amount of counterfeit
pesticides and apparel on the market.

The Ukrainian Ministry of Health does not routinely check the validity of
patents when it grants marketing approval in Ukraine.

In 2006, Ukraine adopted the Singapore Treaty on the Law of Trademarks
aiming at establishing a uniform mechanism for administrative trademark

Judicial System
Civil IPR lawsuits remain rare because of a general lack of confidence in
Ukraine's legal system, and because there are few judges properly trained in
IPR law. However, a recording company won a landmark civil court case
against the Ukrainian music download site www.mp3.ua.

The court ruling imposed substantive penalties on the owners of mp3.ua and
was subsequently upheld on appeal. February 2006 amendments to the Criminal
Code drastically lowered the required threshold (from roughly $5,200 to
$700) needed to pursue criminal prosecution and increased penalties up to 7
years imprisonment for major offenders.

The amendments have helped bolster criminal enforcement in the courts. The
U.S. Government has worked closely with the Government of Ukraine to
provide specialized IPR training.


Restrictions on services exist in areas such as insurance, banking
activities, auditing, legal services, television and radio broadcasting, and
information agencies.

During bilateral negotiations on services market access with a number of
countries in the context of Ukraine's negotiations to join the WTO, Ukraine
agreed to open access for foreign service suppliers in a number of areas,
including energy services, banking and insurance branches, professional
services, express delivery, and telecommunications. When these commitments
are fully implemented, Ukraine will have one of the most liberal services
markets in the region.

In 2005, Parliament adopted legislation that will, within 5 years after
Ukraine becomes a WTO Member, permit foreign insurance companies to
open subsidiaries in Ukraine.

In the fall of 2006, it adopted amendments to the law on "Banks and Banking"
that would permit foreign banks to open subsidiaries and branches, a law "On
Advocacy" that eliminates the nationality requirements for legal services,
and amendments to the law "On Publishing" that will cancel limitations on
foreign investment in publication services over a 5 year transition period.

In May 2007, Parliament amended the law "On Insurance" to allow for
unrestricted reinsurance of risks related to waterway transportation,
commercial aviation, and space launch (including satellites) from the date
of WTO accession.

Foreign professionals are permitted to work in Ukraine, but a lack of
transparency hinders foreign access to the Ukrainian services market. A
local content requirement exists for radio and television broadcasting,
although it has not been stringently enforced in most cases. All foreign
films are required to be dubbed or subtitled in Ukrainian.

In 2006, U.S. industry identified efforts to limit the ability of foreign
credit and debit card service providers to provide their services to clients
of national electronic payments systems as a significant barrier to trade.

When Ukraine becomes a WTO Members, it must take on services
commitments in the context of WTO negotiations to maintain an open and
competitive banking system, including with respect to credit and debit
cards, with full market access to electronic payments services. At present,
Ukraine applies no formal restrictions. The United States continues to
monitor Ukraine's actions in this important area.


The government is working to streamline regulations and eliminate
duplicative and confusing laws regarding investment and business. In 2005,
Ukraine created several agencies in order to attract investment to Ukraine,
including the State Center for Foreign Investment Promotion (known as
InvestUkraine) and the State Agency for Investment and Innovation.

In 2007, the Cabinet of Ministers of Ukraine created the Council of
Investors, a government advisory body, and the Committee for Modernization
of the Investment Environment and Development of Capital Markets
Infrastructure, to be chaired by the Minister of Finance.

The United States has a bilateral investment treaty (BIT) with Ukraine,
which took effect in 1996. The BIT guarantees U.S. investors the better of
national and MFN treatment, the right to make financial transfers freely and
without delay, international legal standards for expropriation and
compensation, and access to international arbitration. Despite the BIT,
there are a number of longstanding investment disputes faced by several
U.S. companies.

These disputes mainly date from the early 1990s and the initial opening of
the Ukrainian economy to foreign investors. In most cases, however, there
has been little progress toward resolution of these cases under subsequent
Ukrainian governments despite intensive advocacy by the United States.

Companies report that Ukraine's taxation system is a major obstacle for U.S.
investors doing business in Ukraine, and a World Bank study recently ranked
Ukraine 177th out of the 185 countries surveyed in terms of the ease of
paying taxes.

Ukraine currently maintains a corporate profit tax (25 percent), a personal
income tax (flat rate of 15 percent), a Value Added Tax (20 percent), and a
payroll tax (variable, between 36.66 percent and 49.6 percent) that funds
pension and social insurance programs. Many analysts single out the payroll
tax as being exceptionally high and the main reason why shadow wage payments
remain common in Ukraine.

Arrears in the payment of VAT refunds to exporters have also been a serious
problem. Ukraine decreased the pace of VAT refunds beginning in August
2006, reimbursing only 76 percent of verified claims, down from 87 percent
refunded in 2005. VAT refund problems continued in 2007, leading to calls
for an overhaul of the VAT reimbursement mechanism.

Industry claims that delays in reimbursements create opportunities for tax
officials to demand kickbacks in return for quicker processing of rebates,
and several companies reported being approached by "middlemen" who
claimed that, for a fee, they could speed up the reimbursement process.

Currently, the process for obtaining a refund of VAT payments can take
from 3 to 18 months for foreign companies. Increasingly, the delays in
reimbursement are becoming an important cost factor for many foreign
companies and are seriously affecting the profitability of planned
investments. Foreign companies have the right to use promissory notes
for the payment of VAT on inputs to goods destined for export.

Foreign investors complain that the tax regime for nonresidents'
representative offices is discriminatory. Funds transferred from a company's
foreign home office to its representative office in Ukraine as part of the
latter's operational expenses are taxed, while funds transferred from one
office to another within Ukraine are not.

Special Economic Zones (SEZs)
Ukraine has in the past maintained two forms of special economic zones
(SEZs): Free Economic Zones (FEZs) and Priority Development Territories

In April 2005, Ukraine canceled all tax exemptions (i.e., from land tax,
corporate income tax, import duty, and VAT on imports) to investors in all
SEZs to stop large-scale misuse of these zones for tax evasion and

While the step reduced corruption and expanded the tax base, the abrupt
cancellation of privileges and lack of compensatory provisions caused
losses to some legitimate investors.

In November 2005, the Parliament adopted legislation to create technology
parks, providing for some government financial support, targeted subsidies,
and tax privileges for a list of 16 technoparks based on existing scientific
and research institutes.

At the end of 2006, the Ukrainian government announced its intention to
renew tax privileges granted to businesses operating in some SEZs and to
introduce a compensation mechanism for investors, but a draft law on the
subject never went forward.

The State Property Fund oversees the privatization process in Ukraine.
Privatization rules generally apply to both foreign and domestic investors,
and, in theory, a relatively level playing field exists. Observers claim,
however, that a common abuse of privatization laws is the adjustment of
the terms of a privatization contest to fit the characteristics of a
certain, pre-selected bidder.

Few major, new privatizations have been conducted since the privatization
rush of 2004. As of September 2007, revenues from privatization were only
15.4 percent ($320 million) of the fiscal year's target.

In 2005, Ukraine revoked the privatization of the Krivorizhstal steel
factory, which had been sold to a group of domestic investors for $800
million, and subsequently sold it in a fair and transparent tender to Mittal
Steel for $4.8 billion, in what is generally viewed as Ukraine's most
transparent major privatization to date. Since then, Ukraine has taken no
further steps to reverse previous privatizations.

The few privatizations that took place in 2007 were often marked by
controversy. In March, the State Property Fund sold a majority share in
Luganskteplovoz (a Ukrainian locomotive manufacturer) to Russian-owned
CJSC Bryansk Machine Building Plant.

Only two related bidders were able to meet the tender requirements as set by
the State Property Fund, and the Fund may also have violated rules governing
the announcement of the tender, making it impossible for potential investors
to learn of the tender in time to submit bids. The President of Ukraine has
appealed the decision in court, claiming noncompetitiveness and lack of
transparency in the sale.

In August 2007, the state sold a 28 percent stake in Dniproenergo, a
regional electricity distributor, to the Donbas Fuel and Energy Company
(DTEK), owned by a Member of Parliament in the ruling coalition.

The sale was conducted as a controversial debt-for-shares swap, whereby
DTEK acquired the shares in exchange for covering a debt owed by
Dniproenergo to coal suppliers. Some experts claimed that DTEK acquired
the shares in Dniproenergo for only 30 percent to 40 percent of the market

In August, Ukraine announced its intention to move forward with the
long-awaited privatization of the Odesa Portside Plant, one of Ukraine's
largest chemical producers. The State Property Fund canceled the tender in
October, however, after the President complained that the tender plan failed
to include environmental safety provisions and could allow the formation of
a monopoly in the sector.

Ukraine's Parliament amended the Land Code of Ukraine in October 2006,
extending a moratorium on the sale of farmland until January 1, 2008. This
provision blocks private investors from purchasing some of the 33 million
hectares of arable land in Ukraine and constitutes a serious obstacle to the
development of the agricultural sector. As of October 2007, Ukraine had
failed to adopt new legislation necessary to open the land market. As a
result, the ban on the sale of agricultural land may be prolonged again.

Corporate Hijacking
Ukraine is currently experiencing an escalation in corporate hijacking
activity. Some researchers claim that as many as 2,500 Ukrainian enterprises
have suffered hijacking attempts in the last several years.

These hijackers frequently purchase a small stake in a company, and then
take advantage of deficient legislation, corrupt courts, and a weak
regulatory system to gain control of companies to the detriment of rightful

This development harms investors, including U.S. companies and shareholders,
and has damaged the image of Ukraine among foreign investors. The Ukrainian
government has recognized the seriousness of this problem and has taken some
limited steps to address it, convening a special state commission in

In May, Parliament passed in the first reading a draft law "On Joint Stock
Companies," considered critical to stopping corporate hijacking, but a
protracted political crisis prevented the law from moving forward.


Electronic commerce is underdeveloped in Ukraine, particularly in the areas
outside of Kyiv. Experts estimate that active Internet users number about
12.1 percent of the total population. There is a higher level of usage in
Kyiv, which accounts for 61.4 percent of all Internet users, and where
Internet commerce, while small in total volume, is experiencing strong
annual growth.

The National Council on Communications is entrusted with monitoring the
telecommunications market. The Internet in Ukraine remains mostly

Industry asserts that the frequency of inspections by regulatory agencies is
one of the major hindrances to business development in Ukraine.

The annual number of inspections conducted throughout the country exceeds
1.5 million. According to a recent study, 57 percent of the private
businesses in Ukraine consider inspections to be unclear, complicated, and
nontransparent. Ukraine's system of inspections does not fulfill its main
purpose of preventing legal abuses, but is primarily punitive in nature.

Parliament adopted a new law in June 2007 "On the Fundamentals of State
Monitoring (Control) over Economic Activity," which provides for additional
inspections and investigations of economic activities, and may worsen the

There is also a proposal in the new draft Tax Code to expand the authority
of the State Tax Administration so that it could conduct on-site, unplanned
inspections of companies and would no longer need a court order to obtain
financial, economic, and accounting reports of audited companies. This
proposed change to the Tax Code has not yet been adopted, however.
Click here for the link

LINK: http://www.usubc.org/news/ukraine_trade_summary040308.php
[return to index] [U.S.-Ukraine Business Council Monitoring Service]

       (ROAD MAP), April 1, 2008 Document

The government of Ukraine and the government of the United States
signed a new 'Road Map' document entitled, "Priorities for U.S.-Ukraine
Cooperation" on April 1, 2008. A copy of the document follows. 
USUBC was very surprised to find that the serious matter of resolving
the major problem that has caused the economic and business
development programs of the U.S. governments' Overseas Private
Investment Corporation (OPIC) to be closed for Ukraine for several
years was not even mentioned as a priority for the U.S. and Ukraine.

(ROAD MAP), April 1, 2008

Government of Ukraine, Government of the United States of America
Signed for the United States of America:
Daniel Fried, Assistant Secretary of State
Signed for Ukraine:
Volodymyr Khandogiy, First Deputy Minister of Foreign Affairs
Signed at Washington, DC and Kyiv, Tuesday, April 1, 2008

As important friends and strategic partners, the United States and Ukraine
cooperate closely across a broad spectrum of mutual concerns.

This cooperation between our two democracies is based on shared values
and shared interests including expanding economic freedom and democracy;
protecting security; strengthening the rule of law; supporting innovation
and technological advances; and promoting public health. We intend to
deepen this partnership to the benefit of both nations.

This statement of priorities constitutes a political arrangement reflecting
the participants' intentions with regard to the matters it addresses. This
list of priorities is not exhaustive.

Deepening Ukraine's integration in European, Euro-Atlantic and
global institutions

Ukraine will pursue enhanced cooperation with the North Atlantic Alliance
and undertake a concerted NATO information campaign.

The United States will continue to support Ukraine's NATO membership

Ukraine will continue to provide strong support for international
peacekeeping operations, particularly assistance for UNAMID operations
in Darfur.

Strengthening the rule of law in Ukraine, promoting reform of the
legal system, law enforcement and security structures, as well as
accelerating efforts to combat corruption and trafficking in persons

Ukraine will pursue judicial reform legislation and implement the
anti-corruption reforms supported by the MCC Threshold Program; the
United States will offer other assistance programs that promote the rule
of law.

Ukraine will consider measures to ensure that punishments resulting from
prosecution of convicted traffickers are sufficiently stringent to deter
human trafficking and document fraud.

The United States will provide Ukraine with technical assistance and
support in organizing trainings for Ukrainian experts and judges in
combating human trafficking and strengthening witness protection.

Ukraine will undertake additional steps to improve victims' protection
and assistance programs.

Improving Ukraine's investment climate and promoting closer
economic and commercial cooperation

Ukraine will pursue expedited Rada ratification of the WTO accession
protocol. The United States and Ukraine look forward to implementing our
bilateral Trade and Investment Framework Agreement, including holding
annual consultations as mandated by the agreement.

To facilitate increased trade and investment, Ukraine will implement
streamlined registration, licensing, and customs procedures, clarify
property rights, and improve tax administration.  Ukraine and the United
States will work together to resolve outstanding business issues.

Building Ukrainian energy security, energy efficiency, diversification
of sources and transparency

Ukraine and the United States agree to intensify their dialogue on energy
issues, including through a Bilateral Energy Security Working Group. We
will also explore the creation of a trilateral dialogue on energy involving
Ukraine, the United States and the European Union.

Ukraine will complete work on a contract for alternate nuclear fuel supply
and begin construction of a central spent nuclear fuel storage facility.

The United States, along with other donors, will provide assistance through
a joint task force with the Government of Ukraine on modernization of
municipal heating systems to enhance energy efficiency and reduce gas
import dependence.

Enhancing efforts to promote nonproliferation, arms control and
disarmament goals

Ukraine and the United States will work together to build capacity within
the framework of the G8 Global Partnership and the Global Initiative to
Combat Nuclear Terrorism.

Ukraine and the United States will continue Biological Threat Reduction
Cooperation by enhancing bio-security and improving disease-surveillance

Ukraine and the United States will cooperate to successfully complete the
destruction of excess weapons and munitions in accordance with the
NATO/PfP Trust Fund project.

The United States and Ukraine will continue activities in the area of
environmentally responsible storage and elimination of SS-24 solid rocket
motors in a technically and financially sound manner.  The U.S. share of
the costs is set forth in Secretary of Defense Gates' letter to Deputy
Prime Minister Kliuyev, dated April 3, 2007.

Both countries intend to cooperate to consolidate and subsequently
downblend all highly enriched uranium in Ukraine for domestic use.

Continuing Ukraine's defense and military transformation

Ukraine will conduct a Strategic Defense Review with U.S. assistance.

The United States will assist and advise Ukraine in purchasing and
fielding/deploying communications equipment for Ukrainian defense

Ukraine will pursue necessary legislative and regulatory reforms to
transform human resource management and training of the military with
the projected goal of more effective cooperation with NATO forces.
The United States will provide technical assistance for this endeavor.

Exploring new areas for cooperation in high-technology,
space and missile defense

Ukraine and the United States will explore avenues for possible technical
cooperation in ballistic missile defense.

Ukraine and the United States will implement the Framework Agreement for
Space Cooperation.

Ukraine and the United States will renew discussions aimed at completing a
Research, Development, Testing and Evaluation Agreement.

Continuing to work together toward resolution of the Transnistria
and other regional conflicts and to encourage the promotion of
democracy in Belarus

Ukraine and the United States renew their commitment to negotiating a
resolution to the Transnistria conflict through the 5+2 talks in compliance
with the implementation of the plan "To the Resolution through
Democracy" developed on the basis of the initiative of the President of

We agree to support vigorously the EU Border Assistance Mission and the
unified customs regime at the Ukraine-Moldova border.

Ukraine and the United States are united in the opinion that Kosovo's
declaration of independence does not serve as a precedent.

Ukraine and the United States will work toward the peaceful resolution of
protracted conflicts in the region within the framework of the
international organizations, in particular the UN and the OSCE.

Developing regional organizations

The leadership role of Ukraine in GUAM will be further strengthened,
including enhancing its role as host of the GUAM Secretariat in Kyiv.

Enhancing bilateral cooperation through exchanges and visits

Ukraine and the United States agree to pursue a vigorous program of
high-level visits between our two capitals. Both sides will use such visits
to enhance and energize work on key priorities.

Ukraine and the United States agree to promote people-to-people contacts
and increase focus on cultural, educational and professional exchange

Ukraine and the United States will further their dialogue through bilateral
cooperation mechanisms, especially the Bilateral Coordination Group and
the Bilateral Working Group on Nonproliferation and Export Control.

Remembering the 1932-33 Holodomor (Great Famine) in

Ukraine and the United States will closely cooperate to promote remembrance
and increase public awareness of the 1932-33 man-made Great Famine
(Holodomor) in Ukraine including within the framework of the international

Combating HIV/AIDS and tuberculosis

Ukraine and the United States will further their cooperation in order to
fight HIV/AIDS, and tuberculosis. Ukraine will continue scaling up its
efforts in combating HIV/AIDS, including prevention, detection and
treatment, to meet Global Fund commitments.

Ukraine will strengthen its Country Coordination Mechanism on
combating AIDS, and undertake efforts to introduce best practices for
detecting, preventing and treating TB and HIV.

Signed at Washington, DC and Kyiv of April 1, 2008

For the United States of America:
Daniel Fried, Assistant Secretary of State

For Ukraine:
Volodymyr Khandogiy, First Deputy Minister of Foreign Affairs
NOTE: Again, USUBC was very surprised and disappointed to find
that the serious matter of resolving the major problem that has caused
the economic and business development programs of the U.S.
governments' Overseas Private Investment Corporation (OPIC) to be 
closed for Ukraine for several years was not even mentioned as a priority
for the U.S. and Ukraine. USUBC feels strongly that resolving the OPIC
issue should have been listed as one of the very top priorities for the
two countries.  This problem has existed since 1999. 
[return to index] [U.S.-Ukraine Business Council Monitoring Service]
NOTE: If you would like to be removed from the USUBC e-mail
distribution list please send an email to usubc@usubc.org.
U.S.-Ukraine Business Council (USUBC)
1701 K Street, NW, Suite 903
Washington, D.C. 20006
Tel: 202 437 4707; Fax: 202 223 1224
E-mail: usubc@usubc.org; Website: www.usubc.org
return to index [U.S.-Ukraine Business Council Monitoring Service]