Remarks by Assistant Secretary for Economic and Business Affairs
E. Anthony Wayne
at Kyiv International University
Thursday, October 6, 2005
Kyiv, Ukraine

It's a great pleasure to be here today. My visit to Ukraine is a sign of the strong interest Americans take in your country. We were inspired by the courage of the Ukrainian people and the events that led last winter to the election of President Viktor Yushchenko. It was one of the most visible demonstrations in recent history of the hunger of people everywhere for democracy. With your slogan "no to falsifications, no to machinations" you demanded, and in the end achieved, free and fair elections. A free, democratic process is a goal that the United States always supports. As you go forward with a new government into the election of a new Rada in March, the United States remains committed to helping ensure that Ukraine's political and economic transformation continues to move forward.

Democracy and market economics are two sides of the same coin. They are both about freedom. Just as the government should not choose your leaders for you, it should not control your actions in the economic sphere. Instead, the most important economic role of a government is to ensure that the market is functioning properly and fairly. It is clear that President Yushchenko understands this. One of his chief promises has been to undertake reforms that will expand opportunities for trade and investment, attack corruption, and give greater freedom for ordinary people to make their own economic choices.

There were certainly times in the past eight months when progress on these reforms seemed to have stalled. Building consensus on the tough issues of transformation is never easy. We were concerned that infighting and disarray in decision-making was preventing the government from moving forward on the economic reforms it needed to undertake. But we are now optimistic that with the confirmation of Prime Minister Yekhanurov and other new cabinet members, the process of economic reform is back on track. In the past two days, I have met with the Prime Minister and other government officials, members of the Rada, and Ukrainian and American businessmen—people who are investing in Ukraine’s future. I am very pleased to report that our optimism is justified.

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

WTO accession has understandably been one of President Yushchenko's top economic priorities. Prime Minister Yekhanurov has publicly endorsed that goal. They both recognize that membership in the WTO shows a country's commitment to conducting economic relations under a common rules-based system. Membership will lower barriers to exports of Ukrainian products to the roughly 150 WTO members around the world, it will help expand Ukraine's markets, and it will give encouragement to investors that Ukraine has met international standards of economic openness and fairness.

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

But other hurdles also have to be crossed to join the WTO. Most importantly, Ukraine must still undertake a number of commitments, for the most part in the form of passage of laws required to meet WTO norms. The Rada passed a few important pieces of WTO-related legislation in July. Upon returning from recess in September, it took up several other pieces of legislation needed to advance the process. This legislation has a common theme: it is all designed to dismantle government rules or intervention that distort the free functioning of markets. It's not politically easy, because powerful business interests often want the government to grant them special favors and protection from competition. But these reforms are not only the key to entry into the WTO. They are also the best way to ensure that the Ukrainian economy can grow unencumbered by government interference. I hope that the new government will be able to muster the political will to complete this work quickly.

Protection of intellectual property has been a key issue for the United States in our economic relations with Ukraine for several years now. We were very glad to see the enactment on August 2 of amendments to Ukraine's law on Laser-Readable Discs. We had been urging their passage for several years in order to protect the rights of producers of music, movies, and software. Not only American artists and innovators benefit from this protection. So do your own musicians, filmmakers, and software designers. That’s why some of the most prominent Ukrainian artists, including the famous winner of the 2004 Eurovision Song Contest, Ruslana, strongly backed this measure. With the passage of these amendments, the U.S. government was very pleased on August 30 to restore normal tariff levels on a range of Ukrainian products, lifting sanctions that we had put in place in 2002.

But effective protection of intellectual property does not end with passage of legislation. You need strong enforcement; The U.S. government is in the midst of a three-month review of Ukraine's efforts to strengthen its IPR enforcement through effective prosecution and penalties against piracy and counterfeiting, border controls, and other means. Among the important outcomes of the review will be a decision on whether to restore Ukraine's eligibility for benefits under the U.S. Generalized System of Preferences, which offers certain countries lower tariffs for selected products. We have received some encouraging reports on the work of the Ukrainian government in IPR enforcement, and we very much hope that the government can document these good results and clarify some of the outstanding questions that we have.

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

One of the greatest challenges for Ukraine and other countries around the world is to encourage investment by doing away with burdensome bureaucratic procedures and other structural problems. In meetings I have had with Ukrainian officials and in public events I attended in New York in which President Yushchenko spoke, I have been happy to hear that the Ukrainian government is quite aware of some of the things it needs to do to tackle them.

One of the most contentious issues for the previous cabinet was what to do about the former state enterprises that the government had earlier sold for discount prices under dubious circumstances. While there was general agreement that those privatizations had been improperly conducted, the absence of a clear policy on such cases helped precipitate the cabinet's downfall. Mixed signals coming from the Ukrainian government diminished investor confidence. Ukrainian and foreign businessmen were understandably reluctant to invest new money into enterprises whose ownership might soon have come into question. The critical need now is for the government to establish a straightforward plan to resolve the issue and move on. President Yushchenko and Prime Minister Yekhanurov have now resolved to pursue speedy and amicable resolution of the most difficult cases. That's encouraging.

Other problems are more deeply rooted and will require constant attention: The new administration has to step up the fight against corruption. It pervades many levels of both the government and the private sector and it seriously discourages investors. The 2004 Corruption Perception Index of Transparency International ranked Ukraine at 122nd place, near the bottom of the list, well below most other European countries.

But how do you fight corruption? You start by publishing government budgets and revenues, disclosing official incomes, and rigorously investigating and prosecuting wrongdoing. These help eliminate opportunities for malfeasance. You also need to draw a clear line between government service and involvement in private sector activity. As long as government officials, legislators, or judges have personal interests in the welfare of particular enterprises, they will not be able to make impartial decisions in an unbiased manner. Making these changes isn’t easy but it's very important.

Weak rule of law and a poorly-functioning judicial system have been largely responsible for the failure to resolve many longstanding commercial and investment disputes. The lack of resolution of at least some of these disputes is another major disincentive for increasing trade and investment.

There is a need to streamline regulations and make it easier for companies operating in Ukraine to understand the rules that everyone must follow. An annual report of the World Bank ranks countries according to the ease of doing business. The most recent edition of that report, issued this summer, put Ukraine in the bottom 25% of all countries for ease of doing business. The United States is directing some of our technical assistance to Ukraine to be of assistance in this area.

One of the priorities of legal reform should be reform of the old Soviet style Commercial Code that conflicts with the modern Civil Code. Another is to adopt the law on Joint Stock Companies to strengthen corporate governance. It was very good to hear President Yushchenko in New York two weeks ago say that he wanted to deal with these issues.

The factionalism of the previous cabinet undermined coherent macroeconomic policy, leading to price controls and other forms of undue state interference, along with frequent reversals of policies. It is essential that the new cabinet maintain a steady policy that minimizes state intervention and allows the market to function efficiently.

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

It is no secret that Ukraine is highly dependent on subsidized gas and oil. The fact that Ukraine pays unusually low prices for its fuel has led to wasteful use of energy. For every dollar it produces, Ukraine consumes about two and a half times as much energy as does Poland. We are all painfully reminded, the age of cheap fuel is coming to an end. There are no short-term fixes to this, but the Ukrainian government urgently needs to develop a concerted energy diversification strategy.

With its strategic location between Russian and Caspian oil and gas fields on one side, and European energy consumers on the other, Ukraine has greater potential to profit from the pipelines that pass through its territory. It could take better advantage of that position, for example, by developing a commercial plan for the Odessa-Brody pipeline - to transport Caspian crude to Central Europe - and working with Russia to expand current gas transit infrastructure. Alternative sources of energy also need to be developed, for example in coal bed methane and safe nuclear technologies.

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

Finally in the energy sector, Ukraine needs to pursue better energy conservation policies. Historically, the abundance of cheap Russian-supplied fuel caused Ukrainian industries to be highly energy-inefficient. Those industries will have to learn ways to conserve if they are going to compete in export markets.

I know have outlined a lot of urgent tasks. But I'm convinced the Ukrainian government is already hard at work to accomplish these tasks. Ukraine's natural resources, its geographical location, and its well-educated population -- including yourselves -- make it well situated to become a regional economic powerhouse. Investors inside and outside of Ukraine know that, and are poised to create new businesses and expand existing ones in this country. The most important things missing are a proper policy framework and fair, consistent implementation of that framework, to allow Ukraine to flourish. We in the U.S. government stand ready to work with Ukraine to further strengthen our economic ties and support the important transformation going on.