KEYNOTE ADDRESS: America, Ukraine and reform (10/26/97)

KEYNOTE ADDRESS

America, Ukraine and reform

Following is the text of the keynote speech delivered by Ambassador William H. Courtney, special assistant to the president and NSC senior director for Russia, Ukraine and Eurasia, delivered at The Washington Group's Leadership Conference on October 11.

It is an honor and great pleasure to be with you today. When I participated in an earlier TWG Leadership Conference, the USSR was in its death rattle. Today, Americans rejoice in Ukraine's peaceful and successful path to independence, and its integration into the international community. I believe all Americans are proud of what our country has done to assist this historic change. And, of course, Ukrainian Americans have special reason to take pride in their exceptional role in promoting this great advance for world freedom.

A decade ago when I thought I was going to Kyiv to open a new U.S. Consulate General, you and others kindly took me in as one of your own. I visited with Ukrainian American communities in Chicago, Detroit, Cleveland, New York, Boston, Philadelphia, Pittsburgh and Washington. I even had the honor of joining a commencement ceremony in Warren, Mich., for a Ukrainian church's Saturday school. The young graduates I saw were inspired by the language, history and customs of Ukraine. Few of them dreamed Ukraine would be free so soon. But this did not slacken their thirst to learn more about their ancestors' homeland and language, its wonderful culture and people.

The inspiration of those young people is with all of us today. We know in our hearts that Ukraine will become a great nation of Europe, and that it will attain this goal by developing as a democracy and a market economy based on private property. Today, I would like to discuss with you what the American government is doing to help Ukraine realize this future, and why reform is the only path to get there.

Ukraine is enjoying its largest measure of stability since becoming independent in 1991. Ukraine's leadership has largely defused the ethnic and regional tensions that earlier plagued the country. Progress, albeit uneven, has been made in implementing democratic and economic reforms. Nonetheless, political and economic obstacles have slowed and could stall the reform program. With parliamentary elections coming in March 1998 and presidential elections in October 1999, some political forces advocate going slow on tough reforms. But going slow on reform in the past has intensified and prolonged the pain ordinary Ukrainians feel.

Let me walk through several specific areas where accelerated reform makes sense.

Democratic change: Democracy has made great strides in Ukraine. Generally free and fair elections helped consolidate public support for Ukraine's independence and sovereignty. Ukraine's leadership worked effectively to contain some key problems, especially in Crimea. More broadly, ethnic tensions were averted by wisely basing citizenship on residency rather than ethnicity.

But the threat of corruption has tarnished Ukraine's image as a democratic nation. A conventional wisdom has emerged that it is difficult to do business in Ukraine without some form of "special arrangement." Ukraine has seen some foreign investment, but it is a trickle compared to the potential. Onerous regulations and taxes force small entrepreneurs into the unofficial economy - which generates half of Ukraine's income - making them all the more vulnerable to bribes and extortion. Corruption lessens public confidence in government and public support for reform. Corruption and poor treatment of American investors have caused a change in U.S. congressional attitudes toward Ukraine. This problem goes beyond selective reporting or public perceptions. The House and Senate even looked at conditioning half of Ukraine's Fiscal Year 1998 aid on an improved business climate.

Competition is stiff in the global marketplace, and Ukraine must give investors good reason to take their capital to Kyiv, Lviv or Kharkiv, as opposed to Prague, Warsaw or Budapest. To attract more investors, Ukraine should send a clear signal that it fosters economic freedoms, clamps down on corruption and makes investors welcome.

Economic performance: Through tight fiscal policy and monetary control, inflation has been reined in and the hryvnia, up until last month, became relatively stable. This is a momentous gain. At the same time, economic contraction continues. Officially measured GDP declined by over 7 percent in the first half of 1997 in comparison with the first half of last year. The pace of privatization slowed to about half of what it was in 1996, when the government was privatizing about 400 mostly small-scale enterprises per month; fortunately, we are now seeing an upturn. Wage and pension arrears have increased to over $2 billion. Only a fraction of economic reform legislation has been adopted.

More reform momentum is vital to address these challenges. Prospects for this seemed strong in late 1996, when Ukraine announced it would pursue a bold program to stem the economic decline and lay the foundations for economic growth. U.S. and IMF (International Monetary Fund) experts had helped Ukraine prepare the program. But Ukraine did not implement most of the program, causing it to forego much international financial support. In July, for example, Ukraine reneged on fresh promises to the World Bank on energy reform, leading the bank to suspend over $100 million in financing.

Despite these problems, we worked hard with Ukraine and the IMF to clear the path for a $540 million agreement signed in late August. It provided the financial seal of approval that helped Ukraine sell $450 million in Eurobonds. But with the ink barely dry, the IMF program now stands a chance of unraveling unless Ukraine sharply changes course. We cannot overemphasize how precarious it would be for Ukraine to fall off of its reform program. Ukraine could lose $1.2 billion from the IMF and World Bank over nine months. It could lose another $300 million in Eurobond sales. Interest rates on treasury bill sales are already shooting upwards. And last month, Ukraine spent $200 million from reserves to protect the value of its currency.

We will not let this situation go untreated. The week after next a team of our most senior economic specialists will travel to Kyiv to meet with President Leonid Kuchma's economic team. They will describe a course that could sustain economic stability. But they will also work with their Ukrainian counterparts to look beyond the immediate crisis and help them develop a strategy to build investor confidence and stimulate private investment.

Such reform measures can also prove to be good politics. Creating private sector jobs and boosting small business could quickly lift public confidence and economic prospects. But to do this and improve the investment climate, reforms are urgently needed to simplify the tax structure, ease onerous regulatory and licensing requirements, speed enterprise privatization, and permit relatively unregulated buying and selling of land. Ukraine has one-third of the world's black earth and was once famed as the "breadbasket of Europe." Creation of an efficient land market could therefore bring enormous gains by boosting farm investment. Promoting transparency and predictability in government processes should also be a priority.

Foreign and security policy: Ukraine's foreign and security policy rests on improving relations with neighbors and participating more actively in Western security structures, such as NATO's Partnership for Peace (PFP) and the Organization for Security and Cooperation in Europe (OSCE). Recently Ukraine has scored landmark successes in foreign policy. The NATO-Ukraine Charter, concluded in May, provides further recognition of Ukraine's sovereignty. Conclusion of the charter also enhanced Ukraine's confidence in resolving the Black Sea Fleet dispute, the historic agreement reached with Russia which acknowledged Sevastopol as a Ukrainian city. Ukraine actively participates in the PFP, seeing this as aiding its overall effort to integrate more closely with the West.
American policy: America's goal with Ukraine is to support its development as an independent, democratic, and prosperous state having good relations with its neighbors and increasing links to the West and to European institutions. Such a Ukraine can be a strong political and commercial partner for the United States, and positively influence its neighbors.

Support for reform is a defining feature of America's policy toward Ukraine. U.S. and Ukrainian experts worked together to craft a macroeconomic strategy that could help Ukraine address its most pressing economic liability: clearing most wage arrears. U.S. teams are working with Ukrainians in such key areas as defining steps to reduce the scope for corruption and helping Ukraine join the World Trade Organization. We currently provide Ukraine on the order of $300 million annually in grants and another $300 million in credits, and we have been instrumental in mobilizing billions of dollars in multilateral financial support.

This year the U.S. and Ukraine have had intense engagement at the highest levels. President Bill Clinton met with President Kuchma in May, June and September. The Gore-Kuchma Commission met in Washington in May, and the vice-president met again with President Kuchma in June. In November, the vice-president and President Kuchma will likely co-host a pledging conference in New York to begin the process of raising $300 million from the international community to stabilize the covering over the remains of Unit 4 at Chornobyl. We are proud that under U.S. leadership, the G-7 have already pledged $300 million to this project.

The vice-president's engagement with President Kuchma has introduced an important high-level dynamic that has facilitated fast action on important issues. It helped secure Ukraine's approval of the Conventional Armed Forces in Europe flank accord, and accelerated progress on the NATO-Ukraine charter. Their direct dialogue was key to working out language that addressed Ukraine's concerns over the basing of foreign troops on its territory. Further, it has set a framework for constructive interaction at the Cabinet level. Secretary of State Madeleine Albright met with President Kuchma last month in New York. The participation of Secretary of Defense William Cohen in "Cooperative Neighbor," a PFP exercise in Western Ukraine, underscored U.S. support for Ukraine's sovereignty and independence. We will continue to work with Ukraine to ensure that its advanced weapons and technologies do not get into the wrong hands.

Staying engaged: Some challenges in Ukraine might seem difficult to meet as parliamentary and presidential elections approach. But impending elections should not be an excuse to slow reform. Rather, elections in a democracy offer unique opportunities for debate and consensus-building, for clarifying promising new ideas and discarding failed concepts. You and others in the Ukrainian American community can help. Your moral support, and your experience in a democratic market economy, can help Ukrainians define their own vision of a better future, with more freedom and more prosperity. Please stay engaged, and help Ukrainians stay the course for reform.

America and Ukraine have established mechanisms to work through difficult issues together to achieve a common objective: an independent and sovereign Ukraine, secure within its borders and at peace with its neighbors. President Clinton has often said that he sees Ukraine as a cornerstone in his European security strategy. This is reflected in the level of our engagement, and in our commitment to support the steps Ukraine is ready to take to foster prosperity for its own people. In the end this responsibility lies with Ukraine, and we are but partners who can and will help in the process.

Thank you.

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