The secretary of state's certification of Ukraine: a behind-the scenes view (02/28/99)

The secretary of state's certification of Ukraine: a behind-the scenes view

by Michael Sawkiw Jr.
Ukrainian National Information Service

WASHINGTON - In 1998 Congress allocated a $195 million earmark of assistance for Ukraine for Fiscal Year 1999. Within the Foreign Aid Bill it was stipulated, however, that 50 percent of the amount of assistance to Ukraine shall be withheld from obligation "until the secretary of state reports to the Committees on Appropriations that Ukraine has undertaken significant economic reforms additional to those achieved in Fiscal Year 1998 and include: (1) reform and effective enforcement of commercial and tax code; and (2) continued progress on resolution of complaints by United States investors."

As mandated by Congress, that report was issued to the Appropriations Committees of both the House of Representatives and the Senate on Thursday, February 18.

The fairly lengthy report detailed the pace of economic reform in Ukraine, as well as the continued progress in resolving several U.S. investor complaints in Ukraine. Regarding the general assessment of economic reform in Ukraine, Secretary of State Madeleine K. Albright reported on the Ukrainian government's continued programs to strengthen the programs initiated by the International Monetary Fund's (IMF) Extended Fund Facility (EFF).

Reference was made also to future areas of growth opportunities for Ukraine as the "government has begun to undertake tax, expenditure and public administration reforms that will help facilitate sustainable fiscal balances in the future." It was noted, however, that "non-support" of reform in the Ukrainian Parliament has largely stalled Ukraine's ability to proceed with the necessary radical economic reform as indicated by World Bank and IMF programs.

The secretary's report also highlighted several crucial reform programs that have been undertaken since October 1, 1998, by the Ukrainian government in the areas of budget, tax reform, fiscal control, monetary policy, public administration reform, privatization and reform of Ukraine's commercial laws. Each topic was addressed individually, noting the validity of the reform, as well as recommendations that could be implemented by the Government of Ukraine (GOU).

Significant attention was focused on reforming Ukraine's commercial environment, in particular passage of a civil code (commercial law) and regulatory reform efforts, which include standardized methods of international accounting and shareholders rights. In her report, Secretary Albright states: "The [Verkhovna] Rada passed in the first reading a civil code that would comprehensively reform the statutory basis for private commercial activity in Ukraine's emerging market."

Notwithstanding these reform efforts, many areas have shown inadequate results in Ukraine's move toward a market-oriented economy. "The lack of structural change," stated the secretary, "in such areas as energy and agriculture have kept Ukraine from creating a sustainable fiscal balance and building incentives for growth." While privatization of Ukraine's small and medium-size enterprises has consistently forged ahead since independence, "privatization of large enterprises has barely begun." This is especially evident in Ukraine's private ownership of land and the de-collectivization of its state farms. In offering suggestions for continued economic reform, Secretary Albright noted the Ukrainian government's "interference" in the agricultural market, and the high and numerous tax burdens that result in "pushing economic activity into the shadow sector."

In its present negotiations with the IMF to renew disbursement of the EFF tranches, Ukraine faces a serious debt payment schedule in the first half of 1999. Without financing from international financial institutions, the report noted, Ukraine may default on its balance of payments, which would evidently lead to decreased economic confidence in Ukraine and "make further near-term reform progress very difficult."

The secretary's assessment of Ukraine's overall economic reform program was reviewed in consideration of the political dynamism and otherwise uncontrollable external financial circumstances. The reports states: "The Russian financial crisis, Ukraine's loss of access to international capital and politicking toward the October 1999 presidential election have limited the government's room to maneuver."

As to the complaints of American business investors in Ukraine, the secretary of state said the Ukrainian government "has taken steps to address some of these impediments, including a comprehensive program to cut regulatory burdens on business, reduce what companies regard as harassment by tax and other government authorities, and protect the rights of shareholders." The report underlined that hundreds of American businesses are operating in Ukraine, while "several, such as Coca-Cola, Ceres Terminals, Cargill and Procter & Gamble, have recently expanded their Ukrainian investments and commercial activities." [In early February 1999, Coca-Cola opened a $100 million soft-drink plant outside of Kyiv, making it the largest non-alcoholic beverage facility in Ukraine.] This is not to diminish the fact that American investors have not faced various business obstacles within Ukraine, however, it was clearly affirmed that "many of these are not specific to this country [Ukraine], but rather reflect the broader challenges of operating in rapidly changing, post-Soviet economies."

The report went on to state that the Ukrainian government has even established a Council of Independent Experts to assist foreign and domestic investors in overcoming various obstacles to doing business.

Indeed, several American businesses in Ukraine have experienced investment disputes. American officials, whether in the United States or in the Embassy in Kyiv, have been in constant communication with Ukrainian authorities to monitor the complaints filed and any action on them. Secretary Albright acknowledged that four investors (out of approximately a dozen) have been "satisfied" with the resolution of their individual business dispute. Others cases remain to be completely resolved following several verdicts in Ukraine's judicial system, yet the report properly characterizes the situation as it relates to the enforcement of these decisions: "This is an endemic problem in Ukraine and in other states of the former USSR that reflects the weakness of judicial mechanisms only partially transformed from the Soviet system."

Secretary Albright's final assessment of Ukraine's performance in economic reform concluded that "significant progress as required in this legislation has been made." Various reform programs have proven noteworthy, in particular Ukraine's fiscal reform, yet "enormous economic problems ... with a range of macroeconomic and structural reforms" must be addressed accordingly.

In regard to the resolution of U.S. business disputes, the secretary reported that continued progress has been made (in accordance with the law adopted by Congress). Though it was noted that many of the disputes have been generic in nature, the report concluded that "even if incomplete [the resolution of all business complaints], there has been significant progress on these issues." In the final statement of the report to Congress, Secretary Albright reaffirms "that the test of 'continued progress' has been met, particularly when viewed against GOU efforts to address a range of systematic issues that bedevil foreign and domestic investors, which the U.S. business community in Ukraine clearly regards as significant."

Congressional support for certificate

Various members of Congress, the Congressional Ukrainian Caucus, the U.S. business community, as well as the Ukrainian American community focused significant attention on this year's "certification" process.

Following an in-depth briefing to the Congressional Ukrainian Caucus (CUC) presented by Bill Taylor, special adviser to the secretary of state and coordinator of assistance to the NIS, and Ambassador Stephen Sestanovich, ambassador-at-large to the new independent states, the CUC penned a letter to Secretary Albright, urging her to "follow through on our strategic partnership with Ukraine." Advocating sustained U.S. foreign assistance to Ukraine, the caucus's five co-chairs - Reps. Sander Levin (D-Mich.), Bob Schaffer (R-Colo.), Louise Slaughter (D-N.Y.), Mary Kaptur (D-Ohio) and the newest co-chair, Steve Horn (R-Calif.) - pointed to a problem plaguing all of the former-Soviet republics: corruption. "Corruption was a usual occurrence in the former Soviet Union, and Ukraine had inherited these problems. While Ukraine is taking action to combat these difficulties, doing so effectively and decisively will take time and increased technical presence," stated the CUC letter to Secretary Albright.

The Congressional Ukrainian Caucus also enumerated the objectives of security and stability in Central Europe should the United States provide a positive report to Congress. Quoting from a speech that Vice-President Al Gore delivered in Kyiv during his most recent visit in July 1998, the caucus co-chairs provided examples of the many cooperative efforts undertaken between the U.S. and Ukrainian governments to achieve stability within the region, as well as continue the course of economic reform. "A negative report to Congress," stated the CUC, "could signal a subtle shift in U.S. policy away from Ukraine and play into the hands of those who hope to reconstitute a 'union' of states closely allied with Russia."

The caucus concluded its letter by emphasizing the efforts of Secretary Albright in "attaining a level of cooperation [with Ukraine] to achieve an economically strong and democratic Ukraine," which is in the national security interest of the United States.

In a separate news release Rep. Levin further commented: "It is difficult to understate the strategic importance of Ukraine to the United States. Particularly during this critical period of worldwide economic dislocations, we must remain fully engaged in Ukraine."

Community efforts

An argument similar to that used by the Congressional Ukrainian Caucus was presented to Secretary Albright in a letter from the Ukrainian Congress Committee of America (UCCA). In its appeal to Secretary Albright to provide a positive report to Congress, the UCCA indicated that "funds appropriated to Ukraine for FY 1999 from the United States have, as their main priority, the goal of maintaining support for reform efforts in a broad range of areas. Each of those areas is vitally important in continuing Ukraine's transition to a stable parliamentary democracy with a free-market economy, most notably the enactment of commercial law and the enhancement of law enforcement procedures." The UCCA pointed to the fact that only such fundamental programs and system-wide reforms will enable Ukraine to implement necessary strategies to stabilize its economy, attract foreign investment and proceed with further economic reform efforts.

Mindful of the resonance a positive or negative report would carry, the UCCA cited a critical juncture that lies ahead for Ukraine: the 1999 presidential elections. "Failure to provide a positive report to Congress," wrote UCCA President Askold Lozynskyj, "would signal a weakening of U.S. strategic, political and economic interests in Ukraine in light of growing evidence within the region of a resurgence of Russian imperialism." As Ukraine has adhered to the principles of non-proliferation of weapons of mass destruction, its resolve not to supply turbines to the nuclear reactor facility in Bushehr, Iran, and its forging of closer relations to the West and NATO, the UCCA argued that "it is in the best interest of the United States to provide a positive report to Congress" regarding economic and political reform movement in Ukraine.

Ukrainian American community members' efforts led to private meetings with members of Congress to discuss the certification process, as exemplified by discussions held in Detroit, with the local UCCA branch (headed by Borys Potapenko) and Sen. Spencer Abraham (R-Mich.) and Rep. Joseph Knollenberg (R-Mich.), a member of the House of Representatives Foreign Operations Appropriations Subcommittee.

As a result, Sen. Abraham, an outspoken proponent of U.S.-Ukrainian bilateral relations, penned a letter to Secretary Albright expressing his support for certification. "Although U.S. foreign assistance is contingent upon economic reforms in Ukraine," wrote Sen. Abraham, "I believe that we should remain engaged while these reforms are taking place. It is critical, in my view, that we do more to build our relationship with Ukraine." The senator also acknowledged the importance of sustained U.S. foreign assistance programs that is "often critical, if not the key to encouraging ongoing economic and political reform" in Ukraine.

In a letter written to Secretary Albright following certification, Rep. Knollenberg thanked the secretary for her efforts to provide a positive report to Congress. The congressman did state that he is concerned about the "obvious need for continuing reform, and it is my hope that you [Secretary Albright] will continue to promote further progress in Ukraine over the coming months, before consideration of the fiscal year 2000 Foreign Operations Appropriations Bill."

Sen. Frank Lautenberg (D-N.J.), a member of the Senate Foreign Operations Appropriations Subcommittee and longtime supporter of Ukraine, felt compelled to offer his views on certification to Secretary Albright. In his February 12 letter to the secretary of state, Sen. Lautenberg reasserted "how important it is that the United States continue support for Ukraine in order to maintain a strategic relationship and to sustain that country's economic and political reforms."

The senator elaborated on the resolution of U.S. business disputes in Ukraine and referred to Ukraine's progress in economic market-oriented reform. "I am concerned," stated Sen. Lautenberg, "that cutting U.S. assistance to Ukraine would undermine the goal of the legislation, which is to promote economic reforms and to create an environment favorable to U.S. business." It is only through continued support and U.S. engagement, continued Sen. Lautenberg, that true reform will be implemented in Ukraine.

The U.S. business community also offered recommendations to Secretary Albright. The Ukraine-U.S. Business Council forwarded a position paper to Secretary Albright's attention regarding the certification process. The analysis concluded that "there is little doubt that Ukraine met the test of satisfactory economic reform in 1998." The experience of the business council's members in Ukraine provided an appropriate argument for the progress made in resolving various U.S. business disputes. "Cause for investor complaints," wrote the Ukraine-U.S. Business Council, "probably arise more frequently in economies which are transiting from 'Marx to markets' than in more settled economies."

The council's recommendation for a positive report to Congress was based on "the cause of Ukrainian economic and political progress and U.S. long-term strategic, economic and business interests in that country."

Such strong political support from members of Congress and the business community was apparently the result of the efforts of the Ukrainian American community. Through an Action Item in Ukrainian American newspapers and information posted on the Internet, the community was encouraged to write, fax, or call their respective members of Congress to urge them to bring this important matter to the attention of Secretary Albright.

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