FOR THE RECORD: Ambassador Pifer speaks on Ukraine's next steps

U.S. Ambassador to Ukraine Steven Pifer, in the first official U.S. reaction to the re-election of Ukraine's President Leonid Kuchma, told an audience of students and faculty at the Kyiv State University of Taras Shevchenko on December 2 that the Ukrainian government immediately must take decisive steps to implement long-planned and promised economic and administrative reforms. He said that the president has a six-month window of opportunity to make the radical and decisive changes needed to open up the markets and get the economy rolling.

The following is an extended excerpt of Ambassador Pifer' s remarks.

U.S.-Ukraine relations

Relations between the United States and Ukraine have developed a long way since Ukraine regained its independence in 1991. We have become strategic partners. Our relationship spans the entire spectrum of political, economic and security issues.

Washington's push to deepen relations reflects the importance that the United States attaches to Ukraine's success. A successful Ukraine will be a stronger partner for us. Such a Ukraine will also make the challenge of shaping a more stable and secure Europe in the 21st century easier to solve.

While the U.S.-Ukrainian relationship has made great strides, we can achieve much more. I have in mind, in particular, the development of our trade, commercial and investment relations. Strong economic relations not only strengthen the well-being of our two countries, they are a key underpinning of our partnership.

Ukraine's economic strength at home, moreover, will define Ukraine's place in the world. In order to be a full member of Europe, Ukraine has to look like Europe. And that means in economic terms.

At present, we cannot be satisfied with the current state of our bilateral economic relations. They do not reflect the potential of U.S.-Ukrainian economic cooperation or the potential of Ukraine's economy.

Our ability to realize this potential will turn in large measure on how Ukraine's economy develops in the coming months. And that depends on serious Ukrainian movement on economic reform.

Time to move on economic reform

Ukraine has made certain progress in moving from a command economy to a market economy. But Ukraine has not yet put in place the critical mass of reforms necessary to achieve real change and strong, sustained economic growth.

Some important economic policy decisions were put on hold this year because of the upcoming election. That is understandable: tough decisions are hard to make in an election year. This is equally true in Ukraine and the United States. But the election is now past; it is the time of change.

The actions of President [Leonid] Kuchma and the members of his new government will do much to determine whether Ukraine continues to stagnate or moves forward on a vigorous path of genuine change. The decisions that are taken early in this administration will have a huge impact on Ukraine's future and on its prospects for becoming a prosperous European democracy.

President Kuchma has a window of opportunity to move forward. He won re-election by a significant margin. He does not have to face another presidential campaign. The Verkhovna Rada elections are more than two years away. His political authority likely is as strong now as it will ever be. The political calendar is right for tough decisions on decisive reform.

I listened to President Kuchma's speech on Tuesday with great interest. He proposed an agenda of real change. It was an important statement. Now the question is how the goals the president described will be implemented. Let me address some of the issues that he raised.

Investment and economic recovery

Economic recovery can be difficult, but its recipe is no secret. Indeed, many in the Ukrainian government know what Ukraine needs to do. Economic recovery requires investment. But investment is very low in Ukraine.

Many potential investors, foreign and Ukrainian alike, put investment plans on hold pending the outcome of the recent election. The foreign business community will be carefully scrutinizing what the Ukrainian government does in its first days. Investors and businessmen are waiting to see if it will be business as usual, or if the authorities will launch the serious changes needed to make Ukraine an attractive place in which to do business. In the more successful economies of Central Europe and the Baltics, investment-friendly policies have led to rapid increases in investment and employment, and to impressive improvements in living standards.

I have often compared Poland and Ukraine. With your indulgence, I will do so once more. The United States is the largest direct foreign investor in Ukraine. We have about $570 million in investment here, out of a total of $3 billion. The comparable figures in Poland are $6 billion and $30 billion.

I find this difficult to understand. It is perhaps true that historical experience favors Poland. But Ukraine has more people, and they are talented and highly educated. Ukraine is better placed in geo-economic terms, and has richer and more plentiful agricultural and mineral resources.

Are Poles somehow brighter or more capable than Ukrainians? I certainly do not think so. But 10 years ago the Polish government made a decision to reform as rapidly as possible to pass quickly through a period of painful economic dislocation and put in place the foundations of a real market economy. By and large, Poland is now enjoying the benefits of that decision.

American investors are eager to bring capital, technology and modern management techniques to Ukraine. They see many opportunities throughout the economy here.

But they are not investing - or at least not nearly as much as they could. When we ask American businessmen, or Ukrainian businessmen, why they do not invest more here, we get the same answers: high and unpredictable taxes, complicated and arbitrary regulations and standards, corruption, the inability to enforce contracts and judicial rulings.

They are also disappointed by the government's slow progress on large-scale privatization. The policy of offering only small shares to strategic foreign investors has understandably generated little interest.

Let me cite a disturbing example that shows how the environment of closed-door decision-making hurts the Ukrainian economy and Ukraine's citizens. The Ukrainian government announced a project for the creation of an encrypted mobile communication system for Ukrainian law enforcement agencies. Foreign companies like Motorola, Ericsson and Rhodes & Schwatz expressed interest. Motorola was ready to form a joint venture with the Ukrainian company Kommunar in Kharkiv to participate.

But there was no request for bids, no criteria for selection, only an announcement that another foreign company had been selected to supply the radios. The U.S.-Kharkiv joint venture was offering a more advanced product at significantly lower cost. Moreover, significant local production would have taken place in Kharkiv, creating good jobs for Ukrainians. But the Ukrainian-American joint venture never was finalized, because there was no invitation to bid on the sale.

This is the type of news that troubles reform-minded Ukrainians and causes potential foreign investors to look elsewhere on the map when they consider their investment strategies. These are the kinds of problems that the new Ukrainian government must tackle, and tackle quickly, if it wants to send a positive signal to investors.

Without confidence that Ukraine is a country where regulations and taxes will be predictable, where contracts will be enforced, and where due process will be respected, most foreign investors will put their money elsewhere. And the same is true for Ukrainian investors, who withhold their capital, or invest only in the gray economy, or invest in other countries.

Administrative reform

Another problem that the Ukrainian government must address immediately is that of administrative reform. A government that has over 85 ministries, state committees and independent agencies plus a large Cabinet of Ministers apparatus is too big, too bloated and too cumbersome. It cannot be an agent for real and rapid economic change in the high-speed, high-tech world of the 21st century. It costs too much, and it gets in the way of business.

A streamlined government, in which the power to make decisions is concentrated in a smaller number of people, who each are committed to change and have full authority in their area of responsibility, will be key to Ukraine's success in carrying out a real transformation. And that streamlining is best accomplished now, before 85 ministers and chairmen are appointed.

The battle against corruption

Corruption is a particularly corrosive part of Ukraine's economic challenge. It has greatly diminished popular respect for government officials, and has discouraged normal business activity by foreigners and Ukrainians alike.

As Vice-President Gore said earlier this year, "Corruption is an enemy of democracy, for democracy lives on trust, and corruption destroys trust." Nor can economic stability take root in an environment subverted by corruption. Whether it is cronyism between large enterprises and government officials, or everyday bribery of customs agents, corruption undermines the rule of law. It chokes economic development. And it hurts ordinary Ukrainian citizens more than anyone else.

Senior Ukrainian officials need to demonstrate that they are serious about the fight against corruption. They need to do so in deeds. Among other things, that means that senior officials must sever links with major figures who have engaged in corrupt practices or are associated with criminal groups. Unless senior government officials do this, their efforts to fight corruption will not be taken seriously, and the trust and confidence of Ukrainians in their leaders will continue to erode.

A market for all Ukrainians

Development of an open, competitive market economy is essential for Ukraine's future as a democracy. As Ukraine proceeds to build such an economy, the people who most threaten that vision of Ukraine's future are not those who wave Communist banners or yell slogans against the West. I am more worried about the oligarchs who have become comfortable under the current system.

These are not people who want to return to the past. They may even call for economic reform as a general policy. But, as a practical matter, they do not want deregulation, or competitive privatizations or transparency in sectors of the economy where they have authority and control. They do not want competition in sectors where they have personal interests.

These people pose a major challenge to genuine change. In pressing to build a competitive, transparent market economy, the Ukrainian government must choose between the interests of this small number of protected insiders and the interests of the vast majority of the people.

Government-Rada relations

As the Ukrainian government comes to grips with these various problems, the support of a majority in the Verkhovna Rada will be critical. A repeat of the stalemates that so often characterized relations between the government and the Verkhovna Rada over the last two years is a recipe for stagnation.

Building a Verkhovna Rada majority - and then sustaining it - requires that the government persuade and cajole deputies to support its goals, strategy and proposals. This is hard political work.

Within the Verkhovna Rada, I hope a sustainable majority to support reform can be found. That may require compromise. But when factions agree on 80 or 90 percent of the questions, it is self-defeating to let differences over the remaining 10 or 20 percent be a roadblock to common positions. It also defeats the interests of their constituents.

My government is committed to working with Ukraine, over the long term, to further economic and political reform, to strengthen our bilateral ties, and to deepen Ukraine's links with Europe and the Euro-Atlantic community. Ukraine's success at achieving these goals depends first and foremost on Ukrainians. We can help; we want to help. But we cannot do this for Ukraine.

Ukraine has before it a real opportunity for success. There is a desire throughout the country and among many in government for strong reforms, to encourage investment, to reward honest initiative, to create a society based on rule of law. These reforms will not be easy. They will require cooperation between the government and the Rada, among different levels of government and with civil society. Most of all, these reforms require decisive leadership. The political calendar now is as good as it will be for the tough choices that must be made.

If, six months from now, the opportunity Ukraine has before it has not been taken, people will ask: how can we expect any change during the next five years? That will be a hard question to answer. It will also represent an enormous loss for the future of the Ukrainian people.

If, on the other hand, Ukraine seizes the opportunity now before it and sets out on a path of real reform, my government and others in the West will help eagerly. Just as important, the international investment community, which can bring billions of dollars to bear, will engage heavily. And the future for Ukraine and its people will be bright indeed.

As a friend of Ukraine, I hope Ukraine makes the right choice.

Copyright © The Ukrainian Weekly, January 2, 2000, No. 1, Vol. LXVIII

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