1.      From 15-16 March 2007 members of
the Ukraine-NATO Interparliamentary Council (UNIC), the Sub-Committee on
East-West Co-operation and Convergence and the Political Sub-Committee on NATO
Partnerships met at the Rada in Kyiv, Ukraine, for discussions on the
political, economic and security developments in Ukraine.Â
I.
Foreign Policy Priorities of Ukraine
2.      Yuriy
Kostenkno, the Deputy Minister of Foreign Affairs, opened the conference by
suggesting that the vivid debate unfolding in Ukrainian society is largely
focused on domestic matters and that the foreign policy ambitions of the
Ukrainian state remain relatively constant. A change in government may
introduce subtle shifts in foreign policy but is unlikely to upset longer-term
policies. In Mr. Kostenko’s view, Ukraine’s national interests are too
fundamental for this to happen. In this sense, Euro-Atlantic integration will
very likely remain a Ukrainian priority. He suggested that this view is shared
by both the president and the parliament and is enshrined in the legislation
passed in 2003.Â
3.      At the
same time, however, strengthening relations with the West should not imply an
unravelling of the close relationship between Russia and Ukraine. Ukraine seeks to remain active in its own neighbourhood and will continue to work
with other states in the region, including Russia, on matters of mutual concern
including energy security.Â
4.      Ukraine is particularly focused on its relations with both the European Union and NATO and
is seeking to implement action plans developed in partnership with both
institutions. This requires both intensified dialogue and a serious commitment
to reform. Ukraine hopes to conclude eventually a new treaty with the EU to
deepen relations and establish a clearer path for eventual Ukrainian
membership. This would lay out a path for progress in political development,
energy security, human and cultural development, and would also include the
eventual establishment of a free trade zone with the EU and a common market
permitting the free movement of goods, capital and people. Ukraine’s leaders feel that the EU’s current neighbourhood policy does not provide the kind of
market access, nor the long-term integration prospects that Ukraine needs to galvanize and sustain its reform process. In this respect the proposals
that the European Commission have tabled for a revamped relationship are not
seen as satisfactory in Kyiv. Ukraine wants the EU to acknowledge that, as a
European state, it has the right to apply for EU membership. Ukraine’s European vocation and its right to accede when it succeeds in meeting the
criteria for membership should be recognized in the new agreement. Talks with
the EU are ongoing, and the next round of talks is scheduled to get underway in
April 2007.
5.      By
contrast, the internal discussion about Ukraine’s relations with NATO is more
heated. The question has been excessively politicised but it needs to be
understood, not in narrow political terms, but as a strategic choice for the
country. Advocates of NATO accession are pushing for a deepening of Ukraine’s relationship with NATO, but are frustrated by some in the majority in the
governing parties who are seeking to slow this process down.
6.      Ukrainian
officials link regional prosperity to regional stability and this is the
cornerstone of its “relations with the neighbourhoodâ€. Deepening relations
with Russia is also a priority and Ukrainian officials do not see this as a
contradiction with their Western vocation. Ukraine also enjoys strategic
partnerships with Poland, Slovakia, Romania and Bulgaria and is seeking to
deepen these relationships as well. Moldova, Belarus and the South Caucusus are
not on the verge of acceding to the European Union, but Ukraine hopes to help these regions move closer to the European family of nations, while
developing closer economic relations with them. It is working to contribute to
the resolution of frozen conflicts in Transnistria, Georgia, Armenia and Azerbaijan. Because of geography, it is particularly concerned about the Transnistrian
conflict, and President Yuschenko recently advanced a plan to encourage
negotiations, which are now taking place. Ukraine, like Turkey, also wants to intensify cooperation in the Black Sea region and work to build prosperity there.Â
It sees GUAM (Georgia, Ukraine, Azerbaijan and Moldova) as a vital tool to
pursue both aims.
7.      Former
Foreign Minister Borys Tarasyuk also noted that while NATO has been quite open
to the notion of eventual Ukrainian accession, the EU has not. He suggested
that this contradicts the founding document of the EU. He did note that on 5
March, negotiations were launched to put the EU-Ukrainian relationship on a new
foundation. These talks are likely to be completed by next April when the
current agreement will have expired. But there are fundamental differences to
be ironed out, mainly relating to the fact that Ukraine wants its EU
aspirations taken seriously and the EU is not willing to acknowledge them, in
Mr. Tarasyuk’s estimation. He argued that Ukraine is too frequently associated
with Russia in the Western mind and suggested that this is a consequential
mistake.
8.      Today, Ukraine is the EU’s largest trading partner. 31.1% of its trade is with the EU, while Russia holds second place.  Ukraine is also closely cooperating with the EU on regional
issues and a range of foreign policy matters. Ukraine’s foreign policy vision
is very similar to that of the EU, particularly on the importance of human
rights matters. It is also participating in the EU police mission in the
Balkans. President Yuschenko, with the support of Russia, the EU and the United States, has also been working to resolve the Transnistrian problem.
9.      Ukraine brings important defence capabilities to the table as well. It has the world’s
third largest airlift capability and hopes to deepen cooperation with both the
EU and NATO in this area, although it is not happy with the current level of
cooperation. It has also proposed deeper airspace cooperation and has concluded
several international agreements to develop new rocket launch systems. The EU
and NATO have both been working to support the destruction of obsolete
munitions in Ukraine.Â
10.    In
response to a question Mr. Tarasyuk outlined elements of the constitutional
disagreement that has characterized recent Ukrainian politics. He noted that
the constitution accords the president exclusive rights in the conduct of
foreign policy, while the parliament has the right to approve the fundamentals
of foreign policy. But until recently there had been no law governing those
fundamentals. The president also has the exclusive right to nominate the
foreign and defence ministers, while parliament is charged with approving their
nomination.
11.    He
suggested that, because of a decision by the Socialist Party to leave the Orange coalition, the governing coalition does not reflect the will of the voters. This has
sparked a genuine internal crisis that has implications for Ukraine’s external position. Mr. Tarasyuk noted, for example, that the crisis has forced a
pause in Ukraine’s deepening relationship with NATO.
12.    Mr.
Tarasyuk also discussed emigration as a problem for his country. He noted that
there are between five and seven million Ukrainians who have left the country
in search of employment, a development that has hampered economic development.Â
Moreover, many of these Ukrainians working in Europe do not enjoy legal
protection. The government has established assistance centres in Poland, Italy, Spain and Portugal, and has urged EU countries to grant more Ukrainians legal status.
Ukrainians have been particularly vulnerable to criminal exploitation because
of this lack of protection. To date, 13 agreements have been signed to provide
a degree of social protection to Ukrainians living in EU countries. Ukraine and the EU have also initiated an agreement to simplify visa and readmission
procedures and government officials hope eventually to forge a visa free regime
with the EU.
II.
Ukraine’s Defence
Priorities
13.    Ukraine’s defence sector has undergone important changes over the past year. There are far
more civilians working at the Ministry of Defence today than several years ago,
although some of these are former military officers. This is, indeed, a
transition period, which should result in a fully civilian controlled military
establishment.
14.    At the end
of 2005 the government and the president approved a national programme of armed
forces development. This is a comprehensive defence programme the country has
conducted to rectify security objectives and resources through an interagency
process. This breadth and thoroughness of the review process has improved the
capacity of the MoD to defend the budget. This was the first time that Ukraine had conducted a major defence planning exercise employing NATO standards and thus
represented a major advance for the country and for its transition. In 2003
and 2004 the government embarked upon a thorough defence review that made the
national development programme possible. According to Ukrainian officials, this
has bolstered the country’s capacity to operate with NATO and Western forces
and established new markers for higher and more relevant training standards. It
is now employing a similar methodology to embark on a broader security sector
review. Ukraine is working with NATO, the EU and the UN on this review. One
Ukrainian parliamentarian noted, however, that the security sector initiative
is strictly presidential and has not been discussed in parliament, although it
was based on the Ukrainian law on national security.
15.    NATO and
NATO member governments have been very active in supporting these efforts,
while Ukraine has an inter-agency commission working under the Ministry of
Foreign Affairs to focus efforts on deepening cooperation with the Alliance. Ukraine takes the PARP (Planning and Review Process) process very seriously
and sees it as way to advance force modernization whilst bolstering
interoperability with NATO forces. NATO technical assistance programmes have
provided important support to Ukraine’s revamped planning process. NATO has
also provided important assistance to Ukraine’s munitions destruction
programme.
16.    NATO has
also reached out to civil society as well as political leaders. Kyiv hosts a
NATO Information Centre, which has an important outreach function. Roughly 10%
of Rada members, for example, have travelled to Brussels for discussions with
NATO officials. Many of these politicians harbour strong reservations about
NATO, but the dialogue is designed to clear up misunderstandings on both
sides. Cultural elites, religious leaders and young people are also engaged in
a number of activities organised by NATO. Despite these efforts, there is a
sense that more can be done to engage the population in a well-informed dialogue
about the role and function of the Alliance.
17.    A growing
number of NGOs are adopting an explicitly Euro-Atlantic agenda. But as the head
of the Ukrainian Atlantic Council noted, there is a sense among those in civil
society supporting this agenda that the government is very reluctant to adopt
it, nor does it respond when NATO is attacked by strongly anti-NATO forces like
the Communist Party. This suggests that a new internal impetus is needed to
generate a greater understanding of the potential benefits of a closer
relationship with NATO. The Atlantic Council of Ukraine has been particularly
active in this regard with young people and university students. Indeed, there
is a sense that the younger generation is far more open to Western integration
than the older generation. The problem is both generational and geographical
with eastern and southern Ukraine registering far more objections to deepening
ties to NATO than western Ukraine. The problem ultimately lies in the lack of
good public information on the Alliance and on security issues in general.Â
Some of those supporting Ukraine’s dialogue with NATO feel that the environment
is growing more difficult because of Russia’s openly expressed hostility to
this relationship and its active public campaign against it. The government’s
own public relations campaign, from the perspective of these critics, has not
been adequate to the task.
18.    Ukraine
has offered airlift capabilities for the KFOR operations, and negotiations on
this offer are underway. Ukrainian police units are also deployed in Kosovo,
as well as forces in the Ukrainian, Polish, Lithuanian battalion. At one
point, Ukraine also had 1,500 troops in Iraq, but that number has fallen to 40
working on border, police and training matters. In Liberia, Ukraine has sent a
helicopter squad to provide fire support and transport.Â
19.    Ukraine
confronts an array of non-traditional threats: the proliferation of WMD,
terrorism, mafia groups, mass migration, energy security and the aftermath of
Chernobyl. The recent decision to deploy elements of an American ABM
(anti-ballistic missile) system in Poland and the Czech republic has generated
a great deal of controversy in Ukraine in recent months. Ukrainian officials
want to examine the issue very closely before making a decision on how to
approach the matter. Ukraine also wants to participate in the international
discussion about this system and the general threat it aims to thwart. There
are clearly concerns about the proliferation of missiles and missile technology
and this, in the minds of some of the Ukrainian participants, certainly should
inspire a discussion about the possible role of ABM. If this can be dealt as a
technical challenge, it can be handled in a more rational fashion and, thus,
common ground is more likely to be found. But the dialogue must be intensified
and Ukraine’s demands are, at least, in part, a direct consequence of its now
enhanced capacity to assess threats and to formulate national strategies for
coping with these.
20.    For its
part, the EU has also embarked on a number of security sector programmes with
the Ukrainian government, and Ukraine is seeking ways to work more closely with
the EU in the security field. NATO and the EU have shared notes and are making
an effort not to duplicate their efforts.Â
III.
Economic Outlook
21.    The
Ukrainian economy has been growing at roughly 7.5% over the past year, and its
public finances have significantly improved. It has made great progress in
poverty reduction, although significant levels of poverty persist, particularly
in the countryside. A moratorium on sales of land has made it more difficult to
generate wealth in the countryside.
22.    Ukraine’s
economic management has been generally good and the country has benefited
recently from favourable terms of trade and increased exports. Because of
significant installed capacity, rising demand has not proven inflationary.
23.    The
business and investment environment, however, must be changed. The economy is
harmed by the state’s low level of administrative efficiency. This is
recognized in the Council of Minister’s Action Plan for 2007-2008. Tax reform,
and reduced fiscal and administrative burdens are essential. Currently 35% of
the economy is operating in the grey and black markets, in part, because state
inspections and licensing requirements remain burdensome and liable to abuse
and corrupt practices. The government hopes to establish more simplified and
lower cost systems to create a better business environment. The barriers to
business in Ukraine remain formidable, and confusing regulatory requirements
create an environment very conducive to corruption and discretionary
decision-making. In 2005 an important reform was introduced in this regard and
9,475 regulatory acts were revised or cancelled. This significantly reduced
pressures on businesses operating in Ukraine. This has helped reduce the size
of the shadow economy. The longer-term challenge will be to galvanize the
high-tech sector of the national economy to ensure a higher degree of added
value production. Ukraine has an important scientific tradition but it has yet
to develop systems to transform this to commercial advantages.
24.    Public
investments must also be improved. The problem is that social spending has
crowded out fiscal space, and if a new balance between investment and
consumption is not struck, Ukraine could confront bottlenecks to growth over
the longer term. There is ample room to improve the social welfare sector in
order to render it more cost effective and efficient. Ukraine’s pension system
is the most expensive in the world in terms of its size relative to GDP.
Roughly 25% of the population is paid pensions, and this number simply has to
be reduced. Many of these entitlements are received by people who do not need
them and should not qualify. The system has also placed high costs on
businesses and the tax system is increasingly underwriting consumption rather
than investment. Change in the retirement age is an essential but politically
daunting initiative that will eventually have to be undertaken.
25.    The
government has made growth, poverty reduction, further international links and
a closer relationship with the EU top economic priorities. The EU has been
accelerating support to the country in recent years and the World Bank group
has been the biggest supporter. The Bank has focused on Ukrainian
infrastructure and energy efficiency projects. There are major new investments
designed to spur energy efficiency, and this has helped the country adjust to the
introduction of market gas prices. The Bank also wants to support quality
improvements in public institutions and particularly those that govern
markets. Here, there is much work to be done. US support through the
Millennium Development Project could play an important role here.
26.    One of the
greatest economic challenges Ukraine has faced has been a lack of consistency
in the application of its economic transition strategies. The country has had
more than ten different transition programmes since its independence. Myriad
reforms have been adopted but never implemented. The government is now
focusing on the basic reforms needed to galvanize the economy to a higher level
of technological development and greater economic efficiency. High technology
accounts for only 5% of Ukraine’s exports, and the trends have been negative in
recent years, despite increased spending on research. The government
recognizes that it must reverse this course by improving the county’s capacity
to commercialise its basic research. The government is introducing a series of
education reforms and is working with Hungarian officials to develop
methodologies for developing its technological potential. But the problem is
not simply technical, it also has important legal dimension.
27.    Attracting
more foreign direct investment represents another government ambition. The re‑nationalizations
of 2006 deterred investors, and the level of investment inflow has yet to
return to that of 2005. Greater stability, as well as an improved regulatory
environment, is needed to encourage foreign investment flows, which are needed
to generate jobs and access to advanced technology.Â
IV.
The Energy Sector
28.    Ukraine
confronts a range of energy challenges that have important implications for the
national economy and for national security. Western Europe tends to see
Ukraine as a critical energy transport region. 45 millions tons of oil passed
through the country last year as well as 128.5 billion cubic meters of
natural gas. Natural gas pricing has posed painful problems for Ukraine and
has been a source of enormous tension with Russia. Although an agreement has
been signed on pricing, it is not on as favourable terms as some had hoped.
Romania, for example, is paying significantly less for its gas supplies.Â
Moreover, prices rise significantly once gas passes into the country and this
is proving a burden to Ukraine’s chemical and steel industries. Debt for
previously consumed gas is a significant problem for a number of Ukrainian
communities, where only half of consumers pay for their gas. Limits have now
been placed on communities that fail to make their payments and this has
adverse social effects.
29.    Ukraine
needs to address domestic market inefficiencies as part of its energy security
strategy. There has been an absence of vision for the sector’s future and no
attempt to inform the public of its own responsibilities in this regard. The
market itself is poorly structured and fails to encourage energy savings.Â
Ukraine also needs to diversify its own energy sources in order to reduce its
energy dependence on a country that routinely uses its own gas and oil
endowments for political purposes. That said, Russia’s own capacity to fix
global gas prices through the creation of an OPEC-like cartel is very limited.
With the exception of Liquefied Natural Gas, gas exports depend on pipelines
and it is therefore not a globally “fungible†commodity.
