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February 4, 1998
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Committee on Trade and Investment


The Committee on Trade and Investment of the Ukraine-U.S. Binational Commission held its third meeting January 29-30, 1998 in Kiev. The Ukrainian side was headed by Andriy Goncharuk, First Deputy Minister of Foreign Economic Relations and Trade, Special Representative of the Government of Ukraine for Trade and Economic Cooperation with the U.S., and included the participation of Volodymyr Ignaschenko, First Deputy Chairman of the National Agency for Reconstruction and Development and cochair of the Business Facilitation Subcommittee. The first meeting on January 30, 1998 was headed by Sergiy Osyka, Minister of Foreign Economic Relations and Trade, and cochair of the Committee on Trade and Investment. Representatives of the Ministries of Economy, Energy, and Justice, and of the State Committees on Entrepreneurship and the Standardization, and Trade Representative lhor Gayduchok also participated. The U.S. delegation was headed by Yan H. Kalicki, Counselor to the Department of Commerce and Ombudsman for Energy and Commercial Cooperation with the New Independent States, The U.S. delegation included representatives of the National Security Council, and the Departments of Commerce, State, Agriculture, Energy, and the Agency for International Development. Ambassador Steven Pifer and Ambassador Richard Morningstar, Special Advisor to the President and Secretary of State on Assistance to the New Independent States participated on the U.S. side. The two delegations also participated in a Joint Session with the American business community, including representatives of the American Chamber of Commerce in Ukraine and the Ukraine-U.S. Business Council.

The US and Ukrainian sides agreed that trade and investment offer the greatest potential contribution to Ukraine's economic growth and integration into global economic institutions. The Committee’s goal, therefore, is to foster the creation of a commercial environment conducive to the growth of Ukraine-U.S. trade and investment.

The Committee underscored the crucial need for bold macroeconomic and structural reform to sustain progress toward macroeconomic stability in the context of tighter international financial markets. Ukraine's annual inflation rate has been reduced from over 400% in 1994 to 40% in 1996 to 10% in 1997. The Committee stressed the importance that Ukraine for the first time since its independence approved its budget law before the beginning of the next fiscal year, and that special economic measures have been approved to reduce the 1998 budget deficit to 2.5 percent of GDP. On December 30, 1997 the Ukrainian Government approved its privatization program for 1998. Further, the Ukrainian government signed into law new measures to cut the number of business licenses from 102 to 42, and it signaled its intent to issue a new decrees to reduce the regulatory burden on small business. Both sides agreed on the need to implement bold measures here to launch a more aggressive program of structural reform to spur business development and sustained economic growth.

Significant growth of trade and investment is possible if favorable conditions are created. Both sides underscored the importance to facilitate access to each others markets. The U.S. side pointed out that the U.S. economy is among the most open in the world. In June 1997, President Clinton determined that Ukraine is in full compliance with the Jackson-Vanik provisions of the 1974 Trade Act and, therefore, no longer needed an annual waiver to maintain its MFN trade status with the United States. The Ukrainian side also expressed its concern about extension of the Generalized System of Preferences on highly- liquid products of Ukrainian origin. The U.S. side noted that as part of the annual GSP Product Review Process petitions requesting the addition of products to the GSP program may be submitted to the Office of the U.S. Trade Representative.

The American and Ukrainian sides underscored the importance of taking the necessary steps to accelerate the process of Ukraine's accession to the World Trade Organization in accordance with WTO standards commonly applied to newly-acceding members. The American side agreed to continue to provide Ukraine with appropriate technical assistance for its final accession to the WTO.

The Committee emphasized that the development of an open trade regime is necessary to stimulate investment in the domestic economy. Ukraine affirmed its intent to adopt trade policies that will support its efforts to attract large-scale foreign investment. In this connection, the U.S side stressed the need to liberalize foreign trade, reform Ukraine's customs regulations and procedures and develop a WTO-consistent standards and certification system. The U.S. side cited specific problems identified by U.S. investors, including the use of minimum import valuation for purposes of tax and tariff assessment. The Ukrainian side agreed to review recently adopted measures related to imports raised by the U.S. side and to work to eliminate those practices that are not in conformity with WTO obligations. The Committee agreed to explore ways to improve standards and certification processes, beginning with the telecommunications and consumer goods sectors. Both sides noted the commitment of Derzhstandart and American Chamber of Commerce in Ukraine to begin monthly meetings on standards and certification issues. Based on early results from there meetings, responsible U.S. and Ukrainian government officials will prepare in the framework of the working group a plan for further action to improve the process for standards and certification, outlining steps to be taken for the next Ukraine-U.S. Binational Commission meeting.

The Ukrainian side expressed deep concern regarding application of the U.S. antidumping laws towards Ukrainian products. The Ukrainian side stressed while the U.S. has, politically, recognized Ukraine as an economy in transition, Ukraine is treated as a nonmarket economy under U.S. antidumping law. The U.S. side noted that there is no basis in U.S. law for economy in transition status. The U.S. side affirmed that the Commerce Department would, in accordance with the antidumping law and its regulations, consider a request in an antidumping proceeding for Ukraine to be considered a market economy. The U.S. side agreed to provide a nonpaper describing U.S. trade law as applied to antidumping investigations and of ramifications of market economy status. The U.S. side noted that with respect to outstanding antidumping orders, Ukrainian producers or exporters can seek administrative reviews in accordance the antidumping law in order to have new deposit rates and antidumping margins established.

Both sides stressed that improvement in Ukraine’s commercial environment is necessary in order to attract a significant, sustainable stream of foreign investment. They reviewed progress in achieving the objectives of the Joint Action Plan on Investment Climate Issues adopted by the Committees on Trade and Investment, and Sustainable Economic Cooperation. The Ukrainian side reported that it had developed a deregulation plan and that several laws had recently been passed which would reduce licensing requirements for business and streamline the business registration process. The Ukrainian side also noted that a presidential decree was soon to be enacted on deregulation. The U.S. side noted its support for these efforts and stressed the importance of full implementation of these deregulation laws and decrees so that tangible improvements in the business climate in Ukraine are in fact felt by foreign and domestic business firms.

Both governments placed a high priority on the need for bilateral efforts and concrete actions to foster the development of a favorable investment climate within the framework of appropriate laws and legal institutions. The Committee stressed the need for a strong senior level commitment by the Government of Ukraine to address conflicts of interest in public administration and urged early adoption of a strong code of government ethics. The Government of Ukraine affirmed its plans to adopt a code of ethics and has established a working group to achieve this. Both sides agreed that establishing fair and reliable mechanisms for resolving commercial disputes is essential to developing business confidence. Both sides agreed on the need for Ukraine to develop an independent judiciary capable of resolving commercial disputes, and effective means of enforcing judicial decisions free of non-judicial interference, and the Ukrainian side agreed to take concrete steps to achieve these objectives. The Committee agreed to facilitate a government-business dialogue on legal issues and agreed that the Ministry of Justice will convene a meeting with U.S. business representatives, with a view to possible establishment of a working group in this area. The Ukrainian side also noted that it had established a working group on procurement reform and planned to prepare draft legislation for submission to the Rada during the first half of 1998. The U.S. side offered its support for this effort, noting the problems U.S. firms have experienced in the procurement area. The Committee stressed the importance of having a transparent organizational framework to facilitate implementation of investment projects. The two sides agreed to continue cooperation, in coordination with other bilateral and multilateral efforts, to improve the predictability and transparency of government processes affecting investment, with particular emphasis on deregulation in all sectors of the economy and reform of the public procurement regime and tender and licensing processes.

The Committee agreed that resolution of long-standing problems involving U.S. companies is a critical issue and affirmed that strong and decisive steps must be taken to resolve all outstanding issues. The U.S. side reviewed U.S. legislation which requires the Secretary of State to certify by April 30, 1998 whether the Government of Ukraine has made significant progress toward resolving complaints made by United States investors to the United States Embassy prior to April 30, 1997, prior to releasing 50 percent of U.S. assistance to Ukraine in 1998 . The U.S. side noted that prior to making this certification the U.S. government will fully consult with the U.S. business community and review both outstanding business problems and whether more generalized improvements had been made in the investment environment in Ukraine.

The U.S. side underscored the need to fulfill the commitments contained in the Action Plan adopted by the Committee with respect to outstanding business cases during its May 1997 session. The U.S. side observed that one American investor has filed for international arbitration as provided for in the Ukraine-U.S. Bilateral Investment Treaty. The U.S. explained the arbitration process and responsibilities of both countries in that process and provided a nonpaper describing the arbitration process. Ukraine said it believes the pending cases will be solved in accordance with Ukrainian law and international norms as soon as possible. The Committee discussions indicated that there are differences between the American and Ukrainian sides on progress toward revolving business disputes and differences in perception, over the Ukrainian government's authority to resolve these disputes. The Committee agreed to work through these differences and established a tight schedule to exchange information and consult with the American business community to achieve practical solutions to problems faced by American investors. In addition, the Committee agreed that concrete and constructive actions to solve these investment cases would improve the business climate for all potential investors, including Ukrainians and foreigners.

To encourage foreign and domestic investment in Ukraine's critical agriculture and energy sectors, both sides agreed continued support for structural reform is essential. The Agribusiness Task Force held its first meeting. The Task Force agreed on the importance of following through on commitments made during earlier SEC and CTI meetings. The U.S. welcomed Ukraine's decision to reduce state agricultural procurements, to carry out its limited state purchases through commodity exchanges for cash, and not to interfere at any level on the grain market. These steps are key to the development of a market-driven agricultural sector. Both sides regard the progress made in privatization of agricultural parastatals such as Khlib Ukrainy, UkrAgroKhim and UkrAgroTechService as very positive, and Ukraine affirmed that it will complete privatization of these entities. As agricultural privatization continues, there was full agreement that the process must be fair and transparent. The Task Force noted that there is no moratorium on land sales for the vast majority of land in Ukraine and that this allows for creative solutions to promote private land transactions and its use as collateral. Both sides agreed to develop an action plan by mid-March to advance the commercial use of agricultural land, including the potential to use land to secure agricultural finance.

The two governments agreed that development of trade and investment in the energy sector will provide technology, equipment, and capital needed to enhance energy efficiency, increase production of Ukraine's domestic oil and gas resources, reduce energy imports and diversify energy resources. The Committee stressed the need for a transparent, consistent and fair investment environment to attract investors in the energy sector. The Ukrainian side announced that the Rada is making progress on adoption of the production sharing legislation, which is expected to be passed this year, along with conforming legislation. Both sides supported positive actions by the Cabinet of Ministers on the recommendations of the Ukraine-U.S. energy efficiency working group to reform the law on profits tax, and adopt efficient and clear administrative procedures. The U.S. side was encouraged by the government's establishment of an interministerial working group to develop a financial recovery plan for the electricity sector, which will be considered by the Ukrainian government and the World Bank in mid-February. The Ukrainian government expects to complete the recovery plan by the end of February and review it with the donor community. Both sides agreed that the outcome of the February 12 meeting of the Government of Ukraine and World Bank working group on gas sector reform should be next steps for further reforms and privatization in this sector. The U.S. side affirmed its continuing support and cooperation to accelerate reforms in the oil, gas, coal and electricity sectors.

The Committee underscored the importance of simulating cooperation and expanding trade in high-technology products. The Ukrainian side noted that Ukraine's space and other former defense enterprises are becoming more and more commercialized and internationalized, citing conversion of many of Ukraine's military communications and electronic manufacturers. Many of these enterprises wish to enter into international partnerships. Space projects, like "Sea Launch" and "Globalstar", are developing quickly into a vital component of our bilateral economic cooperation. The U.S. side agreed that we enjoy excellent cooperation on space projects. The Committee noted that the satellite launch projects could not move forward without the completion of a Technology Safeguards Agreement and noted that U.S. negotiators would like to meet soon to finalize the agreement on the protection of satellite and rocket technologies.

Both delegations participated in a Joint Session with representatives of the business community, including the American Chamber of Commerce in Ukraine and the Ukraine-U.S. Business Council, and representatives of the Ukrainian business sector. Representatives of both countries' business sectors urged broad deregulation of the economy to spur business development and economic growth. U.S. business representatives stressed the need to improve Ukraine's investment climate, and pointed to reforms in the standard and certification areas, agriculture, customs, and rule of law as critical to achieving economic growth. U.S. business representatives noted that the Ukrainian system of product certification is one of the most serious obstacles to trade and urged the Ukrainian government to improve regulatory transparency, address duplicative certification requirements and eliminate discriminatory practices. In agriculture, U.S. businesses asked for elevator privatization to remain on schedule and clarification of VAT on agricultural imports. To ease the current agricultural credit crisis, U.S. businesses urged that obstacles to private grain trade be eliminated and legislation put into place to allow for land to be collateralized. Both sides noted that the meeting enhanced government-business dialogue, and hoped that this would be the first of many such exchanges which would help to shape the work of the Committee.

Signed in Kyiv [Kiev], on the 30th day of January 1998 in duplicate in the English language

FOR THE UNITED STATES                           FOR UKRAINE 
Jan H. Kalicki                                  Sergiy Osyka 
Steven Pifer                                    Volodymyr Ignaschånko

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