# EUR-Lex - 52012SC0124 - EN

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# 52012SC0124

**JOINT STAFF WORKING DOCUMENT Implementation of the European Neighbourhood Policy in Ukraine Progress in 2011 and recommendations for action Accompanying the document JOINT COMMUNICATION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS Delivering on a new European Neighbourhood Policy /* SWD/2012/0124 final */**

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1. 
Overall assessment and recommendations

This document reports on the progress made
in implementing the EU-Ukraine Association Agenda between 1 January and 31
December 2011. Developments outside this reporting period are also taken into
consideration where deemed relevant. This is not intended to be a general
review of the political and economic situation in Ukraine. For information on
regional and multilateral sector processes, readers should refer to the Eastern
Partnership report.

In 2011 Ukraine took positive steps to
secure deeper long-term future relations with the EU by working intensively to
finalise the negotiations of the Association Agreement. This Agreement
establishes a comprehensive agenda for political association and economic
integration on the basis of the sharing of European values, increased market
access, approximation with the EU acquis and the overall modernization
of Ukraine’s institutions. It includes a Deep and Comprehensive Free Trade Area
(DCFTA), and covers political and security co-operation, justice, liberty and
security, financial co-operation and a comprehensive programme of approximation
to the EU acquis across all sectors. Substantive negotiations on
the Agreement were closed in December and the text was initialled on 30 March
2012.

In the area of democracy and human rights there
was further deterioration. Several leading opposition figures, including former
Prime Minister Tymoshenko, were subjected to selective justice, characterized
by un-transparent judicial processes. This attracted substantial criticism both
at home and abroad. Ukraine’s
performance, notably in relation to respect for common values and the rule of
law, will be of crucial importance for the speed of its political association
and economic integration with the EU, inter alia with regard to conclusion of
the Association Agreement and its subsequent implementation. This would also provide a new momentum to a political dialogue which
at present is dominated by discussions on stalled reforms and the rule of law. The
adoption of a new Law on Public Associations in March 2012 was an important
first step signalling a possible change from the existing trend.

Despite the adoption of new legislation,
corruption perception remains high and Ukraine maintains a low position in
relevant international indices. Conditions for business and investment have
further deteriorated.

In November 2011, a new law on
parliamentary elections was approved with an overwhelming cross party majority,
although it failed to take fully into account all of the recommendations from
the Venice Commission[1].

In the second part of the year Ukraine started a process of reviewing the Criminal Procedure Code which dates from the
early 1960s (the Criminal Procedural Code was later adopted in April 2012). This
revision was carried out in close consultation with experts from the Council of
Europe and could represent an example for pursuing other reforms such as
revision of the Criminal Code.

In 2011, Ukraine's economic recovery
continued, with a strong growth performance and inflation largely under
control. However, there are significant risks to the fiscal balance and the
balance of payments. Moreover, the International Monetary Fund (IMF) programme
is currently off-track, with an impact on access to international capital
markets. Ukraine has resumed talks with the IMF in February.

Ukraine's progress
in achieving important structural reforms and implementing the Association
Agenda priorities remained below expectations. Public procurement
legislation was brought closer to international standards but reforms in the
field of public finance management were not adequately pursued. This had a
negative impact on the delivery of EU financial assistance including budget
support[2].

Ukraine made
progress in the implementation of the first phase of the Action Plan for Visa
Liberalisation.

On 1 February
2011, Ukraine acceded to the Energy Community Treaty committing
in the process to implement a number of significant structural reforms
including, for the gas sector, third party access and the separation of
production, distribution and transport. Further efforts by Ukraine are necessary to fulfil these commitments.

Increased prices
for imported gas negatively impacted on Ukraine’s fiscal situation: securing a
new arrangement with Russia remains a top priority for Ukrainian authorities.
This needs to be linked to long-term energy reform including the restructuring
of the state oil and gas monopolist Naftogaz and improving energy efficiency
and the use of renewable energy. The EU will continue to offer to both Ukraine and Russia to participate in tripartite discussions on gas transit.

In a successful
pledging conference in April 2011, EUR 550 million were pledged for the
implementation of projects to complete the permanent shelter and related
facilities at the Chernobyl site.

Ukraine continued to cooperate with the EU on regional and international
issues. At the regional level, Ukraine’s agreement with the Republic of Moldova on the demarcation of the borderline at the Odessa-Reni highway sector at
Palanca gave a boost to bilateral relations. Cooperation with the EU on all
questions related to the Transnistria settlement was very constructive.

On the basis of this year’s report, and
with the view of a sustained implementation of the Association Agenda in 2012, Ukraine is invited to:

· 
Ensure that constitutional reform process is
carried out in an inclusive and transparent way and in close cooperation with
the Council of Europe/Venice Commission.

· 
Effectively implement the Association Agenda
priorities concerning therespect for the rule of law and democratic values.

· 
Bring legislation on freedom of assembly
and media freedom in line with European standards.

· 
Address the issue of politically-motivated
selective justice, take steps, more broadly, to ensure the independence of the
judiciary and pursue reform in all aspects of the judicial process:
prosecution, trial, sentencing, detention and appeals.

· 
Further develop co-operation with Council of
Europe (including on elections, the revision of the legislation on the Office
of the Public Prosecutor and on the Bar, of the role of the High Council of
Justice, of the Criminal Code and notably its articles 364 and 365 as well as
amendments to the laws on the Judicial System and the Status of Judges in
accordance with the recommendations made by the Venice Commission, effective
implementation of the Law on Free Legal Aid and establishment of a National
Preventive Mechanism to prevent ill-treatment and torture), building on the
experience of preparing the new Criminal Procedure Code; address transparently the
recommendations and advice received during consultations.

· 
Take effective action to tackle conflict of
interest and corruption as well as specific obstacles to business and
investment; address the trade and trade-related reforms laid down in the
Association Agenda with a view to facilitate the implementation of the future
DCFTA.

· 
Address in good time issues raised in the area
of justice and home affairs, notably on combating trafficking in human beings
taking into account a gender and human rights perspective.

· 
Prepare and conduct the 2012 parliamentary
elections in line with the standards of the Organisation for Security and
Cooperation in Europe - Office for Democratic Institutions and Human Rights
(OSCE/ODIHR), including full co-operation with monitoring missions.

· 
Establish a macroeconomic framework, conducive
to the resumption of IMF support addressing inter alia issues of fiscal
sustainability in the energy sector.

· 
Address outstanding issues of transparency and
accountability in public finance management, making use of EU technical
assistance in this area. This is a condition for continued EU budget support
and EU macro-financial assistance. Sustained improvements in public finance
management are also essential for continued EU budget support.

· 
Bring the law on civil service of November 2011
in line with EU norms, which would allow an EU sector budget support programme
of EUR 70 million to advance.

· 
Comply with the obligations of the Energy Community
Treaty (as reflected in the Association Agreement and the Association Agenda)
and pursue reforms in line with the commitments taken upon accession to this
treaty.

· 
Coordinate better EU assistance and optimise its
effectiveness by facilitating project and expert registration and integrating
experts better in their respective working environment.

2. 
Political dialogue and reform
Towards Deep
and Sustainable Democracy

Ukraine’s electoral
legislation was further revised taking into account a number of the recommendations
from the Council of Europe Venice Commission or the OSCE/ODIHR. However the new
law on Election of People’s Deputies did not take into account those of the Venice
Commission recommendations concerning the introduction of a mixed electoral system
(majoritarian and proportional), the increase of the electoral threshold for
parties to participate in distribution of mandates in the “nation-wide
district” from 3% to 5%, the ban on electoral blocs and the proposed electoral
limitations for convicted persons. The decision by the parliamentary majority of
81% to disregard these points and adopt the law  was criticised by some civil
society representatives. Civil Society also complained that, in its initial
phase, the work on the new electoral legislation lacked transparency and
inclusiveness[3].

Improved legislation in the area of freedom
of association would allow Ukraine’s lively civil society to develop
further. To this end, in May 2011, a new draft law on public associations,
elaborated in close cooperation with civil society groups, passed its first
reading in the parliament. Subsequent to the reporting period, the Parliament
adopted the new law in March 2012. It was positively received by civil society
representatives.

Authorities are increasingly hostile to
public displays of discontent and on occasions tried to limit freedom of
assembly. The number of court rulings prohibiting gatherings has grown
compared to previous years. A further effort is needed to encourage courts to
follow European Court of Human Rights case law, rather than resort to Soviet-era
legal acts, when justifying their decisions. Law enforcement bodies resort to
various means to deter demonstrations, in particular those against the current
government. In November, while the authorities were removing a tented camp to
fulfil a court ruling banning a rally in Donetsk, a 70-year-old protester died.
The case is being investigated by the prosecutor.

The distribution of digital broadcasting
licences to companies controlled by prominent members and associates of the
current administration raises concerns about the future of media freedom
and the pluralism of broadcast media. Journalists from the electronic media and
the press report cases of censorship and harassment from law enforcement bodies.
An interdepartmental working group has been established under the Presidential
Administration to address the reports of violations of journalists' rights. An
initiative welcomed by journalists which are, however, concerned by the lack of
follow-up to the working group’s meetings. The investigations on the
disappearance of Editor Vasyl Klymentyev have not visibly progressed despite
assurances from the Prosecutor General’s Office in November that the case was
being pursued. No effective steps were taken to establish a public service
broadcaster in line with international standards. In June 2011, the Cabinet of
Ministers finalised a draft law on public broadcasting which was submitted to
the Council of Europe for assessment. The draft law was criticised by
independent media experts. The issue of a lack of transparency in media
ownership remains to be addressed.

Important concerns remain regarding respect
for the rule of law and strengthening the judiciary. Trials
against opposition leaders and members of the former government, which did not
respect international standards on fair, transparent and independent legal
processes, confirmed the perception that justice is being applied selectively
through politically motivated prosecutions.

More than 20 high-level representatives of
the former government are either under investigation or have been convicted,
including former Prime Minister Yulia Tymoshenko. In October, Tymoshenko was
sentenced to seven years in prison for abuse of office, in relation to the gas
contracts she signed with Russia in January 2009. She is now serving her
sentence in jail. Other high-profile cases concern former Minister of the
Interior Yuriy Lutsenko and former Acting Defence Minister Valeriy Ivashchenko
who were sentenced to prison subsequent to the reporting period. Apart from a
high number of procedural deficiencies serious concerns have been voiced
regarding the lack of proper medical treatment available to detainees.
According to a number of reports the government has exerted inappropriate
pressure on the chairman of the Supreme Court.

The National Commission for the
Strengthening of Democracy and Rule of Law has worked on the preparation of
amendments to the law on the Judiciary and on the Status of the Judges to
address earlier recommendations by the Venice Commission. In July, the
amendments were re-submitted to the Venice Commission. In its October opinion,
the Venice Commission concluded that the draft amendments include a number of
important improvements. It recommended, however, that the Constitution be
amended to allow for reform of the appointments system and the removal of
judges.

Regarding the fight against corruption,
there was no significant progress in terms of results. In 2011, Ukraine lost 18 places in the Corruption Perceptions Index of Transparency International,
being ranked 152nd out of 187 countries. In July 2011, the law on
the Principles of Preventing and Combating Corruption, and the law amending
several legislative acts concerning liability for corruption offences, entered
into force. However, the legislation which has been adopted remains incomplete,
and in some places ambiguous, and does not fully comply with the requirements
of the relevant Council of Europe and UN instruments. There are important
recommendations from the Council of Europe Group of States against Corruption
(GRECO) to which proper follow-up has not yet been given.

In October, a
National Anti-Corruption Strategy was adopted. The Strategy gives general
directions for further action in a number of areas but does not tackle some of
the key outstanding issues, such as the establishment of an independent
anti-corruption body, the specialisation and clearer distribution of tasks
among law enforcement agencies, the verification of asset declarations, and the
conflict of interests. The corresponding action plan is still under
preparation. The institutional framework necessary to prevent and repress
corruption, to monitor the implementation of anti-corruption policies, to
enforce the law, and to prosecute violations, is not yet in place.

As in previous years, there was no
significant progress on constitutional reform. In February 2011, an
expert working group was established to prepare for the election of a
Constitutional Assembly and the Venice Commission provided an opinion on the
concept paper on the establishment and functioning of a Constitutional Assembly
in March. The Constitutional Assembly had not been established by the end of
2011. In January 2012, the President issued a decree on formation and organisation
of activities of a Constitutional Assembly. It is important that this reform is
carried out through an inclusive process and that it aims to establish a
coherent, lasting and democratic system of checks and balances in accordance
with European standards.

Other Human rights and governance-related
issues

The Ombudsperson’s Office raised its
profile by increasing the media coverage of its activities. An updated website
allows the public to more easily access information on the Ombudsperson activities.
Despite this positive development, government bodies failed to provide proper
responses to a number of the Ombudsperson’s requests.

The implementation of the judgements of the
European Court of Human Rights continues to be of concern. The authorities
in Kyiv have not yet taken measures to execute the “pilot judgment” in the
Ivanov case, which concerns the obligation of Ukraine to set up an
effective domestic remedy in cases of non-enforcement of domestic judicial
decisions. The implementation of this pilot judgement is of particular
relevance because of its effects on more than 1000 similar applications lodged
with the Court.

International and domestic human rights
organisations continue to report on an increasing number of complaints of torture
and ill-treatment in penitentiary and detention facilities, and of
failures to ensure appropriate medical care. There is an excessive use of
pre-trial detention measures. The problem of overcrowding in detention
facilities has been reported by both the Ombudsperson and independent human
rights defenders. There is an urgent need to raise awareness among judges,
prosecutors and other law-enforcement agents on combating torture and inhuman
and degrading punishment. In November, Ukraine agreed to the publication of the
report by the European Committee for the Prevention of Torture and Inhuman or
Degrading Treatment or Punishment (CPT) of the Council of Europe. In its
report, the CPT notes some improvement in the material conditions of detention
in law enforcement establishments, but expresses concern that little progress
has been made in many other areas. The National Preventive Mechanism under the
Optional Protocol to the Convention against Torture has not been established.

Cases of discrimination on the basis
of nationality or ethnic origin continue to be reported. Roma and Crimean
Tatar, as well as other minority groups, continue to be the object of
discrimination and racism. Discrimination on the grounds of sexual orientation
remains common and there is a need to raise social awareness and modify
widespread attitudes in this respect. A comprehensive anti-discrimination
legislation to ensure effective protection against discrimination, as
recommended by UN and Council of Europe monitoring bodies is still missing. Ukraine should revise its national legislation in the field of protection of persons
belonging to national minorities to address the recommendations made by the
European Commission against Racism and Intolerance and by the Council of Europe
Committee of Ministers on the application of the European Charter for Regional
or Minority Languages.

In the area of gender equality, the
draft law on equal rights and voters lists remains to be adopted. Some
further progress can be reported in the area of children’s rights.

Human rights and international
organisations reported a number of cases of violation of the rights of
refugees and asylum-seekers, including instances of forced deportation, systematic
lack of protection of certain nationalities, lack of protection of
unaccompanied minors, widespread corruption in the asylum system, and denial of
access to asylum seekers by representatives of the United Nations High
Commissioner for Refugees (UNHCR). While the adoption of a Law on Asylum and
Refugee Status is a positive development, problems remain with its
implementation and the functioning of the new structures.

The functioning of local and regional
self-government is affected by entrenched centralisation and excessive
bureaucracy. Shortly after the reporting period, the Parliament adopted a law
on the establishment of a State Fund for Regional Development. Together with the process of updating the National Regional
Development Strategy, this represents a positive development.

Work continued on public administration
reform. In November, the Parliament adopted a new law on the Civil Service
which was subsequently endorsed by the President. The law did not take into
account the core recommendations made by the EU funded SIGMA programme, putting
at risk an EUR 70 million support programme for public administration reform[4]. The President submitted to the
Parliament a draft law on administrative services, the adoption of which would
help to define a legal framework for the relationship between state and
citizens. It will need to be accompanied by a code of administrative
procedures.

Cooperation on
foreign and security policy, regional and international issues, conflict
prevention and crisis management

Ukraine continued to cooperate actively with the EU on regional and international
issues although its alignment with EU Common Foreign and Security Policy declarations
continued to decrease. In 2011 Ukraine aligned itself with 36 out of 82 declarations
(44% against 89% in 2009). Ukraine cooperated very constructively with the EU
on all questions related to the Transnistria settlement efforts and
pro-actively engaged in the resumption of official 5+2 talks.

In June, Ukraine and the Republic of Moldova found a negotiated solution to almost all their disagreements
over the demarcation of the northern and southern segments of their common
border. Further efforts are needed to find solutions to the remaining border
issues in particular as regards the Novodnistrovsc hydroelectric power station.

Ukraine continued
to participate very constructively in the work of the EU Border Assistance
Mission to the Republic of Moldova and Ukraine (EUBAM). With EUBAM support,
the Ukrainian customs and border guard services continued to enhance their
professional capacities, and to secure valuable inter-agency cooperation both
within Ukraine and between Ukraine and the Republic of Moldova. EUBAM continued
to support the demarcation of the central segment of the Ukrainian-Moldovan State border on the Ukrainian side and coordinated the successful “Akkerman” joint border
control operation. In December, the Ukrainian government approved of the
long-awaited decision to authorise joint patrolling of the border between Ukraine and the Republic of Moldova. EUBAM also facilitated talks to resume rail cargo traffic
through the Transnistrian region. The EU continued to actively support the
demarcation of the central (Transnistrian) segment of the border between Ukraine and the Republic of Moldova.

Ukraine indicated
its interest in contributing to the EU-led naval operation ATALANTA, seconding
staff and opening discussions on possible participation in future airborne
reconnaissance activities.

Ukraine intensified
cooperation with the countries from the region and the exchange of best
practices with the EU through its participation in the EU Programme for Prevention
of, Preparedness for, and Response to natural and man-made disasters (PPRD
East).

3. 
Economic and social reform
Macroeconomic
framework and functioning market economy

Ukraine's economy
performed well in 2011, with real GDP growth reaching 5.2%, after 4.2% in 2010.
It thus continued its recovery after the crisis in 2009, when output contracted
by nearly 15%. Growth in 2010 and 2011 was initially export-led but
increasingly fuelled by stronger domestic demand. Real growth is expected to
slow down in 2012, with the World Bank and the IMF estimates ranging between
2.5% and 3.5-4% respectively.

After three years of double digit rates,
year-on-year inflation in December 2010 came down to 4.6% (from 9.1% in December
2010) mainly due to falling food prices as international commodity prices
dropped and the harvest was better than expected. Regarding fiscal policy, Ukraine broadly followed the consolidation course agreed with the IMF. However, the deficit
of Naftogaz continues to represent a major risk for the budget. The gas tariff
increases for households and utilities foreseen in the IMF programme have yet
to be implemented and the programme is off-track. With Naftogaz’ deficit
reaching 1.6% of GDP, the overall government deficit is at 4.3% of GDP in 2011,
which is above the 3.5% target agreed with the IMF.

The public debt ratio has increased
significantly in recent years, to approximately 40% of GDP in 2011 from only
12% in 2007. Delays in the adjustment of gas prices and the expected slowdown
in economic activity may threaten the fiscal consolidation path agreed under
the IMF programme.

Following a period of stabilisation in 2010
(after the balance of payments crisis of 2008-2009), the current account
deficit widened again in 2011, reaching an estimated USD 9.3 billion (EUR 7.2
billion), or 5.9% of GDP.

Currency reserves declined to USD 31.8
billion (EUR 24.6 billion) by end 2011. The EUR 610 million macro-financial
assistance made available by the EU is currently on hold due to lack of
progress in negotiations with the IMF and the slow pace of structural reforms
in key sectors including energy, public finance management and fight against
corruption.

The implementation of the ambitious
Programme for Economic Reforms for 2010-2014 has been slow. Progress has been
achieved in pension reform and, to a lesser extent, in improving budget
legislation. Public administration and public finance management remain
unreformed and non-transparent, weakened by red tape and prone to corruption.

Employment and
social policy

The official unemployment rate is at 2.1%,
(2.2% in 2010). While the ILO-measured rate stands at a substantially higher
level, figures do not reflect the high number of unregistered low-paid jobs in
the shadow economy.

Between January and August 2011, over 1.3
million of seekers were registered as unemployed, while around half a million found
an occupation via the state employment services. The informal sector (including
both undeclared jobs and undeclared wages) continues to represent a substantial
share of employment, estimated at around 20%.

In September, Ukraine declared the
improvement of skills matching a key priority and launched several initiatives
in this area with donor support. An EU-funded project on skills matching and
migration involving social partners started in April 2011.

In the area of social protection, a
law on pension reform entered into force in October. The law increased from five
to 15 years and from 25 to 35 years the minimum contribution requirements to
qualify for a pension and to receive a full pension, respectively. Pension age
for women and state civil servants increased to 60 and 62 years respectively.
Specific services for disabled persons and veterans were established through
Presidential decree in April 2011, as part of the overall administrative
reform. The Ministry of Social Policy was given responsibility for the delivery
of social allowances and services for youth and families. Social Service
Centres are being reformed.

There was no progress towards the adoption
of the amended Labour Code; several laws, notably concerning wages and
collective bargaining, still have to be revised so as to ensure compliance with
international labour standards. In February, the parliament ratified the
1981 ILO Convention concerning Occupational Safety and Health
and the Working Environment, the 1993 ILO Convention on the Prevention
of Major Industrial Accidents, and the 1995 ILO Convention on Safety and Health
in Mines.

An occupational health and safety project
including capacity-building of social partners, occupational security and
health offices and labour inspectorates started in 2011, as part of an ILO
global project.

4. 
Trade-related issues, market and regulatory
reform

Bilateral trade between the EU and Ukraine continued growing during 2011,
consolidating the recovery started in 2010. EU imports
from Ukraine increased by 30.6% and were dominated by iron and steel (29.5%),
fuels and mining products (25.1%), as well as agricultural products (19.4%). EU
exports to Ukraine experienced a growth of 22.2% and consisted mainly of
machinery and transport equipment (36.6%) and chemicals (18.6%).

Economic operators were affected by a
number of persistent trade irritants during 2011, notably difficulties with
customs valuation and classification; growing value added tax (VAT) refund
arrears despite the new automatic refund system; and perceived harassment by
tax authorities.

In December, the EU and Ukraine completed the negotiations on a DCFTA as part of a future Association Agreement.

Ukraine acceded to
the Revised Kyoto Convention on Harmonisation and Simplification of Customs Procedures,
which should contribute to approximation with EU standards. The New Customs
Code, which is still under preparation, should take into account the provisions
of the Kyoto Convention and the DCFTA objectives. There is a need for a more
structured approach for customs modernisation allowing to focus on strategic
objectives. Despite of some progress made in specific areas, such as more
streamlined coordination of border control and improved communication with
business environment, the need for substantial reforms remains. Importers
reported an increase from 2 to 8 days in the customs clearance time, as well as
an increase in the rate of physical inspections (to 41%). Customs valuation remains
a serious concern. Despite some positive steps taken, the situation after a
short improvement deteriorated again in the fourth quarter of the year. An
emerging problem area is classification control. Corruption remains a serious
obstacle to trade and business operations. Ukraine participated in the
"FIREBLADE" joint customs operation targeting trafficking of
counterfeit goods at the EU Eastern border.

On free
movement of goods, new laws on market surveillance and control of non-food
products and on the safety of non-food products entered into force in July. Ukraine abolished the pre-market control of manufacturers. Implementing legislation made progress,
with the adoption of nine by-laws in December, but there is still room for
further development. The law on liability for the damage caused by defective
products came into force in September.

In 2011, the
Government submitted to the Parliament amendments to the metrology law, which
preserve the existing (non-transparent) system burdened with conflicts of
interest. Technical regulations based on EU Directives need to be revised in
order to become fully compliant. The EU Budget Support Programme on Technical
Barriers to Trade (EUR 45 million) experienced several delays due to the slow
pace of implementation of the administrative reform programme. As a result the
second disbursement was postponed at the request of Ukraine.

The business
climate deteriorated in 2011. Economic operators reported that they were facing
an unpredictable regulatory environment where rules were unclear and
inconsistently applied, which had the effect of hampering business development.
Pressure and harassment of businesses by various authorities (tax, customs) and
by law enforcement bodies (police, prosecutor general, security service),
corruption and a general deficiency of rule of law enforcement were reported as
the major obstacles to doing business. The ranking of the ease of doing
business, produced in the annual World Bank's "Doing Business 2012"
report showed that Ukraine's rating had worsened (to 152nd place in
2012, three places below its position last year).

Ukraine continued its gradual process of approximation with EU sanitary
and phyto-sanitary (SPS) standards. It prepared the institutional reform
plan required to obtain EU support under the Comprehensive Institution Building and an SPS roadmap. It started to consolidate the Veterinary and
Phyto-sanitary Service, established in April 2011, and started training staff (with
EU support). In November 2011, the Food and Veterinary Office (FVO) of the
European Commission carried out an inspection mission on the implementation of
feed safety requirements. The EU supported Ukraine, via a twinning project, in
tightening up food safety checks. A new twinning on approximation of
phyto-sanitary legislation and administration with EU standards was prepared.

In the area of company law, the law on Joint Stock
Companies was amended in February 2011. The aim of the amendments is to further
simplify the corporate governance framework. Hostile take-overs have been made more
difficult. Due attention should be paid to minority shareholders' rights. The law
introducing the International Financial Reporting Standards for banks, public
limited companies, and insurance companies was approved in May.

There was
progress in the area of financial services regulation. In February the amended
regulation on Banking Activities defined certain disclosure requirements on the
banks' ultimate/beneficial owners/controllers. It also included provisions on
registration and external audit procedures for banks, on strengthened
creditors' rights, and on investment activities. Internal financial rules have
been defined with the aim of preventing money laundering activities. Reporting
requirements in line with International Financial
Reporting Standards were also established, and
provisions on raising the capitalisation requirements for banks were put in
place. However, the issue of the non-performing loans has not yet been
substantively addressed. The legislator tightened up the information disclosure
requirements on securities and stock market in October and the law on insider
dealing in April.

A law
introducing the methodology of consolidated supervision of financial
institutions entered into force in December. It established the consolidated
supervision responsibilities of the various bodies. The supervision work is now
entirely financed by the industry via a specific fee. Amendments to the laws on
mortgage bonds and on special-purpose bonds to improve the mechanisms for the
emission and circulation of bonds and providing the market regulator with the
powers for ensuring the protection of the legal rights of the investors were
adopted in April and June 2011 respectively. This process was supported by an
EU funded twinning project in order to reinforce the monitoring policy.

There is no progress to report in the area
of free movement of capital. The 2010 requirement that non-residents
deposit a 20% reservation of funds in the form of credits or deposits with Ukraine's National Bank for a period up to six months was extended. The regulatory
procedures for foreign exchange transactions were tightened in December 2011 to
promote the use of the national currency in international operations and to
restrict capital flight.

Other key
areas

In the area of
agriculture, the negotiations on geographical indications were finalised in
September 2011 as part of the DCFTA negotiations.

The
new Tax Code unifying all tax legislation into a single act entered into
force in 2011. The absence of implementing legislation creates serious problems
for businesses and control authorities. The State Tax
Service reform, which is facing delays, has not yet reduced burden and costs
for business operators. Business operators also report that tax controls are
repressive and often accompanied by judicial intimidation. Despite efforts made
by the authorities to tackle the long-lasting problem of VAT refunds, economic operators’ increasingly complained about delays in VAT
refunds and pressure to withdraw claims or pay corporate income tax in advance
in order to receive any VAT refunds. The automatic refund system introduced in
March offered only partial relief, as the criteria for
such refunds lack transparency and few companies
qualify. It is important that Ukraine adopts and implements without delay a comprehensive action plan with timeframes,
bringing a sustainable solution to this problem.

Amendments made in July to the competition
law and the law on the Anti-Monopoly Committee of Ukraine (AMCU) covered misleading advertising and increased
fines for infringement. The AMCU proposed an increase in the value thresholds
for merger notifications in line with international community recommendations. Budgetary constraints led to staff cuts of up to 20%. A number of
AMCU practices fail to comply with EU standards (such as investigation of
cartels based exclusively on price parallelism and assessment of vertical
restraints). In the area of state aid EU assistance under the
Comprehensive Institutional Building Programme was postponed pending the
adoption of legislation in line with EU standards.

In 2011, the
State Department of Intellectual Property was replaced by the State
Intellectual Property Service of Ukraine (SIPSU). The SIPSU will be responsible
for granting rights to intellectual property law objects, drafting legislation
and providing information, products and services (including training) related
to intellectual property issues. A twinning project was prepared to support
this new institution.

An assessment
of the national statistical system was carried out in 2011 which
resulted in a number of recommendations for further improvement. While progress
has been made to implement European standards in a number of statistical
domains (business statistics, national accounts and others) future efforts
should focus on guaranteeing the professional independence of the State
Statistical Service of Ukraine, assure the confidentiality of individual data
as stipulated in the European Code of Practice and improve the coordination of
the statistics system in Ukraine through the inclusion of all official
statistics into the work programme and the statistical law.

Public
finance management (PFM) progressed little. High
levels of corruption and widespread conflicts of interest remained a major
concern. The absence of a comprehensive PFM reform programme led to delays in
the release of EU budget support payments; however, in December, the Government
agreed to set up a working group to elaborate the programme. Concerning public
internal financial control (PIFC) specific procedures for establishing
internal audit units, their working procedures and a code of ethic were adopted
in November. A draft law on public and publicly guaranteed debt was debated in
Parliament and many of its provisions have been incorporated in the amendments
to the Budget Code of July 2011. The focus should now be on streamlining the
control systems for the budget.

The amendments to the Public Procurement
law adopted in July 2011 introduced framework agreements and abolished prior
approval for single source procurements by the Ministry of Economy. However the
amendments did not address two key issues: namely the proper definition of
the concept of contracting authorities or entities which are bound by the law (state
enterprises, in particular, are excluded from the scope of the law) and the
exclusions under the EU procurement acquis. Technical assistance from
the EU has helped the government in improving the new legislation.

On external audit, the remit and
technical capacity of the Supreme Audit Institution (the Accounting Chamber of
Ukraine) remains insufficient to ensure an appropriate level of control over
the budget. In particular, the Chamber has no right to audit government
revenue, local government, extra-budgetary funds and state-owned enterprises.

The charter
of the State Inspection of Ukraine for Consumer Rights Protection of April 2011
puts it in charge of consumer protection and the surveillance of
compliance with standards.

5. 
cooperation on justice, freedom and security

Intense cooperation on matters concerning
justice, freedom and security took place between the EU and Ukraine in 2011, with a strong focus on mobility. Following presentation by the EU to Ukraine
of the Visa Liberalisation Action Plan in November 2010, a first
Progress Report on the implementation by Ukraine of Plan was issued in
September 2011 and a second Progress Report in February 2012. Implementation of
the EU-Ukraine Visa Facilitation and Readmission Agreements continued
and was monitored at the Joint Committee meeting of May 2011. Ukraine and several EU Member States launched negotiations on implementing protocols under
the Readmission Agreement, but no protocol was concluded. The
negotiations on amendments to the EU-Ukraine Visa Facilitation
Agreement were concluded in December. The text of the amending agreement
was initialled in February 2012.

Ukraine achieved
progress in the area of migration and asylum, but it now needs to adopt
additional by-laws and to finalise the National Migration Management Strategy.
A law on the legal status of foreigners and stateless persons was adopted in
September. The State Migration Policy Strategy was approved in May 2011,
together with the accompanying Action Plan. An Action Plan covering the period
until 2015 on the Integration of Migrants in Ukraine and the Reintegration of
Ukrainian Migrants was approved in June. After the establishment of the State
Migration Service (SMS) in December 2010, a regulation defining its basic
tasks, functions and organisation was adopted in April 2011. A major EU project
in support of the SMS was prepared as part of the Comprehensive
Institution-Building Programme. Regarding asylum, the law on Refugees and Persons
in Need of Subsidiary and Temporary Protection was adopted in July. Work on
bylaws and other related legislation is ongoing. Human rights and international
organisations reported a number of cases of violation of the rights of
refugees and asylum-seekers, including instances of refoulement and
denial of access to asylum seekers by UNHCR representatives.

Ukraine continued
implementing the Concept for Integrated Border Management and the
related Action Plan, approved in January 2011. A major EU project on Ukraine’s border management sector policy was signed in October with the aim, inter alia, of
contributing to Ukraine’s border demarcation activities with the Republic of Moldova, Belarus, and the Russian Federation.

In October, Ukraine adopted a strategy on
the fight against organised crime. The accompanying Action Plan remains
to be adopted. The Third Protocol on the Illicit
Manufacturing and Trafficking of Firearms, Their Parts, Components and
Ammunition remained unsigned.

In September, Ukraine adopted a framework
law on combating trafficking in human beings, articulated on three main
pillars: prevention, prosecution and victim protection. The law introduces the
function of National Coordinator on trafficking in human beings to be appointed
by the Cabinet of Ministers, as well as a national mechanism for cooperation
between all players involved in anti-trafficking actions. The accompanying Action
Plan remains to be adopted. It is essential that the future Action Plan
contains a timeframe, specific objectives, activities, results, performance
indicators and sufficient human and financial resources.

The law amending certain legislative acts
on the responsibility of carriers providing international passenger
transportation so as to strengthen the responsibility of carriers was adopted
by Parliament in December 2010 and entered into force in April 2011. It
contains relevant measures on fighting trafficking in human beings, in line
with the Council of Europe Convention on trafficking in human beings.

Progress was achieved on combating money laundering and the financing of terrorism.
Three new laws entered into force in May. The Financial Action Task Force
(FATF) plenary meeting of October decided to take out Ukraine from the list of states that have shortcomings of counteraction to money laundering
systems and financing terrorism.

Concerning the fight against drugs,
a new National Service for Drugs Control was established in April. Policy
dialogue continued in September at the EU-Ukraine Drugs Dialogue meeting.

Major steps were taken in establishing an
adequate legal framework for data protection. Ukraine ratified the 1981
Council of Europe Convention for the Protection of Individuals with regard to
Automatic Processing of Personal Data and its 2011 Protocol. Ukraine’s first law on data protection entered into force in January together with the
Council of Europe Convention. Sanctions were introduced for the violation of
data protection legislation, which entered into force in January 2012. Ukraine’s data protection supervisory authority, established in April, became operational
in July. Work started on assessing Ukraine’s new legislation with a view to
concluding cooperation agreements with EUROPOL and EUROJUST.

In the area of judicial cooperation,
  Ukraine ratified the Second Additional Protocol to the European Convention on
Mutual Assistance in Criminal Matters in June.

6. 
transport, energy, environment, the information
society, research and development

Ukraine started in
2011 the implementation of the comprehensive transport strategy until
2020 by the development and elaboration of transport sub-sector programmes.
This is supported by the EU through a sector policy support programme launched
in January (EUR 65 million). There was satisfactory progress in road infrastructure
development, good progress in the railways and aviation sectors and limited
progress in inland water transport. A road safety strategy was adopted in May
2011. In rail, due to little progress in the implementation of the 2009 railway
reform programme, a new law on railway reform was drafted in 2011; its adoption
is still pending. The revised air code was finally adopted and entered into
force in September 2011; its diligent implementation remains a challenge. The
negotiations with the EU on a comprehensive air services agreement continued at
a slow pace. The Law on Sea Ports which would enable partial privatisation of
ports and allowed for the introduction of public-private partnerships has not
yet been adopted. The Ukrainian flag remains on the black list of the Paris
Memorandum of Understanding on Port State Control in the 'medium risk'
category.

In February, Ukraine joined the Energy Community. More efforts are needed in order to
implement its Community obligations. In December, the EU and Ukraine agreed the sixth progress report on the implementation of their Energy Memorandum
of Understanding. Ukraine initiated the update of its energy strategy. In November, the National Commission on
State Regulation in Energy was established, replacing the National Electricity
Regulatory Commission. After an initial increase in gas
prices for households and utilities (50% in August 2010) and electricity prices
(30% in January 2011), Ukraine has not further increased the prices in 2011
towards cost recovery levels. This is an important obstacle to sustainability
of the sector. In September, the President asked for the development of a
restructuring plan for Naftogaz, but the plan was not finalised according to
the established timetable. Restructuring should help to increase transparency in the gas sector and improve the financial
viability of Naftogaz[5].
In April, Ukraine announced privatisation plans for the electricity sector. A
masterplan for the restructuring of the coal mining industry until 2017 was
developed as an output of an EU funded project. The reform process in the gas sector was facilitated through EU
twinning assistance to the regulator. Ukraine had planned to join the Extractive
Industry Transparency Initiative, but achieved little progress towards meeting
its requirements. The
Sector Budget Support programme for the energy sector was completed. The final
tranche under the programme could however not yet be released, pending the
elaboration of a mutually agreed comprehensive reform strategy and action plan.

Following-up the joint 2009 EU-Ukraine conference on the modernisation of the
Ukrainian gas transit system, the EU financed feasibility study, and an environmental
and social impact study progressed well. The study, together with
progress to be made on restructuring Naftogaz, will be an important element for
future loans from international financial institutions. In September, it initiated a feasibility study for a liquefied
natural gas terminal on the Black Sea coast. Work towards a Euro-Asian Oil
Transportation Corridor continued. The
amendment of the law on Production Sharing Agreements in June constituted a
first important step in improving the investment climate of Ukraine's upstream energy sector. Ukraine requested,
together with the Republic of Moldova and Romania, EU financing for a feasibility study on synchronous
interconnection of the power systems of the countries to the European
Network of Transmission System Operators for Electricity (ENTSO-E), the continental European power system.
  Ukraine upgraded its electricity networks. Ukraine started implementing its
energy efficiency programme 2010-2015; the draft law on energy efficiency has
yet to be adopted.

In the framework of the sector policy
support programme to the implementation of Ukraine's energy strategy in the
area of energy efficiency and renewable sources of energy, the EU released a
first tranche of EUR 31 million in September. In 2011, the EU also provided an
additional contribution to the Eastern Europe Energy Efficiency and Environment
Partnership Fund of EUR 15 million.

Ukraine continued
the safety upgrading of its nuclear power plants. After the Fukushima nuclear
accident, Ukraine initiated a comprehensive risk and safety assessment (nuclear
stress test) of its plants, taking EU standards into account; and submitted a
report to the Commission. In the context of the commemoration of the 25th anniversary of the Chernobyl
accident, in April, donors raised additional funds to fill the financial gap
for the completion of the major Chernobyl projects. Ukraine's Nuclear
Regulatory Authority continued contributing towards restoring the Chernobyl site to an environmentally safer condition.

In the field of climate change, Ukraine took further steps to prepare legislation on emission trading, in line with its long-term
objective to link with the EU emission trading system. 34 new Joint
Implementation projects were registered at the UN level, bringing the number of
registered projects to 82. In October, the United Nation Framework Convention
on Climate Change (UNFCCC) Kyoto Protocol compliance committee suspended Ukraine from trading emissions units pending the resolution of questions relating in
particular to transparency of emission data. Ukraine is encouraged to build
capacity and engage in the new carbon market mechanism to be developed
following the United Nation Framework Convention on Climate Change 17
Conference of the Parties (UNFCCC COP 17). Ukraine is also encouraged to fully
implement the Cancun and Durban agreements and in particular devise a low
carbon development strategy including update information on target or actions
that it will implement. The EU launched two projects to study the potential
implementation of low carbon technologies and carbon sequestrations with
Ukrainian partners.

Ukraine adopted a
national environment action plan for 2011-2015 to implement its environment
strategy. A decree setting out the procedure for public
participation with regard to decisions that can affect the environment was also
approved. New legislation regulating urban development
activities has raised concerns about the procedure of environmental
assessments, including possibilities for public participation and will need to
be reviewed. Ukraine adopted national targets under the Protocol on Water and
Health to the Convention on protection and use of trans-boundary watercourses
and international lakes of the United Nations Economic Commission for Europe
(UNECE). Ukraine faced problems with implementing several agreements it has
already ratified. In June and July respectively, the fifth Meeting of the
Parties of the Espoo Convention and the fourth Meeting of the Parties of the
Aarhus Convention issued cautions against Ukraine for non-compliance. The EU
launched a sector policy support programme in the field of environment (EUR 35
million). A follow-up project to continue supporting Ukraine’s implementation
of Espoo and Aarhus Conventions was also launched.

In the field of civil protection, Ukraine intensified the
cooperation with the countries from the region and the exchange of best
practices with the EU in the field of disaster prevention, preparedness and
response through its participation in the EU Programme for Prevention of,
Preparedness for, and Response to natural and man-made disasters. The EU supported the clean up of the Gorlovka chemical plant (TNT,
pesticides) through a contract with UNIDO.

In the information society sector,
good progress was made as Parliament has adopted several important laws,
notably those simplifying market entry procedures for some electronic
communications services and strengthening the regulator’s independence. In July,
the law facilitating operators’ access to the telecommunications market was
approved. Accordingly legal entities who wish to
provide services in the field of telecommunications shall apply to the National
Commission for Communication Regulations (NCCR) to register as operators and
providers of telecommunications. Another law strengthened the independence of
NCCR (to be renamed into National Commission for Communication and
Informatisation Regulations) and provided it with an additional mandate to
regulate Informatisation. The approval of the Commission new statute and staff
numbers is still pending. A twinning project for the NCCR was prepared.

In
the area of research and innovation, the procedures for the prolongation
of the EU-Ukraine Science and Technology Cooperation Agreement for an
additional four years, to 2014 were completed in 2011. The first meeting of the
Joint Committee established under the Agreement was held in Brussels on 23
November. Both sides shared information on priorities in health, ICT and
nanotechnology/materials research, and it was agreed to enhance cooperation in
areas of mutual interest through the Ukrainian funding programmes and the EU
Framework Programmes. Ukraine continued to update and modernise the legal base
and funding structure for research and innovation. Ukraine's participation in
the 7th Framework Programme for Research and Technological
Development (FP7) continued to be at a good level. Ukraine is the seventh most
active international partner country participating in the programme. To date,
112 Ukrainian research organisations are involved in 150 FP7 projects,
receiving an EU contribution of over EUR 14.1 million. Ukraine continued to strengthen the network of FP7 Contact Points, which should greatly
assist increasing Ukrainian participation in the final calls to be launched
under FP7.

Ukraine has made progress towards the setting up of a
regional development policy and a regional development Fund. However, there are
delays in adopting the Law on the State Regional Policy and the approval of the
disbursement rules of the newly established Fund.

Recent
analytical work shows discrepancies between allocations in the budget 2012 and
the National Regional Development Strategy. Greater continuity and
determination in the implementation of actions agreed in the regional policy
dialogue with the EU will be essential to achieving results.

An identification mission took place in space
cooperation in the context of the European
Geostationary Navigation Overlay Service (EGNOS).

7. 
People-to-people contacts, education and health

In the area of education reform, a
revised higher education text was drafted following consultation of
stakeholders, including universities, non-governmental organisations and
students. Despite some improvements in approximating to
EU legislation, the proposed law does not grant more autonomy to the
universities, an element that remains a concern to civil society in Ukraine, as well to some university authorities. A lack of autonomy
will also be an obstacle to setting up of multidisciplinary programmes, notably
in the area of European studies.

Ukraine continued to benefit substantially from its increasing participation
in higher education cooperation and exchanges with the EU. Nine new university
cooperation projects were selected under the Tempus IV programme and at the end of 2011, Ukraine was involved in 38 projects; figures
also show a constant increase in participation under the successive calls of
the programme. Ukraine
continued its active participation in the Erasmus Mundus (EM) programme
in the academic year 2011-2012 with the award of a total of 354 scholarships
and mobility grants. Seven new Ukrainian projects were selected under the Jean
Monnet Programme in 2011, which fosters teaching and research in the field
of EU integration studies.

At the end of
2011, among the Eastern Partnership Countries, Ukraine
was the first country in terms of number of institutions (49) and individual
researchers (62) currently participating in research collaboration actions
under the Marie Curie scheme.

In the field of vocational education and
training (VET), the European Training Foundation provided support to the
Ministries of Education and Economy in developing a balance between the demand
and supply of qualified workforce, on the basis of the National VET Development
Programme 2011-2015, approved by the Ukrainian Government in April 2011. A
major outcome of social partners’ involvement is the proposal for a National
Qualifications Framework which the inter-agency expert group finalised in
October.

Preparations began for the participation of Ukraine in the eTwinning component of the Comenius programme, the EU programme for interconnecting
schools, foreseen for 2012, with the selection of the partner support agency
and an assessment of potential beneficiaries/schools.

Very positively, the number of young people and youth workers
benefitting from exchange opportunities offered by the Youth in Action
programme increased from 255 projects involving 818 participants in 2010 to 289
projects and 872 participants in 2011.

Ukraine developed a health reform concept and launched pilot
decentralisation projects. It amended the law on health security and health
care provision and established new institutions (for sanitary issues and
epidemiology; quality control
of medicines; and HIV/AIDS). In January 2011, the President
signed the law on HIV/AIDS prevention and social protection, which also
contributes to fight tuberculosis. Ukraine participated in the Commission’s
HIV/AIDS think tank. In September 2011, the parliament adopted a law
prohibiting the advertising, sponsorship and promotion of sales of tobacco. In
January, the Global Fund to fight AIDS, Tuberculosis and Malaria, to which the
EU is one of the major contributors, awarded Ukraine a major grant of USD 305
million (EUR 228 Million) covering 2012-2016 to fight HIV/AIDS.

[1] Subsequent to the reporting period, in April 2012, the Constitutional Court of Ukraine ruled that some of the
provisions of the new law on parliamentary elections were
unconstitutional.

[2]               Subsequent
to the reporting period, in April 2012, Ukraine reinvigorated the Department in the

Cabinet of Ministers following up on the
European agenda. It also took initial steps towards

the adoption of a strategy on public finance
management.

[3]               Subsequent to the reporting period, in April 2012,
the Constitutional Court of Ukraine ruled

that some of the provisions of the new law on
parliamentary elections were unconstitutional.

[4] SIGMA is a joint initiative of the OECD and the European
Union, principally financed by the EU. SIGMA supports European Union
candidates, potential
candidates and European
Neighbourhood countries in their public administration reforms.

[5]               Subsequent to the reporting period, a law including
provisions which would permit

unbundling
was adopted. The follow up of this law will be closely monitored during 2012.