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[Joint House and Senate Hearing, 111 Congress]
[From the U.S. Government Publishing Office]

                    UKRAINE: MOVING BEYOND STALEMATE?

=======================================================================

                                HEARING

                              BEFORE THE

            COMMISSION ON SECURITY AND COOPERATION IN EUROPE

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 16, 2010

                               __________

                       Printed for the use of the
            Commission on Security and Cooperation in Europe

                             [CSCE 111-2-3]

             [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                   Available via http://www.csce.gov

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            COMMISSION ON SECURITY AND COOPERATION IN EUROPE

                    LEGISLATIVE BRANCH COMMISSIONERS

               HOUSE

                                                   SENATE

ALCEE L. HASTINGS, Florida,                BENJAMIN L. CARDIN, Maryland, 
Co-Chairman                                   Chairman
EDWARD J. MARKEY, Massachusetts            CHRISTOPHER J. DODD, Connecticut
LOUISE McINTOSH SLAUGHTER,                 SHELDON WHITEHOUSE, Rhode Island
New York                                   TOM UDALL, New Mexico
MIKE McINTYRE, North Carolina              JEANNE SHAHEEN, New Hampshire
G.K. BUTTERFIELD, North Carolina           SAM BROWNBACK, Kansas
CHRISTOPHER H. SMITH, New Jersey           SAXBY CHAMBLISS, Georgia
ROBERT B. ADERHOLT, Alabama                RICHARD BURR, North Carolina
JOSEPH R. PITTS, Pennsylvania              ROBERT F. WICKER, Mississippi
DARRELL E. ISSA, California

                                        

                     EXECUTIVE BRANCH COMMISSIONERS

                 Michael H. Posner, Department of State
               Alexander Vershbow, Department of Defense
               Michael C. Camunez, Department of Commerce

                                  (ii)

 
                   UKRAINE: MOVING BEYOND STALEMATE?

                              ----------                              

                             March 16, 2010
                             COMMISSIONERS

                                                                   Page
Hon. Benjamin L. Cardin, Chairman, Commission on Security and 
  Cooperation in Europe..........................................     1
Hon. Alcee L. Hastings, Co-Chairman, Commission on Security and 
  Cooperation in Europe..........................................     7

                               WITNESSES

Daniel A. Russell, Deputy Assistant Secretary of State for 
  Russia, Ukraine, Belarus and Moldova, Department of State......     2
Damon Wilson, Vice President, Atlantic Council...................    11
Anders Aslund, Senior Fellow, Peterson Institute for 
  International Economics........................................    15

                                APPENDIX

Prepared statement of Hon. Alcee L. Hastings.....................    26
Prepared statement of Daniel A. Russell..........................    28
Prepared statement of Damon Wilson...............................    33
Prepared statement of Anders Aslund..............................    38
Material submitted by His Excellency Oleh Shamshur, Ambassador of 
  Ukraine to the United States of America........................    43

                                 (iii)

                   UKRAINE: MOVING BEYOND STALEMATE?

                              ----------                              

                             March 16, 2010

           Commission on Security and Cooperation in Europe

                                             Washington, DC

    The hearing was held from 10 a.m. in room Senate Visitor 
Center 201/200, Washington, DC, Hon. Benjamin L. Cardin, 
Chairman, Commission on Security and Cooperation in Europe, 
presiding.
    Commissioners present: Hon. Benjamin L. Cardin, Chairman, 
Commission on Security and Cooperation in Europe; and Hon. 
Alcee L. Hastings, Co-Chairman, Commission on Security and 
Cooperation in Europe.
    Witnesses present: Daniel A. Russell, Deputy Assistant 
Secretary of State for Russia, Ukraine, Belarus and Moldova, 
Department of State; Damon Wilson, Vice President, Atlantic 
Council; and Anders Aslund, Senior Fellow, Peterson Institute 
for International Economics.

 HON. BENJAMIN L. CARDIN, CHAIRMAN, COMMISSION ON SECURITY AND 
                     COOPERATION IN EUROPE

    Mr. Cardin. Well, good morning everyone and welcome to the 
hearing--the Helsinki Commission hearing on ``Ukraine: Moving 
Beyond Stalemate?'' I am pleased to welcome you to this hearing 
on Ukraine, an important partner for the United States and one 
of the largest countries in Europe, both in terms of size and 
population.
    An independent, democratic and stable Ukraine is in 
America's interest and vital to the security of the OSCE 
region. Ukraine remains a country in transition, in part due to 
its tragic history. To visit, as I have, the memorials to 
Stalin's famine, Babi Yar and Chornobyl, is a stark reminder of 
the history of Ukraine.
    Despite this legacy, especially since the 2004 Orange 
Revolution, there have been gains in political pluralism, media 
freedoms and holding of free and fair elections. Additionally, 
Ukraine is the only country among the 12 non-Baltic former 
Soviet states to earn the assessment of free by Freedom House.
    The country has recently witnessed Presidential elections, 
which the OSCE assessed as having met international democratic 
standards. Ukraine faces a myriad challenges. Clearly, the 
President, along with the new Prime Minister and the Rada will 
need to accelerate economic and political reforms, tackle 
systematic corruption and overcome the rule of law deficits, 
including building up an underdeveloped judiciary.
    Will Ukraine, despite tangible progress and freedom and 
democracy, be able to move beyond the stalemate that has 
stymied its ability to grapple with these difficult problems 
and slow this euro-Atlantic integration?
    Nothing would be more important to strengthening Ukraine's 
independence and reducing its vulnerability to outside 
pressures, including strengthening its energy independence and 
bringing it closer to its stated European aspirations. Despite 
past disappointments, there is genuine desire in Washington 
that Ukraine succeed as an independent, democratic, stable and 
economically successful state.
    Importantly, both the Congress and administration continue 
to strongly support the right of Ukraine to decide its own 
fate, consistent with the principles enshrined in the Helsinki 
Final Act. Today, we will examine Ukraine's future course 
following the February 7th elections, which the OSCE assessed 
as having met international democratic standards.
    Our witnesses will focus on policy implications for the 
United States, examining how the U.S. can best continue to 
encourage and assist Ukraine in the development of democracy, 
rule of law and market economy at home as well as relationships 
with its neighbors, the United States and the European 
institutions. And we look forward to hearing from our 
distinguished panel of witnesses.
    For our first panel, I'm pleased to have with us today, Mr. 
Daniel Russell, Deputy Assistant Secretary of State for Russia, 
Ukraine, Belarus and Moldova. Since joining the Foreign Service 
in 1983, Mr. Russell has held a variety of positions in 
Washington and abroad, most recently, as Chief of Staff to 
Undersecretary of State for Political Affairs Bill Burns. And 
prior to that, the Deputy Chief of Mission in Moscow, Russia 
and Kazakhstan. Mr. Russell, it's a pleasure to have you before 
the Commission.

  DANIEL A. RUSSELL, DEPUTY ASSISTANT SECRETARY OF STATE FOR 
   RUSSIA, UKRAINE, BELARUS AND MOLDOVA, DEPARTMENT OF STATE

    Mr. Russell. Thank you very much, Mr. Chairman. I will 
apologize in advance for my voice. It's part of the burden of 
having two young children. But look, thank you very much for 
your invitation to discuss Ukraine and its relations with the 
United States in the wake of Presidential elections. Your 
timing could not be better.
    Let me begin by making three basic points about Ukraine and 
the recent elections before sketching out our agenda for 
engagement. My first point should be obvious. Ukraine matters. 
Ukraine matters to the United States. Ukraine matters to 
Europe. Ukraine has tremendous potential. It could become a net 
contributor to global food security.
    It could become self-sufficient in energy. Ukraine can also 
serve as an example in a critical region. It has shown 
leadership on the world stage, giving up its nuclear weapons to 
become a non-nuclear state and contributing to peacekeeping 
operations from the Balkans to Iraq. Ukraine serves--also 
serves as a transit route through which nearly a quarter of 
Europe's gas flows.
    My second point is about Ukraine's leadership in democracy 
in the region. Taken together, the conduct of its Presidential 
elections received an overwhelmingly positive assessment from 
international observers. I should add that among those 
observers were Congressman Hastings and staff of your 
Commission and I would like to commend their contribution.
    The OSCE concluded that the Presidential elections showed 
significant progress over previous elections and met most OSCE 
and Council of Europe standards. The open competitive election 
demonstrated respect for civil and political rights and offered 
voters a genuine choice.
    My third point is about the 2010 election--how we look at 
it. It may have been a defeat for the Orange Revolution 
leaders, but it's far from a defeat for the Orange Revolution. 
Elections should be viewed, I think, as another step in 
strengthening Ukraine's democracy and Ukrainians should take 
pride in what they've achieved.
    The post-election transfer of power has been orderly. Prime 
Minister Tymoshenko initially challenged the results in court, 
but withdrew her case. When formation of a political 
parliamentary majority coalition appeared unlikely, President 
Yanukovych and his Party of Regions sought and won passage of a 
new law that allows coalition formation, not only with 
political parties, but with independent deputies.
    On that basis, Prime Minister Azarov and his Cabinet were 
confirmed last week. The opposition questioned the new laws' 
constitutionality and we were pleased to see that the Party of 
Regions itself took the initiative to ask the constitutional 
court to review the law and pledge to abide by its decision.
    With the election now behind him, President Yanukovych 
faces the challenge of governing. Obviously, he and his new 
team need some time to organize themselves, but I think some 
key elements of his approach are obvious. Economic recovery 
will rightly be his top priority and he has inherited a 
difficult situation at a difficult moment.
    With regard to foreign policy, I think President Yanukovych 
has been quite clear. He wants to continue Ukraine's strategic 
partnership with the United States. He wants to improve 
relations with Russia and he wants to pursue integration with 
the European Union.
    And as we look ahead to engagement with President 
Yanukovych and his new team, it's, I think, worth reviewing the 
underlying premises of U.S. policy toward Ukraine. Simply put, 
the United States will not waver in its support for a strong 
and independent Ukraine. We want to see, as you mention, 
Ukraine succeed.
    Our vision for Ukraine, I think, is the vision that most 
Ukrainians want, a democratic and prosperous European nation 
with an effective and accountable government. Charting the 
course for Ukraine is of course, a decision to be made by 
Ukrainians and their elected leaders. There has been 
speculation over the past year that the Obama administration's 
efforts to improve relations with Russia would somehow threaten 
our relationship with Ukraine.
    I think that was not correct and it is not correct. As we 
reset relations with Russia, we have reaffirmed our commitment 
to the sovereignty and territorial integrity of Ukraine and its 
neighbors. We do not believe that a partnership with one 
country comes at the expense of another.
    The stronger our partners, the more effective our 
partnerships. I would posit that a strong and independent 
Ukraine is good for Russia, good for the region and good for 
the world. There's also been speculation about Ukraine's 
relationship with NATO during a Yanukovych Presidency. Let me 
be clear that the United States continues to support Ukraine's 
deepening ties to NATO and to the European Union.
    But again, these are decisions to be made by Ukrainians and 
their leaders. We recognize that how far and how fast to 
proceed will be a Ukrainian choice. President Yanukovych has 
said that he wishes to continue programs of cooperation with 
NATO at existing levels but NATO membership is not on his 
agenda. We respect that choice. But we want the Ukrainians to 
know that NATO's door remains open.
    We look forward to cooperating with Ukraine to meet its 
objectives in the NATO-Ukraine Commission and its Annual 
National Programme. Because of the importance that we attach to 
our relationship with Ukraine, once the Central Election 
Commission had announced the full electronic results of the 
election, President Obama was among the first world leaders to 
congratulate Viktor Yanukovych on his victory.
    National Security Advisor General Jones led the U.S. 
delegation at the Presidential Inauguration, where he met not 
only President Yanukovych, but Prime Minister Tymoshenko. And 
Mrs. Tymoshenko is obviously going to be one of the leaders in 
the opposition in parliament and we are going to continue our 
longstanding relationship with her.
    At the same time, we also plan to work closely with 
emerging leaders like Deputy Prime Minister Tigipko and Member 
of Parliament Arseniy Yatseniuk. The development of new 
democratic leaders is important for all parties in Ukraine. Let 
me underscore that U.S. policy toward Ukraine will continue to 
focus on strengthening our strategic partnership.
    Our engagement and cooperation with Ukraine will continue 
to be guided by the U.S.-Ukraine Charter on Strategic 
Partnership. The charter outlines enhanced cooperation across 
the full spectrum of mutual priorities, including economics, 
trade and energy, defense and security, strengthening democracy 
and people-to-people and cultural exchanges.
    To advance the objectives of that charter, we now have a 
strategic partnership commission, established during the Vice 
President's visit to Kyiv last July. Our commitment to Ukraine 
is also evidenced by our assistance program--$123 million this 
year. The goals of our assistance are to bolster peace and 
security, strengthen democratic institutions, promote economic 
growth and energy efficiency, enhance security, secure 
Chornobyl, fight AIDS and HIV and improve child health.
    In the spirit of our strategic partnership with Ukraine, 
I'd like to suggest five policy priorities that should be high 
on our shared agenda with the Yanukovych Presidency. First, the 
United States is committed to policies that contribute to a 
democratic and prosperous Ukraine. And the United States stands 
ready to help Ukraine reach agreement with the International 
Monetary Fund as soon as possible.
    The path to economic recovery and renewed prosperity runs 
through agreement with the IMF, which can help provide Ukraine 
a way out of the current crisis and open the door to lending 
for other--from other international financial institutions in 
the European Union. That will require resolute leadership and 
hard decisions to undertake the critical reforms needed to fix 
the budget deficit, revive the banking sector and phaseout 
energy subsidies.
    A second, and I would say equally important, policy area 
for Ukraine's long-term prosperity and economic independence is 
energy-sector reform. A gas sector based on transparency, 
competition, realistic pricing and more energy-efficient gas 
distribution and consumption will be key.
    Third, the United States is ready to work to strengthen the 
business side of Ukraine--U.S.-Ukraine relations, which 
frankly, I think, are weaker than they should be. We welcome 
President Yanukovych's remarks in favor of creating incentives 
for investors such as lowering taxes and cutting red tape.
    Our business community tells us that there is much more to 
be done to make Ukraine attractive to investors, from greater 
rule of law protection to serious action against corruption. 
The payment of VAT--V-A-T--refunds would be a big step forward, 
I think, and a sign to our investors.
    A fourth area of cooperation in our relationship with 
Ukraine lies in nuclear security. We look forward to building 
on our successful record of nonproliferation with Ukraine at 
the upcoming nuclear security summit here and we look forward 
to President Yanukovych attending. Thanks to the leadership of 
Sen. Lugar and former Sen. Nunn, we can point to vital 
cooperation between Ukraine and the United States that has made 
the world safer.
    Finally, the United States wishes to strengthen bilateral 
security and defense cooperation. As part of that effort, we 
hope that the Ukrainian parliament will pass legislation to 
allow joint military exercises on its territory this year. 
While the challenges in U.S.-Ukrainian relations are complex 
and demanding, I remain optimistic about the possibilities 
before us.
    It's important to both nations and both peoples to get this 
relationship right. We have a chance at the beginning of a new 
Presidency in Kyiv to redouble our efforts to do so. And I hope 
that both Ukrainians and Americans both inside and outside of 
government will take advantage of that opportunity.
    Thank you very much and I'm happy to answer your questions.
    Mr. Cardin. Well, Mr. Russell, thank you very much for your 
testimony. We've been joined by the House Chair of the Helsinki 
Commission Alcee Hastings. As you've already pointed out, Mr. 
Hastings was present as an observer in the elections in Ukraine 
and helped in the certification of Mr. Yanukovych's elections. 
So we thank our House Chair for his active involvement and the 
ability to give us a first-hand report as to the progress of 
democracy in Ukraine.
    I want to, I guess, ask you a fundamental question first 
and then I'll turn it to my Co-Chair. You talk about Mr. 
Yanukovych's desire to strengthen the ties with the West and 
the East about developing stronger ties, certainly, with 
Russia, but also with the United States and Europe. And then 
you talk about our NATO desires, that we still believe that 
this is a country that is important in our European security 
arrangements.
    How can he accomplish all that? How can he strengthen the 
tie between Ukraine and Russia, which was stressed during the 
Orange Revolution and which Mr. Yanukovych was not a supporter 
of? Now, he's all of a sudden going to be able to maintain this 
development with the West, with Europe and with Russia and also 
perhaps be with us in NATO. How does he balance all that? It 
seems like that's an impossible task.
    Mr. Russell. Well, we're going to see how good he is at it. 
I think it was interesting that he chose to make his first trip 
abroad to Brussels. He talked about European integration and a 
free trade agreement with the EU. Then, to go to Moscow and 
create--finish the leg of his triad by coming here for the 
nuclear assistance security summit.
    So he clearly is going to try to balance these three 
interests. And I don't think it's a bad idea, actually. I mean 
nobody's going to move in their neighborhood. Russia's not 
going to go away. Russia's Ukraine's second largest trading 
partner after the European Union. And I think he's got a good 
shot at making some progress on all of this. But like I said, 
we're going to be there pushing for strategic partnership.
    Mr. Cardin. Well, how much influence will Russia have in 
the priorities that he places on the agenda for security?
    Mr. Russell. It's an open book. He's just named his 
government, so we're going to have to see. I mean he's trying 
to be all things to all people like many leaders. We'll see if 
he succeeds.
    Mr. Cardin. Well, let me ask you just one more question on 
a subject that the Orange Revolution was not successful in 
dealing with and it's corruption. It's been a--we've seen 
first-hand the consequences of corruption within Ukraine. It's 
not unique for countries in transition, but certainly, the game 
plan to deal with it has not been as successful as the United 
States would like to see it. Do you have any view as to how 
this new government will deal with the problems the country 
faces in corruption?
    Mr. Russell. Well, we agree with your assessment. It is a 
major problem in practically, every field. Our human rights 
report, which we just put out talks again about corruption, 
which everybody knows. And I think it's going to be key. If 
he's going to make progress on economic recovery, he's got to 
deal with this because, if he's going to get ahead on economic 
recovery, he's really got to start with sound fiscal policies 
and pass the budget.
    He's got to figure out how to get the private sector to 
really fuel economic recovery and they need an effective 
banking sector to provide the financing to do that. Well, if 
you don't deal with corruption, you're just not going to get--
you're not going to get investors. And transparency and rule of 
law are part of the keys. He's talked about this and we're 
going to have to see how they do, but I agree, it should be a 
priority and it's something the United States is going to push.
    Mr. Cardin. I'll look at your five issues that you've 
raised for priorities. Certainly, democracy and prosperity is 
going to depend upon dealing with the corruption issues, the 
energy sector reforms, very much so and we push the EITI as a 
framework to deal with the energy sector issues.
    On business, business and investment by the United States 
or any country in Ukraine will be very much dependent upon a 
comfort level as it relates to dealing with the issues of 
corruption. So on every one of these areas, it's going to be 
fundamental that they have to deal with this and their track 
record's not very good.
    Mr. Russell. I agree with you. I think they'll probably 
have a new program with the IMF and I suspect that transparency 
and rule of law are going to be a big part of that. I should 
also mention that we're coordinating with the European Union 
because I think if he wants to pursue European integration, 
clearly all of these issues are going to be key to that as well 
because the European Union's goals for integration are not 
particularly different than our own bilateral goals in this 
respect.
    Mr. Cardin. So what is your advice to Congress? What would 
be your top recommendations for what the Congress should do in 
order to reinforce the goals that you laid out--with your goals 
that we fully support and we certainly encourage the new 
government to improve relations with all of its neighbors. That 
is fundamental to your regional stability and it's fundamental 
to U.S. interests. What would your advice be to Congress?
    Mr. Russell. Well, I think, your Co-Chairman here has set a 
good example for engagement early on with Ukraine and I think 
it's important. I think it's important that the Congress is 
dealing--this is a country where the Rada, their parliament is 
very important, that you engage with the leadership there as 
we're doing in the executive branch to try to push that 
forward.
    And we're going to look for your support, obviously, with 
our assistance programs. And if, you can encourage some of the 
private-sector businesses in your states that if Ukraine does 
make some of these changes, to try to look and see if 
investment there or business opportunities would be a 
possibility.
    Mr. Cardin. Well, as I said in my opening statement, 
Ukraine is very important to U.S. interests. It's a high 
priority of our Commission. We have spent a lot of time 
visiting Ukraine because we thought it was important to do that 
on many occasions and so clearly, it's just going to be a 
continued focal point for our interest because we think it's 
important to the entire OSCE region.
    With that, let me turn to Congressman Hastings and again, 
thank him for his leadership on the traveling to Ukraine and in 
his continued leadership on this country and the place that the 
Helsinki Commission has placed in following the events in 
Ukraine.

HON. ALCEE L. HASTINGS, CO-CHAIRMAN, COMMISSION ON SECURITY AND 
                     COOPERATION IN EUROPE

    Mr. Hastings. Thank you very much, Mr. Chair. OK, it's on. 
And Mr. Russell, thank you very much. Mr. Chairman, I'm sure 
it's already been noted--my humble apologies for being delayed. 
I had the distinct privilege and honor to participate in three 
Ukrainian elections, including the first round of the just-
passed Presidential elections.
    In addition to just being an election observer, I also like 
to consider myself a good observer of people. And while I don't 
speak the language, on two different occasions in Ukraine, one 
during the Orange Revolution and on the very last visit, I took 
it upon myself to walk into areas, first, during the Orange 
Revolution that I had not been in and a second time, to go back 
into those again.
    And then of course, as you might know, Mr. Russell, a 
considerable number of Ukrainians in the diaspora and those in 
academia and the think tanks and in government all talk to us a 
great deal about Ukraine. One thing, if I had to characterize 
the residual from the Orange Revolution, it would be unfilled 
promises. That would just be all that I would say.
    The other things that I note is considerable frustration 
among those that are supporters of the efforts that have been 
put forward in Ukraine. Now, the United States doesn't have to 
make any apologies to anybody and I'm not suggesting that they 
ever would, but we have a solid record of standing with the 
Ukrainian people over the decades in support of their struggle 
for freedom and democracy.
    I'll start by asking you how you assess the Prime 
Minister's remarks last week and I'm paraphrasing what he said, 
that their treasury is depleted. I'm reminded--that's very 
similar to our nation at this time, a President, inheriting 
some 30 years of transformation of an economy, is expected in 1 
year to reverse it.
    Mr. Yanukovych and his new coalition, in my judgment, have 
a very high hill to hustle and they cannot do it, quite 
frankly, without the United States and Russia and the European 
Union and with some clear understanding of how the 
international community that is experiencing a global crisis of 
its own is going to be able to address it. So I guess I'd like 
to know from you the status of Ukraine with respect to the 
Millennium Challenge Account.
    Mr. Russell. Well, the Millennium Challenge Account 
threshold program didn't succeed. I mean, the Millennium 
Challenge Corporation chose not to continue it in 2009 because 
of Ukraine's performance. And I can't say where they'll go from 
here. Corruption was one of the big issues, actually.
    But to the broader point that you're making, which I agree 
with, they've got a tough row to hoe. But I think that they've 
got to try to reach agreement with the IMF has to be the first 
priority because that's what's going to unlock the doors to the 
other lending they need to survive.
    In the longer term, I mean, the shorter your time horizon 
with Ukraine, the more pessimistic you're going to be. The more 
you stretch that out, the more optimistic. I mean they have gas 
reserves. They have oil; they have a lot of coal. Their 
manufacturing sector actually did pretty well before the 
economic recession.
    I think they've got to go back to basics. And frankly 
Anders Aslund--it's always very difficult to talk about 
economics when you have, actually, a real economist sitting 
behind you--[laughter]--he can probably help you more than me 
with most of this.
    Mr. Hastings. All right. Looking ahead, in 2017, the lease 
agreement with Russia in the Black Sea are going to become more 
and more an issue. Attendant to that is the fact that we, the 
United States, really have poured millions of dollars and 
security assistance cooperation to Ukraine and yet, it seems 
their armed forces are still in need of reform and 
modernization.
    So I guess, do we still look to try and bring them into 
NATO? What's your take on the Black Sea as it pertains to Mr. 
Yanukovych? And what are the substantive benefits of our 
security cooperation with Ukraine beyond just building our 
relationships?
    Mr. Russell. Well, I think that defense and security 
cooperation is a key part of our relationship. I think you're 
right that there's a lot more to be done, but at the same time, 
I mean, this is a country where you now have civilian control 
of the military. You have an all-volunteer officer corps. 
They've made some key reforms that they've got more to do.
    I know our own military finds them very enthusiastic and 
good to work with and they have an interest and we have an 
interest in seeing them become a net contributor to global 
security. They still have a pretty good-sized presence among 
peacekeepers in Kosovo.
    They've contributed to Iraq and Afghanistan and other U.N. 
peacekeeping missions and NATO missions and I think that's 
what's in it for us in the longer term. The question you posed 
about the Black Sea fleet; I don't know what they're going to 
do, but what we support is Ukraine's independence and 
territorial integrity and their right to make their own foreign 
policy choices. So whatever they do, we would support something 
that obviously, they freely enter into.
    Mr. Hastings. The last couple of questions that I have deal 
specifically with what your sentiments are at this time and 
what the administration, if anything, is picking up--if 
anything--regarding Kyiv's desire to have a Euro-Atlantic 
integration. Is that still viable? I heard you say that the new 
President's first visit was to Brussels, but I hasten to add 
that his second visit was to Moscow. And so where they'll go 
with--[laughter]--Ukraine at this point?
    Mr. Russell. Well, I think our approach as far as NATO is 
that Mr. Yanukovych has said he wants to continue practical 
cooperation. There's a lot that needs to be done, and can be 
done through the NATO-Ukraine Commission, through the Annual 
National Programme they have with NATO and all these good 
things for a more modern, more professional military and 
defense establishment. And I think they're worth continuing no 
matter what they choose to do on the larger question of NATO 
membership.
    I think with European integration, it's pretty clear that 
Mr. Yanukovych has already talked about a free trade agreement 
with the European Union and liberalization of their visa 
regime. And again, all of that's going to require some changes 
we've been talking about toward meeting European Union 
standards.
    I think there's--in some ways, not much choice. I mean, 
they want to become a modern, prosperous nation and that will 
require being part of the international community in a 
different way than they were in the past century.
    Mr. Hastings. Well, you have a rather considerable 
portfolio, but as it pertains to Ukraine, two of the neighbors 
that are also in your portfolio, Belarus and Moldova--I'll 
leave Russia to the side because I know that's overarching. But 
just as it pertains to Belarus and Moldova, what do you see for 
the future of Ukraine relations with those two countries?
    Mr. Russell. Well, I mean, we hope to see a good 
relationship in Ukrainian bilateral relations with both of 
those countries. Moldova has had quite a change in its own 
government, bringing in a new coalition that's committed to 
European integration as its foreign policy and to rule of law 
and democracy at home, which we see is a very, very good and 
welcome development.
    Ukraine can help to support that. There's some basic issues 
about delineation of the border between the part of Moldova 
that is Transnistria and Ukraine--Ukraine also plays a role in 
the five-plus-two talks looking at a settlement to this 
longstanding frozen conflict. So they can do quite a bit there.
    Ukraine's always had a reasonably good relationship with 
Belarus. As you know, the United States--Mr. Cardin knows from 
his recent trip there--we have some real issues in our own 
relationship with them and we would hope that Ukraine's 
relationship would help to push toward a more open system there 
and make some small steps toward a more open, pluralistic 
government.
    Mr. Hastings. Right. Well, finally, Mr. Chairman, time 
won't permit us to explore the importance of Poland in all of 
this as well, so I'll just leave that to the side. But let me 
offer what I think are two things that help in our developing 
better and building better relationships with countries.
    And it's not ignored, but not enough emphasis is placed on 
cultural and educational exchanges. And as policymakers, 
Senator Cardin, my dear friend and Co-Chair of this Commission 
and I have been active in pursuing funding in that arena. But I 
believe Ukraine would benefit greatly by large student 
exchanges and cultural exchanges. They have so much to offer 
and in that regard, it would be helpful if we were to 
participate.
    Now, let me be a little more precise and I'll stop right 
here. If I had to make a bet on where 19- and 20-year-olds are 
going to go to college, that can with the support of their 
families or however they manage to do so, I'll bet you Russia 
is going to do more in the education arena having them come to 
Russia than we are having them come to America. I'll stop right 
there.
    Mr. Cardin. Well, Congressman Hastings, thank you very much 
for those observations. I would just observe I think the two 
greatest challenges will be for Ukraine as to whether it really 
can establish itself as an independent democracy in that 
region, which is our goal and being able to establish relations 
with all of its neighbors, including to the West. And second, 
whether it can deal with corruption.
    We've mentioned this a couple times, and the Millennium 
Challenge grant is a good example. We just completed a hearing 
in the Senate Foreign Relations Committee with President 
Clinton and Bill Gates who are involved in two major 
foundations that provide international assistance. And I was 
very impressed with their commitment on accountability in 
making sure the funds do not get sidetracked to help finance 
corrupt activities.
    We are looking at a change in our foreign assistance 
programs and accountability's going to be part of that. So 
Ukraine is a developing democracy that is--needs an independent 
economy and they will have an independent economy, but it will 
not happen at the pace that they want if they can't get 
corruption under control.
    So I think those two issues are critically important as we 
watch Ukraine. And I agree with Congressman Hastings. We need 
to look at its relationship with other countries; whether 
Moldova or Belarus, Ukraine can play a very important role in 
the development of other countries in transition in that 
region.
    So I think it's in all of our interests to continue our 
focus on Ukraine and just observe with a great deal of, I 
think, optimism, the recent elections being the expression the 
people of Ukraine as to the future of their country. And we 
certainly are impressed by the new government's ability to form 
under very challenging circumstances. Thank you, Mr. Russell, 
for your testimony.
    Mr. Russell. Thank you.
    Mr. Hastings. Thank you, Mr. Russell.
    Mr. Cardin. I would want to observe that the Ambassador for 
Ukraine had planned to be with us. He has taken ill. He must 
have similar children that you have. [Laughter.] And maybe more 
in number, so he's maybe more severely impacted. We're very 
pleased to have two distinguished experts on Ukraine for our 
second panel.
    Damon Wilson is Vice President, Director of International 
Security Programs at the Atlantic Council. Mr. Wilson 
previously served as Special Assistant to the President and 
Senior Director of European Affairs at NSC. We're among his 
many responsibilities. He coordinated interagency policy in 
support of Ukraine, including during the Orange Revolution. Mr. 
Wilson also served in a variety of other governmental positions 
at NSC and State Department including as Chief of Staff at the 
U.S. Embassy in Iraq.
    Anders Aslund is Senior Fellow at the Peterson Institute 
for International Economics and has been deeply engaged with 
Ukraine since 1985. Previously, Dr. Aslund was Director of the 
Russian and Eurasia Program at the Carnegie Endowment and is 
the author of nine books, including ``How Ukraine Became a 
Market Economy and Democracy.'' And he has a copy here, willing 
to sell it, I assume. [Laughter.] We have extra copies that 
we'll make available.
    Mr. Aslund. Free copy.
    Mr. Cardin. Thank you. We'll start off with Mr. Wilson.
    Mr. Wilson. Thank you very much, Mr. Chairman, Mr. Co-
Chairman.
    Mr. Hastings. Press that button, Damon. See if it's on.

         DAMON WILSON, VICE PRESIDENT, ATLANTIC COUNCIL

    Mr. Wilson. Oh yes, thank you. Thank you, again. I'm 
honored to speak to you today about our relationship with 
Ukraine. I want to thank the Commission for the role that it's 
taken in helping to raise the spotlight in Washington on the 
issue.
    Mr. Hastings. I apologize to you, but some of the people in 
the back are still having difficulty hearing. Is that red light 
on, on that mic?
    Mr. Wilson. It's hard to see. Yes.
    Mr. Hastings. All right. There, you're better now.
    Mr. Wilson. All right, is that better?
    Mr. Hastings. Yeah.
    Mr. Wilson. All right. I want to thank you, again.
    Mr. Cardin. That's three thank-you's. [Laughter.]
    Mr. Wilson. Naturally. But I did want to thank the 
Commission for taking the opportunity to help raise the 
attention--the spotlight on Ukraine here in Washington. I think 
that's an important function of the Commission and I applaud 
that leadership. I also want to thank you, Mr. Co-Chairman, for 
your personal leadership and the role that you've played in 
elections in Ukraine over the years. I think that's been very 
important. I commend my former colleague, Dan Russell, for some 
excellent testimony.
    Today, I'd like to underscore why the issue of Ukraine 
should matter in Washington, outlining key benchmarks against 
which to judge the policies of Ukraine's new President and 
offer recommendations for U.S. policy. I agree that we should 
not underestimate what has just happened in Ukraine this year.
    This election is a victory for the consolidation of 
democracy. And yet for most of us that follow Ukraine closely, 
there is a sense of disappointment. Why is that? First, the 
leaders of the Orange Revolution failed to deliver for Ukraine 
that which those protestors on the Maidan were calling for back 
in 2004.
    Second, Ukraine's track record of good elections has yet to 
translate into a track record of good governance. And third, 
we've been disappointed by the timidity in the West to continue 
to support Ukraine. So President Yanukovych, therefore, assumes 
the Presidency in an atmosphere of pragmatism.
    And a sober assessment of Ukraine's prospects is 
appropriate. However, the vision of a democratic, free-market 
Ukraine firmly anchored in Europe remains important as it 
remains a motivator for tough policy decisions in Kyiv as well 
as in Brussels and Washington. And we must not take this vision 
for granted.
    Why does all of this matter? First, it matters for the 
quality of life of Ukrainian citizens, but it also matters 
geopolitically. In some sense, Ukraine is untethered, if you 
will. Its future is not certain. Although it is an ancient 
nation, it is a young state. The history of conflict in Europe 
is about uncertainty in the space between Germany and Russia.
    And this would not matter if the Russia of today had 
evolved and changed to become like the Germany of today. But 
Russia has not. Ukraine's statehood remains fragile. If 
Ukrainian democracy continues to succeed and helps produce good 
governance and economic growth, it will serve as a powerful 
example in a region that desperately needs positive examples.
    And that is why Russia has a strategy, which in some terms 
essentially is rollback. This strategy had been well 
articulated by Russia's leaders, including President Medvedev's 
declaration of privileged interests--the commitment to protect 
Russian citizens wherever they may live--as well as in Russia's 
new security strategy. In contrast, I'm not convinced that 
either the West or Ukraine itself has a very clear strategy 
about the way forward.
    So let me first address Ukrainian policy, as what President 
Yanukovych does will have more of an impact on Ukraine's place 
in the world than any outside actor. He's off to a good start 
with an early visit to Brussels followed by one to Moscow. He's 
outlined his four top priorities of EU integration, returning 
good neighborly relations with Russia, developing relations 
with Ukraine's neighbors and pursuing strategic partnership 
with the United States. I think as we look forward, we should 
judge Ukrainian policy by several benchmarks.
    First, Russia--how does Kyiv manage its relationships with 
Moscow? A stable and positive bilateral dynamic requires 
Ukraine to behave as and be treated as a sovereign, independent 
actor. Key issues include whether Yanukovych maintains a non-
recognition policy toward South Ossetia and Abkhazia and 
whether he opens the door to an extension on the Black Sea 
fleet in Sevastopol.
    Energy security--Russian interests have been keen to gain 
control of Ukraine's energy structure. Will Yanukovych agree? 
If he believes energy is a national security issue as I do, the 
new government would pursue a serious energy efficiency 
strategy.
    International economics--The government's handling of the 
IMF will be an early test of its credibility. I'll leave the 
details of this to Anders, but similarly, a key question is how 
Yanukovych handles the common economic space with Russia? Does 
he do so in a way that negatively impacts Ukraine's WTO 
membership or the prospects for a free trade agreement with the 
EU?
    Regional relations--Does Ukraine use its regional weight to 
support Moldova and a resolution of Transnistria? How 
Yanukovych handles ties with Belarusian leader Lukashenka and 
Georgian President Saakashvili will offer insights into the 
regional role that Ukraine will play, as well as the role that 
it wants to assume within Guam.
    The European Union--Will Yanukovych press as hard to grow 
Ukraine's bilateral ties with the EU, as well as take advantage 
of the Eastern Partnership? A free trade agreement and visa 
liberalization are key practical steps which would help 
Ukrainians actually be Europeans and move the country toward 
Europe.
    Nonproliferation--Ukraine had a spotty record of 
nonproliferation under then-Prime Minister Yanukovych. Will 
Ukraine's arms sales track record continue to improve given the 
economic interests at stake?
    And finally NATO--NATO is clearly not at the top of the 
agenda, nor should it be. But NATO-Ukraine relations do need to 
be on the agenda. Yanukovych, in fact, had a track record as 
Prime Minister of advancing NATO-Ukraine ties. So while the 
window has closed on rapid movement toward NATO, both sides 
should ensure that there is substance to underpin the NATO-
Ukraine Commission. As NATO is a demand-driven bureaucracy, the 
signals from Kyiv will determine the substance.
    I believe it is an imperative to maintain the credibility 
of the historic Bucharest summit decision that Ukraine will 
become a member of the alliance. If we look back in 5 to 10 
years and the Bucharest decision is seen as hollow, there will 
be damaging implications for the alliance's credibility, as 
well as for Ukraine.
    In the face of Russian opposition and genuine divisions 
within Ukraine, some have argued that we should aim for 
Finlandization of Ukraine--independent, but not part of any 
alliance. When applied to Ukraine, these analysts imply that 
big powers taking decisions about Ukraine's future--I believe 
Ukraine must be in a position to determine its own future, 
including whether to pursue any membership in any alliance.
    These issues provide benchmarks against which we can judge 
the new government. I have modest expectations, but do believe 
that Yanukovych can deliver on his campaign pledge to move--
continuing moving Ukraine toward Europe. His early visit to 
Brussels and his reception in Brussels are good signs.
    Yet the most important factor to achieve this foreign 
policy goal is what the government does domestically. 
Yanukovych's reception in Western capitals will be determined 
by whether he governs effectively, protects democratic 
advances, stabilizes and grows the economy and ensures Ukraine 
is a reliable energy partner.
    In terms of implications for U.S. policy, I'm not convinced 
that the West as a unit yet has a coherent strategy, although 
Vice President Biden's visit to Kyiv last year helped lay out 
excellent principles for U.S. policy. We cannot afford to put 
Ukraine on the backburner or accept the argument that U.S. 
engagement is somehow provocative to Moscow. We should not 
accept the argument that Ukraine is messy or too divided as an 
excuse to not engage.
    While changes in Ukraine are unlikely to be decisive in the 
next few years, the trend lines could take Ukraine further away 
from rather than closer to Europe. And we do not want to look 
back at Ukraine's next election and wonder what happened. So 
Mr. Chairman, as part of my effort to outline a way ahead for 
U.S. policy toward Ukraine, I offer six recommendations to 
conclude.
    First, be in the game. Ukraine is in play and we need to 
engage and be present. The appointment of John Tefft as our 
Ambassador and the visits by Vice President Biden, National 
Security Advisor Jones and President Obama's congratulatory 
call to Yanukovych are key steps in this effort. This high-
level outreach should continue.
    Second, articulate a vision. We need to recommit to 
building a Europe whole and free, energizing the bipartisan 
tradition behind this vision and making clear that Ukraine has 
a place within this vision, as does Russia.
    Third, maintain funding. We need to protect our funding for 
transition in Ukraine, as the Freedom Support Act model of 
graduation no longer applies in Europe's East in my view. 
Higher per capita GDP does not necessarily translate into a 
democratic Ukraine anchored firmly in Europe.
    Fourth, reach beyond leaders. Unfortunately, Yushchenko was 
a failure. Yanukovych is unlikely to bring decisive change. We 
therefore need to ensure that our relations with Ukraine extend 
beyond leaders. We should place emphasis on developing next-
generation leaders, ties with the Rada, engaging the regions 
and fostering people-to-people ties.
    Fifth, push energy efficiency. The United States and 
Ukraine need to get serious about working with European 
partners to support energy efficiency in Ukraine as a national 
security strategy.
    And sixth, enhance military-to-military ties. We must 
ensure that close military-to-military ties continue and are 
backed with funding from foreign military financing and foreign 
military sales and we must push back when Russia tries to 
portray military cooperation with Ukraine as provocative.
    In the wake of Ukraine's election, Yanukovych is now 
President and his party leads the government. Now is the time 
to move beyond stalemate. Just as much as we hold Kyiv to that 
standard, we must hold ourselves to that standard. Thank you, 
Mr. Chairman, Mr. Co-Chairman. I look forward to your 
questions.
    Mr. Cardin. Mr. Wilson, thank you for your comments. Dr. 
Aslund?

     ANDERS ASLUND, SENIOR FELLOW, PETERSON INSTITUTE FOR 
                    INTERNATIONAL ECONOMICS

    Mr. Aslund. Thank you very much, Mr. Chairman. And I would 
very much like to thank you for this opportunity to speak on a 
topic that I consider very important: how Ukraine should move 
beyond the stalemate--as you so rightly have put it in the 
headline--in the sphere of economic reform. I leave the 
political aspects to Dan Russell and Damon Wilson and just want 
to concur with their statement and I'll focus entirely upon the 
economic aspects.
    Ukraine has established an open market economy with 
predominant private ownership. And from 2000 to 2007, the 
country had an average economic growth of 7.5 percent a year. 
But then came the global financial crisis and last year, GDP 
fell by no less than 15 percent. And this shows partly that 
Ukraine is part of the world economy but it also shows that 
it's not performing up to its potential. Its big problems, as 
you pointed out, Mr. Chairman, is pervasive corruption and poor 
business environment. And the question today is what and how 
can be done about it?
    I co-chaired an independent international expert commission 
that has done a report on what the new government should do 
during its first year in power. We call it, ``Proposals for 
Ukraine 2010: Time for Reforms.'' And our contention is that 
Ukraine today has a unique possibility to move ahead because a 
new Presidential election with a new government is always a 
good time to take reform. And on top of that, if you have been 
badly beaten by an economic crisis and are coming out of it, 
then you can act.
    And our three main conclusions to put it first is that 
Ukraine needs a new capacity for economic reform. Second, a 
clear prioritization of what the top priorities are so that 
they are really carried out. And third, it needs to utilize 
international organizations as lighthouses or anchors to guide 
its reforms.
    So let me start with the first point. Ukraine needs to 
establish a new capacity that is independent of the agencies to 
be reformed. We recommended the creation of the reform 
commission at the cabinet of ministers headed by a powerful 
Deputy Prime Minister, such as Deputy Prime Minister Sergei 
Tigipko has now been appointed. The reform commission should 
have its own budget and a single goal to decide and implement 
reform. This must come from above.
    At the same time, President Yanukovych has now formed a 
reform committee at the Presidential administration that he 
chairs himself. And he did set this up on the second day of--
his second day in office. And he has also appointed the first 
deputy head of his Presidential administration, Iryna Akimova, 
who's an outstanding economic reformer, to be the executive 
secretary of his reform.
    Second point is that Ukraine needs to have clear reform 
priorities. And the short of it is that they must improve the 
effectiveness of a state, achieve financial stability, allow 
private enterprise, the freedom of the market and make social 
policy more effective.
    And the government has adopted a coalition program that is 
already out which is called ``Stability and Reform.'' By and 
large, all the bullet points in this program are the right 
ones. But of course, they are bullet points rather than clear 
plans. So this looks promising. And it--to a considerable 
extent--it reflects the views of our Commission.
    The problem in Ukraine so far has not been what should be 
done. There's a broad public consensus. The question is if it 
should be done and who should do it. There's always a reason 
not to do things.
    And therefore we think that as everybody here has expressed 
today, the United States, the IMF and other international 
organizations need to help Ukraine to break through this 
political logjam, which is very much created by the interests 
of corruption. And naturally the United States should engage in 
the promotion of reforms that are beneficial for Ukraine's 
future governance and economic welfare.
    To summarize our Commission report, we've found 10 top 
priorities for this year: First, carry out gas reform. That's 
vital. Second, make the national bank of Ukraine independent to 
give a proper basis for the banking system. Third, move toward 
inflation targeting with a floating exchange rate to stop 
future high inflation. Fourth, cut public expenditures. There's 
no way to run a country with a budget deficit of 8 to 10 
percent of GDP in budget deficit.
    Fifth, undertake comprehensive deregulation of enterprise 
capital--this red tape. Sixth, conclude a European association 
agreement, which would include a deep and comprehensive free 
trade agreement. Seven, get privatization going again. Eight, 
legalize private sales of agriculture land. Nine, adopt a law 
of the public information to fight corruption. And 10, complete 
the modern commercial legislation.
    And all these measures are truly vital and they can be 
implemented within a year. In most cases, they're already draft 
laws lying ready to be adopted. And if I should pick a--point 
out one thing that is absolutely key, that's the gas reform. 
Currently Ukraine subsidizes the import of Russian gas to the 
tune of 3 percent of GDP each year, which makes no sense 
whatsoever. And this has to be changed.
    As Dan Russell in particular pointed out, the IMF will be 
the key in this process. The IMF will go out and start 
negotiating a new agreement very soon indeed. And it will 
contain a gas reform and sensible macroeconomic polices. And of 
course, the European Union is also currently negotiating a 
substantial association agreement and it is also involved in 
the gas reform.
    The role of the United States here as the biggest 
shareholder in the IMF is, of course, push the IMF in action as 
Dan Russell spoke about. And the U.S. also should engage in the 
gas reform. I think that Congressman Hastings mentioned 
something very important. Ukraine needs a new, broader educated 
elite. And therefore, I think that the United States should 
offer hundreds of student scholarships for Ukrainian scholars 
to come to this country. Let me thank you with these words.
    Mr. Cardin. Well, let me thank both of you for your 
testimony. It was very specific on benchmarks and 
recommendations. I think that's very helpful to us, but I hope 
it's helpful also to Ukraine. I think that your lists there, 
particularly on benchmarks, Mr. Wilson, and recommendations, 
Dr. Aslund, were both very helpful to us.
    So let me start off with Mr. Wilson if I might and try to 
pose the question as to what you think Russia--[laughter]--will 
be doing in regards to the new opportunities in Ukraine. 
Congressman Hastings mentioned that the issues of stronger 
exchanges between the two countries, whether its students or 
else-wise, that I think many of us in the West thought the 
history between Russia and Ukraine would serve the East--would 
serve the West well in building a strong relationship with 
Ukraine.
    But looking forward, it's going to be based upon a mutual 
interest going forward. And Russia certainly has the 
geographical advantage over the West in developing a closer tie 
with Ukraine. Now, again, I personally believe that the United 
States needs to develop a closer relationship with Russia, so 
this is not saying this in a hostile sense. But trying to 
figure out the policies for the United States--how should we 
anticipate Russia's response to the opportunities in Ukraine?
    Mr. Wilson. That's right. I think you're absolutely right. 
Ukraine and Russia should be expected to have good relations. 
There's every expectation that that should be the case. I think 
Russia and Russian leadership have learned some lessons in 
Ukraine. In 2004, then-President Putin overplayed his hand with 
pretty an outright, overt endorsement of candidate Yanukovych 
at the time for President.
    And I think that actually hurt Yanukovych in 2004 because 
it was heavy handed. And I think the Ukrainian people who are 
open and receptive to close ties with their northern neighbor 
saw this as an overt effort to manipulate their political 
process and didn't like that, responded to that.
    I think it's been interesting to watch over time the way 
that Moscow has related to Ukraine. In some respects, it become 
somewhat disenchanted with Yanukovych as their candidate, if 
you will, made more of an effort to develop a relationship with 
Prime Minister--at the time--Prime Minister Timoshenko, but dug 
in a hard line against President Yushchenko.
    And I think some of the approach that Russia took over the 
past years during President Yushchenko's tenure were actually 
quite dangerous. The letter that Medvedev sent to Ukraine, 
basically refusing to have an Ambassador until the President 
was gone, President Putin's challenging of Ukraine's 
sovereignty at the Bucharest summit, certain activities taking 
place in Crimea--were downright potentially dangerous, laid the 
seeds for a potentially dangerous future.
    But I think Russia looks at the situation in their view, 
they think they've had a bit of a victory, but I think it is a 
tactical victory. In one respect, they've seen the defeat of 
the Orange Revolution leaders, especially Yushchenko. Remember, 
Yushchenko actually ran in this election.
    If he had been a successful President, he could have had a 
second term and delivered on a vision which had very much 
irritated the Russians. He failed. He lost. Now, I don't think 
Russia had the reason for why he lost. I think he lost on his 
own merits. But Russia also sees themselves as having succeeded 
in pushing NATO off the agenda. I do think these are tactical 
victories because, I think, as Dan Russell began, the 
principles of the Orange Revolution were not defeated in this 
process.
    So I think it's important to watch this relationship. If 
Russia tries to exert, if you will, its sphere of privileged 
interest and expect Ukraine to do things that are Russia's 
bidding, such as open up the extension of the Black Sea Fleet 
in Sevastopol, to move on recognition of South Ossetia and 
Abkhazia--those would be very disconcerting signs. I think, for 
the moment, we've seen President Yanukovych resisting that type 
of pressure. He's given a nod toward issue like elevating the 
status of Russian language in Ukraine but that's a fair issue 
to have debated with inside Ukraine's polity. And I think the 
important part of this from U.S. policy is that we need to help 
support Ukraine as an independent actor, as a sovereign actor.
    And we need to be very clear that when we talked about a 
Russia reset policy, we need to articulate, just as powerfully, 
the other side of that--that we pursue cooperative relations 
with Russia but not at the expense of our values of our friend 
or our friends. And I think when we see or sense this type of 
pressure on Ukraine, we should work with our European partners 
to push back and to push back very clearly on Moscow.
    Mr. Cardin. I think your benchmarks are good ones for us to 
follow because I really do think it's too early to tell not 
only what Ukraine will do but what Russia will be doing----
    Mr. Wilson. That's right.
    Mr. Cardin [continuing.] And how it impacts on U.S. 
interests. I think it's just something we need to deal with. 
And I think the energy issue is probably going to be one of the 
most fundamental. I mean, you raise a very good point about gas 
prices in Ukraine are unrealistically low, which is having a 
major impact on their economy because the government 
subsidizing so much of the cost of energy. And we're not sure 
what impact this has on market forces. And then put on top of 
that the interest, internationally, on dealing with global 
climate change and energy security issues within that region, 
it is a matter that Ukraine could play a very positive role but 
it requires reform.
    And when you do reform, there're winners and losers. And 
the current--I'm sorry, Dr. Aslund, if I get involved, a little 
bit, in politics here but the business leaders' impact in 
government decisions in Ukraine is well known. So the question 
is, can they go forward with these market reforms in the energy 
sector, not just from the point of view of the impact it has on 
its economy but on its political structure. And will the 
international organizations have enough impact, IMF, et cetera, 
in the reform commission's recommendations and implementation. 
What is your assessment on that?
    Mr. Aslund. Thank you very much. This is exactly the 
question that I wanted to get because I think that this is the 
key issue. When the IMF makes an agreement, normally it 
requires certain prior actions, the natural prior action for 
the IMF to demand now is that gas prices should be increased 
domestically before the IMF concludes any agreement. We can 
discuss how much. My basic view is the faster, the better. And 
then you provide social compensation for those who are really 
suffering. Normally, the people are really suffering--they 
don't use much gas.
    So it's not so much you have to pay--from a state point of 
view, you can save $3 out of $4 by raising the prices and 
giving full social compensation. And I think that the Ukrainian 
Government is ready for this because they realize that they 
can't play an old game for too long. And what we are gradually 
seeing is that these big businessmen, they prefer to be owners 
of enterprises rather than sit and play in arbitrage, play 
between low, controlled prices and the free, much higher 
prices. So I think that this is the time to make the push. And 
the IMF, the U.S. and the European Union are all highly aware 
of this. And I do hope that they will hold firm and get that 
done.
    Mr. Cardin. Thank you. One of you mentioned the fact that I 
didn't realize that Ukraine has a large coal reserve--which I 
wasn't aware of. Is there a concern that you might find an 
increase in the utilization of coal, which could also 
compromise, then, our global climate change issues and deals 
with security issues also, as far as the pipelines, et cetera, 
as part of the way that Ukraine responds to the IMF's desires? 
Is that on the table?
    Mr. Aslund. I don't think that we should be much worried in 
this regard. The coal price is half of what it should be and 
the big states are----
    Mr. Cardin. They're also subsidizing coal?
    Mr. Aslund. Yeah. And there're big subsidies to the coal 
mines. The coal mine owners say, we don't need any subsidies if 
the prices are free. So if you have higher coal prices, the 
consumption will go down. In Soviet times, Ukraine consumed 110 
billion cubic meters of gas each year. Now, it's down to 50 
billion cubic meters. So just let the market function and you 
will get the reduction. Ukraine was the most energy intensive 
economy in the world in Soviet times--even worse than Russia. 
So therefore, you have huge benefits to get and Ukraine has 
reduced its emissions enormously and they can do much more and 
should do much more for their own benefit.
    Mr. Cardin. Well, I thank both of you for your testimony. I 
think it gives us a yardstick to judge what is happening in 
Ukraine and it's very helpful for our Commission. I'm going to 
turn the gavel over to Chairman Hastings. I have a commitment 
on the Senate floor this morning in about 10 minutes. So to not 
to be disruptive, I'll give him the gavel and thank you again 
for your testimony.
    Mr. Hastings. Thank you very much, Mr. Chairman. And I 
agree with you that our witnesses were very specific and left 
very little that needs to be asked. At the very same time, in 
listening to your testimony I had a couple of takeaways and, 
specifically, Mr. Wilson, when you commented about the thrust 
to have a Europe whole and free, and we hear about Ukraine but 
I think about so many other flashpoints. Two that come to mind 
most immediately are Bosnia and Kosovo that have, kind of, like 
dropped off of the radar screen in the minds of most 
policymakers and a lot of folk in the administration.
    And in my judgment, those two areas still pose considerable 
problems. The global downturn took a heavy toll on a 
considerable number of the areas of the former Soviet Union. 
And nearby to all of this are those Central Asian countries 
that have been laboring under what would be classified as 
recessionary times for a very long time. And so when you say, 
Dr. Aslund, right, that this is a unique opportunity to move 
ahead, as you put it, I wonder how do you move ahead when you 
don't have any money?
    And put bluntly, if you look at the role--and we seem to 
rely heavily upon the International Monetary Fund, perhaps it 
would help me--and I'll start with you, well, Dr. Aslund, if 
you would tell me how that works with Russia as a player? And 
going even further into that, what tax consequences exist for 
Ukraine's citizenry and just where would they all find a 
revenue stream and how would they? Corrupt business persons--
and we use that term--I'm always fascinated how we in the 
United States form a list of corruption and somehow--and I 
understand how we do that but if I was in another country, and 
I was looking at what happened on Wall Street the last 20 
years, I'd wonder about the United States telling me about 
corruption. And I really--that's a blunt statement but maybe 
ours is just organized corruption some kind of way or another.
    I'm reminded of a story, people were telling me how bad 
organized crime was in south Florida--and this is 40 years 
ago--and at that time, I had been robbed face-to-face with a 
gun three times, my house had been broken into seven times, I 
had three cars stolen--two from church--[laughter]--and I said 
that I wasn't as worried about organized crime as I was 
disorganized crime--[laughter]--that was about to kill me. So 
and that's a real true story about my own life and when the 
Prime Minister so rightly said the other day, Prime Minister 
Azarov, that the debts that are owed to the population and, in 
this case, Mr. Yanukovych rightly, as I'm sure Mr. Yushchenko 
must have as well, said that we're going to take care of you.
    Don't worry. We're going to be able to pay you. And then, 
evidently, Azarov had done his own auditing and learned that he 
doesn't have anything to pay them with. And so where do they go 
from here, Dr. Aslund? And then I'll come back, Mr. Wilson, to 
you on a couple of other matters. I hope there were a few 
questions in there aside from personal ruminations. [Laughter.]
    Mr. Aslund. Thank you very much, Mr. Chairman. Well, 
certainly, I will start with one saying, booms are times of 
corruption, depressions are times of moral rearmament. And 
therefore, I think, that the crisis now is good. We see the 
same thing in Ukraine as here. People tolerate corruption much 
less when the times are bad than when they are good.
    Mr. Hastings. I hear you.
    Mr. Aslund. And therefore, they want to do something about 
it. One area that this is very striking is in the red tape of 
petty corruption in the bureaucracy. Here, there is a strong 
general sense now in Ukraine, that we must do something about 
it. And we have seen several countries in the former Soviet 
Union--in particular, Georgia but also Azerbaijan and 
Kyrgyzstan--have cleaned this up. If they can clean it up, why 
shouldn't Ukraine be able to do that? Ukraine is today the 
110th country in the world in terms of GDP per capita, 
according to the IMF statistics which is far too low with a 
generally educated labor force and two-thirds of young now get 
some kind of higher education.
    So you can say that human capital is hardly anywhere worse 
used than in Ukraine. So the essential thing is just, free them 
and give them possibilities to work. That doesn't cost money. 
That saves you money--cutting down the bureaucracy. And that's 
also reason why it should be possible to do the gas reform now 
because the government has to listen to the IMF and this here 
is rather limited number of corrupt people who are trying to 
benefit from that. It's much more difficult to do that in bad 
times. But, essentially, taxes in Ukraine are already high. Tax 
collection is good, surprisingly. The problem is too big public 
expenditures. I've already talked about the gas subsidies--or 
energy subsidies more broadly.
    The second is discretionary enterprise subsidies, which 
are--(inaudible). The third big area is the pension 
expenditures. Ukraine spends 16 percent of GDP--more than twice 
as much as this country--on public pensions, which makes no 
sense. It goes to people who retired in the '40s through 
various early pension schemes. Their retirement age for women 
is 55, for men, 60. It doesn't make sense. These people should 
continue their work and so pension reform is a politically 
difficult thing that needs to be done.
    With regard to Russia, Russia has a positive attitude 
toward IMF support for Ukraine and was interested in getting 
IMF money for Ukraine also in December when the big Western 
countries said no. With regard to the tax system, not that much 
needs to be changed there. It's mainly unnecessary public 
expenditures that go to the corrupt that should be stopped. 
Thank you.
    Mr. Hastings. Well, turning again just very briefly, to 
Russia, it would seem to me that what they have done by cutting 
off their gas resources last year to Ukraine was particularly 
brutal in the dead of winter. And second, Ukraine pays the 
highest prices for their supplies of all of the European 
countries. And so Russia, whether they come, they get money 
from the IMF or not, seems to be in a position of win-win. And 
let's put something here on the table. I was at the first 
election. And I read the words of Mr. Yushchenko and Ms. 
Tymoshenko and Mr. Yanukovych and others whose names I can't 
remember.
    But I distinctly remember that Mr. Yanukovych, at that 
time, was much more inclined to work with Russia than he was 
with the United States. So is there an old Yushchenko and a new 
one? Is--Yanukovych, I mean. And that's troubling to me. Don't 
they have--Russia--a lot of leverage on what happens with the 
energy resources in Ukraine? And if you are talking oligarch to 
oligarch in the business world, then without knowing--and I 
don't know anybody in Ukraine that's a rich man or woman that 
is in this business and I don't know anybody in Russia that's a 
rich man or woman in that business--every time I'm in both the 
countries I hear about the oligarchs but I don't ever see any 
or meet any--but I'll bet you they meet.
    And therein lies the rub. How do you get crooks to not be 
crooked when they're making a lot of money? And what role, Mr. 
Aslund, does the shadow economy play? When I'm down in the 
train system in Kyiv, I can see--just like if I walk over here 
in Anacostia--I can see that shadow economy at work. And I'm 
not decrying it. Americans don't quite understand that a large 
part of the underpinning of this country is a shadow economy 
and if it didn't exist, we'd be in worse shape than we are now. 
For some strange reason, folk don't seem to want to accept 
that. But you come go with me to Pentagon City and I'll show 
you people--today--that are buying expensive garments and 
perfume and what have you that don't have no job nowhere. And 
didn't get it from welfare either.
    So it's a strange environment that we live in, in this 
world. I'm sorry. Perhaps, Dr. Aslund, not to keep you on the 
spot--put those in the catalogue and then come back and talk to 
me about it and I'll go to Mr. Wilson and maybe along in the 
same vein. When we talk about reliable partners in energy--how 
are you going to be a reliable partner when somebody else has 
all of this leverage over you? And let's put something else on 
the table. While there's an extraordinary Ukraine diaspora here 
in the United States and elsewhere in the world, there are more 
Russians in Crimea or Russian-sympathizing people in Crimea 
than all of the diaspora combined.
    So while it may very well be true that Russia did not 
defeat Yushchenko, the turnout in Crimea suggest to me that 
Russia may have helped Yanukovych. We do it on the straight up, 
with nice words and narratives but there was some evidence and 
talk on the streets of Russia's influence in the last election. 
And I don't decry that. We have our nonprofit organizations 
that work in an effort to try and make a difference for human 
rights and transparency and all of the rule of law and those 
fine things that we say and the other people just put money on 
the ground and get it done. I don't know whether there's 
anything for you to respond to. I think you and I are in 
thorough agreement about people-to-people exchanges. But how 
about you, Dr. Wilson?
    Mr. Wilson. Sir, I will certainly pick up on a few of those 
points. There are--I mean, Russian-speakers play a major role 
in Ukraine and Ukrainian politics. But these Russian-speakers 
are citizens of Ukraine and have loyalty to Ukraine and are 
part of building a future of Ukraine. If Ukraine is to succeed, 
it has to have a role where the Russian-speakers in the east 
feel a part of that future.
    Mr. Hastings. Agree.
    Mr. Wilson. That is one of the areas where Yanukovych can 
potentially make progress. The problem is when leaders in 
Moscow look to manipulate and use Russian-speaking populations 
to advance their own interests in other countries. That's 
dangerous. That's interfering in the internal affairs of 
Ukraine.
    Mr. Hastings. And we see that in Lithuania and Latvia----
    Mr. Wilson. That's right, that's right. And part of it----
    Mr. Hastings [continuing.] Slovakia and Slovenia.
    Mr. Wilson [continuing.] Is soft influence through the 
power of Russian language media. So many of these folks getting 
their media out of Moscow. And part of it's more concerning 
where there're reports of folks acquiring Russian passports 
that provide a bit more of a pretense. This was the pretense 
that the Russians used in South Ossetia, Abkhazia--the 
protection of Russian citizens there--which was, frankly, a 
fabricated pretense. And I think that's something to keep an 
eye on. You asked a little bit about Yanukovych's disposition. 
And I think in 2004, 2005, it was essentially fair to say he 
was a pro-Russian candidate. He was backed by the Kremlin in 
that election. I think it's a little bit more nuanced now. And 
I think he certainly has adopted a much softer position toward 
Russia. He wants to pursue positive relations.
    But he hasn't turned his back on Europe. He has pressed 
back on a NATO agenda, very clearly so. And that obviously 
pleases many in Moscow. But I think once you become President 
of Ukraine, it's, kind of, nice to be President of an 
independent, sovereign country. And I would hope that this 
position of responsibility would make him think more about the 
benefits to Ukraine of an independent streak, of an independent 
decisionmaking process. So while I don't decry an effort to 
develop a manageable relationship with Moscow, I think it is 
important that there not be early concessions just for the sake 
of it.
    Mr. Hastings. Yeah, on the people-to-people exchange kind 
of thing, obviously, an American President cannot do 
everything. But it would seem to me--the Vice President has 
visited Ukraine. But I'm wondering and if I were President of 
the United States, I certainly would invite Yanukovych to come 
to the United States. And I think that that would be, 
singularly, just a Presidential visit would be particularly 
important in these times.
    I don't know whether the administration is thinking along 
those lines or whether anything is planned but I see all sorts 
of Presidents come through here and I guess because of 
involvement in Europe, I have the attitude that I do, but if 
you're going--when you talk about, now he's President and it's 
an important thing to be President, then you have to give him 
the feeling of being President. And what better way could that 
be expressed than to have him come for a visit with the United 
States? And I'll make that recommendation to the 
administration.
    Mr. Wilson. That's absolutely right. I concur with that. 
And I think President Yanukovych has been to Brussels, he's 
been to Moscow and he's planning to visit Washington as part of 
the nuclear security summit which President Obama will host in 
April. That's good because it gets him here to Washington at an 
early stage. It's a bit of a distracted platform because there 
will be a lot of foreign leaders here at the time. So I think 
it's important to think about how to maximize the impact of 
that particular visit.
    But then also, how to follow that up because he will be 
overshadowed by many other leaders. I don't want to downplay 
the importance of it, but the power of having Ukrainians come 
to Washington regularly, come to the United States regularly--
but also, even more importantly, it is very important for the 
United States to be present in Ukraine. It would be terrific to 
see President Obama make a trip to Ukraine in his first term. 
We've had the Vice President there, we've had the national 
security advisor. Secretary Clinton would be a natural 
followup.
    President Yanukovych and President Medvedev have already 
agreed to, I think, three more meetings this year. They're 
neighbors. That's natural. They're close. But it's important 
for us to remember that we do need to be in the game. And that 
requires--that's why your trips, your frequent trips to Kyiv, 
have mattered so much. We need to have senior Americans showing 
up in Ukraine, engaging their interlocutors, keeping these 
issues on the agenda, cajoling, pressing but also exchanging 
information, strengthening the ties here because they will be 
having that on a very frequent basis with their Russian allies.
    Mr. Hastings. I hear you. Dr. Aslund, I left all those 
questions out there but I'm sure you have lots of answers for 
those questions and you'll have the last word for us.
    Mr. Aslund. Thank you very much. Were very good questions, 
Mr. Chairman. If I start with Russia--of course, Russia has an 
interest in selling gas to Ukraine and now it's spoiling that 
market. Until 2008, Ukraine was actually the biggest purchaser 
of Russian gas in the quantity. Now, with energy saving, 
Ukraine could stop importing gas within a few years. Russia 
should understand that that is not in their interest. The 
biggest impact we see of Russian business in Ukraine is direct 
investment.
    The two biggest outside investors in Ukraine are Russian 
businessmen who were actually born in Ukraine but now live in 
Moscow. And I think that this is a normal thing and we are also 
seeing that the people who invest in the worst depression are 
big Russian businessmen, because they are used to handle risk 
and are not afraid of it. In particular, the big Russian banks 
are now expanding fast in Ukraine. How does one make crooks 
honest? First, it's much better that they own companies because 
when they defend their companies against criminal practices 
rather than extort from other enterprises and second, it's good 
if they get integrated into the outside world.
    The people who make initial public offerings selling their 
stocks abroad, they clean up the companies first, they bring in 
international auditing companies and make the companies more 
transparent. One of the cleanest sectors is actually the 
banking sector because 40 percent of the banks are now owned by 
foreign banks--mainly European banks but also Citi runs a good 
bank in Ukraine.
    About the shadow economy, I share your sympathy because the 
shadow economy is to considerable extent small private plots. 
Each Ukrainian family has a private plot. If they are doing 
badly, they live on subsistence agriculture because they have 
enough land so that they can live on the land if necessary. And 
this is a quite important social safety net which is the 
explanation why the social crisis has not been worse in this 
very bad economic downturn. Thank you.
    Mr. Hastings. Right, all right. I thank you both so very 
much and also the previous witness. And I can assure you that 
at the Commission that we will keep our interest level high as 
we proceed and I will try to persuade many of my colleagues to 
visit more and engage more and try best to gain greater 
understanding. Thank you so very much.
    Mr. Aslund. Thank you.
    Mr. Wilson. Thank you.
    [Whereupon, at 11:28 a.m., the hearing was adjourned.]

                          A P P E N D I C E S

         PREPARED STATEMENT OF HON. ALCEE L. HASTINGS, 
 CO-CHAIRMAN, COMMISSION ON SECURITY AND COOPERATION IN EUROPE

    Thank you, Mr. Chairman, for holding this important and 
timely hearing. I had the privilege to serve as the Deputy Head 
of the OSCE Parliamentary Assembly election mission to Ukraine 
during the first round, January 17th elections. Judging by my 
personal experience and those of my OSCE colleagues in both 
rounds, these elections were largely free and democratic. This 
does not mean they were perfect. There were some problems 
stemming largely from the inadequate and confusing electoral 
framework. So there is no doubt that these laws need fixing 
before the next elections.
    The ultimate victors in this election are the Ukrainian 
people. This is not something we should take for granted--
regardless of whether or not one liked the outcome. To some 
Western observers, this may seem odd, but the fact these 
election results were not preordained is a success in itself. 
The fact that voters do not know who will win a race is a new 
and rare concept in the region and puts Ukraine in stark 
contrast with some of its neighbors.
    The world was enamored with the 2004 Orange Revolution, 
which brought millions of Ukrainians into the streets to 
peacefully protest election fraud, corruption and lack of rule 
of law. Since then, Ukraine has developed an open and 
pluralistic political system and media freedoms have expanded. 
Although Ukraine has had good elections now for the last five 
years--and I've had the opportunity to lead or otherwise 
contribute to three OSCE election missions to Ukraine during 
that time--I can tell you that you need more than good 
elections to make a functioning democracy.
    Unfortunately, despite the progress, Ukraine has also 
witnessed poor governance, destructive infighting and political 
instability--in part due to no clear delineation of powers 
between the offices of prime minister and president. President 
Yanukovych, along with the just-appointed Prime Minister, 
Mykola Azarov, will need to seriously address long-standing 
problems that undermine Ukraine's potential, including 
corruption and the lack of an independent judiciary, which is a 
key underpinning for the rule of law.
    Ukraine's leadership also needs to reform and make more 
transparent the troubled energy sector as well as a plethora of 
issues involving Crimea, be it the Black Sea Fleet, Russian 
influence, or inter-ethnic challenges, especially the plight of 
the Crimean Tatars. Ukraine must vigorously fight hate crimes. 
Ukraine has been especially hard-hit by the global financial 
crisis. Unfulfilled promises of the Orange Revolution led to 
disappointment and cynicism in Ukraine, as well as frustration 
among Ukraine's supporters in the United States and Europe. 
Obviously, the Ukrainian leadership's work is cut out for them.
    President Yanukovych desires to improve relations with 
Russia and is certainly more oriented in that direction than 
his predecessor, but I don't believe would cede Ukraine back to 
a bygone era, and judging from his initial statements and 
visits, he clearly sees integration into the European Union as 
a priority. At the same time, he appears to value the benefits 
of a continued, strong relationship with the United States.
    The United States has a solid record of standing with the 
Ukrainian people over the decades in support of their struggle 
for freedom and democracy. I look forward to hearing from our 
witnesses as to how we can maintain and strengthen our 
partnership with Ukraine.

        PREPARED STATEMENT OF DANIEL A. RUSSELL, DEPUTY 
 ASSISTANT SECRETARY OF STATE FOR EUROPEAN AND EURASIAN AFFAIRS

    Chairman Cardin, Co-Chairman Hastings, Members of the 
Commission: Thank you for the invitation to discuss Ukraine and 
its relations with the United States in the wake of 
presidential elections. Your timing could not be better, as 
Ukraine's new president took office last month and its new 
government was confirmed last week.

                          Why Ukraine Matters

    Let me begin by making three basic points about Ukraine and 
the recent elections before sketching out our agenda for 
engagement. My first point should be obvious: Ukraine matters 
to the United States and it matters to Europe. Ukraine is one 
of Europe's largest states, roughly the size of France with 45 
million people. It serves as a transit route though which 
nearly a quarter of Europe's gas imports flow, and it could 
become self sufficient in energy, were its natural resources to 
be fully developed. Ukraine has tremendous potential. It could 
become a net contributor to global food security; its rich 
black soil produced over one-quarter of the Soviet Union's 
agricultural output. Ukraine can also serve as an example in a 
critical region. It has shown leadership on the world stage, 
giving up its nuclear weapons to become a non-nuclear state and 
contributing to security and peacekeeping operations from the 
Balkans to Iraq. And Ukraine's highly educated workforce is 
probably now more connected with Europeans and Americans 
through business, travel and education than ever before. Cell 
phones outnumber Ukrainians; about one-quarter of the 
population is on-line; and Ukrainians are travelling abroad in 
record numbers.
    My second point is about Ukraine's leadership in democracy 
in the region, a role aptly illustrated by the conduct of its 
presidential elections in January and February. Taken together, 
the two rounds of voting received an overwhelmingly positive 
assessment by international observers. Among those observers 
were Congressman Hastings and Helsinki Commission staff 
members, and I would like to recognize their contribution to 
the OSCE Parliamentary Assembly's election observer mission. 
The OSCE concluded that the presidential election showed 
significant progress over previous elections, and met most OSCE 
and Council of Europe commitments. The open, competitive 
election demonstrated respect for civil and political rights 
and offered voters a genuine choice among candidates 
representing diverse political viewpoints. Candidates were able 
to campaign freely, and the campaign period was generally calm 
and orderly. The U.S. Senate, in fact, recognized the progress 
represented by this election with its passage of Resolution 
422.
    My third point is that the 2010 presidential election may 
have been a defeat for the Orange Revolution's leaders, but not 
for the Orange Revolution. The peaceful expression of the 
political will of Ukrainian voters should be viewed as another 
step in strengthening democracy in Ukraine. Ukraine has 
undergone rapid--and, I would suggest--irreversible, democratic 
change, and Ukrainians should take pride in what they have 
achieved. During the presidential campaign, Ukraine's vibrant 
body politic and free press discussed and debated the poor 
governance and chronic political infighting that has plagued 
the country. Ukraine's economy contracted 15% in 2009, one of 
the worst economic performances in the world. Voters, with 
access to independent information and the candidates' views, 
made up their own minds and turned out--and turnout exceeded 
65% in each roundvote out the incumbents.
    The post-election transfer of power has been orderly. After 
the votes were counted and certified, President Yushchenko 
stepped down and Viktor Yanukovych took the oath of office in 
the parliament as Ukraine's fourth president since 
independence. Prime Minister Tymoshenko initially challenged 
the results in court but later withdrew her case. She left 
office after a vote of no-confidence and President Yanukovych 
set about assembling a parliamentary majority coalition. When 
formation of a coalition appeared unlikely, threatening 
stalemate or early elections, Yanukovych and his Party of 
Regions sought and won passage of a new law that allows 
coalition formation based on votes not only of political 
parties but also independent deputies. On that basis, Prime 
Minister Mykola Azarov and his cabinet were confirmed last 
week. The opposition questioned the new law's 
constitutionality. We were pleased to see that the Party of 
Regions itself took the initiative to ask the Constitutional 
Court to review the law and pledged to abide by the court's 
decision. If the court rules against the new procedure, we 
expect the Party of Regions will seek to form a new coalition 
consistent with whatever the Court decides or seek early 
parliamentary elections.
    Ukraine's democracy is a work in progress. The electoral 
process is contentious but as Vice President Biden told a 
Ukrainian audience when we visited Kyiv last July: ``to those 
cynics who have asserted for centuries that this part of the 
world could never practice democracy because its culture and 
values are different, Ukraine today stands as resolute rebuttal 
. . .''
    With the election behind him, President Yanukovych now 
faces the challenge of governing. Obviously, he and his new 
team need time to organize themselves and put policies and 
programs in place, but some key elements of his approach are 
already obvious. Economy recovery will rightly be the 
Yanukovych Presidency's top priority, and he has inherited a 
difficult situation at a difficult moment. Sound leadership and 
tough measures will be needed if he is to succeed. With regard 
to foreign policy, President Yanukovych has been quite clear. 
He says he wants to continue Ukraine's strategic partnership 
with the United States, improve relations with Russia, and 
pursue integration with the European Union. President 
Yanukovych made his first trip abroad to Brussels, his second 
to Moscow, and he has been invited to Washington to attend the 
President's Nuclear Security Summit in April. Let me add that 
the United States enjoyed a productive working relationship 
with Ukraine and with Mr. Yanukovych during his two previous 
tenures as prime minister.

                   U.S.-Ukraine Strategic Partnership

    As we look ahead to engagement with President Yanukovych 
and his new team, it is worth reviewing the underlying premises 
of our U.S. policy toward Ukraine. Simply put, the United 
States will not waiver in its support for a strong and 
independent Ukraine. We want to see Ukraine succeed; our vision 
for Ukraine is the vision Ukrainians have for themselves--a 
democratic and prosperous European nation with an effective and 
accountable government. Charting the course for Ukraine is, of 
course, a decision to be made by Ukrainians and their elected 
leaders. President Obama, in his speech in Moscow last July 
said, and I quote, ``State sovereignty must be a cornerstone of 
international order. Just as all states should have the right 
to choose their leaders, states must have the right to borders 
that are secure, and to their own foreign policies. Any system 
that cedes those rights will lead to anarchy. That is why this 
principle must apply to all nations, including . . . Ukraine . 
. . .''
    There has been speculation over the past year that the 
Obama Administration's efforts to improve ties with Russia 
would somehow threaten our relationship with Ukraine. This was 
not and is not correct. As we reset relations with Russia, we 
have reaffirmed our commitment to the sovereignty and 
territorial integrity of Ukraine and its neighbors. We do not 
believe that a partnership with one country must come at the 
expense of another. The United States, in fact, joined Russia 
last December in re-affirming the security assurances provided 
Ukraine in the 1994 Budapest Memorandum. Our larger goal is to 
encourage the transition to a multi-partner world, in which 
like-minded nations can make common cause on our common 
concerns--the stronger our partners, the more effective our 
partnerships. A strong and independent Ukraine is good for 
Russia, good for the region and good for the world.
    There also has been speculation about Ukraine's 
relationship with NATO during a Yanukovych presidency. Let me 
be clear that the United States continues to support Ukraine's 
deepening ties to NATO and to the European Union. But again, 
these are decisions to be made by Ukrainians and their elected 
leaders. We recognize that how far and how fast to proceed will 
be a Ukrainian choice.
    President Yanukovych has said that he would continue 
programs of cooperation with NATO at existing levels but NATO 
membership was not on his agenda. We respect that choice and 
want Ukrainians to know that NATO's door remains open.
    Because of the importance that we attach to our 
relationship with Ukraine, once the Central Election Commission 
had announced the full electronic results of the presidential 
election, President Obama was among the first world leaders to 
congratulate Viktor Yanukovych on his victory. The President 
wished Mr. Yanukovych success in carrying out his mandate and 
commended the Ukrainian people on the conduct of the vote. 
National Security Advisor General Jones subsequently led the 
U.S. delegation to the presidential inauguration, where he had 
a chance to meet not only with Ukraine's newly elected 
President, but Prime Minister Tymoshenko. Mrs. Tymoshenko will 
be one of the leaders of the opposition in parliament and we 
will continue our longstanding relationship with her in that 
new role. We also plan to work closely with leaders on the 
political scene, among them Member of Parliament Arseniy 
Yatsenyuk and Deputy Prime Minister Sergey Tigipko. The 
development of new democratic leaders is important for all 
parties in Ukraine.
    Let me underscore that U.S. policy toward Ukraine will 
continue to focus on strengthening the strategic partnership 
between our two countries. The specifics of our engagement and 
cooperation with Ukraine will continue to be guided by the 
U.S.-Ukraine Charter on Strategic Partnership. The charter 
highlights the importance of our bilateral relationship and 
outlines enhanced cooperation across a broad spectrum of mutual 
priorities including economics, trade and energy; defense and 
security; strengthening democracy; and people-to-people and 
cultural exchanges. During Vice President Biden's trip to Kyiv 
last July, the U.S.-Ukraine Strategic Partnership Commission 
was established in order to advance the objectives of the 
charter. The commission now includes six autonomous working 
groups and met in Washington in December. We look forward to 
its next session in Kyiv.
    Our commitment to Ukraine is evidenced by our assistance 
program--$123 million in FY2010. The goals of our assistance 
are to bolster peace and security, strengthen democratic 
institutions, promote economic growth and energy efficiency, 
enhance security and non-proliferation, secure Chernobyl, fight 
AIDS and HIV, and improve child health.

                         U.S. Policy Priorities

    In the spirit of our strategic partnership with Ukraine, I 
would like to suggest five policy priorities, beyond 
traditional foreign policy cooperation, that should be high on 
our shared agenda with the Yanukovych Presidency:
    First, the United States is committed to policies that 
contribute to a democratic and prosperous Ukraine and stands 
ready to help Ukraine reach agreement with the International 
Monetary Fund as soon as possible. The path to recovery and 
renewed prosperity runs through the IMF, which can help offer 
Ukraine a way out of the current crisis and open the door to 
lending from other international financial institutions and the 
European Union. That will require resolute leadership and hard 
decisions to undertake the critical reforms needed to cut the 
budget deficit, revive the banking system and phase out energy 
subsidies.
    A second equally important policy area for Ukraine's long-
term prosperity and economic freedom is energy sector reform. A 
gas sector based on transparency, competition, realistic 
pricing, and more energy-efficient gas distribution and 
consumption will be key, and the United States is coordinating 
closely with the European Union on this issue. Ukraine uses 
energy three times less efficiently than the EU average; the 
country consumes 50-60% more gas than it should. The United 
States is helping with a three-year pilot program designed to 
increase energy conservation and efficiency at the municipal 
level.
    Third, the United States is ready to work to strengthen the 
business side of U.S.-Ukraine relations, which is weaker than 
we would like it to be. The United States remains Ukraine's 8th 
largest foreign investor, with $1.4 billion in foreign direct 
investment. We welcome President Yanukovych's remarks in favor 
of creating incentives for investors, such as lowering taxes 
and reducing red tape. Our business community tells us that 
much remains to be done to make Ukraine more attractive to 
investors, from tax code reform to increased transparency, from 
greater rule of law protection to serious action against 
corruption. The payment of VAT refunds would be a big step 
forward. One area where the U.S. private sector could do more 
is in Ukraine's nuclear power industry.
    A fourth area of cooperation lies in nuclear security. The 
United States and Ukraine must continue to work together to 
reduce the threat of the spread of nuclear materials and 
technology to dangerous regimes or terrorist groups, while 
safeguarding the peaceful uses of nuclear energy. We look 
forward to building on our successful record on non-
proliferation at the upcoming Nuclear Security Summit. Thanks 
to the leadership of Senator Lugar and former Senator Nunn, we 
can point to vital cooperation between Ukraine and the United 
States that has made the world safer. We recognize Ukraine's 
importance as a partner in the Global Initiative to Combat 
Nuclear Terrorism, which brings our experience and expertise 
together with those of over 70 other countries to fight nuclear 
terrorism.
    Finally, the United States wishes to strengthen bilateral 
security and defense cooperation, which is an essential 
component of our strategic partnership. We are grateful to 
Ukraine for its contributions to international security. As 
part of this effort, we hope that Ukrainian parliament will 
pass legislation to allow joint military exercises on its 
territory this year in order to facilitate mutually beneficial 
military training activities. With regard to NATO, we look 
forward to cooperating with Ukraine to meet its objectives in 
the NATO-Ukraine Commission and in its Annual National Program, 
regardless of Ukraine's intentions regarding membership.

                               Conclusion

    While the challenges in U.S.-Ukrainian relations are 
complex and demanding, I remain optimistic about the 
possibilities before us. It is important to both nations and 
both peoples to get U.S.-Ukraine relations right. We have a 
chance, at the beginning of a new presidency in Kyiv, to 
redouble our efforts. Let's ensure that Ukrainians and 
Americans, both in and outside of government, make the most of 
that chance.
    Thank you. And I will be happy to answer your questions.

PREPARED STATEMENT OF DAMON WILSON, VICE PRESIDENT AND DIRECTOR 
                 OF THE INTERNATIONAL SECURITY 
                   PROGRAM, ATLANTIC COUNCIL

    Mister Chairman, Mister Co-Chairman, Members of the 
Commission, I am honored to speak before you today about our 
relationship with Ukraine.
    My perspective on Ukraine stems from years observing and 
developing U.S. policy toward Ukraine. Most relevant to this 
hearing, I served as Special Assistant to the President and 
Senior Director for European Affairs at the National Security 
Council in the run-up to the NATO Bucharest Summit during which 
the Alliance debated a Membership Action Plan for Ukraine. I 
also served as the NSC Director for Central, Eastern and 
Northern European Affairs, responsible for coordinating policy 
toward Ukraine in advance of the 2004 presidential election, 
during the Orange Revolution and during the first years of the 
Yushchenko presidency. My prior experience with Ukraine related 
to my work at NATO, where I served as Deputy Director of the 
Private Office of Secretary General Lord Robertson, as well as 
my work on NATO policy within the Department of State. I 
continue to follow Ukraine at the Atlantic Council.
    Today, I would like to underscore why the issue of Ukraine 
should matter in Washington, outline some key benchmarks 
against which to judge the foreign and security policy of 
Ukraine's new president and government, and offer some 
recommendations for U.S. policy.

                      Progress Yet Disappointment

    I believe it is important to begin our discussion by 
stressing that we should not underestimate what has happened in 
Ukraine this year. On January 17, Ukrainian authorities 
conducted a successful first round of the presidential 
election. Three weeks later, there was a very close run-off. 
Nearly 70% of Ukrainian voters turned out for each round. 
Domestic and international observers validated that the 
election met key standards. Protests were lodged using legal 
procedures. On February 25, a peaceful transfer of power 
occurred.
    This election is a victory for the consolidation of 
democracy in Ukraine (even if the maneuvers in the Rada 
required to bring a Regions-led government to office stretched 
parliamentary practice).
    Nonetheless, many of Ukraine's greatest supporters, 
including myself, remain disappointed. Why?
    First, a good election does not necessarily translate into 
good governance. While Ukrainians have developed a track record 
on free and fair elections, their representatives have not yet 
demonstrated a track record of performance--a dynamic which 
over time risks undermining support for democracy in Ukraine.
    Second, many observers are disappointed because we were 
buoyed by the vision Orange Revolution leaders offered of a 
democratic, free-market Ukraine firmly anchored in the West. We 
believed that there was a genuine opportunity to ensure that 
this vision was not just a long-term goal, but a realistic 
prospect. As Ukraine's partners, we responded rapidly to help 
consolidate this vision by acting to lift Jackson-Vanik 
restrictions, provide Market Economy Status, conclude World 
Trade Organization (WTO) negotiations, offer a Millennium 
Challenge Compact to combat corruption, and support closer ties 
to both NATO and the European Union (EU). And yet President 
Yushchenko and successive Ukrainian governments were not in a 
position to deliver on their end because of their own 
infighting and the refusal in some cases to confront entrenched 
interests and battle corruption. A key window of opportunity 
closed.
    Third, we are disappointed because of the timidity in the 
West to continue to support Ukraine. Indeed, at best, there is 
much talk of Ukraine fatigue. At worst, there is a growing 
acceptance that active support of Ukraine is considered 
provocative in Moscow.
    President Yanukovych assumes the presidency in an 
atmosphere of pragmatism. And a sober assessment of Ukraine's 
prospects is appropriate. However, the vision of Ukraine in 
Europe remains important as it remains a motivator for tough 
policy decisions in Kyiv, as well as Brussels and Washington. 
We must not take this vision for granted. In the coming years, 
there is a good possibility that Ukraine will move further away 
rather than toward that vision. The most likely scenario is 
that Ukraine will muddle along.

                           What Is at Stake?

    Why does this matter? First, it matters for the quality of 
life of Ukrainian citizens. But it also matters geopolitically. 
In some sense, Ukraine is ``untethered.'' Its future is not 
certain. Its future is being impacted by decisions being taken 
today. I do not want to exaggerate the situation, but it is 
potentially a dangerous period in Ukraine's history--an ancient 
nation, but a young state.
    The history of conflict in Europe is about uncertainty in 
the space between Germany and Russia--that is the storyline of 
European history and war. This would not matter if the Russia 
of today had evolved and changed to become like the Germany of 
today. But Russia has not. Last September at the Atlantic 
Council, Senator Lugar warned against ``slid[ing] into . . . a 
very ominous potential crisis'' in Ukraine. He cautioned that 
``our inattention . . . could be disastrous.''
    This ancient nation of Ukraine just elected only its fourth 
president--its James Madison, if you will. Ukraine's statehood 
remains fragile. If Ukrainian democracy continues to succeed, 
and helps produce good governance and economic growth, it will 
serve as a powerful example in a region that desperately needs 
positive examples.
    And that is why Russia has a strategy which is essentially 
rollback. This strategy is well articulated by Russia's 
leaders, including President Medvedev's declaration of 
``privileged interests,'' as well as in Russia's new Security 
Strategy. Neither the West nor Ukraine has a clear strategy.

                    Benchmarks for Ukraine's Policy

    Let me first address Ukrainian policy, as what President 
Yanukovych does will have more of an impact on Ukraine's place 
in the world than any outside actor. As we seek to evaluate the 
kind of partner we have in President Yanukovych, we should 
consider key issues, which essentially serve as a test for 
Ukrainian foreign policy.
      Russia. How does Kyiv manage its relations with Moscow? 
Many in the West are reassured by a Yanukovych presidency at it 
augurs a more stable, positive relationship with Moscow. But a 
stable and positive bilateral dynamic requires Ukraine to 
behave as and be treated as a sovereign, independent actor. Key 
issues on the agenda include whether Yanukovych maintains a 
non-recognition policy toward South Ossetia and Abkhazia and 
whether he opens the door to an extension of the Black Sea 
Fleet in Sevastopol.
      Energy Security. Russian interests have been keen to 
gain control of Ukraine's energy infrastructure. Yanukovych 
will have an opportunity to demonstrate whether he views energy 
as a national security issue or simply as a transactional 
issue. If he believes energy is a national security issue, the 
new government would pursue a serious energy efficiency 
strategy.
      International Economics. The government's handling of 
the International Monetary Fund will be an early test of its 
credibility. Similarly, does Yanukovych pursue the Russian 
proposal for a Common Economic Space in a way that negatively 
impacts Ukraine's WTO membership or prospects for a free trade 
agreement with the EU?
      Regional Relations. Does Ukraine use its regional weight 
to support the new pro-Western government in Moldova and adopt 
a constructive position regarding Transnistria? How Yanukovych 
handle ties with Belarusian leader Lukashenka and Georgian 
President Saakashvili will offer insights into the regional 
role Ukraine may play. Similarly, does Kyiv engage or neglect 
GUAM (which groups Georgia, Ukraine, Azerbaijan and Moldova) 
given Moscow's irritation with the organization?
      European Union. During the campaign, Yanukovych played 
up his support for Ukraine in the EU while downplaying NATO. In 
office, will he press hard to grow Ukraine's bilateral ties to 
the EU as well as take advantage of the Eastern Partnership? A 
free trade agreement and visa liberalization are practical 
steps which would help Ukrainians be Europeans and move the 
country toward Europe.
      Nonproliferation. Ukraine had a spotty nonproliferation 
record under then-Prime Minister Yanukovych. Will Ukraine's 
arms sales track record continue to improve given the economic 
interests at stake?
      NATO. NATO is clearly not at the top of the agenda. Nor 
should it be. But NATO-Ukraine relations do need to be on the 
agenda. Yanukovych in fact had a track record as prime minister 
of advancing NATO-Ukraine ties. So while the window has closed 
on rapid movement toward NATO, both sides should ensure there 
is substance to underpin the NATO-Ukraine Commission. As NATO 
is a demand-driven bureaucracy, the signals from Kyiv will 
determine the substance.
    I would like to make a broader point about NATO. I believe 
it is an imperative to maintain the credibility of the historic 
Bucharest summit decision that Ukraine will become a member of 
the Alliance. If we look back in 5 to 10 years, and the 
Bucharest decision is seen as hollow, there will be damaging 
implications for the Alliance's credibility and for Ukraine. 
And on this point, Russia is not quiet; Russia's national 
security strategy commits it to undermining the Bucharest 
commitment.
    In face of Russian opposition and genuine divisions within 
Ukraine, some have argued that we should aim for the 
``Finlandization'' of Ukraine--independent, but not part of any 
alliance structure. While Finland is an exemplary partner of 
the Alliance and a possible future member, I believe the term 
Finlandization has no utility beyond the Cold War. When applied 
to Ukraine, analysts imply big powers taking decisions about 
Ukraine's future. I believe Ukraine must be in a position to 
determine its own future, including whether to pursue 
membership in any alliance.
    These issues provide benchmarks against which we can judge 
the new government. I have modest expectations, but do believe 
Yanukovych can deliver on his campaign pledge to continue 
moving Ukraine toward Europe. Yet the most important factor to 
achieve this foreign policy goal is what the government does 
domestically. Yanukovych's reception in Western capitals will 
be determined by whether he governs effectively, protects 
democratic advances, stabilizes and grows the economy, and 
ensures Ukraine is a reliable energy partner.

                      Implications for U.S. Policy

    In the wake of the collapse of the Berlin Wall, ``Europe 
whole, free and at peace'' was not just a vision; it was a 
successful policy leading to the consolidation of democracy in 
Central and Eastern Europe and integration of the region into 
Europe's great institutions. This outcome was neither easy nor 
obvious.
    The same bipartisan leadership demonstrated over the past 
20 years is required today to ``complete Europe''--that is, to 
finish the unfinished business of integrating the western 
Balkans and Eastern Europe into the European mainstream, 
including ultimately the European Union and NATO.
    However, at present, we are missing the vision and the 
policy to extend this great success story to the south and 
east.
    Russia has a strategy--unfortunately, one of rollback. The 
West does not yet have a coherent strategy, although Vice 
President Biden's trip to Kyiv last year helped lay out 
excellent broad principles for U.S. policy. We cannot afford to 
put Ukraine on the back burner or accept the argument that 
active U.S. engagement is somehow provocative toward Russia. We 
should not accept the argument that Ukraine is ``messy'' and 
too divided as an excuse not to engage. If so, we may lose 
Ukraine. Ukraine's future is in play today. While changes in 
Ukraine are unlikely to be decisive in the next few years, the 
trend lines could take Ukraine further away rather than closer 
to Europe. We do not want to look back at Ukraine's next 
election and wonder what happened.
    Mister Chairman, as part of my effort to outline a way 
ahead for U.S. policy toward Ukraine, I offer six 
recommendations:
    1. Be in the Game. The United States needs to be in the 
game. Ukraine is in play, and we need to engage and be present. 
The Obama Administration has sent a top-notch Ambassador, John 
Tefft, to Kyiv. The visits to Kyiv by Vice President Biden and 
National Security Advisor Jones, as well as President Obama's 
early call to congratulate Yanukovych, are key steps in this 
effort. This high-level outreach should continue.
    2. Articulate a Vision. We need to recommit to building a 
Europe whole and free, energizing the bipartisan tradition 
behind this vision and making clear that Ukraine has a place 
within this vision, as does Russia.
    3. Maintain Funding. We need to protect our funding for 
transition in Ukraine, as the Freedom Support Act model of 
``graduation'' no longer applies in Europe's East. Higher per 
capita GDP does not necessarily translate into a democratic 
Ukraine anchored securely in Europe.
    4. Reach Beyond Leaders. Yushchenko was a failure. 
Yanukovych is unlikely to bring decisive change in Ukraine. We 
therefore need to ensure our relations with Ukraine extend 
beyond leaders. We should place emphasis on developing next 
generation leaders, engaging the regions, and fostering people-
to-people ties. In this area, the European Union can lead given 
the prospect of visa-free travel.
    5. Push Energy Efficiency. The United States and Ukraine 
need to get serious about working with European partners to 
support energy efficiency in Ukraine as a national security 
strategy.
    6. Enhance Mil-Mil Ties. We must ensure that close 
military-to-military ties continue and are backed with funding 
through Foreign Military Financing and Foreign Military Sales. 
We should cultivate mil-mil links between Ukraine and NATO as 
well as with Allied nations. And we must push back when Russia 
tries to portray military cooperation with Ukraine as 
provocative.
    In the wake of Ukraine's election, Yanukovych is now 
president and his party leads the government. Now is the time 
to move beyond stalemate. Just as much as we hold Kyiv to that 
standard, we must hold ourselves to that standard.
    Thank you, Mister Chairman, Mister Co-Chairman, and Members 
of the Commission. I look forward to answering your questions.
    [Note.--The views expressed in this testimony do not 
necessarily represent the views of the Atlantic Council.]

          PREPARED STATEMENT OF ANDERS ASLUND, SENIOR 
         FELLOW, PETERSON INSTITUTE FOR INTERNATIONAL 
                           ECONOMICS

    Mr. Chairman,
    I would like to thank you for this opportunity to speak on 
an important topic, will Ukraine move beyond stalemate in the 
sphere of economic reform. Geopolitically Ukraine is an 
important country that has still not found its space and its 
relations with the United States are entirely friendly.
    Ukraine must be congratulated on having carried out a 
series of free and fair elections. The country has undergone no 
less than three democratic and peaceful presidential transfers 
of power in sharp contrast to other countries in the former 
Soviet Union. Since 2005 Freedom House has classified Ukraine 
as a free country.

                         Ukraine's Predicament

    Ukraine has established an open market economy with 
predominant private ownership. From 2000 to 2007, the country 
enjoyed an average economic growth of 7.5 percent, but the 
global financial crisis hit it hard. The economic crisis has 
illuminated the malfunction of the Ukrainian state and economy. 
Last year, Ukraine's gross domestic product slumped by no less 
than 15 percent, one of the biggest plunges in the world. 
Economically, Ukraine is not performing up to its potential. In 
2009, the International Monetary Fund (IMF) assessed that its 
GDP per capita will be as little as $2,540 in current US 
dollars, placing it 110th in the world.
    Qualitative international comparisons present an even more 
worrisome picture. I its 2009 overview, the World Economic 
Forum ranked Ukraine 72nd among 131 countries. Ukraine is 
lagging behind most in three areas: institutions, macroeconomic 
stability, and goods market efficiency, while it is doing 
comparatively well with regard to education, labor market 
efficiency, and innovation. This impressive human capital does 
not produce as much as it could because the state malfunctions, 
not delivering macroeconomic stability while impeding the free 
operation of private enterprise.
    According to the European Bank for Reconstruction and 
Development, Ukraine is a relative laggard among the post-
Soviet countries in terms of economic and institutional 
reforms. A comparative World Bank study in 2005 assessed that 
Ukraine was one of the post-Soviet countries with the least 
amount of novel market economic legislation. Since then Ukraine 
has adopted minimum new legislation, while another laggard, 
Georgia, has forged ahead.
    A more specialized international comparison, the World Bank 
Doing Business index, shockingly ranks Ukraine 142nd out of 183 
countries by business environment. It is particularly arduous 
to obtain construction permits and carry out tax payments, but 
it is also difficult to start and close a business, to register 
property, and to trade across borders. Similarly, Transparency 
International ranks Ukraine 146th out of 180 countries on its 
2009 corruption perception index.
    Because of the many years of neglecting reform, tasks have 
in many ways become more difficult in Ukraine. First, 
legislation is substandard. The common statement that Ukraine 
has good laws but they have not been implemented is not true. 
On the contrary, the country has few modern laws, and the 
quality of new legislation is generally considered 
unsatisfactory. Too much Soviet legislation has persisted for 
too long, and it permeates many new laws. During the many years 
of distorted markets, multiple vested interests have twisted 
many laws to their advantage. Endemic corruption has bred 
legislation that offers corrupt officials the opportunity to 
reap more corrupt revenue. The competence to draft laws has 
also been insufficient.
    Second, not only the legislation but also the legislative 
process is tilted to the advantage of vested interests. This 
process is inordinately complex and non-transparent in Ukraine. 
It should be opened up, abridged, and made more cohesive. It 
must be made easier for the ruling political forces to have 
legislation adopted in line with their design.
    Third, the government's capacity to formulate and carry out 
reforms is limited. The great bureaucratization and 
centralization mean that central authorities are overwhelmed by 
decision making on all kinds of current matters, leaving them 
little time for reforms. Therefore, the Ministry of Finance or 
the Ministry of Economy can hardly lead reforms as has been the 
case in other countries.
    On the other hand, because many other postcommunist 
countries have already undertaken the necessary reforms, 
Ukraine can learn from their successes and failures, which 
renders it an advantage to be a laggard.

              A Window of Opportunity for Economic Reform

    At present, Ukraine faces an extraordinary window of 
opportunity. The country has both a unique political 
possibility and great economic need to launch a new wave of 
reform that will lay the foundation for sustainable economic 
growth. The new Ukrainian authorities need to act fast and 
forcefully to shore up the state. A presidential election 
offers a great opportunity for a new start. The new president 
enjoys a political mandate and parliamentary majority. A new 
government has just been formed and is ready to govern. But the 
period of ``extraordinary politics,'' when the parliament and 
public allow the president to act fast and radically, will 
probably be brief.
    So far, Ukraine has experienced two waves of substantial 
reform. The first reform wave started in the last quarter of 
1994, after Leonid Kuchma was elected president. The second 
wave arose in the first quarter of 2000, when Kuchma was 
reelected and Victor Yushchenko became prime minister. In these 
two cases, reforms occurred immediately after a presidential 
election and in the midst of financial and economic crisis, 
underlining that Ukraine currently has a great chance to 
reform. Today, Ukraine is once again in such a situation. It 
badly needs to launch a new wave of substantial and 
comprehensive reforms.
    Seeing this situation arising last fall, I initiated and 
served as co-chairman of an Independent International Expert 
Commission on a reform program for Ukraine after the 
presidential elections together with Ukrainian colleagues. It 
was meant to be an action program for the first year of a new 
presidency. Our proposal was endorsed by Ukraine's prime 
minister last September and also the new administration has 
expressed its appreciation. Half of the commissioners we 
invited were Ukrainians and the other half foreigners. They 
were prominent experts on different aspects of reform and 
policy and independent of government, political parties, and 
business. The work of the Commission was financed by the 
Swedish and Netherlands Ministries for Foreign Affairs, with 
additional support from the United Nations Development Program. 
We have published our report ``Proposals for Ukraine: 2010--
Time For Reforms,'' and I would like to report to you our key 
findings.

                 Reform Priorities for Ukraine in 2010

    Mr. Chairman,
    The new presidential mandate, the shock of a recent severe 
economic crisis, and popular dissatisfaction with the status-
quo create ideal conditions for successful reforms. Our three 
main conclusions are: Ukraine needs (1) new organizational 
capacity for reforms, and (2) clear prioritization of reforms, 
and (3) utilization of international organizations as 
lighthouses to guide its reforms.
    Our Commission's first conclusion was that Ukraine needs to 
establish new capacity to carry out reforms that is independent 
of the agencies to be reformed. We recommend the creation of a 
Reform Commission at the Cabinet of Ministers, headed by a 
Deputy Prime Minister with overarching authority. The Reform 
Commission should have its own budget and a single goal: to 
design and implement reforms. Together with the European 
Integration Secretariat, it should lead Ukraine's reforms from 
the Cabinet of Ministers. President Yanukovych formed a Reform 
Committee at the Presidential Administration that he chairs 
himself on his second day in office. He has also appointed a 
Deputy Prime Minister for Economic Reform.
    Our second conclusion was that Ukraine needs to formulate 
clear priorities for reforms. First things need to be done 
first. Ukraine must: (a) improve the effectiveness of the 
state, (b) achieve financial stability, (c) allow private 
enterprise freedom on the market, and (d) make social policy 
more effective. Our selection is based on experts' views of 
priorities that are also politically feasible within one year. 
The new government has adopted a coalition program called 
``Stability and Reform.'' To a considerable extent, it reflects 
the views of our commission as Ukraine benefits from a broad 
consensus on what needs to be done.
    The problem in Ukraine has not been what to do but who 
should do it, as far too often policymaking ends up in 
gridlock. Our third conclusion is therefore that it is 
necessary for Ukraine to use its international leverage or 
external guidance to break through the domestic logjam on 
reforms. The Commission has identified three anchors that can 
guide Ukraine to realize its commitment to its reforms: The 
IMF, the European Union and the World Bank. All these 
organizations are ready to engage with the new Ukrainian 
administration. Naturally, the United States should also engage 
in the promotion of reforms beneficial for Ukraine's future 
governance and economic welfare.
    In the view of our commission, Ukraine's ten top priorities 
for 2010 are:
    1. Carry out gas reform!
    2. Make the National Bank of Ukraine (NBU) independent!
    3. Move toward inflation targeting!
    4. Cut public expenditures!
    5. Undertake comprehensive deregulation of enterprise!
    6. Conclude a European Association Agreement!
    7. Get privatization going again!
    8. Legalize private sales of agricultural land!
    9. Adopt a Law on Public Information!
    10. Complete the modern commercial legislation!
    All these measures have been chosen on the basis that they 
are truly vital and can be implemented within one year. Some of 
them are simple, such as the legalization of private sales of 
agricultural land and the adoption of a law on public 
information, while others require some explanation.
    The top priority is to reform the gas sector. At present, 
Ukraine is actually subsidizing imported Russian gas to the 
tune of 3 percent of GDP a year. This must cease. The 
government needs to adopt a realistic energy pricing policy. 
All energy prices should be brought to the level of full cost 
recovery plus a profit margin for operators as soon as 
possible. The Cabinet of Ministers should develop and adopt a 
Concept for Liberalization of the Gas Market in Ukraine, which 
should lead to the adoption by parliament of a Law on 
Principles of the Natural Gas Market Functioning to establish 
the principles for the natural gas market so that it performs 
transparently and efficiently, and stimulate competition. In 
line with the EU-Ukraine Brussels Declaration on renovation of 
the Gas Transit System of March 2009, the government should 
develop a plan for renovation and modernization of the gas 
transit system and attract financing from interested 
international financial institutions. In parallel with the 
price hikes, the Cabinet of Ministers should introduce a new 
system of targeted social assistance for the least protected 
groups of consumers who suffer because of high gas, 
electricity, and coal prices. Gas reform must be an absolute 
condition for international assistance.
    In order to secure macroeconomic stability, it is essential 
to minimize potential conflicts between the government and the 
NBU. The independence of the NBU needs to be reinforced and its 
governance improved, as it is currently seen as being unduly 
influenced by both commercial and political forces. The NBU 
Council, whose role is unclear and is dominated by prominent 
business representatives and politicians, should be abolished 
in its present form, while the NBU chairman and his/her 
deputies should be given fixed terms. The political authorities 
should refrain from enacting legislation that impinges on NBU 
independence, such as proposals to finance various government 
expenditures by advancing the payment of NBU profits. The 
Ukrainian monetary policy should instead be governed by an 
independent Monetary Policy Committee consisting of independent 
professionals with well-defined powers and fixed terms. The NBU 
should also raise its professional quality and include 
prominent international expertise. A new law on the NBU 
reflecting these elements should be drawn up and adopted.
    Ukraine should move toward inflation targeting regime 
within the next three years, which presupposes a floating 
exchange rate. The transition period should offer the NBU 
enough room to bring down inflation to the 2 to 3 percent range 
and provide guidance to the public on the future development of 
the exchange rate, as well as fostering a reduction of 
dollarization. In the meantime, the NBU should proceed 
expeditiously with streamlining its monetary policy instruments 
and its decision-making process.
    Ukraine needs to balance the state budget in the medium 
term by cutting public expenditures. The government should 
reconsider the obligations of the state in order to make them 
financially affordable. The authorities should resist any 
expansionary fiscal initiatives. Three public expenditures 
stand out as excessive: price subsidies, enterprise subsidies, 
and pension expenditures. Price subsidies and enterprise 
subsidies should be minimized, while pension expenditures need 
to be brought under control through a profound pension reform. 
It appears both unrealistic and harmful to try to increase the 
level of state revenues in Ukraine.
    An overall aim must be a major improvement of the business 
environment, which should entail the strengthening of the legal 
base and property rights. The state's interaction with private 
enterprises needs to be reduced and simplified. Starting a 
business currently requires ten procedures that take 27 days, 
according to the Doing Business in Ukraine report. This process 
should be reduced to one procedure: registration of the 
business with the tax authorities and receiving a taxpayer 
number. It should take only one day and cost nothing as is the 
case in New Zealand. A new law on the liquidation of 
enterprises is needed to minimize the time needed as well as 
the cost, while maximizing the recovery rate. The issuance of 
construction permits is exceedingly difficult in Ukraine. The 
goal should be to simplify the process from 30 procedures to a 
small fraction and reduce the time required from 476 days to a 
small fraction. Procedures for registering property can be 
reduced from ten to probably three. The list of economic 
activities subject to mandatory licensing should be minimized 
to only those that are dangerous to human health and life, 
environment, or national security. A new Law on Licensing 
should establish firm legal limits of licensing. The 
requirement of official permits should be reviewed and limited 
to an exclusive list of economic activities, which should be 
sanctified by law. The government should sharply reduce the 
number of agencies entitled to undertake inspections as well as 
slash the number of legitimate reasons for inspections to the 
safeguarding life and health.
    All these measures can be implemented within one year. The 
IMF will play a central role in implementing the gas reform and 
the macroeconomic policies in return for a two-year standby 
agreement with substantial financing. The European Union is 
currently negotiating a substantial association agreement 
including a comprehensive and deep free trade agreement. The EU 
is also deeply involved in the gas reform.
    The United States plays a key role in the IMF as its 
biggest shareholder, and it should also engage in the gas 
reform which will be crucial not only for state finances and 
energy efficiency but also for the improvement of governance in 
Ukraine. The United States has a major interest in the economic 
success of a democratic and friendly Ukraine.

   MATERIAL SUBMITTED FOR THE RECORD BY HIS EXCELLENCY OLEH 
SHAMSHUR, AMBASSADOR OF UKRAINE TO THE UNITED STATES OF AMERICA

    Dear Chairman Cardin,
    Dear Co-chairman Hastings,
    Distinguished Members of the Commission
    Let me start with expressing appreciation of the very 
important work that is being done by the US Congress Commission 
on Security and Cooperation in Europe. We value your consistent 
support of Ukraine in her efforts to pursue the path of 
democratic reforms and play an active role as contributor to 
regional and European security.
    Ukrainian presidential election that took place earlier 
this year should be viewed within the context of the 
developments that had been taking place in this country since 
2005. In spite of considerable political turbulence and recent 
acute economic problems, this period has been characterized by 
further development of democratic institutions, strengthening 
civil society and freedom of speech, emergence of the political 
culture free from intimidation and harassment of opponents.
    Thus, Ukraine has made substantial gains in her democratic 
evolution. It was this environment and Ukrainian people's 
strong commitment to democracy that enabled the conduct of free 
and transparent parliamentary elections in 2006 and 2007 as 
well as the last Presidential election. H. Tagliavini, Head of 
the OSCE ODIHR observation mission concluded that this was ``a 
well-administered and truly competitive election offering 
voters a clear choice''. We highly appreciate the fact that Co-
chairman Hastings visited Ukraine as a Deputy Head of the OSCE 
Parliamentary Assembly election observation mission.
    New President and a newly formed Government of Ukraine are 
facing a number of serious challenges. First and foremost they 
are related to the pressing need to overcome the consequences 
of the crisis that has hit Ukrainian economy. It is quite clear 
that this goal cannot be achieved without a series of immediate 
steps (the Government has already started the work on the new, 
realistic budget) and systemic reforms aimed at rehabilitation 
and improvement of national finances, overhaul of the energy 
sector, including the emphasis on energy saving and energy 
efficiency, large-scale modernization of Ukraine's industrial 
base following innovation model of development, amelioration of 
investment climate, reduction of fiscal pressure.
    President Yanukovych stated his determination to carry out 
structural economic reforms and get Ukrainian economy firmly 
back on track. He called for the diminishing of the 
Government's interference into economy and introduction of 
clear and constant rules governing relationship between the 
State and the private sector, reforms of pension and health 
care systems. By one of his first decrees he has established 
the Committee on Economic Reforms. It will serve as an advisory 
body to the President focusing on devising the overall reform 
strategy and the most urgent economic measures, elaboration of 
the corresponding implementation mechanisms.
    The President and the Government have also indicated their 
willingness to resume active cooperation with all international 
financial institutions, including IMF in the framework of the 
stand-by arrangement for Ukraine.
    Another set of pressing problems is defined by the need to 
improve the system of governance, eliminate causes of frequent 
conflicts between different branches of power that have led to 
the political gridlock. In his inaugural speech new President 
of Ukraine stressed that ensuring domestic stability and 
overcoming corruption were at the top of his policy priorities 
list. Both objectives cannot be achieved without reforming the 
system of state management and raising its efficiency, that 
include constitutional and judicial reforms, ensuring true 
independence of the judiciary.
    In the field of foreign policy, during his meetings in 
Brussels with EU leadership President Yanukovych underscored 
that European integration is a key goal for Ukraine. He 
believes that the policy of European integration provides 
Ukraine with a strategy of societal reforms, and as such it can 
become a powerful factor uniting all Ukrainians.
    Main efforts of Ukrainian diplomacy in relations with the 
European Union are now concentrated on finalizing negotiations 
process on the agreement on association and creation of the 
free trade area, introduction of the visa-free regime and 
cooperation in mitigating the consequences of the financial and 
economic crisis in Ukraine.
    It should be noted that creation of a comprehensive free-
trade area will enable Ukraine's gradual integration into the 
EU internal market and open up new investment opportunities for 
the European business in Ukraine, while Association Agreement 
as a whole will mark a qualitative step forward in Ukraine's 
cooperation with European institutions. Ukraine is also ready 
for the constructive interaction with the European Union 
through the EU's Eastern Partnership initiative.
    In our quest for European integration we have been 
encouraged by the recent resolution of the European Parliament 
that for the first time has recognized that ``Ukraine is a 
European state and, pursuant to Article 49 of the Treaty on 
European Union, may apply for membership of the EU like any 
European state that adheres to the principles of liberty, 
democracy, respect for human rights and fundamental freedoms, 
and the rule of law''.
    Substantial attention of the new state leadership will be 
drawn to the development of friendly, mutually beneficial and 
pragmatic relations between Ukraine and the Russian Federation 
in all spheres, including the sphere of energy. Ukraine will 
tackle energy issues proceeding from her possibilities and 
national interests.
    There is no doubt that relations with the United States 
will remain in the centre of the foreign policy of Ukraine. In 
the course of the telephone conversation of 11 February 2010 
Presidents Yanukovych and Obama confirmed their mutual 
willingness to promote further development of Ukraine-USA 
relations on the basis of the Charter on Strategic Partnership. 
Signed in December 2008 the Charter states the intention of our 
nations to deepen our partnership and expand our cooperation 
across a broad spectrum of mutual priorities in the economic, 
political, diplomatic, cultural, and security fields. We are 
proud that our partnership is a relationship of two democracies 
based on shared values and interests.
    Ukraine is ready to enhance positive dynamic acquired by 
bi-lateral cooperation in the course of the previous period. 
First of all, we are looking forward to intensification of our 
political dialogue, especially to organizing the meeting at the 
highest level. We also expect productive outcome from the 
forthcoming sessions of the major bilateral bodies--Commission 
on Strategic Partnership, Working Groups on energy security, 
non-proliferation and export control, science, technology and 
education, consular issues, Defense Consultations and Council 
on Trade and Investment. We hope that they will widen the scope 
of practical, mutually advantageous projects to be implemented 
by our two countries.
    Ukraine, having voluntarily relinquished the third largest 
nuclear arsenal in the world, continues to play a constructive 
role in safeguarding global non-proliferation regime. Let me 
use this opportunity to reiterate our support for the US 
efforts in the field. We share the goals of the Prague 
initiative of President Obama, and will continue to work 
together with the USA and other nations to make future Nuclear 
Security Summit in Washington a success.

                                 

  
  
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