```

[Senate Hearing 114-813]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 114-813
 
                       THE ECONOMIC AND POLITICAL
                           FUTURE OF UKRAINE

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

                                HEARING

                               BEFORE THE

                     COMMITTEE ON FOREIGN RELATIONS
                     
                          UNITED STATES SENATE

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 8, 2015

                               __________

       Printed for the use of the Committee on Foreign Relations
       
       
       
       
 [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]      
 
 

       Available via the World Wide Web: https://www.govinfo.gov
       
       
       
                U.S. GOVERNMENT PUBLISHING OFFICE
                   
35-960 PDF                WASHINGTON : 2019             
       

                COMMITTEE ON FOREIGN RELATIONS         

                BOB CORKER, TENNESSEE, Chairman        
JAMES E. RISCH, Idaho                BENJAMIN L. CARDIN, Maryland
MARCO RUBIO, Florida                 BARBARA BOXER, California
RON JOHNSON, Wisconsin               ROBERT MENENDEZ, New Jersey
JEFF FLAKE, Arizona                  JEANNE SHAHEEN, New Hampshire
CORY GARDNER, Colorado               CHRISTOPHER A. COONS, Delaware
DAVID PERDUE, Georgia                TOM UDALL, New Mexico
JOHNNY ISAKSON, Georgia              CHRISTOPHER MURPHY, Connecticut
RAND PAUL, Kentucky                  TIM KAINE, Virginia
JOHN BARRASSO, Wyoming               EDWARD J. MARKEY, Massachusetts

                 Lester Munson, Staff Director        
           Jodi B. Herman, Democratic Staff Director        
                    John Dutton, Chief Clerk        

                              (ii)        

  

                            C O N T E N T S

                              ----------                              
                                                                   Page

Hon. Bob Corker, U.S. Senator From Tennessee.....................     1
Hon. Benjamin L. Cardin, U.S. Senator From Maryland..............     2
Hon. Victoria Nuland, Assistant Secretary, Bureau of European and 
  Eurasian Affairs, U.S. Department of State, Washington, DC.....     3
    Prepared Statement...........................................     6
Hon. Paula J. Dobriansky, Former Under Secretary of State for 
  Democracy and Global Affairs, Senior Fellow for the Future of 
  Diplomacy Project, Harvard University JFK Belfer Center for 
  Science and International Affairs, Cambridge, MA...............    18
    Prepared Statement...........................................    20
Hon. Clifford G. Bond, Former Ambassador to Bosnia and 
  Herzegovina and U.S. Assistance Coordinator in Ukraine, U.S. 
  Department of State,
  Washington, DC.................................................    21
    Prepared Statement...........................................    23

                                 (iii)

  

                   THE ECONOMIC AND POLITICAL FUTURE 
                               OF UKRAINE

                              ----------                              

                       THURSDAY, OCTOBER 8, 2015

                                       U.S. Senate,
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:39 a.m., in 
room SD-419, Dirksen Senate Office Building, Hon. Bob Corker 
(chairman of the committee) presiding.
    Present: Senators Corker, Gardner, Cardin, Menendez, 
Shaheen, and Kaine.

             OPENING STATEMENT OF HON. BOB CORKER, 
                  U.S. SENATOR FROM TENNESSEE

    The Chairman. Our hearing will come to order, and we want 
to thank you for being here today, and thank you for your 
service to our country. We look forward to your testimony. We 
thank our witness from the State Department and our panel of 
private witnesses for being here today.
    We believe and our European allies agree that Ukraine 
should be free to choose its future. Ukraine can, over time, be 
like its neighbor, Poland. Ukraine has a number of resources 
and educated and determined people. Most Ukrainians, as the 
Secretary knows well, want to be a part of a united, free, and 
prosperous Europe.
    If Ukraine wants to go in the right direction, if Ukraine 
wants the rule of law, it has to keep making real changes, and, 
again, I know our Secretary is working hard toward that end. 
This cannot be done without political will on their part. The 
United States for our part needs a sustained bipartisan 
commitment to Ukraine for as long as necessary. Today we will 
examine where the Minsk process and the Normandy Group stand. 
Any progress on that front will only be worth something if it 
creates space for Ukraine to become a part of Europe.
    Ukrainians are wondering if the West will walk away. 
Candidly, I have concerns about our real commitments to Ukraine 
and the length of that time that a real commitment will be 
sustained. And so, we need to make sure that that is not the 
case. Ukraine's leaders are enacting key reforms, but they will 
also be judged on how they address corruption. We and our 
allies will be judged on what we do now and over the next 
decade to support Ukraine.
    Here in Congress we are working to authorize a long-term 
framework for Ukraine, but given all that has happening, our 
executive branch also needs to act to set the right course and 
not posture. Obviously, we can never accept Russia's land grabs 
through frozen conflicts and outright annexation. We need to be 
prepared to invest resources and put significant effort behind 
that.
    A reformed Ukrainian economy needs to be fully engaged with 
the West so that it can grow and withstand Russian pressure. We 
obviously need to be firm and reinforce Ukraine's economic and 
political reforms, including decentralization and punishing 
corruption. And we need to ensure that all Ukrainians, 
including Russian speakers, benefit from Ukraine's democratic 
future.
    We need to make sure that we are assisting and training and 
supporting Ukraine's military and security forces, and we need 
to do whatever is necessary to ensure NATO readiness in the 
Baltics and Europe east of Germany. We need our NATO allies, 
including Germany, Poland, United Kingdom, France, Canada, and 
others to also make a real long-term commitment to work with us 
to see that Ukraine has a future tomorrow, and that it is as 
secure as Poland's is today.
    And I just want to say one more time, our friends in 
Europe, so few of them--I am sorry--so few of them are honoring 
their basic NATO commitments. Basic NATO commitments. I know 
the Secretary has pushed hard to change that. I know that our 
NATO Secretary General is pushing hard to change that. We 
continue to be, our Nation, the provider of security services. 
Europe continues to be the consumer of security services, and 
that dynamic has got to change.
    I would like to recognize our distinguished ranking member 
for any opening comments that he would like to offer, and thank 
him for his service.

         OPENING STATEMENT OF HON. BENJAMIN L. CARDIN, 
                   U.S. SENATOR FROM MARYLAND

    Senator Cardin. Well, thank you, Mr. Chairman, and thank 
you for convening this hearing. Secretary Nuland, it is always 
a pleasure to have you here and our distinguished guests on the 
second panel. It is nice to have both of you here also.
    Let me first make an observation as it relates to Ukraine. 
Ukraine has a dual challenge. It has the external interference 
by Russia, which has affected not only its territorial 
integrity, but also its ability to advance a strong, 
independent state. And then it has its internal challenges, a 
country that has been plagued for many, many years with 
weakness in democratic institutions and its susceptibility to 
the plague of corruption. Both need to be dealt with for 
Ukraine to be successful.
    Many of us have visited Ukraine on many occasions. I have, 
and I have seen the people. I have been there during the 
different revolutions and seen the will of the people. I have 
been to the Maidan and could sense the frustration. And what I 
got from my visits is that the people of Ukraine want a 
government that is honest, that gives them a fair shake, and 
that represents all the people. It is not so much whether it is 
affiliated with Europe or Russia. It is more of whether you 
have an independent country that can make independent judgments 
and can represent all of its people.
    So our Ukraine strategy has been to try to make sure that 
we accomplish both objectives, and, quite frankly, I have 
supported a more aggressive approach than the administration on 
the defensive side. I thought we should have been providing 
more military equipment so that Ukraine could defend its 
borders more successfully than it has been able to defend its 
borders. And I understand the administration has been slow on 
that mainly because of our coalition, but I do think we have 
paid the price because of the porous borders between Ukraine 
and Russia, particularly on the eastern part and what has 
happened.
    Secondly, we need to aggressively work to establish strong 
democratic institutions in Ukraine, and we have worked with the 
international community, and I am interested in seeing where we 
are on that and what more can be done. Part of that is fighting 
corruption. I am going to say this over and over. Fighting 
corruption. And I know the commitment of the President to fight 
corruption, but it is still a huge problem, and how much have 
we done in order to make that possible.
    We have seen progress, as the chairman has pointed out. The 
Association Agreement with the EU is certainly a positive step 
forward. We have seen anticorruption laws passed by their 
legislature, which is certainly a positive step. The question 
is how they are being implemented. And we have seen energy 
reform, which is a critical issue for Ukraine's future.
    But much work remains. The interaction of the oligarchs 
with the government and its impact on democratic reforms is a 
matter that we can get into some discussion about. The 
inability to remove corrupt officials still remains in Ukraine, 
and what efforts are being made in order to remove corrupt, 
particularly in the judicial branch of government. Humanitarian 
assistance is problematic in the territories that are not 
controlled by the government. Can we be more effective in 
providing humanitarian need?
    And one last point I added as a result of this morning's 
business discussion, and that is, Madam Secretary, I think if 
you had your full complement, including the assistant 
administrator for Europe, it would be helpful. That is not the 
fault of this committee. Tom Little has been lingering on the 
floor of the United States Senate for 71 days, and I think we 
could help if we confirmed that position for you to give you 
the full complement at the State Department.
    So, Mr. Chairman, I look forward to our witnesses, and I 
look forward to how we can work together to strengthen 
Ukraine's ability to become a strong, independent state.
    The Chairman. Thank you. Our witness for the first panel is 
the Honorable Victoria Nuland, Assistant Secretary for the 
Bureau of European and Eurasian Affairs at the State 
Department. We thank you for being here. You have been here 
many times. I know that a summary of 5 minutes is probably what 
you want to do. Any written materials will be made part of the 
record, without objection.
    With that, we would like to recognize you and thank you for 
waiting to testify as you have. Thank you.

STATEMENT OF HON. VICTORIA NULAND, ASSISTANT SECRETARY, BUREAU 
  OF EUROPEAN AND EURASIAN AFFAIRS, U.S. DEPARTMENT OF STATE, 
                         WASHINGTON, DC

    Ms. Nuland. Thank you very much, Chairman Corker, Ranking 
Member Cardin, members of this committee, for the opportunity 
to join you today and for the bipartisan spirit in which you 
have supported Ukraine in its difficult times, and for the 
personal investment that so many of you have made in Ukraine's 
democratic European future.
    I have submitted a longer statement with more detail, 
particularly on the reform side, but I will summarize here.
    As you noted during the business meeting, this week we 
celebrate 25 years since Germany's reunification, the first 
major step on our collective bipartisan journey toward a Europe 
whole, free, and at peace, a goal of administrations of both 
parties, and today that journey goes through Ukraine.
    In the 6 months since I last appeared before this 
committee, Ukraine can be proud of the progress that it has 
made. Last spring, the IMF approved a 4-year $17.5 billion 
economic support program for Ukraine, and disbursements have 
begun. The Rada has passed legislation to reform the energy and 
agriculture sectors, to devolve authority to the regions, and 
to create oversight structures to clean up corruption. Last 
month, Ukraine reached a landmark debt relief deal with its 
creditors, and the September 1 cease-fire in Eastern Ukraine is 
largely holding. Heavy weapons are starting to be pulled back.
    While we welcome this progress, as you both mentioned, 
Ukraine still has a long, hard road to travel. Today I want to 
talk about the status of the Minsk agreements, Ukraine's reform 
agenda, and the tough work ahead to cement Ukraine into a 
European future.
    We continue to believe that the Minsk package provides the 
best hope for the return of Ukraine state sovereignty in its 
east. Yet in the 8 months since the February signing of the 
implementing agreement, Eastern Ukraine has seen almost 
constant violence, continued weapons shipments from Russia, 
separatist filibustering at the negotiating table, and repeated 
Russian efforts to relitigate basic elements of Minsk.
    Yet on September 1, the guns largely fell silent, and on 
October 2, President Putin agreed to put a stop to the 
separatists to hold another round of fake elections. Instead he 
committed to Presidents Poroshenko and Hollande and to 
Chancellor Merkel to withdraw heavy weapons, to allow full OSCE 
access all the way to Ukraine's border, and to negotiate 
modalities for real elections in the Donbass under Ukrainian 
law and monitored by ODIHR.
    If these commitments are kept, Ukraine will once again have 
access to its own people and its territory in the East. And as 
President Obama did with President Putin in New York last week, 
we will also keep pushing for the return of all hostages, 
including Nadiya Savchenko and Oleg Sentsov, who are being held 
in Russia, for full humanitarian access to Donbass for relief 
agencies, Ukrainian and Russian international, U.N. as well, 
and the removal of all foreign forces, weapons, and landmines 
as Minsk dictates.
    We understand why after almost 2 years of violence, war, 
and lies, many Ukraine patriots and some in the West doubt that 
Russia and its proxies will ever allow full implementation of 
Minsk. But Minsk remains a goal worth fighting for because the 
alternatives for Ukraine are bleak. At best, we will have a 
frozen conflict in the Donbass; at worst, a return to the war 
that has already claimed too many lives.
    So we will keep supporting Ukraine as it does its part to 
implement Minsk, and we will keep pushing Russia and its 
proxies to demonstrate good faith. But we will judge Russia and 
the separatists not by their words, but by their actions, and 
we will work with the EU to keep sanctions in place until the 
Minsk agreements are fully implemented. And, of course, Crimea 
sanctions must stay in place so long as the Kremlin imposes its 
will on that piece of Ukrainian land.
    While 7 percent of Ukraine territory remains under threat, 
the other 93 percent is fighting a different battle. To build a 
democracy that is closer to its people and a colony where what 
you know matters more than whom you know, and a society where 
law rules rather than corruption and greed.
    The reforms Ukraine have already enacted are impressive in 
their scope. Just a few examples. With U.S. help, newly vetted 
and trained police officers are now patrolling the street of 
Kiev, Odessa, Lviv, and Kharkiv. A new national anticorruption 
bureau has been approved, and with the help of the IMF, the 
government is rebuilding its financial sector, closing 
insolvent banks, and strengthening protection of depositors' 
rights.
    These efforts are beginning to bear some fruit. The latest 
IMF forecast released this week predicted Ukraine's economy 
could grow by 2 percent in 2016. And Ukraine's foreign reserves 
have already increased to $12.8 billion, up from a low of only 
$5.6 billion in February.
    With Congress' support, the United States has committed to 
provide over $548 million in assistance to Ukraine since the 
start of this crisis, plus the two $1 billion loan guarantees. 
With continued progress on economic reform and as conditions 
warrant, we will come back to work with you on a third loan 
guarantee later this winter.
    Because there can be no reform in Ukraine without security, 
$266 million of our United States support has been in the 
security sector. This includes sending 130 Humvees, 150 thermal 
and night vision devices, over 300 secure radios, five 
explosive ordnance disposal robots, and 20 counter mortar 
radars. Just last week we notified Ukraine that two defensive 
longer range counter artillery radars are on the way, and in 
November we will successfully complete our train and equip 
program for Ukraine's national guard, and begin training six 
battalions of Ukraine's army and special forces.
    Ukraine has already put this training and equipment to good 
use. When combined Russian and separatist forces tried all 
summer to break Ukraine lines, particularly at Marinka and at 
Starohnativka, they were pushed back by Ukraine's increasingly 
capable military.
    As I said, though, much difficult work remains to reform 
the economy and the justice sector and to clean up endemic 
corruption. Next steps for the reform agenda should include the 
following kinds of things: a cleanup of the prosecutor 
general's office so that it begins to serve the Ukrainian 
people rather than ripping them off; procurement and revenue 
management reform, particularly in the gas sector, and the 
unbundling of services making way for the restructuring of 
Naftogaz by June 2016; transparent privatization of the many 
state-owned companies and cutting of ???red tap??? for 
investors; constitutional amendments to reform the judicial 
sector, limit immunity, and improve judicial ethics and 
standards; and continued recapitalization of the banking 
system; and, of course, on October 25 when local elections are 
held across Ukraine, good, free, fair elections.
    While Ukraine works through these tough challenges, the 
United States, Europe, and the international community must 
continue to keep faith with Ukraine, and we thank this 
committee for continuing to highlight Ukraine, making clear we 
stand with them. America's investment in Ukraine is about far 
more than protecting the free choice of a single European 
country. It is about protecting the rules-based system across 
Europe and around the world. It is about saying no to borders 
changed by force, to big countries intimidating their neighbors 
or demanding a sphere of influence.
    I thank this committee again for its bipartisan support and 
its commitment to the sovereignty and territorial integrity of 
Ukraine and to a Europe whole, free, and at peace. I am 
delighted to take your questions.
    [The prepared statement of Ms. Nuland follows:]

       Prepared Statement of Assistant Secretary Victoria Nuland

    Thank you Chairman Corker, Ranking Member Cardin, members of this 
committee for the opportunity to join you today and for the personal 
investment so many of you have made in Ukraine's democratic, European 
future. Your bipartisan support, your visits to Ukraine, the assistance 
you and your fellow members have provided are truly making a 
difference.
    This week we celebrate 25 years since Germany's reunification--the 
first major step on our journey toward a Europe whole, free, and at 
peace. Today that journey goes through Ukraine. Across Ukraine, 
citizens are standing up and sacrificing for the universal values that 
bind us as a transatlantic community: for sovereignty, territorial 
integrity, human rights, dignity, clean and accountable government, and 
justice for all. America helps Ukraine because that country's success 
is central to our own profound national interest in an ever more 
democratic, prosperous, stable Europe. Ukraine's aspirations are ours.
    In the 6 months since I last appeared before this committee, 
Ukraine can be proud of the progress it has made:

   Last spring, the IMF approved an augmented 4-year, $17.5 
        billion economic support program for Ukraine, $6.7 billion of 
        which has already been disbursed;
   The government has proposed and the Rada has passed 
        legislation to reform the energy and agriculture sectors, 
        strengthen the banks, shrink and modernize government 
        bureaucracy, devolve more authority to the regions, and create 
        oversight structures to clean up corruption;
   Last month, Ukraine reached a land-mark debt-relief deal 
        with its creditors, opening the door for more intensive 
        support;
   The September 1 cease-fire in Eastern Ukraine is largely 
        holding, the Minsk parties have signed and begun to implement 
        agreements to pull back their heavy weapons, and some IDPs are 
        returning home.

    While we welcome this progress, Ukraine still has a long, hard road 
to travel.
    In my remarks today, I will first discuss implementation of the 
Minsk package of agreements; I will also give an update on the work 
that Ukraine is doing, with U.S. and international support to reform 
the country, tackle corruption, and to strengthen democratic 
institutions; and, finally, I will focus on the tough work ahead to 
cement Ukraine into Europe and the community of successful democracies.
                          the minsk agreements
    The September 2014 and February 2015 package of Minsk agreements 
remains the best hope for peace, weapons withdrawal, political 
normalization, decentralization in Eastern Ukraine, and the return of 
Ukrainian state sovereignty over that part of its border. Yet in the 8 
months since the February signing of the implementing agreement, 
Eastern Ukraine has seen almost constant violence all along the contact 
line, continued weapons shipments from Russia masquerading as 
humanitarian aid, separatist filibustering and threats at the political 
negotiating table, and repeated Russian efforts to relitigate basic 
elements of Minsk.
    On September 1, however, the guns largely fell silent. And on 
October 2, in Paris, President Putin agreed to put a stop to the 
separatists' threat to hold another round of fake elections. Instead, 
he committed to Presidents Poroshenko and Hollande and Chancellor 
Merkel to withdraw heavy weapons, allow full access to the OSCE all the 
way to the border, and to negotiate modalities for real elections in 
Donbas under Ukrainian law, safe conditions, and observation by OSCE's 
ODIHR.
    If these commitments are kept--if weapons are pulled back and 
stored, if the OSCE gets in, and legal, monitored elections are 
negotiated and held--Ukraine will once again have unfettered access to 
its own people and its territory in the East. That is what Minsk 
promises: peace, weapons withdrawal, political normalization, then a 
return of the border.
    As President Obama did with President Putin in New York, we will 
also keep pushing to complete other unfinished aspects of Minsk--the 
return of all hostages, including Nadia Savchenko, Oleg Sentsov, and 
those held in Russia; full humanitarian access for U.N. agencies, 
Ukrainian NGOs, and government relief agencies; and the removal of all 
foreign forces, weapons, and landmines.
    We understand why--after almost 2 years of violence, war and lies--
many Ukrainian patriots and some in the West doubt Russia and its 
proxies will ever allow full implementation of Minsk. But Minsk 
implementation remains a goal worth fighting for because the 
alternatives are bleak: at best, a frozen conflict in which Donbas 
becomes an unrecognized gray zone for the foreseeable future; at worst, 
a return to the war that has already claimed too many Ukrainian lives--
and Russian lives, as well.
    So we will keep supporting Ukraine as it does its part to implement 
Minsk. Along with the Normandy powers, France and Germany, we will keep 
pushing Russia and its proxies to demonstrate equal good faith. As the 
President and Secretary Kerry have repeatedly said, we will judge 
Russia and the separatists by their actions, not their words. We will 
work with the EU to keep sanctions in place until the Minsk agreements 
are fully implemented. And of course, Crimea sanctions remain in place 
so long as the Kremlin imposes its will on that piece of Ukrainian 
land.
                             reforms update
    While 7 percent of Ukrainian territory remains under threat, the 
other 93 percent is fighting a different battle: to build a democracy 
that is closer to its people; an economy where what you know matters 
more than whom you know; and a society where law rules rather than 
corruption and greed.
    The electoral, judicial, financial, and anticorruption reforms 
already put forward by the government and enacted by the Rada are 
impressive in their scope and political courage.
    Here are just a few examples:

   With generous U.S. support, newly vetted and trained police 
        forces are now patrolling the streets of Kiev, Odesa, Lviv, and 
        Kharkiv, with another three provinces to be covered by year's 
        end. By the end of 2016, every Ukrainian oblast will have them;
   A new National Anti-Corruption Bureau is being stood up and 
        will work with a new special anticorruption prosecutor once the 
        latter is appointed;
   With U.S., EU, and U.K. help, new local prosecutors are 
        being hired, old ones are tested and retrained, and all will 
        now submit to periodic performance evaluations to root out 
        corruption and malfeasance;
   Ukraine is closing loopholes in its pension system to help 
        reduce the system's $3.7 billion annual deficit;
   It is working hard to increase energy efficiency, cut 
        subsidies for state-owned gas producers, and establish a 
        market-oriented model;
   And, with the help of the IMF, the government is rebuilding 
        its financial sector, closing insolvent banks and strengthening 
        protection of depositors' rights.

    These efforts and more are beginning to bear fruit:

   The latest IMF forecasts released this week predict 
        Ukraine's economy will grow by 2 percent in 2016.
   Ukraine exported a record-breaking 33.5 million tons of 
        grain in 2014, and in 2015 will increase agricultural exports 
        by 6 percent;
   And, Ukraine's foreign reserves have increased to $12.8 
        billion, up from a low of $5.6 billion in February.
                         what the u.s. is doing
    With Congress' unwavering support, the United States has committed 
to provide over $548 million in assistance to Ukraine since the start 
of this crisis, in addition to two $1 billion loan guarantees. With 
continued progress on economic reforms and as conditions warrant, we 
will ask you to work with us on a third loan guarantee of up to $1 
billion. U.S. economic and technical advisors advise almost a dozen 
Ukrainian ministries and localities. Our $69 million in humanitarian 
support helps 2.4 million displaced Ukrainians through international 
relief organizations and local NGOs.
    Because there can be no reform in Ukraine without security, $266 
million of our support has been in the security sector. This includes 
sending: 130 HMMWVs, 150 thermal and night vision devices, over 300 
secure radios, 5 Explosive Ordnance Disposal robots, and 20 counter 
mortar radars.
    Just last week, we notified Ukraine that two more life-saving long-
range counter fire radar batteries are on the way. And, in November, we 
will complete a $19 million train and equip program for Ukraine's 
National Guard and begin training Ukrainian Ministry of Defense forces 
using $45 million in European Reassurance Initiative funding.
    Ukraine has already put this equipment and training to good use. 
When combined Russian-separatist forces tried all summer to break 
Ukrainian lines at Maryinka and Starohnativka, they were pushed back 
again and again by Ukraine's increasingly professional military, and 
Ukrainian lives were saved.
                       what ukraine still must do
    Because the best antidote to Russian aggression and malign 
influence is for Ukraine to succeed as a democratic, prosperous, 
European state, the Ukrainian Government must continue to live up to 
its promises to its own people and maintain the trust of the 
international community.
    As I said, much difficult work remains to clean up endemic 
corruption throughout government and society, at every level; to 
stabilize the economy; break the hold of corrupt state enterprises and 
oligarchs; and reform the justice system.
    Key steps toward these reforms include:

   Procurement and revenue management reform in the gas sector, 
        and unbundling of services along with the restructuring of 
        Naftogaz by Ukraine's deadline of June 2016;
   Like Ukraine's police force, the Prosecutor General's Office 
        has to be reinvented as an institution that serves the citizens 
        of Ukraine, rather than ripping them off. That means it must 
        investigate and successfully prosecute corruption and asset 
        recovery cases--including locking up dirty personnel in the PGO 
        itself;
   The newly created Inspector General's Office within 
        Ukraine's prosecution service must be able to work 
        independently and effectively, without political or judicial 
        interference;
   And, the government must appoint the NABU Anti-Corruption 
        Prosecutor ASAP in order to start investigating these crimes.

    Ukraine is well situated to provide products and services to Europe 
and Eurasia, but must improve the business climate by dismantling 
thousands of duplicative functions and transparently privatizing 
approximately 1,800 state-owned enterprises, and do more to 
recapitalize and repair its banking system. Clean governance and 
business practices that root out corruption are essential to attracting 
more foreign investment and development opportunities.
    Ukrainians also need a justice system that cannot be bought, one 
that will deliver verdicts, uphold the rule of law, and stop injustice, 
which was a key demand of 
the Maidan protests. Currently, only 5 percent of the Ukrainian 
population completely trust the judiciary. Inspiring confidence will 
require passing the constitutional amendments to limit judges' 
immunity, improve judicial ethics and standards, and rigorously 
investigate judicial misconduct and enforce disciplinary rules and 
dismissals.
                what the international community must do
    While Ukraine works through these tough challenges, the United 
States, Europe, and the international community must keep faith with 
Ukraine and help ensure that Russia's aggression and meddling cannot 
crush Ukraine's spirit, its will, or its economy before reforms take 
hold.
    We must challenge the false narrative that nothing can or will 
change in Ukraine. To fight disinformation not only in Ukraine and 
Russia, but across Russian-speaking communities in Europe, we are 
joining forces with our partners in the EU to support alternatives to 
state-sponsored, Russian programming. We are also training foreign 
journalists and civil society actors in the art of fighting lies with 
the truth.
    Mr. Chairman, Mr. Ranking Member, members of this committee, 
America's investment in Ukraine is about far more than protecting the 
choice of a single European country.
    It is about protecting the rules-based system across Europe and 
around the world. It is about saying no to borders changed by force, to 
big countries intimidating their neighbors or demanding a sphere of 
influence.
    I thank this committee for its bipartisan support and commitment to 
the sovereignty and territorial integrity of Ukraine and to a Europe 
whole, free and at peace.

    The Chairman. Well, we thank you very much for your 
testimony and your continued efforts sometimes swimming 
upstream to make things happen in an appropriate way in 
Ukraine. And I had a lot to say over the last hour. I am going 
to defer our ranking member.
    Senator Cardin. Well, thank you, Mr. Chairman, and, 
Secretary Nuland, again, thank you for your leadership on this 
area. I want to talk about one area. I want to talk about 
corruption. To me, if they cannot deal with this issue, their 
future is not going to be very bright.
    Prior to the current revolution, the government was very 
corrupt at all levels. It is my understanding that very few 
people have been sent to jail for corruption in Ukraine. It is 
my understanding that there are still corrupt officials in the 
judicial branch of government that have not been rooted out. 
And I heard what you said about moving forward in dealing this 
issue. If the impunity rate cannot be reduced, it is not going 
to make much difference these reforms.
    So how do we anticipate leveraging our involvement so that 
there is real progress made on dealing with the problems of 
corruption in Ukraine?
    Ms. Nuland. Well, thank you, Ranking Member Cardin. We 
could not agree more. As I said in my opening, this is a 
central tenet of the work that we are doing with your support 
with the Ukraine Government. We have U.S. and European advisors 
in the prosecutor general office's helping with the reforms, to 
stress test all of the individuals there, to insist that those 
who are found to be corrupt are dismissed, and the hiring and 
retraining of new personnel. And that has to happen not just at 
the federal level, but at every level in the districts.
    As I said in my testimony, there need to be constitutional 
amendments and then new legislation to eliminate impunity in 
the judicial sector to ensure that the highest standards of 
ethics apply. That has not been the case in Ukraine. The 
Ukrainian people, when you look at public opinion polls, 
fighting corruption is their number one demand. And as you have 
said, there are too many instances, even in the last months, of 
cases not being made of folks being put back on the street who 
should not be.
    So this is a major, major focus of our effort. It is a 
major focus of international attention on Ukraine. A lot of the 
support that you are giving us we are applying to this 
question. Every time we meet with senior Ukrainian leadership 
we push on this, including when the Vice President saw 
President Poroshenko in New York last week.
    Senator Cardin. So let me make a suggestion, and it deals 
with transparency and metrics.
    Ms. Nuland. Yes.
    Senator Cardin. Where you can show progress being made or 
not made, that there is expectations. The United Nations is 
developing metrics right now for anticorruption measures with 
the implementation of Sustainable Development Goal Number 16. I 
think Ukraine could be a case in point of how the international 
community, working with the Government of Ukraine, which I 
think is sincere in trying to root out corruption, can address 
this issue. Whether Ukraine is capable of doing so, or not, is 
another story.
    But developing achievable goals on reducing the impunity 
rates on the expectations of an independent judiciary, of 
independent prosecutors, of funding these offices, of 
implementing the anticorruption laws, transparency, those types 
of issues, is important so that the public can gauge how well 
the government is meeting the goals, which then gives the 
government more power to make--to implement that because they 
know the public is looking. It helps the government achieve 
these goals and fight some of the corruptive influences of the 
powerful who do not want this to change.
    Ms. Nuland. We agree completely. The IMF agrees. In fact, 
some of the benchmarks that you are looking for are part and 
parcel of the IMF's program. And some of the things that the 
Ukrainians have already done are because the international 
community is demanding it, the standing up of the 
anticorruption bureau, et cetera. The things that I mentioned 
in my testimony, which are outlined in more detail, are not 
only requirements of the IMF and the EU, they are also 
requirements that we put forward with regard to the loan 
guarantees that you have been so generous in helping us to 
attack. So we will continue to be on this. We are also working 
on things like e-governance, customs reform, things that can 
squeeze out the ability for graft.
    But I would say that given how endemic this has been in 
Ukraine, this is going to be a relatively long journey because 
you can change the tops of ministries. You have to change the 
entire culture and not just at the federal level, but all 
through the localities. So this is a major challenge for 
Ukraine and something that we agree we must stay on.
    Senator Cardin. I agree it is long term. I just urge you to 
set it up in a way that we can evaluate if we are making 
progress.
    Ms. Nuland. Right.
    Senator Cardin. Not only that we can evaluate, not only IMF 
can evaluate, not only the international investors can 
determine, but also the people of Ukraine need to know that 
there is progress being made. Without that, I am afraid the 
stability in the country will not be there.
    Ms. Nuland. Absolutely. And, you know, they are going to 
measure it by when cops stop taking bribes, when you do not 
have to bribe your way into a hospital or into a school, and 
when cases are actually made such that they have the courage to 
come forward with cases because they know that folks will be 
convicted.
    Senator Cardin. I agree. Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Shaheen.
    Senator Shaheen. Thank you. Just to follow up on that line 
of questioning, and thank you for being here. To what extent do 
you think the leadership in the Rada, the elected officials, 
understand the importance of addressing corruption?
    Ms. Nuland. I would say that particularly in the broad 
reform coalition, many of those Rada deputies, particularly 
those serving for the first time, got elected on a promise of 
trying to clean up the system. I think some of them are 
concerned about how difficult it is, and that they need 
support, particularly on the justice and prosecutorial side, 
and that this is a long-term project.
    One of the most popular programs we have, as you know, and 
I think you have seen some of them when you have traveled, is 
this investment that we have made in clean police. And as I 
mentioned in my testimony, they are now present in five cities 
in Ukraine, and every city in Ukraine is now asking for them 
because they are setting a new standard for serving the people 
rather than shaking down the people, so that is a small first 
step. Now we have to see that in the justice system. We have to 
see that in every ministry. We have to see that in daily life 
for Ukrainians.
    Senator Shaheen. And in terms of the measures that Senator 
Cardin was talking about, is this something that the commission 
on corruption is actually looking at implementing as they are 
thinking about the challenge that they have?
    Ms. Nuland. Again, the anticorruption bureau is responsible 
for oversight of the various ministries and trying to root out 
the corrupt deep state in all of these ministries. That is only 
one piece of the puzzle. So this is part of the challenge that 
almost every sector of the Ukraine Government has to be working 
on anticorruption, so the judicial reforms, the prosecutorial 
reforms, e-governance, what it feels like in the regions as 
well.
    So the anticorruption bureau will be one of the monitors, 
one of the stress testers, but every ministry is going to have 
to be involved, and is going to have to prove that it is making 
progress.
    Senator Shaheen. You talked about Putin's commitments on 
the 2nd to hold elections not with the separatists, but with 
the rest of the country, and to remove heavy weapons. Have we 
seen any evidence yet? I mean, it has only been a week, but 
have we seen any evidence that they are actually going to move 
in that direction?
    Ms. Nuland. The agreement that was finally achieved on the 
second phase, the tanks and weapons under 100 millimeters, 
allows for the withdrawal in two phases, a northern phase and a 
southern phase. Ukraine wanted to do it that way to ensure that 
the most sensitive areas come second, and that the OSCE can 
truly get in and monitor.
    My understanding, and I checked this morning with our folks 
who work with the OSCE, is that we are starting to see on both 
sides, on the Ukrainian side and on the separatist Russian 
side, some pullback of heavy weapons, some increased access in 
that northern first segment. The question will be whether that 
remains the case, whether access is allowed for the OSCE 
because we have seen occasions where this has been incomplete, 
and we did have one violent incident overnight, so the sort of 
first break in the cease-fire in a little bit. So we are 
watching very, very carefully.
    Senator Shaheen. Okay. One of the things that I think we 
would probably all agree that has helped with progress in 
Ukraine has not just been the will of the people of the 
country, which is obviously the most important, but it has been 
support from the international community to try and help them 
as they are making these changes. And I wonder to what extent 
we feel like we are continuing to be in sync with President 
Hollande and Chancellor Merkel with respect to the progress on 
the Minsk II agreements, and how willing do we think they are 
to continue with a sanctions regime if Russia does not respond 
as they have committed to.
    Ms. Nuland. We have very good--we have had very good 
coordination at every level going forward. We had superb 
coordination at the leader level, I would say, in New York when 
everybody was in the same place in advance of the October 2 
Normandy meeting. And as you know, President Obama met with 
President Putin early in that New York week.
    And I think, you know, one of the reasons why the Normandy 
meeting went better on October 2 was because what President 
Putin heard from President Obama, from Chancellor Merkel, and 
from President Hollande, particularly on canceling fake 
elections, on pulling back heavy weapons, and on having real 
elections in Ukraine and on hostages, was identical. So that is 
extremely important that we continue to work moving forward.
    The EU continues to join us in saying that there will not 
be sanctions relief until Minsk is fully implemented. That 
means until Ukraine has sovereignty again over its eastern 
border. Given the shifting timelines of Minsk, that is likely 
going to take more time than we originally anticipated, so that 
is probably going to mean we will have to have some rollover 
next year.
    Senator Shaheen. Some of us just met with some Ukrainian 
parliamentarians who were here, and they were quite--seemed 
very anxious about what is going to happen with Minsk II, not 
just with the elections, but also with withdrawal of weapons, 
and talked about how important it was for us to support and to 
push for the other provisions. Are there other provisions that 
we think Ukraine is particularly concerned about other than 
those two that we should be aware of and be pushing for here?
    Ms. Nuland. As I mentioned in my opening, the return of 
hostages, including those held by Russia, like Nadiya 
Savchenko, that is an extremely important humanitarian issue 
for Ukraine. The issue of the OSCE having access not just where 
weapons are being pulled back, but all the way to the border is 
an essential prerequisite to Ukraine itself having access, 
which you have to have before you can have an election. I think 
the concern also is that heavy weapons need not just to be 
pulled back, but Minsk ultimately calls for the full withdrawal 
of all foreign weapons and troops, so that needs to happen.
    You know, it is not surprising that there is skepticism, as 
I said in my opening, among many Ukrainian patriots given the 7 
months of nonimplementation that we have had. With the cease-
fire now, with the beginning of the pullback, we need to use 
this time now to push for continued demilitarization so that a 
real election can happen because that is the only way for 
Ukraine to get its territory back.
    Senator Shaheen. All right. Thank you very much. Thank you, 
Mr. Chairman.
    The Chairman. Thank you.
Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman, and thank you, 
Madam Secretary. Look, I want to focus on the reality. We had 
the IMF managing director here in a private session with the 
members of the committee, and there is one statement, I think, 
that is pretty open and public that is pretty universal, which 
is that when you take 20 percent of a country's GDP, which is 
the eastern part of Ukraine, and when you are ultimately and 
still are in war, for all intents and purposes, as is evidenced 
by your own statement, that in the eight months since the 
February signing of the implementing agreement Eastern Ukraine 
has seen almost constant violence all along the contact line, 
continued weapon shipments from Russia masquerading as 
humanitarian aid. Then it is very difficult to be able to 
steady yourself and advance economically in a way that we want 
Ukraine to advance.
    So notwithstanding all the other elements of your testimony 
and questions that have been raised about focusing on 
corruption, which I am all for, and other elements of economic 
reforms that they have been, I think, pretty aggressive on and 
need to continue to move forward. It seems to me the central 
question as the administration comes up a new ask of assistance 
to Ukraine, as we look at the future of Ukraine, as someone who 
has been very supportive on the committee.
    The question is, Where are we headed with Russia, because 
at the end of the day you cannot continue to have 20 percent of 
GDP under assault. You cannot continue to have new armaments 
being shipped into Ukraine by Russia and simply think that this 
is not the ultimate plan of President Putin is either to have, 
by de facto or default, a quasi-annexation of the eastern part 
of the country, or at least a leash that you can pull at any 
given time when President Poroshenko and the Ukraine people 
want to move westward.
    So what are we going to do with Russia because they have 
shown themselves, so they now think that military intervention, 
not only here, but in Syria, serves their aims. So what are we 
ready to do?
    Ms. Nuland. Well, thank you, Senator Menendez. You know, 
this is one of the reasons why we focus so much on the Minsk 
agreements because if these weapons can be pulled back from the 
line, if the cease-fire can hold as it has now for a month, you 
can start to have economic activity from the Donbass benefit 
all of Ukraine. So just in the last couple of weeks, coal is 
beginning to flow out of the Donbass back into the rest of 
Ukraine so that they will not have to import as much coal as 
they did last year. If we can get the OSCE in in a real 
election, you can reintegrate the population, all those kinds 
of things.
    Senator Menendez. I do not want to interrupt you----
    Ms. Nuland. Yes.
    Senator Menendez [continuing]. Because I did read your 
testimony. I know some people do not read testimonies before. I 
read your testimony. It is why I stepped outside and did 
something else knowing that I had read your testimony. I have 
the whole section.
    If the commitments are kept, my concern is what if they are 
not kept? What are we ready to do? What do we think we should 
do in anticipation or in trying to ensure that the commitments 
are kept, because for me, if there are no consequences for 
Russia not to keep their commitments other than that which 
exists, there is not necessarily a reason for them to pursue 
their commitments, at least in the way that we would like to 
see. You know, we have this one step forward, two steps back 
situation going on.
    So I am trying to get a sense of what we are willing to do. 
For example, the Russians went ahead and at the height of the 
Maidan protests extended a $3 billion bond to then President 
Yanukovych in power to try to help him stay in power. 
Yanukovych fled the country with unknown millions, but as far 
as I understand, the Ukrainian citizen still ends up with the 
debt. The terms of the bond are pretty exorbitant, and Russia 
could demand an immediate payment, which they have not done. I 
acknowledge they have not done so, but they could, so it is an 
economic weapon at the end of the day potentially.
    So should they pay a price with that issue? Should the 
international community suggest to them if you do not go ahead 
and pursue the elements of Minsk fully, that there is going to 
be a consequence as it relates to your bond, because we are not 
necessarily going to, in essence, help the Ukrainians pay the 
Russian bond, right?
    Ms. Nuland. Well, first, Senator, as I said and as you have 
helped us to implement throughout this, the first line with 
regard to pressure on Russia from Minsk is the sanctions that 
the United States and the EU have in place, and which will have 
to be rolled over if Minsk is not implemented by January 1. 
Those sanctions, we believe, are biting the Russian economy 
deeply. I can go through the figures if you would like.
    We have also said that if there is a return to violence, if 
there is a new land grab, and we have worked with our European 
partners on this, there will be an increase in sanctions. I 
think that the message that we sent is that if another round of 
fake elections were held, that would also draw a conversation 
about more sanctions, had an impact on the decision to prevail 
and the separatists to cancel what would have been a bad scene.
    You are right that there is a $3 billion note coming due 
for Ukraine because Yanukovych took this $3 billion loan as he 
was in his final months. My understanding is that the Ukrainian 
Government is now approaching the Russian Government, and that 
conversation may begin in coming days at the Lima Bank Fund 
meeting to say we have now made a debt relief deal with our 
private creditors. If you, Russia, are prepared to accept the 
same terms, then that would be acceptable to Ukraine. We will 
see what Russia does in that circumstance.
    Senator Menendez. Was that not offered and rejected already 
once?
    Ms. Nuland. There has not been a formal conversation about 
it because the deal with the private creditors was only 
completed a couple of weeks ago, so we will see how Russia 
deals there. Russia has said it wants to help Ukraine with its 
recovery. This would be one way that it could do so. If it does 
not accept those terms, then we will have to work with Ukraine 
on other options.
    Senator Menendez. Mr. Chairman, if I may, one final 
comment, and that is that, look, I hope that this all works 
out. But from my perspective, hope is not a national security 
strategy.
    Ms. Nuland. Absolutely.
    Senator Menendez. So the question then becomes, what are we 
ready to do. And I will say that if we wait for Minsk and it 
does not get fulfilled by Russia, and then start thinking about 
what we are going to do, other than keep what we have, and 
obviously keeping what we have, if they violate or do not 
fulfill the Minsk agreement, then there will be no reason for 
them to change course.
    So I hope that we are ready to go with a series of other 
actions to ratchet up the consequence, even putting Syria aside 
for the moment. But just on this because one of my concerns is 
that what is happening in Syria, for which I think Putin has a 
series of reasons, but not the primary, but a collateral reason 
is I have got you all paying attention over here, and when the 
time comes, we will do what we want to do in Ukraine. So I just 
hope that we are being proactive at the end of the day.
    Ms. Nuland. If I may just say that we did over the summer 
do considerable work with the European Union on what an 
increase in sanctions would look like if that were necessary.
    The Chairman. Thank you. If you would, share with us the 
sanctions relief that Russia will receive in the event they 
satisfactorily implement Minsk II.
    Ms. Nuland. Senator, we have--Mr. Chairman, we have talked 
about a rollback of sanctions if Minsk is fully implemented. As 
I said in my testimony, there are certain sanctions that were 
applied for Crimea, about Crimea. Those stay in place. There 
were other sanctions that were applied in direct response to 
the violence in Eastern Ukraine, primarily the sectoral 
sanctions, the banking sanctions. It would be those that we 
would look at rolling back should Minsk be fully implemented, 
meaning all weapons and foreign forces withdraw and a real 
election and return of sovereignty at the border and hostages.
    The Chairman. So I know there have been some discussions 
with others about the $3 billion bond payment. And I think what 
Senator Menendez may have been referring to is maybe those 
negotiations were not between two real parties, and the former 
President left the country, and was $3 billion the right 
number, if you will. Now, the country certainly is bound by 
that.
    So I guess there has been some discussion about Russia 
would have huge amounts of war reparations, would they not, 
that Russia would owe Ukraine for what they did. And I am just 
curious as to how people are thinking about ensuring that 
Ukraine, with their economy tanked, with the illegal actions 
that Russia has taken, is there not going to be some type of 
compensation, if you will, to offset some of the issues that 
Ukraine has gone through, or is that just going to be washed 
over?
    Ms. Nuland. Well, I do not want to speak for the Ukraine 
Government and how it would pursue those reparations. But our 
understanding from our conversations with them is that they are 
working on International Court of Justice cases. They are 
working on ICC cases, which could apply in some of those cases. 
But I think we can prepare a separate briefing for you on what 
they are thinking if you are interested in that.
    With regard to, as I said, the debt, our understanding is 
that Ukraine will offer Russia the same proposal that it had 
with its private creditors. We will see if Russia accepts that, 
and if it does not, we will have to see where Ukraine wants to 
go thereafter.
    The Chairman. The recent discussions regarding the moving 
back of the elections until February and some of the demands 
that have been placed on Ukraine have read as if the United 
States and Europe have placed additional demands on Ukraine 
that were very much in Russia's favor. And could you talk just 
a little bit about what those additional demands on Ukraine 
have been relative to moving things back so that Minsk possibly 
could be successful?
    Ms. Nuland. I would actually argue the opposite, that what 
we have been doing with Ukraine is working with that country to 
ensure that it can make the case that it has met every single 
one of its Minsk obligations, and thereby shining the spotlight 
on the nonimplementation by Russia and the separatists. And it 
is because Russia and the separatists have not pulled back 
weapons, it is because they have not been serious at the 
political negotiating table that the timelines of Minsk are 
probably going to have to be moved out.
    But as I said, that also means that sanctions will stay in 
place longer. So it is Russia that has, by not meeting the 
original Minsk timelines, ensured that it stays under sanctions 
longer than was originally intended.
    Now, in working with the Ukrainians to ensure that their 
record was completely unimpeachable on Minsk implementation, we 
did, along with our European partners, support early work on 
the constitutional amendments on decentralization, which are 
good for the country nationally, but which include this very 
difficult concession that Ukraine made at the Minsk table to 
codify in the constitution special status for these territories 
in Donetsk and Luhansk Oblast.
    This caused a huge reaction in the Parliament when it was 
originally reviewed in August and again in September because a 
number of Ukraine legislators--probably you met some of them--
felt that they should not be forced to make those moves in 
advance of a real cease-fire in advance of a real weapons 
pullback. They did, though. They did the statesman-like thing, 
and now it will be on Russia and the separatists to implement 
their portions.
    The Chairman. On the corruption front, you know, we have 
heard good reports about the police that you referred to, and 
certainly they are making significant efforts within the 
country, a country that, let us face it, is at least 20 years 
behind the rest of Europe because of its inheritance from the 
Soviet Union, but also all the corruption that takes place 
within the country.
    We understand the, you know, big power center, if you will, 
in Ukraine is the oligarchs, and it would seem to me that that 
would be--those would be a group of people that can help 
determine success and certainly help make it not happen. Can 
you talk to us a little bit about that evolution?
    Ms. Nuland. Well, you are absolutely right, Chairman, that 
there is a 20-, maybe longer, year tradition in Ukraine of the 
biggest business folk, the oligarchs having sweetheart deals 
with corrupt politicians. In the context of the IMF reform 
process, the Ukrainian Government, both the Prime Minister and 
President sat down individually with each of the major power 
brokers, and renegotiated some of the deals that they had had 
with Yanukovych so that they would be more transparent, so that 
these guys would be paying their taxes, so that the royalties 
owed to the state for resources of the state were appropriate 
and at world market prices.
    And most of the major oligarchs were willing to sit down 
and cut those deals. A number of them are now paying their 
taxes, as I mentioned. The coal is now being delivered to 
Ukraine, et cetera. But there are a few that have either broken 
deals, or are not paying their taxes, or are using ill-gotten 
gains to throw money around in the political system. And the 
Ukrainian Government is now considering what kind of legal 
action it can take against those people.
    And we are making clear as the Vice President has, as the 
President has in all of his statements, the Secretary has, and 
as I did at a conference in Ukraine, that there should be zero 
tolerance for anybody who does not pay their taxes, for anybody 
who continues in this environment to rip off the people of 
Ukraine.
    The Chairman. Thank you. I do not--if there are additional 
questions, I am glad for those to be asked. I would just ask in 
closing, I know we have another panel, and thank you for being 
here. Are there additional things that you plan to be asking 
Congress to pursue relative to Ukraine? Are there things that 
we might do to provide even more assistance to the 
administration and others as we deal with Ukraine?
    Ms. Nuland. Mr. Chairman, the Congress has been extremely 
generous in fulfilling and sometimes over fulfilling our 
requests, so we are very grateful for that. As I said in my 
testimony, if Ukraine stays on track, we do anticipate coming 
and asking you some time this winter to support a third loan 
guarantee for Ukraine. The conditions that we will put on it in 
our negotiations with Ukraine will cover many of the issues we 
discussed here today, primarily implementation of 
anticorruption measures.
    The Chairman. I do think it would be helpful, maybe not in 
a hearing, but for there to be a small briefing of some kind 
for us to fully understand the sanctions relief that is going 
to be taking place relative to Russia. And I hope that we are 
not sending signals to Russia that they come into countries 
like this, destabilize countries like this, in many ways get 
their wishes relative to how Eastern Ukraine is going to be 
governed, and leave, and have all sanctions released. So I do 
hope we can, and we will be following up to make sure we fully 
understand what is happening there.
    We thank you for your testimony and your service to our 
country. Thank you.
    Ms. Nuland. Thank you, Chairman. Delighted to come brief.
    The Chairman. So we will bring the next panel up. We thank 
you for your patience.
    This panel consists of two witnesses. The first witness is 
Ambassador Paula J. Dobriansky, the former Under Secretary of 
State for Democracy and Global Affairs., senior fellow for the 
Future of Diplomacy Project at Harvard University, JFK Belfer 
Center for Science and International Affairs. Thank you so much 
for being here and for listening to us. Our second witness will 
be Hon. Clifford G. Bond, the former Ambassador to Bosnia, and 
former United States assistance coordinator in Ukraine.
    We thank you both for being here. I know you all have been 
before us before and certainly participated. If you could keep 
your comments to around 5 minutes, and your written testimony, 
without objection, will be entered into the record. And with 
that, in whichever order you feel like is best, begin.
    Ambassador Bond. Ladies first.
    The Chairman. Ladies first apparently. Thank you so much.

 STATEMENT OF HON. PAULA J. DOBRIANSKY, FORMER UNDER SECRETARY 
 OF STATE FOR DEMOCRACY AND GLOBAL AFFAIRS, SENIOR FELLOW FOR 
THE FUTURE OF DIPLOMACY PROJECT, HARVARD UNIVERSITY JFK BELFER 
  CENTER FOR SCIENCE AND INTERNATIONAL AFFAIRS, CAMBRIDGE, MA

    Ambassador Dobriansky. Thank you, Chairman Corker and 
members of the Senate Foreign Relations Committee. I appreciate 
the opportunity to testify before you today concerning why 
Ukraine's economic and political future matters and what should 
be done to secure it.
    This hearing is both timely and essential. While Russian 
airstrikes in Syria have properly caused the global community 
to focus on events playing out in the Middle East, attention 
unfortunately has been diverted from the grave situation in 
Ukraine. Russia continues its illegal occupation of Crimea and 
has embarked on a variety of measures designed to finalize its 
unlawful annexation of that portion of Ukraine's territory.
    Meanwhile Russian-led aggression continues unabated in 
Eastern Ukraine in violation of the Minsk cease-fire agreement. 
More than 6,400 Ukrainians have lost their lives, and more than 
1.5 million have been displaced because of Russia's invasion. 
At the same time Ukraine is fighting a war on its eastern 
front, the Kiev government seeks to revitalize its economy and 
secure needed Western aid. Their circumstances are extremely 
difficult as Moscow continues to destabilize Ukraine by adding 
to its war costs, keeping energy prices artificially high, 
resisting efforts at debt rescheduling or reduction, blocking 
Ukraine's trade, and inhibiting foreign investment there.
    Despite these major challenges, the Ukrainian Government 
has achieved some notable progress: partial debt rescheduling, 
improved tax collection, reduced government procurement, 
passage of anticorruption laws, disclosure of assets of members 
of Parliament, and curbed energy subsidies. Change and 
substantial reform in Ukraine will take time--but it is an 
effort which is both in Ukraine's interest and in our national 
security interest. Accordingly, it deserves our steadfast, 
long-term support.
    Moscow's aggression against Ukraine is a component of 
Putin's strategic vision, which he has laid out openly in a 
series of speeches, not isolated misbehavior. Clearly 
understanding his desire to reverse the consequences of the 
Soviet Union's collapse and a rejection of the existing 
international system's legitimacy is central to understanding 
why long-term support for Ukraine is so crucial.
    The Atlantic Council has outlined the task at hand--
``Secure Europe's East--Support Ukraine.'' Their experts call 
for three basic steps: stop Putin through enhanced economic 
sanctions, support Ukraine through increased U.S. economic 
assistance and military and humanitarian aid, and strengthen 
NATO. What happens in Ukraine is not just Europe's concern. 
Both the United States and Europe have a stake in seeing a 
democratic, economically strong Ukraine.
    Russia's invasion of Ukraine starting in February 2014 in 
Crimea marks the first annexation of one European country's 
territory by another since World War II, and threatens the 
normative order and geostrategic stability in Europe. Our 
values, institutions, and alliances have been directly 
challenged. Putin abrogated the 1994 Budapest Memorandum and 
other agreements which have kept the peace in Europe for 
decades and buttress nuclear nonproliferation. To not act and 
leave Putin's aggression unchallenged sends a signal to other 
authoritarian regimes that they, too, can commit acts of 
aggression without consequences.
    The crisis in Ukraine has created a highly dangerous 
situation in Europe fraught with risks of further Russian 
aggression. There are several important implications to 
consider. First, this crisis underscores that the end of the 
cold war, which saw the collapse of the Soviet Union and the 
creation of many European economic and security institutions, 
has not rendered Europe immune to new security and political 
challenges.
    Second, as the developments in Ukraine since it became 
independent demonstrate, the path to democracy in post-
Communist countries is a difficult one filled with dangers, 
especially if domestic problems are exacerbated by other 
countries. To survive Ukraine needs long-term economic 
assistance and targeted military aid that can augment the 
fighting capabilities of the Ukrainian military.
    Third, the Ukraine crisis highlights the precarious 
security of the Baltic States and their extreme vulnerability 
to Russian pressure and potential military action. The failure 
of the West to confront Russia more directly in Ukraine has 
emboldened Moscow to take provocative actions along other parts 
of its periphery.
    Fourth, new thinking is needed on sanctions. Fifth, the 
assumption that post-Communist Russia has become a responsible 
member of the international community, seeking to work within 
the framework of existing international institutions and the 
rule of law, has proven to be unfounded. Last, there is no 
substitute for an engaged American policy to exercise robust 
leadership.
    Let me close by briefly elaborating on economic sanctions 
and military assistance to Ukraine. Ukraine's President, 
Poroshenko, has requested military aid and training from the 
West. Specifically he has requested antitank weaponry, 
antibattery radar systems, and other types of defensive 
military equipment. We must act upon this request. We must also 
extend and expand economic sanctions which will impose a 
heightened cost for Russia's aggressive actions.
    Despite Moscow's far-reaching strategic aspirations, Russia 
is operating from a weak posture. The Russian economy continues 
to shrink. Russia's greatest vulnerability may be its 
refineries. While Russia is one of the world's top energy 
producers, its refining facilities are antiquated, have no 
spare capacity, and must be refurbished with Western spare 
parts on a continuous basis.
    Much of this equipment is of U.S. origin. If Congress were 
to enact statutory sanctions placing an embargo on exports to 
Russia of refinery pumps, compressors, control equipment, and 
catalytic agents, it would cause widespread shortages of 
refined products, putting tremendous pressure on Russia's 
civilian economy and Moscow's ability to carry out military 
operations.
    In sum, the most effective strategy is to provide military, 
economic, and humanitarian assistance to Ukraine in the long 
term. I look forward to your questions. Thank you.
    [The prepared statement of Ambassador Dobriansky follows:]

          Prepared Statement of Ambassador Panla J. Dobriansky

    Chairman Corker, Ranking Member Cardin, and members of the Senate 
Foreign Relations Committee, I appreciate the opportunity to testify 
before you today concerning why Ukraine's economic and political future 
matters and what should be done to secure it.
    This hearing is both timely and essential. While Russian airstrikes 
in Syria have properly caused the global community to focus on events 
playing out in the Middle East, attention has unfortunately been 
diverted from the grave situation in Ukraine. Russia continued its 
illegal occupation of Crimea and has embarked on a variety of measures, 
designed to finalize its unlawful annexation of that portion of 
Ukraine's territory. Meanwhile, Moscow-led aggression continues 
unabated in Eastern Ukraine, in violation of the Minsk cease-fire 
agreement. More that 6,400 Ukrainians have lost their lives and more 
than 1.5 million have been displaced because of Russia's invasion.
    At the same time Ukraine is fighting a war on its eastern front, 
the Kiev government seeks to revitalize its economy and secure needed 
Western aid. Their circumstances are extremely difficult, as Moscow 
continued to destabilize Ukraine by adding to its war costs, keeping 
energy prices artificially high, resisting efforts at debt rescheduling 
or reduction, blocking Ukraine's trade and inhibiting foreign 
investment there. Despite these major challenges, the Ukrainian 
Government has achieved some notable progress: partial debt 
rescheduling, improved tax collection, reduced government procurement, 
passage of anticorruption laws, disclosure of assets of members of 
Parliament, and curbed energy subsidies. Change and substantial reform 
in Ukraine will take time--but it is an effort which is both in 
Ukraine's interest and in our national security interest. Accordingly, 
it deserves our steadfast, long-term support.
    Moscow's aggression against Ukraine is a component of Putin's 
strategic vision, which he has laid out openly in a series of speeches, 
not isolated misbehavior. Clearly understanding his desire to reverse 
the consequences of the Soviet Union's collapse and a rejection of the 
existing international system's legitimacy is central to understanding 
why long-term support for Ukraine is so crucial.
    The Atlantic Council has outlined the task at hand--``Secure 
Europe's east--support Ukraine.'' Their experts call for three basic 
steps: (1) stop Putin through enhanced economic sanctions, (2) support 
Ukraine through increased U.S. economic assistance and military and 
humanitarian aid, and (3) strengthen NATO.
    What happens in Ukraine is not just Europe's concerns. Both the 
United States and Europe have a stake in seeing a democratic, 
economically strong Ukraine.
    Russia's invasion of Ukraine, starting in February 2014 in Crimea, 
marks the first annexation of one European country's territory by 
another since World War II and threatens the normative order and 
geostrategic stability in Europe. Our values, institutions and 
alliances have been directly challenged. Putin abrogated the 1994 
Budapest Memorandum and other agreements which have kept the peace in 
Europe for decades and buttress nuclear nonproliferation. To not act 
and leave Putin's aggression unchallenged sends a signal to other 
authoritarian regimes that they too can commit acts of aggression 
without consequences.
    The crisis in Ukraine has created a highly dangerous situation in 
Europe fraught with risks of further Russian aggression. There are 
several important implications to consider:

   First, this crisis underscores that the end of the cold war, 
        which saw the collapse of the Soviet Union and the creation of 
        many European economic and security institutions, has not 
        rendered Europe immune to new security and political 
        challenges.
   Second, as the developments in Ukraine since it became 
        independent demonstrate, the path to democracy in post-
        Communist countries is a difficult one filled with dangers, 
        especially if domestic problems are exacerbated by other 
        countries. To survive, Ukraine needs long-term economic 
        assistance and targeted military aid that can augment the 
        fighting capabilities of the Ukrainian military.
   Third, the Ukrainian crisis highlights the precarious 
        security of the Baltic States and their extreme vulnerability 
        to Russian pressure and potential military action. The failure 
        of the West to confront Russia more directly in Ukraine has 
        emboldened Moscow to take provocative actions along other parts 
        of its periphery.
   Fourth, new thinking is needed on sanctions.
   Fifth, the assumption that post--Communist Russia has become 
        a responsible member of the international community seeking to 
        work within the framework of existing international 
        institutions and the rule of law has proven to be unfounded.
   Last, there is no substitute for an engaged American policy 
        to exercise robust leadership.

    Let me close by briefly elaborating on economic sanctions and 
military assistance to Ukraine. Ukraine's President Poroshenko has 
requested military aid and training from the West. Specifically, he has 
requested antitank weaponry, antibattery radar systems, and other types 
of defensive military equipment. We must act upon this request.
    We must also extend and expand economic sanctions, which will 
impose a heightened cost for Russia's aggressive actions.
    Despite Moscow's far-reaching strategic aspirations, Russia is 
operating from a weak posture. The Russian economy continues to shrink. 
Russia's greatest vulnerability may be its refineries. While Russia is 
one of the world's top energy producers, its refining facilities are 
antiquated, have no spare capacity and must be refurbished with Western 
spare parts on a continuous basis. Much of this equipment is of U.S. 
origin. If Congress were to enact statutory sanctions, placing an 
embargo on exports to Russia of refinery pumps, compressors, control 
equipment and catalytic agents, it would cause widespread shortages of 
refined products, putting tremendous pressure of Russia's civilian 
economy and Moscow's ability to carry out military operations.
    In sum, the most effective strategy is to provide military, 
economic, and humanitarian assistance to Ukraine in the long term.
    I look forward to your questions.

    The Chairman. Thank you very much. Thanks for being here.
    Mr. Bond, sir. Ambassador.

STATEMENT OF HON. CLIFFORD G. BOND, FORMER AMBASSADOR TO BOSNIA 
  AND HERZEGOVINA AND U.S. ASSISTANCE COORDINATOR IN UKRAINE, 
            U.S. DEPARTMENT OF STATE, WASHINGTON, DC

    Ambassador Bond. Thank you very much. It is a pleasure 
being here. I met several of you gentlemen and lady in Kiev 
over the past 17 months when I was working on coordinating and 
expanding our assistance program in Kiev. My work focused on 
the technical and humanitarian aspects of the assistance 
program, though an important security component was built up 
over those months as well.
    I am going to make a few comments about the economic 
transition in Ukraine. Those comments are informed by my 
experience in Eastern Europe and Prague for the Velvet 
Revolution, and then working in Washington on the support for 
East European Democracy Act and implementing it, and then 
later, my experience in Moscow where we saw a failed economic 
transition. And what I have to say now, I want to be clear is 
not criticism and should not be viewed as criticism, but is a 
hard-headed approach to what needs to be done if we want to see 
Ukraine develop a functioning market economy.
    First off, the current Kiev government is the most 
reformed-minded and technically the most competent team Ukraine 
has had since post-Communist times. But I am afraid its goals 
are not ambitious enough and they are not radical enough, and 
the process of reform, as others have said, is only just 
beginning in Ukraine. There have been important successes. 
Raising energy tariffs and meeting other IMF conditions. The 
patrol police reform in Kiev, which was already discussed, is a 
big success, and is now being repeated in many cities, and we 
have had agreement on debt restructuring.
    But the reformers are facing serious resistance in a number 
of key areas, including the fight against corruption. The 
prosecutor general's office should be ground zero for that 
fight. Unfortunately, the prosecutor general's office has not 
completed a single criminal investigation or criminal 
prosecution of any senior-level figure from the Yanukovych era. 
We have Department of Justice and FBI advisors working with 
reformers inside the prosecutor general's office. They are 
being resisted and fought by old thinkers and old timers in 
that bureau, and they need the support of senior members of the 
government if they are to succeed.
    A new anticorruption bureau, which was discussed and which 
is being formed, will rely on the PGO's office for any 
corruption prosecutions. And the PGO's office is, frankly, just 
not doing its job right now. In the health ministry, there are 
efforts to reform the procurement system. That is essential 
because the procurement system was deeply corrupt and resulted 
in a catastrophically low level of vaccinations of Ukraine 
youth, and we have just seen the first signs of polio outbreaks 
in Western Ukraine. In some areas, in fact, privatization and 
deregulation, for example, reforms are only just beginning.
    My bottom line is what the Ukrainian economy basically 
needs is a fundamental liberalization and deregulation to 
include broad privatization of more than 2,200 state-owned 
enterprises. What economists sometimes refer to as the factor 
markets of production for land, labor, and capital just are not 
functioning in Ukraine. If you are an SME owner or an 
entrepreneur, you find it very difficult to buy real estate, 
you cannot get capital or a loan from a bank. There are hiring 
practices and restriction that make it very difficult for you 
to set up your business. This is a key problem.
    Again from my experience in Eastern Europe it is important 
for macroeconomic policies to be coordinated and focused. Some 
ministries are doing outstanding work, but there is no central 
figure in the government who is pulling all of those pieces 
together for a comprehensive macroeconomic strategy.
    In Eastern Europe countries where transitions were 
successful, they were led by a Deputy Prime Minister, who 
usually was double-hated as the Finance Minister. I am thinking 
of Leszek Balcerowicz in Poland and Vaclav Klaus in Prague. 
There is no figure like that in Ukraine, and I think the Prime 
Minister and the President need to agree and empower such an 
individual to lead the whole process of market reforms.
    A big part of the problem is a lack of understanding on the 
part of the general public, a lack of communication by 
political leaders on what a market economy is and how it works. 
Significantly, there is a recent poll conducted by the 
International Republican Institute that shows two-thirds of the 
citizens of the country believe that government should be 
supplying jobs and investment. Less then 10 percent understand 
that it should be the private sector. This is part of the 
Soviet legacy that needs to change.
    In Eastern Europe, focusing on developing the private 
sector was key to the success of the transitions. Poland, for 
example, focused on SME creation, and that resulted in 
investment, growth, and jobs. The GOU seems to be--the 
Government of Ukraine seems to be focused on meeting the 
conditions required by the IMF, and that is important, it is 
essential it is how you are going to get the money to pay the 
bills. But it is not a substitute for a growth strategy that 
gets out in front of that IMF demanded reform curve to get 
things moving in the broader economy.
    Energy is a perfect example of this. They have raised the 
tariffs as required by the IMF, but have not done anything to 
fundamentally reform the Ministry of Energy or the energy 
sector itself, which is not really a market, but a battleground 
of competing oligarchic interests. This point was made at a 
recent Ukraine Foundation Conference which discussed the energy 
situation.
    I have more to say on the question of assistance, but we do 
need assistance so that we can work with reformers to build 
institutions, fight corruption, and create conditions for 
growth. And that that is going to require a long-term 
assistance strategy with our partners, other donors, and a 
commitment from Congress to multiyear funding and additional 
resources.
    Visiting congressional delegations, including your members 
of your committee, have repeatedly told us that they are ready 
to consider substantial expansion of assistance to Ukraine, and 
that they understand its importance. Ukraine's success is 
essential for the wider security of Europe and fulfilling the 
vision of a continent whole, free, and at peace.
    Now, if we were able to get substantial new resources, I 
have some ideas about how they could be used. We have been 
trying to direct the resources we do have to make more of an 
impact on reforms in Ukraine already. One thing I think we need 
to do is consider new forms of macroeconomic support. The loan 
guarantees that we are providing are very costly in terms of 
our assistance dollars. They also place a very heavy sovereign 
debt burden on Ukraine itself.
    We can look to the Support for East European Democracy 
(SEED) Program of the early 1990s for successful ideas of how 
we support successful reforms then. With more macroeconomic 
support, in particular, we would create a financial cushion 
that would allow Ukraine reformers to be more radical.
    Thank you very much, and I welcome your questions.
    [The prepared statement of Ambassador Bond follows:]

                 Prepared Statement of Clifford G. Bond

    It is a pleasure to appear before the committee today and join my 
fellow panelist.
    I returned only a few weeks ago from Kiev where I worked for 17 
months on expanding and coordinating our assistance program to Ukraine. 
Over those months our assistance grew by more than four times and 
included a significant security component. I arrived as the aggression 
was beginning in Eastern Ukraine and as a humanitarian crisis 
developed. My work was focused on technical and humanitarian 
assistance, not the security aspects of the program.
    I will make some comments on the state of economic reforms and 
transition in Ukraine that our program is meant to support.
    I have past experience in economic transitions. I witnessed a 
successful transition in Eastern Europe in the early 1990s when I 
served in Prague during the Velvet Revolution and later worked in 
Washington implementing our Support for East European Democracy or SEED 
assistance program. Later in the 1990s I saw a failed transition when I 
worked at our Embassy in Moscow.
    What I have to say now is informed by this experience. It should 
not be viewed as criticism, but as a hardheaded approach to what needs 
to be done if Ukraine is to succeed in an economic transition to a 
well-functioning market economy.
    First off, the current Kiev government is the most reform-minded 
and technically most competent team in post-Soviet times, but its goals 
are not ambitious or radical enough, and the process of reform has only 
begun. There have been important successes: energy tariff rate 
increases and meeting other IMF conditions, the recent rollout of a new 
patrol police in Kiev, a reform now being repeated in other cities, and 
agreement on debt restructuring.
    But reformers face increasing resistance to change in key areas 
such as anticorruption. The Prosecutor General's Office (or PGO) should 
be ground zero for the fight against corruption, but the PGO has yet to 
carry out a corruption prosecution against a senior Yanukovych-era 
figure. The PGO is divided between reformers who want to work with our 
FBI and DOJ advisors (and need full political support from the top), 
and an old guard that is frustrating and seeking to intimidate them.
    A new Anti-Corruption Bureau is being formed, which will rely on 
the PGO to prosecute any criminal investigations it concludes. But, as 
I said, the PGO is not doing its job. In the Health Ministry efforts to 
change corrupt procurement practices are being resisted by domestic 
pharmaceutical interests --even in the face of low levels of 
vaccination and immunization among Ukrainian children (a direct result 
of past corrupt practices) and the first outbreak of polio cases in 
western Ukraine.
    In some areas, such as privatization and de-regulation, reforms are 
only getting started. What the Ukrainian economy needs is fundamental 
liberalization and de-regulation to include broad privatization of its 
approximately 2,200 State-owned Enterprises (SOEs).
    What economists call the factor markets of production in the 
economy for land, labor, and capital are simply not functioning because 
of structural impediments and rigidities built into the system or 
because of corruption, past and on going. This means an entrepreneur or 
SME finds it extremely difficult to buy the real estate (there is no 
market in farm land), raise capital (the banks are not lending) or hire 
the people he/she needs to start up or expand a business.
                   lack of macroeconomic coordination
    Importantly from a macroeconomic perspective, there is no overall 
coordinator of market reforms. Some ministers are out there doing 
important work, but there is no central figure overseeing and 
coordinating the process with a strategic vision in mind to pull the 
pieces together.
    In east European transition economies the senior Deputy Prime 
Minister who was usually double hatted as Finance Minister played this 
role. Poland's Leszek Balcerowicz and the Czech Republic's Vaclav Klaus 
were key to the success of economic reform in their countries. The 
Prime Minister and President need to empower an individual with real 
reform credentials to fill this function and step out of the way to let 
him or her get the job done.
                    need for strategic communication
    Part of the problem is also lack of understanding on the level of 
the general public and a lack of communication by political leaders of 
what a market economy is and how it should operate. Public surveys, 
such as a recent IRI poll, show that two-thirds of citizens believe 
investment and job creation are the responsibility of the government. 
Less than 10 percent understand this should be the role of the private 
sector.
                                 focus
    Early cleanup of the business and investment climate was central to 
the success of the transitions in Eastern Europe. Poland focused on SME 
growth. This produced new businesses, jobs and investment, and gave 
government the political capital to move on to other reforms.
    The GoU is focused on meeting the conditions required by the IMF 
and other donors. These are hard conditions and meeting them is 
essential to get the money to pay the bills. It is not a substitute, 
however, for a growth strategy that gets out ahead of the IMF-demanded 
reform curve. Energy is an example of the problem. The GoU has done 
difficult things, like raising energy tariffs as the IMF required, but 
it has not fundamentally reformed the corrupt Ministry of Energy nor 
changed the sector, which is not a market, but a battleground of 
struggling interest groups. (This point was made at a recent Ukraine 
Foundation conference discussion of reforms.)
                     more international assistance
    We need to work with reformers to build institutions, fight 
corruption and create conditions for growth. This will require a long-
term assistance strategy coordinated with our partners and a commitment 
from Congress to multiyear funding and additional resources.
    Visiting congressional delegations repeatedly told us in Kiev that 
they are ready to consider a substantial expansion in assistance to 
Ukraine. They understand that our support to Ukraine is important, but 
is currently insufficient, particularly in comparison to our response 
to the Georgia crisis of 2008.
    Ukraine's success is essential for the wider security of Europe and 
fulfilling the vision of a continent ``whole, free, and at peace.''
                   how would we use additional money?
    We should consider new forms of macroeconomic support and link this 
to tougher, more market-oriented reforms. Our current use of loan 
guarantees is costly in terms of assistance dollars and is placing a 
heavy sovereign debt burden on Ukraine.
    We should look to the sorts of things done under the SEED Act in 
the early 1990s. It will be easier for Ukraine's reformers to be more 
radical when they have a macroeconomic cushion for the economy.
    The government badly needs public sector and civil service reform. 
The current bloated and poorly paid bureaucracy is a brake on reform 
implementation, and a source of corruption. But this is an enormous and 
expensive task.
    It is not a task a single donor or the Ukrainian Government can 
assume alone. But with additional funding we could work with the EU and 
other donors to undertake widespread public sector reform.
    We also need to support a massive privatization effort with the 
advisors and technical assistance to do the due diligence to prepare 
hundreds of state-owned enterprises for transparent privatization 
process that will attract strategic investors.
    In addition to the conflict in the East and fighting for reform in 
Kiev, Ukraine faces a humanitarian crisis, largely overlooked in the 
West. This involves more than 1.5 million displaced persons inside the 
country, more than a million refugees outside it and millions more 
trapped and vulnerable in the area of conflict.
    Neither we, nor our European allies are stepping up with an 
adequate response to the needs of these people, particularly as they 
face the onset of a second winter.
    In conclusion, Ukraine needs to redouble efforts at reform and 
adopt deeper, more radical market-oriented measures, particularly by 
cleaning up the business and investment environment. The U.S. and 
international community need to explain the stakes to their publics and 
think bigger and more strategically in terms of the level and types of 
assistance that can be made available.

    The Chairman. Thank you very much.
    Senator Menendez.
    Senator Menendez. Well, thank you both for your testimony. 
Ambassador Dobriansky, your testimony is more forward leaning 
in terms of--and by that I mean Ambassador Bond is focused on 
the economics, so you had a whole different set of agendas, 
different than what we heard from Secretary Nuland, from my 
perspective, and you mentioned the Atlantic Council.
    So let me ask you about a couple of those things. Number 
one is as it relates to sanctions, is there a set of ideas that 
you all have? Is it about being prepared? If Minsk does not 
move forward fully enforced, is it before that? Is it 
proactive? What are you thinking about in that regard?
    Ambassador Dobriansky. Earlier when you posed the question 
to the Assistant Secretary, it certainly caught my attention 
because the sanctions that had been imposed on Russia by the 
administration, although they have had an impact, the costs 
have not been that great to deter Russia from what it is doing, 
and not just in Europe, but also in Syria. And I think there is 
a concern in Europe about Russia's next move.
    So to answer your question, it is now and later. It is 
looking at strengthened sanctions now. We need to focus on what 
we should be doing further because we are not operating and 
having discussions from a position of strength. In the 
discussions that we are having with Russia, we are not having 
the kind of influence and impact that we should. We have not 
deterred Russia, at least as I can see, in terms of their 
actions. So our focus is on now and beyond.
    Senator Menendez. Let me ask you, I personally have been an 
advocate, as I think the majority of this committee has, of 
providing lethal weapons to the Ukrainians--lethal defensive 
weapons to the Ukrainians. It is great to provide night vision 
goggles so that you can see your enemy coming, but if you 
cannot stop it, it does not do you very good to see them 
coming.
    So the response to that is, well, that would only 
potentially create a greater provocation by Russia. It does not 
seem that Russia has needed much provocation to use its 
military might so far--Crimea, Eastern Ukraine, and now Syria. 
So I doubt provocation is really an answer. But it seems to me 
that the existence of Ukraine's ability to defend itself and up 
the cost to Putin is part of an equation to try to both deter 
him from doing anything more, and maybe to get the 
implementation of Minsk as we would like to see. Do you support 
that view?
    Ambassador Dobriansky. First, if I may----
    Senator Menendez. Sure.
    Ambassador Dobriansky [continuing]. I was here in Congress 
when Ukraine's President Poroshenko delivered his remarks 
before the joint session and said to the United States, thank 
you for the blankets, but blankets will not win wars. Ukraine 
needs serious military aid and assistance to be able to defend 
its territory and to push back against these Russia-backed 
separatists or terrorists, as the Ukrainians call them, and 
also to push back against Moscow.
    Our support militarily, not only would be in response to 
the request from Ukraine, but, significantly, I think it sends 
a very important and clear signal in terms of our concern about 
what is happening on the ground there. We were one of the 
signatories of the 1994 Budapest Accords. We do have on 
obligation to fulfill it, and in that context, Ukrainians are 
saying, please help us, let us defend ourselves. It is not only 
a military issue for Ukraine's self-defense, but a political 
one as well. I do not support the argument and concern about 
escalation.
    Putin is very concerned about Russian soldiers, dying. You 
know that former Russian Deputy Prime Minister Boris Nemtsov 
was murdered near the Kremlin. He was going to release a 
documentary on Russia's military in Ukraine. The Atlantic 
Council also has a report called ``Hiding in Plain Sight,'' 
which documents in detail the scale and scope of Russian 
involvement in Ukraine. And then third, there is just the 
political dimension here of what we are about and what we stand 
for. Not moving on providing military aid sends a very bad 
signal indeed.
    Senator Menendez. The Budapest Agreement where we gave 
Ukraine security assurances if they gave up their nuclear 
weapons that we would protect their territorial integrity, that 
has not worked out too well for them.
    Ambassador Dobriansky. That is correct. In fact, 
interestingly enough, when Russia illegally annexed Crimea, and 
then invaded Ukraine's eastern territory, I remember reading in 
Japanese press about their concern about the credibility of 
U.S. extended deterrence in Asia. This also has ramifications 
for global nuclear proliferation given Moscow's abrogation of 
those accords. It is not just about Ukraine.
    Senator Menendez. Ambassador Bond, let me ask you a 
question. Your testimony has a lot of golden nuggets in there 
about things we can be doing and should be considering as we 
help Ukraine achieve an economy that can grow. But as a 
prerequisite to that or as a condition of success, how can they 
ultimately--if they did every reform that we could envision, 
can they really ultimately succeed when a part of the most 
robust economic part of the country, which is the eastern part, 
which the head of the IMF said was about 20 percent of their 
GDP. If that ends up being gone, just for argument sake, how 
successful can they be?
    Ambassador Bond. I think there is no question----
    Senator Menendez. If you can put your microphone----
    Ambassador Bond. I think there is no question that they can 
be very successful. That eastern part is the old industrial 
base of the economy, so if----
    Senator Menendez. So if it is----
    Ambassador Bond. It is a rust belt.
    Senator Menendez. Okay.
    Ambassador Bond. Some have--some investors there, domestic 
investors, have upgraded those industries, but their future is 
in the knowledge economy. It is in agriculture. It is in energy 
efficiency, information technology. They have the base in the 
rest of Ukraine to succeed.
    Senator Menendez. For all intents and purposes, not that 
they want to, but you are suggesting they could lose that 20 
percent and still be successful.
    Ambassador Bond. Yes, I think the country could be 
economically successful. Of course, no one wants to see them 
lose the Donbass and the eastern parts of the country that are 
now occupied. It creates--being occupied, not being under the 
control of Ukraine means less tax revenue, less of a base to 
support the conflict that they need to support, less money to 
finance some reforms.
    But an argument I tried to make was that deregulation and 
liberalization may not actually be very costly. It is removing 
regulation, it is removing sources of corruption. And you hear 
it again and again from Ukraine business people when you talk 
to them.
    Senator Menendez. If I may, one very final question, Mr. 
Chairman. So investment, investors.
    Ambassador Bond. Right.
    Senator Menendez. External investors. So they see what is 
happening in Eastern Ukraine, and they say to themselves, I do 
not know how far this is going to go. I do not know what it is 
going to create as a ripple effect across the country. Does it 
undermine the opportunity to bring investment, or is your view 
that the reforms is what undermines investment?
    Ambassador Bond. Reforms, systemic reforms are undermining 
investment, particularly substantial strategic investors who 
might be interested in some of those state-owned enterprises 
that need to be privatized. There is a plant, the Odessa 
Portside Plant, which is the largest fertilizer factory in 
Europe. That is a state-owned enterprise which could be 
privatized if it was done correctly, transparently. With due 
diligence and the proper paperwork, it would attract strategic 
European and American investors. And there are other examples 
of that throughout the economy.
    Senator Menendez. Thank you, Mr. Chairman.
    The Chairman. Thank you. Ambassador Bond, I happen to agree 
with the comments of the other Ambassador relative to our 
support of them defensively and in other ways, intelligence 
which we have been just incredibly remiss in not sharing. Do 
you share those thoughts relative to, again, defensive lethal 
weaponry? I know we are a little different stage of the 
evolution right now.
    Ambassador Bond. Right. As I said, that was not my lane in 
the Embassy, but I personally believed that lethal defensive 
weapons should be considered for Ukraine. We have seen the 
Minsk agreement signed when the body counts of fallen Russian 
soldiers has gone sharply up. I think it will create a 
deterrent. It will create a cost, but Putin does not see it 
right now.
    The Chairman. As far as the details of the Minsk II 
agreement relative to our sanctions relief for Russia, we put 
sanctions in place because of what they had done in Eastern 
Ukraine, and we also had sanctions relative to Crimea. Have you 
gone through those and looked at those and feel there is a 
balance, an appropriate balance there regarding the relief that 
is being given to them by simply agreeing to an accord after 
they have come in and destabilized the country the way they 
have?
    Ambassador Bond. Senator, I have not. That, again, was not 
part of my brief when I was working at the Embassy. My small 
part of following Minsk were the humanitarian aspects where 
there is a working group that is supposed to be finding ways to 
get humanitarian assistance into the conflict area for 
civilians. It has not been very successful.
    But, you know, we talk about the fight in the East and we 
talk about the reform fight in Kiev against corruption and 
everything else. There is a third struggle going on on the 
humanitarian front where, as Ambassador Dobriansky said, they 
have got $1.5 million displaced persons in the country, another 
million fled outside as refugees, and millions of other people 
who are trapped in this area of conflict and that we cannot get 
humanitarian supplies in to support them, particularly with the 
onset of a second winter for these people.
    The Chairman. Ambassador Dobriansky, have you seen those--
have you examined the relief that is going to be given to 
Russia for somewhat fully implementing Minsk?
    Ambassador Dobriansky. No, I cannot say that I have studied 
that in detail, but I will make two comments relative to the 
Minsk accords. I would have liked to have seen the United 
States at that table, quite frankly, as part of the discussions 
taking place. I think our European allies, Germany and France, 
are working very hard, but I think that the United States 
should be engaged there as well. We have a stake in the future 
of Europe. We are part of the transatlantic community.
    Secondly, I would just say that hearing Ukrainian officials 
speak about what is contained in the Minsk Accords, I think 
there is significant concern about certain interpretations of 
the text. Russian President Putin has stated very clearly his 
aspiration to see federalism established in Ukraine whereas the 
Ukrainians emphasize ``decentralization.''
    So my concern is politically what will unfold, and Russia's 
actual influence already on the ground in Eastern Ukraine. And 
as Ambassador Bond pointed out, even just from the humanitarian 
side, OSCE is not able to bring in assistance, no less to be 
able to evaluate the political situation on the ground there.
    The Chairman. What is your sense, and I know there is no 
way for you to fully know, but what is your sense of the role 
that Syria is playing relative to Russia's recent behavior in 
Ukraine?
    Ambassador Dobriansky. Well, I will start with this, and if 
I may go back to the statement or question posed by Senator 
Menendez about our different testimonies. Actually I think our 
testimonies were very complementary in a way because Ambassador 
Bond got into a lot of detail, which I agree with. I wanted to 
explain to you why Ukraine matters, and why we must give 
different kinds of aid to Ukraine.
    With respect to Syria, Putin's vision and his long-term 
goals and intentions, I think, have been very clearly stated 
and had not changed. At the Munich Security Conference in 2007 
he stated very clearly that he rejected the international legal 
order, and would take steps to bring about a change.
    In the case of Syria, I see what is happening as threefold: 
first, to bolster Assad or a successor to Assad because they 
have a stake in Syria's territory; secondly, to marginalize the 
United States and our role in the region; and thirdly, to 
divert attention from their aggression in Ukraine and to 
undertake action which would force other countries, in 
particular, Europe, to have to engage with them. And it puts 
the negotiations and the discussions about in Ukraine in a very 
different context as a result of Syria.
    I see all of these issues as interrelated. And what really 
does matter here and what has not changed, despite in these 
last weeks a slow down in fighting or cessation of fighting in 
Eastern Ukraine, is the fact that Putin's goals and objectives 
have not changed.
    The Chairman. What, from your standpoint, of the NATO 
alliance--I know we had some--we had a leader of one of the 
Baltic countries in here recently, and the over flies and 
things that are taking place obviously are disconcerting. I 
know that, you know, article 5 is being looked at because of 
hybrid warfare, what does it mean for another country to be 
attacked, what is the definition of that. How do we come to 
their aid if it is over cyber, if it is something else?
    I have been increasingly concerned about our friends in 
Europe and their lack of commitment. I mean, let us face it, 
again Germany--we have numbers of NATO bases and others in 
Germany, and yet they do not come close to meeting their NATO 
commitments financially. And, by the way, why should they? I 
mean, they are so reinforced. How are the Eastern European 
countries feeling about Western Europeans' commitment towards 
that region and towards real pushback relative to Russia?
    Ambassador Dobriansky. I think that there are several 
factors that are on the table relative to NATO. The first is 
that NATO is being challenged by Putin both in terms of in area 
and also out of area. Secondly, I think you asked the question 
how does the East feel about the West. President Duda, the new 
President of Poland, made it very clear in his inaugural 
speech, that one of the steps that he would when the NATO 
summit will be held in Warsaw in 2016 is to advance the forward 
permanent deployment of NATO troops. It will be part of the 
Warsaw NATO summit agenda.
    I am a proponent of that. I think that we have demonstrated 
previously, to the Russians and to Gorbachev when Gorbachev 
himself talked about Europe whole and free, that the nonforword 
deployment was part of that overall arrangement. But at this 
time, we are witnessing an aggression, and terms and 
circumstances have changed. So, the East European countries are 
acting on their stated goals. They want to see permanent, 
forward deployment of NATO troops on Polish territory and in 
the Baltic States.
    Thirdly, with regard to NATO's budget, you raised a fair 
point. It is something that has concerned the United States. We 
would like to see greater burden-sharing. A number of the 
countries, since the aggression in Ukraine, have enhanced their 
budgets, but not all. And toward that end, it has to be a 
shared responsibility. There cannot be complacency. There has 
to be a transatlantic strategy as well here, which is lacking.
    The Chairman. Well, listen, thank you both. Do you have any 
further questions? I know we started late and you witnessed 
something that is rare in this committee. But one of the 
reasons we do not give some of the Deputy Secretaries and Under 
Secretaries a difficult time, candidly, you know, many of us 
are disappointed about what has, and has not, happened in 
Ukraine. We feel like it has been half-hearted support.
    It is difficult to give an Under Secretary a hard time when 
you are not even sure--you know, the policies are emanating 
from someone else, and I think in some cases it is somewhat 
difficult for them to really testify in a strong manner about 
what is happening. So that is what you may have witnessed with 
the last witness.
    We thank you for being here today and sharing your 
insights. I know we will be following up. There will be 
questions. Without objection, the record will remain open until 
the close of business tomorrow, and if you would answer 
expeditiously those questions, we would appreciate it.
        
    Thank you both for your service to our country, for being 
here today. And with that, the meeting is adjourned.
    [Whereupon, at 12:04 p.m., the hearing was adjourned.]
```