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UKRAINE: MOVING BEYOND STALEMATE? 

HEARING 

BEFORE THE

COMMISSION ON SECURITY AND 

COOPERATION IN EUROPE 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

MARCH 16, 2010 

Printed for the use of the 

Commission on Security and Cooperation in Europe 

[CSCE 111–2–3] 

( 

Available via http://www.csce.gov 
COMMISSION ON SECURITY AND COOPERATION IN EUROPE 

LEGISLATIVE BRANCH COMMISSIONERS 

HOUSE SENATE 

ALCEE L. HASTINGS, Florida, 

Co-Chairman 

EDWARD J. MARKEY, Massachusetts 

LOUISE McINTOSH SLAUGHTER, 

New York 

MIKE McINTYRE, North Carolina 

G.K. BUTTERFIELD, North Carolina 

CHRISTOPHER H. SMITH, New Jersey 

ROBERT B. ADERHOLT, Alabama 

JOSEPH R. PITTS, Pennsylvania 

DARRELL E. ISSA, California 

BENJAMIN L. CARDIN, Maryland, 

Chairman 

CHRISTOPHER J. DODD, Connecticut 

SHELDON WHITEHOUSE, Rhode Island 

TOM UDALL, New Mexico 

JEANNE SHAHEEN, New Hampshire 

SAM BROWNBACK, Kansas 

SAXBY CHAMBLISS, Georgia 

RICHARD BURR, North Carolina 

ROBERT F. WICKER, Mississippi 

EXECUTIVE BRANCH COMMISSIONERS 

Michael H. Posner, Department of State 

Alexander Vershbow, Department of Defense 

Michael C. Camun ̃ ez, Department of Commerce 

(II) 
UKRAINE: MOVING BEYOND STALEMATE? 

MARCH 16, 2010 

COMMISSIONERS 

Page 

Hon. Benjamin L. Cardin, Chairman, Commission on Security and Cooperation in Europe .............................................. 1 

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

WITNESSES 

Daniel A. Russell, Deputy Assistant Secretary of State for 

Russia, Ukraine, Belarus and Moldova, Department of 

State ......................................................................................... 2 

Damon Wilson, Vice President, Atlantic Council ..................... 11 

Anders A ̊ slund, Senior Fellow, Peterson Institute for International Economics .................................................................. 15 

APPENDIX 

Prepared statement of Hon. Alcee L. Hastings ........................ 26 

Prepared statement of Daniel A. Russell .................................. 28 

Prepared statement of Damon Wilson ....................................... 33 

Prepared statement of Anders A ̊ slund ...................................... 38 

Material submitted by His Excellency Oleh Shamshur, Ambassador of Ukraine to the United States of America .......... 43 

(III) 

(1) 

UKRAINE: MOVING BEYOND STALEMATE? 

March 16, 2010 

COMMISSION ON SECURITY AND COOPERATION IN EUROPE

WASHINGTON, DC 

The hearing was held from 10 a.m. in room Senate Visitor Center 201/200, Washington, DC, Hon. Benjamin L. Cardin, Chairman, 

Commission on Security and Cooperation in Europe, presiding. 

Commissioners present: Hon. Benjamin L. Cardin, Chairman, 

Commission on Security and Cooperation in Europe; and Hon. 

Alcee L. Hastings, Co-Chairman, Commission on Security and Cooperation in Europe. 

Witnesses present: Daniel A. Russell, Deputy Assistant Secretary 

of State for Russia, Ukraine, Belarus and Moldova, Department of 

State; Damon Wilson, Vice President, Atlantic Council; and Anders 

A ̊ slund, Senior Fellow, Peterson Institute for International Economics. 

HON. BENJAMIN L. CARDIN, CHAIRMAN, COMMISSION ON 

SECURITY AND COOPERATION IN EUROPE 

Mr. CARDIN. Well, good morning everyone and welcome to the 

hearing—the Helsinki Commission hearing on ‘‘Ukraine: Moving 

Beyond Stalemate?’’ I am pleased to welcome you to this hearing 

on Ukraine, an important partner for the United States and one of 

the largest countries in Europe, both in terms of size and population. 

An independent, democratic and stable Ukraine is in America’s 

interest and vital to the security of the OSCE region. Ukraine remains a country in transition, in part due to its tragic history. To 

visit, as I have, the memorials to Stalin’s famine, Babi Yar and 

Chornobyl, is a stark reminder of the history of Ukraine. 

Despite this legacy, especially since the 2004 Orange Revolution, 

there have been gains in political pluralism, media freedoms and 

holding of free and fair elections. Additionally, Ukraine is the only 

country among the 12 non-Baltic former Soviet states to earn the 

assessment of free by Freedom House. 

The country has recently witnessed Presidential elections, which 

the OSCE assessed as having met international democratic standards. Ukraine faces a myriad challenges. Clearly, the President, 

along with the new Prime Minister and the Rada will need to accelerate economic and political reforms, tackle systematic corruption 

and overcome the rule of law deficits, including building up an underdeveloped judiciary. 
2 

Will Ukraine, despite tangible progress and freedom and democracy, be able to move beyond the stalemate that has stymied its 

ability to grapple with these difficult problems and slow this euroAtlantic integration? 

Nothing would be more important to strengthening Ukraine’s 

independence and reducing its vulnerability to outside pressures, 

including strengthening its energy independence and bringing it 

closer to its stated European aspirations. Despite past disappointments, there is genuine desire in Washington that Ukraine succeed 

as an independent, democratic, stable and economically successful 

state. 

Importantly, both the Congress and administration continue to 

strongly support the right of Ukraine to decide its own fate, consistent with the principles enshrined in the Helsinki Final Act. 

Today, we will examine Ukraine’s future course following the February 7th elections, which the OSCE assessed as having met international democratic standards. 

Our witnesses will focus on policy implications for the United 

States, examining how the U.S. can best continue to encourage and 

assist Ukraine in the development of democracy, rule of law and 

market economy at home as well as relationships with its neighbors, the United States and the European institutions. And we look 

forward to hearing from our distinguished panel of witnesses. 

For our first panel, I’m pleased to have with us today, Mr. Daniel 

Russell, Deputy Assistant Secretary of State for Russia, Ukraine, 

Belarus and Moldova. Since joining the Foreign Service in 1983, 

Mr. Russell has held a variety of positions in Washington and 

abroad, most recently, as Chief of Staff to Undersecretary of State 

for Political Affairs Bill Burns. And prior to that, the Deputy Chief 

of Mission in Moscow, Russia and Kazakhstan. Mr. Russell, it’s a 

pleasure to have you before the Commission. 

DANIEL A. RUSSELL, DEPUTY ASSISTANT SECRETARY OF 

STATE FOR RUSSIA, UKRAINE, BELARUS AND MOLDOVA, DEPARTMENT OF STATE 

Mr. RUSSELL. Thank you very much, Mr. Chairman. I will apologize in advance for my voice. It’s part of the burden of having two 

young children. But look, thank you very much for your invitation 

to discuss Ukraine and its relations with the United States in the 

wake of Presidential elections. Your timing could not be better. 

Let me begin by making three basic points about Ukraine and 

the recent elections before sketching out our agenda for engagement. My first point should be obvious. Ukraine matters. Ukraine 

matters to the United States. Ukraine matters to Europe. Ukraine 

has tremendous potential. It could become a net contributor to 

global food security. 

It could become self-sufficient in energy. Ukraine can also serve 

as an example in a critical region. It has shown leadership on the 

world stage, giving up its nuclear weapons to become a non-nuclear 

state and contributing to peacekeeping operations from the Balkans to Iraq. Ukraine serves—also serves as a transit route 

through which nearly a quarter of Europe’s gas flows. 

My second point is about Ukraine’s leadership in democracy in 

the region. Taken together, the conduct of its Presidential elections 
3 

received an overwhelmingly positive assessment from international 

observers. I should add that among those observers were Congressman Hastings and staff of your Commission and I would like to 

commend their contribution. 

The OSCE concluded that the Presidential elections showed significant progress over previous elections and met most OSCE and 

Council of Europe standards. The open competitive election demonstrated respect for civil and political rights and offered voters a 

genuine choice. 

My third point is about the 2010 election—how we look at it. It 

may have been a defeat for the Orange Revolution leaders, but it’s 

far from a defeat for the Orange Revolution. Elections should be 

viewed, I think, as another step in strengthening Ukraine’s democracy and Ukrainians should take pride in what they’ve achieved. 

The post-election transfer of power has been orderly. Prime Minister Tymoshenko initially challenged the results in court, but 

withdrew her case. When formation of a political parliamentary 

majority coalition appeared unlikely, President Yanukovych and 

his Party of Regions sought and won passage of a new law that allows coalition formation, not only with political parties, but with 

independent deputies. 

On that basis, Prime Minister Azarov and his Cabinet were confirmed last week. The opposition questioned the new laws’ constitutionality and we were pleased to see that the Party of Regions itself 

took the initiative to ask the constitutional court to review the law 

and pledge to abide by its decision. 

With the election now behind him, President Yanukovych faces 

the challenge of governing. Obviously, he and his new team need 

some time to organize themselves, but I think some key elements 

of his approach are obvious. Economic recovery will rightly be his 

top priority and he has inherited a difficult situation at a difficult 

moment. 

With regard to foreign policy, I think President Yanukovych has 

been quite clear. He wants to continue Ukraine’s strategic partnership with the United States. He wants to improve relations with 

Russia and he wants to pursue integration with the European 

Union. 

And as we look ahead to engagement with President Yanukovych 

and his new team, it’s, I think, worth reviewing the underlying 

premises of U.S. policy toward Ukraine. Simply put, the United 

States will not waver in its support for a strong and independent 

Ukraine. We want to see, as you mention, Ukraine succeed. 

Our vision for Ukraine, I think, is the vision that most Ukrainians want, a democratic and prosperous European nation with an 

effective and accountable government. Charting the course for 

Ukraine is of course, a decision to be made by Ukrainians and their 

elected leaders. There has been speculation over the past year that 

the Obama administration’s efforts to improve relations with Russia would somehow threaten our relationship with Ukraine. 

I think that was not correct and it is not correct. As we reset relations with Russia, we have reaffirmed our commitment to the 

sovereignty and territorial integrity of Ukraine and its neighbors. 

We do not believe that a partnership with one country comes at the 

expense of another. 
4 

The stronger our partners, the more effective our partnerships. 

I would posit that a strong and independent Ukraine is good for 

Russia, good for the region and good for the world. There’s also 

been speculation about Ukraine’s relationship with NATO during a 

Yanukovych Presidency. Let me be clear that the United States 

continues to support Ukraine’s deepening ties to NATO and to the 

European Union. 

But again, these are decisions to be made by Ukrainians and 

their leaders. We recognize that how far and how fast to proceed 

will be a Ukrainian choice. President Yanukovych has said that he 

wishes to continue programs of cooperation with NATO at existing 

levels but NATO membership is not on his agenda. We respect that 

choice. But we want the Ukrainians to know that NATO’s door remains open. 

We look forward to cooperating with Ukraine to meet its objectives in the NATO-Ukraine Commission and its Annual National 

Programme. Because of the importance that we attach to our relationship with Ukraine, once the Central Election Commission had 

announced the full electronic results of the election, President 

Obama was among the first world leaders to congratulate Viktor 

Yanukovych on his victory. 

National Security Advisor General Jones led the U.S. delegation 

at the Presidential Inauguration, where he met not only President 

Yanukovych, but Prime Minister Tymoshenko. And Mrs. 

Tymoshenko is obviously going to be one of the leaders in the opposition in parliament and we are going to continue our longstanding 

relationship with her. 

At the same time, we also plan to work closely with emerging 

leaders like Deputy Prime Minister Tigipko and Member of Parliament Arseniy Yatseniuk. The development of new democratic 

leaders is important for all parties in Ukraine. Let me underscore 

that U.S. policy toward Ukraine will continue to focus on strengthening our strategic partnership. 

Our engagement and cooperation with Ukraine will continue to 

be guided by the U.S.-Ukraine Charter on Strategic Partnership. 

The charter outlines enhanced cooperation across the full spectrum 

of mutual priorities, including economics, trade and energy, defense 

and security, strengthening democracy and people-to-people and 

cultural exchanges. 

To advance the objectives of that charter, we now have a strategic partnership commission, established during the Vice President’s visit to Kyiv last July. Our commitment to Ukraine is also 

evidenced by our assistance program—$123 million this year. The 

goals of our assistance are to bolster peace and security, strengthen 

democratic institutions, promote economic growth and energy efficiency, enhance security, secure Chornobyl, fight AIDS and HIV 

and improve child health. 

In the spirit of our strategic partnership with Ukraine, I’d like 

to suggest five policy priorities that should be high on our shared 

agenda with the Yanukovych Presidency. First, the United States 

is committed to policies that contribute to a democratic and prosperous Ukraine. And the United States stands ready to help 

Ukraine reach agreement with the International Monetary Fund as 

soon as possible. 
5 

The path to economic recovery and renewed prosperity runs 

through agreement with the IMF, which can help provide Ukraine 

a way out of the current crisis and open the door to lending for 

other—from other international financial institutions in the European Union. That will require resolute leadership and hard decisions to undertake the critical reforms needed to fix the budget deficit, revive the banking sector and phaseout energy subsidies. 

A second, and I would say equally important, policy area for 

Ukraine’s long-term prosperity and economic independence is energy-sector reform. A gas sector based on transparency, competition, realistic pricing and more energy-efficient gas distribution and 

consumption will be key. 

Third, the United States is ready to work to strengthen the business side of Ukraine—U.S.-Ukraine relations, which frankly, I 

think, are weaker than they should be. We welcome President 

Yanukovych’s remarks in favor of creating incentives for investors 

such as lowering taxes and cutting red tape. 

Our business community tells us that there is much more to be 

done to make Ukraine attractive to investors, from greater rule of 

law protection to serious action against corruption. The payment of 

VAT—V–A–T—refunds would be a big step forward, I think, and 

a sign to our investors. 

A fourth area of cooperation in our relationship with Ukraine lies 

in nuclear security. We look forward to building on our successful 

record of nonproliferation with Ukraine at the upcoming nuclear 

security summit here and we look forward to President 

Yanukovych attending. Thanks to the leadership of Sen. Lugar and 

former Sen. Nunn, we can point to vital cooperation between 

Ukraine and the United States that has made the world safer. 

Finally, the United States wishes to strengthen bilateral security 

and defense cooperation. As part of that effort, we hope that the 

Ukrainian parliament will pass legislation to allow joint military 

exercises on its territory this year. While the challenges in U.S.- 

Ukrainian relations are complex and demanding, I remain optimistic about the possibilities before us. 

It’s important to both nations and both peoples to get this relationship right. We have a chance at the beginning of a new Presidency in Kyiv to redouble our efforts to do so. And I hope that both 

Ukrainians and Americans both inside and outside of government 

will take advantage of that opportunity. 

Thank you very much and I’m happy to answer your questions. 

Mr. CARDIN. Well, Mr. Russell, thank you very much for your 

testimony. We’ve been joined by the House Chair of the Helsinki 

Commission Alcee Hastings. As you’ve already pointed out, Mr. 

Hastings was present as an observer in the elections in Ukraine 

and helped in the certification of Mr. Yanukovych’s elections. So we 

thank our House Chair for his active involvement and the ability 

to give us a first-hand report as to the progress of democracy in 

Ukraine. 

I want to, I guess, ask you a fundamental question first and then 

I’ll turn it to my Co-Chair. You talk about Mr. Yanukovych’s desire 

to strengthen the ties with the West and the East about developing 

stronger ties, certainly, with Russia, but also with the United 

States and Europe. And then you talk about our NATO desires, 
6 

that we still believe that this is a country that is important in our 

European security arrangements. 

How can he accomplish all that? How can he strengthen the tie 

between Ukraine and Russia, which was stressed during the Orange Revolution and which Mr. Yanukovych was not a supporter 

of? Now, he’s all of a sudden going to be able to maintain this development with the West, with Europe and with Russia and also 

perhaps be with us in NATO. How does he balance all that? It 

seems like that’s an impossible task. 

Mr. RUSSELL. Well, we’re going to see how good he is at it. I 

think it was interesting that he chose to make his first trip abroad 

to Brussels. He talked about European integration and a free trade 

agreement with the EU. Then, to go to Moscow and create—finish 

the leg of his triad by coming here for the nuclear assistance security summit. 

So he clearly is going to try to balance these three interests. And 

I don’t think it’s a bad idea, actually. I mean nobody’s going to 

move in their neighborhood. Russia’s not going to go away. Russia’s 

Ukraine’s second largest trading partner after the European Union. 

And I think he’s got a good shot at making some progress on all 

of this. But like I said, we’re going to be there pushing for strategic 

partnership. 

Mr. CARDIN. Well, how much influence will Russia have in the 

priorities that he places on the agenda for security? 

Mr. RUSSELL. It’s an open book. He’s just named his government, 

so we’re going to have to see. I mean he’s trying to be all things 

to all people like many leaders. We’ll see if he succeeds. 

Mr. CARDIN. Well, let me ask you just one more question on a 

subject that the Orange Revolution was not successful in dealing 

with and it’s corruption. It’s been a—we’ve seen first-hand the consequences of corruption within Ukraine. It’s not unique for countries in transition, but certainly, the game plan to deal with it has 

not been as successful as the United States would like to see it. Do 

you have any view as to how this new government will deal with 

the problems the country faces in corruption? 

Mr. RUSSELL. Well, we agree with your assessment. It is a major 

problem in practically, every field. Our human rights report, which 

we just put out talks again about corruption, which everybody 

knows. And I think it’s going to be key. If he’s going to make 

progress on economic recovery, he’s got to deal with this because, 

if he’s going to get ahead on economic recovery, he’s really got to 

start with sound fiscal policies and pass the budget. 

He’s got to figure out how to get the private sector to really fuel 

economic recovery and they need an effective banking sector to provide the financing to do that. Well, if you don’t deal with corruption, you’re just not going to get—you’re not going to get investors. 

And transparency and rule of law are part of the keys. He’s talked 

about this and we’re going to have to see how they do, but I agree, 

it should be a priority and it’s something the United States is going 

to push. 

Mr. CARDIN. I’ll look at your five issues that you’ve raised for priorities. Certainly, democracy and prosperity is going to depend 

upon dealing with the corruption issues, the energy sector reforms, 
7 

very much so and we push the EITI as a framework to deal with 

the energy sector issues. 

On business, business and investment by the United States or 

any country in Ukraine will be very much dependent upon a comfort level as it relates to dealing with the issues of corruption. So 

on every one of these areas, it’s going to be fundamental that they 

have to deal with this and their track record’s not very good. 

Mr. RUSSELL. I agree with you. I think they’ll probably have a 

new program with the IMF and I suspect that transparency and 

rule of law are going to be a big part of that. I should also mention 

that we’re coordinating with the European Union because I think 

if he wants to pursue European integration, clearly all of these 

issues are going to be key to that as well because the European 

Union’s goals for integration are not particularly different than our 

own bilateral goals in this respect. 

Mr. CARDIN. So what is your advice to Congress? What would be 

your top recommendations for what the Congress should do in 

order to reinforce the goals that you laid out—with your goals that 

we fully support and we certainly encourage the new government 

to improve relations with all of its neighbors. That is fundamental 

to your regional stability and it’s fundamental to U.S. interests. 

What would your advice be to Congress? 

Mr. RUSSELL. Well, I think, your Co-Chairman here has set a 

good example for engagement early on with Ukraine and I think 

it’s important. I think it’s important that the Congress is dealing— 

this is a country where the Rada, their parliament is very important, that you engage with the leadership there as we’re doing in 

the executive branch to try to push that forward. 

And we’re going to look for your support, obviously, with our assistance programs. And if, you can encourage some of the privatesector businesses in your states that if Ukraine does make some of 

these changes, to try to look and see if investment there or business opportunities would be a possibility. 

Mr. CARDIN. Well, as I said in my opening statement, Ukraine 

is very important to U.S. interests. It’s a high priority of our Commission. We have spent a lot of time visiting Ukraine because we 

thought it was important to do that on many occasions and so 

clearly, it’s just going to be a continued focal point for our interest 

because we think it’s important to the entire OSCE region. 

With that, let me turn to Congressman Hastings and again, 

thank him for his leadership on the traveling to Ukraine and in his 

continued leadership on this country and the place that the Helsinki Commission has placed in following the events in Ukraine. 

HON. ALCEE L. HASTINGS, CO-CHAIRMAN, COMMISSION ON 

SECURITY AND COOPERATION IN EUROPE 

Mr. HASTINGS. Thank you very much, Mr. Chair. OK, it’s on. And 

Mr. Russell, thank you very much. Mr. Chairman, I’m sure it’s already been noted—my humble apologies for being delayed. I had 

the distinct privilege and honor to participate in three Ukrainian 

elections, including the first round of the just-passed Presidential 

elections. 

In addition to just being an election observer, I also like to consider myself a good observer of people. And while I don’t speak the 
8 

language, on two different occasions in Ukraine, one during the Orange Revolution and on the very last visit, I took it upon myself 

to walk into areas, first, during the Orange Revolution that I had 

not been in and a second time, to go back into those again. 

And then of course, as you might know, Mr. Russell, a considerable number of Ukrainians in the diaspora and those in academia 

and the think tanks and in government all talk to us a great deal 

about Ukraine. One thing, if I had to characterize the residual from 

the Orange Revolution, it would be unfilled promises. That would 

just be all that I would say. 

The other things that I note is considerable frustration among 

those that are supporters of the efforts that have been put forward 

in Ukraine. Now, the United States doesn’t have to make any 

apologies to anybody and I’m not suggesting that they ever would, 

but we have a solid record of standing with the Ukrainian people 

over the decades in support of their struggle for freedom and democracy. 

I’ll start by asking you how you assess the Prime Minister’s remarks last week and I’m paraphrasing what he said, that their 

treasury is depleted. I’m reminded—that’s very similar to our nation at this time, a President, inheriting some 30 years of transformation of an economy, is expected in 1 year to reverse it. 

Mr. Yanukovych and his new coalition, in my judgment, have a 

very high hill to hustle and they cannot do it, quite frankly, without the United States and Russia and the European Union and 

with some clear understanding of how the international community 

that is experiencing a global crisis of its own is going to be able 

to address it. So I guess I’d like to know from you the status of 

Ukraine with respect to the Millennium Challenge Account. 

Mr. RUSSELL. Well, the Millennium Challenge Account threshold 

program didn’t succeed. I mean, the Millennium Challenge Corporation chose not to continue it in 2009 because of Ukraine’s performance. And I can’t say where they’ll go from here. Corruption 

was one of the big issues, actually. 

But to the broader point that you’re making, which I agree with, 

they’ve got a tough row to hoe. But I think that they’ve got to try 

to reach agreement with the IMF has to be the first priority because that’s what’s going to unlock the doors to the other lending 

they need to survive. 

In the longer term, I mean, the shorter your time horizon with 

Ukraine, the more pessimistic you’re going to be. The more you 

stretch that out, the more optimistic. I mean they have gas reserves. They have oil; they have a lot of coal. Their manufacturing 

sector actually did pretty well before the economic recession. 

I think they’ve got to go back to basics. And frankly Anders 

A ̊ slund—it’s always very difficult to talk about economics when you 

have, actually, a real economist sitting behind you—[laughter]—he 

can probably help you more than me with most of this. 

Mr. HASTINGS. All right. Looking ahead, in 2017, the lease agreement with Russia in the Black Sea are going to become more and 

more an issue. Attendant to that is the fact that we, the United 

States, really have poured millions of dollars and security assistance cooperation to Ukraine and yet, it seems their armed forces 

are still in need of reform and modernization. 
9 

So I guess, do we still look to try and bring them into NATO? 

What’s your take on the Black Sea as it pertains to Mr. 

Yanukovych? And what are the substantive benefits of our security 

cooperation with Ukraine beyond just building our relationships? 

Mr. RUSSELL. Well, I think that defense and security cooperation 

is a key part of our relationship. I think you’re right that there’s 

a lot more to be done, but at the same time, I mean, this is a country where you now have civilian control of the military. You have 

an all-volunteer officer corps. They’ve made some key reforms that 

they’ve got more to do. 

I know our own military finds them very enthusiastic and good 

to work with and they have an interest and we have an interest 

in seeing them become a net contributor to global security. They 

still have a pretty good-sized presence among peacekeepers in 

Kosovo. 

They’ve contributed to Iraq and Afghanistan and other U.N. 

peacekeeping missions and NATO missions and I think that’s 

what’s in it for us in the longer term. The question you posed about 

the Black Sea fleet; I don’t know what they’re going to do, but what 

we support is Ukraine’s independence and territorial integrity and 

their right to make their own foreign policy choices. So whatever 

they do, we would support something that obviously, they freely 

enter into. 

Mr. HASTINGS. The last couple of questions that I have deal specifically with what your sentiments are at this time and what the 

administration, if anything, is picking up—if anything—regarding 

Kyiv’s desire to have a Euro-Atlantic integration. Is that still viable? I heard you say that the new President’s first visit was to 

Brussels, but I hasten to add that his second visit was to Moscow. 

And so where they’ll go with—[laughter]—Ukraine at this point? 

Mr. RUSSELL. Well, I think our approach as far as NATO is that 

Mr. Yanukovych has said he wants to continue practical cooperation. There’s a lot that needs to be done, and can be done through 

the NATO-Ukraine Commission, through the Annual National Programme they have with NATO and all these good things for a more 

modern, more professional military and defense establishment. And 

I think they’re worth continuing no matter what they choose to do 

on the larger question of NATO membership. 

I think with European integration, it’s pretty clear that Mr. 

Yanukovych has already talked about a free trade agreement with 

the European Union and liberalization of their visa regime. And 

again, all of that’s going to require some changes we’ve been talking about toward meeting European Union standards. 

I think there’s—in some ways, not much choice. I mean, they 

want to become a modern, prosperous nation and that will require 

being part of the international community in a different way than 

they were in the past century. 

Mr. HASTINGS. Well, you have a rather considerable portfolio, but 

as it pertains to Ukraine, two of the neighbors that are also in your 

portfolio, Belarus and Moldova—I’ll leave Russia to the side because I know that’s overarching. But just as it pertains to Belarus 

and Moldova, what do you see for the future of Ukraine relations 

with those two countries? 
10 

Mr. RUSSELL. Well, I mean, we hope to see a good relationship 

in Ukrainian bilateral relations with both of those countries. 

Moldova has had quite a change in its own government, bringing 

in a new coalition that’s committed to European integration as its 

foreign policy and to rule of law and democracy at home, which we 

see is a very, very good and welcome development. 

Ukraine can help to support that. There’s some basic issues 

about delineation of the border between the part of Moldova that 

is Transnistria and Ukraine—Ukraine also plays a role in the fiveplus-two talks looking at a settlement to this longstanding frozen 

conflict. So they can do quite a bit there. 

Ukraine’s always had a reasonably good relationship with 

Belarus. As you know, the United States—Mr. Cardin knows from 

his recent trip there—we have some real issues in our own relationship with them and we would hope that Ukraine’s relationship 

would help to push toward a more open system there and make 

some small steps toward a more open, pluralistic government. 

Mr. HASTINGS. Right. Well, finally, Mr. Chairman, time won’t 

permit us to explore the importance of Poland in all of this as well, 

so I’ll just leave that to the side. But let me offer what I think are 

two things that help in our developing better and building better 

relationships with countries. 

And it’s not ignored, but not enough emphasis is placed on cultural and educational exchanges. And as policymakers, Senator 

Cardin, my dear friend and Co-Chair of this Commission and I 

have been active in pursuing funding in that arena. But I believe 

Ukraine would benefit greatly by large student exchanges and cultural exchanges. They have so much to offer and in that regard, it 

would be helpful if we were to participate. 

Now, let me be a little more precise and I’ll stop right here. If 

I had to make a bet on where 19- and 20-year-olds are going to go 

to college, that can with the support of their families or however 

they manage to do so, I’ll bet you Russia is going to do more in the 

education arena having them come to Russia than we are having 

them come to America. I’ll stop right there. 

Mr. CARDIN. Well, Congressman Hastings, thank you very much 

for those observations. I would just observe I think the two greatest 

challenges will be for Ukraine as to whether it really can establish 

itself as an independent democracy in that region, which is our 

goal and being able to establish relations with all of its neighbors, 

including to the West. And second, whether it can deal with corruption. 

We’ve mentioned this a couple times, and the Millennium Challenge grant is a good example. We just completed a hearing in the 

Senate Foreign Relations Committee with President Clinton and 

Bill Gates who are involved in two major foundations that provide 

international assistance. And I was very impressed with their commitment on accountability in making sure the funds do not get 

sidetracked to help finance corrupt activities. 

We are looking at a change in our foreign assistance programs 

and accountability’s going to be part of that. So Ukraine is a developing democracy that is—needs an independent economy and they 

will have an independent economy, but it will not happen at the 

pace that they want if they can’t get corruption under control. 
11 

So I think those two issues are critically important as we watch 

Ukraine. And I agree with Congressman Hastings. We need to look 

at its relationship with other countries; whether Moldova or 

Belarus, Ukraine can play a very important role in the development of other countries in transition in that region. 

So I think it’s in all of our interests to continue our focus on 

Ukraine and just observe with a great deal of, I think, optimism, 

the recent elections being the expression the people of Ukraine as 

to the future of their country. And we certainly are impressed by 

the new government’s ability to form under very challenging circumstances. Thank you, Mr. Russell, for your testimony. 

Mr. RUSSELL. Thank you. 

Mr. HASTINGS. Thank you, Mr. Russell. 

Mr. CARDIN. I would want to observe that the Ambassador for 

Ukraine had planned to be with us. He has taken ill. He must have 

similar children that you have. [Laughter.] And maybe more in 

number, so he’s maybe more severely impacted. We’re very pleased 

to have two distinguished experts on Ukraine for our second panel. 

Damon Wilson is Vice President, Director of International Security Programs at the Atlantic Council. Mr. Wilson previously served 

as Special Assistant to the President and Senior Director of European Affairs at NSC. We’re among his many responsibilities. He coordinated interagency policy in support of Ukraine, including during the Orange Revolution. Mr. Wilson also served in a variety of 

other governmental positions at NSC and State Department including as Chief of Staff at the U.S. Embassy in Iraq. 

Anders A ̊ slund is Senior Fellow at the Peterson Institute for 

International Economics and has been deeply engaged with 

Ukraine since 1985. Previously, Dr. A ̊ slund was Director of the 

Russian and Eurasia Program at the Carnegie Endowment and is 

the author of nine books, including ‘‘How Ukraine Became a Market Economy and Democracy.’’ And he has a copy here, willing to 

sell it, I assume. [Laughter.] We have extra copies that we’ll make 

available. 

Mr. A ̊ SLUND. Free copy. 

Mr. CARDIN. Thank you. We’ll start off with Mr. Wilson. 

Mr. WILSON. Thank you very much, Mr. Chairman, Mr. CoChairman. 

Mr. HASTINGS. Press that button, Damon. See if it’s on. 

DAMON WILSON, VICE PRESIDENT, ATLANTIC COUNCIL 

Mr. WILSON. Oh yes, thank you. Thank you, again. I’m honored 

to speak to you today about our relationship with Ukraine. I want 

to thank the Commission for the role that it’s taken in helping to 

raise the spotlight in Washington on the issue. 

Mr. HASTINGS. I apologize to you, but some of the people in the 

back are still having difficulty hearing. Is that red light on, on that 

mic? 

Mr. WILSON. It’s hard to see. Yes. 

Mr. HASTINGS. All right. There, you’re better now. 

Mr. WILSON. All right, is that better? 

Mr. HASTINGS. Yeah. 

Mr. WILSON. All right. I want to thank you, again. 

Mr. CARDIN. That’s three thank-you’s. [Laughter.] 
12 

Mr. WILSON. Naturally. But I did want to thank the Commission 

for taking the opportunity to help raise the attention—the spotlight 

on Ukraine here in Washington. I think that’s an important function of the Commission and I applaud that leadership. I also want 

to thank you, Mr. Co-Chairman, for your personal leadership and 

the role that you’ve played in elections in Ukraine over the years. 

I think that’s been very important. I commend my former colleague, Dan Russell, for some excellent testimony. 

Today, I’d like to underscore why the issue of Ukraine should 

matter in Washington, outlining key benchmarks against which to 

judge the policies of Ukraine’s new President and offer recommendations for U.S. policy. I agree that we should not underestimate what has just happened in Ukraine this year. 

This election is a victory for the consolidation of democracy. And 

yet for most of us that follow Ukraine closely, there is a sense of 

disappointment. Why is that? First, the leaders of the Orange Revolution failed to deliver for Ukraine that which those protestors on 

the Maidan were calling for back in 2004. 

Second, Ukraine’s track record of good elections has yet to translate into a track record of good governance. And third, we’ve been 

disappointed by the timidity in the West to continue to support 

Ukraine. So President Yanukovych, therefore, assumes the Presidency in an atmosphere of pragmatism. 

And a sober assessment of Ukraine’s prospects is appropriate. 

However, the vision of a democratic, free-market Ukraine firmly 

anchored in Europe remains important as it remains a motivator 

for tough policy decisions in Kyiv as well as in Brussels and Washington. And we must not take this vision for granted. 

Why does all of this matter? First, it matters for the quality of 

life of Ukrainian citizens, but it also matters geopolitically. In some 

sense, Ukraine is untethered, if you will. Its future is not certain. 

Although it is an ancient nation, it is a young state. The history 

of conflict in Europe is about uncertainty in the space between Germany and Russia. 

And this would not matter if the Russia of today had evolved and 

changed to become like the Germany of today. But Russia has not. 

Ukraine’s statehood remains fragile. If Ukrainian democracy continues to succeed and helps produce good governance and economic 

growth, it will serve as a powerful example in a region that desperately needs positive examples. 

And that is why Russia has a strategy, which in some terms essentially is rollback. This strategy had been well articulated by 

Russia’s leaders, including President Medvedev’s declaration of 

privileged interests—the commitment to protect Russian citizens 

wherever they may live—as well as in Russia’s new security strategy. In contrast, I’m not convinced that either the West or Ukraine 

itself has a very clear strategy about the way forward. 

So let me first address Ukrainian policy, as what President 

Yanukovych does will have more of an impact on Ukraine’s place 

in the world than any outside actor. He’s off to a good start with 

an early visit to Brussels followed by one to Moscow. He’s outlined 

his four top priorities of EU integration, returning good neighborly 

relations with Russia, developing relations with Ukraine’s neighbors and pursuing strategic partnership with the United States. I 
13 

think as we look forward, we should judge Ukrainian policy by several benchmarks. 

First, Russia—how does Kyiv manage its relationships with Moscow? A stable and positive bilateral dynamic requires Ukraine to 

behave as and be treated as a sovereign, independent actor. Key 

issues include whether Yanukovych maintains a non-recognition 

policy toward South Ossetia and Abkhazia and whether he opens 

the door to an extension on the Black Sea fleet in Sevastopol. 

Energy security—Russian interests have been keen to gain control of Ukraine’s energy structure. Will Yanukovych agree? If he 

believes energy is a national security issue as I do, the new government would pursue a serious energy efficiency strategy. 

International economics—The government’s handling of the IMF 

will be an early test of its credibility. I’ll leave the details of this 

to Anders, but similarly, a key question is how Yanukovych handles the common economic space with Russia? Does he do so in a 

way that negatively impacts Ukraine’s WTO membership or the 

prospects for a free trade agreement with the EU? 

Regional relations—Does Ukraine use its regional weight to support Moldova and a resolution of Transnistria? How Yanukovych 

handles ties with Belarusian leader Lukashenka and Georgian 

President Saakashvili will offer insights into the regional role that 

Ukraine will play, as well as the role that it wants to assume within Guam. 

The European Union—Will Yanukovych press as hard to grow 

Ukraine’s bilateral ties with the EU, as well as take advantage of 

the Eastern Partnership? A free trade agreement and visa liberalization are key practical steps which would help Ukrainians actually be Europeans and move the country toward Europe. 

Nonproliferation—Ukraine had a spotty record of nonproliferation under then-Prime Minister Yanukovych. Will Ukraine’s arms 

sales track record continue to improve given the economic interests 

at stake? 

And finally NATO—NATO is clearly not at the top of the agenda, 

nor should it be. But NATO-Ukraine relations do need to be on the 

agenda. Yanukovych, in fact, had a track record as Prime Minister 

of advancing NATO-Ukraine ties. So while the window has closed 

on rapid movement toward NATO, both sides should ensure that 

there is substance to underpin the NATO-Ukraine Commission. As 

NATO is a demand-driven bureaucracy, the signals from Kyiv will 

determine the substance. 

I believe it is an imperative to maintain the credibility of the historic Bucharest summit decision that Ukraine will become a member of the alliance. If we look back in 5 to 10 years and the Bucharest decision is seen as hollow, there will be damaging implications 

for the alliance’s credibility, as well as for Ukraine. 

In the face of Russian opposition and genuine divisions within 

Ukraine, some have argued that we should aim for Finlandization 

of Ukraine—independent, but not part of any alliance. When applied to Ukraine, these analysts imply that big powers taking decisions about Ukraine’s future—I believe Ukraine must be in a position to determine its own future, including whether to pursue any 

membership in any alliance. 
14 

These issues provide benchmarks against which we can judge the 

new government. I have modest expectations, but do believe that 

Yanukovych can deliver on his campaign pledge to move—continuing moving Ukraine toward Europe. His early visit to Brussels 

and his reception in Brussels are good signs. 

Yet the most important factor to achieve this foreign policy goal 

is what the government does domestically. Yanukovych’s reception 

in Western capitals will be determined by whether he governs effectively, protects democratic advances, stabilizes and grows the 

economy and ensures Ukraine is a reliable energy partner. 

In terms of implications for U.S. policy, I’m not convinced that 

the West as a unit yet has a coherent strategy, although Vice 

President Biden’s visit to Kyiv last year helped lay out excellent 

principles for U.S. policy. We cannot afford to put Ukraine on the 

backburner or accept the argument that U.S. engagement is somehow provocative to Moscow. We should not accept the argument 

that Ukraine is messy or too divided as an excuse to not engage. 

While changes in Ukraine are unlikely to be decisive in the next 

few years, the trend lines could take Ukraine further away from 

rather than closer to Europe. And we do not want to look back at 

Ukraine’s next election and wonder what happened. So Mr. Chairman, as part of my effort to outline a way ahead for U.S. policy 

toward Ukraine, I offer six recommendations to conclude. 

First, be in the game. Ukraine is in play and we need to engage 

and be present. The appointment of John Tefft as our Ambassador 

and the visits by Vice President Biden, National Security Advisor 

Jones and President Obama’s congratulatory call to Yanukovych 

are key steps in this effort. This high-level outreach should continue. 

Second, articulate a vision. We need to recommit to building a 

Europe whole and free, energizing the bipartisan tradition behind 

this vision and making clear that Ukraine has a place within this 

vision, as does Russia. 

Third, maintain funding. We need to protect our funding for 

transition in Ukraine, as the Freedom Support Act model of graduation no longer applies in Europe’s East in my view. Higher per 

capita GDP does not necessarily translate into a democratic 

Ukraine anchored firmly in Europe. 

Fourth, reach beyond leaders. Unfortunately, Yushchenko was a 

failure. Yanukovych is unlikely to bring decisive change. We therefore need to ensure that our relations with Ukraine extend beyond 

leaders. We should place emphasis on developing next-generation 

leaders, ties with the Rada, engaging the regions and fostering people-to-people ties. 

Fifth, push energy efficiency. The United States and Ukraine 

need to get serious about working with European partners to support energy efficiency in Ukraine as a national security strategy. 

And sixth, enhance military-to-military ties. We must ensure 

that close military-to-military ties continue and are backed with 

funding from foreign military financing and foreign military sales 

and we must push back when Russia tries to portray military cooperation with Ukraine as provocative. 

In the wake of Ukraine’s election, Yanukovych is now President 

and his party leads the government. Now is the time to move be-
15 

yond stalemate. Just as much as we hold Kyiv to that standard, 

we must hold ourselves to that standard. Thank you, Mr. Chairman, Mr. Co-Chairman. I look forward to your questions. 

Mr. CARDIN. Mr. Wilson, thank you for your comments. Dr. 

A ̊ slund? 

ANDERS A ̊ SLUND, SENIOR FELLOW, PETERSON INSTITUTE 

FOR INTERNATIONAL ECONOMICS 

Mr. A ̊ SLUND. Thank you very much, Mr. Chairman. And I would 

very much like to thank you for this opportunity to speak on a 

topic that I consider very important: how Ukraine should move beyond the stalemate—as you so rightly have put it in the headline— 

in the sphere of economic reform. I leave the political aspects to 

Dan Russell and Damon Wilson and just want to concur with their 

statement and I’ll focus entirely upon the economic aspects. 

Ukraine has established an open market economy with predominant private ownership. And from 2000 to 2007, the country had 

an average economic growth of 7.5 percent a year. But then came 

the global financial crisis and last year, GDP fell by no less than 

15 percent. And this shows partly that Ukraine is part of the world 

economy but it also shows that it’s not performing up to its potential. Its big problems, as you pointed out, Mr. Chairman, is pervasive corruption and poor business environment. And the question 

today is what and how can be done about it? 

I co-chaired an independent international expert commission that 

has done a report on what the new government should do during 

its first year in power. We call it, ‘‘Proposals for Ukraine 2010: 

Time for Reforms.’’ And our contention is that Ukraine today has 

a unique possibility to move ahead because a new Presidential election with a new government is always a good time to take reform. 

And on top of that, if you have been badly beaten by an economic 

crisis and are coming out of it, then you can act. 

And our three main conclusions to put it first is that Ukraine 

needs a new capacity for economic reform. Second, a clear 

prioritization of what the top priorities are so that they are really 

carried out. And third, it needs to utilize international organizations as lighthouses or anchors to guide its reforms. 

So let me start with the first point. Ukraine needs to establish 

a new capacity that is independent of the agencies to be reformed. 

We recommended the creation of the reform commission at the cabinet of ministers headed by a powerful Deputy Prime Minister, 

such as Deputy Prime Minister Sergei Tigipko has now been appointed. The reform commission should have its own budget and a 

single goal to decide and implement reform. This must come from 

above. 

At the same time, President Yanukovych has now formed a reform committee at the Presidential administration that he chairs 

himself. And he did set this up on the second day of—his second 

day in office. And he has also appointed the first deputy head of 

his Presidential administration, Iryna Akimova, who’s an outstanding economic reformer, to be the executive secretary of his reform. 

Second point is that Ukraine needs to have clear reform priorities. And the short of it is that they must improve the effective-
16 

ness of a state, achieve financial stability, allow private enterprise, 

the freedom of the market and make social policy more effective. 

And the government has adopted a coalition program that is already out which is called ‘‘Stability and Reform.’’ By and large, all 

the bullet points in this program are the right ones. But of course, 

they are bullet points rather than clear plans. So this looks promising. And it—to a considerable extent—it reflects the views of our 

Commission. 

The problem in Ukraine so far has not been what should be done. 

There’s a broad public consensus. The question is if it should be 

done and who should do it. There’s always a reason not to do 

things. 

And therefore we think that as everybody here has expressed 

today, the United States, the IMF and other international organizations need to help Ukraine to break through this political logjam, 

which is very much created by the interests of corruption. And naturally the United States should engage in the promotion of reforms 

that are beneficial for Ukraine’s future governance and economic 

welfare. 

To summarize our Commission report, we’ve found 10 top priorities for this year: First, carry out gas reform. That’s vital. Second, 

make the national bank of Ukraine independent to give a proper 

basis for the banking system. Third, move toward inflation targeting with a floating exchange rate to stop future high inflation. 

Fourth, cut public expenditures. There’s no way to run a country 

with a budget deficit of 8 to 10 percent of GDP in budget deficit. 

Fifth, undertake comprehensive deregulation of enterprise capital—this red tape. Sixth, conclude a European association agreement, which would include a deep and comprehensive free trade 

agreement. Seven, get privatization going again. Eight, legalize private sales of agriculture land. Nine, adopt a law of the public information to fight corruption. And 10, complete the modern commercial legislation. 

And all these measures are truly vital and they can be implemented within a year. In most cases, they’re already draft laws 

lying ready to be adopted. And if I should pick a—point out one 

thing that is absolutely key, that’s the gas reform. Currently 

Ukraine subsidizes the import of Russian gas to the tune of 3 percent of GDP each year, which makes no sense whatsoever. And this 

has to be changed. 

As Dan Russell in particular pointed out, the IMF will be the key 

in this process. The IMF will go out and start negotiating a new 

agreement very soon indeed. And it will contain a gas reform and 

sensible macroeconomic polices. And of course, the European Union 

is also currently negotiating a substantial association agreement 

and it is also involved in the gas reform. 

The role of the United States here as the biggest shareholder in 

the IMF is, of course, push the IMF in action as Dan Russell spoke 

about. And the U.S. also should engage in the gas reform. I think 

that Congressman Hastings mentioned something very important. 

Ukraine needs a new, broader educated elite. And therefore, I 

think that the United States should offer hundreds of student 

scholarships for Ukrainian scholars to come to this country. Let me 

thank you with these words. 
17 

Mr. CARDIN. Well, let me thank both of you for your testimony. 

It was very specific on benchmarks and recommendations. I think 

that’s very helpful to us, but I hope it’s helpful also to Ukraine. I 

think that your lists there, particularly on benchmarks, Mr. Wilson, and recommendations, Dr. A ̊ slund, were both very helpful to 

us. 

So let me start off with Mr. Wilson if I might and try to pose 

the question as to what you think Russia—[laughter]—will be 

doing in regards to the new opportunities in Ukraine. Congressman 

Hastings mentioned that the issues of stronger exchanges between 

the two countries, whether its students or else-wise, that I think 

many of us in the West thought the history between Russia and 

Ukraine would serve the East—would serve the West well in building a strong relationship with Ukraine. 

But looking forward, it’s going to be based upon a mutual interest going forward. And Russia certainly has the geographical advantage over the West in developing a closer tie with Ukraine. 

Now, again, I personally believe that the United States needs to 

develop a closer relationship with Russia, so this is not saying this 

in a hostile sense. But trying to figure out the policies for the 

United States—how should we anticipate Russia’s response to the 

opportunities in Ukraine? 

Mr. WILSON. That’s right. I think you’re absolutely right. 

Ukraine and Russia should be expected to have good relations. 

There’s every expectation that that should be the case. I think Russia and Russian leadership have learned some lessons in Ukraine. 

In 2004, then-President Putin overplayed his hand with pretty an 

outright, overt endorsement of candidate Yanukovych at the time 

for President. 

And I think that actually hurt Yanukovych in 2004 because it 

was heavy handed. And I think the Ukrainian people who are open 

and receptive to close ties with their northern neighbor saw this as 

an overt effort to manipulate their political process and didn’t like 

that, responded to that. 

I think it’s been interesting to watch over time the way that Moscow has related to Ukraine. In some respects, it become somewhat 

disenchanted with Yanukovych as their candidate, if you will, made 

more of an effort to develop a relationship with Prime Minister— 

at the time—Prime Minister Timoshenko, but dug in a hard line 

against President Yushchenko. 

And I think some of the approach that Russia took over the past 

years during President Yushchenko’s tenure were actually quite 

dangerous. The letter that Medvedev sent to Ukraine, basically refusing to have an Ambassador until the President was gone, President Putin’s challenging of Ukraine’s sovereignty at the Bucharest 

summit, certain activities taking place in Crimea—were downright 

potentially dangerous, laid the seeds for a potentially dangerous future. 

But I think Russia looks at the situation in their view, they 

think they’ve had a bit of a victory, but I think it is a tactical victory. In one respect, they’ve seen the defeat of the Orange Revolution leaders, especially Yushchenko. Remember, Yushchenko actually ran in this election. 
18 

If he had been a successful President, he could have had a second term and delivered on a vision which had very much irritated 

the Russians. He failed. He lost. Now, I don’t think Russia had the 

reason for why he lost. I think he lost on his own merits. But Russia also sees themselves as having succeeded in pushing NATO off 

the agenda. I do think these are tactical victories because, I think, 

as Dan Russell began, the principles of the Orange Revolution were 

not defeated in this process. 

So I think it’s important to watch this relationship. If Russia 

tries to exert, if you will, its sphere of privileged interest and expect Ukraine to do things that are Russia’s bidding, such as open 

up the extension of the Black Sea Fleet in Sevastopol, to move on 

recognition of South Ossetia and Abkhazia—those would be very 

disconcerting signs. I think, for the moment, we’ve seen President 

Yanukovych resisting that type of pressure. He’s given a nod toward issue like elevating the status of Russian language in 

Ukraine but that’s a fair issue to have debated with inside 

Ukraine’s polity. And I think the important part of this from U.S. 

policy is that we need to help support Ukraine as an independent 

actor, as a sovereign actor. 

And we need to be very clear that when we talked about a Russia reset policy, we need to articulate, just as powerfully, the other 

side of that—that we pursue cooperative relations with Russia but 

not at the expense of our values of our friend or our friends. And 

I think when we see or sense this type of pressure on Ukraine, we 

should work with our European partners to push back and to push 

back very clearly on Moscow. 

Mr. CARDIN. I think your benchmarks are good ones for us to follow because I really do think it’s too early to tell not only what 

Ukraine will do but what Russia will be doing—— 

Mr. WILSON. That’s right. 

Mr. CARDIN [continuing.] And how it impacts on U.S. interests. 

I think it’s just something we need to deal with. And I think the 

energy issue is probably going to be one of the most fundamental. 

I mean, you raise a very good point about gas prices in Ukraine 

are unrealistically low, which is having a major impact on their 

economy because the government subsidizing so much of the cost 

of energy. And we’re not sure what impact this has on market 

forces. And then put on top of that the interest, internationally, on 

dealing with global climate change and energy security issues within that region, it is a matter that Ukraine could play a very positive role but it requires reform. 

And when you do reform, there’re winners and losers. And the 

current—I’m sorry, Dr. A ̊ slund, if I get involved, a little bit, in politics here but the business leaders’ impact in government decisions 

in Ukraine is well known. So the question is, can they go forward 

with these market reforms in the energy sector, not just from the 

point of view of the impact it has on its economy but on its political 

structure. And will the international organizations have enough 

impact, IMF, et cetera, in the reform commission’s recommendations and implementation. What is your assessment on that? 

Mr. A ̊ SLUND. Thank you very much. This is exactly the question 

that I wanted to get because I think that this is the key issue. 

When the IMF makes an agreement, normally it requires certain 
19 

prior actions, the natural prior action for the IMF to demand now 

is that gas prices should be increased domestically before the IMF 

concludes any agreement. We can discuss how much. My basic view 

is the faster, the better. And then you provide social compensation 

for those who are really suffering. Normally, the people are really 

suffering—they don’t use much gas. 

So it’s not so much you have to pay—from a state point of view, 

you can save $3 out of $4 by raising the prices and giving full social compensation. And I think that the Ukrainian Government is 

ready for this because they realize that they can’t play an old game 

for too long. And what we are gradually seeing is that these big 

businessmen, they prefer to be owners of enterprises rather than 

sit and play in arbitrage, play between low, controlled prices and 

the free, much higher prices. So I think that this is the time to 

make the push. And the IMF, the U.S. and the European Union 

are all highly aware of this. And I do hope that they will hold firm 

and get that done. 

Mr. CARDIN. Thank you. One of you mentioned the fact that I 

didn’t realize that Ukraine has a large coal reserve—which I wasn’t 

aware of. Is there a concern that you might find an increase in the 

utilization of coal, which could also compromise, then, our global 

climate change issues and deals with security issues also, as far as 

the pipelines, et cetera, as part of the way that Ukraine responds 

to the IMF’s desires? Is that on the table? 

Mr. A ̊ SLUND. I don’t think that we should be much worried in 

this regard. The coal price is half of what it should be and the big 

states are—— 

Mr. CARDIN. They’re also subsidizing coal? 

Mr. A ̊ SLUND. Yeah. And there’re big subsidies to the coal mines. 

The coal mine owners say, we don’t need any subsidies if the prices 

are free. So if you have higher coal prices, the consumption will go 

down. In Soviet times, Ukraine consumed 110 billion cubic meters 

of gas each year. Now, it’s down to 50 billion cubic meters. So just 

let the market function and you will get the reduction. Ukraine 

was the most energy intensive economy in the world in Soviet 

times—even worse than Russia. So therefore, you have huge benefits to get and Ukraine has reduced its emissions enormously and 

they can do much more and should do much more for their own 

benefit. 

Mr. CARDIN. Well, I thank both of you for your testimony. I think 

it gives us a yardstick to judge what is happening in Ukraine and 

it’s very helpful for our Commission. I’m going to turn the gavel 

over to Chairman Hastings. I have a commitment on the Senate 

floor this morning in about 10 minutes. So to not to be disruptive, 

I’ll give him the gavel and thank you again for your testimony. 

Mr. HASTINGS. Thank you very much, Mr. Chairman. And I 

agree with you that our witnesses were very specific and left very 

little that needs to be asked. At the very same time, in listening 

to your testimony I had a couple of takeaways and, specifically, Mr. 

Wilson, when you commented about the thrust to have a Europe 

whole and free, and we hear about Ukraine but I think about so 

many other flashpoints. Two that come to mind most immediately 

are Bosnia and Kosovo that have, kind of, like dropped off of the 
20 

radar screen in the minds of most policymakers and a lot of folk 

in the administration. 

And in my judgment, those two areas still pose considerable 

problems. The global downturn took a heavy toll on a considerable 

number of the areas of the former Soviet Union. And nearby to all 

of this are those Central Asian countries that have been laboring 

under what would be classified as recessionary times for a very 

long time. And so when you say, Dr. A ̊ slund, right, that this is a 

unique opportunity to move ahead, as you put it, I wonder how do 

you move ahead when you don’t have any money? 

And put bluntly, if you look at the role—and we seem to rely 

heavily upon the International Monetary Fund, perhaps it would 

help me—and I’ll start with you, well, Dr. A ̊ slund, if you would tell 

me how that works with Russia as a player? And going even further into that, what tax consequences exist for Ukraine’s citizenry 

and just where would they all find a revenue stream and how 

would they? Corrupt business persons—and we use that term—I’m 

always fascinated how we in the United States form a list of corruption and somehow—and I understand how we do that but if I 

was in another country, and I was looking at what happened on 

Wall Street the last 20 years, I’d wonder about the United States 

telling me about corruption. And I really—that’s a blunt statement 

but maybe ours is just organized corruption some kind of way or 

another. 

I’m reminded of a story, people were telling me how bad organized crime was in south Florida—and this is 40 years ago—and 

at that time, I had been robbed face-to-face with a gun three times, 

my house had been broken into seven times, I had three cars stolen—two from church—[laughter]—and I said that I wasn’t as worried about organized crime as I was disorganized crime—[laughter]—that was about to kill me. So and that’s a real true story 

about my own life and when the Prime Minister so rightly said the 

other day, Prime Minister Azarov, that the debts that are owed to 

the population and, in this case, Mr. Yanukovych rightly, as I’m 

sure Mr. Yushchenko must have as well, said that we’re going to 

take care of you. 

Don’t worry. We’re going to be able to pay you. And then, evidently, Azarov had done his own auditing and learned that he 

doesn’t have anything to pay them with. And so where do they go 

from here, Dr. A ̊ slund? And then I’ll come back, Mr. Wilson, to you 

on a couple of other matters. I hope there were a few questions in 

there aside from personal ruminations. [Laughter.] 

Mr. A ̊ SLUND. Thank you very much, Mr. Chairman. Well, certainly, I will start with one saying, booms are times of corruption, 

depressions are times of moral rearmament. And therefore, I think, 

that the crisis now is good. We see the same thing in Ukraine as 

here. People tolerate corruption much less when the times are bad 

than when they are good. 

Mr. HASTINGS. I hear you. 

Mr. A ̊ SLUND. And therefore, they want to do something about it. 

One area that this is very striking is in the red tape of petty corruption in the bureaucracy. Here, there is a strong general sense 

now in Ukraine, that we must do something about it. And we have 

seen several countries in the former Soviet Union—in particular, 
21 

Georgia but also Azerbaijan and Kyrgyzstan—have cleaned this up. 

If they can clean it up, why shouldn’t Ukraine be able to do that? 

Ukraine is today the 110th country in the world in terms of GDP 

per capita, according to the IMF statistics which is far too low with 

a generally educated labor force and two-thirds of young now get 

some kind of higher education. 

So you can say that human capital is hardly anywhere worse 

used than in Ukraine. So the essential thing is just, free them and 

give them possibilities to work. That doesn’t cost money. That 

saves you money—cutting down the bureaucracy. And that’s also 

reason why it should be possible to do the gas reform now because 

the government has to listen to the IMF and this here is rather 

limited number of corrupt people who are trying to benefit from 

that. It’s much more difficult to do that in bad times. But, essentially, taxes in Ukraine are already high. Tax collection is good, 

surprisingly. The problem is too big public expenditures. I’ve already talked about the gas subsidies—or energy subsidies more 

broadly. 

The second is discretionary enterprise subsidies, which are—(inaudible). The third big area is the pension expenditures. Ukraine 

spends 16 percent of GDP—more than twice as much as this country—on public pensions, which makes no sense. It goes to people 

who retired in the ’40s through various early pension schemes. 

Their retirement age for women is 55, for men, 60. It doesn’t make 

sense. These people should continue their work and so pension reform is a politically difficult thing that needs to be done. 

With regard to Russia, Russia has a positive attitude toward 

IMF support for Ukraine and was interested in getting IMF money 

for Ukraine also in December when the big Western countries said 

no. With regard to the tax system, not that much needs to be 

changed there. It’s mainly unnecessary public expenditures that go 

to the corrupt that should be stopped. Thank you. 

Mr. HASTINGS. Well, turning again just very briefly, to Russia, it 

would seem to me that what they have done by cutting off their 

gas resources last year to Ukraine was particularly brutal in the 

dead of winter. And second, Ukraine pays the highest prices for 

their supplies of all of the European countries. And so Russia, 

whether they come, they get money from the IMF or not, seems to 

be in a position of win-win. And let’s put something here on the 

table. I was at the first election. And I read the words of Mr. 

Yushchenko and Ms. Tymoshenko and Mr. Yanukovych and others 

whose names I can’t remember. 

But I distinctly remember that Mr. Yanukovych, at that time, 

was much more inclined to work with Russia than he was with the 

United States. So is there an old Yushchenko and a new one? Is— 

Yanukovych, I mean. And that’s troubling to me. Don’t they have— 

Russia—a lot of leverage on what happens with the energy resources in Ukraine? And if you are talking oligarch to oligarch in 

the business world, then without knowing—and I don’t know anybody in Ukraine that’s a rich man or woman that is in this business and I don’t know anybody in Russia that’s a rich man or 

woman in that business—every time I’m in both the countries I 

hear about the oligarchs but I don’t ever see any or meet any—but 

I’ll bet you they meet. 
22 

And therein lies the rub. How do you get crooks to not be crooked 

when they’re making a lot of money? And what role, Mr. A ̊ slund, 

does the shadow economy play? When I’m down in the train system 

in Kyiv, I can see—just like if I walk over here in Anacostia—I can 

see that shadow economy at work. And I’m not decrying it. Americans don’t quite understand that a large part of the underpinning 

of this country is a shadow economy and if it didn’t exist, we’d be 

in worse shape than we are now. For some strange reason, folk 

don’t seem to want to accept that. But you come go with me to Pentagon City and I’ll show you people—today—that are buying expensive garments and perfume and what have you that don’t have no 

job nowhere. And didn’t get it from welfare either. 

So it’s a strange environment that we live in, in this world. I’m 

sorry. Perhaps, Dr. A ̊ slund, not to keep you on the spot—put those 

in the catalogue and then come back and talk to me about it and 

I’ll go to Mr. Wilson and maybe along in the same vein. When we 

talk about reliable partners in energy—how are you going to be a 

reliable partner when somebody else has all of this leverage over 

you? And let’s put something else on the table. While there’s an extraordinary Ukraine diaspora here in the United States and elsewhere in the world, there are more Russians in Crimea or Russiansympathizing people in Crimea than all of the diaspora combined. 

So while it may very well be true that Russia did not defeat 

Yushchenko, the turnout in Crimea suggest to me that Russia may 

have helped Yanukovych. We do it on the straight up, with nice 

words and narratives but there was some evidence and talk on the 

streets of Russia’s influence in the last election. And I don’t decry 

that. We have our nonprofit organizations that work in an effort 

to try and make a difference for human rights and transparency 

and all of the rule of law and those fine things that we say and 

the other people just put money on the ground and get it done. I 

don’t know whether there’s anything for you to respond to. I think 

you and I are in thorough agreement about people-to-people exchanges. But how about you, Dr. Wilson? 

Mr. WILSON. Sir, I will certainly pick up on a few of those points. 

There are—I mean, Russian-speakers play a major role in Ukraine 

and Ukrainian politics. But these Russian-speakers are citizens of 

Ukraine and have loyalty to Ukraine and are part of building a future of Ukraine. If Ukraine is to succeed, it has to have a role 

where the Russian-speakers in the east feel a part of that future. 

Mr. HASTINGS. Agree. 

Mr. WILSON. That is one of the areas where Yanukovych can potentially make progress. The problem is when leaders in Moscow 

look to manipulate and use Russian-speaking populations to advance their own interests in other countries. That’s dangerous. 

That’s interfering in the internal affairs of Ukraine. 

Mr. HASTINGS. And we see that in Lithuania and Latvia—— 

Mr. WILSON. That’s right, that’s right. And part of it—— 

Mr. HASTINGS [continuing.] Slovakia and Slovenia. 

Mr. WILSON [continuing.] Is soft influence through the power of 

Russian language media. So many of these folks getting their 

media out of Moscow. And part of it’s more concerning where 

there’re reports of folks acquiring Russian passports that provide 

a bit more of a pretense. This was the pretense that the Russians 
23 

used in South Ossetia, Abkhazia—the protection of Russian citizens there—which was, frankly, a fabricated pretense. And I think 

that’s something to keep an eye on. You asked a little bit about 

Yanukovych’s disposition. And I think in 2004, 2005, it was essentially fair to say he was a pro-Russian candidate. He was backed 

by the Kremlin in that election. I think it’s a little bit more 

nuanced now. And I think he certainly has adopted a much softer 

position toward Russia. He wants to pursue positive relations. 

But he hasn’t turned his back on Europe. He has pressed back 

on a NATO agenda, very clearly so. And that obviously pleases 

many in Moscow. But I think once you become President of 

Ukraine, it’s, kind of, nice to be President of an independent, sovereign country. And I would hope that this position of responsibility would make him think more about the benefits to Ukraine 

of an independent streak, of an independent decisionmaking process. So while I don’t decry an effort to develop a manageable relationship with Moscow, I think it is important that there not be 

early concessions just for the sake of it. 

Mr. HASTINGS. Yeah, on the people-to-people exchange kind of 

thing, obviously, an American President cannot do everything. But 

it would seem to me—the Vice President has visited Ukraine. But 

I’m wondering and if I were President of the United States, I certainly would invite Yanukovych to come to the United States. And 

I think that that would be, singularly, just a Presidential visit 

would be particularly important in these times. 

I don’t know whether the administration is thinking along those 

lines or whether anything is planned but I see all sorts of Presidents come through here and I guess because of involvement in Europe, I have the attitude that I do, but if you’re going—when you 

talk about, now he’s President and it’s an important thing to be 

President, then you have to give him the feeling of being President. 

And what better way could that be expressed than to have him 

come for a visit with the United States? And I’ll make that recommendation to the administration. 

Mr. WILSON. That’s absolutely right. I concur with that. And I 

think President Yanukovych has been to Brussels, he’s been to 

Moscow and he’s planning to visit Washington as part of the nuclear security summit which President Obama will host in April. 

That’s good because it gets him here to Washington at an early 

stage. It’s a bit of a distracted platform because there will be a lot 

of foreign leaders here at the time. So I think it’s important to 

think about how to maximize the impact of that particular visit. 

But then also, how to follow that up because he will be overshadowed by many other leaders. I don’t want to downplay the importance of it, but the power of having Ukrainians come to Washington regularly, come to the United States regularly—but also, 

even more importantly, it is very important for the United States 

to be present in Ukraine. It would be terrific to see President 

Obama make a trip to Ukraine in his first term. We’ve had the 

Vice President there, we’ve had the national security advisor. Secretary Clinton would be a natural followup. 

President Yanukovych and President Medvedev have already 

agreed to, I think, three more meetings this year. They’re neighbors. That’s natural. They’re close. But it’s important for us to re-
24 

member that we do need to be in the game. And that requires— 

that’s why your trips, your frequent trips to Kyiv, have mattered 

so much. We need to have senior Americans showing up in 

Ukraine, engaging their interlocutors, keeping these issues on the 

agenda, cajoling, pressing but also exchanging information, 

strengthening the ties here because they will be having that on a 

very frequent basis with their Russian allies. 

Mr. HASTINGS. I hear you. Dr. A ̊ slund, I left all those questions 

out there but I’m sure you have lots of answers for those questions 

and you’ll have the last word for us. 

Mr. A ̊ SLUND. Thank you very much. Were very good questions, 

Mr. Chairman. If I start with Russia—of course, Russia has an interest in selling gas to Ukraine and now it’s spoiling that market. 

Until 2008, Ukraine was actually the biggest purchaser of Russian 

gas in the quantity. Now, with energy saving, Ukraine could stop 

importing gas within a few years. Russia should understand that 

that is not in their interest. The biggest impact we see of Russian 

business in Ukraine is direct investment. 

The two biggest outside investors in Ukraine are Russian businessmen who were actually born in Ukraine but now live in Moscow. And I think that this is a normal thing and we are also seeing 

that the people who invest in the worst depression are big Russian 

businessmen, because they are used to handle risk and are not 

afraid of it. In particular, the big Russian banks are now expanding 

fast in Ukraine. How does one make crooks honest? First, it’s much 

better that they own companies because when they defend their 

companies against criminal practices rather than extort from other 

enterprises and second, it’s good if they get integrated into the outside world. 

The people who make initial public offerings selling their stocks 

abroad, they clean up the companies first, they bring in international auditing companies and make the companies more transparent. One of the cleanest sectors is actually the banking sector 

because 40 percent of the banks are now owned by foreign banks— 

mainly European banks but also Citi runs a good bank in Ukraine. 

About the shadow economy, I share your sympathy because the 

shadow economy is to considerable extent small private plots. Each 

Ukrainian family has a private plot. If they are doing badly, they 

live on subsistence agriculture because they have enough land so 

that they can live on the land if necessary. And this is a quite important social safety net which is the explanation why the social 

crisis has not been worse in this very bad economic downturn. 

Thank you. 
25 

Mr. HASTINGS. Right, all right. I thank you both so very much 

and also the previous witness. And I can assure you that at the 

Commission that we will keep our interest level high as we proceed 

and I will try to persuade many of my colleagues to visit more and 

engage more and try best to gain greater understanding. Thank 

you so very much. 

Mr. A ̊ SLUND. Thank you. 

Mr. WILSON. Thank you. 

[Whereupon, at 11:28 a.m., the hearing was adjourned.] 
26 

A P P E N D I C E S 

PREPARED STATEMENT OF HON. ALCEE L. HASTINGS, 

CO-CHAIRMAN, COMMISSION ON SECURITY AND COOPERATION IN EUROPE 

Thank you, Mr. Chairman, for holding this important and timely 

hearing. I had the privilege to serve as the Deputy Head of the 

OSCE Parliamentary Assembly election mission to Ukraine during 

the first round, January 17th elections. Judging by my personal experience and those of my OSCE colleagues in both rounds, these 

elections were largely free and democratic. This does not mean they 

were perfect. There were some problems stemming largely from the 

inadequate and confusing electoral framework. So there is no doubt 

that these laws need fixing before the next elections. 

The ultimate victors in this election are the Ukrainian people. 

This is not something we should take for granted—regardless of 

whether or not one liked the outcome. To some Western observers, 

this may seem odd, but the fact these election results were not preordained is a success in itself. The fact that voters do not know 

who will win a race is a new and rare concept in the region and 

puts Ukraine in stark contrast with some of its neighbors. 

The world was enamored with the 2004 Orange Revolution, 

which brought millions of Ukrainians into the streets to peacefully 

protest election fraud, corruption and lack of rule of law. Since 

then, Ukraine has developed an open and pluralistic political system and media freedoms have expanded. Although Ukraine has 

had good elections now for the last five years—and I’ve had the opportunity to lead or otherwise contribute to three OSCE election 

missions to Ukraine during that time—I can tell you that you need 

more than good elections to make a functioning democracy. 

Unfortunately, despite the progress, Ukraine has also witnessed 

poor governance, destructive infighting and political instability—in 

part due to no clear delineation of powers between the offices of 

prime minister and president. President Yanukovych, along with 

the just-appointed Prime Minister, Mykola Azarov, will need to seriously address long-standing problems that undermine Ukraine’s 

potential, including corruption and the lack of an independent judiciary, which is a key underpinning for the rule of law. 

Ukraine’s leadership also needs to reform and make more transparent the troubled energy sector as well as a plethora of issues involving Crimea, be it the Black Sea Fleet, Russian influence, or 

inter-ethnic challenges, especially the plight of the Crimean Tatars. 

Ukraine must vigorously fight hate crimes. Ukraine has been especially hard-hit by the global financial crisis. Unfulfilled promises of 

the Orange Revolution led to disappointment and cynicism in 

Ukraine, as well as frustration among Ukraine’s supporters in the 

United States and Europe. Obviously, the Ukrainian leadership’s 

work is cut out for them. 

President Yanukovych desires to improve relations with Russia 

and is certainly more oriented in that direction than his predecessor, but I don’t believe would cede Ukraine back to a bygone era, 

and judging from his initial statements and visits, he clearly sees 
27 

integration into the European Union as a priority. At the same 

time, he appears to value the benefits of a continued, strong relationship with the United States. 

The United States has a solid record of standing with the 

Ukrainian people over the decades in support of their struggle for 

freedom and democracy. I look forward to hearing from our witnesses as to how we can maintain and strengthen our partnership 

with Ukraine. 
28 

PREPARED STATEMENT OF DANIEL A. RUSSELL, DEPUTY 

ASSISTANT SECRETARY OF STATE FOR EUROPEAN AND 

EURASIAN AFFAIRS 

Chairman Cardin, Co-Chairman Hastings, Members of the Commission: Thank you for the invitation to discuss Ukraine and its relations with the United States in the wake of presidential elections. 

Your timing could not be better, as Ukraine’s new president took 

office last month and its new government was confirmed last week. 

WHY UKRAINE MATTERS

Let me begin by making three basic points about Ukraine and 

the recent elections before sketching out our agenda for engagement. My first point should be obvious: Ukraine matters to the 

United States and it matters to Europe. Ukraine is one of Europe’s 

largest states, roughly the size of France with 45 million people. It 

serves as a transit route though which nearly a quarter of Europe’s 

gas imports flow, and it could become self sufficient in energy, were 

its natural resources to be fully developed. Ukraine has tremendous potential. It could become a net contributor to global food security; its rich black soil produced over one-quarter of the Soviet 

Union’s agricultural output. Ukraine can also serve as an example 

in a critical region. It has shown leadership on the world stage, giving up its nuclear weapons to become a non-nuclear state and contributing to security and peacekeeping operations from the Balkans 

to Iraq. And Ukraine’s highly educated workforce is probably now 

more connected with Europeans and Americans through business, 

travel and education than ever before. Cell phones outnumber 

Ukrainians; about one-quarter of the population is on-line; and 

Ukrainians are travelling abroad in record numbers. 

My second point is about Ukraine’s leadership in democracy in 

the region, a role aptly illustrated by the conduct of its presidential 

elections in January and February. Taken together, the two rounds 

of voting received an overwhelmingly positive assessment by international observers. Among those observers were Congressman 

Hastings and Helsinki Commission staff members, and I would like 

to recognize their contribution to the OSCE Parliamentary Assembly’s election observer mission. The OSCE concluded that the presidential election showed significant progress over previous elections, 

and met most OSCE and Council of Europe commitments. The 

open, competitive election demonstrated respect for civil and political rights and offered voters a genuine choice among candidates 

representing diverse political viewpoints. Candidates were able to 

campaign freely, and the campaign period was generally calm and 

orderly. The U.S. Senate, in fact, recognized the progress represented by this election with its passage of Resolution 422. 

My third point is that the 2010 presidential election may have 

been a defeat for the Orange Revolution’s leaders, but not for the 

Orange Revolution. The peaceful expression of the political will of 

Ukrainian voters should be viewed as another step in strengthening democracy in Ukraine. Ukraine has undergone rapid—and, I 

would suggest—irreversible, democratic change, and Ukrainians 

should take pride in what they have achieved. During the presidential campaign, Ukraine’s vibrant body politic and free press dis-
29 

cussed and debated the poor governance and chronic political infighting that has plagued the country. Ukraine’s economy contracted 15% in 2009, one of the worst economic performances in the 

world. Voters, with access to independent information and the candidates’ views, made up their own minds and turned out—and 

turnout exceeded 65% in each roundvote out the incumbents. 

The post-election transfer of power has been orderly. After the 

votes were counted and certified, President Yushchenko stepped 

down and Viktor Yanukovych took the oath of office in the parliament as Ukraine’s fourth president since independence. Prime 

Minister Tymoshenko initially challenged the results in court but 

later withdrew her case. She left office after a vote of no-confidence 

and President Yanukovych set about assembling a parliamentary 

majority coalition. When formation of a coalition appeared unlikely, 

threatening stalemate or early elections, Yanukovych and his Party 

of Regions sought and won passage of a new law that allows coalition formation based on votes not only of political parties but also 

independent deputies. On that basis, Prime Minister Mykola 

Azarov and his cabinet were confirmed last week. The opposition 

questioned the new law’s constitutionality. We were pleased to see 

that the Party of Regions itself took the initiative to ask the Constitutional Court to review the law and pledged to abide by the 

court’s decision. If the court rules against the new procedure, we 

expect the Party of Regions will seek to form a new coalition consistent with whatever the Court decides or seek early parliamentary elections. 

Ukraine’s democracy is a work in progress. The electoral process 

is contentious but as Vice President Biden told a Ukrainian audience when we visited Kyiv last July: ‘‘to those cynics who have asserted for centuries that this part of the world could never practice 

democracy because its culture and values are different, Ukraine 

today stands as resolute rebuttal . . .’’ 

With the election behind him, President Yanukovych now faces 

the challenge of governing. Obviously, he and his new team need 

time to organize themselves and put policies and programs in 

place, but some key elements of his approach are already obvious. 

Economy recovery will rightly be the Yanukovych Presidency’s top 

priority, and he has inherited a difficult situation at a difficult moment. Sound leadership and tough measures will be needed if he 

is to succeed. With regard to foreign policy, President Yanukovych 

has been quite clear. He says he wants to continue Ukraine’s strategic partnership with the United States, improve relations with 

Russia, and pursue integration with the European Union. President Yanukovych made his first trip abroad to Brussels, his second 

to Moscow, and he has been invited to Washington to attend the 

President’s Nuclear Security Summit in April. Let me add that the 

United States enjoyed a productive working relationship with 

Ukraine and with Mr. Yanukovych during his two previous tenures 

as prime minister. 

U.S.-UKRAINE STRATEGIC PARTNERSHIP

As we look ahead to engagement with President Yanukovych and 

his new team, it is worth reviewing the underlying premises of our 

U.S. policy toward Ukraine. Simply put, the United States will not 
30 

waiver in its support for a strong and independent Ukraine. We 

want to see Ukraine succeed; our vision for Ukraine is the vision 

Ukrainians have for themselves—a democratic and prosperous European nation with an effective and accountable government. 

Charting the course for Ukraine is, of course, a decision to be made 

by Ukrainians and their elected leaders. President Obama, in his 

speech in Moscow last July said, and I quote, ‘‘State sovereignty 

must be a cornerstone of international order. Just as all states 

should have the right to choose their leaders, states must have the 

right to borders that are secure, and to their own foreign policies. 

Any system that cedes those rights will lead to anarchy. That is 

why this principle must apply to all nations, including . . . 

Ukraine . . . .’’ 

There has been speculation over the past year that the Obama 

Administration’s efforts to improve ties with Russia would somehow threaten our relationship with Ukraine. This was not and is 

not correct. As we reset relations with Russia, we have reaffirmed 

our commitment to the sovereignty and territorial integrity of 

Ukraine and its neighbors. We do not believe that a partnership 

with one country must come at the expense of another. The United 

States, in fact, joined Russia last December in re-affirming the security assurances provided Ukraine in the 1994 Budapest Memorandum. Our larger goal is to encourage the transition to a multipartner world, in which like-minded nations can make common 

cause on our common concerns—the stronger our partners, the 

more effective our partnerships. A strong and independent Ukraine 

is good for Russia, good for the region and good for the world. 

There also has been speculation about Ukraine’s relationship 

with NATO during a Yanukovych presidency. Let me be clear that 

the United States continues to support Ukraine’s deepening ties to 

NATO and to the European Union. But again, these are decisions 

to be made by Ukrainians and their elected leaders. We recognize 

that how far and how fast to proceed will be a Ukrainian choice. 

President Yanukovych has said that he would continue programs 

of cooperation with NATO at existing levels but NATO membership 

was not on his agenda. We respect that choice and want Ukrainians to know that NATO’s door remains open. 

Because of the importance that we attach to our relationship 

with Ukraine, once the Central Election Commission had announced the full electronic results of the presidential election, 

President Obama was among the first world leaders to congratulate 

Viktor Yanukovych on his victory. The President wished Mr. 

Yanukovych success in carrying out his mandate and commended 

the Ukrainian people on the conduct of the vote. National Security 

Advisor General Jones subsequently led the U.S. delegation to the 

presidential inauguration, where he had a chance to meet not only 

with Ukraine’s newly elected President, but Prime Minister 

Tymoshenko. Mrs. Tymoshenko will be one of the leaders of the opposition in parliament and we will continue our longstanding relationship with her in that new role. We also plan to work closely 

with leaders on the political scene, among them Member of Parliament Arseniy Yatsenyuk and Deputy Prime Minister Sergey 

Tigipko. The development of new democratic leaders is important 

for all parties in Ukraine. 
31 

Let me underscore that U.S. policy toward Ukraine will continue 

to focus on strengthening the strategic partnership between our 

two countries. The specifics of our engagement and cooperation 

with Ukraine will continue to be guided by the U.S.-Ukraine Charter on Strategic Partnership. The charter highlights the importance 

of our bilateral relationship and outlines enhanced cooperation 

across a broad spectrum of mutual priorities including economics, 

trade and energy; defense and security; strengthening democracy; 

and people-to-people and cultural exchanges. During Vice President 

Biden’s trip to Kyiv last July, the U.S.-Ukraine Strategic Partnership Commission was established in order to advance the objectives 

of the charter. The commission now includes six autonomous working groups and met in Washington in December. We look forward 

to its next session in Kyiv. 

Our commitment to Ukraine is evidenced by our assistance pro- gram—$123 million in FY2010. The goals of our assistance are to 

bolster peace and security, strengthen democratic institutions, promote economic growth and energy efficiency, enhance security and 

non-proliferation, secure Chernobyl, fight AIDS and HIV, and improve child health. 

U.S. POLICY PRIORITIES

In the spirit of our strategic partnership with Ukraine, I would 

like to suggest five policy priorities, beyond traditional foreign policy cooperation, that should be high on our shared agenda with the 

Yanukovych Presidency: 

First, the United States is committed to policies that contribute 

to a democratic and prosperous Ukraine and stands ready to help 

Ukraine reach agreement with the International Monetary Fund as 

soon as possible. The path to recovery and renewed prosperity runs 

through the IMF, which can help offer Ukraine a way out of the 

current crisis and open the door to lending from other international 

financial institutions and the European Union. That will require 

resolute leadership and hard decisions to undertake the critical reforms needed to cut the budget deficit, revive the banking system 

and phase out energy subsidies. 

A second equally important policy area for Ukraine’s long-term 

prosperity and economic freedom is energy sector reform. A gas sector based on transparency, competition, realistic pricing, and more 

energy-efficient gas distribution and consumption will be key, and 

the United States is coordinating closely with the European Union 

on this issue. Ukraine uses energy three times less efficiently than 

the EU average; the country consumes 50-60% more gas than it 

should. The United States is helping with a three-year pilot program designed to increase energy conservation and efficiency at the 

municipal level. 

Third, the United States is ready to work to strengthen the business side of U.S.-Ukraine relations, which is weaker than we would 

like it to be. The United States remains Ukraine’s 8th largest foreign investor, with $1.4 billion in foreign direct investment. We 

welcome President Yanukovych’s remarks in favor of creating incentives for investors, such as lowering taxes and reducing red 

tape. Our business community tells us that much remains to be 

done to make Ukraine more attractive to investors, from tax code 
32 

reform to increased transparency, from greater rule of law protection to serious action against corruption. The payment of VAT refunds would be a big step forward. One area where the U.S. private 

sector could do more is in Ukraine’s nuclear power industry. 

A fourth area of cooperation lies in nuclear security. The United 

States and Ukraine must continue to work together to reduce the 

threat of the spread of nuclear materials and technology to dangerous regimes or terrorist groups, while safeguarding the peaceful 

uses of nuclear energy. We look forward to building on our successful record on non-proliferation at the upcoming Nuclear Security 

Summit. Thanks to the leadership of Senator Lugar and former 

Senator Nunn, we can point to vital cooperation between Ukraine 

and the United States that has made the world safer. We recognize 

Ukraine’s importance as a partner in the Global Initiative to Combat Nuclear Terrorism, which brings our experience and expertise 

together with those of over 70 other countries to fight nuclear terrorism. 

Finally, the United States wishes to strengthen bilateral security 

and defense cooperation, which is an essential component of our 

strategic partnership. We are grateful to Ukraine for its contributions to international security. As part of this effort, we hope that 

Ukrainian parliament will pass legislation to allow joint military 

exercises on its territory this year in order to facilitate mutually 

beneficial military training activities. With regard to NATO, we 

look forward to cooperating with Ukraine to meet its objectives in 

the NATO-Ukraine Commission and in its Annual National Program, regardless of Ukraine’s intentions regarding membership. 

CONCLUSION

While the challenges in U.S.-Ukrainian relations are complex 

and demanding, I remain optimistic about the possibilities before 

us. It is important to both nations and both peoples to get U.S.- 

Ukraine relations right. We have a chance, at the beginning of a 

new presidency in Kyiv, to redouble our efforts. Let’s ensure that 

Ukrainians and Americans, both in and outside of government, 

make the most of that chance. 

Thank you. And I will be happy to answer your questions. 
33 

PREPARED STATEMENT OF DAMON WILSON, VICE PRESIDENT 

AND DIRECTOR OF THE INTERNATIONAL SECURITY 

PROGRAM, ATLANTIC COUNCIL 

Mister Chairman, Mister Co-Chairman, Members of the Commission, I am honored to speak before you today about our relationship 

with Ukraine. 

My perspective on Ukraine stems from years observing and developing U.S. policy toward Ukraine. Most relevant to this hearing, 

I served as Special Assistant to the President and Senior Director 

for European Affairs at the National Security Council in the runup to the NATO Bucharest Summit during which the Alliance debated a Membership Action Plan for Ukraine. I also served as the 

NSC Director for Central, Eastern and Northern European Affairs, 

responsible for coordinating policy toward Ukraine in advance of 

the 2004 presidential election, during the Orange Revolution and 

during the first years of the Yushchenko presidency. My prior experience with Ukraine related to my work at NATO, where I served 

as Deputy Director of the Private Office of Secretary General Lord 

Robertson, as well as my work on NATO policy within the Department of State. I continue to follow Ukraine at the Atlantic Council. 

Today, I would like to underscore why the issue of Ukraine 

should matter in Washington, outline some key benchmarks 

against which to judge the foreign and security policy of Ukraine’s 

new president and government, and offer some recommendations 

for U.S. policy. 

PROGRESS YET DISAPPOINTMENT

I believe it is important to begin our discussion by stressing that 

we should not underestimate what has happened in Ukraine this 

year. On January 17, Ukrainian authorities conducted a successful 

first round of the presidential election. Three weeks later, there 

was a very close run-off. Nearly 70% of Ukrainian voters turned 

out for each round. Domestic and international observers validated 

that the election met key standards. Protests were lodged using 

legal procedures. On February 25, a peaceful transfer of power occurred. 

This election is a victory for the consolidation of democracy in 

Ukraine (even if the maneuvers in the Rada required to bring a Regions-led government to office stretched parliamentary practice). 

Nonetheless, many of Ukraine’s greatest supporters, including 

myself, remain disappointed. Why? 

First, a good election does not necessarily translate into good 

governance. While Ukrainians have developed a track record on 

free and fair elections, their representatives have not yet demonstrated a track record of performance—a dynamic which over 

time risks undermining support for democracy in Ukraine. 

Second, many observers are disappointed because we were 

buoyed by the vision Orange Revolution leaders offered of a democratic, free-market Ukraine firmly anchored in the West. We believed that there was a genuine opportunity to ensure that this vision was not just a long-term goal, but a realistic prospect. As 

Ukraine’s partners, we responded rapidly to help consolidate this 

vision by acting to lift Jackson-Vanik restrictions, provide Market 
34 

Economy Status, conclude World Trade Organization (WTO) negotiations, offer a Millennium Challenge Compact to combat corruption, and support closer ties to both NATO and the European 

Union (EU). And yet President Yushchenko and successive Ukrainian governments were not in a position to deliver on their end because of their own infighting and the refusal in some cases to confront entrenched interests and battle corruption. A key window of 

opportunity closed. 

Third, we are disappointed because of the timidity in the West 

to continue to support Ukraine. Indeed, at best, there is much talk 

of Ukraine fatigue. At worst, there is a growing acceptance that active support of Ukraine is considered provocative in Moscow. 

President Yanukovych assumes the presidency in an atmosphere 

of pragmatism. And a sober assessment of Ukraine’s prospects is 

appropriate. However, the vision of Ukraine in Europe remains important as it remains a motivator for tough policy decisions in 

Kyiv, as well as Brussels and Washington. We must not take this 

vision for granted. In the coming years, there is a good possibility 

that Ukraine will move further away rather than toward that vision. The most likely scenario is that Ukraine will muddle along. 

WHAT IS AT STAKE? 

Why does this matter? First, it matters for the quality of life of 

Ukrainian citizens. But it also matters geopolitically. In some 

sense, Ukraine is ‘‘untethered.’’ Its future is not certain. Its future 

is being impacted by decisions being taken today. I do not want to 

exaggerate the situation, but it is potentially a dangerous period in 

Ukraine’s history—an ancient nation, but a young state. 

The history of conflict in Europe is about uncertainty in the 

space between Germany and Russia—that is the storyline of European history and war. This would not matter if the Russia of today 

had evolved and changed to become like the Germany of today. But 

Russia has not. Last September at the Atlantic Council, Senator 

Lugar warned against ‘‘slid[ing] into . . . a very ominous potential 

crisis’’ in Ukraine. He cautioned that ‘‘our inattention . . . could be 

disastrous.’’ 

This ancient nation of Ukraine just elected only its fourth president—its James Madison, if you will. Ukraine’s statehood remains 

fragile. If Ukrainian democracy continues to succeed, and helps 

produce good governance and economic growth, it will serve as a 

powerful example in a region that desperately needs positive examples. 

And that is why Russia has a strategy which is essentially rollback. This strategy is well articulated by Russia’s leaders, including President Medvedev’s declaration of ‘‘privileged interests,’’ as 

well as in Russia’s new Security Strategy. Neither the West nor 

Ukraine has a clear strategy. 

BENCHMARKS FOR UKRAINE’S POLICY

Let me first address Ukrainian policy, as what President 

Yanukovych does will have more of an impact on Ukraine’s place 

in the world than any outside actor. As we seek to evaluate the 

kind of partner we have in President Yanukovych, we should con-
35 

sider key issues, which essentially serve as a test for Ukrainian 

foreign policy. 

• Russia. How does Kyiv manage its relations with Moscow? 

Many in the West are reassured by a Yanukovych presidency at it 

augurs a more stable, positive relationship with Moscow. But a stable and positive bilateral dynamic requires Ukraine to behave as 

and be treated as a sovereign, independent actor. Key issues on the 

agenda include whether Yanukovych maintains a non-recognition 

policy toward South Ossetia and Abkhazia and whether he opens 

the door to an extension of the Black Sea Fleet in Sevastopol. 

• Energy Security. Russian interests have been keen to gain 

control of Ukraine’s energy infrastructure. Yanukovych will have 

an opportunity to demonstrate whether he views energy as a national security issue or simply as a transactional issue. If he believes energy is a national security issue, the new government 

would pursue a serious energy efficiency strategy. 

• International Economics. The government’s handling of the 

International Monetary Fund will be an early test of its credibility. 

Similarly, does Yanukovych pursue the Russian proposal for a 

Common Economic Space in a way that negatively impacts 

Ukraine’s WTO membership or prospects for a free trade agreement with the EU? 

• Regional Relations. Does Ukraine use its regional weight to 

support the new pro-Western government in Moldova and adopt a 

constructive position regarding Transnistria? How Yanukovych 

handle ties with Belarusian leader Lukashenka and Georgian 

President Saakashvili will offer insights into the regional role 

Ukraine may play. Similarly, does Kyiv engage or neglect GUAM 

(which groups Georgia, Ukraine, Azerbaijan and Moldova) given 

Moscow’s irritation with the organization? 

• European Union. During the campaign, Yanukovych played 

up his support for Ukraine in the EU while downplaying NATO. 

In office, will he press hard to grow Ukraine’s bilateral ties to the 

EU as well as take advantage of the Eastern Partnership? A free 

trade agreement and visa liberalization are practical steps which 

would help Ukrainians be Europeans and move the country toward 

Europe. 

• Nonproliferation. Ukraine had a spotty nonproliferation 

record under then-Prime Minister Yanukovych. Will Ukraine’s 

arms sales track record continue to improve given the economic interests at stake? 

• NATO. NATO is clearly not at the top of the agenda. Nor 

should it be. But NATO-Ukraine relations do need to be on the 

agenda. Yanukovych in fact had a track record as prime minister 

of advancing NATO-Ukraine ties. So while the window has closed 

on rapid movement toward NATO, both sides should ensure there 

is substance to underpin the NATO-Ukraine Commission. As 

NATO is a demand-driven bureaucracy, the signals from Kyiv will 

determine the substance. 

I would like to make a broader point about NATO. I believe it 

is an imperative to maintain the credibility of the historic Bucharest summit decision that Ukraine will become a member of the Alliance. If we look back in 5 to 10 years, and the Bucharest decision 

is seen as hollow, there will be damaging implications for the Alli-
36 

ance’s credibility and for Ukraine. And on this point, Russia is not 

quiet; Russia’s national security strategy commits it to undermining the Bucharest commitment. 

In face of Russian opposition and genuine divisions within 

Ukraine, some have argued that we should aim for the 

‘‘Finlandization’’ of Ukraine—independent, but not part of any alliance structure. While Finland is an exemplary partner of the Alliance and a possible future member, I believe the term 

Finlandization has no utility beyond the Cold War. When applied 

to Ukraine, analysts imply big powers taking decisions about 

Ukraine’s future. I believe Ukraine must be in a position to determine its own future, including whether to pursue membership in 

any alliance. 

These issues provide benchmarks against which we can judge the 

new government. I have modest expectations, but do believe 

Yanukovych can deliver on his campaign pledge to continue moving 

Ukraine toward Europe. Yet the most important factor to achieve 

this foreign policy goal is what the government does domestically. 

Yanukovych’s reception in Western capitals will be determined by 

whether he governs effectively, protects democratic advances, stabilizes and grows the economy, and ensures Ukraine is a reliable 

energy partner. 

IMPLICATIONS FOR U.S. POLICY

In the wake of the collapse of the Berlin Wall, ‘‘Europe whole, 

free and at peace’’ was not just a vision; it was a successful policy 

leading to the consolidation of democracy in Central and Eastern 

Europe and integration of the region into Europe’s great institutions. This outcome was neither easy nor obvious. 

The same bipartisan leadership demonstrated over the past 20 

years is required today to ‘‘complete Europe’’—that is, to finish the 

unfinished business of integrating the western Balkans and Eastern Europe into the European mainstream, including ultimately 

the European Union and NATO. 

However, at present, we are missing the vision and the policy to 

extend this great success story to the south and east. 

Russia has a strategy—unfortunately, one of rollback. The West 

does not yet have a coherent strategy, although Vice President 

Biden’s trip to Kyiv last year helped lay out excellent broad principles for U.S. policy. We cannot afford to put Ukraine on the back 

burner or accept the argument that active U.S. engagement is 

somehow provocative toward Russia. We should not accept the argument that Ukraine is ‘‘messy’’ and too divided as an excuse not 

to engage. If so, we may lose Ukraine. Ukraine’s future is in play 

today. While changes in Ukraine are unlikely to be decisive in the 

next few years, the trend lines could take Ukraine further away 

rather than closer to Europe. We do not want to look back at 

Ukraine’s next election and wonder what happened. 

Mister Chairman, as part of my effort to outline a way ahead for 

U.S. policy toward Ukraine, I offer six recommendations: 

1. Be in the Game. The United States needs to be in the game. 

Ukraine is in play, and we need to engage and be present. The 

Obama Administration has sent a top-notch Ambassador, John 

Tefft, to Kyiv. The visits to Kyiv by Vice President Biden and Na-
37 

tional Security Advisor Jones, as well as President Obama’s early 

call to congratulate Yanukovych, are key steps in this effort. This 

high-level outreach should continue. 

2. Articulate a Vision. We need to recommit to building a Europe 

whole and free, energizing the bipartisan tradition behind this vision and making clear that Ukraine has a place within this vision, 

as does Russia. 

3. Maintain Funding. We need to protect our funding for transition in Ukraine, as the Freedom Support Act model of ‘‘graduation’’ 

no longer applies in Europe’s East. Higher per capita GDP does not 

necessarily translate into a democratic Ukraine anchored securely 

in Europe. 

4. Reach Beyond Leaders. Yushchenko was a failure. Yanukovych 

is unlikely to bring decisive change in Ukraine. We therefore need 

to ensure our relations with Ukraine extend beyond leaders. We 

should place emphasis on developing next generation leaders, engaging the regions, and fostering people-to-people ties. In this area, 

the European Union can lead given the prospect of visa-free travel. 

5. Push Energy Efficiency. The United States and Ukraine need 

to get serious about working with European partners to support energy efficiency in Ukraine as a national security strategy. 

6. Enhance Mil-Mil Ties. We must ensure that close military-tomilitary ties continue and are backed with funding through Foreign 

Military Financing and Foreign Military Sales. We should cultivate 

mil-mil links between Ukraine and NATO as well as with Allied 

nations. And we must push back when Russia tries to portray military cooperation with Ukraine as provocative. 

In the wake of Ukraine’s election, Yanukovych is now president 

and his party leads the government. Now is the time to move beyond stalemate. Just as much as we hold Kyiv to that standard, 

we must hold ourselves to that standard. 

Thank you, Mister Chairman, Mister Co-Chairman, and Members of the Commission. I look forward to answering your questions. 

[NOTE.—The views expressed in this testimony do not necessarily 

represent the views of the Atlantic Council.] 
38 

PREPARED STATEMENT OF ANDERS A ̊ SLUND, SENIOR 

FELLOW, PETERSON INSTITUTE FOR INTERNATIONAL 

ECONOMICS 

Mr. Chairman, 

I would like to thank you for this opportunity to speak on an important topic, will Ukraine move beyond stalemate in the sphere of 

economic reform. Geopolitically Ukraine is an important country 

that has still not found its space and its relations with the United 

States are entirely friendly. 

Ukraine must be congratulated on having carried out a series of 

free and fair elections. The country has undergone no less than 

three democratic and peaceful presidential transfers of power in 

sharp contrast to other countries in the former Soviet Union. Since 

2005 Freedom House has classified Ukraine as a free country. 

UKRAINE’S PREDICAMENT

Ukraine has established an open market economy with predominant private ownership. From 2000 to 2007, the country enjoyed an 

average economic growth of 7.5 percent, but the global financial crisis hit it hard. The economic crisis has illuminated the malfunction 

of the Ukrainian state and economy. Last year, Ukraine’s gross domestic product slumped by no less than 15 percent, one of the biggest plunges in the world. Economically, Ukraine is not performing 

up to its potential. In 2009, the International Monetary Fund 

(IMF) assessed that its GDP per capita will be as little as $2,540 

in current US dollars, placing it 110th in the world. 

Qualitative international comparisons present an even more worrisome picture. I its 2009 overview, the World Economic Forum 

ranked Ukraine 72nd among 131 countries. Ukraine is lagging behind most in three areas: institutions, macroeconomic stability, and 

goods market efficiency, while it is doing comparatively well with 

regard to education, labor market efficiency, and innovation. This 

impressive human capital does not produce as much as it could because the state malfunctions, not delivering macroeconomic stability while impeding the free operation of private enterprise. 

According to the European Bank for Reconstruction and Development, Ukraine is a relative laggard among the post-Soviet countries in terms of economic and institutional reforms. A comparative 

World Bank study in 2005 assessed that Ukraine was one of the 

post-Soviet countries with the least amount of novel market economic legislation. Since then Ukraine has adopted minimum new 

legislation, while another laggard, Georgia, has forged ahead. 

A more specialized international comparison, the World Bank 

Doing Business index, shockingly ranks Ukraine 142nd out of 183 

countries by business environment. It is particularly arduous to obtain construction permits and carry out tax payments, but it is also 

difficult to start and close a business, to register property, and to 

trade across borders. Similarly, Transparency International ranks 

Ukraine 146th out of 180 countries on its 2009 corruption perception index. 

Because of the many years of neglecting reform, tasks have in 

many ways become more difficult in Ukraine. First, legislation is 

substandard. The common statement that Ukraine has good laws 
39 

but they have not been implemented is not true. On the contrary, 

the country has few modern laws, and the quality of new legislation is generally considered unsatisfactory. Too much Soviet legislation has persisted for too long, and it permeates many new laws. 

During the many years of distorted markets, multiple vested interests have twisted many laws to their advantage. Endemic corruption has bred legislation that offers corrupt officials the opportunity 

to reap more corrupt revenue. The competence to draft laws has 

also been insufficient. 

Second, not only the legislation but also the legislative process is 

tilted to the advantage of vested interests. This process is inordinately complex and non-transparent in Ukraine. It should be 

opened up, abridged, and made more cohesive. It must be made 

easier for the ruling political forces to have legislation adopted in 

line with their design. 

Third, the government’s capacity to formulate and carry out reforms is limited. The great bureaucratization and centralization 

mean that central authorities are overwhelmed by decision making 

on all kinds of current matters, leaving them little time for reforms. Therefore, the Ministry of Finance or the Ministry of Economy can hardly lead reforms as has been the case in other countries. 

On the other hand, because many other postcommunist countries 

have already undertaken the necessary reforms, Ukraine can learn 

from their successes and failures, which renders it an advantage to 

be a laggard. 

A WINDOW OF OPPORTUNITY FOR ECONOMIC REFORM

At present, Ukraine faces an extraordinary window of opportunity. The country has both a unique political possibility and 

great economic need to launch a new wave of reform that will lay 

the foundation for sustainable economic growth. The new Ukrainian authorities need to act fast and forcefully to shore up the state. 

A presidential election offers a great opportunity for a new start. 

The new president enjoys a political mandate and parliamentary 

majority. A new government has just been formed and is ready to 

govern. But the period of ‘‘extraordinary politics,’’ when the parliament and public allow the president to act fast and radically, 

will probably be brief. 

So far, Ukraine has experienced two waves of substantial reform. 

The first reform wave started in the last quarter of 1994, after Leonid Kuchma was elected president. The second wave arose in the 

first quarter of 2000, when Kuchma was reelected and Victor 

Yushchenko became prime minister. In these two cases, reforms occurred immediately after a presidential election and in the midst 

of financial and economic crisis, underlining that Ukraine currently 

has a great chance to reform. Today, Ukraine is once again in such 

a situation. It badly needs to launch a new wave of substantial and 

comprehensive reforms. 

Seeing this situation arising last fall, I initiated and served as 

co-chairman of an Independent International Expert Commission 

on a reform program for Ukraine after the presidential elections together with Ukrainian colleagues. It was meant to be an action 

program for the first year of a new presidency. Our proposal was 
40 

endorsed by Ukraine’s prime minister last September and also the 

new administration has expressed its appreciation. Half of the commissioners we invited were Ukrainians and the other half foreigners. They were prominent experts on different aspects of reform and policy and independent of government, political parties, 

and business. The work of the Commission was financed by the 

Swedish and Netherlands Ministries for Foreign Affairs, with additional support from the United Nations Development Program. We 

have published our report ‘‘Proposals for Ukraine: 2010—Time For 

Reforms,’’ and I would like to report to you our key findings. 

REFORM PRIORITIES FOR UKRAINE IN 2010 

Mr. Chairman, 

The new presidential mandate, the shock of a recent severe economic crisis, and popular dissatisfaction with the status-quo create 

ideal conditions for successful reforms. Our three main conclusions 

are: Ukraine needs (1) new organizational capacity for reforms, and 

(2) clear prioritization of reforms, and (3) utilization of international organizations as lighthouses to guide its reforms. 

Our Commission’s first conclusion was that Ukraine needs to establish new capacity to carry out reforms that is independent of the 

agencies to be reformed. We recommend the creation of a Reform 

Commission at the Cabinet of Ministers, headed by a Deputy Prime 

Minister with overarching authority. The Reform Commission 

should have its own budget and a single goal: to design and implement reforms. Together with the European Integration Secretariat, 

it should lead Ukraine’s reforms from the Cabinet of Ministers. 

President Yanukovych formed a Reform Committee at the Presidential Administration that he chairs himself on his second day in 

office. He has also appointed a Deputy Prime Minister for Economic Reform. 

Our second conclusion was that Ukraine needs to formulate clear 

priorities for reforms. First things need to be done first. Ukraine 

must: (a) improve the effectiveness of the state, (b) achieve financial stability, (c) allow private enterprise freedom on the market, 

and (d) make social policy more effective. Our selection is based on 

experts’ views of priorities that are also politically feasible within 

one year. The new government has adopted a coalition program 

called ‘‘Stability and Reform.’’ To a considerable extent, it reflects 

the views of our commission as Ukraine benefits from a broad consensus on what needs to be done. 

The problem in Ukraine has not been what to do but who should 

do it, as far too often policymaking ends up in gridlock. Our third 

conclusion is therefore that it is necessary for Ukraine to use its 

international leverage or external guidance to break through the 

domestic logjam on reforms. The Commission has identified three 

anchors that can guide Ukraine to realize its commitment to its reforms: The IMF, the European Union and the World Bank. All 

these organizations are ready to engage with the new Ukrainian 

administration. Naturally, the United States should also engage in 

the promotion of reforms beneficial for Ukraine’s future governance 

and economic welfare. 

In the view of our commission, Ukraine’s ten top priorities for 

2010 are: 
41 

1. Carry out gas reform! 

2. Make the National Bank of Ukraine (NBU) independent! 

3. Move toward inflation targeting! 

4. Cut public expenditures! 

5. Undertake comprehensive deregulation of enterprise! 

6. Conclude a European Association Agreement! 

7. Get privatization going again! 

8. Legalize private sales of agricultural land! 

9. Adopt a Law on Public Information! 

10. Complete the modern commercial legislation! 

All these measures have been chosen on the basis that they are 

truly vital and can be implemented within one year. Some of them 

are simple, such as the legalization of private sales of agricultural 

land and the adoption of a law on public information, while others 

require some explanation. 

The top priority is to reform the gas sector. At present, Ukraine 

is actually subsidizing imported Russian gas to the tune of 3 percent of GDP a year. This must cease. The government needs to 

adopt a realistic energy pricing policy. All energy prices should be 

brought to the level of full cost recovery plus a profit margin for 

operators as soon as possible. The Cabinet of Ministers should develop and adopt a Concept for Liberalization of the Gas Market in 

Ukraine, which should lead to the adoption by parliament of a Law 

on Principles of the Natural Gas Market Functioning to establish 

the principles for the natural gas market so that it performs transparently and efficiently, and stimulate competition. In line with the 

EU-Ukraine Brussels Declaration on renovation of the Gas Transit 

System of March 2009, the government should develop a plan for 

renovation and modernization of the gas transit system and attract 

financing from interested international financial institutions. In 

parallel with the price hikes, the Cabinet of Ministers should introduce a new system of targeted social assistance for the least protected groups of consumers who suffer because of high gas, electricity, and coal prices. Gas reform must be an absolute condition 

for international assistance. 

In order to secure macroeconomic stability, it is essential to minimize potential conflicts between the government and the NBU. The 

independence of the NBU needs to be reinforced and its governance 

improved, as it is currently seen as being unduly influenced by 

both commercial and political forces. The NBU Council, whose role 

is unclear and is dominated by prominent business representatives 

and politicians, should be abolished in its present form, while the 

NBU chairman and his/her deputies should be given fixed terms. 

The political authorities should refrain from enacting legislation 

that impinges on NBU independence, such as proposals to finance 

various government expenditures by advancing the payment of 

NBU profits. The Ukrainian monetary policy should instead be governed by an independent Monetary Policy Committee consisting of 

independent professionals with well-defined powers and fixed 

terms. The NBU should also raise its professional quality and include prominent international expertise. A new law on the NBU reflecting these elements should be drawn up and adopted. 

Ukraine should move toward inflation targeting regime within 

the next three years, which presupposes a floating exchange rate. 
42 

The transition period should offer the NBU enough room to bring 

down inflation to the 2 to 3 percent range and provide guidance to 

the public on the future development of the exchange rate, as well 

as fostering a reduction of dollarization. In the meantime, the NBU 

should proceed expeditiously with streamlining its monetary policy 

instruments and its decision-making process. 

Ukraine needs to balance the state budget in the medium term 

by cutting public expenditures. The government should reconsider 

the obligations of the state in order to make them financially affordable. The authorities should resist any expansionary fiscal initiatives. Three public expenditures stand out as excessive: price 

subsidies, enterprise subsidies, and pension expenditures. Price 

subsidies and enterprise subsidies should be minimized, while pension expenditures need to be brought under control through a profound pension reform. It appears both unrealistic and harmful to 

try to increase the level of state revenues in Ukraine. 

An overall aim must be a major improvement of the business environment, which should entail the strengthening of the legal base 

and property rights. The state’s interaction with private enterprises needs to be reduced and simplified. Starting a business currently requires ten procedures that take 27 days, according to the 

Doing Business in Ukraine report. This process should be reduced 

to one procedure: registration of the business with the tax authorities and receiving a taxpayer number. It should take only one day 

and cost nothing as is the case in New Zealand. A new law on the 

liquidation of enterprises is needed to minimize the time needed as 

well as the cost, while maximizing the recovery rate. The issuance 

of construction permits is exceedingly difficult in Ukraine. The goal 

should be to simplify the process from 30 procedures to a small 

fraction and reduce the time required from 476 days to a small 

fraction. Procedures for registering property can be reduced from 

ten to probably three. The list of economic activities subject to 

mandatory licensing should be minimized to only those that are 

dangerous to human health and life, environment, or national security. A new Law on Licensing should establish firm legal limits of 

licensing. The requirement of official permits should be reviewed 

and limited to an exclusive list of economic activities, which should 

be sanctified by law. The government should sharply reduce the 

number of agencies entitled to undertake inspections as well as 

slash the number of legitimate reasons for inspections to the safeguarding life and health. 

All these measures can be implemented within one year. The 

IMF will play a central role in implementing the gas reform and 

the macroeconomic policies in return for a two-year standby agreement with substantial financing. The European Union is currently 

negotiating a substantial association agreement including a comprehensive and deep free trade agreement. The EU is also deeply 

involved in the gas reform. 

The United States plays a key role in the IMF as its biggest 

shareholder, and it should also engage in the gas reform which will 

be crucial not only for state finances and energy efficiency but also 

for the improvement of governance in Ukraine. The United States 

has a major interest in the economic success of a democratic and 

friendly Ukraine. 
43 

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

THE UNITED STATES OF AMERICA 

Dear Chairman Cardin, 

Dear Co-chairman Hastings, 

Distinguished Members of the Commission 

Let me start with expressing appreciation of the very important 

work that is being done by the US Congress Commission on Security and Cooperation in Europe. We value your consistent support 

of Ukraine in her efforts to pursue the path of democratic reforms 

and play an active role as contributor to regional and European security. 

Ukrainian presidential election that took place earlier this year 

should be viewed within the context of the developments that had 

been taking place in this country since 2005. In spite of considerable political turbulence and recent acute economic problems, this 

period has been characterized by further development of democratic 

institutions, strengthening civil society and freedom of speech, 

emergence of the political culture free from intimidation and harassment of opponents. 

Thus, Ukraine has made substantial gains in her democratic evolution. It was this environment and Ukrainian people’s strong commitment to democracy that enabled the conduct of free and transparent parliamentary elections in 2006 and 2007 as well as the last 

Presidential election. H. Tagliavini, Head of the OSCE ODIHR observation mission concluded that this was ‘‘a well-administered and 

truly competitive election offering voters a clear choice’’. We highly 

appreciate the fact that Co-chairman Hastings visited Ukraine as 

a Deputy Head of the OSCE Parliamentary Assembly election observation mission. 

New President and a newly formed Government of Ukraine are 

facing a number of serious challenges. First and foremost they are 

related to the pressing need to overcome the consequences of the 

crisis that has hit Ukrainian economy. It is quite clear that this 

goal cannot be achieved without a series of immediate steps (the 

Government has already started the work on the new, realistic 

budget) and systemic reforms aimed at rehabilitation and improvement of national finances, overhaul of the energy sector, including 

the emphasis on energy saving and energy efficiency, large-scale 

modernization of Ukraine’s industrial base following innovation 

model of development, amelioration of investment climate, reduction of fiscal pressure. 

President Yanukovych stated his determination to carry out 

structural economic reforms and get Ukrainian economy firmly 

back on track. He called for the diminishing of the Government’s 

interference into economy and introduction of clear and constant 

rules governing relationship between the State and the private sector, reforms of pension and health care systems. By one of his first 

decrees he has established the Committee on Economic Reforms. It 

will serve as an advisory body to the President focusing on devising 

the overall reform strategy and the most urgent economic measures, elaboration of the corresponding implementation mechanisms. 

The President and the Government have also indicated their 

willingness to resume active cooperation with all international fi-
44 

nancial institutions, including IMF in the framework of the standby arrangement for Ukraine. 

Another set of pressing problems is defined by the need to improve the system of governance, eliminate causes of frequent conflicts between different branches of power that have led to the political gridlock. In his inaugural speech new President of Ukraine 

stressed that ensuring domestic stability and overcoming corruption were at the top of his policy priorities list. Both objectives cannot be achieved without reforming the system of state management 

and raising its efficiency, that include constitutional and judicial 

reforms, ensuring true independence of the judiciary. 

In the field of foreign policy, during his meetings in Brussels 

with EU leadership President Yanukovych underscored that European integration is a key goal for Ukraine. He believes that the 

policy of European integration provides Ukraine with a strategy of 

societal reforms, and as such it can become a powerful factor uniting all Ukrainians. 

Main efforts of Ukrainian diplomacy in relations with the European Union are now concentrated on finalizing negotiations process 

on the agreement on association and creation of the free trade area, 

introduction of the visa-free regime and cooperation in mitigating 

the consequences of the financial and economic crisis in Ukraine. 

It should be noted that creation of a comprehensive free-trade 

area will enable Ukraine’s gradual integration into the EU internal 

market and open up new investment opportunities for the European business in Ukraine, while Association Agreement as a whole 

will mark a qualitative step forward in Ukraine’s cooperation with 

European institutions. Ukraine is also ready for the constructive 

interaction with the European Union through the EU’s Eastern 

Partnership initiative. 

In our quest for European integration we have been encouraged 

by the recent resolution of the European Parliament that for the 

first time has recognized that ‘‘Ukraine is a European state and, 

pursuant to Article 49 of the Treaty on European Union, may apply 

for membership of the EU like any European state that adheres to 

the principles of liberty, democracy, respect for human rights and 

fundamental freedoms, and the rule of law’’. 

Substantial attention of the new state leadership will be drawn 

to the development of friendly, mutually beneficial and pragmatic 

relations between Ukraine and the Russian Federation in all 

spheres, including the sphere of energy. Ukraine will tackle energy 

issues proceeding from her possibilities and national interests. 

There is no doubt that relations with the United States will remain in the centre of the foreign policy of Ukraine. In the course 

of the telephone conversation of 11 February 2010 Presidents 

Yanukovych and Obama confirmed their mutual willingness to promote further development of Ukraine-USA relations on the basis of 

the Charter on Strategic Partnership. Signed in December 2008 the 

Charter states the intention of our nations to deepen our partnership and expand our cooperation across a broad spectrum of mutual priorities in the economic, political, diplomatic, cultural, and 

security fields. We are proud that our partnership is a relationship 

of two democracies based on shared values and interests. 
45 

Ukraine is ready to enhance positive dynamic acquired by bi-lateral cooperation in the course of the previous period. First of all, 

we are looking forward to intensification of our political dialogue, 

especially to organizing the meeting at the highest level. We also 

expect productive outcome from the forthcoming sessions of the 

major bilateral bodies—Commission on Strategic Partnership, 

Working Groups on energy security, non-proliferation and export 

control, science, technology and education, consular issues, Defense 

Consultations and Council on Trade and Investment. We hope that 

they will widen the scope of practical, mutually advantageous 

projects to be implemented by our two countries. 

Ukraine, having voluntarily relinquished the third largest nuclear arsenal in the world, continues to play a constructive role in 

safeguarding global non-proliferation regime. Let me use this opportunity to reiterate our support for the US efforts in the field. We 

share the goals of the Prague initiative of President Obama, and 

will continue to work together with the USA and other nations to 

make future Nuclear Security Summit in Washington a success. 

Æ 


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