COMMUNICATION FROM THE COMMISSION TO THE COUNCIL - Action Plan for Ukraine
Date: 1996-11-20
Institutions: European Commission
Subjects: EU aid, EU relations, Ukraine, action programme, cooperation policy

COMMISSION  OF THE  EUROPEAN  COMMUNITIES 

Brussels,  20.11.1996 
COM(96)  593  final 

COMMUNICATION  FROM  THE  COMMISSION  TO THE  COUNCIL 

Action Plan for Ukraine 

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COMMUNICATION  FROM THE COMMISSION  TO THE COUNCIL 

Subject:  Action Plan for Ukraine 

This document  addresses two complementary objectives  :  giving The Ukraine authorities a 
strengthened  political  signal  of  support  from  the  EU  and  exploring  the  means  for  an 
improved  development  of  the  existing  assistance  and  the  synergetic  ties  between  the 
Community and the Member States in this area. 

1.  The  political  signal  is  in  response  to  a  request  from  the  Ukraine  authorities.  This 
request comprises, first, a short-term aspect  :  to receive visible support from  the EU. Over 
the  longer  term,  it  is  a  matter  for  the  EU  to  take  note  of  the  request  from  the  Ukraine 
authorities  to  secure  a  firmer  anchorage  in  the  European  structures  and  possibly 
membership in the EU. 

Confronted  by  serious  challenges  in  consolidating  its  independence  and  in  its  integration 
into  the  world  economic  market,  Ukraine  has  achieved  substantial  advances  particularly 
since October  1994.  It now finds itself, as it were, standing at a crossing point of a river, in 
having  established  the  basis  of  a  democracy,  achieved  a  true  macro-economic  stability, 
initiated  the  transformation  of  its  economy  and  found  a  position  in  the  international 
community.  It  is now facing  perhaps the most  difficult  stage of its economic  and  political 
transformation  :  the  restructuring  of  its  industry  and  energy  base,  the  implementation  of 
the  rule  of law  and  of a democratic  society  and  the  strengthening  of the  parameters  of  its 
independence, particularly the lifting  of the Russian yoke. 

The results  obtained  are to  be  credited  to  the  courageous  and  determined  policy  followed 
since  the  election  of  President  Kuchma  in  1994,  and  also  to  the  resolute  support  of  the 
international  community,  particularly the EU  and the United  States.  This support  must be 
maintained  and developed  in response to the request  of the Ukraine  authorities  and  should 
accompany a deeper transformation  of the economy and of society. 

The  political  question  posed  by  Ukraine  about  its  place  in  Europe  cannot  be  given  a 
definitive  response  here.  Rather,  it is suggested  that  this leads to  consideration  within  the 
framework of the Community  and of the Common  Foreign and  Security Policy  (CFSP)  of 
the type of relationship  to  be established  with  a country that  is near to the EU,  one that is 
important in terms of trade and security. 

2. The development  of European  assistance:  this document  attempts to  assess what has 
been  accomplished  and  to  highlight  both  the  strong  and  the  vulnerable  points  of  Ukraine 
after  five  years  of  independence.  On  the  basis  of  this  assessment,  it  proposes  six 
approaches for action for the Community and its Member States : 

- 
- 
- 

- 

support for the reform  of the economy; 
social  transformation; 
introduction of Ukraine into the European security architecture and the strengthening of 
the political dialogue; 
support in regional  cooperation; 

1 

- 
- 

the deepening of contractual  relationships; 
the reform  of the energy sector. 

The short-term  priority  measures  are as follows  :  (i) the  ratification  of the PCA  by the 
Member  States  and  its  entry  into  effect,  (ii)  the  decision  concerning  balance  of  payments 
assistance for  1997, (Hi) the financing  and the implementation of the agreement between the 
G7, the EC  and  Ukraine  on the  closing  down  of Chernobyl,  (iv) the work  of the  working 
group  on  bilateral  trade  and  (v)  putting  in  place  an  environment  conducive  to  private 
investment in Ukraine. 

The support  for Ukraine as conceived  under the Common Position  of November  1994 is a 
collective  EU  action,  and  the PCA  is an  agreement  of  a mixed  type.  In  this  perspective, 
this  document  incorporates  the  suggestions  made  by the  Member  States  in  particularly  in 
the area of the CFSP.  Similarly, its implementation  will involve close cooperation  between 
the Community and the Member States. 

This  document,  which  is  addressed  to  the  Member  States  for  their  general  guidance 
comprises  proposals  for  concrete  action.  These  are  presented  in  the  last  section  in  the 
order  of priority  corresponding  to  the topics  discussed  in the  document.  However,  while 
the strategy of the EU towards Ukraine is uniform, the legal bases of the concrete  measures 
are diverse.  The  measures  indicated  may give rise to  (i) measures  of assistance  within  the 
competence  of  the  Community,  covered  by the  Tacis  regulation,  (ii)  measures  within  the 
competence  of the  Community  to  implement  the  Interim  Agreement,  (iii)  measures  falling 
within mixed competence to  implement the PCA when  ratified,  (iv) measures  arising under 
Titles  V  and  VT of  the  Treaty  on  European  Union,  (v)  measures  arising  within  the  sole 
competence of Member States. 

This document  has no budgetary implications  apart,  of course,  from  the Chernobyl  matter, 
the financing of which should be specified  in  1997 by G7 and from possible  macro-financial 
assistance for  1997 which will be the subject  of a Council  decision  (15% of the  amount  to 
be established must be guaranteed under the budget). 

Conclusion:  the  Commission  should  transmit  this  action  plan  to  the  Council  to  be 
incorporated,  where  appropriate,  in  the  conclusions  of  the  Dublin  European  Council  (14 
and  15 December). 

i-t 

Brussels, 20 November  1996 

Action Plan for Ukraine 

For five years Ukraine  has affirmed  its independence  and taken  up  an  appropriate  position 
for  itself  in  the  continent  of  Europe,  that  of  a  large  country  occupying  a  key  position, 
destined to one day become an immediate neighbour of the EU. It has been able to  maintain 
its cohesion, begin developing a democratic system, engage in an economic transition which 
is progressively  opening  it up to  the world  economy  and appear  on the  international  scene 
as a reliable partner, playing a stabilizing role in the region. 

These results are due to the courageous and determined  policy conducted  since the election 
of  President  Kuchma  in  1994  but  also  to  the  resolute  backing  of  the  international 
community,  notably the EU,  whose technical  and  financial  assistance  from  its whole  range 
of instruments was ECU  2.8 billion over five years  (1991-95).  US  assistance  amounted  to 
ECU  1.05  billion over that period. 

The  European  Union  has  consistently  reaffirmed  the  importance  which  it  attaches  to 
Ukraine.  The objectives, as announced in the Common Position of November  1994, are : 
the development  of a strong political  relationship,  support  for  Ukraine's  independence,  the 
development  of  democracy,  economic  reform  and  its  entry  into  the  world  economy.  The 
Union welcomes the Ukrainian  desire for rapprochement with Europe and  it intends, 
within  the  framework  of  the  European  architecture  drawn  up  by  the  Copenhagen 
European  Council,  to  develop  partnership  relations  with  Ukraine.  The  Community 
and  its  Member  States  have,  in  the  light  of  this,  signed  a  Partnership  and 
Cooperation  Agreement  and  developed  an  overall  strategy  of  support  for  transition 
and for Ukraine's  integration  into the European arena. 

Ukraine recently celebrated  the fifth year of its independence.  Consideration  of this period 
enables one to  better  gauge the results  of the  reforms  undertaken  and  to  understand  what 
remains  to  be  accomplished  in  terms  of  social  and  economic  transformation.  This 
document,  on  the  basis  of  such  an  analysis,  seeks  specifically  to  determine  the  thrust  of 
priority  action  which  should  lead  to  the  establishment  of  a  real  partnership  by  the  year 
2000. 

UKRAINE AFTER FIVE YEARS OF INDEPENDENCE : 

1. The achievements of the policy of reforms are substantial : 

a) Politically, the progress of democracy  in Ukraine is real (free  elections,  a multi-party 
system,  freedom  of  the  press,  freedom  of  religion,  respect  for  Human  Rights  and  fair 
treatment of minorities).  Ukraine has demonstrated  its capacity to resolve internal  conflicts 
by  political  dialogue  and  compromise.  The  adoption  of  a  new  Constitution  on  28  June 
1996 constitutes  decisive progress  in the  stabilization  of the  system.  This text,  which  still 
has to be implemented,  establishes a parliamentary system which conforms to the traditional 

The most recent positions taken are those in the Declaration made by the Presidency  in Rome in 

May 1996 and the conclusions of the Troika Meeting of Political Directors of November 1996. 

principles  of  separation  of  powers,  executive  responsibility,  application  of  the  rule  of  law 
and independence of the judiciary. 

The  entry of Ukraine  into  the  Council  of Europe  (in Nov.  1995)  constitutes  a  recognition 
of these initial achievements and encouragement  to push ahead with them. 

b)  Economically  :  in  spite  of  a  slow  start  (Oct.  1994),  Ukraine  has  very  quickly 
implemented  a  macro-economic  stabilization  policy,  the  results  of  which  have  borne 
fruit (see  Annex  III).  Microeconomic  liberalization  has  started  (freedom  of  internal  and 
external trade, freeing of prices and a reduction of state intervention).  Structural  reforms 
(privatization  and  conversion  of  public  enterprises,  administrative  reform  and  tax  reform) 
have begun and are expected to be accelerated  in the coming years. 

c) Foreign  policy  :  Ukraine  has emerged  as an  element  of stability  in  the  region.  The 
policies adopted  (on nuclear disarmament,  adherence to preventive diplomacy, the policy of 
conciliation  towards  Russia  and  rapprochement  with  the  West)  have  increased  Ukraine's 
international  credibility.  Similarly,  Ukraine  has  affirmed  its identity  by an  active  policy  of 
diplomatic  presence  at  important  international  occasions  and  fora  (the  1995  Euro-
Mediterranean  Conference,  implementation  of the Bosnia Peace Plan).  The country,  which 
remains  a  substantial  military  power,  has  participated  in  peacekeeping  operations  (the 
Ukrainian contingent in IFOR) and in joint exercises with Western forces.  Political  dialogue 
with the EU has developed in an intensive and consistent manner. 

d)  Consolidation  of  independence  :  although  Ukraine  lacks  an  ethnic  identity  and  a 
unitary  culture, this consolidation  has benefited  from  the will  of its people  to  control  their 
own  affairs.  Trends  towards  the  breaking  up  of  society  have  not  solidified,  in  spite  of 
economic and social  difficulties. 

2. Weaknesses  remain : 

a)  the  consolidation  of  democracy  and  of  the  process  of  transformation  in  general 
requires the development  of a free  civil society  (political  parties,  free  trade  unions,  media) 
and  also  a  substantial  effort  at  the  training  of  leaders  among  the  population.  The 
transformation  of the country and its entry into the world economy takes effect  through the 
improved understanding by the people as a whole of the working  of the democratic  system 
and of the market economy. 

This  requirement  is  of  particular  importance  to  the  civil  administration,  which  should  be 
able  to  assume  the  functions  incumbent  on  it  within  a  state  based  on  the  rule  of  law 
(defence  of  the  general  interest  rather  than  sectoral  or  group  interests,  impartiality  and 
respect  for  the  law)  and  in  a  free  economy  (regulation  rather  than  management, 
comprehension  of the  increased  complexity  of  autonomous  market  mechanisms  and  of an 
economy open to world trade). This requirement  is also relevant  to managers in the private 
sector and business leaders. 

b) economic  transformation  is difficult  but  also crucial,  in that  it is a necessary  condition 
for the maintenance of independence. 

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- The economic situation remains uncertain  :  GDP in real terms is 42% of the  1989 
level,  industrial  production  has  fallen  continuously  since  independence 
.  A  substantial 
budget  liquidity  crisis  has  developed,  the  decrease  in  structural  expenditure  not  having 
been sufficient  to achieve budgetary deficit  targets, due to the fall in tax receipts. 

Although the underground  or black  economy,  estimated  to  be  50% of GDP,  compensates 
to some degree, its scale is a sign of serious economic and social disruptions. 

- Reform  of the economic, industrial, financial and  administrative  structure  remains 
to be implemented.  These reforms  have begun but there are serious countervailing  forces : 
the  political  opposition  of  the  officials  of  the  previous  administrative  system,  the  highly 
inappropriate  nature  of  the  means  of  production  (heavy  industries  which  are  difficult  to 
transform),  shortage  of  capital,  scarcity  of  leadership  potential  and  the  reduction  in living 
standards. 

In May  1996 the EU recognized that Ukraine was an economy  in transition.  In fact,  with 
respect  to  liberalization  and  share  of the  private  sector  in the  economy,  Ukraine  is  in  the 
last group  among countries  in transition,  according  to  World  Bank  figures 
. The  decisive 
switch  to  a  market  economy  has  not  yet  taken  place  in  Ukraine,  unlike  in  certain  other 
countries  in  Central  Europe.  The  Ukrainian  economy  is  thus  deprived  of  the  benefits  of 
integration  in  the  world  market,  such  as  foreign  investment,  which  is  itself  an  important 
source of competition on the home market, transfer  of know-how and creation of jobs. 

c)  Energy,  and  nuclear  safety  in  particular,  is  foremost  amongst  the  challenges  facing 
Ukraine, whose economy must cope with an energy crisis greater  than that  experienced  by 
the  West  in  the  1970s,  while  simultaneously  coping  with  substantial  restructuring  of  its 
economy. 

The  energy  problem  is  closely  intertwined  with  the  main  challenges  facing  reform  in 
Ukraine  :  its  independence  as  a  nation  is  linked  to  its  dependence  on  foreign  primary 
sources of energy  and its accumulated  debt,  production  processes and jobs  are related  to 
doubts about the viability of many of its companies once energy is only available at  market 
prices, social cohesion is linked with the drastic impact  of price changes on the standard  of 
living, the  restructuring  and the environmental  and  safety  linkages  of the  coal  and  nuclear 
sectors.  The  issue  of  nuclear  safety  also  influences  Ukraine's  relations  with  its  western 
partners  to  the  extent  that  this  country  is  still  too  often  perceived,  domestically  and 
internationally,  in  the  light  of  its  capacity  to  meet  its  commitments  with  respect  to 
Chernobyl. Likewise in Ukraine, the credibility of  Western countries will depend to  a large 
extent on their ability to fulfill  their commitments regarding Chernobyl. 

d) The future is subject to four potential obstacles : 

-  The  level  of  dependence  on  Russia,  which  is  perceived  as  critical  by  the 
Ukrainian  authorities,  preoccupied  as  they  are  by  the  ongoing  disputes  and  the  pressures 

2 

Production has fallen consistently since 1990.  Industrial production in real terms has fallen to 
35% of the 1990 level, agricultural production has fallen to 65%. 
3 "From Plan To Market". July 1996. 

60% of primary energy is imported; 90% of oil comes from Russia and Turkmenistan. 

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being exerted  for  increased  integration within the structures  of the CIS.  The key aspects of 
this  dependence  are  : the  energy  imbalance,  commerce  (half  of  visible  trade),  unresolved 
conflicts  (the  Black  Sea  fleet),  latent  disputes  (frontier  recognition,  Crimea)  and  the 
presence of a large Russian minority in Ukraine 5. 

- The loyalty of the population  is one of the major challenges  of the transition. 
The durable maintenance of independence largely depends, on the capacity of the regime to 
create  an  economic  system  which  satisfies  the  expectations  of  the  population  : 
these 
expectations are closely related to the standard of living in Russia  . The sharp  deterioration 
in living standards limits support  for  the reforms.  In this respect  regular  payment  of public 
sector  salaries by the  state  constitutes  a prerequisite  in restoring  the  credibility  of the new 
economic policy. 

-  The  heterogeneous  nature  of  Ukrainian  society  is  marked  by  the  dichotomy 
between  and  the  divergent  historical  experiences  of  the  russianised  east  and  the  more 
nationalist,  pro-European  west.  A prolonged  deterioration  of the economic  situation  or an 
over-strong  pro-Ukrainian  linguistic  shift  in  the  public  authorities  cannot  but  bring  out 
latent separatist tendencies. 

- The position  of Ukraine within  Europe  :  the Ukrainian authorities fear that any 
enlargement  of  NATO  and  the  European  Union  to  the  Central  and  Eastern  European 
countries will leave their country in  a "security  vacuum"  between the Euro-Atlantic bloc 
and  the  Russian  sphere  of  influence/Treaty  of  Tashkent.  The  pivot  of  Ukraine's  foreign 
policy  is  the  parallel  improvement  of  its  relations  both  with  Russia  and  with  the  West. 
Ukraine  seeks  in  and  from  Europe  a  stable  anchorage  which  would  provide  a  concrete 
guarantee  of its  independence.  The United  States, which  is very  attentive  to  this  country 
and very active there, has shown its wish to establish a "strategic partnership" with Ukraine, 
which  has  taken  the  form  in  particular  of  a  mechanism  of  dialogue  and  cooperation  at  a 
very high level (the Gore-Kuchma Commission). 

The  Ukrainian  authorities  expect  from  the  EU  comparable  political  responses  substantial 
enough to  meet  the  strong  challenges  of stability  and  social  and  economic  progress  which 
the Community pursues in Europe as a whole. 

3. International  aid is substantial  :  so much so that the problem lies more in the capacity 
of the country to absorb it, and in its capacity for  repayment  of loans in the long run, unless 
there is significant  economic growth. 

EU  assistance  may be calculated,  taking  all instruments  into  account,  at  ECU  2.  8  billion 
over  five  years  (1991-95),  of  which  1215  from  Community  sources  and  the  rest  from 
Member  States.  Since  the  acceleration  of  the  reforms,  a  spectacular  growth  of  macro-
financial  assistance  has  taken  place.  No  doubt  this  should  be  followed  up  within  the 
framework of the IMF  and  of the World  Bank  and  in liaison  with  the  principal  donors,  to 
accompany the deepening of the structural reforms and their budgetary implications. 

Over 11 million Ukrainians (22% of the population) are Russian.  They are heavily concentrated in 
certain regions; 44% of the population in the Donbass are Russians, 33% in Donetsk and 63% in the 
Crimea. 

Real wages in Ukraine are about 62% of the level in Russia. 

12 

Assistance from  the USA (ECU  1,05  billion or US $1405  million between  1991 and  95), is 
strongly  increasing  since  1996, with  Congress  having  decided  to  make  Ukraine  a  priority 
for American aid in that region.  Ukraine is the third largest recipient  of American  aid  (after 
Israel  and  Egypt).  Coordination  is  implemented  with  the  Community,  notably  via 
Transatlantic  Cooperation. 

EU OBJECTIVES AND ACTION  GUIDELINES 

The Ukraine authorities have clearly indicated their objective  of integrating the country into 
the  various  European  structures.  This  strategy  conforms  to  the  objective  of  regional 
stability  sought  by  the  EU,  and  also  to  the  objectives  of  the  Common  Position.  A 
strengthened  partnership  corresponds  to  the  particular  situation  of  Ukraine,  which 
occupies a pivotal position in Europe. 

Consideration  should  be  given  to  the  place  of  Ukraine  on  the  map  of  Europe  which  will 
emerge from  the enlargement  of the Union to the countries  of Central  and Eastern  Europe, 
and to the type of relations to be established  with this country.  The importance  of Ukraine 
for the Union, already perceptible, will be clear to all when it has a common border with the 
EU  :  comparable  to  a large European  country  in the  size  of  the  population  (52  million), 
one of the biggest  potential  economic markets at the very gates of the Union,  a transit  area 
for  Russian gas on its way to the EU, with  coastal  access to  the Black  Sea,  this  country is 
an  essential  element  in  the  stability  of  the  region.  To  this  has  to  be  added  a  favourable 
political  consideration  that  the  Union  cannot  ignore  : Ukraine  is  an  emerging  democracy, 
and it takes its inspiration from Europe. 

The  support  of  the  Community  and  its  Member  States  may  be  developed  in  the  six 
following  directions (see the last part of this document for concrete measures): 

1)  support for the reform  of the economy; (Community + Member  State action); 
2)  social transformation;  (Community  + Member State action); 
3)  introduction of Ukraine into the European  security architecture and the strengthening of 
the political dialogue; (CFSP  2nd Pillar : Commission + Council + Member  States); 

4)  support for regional cooperation; (Community  + Member  State action); 
5)  deepening of contractual relationships; (Community + Member States); 
6)  reform  of the energy sector. (Community + Member State action); 

1) support  for  the  reform  of  the  economy  :  the  Community  will  continue  to  support  a 
policy  of  macro-economic  stabilization  in  conjunction  with  the  IMF  and  will  develop  its 
backing  for  the  deepening  of  the  reforms,  both  in  the  framework  of  the  multilateral  aid 
system  of the IFIs  and  through  its own  means  of action.  It  will  attempt  to  accelerate  the 
transition  to  a  market  economy,  particularly  through  its  assistance  with  the  privatization 
process, the development  of small  and  medium-sized  enterprises,  and  also  a more  dynamic 
labour market. 

2)  the  transformation  of  Ukrainian  society  : 
the  EU  will  back  the  legislative  and 
administrative  reforms  which  will  promote  the  emergence  of  a  pluralist  society,  the 
consolidation  of  democratic  institutions  and  of  a  state  based  on  the  rule  of  law,  the 
protection  of individual rights, (in conformity  with the political principles of the Council of 

13 

Europe,  implementation  of  the  Constitution).  This  implies  the  opening  and  modernization 
of education  systems,  the  development  of  human  resources,  the  training  of  officials  of the 
civil  administration,  the  private  sector  and  also  the  components  of  a  pluralist  society 
(associative  system,  media,  trade  unions,  political  parties),  and  the  development  of  a  new 
system of social security. 

Entry into the Council  of Europe  involves  several  obligations for  Ukraine,  in particular  the 
establishment  of  an  independent  system  of  justice,  reform  of  the  electoral  law  and  the 
abolition of the death penalty which has not yet become  effective. 

3.  Introduction  of Ukraine  into the European  security  architecture.  Consideration  of 
Ukraine's place in the European  security architecture has to be pursued,  mainly  through a 
strengthened  political  dialogue,  and in respect  both  of the  positions  of Ukraine  and  that 
of  the  EU,  the  evolution  of  which  is  still  in  progress.  The  measures  enunciated  in  the 
Common  Position,  already  broadly  under  way,  must  be  reinforced  :  political  dialogue, 
cooperation of Ukraine with the Stability Pact, the North Atlantic Cooperation  Council and 
the Partnership for Peace, as well as with the WEU. 

Beyond  this,  the  strengthening  of  the  partnership  with  Ukraine  will  take  place  in  parallel 
with  the  enlargement  of  the  EU  to  the  countries  of  Central  and  Eastern  Europe.  This 
enlargement  will  itself  contribute  to  the  improvement  of  security  in  the  region  and  thus 
Ukraine's own security. The new developments may be defined  on the basis of the Council's 
ongoing  deliberations  on  the  integration  of  the  countries  of  Central  and  Eastern  Europe 
into  the  European  Security  Architecture  and  the  position  of  Russia  and  Ukraine  and  the 
contribution  of  the  EU  to  the  drawing  up  of  a  model  of  European  security  within  the 
framework  of the OSCE. 

-  Strengthening  of  political  gatherings  at  various  levels  between  the  EU  and 

Ukraine, including where necessary summit meetings; 

-  The  widening  of  the  political  dialogue  to  security  topics,  the  development  of 
common  orientations  with  Ukraine  in  the  area  of  international  relations  on  topics  of 
common interest, will constitute the next stages of development  of this partnership. 

-  Strengthening the OSCE will be pursued  in order to provide for  the integration  of 

Ukraine into the European  security model; 

- Consultations will be stepped up with the WEU. But the "special partnership" with 
NATO  requested  by Ukraine would  no  doubt  be a more  effective  response  to  the  security 
guarantees that country seeks. 

4.  Support  in  regional  cooperation  will  be  developed  to  contribute  to  a  "re-balancing" 
vis-à-vis  the  CIS  and  to  "anchor"  Ukraine  within  the  continent  of  Europe.  Ukraine  has 
clearly indicated its rejection  of a strengthening of the CIS and the priority which it gives to 
recognition of its independence and its territorial integrity  . 

Although Ukraine is "founder member" of the CIS, it has not signed neither the January 93 

Charter, nor the October 92 agreement on the concept of military defence, nor that concerning the 
common defence of frontiers proposed by the Russians in February 95.  It rejects the customs union. 

14 

-  The  multi-disciplinary  regional  measures  which  contribute  to  the  development  of 
Ukraine's relations with its immediate neighbours, particularly the countries associated  with 
the Community,  should be developed.  In this respect,  the joining of Ukraine to the CEFTA 
is  to  be  encouraged  and  the  Stability  Pact  constitutes  a  framework  for  the  settlement  of 
differences,  as  does  the  cross-frontier  cooperation  between  Ukraine  and  the  countries 
associated  with  the  Community,  who  now  possess  experience  of  the  transition  to  the 
market  economy. 

- The EU  could  additionally use the political  dialogue with Ukraine's  neighbours  to 
explain to them its policy to Ukraine and contribute to a balanced  settlement  of  differences. 
(For example, for Russia,  the solution of the current  differences  with Ukraine could  ensure 
the  existence  of  a  stable  and  friendly  partner  on  its  south  west  flank.  Such  a  development 
would constitute an advantage for Russia, since it would contribute to its own stability.) 

-  The  cooperation  of  the  states  bordering  the  Black  Sea  assumes  a  particular 
importance in this context.  The interests  of the Union  in this region  seem to  converge with 
those  of Ukraine,  for  whom  this  is  of  crucial  importance  : a  potential  access  way  to  the 
Caspian basin  and to  Central  Asia,  allowing  diversification  of energy  supplies,  support  for 
economic cooperation with  a potentially  strong grouping  and  seeking the  stabilization  of a 
particularly fragile  geopolitical area. 

The  Commission  plans  to  strengthen  its  role  in  Black  Sea  cooperation,  by  participating 
actively  in  the  activities  of  the  Black  Sea  Economic  Cooperation  Council  and  better 
utilizing and coordinating the intervention of its aid programmes for the countries bordering 
the Black Sea (Tacis, Phare, Meda). 

5. The deepening  of contractual  relationships : 

is  a  priority  of  the 
a)  the  implementation  of  the  IA  and  the  potential  of  the  PCA 
Union  in its relations  with Ukraine  for  the  years  to  come,  as the Presidency,  on  behalf  of 
the EU, stated in the Declaration of Rome in May  1996 : 

o 

i)  the  ratification  of  the  PCA  by  the  Member  States  of  the  Union  is  a  political 
priority.  This  already  long  process  is  currently  faced  by  an  unforeseen  legal  situation, 
linked  to  the  need  to  also  ratify  the  supplementary  protocol  following  the  enlargement  to 
three  new  Member  States.  It  is  imperative,  leaving  aside  the  legal  difficulties,  to  find  a 
solution  to  enable  the  PCA  to  be  implemented  without  waiting  for  the  supplementary 
protocol.  The Community and its Member States should be in a position to face up to their 
commitments  with  respect  to  Ukraine  which,  for  its  part,  immediately  ratified  this 
agreement and for which its coming into effect  assumes a high degree of political priority. 

PCA = Partnership and Cooperation Agreement between the European Communities and their 

Member States and Ukraine, signed in June 1994 currently being ratified; 
IA = Interim Agreement on Trade between the European Communities and Ukraine, signed in June 
1995, (consisting of the commercial parts of the PCA pending the latter's ratification), which came 
into effect in February 1996. 

15 

ii)  the  development  of  the  contractual  relations  provided  by  the  Agreement  should 
lead  to  a  progressive  rapprochement  between  the  parties  in  the  very  broad  area  of 
economic  cooperation  :  commercial,  industrial,  scientific  and  administrative  cooperation, 
coordination  of laws  .  The PCA  also  represents  a framework  for  sustained  cooperation 
in  the  key  areas  of  social  transformation  :  education,  transport,  or  of  direct  concern 
for the integration  of Ukraine  into the European  arena  : protection  of the  environment, 
customs cooperation,  control of illegal immigration, drug trafficking  and money laundering. 

Without  listing  here  the  various  measures  provided  for  under  the  PCA,  certain  areas  of 
action  deserve  to  be  highlighted  due  to  their  particular  importance  or  their  potential  for 
rapid  development: 

-  Transport  (art.  64  of  the  PCA)  is  a  major  element  in  the  development  of 
economic activity and trade.  The current situation, marked by the delay in privatization and 
under-investment,  is inappropriate to the development  of a modern and open economy. 

Infrastructure:  The development  now  in progress  of the  TEN  networks  should  go  hand 
in  hand  with  economic  and  trade  rapprochement  between  Ukraine  and  Europe.  The 
definition  in  1994  of  nine European  corridors,  two  of which  concern  Ukraine,  provides  a 
framework for  trade  and  investment  coordinated  by the  Commission  which  has  led  to  the 
signing  of  development  agreements  and  the  launching  of  measures  on  routes  and  frontier 
crossings.  But a much more global effort  is necessary.  Since the aspect linked to  structural 
investments  is  decisive,  it  is  necessary  to  seek  other  sources  of  finance,  notably  in  the 
private  sector.  A  more  active  contribution  by  EBRD  would  also  be  desirable.  But  the 
participation  of private investors in this market  should  be facilitated  by the improvement  of 
the  legislative  framework  and  particularly  by  a  better  transparency  of  the  conditions  for 
awarding public contracts in Ukraine. 

Transport  services:  In 
the  counterproductive  Ukrainian  policy  of 
protectionism  in  air  transport  cannot  be  ignored.  The  benefit  of  public  assistance  by  the 
Community  in  the  improvement  of  the  transport  system  must  go  hand  in  hand  with  the 
elimination of obstacles in terms of taxation of foreign  companies. 

this  context, 

-  Telecommunications  (art.  66 of the PCA)  :  they  play a vital  role (together  with 
In  this 
information  technology)  as  the  enabling  mechanism  of  the  Information  Society. 
respect  the  Community  will  support  the  following  measures  : 
(i)  the  adoption  of  a 
framework  of  laws  and  regulatory  policies  that  encourage  all  types  of  investment  in  the 
telecommunications  infrastructure  and  which  maximize  open  access  to  it;  (ii)  the  use  of 
appropriate  technical  standards  for  hard-ware  and  services  so  that  telecommunications 
TENs can be extended easily into Ukraine, (iii) the use of telematic services for vital  sectors 
of  the  economy,  e.g.  for  education,  for  health  services,  for  transport,  for  publishing,  for 
government  administration and for electronic commerce generally. 

This development of cooperation is also requested by the European Parliament (report of Mme. 

Mann, December 1995). 

A 15% tax on foreign firms' turnover imposed when Air Ukraine does not operate the same route 

has already made several European companies cease activities in Ukraine. Besides the 
discrimination which goes against the principles of international air transport such a policy cannot 
be said to help Ukraine's integration with the world economy. 

16 

-  Industrial  cooperation  (art.  53  of  the  PCA)  is  a  sine  qua  non  for  the 
modernization  of industry.  Areas where cooperation with the private sector is practical will 
be identified.  Industrial  sectors with high value-added  potential  (the farm-produce  industry, 
engineering,  consumer  industries)  should  be given  priority,  countering  the  current  position 
which  tends  to  preserve  heavy  industry  by  maintaining  state  intervention  in  sectors 
considered  to  be  strategic 
.  The  latter  are  inappropriate  to  Ukrainian  market  demand  : 
they  stem  from  the  structure  of  the  former  USSR  with  its  military  connotations.  The 
interest  of  the  private  sector  in  industrial  cooperation  operations  hinges  on  the  effective 
privatization  of enterprises and the potential for restructuring them. 

• 

1 "2 

-  Agriculture  (art.  60  of  the  PCA)  is  a  sector  of  high  potential 

.  The  current 
yields  of  the  main  products  (wheat,  sugar,  sunflowers),  are  half  as  large  as  those  of  a 
comparable European  country.  Taking  account  of the agricultural  tradition  and the quality 
of  the  soil  in  Ukraine,  this  country  could  achieve  a  spectacular  and  rapid  increase  in  its 
yields and become again a big exporter to world markets, subject  only to an effective  policy 
of  privatization,  opening  up  to  foreign  capital  and  modernization.  This  applies  also 
downstream  to  the food-product  industry which,  together  with  agriculture,  constitutes  one 
of the main potential areas for rapid wealth creation and export revenue for Ukraine. 

-  Tourism  (art.  72  of  the  PCA)  is  another  sector  in which  there  is  a  considerable 
potential  for  rapid  development,  with  a  notable  advantage  :  it  involves  the  creation  of 
substantial  numbers  of new jobs.  Again, what  is needed  is a policy  of privatization  and  the 
modernization of accommodation,  communication  and transport  infrastructure. 

This applies particularly to Crimea 

, which has substantial assets in this sphere. 

13 

-  The  environment  (art.  63  of the PCA)  has particular  importance  in Ukraine  and 
not only because of the crucial nuclear aspect.  The latest research confirms the existence of 
air, water  and ground  pollution exceeding currently accepted  international  standards by far. 
This situation  is due to  an obsolete  industrial  infrastructure,  excessively  hungry  for  energy 
and other raw materials, and to a lack of 
investment  in anti-pollution  processes.  The  Community  intends  to  promote  measures  of a 
horizontal type in this sphere, as well as more specific measures. 

The share of heavy industry in industrial production increased from 39% in 1993 to 58% in 1996 

in the general context of reduction of overall industrial production.  The Ukrainian authorities are 
rightly preoccupied about the insufficiency  of domestic production of consumption goods. 

The farm-produce industry delivers 1/4 of Ukraine's GNP and provides employment to 1/4 of the 
active population.  The significant reduction of agricultural production recorded in 1996, generally 
attributed to drought but also due to structural problems (particularly, the system of ownership is 
almost unchanged, and there is chronic under-investment). 
13 

Even before  1917, the Crimea was the favourite tourist spot for Russians.  In 1996 4 million 
tourists were attracted to the area, against 8 to 10 millions before  1991.  The conversion from mass 
tourism, with limited purchasing power, to a modern tourist service industry requires : (i) the 
reconstruction of communication and public service infrastructures,  (ii) the privatisation of hotel 
and tourist facilities, and (iii) the assurance of maintenance of law and order.  (For the current 
situation, see the OSCE report of August 96 on tourism in Crimea). 

17 

-  Scientific  and  technical  cooperation 

(art.  58  of  the  PCA).  Ukraine  has  a  high 
its 
potential  for  Research  and  Development,  but 
development  :  a  lack  of  resources  which  is  severe  enough  to  compromise  even  the 
maintenance  of  the  potential  for  research  and  is  a  source  of  isolation  among  researchers; 
and  inadequate  scientific  training  for  the  requirements  of a modern  economy. 

there  are  two  main  obstacles 

to 

The  opening  of  European  research  programmes  under  the  Fourth  Framework  Programme 
(participation  in  specific  programmes;  INCO-Copernicus  calls  for  tender  and  INT AS)  and 
Community  membership  of  the  Ukraine  Science  and  Technology  Centre  (USTC)  will  help 
address  the  first  problem.  The  second  is  dealt  with  in  the  framework  of  the  training 
measures  listed  under  point  2. 

-  The  battle  against  organized  crime  and  money  laundering  (arts.  68  and  79  of 
the  PCA),  has  to  be  the  subject  of  intense  cooperation  between  the  Community  and  its 
Member  States  and  Ukraine.  This  is  a  matter  of  vital  concern  both  for  these  national 
institutions  and  for  their  people.  Beyond  the effects  which  impinge  on  it  directly,  the  Union 
must  be  very  concerned  at  the  development  in  Ukraine  of  organized  crime  and  the 
weakening  of  government  institutions  due  to  the  development  of  a  black  economy  and  the 
power  of clans  on the  administration  and  the  economy. 

The PCA  provides  for  cooperation  in the  control  of  illegal  migration  (art.  27)  and  the  fight 
against  drugs  (art.  79).  The  implementation  of  this  cooperation  involves  consultation  with 
the  Ukrainian  side,  and  comes  under  Titles  V  and  VI  of  the  Treaty  on  European  Union. 
The  potential  of  the  Round  Table  of  the  Stability  Pact  may  be  used.  The  technical 
assistance  of the  Community  could  contribute  to  regional  cooperation  in these  areas  and  in 
strengthening  the  capacity  for  action  of  the  Ukrainian  administration.  Some  research  has 
already been  started  to  draw up  means  of action  in this  sphere. 

b)  Development  of  bilateral  trade  :  although  trade  with  the  Community  has  grown 
substantially,  Ukraine  is  still  highly  dependent  on  the  CIS  market.14  Ukraine  is  also 
concerned  about  its increasing trade  deficit  with the  Community. 

The existence  of a trade  deficit  is a normal  phenomenon  with  economies  in transition  which 
have  to  import  many  capital  goods  and  which  lack  products  which  are  competitive  in 
foreign  markets. 
The  effect  of the  Community's  anti-dumping  policy  on  trade  should  not 
be  overestimated;  it  actually  affects  less  than  1%  of  bilateral  trade.  Anti-dumping  policy  is 
an integral  part  of the rules  of multilateral  trade  and  as long  as Ukraine  is not  recognized  as 
a  market  economy  the  rules  applicable  remain  those  of  reconstitution  of  real  value, 
corresponding  to  state-run  economies.  The  Commission  reminded  the  Ukrainian  authorities 
in May  1996  of the  possibility  of individual  treatment  for  producers  able  to  prove  that  they 
were  producing  without  state  intervention. 

The EC is the  Ukraine's principal trading partner outside the CIS, with  15% of its trade and a 
positive balance of 700 Mecu in  1995.  However  in  1995,  45% of its product exports and 65% of 
its imports were still carried out within the CIS;  see Annex IV 

Ukrainian exports outside the CIS consist mainly of métallurgie products (over 40%), iron ore 

and transport equipment,  all these being products for which demand is stagnant and where 
competitiveness relates first and foremost to the prices. 

In the short term, EU action will relate to : 

- 

the  establishment  of  a  joint  working  party  on  trade  which  will  carry  out  an 
comprehensive  examination  of  the  trading  situation  between  the  EU  and  Ukraine.  In 
particular,  it  must  identify  the  causes  of  the  unfavourable  balance  linked  with  the  current 
economic  transition.  It  must  seek  methods  of  balancing  trade,  by  identifying  the  various 
types  of  existing  obstacles,  acting  as  a  monitoring  and  early  warning  unit  regarding 
potential  obstacles  and  difficulties,  and  following  up  decisions  made  in  this  connection, 
particularly by the Joint Committee: 

- assistance to Ukraine within the framework  of its membership  of the WTO will 
be continued with a view to adapting its commercial legislation to international  standards as 
well as to the principles of the Interim  Agreement,  particularly  in the  spheres  of standards, 
certification  and intellectual  property. 

-  an  easing  of  quantitative  restrictions  will  be  sought  within  the  current  steel 
negotiations.  The  Community  is  proposing  a  gradual  liberalization  of  access  to  the 
European  market  in  return  for  effective  restructuring  and  liberalization  of  the  Ukrainian 
system of production  (particularly the abolition of government grants). 

The entry into force  of the PCA will confirm  the date set in Article 4, namely  consultations 
in  1998  to  see  whether  circumstances,  in  particular  headway  made  by  Ukraine  with  its 
reforms  on  the  way  to  a  market  economy,  and  the  state  of the  economy  at  the  time, will 
allow the beginning  of negotiations  on the establishment  of a free  trade  area.  This  outlook 
underscores the importance of continued  economic  reform. 

In the longer term, trade expansion and an improvement  in the Ukrainian balance will above 
all be achieved by enterprise modernization,  increased  competitiveness and a more dynamic 
presence on world markets. 

c)  growth  of  investments  :  foreign  investments  form  the  principal  source  of  long-term 
capital,  taking  into  account  the  low  lending  capacity  of the  Ukrainian  banking  sector  and 
the limited borrowing  capacity  of enterprises. However  foreign  investments  remain  limited 
16 

-  The  development  of  an  appropriate  legislative  framework  in  addition  to  its 
implementation  procedures  is a prerequisite  for  the growth  of  investments.  In  this  respect 
the Ukrainian government  must itself take the initiative  : only a clear and  committed  policy 
of  liberalization  and  privatization,  including  the  introduction  of  legislation  ensuring  that 
foreign  companies do not receive discriminatory treatment  (as provided  for  in Article 30 of 
the  PCA)  is  likely  to  attract  foreign  and  national  investors.  Additionally,  effective 
protection  of intellectual  property  is an essential  condition  - although not  sufficient  in itself 
- for the encouragement  of direct foreign  investment and the transfer  of technology. 

$150 - 200 million flow of funds per annum and $950 million in stock since 1989 against $3.9 

billion in Russia. 
17 

As a general rule, these rights under private law belong to private organisations which make their 

own decisions regarding their availability.  Nevertheless the public authorities can encourage the 
transfer of technology by the use of appropriate measures.  Although Ukraine is not yet a member of 

19 

Beyond  privatization,  conditions for  the private sector  are  still very  difficult  (high  levels of 
complicated  and discriminatory taxation, administrative complexities, mafia payments). 

-  The  Community  will  supplement  measures  taken  by  the  Ukrainian  authorities  in 
this sphere by the transfer  of knowledge and discussions  relating to the establishment  of an 
investment  fund  (revolving  fund).  Such an instrument,  specific  to Ukraine,  could  stimulate 
investment  and  provide  a  cover  for  certain  risks.  The  experience  of  the  Jopp  programme 
will be  developed  to  finance  SMEs,  but  it  is not  enough  to  provide  a  significant  stimulus. 
The  EBRD  will  be  encouraged  to  develop  its  activities  in  Ukraine,  in  liaison  with  the 
Community. 

The Member  States  could  study  formulas  for  guaranteeing  investments  in  addition  to  the 
development  of  a  bilateral  network  for  the  encouragement  of  trade  through  linking  the 
Chambers of Commerce. 

6.  The  reform  of  the  energy  sector  :  since  1992  one  of the  Community's  priorities  has 
been  the  reform  of  the  energy  sector  and  the  improvement  of  nuclear  safety  in  Ukraine. 
This will be continued,  with the objective of reducing Ukraine's  dependence  and  increasing 
the safety of its nuclear plants (35% of electrical energy is of nuclear origin).  This initiative 
will take the form  of a restructuring  of the energy market  in Ukraine, the encouragement  of 
energy  saving and  a search  for  alternative  sources of energy,  the continuation  of the  effort 
to  improve  nuclear  safety,  particularly  through  implementation  of the MoU  relating  to  the 
closure of Chernobyl in the year 2000. 

the  Commission's 
a)  Assistance  from  the  EC  in  restructuring  the  energy  sector  : 
objective  is the  promotion  of  an  efficient  energy  sector,  based  upon  the  principles  of  the 
market economy and ensuring security of supply. 

In 
Although  these  reforms  are  well  under  way,  significant  effort  will  still  be  required. 
particular, it is necessary to speed up the process of privatization and the introduction  of an 
appropriate  legislative  framework  :  in this  sphere  as in others,  these  factors  influence  the 
access to foreign  investment.  Ratification  of the Treaty  on the Energy  Charter  by Ukraine 
and the Community will ease the introduction of the plan of action. 

Various types of action will be intensified  : (i) support  for  the implementation  of an overall 
energy  saving  strategy,  for  the  restructuring  of  the  coal  industry,  relating  in  particular  to 
social problems and the liberalization of the energy market;  (ii) assistance in finding  reliable 
sources  of fuel  supplies  in  addition to  searching  for  other  forms  of renewable  energy,  (iii) 
the  integration  of  Ukraine  into  regional  working  parties  on  the  restoration  of  gas  and  oil 
(iv)  preparatory  studies  and  measures  accompanying  loans  made  by  the 
pipelines; 

the WTO, the effective  implementation of measures modelled upon those of the ADPIC (TRIPS) 
should ensure sufficient  protection of intellectual property to encourage foreign companies to invest 
in the country and to ease the transfer of technology 
18  The EBRD committed ECU 150 million in Ukraine in 1995; it should be ECU 200 million in 
1996, chiefly in the private sector. It is participating in the financing of G7 Plan measures for 
Chernobyl and is managing the $ 200 million Nuclear Safety Fund (NSA). 

20 

international  financial  institutions,  with regard to the implementation  of investments which 
are  economically  viable  and  which  respect  the  environment;  (v)  industrial  cooperation, 
particular  through  the  promotion  of  joint  ventures  between  traders  and  component 
manufacturers. 
The  importance  of  points  (i)  and  (ii)  should  be  emphasized,  in  that  removal  of  the 
constraints  imposed  by Russia  upon Ukrainian  supplies  is  a priority.  Coal  can  obviously 
not fulfill this function.  Energy saving and the search for independent gas supplies must be 
contributory factors. 

21 

b)  nuclear safety  constitutes  a  priority  19 within the context  of the overall  reform  of the 
energy  sector  in Ukraine.  It  is centered  upon  two  fundamental  factors  :  the  improvement 
of  nuclear  safety  and  the  closure  of  the  Chernobyl  nuclear  power  station.  This  agreement 
provides 
implement  projects  for 
decommissioning  the Chernobyl nuclear  power  plant, to cooperate in the development  of a 
cost-effective  and  environmentally  sound  approach  to  the  shelter  for  Chernobyl  4,  to 
develop an action plan for addressing the social impact of the closure of Chernobyl. 

the  following  commitments 

inter  alia  for 

:  to 

-  Assistance  in improving  nuclear  safety  essentially relates to  power  stations  of the 
W ER  type  which  are  in  operation,  through  the  programme  of  assistance  on  the  sites, 
reinforcement  of the body responsible for safety,  and help on the Chernobyl site. 

-  The  EC  contributes  actively  to  the  implementation  of  the  agreement  of 
December 1995 (MoU) relating to the closure of Chernobyl, with the firm intention of 
respecting  the  deadlines  set.  Preliminary  studies  financed  by  the  Community  should 
enable  decisions  to  be  taken  within  the  framework  of  the  G7  in  1997,  regarding  the 
additional  financing  to  be  anticipated,  project  by  project.  The  contribution  of  Ukrainian 
resources which is stipulated in the MoU must also be carried out. 

The closure of Chernobyl has long term and short term aspects. 

-  The  long  term  aspect  is  related  to  the  in  depth  restructuring  of  the  energy  sector. 
Investments  are  needed  for  the  rehabilitation  of the  existing  thermal  power  plants  and  for 
additional  hydro-electric  power  plant.  The  MoU  includes  a  comprehensive  package  of 
measures  which  go  well  beyond  the  year  2000,  until  the  full  restructuring  of  the  energy 
sector will have been achieved. 

- The short term  aspects concern  safety  risks associated  with the present  situation  at the 
Chernobyl  site  (operation  of  reactors  and  status  of  sarcophagus)  and  the  need  to  find 
replacement  electricity  for  the  reactors  to  be  shutdown.  In  the  view  of  the  Ukrainian 
authorities,  the  completion  of  two  nuclear  reactors  under  construction  at  Rovno  and 
Khmelnitsky (the R4K2 project), could bring by the year 2000 the compensating  electricity 
capacity for the two Chernobyl reactors. 

- Two measures are of particular importance for the Community  over the period  up to 
mid 1997, in order to support the decision  of Ukraine to close the Chernobyl  plant by 
the  year  2000.  These  measures  relate  to  the  financing  of  the  completion  of  the  two 
reactors  under  construction,  the  implementation  of  the  necessary  measures  to  assure  the 
safety of the sarcophagus. 

For the completion  of the two reactors 70% of the investment  (about  1000 Mio$) should 
be paid by loans from  Euratom  (up to  400 mecu)  and from  the EBRD.  The preparation  of 
these financing decisions in under way.  Safety,  economic,  environmental  and financial  due 
diligence has to be demonstrated. The EBRD and the Commission  have agreed to entrust a 
panel  of independent  experts  with a new least  cost  investment  analysis  in the  context  of 
the MoU  requirement  to  "identify  least  cost  power  supply  investments  to  meet  Ukraine's 
future  national  power  requirements". The financial due diligence will  depend  on  Ukrainian 

See the Commission's Information Note of November 1996 on this subject. 

22 

decisions in the nuclear power  sector, which should ensure that the borrower will be able to 
reimburse the loans. The current planning is to submit the loan decisions to the  Commission 
and to the EBRD board by mid-1997. 

Although  the funding  of the  sarcophagus  ass such  is not  part  of the MoU,  it  is  considered 
essential  by  The  Ukrainian  President  and,  as  agreed  by  the  G7  Heads  at  the  Moscow 
Summit, the G7 and Ukraine will begin to discuss this issue in December 96. 
The financing modalities for both the completion  of R4K2 and for  the  sarcophagus  require 
therefore urgent  attention. 

c)  The economic and social aspects connected with the accident and with  the  closure 
of  Chernobyl  also  constitute  an  important  part  of  the  Community's  overall  assistance 
regarding  Chernobyl.  The  social  aspects  of  the  closure  of  the  power  station  form  an 
integral  part  of the  MoU  and  the  EC  must  endeavour  to  contribute  to  an  analysis  of  the 
problem  of rehabilitation  of the  occupational  groups  which  will be  affected  by  the  closure 
of  the  plant,  the  problem  of  the  economic,  social  and  environmental  restoration  of  the 
regions  affected  by  radioactive  fallout,  and  medical  assistance  for  the  development  of 
specific treatment  (for  example for cancer of the thyroid). 

AVAILABLE  INSTRUMENTS 

This  document,  addressed  to  the  Member  States  as  a  general  guideline  also  includes 
information  regarding  concrete  projects.  These  are  set  out  in  the  last  part  in  a  thematic 
order  which  corresponds  with  the  priorities  set  out  above.  However,  whilst  the  Union's 
strategy  with  regard  to  Ukraine  constitutes  a  coherent  whole,  the  legal  bases  of  the 
concrete  initiatives  are  various.  The  projects  mentioned  could  give  rise  to  (i)  assistance 
initiatives under the  responsibility  of the Community,  covered  by the Tacis Regulation,  (ii) 
initiatives  under  the  responsibility  of  the  Community  in  implementation  of  the  Interim 
Agreement,  (iii)  initiatives  under joint  responsibility  in  implementation  of  the  PCA  when 
this  has  been  ratified,  (iv)  initiatives  under  Titles  V  and  VI  of  the  Treaty  on  European 
Union,  (v) initiatives under the exclusive responsibility of the Member  States for  which the 
latter will take any decisions. 

1.  At  Community  level  : the Community  has introduced  a set  of measures  for  assistance 
to Ukraine (see Annex II), some of which are open to all the NEI (Tacis)  or others  such as 
the macro-financial  assistance which has been  in progress  since  1994, or the Euratom  loan 
instrument  for  the  improvement  of  nuclear  safety  which  is  only  granted  to  a very  limited 
number of countries. 

The priority objectives are defined  by the Tacis Indicative Programme,  signed in  September 
1996  for  the  period  1996-99  (the  reform  of  the  legislative  and  statutory  framework, 
enterprise reform  and the development of the private sector, the reform  of the energy sector 
and  the  environment),  covering  very  broadly  the  objectives  set  out  in  this  document  and 
making it possible to embark upon initiatives without  delay.  A quarter of the budget which 
is available for the NEI  over the period  1996-99 is allocated  to Ukraine,  of which  an initial 
installment of approximately  110 Mecu will be committed before the end of 1996. 

23 

It  will  be  advisable  to  study  the  possibilities  of  developing  additional  instruments  in  the 
infrastructure  projects  in  Ukraine  (particularly  the  trans-European  networks),  and  of 
encouraging  cooperation  with the EBRD  in order  that  the latter  can  increase  its  activity in 
Ukraine alongside the Community and the other principal partners. 

2.  Cooperation  under  Titles  V  and  VI  of  the  Treaty  on  European  Union  (CFSP  and 
Third Pillar)  :  developments  relating to  security  in addition  to  initiatives  for  the  control  of 
organized  crime  and  illegal  immigration,  necessitating  an  increased  level  of  cooperation 
between  the  Commission,  the  Council  and  the  Member  States  and  Ukraine,  and 
undoubtedly the development  of specific instruments. 

3.  At  the level  of the Member  States, there  is a significant  level  of potential  which  calls 
for  a  higher  level  of  synergy  between  Community  initiatives.  The  establishment  of  the 
Ukrainian Centre for Legal and Political Advice, in addition to a large German project,  is in 
this respect  a model to be followed.  Some Member  States are very committed  with  regard 
to  Ukraine  in  a  bilateral  capacity,  and  all  are  through  their  contributions  to  international 
institutions such as the World Bank or the EBRD. 

for  example  teaching  and 
Some  spheres  are  suitable  for  decentralized  initiatives  : 
initiatives 
training,  where 
(secondment - of  teachers,  giving  study  grants  in  Europe,  support  for  the  teaching  of 
European 
information  exchange,  university 
sponsorship), industrial and scientific  cooperation. 

the  Member  States  should  be  encouraged 

in  Ukraine,  networks  of 

languages 

increase 

to 

24 

CONCLUSION 

Ukraine has clearly demonstrated  its ambition  to become integrated  into the European  area 
and  the  new  geopolitical  scene  will  place  this  large  country  immediately  adjacent  to  the 
Union.  This is a quite new situation both for the Union and Ukraine.  Until  1991 the Union 
had  in this  region  only  a  single  negotiating  partner,  which  was  geographically  distant;  it 
now  has  a  new  partner,  geographically  close,  which  is  diplomatically  demonstrating  its 
dissimilarity as well as its readiness to contribute to the stability of the region.  Ukraine has 
for  the  first  time  in  its  history  a  choice  other  than  that  of  allegiance  to  one  of  its  two 
powerful  neighbours. 

Ukraine  has  also  given  pledges  of  its  wish  and  ability  to  move  closer  to  Europe  and  to 
reform  its  economy  and  its  society.  These  pledges  are  of  even  greater  value  in that  they 
have been  produced  from  a  situation  of  extremely  severe  constraint,  which  is described  in 
the first part of this document. 

However,  this country is still only in the middle of the river crossing and will not be able to 
continue  without  international  support.  This  support  must  naturally  be  practical  with  the 
following  immediate priorities: 
(i)  the  transformation  of  society  by  all  the  measures 
available under the PCA (ratification  by the Member  States and entry into force); 

(ii)  support  for  the  reform  of  the  economy  (decision 

regarding new macro-financial  assistance for  1997); 

(iii) the reform  of the energy  sector,  and  in  particular 
the closure of Chernobyl  (financing  and implementation  of the agreement  between  the G7, 
the EC and Ukraine, including the financing  of the sarcophagus); 

(iv)  the  search  for  improvements  in  bilateral  trade 

(working party on trade); 

private investment in Ukraine. 

(v)  the  introduction  of  a  framework  conducive  to 

These initiative priorities are developed within the operational  section which follows. 

This  support  should  also  offer  the  authorities  and  the  Ukrainian  people  a  political 
perspective  which  will be  substituted  for  any  possible  return  to  the  former  ways  and  will 
loosen the grip of dependence upon their powerful  neighbour. 

The  Union  has  a  unique  opportunity  of  contributing  to  the  emergence  of  a  large 
democratic  country,  which  can contribute to  the  stability  of the  region,  which  has  obvious 
economic potential and with which it would be linked by a solid partnership. 

20 

It is worth recalling that Ukrainian independence has twice hung fire (1648-1654 and 1918-

1921), through a failure to find support and an anchorage point outside its two powerful neighbours. 
Whilst the Ukrainian authorities are resolute in searching for anchorage within Europe, public 
opinion within the country provides a figure of 54% representing those who still see the future of the 
country linked with Russia. (Eurobarometer March 1996) 

25 

CONCRETE  MEASURES 

1. SUPPORT FOR ECONOMIC  STABILIZATION AND REFORM 

Measures implemented  : 

Measures to be implemented  : 

Tacis : Action Programmes during the period 
1991-1995 have supported numerous projects in 
the areas of privatization, post-privatization, 
financial services, development of the SME 
sector, military conversion, and food 
production, processing and distribution. Tacis 
assistance in privatization has been a 
combination of institutional support, mostly to 
the State Property Fund (SPF) and the Small 
and Medium Enterprises' Development Agency 
(SMEDA), as well as support for the 
privatization of specific enterprises. 

Macro-financial  assistance: disbursement of 
balance of payments aid of ECU 85 million in 
1995 and first tranche of ECU a maximum of 
100 million of a maximum 200 million for 
1996, in support of the programme of 
stabilization and of economic reforms, also 
linked to the registering of progress on 
Chernobyl. 

Timetable 

1996-1999 

Tacis : priorities set out by the Tacis Indicative 
programme for the period {support for  the development of 
institutional cadre of officials, reform of the legislative 
and regulatory framework,  enterprise reform and 
development of the private sector, reform of the energy 
sector and of the environment), corresponding to the 
shaping of the reform of the Ukrainian colony. 

-  1996 Action Programme approved by the Commission 

October 96 

-  1997 Action Programme in preparation - Expected 
decision: 

Creation of the Ukrainian Centre of Legal and Political 
Advice, which will provide legal and economic policy for 
the use of the Parliament, the President and the Prime 
Minister (a complementary measure to that implemented 
by bilateral German assistance). 

Macro-financial  assistance: payment, where possible, of 
the 2nd  tranche of the loan of ECU 200 million decided 
on in 95; 
a request for  1997 is under examination. 

March 97 

Start of 97 

End 96 

January 97 

26 

2. TRANSFORMATION  OF UKRAINIAN SOCIETY 

Measures implemented : 

legal advice activities on  parliamentary 
procedures, banking legislation, and advice 
on economic policy in liaison with a 
German project of the Federal Ministry of 
the Economy. 

joint programme with the Council of 
Europe on adapting Ukrainian legislation to 
democratic criteria. 

Measures to be implemented : 
Community  : 
• 

in conformity with the objectives of the implementation 
of the PCA the modernization and reform of state 
institutions will be a major objective for the period. 

• 

further  support for the development of a free  civil 
society and for democracy through the instruments 
developed for this purpose (Democracy, LIEN, City 
Twinning, TEMPUS, etc.) with particular stress on 
education and training issues. 

training project for Ukrainian Members of 
Parliament. 

• 

furtherance  and deepening of cooperation with the 
Council of  Europe. 

support for  NGOs (Democracy,  poverty 
alleviation, LIEN). 

policy advice for the strengthening  and 
reorganization of public  employment 
services. 

other activities have been carried out in 
education, retraining, vocational guidance 
and building social dialogue structures for 
effective policy making. 

•  Continuation ofsupport  for  the development of an 

active employment policy. The assistance over  1996-
99 will focus more in-depth on (i) general policy 
support, (ii) promotion of active labour market 
measures, and (iii) institution-building. 

Member States : 
• 

provision of instructors, the providing of study grants 
in Europe, support for the teaching of European 
languages in Ukraine, information exchange networks 
and sponsorship of university institutions. 

Timetable 

1996-1999 

1996-1999 

1st half 97 

1996-1999 

27 

3.  UKRAINE'S PLACE IN EUROPE'S  SECURITY  ARCHITECTURE 

Measures implemented : 

cooperation of Ukraine with the Stability Pact, 
the NEAP andPfP  and also with the  WEO, 
support for regional cooperation efforts. 

Measures to be implemented : 
CFSP: 
• 

strengthening of political meetings at various political 
levels with the possibility of organizing summit 
meetings where necessary; 

Timetable 

1. security questions: 
• 

strengthening of the political dialogue on security 
matters, and provision of information  for Ukraine on 
the Union's policy in this area; 

•  development of existing cooperation, and of contacts 
with specialists (particularly on the questions of illegal 
trafficking  in nuclear materials): 

•  development of joint  action with Ukraine in the 

sphere of international relations,  and association of 
Ukraine on a case by case basis of the steps taken by 
the Union (on questions such as the CTBT, mines and 
non-proliferation) ; 

•  promotion of the ratification of international treaties 

• 

• 

by Ukraine; 
further consideration within the Council on the 
position of Ukraine in the European architecture of 
security; 
further support in the development of OSCE and its 
work on a European security model, in cooperation 
with Ukraine. 

2. foreign policy questions: 
• 
• 

strengthening of political dialogue; 
consultations with Ukraine prior to particular events 
(such as UNGA); 
specialist consultations with the CFSP group, and 
on an ad hoc basis. 

• 

Community (Tacis ) : 
•  with respect to regional cooperation, strengthening of 
assistance by the improved coordination of the 
existing assistance programme and the development 
ofsynergetic  links (Tacis, Phare, Meda, Black Sea 
cooperation, relations of Ukraine with countries of 
Central and Eastern Europe). 

28 

Measures to be implemented : 

Timetable 

5.a.6 Transport 

Community : 
•  priority in assistance for  the trans-European 

networks programme, in particular with respect to the 
multi-mode connection of Ukraine's national transport 
systems with those of the rest of the continent; 
importance of the improvement of border crossings in 
this context; 

• 

legal and technical advice for the adoption of more 
transparent legislation on calls for  tender, the 
reorganization of the road transport sector, 
privatization of transport; 

•  development of the preparatory stage of investments 
in infrastructures in close coordination with EBRD. 

Community + Member States : 

• 

• 

action aimed at ensuring non-discriminatory treatment 
of air carriers flying to Ukraine 

assistance in the organization and training of 
officials; 

Possibility of including Ukraine in such multi-lateral 
events/conferences  as the next EU/CEEC  Information 
Society Forum, which will take place in Brussels. It would 
be helpful  if Tacis could meet the costs of Ukrainian 
participation in this (or an equivalent meeting) in the same 
way as Phare has done for CEEC countries. 

Autumn 97 

Nov. 96 

33 

Measures implemented : 

Measures to be implemented 

Timetable 

5.b) Development  of bilateral  commercial 
exchange 

• 

assistance to Ukraine in the matter of its 
gaining membership to the WTO with the 
intention of adapting its commercial 
legislation to international practice and 
also to the principles  of the  Interim 
Agreement, particularly in the sphere of 
standards and of the registration of 
intellectual and industrial property. 

anti-dumping policy,  the position of the 
Commission, spelt out during the Joint 
Committee of May  1996, rests on the 
following elements : antidumping rules are 
an integral part of the rules governing the 
multilateral trade system, actual anti 
dumping measures affect  a very limited 
share of EC trade with Ukraine, amounting 
to less than  1% of Ukrainian exports in 
1994. Eight products are  affected. 
Two seminars on antidumping policy 
already took place in Ukraine. 

Community  : 
• 

creation of a. joint  working group  (EC + Ukraine.) 
responsible for identifying  causes of imbalance: study 
of measures to achieve trade balance, identification  of 
various forms of obstacles, an alert system and 
following up decisions; 

November 
96 

• 

• 

entry into force  of the PCA will confirm the date set 
in Article 4. This prospect underlines the importance 
of continuing the economic reform process. 

1998 

November 
96 

steel trade  : the Commission will start negotiations 
on 28-29 November in Kiev for  a new  ECSC 
agreement. The directives foresee a longer 5 years 
agreement, seeking improved market opening in the 
Community with the possible eventual abolition of 
quantitative restrictions for Ukrainian steel products, 
in exchange for the achievement of appropriate market 
conditions within the Ukrainian economy, namely "the 
application of disciplines no less stringent than those 
applied in the Community, concerning competition and 
state aids". This offer  will be a major  prospect of 
market  opening. 

• 

textiles: during  1996-99, gradual  forthcoming 
liberalization of the Community regime towards 
Ukrainian products in accordance with the  PCA. 

•  membership of WTO  : further  assistance in the 

adapting of commercial legislation to international 
standards, in accordance with the PCA and with a 
view to the membership. 

• 

anti-dumping  : organization of seminars for 
officials; 

•  Commission available to examine the granting  of 
individual treatment to producers in non-market 
economies that provide evidence that they operate 
without state interference. 

34 

Measures implemented : 

Measures to be implemented : 

Timetable 

5. c) development of investment 

Community (Tacis) : 
• 

assistance in developing the secondary market of 
shares of privatized companies (assistance to the 
Stock Exchange related to the setting up of custodians, 
the control and supervision of capital markets and staff 
training). 

• 

support to financial sector for the introduction of 
international accounting standards by Ukrainian 
banks. 

Member States : the promotion of investment under the 
auspices of the PCA (art. 54 of the PCA), requires the 
Member States to intervene. Research into investments 
guarantee systems,  development of a system for 
promotion  of trade/bilateral  Chambers of Commerce. 
Germany announced the establishment of a German-
Ukrainian fund for SMEs, as a preliminary stage for a 
bank providing credits to SMEs. 

35 

6. ASSISTANCE TOWARDS REFORM OF THE ENERGY  SECTOR 

Measures implemented : 

Measures to be implemented : 

Timetable 

6. a)  restructuring  of the energy  sector 

•  The Community  has put aside ECU 55 

million for the 1991-96 period, i.e. 35% of 
its technical assistance to Ukraine, to 
energy and 24% to nuclear safety?. 

Principal guidelines : 
(i) support for the implementation of the 
decentralized, competitive structure of 
production and distribution, based on prices 
reflecting costs; 
(ii) support for measures of energy savings 
and improvement of energy  efficiency, 
particularly in industry; 

(iii) support for the modernization of production 

equipment. 

•  The EBRD committed ECU  150 million in 
Ukraine in 1995; it is to commit ECU 200 
million in 1996, chiefly in the private 
sector. 

1996-1999 

The Community  : will continue to develop a global 
approach for progress across all areas of energy 
production and usage, including energy  efficiency: 

•  create a structured dialogue with Ukraine on energy 
policy, to revitalize the sector within a competitive 
market focus and to ensure security of supply and 
energy diversification  for both the EU and Ukraine; 

•  define co-operative schemes, reinforced  by exchanges 

of institutional experience and technological know-how; 

•  promote funding of selected schemes through 

collaboration with appropriate financing  institutions, 
especially the EBRD; 

•  continue support to the restructuring of the power 

sector according to sound economic principles (least-
cost options, cost-based tariffs  and efficient  system of 
bill collection); 

continue efforts  to implement energy efficiency  policies 
and programmes in all sectors of the Ukrainian 
economy; 

•  promote a global approach to the restructuring of the 

coal sector, taking into account the social dimension in 
Ukraine, especially in the Donbass region; 

•  secure transit arrangements for oil and gas, which is 
important both in meeting European Union energy 
import needs and in providing a source of revenue to 
Ukraine: support to the participation of Ukraine to NIS 
working groups on rehabilitation, modernization and 
rationalization of oil and gas pipelines; 

encourage the development of legislative and financial 
frameworks  within which industrial co-operation and 
joint ventures in the energy field can be established. 

• 

ratification  of the Energy Charter Treaty to achieve 
these objectives. 

36 

Measures 

implemented 

Measures  to  be  implemented 

Timetable 

6.  b) nuclear  safety 

The EC  plays an essential  role in the 
implementation  of the EU/G7  Plan  formulated 
in Naples  in  1994 for the restructuring  of the 
nuclear  sector  and particularly  the closure  of 
Chernobyl. 

As a member of G7's Working  Group  for 
Nuclear  Safety,  the Community  participated  in 
the elaboration  of the action plan  and the 
negotiations. 

The Community  is  financially  committed  to 
assist Ukraine in the implementation  of the 
Plan. 

The Community  Vas, financed research  in the 
following  areas: 

* phasing  out  of reactors  1, 2  and  3  of  the 
Chernobyl  power  station 

* ensuring  the  safe  condition  of the  damaged 
reactor  (sarcophagus) 

* completion  oftheRovno  4 and  Khmelnitsky 
2 reactors  (project  management,  on-site 
inspection, engineering with a view to  obtaining 
ofloan) 

The Community participates  in the  financing  of 
the new  installations  necessary  for  the 
phasing  out  of  Chernobyl 

The EBRD  is participating  in the financing  of 
G7 Plan measures  for  Chernobyl  and  is 
managing the $ 200 million Nuclear  Safety  fund 
(NSA) 

Community  : 
• 

contribution to the implementation  of the  agreement 
providing  for  the  closure  of  Chernobyl  in  2000. 

Mid-1997 

• 

decision  within  the  G7 of supplementary  funds  to  be 
provided  project  by  project. 

(i)  the granting of the Euratom  loan to  finance  the 
completion  of the two reactors  at Rovno  and 
Khmelnitsky  if the current  study confirms  that this  is 
the least cost solution as required  in the  MoU, 
(ii) the Community, together with  its G7 partners,  will 

have to take important political  decisions  regarding  the 
necessary  measures  to assure the safety  of the  shelter 
(Chernobyl  unit 4). 

(iii)The provision  of Ukrainian  funds  planned under  the 

MoU will also have to be  confirmed. 
•  Continuation  of ongoing  programmes 

in order to 
insure an increased  level of protection  and  safety  of 
existing nuclear power  stations. 

Mid-1997 

Mid-1997 

1996-1999 

37 

Measures implemented : 

Measures to be implemented : 

Timetable 

6.  c) economic, social and environmental 
regeneration and secondary medical effects of 
Chernobyl 

•  The Joint EU-Ukraine-US project to 

develop an action plan  to address the 
social impact of closing Chernobyl 
Nuclear Power Plant  (CNPP) commenced 
in October  1995, in response to the request 
from  Ukraine to include this topical issue in 
the G7-Ukraine MoU. A number of project 
activities have been initiated at a local level, 
i.e. in the Slavutich region and the CNPP. 
They have resulted in a cooperative working 
environment with the key local actors who 
will be most affected  by the closure. 

•  Clean-up and secondary medical effects of 

the Chernobyl accident were already 
tackled through the Tacis Nuclear safety 
programme from 1991 to  1995, concerning 
in particular studies on the use of 
contaminated soil, radioactive waste 
treatment, development of thyroid cancer 
and its treatments, abstraction of ground 
water for domestic potable supply, use of 
contaminated forestry waste. 

1996/1997 

the EC will further contribute to the establishment  of 
a programme aimed at alleviating the major social 
consequences of closing CNPP and an appropriate 
structure to administer the initiatives contained in the 
"closure package" through ways of training schemes, 
surveys (on population, labour mobility, compensation 
mechanisms), information campaigns to inform 
population on the ways it will be affected  by the 
closure. 

There shall be a continuation of past activities 
through the Tacis programme at a regional level, 
involving in particular the main contaminated 
populations and areas of Ukraine, Belarus and Russia, 
with the objective to try and define an overall long-
term strategy to tackle these issues. 

1997 

38 

Annex I  : THE  TACIS  PROGRAMME  FOR  1996-99 IN THE  CONTEXT  OF  THE 
NEW  TACIS  REGULATION 

The new Tacis Regulation,  adopted in June  1996, does not alter in any respect the general 
approach of the previous regulation, i.e. it still focuses  on the transfer  of know-how in key 
sectors of reform.  There are however some important innovative elements that allow the 
Tacis programme to have a broader set of instruments to assist the New Independent  States 
in their reform  process towards an open market economy with democratic institutions. 
These elements are particularly relevant for a country like Ukraine and they are mainly the 
following: 

• 

• 

assistance may cover costs related to small-scale infrastructure projects  in the context 
of border-crossing  facilities; 
the programme shall support the establishment of joint  ventures through the funding  of 
equity investment  in small and medium-sized  companies; 

•  due regard  shall be taken of the promotion  of equal opportunities for  women in 
recipient countries and of environmental considerations when designing and 
implementing programmes; 

•  particular attention will be paid to border-crossing facilities  on borders between the 
New Independent  States and the Union, and the New Independent States and  central 
Europe,  as well as to measures on the Finnish-Russian  border; 

Moreover, the Regulation encourages once again coordination  and cooperation with the 
international financial  institutions along these lines. 

The Tacis Indicative Programme for Ukraine for  1996-1999 has been prepared,  negotiated, 
approved  and signed on September  11,  1996. It will concentrate on three priority areas: 
institutional reform  and development,  support for economic reforms  and private sector 
development,  energy and environment. Within the first priority, the measures foreseen will 
aim at implementing the PCA provisions and adapting the institutional  framework 
conducive to a democratic and market based  society, forming the administration  and 
developing the civil society. Within the second priority, three objectives will be pursued: 
the transfer  of existing economic activities from  the public sector to the private sector, the 
restructuring  and development of privatized companies, the start-up and development  of 
new economic activities by the private sector. Under the third priority area, assistance shall 
concentrate on the support  of an overall sectoral reform policy while reducing the energy 
dependence of Ukraine, and envisage activities in the field of environment  at horizontal as 
well as vertical level,  within the scope of the Regulation,  starting from  projects  aimed at 
increasing public awareness in this area. 

The Tacis Programme for  1996-1999 for projects benefiting Ukraine has duly taken into 
account these innovative elements of the new Tacis regulation. Indeed, environment  issues 
will be considered  in the development  of projects at national and regional level; the 
programme JOP will, hopefully  successfully,  be developed in Ukraine for developing joint 
ventures based on specific local needs; cross-border cooperation and measures promoted at 
decentralized level by local and regional actors of Ukraine will be supported  in the regional 
programmes for  common environment projects as well as management  of border posts and 
the development of the TENs all over Europe. In this latter context, extensive use could be 
envisaged of small-scale infrastructure  projects. 

39 

The Commission shall therefore  make technical assistance and small-scale infrastructure 
facilities for border crossings available to Ukraine for  1996-1999. Efficient  and optimal use 
of these instruments will very much depend on the reform  path that Ukraine will have 
followed  all along this period. 

40 

Annex H  : INTERNATIONAL  AID TO UKRAINE 

International  aid  1991-1995  : 

Grants 

loans 

European  Union  (mecu)  : 

871 

1436 

Total 

2744 

of which : 

Community: 

340* 

815 

1155 

*(this compounds with the share of Ukraine in Tacis intestates (60 mecu total)  and 
humanitarian aid ECHO (about 4 mecu). 

Member  States  : 

USA: 
($ in mecu) 

556 

558 

1033 

494 

1589 

1052 

1. Aid from  the Union  : the EC has implemented  a series of instruments to assist Ukraine 
in its transition to a market economy and a democratic society.  The technical and  financial 
assistance may be calculated,  including all instruments, at ECU 2.8 billions, of which  1215 
comes under the Community: Tacis: ECU 400 million (grants); loans for the balance of 
payments: up to ECU 285 million for  1995-96, the rest coming from  the Member  States 
(ECU  1589 million of which ECU 556 million are grants and ECU  1033 million are loans). 
Some Member  States are very involved in Ukraine on a bilateral basis and all of them are 
through their contributions to international institutions such as the IMF, the World Bank 
and the EBRD. 

a) technical  assistance: the Tacis programme represents ECU 400 million over  1992-95 
of which  105 million was for  nuclear safety and ECU 62.5 million constituted  the EUs 
contribution to the G7 Plan for Chernobyl.  About ECU 538 million are planned  for 
1996-99 with the following  priorities: support for the legislative and regulatory  institutions 
and the retraining of staff,  enterprise reform  and the development  of the private sector and 
the reform  of the energy sector and the environment. 

The total Tacis  undertakings  which will benefit  Ukraine  under the 1996 budget are 
estimated  at about ECU  108 million in the form of grants.  The national  allocation 
(ECU 38.5 million) is already committed, as is the  1996 Tacis contribution under the E 
U/G7 Plan for the closure of Chernobyl (ECU 37.5 million).  To this is added the measures 
provided  as topic programmes,  such as the Democracy, Nuclear  Safety,  Inter-state  ... 
programmes, estimated at ECU 32 million. 

b) aid in the restructuring  of the energy sector has constituted  a priority of Community 
assistance since the beginning.  This position is enshrined in the approach of G7, which has 
established  a link between the measures for the closure of Chernobyl and the long-term 
reform  of the energy sector in Ukraine.  The Community's aid has been concentrated  on the 
reorganization  of the energy  sector, the improvement  of the efficiency  of the production 
process in the oil, gas and coal sectors, and also in energy savings, for a total of ECU  55 
million. 

41 

For nuclear energy, the EC participated  in the G7 Plan decided on in Naples in 1994. 
This provided  overall measures for the restructuring of the nuclear sector and, in particular, 
the closure of Chernobyl, in the framework  of the MoU signed on 20.12.95 with Ukraine. 
The financing will comprise grants, loans and local funding.  The European  Community has 
committed  itself to put ECU 500 million in this action over three years (100 million  from 
Tacis, 400 million of Euratom loans).  The actual contribution  of the EC has already been 
determined:  1994; ECU 25 million:  1995; ECU 37.5 million:  1996; ECU 37.5 million, of 
Tacis credits. 

c) macro-financial  assistance: the EC paid Ukraine in  1995 a first loan to the balance of 
payments of ECU 85 million.  The Commission is currently implementing the decision of 
the Council of October  1995 to grant a second loan up to a maximum of ECU 200 million. 
This aid is linked to the registering of progress on the nuclear question and to the 
furtherance  of economic reforms.  It is granted under particularly favourable  financial 
conditions and is subject to a condition of the sharing in the settlement  of the aid between 
the international donors. 

d) humanitarian  aid - ECHO has financed  humanitarian measures in Ukraine of a total 
amount of  1994; ECU 3.3 million:  1995; ECU 0.5 million:  1996; ECU 0.8 million.  These 
measures, intended to deal with the consequences of the Chernobyl nuclear accident,  have 
mainly consisted of the sending of equipment and medicines for detecting and monitoring of 
cancer.  Ukraine has also benefited  from  programmes covering several countries (Russia, 
Ukraine, Belarus), for  an amount  of ECU 0.9 million in  1994, ECU  1.4  million in  1995 and 
ECU 0.5 million in 1996. 

2. Aid from the USA: $1405 million between  1991 and  1995 mainly to the support  of 
democracy, the restructuring  of the economy, the private sector, energy and  financing 
linked to nuclear non-proliferation  ($403 million between  1992 and 96).  To this is added 
$400 million of commercial  credit between  1992 and 96.  Aid of $225 million is planned  for 
1997. 

3. Other sources of aid (international aid) 

-  aid from the World Bank and the IMF: $3.500 million of loans since  1994 of which 
$2 billions were in  1996; planned for  1997: a balance of payment loan of $550 million 
and loans of $200 million linked to projects; discussions in progress with the IMF for a 
loan of $3.1 billions over 3 years, and also a stabilization fund  of $1.5 billions linked to 
the introduction of a new currency. 

-  aid from the EBRD: ECU  150 million was committed to Ukraine in  1995 and this 

should amount to ECU 200 million in 1996, mainly in the private sector.  The EBRD 
participates in the financing  of the measures of the G7 Plan for Chernobyl and also 
through the Nuclear  Safety Fund of $200 million (NSA) administered by the bank. 
loans linked to the reform  of the energy sector and to nuclear safety,  approved  or 
under negotiation for  1996-97: World Bank, $1,409 million; EBRD, ECU 975 million, 
(pm : Euratom, ECU 400 million). 
loans linked to disarmament:  $234 million promised in November  1994 by several 
European  countries (conversion of defence industry, training of personnel, etc), $350 

- 

- 

42 

million committed by the USA and $1 billion promised by the USA and Russia in the 
form  of compensation  (mainly nuclear  fuel). 

43 

Annex HI  : THE ECONOMIC  SITUATION  OF UKRAINE 

1. The economic  situation 

a)  the  Ukrainian  economy  is  faced  by  considerable  challenges:  transformation  from  a 
planned economy heavily centered  on heavy and military industries, controlled  from  abroad, 
to a market  economy; an energy price crisis greater  than that  facing  the West  in the  1970s; 
a  reshuffle  of  its  trade  markets.  These  challenges  were  aggravated  by  the  absence  of 
reforms  between  1991  and  1994,  a  period  of  marked  recession  (economic  activity  had 
fallen  in  1994  to  half  the  level  of  1990),  hyper-inflation  (over  10,000%  in  1993),  and 
budgetary  deficit. 

The success of the economic transformation  is a necessary condition for  the maintenance of 
independence.  It also constitutes the main preoccupation  of the population. 

b) the policy  of macro-economic  stabilization  implemented  since October  1994 has given 
impressive results  : reduction  of inflation  to  0.1% per month  in July  1996, reduction  of the 
budget  deficit  to  4.2% in the first half of  1996, relative currency  stabilization.  However,  a 
serious  crisis  of  budgetary  liquidity  has  developed  (1.5  billion  of unpaid  public  salaries in 
August  1996). 

c) micro-economic  liberalization  has been taken on (liberalization  of internal  and  external 
trade and prices, and the reduction of state intervention).  Structural  reforms  (privatization 
and  conversion  of  enterprises,  reform  of  the  state  administration  and  of  the  tax  system) 
have begun. 

The  EU  recognized  in  May  96  that  Ukraine  was  an  economy  in  transition.  In  fact,  with 
respect  to the liberalization  of the economy  and  of the  share of the private  sector,  Ukraine 
is in the last  group  among  countries  in transition,  according to World Bank  figures  ("From 
Plan  to  Market").  In  practice  the  transformation  of  the  economy  is  colliding  against 
strong  political  resistance,  a  conservative  parliament,  vested  interests  of  the  former 
nomenklatura in the economy and the administration,  the low level of the standard  of living 
of the population  and of capital available for  investment. 

d)  the  economic  situation  is  uncertain:  GDP  in  real  terms  is  42%  of  the  1989  level, 
production  is still falling  (currently less than 35% of the  1990 level in industry  and  65% for 
agriculture).  However  this  does  not  record  the  dynamism  of  the  underground  economy, 
which is estimated to be 50% of GNP and of services. 

e)  investment  is  insufficient  :  (foreign  investment:  about  $200  million  in  flux  for  1995, 
$950  million  in  stocks  since  1989, against  $3.9  billions  in Russia),  the  liberalization  of the 
economy and  privatization being incomplete,  and the treatment  of foreign  enterprises being 
perceived  as  uncertain  (instability  of  the  legal  framework,  arbitrary  behaviour  by  the 
administration,  absence  of  reliable  commercial  courts).  This  situation  has  up  till  now 
deprived the Ukrainian economy of an essential backing of economic dynamism. 

O  the  population  is  affected,  which  substantially  reduces  the  room  for  maneuver  of 
economic  policy.  Real  wages  are  35% of  their  1990  level  (the  average  wage  is  $78  per 
month, below the estimated  minimum requirement  of $100).  A "glimmer of social security" 

44 

was  introduced  in  March  1995  and  pensions  doubled  in  April  1996  in  order  to  partly 
compensate for the introduction  of market mechanisms for the most destitute. 

The  regular  payment  of  wages  constitutes  a  prerequisite  to  restoring  confidence  in  the 
government's economic policy. 

2. The state of implementation  of reforms : 

-  macro-economic  stabilization:  reduction  of budget  deficit  (this fell  from  23% of the 
GNP in  1992 to 4.2% in the first  half of  1996.  Public expenditures  were  reduced  from 
58% of GNP in  1992 to 40% in  1996);  establishment  of a restrictive  monetary  policy 
(limitation  on  money  creation,  freezing  of  bank  credits  to  the  private  sector);  tax 
reform (introduction  of VAT law on the taxation of companies). 

- 

-  price liberalization,  particularly  of  publicly  set  prices,  rents  and  charges  (80%  of  the 
actual  price  is  invoiced),  of  energy  and  of  basic  living  goods,  is  complete  for 
enterprises,  still partial for individuals.  Since January  1996 the government  has stopped 
covering  payment  defaults  by  consumers.  However,  since  these,  in  particular  the 
enterprises,  are still not  paying their energy bills, the  suppliers are accumulating  a large 
debt. 
the  liberalization  of  foreign  trade  and  exchange  is  well  advanced,  in  spite  of  the 
persistence of administrative obstacles.  Negotiations  for  membership  of Ukraine to the 
WTO are progressing.  The relative stability of the currency has enabled  a new  national 
currency, the Hryvnia, to be introduced  in September. 
the  privatization  of  enterprises  has  been  delayed  due  to  the  complexity  of  the 
procedure adopted  and the political opposition  of the parliament.  The latter has, for  the 
fourth  time  (in  July  1996),  adopted  a  draft  law  which  is  unfavourable  to  the 
privatization of the food-product  industry. 

- 

"Small  privatization"  is well  advanced:  33,000  small  enterprises  had  been  privatized  by 1 
July  1996  (out  of 45,000)  and  2,100  medium  and  large  enterprises  (out  of  8,000).  There 
has only been  limited  privatization  of land  (33,000  private  farms,  representing  1.8%  of the 
agricultural land of the country). 

Access  to  foreign  investors  is  restricted:  although  in  principle  it  is  guaranteed  by  law 
(treatment  as for nationals), in reality it is subject to numerous restrictions  (priority given to 
employees,  some  shares  are  reserved  for  the  state,  reduced  periods  of  publication,  land  is 
excluded).  There  is  no  secondary  market  and  the  law  on  bankruptcies  is  defective.  One 
thousand  enterprises are excluded from the privatization process. 

Beyond  privatization,  the  operating  conditions  of  the  private  sector  remain  very 
taxation,  restrictive  attitude  by  the 
difficult 
administration, Mafia payments. 

:  high,  complex  and  discriminatory 

3.  The  government  has  announced  a  huge  reform  programme  for  1997  centering  on 
micro-economic liberalization,  the return  to growth  and the integration  of the  underground 
economy  into  the  legal  one.  However,  this  programme  still  has  to  be  accepted  by 
Parliament.  The  measures  under  way  or  envisaged  include:  administrative  reforms  -
simplification  of  the  government  organizational  structure,  and  development  of  the  rule  of 

45 

law  in  economic  matters  (establishment  of  a  bankruptcy  law  and  of  a  reliable  system  of 
commercial  courts);  tax  reform  of  the  taxable  base,  the  rates  and  the  methods  of 
collection,  so  as  to  improve  the  budget  balance  and  reduce  the  share  of  the  underground 
economy; restructuring  of the state budget,  particularly  with a reduction  of grants to the 
economy  and  a  better  allocation  of  resources  in  favour  of  health  and  education  costs, 
reform  of  the  pension  system  (particularly,  the  creation  of  autonomous  pension  funds, 
independent  of  the  state  budget);  reform  of  the  financial  system  (consolidation  of  the 
independence  of  the  central  bank,  introduction  of  a  reliable  mechanism  of  regulation  and 
supervision of banking activities), development  of a stock (and bond)  exchange to  mobilize 
domestic  savings  and  foreign  investment;  further  privatization  (large  enterprises,  land, 
commercial  assets),  closing  of 
liberalization, 
improvement  of  access  to  the  Ukrainian  market  for  foreign  products  and  investments, 
implementation  of the legislative and regulatory conditions for joining the WTO. 

loss-making  mines;  further 

trade 

4. Various figures on the Ukrainian  economy: 

GDP  : $44.3 billions in  1996.  The GDP in real terms has fallen  since  1989 (-40%  between 
1989  and  1993,  -24.3%  in  1994,  -12%  in  1995,  -8%  predicted  for  1996).  The  black 
economy is estimated at 50% of GDP.  The IMF predicts a recovery in  1997 (+3%). 

Production  : consistently  falling  since  1990.  Real  industrial  production  is  at  35% of the 
1990 level, agricultural production at 65%. 

Inflation  :  clearly  improved,  2%  monthly  in  September  1996.  The  rate  of  annual 
inflation  has decreased  from  375% in  1995  (the first year  without  hyper-inflation)  to 45% 
in 1996. 

Foreign trade  : CIS 61%; EC  14.9%; USA 5.7%.  See annex IV. 

Balance  of  payments  : deficit  of  $5.7  billions  in  1995,  due  to  energy  imports;  deficit  of 
$3.2  billions  predicted  for  1996  and  $3.6  billions  in  1997,  before  international  financing. 
Foreign debt linked to energy: $4 billion with Russia (rescheduling  agreement  concluded in 
February  1995), $500 million with various creditors under Year 1995. 

Employment  : low official  unemployment  rate (1%).  A recent study by the ILO calculated 
hidden  unemployment  at  34%  (unpaid  holidays,  reduced  working  hours).  Survival  is 
widely obtained by a second job.  Employment  structure: agriculture, 20%. 

46 

Annex IV : TRADE  & INVESTMENT  ISSUES BETWEEN THE EC AND UKRAINE 

1. Distribution  of Ukrainian  foreign  trade  : CIS  61 %; EC  15%; USA  : 5,7%  Ukraine 
has  significantly  reoriented  its  trade  relations  since  1991. It  increased  its  exports  towards 
Western  countries  and  now  reaches  a  positive  balance  with  the  West  in  general,  but  not 
with  the  EC.  However  it  remains  very  dependent  on  CIS  countries,  with  a  substantial 
deficit  (- $2.8 billions in  1995, $ 4.5 billion in 96), due mainly to energy imports. 
The  EC  is  already  Ukraine's  main  trading  partner  outside  the  CIS,  with  a  share  of 
15%  of  Ukrainian  foreign  trade.  Although  the  EU's  increasingly  positive  balance,  is  a 
problem  for  Ukraine,  EC  imports  from  Ukraine  are  also  increasing  (+35%  in  1994, 
+15% in  1995). They amount to four times those of the USA. Trade with the EC  comprises 
mainly machine-tools,  electrical machinery (EC exports),  steel  and  metal,  mineral,  chemical 
and textile products (EC imports). 
Trade  data  should  be taken with  caution  as they  only  reflect  part  of the  reality.  There  is a 
substantial amount of unregistered trade and barter trade (about 30%). 

Latest EC-Ukraine trade data (in million ecu,  12 Member states) : 

1993 

1994 

1995 

EC Imports: 

934.6 

1253.6 

1452.6  (+15,6%) 

EC Exports: 

1474.8 

1667.7 

2061.8  (+23,6%) 

EC Trade Balance: 

+540 

+414 

+609 

(+47%) 

15 Member  States  (1995)  : imports  :  1518.7  million  ecu;  exports  : 2214  million  ecu; 
ecu; 
balance 

+695.2million 

: 

47 

2. Regulatory  framework  : Ukrainian  trade  was  in  principle  liberalized  (no  more  state 
trading,  withdrawal  of  tariff  measures  and  quotas  on  exports,  withdrawal  of  quotas  on 
imports).  However  there  are  strong  pressures  by  various  ministries  for  a  strategy 
based  on  support  for  exports  and  substitution  for  imports,  in  order  to  protect 
domestic  products.  Therefore  administrative  intervention 
is  generally  intent  on 
preventing free trade. 

Concrete  obstacles  remain  such  as  indicative  prices  for  exports,  import  licensing 
regimes  for  some  products,  which  entail  cumbersome  and  often  arbitrary  administrative 
control.  Export  tariffs  were  even  recently  reintroduced  on  some  products  namely  ferrous 
scraps, non ferrous  metals; following  an EC request,  the Ukrainian  authorities  promised  to 
them rapidly.  Such  export  restrictions  create  an unfair  competitive  advantage  for  domestic 
manufacturers  as  they  get  access  to  subsidized  raw  materials,  and  they  may  delay  the 
process  of  industrial  restructuring.  They  are  against  WTO  rules  and  they  are  against  the 
condition  of  the  EU  macro-financial  loan  that  "no  reversal  shall  be  permitted  in  the 
liberalized trade and price regime". 

The  Community's  objective  is  to  eliminate  these  restrictions  to  trade,  and  it  would 
deem a reversal from  liberalization very  negative. 

3. Issues at stake  in bilateral trade relations : 
-  There are  recurrent  complaints  from  the Ukrainian  authorities  that  EC  trade  is not  open 
enough.  Complaints refer  to the EC positive balance, to areas of trade which  are  subject  to 
quantitative limitations like steel, textile, agriculture, as well as to the antidumping policy. 

-  The  EC  is  concerned  about  unsatisfactory  market  access  conditions  in  Ukraine  for  EC 
products  and  services,  as  European  enterprises  face  numerous  market  access  difficulties 
such  as  : tariff  protection,  discriminatory  excise  taxation  regimes, 
technical  barriers  like 
non-transparent  or discriminatory testing and certification  requirements, pure  discrimination 
by legislation,  like the new law on public procurement which excludes foreign  suppliers. 

These  issues  were  discussed  in  depth  and  arguments  were  exchanged  at  the  May  Joint 
Committee  meeting,  and  the  Commission  agreed  in  September  96  to  set  up  a  joint 
working group in order to look for ways an means to improve trade relations. 

4. detailed  description  of the bilateral trade issues. 

i) market access issues in the EC for Ukrainian  products  : 

a) the EC positive balance  : the  increase  in  EC  import  figures  indicates  that  Community 
market access is not so restrictive. The existence of a trade surplus is a normal  phenomenon 
with  economies  in  transition  as  the  latter  still  lack  products  which  are  competitive  in 
western markets. The constantly falling trend  of Ukrainian  industrial  production  since  1990 
indicate that this is largely an industrial problem. 
Moreover  the EC  has made substantial trade concessions  (most  favoured  nation  treatment, 
General System of Preferences). 

48 

b)  steel  products  :  the  current  agreement  on  trade  in  steel  products,  signed  in  January 
1995 (for  two years, extended  to June 97), has set up an increase in steel  quotas  of 35% in 
1995 and  15% in 96. Quotas for  1995 have been fully  used by Ukraine on flat  products, but 
not on long products. The Commission had a first exchange of views on the new agreement 
with the Ukrainian authorities in October 96, in the framework  of the ECSC contact group; 
it will start  negotiations  for a new ECSC agreement  on  28-29  November  (see last  part 
of the main document). 
It should be noted that the Interim Agreement  already entails an obligation  to  remove  state 
aid which are detrimental to mutual trade. 

c)  textile  products  :  the  new  agreement  concluded  with  Ukraine  in  November  199.5 
maintains  existing  quantitative  limitations,  except  for  five  categories  of  textile  imports 
where  they  are  suppressed.  The  quota  level  was  raised  by  20%.  This  seems  to  be  a 
satisfactory  deal for Ukraine. 
Textile trade  with  Ukraine  has  increased  strongly  in  1994,  leaving  a  small  surplus  for  the 
EC  : EC imports =  117.8 million ecu,  exports =  124 million ecu; surplus = 6.2  million ecu, 
reduced from  15.5 million ecu in 1993. 

d)  GSP  :  criticisms  of  GSP  mainly  stems  from  a  lack  of  understanding  of  the  Ukrainian 
authorities  regarding  the  functioning  and  opportunities  of  the  GSP  system.  Therefore  the 
Commission  has proposed  at the Joint  Committee  to  organize  an information  seminar.  As 
regards  the  substance,  a proposal  for  a revision  of the  preference  levels  was  addressed  to 
the Council, it foresees  a 50% reduction of preferences  for  products of chapter  12, with the 
exclusion of these products in 1999.  No change is expected  as regards industrial products. 

e)  antidumping  policy  :  antidumping  is  a  recurrent  political  issue  for  the  Ukrainian 
authorities  who  keep  stressing  the  "adverse"  effect  of  the  ad.  policy  in  relation  with  EU 
trade  opening.  The  position  of the  Commission  was  spelt  out  during  the  May  1996  Joint 
Committee: Anti-dumping  policy is an integral  part  of the rules of multilateral  trade  and as 
long as Ukraine is not recognised  as a market economy the rules applicable remain those of 
reconstitution  of  real  value,  corresponding  to  state-run  economies.  The  Commission 
reminded  the  Ukrainian  authorities  in May  1996  of  the  possibility  of  individual  treatment 
for producers able to prove that they were producing without  state intervention. 

ii) market access issues in Ukraine for EC products and services : 

This  is  a  main  issue  for  the  EC,  as European  enterprises  face  numerous  market  access 
difficulties.  A comprehensive  note  on barriers to  trade  in Ukraine  was  handed  over  to  the 
Ukrainian authorities during the May Joint Committee meeting. 
This problem of market access for EC products  is interrelated with the issue of access 
for foreign  investments.  They  have similar causes, namely  misconceptions  regarding 
the  rationale  of  a  free  economy,  reluctance  to  allow  competition,  and  contradictory 
regulatory  decisions.  The  consequences  are  also 
:  they  act  as 
disincentives  to  potential  foreign  investors  and  the  lack  of  competition  and  foreign 
investment delays the take-off of the Ukrainian  economy. 
The  Commission  considers  that  the  removal  of  these  obstacles  is  in  the  interest  of  the 
Ukrainian economy itself, as they hamper its integration into the world economy.  Moreover 
they  are  contrary  to  the  PCA  and  the  WTO  rules  and  Ukraine  will  have  an  obligation  to 
remove them. The Community offered  support  for this through its technical assistance, as it 

interrelated 

49 

is already  the case for  standards with Tacis  assistance  to  Derzstandardt,  as well  as for  the 
WTO accession process. 

Main obstacles : 

§  tariff  protection  :  a number  of tariffs  have been  increased  in recent  months, whereas a 
standstill would be appropriate during WTO access negotiations, and information  of the EC 
would be desirable; 

§  discriminatory  excise  taxation  regimes.  Many  excise  rates  are  discriminatory  to  the 
detriment  of  imported  goods.  This  is  against  national  treatment  for  goods  (Interim 
Agreement). 

§  technical  barriers,  like  non-transparent  or  discriminatory  testing  and  certification 
requirements.  Separate  certification  of car  spare parts for  already  certified  types of motor 
vehicles is an example.  This is uncommon  and useless, it is also against  national  treatment 
for goods (I. A.). 

§  discrimination  by  legislation,  like the new  law  on  public  procurement  which  excludes 
foreign  suppliers.  This  is  against  national  treatment  for  companies'  operation  (art.30  of 
PCA  when  ratified)  as  well  as  against  WTO  rules.  The  Ukrainian  delegation  at  the  Joint 
Committee  indicated  that  the  new  law  on  public  procurement  is  being  revised  so  as  to 
include foreign  suppliers. 

Another case is air services taxation. Ukraine imposes a discriminatory tax when a  foreign 
carrier operates a route to or from Ukraine, which is not  operated  by the Ukrainian  carrier. 
This tax is against  commonly  accepted  international  air policy principles  and  is imposed  to 
the detriment of the development of air services with Ukraine; 

The Ukrainian Delegation  at the Joint Committee referred  to the "Plan of priority  measures 
regarding the accession  of Ukraine to the WTO", approved  by the  Cabinet  of Ministers on 
18 March  1996, which foresees  in particular to bring the Ukrainian legislation in  conformity 
with WTO  rules» regarding  import  licensing,  public  procurement  and  intellectual  property: 
but no deadline was given for  implementation. 

Hi) WTO : prospects for Ukraine's application  : 

The  accession  process  of  Ukraine  to  the  WTO  is  going  on,  with  the  support  of  Tacis 
technical  assistance.  Problems  raised  by  WTO  members  last  year  included  the  country's 
heavy  dependence  on  barter  (currently  30%  of  Ukrainian  foreign  trade),  especially  for 
agriculture, the rôle of state monopolies, export restrictions and high import barriers. 
A WTO working party was  set up in December  93 to  define  Ukraine's terms  of entry, and 
has met for the 3 rd. time in June  1996 to examine Ukraine's trade policies. 
This  last  meeting  discussed  the  customs  tariffs  structure  of  Ukraine,  as  well  as  market 
access in Ukraine for goods and services. On the former  issue, Ukraine made an offer  with 
a fairly high tariff levels, liable to decrease to  14% on a weighted average basis until 2005. 

5. Investment  review  : evolution  of investment  flows  and  current legal framework  for 
investment in Ukraine : 

50 

This  is  a  main  issue  for  the  EC,  and  it  should  also  be  for  Ukraine,  as  foreign 
investment  is  essential  to  foster  restructuring  of  the  economy.  (Investment  promotion 
and  protection  is  mentioned  in  art.  54  of  the  PCA).  The  Commission  is  concerned  that 
foreign  investment  remains low in Ukraine, (an inflow  of direct foreign  investment  last year 
in the order  of between  $  150 - 250  million),  as  privatisation  has  done  little  progress  and 
the  legislative  and  tax  framework  is  still  perceived  as  unpredictable.  This  brings  the 
cumulative FDI since  1989 to between  $950 million), of which about  80 % are in the  form 
of equipment,  and  quite  a substantial  part  had  been undertaken  by Ukraine  -  G7  countries 
joint-ventures. 
The  new  law  concerning  the  "Regime  for  Foreign  Investments"  approved  by  the 
Werchowna  Rada  in March  1996,  apparently  does  not  give  the  adequate  framework  and 
guarantees  liable to  attract  foreign  investment.  Too  many exceptions written  into  this law 
raise  doubts  about  the  reliability  and  trustworthiness  of  its  rules  concerning  national 
treatment  to  FDI,  tax  and  customs  duties  privileges,  long-term  protection  of  FDI  and 
repatriation. 
Some  improvements  can  be  expected  from  the  proposed  establishment  of  the  "National 
Agency  for  Foreign  Investment  promotion"  and  political  pressure  from  outside  like,  for 
instance, by Western business groups, including the Kiev based European Business Club. 
Without a radical change of mind translated into new transparent  legislation, the insider and 
investors  and  so  delay 
monopolist  mentality  will  continue  to  discourage  foreign 
considerably the necessary restructuring and modernising of the Ukrainian  economy. 

51 

Annex V : NUCLEAR  SAFETY IN UKRAINE 

This  is  a  priority  for  the  Community  as  part  of  overall  reform  of  the  energy  sector  in 
Ukraine  Assistance  for  improving  safety  chiefly  concerns:  functioning  VVER-type  power 
stations  en  fonctionnement,  via  programmes  to  provide  on-site  assistance,  strengthening 
the safety authority and aid for the Chernobyl site. 

i) The  Memorandum  of Understanding  (MoU)  on the  closure  of the  Chernobyl 
Nuclear Power Plant  signed on 21 December  1995 is a political agreement  between the G7 
and Ukraine in support  of the decision of President Kuchma to close the Chernobyl NPP by 
the year 2000. 
-  The  elements  for  cooperation  laid  down  in  the  MOU  relate  to  :  power  sector 
restructuring,  energy  investment  programme,  nuclear  safety,  social  impact  plan.  The  MoU 
includes a list of specific  projects  which  are to  be implemented,  namely  the  sarcophagus, 
short term upgrading of Chernobyl unit 3, preparation of decommissioning of units 1-3, new 
generating capacities to replace Chernobyl. 
-  The MoU  also  contains  provisions  concerning  financial  resources.  The  agreed  principles 
for  possible  Western  financial  assistance  necessary  to  supplement  domestic  Ukrainian 
resources are  : revenue generating  projects  should  be financed  through  loans,  non  revenue 
generating  projects  can be  considered  for  grant financing. The MoU  figures  for  Western 
financial  support  are : 1809 Million $ as loan financing,  498 Million  $ as grant financing. 
These figures reflect  loans and grants which were - at the time of the signature of the MoU 
-either  firmly  committed  or  likely  to  become  available  from  the  G7  members  (including 
Tacis  and  Euratom),  from  the  World  Bank  and  from  the  EBRD  for  areas  covered  by the 
MoU. These figures  do not include any provisions for the sarcophagus. 

-  At  the  Moscow  G7  summit  on  26  April  1996,  the  G7  Heads  and  President  Kuchma 
confirmed  that  the  MoU  should  be  implemented  in  all  its  terms.  They  also  agreed  that 
specific  discussions  would  be  held  on  the  sarcophagus  once  the  EC  Tacis  financed  study 
would be finished (before  end 96). 

ii)  The  European  Community  actively  contributes  to  the  implementation  of 
the  agreement  and  has  a  firm  intention  of  respecting  the  time  periods  envisaged. 
Preliminary studies financed by the EC at the cost of  100 million ecu (1994  : 25 million ecu; 
1995  : 37.5  million  ecu;  1996  : 37.5  million  ecu), will  enable the  projected  supplementary 
financing to  be  determined  in  the  G7,  project  by  project.  The  contribution  by  Ukraine 
specified  in the MoU has also to be  finalised. 

Two measures are of particular  importance  for the Community  over the  period  up to 
mid  1997, in order to support the decision of Ukraine to close the Chernobyl  plant by 
the  year  2000.. These  measures  relate  to  the  financing  of  the  completion  of  the  two 
reactors  under  construction,  the  implementation  of  the  necessary  measures  to  assure  the 
safety of the sarcophagus. 

-  For  the  completion  of  the  two  reactors  70%  of  the  investment  (about  1000  Million 
USD)  should  be paid  by loans from  Euratom  (up to 400 Mecu)  and  from  the EBRD.  The 
preparation  of these financing decisions is under way.  Safety,  economic,  environmental  and 
financial  due  diligence  has  to  be  demonstrated.  The  EBRD  and  the  Commission  have 
agreed  to  entrust  a  panel  of  independent  experts  with  a  new  least  cost  investment 
analysis.  The  financial  due  diligence  will  depend  on  Ukrainian  decisions  in  the  nuclear 
power  sector,  which  should  ensure  that  the  borrower  will  be  able to  reimburse  the  loans. 

52 

The current  planning  is to  submit  the  loan  decisions  to  the  Commission  and  to  the  EBRD 
board by mid  1997. 
- As far  as the sarcophagus  is concerned,  a Tacis study by EC and  Ukrainian  experts with 
participation  of  US  and  Japanese  experts  will  provide  proposals  for  short  and  long  term 
measures  by  the  end  of  1997.  On  the  basis  of  the  results  of  this  study,  the  G7  should 
discuss possible  solutions with  Ukraine.  It  is expected  that  the cost  of these  measures will 
amount  to  several  hundreds  of million ecus  over  the  next  10 years.  There  is at  present  no 
identified  financing  source  available.  This  will  however  become  a  subject 
for 
consideration  by the  G7  within  the  next  months,  in  particular  in  1997 when  the  G7  chair 
will be held by the US A. 

53 

FINANCIAL  STATEMENT 

This document has no new budgetary implications. 

The  proposals  relating  to  Community  assistance  are  covered  by  line  B7.52  :  Technical 
Cooperation with the Independent  States of the former  USSR (the Tacis Programme).  The 
amount  of  credits  in  the  line  for  Ukraine  for  the  year  1996  is ECU  38.5  million  and  the 
1996  Tacis  contribution  to  the  EU/G7  Plan  for  the  closure  of  Chernobyl  is  ECU  37.5 
million.  To  this  has  to  be  added  the  measures  specified  under  the  heading  of  thematic 
programmes such as the Democracy, Nuclear  Safety  and Inter-state Programmes,  estimated 
at ECU 32 million. 

The financing of the Chernobyl dossier is yet to be decided within the G7 in  1997. 

The final macro-financial  assistance for  1997 will be the subject  of a Council  decision  (15% 
of the amount to be established must be guaranteed  from  the budget). 

ISSN 0254-1475 

COM(96) 593  final 

DOCUMENTS 

EN 

11 

Catalogue  number  :  CB-CO-96-608-EN-C 

ISBN 92-78-11837-0 

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