Source: EURLEX
Language: en
Format: md

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 EuroMediterranean 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.

**10**

    - 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.

**11**

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 macrofinancial 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 :

**o**
a) the implementation of the IA and the potential of the PCA is a priority of the
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 :

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 this context, 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.

     - **Telecommunications** (art. 66 of the PCA) : they play a vital role (together with
information technology) as the enabling mechanism of the Information Society. In this
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.

**13**
This applies particularly to Crimea, which has substantial assets in this sphere.

    - 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
potential for Research and Development, but there are two main obstacles to its
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.

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.

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

Although these reforms are well under way, significant effort will still be required. In
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
pipelines; (iv) preparatory studies and measures accompanying loans made by the

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 inter alia for the following commitments : to 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.

    - Assistance in improving nuclear safety essentially relates to power stations of the
W E R 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.

Some spheres are suitable for **decentralized initiatives** : for example teaching and
training, where the Member States should be encouraged to increase initiatives
(secondment - of teachers, giving study grants in Europe, support for the teaching of
European languages in Ukraine, networks of information exchange, university
sponsorship), industrial and scientific cooperation.

**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);

(v) the introduction of a framework conducive to
private investment in Ukraine.

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 :

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.

Measures to be implemented :

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

- 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.

**26**

Timetable

1996-1999

October 96

March 97

Start of 97

End 96

January 97

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._

_**training**_ _project_ for Ukrainian Members of
Parliament.

_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.

_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.

 - _furtherance and_ _deepening_ _of cooperation with the_
_Council of Europe._

 - Continuation of _support_ _for the development of an_
_active employment_ _policy._ The assistance over 199699 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.

**27**

**Timetable**

1996-1999

1996-1999

1st half 97

1996-1999

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;

**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**

**Timetable**

_**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 :_

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 antidumping 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.

_Measures to be implemented_

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;

- _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._

- 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**

_Timetable_

November

96

1998

November

96

_Measures implemented :_

_5._ c) **development** of investment

_Measures to be implemented :_

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 GermanUkrainian fund for SMEs, as a preliminary stage for a
bank providing credits to SMEs.

**35**

_Timetable_

6. ASSISTANCE TOWARDS REFORM OF THE ENERGY SECTOR

_Measures implemented :_

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.

_Measures to be implemented :_

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 (leastcost 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**

_Timetable_

1996-1999

_**Measures implemented**_

**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)

_**Measures to be implemented**_

**Community** :

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

_**•**_ _**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.

**37**

_**Timetable**_

Mid-1997

Mid-1997

Mid-1997

1996-1999

_Measures implemented :_

**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.

_Measures to be implemented :_

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.

**38**

_Timetable_

1996/1997

1997

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 Total

European Union (mecu) : 871 1436 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 : 556 1033 1589

USA: 558 494 1052
($ in mecu)

**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

**difficult** : high, complex and discriminatory taxation, restrictive attitude by the
administration, Mafia payments.

**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 loss-making mines; **further trade liberalization,**
improvement of access to the Ukrainian market for foreign products and investments,
implementation of the legislative and regulatory conditions for joining the WTO.

**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;**
**balance** **:** **+695.2million** **ecu;**

**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** **interrelated : 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

**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
monopolist mentality will continue to discourage foreign investors and so delay
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

Office for Official Publications of the European Communities

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