Source: EURLEX
Language: en
Format: md

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# 52015SC0074

**JOINT STAFF WORKING DOCUMENT Implementation of the European Neighbourhood Policy in Ukraine Progress in 2014 and recommendations for actions Accompanying the document JOINT COMMUNICATION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS Implementation of the European Neighbourhood Policy in 2014 /\* SWD/2015/0074 final \*/**

  

1.         OVERALL ASSESSMENT AND
RECOMMENDATIONS FOR ACTION

This document reports on progress made
between 1 January and 31 December 2014 on the implementation of the EU-Ukraine
Association Agenda. Developments outside this period are taken into
consideration where relevant. This is not a general assessment of the political
and economic situation in Ukraine. Information on regional and multilateral
sector issues is contained in the Eastern Partnership Implementation Report.

In 2014 European Neighbourhood Policy
(ENP) reforms were carried out in a very difficult political, economic, social
and military/security context of armed conflict in Ukraine. The illegal
annexation of Crimea and Sevastopol by the Russian Federation and the
subsequent destabilisation of eastern Ukraine have been major challenges for
the state and the country’s sovereignty and territorial integrity. In parallel
to the armed conflict, Ukraine sought a sustainable political solution to the
crisis in 2014, in particular through diplomatic contacts and the National
Dialogue on Reforms.

Following massive civil protests at
Independence Square (‘the Maidan’), in which more than 100 people were reported
to have been killed, the President and the opposition reached an agreement on
the way out of the political crisis on 21 February 2014. Subsequently,
parliament voted for a law to reinstate the 2004 constitution. Following the
sudden departure of President Viktor Yanukovych from Kyiv, parliament, with the
necessary constitutional majority, dismissed President Yanukovych for failing
to perform his duties, and appointed a new government headed by Prime Minister
Arseniy Yatsenyuk. Petro Poroshenko was elected President of Ukraine on 25 May
2014. Following parliamentary elections of 26 October 2014, a new government
led by Prime Minister Yatsenyuk was formed on 3 December, on a reform platform.

High-level political dialogue between
the EU and Ukraine was intense during 2014. Ukraine signed the political
provisions of the Association Agreement on 21 March 2014 and signed the
provisions in the remaining parts on 27 June 2014. On 16 September 2014, the
Ukrainian Parliament ratified the Association Agreement and the European
Parliament gave its consent, enabling the provisional application of the
relevant provisions of the agreement on 1 November 2014 and the Deep and
Comprehensive Free Trade Area section of the agreement on 1 January 2016.
The first meeting of the EU-Ukraine Association Council was held
15 December 2014.

The EU also participated in meetings seeking
a sustainable political solution to the conflict in eastern Ukraine, including
in Geneva in April 2014, in Milan in October 2014 and in Minsk in August 2014
and in February 2015.

In response to the challenging situation
in Ukraine, the European Commission adopted a support package for Ukraine in
March, worth EUR 11.1 billion over the coming years. It also set up a special
support group to assist the Ukrainian authorities in carrying out the necessary
economic and political reforms. In this context, the EU disbursed more than EUR
1.6 billion in loans and grants in 2014, notably through its State Building
Contract and Macro-Financial Assistance programmes. In July the EU also set up
the EU Advisory Mission for Civilian Security Reform Ukraine (EUAM Ukraine) to
assist Ukraine in reforming its civilian security sector, including the rule of
law and the police.

Following dramatic changes at the
beginning of the year, and despite some months in which severe abuses of human
rights took place, Ukraine made overall good progress on deep and sustainable
democracy, on human rights and fundamental freedoms. Ukraine conducted its
presidential and parliamentary elections largely in compliance with EU and
international standards, as confirmed in reports from the Organisation for
Security and Cooperation in Europe’s Office for Democratic Institutions and
Human Rights (OSCE/ODIHR). Election legislation was improved before these
elections. However, the need for comprehensive reforms in this area remained. A
law on public prosecution and several anti-corruption laws were adopted. Some
steps were taken towards the establishment of the National Anti-Corruption
Bureau. Progress is still pending on judicial reform and law enforcement
reform, where several proposals were discussed but new legislation was not
produced. The lack of accountability in the police for cases of ill-treatment
persisted. After worrying developments at the beginning of the year, the
situation improved with regard to freedom of expression, freedom of the media
and freedom of assembly. Anti-discrimination legislation was improved and now
needs to be implemented.

The human rights situation deteriorated
drastically for people living in Crimea and Sevastopol after the illegal
annexation and in the areas controlled by illegal armed groups in eastern
Ukraine. Fundamental freedoms, in particular freedom of assembly, freedom of
association, freedom of expression and freedom of the media were not guaranteed
in these regions. The number of internally displaced persons and refugees
increased, exceeding 1.4 million. Ukraine’s capacity for providing humanitarian
assistance to internally displaced persons proved insufficient. The armed
conflicts had a significant impact on children’s and women’s rights.

Civil society continued to develop in
Ukraine. Since 2014, municipalities gave civil society organisations (CSOs)
insight into their decision-making process.

Ukraine adopted a number of important
legislative reforms to meet the benchmarks set in the Visa Liberalisation Action
Plan. As a consequence, Ukraine moved on to the second phase of implementing
the action plan.

The process of decentralising
competences was launched. A number of legal acts were adopted, notably on the
amalgamation of municipalities and on budget decentralisation.

Ukraine’s efforts to reach a sustainable
political solution to the conflicts in its territory are particularly
noteworthy. The EU supported Ukraine in these efforts.

Ukraine’s economic output sharply
contracted in 2014, as a result of deep-rooted macroeconomic and structural
weaknesses. This situation was significantly aggravated by the worsening
security situation, which damaged the country’s capacity for production and
affected business and consumer confidence.

Taking into account the particular
political and security/military situation in Ukraine in 2014, Ukraine made some
progress in implementing the ENP, with notably substantial achievements on deep
and sustainable democracy, including on elections, prosecutorial reform,
anti-corruption legislation, and visa liberalisation.

Based on the assessment of its progress
in 2014 on implementing the ENP, Ukraine should focus its work in the coming
year on:

·
ensuring
that the constitutional review process is carried out and completed in an inclusive
and participatory way, in line with the recommendations of the Venice
Commission of the Council of Europe and including civil society. As first
steps, this includes measures towards enabling decentralisation reform and
reform of the judiciary;

·
taking
steps towards harmonisation of all electoral legislation through its
unification and reform of political party financing, including state financing.
This should be prepared through an inclusive and participatory process in line
with the OSCE/ODIHR, GRECO and Venice Commission recommendations, with first
priority being given to revising the law on local elections for the local
elections planned for the second half of 2015;

·
taking
additional steps on judicial reform in line with European standards and in close
consultation with the Council of Europe/Venice Commission, in particular by
adopting a Justice Reform Strategy with a comprehensive implementation plan;
ensuring the effective functioning of the High Council of Justice and adopting
and implementing the laws on the judicial system and the status of judges;
implementing the law on public prosecution;

·
continue
to investigate independently the violent acts which occurred during civil
protests in November 2013 – February 2014, as well as the tragic events in
Odessa in May 2014, with the support of the International Advisory Panel
proposed by the Council of Europe;

·
investigating,
in an independent and transparent manner, alleged crimes committed in the
conflict zone;

·
taking
steps towards ratification of the Rome Statute of the International Criminal
Court;

·
ensuring
that the lustration processes in the executive and in the judiciary are in line
with the relevant international standards;

·
in
close cooperation with the EU Advisory Mission, adopting and implementing a
plan for police reform, to pave the way for comprehensive reform of the police,
including the establishment of a police complaint mechanism for allegations of
ill-treatment and torture by law enforcement officers, and an independent and
an effective investigative mechanism for such crimes;

·
duly
implementing the comprehensive anti-corruption legal package adopted in October
2014, starting with setting up and ensuring effective functioning of the
National Anti-Corruption Bureau and the National Agency for the Prevention of
Corruption;

·
improving
transparency and competitiveness in public procurement, notably by bringing the
list of exceptions from the sphere of public procurement into line with the EU
Public Procurement Directives;

·
starting
comprehensive reform of the public administration, and in particular of the
civil service and service in local self-government bodies focusing on European
principles of public administration, including by finalising and adopting the
draft Law on Civil Service Reform; appointing an institution at government
level to be in charge of public administration reform;

·
adopting
and implementing laws introducing decentralisation reforms;

·
aligning
energy legislation and practice with the 'Third Energy Package';

·
reducing
the regulatory burden for businesses and improving the efficiency of the tax
administration;

·
continuing
to develop external audit function to strengthen the system of checks and
balances;

·
making
efforts to meet the second phase of benchmarks set out in the Visa
Liberalisation Action Plan on Visa Liberalisation;

·
speeding
up the implementation of the Law on Public Broadcasting, in particular by
setting up a new supervisory body;

·
strengthening
capacity and the scope of action in institutions dealing with internally
displaced persons and taking steps to facilitate the delivery of international
humanitarian assistance (including taxation issues);

·
continuing
reforms to public finance management, in particular in the areas of strategic
budgetary planning, introduction of budgetary rules, forecasting,
prioritisation of investment projects, public procurement, internal control and
internal audit and budget transparency.

2.         POLITICAL DIALOGUE AND REFORM

Deep
and sustainable democracy

The presidential election in May
and the parliamentary elections in October 2014 were considered by both
international and national observers to have been conducted largely in
compliance with Ukraine’s international commitments, with only minor reported
incidents of violations or fraud, including indirect vote buying and violence.
Elections could not be held in the illegally annexed Crimea and Sevastopol
regions, or in the parts of the Donetsk and Luhansk regions which are
controlled by illegal armed groups. The election of city councils and of mayors
in a number of cities where the post was vacant also took place, in May 2014.

With regard to election legislation
reform, only the law on presidential elections was significantly improved, with
relevant amendments adopted by parliament in March 2014. These addressed a
number of concerns raised by both international and domestic election experts.
Some minor amendments to the parliamentary elections law were also adopted in
October 2014, reducing the number of deficiencies.

No progress was
made on the long-standing need for comprehensive reform of the laws on
parliamentary elections, local elections, national and local referenda, in line
with the recommendations by the OSCE/ODIHR and the Council of Europe’s Venice
Commission.

In February 2014, the 2004 constitution
was reinstated through a parliamentary resolution. Simultaneously, an ad
hoc parliamentary commission for constitutional reform was set up to work on
horizontal division of powers, decentralisation reform and the reform of the
judiciary. The commission did not propose uniform constitutional amendments
before the presidential elections. Amendments proposed by President
Poroshenko after his election were not put to a parliamentary vote before the
early parliamentary elections. They were analysed by the Venice Commission,
which issued a mixed assessment in October 2014.

In mid-January 2014, legislation
severely restricting freedom of assembly and other fundamental freedoms
was introduced to curb the nation-wide protests. Riot police violently attacked
the ‘Maidan’ on several occasions. The protests peaked during the second half
of February 2014, leaving up to a hundred people dead. The restrictive
legislation was partially withdrawn a week later and entirely repealed after
the change of government in February 2014. Demonstrations and manifestations
were frequent in 2014, but since May no major violent incidents have occurred.
The tragic incident resulting in the death of over 40 anti-‘Maidan’
demonstrators in Odessa in May is under investigation.

The Ukrainian authorities agreed to the
proposal by the Secretary General of the Council of Europe to set up an
International Advisory Panel, covering investigations into human rights abuses
in the period from November 2013 to February 2014. Its mandate was later
extended to cover the events in Odessa. Parliament recognised the International
Criminal Court’s jurisdiction over the crimes committed between November 2013
and February 2014.

The beginning of 2014 saw a very
difficult situation regarding freedom of expression and freedom of the
media, with most media strictly under central state authority control and
journalists being a physical target for the riot police. The situation
substantially improved after February 2014, except in those parts of the
Ukrainian territory which were illegally annexed by the Russian Federation
(Crimea and Sevastopol) or were under the control of illegal armed groups
(parts of the Donetsk and Luhansk regions). The law on public broadcasting was
adopted by parliament, aiming to transform the state broadcasting service into
an independent public service. However, its implementation was significantly
delayed due to attempts by various interest groups to derail the process of
establishing a public broadcasting service.

The lack of transparency of ownership of
media remained an issue and a proper legislative framework on media ownership
was not created in 2014.

Broadcasting of several news channels
from Russia was suspended by the courts, for national security reasons.
Ukrainian TV channels were suspended in the illegally annexed Crimea/Sevastopol
and in the territory under the control of illegal armed groups. Cases of
abduction, killing and mistreatment of journalists in these parts of Ukraine
were frequently reported. Freedom of religion or belief has also been
severely affected in these regions, with the targeted persecution of particular
religious communities.

In April 2014 parliament adopted a law
on restoring trust in the judiciary, changing the process whereby judges
were excessively subordinate to court presidents, and making court presidents
and judges independent from political authorities. All incumbent court
presidents were dismissed, although many of them were re-elected. A draft
justice sector reform strategy was developed, with EU support.

In October parliament adopted a new law
on public prosecution, which largely took account of the Venice Commission’s
recommendations.

Several
measures were taken by the government, the presidential administration and
parliament, to implement anti-corruption policies. Changes to the
anti-corruption legislation were adopted in May 2014, strengthening asset
disclosure provisions by:

·
introducing
an external control mechanism;

·
criminalising
all types of bribery (active and passive);

·
adding
rules on corruption in the private sector as regards legal persons; and

·
increasing
penalties.

In addition, whistle-blower protection
was also strengthened. A separate comprehensive law was adopted on public
procurement, covering transparency rules, the award of public contracts, and
the scope of procuring entities. Ukraine was ranked 142nd out of 175
in the Transparency International 2014 corruption perception index (2013: 144th
out of 177).

Another package of anti-corruption laws
was adopted by parliament in October, including laws on the National
Anti-Corruption Bureau, the setting up of an Agency for the Prevention of
Corruption, the disclosure of the actual owners of companies, combating
money-laundering, terrorist financing and financing for WMD proliferation, and
preventing corruption. The national strategy on corruption still needs to be
supported by an implementation plan setting out precise measures, deadlines,
indicators, responsibilities and an indication of available resources.

The reform of the law enforcement,
including police reforms, did not progress. The role of law enforcement
services, including special police forces, in violent attempts to disperse
peaceful demonstrators at the ‘Euromaidan’ protests in the first half of 2014
and the failure to prevent active participation by some disloyal law
enforcement operatives in the initial stages of destabilisation in eastern
Ukraine underlined the need for reform in this sector. The government approved
a police reform strategy, proposed in October by the Minister of Interior.

As regards the democratic control
over armed and security forces, Ukraine began to reform its
military, to create a professional army with contract soldiers, before the
annexation of Crimea and Sevastopol. The reform was at a very early stage, and
had not been fully implemented. After the annexation had taken place, the draft
law was formally re-introduced and volunteer units were organised under the
supervision of the Ministry of Interior. On some occasions, their leaders
expressed discontent with official policies.

Other
human rights and fundamental freedoms

Even though the number of cases of ill-treatment
decreased due to the implementation of the new Criminal Procedure
Code, the lack of police accountability for recurrent cases of ill-treatment
and torture remained a problem. This is due to the absence of effective and
independent investigation and the lack of a police complaint mechanism. The
State Bureau of Investigation, provided for in the new Criminal Procedure Code
and which could investigate cases of ill-treatment and torture, was not yet set
up.

National
legislation on gender equality and women’s empowerment was, in general,
well-advanced, based on existing UN Conventions. However, Ukraine still did not
meet European standards in this area. According to the World Economic Forum’s
global gender gap index, in 2014, Ukraine was ranked 56 out of 142 countries.
Gender-based violence remained a major concern. The state programme for gender
equality and equal opportunities for 2014-16 continued to lack adequate
resources. The number of cases of domestic violence increased. A state hot line
for the victims was not yet set up. The NGO-operated hotline was insufficiently
resourced and did not cover the whole country. In December 2014, the
Ministry of Social Policy, supported by an EU twinning project, prepared
amendments to the legislation on employing people with disabilities.
They focused on incentives for employers and administrative sanctions for companies
violating the rights of people with disabilities.

In May amendments to the anti-discrimination
law were adopted by parliament, addressing key issues, including provisions on
shifting the burden of proof in cases before the courts. The amended anti-discrimination
law did not introduce an explicit reference to sexual orientation as prohibited
grounds for discrimination. In May the Highest Specialised Court on Civil and
Criminal Cases issued a ruling confirming that sexual orientation is implicitly
included in the existing legislation and is therefore prohibited as grounds for
discrimination.

In 2013 a strategy and an action plan on
the inclusion of the Roma minority were adopted. Limited progress was
made on implementing these, with insufficient time and resources being devoted
to the pressing social, educational, administrative and legal challenges that
the Roma community faced.

Regarding national minorities, in
February 2014 the Acting President vetoed the revocation proposed by parliament
of the 2012 language law. This would have meant that regional and local
authorities no longer had the right to declare minority and regional languages
for official use on their territory, in addition to Ukrainian, as provided for
by the law. Large parts of the 2012 language law had been positively assessed
by the Venice Commission, who made however several suggestions for
improvements. An ad hoc parliamentary committee was set up to prepare a new
draft law on languages, but it did not come up with an agreed draft before the
early parliamentary elections. The 2012 language law therefore remained in
force.

Following the illegal annexation of
Crimea and Sevastopol, reports from international organisations confirmed a
general degradation of the human rights situation on the peninsula. The Crimean
Tatar community was particularly affected. The Mejlis (the Assembly of Crimean
Tatars) was evicted from its premises, two Mejlis leaders were banned from
entering the peninsula, a number of its activists were persecuted and several
young male Crimean Tatars were reported to be kidnapped, tortured and killed.

The ongoing armed conflict made many
people leave their homes, becoming internally displaced persons (IDPs)
or refugees. There were more than 1.4 million of them altogether, according to
estimates by the UN Office for the
Coordination of Humanitarian Affairs from December 2014.
Legislation on IDPs, adopted by parliament in October 2014, came into force in
November. However, a number of issues hampering the delivery of humanitarian
aid remained to be addressed. The Ministry of Social Policy was tasked with
registering IDPs and channelling relief efforts. A dedicated agency focusing on
IDPs was created, but the head of the agency was not appointed. Housing
remained an issue, as many private houses were destroyed during the conflict.
The decisions taken by president and government in December regarding the
suspension of social transfers to people from the areas outside government
control in the Donbas (unless they resettled as IDPs) are also of concern.

The overall human rights situation
worsened in the Donbas region: reports were frequent of targeted killings,
arbitrary detention, ill-treatment and torture, intimidation, threats and
‘expropriation’ of private property by the illegal armed groups. There were
reports of cases of allegedly indiscriminate use of artillery in densely
populated areas, targeting or bringing collateral damage to civilians.

Parliament
adopted legislation to give extraordinary powers to law enforcement bodies
in connection with the anti-terrorist operation in the east of the country.
This legislation included amendments to:

·
the
law on the police allowing for the use of force against people considered to be
terrorists under Ukrainian terrorism legislation;

·
the
Code of Criminal Procedure and other laws on establishing the competent court
to oversee the investigations of crimes committed in the area of an
anti-terrorist operation; and

·
the
Code of Criminal Procedure, allowing for administrative detention of suspects
for up to 30 days by decision of a prosecutor, without any judicial oversight.

The conflict in
the east of the country had a heavy impact on children’s rights. Many
children and their parents were forced to leave their native towns and places
of residence, and many became victims of the war and subject to kidnapping,
sexual and other forms of exploitation and trafficking. Since February 2013,
Ukraine has been a member of the Global Alliance against Sexual Abuse of
Children Online. In December 2014 parliament discussed four new draft laws
related to protecting children’s rights.

Regarding labour
rights, Ukraine ratified all
eight of the International Labour Organisation’s Labour Core Conventions. There
was no tangible development in 2014 to bring the Labour Code fully into line
with these standards.

Other governance-related issues

Regarding public administration
reform, new draft laws on the civil service and on administrative procedure
were prepared. The drafts were assessed positively by SIGMA (a joint EU-OECD
initiative on Support for Improvement in Governance and Management). A law
on ‘cleaning up the government’ was adopted in September 2014, aiming to
improve the transparency of the civil service by establishing a re-vetting
process. This law was being revised following the Venice Commission’s interim
opinion in December 2014.

In
April 2014, the government adopted a strategy on local self-government
and territorial organisation of power in Ukraine, setting the framework for
far-reaching decentralisation reforms. The reforms tackle a complex set
of issues:

·
de
facto excessive centralisation of the system, fiscal dependence on central
government and limited financial resources, and socioeconomic issues;

·
limited
administrative capacity;

·
corruption;
and

·
insufficient
involvement of the public.

Following this, the law on cooperation
of territorial communities was adopted in June 2014. Amendments to the budget
were adopted in December 2014, allowing additional funds for local
self-administration. Other draft laws remained under consideration.

The state strategy for regional
development until 2020, prepared with the support of the EU technical
assistance, was adopted in August 2014 and a financing agreement on EU budget
support to Ukraine’ s regional policy worth EUR 55 million was signed in
December 2014.

Civil society was
developing quickly in all parts of Ukraine. Several groups became more
organised and structured. There were numerous attempts to create a national
network, including civil society organisations and activists from all parts of
Ukraine. To meet the demand for public awareness and understanding of
decision-making processes, many municipalities introduced ‘Citizen Advisory
Boards’. In September representatives from civil society organisations, trade
unions and the employers’ federation made up the Ukrainian delegation to the
EU-Ukraine civil society platform, provided for in the EU-Ukraine Association
Agreement. Ukrainian civil society took an active part in the work of the
Eastern Partnership Civil Society Forum.

Massive civil protests in
November 2013-February 2014 were sparked by the decision to suspend
preparations to sign the Association Agreement/Deep and Comprehensive Free
Trade Area. Civil society further developed its capacity in many sectors
including elections, European integration, human rights protection and the
environment/green society. Networking and communication among civil
society organisations increased both across the sectors of their expertise and
between regions. The importance of working in coalitions, ability to
self-organise and defining roles and tasks was clearly demonstrated in the
activities taking place as part of the ‘Reanimation Package of Reforms’
initiative.

After the laws restricting
citizen’s rights and civil society activities were revoked in late January
2014, civil society organisations operated in a generally favourable
legislative environment. The emergence of non-for-profit internet media added a
new dimension in
overseeing and monitoring public policies. However, the smooth functioning of civil society was hampered by a lack of
legislation on assembly that was in line with international standards and a
lack of progress in investigating cases of physical aggression against civil
activists.

In 2014 the EU committed EUR 10 million
in a programme to support civil society, which accompanied the ‘State
Building Contract’ programme worth EUR 355 million. The increase of civil
society participation in policymaking, public policy monitoring and service
delivery was identified as one of the priorities for the EU country roadmap for
engagement with civil society in Ukraine.

Cooperation
on foreign and security policy, regional and international issues, conflict
prevention and crisis management

In 2014 Ukraine
aligned with 35 out of the 49 EU Common Foreign and Security Policy (CFSP)
declarations (73 %) which it had been invited to support. This constituted
an increase in alignment, compared to 2013 (15 out of 32 (47 %) in 2013).

Ukraine
continued to cooperate with the EU on regional and international issues.
Ukraine contributed to the Common Security and Defence Policy (CSDP) Operation
EUNAVFOR Atalanta by sending personnel to its headquarters and the frigate Hetman Sahaydachny to the
operation area. The latter returned to Ukraine following the illegal annexation
of Crimea and Sevastopol.

The EU Advisory Mission for civilian
security sector reform was launched in July 2014 to provide strategic advice in
this area. The mission agreement was signed in October 2014 and the mission was
officially launched on 1 December 2014.

In
2014 the EU and Ukraine took part in diplomatic efforts to reach a sustainable
political solution to the conflicts on Ukrainian territory, in particular:

·
the
Geneva Joint Declaration of 17 April 2014;

·
the
ad hoc presidential meeting in Minsk in August 2014; and

·
the
high-level meeting in Milan in October 2014.

Ukraine was active in seeking political
solutions in other formats, including the Normandy format (the Berlin
Declaration in July 2014) and the Trilateral Contact Group (the Minsk Protocol
and Memorandum in September 2014). Ukraine worked to carry out its commitments.

3.         Economic REFORM AND SOCIAL reform AND
DEVELOPMENT

Following two years of stagnation,
Ukraine’s economy entered a deep recession in 2014 due to the conflict
in the eastern part of the country. This crisis was reflected in a sharp
currency depreciation and lower investment and consumption. The loss of
productive capacity in eastern Ukraine, the country's industrial hub,
contributed to the contraction of GDP by an estimated 7.1%[1] in
2014.

The depreciation of the currency,
coupled with significant increases in administered prices, resulted in an
acceleration of CPI inflation to an estimated 24.9% year-on-year in
December 2014. Despite the introduction of various corrective measures (on both
the revenue and expenditure side), the fiscal position worsened, as the
overall fiscal deficit, including the deficit of the state-owned gas monopoly
Naftogaz, rose to an estimated 10% of GDP in 2014 from 6.7% a year earlier.
This high budget deficit, coupled with the currency depreciation and funds
allocated in support of the banking sector, led to a strong increase of the public
debt, reaching an estimated 72.4% of GDP at the end of 2014 from 40.3% in
2013.

On the external front, an adjustment of
the current account deficit (to an estimated 4.0% of GDP from 8.7% in
2013), due to reduced imports, was accompanied by sizeable private-sector
financial outflows and payments for gas arrears. As a result, Ukraine’s gross
international reserves fell by nearly 60% (EUR 10 billion) in 2014 to only
EUR 6.2 billion at the end of the year, or only 1.4 months of next year’s
imports. This happened despite official support of close to EUR 7 billion that
Ukraine received in the year as part of the IMF-led international support
programme for the country. The EU disbursed EUR 1.36 billion in loans to
Ukraine under two macro-financial assistance programmes and provided EUR 250
million in budget support grants for institution-building.

The unemployment rate
reached an estimated 9.2 %, up from 7.2 % in 2013 and was
approximately twice as high for young people. Informal employment remained
substantial. The authorities decided in April 2014 to reduce the size of the
state public service by 30 % and to reduce benefits for public servants as
part of their efforts to reform the public administration and in view of the
significant budgetary constraints the country faces. In June, many state
agencies were closed or merged. The situation in eastern Ukraine generated new
social emergencies. The 2015 budget that the government prepared made provision
for considerable cuts in social benefits. Adoption of the revised Labour Code
is still pending.

There was almost no assistance provided
by the government to IDPs and the modest financial benefits granted to IDPs
under the Decree 505 are running out due to a lack of funding.

Sustainable development was
still not addressed systematically. Due to the lack of a single and
comprehensive agricultural strategy, the EU supported the initiative to
launch an inclusive process to support the development of a strategy for
agriculture and rural development covering 2015-20.

4.         Trade-related issues, market and regulatory
reform

Despite a significant annual contraction
(-27%), the EU-28 consolidated its position as Ukraine’s main trading partner,
with an overall trade in goods amounting to EUR 30.92 billion in 2014.

While in 2013 the EU and the Russian
Federation had represented respectively 27% and 24% of Ukraine's total exports,
the picture changed substantially in 2014, with the EU representing close to a
third of Ukraine's exports and Russia only 18%.
Exports to the EU, which remained to similar level as in 2013, contributed to
compensate falling trade between Ukraine and Russia, although the type of goods
exported to the EU (mainly agricultural products and raw materials) were
different to those exported to Russia (mainly machinery and manufactured
goods). The relative shift in external trade flows towards the EU can be
explained partly by the opportunities created by the preferential access to the
EU market granted by the autonomous trade measures (ATMs), partly by the
adverse effects of restrictive trade measures imposed by the Russian
Federation. The decline in imports and overall slowdown in consumer spending
has sharply reduced Ukraine's overall trade deficit to USD 0.5 billion in 2014,
compared with USD 19.6 billion in 2013.

The current government
initially adopted a number of measures aimed at improving the EU-Ukraine trade.
However, new trade restrictive measures were introduced as response to the
critical macroeconomic conditions. They risk reversing the improvements in
trade relations and worsening the business climate.

In
the areas of free movement of goods and technical regulation, the new
government renewed efforts to move forward on technical regulation reforms. A
draft strategy for the development of the technical regulation system until
2018 and a related action plan were prepared. These were in line with the
relevant provisions of the EU-Ukraine Association Agreement. Long-awaited new
versions of the laws on standardisation and metrology were adopted, as was a
new law on technical regulations and conformity assessment. Work continued on
revising other technical legislation, but this did not result in the adoption
of new regulations (due more to technical complexities than to any lack of
political will). Ongoing cooperation in the area included a EUR 45 million
programme for promoting mutual trade by removing technical barriers to trade
between Ukraine and the EU.

Reform of the customs authorities
was hindered by the legacy of confusion from earlier re-organisations and the
complex process used to review responsibilities and resources. This also
hindered effective relations with other agencies, notably with regard to
facilitating trade. Some capacity-building activities were carried out in the
areas of common transit procedure, authorised economic operator, rules of
origin, enforcement of intellectual property rights, and tariff classification.

In relation to sanitary
and phytosanitary issues (SPS), some
progress was made on harmonising Ukrainian food
legislation with EU legislation, including the adoption in September of laws on
food safety and animal identification and registration. Draft laws on official
inspections of food and feed, and animal health and welfare, and on by-products
of animal origin not intended for human consumption began the legislative process.
The government adopted a resolution to create a single State Service for Food
Safety and Consumers Protection (including responsibility for the Sanitary and
Epidemiological Service) in line with EU recommendations. However, several
long-standing SPS barriers were not addressed, for instance the BSE-related
restrictions of imports of beef and veal meat from the EU.

Ukraine
made little progress in aligning its legislation with that of the EU in the
areas of company law, corporate governance, accounting and auditing. The
Ministry of Finance continued to prepare new legislation on auditing, aiming
for compliance with Directive 2006/43/EC on statutory audits.

The business and
investment climate in Ukraine remained poor, with long-standing problems
exacerbated by the very difficult macroeconomic situation and the conflict in
the south and east of the country. There was little perception of improvement
with regard to corruption and economic reforms. Consequently, there was little
new foreign direct investment in Ukraine: most commentators forecast a further
drop in foreign direct investment to well below USD 1 billion (compared with
USD 3.3 billion in 2013 and USD 6.6 billion in 2012). New difficulties arose
from the national bank’s restrictions on access to and use of foreign exchange.
While Ukraine further improved its position in the World Bank’s Doing
Business report (up 16 ranks to 96th, compared with 137th two years earlier),
this mainly reflected improvements in registering property and paying taxes.

In relation to financial
services, legislation was adopted in July, introducing criteria for
systemically important banks. The National Bank of Ukraine began to develop
implementing rules, identifying eight banks in this category, and developed a
schedule of charter capital increase in order to comply with the law. Progress
was also made on the disclosure of information about banks’ owners, with
information about owners with ‘substantial participation’ in operating banks
published on the National Bank’s website. In July, parliament adopted
legislation which envisages increased requirements for corporate governance of
banks.

Steps
were also taken towards introducing disclosure requirements in the non-banking
sector, with consideration being given to a draft law on the disclosure of
information by non-bank financial intermediaries. These are subject to the
regulation by the National Commission for Regulation of Financial Services
Markets (insurance, private pension funds, credit unions, leasing, factoring, and
pawn shops). The Commission began technical preparations for the implementation
of this legislation.

In the area of free movement of
capital, the National Bank introduced numerous restrictions to stem capital
flight. Although understandable from a macroeconomic viewpoint, some of the
measures were heavily criticised by businesses, as they hampered business
transactions, and created uncertainties as the measures changed frequently
throughout 2014. In November, the National Bank annulled these restrictions,
but tightened the compensatory rule,  requiring banks’ clients to provide
evidence that their contract prices are in line with market prices, to prevent
fraudulent operations.

The revised public procurement law
came into force in April. Although this had
many positive aspects, it was not fully compatible with the relevant EU
legislation.

Ukraine
made significant progress in the area of public finance management
reform in August 2013, approving the public finance management strategy and
action plan by a decision of the Cabinet of Ministers. Some
positive legislative changes occurred relating to the public procurement
system, the anti-corruption strategy, and the law on public access to
information. However, implementation of the 2013 reform strategy was delayed.
There was no progress on increasing budget transparency, due to the delayed
submission of the 2015 budget and the upcoming adoption of a new law regulating
the Accounting Chamber of Ukraine’s mandate to control revenues and local
budgets.

In July the Parliament passed a law on state
aid to companies, designed to work as a framework law for the Ukrainian
state aid system. The law was compatible with EU standards, but care needed to
be taken to ensure that the large amount of secondary legislation was also
compliant with the EU state aid acquis. The EU supported Ukraine in
setting up a sound state aid monitoring and audit system.

In the first half of 2014, Ukraine’s
Anti-Monopoly Committee (AMCU) received nearly 3 000 complaints about competition
violations and took about 3 200 decisions.

Ukraine made some progress on deregulation,
by reducing the number of licences and permits necessary to do business
in Ukraine. The new government revised the national programme for small and
medium enterprises, which was awaiting adoption by parliament, and
abolished the State Administration on Regulatory Policy and Entrepreneurship,
which had drafted the national programme. The government set up a new service
for regulatory policy and transferred responsibility for entrepreneurship
support to the Ministry of Economic Development and Trade. Ukraine officially
requested to participate in the EU Programme for the Competitiveness of
Enterprises and SMEs.

In the area of taxation,
the government undertook several revenue-consolidating measures. These included
a
new 1.5 %
military tax (to support the anti-terrorist operation in the east of Ukraine)
on individual incomes and higher duty rates on oil, gas and metals extraction. The
long-standing problem of VAT refund arrears was addressed by issuing VAT
bonds.
A new system of electronic VAT administration was introduced, created as part
of the amendments made to the Tax Code, and this was expected to become fully
operational in the second half of 2015. In the summer,
the government announced an ambitious reform of the tax system and introduced
relevant draft legislation to parliament. The reform envisaged cutting the
number of taxes, simplifying companies’ tax reporting, and revising the social
contribution tax and personal income taxation system. Some taxes, particularly
the real estate tax and a fixed agricultural tax, would be retained at local
level. Local municipalities would also be given autonomy to approve their
budgets and borrow from international financial institutions. These reforms
were adopted with the 2015 budget law. Tax
administration pressure on businesses persisted in 2014.

Concerning statistics,
the planned 2014 population and housing census did not take place. The lack of
data on population and housing conditions will make future planning and
policy-making more difficult. Concerns about the professional independence of
statistics services also surfaced, raising questions about the reliability and
objectivity of statistical data.

Some amendments were made to consumer
protection legislation, removing administrative requirements which had
hindered competition and trade.

The EU and Ukraine began a dialogue on
integrated maritime policy and fisheries, for which the Ministry of
Foreign Affairs appointed relevant national contact points.

5.         COOPERATION ON JUSTICE, FREEDOM AND
SECURITY

The fourth European Commission report on
the fulfilment of the Visa Liberalisation Action Plan benchmarks was adopted on
27 May 2014. The new EU-Ukraine visa facilitation agreement, which came into
force on 1 July 2013, has been implemented in a satisfactory manner. The
Readmission Agreement between Ukraine and the EU was implemented satisfactorily
and without significant obstacles. In November proceedings were completed to
enable the entry into force of the first two implementing protocols, with
Austria and the Czech Republic, concluded by Ukraine under the Readmission
Agreement with the EU. Ukraine also signed Readmission Agreements with Russia,
Georgia, Uzbekistan, Turkmenistan and Moldova, among others. In total, 17
Readmission Agreements were concluded.

Progress continued on the demarcation of
state borders. Ukraine lost effective control over a part of its borders with
the Russian Federation due to the control of areas in eastern Ukraine by
illegal armed groups and the illegal annexation of Crimea and Sevastopol. With
the 2007-15 integrated border management strategy and the state target law
enforcement programme (‘development and restructuring of the border until
2015’) coming to an end, the government intended to work on a strategic vision
for the State Border Guard Service and for border management over the next
decade. The conflicts halted the ongoing process of demilitarising the State
Border Guard Service.

As regards document security,
implementing regulations were adopted to prepare for the issue of biometric
passports. The amended framework registry law (‘the Law on Single Demographic
Registry and Identity Documents’) came into force in July 2014. It provided for
a unified register to be the only database used for issuing biometric identity
and travel documents. Ukraine started to issue biometric passports in January
2015.

In May amendments to Ukraine’s asylum
legislation on the scope of complementary and temporary protection were
adopted. In addition, the legal framework was improved, to ease access to
employment for asylum-seekers and to ensure that medical care is provided. The
provision of interpretation to asylum-seekers, the listing of grounds for
rejecting asylum claims, and corruption appear still to pose challenges. People
seeking international protection are now entitled to free primary legal aid
(such as information on the procedures, and consultations and assistance
regarding preparing documents and applications) under the ‘Law on Free Legal
Aid’. Due to financial constraints, the provision of secondary legal aid was
postponed until 1 January 2017. The rate of recognised asylum seekers in
Ukraine increased in 2014. The number of Ukrainian citizens asking for international
protection in the EU also increased compared to 2013.

Continued progress was made on
preventing and fighting trafficking in human beings. The size of the
trafficking in human beings department within the police, set up in 2013,
increased, to a total of 470 people. As a consequence, 88 cases of trafficking
in human beings were under investigation in 2014, of which 68 were taken to
court. Collaboration between government and NGOs continued to develop. A
memorandum of understanding was signed to facilitate the government and NGOs
working together on issues relating to trafficking in human beings. Funding for
NGOs dealing with trafficking in human beings remained limited. The
EU-Institute of Migration MIGRECO project added three more regions to the
national referral mechanism.

As regards preventing and fighting
organised crime, the 2011 strategy for state policy on fighting organised
crime was replaced by a new state strategy on combating organised crime,
covering the period until 2017.

The State Service on Drugs
Control, an institution created in 2011 to combat illicit drug trafficking,
developed a strategy to combat drug use. However, the 2014 implementation
action plan was not approved by the government

In line with the 2013 data protection
legislative reforms, the Ukrainian Ombudsman (the Commissioner for Human
Rights) was entrusted on 1 January 2014 with responsibility for personal data
protection. Amendments both to the data protection law and to the law on the
ombudsman, notably extending the powers of the ombudsman to cover the private
sector and including the notion of consent by the personal data subject, were
adopted by parliament in May.

Further meetings took place with Eurojust
and steps were taken towards the conclusion of the cooperation agreement.

6.         Transport,
energy, environment, CLIMATE CHANGE, information society, research and
development and innovation

There was little
progress on implementing Ukraine’s 2010 national transport strategy.
Some progress was made towards the approximation of transport legislation
and the implementation of international transport conventions, with Ukraine
assessing the gaps relating to existing legislation and standards and starting
to draft amendments to laws, in particular in the road and maritime transport
sectors.

The State
Aviation Administration revoked the certificates issued to Donetsk, Luhansk and
Mariupol airports, in view of concerns about passenger safety and its lack of
control over aviation activity in the regions. The EU-Ukraine common aviation
area agreement, which had been initialled in the margins of the Vilnius
summit in 2013, remained unsigned due to a pending decision by the Council of
the European Union. Ukraine remained ready to sign the agreement as soon as
possible

Some progress
was made on rail transport reform. In June, the Cabinet of
Ministers of Ukraine approved plans to privatise Ukrainian Railways. This was
scheduled for January 2015, pending the completion of an inventory of its
assets. Safety, in particular of road transport, remained a significant
problem and required far more work.

Ukraine suffered
major damage to its transport infrastructure in its eastern
regions, in particular to rail tracks. In September, parliament ratified the
guarantee agreement with the European Investment Bank to construct the
1.8 km Beskid railway tunnel, which was a precondition for the entry into
force of the financial agreement between Ukrainian Railways and the European
Investment Bank.

Political developments directly affected
energy policy. The new government decided in April to revise the energy
strategy, as the version published earlier in the year did not adequately meet
the challenges faced by the sector. Work on its revision was still ongoing by
the end of the year.

Ukraine’s implementation of its Energy
Community commitments continued to be slow, particularly with regard to the
independence of the energy regulator, unbundling, transparency, market opening
and third party access. As a result, four dispute settlement cases were opened
by the Energy Community Secretariat against Ukraine between February 2013 and
April 2014. The most recently opened case concerned Ukraine’s failure to adopt
state aid legislation. In October the Energy Community Secretariat initiated a
preliminary procedure relating to Ukraine’s non-compliance with the Energy
Community acquis on local content requirements. The Energy Community
Secretariat closed a dispute settlement case against Ukraine relating to
renewable energy in November, after Ukraine submitted a national renewable
energy action plan. In September, Ukraine hosted an Energy Community
Ministerial Council meeting, which discussed energy security, including gas
stress tests, and implementation of the relevant aspects of the 'Third Energy
Package'. While work intensified towards the end of the year on preparing laws
that complied with the Third Energy Package, in particular on gas, there was,
regrettably, a marked setback in applying EU energy market principles in
adopting a decree monopolising the supply of gas. The government justified this
measure as a necessary step in view of the energy crisis.

The
national energy regulator was subject to political intervention, as the
existing regulatory bodies for energy and public utilities were abolished and
their staff were dismissed by order of the Ukrainian President. A new regulatory commission was established but relevant
legislation (which would have helped ensure that the newly created National
Commission for State Regulation of Energy and Public Utilities has all of the
regulatory powers and independence required under the EU 'Third Energy
Package') was not adopted.

In
August, problems regarding supplies of coal from the area held by illegal armed
groups led the government to impose emergency measures affecting the electricity
market (resolution No 372 and instruction No 764-p). The crisis was expected to
slow progress towards electricity market liberalisation.

In April the gas
transportation system operators in Ukraine (Ukrtransgas) and Slovakia (Eustream)
signed a memorandum enabling Slovakia to supply gas to Ukraine.  Subsequently,
natural gas was supplied from the EU to Ukraine via pipelines from Poland,
Hungary and Slovakia. The new government showed willingness to move forward
with significant gas sector reforms, and parliament passed a law permitting the
Ukrainian gas transportation system to be leased to an operating company.
Ukraine endorsed the terms of reference for joint EU-World Bank assistance on
restructuring Naftogaz. In December 2014 the EIB and EBRD signed loan
agreements for EUR 150 million for a first project on the modernisation of the
Ukrainian Gas Transit System. However, as with electricity, Ukraine did not
develop gas legislation that complied with the EU’s 'Third Energy Package' or
provisions ensuring the independence of the energy regulator, which it had
agreed to do under its Energy Community commitments.

National action
plans on renewable energy and on energy efficiency were drafted
and the Energy Community Secretariat was consulted on them. The national
renewable energy action plan was adopted. Parliament sent draft legislation on
efficient use of fuel energy resources, energy efficiency in buildings and
energy service companies back to the relevant ministries for revision, and renewable
energy legislation was not amended to bring it into line with Energy
Community requirements.

Ukraine participated fully in carrying
out the nuclear safety stress tests in cooperation with the European
Commission. In order to prepare for the ENSREG
workshop planned for April 2015, the National Action Plan of Ukraine was
updated. It now specifies the current status of safety improvement measures and
schedules for their implementation.

Ukraine received
loans from the European Bank for Reconstruction and Development and Euratom
to support the modernisation of Ukraine’s 15 nuclear
units, which supply roughly half of its electricity. Construction of the new
safe confinement shelter over the fourth destroyed unit at Chernobyl progressed
well.

There was no
comprehensive policy in Ukraine to prevent and mitigate climate change.
Lack of funding remained a major obstacle to modernising infrastructure and
cutting greenhouse gas emissions. EU assistance is provided through the
regional Clima East project, in particular for strengthening the capacity of
policymakers and for the development of monitoring, reporting and verification
capacities and other mitigation policies.

Ukraine made
generally good progress in implementing its 2010 national environment strategy,
for which the EU provided budget support. However, the lack of a law on
environmental impact assessments remained a concern, as draft legislation which
was introduced in parliament in May, failed to make further progress. As a
result, Ukraine continued to fail to comply with the Espoo and Aarhus
Conventions. In August Ukraine published a detailed national strategy on
approximation, to transpose in full the environment-related acquis
provided in the Association Agreement. Parts of the EU acquis on emissions,
waste and water management referred to in the Association Agreement were slowly
transposed.

Ukraine sought closer integration of its
civil protection mechanism with that of the EU, and made progress in
dealing with its legacy of industrial chemicals and pesticides. Nevertheless
these issues still needed significant attention to prevent major pollution or
accidents. Ukraine also worked with the EU on chemical, biological,
radiological and nuclear defence and bio-safety issues.

For
the first time in Ukraine, a dedicated agency (the E-Governance Agency) was
appointed to coordinate information society activities, dealing with
policies, legislative reforms and regulations regarding information
communication technologies. A consultative working group was set up to support
the agency, consisting of representatives of public institutions, non-profit
organisations and universities. In July a presidential decree was
issued to:

·
improve
the
regulation of information society;

·
establish
conditions for the development of national information infrastructure and
resources; and

·
provide
more people with internet access.

On research and innovation, the
EU-Ukraine cooperation agreement on science and technology was renewed in 2014.
Ukraine expressed its willingness to take part in the EU-funded 'Horizon 2020'
research programme, and a bilateral agreement was successfully negotiated in
November 2014. Ukrainian entities participate in several collaborative projects
under the 7th EU Research Framework Programme and in the first Calls for
Proposals under 'Horizon 2020'. Ukraine is also active in the Eastern
Partnership Panel on Research and Innovation.

7.         People-to-people contacts, education and health

The
law on higher education was adopted in July and came into force in
September. In line with the Bologna process, the law introduced a three-cycle
higher education system, a National Qualification Framework, an independent
quality assurance mechanism, the European credit transfer and accumulation
system and substantially increased autonomy for universities. Work began on an
implementation action plan and a statute for the Quality Assurance Agency for
Higher Education as well as on developing a new law on education, aimed at
setting the fundamental principles of the education system at
all levels and making provisions on governance, funding and equity. In
addition, new
legislation is envisaged to cover specific sections of the education sector,
such as primary, secondary and vocational education.

In June, wide public discussion began on the state programme on youth
policy for 2016-20, which involved of more than 200 NGOs focusing on young
people. Civil society experts were also invited to participate in developing
new support mechanisms for youth organisations.

Ukraine participated in the Tempus programme
with 60 on-going projects. 786 students and staff
were selected for mobility within partnership supported by Erasmus
Mundus and 31 masters students and six PhD
candidates were selected for joint master's degrees or joint doctoral
programme. 11 applications were selected
for funding under the Marie Skłodowska-Curie actions (MSCA) under 'Horizon
2020'.
Ukraine
also
participated in the eTwinning plus project with 86 schools. Young
people
and youth organisations benefited from the Youth in Action programme,
with 2 349 people taking part in mobility projects and 264 in the project for
young people and decision-makers in this field.

The Ministry of Culture expressed
interest in Ukraine's participation in the Creative Europe programme. Ukraine
hosted the conference "Cultural Policy in Europe Today: Finance,
Management, Audience Development" on the strategic
role of culture in the Eastern Partnership countries. Ukraine
also participated as a leader or partner in 10 regional projects within the Eastern
Partnership Culture programme.

There was no progress on public
health. International donors, including the World Health Organisation, were
alarmed by the critical situation with regard to medicine procurement and
supply, which put at risk the implementation of the 14 national programmes
focused on the most dangerous diseases, including haemophilia, TB, AIDS and
polio. There was a shortage of lifesaving medicines from November 2014,
especially in the area of conflict in the Donetsk and Luhansk regions.
According to the Joint United Nations Programme on HIV and AIDS, the
HIV/AIDS epidemic in the country got worse, and the number of cases registered
increased by 12 % in 2014.

In June 2014, representatives of
Ukraine’s civil society participated in the HIV/AIDS Civil Society Forum, in
Luxembourg. The government started negotiations with the Global Fund for
comprehensive support to combat HIV/AIDS and TB in Ukraine. It announced that
the State Service for Socially Dangerous Diseases would be abolished and its
functions would be transferred to the Ministry of Health. In March, the new
government agreed with the EU that specific areas of cooperation should be
identified in line with the provisions of the Association Agreement. The
national plan for the implementation of the Association Agreement included many
actions related to the health sector. These needed to be assessed and specific
actions needed to be prioritised.

Ukraine continued its technical
cooperation with the European Centre for Disease Prevention and Control (ECDC),
nominated a national correspondent for relations with the ECDC, and
participated in the National ECDC Correspondent meeting in May. It also
attended technical workshops on HIV/AIDS and vaccine preventable diseases, and
the annual European scientific conference on applied intervention epidemiology.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

[1] For sources and
detailed figures, see Statistical Annex accompanying the reports; figures
without sources are forecasts by Commission services.

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