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# 52013SC0084

**JOINT STAFF WORKING DOCUMENT Implementation of the European Neighbourhood Policy in Ukraine Progress in 2012 and recommendations for action Accompanying the document JOINT COMMUNICATION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS European Neighbourhood Policy: Working towards a Stronger Partnership /\* SWD/2013/084 final \*/**

  

1.         Overall Assessement  and recommendations

This document reports on
the progress made in implementing the EU-Ukraine Association Agenda between 1
January and 31 December 2012. Developments outside this reporting period are
also taken into consideration where deemed relevant. This is not intended to be
a general review of the political and economic situation in Ukraine. For information on regional and multilateral sector processes, readers should refer to the
Eastern Partnership report.

In March 2012, the EU and Ukraine initialled the text of the Association Agreement and its Deep and Comprehensive
Free Trade Area (DCFTA). There was a common understanding that Ukraine’s performance, notably in relation to respect for
common values and the rule of law, will be of crucial importance for the speed
of its political association and economic integration with the EU, including in
the context of conclusion of the Association Agreement and its subsequent
implementation. Ukraine stepped up its efforts to implement the priorities of
the Association Agenda, as evidenced by the Joint Committee’s report of
November 2012[1]. However, much
remains to be done by Ukraine, for example the fight against conflict of
interest and corruption in the judiciary, and the stabilization and
consolidation of its public institutions so as to enable it to benefit fully
from the Association Agreement’s potential.

Overall Ukraine presented a mixed picture of developments on deep and sustainable democracy. The were some
positive developments in the field of legal reform, including the judiciary,
where some important laws were enacted (entry into
force of a new Criminal Procedure Code, the new legislation on the Bar, the
establishment of a National Preventive Mechanism against torture), and in the area of freedom of association. It was decided to
launch the preparation for constitutional reform: a Constitutional
Assembly was established to act as an auxiliary and advisory body to the
President. At the same time, these developments remained over-shadowed by the
matter of selective justice and the conduct of parliamentary elections which
showed deterioration in several areas compared to standards previously achieved.
The perception of corruption remained high, and Ukraine continued to occupy a lowly position in international rankings. This was also due
to lack of progress in improving the anti-corruption system and even regression
in budget transparency and in terms of legislation on public procurement. Ukraine
took only at a late stage initial measures to start removing EU’s concerns related
to public finance management. This led to delays in planned disbursements under
EU sectoral budget support.

Progress was achieved in
the energy sector, notably with the adoption of legislation enabling the unbundling
of Naftogaz. At the same time, Ukraine’s notification of wishing to renegotiate its
World Trade Organisation commitments under Article XXVIII of the General
Agreement on Tariffs and Trade (GATT) raised commercial concerns and posed a
challenge to the integrity of the multilateral trading system.

In the
framework of the first
(legislative) phase of the Action Plan on Visa Liberalisation, Ukraine continued
to pursue the adoption of the requisite legislation
and strategic and policy documents in
such areas as the legal status of foreigners, border and migration management,
asylum, trafficking in human beings, drugs and mutual
assistance in criminal matters. The agreement amending the Visa Facilitation Agreement between Ukraine and the EU was
signed on 23 July 2012. Instances of refoulement and of denial of access
for United Nations High Commissioner for Refugees (UNHCR) representatives to
asylum seekers were observed with concern by the EU.

In 2012, the risks to Ukraine’s economy increased markedly as growth stalled and the balance of payments deficits
widened, partly as a consequence of sluggish external demand. Foreign direct
investment remains at a low level as a result of the deteriorating business
climate. International reserves decreased significantly as Ukraine attempted to stabilise its currency, contrary to the recommendation of the International
Monetary Fund (IMF). Negotiations with the Fund on a new standby arrangement
started in January 2013.

Ukraine continued to cooperate with the EU on several regional and
international issues. At regional level, it adopted a positive stance in the
5+2 Transnistria settlement talks, and its cooperation with the EU on all
questions related to this matter was constructive.

The
Council Conclusions of 10 December 2012 reaffirmed the EU’s commitment to
signing the Association Agreement, including the DCFTA, as soon as Ukraine
demonstrates determined action and tangible progress in three areas - actions to remedy the shortcomings noted in the
October 2012 parliamentary elections; progress in addressing the issue of
selective justice and preventing its recurrence; and action to implement the
reforms set out in the jointly agreed Association Agenda, possibly by the time of the Eastern
Partnership Summit in Vilnius in November 2013. It indicated that signature
could be accompanied by opening for provisional application of parts of the
Agreement. At the 16th EU-Ukraine Summit which took place on 25
February 2013 in Brussels Ukraine confirmed its determination to comply with
those areas/elements specified by the Conclusions to that end.

In
2012, Ukraine did not address most of the key recommendations contained in last
year's European Neighbourhood Progress (ENP) progress report. However, it did
take steps toward legal and judicial reform, with the entry into force of a new
Criminal Procedure Code and other important legislation. It also adopted a law
on Asylum and Refugee Status, though implementation is flawed. Progress is
needed on the other key recommendations. On the basis of this year’s report,
and with a view to the sustained implementation of the Association Agenda in
2013, Ukraine is invited to:

·
Take early steps to establish a reliable
electoral system based on an Election Code and clear rules for balanced media
access for candidates; fully implement the OSCE-ODIHR’s other recommendations on
the conduct of the October 2012 parliamentary elections, and address the
shortcomings, in line with the public commitments made by the Prime Minister of
Ukraine in an inclusive dialogue with the opposition.

·
Address the cases of politically motivated
convictions without further delay; take further steps to reform the judiciary
to prevent any recurrence, including  an early implementation of all judgments
of the European Court of Human Rights and of the recommendations by the Council
of Europe related to detention conditions and medical assistance for persons in
detention; review in close consultation with the Council of Europe/Venice
Commission the law on the functioning of the Prosecutor’s Office, the Criminal
Code, the role of the High Council of Justice, the laws on the Judicial System
and the Status of Judges, and reform of the Police.

·
Step up fight against
conflict of interest and corruption, including in the judiciary system and in
relation to improving the business climate.

·
Reverse the backsliding which occurred in 2012
on public procurement and budget transparency; develop and start to implement a
public finance management strategy; broaden the remit
of the Accounting Chamber and amend the law on
the civil service of November 2011 in line with EU norms.

·
Ensure that the constitutional reform process is
carried out in an inclusive and transparent way in line with all constitutional
norms and in close cooperation with the Council of Europe/Venice Commission.

·
Make greater efforts to meet the benchmarks set
out in the Action Plan on Visa Liberalisation.

·
Comply with its obligations under international
refugee and human rights law, in particular the principle of non-refoulement.

·
Establish a macroeconomic framework conducive to
the resumption of IMF support,
addressing such issues as fiscal sustainability in the energy sector.

·
Refrain from introducing protectionist measures,
such as recycling fees on vehicles, which are potentially in breach of its WTO
commitments, and withdraw the notification for renegotiating its WTO
commitments.

·
Comply with its obligations under the Energy
Community Treaty (as reflected in the Association Agreement and the Association Agenda).

2.         Political dialogue and reform
Towards deep and sustainable democracy

The
conduct of the 28 October 2012 parliamentary elections presented a mixed
picture. The voters had a genuine choice between distinct parties; candidate
registration was inclusive; the centralised voter registration system appeared
to be functioning well; and the campaign was visible and active and was
competitive in most parts of the country. But the lack of a level playing
field, caused primarily by the abuse of administrative resources, cases of
candidates and electoral staff being intimidated, lack of transparency of
campaign and party financing, lack of balanced media coverage, and the
irregularities and delays in the vote count and tabulation constituted a step
backwards compared with recent national elections. The Prime Minister made a public
commitment to follow-up on electoral complaints. It proved impossible to
establish the election results in five single mandate electoral districts. Electoral
legislation still needs to be brought into line with OSCE and Council of Europe
standards. Trials which did not comply with international standards prevented some
opposition representatives from standing in the elections.

The new law on civic
organizations, which entered into force on 1 January 2013, represented an
important step forward in the area of freedom of association. If
correctly implemented, it will address such problems as territorial
restrictions on the activities of NGOs and administrative obstacles to their
registration.

Freedom of assembly has been undermined by the lack of modern legislation. Steps have
been taken to prepare new legislation, though this has still to be adopted.

Media freedom did not improve in 2012. Reports of physical attacks on journalists
have become more frequent, and the law-enforcement agencies have failed to investigate
alleged cases properly. The information space has been dominated by
pro-governmental media. The pressure on media which are critical of the
government has increased. Journalists and media experts have criticised the
Inter-Agency Working Group under the Presidential Administration for failing to
address the situation effectively. A draft law on defamation was passed by the
Parliament at first reading but withdrawn following strong criticism from civil
society and the international community. There was no progress in adopting legislation
on public broadcasting and on the transparency of media ownership.

Confidence in Ukraine’s judiciary was undermined by trials which did not meet international
standards as regards fair, transparent and independent legal processes and which
indicated a selective use of justice vis-à-vis leaders of the opposition and
members of the former government. Ukrainian judges are subject to interference
from the executive branch.

In August 2012, the
adoption of new legislation on the Bar was a positive step. In November, the
entry into force of a new Criminal Procedure Code, formulated elaborated in
close consultations with the Council of Europe, was a further major step, if
implemented correctly, the Code will play its part in ensuring fair trials, and
equality of status between prosecution and defence, and in preventing ill-treatment and torture.

The Prosecutor General’s
Office remains largely unreformed, resists any restrictions of its current prerogatives
and interferes with law-enforcement investigations. Despite a law adopted in
September, Ukraine needs a comprehensive reform of how the Prosecutor’s Office
operates. A law on the Police and a revision of the Criminal Code are yet to be
pursued.

Despite the National
Anti-Corruption Strategy approved in October 2011, corruption perception
remains high: Transparency International rated Ukraine 144th out of 176
countries in the 2012 Corruption Perception Index. Conditions for business and
investment have deteriorated further. In September, the government approved a
Concept Paper on reform of public financial management (PFM), and initiated
work on an Action Plan. Progress in PFM is a condition for EU budget support
and EU macro-financial assistance.

There were some steps to prepare
for a constitutional reform. In May, the President adopted a decree appointing the
members of a Constitutional
Assembly, which acts as an auxiliary body advising the President. The Assembly has met three times, but its working
methodology has not yet been approved. Draft constitutional amendments prepared by the Assembly are to be sent to the
President who intends to submit
them to Parliament. Reform of the local
self-government and judicial systems have been
announced as a priority issue. The Assembly includes some
members of independent civil society organisations, but
opposition parties have declined to
take part. It will be of crucial importance that the constitutional
reform process be transparent and inclusive.

Other human rights and governance-related issues

In spring, the election of a new Ombudsperson
proved to be a divisive issue in a
very polarised Parliament. The aim of electing
an Ombudsperson outside of the domestic political
struggle was not achieved. Subsequently, the Ombudsperson's office has
undergone a number of positive changes. Further steps will be needed to create a climate of confidence and to
prove that the Ombudsperson’s
office is genuinely free of interference.

The establishment of a
National Preventive Mechanism against torture is a substantial step forward, in
line with Ukraine’s obligations under the Optional Protocol to the Convention
against Torture, which it ratified in 2006. Together with the new Criminal
Procedure Code, it should significantly reduce cases of torture and
ill-treatment. The Criminal Procedure Code provides for the establishment
of an Independent Bureau of Investigation, i.e. an independent body with
authority to investigate cases of torture and ill-treatment. Detention
conditions and overcrowding in prisons remain matters of concern.

The situation regarding freedom
of religion in Ukraine is generally satisfactory. The authorities engage in
dialogue with most religious denominations. There were some cases of display of
religious hatred and disputes over property during the reporting period.

The promotion of gender
equality by Ukraine government entities was affected by a significant
slow-down in cooperation with civil society, as well as some regression from the
standards previously achieved.

Progress has been made in
terms of children’s rights. In June, Parliament ratified the Council of
Europe’s Convention on the protection of children against sexual exploitation
and sexual abuse. The Government approved the concept and subsequently the
National Strategy to Prevent Social Orphanhood. Despite improved legislation,
though, societal and cultural factors are still leading to violence against
children.

Despite
the adoption of anti-discrimination provisions related to disability, Ukrainian
legislation lacks comprehensive provisions regarding the rights of disabled
persons and the need for their integration in society and in the
workplace.

Regarding labour
rights, no progress can be reported regarding the adoption of the
long-awaited amended Labour Code. Concerns were expressed by the ILO on the
non- conformity of certain provisions with its basic standards.

Ukraine adopted a Law on Countering Discrimination. The new
legislation represents a step in the right direction but lacks clear and complete
definitions, broader scope including an explicit reference to sexual
orientation and institutional provisions to ensure its effectiveness. The LGBT
community continues to face discrimination and is often victim of hate speech.
Their freedom of peaceful assembly during the Kyiv Pride 2012 was effectively
prevented by anti-LGBT protesters. In October, the adoption at first reading of
a draft law banning homosexual promotion raised important concerns. Crimean
Tatars and Roma minorities as well as smaller groups such as refugees, foreign
students and illegal migrants face different forms of discrimination and,
occasionally, acts of violence. The representation of the Crimean Tatars in the
local administration has decreased and the adoption of the draft Law on
Deported People has been postponed. The proposal of the Mejlis of Crimean
Tatars to hold an International Forum on the Restoration of Crimea Tatars’ and
others’ rights as deported people, supported by the OSCE High Commissioner for
Minorities, did not materialize. Tensions and clashes
over land property and other contentious issues were reported recurrently, with
turmoil erupting in December 2012 when a group of unidentified persons tried to
organize a pogrom in a rural Crimean Tatars settlement.

A new law that allows
regional and local bodies to grant regional status to minority languages spoken
by at least 10% of the population has mostly consolidated the use of Russian in
the official sphere in Eastern and Southern regions and has had some positive impact
on people’s right too use other minority languages. The law triggered a wave of
protests by opposition parties and citizens who felt that the Ukrainian
language was being threatened by the wider use of Russian.

Human rights and
international organisations reported a number of cases of violation of the rights
of refugees and asylum-seekers, including instances of forced deportation,
systematic lack of protection for certain nationalities, lack of protection for
unaccompanied minors, widespread corruption in the asylum system, and denial of
access to asylum seekers for representatives of the UNHCR. The adoption of a
Law on Asylum and Refugee Status was a positive development, but there are
practical challenges in getting it implemented and in running the new
structures effective.

Ukraine remains one of the most centralised
states in Europe, something which impacts on local and regional
self-government. Reform efforts, closely coordinated with the Council of
Europe, have yet to yield practical results. The press and NGOs have reported
increasing pressure on elected mayors who are not members of the central ruling
party. In several cases elected mayors have been dismissed by local deputies
and replaced by ‘Heads of Administration’ appointed by the central authorities.

Although the EU continued to support Public
Administration Reform
through a SIGMA initiative, the law on the civil service passed at the
beginning of 2012 was assessed by the OECD/SIGMA and the Council of Europe as
not in line with the European standards. The November 2012 amendments to the
law merely deferred the entry into force of the law that SIGMA has already
flagged as being not in line with European principles. The main reason for the
law entering into force a year later (now 1 January 2014) appears to be budgetary,
while the current legislative framework continues to allow the civil service in
Ukraine to be politicised and subject to arbitrariness. It therefore did not
provide a sufficient basis for the EU sectoral budget support programme in this
area. Consequently the EUR 70 million initiative agreed between Ukraine and the EU to support public administration reform was cancelled. There was at
least some progress with the adoption of the law on administrative services.
Cooperation on foreign and security policy, regional
and international issues, conflict prevention and crisis management

In 2012 Ukraine aligned with 23 out of 62 EU CFSP declarations it has been invited to support (36
out of 82 in 2011). The rate of alignment has been decreasing over the last
three years. On the other hand, good progress
was achieved as regards cooperation on the Transnistrian issue. Five official
meetings of the ‘5+2’ forum showed the resilience of the reinstated negotiating
process. In the course of 2012 the ‘5+2’ reached agreement on two important
documents: ‘Principles and Procedures for the Conduct of Negotiations’ and a
comprehensive agenda for the negotiating process. Ukraine took a pro-active
part in the resumed 5+2 talks. Ukrainian diplomacy has become more active,
particularly with a view to its chairmanship–in-office of the OSCE in 2013.
Kyiv has reiterated that Transnistria will be a central issue on the OSCE
agenda in 2013.

Ukraine continued to participate constructively in the work of the EU
Border Assistance Mission to the Republic of Moldova and Ukraine (EUBAM).
With EUBAM support, the Ukrainian customs and border guard services continued
to enhance their capacities and to secure inter-agency cooperation both within Ukraine and between Ukraine and the Republic of Moldova. EUBAM continued to support the demarcation of
the state border with the Republic of Moldova, as well as the joint pilot project
launched with the Republic of Moldova in February 2012, establishing joint
control on Ukraine’s territory of the “Briceni-Rososhany” border section.

Ukraine contributed one Officer to the
ATALANTA with Operational Headquarters. Discussions on deploying Ukrainian
maritime patrol and reconnaissance aircraft as well as Vessel Protection
Detachments have continued, as have discussions on signing the Administrative
Arrangement on Strategic Air Transport. Ukraine plans to contribute to the
Greek-led HELBROC battle group in 2014 by offering strategic airlift
capabilities, a marine company and ten staff officers. The
Ukraine-Poland-Lithuania Brigade should become fully operational in 2013 and
available for future CSDP missions.

3.         ECONOMIC AND SOCIAL REFORM

Macroeconomic framework and functioning market economy[2]

Ukraine's economy was increasingly affected by the negative global
environment in 2012. Following strong expansion of 4.2% in 2010 and 5.2% in
2011, GDP growth slowed to 0.2% in 2012, as a consequence of declining
industrial production, weaker agricultural output and tight credit conditions.
In the absence of a strong global economic recovery, real growth in 2013 is
expected to remain sluggish.

Low food prices helped
keep inflation under control. Headline inflation reached a record low of
-0.2% at year end, after 9.1% and 4.6% in December 2010 and 2011[3]. Ukraine's fiscal deficit exceeded the target agreed with
the IMF in 2012. IMF expects the deficit to increase to 5.3% of GDP (up from
4.2% of GDP in 2011), mainly as a result of the authorities' refusal to
increase gas tariffs for households and utilities to cost-recovery levels, and
due to increased government spending before the October 2012 Parliamentary elections.
After a marked rise following the 2008-09 crisis public debt stabilised at
around 36-40% of GDP in 2011-2012.

The current account
deficit, already high, grew further in 2012, reaching an estimated 8.3% of GDP
(up from 6.2% in 2011). Foreign currency reserves declined to USD 25.3 billion
(EUR 18.6 billion) at the end of 2012. Ukraine received no disbursements under
the IMF standby arrangement in 2012, as the authorities had reached no agreement
with the Fund on gas tariffs and the budget parameters. Macro-financial
assistance from the European Union to the value of EUR 610 million presupposes
IMF disbursements.

Progress in implementing
structural reforms to boost competitiveness has been slow, and Foreign Direct Investment
remains very weak in regional comparison. Public administration reform was not
pursued in line with European practice, and technical advice from SIGMA was not
taken adequately into account in formulating the new Civil Service law. The law
was not amended despite repeated requests from the EU side. Initial steps were, however, taken to prepare a public financial
management reform through the adoption of a Concept in September and the
formulation of an Action Plan.

Social
situation and employment

The
economic crisis continued to impact negatively on the employment and
social situation. According to ILO, the activity rate for the working age
population was at 73.0% (first half of 2012), the employment rate at 66.9%. 
While the unemployment rate stood at 7.9% in 2011 (8.8 for men, 6.8 for women
and 18.6 for young people), unemployment is expected to be at 7.5% for 2012.

The
National Tripartite Agreement on Employment and Jobs signed in June was seen as
a response to the ILO's Global Jobs Pact and was aligned on the ILO's Decent
Work Agenda. This could be a move towards a more comprehensive approach to
employment and social challenges and a step in fostering social dialogue. The
agreement set specific targets for the employment rate and the
training/retraining of employees to be met by 2017.

Social payments and wages
were, in theory, increased in an attempt to mitigate the impact of the crisis,
but the payments were not actually made. New legislation entered into force,
with the aim of encouraging employment among vulnerable groups (e.g. young
people, parents with children under six, disabled persons, orphans and persons
over 50); for one year, employers will be able to reclaim social taxes paid for
employing persons falling under these categories.

No
progress can be reported towards the adoption of the long-awaited, amended
Labour Code.

In
June, the Parliament adopted the law on "Amendments to the Administrative
and Criminal Code to strengthen the responsibility of actions in line the
legislation on occupational health and safety". These amendments aim to
reverse the current situation whereby entrepreneurs are willing to pay a small
fine rather than bear the expense of creating safe conditions for work. A more
comprehensive approach and more capacity building and training would be needed
to create the conditions for a real improvement of in health and safety at
work. An EU supported project on health and safety, run by ILO, ended in
September 2012. The improvements need to be sustained.

4.         Trade-related issues,
market and regulatory reform

The EU
is Ukraine's second largest trading partner accounting for about 27% of its
trade volume in 2011[4]. Bilateral trade flows increased and during the first eleven
months of 2012 amounted to EUR 35.2 billion. EU exports to Ukraine consisted mainly of manufactures of machinery and vehicles, other manufactured goods and
chemicals. EU imports from Ukraine consisted mainly of other manufactured goods
(mostly iron and steel), raw materials (mineral fuels, ores) and food and
drinks (cereals, oilseeds).

In a
move that raises both commercial and systemic concerns, including about the
impact of such action on the global trading system, Ukraine notified the WTO in
September of its intention to modify import tariffs for a large number of
agricultural and industrial products. Another worrying development took place
in November, when a new Law on Customs Tariff was adopted by Parliament, raising
customs tariffs on some 100 tariff lines to the highest levels allowed under Ukraine’s WTO-bound tariffs.

The entry into force of a
new Customs Code in June had a significant and positive impact in a
number of areas. The new Code enhanced the rights of operators by allowing them
to choose customs entry points and reversed the burden of proof regarding
customs valuation. Operators acquired the right to make electronic declarations
and to modify their customs declarations within three years of the release of
the goods. The new Code also facilitated customs flows by reducing the number
of documents required for customs declarations, limiting customs clearance time
to four hours and introducing the concepts of preliminary customs declaration
and authorised economic operator. Valuation control has improved, with fewer
complaints from trade operators, but classification control remains an area of
concern as customs authorities tend to change the classification of imported
goods to a higher duty category. The improvements may be helpful in the fight
against corruption, which remains a serious concern.

In
the area of free movement of goods, Ukraine prepared a draft Law on Standardisation
which envisages a separate standardisation body for the construction industry.
This is not consistent with EU practice and needs reconsideration. A new Law on
Metrology was under preparation. Ukraine has adopted 40 technical regulations,
loosely based on EU directives, and about 20 more were being drafted. The
process of revising existing technical regulations started, with the aim of
achieving closer correspondence to the relevant EU directives. Ukraine established a legal basis for market surveillance and set work in motion.

On sanitary
and phyto-sanitary (SPS) issues, Ukraine approved an Institutional
Reform Plan in June in preparation for the DCFTA; a detailed Action Plan
is being drafted, with EU support.. Ukraine is preparing a food safety strategy
and a list of SPS legislation to be approximated with EU standards. Laws on food
safety, official controls, veterinary checks, novel food, hygienic
production and animal feed are in preparation. Ukraine approved an Order on microbiological
criteria. It continued to train SPS staff with some TAIEX support, on areas
such as animal welfare, African swine fever and auditing of food processing
enterprises. Greater efforts are needed on training at regional level too.

The business
climate remained poor in 2012. The main causes are the lack of rule of law
and widespread corruption. The new Customs Code and the progress made with the
automated VAT refund system are the positive elements. The poor business
climate affects SMEs in particular: the contribution of SMEs to the Ukrainian
economy is falling, with employment in medium-sized enterprises falling by some
10 % per year between 2007 and 2010. Ukraine maintains a low position in
the World Bank’s Ease of Doing Business Index: it moved up to 137th
place in 2012 (out of 185 countries) due to some improvement on starting
business, registering property and paying taxes. Transparency
International has rated Ukraine 144th out of 176 countries in the
2012 Corruption Perception Index. The ranking reflects the lack of activity on
the part of the National Anti-corruption Committee under the President, and
amendments to the public procurement legislation.

In the
course of 2012, the Government submitted to the Parliament draft laws
introducing amendments to the Joint Stock Company Law on simplification
of the procedures for reorganising joint stock companies into companies with
different forms of ownership, and on reducing the quorum for general
shareholders’ meetings. Neither law has been yet passed by Parliament.
International Standards for Financial Reporting were introduced for all
publicly listed companies.

In
the area of financial services, in September Ukraine adopted a law on
the depository system raising businesses' concerns over the potential
establishment of a Central Depository under the National Bank’s control. Ukraine introduced legislative changes to the functioning of payment systems and
non-cash payments which provide for the creation of a National clearing centre
for electronic payment under the oversight of the National Bank. The potential
monopolisation of the sector is a matter of concern for market operators. The
newly established National Commissions for Securities and Stock Market, and for
Regulation of Financial Services Markets were subordinated to the President of
Ukraine and not to the Cabinet of Ministers. Both non-bank regulators were
fully dependent on state funding, which is not compliant with the best
international practices. The major weaknesses in the financial services market
in Ukraine remained a lack of sector consolidation and too many weakly
capitalised, non-viable financial institutions. Ukraine needs to make progress
on capital adequacy in the banking and securities sectors, on investor
protection and on protecting the rights of financial services’ consumers.

In the area of movement
of capital, the National Bank of Ukraine (NBU) introduced obligatory sales
of F/X proceeds from exports and mandated conversion into local currency of any
individual transfers from abroad exceeding UAH 150 000. The NBU also reduced
the maximum term for the repatriation of profits from 180 to 90 days, as from
19 November, and set a requirement to sell 50% of exporters’ profits received
in foreign currencies. The measures will be in effect for the next six months. Also
on 19 November, the NBU set up a Committee to prevent fraudulent operations in
the foreign exchange market.

Other key
areas

Amendments to the Tax Code
changed the rules for the administration of taxes, and introduced new tax rates
and tax benefits in Ukraine. Ukraine’s further efforts to reform the tax system
could benefit from greater involvement on the part of experts and the business
sector. The long-standing issue of VAT refunds saw some progress with the
improved automatic VAT refund system; approximately 50% of refunds were
processed automatically. The total amounts of VAT refunds have increased. The
automated system functions best for larger taxpayers, while many smaller
businesses were unable to access the system because of its strict criteria. Economic
operators complained about pressure to pay corporate income tax in advance in
order to receive VAT refunds or to refrain from submitting VAT refund
applications. On fighting fraud, Ukraine replaced criminal penalties for
goods smuggling with fines, to be determined by the authorities taking into
consideration the gravity of the act. This raises concerns about the possible
negative impact on investigations and sanctioning of cases of smuggling of
excisable goods, especially cigarettes. Given the high profit margins, fines
might not always ensure the adequate level of deterrence. Ukraine is expected to provide further information on the impact of these changes. The EU will
continue to follow this matter closely.

In 2012 the Antimonopoly
Committee adopted a regulation on leniency for cartel participants. In August a
draft State Aid Law, seeking to approximate with EU rules, was submitted
to the Parliament. It proposes to designate the Antimonopoly Committee as the
State aid authority and to give the Cabinet of Ministers an important role on exemptions
from notifications. In September, the Cabinet of Ministers approved a concept
for the draft law on Competitive Strategy.

In
2012, intellectual property rights (IPR) protection and enforcement in Ukraine deteriorated in some areas. The situation regarding copyright protection and
related rights raised particular concerns: piracy and counterfeiting were
widespread, and the enforcement authorities did not coordinate their work. The
institutional and administrative weakness of the State Intellectual Property
Service is also a concern. Ukrainian legislation did not provide for adequate
and effective enforcement of IPR rights, especially in the digital environment.
Existing criminal sanctions did not prove to be a sufficient deterrent and the
rules concerning the destruction of IPR-infringing goods and of equipment used
for their production were applied inconsistently. 2012 saw some worrying
developments regarding the system of collective management organisations (CMOs),
especially in terms of CMO accreditation. The establishment of a collective
management system in accordance with EU standards would help to ensure the
remuneration of royalties, paving the way for proper implementation of the
DCFTA.

In the
area of enterprise policy, in April the President signed the Law on the ‘Development of and State
Support for Small and Medium Business in Ukraine’. The Law’s definition of an SME aims to approximate with the EU acquis. The Law sets the goals and the tasks of
the new SME Agency which, under the supervision of the Cabinet of Ministers, will be responsible for drafting and implementing
SME policy and policy instruments.

Public procurement policy still lacks a coherent strategic approach to legislative
approximation with EU rules and standards. A series of amendments to the public
procurement law were passed during 2012, restricting the scope of competitive
procurement by either excluding certain operations or by increasing the scope
of the single source procedure. A law on procurement by utilities was adopted
in May, but the key concept of ‘utilities’ is not
fully compliant with EU rules due to a different definition of the entities
concerned and, in some cases, to higher threshold values for the law to apply.

From January onwards, internal
audit units were being established and audits conducted in the ministries,
other central executive authorities, their territorial offices and budget
institutions. However, further evidence is needed to
demonstrate that the audits meet international standards. Their effectiveness
might be limited in the absence of a comprehensive Internal Control strategy
based on the applicable international framework (COSO-ERM) and of strategic
reflection on the interaction between Internal Control, Internal Audit and
Financial Inspection.

In June, Ukraine adopted the amendment of the Regulation on the State Statistics Service and
re-instated the professional independence of the statistical office to accord
with European standards. The multi-annual statistical
work programme has been developed for the period 2013–2017, taking into
account the recommendations of the 2011 global assessment and EU best practice.

Ukraine prepared a draft Concept for State Policy on consumer protection.
The point is to gradually shift the emphasis from the State to progressive
inclusion of consumers NGOs in consumer protection activities. It also addresses consumer information, education and counseling; access to justice; consumer collective
actions; and out-of-court resolution of disputes. The Concept has still to be
adopted. There was no progress on adopting the legislation on protection of
rights of financial services’ consumers.

5.         cooperation on justice,
freedom and security

Progress in the area of
migration and asylum slowed. There is a Migration Policy Strategy and Action
Plan in place, but the State Migration Service (SMS, established in 2010) was
not fully and effectively functional. A major EU project in support of the SMS
was finalised as part of the Comprehensive Institution-Building Programme
(CIB), and relevant preparatory measures were launched.

The
Second EU Report on the implementation by Ukraine of the Visa Liberalisation
Action Plan was issued in February. Implementation of the EU-Ukraine
Visa Facilitation and Readmission Agreements continued, and was
monitored at the Joint Committee meeting of July. The amended EU-Ukraine Visa
Facilitation Agreement was signed in July. Negotiations with several EU Member
States continued on implementation of the Protocols under the Readmission
Agreement.

Regarding asylum, in
July Ukraine adopted the Law on Refugees and Persons in Need of Subsidiary and
Temporary Protection. Work on bylaws and other related legislation was
launched. Human rights and international organisations reported a few cases of
violation of the rights of refugees and asylum-seekers, including
instances of refoulement, lack of protection of certain nationalities,
lack of protection of unaccompanied minors, widespread corruption in the asylum
system and denial of access for UNHCR representatives to asylum-seekers.

Ukraine started to implement the 2011 Integrated Border Management Strategy
and Action Plan. A EUR 66-million sector budget support programme was launched
to help implement the Action Plan.

Ukraine adopted an Action Plan in January to give effect to its strategy on
the fight against organised crime. The Third Protocol on the Illicit
Manufacturing and Trafficking of Firearms, their Parts, Components and
Ammunition remained unsigned.

The administrative reform
process almost paralysed criminal investigations of human trafficking in
2011, leading to a significantly lower number of prosecutions and of identified
victims in 2012. Administrative capacity on counter-trafficking (CT) was
weakened, partly because of the reorganisation at the Ministry of Interior. According
to the Minister of Interior, combating trafficking was not among the priorities.
Local counter-trafficking units were subordinated to the local criminal
investigation departments, and suffered of a high staff turnover and a lack of financial
resources.

Good progress was achieved
on combating money laundering and terrorism
financing. Ukraine significantly enhanced its legislation by adopting the Law
on Prevention and Counteraction to Legalisation of the Proceeds of Crime, on
Terrorist Financing and three laws that concern money laundering and the
freezing of terrorist assets. The Financial Action Task Force (FATF) removed Ukraine from the list of states with shortcomings and Ukraine is no longer subject to FATF’s
monitoring process.

Concerning
the fight against illegal drugs, Ukraine continued to implement the National Strategic Programme and Action Plan including
by incorporating the institutional activities into the National Service for
Drugs Control created in 2011. Also in April, an EU Dialogue on Drugs with Azerbaijan, Georgia, the Republic of Moldova and Ukraine was held in Brussels. Cooperation with the
European Monitoring Centre for Drugs and Drug Addiction (EMCDDA), based on a
2010 Memorandum of Understanding, continued. Ukraine attended
the EMCDDA first European Information Network on Drugs and Drug Addiction
(Reitox) week in Lisbon in May. The Ukrainian Medical and Monitoring Centre on
Drugs and Alcohol (UMMCDA), reporting to the Ministry of Health, sent its
annual report following EMCDDA guidelines at the end of June 2012.

Ukraine adopted amendments to the Data Protection Law. However, the
law is not in full compliance with European and international standards.
Remaining concerns, inter alia insufficient guarantees on freedom of
expression, and independence of the Supervisory Authority, are expected to be
addressed by further amendments to the law.

No progress was made
following the initialing of a draft agreement between Ukraine and Eurojust (in December 2011). Further steps will depend on full alignment of data
protection legislation with European standards.

Regarding judicial
cooperation, the Second Additional Protocol to the European Convention on
Mutual Assistance in Criminal Matters entered into force on 1 January 2012.

6.         Transport, energy, environment,
the information society, research and innovation

Ukraine’s 2010 national transport
strategy envisaged the development of transport sub-sector programmes. Despite
their approval being a condition for the disbursement of transport sector
budget support tranches for 2012, none of the draft programmes was approved. Following
the approval in May 2011 of a strategy for improving road safety by 2015, the
action plan was approved by the Cabinet of Ministers in March 2012. Regarding
maritime transport, Ukraine remains on the blacklist of the Paris Memorandum of
Understanding (MoU) on Port State Control. In order to address deficiencies in
maritime safety, Ukraine established a new State Inspection body; further
efforts in this area are needed. In June, Ukraine approved a Law on Sea Ports.
It regulates the administration and governance of ports, monitoring of shipping
safety, and the supervision and monitoring of sea port operations. On inland
waterways, Ukraine has yet to apply EU standards regarding technical
requirements for inland waterway vessels. The negotiations between the EU and Ukraine on the Common Aviation Area Agreement were resumed in September 2012, following the
tentative technical resolution of the issue of aircraft certification. The EU
and Ukraine will keep their own certification methods and work towards a
revised MoU on the convergence of certification systems.

Ukraine made progress in implementing some of its Energy Community Treaty (EnCT) commitments. In particular, the
regulator approved rules on certifying eligible customers of natural gas and on
third party access to the gas transportation system though they need further
work to bring the rules fully into line with the EU acquis. As Ukraine progressively implements its EnCT commitments,
the investment climate is improving and it has been able to further diversify
energy supplies. Since November 2012, Ukraine received gas from the West. The EU
is closely working with Ukraine in developing additional routes of
bidirectional gas supplies. In June, a
law on natural monopolies was adopted; it is a first step towards
incentive-based regulation in the sector. A draft law on the principles of electricity
market operation was submitted to the Parliament. Legislation on state regulation in the energy sector
and legislation aiming to approximate with EnCT rules on energy performance in buildings
and the energy services directive are in preparation. Ukraine is encouraged
to swiftly agree with the EnCT Secretariat on an Action Plan and a Roadmap for
implementing its EnCT obligations and to make progress on implementation. No progress
was noted in bringing energy prices to cost recovery levels. This continues to
be an obstacle to sustainability of the sector. The continued low rates of energy
bill collection (households approximately 85%, heating utilities approximately 40%)
remain a concern.

Ukraine continued to implement the 2009 Joint
Declaration on the modernisation of Ukraine’s gas transit system. It made
progress on the unbundling of Naftogaz, with the amendment of the pipeline
transport law in April and a regulation allowing
for the corporatisation of two key subsidiaries of Naftogaz, Ukrtransgaz and
Ukrgazproduction. This was expected to be completed by the end of 2012. The
EU-World Bank Trust Fund on restructuring Naftogaz was signed in December. Implementation
of this fund will be important to pave the way for future lending by international
financial institutions.

Ukraine has yet to finalise the revision of its Energy Strategy to 2030. The
strategy should incorporate Ukraine's EnCT commitments and reflect the
International Energy Agency’s recommendations from its in-depth review of the
country's energy sector policy, which was co-funded by the EU, as well as the
joint comments from the EU, US and the World Bank.

In April, Ukraine announced its plan to implement the Extractive Industries Transparency Initiative.
A multi-stakeholder group, created in October, started drafting an
implementation action plan. The 'Master Plan for the Development of the Ukrainian
Coal Industry' – the main output from the EU supported coal support programme –
is gradually being implemented, albeit with some delay due to the lack of
financial resources. In April, Ukraine adopted a law on the privatisation of
coal mining enterprises.

In November, Ukraine amended its renewable energy law. The country needs to vigorously step up its
efforts on energy efficiency and the use of renewable energy sources. It also
needs to adopt, among other things, its draft Energy Efficiency Action Plan up
to 2020 and, in line with Energy Community commitments, the draft law on the
efficient use of energy resources.

The
EU’s energy/energy efficiency related assistance continued through two sector
budget support programmes (EUR 157 million), technical assistance, twinning,
the Neighbourhood Investment Facility and a contribution to the Eastern Europe
Energy Efficiency and Environment Partnership Fund.

The
EU Instrument for Nuclear Safety
Cooperation focuses on the consequences of the Chernobyl accident (shelter fund, nuclear safety account) and on the management of radioactive waste and
safety improvements to currently
operational nuclear power plants. Energoatom designed an "upgrade package" for its nuclear power plants to the value of EUR 1.2 billion. The EU (EURATOM) and EBRD are
considering a loan to help implement this package. In September 2012, Parliament approved the construction of two new
1000 MW nuclear units at the Khmelniskiy site without waiting for the results
of the impact assessment required under the Espoo Convention.

Regarding climate
change, in June the Government launched a national platform on green
economy/sustainable development under the auspices of the Ministry of Economy. The
suspension imposed on Ukraine from trading emissions units under the Kyoto
Protocol of the United Nations Framework Convention on Climate Change (UNFCCC)
was lifted. The EBRD will provide expertise to Ukraine for the possible
development of a national greenhouse gas emissions trading system. Ukraine participated in preparations for the forthcoming regional EU Clima East project (EUR
18 million) that will be implemented in the period 2013-2016. Ukraine is encouraged to build capacity and engage in the new carbon market mechanism to be
developed following the 17th and 18th sessions of the
UNFCCC Conference of the Parties. Ukraine is also encouraged to make additional
efforts to fully implement the Cancun and Durban agreements and in particular
devise a low-carbon development strategy. The country is also encouraged to
ratify the Doha agreement on the second commitment period of the Kyoto
Protocol.

Work
continued on implementing the National Environmental Strategy (NES) and
Action Plan. In December, the Ministry of Ecology and Natural Resources
published a report on the civil society assessment of NES implementation in
2011. In May, Ukraine adopted a water management programme for the period up to
2021. The Minister of Environment approved an approximation plan for the
environmental acquis. Past pollution from industrial dumps remained a
concern. In April, the Ministry of Ecology and Natural Resources organised a
forum, ’Environment for Ukraine‘, to raise awareness of environment issues. In
May, Ukraine submitted an implementation report to the Secretariat of the
Aarhus Convention, following the decision by the Meeting of the Parties (MOP)
to the Convention in July 2011 to issue a caution to Ukraine for non-compliance
with its obligations under the Convention. The report indicates that a law is
under preparation but, based on the evaluation process established by the MOP,
gives no evidence of full implementation of the measures requested by the 2011
MOP. Following the caution for non-compliance with the Espoo Convention in May
2011, Ukraine informed the Espoo Convention Compliance Committee in June that
the relevant draft law on environmental impact assessment in a trans-boundary
context had been submitted to the Parliament. However, the draft law did not
pass its first reading before Parliament was dissolved following the elections
in October. Ukraine is encouraged to strengthen its environmental legislation
and administrative capacity, to apply develop procedures for environmental
impact assessment consistently and to pay particular attention to public
participation.
The EU provides environment sector budget support of
EUR 35 million.

In
November 2012, Ukraine signed the Charter of the Regional Environmental
Centre for Central and Eastern Europe (REC-CEE) enabling a branch of
REC-CEE to be opened in Ukraine.

In the field of civil
protection, Ukraine continued to participate in the EaP flagship programme
on prevention, preparedness and response to natural and man-made disasters
(PPRD East). As a part of the programme Ukraine is contributing to the
development of Electronic Regional Risk Atlas. Ukraine is encouraged to take
advantage of the guiding document on Risk Assessment Policy for the EaP region
produced under the PPRD East programme. In December 2012 the Ministry of
Emergencies became an agency under the Ministry of Defence.

Ukraine is among the 168 governments that
adopted the "Hyogo Framework for Action: Building the Resilience of
Nations and Communities to Disasters", but work on Disaster Risk Reduction
is still only at the beginning and it will require considerable further effort
to develop capacities and processes.

In terms of the information society, Ukraine defined the competencies of
the regulatory authority, eliminated duplications of price-setting controls and
extended the powers of the regulator to identify telecommunications operators
with significant market power. The regulator established unified requirements
for the routing of voice telephony traffic by telecommunications operators in
public telecommunications networks (in force since July).

Despite Ukraine’s ratification of the European Convention on Transfrontier Television (ECTT) in 2008, only
minor changes has been made to legislation on the audiovisual media up
to 2012. This was partially caused by the standstill in the revision of the
Convention. Two draft laws on setting up the public broadcasting system were tabled
in Parliament in mid-December 2012. However, neither of these drafts meets
European standards and both need substantial improvement.

In the field of research
and innovation, Ukraine's participation in the Seventh Framework Programme
for Research and Technological Development (FP7) continued at a good level. Ukraine was the seventh most active international partner country in the programme. There
are 125 public and private Ukrainian institutions participating in 123 projects
under FP7. The total EU contribution to these projects amounts to EUR 390
million, of which EUR 18 million went to the Ukrainian partners. They have been
most active in collaborative research projects in the fields of the
environment, health, agriculture and international cooperation activities.

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

Education reform
progressed in Ukraine, notably in the area of higher education, which
moved decisively towards the implementation of the Bologna principles. Ukraine made progress in areas like organising the first two cycles
of tertiary education, and implementing quality assurance measures and the
European Credit Transfer and Accumulation System (ECTS). Further efforts (methodical
support and legislative amendments) are needed in areas such as the reform of
the third cycle, the application of learning outcomes, and the development of
internal and external mechanisms for quality assurance. In this context, the
government proposed recasting the existing legislation on higher education. The
proposed amendments include the key points under the Bologna Process: introducing
a three-cycle system; granting greater autonomy to universities; granting more
rights to students’ self-governance; supporting companies which employ
graduates; improving the legal basis for independent external assessments. In
December the Government decided to use a draft law prepared by a working group
headed by the Rector of the Kyiv Polytechnic University as a basis for further work
by the Ministry of Finance and the Ministry of Education, Science, Youth and
Sports.

With regard to vocational
education and training, Ukraine adopted an inter-ministerial decree in
April to implement the National Qualification Framework (NQF). An inter-agency
working group began drafting an NQF implementation strategy. The involvement of
the social partners and particularly employers in education and training policy
development was endorsed through two laws adopted in January and June
respectively (the Law on Professional Development of Employees, and the new Law
on Employers’ Organisations). In spite of these positive developments and
growing awareness, Ukraine has only limited technical competence and capacity
to reform its vocational education and training with a view to addressing the mismatch between supply and
demand of skills on the labour market. The upcoming EU-funded
Twinning project will assist the Ministry of Education and Science in this
field.

Ukraine continued to benefit substantially from its active participation in
Tempus, with the selection of 23 new projects. There is a steady
increase in Ukrainian participation and a clear willingness on the part of
Ukrainian higher education institutions to act as project coordinators. The
Tempus programme has done a lot to internationalise Ukrainian universities,
help to establish long-term partnerships with European counterparts, contribute
to new initiatives and exchange programmes, promoted competitiveness in higher
education and introduce a culture of quality assurance, establishing new
curricula and introducing new forms of governance and evaluation. Ukraine
continued its active participation in the Erasmus Mundus programme, with
the award of 52 scholarships for Erasmus Mundus joint Masters programmes, two
scholarships for Erasmus Mundus Joint Doctoral programmes, and a further 391
grants for short-term mobility organized within a university consortium. Five
new Ukrainian projects were selected under the Jean Monnet Programme in
2012. Among the Eastern Partnership (EaP) countries, Ukraine ranks first in
terms of the number of institutions (63 institutes) and individual researchers
(107 individual researchers) participating in Marie Curie Actions supporting
researchers’ training, mobility and career development.

Ukrainian young people and
youth organisations continued to benefit from the Youth in Action
programme. For 2012 and 2013, the ENPI is providing additional funding for the Youth
in Action Programme to increase cooperation among young people, youth workers
and youth organisations from the European Union and the Eastern Partnership
(EaP) countries. The setting up of the EaP Youth Window within the Youth in
Action Programme enables significantly more young Ukrainians to participate in
the programme. In 2012, 1976 young Ukrainians and Ukrainian youth workers were
involved in 512 projects.

Ukraine was fully involved in the EaP Culture
Programme. Of the fifteen regional projects selected, eleven involve Ukrainian
partners and four projects are led by a Ukrainian partner. The priority field for
the period 2012-2013 is to get more Ukrainian cultural players involved in
cultural cooperation programmes, with special reference to launching the new Creative
Europe programme as of 2014.

In the
area of health, Ukraine continued to implement its reform concept, inter
alia, through pilot decentralisation projects. The EU and Ukraine strengthened health cooperation. Following a risk assessment by the European Centre for
Disease prevention and Control (ECDC) in the wake of the outbreak, in early
2012, of measles in Western Ukraine, the EU provided health security support
during the EURO-2012 football championship. In the run-up to this tournament, Ukraine adopted, with TAIEX support, the law on the emergency system operation under “112”
calls. In March the Ukrainian President signed a law banning any advertising,
promotion or sponsorship by the tobacco industry. In
October, Ukraine adopted a programme to fight non-communicable diseases. To
fight maternal and infant mortality, Ukraine started implementation of its "New life" programme aiming to establish, by 2014, twenty seven prenatal centres throughout the country. It continued to
address the problem of HIV/AIDS and tuberculosis. In 2012, despite being
invited, Ukraine did not participate in the Commission’s HIV/AIDS think tank. Through
the thematic programme "Investing in people", the EU supports
Ukrainian civil society organisations in developing a network of legal support
in the field of HIV/AIDS. A programme to combat tuberculosis is before Parliament
for adoption. As major contributor to the Global Fund to Fight AIDS,
Tuberculosis and Malaria, the EU supports Ukraine through this fund.

[1] The Association Agenda will be updated in 2013 to reflect the
priorities of the finalised Association Agreement.

[2] Figures on GDP, inflation, trade and employment are generally from
Eurostat based on data supplied by the national statistical offices; or IMF or Commission
Staff estimates, as indicated in the Statistical Annex. When other data sources
are used these are then indicated.

[3] All figures as per Ukrainian statistical
office

[4] Data for 2012 was not available at the time of writing.

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