UKRAINE: BILATERAL COORDINATION GROUP TALKS:

UNCLAS SECTION 01 OF 03 KIEV 000368 SIPDIS SENSITIVE STATE PLEASE PASS TO OPIC FOR JFLYNN COMMERCE FOR CLUCYK E.O. 12958: N/A TAGS: ECON EINV PREL KCRM UP SUBJECT: UKRAINE: BILATERAL COORDINATION GROUP TALKS: CORRUPTION, MILLENNIUM CHALLENGE, OPIC, INVESTMENT CLIMATE Sensitive but Unclassified; Not for Internet Distribution ¶1. (SBU) Summary: In the final session of the January 24 Bilateral Coordination Group talks, the Ukrainian side reviewed GOU judicial reform and anti-corruption efforts and pledged to respond soon to OPIC's urgent request for resolution of the issues stemming from OPIC's payment of a $17-million claim to Alliant Kiev. Assistant Secretary of State for Economic and Business Affairs E. Anthony Wayne stressed that high-profile anti-corruption efforts were important to improving the investment climate. He noted that the Millennium Challenge Corporation (MCC) had designated Ukraine as a "threshold country" because Ukraine had failed only the corruption criteria. The MCC would soon send a team to Kiev to explore setting up a program of targeted anti-corruption assistance to help Ukraine become eligible for a full program of MCC assistance. It is important to have a proposal ready for the MCC, Wayne said. End Summary. ¶2. (U) The session was co-chaired by the Ukrainian Deputy Foreign Minister Volodymyr Khandohiy and A/S Wayne. Also on the Ukrainian side were: Inna Fasenko, Deputy Director of the Ministry of Justice's Department of State Legislation on Judiciary issues and Law Enforcement; Stanislav Turovskyi, Acting Director of the Division for Supervision of Special Agencies that Combat Crime and Corruption in the Procurator General's Office; Viktor Shevkolyuk, Deputy Director of the investments Department of the Ministry of Economy; and Natalya Belkina, Head of Economic Analysis for the Foreign Ministry's Economic Cooperation Department. A/S Wayne was accompanied by EUR/ACE Director for the Freedom Support Act George Frowick, Marta Youth of EB/IFD/OMA, Christine Lucyk of the Commerce Department, Matthew Gaertner of Treasury, and Lana Ekimoff of the Department of Energy, and EconOff (notetaker). Judicial Reform -------------- ¶3. (SBU) Although judicial reform had been dropped from the BCG agenda in favor of the broader topic of corruption, Inna Fasenko, Deputy Director of the Ministry of Justice's Department of State Legislation on Judiciary issues and Law Enforcement, presented a thorough and frank review of judicial reforms, admitting that Ukraine had much left to do. There were, she said, many shortcomings and loopholes in Ukrainian laws. While there was a new law on the judicial system, the government had drafted and the Rada Judiciary Committee was reviewing amendments to tighten judicial recruitment and appointment procedures and establish minimum qualifications for judges. Among the gaps in the law that needed filling was the need to set up disciplinary and assessment boards. Moreover, she said, the administrative court system structure needed "finalization." While a Higher Administrative Court existed, it was not staffed, she said. ¶4. (SBU) Fasenko said the GOU had enacted new codes of both administrative and civil procedures in the last year. The Code of Commercial Procedure had passed its first reading in the Rada but needed further revisions. As for the Criminal Procedure Code (CPC),it had passed its first reading some time ago and had then been sent to the Council of Europe for comment. The CoE had responded, and the GOU had prepared a revised draft based on those comments. A working group in the Rada was now reviewing the new draft. The President had established a Commission for Democracy and Rule of Law charged with planning comprehensive judicial and reform, a component of which includes drafting a new CPC. (Comment: Embassy is working closely with the GOU to help ensure a new CPC is what it should be. Rada efforts to revise the old CPC have been, to date, inadequate. End Comment.) While there were no specific anti-corruption provisions in recent or proposed judicial reform measures, Fasenko noted that the GOU had improved compensation -- both salaries and housing benefits -- for judges. Corruption -------------- ¶5. (SBU) Stanislav Turovskyi, Acting Director of the Division for Supervision of Special Agencies that Combat Crime and Corruption in the Procurator General's Office, reviewed the GOU's broader anti-corruption efforts. Since 1995 there had been an anti-corruption law in place that defined corruption as an offense. There had recently been an increase in the number of cases detected, reflecting not a greater incidence of corruption, but more success in enforcement. In 2005 the GOU had imposed administrative sanctions on 4000 individuals for corruption, of whom 500 were civil servants of categories one to four (Note: the lower the category, the more senior the position). Although the criminal code did not yet have a specific definition of "corruption," there had been 1500 criminal cases brought in 2005 for administrative abuses and for taking bribes, he said. ¶6. (SBU) Turovskyi complained that although the GOU was highly motivated to crack down on corruption, political instability had slowed the progress of new initiatives. He hoped that after the March parliamentary elections, the Rada would be able to pass new measures, including a new draft law on corruption that would define corruption as a criminal offense, expand the number of agencies and personnel charged with fighting corruption, and set up an agency under the Cabinet of Ministers to field complaints on corruption. He noted that Ukraine was participating in the European anti-corruption program and was expecting technical assistance from the EU. (Comment: As Turovskyi implied, the GOU's efforts to date have been disjointed and ineffective. Although the GOU widely acknowledges the need to pull together a plan of action, there are now several competing approaches under consideration. End Comment.) Millennium Challenge Eligibility Depends on Anti-Corruption -------------- -------------- ¶7. (SBU) A/S Wayne told the Ukrainian side that the U.S. was eager to develop new assistance to combat corruption in Ukraine via the Millennium Challenge Corporation's Threshold Program. Ukraine had not qualified for full MCC eligibility in 2005 because it had failed the corruption criteria. The MCC would be sending a team to Kiev in several weeks and hoped to see a GOU proposal for an anti-corruption program in advance of the visit so that the team could act quickly when it arrived. A/S Wayne encouraged the GOU to develop the proposal soon, stressing the importance to the investment climate of overcoming the legacy of corruption that afflicts Ukraine. EUR/ACE Director for the FREEDOM Support Act George Frowick noted that the U.S. had already in 2005 begun to increase its assistance for anti-corruption. ¶8. (SBU) DFM Khandohiy said he had understood that Ukraine had not been selected for 2006, but hoped that it would be put on the list for 2007. He assured A/S Wayne that the GOU would meet with the MCC group when it came. (Comment: Khandohiy's remarks revealed a poor understanding of Ukraine's status under the MCC, and his failure to mention the request for a GOU proposal for an anti-corruption program prompted both A/S Wayne to reiterate the need for the GOU to take initiative. The Presidential Secretariat, however, has designated a POC to prepare for the MCC team's visit, and is working on a concept paper. Embassy is working closely with the POC. End Comment.) OPIC/Alliant Techsystems Claim -------------- ¶9. (SBU) Shevkolyuk of the Ministry of Economy took up the issue of OPIC's request to settle its longstanding claim against the GOU stemming from the losses sustained by OPIC client Alliant Techsystems. (Note: Alliant had a contract in the late 1990s to dismantle surplus munitions and convert them to scrap, but alleged that the GOU failed to turn over to Alliant the originally promised high-value items such as brass and copper shell casings that would have made the enterprise profitable. When Alliant tried to withdraw from the investment, the GOU prohibited Alliant from removing its equipment. OPIC paid Alliant its claim of $17.7 million and, under the 1992 bilateral agreement between OPIC and the GOU, thereby succeeded to Alliant's claim of expropriation against the GOU. The interest of Swedish firm "Nammo" in taking over the munitions conversion appeared to offer a possible solution, but failed when Nammo withdrew in early 2005. In the last quarter of 2005, OPIC informed the GOU that it would be forced to suspend operations in Ukraine if a settlement were not reached soon. End Note.) ¶10. (SBU) Shevkolyuk reviewed the history of the case, arguing that OPIC's claim that the GOU had expropriated assets had been decided unilaterally, rather than being the result of arbitration. He was aware that OPIC had made any new projects in Ukraine contingent on settlement of this matter, but said that political instability in Ukraine had delayed resolution. Shevkolyuk said that amounts of compensation and scheduling of payments should be open to negotiation. The Prime Minister had ordered the creation of a working group to create specific proposals. As Shevkolyuk saw it, there were three paths to resolution: -- a new program of munitions conversion that would involve or otherwise compensate Alliant Kiev (the joint venture Alliant Techsystems had set up with the GOU); -- an amicable settlement (note: presumably a schedule of GOU compensation payment to OPIC); or, -- arbitration. ¶11. (SBU) A/S Wayne said he hoped the case could be settled without further delay. He pointed out that the GOU had led OPIC to expect a proposal in mid-January. OPIC had on 19 January approved the creation of two investment funds that could be worth up to $300 million to Ukraine, but these funds would only be available if there were a satisfactory settlement in this case. ¶12. (SBU) The MFA's Natalya Belkina responded that the GOU had done all it could have done in the evolution of this dispute. The fact that the effort to involve Swedish firm Nammo had not worked out was not the GOU's fault. OPIC had signed an MOU agreeing to this approach, and that MOU contained no stipulations contingent on GOU action, she argued. It was true that the GOU had promised an answer to OPIC by mid-January, but the issue was legally very complex, and there had not been enough time after Christmas (January 6 in Ukraine) to formulate the response. The Cabinet of Ministers had on January 23 approved the creation of the working group to include the MFA, the Ministries of Justice, Economy, Finance, and Defense. She said that the GOU pledged to prepare its concept for a resolution and present it to the U.S. side. A/S Wayne suggested the GOU communicate that proposal directly to OPIC. (Note: Ambassador met January 25 with Deputy Foreign Minister Makukha and raised OPIC/Alliant. Makukha argued it might be necessary to liquidate Alliant Kiev first before approaching a settlement with OPIC.) ¶13. (SBU) A/S Wayne encouraged the GOU also to resolve several long-standing investment dispute cases that he had presented to high-level officials during his November 2005 visit to Ukraine. He asked whether the issue of arrears in VAT reimbursements from the State Tax Administration (STA) to exporters had been fully resolved. He asked the GOU whether there were prospects of legal reforms to improve the investment climate such as passage of the joint-stock company law or abolition of the backward commercial code. ¶14. (SBU) Shevkolyuk said President Yushchenko had ordered the abolition of the commercial code, but that there had been no specific proposals developed as yet. He hoped there would be one by the end of February adding that the joint-stock company law draft existed and needed to be considered by the Rada. He said that the STA had managed to pay off legitimate VAT refund arrears, but that there were still some claims that the STA believed might be fraudulent and were investigating. He acknowledged that the refund process took too long and said the STA was looking to introduce electronic processing in order to expedite repayment. ¶15. (U) A/S Wayne has cleared this cable. HERBST