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