UKRAINE: LEADING POLITICIANS VIE FOR REPUTATION AS MOST

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SUBJECT: UKRAINE: LEADING POLITICIANS VIE FOR REPUTATION AS MOST
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1. (U) Summary: PM Viktor Yanukovych and opposition leader Yuliya
Tymoshenko held dueling meetings with investors on September 10 to
present their plans to improve the investment and business climate.
Tymoshenko promised to push forward transparent privatizations, open
up energy exploration to foreign bidders, and dramatically cut red
tape affecting businesses. She backed away from previous calls to
eliminate the Value Added Tax (VAT) and focused instead on reduction
of the country's excessive payroll taxes. Yanukovych emphasized his
goal of bringing Ukraine's business regulatory environment up to
European standards and promised speedy legislative action should
elections return him as head of the government. Several private
sector participants at the meetings criticized the GOU for its
failure to do more for businesses, allowing Tymoshenko to score some
political points. Both Yanukovych and Tymoshenko showed they know
what to tell potential investors, even though neither managed to
improve the investment climate while in office. End Summary.


2. (U) Viktor Yanukovych, Prime Minister and Party of Regions
leader, and Yuliya Tymoshenko, leader of the opposition bloc BYuT,
held competing meetings with international investors on September

10. Yanukovych and Tymoshenko each presented their plans for
improving Ukraine's investment and business climate. Both events
attracted a large media presence, as well as a good showing from
foreign companies and the diplomatic corps. President Viktor
Yuschenko plans to hold a similar event next week.

Yuliya's "Contract with Investors"
--------------


3. (U) Tymoshenko formally presented her "Contract with Investors,"
a document outlining BYuT's program to increase investment (and
available online at http://www.ibyut.com/downloads_files/
ContractwithInvestors.pdf),and argued her credentials as the most
investor-friendly of the leading political candidates. She
emphasized her track record in supporting transparent privatizations
and said a government under her leadership would accelerate
privatization of state-owned enterprises, especially in the energy
and agricultural sectors. Tymoshenko promised to open up energy
exploration to foreign bidders, and to rid Ukraine of "monopolies,"
in particular RosUkrEnergo, that control the sector. She also
pledged to cut red tape, saying that BYuT would introduce
legislation to simplify procedures for purchasing land and to reduce
the country's regulatory bureaucracy. Tymoshenko said her
government would never resort to export restrictions of the kind
recently imposed by the GOU on grain.


4. (U) On the fiscal side, Tymoshenko backed away somewhat from her
recent calls to abolish the Value Added Tax (VAT) (reftel),saying
that she was now awaiting EU analysis of her proposals. Instead
Tymoshenko focused on the payroll tax, which she promised to reduce
or even eliminate altogether in order to bring Ukrainian salaries
"out of the shadows." (Note: A recent OECD report also identified
excessive payroll taxes as "a major incentive to under-report wages
and salaries" and called for their reform. End note.) Finally,
Tymoshenko said judicial reform was needed to eliminate corruption
in the courts so that potential investors could be confident that
contracts signed today would be honored tomorrow.

Yanukovych: Moving toward Europe
--------------


5. (U) Yanukovych shared the stage with Minister of Economy Anatoliy
Kinakh and economic adviser/number four on the Regions list Inna
Bohoslovska in his own effort to woo the international business
community. They spent little time boasting about their track
record, however, and rather acknowledged the need for significant
reforms in the manner that Ukraine regulates private enterprise.


6. (U) Yanukovych repeatedly emphasized the goal of bringing
Ukraine's business regulatory environment up to European standards.
He also praised the passage of legislation needed for Ukraine's WTO
accession as an example of the executive and legislative branches
working together to improve Ukraine's investment climate.
Yanukovych agreed with Tymoshenko that lack of constitutional reform
and the country's weak judicial system were at the heart of
Ukraine's continued problems with the business climate.

Regions Promises New and Improved Legislation
--------------


7. (U) Kinakh and Bohoslovska said a new parliament (presumably
under Regions' control, of course) would quickly pass the much
delayed law on joint stock companies. Bohoslovska said the latest
draft was "already 99 percent finished." Kinakh also said the next
Rada would pass a new bankruptcy law as well as a law that would
strengthen the capital markets' depository system. The GOU had
underestimated what still needed to be done to reform the country's
land laws, Kinakh said. A draft law in the Rada would simplify land
transactions and make them more transparent. The new Rada would
also pass the tax code, address the problems associated with the VAT
regime, and simplify the cumbersome system of payroll taxes, Kinakh
said.


8. (U) Bohoslovska said the Government Committee on Reforms had
established 21 working groups that had focused on various aspects of
regulatory reform until last spring's political events disrupted
their work. (Note: Senior GOU leaders have told us the GOU engaged
the McKinsey consultants to help these working groups.) Each will
make policy recommendations that will be subjected to public debate
before the Cabinet of Ministers signs off and submits them to the
new Rada for action. Two different international consultancy groups
would issue recommendations to ensure that any legislative action
was in conformity with European standards of business regulation,
she said. The goal was to radically simplify business regulations
and eliminate the licensing and most of the regulations for all
types of business except those that can affect public health and
welfare, she said. She acknowledged the shortcomings of the VAT
system; the problem was that all tax systems in countries of the
former Soviet Union that involved refunds that were heavily abused
by criminal fraud. Any changes in the system would need to take
that fact into account, she said.

Tough Questions for Viktor, Softballs for Yuliya
-------------- ---


9. (U) Several private sector reps, both domestic and foreign,
enumerated their problems and frustrations to Yanukovych in front of
the rolling cameras. Their complaints focused on excessive and
contradictory regulation, tax problems (in particular VAT
reimbursement),and frustrations with customs.


10. (U) Martin Raiser of the World Bank also said that Ukraine
needed to reduce the amount of duplicate and contradictory laws and
regulations governing commercial activities. Standardization
regulations needed to be upgraded, and a new public procurement law
was desperately needed. The GOU could also better mobilize funds
already approved by the WB and the IMF but which had yet to be
tapped. In response to Yanukovych's statement that his government
would reduce taxes but significantly increase social benefits,
Raiser said that Ukrainian officials needed to acknowledge that
expenditures would need to be reduced as well when reducing taxes.
On energy security, the GOU needed to understand that it could not
get needed foreign investment in the energy sector without
substantive reforms of pricing and rates. Finally, Ukraine could
not mobilize more investment capital through its capital markets
without modernizing the capital markets regulatory framework, Raiser
said.


11. (U) Tymoshenko, not forced to defend any government policies,
used investors' concerns to criticize the Yanukovych government.
Representatives of energy companies dominated the Q&A session,
allowing Tymoshenko to go on the offensive in one of her favorite
areas of attack.

Comment: They Talk the Talk, but who will Walk the Walk?
-------------- --------------


12. (SBU) Both Yanukovych and Tymoshenko showed a common
understanding of what needs to be done to improve Ukraine's
investment and business climate, and each was anxious to convince
business leaders that he/she is the right man/woman for the job.
There seems to be a reasonable degree of consensus in the Ukrainian
political elite in identifying the economic challenges Ukraine
faces. Where some differences were apparent was in the solutions
proffered: Tymoshenko's recommendations had a more populistic,
"throw the rascals out" flavor, while Yanukovych took a more
technocratic approach. We suspect Yanukovych also is emphasizing
his commitment to European standards in an effort to overcome his
lingering image of being "pro-Russian." Tymoshenko, meanwhile, is
using the country's poor investment climate as evidence of the
Yanukovych government's alleged corruption and mismanagement, and to
paint a picture of BYuT as the anti-corruption, reform party. To be
fair, neither Yanukovych nor Tymoshenko managed to improve the
investment climate significantly during their time in power. (Note.

Tymoshenko was Prime Minister from February to September 2005. End
note) Despite all the rhetoric, Ukraine still sits at number 128 on
the World Bank's "Doing Business" ranking of the ease of doing
business worldwide, ominously lodged between the Palestinian
territories and Belarus. Ukrainians can only look with wonder at
their color revolutionary cousins the Georgians, who have taken
honors as "reformer of the year" for successes in improving the
business climate.

TAYLOR