U.S.-UKRAINE BILATERAL TRADE AND INVESTMENT TALKS

UNCLAS KYIV 001703 SENSITIVE SIPDIS STATE PASS OPIC AND USTDA STATE FOR EUR/UMB AND EEB USTR FOR PAUL BURKHEAD DOC FOR ITA/USCS/OIO/EUR/RMILLER/MCOSTA AND ITA/MAC/EEUR/JBROUGHER/CLUCYK E.O. 12958: N/A TAGS: ETRD EAGR TBIO USTR OPIC UP SUBJECT: U.S.-UKRAINE BILATERAL TRADE AND INVESTMENT TALKS Sensitive but Unclassified ¶1. (SBU) Summary. The next round of the U.S.-Ukraine Council on Trade and Investment, scheduled to be held in Washington on October 14, will provide an important venue to address the broadest range of economic issues with Ukrainian counterparts. Issues of concern to U.S. business include Ukrainian customs procedures, value-added tax refunds, intellectual property rights protection, and finalizing the return of the Overseas Private Investment Corporation to Ukraine. Ukraine will place emphasis on issues related to dumping, including anti-dumping duties on its steel exports and a Ukrainian dumping investigation into U.S. poultry imports. Ukrainian officials will also want to discuss their desire to improve access to the U.S. civil aviation market for Ukrainian carriers. This message provides background and updates on agenda items for the upcoming Trade and Investment Cooperation Agreement (TICA) meeting. End Summary. -------------- TICA Background -------------- ¶2. (SBU) In April 2008, the USG and GOU signed a Trade and Investment Cooperation Agreement (TICA) that provides a forum to address trade issues and help build trade and investment relations between the United States and Ukraine. The TICA provides for the formation of a joint U.S.-Ukraine Council on Trade and Investment, where a wide range of trade and investment issues can be addressed. The following issues, divided into sections and subsections in this report, are expected to be on the formal agenda or discussed on the margins of the second meeting of the United States-Ukraine Council on Trade and Investment Council, which will be held in Washington on October 14, 2009. ========================= CUSTOMS AND BORDER ISSUES ========================= ¶3. (SBU) Due to the stringent and inefficient customs procedures left over from the Soviet era, when 100% inspection of packages was mandated, Ukrainian customs procedures are slow, corrupt and bureaucratic. Despite Ukraine's accession to the World Trade Organization (WTO) in 2008, several of their current and proposed customs regulations are not fully compliant with WTO guidelines. -------------- Draft Customs Code -------------- ¶4. (SBU) USAID has reviewed the State Customs Service's Draft Customs Code, which was submitted to the Verkhovna Rada (Ukraine's parliament) on March 17, 2009. In regards to WTO compliance, USAID feels that the draft law contains the following omissions: procedures for requesting, granting, suspending or revoking eligibility for streamlined customs processing as an Authorized Economic Operator (AEO); importer/exporter record-keeping requirements; requirements for cargo departing Ukraine to be reported to customs authorities in advance for safety evaluation; a set of general due process rules for customs decisions; procedures for recovery of customs import duties and taxes; rules for an AEO to delay payment of duties and taxes; specification of the types of intellectual property rights that will be protected by the State Customs Service ("Customs"),or the customs regimes in which Customs will intervene to protect these rights. Customs reform that is anchored into a modern code, consistent with international standards, will be critical for greater market integration. -------------- E-Customs -------------- ¶5. (SBU) As part of an effort to streamline customs procedures and address inefficiencies, in October 2006 the State Customs Service of Ukraine finalized its concept for an "E-Customs" system. The new, computerized system is intended to facilitate a continuous flow of electronic information between customs administrations of different countries, Ukrainian government agencies and foreign economic operators, as well as provide storage and processing of that information. Customs officials are using computers for processing of declarations and duties. However, many of the advanced features of the new system, including some of the risk analysis/cargo selectivity programs are not being used because Customs officers do not yet accept them as a valid tool, and also because other agencies (like the Security Bureau of Ukraine and border gourds) watch Customs to ensure a high rate of physical examination of shipments. -------------- Shipper's Export Declaration -------------- ¶6. (SBU) On July 24, The GOU adopted Resolution no. 767, which will come into force on October 26, 2009. According to the resolution, the Customs authorities will request an "original" export declaration during customs clearing procedures for imports to check the value of goods. The document requested from American exporters is the Shipper's Export Document (SED) used by the Census Bureau. Under U.S. law, exporters may be forbidden from providing this document to third parties, such as authorities in importing countries. Practically speaking, providing an "original" presents problems as well. On October 1, we received information that the GOU was amending this requirement to state the SED would be required only if the importer could receive it from the country of export. We are awaiting official documentation to confirm this decision. -------------- Recycling -------------- ¶7. (SBU) Cabinet of Ministers of Ukraine Resolutions no. 915 and no. 508 require importers to provide documentation showing that they have a recycling contract to dispose of packaging and waste materials with either the state monopoly UkrEcoComResursy or another private firm. In practice, however, the American Chamber of Commerce reports that its members have been advised by environmental protection inspectors to conclude contracts with UkrEcoComResursy, and in several cases inspectors have refused to issue import approval when proof of a recycling contract with a private firm was presented. On September 8, President Yuschenko issued Decree no. 718, calling for Customs to "stop the action" requiring enterprises to account for the recycling of their packaging materials and to sign contracts with UkrEcoComResursy. The President filed documentation with the Constitutional Court as well on the same day to make the action permanent. As of yet, Customs is not fully honoring the President,s decree, and the American Chamber of Commerce reports that environmental protection inspectors are still demanding proof of recycling contracts at customs checkpoints. -------------- WTO-Inconsistent Tariff -------------- ¶8. (SBU) A 13% tariff imposed on automobiles and refrigerators in February 2009 expired on schedule in September. The Rada is now considering a new tariff bill ) Draft Law no. 5080 ) which would increase automobile and agricultural duties by 10%. Sources in the Ministry of Economy (MOE) indicate that the goal of the bill is to protect jobs in the domestic automobile and agricultural sectors, rather than trying to influence Ukraine's balance of trade, which was the justification given for the 13% tariff. Further, MOE sources told EmbOffs that if the tariff were enacted, the government may be able to limit its application to imports from non-WTO countries only. According to the report of the Verkhovna Rada's Central Experts Office, the wording of the Draft Law is unclear and it has been sent for rewriting and clarification. It is unknown when it will be resubmitted for consideration. -------------- Veterinary Inspection Regime -------------- ¶9. (SBU) A new veterinary inspection regime is scheduled to come into effect in January 2010. Under the new regulations, companies wishing to import raw materials and products of animal origin into Ukraine must obtain a veterinary permit. Before a permit can be issued, Ukrainian veterinary inspectors must verify that production facilities, industrial processes and storage conditions meet Ukrainian standards. As a result, veterinary inspectors are interpreting this to mean they must do individual production facility inspections in the country of origin. The Foreign Agricultural Service estimates that the inspection requirements will impact food exports from the U.S. to Ukraine, including meat, seafood, and dairy. As of October 1, we are hearing that the government intends to issue additional guidance and revisions to the new regulations, providing additional detail about the list of products affected. -------------- GMO Labeling -------------- ¶10. (SBU) On May 12, 2009, the GOU adopted Resolution no. 468 "On Approval of the Procedure for Labeling Food Products Containing Genetically Modified Organisms or Produced from Them and Put into Trade". Resolution no. 468 introduced mandatory Genetic Modification (GM) labeling from July 2009. According to the resolution, a food product that contains more than 0.9% GM or a food product that has ingredients containing more than 0.9% of GMOs, as well as a food product that does not contain GM but was wholly or partially produced with agricultural products containing GM over 0.9%, shall be labeled and be subject to removal from the market. Food products that do not contain genetically modified organisms or contain less than 0.1% may be labeled "without genetically modified organisms." Claims of GMO-free content are subject to verification in accordance with the procedure established by the State Standards Committee. So far, the domestic food industry and food importers are not labeling GM products. There are very few labs (between four and six) capable of identifying and measuring GM content in Ukraine, making countrywide implementation of mandatory GM testing and labeling impractical. -------------- Customs Valuation -------------- ¶11. (SBU) Customs inspections are seen by the GOU as a source of revenue, and customs officers are incentivized to over-estimate the value of imported goods to increase the amount of customs duties collected. In response, some importers reportedly under-estimate the invoiced value of their goods. Customs can reject a declared transaction value if it finds that the price declared is less than the cost of production. It has been suggested by some importers that this is not a legitimate basis for rejection of declared transaction values under the WTO valuation agreement. -------------- Anti-Dumping-- U.S. Poultry -------------- ¶12. (SBU) The GOU (Ministry of Economy) is currently pursuing an anti-dumping action against American poultry imports, which it initiated on March 18, 2009. On June 18, 2009, the American firms involved submitted questionnaire responses to the GOU. If the Ministry of Economy accepts the producers and exporters reported prices, they should not be found to be dumping, but if the GOU instead uses import values based on Ukrainian customs valuations, the companies may be found to have very high dumping margins. -------------- Anti-Dumping-- Ukrainian Steel -------------- ¶13. (SBU) The U.S. International Trade Commission (ITC) voted to conduct a second five-year sunset review of anti-dumping duties against Ukrainian steel in November 2008. A review by the ITC found that Ukrainian exporters were selling their products at less than market value. During the first five-year review in 2003, the ITC ruled that lifting the duties likely would lead to material injury of the domestic industry. Ministry of Economy representatives told Emboffs that Ukraine now has a market economy, and that they would like the anti-dumping tariffs to be reviewed and, if possible, lifted. According to Ukrainian government data, exports of steel and steel products to the U.S. totaled $3.9 billion in 2008. -------------- Express Delivery -------------- ¶14. (SBU) The quality of express delivery service in Ukraine is lower than in other Western countries. Ukrainian customs laws regulating express delivery are complicated, requiring payment of duties for all parcels addressed to private individuals. The delay in package delivery can range from one day to one week, and both DHL and UPS report that up to 25% of all express packages brought into Ukraine have to be shipped back to the sender because the receiver of the package gives up, citing customs fees, delays, and paperwork. Consequently, the duties are of doubtful value to the Ukrainian economy, as the collection costs are often higher than the actual duty. ========== Tax Issues ========== ¶15. (SBU) Ukraine's business climate is poorly regarded, ranking 142nd overall out of 183 countries by the World Bank's "Ease of Doing Business" estimates for 2010. In the specific category of taxation, Ukraine is rated third worst in the world (181 out of 183),with heavy taxation of entrepreneurial activity and high tax rates on wages, including obligatory social payments. -------------- Value Added Tax Refunds -------------- ¶16. (SBU) Value Added Tax (VAT) refunds owed to businesses are presently paid by the GOU with lag times that range from months to over a year, and in some cases companies face bureaucratic denial of valid claims. From 2006 to 2008, Ukraine had the worst track record in the world both in terms of delays in refunding VAT payments and the value of those delinquent payments. Members of the United States-Ukraine Business Council (USUBC) report that overdue refunds of VAT paid on exports amount to hundreds of millions of dollars. U.S. agricultural enterprises with operations in Ukraine are particularly hard hit by this issue. =============== OPIC Settlement =============== ¶17. (SBU) In 1999, the U.S. Overseas Private Investment Corporation (OPIC) stopped supporting projects in Ukraine because of a dispute over a $17 million insurance claim. Ukrainian business analysts estimate that, over the past decade, Ukraine has missed out on $5)10 billion in foreign direct investment due to OPIC's moratorium on involvement in Ukrainian transactions. The GOU agreed to settle the claim with OPIC by January 2005, but failed to act on their promises. Then-PM Yanukovich also assured the USG that he would give the matter his personal attention in late 2006, but his administration neither paid the bill nor agreed to negotiate the issue further. A resolution pushed through the Ukrainian Cabinet of Ministers by PM Tymoshenko on July 17, 2009, would allow the outstanding debt to be repaid. Negotiations between OPIC and Tasco, the Ukrainian firm chosen to facilitate the repayment to OPIC return, are running into problems, however. Tasco is seeking additional documents (that likely no longer exist) of underlying transactions from a decade ago to cover its own concerns about future Ukrainian tax audits. Tasco also claims to be encountering difficulty with obtaining a license for foreign exchange transactions. Negotiations between OPIC and Tasco on the details of their agreement continue. ============== WTO COMPLIANCE ============== ¶18. (SBU) Ukraine's accession to the World Trade Organization (WTO) on May 16, 2008, was seen as a major step forward in the country's ongoing integration with the international economic system. With a few noted exceptions, Ukraine is living up to the terms of its WTO accession. One of the central requirements for Ukraine's accession was that the Rada amend ten of its trade-related laws to bring its legal code into alignment with WTO guidelines. Ukraine enacted five key laws just prior to accession, and passed three more thereafter, but one year after accession, two required legal amendments are still unresolved. Some areas of incompliance, including overlapping authorities in Ukraine's food safety and import inspection regime for food safety, have had a legislative "fix", but, in reality, the institutional overlap persists. Some products, including fish, are subject to triple inspection for the same safety indicators. This is time-consuming and costly for importers. -------------- Required Legislation -------------- ¶19. (SBU) At least two important pieces of legislation, which were identified as necessary for WTO compliance during the accession process, have not yet been passed into law. They are: Draft Law no. 2297 "On Fish, other Living Aquatic Resources and Food Made of Them," which deals with Sanitary and Phyto-Sanitary (SPS) and Technical Barriers to Trade (TBT) issues; and Draft Law no. 3322 "On Quality and Safety of Food Products and Food Raw Materials," which would define the legal parameters of the term "standard." Though scheduled for Rada consideration and enactment, the first was removed from the Rada's agenda on February 3, 2009 and the second was revoked by the Cabinet of Ministers on May 20, ¶2009. Presidential Decree no. 713, dated September 4, 2009, calls for the Cabinet of Ministers to re-submit both laws to the Verkhovna Rada and support their enactment. -------------- Additional Harmonization -------------- ¶20. (SBU) Decree no. 713 mandates Cabinet support for three laws currently before the Verkhovna Rada. These laws include: Draft Law no. 1365 "On Market Surveillance;" no. 3301 "On the Amendment of Article 1 of the Law on the Importation in Ukraine of Raw Cane Sugar;" and no. 3421 "On the General Safety of Products." ¶21. (SBU) Decree no. 713 further instructs the Cabinet of Ministers to submit legislation "without delay" to the Rada on two additional topics: "On the Amendment of the Law on Standards, Technical Regulations and procedures for Conformity Assessment" ) abolishing the registration requirement for manufacturers to make conformity declarations; "On the Amendment of Certain Laws of Ukraine to Bring the Product Nomenclature into Compliance with the 2007 Harmonized System of Description and Coding of Goods" ) which would regulate compliance with the commitments undertaken with the relevant International Convention and bring import duty rates into accord with the Protocol on WTO Accession of Ukraine. In addition, Ukraine should adopt the following draft laws related to trade: 2391 "On Changes to Select Laws of Ukraine (as to State Policy in the Sphere of Licensing)" and 3444 "On Changes to the Law of Ukraine On Customs Tariffs." ============================ INTELLECTUAL PROPERTY RIGHTS ============================ ¶22. (SBU) The GOU has made the improvement of their Intellectual Property Rights (IPR) enforcement regime a high priority over the past several years. While Ukraine remains on the Special 301 Report Watch List, due to weak overall enforcement of IPR, it continues to make progress upgrading its enforcement regime. The GOU launched a first criminal case involving unauthorized file sharing in November 2008. The case involves distribution of copyrighted material within a local area network. A second case, launched in December 2008, involved dissemination of pornographic material via the internet. While the final charges were related more to the pornographic content being disseminating, this may be viewed as another step toward better enforcement. The U.S. Commerce Department's Commercial Law Development Program and the United States Patent and Trademark Office continue to organize training workshops for Ukrainian judges, prosecutors, law enforcement personnel, customs officials and industry professionals on proper interpretation and application of IPR laws and regulations. -------------- Unlicensed Software -------------- ¶23. (SBU) The United States remains concerned about GOU use of unlicensed software. According to official information from Ukraine's State Department of Intellectual Property, the current software piracy rate in the GOU exceeds 70%. (In-house estimates by industry leaders place the figure at 75%.) Illegal software usage by the GOU, especially at enforcement agencies, sends the wrong signal to society and the business community, and makes it impossible to argue the value of intellectual property in the country. Furthermore, this also degrades efforts and investments of the rights holders directed at increasing IPR awareness. -------------- Illegal Planting of Biotech Crops -------------- ¶24. (SBU) The potential for biotechnology products in Ukraine's agricultural sector is significant. In 2009, we have seen some progress on biotech issues related to human consumption (labeling) and in the area of biotech products used for feed. However, appealing to public health concerns, Ukraine has not approved a single biotech plant variety for commercial production (planting),and GOU authorities claim that Ukraine's agricultural sector remains GMO-free. In actuality, experts estimate that half of Ukraine's soybeans are illegally planted GMO soybeans and suspect that illegally acquired GMO seeds are being used to grow corn and possibly a few other products. Ukraine needs a system to deal effectively with biotech plantings to make its regulatory system comprehensive (covering feed, human consumption and planting). In addition, the creation of effective property rights legislation in Ukraine for biotech would help promote biotechnology research and legal agricultural product development. -------------- Counterfeit Pesticides -------------- ¶25. (SBU) The European Crop Protection Association estimates that 20% of pesticide products sold in Ukraine are counterfeit, bearing labels of internationally recognized brands, but containing low levels of active ingredient mixed with dangerous additives. These products are mostly imported from China by unscrupulous wholesalers and sold to unsuspecting farmers. Such counterfeit products can often damage or destroy crops, and impact both the revenues and reputations of the firms whose intellectual property rights are being violated. The volume of the counterfeit trade is significant in Ukraine, with 560 tons taken in a single seizure in January 2007. The counterfeit pesticides are currently being stored, as the GOU does not have the funds to safely dispose of the illegal and toxic products. ============== CIVIL AVIATION ============== -------------- Category 2 Status -------------- ¶26. (SBU) Following a reassessment of Ukraine's State Aviation Authority (SAA) conducted in October 2004, Ukraine's Federal Aviation Administration (FAA) safety rating was lowered in June 2005 from Category 1 to Category 2. As a result of the Category 2 status, Ukraine's national carriers have not been allowed to expand their operations to the United States; only Aerosvit, which had direct flights to the U.S. before the safety rating was lowered, has been allowed to fly to the U.S. since 2005. In order to assist Ukraine in meeting FAA and International Civil Aviation Organization (ICAO) standards, the U.S. Trade Development Agency issued a grant for technical assistance to the SAA in 2006. In 2008, the ICAO audited the SAA and again found several areas of concern, including inadequacies in Ukraine's primary aviation legislation. The SAA has tried to remediate issues raised in the ICAO audit, and the Government of Ukraine has submitted a draft air code to the parliament. The GOU is also working with the FAA to schedule a technical review of the SAA to identify any remaining areas for remediation before undergoing another FAA assessment. -------------- Cape Town Convention -------------- ¶27. (SBU) The Cape Town Convention, which became effective in March 2006, establishes an international framework for the creation and enforcement of security and leasing interests in aircraft equipment. It also contains bankruptcy rules that protect contract rights in the context of insolvency. Although Ukraine would likely receive favorable financing terms if it ratified the convention, it has yet to do so and is unlikely to in the foreseeable future. To ratify the Convention, nine of Ukraine's ministries would need to agree on the text; the Convention cannot be sent for agreement until a new Minister of Transportation and Communications has been appointed. (Note: The former Minister was dismissed in June 2009. End note.) ================== FINANCIAL SERVICES ================== ¶28. (SBU) A Draft Law in the Rada would require all banks to join the National System of Mass Electronic Payment (NSMEP) and use it for all electronic payment transactions. During its WTO accession, Ukraine committed to maintaining an open and competitive market for electronic payment services. The new draft law appears to run contrary to these WTO commitments. We encourage Ukraine to consider whether a less preferential policy might better stimulate competition and growth in the financial services sector and ensure the best and least costly service to Ukrainian consumers. ====================== GOVERNMENT PROCUREMENT ====================== ¶29. (SBU) On November 19, 2008, Ukraine's Cabinet of Ministers issued new provisions to regulate the country's government procurement system. World Bank analysts concluded that the new provisions set up a WTO-compliant legislative framework and were an improvement after several years of GOU backsliding on procurement reform. However, these provisions were only temporary, while a new law on government procurement was drafted. Draft Law no. 2263-1 On Government Procurement passed the first reading on May 20, 2009. It was generally in line with best international practice and enjoyed the support of the donor community. ¶30. (SBU) While it awaited a second reading, regressive changes were introduced to Draft no. 2263-1, including the establishment of an inter-ministerial commission that resembles the former Tender Chamber, a purportedly non-governmental organization with the authority to monitor the procurement process and undertake key operational functions that were inherently governmental. The Tender Chamber was the center of the procurement system's corruption and lack of transparency prior to its abolition in 2008. Other regressive changes include: weakening and dispersing policy and oversight functions; establishing a defective, insufficiently independent, bid protest mechanism; and expanding the number of exclusions from the scope of the law. The Ministry of Economy, with support from the World Bank and the European Commission, has prepared an alternate draft procurement law based on the version of no. 2263-1 that passed the first reading. This draft is generally in line with international standards and is advocated by the donor community. If the revised draft law is enacted, we believe that Ukraine will have in place a procurement regime that promotes conflict of interest and corruption. KASKA