UKRAINE: Overcoming political and economic challenges
Thomas Cromwell

Since the Orange Revolution shook up Ukraine’s political world in late 2004, the country has been in almost constant political crisis, but at the same time has seen a significant expansion of its economy. Foreign investment has increased dramatically, and exports have soared.

However the one issue that has hovered like a dark cloud over the economy, and by extension over the country as a whole, has been relations with Russia over the price Ukraine pays for gas it imports from Moscow.

In January 2006, in what was seen at the time as Russia punishing Ukraine for choosing a president opposed by Moscow, Viktor Yushchenko, instead of its favored candidate, Viktor Yanukovych, gas was cut off in the depth of winter, forcing a solution that ended with Russian giant Gazprom setting up a gas trading company with Ukrainian partners that provided the precious energy at a higher price, although still significantly discounted from European prices.

This winter saw a gas dispute once more shake Russian-Ukrainian relations. Moscow once more turned off the gas on January 7 to put pressure on Kyiv. Since Ukraine is the main transit route of Russian gas to Europe, which gets a quarter of its gas from Russia, a dozen countries suffered from the disruption of supplies.

On January 20 Ukrainian Prime Minister Yulia Tymoshenko agreed a deal with her Russian counterpart, Vladimir Putin, that settled the dispute. Ukraine agreed to purchase Russian gas at a discount of 20 percent on the European price, and Russia began pumping gas through Ukraine’s pipelines again. Middlemen companies were removed from future gas trading with Ukraine.

In a recent interview with DiplomaticTraffic.com, Ukraine’s Ambassador to Washington, Oleh Shamshur, discussed the recent developments in his country, and the ever closer relations between Kyiv and Washington.

The ambassador said that Ukraine acted responsibly in the latest gas crisis. “Ukraine behaved as a responsible party in the pan-European gas dispute,” he said. “We did everything we could to avoid disruption of the gas supply to the European consumers.”

He noted that, unlike in 2006, when the cut off of Russian gas caused real hardship in much of Ukraine, which uses gas as a primary energy source for heating homes as well as in industry, this time around gas had been stored in advance and Ukraine got through the crisis relatively unscathed.

“We are glad,” he said, “that due to a new agreement gas has started flowing to the EU consumers, although at a higher price for Ukraine” ($360 per 1,000 cubic meters in the first quarter of 2009, compared to $179.5 in 2008). He noted that transit prices Ukraine charges Russian suppliers for the gas they sell to European customers are unchanged for 2009, and have yet to be established at adequate levels for subsequent years.

He said that gas is only part of the larger issue of energy sector reforms that need to center upon radically improving energy efficiency and energy saving, expanding nuclear power and coal production for its electricity needs, as well as increasing use of alternative energy sources.

Currently nearly 50 percent of Ukraine’s electricity is nuclear-generated, and the country is planning to build additional capacity. According to the National Energy Strategy, nine new nuclear reactors are to be built by 2030, with the first two in Khmelnytska expected to go into operation in 2016.

Meanwhile, the United States and European Union have been actively involved in a program to undertake major overhauls of Soviet-era plants, so that they meet international safety standards.

Last year the government signed a contract with US-based Westinghouse for the supply of fuel for a nuclear plant, as part of a plan to diversify energy sources.

Another strategically important area in energy security is the Central Dry Storage Project for spent nuclear fuel from three Ukrainian nuclear plants (South-Ukraine, Rivne and Khmelnytska), whose implementation by Holtec International will help Ukraine avoid risks associated with a Russian monopoly in reprocessing of spent nuclear fuel.

“We are looking first and foremost to nuclear energy,” the ambassador said. At the same time Ukraine also has extensive coal supplies, which it wants to exploit further for electricity generation.

It already exports electricity to some Eastern Europe countries. Soon it will be linked to the pan-European electric power grid, making it possible for Ukraine to supply more power abroad.

Despite the political turbulence in Ukraine, the volume of foreign direct investment in the Ukrainian economy totaled USD 36.45 billion since independence by mid-2008, before the global financial crisis set in. FDI was $6.9 billion in the first six months of 2008 alone.

In addition to the financial sector, prime sectors for foreign investment are agriculture, food processing, energy and IT, light industry and, at least until recently, construction.

In the near future, Ukraine's preparations to host the Euro 2012 soccer competition are expected to attract significant investment in telecommunications, commercial real estate, transportation infrastructure, security services and equipment, and financial services. Potential investors will be looking to the government for a clear strategy to prepare Ukraine for this massive event.

US investment in Ukraine was encouraged when Washington’s OPIC, the Overseas Private Investment Corporation, last year signed a memorandum of understanding to resolve a long-standing dispute over an investment that had gone wrong, opening the way for greater confidence among American investors.  

Last year also saw a robust increase in bilateral trade, approaching $5 billion, almost equally divided between the United States and Ukraine.

The ambassador noted that although political disputes hardly help Ukraine, his is a democratic country that has not been afflicted by widespread strikes or violence in the streets. “There is more noise than actual impediments to investment,” the ambassador said. “The situation is sometimes volatile, but never life threatening.”

He said that the main area of reform needed is improvement in the legal framework, to reassure investors that they are well protected, and can get legal recourse when needed, in Ukraine. There have been improvements, and “everyone recognizes that doing business in Ukraine is getting easier,” Ambassador Shamshur said.

To help tide Ukraine over its present financial difficulties, the International Monetary Fund agreed to provide a stand-by credit, after the adoption of anti-crisis laws and the signing of a memorandum on anti-crisis measures by the president, prime minister, central bank governor and finance minister. The stabilization standby credit is for 11 billion Special Drawing Rights (SDR), equivalent to $16.5 billion, of which SDR 3 billion has already been received by the National Bank of Ukraine.
 
The IMF is tracking the use of the funds, to make sure it is consistent with the terms of the MOU. If satisfied, the IMF will release the next tranche on February 15 (SDR 1.25 billion), and the remaining tranches on May 15 (SDR 2.5 billion), August 15 (SDR 750 million) and November 15 (SDR 2 billion).

The ambassador said that banks in Ukraine had become over-extended primarily through offering too much easy consumer credit, and that a fall in the value of the national currency, the hryvnia, had resulted from related weakening of the financial sector. Some 35 percent of the capital of Ukraine’s banks is held by foreign banks, making them susceptible to the global financial meltdown.

The IMF stabilization package aims to restore financial and macroeconomic stability by adopting a flexible exchange rate regime with targeted intervention, a pre-emptive recapitalization of banks, and a prudent fiscal policy coupled with tighter monetary policy, the ambassador said.

In October 2008, after numerous efforts to put an end to increasing political instability, President Victor Yushchenko issued an order dissolving Parliament and calling an early election. By late December, however, after resistance from parliament and in view of the world financial and economic crisis which heavily affected the country, the president reversed his decision in the name of focusing all efforts on addressing the crisis.

The ambassador said that relations with Washington are getting stronger all the time. “Since 2005 we have managed to create a very solid basis for our relations with the United States, that have acquired the status of strategic partnership,” he said.

He said a lot of substance has been added to the relationship, “based on shared democratic values and mutual interests.”

At the same time, Ukraine continues to pursue ambitions to join NATO and the European Union, and sees America as a key international ally. Increased trade and investment as well as more students and professional exchange programs will help strengthen ties, the ambassador said.

He said he is looking forward to working with the new US Administration and believes that there is strong support in Congress for closer US-Ukraine ties and for its Euro-Atlantic ambitions.

Curriculum Vitae of Ambassador Oleh Shamshur

EDUCATION:
1978 - Taras Shevchenko Kyiv University, Department of International Relations and International Law, specialization in International Relations, cum laude

1982 - Ph. D. in History, Kyiv University

PROFESSIONAL EXPERIENCE:
February 2004 - January 2006 - Deputy Minister of Foreign Affairs of Ukraine

October 2003 - February 2004 - Head, European Union Department, Ministry of Foreign Affairs of Ukraine

1998-2003 - Minister/Counsellor, Embassy of Ukraine to the Benelux Countries

1996-1998 - Deputy Chairman, State Committee for Nationalities and Migration of Ukraine, member of the President's Commission on Citizenship

1993-1996 - First Secretary/Counsellor of the Permanent Mission of Ukraine to the UN, and other international organizations in Geneva

1993 - Visiting Scholar, University College, London

1981 -1993 - Work at the Institute of Social and Economic Problems of Foreign Countries, Academy of Sciences of Ukraine, including 1984 -1989 as Director of Programs

1978-1981 - Post-graduate course at the Institute of Social and Economic Problems of Foreign Countries, Academy of Sciences of Ukraine

LANGUAGES:
Fluent in English, French and Russian

PERSONAL:
Born: July 6, 1956, Kyiv, Ukraine

Married, one daughter