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Cablegate: 1st Meeting of U.S.-Ukraine Trade and Investment

VZCZCXRO2895
PP RUEHLN RUEHVK RUEHYG
DE RUEHKV #2017/01 2840646
ZNR UUUUU ZZH
P 100646Z OCT 08
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 6510
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC PRIORITY
RUEHGV/USMISSION GENEVA 0143
RUCNCIS/CIS COLLECTIVE

UNCLAS SECTION 01 OF 04 KYIV 002017

SIPDIS
SENSITIVE

STATE FOR EUR/UMB, EB/TPP/BTA, EB/TPP/MTA
STATE PLEASE PASS TO USTR FOR CKLEIN, PBURKHEAD, EPORTER
USDOC FOR 4201/DOC/ITA/MAC/BISNIS
USDOC FOR 4231/ITA/OEENIS/NISD/CLUCYK
USDA FOR FAS/ONA (KRAMOS, AMANNIX, MSALLYARDS)
USDA FOR FAS/OCRA (JFLEMINGS)
GENEVA FOR USTR

E.O.: 12958: N/A
TAGS: ETRD WTRO PREL UP
SUBJECT: 1ST MEETING OF U.S.-UKRAINE TRADE AND INVESTMENT
COUNCIL ADVANCES BILAT ECONOMIC RELATIONS

REFS: A) KYIV 1875
B) KYIV 1330
C) KYIV 1146
D) KYIV 964

1. (SBU) Summary: The inaugural meeting of the U.S.-Ukraine
Trade and Investment Council, created by our new bilateral
Trade and Investment Cooperation Agreement (TICA), took
place on October 2. Deputy U.S. Trade Representative John
Veroneau led the U.S. delegation; Minister of Economy
Bohdan Danylyshyn headed the Ukrainian side, with reps from
all major GOU agencies participating. Ambassador Veroneau
urged progress on a range of bilateral issues, including
WTO accession implementation, opening the Ukrainian market
for biotech products, enforcing contracts, solving the OPIC
dispute, reforming the tax system, ensuring national
treatment in electronic payment systems, and combating
internet piracy. The Ukrainian side asked for USG help in
ending some U.S. anti-dumping orders against Ukrainian
producers, upgrading the FAA's designation of Ukraine's
State Aviation Administration to CAT 1, and upgrading
Ukraine's OECD export credit rating. The GOU also proposed
negotiating a new U.S.-Ukraine Customs Cooperation
Agreement. The TICA calls for the Trade and Investment
Council to meet no less than once a year. End Summary.

2. (U) While in Kyiv, Ambassador Veroneau held side
meetings with Danylyshyn and Ukraine's lead trade
negotiator Valeriy Pyatnytskiy, and was interviewed by the
prominent weekly journal Invest Gazeta. Alongside the
Trade and Investment Council meeting, USG and GOU officials
participated in a forum with local and international
business reps. Morgan Williams, President of the U.S.-
Ukraine Business Council (USUBC), delivered a passionate
criticism of Ukraine's investment climate at the forum and
urged the GOU to improve its cooperation with business.

3. (U) The following were the major topics raised at the
Trade and Investment Council and other meetings.

WTO Accession and EU FTA
------------------------

4. (U) Ambassador Veroneau congratulated Ukraine on
completing its accession to the WTO, while at the same time
urging the GOU to complete the few WTO commitments still
outstanding (ref B). Danylyshyn thanked Ambassador
Veroneau for USG support of Ukraine's accession and
emphasized Ukraine's interest in further integration with
the European and global economy, including through a Free
Trade Agreement with the EU (ref A). Ambassador Veroneau
responded that the USG viewed Ukraine's increasing economic
ties with Europe as a positive development.

Agricultural Issues and Biotech
-------------------------------

5. (U) Danylyshyn and Yuriy Luzan, Deputy Minister of
Agriculture, described recent progress in agricultural
development and argued that Ukraine had the potential to be
among the world's largest food suppliers. Luzan recognized
the importance of U.S. investment in this sector and called
for increased cooperation on issues like biofuels and
market infrastructure.

6. (SBU) Ambassador Veroneau agreed, and argued that
agricultural biotechnology could play an important role in
helping Ukraine to realize its potential. He reminded the
GOU of its commitment under our bilateral WTO Market Access
Agreement to open its market for biotech products and asked
for an update on efforts to establish the appropriate
regulatory system. GOU reps dodged the question, but, when
pressed, noted that they had just conducted a roundtable
with U.S. officials on biotech issues and claimed that work
on the necessary regulations was moving forward. Luzan
added that a new law needed to move through Parliament,
which could delay things until next year. (Comment:
Luzan's comments were concerning, as Ukraine already has
the necessary legislation in place and only needs to issue
implementing regulations to open the market. Luzan may

KYIV 00002017 002 OF 004


have been referring to a draft law requiring labeling for
biotech products, an initiative thus far successfully
opposed by the Ministry of Economy. End Note.)

7. (SBU) Pyatnytskiy, both during the Council meeting and
privately with Ambassador Veroneau, noted GOU concerns that
a new biotech regulatory system could create market access
problems for Ukrainian producers. The EU and Russia,
Ukraine's major export markets, had drastically different
rules, said Pyatnytskiy, and he asked for U.S.
understanding as the GOU proceeded cautiously on biotech.
(Note: Pyatnytskiy repeated this logic at a meeting hosted
by the World Bank on October 7. End Note.) Ambassador
Veroneau argued that the EU biotech regulatory system was
not WTO compliant and reiterated the importance of
Ukraine's commitment to open its market.

Investment Promotion Efforts
----------------------------

8. (U) Danylyshyn and Ambassador Veroneau agreed on the
importance of foreign investment for Ukraine's continued
economic growth. Danylyshyn noted that the GOU had created
a permanent Council of Investors charged to advise GOU
leadership on investment climate issues, and he cited
rising levels of FDI in recent years.

9. (SBU) Ambassador Veroneau highlighted the rule of law as
especially important for the investment climate. While not
engaging on the substance of the case, Ambassador Veroneau
raised the government's nullification of a Production
Sharing Agreement with Vanco International (refs C-D) as an
example of how failure to uphold contracts can scare away
potential investors.

OPIC
----

10. (SBU) Ambassador Veroneau emphasized the importance of
solving the long-standing dispute that has prevented the
Overseas Private Investment Corporation (OPIC) from
operating in Ukraine. Danylyshyn affirmed the GOU's
resolve to find a solution, the details of which he said he
hoped could be worked out by year's end. Deputy Minister
of Economy Victor Panteleyenko, who has the lead on this
issue within the GOU, briefed the group on recent progress.
He said the eventual solution would contain two distinct
parts: a Memorandum of Understanding between the GOU and
USG; and a settlement of OPIC's commercial dispute.
Panteleyenko noted that Deputy Prime Minister Hryhoriy
Nemyrya had tasked him to finalize the bilateral MOU as
soon as possible.

Tax Reform and VAT Refunds
--------------------------

11. (SBU) Yuriy Gladun, head of the International Relations
Department of the State Tax Administration (STA), reviewed
GOU efforts to increase transparency in the tax system.
Ambassador Veroneau praised the GOU for improving its
reimbursement of VAT to U.S.-owned exporters, and
encouraged further reform to ensure debts to exporters
would not accumulate in the future. Gladun noted that the
STA was moving to an electronic system that should
institutionalize speedier VAT reimbursement.

Electronic Payments
-------------------

12. (SBU) Paul Burkhead, USTR Director for Europe and the
Middle East, raised U.S. concerns about new regulations
requiring banks that wish to bid on Ukrainian government
contracts for issuing state employee salary cards to join
the National System of Mass Electronic Payment (NSMEP).
Burkhead and Ambassador Veroneau asked the GOU to review
this new policy to ensure that it did not discriminate
against foreign financial services providers.

Customs Reform
--------------

KYIV 00002017 003 OF 004

13. (SBU) Igor Pikovskiy, First Deputy Chairman of the
State Customs Service, reviewed Ukraine's efforts to reform
Customs operations in line with international best
practices. He noted that our bilateral Customs agreement
dated to Soviet times, and proposed that we launch
negotiations on a new U.S.-Ukraine Customs Cooperation
Agreement. (Note: Ukrainian Customs has increasingly
approached Embassy of late with requests for cooperation
and information sharing, but this was the first time such a
proposal was made. End Note.) Ambassador Veroneau said he
would have to consult with U.S. Customs and Border
Protection before responding to Pikovskiy's proposal.
Ambassador Veroneau also encouraged the GOU to ease
unnecessary restrictions currently faced by express mail
operators in Ukraine.

Anti-Dumping Orders on Ukrainian Exporters
------------------------------------------

14. (SBU) Sergiy Gryshchenko, Deputy Minister of Industrial
Policy, and Natalia Sydoruk, deputy head of the Ministry of
Economy's Anti-Dumping Department, raised concerns
regarding long-standing U.S. anti-dumping orders on some
Ukrainian exports, particularly steel products and
fertilizers, in place since before Ukraine achieved market
economy status. Ambassador Veroneau recognized the
importance to Ukrainian industry, but noted that U.S. trade
remedy laws were consistent with WTO rules and among the
most transparent in the world.

15. (SBU) Christine Lucyk, Senior Policy Adviser from the
Department of Commerce, briefed on a recently signed,
market economy-based agreement with Ukrainian steel
producers that would come online on November 1. Lucyk also
noted that the Department of Commerce and the International
Trade Commission (ITC) had just hosted a team of GOU
officials during the week of September 22 to help explain
U.S. trade remedy laws. Sydoruk thanked the USG for
engaging on this issue, and invited reps from Commerce and
the ITC for a follow-on session in Ukraine and to meet
directly with the Ukrainian companies affected.

Aviation
--------

16. (SBU) Kyrylo Polishchuk, Deputy Chairman of the State
Aviation Administration (SAA), reviewed GOU efforts to
improve aviation safety in Ukraine. Polishchuk made a plea
for the U.S. Federal Aviation Administration (FAA) to
reconsider its current Category 2 designation of the SAA.
(Note: The FAA downgraded the SAA from CAT 1 to CAT 2 in
2004. End Note.) USUBC rep Williams argued at the
business forum that the GOU needed to seriously address FAA
and International Civil Aviation Organization
(ICAO) concerns in order to move up to CAT 1, which is
necessary to open new flights between Ukraine and the
United States.

17. (SBU) Ambassador Veroneau applauded Ukraine for opening
its market to low-cost airline Wizz Air and urged speedy
ratification and implementation of the Cape Town Convention
on International Interests in Mobile Equipment.

OECD Credit Rating
------------------

18. (SBU) Volodymyr Lytvyn, Deputy Minister of Finance,
complained that Ukraine's poor score (five on a scale of
zero to seven) on the OECD's export credit rating (i.e. the
OECD's Country Risk Classification) made it hard for
Ukrainian firms to purchase equipment from U.S. companies.
Lytvyn asked for USG support in achieving a revision of the
OECD rating. Ambassador Veroneau said he would look into
the matter to determine what was holding Ukraine back.

IPR
---

19. (U) Ambassador Veroneau praised Ukraine for improved

KYIV 00002017 004 OF 004


enforcement of intellectual property rights in recent
years. He encouraged the GOU to continue the progress,
especially in new areas of concern like internet piracy.

GSP
---

20. (U) Ambassador Veroneau mentioned USG willingness to
help Ukrainian exporters take advantage of the General
System of Preferences (GSP) program allowing duty-free
import of some products to the United States. Marideth
Sandler, Executive Director of the GSP program at USTR,
gave a well-received presentation on the program during the
business forum on October 3.

Next Council Meeting
--------------------

21. (U) The TICA calls for the Trade and Investment Council
to meet no less than once a year. Danylyshyn said he hoped
the next meeting would take place in Washington sometime in
2009.

22. (U) USTR has cleared on this cable.

TAYLOR

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