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Cablegate: U.S.-Ukraine Bilateral Trade and Investment Talks

VZCZCXYZ0000
RR RUEHWEB

DE RUEHKV #1703/01 2750753
ZNR UUUUU ZZH
R 020753Z OCT 09
FM AMEMBASSY KYIV
TO RUEHRC/USDA FAS WASHDC
RUCPDOC/USDOC WASHINGTON DC
RUEHRC/USDA WASHDC
RUEHC/SECSTATE WASHDC 8504

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

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