This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 KIEV 000368 
 
SIPDIS 
 
SENSITIVE 
 
STATE PLEASE PASS TO OPIC FOR JFLYNN 
COMMERCE FOR CLUCYK 
 
E.O. 12958: N/A 
TAGS: ECON EINV PREL KCRM UP
SUBJECT: UKRAINE: BILATERAL COORDINATION GROUP TALKS: 
CORRUPTION, MILLENNIUM CHALLENGE, OPIC, INVESTMENT CLIMATE 
 
Sensitive but Unclassified; Not for Internet Distribution 
 
¶1. (SBU) Summary:  In the final session of the January 24 
Bilateral Coordination Group talks, the Ukrainian side 
reviewed GOU judicial reform and anti-corruption efforts and 
pledged to respond soon to OPIC's urgent request for 
resolution of the issues stemming from OPIC's payment of a 
$17-million claim to Alliant Kiev.  Assistant Secretary of 
State for Economic and Business Affairs E. Anthony Wayne 
stressed that high-profile anti-corruption efforts were 
important to improving the investment climate.  He noted that 
the Millennium Challenge Corporation (MCC) had designated 
Ukraine as a "threshold country" because Ukraine had failed 
only the corruption criteria.  The MCC would soon send a team 
to Kiev to explore setting up a program of targeted 
anti-corruption assistance to help Ukraine become eligible 
for a full program of MCC assistance.  It is important to 
have a proposal ready for the MCC, Wayne said.  End Summary. 
 
¶2. (U) The session was co-chaired by the Ukrainian Deputy 
Foreign Minister Volodymyr Khandohiy and A/S Wayne.  Also on 
the Ukrainian side were: Inna Fasenko, Deputy Director of the 
Ministry of Justice's Department of State Legislation on 
Judiciary issues and Law Enforcement; Stanislav Turovskyi, 
Acting Director of the Division for Supervision of Special 
Agencies that Combat Crime and Corruption in the Procurator 
General's Office; Viktor Shevkolyuk, Deputy Director of the 
investments Department of the Ministry of Economy; and 
Natalya Belkina, Head of Economic Analysis for the Foreign 
Ministry's Economic Cooperation Department.  A/S Wayne was 
accompanied by EUR/ACE Director for the Freedom Support Act 
George Frowick, Marta Youth of EB/IFD/OMA, Christine Lucyk of 
the Commerce Department, Matthew Gaertner of Treasury, and 
Lana Ekimoff of the Department of Energy, and EconOff 
(notetaker). 
 
Judicial Reform 
--------------- 
 
¶3. (SBU) Although judicial reform had been dropped from the 
BCG agenda in favor of the broader topic of corruption, Inna 
Fasenko, Deputy Director of the Ministry of Justice's 
Department of State Legislation on Judiciary issues and Law 
Enforcement, presented a thorough and frank review of 
judicial reforms, admitting that Ukraine had much left to do. 
 There were, she said, many shortcomings and loopholes in 
Ukrainian laws.  While there was a new law on the judicial 
system, the government had drafted and the Rada Judiciary 
Committee was reviewing amendments to tighten judicial 
recruitment and appointment procedures and establish minimum 
qualifications for judges.  Among the gaps in the law that 
needed filling was the need to set up disciplinary and 
assessment boards.  Moreover, she said, the administrative 
court system structure needed "finalization."  While a Higher 
Administrative Court existed, it was not staffed, she said. 
 
¶4. (SBU) Fasenko said the GOU had enacted new codes of both 
administrative and civil procedures in the last year.  The 
Code of Commercial Procedure had passed its first reading in 
the Rada but needed further revisions.  As for the Criminal 
Procedure Code (CPC), it had passed its first reading some 
time ago and had then been sent to the Council of Europe for 
comment.  The CoE had responded, and the GOU had prepared a 
revised draft based on those comments.  A working group in 
the Rada was now reviewing the new draft.  The President had 
established a Commission for Democracy and Rule of Law 
charged with planning comprehensive judicial and reform, a 
component of which includes drafting a new CPC.  (Comment: 
Embassy is working closely with the GOU to help ensure a new 
CPC is what it should be.  Rada efforts to revise the old CPC 
have been, to date, inadequate. End Comment.)  While there 
were no specific anti-corruption provisions in recent or 
proposed judicial reform measures, Fasenko noted that the GOU 
had improved compensation -- both salaries and housing 
benefits -- for judges. 
 
Corruption 
---------- 
 
¶5. (SBU) Stanislav Turovskyi, Acting Director of the Division 
for Supervision of Special Agencies that Combat Crime and 
Corruption in the Procurator General's Office, reviewed the 
GOU's broader anti-corruption efforts.  Since 1995 there had 
been an anti-corruption law in place that defined corruption 
as an offense.  There had recently been an increase in the 
number of cases detected, reflecting not a greater incidence 
of corruption, but more success in enforcement.  In 2005 the 
GOU had imposed administrative sanctions on 4000 individuals 
for corruption, of whom 500 were civil servants of categories 
one to four (Note:  the lower the category, the more senior 
the position).  Although the criminal code did not yet have a 
specific definition of "corruption," there had been 1500 
criminal cases brought in 2005 for administrative abuses and 
for taking bribes, he said. 
 
¶6. (SBU) Turovskyi complained that although the GOU was 
highly motivated to crack down on corruption, political 
instability had slowed the progress of new initiatives.  He 
hoped that after the March parliamentary elections, the Rada 
would be able to pass new measures, including a new draft law 
on corruption that would define corruption as a criminal 
offense, expand the number of agencies and personnel charged 
with fighting corruption, and set up an agency under the 
Cabinet of Ministers to field complaints on corruption.  He 
noted that Ukraine was participating in the European 
anti-corruption program and was expecting technical 
assistance from the EU.  (Comment: As Turovskyi implied, the 
GOU's efforts to date have been disjointed and ineffective. 
Although the GOU widely acknowledges the need to pull 
together a plan of action, there are now several competing 
approaches under consideration.  End Comment.) 
 
Millennium Challenge Eligibility Depends on Anti-Corruption 
--------------------------------------------- -------------- 
 
¶7. (SBU) A/S Wayne told the Ukrainian side that the U.S. was 
eager to develop new assistance to combat corruption in 
Ukraine via the Millennium Challenge Corporation's Threshold 
Program.  Ukraine had not qualified for full MCC eligibility 
in 2005 because it had failed the corruption criteria.  The 
MCC would be sending a team to Kiev in several weeks and 
hoped to see a GOU proposal for an anti-corruption program in 
advance of the visit so that the team could act quickly when 
it arrived.  A/S Wayne encouraged the GOU to develop the 
proposal soon, stressing the importance to the investment 
climate of overcoming the legacy of corruption that afflicts 
Ukraine.  EUR/ACE Director for the FREEDOM Support Act George 
Frowick noted that the U.S. had already in 2005 begun to 
increase its assistance for anti-corruption. 
 
¶8. (SBU) DFM Khandohiy said he had understood that Ukraine 
had not been selected for 2006, but hoped that it would be 
put on the list for 2007.  He assured A/S Wayne that the GOU 
would meet with the MCC group when it came.  (Comment: 
Khandohiy's remarks revealed a poor understanding of 
Ukraine's status under the MCC, and his failure to mention 
the request for a GOU proposal for an anti-corruption program 
prompted both A/S Wayne to reiterate the need for the GOU to 
take initiative.  The Presidential Secretariat, however, has 
designated a POC to prepare for the MCC team's visit, and is 
working on a concept paper.  Embassy is working closely with 
the POC.  End Comment.) 
 
OPIC/Alliant Techsystems Claim 
------------------------------ 
 
¶9. (SBU) Shevkolyuk of the Ministry of Economy took up the 
issue of OPIC's request to settle its longstanding claim 
against the GOU stemming from the losses sustained by OPIC 
client Alliant Techsystems.  (Note:  Alliant had a contract 
in the late 1990s to dismantle surplus munitions and convert 
them to scrap, but alleged that the GOU failed to turn over 
to Alliant the originally promised high-value items such as 
brass and copper shell casings that would have made the 
enterprise profitable.  When Alliant tried to withdraw from 
the investment, the GOU prohibited Alliant from removing its 
equipment.  OPIC paid Alliant its claim of $17.7 million and, 
under the 1992 bilateral agreement between OPIC and the GOU, 
thereby succeeded to Alliant's claim of expropriation against 
the GOU.  The interest of Swedish firm "Nammo" in taking over 
the munitions conversion appeared to offer a possible 
solution, but failed when Nammo withdrew in early 2005.  In 
the last quarter of 2005, OPIC informed the GOU that it would 
be forced to suspend operations in Ukraine if a settlement 
were not reached soon.  End Note.) 
 
¶10. (SBU) Shevkolyuk reviewed the history of the case, 
arguing that OPIC's claim that the GOU had expropriated 
assets had been decided unilaterally, rather than being the 
result of arbitration.  He was aware that OPIC had made any 
new projects in Ukraine contingent on settlement of this 
matter, but said that political instability in Ukraine had 
delayed resolution.  Shevkolyuk said that amounts of 
compensation and scheduling of payments should be open to 
negotiation.  The Prime Minister had ordered the creation of 
a working group to create specific proposals.  As Shevkolyuk 
saw it, there were three paths to resolution: 
 
-- a new program of munitions conversion that would involve 
or otherwise compensate Alliant Kiev (the joint venture 
Alliant Techsystems had set up with the GOU); 
-- an amicable settlement (note:  presumably a schedule of 
GOU compensation payment to OPIC); or, 
-- arbitration. 
 
¶11. (SBU) A/S Wayne said he hoped the case could be settled 
without further delay.  He pointed out that the GOU had led 
OPIC to expect a proposal in mid-January.  OPIC had on 19 
January approved the creation of two investment funds that 
could be worth up to $300 million to Ukraine, but these funds 
would only be available if there were a satisfactory 
settlement in this case. 
¶12. (SBU) The MFA's Natalya Belkina responded that the GOU 
had done all it could have done in the evolution of this 
dispute.  The fact that the effort to involve Swedish firm 
Nammo had not worked out was not the GOU's fault.  OPIC had 
signed an MOU agreeing to this approach, and that MOU 
contained no stipulations contingent on GOU action, she 
argued.  It was true that the GOU had promised an answer to 
OPIC by mid-January, but the issue was legally very complex, 
and there had not been enough time after Christmas (January 6 
in Ukraine) to formulate the response.  The Cabinet of 
Ministers had on January 23 approved the creation of the 
working group to include the MFA, the Ministries of Justice, 
Economy, Finance, and Defense.  She said that the GOU pledged 
to prepare its concept for a resolution and present it to the 
U.S. side.  A/S Wayne suggested the GOU communicate that 
proposal directly to OPIC. (Note:  Ambassador met January 25 
with Deputy Foreign Minister Makukha and raised OPIC/Alliant. 
 Makukha argued it might be necessary to liquidate Alliant 
Kiev first before approaching a settlement with OPIC.) 
 
¶13. (SBU) A/S Wayne encouraged the GOU also to resolve 
several long-standing investment dispute cases that he had 
presented to high-level officials during his November 2005 
visit to Ukraine.  He asked whether the issue of arrears in 
VAT reimbursements from the State Tax Administration (STA) to 
exporters had been fully resolved.  He asked the GOU whether 
there were prospects of legal reforms to improve the 
investment climate such as passage of the joint-stock company 
law or abolition of the backward commercial code. 
 
¶14. (SBU) Shevkolyuk said President Yushchenko had ordered 
the abolition of the commercial code, but that there had been 
no specific proposals developed as yet.  He hoped there would 
be one by the end of February adding that the joint-stock 
company law draft existed and needed to be considered by the 
Rada.  He said that the STA had managed to pay off legitimate 
VAT refund arrears, but that there were still some claims 
that the STA believed might be fraudulent and were 
investigating.  He acknowledged that the refund process took 
too long and said the STA was looking to introduce electronic 
processing in order to expedite repayment. 
 
¶15. (U) A/S Wayne has cleared this cable. 
HERBST