VZCZCXYZ0012
RR RUEHWEB

DE RUEHKV #2336/01 2570814
ZNR UUUUU ZZH
R 140814Z SEP 07
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 3741
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC

UNCLAS KYIV 002336 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
STATE FOR EB/IFD/OIA AND EUR/UMB 
STATE PLEASE PASS TO USTR FOR KLEIN/MOLNAR 
USDOC FOR 4201/DOC/ITA/MAC/BISNIS 
USDOC FOR 4231/ITA/OEENIS/NISD/CLUCYCK 
 
E.O. 12958: N/A 
TAGS: EINV ECON PGOV UP
SUBJECT: UKRAINE: LEADING POLITICIANS VIE FOR REPUTATION AS MOST 
INVESTOR-FRIENDLY 
 
REF: KYIV 2204 
 
Treat as Sensitive but Unclassified.  Not for Internet. 
 
¶1. (U) Summary: PM Viktor Yanukovych and opposition leader Yuliya 
Tymoshenko held dueling meetings with investors on September 10 to 
present their plans to improve the investment and business climate. 
Tymoshenko promised to push forward transparent privatizations, open 
up energy exploration to foreign bidders, and dramatically cut red 
tape affecting businesses.  She backed away from previous calls to 
eliminate the Value Added Tax (VAT) and focused instead on reduction 
of the country's excessive payroll taxes.  Yanukovych emphasized his 
goal of bringing Ukraine's business regulatory environment up to 
European standards and promised speedy legislative action should 
elections return him as head of the government.  Several private 
sector participants at the meetings criticized the GOU for its 
failure to do more for businesses, allowing Tymoshenko to score some 
political points.  Both Yanukovych and Tymoshenko showed they know 
what to tell potential investors, even though neither managed to 
improve the investment climate while in office.  End Summary. 
 
¶2. (U) Viktor Yanukovych, Prime Minister and Party of Regions 
leader, and Yuliya Tymoshenko, leader of the opposition bloc BYuT, 
held competing meetings with international investors on September 
¶10.  Yanukovych and Tymoshenko each presented their plans for 
improving Ukraine's investment and business climate.  Both events 
attracted a large media presence, as well as a good showing from 
foreign companies and the diplomatic corps.  President Viktor 
Yuschenko plans to hold a similar event next week. 
 
Yuliya's "Contract with Investors" 
---------------------------------- 
 
¶3. (U) Tymoshenko formally presented her "Contract with Investors," 
a document outlining BYuT's program to increase investment (and 
available online at http://www.ibyut.com/downloads_files/ 
ContractwithInvestors.pdf), and argued her credentials as the most 
investor-friendly of the leading political candidates.  She 
emphasized her track record in supporting transparent privatizations 
and said a government under her leadership would accelerate 
privatization of state-owned enterprises, especially in the energy 
and agricultural sectors.  Tymoshenko promised to open up energy 
exploration to foreign bidders, and to rid Ukraine of "monopolies," 
in particular RosUkrEnergo, that control the sector.  She also 
pledged to cut red tape, saying that BYuT would introduce 
legislation to simplify procedures for purchasing land and to reduce 
the country's regulatory bureaucracy.  Tymoshenko said her 
government would never resort to export restrictions of the kind 
recently imposed by the GOU on grain. 
 
¶4. (U) On the fiscal side, Tymoshenko backed away somewhat from her 
recent calls to abolish the Value Added Tax (VAT) (reftel), saying 
that she was now awaiting EU analysis of her proposals.  Instead 
Tymoshenko focused on the payroll tax, which she promised to reduce 
or even eliminate altogether in order to bring Ukrainian salaries 
"out of the shadows."  (Note: A recent OECD report also identified 
excessive payroll taxes as "a major incentive to under-report wages 
and salaries" and called for their reform.  End note.)  Finally, 
Tymoshenko said judicial reform was needed to eliminate corruption 
in the courts so that potential investors could be confident that 
contracts signed today would be honored tomorrow. 
 
Yanukovych: Moving toward Europe 
-------------------------------- 
 
¶5. (U) Yanukovych shared the stage with Minister of Economy Anatoliy 
Kinakh and economic adviser/number four on the Regions list Inna 
Bohoslovska in his own effort to woo the international business 
community.  They spent little time boasting about their track 
record, however, and rather acknowledged the need for significant 
reforms in the manner that Ukraine regulates private enterprise. 
 
¶6. (U) Yanukovych repeatedly emphasized the goal of bringing 
Ukraine's business regulatory environment up to European standards. 
He also praised the passage of legislation needed for Ukraine's WTO 
accession as an example of the executive and legislative branches 
working together to improve Ukraine's investment climate. 
Yanukovych agreed with Tymoshenko that lack of constitutional reform 
and the country's weak judicial system were at the heart of 
Ukraine's continued problems with the business climate. 
 
Regions Promises New and Improved Legislation 
--------------------------------------------- 
 
¶7. (U) Kinakh and Bohoslovska said a new parliament (presumably 
under Regions' control, of course) would quickly pass the much 
delayed law on joint stock companies.  Bohoslovska said the latest 
draft was "already 99 percent finished."  Kinakh also said the next 
Rada would pass a new bankruptcy law as well as a law that would 
strengthen the capital markets' depository system.  The GOU had 
underestimated what still needed to be done to reform the country's 
land laws, Kinakh said.  A draft law in the Rada would simplify land 
transactions and make them more transparent.  The new Rada would 
also pass the tax code, address the problems associated with the VAT 
regime, and simplify the cumbersome system of payroll taxes, Kinakh 
said. 
 
¶8. (U) Bohoslovska said the Government Committee on Reforms had 
established 21 working groups that had focused on various aspects of 
regulatory reform until last spring's political events disrupted 
their work.  (Note:  Senior GOU leaders have told us the GOU engaged 
the McKinsey consultants to help these working groups.)  Each will 
make policy recommendations that will be subjected to public debate 
before the Cabinet of Ministers signs off and submits them to the 
new Rada for action.  Two different international consultancy groups 
would issue recommendations to ensure that any legislative action 
was in conformity with European standards of business regulation, 
she said. The goal was to radically simplify business regulations 
and eliminate the licensing and most of the regulations for all 
types of business except those that can affect public health and 
welfare, she said.  She acknowledged the shortcomings of the VAT 
system; the problem was that all tax systems in countries of the 
former Soviet Union that involved refunds that were heavily abused 
by criminal fraud.  Any changes in the system would need to take 
that fact into account, she said. 
 
Tough Questions for Viktor, Softballs for Yuliya 
--------------------------------------------- --- 
 
¶9. (U) Several private sector reps, both domestic and foreign, 
enumerated their problems and frustrations to Yanukovych in front of 
the rolling cameras.  Their complaints focused on excessive and 
contradictory regulation, tax problems (in particular VAT 
reimbursement), and frustrations with customs. 
 
¶10. (U) Martin Raiser of the World Bank also said that Ukraine 
needed to reduce the amount of duplicate and contradictory laws and 
regulations governing commercial activities.  Standardization 
regulations needed to be upgraded, and a new public procurement law 
was desperately needed. The GOU could also better mobilize funds 
already approved by the WB and the IMF but which had yet to be 
tapped.  In response to Yanukovych's statement that his government 
would reduce taxes but significantly increase social benefits, 
Raiser said that Ukrainian officials needed to acknowledge that 
expenditures would need to be reduced as well when reducing taxes. 
On energy security, the GOU needed to understand that it could not 
get needed foreign investment in the energy sector without 
substantive reforms of pricing and rates.  Finally, Ukraine could 
not mobilize more investment capital through its capital markets 
without modernizing the capital markets regulatory framework, Raiser 
said. 
 
¶11. (U) Tymoshenko, not forced to defend any government policies, 
used investors' concerns to criticize the Yanukovych government. 
Representatives of energy companies dominated the Q&A session, 
allowing Tymoshenko to go on the offensive in one of her favorite 
areas of attack. 
 
Comment: They Talk the Talk, but who will Walk the Walk? 
--------------------------------------------- -------- 
 
¶12. (SBU) Both Yanukovych and Tymoshenko showed a common 
understanding of what needs to be done to improve Ukraine's 
investment and business climate, and each was anxious to convince 
business leaders that he/she is the right man/woman for the job. 
There seems to be a reasonable degree of consensus in the Ukrainian 
political elite in identifying the economic challenges Ukraine 
faces.  Where some differences were apparent was in the solutions 
proffered:  Tymoshenko's recommendations had a more populistic, 
"throw the rascals out" flavor, while Yanukovych took a more 
technocratic approach.  We suspect Yanukovych also is emphasizing 
his commitment to European standards in an effort to overcome his 
lingering image of being "pro-Russian."  Tymoshenko, meanwhile, is 
using the country's poor investment climate as evidence of the 
Yanukovych government's alleged corruption and mismanagement, and to 
paint a picture of BYuT as the anti-corruption, reform party.  To be 
fair, neither Yanukovych nor Tymoshenko managed to improve the 
investment climate significantly during their time in power.  (Note. 
 
 Tymoshenko was Prime Minister from February to September 2005.  End 
note) Despite all the rhetoric, Ukraine still sits at number 128 on 
the World Bank's "Doing Business" ranking of the ease of doing 
business worldwide, ominously lodged between the Palestinian 
territories and Belarus.  Ukrainians can only look with wonder at 
their color revolutionary cousins the Georgians, who have taken 
honors as "reformer of the year" for successes in improving the 
business climate. 
 
TAYLOR