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