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June 15, 2009

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Reference ID Created Released Classification Origin
09KYIV1027 2009-06-15 12:02 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Kyiv

DE RUEHKV #1027/01 1661202
R 151202Z JUN 09

E.O.: 12958: N/A 
REFS: A) STATE 44733 
      B) KYIV 777 
      C) KYIV 497 
      D) KYIV 349 
      E) 2008 KYIV 1875 
      F) 2008 KYIV 915 
1. (SBU) Summary: Ukraine recently marked the end of a 
tumultuous first year as a member of the WTO.  Although 
the terms of Ukraine's accession were very favorable for 
WTO members, Ukraine made several missteps in 
implementing some its accession commitments.  Of most 
concern was a partial rollback of tariff commitments, and 
Ukraine still needs to clean up some technical barriers 
to trade and sanitary/phytosanitary measures that 
discriminate against imports.  The GOU has also failed to 
live up to some bilateral commitments to us on meat trade 
and on biotechnology.  In addition, Ukraine has earned 
some notoriety for its tough negotiating tactics with 
prospective WTO members.  Ukraine's trade statistics 
reveal no sea change since WTO accession, although WTO 
membership does seem to have bolstered total trade and 
helped diversify Ukraine's trade away from CIS countries. 
Despite the various problems, accession has been good for 
Ukraine, and continued dialogue bodes well for our trade 
relationship.  End Summary. 
Blissful Matrimony 
2. (SBU) Ukraine joined the World Trade Organization 
(WTO) on May 16, 2008, after some 14 years of difficult 
negotiations (ref F).  WTO members seem to agree that the 
terms of Ukraine's accession were quite favorable, and 
USTR has noted that Ukraine's tariffs and rules 
commitments were "some of the best ever offered by an 
acceding country" (ref A).  And even before joining the 
WTO, Ukraine had a fairly open economy, with total trade 
in goods equaling 77 percent of GDP in 2007 (exports 35 
percent, imports 42 percent).  Accession to the WTO 
promised to push Ukraine to eliminate most remaining 
trade barriers and to provide the country better market 
access to capitalize on its enormous export potential. 
Rain on Wedding Day - Ratification Problems 
3. (U) Implementation of accession commitments wobbled 
from Ukraine's first day as a WTO member, however.  The 
GOU mishandled the ratification process, failing to 
ensure the passage of five laws promised as part of 
negotiations before accession (ref F).  Unable to secure 
parliamentary support, the GOU used sub-legislative 
instruments to try to ensure compliance with WTO 
commitments, with some success.  In the meantime, it has 
managed to pass some laws, but a year on, Ukraine has 
still not adopted necessary legislation to bring its 
standardization regime for agricultural imports and its 
taxation system for agricultural producers into full WTO 
Infidelity - Tariffs 
4. (SBU) Ukraine has also wavered on its tariff 
commitments.  Lawmakers, facing severe pressure from 
domestic interests, particularly agricultural producers 
and the automobile industry, first tried to delay the 
tariff reductions for several months, creating 
uncertainty for importers.  Then, in February/March, 
parliament succeeded in pushing through a 13 percent 
import tariff surcharge on a wide range of goods, 
bringing tariffs back above Ukraine's WTO commitments 
(ref D).  The effort was spearheaded by Serhiy Teriokhin, 
a savvy, influential, and independent-minded MP from PM 
Tymoshenko's own bloc.  President Yushchenko also played 
a critical role, as everyone -- including the President's 
own staff -- thought he would veto the law.  The GOU 
subsequently managed to revoke the surcharge for most 
goods using a loophole provided in the law (ref C), but 
the surcharge remains in effect for automobiles and 
KYIV 00001027  002 OF 004 
5. (U) Ukraine has also taken some draconian measures 
related to customs valuation.  In contrast to the WTO 
Agreement on Customs Valuation, which mandates that the 
transaction value should usually be used for customs 
valuation purposes, Ukrainian Customs has frequently 
demanded importers to accept higher prices.  While 
intended to cut down on customs valuation fraud, this 
practice has also negatively impacted legitimate trade. 
Constant Bickering - Agricultural Trade 
6. (SBU) Like many countries, Ukraine remains least 
committed to the principles of free trade when 
agricultural products are involved.  Agricultural 
producers have undue influence on government policy, and 
several high-level officials -- including Minister of 
Agriculture Yuriy Melnyk -- have commercial ties to the 
agricultural sector.  At the same time, prices for basic 
food products are politically sensitive in Ukra
ine, and 
the GOU routinely intervenes in the market to keep 
certain prices artificially low.  For example, Ukraine 
has employed export bans or restrictions on agricultural 
goods, particularly grains, to keep domestic prices 
artificially low.  Ukraine canceled the most recent 
incarnation of these export restrictions shortly after 
joining the WTO in 2008 -- thanks to a banner harvest and 
falling world prices -- but the GOU would likely seek to 
re-impose such measures should agricultural commodity 
prices again spike. 
7. (SBU) Ukraine's system of technical regulations, 
despite changes bringing it closer to conformity with the 
WTO Agreement on Technical Barriers to Trade (TBT), 
remains a significant obstacle to trade and investment. 
Based on the old Soviet system, the Ukrainian technical 
regulations system is characterized by burdensome, ex 
ante control and widespread compulsory standards, and it 
differs markedly from systems in western Europe. 
Moreover, Ukraine's oversight system for human and animal 
health measures is complex and nontransparent, involving 
overlapping authority by the Veterinary Service, Sanitary 
Service, and the State Standards Committee.  Several 
legislative amendments passed as part of the WTO 
accession process made progress but did not solve 
entirely the problem of overlapping authority.  Ukrainian 
practice in these areas has created powerful bureaucratic 
interests that want the system, which provides not only 
government jobs and authority but also tremendous rent- 
seeking opportunities, to remain as is.  Volodymyr 
Baluta, Head of the Ministry of Economy's WTO Department, 
told Econoff on June 2 that the Ministry was pushing the 
State Standards Committee to issue its own order 
cancelling mandatory certification of food products, but 
the State Standards Committee was still resisting. 
Ukraine Doesn't Like Our Cooking - Bilat Ag Problems 
--------------------------------- ------------------ 
8. (U) A bilateral agreement with Ukraine negotiated as 
part of our March 2006 WTO bilateral Market Access 
Agreement addresses the terms of U.S. meat exports to 
Ukraine.  The lack of a functioning protocol on pork or 
on live swine for breeding continues to limit U.S. 
exports.  Ukrainian veterinary authorities conducted a 
system audit of the U.S. system in 2007 but call for 
further audits, and in the meantime insist on individual 
plant inspections of U.S. producers.  In addition, the 
Veterinary Service recently banned all U.S. pork due to 
H1N1 influenza fears and kept the ban in place even after 
GOU authorities recognized that the disease was not 
transmitted through consumption of pork (ref B).  In such 
cases, a combination of protectionist motives -- pushed 
by domestic producers -- and bureaucratic interests -- 
from the agencies that benefit from greater restrictions 
-- is to blame. 
9. (SBU) Ukraine has also dragged its feet on 
establishing an approval process for agricultural 
biotechnology products.  The absence of an approval 
process has resulted in unpredictable sales conditions 
KYIV 00001027  003 OF 004 
for corn products, soybeans, and meal.  Ukraine agreed to 
open its market to the products of biotechnology in our 
2006 WTO bilateral Market Access Agreement, and 
Parliament did passed a law establishing the framework 
for the creation, testing, and use of products of 
biotechnology in 2007.  The GOU has failed to issue the 
necessary implementing regulations to open the market, 
however, and has shown little sign of progress over the 
last year.  At the same time, the GOU has issued 
regulations requiring labeling of biotech in foods, 
without the necessary first step of establishing a 
registry and approvals system.  Here, too, bureaucratic 
intransigence is to blame, but Ukrainian officials are 
also responding to public opinion, which is largely anti- 
Ukraine as the Difficult Mother-in-Law - New Accessions 
--------------------------------------- --------------- 
10. (SBU) Ukraine has ruffled some feathers in its 
negotiations with prospective WTO members.  Montenegro 
blames Ukraine for stalling its accession and has 
criticized Ukraine's negotiating tactics as 
unprofessional (ref A).  While Ukraine may have been 
within its rights, its actions on the Montenegro 
accession have clearly won no new friends.  Reports from 
Belgrade indicate that Ukraine may play a similar role on 
Serbia's accession.  Ukraine's motives for playing 
hardball with prospective members are not entirely clear, 
although they do seem to emanate from GOU trade 
negotiators, and not from the political level. 
11. (SBU) Ukraine's handling of Russia's accession, 
undoubtedly the most important for Ukraine, has been less 
controversial.  Although some GOU officials have hinted 
that Ukraine would or should seek major concessions from 
Russia, political leaders have stressed their support for 
the Russian accession, and the GOU has not made any 
formal demands of Russia as yet.  Ukraine's lead trade 
negotiator Valeriy Pyatnytskiy has told us that he hopes 
to expand certain aspects of the Russia-Ukraine Free 
Trade Agreement, however, and Ukraine could jump more 
vigorously into negotiations with Russia closer to the 
end of the accession process.  Yevhen Burkat, head of the 
MFA's department of international economic relations, 
told us on June 11 that the GOU was shocked upon hearing 
Russian PM Putin's recent announcement that Russia would 
put its WTO negotiations on hold to pursue a customs 
union with Kazakhstan and Belarus.  Burkat said the GOU 
was still attempting to understand whether it should take 
Putin's statement seriously, and to determine the impact 
the customs union would have on Ukraine's trade relations 
with each of the three involved countries. 
Married Life not so Different from Bachelor Life 
--------------------------------------------- --- 
12. (U) Most analysts agree that WTO accession did not 
lead to seismic changes in Ukraine, either good or bad. 
Pavlo Sultansky, director of the MFA's Economic 
Department, told the press in February, "We have actually 
been living according to WTO requirements for the last 10 
years, and entering it has not changed our economy." 
Executive Director of the Ukrainian Association of 
Ferroalloy Producers Sergey Kudryavtsev, referring to 
widespread restrictions on Ukrainian steel imports put in 
place before Ukraine achieved market economy status, 
noted accurately in an interview in late 2008 that 
"restrictions imposed against our products in most 
countries (Note: including the EU) were withdrawn prior 
to the entry of Ukraine into the WTO, and in the United 
States are still not removed." 
13. (U) Total trade has grown since WTO accession -- up 
from 77 percent of GDP in 2007 to 86 percent of GDP in 
2008 -- although Ukraine's economic crisis, which has 
caused a majo
r weakening of the national currency and a 
severe contraction of GDP, may have more to do with the 
change than WTO accession. 
14. (U) There has also been a small but noticeable 
reorientation of Ukraine's trade since WTO accession. 
KYIV 00001027  004 OF 004 
Trade with CIS countries between June 2008 and March 2009 
(the most recent data available for the post-WTO 
accession period), compared to the same period in the 
previous year, fell from 39.6 percent of total trade to 
37.2 percent.  The difference was made up not by expanded 
trade with Europe, but rather with Asia (from 18.8 
percent to 20.5 percent of total trade), Africa (from 3.1 
percent to 3.9 percent of total trade), and the Americas 
(from 4.7 percent to 5.4 percent of total trade).  WTO 
accession therefore appears to be serving as a kind of 
counterweight to Ukraine's free trade agreements and 
historical economic ties with CIS countries, increasing 
Ukraine's trade with more far-flung nations and 
diversifying Ukraine's trade. 
Comment: A Marriage Worth Saving 
15. (U) Despite the multitude of trade-related problems 
that have colored Ukraine's first year as a WTO member, 
no one could argue that accession was a mistake.  Ukraine 
is suffering woefully from the economic crisis, but WTO 
membership has bolstered and diversified foreign trade, 
which should help ease the pain.  Accession also allowed 
Ukraine to launch Free Trade Agreement negotiations with 
the EU (ref E), the conclusion of which would 
dramatically reorient Ukraine's trade toward Europe and 
likely have a larger, more positive impact on the 
Ukrainian economy.  And while the GOU could and should 
have handled accession implementation better, we are 
benefiting from increased transparency in Ukraine's trade 
regime as a result of accession.  The next year promises 
to be no easier than the last, as the GOU will continue 
to face calls for increased protectionism as a response 
to the economic crisis.  Continued dialogue and targeted 
assistance, both bilaterally and multilaterally, will 
help us make progress, and this is indeed a relationship 
worth investing in.  End comment. 
Note: All statistics are from the State Statistics 
Committee of Ukraine.  End note. 


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