Thawing Relationship

Economic News

22 Jul 2010
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While Ukraine finds itself in a heated pre-election battle, the granting of market economy status by the US coupled with the confirmed sale of Ukraine's fourth-largest bank are being greeted by the market as positive steps towards further liberalisation.



Market-watchers also hope these developments show an improvement in the traditionally frosty relationship between the US and Ukraine, creating an opportunity to increase the relatively low weight of US investment in the country.



In bestowing the coveted market economy label upon Ukraine - some two months after the same decision was reached by the EU - the US Commercial Department had to examine such key issues as currency convertibility, wage rate negotiation, foreign investment, government ownership and the state's role in allocating resources.



The US deputy secretary of commerce, David Sampson, told the Ukrainian authorities in Kiev last week that the move reflects "impressive economic developments that occurred in Ukraine over the past several years and underscores the US wish to expand its bilateral economic relationship with Ukraine."



According to analysts, this represents a thaw in Ukraine's relationship with the transatlantic superpower. Washington has over the years expressed frustration with Kiev, especially over its role as a leading European producer of pirated music, video and computer products.
The International Federation of the Phonographic Industry used to cite Ukraine as the fourth-largest producer of pirated CDs in the world, surpassed only by Paraguay, China and Indonesia, with the total value of bootleg discs estimated at $200m.
Back in 2002, the US went as far as imposing prohibitive tariffs on imports from Ukraine to offset the losses incurred.



In addition to piracy, the US was critical of Ukraine's lenient attitude to international money laundering and expressed great frustration with Ukraine's alleged decision to sell anti-aircraft radar systems to Iraq during the Saddam Hussein era.



The former chief of Ukraine's presidential staff, Viktor Medvedchuk, has since called these accusations unfounded and asked for an apology from the US.



Yet despite these past acrimonious exchanges, most of the old sticking points now appear to have been resolved.



Ukraine has improved its anti-money laundering procedure, resulting in its removal from the Financial Action Task Force (FATF) black books in February 2004.



In July 2005, President Viktor Yushchenko signed several legal amendments regulating the production, sale and export of laser discs, thus closing in on intellectual property pirates.



Meanwhile, the most important event to help usher in a thaw in US-Ukrainian relations, analysts argue, was the Orange revolution - much admired by the US public and the Bush administration.



The US, according to political analysts, is interested in promoting the success of the Orange revolution as a beacon of democratic hope for other nations in the region, such as Belarus, and would like Ukraine to succeed in becoming completely independent of Russia.



Moreover, the new Orange administration has been vocal about its ambitions to join NATO and has shown loyalty to the US by sending 1600 Ukrainian troops to Iraq - 17 of whom have perished there.



The main outstanding issue on the US-Ukraine economic bilateral agenda is the stalled process of accession into the World Trade Organisation (WTO). According to the State Department, the Bush administration wants to complete WTO accession talks with Ukraine by the end of 2006.



The failure to close the accession talks in 2005 was perhaps the main failure of Ukraine's foreign policy last year. The accession process still faces a number of hurdles, too.



First, Ukraine needs to finish bilateral negotiations with the US, Australia and China. Second, it has yet to pass a number of laws through parliament to lower export duties on scrap metal, live cattle and leather. These are amendments being blocked in parliament by the same powerful lobby groups who were accused of sabotaging the WTO accession process last year.



Progress on this all-important front, however, is not expected until after the new parliament and government are formed, likely to be some time before the end of May. This will give Ukraine another six months to conclude the bilateral talks and pass the necessary bills in parliament.



At the end of the day, analysts say, politics has not been entirely phased out of the Ukrainian economy, and most sectors are adopting a wait-and-see approach for the next two months. Nonetheless, the granting of market economy status opens up an important floodgate for transatlantic investments that many hope will pour in after elections.

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