2000: THE YEAR IN REVIEW

Ukraine's foreign policy: a multi-vectored approach

Ukraine continued to develop its multi-vectored policy in foreign relations during the year 2000. With days to the dawn of the new millennium, Ukraine's acting Minister of Foreign Affairs Borys Tarasyuk reaffirmed Ukraine's foreign policy strategy, which is defined by strategic partnerships and close cooperation with Moscow and Washington, and movement towards gradual integration into European political and economic structures.

On December 28, appearing before the press for the first time since he was nominated by new Prime Minister Viktor Yuschenko to continue in his role in the new Cabinet, Mr. Tarasyuk said he saw no reason for major changes in Ukraine's relations with foreign countries.

He called integration into the European Union a "Ukrainian strategic target," while emphasizing that Ukraine's foreign policy must pay more attention to the needs of its economy. He predicted that by the end of the year Ukraine would achieve associate status within the European Union, a forecast that would prove untrue.

Concurrently, he reaffirmed the need to maintain strategic partnerships with Russia and the United States.

The fickleness and continued lack of stability in the higher echelons of the Ukrainian government was demonstrated just over nine months later: Mr. Tarasyuk was out, replaced by Ukraine's first foreign affairs minister, Anatolii Zlenko.

Although President Leonid Kuchma officially explained the move as a change "in connection with his transfer to another position," Mr. Tarasyuk expressed no plans to go anywhere before or after the decision. Mr. Kuchma also alluded to the need to put a more diplomatic type in the post. That comment gave credence to speculation by political analysts that the unexpected announcement - made by the president and not Prime Minister Yuschenko - was a gesture to Moscow and President Vladimir Putin. While Mr. Tarasyuk had cozy relations with Europe and the West, he considered dalliances with Moscow most risky and least important.

His replacement, Mr. Zlenko, who has a reputation as an obedient bureaucrat, quickly flew off to Russia to strengthen tattered ties between the two countries' foreign ministries.

Mr. Tarasyuk's policy of keeping Moscow at arms length over the objections of President Kuchma was not the only reason that relations with Russia remained turbulent in 2000. Among the several outstanding issues that caused tensions - not least of which was a border that continued to be undelineated - the most controversial remained the dispute over Russian gas: how much Ukrainians took and how much Kyiv owed Moscow.

Russia's acting Prime Minister Mikhail Kasianov, appointed to the post after President Boris Yeltsin resigned on New Year's Eve in favor of Mr. Putin, arrived in Kyiv on February 22 to discuss a growing Ukrainian debt for natural gas and allegations by Rem Viakhirev, the head of Gazprom, Russia's natural gas monopoly, that Ukraine was stealing Russian gas from a pipeline that circumvented Ukraine on its way to Western Europe.

In mid-January the Russian government and the Gazprom chief had chastised Kyiv for allowing billions of cubic meters of natural gas to be diverted from the Ukrainian natural gas pipeline and had implied that in addition to private commercial interests the government also was involved. Officially it charged the quasi-public Naftohaz Ukrainy with taking the majority of the gas. On January 17 Naftohaz Ukrainy Chairman Ihor Bakai rejected the allegations and explained that the only natural gas it had been diverting was what was allowed under the transit fee agreement between Ukraine and Russia. He said Ukraine owed Russia no more than $763 million for the natural gas supplied by agreement.

Days before the two prime ministers met in Kyiv to attempt to resolve Ukraine's energy problems, an ad hoc inter-governmental committee had tabulated Ukraine's energy debt to Russia at $1.4 billion, much less than the $2.2 billion that Vice Prime Minister Yulia Tymoshenko had declared after returning from Moscow several weeks earlier. Ms. Tymoshenko incorrectly had accepted Russian assertions that the debts of both the government and the private sector should be lumped together. Moscow has always looked to Kyiv to take responsibility for the loose credit arrangements that many Ukrainian firms have with Gazprom.

Ukraine's Vice Minister of Finance Serhii Makatsaria announced the ad hoc committee had made an even more surprising finding, which gave Ukraine some leverage in discussions with Russia. He disclosed that while Ukraine's overall commercial and governmental debt to Russia stood at $3 billion, Russia owed Ukraine some $3.9 billion. The numbers, which were verified in a protocol signed by the two governments on February 17, included the difference in the value of the diplomatic properties and international holdings divvied up after the Soviet Union collapsed, as well as property given to Russia for its Black Sea Fleet by Ukraine.

For cash-strapped Ukraine, which until recently was almost entirely dependent on Russia for its natural gas, repayment of the gas debt had been an ongoing problem, most often resolved in barter arrangements. This continued to be the case until the fourth quarter of the year, when Vice Prime Minister Tymoshenko banned all barter transactions in the fuel and energy sector. Until then much of the debt repayment was made in the form of Ukrainian agricultural goods and defense technology, including aircraft and missiles. The last transaction of the sort occurred in late February when Kyiv handed over to Moscow the last two of 11 Soviet-era aircraft - eight TU-160 and three TU-95 MS strategic bombers, along with 600 X-22 cruise missiles - valued at about $800 million, which had been agreed upon in autumn 1999.

Continued Ukrainian debt and Russian discussions on the construction of a new pipeline that would circumvent Ukraine led Messrs. Putin and Kuchma to meet in Sochi, Russia, on October 16 to further discuss the natural gas problem. There the Ukrainian president announced that he was ready to allow Russian commercial enterprises to take part in the privatization of the Ukrainian gas pipeline. The two sides agreed that, in return, Russia would invest in upgrading Ukraine's aging transit line. "This is a good offer, and we accept it," said President Putin at the end of the Sochi meeting.

Several days later, however, the Petroleum Information Agency announced that plans for an alternative pipeline were continuing and that a five-nation consortium of natural gas producers had signed an agreement. On October 18 the consortium, consisting of Gazprom of Russia, the Italian SNAM, French Gaz de France, and Germany's Wintershall and Ruhrgas, signed a memorandum of cooperation in Moscow to develop a natural gas pipeline through Poland and Slovakia that would connect to an existing one running through Belarus.

Commenting on the announcement, President Kuchma said Ukraine would not take countermeasures in connection with the creation of the consortium, adding that much lies in the way of bringing the project from the drawing board to fruition.

One of those obstacles turned out to be Poland, which said it would not seriously consider such a project on its territory without some sort of participation by Ukraine. Polish President Alexander Kwasniewski said he did not want to be part of a project that would hinder another country, but said that he would give it the go-ahead if Ukraine "also receives the opportunity to obtain economic benefits from the project."

A week later, Prime Minster Yuschenko flew to Warsaw for an annual review of Polish-Ukraine relations, which heavily accented the proposed gas pipeline project. Mr. Yuschenko continued to receive support from the Polish government for Ukraine to be included in the new project. He also attempted to convince Russia that Ukraine's pipeline offered the most economical means to handle the additional demand from Western Europe, which is expected to need 180 billion cubic meters of Russian gas in the future. He said the Ukrainian transit system, which currently handles 110 million cubic meters annually, was underutilized by 60 million cubic meters and could take as much as 170 million cubic meters annually. After completion of the joint Ukrainian-Russian project to modernize the pipeline, capacity would approach 230 million cubic meters, according to Mr. Yuschenko.

Before Moscow would agree to continued use of the Ukrainian pipeline, Kyiv had to overcome allegations and a widespread belief that it was continuing to steal Russian gas, which Moscow maintained amounted to 10 million cubic meters annually. Problems were multiplied by a Western Europe that really didn't care how it received its energy supplies.

On December 7, a few days after the presidents and prime ministers of the two countries conferred on the natural gas problem during the Commonwealth of Independent States summit in Miensk, Belarus, Russia agreed to restructure Ukraine's debt of $1.5 billion. The deal reassigned debt responsibilities to those Ukrainian private commercial entities that took Russian gas and gave Ukraine a 10-year deferment on repayment of what it owed. The two sides also agreed that Russia would give Ukraine 30 billion cubic meters of gas in 2001 and would also allow another 30 billion to flow through its territory from Turkmenistan. Ukraine would pay with cash for half of the natural gas it would receive in the future, while half would be deferred for eight to nine years.

Russia also officially acknowledged for the first time that since May Ukraine had not illegally diverted Russian natural gas running through the Ukrainian pipeline.

Another point of friction between Moscow and Kyiv in 2000 was the issue of language, more specifically the continued prevalence of the Russian language on Ukrainian lands.

On February 9 Russia's Ministry of Foreign Affairs accused Ukraine of violating the language rights of the Russian minority on its territory. The outcry from Moscow came as a result of a ruling by Ukraine's Constitutional Court that said the Ukrainian language is "the mandatory means of communication for state bodies and local administrations, as well as in the sphere of public life in Ukraine."

In the decision, which had been handed down on December 19, 1999, the court supported a view held by 10 national deputies of Ukraine who had petitioned for a clarification on the language statute of the Constitution that the Ukrainian language is "disregarded" and "deliberately ignored" within government institutions and public schools.

In criticizing the decision, Moscow said "certain forces in Ukraine seem determined to create a phenomenon previously unseen in Europe: to make the native language of the overwhelming majority of the population unacceptable."

Moscow urged European organizations such as the Council of Europe to increase their monitoring of the situation.

The Russian allegations were also in response to a move by the Yuschenko government to finally develop a comprehensive language policy. On January 27 First Vice Prime Minister Mykola Zhulynskyi presented a final draft of such a plan for Cabinet approval.

The language issue again caused friction between the two countries after Ihor Bilozir, a renowned Ukrainian composer died in Lviv on May 28, five weeks after a beating that was the result of an altercation in a café over the singing of Ukrainian songs.

On June 19-20 the Lviv city and oblast governments banned the use of Russian in commercial establishments and on Lviv radio. Russia denounced the move and said that members of the Russian minority in Ukraine were suffering persecution. Ukraine's Foreign Affairs Ministry responded by citing statistics that showed to what extent the Russian language officially is supported by the Ukrainian government. It also presented another set of figures that criticized the low level of support for the development of the Ukrainian language in Russia.

As the cross-border debates raged over language policies and natural gas supplies, Russian President-elect Putin traveled to Kyiv on April 18 to attempt to strengthen fragile relations between the two countries.

The trip, which was the final leg of the Russian president's first tour of foreign capitals, led to no groundbreaking agreements, but allowed the Ukrainian and Russian presidents to discuss common issues, chief among them natural gas trade. The two also journeyed to Sevastopol to review the facilities of Ukraine's naval forces and Russia's Black Sea Fleet.

Presidents Kuchma and Putin met several times in the next several months; by the end of the year, when they concluded a joint agreement on a natural gas policy in Miensk, they had established normal working relations.

The second meeting between the two occurred less than a month after Mr. Putin's initial stay in Kyiv. In a display of Slavic unity, Messrs. Kuchma and Putin joined Belarusian President Alyaksandr Lukashenka in Belgorod, Russia, to celebrate the 55th anniversary of the defeat of Nazi Germany.

While Mr. Lukashenka blatantly touted the need for a single Slavic state composed of the three countries, Mr. Putin was more restrained, merely implying that the three nations share a common heritage, culture, religion and fate. For his part, Mr. Kuchma distanced himself furthest from endorsing a confederacy of some sort. He would go only as far as to suggest that the three countries must continue to seek mutual support and cooperation.

CIS summits

The Ukrainian and Russian presidents met again in Yalta, if only briefly, during the CIS summit that President Kuchma organized on August 18-19. The summit, which was intended to be a forum on regional economic cooperation and development, was overshadowed by the tragedy of the sinking of a Russian submarine, the Kursk, in the Barents Sea. Citing the need to be in Moscow to oversee developments, Mr. Putin's stay in Yalta lasted a few hours. Moscow's limited participation may also have been because it does not see a benefit for itself in a free- trade agreement among the CIS states.

Nonetheless, President Kuchma called the summit a success, even though only nine of the 12 leaders of the member-states participated.

For Ukraine, the Yalta CIS summit was one of several that Ukrainian leaders utilized to push foreign policy initiatives forward. Ironically, it took part in three within the CIS structure, which has been generally acknowledged as an ineffective and insignificant organization.

For Ukraine, which has often said that it sees the CIS primarily as an economic instrument and not a political one, the key objective of the summits was to push for a free-trade zone among CIS member-states.

On June 20 Kyiv achieved a measure of success when the CIS summit in Moscow agreed on a compromise that would plan the implementation of a free-trade zone across the region by the end of 2001. Belarusian Prime Minister Vladimir Yermoshyn, the new chairman of the CIS Heads of Government Council, who replaced Prime Minister Yuschenko in the post, promised at the summit that such a zone would be set up by January 2002.

Mr. Yuschenko, who will serve as vice-chairman in the next year, said the CIS government leaders had agreed to reduce the list of goods to be excluded from free-trade provisions by 25 percent. He also explained that Russia, which has shown the most resistance to the establishment of a free-trade zone, had expressed a "strict readiness" to cut the list of commodity groupings of exports to Ukraine that would be subject to taxation. However, the sides did not specify how the zone would be launched.

Kyiv spent a good amount of energy in developing relations with the European Union in 2000. Its ultimate goal: to obtain associate status and realize the third leg of President Kuchma's multi-vectored policy as a member of the European Union.

On May 22-23, Prime Minister Yuschenko returned from the annual Council on Ukraine-European Union Cooperation encouraged that Ukraine had every chance of obtaining more liberalized trade relations, which might even lead to associate membership in the EU by the end of the year.

While the prime minister said upon his return from Brussels that discussions with EU leaders had laid the groundwork for broader cooperation, his press secretary, Natalia Zarudna, said the talks "managed to change the way the EU looks at Ukraine."

A lack of tangible results tempered the optimism, however. The presidential advisor to the Cabinet of Ministers, Anatolii Lytvytskyi, explained that it was too much to expect that all trade problems would be resolved in a single meeting and that a country that merely had a partnership agreement with Europe would be given associate or full membership.

Mr. Yuschenko's primary objective in Brussels was, first, to show that Ukraine was moving on economic reforms and, second, to open a dialogue on free-trade status for Ukraine and recognition for the country as a free- market economy. The latter would allow Ukraine more optimal trade benefits and allow it to maneuver around various European anti-dumping laws.

Two months later, on September 15, President Kuchma traveled to Paris to continue the effort at the annual EU-Ukraine Summit, where he met with various European leaders, including French President Jacques Chirac. President Kuchma underscored that Ukraine's ultimate goal is full membership in the EU. His EU advisor, Roman Shpek, said that concrete headway was made on a free-trade status in the form of an agreement on quota-free trade in textiles in 2001, which soon would be signed.

Meanwhile, President Chirac gave Ukraine a passing grade on its recent economic reform efforts and announced that the EU would support Ukraine's entry into the World Trade Organization.

Mr. Kuchma's biggest achievement in Paris, however, was obtaining agreement from France to support Ukraine's request for funding from the European Bank for Reconstruction and Development to complete two nuclear reactors to replace the Chornobyl nuclear energy complex. Mr. Kuchma said he had also convinced EU officials to support a $100 million loan to Ukraine to cover the cost of additional fossil fuel purchases to compensate Ukraine for the energy lost when Chornobyl would be shut down at the end of the year.

A free-market economy

Ukraine's efforts led to some success in the final quarter of the year when on October 4 the EU designated Ukraine a free-market economy. The EU Council of Ministers in Brussels agreed to adopt a proposal to extend to Ukraine its special ad hoc market regime in anti-dumping procedures, which gave Kyiv new leverage in resolving anti-dumping disputes between European commercial entities and its own. EU Trade Commissioned Pascal Lamy said the decision was recognition of the improvements that have taken place in Ukraine's economy.

Then, in mid-November, the EU announced that it had agreed to extend $100 million for the purchase of fuel to run thermal and hydroelectric power plants, which would offset the losses at Chornobyl. That decision was followed some weeks later by an EBRD agreement, announced on December 7, that it had agreed to extend to Ukraine some $215 million to complete nuclear reactors near the cities of Rivne and Khmelnytskyi, which would permanently replace Chornobyl-generated electricity.

Ukraine hosted European leaders in its capital in 2000, most prominently NATO. In an effort to better acquaint Ukrainians with the defense alliance, which was considered the enemy for more than 45 years, the 19 permanent ambassadors who comprise NATO's ruling body met in Kyiv on March 1-2 to further expand NATO-Ukraine relations.

It was the 16th meeting of the NATO-Ukraine Commission, formed after Ukraine signed a charter on distinctive partnership with the North Atlantic Alliance in July 1997, but the first time that the North Atlantic Council, the organization's highest body, met in a country with which NATO maintained a special partnership.

While Ukraine-NATO bilateral relations stood at the top of the agenda, the ambassadors also sought to change perceptions still held by a majority of Ukrainians that NATO is a military threat. Surveys show that some 60 percent of Ukrainians either do not fully understand what NATO is or do not trust its intentions.

"Our joint meeting here in Kyiv was not just to demonstrate NATO's friendship and solidarity with our distinctive Ukrainian partner, but also to serve a very simple purpose: allowing you, the people of this country, to understand what NATO is and how we can interact for the benefit of all the people of this region," explained NATO Secretary General George Robertson after the commission meeting ended.

Ukraine on the Security Council

Seven of the ambassadors spent a day in various regions of Ukraine continuing the public relations blitz. Ukraine increased its activity within the largest international organization when in January it took its seat as one of 10 non-permanent members of the United Nations Security Council elected to two-year terms. The increased role for Ukraine within the U.N. came as a result of a successful campaign it ran in 1999 to become the representative of Central and Eastern Europe in the international organization's Security Council.

In an effort to ensure that its work in the U.N. Security Council would be effective, Ukraine's Permanent Mission to the United Nations issued an appeal to the international Ukrainian community on March 31, to ask for financial support, noting that the additional responsibilities posed by its membership in the Security Council require additional financing, which Ukraine's budget, due to a continued weak economy, could not cover.

Ukraine, which took part in key debates within the body on the issue of Serbia and Kosovo during the year, emphasized in its diplomatic work that consistency is the key to the Security Council process.

In an interview with The Weekly on September 3, Ambassador Valerii Kuchinsky, first deputy permanent representative, whose key responsibility is Security Council affairs, said Ukraine had promulgated a position within the body that commanded respect from the other members. He said the delegation had overcome uncertainties held by the other member-states as to what ideology the Ukrainian delegation would maintain and with whom it would align. "Ukraine, however, has consistently maintained positions that, above all else, reflect our national priorities and our national interest," said Mr. Kuchinsky.

The highlight of the U.N. year for Ukraine and the rest of its members occurred on September 6-8, when the U.N. Millennium Summit brought together the largest gathering of world leaders in history. The event, attended by 150 heads of state and government, was intended to begin the process of renewing the focus and the purpose of the 55-year-old international organization.

President Kuchma headed the Ukrainian delegation, and spoke before the Security Council and the General Assembly during his stay in New York. He also met with Secretary-General Kofi Annan and held bilateral meetings with nine state leaders from countries ranging from Bangladesh and Mongolia to Argentina and Jamaica. In addition, he attended a meeting of representatives of the regional group GUUAM (Georgia, Ukraine, Uzbekistan, Azerbaijan and Moldova).

Foreign Affairs Minister Tarasyuk, who was also part of the Ukrainian delegation, said perhaps Ukraine's biggest accomplishment at the world summit was to have initiated and developed a summit on the Security Council within the larger summit. Some 75 percent of the statement adopted at the Security Council summit was prepared by Ukraine, noted Mr. Tarasyuk.

Two weeks earlier, Verkhovna Rada Chairman Ivan Pliusch also traveled to New York in millennium-related U.N. celebrations. He attended the international Conference of Presiding Officers of National Parliaments. The summit, the first of its kind, was organized by the Geneva-based Inter-parliamentary Union and attended by more than 150 Parliamentary leaders from 140 countries.

Mr. Pliusch, who addressed the summit on August 31, underscored the importance of parliamentary bodies in the development of democracy and enumerated the lengthy ties Ukraine's Verkhovna Rada has with the international community.

Ukraine also took part in a U.N.-sponsored conference on gender equality held on June 5-9. The conference, a special session of the 23rd U.N. General Assembly called "Women 2000: Gender Equality, Development and Peace for the 21st Century," was a follow-up to the Fourth World Conference on Women, held in Beijing in 1995.

Ukraine's Minister of Justice Suzanna Stanik lead a delegation of 10 women from both the governmental and non-governmental sectors.

"It is the woman who personifies the civil, moral and human approach to addressing the most complex problems of the modern world," Ms. Stanik told the delegates during her address to the U.N. General Assembly on June 5.

A couple of weeks later a similar conference sponsored by the United States and Ukraine addressed a specific concern of women, especially in Central and Eastern Europe. The conference's topic was trafficking in humans, and its aim was to promote more effective cooperation and information-sharing among law enforcement officials in the region.

Trafficking in women and children is the world's fastest growing criminal enterprise and has reached epidemic proportions in Central and Eastern Europe, with Ukraine especially heavily affected.

Attendees from 12 countries and various European organizations - including Melanne Verveer, the chief of staff for U.S. First Lady Hillary Rodham Clinton - heard speaker after speaker talk of the need for more public awareness on the techniques and lures utilized by those who profit from the international smuggling of women and children for prostitution and forced labor. They discussed what needs to be done to protect the victims, to re-integrate them back into their own societies and to more effectively prosecute the criminals.

"In a world where the rule of law must prevail too many, too many victims must question why so many criminals go unpunished," said Ms. Verveer, who has Ukrainian roots and greeted the delegates in the Ukrainian language.

President Bill Clinton had endorsed the conference during his visit to Kyiv on June 5. The U.S. president arrived in the Ukrainian capital on his way back from Moscow, where he had his first face-to-face meetings with Russia's new president. Mr. Clinton's stay in the Ukrainian capital, which was to have been a two-day affair, was cut short after it was decided that he should fly to Japan to attend memorial services for the recently deceased Japanese prime minister.

The theme of Mr. Clinton's visit to Ukraine became "Boritesia-Poboryte" (fight and you shall overcome), after he repeated the words no less than four times during a rousing 15-minute presentation in which he exhorted Ukraine to believe in democratic reforms and free markets and to remain patient a while longer. The speech, delivered before 50,000 Ukrainians on a hot and sunny day on Mykhailivskyi Square in the shadow of the newly reconstructed St. Michael's Golden-Domed Cathedral, undoubtedly was the highlight of Mr. Clinton's trip.

Mr. Clinton addressed the throng after laying a wreath before the Great Famine memorial and paying his respect to the victims with a lengthy moment of silence.

Earlier in the day he met with President Kuchma to talk over various aspects of the strategic partnership the two countries claim, during which the Ukrainian president announced that Ukraine had set December 15 as the closing date for the Chornobyl nuclear power plant.

Mr. Clinton promised several financial aid packages, including $78 million towards the construction of a new covering over the destroyed No. 4 reactor at Chornobyl, which was disintegrating and beginning to leak radioactivity. He also promised $52 million in new programs to aid Ukraine, much of it in nuclear energy related programs.

U.S. Secretary of State Madeleine K. Albright had announced the U.S. president's trip to Kyiv during a stop in Kyiv on April 14. After meeting with President Kuchma, she praised the Ukrainian leadership for moving forcefully on economic reforms. She also visited the Famine Memorial, where she laid a wreath.

Her escort in Kyiv was U.S. Ambassador Steven Pifer, who would be replaced in early October by Carlos Pascual. But the routine rotation of diplomats did not occur before Sen. Jesse Helms, chairman of the Senate Foreign Relations Committee, decided to block the release of the nominations of Mr. Pascual and 13 other ambassadorial candidates already approved by the committee to the full Senate for a confirmation vote. His action was in protest against a White House decision to allow Russia to postpone a $485 million debt repayment owed to the U.S. government. Mr. Pascual finally was confirmed on September 8, after the senators returned from summer recess.

Mr. Pifer also had a rocky moment before his term ended in Kyiv. A week before his departure, the ambassador, who had arrived in Kyiv in January 1998 as the replacement for William Green Miller, was called on the carpet by the Ukrainian government along with his Canadian counterpart and representatives of two major European organizations for allegedly interfering in the internal affairs of Ukraine. Mr. Pifer, however, did not appear, explaining that he had taken ill.

The Ukrainian government chastised the diplomats for presenting a letter of protest to President Kuchma based on inaccurate information that the budget reform process in Ukraine was about to be killed. Prime Minister Yuschenko told reporters the same day that the diplomats "were a bit misinformed."

IMF criticizes Ukraine

Ukraine, in turn, was dressed down by the International Monetary Fund several times during 2000 for not fulfilling specific requirements for financial crediting, which forced the financial organization to refuse to renew an extensive crediting program called the Extended Fund Facility (EFF). The program had been suspended in September 1999.

In February the IMF began investigating allegations that the National Bank of Ukraine had improperly reported its currency reserves for 1997 and 1998, and had inappropriately invested some IMF money. The investigation was begun after the London newspaper, The Financial Times, published the story on January 28, while President Kuchma was in Davos, Switzerland, for the annual World Economic Forum.

On February 15 Prime Minister Yuschenko, the chairman of the NBU at the time the infractions allegedly occurred, responded by stating that the central bank never had misused resources provided by the international lender. He also denied that some individuals within President Kuchma's inner circle had made as much as $200 million from illegal investments made with the money.

The allegations surfaced at a critical and unfortunate moment for Ukraine: just as it was successfully completing a debt restructuring project in which the government had convinced leading European banking and commercial interests to reschedule some $2.7 billion that Ukraine owed. About 88 percent of holders of Ukrainian Eurobonds agreed to take new seven-year depreciable bonds with an average maturity of 4.4 years and quarterly interest rate coupons of 10 to 11 percent.

The agreement came in London after an extensive lobbying campaign by Mr. Yuschenko and Finance Minister Ihor Mitiukov, who had traveled to several European capitals to promote the effort.

On March 15 the IMF confirmed that Kyiv indeed had been supplying misleading information on the state of its financial reserves - to the tune of $1 billion.

The IMF released a statement on its Internet website that reported: "on the basis of the information currently available to the IMF staff, it appears that a number of transactions in 1996-1998 gave the impression that Ukraine's reserves were larger than was actually the case."

The IMF noted that had it had the real numbers it most likely would not have approved the loans. Nonetheless, Prime Minister Yuschenko was not ready to admit guilt on the part of the NBU.

"We held six audits two years ago and made all the operations public," said the prime minister in response to IMF assertions. He blamed the misunderstandings on the NBU's old accounting procedures, which were based on outdated Soviet practices that had subsequently been changed.

The IMF also sent its own auditors to look into NBU practices and forced the bank to have an independent "Big 5" auditing firm conduct an additional review as well. In the end, the IMF decided that while Ukraine's reporting practices had been deceptive and inaccurate, no funds had been misused or stolen.

That did not, however, clear the way for the resumption of the EFF loan program. The IMF still demanded that Ukraine fulfill certain requirements, including reform of its energy sector, new laws on banking and parliamentary approval of a balanced budget for 2001.

While Vice Prime Minister Yurii Yekhanurov could not say that the IMF was ready to renew credits after his trip to Washington to meet with bank officials on August 1-4, matters were a bit more upbeat by mid-September, with the IMF's investigation of the NBU complete.

After Ukraine's Parliament approved both a balanced budget and a new law on banks on December 7, government officials expected an approval for renewal of the EFF on December 19. Mr. Yekhanurov said that Ukraine would expect to have the program extended to 2002. The IMF had yet to disburse about half the value of the three-year program, worth $2.6 billion.

The IMF-NBU controversy reinforced the poor reputation Ukraine continued to suffer within the international community in 2000. Its poor standing was confirmed in a survey conducted by Transparency International, a non-governmental organization that tracks corruption as perceived by international investors. The poll put Ukraine 88th among 90 countries that are tracked - the third most corrupt country in its listing.

Meanwhile, foreign investors who have taken a chance on Ukraine were a bit more optimistic in their outlook on investing here. During the annual meeting of the Foreign Investment Advisory Council, a group representing foreign investors that meets regularly with President Kuchma to advise him on the problems related to doing business in Ukraine, investors said that now is the best time for investment in Ukraine.

They did have reservations, however, and suggested that the government keep a steady and consistent course in its reform effort, and that tax reform proceed more quickly. But, in the end, several of the businesspersons agreed that they are bullish on Ukraine.

Copyright © The Ukrainian Weekly, January 7, 2001, No. 1, Vol. LXIX

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