Hearing :: Ukraine: Moving Beyond Stalemate?

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HEARING


COMMISSION ON
SECURITY & COOPERATION IN EUROPE: 
U.S. HELSINKI COMMISSION

UKRAINE:  MOVING BEYOND STALEMATE?

WITNESSES:
DANIEL A. RUSSELL,
DEPUTY ASSISTANT SECRETARY OF STATE FOR 
RUSSIA, UKRAINE, BELARUS AND MOLDOVA,
DEPARTMENT OF STATE

DAMON WILSON,
VICE PRESIDENT
ATLANTIC COUNCIL

ANDERS ASLUND,
SENIOR FELLOW,
PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS

THE HEARING WAS HELD FROM 10:00 A.M. TO 11:28 A.M. TIME IN SVC 201/200, 
WASHINGTON, D.C., [SEN. BENJAMIN CARDIN (D-MD), CHAIRMAN, CSCE], MODERATING 

TUESDAY, MARCH 16, 2010


SEN. BENJAMIN CARDIN (D-MD):  Well, good morning, everyone and welcome to the 
hearing – the Helsinki Commission on Ukraine:  “Beyond the Stalemate.”  I am 
pleased to welcome you to this hearing on Ukraine, an important partner for the 
United States and one of the largest countries in Europe, both in terms of size 
and population.  

An independent, democratic and stable Ukraine is in America’s interest and 
vital to the security of the OSCE region.  Ukraine remains a country in 
transition, in part due to its tragic history.  To visit, as I have, the 
memorials to Stalin’s famine, Babi Yar and Chernobyl, is a stark reminder of 
the history of Ukraine.  

Despite this legacy, especially since the 2004 Orange Revolution, there has 
been gains in political pluralism, media freedoms and holding of free and fair 
elections.  Additionally, Ukraine is the only country among the 12 non-Baltic 
former Soviet states to earn the assessment of free by Freedom House.  

The country has recently witnessed presidential elections, which the OSCE 
assessed as having met international democratic standards.  Ukraine faces a 
myriad of challenges.  Clearly, the president, along with the new prime 
minister and the Rada will need to accelerate economic and political reforms, 
tackle systematic corruption and overcome the rule of law deficits, including 
building up an underdeveloped judiciary.  

Will Ukraine, despite tangible progress and freedom and democracy, be able to 
move beyond the stalemate that has stymied its ability to grapple with these 
difficult problems and slow this euro-Atlantic integration?  

Nothing would be more important to strengthen Ukraine’s independence and 
reducing its vulnerability to outside pressures, including strengthening its 
energy independence and bringing it closer to its stated European aspirations.  
Despite past disappointments, there is genuine desire in Washington that 
Ukraine succeed as an independent, democratic, stable and economically 
successful state.  

Importantly, both the Congress and administration continue to strongly support 
the right of Ukraine to decide its own fate, consistent with the principles 
enshrined in the Helsinki Final Act.  Today, we will examine Ukraine’s future 
course following the February 7th elections, which the OSCE assessed as having 
met international democratic standards.  

Our witnesses will focus on policy implications for the United States, 
examining how the U.S. can best continue to encourage and assist Ukraine in the 
development of democracy, rule of law and market economy at home as well as 
relationship with its neighbors, the United States and the European 
institutions.  And we look forward to hearing from our distinguished panel of 
witnesses.  

Our first panel, I’m pleased to have with us today, Mr. Daniel Russell, deputy 
assistant secretary of state for Russia, Ukraine, Belarus and Moldova.  Since 
joining the Foreign Service in 1983, Mr. Russell has held a variety of 
possessions in Washington and abroad, most recently, as chief of staff to 
Undersecretary of State for Political Affairs Bill Burns.  And prior to that, 
the deputy chief of mission in Moscow, Russia and Kazakhstan.  Mr. Russell, 
it’s a pleasure to have you before the commission.

DANIEL RUSSELL:  Thank you very much, Mr. Chairman.  I will apologize in 
advance for my voice.  It’s part of the burden of having two young children.  
But look, thank you very much for your invitation to discuss Ukraine and its 
relations with the United States in the wake of presidential elections.  Your 
timing could not be better.

Let me begin by making three basic points about Ukraine and the recent 
elections before sketching out our agenda for engagement.  My first point 
should be obvious.  Ukraine matters.  Ukraine matters to the United States.  
Ukraine matters to Europe.  Ukraine has tremendous potential.  It could become 
a net contributor to global food security.  

It could become self-sufficient in energy.  Ukraine can also serve as an 
example in a critical region.  It has shown leadership on the world stage, 
giving up its nuclear weapons to become a non-nuclear state and contributing to 
peacekeeping operations from the Balkans to Iraq.  Ukraine serves – also serves 
as a transit route through which nearly a quarter of Europe’s gas flows.  

My second point is about Ukraine’s leadership in democracy in the region.  
Taken together, the conduct of its presidential elections received an 
overwhelmingly positive assessment from international observers.  I should add 
that among those observers were Congressman Hastings and staff of your 
commission and I would like to commend their contribution. 

The OSCE concluded that the presidential elections showed significant progress 
over previous elections and met most OSCE and Council of Europe standards.  The 
open competitive election demonstrated respect for civil and political rights 
and offered voters a genuine choice.  

My third point is about the 2010 election – how we look at it.  It may have 
been a defeat for the Orange Revolution leaders, but it’s far from a defeat for 
the Orange Revolution.  Elections should be viewed, I think, as another step in 
strengthening Ukraine’s democracy and Ukrainians should take pride in what 
they’ve achieved.

The post-election transfer of power has been orderly.  Prime Minister 
Tymoshenko initially challenged the results in court, but withdrew her case.  
When formation of a political parliamentary majority coalition appeared 
unlikely, President Yanukovych and his party of regents sought and won passage 
of a new law that allows coalition formation, not only with political parties, 
but with independent deputies.

On that basis, Prime Minister Azarov and his Cabinet were confirmed last week.  
The opposition questioned the new laws’ constitutionality and we were pleased 
to see that the party of regents itself took the initiative to ask the 
constitutional court to review the law and pledge to abide by its decision. 

With the election now behind him, President Yanukovych faces the challenge of 
governing.  Obviously, he and his new team need some time to organize 
themselves, but I think some key elements of his approach are obvious.  
Economic recovery will rightly be his top priority and he has inherited a 
difficult situation at a difficult moment.  

With regard to foreign policy, I think President Yanukovych has been quite 
clear.  He wants to continue Ukraine’s strategic partnership with the United 
States.  He wants to improve relations with Russia and he wants to pursue 
integration with the European Union.

And as we look ahead to engagement with President Yanukovych and his new team, 
it’s, I think, worth reviewing the underlying premises of U.S. policy towards 
Ukraine.  Simply put, the United States will not waver in its support for a 
strong and independent Ukraine.  We want to see, as you mention, Ukraine 
succeed.

Our vision for Ukraine, I think, is the vision that most Ukrainians want, a 
democratic and prosperous European nation with an effective and accountable 
government.  Charting the course for Ukraine is of course, a decision to be 
made by Ukrainians and their elected leaders.  There has been speculation over 
the past year that the Obama administration’s efforts to improve relations with 
Russia would somehow threaten our relationship with Ukraine.

I think that was not correct and it is not correct.  As we reset relations with 
Russia, we have reaffirmed our commitment to the sovereignty and territorial 
integrity of Ukraine and its neighbors.  We do not believe that a partnership 
with one country comes at the expense of another.

The stronger our partners, the more effective our partnerships.  I would posit 
that a strong and independent Ukraine is good for Russia, good for the region 
and good for the world.  There’s also been speculation about Ukraine’s 
relationship with NATO during a Yanukovych presidency.  Let me be clear that 
the United States continues to support Ukraine’s deepening ties to NATO and to 
the European Union.

But again, these are decisions to be made by Ukrainians and their leaders.  We 
recognize that how far and how fast to proceed will be a Ukrainian choice.  
President Yanukovych has said that he wishes to continue programs of 
cooperation with NATO at existing levels but NATO membership is not on his 
agenda.  We respect that choice.  But we want the Ukrainians to know that 
NATO’s door remains open.

We look forward to cooperating with Ukraine to meet its objectives in the 
NATO-Ukraine Commission and its Annual National Programme.  Because of the 
importance that we attach to our relationship with Ukraine, once the Central 
Election Commission had announced the full electronic results of the election, 
President Obama was among the first world leaders to congratulate Viktor 
Yanukovych on his victory.

National Security Advisor Gen. Jones led the U.S. delegation at the 
presidential inauguration, where he met not only President Yanukovych, but 
Prime Minister Tymoshenko.  And Mrs. Tymoshenko is obviously going to be one of 
the leaders in the opposition in parliament and we are going to continue our 
longstanding relationship with her.

At the same time, we also plan to work closely with emerging leaders like 
Deputy Prime Minister Tigipko and Member of Parliament Arseniy Yatseniuk.  The 
development of new democratic leaders is important for all parties in Ukraine.  
Let me underscore that U.S. policy towards Ukraine will continue to focus on 
strengthening our strategic partnership.

Our engagement and cooperation with Ukraine will continue to be guided by the 
U.S.-Ukraine Charter on Strategic Partnership.  The charter outlines enhanced 
cooperation across the full spectrum of mutual priorities, including economics, 
trade and energy, defense and security, strengthening democracy and 
people-to-people and cultural exchanges.

To advance the objectives of that charter, we now have a strategic partnership 
commission, established during the vice president’s visit to Kiev last July.  
Our commitment to Ukraine is also evidenced by our assistance program – $123 
million this year.  The goals of our assistance are to bolster peace and 
security, strengthen democratic institutions, promote economic growth and 
energy efficiency, enhance security, secure Chernobyl, fight AIDS and HIV and 
improve child health.

In the spirit of our strategic partnership with Ukraine, I’d like to suggest 
five policy priorities that should be high on our shared agenda with the 
Yanukovych presidency.  First, the United States is committed to policies that 
contribute to a democratic and prosperous Ukraine.  And the United States 
stands ready to help Ukraine reach agreement with the International Monetary 
Fund as soon as possible.

The path to economic recovery and renewed prosperity runs through agreement 
with the IMF, which can help provide Ukraine a way out of the current crisis 
and open the door to lending for other – from other international financial 
institutions in the European Union.  That will require resolute leadership and 
hard decisions to undertake the critical reforms that needed to the budget 
deficit, revive the banking sector and phase out energy subsidies.

A second, and I would say equally important, policy area for Ukraine’s 
long-term prosperity and economic independence is energy-sector reform.  A gas 
sector based on transparency, competition, realistic pricing and more 
energy-efficient gas distribution and consumption will be key.

Third, the United States is ready to work to strengthen the business side of 
Ukraine – U.S.-Ukraine relations, which frankly, I think, are weaker than they 
should be.  We welcome President Yanukovych’s remarks in favor of creating 
incentives for investors such as lowering taxes and cutting red tape.

Our business community tells us that there is much more to be done to make 
Ukraine attractive to investors, from greater rule of law protection to serious 
action against corruption.  The payment of VAT – V-A-T – refunds would be a big 
step forward, I think, and a sign to our investors.

A fourth area of cooperation in our relationship with Ukraine lies in nuclear 
security.  We look forward to building on our successful record of 
nonproliferation with Ukraine at the upcoming nuclear security summit here and 
we look forward to President Yanukovych attending.  Thanks to the leadership of 
Sen. Lugar and former Sen. Nunn, we can point to vital cooperation between 
Ukraine and the United States that has made the world safer.

Finally, the United States wishes to strengthen bilateral security and defense 
cooperation.  As part of that effort, we hope that the Ukrainian parliament 
will pass legislation to allow joint military exercises on its territory this 
year.  While the challenges in U.S.-Ukrainian relations are complex and 
demanding, I remain optimistic about the possibilities before us.

It’s important to both nations and both peoples to get this relationship right. 
 We have a chance at the beginning of a new presidency in Kiev to redouble our 
efforts to do so.  And I hope that both Ukrainians and Americans both inside 
and outside of government will take advantage of that opportunity.

Thank you very much and I’m happy to answer your questions.

SEN. CARDIN:  Well, Mr. Russell, thank you very much for your testimony.  We’ve 
been joined by the House Chair of the Helsinki Commission Alcee Hastings.  As 
you’ve already pointed out, Mr. Hastings was present as an observer in the 
elections in Ukraine and helped in the certification about Mr. Yanukovych’s 
elections.  So we thank our House chair for his active involvement and the 
ability to give us a first-hand report as to the progress of democracy in 
Ukraine.

I want to, I guess, ask you a fundamental question first and then I’ll turn it 
to my co-chair.  You talk about Mr. Yanukovych’s desire to strengthen the ties 
with the West and the East about developing stronger ties, certainly, with 
Russia, but also with the United States and Europe.  And then you talk about 
our NATO desires, that we still believe that this is a country that is 
important in our European security arrangements.  

How can he accomplish all that?  How can he strengthen the tie between Ukraine 
and Russia, which was currently stressed during the Orange Revolution and which 
Mr. Yanukovych was not a supporter of?  Now, he’s all of a sudden going to be 
able to maintain this development with the West, with Europe and with Russia 
and also perhaps be with us in NATO.  How does he balance all that?  It seems 
like that’s an impossible task.

MR. RUSSELL:  Well, we’re going to see how good he is at it.  I think it was 
interesting that he chose to make his first trip abroad to Brussels.  He talked 
about European integration and a free trade agreement with the EU.  Then, to go 
to Moscow and create – finish the leg of his triad by coming here for the 
nuclear assistance security summit.  

So he clearly is going to try to balance these three interests.  And I don’t 
think it’s a bad idea, actually.  I mean, you know there – nobody’s going to 
move in their neighborhood.  Russia’s not going to go away.  Russia’s Ukraine’s 
second largest trading partner after the European Union.  And you know, I think 
he’s got a good shot at making some progress on all of this.  But like I said, 
we’re going to be there pushing for strategic partnership.

SEN. CARDIN:  Well, how much influence will Russia have in the priorities that 
he places on the agenda for security?

MR. RUSSELL:  You know, it’s an open book.  He’s just named his government, so 
we’re going to have to see.  I mean, he’s – you know, he’s trying to be all 
things to all people like many leaders.  We’ll see if he succeeds.

SEN. CARDIN:  Well, let me ask you just one more question on a subject that the 
Orange Revolution was not successful in dealing with and it’s corruption.  It’s 
been a – we’ve seen first-hand the consequences of corruption within Ukraine.  
It’s not unique for countries in transition, but certainly, the game plan to 
deal with it has not been as successful as the United States would like to see 
it.  Do you have any view as to how this new government will deal with the 
problems the country faces in corruption?

MR. RUSSELL:  Well, you know, we agree with your assessment.  It is a major 
problem in practically, you know, every field.  Our human rights report, which 
we just put out, you know, talks again about corruption, which everybody knows. 
 And I think it’s going to be key.  If he’s going to make progress on economic 
recovery, he’s got to deal with this because you know, if he’s going to get 
ahead on economic recovery, he’s really got to start with sound fiscal policies 
and pass the budget.  

He’s got to figure out how to get the private sector to really, you know, fuel 
economic recovery and they need an effective banking sector to provide the 
financing to do that.  Well, if you don’t deal with corruption, you’re just not 
going to get – you’re not going to get investors.  And transparency and rule of 
law are part of the keys.  He’s talked about this and we’re going to have to 
see how they do, but I agree, it should be a priority and it’s something the 
United States is going to push.

SEN. CARDIN:  I’ll look at your five issues that you’ve raised for priorities.  
Certainly, democracy and prosperity is going to depend upon dealing with the 
corruption issues, the energy sector reforms, very much so and we push the ITI 
as a framework to deal with the energy sector issues.  

On business, business and investment by United States or any country in Ukraine 
will be very much dependent upon a comfort level as it relates to dealing with 
the issues of corruption.  So on every one of these areas, it’s going to be 
fundamental that they have to deal with this and their track record’s not very 
good.

MR. RUSSELL:  I agree with you.  I think they’ll probably have a new program, 
you know, with the IMF and I suspect that transparency and rule of law are 
going to be a big part of that.  I should also mention that we’re coordinating 
with the European Union because I think if he wants to pursue European 
integration, clearly all of these issues are going to be key to that as well 
because the European Union’s goals for integration are not particularly 
different than our own bilateral goals in this respect.

SEN. CARDIN:  So what is your advice to Congress?  What would be your top 
recommendations for what the Congress should do in order to reinforce the goals 
that you laid out – with your goals that we fully support and we certainly 
encourage the new government to improve relations with all of its neighbors.  
That is fundamental to your regional stability and it’s fundamental to U.S. 
interests.  What would your advice be to Congress?

MR. RUSSELL:  Well, I, you know, I think, you know, your co-chairman here has 
set a good example for engagement early on with Ukraine and I think it’s 
important.  I think it’s important that the Congress is dealing – you know, 
this is a country where the Rada, their parliament is very important, that you 
know, you engage with the leadership there as we’re doing in the executive 
branch to try to push that forward.  

And we’re going to look for your support, obviously, you know, with our 
assistance programs.  And if you know, you can encourage some of the 
private-sector businesses in your states that if Ukraine does make some of 
these changes, to try to look at that, you know, investment there or business 
opportunities would be a possibility.

SEN. CARDIN:  Well, as I said in my opening statement, Ukraine is very 
important to U.S. interests.  It’s a high priority of our commission.  We have 
spent a lot of time visiting Ukraine because we thought it was important to do 
that in many occasions and so clearly, it’s just going to be a continued focal 
point for our interest because we think it’s important to the entire OSCE 
region.  

With that, let me turn to Congressman Hastings and again, thank him for his 
leadership on the traveling to Ukraine and in his continued leadership on this 
country and the place that the Helsinki Commission has placed in following the 
events in Ukraine.

REP. ALCEE L. HASTINGS (D-FL):  Thank you very much, Mr. Chair.  Okay, it’s on. 
 And Mr. Russell, thank you very much.  Mr. Chairman, I’m sure it’s already 
been noted – my humble apologies for being delayed.  I had the distinct 
privilege and honor to participate in three Ukrainian elections, including the 
first round of the just-passed presidential elections.

In addition to just being an election observer, I also like to consider myself 
a good observer of people.  And while I don’t speak the language, on two 
different occasions in Ukraine, one during the Orange Revolution and on the 
very last visit, I took it upon myself to walk into areas, first, during the 
Orange Revolution that I had not been in and a second time, to go back into 
those again.

And then of course, as you might know, Mr. Russell, a considerable number of 
Ukrainians in the diaspora and those in academia and the think tanks and in 
government all talk to us a great deal about Ukraine.  One thing, if I had to 
characterize the residual from the Orange Revolution, it would be unfilled 
promises.  That would just be all that I would say.

The other things that I note is considerable frustration among those that are 
supporters of the efforts that have been put forward in Ukraine.  Now, the 
United States doesn’t have to make any apologies to anybody and I’m not 
suggesting that they ever would, but we have a solid record of standing with 
the Ukrainian people over the decades in support of their struggle for freedom 
and democracy.

I’ll start by asking you how you assess the prime minister’s remarks last week 
and I’m paraphrasing what he said, that their treasury is depleted.  I’m 
reminded – that’s very similar to our nation at this time, a president, 
inheriting some 30 years of transformation of an economy, is expected in one 
year to reverse it.

Mr. Yanukovych and his new coalition, in my judgment, have a very high hill to 
hustle and they cannot do it, quite frankly, without the United States and 
Russia and the European Union and with some clear understanding of how the 
international community that is experiencing a global crisis of its own is 
going to be able to address it.  So I guess I’d like to know from you the 
status of Ukraine with respect to the Millennium Challenge Account.

MR. RUSSELL:  Well, the Millennium Challenge Account, you know, threshold 
program didn’t succeed.  I mean, the Millennium Challenge Corporation chose not 
to continue it in 2009 because of Ukraine’s performance.  And you know, I can’t 
say where they’ll go from here.  Corruption was one of the big issues, actually.

But to the broader point that you’re making, which I agree with, I mean they’ve 
got a tough row to hoe.  But you know, I think that they’ve got to try to reach 
agreement with the IMF has got to be the first priority because that’s what’s 
going to unlock the doors to the other lending they need to survive.  

In the longer term, I mean, the shorter your time horizon with Ukraine, the 
more pessimistic you’re going to be.  The more you stretch that out, the more 
optimistic.  I mean they have gas reserves.  They have oil; they have a lot of 
coal.  Their manufacturing sector actually is, you know, did pretty well before 
the economic recession.

I think they’ve got to go back to basics.  And frankly Anders Aslund – you 
know, it’s always very difficult to talk about economics when you have, 
actually, a real economist sitting behind you – (chuckles) – he can probably 
help you more than me with most of this.

REP. HASTINGS:  All right.  Looking ahead, in 2017, the lease agreement with 
Russia in the Black Sea are going to become more and more an issue.  Attendant 
to that is the fact that we, the United States, really has poured millions of 
dollars and security assistance cooperation to Ukraine and yet, it seems their 
armed forces are still in need of reform and modernization.

So I guess, you know, do we still look to try and bring them into NATO?  What’s 
your take on the Black Sea as it pertains to Mr. Yanukovych?  And what are the 
substantive benefits of our security cooperation with Ukraine beyond just 
building our relationships?

MR. RUSSELL:  Well, I think that defense and security cooperation is a key part 
of our relationship.  I think you’re right that there’s a lot more to be done, 
but at the same time, I mean, this is a country where you now have, you know, 
civilian control of the military.  You have an all-volunteer, you know, officer 
corps.  They’ve made some key reforms that they’ve got more to do.

You know, I know our own military finds them very enthusiastic and good to work 
with and you know, they have an interest and we have an interest in seeing them 
become a net contributor to global security.  You know, they still have a 
pretty good-sized presence among peacekeepers in Kosovo.

You know, they’ve contributed to Iraq and Afghanistan and other U.N. 
peacekeeping missions and NATO missions and I think that’s what’s in it for us 
in the longer term.  The question you posed about the Black Sea fleet; I don’t 
know what they’re going to do, but what you know, we support, you know, 
Ukraine’s independence and territorial integrity and their right to make their 
own foreign policy choices.  So whatever they do, we would support something, 
you know, that obviously, they freely enter into.

REP. HASTINGS:  The last couple of questions that I have deal specifically with 
what your sentiments are at this time and what the administration, if anything, 
is picking up – if anything – regarding Kiev’s desire to have a Euro-Atlantic 
integration.  Is that still viable?  I heard you say that the new president’s 
first visit was to Brussels, but I hasten to add that his second visit was to 
Moscow.  And so where they’ll go with – (chuckles) – Ukraine at this point?

MR. RUSSELL:  Well, I think our approach as far as NATO is that Mr. Yanukovych 
has said he wants to continue practical cooperation.  There’s a lot that needs 
to be done, you know, and can be done through the NATO-Ukraine Commission, 
through the Annual National Programme they have with NATO and all these good 
things for you know, a more modern, more professional military and defense 
establishment.  And you know, I think they’re worth continuing no matter what 
they choose to do on the larger question of NATO membership.

I think European integration, it’s pretty clear that Mr. Yanukovych has already 
talked about a free trade agreement with the European Union and liberalization 
of their visa regime.  And again, all of that’s going to require some changes 
we’ve been talking about towards a more, you know, meeting European Union 
standards.

You know, I think there’s – in some ways, not much choice.  I mean, they want 
to become a modern, prosperous nation and that will require, you know, being 
part of the international community in a different way than they were in the 
past century.

REP. HASTINGS:  Well, you have a rather considerable portfolio, but as it 
pertains to Ukraine, two of the neighbors that are also in your portfolio, 
Belarus and Moldova – I’ll leave Russia to the side because I know that’s 
overarching.  But just as it pertains to Belarus and Moldova, what do you see 
for the future of Ukraine relations with those two countries?

MR. RUSSELL:  Well, I mean, we hope to see a good relationship in Ukrainian 
bilateral relations with both of those countries.  You know, Moldova has had 
quite a change in its own government, bringing in a new coalition that’s 
committed to European integration as its foreign policy and to rule of law and 
democracy at home, which we see is a very, very good and welcome development.

Ukraine can help to support that.  There’s some basic issues about delineation 
of the border between the part of Moldova that is Transnistria and Ukraine – 
Ukraine also plays a role in the five-plus-two talks looking at, you know, a 
settlement to this longstanding frozen conflict.  So they can do quite a bit 
there.

Ukraine’s always had a reasonably good relationship with Belarus.  As you know, 
the United States – Mr. Cardin knows from his recent trip there – we have some 
real issues in our own relationship with them and we would hope that Ukraine’s 
relationship would help to push toward a more open system there and make some 
small steps towards a more open, pluralistic government.

REP. HASTINGS:  Right.  Well, finally, Mr. Chairman, time won’t permit us to 
explore the importance of Poland in all of this as well, so I’ll just leave 
that to the side.  But let me offer what I think are two things that help in 
our developing better and building better relationships with countries.

And it’s not ignored, but not enough emphasis is placed on cultural and 
educational exchanges.  And as a policymaker, Sen. Cardin, my dear friend and 
co-chair of this commission and I have been active in pursuing funding in that 
arena.  But I believe Ukraine would benefit greatly by large student exchanges 
and cultural exchanges.  They have so much to offer and in that regard, it 
would be helpful if we were to participate.  

Now, let me – let me be a little more precise and I’ll stop right here.  If I 
had to make a bet on where 19- and 20-year-olds are going to go to college, 
that can with the support of their families or however they manage to do so, 
I’ll bet you Russia is going to do more in the education arena having them come 
to Russia than we are having them come to America.  I’ll stop right there.

SEN. CARDIN:  Well, Congressman Hastings, thank you very much for those 
observations.  I would just observe.  I think the two greatest challenges will 
be for Ukraine as to whether it really can establish itself as an independent 
democracy in that region, which is our goal and being able to establish 
relations with all of its neighbors, including to the West.  And secondly, 
whether it can deal with corruption.  

We’ve mentioned a couple times, the Millennium Challenge grant is a good 
example.  We just completed a hearing in the Senate foreign relations committee 
with President Clinton and Bill Gates who are involved in two major foundations 
that provide international assistance.  And I was very impressed with their 
commitment on accountability in making sure the funds do not get sidetracked to 
help finance corrupt activities.  

We are looking at a change in our foreign assistance programs and 
accountability’s going to be part of that.  So Ukraine is a developing 
democracy that is – needs an independent economy and they will have an 
independent economy, but it will not happen at the pace that they want if they 
can’t get  corruption under control.  

So I think those two issues are critically important as we watch Ukraine.  And 
I agree with Congressman Hastings.  We need to look at its relationship with 
other countries, whether Moldova or Belarus, Ukraine can play a very important 
role in the development of other countries in transition in that region.  

So I think it’s in all of our interests to continue our focus on Ukraine and 
just observe with a great deal of, I think, optimism, the recent elections 
being the expression the people of Ukraine as to the future of their country.  
And we certainly are impressed by the new government’s ability to form under 
very challenging circumstances.  Thank you, Mr. Russell, for your testimony.

MR. RUSSELL:  Thank you.

REP HASTINGS:  Thank you, Mr. Russell.

SEN. CARDIN:  I would want to observe that the ambassador for Ukraine had 
planned to be with us.  He has taken ill.  He must have similar children that 
you have.  (Laughter.)  And maybe more in number, so he’s maybe more severely 
impacted.  We’re very pleased to have, as our two distinguished experts on 
Ukraine for our second panel.  

Damon Wilson is vice president, director of international security programs at 
the Atlantic Council.  Mr. Wilson previously served as special assistant to the 
president and senior director of European Affairs at NSC.  We’re among his many 
responsibilities.  He coordinated interagency policy in support of Ukraine, 
including during the Orange Revolution.  Mr. Wilson also served in a variety of 
other governmental positions at NSC and State Department including as chief of 
staff at the United States Embassy in Iraq.  

Anders Aslund is senior fellow at the Peterson Institute for International 
Economics and has been deeply engaged with Ukraine since 1985.  Previously, Dr. 
Aslund was director of the Russian and Eurasia Program at the Carnegie 
Endowment, is the author of nine books, including “How Ukraine Became a Market 
Economy and Democracy.”  And he has a copy here, willing to sell it, I assume.  
(Laughter.)  We have extra copies that we’ll make available.

ANDERS ASLUND:  Free copy.

SEN. CARDIN:  Thank you.  We’ll start off with Mr. Wilson.

DAMON WILSON:  Thank you very much, Mr. Chairman, Mr. Co-chairman.  

REP. HASTINGS:  Press that button, Damon.  See if it’s on.

MR. WILSON:  Oh yes, thank you.  Thank you, again.  I’m honored to speak to you 
today about our relationship with Ukraine.  I want to thank the commission for 
the role that it’s taken in helping to raise the spotlight in Washington on the 
issue.

REP. HASTINGS:  I apologize to you, but some of the people in the back are 
still having difficult hearing.  Is that red light on, on that mike?

MR. WILSON:  It’s hard to see.  Yes.

REP. HASTINGS:  All right.  There, you’re better now.

MR. WILSON:  All right, is that better?

REP. HASTINGS:  Yeah.

MR. WILSON:  All right.  I want to thank you, again.

SEN. CARDIN:  That’s three thank-you’s.  (Laughter.)

MR. WILSON:  Naturally.  But I did want to thank the commission for taking the 
opportunity to help raise the attention – the spotlight on Ukraine here in 
Washington.  I think that’s an important function of the commission and I 
applaud that leadership.  I also want to thank you, Mr. Co-chairman, for your 
personal leadership and the role that you’ve played in elections in Ukraine 
over the years.  I think that’s been very important.  I commend my former 
colleague, Dan Russell, for some excellent testimony.

Today, I’d like to underscore why the issue of Ukraine should matter in 
Washington, outlining key benchmarks against which to judge the policies of 
Ukraine’s new president and offer recommendations for U.S. policy.  I agree 
that we should not underestimate what has just happened in Ukraine this year.  

This election is a victory for the consolidation of democracy.  And yet for 
most of us that follow Ukraine closely, there is a sense of disappointment.  
Why is that?  First, the leaders of the Orange Revolution failed to deliver 
Ukraine which those protestors on the Maidan were calling for back in 2004.

Second, Ukraine’s track record of good elections has yet to translate into a 
track record of good governance.  And third, we’ve been disappointed by the 
timidity in the West to continue to support Ukraine.  So President Yanukovych, 
therefore, assumes the presidency in an atmosphere of pragmatism. 

And a sober assessment of Ukraine’s prospects is appropriate.  However, the 
vision of a democratic, free-market Ukraine firmly anchored in Europe remains 
important as it remains a motivator for tough policy decisions in Kiev as well 
as in Brussels and Washington.  And we must not take this vision for granted.

Why does all of this matter?  First, it matters for the quality of life of 
Ukrainian citizens, but it also matters geopolitically.  In some sense, Ukraine 
is untethered, if you will.  Its future is not certain.  Although it is an 
ancient nation, it is a young state.  The history of conflict in Europe is 
about uncertainty in the space between Germany and Russia.

And this would not matter if the Russia of today had evolved and changed to 
become like the Germany of today.  But Russia has not.  Ukraine’s statehood 
remains fragile.  If Ukrainian democracy continues to succeed and helps produce 
good governance and economic growth, it will serve as a powerful example in a 
region that desperately needs positive examples.  

And that is why Russia has a strategy, which in some terms essentially is 
rollback.  This strategy had been well articulated by Russia’s leaders, 
including President Medvedev’s declaration of privileged interests – the 
commitment to protect Russian citizens wherever they may live – as well as in 
Russia’s new security strategy.  In contrast, I’m not convinced that either the 
West or Ukraine itself has a very clear strategy about the way forward.  

So let me first address Ukrainian policy, as what President Yanukovych does 
will have more of an impact on Ukraine’s place in the world than any outside 
actor.  He’s off to a good start with an early visit to Brussels followed by 
one to Moscow.  He’s outlined his four top priorities of EU integration, 
returning good neighborly relations with Russia, developing relations with 
Ukraine’s neighbors and pursuing strategic partnership with the United States.  
I think as we look forward, we should judge Ukrainian policy by several 
benchmarks: 

First, Russia – how does Kiev manage its relationships with Moscow?  A stable 
and positive bilateral dynamic requires Ukraine to behave as and be treated as 
a sovereign, independent actor.  Key issues include whether Yanukovych 
maintains a non-recognition policy towards South Ossetia and Abkhazia and 
whether he opens the door to an extension on the Black Sea fleet in Sevastopol. 
 

Energy security:  Russian interests have been keen to gain control of Ukraine’s 
energy structure.  Will Yanukovych agree?  If he believes energy is a national 
security issue as I do, the new government would pursue a serious energy 
efficiency strategy.  

International economics:  The government’s handling of the IMF will be an early 
test of its credibility.  I’ll leave the details of this to Anders, but 
similarly, a key question is how Yanukovych handles the common economic space 
with Russia?  Does he do so in a way that negatively impacts Ukraine’s WTO 
membership or the prospects for a free trade agreement with the EU?

Regional relations:  Does Ukraine use its regional weight to support Moldova 
and a resolution of Transnistria?  How Yanukovych handles ties with Belarusian 
leader Lukashenko and Georgian president Saakashvili will offer insights into 
the regional role that Ukraine will play, as well as the role that it wants to 
assume within Guam.  

The European Union:  Will Yanukovych press as hard to grow Ukraine’s bilateral 
ties with the EU, as well as take advantage of the Eastern Partnership?  A free 
trade agreement and visa liberalization are key practical steps which would 
help Ukrainians actually be Europeans and move the country towards Europe.

Nonproliferation:  Ukraine had a spotty record of nonproliferation under 
then-Prime Minister Yanukovych.  Will Ukraine’s arm sales track record continue 
to improve given the economic interests at stake?  

And finally NATO:  NATO is clearly not at the top of the agenda, nor should it 
be.  But NATO-Ukraine relations do need to be on the agenda.  Yanukovych, in 
fact, had a track record as prime minister of advancing NATO-Ukraine ties.  So 
while the window has closed on rapid movement toward NATO, both sides should 
ensure that there is substance to underpin the NATO-Ukraine Commission.  As 
NATO is a demand-drive bureaucracy, the signals from Kiev will determine the 
substance.  

I believe it is an imperative to maintain the credibility of the historic 
Bucharest summit decision that Ukraine will become a member of the alliance.  
If we look back in five to 10 years and the Bucharest decision is seen as 
hollow, there will be damaging implications for the alliance’s credibility, as 
well as for Ukraine.  

In the face of Russian opposition and genuine divisions within Ukraine, some 
have argued that we should aim for Finlandization of Ukraine – independent, but 
not part of any alliance.  When applied to Ukraine, these analysts imply that 
big powers taking decisions about Ukraine’s future – I believe Ukraine must be 
in a decision to determine its own future, including whether to pursue any 
membership in any alliance.  

These issues provide benchmarks against which we can judge the new government.  
I have modest expectations, but do believe that Yanukovych can deliver on 
campaign pledge to move – continuing moving Ukraine towards Europe.  His early 
visit to Brussels and his reception in Brussels are good signs.  

Yet the most important factor to achieve this foreign policy goal is what the 
government does domestically.  Yanukovych’s reception in Western capitals will 
be determined by whether he governs effectively, protects democratic advances, 
stabilizes and grows the economy and ensures Ukraine is a reliable energy 
partner.  

In terms of implications for U.S. policy, I’m not convinced that the West as a 
unit yet has a coherent strategy, although Vice President Biden’s visit to Kiev 
last year helped lay out excellent principles for U.S. policy.  We cannot 
afford to put Ukraine on the backburner or accept the argument that U.S. 
engagement is somehow provocative Moscow.  We should not accept the argument 
that Ukraine is messy or too divided as an excuse to engage.  

While changes in Ukraine are unlikely to be decisive in the next few years, the 
trend lines could take Ukraine further away from rather than closer to Europe.  
And we do not want to look back at Ukraine’s next election and wonder what 
happened.  So Mr. Chairman, as part of my effort to outline a way ahead for 
U.S. policy towards Ukraine, I offer six recommendations to conclude:

First, be in the game.  Ukraine is in play and we need to engage and be 
present.  The appointment of John Tefft as our ambassador and the visits by 
Vice President Biden, National Security Advisor Jones and President Obama’s 
congratulatory call to Yanukovych are key steps in this effort.  This 
high-level outreach should continue. 

Second, articulate a vision.  We need to recommit to building a Europe whole 
and free, energizing the bipartisan tradition behind this vision and making 
clear that Ukraine has a place within this vision, as does Russia.

Third, maintain funding.  We need to protect our funding for transition in 
Ukraine, as the Freedom Support Act model of graduation no longer applies in 
Europe’s East in my view.  Higher per capita GDP does not necessarily translate 
into a democratic Ukraine anchored firmly in Europe.  

Fourth, reach beyond leaders.  Unfortunately, Yushchenko was a failure.  
Yanukovych is unlikely to bring decisive change.  We therefore need to ensure 
that our relations with Ukraine extend beyond leaders.  We should place 
emphasis on developing next-generation leaders, ties with the Rada, engaging 
the regions and fostering people-to-people ties.  

Fifth, push energy efficiency.  The United States and Ukraine need to get 
serious about working with European partners to support energy efficiency in 
Ukraine as a national security strategy.

And sixth, enhance military-to-military ties.  We must ensure that close 
military-to-military ties continue and are backed with funding from foreign 
military financing and foreign military sales and we must push back when Russia 
tries to portray military cooperation with Ukraine as provocative.  

In the wake of Ukraine’s election, Yanukovych is now president and his party 
leads the government.  Now is the time to move beyond stalemate.  Just as much 
as we hold Kiev to that standard, we must hold ourselves to that standard.  
Thank you, Mr. Chairman, Mr. Co-Chairman.  I look forward to your questions.

SEN. CARDIN:  Mr. Wilson, thank you for your comments.  Dr. Aslund?

MR. ASLUND:  Thank you very much, Mr. Chairman.  And I would very much like to 
thank you for this opportunity to speak on a topic that I consider very 
important:  how Ukraine should move beyond the stalemate – as you so rightly 
have put it in the headline – in the sphere of economic reform.  I leave the 
political aspects to Dan Russell and Damon Wilson and just want to concur with 
their statement and I’ll focus entirely upon the economic aspects. 

Ukraine has established an open market economy with predominant private 
ownership.  And from 2000 to 2007, the country had an average economic growth 
of 7.5 percent a year.  But then came the global financial crisis and last 
year, GDP fell by no less than 15 percent.  And this shows partly that Ukraine 
is part of the world economy – (inaudible) – but it also shows that it’s not 
performing up to its potential.  Its big problems, as you pointed out, Mr. 
Chairman, is pervasive corruption and poor business environment.  And the 
question today is what and how can be done about it?

I co-chaired an independent international expert commission that has done a 
report on what the new government should do during its first year in power.  We 
call it, “Proposals for Ukraine 2010: Time for Reforms.”  And our contention is 
that Ukraine today has a unique possibility to move ahead because a new 
presidential elections with a new government it’s always a good time to take 
reform.  And on top of that, if you have been badly beaten by an economic 
crisis and are coming out of it, then you can act.  

And our three main conclusions to put it first is that Ukraine needs a new 
capacity for economic reform.  Second, a clear prioritization of which the top 
priorities are so that they are really carried out.  And thirdly, it needs to 
utilize international organizations as lighthouses or anchors to guide its 
reforms.  

So let me start with the first point.  Ukraine needs to establish a new 
capacity that is independent of the agencies to be reformed.  We recommended 
the creation of the reform commission at the cabinet of ministers headed by a 
powerful deputy prime minister, such as Deputy Prime Minister Sergei Tigipko 
has now been appointed.  The reform commission should have its own budget and a 
single goal to decide and implement reform.  This must come from above. 

At the same time, President Yanukovych has now formed a reform committee at the 
presidential administration that he chairs himself.  And he did set this up on 
the second day of – his second day in office.  And he has also appointed the 
first deputy head of his presidential administration, Iryna Akimova, who’s an 
outstanding economic reformer, to be the executive secretary of his reform.

Second point is that Ukraine needs to have clear reform priorities.  And the 
short of it is that they must improve the effectiveness of a state, achieve 
financial stability, allow private enterprise, the freedom of the market and 
make social policy more effective.  

And the government has adopted a coalition program that is already out which is 
called “Stability and Reform.”  By and large, all the bullet points in this 
program are the right ones.  But of course, they are bullet points rather than 
clear plans.  So this looks promising.  And it – to a considerable extent – it 
reflects the views of our commission.  

The problem in Ukraine so far has not been what should be done.  There’s a 
broad public consensus.  The question is if it should be done and who should do 
it.  There’s always a reason not to do things.  

And therefore we think that as everybody here has expressed today, the United 
States, the IMF and other international organizations need to help Ukraine to 
break through this political logjam, which is very much created by the 
interests of corruption.  And naturally the United States should engage in the 
promotion of reforms that are beneficial for Ukraine’s future governance and 
economic welfare. 

To summarize our commission report, we’ve found 10 top priorities for this 
year:  First, carry out gas reform.  That’s vital.  Second, make the national 
bank of Ukraine independent to give a proper basis for the banking system.  
Third, move towards inflation targeting with a floating exchange rate to stop 
future high inflation.  Fourth, cut public expenditures.  There’s no way to run 
a country with a budget deficit of eight to 10 percent of GDP in budget 
deficit.  

Fifth, undertake comprehensive deregulation of enterprise capital – this red 
tape, this – (inaudible) – very good for – (inaudible).  Sixth, conclude a 
European association agreement, which would include a deep and comprehensive 
free trade agreement.  Seven, get privatization going again.  Eight, legalize 
private sales of agriculture land.  Nine, adopt a law of the public information 
to fight corruption.  And 10, complete the modern commercial legislation.  

And all these measures are truly vital and they can be implemented within a 
year.  In most cases, they’re already draft laws lying ready to be adopted.  
And if I should pick a – point out one thing that is absolutely key, that’s the 
gas reform.  Currently Ukraine subsidizes the import of Russian gas to the tune 
of 3 percent of GDP each year, which makes no sense whatsoever.  And this has 
to be changed.  

As Dan Russell in particular pointed out, the IMF will be the key in this 
process.  The IMF will go out and start negotiating a new agreement very soon 
indeed.  And it will contain a gas reform and sensible macroeconomic polices. 
And of course, the European Union is also currently negotiating a substantial 
association agreement and it is also involved in the gas reform. 

The role of the United States here as the biggest shareholder in the IMF is, of 
course, push the IMF in action as Dan Russell spoke about.  And the U.S. also 
should engage in the gas reform.  I think that Congressman Hastings mentioned 
something very important.  Ukraine needs a new, broader educated elite.  And 
therefore, I think that the United States should offer hundreds of student 
scholarships for Ukrainian scholars to come to this country.  Let me thank you 
with these words. 

SEN. CARDIN:  Well, let me thank both of you for your testimony.  It was very 
specific on benchmarks and recommendations.  I think that’s very helpful to us, 
but I hope it’s helpful also to Ukraine.  I think that your lists there, 
particularly on benchmarks, Mr. Wilson, and recommendations, Dr. Aslund, were 
both very helpful to us.  

So let me start off with Mr. Wilson if I might and try to pose the question as 
to what you think Russia – (chuckles) – will be doing in regards to the new 
opportunities in Ukraine.  Congressman Hastings mentioned that the issues of 
stronger exchanges between the two countries, whether its students or else 
wise, that – you know, I think many of us in the West thought the history 
between Russia and Ukraine would serve the East – would serve the West well in 
building a strong relationship with Ukraine.  

But you know, looking forward, it’s going to be based upon a mutual interest 
going forward.  And Russia certainly has the geographical advantage over the 
West in developing a closer tie with Ukraine.  Now, again, I personally believe 
that the United States needs to develop a closer relationship with Russia, so 
this is not saying this in a hostile sense.  But trying to figure out the 
policies for the United States – how should we anticipate Russia’s response to 
the opportunities in Ukraine?

MR. WILSON:  That’s right.  I think you’re absolutely right.  Ukraine and 
Russia should be expected to have good relations.  There’s every expectation 
that that should be the case.  I think the – Russia and Russian leadership have 
learned some lessons in Ukraine.  In 2004, then-President Putin overplayed his 
hand with pretty an outright, overt endorsement of candidate Yanukovych at the 
time for president.  

And I think that actually hurt Yanukovych in 2004 because it was heavy handed.  
And I think the Ukrainian people who are open and receptive to close ties with 
their northern neighbor saw this as an overt effort to manipulate their 
political process and didn’t like that, responded to that.  

I think it’s been interesting to watch over time the way that Moscow has 
related to Ukraine.  In some respects, it become somewhat disenchanted with 
Yanukovych as their candidate, if you will, made more of an effort to develop a 
relationship with Prime Minister – at the time – Prime Minister Timoshchenko, 
but dug in a hard line against President Yushchenko.  

And I think some of the approach that Russia took over the past years during 
President Yushchenko’s tenure were actually quite dangerous.  The letter that 
Medvedev sent to Ukraine, basically refusing to have an ambassador until the 
president was gone, President Putin’s challenging of Ukraine’s sovereignty at 
the Bucharest summit, certain activities taking place in Crimea – were 
downright potentially dangerous, laid the seeds for a potentially dangerous 
future.  

But I think Russia looks at the situation in their view, they think they’ve had 
a bit of a victory, but I think it is a tactical victory.  In one respect, 
they’ve seen the defeat of the Orange Revolution leaders, especially 
Yushchenko.  Remember, Yushchenko actually ran in this election.  

If he had been a successful president, he could have had a second term and 
delivered on a vision which had very much irritated the Russians.  He failed.  
He lost.  Now, I don’t think Russia had the reason for why he lost.  I think he 
lost on his own merits.  But Russia also sees themselves as having succeeded in 
pushing NATO off the agenda.  I do think these are tactical victories because, 
I think, as Dan Russell began, the principles of the Orange Revolution were not 
defeated in this process. 

So I think it’s important to watch this relationship.  If Russia tries to 
exert, if you will, its sphere of privileged interest and expect Ukraine to do 
things that are Russia’s bidding, such as open up the extension of the Black 
Sea Fleet in Sevastopol, to move on recognition of South Ossetia and Abkhazia – 
those would be very disconcerting signs.  I think, for the moment, we’ve seen 
President Yanukovych resisting that type of pressure.  He’s given a nod towards 
issue like elevating the status of Russian language in Ukraine but that’s a 
fair issue to have debated with inside Ukraine’s polity.  And I think the 
important part of this from U.S. policy is that we need to help support Ukraine 
as an independent actor, as a sovereign actor.  

And we need to be very clear that when we talked about a Russia reset policy, 
we need to articulate, just as powerfully, the other side of that – that we 
pursue cooperative relations with Russia but not at the expense of our values 
of our friend or our friends.  And I think when we see or sense this type of 
pressure on Ukraine, we should work with our European partners to push back and 
to push back very clearly on Moscow.

SEN. CARDIN:  I think your benchmarks are good ones for us to follow because I 
really do think it’s too early to tell not only what Ukraine will do but what 
Russia will be doing –

MR. WILSON:  That’s right.

SEN. CARDIN:  – and how it impact on U.S. interests.  I think it’s just 
something we need to deal with.  And I think the energy issue is probably going 
to be one of the most fundamental.  I mean, you raise a very good point about 
gas prices in Ukraine are unrealistically low, which is having a major impact 
on their economy because the government subsidizing so much of the cost of 
energy.  And we’re not sure what impact this has on market forces.  And then 
put on top of that the interest, internationally, on dealing with global 
climate change and energy security issues within that region, it is a matter 
that Ukraine could play a very positive role but it requires reform.

And when you do reform, there’re winners and losers.  And the current – I’m 
sorry, Dr. Aslund, if I get involved, a little bit, in politics here but the 
business leaders’ impact in government decisions in Ukraine is well known.  So 
the question is, can they go forward with these market reforms in the energy 
sector, not just from the point of view of the impact it has on its economy but 
on its political structure.  And will the international organizations have 
enough impact, IMF, et cetera, in the reform commission’s recommendations and 
implementation.  What is your assessment on that?

MR. ASLUND:  Thank you very much.  This is exactly the question that I wanted 
to get because I think that this is the key issue.  When the IMF makes an 
agreement, normally it requires certain prior actions, the natural prior action 
for the IMF to demand now is that gas prices should be increased domestically 
before the IMF concludes any agreement.  We can discuss how much.  My basic 
view is the faster, the better.  And then you provide social compensation for 
those who are really suffering.  Normally, the people are really suffering – 
they don’t use much gas.

So it’s not so much you have to pay – from a state point of view, you can save 
$3 out of four (dollars) by raising the prices and giving full social 
compensation.  And I think that the Ukrainian government is ready for this 
because they realize that they can’t play an old game for too long.  And what 
we are gradually seeing is that these big businessmen, they prefer to be owners 
of enterprises rather than sit and play in arbitrage, play between low, 
controlled prices and the free, the much higher prices.  So I think that this 
is the time to make the push.  And the IMF, the U.S. and the European Union are 
all highly aware of this.  And I do hope that they will hold firm and get that 
done.

SEN. CARDIN:  Thank you.  One of you mentioned the fact that I didn’t realize 
that Ukraine has a large coal reserve – which I wasn’t aware of.  Is there a 
concern that you might find an increase in the utilization of coal, which could 
also compromise, then, our global climate change issues and deals with security 
issues also, as far as the pipelines, et cetera, as part of the way that 
Ukraine responds to the IMF’s desires?  Is that on the table?

MR. ASLUND:  I don’t think that we should be much worried in this regard.  The 
coal price is half of what it should be and the big states are –

SEN. CARDIN:  They’re also subsidizing coal?

MR. ASLUND:  Yeah.  And there’re big subsidies to the coal mines.  The coal 
mine owners say, we don’t need any subsidies if the prices are free.  So if you 
have higher coal prices, the consumption will go down.  In Soviet times, 
Ukraine consumed 110 billion cubic meters of gas each year.  Now, it’s down to 
50 billion cubic meters.  So just let the market function and you will get the 
reduction.  Ukraine was the most energy intensive economy in the world in 
Soviet times – even worse than Russia.  So therefore, you have huge benefits to 
get and Ukraine has reduced its emissions enormously and they can do much more 
and should do much more for their own benefit.

SEN. CARDIN:  Well, I thank both of you for your testimony.  I think it gives 
us a yardstick to judge what is happening in Ukraine and it’s very helpful for 
our commission.  I’m going to turn the gavel over to Chairman Hastings.  I have 
a commitment on the Senate floor this morning in about 10 minutes.  So to not 
to be disruptive, I’ll give him the gavel and thank you again for your 
testimony.

REP. HASTINGS:  Thank you very much, Mr. Chairman.  And I agree with you that 
our witnesses were very specific and left very little that needs to be asked.  
At the very same time, in listening to your testimony had a couple of takeaways 
and, specifically, Mr. Wilson, when you commented about the thrust to have a 
Europe whole and free, and we hear about Ukraine but I think about so many 
other flashpoints.  Two that come to mind most immediately are Bosnia and 
Kosovo that have, kind of, like dropped off of the radar screen in the minds of 
most policymakers and a lot of folk in the administration.

And in my judgment, those two areas still pose considerable problems.  The 
global downturn took a heavy toll on a considerable number of the areas of the 
former Soviet Union.  And nearby to all of this are those Central Asian 
countries that have been laboring under what would be classified as 
recessionary times for a very long time.  And so when you say, Dr. Aslund, 
right, that this is a unique opportunity to move ahead, as you put it, I wonder 
how do you move ahead when you don’t have any money?  

And put bluntly, if you look at the role – and we seem to rely heavily upon the 
International Monetary Fund, perhaps it would help me – and I’ll start with 
you, well, Dr. Aslund, if you would tell me how that works with Russia as a 
player?  And going even further into that, what tax consequences exist for 
Ukraine citizenry and just where would they all find a revenue stream and how 
would they?  Corrupt business persons – and we use that term – I’m always 
fascinated how we in the United States form a list of corruption and somehow – 
and I understand how we do that but if I was in another country, and I was 
looking at what happened on Wall Street the last 20 years, I’d wonder about the 
United States telling me about corruption.  And I really – that’s a blunt 
statement but maybe ours is just organized corruption some kind of way or 
another.  

I’m reminded of a story, people were telling me how bad organized crime was in 
South Florida – and this is 40 years ago – and at that time, I had been robbed 
face-to-face with a gun three times, my house had been broken into seven times, 
I had three cars stolen – two from church – (laughter) – and I said that I 
wasn’t as worried about organized crime as I was disorganized crime – 
(laughter) – that was about to kill me.  So and that’s a real true story about 
my own life and when the Prime Minister so rightly said the other day, Prime 
Minister Azarov, that the debts that are owed to the population and, in this 
case, Mr. Yanukovych rightly, as I’m sure Mr. Yushchenko must have as well, 
said that we’re going to take care of you.  

Don’t worry.  We’re going to be able to pay you.  And then, evidently, Azarov 
had done his own auditing and learned that he doesn’t have anything to pay them 
with.  And so where do they go from here, Dr. Aslund?  And then I’ll come back, 
Mr. Wilson, to you on a couple of other matters.  I hope there were a few 
questions in there aside from personal ruminations.  (Laughter.)

MR. ASLUND:  Thank you very much, Mr. Chairman.  Well, certainly, I will start 
with one saying, booms are times of corruption, depressions are times of moral 
rearmament.  And therefore, I think, that the crisis now is good.  We see the 
same thing in Ukraine as here.  People tolerate corruption much less when the 
times are bad than when they are good.

REP. HASTINGS:  I hear you.

MR. ASLUND:  And therefore, they want to do something about it.  One area that 
this is very striking is in the red tape of petty corruption in the 
bureaucracy.  Here, there is a strong general sense now in Ukraine, that we 
must do something about it.  And we have seen several countries in the former 
Soviet Union – in particular, Georgia but also Azerbaijan and Kyrgyzstan – have 
cleaned this up.  If they can clean it up, why shouldn’t Ukraine be able to do 
that?  Ukraine is today the 110th country in the world in terms of DDP per 
capita, according to the IMF statistics which is far too low with a generally 
educated labor force and two-thirds of young now get some kind of higher 
education.  

So you can say that human capital is hardly anywhere worse used than in 
Ukraine.  So the essential thing is just, free them and give them possibilities 
to work.  That doesn’t cost money.  That saves you money – cutting down the 
bureaucracy.  And that’s also reason why it should be possible to do the gas 
reform now because the government has to listen to the IMF and this here is 
rather limited number of corrupt people who are trying to benefit from that.  
It’s much more difficult to do that in bad times.  But, essentially, taxes in 
Ukraine are already high.  Tax collection is good, surprisingly.  The problem 
is too big public expenditures.  I’ve already talked about the gas subsidies – 
or energy subsidies more broadly.  

The second is discretionary enterprise subsidies, which are – (inaudible).  The 
third big area is the pension expenditures.  Ukraine spends 16 percent of GDP – 
more than twice as much as this country – on public pensions, which makes no 
sense.  It goes to people who retired in the ’40s through various early pension 
schemes.  Their retirement age for women is 55, for men, 60.  It doesn’t make 
sense.  These people should continue their work and so pension reform is a 
politically difficult thing that needs to be done.

With regard to Russia, Russia has a positive attitude towards IMF support for 
Ukraine and was interested in getting IMF money for Ukraine also in December 
when the big Western countries said no.  With regard to the tax system, not 
that much needs to be changed there.  It’s mainly unnecessary public 
expenditures that go to the corrupt that should be stopped.  Thank you.

REP. HASTINGS:  Well, turning again just very briefly, to Russia, it would seem 
to me that what they have done by cutting off their gas resources last year to 
Ukraine was particularly brutal in the dead of winter.  And second, Ukraine 
pays the highest prices for their supplies of all of the European countries.  
And so Russia, whether they come, they get money from the IMF or not, seems to 
be in a position of win-win.  And let’s put something here on the table.  I was 
at the first election.  And I read the words of Mr. Yushchenko and Ms. 
Tymoshenko and Mr. Yanukovych and others whose names I can’t remember.

But I distinctly remember that Mr. Yanukovych, at that time, was much more 
inclined to work with Russia than he was with the United States.  So is there 
an old Yushchenko and a new one?  Is – Yanukovych, I mean.  And that’s 
troubling to me.  Don’t they have – Russia – a lot of leverage on what happens 
with the energy resources in Ukraine?  And if you are talking oligarch to 
oligarch in the business world, then without knowing – and I don’t know anybody 
in Ukraine that’s a rich man or woman that is in this business and I don’t know 
anybody in Russia that’s a rich man or woman in that business – every time I’m 
in both the countries I hear about the oligarchs but I don’t ever see any or 
meet any – but I’ll bet you they meet.  

And therein lies the rub.  How do you get crooks to don’t be crooked when 
they’re making a lot of money?  And what role, Mr. Aslund, does the shadow 
economy play?  When I’m down in the train system in Kiev, I can see – just like 
if I walk over here in Anacostia – I can see that shadow economy at work.  And 
I’m not decrying it.  Americans don’t quite understand that a large part of the 
underpinning of this country is a shadow economy and if it didn’t exist, we’d 
be in worse shape than we are now.  For some strange reason, folk don’t seem to 
want to accept that.  But you come go with me to Pentagon City and I’ll show 
you people – today – that are buying expensive garments and perfume and what 
have you that don’t have no job nowhere.  And didn’t get it from welfare 
either.  

So it’s a strange environment that we live in, in this world.  I’m sorry.  
Perhaps, Dr. Aslund, not to keep you on the spot – put those in the catalogue 
and then come back and talk to me about it and I’ll go to Mr. Wilson and maybe 
along in the same vein.  When we talk about reliable partners in energy – how 
are you going to be a reliable partner when somebody else has all of this 
leverage over you?  And let’s put something else on the table.  While there’s 
an extraordinary Ukraine diaspora here in the United States and elsewhere in 
the world, there are more Russians in Crimea or Russian-sympathizing people in 
Crimea than all of the diaspora combined.  

So while it may very well be true that Russia did not defeat Yushchenko, the 
turnout in Crimea suggest to me that Russia may have helped Yanukovych.  We do 
it on the straight up, with nice words and narratives but there was some 
evidence and talk on the streets of Russia’s influence in the last election.  
And I don’t decry that.  We have our nonprofit organizations that work in an 
effort to try and make a difference for human rights and transparency and all 
of the rule of law and those fine things that we say and the other people just 
put money on the ground and get it done.  I don’t know whether there’s anything 
for you to respond to.  I think you and I are in thorough agreement about 
people-to-people exchanges.  But how about you, Dr. Wilson?

MR. WILSON:  Sir, I will certainly pick up on a few of those points.  There are 
– I mean, Russian-speakers play a major role in Ukraine and Ukrainian politics. 
 But these Russian-speakers are citizens of Ukraine and have loyalty to Ukraine 
and are part of building a future of Ukraine.  If Ukraine is to succeed, it has 
to have a role where the Russian-speakers in the east feel a part of that 
future.

REP. HASTINGS:  Agree.

MR. WILSON:  That is one of the areas where Yanukovych can potentially make 
progress.  The problem is when leaders in Moscow look to manipulate and use 
Russian-speaking populations to advance their own interests in other countries. 
 That’s dangerous.  That’s interfering in the internal affairs of Ukraine.

REP. HASTINGS:  And we see that in Lithuania and Latvia –

MR. WILSON:  That’s right, that’s right.  And part of it –

REP. HASTINGS:  – Slovakia and Slovenia.

MR. WILSON:  – is soft influence through the power of Russian language media.  
So many of these folks getting their media out of Moscow.  And part of it’s 
more concerning where there’re reports of folks acquiring Russian passports 
that provide a bit more of a pretense.  This was the pretense that the Russians 
used in South Ossetia, Abkhazia – the protection of Russian citizens there – 
which was, frankly, a fabricated pretense.  And I think that’s something to 
keep an eye on.  You asked a little bit about Yanukovych’s disposition.  And I 
think in 2004, 2005, it was essentially fair to say he was a pro-Russian 
candidate.  He was backed by the Kremlin in that election.  I think it’s a 
little bit more nuanced now.  And I think he certainly has adopted a much 
softer position towards Russia.  He wants to pursue positive relations.

But he hasn’t turned his back on Europe.  He has pressed back on a NATO agenda, 
very clearly so.  And that obviously pleases many in Moscow.  But I think once 
you become president of Ukraine, it’s, kind of, nice to be president of an 
independent, sovereign country.  And I would hope that this position of 
responsibility would make him think more about the benefits to Ukraine of an 
independent streak, of an independent decision-making process.  So while I 
don’t decry an effort to develop a manageable relationship with Moscow, I think 
it is important that there not be early concessions just for the sake of it.

REP. HASTINGS:  Yeah, on the people-to-people exchange kind of thing, 
obviously, an American president cannot do everything.  But it would seem to me 
– the vice president has visited Ukraine.  But I’m wondering and if I were 
president of the United States, I certainly would invite Yanukovych to come to 
the United States.  And I think that that would be, singularly, just a 
presidential visit would be particularly important in these times.  

I don’t know whether the administration is thinking along those lines or 
whether anything is planned but I see all sorts of presidents come through here 
and I guess because of involvement in Europe, I have the attitude that I do, 
but if you’re going – when you talk about, now he’s president and it’s an 
important thing to be president, then you have to give him the feeling of being 
president.  And what better way could that be expressed than to have him come 
for a visit with the United States?  And I’ll make that recommendation to the 
administration.

MR. WILSON:  That’s absolutely right.  I concur with that.  And I think 
President Yanukovych has been to Brussels, he’s been to Moscow and he’s 
planning to visit Washington as part of the nuclear security summit which 
President Obama will host in April.  That’s good because it gets him here to 
Washington at an early stage.  It’s a bit of a distracted platform because 
there will be a lot of foreign leaders here at the time.  So I think it’s 
important to think about how to maximize the impact of that particular visit.  

But then also, how to follow that up because he will be overshadowed by many 
other leaders.  I don’t want to downplay the importance of it, but the power of 
having Ukrainians come to Washington regularly, come to the United States 
regularly – but also, even more importantly, it is very important for the 
United States to be present in Ukraine.  It would be terrific to see President 
Obama make a trip to Ukraine in his first term.  We’ve had the vice president 
there, we’ve had the national security advisor.  Secretary Clinton would be a 
natural follow up.

President Yanukovych and President Medvedev have already agreed to, I think, 
three more meetings this year.  They’re neighbors.  That’s natural.  They’re 
close.  That’s natural.  But it’s important for us to remember that we do need 
to be in the game.  And that requires – that’s why your trips, your frequent 
trips to Kiev, have mattered so much.  We need to have senior Americans showing 
up in Ukraine, engaging their interlocutors, keeping these issues on the 
agenda, cajoling, pressing but also exchanging information, strengthening the 
ties here because they will be having that on a very frequent basis with their 
Russian allies.

REP. HASTINGS:  I hear you.  Dr. Aslund, I left all those questions out there 
but I’m sure you have lots of answers for those questions and you’ll have the 
last word for us.

MR. ASLUND:  Thank you very much.  Were very good questions, Mr. Chairman.  If 
I start with Russia – of course, Russia has an interest in selling gas to 
Ukraine and now it’s spoiling that market.  Until 2008, Ukraine was actually 
the biggest purchaser of Russian gas in the quantity.  Now, with energy saving, 
Ukraine could stop importing gas within a few years.  Russia should understand 
that that is not in their interest.  The biggest impact we see of Russian 
business in Ukraine is direct investment.  

The two biggest investors outside investors in Ukraine are Russian businessmen 
who were actually born in Ukraine but now live in Moscow.  And I think that 
this is a normal thing and we are also seeing that the people who invest in the 
worst depression are big Russian businessmen, because they are used to handle 
risk and are not afraid of it.  In particular, the big Russian banks are now 
expanding fast in Ukraine.  How does one make crooks honest?  First, it’s much 
better that they own companies because when they defend their companies against 
criminal practices rather than extort from other enterprises and secondly, it’s 
good if they get integrated into the outside world.  

The people who make initial public offerings selling their stocks abroad, they 
clean up the companies first, they bring in international auditing companies 
and make the companies more transparent.  One of the cleanest sectors is 
actually the banking sector because 40 percent of the banks are now owned by 
foreign banks – mainly European banks but also Citi runs a good bank in Ukraine.

About the shadow economy, I share your sympathy because the shadow economy is 
to considerable extent small private plots.  Each Ukrainian family has a 
private plot.  If they are doing badly, they live on subsistence agriculture 
because they have enough land so that they can live on the land if necessary.  
And this is a quite important social safety net which is the explanation why 
the social crisis has not been worse in this very bad economic downturn.  Thank 
you.

REP. HASTINGS:  Right, all right.  I thank you both so very much and also the 
previous witness.  And I can assure you that at the commission that we will 
keep our interest level high as we proceed and I will try to persuade many of 
my colleagues to visit more and engage more and try best to gain greater 
understanding.  Thank you so very much.

MR. ASLUND:  Thank you.

MR. WILSON:  Thank you.

(END)