S S 9602242 United States Department of State Washington D C 20520 February 16 1996 UNCLASSIFIED with 6ONFIDEH' PIAL attachments Subject Papers for the President's and Vice President's Meetings with Ukrainian President Leonid Kuchma February 21 1996 Enclosed is a computer disk containing Background Papers for the President's and Vice President's use during their meetings with Ukraine President Leonid Kuchma February 21 1996 The memos themselves were initially sent on February 15 UNCLASSIFIED with CONPIBBNTIAkattachments From the Nunn-Lugar collection of the National Security Archive MEMORANDUM FOR ANDREW D SENS EXECUTIVE SECRETARY NATIONAL SECURITY COUNCIL UNCLASSIFIED with COHFIDBN'l'IAL attachments - 2 - Attachments Paper Paper Paper Paper Paper Paper Overview of US-Ukraine Relationship Domestic Political Situation Economic Reform and Privatization Relations with Russia CIS Global Integration and European Security Energy Situation From the Nunn-Lugar collection of the National Security Archive Background BAckground Background BAckground Background BAckground UNCLASSIFIED with COHFIBE i' E'IAL attachments · s0NFI9Sll1TIAI l OVERVIEW OF BILATERAL RELATIONS l O l - Oll • fl' o y'J D1g The past year has been one of remarkable achievements in the US-Ukraine bilateral relationship Your State Visit to Kiev in May provided important public recognition of the great progress Ukraine has made in introducing a genuinely democratic political process resolving longstanding security issues undertaking serious economic reform and respecting human rights Prime Minister Marchuk's meeting with Vice President Gore in Washington in September helped to maintain a serious working dialogue More recently Secretary Perry's travel to Kiev in January and Secretary Christopher's meeting with President Kuchma earlier this month in Helsinki served to bolster US political visibility at a time when concerns about communist resurgence in Russia and winter energy stocks weighed heavily on Ukrainian minds As 1996 unfolds Kiev faces important challenges - - implementing a new constitution meeting Trilateral Statement targets coping with a burdensome energy debt to Russia and getting its IMF program back on track to name a few Problems with Russia whether over the final division of Black Sea Fleet assets CIS integration pressures compensation for tactical nuclear warheads or other issues will likely remain chronic Ukraine and the G-7 will have to provide substance to the Chernobyl closure and energy market restructuring programs Similarly Kuchma will have to make hard political decisions quickly on the most critical reform elements -- including privatization -- if he is to sustain any political momentum for reform or maintain credibility among international donors This will not make the job of reform any easier The challenge for the us this year is to bolster Ukraine in its efforts and demonstrate that we remain committed to an active political dialogue At the same time our fundamental message should stress that Ukraine must follow through on its commitments This means tough decisions -- there is no viable alternative if Ukraine is to make the transformation to a market-based economy If Ukraine does follow through we must be prepared to respond quickly to ensure that its efforts bear fruit in a timely fashion Delivering on a promise of continued assistance $225 million in FY96 funds will help to demonstrate our commitment Kuchma should leave Washington confident that the decisive action he must take will have a positive impact on the economy and will serve to strengthen Ukrainian statehood both in terms of its economic security and its overall survivability as a nation He must understand that inaction will only serve to erode Ukraine's few tangible economic gains to date and isolate Ukraine from the international donor community --COMF'IDEN'f EA L DECL 02 12 2006 Vii 6 From the Nunn-Lugar collection of the National Security Archive US-UKRAINE DECLASSIFIED PER E O 13526 POTUS Kuchma Background Overview of Bilateral Relations Draft EUR WST EJSalazar 02 13 96 SESOVUP 767 x7-8696 From the Nunn-Lugar collection of the National Security Archive CLEAR S NIS DSpeckhard EUR WST JPurnell P JKlekas S P AWeiss ·eoNFIDEHTIAL UKRAINE DOMESTIC POLITICAL SITUATION DECLASSIFIED PER E O 13526 o - 011 3-M l-'iC 0 1 'J 0 6 KB t The constitutional accord between Kuchma and the Rada helped to avert a major constitutional confrontation between the executive and the legislature by granting Kuchma extraordinary executive powers for one year pending the adoption of a new constitution As the June deadline for the accord approaches debate over the constitution will begin to dominate the political agenda Major differences have already surfaced The Rada will fight Kuchma's desire to preserve most of his enhanced powers in the new constitution Kuchma also is backing the creation of a bicameral parliament -- a change which could further dilute the power of the unicameral Rada Another obstacle to timely adoption will be the ratification mechanism itself which requires constitutional issues to be decided by a two-thirds majority in the Rada -- a tough hurdle even under the best of circumstances Kuchma may try to circumvent this process by taking the constitution directly to the people for approval via referendum No less important on the Rada's agenda is the budget Despite recent progress in finalizing draft appropriations the budget has become highly politicized by leftists currying favor with public demands for increased deficit spending Powerful state industries and politically strong trade unions also clamor for continued subsidies Complicating the debate is the government's obligation to adopt a budget consistent with IMF priorities without which a fourth tranche of IMF funds cannot be made available The Kuchma administration has vowed to hold the line on expenditures as evidenced by the government's refusal to cave in to striking coal miners earlier this month This newly found austerity is being driven not only by the IMF's requirements but also by the realization both within government circles and a growing portion of the public at large that delaying reform further is no longer an option Indeed one of the pluses that emerged from the strike is the understanding that faster not slower reforms could have alleviated the sharp payments crisis in the coal industry Fortunately Ukraine's overall human rights picture is not an issue complicating the domestic political scene Despite recent apparently isolated incidents involving government interference with the news media widespread human rights abuses continue to be virtually absent in Ukraine CONFIDENTIAL DECL 02 12 2006 From the Nunn-Lugar collection of the National Security Archive President Kuchma faces several significant domestic challenges in 1996 Chief among these are the adoption of a new post-Soviet constitution and the acceleration of comprehensive economic reforms Kuchma's ability to meet these challenges will have a most profound impact on Ukraine's development POTUS Kuchma Background Domestic Political Situation Draft INR RUE EFishel EUR WST EJSalazar 02 13 9 6 SESOVUP 768 x7-8696 From the Nunn-Lugar collection of the National Security Archive CLEAR S NIS DSpeckhard EUR WST JPurnell P JKlekas S P AWeiss €0PiJP I DElH'f IAL UKRAINE DECLASSIFIED PER E O 13526 ECONOMIC REFORM AND PRIVATIZATION 'l O r O 'l 3 • W O 'l Jli K8'-t St In not much more than a year the Kuchma government has created · a rough economic order out of chaos By controlling the budget deficit at 4% of gross domestic product GDP down from 8 6% in 1994 it reduced inflation from 400% in 1994 to 180% The government also liberalized the foreign exchange regime freed most prices and went a long way toward freeing trade The result was not only macroeconomic stabilization but some measure of progress for the population and the economy Also in 1995 the GDP declined 13% from 23% in 1994 but the social impact is limited by Ukraine's policy of conti uing to pay workers even when enterprises stop producing Exports increased 4 5% in 1995 and by 40% to non-NIS countries Agricultural output declined just 3% Yet Ukraine's position is still precarious The IMF has not decided yet whether to release the $700 million remaining in the $1 5 million Stand-by Arrangement and several large World Bank loans also are contingent on Fund action International reserves equal only four weeks of imports far below the 12 weeks considered minimal A financial panic could quickly exhaust foreign currency reserves and force the central bank to impose exchange controls Kiev would find it even more difficult to pay for Russian energy Ukraine needs economic growth to stop living on the edge financially and growth requires investment Structural reforms such as privatization tax reform and a stable'foreign investment regime are critical to investor confidence Ukraine's comprehensive reform program -- including privatization -- began late in 1994 Since then small-scale privatization has made considerable progress but technical and political snags have slowed implementation of the medium and large-enterprise program Strong parliamentary opposition has hampered efforts to speed up privatization During his September 1995 meeting with Prime Minister Marchuk the Vice President emphasized the importance of moving privatization forward Since then Ukraine has made some progress but is still well behind the initial target of privatizing 8 000 medium and large-scale enterprises by the end of 1995 Some 1 400 have sold more than half their shares negotiations continue on a realistic target for end of 1996 While our discussions with Ukraine are continuing on steps Ukraine must take to accelerate medium and large-scale privatization it will be important for you to underscore what needs to be done and that we will continue to work with Ukraine to ensure successful implementation CQNFIOE H'fIAL DECL 2 14 2006 From the Nunn-Lugar collection of the National Security Archive Ukraine has made some progress on economic reform despite the lack of major structural reform to date Yet the situation remains precarious as evidenced by the IMF's decision to hold up additional loans to Ukraine because of concerns over the 1996 budget and Kiev's difficulty in paying foreign obligations POTUS Kuchma Background Economic Reform Privatization Drafter EUR WST MBocchetti S NIS C SDwyer SESOVUP 771 6-4443 2 13 96 Clearance s S NIS DSpeckhard From the Nunn-Lugar collection of the National Security Archive EUR WST EJSalazar EUR WST JPurnell S NIS C SDwyer EB IFD OMA LKubiske AID ENI SGrossman S P AWeiss P JKlekas eOHPIDEM'fIAL UKRAINE RELATIONS WITH RUSSIA CIS DECLASSIFIED PER E O 13526 lo - o 1 3 - P C si t 3 011 - 3H On bilateral issues the two sides are on schedule in dividing Black Sea Fleet support facilities but progress on the status of the main Fleet base in Sevastopol -- the main stumbling block -- remains elusive Similarly despite Russia's having acknowledged its obligation in 1994 Ukraine has yet to be compensated for tactical nuclear weapons removed to Russia in 1991-92 In the meantime several new problems have emerged such as differences over oil transportatioti tariffs and an increase in excise taxes on Ukrainian goods imported to Russia More importantly the Russians continue to link signature of the long - delayed Friendship Treaty to a final BSF agreement Despite upbeat press play Ukrainian officials are publicly skeptical that the April 4 - 5 Yeltsin visit to Kiev to sign the long- delayed Friendship Treaty will take place They argue that the visit itself will serve as the best indicator of Russia's sincerity in seeking as it maintains a genuin partnership with Kiev based on respect for Ukraine's · independence and sovereignty Kiev's attitude is intended to put Moscow on notice that it is looking for actions not words but few in Kiev expect Moscow's policy to change for the better Indeed there is a growing feeling that the coming months will see a 11 full court press 11 by Russia to reverse Ukraine's perceived drift toward the West During his visit to Kiev earlier this month Russian Foreign Minister Primakov reportedly pressed Ukraine to integrate more closely with the CIS in all spheres and warned of the consequences of NATO's expansion eastward Primakov has made clear that one of his top priorities will be Russia's relations with the other NIS Ukraine opposes any moves aimed at giving the CIS a supra-national character Kiev's posture at the mid- January CIS summit underscored its policy of using CIS structures as a brake on Russian ambitions without compromising Ukraine's sovereignty President Kuchma reiterated that Ukraine's national interests will continue to dictate the scope of its participation in the organization Indeed the Ukrainian delegation did not participate in discussion of military issues including membership in the CIS Collective Security arrangement and again declined to sign on to agreements forming customs or payments unions CO iPIOBU'FIAL DECL 02 13 2006 From the Nunn-Lugar collection of the National Security Archive Ukraine's relationship with Russia remains difficult Kiev is worried by what it sees as growing uncertainties in Russia's political development- · Yeltsin's recent personnel changes the strong showing of the communists in the December Duma elections recent CIS integration pressures etc You will want to use any discussion of Russia and the CIS to underscore our desire for a productive bilateral relationship POTUS Kuchma Background Relations with Russia CIS Draft INR RUE EFishel EUR WST EJSalazar 02 13 96 SESOVUP 769 x7-8696 From the Nunn-Lugar collection of the National Security Archive CLEAR S NIS DSpeckhard EUR WST JPurnell P JKlekas S P AWeiss EUR RUS TLynch EUR RPM DCagan PM SPN PDolliff info €OMPIDB i' PIAL UKRAINE GLOBAL INTEGRATION AND EUROPEAN SECURITY Despite initial concern about meeting strict NATO certification requirements Ukraine now maintains a battalion in IFOR under French command It also has contributed a helicopter unit to UNTAES UN Transitional Administ-r ation in Eastern Slavonia headed by an American We have consistently and actively promoted Ukraine's participation in these organizations to underscore our view that such contributions help to enhance Ukraine's security and reliability'as an international partner Ukraine's admission to the Council of Europe in 1995 was in part a testament to the success of that approach Meanwhile Ukraine has developed a close and reliable working relationship with the OSCE largely overcoming initial doubts about OSCE intrusions in sensitive areas -- like Crimea Despite some progress in other areas obstacles remain to Ukraine's entry into the post-COCOM Wassenaar Arrangement and the Missile Technology Control Regime MTCR -- both of which Ukraine considers important to security trade and export goals We have told Ukraine we would welcome its participation in the new Wassenaar regime once we receive its commitment to end arms-related trade for military end-uses to countries whose behavior is a cause of concern Iran Iraq Libya North Korea -- a commitment we obtained from Russia and other countries we have supported for membership Ukrai' nian diplomats have signalled that the assurances will be conveyed soon On MTCR the principle obstacle has been Ukraine's resistance to forgoing short range missiles We are working closely with Ukrainian diplomats to craft a mutually acceptable position Without resolution Ukraine could carry through with its threat not to adhere to INF limitations on medium range missiles Ukraine's record on implementing the CFE Treaty has been good although final action has been postponed on Treaty-limited equipment whose ownership remains in question until the Black Sea Fleet assets are divided While START implementation is proceeding with only minor technical problems Ukraine's first try at ratifying the Open Skies agreement failed probably thanks to considerable confusion and poorly briefed parliamentarians The government intends to resubmit the agreement once the members are properly briefed Finally Secretary Christopher underscored to President Kuchma in Helsinki earlier this month our hope to conclude agreement on a CTBT in June and sign in September emffIE ENTI AJ DECL 02 13 2006 DECLASSIFIED PER E O 13526 l ol a Oll 3-P t-51 O 'J 'JJ l B'1 From the Nunn-Lugar collection of the National Security Archive Since its commitment to adhere to the terms of the 1994 Trilateral Statement Ukraine has become increasingly prominent in international -- and especially European -- fora that have a bearing on regional security Ratification of START and accession to the NPT further enhanced Ukraine's stature Ukraine also was the first NIS country to sign up for NATO's PFP and maintained a battalion of Ukrainian troops in UNPROFOR POTUS Kuchma Background Global Integration and European Security Draft EUR WST EJSalazar 02 13 96 SESOVUP 770 x7-8696 CLEAR S NIS DSpeckhard EUR WST JPurnell P JKlekas S P AWeiss EUR RPM Hess Brown Eddins Kloekner Cagan PM CBM DGlassman EUR SCE CHoh info From the Nunn-Lugar collection of the National Security Archive PM ATEC JNovak PM SPN DAppleton COWFIDEPT'PIAL UKRAINE ENERGY SITUATION DECLASSIFIED PER E O 13526 - o 'l 1-11' r 53 Energy sector reform The GOU has deferred implementation of an electricity sector restructuring program that would introduce market prices citing low fuel supplies and social concerns We are urging the GOU to implement the program because of its importance for energy efficiency additional IFI financing and attracting private investment On February 7 President Kuchma issued a decree to reform the antiquated coal sector which may close up to 100 mines - He will have World Bank support We are preparing a program to support demand-side efficiency measures Current supplies Entering the winter Ukraine had low but adequate energy stocks comparable to last year's Following a miners' strike in February Ukraine's coal reserves have been depleted although most miners have returned to work following government pledges to pay back-wages The coal shortage has put additional pressure on fuel oil reserves Petroleum and Gas At a USG-sponsored conference U S companies expressed interest in rehapilitating Ukraine's old oil and gas fields and exploring for new deposits However companies are reluctant to invest without clearer foreign invescment regulations Symptomatic of its erratic investment climate Ukraine has postponed its Black Sea oil exploration program three times Ukraine's plan to build an oil terminal in Odesa to diversify oil imports has been delayed by ownership controversies and lack of financing Nuclear Nuclear power accounts for almost 40% of Ukraine's electricity production Ukraine wants to reduce its reliance on Russian fuel by building a nuclear fuel fabrication plant currently it receives fuel rods at no cost from Russia in exchange for its nuclear warheads While U S firms were interested Ukraine conditionally awarded the contract to Russia's MINATOM However we question the economic viability of the plant given alternative fuel supplies and other pressing investment needs We are considering initiating negotiations with Ukraine on a peaceful nuclear cooperation agreement The Atomic Energy Act requires an agreement for the export of nuclear fuel and reactors U S Assistance Ukraine is considering using up to $100 million of an AID agricultural credit facility to buy U S fuel for che agricultural sector The GOU considered using the EXIM credit program for fuel imports but determined the 180-day repayment term is too short the AID program has 540-day terms GONFIQl HTIAI i DECL 2 13 06 From the Nunn-Lugar collection of the National Security Archive 10 1 f l ol - Ukraine has been hard pressed to meet its energy needs and is seeking to reduce its reliance on Russia -- it imports half of its energy and relies on Russia for 90% of its imports Through 1994 Ukraine incurred over $2 5 billion in energy debts to Russia and Turkmenistan Under its IMF agreement since 1995 Ukraine has had to remain current on fuel imports Its ability to finance imports is hampered because many Ukrainian consumers do not pay their energy bills Ukraine views stabilization of its energy sector as key to proceeding with Chernobyl closure POTUS Kuchma Background Energy Situation drafted EUR WST DEdwards 2 13 96 SESOVUP 774 7-6799 From the Nunn-Lugar collection of the National Security Archive cleared S NIS DSpeckhard EUR WST JPurnell S NIS C SDwyer EB EPC JSteele PM SC CKessler PM NE JDooley E MColeman AID Richord Energy JElkind S P AWeiss f _