US Secretary of Commerce Carlos M. Gutierrez expressed concern last week over a recent Ukrainian government decision to cancel an energy partnership deal with an American company that would have seen deposits off the Crimean coastline developed. Investors have been alarmed by the decision to unilaterally reverse an agreement signed with a serving Ukrainian government, with the incident widely interpreted as more evidence of Prime Minister Yulia Tymoshenko’s lack of commitment to honouring deals which she views as politically unfavourable. While in Kyiv on an official visit Mr. Gutierrez raised the energy contract issue with President Yushchenko when the two met to discuss bilateral trade ties before speaking of the need to create a transparent environment where investors confident of their rights.
At issue is an energy agreement between the Ukrainian government and Vanco Energy which was drawn up under the previous administration of Viktor Yanukovych but was then cancelled by Yulia Tymoshenko’s government in late April. The announcement of the cancellation was accompanied by accusations of secret ownership changes on the American company’s side of the agreement and allegations that Vanco officials were considering selling their licence to explore and develop the Prykerchenskiy oil and gas field to Russian energy giant Gazprom. Since the decision was made public American officials in Kyiv have called for dialogue and investors have sought reassurances while Mrs. Tymoshenko has defended the decision to cancel Vanco’s licence as a step needed to protect national interests.
Protecting the sanctity of contracts
“We have stressed to Ukrainian government officials that it is important the international community sees that contracts are respected. If there are any genuine concerns then they should be managed in a transparent way that shows that there is respect for the sanctity of a contract,” Mr. Gutierrez told Business Ukraine while in Kyiv, adding that it had the potential to undermine investor confidence in the market. “Companies take their capital where they perceive that there is less risk in terms of political stability, economic stability and transparency. Every country needs to understand that they are competing for capital in terms of these issues,” he emphasised.
WTO membership and increased competition
The current dispute over the cancelled Vanco contract has reawakened investor concerns which were first generated during Mrs. Tymoshenko’s 2005 administration when talk of a wide-ranging programme of reprivatisation hurt confidence in the Ukrainian market and raised doubts about investor ability to protect property rights. However, while the Vanco affair has clearly shaken the investor community, Mr. Gutierrez arrived in Kyiv at a time when bilateral trade is booming and Ukraine’s success in gaining WTO membership is fuelling renewed optimism.
He was accompanied on his trip to Ukraine by members of President Bush’s Export Council, a body of American CEOs which advises the US President on export policy and foreign investment issues, something the Secretary of Commerce says underlines the continued importance attached to the country in Washington circles and the potential created by growing bilateral trade and Ukraine’s recent WTO membership.
While in Kyiv Mr. Gutierrez praised the progress made by the government in dealing with such bones of bilateral contention as respect for international copyright law and cites the recent removal of Ukraine from the US government’s watch list of countries engaged in large-scale piracy as evidence of a broader positive trend which WTO membership can help strengthen. “Being part of the WTO conveys to investors that Ukraine is meeting certain guidelines and standards. That’s always good for attracting investment,” Mr. Gutierrez commented.
He remains unconvinced by concerns among Ukrainian producers that they might struggle in the face of a new wave of high quality internationally-produced products flooding the domestic market. “We have seen that over time competition strengthens an economy, whereas a lack of competition trends to hurt growth, hurt job creation and productivity,” the Secretary of State argued.
Progress in a young market
Ukraine’s ability to attract investor interest has been bolstered by the media coverage the country has garnered since it captured headlines with the 2004 Orange Revolution and Mr. Gutierrez commented on the difference the popular uprising appears to have made in the Ukrainian business climate. “The companies I have spoken to in Kyiv talked in terms of their growth rates before and after the Orange Revolution. Democracy is a boost for confidence. Political stability, transparency and freedom of speech over the long term make a big difference,” he pointed out, adding that the relative youth of the Ukrainian economy should also be taken into account. “This is a market that began just 16 years ago so it is still very young but I have been impressed to meet American companies who are already expanding,” he said.
An ongoing agenda
America will elect a new president in November but there appears to be little fear of any change in the superpower’s strategic relations with Ukraine regardless of who makes it to the White House. Both the Republican and Democratic party candidates have visited Ukraine personally and have recently made public their support for Ukraine’s NATO membership bid in a rare display of bipartisan agreement on foreign policy. Mr. Gutierrez describes ties between Washington and Kyiv as a long-term commitment and an on-going agenda. “We’re constantly in dialogue with the Ukrainian government,” he said. “Three years ago we were talking about WTO membership and today it is a reality, so this is an ongoing process. I have been particularly impressed by the government’s view of Ukraine as global player. This country has the potential to look well beyond its regional neighbourhood.”
