Ukraine: Current Issues and U.S. Policy

Ukraine: Current Issues and U.S. Policy
Updated September 10, 2008
Steven Woehrel
Specialist in European Affairs
Foreign Affairs, Defense, and Trade Division

Ukraine: Current Issues and U.S. Policy
In January 2005, Viktor Yushchenko became Ukraine’s new President, after
massive demonstrations helped to overturn the former regime’s electoral fraud, in
what has been dubbed the “Orange Revolution,” after Yushchenko’s campaign color.
Some hoped that Ukraine might finally embark on a path of comprehensive reforms
and Euro-Atlantic integration after nearly 15 years of half-measures and false starts.
However, infighting within his governing coalition hampered economic reforms and
led to disillusionment among Orange Revolution supporters. The victory of the
opposition Party of Regions in August 2006 parliamentary elections led to further
political conflict and deadlock.
Parliamentary elections on September 30, 2007 confirmed the Party of Regions
as the largest party in the parliament, but the party of former Prime Minister Yuliya
Tymoshenko performed well. On December 18, 2007, the parliament approved by
a new coalition government of pro-Western, “Orange” parties, with Tymoshenko as
Prime Minister. Political conflict between Tymoshenko and Yushchenko soon
resumed however. In September 2008, a crisis in the governing coalition threatened
its collapse, which could trigger a Tymoshenko alliance with the Party of Regions or
new elections.
After taking office as President, Yushchenko said that Ukraine would seek
integration into the global economy and Euro-Atlantic institutions. Ukraine joined
the World Trade Organization (WTO) in May 2008. In the longer term, Yushchenko
seeks Ukrainian membership in the European Union and NATO. Relations with
Russia have at times been tense over such issues as Ukraine’s NATO aspirations and
energy supplies. Yanukovych and the Party of Regions oppose NATO membership,
are less eager to conduct reforms in pursuit of EU membership, and are more
favorable to closer ties with Russia, especially in the economic sphere. Conflict
between Ukraine’s political forces has led its foreign policy to appear incoherent, as
the contending forces pulled it in pro-Western or pro-Russia directions or simply
neglected foreign policy as less important than domestic political combat.
U.S. officials supported the “Orange Revolution” in Ukraine, warning the
former regime against trying to impose fraudulent election results, and hailing
Yushchenko’s ultimate victory. U.S. officials have remained upbeat about Ukraine’s
successes in some areas, such as securing WTO membership, as well as in holding
free and fair elections and improving media freedoms, while acknowledging
difficulties in others, such as fighting corruption, establishing the rule of law, and
constitutional reforms. The United States strongly supported granting a Membership
Action Plan to Ukraine at the NATO summit in Bucharest in April 2008, a key
stepping-stone to NATO membership. However, opposition by Germany, France,
and several other countries blocked the effort. On the other hand, the Allies surprised
many observers by confirming that Ukraine will join NATO in the future, without
specifying a timetable. The United States strongly reiterated its support for Ukraine
in the wake of the Russia-Georgia conflict of August 2008, which has sparked fears
that Russia could take steps to divide Ukraine. This report will be updated as needed.

Background ......................................................1
Current Political Situation ..........................................3
Current Economic Situation..........................................5
Ukraine’s Foreign Policy............................................6
NATO ......................................................7
European Union...............................................8
Russia .......................................................9
Energy Issues............................................10
NATO Membership.......................................12
U.S. Policy......................................................12
Congressional Response.......................................14

Ukraine: Current Issues and U.S. Policy
Ukraine, comparable in size and population to France, is a large, important,
European state. The fact that it occupies the sensitive position between Russia and
new NATO member states Poland, Slovakia, Hungary, and Romania, adds to its
geostrategic significance. Many Russian politicians, as well as ordinary citizens, have
never been fully reconciled to Ukraine’s independence from the Soviet Union in

1991, and feel that the country should be in Russia’s political and economic orbit.

The U.S. and European view, especially in Central and Eastern Europe, is that a
strong, independent Ukraine is an important source of regional stability.
From the mid 1990s until 2004, Ukraine’s political scene was dominated by
President Leonid Kuchma and the oligarchic “clans” (groups of powerful politicians
and businessmen, mainly based in eastern and southern Ukraine) that supported him.
Kuchma was elected President in 1994, and re-elected in 1999. He could not run for
a third term under the Ukrainian constitution. His rule was characterized by fitful
economic reform (albeit with solid economic growth in later years), widespread
corruption, and a deteriorating human rights record.
Ukraine held presidential elections on October 31, November 21, and December
26, 2004. The oligarchs chose Prime Minister Viktor Yanukovych as their candidate
to succeed Kuchma as President. The chief opposition candidate, former Prime
Minister Viktor Yushchenko, was a pro-reform, pro-Western figure. International
observers criticized the election campaign and the first and second rounds of the
election as not free and fair, citing such factors as government-run media bias in
favor of Yanukovych, abuse of absentee ballots, barring of opposition representatives
from electoral commissions, and inaccurate voter lists. Nevertheless, Yushchenko
topped the first round of the vote on October 31 by a razor-thin margin over
Yanukovych. Other candidates finished far behind.
After the November 21 runoff between the two top candidates, Ukraine’s
Central Election Commission proclaimed Yanukovych the winner. Yushchenko’s
supporters charged that massive fraud had been committed. Hundreds of thousands
of Ukrainians took to the streets, in what came to be known as the “Orange
Revolution,” after Yushchenko’s chosen campaign color. They blockaded
government offices in Kiev and appealed to the Ukrainian Supreme Court to
invalidate the vote. The court invalidated the runoff election on December 3, and set
a repeat runoff vote on December 26. Yushchenko won the December 26 re-vote,
with 51.99% of the vote to Yanukovych’s 44.19%. After court challenges by
Yanukovych were rejected, Yushchenko was inaugurated as President of Ukraine on
January 23, 2005. On February 4, 2005, the Ukrainian parliament approved President
Yushchenko’s appointment of Yuliya Tymoshenko as Prime Minister of Ukraine by

a vote of 373-0. Tymoshenko is a charismatic, populist leader with a sometimes
combative political style who campaigned effectively on Yushchenko’s behalf. She
is a controversial figure due in part to her alleged involvement in corrupt schemes as
a businesswoman and a government minister during the Kuchma regime.
The “Orange Revolution” sparked a good deal of interest in Congress and
elsewhere. Some hoped that Ukraine could finally embark on a path of
comprehensive reforms and Euro-Atlantic integration after years of half-measures
and false starts. However, subsequent events led to some disillusionment among
Orange Revolution supporters. Yushchenko dismissed Prime Minister Tymoshenko’s
government in September 2005. The atmosphere between the two leaders was
poisoned by accusations of corruption lodged by supporters of each against the other
side’s partisans, including over the highly lucrative and non-transparent natural gas
In order to secure support for a new government, Yushchenko then made a
political non-aggression pact with his opponent from the presidential election, Viktor
Yanukovych, and promised not to prosecute Yanukovych’s key supporters for
electoral fraud and other crimes. Some supporters of the Orange Revolution viewed
the move as a betrayal of one of the key principles of their movement. Some began
to question whether the new government was better than the old regime, given
ongoing government corruption scandals and the perception that the Orange
Revolution might be reduced to squabbling over the redistribution of property among
the “old” oligarchs and would-be, new “Orange” ones.1
On March 26, 2006, Ukraine held parliamentary elections. The largest vote-
getter in the elections was the Party of Regions, headed by Yushchenko’s former
presidential election rival Viktor Yanukovych. After the failure of protracted
attempts to reconstitute the Orange Revolution coalition, the Socialist Party, formerly
part of it, changed sides and formed a coalition with the Party of Regions and the
Communists, which put forward Yanukovych as its candidate for Prime Minister.
Yushchenko reluctantly appointed Yanukovych as Prime Minister, and the Ukrainian
parliament approved the new government on August 4, 2006. Yanukovych’s
government and the parliamentary majority, led by the Party of Regions, worked
steadily to whittle away at Yushchenko’s powers and political influence. The
government and parliament removed ministers appointed by Yushchenko and
rejected his proposed candidates to replace them. The government refused to
implement Yushchenko’s decrees.
Hoping to stem the threat to his power, President Yushchenko dissolved the
Ukrainian parliament on April 2, 2007, claiming that the defection of individual
members of the opposition to the majority (as opposed to a whole faction) made the
ruling majority illegitimate. Prime Minister Yanukovych condemned Yushchenko’s
decree as unconstitutional and called on the government and parliament to ignore
Yushchenko’s decree and keep working. On May 27, after weeks of political and
legal turmoil, Yushchenko, Yanukovych, and parliament chairman Oleksandr Moroz

1 Jamestown Foundation, Eurasia Daily Monitor, September 9, 2005; RFE/RL Belarus,
Ukraine, Moldova Report, September 16, 2005.

agreed that new parliamentary elections would be held on September 30, 2007, to end
the crisis.
According to many observers, this political crisis underlined the fact that the
country still needs to make substantial progress in developing a smoothly functioning
democracy. The poorly defined separation of powers in Ukraine’s constitution has
invited conflict and needs to clarified. Another key problem is the persistence of a
post-Soviet political culture in which “winner-take-all” attitudes and unscrupulous
tactics take precedence over a genuine respect for the rule of law.
Current PoliticalUkraine’s Main Political Groups
Situation Party of Regions: The largest party in Ukraine’s
parliament. It draws its support from eastern
On September 30, 2007,Ukraine, where suspicion of Ukrainian nationalism
Ukraine held earlyis high and support for close ties with Russia is
parliamentary elections. Thestrong. It defends the economic interests of
Party of Regions remains thepowerful oligarchic groups in eastern Ukraine.
largest party in the new
legislature. It won 34.37% ofYuliya Tymoshenko Bloc: Mainly a vehicle for
the vote and 175 seats in thethe ambitions of the charismatic Tymoshenko, it
450-seat parliament. Thehas little ideological cohesion of its own. It is thesecond largest group in the Ukrainian parliament
Yuliya Tymoshenko Bloc,largely because many Ukrainians see Tymoshenko
which won 30.71% and 156as the most stalwart defender of the populist, anti-
seats, is the second largest. Ourcorruption ideals of the Orange Revolution.
Ukraine-People’s Defense came
in a distant third, with 14.15%Our Ukraine-People’s Self Defense bloc: The
and 72 seats. The Communistmain political group supporting President
party received 5.39% of theYushchenko. It favors free market economic
vote and 27 seats. The Lytvynreforms and a pro-Western foreign policy. It draws
Bloc was the only other party toits support from western Ukraine, where Ukranian
reach the 3% vote barrier fornationalism is strong.
representation in the parliament.Communist Party: Now a shadow of its former
It won 3.96% of the vote, andself, overtaken by the Party of Regions in its
secured 20 seats. eastern Ukraine strongholds and faced with an
aging electorate. It strongly opposes market
These results were not aeconomics and favors strong ties to Russia.
dramatic departure from the
results of the March 2006Lytvyn Bloc: A centrist bloc headed by Volodmyr
election. The Party of RegionsLytvyn, former top official in the Kuchma regime.
lost 11 seats, but its CommunistLytvyn has changed sides several times in
allies gained six. The OurUkraine’s political struggles, backing the side with
Ukraine bloc lost nine seats.the upper hand at the moment.

However, its former Orange
Revolution partner, the Yuliya
Tymoshenko Bloc, gained 27 seats. The Socialists, perhaps punished by the
electorate for betraying their former Orange allies, fell below the 3% and lost all of

their parliamentary seats. The Lytvyn Bloc was not represented in the previous
parliament, as it fallen below the 3% threshold.2
As has occurred in elections since Ukraine became an independent country in
1991, support for the parties was heavily regionalized. The Party of Regions was
dominant in eastern and southern Ukraine, but did poorly in western and central
Ukraine. Support for the Communists was also concentrated in the east and south.
Our Ukraine-People’s Self Defense did well in western Ukraine, but poorly in the
east. The Yuliya Tymoshenko Bloc is strongest in western and central Ukraine,
beating Our Ukraine-People’s Self Defense in all districts of these regions but one.
The Tymoshenko Bloc is much weaker in eastern and southern Ukraine, but made
moderate inroads there as compared to the previous election just over a year earlier,
perhaps opening the way to a future as democratic Ukraine’s first truly country-wide
Negotiations over a new government were protracted. On December 6, the
parliament approved Arseniy Yatsenyuk as chairman of the Rada. Yatsenyuk, from
Our Ukraine-People’s Self Defense, was formerly Ukraine’s foreign minister.
President Yushchenko nominated Tymoshenko as his candidate for Prime Minister.
The parliament approved Tymoshenko as Prime Minister on December 18 by a vote
of 226-0. The parliament then approved Tymoshenko’s government. The Party of
Regions, Communist Party and Lytvyn Bloc did not take part in the votes.
The extreme fragility of her majority has made Tymoshenko’s task as Prime
Minister difficult. In mid-January 2008, the Party of Regions and the Communist
Party blocked the parliament from meeting. Their ostensible reason was Yatsenyuk’s
signature on a letter with Yushchenko and Tymoshenko to NATO Secretary General
Jaap de Hoop Scheffer requesting a Membership Action Plan (MAP) for Ukraine at
the NATO summit in Bucharest on April 2-4, 2008. They said Yatsenyuk had no
right to speak for the parliament on such a controversial issue without their consent.
The parliament resumed operations on March 6, 2008, after it passed a resolution
stating that the parliament would consider legislation to join NATO only after a
public referendum approved NATO membership.
Another problem has been escalating tension between Tymoshenko and
Yushchenko. Yushchenko has often criticized Tymoshenko’s policies, including her
privatization plans, efforts to renegotiate energy relations with Russia, and alleged
failure to fight rising inflation. He has pressed for constitutional reforms giving the
Presidency greater powers over the government. Yushchenko appointed a (now
former) high-ranking leader from the Party of Regions as secretary of the National
Security and Defense Council, to the surprise of Yanukovych. Analysts say that
Yushchenko may be building bridges to pragmatic elements in the Party of Regions
(especially key businessmen such as Rinat Akhmetov) in order to balance
Tymoshenko’s power. Persons close to Yushchenko have created a new party called
United Center that may be designed to attract support from such “centrist” forces in
eastern Ukraine.

2 For the 2007 Ukrainian parliamentary elections results, see the Ukrainian Central Election
Committee website, [].

Tymoshenko hit back by calling for a “parliamentary republic” that would
weaken the presidency. Such a move would require the support of the Party of
Regions, which also favors a weaker presidency. These moves suggest early
jockeying for power in advance of presidential elections in 2010 (in which
Yushchenko and Tymoshenko could both be candidates). At present, Yushchenko
appears to be in the weaker position as opinion polls have consistently shown him to
be much less popular than Tymoshenko.
On September 3, 2008, Our Ukraine announced that it was leaving the
governing coalition in ten days, unless Tymoshenko reversed herself on the recent
passage of laws by the parliament reducing the president’s powers. The Tymoshenko
Bloc and the Party of Regions provided the votes for the measures. Our Ukraine also
demands that Tymoshenko join Yushchenko in condemning Russia’s military assault
on Georgia in early August. Tymoshenko avoided commenting on the issue. If the
government collapses, Yushchenko has warned that he will exercise his powers under
the constitution to call new parliamentary elections, if a new government is not
formed within 30 days. The elections would be Ukraine’s third in three years. Some
analysts believe Our Ukraine would likely suffer a sharp defeat in such elections,
judging from current opinion polls. If a new government is formed without elections,
it would like be composed of the Tymoshenko Bloc and the Party of Regions.
Current Economic Situation
Ukraine is experiencing strong economic growth, although it has slowed
somewhat in recent months. GDP grew by 6.3% in the first half of 2008, on a year-
on-year basis. Ukranian real disposable income is increasing rapidly (nearly 20%
in the first quarter of 2008, year-on-year). Since late 2004, average wages have
roughly tripled, to about $400 per month in July 2008, in part to an increase in public
sector wages. Consumer price inflation rate has accelerated this year, due to higher
energy costs. It was 26% in June 2008, year-on-year.
Ukraine’s economic growth has been fueled mainly by consumption, including
an import boom which has resulted in a widening trade deficit and current account
deficit (7.2% of GDP in the first seven months of 2008). On the other hand, Ukraine
is experiencing substantial foreign investment inflows. Ukraine’s total stock of
foreign direct investment (FDI) was low, at $21.2 billion in January 2007, but net
FDI inflows are rising rapidly. Net FDI for 2007 was a record $9.2 billion. FDI for
January-July 2008 was nearly $7 billion. Foreign investment has been particularly3
strong in the banking and insurance sectors.
A key priority of the Tymoshenko government is to master Ukraine’s rapidly
rising inflation. On the other hand, Tymoshenko made populist promises during the
campaign that will increase government spending, such as a commitment to
reimburse Ukrainians for money frozen in Soviet-era savings accounts. Tymoshenko
and her supporters blame other factors, such as price-fixing by retailers and the

3 Economist Intelligence Unit Country Report: Ukraine, June 2008; “Ukraine: Slowing
Growth Suggests Stagflation Risk,” Oxford Analytica, August 14, 2008.

National Bank of Ukraine’s (NBU) pegging of Ukraine’s currency to the weak dollar.
The NBU has tried to ameliorate the problem by a modest revaluation of the hryvnya
against the dollar and by tightening monetary policy. In June 2008, President
Yushchenko vetoed price controls legislation proposed by the government.
Tymoshenko plans to rapidly privatize key firms such as the
telecommunications monopoly Ukrtelecom and the Odesa Portside Plan chemical
firm, in part to pay for her plan to compensate Soviet-era savings account holders.
However, Yushchenko has blocked Tymoshenko’s privatization efforts, claiming he
is opposed to a hasty sell-off. The two leaders are fighting for control of Ukraine’s
remaining state property. The conflict appears to be another facet of the ongoing
power struggle between the two leaders.
In April 2008, Prime Minister Tymoshenko cancelled a production sharing
agreement (PSA) with the U.S. firm Vanco and several partners to exploit the large
Prykerchenska oil and natural gas field in the Sea of Azov. She claimed that the field
was too large for the group to exploit, that the terms of the PSA were too generous,
and that the license holders were planning to sell control of the field to Gazprom.
Tymoshenko may also have been upset that one of Vanco’s partners is Rinat
Akhmetov, a powerful oligarch and political opponent of Tymoshenko. U.S.
Ambassador to Ukraine William Taylor criticized Tymoshenko’s move, saying that
it would hurt prospects for foreign investment in Ukraine, as well as Ukraine’s
energy security. In May 2008, President Yushchenko’s Security and Defense Council
ordered the government to rescind its cancellation of the group’s PSA.
Prime Minister Tymoshenko has pledged to battle corruption in Ukraine, which
many experts and U.S. officials view as a key problem hindering Ukraine’s economic
development. In March 2008, the parliament repealed a state procurement law that
had been widely criticized for promoting corruption. The government says that a
crackdown on tax evasion and customs fraud has substantially increased government
Ukraine’s Foreign Policy
Until Yushchenko’s election in 2005, Ukrainian foreign policy was
characterized by an effort to balance ties with Russia with those with the United
States and Western countries. Previous leaders gave lip service to joining NATO and
the European Union, but did little to meet the standards set by these organizations.
Ukrainian leaders also promised closer ties with Russia in exchange for Russian
energy at subsidized prices, but balked at implementing agreements with Russia that
would seriously compromise Ukraine’s sovereignty, such as ceding control over
Ukraine’s energy infrastructure to Moscow.
After taking office, President Yushchenko put integration into the global
economy and Euro-Atlantic institutions at the center of Ukraine’s foreign policy.
One key foreign policy goal has been for Ukraine to join the World Trade
Organization (WTO). Ukraine joined the WTO in May 2008. In addition to helping
Ukrainian exporters, WTO membership may give Ukraine political leverage over

Russia, given that the consent of Ukraine (and every other WTO member state) is
necessary for Russia to join the organization. In the longer term, Yushchenko wants
Ukraine to join the European Union and NATO. Ukraine has sought to retain good
ties with Russia, but relations have been troubled since Yushchenko took power.
Conflict between Ukraine’s political forces has led its foreign policy to appear
incoherent, as the contending forces pulled it in pro-Western or pro-Russia directions
or simply neglected foreign policy as less important than domestic political combat.
Yanukovych and the Party of Regions are less eager to pursue rapid integration into
Euro-Atlantic institutions and more favorable to closer ties with Russia, especially
in the economic sphere.
Ukraine currently has an “Intensified Dialogue” with NATO, but President
Yushchenko has sought a Membership Action Plan (MAP), a key stepping-stone to
joining the Alliance. The MAP gives detailed guidance on what a country needs to
do to qualify for membership.
On January 15, 2008, Prime Minister Tymoshenko joined President Yushchenko
and parliament speaker Arseniy Yatsenyuk in sending a letter to NATO Secretary
General Jaap de Hoop Scheffer requesting a Membership Action Plan for Ukraine
at the April 2-4 NATO summit in Bucharest, Romania. On March 17, Yushchenko
and Tymoshenko sent letters to De Hoop Scheffer, German Federal Chancellor
Angela Merkel, and French President Nicolas Sarkozy reiterating Ukraine’s request
for a MAP.
The Party of Regions and the Communists are strongly opposed to a MAP for
Ukraine. They responded to the first letter by blocking the functioning of the
parliament. Yanukovych threatened to hold public demonstrations against the
government’s request for a MAP. Public opinion polls have shown that less than
one-quarter of the population supports NATO membership. Both President
Yushchenko and Prime Minister Tymoshenko have launched a public information
campaign to educate Ukrainians about NATO. They have also agreed that Ukraine’s
entry into NATO would have to be endorsed beforehand by a public referendum.
Perhaps in an effort to defuse domestic and Russian criticism, President Yushchenko
has said that Ukraine will not allow the establishment of NATO bases on Ukrainian
soil. He has noted that the Ukrainian constitution does not permit the establishment
of foreign military bases, with the temporary exception of Russia’s current Black Sea
naval base, the lease for which runs out in 2017.
NATO declined to offer Ukraine a MAP at the Bucharest summit, despite strong
support from the United States and almost all central European NATO members.
Germany and France played the leading role in blocking the effort. They raised
questions about Ukraine’s qualifications for a MAP and also expressed concerns that
granting a MAP to Ukraine would hurt relations with Russia. However, the Allies
agreed that Kiev could receive a MAP as early as the NATO Foreign Ministers’
meeting in December 2008, if remaining questions over its application are resolved.
In a move that surprised many observers, the summit communique also contained an

unqualified statement that Ukraine (and Georgia) “will become members of NATO,”
without specifying when that might happen.
The ambiguous result of the summit caused varying reactions within Ukraine.
President Yushchenko and the Ukrainian government hailed the summit as a key
stepping-stone on Kiev’s path toward NATO membership, pointing in particular to
the commitment made to admit Ukraine into the Alliance. In contrast, Yanukovych
and the opposition applauded the denial of a MAP at the summit, viewing it as a
blow to Yushchenko’s pro-NATO policy.
The conflict between Russia and Georgia in August 2008 may have an
important impact on Ukraine’s hopes of receiving a MAP. European NATO
countries that have opposed a MAP for Ukraine may be even more reluctant to
agreed to one, fearing a sharp deterioration in relations with Moscow and perhaps
even being embroiled in a military conflict with Russia in the future. Supporters of
a MAP for Ukraine have argued that the refusal to grant a MAP to Kiev and Tbilisi
at the Bucharest summit may have emboldened Moscow to use massive military
force against Georgia. They believe that a MAP for Ukraine and Georgia would send
a strong warning signal to Russia to not repeat the use of such aggressive tactics. It
would also signal NATO’s rejection of Moscow’s assertion of a sphere of influence
in post-Soviet countries.
Domestic political infighting in Ukraine may also hurt Ukraine’s MAP
prospects, either by convincing some NATO members that Ukraine lacks the political
maturity for candidate status or if the collapse of the current government results in
the creation of a new one that includes the Party of Regions. Such a government
could downplay or even renounce the current government’s MAP aspirations.
European Union
Ukraine seeks to open talks on an Association Agreement with the European
Union that would clearly state Ukraine’s status as a candidate EU member. Many
countries in the EU have been cool to Ukraine’s possible membership, perhaps
because of the huge burden a large, poor country like Ukraine could place on already-
strained EU coffers. Indeed, EU officials have tried to dissuade Ukraine from even
raising the issue. However, not all EU states are reluctant to consider Ukraine’s
eventual membership. Poland and the Baltic states have advocated Ukraine’s joining
the EU, in part because they see a stable, secure Ukraine as a bulwark against Russia.
Nevertheless, even supporters of Ukraine’s EU membership acknowledge that it
could be more than a decade before Kiev is ready to join, but believe that formal EU
recognition of Ukraine’s candidacy could speed the reform process in Ukraine.
Ukraine currently has a Partnership and Cooperation Agreement (PCA) with the
EU, as well as a Ukraine-EU Action Plan within the context of the EU’s European
Neighborhood policy. The agreements are aimed at providing aid and advice to assist
Ukraine’s political and economic transition and to promote closer ties with the EU.
At an EU-Ukraine summit in December 2005, the EU announced that it would grant
Ukraine market economy status. The move makes it easier for Ukrainian firms to
export to the EU without facing antidumping duties.

In March 2007, the EU and Ukraine announced the opening of negotiations on
an Enhanced Agreement to replace the current PCA, which is scheduled to expire in
2008. Talks on an EU-Ukraine free trade area began in February 2008. The two
sides have agreed to work toward visa-free travel between the EU and Ukraine, a key
Ukrainian goal. The EU plans to spend 494 million Euro ($658 million) from 2007-
2010 to support reform in Ukraine, in such areas as energy cooperation, strengthening
border controls, bolstering the judiciary and the rule of law, and addressing
environmental concerns.4
In June 2008, the EU agreed to set an Eastern Partnership program within the
context of their European Neighborhood policy, which also includes non-European
countries. It is not clear whether the new initiative will have much actual content in
addition to current efforts, let alone whether it will offer Ukraine and other eastern
European countries a perspective of EU membership. In September 2008, the EU
agreed to call the new Ukraine-EU accord currently under negotiation an “association
agreement.” However, unlike the association agreements signed by other European
countries in the past, the new accord will not contain an explicit recognition of
Ukraine’s EU membership aspirations.
Ukraine’s most difficult and complex relationship is with Russia. President
Putin strongly backed Yanukovych’s fraudulent “victory” during the 2004
presidential election campaign and reacted angrily at the success of the Orange
Revolution. Russian observers with close ties to the Kremlin charged that the Orange
Revolution was in fact a plot engineered by the United States and other Western
countries. For his part, President Yushchenko offered an olive branch to Moscow,
calling Russia a “permanent strategic partner” of Ukraine.5 Nevertheless, relations
have been rocky. Russia has been irked by Yushchenko’s efforts to support greater
democratization in the region and impose tighter border controls on Transnistria, a
pro-Moscow, separatist enclave within neighboring Moldova.
Ethnic Russians make up 17.3% of Ukraine’s population, according to the 2001
Ukrainian census. They are concentrated in the southern and eastern parts of the
country. They form a majority in Crimea, where they make up 58.3% of the
population. In the Crimean city of Sevastopol, the home base of the Russian Black
Sea Fleet, 71.6% of the population are Russians. In addition, ethnic Ukrainians in
the east and south also tend to be Russian-speaking, are suspicious of Ukrainian
nationalism, and support close ties with Russia. Russian officials have tried to play
on these regional and ethnic ties, not always successfully, as demonstrated by the

2004 Ukrainian presidential election.

The Russia-Georgia conflict in August 2008 has had a negative impact on
Russian-Ukrainian relations. Since President Yushchenko took power, Ukraine and
Georgia have had close ties. President Yushchenko strongly condemned Russia’s

4 “Commissioner Ferrero-Waldner Announces Substantial Increase in Financial Assistance
to Ukraine,” EU press release, March 7, 2007.
5 Jamestown Foundation, Eurasia Daily Monitor, January 25, 2005.

military actions in Georgia. Ukraine’s foreign ministry accused Russia of using
Black Sea Fleet vessels based in Crimea to attack targets in Georgia without
consulting Ukraine and said Ukraine reserved the right to exclude such vessels from
On August 13, Yushchenko issued a decree requiring Russia to provide advance
permission for movement of Russian military ships, planes, and personnel on
Ukraine’s territory. Russia said the decree was anti-Russian and in contradiction to
the 1997 treaty that gave Russia the right to base its fleet in Crimea. Prime Minister
Tymoshenko also criticized the Yushchenko decree, saying she would not permit a
conflict to occur between Russia and Ukraine over the Fleet. The Russian vessels that
participated in the Georgia conflict later reportedly returned to their Crimean base.
In September 2008, Ukraine’s foreign minister charged that Moscow is
providing Russian citizenship documents to inhabitants of Crimea. He expressed
fears that Russia could use the presence of Russian citizens in Ukraine to justify
military intervention in the future, as it has in Georgia.
Energy Issues. The most severe crisis in Russian-Ukrainian relations in
recent years occurred in January 2006. In 2005, the Russian government-controlled
natural gas monopoly Gazprom insisted on a more than fourfold increase in the price
that it charges Ukraine for natural gas. When Ukraine balked at the demand, Russia
cut off natural gas supplies to Ukraine on December 31, leading also to cuts in gas
supplies to Western Europe. The gas supplies were restored two days later after a
new gas supply agreement was signed. In early 2007, with the more pro-Russian
Yanukovych government in power, Russia and Ukraine agreed to gradually increase
the price of Russian natural gas to Ukraine over the next five years, at which time it
will reach the world market price. Gazprom announced a natural gas price of
$179.50 for 2008, a significant increase over the $130 Ukraine paid in 2007, but still
well short of world market levels.
Another issue is the involvement of a shadowy company, RosUkrEnergo, as the
nominal supplier of Russian natural gas to Ukraine. Some analysts are concerned
about possible involvement of an organized crime kingpin in the company, as well
as corrupt links with Russian and Ukrainian officials. The U.S. Justice Department
has reportedly investigated the firm.6
Perhaps more troubling for Ukraine, the 2006 accord with Gazprom called for
the creation of UkrGazEnergo, a joint venture between RosUkrEnergo and the
Ukrainian state-controlled gas firm Naftogaz that grants the former access to one-half
of Ukraine's domestic market. Ukraine’s intelligence service reportedly believes the
owners of RosUkrEnergo are using their control over energy supplies to secure
ownership of energy intensive industries such as fertilizer plants and a titanium

6 Glenn R. Simpson, “U.S. Probes Possible Crime Links to Russian Natural-Gas Deals,”
Wall Street Journal, December 22, 2006, 1. For background on the gas crisis, see CRS
Report RS22378, Russia’s Cutoff of Natural Gas to Ukraine: Context and Implications, by
Bernard Gelb, Jim Nichol, and Steven Woehrel.

plant.7 Naftogaz has teetered on the verge of bankruptcy, in part because
UkrGazEnergo has been allocated more solvent customers in the industrial sector,
while Naftogaz has been left with less well-off residential consumers.
Prime Minister Tymoshenko has sharply criticized the presence of
RosUkrEnergo as a middleman from the Ukrainian natural gas market. In January
2008, she sharply reduced the amount of gas UkrGazEnergo can sell to Ukrainian
consumers. The role of middlemen in the Ukrainian gas market may also be reduced
by market forces. RosUkrEnergo’s profits are based on selling cheap Central Asian
gas at higher prices to Ukraine. As Central Asian countries demand that prices for
their gas move closer to market rates, the intermediary’s margins may be squeezed.
Tymoshenko is also reportedly seeking a steep rise in transit fees from Gazprom.
Russian President Dmitri Medvedev expressed support for removing RosUkrEnergo
as an intermediary, but it still remains unclear whether Russia supports a genuinely
transparent energy relationship with Ukraine.
On March 3-5, 2008, Gazprom reduced gas supplies to Ukraine by 50%,
alleging non-payment of debts by Ukraine. Ukrainian gas company officials warned
that they might divert gas intended for Western Europe to make up the difference.
The two sides reached agreement on the debt on March 5 and supplies were restored.
On March 12, the two sides agreed to eliminate UkrGazEnergo from the domestic
gas trade, but gave Gazprom direct access to the most lucrative part of Ukrainian’s
domestic market – supplies to large enterprises. The agreement said the fate of
RosUkrEnergo would be determined by future negotiations. However, Tymoshenko
appeared dissatisfied with parts of the accord. She remains determined to eliminate
RosUkrEnergo as soon as possible. The Ukrainian government made significant
unilateral changes to the agreement, including barring RosUkrEnergo from the
profitable practice of re-exporting Central Asian gas from Ukraine to other markets.
Gazprom has said that Ukraine will have to pay world market prices for its gas
in 2009, as a result of Gazprom’s agreement with Central Asian countries to pay full
price for their supplies. This could cause the price Ukraine pays for gas to more than
double next year, dealing a heavy shock to Ukraine’s economy, which is already
suffering from high inflation. Tymoshenko is likely to try to resist a sharp price
increase and is seeking a steep rise in transit fees from Gazprom. The clash could
result in further “gas crises” later this year.
Russia still hopes to achieve its long-standing goal of owning a controlling stake
in Ukraine’s natural gas pipelines and storage facilities. At present, more than two-
thirds of Russian gas exports to Europe (a critical source of revenue for the Russian
government) transit Ukraine. In February 2007, Putin announced that he and then-
Prime Minister Yanukovych had agreed on joint Russian-Ukranian control of
Ukraine’s natural gas assets, in exchange for a Ukrainian stake in Russian natural gas
fields. However, this statement provoked a strongly negative reaction in Ukraine,
and in February 2007 the parliament approved a law banning any transfer of control
of the pipelines by a vote of 430-0. Russia has tied possible support for building new

7 Roman Kupchinsky, “Russia/Ukraine: Pipeline Conflict Resurfaces,” Radio-Free Europe
Radio Liberty Newsline, June 28, 2007.

pipelines in Ukraine to greater Gazprom ownership of Ukraine’s pipeline system.
Russia is also working on developing new energy export routes through the Baltic
Sea (Nord Stream) and the Balkans (South Stream) to western Europe that could
bypass Ukraine in four to five years, at least in part. If successful, these efforts could
reduce Ukraine's leverage over Russia on energy issues.
NATO Membership. Russian-Ukrainian relations have been strained by
Kiev’s desire to join NATO. Russian leaders were angered when the April 2008
NATO summit in Bucharest said that Ukraine will join NATO at some point in the
future. According to Russian press accounts, President Putin reportedly told
President Bush and NATO leaders that Ukraine was not a real state, given its regional
heterogeneity, and that it would cease to exist if it joined NATO.
On April 8, 2008, Russian Foreign Minister Sergei Lavrov said Russia would
do all that it could do to prevent NATO membership for Ukraine. On April 11, Chief
of the Russian General Staff General Yuriy Baluyevsky warned that Russia would8
take military and “other measures” if Ukraine joined NATO. Non-military
measures could include economic sanctions and efforts to encourage secessionist or
other centrifugal forces in eastern and southern Ukraine, especially the Crimea.
Russia could make territorial claims against the city of Sevastopol in Crimea (where
Russia has a naval base) or the Crimean peninsula as a whole. Russia is upset that
Ukraine has rejected Russian proposals to extend the Russian Black Sea Fleet’s stay
in Crimea beyond 2017. On the contrary, Ukraine wants to start talks on preparing
for the withdrawal of the Fleet, so as to prepare a smooth transition in 2017.
In June 2008, the Russian Duma (lower house of the parliament) passed a
resolution asking the government to consider suspending the 1997 friendship treaty
between Russia and Ukraine, if Ukraine receives a MAP. Such a move could be
perceived as withdrawing recognition of Ukraine’s borders by Russia. Also in June,
Deputy Russian Prime Minister Sergei Ivanov during a visit to Sevastopol warned
that Ukrainian membership in NATO would lead to a severing of military ties,
reduced trade and industrial cooperation, and the introduction of visas for Ukrainians
traveling to Russia.
U.S. Policy
U.S. officials supported the “Orange Revolution” in Ukraine in late 2004 and
early 2005, warning the former regime against trying to impose fraudulent election
results, and hailing Yushchenko’s ultimate victory. President Yushchenko visited the
United States from April 4-7, 2005 and had meetings with President Bush and
Secretary of State Rice. Yushchenko’s address to a joint session of Congress on April
6 was interrupted by several standing ovations. U.S. officials have remained upbeat
about Ukraine’s successes in some areas, such as finishing the steps needed to join
the WTO, holding largely free and fair elections, and improving media freedom,

8 Jamestown Foundation Eurasia Daily Monitor, April 14, 2008, Radio Free Europe/Radio
Liberty Daily Report, April 9, 2008, and Agence France Presse wire dispatch, April 11,


while acknowledging difficulties in others, such as fighting corruption, establishing
the rule of law, and constitutional reform.
President Yushchenko withdrew Ukraine’s troops from Iraq in December 2005,
in fulfillment of a campaign pledge, but promised to continue participation in Iraqi
troop training efforts. Ukraine has not contributed troops to Afghanistan, at least in
part due to bad public memories of the Soviet occupation of Afghanistan in the

1980s, but has supported a provincial reconstruction team.

The United States has taken steps to upgrade its economic relations with
Ukraine. On January 23, 2006, the United States reinstated tariff preferences for
Ukraine under the Generalized System of Preferences (GSP). Ukraine lost GSP
benefits in 2001 for failing to protect U.S. intellectual property, particularly CD and
DVD piracy. U.S. officials hailed Ukraine’s efforts to improve its record on this
issue. On March 6, 2006, the United States and Ukraine signed a bilateral agreement
on market access issues, a key step in Ukraine’s effort to join the WTO. U.S.
officials said that Ukraine committed itself to eventual duty-free entry of U.S.
information technology and aircraft products, as well as very low or zero duty on
chemical products. U.S. firms will also receive more open access in such areas as
energy services, banking and insurance, telecommunications, and other areas. The
bilateral agreement addressed other key concerns such as protection of undisclosed
information for pharmaceuticals and agricultural chemicals, imports of information
technology products with encryption, the operation of state owned firms based on
commercial considerations, and reduction of export duties on non-ferrous and steel
The Administration was sharply critical of Russia’s behavior during the January
2006 natural gas standoff between Russia and Ukraine. State Department spokesman
Sean McCormack criticized Russia for using “energy for political purposes.” He
stressed that while the Administration supported a gradual increase in prices to
market levels, it disagreed with a “precipitous” increase and cutoff. Secretary of
State Condoleezza Rice likewise on January 5 stated that Russia had made
“politically motivated efforts to constrain energy supply to Ukraine.”9 In May 2006,
Vice President Dick Cheney characterized Russia’s energy policy toward vulnerable
countries as “blackmail” and intimidation.”10 A State Department spokesman
reiterated U.S. opposition to the use of energy supplies as a political weapon after the
March 3-5, 2008 gas supply incident.
The United States has favored helping Ukraine and other countries reduce their
dependence on Russian energy supplies. The United States has advocated extending
an existing oil pipeline that currently runs from the oil terminal at Odesa in Ukraine
to Brody, on the Polish border. This pipeline could then be extended to Gdansk in
northern Poland. However, the project remains stalled due to a lack of financing.

9 The State Department. Statement, January 1, 2006; Daily Press Briefing, January 3, 2006;
Secretary Condoleezza Rice, Remarks at the State Department Correspondents Association’s
Breakfast, January 5, 2006.
10 “Vice President’s Remarks at the Vilnius Conference,” May 4, 2006, from the White
House website [].

U.S. officials called on Ukrainian leaders to resolve peacefully the political
crisis caused by President Yushchenko’s April 2, 2007, decree dissolving parliament
and calling new elections. The State Department issued a statement welcoming the
May 2007 agreement to hold early parliamentary elections on September 30, 2007
as demonstrating the “resiliency of Ukrainian democracy,” but stressed that the
country still needed to clearly define the roles of the executive, legislative, and
judicial branches of government. U.S. officials said they agreed with OSCE
assessments that the September 2007 parliamentary elections were conducted mostly
in line with international standards.
President Bush visited Kiev on April 1, 2008. He offered “strong support” for
Ukraine’s request to receive a Membership Action Plan from NATO at the Bucharest
summit. He praised Ukraine for its contributions in Iraq, Afghanistan, and Kosovo,
noting that Ukraine is the only non-NATO country supporting every NATO mission.
He praised Ukraine’s commitment to democratic values and open markets, and
offered continued U.S. support to fight corruption, support civil society groups and
strengthen Ukraine’s institutions. The two sides also signed a “roadmap” for
strengthening bilateral ties in many areas, including trade and investment, energy
security, defense cooperation, technology and space cooperation, among other
Although the United States was unsuccessful in persuading NATO to give
Ukraine a MAP at the Bucharest summit, Administration officials said that they
hoped Ukraine would receive a MAP as early as the NATO foreign ministers meeting
in December 2008. They hailed NATO’s commitment in the summit communique
to grant Ukraine membership in the future.
The Administration sharply criticized Russia’s military actions in Georgia in
August 2008. On September 5, Vice President Cheney visited Ukraine, as part of a
tour to bolster U.S. allies in the region. Other stops included Azerbaijan and Georgia.
After a meeting with President Yushchenko, Cheney stressed the U.S.’s “deep and
abiding interest” in Ukraine’s security. He said Ukraine should be free of “threat of
tyranny, economic blackmail, or military invasion or intimidation” in the region. He
said Ukraine’s “best hope to overcome these threats is to be united -- united
domestically first and foremost, and united with other democracies."12 Cheney and
U.S. officials have reiterated the U.S. rejection of Russian claims to a sphere of
influence in the region and continue to express support for granting Ukraine a MAP.
Congressional Response
During the Ukranian presidential election campaign and during the ensuing
electoral crisis, the 108th Congress approved legislation calling for free and fair
elections in Ukraine and urged the Administration to warn Ukraine of possible

11 Transcript of Bush-Yushchenko press conference, April 1, 2008, from the White House
website at [].
12 “Remarks by Vice President Cheney and President Yushchenko of Ukraine After
Meeting,” September 5, 2008 from the White House website,
[ ht t p: / / www.whi t e news/ r el eases/ 2008/ 09/ pr i nt / ml ] .

negative consequences for Ukraine’s leaders and for U.S.-Ukraine ties in the case of
electoral fraud. The 109th Congress passed resolutions after President Yushchenko
was inaugurated. On January 25, 2005, the House passed H.Con.Res. 16 and the
Senate passed S.Con.Res. 7 on the 26th. The identical resolutions included clauses
congratulating Ukraine for its commitment to democracy and its resolution of its
political crisis in a peaceful manner; congratulating Yushchenko on his victory;
applauding the candidates, the EU and other European organizations and the U.S.
Government for helping to find that peaceful solution; and pledging U.S. help for
Ukraine’s efforts to develop democracy, a free market economy, and integrate into
the international community of democracies.
Congress has also dealt with the issue of U.S. aid to Ukraine. The FY2005 Iraq-
Afghanistan supplemental appropriations bill (P.L. 109-13) provided $60 million in
aid to help the new government in the run-up to the March 2006 parliamentary
election. Including funds appropriated in FY2005 foreign operations appropriations
legislation, Ukraine received $156 million in U.S. assistance in FY2005.
The FY2006 foreign operations appropriations legislation (P.L. 109-102)
provided $84 million in Freedom Support Act (FSA) funds to promote reforms in
Ukraine. Five million of that amount was earmarked for nuclear safety initiatives and
$1 million for mine safety programs in Ukraine. Total FY2006 U.S. aid to Ukraine
was $100.1 million. In addition to Freedom Support Act funds ($82.16 million were
actually allocated in FY2006, according to the Administration), Ukraine received
$2.18 million in Child Safety and Health (CSH) funds; $10.89 million in Foreign
Military Financing (FMF); $1.75 million in IMET military training funds; and $3.1
million in NADR funding to fight terrorism and proliferation.
Congress did not pass an FY2007 foreign operations bill, instead approving a
continuing resolution (P.L. 110-5). In FY2007, U.S. aid to Ukraine was $96.5
million. Of this total, $80 million was in FSA funding, $9.5 million in FMF, $2.17
million in Child Survival and Health funding, $1.86 million in IMET, $1.36 million
in NADR, and $1.63 million in Global HIV/AIDS Initiative funding. The
Administration estimates FY2008 funding for Ukraine at $82.9 million. Of this
amount, $72.4 million is in FSA, $4.7 million in FMF, $2.1 million in NADR, $1.81
million in IMET, and $1.9 million in CSH.
For FY2009, the Administration requested a total of $86.48 million in aid for
Ukraine. Of this amount, $67.58 million is slated for FSA, $8 million for FMF, $5.4
million for CSH, $1.8 million for NADR, and $1.75 million for IMET. The
committee report for the FY2009 State-Foreign Operations appropriations bill (S.

3288) recommends $71.575 million in FSA aid for Ukraine.

U.S. aid to Ukraine is focused on anti-corruption and rule of law efforts,
stopping trafficking in persons, media and civil society development, energy sector
reform, and fighting HIV/AIDS. Aid will help Ukraine prepare for presidential
elections in 2010 and improve local governance, particularly in eastern and southern
Ukraine. The United States also seeks to increase exchange programs between the
two countries. Other programs include efforts to help Ukraine implement WTO
accession, encourage the growth of small business, strengthen export and border
controls, assist defense reform and interoperability with U.S. and NATO forces. In

2005, the Millennium Challenge Corporation (MCC) selected Ukraine for
Millennium Challenge Account (MCA) Threshold status. MCC funding in Ukraine
is focused on fighting the country’s severe corruption problem. In November 2006,
Ukraine was made “compact-eligible” by the MCC board. The MCC will spend
about $45 million on anti-corruption efforts over the next two years.13
Congress dealt with a long-standing stumbling block in U.S.-Ukrainian relations
by passing legislation to terminate the application of the Jackson-Vanik amendment
to Ukraine, granting the country permanent Normal Trade Relations Status. On
March 8, 2006, the House passed H.R. 1053 by a vote of 417-2. It was approved by
the Senate by unanimous consent on March 9, and was signed by the President on
March 23.14
On April 17, 2007, Representative Hastings introduced H.Con.Res. 116, which
called on all sides in Ukraine’s political crisis to solve the issue peacefully and in
accordance with the rule of law. The resolution reaffirms U.S. support for Ukraine’s
transition to democracy and a free market economy, as well as for the country’s
independence, sovereignty, and territorial integrity. A Senate version of the
resolution (S.Con.Res. 30) was introduced by Senator Dodd on May 2. On July 23,
Mr. Hastings introduced H.Con.Res. 189, which called on Ukrainian leaders to abide
by the May 27 agreement to hold new parliamentary elections, and to hold those
elections in accordance with OSCE standards.
On September 21, 2007, the Senate passed S.Res. 320. The resolution expresses
hope that Ukraine will hold its September 30 parliamentary vote in a way that is
consistent with OSCE standards, urges Ukrainian leaders to work together to solve
Ukraine’s problems, and pledges continued U.S. friendship for and assistance to
Ukraine. On October 4, Mr. Hastings introduced H.Res. 173, which congratulated
Ukraine on conducting the September 30 elections in accordance with OSCE
standards and pledging continued U.S. support for Ukraine’s efforts to achieve a
democratic political system, a free market economy, and full integration with the
Congress has expressed support for Ukraine’s possible membership in NATO.
The NATO Freedom Consolidation Act was passed by the Senate on March 15,
2007, and the House on March 26. The bill (S. 494) expresses support for further
enlargement of NATO and authorizes U.S. aid to Ukraine to assist it in preparing for
possible NATO membership. President Bush signed the bill into law on April 9 (P.L.
110-17). On February 14, 2008, the Senate passed S.Res. 439, which expresses the
“strong support” of the Senate for a MAP for Ukraine and Georgia. On February 25,

2008, Representative Wexler introduced H.Res. 997, the House version of S.Res.

439. It was passed by the House on April 1, 2008.

13 FY2009 Congressional Budget Justification for Foreign Operations, from the State
Department website, [].
14 CRS Report RS22114, Permanent Normal Trade Relations (PNTR) Status for Ukraine
and U.S.-Ukrainian Economic Ties, by William H. Cooper.

After the NATO summit, the Senate passed S.Res. 523 on April 28. The
resolution expresses the “strong support” of the Senate for the statement of the Allies
at the Bucharest summit that Ukraine and Georgia will become members of NATO.
It also urges NATO to grant a MAP to Ukraine and Moldova at the NATO foreign
ministers’ meeting in December 2008. On May 19, the Senate passed S.Res. 570,
which reiterated the Senate’s strong support for Ukraine and Georgia’s NATO