Poland, Belarus & Ukraine Report: February 4, 2003

POLAND PROPOSES EU'S NEW EASTERN POLICY. Polish and international media reported last week that Poland, following a commission from the Danish EU Presidency last year, has proposed a paper outlining the expanded EU's new policy with regard to its eastern neighbors: Ukraine, Belarus, Moldova, and Russia. Polish Foreign Ministry official Pawel Swieboda told journalists that the document was sent in early January to the foreign ministries of the 15 EU, the 10 EU-candidate countries, and to the four future EU neighbors. The European Commission is reportedly expected to publish the document in mid-March.

"We postulate the intensification of political dialogue [with the four future neighbors] in the context of security and foreign policy," Swieboda told PAP. "Such states as Ukraine have a lot to contribute, for instance in the resolution of conflicts in neighboring regions of the world, including the Dniester area."

Swieboda said the document also includes a proposal for a gradual liberalization of trade between the enlarged EU and its eastern neighbors but makes this proposal conditional on economic and political reforms in the four countries. Other inducements in the paper include the "long-term perspective" of EU membership and the establishment of a "European democracy fund," which would work through local nongovernmental organizations to promote democratic values in the region. Poland also proposes the creation of an European Peace Corps, modeled on the American Peace Corps. Warsaw believes that these initiatives will help eradicate "divisions between the enlarged EU and its eastern neighbors."

Ukrainian Deputy Foreign Minister Oleksandr Chalyy said last week that Ukraine was satisfied with the Polish plan for a new EU eastern policy. According to Chalyy, the plan assumes, first, that Ukraine will have an open road toward integration with the EU; second, that Ukraine may sign an accord on association with the EU in the future; and third, the document does nor preclude Ukrainian membership of the EU. (Jan Maksymiuk)

DID WARSAW COMPREHEND WHAT IT NEGOTIATED WITH BRUSSELS? The European Commission on 27 January ruled out any possibility of introducing changes to final agreements on agriculture reached between Poland and the European Union in Copenhagen in December (see "RFE/RL Poland, Belarus, and Ukraine Report," 17 December 2002). The commission was reacting to letters to EU leaders from Premier Leszek Miller who expressed his concern over the difference between what the Polish leader believes was agreed to in Copenhagen and what the EU is now seeking to include in the accession treaty. The Polish side maintains that it negotiated a simplified system of direct farm subsidies based on farm size irrespective of the type of production. "Now [EU] experts are trying to persuade us into introducing a twofold system [of direct farm subsidies]: a simplified one and a standard one," PAP quoted Miller as saying.

According to what Miller triumphantly advertised in the media after his return from the Copenhagen summit to Warsaw, the new EU members will get 25, 30, and 35 percent of the full EU farm subsidies in 2004, 2005, and 2006, respectively; these sums will be enlarged with 20 percent of the money from rural-development funds, which will increase the effective subsidies to 36, 39, and 42 percent of the EU level, respectively. Miller actually negotiated the right of EU aspirants to increase these subsidies to the level of 55, 60, and 65 percent from their domestic budgets. The understanding of the Polish side was that Polish farmers will get these subsidies based on farm size, while media have recently suggested that Brussels is working on an accession treaty in which these subsidies will be paid to levels of 25 percent, 30 percent, and 35 percent based on farm size, while the remainder will be paid, if ever, based on productivity. The EU subsidizes the production of grain, oil-bearing plants, cattle, and ships but does not financially support the raising of pigs, or the growing of potatoes and sugar beets.

Last week, the fiercely anti-EU League of Polish Families (LPR) requested that Sejm speaker Marek Borowski call a parliamentary debate at which the government will present the "true results" of its EU-membership negotiations at the EU summit in Copenhagen. According to LPR leader Roman Giertych, the information presented by Premier Leszek Miller immediately after the EU summit was either untrue, Miller "did not understood the content of the agreement he initialed," or "the EU is now cheating and introducing other provisions than those agreed upon in the negotiations." According to Giertych, the difference between the EU direct subsidies based on farm size and those paid under a mixed system would amount to $5 billion over two years to the detriment of Polish farmers.

Another opposition party, Law and Justice (PiS), demanded that the government make public what was agreed on at the EU summit. "We are indignant over the fact that these texts have not been made available at least to parliamentary caucus heads and the [parliamentary] Commission for European Integration," PiS lawmaker Michal Kaminski told journalists. Kaminski added that the recent Polish-EU controversy over the outcome of negotiations regarding direct subsidies to farmers should be resolved as soon as possible "because its protraction may suggest that the international position of Leszek Miller's government is so poor that it has been fooled by its partners from Brussels."

European Affairs Minister Danuta Huebner said on 30 January that the government has until March 2004 to select a system for calculating direct EU subsidies for farmers. Huebner appears to have modified her statement from the previous day, when she said the government must decide on this issue by the evening of 31 January, when editing of the text of the accession treaty is to be completed in Brussels. Huebner confirmed that the government continues to favor the simplified system but did not rule out the possibility that this stance might change. "There are ever more voices and experts' reports demonstrating the great benefits of this mixed system, [which] is, in fact, a dream come true for the Polish situation, since it would allow for the linking together of support for small farms that do not always produce for the market...with those farmers who have advanced production in the areas that are included in the direct payments system," she added. (Jan Maksymiuk)

WHAT'S PAINFUL ABOUT DOING BUSINESS IN BELARUS? The Minsk-based Institute of Privatization and Management, in cooperation with the U.S. Center for International Private Enterprise (CIPE), conducted a poll among Belarusian entrepreneurs in October to discover the most difficult problems they face in pursuing business activities in Belarus, Belapan reported last week. The respondents, whose number was not reported, were requested to ascribe an integer value from the range of 1 (no problem) to 5 (the largest problem) to each item on a previously compiled list of potential problems. The poll found that the five top problems of Belarusian private businesses are: too many taxes (4.49), unstable legislation (4.44), frequent changes in tax accounting (4.44), excessive tax rates (4.42), too many legislative changes (4.24).

The poll also found that an average enterprise in Belarus needs to get three licenses to pursue its activities. The number of required licenses increases with the number of employees in a given enterprise. Thus, a company employing more than 200 people needs at least nine licenses to be operational.

Asked about what is necessary to advance the development of private businesses in Belarus, respondents responded that lower taxes (80.4 percent of respondents), improved legislation for small businesses (52.4 percent), simplification of registration, licensing, and other procedures that block access to the market (40.7 percent), and developing a system of financial support for small businesses (38.6 percent). (Jan Maksymiuk)

LUKASHENKA TIGHTENS THE SCREWS ON TRADE EVEN FURTHER. Belarus took yet another series of steps towards stifling private businesses when, at the beginning of the year, President Alyaksandr Lukashenka signed two decrees on state regulation of the production, distribution, and advertisement of tobacco and alcohol products. The decrees de facto nationalize this business sphere, as companies willing to engage in it and obtain or confirm their licenses must obey tightened regulations concerning the size of their business, statutory capital, price policy, creditworthiness, and the ability to obtain bank guarantees, etc. Some of the key business decisions concerning the level of production, imports, and pricing policy are transferred into the competence of regulatory bodies. The new regulations also establish severe punishments for violations of the decrees, which in most cases lead to huge fines, revoking a license, confiscation of property, or imprisonment. Independent analysts believe that the decrees will effectively wipe out small private companies engaged in the sector, as it is highly unlikely that anybody except for large state-owned trading firms with good connections to the authorities will be able to fully obey the new rules. Moreover, new advertisement rules effectively disable the promotion of new brands, which will only add to a further monopolization of the sector.

Another blow came on 27 January, when Lukashenka called upon his government to monopolize the country's foreign trade by closing down private companies that control export-import operations for large state-run industrial conglomerates. He justified his demand by the necessity to get rid of "intermediaries" who, in his opinion, are merely an instrument for the accumulation of profits in private hands and hiding them from state coffers. "If I had this money, I would have been able to build many hospitals, apartments, or sports facilities," Lukashenka said in a televised speech. He demanded that by 2 April all such intermediaries be closed down and foreign trade be carried out exclusively under the auspices of large state-owned dealers. He threatened to imprison his ministers should they fail to fulfill this order.

Lukashenka justified his decisions with the findings of the State Monitoring Committee, which discovered several hundred cases of tax evasion, illegal price-setting practices, and the so-called "false entrepreneurial activities" of private companies engaged in export-import operations. These companies, the president claimed, were not able to account for a large share of the profits from their activities, which resulted in massive tax evasion and capital flight. The violations are especially widespread in the alcohol sector, where 132 out of 169 private dealers subject to inspection admitted violations of the law. Lukashenka specifically mentioned the principal exports of Belarus (potash fertilizer, timber, tractors) and so-called "critical-import goods" (sugar, oil, cars, tobacco) as areas where no private intermediaries should be tolerated. His orders have already begun to be fulfilled. Thus, imports and the processing of fish was monopolized by the Presidential Administrative Department several weeks ago.

The Belarusian president's claim that his new policies will help reduce prices and increase budget revenues find little sympathy with independent experts, who expect the destruction of established trade links, bankruptcy for companies and their contractors, the failure of investment projects in the alcohol and tobacco sectors, and price hikes due to the stifling competition. There is also little doubt that limiting the access of private companies to the market will result in an expansion of the shadow economy and create new corruption opportunities. The new trade rules, however, are remarkable since they continue a sequence of policies that together form the government's course toward fulfilling its social obligations and maintaining a reasonable level of economic activity in the conditions when a deep crisis in the production sector (over 40 percent of the total number of industrial firms in Belarus are loss-making) creates serious problems in the collection of budget revenues. Belarusian authorities respond to these problems through the monopolization of export-oriented sectors, foreign trade, and trading in alcohol and tobacco products.

Since Belarus does not possess a large amount of natural resources (except for potash fertilizer and timber), its primary target is to profit from other hard-currency activities (such as transit, the exploitation of national faunal and floral reserves, the production of folk crafts, timber, etc.), many of which have been monopolized by the Presidential Administrative Department since Lukashenka came to power in 1994. Revenues from most of these activities went to the so-called "presidential fund," a shadow budget whose size and operations remain a top secret.

One year ago, Belarus sharply increased dues for imports of goods for private use and consumption and limited the duty-free amount of goods a private person may carry upon arrival to the country to 50 kg of industrial goods and 10 kg of agricultural products (cross-border shuttle trade has become widespread in Belarus since prices for most industrial and agricultural goods surpass those in the neighboring countries). The impact of these regulations can be appraised by a great number of shops and even department stores specializing in selling confiscated goods in Minsk and regional centers. As of today, about one-third of the total national budget is generated, according to official reports, by the Belarusian customs authority. This exceeds the revenues from personal- and corporate-income taxes combined.

The government's drive to monopolize rent seeking activities has important implications for the Russia-Belarus integration. The real monopolization of foreign trade can come only when the Belarusian government resumes full control over the border with its eastern neighbor. The growing significance of customs as a primary source of revenue for the national budget makes it unlikely that Lukashenka will acquiesce with the transfer of authority over customs and tariffs to Russia or a union body, or will take any realistic steps toward convergence of the tariff regimes. It is noteworthy that the government has recently decided to establish and strengthen customs checkpoints at the border with the Russian Federation to curb shuttle trade and smuggling.

(By Vital Silitski, an associate professor at the Department of Economics at European Humanities University, Minsk.)

DOES UKRAINE RETURN TO YOUNGER-BROTHER STATUS? The well-known American Sovietologist John Armstrong wrote that in the post-Stalin era Ukrainians became Russia's "younger brothers" (John A. Armstrong, The Soviet Bureaucratic Elite. A Case Study of the Ukrainian Apparatus, New York, Praeger, 1959.) As "younger brothers," Ukrainians would migrate and follow Russians into different regions of the USSR, such as Kazakhstan, Moldova, Estonia, and Latvia, where they would help entrench Soviet power. Soviet historiography had promoted the view that Kyiv Rus was the common "cradle of the three fraternal Slavs." The ultimate goal of the new Homo Sovieticus was understood as a return to this once mythical unity in Kyiv Rus.

Ukrainian-Russian relations are now returning to many of these ideological positions, as encapsulated in the slogan "To Europe With Russia!" The newly opened Year of Russia in Ukraine website is captioned: "From common origins to common goals."

Events last week at the hastily organized and poorly attended CIS summit in Kyiv confirms that the Soviet-era mindset of a "younger brother" is still entrenched in Ukraine's ruling elites. On 29 January, Ukrainian President Leonid Kuchma was elected head of the Council of CIS Heads of States, the first non-Russian to hold this position. Although the position is supposed to be rotated between CIS leaders each year according to the Russian alphabet, it has always been held by Russia.

On the eve of the CIS summit, Ukrainian Ambassador to Russia Mykola Biloblotskyy said in an interview in "Nezavisimaya gazeta" that the Year of Russia in Ukraine should be used by both countries to "strengthen their cooperation in the international arena in the political, economic, and humanities spheres." Biloblotskyy added that, "We are moving together in one direction; true, one of us quicker and the other slower."

This ignores the fact that Ukraine and Russia have incompatible goals towards NATO -- only Ukraine seeks membership. Russian Ambassador to Ukraine Viktor Chernomyrdin was perplexed as to why Ukraine desires NATO membership: "What does it [Ukraine] want to receive in exchange? We have no idea." Ukraine and Russia are obviously not moving together towards NATO in tandem.

Acceptance of a "younger-brother" status was only forthcoming after Russia finally recognized Ukraine's sovereignty and territorial integrity. At the CIS summit, Ukraine and Russia signed a treaty on the state border between the states. According to Kuchma, this should end all speculation about "Russia's imperial ambitions."

The treaty only refers to their 2,063 kilometer land border as both sides still disagree about the Sea of Azov. Ukraine demands that the shelf and water be divided while Russia believes it should remain as a joint "internal lake." Delimitation of the border has been taking place since 1998 but Russia has remained opposed to its eventual demarcation.

Besides the border treaty, the sides signed other documents on cooperation between their Border Troops, culture ministries, youth groups, and information agencies. Russian Minister of Culture Mikhail Shvydkoi said in Kyiv that the Year of Russia in Ukraine will "preserve and enrich" the "close cultural cooperation between our peoples," adding that, "There is a great need for Russian actors, films, and music in Ukraine, and for Ukrainian ones in Russia." Ukraine already has no shortage of imported Russian folk and pop culture, books, and media publications. In Russia no such Ukrainian equivalents are to be found, even after the Year of Ukraine in Russia has ended.

Ukraine is ready, Kuchma said, to "open its doors to representatives of Russian culture, science, and business." This reflects the growing support from Kuchma and pro-presidential oligarchs of Russian investment in Ukraine's economy. Putin and Kuchma referred to their joint transitions from the same state as a reason for close cooperation. "We are strengthening institutions of democracy and civil society," Putin said. In reality, Russia's influence on democratization processes in Ukraine and other CIS states is negative, a reflection of authoritarian trends evident inside Russia.

Legal niceties did not prevent Kuchma from becoming the head of the CIS. Ukraine is not legally a member of the CIS because it never ratified the CIS Charter. Ukraine is only a "participant country" of the CIS.

What factors, other than returning to the status of a "younger brother," are behind Kuchma's election? According to Our Ukraine Deputy Mykola Tomenko, Kuchma sees the new CIS position as an escape mechanism in case he calls early presidential elections. Heading the CIS would provide Kuchma with psychological, moral, and financial support after he steps down and seeks immunity from prosecution.

Russia has given up the position of head of the CIS for the first time with a view to cementing expanding ties, such as those between Gazprom and Naftohaz Ukrayiny through the Russian-Ukrainian gas consortium. The consortium provides unprecedented access to funds that can be laundered abroad and then rechanneled back to Ukraine and Russia for use as election slush funds.

Russia continues to pressure Ukraine to join the Eurasian Economic Community (EEC) that brings together six CIS states. According to Putin, Ukraine's membership would allow the creation of the long held Ukrainian goal of a free-trade regime with Russia. As Putin argued, with Ukraine a member of the EEC, "We shall then be able to eliminate a number of obstacles and problems."

(This report was written by Dr. Taras Kuzio, resident fellow, Centre for Russian and East European Studies, University of Toronto.)

"There is nothing extraordinary [in Leonid Kuchma's appointment as CIS leader]. According to the CIS Charter, there should be a rotation of the post every year according to the Russian alphabet unless the Council of CIS Heads of State decides otherwise. In this case, it was decided otherwise. Russia should have been followed by Tajikistan. So we asked [Tajik President] Imomali Rakhmonov point blank. It was my proposal since there was a moral aspect in this, since he [Rakhmonov] is our colleague and the charter stipulated [that it was his turn to head the CIS]. If he agrees to give up his turn in favor of Ukraine, there are no problems. He agreed to that. So Ukraine will head the Council of CIS Heads of State in 2003." -- Belarusian President Alyaksandr Lukashenka; quoted by Belarusian Television on 31 January.

"Why did Putin elect Kuchma as head of the Council of CIS Heads of State? First, to cover Russian economic, informational, and spiritual expansion with regard to Ukraine. Second, to cast doubt in the West on Ukraine's policy of European choice. Third, to finally ruin GUUAM. To what will Kuchma apply his energy -- developing CIS or GUUAM -- while being in the post of CIS leader?" -- Our Ukraine lawmaker Ivan Zayets in an interview with RFE/RL's Ukrainian Service on 30 January.

"The election of Leonid Kuchma as head of the Council of CIS Heads of State is an attempt at answering the question about how to restore the prestige of Ukrainian authorities, at least, in the CIS territory.... [This is] a rather symbolic post since the CIS is an amorphous association in which declarations are not filled with substance.... As is known, the president has not signed and the Ukrainian parliament has not ratified the CIS charter. So there is [also] a question whether Kyiv's vote in the Council of CIS Heads of State is legally valid." -- Our Ukraine leader Viktor Yushchenko; quoted by the Our Ukraine website (http://www.razom.org.ua/) on 31 January.