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24 February, 2012  ▪  Спілкувався: Dmytro Hubenko,  Oleksandr Kramar

Diplomatic Advice

Wolf Dietrich Heim, Ambassador Extraordinary and Plenipotentiary of the Republic of Austria in Ukraine, talks to The Ukrainian Week about cooling relations between the EU and official Kyiv, the prospects of Austrian banks in Ukraine and the future of the eurozone

U. W. Austria has a long history of relations with Ukraine. Does Austrian society realize today that Ukraine is not Russia? Does it see our country as part of Europe?

Indeed, Austria has a long history of relations with large parts of Western Ukraine which used to belong to the Austro-Hungarian Empire from the late 18th century up to WWI, like Eastern Galicia (a former Polish province) and Bukovina (part of Moldova or the Ottoman Empire) or Carpatho-Ukraine, a former part of Hungary. In the late 19th and early 20th century, a generation of Ukrainian politicians, journalists and intellectuals, among them personalities like Ivan Franko, got to know the old Austrian parliamentary system, the rule of law and freedom of press.

Many Austrians kept a certain nostalgia for university towns like Lviv (Lemberg) and Chernivtsy (Czernowitz), but after 1918 these regions became distant and inaccessible. Thanks to arts and literature and in particular to authors like Joseph Roth, the history and life in Galicia would also reach a wider Austrian audience in the 20th century.

Ukraine reemerged in the overall perception in Western Europe only after the break-up of the Soviet Union. With the independence of Ukraine in 1991, Kyiv became known more and more as a European capital. The Orange Revolution contributed again to raise awareness. In 2012, the Euro soccer championship offers great opportunities for Ukraine to be better known by many young people who know too little about one of Europe's largest countries. This is a unique opportunity not to be missed.

U. W. Austria is the Western European country which has traditionally been the most open towards the East. Is there some understanding in the Austrian political class of how important it is to attach Ukraine to the rest of Europe? 

 There seems to be a large consensus among the political parties in the Austrian parliament with regard to relations with Ukraine. We attach great importance to events and developments in Ukraine, and there is a lot of support for drawing Ukraine closer to the EU, to approximate legislation and implement European duties and values. In line with EU policies, we are happy to provide all kind of advice, expertise and support in every area where Ukraine wishes to make use of it. In the course of the last year, however, in Austria as well as in other EU countries, some people have had some doubts about Ukraine’s commitment to European values and standards.

U. W. Ukraine has been heading the Central European Initiative now since January 1, 2012. Austria traditionally plays the leading role in this organization. What possibilities does CEI provide in facilitating Ukraine's integration into the EU?

The CEI is the largest and oldest intergovernmental forum for regional cooperation in Europe. It encompasses 18 countries of different sizes and economic strengths, historical and political background. Half of them are European Union member states, soon 10 with Croatia likely to join next. The other CEI members are “neighbours” in close cooperation (as candidates or potential candidates). The CEI is committed to supporting good-neighbourly relations, stability, security and prosperity of the countries in the region, enhancing economic and social cohesion in both the present and a future, enlarged Union. The CEI activities are devised in particular to assist in bringing its countries closer to the EU.

The real strength of the CEI is that it has succeeded in turning the diversity among its countries into an added value. It has created a sense of ownership of the various mechanisms of cooperation by each of its Member States, and in doing so strengthens their cooperation and commitment to assist each other in the goal of drawing closer to the EU. The CEI is now a champion of regional cooperation for European integration. Moreover, with access to three seas (the Baltic, the Adriatic and the Black Sea) and with the Danube River in the middle, the CEI is perfectly suited to act as a bridge between macro regions. It already offers its own input to the EU Strategy for the Danube Region (EUSDR) in areas such as transport, sustainable energy and research and looks forward to contribute to other possible strategies.

As far as institutional structures are concerned, it should be noted that the new formula of sharing competences between the Secretariat of the CEI and the Presidency, namely the MFA Meeting in Trieste and the CEI Summit in the country holding the presidency, worked well last year with the Serbian Presidency and contributed to the overall success and visibility of the organization. We are encouraged that this format will be kept by the Ukrainian Presidency.

U. W. How far do you think the process of cooling the relations between the EU and Ukraine can go, if Ukrainian authorities continue to ignore calls to stop political repressions and to honor human rights?

The obstacles on Ukraine's path towards European integration are not only individual cases of former members of government being prosecuted and prevented from political activities. If democratic values and the overall rule of law are not respected, fostered and standards not improved, any declaration of intent to move Ukraine closer to the European Union will be perceived as not very credible.

U. W. Is the EU ready to have attitudes that differentiate between the authorities and the Ukrainian people?

It helps to take a look at another example, in Belarus the EU policies make a clear distinction between the government and related authorities on one hand, and civil society and the population in general on the other. Of course Ukraine is neither Belarus nor Russia. Yet, many leaders have been proven wrong in their assumption that certain measures cannot be sufficiently targeted, one way or another the population may suffer. This is a rather cynical approach.

If we take a look at visa liberalisation for instance. We are now in the first phase of a technical process, in which Ukraine is putting the required legislation in place. Here we see some delays, with regards to biometric documents and anti-corruption strategy and laws. 15 months after the EU-Ukraine action plan has been agreed, there is still no anti-corruption strategy or relevant laws. Once the required legal basis has been implemented, the second phase will start when the impact of the new legislation will be analysed.

We see that things cannot be rushed, if commitments are not implemented in time. Another extreme example is the commitments that Ukraine assumed when joining the Council of Europe 16 years ago (see recent edition), as the recent PACE resolution raised.

U. W. How active is Austrian business in Ukraine today? Is activity rising or declining?

According to the State Statistics Service of Ukraine, Austria is the fourth largest investor in Ukraine with a total of USD 3.54bn invested. This is one strong indicator of how active Austrian businesses are in Ukraine. Most Austrian investments are concentrated in the financial sector, almost all large Austrian banks and insurance companies were early foreign investors in those fields. Over the past few years, Austrian business activities have spread into many different sectors such as telecommunication, manufacturing (machinery as well as consumer products), car imports, catering services and food distribution, agriculture, real estate and also environmental services such as waste removal to name only a few.

However, due to the challenging business environment, many Austrian companies still prefer to simply trade with Ukraine rather than to invest in the country. During the recent financial crisis Austrian business activity in Ukraine also suffered albeit we only saw very few companies leaving the market for good. 2010 was definitely a year of recovery with further positive tendencies in volume and in terms of value. However, we are still below pre-crisis levels in trade volumes, while FDI has been growing continuously.

U. W. How could Ukraine improve its investment climate?

As anywhere else, investment is connected with risks. For a businessman the main risks he or she runs are – among others – economic, political and legal risks. Due to the global economic environment and mutual trading relations, it is difficult for any country alone to curb economic risk.

The risks in the political and legal sphere need to be seen mainly in a domestic context. This is where I would see the challenges that most foreign investors look at. With some likelihood the global economic environment will remain challenging for some time to come, so any country would be well advised to lessen political and legal risks.

With regard to Ukraine, the focus needs to be on measures strengthening the rule of law, fostering the independence of the judiciary and striving for a better balance between the judicial bodies. Few observers would say there has been much progress in this context recently.

U. W. During the last decade, Austrian banks were among the biggest investors in the banking sector of the Central and Eastern European countries, and Ukraine was no exception. But as the sovereign debt crisis was unfolding in the Eurozone's periphery, the Austrian government in November 2011 recommended such financial institutions as Erste Bank, Raiffeisen Bank etc. (which are present in the Ukrainian market) to limit their trans border credits. How substantial is the threat that in case of a deepening crisis in the EU these limitations may grow into divestment — the withdrawal of capital investment from those banks' Ukrainian subsidiaries?

As always, it is hard to say whether or not the global economy will improve soon, or whether or not the sovereign debt crisis in many western countries will deepen. To me it seems that many western countries still need to get things done to overcome the sovereign debt crisis. Austria is not directly exposed to great downward risks. Our public debt levels are relatively modest, but need to be gradually lowered from 72% of GNP to 60%. The Austrian public sector deficit has been much lower than those in most other EU countries even in the post-crisis years.

Nonetheless the Austrian Financial Market Authority is committed to establish limits of Austrian commercial banks’ credit lines in Central and European countries to a certain ratio credit/deposits. Most Austrian banks in Ukraine have limited exposure in this context, their credit portfolio is covered well by deposits, thus there is little currency risk or little need to refinance externally. These limitations as well as the uncertainty related with the sovereign debt crisis in some countries should not be interpreted as a withdrawal of capital investment from Ukrainian subsidiaries. The Austrian banks in Ukraine have the relevant experience, the right size, long term strategy and enough stamina to operate in the Ukrainian market.

U. W. Austria is one of the most stable countries in the Eurozone, and this means that it (as well as Germany or Netherlands) may become a donor for the Eurozone periphery. What is your opinion about the idea of turning the monetary union into a transfer union?

 Austria is a net payer to the EU budget. This means that in the framework of the wide range of EU programs our contribution to the EU budget is slightly larger than payments to Austrian farmers, enterprises, scientists and so on. This is a fairly complicated matter, as not all economic effects are depicted by payments. How much we pay annually into the EU budget is clearly established by budget laws. How much we get out of the EU budget is a dynamic, competitive issue. It depends on Austrian individuals as much as state institutions to make the best use of EU funds. Each year, large parts of the EU budget are not made use of by member states, because projects or policies are not defined in time, or are not sufficiently in line with EU law.

The other question is what the net total accumulated economic effect of our EU membership has been. Most experts agree that Austria has benefitted considerably from membership. This can be illustrated in several ways. Since 1995, the Austrian economy has grown considerably, has become much more competitive, has internationalized. Our exports – and most of our trade is conducted within the EU – have grown dynamically. Our external balance has been positive for years, while 20 years ago it was chronically negative. Over the last 10 years, our net FDI outflow has grown from zero to roughly €10bn annually, most of which has been invested in eastern Europe, very little in fact in southern Europe.

Before membership our market access was very limited, since EMU we conduct more than half of our trade within the euro zone, without barriers, without transaction costs, and without many of the risks that had to be hedged or considered in pricing 15 years ago. I believe this comparison is also indicative of the potential impact of Ukrainian free trade with Europe – market access to some 500m consumers with much higher purchasing power. EU leaders have just now adopted a set of rules intended to foster budgetary discipline through a “fiscal compact”, to increase convergence in the euro area, to strengthen the coordination of economic policies and to improve the governance of the euro area.

25 EU member states agreed that the budgetary position of the general government should be balanced or in surplus. States which run excessive deficits will have put in place a budgetary and economic partnership program including a detailed description of reforms correcting the excessive deficits.

It may take some time to fully implement this new strategy as it pertains to individual member states, requiring them to set priorities according to their specific needs and circumstances. For instance, Austria has the lowest unemployment rate in the EU. This implies that our employment policies and job creation initiatives may differ considerably from other countries where unemployment is above 20%, even much higher among young people in some member states. Personally, I do not see the European Monetary Union becoming a so-called transfer union. Debts will always have to be assumed by those who have incurred them. Any club of equals where some have to cover debts incurred by others is doomed to fail. 

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