Testimony
Eric Stewart
Deputy Assistant Secretary for Europe
Department of Commerce
Before the Subcommittee on International Economic Policy, Trade
and Export Promotion
Senate Foreign Relations Committee
Hearing on “Armenia, Azerbaijan, Georgia and Ukraine”
July 20, 2005
INTRODUCTION
Mr. Chairman, Ranking Member Biden and members of the Committee, thank you for
inviting me here today. I am honored to appear before the Senate Foreign Relations Committee
Subcommittee on European Affairs to discuss Armenia, Azerbaijan, Georgia, and Ukraine. The Commerce Department is working in all four countries to promote U.S. exports, advocate for U.S. commercial projects, ensure market access for U.S. companies, and to monitor and pursue compliance with bilateral and multilateral trade agreements.
At this time, the markets in Armenia, Azerbaijan, Georgia, and Ukraine are relatively small and undeveloped, with business environments lacking strong market institutions, transparency, and rule of law for business. Our International Trade Administration (ITA) is encouraging American companies to explore opportunities in these markets and is assisting them with information, contacts, business counseling, and advocacy for commercial projects.
We are also supporting American companies which are already present in these markets. The success or failure of these pioneers will influence other companies to follow them into these markets or to stay away. Their issues, which include nonpayment, corruption, arbitrary tax administration, and violations of intellectual property rights, must be solved if Armenia, Azerbaijan, Georgia, and Ukraine are to have flourishing markets. ITA programs are also helping to train potential business partners for American companies and to improve governance with the aim of encouraging business environments in which trade and investment can flourish and provide U.S. companies with level playing fields.
The Commerce Department engages with these countries through International Trade Administration programs tailored for work in the region:
• The U.S. & Foreign Commercial Service’s Business Information Service for the Newly Independent States (BISNIS), which is the U.S. Government's primary market information center for U.S. companies interested in Russia and other Newly Independent States, encourages companies to explore business opportunities in these countries and assists them with market information, as well as business counseling and events to facilitate business contacts. Since opening in 1992, BISNIS has facilitated more than $4 billion worth of U.S. exports and overseas investments with the successor countries of the Soviet Union.
• In Ukraine, the U.S. & Foreign Commercial Service post is promoting U.S. export sales by conducting market research, organizing trade events that promote U.S. products and services to qualified buyers, facilitating introductions to qualified buyers and distributors, and by counseling U.S. companies through every step of the export process.
• The International Trade Administration’s Market Access and Compliance (MAC) policy staff works with U.S. companies to help them resolve commercial disputes, address administrative barriers and, in coordination with other U.S. government agencies, advocates with governments in the region. MAC assists U.S. companies obtain market access by helping them solve business problems in the region, working with these countries to improve their business environments, and ensuring that these countries adhered to the trade agreements they have signed with the United States. Our MAC and FCS posts work together with FCS’ Advocacy Center to advocate for U.S. commercial projects in these countries.
• Through MAC’s Good Governance Program, we are increasing market access and ensuring a level playing field for U.S. and host country companies by promoting transparency, accountability, fairness, and the rule of law. The Program accomplishes this by training trainers, supporting the creation of working groups, and publishing business ethics, corporate governance, and dispute resolution materials.
• MAC’s Special American Business Internship Training Program (SABIT) has trained more than 900 professionals from these countries in the United States and many more through alumni follow-on training. SABIT is primarily a technical assistance program, providing useful training and information about U.S. industry and society to Eurasian managers and scientists. This combination of practical training and exposure to American business and cultural values work together as a catalyst for participants to influence the reform process in their home countries and serve as good business partners for U.S. companies.
In response to the Committee’s request, I would like to present the Commerce Department’s view of the Armenia, Azerbaijan, Georgia, and Ukraine markets, including key sectors for future U.S. exports and market access barriers, and to discuss our Department’s engagement with these countries to promote U.S. exports and increase market access.
ARMENIA
The Market
Armenia, with a GDP of $3.5 billion (2004) and a declining population of 3.1 million, is a small market. The trade embargo imposed by two of Armenia's four neighbors -- Turkey and Azerbaijan - is a major impediment to trade since transport costs through Georgia are high. The United States is one of Armenia’s major trade partners along with Greece, Russia, Germany, France, and Argentina. U.S. exports reached $398 million in 2004, led by assistance goods, iron and steel articles, electrical machinery and equipment, pearls, and semi-precious and precious stones and metals. Many of the American goods sold in Armenia are resold from dealers in neighboring countries. Several U.S. information technology firms have entered the market in recent years. Members of the Armenian diaspora own the majority of the over 70 U.S. companies in Armenia. Best prospects for U.S. exports and investment include tourism infrastructure, information and communication technologies, construction materials, and processed foods. U. S. imports totaled $850 million in 2004 and consisted primarily of precious and semi-precious stones (due to a thriving gem-cutting industry), precious and semi-precious metals, and apparel and clothing.
Market Access Barriers
American businesses have historically complained that Armenia's administration of the Value-Added Tax (VAT) regime is burdensome and poses unnecessary costs on foreign direct investment. Arbitrary and sweeping interpretations of tax laws as well as inconsistent and unpredictable calculation of fines significantly raise the cost of doing business and discourage investment. The barrier of state ownership should be reduced as privatization and de-monopolization of key industries such as telecommunications open the door for participation by U.S. companies.
Commerce Department Engagement
In contacts with Armenian officials, Market Access and Compliance officials stress the need to create a more attractive business environment and reduce corruption, pointing out that potential U.S. business partners will want a level playing field with clear rules of the game. I met with the Armenian Deputy Finance Minister last year to raise U.S. industry concerns regarding the tax system, and I encouraged efforts to improve the transparency and efficiency of the tax system and lower other administrative barriers such as licensing and registration requirements.
The Good Governance Program, in cooperation with the American Chamber of Commerce in Armenia, has established a Business Ethics Working Group which is engaging Armenian enterprises in initiatives to promote good business practices and combat corruption. One of the alumni of the Program’s train-the-trainer program has conducted training for Armenian universities and international organizations, including Junior Achievement, and developed a university-level business ethics curriculum.
The BISNIS representative in Armenia develops promising trade and partner leads and prepares overviews of promising industry sectors as well as comprehensive reports on such critical business issues as clearing customs and certifying products. BISNIS' Armenia trade specialist in Washington, DC provides market counseling and related assistance and distributes Armenia leads and updates to more than 2,100 contacts in the U.S. business community. This month, the Washington-based trade specialist is conducting outreach in New York and New Jersey. BISNIS is also monitoring Armenia's participation in the Millennium Challenge Corporation and is advising U.S. companies seeking to position themselves to take advantage of the resulting procurement opportunities. The Trades & Tenders program has generated exports of dental equipment, construction materials, and food products, fostering nearly two-dozen new U.S.-Armenia partnerships.
SABIT has trained 97 professionals since 1992, primarily from the IT, construction, and food processing sectors. A SABIT Standards program alumnus was instrumental in passing three laws pertaining to standardization and accreditation after her internship in 2000, while another alumnus used information from his training to develop a voluntary certification procedure for companies selling medical equipment in Armenia, based on GMP and ISO principles.
AZERBAIJAN
The Market
In 2003, Azerbaijan had a GDP of $7.1 billion and a population of 8 million. Dominated by the oil and gas sector, the economy has attracted $4 billion in foreign direct investment since 1996. In February of this year, Azerbaijan celebrated the pumping of “first oil” into the recently completed Baku-Tbilisi-Ceyhan pipeline, which has been strongly supported by the U.S. government. American companies are key players in the pipeline project as well as the Shah-Deniz gas pipeline and other oil and gas projects.
Azerbaijan’s exports totaled $2.6 billion in 2003, while imports also reached $2.6 billion. Azerbaijan’s major trading partners are the United Kingdom, Russia, the United States, Turkey, Germany, France, Italy, Kazakhstan, and Georgia. U.S. exports to Azerbaijan in 2004 were $159 million, while imports totaled $38 million. The leading U.S. exports were nuclear reactors and machinery, meat products, vehicles, electrical machinery and equipment, and optical equipment. More than 100 U.S. companies, a 25 percent increase since 2000, reside in Baku. Best prospects for additional exports of U.S. products and services include: oil/gas field machinery and services; architectural, construction, and engineering services; building materials; telecommunications equipment and services; food processing/packaging equipment; and agricultural machinery.
Market Access Barriers
Despite macroeconomic success and initial efforts at structural economic reform, Azerbaijan remains a difficult place to do business because of arbitrary tax and customs administration, a weak court system, monopolistic regulation of the market, and corruption. Our business community continues to express concern that regulatory agencies are using their position to favor one company over another, and that government decisions on commercial issues are often made in a non-transparent manner. Corruption also limits the ability of American firms to compete effectively for government contracts.
Enforcement of intellectual property rights in Azerbaijan is weak. While criminal penalties for IPR violations have been adopted, U.S. copyright industries assert that there have been no known convictions and that the "significant damage” threshold is too vague to commence action and deter copyright piracy. Commerce and other U.S. government agencies are assisting a U.S. beverage company which is fighting to shut down a counterfeiting operation that has caused major losses in profits as well as damage to the reputation of the company’s product.
Commerce Department Engagement
The Commerce Department’s Market Access and Compliance (MAC) unit has been working with the American Embassy in Baku - and directly with U.S. companies - to defend current U.S. business interests and to ensure a level playing field. I visited Azerbaijan in April 2004 in order to seek improved market access for U.S. companies, resolve longstanding commercial disputes and advocate on behalf of several U.S. commercial projects. Following my visit, Secretary of Commerce Donald Evans wrote to President Ilham Aliyev on behalf of several American companies experiencing difficulties in Azerbaijan.
During my visit and in the year since, my staff and I have worked to provide market access for U.S. companies entering sectors of the Azerbaijani economy that are dominated and heavily influenced by state-owned enterprises. I noted to Azerbaijani officials that privatization of state-owned assets is crucial to Azerbaijan’s ability to compete in the global marketplace and key to Azerbaijan’s efforts to diversify its economy.
Assistant Secretary for Market Access and Compliance William Lash met with the Azerbaijani Minister of Communication in Washington to facilitate market access for U.S. companies in the telecommunications sector. In addition to these interactions, we have worked extensively with several U.S. companies to resolve commercial disputes. As a result, a U.S. telecommunications company was able to retrieve property that had been confiscated by the Azerbaijani government, obtain a license to provide mobile services, and achieve restoration of their operating system in the country.
Alumni of our Good Governance Program have published articles on business ethics, conducted seminars, made presentations at conferences, and partnered with international NGOs to provide training and create codes of conduct for the Azerbaijani business community. The Program has supported alumni efforts to conduct three rounds of good governance training for 120 executives and academics, provided guidance and reviewed sample business ethics codes of conduct for 10 pilot Azerbaijani companies, and advised alumni on business ethics training programs for 15 domestic private sector partners of foreign direct investors.
A BISNIS representative is the sole commercial specialist at the U.S. Embassy in Baku and plays a critical role in fostering new U.S. business activities. BISNIS has facilitated nearly $310 million in U.S. exports and U.S.-Eurasian business activities in Azerbaijan since FY99. Companies from Azerbaijan have been assisted by BISNIS in partnering with multiple U.S. companies in a variety of sectors, including medical services and equipment, oil and gas, and the telecommunications and aviation sectors. BISNIS is supporting U.S. small and medium-sized enterprises (SMEs) in Azerbaijan, including a $20 million project to build a modern business plaza in Baku, involving the first Ex-Im credit in Azerbaijan.
SABIT has trained 63 Azerbaijani participants and generated more than $7 million worth of U.S. exports, primarily in the IT, energy, and food processing sectors. One alumnus finalized the implementation of ISO 9001:2000 standards in his company, which was certified by Moody's Certification International.
GEORGIA
The Market
With a population of 4.4 million, Georgia’s GDP totaled $4 billion in 2003. The U.S. is Georgia’s fourth largest trade partner behind Russia, Turkey and Germany. U.S. exports totaled $224 million in 2004, led by meat and grain. U.S. imports reached $77 million, up from $54 million in 2003. Georgia’s largest exports to the U.S. are fuel, beverages (e.g. wine), and steel. The U.S. is one of the top investors in Georgia, where key sectors for future trade and investment are tourism, oil and gas, telecommunications, agribusiness, food processing, and construction materials.
Market Access Barriers
The last two years have been a time of positive change in Georgia’s progress toward a full market economy. The U.S. business community, however, reports that the Georgian government still has much to do in improving the business environment, especially in demonstrating more transparency in its dealings with companies, both foreign and domestic. Despite many well publicized efforts on the part of the new government, corruption continues to be a significant problem, due in part to an underdeveloped legal and regulatory framework for business.
Commerce Department Engagement
In January 2004 Commerce Secretary Donald Evans became the first member of the Cabinet to meet then-President-elect Mikheil Saakashvili, beginning a productive series of high level meetings with the new Georgian government. At the request of Secretary Evans, I visited Georgia in April 2004 to reinforce his message that expansion of trade and investment between our two countries would depend in part upon Georgian government efforts to resolve key market access barriers. In particular, I emphasized the need to reduce corruption and to improve the business environment by creating transparent tax and customs regimes, developing mechanisms for dialogue with the domestic and foreign business communities, and ensuring a fair and open process for government procurement. In December of 2004, Secretary Evans met with the late Prime Minister Zurab Zhvania, who reported significant strides by his government to address corruption. In April of this year, Deputy Secretary Theodore Kassinger met with the Georgian Finance Minister to discuss the newly revised tax code.
A major focus of our efforts in Georgia have been ensuring that the new government provides fair treatment to U.S. companies that established relations in Georgia under the previous regime. While we applaud the efforts of the government to ensure that contracts and agreements were based on a sound legal basis, several U.S. companies have been subject to seemingly unjustified investigations, fines, harassment, and attempts to undermine legal agreements. Commerce officials and staff have worked closely with the Georgian government to ensure that U.S. companies are dealt with in a transparent manner based on the rule of law.
Building upon this increasing policy dialogue regarding the business environment, the Good Governance Program sponsored training for four Georgian professionals who subsequently conducted ethics seminars and workshops and created an IREX award-winning business ethics website. The Program has also established a Business Ethics Working Group which developed a Georgian Business Ethics Code of Conduct.
Since 1999, BISNIS has generated or supported more than $60 million in new U.S. exports and projects in Georgia. While BISNIS no longer has a local representative at the U.S. Embassy, it is providing support to small U.S. companies that are currently involved in providing services (marketing and communications consulting) and goods, such used cars and auto parts, environmental technologies, and agricultural machinery and products. BISNIS is also monitoring the progress of Georgia's participation in the Millennium Challenge Corporation and advising U.S. companies on positioning themselves for resulting procurement opportunities.
SABIT has trained 117 Georgian professionals, mostly from the energy, medical services and equipment, and transportation industries. After one internship, an alumnus helped his company initiate the process of certification to provide maintenance and technical services to Boeing planes - the 737-500 and 737-300.
UKRAINE
The Market
With a population of 49 million, Ukraine is an important emerging market at the crossroads of Eastern Europe, Russia, Central Asia, and the Middle East - one that holds considerable potential as a new market for U.S. trade and investment. Ukraine's resources and economic strengths include very rich agricultural land, a strong scientific establishment, an educated and skilled workforce, and significant coal and moderate oil and gas reserves. The economy, which grew by a brisk 12 percent last year, offers opportunities in IT and telecommunications, food processing and packing, pharmaceuticals, medical equipment, aerospace and airport construction, agricultural equipment sales, energy efficiency, power systems, oil and gas equipment, building materials, and automotive parts.
U.S.- Ukraine trade reached $1.25 billion in 2004, with the U.S. running a $552 million deficit. Ukraine's exports to the United States increased sharply, driven by strong growth in steel and fertilizer, as well as the lifting of U.S. steel safeguards. U.S. imports from Ukraine were $850 million, nearly triple the total in 2003. U.S. exports were up strongly, growing by more than 72 percent. Top Ukrainian imports from the U.S. are motor vehicles, poultry products, tobacco, and medical instruments. The U.S. has generally had the largest share of foreign investment - just over $1 billion (14 percent of the total), but has been displaced for first place by Cyprus, which tends to represent returning Ukrainian and Russian capital.
The Department of Commerce currently treats Ukraine as a non-market economy (NME) country under the antidumping law and, thus, uses its standard surrogate country methodology to calculate normal value in antidumping investigations. On April 20, 2005, in response to a written request from the Ukrainian government, the U.S. Commerce Department initiated a changed circumstances review on carbon and certain alloy steel wire rod from Ukraine. The purpose of this review is to determine whether circumstances in Ukraine’s economy have changed such that Ukraine should be designated as a market economy in antidumping cases. In order to fully analyze this issue, the Commerce Department is requesting comment and information from the public by July 11, 2005, and rebuttal comments are due by August 10, 2005.
The U.S. Government supports Ukraine’s effort to join the World Trade Organization on commercially acceptable terms. The U.S. government funds a $600,000 advisor program and is considering enhanced technical assistance for an accelerated accession effort. Resumption of trade in poultry, our most important agricultural export to Ukraine, and passage of optical disk legislation are required to complete a bilateral agreement with the United States.
Market Access Barriers
Ukraine’s potential as a market and an investment destination has been constrained by a difficult business environment and an ambivalent view of the role of foreign investment. The advent of a new Ukrainian leadership in Ukraine following the “Orange Revolution” has spurred a renewed interest by the U.S. business community in exploring opportunities there. Potential investors remain cautious, however, because of uncertainty created by contradictory statements and policy moves by the new leadership on issues such as privatization and conditions for investment. The new Ukranian government’s efforts to reform its regulatory system, complete the legal framework for business, curb corruption, and reform the judiciary will improve the business environment and attract investment.
Commerce Department Engagement
The Department of Commerce has been encouraging Ukrainian officials to promote the completion of essential economic and legal reform and the creation of a stable, predictable, and transparent business environment necessary to translate this nascent interest into new investment. We are highlighting the importance of effective intellectual property protection, including enactment of legislation to protect optical media, the need for urgent legal reforms to strengthen the legislative basis to support business, and the need for regulatory clarity and consistency.
We hope that the new leadership’s emphasis on the rule of law will provide the impetus to resolve some longstanding problems faced by U.S. investors - particularly those that involve implementation of arbitration and court judgments. Following up on Secretary Gutierrez’ recent meetings with members of the new Ukrainian Government, I will travel to Ukraine in July to promote improvement in business conditions, to encourage resolution of problems experienced by individual American companies, and to advocate on behalf of companies pursuing specific business opportunities.
The Good Governance Program began laying groundwork in Ukraine last year when Assistant Secretary for Market Access and Compliance William Lash participated in a roundtable at Kyiv Mohyla University. Commerce Secretary Gutierrez noted the importance of good governance and an ethical business culture to Minister of Economy Teriokhin during their April meeting, and, subsequently, Good Governance staff traveled to Ukraine this month to meet with potential partners and counterparts to discuss and plan to conduct programs on business ethics and corporate governance.
BISNIS provides detailed market information, practical advice, and referrals to U.S. and Eurasian companies to promote trade and investment in Ukraine via its representative in Kiev and its Ukraine trade specialist in Washington D.C. In recent years BISNIS has launched several new programs, including its Russian language Vestnik newsletter and a Russian-language website for Eurasian companies, which receives about 10,000 visits per month. An extensive range of contacts receives BISNIS information - about 4,000 U.S. company representatives directly receive BISNIS Ukraine leads and market updates.
SABIT has supported economic and democratic transition in Ukraine for more than 14 years, providing business managers, and to a lesser extent, scientists, with the technical training necessary to improve their enterprises and their approach to conducting business both domestically and internationally. Since 1990, SABIT has trained more than 665 professionals from Ukraine in the United States and many more through alumni follow-on training. SABIT will conduct follow-on training for alumni in Ukraine this fall, including a networking reception for alumni, local business leaders and American companies doing business in Ukraine, and plans on conducting an Association Development program for Ukraine next year.
CONCLUSION
The Department of Commerce will continue to assist U.S. companies in Armenia, Azerbaijan, Georgia, and Ukraine take full advantage of emerging market opportunities. In addition, the Commerce Department will work with these countries to develop their commercial markets and to bring their trade regimes into compliance with international norms. Strong markets will lead to better opportunities for the export of American goods and services as well as enhance the stability of these nations as they work to pursue necessary democratic and economic reforms.