Financing a New Ukraine

Financing a New Ukraine

Courtesy: Don Pollard

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Europe and Eurasia

Financial Markets

from C. Peter McColough Series on International Economics

Ukrainian Finance Minister Natalie Jaresko joins Reuben Jeffrey III, president and chief executive officer of Rockefeller & Co., to discuss her country's economy, including its ambitious reform agenda and recent International Monetary Fund package. Jaresko begins by describing her personal path into the Ukrainian cabinet following the February 2014 revolution. She emphasizes the many strengths of the Ukrainian economy despite the financial stress of the ongoing conflict against Russia-backed anti-government rebels in the country's eastern regions. Jaresko goes on to address Ukraine's relationship with the European Union, planned financial restructuring, and anti-corruption efforts.

The C. Peter McColough Series on International Economics is presented by the Corporate Program and the Maurice R. Greenberg Center for Geoeconomic Studies.

JEFFERY: Welcome everybody. I'm Ruben Jeffery and we're privileged to have with us—really honored to have with us this morning Natalie Jaresko, Ukraine's finance minister. By way of introduction, I think you all have her biography but I think it's fair to note one of the startling things on the page is that her progression from the suburbs of Chicago to the finance ministry of Ukraine is not the usual path for most finance ministers of various countries around the world.

I thought I might start, Minister Jaresko, with a little question. Could you comment a little bit on your—your personal journey?

JARESKO: It has been a remarkable journey and certainly one that's unpredictable. I grew up in Chicago a Ukrainian-American. My family emigrated from Ukraine shortly after World War II. And I grew up a, frankly speaking, very patriotic American, very patriotic Ukrainian simultaneously. And I can imagine that's hard for people to understand being united but Ukraine was part of the Soviet Union as I was growing up and no one ever could have imagined that it would be a free country someday. And then it became a free country.

I took from the United States and took from what the United States gave my family in terms of a life, freedom, a place to raise their children, to get a good job, to become literally solid middle class which my parents were able to do here, thanks to the U.S. system. And I took those values and I translated them in my own way as any child would into a—into a certain love for public policy. I went to Kennedy School of Government where Richard Haass was my professor, and I'm really sorry Richard couldn't be here today because Richard introduced me to the State Department and to the Office of Soviet Union Economic Affairs. So I have perhaps to thank Richard for being in this position today. Or blame him, one of the two. At the end of the day we'll see.

And I went into the State Department to serve as a presidential management intern then later when Ukraine became free, Bob Zoellick was the undersecretary of economic affairs, said you should go out to the U.S. Embassy in Kiev, you're an economist, you speak Ukrainian. I was not a foreign service officer, I was a civil servant.

When I got to Ukraine—I had not been there before—and it was remarkable because as many of you have heard, you're just overwhelmed with the potential and the opportunity of a 45 million populated state in the middle of Europe, extraordinary wealthy in all kinds of resources, agricultural, mineral, human resources. And yet, it has been so misguided, 70 years of communism, more recently 23 years of incomplete reforms, corruption, the last regime, the Yanukovych regime, taking advantage at a very high level of styles of corruption put an additional $40 billion of hard currency debt on the shoulders of the Ukrainian people. And, yet, I found myself consistently wanting to help Ukraine realize that potential.

And when a few months ago, right around Thanksgiving, the president and the prime minister turned to me and said, "We'd like you to help us," there was no way to say no. Every day you were seeing people volunteer to go to the front to protect Ukraine's sovereignty and territorial integrity in a war against a very difficult aggressor. And, you know, I would be of no use at the front. That was not a value-add that I could bring to this equation. So this was what I thought I could do to help the country, and I—and I believe that today every person—and I ask all of you to do what you can for Ukraine because I mentioned this at the breakfast table I feel this is an absolutely critical time in—in—in world history. And Ukraine is on the forefront of the values and the principles that we all hold so dear. We're living it.

JEFFERY: Right. Madame Jaresko, thank you for that breathtaking progression. You stepped into this job, it's not as if Ukraine, the economy was without its challenges from 2008—actually before, to the present, then Russia invades—or excuse me, there's a spontaneous eruption of civil unrest with outside support of little green men. Can you comment today on the effect of this conflict on the Ukrainian people and the economy?

JARESKO: It's more than I think anyone can imagine. First and foremost, it's a humanitarian crisis of proportions not seen since World War II. We have over 5,000 dead civilians and military, over 15,000 wounded, 1.1 million internally displaced people in our country. Over a million people who have no homes, no jobs, nothing left to have been—had to be—have—we have to find them a new place to live. Their entire lives have been disrupted. UNICEF says that 1 million children have been affected in our country from the illegal annexation of Crimea and the invasion of Eastern Ukraine.

The cost to the economy is tremendous. It's some 20 percent of our economy and it's an important industrial production center for the economy. Last year overall industrial production dropped some 11 percent but in Donbass and Donetsk and Luhansk regions which are where the Russian-sponsored terrorists are, it's some 20 and 30 percent.

This affects the exports which then affects the amount of hard currency in my country. The currency then affects, as you can imagine, confidence, the banking system, the exchange rates, depreciation, and you have a vicious cycle. An unfortunate viscous cycle which is very hard to put a stop in when you can't stop the war.

JEFFERY: A major component of that kind of stabilize things relates to the overall external debt situation of the economy. And if you read in the newspapers, looks like you've had a pretty busy week in Washington and elsewhere around the United States working with the IMF, other creditor—creditors—creditor organizations and sovereigns on the Ukraine debt situation to sort of give you some breathing room. If—how is that—those discussion—how are those discussions going and progressing and where do you want to take them?

JARESKO: I don't know that any sovereign debt restructuring is easy. And I don't think that any country, you know, likes to be in the position that we're in. The one thing I can say is that this situation is created primarily by not a country's willingness to pay or a country's financial situation but by a very, very unexpected and—and very difficult war on top of the complications of the economy.

You probably know that the IMF Chief Madame Lagarde announced a $40 billion package for Ukraine; that $40 billion is three pieces. It's $17-and-a-half billion over four years from the IMF of which we received the first $5 billion tranche after meeting prior actions, the conditionality in the agreement for the first tranche. That $5 billion, just to give you a sense, doubled our reserves at the central bank. That's how low a level of central bank reserves we were—we had prior to the agreement.

The second part of this is $7-and-a-half, $8 billion of bilateral, multi-lateral support from the United States, from the E.U., from Canada, from Poland, Germany, Sweden has now come to the table with bilateral support, also multi-lateral so the European Investment Bank, the European Bank for Reconstruction and Development, and the World Bank. That money is more one-year, 18-month money commitments.

And then the final piece is the debt restructuring which is $15 billion, $15.3 billion in what we are supposed to achieve in savings over the period of the program, or over four years. And given the amounts of public sector sovereign debt that we have, quasi-sovereign and state guaranteed, this means that this restructuring is going to be complicated. It's going to require some combination—a combination of both maturity extensions, coupon reductions and principle reductions. And it's something that's going to have to give us not just balance of payment support, but we're going to have to try and meet—kind of build our medium-term debt sustainability back over time to become a healthy economy and restore growth.

Creditors are naturally acting surprised. But if you look at the markets, the pricing in the markets of our—of our sovereign debt, I think there's an acknowledgment of our situation. I think the IMF agreement lays it out very clearly in a very black-and-white sense what the box is we need to fit into.

Now we're in a collaborative process with our creditors. I came to meet with creditors on the West Coast, East Coast and then I'll be in London next week, to talk to them, to our largest creditors because we want to do this in a collaborative way. We want to do this in a way where we can—we can try and build a vision as to how Ukraine moves forward together.

And I think—I think so far we've gotten a reasonably good sense that everyone is supportive and understanding. I think the hard thing for everyone is to understand what kind of shocks remain in the system. So you can take the IMF program and you can base—you have a baseline forecast for what it looks like but you can imagine how hard it is to predict how close we'll be to that baseline forecast if there are external shocks, if the very fragile ceasefire doesn't hold, if there are exchange rate shocks, if there's a banking crisis, if, if, and if.

So I think there are a lot of—a lot of pieces to the puzzle that are just not predictable and that's—that's the hard part because everyone wants to look forward to peace, growth, but how we get there and when we get there is more complicated.

JEFFERY: I'll resist the temptation to drill down on the elements of the debt restructure because other members might have comments on that. But alongside your immediate efforts related to the debt, you, President Poroshenko and the other ministers have a broad-base reform agenda for the economy and really society as a whole. Do you want to give us some sense as to the key elements of that?

JARESKO: There are—there are three. First it's to stabilize the banking and finance system. There is no real economy, there's no businessman who can plan his budget when you have volatility and currency between 20:1 and 40:1 at any given time, so we need to eliminate the volatility. We need to stabilize the economy, reduce the inflation pressures so the real bank lending rates become possible. Today, the discount rate at our central bank is 30, 32 percent which means lending is at 35 percent or more. You know, there are—there are few businesses in the world that can afford 35, 37 percent interest rates. So stabilizing the banking and financial system is absolutely critical, number one.

Second is restoring growth. Restoring growth by creating a better business environment. So that's everything from deregulation to broadening the tax base, reducing the burden of taxes on those who are paying by instead bringing in those who are not. We have a large shadow economy; we need to bring those folks back into the formal economy. They need to do their part. We've increased taxes on the—on the wealthy again. Compared to U.S. tax rates to European, it's still nothing. It's a 20 percent marginal tax rate, 15 percent being the basic personal tax rate. But all the passive income is now at—at 20 percent as well. So we've cut out the ability to pick and choose for those wealthy people who try to optimize their taxes.

We then—the third part of broadening the tax base is cutting out the big business loopholes. We have many industries, many tycoons who've benefited—not unlike, I suppose, in other countries—but maybe to a larger extent on loopholes. And bringing them back into the fold, having them pay their fair share, we've adopted transfer pricing that doesn't allow them to, for example, shift their profits abroad any more. So that broadening of the tax base we're in the midst of a large tax administration reform, making it more service oriented.

Reforming our state-owned enterprises. We still have some 3,000 state-owned enterprises which we need to start by figuring out what's left, what hasn't been stolen or what's disappeared, so auditing them, establishing a fair transparent way to picking the CEOs of these companies, and then moving them as quickly as possible to privatization.

And the third big element is anti-corruption. The country has been held back to a great extent by corruption over the 23—I would even say last 100 years because the Soviet tradition had no less corruption, it was just different. The anti-corruption efforts are broad based. They're everything from enforcement, meaning a new anti-corruption bureau which has very, very—a great deal of authority and funding to actually enforce anti-corruption, to policy-based changes. Policy-based changes which change the nature of how business is done and how government is—works. A perfect example, for years—for 23 years, we've had middle men in our trade in our import of gas to the country. We had middle men who were making—siphoning off hundreds of millions of dollars somehow, somewhere. We no longer have any intermediaries in our trade, neither from what we continue to buy in terms of imported gas from Russia which now is only 30 percent of our purchases and 70 percent we now purchase from Europe. Reverse gas. Again, in neither case, in neither direction are there intermediaries. We've just eliminated that.

Other kinds of policy-based elimination of corruption has to do with e-procurement, cleaning up the state purchasing. There's a lot of—of corruption in the state purchasing—state purchase element and that—we're moving that out into the open, into a transparent, online-type of e-procurement.

I think that at the average citizen's level, we need to show them that that affects their lives because whether or not there's an intermediary in gas, that's a good thing for me from a budget standpoint, it's a good thing for people as a whole but they don't feel it. So at the average citizen's level, we've started a reform of our police because that's where they see it. They see these militia stopping them and asking them for bribes, day-after-day, morning-after-morning. We've introduced a new police system in Kiev; it's being rolled out right now. I just saw yesterday on Facebook the new police cars. Hired all new policemen. We've changed the training, the financial transparency of the police. This is something that the average citizen will feel; that he's no longer—have somebody with a—his hand out every morning when he drives to work. And that'll roll out across the country.

We brought in experts—our deputy minister of internal affairs who's doing this who's from Georgia. She did it in Georgia, Eka, and she did it successfully there. We're not trying to reinvent the wheel; we're just trying to accelerate these changes.

So those three things, within each of them—there's energy sector, we can talk about other sectorial changes but I would say financial stabilization, creating the path—the under—the underpinning for economic—real economic growth, and then anti-corruption.

JEFFERY: Maybe for those of us who are less knowledgeable about the Ukraine economy on a—on a real-time basis, and from my perspective and maybe for some of the members here of a certain age, I can remember learning, you know, you memorize countries in high school and stuff and you—Soviet Union, Ukraine, breadbasket of Soviet Union. So agriculture is kind of part of the economy. You've got issues with energy, you've got trade. What are—you've got tourism. Obviously, there's an industrious population. What are kind of the key engines of economic growth as you make this transition?

JARESKO: Clearly, agriculture is number one. Last year, if it weren't for agriculture, the economy would probably have had an even much more difficult time. Agriculture grew last year despite what was going on and agriculture is not—is not being hampered by the war.

I have to—I have to make very clear, as horrendous and horrible as the war is and as much as I want you to take to heart that the Ukrainian people are fighting for the values and principles that—that the free world holds dearly, I want to make also clear at the same that that's 7 percent of the territory of the country. Ninety-three percent of the territory of the country is open and doing business. Ninety-three percent of the territory is going to work, receiving their pension, sending their children to school and ready for and welcoming of investment. Agriculture being number one, Ukraine is the largest sunflower oil exporter in the world. It's the number four grain exporter in the world. And that's all in a—still in a relatively inefficient sector. So the potential of agriculture is even that much greater. And food processing.

Second in energy, we're an electricity exporter, traditionally. We've had some problems, unfortunately, with our coal supplies because of the occupied East but, in general, Ukraine's energy sector is very interesting. And one of the things we've done now in breaking up our state oil and gas company, Naftogaz, into two pieces, transportation and storage under the E.U. third energy charter gives us an opportunity to attract U.S. investment into energy. That's important for multiple reasons. One, technology, nobody better than the United States to help us in that area. Number two, corporate governance. Number three, ensuring that this—this sector never returns to that endemic corporate corruption. So I think U.S. investment in energy and energy efficiency is very critical.

Third, I would say that infrastructure. Now, we have a great deal of value added in transit, north, south, east, west, but our roads, our bridges, our airports, our ports—and that relates directly back to agriculture, frankly, on the ports—all of that requires a great deal of new investment.

Tourism, I was speaking to several people, it is a beautiful country, it is a European country and it has quite a bit of European history, whether you're of Polish heritage, German heritage, Lithuanian heritage, everyone can find something—Jewish heritage, everyone can find something in Ukraine. Ukraine is a multi-ethnic, multi-religious, multi-lingual and very tolerant state and so everyone has a little bit of history to find if they're—if they're interested.

I think the last thing I'd say is that as a manufacturing platform, Ukraine offers an incredible opportunity today for any American, for Europeans, for Russian investors, it doesn't matter. But given our cost competitiveness, especially after the unfortunate depreciation of the currency that has its negatives with the population but it's a positive for exporters. Our deep and comprehensive free trade agreement with the European Union gives us access to the European Union markets unfettered in a way that, frankly speaking, no one else has.

So if you take the resource base, natural resources, agriculture resources, the human resource base, the IT sector, for example,—in value-added IT sector—if you take that resource base and that access to market and that proximity to the European market, it's an incredible platform for the future.

JEFFERY: OK. Thank you. Just—can we come back to energy? I think many of us can recall over the past—better part of the past decade, it's like sort of a right of winter, Russians cut off gas to Ukraine, and then there's a big negotiation and Naftogaz gets in the middle and it all gets sorted out somehow. Then spring comes and we don't hear about it for another nine months. You've kind of—if I understand correctly, you've really transformed that equation in some very significant ways. Can you maybe elaborate?

JARESKO: First of all, you didn't hear that this winter, so you know it's different. And I will also add we had a relatively warm winter which means God is on our side. You've got to look for everything you can get situation.

So first and foremost, we've started to diversify where we import gas from and that's very important from an energy-dependency perspective. It's not that there's any problem with importing Russian gas but having a sole exporter of gas to Russia—from Russia to Ukraine is—obviously, has its consequences. We've not moved from what was 100 percent import from Russia to, in the beginning of this year, we're at 30 percent import from Russian, 70 percent reimported from the E.U. It's not only an independence issue, it actually is a pricing issue and a fiscal issue so as—the finance minister, it's about $50 per 1,000 cubic meters cheaper when we import it from the European Union.

The second part of this is that we're reforming how we use gas. And I think that's critical because Ukraine's also been known not only to have corruption in this sector but to be one of the most inefficient energy users in Europe, if not in the world. And we've already reduced our consumption by some 20 percent which helps both financially but it also helps from the energy independence standpoint; there's less to import.

I think on energy efficiency one of the important things for us is to start—stop subsidizing the state-owned enterprise of Naftogaz and, instead, provide subsidies as needed to the vulnerable parts of the population. So we are on a track, we've agreed with the IMS and we did one large increase in pricing last year for the households and we do—we've announced another for April 1 of this year which should take us to 50 percent cost recovery. Next year, 75 percent, and then within two years, 100 percent cost recovery. What does that mean? It means that we will have to provide subsidies to the vulnerable part of our population.

A large and growing part of the population will not be able to afford these prices. So a means-tested social subsidy has to be in place and today we have a social subsidy in place, it's not means-tested yet, but we'll get there. Right now it's something that we've tried to make easier for people, less—less tiresome and less irksome for people to go get the subsidy. Now they just mail a form in and it's automatic. They don't have to stand in line; they don't have to deal with bureaucrats. And by doing that, they understand the price of gas and so they use less. It's natural. So we eliminate—again, every one of these forms has multiple angles. We eliminate corruption because we're not putting money in the state-owned enterprise; we're putting it into the hands of the users. We're eliminating—we're reducing overall consumption which helps us on independence, it helps us fiscally.

Last year the government financed the Naftogaz—the state oil and gas monopoly deficit of 110 billion hryvnia which is the equivalent of about $10 billion. It was more than our state budget deficit. This year we budgeted for a deficit of 30 billion, approximately, of hryvnia, or about $1.5 billion; 10 billion last year, 1-and-a-half billion this year. That's a huge change.

So taken together, I think that the energy sector reform is really something that showcases all the different sides of what we're trying to do and do quickly.

JEFFERY: OK. Thanks. Pretty impressive turnaround. I've seen a lot of questions come up from the tables, but let me one final one from my seat and that is, maybe to widen the aperture a little bit, Madame Minister, how do you see the implications of what's going on in the Ukraine for the broader political and security situation in the former Soviet states in western Europe as a whole?

JARESKO: I think that's the most important question and I guess part of what I tried to do in Washington and when I—when I speak here is to make sure that everyone understands, this is not a war for territory. Russia's a very large country; it doesn't need Ukraine's territory. This is not a war about language, because, frankly speaking, I'm a Ukrainian speaker and I have more problems in Ukraine than any Russian speaker will ever have. There are more people who don't understand Ukrainian than will not understand Russian. It's a multi-lingual state, always has been and will continue to be.

This is a war of principles. This is a war based on the fact that the Ukrainian people sacrificed their lives to choose a European future, not European Union membership. They died for European values, freedom of speech, freedom of assembly, freedom of religion.

We recently had our March for Dignity in Kiev, in the front line were three different Orthodox churches, a Greek Catholic church, a Roman Catholic representative, the Imam of the Muslim mosque, the rabbi from the Jewish Synagogue, multiple Baptist, Pentecostal, all linked arm-in-arm, walking forward through the streets of Kiev. And that's normal in Ukraine. We've the largest Mormon tabernacle east of Dusseldorf. Mormons are illegal in the country neighboring us. It is an issue of values and principles. We have a very vibrant, albeit fragmented, vibrant civil society that demonstrates, has revolutions, it does—it holds everyone to the fire right now in terms of reform and is a very, very important part of this process. That's not possible in the neighboring country next door. And so this war is about the principles and it's about, I believe, not allowing our country to maintain its sovereignty, its territory integrity and to live by those principles.

And I think it's not even just an issue for Europe, I think it's an issue for the world, for the free world. I think it's an issue for the free world to see. What did it mean after World War II when we established the institutions of the United Nations, the Helsinki Principles, the OSCE, the Budapest Memorandum? What did it mean when we made promises for Ukraine to give up its nuclear weapons in—in return for guarantees of security? All of these institutions and principles are being trampled upon today. And I think that has an effect, not just in Ukraine, not just in the former Soviet Union, not just in Europe, it has a global effect.

While the United States today tries to negotiate with Iran, they have to have in the background, what did the Budapest Memorandum mean, and how will that figure into the Iranians' mind when they try and negotiate nuclear nonproliferation going forward? What will the Baltics believe about NATO and Article 5 in terms of security if—if Russia—if the Kremlin is continually poking at them by doing flyovers over NATO airspace, cyber attacks? Does Article 5 protect you from a cyber-attack? Does Article 5 protect you when in Estonia, you come across the border, you pick up one of their officials and you kidnap them to the other side? There's a constant testing of the institutions that we all believe kept us from any possible World War III. And I think the maintenance of the institutions, the principles, the values and Ukraine and this war is absolutely the testing point of them. It's critical to avoiding anything like that ever happens in the world again.

So I think this is probably the most important thing that we could focus on in terms of the 21st century.

JEFFERY: Well, OK, why don't I turn it over to those of you here, no doubt have a lot of questions. I think the protocol here is state your name and affiliation, no multi-part questions, please. You can try but I—she'll only answer one of them. And kind of keep them short and to the point because there are a lot of them. Please.

QUESTION: Hi. Jake Ho (ph) from Sigluer Guff. You're well familiar with the enterprise funds that were set up at the transition point in the 90s. What support should the United States and the west have for private investment into Ukraine in supporting the Ukrainian economy going forward?

JARESKO: Yes, I was honored and privileged to be the first country director at the enterprise fund in—in Kiev. The concept, I think, is fabulous and I think there should be more done exactly in that area. It's going to be a difficult year or two. It'll be a difficult period of time to attract major foreign investment while there's a war ongoing. I will continue to try and we have select cases where, even now, we did a 3G (ph) license competition, we had three new investors in our 3G (ph) just last month, so it's not that we won't receive any foreign investment, but it's going to be a battle.

So I think anything like an enterprise fund which can spur and accelerate investment into small, medium-sized business, create jobs, show that growth is possible, I think OPEC being active in Ukraine is important. I think reopening export-import bank and enabling U.S. exports in particular in the agriculture sector but elsewhere as well is critical. I think overall greater and deeper U.S. financial support for Ukraine because I go back, it all starts with the stability of our banking system. Nobody can function with a banking system that's not strong, and we need to strengthen that banking system now.

So I think that the United States has multiple tools. We're grateful for the things that we've received to date but I think there's more that needs to be done on the real economy.

JEFFERY: Great. Other questions?

QUESTION: Ann Marlowe from Hudson Institute in Washington. Minister, could you speak about the economic impact of sanctions and where you'd like to see that go? Would you like to see more sanctions, fewer sanctions, how can that help?

JARESKO: I think first and foremost we'd like to see the sanctions that in place be maintained and that there be no division in the Transatlantic Partnership with regard to the sanctions that are currently in place. As long as the Minsk Agreement, Minsk I, Minsk II, are not being fulfilled in full, those sanctions need to remain in place.

And on the second part, I believe and my president, our government believes that any increase in violence, any further disruption to the ceasefire ought to be married with increased sanctions. I think the sanctions have had—they have a critical role in trying to change the psychology of the aggressor. Clearly, energy prices have helped, and it's hard for anyone to say how much of what's happened is a result of $50 a barrel oil and how much is the result of sanctions. But I think taken together, I think it is starting to change and I believe that sanctions are an important part of the psychology of the aggressor. Making choices, he has to make choices with regard to what it's worth and what the next potential set of sanctions might mean. I think that right now it's critical for the European Union to renew, I believe, there—they've made a decision to put off the decision until May but I believe that maintaining them, being united in them and accelerating them if there's an acceleration in violence is critical.

JEFFERY: OK.

QUESTION: First of all, I would just like to say I have never heard—

JEFFREY: Name and affiliation?

QUESTION: Oh, sorry. Bruce Gelb, Council of American Ambassadors.

JEFFREY: Thank you.

QUESTION: I've been coming to this wonderful room for a number of years. I've never heard a male or female do a more total job of analyzing a complicated situation the way you have.

JARESKO: Thank you.

QUESTION: I have a...

(APPLAUSE)

QUESTION: I have a very old personal friendship with your country in 19—if you can believe anyone lived that long ago—1959 I walked along the banks of the Dnieper River in Kiev with a group of young Ukrainians. What I learned was the depth of negative feelings verging on rage and frustration toward the Russians in Kiev at that—at that time.

The article in the Foreign Affairs about this subject gave me insight that I did not fully grasp and that is the Russians do not want anything close to friendship with the NATO part of the world next to them and the—and the little cartoon of NATO sticking its finger into the stomach of Russia with a man like Mr. Putin in there, all I can think of is all the things you want to do are things that are right. And I'm sorry for making this such a long statement but my concern is that I don't want to see World War III start because of Ukraine. And what is it that is going to keep the Russians from going absolutely off the wall when you are successful in doing the financial things that you're talking about?

JEFFERY: Thank you, Ambassador. How are you going to tackle that one?

(LAUGHTER)

JARESKO: First of all, Ukrainians are a very peaceful nation, and one of the reasons we found ourselves in this situation is because we had no border with Russian. We were brotherly nations and we never had a defensive strategy because we could never have imagined that our brotherly nation would invade. I sat and watched the illegal annexation of Crimea and I sat with my fellow Ukrainians and we were just shocked as they just swept through and just—and Ukrainians didn't even—I mean, we were just—it was so unexpected.

Today, after these events, Ukrainians have changed their vision of Russia, naturally. If you look at the pre- and post-war opinion polls on NATO, for example, Ukrainians were not particularly pro-NATO, never a majority of the people. Today, after the invasion of Crimea and the war in the east, a majority of Ukrainians are pro-NATO. If you look at the vision that Ukrainians had being European, pro-EU, it was ranging between 30, 40 percent before the war. It's now over 60 percent.

If there's anything positive that's come out of this, it's that the Ukrainian people are more unified today than they've ever been before. They have a much clearer vision of the choices that they have, civilizational choices that they have, and they're much more dedicated to moving forward together—the president, prime minister, the parliament, everyone together despite how hard it is. So that—that's the positive.

You said something that I can't—I can't let go, what you said. You don't want World War III to be caused by Ukraine. Ukraine is not the cause. If, God forbid, World War III occurs, it will not be because of Ukraine. Ukraine has done everything possible for peace. President Poroshenko, when elected in a free and fair democratic election, in May of last year called a unilateral ceasefire immediately. It was broken. He's gone into ceasefire discussions twice, Minsk I, Minsk II. Today, Ukraine continues to remove its heavy artillery from the line of demarcation in accordance with the agreement, and last night Grodz' (ph) heavy artillery fired on our troops. Not only did they not remove them, they're using them today.

Ukraine has allowed the OSCE into—to look at and investigation—what is the proper—look at—check where we've put this heavy artillery, the security safety points. The Russian side, the terrorists have not allowed them to get anywhere close. Ukraine is nothing—wants nothing more than peace. Everything we do is about trying to achieve peace.

At the same time, you know, you have to be amazed. I mean, this is the war that's been supported almost—you know, half at least in the beginning, more maybe, by volunteers. I mentioned before that, you know, how in my mind could I not take this job when men were volunteering for the front day after day. Volunteering. Nothing conscripted. Volunteering. Hundreds and hundreds of men.

We had a military that was completely—during the invasion of Crimea it was clear—completely not ready. Not financially, not from a command and control, not from supplies, certainly not from equipment. And yet, we've held them. We have held them to this line. All by ourselves with the help of no one in the world. A poor country, a country in recession, a country with all kinds of problems with two sets of elections, presidential and parliamentary, we have held a nuclear power, one of the largest militaries in the world from going any further.

I believe that peace is not going to be achieved with a military outcome, it's a diplomatic one. But it's only with the support of the entire community and I—none of us want World War III, let alone on the territory of Ukraine. We had World War II on the territory of Ukraine, remember. You know, they're about to have May 9th celebrations, V-Day, in Moscow, but the place where V-Day should be celebrated is Kiev.

The situation I think is one of convincing the Kremlin that this is not worth it. This is not worth it. They are better off with a healthy, vibrant free Ukraine than they are with an ongoing war bringing, you know, trucks back with their soldiers. And I think that's why the sanctions are important. I think that's why the Transatlantic Partnership being strong and united is important. I think it's important that we continue to say this is unacceptable and raise the price so that he has the so-called off ramp so that this ends peacefully.

JEFFERY: Thank you, Ambassador. Other questions?

QUESTION: Andrew Nagorski. I was with Newsweek in that area of the world for quite a while. I mean, I take your point about, yes, Russia would be much better off with a prosperous, stable Ukraine. Obviously, Mr. Putin doesn't think so. And isn't it a common—isn't it—can't you assume that whatever his territorial ambitions, the last thing he wants is for your reforms to succeed? That he sees a successful Ukraine as a threat to him in the sense that—of the example it might set for Russia. So how do—you know, whatever Russians want to do territorially, how do you limit their ability to disrupt the economy, to make sure that things don't go well in your country?

JARESKO: I couldn't agree with you more. Our ultimate success will be the success of the economy. And that's why right now the stabilization and returning to growth, eliminating corruption, and attracting additional investments into the country is absolutely paramount. Implementing that deep and comprehensive free trade agreement, ensuring that it's not just a piece of paper, that we're walking the walk not talking the talk. That we are the new Ukraine. That we're not entering into an IMF agreement, taking the first tranche and then what? That we break those habits, we break those traditions, that we break that mentality that exists both outside the country and inside. And we establish a new one.

I just recently named four new deputy ministers to—just actually days before I came to the United States. And I know that doesn't sound like much but I think that it may be the first government in the history of 23 years where the ministers got to choose their own deputy ministers. I didn't ask anyone's permission, I didn't clear them with somebody. they're not somebody's political tool. They're my four deputy—and I kept one of my deputy ministers from—that was already there, and four young people who only three of them—three of them have never served in government before, they come from outside. They come from the private sector. All of them are younger than I am. The whole government, by the way—you know, I'm the second oldest person in government, so the whole government is younger than I am. Someone grasps the ministry and the age of the ministers and, you know, it was all the 30, 35-year olds were here and I was all the way over here on the graph. It's a unique feature.

This isn't—we all have shown that this model which worked for the Baltics, which worked for Poland, which worked for the central and eastern European countries, this model can work in a form of Soviet country.

JEFFERY: All right. We've got a lot of questions here.

QUESTION: My name is Mahtsen Burkhardt (ph). I'm the U.S. correspondent for Danish newspaper Information. I wanted to ask you about the oligarchs. Your president is an oligarch by origin at least, and he, like the former Italian premier, still has his own company's chocolate empire. He is involved in media, like Berlusconi was. So—and I think your constitution actually forbids that. And so I—I'm—I wanted you to talk about what could be done with a president in that position to basically deal with the monopolies that oligarchs have been using to control large sectors of the economy. And that speaks, obviously, to the question of transparency, it speaks to the question of competitiveness of Ukrainian economy.

JARESKO: Yes, I—I think—I think the use of the term oligarch, especially if you want to talk about oligarchs and having monopolies, is not something you can use with our president. Our president is involved in two sectors, confectionary and media in the past, both of which are very competitive. In fact, in confectionary, as an example, he competes with Nestle and Kraft. So is he a business tycoon? Yes, he was a business tycoon, there's no question. He is selling his property, so he has an hired investment banker and the confectionary's up for sale. And I believe he has every desire to sell it. Unfortunately, we've having some trouble getting foreign investors into the country at a pace that we'd like to see but I think he's committed, he's absolutely committed to divesting. As I said, he's turned it over to investment bankers and the process is underway.

I think there is a segment of the population in business tycoons which are more what you're describing who are involved in monopolies, and I think anti-trust is something that is critical for us to get past this. A true anti-trust program we have to strengthen our anti-monopoly committee, we have to change the rules. I think everyone's aware of that.

Some of the things that we've already done to try and change the behavior, let's say, of these business tycoons, some of whom are oligarchs, has to do with, as I said, bringing them back into the tax sharing burden so eliminating transfer pricing, especially for commodities. That's important because commodities were being sold for 10 cents to mother companies outside and then the mother companies outside were selling that commodity for $100 a ton. And that—and we were not participating in the—in the tax base of that profitable enterprise.

I - I think it's important to have everyone pay their taxes from an administration standpoint as well. We adopted a law in December which allows us if a company is—has acknowledged that they owe us taxes, that we can actually take the money from their bank account. In the past, oligarchs have avoided that by hanging it up in some courts or just, you know, not being willing to pay. We eliminate that leverage that they have.

Another area where oligarchs have been painful for us is in the banking sector, particularly painful for me because I see us having to recapitalize banks, having to recapitalize our version of the FDIC. And we recently passed a law against related-party lending or related-party transactions that cause banks to fail. In particular, it's a law enforcement issue. If you used related-party transactions in a fraudulent and/or criminal fashion and defrauded the depositors, you ought to be brought to justice. And that law is now in place.

None of these things have been easy. Just this week while I've been gone we re-took control over a state-owned enterprise that we share ownership with one large businessman, tycoon, and that was very hard to get through the parliament to restore for an oil company, Ukrnafta, 51 percent state control rather than having to have two-thirds. So step by step you see very specific things happening. It's not easy. I'm originally from Chicago, corruption is something you battle.

(LAUGHTER)

But in Chicago, one of the big things that happened was law enforcement. I think that's where you see things changing in Ukraine with the new anti-corruption bureau with a newly-named general prosecutor, and I think that that's where you'll see the reality of the changes.

JEFFERY: Thank you. Let's get a question from this side. Yes, sir?

QUESTION: Madam Minister, I'm Ethan Bronner from Bloomberg. I wonder if you could tell us a little bit more about your debt restructuring talks with bondholders, how it's going, how long you think the first round will last, how you're hoping to persuade the Russians to do what they said they wouldn't do, which is to accept some kind of restructuring, that kind of thing. Thank you.

JARESKO: That's three questions, OK.

(LAUGHTER)

JEFFERY: Yes.

JARESKO: The first question...

JEFFERY: Answer whichever one you want.

JARESKO: The—we don't have a first and a second and a third round. We're on a very tight schedule to save the country. We need to complete the debt restructuring as a prior action from the May review of the IMF meeting the June tranche. So I had between now and then. Working backwards, you understand we need to—we need to get through these negotiations relatively quickly.

We are boxed in to parameters of a transaction which we've agreed to and I actually think they're relative healthy parameters—perimeters with regard to reducing the debt-to-GDP ratio over time, reducing the percentage of financing in any given year to pay debt, and reducing the overall balance of payments pressure during the time of the program, over the next four years. Those three elements put us in a box that we need to then stay in. We will be using all the elements possible, meaning coupon reduction, principle reduction, maturity extension in a collaborative fashion finding some combination with our—with our creditors. I believe we're doing—as I said, on a collaborative basis, we're trying to do this in a very principled fashion. I've done very public presentations; I've invited all creditors willing to talk to us to register, to talk to us because these are tradable bonds. I don't know who holds them in many, many cases, including in the one you mentioned. I don't know who specifically holds the $3 billion bonds issued via VTB Capital in December of 2013.

So I invite them and we will do this on principles of transparency, inter-creditor equity and we will do this on the basis of being fair. And I look forward to everyone participating because I think it's in our mutual interests to get Ukraine back to a debt-sustainable country, a country that is in a good capacity to repay its debt. We're not there today and only working together can we get there.

JEFFERY: Great. Other questions? Sir?

QUESTION: Tim Frye from the Harriman Institute. You've talked a lot about the 93 percent of Ukraine that you control and you've done a really marvelous job. Can you speculate a little bit about going forward what that other 7 percent might look like as an economy going forward and how could it be integrated into Ukraine?

JARESKO: Let me start with it's never been disintegrated. Disintegrated or detached.

QUESTION: Right.

JARESKO: It doesn't exist in a detached basis. There is a single banking system, there's a single gas system, there's a single electricity system, and that's why they've had so much difficulty through this winter because it is part of a unified country.

The Minsk II agreement gives a sense of the willingness of Ukraine to continue to decentralize authority, decentralize—providing more authority to the local regions. We just, again, this week—today's Friday of this week—adopted legislation in accordance with that Minsk agreement decentralizing power. I think there's—again, on the part of Kiev, on the part of—of our government, every vision and willingness to do so, we've actually decentralized our entire budget system in December, giving local authorities more tax authority, tax responsibility at their own level for the first time in the history of the country, so we're doing that. Again, whether or not it's part of a ceasefire agreement, that's what we're doing because we know that's the right thing and that's what we want to do.

So I don't—I can't say to you that I see it as a separate economy; it's part of Ukraine. What I see is regaining a semblance of—of peace, control, implementing in full the Minsk agreements, meaning pulling all heavy artillery out, foreign troops out, getting Ukraine—recontrol its borders, and an exchange of all hostages. And I have to say that because there are hostages still being held. We have one of our air force pilots being held in Moscow. She's on her—she stopped recently but she had been over 75 days in a hunger strike and that's part of the Minsk agreement. We need to get all of it done to restore peace.

But Donbass is as important and integral part of the Ukrainian economy. That's why last year was so difficult for us. It will require, frankly speaking, tens of billions of dollars for rebuilding. I think there's a thing called the Kremlin's black book out there. If you take a look at it, it talks about, you know, the number of apartment buildings that have been bombed, the number of gas pipelines that have been destroyed, the number of the—airport—everyone's seen the Donetsk Airport. You know, this is tens of billions of dollars of rebuilding. It's a new Marshall Plan, when the time comes.

JEFFERY: Other questions? OK, last—yes, sir?

QUESTION: Michael Levi, Council on Foreign Relations. I take your point on sanctions being important from a political standpoint to put pressure on Russia. But as you see a weakening Russian economy, does that create spillover challenges for Ukraine? How do you figure that dimension into your planning for the future?

JANESKO: If you mean from a trade perspective, our trade has already taken a big hit. There are multiple categories, there's trade that has been important in the past for Ukraine, number one has been gas. We will never return to importing 100 percent of our gas. It's just not appropriate. No one would if they had a choice to diversify. They would—they will always diversify so that will not come back.

There's a portion of our trade that's been very critical over the years and that's military and dual-use technology which has stopped, as you can well imagine. Why? I don't expect that to restart in the near future.

There's a heavy industry portion of our trade which is, unfortunately, based in Donbass and is—and is in very rough shape in many cases. The factories have been bombed. And so I don't know when that'll be rebuilt.

And then the final part that's been very critical for us is food processing and food where, unfortunately, Russia has implemented a number of non-tariff barriers to our trade. We would love for that trade to come back over time. There's nothing really we can do about those non-tariff barriers.

To the extent, frankly speaking, that the Russian economy suffers, it's not good for anyone. But I don't believe, for example, that sanctions were meant to hurt the Russian people; they should not be meant to hurt the Russian people, the Russian economy. And I go back, Russian—the sanctions against Russia were meant to have a psychological effect pn the decision making with regard to aggression. And I think, you know, the aggression stops, you know, we implement the Minsk agreement, happy to trade.

JEFFERY: Great. And one last question.

QUESTION: Stanl Heginbotham, Paul and Daisy Soros Fellowships Program. I wondered if we could ask for a more personal reflection on you as aUkrainian-American. I was in Lviv in 1990 and there was such enthusiasm and hope and I wondered if you could reflect on your own sense of what you're most proud of of what's happened in western Ukraine, and what you're most frustrated about and would like to see changed in that area?

JANESKO: In western Ukraine? I think western Ukraine has a done a fabulous job in developing new economic potential. Lviv has been the center for tourism, it's been a center for the IT cluster and it's shown that it's diversified to a great extent from the traditional economy and I think that's the big plus of Western Ukraine, not to mention its patriotism which is always very supportive and helpful.

My greatest—my greatest frustration in western Ukraine, I never think of it that way. That's a great question. My greatest frustration would be that a large number of people have emigrated over the past 23 years. We've lost a great amount of the value of the people in western Ukraine because they've been close to the border and they have a very international perspective and they've been more willing to emigrate, whether it's to the United States, to Europe or elsewhere. And so I would hope both from a demographic standpoint but just from, again, a patriotism standpoint, that they will come back with the resources that they've accumulated, with the talents and skills that they've taken from abroad, and they come back home and repopulate the villages and towns and businesses and rebuild that part of Ukraine.

It's s—it's a challenge, as you can well imagine, because you want every family wants to raise their children as best—I mean, what's your life? Your life is always about, you know, the next generation, and people make decisions for that generation. And when we as a government and we as a state can make sure that every parent that's making that decision is saying, "Yes, I want my child to grow up here," with the proper education system, with the proper medical system, I want my children here, they we'll have succeeded.

JEFFERY: Well, Madame Minister, I can't resist saying it. When you're finished in the Ukraine, I think there are other countries who could use your insight and leadership.

(LAUGHTER)

JEFFERY: But on behalf of all members of the...

JANESKO: Take a vacation after this.

JEFFERY: ... council who are here today and listening, thank you ever so much.

(APPLAUSE)

JANESKO: Thank you very much.

END