8. PRICE WAR THREATENS UKRAINE’S ECONOMY

Reuters, Kiev, Ukraine,
Monday, December 19, 2005

KIEV — A row with Russia that could see dramatic gas price rises will put
the brakes further on Ukrainian economic expansion next year and eat into
profit margins of major exporters, analysts and officials said on Friday.

“A sharp increase in energy prices is coming. It will be a big blow to the
steel and chemicals sectors, which provide over 30 percent of export
revenue,” said Anatoly Danilenko, deputy head of the Academy of Sciences’
Economic Forecasts Institute.

Ukraine has a Soviet-style economy in which exports account for over 60
percent of gross domestic product. Industry is dominated by steel and
chemicals, both requiring vast supplies of gas.

Heavy reliance on exports has already cost Ukraine, with the economy
contracting by 2.7 percent year on year in November. That took growth for
the first 11 months of the year to just 2.2 percent, the slowest pace in
five years.

A further slowdown could set in next year. Some analysts predict a
contraction due to the gas dispute with Russia, political uncertainty and
delayed implementation of reforms as politicians gear up for a March
parliamentary election.

Kiev and Moscow have been at loggerheads over gas prices and transit since
Viktor Yushchenko took power in Ukraine in January, propelled to victory
over a Kremlin-backed candidate in the Orange Revolution. But rhetoric has
toughened as the parliamentary election campaign becomes more intense.

Anatoly Kinakh, secretary of the National Defense and Security Council, said
if gas prices climbed over $95, most Ukrainian chemicals companies would go
into the red.

Industrial Minister Volodymyr Shandra said steelmakers’ profit margins would
slump to under 3 percent from 13 percent. “The industry will survive but
profitability will be very different,” he said, adding the only way out was
to improve energy efficiency. -30-

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