AUR#643Macroeconomic Situation Update By SigmaBleyzer; Constitutional Reform Allows Oligarchs To Seize Power; Denounce Gas Deal Immediately

THE ACTION UKRAINE REPORT – AUR
An International Newsletter, The Latest, Up-To-Date
In-Depth Ukrainian News, Analysis and Commentary

Ukrainian History, Culture, Arts, Business, Religion,
Sports, Government, and Politics, in Ukraine and Around the World

THE ACTION UKRAINE REPORT – AUR – Number 643
Mr. E. Morgan Williams, Publisher and Editor
Washington, D.C., Kyiv, Ukraine, TUESDAY, JANUARY 17, 2006

——–INDEX OF ARTICLES——–
Clicking on the title of any article takes you directly to the article.
Return to the Index by clicking on Return to Index at the end of each article

1. UKRAINE – MACROECONOMIC SITUATION – DECEMBER 2005
REPORT AND ANALYSIS: By Olga Pogarska and Edilberto Segura
SigmaBleyzer Emerging Markets Private Equity Investment Group
Kyiv, Ukraine, Monday, January 16, 2006

2. TRANSCARPATHIA ATTRACTING MORE FOREIGN INVESTORS
Food, wood treating industries, mfg of household appliances, tourism
Ukrinform, Kyiv, Ukraine, Monday, January 16, 2006

3. METRO CASH & CARRY MOVES INTO WESTERN UKRAINE
Opens wholesale trading center on outskirts of Lviv
Ukrainian Times, Kyiv, Ukraine, Monday, January 16, 2006

4. GERMAN INVESTORS IN ODESA HAVE OPTIMISTIC VIEW
ON UKRAINE’S ECONOMIC PROSPECTS
Ukrinform, Kyiv, Ukraine, Saturday, January 14, 2006

5. KRYVORIZHSTAL RENAMED MITTAL STEEL KRIVOI ROG
Ukrinform, Kyiv, Ukraine, Saturday, January 14, 2006

6. UKRAINE IN TOP FIVE COUNTRIES FOR NUMBER OF
ROCKET LAUNCHES IN 2005
Ukrainian News Agency, Kyiv, Ukraine, Monday, January 16, 2006

7. CONSTITUTIONAL REFORMS IN UKRAINE WILL LEAD TO
A SEIZURE OF POWER BY THE OLIGARCHS SAYS ZINCHENKO
New prime minister will be hostage to the oligarchs behind the parties
Interfax, Moscow, Russia, Monday, January 16, 2006

8. UKRAINIAN PRESIDENT’S PARTY ‘OUR UKRAINE’ BEGINS WORK ON NEW CONSTITUTION

Interfax-Ukraine news agency, Kiev, in Russian Mon, 16 Jan 06
BBC Monitoring Service, UK, in English, Monday, Jan 16, 2006

9. VIKTOR YUSHENKO MUST DEFEND AND UPHOLD THE INTEREST OF UKRAINE AND ITS CONSTITUTION

LETTER TO THE EDITOR: By Anthony van der Craats, Australia
Published by The Action Ukraine Report (AUR), #643, Article 9
Washington, D.C., Tuesday, January 17, 2006

10. RECENT OUTCAST IS BACK IN FAVOR IN UKRAINE RACE Yanukovych, chosen heir of discredited and unpopular government

By Steven Lee Myers, The New York Times
New York, New York, Tuesday, January 17, 2006

11. ORANGE OPPOSITION
Republican lobbyist in Washington signs on to help Viktor Yanukovych
Washington Wire, The Wall Street Journal, NY, NY, Tue, Jan 10, 2006

12. YUSHCHENKO’S DEFEATED RIVAL MOUNTS FRESH ATTACK
Olena Horodetska, Reuters, Kiev, Ukraine, Friday, Jan 13, 2006

13. SEVEN QUESTIONS – ONE ANSWER
Questions about the ouster of Yuri Ekhanurov’s Cabinet
Representative government is a highly demanding instrument, indeed. And
nobody wants to hear that instrument playing a death march for our hopes.
ANALYSIS & COMMENTARY
: By Serhii Rakhmanin
Zerkalo Nedeli On The Web (ZN), Mirror-Weekly, #1 (580)
International Social Political Weekly
Kyiv, Ukraine, Saturday, 14-20 January 2006

14. UKRAINE PARLIAMENT SPEAKER LYTVYN DEFIANT OVER VOTE DISMISSING CABINET
INTERVIEW: With Ukraine’s parliament speaker Volodymyr Lytvyn
BY: Mara D. Bellaby, AP Worldstream, Kiev, Ukraine, Mon, Jan 16, 2006

15. DEFUSE RUSSIA’S ENERGY WEAPON
COMMENTARY: By Keith Smith
International Herald Tribune (IHT)
Paris, France, Tuesday, January 17, 2006

16. GAZPROM WANTS TRANSPARENT UKRAINE DISTRIBUTOR
Secretive intermediary RosUkrEnergo with unidentified owners
By Neil Buckley in Moscow and Tom Warner in Ukraine
Financial Times, London, United Kingdom, Mon, January 16 2006

17. SHALOM GAZAVAT!
Best solution for Ukraine would be to denounce gas agreement immediately,
revoke O.Ivchenko’s signature on grounds of his exceeding his
mandate, continue its talks with the Russian Federation and turn to the
Stockholm Chamber of Commerce for arbitration.
ANALYSIS & COMMENTARY: By Alla Yeremenko
Zerkalo Nedeli On The Web (ZN), Mirror-Weekly, #1 (580)
International Social Political Weekly
Kyiv, Ukraine, Saturday, 14-20 January 2006
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1. UKRAINE – MACROECONOMIC SITUATION – DECEMBER 2005

REPORT AND ANALYSIS: By Olga Pogarska and Edilberto Segura
SigmaBleyzer Emerging Markets Private Equity Investment Group
Kyiv, Ukraine, Monday, January 16, 2006

SUMMARY
[1] Over January-November, Ukrainian economic growth reported a
2.2% year-over-year (yoy) increase; the whole year economic growth
may accelerate slightly to 2.4% yoy due to a lower base.

[2] A 90% increase in imported gas prices in January 2006 will have a
significant impact on Ukraine’s macroeconomic performance in the
short-run; however, the economy may benefit in the medium-run from
introduction of energy-saving technologies.

[3] In January-October, the consolidated budget remained in surplus
at 1.6% of GDP.

[4] The parliament approved the 2006 budget with a targeted deficit
of about 2.6% of GDP and a number of risks.

[5] Consumer price inflation continued to decelerate. The trend is
expected to continue next year; however, year-end inflation this and
next year are unlikely to return to single digits.

[6] Although the merchandise trade balance will continue to worsen
through the rest of the year, the current account balance will remain
in surplus thanks to a positive balance of services trade.

[7] Net inflow of FDI will reach a record high level in 2005 due to
the successful re-privatization of Kryvorizhstal and a number of
acquisitions in the banking sector.

ECONOMIC GROWTH
In November, a substantial decline of value added in domestic trade and the
continuing slowdown in industry contributed to a reversal of GDP growth
dynamics. During the month, real GDP declined by 2.7% yoy after
encouraging growth at 3% yoy in September and 2.2% yoy in October. As
a result, cumulative economic growth slowed to 2.2% yoy.

During the year, the government revised its full-year GDP forecast downwards
several times from the initial 8.2% yoy to 3.2-3.5% yoy at the beginning of
December. However, based on Ukraine’s economic performance during eleven
months of the year, we believe 2005 growth will amount to 2-2.4% yoy.

Despite a good harvest this year and an easing high base effect, value added
growth in agriculture remained quite moderate at 2.3% yoy over the period.
Domestic trade, which accounts for more than 12% of the total value added,
reported an 8.5% yoy decline, twice as large as in the previous period.

By structure, it was wholesale trade that reported an almost 15% yoy decline
over January-November as retail trade turnover continued to grow, benefiting
from the population’s increased income. Wholesale trade was affected by poor
merchandise export performance and decelerating domestically-oriented
industries, because domestically produced products account for 73.4% of the
total wholesale trade turnover according to official statistics.

Over January-November, value added in construction reported a 6.9% yoy
decline, the same rate as in the previous period. Contraction in the sector
this year is attributed to a high base effect due to a number of
infrastructure and repair works last year. On the upside, transport was the
main contributor to period GDP growth, accelerating to 7.9% yoy.

Ukraine’s industrial production continued to decelerate, with output
reporting 2% yoy growth in November (down from 2.4% yoy in October)
and 2.9% yoy in January-November. In the corresponding period last year,
industrial output grew by 13.4% yoy, underpinned by an impressive 15.5%
yoy increase in manufacturing.

This year, manufacturing production decelerated to 2.7% yoy on the back
of a contraction in metallurgy and oil refining and a considerable slowdown
in machine-building. Difficulties in metallurgy are primarily explained by
worsening export opportunities for steel products.

Over January-November, metallurgical production declined by 2.1% yoy.
However in November, industry continued to recover, demonstrating a 1.7%
yoy increase in output. The growth in metallurgy over the last two months
may be attributable to the stabilization of world steel prices during
September-October. Machine-building production picked up to 15% yoy in
November thanks to recovered external demand. As a result, cumulative
growth expanded to 6.1% yoy over January-November, up from 5.2% yoy
in the previous period.

Food processing demonstrated healthy 13.7% yoy growth since the beginning
of the year. Benefiting from high external demand, the traditionally
sluggish extractive industry and utilities demonstrated 4.1% yoy and 2.5%
yoy growth over the period, respectively.

Until recently, the government forecasted GDP growth at 7% yoy in 2006,
inflation at 9.7% yoy and a consolidated fiscal deficit at 2.5% of GDP.
Although international organizations were more modest in their estimates,
forecasting GDP growth at 5-5.5% yoy and double digit inflation, the overall
economic performance looked encouraging. Domestic demand is expected to
be robust next year, although the growth rates will be lower compared to
this year due to a high base effect and more moderate income growth.

Investment activity in the first half of 2006 will be affected by political
uncertainty due to parliamentary elections and enforcement of changes to
the constitution; however, it is expected to rebound in the rest of the
year. The prospects for Ukrainian exports are not very favorable next
year because of the expected slowdown in the world economy.

At the same time, while world steel prices are forecasted to continue to
decline next year, the trend will be much flatter than this year and prices
will remain at a fairly high level. However, almost twofold increase in
imported gas prices for Ukraine since the beginning of 2006 dramatically
changed the prospects for the country’s economy.

Ukraine inherited a very energy intensive industrial sector from the Soviet
period. Being one of the largest consumers of natural gas in the world,
Ukraine did very little to reduce its gas consumption since independence.
Although Ukraine has its own gas resources, domestic gas production
accounts for about 25% of the demand. The remainder is imported from
Russia and Turkmenistan (about 35% and 40%, respectively).

According to a barter arrangement with Russia, in 2005 Ukraine received
about 24 billion cubic meters (m3) of gas each year at a price $50 per 1000
as a payment for transit of about 125 billion m3 of Russian gas to Europe.
The transit fee was set at $1.09 per 1000 m3 100 km.

According to the new agreement between Ukraine and Russia, starting
January 1st 2006 the new gas price for Ukraine will be $95 per 1000 m3
at the Russian-Ukrainian border. Although the higher gas bill for Ukraine
will be partially offset by an increase in the transit fee to $1.6 per 1000 m3
100 km, the increase in gas prices will have a significant impact on Ukraine’s
economy in the short run.

In particular, GDP may show meager growth or even decline in 2006 as
energy imports will increase and a number of export-oriented industries
(such as chemicals and metallurgy) will be affected.

In addition, the hike in gas prices will lead to higher inflation, a larger
consolidated fiscal deficit and a reversal of current account balance from
surplus to moderate deficit. On a positive note, an increase in gas prices
will stimulate investments in energy-saving technologies and hasten the
adjustment of tariffs to cost-recovery levels. In the medium-run, it should
lead to a diversification of the economy and improvements in energy
conservation.

FISCAL POLICY
Despite the generally poor performance in the real sector, the consolidated
budget posted a surplus of UAH 5.3 billion (about $1.05 billion) over
January-October, which is equivalent to 1.6% of period GDP. The surplus
was achieved thanks to a considerable increase in tax proceeds due to
elimination of a number of tax privileges at the beginning of the year and
improved tax compliance, as well as payments of enterprise profit tax in
advance.

As of December 1st, VAT refund arrears were almost fully repaid according to
the Ministry of Finance. Over January-October, consolidated budget revenues
went up by a real 33.8% yoy to reach UAH 105.7 billion ($20.9 billion),
while expenditures grew by a more moderate 19.4% yoy to UAH 100.3 billion
($19.9 billion).

However, due to further increases in social payments at the end of the year,
the expected state budget deficit will reach UAH 9.53 billion, or 2.3% of
forecasted full-year GDP as envisioned in the amended 2005 State Budget.

Following three months of tough debates, the parliament approved the 2006
budget with the targeted deficit of about 2.6% of GDP at the end of
December. The budget, which is considered a political rather than an
economic compromise, contains a number of risks.

[1] First, it was developed based on quite optimistic macroeconomic
indicators (in particular, 7% yoy economic growth).
[2] Second, despite the generally accepted view that following the large
hike in social spending in 2004-2005 future budgets should focus on
economic development and investment needs, the 2006 budget envisages
further increases in minimum wages, pensions, the subsistence level and
other social outlays.
[3] Third, a small reduction in several tax rates next year (a meager 1
percentage point (pp) cut in the payroll tax rate and a 0.2 pp reduction in
the pension duty on foreign exchange sales to 1.3%) do not do much to
ease the tax pressure for businesses. Due to the upcoming parliamentary
elections, the long-awaited comprehensive tax reform is unlikely to
commence before 2007.
[4] And last but not least, the adopted budget was developed keeping the
gas prices imported from Russia and Turkmenistan unchanged. Most likely,
the budget will be amended shortly after March’s parliamentary elections.

MONETARY POLICY
Despite the accelerating consumer price index (CPI) on a month-to month
basis, it continued to decline in annual terms, reporting a 12% yoy increase
in November (down from 12.4% yoy in the previous month.) Monthly inflation
picked up to 1.2% in November, driven by a 1.4% month-over-month (mom)
increase in food prices.

However, food prices continued to decelerate to 13.2% in annual terms, down
from 13.6% yoy a month ago. Some increase in annual prices for vegetables,
sugar and bread was compensated for by decelerating prices on meat, milk and
cereals. In annual terms, the non-food price index was on a declining trend,
reporting a 4.8% yoy increase in November (down from 5.1% yoy in October)
as price deceleration was observed for most non-food commodities.

Following the stabilization of world prices, domestic gasoline prices
declined for the second month in a row (down by 2.8% mom). However,
affected by high gasoline prices in previous periods, transportation tariffs
continued to increase, although at a slower pace. In November,
transportation tariffs grew to 26.8% yoy, up from 26.1% yoy in October.

On account of the high base in the previous year, the cost of public
utilities decelerated to 12.8% yoy in November, down from 14% yoy a
month before. As a result, the growth of service tariffs slowed to 14.2%
yoy. In November, the producer price index (PPI) continued to decelerate.
Reporting a 10.3% yoy increase in November (down from 12.8% yoy in
October), producer inflation was below consumer inflation for the fist time
since mid-2003.

Year-end consumer inflation will most likely be lower than last year’s, but
will remain in double digits at around 11.5% yoy affected by the surge in
the population’s income and a number of supply side shocks (e.g., the rapid
increase in world oil prices).

For next year, the government forecasts inflation to decline to 9.7% yoy.
However, the high oil prices that affected transportation tariffs this year
may continue to pressure inflation next year too as a spillover effect on
other prices. The anticipated sharp increase in gas prices next year will
lead to an upward revision in administered prices.

At the end of December, the government announced a 20% hike in electricity
tariffs for the population with the consequent 10% increase each quarter to
reach cost-covering level. Moreover, gas tariffs for both industrial
producers and households will be increase by 25% on average at the
beginning of 2006.

In addition, loose fiscal policy next year and the NBU’s firm intention
(expressed in 2006 Monetary Policy Guidelines) to maintain a de facto
exchange rate peg will make the NBU’s task of reducing inflation to single
digits difficult to achieve. Nevertheless, inflation is expected to be on a
declining trend, though rather flat.

During November, the growth of monetary aggregates was rather moderate as
money supply advanced by 0.3% mom while money base reported a decline
of 2.8% mom. However, due to money transferring to the former owners of
Kryvorizhstal on the last day of the month, the growth rates of the
respective aggregates accelerated to 3.1% mom and 4.6% yoy respectively.

As a result, the money base accelerated to 49.6% yoy in annual terms (up
from 34.6% yoy in October), while the money supply increased by 44% yoy
(up from 38.5% yoy.) Due to the shortage of liquidity (currency in
circulation increased by a meager 0.3% mom in November), commercial
banks increased their deposit rates to an average of 7.7%, up from 7.4%
yoy during September-October.

Affected also by a low base, this led to an acceleration of the deposit
growth to 47.6% yoy, up from 40.6% yoy in the previous month. This, in
turn, allowed for further expansion of private sector lending. During the
month, the growth of domestic credit increased to 49.7% yoy, 1 higher than
in the previous month.

During December, the foreign exchange market was almost balanced and the
NBU did not intervene in the market. As a result, the official exchange rate
remained stable at 5.05 UAH/USD, while international reserves increased only
marginally from the surge at the end of November. On the contrary, the cash
exchange rate showed a slight depreciation in the second half of December,
which may be explained by increasing uncertainly related to the gas price
issue and the upcoming parliamentary elections.

INTERNATIONAL TRADE AND CAPITAL
Over January-October, Ukraine’s merchandise foreign trade balance continued
to worsen, reporting a more than $1 billion deficit. Robust growth of
domestic demand and high world crude oil prices contributed to the 25.3%
yoy growth in imports. At the same time, exports showed a meager 6.3% yoy
increase over the period affected by weaker external demand for steel
products, sharp national currency appreciation in April and general cooling
of Ukraine’s economy.

Imports growth is expected to be high next year closely linked with a
further rise in population incomes, the anticipated rebound in investment
activity and more expensive energy imports. As steel prices are forecasted
to continue falling next year and a number of export-oriented industries
(like metallurgy and chemicals) may be severely affected by a possible sharp
increase in gas prices or gas shortages, export growth is expected to be
quite moderate. This will lead to further widening of the trade deficit next
year.

By product breakdown, cross border metals sales continued to slow,
reporting a 12.8% yoy increase over January-October versus 14.1% yoy
over January-September. Slight acceleration of metals export growth to
2.5% yoy in October may be explained by an upward trend of world steel
prices in September and almost stable prices in October.

An expansion of machinery and equipment exports at 20.7% yoy in October,
although encouraging, may reflect the softening high base effect.
Cumulatively, machinery and equipment exports declined by 9.1% yoy. On the
import side, energy resources and investment goods such as machinery and
equipment remained the two largest items of merchandise import, accounting
for 33.4% and 17.2% respectively.

Over January-October, imports of machinery and equipment increased by
about 34.4% yoy while imports of energy reported a 8.6% yoy increase. The
geographical breakdown of Ukraine’s foreign trade reveals an increasing
export bias towards Russia, whose share of total exports increased from
about 18% in 2004 to 21.6% at the end of November.

On the import side, the share of CIS countries in total imports, and Russia
in particular, declined slightly in favor of European countries. In
January-November, European countries’ and Russia’s shares constituted
34.1% (up from 32.6% in 2004) and 36.6% (down from 40.7%) respectively.

Deterioration of merchandise foreign trade was compensated for by the
strong position of Ukraine’s foreign trade of services. According to the
NBU, the nine-month service trade balance reported a $933 million surplus,
which is more than 8% yoy higher.

Over the period, the current account surplus shrunk by almost 63%; however,
it remained in surplus of $2.1 billion, which is equivalent to 0.7% of
period GDP. Although the current account will continue to worsen, it is
unlikely to turn into a deficit by the end of the year.

Despite a considerable economic growth slowdown, Ukraine will post record
FDI inflows this year. Although the net FDI inflow was almost 25% yoy lower
in January-September, successful re-privatization of metallurgical plant
Kryvorizhstal and a number of acquisitions in the banking sector will boost
FDI to a record high $7 billion.

INTERNATIONAL PROGRAMS
In mid-December, the Verkhovna Rada ratified an agreement between Ukraine
and the World Bank (WB) signed in September. The $106 million is loaned
for reconstruction of nine hydroelectric power stations. Reconstruction is
expected to be completed by the end of 2011, while the loan is granted for
18.5 years with a grace period of 6 years and a LIBOR + 0.75% interest rate.

At the end of November, the WB announced that it completed the preparation
of two more projects totaling $290 million. The Bank plans to allocate $150
million to improving the rural population and municipalities’ access to
financial services.

The other project is designed to provide loans to local governments and
utilities for priority investments in improving infrastructure (water
supply, waste-processing systems, etc.) In mid-November, another $99.4
billion project started aimed at modernization of the social assistance
system.

In mid-December, the European Bank for Reconstruction and Development
announced its intent to invest about EUR500 billion in Ukraine. The
investments will be directed at mortgage, energy saving, leasing and other
programs. Out of that amount, EUR 40 billion is reserved for SigmaBleyzer’s
Southeast European Fund IV.

OTHER DEVELOPMENTS AND REFORMS AFFECTING
THE INVESTMENT CLIMATE
On November 26th, the parliamentary election campaign officially started in
Ukraine. 52 political parties and blocks expressed the intent to participate
in the elections. For the first time, elections will be held on a
proportional vote system replacing the mixed (proportional-majority) vote
system.

Moreover, the parliament will be elected for five years instead of the
previous four years. According to the polls, about six political parties
have a chance to pass the threshold requirement of 3%. The Party of
Regions of Ukraine headed by Mr. Yanukovich, the former rival of
President Yushchenko during the presidential elections last year, holds the
leading positions. The others are the People’s Union of Our Ukraine, Yulia
Tymoshenko’s Block, the People’s Block of Lytvyn, and the Socialist and
Communist parties.

Starting on January 1st, 2006, the changes to the Constitution of Ukraine
will be partially enforced, although a number of important provisions will
be fully effective after the parliamentary elections on March 26. The
constitutional reform envisages a shift to a parliamentary-presidential
republic, reducing presidential power and giving more authority to the
Parliament.

In particular, the power of the President of Ukraine is limited to the
appointment of the Prime Minister upon the formation of a majority
coalition in the Parliament, and the appointment of the Minister of
Defense, the Minister of Foreign Affairs, the Head of the National Bank,
and the Prosecutor General with the subsequent approval of the
Parliament.

However, the President will have the right to dissolve the Parliament if it
fails to form a majority coalition within one month of parliamentary
elections or if it fails to form the Cabinet of Ministries within 60 days of
the Cabinet’s resignation. In case of the Parliament’s dissolution, the
Cabinet of Ministries will also be automatically dismissed.

The powers of the Parliament of Ukraine were widened to include the right
to approve other Ministers (except those mentioned above) and heads of
key state committees by motion of the Prime Minister, without the need for
Presidential approval. In case of early termination of the President’s
powers, the Head of the Parliament (not the Prime Minister) will act as
President until the new presidential election. -30-
———————————————————————————————-
NOTE: To read the entire SigmaBleyzer Macroeconomic Situation report
for December 2005 in a PDF format, including several color charts and
graphics click on the following link:
http://sigmableyzer.com/files/ukr_monthly_ec_report_12_05.pdf
———————————————————————————————–
CONTACT: Olga Pogarska, Kyiv, opogarska@sigmableyzer.com.ua
———————————————————————————————–
[return to index] [The Action Ukraine Report (AUR) Monitoring Service]
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2. TRANSCARPATHIA ATTRACTING MORE FOREIGN INVESTORS
Food, wood treating industries, mfg of household appliances, tourism

Ukrinform, Kyiv, Ukraine, Monday, January 16, 2006

KYIV – The town of Yaremcha, the Transcarpathian region’s tourist Mecca,
hosted an investment presentation-forum, which preceded a major investment
fair in the region to be held in summer 2006.

The forum was meant for drawing the participants’ and guests’ attention to
the region’s economic-investment opportunities, and was attended by
business figures from near and far abroad countries.

According to Pavlo Andresiak, chief of the Transcarpathian Regional
Administration’s Agency for European integration and foreign economic
contacts, the forum showed the regional authority’s openness and readiness
to cooperate with investors. During the business get-together matters were
discussed of regulating business activity, investment policies.

The participants got familiar with the region’s tourist attractions. In
particular, they visited the Alpine skiing center Bukovel.

The Transcarpathian region’s investment attractiveness can be seen from
the fact that investors from a score of countries are investing in its food,
wood treating industries, in manufacture of household appliances,

The Regional Administration counts on more investors coming to
Transcarpathia, in view of the region’s available raw materials, energy
resources and relatively cheap (under four euro per sq m.) lands.

To this the region’s lucrative geographic location should be added,
proximal to European countries and major railways. There are 183
deposits there of petroleum, gas, salts of potassium, magnesium, pot
clays, and lime. -30-
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[return to index] [The Action Ukraine Report (AUR) Monitoring Service]
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3. METRO CASH & CARRY MOVES INTO WESTERN UKRAINE
Opens wholesale trading center on outskirts of Lviv

Ukrainian Times, Kyiv, Ukraine, Monday, January 16, 2006

KYIV – Recently, Metro Cash & Carry Ukraine has opened a wholesale
trading center on the outskirts of Lviv near a highway running to the
Ukraine’s Polish frontier.

It is important to note that German investors pumped more than 100
million hryvnias into the pilot project and created 360 jobs.

In addition to Metro Cash & Carry, such trading enterprises as
Intermarket, VAM and Shuvar operate on the local market. Metro has
520 stores in 28 countries. -30-
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[return to index] [The Action Ukraine Report (AUR) Monitoring Service]
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4. GERMAN INVESTORS IN ODESA HAVE OPTIMISTIC VIEW ON
UKRAINE’S ECONOMIC PROSPECTS

Ukrinform, Kyiv, Ukraine, Saturday, January 14, 2006

KYIV – We have an optimistic view of Ukraine’s economic prospects, Dirk
Battermann, CEO of the company HPC – Ukraine (“Hamburg Port Consulting
GmbH – Ukraine”), told a news conference in Odesa.

The HPC-Ukraine is a daughter-company of the HHLA International, one of
Europe’s biggest operators of container terminals, and is in charge of
operating the Odesa Marine Merchant Port’s container terminal.

Over the first year of its operations in the Odesa Marine Merchant Port, the
PHC-Ukraine handled 78,000 TEU. It annually increased container handling by
25 percent to 35 percent, and in 2005 handled 288,000 TEU, 42 percent up
from 2004’s figure.

Under the company’s contract with the Odesa Marine Merchant Port in late
2005 the parties signed an investment plan to develop the terminal. The plan
provides for investing 40 M. USD in the container terminal’s technical
upgrading. By 2010 the company means to increase container handling to one
million TEU. -30-
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5. KRYVORIZHSTAL RENAMED MITTAL STEEL KRIVOI ROG

Ukrinform, Kyiv, Ukraine, Saturday, January 14, 2006

KYIV – The company Mittal Steel has announced that the KryvorizhStal mill
has been officially renamed the Mittal Steel Krivoi Rog. A decision to this
effect was made at a general meeting of the company’s stockholders.

The general meeting also appointed the company’s CEO and elected its board
of directors, headed by Narendra Chaudhari, who has a 40-year experience of
managerial work. He has been with the Mittal Steel since 1993. He was once
executive director of the Mittal Steel Galati (Romania) and Mittal Steel
Temirtau (Kazakhstan).

The general meeting elected the company’s new supervisory Panel, composed
of Malai Mukherjee, Vijai Bhatnagar, Gregor Munstermann, Simon Ivans,
Sherde de Vrise.

The KryvorizhStal is Ukraine’s biggest steel works, accounting for around
20 percent of Ukraine’s metal market. Its facilities allow to annually make
over 6 M. tons of rolled metal, about 7 M. tons of steel and over 7.8 M.
tons of cast iron.

UKRINFORM NOTE: The company Mittal Steel is the world’s biggest
manufacturer of steel and runs steel mills in fourteen countries. It supplies
its metal to major automakers, enginery industry enterprises, construction
businesses.

In 2004 the company’s profits were posted at 22.2 bn. USD. It made
42.1 M. tons of steel in 2004. The company is operational at the NYSE
and Amsterdam’s Euronext, under the MT brand name. -30-
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6. UKRAINE IN TOP FIVE COUNTRIES FOR NUMBER OF
ROCKET LAUNCHES IN 2005

Ukrainian News Agency, Kyiv, Ukraine, Monday, January 16, 2006

KYIV – Ukraine has entered a top five list of countries that launched the
largest number of rockets boosters in 2005. This follows from a statement of
the National Space Agency, with reference to the report on space activity in
2005, drawn by corresponding member of the Russian Academy of Space
Technology Aleksandr Zhelezniakov.

According to the statement, in 2005 a total of 55 rocket boosters were
launched from launch sites of the world.

Developer countries are listed as follows: Russia with 25 launches (first
place), the U.S. with 12 launches (second place), Ukraine, France and China
with three launches each (third place), Japan with two launches (fourth
place), and India with one launch (fifth place).

So, in 2005 Ukraine launched four rocket boosters of Ukraine-Russia
development Zenit, which took off from the floating platform Odysseus of
the rocker and space complex Sea Launch from the water area of the Pacific
Ocean near Christmas island, Australia, and one Dnipro conversion booster
that took off from the Baikonur launch center, Kazakhstan.

In 2004 Ukraine occupied the fourth place in the world as for rocket booster
launches, in 2003 it had the sixth place.

As Ukrainian News reported earlier, in March 2005 six Zenit rocket launches
involving Ukraine were planned for 2005 under the Sea Launch program. The
Zenit-3SL rocket booster launched its first satellite into orbit under the
Sea Launch program on March 28, 1999.

The Pivdennyi machine-building plant named after Makarov (Dnipropetrovsk)
and the Pivdenne design bureau (which owns a 15% stake in the Sea Launch
program), Boeing Commercial Space Company (40%), Russia’s Energiya
aerospace corporation (25%), and the British-Norwegian Kvaerner Group
(20%) are participating in the Sea Launch program.

The first and second stages of the rocket launcher were designed by the
Pivdenne design bureau and manufactured at the Pivdennyi machine-building
plant. The third stage was designed and manufactured by the Energiya
aerospace corporation.

The Dnipro rocket booster is a strategic RS-20 intercontinental ballistic
missile designed and developed by the Pivdenne design bureau and converted
at the Pivdenne machine-building plant in conjunction Ukrainian and Russian
producers. The Pivdenne state design bureau designed the Tsyklon, Mayak,
Dnipro, Zenit, and Svitiaz rocket launchers. -30-
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7. CONSTITUTIONAL REFORMS IN UKRAINE WILL LEAD TO
A SEIZURE OF POWER BY THE OLIGARCHS SAYS ZINCHENKO
New prime minister will be hostage to the oligarchs behind the parties

Interfax, Moscow, Russia, Monday, January 16, 2006

MOSCOW – The constitutional reforms in Ukraine will lead to a seizure
of power by the oligarchs rather than openness and transparency in
political processes, former Ukrainian State Secretary Oleksandr
Zinchenko, leader of the Party of Patriotic Forces, said.

“Reforms have engendered new problems, because even after they are
completed, the system of power structures will remain controversial.

Yes, some of the presidential powers will go to the prime minister. But
even in the future, after parliamentary elections, this will not
simplify political processes or make them more transparent.

In fact, the new prime minister may be hostage to the interests of large
political fractions that appoint him or, to be more precise, to the
oligarchs who stand behind fractions,” Zinchenko said in a interview
published by the Nezavisimaya Gazeta newspaper on Monday.

According to him, oligarchs will control parliamentary fractions.
“It is obvious even now that money is playing the defining role as far
as March’s parliamentary elections are concerned. Almost all political
parties or blocs include oligarchs, and they, I may assure you, are
playing key roles,” he said.

Commenting on the possible victory of Ukraine’s Party of Regions
led by former Prime Minister Viktor Yanukovich, Zinchenko said
that “there is the law of political life: the opposition may retaliate only
if the authorities’ actions are inconsistent and misguided. That is what
is happening in Ukraine.

In my opinion, Yanukovich’s victory is dangerous only because it
means a return to Kuchma’s era [Leonid Kuchma is the former

president of Ukraine].” -30-
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8. UKRAINIAN PRESIDENT’S PARTY ‘OUR UKRAINE’ BEGINS
WORK ON NEW CONSTITUTION

Interfax-Ukraine news agency, Kiev, in Russian Mon, 16 Jan 06
BBC Monitoring Service, UK, in English, Monday, Jan 16, 2006

KIEV – The manager of the Our Ukraine bloc’s election campaign [and
formal head of Our Ukraine People’s Union], Roman Bezsmertnyy, has
said that a reviewed text of the constitution will be submitted to the new
parliament [after the March election]. A special working group is working
on it, Bezsmertnyy told journalists in Lviv today.

“Tomorrow a working group resumes its work to draft a new text of the
Ukrainian constitution. The reviewed text will be submitted to a new
parliament on the first day of its work,” he said.

Bezsmertnyy also said that “together with the constitutional proposal a
whole package of accompanying laws will be submitted to parliament,
including the draft law ‘On the Cabinet of Ministers of Ukraine’, ‘On the
president of Ukraine’, ‘On parliamentary procedure’, ‘On judicial system’
and seven draft laws on administrative and territorial reform”.

The Our Ukraine bloc held a rally on Sunday [15 January in Lviv] to
support the president and the dismissed government of [Prime Minister]
Yuriy Yekhanurov. -30-
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9. VIKTOR YUSHENKO MUST DEFEND AND UPHOLD THE
INTEREST OF UKRAINE AND ITS CONSTITUTION

LETTER TO THE EDITOR: By Anthony van der Craats, Australia
Published by The Action Ukraine Report (AUR), #643, Article 9
Washington, D.C., Tuesday, January 17, 2006

I WISH to express my concern at suggestions that Viktor Yushenko, President of Ukraine, and his supporters are considering or even suggesting a challenge to amendments to the Ukraine’s Constitution agreed to in 2004.

Those that seek to undermine and overturn Ukraine’s current constitution are more interested in maintaining power as opposed to democratic rule of law.

Any suggestion or attempt to challenge the amendments in the lead-up to Ukraine’s 2006 parliamentary election would be a disaster both politically and economically for Ukraine.

The last thing Ukraine needs is a constitutional crises brought on by one individuals desire to arrest power from a democratically elected parliament.

It is “Evolution” not “Revolution” that Ukraine needs.

The move to a parliamentary democratic rule is a step in the right direction. The proposed parliamentary democratic rule is a positive and stabling influence on Ukraine’s future development. There are many successful European and other western Countries with parliamentary democracies (such as Australia, New Zealand and Canada.)

There are some aspects of Ukraine’s new constitution that I do not favour – I would have preferred a proportional preferential ballot as opposed to a party list system and believe a four-year term of office would deliver a better outcome overall. However I am fully supportive of Ukraine adopting a parliamentary democracy as opposed to retaining a presidential democracy.

Viktor Yushenko had his chance to influence the structure of Ukraine’s constitution in 2002-2004 but opportunistically refused to consider or consent to any proposed amendments prior to the 2004 Presidential election. The previous amendments to Ukraine’s constitution fell five votes short of the required 2/3rds statutory majority.

In the lead-up to the third Presidential ballot in December 2004, Viktor Yushenko consented and agreed to changes to Ukraine’s Constitution that are currently in place. Changes that will see Ukraine in 2006 adopt and implement a parliamentary democracy, similar to Hungary and Poland.

If the President is of the view that some aspects of the current constitution are not to his liking then he should seek support for further amendment though the proper process as opposed to alternative of undermining Ukraine’s current constitution.

The President of Ukraine must have faith in his people and their right to democratically elect its parliament.

If the President is sincere about democratic rule of law then he should honour his commitment and support the current constitution and put Ukraine’s interest ahead of his own personal power struggle.

He must ensure that the 2006 parliamentary election is fair, honest and a true expression and representation of Ukraine.

Viktor Yushenko must defend and uphold the interest of Ukraine and its constitution. Failure to do so would create a constitutional crises going back to the days of Oliver Cromwell.

The people of Ukraine elected Viktor Yushenko on the understanding that these amendments and changes would be put in place.

The suggestion that Viktor Yushenko may now renege on his undertaking by seeking to overturn the democratic reforms in Ukraine’s constitutional court would seriously undermine his credibility.

Creating a constitutional crises, bringing both Ukraine and his Presidency into disrepute, resulting in further political and economic instability – something Ukraine can ill afford.

Anthony van der Craats
Australia (anthony.vandercraats@gmail.com)
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10. RECENT OUTCAST IS BACK IN FAVOR IN UKRAINE RACE
Yanukovych, chosen heir of discredited and unpopular government

By Steven Lee Myers, The New York Times
New York, New York, Tuesday, January 17, 2006

KIEV, Ukraine, Jan. 14 – A campaign ad, broadcast repeatedly on television
here, shows a man basking in the adulation of flag-waving crowds reminiscent
of the protests that overturned the fraudulent election for president in
2004. But he is not Viktor A. Yushchenko, who rode those protests to the
presidency, vowing to turn Ukraine into a free and prosperous democracy.

He is the man Mr. Yushchenko defeated, Viktor F. Yanukovich, the chosen
heir of a discredited and unpopular government, who would have been
president but for those huge street demonstrations and international
diplomatic pressure.

A year ago, Mr. Yanukovich appeared disgraced, abandoned even by his
own supporters. Now he leads a party predicted to win the most seats in the
parliamentary elections that are only a little more than two months away.

Mr. Yushchenko, on the other hand, has been discredited by scandals, a
worsening economy and internal disputes over policy that led him to fire a
popular prime minister.

At a minimum Mr. Yanukovich could have a decisive role in choosing the
new – and newly empowered – prime minister. He could even become prime
minister himself, sharing power with his bitter rival. “We have set this
goal: to win the election,” Mr. Yanukovich said in an interview at his party
headquarters in a 19th-century mansion here.

The March 26 election, in which thousands of candidates from 45 parties
are competing for 450 parliamentary seats, will be the first electoral test
of the political changes that Mr. Yushchenko promised during what became
known as the Orange Revolution.

But after a year of turmoil that culminated in popular anger over his
handling of a dispute with Russia over natural gas, the prospects for Mr.
Yushchenko’s coalition are not promising.

In a poll released Friday by the Democratic Initiative Fund, Mr.
Yanukovich’s Party of Regions was favored by 31 percent of those who
responded, compared with 13 percent for Mr. Yushchenko’s bloc, led by the
faction Our Ukraine. That is 3 percentage points behind the bloc of Yulia V.
Tymoshenko, who served as his first prime minister until Mr. Yushchenko
dismissed her in September amid mutual accusations of corruption.

“The work of the authorities has been ineffective,” Mr. Yanukovich said,
when asked about his striking reversal of fortune.

“Everything that happened this year worsened the economic levels, increased
instability inside the country and worsened the image of our state in the
world. For those in Ukraine that supported Mr. Yushchenko, it was a year
of disappointment. For the part that did not, it was a year of trial,
including for myself.”

The rebound of Mr. Yanukovich is, in fact, less about his successes than Mr.
Yushchenko’s failings since he was inaugurated a year ago. While Mr.
Yushchenko is often portrayed abroad as a reform-minded democrat seeking to
realign Ukraine toward Europe and the United States, his reputation at home
has suffered from one problem after another.

“He has a Gorbachev syndrome,” said Mychailo Wynnyckyj, a professor of
sociology at the University of Kiev-Mohyla Academy, referring to the former
Soviet leader, Mikhail S. Gorbachev. “He looks better abroad than he does at
home.”

In the gas dispute, for example, Mr. Yushchenko appeared to have emerged
victorious, having resisted Russia’s demands for a nearly five-fold increase
from the $50 per thousand cubic meters Ukraine was paying under a 2004
agreement.

But critics soon pounced on the new deal, which set the price on average at
$95, publicizing details that the government had not, including the fact
that the price was fixed for only six months and is likely to rise again.

Members of Parliament and industrialists warned of harm to an already feeble
economy and questioned the role of a murky gas-trading company with ties to
Russia’s energy monopoly, Gazprom.

Last Tuesday, Parliament voted to oust Mr. Yushchenko’s prime minister and
the rest of the government. At the time of the vote Mr. Yushchenko was in
Kazakhstan, where he met with President Vladimir V. Putin of Russia to
praise the deal as mutually beneficial to both countries.

In a televised interview on Friday night, Mr. Yushchenko called those who
voted against the government “the fifth column, for which a petty corporate
or party interest is superior to stability in Ukraine now.”

The political turmoil has, for now, worsened his split with Ms. Tymoshenko,
the charismatic populist whose public role in the Orange Revolution was
second only to his.

Coalitions in Ukraine, however, are ever shifting, and one of her advisers,
Hyrhory M. Nemyrya, said Ms. Tymoshenko still hoped for an
accommodation that would reunite the forces that defeated Mr. Yanukovich,
President Leonid D. Kuchma’s chosen successor.

“The only choice for him is to choose between Tymoshenko and Yanukovich,”
Mr. Nemyrya said of Mr. Yushchenko.

Mr. Yanukovich, in contrast to Mr. Yushchenko, has succeeded in holding
together his supporters, predominantly Russian speakers in the
industrialized east and south, areas where Mr. Yushchenko has been unable to
gain support.

Mr. Yanukovich, a former mechanic who rose through the ranks of regional
government in Donetsk before serving as prime minister, remains his party’s
leader despite his defeat and other liabilities, including having served
almost four years in prison after a conviction for robbery and assault as a
young man.

In the 2004 election Mr. Yanukovich had strong support from the Kremlin. He
still vows not to change Ukraine’s foreign policy at the expense of Russia,
though he had to distance himself in the gas dispute. “It was wrong to try
to corner Ukraine,” he said of Russia.

Mr. Yushchenko’s foreign minister, Boris I. Tarasyuk, contends that despite
Mr. Yanukovich’s seemingly stronger position, Ukrainians overwhelmingly
support the course Mr. Yushchenko has set: integrating the country into the
European Union and NATO, while building a democratic society and a
market economy.

He predicted a pro-Yushchenko majority in Parliament, saying, “There will
again be a coalition that supports the president.”

Ukraine’s new Parliament will have expanded powers, including the role of
electing the prime minister, who has been appointed by the president.

Mr. Wynnyckyj, the professor of sociology, predicted a different outcome:
a chaotic period of political instability like Italy’s ever-revolving
Parliaments in the 1970’s and 80’s.

He said that even if a new government could be formed, it would soon
collapse, forcing new elections by 2007, if not sooner. “There’s no chance
of a coalition because the personalities are getting in the way,” he said.

Much depends on the fate of smaller parties, 9 or 10 of which could each
clear the 3 percent threshold for winning seats. A new one is an alliance of
the Party of Reforms and Order, a liberal party that was once Mr.
Yushchenko’s, and Pora, the youth group that provided much of the zeal
during the protests of 2004.

One of Pora’s leaders, Vladyslav V. Kaskiv, even works as a presidential
adviser, but decided to run independently out of a belief that Ukrainian
politics needed a new generation of leaders. He said the three most
prominent ones these days all possessed “the same values.”

Mr. Kaskiv was optimistic, however, about one thing. “Politics cannot
return to what it was before,” he said, articulating perhaps the greatest
success of the Orange Revolution. “It could be better or worse, but it will
be a democratic process.” -30-
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11. ORANGE OPPOSITION
Republican lobbyist in Washington signs on to help Viktor Yanukovych

Washington Wire, The Wall Street Journal, NY, NY, Tue, Jan 10, 2006

ORANGE OPPOSITION: In a hush-hush deal, longtime Republican
lobbyist Paul Manafort signs on as a behind-the-scenes campaign adviser
for the much-maligned Ukrainian opposition figure and close friend of the
Kremlin, Viktor Yanukovych, who earned the scorn of the White House
during the 2004 Orange Revolution that brought his opponent to power
in Kiev.

Manafort’s U.S. political resume includes a stint as a top strategist for
Bob Dole’s unsuccessful 1996 presidential run. — Neil King
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E-mail: washwire@wsj.com

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12. YUSHCHENKO’S DEFEATED RIVAL MOUNTS FRESH ATTACK

Olena Horodetska, Reuters, Kiev, Ukraine, Friday, Jan 13, 2006

KIEV – The man defeated by President Viktor Yushchenko in
Ukraine’s “Orange Revolution” denounced the Ukrainian leader’s rule on
Friday as impotent and backed parliament’s dismissal of his cabinet.

Ukraine is gripped by constitutional crisis with parliament and Yushchenko
accusing each other of violating the constitution after deputies gearing up
for a parliamentary election sacked the liberal government over a
contentious gas deal.

The pro-Western Yushchenko says the vote was unconstitutional and wants
it retracted. Prime Minister Yuri Yekhanurov is to stay on pending the
March 26 election.

But Viktor Yanukovich, the Kremlin’s preferred candidate in a 2004
presidential campaign won by Yushchenko after mass protests, said he was
ready to take power after the March poll.

“We have set ourselves the task of taking power,” he told a news conference.
“In one year, the current administration has showed only weakness. It has
proved it is inefficient and unable to manage the state.”

Yanukovich was the handpicked successor of ex-President Leonid Kuchma,
reviled by protesters who massed in Kiev to denounce an election later ruled
invalid by the Supreme Court.

He is still heavily backed by Ukraine’s Russian-speaking industrial east. A
survey issued on Friday by the Democratic Initiatives Fund and the Ukrainian
Sociology Service put Yanukovich’s Regions Party in the lead with a 25
percent rating.

A group led by Yulia Tymoshenko, sacked as prime minister by Yushchenko
last September, lies second with 13.6 percent, while Yushchenko’s Our
Ukraine was third with just over 11 percent.
PARLIAMENT UNLIKELY TO BACK DOWN
Parliamentary speaker Volodymyr Lytvyn said the assembly, often fractious
and unpredictable, was unlikely to back down from its decision to sack the
government.

“I don’t think there will be any consolidation in parliament to over-rule
the decision,” Lytvyn, a key figure in resolving legal rows over the rigged
election, told reporters.

“I think both the president and the government understand that nobody will
agree to the language of ultimatums.”

Parliament, however, responded to Yushchenko’s request to sit for another
week to debate laws seen as critical to the economy. It had originally
planned to go into recess on Friday.

Parliament, its members clearly keen to curry voters’ favor, passed the
censure motion to denounce a deal under which Ukraine will pay almost
double for Russian gas imports. Russian gas giant Gazprom had originally
sought a fourfold increase.

Tymoshenko, who backed Yushchenko during the 2004 protests, joined
forces with Yanukovich and his allies to bring down the government.
Yushchenko can count on no more than a third of votes in the 450-seat
parliament at the moment.

Yushchenko secured victory last year only through his party joining forces
with Tymoshenko and the small Socialist Party.

Their first year in power was plagued by a dramatic economic slowdown,
constant ministerial squabbling and corruption accusations generating
widespread voter disillusion. -30-
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13. SEVEN QUESTIONS – ONE ANSWER
Questions about the ouster of Yuri Ekhanurov’s Cabinet
Representative government is a highly demanding instrument, indeed. And
nobody wants to hear that instrument playing a death march for our hopes.

ANALYSIS & COMMENTARY: By Serhii Rakhmanin
Zerkalo Nedeli On The Web (ZN), Mirror-Weekly, #1 (580)
International Social Political Weekly
Kyiv, Ukraine, Saturday, 14-20 January 2006

The top news of the week is no doubt the Verkhovna Rada resolution,
issued on January 10. Comments on the ouster of Yuri Ekhanurov’s
Cabinet — all different, though — have come from anyone who felt like it.

The number of questions from the confused public is growing with every
passing day, as answers by furious politicians do not add any clarity to the
situation. What remains for us is to try and figure out by ourselves what
has happened.

To begin with, let’s try and answer the number-one question:
[1] DID THE VERKHOVNA RADA HAVE THE MANDATE
TO UNSEAT THE CABINET?
Answering this question is easier said than done. Yes, it did, indeed. It
had such a mandate even before this January 1, when the country’s top
legislature obtained extra levers of influence on the Cabinet of Ministers.

By the previously revised Constitution, it was the President of Ukraine who
had the exclusive authority to sack any member of the Cabinet, the Prime
Minister included, with the Premier’s ouster entailing the resignation of
the entire Cabinet.

For its part, the Verkhovna Rada was empowered to consider Cabinet’s
responsibilities and pass a vote of no-confidence in the top executive
authority. A no-confidence vote, if it garnered support from 226 deputies,
would automatically terminate the Cabinet’s mandate.

The situation changed somewhat with the coming into force on January 1
of provisions of the so called ‘political reform’. The parliament retained
its authority to give a vote of no confidence to the government, while the
President was stripped of the power to fire members of the Cabinet. From
now on, the President (like the people’s deputies themselves) is only
empowered to propose no-confidence vote in the Cabinet, with the final
say being vested in the lawmakers.

As far as the parliament is concerned, it has had its powers enlarged. In
line with the newly revised Article 85 of the Constitution, the Verkhovna
Rada’s jurisdiction now includes the ouster of the Prime Minister and more
Cabinet members.

Having learned all this, we can now pass on to the next question:
[2] WAS THE RADA’S DECISION TO FIRE THE CABINET
LEGITIMATE?
In this particular case, everything is a bit more complicated. Why? The
point is that to answer the first question we only needed to read (hereafter
italicized by the author) the text of the Constitution. As for the second
question, answering this needs interpretation of the Constitution.

But the sole official ‘interpreter’ – the Constitutional Court – is known to
have been half-staffed and therefore ineligible to give any kind of
interpretation of the true legal content of the constitutional provisions.

In a televised interview on one of these days, it was suggested that it is
the Justice Minister who should take over the power to interpret the
Constitution pending the formation of a fully competent Constitutional
Court. It’s our hope that this invented suggestion has come from the
journalistic community rather than Serhiy Holovaty himself, who has, in
recent days, said a great deal that he should not have to.

We remind you, just in case, that the exclusive authority, or – if you
please – the monopoly to interpret the Fundamental Law belongs to nobody
but the Constitutional Court. We are not empowered to do so either. But
nobody can forbid us from trying and sorting out that problem. What’s
more, we consider this our duty to our readers.

To begin with, we draw your attention to the colloquialism ‘ouster of
government’ that we consciously used above. The fact is that the newly
revised Constitution interprets the resignation of the Prime Minister (or
the whole Cabinet) in various legal terms such as ‘dismissal from office’,
‘adoption of a decision on [Cabinet’s] dismissal’ and ‘passing a
no-confidence vote’. These terms seem synonymous, but only at first
glance.

Meanwhile, either political advocates of the Rada’s scandalous resolution of
January 10 or its most hostile critics do not bother to discriminate these
three from one another. Whether they are conscious of so doing or not does
not matter now. The confused electorate is none the better for it, while the
Constitutional Court, the only body that is not only competent to bring
badly needed clarity to the situation, but is also obliged to do so, has to
keep silence for well-known reasons.

We do hope that the Constitutional Court would turn up for work soon and
expound the legal content of the three terms once and forever, thereby
disabling political provocateurs (from both camps) to exploit with impunity
the imperfections of the constitutional reform.

What remains for us is to accept the opinion offered by Oleksandr Moroz
and Victor Musiyaka that ill-thought-out moves by cynical politicians have
compromised altogether the high idea of political reform. And we yet again
refer to [Prince Klemence von] Metternich, who once observed that
“.representative government is like an instrument which only most proficient
musicians can play, because that instrument is highly demanding and very
difficult [to play]”.

The ‘instrument’ has turned too demanding, while the ‘musicians’ have
revealed not only a lack of proficiency to play it but also a lack of will
to learn to do so.

Here let’s try and analyze, using lawyers’ comments and logical laws, how
the Cabinet could have been dissolved before the expiration of its mandate.

Three legal scenarios existed there.

Scenario number one: The Prime Minister (or the entire Cabinet) could
have tendered their letters of resignation at their own free will. If so,
according to the revised Constitution, it was precisely the Verkhovna Rada
(not the President, as was the case previously) who was to accept the
resignation and oblige the Cabinet to stay on in a caretaker capacity
pending the formation of a new Cabinet.

Scenario number two: The parliament could have raised the issue of
Cabinet’s responsibility. If so, according to Articles 5.3.1 and 5.3.2 of
the Rada’s Rules of Procedure, the parliament should have done the
following:

a. place that issue on its agenda for a selected session day and garner
at least 150 votes for it;
b. meet for a session sometime in between the fifth and tenth days
following the inclusion of the subject on parliament’s calendar;
c. give the floor to the Premier and every Cabinet member who may
wish to speak;
d. pass a vote of confidence or no-confidence in the Cabinet by a
roll-call vote.

If a no-confidence vote had had received support from 226 deputies, the
Cabinet of Ministers would have had to resign and parliament, to accept the
resignation.

Scenario number three: We remind you that the newly-revised Article 85 of
the Constitution not only empowers the Rada to take decisions to sack the
Premier and the Cabinet as a whole but also actually to fire them.

Unfortunately, legal procedures for that are non-existent thus far. These
were to have been set out by the Rada’s Procedural Code and the Law on
the Cabinet of Ministers, which Victor Yushchenko, then a Presidential
candidate, singled out as one of his number-one priorities.

All of the actors in this play – the President, pro-government deputies and
lawmakers from the opposition camp – have openly neglected their duties as
lawmakers. So, the blame for the current political crisis in this country
should be equally shared between the head of state (together with his team)
and each of the people’s deputies.

Here let’s come back to our wordplay. We would venture to suggest that a
lack of a prescribed mechanism does not mean to say that the parliament did
not have the authority in principle to sack the Premier, individual
ministers or the Cabinet as a whole. But it should not have acted by
analogy – that is to exercise its new powers using the procedures prescribed
for a no-confidence vote or recommending Cabinet’s ouster.

To explain what we mean: If the Verkhovna Rada had voted for Cabinet’s
dismissal before January 10, the legitimacy of such a decision would have
been far more difficult to argue with. But the parliament did otherwise,
which gives us every ground to judge that the Rada’s decision last week is
illegitimate. This conclusion brings us to the next question:
[3] WHAT PRECISELY DID THE RADA DECIDE?
The document adopted by 250 votes of Rada deputies carries the title
“Verkhovna Rada of Ukraine Resolution on the Dismissal of the Prime
Minister of Ukraine and Members of the Cabinet of Ministers of Ukraine”.

Here let’s recall the three scenarios described above. Did Ekhanurov or
anybody of his cabinet submit letters of resignation? No, they did not. So
the first scenario is of no use in this situation.

Now we pass on to the second variant and find out that this does not
suit the situation either. Because:

a.the issue of the Cabinet’s responsibility has never been included
in the Rada’s agenda;
b. this issue has never been put to vote, hence not garnered the
required 150 votes;
c. the lawmakers have not observed the required timeframe as set
by the Rada’s internal procedural regulations;
d. the Premier and the Cabinet ministers have never been allowed
floor time to report to parliament on the work done (not only on
the natural gas agreements reached with Russia);
e. the constitutional provision demanding a no-confidence vote
in Cabinet has been effectively ignored.

We draw your attention to one nuance: a no-confidence vote and a
resolution dismissing the Cabinet are two different things from a legal
standpoint.

Finally, the third and last scenario that suggests Cabinet’s resignation.
This might be the one that would best fit the situation obtained. But most
likely it would not. Why? Because the operative part of the resolution
unequivocally reads ‘resignation of the Cabinet’.

But ‘resignation’ is not ‘dismissal’. According to Paragraph 12, Article 85
of the Constitution, these imply two different ideas: voluntary resignation
and forced resignation (following a no-confidence vote). But neither of the
two took place in our story. In this particular case, the Cabinet was
dismissed by the legislature, although even a single word about this cannot
be found in the Constitution. Article 85 empowers the deputies either to
dismiss the Premier and selected ministers (see scenario number 3) or take
a decision on the Cabinet’s resignation (scenarios #1 and #2).

The deputies have not bothered to comply with the old procedure, neither
have they found time for setting out a new one. Therefore, the legitimacy of
the Rada’s ruling looks highly questionable from a constitutional
standpoint. This raises the next question:
[4] IS THE RADA RULING VALID?
Yes it is. But we have every ground to regard the notorious resolution
#8686-2 as inconsistent with the Fundamental Law. This is nothing more
than just our judgment. This decision has never been overruled, neither
has it been officially proclaimed unconstitutional. So, much to our regret,
it remains valid for the time being.

Serhiy Holovaty, the chief of the Justice Ministry (i.e. the agency whose
principal mission is guarding the law) has come out with calls to disregard
the same law and ignore the Rada ruling.

Here are just two examples. In late 2004, the Verkhovna Rada sacked the
Yanukovych-led Cabinet, thereby violating the following:

a. its own procedural code, prescribing for this roll-call vote rather than
secret ballot, as was the case that time;
b. the Constitution, which forbids passing a vote of no-confidence in
Cabinet for 12 months after the presentation of the Cabinet program in
parliament.

The violation, though entirely evident, had never been appealed against or
repaired according to legally prescribed procedures, and hence came into
force as valid.

Another example: there was much talk of President Yushchenko having
grossly violated the Constitution in appointing governors for individual
regions.

But these nominations (though illegitimate from our viewpoint) are
considered valid unless the Constitutional Court decides otherwise.
Because it is the Constitutional Court that is vested with the exclusive
power to label a decision of this kind to be legitimate or not.

What will happen if everyone begins ignoring decisions he or she doesn’t
like? Yanukovych might consider himself the Prime Minister, and, for
example, Shcherban – the governor of Sumy region?

Justice Minister Serhiy Holovaty, who is known to have an extensive
experience with the legislature, permits himself to comment on the Rada
ruling in the most boorish terms, thereby undermining the reputation of the
authorities instead of enhancing this. A breach of law, if responded in
another breach of law, will lead to nothing but legal chaos.

Who has enough authority to overrule this parliamentary decision? There
are two possible scenarios there.

First, the Rada itself could rescind the decision at its own free will. But
this is unlikely to happen, which has been made clear by [Rada Speaker]
Volodymyr Lytvyn and opposition faction leaders.

Second, the decision could be annulled as unconstitutional by the
Constitutional Court. But he who awaits such an end to the story must
possess his soul in patience.

In formal terms, Premier Ekhanurov, Justice Minister Holovaty and more
Cabinet members have for the time being the status of ‘acting’ members of
the Cabinet, no matter how painful this might be for their ambition.
[5] WHO’S RIGHT AND WHO’S WRONG?
For answers to part of this question see the sections above. Responsibility
for what is going on in this country falls entirely on its political
community.

The Constitutional Court, being understaffed, is so far incompetent to take
any decisions. One cannot but notice that the vote on Verkhovna Rada’s
nominations for the Constitutional Court has been persistently frustrated by
deputies from both pro-presidential factions and the opposition camp.

The ‘orange,’ ‘blue-and white,’ and ‘red’ factions in parliament are equally
responsible for a situation where the country has been effectively left
without a competent body to assess whether some or other decision is
constitutional, hence legitimate or not.

The problem is that the majority of people’s deputies from various political
camps make no secret of the fact that they consider the Constitutional Court
to be not an unbiased arbitrator in legal disputes but rather a tool for
having the political reform scrapped or further advanced. Some are making
attempts to drag through and into the Court their own, while those from the
opposing camp are doing their utmost to have these attempts thwarted.
That’s it.

What is that to the people, about whose well-being both of the warring
parties are crying so much? True, the theory that the notorious natural gas
accords with the Russian Federation rode roughshod over the national
interests of Ukraine has the right to exist. But this needs to be proven,
though.

It’s most unlikely that the whole blame lies with Ekhanurov, as he is known
to have been effectively barred from decision-making on key issues. Those
who have bargained away Ukraine’s national interests, wholesale and retail,
for so long do not have the moral right to complain about these interests
being disregarded. Because they who are complaining most loudly are
hardly being guided by people’s interests in what they do.

But this, however, has nothing to do with the legal aspects of the issue.
This is rather a matter of political responsibility. The authorities have
displayed a lack of responsibility in settling energy supply issues. This is
too apparent. But the Rada turned out to be equally irresponsible, having
failed to give a political assessment to the gas accords or use its own
vested powers to influence the whole process.

Whatever the hypothetical election ambitions of Lytvyn’s or Tymoshenko’s
teams, these two could not but well understand what kind of political
consequences their anti-government move may have for the country.

The letter of the newly revised Constitution gives new legal opportunities
to this parliament. But the spirit of the revised Fundamental Law does not
give it the political right to put these opportunities into use right now.
That is if, of course, the lawmakers kept people’s interests in mind and
really cherished the idea of political reform.

The pseudo-antagonistic rhetoric by people from the former powers that be
cannot but exasperate, and the brutality of the current authorities cannot
but anger. What has in recent days been said by the presidential team, from
Bessmertny and Holovaty to Yushchenko and Ekhanurov, is strongly
reminiscent of the Kuchma’s era’s rhetoric. Sad as it may be, one should
give up hope that excessive certainty and loutish behavior will any day
cease to exist in this country’s internal policy.

Fantasies about Rada dissolution, the introduction of direct presidential
rule over the whole country or live televising of the ceremony to swear in
Constitutional Court judges are not even worth being discussed here.

What I would like to remind the President (who is continuously repeating the
story about a small group of politicos allegedly changing the Constitution
in secret assemblies) is the following:

a. all of the changes were made openly in parliament;
b. the Rada faction once led by Yushchenko was directly engaged in that
effort;
c. the President should have numbered himself among what he calls the ‘small
group’, because in 2002 he was among the most ardent proponents of the idea
to trim off the presidential powers. In 2004, in numerous statements, he
said that the ‘Nasha Ukraina’ faction would support the political reform,
promising that to Kuchma, Yanukovych, Solana, Kwasniewski, Adamkus and
millions of Ukrainians. He reiterated his loyalty to political reform many
times in 2005, too. Viktor Andriyevych [Yushchenko] should have either
displayed adherence to his principles yesterday or show consistency today.

Or kept silence altogether. So what’s next?
[6] IF THE CABINET IS CONSIDERED DISMISSED, WHO CAN
(OR MUST) FORM THE NEW ONE?
To all appearances, nobody. Deputies from Nasha Ukraina claim this authority
is, as before, vested in the President. But this is not the case. The new
Constitution has stripped the President of this power. What he can do now is
to propose nominations for the Premier’s office – compromised with the Rada
majority. This majority should be made up in line with the regulations set
out by the revised Constitution. But these regulations will not take force
until the spring of 2006.

Can the Rada do so? Ex-Justice minister Serhiy Lavrynovych says yes.
But we don’t think so. The provisions of the law mentioning this power
of the Rada all refer to Article 83 of the Constitution, which will not take
force until after the end of the March 31 parliamentary elections.

However, there is Article 114, which says that the Premier’s nomination can
be proposed by a parliamentary faction containing 226 or more deputies. This
provision, though valid from January 1, is believed by many lawyers to be
designed for the future convocation of the Rada.

Either way, it is, to put it mildly, difficult to imagine how Tymoshenko’s
bloc of parties, two of Lytvyn’s factions, social democrats (united),
Regions of Ukraine and the Communist faction can merge into a single
mega-faction.

Therefore, it could be predicted with a high degree of probability that
Ekhanurov’s Cabinet will easily last until this March.
[7] WHAT ARE THE CONSEQUENCES OF THE RADA RULING?
This offers a good deal of scenarios. But here we will only concentrate on
what it really means. The Rada resolution of January 10 (and also what
preceded and followed it) seems to have destroyed altogether the entire
coordination system for the three authorities, which means nothing more than
real paralysis for the state. What’s more, the recent events have questioned
the very prospect of the government proper existing in this country after
the election of 2006.

It is the Rada who is supposed to become the key player on the country’s
political arena after March 31. But it requires a coalition of at least 226
deputies for the Rada to become a truly effective player. Here let’s ask
ourselves whether a coalition of Nasha Ukraina, Tymoshenko’s and Lytvyn’s
blocs of parties and Regions of Ukraine is easy to imagine after what has
happened?

Does that mean to say that Nasha Ukraina stands no chances of participating
in the future ruling coalition? Is Tymoshenko going to live up to her
promise not to enter a coalition with Yanukovych? If she is, are any
coalitions possible at all with the bloc she leads?

Representative government is a highly demanding instrument, indeed. And
nobody wants to hear that instrument playing a death march for our hopes.

But this does happen every time when the law is disregarded by politicians.
———————————————————————————————-
LINK: http://www.mirror-weekly.com/ie/show/580/52317/
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[return to index] [The Action Ukraine Report (AUR) Monitoring Service]
========================================================
14. UKRAINE PARLIAMENT SPEAKER LYTVYN DEFIANT
OVER VOTE DISMISSING CABINET

INTERVIEW: With Ukraine’s parliament speaker Volodymyr Lytvyn
BY: Mara D. Bellaby, AP Worldstream, Kiev, Ukraine, Mon, Jan 16, 2006

KIEV – Ukraine’s parliament speaker said last week’s vote to fire the
Cabinet should be considered a warning to President Viktor Yushchenko,
and insisted Monday there was not enough support among lawmakers to
rescind it despite efforts from the president’s loyalists.

“We took a decision to warn the government. I look at it like a yellow
card,” Volodymyr Lytvyn told The Associated Press, referring to the
warning soccer players receive that they are at risk of being expelled
from a game.

The vote left Yushchenko and his supporters looking severely weakened
before March legislative elections, in which they need a strong showing
to be able to form the next government.

Lytvyn, who won wide respect in Ukraine for his mediation efforts during
last year’s Orange Revolution, defended parliament’s actions, and said they
could have been even more stringent. Instead, Lytvyn said lawmakers agreed
to let Prime Minister Yuriy Yekhanurov and his Cabinet continue working
under “a reduced status” as so-called acting ministers until the March 26
election.

The vote to fire the Cabinet came last Tuesday following a fierce dispute
with Russia over the price of gas, which resulted in a nearly twofold
increase for Ukraine.

Yushchenko won office in December 2004 after masses of supporters took
to the streets and the Supreme Court annulled a fraud-marred vote in which
his Russian-backed rival had been declared the victor.

But his popularity has suffered since then because of his failure to root
out long-entrenched corruption and bring economic improvements, and
because of an acrimonious split in his coalition of one-time opposition
leaders.

Yushchenko called the lawmakers’ decision to fire his Cabinet “illegal,” and
has vowed to ignore it, insisting his government would carry no prefixes
such as “acting.” He also demanded parliament rescind the vote.

On Monday, a Yushchenko ally, Our Ukraine faction member Yuriy
Karmazin, submitted the formal request to parliament, contending that the
breached the rules of parliament and constitutional norms.

But Lytvyn denied that, predicting it would get far below the 226 votes
needed to pass. “This is not an example of direct dialogue, this is not a
proposal that will help us to normalize our mutual relations,” the
parliament speaker said.

Asked how to resolve the political situation in Ukraine, Lytvyn said the
government must first acknowledge the parliamentary vote as legal. The
measure’s validity has been under debate because Ukraine is in the middle of
implementing constitutional reforms that include giving parliament, rather
than the president, the right to dismiss the government.

Lytvyn is fielding his own party in the March elections, and many polls
show that he could play a key role in any talks to form a coalition after the
vote. Initially, he had been seen as a likely ally of Yushchenko, but his
party strongly supported last week’s vote for the government’s dismissal.
——————————————————————————————-
[return to index] [The Action Ukraine Report (AUR) Monitoring Service]
========================================================
15. DEFUSE RUSSIA’S ENERGY WEAPON

COMMENTARY: By Keith Smith
International Herald Tribune (IHT)
Paris, France, Tuesday, January 17, 2006

WASHINGTON – The recent “gas war” between Ukraine and Russia was
viewed by too many in Europe and in America as a short-term crisis that
raised questions about Russia’s reliability as a stable supplier of energy.
It’s time the West ended its complacency regarding Russia’s willingness
to use its considerable energy resources for political blackmail.

Moscow’s deployment of the “energy weapon” dates from 1990, when it cut
energy supplies to the Baltic countries in a futile attempt to stifle their
independence movements. It was again used against the Baltic states in 1992,
in retaliation for demands that Russia remove its remaining military forces.

In 1993 and 1994, Russia reduced gas supplies to Ukraine, in part to
pressure Ukraine into ceding more control over its energy infrastructure and
over the Black Sea Fleet. Even Belarus, and indirectly Poland and Lithuania,
suffered in 2004 from politically motivated supply reductions.

Why has the European Union, and particularly the large gas importers like
Germany, the Netherlands and France, ignored the lack of transparency and
competition in Russia’s energy sector? The Russian pipeline monopolies of
Gazprom (natural gas) and Transneft (oil) have been given free rides in
terms of the open-market requirements of the World Trade Organization and
the EU’s own energy charter.

The EU’s agreement with Russia on its entry to the WTO gave Moscow’s
increasingly monopolistic pipeline and production companies’ carte blanche.
Russia has been able to increase its market power in Europe through the
construction of the expensive undersea Baltic Pipeline System.

The West ignored Gazprom’s takeover, with Ruhrgas’ help, of domestic
gas facilities and markets in the Baltic states. It disregarded Transneft’s
preventing Kazakhstan from supplying oil to Lithuania’s Mazheikiu Nafta
Refinery through the Russian pipeline system, even though it has the legal
right to do so.

Russia has stopped all piped shipments of oil to Latvia for the past two
years in an effort to control the port of Ventspils. Now, Moscow is again
attempting to keep non-Russian companies from buying Lithuania’s
Mazheikai Nafta Refinery and the port at Butinge.

Should this use of raw energy power not be a subject for discussion
within the European Commission?

Does the West believe that it needs Russian energy supplies more than
Russia needs the oil and gas revenue that comes from Western markets?

Russia cannot develop its vast energy fields without Western capital or
technology, but there has been no inclination by either the EU or the United
States to use their considerable leverage to force Russia to play by
transparent, competitive rules that guide business in the West, partly
because of competition by Western companies for exploration and
production rights in Russia.

The Russia-Ukraine “gas war,” which recently drew the world’s attention to
Moscow’s energy blackmail, was purportedly resolved to the satisfaction of
both sides on Jan. 4, but few people familiar with political and economic
relations between Russia and Ukraine believe that this agreement will last
very long.

Moscow’s requirement that all gas to Ukraine be contracted by the
nontransparent company RosUkrEnergo, the direct successor to the even
less transparent EuralTransGas, raises questions about the reliability of
future European gas supplies that originate in Central Asia.

Russia’s political agenda in using gas prices to punish the pro-Western
government of President Viktor Yushchenko is clear from statements made
by Russian supporters of Gazprom’s hard line and from remarks by
Russia’s few remaining reformers.

Ukraine’s politicians, however, deserve some of the blame for the present
situation. Kiev has allowed corrupt oligarchs to continue to control gas
deliveries from Russia. More damaging in the long run is the Yushchenko
government’s lack of movement in developing a level playing field for
domestic and foreign energy investors.

Ukraine could substantially reduce its dependency on Russia through rapid
reforms that permit open tenders for exploration rights and a welcoming
atmosphere for legitimate foreign energy investors. Instead, the cozy
relationship between Russian and Ukrainian energy interests persists, even
after the New Year’s Day reduction of gas supplies.

The West has the economic and political leverage to force Russia to
become more transparent and commercial in its foreign energy policies.

It cannot allow Moscow to threaten the security of Europe, particularly
the new democracies of Central Europe, through neglect or unwillingness
to face down the new imperial mindset in the Kremlin. -30-
——————————————————————————————–
NOTE: Keith Smith, a senior associate at the Center for Strategic and
International Studies [CSIS] in Washington, was U.S. ambassador to
Lithuania from 1997 to 2000. He is very active in Washington circles
regarding energy security issues especially regarding Ukraine and is
a highly regarded and frequent speaker at seminars and conferences
related to Ukraine. AUR EDITOR
——————————————————————————————–
LINK: http://www.iht.com/articles/2006/01/16/opinion/edsmith.php?rss
——————————————————————————————–
[return to index] [The Action Ukraine Report (AUR) Monitoring Service]
========================================================
16. GAZPROM WANTS TRANSPARENT UKRAINE DISTRIBUTOR
Secretive intermediary RosUkrEnergo with unidentified owners

By Neil Buckley in Moscow and Tom Warner in Ukraine
Financial Times, London, United Kingdom, Mon, January 16 2006

Gazprom, Russia’s natural gas giant, has called for greater transparency in
the ownership of a secretive intermediary that will control all gas imports
to Ukraine amid continuing controversy over the two-week-old deal to
end the gas pricing dispute between the two countries.

The call from Alexei Miller, Gazprom’s chief executive, comes as the
state-controlled gas monopoly strives to increase its attractiveness to
investors. Foreign investors have been piling into its stock since
restrictions on foreigners owning Gazprom’s 49 per cent free float were
lifted at the end of last year.

Gazprom shares have jumped more than 20 per cent since January 10,
when the Russian market reopened after the extended Russian New Year
holiday. That took its value last Thursday above $200bn (Euro165bn,
£113bn), putting it among the world’s 10 biggest companies by market
capitalisation.

The Russian gas company has emerged as a key part of President Vladimir
Putin’s plans both to revitalise Russia’s economy and use its energy
reserves to regain international clout.

Gazprom’s decision to cut supplies to Ukraine on January 1, reducing
deliveries to western Europe through a transit pipeline across the former
Soviet republic, has sparked a debate about Europe’s reliance on Russian
gas. But it also boosted Gazprom’s profile and has done nothing to damp
investor interest.

The opaque and potentially fragile nature of the deal that enabled gas
supplies to be restored to Ukraine, however, is continuing to attract
critical attention from Russian and Ukrainian legislators. At its centre is
RosUkrEnergo, a joint venture between Gazprom’s banking arm,
Gazprombank, and a unit of Austria’s Raiffeisen Bank, which holds the
stake in trust for unidentified beneficial owners.

Under the Russian-Ukrainian deal, RosUkrEnergo will be sole importer
of Russian and Central Asia gas to Ukraine, and Gazprom will sell all
gas intended for Ukraine to the intermediary company. Both senior
Russian and Ukrainian officials have said they have no idea who those
ultimate owners are.

Gazprom’s Mr Miller proposed in a TV interview late on Sunday that
Naftogaz, the Ukrainian national gas company, should buy out out the
owners of the other half of RosUkrEnergo, turning it into a Gazprom-
Naftogaz joint venture.

“Russia has many times stated that it would be right for Gazprom and
Ukraine’s Naftogaz to be the founders of this joint venture,” Mr Miller
said.

Mr Putin discussed the issue with Viktor Yushchenko, his Ukrainian
counterpart, when the two met in Kazakhstan last week.

Mr Yushchenko later told the Financial Times in an interview he had asked
Mr Putin for help in ensuring that Ukraine got a stake in a venture he said
it had played no part in setting up.

“I asked the Russian president to give all the help needed so that Ukraine,
as one of the interested parties in the transit of gas, would receive a
corresponding place in RosUkrEnergo, so that we would feel ourselves
a full member of the gas transit process,” he said.

Proposals for Naftogaz to take up to 50 per cent of RosUkrEnergo
surfaced almost immediately after Mr Yushchenko came to power last year,
and RosUkrEnergo said it was ready to start talks. Little progress had been
made, however, before the recent Russian-Ukrainian gas crisis. -30-
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[return to index] [The Action Ukraine Report (AUR) Monitoring Service]
========================================================
17. SHALOM GAZAVAT!

Best solution for Ukraine would be to denounce gas agreement immediately,
revoke O.Ivchenko’s signature on grounds of his exceeding his
mandate, continue its talks with the Russian Federation and turn to the
Stockholm Chamber of Commerce for arbitration.
ANALYSIS & COMMENTARY: By Alla Yeremenko
Zerkalo Nedeli On The Web (ZN), Mirror-Weekly, #1 (580)
International Social Political Weekly
Kyiv, Ukraine, Saturday, 14-20 January 2006

During the “gas war” between Ukraine and Russia, President Viktor

Yushchenko said justly that “this serious test of independence should make
us stronger and more independent”. And Prime Minister Yuri Yekhanurov
advised journalists to find out who exactly stood behind the agreement
between Naftogaz Ukrainy and Russia’s Gazprom [on new terms of
supplies and transit of Russian natural gas].

The following is an attempt to analyze how much stronger and more
independent the gas deal has made Ukraine; how much further Ukraine has
moved to its declared goal of diversified sources of energy; and who has
become Ukraine’s partner, and why.
WHAT WAS SIGNED IN MOSCOW ON JANUARY 4?
The Trilateral Agreement on Relations in the Gas Sphere was signed at 2.30
a.m. January 4 in Moscow. For Ukraine it was signed by Fuel and Energy
Minister Ivan Plachkov and Naftogaz Board Chairman Oleksiy Ivchenko.

President Yushchenko called the agreement mutually profitable and stated
that the document was drawn up professionally. “I possess all information on
each item of this agreement. I have talked several times with Vladimir Putin
about nuances of the new policy. I can state that healthy compromise was
found at both the political and the economic level.”

Prime Minister Yekhanurov, Fuel and Energy Minister Plachkov, and especially
Naftogaz Board Chairman Ivchenko called the agreement “Ukraine’s victory”
that was won thanks to the Ukrainian negotiators’ good coordination and
professionalism: Ukraine would buy Russian natural gas at $95 per 1,000
cubic metres instead of $230 as Gazprom demanded.

However, Russian President Putin stated during his meeting with Yushchenko
in Astana, Kazakhstan that Gazprom would sell its gas to Ukraine at $230.
The Ukrainian President did not respond.

The agreement consists in the following. The new tariff for transit of
Russian natural gas via Ukraine’s territory is $1.60 per 1,000 cubic metres
per 100km. This tariff will be effective until January 1, 2011. The
Ukrainian side undertakes to transport the natural gas that belongs to
Gazprom (its daughter company Gazexport Ltd, to be more exact) and
RosUkrEnergo. Gazprom undertakes to transport via Russia the natural gas
that belongs to RosUkrEnergo at the same tariff.

From now on, the sole supplier of natural gas to Ukraine is RosUkrEnergo,
which means that Gazprom is formally outside the process. Naftogaz, for its
part, undertakes “not to export the natural gas supplied from the Russian
Federation”.

Moreover, Naftogaz will have to share the national gas market with a joint
venture that it is going to establish with RosUkrEnergo. Under the January 4
agreement, the authorized capital of the new joint venture “will be formed
by contribution of money and other assets”.

There is a notable detail: the January 4 agreement stipulates “the annual
gas balance of the company RosUkrEnergo” but not Ukraine as it was

meant initially. The agreement states exactly how much natural gas this
intermediary company is supposed to buy and sell annually.

The purchase scheme is as follows: RosUkrEnergo will buy 41 billion cubic
metres of Turkmen natural gas, up to 7 billion cubic metres of Uzbek natural
gas (Gazexport’s quota), and up to 8 billion cubic metres of Kazakh natural
gas (also Gazexport’s quota). Another 17 billion cubic metres will be bought
from Gazprom at a price calculated on the basis of the reference price ($230
per 1,000 cubic metres).

The selling scheme is simpler. In 2006 RosUkrEnergo plans to sell 34 billion
cubic metres at $95 to the newly established joint venture, which will sell
it to Ukrainian consumers and will have no right to export it. Importantly,
the agreement states that the price $95 is effective only in the first
semester of 2006.

Beginning from 2007, RosUkrEnergo will sell up to 58 billion cubic metres

of natural gas to Ukraine and will export another 15 billion cubic metres
jointly with Gazexport (under the export quota).

The contract also states that the transit tariff and the price of supplied
natural gas may only be revised upon the parties’ mutual agreement.

The January 4 agreement was signed by three parties: A. Miller for Gazprom,
O. Ivchenko for Naftogaz Ukrainy, and O. Palchikov and K. Chuichenko for
Rosukrenergo.

The Ukrainian opposition as well as many pro-government politicians and even
members of government assessed the contract with a good deal of criticism.
Ex-Prime Minister Yulia Tymoshenko opposed it very vigorously, demanding

to abrogate it in court and calling it “high treason against national
interests”.

“You’ve got to be at least Zhirinovsky to sign an agreement like that on
behalf of Ukraine. You’ve got to be having a bad hangover after a heavy

New Year’s drinking spree to call this agreement successful.”

Oleksandr Chaliy, the former Deputy Foreign Minister, called it
“catastrophic”, saying that January 4 was “Pearl Harbor for Ukrainian
diplomacy”. When Prime Minister Yekhanurov tried to explain the agreement

to lawmakers on January 10, he heard many unpleasant remarks.

Passions have not abated since. On the contrary, there is even a higher wave
coming up: by January 16 Ukraine is supposed to offer its version of an
intergovernmental agreement on supplies and transit of natural gas and to
prepare relevant commercial contracts for signing.
WHAT DIRECTIVES DID THE SIDES FOLLOW?
Actually, this outcome was programmed by the Russian side back in October
when Gazprom President Alexei Miller approved the company’s balance for
2006. Ukraine was supposed to receive 55 billion cubic metres: 15 billion
cubic metres from Gazprom (Gazexport) and 40 billion cubic metres from
RosUkrEnergo.

The terms of the January 4 agreement reserve 17 billion cubic metres for
RosUkrEnergo to sell it to Ukraine at $230 per 1,000 cubic metres.
Irrespective of its tactical goals in negotiations, the Russian side
definitely and evidently achieved its strategic goal.

The Ukrainian negotiators followed the directive signed by Prime Minister
Yekhanurov and First Deputy Foreign Minister Ogryzko. According to

available information, the directive set the highest limit of $80 per 1,000 cubic
metres of supplied natural gas and at least $1.75 per 1,000 cubic metres per
100km for transit of natural gas via Ukraine. The Ukrainian side evidently
failed to cope with its task and exceeded their authority, having agreed to
a higher price and a lower transit tariff.
HOW DANGEROUS IS THE GAS DEAL FOR UKRAINE?
Many experts point to the fact that the January 4 agreement (and all further
intergovernmental agreements and commercial contracts to be concluded
on its basis) will deprive Ukraine of alternative sources of supplies.
Now Ukraine will depend on a monopoly: the obscure company
RosUkrEnergo with unknown stakeholders, indefinite guarantees and
obligations, an authorized capital of $37,000, and billion-dollar contracts.

And no one can guarantee that one day the company will not refuse to

supply natural gas to Ukraine. This monopoly can not be forced to abide,
because there are no interstate agreements. Moreover, the company is
beyond Ukraine’s control, as it is under Swiss jurisdiction.

Besides, now the Russian Federation is not bound by the active legal
guarantees of supplies of natural gas to Ukraine or any other terms of the
2001 agreement. Nor is Gazprom bound to pay in full for the transit of
natural gas via Ukraine. And Ukraine is left without access to any other
transit but that through its own territory.

Moreover, the Ukrainian industrial consumers will depend on a joint venture
that will set its own prices. The housing, communal, and government-funded
sectors will receive natural gas from Naftogaz. It is unknown how much the
joint venture will charge, especially in the second half of the year.

Besides, the profit will have to be shared among the co-founders (which will
eventually make a big hole in the state’s coffers). And it is unknown who
exactly will found that joint venture and on what terms. The Prime Minister
says that Ukraine will not cede its gas transportation system as a
contribution to the authorized fund. It would be good if it were so.

The January 4 agreement rigidly sets the tariff for transit of Russian
natural gas via Ukraine at $1.6 per 1,000 cubic metres per 100km until 2011,
and breaks the “supply-transit” price correlation, which would otherwise be
Ukraine’s trump card in further negotiations. It means that the transit
tariff will remain unchanged for five years even if Russia raises the price
of supplied natural gas.

The agreement does not contain a complete formula for calculating the price
of natural gas. It means that the current $230 may as well be changed at any
time and without any economic substantiation. In fact, Ukraine has
surrendered the $50 price that would otherwise remain legally valid until
2009.

Experts point to another fact. When Ukraine bought Russian natural gas at
$50 and pumped 110 billion cubic metres annually, charging $1.093 for
transit, it received about 29 billion cubic metres as payment for the
transit services. Now, with the $1.6 transit tariff and $95 per 1,000 cubic
metres, Naftogaz can receive less than 22 billion cubic metres as payment
for pumping the same annual volume of natural gas.

The Russian side promises, however, to export 10 billion cubic metres more
than the initially planned amounts, so Ukraine may receive more natural gas
for its transit services. But under the new contract Ukraine loses 7 billion
cubic metres, which it has to buy elsewhere, spending $700M (at the present
prices). In order to preserve the existent proportion and receive the same
29 billion cubic metres, the transit tariff should be around $2.1 instead of
$1.6.

Apart from that, Naftogaz has to subtract 5 billion cubic metres from this
22 billion, clearing its outstanding debt to Gazprom until 2009. As a
result, Ukraine will receive a mere 17 billion cubic metres.

And most surprisingly, the January 4 agreement does not envision any
procedure of settling disputes between the parties. This means that should
any dispute arise, either party will have to seek arbitration in Moscow –
the place where the agreement was concluded.

Even if we regard this agreement as a framework one, it poses serious risks,
because such documents normally serve as a basis for further specifying
documents. And if they are signed on such terms, Ukraine is sure to lose the
last vestiges of its economic independence. In fact, this country began to
lose ground long before January 4.
A HISTORY OF ERRORS (2000 – 2004)
Russo-Ukrainian relations were far from good in 2000, and yet it was one of
the most successful years. On December 22, the two governments signed a
document that was very advantageous for Ukraine: The Agreement between the
Government of the Russian Federation and the Cabinet of Ministers of Ukraine
on Guarantees of Transit of Russian Natural Gas through the Territory of
Ukraine. Gazprom undertook to transport 124.6 billion cubic metres of
natural gas via Ukraine in 2001.

30 billion cubic metres of that amount would go to Naftogaz Ukrainy as
payment for the transit services. The Russian Federation also guaranteed
transit of Turkmen natural gas via its territory to Ukraine in the annual
amount of 30 billion cubic metres .

The agreement even stated exactly how much natural gas Gazprom was to

supply per quarter. The year was successful and not very cold, and Naftogaz
even managed to accumulate a reserve of 7 billion cubic metres of natural gas
in underground storage.

The history of Ukraine’s capitulation began in 2001. Having two sources of
gas supply (Russia and Turkmenistan) and controlling 95% of Russia’s gas
exports, Ukraine stood in the way of Gazprom’s plans of expansion to Europe.
That is why Moscow changed its tactics. To begin with, it claimed Ukraine’s
$1.4-billion debt.

In September 2001 the Ukrainian government signed an intergovernmental
agreement with Russia On Additional Measures for Ensuring Transit of

Russian Natural Gas through Ukraine’s Territory, in which it acknowledged
the debt and undertook to clear it by 2009.

The new agreement actually emasculated the previous one and did not even
mention the volumes of transit and terms of barter payment for transit
services. Nor did it mention Russia’s obligations to transport 30 billion
cubic metres of Turkmen natural gas to Ukraine. Having untied its hands,
Gazprom grabbed at the entire transit of natural gas from Central Asia.

The bottleneck in the Central Asia – Center main pipeline was Uzbekistan,
with its annual transit capacity barely reaching 30 billion cubic metres .
But back in 1998 Ukraine and Uzbekistan concluded an agreement of

unlimited duration on transit of Turkmen natural gas to Ukraine.

Gazprom tried hard to persuade Uzbek President Karimov to let the Russians
“into the pipeline”, but Karimov stood his ground. Instead of supporting
him, Kyiv began to demand $800,000 for repairs to an Antonov 70 plane. In
response, Tashkent reminded Kyiv about a $20M debt to Uzbekistan. Later,
when the Ukrainian leadership openly accused Karimov of unfair elections,
relations between the two countries became even worse.

While Gazprom was coaxing Karimov, Russian customs detained a plane

with a huge cargo of gold jewelry meant for the chain of shops that belonged
to Karimov’s daughter. As a last resort, the Uzbek President turned to Vladimir
Putin for help. He got it and in December 2003 the Uzbek government
concluded a contract with Gazprom, which gave the latter access to the Uzbek
gas transportation system. Gazprom did not invest much, but it got its foot
in the door: now the Russians stood firmly on the Uzbek pipeline.

Ukraine did not worry much. No one even tried to do anything about it,
forgetting about the active agreement with Uzbekistan on transit of

Turkmen natural gas to Ukraine.

It did not take Moscow long to agree with the Turkmen President. When the
masterminds of an attempt at his life fled to Russia, he demanded that
Russia ban double citizenship. Putin agreed. In gratitude, Niyazov agreed to
sign a contract for supplies of Turkmen natural gas to Gazprom. Naftogaz

was not alerted and, instead of negotiating, concentrated on transit schemes.

Naftogaz decided to make some money on exporting the 7 billion cubic

metres of natural gas that was “saved” in Ukrainian underground storage.
Pursuing their momentary commercial interests, the Naftogaz management
began to build up corporate relationships with Gazprom and a Hungary-
based company named UralsTransGaz.

In the meantime, Putin embarked on replacing the Gazprom management and

on ousting the US-registered Itera Corporation from the gas business. Before
early 2003, Itera was the authorized operator of supplies of Turkmen natural
gas to Ukraine and its transit up to the Russia-Ukraine borderline.

For its services, Itera received a certain amount of natural gas from the
Ukrainian side, but it was bound to sell it exclusively in Ukraine. Besides,
Naftogaz remained the actual owner of the natural gas transported by Itera.
And if the corporation had ever ventured to sell it elsewhere than Ukraine,
it would have had a hard brush with the law.

In 2002, the Russo-Ukrainian governmental-commercial alliance replaced Itera
with a new operator – the private firm UralsTransGaz. The firm was
registered in Hungary on December 5 (while tax privileges were still
available in Hungary). It was founded by several private individuals, but
the media hinted at Seva Mogilevich – an authoritative criminal.

It was Ukrainian officials who told the Turkmen and Kazakh Presidents that
UralsTransGaz would take over as the operator. Neither Niyazov nor
Nazarbayev was happy, but the Ukrainian side agreed to the terms offered by
the Russians. Now UralsTransGaz was authorized to transport the natural gas
that Ukraine bought from Turkmenistan but was not bound to sell it in
Ukraine.

The road to export was open. Itera never disagreed with the newly appointed
top managers of Gazprom, but it was a US resident and Gazprom needed total
control. When UralsTransGaz stained its reputation with a criminal case of
gas contraband, it was succeeded by RosUkrEnergo.
THE PRICE FORMULA
Yuri Boiko, the new board chairman of Naftogaz Ukrainy, and his deputy Igor
Voronin were so deeply drenched in export deals that they simply had no time
to correct the mistakes made in relations with Kazakhstan, Turkmenistan, or
Uzbekistan.

On July 16, 2004 Voronin signed a contract with Zarubezhgaz Management und
Beteiligungsgesellschaft mbH for supplies of natural gas in 2005-2009. The
company is known to be directly linked to Gazprom. Naftogaz undertook to
hand 3.5 billion cubic metres of natural gas over to ZMB at the
Ukraine-Slovakia border from January 2005 to December 2009.

The contract was tentatively estimated at $1,575M. In August the planned
volume of supplies was increased to 4 billion cubic metres and the sum
approached $2 billion. The most interesting about this contract is that for
the first time it contained a formula of price calculation. The price was
calculated on the basis of the sum of fuels alternative to natural gas (fuel
oil and gas oil) with mutually acceptable coefficients.

By this formula, the German company supplied natural gas in 2005 at $93.16
per 1,000 cubic metres (at 20 C°) as of January 1; at $99.25 as of April 1;
at $105.76 as of July 1.

The January 4 agreement between Naftogaz and Gazprom does not even

mention any formula of pricing. This means that the Ukrainian party agrees
a priori to the Russian monopolist’s unmotivated price dictates.
WHY GAZPROM AND RUSSIA NEEDS ROSUKRENERGO
Both pro-government and opposition politicians call into question the
transparency of RosUkrEnergo and its business. In fact, very little is known
about its founders. According to available information, it was co-founded
by Gazprombank (which means the same as Gazprom) and Raiffeisen
Investment AG.

The latter transferred its stakes in RosUkrEnergo to Arosgas Holding
Aktiengesellschaft and Centragas Holding Aktiengesellschaft.

The ex-Chief of the SBU [Security Service of Ukraine], Alexander Turchinov,
maintains that Arosgas is controlled by the Gazprom President’s deputies A.
Komarov, I. Akimov, and A. Ryazanov, who make up Gazprom’s “St.

Petersburg branch”.

Centragas, according to Turchinov, is represented by Yuri Boiko (the former
head of Naftogaz) and his deputy Igor Voronin, who is still in control of
transit schemes in Naftogaz and who was involved in talks with RosUkrEnergo.

But the real owners and managers of these companies remain in the shade.
According to our sources, one of them may be Dmytro Firtash, who lent a
helping hand to Yushchenko during the 2004 presidential elections. (On
December 28, 2005 Firtash had a meeting with Yushchenko.)

RosUkrEnergo should be regarded from two angles: as a private commercial
project of Russian and Ukrainian high-ranking businessmen and as the

Kremlin’s tool in its expansion strategy in the CIS and European markets.

As a private commercial project, the company yields ten-digit profits to its
owners. Besides, the Russian federal budget gets nothing as the company pays
taxes in Switzerland. In the canton of Zug, taxes are fixed upon agreement
with local authorities and do not depend on the size of income. No one knows
where the profit goes.

As a tool in the hands of Gazprom (which is the Kremlin’s tool),
RosUkrEnergo kills several birds with one stone. It blocks free access to
the gas transportation infrastructures of Central Asia. It buys up
Central-Asian natural gas and sells it as Russian, thus keeping Gazprom’s
competitors out of the European market.

It keeps Asian sources of natural gas supply closed to Ukraine – the last of
the former USSR countries whose gas transportation system Gazprom has not
seized yet. Being monopoly suppliers, Gazprom and RosUkrEnergo can dictate
prices. And that amounts to direct influence on economies. For the sake of
such a tremendous strategic goal Gazprom is ready to sell low for a few
months.

Simple calculations lead to interesting conclusions. Under the January 4
agreement, RosUkrEnergo will purchase 41 billion cubic metres of natural gas
from Turkmenistan at $50 per 1,000 cubic metres and 17 billion cubic metres
from Gazprom at $230 per 1,000 cubic metres . So the “mixed” price ought to
be $103, and not $95 at which RosUkrEnergo will sell the mixture to Ukraine.

The operator loses $8 on every 1,000 cubic metres and all-in-all, $464
million. Half a billion dollars in losses may seem a big sum, but it is not
too high a price for the main goal: monopoly on transit and the right to
export natural gas to Western Europe (where 1,000 cubic metres costs up to
$250).

Under the January 4 agreement, RosUkrEnergo will also buy 7 billion cubic
metres from Uzbekistan and 8 billion cubic metres from Kazakhstan.
Certainly, this amount is not only meant for the Caucasian countries – they
are simply unable to consume so much natural gas.

Therefore, a part of it is meant to be exported to Western Europe (at much
higher prices). If RosUkrEnergo sells 10 billion cubic metres of that gas at
$120, it will earn $1,200M. And if it sells at $230, then the contract will
yield $2,300M! Even if RosUkrEnergo sells natural gas to Ukraine at $95, its
net profit does make this “charity” worthwhile.

Parallel to that, RosUkrEnergo helps Russia to increase its quota on the
European market. According to EU directives, one EU member country must

not receive more than 30 percent of energy resources from one source. Last
year Russia’s quota reached 29 percent.

Using RosUkrEnergo, Gazprom tries to artificially increase its presence in
the European market. According to the latest information, Gazprom has
already ceded its quota for export to Hungary to RosUkrEnergo, thus
increasing its own. Now it is difficult to prove that it is one and the same
quota of Russian natural gas.
MISTAKES OF 2005-2006
By 2005, the National Joint Stock Company NAFTOGAS UKRAINY had

turned into a monopoly admitting a closed group of privileged insiders. The
new administration headed by Viktor Yushchenko has not changed the
company’s non-transparent and dubious personnel policy.

The dismissal of NAFTOGAS CEO Yuriy Boiko, one of the former regime’s
pillars and a RosUkrEnergo protege, has not transformed the company’s
nature. The only difference was that the new Chairman of the Board was good
at following directions rather than generating commercial ideas.

A bright example is a contract for USD 6.4 million that O.Ivchenko signed

on 31 March 2005: a PetroGas FZE Company registered in the United Arab
Emirates (sic!) undertakes to supply NAFTOGAS UKRAINY with Turkmen
(sic!) gas at USD 28 per 1000 cubic meters. The money was immediately
transferred to the “Emirate” company. Yet this is a digression.

So a person who replaced Boiko is directly subordinated and personally
accountable to Viktor Yushchenko. This was the essence of the President’s
special edict forbidding any other authority to give instructions to or
otherwise interfere with NAFTOGAS.

Neither the government, nor the then Prime Minister Yuliya Tymoshenko, nor
even Security Service Chief Olexander Turchynov could do anything about
NAFTOGAS or RosUkrEnergo. Amazingly, the presidential “non-interference”
edict has not been countermanded yet.

However, Yuriy Boiko’s discharge from office did not deter his deputy,
I.Voronin, from being re-appointed, after a short break, to the same
position in the company run by O.Ivchenko. He was also one of the three
Ukrainian delegation members at the negotiations to conclude the 2006 gas
agreement.

Perhaps, I.Voronin owes his return to the company to Olexander Tretiakov,
the President’s ex-Aide, with whom he has been on friendly terms since the
early 1990s.

The latest talks with GASPROM (and some other participants) were the

closest and least-transparent in Ukraine’s history. It was closed both to the
uninitiated and to those who are supposed, in their line of duty, to
participate in preparing comprehensive decisions and developing
negotiation strategy.

In late 2000, relations between Ukraine and Russia were also strained. At
that time Ukraine (with Viktor Yushchenko as the Prime Minister) took its
gas talks with its northern neighbour very seriously.

A special working group was established from deputy ministers and

department heads from practically every concerned ministry – the Ministry
of Foreign Affairs, the Ministry of Fuel and Energy, the Ministry of the
Economy, the Ministry of Finance, the Ministry of Justice, the Ministry
of Industrial Policy. In the final analysis, the delegation managed effectively
to safeguard Ukraine’s national interests in the gas sector.

Ukraine’s key gas negotiators this time were Ivchenko, Voronin and Plachkov.
The Vasiunyk brothers were also actively involved in the process. These
people were the President’s only sources of information about the
developments in gas talks. When an alternative source loomed on the
horizon – Vitaliy Hayduk being nominated for the position of Vice Prime
Minister for Fuel and Energy – they made sure the decree on his appointment
was shelved.

Of course, the two Presidents talk on the phone regularly. Yet nobody even
pretends to observe formalities and meet legal requirements of taking a
coordinated Cabinet decision, of convening a thoroughly prepared session of
the National Security and Defence Council and acting on its recommendations.

As a result, Ukraine made a series of glaring legal errors in the agreement
failed to focus, in the course of negotiations, on a realistic chance to
assert its lawful right to the Central Asian gas transit to Ukraine and to
direct purchase of Turkmen gas.

Could it have done so? It, certainly could! The Ukrainian-Turkmen
intergovernmental agreement on gas supplies to our country was signed. Yet
for want of a strategic vision of the country’s energy security, Ukraine
ceded its right to purchase gas to the GASEXPORT Company. Starting in

2007, we will have to buy Turkmen gas from this Russian intermediary.

Minister I.Plachkov keeps saying as a mantra that he has a gas agreement
with Turkmenistan in his attache-case, but it does not make the situation
any better. Today, anyone can strike a gas deal with Niyazov: he signed

such contracts with both Russians and NAFTOGAS.
Yet entering into a contract for purchasing Turkmen gas today is like buying
a plot of land on the Moon or Mars – one cannot get there without a
spacecraft.

No country can use Turkmen gas without access to transit facilities in
Uzbekistan, Kazakhstan and Russia. Therefore Niyazov sells Turkmen gas to
all interested buyers at the Turkmen-Uzbek border and never cares what
happens to it afterwards. A gas-transporting infrastructure is Ukraine’s
spacecraft.

In order to get access to the gas transporting infrastructure in Uzbekistan,
Ukrainian officials should have restored friendly relations with that
country, instead of reminding them about a petty debt for the AN-70 airplane
repairs. Ukrainian leaders should have supported Karimov, instead of pushing
him into Putin’s open arms.

And, when informed of GASPROM’s attempts to take over the Uzbek gas
pipeline, they should have reminded the interest groups involved, tactfully
but firmly, about the 1998 Ukrainian-Uzbek intergovernmental agreement that
is still in force.

Being a signatory to the European Energy Charter of 17 December 1991 and
having ratified it, Uzbekistan, as well as Kazakhstan, undertook to give the
third parties unlimited access to its transit gas pipeline. Otherwise they
will face a cumbersome and unpleasant disciplinary procedure foreseen in the
European Energy Charter and Supplementing Agreement, including penalties,
fines, etc.

Russia has not ratified the European Energy Convention and takes advantage
of its non-allied status to restrict access to its gas transportation
infrastructure to undesirable clients. Whereas, under the 2001
Intergovernmental Agreement and annual protocols, GASPROM was obliged

to guarantee Turkmen gas transit to Ukraine, the agreement of 4 January 2006
discharges it from this obligation.

In the same vein, the agreement relieves GASPROM from the obligation to
provide enough gas not only for its transit but also for maintaining gas
balance in Ukraine.

Besides, vague provisions concerning the gas price for Ukraine in the second
part of 2006 allow Vladimir Putin to use the gas price as a tool in
blackmailing Victor Yushchenko – through GASPROM and RosUkrEnergo –

when a new Ukrainian government is being formed after the parliamentary
elections. It may so happen that the Russian, rather than Ukrainian, President
will appoint the Cabinet to his liking in the post-reform Ukraine.
MISTAKES THAT CAN BE AVOIDED
We are being told that the gas agreement of 4 January 2006 is a framework
document resulting from a compromise; that it is neither an
intergovernmental protocol (with a Swiss closed commercial structure?),
nor a contract wit GASPROM.

Nevertheless, it contains terms unacceptable for Ukraine, such as:

[1] transit dues fixed for five years,
[2] a monopolist gas supplier thrust onto Ukraine, and
[3] an economically unmotivated gas price.

It would be an egregious error to remain within this agreement framework and
sign an intergovernmental protocol and contract on the terms stipulated in
it. Yekhanurov promised to have drafted the Ukrainian version of the
protocol by 16 January.

The Russian draft of intergovernmental protocol, which ZN had a chance to
read, confirms our concerns. Unlike the previously signed annual protocols,
this document does not [1] set the price of gas supplied to Ukraine. [2] Nor

does it establish the transit dues.

De facto and de jure, it dilutes international legal guarantees envisioned
in the 2001 Intergovernmental Agreement. It means that the Russian party
wants to downgrade all specific provisions from the interstate to the
contractual level.

The draft protocol provides for a mediated settlement of transit terms for
the next eight years, exclusively by the contractual parties (business
entities), although a common practice is to regulate such significant norms
through annual intergovernmental protocols.

The draft suggests fixing the terms of transiting Russian gas via Ukraine’s
territory for seven years, while defining the terms of transiting Turkmen
gas to Ukraine for only a year.

According to the draft, Russia guarantees to supply 17 billion cubic meters
of gas to Ukraine in 2006, but it does not designate the entity responsible
for the supplies. Nor does the draft make any provisions describing
responsibility of the Russian Federation. It says nothing specific about the
joint venture incorporated to distribute gas in Ukraine.

All of the above weakens Ukraine’s standing in bilateral negotiations and
makes it totally dependent on the Russian Federation and its monopolist
intermediary.
THEREFORE BEST SOLUTION FOR UKRAINE WOULD BE TO
[1] Denounce the agreement as soon as possible.
[2] It should revoke O.Ivchenko’s signature under the agreement of 4
January 2006 on the grounds of his exceeding his mandate.

[3] Ukraine should continue its talks with the Russian Federation and
insist on the terms stipulated in the previous intergovernmental agreement.
[4] It should turn to the Stockholm Chamber of Commerce for arbitr
ation.

The issue will not be resolved overnight, but Ukraine needs time to look
back and realize how far it is from the desired diversification of sources
and ways of power supplies. Then it will understand that it did not need
RosUkrEnergo in the first place, and that Turkmen, Uzbek, Kazakh and

Russian gas can be supplied under direct contracts.

It will understand that by mixing it we could get an affordable price and
(attention, Viktor Yushchenko!) a transparent system of payments and
providing gas to consumers.

NAFTOGAS is capable of doing it on its own, provided, of curse, that

its top management cares about national, rather than corporate commercial,
interests. -30-
——————————————————————————————–

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