AUR#686 Macroeconomic Situation Update By SigmaBleyzer; Bank Growth; Nuclear Storage; How Not To Step On The Rake; Easter Eggs Taken/Customs

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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

U.S. CUSTOMS AGENTS CONFISCATING UKRAINIAN

EASTER EGGS AT DULLES AIRPORT NEAR WASHINGTON
[Article 22]

ACTION UKRAINE REPORT – AUR – Number 686
Mr. E. Morgan Williams, Publisher and Editor
PUBLISHED FROM KYIV, UKRAINE, MONDAY, APRIL 10, 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-MARCH 2006
REPORT & ANALYSIS: By Olena Bilan and Edilberto Segura
SigmaBleyzer Emerging Markets Private Equity Investment Group
Kyiv, Ukraine, Monday, April 10, 2006

2. GERMAN COMPANY CONTEMPLATING TO SET UP CHAIN
OF CONSTRUCTION MATERIAL SHOPS IN UKRAINE
Ukrinform, Kyiv, Ukraine, Thursday, April 6, 2006

3. UKRAINE: INTERNATIONAL BANKS DO NOT PAY TOO
MUCH ATTENTION TO POLITICAL RISKS
ANALYSIS: Roman Bryl, Ukraine Analyst
IntelliNews-Ukraine This Week, Kyiv, Ukraine, Tue, April 4, 2006

4. POLISH AND UKRAINIAN BANKING SECTOR LAGS BEHIND
REGIONAL COMPETITORS SAYS AUSTRIAN ERSTE BANK’S REPORT
Ukraine’s banking sector growing the fastest, but still the most underdeveloped
Polish News Bulletin, Warsaw, Poland, Thu, Apr 06, 2006

5. UKRAINE SLAPS LIMITS ON BLACK SEA BALLAST
CAN a ship pollute an already polluted stretch of water?
Lloyds List, London, United Kingdom, Thu, Apr 06, 2006

6. SOFTLINE MODERNIZES UKRAINE’S FUEL & ENERGY
MINISTRY’S INTERNET WEBSITE
Ukrainian News Agency, Kyiv, Ukraine, Thur, April 6, 2006

7. SEVASTOPOL SEAPORT TAKES TIDE OF CAPITAL INFLOW
Ukrainian Times, Kyiv, Ukraine, Friday, April 7, 2006

8. FINANCIAL SITUATION OF UKRAINE’S STATE-OWNED OIL
AND GAS MONOPOLY TO BE PROBED BY CABINET OF MINISTERS
NTN, Kiev, in Ukrainian 1400 gmt 5 Apr 06
BBC Monitoring Service, UK, in English, Wed, Apr 05, 2006

9. UKRAINE’S GAS CHIEF OLEKSIY IVCHENKO UPBEAT ON
HIS COMPANY’S FINANCIAL PERFORMANCE
Said driving the most prestigious & most expensive Mercedes
car paid for by state-owned gas company is just normal
NTN, Kiev, Ukraine, in Ukrainian 1400 gmt 8 Apr 06
BBC Monitoring Service, UK, in English, Saturday, April 8, 2006

10. U.S. NETCRACER TECHNOLOGY CORP OPENS REGIONAL
REP OFFICE IN UKRAINE, WILL HIRE UP TO 100 PEOPLE
Ukrainian News Agency, Kyiv, Ukraine, Thu, April 6, 2006

11. UZHGOROD REGION ABUZZ WITH INVESTMENT ACTIVITY
Ukrainian Times, Kyiv, Ukraine, Friday, April 7, 2006

12. AGRARIAN CONFEDERATION CONSIDERS DELAY IN LIFTING
RUSSIA’S BAN ON UKRAINIAN DAIRY PRODUCTS UNJUSTIFIED
Ukrainian News Agency, Kyiv, Ukraine, Wed, April 5, 2006

13. RUSSIA UNCORKS ANOTHER TRADE DISPUTE
Wine From Georgia & Moldova Banned as Ex-Soviet States Anger Moscow
By Peter Finn, Washington Post Foreign Service
Washington, D.C., Friday, April 7, 2006; Page A16

14. AES UTILITIES CORP FOURTH-QUARTER PROFIT ROSE 75%
Major international investor in two electric plants in Ukraine
By Rebecca Smith, The Wall Street Journal
New York, New York, Wed, April 5, 2006; Page A18

15. UKRAINE: EBRD GRANTS USD 200 MILLION LOAN TO MITTAL
STEEL KRYVYI RIH TO INCREASE PRODUCTIVITY
Ukrainian News Agency, Kyiv, Ukraine, Wed, April 5, 2006

16. EUROPEAN PARLIAMENT CALLS ON EUROPEAN COMMISSION
TO START TALKS WITH UKRAINE ON ASSOCIATED MEMBERSHIP
Ukrainian News Agency, Kyiv, Ukraine, Thu, April 6, 2006

17. BRUSSELS SET TO ALLOW ROMANIA INTO THE EU
By George Parker in Bucharest, Financial Times
London, United Kingdom, Thursday, April 6 2006

18. UKRAINE: BUILDING NUCLEAR STORAGE FACILITY IS GOOD
BUT THE GOVERNMENT FAILED TO MAKE THAT CLEAR
COMMENT: Viktor Chumak, Chief Specialist, Defense & Security Issues
International Center for Policy Studies (ICPS), Kyiv, Ukraine, March 7, 2006

19. UKRAINE/2006 COALITION: HOW NOT TO STEP ON THE RAKE
ANALYSIS & COMMENTARY: Vira Nanivska, ICPS Director
International Centre for Policy Studies (ICPS)
Newsletter #12 (316), Kyiv, Ukraine, Monday, April 3, 2006

20. SQUABBLES HINDER UKRAINE’S ATTEMPTS TO FORM COALITION
By Tom Warner in Kiev, Financial Times
London, United Kingdom, Saturday, April 8 2006

21. U.S. SENATE MAJORITY LEADER FRIST WILL VISIT UKRAINE
Senator’s Frist, Burr & Gregg to visit Poland, Ukraine, Russia & Georgia
Associated Press (AP), WNCT Channel 9
Washington, North Carolina, Friday, Apr 7, 2006

22. U.S. CUSTOMS AGENTS CONFISCATING FAMOUS UKRAINIAN
EASTER EGGS AT DULLES AIRPORT NEAR WASHINGTON
LETTER-TO-THE EDITOR: By Cliff Downen
The Action Ukraine Report (AUR) #686, Article 22
Kyiv, Ukraine, Monday, April 10, 2006

23. EGGS AS ART: ORNATE UKRAINIAN EASTER EGGS PYSANKY
Joanne Staroschak shares her passion for an art form that was
repressed by the country’s communist government
.
By Kellie B. Gormly, Tribune-Review
Pittsburg, Pennsylvania, Saturday, April 1, 2006

24. FAMED “UKRAINIAN EASTER EGGS” PYSANKY HAVE A
RICH RELIGIOUS AND CULTURAL HISTORY
Second-generation Ukrainian-Canadian artist and illustrator Olga Lang
By Sheila Potter, Oak Bay News
Oak Bay, British Columbia, Canada, Wed, Mar 29 2006

25. SPIELBERG FOUNDATION & VIKTOR PINCHUK CO-PRODUCE
HOLOCAUST FILM: BABI YAR MASSACRE IN 1941 IN UKRAINE
By Yulianna Vilkos, JTA, New York, NY, Sunday, April 9, 2006
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1
. UKRAINE-MACROECONOMIC SITUATION-MARCH 2006

REPORT & ANALYSIS: By Olena Bilan and Edilberto Segura
SigmaBleyzer Emerging Markets Private Equity Investment Group
Kyiv, Ukraine, Monday, April 10, 2006

SUMMARY
[1] Over the first two months of the year, real GDP grew by 1.5% yoy (up
from 0.9% yoy in January), signaling the revival of economic activity in the
country.

[2] Inflation accelerated slightly in February driven by a temporary
imbalance on the domestic sugar market.

[3] In February, growth of the money supply decelerated to 46.0% yoy
partially reflecting the sluggish inflow of household deposits before the
parliamentary elections.

[4] In 2005, the current account balance remained positive at $2.5 billion
(3.1% of GDP), while the financial account surplus reached an impressive
$7.7 billion (9.4% of GDP) driven by long-term corporate borrowings and
record high FDI inflow.

[5] On March 26th, Ukraine held elections for parliament, regional and
district councils, as well as city mayors. The preliminary results of the
voting suggest that five political blocs and parties will enter the
Verkhovna Rada.

[6] Ukraine and the Unites States signed a bilateral protocol on accession
to goods and services markets in the framework of Ukraine’s WTO
accession, which marks a milestone in the country’s WTO negotiations.

ECONOMIC GROWTH
February real sector data signaled the revival of economic activity in the
country. Real GDP grew by 1.5% yoy during the first two months of the year,
up significantly from 0.9% yoy in January. Economic growth was primarily led
by an increase in value added in transport, which grew by 5.9% yoy.

Growth of value added in distribution of electricity, gas, and water
(utilities) decelerated to 9.0% yoy, down from 13.2% yoy in January, but
remained the second largest contributor to GDP growth.

On an encouraging note, construction and industry improved their
performance, albeit not substantially. The reduction of value added in
construction shrank to -0.2% yoy, a significant improvement from -8.1% yoy
in January.

The same trend was observed in manufacturing, which posted a lower reduction
in value added compared to the first month of the year: -1.8% yoy in
January-February versus -4.6% in January. Following the increased demand for
domestic energy materials, the extractive industry showed a 2.5% yoy
increase in value added, compared to a 1% yoy reduction a month before.

The improvement in industrial performance was led by two sectors:
food-processing and machine-building. Food-processing showed a 8.0% yoy
increase in output over the first two months of the year stimulated by
robust consumption demand. Machine-building went up by 8.6% yoy, driven
mainly by production of vehicles and vehicle equipment.

At the same time, metallurgy and coke and oil-refinery industries showed
only slight improvement compared to January, still significantly
contributing to a decline in industrial output. Metallurgy has still not
recovered from an increase in gas prices and reduction of world steel
prices. Output of metals and metal products posted a 1.0% yoy reduction
in January-February.

Accordingly, lower demand on the side of metallurgical enterprises
contributed to lower production of coke. The oil-refinery industry suffers
from outdated technologies that do not allow for the production of high
quality gasoline. The reduction of import tariffs on oil products introduced
in 2005 stimulated imports of higher-quality gasoline to the country.

In addition, introduction of seasonal export quotas on oil products
discouraged production of diesel and black oils. As a result, the two
largest oil refineries were closed in 2005 and volumes of processed oil
declined to 2.3 million tons in January-February 2006, compared to 3.2
million tons in the same period last year.

However, industrial production may recover in the coming months. According
to the Ministry of Economy, industrial output will increase by 1-1.5% yoy in
the first half of the year driven by sectors oriented towards domestic
demand (food processing, light industry) as well as by machine-building.
Also, there will be a reduced statistical base effect stemming from
deceleration of industrial output throughout 2005.

FISCAL POLICY
In January-February, consolidated budget revenues increased by a nominal 33%
yoy to UAH 20.6 billion ($4.1 billion), down from 36% yoy in January. At the
same time, budget expenditures grew by 36% yoy to UAH 18.2 billion ($3.6
billion), compared to 28% yoy a month before; this shows better execution of
planned expenditures, which traditionally takes place throughout the fiscal
year.

The resulting budget balance constituted UAH 2.4 billion ($0.5 billion)
remaining virtually unchanged in nominal terms compared to January, but
declining in relation to period GDP to 4.0%, down from 8.4%.

According to the State Treasury information, revenues of the general fund of
the central budget were 4.1% above target. Collection of tax revenues, which
account for almost three quarters of all state budget revenues, was fully in
line with the target, while non-tax revenues were overexecuted by 25%. At
the same time, the execution rate of major taxes differed substantially.

The enterprise profit tax (EPT) was almost 20% below the target, reflecting
deterioration in performance of enterprises. In January, profits before
taxes of Ukrainian enterprises were 37% less than in the same period of
2005, mostly on account of industrial enterprises (primarily metallurgy) and
firms operating in the trade sector.

But another major tax, the value added tax (VAT), was overexecuted by 20%,
more than offsetting the shortfall in EPT collection. VAT from both domestic
and imported products was above the plan. In addition, there is no evidence
of accumulation of VAT refund arrears, as VAT refunds were almost in line
with the target.

Since VAT is essentially a tax on consumers, its overexecution may indicate
that private consumption is growing at a higher pace than expected, even by
the rather optimistic macroeconomic forecast envisaged in the budget. This
gives additional grounds to expect further revival of economic growth later
this year. However, the recovery is not going to be strong since growth of
domestic demand will be partially satisfied by imports.

Execution of budget expenditures improved in February. Expenditures of the
general fund of state budget were 15% below the target, compared to almost
20% in January. This trend is very likely to continue, with the budget
surplus turning to deficit by year-end.

MONETARY POLICY
In February, consumer prices grew by 10.7% yoy, up from 9.8% yoy a month
before. Acceleration of inflation was primarily attributable to an increase
in prices on food products, the major component of the consumer price index
(CPI). Food product prices sped up to 11.4% yoy from 9.9% in January,
explaining more than two-thirds of CPI growth.

At the same time, non-food product prices were on a moderate track posting a
4.4% yoy rise. Services tariffs preserved their high growth rate reaching
15.8% yoy in February, but contributed to the inflation rate moderately due
to the low share of this group in the consumption basket.

A rapid increase in sugar prices (which surged by 25% month-over-month
(mom), or 56.6% yoy, in February) was among the major causes of the higher
growth of food prices and the whole price index. The domestic sugar market
was indirectly affected by an increase in world prices of white and raw
sugar.

Although domestic sugar prices exceed world prices due to prohibitive import
tariffs, sugar prices in Russia surged far above the world average at the
beginning of 2006 thereby stimulating supply of sugar to Russia from CIS
countries, including Ukraine. Thus, higher external demand for domestically
produced products drove up prices in Ukraine.

However, domestic sugar prices are likely to go down soon thanks to
licensing of sugar exports introduced by Ukrainian authorities in February
as well as cooling of the overheated Russian market, which already started
in mid-March.

In February, growth of the monetary base and money supply decelerated to
36.4% yoy and 46.0% yoy respectively (down from 39.4% and 50.1% yoy in
January), reflecting the slowdown of deposits to the banking system.
According to the NBU, total bank deposits grew by 50% yoy, compared to
54.5% yoy a month before.

On the one hand, this reflects the increasing statistical base effect
related to the resumption of deposits inflow in early 2005, after the
presidential election turmoil. On the other hand, the inflow of deposits was
rather sluggish at the beginning of 2006, since households tried to stay on
the safe side before the parliamentary elections, reorienting part of their
savings from bank deposits to foreign currency cash holdings.

At the same time, the demand for bank credit remained robust, as banks
continued to disburse credit at an accelerating pace. In February, bank
credit grew by 66.2% yoy, up from 64.8% yoy a month before.

Overall, monetary policy remained quite loose in February. The interest rate
on interbank credit, which serves as the closest indicator of banks’
liquidity and monetary stance, stood at a low 3.0% per annum. By the end of
February, the estimated excess liquidity of the banking system rose by 17.7%
mom to UAH 5.7 billion. This is despite the NBU’s sterilization operations,
which amounted to UAH 2.2 billion in gross volume.

Still, the NBU considered it worthwhile to ease monetary policy further
through its fine-tuning instruments. Starting March 1, the daily requirement
for the amount of bank funds to be kept on the correspondent account within
the NBU was reduced from 90% to 70% of the previous month’s obligatory
reserves.

According to our estimates, this will add about UAH 1.7 billion to banks’
excess liquidity. Most likely, the NBU’s decision is motivated by the
possibility of higher political risks following the parliamentary elections
at the end of March. A weaker reserve requirement will give banks more
flexibility to manage their flow of funds in case of unexpected
difficulties.

In February, the foreign exchange market was almost balanced and the NBU
sold only $179 million of its international reserves, compared to $939
million in January. Although sale interventions by the NBU are likely to
continue in March, the reduction of central bank reserves shall not raise
serious concerns.

By the end of February, the total amount of reserves constituted $18.3
billion, which is sufficient enough to allow the NBU to compensate for
temporary imbalances on the foreign exchange market.

Furthermore, the inflow of foreign currency is likely to resume in the
coming months after stabilization of the political situation. By the end of
2006, the NBU’s international reserves are expected to post a moderate
increase compared to 2005 thanks to a positive financial account balance,
which will cover the small current account deficit expected this year.

INTERNATIONAL TRADE AND CAPITAL
According to preliminary NBU data, the current account surplus stood at $2.5
billion or 3.1% of GDP in 2005, while the financial account surplus
(analytical presentation) reached an impressive $7.7 billion or 9.4% of GDP.
As a result, the NBU’s international reserves more than doubled and
constituted $19.4 billion, which corresponds to 4.9 months of prospective
imports of goods and services.

The decline in the current account surplus from a remarkable $6.8 billion
(10.5% of GDP) in 2004 was mainly because of merchandise trade balance
deterioration. Contraction of external demand, an increase in production
costs, the real appreciation of the hryvnia with respect to the US dollar
and the euro, and liberalization of import tariffs were among the major
factors that contributed to reversal of the merchandise trade balance from a
high surplus in 2004 to a moderate deficit in 2005.

On a positive note, the services trade surplus that stood at $1.8 billion
(2.2% of GDP) was high enough to compensate for the $1.1 billion (1.4% of
GDP) of goods trade deficit (FOB/FOB). Along with the net inflow of current
transfers that reached $2.8 billion (3.5% of GDP), this ensured a positive
current account balance.

The impressive improvement in the financial account, which reversed from a
sizable deficit of $4.5 billion (7% of GDP) in 2004 to the present surplus,
was primarily due to record high growth of net foreign direct investment
(FDI) and intensification of private borrowings from abroad.

By the end of the year, net inflow of foreign investment reached $7.5
billion, which almost equals the total amount of FDI attracted since
independence. The bulk of this sum, $4.2 billion, was received thanks to the
successful re-privatization of the country’s largest metallurgical plant
Kryvorizhstal to the German subsidiary of world leader Mittal Steel. The
acquisition of Aval Bank, one of the biggest local banks, by Austrian
Raiffeisen International brought another $1 billion of FDI.

These acquisitions will bring new know-how and management technologies to
Ukrainian metallurgy and the banking system, thereby increasing the
competitiveness of these sectors and the economy as a whole.

External borrowings also grew considerably in 2005, mostly on account of
private sector debt. The country’s gross external debt increased by $8.2
billion, out of which about $7 billion was expansion of private debt. Both
the banking system and the non-bank corporate sector were active in
attracting funding from abroad.

The continuing expansion of domestic demand gave impetus to banks to look
for longer and cheaper resources compared to household deposits, which for a
long time were the major source of bank credits. At the same time, the high
fragmentation and low capitalization of the domestic banking system impeded
development of large-scale and long-term lending, forcing corporate firms to
seek resources abroad as well.

The 2005 trends in Ukraine’s balance of payments are expected to continue in
the nearest future. In particular, the merchandise trade deficit will keep
on widening throughout 2006. Merchandise imports are likely to grow at a
double-digit rate stimulated by the ongoing increase in consumption demand
and the revival of investment demand expected in the second half of 2006.

The increase in prices for imported gas will also have a direct effect on
imports, raising nominal volumes. Merchandise exports will be adversely
affected first of all by an increase in gas prices, which substantially
raises the production costs in metallurgy and chemistry, the two major
export-oriented industries.

In addition, metallurgy will face a certain reduction of output prices due
to increasing competition on the world metal markets. These expectations
have already been confirmed by January merchandise trade statistics.
According to the State Statistics Committee, the monthly goods trade balance
remained at a negative $0.37 billion, which translates into 6.3% of period
GDP.

Nevertheless, Ukraine’s external position will remain rather strong in 2006.
The merchandise trade deficit will be partially compensated for by the
services trade surplus and net current transfers, which are expected to
increase moderately. Although the current account is very likely to turn to
small deficit, it is expected to be securely covered by the financial
account surplus.

The latter will be primarily based on a further increase in long-term
private debt and the relatively high net inflow of FDI anticipated at around
$3 billion. As a result, the gross international reserves are likely to grow
moderately in 2006 and stay at rather comfortable levels in terms of import
coverage.

OTHER DEVELOPMENTS AND REFORMS AFFECTING
THE INVESTMENT CLIMATE
On March 26th, Ukraine elected the national parliament (the Verkhovna Rada),
as well as regional and district councils and city mayors. International
observes (OSCE, International Republican Institute, etc.) concluded that the
parliamentary elections met international standards and were carried out in
accordance with Ukrainian election law.

According to preliminary information from the Central Election Commission,
five political blocs and parties passed the 3% threshold to the Verkhovna
Rada. The Party of Regions, headed by Viktor Yanukovich (the main opponent
of current President Viktor Yuschenko during the 2004 presidential
elections) led the race with 32.12% of the vote. Yulia Tymoshenko’s bloc was
in second place with 22.27%. Pro-presidential Our Ukraine secured 13.94% of
the vote.

The Socialist Party of Ukraine enters the Verkhovna Rada with 5.67% and the
Communist Party with 3.66%. After official results of the voting are
announced, the newly elected parliamentary factions will have to form a
coalition that will appoint the Prime Minister.

Ukraine and the Unites States signed a bilateral protocol on access to goods
and services markets in the framework of Ukraine’s WTO accession.
Endorsement of the protocol marks significant progress in Ukraine’s trade
relationship with the US and paves the way for Ukraine to complete other
bilateral WTO negotiations.

As of the end of March, Ukraine also finalized negotiations with Egypt,
Morocco and Romania. Among the remaining countries, negotiations with
Australia are expected to be quite tough due to a strong disagreement
between Ukrainian and Australian authorities regarding protection of
Ukraine’s agricultural market.

Some progress in negotiations with Australia has been made recently. In
particular, according to the Ministry of Economy, Ukraine and Australia
agreed on the main principles of distribution of the import tariff quota on
raw cane-sugar during the unofficial Working Party meeting in Geneva.

To become a WTO member, Ukraine also needs to adopt several laws, including
those envisaging reduction of export duties on live cattle, hide and metal
scrap. These issues are politically sensitive as they reduce protection of
certain industries. Provided the laws are enacted by the new Parliament soon
after elections, Ukraine has a good chance of entering the WTO by the end of
2006.

In March, the US repealed Ukraine from the Jackson-Vanik amendment to the
US Trade Act of 1974. The respective bill was passed by Congress and signed
by President Bush in late March. The amendment links US trade relations with
former communist countries to the rights of their citizens to emigrate
freely.

Termination of the Jackson-Vanik amendment for Ukraine is not likely to
substantially influence trade flows between the countries, since an annual
waiver from the amendment was issued for Ukraine on a regular basis. But the
decision will play an important role in improving Ukraine’s international
image and clear the way for the two countries to apply the WTO Agreement
when Ukraine becomes a WTO member. -30-
————————————————————————————————–
NOTE: To see the entire SigmaBleyzer Ukraine Macroeconomic Situation
report for March 2006 in a PDF format, including several color charts
and graphics click on the following link:

http://www.sigmableyzer.com/files/Ukr-Monthly_Ec_Report_03_06.pdf
————————————————————————————————–
CONTACT: Olena Bilan, Economist, The Bleyzer Foundation,
Kyiv, OBilan@SigmaBleyzer.com.ua, www.SigmaBleyzer.com
———————————————————————————————-

[return to index] [Action Ukraine Report (AUR) Monitoring Service]
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2. GERMAN COMPANY CONTEMPLATING TO SET UP CHAIN
OF CONSTRUCTION MATERIAL SHOPS IN UKRAINE

Ukrinform, Kyiv, Ukraine, Thursday, April 6, 2006

KYIV – The company Praktiker Bau and Heimwerkermarkte Holding AG,
which operates one of the world’s biggest chains of construction material
supermarkets and is an element of the Metro Group, is contemplating to
set up a chain of Praktiker shops in Ukraine.

The company has opened its office in Kyiv, with a view of becoming a
major player on the Ukrainian market of construction materials, including
those in the do-it-yourself format.

The Metro Group runs a chain of Metro Cash & Carry supermarkets in
Ukraine. By 2007 the chain is to incorporate a score of trading outlets.
Presently its chain numbers eight supermarkets. -30-
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[return to index] [Action Ukraine Report (AUR) Monitoring Service]
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3. UKRAINE: INTERNATIONAL BANKS DO NOT PAY TOO
MUCH ATTENTION TO POLITICAL RISKS

ANALYSIS: Roman Bryl, Ukraine Analyst
IntelliNews-Ukraine This Week, Kyiv, Ukraine, Tuesday, April 4, 2006

Political risks that were expected to increase due to the March
parliamentary elections did not exert too much influence on the main trends
of the banking sector. The latest information about the purchase by French
Credit Agricole S.A. of medium-sized Index-Bank proves that foreign banks
continue entering the local market.

Credit Agricole made its announcement on buying the bank just when the
election campaign was at its peak and it was not clear what exactly result
the political fight would produce. The political factor became of minor
importance for foreign financial institutions that started to reshape the
banking system in late 2005 and early 2006. We witnessed sales of large
domestic banks and entrance of new major players.

They are Raiffeisen that bought Aval Bank for USD 1.03bn; BNP Paribas that
purchased UkrSibbank, and Intesa that became the owner of Ukrsotsbank. The
banks purchased belonged to the group of the biggest banks. Also there were
some sales of smaller banks (e.g. Mriya bank bought by Russian
Vneshtorgbank, or Kharkiv Megabank planning to sell its stake to a foreign
investor).

Foreign banks entering local market starts renovating acquired
banks which negatively influences clients —–

But as far as entrance of foreign banks became a common trend, the situation
within the system started to change. Purchases of local banks first of all
influenced the quality of servicing corporate clients.

Lack of attention from the management of sold banks is the biggest obstacle
corporate clients are facing. For obvious reasons, banks’ purchases are
focused more on transition of new standards of internal management and
activities. Some managers thus pay less attention to their previous
priority – improving service quality.

Thus, banks concentrate on boosting financial results, and this process
involves not only sold banks but Ukrainian ones. The tougher competition
forces banks to beef up balance sheets – either to become more attractive
for potential foreign buyers or to simply survive.

Confirming information we obtained from well-informed local sources, several
large and medium-sized banks announced the increase of their charter
capital. State-owned Ukreximbank boosted capital by UAH 300mn to UAH
744mn (USD 147.2mn), following a UAH 76mn increase in Oct 2005.

Another state-held bank Oschadbank increased capital by UAH 300mn to
UAH 703mn. The bank also decided to become the first participant of the
first national credit bureau.

Creditprombank raised capital by UAH 200mn to UAH 449mn via an additional
share issue. Among planned capital increases, Privatbank intends to lift its
capital to UAH 1.582mn from current UAH 1.13bn. Ukrsibbank has opted to
enlarge capital by UAH 500mn to UAH 1.25mn. 50% in the bank was recently
contracted to BNP Paribas.

Brokbusinessbank revealed plans to increase regulatory capital by 52% to UAH
726mn this year. Small-sized TAS-Invest Bank plans to increase capital by
UAH 60mn to UAH 187.24mn.

Clients start withdrawing funds from one bank – in most cases a
large one – taking them to another more focused on clients —–

Focusing on these aspects, major banks have started to lose their clients.
When depositors understand that banks are busy with their own
transformation, they just take their money from one bank to another.

First we see the reapportion of clients’ deposits. For instance, only in
February Brockbusinessbank lost about UAH 130mn (USD 26mn) of
individuals deposits. On the whole, Brockbusinessbank, UkrSibbank and
Ukrsotsbank lost UAH 250mn such deposits during the month.

At the same, PrivatBank and state-held Oschadbank attracted together more
than UAH 600mn of deposits. The reapportion is caused mainly by banks that
were bought by foreign financial institutions lowering interest and deposit
rates.

In some cases rates are lowered by 5-7pps. Loan rates in some banks are
lower than deposit rates in others. In other words, banks that are foreign-owned
received access to cheap credit resources, having also the possibility to provide
long-term policy.

Ukrsotsbank attracted USD 125mn at 8.25% interest rate and plans to attract
this year another USD 600-650mn at 7-8%.

Small banks try to use situation, offering higher rates —–

But at the same time, some smaller banks use the situation to increase
deposit rates to attract more clients. Very often small banks attract
deposits at 17% rates, while large banks extend loans at 15-16%. A strange
situation appeared when banks acquire funds at higher cost when others
provide funds at cheaper prices.

This creates larger risk for them and banking system as a whole —–

This can be explained by the fact medium and small-sized banks that do not
at the moment plan to sell their stakes to foreign investors try to get
short-term competitive advantages. For instance, by accumulating more funds
to increase their size. But by doing this, they play a more risky game that
has already resulted in collapse of several medium and small sized banks.

For example, on Mar 10 NBU recalled the license of small Premierbank
(Dnipropetrivsk) and started the procedure of its liquidation. In mid 2004
NBU tried to save the bank giving it a UAH 28mn stabilization credit, but
this did not help.

The bank served only the clients and partners of its owner – a Rada MP. It
served as a classic example of a so called “pocket” bank servicing only
selected clients.

Also, in the beginning of March the procedure of liquidation of Garant bank
began. It was said that the bank accumulated a critical amount of problem
credits two or three years ago, but its owner assured that the bank did not
have any problems. NBU did not apply any measures until 2005, when
shareholders of Garant were changed. It appeared that the bank gave
uncovered credits. The loans were collateralized by false promissory notes.
It was the same illegal schemes that lead to the collapse of Premierbank,
mentioned above.

NBU’s reaction to rising number of problematic banks inadequate —–

Over the past year liquidation procedures were started at 3 domestic banks.
In two other banks (Intercontinentbank and Kyiv Universal bank)
temporary state management was introduced. In total about 20 banks are
under liquidation now. It can be expected that the list of such banks will
expand significantly, taking into consideration the large number of “pocket”
banks.

On one hand, liquidating such banks will clear up the sector from morbid
financial institutions. But on the other, additional banks collapses can
further lower the population’s still weak trust in the system. It can result
in massive outflow of individual deposits and provoke a banking crisis.

In this light, NBU’s attitude is rather strange. The regulator refuses to
see the rising number of troubled banks as a threat to the system saying
depositors should blame themselves for choosing such weak banks.

Of course, since the bankruptcy of major Ukraina Bank in the mid-1990s
there have been no cases of large collapses of financial institutions. That
might have relaxed NBU’s officials that are responsible for supervision
of financial institutions.

Reshaping of retail market is next step of transformation of
domestic banking system ———–

In the next several years the bank headcount can by decreased 1.5-2-fold.
The liquidation of weak banks will be one of the reasons. We also expect a
start of the process of consolidation of medium-sized banks that will be
courageous enough to withstand large foreign banks. The M&A process
will be boosted by further entrance of foreign financial institutions.

According to our information, we should expect the entry of 5-6 new banks
this year. These processes will deepen the trend we are starting to see
today – the redistribution of clients. We expect that after corporate
clients starting to change their banks, individual clients will follow suit.

On the whole, individuals are more promising than corporate clients. Let us
present some official figures. According to NBU, individuals’ funds
increased by 46.1% y/y to USD 24.6bn in Jan-Nov 2005. The relevant figure
for corporate sector showed 37.2% y/y increase to USD 11.3bn. As on Mar
2006, corporate funds in banks made up USD 11.76bn versus USD 15.03bn
retail deposits.

At present there are not many examples when a bank offers deposit rates of
8-10% in UAH and 3-5% in USD. It can be only a foreign bank. But such rates
will become the norm for the market in a year, many bankers predict. This
can hurt individual depositors that do not have a high banking culture. It
can even sever the process of their deposits turning into long term credits,
which can keep the rates at the current level.

In our opinion, people would prefer to withdraw funds from banks with lower
rates in favor of those with higher rates. The exodus of funds will begin
soon or maybe it has just begun already. -30-
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4. POLISH AND UKRAINIAN BANKING SECTOR LAGS BEHIND
REGIONAL COMPETITORS SAYS AUSTRIAN ERSTE BANK’S REPORT
Ukraine’s banking sector growing the fastest, but yet the most underdeveloped

Polish News Bulletin, Warsaw, Poland, Thu, Apr 06, 2006

WARSAW – The development of the banking sector in Central and Eastern
Europe will be marked by quick growth facilitating catching up with Western
Europe and further consolidation, says the most recent report prepared by
the Austrian Erste Bank.
———————————————————————————————
TABLE. Most developed banking sectors in Central and Eastern Europe
(percent of the GDP)
Euro zone 229; Croatia 115.1; Slovenia 103.1; Czech Republic 99.5;
Slovakia 97.7; Hungary 93.0; Bulgaria 80.0; Poland 67.4; Romania 46.2;
Russia 43.3; Ukraine 34.0. (source: Parkiet)
——————————————————————————————–
Statistically the banking sector in Croatia and Slovenia are the closest to
the desired target. According to data from their central banks, in only
these two countries from the region the banking sector’s assets have
exceeded the 100 percent of the GDP threshold.

The Czech Republic and Hungary are not far behind, though. Meanwhile
Poland is lagging behind – the assets of the Polish banking sector represent
only two thirds of the GDP. For all countries in the region, the asset level in
the euro zone will still be unattainable for a long time, as the value of
Western banks’ assets are over twice as high as Euroland’s GDP (227
percent). Reaching this level will most probably last at least a dozen
years.
———————————————————————————————–
TABLE. Table. Largest banking sectors in Central and Eastern Europe
(value of assets in billion euro)
Euro zone 17,852.2; Russia 275.9; Poland 170.5; Czech Republic 99.5;
Hungary 80.6; Slovakia 37.1; Romania 35.2; Croatia 34.5; Slovenia 28.6;
Ukraine 24.0; Bulgaria 16.7. (source: Parkiet)
———————————————————————————————–
If last year’s dynamic is maintained, the assets in Polish banks will reach
the value of the GDP in seven years. While the GDP went up by 3.3 percent,
the banks’ assets grew at a rate of 9.3 percent, that is almost three times
as fast. Erste Bank’s analysts indicate that the expected acceleration in
the economy does not necessarily have to contribute to a faster development
of the banking sector.

Last year cash loans (22 percent increase) and mortgage loans (41 percent
surge) were the sector’s motor for growth. Soaring sales of the latter, mainly
granted in foreign currencies, might be hindered by the introduction of
limitations by the banking supervision.

Another factor impeding the market’s development are the companies, which
do not want to incur debts in banks – last year the loan portfolio went up by a
mere 2.1 percent, because the firms are able to finance their investments
from their own financial surpluses. A similar situation does not exist in
any country from the region.
———————————————————————————————–
TABLE. Fastest developing banking sectors in Central and Eastern Europe
(annual asset growth in percent)
Ukraine 61.9; Romania 42.9; Russia 31.8; Bulgaria 31.6; Slovakia 20.9;
Slovenia 20.6; Hungary 19.0; Euro zone 13.6; Croatia 13.2
Czech Republic 10.4 Poland 9.3. (source: Parkiet)
———————————————————————————————–
PARADISE FOR BANKS
Hungary is a paradise for banks, say Erste Bank’s analysts. The players on
the Hungarian market are not burdened by pressure on lowering margins. The
overall assets of the Hungarian banking sector went up by 19 percent last
year, that is by around twice as much as in Poland and the Czech Republic.

The mortgage loan segment is dynamically growing – last year the value of
loans granted in domestic currency went up by 19.5 percent and the value of
foreign currency loans increased by almost 40 percent. A two-digit dynamic
is also noted in loans for companies.

Hungary is only threatened by the risk connected with the country’s fiscal
condition, which might prove difficult to improve, because the two largest
parties getting prepared for elections do not have reliable programmes of
budget deficit reduction. –
CONSOLIDATION? TRY HARDER
According to analysts from the Austrian institution, the banking sector in
the region can expect further consolidations. This tendency will mainly
concern such countries as Serbia, Ukraine and Russia. Mergers and
acquisitions of only smaller institutions are likely in Hungary and the
Czech Republic.

Although in Poland the government controls majority shares in the first and
the tenth bank on the market (PKO BP and BGZ), the current composition
of the political scene suggests increasing, rather than limiting state
involvement.

The streets are no longer paved with acquisition targets, reads the report.
That is why there are quite a lot of institutions interested in takeovers
and competition is strong.
————————————————————————————————
TABLE. Largest banks in Central and Eastern Europe (million euro,
percent) Bank 2005 profit
BACA 964; Raiffeisen Int 371; FHB 32; OTP 595; Komercni banka 313;
Pekao 392; Bank BPH 262; PKO BP 449; BZWBK 13. (source: Parkiet)
————————————————————————————————
WHAT CAN BE BOUGHT?
Currently two large entities in the region are for sale. UniCredito had to
sell the Croatian Splitska banka, which belonged to the HVB group, because
it would have a too high market share. Its assets amount to EUR2.8bn, which
represents 9.2 percent of all banking assets in Croatia.

According to Erste Bank, the takeover of Splitska would require engaging at
least EUR800m. The second bank for sale is the Serbian national Vojvodjanska
banka, the fifth largest bank on that market. With assets being worth almost
EUR460m it has an almost 6 percent market share.

Both banks will most probably find new owners before or during the summer
holidays. PKO BP is attempting to buy them, but leaks from local press
suggest that it is likely to lose against rivals from Western Europe.

It is characteristic of the region’s banking sector that only Western
investors participate in its largest transactions. Among the two largest
banks in the region, that is PKO BP and Hungary’s OTP, only the latter
managed to expand outside the domestic market, but not through headline
acquisitions. The Hungarian bank is an investor is Bulgaria, Slovakia,
Croatia, Romania an Serbia. These markets enjoyed a 10.5 percent share in
the group’s last year’s profits.

Erste Bank analysts indicate the possibility of consolidation between
Western European banks which are present on markets from the region, such
as in the case of UniCredito and HVB last year. The merger of Pekao and
Bank BPH is to be the consequence of the transaction.

According to Erste Bank and contrary to what the Polish government is
saying, this operation does not pose any threats as the new institution will
have a 19 percent market share, that is not too much taking into account the
regional standards. The largest banks in the Czech Republic and in Hungary
control over one fifth of their markets.
HOW TO MAKE MONEY ON BANKS?
According to the Austrian analysts, the good prospects for the banking
sector in Poland can be a good opportunity for stock market investors. The
Austrians closely examined nine institutions ? two Austrian ones (Raiffeisen
and Bank Austria Creditanstalt, which records half of its incomes and
profits in Central and Eastern Europe), two Hungarian ones (the market
leader OTP and the mortgage bank FHB), one Czech bank (Komercni banka,
the Czech market’s third largest player) and four Polish institutions (Bank BPH,
Pekao, BZWBK and PKO BP).

The analysis proved that the shares of Polish banks are rather expensive in
relation to “a group of peers” comprising 15 entities. Erste Bank
recommended to keep BPH, Pekao and PKO BP equities and reduce
involvement in BZWBK shares.
POLES WANT TO BORROW LIKE THE ENGLISH
In a research ordered by the European Credit Research Institute concerning
the European consumer loan market, Poland found itself among 21 examined
countries. The authors from the London consulting company Mercer Oliver
Wyman indicate that besides Great Britain, the Czech Republic, Portugal,
Hungary, Spain and Italy, Poland belongs to the most dynamically developing
markets. The quick growth results from high level of innovations, increasing
competition and liberal legal regulations.

Banks from Great Britain, Norway and Sweden are the ones with the highest
number of clients using debit accounts, car loans and cash loans. These
liabilities reach 11 to 16 percent of those countries GDPs. What is
interesting, a similar mechanism of incurring debts has been observed in
Poland, the Czech Republic, Hungary and Turkey, that is countries with
relatively low salaries, yet a large potential for economic growth.

Poles were taking out loans amounting to 5 percent of the GDP and exceeded
the Dutch, Italians and the Swiss. “We have low salaries and aroused
consumption needs at the same time. The disproportion of needs and
possibilities paves way for quick cash and instalment loans. Of course, the
dynamic of the GDP contributes to in increase in loan granting as well,”
said Maciej Kossowski from Expander financial advisors. – Half a Card per
Capita

Poland is doing much worse taking into account the number of payment cards
per 1,000 citizens. It is placed last among the researched countries.
Statistically only half a card falls on one Pole. The average British
citizen carries 2,5 cards in his wallet. The Portuguese, Spaniards,
Norwegians and Belgians carry two. Czechs and Hungarians are also far better
than Poles as there are more or less 1,000 cards per 1,000 people there.

Despite the huge growth of the mortgage loan market, Poland is still the
European Cinderella, similarly to the Czechs. Poland’s share in mortgage
loans amounts to 5 percent of the GDP, while in Hungary the ratio works out
at 10 percent. – Banking Is Not Mass Service Yet

Mariusz Wojcik from the Xelion advising company says that the consumer loan
market is developing rapidly in Poland and it looks like the tendency will
be maintained in the next few years. “Interest rates are falling, but it is
worth indicating that the interest on consumer loans is still high ? around
15-20 percent.

On the other hand the small number of payment cards results from the low
level of affluence in the Polish society. Banking services still are not
mass services, especially in case of clients living outside cities. Only 70
percent of Polish households has bank accounts. This figure is still much
lower than in other European countries,” he said
ESTABLISHING GIANT NATIONAL BUSINESS ENTITY LIKELY?
“Both the representatives of Law and Justice (PiS), the Polish Peasants’
Party (PSL) and Self-Defence (Samoobrona) have the idea of establishing a
banking-services-industrial-insurance institution,” admitted Krystyna
Skowronska, a Civic Platform (PO) MP. The PKO BP would be included in
it, while the BGZ bank is also mentioned as potential part of the giant.

Meanwhile the PKO BP bank and the Poczta Polska post office are preparing
themselves for tightening cooperation. Bank Pocztowy is to be the link
between the two companies as PKO BP holds shares in the institution
controlled by Poczta. Is this the beginning of realising the concept the PO
MP spoke of?

Slawomir Skrzypek, the CEO at PKO BP, is ambiguous on the issue. “I would
not like to talk about long-term, strategic plans of Bank Pocztowy, but I
can admit that it will play an important role on the Polish market. It might
be totally different from what everyone is expecting,” he said.

By creating a national giant comprising of banks, telecoms, insurance firms,
energy companies, mines and shipyards, Poland would enter the path that
other EU countries have already blazed. It is enough to mention the French
EDF and France Telecom, the Italian UniCredit Group, the Swedish Vattenfall,
Telia and Nordea.

These companies operate on the European market often by entering other
countries and by taking over privatised state-owned companies. Establishing
such an institution in Poland would facilitate competing on the European
markets for domestic capital. -30-
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5. UKRAINE SLAPS LIMITS ON BLACK SEA BALLAST
CAN a ship pollute an already polluted stretch of water?

Lloyds List, London, United Kingdom, Thu, Apr 06, 2006

LONDON – Ukraine says enough is enough, and has begun to impose
heavy fines on ships exceeding permissible levels of contamination during
scheduled deballasting, writes James Brewer.

The country’s stringent official limits for vessels are lower than the level
of contaminants already in the Black Sea, according to protection and
indemnity insurance experts.

Several P’I clubs, including Britannia and Swedish Club, have issued
warnings to owners that they face penalties of $15,000, and potentially even
more, but it seems shipowners have little leeway. Britannia has told its
members that the ports of Odessa, Yuzhny and Ilyichevsk are particularly
affected.

State ecological inspection authorities take samples of ballast and where
levels are above the limit, ships are only allowed to discharge the ballast
on payment of a penalty. The penalty consists of tariff compensation for
damage to the environment, plus an administrative fine.

Ship-owners can avoid the penalty by deballasting outside the 12-mile
territorial sea zone, but ‘the costs and practicalities of this usually make
the penalty the more commercial option’, admitted Britannia in its Risk
Watch newsletter.

According to Legat Co, the Odessa-based correspondent for the Swedish
Club, ballast must be changed when entering the Black Sea, but this does not
release a vessel from liability.

In one case, P’I interests are challenging a fine, saying that a laboratory
number from an earlier test was discovered on the label.
Leaving the ballast on board is an unattractive option, as it will cost the
owner freight space. Advice includes keeping the ballast to a minimum, and
arranging for a P’I surveyor to watch the sampling. -30-
———————————————————————————————-
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========================================================
6. SOFTLINE MODERNIZES UKRAINE’S FUEL & ENERGY
MINISTRY’S INTERNET WEBSITE

Ukrainian News Agency, Kyiv, Ukraine, Thur, April 6, 2006

KYIV – Softline, a Kyiv-based software manufacturer, has modernized the
Internet website of the Fuel and Energy Ministry (http://mpe.energy.gov.ua)
that was developed in 2003. The press service of Softline disclosed this to
Ukrainian News.

According to the press service, the ministry’s Internet portal has the
interface that is standard for the websites of all government agencies, an
information update system, a search tool, and certain services and
technologies. This allowed integration of the ministry’s website into the
web portal of executive government agencies.

The web portal is part of the so-called Data Center system that unites the
websites of several central organs of the executive branch of government.

Visitors to the website can obtain information about tenders invited by
enterprises of the Fuel and Energy Ministry, the volumes of purchase of
major goods, the information resources of the Ukrainian fuel and energy
complex, the Ukrainian Coal program. And other information.

Specialists with Softline developed the modernized website on the basis of
Megapolis Portal Manager, a portal management system. This multifunctional
system allows employees of the Fuel and Energy Ministry to fully administer
the ministry’s Internet resources: update information and manage the
portal’s services.

As Ukrainian News earlier reported, Softline recently modernized the website
of the State Committee for Land Resources. Softline was founded in 1995.
It is a business automation software developer and system integrator. The
SigmaBleyzer international [private equity] investment company [through
the Ukrainian Growth Funds (UGF)] controls Softline. -30-
———————————————————————————————-
LINK: http://www.ukranews.com/eng/index_high.html
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========================================================
7. SEVASTOPOL SEAPORT TAKES TIDE OF CAPITAL INFLOW

Ukrainian Times, Kyiv, Ukraine, Friday, April 7, 2006

KYIV – The influx of foreign capital into the economy of Sevastopol
increased fivefold last year, compared with 2004. Specifically, the
increase made up more than 19% that is six times the average rate in
Ukraine.

Presently, petroleum and grain terminals are under construction in the
Crimean seaport, and the Ukrainian-Turkish investment of setting up a ferry
service between Sevastopol and Samsun is carried out. Work is well under-
way upon 10 large-scale projects, including tourist and recreation enterprises.

Also, special attention is paid to the question of attracting investments to
the tune of no less than $200 million and $30 million in construction of the
airport Belbek and a water park in the village of Lyubimovka respectively.

Further, to renovate a hotel and expand the sphere of services, the tourist
and health-improvement complex Krym needs investment in the amount of $7
million. The Sevastopol-based complex is the subsidiary of the company
KrymTur.

Located in downtown Sevastopol, the 14-story building of Krym has 235
rooms designed to accommodate 500 guests. The tourist complex occupies
the area of 0.99 hectare. Reportedly, Krym can be sold for $6 million. -30-
—————————————————————————————————-
Additional information: E-mail: adm@tourism.gov.ua
———————————————————————————————-
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========================================================
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========================================================
8. FINANCIAL SITUATION OF UKRAINE’S STATE-OWNED OIL
AND GAS MONOPOLY TO BE PROBED BY CABINET OF MINISTERS

NTN, Kiev, in Ukrainian 1400 gmt 5 Apr 06
BBC Monitoring Service, UK, in English, Wed, Apr 05, 2006

KYIV – [Presenter] The Ukrainian cabinet convened today at the government
building on 12/2 Hrushevskhoho street [in Kiev] for the first time after the
[26 March parliamentary] election. They discussed 70 points on the meeting’s
agenda, most of which focused on economic matters, for more than three
hours. [Passage omitted: repetition]

[Correspondent] Economics Minister [Arseniy Yatsenyuk] said that a probe
into the activities of the country’s gas monopoly [state oil and gas company
Naftohaz Ukrayiny] will be launched this Saturday [8 April].

[On 29 March, Finance Minister Viktor Pynzenyk accused Naftohaz Ukrayiny of
failing to pay VAT worth of 120m dollars in January-March this year, see
“Ukrainian government concerned over decline in budget payments”, NTN, Kiev,
in Ukrainian, 1600 gmt 29 Mar 06.]

[Yatsenyuk] We have formed an ad hoc group which comprises representatives
of the Economics and Finance ministries and will seek to extremely
scrupulously analyse the financial situation of the National Joint Stock
Company Naftohaz Ukrayiny. Prime Minister [Yuriy Yekhanurov] is going to
hold a meeting dedicated to the issue on Saturday.

[Passage omitted: Justice Minister Serhiy Holovatyy says at the meeting that
the current cabinet will continue working until newly-elected MPs are sworn
in.] -30-
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9. UKRAINE’S GAS CHIEF OLEKSIY IVCHENKO UPBEAT ON
HIS COMPANY’S FINANCIAL PERFORMANCE
Said driving the most prestigious & most expensive Mercedes
car paid for by state-owned gas company is just normal

NTN, Kiev, Ukraine, in Ukrainian 1400 gmt 8 Apr 06
BBC Monitoring Service, UK, in English, Saturday, April 8, 2006

KYIV – [Presenter] The cabinet was expected to meet today to analyse the
financial performance of the national gas company Naftohaz Ukrayiny.
Yesterday a deputy head of Naftohaz said that the company has suffered
losses amounting to over 3.5bn hryvnyas in the first quarter this year.

However, no fuss could be noticed near the cabinet building early today. The
prime minister was also nowhere to be seen. However, Naftohaz chief Oleksiy
Ivchenko has made his own contribution to the story. He came to report to
cabinet experts on a brand new Mercedes of the latest design.

[Correspondent] Economics Minister Arseniy Yatsenyuk said earlier this week
that Naftohaz would have to pass a rigorous test.

[Yatsenyuk] A working group has been set up, involving representatives of
the Economics Ministry and Finance Ministry, to check Naftohaz’s financial
condition thoroughly. The prime minister will hold a meeting on this subject
on Saturday [today].

[Correspondent] They conferred to discuss Naftohaz’s financial figures in a
top secret atmosphere. Neither the cabinet’s press service nor Naftohaz
officials dared to tell journalists where and when the meeting would be
held. A former finance minister explained this secrecy in simple terms.

[Former Finance Minister Serhiy Teryokhin] Even if they have serious
structural problems, and they do have them, which any economist can tell
you, this will be explained away as some shortcomings which should be
corrected, but otherwise everything is good and so on. To be honest, if I
were the prime minister or the president I would never have allowed the
information to be leaked that something has gone wrong in this monopoly.

[Correspondent] Two and a half hours of journalistic persistence were
rewarded with a double appearance. Fuel and Energy Minister Ivan Plachkov
and [Naftohaz chief] Oleksiy Ivchenko came out of the cabinet building
according to their seniority. Rightaway, they denied that any commissions
had existed.

[Plachkov] Which commission? There has been no commission.

[Correspondent] In a while, Plachkov leaves Ivchenko one-to-one with
journalists. Mr Ivchenko says that an ordinary working meeting has been
held, and that it has been called at his own initiative. As for the billions
of hryvnyas of which Naftohaz is short of, this is a normal situation,
Ivchenko says.

[Ivchenko] This is a normal situation, this is a normal loss-making
situation, which I talked of earlier. Since last January we have been buying
gas at 95 dollars and selling it at 40 or 50 dollars. I have always been
and, I believe, will be trusted.

[Correspondent] However, some distant but well-informed economists
disagree and say that, of course, Naftohaz is not bankrupt but there are
other indicators of the company’s financial health.

[Teryokhin] This activity is not positive. This is the activity of, you
know, classical trust, when liabilities exceed assets.

[Correspondent] Indirect proof that everything is fine with Naftohaz is
Ivchenko’s decision to change a company car.

Ivchenko currently uses for business purposes his limousine Mercedes
500 S class, which appeared in Ukraine just a few months ago. It turned
out that Mercedes is a long-standing passion of the country’s chief
nationalist [Ivchenko heads the Congress of Ukrainian Nationalists].

[Ivchenko] As the head of Naftohaz, whom I am now, I have been using
Mercedeses of the latest design since 1992. I change my car every second
year. This has happened for the past 15 years. I will not change my habits.

I believe that the head of such a company should drive the most prestigious
and most expensive car. [Passage omitted: Ivchenko gives journalist a ride
in his new car] This does not affect Naftohaz’s financial condition. It is
like a drop in the ocean, if we talk of influence on Naftohaz’s financial
condition.

[Correspondent] Ivchenko also said that the issue of Naftohaz’s financial
condition has not been resolved yet. Experts in energy issues will next meet
with the prime minister on Tuesday [11 April]. -30-
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10. U.S. NETCRACER TECHNOLOGY CORP OPENS REGIONAL
REP OFFICE IN UKRAINE, WILL HIRE UP TO 100 PEOPLE

Ukrainian News Agency, Kyiv, Ukraine, Thu, April 6, 2006

KYIV – The US Netcracer Technology corporation opened a regional office
in Kyiv thus having created its mission in Ukraine. Yen Rost, Netcracer vice
president for production management, announced this at a press conference.
The office opened in March, he said.

Rost noted that the main objective of the office will be the creation of a
technology center for service support of Netcracer clients in Ukraine and
European countries. In his words, the office is planning to develop active
cooperation with Ukrainian colleges for the creation on their base of
educational centers to train experts for Netcracer.

According to Serhii Kuzmenko, executive manager of the company’s Kyiv-
based office, the office cannot be called a full-value mission, because it will
not deal with production sale, just provide technical support and prepare
personnel for the company.

In his words, the company is planning to employ in its regional office up to
100 people before the end of the year. Earlier Netcracer offices were situated
in four cities: headquarters in Waltham (US), Melbourne (Australia), Moscow
and Samara (Russia).

As Ukrainian News reported, the UMC mobile communications operator and
Netcracker Technology concluded a contract on introduction of the Netcracker
operations support system (OSS) at the UMC by 2007.

Netcracker Technology is a leading developer of solutions that allow
telecommunication companies to effectively manage sets of complex integrated
multimedia structures. The company was founded in 1993 and headquartered in
the state of Massachusetts (United States). -30-
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LINK: http://www.ukranews.com/eng/index_high.html
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11. UZHGOROD REGION ABUZZ WITH INVESTMENT ACTIVITY

Ukrainian Times, Kyiv, Ukraine, Friday, April 7, 2006

KYIV – The Uzhgorod region is seen by foreign investors as one of the most
attractive parts of the Transcarpathian oblast that can be explained by its
vicinity to the state border, developed infrastructure and skilled manpower.
Of 20 entities of the free economic zone Zakarpattya 15 are implementing
their investment projects in the Uzhgorod region.

In 2005 alone 1,845 jobs were created after commissioning facilities at the
close joint-stock company Eurocar and Yazaki-Ukraine Ltd., among others.
As expected, 4,597 new jobs will be created in the near future. It must be
noted that on the average enterprises, which are based in the free economic
zone, pay a monthly wage in the amount of 840 hryvnias.

Today deductions made by these enterprises for the coffers exceed 50% of
all regional budget revenues. Reportedly, a fruit cannery will be among the
very first to enter service this year at the expense of invested capital.

Incidentally, the Uzhgorod company GTK Zakarpattya invites investors to
participate in the project of renovation of the hotel complex Inturist-
Zakarpatye. The project is valued at $500,000.

Investment can be made either in cash or by delivering new equipment or
through the formation of a joint venture. Ownership capital of the hotel
complex, which employs 240 persons, amounts to $698,000.Additional
information: Tel.: (03122) 32572, 36210. -30-
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12. AGRARIAN CONFEDERATION CONSIDERS DELAY IN LIFTING
RUSSIA’S BAN ON UKRAINIAN DAIRY PRODUCTS UNJUSTIFIED

Ukrainian News Agency, Kyiv, Ukraine, Wed, April 5, 2006

KYIV – The Ukrainian Agrarian Confederation considers the delay in lifting
Russia’s ban on importation of Ukrainian dairy products into Russia
unjustified. The press service of the confederation announced this to
Ukrainian News.

“The UAC believes that a situation in which the best enterprises in the milk
processing industry have still not been granted permission to sell their
products on the Russian market for unknown reasons is unacceptable,” the
press service said.

According to the press service, specialists with the confederation are
convinced that not only the six enterprises that Russian experts have
allowed to export dairy products to Russia, but most of the producers of
dairy goods in Ukraine, have the relevant technologies and can guarantee
the necessary product quality.

At the same time, officials at the confederation expressed surprise at the
inaction of the relevant Ukrainian services in resolving this issue. “Of
recent, no information has been received about the dynamics of resolution
of this issue. One gets the impression that the interests of the dairy
industry, just like those of milk producers, are no longer a priority for
Ukrainian rulers,” the press service said.

As Ukrainian News earlier reported, the Russian federal service for
veterinary and phytosanitary supervision has authorized importation of dairy
products from the Baltskii baby food cannery (Odesa region), the Hadiachsyr
company (Poltava region), the Khmelnytska Maslosyrbaza company
(Khmelnytskyi), the Romny dairy plant (Sumy region), the Menskyi Syr
enterprise (Chernihiv region), and the Pyriatyn cheese plant (Poltava
region) into Russia.

Russia banned the import of all types of livestock products from Ukraine
on January 20, as a result of which several producers of dairy goods
significantly lowered the purchase prices of milk. Experts predict possible
monthly losses of USD 50-60 million in the dairy sector and USD 12-15
million in meat sector as a result of the import ban. -30-
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13. RUSSIA UNCORKS ANOTHER TRADE DISPUTE
Wine From Georgia & Moldova Banned as Ex-Soviet States Anger Moscow

By Peter Finn, Washington Post Foreign Service
Washington, D.C., Friday, April 7, 2006; Page A16

MOSCOW – In major Russian supermarkets, Georgian and Moldovan wine is
being pulled from the shelves. At warehouses across the country, millions of
bottles from the two countries are in lockdown. And hundreds of train cars
and trucks laden with wine are stopped on Russia’s borders, blocked from
entering by customs officials.

Just a few months ago, Russia settled its war over natural gas prices with
Ukraine. Now it has opened another trade battle with two other former Soviet
republics that officials here see as recalcitrant for drifting away from
Moscow’s influence.

Late last month the Russian consumer protection agency banned the import
of Georgian and Moldovan wine and ordered a halt to all sales of existing
stock, claiming the wines were contaminated with pesticides and heavy
metals. Officials in the two countries dismiss the allegation as nonsense.

Together, Georgia and Moldova provide nearly 43 percent of all wine sold in
Russia, according to Snezhana Ravlyuk, senior analyst at Business Analytica
in Moscow. The ban is having a punishing effect on an industry that
stretches from Black Sea vineyards to the Moscow warehouses of Russian
wholesalers.

“It’s very clear this was a political, illegal and unfriendly decision,”
said Georgia’s prime minister, Zurab Nogaideli, in a telephone interview
from Tbilisi, the capital. “It’s absolutely absurd and ridiculous. If our
wine goes to European Union markets and North America and has no
problems, why is it not able to go to the Russian market?”

The Russian action followed suggestions by Georgian and Moldovan officials
that they might block Russia’s attempt to join the World Trade Organization,
a major goal of President Vladimir Putin. He has also complained recently
that the United States was holding up Russia’s membership.

Both Georgia and Moldova contain breakaway regions that are supported by
Russia. The two governments hoped to use Russia’s desire to join the WTO as
leverage in negotiations with the Kremlin about those regions, analysts here
said.

Georgia and Moldova have had strained relations with Moscow since
Western-oriented governments came to power. They say the wine ban
exemplifies Russia’s willingness to use its economic clout for political
purposes. Such moves are generally illegal under WTO rules.

A similar accusation was leveled when Russia’s state-owned Gazprom switched
off the flow of natural gas to Ukraine for a few days at the beginning of
January. Russian officials said at the time that the cutoff resulted from a
need to charge market prices and end what amounted to a massive subsidy of
the Ukrainian government.

This time, the Russians say, it’s all about bad wine.

“Our results show that more than 60 percent of wine and wine materials from
Moldova and the Republic of Georgia do not comply with sanitation and
epidemiological regulations,” Russia’s Federal Inspectorate for Consumer
Protection said in a letter to the Russian Customs Service. Officials at the
consumer agency were not available for comment, a spokeswoman said.

The decision followed what the consumer agency said were routine checks of
Georgian and Moldovan wines on store shelves. Whether the checked wine was
even from Georgia is open to question; in Russia there is large-scale
counterfeiting of Georgian wine, which is very popular for both its quality
and cost.

In any case, it was a devastating decision for both countries. Russia buys
more than 80 percent of all exported Georgian wine, or 9 percent of all
exports from the Black Sea country. To Moldova, the trade accounts for
nearly 75 percent of total wine exports and 19 percent of all exports.

“Of course we are going to suffer losses, but it’s also clear we have to
reorient our exports,” Valery Lazar, Moldova’s economy and trade minister,
said in a phone interview from the capital, Chisinau.

Moldovan officials flew to Moscow on March 28, but were forced to cool their
heels for a week, the minister said. “They finally met some officials” on
Tuesday, Lazar continued, “but the Russian side failed to produce any
concrete results. And they can’t. The quality of our wine is excellent.”

Lazar said he suspects that another factor in the ban may be business
figures who for their own interests “are trying to discredit the quality of
Moldovan wine.”

Kakhetian Traditional Winemaking, a company that owns vineyards in southern
Georgia and produces 1 million bottles of wine annually, has lost 70 percent
of its sales. “Our business has stopped,” Natalia Yanchuk, the company’s
marketing director, said in a telephone interview. “The situation must be
solved.”

At the warehouse of Group Dionis on the edge of Moscow, 3 million bottles of
wine are gathering dust. The company, which has nearly 1,000 employees in
Russia, Georgia and Moldova, has begun laying off workers. The Russian
National Alcohol Association estimates potential losses in the hundreds of
millions of dollars.

“I don’t want to talk about politics, but it’s clear this action is
punishing Russians,” said Sergei Dyuzhinov, development director for Dionis,
one of Russia’s largest wine importers.

Many Georgian restaurants dot the Russian capital, and managers said they
had enough Georgian wine in their cellars for their customers, even if
serving it now appears to be illegal. They are dreading a protracted
blockade. “In a month,” said Iveri Dzhikiya, manager of the Tiflis
restaurant in Moscow, “I may have to serve French wine.” -30-
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14. AES UTILITIES CORP FOURTH-QUARTER PROFIT ROSE 75%
Major international investor in two electric plants in Ukraine

By Rebecca Smith, The Wall Street Journal
New York, New York, Wed, April 5, 2006; Page A18

AES Corp. announced a 75% jump in profit for the fourth quarter of 2005,
and the global power seller said its latest financial restatement would reduce
earnings for 2003 by $17 million and boost 2004 results by $6 million.

The latest earnings restatement, announced Monday, was the third since
March 2005 by the Arlington, Va., owner of utilities and generating plants in
25 countries. Deloitte & Touche LLP is the company’s accounting firm.

AES said the restatement corrected past errors that concerned minority
interest expense and tax expense related to withholding taxes at
subsidiaries in Brazil and El Salvador, as well as accounting for four
derivative instruments. The company said the errors were unintentional.

The restatements put AES in default on two credit facilities, but the
company said it had resolved the default on the largest, a $600 million
facility arranged by Merrill Lynch & Co., on Monday.

Investors appeared to shrug off the most recent restatement and AES’s
stock yesterday rose 45 cents, or 2.7%, to $17.13 in 4 p.m. composite
trading on the New York Stock Exchange.

“People are willing to look the other way because AES has come out of a
position of complete disaster,” said Soam Goel, a partner at Enersights, a
New Jersey consulting firm focused on energy companies.

AES said fourth-quarter net income jumped to $177 million, or 27 cents a
share, from $101 million, or 16 cents a share, in the year-earlier quarter.
Revenue increased 18% to $2.97 billion from $2.52 billion. The company
attributed the improvement in the latest period to a lower tax rate, rising
gross margins and fewer impairment charges.

It said its deregulated electricity business boosted revenue in the fourth
quarter by 20% to $318 million because of higher prices in New York,
Panama and Argentina. A gross margin of $108 million was 89% higher
than the fourth quarter of 2004 as a result of higher electricity prices.

Among AES’s largest investments are three vertically integrated utilities,
including Ipalco Enterprises Inc. in Indiana, EDC in Venezuela and Sonel in
Cameroon, West Africa. Its distribution utilities include AES Eletropaulo in
São Paulo, Brazil, and other delivery utilities in Argentina, El Salvador
and Ukraine, as well as numerous generating plants including wind-, coal-
and gas-fired units in the U.S., Latin America, Europe and Asia.

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Write to Rebecca Smith at rebecca.smith@wsj.com; www.wsj.com
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15. UKRAINE: EBRD GRANTS USD 200 MILLION LOAN TO
MITTAL STEEL KRYVYI RIH TO INCREASE PRODUCTIVITY

Ukrainian News Agency, Kyiv, Ukraine, Wed, April 5, 2006

KYIV – The European Bank for Reconstruction and Development has
decided to grant the Mittal Steel Kryvyi Rih ore mining and metallurgical plant
(Dnipropetrovsk region) a USD 200 million loan. EBRD representative
disclosed this to Ukrainian News.

According to him, this decision the directorate council of EBRD made on
April 4. The loan is intended for increment of company’s productivity and
effective energy consumption at the enterprise. EBRD decided to grant USD
200 million, while the total cost of the projects needs USD 500 million. As
Ukrainian News earlier reported, Mittal Steel Kryvyi Rih intends to invest
USD 1.2 billion in modernization of production by 2009.

According to Choderi, the program for modernization of the plant’s
production involves reconstruction of its blast furnaces Nos. 5, 6, and 8,
construction of a new converter workshop instead of an open-hearth furnace,
introduction of a technology for production of steel slabs and sheets, and
investment in ore mining and ore enrichment with the aim of enabling the
plant to be self-sufficient ore.

Moreover, one of the goals of the investment program is optimization of
energy consumption and reduction of the volume of natural gas it uses by
increasing the use of coal.

The net revenues of the plant rose by 34.1% or UAH 2,566.913 million to
UAH 10,099.849 million in 2004, compared with 2003.

Mittal Steel Kryvyi Rih is the largest producer of rolled steel in Ukraine.
It specializes in the production of elongated rolled products, including
steel reinforcing bars and iron rods.

Mittal Steel Germany GmbH, which is part of the Mittal Steel international
holding that is the world’s largest steel producer, owns 93.02% of the
shares in Mittal Steel Kryvyi Rih. -30-
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16. EUROPEAN PARLIAMENT CALLS ON EUROPEAN COMMISSION
TO START TALKS WITH UKRAINE ON ASSOCIATED MEMBERSHIP


Ukrainian News Agency, Kyiv, Ukraine, Thu, April 6, 2006

KYIV – The European Parliament has called on the European Commission
to start talks with Ukraine on associate membership. This is stated on the
official website of the European Parliament.

According to the relevant resolution adopted by the European Parliament,
despite noting the shortcomings of the recent elections in Ukraine, European
Parliament congratulates the people of Ukraine on their commitment to the
democratic process in their country.

In the resolution, the European Parliament calls on the European Commission
to advance its support for further democratic development of Ukraine and to
begin “to negotiate an Association Agreement between the European
Communities and Ukraine” in view of the expiration of the current agreement
in 2008.

The European Parliament also calls on member states of the European Union
to “provide concrete support, contributing to a continuation of the
democratization and reform process” in Ukraine and calls on neighboring
states to “refrain from any economic or other pressure to change the
democratically decided further political, social and economic development of
the country.”

The European Parliament looks forward to increased cooperation with the
Ukrainian parliament as well as to a visa-facilitation agreement between the
European Union and Ukraine with the final goal of a non-visa regime.

The resolution expresses the hope that Ukraine can make progress in its
attempt to become a full member of the World Trade Organization.

As Ukrainian News earlier reported, Ukraine is aiming to conclude an
agreement on associate membership with the European Union in 2008, with
a view to becoming a member of the union in the future. -30-
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17. BRUSSELS SET TO ALLOW ROMANIA INTO THE EU
Bulgaria has slipped in its reforms in late 2004 and the first part of 2005

By George Parker in Bucharest, Financial Times
London, United Kingdom, Thursday, April 6 2006

BUCHAREST – Romania was shown an open door on Thursday to join
the European Union in January 2007 after Olli Rehn, the EU’s enlargement
commissioner, praised the country’s judicial reforms and its crackdown on
corruption. Although Mr Rehn said Romania was “not there yet”, he said
that Bucharest had taken big strides towards meeting European concerns
about its legal system.

Mr Rehn was speaking on his final fact-finding trip to Romania, ahead of
presenting a report on May 16 on whether the Black Sea state can join the
Union on January 1 next year. “It’s already clear today that Romania has
made considerable progress over the past year,” he said, after meeting Calin
Popescu Tariceanu, prime minister.

However, the commissioner was much more critical of reforms in another EU
candidate country – Bulgaria – which he accused of “losing time” in carrying
out required judicial reforms.

Mr Rehn must recommend on May 16 whether either country should be made
to wait a year before joining, to allow them to carry out further reforms. Such
a delay would be humiliating for Bucharest or Sofia. But Mr Rehn is under
pressure from some European states to slow the pace of EU expansion in
response to “enlargement fatigue”.

Speaking to the Financial Times, Mr Rehn said he wanted “concrete results”
from Romania to confirm its entry into the Union, including proof that
judicial reforms were “irreversible”. “Romania has to ensure it has a
credible track record in tackling corruption and organised crime, and that
will be the focus of our remaining examinations,” he said.

However, he said Bucharest had taken seriously warnings on the issue last
year and already had a limited track record in bringing prosecutions. He
also praised Romania’s efforts to secure its external borders.

In the case of Bulgaria, he said the country had slipped in its reforms in
late 2004 and the first part of 2005, and that Brussels was working with
Sofia to improve its constitutional law.

However, there is little appetite within the European Commission for making
either country wait a year. “What would be gained?” asked one senior
official in Brussels. “What leverage would we have then?”

Although Romania and Bulgaria are guaranteed EU membership and Croatia is
likely to become the Union’s 28th member within the next five years, the
prospect for future enlargements is becoming less clear.

Wolfgang Schüssel, Austria’s chancellor who holds the rotating EU
presidency, said that some western European countries had a “psychological”
problem with extending the Union.

Peter Mandelson, EU trade commissioner yesterday urged countries in
south-east Europe to develop a free trade area to prepare for EU membership,
and insisted that Turkey, and even Ukraine, should look forward to joining
the 25-member club. -30- LINK: http://www.ft.com
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18. UKRAINE: BUILDING NUCLEAR STORAGE FACILITY IS GOOD
BUT THE GOVERNMENT FAILED TO MAKE THAT CLEAR

COMMENT: Viktor Chumak, Chief Specialist, Defense & Security Issues
International Center for Policy Studies (ICPS), Kyiv, Ukraine, March 7, 2006

The signing of a Government contract with US-based Holtec International to
build a storage facility for spent nuclear fuel is appropriate and timely,
says Viktor Chumak, ICPS’s chief specialist on defense and security issues.
But this move created a considerable uproar in the country’s media and the
opposition were quick to use it as a weapon in the election campaign.

The main message in this negative PR campaign was, “Ukraine will become the
trash heap for radioactive waste from all of Europe and America.” Meanwhile,
the Government neglected to inform the public and the press of the reasoning
behind this decision.

The media campaign that opposition parties and blocs are waging against this
project has the sole purpose of increasing voter support by playing on the
issue of environmental safety, which is a painful one for Ukrainians. Here,
again, the inability of the Ukrainian Government to run an effective public
awareness campaign to gain support for critical state projects is very
evident.

ICPS analysts say this contract is quite beneficial for Ukraine and, indeed,
makes it possible for the country to increase its energy independence. First
of all, the planned facility is not a burial ground for spent nuclear fuel
but temporary storage for spent fuel rods from Ukrainian atomic energy
stations (AESs) before being transported for further reprocessing.

Clearly, any country using atomic energy should also have its own industry
for recycling the resulting radioactive wastes if it does not wish to be
captive politically and economically to another country.

Finally, the Ukrainian facility for spent fuel rods will be the more
environmentally-friendly “dry” type rather than wet, that is, the container
will not be in water, which carries a high risk of corrosion.

This same type of container is widely used in the US and, according to its
specifications, can withstand the most severe external shocks, such as
hurricanes, tsunami, falling flying objects, and even terrorist attacks.

Holtec International has all the necessary permits and certifications, and
has, moreover, carried out projects in Japan, South Korea, China, Taiwan,
Great Britain, Spain, Canada, the US, and Brazil.

The most appropriate site for building this container of the three proposed
locations-two in the Chornobyl Zone and one on the territory of the
Khmelnytskiy AES-is probably the one inside the isolated Chornobyl Zone.
This area will remain closed to the general public for living purposes and
has the necessary infrastructure and scientific institutions that deal with
nuclear issues. -30-
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LINK: http://www.icps.kiev.ua/eng/comment.html?id=182

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19. UKRAINE/2006 COALITION: HOW NOT TO STEP ON THE RAKE

ANALYSIS & COMMENTARY: Vira Nanivska, ICPS Director
International Centre for Policy Studies (ICPS)
Newsletter #12 (316), Kyiv, Ukraine, Monday, April 3, 2006

In an article for the Kyiv based weekly “Korrespondent,” ICPS Director
Vira Nanivska outlines the four principles for building a parliamentary
coalition.

These principles, based on the experience of EU countries, include placing
the issue of government posts at the end, focusing on discussing a common
program and resolving controversial issues, a rational distribution of key
Government posts, and the establishment of a body responsible for political
coordination among the participants in the coalition. Unless these basic
principles are followed, the future coalition risks being as short-lived as
the previous one.

THE 2006 COALITION: HOW NOT TO STEP ON THE RAKE
Putting together a coalition in the Verkhovna Rada and forming a
Government based on it as the result of democratic elections is a first for
our country. The risk of doing something wrong is quite high.

Let’s remember the short lived union of Nasha Ukraina with the Bloc of
Yulia Tymoshenko and the Socialists after Viktor Yushchenko’s victory
in the presidential election. How can the new coalition be protected against
old mistakes? Do our politicians understand where these mistakes were
made?

Their latest moves seem to indicate that this is not the case. The president
has been insisting on the need to put together the “common principles”
along which the new coalition might be built.

BYT is determined not to participate in a coalition unless Yulia Tymoshenko
is given the premiership. But wait. Didn’t we have common values among
the “Orange team” before? And wasn’t Ms. Tymoshenko the premier then?

Apparently, Ukraine’s politicians still haven’t learned how to put together
a stable coalition and have little idea of what the basis for one might be.

Yet where we are about to tread, many Europeans have trod before. In
Europe, coalitions can even be formed by parties who were the main rivals
during an election campaign. They can also be formed of minor parties,
generally 4-5 in order to gain a majority in the legislature.

Finland, for instance, surprised everybody in 1995 when it cobbled together
a coalition of five political parties with fairly divergent ideologies-and
it proved to be one of the most stable coalitions in the country’s history.

In Germany today, the Social Democrats have joined in a coalition with
their main opponents, the Christian Democrats. Ideological differences and
difficult personal relations are no barrier to establishing a stable
coalition in Europe.

So, wouldn’t it be worthwhile to learn something from this experience and
our own failures? Ukrainian politicians are concerned to a person about the
proper principles for building a coalition. What kinds of principles operate
in countries with a successful history of coalition building?

Posts come last on the agenda. This is a principle that is very hard for
most politicians to swallow. The members of a coalition should be
represented in the Government in proportion to their success in the
elections. This general principle does not need negotiating.

Still, detailed discussions about who will take what post have no room at
the starting phase. They will only complicate the negotiation process and
quite possibly lead to the collapse of talks.

The main thing is to put together a common program and resolve key
differences. In most coalition talks, once the parties have confirmed their
interest in joining, the main focus of discussion is a common Plan of
Action.

First and foremost, representatives of potential participants need to
clearly determine the range of controversial issues that are likely to
lead to conflict among them and to try to resolve them. Conflicts can
be about overall state policy, or about personal and personnel
expectations.

For instance, after the elections to the Swedish Parliament in 1991, four
parties indicated their interest in forming a coalition. It turned out that
they had different views on a total of 147 policy issues! These ranged from
building a bridge to Denmark to how to punish underage lawbreakers.

To resolve these issues, mini groups were formed on the basis of one
representative from each party. Together, these groups were able to find
and agree to compromises on 140 of the issues. At a higher level, in an
“executive” group that included the first secretary of each of the parties,
they were able to reach a compromise on the remaining 7 issues.

The presence of a common Plan of Action removes the grounds for
political conflict in the future, as all the parties have committed up front
to carrying it out.

Have a rational approach to giving out posts. When it’s clear what this or
that minister will be doing and the obligations of the post are set down in
writing, it is not that scary to give a portfolio into the hands of another
party.

When posts in the Government are being given out, the important points are
that the ministers need to be people who understand the particular area and
that each party receives a number of posts that reflects its base in the
legislature.

Set up a coordination mechanism. There needs to be a body within the
Government that professionally handles ongoing negotiations among the
partners in the coalition. Over time, new political issues will arise and
the coalition needs to be able to agree to a position on them.

The main thing is that this body include representatives of all the parties
in the coalition and that it also have enough authority within the
Government. The latter is usually achieved by making sure that the premier
and other key politicians are part of the group.

Basing the negotiations for a coalition on these principles has obvious
advantages.

[1] Firstly, it reduces the influence of personalities and offers the
opportunity for unexpected players to be included in the negotiating
process: negotiations are led, not so much by the leaders as by the teams,
and the discussion is not about their eventual portfolios but about their
future activities.

[2] Secondly, a coalition that is formed on the basis of a common Plan of
Action and is able to eliminate conflicts and controversial issues among its
partners at the start has a far better chance of surviving. For one thing,
there will be few things for its partners to squabble over. -30-
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ICPS newsletter is a weekly publication of the International Centre for
Policy Studies, delivered by electronic mail. To be included in the
distribution list, contact the ICPS publications department at
marketing@icps.kiev.ua or call (380-44) 484-4400.

ICPS newsletter editor Yevhen Shush (shulha@icps.kiev.ua). Phone:
(380 44) 484-4400. English text editor L.A. Wolanskyj.
LINK: http://newsletter.icps.kiev.ua
LINK: http://www.icps.com.ua/doc/nl_eng_20060403_0316.pdf
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20. SQUABBLES HINDER UKRAINE’S ATTEMPTS TO FORM COALITION

By Tom Warner in Kiev, Financial Times
London, United Kingdom, Saturday, April 8 2006

The world may be congratulating Ukraine on its first “free and fair”
elections, but not all of its newly elected legislators are happy. Many are
considering asking the president to dissolve the new parliament and try
again.

The vote two weeks ago, in which a divided pro-western “Orange” camp won a
narrow victory over “Blue” pro-Russian forces, has led to a stand-off in
coalition talks that some say could be a stalemate.

The outcome depends mainly on whether the two “Orange” leaders – Viktor
Yushchenko, the president, and Yulia Tymoshenko, who was his prime minister
until they fell out and he sacked her – can be reconciled.

The trouble for Mr Yushchenko is that Ms Tymoshenko’s bloc won the biggest
share of the “Orange” vote, which she says gives her a mandate to return as
prime minister. If Mr Yushchen-ko’s bloc disagrees, there will not be any
coalition, she says.

Mr Yushchenko argues that the “Orange” camp should commit to a coalition but
put off the decision about a prime minister.

He wants signed promises from the Tymoshenko bloc and the third prospective
partner, the Socialists, that the coalition would carry out a programme in
line with the president’s vision – including quick entry to the World Trade
Organisation, a free-trade agreement with the European Union, and no
revision of past privatisations, one of the issues Mr Yushchenko and Ms
Tymoshenko quarrelled over.

But, privately, Our Ukraine insiders say the real obstacle to a coalition is
the animosity that exists between Ms Tymoshenko and leading Our Ukraine
members, including several whom she has accused of corruption. At a
closed-doors meeting this week where Our Ukraine leaders voted on a draft
coalition agreement, many opposed giving her the premiership.

A group around Petro Poroshenko, a businessman and Ms Tymoshenko’s leading
opponent within Our Ukraine, proposed a draft that would have invited
pro-Russian “Blue” parties to join the coalition talks, which was voted down
by a three-to-two majority.

Viktor Yanukovich, leader of the pro-Russian Regions party, which came first
in the elections with 32 per cent of the vote, is calling for a “universal”
coalition embracing all five parliamentary parties.

Most Our Ukraine members say their bloc would prefer new elections to an
“Orange-Blue” coalition. But they say the stand-off is likely to continue
until June or even July. Parliament is expected to open session in the
second week of May. If it fails to appoint a cabinet within 60 days, the
president can call new elections.

Mykola Katerynchuk, an Our Ukraine leader, says Ms Tymoshenko will be able
to get herself nominated as prime minister, but she may not win confirmation
as only 18 supporters would have to defect to undermine her bid.

The uncertainty is testing investors’ nerves. The central bank released data
this week showing it spent $1.8bn (Euro1.5bn, £1bn) of reserves defending
the currency during the three months before the elections. Analysts say a
coalition failure could precipitate a currency crisis.

But Mr Katerynchuk says the threat of new elections will force a compromise.
“There’s a lot of ‘he doesn’t like her’ and ‘she doesn’t like him’ and ‘he
doesn’t like him’ around. We need to put all that behind us.”
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21. U.S. SENATE MAJORITY LEADER FRIST WILL VISIT UKRAINE
Senator’s Frist, Burr & Gregg to visit Poland, Ukraine, Russia & Georgia

Associated Press (AP), WNCT Channel 9
Washington, North Carolina, Friday, Apr 7, 2006

WASHINGTON, N.C. – North Carolina’s Richard Burr is on a spring road
trip with some of his colleagues in the Senate.

The Republican is accompanying Senate Majority Leader Bill Frist on a trip
to Russia and Eastern Europe, starting today and lasting through next week.
They’re being joined by New Hampshire Senator Judd Gregg.

Frist’s office says the three will meet with scholars, journalists and
others in Poland, Ukraine, Russia and Georgia. They’ll also talk to experts
on avian flu to see what the region is doing to fight the virus. -30-
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[return to index] [Action Ukraine Report (AUR) Monitoring Service]
========================================================
22. U.S. CUSTOMS AGENTS CONFISCATING FAMOUS UKRAINIAN
EASTER EGGS AT DULLES AIRPORT NEAR WASHINGTON

LETTER-TO-THE EDITOR: By Cliff Downen
The Action Ukraine Report (AUR) #686, Article 22
Kyiv, Ukraine, Monday, April 10, 2006

Morgan: Just a little heads up: U.S. Customs is on the look out for
travelers from Ukraine bringing back the famous pysanky [decorated
eggs]. I had bought some in Kyiv for my Mom’s birthday but Dulles
Airport Customs Agents [near Washington, D.C.] confiscated them
because of bird flu, they said.

I found no warning on the U.S. Embassy website about taking them out.
Since the Embassy has not bothered to warn Americans about buying
pysanky, perhaps we should get the word out.

Cliff Downen, Arlington, Virginia, cdownen01@comcast.net
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[return to index] [Action Ukraine Report (AUR) Monitoring Service]
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23. EGGS AS ART: ORNATE UKRAINIAN EASTER EGGS PYSANKY
Joanne Staroschak shares her passion for an art form that was
repressed by the country’s communist government.

By Kellie B. Gormly, Tribune-Review
Pittsburg, Pennsylvania, Saturday, April 1, 2006

PITTSBURG – After spending a good portion of her life in the former
Soviet Union, Joanne Staroschak has spent five decades in the United
States reclaiming and sharing her passion for an art form that was
repressed by the country’s communist government.

Staroschak, a native of Ukraine and resident of Stowe, creates ornate
Ukrainian Easter eggs — also known as pysanky. Starting on Tuesday, she
will bring her work to PPG Place — Staroschak’s annual ritual for about 20
years — for a 10-day sale.

“It’s such a beautiful art, and the people should know about it,” says
Staroschak, who moved to the United States in 1948. “It used to be such
a big secret.”

Because of the religious symbolism, pysanky — made of actual chicken,
goose and even ostrich eggs with the yolks blown out — were not allowed
under communism.

Mothers often painted eggs and secretly passed them down to their daughters.
When the Soviet Union collapsed in the early ’90s, Staroschak visited her
native Ukraine and taught hundreds of children how to make pysanky.

Since then, she has traveled to other areas, including Brazil, to spread
knowledge of the art, which has ancient roots. She also has taught at
numerous Pittsburgh-area high schools and colleges, and hosted many
workshops — including some at her church, St. Mary’s Ukrainian Orthodox
Church in McKees Rocks — over the years.

Making pysanky takes skill, a steady hand, and intense attention to
intricate detail, Staroschak says. Creating a single egg can take two to six
hours, and the process includes creating a design on the empty egg shell,
and then coating parts of the design with melted wax before dipping it into
dye.

The parts of the egg that are coated with wax aren’t affected by the dye.
After many wax applications and dye baths, all the wax is melted off and
the final design emerges.

Complicated as the process may be, Staroschak says anyone can learn how
to make pysanky. “You don’t have to be an artist, but you have to have
patience and time,” she says.

Staroschak — who, with her late husband, Metro, has two grown children and
two grandchildren — anticipates that this might be her last year at PPG
Place, because carpal tunnel syndrome has inhibited her ability to continue
creating the eggs. However, Staroschak says she plans to keep teaching
others how to make pysanky.

Anita Falce — marketing and events manager for Grubb & Ellis, which manages
PPG Place — says that Staroschak has become an Easter-season fixture at PPG
Place. “People seem to look for her every year. People call and ask about
her,” Falce says. “It astounds me,” she says about Staroschak’s eggs. “The
details are so fine and so close together.” -30-
————————————————————————————————-
Kellie B. Gormly can be reached at kgormly@tribweb.com or (412) 320-7824.
LINK with photos: http://pittsburghlive.com/x/tribune-review/s_438932.html
————————————————————————————————-
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
========================================================
24. FAMED “UKRAINIAN EASTER EGGS” PYSANKY HAVE A
RICH RELIGIOUS AND CULTURAL HISTORY
Second-generation Ukrainian-Canadian artist and illustrator Olga Lang

By Sheila Potter, Oak Bay News
Oak Bay, British Columbia, Canada, Wed, Mar 29 2006

OAK BAY – Lent, the Christian season of soul-searching and fasting in
preparation for Easter, is two-thirds past. That may be a comfort to those
faithful that give up a creature comfort for Lent in imitation of Jesus’
withdrawal into the wilderness for 40 days.

But, for Ukrainian-Canadians, Lent is also the time for meditation while
creating Pysanky: Ukrainian Easter eggs. Olga Lang is a second-generation
Ukrainian-Canadian artist and illustrator that has a passion for pysanky.
During Lent, she teaches the ancient technique.

While most people are familiar with the intricate, colourful eggs made
through a batik-like process with dyes and beeswax, few realize the
pysanky’s history of spiritual meditation. The practice far predates
Christianity which only took solid root in the Ukraine region in the 10th
century.

Lang teaches her pupils that archeologists have discovered evidence of egg
dying dating from the Trypillian culture that flourished in Central Europe
from 4,500 BC to 3,000 BC.

The eggs are considered an early form of writing, and even the word pysanka
(singular for pysanky) comes from the Ukrainian word pysaty which means
“to write.” Or perhaps, said Lang, the word for writing comes from the eggs,
which came first. The eggs were sort of like greeting cards in the days
before Hallmark.

People gave eggs to each other at times of celebration or mourning. There
are get-well-soon eggs and wishing-you-were-here eggs. Every symbol, even
every colour, has a specific meaning: blue for good health, black for
respect and remembrance, red for love.

“My grandfather’s generation would have known how to read a pysanka,”
said Lang. “It was not really lost until communism.” Communists distrusted
the art because of its Christian connections. The art went underground and
was maintained in the West.

“Unfortunately in the West, it was somewhat disconnected and also people
introduced higher technology,” said Lang. People started using electric
kistkas, the tools used to paint melted beeswax onto the eggs. Formerly
kistkas were a simple stick with a heated copper funnel for melted wax.

“The lines got more thin, more even, the designs more intricate, more
geometric” she said. “Unfortunately what happened is that the design became
more important and the idea that it was a message of love was lost.”

For Lang, the process of creating the egg is more important than the final
outcome. Lang likens the process to Tibetan sand paintings, where monks
meditate and pray for peace while they work. “They spend hours and hours
making intricate, beautiful designs, all with prayers,” she said.

“While you are doing a pysanka, you are in a state of love. And that is
really tough, because this thing is not easy to do. And it is also easy to
be hard on yourself, or be critical or disappointed – all these bad things
are just not allowed. You have to like life and acknowledge that (bad
feelings) are coming to affect you and just not let it happen.”

A simple design may take four hours – a challenging amount of time to have
only accepting, grateful, peaceful and loving thoughts, Lang said. It’s
probably a good idea that the practice is contained to just Lent, she said,
given its time-consuming nature.

Lang said the altruistic meditative aspect of the eggs probably predates
Christianity, but it was a symbol that was easily adopted by Christians and
the practice suited the season of Lent, with its emphasis on withdrawal from
the day-to-day world. People have the eggs blessed at Easter, but will hand
them out to people throughout the year.

Lang will teach a pysanka class at the Ukrainian Cultural Centre on April 9,
one week before Easter. To register, call the Ukrainian Cultural Centre at
475-2585.

Olga Lang made this egg for staff photographer Sharon Tiffin (complete with
an image of a camera) as an example of the types of symbols one can put on
an pysanka:

periwinkle: everlasting love; spider: patience, happiness; flower: wisdom and
beauty in life; birds: messenger of good news, often spring; dove: love;
butterfly: transformation; tree: good health

Some symbols, such as the rooster, have been found on fragments of pottery
south of Kiev from 3,000 years ago. Archeologists have discovered ceramic
pysanky in Ukraine dating back to 1,300 BC, and suspect they were made in
honour of the spring equinox. -30-
—————————————————————————————————————-
http://www.oakbaynews.com/portals-code/list.cgi?paper=23&cat=23&id=617863&more
—————————————————————————————————————-
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
========================================================
25. SPIELBERG FOUNDATION & VIKTOR PINCHUK CO-PRODUCE
HOLOCAUST FILM: BABI YAR MASSACRE IN 1941 IN UKRAINE

By Yulianna Vilkos, JTA, New York, NY, Sunday, April 9, 2006

KIEV, Ukraine – There’s a lot of Holocaust documentaries, but not many
that have been filmed in Ukraine. Add one to the list. A new documentary,
co-produced by the Los Angeles-based Shoah Foundation, is shooting in
Ukraine.

The film should be completed by September, in time for the 65th anniversary
of the Babi Yar massacre. The 70-minute documentary will focus on Babi Yar,
the infamous ravine just outside Kiev where some 33,000 Jews were
slaughtered in the last few days of September 1941.

It also will deal with the larger history of the Holocaust in Ukraine,
according to the Shoah Foundation’s president and chief executive officer,
Douglas Greenberg.

Greenberg told Ukrainian reporters last week that the bulk of the film’s
material will come from the video archives of the USC Shoah Foundation
Institute for Visual History and Education, created by filmmaker Steven
Spielberg after he finished his 1994 Oscar award-winning “Schindler’s List.”

The foundation has so far collected 52,000 video testimonies of Holocaust
survivors in 56 countries, speaking in 32 languages, including 3,200
interviews from Ukrainian survivors. Both Greenberg and Spielberg have
family roots in Ukraine.

According to Greenberg, the foundation’s mission now is to bring these
testimonies back to the countries they were collected in order to educate
the local populations about the Holocaust.

Greenberg said he hopes the film will eventually be distributed in Ukrainian
schools. Work is under way to create a teacher’s guide so Ukrainian teachers
can use the film in their Holocaust lessons.

Approximately one-fifth of the film will be new material shot in Ukraine
this past year, Greenberg said. Interviews with Ukrainian Jews remembering
the country’s prewar Jewish community will make up much of this material.

The documentary is co-produced by Ukrainian Jewish oligarch Viktor Pinchuk,
a son-in-law of former Ukrainian President Leonid Kuchma and a major donor
to the Jewish community in his native Dnepropetrovsk. Budget figures have
not been disclosed.

Greenberg says Spielberg and Pinchuk were introduced to each other by a
mutual friend a year and a half ago. “We’ve always wanted to make a
documentary film about the Holocaust in Ukraine, because it’s such an
important chapter” in the overall history of the Holocaust, Greenberg said.
“And there was Mr. Pinchuk, who was also interested in the subject.”

Pinchuk’s spokesman, Thomas Eymond-Laritaz, described his boss’s
participation in the project as “a tribute to the Jewish community he was
brought up in” as well as his “desire to participate in something that would
eventually benefit the wider world community.”

Film director Sergey Bukovsky, a 20-year veteran of the local film industry,
said that the subject matter doesn’t lend itself to much “creative
directing,” but said he would try to make it as engaging as possible.

“We looked for other solutions to avoid having just ‘talking heads,’ “
Bukovsky said. “There will be Jewish artifacts and scenes from the old
Jewish towns in western Ukraine in the film.”

Bukovsky, who is not Jewish, said he had to resist the temptation to
editorialize. “The biggest challenge for me has been finding a balance
between educating and moralizing in the film,” he said.

One thing that makes the Ukrainian project stand out from similar
documentaries produced by the Shoah Foundation in other countries,
Greenberg said, is that it will include the testimony of Ukrainians who
helped Jews during World War II.

Distribution plans have yet to be finalized, but Greenberg said he expects
the film will be shown on Ukrainian television, and he hopes for a
theatrical release in Ukraine as well. The film will be released in both
Ukrainian and Russian, Ukraine’s two official languages, and will be
subtitled in English for the United States, Europe and Israel.

“This is a story that isn’t Ukrainian or American, Polish or German,”
Greenberg said. “It’s a human story, and from this point of view, the fact
that it’s going to be told about Ukrainians and in the languages that
Ukrainians speak makes it very important.” -30-
————————————————————————————————-
http://www.jta.org/page_view_story.asp?intarticleid=16509&intcategoryid=2
————————————————————————————————-
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
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