AUR#730 Jul 12 Macroeconomic Situation June 2006 By SigmaBleyzer; Economic Code; Donbass; Russian Calls Ukraine Leaders ‘Hooligans’; WTO: Russia & USA

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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       

                                                         
ACTION UKRAINE REPORT – AUR – NUMBER 730
Mr. E. Morgan Williams, Publisher and Editor  
PUBLISHED IN WASHINGTON, D.C., WEDNESDAY, JULY 12, 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 – JUNE 2005
REPORT & ANALYSIS
: By Olga Pogarska, Edilberto L. Segura
SigmaBleyzer Emerging Markets Private Equity Investment Group
The Bleyzer Foundation, Kyiv, Ukraine, Wednesday, July 12 , 2006

2.   ECONOMIC CODE OF UKRAINE NEEDS TO BE ELIMINATED

Ukrainian News Agency, Kiev, Ukraine, Thursday, July 6, 2006

3. SHARE OF FOREIGN CAPITAL IN UKRAINE’S BANKING SECTOR
         SHOULD GROW GRADUALLY, SAYS NBU COUNCIL HEAD
Interfax-Ukraine, Kyiv, Ukraine, Tuesday, July 11, 2006

4.       UKRAINE’S RICH START BANKING ON THEIR WEALTH
Vedomosti, re-published by The St. Petersburg Times
St. Petersburg, Russia, Tuesday, July 11, 2006

5ASTARTA KIJEW POSSIBLY THE FIRST UKRAINIAN COMPANY
             TO DEBUT ON WARSAW STOCK EXCHANGE (WSE)
Polish News Bulletin, Warsaw, Poland, Tue, Jul 11, 2006

6UKRAINE WANTS TO BUILD BIODIESEL PLANT PROCESSING
                       RAPESEEDS IN THE CHORNOBYL ZONE
Shell to make presentation on gasification of coal & production of biodiesel
Ukrainian News Agency, Kyiv, Ukraine, Tuesday, July 4, 2006

7DONBASS INDUSTRIAL UNION ATTRACTS USD 100 MILLION
CREDIT FROM THE INTERNATIONAL FINANCIAL CORPORATION

IntelliNews – Ukraine Today, Kyiv, Ukraine, July 5, 2006 

8.  GAZPROM WILL NOT CHANGE PRICE OF GAS EXPORTS TO
                              UKRAINE UNTIL START OF 2007

Ukrainian News Agency, Kyiv, Ukraine, Friday, July 7, 2006

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

10AGREEMENT ON EXTENDING ODESSA-BRODY PIPELINE TO
                    PLOCK, POLAND EXPECTED IN SEPTEMBER
Polish News Bulletin, Warsaw, Poland, Tuesday, Jul 04, 2006

 
By Vitaliy Kniazhansky, The Day Weekly Digest in English #22
Kyiv, Ukraine, Tuesday, July 11, 2006
13MOSCOW’S PAST SATELLITES TAKE INTEREST IN ENERGY TALKS
            Poland is making its point by hosting an energy security summit at
                  the same time as the G8 meeting. It will bring together the
                 presidents of Poland, Ukraine, Azerbaijan and Kazakhstan.
By Robert Anderson, Jan Cienski, Christopher Condon and Stefan Wagstyl
Financial Times, London, United Kingdom, Wednesday, July 12 2006

14.                         RUSSIAN PUNDIT SOURS ON WEST
              Rancor Mirrors Oil-Fueled Nationalism Ahead of G-8 Summit
      Says Ukraine’s U.S.-backed Orange Revolution leaders are “hooligans.”
By Guy Chazan in Moscow, The Wall Street Journal
New York, New York, Wed, July 12, 2006; Page A6

15.                              POLITICS OF THE PIPELINES
                   U.S. Seeks Ways to Route Natural Gas Around Russia
By Steven Mufson, Washington Post Staff Writer
The Washington Post, Washington, D.C., Tue, 11 July 2006

16.            US AND RUSSIA CLOSE TO DEAL ON WTO ENTRY
By Neil Buckley in Moscow, Financial Times
London, United Kingdom, Tuesday, July 11 2006

17.                  RUSSIANS AND U.S. PUSH HARD ON TRADE
By Andrew E. Kramer and Steven R. Weisman
The New York Times, New York, New York, Wed, July 12, 2006

18.    PRESIDENT BUSH HOPEFUL OF WTO DEAL WITH RUSSIA
AFX Europe (Focus), Washington, Tuesday, Jul 11, 2006

19 HEAD OF AMERICAN CHAMBER OF COMMERCE IN RUSSIA
    ‘CONFIDENT’ OF U.S.-RUSSIA WTO DEAL DURING G8 SUMMIT
Alex Nicholson, Associated Press, Moscow, Russia, Tue, Jul 11, 2006

20.                PUTIN LIMBERS UP TO FLEX MUSCLES AT G8
 On Kosovo, Georgia, Moldova & Ukraine, his position is seen as unhelpful.
By Simon Tisdall, The Guardian, London, UK,Tue, Jul 11, 2006

21.     WHY THE WEST IS NERVOUS ABUT PUTIN’S FINEST HOUR
                 Gazprom’s decision to cut off gas supplies to Ukraine.
By Mary Dejevsky, The Independent, London, UK, Tue, Jul 11, 2006
 
COMMENTARY: By Daniel Yergin, The Wall Street Journal
New York, New York, Tuesday, July 11, 2006

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1
UKRAINE – MACROECONOMIC SITUATION – JUNE 2006

REPORT & ANALYSIS: By Olga Pogarska, Edilberto L. Segura
SigmaBleyzer Emerging Markets Private Equity Investment Group
The Bleyzer Foundation, Kyiv, Ukraine, Wednesday, July 12 , 2006

                                            SUMMARY
[1] In May, the Ukrainian economy grew at an impressive 8.5% year-over-year
(yoy), bringing the cumulative growth to 4% yoy. The growth was underpinned
by robust value added growth in the service sector and construction, and
most importantly by resumed industrial output growth.

[2] Stronger economic growth in recent months allowed the government to
meet its budget revenue targets. However, the early budget deficit this year
calls for urgent government measures to rationalize public finances.

[3] Consumer inflation decelerated to 7.3% yoy in May as the impact of
increased service tariffs was outweighed by decelerating food prices.
However, the disinflation trend is expected to reverse in the coming months
following the second wave of tariff increases in June-July.

[4] The merchandise trade balance continued to worsen, posting a $2.1
billion deficit over January-April 2006; however, the data revealed some
signs of improvement.

[5] The current account reported a deficit of $743 billion in the first
quarter (1Q) of 2006. Despite a more than 2.5 times increase in FDI, the
financial account balance was negative with both deficits financed by the
NBU international reserves.

[6] In July, the head of the Socialist Party, Mr. Oleksander Moroz was
elected as the Speaker of the Parliament

                                   ECONOMIC GROWTH

The Ukrainian economy continued its strong recovery in May, with GDP
expanding by an impressive 8.5% yoy according to preliminary data from the
State Statistics Committee (SSC). As a result, cumulative GDP showed a 4%
yoy increase, which is comparable to last year’s figure for the respective
period. On the demand side, the growth was supported by strong domestic
demand, underpinned by robust growth of real wages and social security
payments.

In particular, real households’ disposable income grew by 21.4% yoy for the
first four months of the year. Moreover, there are signs of rebounding
investment demand, which is reflected in booming machine-building and
construction. According to the SSC, investments in fixed capital increased
by 15.9% yoy in nominal terms for the first quarter of 2006.

More than 50% of these funds were spent to acquire machines and equipment
for new facilities and technical modernization of the existing ones.
Increasing investment will help Ukraine to materialize its medium-term
growth opportunities and bring the growth pace back to the regional-average
5% yoy.

On the supply side, economic growth was primarily driven by the service
sector. Value added in transport and domestic trade, cumulatively accounting
for about 23.5% in total GDP, advanced by 6.7% yoy and 7.3% yoy over
January-May, up from 4.2% yoy and 6% yoy over January-April respectively.

Following more than a year of contraction, construction strongly rebounded
at 8.2% yoy over January-May. To a great extent, the growth acceleration in
these sectors is linked to a recovery in manufacturing, which had contracted
due to the sector’s adjustment to higher prices of gas and other inputs
(such as crude oil). Just in May the growth of industrial output resumed at
an impressive 10% yoy, bringing the cumulative growth to 2.4% yoy (up
from a meager 0.4% yoy over January-April).

The rebound occurred primarily thanks to growth acceleration in
machine-building, metallurgy and food processing (up by 17% yoy, 12.4% yoy,
and 9.8% yoy respectively in May), driven by stronger investment demand,
favorable external conditions (international prices on steel were on the
upward trend since February and accelerated during April-May), and positive
developments in private consumption.

As a result, these industries reported a 11.5% yoy, 1.7% yoy, and 7.3% yoy
cumulative increase in their output respectively. On the downside, coke and
oil-refining continued to decline, reporting a 15.1% yoy decrease in output
for January-May. However, its performance has been gradually improving.

The Ministry of Economy forecasts real GDP growth at a reasonable 2.8% yoy
in 2006. However, taking into account recent real sector improvements, the
original estimate of GDP growth may be exceeded with GDP growing by
3%-4% in 2006, given that the price on imported gas will not increase
significantly in the second half of the year.

                                       FISCAL POLICY

Stronger than expected economic growth over the last few months allowed
the government to fulfill its financial targets. According to preliminary
data of the State Treasury of Ukraine, revenues of the general fund of the
central budget for January-May were 1.8% above target, with tax revenues
exceeding the target by 1.1%.

At the same time, the execution rate of major taxes continued the pattern
observed since the beginning of the year. In particular, the enterprise
profit tax (EPT) receipts were almost 17.3% below target, reflecting
deterioration of enterprises’ performance. Moreover, deterioration of
foreign trade resulted in lower than planned receipts from export/import
duties. However, they were more than compensated for by over-execution
of the value-added tax receipts planned for this period by 17.2%.

Although expenditures of the general fund of the central budget were almost
7% below the target for January-May, it ran an early deficit. This signals
an urgent need for government measures to rationalize public finances to
bring expenditures in line with revenues or vice versa, which can be
achieved through public administration and pension reforms, and further
improvement of tax administration.

The consolidated fiscal deficit is not expected to exceed 3% of GDP in 2006,
which will be easily financed by the remainder of the funds received from
the privatization of Kryvorizhstal and funds received from new privatization
as the process is expected to accelerate in the second half of the year.

Since issuance of new domestic debt instruments was suspended in mid-
summer of last year, Ukraine’s domestic public debt declined by 1.4% since
the beginning of the year to reach $3.7 billion at the end of April.
Although external public debt increased slightly in April, it has declined by

4.2% since the beginning of the year, constituting $11.2 billion at the end of
April.

The increase in April is attributable to the strengthening of the euro with
respect to the US dollar (as about 15% of total external public debt is
denominated in euros). As a result, total public debt constituted $14.9
billion at the end of April. In terms of expected full-year GDP, Ukraine’s
public debt is among the lowest in peer countries.

                                    MONETARY POLICY

Consumer price inflation has been rapidly decelerating since February of
this year. In particular, CPI declined from 10.7% yoy in February to less
than 7.5% yoy in May. The disinflation occurred due to considerable
deceleration of monetary aggregates growth, robust growth of food output on
the back of limited export opportunities, and moderate growth of prices on
imported goods due to a stable exchange rate. To acknowledge the positive
developments of consumer prices over recent months, the NBU decided to
reduce its discount rate from 9.5% to 8.5% per annum as of June 10th.

By components, the deceleration of inflation was primarily attributable to
the decline in prices on food products, the largest component of the CPI. In
May, for the third consecutive month, food prices declined by 0.3%
month-over-month (mom), which is explained by overproduction on certain
food markets such as milk, dairy and meat products (to a large extent due to
Russia’s ban on these products imports from Ukraine) and growing competition
from certain imported goods (e.g., potatoes, the domestic market for which
faces increasing imports from Egypt). As a result, in annual terms food
prices decelerated from 11.4% yoy in February to less than 6% yoy in May.

An increase in gasoline prices (which grew by 21.4% yoy in May) resulted in
some acceleration of the non-food price index to 2.7% yoy, up from 2.5% yoy
a month before. At the same time, the growth of non-food prices remained
rather moderate, favored by a stable exchange rate as imported goods
constitute the lion’s share in this commodity group.

Coupled with the small share of non-food products in the consumer basket
(about 15%), May’s non-food price acceleration had a limited effect on price
index dynamics. A similar situation was observed for service tariffs. In
May, service tariffs grew by 17.8% yoy, up from 14.6% yoy in April due to a
26.2% and 25% increase in tariffs for gas and electricity, effective since
May 1st.

However, since services account for just about 20% of the consumer basket,
their impact on the whole CPI was outweighed by the decelerating food
prices. However, due to the other waves of service tariffs increases
(starting June 12th, the cost of passenger railway transportation was raised
by about 43%, starting July 1st gas prices for households will be raised by
another 85%), consumer price inflation is expected to accelerate to 12% yoy
by the end of the year.

Although the growth of money supply (M3) slightly accelerated to 40.2% yoy
in May (up from 37.4% yoy in April), it was still considerable deceleration
compared to more than 50% yoy at the beginning of the year. The acceleration
may be attributed to faster growth of deposits, whose growth rates increased
to almost 46% yoy, up from 41.4% yoy a month before.

May’s monetary base performance was affected by the following developments –
on the one hand, due to an almost balanced forex market in May (as a result
of eased political uncertainty after parliamentary elections and a favorable
external situation), the NBU started to replenish its foreign reserves. At
the end of May, the NBU’s gross international reserves constituted $17.7
billion (up from $17.2 billion in April).

In addition, the NBU supported commercial banks’ liquidity through its
refinancing operations in the amount of UAH 1.3 billion ($257 million). On
the other hand, the central bank softened reserve requirements in May, which
resulted in a decline of commercial banks’ funds kept at corresponding
accounts with the NBU. The combined effect was that the monetary base
declined by 1.6% mom, while the annual rate of growth remained almost
unchanged in May compared to the previous month at 24%.

May’s reduction of reserve requirements coupled with the NBU’s refinancing
operations helped to ease liquidity tensions in the banking system. Interest
rates on interbank credits, the closest indicator of banks’ liquidity,
declined from 12.5% pa at the end of April to 4.1% pa in mid-May, though
they slightly accelerated to about 6% pa by the end of the month.

This, coupled with further expansion of deposits, allowed commercial banks
to further increase their lending operations while simultaneously reducing
their costs. In particular, commercial bank lending grew by 69.2% yoy in May
2006, up from 68.6% yoy in April and 61.5% yoy in December 2005. At the
same time, the lending rate declined from 14.2% pa in April to 13.7% pa in
May.

The increases in bank lending took place both at the retail and corporate
levels. Consumer lending growth was driven by growing household incomes
and the development of financial innovations for consumers, including credit
cards, mortgages, and retail financing. The growth of corporate lending is
seen as an additional sign of growing investment demand in the country.

                       INTERNATIONAL TRADE AND CAPITAL

Over January-April, Ukraine’s merchandise trade deficit increased to $2.1
billion, as the main export-oriented industries are still adjusting to
increased input costs (mostly due to more energy resources) while growing
household disposable income and recovering investment demand stimulates
the growth of imports. Although Ukraine’s merchandise foreign trade balance
continued to deteriorate, April revealed some signs of improvement.

In particular, the rate of decline in exports diminished to 3.9% yoy over
January-April compared to 4.4% yoy over the first quarter, and there were
positive changes in the commodity structure of Ukraine’s exports and
imports.

Moreover, an acceleration of world metal prices over April-May, coupled
with strong external demand for Ukraine’s machinery, equipment and
vehicles, may reverse export dynamics.

Metals, accounting for about 42% of merchandise exports, reported a slower
rate of decline (7.4% yoy over January-April compared to 7.7% yoy over 1Q
2006). Exports of machinery and transport vehicles continue to expand at a
strong 13.1% yoy over January-April, with their share in total exports
increased to 13.5%, up from 11.4% over the same period last year.

At the same time, the growth rate of imports sharply decelerated to 23.2%
yoy over January-April, down from 30.2% yoy registered for 1Q 2006. The
deceleration occurred mostly due to the growth slowdown of imports of energy
resources, which account for about 34% of total imports.

In particular, the growth of imports of mineral products diminished to 17%
yoy over January-April (down from 26.6% over 1Q 2006), which may be
attributed to lower volumes of gas imports related to the end of the heating
season in Ukraine and delays in filling gas underground storage facilities,
as well as lower volumes of crude oil imports.

The latter were substituted by gasoline imports, since after reducing import
tariffs on these commodities in May last year, it became cheaper to import
gasoline than to refine imported crude oil domestically. Indeed, imports of
gasoline more than doubled over January-April compared to the same period
last year.

Although in value terms imports of crude oil still reported a 4% yoy
increase, it was due to increasing world crude oil prices over
February-April and Russia’s higher export duty on crude oil over the first
four months of 2006 compared to the respective period last year.

On a positive note, imports of investment goods, machinery and
transportation vehicles grew by about 39% yoy, with their share increased
to 36.8%, up from 23.8% over the same period last year.

The widening of the merchandise foreign trade deficit was the primary reason
for the negative current account balance of $733 million in 1Q 2006,
according to NBU data. Political uncertainty related to March’s
parliamentary elections resulted in a considerable outflow of short-term
capital, which were only partially compensated for by more than a 2.5 times
increase in net FDI inflows to $662 million and increased borrowings from
abroad. As a result, the financial account (excluding reserve assets) also
generated a deficit of $1.7 billion.

Although Ukraine is expected to face a current account deficit for 2006 of
about $2.8 billion, it will be easily financed by inflows of foreign direct
investments (expected at $2.2 billion), by the large size of international
reserves (currently at $17.7 billion, covering about 4 months of future
imports), and by foreign financing. So far, the current account and
financial account deficits have been financed by the NBU’s international
reserves.

     OTHER DEVELOPMENTS AND REFORMS AFFECTING
                           THE INVESTMENT CLIMATE

On late June, following three months of negotiations, three political
forces – the Block of Yulia Tymoshenko, Our Ukraine and the Socialist
Party – formed a coalition. The coalition chose Ms. Tymoshenko as its
candidate for Prime Minister.  However, this coalition unraveled on July 6th
after the Socialists refused to support the Our Ukraine’s candidate for
Parliament Speaker.

The current political situation is quite fluid.  A new majority coalition
was formed involving the Party of the Regions, the Socialist Party and the
Communist Party.  This new coalition elected the head of the Socialist
Party, Mr. Oleksander Moroz, as Parliament Speaker and nominated the head
of the Party of the Regions, Mr. Yanukovych, as its candidate for Prime
Minister.

However, negotiations with other political parties are still going on and
the ultimate composition of the government is still uncertain.  In any
event, given the strong competition among political parties, the new
government, regardless of its ultimately shape, should be more accountable
than in the past.                                    -30-
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NOTE: To see the entire SigmaBleyzer/The Bleyzer Foundation Ukraine
Macroeconomic Situation report for June 2006 in a PDF format, including
several color charts and graphics click on the following link:
http://www.sigmableyzer.com/File/countries/ukraine/Ukr-Monthly_Ec_Report_06_06.pdf
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CONTACT: Olga Pogarska, Economist, The Bleyzer Foundation,
Kyiv, Ukraine. OPogarskia@SigmaBleyzer.com.ua,
http://www.SigmaBleyzer.com, http://www.BleyzerFoundation.com.
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[return to index] [Action Ukraine Report (AUR) Monitoring Service]
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2.   ECONOMIC CODE OF UKRAINE NEEDS TO BE ELIMINATED
SAYS UN ORGANIZATION FOR ECONOMIC COOPERATION & DEV 
 
Ukrainian News Agency, Kiev, Ukraine, Thursday, July 6, 2006

KIEV – The Organization for Economic Cooperation and Development and
European Commission (OECD) believe that it is necessary to liquidate the
Economic Code of Ukraine simultaneously increasing the role of the Civil
Code.

This follows from a joint statement by the Organization for Economic
Cooperation and Development and European Commission, a copy of

which was made available to Ukrainian News.

According to the OECD and European Commission, in general the Civil

Code of Ukraine, which regulates relations between individuals and legal
entities, is a market-oriented document, whereas the Economic Code,
which is applied in relations between legal entities and the state, contains
anti-market provisions.

‘Thus, the Economic Code should be liquidated, and provisions of the
market-oriented Civil Code should be improved,’ the statement reads.

The Civil and Economic Codes took effect on January 1, 2004.

The Organization for Economic Cooperation and Development and European
Commission, jointly with the European Commission, is implementing the
project on improving the conditions for enterprise development and the
investment climate for domestic and international investors in Ukraine,
which is financed by the European Commission’s TACIS program.

The project is being carried out in three directions: research on Ukraine’s
legislation, examination of financial markets and their role in the creation
of a favorable investment climate, as well as investments and regional
development.

As Ukrainian News earlier reported, in October 2005, Justice Minister Serhii
Holovatyi initiated abolition of the Economic Code. The initiative was

prompted by contradictions between the Economic and Civil Codes.

According to Chairman of the State Commission for Securities and Stock
Market Anatolii Baliuk, implementation of Holovatyi’s initiative would
facilitate elimination of the abuses on the stock market that are connected
with contradictions between the two codes.

In May 2005, then-Justice Minister Roman Zvarych called for abolition of the
Economic Code and inclusion of its main provisions in the active Civil Code.
The Economic Code came into force on January 1, 2004.

Among other things, the Economic Code includes provisions of the laws on
prevention of unfair competition, on enterprises, on bankruptcy, on prices
and price formation, on securities, etc. A section of the Economic Code
stipulates the sanctions that should be imposed open subjects of economic
activity.                                            -30-

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[return to index] [Action Ukraine Report (AUR) Monitoring Service]
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3. SHARE OF FOREIGN CAPITAL IN UKRAINE’S BANKING SECTOR
        SHOULD GROW GRADUALLY, SAYS NBU COUNCIL HEAD

Interfax-Ukraine, Kyiv, Ukraine, Tuesday, July 11, 2006

KYIV – The share of foreign capital in Ukraine’s banking system should grow
gradually, believes Valeriy Heyets, the head of the National Bank of
Ukraine’s Council and director of the Ukrainian National Academy of
Sciences’ Economy and Forecasting Institute.

“The presence of banks with foreign capital in Ukraine’s banking system is
in the interests of the development of the national financial system, and is
conducive to raising foreign investment and expanding of the resource base
of the social and economic development.

At the same time, there are quite serious financial and economic risks [if
there is] fast growth of the share of foreign bank capital,” Heyets says in
an article published in the Zerkalo Nedely (Mirror Weekly) newspaper.

Heyets said the risk of fast growth of foreign capital in the country’s
banking system is linked to the possibility a loss of sovereignty in
monetary policy, possible instability, unexpected fluctuations of bank
liquidity, speculative changes in demand and supply on the monetary market,
and probable outflows of financial resources.

At the same time, he believes, that measures could be taken to neutralize or
minimize the negative consequences of the increase in the share of foreign
capital in Ukraine’s banking sector, and take the advantage of such presence
in full for further development of the national economy – strengthening the
monetary market and the financial system in general.

Among such measures are a gradual increase in the share of foreign bank
capital in the banking sector – along with the creation of favorable
domestic conditions for the development of the banking sector and an
increase in the competitiveness of national banking capital.

In addition, Heyets says, foreign bank branches may have access to the
domestic market no earlier than five years after Ukraine joins the World
Trade Organization. Moreover, he says, the state should not forget about the
strengthening and further development of the banks with state capital.

Heyets believes that Ukraine should introduce standards for selecting and
monitoring the access of foreign banking capital on the basis of national
priorities for development, impose a ban on the access of banks from
offshore zones, as well as set out clear-cut rules for the sale of banks
with national capital to foreign owners.

Heyets wrote that by April 1, in Ukraine there were 28 banks with foreign
capital, which is 17% of the overall number of the banks operating in
Ukraine.

Among them there are 11 with 100% foreign capital: Raiffeisenbank Ukraine of
Austria, U.S. bank Citibank Ukraine, Calyon Bank Ukraine of France, Pekao
(Ukraine) of Poland, ING Bank Ukraine of the Netherlands, HVB Ukraine of
Germany, ProCredit Bank of Germany, the United States and the U.K., the
International Mortgage Bank of the United States, Vneshtorgbank of Russia,
Renaissance Capital Bank of the Netherlands, and BM Bank of Russia and
Switzerland.

The share of foreign capital in the overall registered statutory capital of
the banks operating in Ukraine in 2006 grew from 19.5% to 21.6%, Heyets
said. Foreign capital in Ukraine is represented by 16 countries. Austria
accounts for the largest share, with 53.3%, followed by Russia with 18.7%,
the Netherlands with 4.7% and Poland and Germany with 3.8% each.

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[return to index] [Action Ukraine Report (AUR) Monitoring Service]
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4.    UKRAINE’S RICH START BANKING ON THEIR WEALTH

Vedomosti, re-published by The St. Petersburg Times
St. Petersburg, Russia, Tuesday, July 11, 2006

The Ukrainian magazine Korrespondent and investment company Dragon
Capital recently compiled a list of that country’s richest people. The list
includes only 30 names, and the total worth of the Ukrainian top 30 is a bit
more than $38 billion. The total capital for the top 100 Russians in the
Forbes list is more than six times higher, at $248 billion.

The combined worth of the three richest men on the Russian list (Roman
Abramovich with $18.3 billion, Vagit Alekperov with $12.7 billion and
Vladimir Lisin with $11.3 billion) alone outstrips that of the whole
Ukrainian list of 30.

It is no surprise that the Ukrainian list loses to its Russian counterpart
in absolute terms because Ukraine has a GDP of only $84 billion to Russia’s
$802 billion. What is more interesting is a comparison of the types of
people who are on the two lists.

The overwhelming majority of those on the Russian list are connected in some
way with natural-resource exports. Those associated with the energy sector
account for 40 percent of the total, while steel and metallurgy are also
heavily represented.

The top sector on the Ukrainian list is metals, accounting for more than
half.

The biggest difference between the two lists is the greater presence of
bankers in the Ukrainian top 30. Among the Russian top 100, only 16 own
significant banking assets, while the Ukrainian list includes 18 bankers.

As a percentage, banking accounts for 60 percent of the names on the
Ukrainian list. Furthermore, most of the Russian banking names are also
involved with industrial majors, with PromStroibank’s Vladimir Kogan ($530
million) the only one who earned his fortune exclusively in the financial
sector. Five of the members of the Ukrainian list earned their wealth
strictly in banking, with their combined assets accounting for 5 percent of
the whole list.

The 30 wealthiest Ukrainians fully reflect reality: The Ukrainian banking
sector is developing at a much faster pace than Russia’s. According to
Standard & Poor’s, loan activity in Russia grew by 10 percent over the
first half of 2005, while the figure for Ukraine was more than 20 percent.

Over the last five years, total credit from Russian banks relative to gross
domestic product has grown by 10 percent, while the figure for Ukraine
was 26 percent.

It’s no surprise, then, that total loans in Ukraine in 2005 equaled 35
percent of GDP and that in Russia the figure was just 20 percent.

The development of the financial sector is the guarantor of a diversified
economy. When more of Russia’s top 100 are bankers, there will be fewer
depending on oil and metals.

This comment was published as an editorial in Vedomosti.    -30-
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LINK: http://www.sptimes.ru/index.php?action_id=2&story_id=18197

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5. ASTARTA KIJEW POSSIBLY THE FIRST UKRAINIAN COMPANY
            TO DEBUT ON WARSAW STOCK EXCHANGE (WSE)

Polish News Bulletin, Warsaw, Poland, Tue, Jul 11, 2006

WARSAW – Ludwik Sobolewski, CEO of the Warsaw Stock Exchange,

announced on Tuesday that it is possible that the WSE may see its first
Ukrainian debut before the end of the summer holidays – that of Astarta
Kijew.

Sobolewski added that before the debut takes place, Astarta needs to adapt
its share issue prospectus, as Ukraine is not a member of the European
Union. Astarta would be listed exclusively on the WSE, and its shares
registered in the National Depository for Securities.

“We are very interested in the debut, as such undertakings correspond to our
vision of the WSE developing into a regional centre,” said Sobolewski. He
believes the Warsaw bourse may become the place where capital is acquired
for regional companies, which could prove a better way to develop than to
buy other stock markets. He added that 20 new companies are expected to
enter the WSE before the end of the year.               -30-
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6. UKRAINE WANTS TO BUILD BIODIESEL PLANT PROCESSING
                       RAPESEEDS IN THE CHORNOBYL ZONE
Shell to make presentation on gasification of coal & production of biodiesel

Ukrainian News Agency, Kyiv, Ukraine, Tuesday, July 4, 2006

KYIV – Ukraine wants to build a plant processing rapeseeds and producing
biodiesel in the Chornobyl zone. Acting Fuel and Energy Minister Ivan
Plachkov told this at a press conference in Yuzhnoukrainsk (Mykolaiv
region).

‘We intend to study a project for building such an enterprise in the
Chornobyl zone, where it is planned to sow rape on a vast territory,’
Plachkov said.

He also noted that on July 16-17, the Shell company plans to make a
presentation of projects for gasification of coal and production of
biodiesel.

As Ukrainian News earlier reported, the Agricultural Policy Ministry
forecasts rapeseed harvest of 700,000-750,000 tons for 2006.
The ministry intends to initiate introduction of incentives for cultivation
of rapeseed as well as production and use of biodiesel.
Rapeseed oil is the cheapest of all vegetable oils and is used for
production of biodiesel most often.

One ton of rapeseeds gives about 300 kilograms (30%) of rapeseed oil and
then 270 kilograms of biodiesel fuel. Fuel is also made of maize and any
other raw oil.                                -30-

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7.  DONBASS INDUSTRIAL UNION ATTRACTS USD 100 MILLION
CREDIT FROM THE INTERNATIONAL FINANCIAL CORPORATION
 
IntelliNews – Ukraine Today, Kyiv, Ukraine, July 5, 2006 

IFC made a decision to give USD 100mn credit to Donbass Industrial Union
(DIU). A part of these funds will be used by the company for equipment
modernization and the rest to carry out ecological projects. IFC approved
the project on Jun 15 and signed the agreement to partly finance it on Jun
27.

The total cost of the project amounts to USD 1.1bn. DIU also plans to
attract USD 250mn syndicated credit to complete it. The project targets to
improve ecological safety of production on metallurgical plants owned by

DIU, i.e. Alchevsk metallurgical plant, Alchevsk coke and chemical plant,
Dniprovsk metallurgical plant.

The plants owned by DIU produced 9.2mn of steel in 2005 in total and their
revenues made up USD 3.5bn.                         -30-
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8. GAZPROM WILL NOT CHANGE PRICE OF GAS EXPORTS TO
                              UKRAINE UNTIL START OF 2007
 
Ukrainian News Agency, Kyiv, Ukraine, Friday, July 7, 2006
KYIV – The National Joint-Stock Company Naftohaz Ukrainy and the Russian
natural gas monopoly Gazprom have reached an agreement that the price of gas
supplied by Gazprom to Ukraine will remain unchanged till the end of this
year. This is disclosed in a newsletter by Naftohaz Ukrainy, the text of
which Ukrainian News has obtained.

The acting Fuel and Energy Minister Ivan Plachkov and National Joint-Stock
Company Naftohaz Ukrainy’s chairman of the board Oleksandr Bolkisev were

on a visit in Moscow on July 6 for negotiations on the price of gas imports
with the Gazprom’s board chairman Aleksey Miller.

“The Ukrainian and Russian sides confirmed that the price of imported
natural gas will not change for Ukraine during 2006,” the newsletter says.

During negotiations on Turkmen gas shipments to Ukraine, the Ukrainian side
said that Naftohaz Ukrainy has a contract for Turkmen gas imports during
this year.

“The prices specified in the contract had been compromised between the
Presidents of Ukraine and Turkmenistan, and the National Joint-Stock Company
Naftohaz Ukrainy is going to unswervingly adhere to these agreements,” the
document goes on to say.

It was told by the Ukrainian side that the schedule for account settlement
for natural gas consumed had been agreed upon with the Turkmen side, and
that all the accounts would be settled by the end of the third quarter of
this year.

In addition, the parties also discussed issues concerning the creation of an
international consortium for the management and
expansion of the Ukrainian gas transportation network.

The parties reached understanding that negotiators from Naftohaz Ukrainy and
Gazprom will come together in Kyiv before July 17 to negotiate outstanding
problems.

As Ukrainian News earlier reported, Plachkov and Bolkisev traveled to Moscow
on Thursday, July 6, for talks with Gazprom on natural gas shipments to
Ukraine.

In June, the joint-venture enterprise Ukrhaz-Energo and RosUkrEnergo inked a
contract for natural gas supplies to Ukraine at the rate of USD 95 per 1,000
cubic meters during the third quarter of this year.

Meanwhile, the Turkmen Ministry of Oil and Gas Industry and Mineral
Resources in late June offered Ukraine to sign a contract for the supply of
natural gas during the last three months of this year at the rate of USD 100
per 1,000 cubic meters instead of USD 60 per 1,000 cubic meters stipulated
by the current contract for all 2006.

Previously, Gazprom repeatedly announced the possibility of gas prices

being raised for Ukraine beginning in the latter half of this year.  -30-
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9.   UKRTANSNAFTA OBTAINS USD 120M LOAN FROM MERRILL
   LYNCH INTERNATIONAL INVESTMENT BANK FOR FINANCING
      MODERNIZATION OF UKRAINE’S OIL TRANSPORT SYSTEM
 
Ukrainian News Agency, Kyiv, Ukraine, Wed, July 5, 2006
KYIV – The state-owned Ukrtransnafta oil transport company has obtained
a loan of USD 120 million from Merrill Lynch, an international investment
bank, for financing modernization of Ukraine’s oil transport system.

Ukrtransnafta’s Board Chairman Oleksandr Todiichuk announced this to
journalists. ‘The money arrived a week ago,’ he said. He did not disclose

the terms of the loan.

As Ukrainian News earlier reported, Ukrtransnafta operates Ukraine’s system
of major oil pipelines, which is Europe’s second largest. The system has a
total length of 4,570 kilometers and a capacity of 100 million tons of crude
oil per year (its pipes have a diameter of 1220 millimeters).

The state-owned Naftohaz Ukrainy owns 100% of the shares in Ukrtatnafta.
Ukrtransnafta ended the year 2005 with a profit of UAH 84.511 million.
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10. AGREEMENT ON EXTENDING ODESSA-BRODY PIPELINE TO
                 PLOCK, POLAND EXPECTED IN SEPTEMBER

Polish News Bulletin, Warsaw, Poland, Tuesday, Jul 04, 2006

WARSAW – At a press conference held in Kiev, the European Commission’s
(EC) representative Faouzi Bensarsa said the EC expects the Polish-Ukrainian
agreement concerning extending the Odessa-Brody oil pipeline to Plock to be
signed in September 2006. “Work on the bilateral agreement is in the final
stages,” said Bensarsa.

The CEO of the Ukrainian corporation Ukrtransnafta Oleksandr Todiytschuk –
also present at the conference – announced that the route of the Polish
stretch of the pipeline has already been set. He added that his company is
negotiating with potential suppliers and receivers of crude oil.

According to analysts, extending the Odessa-Brody pipeline to Poland could
decrease Poland’s dependence on oil supplies from Russia. Nonetheless
Caspian crude oil, transported from Ukraine, would be more expensive than
the Russian resource due to higher transport costs. The construction of the
line would be profitable provided it were to transfer 15-20m tonnes of oil
annually.                                       -30-

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11. RUSSIA’S LUKOIL TO INVEST USD 700 MILLION TO UPGRADE
   ODESSA OIL REFINERY & DEVELOP GASOLINE STATION CHAIN

Ukrainian News Agency, Kyiv, Ukraine, Monday, July 3, 2006

KYIV – Russia’s oil company Lukoil is planning to invest USD 700 million in
upgrade of Lukoil Odesa Oil Refinery (Odesa) and development of its gasoline
station chain in Ukraine by 2014. Ukrainian News learned this from the press
service of Lukoil Ukraine company, which referred to Lukoil Vice President
Mykola Chornyi.

Chornyi said that USD 500 million will be invested in modernization of the
refinery and USD 200 million in network development.

‘This sum [of USD 700 million] of joint investments [is intended] for
reconstruction of the refinery and expansion to a network that would
correspond to the level of the refinery,’ the press service said.

As Ukrainian News earlier reported, in June 2005, Lukoil Odesa petroleum
refinery shut down for large-scale reconstruction and modernization until
2009. The cost of the effort is USD 350 million.

The depth of refining will grow from 57% to 80.3% after upgrading, provided
that annual volume of refining is 2.8 million.

Lukoil Ukraine, a subsidiary of Lukoil, is determined to increase the number
of its gasoline filling stations to 300 by the year 2007.

Lukoil Odesa Oil Refinery finished 2004 with a net profit of UAH 16.998
million. Lukoil mines oil and gas and refines them into petroleum and
petrochemical products. It extracted 1,846 million cubic meters between
January and September of last year. Lukoil owns 7 refineries in Russia,

Ukraine (in Odesa), Bulgaria and Rumania.            -30-
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12.                                    G8 TO ARBITRATE?

 
By Vitaliy Kniazhansky, The Day Weekly Digest in English #22
Kyiv, Ukraine, Tuesday, July 11, 2006
 
The fighting spirit that was evoked by the Orange Revolution and then spread
to the field of Ukraine-Russia gas relations by the two last governments of
Ukraine has finally fizzled out.

Such a conclusion may be drawn from the statement issued by Ivan Plachkov,
Minister for Fuel and Energy of Ukraine, who announced that Naftohaz Ukrainy
and Gazprom do not consider it necessary to revise the price clauses of the
contracts on gas supplies in 2006, signed with Turkmengaz.

This result of the Moscow talks between the Ukrainian minister and Naftohaz
chairman Oleksandr Bolkisiev, and the chairman of the Gazprom board of
directors, Aleksei Miller, may be viewed as evidence of an alliance of the
two countries’ gas departments against Turkmenistan.

But will this benefit Ukraine, when it is facing Moscow’s dictates? Experts
believe that with long-term interests in mind, our country should do its
best to strengthen relations via concessions with Ashkhabad, a guarantor of
competition in the Ukrainian gas market.

But a lame-duck government can, by definition, pursue expedient interests
only. RosUkrEnergo’s promise to keep the gas price at $95 in the third
quarter suits it very well, but it apparently has never wondered what led to
this unexpected charity.

The answer is simple: Russia does not want to discredit itself in the eyes
of Europe and the world on the very eve of the G8 summit. Thereafter, it
will act according to its plan.

Plachkov, supposedly a powerful negotiator, and Bolkisiev, a rank novice in
this field, also looked lackluster at the meeting of the supervisory board
of UkrHazEnerho Ltd. (a joint venture of Naftohaz Ukrayiny and RosUkrEnergo)
which for some reason was held in Moscow. A source close to Gazprom
described the session darkly: he said it ended in a total fiasco.

“In fact the question was: when will Naftohaz begin concluding the contracts
and paying money?” the source said. No decision was taken because the
Ukrainian side failed to give a convincing guarantee that it will pay off
its nearly $500-million debt.

In other words, Gazprom called Plachkov and Bolkisev on the carpet and gave
them a dressing down. According to Gazprom’s press service, last Thursday
Plachkov and Bolkisev also held talks with Miller.

“At the Ukrainian side’s suggestion, the negotiators also discussed the
resumption of work of the International Consortium for Managing and
Developing the Gas Transit System of Ukraine. It was decided to hold a
consortium meeting in the nearest future,” the Gazprom press release states.

Is our side going to throw in the towel? We were proud of the fact that, as
the January gas crisis was resolved, Ukraine had managed to retain its gas
transit system, a guarantee of our economic independence.

Will there be new attempts to take it over bit by bit or the whole thing at
once? While Naftohaz owes RosUkrEnergo $382 million, the latter’s net profit
in 2005 was $740 million. What and who helped it generate such a profit in
the first year of operations on the Ukrainian market?

And should we be glad that 50 percent of the profits belong to the Ukrainian
businessmen Dmytro Firtash and Ivan Fursin, and, perhaps even more, to

those who stand behind them?

(Nobody in Ukraine knows exactly who the latter are, just as no one in the
Ukrainian leadership, law-enforcement bodies, intelligence and
counterintelligence service, which seem to devour taxpayers’ enormous money
to little avail, knew about the two above-mentioned “good guys” until the US
company Price Waterhouse Coopers audited them.)

On the very eve of the G8 summit in St. Petersburg, where energy security is
on the agenda, Ukraine, no thanks to its leadership, is being presented to
the world community in a bad light.

Look at the glee with which Russian President Vladimir Putin told his
citizens and the whole world during his Internet conference about the
Ukrainian-Russian gas dispute, “I am pleased. We are doing our best! We

have put energy security on the agenda.” Putin emphasized that prior to this
conflict European consumers had been extremely dependent on the agreements
between Russia and Ukraine.

“Now we have agreed to separate these two issues (a gas price for Ukraine
and tariff on the transit of Russian gas across the territory of Ukraine –
Author). If Ukraine meets its commitments, it will be obliged to keep an
uninterrupted supply of gas to European consumers for a long time,” said
Putin with satisfaction. He even praised the Ukrainian leadership, “They
have taken a correct and courageous step.”

At the same time, he portrayed our country as a small-time thief. “We were
not the ones who began to reduce supplies of our gas to European consumers.
It was our Ukrainian partners who began to unlawfully siphon the gas off the
export pipeline.” But now, in the Russian president’s view, everything is
OK.

Has the Ukrainian leadership prepared a response to these statements and its
proposals to the G8 and the world public about strengthening energy
security? We don’t seem to be much concerned about this. The government

is actually on its last legs.

The president is concerned about the next elections, which now looks like
his battle cry on the parliamentary coalition-forming field. He has
forgotten about the economy, while a different country is trumpeting
mightily, albeit with some falseness, into the ears of the G8 whose members
are going to act as arbiters.                             -30-

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LINK: http://www.day.kiev.ua/165127/
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13. MOSCOW’S PAST SATELLITES TAKE INTEREST IN ENERGY TALKS
            Poland is making its point by hosting an energy security summit at
                  the same time as the G8 meeting. It will bring together the
                  presidents of Poland, Ukraine, Azerbaijan and Kazakhstan.

By Robert Anderson, Jan Cienski, Christopher Condon and Stefan Wagstyl
Financial Times, London, United Kingdom, Wednesday, July 12 2006

When the G8 leaders struggle to agree on energy security at the St
Petersburg summit this weekend, few countries will pay more attention than
Russia’s former satellites in central and eastern Europe.

These countries were among those hit hardest by the brief interruption in
Russian gas supplies in the contract dispute with Ukraine last winter. And
having experienced past domination from Moscow, they have reason to worry
about the political dimensions of Russian energy policy.

Poland is making its point by hosting an energy security summit at the same
time as the G8 meeting. It will bring together the presidents of Poland,
Ukraine, Azerbaijan and Kazakhstan – leaders of the two biggest energy
consumers in eastern Europe and of two large potential sources of
non-Russian oil and gas.

The European Union’s other new members in the region – Baltic states, the
Czech Republic, Slovakia and Hungary – will not be present. But all are
interested in diversification and are keeping a close eye on events.

There was considerable approval in the region for Dick Cheney, the US
vice-president, when he warned Moscow in a speech in Vilnius against using
energy supplies as “tools of intimidation and blackmail”. However, most
regional officials would avoid Mr

Cheney’s harsh language. As smallish neighbours of Russia, central European
states are aware they have much to gain from maintaining good ties and not
giving offence.

Also, all are transit states for Russian oil and gas heading west, so their
energy relationship with Russia is one of mutual dependence. But the balance
of power could shift in Moscow’s favour with the construction of a planned
Baltic Sea pipeline directly linking Russia and Germany.

Attitudes to Moscow vary markedly between countries. Russia’s most outspoken
critics in the region are the Baltic states and Poland, not least because of
their long history of conflict with Moscow. The Czechs, Slovaks and
Hungarians enjoy calmer ties – a fact underlined by Russian President
Vladimir Putin’s warm reception on a recent trip to Budapest and Prague.

Russia is furious with Poland and the Baltic states for allegedly promoting
anti-Russian sentiment in the EU, including over energy policy. “Poland is
seen in the EU as having been the first at recognising the growing threat
coming from Russia,” says Eugeniusz Smolar, president of the Warsaw-based
Centre for International Relations.

Moscow also blames Warsaw for interfering in Ukraine’s Orange Revolution and
seeking to promote its own and the west’s influence in the former Soviet
Union.

History is rarely far away. Polish officials are pressing Russia for a
judicial investigation of the Katyn massacre – the wartime killing of
thousands of Polish officers. The past rears its head even in energy
debates. Radek Sikorski, the Polish defence minister, recently described the
Russian-German pipeline deal as a new Ribbentrop-Molotov pact – the 1939
Nazi-Soviet deal that carved up eastern Europe.

Poland, which relies on Russia for about two-thirds of its gas, is leading
central European efforts to secure alternatives. It is negotiating to buy
gas from Norway, in spite of the high cost. It supports EU efforts to import
Caspian oil and gas, including plans to use a Ukrainian pipeline
(Odessa-Brody) to transport oil from the Black Sea.

The Baltic states are even more dependent on Russian energy and even more
nervous than Poland about Russia’s resurgence. Latvia and Estonia have yet
to sign border treaties with Moscow, although Lithuania has done so.

The Baltic states were among the first to feel what they see as Russian
political pressure in the energy market. Three years ago Russia blocked the
oil pipeline to Latvia’s Ventspils oil terminal, leaving it dependent on
expensive rail shipments.

Czechs, Slovaks and Hungarians often view their northern neighbours as
provocative in dealings with Russia. They too suffered under Soviet-imposed
communism. Hungary was invaded by Soviet troops in 1956 and Czechoslovakia
in 1968. But neither event stirs strong passions today, in spite of the
efforts of former anti-communist dissidents such as Vaclav Havel, the former
Czech president, to keep the memories alive.

During his recent visit to Budapest and Prague, Mr Putin acknowledged
Moscow’s “responsibility” for 1956 and 1968. If Mr Putin had added Slovakia
to his itinerary, he would have had an equally friendly reception in
Bratislava. While the outgoing centre-right government sets great store by
relations with the west, Robert Fico, the populist leader who is the likely
new premier, has spoken of improving ties with Russia.

In energy, Czech, Slovak and Hungarian officials say they have few concerns
about the security of Russian supplies. The Czechs are particularly relaxed
because the country already imports 30 per cent of its gas and oil from
elsewhere. CEZ, the electricity group, recently began buying nuclear fuel
exclusively from Russia.

Slovakia and Hungary depend almost completely on Russia for oil and gas. But
Slovak officials say Russia is equally dependent on Slovak pipelines.
Meanwhile, Mol, the Hungarian energy group, is co-operating with Gazprom,
the Russian gas monopoly, on projects including planned new Hungarian
storage tanks.

However, even these countries are cautious about Russian ownership of energy
assets. Prague ruled out Russian bids in the privatisation of Unipetrol, the
oil group. Slovakia sold a strategic stake in Transpetrol, the oil pipeline
operator, to Russia’s Yukos in 2002.

However, when the Russian state acquired key Yukos assets in its dispute
with the company, Slovakia became worried at the prospect of Russian state
ownership of Transpetrol and is now negotiating to buy back the Yukos stake.

In Hungary, periodic rumours that Russian investors might buy a strategic
stake in Mol have generated critical public comments, although the
government has avoided confronting Moscow.
—————————————————————————————————-
Reporting by Stefan Wagstyl, Jan Cienski, Robert Anderson and Chris Condon
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http://www.ft.com/cms/s/dd335e4c-1142-11db-9a72-0000779e2340.html
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14.                   RUSSIAN PUNDIT SOURS ON WEST
            Rancor Mirrors Oil-Fueled Nationalism Ahead of G-8 Summit
     Says Ukraine’s U.S.-backed Orange Revolution leaders are “hooligans.”

   As usual, its Armani-clad presenter squeezes in a swipe at Ukraine: Yulia
       Tymoshenko, one of that country’s most popular politicians, is an
 “aggressive adventurist” backed by the U.S.; her party is the “Orange junta.”

By Guy Chazan in Moscow, The Wall Street Journal
New York, New York, Wed, July 12, 2006; Page A6

MOSCOW — As a speechwriter for Soviet leader Mikhail Gorbachev in the late
1980s, Alexei Pushkov hailed the end of the Cold War and preached friendship
with Moscow’s erstwhile capitalist foes. Now he espouses a starkly different
message.

Europe wants Russia to “surrender its sovereignty” by opening up its gas
pipelines, he tells viewers of his television show, Post Scriptum. The
roster of offenses lengthens: The West is trying to tear Russia apart by
backing Chechen separatists. Ukraine’s U.S.-backed Orange Revolution

leaders are “hooligans.”

Mr. Pushkov’s evolution from rapprochement advocate to hard-line
instigator — and the popularity of his show and its message — go a long
way toward explaining the mood of resentful self-confidence prevailing here
as Russia prepares to host this weekend’s Group of Eight summit.

The St. Petersburg meeting, testament to Russia’s re-emergence as a great
power whose energy resources are increasingly vital to the West, was
supposed to cement the nation’s place in the elite club of leading
democracies. Instead, tensions between Moscow and its G-8 partners are
threatening to cast a pall over the party.

Mr. Pushkov, whose program offers a useful barometer of the deteriorating
relations, is one of Russia’s slickest hawks — fast-talking and tanned,
with carefully coiffed salt-and-pepper hair. Every week some six million
Russians tune in to watch Post Scriptum, a show that encapsulates Russia’s
new oil-fueled nationalism and mistrust of the U.S. Media surveys show its
rating has inched up as Russia’s love affair with the West has turned to
rancor.

“You know, in the early 1990s we used to see the U.S. as a shining temple

on the hill,” Mr. Pushkov laughs. “Not any more.”
Russia’s relationship with the U.S. and Europe has oscillated wildly during
the past 20 years, from Cold War enmity to the warm, fuzzy friendship of the
Yeltsin era. Now a new frostiness has set in, fed by a geopolitical rivalry
that has often placed them on opposite sides of the barricades.

Western critics have accused the Kremlin of playing politics with Russia’s
energy exports, intimidating its neighbors and showing unjustifiable
reluctance to back the West’s tough line on Iran’s nuclear ambitions.
Russia, meanwhile, blames Europe and the U.S. for fomenting popular
uprisings in Ukraine and Georgia and trying to stop Russian energy

companies from expanding abroad.

And while Mr. Pushkov’s show is at the forefront of Western criticism, the
sentiments aired in his arena are now echoed in liberal media as well.
“People mistrust the sincerity of U.S. intentions,” says Alexei Venediktov,
editor in chief of the radio station Ekho Moskvy.

President Vladimir Putin gave voice to the new hostility in a May
state-of-the-nation speech in which he called for a military buildup to
counter “Comrade Wolf” — an unmistakable allusion to the U.S. — who “knows
whom to eat, eats without listening and [is] clearly not going to listen to
anyone.”

The wariness of ordinary Russians is nowhere more obvious than on Ekho
Moskvy’s phone-ins. The calls used to offer a chance for Russia’s
beleaguered liberals — once the station’s core audience — to sound off
about Mr. Putin’s hard-line policies. Now they provide a forum for the
hard-liners themselves.

“Our listeners are increasingly isolationist and xenophobic,” Mr. Venediktov
says. “About half of them see the U.S. as an enemy.”

Yet despite the strains, the consensus in Moscow’s political establishment
is that Russia and the U.S. will remain close, especially on security
issues. “We have few potential allies with whom we can fight terrorism and
Islamic fundamentalism,” says Sergei Karaganov, chairman of the influential
Council on Foreign and Defense Policy. “America is still a useful partner.”

Indeed, the Bush administration has indicated it will make concessions to
the Kremlin in the next few days — perhaps backing Russia’s bid to join the
World Trade Organization and permitting U.S. civilian nuclear cooperation
with Moscow — in an effort to patch things up with Mr. Putin.

Mr. Pushkov’s career embodies the highs and lows of the U.S.-Russian
relationship. In the late 1980s, as a foreign-policy adviser to Mr.
Gorbachev and other Politburo members, he had a hand in hastening the fall
of the Berlin Wall. He pinned his faith on a united Europe in which Cold War
military alliances and old-style ideological differences would melt away.

“I was one of those people who really believed we could build a real
partnership with the West,” he says.

In 1994, he won a grant from the North Atlantic Treaty Organization to write
a report on Russian foreign policy. As deputy editor of Moscow News, a
liberal flagship, he was a regular guest of the White House, Pentagon and
State Department during the Clinton administration.

In 1996, while working as deputy director of Russian TV’s Channel One, he
backed President Yeltsin’s re-election bid and derided his Communist rival,
Gennady Zyuganov, as anti-Western. “[Yeltsin] is the only realistic chance
for a westward-looking Russia,” he wrote in an editorial for this newspaper.

But disillusionment set in as NATO expanded into Eastern Europe, taking in
former Warsaw Pact countries and creeping toward Russia’s borders. All the
West’s talk of a new post-Cold War dispensation was, in the end, just talk,
Mr. Pushkov said. NATO’s 1999 bombing of Russia’s traditional ally Serbia at
the height of its war with Kosovo was the final straw — the “biggest
disappointment of all.”

“We made a huge mistake,” he says. “We really believed the basic
relationship could change. But a new war started — this time for
geopolitical dominance.”

At a cramped studio in the offices of TV-Center, a federal channel owned by
the Moscow City government, Mr. Pushkov’s Post Scriptum is broadcast with
its characteristically hawkish spin on events.

As usual, its Armani-clad presenter squeezes in a swipe at Ukraine: Yulia
Tymoshenko, one of that country’s most popular politicians, is an
“aggressive adventurist” backed by the U.S.; her party is the “Orange
junta.”

The show also features an uncritical report on an Internet news conference
by Mr. Putin, and disparages the U.S. media for its prurient interest in
politicians’ private lives — while repeating a tabloid rumor that President
Bush and Secretary of State Condoleezza Rice are having an affair.

Mr. Pushkov’s TV persona means he is no longer so close to the Washington
establishment. Ekho Moskvy’s Mr. Venediktov was one of several liberal media
icons quaffing white wine at a Fourth of July party in Spaso House, the U.S.
ambassador’s elegant Moscow residence. Mr. Pushkov, once a regular at such
events, was absent.

“They haven’t invited me for the last three years,” Mr. Pushkov says. “These
days, my message isn’t quite what they want to hear.”          -30-
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Write to Guy Chazan at guy.chazan@wsj.com
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15.                        POLITICS OF THE PIPELINES
                U.S. Seeks Ways to Route Natural Gas Around Russia

By Steven Mufson, Washington Post Staff Writer
The Washington Post, Washington, D.C., Tue, 11 July 2006

For a low-profile State Department official, Matthew J. Bryza gets around. A
member of the bureau of European and Eurasian affairs, he frequents places
such as Turkey, Georgia and Azerbaijan. This year, he’s also popped in on
people in Brussels, Rome and Berlin. One key item on his agenda: persuading
governments and energy companies to build natural gas pipelines that skirt
Russia.

New routes that avoid Russia would “make the market function better” and
enhance energy security, a senior State Department official said. “We’re
sharing information and a vision.”

Russia doesn’t share that vision. The Kremlin has been conducting its own
campaign to lock producing countries in Central Asia and consumer countries
in Europe more tightly into Russia’s pipeline network.

The politics of gas pipelines has added friction to the preparations for the
Saturday to Monday meeting of the Group of Eight industrial nations, to be
hosted by Russian President Vladimir Putin in St. Petersburg. A year ago,
Putin said this meeting’s “key topic” would be energy. “The country which is
definitely a leader in the world market is ordained by God to deal with this
issue,” he said after last July’s G-8 summit.

Despite Putin’s boast, the summit’s focus on energy will only highlight why
Russia remains a troublesome issue for the West. The oil and gas industry
reflects Russia’s autocratic nature, diplomats and energy experts say; it is
controlled by the state, opaque to Western investors and difficult for
foreign firms to enter.

Although the United States and Russia may strike a deal on reprocessing
waste from nuclear power plants, the pipeline politics has highlighted the
mutual mistrust between Russia and the West, especially after Russia briefly
cut gas supplies to its neighbor Ukraine in January.

While Russia said it wanted to end subsidies on natural gas sold to Ukraine
since Soviet days, squeezing supplies in winter shortly after the ouster of
a pro-Russian president smacked of a crass political maneuver. “No
legitimate interest is served when oil and gas become tools of intimidation
or blackmail,” Vice President Cheney said in a May 4 speech in Vilnius,
Lithuania, angering Russians.

Because much of the Russian gas bound for Europe flowed through the
Ukraine route, people in European capitals took notice. “This sharpened the
attitudes of Europeans even more than the Americans,” said a senior European
diplomat who spoke on condition of anonymity because talks are ongoing.
“This was very much an important thing for us.”

Europe relies on Russia for about a third of its natural gas supplies. Those
supplies arrive via two major pipeline routes constructed in the 1980s over
the objections of the Reagan administration. Today the United States
realizes that Russian gas will remain vital to Europe, but it is pushing
nations to diversify supplies so that Russia cannot exploit Europe’s energy
dependence for political purposes.

“What does it mean to achieve energy security when you’re reliant on one
country?” Karen Harbert, assistant secretary for policy and international
affairs at the Energy Department, asked at a meeting at the Carnegie
Endowment for International Peace.

At the same time, however, Russia sells 80 percent of its natural gas to
Europe and is worried about European plans to increase gas purchases from
Algeria and Libya, as well as about liquefied natural gas from Qatar, which
plans to triple its exports.

Bryza and more senior U.S. officials have been promoting pipeline routes
that would bring gas from fields in Kazakhstan, Turkmenistan and Azerbaijan
near the Caspian Sea through Turkey to Europe. One such pipeline, from
Azerbaijan through Georgia to Turkey, opens Oct. 1.

U.S. officials have been saying that reserves in Azerbaijan alone could
justify bigger pipelines even if territorial disputes over the Caspian Sea
are not resolved. (Missing from the U.S. vision: supplies from Iran, whose
natural gas reserves are second to only Russia’s.)

Former Soviet Bloc countries are enthusiastic, especially since Russia has
boosted prices on gas sold to Moldova and Belarus. Georgia President Mikheil
Saakashvili said during a recent visit here that he supports a pipeline that
would bring gas from the Caspian Sea basin through Azerbaijan and Georgia,
then under the Black Sea (to avoid Russia) to Romania and then north to
Poland. Building that line would take at least five years.

Meanwhile, Moscow isn’t idle. It has dangled higher prices in front of
producers including Kazakhstan and Turkmenistan. It has held talks with
other gas-exporting nations, such as Algeria and Iran, about coordinating
policies so they don’t undercut one another. And it has deployed former
German chancellor Gerhard Schroeder to promote a new direct pipeline link
between Russia and Germany. (Schroeder now works for the Swiss-based
pipeline venture controlled by Russia’s state-controlled OAO Gazprom.)

Poles fear that a Russian-German pipeline under the Baltic Sea would enable
Russia to pressure Poland, which would no longer be a transit route for
Russian gas destined for Germany. In late April, Poland’s defense minister,
Radek Sikorski, said that the deal to build the $5 billion, 750-mile
pipeline was in “the Molotov-Ribbentrop tradition,” a reference to the pact
between Hitler’s and Stalin’s foreign ministers that led to the partition of
Poland in World War II.

“We want . . . no monopolies or blackmails, price-fixing or the use of
energy as a tool of politics, or geopolitics,” Sikorski said in an interview
with the BBC.

Not everyone buys the U.S. vision. “It’s very simple to make lines on a
map,” said a European energy company executive who had met with Bryza and
spoke on condition of anonymity to protect his U.S. relationships. “It costs
$2 billion, if not more, to build a pipeline from Turkey.”

Many European companies have interests in Russian gas projects. German
energy giant E.On Ruhrgas AG and chemical giant BASF AG own minority
stakes in Gazprom’s Northern European Gas Pipeline under the Baltic. The
Italian state oil company, Eni SpA, is Gazprom’s partner in the Blue Stream
pipeline that carries gas from Russia to Turkey under the Black Sea.

But Russia is still worried. Eni is also building a pipeline from Libya to
Italy. And Qatar says a third of its exports will go to Europe.

As part of its strategy to hang onto European markets and expand its reach,
Russia wants cash-rich Gazprom to invest in European gas distribution
systems in Britain, Germany and Italy. Russian officials say that if Western
firms want to invest in exploration and production in Russia, Gazprom
should have similar access to Western investment opportunities.

Europe is reluctant, though. In a subtle yet clear message, two European
Union ministers wrote in May to the Russian government, saying the
competition “rules applied to Gazprom will be no different to those applied
to . . . other companies.”

They noted that “the fact that Gazprom is the exclusive exporter of gas from
Russia to the EU, when other Russian companies and foreign joint ventures
with gas reserves would otherwise be in a position to supply the EU market,
will be a significant fact that will necessarily be taken into account.”

“Reciprocity is something we’re looking for,” said the senior State
Department official, who spoke on condition of anonymity because the talks
are ongoing. He urged Russia to let foreign oil or gas firms explore and use
Russia’s pipelines.

Yet foreign investors still find Russia challenging territory. Russia has
announced new limits on foreign ownership of key energy resources. TNK-BP,
a joint venture involving BP PLC, has had trouble getting access to export
pipelines; delays have been seen as an effort to force it to sell a stake in
its fields.

Last week, Russia’s parliament reaffirmed Gazprom’s monopoly over the
nation’s gas pipelines. And 10 months after releasing a short list of five
foreign firms, including U.S.-based Chevron Inc. and Conoco Phillips, Russia
has still not said which ones will share with Gazprom the rights to explore
the big Shtokman natural gas field.

Russia has avoided a new conflict over Ukraine on the eve of the G-8 summit.
In January, Russia and Ukraine reached a temporary accord, which expired
July 1. A decision on new terms has been delayed until Ukraine forms a new
government. That will be, conveniently for Russia, after the G-8 meeting.

Meanwhile, Moscow has been wooing foreign gas producers. Shortly after
Cheney visited Kazakhstan and won a pledge from that country’s president to
export Kazakh gas through a trans-Caspian pipeline, Russian officials
visited Kazakhstan and reportedly reached a deal for Gazprom to transport
Kazakh gas.

Turkmenistan is also negotiating with Russia, seeking to raise the price it
is paid by two-thirds. It may accept less, but there is still no pipeline
across the Caspian, and Turkmen relations with Azerbaijan aren’t great.

“Turkmenistan doesn’t have much of an option,” said Hossein Ebneyousef,
president of International Petroleum Enterprises, a consulting firm.

But if Russian concerns about competition from other nations helped raise
the price paid to Turkmenistan, that is a sign that the U.S. strategy is
working, U.S. officials say. And if European nations buy more supplies from
Libya, Algeria and Qatar, that’s as helpful as buying more from Azerbaijan.

“That’s the name of the game: Get more coming in from every possible
direction — except Iran, of course,” the State Department official said.  -30-
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16.       US AND RUSSIA CLOSE TO DEAL ON WTO ENTRY

By Neil Buckley in Moscow, Financial Times
London, United Kingdom, Tuesday, July 11 2006

Moscow and Washington are close to a deal on Russian entry to the World
Trade Organisation, which could provide the country with cause for
celebration at this weekend’s Group of Eight summit in St Petersburg.

A bilateral deal on WTO entry could also open the way for Russia to
announce, during the summit or soon afterwards, that it is pressing ahead
with developing the vast Shtokman gas field in the Barents Sea.

Gazprom, the Russian gas monopoly, which will lead development of the
biggest gas field ever discovered, is also to announce which of five
shortlisted western partners it will include in the multi-billion dollar
project.

While both sides have denied any specific link, Russia is understood to have
delayed naming the Shtokman partners until final barriers are removed to its
WTO entry.

Analysts have speculated that announcing the WTO and Shtokman deals could
enable Russia and the US to portray the summit as a success. They could
compensate for an otherwise modest package of measures on energy security –
the main theme of Russia’s G8 presidency – and what may be terse exchanges
behind the scenes on Moscow’s democratic record.

Diplomats said on Tuesday a US-Russia WTO deal could also clear the way

for Vladimir Putin, Russia’s president, to chair efforts at the summit to
resuscitate the flagging Doha round of world trade talks.

The US is the only country with which Russia has still to conclude a
bilateral deal on entry into the 149-nation trade organisation.

Officials and diplomats in Moscow and Washington said that after a decade
of talks negotiators were pulling out stops to try and reach a deal before this
weekend. They said George W. Bush, US president, and Mr Putin might seal
the agreement at a meeting on Friday, on the eve of the summit on Saturday.

Susan Schwab, US trade representative, will hold talks with German Gref,
Russian economy minister, in Moscow before Friday to seek agreement on
outstanding issues.

In an interview with journalists published by the White House, Mr Bush
identified access to the Russian market for US agricultural products and
protection of intellectual property rights as outstanding issues. He has
written to Mr Putin detailing the US position.

 
“I do believe it’s in our country’s interest to have Russia as a member of
the WTO,” he said. “So hopefully we can get it done. I’m optimistic about
it.”

In Moscow, Alexander Zhukov, deputy prime minister, said he was hopeful
talks could be concluded before the summit.

US businesses, many enjoying rapid growth in Russia, are pressing for a deal
to be finalised. Andrew Somers, head of the American Chamber of Commerce in
Moscow, warned on Tuesday that if agreement was not signed now, approaching
presidential elections in both countries could knock it off the political
agenda. “We think it’s a historic opportunity which should not be missed,”
Mr Somers said.

He said some “major industrial transactions” – including Shtokman and an
expected deal for Aeroflot, the Russian national airline, to buy Boeing
aircraft – were in limbo pending the deal.

Energy specialists have said announcing the gas deal would enable Russia to
trumpet its willingness to make big investments in bringing new reserves
into production and ensure it can meet the growing energy needs of the
global economy. It would highlight its preparedness to bring foreign groups,
albeit as minority investors, into oil and gas production. Chevron and
ConocoPhillips of the US, France’s Total, and Norway’s Statoil and Norsk
Hydro have been shortlisted as Shtokman partners.

Officials from other G8 countries have cautioned the summit package on
energy security will amount to little more than a statement of broad
principles.

Gernot Erler, Germany’s deputy foreign minister and an expert on Russia,
said Berlin did not expect any significant breakthroughs on energy security,
in part because of Moscow’s “declining sensitivity [towards] maintaining
friendly international relations”.

European Union hopes for Russia to ratify the Energy Charter Treaty were
“unlikely to make progress”, he added. Other foreign diplomats said they saw
no sign of Russia preparing any other concession to European pressure to
open Gazprom’s gas pipeline monopoly to third parties.

Opening up Europe’s energy markets will be the chief focus of the EU –
represented at St Petersburg by Matti Vanhanen, Finnish prime minister, and
José Manuel Barroso, the European Commission president.

In spite of the disappointment over the energy charter, Mr Barroso said on
Tuesday he hoped all G8 countries would sign a declaration going further
than before in committing them to a transparent, open energy regime. Such a
statement would, however, be non-binding.                 -30-
————————————————————————————————
Additional reporting by Hugh Williamson in Berlin and Daniel Dombey in
Brussels

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17.          RUSSIANS AND U.S. PUSH HARD ON TRADE

By Andrew E. Kramer and Steven R. Weisman
The New York Times, New York, New York, Wed, July 12, 2006

MOSCOW, July 11 – Russia and the United States are racing to reach a deal
this week that would allow Moscow into the World Trade Organization,
officials from both countries said on Tuesday.

Russia is by far the world’s largest economy still outside the W.T.O., a
149-nation group that sets the ground rules for global trade and investment.
The United States has withheld its approval for letting the Russians into
the organization, even after other countries signed off on membership.

Negotiators say that talks have been held up by lingering disagreements over
aircraft tariffs, banking regulations, movie and music piracy and rules for
trade in the likes of frozen chicken.

In Washington, President Bush suggested that a deal was close. He is
scheduled to meet on Friday with President Vladimir V. Putin of Russia for
talks before heads of state and government of the Group of 8 leading
industrial nations meet this weekend in St. Petersburg. Russia will be the
host of the G-8 summit meeting for the first time.

“Hopefully we can get it done,” Mr. Bush said on Monday. “I’m optimistic
about it.” His remarks were released by the White House Tuesday evening. The
United States trade representative, Susan C. Schwab, left for Moscow on
Tuesday to hold meetings before the weekend, another sign that talks had
reached an advanced stage.

Bush administration officials said Ms. Schwab’s trip was aimed at reaching
agreement and clearing the way for a deal on trade with Russia to be
announced in time for the St. Petersburg meetings. But they also said that
while negotiators had narrowed their differences on several matters, there
was no deal yet.

At a time of tensions with Russia on a range of issues, from Mr. Putin’s
crackdown on dissent to disagreements on energy policy, the negotiators are
working to achieve an accord on two-party trade that would improve the
atmosphere for Mr. Bush’s visit and for the summit meeting generally.

The trade disagreements have been bitter in recent months, with Russia
charging that the United States has held it to a higher standard on
intellectual property and food safety than it has applied to other trading
partners. The Bush administration says its standards are the same for all
countries that want to join the World Trade Organization.

Russian officials have suggested that they would hold up possible bids by
American-based energy companies like ConocoPhillips to drill for natural gas
in the Shtokman fields in the Barents Sea if the trade talks did not make
progress. The Bush administration rejects the idea that the two matters
should be linked.

“W.T.O. accession is a serious business,” Ms. Schwab said last Friday at a
news conference, “and I think Russia wants to do it right, and we’d like to
have Russia do it right. That’s what we’re trying to accomplish.”

She also said that Russia had made “real improvements” in protecting patents
and other safeguards for intellectual property, but that “we’re not there
yet” in getting a full-fledged agreement. Trade officials said the same was
true of safeguards on health safety for trade in food.

From the Russian side, Deputy Prime Minister Aleksandr D. Zhukov said the
negotiations could be concluded this week. “I hope that they will finish
successfully,” he said, according to the Interfax news agency.

Russia’s economy could get a lift from membership in the W.T.O., though the
organization would not help Russia as much as it did China, which exports
mainly manufactured goods that face higher tariffs if made by non-W.T.O.
members. Russia’s largest exports are oil and gas, commodities in demand
worldwide and not blocked by trade barriers.

For Western companies operating in Russia, W.T.O. protections on
intellectual property rights could help the makers of goods as diverse as
designer clothes and prescription drugs – these and many other items are
routinely faked in Russia.

On the Internet, Russia still lacks a dispute procedure for Web addresses
ending in “.ru”.

If the talks are successful, they could put to rest some long-festering
disputes in Russian-American trade.

The United States held out for clear rules on frozen chicken exports, like
the chicken first sent to Russia by Tyson Foods of Springdale, Ark., in the
early 1990’s. The drumsticks became known as Bush Legs after the first
President Bush, and were a staple for millions of Russians in lean times.

In 1998, Russian authorities banned the chicken on health grounds and in
2003 imposed quotas on poultry, prompting American negotiators to press
the matter in W.T.O. talks. It is unclear what concessions, if any, Russia
has offered on the frozen chicken dispute.

The United States has also kept on the books the Jackson-Vanik amendment of
1974, which tied the trade status of the Soviet Union – and now Russia – to
an annual review of whether Jews could freely emigrate. The law rankles
Russia because it has allowed free emigration since the breakup of the
Soviet Union, a point confirmed by most Jewish groups.

Any deal on Russia’s joining the W.T.O. would require Congress to repeal the
Jackson-Vanik amendment, which would otherwise put the United States in
violation of the organization’s rules, Andrew Somers, president of the
American Chamber of Commerce in Russia, told journalists Tuesday.

At issue in the banking dispute is whether foreign banks could open branches
in Russia, or would be required to operate through local subsidiaries
regulated by the Russian central bank. The newspaper Kommersant reported
Tuesday that the United States had softened its demands on banking.

The W.T.O. talks have become a forum for horse trading on business deals
between Russia and the United States, and those may now go forward, Mr.
Somers and others said.

Chevron and ConocoPhillips are bidding to join a consortium with Gazprom
to develop the Shtokman gas deposits, a deal worth about $10 billion.

And Boeing is in a race with Airbus for sales of long-range jets to the
Russian state carrier Aeroflot, a transaction for 22 or 23 planes worth
about $3 billion.                                    -30-
————————————————————————————————
Andrew E. Kramer reported from Moscow for this article and Steven R.
Weisman from Washington.  (http://www.nytimes.com)

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18.   PRESIDENT BUSH HOPEFUL OF WTO DEAL WITH RUSSIA

AFX Europe (Focus), Washington, Tuesday, Jul 11, 2006

WASHINGTON  – US President George W. Bush said he was hopeful

of sealing a deal on Russian entry to the World Trade Organisation (WTO)
after “a difficult negotiation” that still faces obstacles.

“I do believe it’s in our country’s interest to have Russia as a member of
the WTO. It’s been a difficult negotiation,” Bush told a small group of
reporters yesterday, two days before leaving for Germany and Russia.

Bush said that part of the problem was that “we’ve got to make sure we can
get it through the Congress” and that “other nations are watching” the terms
of any US-Russia trade deal.

But “hopefully we can get it done. I’m optimistic about it,” said the US
president, who was due in Saint Petersburg, Russia, later this week for the
Group of Eight summit.

Bush reiterated that agriculture and intellectual property were two major
sticking points. “We want to make sure that if somebody says they’re going
to take our products into their country, they’ll do it,” Bush said.
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LINK: newsdesk@afxnews.com afp/cmr

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19.  HEAD OF AMERICAN CHAMBER OF COMMERCE IN RUSSIA
   ‘CONFIDENT’ OF U.S.-RUSSIA WTO DEAL DURING G8 SUMMIT

Alex Nicholson, Associated Press, Moscow, Russia, Tue, Jul 11, 2006

MOSCOW – The head of the American Chamber of Commerce in Russia said

Tuesday he was confident that Washington and Moscow would reach an
agreement on Russia’s accession to the World Trade Organization during the
Group of Eight summit this weekend.

Andrew Somers cautioned, however, that even if U.S. President George W.

Bush and Russian counterpart Vladimir Putin strike a long-awaited bilateral
agreement, hurdles still remained.

“We are very confident that the U.S. and Russia will sign a bilateral at the
G-8 or the day before the G-8, when Bush and Putin will be meeting to
discuss U.S.-Russia issues,” Somers told reporters Tuesday. “We think this
is an historic opportunity that shouldn’t be missed.”

The summit runs Saturday through Monday; Putin and Bush hold bilateral

talks Friday. The United States is the last major trading country with which
Russia has yet to agree on accession terms.

Somers said that both countries’ differences in the negotiations had
“narrowed considerably” over the last year and expressed hope that
Washington’s remaining concerns over intellectual property rights,
agriculture and U.S. banks’ access to the Russian market would be resolved.

U.S. and Russian officials have given mixed signals on the likelihood of a
deal in time for the summit. There are several issues that remain, Stephen
Hadley, Bush’s national security adviser, said Monday in Washington.

Meanwhile, deputy prime minister Alexander Zhukov held out hopes that the
deal could be reached soon. “I hope we will complete negotiations with the
Americans before the summit begins,” he was quoted as saying by the
RIA-Novosti news agency.

Somers stressed that it was crucial for an agreement to be reached soon,
otherwise pending elections in both countries would eclipse the trade talks.
“It’s simply not an issue politicians will find of interest for
vote-gathering,” he said.

Even if the U.S. and Russia reach an agreement over the weekend it would
take a further six months for the final documents on Russia’s membership to
be drawn up.

After that, Bush would need to call on U.S. Congress to lift the Soviet-era
Jackson-Vanik trade restrictions _ otherwise the United States would violate
WTO regulations and be unable to trade with Russia under the newly agreed
conditions.

That debate will have little to do with trade issues, Somers said,
suggesting it would be colored by issues such as freedom of the press and
fears that Russia is backsliding on democracy under Putin.

Separately, Russian news agencies reported Tuesday that U.S. Trade
Representative Susan Schwab would meet with German Gref, Russia’s Minister
for Economic Development and Trade, in Moscow on Wednesday and Thursday

to discuss Russia’s WTO bid. No one at the ministry could be reached to confirm
that report.                                       -30-
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20.         PUTIN LIMBERS UP TO FLEX MUSCLES AT G8
  On Kosovo, Georgia, Moldova & Ukraine, his position is seen as unhelpful.

By Simon Tisdall, The Guardian, London, UK,Tue, Jul 11, 2006

The official agenda for this weekend’s Group of Eight summit of leading
industrial countries in St Petersburg includes action on energy security,
global education and disease pandemics. But for the summit’s host, President
Vladimir Putin, the overriding aim is to confirm post-Soviet Russia’s
re-emergence as a global player deserving of a place at the top table.

“What Putin really wants is for Russia to be recognised as a power in its
own right, not relying or dependent on the US, China or the EU,” said
Jennifer Moll, a Russia expert with the Risk Advisory Group.

“The increasing assertiveness of Russia’s foreign policy and the push to
join the World Trade Organisation are evidence of this. For Putin, the
summit is about dispelling old notions of the G7 plus one. It’s about great
power status.”

Mr Putin’s bullish mood looks justified. Russia’s economy has grown annually
by an average 6% since 1999. As a financial analyst, Andrew Rozanov,
recently pointed out for the Chatham House thinktank, Russia is now the
world’s 12th largest economy. It has a trade surplus of more than $120bn
(pounds 65bn), a budget surplus of 7.5% of GDP and reserves in excess of
$300bn.

Most of this new-found wealth, and the Kremlin’s resulting political
confidence, flows from energy exports. Russia is the world’s second largest
oil producer and has an estimated 65% of global natural gas reserves.

Last winter brought a glimpse of what that means when Ukraine’s gas supplies
were temporarily cut, causing panic further west. As in the cold war,
Russian tanks are poised on Europe’s borders – but now the tanks contain
oil, not gun crews.

Despite accusations of of anti-democratic tendencies, Mr Putin’s personal
popularity is unmatched by his G8 guests. His approval rating is roughly
twice that of George Bush or Tony Blair. And despite growing NGO and
opposition criticism at home, many Russians seem to admire his readiness to
challenge US global leadership assumptions.

On North Korea’s missiles tests, on Iran’s nuclear ambitions, on Hamas’s
control of the Palestinian Authority, and on Darfur, Mr Putin has
consistently blocked or sidestepped US-led moves towards punitive action.

On Kosovo, Georgia, Moldova and Ukraine, his position is often seen as
unhelpful.

These issues, plus Russia’s poor human and civil rights record, could make
for an indigestible dinner when he and Mr Bush meet privately on Friday
evening. The fact that they are unlikely to be resolved only underscores
Moscow’s strengthening self-belief.

Yet old, familiar Russian paranoia still makes Moscow a touchy partner. “To
be honest, not everyone was ready to see Russia begin to restore its
economic health and its position on the international stage so rapidly,” Mr
Putin said last month.

“Some still perceive us through the prism of past prejudices . . . and see a
strong, reinvigorated Russia as a threat.” Nato’s eastward expansion is set
in this context; so, too, is European reluctance to open downstream energy
business to Russian companies.

Dmitri Trenin of the Carnegie Moscow Centre said the US had made a strategic
mistake in assuming that post-Soviet Russia could be drawn, or tethered,
within the west’s orbit. “Now it has left that orbit entirely. Russia’s
leaders have given up on becoming part of the west and have started creating
their own Moscow-centred system,” he wrote in Foreign Affairs magazine. On
issues such as Iran, “Russia will continue essentially to share western
goals while opposing western (and especially US) hardline policies”.

Mr Putin was not seeking confrontation at the G8 summit, Ms Moll said. But
nor was the meeting likely to achieve a consensus or, indeed, much at all.
“He doesn’t want to be seen as an energy hawk threatening other people. He
does want to do things his own way,” she said. As a result, increasing
friction was likely while Mr Bush remained in office. “We need some new
thinking in Washington.”  (http://www.guardian.co.uk/russia)

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21. WHY THE WEST IS NERVOUS ABUT PUTIN’S FINEST HOUR
                  Gazprom’s decision to cut off gas supplies to Ukraine.
 

By Mary Dejevsky, The Independent, London, UK, Tue, Jul 11, 2006

This time last year leaders of the Group of Eight industrialised countries
had just completed their Africa-themed summit at Gleneagles. As the months
went by, however, two quite different thoughts increasingly preyed on the
minds of seven of them.

The first was: how on earth had it come to pass that President Putin of
Russia would host the 2006 summit at St Petersburg. The second was: what

in heaven’s name would they all find to talk about.

This summit is now upon us. The seven leaders arrive in St Petersburg at the
end of this week, and the second question now has two quite specific and
urgent answers. Africa (the follow-up), education, Aids and drugs will be
there as safe stand-bys, but energy supplies and nuclear proliferation are
what this summit will be about.

As it happens, Russia holds the key to both. With its vast and
under-exploited reserves, it has the potential to become the chief supplier
of oil and gas, not just to Europe, but to much of the Far East as well. The
visiting leaders also hope that Russia will join a scheme to solidify the
nuclear non-proliferation regime and rein in Iran and North Korea.

We shall probably have to wait for the final communiqus from St Petersburg
to discover the extent of agreement. But Mr Putin has been preparing
assiduously for what he undoubtedly sees as his finest hour. Last week he
met representatives of Western non-government organisations for three hours.

He spent another three hours answering e-mailed questions from around the
world – on everything from high politics to kissing children. As an
appetiser for the St Petersburg feast, Russia also lifted all remaining
controls on the rouble, making it to all intents and purposes convertible.

Add the likely successful flotation of the state-owned Russian oil company
Rosneft in London and yesterday’s announcement that Russian special forces
had tracked down and killed the Chechen enemy No One, Shamil Basayev (as

big a catch as Osama bin Laden would be for the US), and it is clear that Mr
Putin goes to St Petersburg riding high. Yet the question of Russia’s right
to chair the rich countries’ club still nags. Its per capita GDP is, after
all, still below that of Portugal.

The technical reason why Russia was granted the chairmanship is that the
other seven could find no reason to deny it. The USSR in its dying days had
been admitted as an associate in an abortive effort to give Mikhail
Gorbachev the international kudos that some Western politicians misguidedly
believed might save him.

To have ejected Boris Yeltsin’s Russia would have conveyed quite the wrong
message about the West’s support for the post-Communist government. Once

a member, it was only a matter of time before Russia qualified for the
chairmanship. This mechanical entitlement, however, has not prevented the
eruption of a ferocious debate outside Russia about Mr Putin’s suitability
to take the chair on Saturday.

Politicians, academics, retired diplomats and activists of every hue have
all had their say. The result is a plethora of pamphlets, books and press
articles, here and in the United States, that cite much the same evidence to
reach opposite conclusions about Vladimir Putin and the Russia he leads.

One view regards Mr Putin as an incorrigible authoritarian who yearns for
the days of Soviet power and is successfully bending a reluctant Russia to
his dictatorial will. Adherents dwell on Mr Putin’s KGB career and
connections’ the closure of independent (i.e. oligarch-owned) television
stations and the reversion to the appointment, rather than election, of
regional governors.

They add the barbaric war in Chechnya’ last year’s imprisonment of Mikhail
Khodorkovsky, the erstwhile owner of Russia’s largest private oil company,
Yukos, and Gazprom’s decision to cut off gas supplies to Ukraine.

The other view sees Mr Putin as a President of and for his time, who has
brought stability and more sound economic management and democracy than
could be expected, given Russia’s recent history. Adherents cite the prudent
stewardship of the budget surplus high oil prices have produced’ continuing
reform of the courts, the codification of laws to bring them into line with
Western practice, and the commercial considerations that should guide
Russia’s exports of oil and gas.

Living standards for most Russians, they say, are higher than they have ever
been’ Russians can plan with confidence for their future. They ask why a
government should subsidise opposition media outlets that cannot pay their
way, and they ascribe the dissatisfaction of tiny intellectual and
communist-era elites to their contempt for a president they regard,
snobbishly, as their social inferior.

There is a genuine debate to be had here, both about the nature of
post-Soviet Russia and the policies we in Britain and Europe should pursue.
And it is one we should have had long ago. We did not have it in Boris
Yeltsin’s time because the West was so heavily invested in his survival.

We have not had it since Vladimir Putin succeeded him because, until very
recently, the negative view rooted in old-style Soviet preconceptions was so
dominant. Opposing voices struggled to be heard.

It is a healthy sign that finally something akin to a real discussion is
taking place. But it is regrettable that this is happening not because of
any heightened curiosity about what is really going on in Russia, but
because of our selfish panic about energy supplies.

The question of Russia’s right to chair the rich countries’ club still nags.
Its GDP is below Portugal’s.                          -30-
————————————————————————————————
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
========================================================
22.    WHAT DOES ‘ENERGY SECURITY’ REALLY MEAN?

COMMENTARY: By Daniel Yergin, The Wall Street Journal
New York, New York, Tuesday, July 11, 2006

ST. PETERSBURG — At the conclusion of last year’s G-8 summit in Scotland,
Vladimir Putin said to the other leaders of the G-8 industrial nations, “We
cannot ignore the question of overcoming poverty . . . and the fight against
terrorism.” But “the key issue for the next summit” would be energy
security.

Setting the agenda was certainly his prerogative as the incoming “president”
of the G-8. Moreover, he did it from a unique perspective. For, he added,
“If you put together Russia’s energy potential in all areas, oil, gas and
nuclear, our country is unquestionably the world leader.”

The turbulence in the year since has earned “energy security” its place as
the No. 1 item for this weekend’s meeting here.

There was the huge shock that Hurricanes Katrina and Rita delivered to the
Gulf of Mexico energy complex; the continuing loss of 20% of Nigerian oil
output from domestic insurgency; Russia’s temporary interruption of natural
gas supplies to Ukraine at the beginning of this year; the chronic
impairment of Iraqi oil output; Hugo Chavez’s warnings about cutting off
Venezuelan supplies to the U.S.; and the recurrent threats by some Iranian
leaders to unleash an “oil crisis” (even if other Iranians deny any such
intent).

Fueling the anxiety, of course, has been the 60% rise in oil prices, to the
mid-$70s a barrel, since the beginning of last year.

The world has changed much since the concept of “energy security” emerged

in the 1970s. But agreeing on its importance is not the same as agreeing on
what it means. Consuming countries declare that they want “security of
supply” — that is, reliability and availability of energy at reasonable
prices.

Exporting countries, whether Russia or in the Middle East, turn it around
and talk about “security of demand” — sufficient access to markets and
consumers to justify future investment (and protect their national
revenues).

Probe further and the differences become even sharper. For Russia, energy
security is about the state’s retaking control of the “commanding heights”
of the energy industry and extending that control downstream, over the
critical export pipelines that provide a substantial part of government
revenues. For Europe, today’s concerns center not on oil, but on natural gas
and on the debate about dependence on gas from Russia.

For Japan, the question is quite different — how to compensate, in running
the world’s second largest economy, for the absence of virtually any
domestic resources. For China and India, it is assuring that energy does not
hold back the economic growth they need for development and to avoid social
turbulence.

In the U.S., energy security has had a double focus. One is offsetting any
future Middle East-style disruptions. The other is achieving that oft-cited
goal of “energy independence” — first set out by Richard Nixon in 1973 — 
even as the U.S. in the years since has gone from importing a third of its
oil to 60%.

So what, then, are the principles and policies that will underpin “energy
security”? Some of them are embedded in the security system that was set up
in the 1970s to either avoid or mitigate disruptions such as the 1973 oil
embargo. There was a further objective, now generally forgotten: to avoid
the kind of bruising political and economic scramble that threatened to
fracture the Western alliance.

This system included the establishment of the International Energy Agency,
the creation of emergency stockpiles such as the Strategic Petroleum
Reserve, increased communication and much better information, and the
development of procedures for sharing supplies in the event of a disruption
(the last of which was activated briefly to offset lost supplies after
Katrina and Rita).

If there was a single overarching principle, it was the importance of
diversification, in terms both of sources of oil and in increased use of
other energy supplies. And this principle of diversification remains the
essential starting point for any thinking on energy security.

But the system must incorporate new realities. First, energy security needs
to be extended to the safety of the whole infrastructure and supply chain — 
recognizing the vulnerabilities that come from terrorism, war, brigandage
and natural disasters. That is the lesson of Katrina and Rita.

It is not just oil and gas coming out of the ground; it is also pipelines,
refineries and, critically, electricity, which is fundamental to everything
else. Global supply chains are only going to become more complex in the
years ahead.

Today, about 40 million barrels a day of oil cross oceans in tankers; within
15 years, that will be 70 million barrels. Over the same period, liquefied
natural gas volumes will triple on the high seas. And there are critical
chokepoints: 20% of the world’s oil supplies flow through the Strait of
Hormuz; 80% of Japan’s and Korea’s oil, and half of China’s, passes through
the Strait of Malacca.

Given their importance and scale, the safety of these supply chains requires
a “security margin.” It also requires increased cooperation among
governments, and between companies and governments. This last is no easy
thing; nor is it clear who will bear the additional costs.

A second, urgent need is to bring China and India into the energy security
system. There is much talk of a clash between the U.S. and China over oil.
But there is nothing inevitable about it. Commercial competition need not
turn into national rivalry. A fundamental reason for establishing the
International Energy Agency in the ’70s was to modulate that mad scramble to
pre-empt barrels.

This contest threatened not only to rip apart the Western alliance, but also
sent oil prices — after the Iranian Revolution — to what is still their
highest level ever. The innovations of the ’70s transformed the scramble
into more durable cooperation. That same kind of approach is needed now with
the emergence of these two huge (and anxious) consumers in the world market.

The investment framework itself is part of energy security. Reasonable,
stable and predictable investment regimes are required if funds and
technology are going to flow into the development of new resources.

Governments that focus on short-term revenue maximization will shortchange
themselves, as well as their consumers, over the longer term. That
definitely needs to be on the table in St. Petersburg.

Energy security should also include enhanced efficiency in the use of
energy. There is much more to accomplish here, and it too ought to be a
major topic at the G-8 summit. U.S. energy efficiency has doubled since the
1970s. A great contribution will result from greater efficiency in China and
Russia (which use far more energy per unit of GDP than do the U.S.), and
Western Europe and Japan (which can become more efficient).

Diversification can go much farther than development of “non-OPEC” fuels.
Today, there is a more robust menu of alternatives, including the making of
liquid fuels either out of natural gas or from the application of biology in
ways that are still being developed in the laboratory.

There’s another principle that is important and perhaps startling:
self-restraint. When disruptions occur, tempers flare, suspicions mount and
the specter of manipulation comes quickly to the fore. In such
circumstances, the temptation becomes very strong for governments to manage
markets.

But so often the most sensible policy is to resist that temptation. Large,
flexible markets are the shock absorbers that promote energy security.
Disruptions are disruptions; once they occur, the objective is to rebound as
quickly as possible. Markets, with their decentralization and ingenuity, can
speed adjustment more quickly and effectively than more interventionist
approaches.

Finally, energy security requires a larger perspective. Whatever may be said
about energy independence, the truth is that there is only one global oil
market, and the U.S. is part of it. Moreover, energy markets, like the rest
of trade and finance, are ever more internationally entwined.

Energy security does not reside in a realm of its own, but is part of the
larger pattern of relations among nations. How those relations go will do
much to determine how secure we are when it comes to energy.
———————————————————————————————-
Mr. Yergin, chairman of Cambridge Energy Research Associates, is author of
“The Prize: The Epic Quest for Oil, Money & Power” (Simon & Schuster, 1991).
————————————————————————————————

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