AUR#748 Aug 8 Macroeconomic Sitution, July 2006, Report From SigmaBleyzer; Free Economic Zones; Tax Cuts Promised, Borderland Split; Marriage Of Opposites

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 ACTION UKRAINE REPORT – AUR           
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ACTION UKRAINE REPORT – AUR – NUMBER 748
Mr. E. Morgan Williams, Publisher and Editor  
PUBLISHED IN WASHINGTON, D.C., TUESDAY, AUGUST 8, 2006
 
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               –——-  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 – JULY 2006
MONTHLY REPORT & ANALYSIS: Olga Pogarska, Edilberto L. Segura
SigmaBleyzer Emerging Markets Private Equity Investment Group
The Bleyzer Foundation, Kyiv, Ukraine, Tuesday, August 8 , 2006
 
By Roman Olearchyk in Kiev, Financial Times
London, United Kingdom, Tuesday, August 8 2006

4.            UKRAINIAN MOBILE MARKET CONTINUES TO BOOM 

PRIME-TASS, Moscow, Russia, Tuesday, August 8, 2006

5. UKRAINE BUYS $201M WORTH OF NUCLEAR FUEL FROM RUSSIA
MosNews, Moscow, Russia, Thursday, August 3, 2006

6     EASTERN EUROPEAN NUCLEAR REACTORS IN BULGARIA
                       AND UKRAINE GET  NEW LEASE OF LIFE
       Building on its Bulgarian success, Invensys Nuclear has just won a
        major contract from DICS Intertrade to supply four Tricon safety
     controllers to the Rovno nuclear power plant at Kuznetsovsk in Ukraine.
EngineerLive website, Thursday, August 3, 2006


7CASPIAN ENERGY EXPORTS AND THE BLACK SEA CORRIDOR
       Keynote speaker Romanian President Basescu spoke on “Romanian:
                           An Energy Gateway to Western Europe”
The Jamestown Foundation, Washington, D.C., Thursday, August 3, 2006

8.          EBA FINDS BARRIERS TO INVESTMENT IN UKRAINE
Ukrainian Times newspaper, Kyiv, Ukraine, Monday, August 7, 2006

9.     TOURIST INDUSTRY: BRIGHT FUTURE, GLOOMY PRESENT
                   Ukraine only starts to develop its tourist industry
ANALYSIS & COMMENTARY:
By Roman Bryl
IntelliNews – Ukraine This Week, Kyiv, Ukraine, Mon, July 3, 2006

10 RUSSIAN COMPANY TO LAUNCH HOTEL CHAIN IN UKRAINE
                      Plans to build a 20-strong mid-market hotel chain
By Chris Druce, CatererSearch.com
Sutton, Surrey, United Kingdom, Wed, 02 August 2006

11.            NEW VILLAGE WILL SPRING UP IN KIEV REGION

Alexei Voskresensky The Ukrainian Times newspaper
Kiev, Ukraine, Monday, August 7, 2006

12UKRAINE’S GAS CHIEF SAYS GAS PRICE IS BOUND TO GROW

INTERVIEW: With Oleksandr Bolkisev, Head of State Run
Naftohazs Ukrayiny oil and gas company
By Roman Kulchynskyy, Kontrakty, Kiev, in Russian 31 Jul 06; pp 8-12
BBC Monitoring Service, United Kingdom, Wednesday,Aug 03, 2006

13.                          BORDERLAND SPLIT
By Mark Von Hagen, The Wall Street Journal
New York, New York, Tuesday, August 8, 2006

14.    FACTIONS INVEST HOPE IN A MARRIAGE OF OPPOSITES
                   Ukraine’s passage to becoming a “normal” economy
                         and society is likely to be long and bumpy.
ANALYSIS & COMMENTARY: By Quentin Peel, Columnist
Financial Times, London, United Kingdom, Saturday, August 5 2006

15UKRAINE’S NEW GOVERNMENT: DARK BLUE, PALE ORANGE,
                              SOME PINK, TOUCH OF RED
                  Ukraine’s new government: composition and politics
ANALYSIS AND COMMENTARY:
By Vladimir Socor
Eurasia Daily Monitor, Volume 3, Issue 153
Jamestown Foundation, Wash, DC. Tuesday, August 8, 2006

 
ANALYSIS & COMMENTARY: By Luca Brusati, Italy
Action Ukraine Report (AUR) #748, Article 16
Washington, D.C.,  Tuesday, August 8, 2006

17UKRAINIAN NEWSPAPERS DISAGREE OVER CRISIS RESOLUTION
              One idea seemed to dominate the print media – Yanukovych has
                    defeated Yushchenko and the Orange Revolution is over.
             People in Lviv discuss Yushchenko’s treachery and incompetence.
BBC Monitoring Research Service, UK, Friday, Aug 04, 2006
BBC Monitoring Service, United Kingdom, Friday, Aug 04, 2006

18UKRAINE’S COALITION DEAL PAPERS OVER ROOT DIFFERENCES
             The net result of the agreement leaves Ukrainian politics pretty much
                      as they were: stagnant, short of cash, and at loggerheads.
ANALYSIS: By Stefan Korshak, Deutsche Presse-Agentur
Hamburg, Germany, Friday, August 4, 2006

19.       MARKETS, GOVERNMENT, AND PUBLIC LANGUAGE USE
OP-ED: By Stephen Velychenko, Resident Fellow,CERES
Research Fellow, Chair of Ukrainian Studies, Munk Center
University of Toronto, Toronto, Ontario, Canada
Action Ukraine Report (AUR) #748, Article 19
Washington, D.C., Tuesday, August 8, 2006
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1
 UKRAINE – MACROECONOMIC SITUATION – JULY 2006

MONTHLY ANALYTICAL REPORT: Olga Pogarska, Edilberto L. Segura
SigmaBleyzer Emerging Markets Private Equity Investment Group
The Bleyzer Foundation, Kyiv, Ukraine, Tuesday, August 8 , 2006

                                        SUMMARY
[1] Over January-June, real GDP grew by 5% year-over-year (yoy), suggesting
that early concerns regarding the negative impact of the imported gas price
increase, political uncertainty and unfavorable external conditions did not
fully materialize.

[2] Stronger economic growth allowed the government to meet its budget
revenue targets for January-June. For the first half of the year, the
consolidated budget deficit was at a controllable 0.5% of period GDP.

[3] Consumer inflation continued to decelerate as the higher cost of
services was compensated for by decelerating food prices. Although CPI
growth was lower than expected for the first half of the year, the forecast
for end-of-period inflation was left unchanged at 11.4% due to further
upward adjustments of service tariffs in the second half of the year.

[4] For the first time since fall 2005, merchandise exports reported growth
in May (11.4% yoy.) However, despite encouraging export developments, the
merchandise trade balance continued to deteriorate.

[5]According to preliminary NBU estimates, the current account (CA) deficit
accounted for $0.9 billion over the period, which translates into 2.1% of
period GDP.

[6] At the beginning of August, the Ukrainian Parliament endorsed Mr.
Yanukovych as Prime Minister and appointed new Cabinet of Minister.

                                    ECONOMIC GROWTH

According to preliminary data from the State Statistics Committee (SSC), the
Ukrainian economy continued its remarkable acceleration in June. Following
the rather unexpected acceleration of 8.5% yoy in May, real GDP growth
picked up by a marked 9.3% yoy in June, bringing the cumulative January-June
figure to 5% yoy.

Although these figures are preliminary and may be revised, current real
sector developments suggest that early concerns about the economic situation
in 2006 related to the impact of the imported gas price increase, political
uncertainty, and forecasted worsening of external conditions, were
exaggerated.

The expansion of the economy in the first half of the year may be attributed
to stronger domestic demand for both consumer and investment goods and
better than expected external conditions (particularly, resumption of the
ascending trend of world steel prices in February, contrary to expectations
of their gradual decline during 2006, and stronger external demand for
Ukraine’s machine-building products).

On the demand side, rising income and declining interest rates boosted
private consumption growth to a record high 19.7% yoy in the first quarter
of 2006. In addition, GDP growth was supported by recovered investment
demand, as gross fixed capital investment increased by an encouraging 8.2%
yoy for the period.

Such a strong rebound of investment activity amid political uncertainties
related to parliamentary elections and the formation of a government
coalition was largely surprising.

At the same time, it may be explained by the need to modernize existing
production capacities and introduce energy-saving technologies, with the
latter especially acute following the recent price hike on imported gas and
its likely increases in the future, as well as by the improving business
climate in Ukraine.

Preliminary data on real sector performance for the first half of the year
suggests further acceleration of investment activity in the second quarter.

On the downside, robust domestic demand stimulated imports, which coupled
with sluggish export performance resulted in considerable worsening of
Ukraine’s foreign trade balance.

At the same time, the negative contribution of net exports may be lower in
the second quarter due to favorable external conditions for Ukraine’s major
export-oriented industries (metallurgy, machine-building, chemicals and
transport vehicles).

On the supply side, GDP growth was primarily driven by the service sector
over January-June. The growth of value added in domestic trade (8.6% yoy),
transport (8% yoy), healthcare (2.6% yoy) and education (1.8% yoy) together
explains about 45% of GDP growth over the first half of the year.

The growth of value added in construction and agriculture (3.4% yoy and 6.5%
yoy respectively) explains another 10% of GDP growth over the period.

At the same time, notable acceleration over May-June should be mainly
attributed to robust growth in the industrial sector over these months.
Although industrial output growth slightly decelerated from the 10% yoy
surge a month before, it remained at a high 9.6% yoy in June, bringing the
cumulative growth to 3.6% yoy.

Growth resumption in world steel prices and its acceleration over the last
two months triggered recovery of metallurgy. Following a 12.4% yoy increase
in May, metals production surged by almost 22% yoy in June, bringing the
cumulative growth to 4.8% yoy.

Strong external demand for chemicals helped the industry to adjust for more
expensive energy resources (particularly gas, which accounts for about 25%
on average in the production costs of chemicals). As a result, the chemical
industry demonstrated 0.4% yoy growth over the first half of the year.

Benefiting from buoyant investment demand as well as recovered metallurgy,
output in machine-building increased by 15.7% yoy in June, which translated
into 12.2% yoy growth to date. On the downside, coke and oil-refining
continued to decline, reporting a 15.2% yoy decrease in output for the first
half of the year.

At the end of June, the price of imported gas, one of the principal
determinants of Ukraine’s economic development, was officially confirmed to
stay unchanged at $95 per 1,000 m3 at the Russian-Ukrainian border through
the end of September. Moreover, in mid-July Ukrainian officials declared the
price will stay unchanged through the end of the year.

These assurances, plus acceleration of industrial production in recent
months and robust growth in the service sector give reason to expect that
GDP growth will be considerably higher than originally expected.

Although the official forecast has not yet been upgraded, acting Prime
Minister of Ukraine expects acceleration of GDP growth to 7% yoy over the
first nine months of the year.

However, considering the vulnerability of Ukraine’s real sector to external
conditions (particularly, evolution of world steel prices and cost of
imported energy resources), the anticipated slower growth of real household
income in the second half of the year and a more moderate harvest than last
year, we expect GDP to grow by a real 5-6% yoy in 2006.

                                      FISCAL POLICY
Acceleration of economic growth in May-June allowed the government to
collect revenues to the general fund of the central budget in an amount that
exceeded January-June’s target by 2.2%.

In particular, tax revenues were over-fulfilled by 1.5% over the period,
primarily thanks to VAT proceeds that were almost 14.1% above the target.
Unlike previous months, receipts from the enterprise profit tax (EPT) were
19.3% yoy above the target in June.

Higher EPT collections can be attributed to faster economic growth in recent
months, which positively affected enterprises’ profitability. Indeed,
according to SSC data, profits before taxes of Ukrainian enterprises were up
by 11.5% yoy in May, while the share of profitable enterprises increased to
61.8% for January-May (up from 60.2% in January-April).

However, due to poor enterprise performance over the first months of the
year, EPT revenues were 13.3% below target for January-June. High growth of
household income also contributed to 23.2% yoy growth of consolidated budget
revenues over January-June, which constituted UAH 72.1 billion ($14.3
billion).

The growth of consolidated budget expenditures continued to slow (28.7% yoy
over January-June compared to 36% yoy for January-April) but considerably
outpaced that of revenues. As a result, the consolidated budget reported a
deficit of UAH 1 billion for the first half of the year, which translates
into 0.5% of GDP.

The deficit was financed by the remainder of the funds received from last
year’s privatization of Kryvorizhstal, as privatization receipts were rather
modest for the period and new borrowings were considerably lower than
interest and principal public debt payments. For the first half of 2006,
receipts from privatization amounted to just UAH 162 million, or 7.6% of the
targeted amount.

External public debt has declined by 5.3% since the beginning of the year,
while in the absence of new issuance of domestic debt instruments in the
first half of the year, domestic public debt has declined by almost 6% since
the beginning of the year. As a result, total public debt declined by 5.5%
year-to-date to $14.6 billion.

                                    MONETARY POLICY
Consumer price inflation continued to decelerate in June despite growing
inflationary pressure from rising service tariffs. Following a 25% increase
in gas and electricity tariffs in May, the government raised the cost of
public railway transportation by 26.6% in June, contributing to 1.1%
month-over-month (mom) growth of service prices in June.

Rising international prices on crude oil over June and Russia’s increase of
the crude oil export duty to almost $200/ton (up by 7.2%) starting June 1st
resulted in a 2.9% mom increase in gasoline prices, driving the non-food
price index up by 0.3% mom.

Overproduction of some food products (e.g., meat, milk and dairy products,
eggs) on the back of the unresolved trade relationship with Russia resulted
in a 0.3% mom reduction of food prices in June. Since food has the most
weight in the consumer basket (almost 65%), consumer prices reported just a
0.1% mom increase in June.

Annual growth of consumer prices made up 6.8% yoy in June, decelerating from
7.3% yoy a month before. Benefiting from monthly deflation over the four
consecutive months and a high base effect, the growth of food prices slid to
5.1% yoy, down from 5.9% yoy in May and 11.4% yoy in February.

Non-food prices sped up to 2.8% yoy in June, while the service price index
slightly decelerated from 17.8% yoy in May to 17.6% yoy.

Despite deceleration, attributable to a high base effect, the growth of
service tariffs was among the highest for the last five years and is
expected to accelerate substantially in July. Starting July 1st, the
government increased gas prices for households by 85% while tariffs on
communication services were raised as of mid-July.

Further upward adjustments of service tariffs in the second half of the year
will be the main reason for acceleration of inflation. Thus, despite
moderate inflation in the first half of the year, the government forecast
for year-end inflation was left unchanged at 11.4% yoy.

Consumer price development in June was also favored by decelerating growth
of monetary aggregates. The growth of money supply (M3) slowed to 37% yoy,
down from 40.2% yoy in May, reflecting slower growth of deposits and
monetary base. In particular, deposits decelerated from 46% yoy in May to
42.2% yoy in June.

Deceleration of the growth of deposits should be attributed to the declining
deposit rate and expected acceleration of inflation in the near future,
which make deposits a less attractive form of money holding. The growth of
the monetary base slid to 22.4% yoy in June, down from almost 24% yoy a
month before, which is explained by a high base effect.

In monthly terms, the monetary base grew by 4.5% due to larger buyouts of
foreign currency by the central bank on the interbank forex market and the
decline of government deposits with the central bank by 16.1% mom.

Throughout 2006, the National Bank of Ukraine (NBU) continued to pursue the
policy of a de facto fixed exchange rate. The official exchange rate has
remained stable at 5.05 UAH/$ since April 2005. Following weaker demand on
cash foreign exchange and improving export performance, net foreign exchange
interventions by the NBU were positive and made up $247 million.

However, due to scheduled foreign debt payments, $/euro rate fluctuations
and gold price differentials, gross international reserves declined slightly
by $73 million to $17.6 billion, which translates into 4 months of future
imports.

In June, the banking system continued to improve liquidity as demand for the
NBU’s refinancing credits dropped to UAH 760 million (down from UAH 1.3
billion in May and UAH 3.5 billion in April) and the money market interest
rate continued to decline. This allowed commercial banks to further expand
their credit operations.

In June, commercial bank loans increased by 5.3% mom, bringing year-to-date
growth to 25.4%, the record high level for the last four years. However, the
cost of bank lending slightly increased by 10 basis points to 13.8% per
annum (pa), while the average deposit rate continued to decline to 6.3% pa,
down from 6.7% pa a month before.

                     INTERNATIONAL TRADE AND CAPITAL

In May, Ukraine’s export performance continued to improve. Increasing for
the first time since fall 2005, merchandise exports reported 11.4% yoy
growth. Favorable export dynamics were achieved thanks to stronger external
demand for Ukraine’s machinery, equipment and vehicles and acceleration of
world metal price growth.

In particular, the export of ferrous metals, which still comprise the
largest share in total exports (34.1%), increased by 1.3% yoy in May (for
the first time since mid-2005.)

As a result, exports of metallurgical products reported a 4.6% yoy decline
over January-May, which is a considerable improvement compared to the 7.4%
yoy decline in January-April. Exports of machinery and transport vehicles
continued to expand at a strong 14.6% yoy over January-May.

The increase in the share of high value-added products in total exports
(export of machine-building and transport equipment account for 13.3% in
total exports, up from 11.5% yoy for the respective period last year)
indicates a positive trend towards export diversification.

At the same time, the growth of imports considerably outpaced that of
exports. In May alone, merchandise imports went up 30% yoy, bringing the
cumulative growth to 24.4% yoy. The high growth of commodity imports was
primarily driven by more expensive energy resources.

Accounting for more than one-third of total merchandise imports, the import
of fossil fuels grew by 17.6% yoy over January-May, reflecting higher export
duties on crude oil raised by the Russian Federation in April.

Strong consumer and investment demand supported by high growth of population
income and extensive commercial bank lending activities contributed to
acceleration of imports as well.

In particular, imports of machinery and transportation equipment, accounting
for about 27% of total merchandise imports, grew by more than 40% yoy in
January-May 2006, up from 38.8% yoy in January-April.

Despite improving export performance, Ukraine’s merchandise trade balance
continued to deteriorate. Over the first five months of the year, the
foreign trade deficit increased to $2.6 billion. The widening foreign trade
deficit was the primary reason for the negative current account balance in
the first half of the year.

According to preliminary NBU estimates, the current account (CA) deficit
accounted for $0.9 billion over the period, which translates into 2.1% of
period GDP. At the same time, this data suggests substantial narrowing of
the CA deficit in the second quarter of the year on the back of resumed
export growth in May-June.

Because of better-than-expected export performance in the first half of the
year, we upgraded our estimates of the CA deficit for 2006 to $2 billion, or
2.1% of expected GDP, which will be securely covered by the financial
account surplus.

                           INTERNATIONAL PROGRAMS

A regular IMF mission visited Kyiv in late July to assess current economic
challenges in the country. The mission acknowledged acceleration of economic
growth in recent months despite continuing political uncertainties, the
lower pace of inflation and the controllable fiscal deficit, and improved
its forecast for Ukraine’s real GDP growth to 5% yoy in 2006 (up from 2.3%
yoy.)

However, IMF representatives indicated a number of risks, in particular
those related to the further rise in the cost of energy resources and
deteriorating external conditions, which may worsen the outlook for the
Ukrainian economy in the short-term.

To secure macroeconomic stability and good performance, the mission
recommended the following actions:

   (1)   adjust service tariffs to the rising cost of energy sources, which 
   will stimulate more effective budget and energy utilization;
   (2)   take measures to secure the 2006 fiscal deficit not exceeding the
   targeted 2.5% of GDP and reduce the 2007 deficit to 2% of GDP;
   (3)   gradually liberalize the exchange rate regime and strengthen
   commercial bank regulation and supervision;
   (4)   speed up structural reforms, including adoption of legislation needed
   for WTO membership, the law on joint stock companies, repeal the

   moratorium on acquisition of agricultural land, and resume the privatization
   process.

Since there is no active lending program, cooperation between Ukraine and
the IMF is limited to technical assistance. Moreover, the government intends
to reform its relationships with other international financial institutions
(IFIs) as it became evident from the Cooperation Strategy with IFIs for
2006-2008, approved by the Cabinet of Ministers in late June this year.

In particular, the strategy envisages a gradual shift from projects
supporting state budget and reform programs to investment projects that
would enhance development of infrastructure and free-market instruments
necessary to improve economic management of the country and increase
competitiveness of Ukrainian goods and services.

By adopting the strategy, the government hopes to seize available investment
potential of IFIs, rather modestly realized so far in Ukraine. This suggests
more intense cooperation with the World Bank (WB), the European Bank for
Reconstruction and Development (EBRD), a number of international investment
banks and other IFIs.

As a part of the above-mentioned strategy, Ukraine and the World Bank signed
a $150 million loan agreement to support better access to financial services
in Ukraine, especially small and medium enterprises in rural areas.

Moreover, in late July the WB’s Board of Executive Directors approved a
$154.5 million loan for the Second Export Development Project (EDP-2) to
support export and real sector growth in Ukraine, by providing medium and
long-term working capital and investment finance to Ukrainian enterprises.

The project also aims to further improve the ability of the Ukrainian
banking sector to provide financial resources to enterprises (through
additional development of financial intermediation by providing a wider
variety of better quality lending products.)

      OTHER DEVELOPMENTS AND REFORMS AFFECTING

                             THE INVESTMENT CLIMATE
On August 3rd, Ukrainian President Viktor Yushchenko nominated Viktor
Yanukovych as Prime Minister (PM). Mr. Yanukovych was PM of Ukraine from
November 2002 to January 2005 and was the rival of Mr. Yushchenko during the
presidential elections in the fall 2004.

During March 2006’s parliamentary elections, the Party of Regions, led by
Mr. Yanukovych, obtained 186 seats in the Parliament (or 41.3%), however
“supporters of the Orange Revolution” (Yulia Tymoshenko’s Block, Our Ukraine
and the Socialist Party) together obtained 242 seats (or 53.8%), which was
enough to form a ruling coalition.

Indeed, such a coalition was announced in late-June; however, lack of
agreement between the participants resulted in the Socialist Party’s
withdrawal on July 6th and formation of the new coalition involving the
Party of the Regions, the Socialist Party and the Communist Party. The new
coalition nominated the head of the Party of the Regions, Mr. Yanukovych, as
its candidate for Prime Minister.

The President took a constitutionally-permitted 15-day pause to decide
whether to nominate Yanukovych as Prime Minister or dissolve the Parliament.
On July 27th, in an attempt to solve the current political crisis, the
Ukrainian President called for a round table, involving the leaders of key
political forces and public figures, and proposed signing a declaration of
national unity.

Following tough consultations and a number of compromises regarding the
issues of NATO membership, federalization, and language policy, the
declaration was signed and President Yushchenko nominated Mr. Yanukovych

as PM. The next day, he was approved by the Verkhovna Rada with 271 votes.

In addition, Parliament swore in Constitutional Court judges that allowed
the Court to resume operation, stalled since late last year due to the lack
of a quorum.

Late in the evening, Parliament approved the new Cabinet of Ministers as
well. The majority of ministerial posts were given to the Party of the
Regions, including the ministries of economy, finance and energy, while
three ministries (of foreign and internal affairs and of defense) remain
nominees of the President.

The formation of the new government ends four months of political
uncertainty in the country. Ukraine can now expect smoother relationships
with Russia, especially regarding gas price negotiations, and further
progress towards WTO and EU membership.              -30-

————————————————————————————————-
NOTE: To read the entire SigmaBleyzer/The Bleyzer Foundation Ukraine
Macroeconomic Situation report for July 2006 and previous monthly
reports in a PDF format, including several color charts and graphics click
on the following link: http://www.sigmableyzer.com/en/page/532.
———————————————————————————————–
FOR FURTHER INFORMATION CONTACT: Olga Pogarska, Economist,
The Bleyzer Foundation, Kyiv, Ukraine. OPogarskia@SigmaBleyzer.com.ua
or Morgan Williams, Director, Government Affairs, Washington Office,
SigmaBleyzer, Washington, D.C., MWilliams@SigmaBleyzer.com.
http://www.SigmaBleyzer.com, http://www.BleyzerFoundation.com.
————————————————————————————————-
NOTE:  SigmaBleyzer/The Bleyzer Foundation also publishes monthly
Macroeconomic Situation Reports for Bulgaria and Romania. They are
 published at http://www.sigmableyzer.com/en/page/532.
————————————————————————————————-
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
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2.       UKRAINE’S NEW GOVERNMENT TO RESTORE FREE
   ECONOMIC ZONES SAYS DEPUTY PRIME MINISTER AZAROV

Associated Press, Kiev, Ukraine, Monday, August 7, 2006

KIEV – Ukraine’s new government plans to reinstate tax privileges for
certain regions and will consider increasing import customs, the first
deputy prime minister said in an interview published Monday.

Both moves would be likely to benefit Ukraine’s industrial sector, whose
leaders are the dominant force behind new Prime Minister Viktor Yanukovych’s
Party of Regions, and could help boost the country’s economy.

The new government was settling into place Monday after being approved by
parliament last week. It brings back many of the people who saw their
careers upended when the 2004 Orange Revolution protests against election
fraud helped bring a group of pro-Western reformers to power.

President Viktor Yushchenko agreed to approve the nomination of his former
Orange Revolution rival, Yanukovych, after the latter publicly committed to
uphold the democratic principles and pro-Western path adopted by the
president.

First Deputy Prime Minister Mykola Azarov laid out his top priorities in an
interview posted Monday on Party of Regions’ Web site.

He said that three or four of Ukraine’s so-called free economic zones will
be restored. He didn’t specify where, saying it would depend on where “big
investment is truly located.”

The zones, which offer investors tax breaks and other incentives, were
canceled in 2005 by former Prime Minister Yulia Tymoshenko, who said they
allowed Ukraine’s oligarchs to bleed money from the state.

The cancellation sparked an outcry not only in Ukraine but also among
foreign investors, particularly Polish firms. Yushchenko, who later fired
Tymoshenko, called the cancellation a mistake.

“When I hear speculations that we’ll cause a huge hole in the state budget
and missed revenues will be in the tens of billions, I want to say in
answer: compared to other world economic zones, we are offering very few
advantages, a thousand or hundreds of thousands time less than what you see
in, say, China,” Azarov said.

He added that the government would explore how it could compensate investors
who suffered unexpected losses when the zones were canceled.

Azarov also said that the new government would take another look at the low
import customs on light industrial products and textiles, saying that
Ukraine had until 2009 to lower the rates under agreements reached toward
joining the World Trade Organization.

“However, the Cabinet of Ministers lowered customs already in 2005,” Azarov
said. “Importers were allowed to become rich at the expense of the state
treasury.”

The new government also said it would work to cut value-added tax and profit
tax rates in 2008. Azarov said the country would look into the financial
health of the state’s gas company, Naftogaz, to determine what was happening
with Ukraine’s own gas resources, which he said should be enough to supply
the domestic sector.

But as for revising this year’s controversial gas deal with Russia, and
possibly removing the middleman RosUkrEnergo, Azarov said that wasn’t atop
his agenda.

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[return to index] [Action Ukraine Report (AUR) Monitoring Service]
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3.          UKRAINE’S NEW LEADERS PROMISE TAX CUTS
 
By Roman Olearchyk in Kiev, Financial Times
London, United Kingdom, Tuesday, August 8 2006

Ukraine’s new government will cut taxes and provide other relief to business
in an effort to fuel economic growth, the finance minister vowed yesterday.

Mykola Azarov, who was also named first deputy prime minister in the
government of Viktor Yanukovich, said he planned to cut corporate taxes from
25 to 20 per cent and value added tax from 20 to 18 per cent. The cuts were
likely to be implemented in 2008 as part of broader tax reform.

“I think that 2008 will be the year of real tax reductions,” Mr Azarov said
in a statement released yesterday on the website of Mr Yanukovich’s Regions
party. “These reforms will take three to four years. After this, the economy
and business can expect a period of tax stability.”

Mr Azarov said the government would also seek to aid Ukraine’s
export-oriented economy by devaluing the currency, although he did not
specify by how much. The hryvnia is pegged to the US dollar at a rate of 5
to 1.

Devaluation is expected to benefit Ukraine’s vast steel industry, which in
recent years has been ranked the world’s seventh biggest and has been the
target of international investors such as Mittal Steel, which last year
acquired the country’s largest mill.

Steel exports have been the largest source of foreign currency in recent
years. Some steel barons, including the multi-billionaire Rinat Akhmetov,
are prominent supporters of the Regions party.

Mr Azarov, who served as first deputy prime minister in Mr Yanukovich’s
cabinet before the Orange Revolution of 2004, said he hoped that in the next
18 months Ukraine would achieve annual gross domestic product growth of “10
to 15 per cent minimum”.

Ukraine posted GDP growth of about 12 per cent in 2004, the year Mr
Yanukovich lost the presidential election to Viktor Yushchenko.

Annual GDP growth dropped sharply to about3 per cent last year because of
declining world steel prices and other factors but has picked up once again
since, finishing at 6 per cent for the first half of this year.

Mr Azarov said the government intended to review sharp and unpopular tariff
rises on electricity, natural gas and the railways introduced this year.

Separately, Yuriy Lutsenko, previously a fierce opponent of Mr Yanukovich,
has agreed to remain as interior minister. Mr Lutsenko, who was instrumental
in rallying support for Mr Yushchenko during the Orange Revolution, had
pledged never to serve in a government headed by Mr Yanukovich, claiming
that his investigators had evidence of a cover-up involving criminal
wrongdoing in Soviet days.

Prosecutors have refused to investigate the case, citing lack of evidence.

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http://www.ft.com/cms/s/3827410a-267a-11db-afa1-0000779e2340.html
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4.  UKRAINIAN MOBILE MARKET CONTINUES TO BOOM 
PRIME-TASS, Moscow, Russia, Tuesday, August 8, 2006

MOSCOW – Ukraine’s mobile market continued to boom in the first half of

this year, though the mobile subscriber base is unlikely to double as it did in
2005, analysts said. Mobile operators are trying to attract customers who
spend less, as well as people who want to use several SIM cards.

Ukraine’s market may reach 100% SIM-card penetration in 2007 as a result but
the ARPU is likely to fall. The boom is coming to and end, analysts said.

The Ukrainian mobile market, which is one year behind the Russian market in
terms of penetration, saw a boom in 2005, when penetration more than
doubled, jumping to 63.8% as of December 31, 2005 from 29% as of December
31, 2004, according to Advanced Communications & Media (AC&M).

Ukrainian mobile operators’ total subscriber base stood at 36.036 million
users as of June 30, or 75.7% penetration, and is expected by the end of
this year to increase to 39.5 million users, or a penetration of about 83%,
AC&M projected.

“The real subscriber base is likely even to exceed our (year-end) forecast,”
said Yelena Sayapina, analyst at AC&M. “Ukrainian mobile operators have
consistently signed up about 1 million users per month (this year). But the
reason for growth deceleration is clear – penetration has already reached
75%.

At this level, there should no longer be a booming market,” Sayapina said,
adding that fewer people in Ukraine could afford to buy mobile phones since
average income is lower than in Russia.

Alexei Danilin, analyst at iKS-Consulting’s Ukrainian branch, has a slightly
higher year-end penetration forecast of 85%, attributing it to the fact that
“in the third and fourth quarters mobile operators historically sign up more
users (compared with the first two quarters).”

Russia’s mobile penetration was comparable to Ukraine’s penetration in
September 2005, when it stood at 77%, according to AC&M.

All penetration figures are provided based on the number of valid SIM cards.
However, if in Russia the actual number of mobile service subscribers is
considerably different from the SIM card-penetration, Ukrainian mobile
operators seem to be more honest in reporting their subscriber bases,
analysts said.

“In Russia the difference (between SIM card-based penetration and the actual
number of users) is 20 to 25 percentage points, while in Ukraine it is
considerably lower – we can say that it is about 10 percentage points,”
Sayapina of AC&M said.

According to a market survey, real mobile penetration in Ukraine stood at
49% in May, Danilin of iKS-Consulting said, noting that it was not clear
whether the survey was representative.

“New subscribers are in most cases people who generate low revenues (to
mobile operators). Operators started to meet their demands by offering lower
tariffs for mobile services,” Danilin said.

Mobile operators are now likely to attract users from their rivals and the
penetration in Ukraine is likely to hit 100% in late 2007, but the figure
will be reached mostly due to the increasing number of people who use
multiple SIM cards, Danilin said, adding that old people and babies won’t
have cell phones in any case.

Per capita income in Ukraine stood at about U.S. $113 in May, compared with
about $373 in Russia in June, according to official statistics.

Any increase in the number of mobile service subscribers dilutes operators’
ARPUs. The average ARPU of Ukrainian operators fell 27% on the year and
19.8% on the quarter to U.S. $7.3 in January-March, according to
iKS-Consulting.

Danilin of iKS-Consulting attributed the decline partly to the low ARPUs of
the country’s third and fourth largest operators, Astelit and Ukrainian
Radiosystems (URS), which together control about 13% of the market.
“Astelit’s ARPU was less than $2, while URS had an ARPU of less than $3 in
January-March,” Danilin said.

The low ARPU of Astelit can be explained by its churn policy, while URS has
to offer lower tariffs in order to meet its aggressive market share target.

“Astelit set its churn rate at 13 months and has not announced any changes
to its policy yet,” Sayapina of AC&M said. For comparison, URS has a churn
rate of three months.

For many years Ukrainian operators’ ARPUs have been relatively stable, as
“there have been no price wars,” Sayapina said.

Until January 2005, Kyivstar and UMC dominated the market while Astelit and
URS started aggressive expansion in January 2005 and April, respectively.

“ARPUs are going to fall further due to VimpelCom, which is likely to be
aggressive on the market,” Sayapina added.

VimpelCom purchased URS, which had less than 1% of the market, in November
and announced its plans to grab about 10% of the market within three years.

“While entering the market VimpelCom introduced several new approaches. [1]
First, it offered low tariffs for calls made within a region. [2] Second, it
offered roaming service to mobile subscribers of Golden Telecom. And [3]
third, when entering the market VimpelCom, as well as some operators before,
did not charge calls made within its network,” Danilin of iKS-Consulting
said.

Golden Telecom has about 50,000 mobile users, mostly generating high
revenues, and operates in the capital, Kiev, and in Odessa.
Analysts at research agency Sotovik project competition on the Ukrainian
market to heat up in the third and fourth quarters. “URS will try to win as
large a market share as possible.

VimpelCom has already proven the efficiency of its marketing policy in
Russian regions – in 2006 we should expect direct price pressure from URS,”
Sotovik said in its research, adding that Kyivstar and UMC had “room to
decrease their average per minute prices.”

Competition on the mobile market is already tough, but there are no price
wars, Danilin of iKS-Consulting said. “All mobile operators spend a lot on
advertising. And VimpelCom has also been successful in this field, as its
Beeline brand (introduced in Ukraine in April) is already widely known in
Ukraine,” Danilin added.

Though ARPUs are falling, mobile operators continue to post soaring
revenues. According to iKS-Consulting’s estimates, Ukrainian mobile
operators’ total revenue soared 56% on the year in January-March to $688
million, as calculated under U.S. GAAP.

Though Astelit and URS have managed to win 13% of subscribers, their revenue
share remains still almost unnoticeable, as Kyivstar and UMC had 97% of
total mobile revenues (51% and 46% respectively).

Particularly noteworthy was that 40% of Astelit’s revenue in January-March
was generated by its subsidiary DCC, which operates in an outdated DAMPS
standard, Danilin of iKS-Consulting said.                   -30-

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5. UKRAINE BUYS $201M WORTH OF NUCLEAR FUEL FROM RUSSIA

MosNews, Moscow, Russia, Thursday, August 3, 2006

MOSCOW – Ukraine’s national atomic energy generating company
Energoatom has transferred $201 million to Russia’s TVEL for fresh
nuclear fuel it received from the beginning of 2006.

“Fresh nuclear fuel is supplied, and spent fuel taken away according to the
schedule,” Ukraine Fuel and Energy Minister Ivan Plachkov was quoted
by RIA Novosti as saying at a parliamentary session on Thursday.

Fuel has been delivered to nine of the 15 power generation units of the
Ukrainian nuclear power plants. Earlier TVEL was reported to sign a deal for
nuclear fuel delivery to all 15 of Ukraine’s nuclear power plants in 2006.

TVEL is one of the world’s biggest producers and suppliers of nuclear fuel
for energy and research reactors in Russia and abroad. The corporation
consists of 15 enterprises of the nuclear fuel cycle and auxiliary
infrastructure. TVEL keeps 17 percent of the world’s nuclear power station
reactors in operation.                        -30-
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LINK: http://www.mosnews.com/news/2006/08/03/ukrpays.shtml
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6. EASTERN EUROPEAN NUCLEAR REACTORS IN BULGARIA
                     AND UKRAINE GET  NEW LEASE OF LIFE
         Building on its Bulgarian success, Invensys Nuclear has just won a
          major contract from DICS Intertrade to supply four Tricon safety
       controllers to the Rovno nuclear power plant at Kuznetsovsk in Ukraine.

EngineerLive website, Thursday, August 3, 2006

Many countries in Eastern Europe, especially those that were part of the
USSR, still rely on Russian-designed nuclear reactors for much of their
electricity output. Bulgaria, for example, has four such reactors that
generate nearly half of its electricity requirements.

The country’s interest in nuclear power generation began in the mid 1950s
with the construction of a research reactor. Then in 1966 Bulgaria signed an
agreement with the USSR for commercial units, some of which still form the
basis of its electricity supply programme today.

According to the Uranium Information Centre (UIC), the first pair of
pressurised water reactors (PWRs) were installed at the Kozloduy plant,
close to the River Danube border with Romania, shortly after this deal was
signed. These were WER440/230 models.

A second pair, also WER440s but incorporating the much-improved safety
features of the 213 model, were then installed. A third pair of much larger
WER1000/320 units were added to the site later.

Between 1991 and 1997 a great number of safety improvements were carried out
at Kozloduy in consultation with the International Atomic Energy Agency
(IAEA), the EU and the World Association of Nuclear Operators (WANO).

This short-term project cost E129m and was designed to bring standards
closer to international norms. From 1998-2002 further modifications were
carried out in line with IAEA safety criteria at a cost of E120m/y.

The UIC says that the promise of EU accession accompanied by the offer of
E200m from the EC led to Kozloduy reactors one and two being closed at the
end of 2002. Units three and four were originally to close in 2006.

However, as these have achieved levels of safety comparable with reactors of
a similar age in Western Europe, the Bulgarian parliament ruled that they
should stay open for the time being.

Since then, an IAEA mission has reported favourably on the units and a
two-week scrutiny by 18 international inspectors from the WANO found that
the units met all necessary international standards for safe operation. The
Bulgarian government is now aiming to renegotiate the agreed 2006 shutdown
and gain a reprieve until the licences expire in 2011 and 2013, giving a
30-year operating life.

An upgrade and modernisation programme for units five and six is ongoing,
but the UIC says there is no great concern about the safety of these units,
which conform well to international standards.
                            PWR CONTROL UPGRADE
All PWR reactors work in a similar fashion. First, water is highly
pressurised to prevent it boiling. Within the primary loop, it is then
pumped through the nuclear core where it is heated and passed though
thousands of tubes within two or more steam generators.

There the heat of the water is conducted across the tubes to a secondary
supply of water at lower pressure, which boils to make steam. This steam
spins the turbine, driving the electric generator and so producing
electricity.

Similar to fossil fired boilers, a system of turbine exhaust condensers, air
ejectors, heaters and pumps recover the condensed steam and return it to the
steam generator. An automatic control system ensures that the correct amount
of feedwater is returned, balancing the exiting steam flow and maintaining a
constant inventory of water within the reactor vessel.

It is this feedwater control system that is at the heart of a successful
control project which Triconex, part of Invensys, has just completed
successfully at Kozloduy.

Each of the Russian designed WER440 PWRs has six primary coolant loops
providing multiple paths for cooling the reactor. This design allows plant
personnel to isolate one or more of these loops for maintenance without the
need for a complete plant shutdown.

However, while providing a degree of fault tolerance, such flexibility
demands a complex control regime. Feed water control in particular is
critical. If the water level, or inventory, decreases significantly, reactor
cooling is jeopardised. If the level increases too much, water passes
through the steam header causing damage to the reactor’s turbines.

In other words, there is no acceptable failure mode. Any control solution
has to offer high and proven levels of reliability, availability and fault
tolerance.

“One of the means of achieving this involved developing and installing
protection systems for cold over pressurisation of the reactor vessel,”
explained Vladimir Urutchev, chief engineer at Kozloduy. “We eventually
selected the Tricon9 platform from Triconex because it has a very good
architecture and met our price requirements,” he added.

Although Tricons are used in thousands of critical applications worldwide,
this is the first time the technology has been involved with nuclear feed
water control.

Control at Kozloduy now involves a classic three-element system configured
for feed forward-feedback performance to control feed water flow. Dual and
triple redundant sensors and transmitters are installed to improve
reliability, matching fault tolerance in the field components.

“Operation of the steam generators within the prescribed limits is important
for plant operation, so the triple modular redundancy of Tricon9 and the 1E
certified basic software and hardware very much suited the importance of
this mission critical process control,” added Urutchev.

The new system dynamically balances steam generator inventory against steam
flow to the main turbine, feed water flow and level. Tricon pressure and
temperature control compensates for all three elements and uses an adaptive
gain control algorithm to maintain water level during steady state and
transient operation.

This control algorithm models the static and dynamic components of the
process. During low power operations such as start-up and shutdown, when
flow measurement is inaccurate and unreliable, the program uses diverse
measurements to estimate flow. Three-element control is used over the full
range of power operation, from 0-100percent and back.

In addition, the development of a plant model and simulation computer during
the course of the project allowed installation and start-up of the steam
generator water level control system without the need for post start-up
tuning.

The project also includes Wonderware InTouch-based operator interfaces. So
to review plant status, an operator simply uses the touch sensitive screen
to select and view grouped parameters. Meanwhile, multiple security levels
prevent unauthorised access to program code and/or stored data.

Triconex’s contract, which was won with the help of DICS Intertrade Limited,
also included all equipment such as transmitters, valves and wiring,
together with programming, simulation testing and project implementation
services.

So far the system has operated flawlessly and Triconex is confident that it
will win future business at the Kozloduy plant. “We are now considering
using Tricon systems in other safety-related aspects such as reactor
control, reactor protection systems, turbo generation control and total unit
control,” confirmed Urutchev.
                                    UPDATE IN UKRAINE
Building on its Bulgarian success, Invensys Nuclear has just won a major
contract from DICS Intertrade to supply four Tricon safety controllers to
the Rovno nuclear power plant at Kuznetsovsk in Ukraine.

Rovno also operates a Russian-designed WER440 PWR, which along with
14 other similar reactors provides over half of Ukraine’s electricity
output.

This contract covers the installation of a Tricon-based cold overpressure
protection system (COPS) on each of the two 400MW reactor units at Rovno.
Such protection is vital to the safe operation of PWRs, which are vulnerable
to vessel damage when below normal operating temperatures.

A COPS compares pressure and temperature inputs against a preset setpoint
curve and relieves the pressure when this setpoint is reached by opening
power-operated relief valves (PORVs). This relief is important because at
the low temperatures experienced during plant start-up and shutdown the
reactor vessel is at risk from brittle fractures.

Each of the Rovno units has two PORVs that are capable of working
independently and each will be linked to a dedicated, electrically isolated
and geographically separated Tricon controller. The four Tricons will
monitor three temperature detectors in each of six coolant loops and three
primary system pressure transmitters, opening redundant PORVs to prevent
pressure limits being exceeded.

Compared with other solutions, Invensys Nuclear says that Tricon-based
COPS applications offer great reliability, ease of online maintenance,
inherent self-test diagnostics and enhanced operator awareness.

According to the company, the accurate balance provided by Tricon technology
at Rovno will increase the coefficient of demand on the system, its
reliability and therefore its overall availability.
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http://www.engineerlive.com/power-engineer/nuclear-power/14431/eastern-european-nuclear-reactors-get-new-lease-of-life.thtml

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[return to index] [Action Ukraine Report (AUR) Monitoring Service]
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7. CASPIAN ENERGY EXPORTS AND THE BLACK SEA CORRIDOR
       Keynote speaker Romanian President Basescu spoke on “Romanian:
                           An Energy Gateway to Western Europe”

The Jamestown Foundation, Washington, D.C., Thursday, August 3, 2006

WASHINGTON, DC – On July 28, more than 250 people attended a conference
hosted by The Jamestown Foundation entitled “Caspian Energy Exports and the
Black Sea Corridor” at the Willard Hotel in Washington, DC.

The keynote speaker of the conference was President Traian Basescu of
Romania, who also gave a speech entitled, “Romania: An Energy Gateway to
Western Europe,” detailing Romania’s important role in becoming an energy
bridgehead for Caspian energy resources.

The topic was of utmost importance considering how energy supplies to
Western Europe were halted this past winter.

In part, he emphasized the growing importance of establishing alternative
shipping routes for crude oil and gas through the Caspian and Black Sea
regions given Gazprom’s recent heavy-handed treatment of energy supplies to
its neighbors both in Western Europe and in the Caucasus.

A full transcript of President Basescu’s speech can be acquired at the
following URL:
http://www.jamestown.org/docs/BasescuSpeech.pdf

This conference can be seen as a culmination of events focusing on The
Jamestown Foundation’s contributions to the discussions concerning Europe’s
growing energy dependency on Russia and the implications it has for European
energy security. In February 2006, Jamestown sponsored another conference
focusing on the Russia-Ukraine gas crisis.

The recent Jamestown conference was spearheaded by Jamestown Senior

Fellow Vladimir Socor. One of the foremost experts on energy affairs in the
Baltics, Belarus-Ukraine-Moldova, the South Caucasus, and the Caspian, Mr.
Socor has published a multitude of articles related to Eurasian energy
security.

A compilation of articles that Mr. Socor has written for Jamestown’s Eurasia
Daily Monitor, entitled “The Current Status of Petroleum Politics in the
Caspian Region,” can be found here:
http://www.jamestown.org/docs/Socor-CaspianGasArticles.pdf

Other participants in the conference included: Ambassador Steven Mann, the
Principal Deputy Assistant Secretary for South and Central Asian Affairs at
the U.S. Department of State; Lana Ekimoff, the Director of Russian and
Eurasian Affairs at the U.S. Department of Energy; Richard Ennis, the
Managing Director and Head of Natural Resources of ING Capital LLC; and
Edward C. Chow, an international energy consultant.

Founded in 1984, The Jamestown Foundation is an independent, non-partisan
research institution dedicated to providing timely information concerning
critical political and strategic developments in China, Russia, Eurasia and
the Greater Middle East.

Jamestown produces five periodic publications: Eurasia Daily Monitor,
Terrorism Monitor, Terrorism Focus, Chechnya Weekly and China Brief.
Jamestown research and analysis is available to the public free-of-charge
via Jamestown’s website, www.jamestown.org.
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8.      EBA FINDS BARRIERS TO INVESTMENT IN UKRAINE

Ukrainian Times newspaper, Kyiv, Ukraine, Monday, August 7, 2006

KYIV – The report ‘Barriers to Investment in Ukraine’ prepared by the
European Business Association (EBA) has been submitted to the Ministry
of Economy for consideration in late July.

Its purpose is to analyze major factors holding back the influx of foreign
capital into Ukraine and propose ways of overcoming barriers to investment.

Also, special attention is paid to the problem of wear and tear of
production capacities. According to observers, 60% of the capacities are
outdated.

It was pointed out at the press conference that one of the barriers to
investment was that it would take between two and three years to seek out a
plot of land and clear it legally with the authorities.

At the same time, Ukrainian legislation is unstable as 70% of businesspeople
are happy if laws are not amended for at least one year. “The legal system
requires not so much stability as predictability,” EBA Vice-President Jorge
Intriago told the press.

Participants in the press conference conceded that Ukraine was totally
lacking in an industrial estate brought up to the European standard,
compared with 93 industrial zones in the Czech Republic.

Moreover, Mr. Intriago said foreign investors felt betrayed when the former
Yulia Timoshenko government closed special economic zones.

Currently, however, if you believe deputy economy minister Liudmyla Musina,
the government rake their brains over the problem how to attract investments
together with high technologies.

She also noted that the political situation in Ukraine does not threaten the
influx of foreign investments because a relevant legal basis has been formed
already.

Data from the State Committee for Statistics shows that total foreign direct
investment volume increased by $922.5 million to $17,339.2 million in the
first quarter of this year.

The EBA is a non-profit organization bringing together about 550 European,
international and Ukrainian companies working in this country.    -30-
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9. TOURIST INDUSTRY: BRIGHT FUTURE, GLOOMY PRESENT
                  Ukraine only starts to develop its tourist industry

ANALYSIS & COMMENTARY: By Roman Bryl
IntelliNews – Ukraine This Week, Kyiv, Ukraine, Mon, July 3, 2006

According to various estimates made by government and independent
agencies the country can obtain up to USD 10bn annually from tourism

Kyiv can host up to 2-2.5mn tourists per annum and earn
USD 1.5bn. However, these figures are based on earnings of other
countries that have similar climate, geographical location and significant
cultural heritage.

At present, the country should invest billions of dollars to be able to have
such earnings. The industry is still undeveloped, but we can see some
changes that aim to improve the country’s attractiveness for tourists.
                                  Ukraine lacks modern hotels
There are at least two issues that hamper the successful development of
domestic tourist industry.
[1] The first is the lack of sufficient infrastructure (not enough hotels,
high quality highways, limited airport capacity, etc).
[2] The second issue is low level of services for tourists.

If we examine these 2 issues in detail we should say that the country lacks
premium-class hotels with large conference halls. Such hotels normally host
VIP foreign guests that come to the country for a certain international
event. The demand on such hotel was very strong last year, when the country
hosted Eurovision song contest.
                  Only 10 new hotels to be built in Kyiv this year
Local and foreign companies saw the demand for modern hotels started
investing in their construction. According to official plan of development
of Kyiv 40 new hotels with capacity of 4,300 rooms should be built by 2010.
But only 5 of them will correspond to 4-5 star level. To inform you in 2005
eleven small hotels were built with capacity 200 rooms each. Radisson SAS
Kyiv with 255 rooms was the largest project among them. This year another 10
hotels will be constructed in the capital.

It is expected that in 2006 big hotel Saint Sophie under management of Hyatt
International will be completed. The prospects of modern hotel network
development in other big cities are not so bright. At the moment the markets
there have limited capacity. We’ve got only one exception when in Donetsk.
System Capital Management built 5-star hotel Donbass palace. It is the only
hotel of such class in the eastern part of the country.
                       There are only 3 five-star hotels in Ukraine
According to Ernst&Young data there are 1,218 officially registered hotels
in the country and 3,200 sanatoriums and health rehabilitations resorts.
There are only 3 five-star hotels in the country (Premier Place in Kyiv,
DonbassPalace in Donetsk and Rixos in Truskavets water resort in Western
part of the country). Also there is only one national hotel chain, Premier
Hotels. It includes only 6 hotels.

Local investors start to spend funds for reconstruction of historical places
to boost tourist inflowNotably, local businessmen started to invest in
reconstruction of places of tourist attraction. When most such places are
restored it will increase the inflow of tourists and stimulate the investors
to build more hotels.

We’ve got already some examples when reconstruction of historical places
influenced the increase of tourist inflow. Thus national fund on restoring
architectural and cultural memorials supported personally by ex-president
Leonid Kuchma set up historical and cultural park “The Song of Igor’s
Campaign” in Novgorod-Siversky (place of birth of Leonid Kuchma).

A part of the project was the construction of 2 modern hotels. One was built
in the monastery in the centre of the park and another 4-stars hotel in the
town. It was said that the project was partially financed by billionaire
Victor Pinchuk.

On a separate note, Aval Bank participated in re-building Mikhaylovsky
cathedral and the monument to princess Olga (both in Kyiv). Billionaire
Rinat Akhmetov donated UAH 15mn to reconstruction of Sophia memorial
(one of the most ancient in the country) and UAH 1mn in Nikitsky botanic
garden (Crimea).
       State spends directly and indirectly  EUR 2.5bn annually to
                                  support tourist industry
We should say that Crimea peninsula, Carpathian mountains and Kyiv are at
present the most attractive places for tourism. At present, many local and
foreign companies started their projects in Crimea. Turkish companies are
the most active in purchasing land on the seashore of peninsula, planning to
invest more than USD 5bn in building resorts and hotels. Among local
investors only NRB Bank spent about USD 150mn in tourists projects in
Crimea.

But the industry needs at least 3 years before the actual positive changes
are seen. This is the most optimistic forecast. It is based on assumption
that the country’s investment attractiveness and macroeconomic indicator
stay at least at present level. This time is necessary to complete building
new hotels and resorts, to creating the market for qualified personnel and
optimize tourist logistics.

The state should also support the development of tourist industry by means
of financing its programs According to unofficial data the state spend EUR
2.5bn a year for various kinds of subsides to support the industry.
              Industry loses 100,000 domestic customers per year
Every year the number of people who prefers spending their vacations abroad
increases significantly. The cost of vacations in the most popular sea
resorts in Crimea often exceeds the expenditures for resorts abroad. And at
the same time the level of services is much higher on foreign resorts. The
same situation is with winter resorts.

This also indicates that it is necessary to invest in domestic tourist
industry. We witness the rise of investment in the industry today, but still
every year local market loses around 100,000 domestic customers. It will be
necessary to spend extra funds to bring their people back.
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10. RUSSIAN COMPANY TO LAUNCH HOTEL CHAIN IN UKRAINE
                    Plans to build a 20-strong mid-market hotel chain

By Chris Druce, CatererSearch.com
Sutton, Surrey, United Kingdom, Wed, 02 August 2006

MOSCOW – Russia’s Commercial Company has announced plans to
build a 20-strong mid-market hotel chain in the Ukraine.

The hotels, all in the three-star category, will cost a total of $100m
(£53m) and be built in the larger regional centres of the country.

Most will be in Crimea, where the company plans to invest in the resort area
around Alushta. A, as yet unnamed, Western consultancy will advise
Commercial Company on the project. Ukraine has a dearth of hotels priced
for the middle-class, and industry experts predict the new properties will
do well.

Commercial Company, set up in August 1999, has been in charge of all
investment initiatives of the National Reserve Corporation of Russia in the
Ukraine. The National Reserve Corporation of Russia is in turn the
non-banking asset management company of the National Reserve Bank of
Russia.                                       -30-
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http://www.caterersearch.com/Articles/2006/08/02/308107/Russian+investment+company+to+launch+hotel+chain+in.htm

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11.       NEW VILLAGE WILL SPRING UP IN KIEV REGION
 
Alexei Voskresensky The Ukrainian Times newspaper
Kiev, Ukraine, Monday, August 7, 2006

KIEV – A new village of Chervona Kalyna (“Red Cranberry”) will spring up

near the town of Vyshgorod, Kiev region, by 2008. Plans are in hand to build
65 cottages within the area of 6.5 hectares.
 
Occupying 120-160 square meters, each one-storied house with the attic is
designed for both permanent residence and vacations. The first 30 cottages
will be completed in June 2007 and the rest of them in summer of 2008. The
value of the houses ranges between $700 and $1,000 per sq.m.     -30-
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12. UKRAINE’S GAS CHIEF SAYS GAS PRICE IS BOUND TO GROW
INTERVIEW: With Oleksandr Bolkisev, Head of State Run
Naftohazs Ukrayiny oil and gas company
By Roman Kulchynskyy, Kontrakty, Kiev, in Russian 31 Jul 06; pp 8-12
BBC Monitoring Service, United Kingdom, Wednesday,Aug 03, 2006

The head of Ukraine’s state-run Naftohaz Ukrayiny oil and gas company,
Oleksandr Bolkisev, has said that natural gas will inevitably become more
expensive for Ukraine. Speaking in an interview, he did not give an exact
figure because of the complex nature of the negotiations process.

Bolkisev said much depended on Ukraine’s relations with Turkmenistan. He
said there was currently no question of transferring Ukraine’s gas transport
network over to Russian ownership. However, Ukraine needs Gazprom’s
participation to develop its network of gas pipelines, he said.

Bolkisev said Ukraine has enough gas to see through the winter without any
problems and he denied that Naftohaz is on the verge of bankruptcy.

The following is the text of the interview with Bolkisev by Roman
Kulchynskyy entitled “The Turkmen gambit: Chairman of the Naftohaz Ukrayiny
board Oleksandr Bolkisev maintains that this year Turkmenistan has not
supplied Ukraine directly with a single cubic metre of gas”, published in
the Ukrainian business weekly Kontrakty on 31 July; subheadings have been
inserted editorially:
               RELATIONS WITH RUSSIA AND UKRAINE’S

                                 GAS TRANSPORT SYSTEM 
[Kulchynskyy] As soon as you were appointed you said that the idea of
setting up a consortium with the Russians to run the Ukrainian gas
transportation system [GTS] was worth considering. Were you serious?

[Bolkisev] I was talking about taking part in a consortium as one of three
possible mechanisms for ensuring a period of transition towards economically
based gas prices. The transition period from subsidized prices to market
prices is of great importance in Ukrainian-Russian gas relations.

Ukraine needs a delay in order to prepare the domestic market and consumers
for world prices. At the same time, I emphasize that we can only have equal
relations with Russia when we transfer to market prices for fuel.

We are now living in a situation of permanent mutual concessions, sometimes
economic and sometimes political. And, to be frank, we have had to consider
what possibilities there are for prolonging the transition period of price
concessions from the Russian side.

One such possibility is to give practical content to the already created
consortium to run the GTS in the area of constructing new gas pipelines to
increase transit capacities. I would like to stress that there is no
question of transferring the GTS into Russian ownership.

[Kulchynskyy] So what is the question?
[Bolkisev] Taking decisions on the possible principles of administration in
the broader sense is not part of the remit of the state-owned Naftohaz
Ukrayiny company. It is the central bodies of legislative and executive
power who must take such a decision.

[Kulchynskyy] Can you make it clear, what sort of plan for running the GTS
is Gazprom proposing?
[Bolkisev] I don’t want to talk about this plan in detail, because according
to current Ukrainian legislation, the GTS can only now be under state
control. Moreover, we must define the term “control” in practical terms,
because at the moment none of the three proposed options for running the GTS
can be implemented for one reason or another.

Generally speaking, the question of creating a consortium stands alongside
another major issue – are intermediaries necessary in supplying Russian gas?
As head of Haz Ukrayiny (a subsidiary of Naftohaz Ukrayiny – editor), I said
more than once that the Swiss-owned RosUkrEnergo company and the
UkrGazEnergo joint venture, which was constructed with its participation,
were a very serious concession on Naftohaz’s part.

I still stick to what I said, but I realize that creating the joint venture
gave our economy a transition period from preferential gas prices to market
prices. From that point of view, the existence of the joint venture has to a
certain extent been justified.

[Kulchynskyy] At the beginning of the year [Prime Minister] Yuriy Yekhanurov
promised Kontrakty that the government would not give up a single metre of
the Ukrainian GTS to Gazprom until the Ukrainian economy was ready for world
gas prices. What is stopping you adhering to this policy now?
[Bolkisev] I agree with the prime minister’s logic. The question now is, who
will allow time to prepare Ukrainian enterprises for the price increase? The
cost of fuel will grow, and this will inevitably lead to an increase in
domestic prices. We cannot hide the problem which the consumers will
inevitably face.

By holding back prices we are bestowing a doubtful benefit on the economy.
If we raise prices gradually we will avoid a shock price hike and give
consumers the chance to adapt to the new conditions. As far as the GTS is
concerned, then Russia is expecting a clear message from Ukraine about our
intentions.
                                 WORKING WITH GAZPROM 

[Kulchynskyy] So what is your message to Gazprom?
[Bolkisev] Gazprom is expecting a formulated position on the consortium not
from the Naftohaz management, but from the government, the president and
parliament. This position has been clearly formulated.

We have a vested interest in increasing the throughput capacity of the GTS
by means of the Bohorodchany-Uzhhorod sector and in the construction of the
new Aleksandrov Gay-Novopskov-Uzhhorod gas pipeline. In my view, these
intentions will meet with the approval even of the most radical patriots.

The Russians have the money to do the construction work and they have the
gas which can then be transported through these sectors. Without Gazprom’s
participation, all these projects make no sense, because without gas the
pipes will be empty.

[Kulchynskyy] With whom, apart from Gazprom, will you be discussing the
conditions for creating this consortium?
[Bolkisev] Gazprom is not against third parties joining the consortium. The
most realistic partner is the German Ruhrgaz company. Its representatives
are currently having talks with us. As far as I know, the Germans have not
had any talks lately with Gazprom. Turkmenistan, for example, may also join
the consortium. We are talking, first and foremost, about developing and
expanding the GTS not just in Ukraine, but beyond the country, too.

[Kulchynskyy] The Gazprom deputy chairman, Aleksandr Medvedev, said that the
gas price for Ukraine would be increased from the second half-year of 2006.
In July, members of our government maintained that the price would not
change until 2007. Did the Russians believe that the idea of the consortium
would be carried through?
[Bolkisev] No. Ukraine’s price for ensuring a transit period was the
creation of a joint venture with the participation of RosUkrEnergo. The
appearance of this joint venture on the Ukrainian market helped to maintain
a preferential price – 95 dollars for 1,000 cu.m. of gas.

[Kulchynskyy] For what period did Ukraine receive a price deferment?
[Bolkisev] At least until the end of 2006, although the contract between
RosUkrEnergo and the joint venture (in other words, UkrGazEnergo) was for
five years.

[Kulchynskyy] Why do you think 95 dollars per 1,000 cu.m. of gas is a
preferential price when Ukraine provides the Russians with a preferential
price for transit?
[Bolkisev] I head Naftohaz Ukrayiny and I inherited what I have. Yes, there
could have been a different logic in the development of relations with
Russia. If we had agreed to a gradual price increase, then one of the
arguments in favour of this could have been a transport tariff. All this had
to be reflected within the framework of annual inter-governmental protocols.

But it should be remembered that a transit tariff must be economically
based. We cannot increase it arbitrarily by reacting to an increase in gas
prices. In the European Energy Charter there are mechanisms for forming
tariffs for gas transportation. In order that we can increase the price of
transit services properly and appropriately, we had to carry out a number of
complex organizational measures.

[Kulchynskyy] What measures precisely?
[Bolkisev] For example, to re-appraise capital stock. It is currently
believed that the carrying book value of the Ukrainian GTS is 9bn hryvnyas
[about 1.8bn dollars].
International auditors (and we called in two companies to do the checking)
value the GTS at approximately 18bn dollars. If we had conducted an official
reappraisal of the value of the GTS, we would have received quite different
depreciation charges, which would have substantially influenced the
rationalization of the transit tariff.

[Kulchynskyy] What will be the guide price for gas for Ukraine, starting
from 2007?
[Bolkisev] To talk about price guidelines for 2007 would be tantamount to
guessing. Whatever price conditions we are able to get, the price on the
domestic market will increase.

Even if we are able to maintain a price of 95 dollars per 1,000 cu.m. (and I
don’t rule out this option), domestic prices will have to go up to prevent
Ukrainian consumers from being blackmailed by the sharp hike. We have gas
price calculations which we shall be proposing to the government and the
NERC [National Electricity Regulation Commission].

It is time to do away with talk about the Ukrainian market being subsidized
and gas prices being preferential, and so, Ukraine must make some
concessions, including the question of running the GTS.

[Kulchynskyy] What is the tentative price for gas for Ukrainian industry?
                             CONTRACT WITH TURKMENISTAN
[Bolkisev] If I gave you a figure I would risk tilting the balance in the
complex negotiations process with the gas suppliers to our disadvantage. The
specific nature of the talks is such that the one who makes the first move
and names an acceptable price (or a critical one) usually ends up the loser.

All I can say is that Ukraine’s relations with Turkmenistan will not play
the last role in fixing the price. The validity of the Russians’ contracts
for Turkmen gas supplies this year expires in the third quarter. Gazprom has
clearly defined price parameters in its hands, but there are no obligations
on Turkmenistan for gas supplies in the fourth quarter. We have a contract
with Turkmenistan for this year, but it is not being fulfilled.

[Kulchynskyy] Is the contract with Turkmenistan not being fulfilled because
of Ukraine’s debt?
[Bolkisev] The failure of Turkmenistan to fulfil its obligations has nothing
to do with our debt to them. We have almost cleared the debt, which amounted
to about 300m dollars at the beginning of 2006, and is now about 60m
dollars. This is not monetary debt but goods debt. We have already signed
all the necessary documents on the supply of goods to clear this debt.

By October we shall have completely fulfilled our obligations and we shall
start the fourth quarter without any debts towards Turkmenistan. So far
Ukraine has not received a single cubic metre of gas from Turkmenistan on
direct contract, whereas Russia has received and will receive before the end
of the third quarter the gas it is contracted to receive, i.e. 30bn cu.m.

[Kulchynskyy] Your predecessor – Oleksiy Ivchenko – said quite the opposite.
[Bolkisev] I want to emphasize that this year we have received Turkmen gas,
like other Central Asian gas, only via RosUkrEnergo. Gazeksport (a Gazprom
subsidiary – editor) has been selling this company its own Turkmen gas, so
that it can ensure Ukraine’s balance via the UkrGazEnergo joint venture.

Incidentally, Mr Medvedev spoke to you about this in his interview. I hope
that in the fourth quarter Turkmenistan will supply gas to Ukraine. At the
moment our Turkmen partners are trying to raise the price for gas for us and
for Gazprom. Russia is insisting that Turkmenistan fulfil its commitments in
price parameters, which were agreed in the contract. We are also trying to
get Turkmenistan to fulfil the contract within the agreed price parameters.

But this doesn’t mean that we and Gazprom have agreed on joint action
against Turkmenneftegaz [Turkmen oil and gas company], it is just that at
this stage our interests have coincided.

[Kulchynskyy] What are the chances that Ukraine will receive Turkmen gas in
2007 without intermediaries?
[Bolkisev] This year the situation has not changed – we have no contract
with Turkmenistan, whereas the Russians have, but, as a year ago, the price
at which they will get their gas has not been agreed. This makes us equal.

The fact that Gazprom has a contract with Turkmenistan without a fixed price
does not guarantee gas supplies 100 per cent. Moreover, Turkmenistan has a
contract for the supply of about 30bn cu.m. of gas to China. Of course, our
Turkmen partners will choose contracts which are more to their advantage,
from both the economic and political points of view.

One way or another, Turkmen gas will flow towards Ukraine. I believe that we
and the Russians should avoid competing for a contract with Turkmenistan.

[Kulchynskyy] If Turkmenistan has not supplied gas to Ukraine in 2006, then
by what formula was the price of gas for Ukraine calculated?
[Bolkisev] The formula is Gazprom’s business. I can confirm that
RosUkrEnergo is supplying Ukraine with all the gas which we import. We have
no direct contracts with Gazprom, but we know that RosUkrEnergo sells us
Russian gas as well.
                     NO PROBLEMS WITH WINTER SUPPLIES 
[Kulchynskyy] What brought about the problems with filling the gas storage
tanks?
[Bolkisev] There have been problems, but they are being resolved. According
to a plan, which is being implemented, we must pump about 16bn cu.m. of gas,
which will enable us to accumulate 23.4bn cu.m. of active gas in the tanks.

This amount will help us to get through the winter without problems. At the
same time, in order to ensure the reliability of Russian gas supplies to
Europe, if we have a repeat of last year’s extreme frosts, we need a reserve
supply of another 2bn cu.m. of gas, and we have made this clear.

Two problems are linked with this question. The first: because of the heavy
frosts in the first quarter of this year we consumed 2bn cu.m. of gas more
than we planned.

The second: because of the delay in UkrGazEnergo entering our market, the
schedule of gas supplies was somewhat disrupted. Now, after our meeting with
Fuel and Energy Minister Ivan Plachkov and Gazprom chief Aleksey Miller, we
agreed to pump 1.5bn – 2bn cu.m. of gas into the storage tanks. Russia, in
turn, will seek a resources base.

[Kulchynskyy] At what price are Ukrainian industrial enterprises currently
buying gas?
[Bolkisev] 108.5 dollars per 1,000 cu.m., not counting VAT and
transportation costs.

[Kulchynskyy] What profit will Gaz Ukrayiny make this year?
[Bolkisev] At the present moment the company is non-profit-making.

[Kulchynskyy] What share of the industrial consumer market is the subsidiary
left with now that UkrGazEnergo has entered it?
[Bolkisev] Not a lot. Mainly small enterprises to whom Gaz Ukrayiny sells
fuel via the regional gas companies. Virtually 100 per cent of the market is
controlled by the new joint venture, but the situation could change with
time.

[Kulchinskyy] But in the beginning the government decided that the joint
venture would receive a licence from the NERC for the supply of only 5bn
cu.m. of gas. Why have these conditions changed with time?
[Bolkisev] Answering that question is outside my remit.
                               NAFTOHAZ “NOT BANKRUPT|” 
[Kulchinskyy] If the joint venture controls the more profitable segment of
the Ukrainian gas market, then Naftohaz must be on the verge of bankruptcy?
Is that right?
[Bolkisev] The rumours about Naftohaz’s bankruptcy have been strongly
exaggerated. Companies which are of strategic importance to the state cannot
be bankrupt by definition. Yes, there is a crisis, and it was caused by the
challenges we faced at the beginning of the year, because we signed the
agreements on 4 January.

Recently, we presented to the government a plan for a way out of the crisis
and we are not hiding it from our creditors who continue to work with us. No
problems have arisen with the serious international financial institutions.
From 1 June we raised the price of gas to the population and district
heating supply enterprises.

This move will enable us to make up the losses we sustained in the first
quarter when we imported 16.5bn cu.m. of gas at a price of 95 dollars per
1,000 cu.m. Among other things, this gas went towards meeting the demands of
the population and the district heating supply companies, which bought it
cheaper than it cost on entry into Ukraine.

But even after the price increase, the annual financial result will not be a
positive one, and we hope to be in profit in the first quarter of 2007. The
population demands 20bn cu.m. of gas – this is quite a demand to make the
retail gas trade a profitable business.

[Kulchynskyy] You were taking about a plan to reduce Naftohaz’s investment
projects. What projects are you talking about?
[Bolkisev] First and foremost, those we are marketing abroad. I can’t say
which ones precisely, this is also to do with costs which we are trying to
minimize.

In Ukraine we shall be concentrating on the most lucrative long-term gas
deposits, and only after we find they are profit-making will we move towards
developing others. Of course, the development of the Black Sea deposits is
one of the priority projects.

[Kulchynskyy] What sort of profit will UkrGazEnergo be making this year?
[Bolkisev] All we have are preliminary results which we need to clarify. I
estimate their profits at roughly 90m dollars. The dividends will be
allocated based on the yearly results and Naftohaz has the right to 50 per
cent of the total cost. I hope that nothing will stop us taking advantage of
this right.

[Kulchynskyy] The former head of Naftohaz, Oleksiy Ivchenko, said that he is
working towards freeing UkrGazEnergo from having to pay VAT on imports. Do
you support your predecessor’s idea?
[Bolkisev] At the moment both Naftohaz and UkrGazEnergo pay VAT on imports –
20 per cent of the price. We are trying to make sure that in 2007 a zero
rate is returned to Naftohaz. As far as UkrGazEnergo is concerned, that is
its affair.

[Kulchynskyy] Will you be able to remove the join venture’s head, Ihor
Voronin?
[Bolkisev] No, not without a joint decision with the Russian side. But
Voronin is a Ukrainian citizen, and he, I hope, will behave in the
appropriate manner in this post.

[Kulchynskyy] Prime Minister Yekhanurov admitted that Voronin has special
relationships with Gazprom. What are they, in particular?
[Bolkisev] Voronin is the best person to answer that question.

[Kulchynskyy] Will Naftohaz be selling gas to third countries?
[Bolkisev] Along with the Poles, we own a small distribution system in their
country, and according to the conditions of cooperation, we provide gas for
local consumers. But these are tiny amounts – about 5m cu.m.

[Kulchynskyy] RosUkrEnergo’s co-owner Dmytro Firtash has spoken of his
intention to build another gas pipeline from Russia to Ukraine in order to
provide enterprises in the Donbass with gas. Do you support this project?
[Bolkisev] I know nothing about any plans of Mr Firtash to build another gas
pipeline. I believe that current capacities are sufficient to ensure gas
supplies to eastern Ukraine.

[Kulchynskyy] How much will petrol go up in the near future?
[Bolkisev] Fuel prices will go up according to the price of oil.
———————————————————————————————–
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13.                         BORDERLAND SPLIT

 

COMMENTARY: By Mark Von Hagen, The Wall Street Journal
New York, New York, Tuesday, August 8, 2006

Fifteen years after Ukraine’s surprise birth, the struggle continues over
its place in the world. The Orange Revolution of 2004 didn’t settle it. Nor
did this spring’s parliamentary elections.

Last week, following four months of political paralysis, brought the
surprise return, as prime minister, of pro-Russian politician Viktor
Yanukovych, whose attempt to steal the 2004 presidential elections sparked
the Orange uprising.

The country was, and is, split along multiple registers — regional and
generational, linguistic and cultural, though not, as some mistakenly claim,
ethnic. Perhaps the most serious divide is between Ukrainians who see their
future with Russia and an economy dominated by the state and its oligarchs,
and those who see it moving closer to the West.

The first group finds powerful allies in Russia that want the two Slavic
countries brought closer together again; this is Mr. Yanukovych’s electoral
base. The second sees a wholly sovereign Ukraine tied to Europe, and
continues to back Orange Revolutionaries like President Viktor Yushchenko
and former Prime Minister Yulia Tymoshenko.
                      SLAVOPHILES AND WESTERNIZERS
A major battleground is history. The “reintegrationists” think that
Russians, Ukrainians and Belarusans are fated again to live in a single
Slavic Christian Orthodox state. This view of the past has its origins in
imperial Russia, and insists that the medieval state of Kievan Rus in the
10th through 13th centuries was the birthplace of Russian civilization and
Moscow its rightful heir.

During the last century, communist ideologues in Moscow and Kiev recast this
argument as “the great friendship of peoples”; Russians were “elder
brothers” to all the other non-Russian peoples, above all the Ukrainians and
Belarusans.

Much as the the current-day Slavophiles lay claim to history for political
purposes, so do those in Ukraine — and the few Westernizers in Belarus — 
who want to build democratic, sovereign nation-states and get close to
modern Europe.

Here the common past shared with Poland and Lithuania, now in the elite
European clubs, is emphasized while the Russians are portrayed as invaders
and illegitimate occupiers.

For this project to succeed, the histories of Ukraine and Russia have to be
disentangled in order to claim a separate existence for the Ukrainian nation
even under Moscow’s rule.

This “nationalization” of the past was well under way at the dawn of the
20th century. Myhailo Hrushevsky, the father of modern Ukrainian history,
became the father of the modern Ukrainian state when he was elected head of
the Central Rada, or parliament, in 1917. The Bolsheviks soon ended this
brief experiment in self-rule.

During an early wave of Stalin-era repressions, Hrushevsky was arrested and
exiled to Moscow and died, in 1934, in mysterious circumstances. There was
no place for such an advocate of Ukraine’s independence or even autonomy.
Stalin drove the “renationalization” project underground and into the
Ukrainian diaspora.

That’s where it stayed until the second breakup of the Russian empire in
1991, the year an independent Ukrainian state resumed life with full force.

Today one of Kiev’s central boulevards, on which sit the Ukrainian
parliament and main government building, is named after Hrushevsky. A
monument to him stands in front of the Pedagogical Museum that housed the
1917 Rada government and across the street from the Ukrainian National
Academy of Science.

Other figures from the Ukrainian past — the Kievan Princes Volodymyr and
Yaroslav, Cossack Hetmans Bohdan Khmelnytsky and Ivan Mazepa, the poet

bard of the Ukrainian nation Taras Shevchenko and 20th-century hetman Pavlo
Skoropadsky — are similarly honored in a not-so-subtle effort to retell the
story of Ukraine’s past.

Many Ukrainians dealing with their messy history today are tempted to claim
that the nation was always so — characterized by primordial and unchanging
traits.

This idea, implied in Hrushevsky’s work, originated with another
19th-century Ukrainian intellectual, Mykola Kostomarov. It tries to explain
how “Ukraine” withstood world wars, occupations, terror, deportations,
famine, nuclear contamination and other plagues and stayed purely Ukrainian.

Just as the Russian imperialists distorted Ukraine’s past for their own
political ends, the new nationalists are guilty of a similar sin.

The major stumbling block in their attachment to the “primordial” Ukrainian
theory is the fact of history. Nothing close to a “pure” genetic pool, rare
enough in any place, could have possibly been preserved on such a large and
diverse territory occupied by a host of invaders who intermingled with the
local population.

Mongols, Poles, Russians, Crimean Turks, Germans, Austrians, Hungarians and
Romanians, to name a few, passed through contemporary Ukraine and left their
mark, genetic included. Add to this violent history the collective biography
of millions of Jews who lived there — under Polish, Austrian and Russian
rule — and those who resettled in Ukraine after feeling serfdom in Russia.

It’s hard to imagine who or what this genuinely primordial Ukrainian might
be. Reducing national identity to biology is an insult to millions of
Ukrainians.

Throughout its history, Ukraine the place and the idea has been located at
the frontiers of powerful Eurasian empires and states. Its “borderland”
characteristic shaped such key social institutions as the Cossacks, who
built a state in the 17th century that was distinct from both an ascendant
Muscovite autocracy to the northeast and the declining constitutional
monarchy of Poland-Lithuania to the west.

The Greek Catholic, or Uniate, Church also could have taken root only in a
borderland, which is what the word Ukraine literally means. Since the Union
of Brest in 1569, Greek Catholics practice the Byzantine rite (largely the
same as the Orthodox Christians) but acknowledge the Roman Catholic pope as
their spiritual leader.

The religious communities of the Greek Catholic Church confronted frequent
persecution by both Roman Catholic (mostly Polish) and Orthodox (mostly
Russian) churches, but emerged in the 20th century as advocates for
ecumenism and reconciliation of eastern and western Christianity.

The borderlands were also, importantly, multiconfessional and multinational.
So the history of Ukraine’s people is shared with the history of Poland,
Russia, Israel and other states. Certainly, this diversity contributed to
very bloody interethnic conflict, above all in the last century. But this
diversity also forced intellectuals to grapple with the dilemmas of
intolerance and inequality.

Some concluded that ethnic purity and violence were the solution; that
included the Ukrainian Dmytro Dontsov and a Jewish counterpart from Odessa,
Vladimir Zhabotinsky, one of the spiritual fathers of modern Israel. But the
mainstream of Ukraine’s intellectual life has more often embraced diversity
and tried to work out models for peaceful and productive coexistence and
even cooperation.
                                   EMPIRES’ CHILDREN
To address the argument that Ukraine differs little from Russia, one must
take a trip to Moscow and Kiev. The differences, which have emerged most
clearly in the past 15 years, are not merely expressions of separate
“national character.” Compare the relatively pluralist religious situation
in Ukraine with the hegemonic power of the Orthodox Church in Russia.

In politics, Ukraine from the beginning of its independence embraced a
parliamentary system that allowed a strong opposition to take root. Not so
in Russia. As the previous and allegedly pro-Kremlin President Leonid
Kuchma, who left in disgrace in 2004, pointed out, Ukraine is not Russia.
It’s also not Poland or Belarus.

Many of Ukraine’s current divisions are legacies of the rival occupations
that shaped its distinctive regions. Western Ukraine — today’s Galicia and
Bukovyna — is historically tied to Poland, Lithuania and Austria-Hungary,
whereas the south and east of the country — the homeland of the Cossacks — 
for centuries have been in the Russian or Soviet, as well as the Ottoman
empires.

Today’s Ukraine lies at a new borderland between the European Union and
NATO, which leave open the door for Ukraine’s membership, and Russia and

its allies in the former Soviet empire, which carry the powerful carrots (and
sticks) of oil and gas. President Yushchenko tries to put Ukraine on the
European track.

The new Yanukovych government may want to veer the country back toward
Moscow. Neither man will have an easy time of it. Ukraine’s distinctive
history, and the shadows it casts on the present and future, refuses to put
the country firmly in the East or West, but somewhere in between.
————————————————————————————————
Mr. von Hagen is Boris Bakhmeteff professor of Russian and East European
studies and chair of the history department at Columbia University.
———————————————————————————————–
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========================================================
14. FACTIONS INVEST HOPE IN A MARRIAGE OF OPPOSITES
                   Ukraine’s passage to becoming a “normal” economy
                           and society is likely to be long and bumpy.

ANALYSIS & COMMENTARY: By Quentin Peel, Columnist
Financial Times, London, United Kingdom, Saturday, August 5 2006

It has taken four months of fraught, inconclusive and – for Ukraine’s
friends and neighbours – often infuriating negotiations to produce a
Coalition of National Unity to rule in Kiev.

By bringing together the parties of Viktor Yushchenko, the president who was
co-leader of the Orange Revolution in January 2005, and Viktor Yanukovich,
the Russian-speaking rival whom he defeated in bitterly contested elections,
it looks like a marriage of opposites with little chance of survival.

Yet it may prove the most stable solution for a country that is bitterly
divided between the factions they represent.

The deal they have done will leave all the major economics ministries in the
hands of Mr Yanukovich’s Party of the Regions and all the principal “power”
ministries, such as defence, foreign affairs and the interior, controlled by
Mr Yushchenko’s Our Ukraine.

It is a pragmatic solution that recognises the reality that the president is
responsible for defence and foreign policy, whereas Mr Yanukovich’s party
emerged from parliamentary elections last March as the single largest.

On the face of it, the deal would appear to mark the end of the Orange
Revolution, in which the nationalist parties led by Mr Yushchenko and Yulia
Tymo-shenko, his more populist and charismatic rival, joined forces on the
streets to force the old regime – represented by Mr Yanukovich – from power.
Ms Tymo-shenko will now be in effect leader of the opposition.

Yet in economic terms, the new coalition brings together two parties that
might both be described as “liberal-conservative”, pro-business and
pro-privatisation, whereas Ms Tymoshenko is more of a social liberal or
social democrat.

The third party in the new government, the Socialists, are ex-communists who
still oppose privatisation and excessive deregulation in the economy, but
their votes are not necessary to keep the new government in power, as they
would have been for a Tymoshen-ko-Yushchenko coalition.

Anders Aslund, senior ­fellow at the Institute for International Economics
in Washington and a long-time observer of post-Soviet Ukraine, believes the
outcome is “about as good as anybody could have hoped for”.

The coalition represents a “strategic realignment” between the unacceptable
alternatives of an all-western “orange” coalition and an all-eastern
Russian-speaking alliance, he argues in a commentary for the Centre for
European Reform.

“National tensions have been resolved,” he says. “This is quite an
impressive outcome of the negotiations, and there is good hope that this
alliance will hold.”

Another natural assumption is that Moscow would be pleased at the outcome,
getting the Russian-speakers of eastern Ukraine into power and in control of
the Ukrainian economy.

Mr Aslund argues the opposite: that Mr Yanukovich and his most important
supporter, Rinat Akhmetov, Ukraine’s richest oligarch with vast interests in
metals and energy, see Russian interests as their greatest economic
competitors. If anything, they will be protectionist in their policies,
seeking to restrict Russian access to the Ukrainian economy.

On the other hand, the US administration is also likely to be disappointed.
President George W. Bush and Donald Rumsfeld, his defence secretary, have
both been pushing the Nato alliance to open the door to Ukraine at its Riga
summit in November, by starting a “membership action programme”.

Although the new coalition agreement calls for “mutually beneficial
co-operation with Nato”, a concession by Mr Yanukovich, it seems unlikely
that Kiev will request any such programme in the near future. The partners
have agreed to hold a referendum before giving the green light to Nato
membership, and popular opinion is hostile.

Mr Yushchenko has prevailed in keeping open negotiations for a free-trade
zone with the European Union, while Mr Yanukovich has a vague commitment to
support Moscow’s favoured “single economic space” with Russia and Belarus.

Whether the new government can make significant headway in rooting out the
corruption that bedevils commercial and daily life in Ukraine is more
questionable. Oligarchs such as Mr Akhmetov are keen to get firm property
rights and a clearer rule of law, to protect assets acquired in the
post-Soviet chaos. But corruption scandals, Mr Aslund believes, will
continue to dog the political system.

Ukraine’s passage to becoming a “normal” economy and society is likely
to be long and bumpy.                             -30-
——————————————————————————————–
AUR FOOTNOTE: Quentin Peel is international affairs editor of the
Financial Times. He is also an associate editor, responsible for leader
and feature writing, and has a foreign affairs column, which appears
every Tuesday.
——————————————————————————————–
http://www.ft.com/cms/s/d474f09c-241e-11db-ae89-0000779e2340.html

———————————————————————————————–
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
========================================================
15.         UKRAINE’S NEW GOVERNMENT: DARK BLUE,
                 PALE ORANGE, SOME PINK, TOUCH OF RED
                   Ukraine’s new government: composition and politics

ANALYSIS AND COMMENTARY: By Vladimir Socor
Eurasia Daily Monitor, Volume 3, Issue 153
Jamestown Foundation, Wash, DC. Tuesday, August 8, 2006

The mere fact that Ukraine finally has a cabinet of ministers since August 4
is an achievement after a seven-month vacuum. (The outgoing cabinet had
been dismissed by parliament in January, continued as a powerless caretaker
beyond the March elections, resigned officially in May both collectively and
at the level of individual ministers, and limped on without proper legal
authority.)

Prime Minister Viktor Yanukovych’s new cabinet includes ministers nominated
by President Viktor Yushchenko, the Socialist Party, and the Communist
Party, alongside a preponderance of ministers from Yanukovych’s Party of
Regions, which is the “Donetsk clan’s” political vehicle.

This cabinet is top-heavy with officials who personified the corrupt fusion
of business interests with the government and the manipulation of elections
before the short-lived Orange period. Thus, Yanukovych’s government marks
a return to power not just of the Party of Regions, but to a certain extent
of the phenomenon of Kuchma-ism and some of its personalities.

Their antecedents do not necessarily or fully presage their conduct in the
new government (just as the coalition’s National Unity Declaration is no
guide to the government’s policy — see EDM, August 7). However, those
antecedents suggest that the Yanukovych government is ill equipped to lead
Ukraine toward democratic institution building — the unfulfilled Orange
mission.

The Verkhovna Rada approved the cabinet’s composition at an agitated session
with 269 votes in favor out of 450, the balance not voting or voting
against. The Yulia Tymoshenko Bloc voted solidly against this cabinet, with
only six deputies bolting from the bloc to vote for the new government.

Despite Yushchenko’s final deal with Yanukovych, only 30 of Yushchenko’s
Our Ukraine deputies voted for the new government, while 51 of them
variously refused to vote or voted against. This action reveals that Our Ukraine’s
majority disapproves not only of the cabinet’s composition but also of the
president’s actions.

The Party of Regions holds the first deputy premiership and all three deputy
premierships, in addition to the prime minister’s post. First Deputy Prime
Minister and concurrently Finance Minister Mykola Azarov had earlier
exemplified the selective and arbitrary use of taxation while serving as
head of the State Tax Administration and Finance Minister during the Kuchma
era.

Deputy Prime Minister Andriy Kluyev, now in charge of the energy sector,
is among Ukraine’s wealthiest businessmen as well as former minister, in a
political system that has yet to internalize the notion of conflict of
interest. Azarov and Kluyev are personally close to the Party of Regions’
most influential decision maker, Renat Akhmetov (formally number seven
on the party’s slate of deputies).

Another deputy prime minister, Dmytro Tabachnyk, the former head of
Leonid Kuchma’s presidential administration, helped coordinate the use of
“administrative resources” in presidential and parliamentary elections
during that period. He has meanwhile reincarnated as a Crimean deputy.

The third deputy prime minister and concurrently construction minister,
Volodymyr Rybak, is also a veteran Kuchma-era office holder. The Minister
of the Cabinet of Ministers, Anatoly Tolstoukhov, is also a throwback to
that period, when the cabinet’s resources and property were used in the

interest of power holders with little public accountability.

The new fuel and energy minister, Yuriy Boyko, headed the state oil and gas
company Naftohaz Ukrainy during the first Yanukovych government (November
21, 20002, to January 5, 2005) and is one of the principal figures who
brought the notorious RosUkrEnergo gas company into Ukraine in August 2004.

The Party of Regions has also appointed the ministers of economy, of the
coal industry, of labor, of the environment, and for ties with parliament

The Socialist Party retains the Transport Ministry and Education Ministry as
in the predecessor government and for the same two incumbents. The party
reckons to retain the chairmanship of the State Property Fund as well, based
on an informal understanding with the Party of Regions.

The unreconstructed Communist Party has entered the government thanks to the
Party of Regions. The Communists have appointed Agricultural Policy Minister
Yuriy Melnyk and Industrial Policy Minister Anatoliy Holovko based on the
party’s coalition quota.

Melnyk was the predecessor government’s deputy prime minister responsible
for agriculture, nominated by the Socialist Party, which opposes the
privatization of land, as does the Communist Party. Meanwhile, the
nonbinding National Unity Declaration envisions “putting land into economic
circulation” by September 2008.

Yushchenko had hoped in vain to be spared the embarrassment, to himself and
his ministers, of accepting Communists in the coalition. The Communist Party
had barely passed the 3% threshold to enter the parliament, holds only 20
seats, is not needed for forming a numerical majority, and cannot make any
serious trouble within parliament or outside, having lost almost all
influence on society. In fact, the Party of Regions has seamlessly inherited
the lion’s share of Communist votes in eastern Ukraine.

Thus, appeasement or cooptation of the Communists was unnecessary. However,
the Party of Regions needs the Communist group of deputies as a watchdog on
the pro-presidential Our Ukraine as well as a reserve of votes for Regions
within the coalition. Communist leader Petro Symonenko has promptly and
snarlingly announced his readiness to play that role.

With the Communists inside the coalition, the Party of Regions will be less
dependent on pro-presidential deputies for approval of decisions, and by the
same token the pro-presidential group will be limited in its leeway to
oppose decisions it may not like.

Yushchenko has re-appointed Minister of Foreign Affairs Borys Tarasyuk
(Rukh), Defense Minister Anatoliy Hrytsenko (non-party), and Internal
Affairs Minister Yuriy Lutsenko (hitherto Socialist) to those same posts and
will also appoint the security service chief and prosecutor-general, all
within the presidential quota under the amended constitution.

In addition, as part of the deal with Regions, Yushchenko has managed to
obtain the ministerial posts at justice, health, family and sports, culture,
and emergency situations and Chernobyl cleanup for the Our Ukraine bloc.

Tarasyuk and Hrytsenko are determined to pursue a Western orientation under
the president’s political authority and constitutional prerogatives to set
the course of foreign and defense policies. Meanwhile, the majorities in the
cabinet and parliament seem set to ponder a return to the Kuchma era’s
two-vector policy.

The incoming Justice Minister, Roman Zvarych of Our Ukraine, served in that
same post for some months in 2005, until he was found to lack a law degree
and to have misrepresented his degree in another field of study. Despite the
ensuing scandal, Zvarych retained Yushchenko’s trust and helped negotiate
the deal with Regions.

At the moment, Zvarych calls for substantially expanding the powers of the
secretary of the National Security and Defense Council, a presidential
appointment, giving him the right to vet government decisions. The proposal
may well be designed to prepare a return of Zvarych’s current political
patron, Petro Poroshenko, to that post, which he held in 2005.

Lutsenko reported sick and did not attend the voting in parliament that
confirmed him as internal affairs minister. He had warned repeatedly that he
was not going to be part of a Yanukovych government, and quit the Socialist
Party in July as a protest against the deal party leader Oleksandr Moroz cut
with Yanukovych.

In the run-up to the August 4 parliamentary vote, Lutsenko publicly
denounced as “forgery” the court documents that purported to rescind
Yanukovych’s two criminal convictions as a youth in Donbas. As minister in
2005-2006, Lutsenko had aggressively targeted some prominent Donetsk
figures for anti-corruption investigations.

Also on August 4, the Verkhovna Rada approved with 274 votes in favor (of
307 deputies in attendance, out of the 450 total) changes to the law on the
Constitutional Court.  Yushchenko immediately signed this bill into law.

Under the changes, the Court does not have the right to review the
constitutionality of the December 2004 amendments that have transferred
some presidential powers to the parliament and the prime minister.

With this development, Yushchenko loses the opportunity to appeal to the
Constitutional Court for rescinding the December 2004 amendments. Until now,
Yushchenko had insistently called for rescinding them, out of concern that
they weaken the presidency unduly in favor of the prime minister and
parliament.

Overall, Regions emerges as the clear winner while Yushchenko seems at this
point to be losing support from most of Our Ukraine, and Our Ukraine risks
losing much of its electorate if it joins the Regions-Socialist-Communist
parliamentary coalition.

The Yulia Tymoshenko Bloc offers a simple message: “betrayal” of the
Orange Revolution, “political capitulation” by the president, and need for a
“cross-party opposition” to organize around this bloc.
———————————————————————————————-
(Interfax-Ukraine, UNIAN, Ukrainian News Agency, Ukrainian Television
Channel One and Channel Five, August 2-7; see EDM, August 7).
———————————————————————————————-
LINK: http://www.jamestown.org
———————————————————————————————–
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
========================================================
16.        UKRAINE ONCE MORE AT THE CROSSROADS

ANALYSIS & COMMENTARY: By Luca Brusati, Italy
Action Ukraine Report (AUR) #748, Article 16
Washington, D.C.,  Tuesday, August 8, 2006

In the heady days of December 2004, disturbed by the unilateral picture the
news articles in the Action Ukraine Report were providing about the events

taking place in Ukraine, I sent a strongly-worded e-mail expressing my
dissent to the Editor, who in turn decided to share it with all the AUR readers.

In a nutshell, I was raising two questions:

(1) Why should Yuschenko prove to be such a trasfigurative leader as he was
described by Western media back then, based on his personal history as a
politician (head of the Central Bank first, then Prime Minister nominated by
Kuchma, and eventually undecided leader of the Parliamentary opposition to
Kuchma himself)?

(2) Wouldn’t Ukraine end up being stuck hopelessly in the middle, once it
bowed eventually to years of Western pressure and distanced itself for good
from Russia, taking into account that the chances of EU membership were
close to zero?

Following the circulation of my e-mail, I received a number of messages from
AUR readers who preferred to attack me on a personal level, rather than
addressing my questions.

One reader declared me unworthy of my professorial job; another asked how
much Russia was paying me for protecting its interests in Ukraine.

Unfortunately for my bank account, nobody was willing to finance my inputs
(a few wealthy Russians were illegally funding the “revolutionaries”
instead, as some Orange leaders acknowledged, but this is another story).

Unfortunately for Ukraine, though, time proved that my questions were both
right on target.

My e-mail back then was a reaction to the articles I had just read, so I did
not articulate my thinking in detail. Those who replied to me got a more
comprehensive feedback, though, and in some cases ended up acknowledging

I had a point.

It is worth reminding that the doubts about Yuschenko’s ability to lead
large-scale change were there among many Ukrainians already in 2004 (but not
in the West, which basically had never heard of him before the presidential
elections).

The question about Ukraine’s place at the crossroads between the EU and
Russia is still relevant, though, especially after the latest political
developments in Kiev.

I believe it is important for the AUR to address it, even more taking into
account the widespread ignorance about how EU institutions actually work
(among most EU citizens in the first place, let alone outsiders).

Alas, at the end of the day the EU is not about sharing European ideals or
embracing democracy (Ukraine is definitely more democratic today than what
it used to be under Kuchma, even without Brussels’ helping hand); once we
set the rhetoric aside, membership is primarily about access to the
“internal market” and to EU budgetary allocations.

For decades, the European Economic Community first and the European Union
then managed to square the circle, by sorting out these thorny commercial
and financial issues in a collaborative manner: at the basis of the entire
exercise laid the assumption that “ever closer integration” was not a
zero-sum game, but could benefit all players in the medium term.

This assumption is still there in the rhetoric, but it is no longer the
background of EU policy-making. Each Member State by now is extremely

keen to check how much it is contributing to and how much it is getting from
Brussels, with no serious long-term perspective. A very natural fact is
happening: the new Member States are catching up.

This phenomenon is a success story for Europe as a whole, but (especially in
a phase of social tensions and sluggish economic growth) it is perceived as
a threat by the “old” Member States: the truth is that they are really
funding with their taxes the Member States which steal their jobs, by
attracting companies from “Old Europe” looking for less red tape and a
cheaper labour force.

The results of the French and Dutch referenda on the EU Constitutional
Treaty are only the tip of a much larger iceberg; many more elements signal
this simmering tension.

One can look, for instance, at how Dalia Grybauskaité, EU Commissioner
responsible for financial programming and the budget, had to walk on a tight
rope when presenting the final accounts for 2004 in September last year,
trying to convince the audience that mathematics no longer mattered, and
everybody had actually benefited from EU enlargement.

Another telling symptom is the attitude towards Romania and Bulgaria by the
“new” Member States, which had been arguing that their budgetary allocations
should not be reduced once the EU expands from 25 to 27 countries.

The consequence of these dynamics might not be immediately visible, but is
pretty straightforward: the EU is less and less built around the principle
of solidarity.

A stark illustration of this point is the composition of the EU budget for
2007-2013, which earmarks less money for budget lines such as agriculture
and local development (of special concern for the “new” Member States) and
more for budget lines such as research and infrastructure (cross-cutting
issues, consequently relevant for “Old Europe” as well).

Add to this the fact that the seats in the European Parliament and the
voting rights in the Council of Ministers are distributed based on the
population of each Member State; plus the fact that funds addressing
regional imbalances are awarded based on the per capita income of each
Region vis-à-vis the EU average, and only allocated to Regions ranking below
a given threshold (meaning, for instance, that as a consequence of
enlargement Sicily will no longer receive this money as of 2007).

The implications for Ukraine are pretty clear: no matter how hard it tries,
the country is too big and too poor to get into the EU, unless (or until?)
the EU itself evolves into a club very different (but probably much less
appealing) from what it is now.

The fact that Turkey stands in line for membership before Ukraine definitely
does not help: if Turkey does get in some day, the impact is going to be so
large to prevent further enlargements for a very long while; if it does not,
then this very fact is going to serve as an excellent excuse against
Ukrainian membership.

Incidentally, it is worth reminding that the neighbours who had welcomed the
“Orange revolution”, such as Poland and Lithuania, would be the first to
loose out handsomely from an EU enlargement including Ukraine, so it

would be foolish to expect them to support for real a Ukrainian bid for
membership.

What next, then? Well, it is probably appropriate for the new leadership
emerged eventually from the latest parliamentary elections to consider with
caution its next steps. In other words, Ukraine must choose carefully its
bedfellows, and necessarily do this in a long-term perspective.

Based on the remarks highlighted above, the EU might well be the wrong
direction where to head for: if Ukraine is serious about strategic thinking,
probably it should take into account that in twenty or thirty years’ time
the relative weights of Europe and Asia are likely to be very different from
what they are now.

Turkey, for instance, is not only building very strong economic partnerships
with Russian companies in a broad range of industries, but in a
little-noticed development decided last year to apply for observer status in
the Shangai Cooperation Organization, i.e. the regional organization linking
Moscow, Peking, Astana, Tashkent and the other capitals of Central Asia.

Granted, we are not witnessing a new Pereyaslav. But maybe one day Viktor
Andreevich will be able to claim that he did take the right step, by
nominating his nemesis as Prime Minister.

Let’s hope so, for the sake of Ukraine’s future.              -30-
————————————————————————————————
NOTE: Luca Brusati is Associate Professor of Management, and since

1996 has been working across most countries of the former Soviet Union.
Since 2003 he has been working in Ukraine on a regular basis, primarily as
a health sector management consultant. Luca G. Brusati
(luca.brusati@unibocconi.it) – August 5th, 2006
———————————————————————————————–
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
========================================================
17. UKRAINIAN NEWSPAPERS DISAGREE OVER CRISIS RESOLUTION
             One idea seemed to dominate the print media – Yanukovych has
                   defeated Yushchenko and the Orange Revolution is over.
            People in Lviv discuss Yushchenko’s treachery and incompetence.

BBC Monitoring Research Service, UK, Friday, Aug 04, 2006
BBC Monitoring Service, United Kingdom, Friday, Aug 04, 2006

Ukraine’s mainstream media has offered diverging views of President Viktor
Yushchenko’s 3 August decision not to disband parliament, but endorse the
appointment of his arch rival, Party of Regions leader Viktor Yanukovych as
prime minister.

Opinions expressed in the newspapers on 4 August ranged from total
disapproval of the compromise between Yushchenko and the Party of Regions,
some even calling this a “betrayal” of the Orange Revolution of December
2004, to the understanding of Yushchenko’s position.

One idea seemed to dominate the print media – Yanukovych has defeated
Yushchenko and the Orange Revolution is over.
            EXPRESSED DESPERATION, DISMAY AND SHOCK
The nationalistic Ukrainian-language daily Ukrayina Moloda has expressed the
shock that many supporters of the orange forces experienced.

“It’s a pity, but we have to say that the Maydan [i.e. the Orange
Revolution] is dead. When Yanukovych again becomes the head of government,
no politician will have any moral right to appeal to the Maydan as an event
that defined a certain period of Ukraine’s history.

This is, in principle, a step back,” Ukrayina Moloda’s columnist Dmytro
Lykhoviy writes in an article entitled “How about betraying the Maydan?”.
             RE-INCARNATION OF FORMER CONVICT AT PM
“This is our mentality and our fate,” he continues, “to witness a
re-incarnation of a former convict as prime minister. This is because it is
one thing to say about implementing the slogan ‘East and west are together’,
and it is a completely different thing to drop the slogan ‘Prisons to
bandits’.”

“Yanukovych is almost a co-thinker of Yushchenko,” Gazeta Po-Kiyevski, a
Russian-language daily traditionally sympathizing with Yushchenko’s main
ally in the Orange Revolution, Yuliya Tymoshenko, writes.

“Yanukovych is finally back – not as a result of a coup or storming of the
cabinet by miners, but after elections, having capitalized on the incessant
squabbles in the orange camp.”

Reporting on Tymoshenko’s behaviour, Gazeta Po-Kiyevski writes: “Tymoshenko
was about to burst into tears, but she restrained herself. Addressing loudly
a crowd of her supporters, she promised to be in the opposition to
parliament, but not to the president.

Was it self-victimization on the part of the leader of the eponymous bloc or
a desire to show consistency in politics? Perhaps, it was cold calculation –
to break all ties to Mr Yushchenko ahead of a next presidential election.”

Reporting on the moods on the streets of Yushchenko’s and Tymoshenko’s
stronghold, the western city of Lviv, Gazeta Po-Kiyevski says: “People speak
in the offices, on the buses and at home. Lviv discusses Yushchenko’s
treachery and incompetence.”
                            SATISFACTION AND SYMPATHY
The newspapers that have been in the opposition to the orange camp see the
situation in a different light.

“In the small hours of 3 August, Viktor Yushchenko drew a line under the
Orange Revolution. The man [Yanukovych] against whose coming to power the
Maydan gathered one time takes this power from the hands of the president
now,” the Russian-language daily Segodnya, which is linked to Yanukovych’s
Party of Regions, says.

“The president explained his decision by a wish to unite Ukraine,” Segodnya
continues. “But he hardly had any choice. There is a majority in parliament
that has decided on its candidate for prime minister, so Yushchenko had to
either accept it or dissolve parliament, which would mean another three
months of instability in this country, whereas [Yushchenko’s party] Our
Ukraine would still have very low chances of winning an election. Mr
Yushchenko chose the lesser evil.”

Another newspaper sympathetic with Yanukovych’s camp, the Russian-language
daily Kiyevskiye Vedomosti, notes that “if Mr Yushchenko dissolved
parliament, the situation would have slipped out of his control (those
parliamentarians who are members of the anti-crisis coalition had warned
that they would ignore the president’s decrees and initiate his
impeachment).

Second, if the head of states eventually disbanded parliament, this would
have looked like a fairy tale in which Yushchenko the wizard meets the
wishes of a capricious princess.

“In reality, the coalition on several occasions proved that it can work, so
that the president had no reason to dissolve parliament explaining this by
the majority’s inability to make decisions.”
                                            WHAT NEXT?
The web site ProUA offers a scenario of further developments.

“Now the anti-crisis coalition will try to conduct a blitzkrieg campaign
involving – in order of priority – approving the new prime minister,
electing the Constitutional Court judges, ratifying a grand coalition
agreement, and finally forming the new Cabinet. The coalition hopes to do
all this in two days, after which everyone will get what they want.

The Ukrainian people will take a break from politics, the president will go
and relax at his Crimean dacha, and Yanukovych and Moroz will get the hang
of running the country.

Only Yuliya Tymoshenko has been left without a prize. At the crucial moment,
she failed to apply sufficient pressure. Now it is she who will be subject
to pressure.”                                             -30-
—————————————————————————————————
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========================================================
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18. UKRAINE’S COALITION DEAL PAPERS OVER ROOT DIFFERENCES
             The net result of the agreement leaves Ukrainian politics pretty much
                      as they were: stagnant, short of cash, and at loggerheads.

ANALYSIS: By Stefan Korshak, Deutsche Presse-Agentur
Hamburg, Germany, Friday, August 4, 2006

KIEV – Ukraine’s newly-signed coalition agreement Thursday papered over most
of the key political disputes facing the former Soviet republic, and
resolved little.

The politicians involved didn’t spin things that way, of course. One of the
architects of the document, pro-Europe President Viktor Yushchenko, praised
the agreement as ‘a fundament for the construction of national unity.’

Pro-Russia politician Viktor Yanukovich, soon to become Yushchenko’s prime
minister as one of the key conditions of the agreement, was similarly
effusive, saying, ‘I salute the president for compromising, and for putting
the interests of the nation ahead of politics.’

But as details of the agreement became known in the hours after Yushchenko
and Yanukovich put their names on the dotted line, far more disputes put off
to a later date were visible, than thorny political issues laid to rest by
sage compromise.

Ukrainian policy towards NATO was one of the cleverer waffles, with the
coalition agreement committing the government to continued cooperation with
the Atlantic alliance until some nebulous future date when the country is
ready to join, at which point there will be a national referendum.

NATO is unpopular in Ukraine because of continued Soviet attitudes, and
because NATO bombed Slavic Serbia, a traditional Ukrainian ally. Less than
one in three Ukrainians would even consider joining the alliance, a recent
poll showed.

The Ukrainian Army, however, is enthusiastic about NATO, as without NATO
there would be very little money for Ukrainian military training.

The probably even more decisive foreign policy question of which economic
alliance Ukraine sees itself as a potential member of – the European Union
or the Russia-led Single Economic Space – is neatly dodged in the agreement
with a firm commitment for the Ukrainian Government to work towards both
those goals equally.

Domestic economic reform planning in the agreement more closely resembles a
pack of soon-to-be forgotten campaign promises, than a blueprint for the
future.

The coalition agreement sets forth as official government policy an effort
by Ukraine to join the World Trade Organization (WTO), the general guarantee
of the right of private property, the creation of a middle class and 1
million jobs and sustained GDP growth at 5 per cent annually.

Sounds nice, but in Ukrainian reality all those nice ideas can’t exist
simultaneously. The ‘guarantee of private property’ is a political code
phrase in the country for no review of privatizations of billions of dollars
of Soviet industrial concerns in the 1990s, creating a privileged tycoon
class running the country’s economy.

The agreement does not even mention plans to combat corruption, according

to most Ukrainians the number one problem in the country.

A key feature of the agreement is a removal of the ‘tax inspectorate
press’ – in other words efforts by the government to squeeze money out of
industry.

Unfortunately for Ukraine’s Ministry of Finance, the national budget is
already running a deficit beyond the 3-per-cent maximum allowed a country
before it can join the WTO.

Land reform is simply put off until 2008, at which time the government
should create a land register.

The agreement term thus effective halts foreign investment – which is
unlikely to send money to a place with no land property rights – in
Ukraine’s theoretically bountiful black earth agriculture.

Energy policy is simply murky, with the coalition charged only ‘to provide
the energy security of Ukraine’ – leaving absolutely open the politically
explosive question as to whether Ukraine should buy energy from Russia or
Europe.

Yushchenko and Yanukovich are on opposite sides of the issue.

Also frankly ignored is the legal status of the Russian language, with the
sides agreeing Ukrainian should be the state language, but anyone not
employed by government could use Russian or whatever other language suited
him ‘without prejudice’ – therefore leaving quite open the question of what
language citizens and government officials will communicate in.

Then there are the plans that haven’t worked before for simple lack of
government cash, that are repeated in the coalition agreement with little
hope of working in the future – among them increased anti-HIV funding,
better medical care, increased pensions, and higher-quality education.

The net result of the agreement leaves Ukrainian politics pretty much as
they were: stagnant, short of cash, and at loggerheads – this time with a
pro-Russia parliament led by Yanukovich, and pro-Europe Yushchenko ready

and willing to slap a presidential veto on almost any of its legislation.
———————————————————————————————–
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
========================================================
19. MARKETS, GOVERNMENT, AND PUBLIC LANGUAGE USE

OP-ED: By Stephen Velychenko, Resident Fellow,CERES
Research Fellow, Chair of Ukrainian Studies, Munk Center
University of Toronto, Toronto, Ontario, Canada
Action Ukraine Report (AUR) #748, Article 19
Washington, D.C., Tuesday, August 8, 2006

The  PROEKT DERZHAVNOI MOVNOI POLITYKA (1) that will be
discussed this summer in Kyiv has a number of shortcomings that must
be addressed.

1. The document ignores the institutional-economic aspect of language- use
and considers only governmental issues. In a mixed economy policy towards
public  language-use must include  the private sphere.

2. In the private sphere the institutional basis of public language- use is
determined by global and large domestic corporations. Both in Ukraine
distribute and produce  in Russian.

The document in question says nothing about why this is so or  how to make
producing in Ukrainian and English profitable for the owners of these
organizations.

3. Mr Jed Sunden, for example, in Kiev, publishes the respected KYIV POST.
Yet he also publishes 12 glossy magazines. These are all in Russian and
thereby Mr Sunden is Russifying Ukraine and keeping it in the Russian
language communications sphere (efir).

How can people like him be persuaded to publish their magazines in Ukrainian
and English and thereby moving  Ukraine into the English language
communications sphere – and giving  it direct contact with the rest of the
world?

4. How to make Columbia Pictures, Bill Gates and the owner of the BURDA
fashion chain distribute Ukrainian-language versions of their products? Why
do they use the national languages  in Poland, or Slovakia, or Holland, or
Estonia, but not in Ukraine?

Why, can the owners of MacDonalds  advertise in Ukrainian, but not the
owners Coffee Time,  Brita, or Parker and Obolensky? Why can employees in
PUZATA KHATA all address customers in Ukrainian, while in DOMASHNIA
KUKHNIA they all use Russian?

5. If Mr Surkis has dubious national loyalties and will not promote
Ukrainian public language-use, Mr Pinchuk  might. Mr. Akhmetov  supports
the Party of Regions. But his profits have been seriously hurt by EU tariffs
because he supports this pro-Russian party.

His profits have also been hurt by Syrian embargo of his pipes because they
are “radioactive.” Syria acted on Russian orders and now Russia on the same
spurious grounds will ban all imports of  Akhmetov’s pipes.

Mr. Akhmetov is rumoured to be learning Ukrainian and since his  present
interests and loyalties seem to be diverging, perhaps even he could  be
approached to reconsider his support for Russian-language media products.

5  Ianukovych now controls the government until the 2009  elections and will
do nothing to change public language-use – he  can’t even make Azarov speak
Ukrainian. In the interim, national leaders must stop thinking about
language in nineteenth-century terms.

They must consider how  to provide Ukrainian with an institutional and
market base with the assistance of corporate leaders. They must not simply
publish more books in Ukrainian.

They must create private and public institutions aimed at moving Ukraine out
of the Russian-language communications sphere (efir).          -30-
————————————————————————————————

FOOTNOTE: (1) THE PROEKT DERZHAVNOI MOVNOI POLITYKA 
IS AN OUTLINE GUIDE FOR THE RECENTLY ESTABLISHED
LANGUAGE POLICY COUNCIL AND IT WILL BE PUBLICALLY
DEBATED AT THE UKRAINIAN WORLD CONGRESS THIS
MONTH, AUGUST 18-20, IN KYIV.
————————————————————————————————
CONTACT: Stephen Velychenko, velychen@chass.utoronto.ca
———————————————————————————————–
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