AUR#804 Jan 12 Macroeconomic Situation Report By SigmaBleyzer; Airport Hotel; Farmland Sales; Soviet-Era Symbols; Russian Extortion

                 An International Newsletter, The Latest, Up-To-Date
                     In-Depth Ukrainian News, Analysis and Commentary

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

Mr. E. Morgan Williams, Publisher and Editor, SigmaBleyzer

              –——-  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
: Olga Pogarska, Edilberto L. Segura
SigmaBleyzer Emerging Markets Private Equity Investment Group,
The Bleyzer Foundation, Kyiv, Ukraine, Friday, January 12, 2007

By: Mara D. Bellaby, AP Worldstream, Kiev, Ukraine, Thu, Jan 04, 2007

By Alex Blakelock, Caterersearch, Surrey, UK, Wed, January 10, 2007

Interfax-Ukraine, Kyiv, Ukraine, Thu, January 11, 2007


                          OF GAS IN UKRAINE SEPT-DEC 2006
Interfax-Ukraine, Kyiv, Ukraine, Thu, January 12, 2007

ITAR-TASS news agency, Moscow, in Russian 1231 gmt 11 Jan 07
BBC Monitoring Service, United Kingdom, Thu Jan 11, 2007

Itar-Tass, Moscow, Russia, Friday, January 12, 2007

                             ON FARMLAND SALES UNTIL 2008 
Interfax-Ukraine news agency, Kiev, in Russian 11 Jan 07
BBC Monitoring Service, United Kingdom, Thu, Jan 11, 2007

By Marek Strzelecki, Dow Jones Newswires
Warsaw, Poland, Friday, January 12, 2007

10.                   WHERE HAVE ALL OUR MIGRANTS GONE?
                           EASTERN EUROPE WANTS THEM BACK .
By Michael J. Jordan, Correspondent, The Christian Science Monitor
Boston, Massachusetts, Wednesday, January 10, 2007

By: Terri Judd, The Independent, London, UK, Saturday, Jan 06, 2007

                    Bronze Soldier set to leave Tallinn as last Soviet soldier
By Vladimir Socor, Eurasia Daily Monitor, Vol 4, Issue 9
The Jamestown Foundation, Wash DC, Fri, Jan 12, 2007

Ukrayinska Pravda, Kyiv, Ukraine, Monday, January 8, 2007

Eurasia Daily Monitor, Volume 4, Issue 8
The Jamestown Foundation, Wash DC, Thu, January 11, 2007

Zerkalo Nedeli, Kiev, in Russian 30 Dec 06; p 5
BBC Monitoring Service, United Kingdom, Monday, Jan 08, 2007

                  NATO referendum may become bargaining chip in Ukraine
: By Paval Korduban
Eurasia Daily Monitor, Volume 4, Issue 7
The Jamestown Foundation, Wash DC, Wed, Jan 10, 2007


COMMENTARY: By Andres Aslund, The Moscow Times
Moscow, Russia, Wednesday, January 10, 2007. Page 9.

         Gazprom, the Russian gas monopoly, began the new year with more
                  sabre-rattling. But strong-arm tactics won’t always serve.
Oliver Morgan, The Observer, London, UK, Sunday January 7, 2007

19.                        RUSSIAN EXTORTION, CONTINUED
                    Will its customers in Western Europe finally be stirred?
The Washington Post, Tuesday, January 9, 2007


                                  OF KAZAKHSTAN’S GULAGS
  “For younger generations the gulag is uninteresting,” said Arest Savchak, a
 61-year-old teacher whose parents and grandparents were exiled to Karaganda
      as political prisoners for the crime of supporting Ukrainian nationalism.
By Ilan Greenberg, The New York, Times
New York, New York, Sunday, December 31, 2006

MONTHLY ANALYTICAL REPORT: Olga Pogarska, Edilberto L. Segura
SigmaBleyzer Emerging Markets Private Equity Investment Group,
The Bleyzer Foundation, Kyiv, Ukraine, Friday, January 12, 2007

[1] Over January-November, GDP grew by 6.7% yoy. Robust economic
growth in 2006, despite the price hike on imported energy resources, gives
reason to be optimistic about Ukraine’s economic performance in 2007.

[2] In December, the 2007 State Budget Law was adopted; however, it is
likely to be amended early next year.

[3] The ongoing tariffs adjustment was the primary cause of consumer price
inflation soaring to 11.6% yoy in November.

[4] Though the cumulative merchandise trade deficit continued to
deteriorate, current account performance has been improving. In the third
quarter, the current account balance returned to a surplus of $460 million,
bringing the cumulative deficit to less than 0.5% of period GDP.

[5] Ukraine has demonstrated generally good reform progress in 2006
despite a long period of political instability. However, the progress in
deregulation and liberalization was uneven.

                                   ECONOMIC GROWTH
Ukraine continued to enjoy rapid economic growth. According to preliminary
data from the State Statistics Committee (SSC), the Ukrainian economy
advanced by 8.2% yoy in November, bringing cumulative growth to 6.7% yoy.
The growth was supported by vigorous consumption and robust investment

Private consumption was fuelled by an ongoing, though decelerating, rise in
real household disposable income (up by 17% yoy over ten months of the
year), and booming consumer credit. In addition, it was favored by the
postponement of a gas price pass-through on utility tariffs to the second
half of the year.

Though political uncertainty persisted beyond the parliamentary elections
and formation of the new government, it seemed to be outweighed by the
growing pressures to modernize existing production capacities and invest in
energy-saving technologies.

Investment growth is underpinned by improving access to domestic banking
services (commercial banks lending to businesses grew by 49.3% yoy in
January-November) and borrowing from abroad. Over the first nine months
of the year, the growth of investments into fixed capital accelerated to
16.1% yoy, up from 12.2% yoy in 1H 2006.

Accordingly, robust private consumption growth favored domestically
oriented sectors and industries, such as retail trade, food, production of
vehicles, and residential housing construction.

At the same time, favorable external conditions and a rise in investment
activity sustained growth in machine-building, metallurgy, industrial
building construction and wholesale trade.

In particular, wholesale and retail trade and construction demonstrated
15.6% yoy and 8.8% yoy increases in value added respectively in

Benefiting from robust growth in the industrial sector and construction and
rising household income, transportation reported an almost 10% yoy increase
over the period.

Following deceleration in October, industrial output growth posted a marked
acceleration in November. That month industrial production picked up by
8.3% yoy, bringing the year to date total to 5.6% yoy.

The largest contributors to industrial output growth were metallurgy, food
processing, and machine-building. Together, they explained more than 80%
of industrial output growth.

Though world steel prices have been generally on a declining trend since
September, price developments were rather sluggish on Ukraine’s major
steel export destination markets, remaining at a rather high level.

Moreover, according to MEPS, steel prices on EU and Asian markets even
slightly increased in November compared to the previous month. Facing also
stronger domestic demand due to robust growth in construction and
machine-building, metallurgy reported a 8.5% yoy increase in output over

Though only about 11% of domestically produced foods and beverages are
exported (compared to about 74% in metallurgy, 67% in chemicals and 45%
in machine-building), external conditions are an important factor affecting
industry performance.

At the start of 2006, Russia introduced restrictions on Ukraine’s export of
meat, milk and dairy products, which resulted in overproduction of these
goods on the domestic market, thus leading to deceleration of output growth
in the industry to just 3% yoy in September. At the beginning of October,
Ukraine and Russia signed a memorandum setting out new conditions for
Ukraine’s export of meat.

Moreover, following Russia’s audit of Ukrainian meat and milk enterprises in
November-December, the restrictions are expected to either be abolished or
considerably softened. However, the output growth acceleration to 23.1%
yoy in November was primarily caused by domestic reasons.

Increasing spending power of the population and a good harvest of sunflower
seeds and sugar beets as well as healthy growth in livestock farming
contributed to the industry’s expansion. Cumulatively, the industry reported
9.4% yoy growth in output in January-November.

Machine-building production expanded by 11.5% yoy in January-November,
favored by both domestic and external demand. Continuing growth in
metallurgy as well as high world prices on iron ores stimulated output
growth in the extractive industry, which expanded by 5.8% yoy over the

At the same time, coke and oil-refining and agriculture, reporting a 14.1%
yoy reduction in output and a 0.6% yoy decline in value added respectively,
remained among the lagging sectors.

Despite price hikes on energy resources, the Ukrainian economy demonstrated
good economic performance during 2006.

Though some of the factors (such as booming consumption and high world
steel prices) that helped to absorb the shock in 2006 are likely to be
considerably weaker next year, 2006’s performance allows for reasonable
optimism. Thus, we expect GDP to grow by 5-6% yoy in 2007 despite a
37% increase in imported gas prices.

                                      FISCAL POLICY
Robust growth of domestic trade, rising household income and improving
enterprise performance allowed the government to over-fulfill revenues to
the general fund of the state budget by 3.3% over January-November. This
translates into a more than 20% nominal increase compared to the respective
period last year.

As in the previous periods, VAT proceeds showed the largest rate of
increase. However, it was achieved on the back of growing VAT refund
arrears. Just in August-November, VAT refund arrears rose by 25% to
reach almost UAH 7 billion (about $1.4 billion) at the end of November.

In the previous several months, the government managed to keep the state
budget deficit low (0.7% of period GDP at the end of October) thanks to
under-execution of expenditures. Such a strategy was explained by the
government’s concerns over deficit financing.

Due to sluggish privatization this year (January-November’s privatization
revenues made up just 20.3% of the planned amount) and the absence of public
borrowings (both domestic and external) during the first eight months of the
year, the primary source of state deficit financing in the previous periods
was the funds received from the re-sale of metallurgical plant Kryvorizhstal
in October 2005.

However, they were not enough to finance the full-year budget deficit of
2.5% of GDP anticipated in the budget law and confirmed during its revision
in mid-November. That is why the government resumed its borrowing
operations on both domestic and external markets in September.

However, since domestic debt redemption and service payments generally
exceeded the newly borrowed amounts, domestic public debt continued to
decline. As of the end of November, it decreased by 12.1% year-to-date (ytd)
to $3.3 billion.

Unlike domestic debt, external public debt grew by 3.8% ytd to $12.1 billion
at the end of November on the back of several successful Eurobond placements
in September and November.

As Ukraine demonstrated good economic performance, the government took
advantage of growing investor interest in emerging markets and in
mid-December placed JPY 35.1 billion (about $300 million) Eurobonds with 4
year maturity, 3.2% yield and a 1.2% discount.

At the same time, private sector borrowing from abroad has been expanding
rapidly. According to NBU data, private external debt rose by 26.3% ytd over
the first nine months of the year to $30.7 billion.

Though such rapid expansion of private external debt is a potential cause
for concern, the rising share of long-term private external debt can be
considered a positive development. Total external debt surged to $44.9
billion at the end of September, which corresponds to almost 45% of
full-year GDP.

At the beginning of December, the parliament adopted the 2007 Budget Law,
which envisaged a state budget deficit at UAH 15.72 billion ($3.1 billion),
or 2.6% of forecasted GDP. The targeted state budget deficit is 18.6% higher
than in 2006. State budget revenues are set to increase by 16% yoy to UAH
147.9 billion ($29.3 billion), while expenditures will be 15.4% yoy up to
UAH 161.8 billion ($32 billion).

However, a few days later, the president vetoed the budget law and returned
it to the parliament. The main disagreement lied in social security
provisions, such as the minimum subsistence level and minimum wages next
year (minimum wage and the subsistence level are used as a basis for
determination of a number of social care and protection payments). On
December 19th, the parliament adopted an amended state budget law, taking
some presidential suggestions.

However, basic social provisions were left unchanged. The new version of the
budget was signed by the president only after the parliament adopted a
resolution that obliged the government to develop amendments to the budget
law envisaging upward revision of the minimum subsistence level and minimum
wage based on economy and budget performance in the fist quarter of 2007.
Most likely, the 2007 budget law will be amended at the beginning of the
second quarter of 2007.

The 2007 budget law envisages that about two-thirds of the targeted deficit
will be financed by receipts from privatization.

Though the parliament adopted a list of about 560 enterprises to be
privatized in 2007, which includes several potentially interesting
enterprises such as Ukrainian telecommunication monopoly “Ukrtelekom”,
Odessa port plant and government shares in 12 energy-distribution companies
(oblenergo), the targeted amount may be hard to achieve.

Moreover, at the end of December, the president vetoed the law arguing that
it violates some constitutional provisions and shareholder rights. According
to the president, the parliament defines the list of enterprises that are
not subject to privatization.

The adoption of the privatization list makes it impossible to privatize
enterprises not included in the list without respective amendments to it by
the parliament. This will make the privatization process more cumbersome
and time-consuming.

Moreover, an important innovation of next year’s privatization was the sale
of government shares in the enterprise together with the land that belongs
to that particular enterprise.

According to the law, a buyer of a more than 25% government stake in a joint
stock company accrued the right to become a single purchaser of the entire
land that belongs to the enterprise. This provision violates other
shareholder rights and is in conflict with international standards of
corporate governance.

The absence of a clear privatization plan makes successful budget execution
in 2007 a rather challenging task.

                                   MONETARY POLICY
In November, the annual growth in consumer prices soared to 11.6% yoy,
driven by ongoing service tariffs adjustment and some agricultural products.
In particular, housing and utility tariffs grew by 9.3% month-over-month
(mom), which translated into 83.2% annual growth.

That month, they were accompanied by 10% mom and 6.8% mom increases
in communication and rent tariffs respectively. Despite a high base effect,
rent services were almost 42% more expensive than in November 2005,
reflecting robust growth of real estate prices and utility tariffs.

The development of food prices was rather modest this year (up by 3.9% yoy
in November). However, it still explained about 20% of total CPI growth
since food products comprise the largest share in the consumer basket (more
than 60%).

By product breakdown, the largest increase in prices was reported for fruits
(up by 43.3% yoy), cereals (up by 16.5% yoy), and bread and bakery
products (up by 16.1% yoy).

Their impact on the total food price index was mitigated by an 11.8% yoy,
6.7% yoy and 3.5% yoy reduction in prices for vegetables, meat and eggs,

An acceleration of flour and bread prices growth over August-September
was mainly the reflection of higher production costs (during the harvest
campaign the prices on petroleum products reached their peak; minimum
wages were raised twice – by 8.7% in January and 7.1% in July, driving the
labor costs up).

At the same time, the increase in domestic bread prices on the back of
revised downwards estimates in the grain harvest this year and a robust
increase in global prices for grain has worried the government. In an
attempt to curb bread price growth, the government introduced grain
export restrictions at the end of September.

However, the effect of these measures was rather limited so far, as wheat
prices constitute only a fraction of the production costs of bread. Indeed,
flour and bread prices continued to accelerate over October-November.

At the same time, non-food prices continued to slow down in November,
primarily on account of the notable deceleration in domestic gasoline

Though world crude oil prices returned to an upward trend, domestic
petroleum prices declined by 10.2% mom in November as a result of the
agreement reached between the government and gasoline traders at the
beginning of the month.

The weight of monetary factors in inflation dynamics continued to decline.
In November, the growth of the monetary base and money supply slowed to
17.2% yoy and 35.7% yoy respectively (down from 22.4% yoy and 36.4%
yoy a month before).

In monthly terms, the monetary base advanced by a meager 0.2% mom, which
was the result of lower NBU net foreign exchange purchases on the interbank
market ($227 million in November compared to $363 million in the previous
month) and accumulation of government cash balances on the account with the
NBU (up by 9.4% mom.)

The slowdown in annual money supply growth may also be attributed to
continuing deceleration of deposits rate of increase (39.8% yoy in November
compared to 41.8% yoy a month before).

Though decelerating, the growth of deposits remained at a decent level,
which accompanied by active borrowing from abroad, allowed commercial
banks to further gather momentum in lending activities.

Gradually declining lending rates and increasing demand for financial
resources from both households and companies stood behind 68.6% yoy
expansion in credit. Consumer lending was an important contributor to
overall credit growth.

In November, more than one third of all loans were issued to households. A
135.7% yoy increase in consumer credit was supported by growing purchasing
power, a gradual shift of consumer preferences towards durable goods,
booming real estate prices, and increasing competition on the consumer
credit market, which manifested itself through the reduction in credit

Though hryvnia-denominated loans grew at a robust 50.2% yoy in November,
foreign currency loans grew considerably faster. Expanding by 93.4% yoy
over the period, the share of loans issued in foreign currency grew to 49%
in November, up from 43% at the beginning of the year. Thus the exposure
of the banking sector to foreign exchange risks has been increasing.

The share of forex-denominated loans issued to households reached 64% in
November, which raises even more concerns as household incomes are mainly

Though the NBU has addressed banking sector risks through differentiation
of reserve requirements, tightening of capital requirements, additional
measures are required to respond to rising banking sector vulnerability.

In October, merchandise exports increased by about 18% yoy, bringing
cumulative growth to 11.2% yoy. At the same time, vigorous domestic
consumption and growing investment demand continued to fuel imports

Rising by 25.7% yoy in October, merchandise imports reported 22.6% yoy
growth since the beginning of the year. As a result, the fob/cif merchandise
trade deficit increased to $4.6 billion at the end of October, which is
equivalent to 5.9% of period GDP.

Despite general improvement, export performance by select industries was
rather mixed. Robust external demand stimulated exports of machines,
equipment and transport vehicles, which expanded by about 15% yoy over
January-October (up from 13.8% in January-September). Though world steel
market conditions were deteriorating, the growth of exports of metallurgical
products accelerated to 14.7% yoy.

The acceleration became possible thanks to wide differentiation of steel
price developments at various markets (steel prices on EU markets, though
slightly decelerated, remained at a very high level; though prices on Asian
markets revealed signs of an increasing trend, their level was significantly
lower than the 2005 average) and the diversified geographical structure of
Ukraine’s metal exports.

Following introduction of grain export restrictions in September-October,
exports of this group showed a 26% yoy reduction in October. As a result,
cumulative growth of grain exports decelerated sharply from 25.7% yoy in
January-September to just 17.3% yoy in January-October.

However, since it accounts for only about 4% of total merchandise exports,
the deceleration did not have a significant impact on cumulative export

On the import side, imports of mineral products (the weightiest group in
total goods imports) were on the decline due to lower import volumes.

In October, imports of energy resources reported only 7.6% yoy growth
(down from an almost 39% yoy increase in the previous month) due to a
more than 35% yoy decline in crude oil imports.

The decline in crude oil imports is closely linked to poor coke and
oil-refining industry performance. Due to high world crude oil prices and
record high duties on Russia’s crude oil exports, gasoline imports have been
displacing domestic production.

For these reasons Ukraine’s exports of gasoline products have deteriorated
in 2006. Since the increase in gasoline imports did not fully compensated
the decline in crude oil imports, cumulative imports of energy resources
decelerated from 15% yoy in January-September to about 14% yoy in
January-October despite almost 22% yoy increase in the natural gas imports
over the period.

Robust investment activity and rising household income stimulated imports
of machines, equipments and vehicles, which expanded by 34% yoy over

Though the cumulative merchandise trade deficit continued to deteriorate,
the current account performance has been improving. According to the
recent NBU report, the merchandise trade deficit constituted $770 million
in 3Q 2006, slightly up from a $876 million deficit registered in the
previous quarter.

On the back of growing surpluses in foreign trade of services ($885 million
in 3Q 2006) and net transfers ($846 million) accounts, the current account
balance returned to a surplus of $460 million, which was equivalent to 1.6%
of period GDP. As a result, the cumulative current account deficit declined
to less than 0.5% of nine month GDP.

The capital and financial accounts balance (analytical representation) has
also demonstrated an impressive improvement, as it moved from a $1.6
billion deficit in 1Q 2006 to a $0.85 billion surplus in 3Q 2006.

The improvement was due to record high growth of net foreign direct
investment (FDI) and intensification of private borrowings from abroad.
For the first three quarters of this year, net FDI reached $3.7 billion.

The bulk of this sum was achieved thanks to a number of mergers and
acquisitions in the banking sector. The growing involvement of foreign banks
in Ukraine will bring new know-how and managing technologies to the sector,
increase competitiveness and bring down interest rates.

Thanks to balance of payments improvements, the NBU was able to replenish
its gross international reserves from a reduction during the first half of
the year.

At the end of September, they almost reached end-of-2005 levels and
constituted $19.1 billion, which corresponds to 4 months of prospective
imports of goods and services.

Though Ukraine’s terms of trade deteriorated in 2006, their developments
were much better than expected due to favorable world steel market
conditions. 2007 is forecasted to witness a moderate decline in world steel
prices, thus the merchandise trade deficit will keep widening throughout the

The rise in imported gas since the beginning of 2007 will negatively affect
export-oriented and energy-intensive industries such as metallurgy and
chemicals, while merchandise imports are likely to continue growing at
double-digit rates.

In addition to rising nominal volumes of imported mineral products, imports
will be stimulated by expected robust growth of investment demand and still
high domestic consumption.

As a result, the current account is forecasted to be in deficit of about 3%
of GDP, which will be securely covered by the financial account surplus
(due to a further increase in private debt and the relatively high net
inflow of
                            THE INVESTMENT CLIMATE
In 2005, Ukrainian authorities announced an extensive reform program aimed
at strengthening the country’s democracy, sustaining economic growth and
preparing Ukraine for eventual EU membership.

Aspirations to join the European Union were behind the outstanding
achievements in macroeconomic performance and public policy reforms in
candidate countries.

Following declaration of the strategic goal of EU membership in early 2005,
the three-year Ukraine-EU action plan was scheduled.

At the beginning of December 2006, the European Commission positively
assessed the implementation of the action plan, emphasizing fair and
transparent parliamentary elections in spring 2006, high-level cooperation
in the foreign policy arena, tighter observance of human rights and the
supremacy of the law, and progress on adopting legislation necessary for
Ukraine’s accession to the WTO.

Currently the European Commission and Ukraine have been negotiating
directives for the new Enhanced Agreement. The Commission proposed
that the new agreement should go beyond the existing Partnership and
Co-operation Agreement wherever possible.

One of the key elements of the new agreement will be creation of a free
trade area, negotiations for which will start shortly after Ukraine
completes its WTO accession process.

Despite the long periods of political instability before and after the
elections, Ukraine made good progress on structural reforms in 2006. At
the same time, the capacity to influence domestic market developments
through market-based mechanisms remained rather weak.

Some of the recent government actions revealed a tendency to intervene in
the economy. In particular, the government negotiated fixation of gasoline
prices with major players on the market and attempted to intervene with
price-setting mechanisms for selected foods.

In September, observing rapid growth of bread and bakery products on the
back of accelerating grain exports and revised downward grain harvest
estimates, the government introduced grain export licensing, which was
replaced by export quotas in mid-October.

In addition to considerable losses to grain producers and traders, the
introduction of quantitative restrictions contradicts WTO principles,
provides ample opportunities for rent-seeking activities and negatively
affects the investment climate as a whole.                   -30-
Chief Economist, Edilberto Segura; Editor, Rina Bleyzer Rudkin.
NOTE: To read the entire SigmaBleyzer/The Bleyzer Foundation
Ukraine Macroeconomic Situation Report for December 2006 in a
PDF format, including color charts and graphics can be found in
the attachment to this e-mail or by clicking on:

SigmaBleyzer/The Bleyzer Foundation also publishes monthly
Macroeconomic Situation Reports for Bulgaria and Romania. The
present and past reports, including those for Ukraine can be found at
Director, Government Affairs, Washington Office, SigmaBleyzer,
Washington, D.C.,,

[return to index] [Action Ukraine Report (AUR) Monitoring Service]

By: Mara D. Bellaby, AP Worldstream, Kiev, Ukraine, Thu, Jan 04, 2007

KIEV – The warnings in Ukraine verged on the apocalyptic when Russia

sharply raised prices for natural gas a year ago. Many feared factories
would close, leading to mass layoffs and grinding industry to a halt. But
Ukraine’s economy leaped ahead, its businesses quickly adapting to the
higher costs.

Now that other former Soviet republics have been hit by price hikes for
Russian gas, Ukraine’s experience offers them a ray of hope, analysts say _
but note that Ukraine has advantages that newly hard-hit countries such as
Belarus and Georgia lack.

Ukraine’s economy grew by about 7 percent in 2006 despite Russia’s nearly
doubling its price for gas and appears in good position to absorb this
year’s further increase.

In 2005 Ukraine paid US$50 per 1,000 cubic meters of Russian gas, but now
pays US$130. The dispute led to temporary reductions of supplies to Western
Europe and raised wide concern about Russia’s reliability as an energy

Proportionately, the increase was bigger than Russia imposed on Georgia and
Belarus with this year. Georgia agreed to pay US$235 per 1,000 cubic meters,
up from the US$110 it was paying previously. Belarus will pay US$100 per
1,000 cubic meters this year, slightly more than double the US$47 it paid in

But unlike Belarus, whose economy is mostly state-controlled, Ukraine’s
economy was open and flexible when the gas increases hit. And unlike
Georgia, Ukraine has diversified industry and alternative resources to fall
back on.

Ukraine was the largest gas importer of the former Soviet countries, able
for years to ignore its wasteful habits due to the ready supply of cheap gas
that Moscow had provided. But once Russia forced the price hikes,

Ukrainian industry took action.

The steel industry _ the driving force of the country’s economy, but also
one of the biggest energy users _ has led the push, tapping into what had
been extremely healthy profit margins to foot the bill.

Following the lead of competitors in Asia and the West, Ukraine’s big
metallurgical plants began chucking out gas-guzzling furnaces for those

that use pulverized coal.

The initial investment is steep, around A20 million-A25 million (US$26
million-US$33 million) per furnace, but the payoff is a process that
requires almost no natural gas and cuts production costs considerably. It
also uses a resource that Ukraine already has in abundance.

“All of our new blast furnaces will be fueled by pulverized coal,” said Ihor
Korytko, a director of Metinvest Holding’s Yenakievsky Metallurgical
Factory. “Within several years, we plan to fully stop the use of natural gas
in blast furnace production. In steelmaking, we already aren’t using any gas

Mikhail Berger, a Russian economic analyst, told Russia’s Ekho Moskvy

radio that by raising prices, Russia did Ukraine “a colossal favor.”

“The Ukrainian economy has begun to arrange itself under the realities of
the market, and when it overcomes this gas withdrawal _ like a drug
withdrawal _ it will become truly competitive,” he said.

Some Ukrainian businesses forged their own gas deals with Russia’s natural
gas giant OAO Gazprom, in a move that helped keep them afloat but which

may ultimately hurt Ukraine by further weakening the Ukrainian state gas
monopoly’s reach and bargaining power, said Vadim Karasyov, head of the
Kiev-based Institute on Global Strategies.

In the meantime, Ukrainian politicians have been flirting with other
possible energy sources. Last year during a visit to Chernobyl, President
Viktor Yushchenko used the 20th anniversary of the world’s worst nuclear
accident to say that Ukraine shouldn’t rule out building new nuclear power

Officials also say coal deserves a wider look. Some estimates suggest that
Ukraine has the ninth-largest coal reserves in the world. Coal Industry
Minister Serhiy Tulub recently proposed building seven new coal mines as a
way to increase production.

Previously, such an idea likely would have sparked international criticism.
Coal mining in Ukraine is notoriously inefficient and dangerous, and for
years, Kiev was advised that unproductive mines should be closed and miners

“But with all countries trying to see if they can use their own internal
resources better, I think if Ukraine can do this in an energy-efficient and
environmentally friendly way, Europe will be much more supportive,” said
Zenyo Baran, a senior fellow at the Washington, D.C.-based Hudson Institute.

Ukraine is also being pushed to develop its own gas reserves, which are
believed to be significant. The country produces about 20 billion cubic
meters of its own gas, which is meant to cover non-industrial needs and
therefore protect the population from sharp price increases.

But Ukraine lacks modern drilling equipment to develop additional gas
reserves, and Western groups ready to invest hundreds of millions of dollars
complain that their contracts aren’t being honored.

Developing the gas reserves could help individual Ukrainians, who have had a
harder time absorbing the price hike than industries. Many saw their home
gas bills more then double, which triggered protests against the government.
Officials have promised to try to shield the poorest residents as much as
possible from the increases.

Belarus and Georgia might have a trickier time, analysts say. Ukraine’s
export-driven industries were buoyed by high world prices and could invest
in energy-saving technology, and the country has significant alternative
energy sources to tap into _ things both Georgia and Belarus lack.

“It was easier for Ukraine to go with these market changes,” said Tomas
Fiala, head of Ukraine’s Dragon Capital investment house.        -30-

[return to index] [Action Ukraine Report (AUR) Monitoring Service]

By Alex Blakelock, Caterersearch, Surrey, UK, Wed, January 10, 2007

The Rezidor Hotel Group has announced the opening of two new properties
in Ukraine’s capital Kiev and Fujairah – part of the United Arab Emirates.

The group has agreed to develop the 300-room Radisson SAS Airport
Hotel in Kiev, due to open in 2009.

The second, Radisson Al Aqah Beach Resort, is 90 minutes from Dubai
and will feature leisure facilities as well as 320-rooms, three restaurants,
a health club and a wedding hall.                        -30-
[return to index] [Action Ukraine Report (AUR) Monitoring Service]


Interfax-Ukraine, Kyiv, Ukraine, Thu, January 11, 2007

KYIV – Austria’s Volksbank International AG (VBI) is buying over 98% of
stocks in Lviv-based OJSC Electron Bank. “VBI headquartered in Vienna has
signed an agreement on the acquisition of stocks in open joint-stock company
Electron Bank from the current stockholders.

Under the agreement, VBI is buying over 98% of stocks in Electron Bank,”
the Ukrainian bank reported in a press release on Thursday. The Ukrainian
bank is being bought for EUR 57 million, according to previous reports.

The agreement is subject to approval by the National Bank of Ukraine, the
Austrian agency for the regulation of financial markets, and other Ukrainian
and Austrian agencies concerned.

According to the press release, VBI is owned by Osterreichische
Volksbanken AG (it holds over 70% of stocks in VBI), DZ BANK
AG/WGZ-Bank (Germany) and Banque Federale des Banques Populaires

As was earlier reported, Electron Bank was founded in 1991. By October
2006, among its stockholders were OJSC Electron Concern (63.3%),
ZTT Electron (6.4%), Larysa Zahorodniaya (6.2%) and Viktor Rybinok

“The acquisition of Electron Bank means the further expansion of VBI in
Central and Eastern Europe, and [it] will let utilize the considerable
potential of sustainable growth in Ukraine,” reads the press release. -30-

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                         OF GAS IN UKRAINE SEPT-DEC 2006

Interfax-Ukraine, Kyiv, Ukraine, Thu, January 12, 2007

KYIV – Kyiv-based Shell Energy Ukraine Ltd. sold about 80 million cubic
meters of natural gas from September through December 2006 in Ukraine,
Director General of Shell Energy Ukraine Sean Mahony said.

“The company started selling gas on September 1. Monthly sales were about

20 million cubic meters of gas,” he said at a meeting of the National
Electricity Regulatory Commission (NERC) on Thursday.

A NERC representative said at the meeting that Shell Energy Ukraine supplied
20.5 million cubic meters of gas to ultimate industrial consumers in 2006,
according to Ukrtransgaz, which operates Ukraine’s gas transport system.

At its Thursday meeting, NERC decided to renew Shell Energy Ukraine’s
license for the supply of natural gas to ultimate consumers at non-regulated
tariffs due to a change in the company’s legal address.               -30-

[return to index] [Action Ukraine Report (AUR) Monitoring Service]

ITAR-TASS news agency, Moscow, in Russian 1231 gmt 11 Jan 07
BBC Monitoring Service, United Kingdom, Thu Jan 11, 2007

ULYANOVSK – The first technical maintenance base in Europe for

An-124-100 Ruslan cargo aircraft has opened at the airport of the German
city of Leipzig as part of the Ruslan-SALIS project, an ITAR-TASS
correspondent was told today by the director-general of the Volga-Dnepr
aircraft company, Gennadiy Pivovarov.

Pivovarov also noted that until 2009 the joint Russian-Ukrainian company
will provide transportation services for large-size and irregular military
cargoes in support of peacekeeping operations carried out by European
countries which are members of NATO.

“The creation of the technical base in the centre of Europe is envisaged in
the contract signed in 2006 between the NATO material and technical
provision agency and the Ruslan-SALIS GmbH company which represents the
interests of the Russian Volga-Dnepr group of companies and the Ukrainian
Antonov aviation scientific-technical complex,” Pivovarov said.

According to Pivovarov, the base will help improve the reliability of the
work of the aircraft. The base counts about a dozen specialized laboratories
equipped with nearly 3,000 appliances. Representatives of the Antonov
aviation scientific-technical complex took part in its creation in addition
to Russian experts.

“The aviation-technical base has a certificate issued by the Russian
aviation administration for carrying out technical maintenance of An-124-100
aircraft and meets all certification requirements,” the director-general of
the Volga-Dnepr aircraft company said.
[return to index] [Action Ukraine Report (AUR) Monitoring Service]

Itar-Tass, Moscow, Russia, Friday, January 12, 2007

KIEV – The court of appeal of the city of Bergen, Norway, has refused to
release three Ukrainian pilots, who were arrested on January 8 on suspicion
of getting drunk before the flight, a representative of the Ukrainian
foreign ministry told Itar-Tass on Friday.

So, Norway rejected the appeal of Ukraine, of which the Ukrainian embassy

in Norway was officially informed on Thursday, he continued.

On the ruling of the Norwegian court, three crewmembers – the flight
commander and two pilots – were sentenced to preliminary imprisonment for a
term of four weeks. Another four crewmembers were set free. The 8th member
of the crew was set free after paying a fine.

The foreign ministry official said as well that the flight commander had had
a telephone conversation with the consulate of the Russian embassy and had
said he had had no complaints over the conditions in which they were kept.

The incident, connected with the arrest of the Ukrainian pilots, took place
on January 8 at the Flesland airport, near Bergen. The crew of the Ukrainian
An-22 plane were arrested by the police on suspicion of being drunk. -30-

[return to index] [Action Ukraine Report (AUR) Monitoring Service]
    NOTE: Send in a letter-to-the-editor today. Let us hear from you.
                            ON FARMLAND SALES UNTIL 2008 

Interfax-Ukraine news agency, Kiev, in Russian 11 Jan 07
BBC Monitoring Service, United Kingdom, Thu, Jan 11, 2007

KIEV – Ukrainian President Viktor Yushchenko has signed the law prolonging
the moratorium on the sale of agricultural land sale until 2008, which was
passed by parliament.

The president signed the law “On amendments to the Land Code of Ukraine
regarding the ban on the sale of agricultural land before respective legal
norms are adopted”, the presidential press service said on 11 January.

The signed law is considered to be adopted on 19 December 2006. That day,
MPs approved the amendments to the Land Code, which banned the sale of
agricultural land until 1 January 2008.

According to the effective Land Code, the sale of farmland in Ukraine was
allowed as of 1 January 2007. The law signed by the president comes into
effect on the day of publication.

In six months, the cabinet shall refer to parliament draft laws on
amendments to the laws “On mortgage” and “On land lease” to consider the
possibility of putting up land ownership rights as collateral in order to
receive loans, including long-term ones, and to Article 20 of the Land Code
of Ukraine in order to improve the procedure for changing the purpose of

The cabinet shall rework and approve the legislation with regard to
appraisal of agricultural land.

[At 1522 on 11 January, Interfax-Ukraine said Yushchenko had written to MPs
urging them to speed up the adoption of laws on the state land register and
the land market.

“Further delay in resolving this issue will cause the spread of abuse in the
use of shadow mechanisms for transferring land plots, leading to a worsening
of the social and economic situation in this area,” Yushchenko wrote. -30-

[return to index] [Action Ukraine Report (AUR) Monitoring Service]

By Marek Strzelecki, Dow Jones Newswires
Warsaw, Poland, Friday, January 12, 2007

WARSAW – The recent halt in oil supplies to Poland highlights the need to
secure alternative supply routes to a country that is 96% dependent on
Russian crude oil imports, a senior government official responsible for oil
and gas supplies said Friday.

Late Wednesday, Russian crude oil shipments to Poland and other European
countries along the Druzhba pipeline resumed after a three-day halt due to a
dispute between Belarus and Russia.

“The last few days reminded everyone that unilateral dependency on one
supply source is a real issue that must be resolved,” Deputy Economy
Minister Piotr Naimski told Dow Jones Newswires in a telephone interview.

Naimski said the country managed to avoid a supply crunch earlier this week
thanks to its strategic reserves and the oil terminal it has at the Baltic
sea port of Gdansk.

Poland’s strategic oil reserves now cover 66 days of production. The country
plans to increase this to 90 days by 2012. Naftoport, the oil terminal in
Gdansk, is capable of loading some 30 million metric tons of crude oil
annually, well above the 17 million to 18 million tons consumed in Poland.

Naimski said the possibility of importing oil through Naftoport has been
positively tested over the last few days, but ideally Polish refiners PKN
Orlen (PKN.WA) and Grupa Lotos (LTS.WA) should get access to their

own oil resources.

“It may take months or years before we gain access to upstream as these are
complex processes, but it should be a priority for PKN Orlen and Lotos,”
Naimski said.

Both PKN Orlen and Lotos have gaining access to upstream and supply
diversification written into their business strategies, but haven’t yet
succeeded in their plans.

The Polish government controls a majority stake in Lotos and is the largest
shareholder of PKN Orlen.

Naimski also said the recent crisis has changed the European Union’s view

on stability of Russian supplies and altered thinking on E.U. energy policy.

“I think the crisis has fueled a greater sense of energy solidarity within
the E.U. and may mark a new start of discussion on energy security,” he

Poland has been the sole proponent of greater energy solidarity within the
E.U. and has taken a firmer position than Brussels on energy relations with

The halt in Russian oil supplies provoked frustration in Brussels and
Germany, which currently holds the E.U. rotating presidency.

E.U. Energy Commissioner Andris Piebalgs said Friday that Russia must
guarantee the reliability of future oil and gas supplies to Europe or risk
the loss of energy contracts and a scaling-down of political contacts.

Naimski said he hoped the E.U. would now be more eager to support the
construction of the extension of the Odessa-Brody oil pipeline that would
transport Caspian oil to Poland and Western Europe.

The line was originally designed to import oil from Kazakhstan through
Ukraine to central Europe. However, changes in economic and political
conditions led the Ukrainian government to agree to reverse its flow, and
use it as an export route for Russian oil branching off OAO Transneft’s
(TRNFP.RS) Druzhba trunk pipeline.                        -30-

By Marek Strzelecki,
[return to index] [Action Ukraine Report (AUR) Monitoring Service]

By Michael J. Jordan, Correspondent, The Christian Science Monitor
Boston, Massachusetts, Wednesday, January 10, 2007

VILNIUS, LITHUANIA – Much ado was made in Paris several years ago
about the symbolic “Polish plumber” who was coming to steal jobs from
les français.

Now, it’s Eastern Europeans who are lamenting the loss of not only plumbers,
but all service workers.

“If you want some repairs in your apartment, you can’t find anyone,” says
Rita Stankeviciute, a sportswriter in Vilnius, Lithuania’s capital. “It’s
ridiculous. Lines in the grocery stores are longer. When I used to need a
taxi, it was always three minutes. Now it’s ‘In an hour.'”

As Western Europeans fret about a new wave of Eastern Europeans flooding
their countries – this time from Romania and Bulgaria, the EU’s newest
members – those nations have an opposite concern: how to bring those
immigrants home.

For a small country like Lithuania, with a low birthrate but high rates of
immigration, alcoholism, and suicide, the situation is particularly urgent.
The former communist nation of 4 million has seen at least 400,000 people
migrate west, whether to work construction in Dublin, pick strawberries in
southern Spain, or conduct research in Scandinavia.

“We must invite them back,” says Zilvinas Beliauskas, director of the
government- supported Returning Lithuanian Information Center. “We
should consider them an integral part of the nation.”

Agencies such as the International Organization for Migration (IOM) have
also joined the repatriation movement. IOM’s Vilnius branch recently
unveiled its Lithuanian-language “Independent Migration Information Center”
website to separate fact from fiction for both Lithuanians contemplating
migration abroad and those mulling a return home.

It’s the first such IOM site among new EU members, says Audra Sipaviciene,
who heads the Vilnius office.

“If a migrant’s been gone for five years, sometimes they’re very pessimistic
about the job situation back home, that ‘Oh, nothing’s changed,’ ” says Ms.
Sipaviciene. “But it is very different. So if there’s good information, all
in one place, perhaps they’ll return.”

Deimante Doksaite, a young Lithuanian journalist who recently cofounded to keep the diaspora connected with home, had a slightly
different goal: show compassion.

“Immigration is the issue everyone here talks about,” says Ms. Doksaite. Yet
migrants “don’t get enough attention from Lithuania, so we wanted to … let
them know someone here cares. And this is the fastest, easiest, and cheapest
way to do it.”

In a region where seemingly everyone has a sibling or neighbor working in
the West, similar websites have also sprouted for Poles, Latvians, and

Economic migration westward, both legal and illegal, has been a constant
since the Berlin Wall crumbled 17 years ago. Some politicians in the
economically ravaged East have been reluctant to stem the tide. The billions
of dollars of remittances sent home annually to the region have been a boon,
and the exodus has eased pressure to produce decent-paying jobs quickly.

In fact, the migrants have allowed states to project, somewhat misleadingly,
the image of having effectively tackled unemployment:In July, the EU said
Estonia and Lithuania had recorded the largest drops in unemployment among
all EU members.

But it’s also become clear that just as the brain drain harms the national
interest – as highly educated young professionals flee to fulfill their
earning potential in wealthier countries – the disappearing working class is
devastating local service industries, with shortages of construction
workers, truck drivers, waitresses, and supermarket clerks.

To compensate, some employers in the region are now turning to laborers from
Ukraine, Russia, Belarus, and Moldova. In Vilnius, where there’s a fear of
re-Russification, “Lithuania for Lithuanians” sentiment runs high.

But Poland, by far the largest of the new EU members, couldn’t hold off any
longer. In August, the Polish Labor Ministry announced it would no longer
require work permits for farmworkers from the East arriving for seasonal

Some say higher salaries could bring back Poles, but that would also raise
costs for employers, making them less competitive in international markets.

“It’s my dream to return to Poland, but not for 30 percent of my salary,”
says economist Jacek Cukrowski, a regional adviser for the UN Development
Program in Bratislava, Slovakia. “So many have gone west [that] to return,
they might not have to receive equal pay, but certainly more than now.”

 In Lithuania, pay is only one factor, says Vida Bagdonaviciene, deputy
director general of the state Department of Lithuanians Living Abroad.

She says that some Lithuanians may be turned off by the bureaucracy,
corruption, and crime – the latter two often sensationalized by the media,
she says. Or perhaps it’s the gloominess. She says that one contented
transplant in Dublin told her, “Irish people are always smiling and polite.”

Lithuanian officials now study the Irish experience: Long a source of
migration, Ireland gradually evolved into the economic “Emerald Tiger”
and a destination target for migrants.

Mr. Beliauskas is a member of an interagency task force that the government
created earlier this year to propose ways to recover some of the nation’s
human resources – while also tapping the experiences they’ve accrued abroad.

The group expects to convene its first meeting this month, proffering
concrete ideas: small-business loans and special classes for young
Lithuanians to reintegrate into schools – and for young adults, year-long
scholarships to study or do research work in an institute.

On, much of the content is geared to life in Lithuania,
such as tax policies, job prospects, and real-estate prices. “Everything
comes down to quality of life,” says Ms. Bagdonaviciene. “Migrants have
contact with their family and friends, and they’re waiting for the signal
that things have really gotten better here.”              -30-
[return to index] [Action Ukraine Report (AUR) Monitoring Service]


By: Terri Judd, The Independent, London, UK, Saturday, Jan 06, 2007

For as far as the eye could see, thousands of daffodils in uniform rows
protruded from the boggy ground. At a flower farm in deepest Cornwall
yesterday, each stem awaited a flower picker to bend, cut it, bunch it and
place it carefully in a tray, one of hundreds of blooms to be transported to
Marks & Spencer or Sainsbury’s.

Shoppers may not be aware of the Bulgarian, Romanian, Russian or
Ukrainian labouring over their flowers. But for Ivan Dimitrov, a tall young
man contemplating the field through a veil of rain, this will be his life
for the next five months.

Despite his heavy waterproof clothing, Marigold gloves and woolly hat, he
shivered slightly in the chill.

The software designer from Sofia said he was now an accomplished flower
picker, mentally and physically strong enough to earn around pounds 70 a
day. It was not always so, he admitted: “My first time I finished a row and
felt like I could spit my liver out. I was exhausted at the end of the day,
the muscles in my back ached.

“In the early days it was so painful. I thought I was fit, but I was not
prepared, not at all. I didn’t expect it to be so hard. The wet, lifting
trays through the rows, bending all the time . . . “

Against far more accomplished workers in their third or fourth season at one
of the country’s largest daffodil farms, he struggled as a “rookie” to
collect blooms for which he was paid pounds 15.

By the end of the five-month season he was earning up to seven times that,
and had lost 15kg in weight.

On New Year’s Day, Mr Dimitrov, 28, was on the first flight from Bulgaria
along with a small group of his countrymen and women, as well as Romanians
enjoying their new status as EU members, determined that a few months of
labour would earn them enough to pay for their studies, or set them up in
business back home. They flew into a storm of hysterical headlines such as
“Migrants: New rush to Britain begins”.

Far from being a newcomer desperate to steal the food out of British
work-ers’ mouths, Mr Dimitrov was simply returning under the same Seasonal
Agricultural Workers Scheme (SAWS) which had brought him to Britain last
summer as a non-EU member. Unlike the previous eight accession countries
such as Poland that joined in 2004, the two newcomers are far more

But this year, 40 per cent of the SAWS quota must go to them rather than
Russians or Ukrainians who also seek this passage into Britain. Next year
they will get 100 per cent of the quota, though farmers plan to challenge
it, saying it will cut off a valuable job market from non-EU countries and
drive some to seek illegal entry.

Mr Dimitrov arrived late at night in the Cornish town of Camborne to be
bussed to the flower farm, where he lives in converted caravans alongside
other Bulgarians, Romanians, Russians, Ukrainians, Belarusians, Moldavans,
Polish and Slovakians.

Two decades ago, the flower fields of Cornwall were picked by the “mothers
gang” but they have long gone. Students found less back-breaking jobs, as
have workers from the 2004 accession countries.

When the SAWS scheme was closed down temporarily in 1988, 60 per cent
of that year’s soft fruit crop rotted with no one to pick it. Farmers rely
on those restricted, desperate or willing enough to do the work.

Mr Dimitrov said he fell into the willing rather than desperate category. He
worked his way through two degrees in information technology and computer
science, and landed a job as a software designer, buying a pounds 30,000
flat in Sofia.

“I am here to make some money, to help support my family, but also to prove
myself. I was tired of office work. This is just more difficult physically,
but I needed to get away from everything, from mobile phones, computers. I
can live simply and save some money for my family. Everyone has their
reasons. I felt I had something to prove.”

There are still horror stories of gangmasters abusing the desperation of
some. The larger growers, such as Nocton Ltd which runs Pendarves Farm
where Mr Dimitrov works, say they operate a strictly regulated regime,
audited by the larger supermarkets.

At 5.8p to 8.5p per bunch of 10 daffodils, some struggle to meet the minimum
hourly wage of pounds 5.35 at first, but soon average pounds 300 to pounds
350 a week, paying the same national insurance contributions as British

Out of this, pounds 40 is taken to pay for accommodation, bills and trips to
everything from the supermarket to tourist sites. Mr Dimitrov laughs at
suggestions that he and his countrymen are merely seeking an easy life.

Ask him what he likes about the country and he mentions clean roads,
pristine parks – and the British Museum. “It reminds me that England once
had all these colonies, unlike Bulgaria. It was a rich country and has
maintained that.

“We were on the first flight [to Britain]. I saw the reporters but I didn’t
talk to them. I knew what they wanted, they wanted to say we were illegal.

“The British people are worried about their jobs.

We are not here to take their jobs. The main reason most of us are here is
to earn a bit of money, see the country and go home, nothing else,” he said.
                                 THE NEW EUROPEANS
Membership of the EU on 1 January gave Romanians and Bulgarians rights
to free movement across all 27 member countries.

There is no ‘open door’ policy, unlike such as that adopted when eight
eastern European countries, including Poland, joined the EU in 2004.

Skilled Bulgarians and Romanians can work if they get a permit, are students
or self-employed. Food processing and agriculture will be the only sectors
initially opened to low-skilled workers.

Under new Defra rules, a permit scheme for agricultural workers – which must
give 40 per cent of its places to Bulgarian and Romanian citizens – will
from next year offer all of its 16,500 places to them first

Predictions of how many will come in 2007 vary from 56,000 to 180,000.
There is already a small community from both countries of about 20,000.
[return to index] [Action Ukraine Report (AUR) Monitoring Service]

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                  Bronze Soldier set to leave Tallinn as last Soviet soldier

By Vladimir Socor, Eurasia Daily Monitor, Vol 4, Issue 9
The Jamestown Foundation, Wash DC, Fri, Jan 12, 2007

On Wednesday, January 10, the Estonian parliament adopted in the third and
final reading a “Law on the Protection of War Burial Sites,” clearing the
way for the long-awaited removal of the monument to the Liberating Soviet
Soldier from downtown Tallinn and other obtrusive symbols of the Soviet
occupation in public places. President Toomas Ilves signed the law on the
following day.

Under the law, such burial sites and the corresponding monuments or markings
are subject to relocation if they are situated in inappropriate public

Decisions on the matter shall be taken by the defense minister upon the
advice of a Commission on War Burial Sites, which is being instituted by
this law. The Estonian authorities have all along proposed transferring the
monument to a memorial site on the city’s outskirts.

The public and parliamentary debate has focused on the towering bronze
statue of the Soviet soldier, located on a mound at a busy traffic
intersection in central Tallinn.

Some claim that Soviet soldiers are buried underneath and that therefore the
monument constitutes not only a political symbol, but also a war-graves
memorial that may not be relocated.

However, there is no evidence from the occupation era or from recent years
to support this claim. The Estonian authorities intend — as Prime Minister
Andrus Ansip confirmed on January 11 — to verify that claim by excavating
the grounds and, if such remains are found, to re-bury them with full
dignity in an appropriate war-graves site.

The parliament is currently considering two further draft laws on related
issues. One bill would rename September 22 — the date of Tallinn’s capture
by Soviet forces in 1944, marked as “Tallinn Liberation Day” during the
occupation era — as a day of mourning. The other draft law would penalize
the public display of Nazi and Soviet symbols in Estonia.

The parliament adopted the law on war memorials with 66 voting in favor,
five opposed, and 30 absent or abstaining. This breakdown is identical to
the parliament’s voting behavior during the presidential election in

On that occasion, the Center Party led by Edgar Savisaar and allied deputies
declined to vote in order to torpedo a parliamentary quorum.

In the January 10 vote, the same deputies took an evasive position with an
eye to the upcoming parliamentary elections. Center Party leaders count on
local Russian votes and have signed a cooperation agreement with Russia’s
party of power, United Russia.

Official Moscow is reacting vehemently to the Estonian parliament’s vote.
Duma chair Boris Gryzlov and Federation Council chair Sergei Mironov, the
two chambers’ international affairs committee’s chairmen, Konstantin
Kosachev and Mikhail Margelov, the presidential administration’s Special
Representative for Human Rights Vladimir Lukin, and other Russian officials
seem inspired in their comments by three convergent approaches.

The first approach simply rehashes 50-year old Soviet themes: To dispute the
Soviet “liberation” is tantamount to seeking “revision of the results of the
Second World War,” to “lionizing fascism,” to offending the [war-time]
“anti-Hitlerite coalition.”

The second theme rehashes Moscow’s response to the Baltic and other
liberation movements of the late 1980s to 1991. As was then the case,
Russian officials construe the Estonian parliament’s January 10 vote as
pitting “nationalist radicals” against the “Russian-speaking population.”

They also express hope that “healthy forces” — in this case, Savisaar’s
party and its allies — would ultimately restore balance in Estonian

The third theme in Moscow officials’ response reflects the post-1991 line:
Soviet rule in the Baltic states was “our common history,” repudiating it
would be sacrilegious and also constitutes evidence of “neo-Nazi moods.”

Some of these reactions can sometimes bear a personal stamp. For example,
according to Margelov, the “removal of monuments to liberating Soviet
soldiers is akin to the Inquisition’s destruction of texts and monuments
from the classical antiquity.”

Kremlin consultant Vyacheslav Nikonov (grandson of Soviet Foreign Minister
Vyacheslav Molotov) calls for breaking diplomatic relations with Estonia if
the latter proceeds with a “systematic removal of [Soviet] monuments.”

Kosachev, who also heads the bicameral Russian parliament’s delegation to
the Parliamentary Assembly of the Council of Europe, vows to seek censure
of Estonia at the PACE session later this month. Kosachev forcefully led a
partially successful battle in 2005 to water down PACE’s resolution of
condemnation of communism.

On this issue, however, such efforts stand little chance. PACE president
Martin van der Linden, coincidentally in Moscow during and after the
Estonian parliament’s vote, commented that the parliament took a sovereign
decision, with which other parliaments or international organizations are
not empowered to interfere.  (BNS, Interfax, January 10, 11)    -30-
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Ukrayinska Pravda, Kyiv, Ukraine, Monday, January 8, 2007

I would like to say farewell.

To a year which started with the doubling of the prices for the Russian
natural gas and signing of the supply agreement with a no-name firm
owned by unknown people.

To a year which not only fixed the political split of Ukraine into
‘orangists’ and ‘yanukovichists’, but also atomized Ukrainian political
parties through all colors of the political spectrum.

To a year of despair for Ukrainian Socialists who lost their party and their
leader, after Mr. Moroz conspired with those who are reincarnation of
President Kuchma’s political dictate.

To a year when the Ukrainian President lost his trust to the round table
agreements while Ukrainian Nation lost its faith to the President.

To a year which brought out a four time price increase to the municipal
utilities with the gravest hikes taking place in the regions which mostly
contributed to the election of the new PM and his government.

2006, a year of the lost illusions, is now rattling and agonizing and would
soon finally sink into the eternity.

People say everything changes for the better in the New Year. This rule
failed 365 days ago. However, we again believe that all bad things would go
away as soon as we snatch the last page from the old calendar.

However, what would change for the better in our fatigue country and what

we should expect of the coming year?

Those entrepreneurs who are close to the government will surely benefit from
the announced privatization. The last 600 state enterprises are at a stake
and these are the cutie pies of the Ukrainian industry.

The recent privatization is nothing else than a cheap sale of those state
possessions, which were saved by the efforts of Communists and Socialists
from the previous Parliaments.

Now it is difficult to understand these efforts as Communists, Socialists
and Party of Regions are the parliamentary support for the new government.
So did they save Ukrainian industry for themselves?

The miser, which the State Property Fund wants to get from the
privatization, so hated by its Socialist Chairman Valentyna Semeniuk,

If the situation will be the same as it was in 2006, when the budget plan
failed, and the state property will be sold at a lesser price then it was
planned (i.e. circa UAH 10 billion), then the Ukrainian State will be
stripped of its property virtually for nothing. Meanwhile, only the sale of
the Ukrtelecom can bring half of the expected amount in cash.

Major Chernovetskiy should be the person satisfied with the year 2006.
Despite the galloping levels of discontent, fights and conflicts during
sessions and darkness in the hall, Kyiv City Council systematically voted
for the redistribution of the land parcels in the City of Kyiv among the
various Limited Liability Companies.

I wish the City Council was so ardent in auditing the economic grounds for
the price increase to the municipal utilities.

2006 brought relief to the martyr soul of Mykola Azarov who is a well known
lobbyist of the grand Ukrainian corporations.

Mr. Azarov can finally boast a decrease of taxation of his protégés whom
former PM Yulia Tymoshenko ‘oppressed’. Now the burden of taxation will

be ‘redistributed’ by introducing more then a dozen of new taxes and levies.

Analysts are sure that the dealers who intermediate the flow of Ukrainian
metal to the foreign markets would do everything to decrease the declared
income of the Ukrainian metallurgic giants.

That would result into a decrease of the income tax inflow. The final
outcome will be increased profits for the real owners of the metallurgic

Probably the most satisfied person should be Vladimir Putin. He has several
good reasons for this.

[1] Firstly, Ukraine now pays more for the Russian natural gas and at the
same time did not substantially increase the price of the transit services.

[2] Secondly, whatever our ‘pro-Western’ President says, the new Ukrainian
government is sailing within the sea lane of the Russian foreign policy.

Such a position is the only way for Yanukovich to show his Russian-speaking
voters that he is ‘on a right course’ despite that fact that all his
promises in the sphere of economy and public administration have failed.

[3] Thirdly, by its shorthanded actions which resulted into the price
increase to the communal services the Ukrainian government deepens the level
of its addiction to the economic support of Moscow.

The President of Ukraine should be also satisfied to some merit with the
2006. The voters who supported Yanukovich have finally got what they wanted
and now they realize that Party of the Regions have failed to fulfill its
electoral promises after being admitted to the power.

The return of Yanukovich has not brought the better life to the quiet
ordinary Ukrainian. Now Our Ukraine has got new arguments to use against its
political opponents during the next Parliamentary elections.

However, is not the price which the country has to pay for such ‘arguments’
too high? Why instead the cynical political intrigue have not the President
used his powers to dismiss the Parliament instead of signing the meaningless
Pact (Universal) of the National Unity?

What have Ukrainians got from the year which now passes?

Probably the only positive thing is the exposure. Undercover traitors showed
their true face and betrayed their voters. Latent scoundrels stopped making
bombastic speeches and started acting in their conditional way.

Ukrainians should not forget and forgive the failures of 2006 until the new
elections come. They should not be trapped by another spin and another

sweet promises.

Before the next Christmas Eve comes we should do our best never to thank
God that the year is now passing.                         -30-
NOTE: Original article in Ukrainian, translated by Ukrayinska Pravda.
[return to index] [Action Ukraine Report (AUR) Monitoring Service]

Eurasia Daily Monitor, Volume 4, Issue 8
The Jamestown Foundation, Wash DC, Thu, January 11, 2007

Ukraine’s domestic and foreign prospects in 2007 depend upon the resolution
of the political and constitutional crisis that began in 2006.

Failure to resolve this ongoing crisis will lead to stagnation and a
possible retreat from some of the gains of the Orange Revolution (see review
of 2006 by Yulia Tymoshenko in Zerkalo Tyzhnia, December 30, 2006).

This year will see the continuation of the Viktor Yanukovych government

and the anti-crisis parliamentary coalition. The coalition’s Achilles heel is
the Socialist Party (SPU), which has little possibility of being elected to
the next parliament as long as it continues to remain in the coalition.

The Yanukovych government’s first 150 days have been widely criticized
inside Ukraine for a lack of strategy, disinterest in reforms, no
transparency, and the return of discredited personnel from the Leonid

Kuchma era.

This year will also see growing demands for the Constitutional Court to
reverse the infamous constitutional reforms, which transferred some
presidential powers to parliament.

U.S. Judge Bohdan Futey, a long-time adviser on legal reform in Ukraine,
told Ukrayinska pravda (January 9) that Ukraine’s constitutional reforms
could be considered “illegitimate.” The Yulia Tymoshenko Bloc, which has
consistently opposed the reforms, and Our Ukraine will support their

The constitutional reforms could be abolished through a national referendum
this year, as the Constitutional Court mandated in a November 2006 ruling.
The Party of Regions has threatened to add two additional questions to any
referendum, such as supporting the elevation of Russian to a second state
language and on Ukraine’s membership of NATO (Ukrayinska pravda,

January 2, 4).

The Tymoshenko Bloc has been consistent in its demand for early
parliamentary elections, although leading deputy Mykola Tomenko is

skeptical that this will take place in 2007 (Ukrayinska pravda, January 1).

Starting this fall, the opposition will therefore begin to prepare for the
October 2009 presidential elections. President Viktor Yushchenko will
increasingly be seen as a lame-duck president, and that the main election
contest in 2009 will therefore be between Yanukovych and Tymoshenko.

This year will also see the growth of a united opposition to the anti-crisis
coalition that will build a protest movement similar to that which emerged
during the Kuchmagate crisis. Then and now, the main opposition force is

the Tymoshenko Bloc, with the difference being that it now has the
second-largest parliamentary faction.

The Tymoshenko Bloc has been strengthened by an alliance with the Reforms
and Order Party. The opposition coalition will be augmented by defectors
from Our Ukraine grouped around Mykola Katerynchuk’s European Platform

for Ukraine and SPU defector Yuriy Lutsenko’s Civil Movement for People’s
Self-Defense (Ukrayinska pravda, January 2).

In the foreign policy domain, Ukraine’s 2007 prospects look poor. The
domestic crisis and the failure to re-establish an Orange coalition
following the March 2006 parliamentary elections has led to a de facto
return of multi-vectorism in Ukraine’s foreign policy (Ukrayinska pravda,
January 2).

Multi-vectorism is a product of different foreign policy orientations
espoused by the president and prime minister. One anticipated foreign policy
success is Ukraine’s entry into the WTO ahead of Russia, which will give
Kyiv added leverage in its trade and energy negotiations with Moscow.

In addition, the EU has offered to begin negotiations with Ukraine on a free
trade area following its WTO membership. These negotiations will begin in
the second half of 2007, but they are unlikely to be concluded until the
first half of 2008. Ukraine will also negotiate a visa-free regime with the

This year will be the last of the ten-year Partnership and Cooperation
Agreement (PCA) between the EU and Ukraine. An Enhanced Agreement and
European Neighborhood Policy-Plus (ENP+) will replace the PCA. However,
neither of these two formulations, like the PCA, offers future EU membership
for Ukraine.

These developments will strengthen the European vector in Ukraine’s foreign
policy and, coupled with an increasingly more belligerent Russia, will make
the CIS Single Economic Space less attractive for Ukraine’s elites.

The greatest disappointment in 2007 will be in Ukraine’s relations with
NATO. Ukraine’s opportunity of being invited into a Membership Action Plan
(MAP) at NATO’s November 2006 Riga summit was squandered by the inability

of President Yushchenko and Our Ukraine to place national interests above
personal conflicts with Tymoshenko.

Ukraine’s recent cooperation with NATO is at a higher level than that under
Kuchma, as Ukraine was invited in 2005 to join the Intensified Dialogue on

Nevertheless, Ukraine is continuing the Kuchma-era policy of intensive
cooperation with NATO while not seeking membership. NATO membership

will not return to the domestic agenda until the country’s next election cycle (in
2009-2011) is completed.

Intensive cooperation with NATO could be undermined if Defense Minister
Anatoliy Hrytsenko is removed, as the anti-crisis coalition has threatened
following its unconstitutional dismissal of Foreign Minister Borys Tarasyuk
in November 2006.

Hrytsenko is the only Orange minister left in the Yanukovych government, and
his support for Ukraine’s NATO membership is at odds with that of the
anti-crisis coalition and government.                       -30-

[return to index] [Action Ukraine Report (AUR) Monitoring Service]

Zerkalo Nedeli, Kiev, in Russian 30 Dec 06; p 5
BBC Monitoring Service, United Kingdom, Monday, Jan 08, 2007

Ukraine’s main foreign policy achievement in 2006 was the beginning of work
of the Yushchenko-Putin commission, and the main blunder was the gas
agreements with Russia, Oleksandr Chalyy, a deputy head of the presidential
secretariat, has said.

He said Ukraine should join the WTO and start talks on a new big agreement
with the EU in 2007. The following is the text of the article in which
Chalyy answers questions from the newspaper, published in the Ukrainian
weekly newspaper Zerkalo Nedeli on 30 December:

1. Ukraine’s biggest foreign policy success in 2006.

The beginning of the [Ukrainian President Viktor] Yushchenko-Putin
Ukrainian-Russian intergovernmental commission.

2. The biggest failure in Ukraine’s foreign policy in 2006.

The signing of the so-called gas agreements [with Russia] on 4 January 2006.
This day will always remain the Pearl Harbour of Ukrainian energy diplomacy.

3. Who and what kept Ukrainian foreign policy in 2006 from being consistent
and predictable?

No-one got in the way except for us ourselves. To answer in another way
would mean trying to avoid responsibility for Ukrainian foreign policy. What
got in the way?

I am certain that first it was Ukrainian domestic policy, that is, populism
during the parliamentary campaign, the introduction of constitutional reform
and the lack of a history of experience in achieving foreign policy based on
the constitution and political and social consensus.

4. What are the main tasks facing Ukrainian foreign policy in 2007? On
relations with what countries should Ukraine concentrate its attention in
the coming year?

Foreign policy should foremost meet the urgent need to develop Ukrainian
society. To realize in actions, and not in words, that postulate of the
priority of national interests which is eternal like the world. That same
postulate which says there are no eternal friends and no eternal enemies.

The biggest challenges to Ukraine’s national interests will be:

1. Regulating the [Moldova’s breakaway] Dniester region problem.

2. The new global redistribution of world energy resources, especially on
the European continent.

3. Raising competitiveness under conditions of Ukraine’s membership in the
WTO. It is exactly this which will determine the level of the country’s
readiness to realize its own course of foreign policy.

4. Proper provision of the legal rights and interests of Ukrainian citizens
and national business abroad.

The key tactical tasks in 2007 will be:

1. Completing the process of Ukraine’s accession to the WTO.

2. Beginning negotiations on a new, stronger agreement with the EU.

3. Bringing the Yushchenko-Putin Ukrainian-Russian intergovernmental
commission to an effective working regime of activity.

4. Institutionalizing a strategic dialogue with the United States via the
establishment of an intergovernmental commission in the same manner as the
commission with Russia.

In 2007, Ukraine’s foreign policy should concentrate on restoring strategic
balances which would meet our country’s national interests within the
Brussels-Kiev-Moscow and Moscow-Kiev-Washington triangles.

Success in such “triangular diplomacy” will be possible only under the
condition of active cooperation with neighbouring countries, Germany and
other key European countries and with China and the leading countries of
Central and South Asia and Latin America, foremost Brazil, and the Arab
world and the African continent.

5. Ukraine’s membership in NATO is an issue which needs to be decided “on
the results of a referendum held after Ukraine fulfils all the procedures
necessary for [membership]”. [As stated in the national unity declaration
signed by Yushchenko and Ukraine’s main parties in August 2006.]

Ukraine’s membership in the European Union is a national dream for which we
must steadfastly strive, but we must clearly understand that in the next 10
years it is impossible to achieve. And the reasons for this are not so much
in Ukraine’s ability or inability to achieve the membership criteria as it
is in the EU’s institutional inability to integrate Ukraine.

Ukraine’s membership in the WTO is Ukraine’s full-fledged institutional
integration into the global world economy, which I believe will be completed
in 2007.

Ukraine’s membership in the SES [Single Economic Space, a joint effort
between Russian, Belarus, Kazakhstan and Ukraine towards economic
integration], is Ukraine’s participation “in the activity of the SES based
on principles of differing levels and differing speeds of integration taking
into account the norms and rules of the World Trade Organization.

In the first stage, setting up a free trade zone within the bounds of the
SES without limits and extraction”. [As stated in the national unity

6. Does Ukraine need a new law on the bases of foreign policy?

Yes, it does. And in line with the constitution, the new law should
determine the bases of Ukraine’s foreign relations.

7. What needs to be changed in the Ukrainian constitution to make the
procedure of drafting, agreeing, adopting and realizing foreign policy
decisions more clear, transparent and effective?

Nothing needs to be changed. The relevant clauses in the constitution simply
need to be executed conscientiously. The Ukrainian constitution sets forth a
clear, transparent mechanism for drafting, agreeing, adopting and realizing
foreign policy decisions.

What is needed is that, in their activity, each branch of power involved in
these processes instil positive thought into realizing the authorities given
them in foreign policy. The Ukrainian Foreign Ministry should coordinate
these processes.                              -30-

[return to index] [Action Ukraine Report (AUR) Monitoring Service]
                NATO referendum may become bargaining chip in Ukraine

Eurasia Daily Monitor, Volume 4, Issue 7
The Jamestown Foundation, Wash DC, Wed, Jan 10, 2007

Signatures have been collected in Ukraine in favor of holding a referendum
on membership in NATO and the Single Economic Space — a loose economic
union with Russia, Belarus, and Kazakhstan.

The Central Electoral Commission (CEC) has confirmed that the signatures are
valid. Pro-Western President Viktor Yushchenko is against the referendum,
however, because the answer on NATO will most probably be no, as NATO is
unpopular in Ukraine.

What initially looked like a hopeless campaign by political outsiders may
badly affect the country’s NATO membership prospect. The SES membership
issue is not as controversial, as apparently neither Yushchenko nor Prime
Minister Viktor Yanukovych is against it in principle.

The signature collection campaign was launched by the Social Democratic
Party-United (SDPUo) of Viktor Medvedchuk, a former key aide to former
president Leonid Kuchma, in October 2005.

The SDPUo, along with the Communists (CPU), used the issue in the run-up
to the April 2006 parliamentary election to capitalize on the pro-Russian
sentiment in eastern and southern Ukraine.

This did not help them much, as the SDPUo lost the election, and the CPU
got only 20 seats in the 450-strong parliament. In any case, the organizers
submitted to the CEC in March 2006 far more than the three million
signatures legally required for a referendum.

At least 200,000 signatures were falsified, and 28 related criminal cases
were launched, according to CEC chief Yaroslav Dadydovych. Nevertheless,
on December 29 the CEC officially approved the validity of more than four
million signatures.

Davydovych told a press conference that the commission has done what it
legally was obliged to do, and now it is up to Yushchenko to sign the
relevant decree to schedule the vote.

Yushchenko’s secretariat has not concealed its skepticism. The secretariat
will check the authenticity of the signatures once again, Yushchenko’s press
secretary Iryna Vannykova announced on December 30.

Yanukovych was less doubtful. “A state body not subordinated to any branch
of power [i.e. the CEC] has delivered its verdict, which we have to abide
by,” the press service of Yanukovych’s Party of Regions quoted him as

Yanukovych noted that this is probably not the best time for a referendum on
NATO and the SES, but “if we live according to laws of a democratic society,
we have to respect and fully abide by democratic principles, irrespective of
the context or individuals involved.”

The CPU, predictably, welcomed the development. CPU leader Petro Symonenko
urged parliament on January 9 to do all it can to compel Yushchenko to call
a referendum.

Segodnya, a newspaper critical of Yushchenko, has quoted analyst Volodymyr
Malynkovych as saying that, according to the constitution, Yushchenko will
have to call a referendum. But Yushchenko may delay this for as long as he
wants, as no law compels him to make a decision immediately, Malynkovych

Another expert quoted by Segodnya, former parliament deputy speaker Viktor
Musiyaka, pointed to a discrepancy between the constitution and the 1991 law
on referenda, which obliges parliament’s presidium — a body scrapped more
than a decade ago — rather than the president to set the date for a

Analyst Volodymyr Fesenko told Segodnya that neither Yushchenko nor
Yanukovych are interested in a referendum on NATO and the SES. He suggested,
however, that Yanukovych might push for such a referendum if Yushchenko
insists on a referendum to reverse constitutional reform.

This means that Yanukovych and the majority in parliament, which supports
him, may use the NATO and SES referendum threat as a tool to thwart
Yushchenko’s plan to reverse the constitutional amendments that
significantly weakened the president vis-à-vis parliament (see EDM, November
29, 2006).

Popular support for NATO membership has been hovering around 20% during
the past six years or so, according to various opinion polls, so the
negative result of a referendum is easy to predict. Another referendum on the

same issue may be held only after five years, according to the law on referenda.
The same law leaves to parliament the option to override referendum results
by a two-thirds vote.

Yushchenko’s Our Ukraine bloc, which is the only consistently pro-NATO
force in parliament, is very far from controlling two-thirds, even if it
secures support of the opposition Yulia Tymoshenko Bloc.

This means that a referendum on NATO could put off Ukraine’s membership
bid until at least 2011, when the next parliamentary election is due to be
held. It will also strengthen doubts in the West about the seriousness of

Ukraine’s NATO choice.

The Declaration of National Unity that both Yushchenko and Yanukovych signed
in August 2006 stipulates that a referendum should be held as the last stage
of the NATO accession process.

The Declaration is more ambiguous on the SES, containing no referendum
requirement, linking Ukraine’s membership of SES to World Trade Organization
rules and urging a free-trade zone as the prerequisite for full
participation in the SES.

Opinion polls show that more than half of Ukrainians support SES membership
for the country.  (Channel 5, December 29, 30, January 9; Segodnya, January
3;, January 4).

[return to index] [Action Ukraine Report (AUR) Monitoring Service]

COMMENTARY: By Andres Aslund, The Moscow Times
Moscow, Russia, Wednesday, January 10, 2007. Page 9.

Moscow’s traffic demonstrates Russia’s fundamental problem. Materially, the
middle class has grown strong, but a small ruling elite disregards the rest
of the population. Karl Marx would have said the economic base has

outgrown the political superstructure. Ultimately, Moscow’s traffic jams
show how badly Russia needs democracy.

For years, Moscow traffic has been getting worse. On the last day of
October, it came to a complete stop for six hours, from 4 p.m. to 10 p.m.
One underlying cause is Russia’s impressive economic boom, but many
countries have enjoyed annual growth rates of 7 percent or more for a decade
and few have suffered as badly. Examples that stand out are Teheran and
Lagos during their oil booms in the 1970s and Bangkok in the 1990s.

When I drove in Moscow 20 years ago, congestion was unknown. The normal
speed in the city center was 100 kilometers per hour and you could park
anywhere. The Soviet Union was not a mass consumption society but an elite
one, with cars and roads reserved for those at the top. Moscow had only
about 300,000 cars. The masses were relegated to mass transportation in the
metro, and even bicycles were prohibited in the city center.

With the introduction of a market economy in 1992, the government abandoned
the rationing, strict protectionism and exorbitant taxes that had limited
the supply of cars. Muscovites could choose for themselves and they wanted
cars, just like everybody else in the world. Today, there are more than 3
million cars in Moscow.

But the government has not adjusted to the new situation. The reason is not
economic, but political. As Russia’s democratization was never more than
partial and now has virtually disappeared altogether, the government serves
the elite rather than the people, and the traffic police form a loyal cog in
the authoritarian wheel.

Their foremost function is to keep the roads clear for top state officials.
Traffic lights are often turned off because some official wants to travel freely.
Roads can be closed for a couple of hours for President Vladimir Putin.
Nobody counts the social or personal costs of the traffic disruptions.

A stark illustration is the morning traffic on Rublyovskoye Shosse. One
morning, I drove out of Moscow in the opposite direction of this traffic.

Hundreds of privileged vehicles sparred with one another, trying to figure
out who had the highest status and what concrete benefits they could extract
for themselves in this truly Hobbesian world. The only surprise was that no
bodyguards started shooting, but that might come yet.

The catalyst for the October standstill was that many streets had been
closed because the Angolan President Jose Eduardo dos Santos visited Moscow,
and Putin wanted to move about freely with his guest. A traffic police
spokeswoman declared that this is done all over the world, which is not
true. In addition, she flatly denied that the case of gridlock had been that
bad. Finally, she claimed that the drivers themselves were at fault.

This illustrates the basic problem: Russian police take no responsibility
for maintaining order. In a democracy, traffic police are supposed to assist
the population by bringing order and reducing traffic deaths.

In Russia, by contrast, traffic police care little about speeding, drunk driving
and, ultimately, death. Consequently, Russia has one of the highest per capita
traffic fatality rates in the world. In the same way, ordinary police do not
take the problem of homicide seriously, and Russia’s murder rate is also one
of the world’s highest.

After they have looked after the top officials, traffic police are allowed
to enrich themselves through extortion, thus manifesting the superiority of
the state over society. A drunken or speeding driver might have to pay a
higher bribe than otherwise, but he may then continue his dangerous voyage.

Many countries have cameras that record speeding and running red lights
objectively. All countries where order prevails have introduced systems by
which all fines must be paid via bank transfer or by check and where paying
police officers in cash is forbidden.

The continuing widespread extraction of cash payments by police officers
demonstrates that the government accepts this corruption, disregarding the
lives of ordinary citizens. The old Soviet kleptocracy, which allowed
officials to steal as long as the theft was moderate, is kept alive.

Over the last few years, the traffic police force has been renamed and been
given huge new resources, but traffic deaths are not declining. On the
contrary, they increased by 15 percent from 2000 to 2005, and traffic jams
are becoming worse. The attitudes of the traffic police have not changed,
not because changing them is too difficult, but as a result of disinterest
on the part of officialdom. Many other post-Soviet countries have
successfully reformed their traffic police.

One artifact remaining from Soviet times is the police posts at the borders
of all regions. They were set up to ensure that unauthorized people, like
collective farm workers and foreigners, could not move around the country.

They serve no role in a free society, but as long as they persist the police
will inevitably use them to indulge in extortion. Several post-Soviet
countries have done away with these police posts. In Ukraine, their removal
has freed up trade within the country that remains so encumbered in Russia.
Georgian President Mikheil Saakashvili drew the logical conclusion and did
away with the harmful traffic police altogether.

With the renewed rise of state power in Russia, the number of privileged
people with blue lights and escorts has increased to the thousands, and it
is foolish to believe that any form of administrative regulation will reduce
this. In Ukraine, by contrast, these notorious pseudo-official convoys have
almost disappeared for all but the president and the prime minister. The
traffic lights are not even all turned off for them, as was the case with
President Leonid Kuchma.

Unfortunately, not even an ideal police force could bring order to Moscow’s
traffic. The whole policy has favored the interests of the elite at the
expense of the population. Why does construction block so many roads for so
long? Why are illegally parked cars allowed to block both sidewalks and
streets? Why have attempts only recently been made to coordinate traffic

The same questions arise regarding investment policy. Why has Moscow so

few multi-level crossings? Why are so few parking garages being built? How
could anybody build the Manezh shopping center without providing any
parking space?

The obvious answer is that the elites do not care about the general
population because power comes from the president, not from the people.

Next time you are sitting stuck in Moscow traffic, think about it: Can the
Kremlin (forget about the emasculated City Hall) solve Moscow’s traffic
problems without listening to the people? I doubt it. The ultimate cause of
Moscow’s horrendous traffic jams is the arrogance of power.

A complex, modern society needs the feedback from its population to grow
strong. As in a Marxian farce, the new Russian authoritarianism is recreating
the mistake of the Soviet Union: It is building a system that is too centralized
and rigid to be able to function in a modern society.            -30-
Anders Aslund is a senior fellow at the Peterson Institute for International
Economics, Washington, D.C.
[return to index] Action Ukraine Report (AUR) Monitoring Service]
     You are welcome to send us names for the AUR distribution list.
       Gazprom, the Russian gas monopoly, began the new year with more
               sabre-rattling. But strong-arm tactics won’t always serve.

Oliver Morgan, The Observer, London, UK, Sunday January 7, 2007

For Kremlinologists and other followers of Russian affairs, 1 January should
perhaps have been Groundhog Day, not New Year’s Day. Then, as 12 months
before, the mighty Russian bear was growling at a former Soviet neighbour,
threatening it not with tanks but with higher gas prices.

As with Ukraine in 2006, Belarus was threatened this year with a cut-off if
it did not agree to pay more than twice what it had been paying Gazprom, the
Russian monopoly, for its gas, as well as allowing that company – in reality
an arm of the Kremlin – a 50 per cent stake in its national pipeline
network, Beltransgaz. It agreed.

There are differences between the Belarus and Ukraine cases. The Belarusian
dictator Alexander Lukashenko is a Putin crony who has done what he has
been told rather than pushing through a platform of change, as happened
with his freely elected counterparts in Kiev.

Also, there was less of a threat to the rest of Europe, as less gas passes
west through Belarus than through Ukraine.

Nevertheless, 2006 started on a similar note and turned out to be the year
when Western oil companies found themselves publicly intimidated by Russian
officials on charges ranging from poor environmental stewardship to bad
project management and cost control.

The pressure became so great that names regarded in Europe and the US as
the most robust examples of the multinational corporation, capable of
dealing with difficult regimes from Indonesia to Venezuela to Nigeria, caved in.

They allowed stakes in projects for which they had signed binding contracts
to be torn up and their holdings to be made over to Russian companies,
mostly Gazprom.

The most notorious example came before Christmas when Gazprom gained
a majority stake in the Sakhalin-2 liquefied natural gas project off
Russia’s eastern coast, elbowing aside Shell – until then the senior partner in

the venture – along with Mitsui and Mitsubishi of Japan. Total, the French oil
company, has buckled under Kremlin pressure over a field in the Arctic.

Moscow also acted pre-emptively in the summer, cutting out five
international oil companies – at least for now – from developing the giant
Shtokman gas field, which is estimated by consultants Wood MacKenzie to
contain 83 trillion cubic feet in reserves. So, will 2007 follow a similar

Chris Weafer, head of strategy at Alfa Bank in Moscow, thinks it will: ‘This
year will see a continuation of the Kremlin trying to take control of the
energy sector from the well-head to as far downstream as it can get.’

Derek Butter of Wood MacKenzie agrees, but believes the policy of
aggressively targeting oil companies may soften. ‘What we have here is a
transitional period, where the Russians want to re-establish the control of
these assets. Once that has happened, the Russians are not going to be
averse to foreign investment.’

According to Weafer, there have been three phases in the transition pursued
by Putin. The first was to create national champions, the largest of which
are Gazprom and Rosneft, the oil company that floated some 12 per cent of
its shares in London last summer, valuing the company at $80bn. The
‘restructuring’ to create these has been highly controversial.

The Russian government was accused of handing Yuganskneftegaz – the main
operating arm of the Yukos oil company founded by Mikhail Khodorkovsky,
the oligarch jailed by Putin – to Rosneft in a ‘sham’ auction. Many opposed
the Rosneft flotation, claiming it was a form of money laundering.

This year is likely to see the denouement of this restructuring, says
Weafer, with the sale of the remaining Yukos operations, Samaraneftegaz in
the Caspian, and Tomskneft. Together these can produce up to 650,000
barrels of oil a day, but have been run down to 400,000.

Also, a 20 per cent stake in Sibneft (80 per cent of which was sold to
Gazprom) could be floated or sold to a trade buyer – experts think Indian
oil and gas giant ONGC.

The second phase has been to extend state control over Russian energy
assets – largely using these companies, which list Putin allies and
ministers on their boards. This is how Shell and Total suffered bear hugs
last year.

Analysts agree there remain two obvious targets for the Kremlin – Sakhalin-1
and the TNK-BP joint venture – and think Putin will want control of these by
the end of the year. He stands down in the middle of 2008.

There was skirmishing last year over Sakhalin-1, which sits on 2.3 billion
barrels of oil and 17.1 trillion cubic feet of gas. The IOC consortium, led
by Exxon (with 30 per cent) and including ONGC (20 per cent) and Japanese
investment company Sodeco (30 per cent) was accused of licence violations
by the natural resources ministry. But this year more significant
developments are likely.

Butter says: ‘Exxon needs a gas export solution. Gazprom has a monopoly
position in gas exports. I would imagine they would be interested in an
equity stake.’

That stake would not have to be 51 per cent to secure Russian control, as
two subsidiaries of Rosneft already hold a total of 20 per cent. As for
TNK-BP, Butter says: ‘It is a 50:50 joint venture.

The Russian partners in that are Alfa Access Renova, who are old-fashioned
oligarchs, not under government control. There has been speculation that
Gazprom would be very interested in controlling this stake.’

Here, Gazprom, as the export monopoly, has leverage too. Chief among
TNK-BP’s assets is the giant Kovykta gas field, which has export potential
to China. BP has already said Gazprom could take majority control over the
field, but wants assets or cash in recompense.

Experts say this is proving a sticking point, and BP may find itself subject
to pressure similar to that suffered by Shell last year. The ultimate aim
would be for Gazprom to replace Alfa Access Renova, and take a
controlling stake in the venture.

The third phase is for Russia to expand ‘as far downstream as it can’, or to
snap up pipeline capacity and refineries and buy customers in its western
European markets via stakes in supply companies.

The most recent pipeline deal was the Beltransgaz element of the Belarus
agreement over the new year, but Gazprom is also investing in the £3.4bn
Baltic pipeline to Germany (and eventually to the North Sea), and is
developing plans for routes across Turkey.

Just as European energy companies have integrated to hedge their reserves
with customers, so Russian ones want to do the same. Gazprom currently
supplies 25 per cent of European gas, and wants to make that 33 per cent by
2010. So it needs to forge agreements with major suppliers. It has struck
deals in some countries already – around a dozen in the past year alone.

Gazprom has also bought into the UK, taking over Pennine Natural Gas, a
small operator. But this is seen as a prelude to taking a stake in Centrica,
owner of Britain’s largest supplier, British Gas. Experts believe it will
not move until Gazprom supplies a greater proportion of gas to the UK,
which has become a net importer only in the past two years.

Meanwhile, Lukoil, the largest Russian oil producer, has petrol stations in
Europe and in America, where it is rebranding Getty petrol stations in the
north east. In November, Gazprom and Lukoil signed a joint venture aimed
at acquiring assets abroad.

However, as Weafer points out, there has been opposition to Russian
ownership of major European assets. This is why he sees expansion as phase
three of the Kremlin’s strategy, following the robust approach to its own

‘I expect 2007 to see high-level talks between Russia and Europe,’ says
Weafer. ‘Russia can say: “We are now in a position to develop our oil and
gas assets and in principle we have no objection to doing that jointly with
European companies.

But in exchange we want unrestricted access to investment in Europe.” The
window of opportunity is while Putin is there and Germany is in charge of
the EU (Chancellor Angela Merkel last autumn held talks with Putin over

So far, Russian moves west have met with resistance. An attempt by a Russian
state bank to buy into aerospace manufacturer Eads was strongly resisted,
and indications of its interest in Centrica have received a mixed reception
here. BP and Exxon can expect further pressure as Putin pushes for an

Examples of aggression, however, are matched with examples of accommodation.
BP, for example, is expected to benefit from its $1bn investment in the
Rosneft float through deals or ventures with that company. And Conoco has
invested $3bn in Lukoil, and in January last year secured a member on its

Perhaps Russia still believes it needs Western companies. As one senior oil
and gas analyst says: ‘Does Russia need the IOCs? Not as much as before,
because it has gained a lot of technical expertise from them already. But
there is a great deal of managerial expertise and best practice they still
want. Do the IOCs still need Russia? Yes, but they will not take it on any

High oil prices mean that the terms of trade have changed. But Russia’s new
boldness relies on mutually assured prosperity rather than the mutually
assured destruction of old.
Russia gave the world’s most powerful oil companies a mauling last year.

Its treatment of Shell was so aggressive that the £116bn company agreed to
alter the Sakhalin-2 production-sharing agreement, signed with the Russian
government a decade ago, to allow Gazprom a majority stake in the
venture -into which Shell and its partners had already sunk more than $10bn.
Exxon and BP are likely to face similar pressure this year.

Oil companies are feeling the squeeze from Latin America to Nigeria as
ownership rights and operating conditions deteriorated markedly last year.
The companies have faced aggressive renationalisation before – in the
Seventies much of the Middle East was closed off to the multinational

The likes of BP, Shell and Exxon, Conoco, Total and Statoil survived, and
in the past few years have done well out of soaring oil prices.

However, before the surge in prices, most of the global majors joined a
round of consolidation that created the super-majors of today: Exxon bought
Mobil; BP took Amoco, Arco and Castrol; Total, Elf and Fina merged, and
so on. Consolidation was born not of strength, but weakness.

Today, although international oil companies (IOCs) are among the biggest
producers of oil and gas they hold only about 20 per cent of the world’s
proved oil reserves, while national oil companies, in resource-rich regions
such as the Middle East, hold 80 per cent.

With increased nationalism in areas rich in resources, it will be more
difficult for IOCs to secure reserves in future. This could have a profound
influence on them.

Companies are focusing on higher cost regions, hoping the oil price stays
high, as BP is doing off Angola, or Shell in Canada,. Linked to this,
companies can develop leading-edge technologies to exploit harder-to-find
resources. In addition, they must find a way of co-existing with their more
nationalist hosts in future.

The price of oil may stay high, but for companies that have traditionally
been valued on their ability to increase reserves and therefore production,
this may not be the boon it has been in the past.

But most analysts agree that the mergers of global super-majors are likely
to return. Could Shell and BP, both baring the scars of their Russian
adventures, be first?                               -30-

[return to index] [Action Ukraine Report (AUR) Monitoring Service]
19.                    RUSSIAN EXTORTION, CONTINUED
                   Will its customers in Western Europe finally be stirred?

EDITORIAL: The Washington Post, Tuesday, January 9, 2007

RUSSIA’S CONTINUING attempt to squeeze neighboring Belarus yesterday

led to the shutdown of a pipeline carrying oil to Europe — another stark
reminder of how the Kremlin’s aggressive use of energy as a political tool
threatens Western democracies as well as its neighbors.

Just days after forcing Belarus to accept a huge increase in the price of
natural gas, the government of Vladimir Putin stopped oil deliveries in an
attempt to impose a large new duty that would eliminate a longstanding and
lucrative subsidy.

Because the pipeline carrying oil to Minsk also serves the rest of Europe,
Poland, Germany and other European Union countries also did not receive
Russian oil deliveries.

Those countries have reserves to fill the gap for the near future. But once
again the message should be clear: Countries that depend on Russia for
energy can be subject to capricious and politically motivated demands —

and interruptions of supplies if those demands are not met.

Belarus has been a faithful ally of Russia; its autocratic president,
Alexander Lukashenko, has made himself a pariah in the West by stealing
elections, imprisoning and murdering opposition leaders, and supplying
weapons to rogue states.

But Mr. Lukashenko has irritated Mr. Putin by failing to follow through on
an agreement to merge his country with Russia. Now he is getting his
punishment: an abrupt withdrawal of energy subsidies that in recent years
have propped up his state-dominated economy.

The Belarusan president consequently must choose between giving Mr. Putin
what he wants or trying to make Belarus a genuinely independent country.

Since the latter would require groundbreaking political and economic
liberalization, the Kremlin’s risk may not be great. Belarus has already
agreed to hand control of its gas pipeline to Russia, a concession Mr.
Lukashenko had long resisted.

Other Russian neighbors are fighting back against its energy imperialism.
Azerbaijan last week stopped buying Russian gas rather than agree to a huge
price increase; it then reduced the amount of oil it pumps through a
Russian-controlled pipeline.

Azerbaijan offended Mr. Putin by agreeing to supply its own gas from a field
soon to come online to neighboring Georgia, whose democratic and pro-

Western government is Moscow’s first target.

Both Caucasian countries have the prospect of ending reliance on Russian
supplies in the near future; in that respect, they are considerably better
off than the European Union, which gets a quarter of its gas from Russia.

Western governments are watching Mr. Putin’s hardball tactics with concern;
yesterday they called for an immediate resumption of supplies through the
Belarusan pipeline. They do not, however, have a policy for countering the
Russian threat.

Even the members of the European Union cannot agree among themselves on
whether to appease Russia — by offering new long-term contracts and capital
for investment in oil and gas projects — or push back, which they could do
by insisting that Mr. Putin sign an international “energy charter” that
would curtail his monopolistic practices. The attack on Belarus ought to
rule out the appeasement option. (

[return to index] [Action Ukraine Report (AUR) Monitoring Service]
                               OF KAZAKHSTAN’S GULAGS
 “For younger generations the gulag is uninteresting,” said Arest Savchak, a
61-year-old teacher whose parents and grandparents were exiled to Karaganda
    as political prisoners for the crime of supporting Ukrainian nationalism.

By Ilan Greenberg, The New York, Times
New York, New York, Sunday, December 31, 2006

KARAGANDA, Kazakhstan – Maria Sadina hunched over fading pictures of her
parents, ethnic Germans who were deported in 1941 from the Volga region in
Russia to one of Karaganda’s many gulag camps.

Karaganda was once the site of Soviet prison and labor camps.

Ms. Sadina’s father was imprisoned for praising the quality of a German-made
tractor, and for a decade he worked as a slave laborer in the nearby coal
mines. Her mother was sent to the Karaganda gulag simply for her German

They had married and reared their daughter, Ms. Sadina, in a two-room brick
house so low to the ground that visitors must bend over to avoid hitting the

Ms. Sadina, now a grandmother, continues to live in the same house, the
walls now appearing to crumble, tending the same garden her parents once
harvested to survive.

She pointed to the neighbors’ homes through her kitchen window. “These
people are all children of the gulag,” she said. “Nobody talks about it
anymore. Nobody even wants to look at their pictures anymore.”

The gulags once spread over the Kazakhstan steppe like a thick wreath.
Eleven sprawling camps with names like Alzhir, a Russian acronym for the
Akmolinsk Camp for Wives of Traitors of the Motherland, housed hundreds

of thousands of prisoners and their families.

The camps, built shortly after the creation of the Soviet Union, were partly
emptied to provide soldiers and workers during World War II and were
eventually closed, although not dismantled, after Stalin died in 1953.

In Kazakhstan today, a large percentage of people have parents or
grandparents whose life trajectories were savagely rewired by deportation
and imprisonment in the camps. But memories of the gulags are dying, fading
like Ms. Sadina’s photos.

“For younger generations the gulag is uninteresting,” said Arest Savchak, a
61-year-old teacher whose parents and grandparents were exiled to Karaganda
as political prisoners for the crime of supporting Ukrainian nationalism.

“After the collapse of the Soviet Union, when we entered market economy, the
values and the views of people have changed. Unless the gulag can be linked
to the present time, it is meaningless.”

For many Karaganda youngsters, the oppression the gulags stand for does not
register. “This was just a village for miners,” said Sasha Talabaev, 12, who
was riding a bicycle through the heart of what was one of the gulags.

Some of the reasons for a quick and collective forgetting are obvious. The
memories, after all, are painful. And since the fall of the Soviet Union and
Kazakhstan’s independence in 1991, there are more pleasant things to focus

Growing affluence is one of them. The economy is growing at about 10 percent
a year, and with the aid of oil, the country has developed a sophisticated
middle class and has nurtured to maturation a regional banking center. Its
once dour towns have metastasized into modern cities.

But there are political aspects to a sidestepping of Kazakhstan’s recent
history, too, often born out of the government’s determination to stay
friendly with Russia.

To sustain support for a pro-Russia foreign policy, “the Kazakhstan state
has gone to great lengths to construct an ideology for its nation-state that
glosses over its colonial and neo-colonial history with Russia,” Sean R.
Roberts, a researcher in Central Asia affairs at Georgetown University,
wrote on Dec. 19 in his Web log about the region.

Although those efforts have not added up to a blanket ban on public
remembrances of the gulags, the government has instead chosen to ignore

the issue. And it has used its control of the education system to keep texts
from dwelling on the topic.

In a more pointed example of control, the government forbade large-scale
remembrances of a violent uprising in Almaty, the capital, that took place
in December 1986.

As many as 40,000 ethnic Kazakhs poured into Almaty’s central square then

to protest Mikhail S. Gorbachev’s firing of the chief of the Kazakh Soviet
state. Soviet security forces are estimated to have killed at least 200
protesters on the square.

The rebellion was a watershed for Kazakh identity. It resonated too strongly
for the government to ignore this year, so in October, President Nursultan
A. Nazarbayev quietly dedicated a statue to commemorate the event.

But the gesture received little coverage in the Kazakh press, which is
closely monitored and controlled by the government.

Opposition leaders and several thousand nationalists hoped to use the statue
as a gathering point for an antigovernment rally on the anniversary, but the
government moved swiftly to crush preparations for it.

With Kazakh nationalism having become mostly the purview of the anti-Russia
opposition here, the government has had to use other avenues to promote a
coherent national identity.

That is no small challenge in this country of 17 million people who span 80
different ethnicities and nearly as many religions – a direct legacy of the
Soviet Union’s use of Kazakhstan as a holding pen for prisoners, dissidents
and people who did not fit in the Russian mainstream.

Popular culture has been one tool of choice, especially through the
government-financed movie studio KazakhFilm, which has a near monopoly

on the country’s film industry.

This year the studio released its biggest hit yet, a historical piece called
“Nomad” that delved into distant history, telling the little-known story of
an ancient battle to give an uplifting view of Kazakh identity.

The film, a $34.5 million production, broke box-office records in
Kazakhstan, grossing more than $1 million here and also doing well in

Despite the huge expense of such historical movies, KazakhFilm plans more.
But the company’s chief executive, Talgat Temenov, says that none will be
set in the 20th century.

“The Kazakh people have a tragic history, but with a movie like ‘Nomad,’
people can feel a sense of pride,” he said. “Film is an art and should not
be a political tool, but at the same time we need to respect what history
can do to people’s psychology.”

Steven A. Barnes, an assistant professor of history at George Mason
University who has studied the gulags in Karaganda, insists that history’s
relevance to society is exactly why remembering Kazakhstan’s painful gulag
past is so important.

“In the post-Soviet space, the trip from remembering to forgetting has been
remarkably swift,” he said. “Perhaps such public forgetting would seem less
problematic if not for the fact that it enables strong, authoritarian rule
that clamps down on basic human rights like freedom of speech and the right
of assembly.”                                      -30-
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
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