AUR#902 Sep 2 Business In Ukraine Eyeing Russia But Confident, Boeing, Battered Stocks

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

Ukrainian History, Culture, Arts, Business, Religion,
Sports, Government, and Politics, in Ukraine and Around the World       
                     
ACTION UKRAINE REPORT – AUR – Number 902
Mr. Morgan Williams, Publisher and Editor, SigmaBleyzer
WASHINGTON, D.C., TUESDAY, SEPTEMBER 2, 2008 
 
INDEX OF ARTICLES  ——
Clicking on the title of any article takes you directly to the article.               
Return to Index by clicking on Return to Index at the end of each article
Analysis: By Sabina Zawadzki, Reuters, Kiev, Ukraine, Thu Aug 28, 2008
 
2 BUYING BOEING
Ukrainian carrier AeroSvit invests in U.S. plane fleet but faces U.S. government regulatory
restrictions on expansion & Ukraine government’s endless political battles and incompetency.
By Jim Davis, BusinessUkraine magazine, Kyiv, Ukraine, Monday, July 28, 2008
 
3.  PIONEERING PROGRAMMERS 
Software firm expands thanks to US investment and marketing expertise
By Jim Davis, BusinessUkraine weekly magazine
Kyiv, Ukraine, Monday, July 28, 2008
 
By Harry Wilson, Wall Street Journal Europe 
New York, New York, Friday, August 29, 2008
 
UkrInform, Kyiv, Ukraine, Monday, September 1, 2008
 
6UKRAINE BANKING SECTOR IN THE FACE OF INFLATIONARY PRESSURES
Ukraine had 178 operating banks at the end of June 2008
Raiffeisen Bank Aval, Kyiv, Ukraine, Monday, September 1, 2008
 
By Peter Apps, Reuters, London, UK, Tuesday August 26 2008
 
World Bank, Kyiv, Ukraine, July, 2008
 
BY 23% IN SEVEN MONTHS
Interfax – Ukraine Business, Kyiv, Ukraine, August 12, 2008
 
10PROSPECT OF EXCHANGE-RATE CRISIS LOOMS
Ukraine has a BB-rating, has rising inflation and a growing current account deficit.
By Rachel Morarjee, Financial Times, London, UK, Friday, August 29 2008
 
IFC Supports Growth of Ukraine’s Private Sector
International Finance Corporation (IFC), Kyiv, Ukraine, Wed, Aug 27, 2008
12ZURICH OFFERS ASSET-BACKED SECURITIZATION IN UKRAINE
Insurance Journal, San Diego, CA, Monday, August 25, 2008
 
U.S.-Ukraine Business Council (USUBC), Washington, D.C., Monday, August 11, 2008
Lease on Black Sea port a source of bitter conflict
OP-ED: David Marples, Freelance
Professor of Russian & East European history at the University of Alberta
Edmonton Journal, Edmonton, Canada, Thursday, August 28, 2008
 
Pravda, Moscow, Russia, Thursday, August 28, 2008  
 
16.  UKRAINE FEARS BECOMING RUSSIA’S NEXT TARGET 
Associated Press, Kiev, Ukraine, Monday, September 1, 2008

17.  LOOSE TALK THAT LOST GEORGIA

Nato Summit Declaration of April 3 About Georgia and Ukraine
Opinion: By Roger Cohen, International Herald Tribune (IHT)
Paris, France, Sunday, August 31, 2008

18GERMAN AND RUSSIA THREATEN EU-UKRAINE RELATIONS
Andrew Rettman, Euobserver, Brussels, Belgium, August 28, 2008

 
Display their lack of historical perspective of Russia, Ukraine, Georgia, Estonia
OP-ED: Peter Millar, The Sunday Times, London, UK, Sun, Aug 31, 2008

20 EUROPE MUST STAND UP TO THE RUSSIAN BULLY
Vladimir Putin cannot be allowed to take an imperial line on Russian expansion
OP-ED: By Sir Malcolm Rifkind, MP for Kensington and Chelsea
British foreign secretary and defence secretary, 1992-97

Telegraph, London, United Kingdom, Sunday, August 31, 2008
 
Analysis & Commentary: By Vladimir Socor
Eurasia Daily Monitor – Volume 5, Issue 166
The Jamestown Foundation, Wash, D.C., Saturday, August 30, 2008 
 
Editorial: Financial Times, London, UK, Thursday, August 28 2008
 
OP-ED: By Bernard-Henri Levy, The Wall Street Journal 
New York, New York, Wednesday, August 27, 2008; Page A15
 
OP-ED: By Mikheil Saakashvili, President of Georgia
Financial Times, London, UK, Wednesday, August 27 2008
 
25EU MUST BE UNITED AND FIRM ON RUSSIA
Editorial: Financial Times, London, UK, Sunday, August 31 2008
 
OP-ED: By David Phillips, Financial Times
London, UK, Sunday, August 31 2008 19:33
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1
 BUSINESS IN UKRAINE EYEING RUSSIA BUT CONFIDENT

 
ANALYSIS: By Sabina Zawadzki, Reuters, Kiev, Ukraine, Thu Aug 28, 2008

KIEV – You might think war next door would make your average western executive take his money and run, but foreign business in Ukraine is still as concerned with red tape and inflation as a looming Russia.

France’s Foreign Minister Bernard Kouchner said on Wednesday that Ukraine could be Russia’s next target, after Moscow recognized the independence of Georgia’s breakaway regions South Ossetia and Abkhazia, populated mostly by Russians.

Investors, indeed, have responded to the regional crisis by driving Ukraine’s credit default swaps — one assessment of risk — to four-year highs and withdrawing cash from its currency and equities markets.

But while businesses say they are monitoring events in Georgia, they remain more concerned by stalled reforms under the divided government of President Viktor Yushchenko and Prime Minister Yulia Tymoshenko, and inflation of close to 30 percent.

“For companies that are here, this is nothing new. It’s business as usual,” said Trond Moe, president of the European Business Association, which represents dozens of large foreign companies including Siemens, Raiffeisen, ArcelorMittal, E.ON, Fujitsu, Nestle and Volvo.

“Ukraine has to deal with Russia. In Ukraine there are sensible politicians who can deal with this, who are not hotheaded or irrational.”

Some observers said Georgian President Mikheil Saakashvili was rash to send in troops to Russian-dominated South Ossetia, providing Moscow with just the excuse to intervene militarily and reduce Georgia’s chances of NATO membership.

They draw parallels with Ukraine’s clashes with Gazprom over gas supplies, its aspirations to join NATO, which Moscow opposes, and the existence of the Crimea region, populated by mostly ethnic Russians. 

“That’s reverberating down to new investors who are not yet here and don’t fully understand that this is part of a complicated relationship,” said Jorge Zukoski, president of the U.S. Chamber of Commerce in Kiev representing U.S. business.

“If you have done your homework, you’re in the market, have the relationships, you’d know this is part of the game but you will of course continue to watch it unfold closely.”

WE NEED FDI

Moe also heads the local arm of Norway’s telecoms firm Telenor, one of a raft of investors who have been at the heart of Kiev’s drive to revitalize its former communist economy since its “Orange Revolution” four years ago.

International rating agencies warn that Ukraine’s economy could quickly be thrown off track by any slowdown in the flow of foreign cash, which has helped the country pay for steep rises in the price of Russian gas imports.

FDI jumped to $6.9 billion in the first half of this year from $2.6 billion a year earlier. Overall last year it rose to $7.9 billion from $4.3 billion in 2006.
Zukoski said “the jury is out” amongst investors drawing up budgets for next year. But he says many are more cautious.

“It’s a superstar market — company boards were deciding to put money back into the country, to solidify their market positions, while their competitors are looking at entrance opportunities,” he said. “Now they’re a little bit more conservative.” 

The Georgian crisis adds another element to consider in Ukraine, where Yushchenko’s and Tymoshenko’s row has stalled privatization, prevented a unified approach to inflation and helped divide the central bank when it revalued the hryvnia.

“What is harming business now is inflation, which is partly due I think to the inability of the authorities to work in a united way — the conflict between the president and the prime minister is contributing to that,” Telenor’s Moe said.
He said businesses have raised wages twice this year, the second time by as much as 15-20 percent, which harms profit margins, and if price rises continue they could cause a deeper economic crisis that would wipe out people’s purchasing power.
As for an actual conflict in Ukraine, few with investments on the ground are worried. “I don’t see any new information. I see more reaction from investors,” said Jerome Booth, head of research at Ashmore Investment, which manages assets of $37.5 billion in emerging countries and has no plans to change its strategy in Ukraine.
“The Soviet Empire hasn’t suddenly appeared. There’s a geo-political stratagem in Russia which has reasserted itself, and some people weren’t aware of it.”
 
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[return to index] [Action Ukraine Report (AUR) Monitoring Service]
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2.  BUYING BOEING
Ukrainian carrier AeroSvit invests in U.S. plane fleet but faces

U.S. government regulatory restrictions on expansion & Ukraine
government’s endless political battles and incompetency.

By Jim Davis, BusinessUkraine magazine, Kyiv, Ukraine, Monday, July 28, 2008

Ukraine-based airline AeroSvit, has in 14 years gone from a bare bones start-up to a dynamically growing international carrier with a large number
of international destinations as far east as Beijing and Shanghai, China and as far west as Toronto, Canada and New York City.

However, as with most 14 year olds, the airline is anxious to keep growing, but finds that it is blocked from expansion in the markets it wants most to add service by regulations that penalise the airline because of failures of the Ukrainian government and what airline officials claims is the abysmal lack of operational safety among its competitors.

THE COUNTRY’S LARGEST CARRIER

AeroSvit Airlines is owned by State Property Fund of Ukraine (22%), Genaviainvest (25%), Ukrinfoconsult (10%), Bureu (5%) and Gilward
Investments (Netherlands) (38%). The airline now has over 2,400 employees in Ukraine and around the world.

Operating mainly from Kyiv’s Boryspil International Airport, AeroSvit has grown to become Ukraine’s largest carrier, with scheduled domestic services
to 11 cities and international services directly or by codeshare to over 33 destinations worldwide.

AeroSvit was established March 25, 1994 and started operations in April that same year with flights from Kyiv to Tel Aviv, Odesa, Thessaloniki, Athens
and Larnaca in co-operation with Air Ukraine.

AeroSvit first operated Boeing 737-200 aircraft and later added Boeing 767s which allowed the commencement of its longest hauls to China, India, and
Thailand in the east and the United States and Canada in the West.

Last year was a landmark year for the airline, in which it carried over two million passengers for the first time, an increase of 31.5% over 2006. The
total number of flights the airline performed increased by 17.2% compared to 2006, reaching 24,800. After first breaking into the list of the world’s top
200 airlines more than three years ago, AeroSvit has continued to move upward on the list.

BUILDING UP A FLEET OF US-MADE BOEING AIRCRAFT

Since its founding, AeroSvit has been an almost totally Boeing-equipped carrier and expects to it stay that way for the near-term future. In August 2007 Boeing announced that AeroSvit was ordering up to 14 Boeing 737-800 airplanes. The carrier signed an order for seven 737s valued at USD 523 million according to list prices, and secured purchase rights for another seven.

This order marks AeroSvit’s first direct purchase from Boeing since its 1994 founding. AeroSvit will gradually replace its fleet of 14 737 Classic airplanes with the Next-Generation 737s which Boeing claims is today’s most technologically advanced single-aisle commercial jetliner. In addition to
other innovations, AeroSvit will equip the airplanes with fuel-saving Blended Winglets.

“This order is significant for Ukrainian aviation. It demonstrates dedicated execution of our replacement strategy and is an indicator of Ukraine’s current economic development and progress as an important player in international business and tourism,” says Aron Mayberg, director-general of AeroSvit.

“Boeing demonstrated in-depth knowledge of our business and, with the Next-Generation 737, presented a compelling solution to our future needs. We look forward to continuing our excellent cooperation.”

The order for Boeing 737s places AeroSvit in the long queue for delivery of what has been the most successful commercial aircraft in history, with more
than 7,000 orders. Boeing has 1,500 unfilled orders for the Next Generation 737 worth more than USD 100 billion.

OUTSTANDING SAFETY RECORD, DISAPPOINTINGLY LOW RATING FROM U.S. GOVERNMENT

By any measure, AeroSvit has enjoyed great success in the last 14 years, becoming an internationally known airline with great growth potential and
the largest air carrier in one of the region’s economic hotspots. However, AeroSvit Deputy General Director Yevhen Treskunov argues that operating
from Ukraine also carries with it immense frustrations.

“Since the very beginning we have made immense contributions to the United States’ economy, with large monthly payments in the past for the lease of
Boeing aircraft and large payments ahead as we expand our fleet of Boeing 737s and 767s.

“We also pay something in excess of USD 3 million per year in commissions to travel agents in the United States. Of course, let me make it clear that we
are not complaining about these payments since they represent value for money in our business.

“However, the rules of the US Federal Aviation Administration (FAA), place Ukraine in Category 2, the same category to which it assigns countries in
Africa where there are armed conflicts and real dangers.

“In practical terms, this designation means that no matter how good our safety record is at AeroSvit, Ukraine’s overall low rating for air safety means that we are totally blocked from expanding our services into the United States,” he explains.

“AeroSvit’s overall record for air safety is outstanding and the FAA admits that we are not the problem. However, because some other Ukrainian airlines
do not have good safety records, we are suffering for the misdeeds of others.

“We must add to that this is also a result of the weakness of Ukraine’s Civil Aviation Agency (CAA) which has a lack of professionals and is not
sufficiently independent to do its job properly,” Mr. Treskunov says.

THE SORRY STATE OF UKRAINE’S AIR SAFETY REGULATIONS

Mr. Treskunov is in a good position to assess the state of Ukraine’s aviation agency as he was previously a leading light at the CAA. He personally led a team in 2000 that put together a ten-year programme that, if adopted, would have solved many of the problems that beset the CAA and Ukrainian aviation as a whole.

However, Mr. Treskunov says that as so often happens, changes of governments and changes of air safety personnel have crippled the agency’s effectiveness. The FAA reclassified Ukraine into Category 2 in 2005 and there now appears no possibility that this classification could be changed any time soon.

A number of local industry insiders point to incidents with some Ukrainian carriers over the last year that seemed to have sealed Ukraine’s aviation fate for the near future and perhaps for many years to come.

During 2007, the CAA tried without success to close down one Ukrainian airline that had what is generally regarded as a terrible air safety record. After the CAA issued the order that would have closed it down, the order was overturned by Kyiv’s Higher Economic Court.

Since then the CAA’s hands have been tied. Only firm action by the current government to appeal the court’s order to a higher court and get a favourable ruling would allow the CAA to carry out its mandate for air safety regulation.

AIR TRAFFIC AGENCY: VICTIM OF UKRAINE’S ENDLESS POLITICAL BATTLES

Every airline and air safety official contacted was unanimous in their condemnation of the CAA and cast doubt on the agency’s ability to carry out its functions in a satisfactory manner.

One source, speaking on condition of anonymity, told Business Ukraine: “There is a complete lack of regulatory professionals in Ukraine’s CAA. Virtually every really competent staff person eventually gets frustrated with the endless changes in leadership and the ability of some of the Ukraine’s oligarchs to bend air safety rules to their liking,” the source claimed.

Mr. Treskunov admitted that he was one of those who came to the CAA, worked very hard with the intention of making real progress in Ukrainian aviation, but finally got fed up and left for the airline industry. As one source pointed out, each new government appoints their own people with their own political agenda, far-removed from the interests of the agency.

Professor Galyna Suslova of the National Aviation University (NAU), one of the world’s most respected air safety professionals, confirms  the situation
with Ukraine’s CAA. In addition to teaching duties, Ms. Suslova is acting director of the International Civil Aviation Organisation (ICAO) programme
in Ukraine. The professor points out that in Soviet times Ukraine was the centre of aviation education, a fact reflected in the current student population at the university of over 50,000.

Ukraine still has a good reputation as an aviation education centre and draws students from all over the world. However, Prof. Suslova agrees that very few of the top NAU graduates seek employment at Ukraine’s CAA because they recognise it is a dead end. Those who do go into the CAA soon tire of their inability to do their job and leave for commercial airlines.

She stresses that the weakness of the CAA is not the fault of its personnel themselves. “The CAA is now undergoing its 17th reorganisation since
Ukrainian independence. There is no air safety organisation in the world that could do its job adequately under such circumstances,” Prof. Suslova says.

“Not only are there management problems, but Ukraine’s main air code has not really been updated since 1992. A revised air code that would comply with
ICAO standards has been presented to the parliament. It is not perfect, but it would greatly improve the situation, if we could ever get it passed,” she opines.

OVERCOMING OBSTACLES & EXPANDING SCHEDULE IN THE UNITED STATES

“We would like to expand our schedule in the United States,” confirms Mr. Treskunov at AeroSvit. “We want to provide an upgraded service to New York and to begin a five times per week service to Chicago. We are convinced that this would allow us to increase our purchases of US-built aircraft, and would make it easier for business travelers to Ukraine to pursue their interest in investing here. It is very much a win-win situation for both countries.

“However, until such time as Ukraine improves its air safety regulation, we are blocked from any further expansion in the US. We hope for a change as
soon as possible, but in reality we fear the changes may be years away. Incidentally, it is not only AeroSvit but also other carriers who bear the burden of this situation. Changes would be good for us all,” Mr. Treskunov concludes.

Dan Fenech, General Representative in Ukraine of Delta Air Lines, the only United States carrier serving Ukraine directly, comments on the current
situation: “Delta Air Lines’ operations into Ukraine at present are governed by the US-Ukraine bilateral treaty and are not impacted by Ukraine’s
Category 2 status.

“However, like all major carriers in the market we strongly prefer that the Ukrainian government achieve all the necessary legislative and procedural
changes required to bring Ukraine back to ICAO compliance and Category 1 status. We believe this would be the best outcome for the people of Ukraine
and the airline industry as a whole.”  LINK: http://www.businessukraine.com.ua/buying-boeing

NOTE: Boeing is a member of the U.S.-Ukraine Business Council (USUBC), Washington, D.C.

[return to index] [Action Ukraine Report (AUR) Monitoring Service]
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3.  PIONEERING PROGRAMMERS 
Software firm expands thanks to US investment and marketing expertise

By Jim Davis, BusinessUkraine weekly magazine, Kyiv, Ukraine, Monday, July 28, 2008

Much like Microsoft, the world’s leading IT giant, SoftServe began with dedicated young founders who had a vision to build a software development
company that could compete with any in the world. Founded in 1993 by two recent Lviv State University graduates, SoftServe recently celebrated its
15th anniversary in July with many of its more than 1,000 employees.

The company continues to operate from its Lviv base but now boasts software development centres in several other Ukrainian cities and strengthened
infrastructure in the United States, its principal target market.

SoftServe has been aided in its American expansion plans by US specialists and investors who have supported the growth and development of the company and played a crucial role in its success. After coming to the realisation that further development into the highly competitive US market would require
additional financial and human resources, SoftServe sought out additional investment and high level marketing expertise, both from US sources.

Today, SoftServe’s expanded marketing operations operate from a new US headquarters in Fort Myers, Florida that co-ordinates the work of sales
offices in Boston, Massachusetts, and Santa Ana, California.

“The opening of the new US headquarters is a crucial milestone in our business development plans,” explains Taras Vervega, SoftServe’s Executive
Vice President of Business Development.

“Our US business was very rapidly expanding, requiring much more intense coordination by top management. This occurred at a time when escalating
energy prices were driving travel costs through the roof. Now, instead of top personnel commuting frequently across the Atlantic, we have much greater
marketing expertise on the ground in the United States, operating in a much more efficient manner.

“When we combined additional financial resources and marketing expertise, both from US sources, our company made a quantum leap in our ability to
compete at the highest levels of the international software development market.”

Software booming in central and eastern Europe

In 2007, Ukraine outstripped other central and eastern European (CEE) countries, posting what were the region’s highest IT industry growth rates. With almost 40% growth and over USD 3.4 billion in volume, the Ukrainian IT market ranks fourth after Russia, Poland and the Czech Republic, reports IDC, the leading IT industry intelligence watchdog.

“This rapid growth explains the interest in the Ukrainian market of such global IT leaders as Microsoft, which ultimately enhances our integration into the global IT community,” noted Volodymyr Pozdnyakov, regional manager and head of IDC in Ukraine, Belarus and Moldova.

As a part of his first-ever extensive CEE tour in May 2008, Microsoft CEO Steve Ballmer visited Ukraine to demonstrate Microsoft’s commitment to what
is one of the most dynamic regions in the world in terms of economic and IT growth.

“The CEE region is Microsoft’s fastest-growing market, and the Ukrainian IT sector in particular is seeing strong expansion. Microsoft is committed to
contributing to Ukraine’s ongoing transition to a knowledge economy, and to helping government, business, and society use the power of information
technologies to create sustainable economic progress,” said Ballmer during his visit.

A reliable partner for global leaders

At a signing ceremony opening a Microsoft Innovation Centre (MIC) at Kyiv National Taras Shevchenko University, the Microsoft CEO named SoftServe
among the company’s reliable partners in Ukraine, a welcome acknowledgement that illustrates the maturity and credibility of Ukraine’s leading IT firms.

“Naturally, we are delighted to receive such recognition from the head of Microsoft. We hope that our profound relationship with Microsoft will continue to strengthen based of trust and mutual advantage,” says Taras Kytsmey, Chief Executive Officer of SoftServe.

On July 11, when SoftServe celebrated its 15th anniversary, it also celebrated the latest in a long series of international honours heaped on the company.

In July 9 ceremonies held at Houston, Texas, Microsoft recognised SoftServe as Mobility Solutions Partner of the Year in Central and Eastern Europe for
innovative use of Microsoft technologies. A Microsoft Gold Certified Partner since 2004, SoftServe received this prestigious award for development and
implementation of solutions based on Windows Mobile technologies.

In February this year, SoftServe also made it to the Global Services 100 rating for 2008, a list representing companies who have the maturity and
capability to lead the next wave of services globalisation.

The ranking of elite offshore outsourcing vendors, based on leadership, innovation, and outstanding performance is prepared by neoIT and CMP
Technology. SoftServe was ranked fifth in the Top 10 to Watch in Emerging European Markets category which focused on the company’s role as a leader in the international software development outsourcing market.

Education and training intrinsic to IT success story

Recognising the importance of continuous training and retraining as a leader in a field of technology in which changes and improvements come at almost
breakneck speed, SoftServe has from its inception pioneered in-house education and training as an integral part of its business. Mr. Vervega explains how the company constantly invests in human capital as part of their growth plans.

“Rapid expansion requires great human resources; that is why SoftServe intensively invests in the education of its personnel. To increase the professional level of prospective co-workers, we launched SoftServe University, a full-scale educational institution giving students the opportunity to receive the latest practical and theoretical education.”

One of the greatest hurdles for software development companies in the region has been differences in language proficiency. This has been extremely
important since most of the major software projects require English language proficiency of a very high level for developers, who must not only develop
the software using English but also must be able to interact with clients in English.

“About seven years ago, we realized that staff proficiency in English was essential for our business growth,” Mr. Vervega says. “We solved this problem by bringing highly qualified English teachers into permanent full-time staff positions and making English-language training universal in the company. Today, our English-language programme has expanded to include 15 full-time English teachers on staff.”

Recognising that a strong grounding in business principles would be important to its software developers, in order to give them a better understanding of the business world in which their clients must survive, SoftServe recently became a co-founder of the new Lviv Business School (LBS).

The school, launched at the Ukrainian Catholic University in Lviv on February 8, 2008, will combine the best world-class management curricula, unique business development products, common human values and cultural and spiritual components. In addition to SoftServe, other founders of LBS include the Ukrainian Catholic University, Galnaftogaz and Trottola, a Lviv-based clothing manufacturer.

From local success story to world-beater

As its 1,000 plus team gathered for the anniversary celebration on July 11 at the Viking Bay resort outside Lviv, top corporate leaders pointed with
well-deserved pride to 15 years of accomplishments that have brought the company from its two founders to its current high level of worldwide acclaim.

“The key drivers for the company’s success seen over the last ten years have been the commitment and dedication of SoftServe employees, consistent
investment in its services, as well as the partner relationships and support we received from clients”, says Taras Kytsmey, SoftServe’s President and
co-founder.

Another founding member, Taras Vervega, EVP, Business Development, says, “I credit this milestone to our unique ability to create innovative solutions
that enable our clients to maximise their efficiency, increase revenue and shorten the time-to-market.” 

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[return to index] [Action Ukraine Report (AUR) Monitoring Service]
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4.  BATTERED UKRAINE STOCKS GET DUBIOUS LABEL FROM ANALYSTS

By Harry Wilson, Wall Street Journal Europe, New York, New York, Friday, August 29, 2008

Ukraine’s equity market has become one of the world’s worst-performing exchanges, following a year-to-date decline in shares of more than 50%, leading analysts to dub it the “China of eastern Europe.”

Ukraine’s benchmark PFTS index fell 5.5% to close at 513.84 Thursday, because of tensions in the region. Russia’s invasion of Georgia has led many to fear that Ukraine might suffer the same fate, since, like Georgia, it is frequently at odds with Moscow and has a significant Russian-speaking population.
This has taken the market’s total year-to-date decline to more than 50%, leading to the comparison to stocks in China, where the benchmark Shanghai Composite Index has declined about 55% this year.
Some of the worst hit stocks have been in the steel industry over fears the companies will require increasing government support. On Wednesday shares in Avdeevka Coke fell 7%, and dropped an additional 2% Thursday, while shares in Enakievo Steel fell 10% Wednesday but recovered to rise marginally Thursday.
The share-price declines also match the drops in neighboring Russia. Russian equity valuations have also been hit hard this year, with Russia’s leading MICEX index losing 19% of its value in the past month.
However, the sharp selloff in Ukrainian equities has some analysts forecasting a rebound in valuations, with Alfa Bank projecting a rally within the next two months. In a report Thursday, calling Ukraine the “China of eastern Europe,” Alfa Bank analyst Denis Shauruk said the fall in valuations offered investors a good opportunity to pick up Ukrainian stocks on the cheap.
 
“For many, this may look like a disaster, but for those who view underperforming stocks and indexes as the perfect buying opportunity, this is a clear signal to buy,” he said. [From Financial News at www.efinancialnews.com.]
 
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[return to index] [Action Ukraine Report (AUR) Monitoring Service]
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U.S.-Ukraine Business Council (USUBC): http://www.usubc.org
Promoting U.S.-Ukraine business relations & investment since 1995.
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5.  UKRAINIAN STOCK MARKET FELL BY 54.5% SINCE BEGINNING OF 2008

 
UkrInform, Kyiv, Ukraine, Monday, September 1, 2008
KYIV – The Ukrainian stock market became the world’s worst market in eight months of 2008, reads the Delo newspaper. It fell by 54.5% since the beginning of this year, thereby outrunning its major competitor, the Chinese market, which decreased by 53.9%.
PFTS index fell by 19.9% only August 18 through August 28, says the newspaper, believing that the Ukrainian stock market has been “let down by two super-states, the United States and Russia.”
Unpleasant news from western stock markets have initially become a signal to sales on the Ukrainian market, thus thwarting the hope of national market players for a quicker return of foreign investors, an analyst from Avrora Capital Investment Company, Vadym Yankovsky, said.
“Our traders have worked out a herd instinct. They see that the U.S. market is falling and take this as an example,” a senior analyst from Prospects Investments Company, Viacheslav Korol, said.
PFTS index fell by 3.5% when Russian President Dmitry Medvedev signed a decree recognizing the independence of South Ossetia and Abkhazia on August 26. The index decreased by 10% in the next two days.
“An escalation of the Russian-Georgian conflict made certain investors review their strategy on the Ukrainian market and some of them decided to leave the national stock market. Their desire to sell equities in the absence of customers has led to a significant fall in prices,” Investment Office Head in Bonum Group Company, Oleksandr Spasichenko, said.
Ukraine’s stock market analysts have changed their position and now forecast the return of PFTS index to 600 points by the end of 2008, or a 48% decrease since the beginning of this year.
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[return to index] [Action Ukraine Report (AUR) Monitoring Service]
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6.  UKRAINE BANKING SECTOR IN THE FACE OF INFLATIONARY PRESSURES
Ukraine had 178 operating banks at the end of June 2008

Raiffeisen Bank Aval, Kyiv, Ukraine, Monday, September 1, 2008

KYIV – The latest developments in Ukraine’s banking segment reflect the upward trend in the country’s economic growth, marking a 7.3 pct annual rise
in July 2008, as well as the inflation pressures under the impact of skyrocketing production prices and expansionary fiscal policy.

Ukraine’s banking sector showed a convincing growth in the first half of 2008, registering a combined profit of 6.2 bln Ukrainian hryvnias ($1.34
bln/909.5 mln euro) and assets worth 717.9 bln hryvnias ($155.7 bln/105.3 bln euro).

However, lending by domestic banks, particularly mortgage loans, experienced a slowdown in the second quarter of 2008, affected by the tighter liquidity
conditions and higher rates.

Ukraine had 178 operating banks at the end of June 2008, of which 49 partially with foreign capital and 18 fully owned by foreign institutions.

Concentration ratios in the Ukrainian banking system did not change much in the first half of 2008, the top 10 banks continued to control almost half of
the market, particularly in the household segment, where their aggregate market share in retail lending and deposits was 62.1 pct and 59.8 pct, respectively.

ASSETS AND LIABILITIES
The credit portfolio of the banking system totalled 531.9 bln hryvnias ($115.4 bln/78 bln euro) at the end of July. In annual terms, credit growth continued to decelerate – from 69.5 pct as at end-May and 64.1 pct as at end-June to 61.3 pct in July.

The household lending segment remained the most dynamic, although the annual growth rate of private income (PI) loans is gradually falling – from 97.8
pct at end-2007 to 71 pct as at end-July 2008. The credit growth slowdown tendency is expected to be preserved by the end of the year, as credits are
projected to grow by 45 pct in 2008, while the PI loans portfolio is seen to increase by nearly 60 pct.

PI deposits continued to grow, although the annual rate has been gradually falling to 50.6 pct at the end of July. Corporate deposits marked a strong
build-up in the June-July period of 15.4 bln hryvnia ($3.34 bln/2.26 bln euro), after a sluggish performance in the first five months of the year,
increasing only by 2.9 bln hryvnias ($629 mln/428.3 mln euro).

Local banks’ equity made up 88.8 bln hryvnias ($19.26 bln/13 bln euro) on July 1, 2008, rising by 4.8 pct month-on-month and by 27.6 pct since the
beginning of the year. In July 2008, two Ukrainian banks placed eurobonds for the first time since the eruption of the global financial crisis in July last year.

Ukrsibbank issued a three-year $250 mln (169 mln euro) notes with a coupon yield of 9.25 pct, 187.5 basis points higher than the bank’s previous
three-year $200 mln (135.2 mln euro) eurobond placed in July 2007. The issue currently offers around 75 basis points premium to Ukrsibbank’s paper due in December 2011.

According to market experts, the eurobond placement is quite successful in view of the strong market position of Ukrsibbank and the strength of the
parent banking group BNP Paribas. Alfa Bank also recently placed three-year $250 mln (169 mln euro) notes but with much higher yield – 12 pct, which is
275 basis points higher compared with the issue of July 2007, that apparently reflects the increased (refinancing) risk profile of the bank.

MORTGAGE LENDING
Mortgage lending growth slowed down further in the second quarter of 2008 under the impact of higher lending rates pushed up by the active
anti-inflationary policies of the central bank and the Government which provoked a liquidity squeeze on the money market.

According to the Ukrainian National Mortgage Association (UNIA), the average interest rate on hryvnia mortgage loans rose from 18.4 pct to 22.5 pct for
April to June. The total portfolio of mortgage loans rose by 4.3 bln hryvnias ($932.8 mln/630.8 mln euro) in the second quarter, after an almost
8.0 bln hryvnia ($1.73 bln/1.17 bln euro) increase for January to March.

As a result, the annual growth fell to 77 pct from 110 pct at end-2007 and 98 pct as at end-March 2008. The growth slowdown in the mortgage lending
segment could be partially attributed to the revaluation of forex (FX) loans, which account for more than 80 pct of the total mortgage loans
portfolio, following a 4.0 pct hryvnia appreciation in late May.

Moreover, FX lending rates are rising as well, since the banks are still facing reduced access to foreign funding. Concentration in the mortgage lending segment remains the highest – as at end-June the top 10 mortgage lenders controlled 76.4 pct of the market, down from 78 pct at the end of 2007.

The segment continues to be dominated by the foreign-owned banks, as four out of five market leaders belong to international financial groups (Ukrsibbank, RB Aval, Ukrsotsbank, OTP Bank).

Moreover, foreign-owned banks, namely Ukrsotsbank and Swedbank were the fastest growers in this segment in the first half of the year. Mortgage lending growth is seen to decelerate to around 60 pct by the end of the year, lending conditions will still be tight.

Specifically, despite recent inflation slowdown and liquidity improvement, lending interest rates are likely to remain elevated in the coming months
thus suppressing the demand for credit.

FINANCIAL PERFORMANCE
Despite the strong profit growth, bank profitability registered a decline in the first half of the year, while cost efficiency slightly worsened. Ukrainian banks’ combined net profit grew 66 pct in annual terms as at end-June 2008.

At the same time, profitability ratios marked a decrease, with return on assets (ROA) going down from 1.50 pct to 1.34 pct for January to June and return on equity (ROE) falling from 12.67 pct to 11.16 pct.

The main reason for the lower profitability was a decline in the net non-interest margin (NonIM), which went down from 2.46 pct at end-2007 to 2.17 pct as at July 1, 2008, apparently due to the reduction of service fees by the banks, following the C-bank’s calls for more transparent product pricing.

At the same time, despite higher funding costs and intensified competition, the banks managed to sustain net interest margin (NIM) at a relatively high
level, at 5.01 pct, down from 5.03 pct at end-2007.

Interest revenues remain the major source of the banks’ income and its share in the total income increased in the first half of 2008 to 76.9 pct on the back of the falling share of fees and commissions income. The banks’ cost efficiency did not improve – cost-income ratio slightly worsened for January to June 2008, going up to 58.9 pct from 58.3 pct.

Specifically, intensified upward pressure on wages due to the surging inflation and high property prices are driving overhead expenses up – as at end-June overheads grew 67 pct in annual terms.

LEGISLATION
In a move to discourage hot money inflow and ease appreciation pressure on hryvnia, the C-bank recently introduced a 20 pct mandatory reserve
requirement on domestic banks’ short-term FX borrowings.

According to the new regulation, FX loans and deposits from non-residents with maturity less than six months, except for overnight loans, loans with state guarantee and loans from international financial institutions, are now subject to a 20 pct reservation. The reservation should be done in the currency of borrowing. Finally, the document concerns only banks, not other residents.

The effect of the new requirement on the banking system is seen to be rather limited, since short-term foreign borrowings is not a major source of funding for Ukrainian banks – as at June 1, 2008 the share of foreign funds in the banks’ combined liabilities made up less than 9.0 pct.

Moreover, banks may escape new requirements by slightly increasing the maturity of the borrowings. On the other side, in view of the new regulations, the price of short-term foreign borrowings will go up.

LINK: www.aval.ua

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7.  TENSION HITS RUSSIAN MARKETS, AND ITS NEIGHBOURS

 
By Peter Apps, Reuters, London, UK, Tuesday August 26 2008
 
LONDON – The value of Russian assets tumbled on Tuesday as tension grew between Moscow and the West over Georgia, with the impact spreading across eastern Europe as far as Poland.
 
Russian President Dmitry Medvedev announced Moscow would recognize two rebel regions of Georgia as independent states, while the Kremlin’s ambassador to NATO compared the situation to 1914 and the outbreak of World War One.
 
Russian stocks lost 4.2 percent, putting them down 31 percent so far this year. At one stage in the day they were down 6.1 percent and at their lowest since October 2006.
 
The cost of insuring Russian debt in the five-year credit default swaps market rose to 137-139 basis points from 126 at Friday’s close, meaning it would cost $137-139,000 a year for five years to insure $10 million of debt.
 
“The main potential impact on Russia is through an impact on capital flows into the country… affecting foreign investment,” Edward Parker, head of emerging European sovereigns at Fitch ratings agency, told Reuters. He said Russia’s oil-rich economy could easily absorb the cost of the Georgia war itself but was still vulnerable.
Russian companies have continued to see good profit growth — between 23 and 75 percent in the first taste of this year’s second quarter financial reports — but that has not yet been enough to encourage spooked investors to return.
On top of the Georgia conflict, investors have been put off as oil giant BP fights to retain control of its local joint-venture and after Prime Minister Vladimir Putin attacked New York listed coalminer Mechel.
Fitch warned that Russian corporate and quasi-sovereign borrowers might find lenders increasingly nervous in a global credit market already drained by the Western credit crunch.
The cost of insuring the debt of Russian gas giant Gazprom rose around 5 basis points to 260 bps, compared to around 230 before the conflict broke out August 7-8.
COMMODITIES KEY
Credit agency Standard and Poor’s said Russia’s economy itself was more dependent on issues other than the row with the West over Georgia.
“At the end of the day, what matters most for Russian creditworthiness is whether commodity prices will hold and whether the consumption boom is sustainable,” S&P director of European sovereign ratings Frank Gill told Reuters. But he warned he could not rule out negative ratings moves in the Baltic states if Russia became more aggressive.
Fear of worsening tensions with Russia have begun to dent investor sentiment towards a string of nearby countries, with Georgia inevitably the worst hit.
Georgia’s debut five-year Eurobond widened by 15 to 20 basis points on Tuesday to around 700 basis points above U.S. Treasuries. The bond launched in April at a yield spread of 474 points over Treasuries.
Ukraine, seen by most investors as next most exposed to a potential conflict with its giant neighbour, saw the cost of insuring its debt rising sharply.
Ukraine credit default swaps rose 14 basis points on Tuesday to 440-450 bps, off peaks seen earlier in the Russia-Georgia conflict but still well above their pre-conflict levels around 400.
But with Moscow furious over the United States stationing defence shield missile systems in Poland and the Czech Republic, investors are even expressing more concern over what were until recently seen as some of the safest emerging markets.
The cost of insuring Poland’s five-year debt against default in the CDS market is up around a third since the Georgia conflict began, widening to 70 basis points from around 50 when Russian and Georgian troops first met in battle on August 8.
“Some risk premium is starting to build up in the Czech Republic and Poland because of the Czech and Polish acceptance of U.S. missiles,” said Elizabeth Gruie, emerging market strategist at BNP Paribas. (additional reporting by Carolyn Cohn and Sebastian Tong; Editing by Gerrard Raven)
 
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8.  UKRAINE: ECONOMIC UPDATE

 
World Bank, Kyiv, Ukraine, July, 2008
KYIV – More of the same for 2008, as the demand-led expansion continues and external conditions remain unexpectedly favorable. Policy efforts to tighten fiscal and monetary policy to cool an overheating economy have been mired in political controversy and may yet suffer from electoral politics.
We upped our growth and inflation forecasts for 2008 and still see a gradual adjustment as the base case for 2009, with higher downside risks.
RECENT ECONOMIC DEVELOPMENTS
Domestic demand kept the economy expanding at above 6% in 1H 2008, as external conditions remained favorable. In Q1, real GDP grew by 6.5%, with 15% and 22% y/y growth in fixed investment and private consumption, respectively while import growth (20%) continued to vastly outstrip export expansion (1%).
 
Higher steel and chemicals prices boosted the terms of trade by another 10% containing the widening of external imbalances. The current account (CA) in Q1 nonetheless reached -9.8% of period GDP in line with our earlier forecast. Two thirds of the CA deficit were financed by FDI and debt inflows continued despite widening spreads for Ukraine (by 180bps since Dec07) in international markets, allowing the NBU to accumulate USD 3bn in H1.
Inflation soared, confirming earlier warnings that the economy was overheating. Consumer inflation reached a peak in May with 31.1% y/y, before marginally retreating to 29.3% in June. Soaring food prices of 50% were the main contributor.
 
Meanwhile, PPI growth further accelerated to 43.7% y/y on the back of commodity price developments. The iron and steel, mining iron ore, and oil products price indices were up (y/y) 68%, 95%, and 75%, respectively.
Macroeconomic policies tightened in response, but were mired in political controversy. In Jan-May, nominal budget revenues were up 46% y/y thanks to higher than planned inflation and some improved collection, while spending was kept within the plan leaving the consolidated budget in surplus (at 3.4% of period GDP). Planned budget amendments to spend the extra revenues would largely undo this effort.
Following weeks of interbank market fluctuations outside of the de-facto band of UAH/USD 5–5.06, the NBU on May 22 revalued the official exchange rate from UAH/USD 5.05 to 4.85 Subsequently, the NBU council set a new exchange rate band for H2 2008 at UAH/USD 4.85 +/- 4%.
 
The move seems to indicate a gradual shift to greater exchange rate flexibility. A period of tighter liquidity and higher interest rates caused credit growth to slow down moderately to 64% y/y in June, the lowest growth since Dec 05.
MEDIUM TERM OUTLOOK
We have revised up our 2008 growth and inflation forecast based on the current external price environment. Ukraine is a net beneficiary of the recent developments in the global economy. The commodity price boom has led to terms of trade gains of close to 40% since 2003, underwriting the growth momentum despite the tightening of global financial conditions.
The expected grain harvest at well over 40 million tons will compensate for weakening trends in industry and construction in 2H 2008 and we now expect growth at 6% for the year.
 
Our inflation forecast is also up, since even with food prices ebbing down as the good harvest is brought to market, macro-policies remain insufficiently tight for a faster pace of disinflation, and electoral pressures may prevent a further tightening during 2008.
We see 2009 as a year of gradual adjustment, with growth slowing to 4.5% and inflation moving back into the middle teens. The fall by 6.4% in the terms of trade, as metal prices stabilize and gas import prices adjust further towards European levels is a key underlying assumption.
 
This together with the impact of slowing credit growth should help contain domestic demand to a more sustainable pace. Even under this gradual adjustment scenario, the CA deficit moves above 11% of GDP, requiring external financing of some USD 25bn.
 
We expect gradually stabilizing international markets and Ukraine’s strong underlying value proposition to ensure this continues to be met through FDI and private lending. We see domestic utility tariffs adjusting to reflect rising import costs, thus keeping the headline CPI above 15% eop, but with core inflation trending down faster.
A fiscally prudent budget and tight monetary policy are core ingredients for the gradual adjustment to take hold. Absent a further widening of the exchange rate band, the NBU will need to rely on tightening prudential regulations to further slow the pace of credit growth and curb short-term capital inflows, whilst monitoring liquidity in the banking sector.
 
At the same time, fiscal policy should target real income increases in the 2009 budget in line with underlying productivity growth, implying a modest increase in nominal wages and social transfers.
 
This would help stabilize inflationary expectations and contain the further deterioration of the CA. In Ukraine’s unstable political environment, the downside risks to this scenario are considerable.
 
While commodity prices might continue to surprise on the upside thereby reducing the need for domestic tightening to some extent, we think risks are biased in the opposite direction. An acceleration of structural reforms to boost domestic supply would contain the dip and lead to faster growth beyond 2009. CONTACT INFO: Ruslan Piontkivsky (380 44) 490 66 71/2/3 E-mail: rpiontkivsky@worldbank.org
 
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9.  UKRAINE INTERNATIONAL AIRLINES UPS PASSENGER TRANSPORTATION
BY 23% IN SEVEN MONTHS

Interfax – Ukraine Business, Kyiv, Ukraine, August 12, 2008

KYIV – Ukraine International Airlines (UIA,Kyiv) January through July 2008 increased passenger transportation by 23% year-over-year, to 936,500
passengers,according to UIA’s press service. In July alone,the carrier increased passenger transportation by 14.5%,to 184,000 people. Last month,the company transported 400 tonnes of cargo and mail.

CJSC Ukraine International Airlines was founded in 1992. The company has 15 Boeing airplanes of various types: four Boeing-737-300s,five Boeing-737-400s and six Boeing-737-500s. The company’s main airport is Boryspil International Airport.

The State Property Fund of Ukraine owns a 61.6% stake in the company, Austrian Airlines has a 22.5% stake, the European Bank for Reconstruction and Development a 9.9% stake, and Ireland’s AerCap a 6% stake.

The net profit of the company in 2007 was UAH 41.89 million,which is 55.7 times up compared to 2006. The company’s net income last year grew by
36.1%,to UAH 1.255 billion.
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10.  PROSPECT OF EXCHANGE-RATE CRISIS LOOMS
Ukraine has a BB-rating, has rising inflation and a growing current account deficit.

By Rachel Morarjee, Financial Times, London, UK, Friday, August 29 2008

Eastern European countries face a growing risk of an exchange-rate crisis as tensions between Russia and the west hit economies struggling to contain inflation and deal with slowing export growth.

Fitch Ratings says in a new report that “the risk of a hard landing accompanied by an exchange-rate crisis somewhere in the region is significant and rising”, though it stresses this is not its central scenario. Seven countries in eastern Europe are on negative outlook, a record number since Fitch began to cover the region.

Ukraine has a BB-rating and has rising inflation and a growing current account deficit. Georgia and Serbia also have a BB-rating.

Ukraine had attracted high levels of foreign direct investment to finance its deficit. Inflows could be hit by the worsening political environment as the country struggles with 27 per cent inflation and 64 per cent domestic credit growth.

“Since Georgia’s prospective membership of Nato was a trigger for Russia’s attack, the risks facing Ukraine are substantial, since its relationship with Nato is identical to Georgia’s,” said David Lubin, economist at Citibank.

 
Ukraine’s PFTS market  has dropped more than 20 per cent this month and 56 per cent since the start of the year, while the pan-European FTSE Eurofirst
300 has fallen 21 per cent this year.  Credit defaults swaps, whihc measure the cost of insuring its five-year sovereign debt against default, have widened 38 basis points over the month. 

“Wherever the credit and commodity boom has pushed up property markets to unsustainable highs, there is a serious risk to growth, particularly where banking system portfolios are less seasoned,” said Frank Gill at Standard and Poor’s. Baltic and Balkan economies which have relied on western european exports for growth are also at risk.

LINK: http://www.ft.com/cms/s/0/da154b2e-75e7-11dd-99ce-0000779fd18c.html

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U.S.-Ukraine Business Council (USUBC) www.usubc.org.
Promoting Ukraine & U.S.-Ukraine business & investment relations since 1995. 
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11.  INTERNATIONAL FINANCE CORPORATION (IFC)
HIGHLIGHTS PRIORITIES FOR UKRAINE 
IFC Supports Growth of Ukraine’s Private Sector
International Finance Corporation (IFC), Kyiv, Ukraine, Wed, Aug 27, 2008

Kyiv, Ukraine – Lars Thunell, Executive Vice President and CEO of IFC, a member of the World Bank Group, today said that IFC will continue supporting the growth of Ukraine’s private sector through investments and advisory programs focusing on agribusiness, infrastructure, cleaner production, and access to finance.

 
Speaking at the end of an official visit to the country, Thunell also emphasized IFC’s aim to help maximize Ukraine’s agribusiness potential throughout the value chain.
Thunell met with Ms. Valentyna Zavalevska, Deputy Minister of Agrarian Policy, to discuss opportunities for expanding cooperation between IFC and Ukraine. He stressed that IFC is ready to help private agribusiness companies meet the growing demand for food and mitigate escalating food prices.
 
“Rising food prices are a catastrophe for the world’s poor,” Thunell said. “Part of IFC’s response is to help increase production in countries such as Ukraine that have strong agribusiness potential.”
 
KHLIBPROM BAKING COMPANY, RISE AGRIBUSINESS SERVICES
Thunell met with IFC investment clients, including the management of Khlibprom, a baking company, and Rise, an agribusiness servicing company. Three years of cooperation with IFC helped Rise expand its products and services, increase outreach to clients, improve transparency and governance, and triple its sales volume.
 
VINNITSA FRUIT SUPPLY CHAIN PROJECT
Thunell also met with clients of the IFC Vinnitsa Fruit Supply Chain Development Project, which is being implemented in partnership with Austria’s Ministry of Finance.
 
SWEDBANK COMMERCIAL BANK
Thunell signed a loan agreement with Swedbank, a leading commercial bank in Ukraine. IFC is providing a $70 million loan for its own account to Swedbank and Swedbank Invest. IFC will also play a critical role in mobilizing parallel and syndicated loans of approximately $69 million in order to complete the financing package.
 
Swedbank, a former IFC advisory client, will use the financing to expand access to finance for small businesses and potential home owners who cannot access financing outside Kyiv under current market conditions.
Since Ukraine became a member of IFC in 1993, IFC has committed about $1 billion in 42 projects in the country, covering such sectors as agribusiness, construction materials, energy, financial markets, retail, and services. IFC is also implementing seven advisory services projects in agribusiness, energy efficiency, housing finance, leasing, and regulatory simplification.
ABOUT IFC 
IFC, a member of the World Bank Group, fosters sustainable economic growth in developing countries by financing private sector investment, mobilizing private capital in local and international financial markets, and providing advisory and risk mitigation services to businesses and governments.
 
IFC’s vision is that people should have the opportunity to escape poverty and improve their lives. In FY07, IFC committed $8.2 billion and mobilized an additional $3.9 billion through syndications and structured finance for 299 investments in 69 developing countries. IFC also provided advisory services in 97 countries.  NOTE: For more information, visit www.ifc.org.
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12.  ZURICH OFFERS ASSET-BACKED SECURITIZATION IN UKRAINE

Insurance Journal, San Diego, CA, Monday, August 25, 2008

Zurich’s Emerging Markets Solutions group announced that it has provided political risk insurance (PRI) for the first public asset-backed securitization (ABS) project in the Ukraine.

Zurich noted that this is the second time it “has provided political risk coverage for investors in the Ukrainian market to manage the unique risks of
capital market transactions in emerging markets. In this latest transaction, Zurich is supporting an $85.8 million Class A Notes issue backed by auto
loans and originated by PrivatBank JSCC. The notes were issued by Ukraine Auto Loan Finance No. 1 PLC.”

“We are excited to be involved in the Ukraine’s first public ABS transaction,” stated Dan Riordan, president of the Surety, Credit and Political Risk group.

“This recent transaction is particularly noteworthy because Zurich was previously involved in the first publicly rated securitization in this market. With these types of capital market transactions on the rise in the Ukraine, there are increased opportunities to provide PRI. The currency inconvertibility and expropriation coverage afforded by this insurance is often crucial for investors when deciding to invest in a bond issue coming out of an emerging market.”

Source: Zurich – www.zurich.com; LINK: http://www.insurancejournal.com/news/international/2008/08/25/93046.htm
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13.  3M JOINS U.S.-UKRAINE BUSINESS COUNCIL

(USUBC), MEMBER NUMBER 88
 
U.S.-Ukraine Business Council (USUBC)
Washington, D.C., Monday, August 11, 2008
 
WASHINGTON, D.C. – The executive committee of the U.S.-Ukraine Business Council (USUBC), on behalf of the entire membership, is most pleased to
announce that 3M has been approved for USUBC membership. 3M is USUBC member number 88 (www.usubc.org).
 
3M IS KNOWN FOR ITS INNOVATION
3M is headquartered in St. Paul, MN and is a global, diversified technology company.  3M is best known for its culture of innovation, which produces
thousands of imaginative products that are leaders in scores of markets – from manufacturing, energy, health care and highway safety to office products and
optical films for LCD displays.
 
For more than 100 years, people around the world have looked to 3M for products and ideas that solve problems and make their lives easier and better.
With more than 55,000 products, 40-plus core technologies and leadership in major markets served worldwide, 3M continues to develop ingenious solutions to meet customers’ needs.
 
3M BRANDS ARE HOUSEHOLD NAMES
The 3M brand is recognized and trusted around the globe. Household names like NexcareT, Post-it®, Scotch®, Scotch-Brite®, and ScotchgardT are market leaders.
 
3M IS AN INTERNATIONAL COMPANY
3M has on-the-ground operations in more than 60 countries including Ukraine. Over half of these subsidiaries possess manufacturing operations.
Approximately 35 subsidiaries have an in-country laboratory to support local innovation for their customers’ needs.  3M employs 7,000 researchers
worldwide; 3,900 in the United States.
 
In 2007 3M’s worldwide sales were $24.5 billion, international sales were $15.5 billion (63 percent of company’s total).  3M has sales in over 200
countries and has more than 75,000 employees worldwide. 3M employs mostly local nationals.  George W. Buckley is Chairman, President and Chief
Executive Officer of 3M.
 
CHERYL INGSTAD HEADS UP 3M IN UKRAINE
Cheryl Ingstad is the new Managing Director of 3M business operations in Ukraine. She assumed her new position in May. Cheryl was previously the
Business Development Manager in the 3M Government Markets office, Washington, D.C.
 
3M Ukraine is expanding its business by constantly broadening its product offering and by moving more personnel into the regions.  In Ukraine, 3M has
significant business in the safety, dental, medical, industrial, electronics, communications, consumer and office sectors.
 
Some examples of 3M’s business in Ukraine are specialty tapes for the automotive industry, respirators for workers in factories and mines, reflective materials for roads, bandages and casts for clinics/hospitals, liquid filtration for beverage and pharmaceutical manufacturers, abrasives for furniture and industrial manufacturers, coatings for pipelines, protective materials for electrical cables in power generation and transmission systems, cleaning products for consumers and stationery products for offices.
 
3M Ukraine is in the process of opening a new Mining & Metallurgy Market Center to bring all solutions from 3M’s world-renown technologies that apply
to the special needs of customers in the Mining and Metallurgy sectors.
 
3M DONATES SUPPLIES FOR FLOOD ASSISTANCE
3M is donating several thousand dollars worth of cleaning supplies and personal protective materials, such as abrasive pads, sponges, wipes, gloves, respirators, protective clothing and hearing protection for the Western Ukraine flood disaster assistance program.  USUBC is a member of a coalition that has created the Ukraine Disaster Assistance Fund to accept donations for Western Ukraine,
 
3M ORGANIZED INTO SIX BUSINESSES
3M has more than 35 business units, which are organized into six businesses: (1) Consumer and Office; (2) Display and Graphics; (3) Electro and
Communications; (4) Health Care; (5) Industrial and Transportation (6) Safety, Security and Protection Services
 
3M IS A LEADER IN SOLUTIONS FOR INDUSTRY
In the area of tapes, adhesives, abrasives, specialty films, worker/facility safety, air and liquid filtration, 3M has thousands of solutions to offer.
3M products can be found in factories, offices, schools and hospitals around the world, helping to protect workers and increase their efficiency.
 
For more information about 3M click on: www.mmm.com or http://solutions.3m.com/wps/portal/3M/ru_UA/Worldwide/WW/ (in Ukrainian).
 
“The U.S.-Ukraine Business Council (USUBC) is most pleased to have 3M join the rapidly expanding USUBC membership.” said Morgan Williams,
SigmaBleyzer,  who serves as President of USUBC.
 
MEMBERSHIP IN USUBC KEEPS GROWING
3M is the 37th new member for 2008, and the 67th new member since January of 2007. USUBC membership has quadrupled in the past 20 months, going from 22 members in January of 2007 to 88 members in July of 2008. Membership is expected to top 100 very soon.

The other new members in 2008 are MaxWell USA, Baker and McKenzie law firm, Och-Ziff Capital Management Group, Dipol Chemical International,
MJA Asset Management, General Dynamics, Lockheed Martin, Halliburton, DLA Piper law firm, EPAM Systems, DHL International Ukraine, Air Tractor,
Inc., Magisters law firm, Ernst & Young, Umbra LLC., US PolyTech LLC, Vision TV LLC, Crumpton Group, American Express Bank, a Standard
Chartered group company, TNK-BP Commerce LLC, Rakotis, American Councils for International Education, Squire, Sanders & Dempsey LLP,
International Commerce Corporation, IMTC-MEI, Nationwide Equipment Company, First International Resources, the Doheny Global Group, Foyil
Securities, KPMG, Asters law firm, Solid Team LLC, R & J Trading International, Vasil Kisil & Partners law firm, AeroSvit Ukrainian Airlines,

ContourGlobal, Winner Imports LLC (Ford, Jaguar, Land Rover, Volvo, Porsche), and 3M.

The complete USUBC membership list and other information about USUBC can be found at: http://www.usubc.org.

 
BUSINESS INVESTMENT DRIVES UKRAINE’S INTEGRATION

 
Ukraine’s Euro-Atlantic integration is first and foremost today being driven by the private business community in Ukraine, Europe, and the United States.

“Ukraine’s aspirations for Euro-Atlantic integration, to be a major member of  the world’s community of strong, democratic, independent, prosperous, private business sector driven nations, will be realized largely through the present leadership and investments from the business community and then hopefully with some real support later from the politicians and government leaders,” wrote Morgan Williams, SigmaBleyzer, who serves as President of USUBC, in a recent article published by the “Welcome to Ukraine” magazine.

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14.  RUSSIA’S POLICY TOWARD GEORGIA DOES NOT BODE WELL FOR UKRAINE 

Lease on Black Sea port a source of bitter conflict

OP-ED: David Marples, Freelance
Professor of Russian & East European history at the University of Alberta
Edmonton Journal, Edmonton, Canada, Thursday, August 28, 2008

Russia’s recognition of the independence of South Ossetia and Abkhazia may signal the demise of Georgia. It also raises serious questions about future relations with Ukraine.

That threat cannot be dismissed as fanciful or far-fetched as in the past. Russia’s foreign policy in what it calls its Near Abroad has changed dramatically over the past three weeks.

Borders are no longer sacrosanct, and Russia has not hesitated to use its monopoly of gas supplies to Ukraine as a political weapon in the past. Ukraine is not blind to the new situation, but it is, in many respects, unprepared for the different forms of potential conflict. These lie in the following areas:

The critical area is Crimea and in particular the port of Sevastopol. When Ukrainian president Viktor Yushchenko refused to extend the lease on the port to the Russian Black Sea fleet beyond 2017, he ignited a new conflict with the northern neighbour. Yushchenko has also demanded that the annual rent Russia pays for its two bases — $98 million — be increased significantly.

Last week in Sevastopol, there was a substantial protest of ethnic Russian members of the Russian Bloc, the most powerful political party on the peninsula. Led by Vladimir Tyunin, they were demanding that Crimea should become part of the Russian Federation.

That demand is hardly new. In the early 1990s, former president Yuri Meshkov ignited a similar movement and promised a referendum on the issue. The Ukrainian government acted firmly to quell the separatists and abolished the post of Crimean president.

Rumours abound that Russia is issuing passports to the majority group of ethnic Russians, just as it did to South Ossetians and Abkhazians in Georgia. Prominent Russian statespersons, including Moscow Mayor Yuri Luzhkov, frequently visit Sevastopol and demand that it be returned to Russia.

Added to the mix are the Crimean Tatars, deported by Josef Stalin in 1944-45, but permitted to return under Gorbachev and now comprising about one-sixth of the population. The relationship between the Tatars and the government in Kyiv is amicable, but relations with Russians who own most of the former Tatar lands and property are volatile.

In 2004, when the Orange Revolution took place, eventually bringing Yushchenko into office, two regions of Ukraine — Donetsk and Luhansk — threatened to leave Ukraine with support from Russia. The two regions, centres of the coal, steel, and chemicals industries, provided overwhelming support to the candidacy of former prime minister Viktor Yanukovych. They have large populations of ethnic Russians comprising majorities in the major cities.

Since the population as a whole is Russian speaking, there is no ethnic tension; but the Regions Party, which dominates eastern Ukraine, has a radically different perception of the country than the Orange parties currently in office.

It is backed by Ukraine’s richest and most powerful oligarch, Rinat Akhmetov, and supports warm relations with Russia and close ties with the EU, while strongly opposing Ukraine’s request to join NATO and Yushchenko’s support for Georgia.

After Russia’s brutal defeat of Georgian forces, both Yushchenko and Prime Minister Yulia Tymoshenko visited the Donbas (to Donetsk and Luhansk respectively). They were not co-ordinated visits but the timing seemed notable. Both leaders wished to ensure that they have a voice in a formerly hostile voting area.

Today, the key issue is the territorial integrity of Ukraine. Prime Minister Vladimir Putin and President Dmitry Medvedev have indicated that they are prepared to revise formerly recognized borders. The Russian government is willing to support and sow disaffection in Eastern Ukraine and Crimea, as well as in the Prydnistrova region of Moldova.
 
However, Ukraine tends to be its own worst enemy. Though its government has requested NATO membership, most residents oppose it. The Regions Party insists that no membership can take place without a referendum, the result of which hitherto has been a foregone conclusion.
 
Despite two recent elections, the Ukrainian Parliament is so badly divided that it could not even pass the 2008 budget before the summer recess. Yushchenko has undermined every reform initiative of Tymoshenko. In turn, the ruling Orange coalition’s majority is down to two seats.
Perhaps most revealing of Ukraine’s predicament is the low standing in the polls of the president and his party. A poll conducted between Aug. 8 and 24 found that, had a parliamentary election been held at that time, 23.4 per cent of respondents would have backed the Tymoshenko Bloc and 20.3 per cent the Regions Party. Yushchenko’s Our Ukraine and People’s Self-Defence Coalition and the Communists had 4.6 per cent.
In terms of the popularity of the potential presidential candidates for an early 2010 election, Tymoshenko leads with 24 per cent, followed by Yanukovych with 20. Yushchenko’s seven per cent makes him the least popular leader in Europe at a time when Ukraine’s economy is as strong as it has ever been.
Ukraine’s politicians need to focus priorities.
 
A coalition government to ensure internal unity seems a logical first step. Yushchenko cannot lead Ukraine without public support as the country enters its 18th and most critical year of independence.
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15.  UKRAINE PRESIDENT DELIBERATELY AIMS TO AGGRAVATE
RELATIONS WITH RUSSIA 
 
Pravda, Moscow, Russia, Thursday, August 28, 2008  

MOSCOW – Ukraine’s Viktor Yushchenko expresses only his personal point of view making anti-Russian statements on behalf of the Ukrainian nation regarding Russia’s recognition of South Ossetia and Abkhazia.

Sergei Markov, a prominent Russian scientist of politics, a United Russia deputy of the State Duma, said that the majority of Ukrainians do not share Yushchenko’s stance on the matter. Yushchenko deliberately tries to aggravate relations with Russia, the specialist believes.

“The majority of Ukrainians support Russia. There is only one person in Ukraine who does not support the Russian Federation – this person carries the title of the Ukrainian President. This is the most important fundamental contradiction of the Ukrainian policy, not the Yushchenko-Tymoshenko opposition. This contradiction may explode Ukraine’s policy,” Sergei Markov said in an interview with Novy Region news agency.
Yushchenko is an open-minded person, the scientist of politics said. “He utterly hates Russia and all things Russian. Without a doubt, he is a Russophobe. He just muddles things up: Ukraine is not Russia’s enemy, he is Russia’s enemy,” Sergei Markov said.
Sergei Markov rejected the concerns of many politicians, who believe that Russia would lay claims to the Crimea Peninsula after the recognition of South Ossetia and Abkhazia.
“Russia will not be laying any claims to the Crimea. We were forced to protect those people, whom war criminal Saakashvili was murdering. If Viktor Yushchenko opts to become a war criminal to exterminate Russians in the Crimea, Russia will defend them too. If he does not murder anyone then there will obviously be no claims,” Markov said.
“Shedding blood between Russia and Ukraine is a dream of such Russophobes as Yushchenko. This is what they are striving for and will be striving for. We are perfectly aware of that, and the people of Ukraine must know it too,” Markov said.
The scientist of politics added that one should expect more anti-Russian provocations that Viktor Yushchenko may initiate, whereas Russia will successively support its friendship with the Ukrainian nation.
 
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16.  UKRAINE FEARS BECOMING RUSSIA’S NEXT TARGET 

Associated Press, Kiev, Ukraine, Monday, September 1, 2008

KIEV, Ukraine  – With Russian troops stationed deep in Georgia, fears run high that Ukraine may be the next victim of a Kremlin drive to reclaim
dominance in the former Soviet Union.

Many here believe Moscow has its sights on Ukraine’s strategic Crimea peninsula on the Black Sea – once a jewel of Russia’s empire. Officials both
here and in the West worry how far Russia might go to stop Ukraine’s drive to join NATO and to regain control of Crimea.

Analysts say war between the two nations is highly unlikely. While Georgia is a small nation of 4.6 million, Ukraine is roughly the size of France, with a population of 46 million.

Russia also relies on Ukraine for transporting its gas to European consumers, and Russia is Ukraine’s energy supplier and top trading partner.

“There is no way on earth that these two countries will go to war,” said Geoffrey Smith, strategist at the Renaissance Capital investment bank in Kiev.

Short of war, however, the Kremlin has many ways of using economic and military might to pressure Ukraine’s Western-backed government.

Russia drew harsh criticism from the United States and Europe last week for recognizing two separatist Georgian territories as independent states
following a short but devastating war. Russian troops still control a key Georgian Black Sea port and other locations deep inside the country.

The conflict plunged relations between Moscow and the West to a post-Cold War low and the European Union is considering sanctions against Russia.

French Foreign Minister Bernard Kouchner suggested last week that Russia might next target Ukraine and its neighbor Moldova, a tiny, impoverished
ex-Soviet republic which is plagued by its own separatist conflict in the Trans-Dniester region.

“It is not impossible. I repeat, it’s very dangerous,” Kouchner told Europe-1 radio. “There are other objectives that we can assume are objectives for Russia, in particular Crimea, Ukraine and Moldova.

Ukrainian leaders also are alarmed. “The decision taken by the Russian leadership poses a threat to peace and stability both in our region and in Europe,” President Viktor Yushchenko said Wednesday. Only NATO can guarantee Ukraine’s independence, he said.

Since he came to power four years ago, Yushchenko has made joining NATO his top goal, sought to create a Ukrainian Orthodox church independent of
Moscow, and enforced the use of the Ukrainian language at the expense of the Russian – all steps that anger Russia.

Crimea carries an immense emotional resonance for Russians: It was part of the Russian empire for centuries, a beloved tourist destination and home to
the proud Russian naval base in the port of Sevastopol.

But in 1954, the Crimea was handed to the Soviet republic of Ukraine by leader Nikita Khrushchev, who had lived and worked there for years. After
the 1991 Soviet breakup, it remained part of independent Ukraine. Back then, Russia was fighting its own separatists and struggling with a collapsing
economy – and was too weak to protest.

But by sending troops to Georgia, an economically and politically revived Russia demonstrated a willingness to use military force outside its borders
to achieve its aims.

The Kremlin has not officially laid claims to Crimea, but Moscow’s powerful mayor, Yuri Luzhkov, whose views often reflect popular sentiments, has
warned that it still isn’t too late for Ukraine to return what doesn’t belong to it.

Crimea, like Georgia, is a tinderbox of political and ethnic problems. Nearly 1.2 million of its 2 million residents are ethnic Russians, many of
whom believe Crimea should be Russian.

Russia has a lease that gives it control of the Sevastopol military base until 2017 and has hinted that it does not want to leave when the lease runs
out.Konstantin Zatulin, a member of the Russian parliament from the Kremlin’s dominant United Russia Party, has warned that if Kiev is not friendly toward Moscow, it will pay a price.

“This will heat up the situation,” Zatulin told the Russian daily Izvestia. “In Ukraine, in the Crimea and in Russia there will be political forces, who
will be developing the thesis of the need to reconsider borders and the fate of Crimea and Sevastopol.”

Several Western leaders rushed to Ukraine’s support. “We have not forgotten our commitments to you. Nor shall we do so,” said British Foreign Secretary
David Miliband, who flew to Kiev last week. U.S. Vice President Dick Cheney is expected to visit in September.

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17.  LOOSE TALK THAT LOST GEORGIA

Nato Summit Declaration of April 3 About Georgia and Ukraine

OPINION: By Roger Cohen, International Herald Tribune (IHT)
Paris, France, Sunday, August 31, 2008

DENVER: In retrospect the NATO summit declaration of April 3 about Georgia and Ukraine seems almost criminal in its irresponsibility: “We agreed today that these countries will become members of NATO.”

That lofty commitment emerged from a Bucharest meeting so split over the two countries’ aspirations to enter the Atlantic alliance that it could not even agree to offer the first step toward joining, the Membership Action Plan that prepares nations for NATO.

It is unconscionable to declare objectives for which the means do not exist, or paper over European-American division through statements of ringing but empty principle. The history of the so-called “safe areas” in Bosnia, Srebrenica among them, is sufficient testimony to the bloodshed lurking in loose commitments.

The great Bucharest fudge succeeded only in infuriating the Russians without providing the deterrence value of concrete steps for Georgia and Ukraine. Vladimir Putin, then Russia’s president and now its prime minister, made Moscow’s fury plain to President George W. Bush the next day in Sochi, but Bush, no surprise, was asleep at the wheel.

Blood has since been shed, Georgia’s borders trampled, and its breakaway provinces of South Ossetia and Abkhazia recognized by Russia resurgent.

That’s a cautionary tale for Monday’s European Union summit on the Georgian crisis: no empty commitments, please, and no feel-good doling-out of threats or sanctions against Russia for which the means are lacking. Grandstanding has had its day.

I’m appalled by what Russia has wrought in Georgia. The gulag and the enslavement of wide swathes of Europe by the Soviet empire burden Moscow with a historical responsibility for the freedom of its neighbors. Viktor Yushchenko, the Ukrainian president, put these neighbors’ fear most bluntly: “What has happened is a threat to everyone.”

It is, but Putin, or at least Putin II, the angry man of the second half of his rule, thinks all that’s bunk.

In 2005, the ex-KGB man, his veneer of St. Petersburg liberalism already buried, called the demise of the Soviet Union “the greatest geopolitical catastrophe” of the 20th century. So perhaps we should not be surprised by the Georgian grab. Yet shock is palpable in Europe and the United States.

At the Democratic national convention here, a Georgian delegation wandered around garnering sympathy. Public relations are a weak state’s best 21st century weapon.

David Bakradze, the chairman of the Georgian Parliament, told me: “Russia’s aim is to weaken Georgia to the point that NATO allies are scared, instability brings regime change, and the map of Europe is changed by military force.”

I can’t argue with that. I don’t like it any more than Bakradze. But before we get to what to do about it, a few points of history bear examination.
No, the West was not wrong to extend NATO to the former vassal states of the Soviet empire in central Europe and the Baltic. The historical debt of Yalta and the indivisibility of a free Europe demanded no less.

Could more have been done to bring Russia into this new European “architecture?” I think not. Ron Asmus, who dealt with these questions as a senior Clinton administration State Department official, told me “It’s become a Weimar-like legend that we humiliated them.”

On the contrary, hundreds of man-hours went into nudging the Russians westward. The NATO-Russia Council was set up; cooperation on nuclear disarmament and nonproliferation was put in place. Boris Yeltsin was determined to break Russia’s imperial tradition; Putin did not immediately reverse the trend.

What turned Putin cannot yet be written. Georgia’s “Rose Revolution” of 2003 and Ukraine’s “Orange Revolution” of 2004 were critical. Iraq played a part. I’m sure the huge amounts of money accruing to the managers, he chief among them, of a controlled one-pipeline Russian state did, too. And here we are.
Russia will pay a price for what it’s done.

It’s angered China, opened a Pandora’s box for a state with its own breakaway candidates, and lost its international law card. Rather than a new Cold War, we’re in a new broad war with several players, China chief among them, and Putin’s Russia has placed short-term gain before long-term interests.

So the West should not overplay its hand. Breaking off arms reduction and missile defense talks with Russia is in nobody’s interest. Nor are cheap shots like throwing Russia out of an (ever less relevant) G-8.

But nor can the West be cowed. It must shore up the Georgian president, Mikheil Saakashvili, with financial and other support. It must keep the trans-Caspian, Russia-circumventing energy corridor open. It must bolster Ukraine’s independence. And, at the NATO foreign ministers’ meeting in December, it should replace Bucharest blather with basics: a Membership Action Plan for Georgia and Ukraine.

Resolve tempered by engagement won the Cold War. It can help in the broad war. [NOTE: Roger Cohen’s blog: www.iht.com/passages]

 
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18.  GERMAN AND RUSSIA THREATEN EU-UKRAINE RELATIONS
 

Andrew Rettman, Euobserver, Brussels, Belgium, August 28, 2008

BRUSSELS – Germany’s close relations with Russia are the main obstacle to signing a major EU-Ukraine treaty at the upcoming EU-Ukraine summit in
France, Ukraine diplomats say, warning that failure to seal the deal will signal to Moscow that it can veto EU policy on post-Soviet states.

“There are maybe two or three countries who are strong opposers, strong sceptics,” Ukrainian deputy foreign minister Konstantin Yeliseyev said in
Brussels on Thursday (28 August), commenting on EU reluctance to state clearly that “the future of Ukraine lies in the European Union” in the preamble to the new treaty.

 
“In this regard, we count very much on the leadership of Germany, which is the engine of EU integration and a very powerful country, we count very much
on their courage,” he added, saying EU explanations – such as lack of formal consensus among the 27 states or public enlargement fatigue – are “not sincere.”

“Some other countries like Belgium are also opposed. But Berlin is the key,” another Ukraine official said, with just 12 days left to go before the summit in Evian, France. “They are telling us the chancellory is talking to the foreign ministry and so forth, but no matter what they say, the real problem is Russia.”

Germany and Russia have historically close relations, with former German chancellor Gerhard Schroeder currently working to help build a new
Germany-Russia gas pipeline and with the current chancellor, Angela Merkel, opposing EU diplomatic sanctions against Russia despite Russia’s actions in Georgia.

The statement on EU enlargement is a deal-breaker for Ukraine, which says that if Germany’s preferred wording – that the new treaty “does not prejudge
future relations” – is used, it will effectively rule out any Ukraine moves toward EU accession for the next 10 to 15 years, when the pact is due to expire.

Ukraine is also pressing for NATO countries to offer it a Membership Action Plan in December, with Germany also leading opposition at NATO-level to such a move. Mr Yeliseyev warned that lack of a clear political commitment by the West to Ukraine will be seen by Moscow as a green light to expand influence in the east.

“If the [EU-Ukraine] summit is not successful … it will send encouragement to Russia that it can influence EU policy and EU strategy,” he said. “If NATO members don’t take this decision, it will show Russia that by using force, they can influence the process of enlargement and obtain a kind of domination of the post-Soviet states.”

The deputy minister underlined that Ukraine sees the EU as a guardian of economic and political stability, in contrast to NATO’s hard security role. “We consider NATO as a father and the EU as a mother. With a father it’s mostly physical protection, security protection. With a mother it is mostly economic protection,” he said.

Mr Yeliseyev explained that the Russia-Georgia war has raised security concerns in Ukraine due to the situation in Crimea, where 60 percent of inhabitants are ethnically Russian and where Russia keeps its Black Sea fleet, which was used against Georgia, making Ukraine a “third party to this
conflict.”

“If Ukrainian security detorirated, it would not be a Georgia scenario, it would be a more dangerous scenario,” he said, with the 50 million-strong, former nuclear power currently controlling most of Russia’s natural gas exports to the EU.

LINK: http://euobserver.com:80/24/26653

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19.  DAVID MILIBAND AND DAVID CAMERON BLUNDER OVER RUSSIA 

Display their lack of historical perspective of Russia, Ukraine, Georgia, Estonia
OP-ED: Peter Millar, The Sunday Times, London, UK, Sun, Aug 31, 2008

The most frightening sight in recent weeks has not been the media’s metamorphosis of Russia from genial, if rather uncouth, bear into snarling wolf, but the knee-jerking of British politicians.

In Kiev and Tbilisi, David Miliband, the foreign secretary, and David Cameron, the Tory leader, displayed their lack of historical perspective, posturing on politico-economic faultlines of which they appear to have barely schoolboy understanding. Russia is a huge country not as far away as we would like, about which our politicians know far too little.
 
That is most acute when it comes to the “near abroad”, the former Soviet republics to which George W Bush – and now Miliband and Cameron – would like to extend the Nato membership that the West refused Russia.
It has been said that Russia fears a new encirclement. It does, but it is more than that: for Nato forces to enter Ukraine would for most Russians be tantamount to invasion. For Cameron to equate Estonia and Ukraine, as he did last week, is stupidity.
Estonia’s history, language and culture are markedly separate. Forced into the Soviet Union in the second world war, it has also over the centuries been part of Sweden, and ruled by the Teutonic knights. Its language is related to Finnish. 

Putin emboldened as sabre-rattling continues

 

Ukraine is another matter. Its name comes from Old Slavonicu kraju, meaning “on the edge” – in other words, borderlands.
We stopped saying “the Ukraine” to make it sound more like any other country. To Russians it doesn’t. “The” Ukraine had no independent existence before 1991. Like most borderlands it has been almost continuously fought over, since the early Slav kingdom of Kievan Rus fell to Mongol invaders.
Parts of it belonged for centuries to the vast Polish-Lithuanian commonwealth, then much of the west to the Austro-Hungarian empire.
Today, those are the most westward-looking regions, where the language mostly spoken is Ukrainian rather than Russian and the religion is Uniate Catholicism rather than Russian Orthodox.
Kiev, however, remains an anchor in Russo-Slav identity. Far older than Moscow, Kievan Rus gave us the word “Russia”; a statue of its first ruler, Rurik, dominates Moscow’s Pushkin Square.
 
Kiev has totemic status, as Winchester or Runnymede does for England. Of all the losses suffered since the fall of the Soviet Union, those of Ukraine and Belarus have been hardest for Russians to suffer.
Fifty per cent of Ukraine’s population speaks Russian (compared with the 17% who are ethnically Russian). Many Russians – including the late Alexander Solzhenitsyn – see Ukrainian as little more than a dialect, no different from Geordie’s relationship to southern English.
 
Stalin, the Georgian who became Russia’s greatest imperialist, gave the Ukrainians extra territory in 1945 because he considered them inseparable from Russia. He vetoed seats in the United Nations for Canada and Australia unless Russia’s “dominions” got them too. And they did. Never in his wildest dreams did he expect them to vote their own way, let alone achieve independence.
Georgia in Moscow’s eyes is merely a testing ground – from which it emerged victorious. If Ukraine is invited into Nato, the risk is not just a crisis over the Black Sea port of Sebastopol, leased until 2017 to the Russian navy, but also a Russian annexation of the whole Crimean peninsula.
 
That is no more improbable than it would be difficult. Access from Ukraine proper is by a narrow causeway over marshland that could be taken by one battalion of paratroops. Meanwhile, the city of Kerch in the east is less than three miles across water from Russian soil.
Russian annexation would be locally popular. Crimea was not part of Ukraine before 1945. Ninety per cent of its population speaks Russian. Its historic population – the Tatars – were exiled by Stalin and replaced by Russians.
That would invite a Ukrainian civil war, almost certainly bringing in the pro-Moscow breakaway region of Transdnistria in neighbouring Moldova.
This is a minefield over which Miliband and Cameron are trampling without a map. John McCain may see “KGB” written in Vladimir Putin’s eyes but that doesn’t mean what it used to. Russia may be a corrupt pseudo-democracy but it is not communist.
This is a turf war. Russia no longer challenges America for global hegemony but that doesn’t mean it’s going to sit quietly while Uncle Sam parks tanks on what it considers to be its front lawn. To borrow a line from a new John le Carré book: “To ignore history is to ignore the wolf at the door.”
NOTE: Author was Sunday Times central Europe reporter who was made foreign correspondent of the year for his coverage of the end of the cold war.
 
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20.  EUROPE MUST STAND UP TO THE RUSSIAN BULLY
Vladimir Putin cannot be allowed to take an imperial line on Russian expansion

OP-ED: By Sir Malcolm Rifkind, MP for Kensington and Chelsea
British foreign secretary and defence secretary, 1992-97

Telegraph, London, United Kingdom, Sunday, August 31, 2008

“The policy and practice of the Russian Government has always been to push forward its encroachments as fast and as far as the apathy or want of
firmness of other Governments would allow it to go, but always to stop and retire when it met with decided resistance.”

So said Lord Palmerston during the Crimean crisis 150 years ago. If the United States and Europe are not careful we may end up with a new Crimean
War in the not-too-distant future.

European Union leaders, meeting in emergency session in Brussels tomorrow, therefore have an awesome responsibility when deciding on future relations
with Russia. They cannot leave it all to Washington. Russia is part of Europe. Russia is Western Europe’s neighbour.

Recent events in the Caucasus are not the start of a new Cold War. But Russia’s behaviour in Georgia marks the worst deterioration in its relations
with the West since the end of the Soviet Union.

Vladimir Putin cannot be allowed to take an imperial line on Russian expansion

However, Russian aggression against Ukraine that would be the deepest crisis for the international community. We are right to back the democratic
government of Georgia but our strategic interests in that country are only slightly greater than our interests and support for the struggling people of
Zimbabwe or Tibet.

A tough reaction by the United States and Europe over Georgia and South Ossetia is necessary not because changing the frontiers in the Caucasus will
directly affect our security but because, if Russia sees the West as weak and indifferent, it will be emboldened to repeat its behaviour in Ukraine –
and in Crimea, in particular.

Such a crisis would cause massive instability in Europe. Ukraine is a major country with a frontier with the EU. While it is true that parts of
Ukraine – including Crimea – have a largely Russian-speaking population, that is far from unique in Europe.

Dare I say it, Russian minorities in Ukraine, Latvia or elsewhere are like the Sudeten Germans in pre-war Czechoslovakia.

Demanding the absorption of the Sudeten Germans into the Third Reich was the prelude to the Second World War. Russian-speakers in Crimea are now citizens of Ukraine, and Moscow has no right to control its so-called “near abroad”. Nor would it be entitled to demand changes of international boundaries on ethnic or national grounds.

The US and EU must be tough. But can the EU meet such a challenge or must it be left to the US? The Russians are not going to be impressed by rhetoric
from Brussels. It was, after all, Stalin who asked “How many divisions has the Pope?”

The truth is that Europe remains terribly weak militarily. Only Britain and France are significant military powers and they are both overstretched, with
inadequate defence budgets.

Furthermore, on oil and gas, Europe is deeply divided, with Germany too dependent on Russian gas to be prepared to fight for a really tough European
energy policy.

There has also been a disinclination by the EU to consider the use of hard power to achieve political ends. The EU has seen itself as the champion of
“soft diplomacy” just as Russia has reverted to its historic role as an expansionist empire.

Washington has few illusions as to what Russia respects; the Europeans are more ambivalent.

So European leaders – not just Britain and France – when they meet tomorrow, must resolve to develop a much more substantial military capability for the
difficult years ahead. And they must be willing to share their military experience and capability in a more substantial way. France’s stated intention to return to full membership of Nato is very much to be welcomed.

But calling for a tougher European strategy is not the same as saying that Nato membership for Georgia and Ukraine is part of the answer.

I do not doubt that if Georgia had been a member of Nato it is less likely that Russia would have behaved in the way it did. But that is precisely the
point. It is less likely; not unlikely nor impossible. For Russia, the Caucasus is a crucial area: vital, as they see it, to their southern
security.

The Russians are not naive. They would have known that the US, Britain and France would not go to war with them to force South Ossetia back into
Georgia against the wishes of its own people.

So if Georgia had been a member of Nato, President Saakashvili would have invoked Article 5 and demanded military intervention by the rest of the
Alliance. This would have been refused and Nato, and its members, would have responded much as they are doing now.

The real damage, however, would have been to Nato’s credibility and to the security of the UK and other European countries, which have relied on
Article 5 for over half a century.

A member state would have been attacked without Nato rushing to its defence. Some in the US may be fairly relaxed if Nato becomes more of a political
alliance and less of a mutual defence pact. After all it is the US that provides most of the military guarantee.

But for the Europeans, including Britain, the weakening of Article 5 would require major increases in defence expenditure and force the British
Government into a more substantial common European defence policy, probably under the EU. This would suit some, but the Conservative party, in
particular, must be alert to this risk.

The alternative to Nato membership is not to throw Ukraine or Georgia to the Russian wolves. The main prize they should and can be offered is membership of the EU – bringing economic benefits and greatly increasing their political security. Finland, Austria and Sweden are no less secure from
Russian aggression than Lithuania or Latvia, despite not being members of Nato.

In any event, in a real crisis, Nato is able to intervene with military force if it wishes to do so, even on behalf of non-members. This is what it
did, rightly or wrongly, in Kosovo. The difference is that Nato had choice. It had no treaty obligation.

So Europe must be tough but also realistic with Russia. Putin – who remains the real power in the country – is no new Lenin waging ideological war. He
is more like a 19th-century tsar trying to extend Russian power, like all tsars since Ivan the Terrible.

It is not the end of history, but the Russians must be made to realise it is the end of empire.

 
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21.  WHAT THE EUROPEAN UNION CAN DO ABOUT GEORGIA
AFTER THE RUSSIAN INVASION 
Seven steps the EU can take in Georgia
 
ANALYSIS & COMMENTARY: By Vladimir Socor
Eurasia Daily Monitor – Volume 5, Issue 166
The Jamestown Foundation, Wash, D.C., Saturday, August 30, 2008 

The EU’s emergency summit on September 1 must contemplate the wreckage of European policies in the eastern neighborhood and toward Russia. Following Russia’s invasion of Georgia and the forcible change of borders there, the EU can expect intensified Russian pressures (perhaps after a decent interval) on Ukraine, the Baltic states, Moldova, and Azerbaijan.

While the form and combination of pressures — economic, political, military — will vary from country to country, Russia has set in motion a general process of overturning the post-1991 international order. Georgia became the first target.

Although triggered by the assault on Georgia, the EU summit would be remiss if it does not offer assurances of political support and integration prospects to Ukraine and Moldova, as well as a strong affirmation of Europe’s interest in the Azerbaijan-Georgia energy transit corridor.

Given that Russia had handed over its passports en masse in Abkhazia and South Ossetia, and then intervened to “protect Russia’s citizens,” the EU needs clearly to de-legitimize this sort of “passportizatsiya.” The EU had seen it coming in Georgia but said nothing. Failure to de-legitimize it could next hit the EU in the face in Ukraine, Moldova, or the Baltic States.

The Brussels summit grapples with a two-part agenda: First, rescuing the state of Georgia from territorial dismemberment, economic devastation, and Russian military occupation; and second, setting prohibitive costs to Moscow’s use of coercion in Europe’s East, where the reimposition of Russian predominance would enhance Russia’s power vis-à-vis the EU and NATO.

The EU seems broadly prepared to extend political and economic support to Georgia, but appears divided on whether to recognize the challenge from the revisionist power Russia, let alone how to handle that challenge.

At its Brussels summit, the EU can offer Georgia the following forms of support:

[1] Elevate to the top of the policy agenda the issue of removing Russia’s military buffer zones (“security zones”) from Georgia’s interior. Carved out by Russia unilaterally, those occupied zones bear no relation to the French-mediated “armistice;” rather, they tear it up.

 
Those zones extend far beyond Abkhaz and South Ossetian territories, jeopardize Georgia’s vital transportation arteries, undermine the viability of the oil and gas transit corridor, and reduce Georgia to an insecure, precarious rump state.

[2] Revert to full diplomatic backing of Georgia’s territorial integrity within its internationally recognized borders. German Minister of Foreign Affairs Frank-Walter Steinmeier and French President Nicolas Sarkozy had conspicuously abandoned that principle in the conflict-resolution plan on Abkhazia in June and the sham “armistice” in August, respectively.

 
That backpedaling (by third parties at Georgia’s expense) undoubtedly encouraged Russia to “recognize” Abkhazia and South Ossetia and bite off further chunks of inner Georgian territory in the so-called buffer zones. As part of delegitimizing Russia’s “recognition,” the EU is well placed to announce that it would withhold EU aid from countries that recognize Abkhazia and South Ossetia.

[3] Recognize officially the fact that mass ethnic cleansing was carried out in Abkhazia in the 1990s and in South Ossetia (plus the “buffer zone”) in August 2008, invalidating the territorial self-determination claim of the perpetrator authorities.

 
Some EU leaders, including German Chancellor Angela Merkel and French Minister of Foreign Affairs Bernard Kouchner, have duly noted this in the run-up to the EU summit (Deutsche Welle, Agence France Presse, August 26-28). The EU as such, however, needs to go on record on the two cases of ethnic cleansing, condemn them, and draw the appropriate policy consequences.

[4] Call for an impartial international investigation by an independent panel into the events that led to the Russia-Georgia war and its consequences on the ground. Georgia’s Ministry of Foreign Affairs has already called for such an investigation, offering full access to evidence and investigators on the ground (press release, August 29).

[5] Assemble and dispatch an EU peacekeeping contingent to Georgia. Such a contingent could consist of multinational gendarme-type (militarized police) or civilian police units, as well as unarmed military observers, drawn from EU member countries. It should be assigned to replace the Russian troops stationed in the so-called buffer zones, as Chancellor Merkel (Deutsche Welle, August 26) and others have suggested.

 
The EU could confer a mandate of its own to such a contingent within the framework of the European Security and Defense Policy (ESDP). Alternatively, a coalition of the willing from among EU countries could contribute the personnel. In either case, Georgia can exercise its sovereign right to invite such a contingent to its territory.
 
Seeking a mandate from the UN, as France suggests (AFP, August 26) or the OSCE would be the wrong way for the EU to proceed. In that case, Russia would use its veto in either organization to delay the contingent’s arrival indefinitely or to reduce its size and mission to near-irrelevance (as is already the case with the UN and OSCE missions in Abkhazia and South Ossetia, respectively, due to Russia’s veto power).

[6] Authorize EU funding for a reconstruction assistance package, to be developed by the Georgian government in consultation with the World Bank and possibly other institutions. The value of this package must be commensurate with the damage inflicted on Georgia’s infrastructure by the Russian military during the invasion and “armistice”.

 
A non-commensurate reconstruction package would signal (not for the first time) that the EU is not serious about using Georgia’s unique transit potential in Europe’s interest. The EU may appoint a special representative for reconstruction in Georgia.
 
The Czech Republic has offered to host an aid donors’ conference for Georgia. The EU’s reconstruction assistance, however, is no substitute for a strategic policy of the EU, which is lacking in Georgia and the South Caucasus generally.

[7] Fast-track a visa facilitation agreement and a free trade agreement between the EU and Georgia. Both were in the works well before the Russian invasion and have become even more urgent now. Beyond their intrinsic value to Georgia and its citizens, the fast-track completion of these agreements would also serve to demonstrate at least a measure of EU engagement in Georgia for the long term.

The EU’s common foreign policy, security policy, energy policy, and neighborhood policy all lack credibility with an adversarial Russia, with pro-western-countries in Europe’s East, or indeed within the EU itself. The EU now has an unprecedented opportunity to gain some credibility all-around by an active policy in Russian-invaded Georgia.   NOTE: The Jamestown Foundation, http://www.jamestown.org
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22.  EU MUST GIVE KIEV ACCESSION HOPE 

 
EDITORIAL: Financial Times, London, UK, Thursday, August 28 2008
The pledges of support given this week to Ukraine by David Miliband, the UK foreign secretary, and other European Union ministers must be followed by concrete action.
It is not enough for the EU to warn that Russia might try to build on its military victory in Georgia by targeting Ukraine and other vulnerable ex-Soviet republics. The west should respond – and the EU must play a big role in that response.
 
Brussels promised Kiev much when pro-west president Viktor Yushchenko triumphed in the 2004 Orange Revolution. It has delivered rather less, increasing aid, political contacts and economic ties. But the EU has denied Kiev the big prize of a pledge of possible future membership. It is time to think again.
[1] First, the Georgian crisis shows Russia’s vulnerable neighbours need support in resisting Russian aggression. While EU membership brings no security guarantees, it confers the political backing of a 27-member bloc.
[2] Next, a membership promise would boost Ukraine’s pro-west reformers in their struggles with opponents, including powerful Russia-oriented lobbies. Working for a clear common goal, Ukrainians could find it easier to set aside their political differences. This in turn could help stabilise Ukraine, leaving it less open to hostile interference.
[3] Finally, there would be a delay of many years before Ukraine met entry standards. That would leave enough time for EU leaders to overcome the current anti-enlargement mood. A union which had by then successfully absorbed today’s wave of new members would be well-placed for further expansion.
None of this need be overtly anti-Russian. Moscow has not raised serious objections to Kiev’s EU bid. Russians investing in Ukraine would be glad to see their assets safe inside the EU. If and when membership came close, Ukrainian-Russian trade would have to conform to EU rules. But that need not be too onerous.
Also, an EU move now would help head off the difficult issue of Ukraine’s Nato membership bid. Ukraine (like Georgia) had consideration of its membership action plan put off at Nato’s summit. This was the right decision. While united over EU accession, Ukrainians are split over Nato.
 
This reflects divisions in attitudes to Russia, with many Ukrainians wanting to stay out of an alliance widely seen as anti-Russian. Only when Ukrainians clearly make up their minds in favour of Nato should the alliance accept Kiev’s bid. But on the EU their minds are made up. Brussels must now summon the courage to offer a positive response.
 
LINK: http://www.ft.com/cms/s/0/f4a72d5e-752e-11dd-ab30-0000779fd18c.html
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23.  RUSSIA IS BRAZEN, EUROPE WEAK

 
OP-ED: By Bernard-Henri Levy, The Wall Street Journal 
New York, New York, Wednesday, August 27, 2008; Page A15

The future of Russia’s excursion in Georgia remains to be determined. But some conclusions can already be drawn:

[1] Russian power is extraordinarily brutal in the post-Soviet era, as we have already seen in Chechnya. This brutality has been confirmed — although on a smaller scale — in the spectacle of the Russian army occupying a sovereign country, moving through it as it pleases, advancing and retreating at will, and casually destroying the military and civilian infrastructures of a young democracy as an astonished world watches.

 
Today it is Georgia. Tomorrow will it be Ukraine? Or, in the name of the same solidarity with the supposedly persecuted Russian-speaking populations, will it be the Baltic countries? Or Poland?
[2] The new Russia is indifferent to international protests, admonishments and warnings. The Cold War had its rules, its codes. It was a time when signs were carefully deciphered. There was a kind of half-warrior, half-pacifist hermeneutics in play, during which we spent our time reacting to what philosopher Michel Serres called “the signal fires and foghorns” of the adversary. In this new-look Cold War, there are no more signals. No more codes.
 
Instead, Russia offers a permanently obscene gesture to “messages” we know will have absolutely no effect. Was it not at the same moment Condoleezza Rice was in Tbilisi that Vladimir Putin, with a cynicism and aplomb that would have been unthinkable in yesterday’s world, chose to advance his troops as far as Kaspi, only 30 kilometers from the capital?
[3] Russia has no shame when it comes to twisting principles and ideals. It brandishes the “precedent” of Kosovo — as if there could be anything in common between the case of a Serbian province hounded, battered and broken by ethnic purification which lasted for decades, and the situation of Ossetia, victim of a “genocide” that, according to the latest news (a report by Human Rights Watch) consists of 47 deaths.
 
And look how they turn to their profit — as well as that of the same Russian-speaking minorities they want to bring back into the bosom of the Empire — the argument of the “duty to intervene” that might justify the exactions, in Gori and elsewhere, of the Russian army and its militias. This is a fine, grand principle dear to the French foreign minister and a few others. How daring! Well, Mr. Putin dared, Mr. Putin thought about it and did it.
[4] European — and in this instance French — diplomacy is weak. We expect a great democracy to condemn and sanction the aggressor, without nuance. But in effect the opposite was done. The party that was attacked was the one sanctioned. The weak, not the strong, was made to yield.
 
Just as 15 years ago in Dayton, Bosnian leader Alija Izetbegovic was forced to sign, with a heavy heart, the agreement laying out the dismemberment of his country. Mikheil Saakhashvili, the Georgian president, was also forced to ratify a document that the Russians speak of as the “Medvedev document.” Not a word in it mentions the territorial integrity of the country.
Then there are the famous “additional security clauses” acknowledging the Russian army’s right to be stationed there and to patrol, as scandalous in principle as they are vague in their modalities of application. Has the world turned upside down? This must be a dream.
[5] Western public opinion fell with disconcerting facility for the thesis advanced — from the very first day — by the Kremlin’s propaganda machine. We know now that the Russian army had been hard at work on its war preparations since before Aug. 8. We know that it massed at the “border” between Georgia and Ossetia a considerable military and paramilitary logistical presence.
 
We know the Russians had methodically repaired the railroad tracks that the troop-transport trains were to take, and we know that at least 150 tanks went through the Roky tunnel separating the two Ossetias the morning of Aug. 8. In other words, no one can ignore the fact that President Saakhashvili only decided to act when he no longer had a choice, and war had already come.
 
In spite of this accumulation of facts that should have been blindingly obvious to all scrupulous, good-faith observers, many in the media rushed as one man toward the thesis of the Georgians as instigators, as irresponsible provocateurs of the war.
We must re-examine all of this. We must analyze in greater depth the mechanisms of a blindness that may, if we are not careful, perpetuate the Western “decline in courage” denounced in his time by Alexander Solzhenitsyn, but which we thought belonged to the past. Reason, if not honor, demands that we go to the rescue of Europe in Tbilisi.
NOTE: Mr. Lévy’s new book, “Left in Dark Times: A Stand Against The New Barbarism,” will be published next month by Random House. This piece was translated from the French by Sara Sugihara.
 
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24.  MOSCOW’S PLAN IS TO REDRAW THE MAP OF EUROPE

OP-ED: By Mikheil Saakashvili, President of Georgia
Financial Times, London, UK, Wednesday, August 27 2008
 
Any doubts about why Russia invaded Georgia have now been erased. By illegally recog­nising the Georgian territories of Abkhazia and South Ossetia, Dmitry Medvedev, Russia’s president, made clear that Moscow’s goal is to redraw the map of Europe using force.

This war was never about South Ossetia or Georgia. Moscow is using its invasion, prepared over years, to rebuild its empire, seize greater control of Europe’s energy supplies and punish those who believed democracy could flourish on its borders. Europe has reason to worry. Thankfully, most of the international community has condemned the invasion and confirmed their unwavering support for Georgia’s territorial integrity and sovereignty.

Our first duty is to highlight Russia’s Orwellian tactics. Moscow says it invaded Georgia to protect its citizens in South Ossetia. Over the past five years it cynically laid the groundwork for this pretence, by illegally distributing passports in South Ossetia and Ab­khazia, “manufacturing” Russian citizens to protect. The cynicism of Russia’s concern for ethnic minorities can be expressed in one word: Chechnya.
This cynicism has become hypocritical and criminal. Since Russia’s invasion, its forces have been “cleansing” Georgian villages in both regions – including outside the conflict zone – using arson, rape and execution. Human rights groups have documented these actions.
 
Moscow has flipped the Kosovo precedent on its head: where the west acted to prevent ethnic cleansing, in Georgia ethnic cleansing is being used by Russia to consolidate its military annexation.
Other Russian lies have also been debunked. The most egregious was Moscow’s absurd claim on the eve of the invasion that Georgia was committing genocide in South Ossetia, with 2,000 civilian deaths. A week later, Moscow admitted that only 133 people had died. These were overwhelmingly military casualties and came after the Russian invasion.  But the genocide claim served its goal. In a media era hungry for content, the big lie still works.
Russia’s campaign to redraw the map of Europe is based on the propagation of misinformation.
 
On Wednesday on this page, Mr Medvedev asserted that Georgia attacked South Ossetia. In fact, our forces entered the conflict zone after Russia rolled its tanks on to our soil, passing through the Roki tunnel into South Ossetia, Georgia. Mr Medvedev also claimed Russia had no designs on our territory. Why then did it bomb and occupy Georgian cities such as Gori? Why does it continue to occupy our strategic port of Poti?
Moscow also counts on historical amnesia. It hopes the west will forget ethnic cleansing in Abkhazia drove out more than three-quarters of the local population – ethnic Georgians, Greeks, Jews and others – leaving the minority Abkhaz in control.
 
Russia also wants us to forget that South Ossetia was run not by its residents (almost half were Georgian before this month’s ethnic cleansing) but by Russian officials. When the war started, South Ossetia’s de facto prime minister, defence minister and security minister were ethnic Russians with no ties to the region.
The next step in Russia’s invasion script, of disinformation and annexation, is regime change. If Moscow can oust Georgia’s democratically elected government, it can then intimidate other democratic European governments. Where will this end? What we know about Russia, and especially the current regime, is not encouraging.
Last week Vaclav Havel, the former Czech president, put us on alert: “Russia does not really know where it begins and where it ends.” He noted that the Moscow regime is “a lot more sophisticated” than the Soviets under Leonid Brezhnev. He should know – he was on the front line the last time Russia invaded a European country.
Mr Medvedev is now making menacing statements about Ukraine and Moldova and is replicating its Georgia strategy in the Crimea by distributing Russian passports. The message is clear. Russia will do as it pleases.
I believe the most potent western response to Russia is to stay united and firm by providing immediate material and political support. If Moscow is trying to overthrow our government using its lethal tools, let us resist with democratic tools that have sustained more than 60 years of Euro-Atlantic peace.
 
Backing Georgia with Europe’s political and financial institutions is a powerful response. Regrettably, this story is no longer about my small country, but the west’s ability to stand its ground to defend a principled approach to international security and keep the map of Europe intact.
 
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25.  EU MUST BE UNITED AND FIRM ON RUSSIA

EDITORIAL: Financial Times, London, UK, Sunday, August 31 2008

The war in Georgia, short and bloody as it was, has called into question the whole relationship between Russia and its neighbours in the European Union, as well as relations with the US and Nato. Gordon Brown, the UK prime minister, says there should be a “root and branch” review of all aspects.

There are divided views in the EU on whether outright sanctions on Russia are justified for invading Georgia and recognising the independence of the secessionist regions of Abkhazia and South Ossetia. But all the European leaders meeting for an emergency summit in Brussels on Monday seem to agree that there must and will be “consequences” for Russia’s refusal to recognise the sovereignty and integrity of its neighbour.

For a start, they must send a clear message. The first challenge for the EU is to maintain a united front, essential to carry any weight in Moscow. Those feeling most threatened by Russia’s behaviour – the Baltic republics and Poland – want sanctions.

Those depending on Russian oil and gas, led by Germany and Italy, argue for engagement. Those who do not depend on Russia for energy – such as the UK, France and Spain – are less vulnerable and less concerned. But a Russia that ignores the sovereignty and integrity of a neighbouring state should be a concern to them all.

Monday’s meeting in Brussels will be too short for a thorough debate on the future of EU-Russia relations. No doubt the EU leaders will issue a strong condemnation of Russia’s actions, including Moscow’s failure to observe the full terms of the ceasefire agreed with Nicolas Sarkozy, the French president.
They will propose a humanitarian package for the thousands of Georgian refugees who have fled those territories, and money to help rebuild what has been destroyed. That is the easy part.

The next step is to get Russia to withdraw from Georgian territory, and put international monitors and eventually peacekeepers in their place. It is hard to see Moscow in its present mindset agreeing to withdraw its troops from the secessionist regions. But at least it should allow access for humanitarian agencies and military monitors. So far neither can get into the conflict zone.

Just dealing with the immediate crisis is not enough. Russia’s actions in Georgia have alarmed all the former Soviet republics with Russian minority populations, including the Baltic republics (all members of the EU) and Ukraine (which is not). The old EU members should show more solidarity with the new members who are threatened.

One way would be to beef up energy security. Intensifying work on alternative energy to oil and gas, and finding new sources of supply is one thing. Building cross-border links and storage facilities inside the EU to guarantee that no member can be threatened by a Russian gas cut is most urgent. All EU members should work harder to reduce reliance on Russian supplies.

In the long run, Russia may be punished more by the markets than by any sanctions. Private Russian corporate borrowing has been increasing sharply as public debt is reduced, and now the terms for such loans are getting tougher.

It is important to bring home to Vladimir Putin and Dmitry Medvedev just how isolated Russia is, politically and commercially, because of their actions. Backing from Belarus and Venezuela is all they have got. But why has Russia not been suspended from the Council of Europe, an organisation based on respect for human rights?

The EU may also halt negotiations on a new partnership agreement. It should not suspend the old one. Engagement is still essential. But the rules of that engagement must be civilised and mutually agreed. By its actions in Georgia, Russia is trying unilaterally to redefine the rules of the game. That can never be acceptable to an organisation like the EU, based on compromise and consensus.

LINK: http://www.ft.com/cms/s/0/7c871e32-778c-11dd-be24-0000779fd18c.html

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26.   FIRM WEST CAN PREVENT A NEW COLD WAR
 
OP-ED: By David Phillips, Financial Times, London, UK, Sunday, August 31 2008
The European Union will meet in emergency session on Monday to discuss its response to the ­Russia-Georgia conflict. The meeting was supposed to be about deploying EU observers to monitor Russia’s compliance with the ceasefire agreement negotiated by Nicolas Sarkozy, the French president.
 
But Russia’s diplomatic recognition of Abkhaz­ia and South Ossetia has created a crisis. Not only does recognition violate the agreement, which called for international mediation to resolve Georgia’s conflict with its breakaway territories. Russia’s violation of its ceasefire oblig­ations also throws into question the basis of its relations with the west.
The US and Europe must make clear to Russia that it has crossed a red line in recognising these territories. Russia cannot be allowed to abuse inter­national law by invading its neighbour and carving up Georgia’s territory. Lest Russia interpret inaction as a green light to expand its neo-imperialist agenda, the west must provide a strong, consistent and coherent response.
 
If Russia does not fulfil its commitments in the ceasefire and rescind recognition, the US should lead efforts to suspend Russia’s participation in the Group of Eight leading industrialised nations and its applications for membership of the World Trade Organisation and the Organisation for Economic Co-operation and Development.
 
The EU can act by suspending talks with Russia on a partnership and co-operation agreement and the visa facilitation regime for Russian passport holders. Sanctions on Russian companies investing in Abkhazia and South Ossetia could be considered.
The US boycotted the Moscow Olympics when Russia invaded Afghanistan. That is the last thing Vladimir Putin, Russia’s prime minister, wants when Russia hosts the 2014 winter Olympics in Sochi (just 35km from Georgia’s border). Not only should western countries reconsider going to Sochi; with Russia making a farce of “Olympic principles”, they should also petition the International Olympic Committee to assess Russia’s suitability as a host country.
Donor countries must work to rebuild Georgia’s economy. Senator Joe Biden has taken the lead by sponsoring a $1bn (euro682m, lb550m) reconstruction fund. At Monday’s meeting, Europe should match the US contribution.
Georgia may be defeated but it must not be abandoned. Nato should intensify the work of its newly established Nato-Georgia Commission. The decision to extend Nato’s membership action plan to Georgia and Ukraine should not wait for the alliance’s ministerial meeting in December. The US secretary of defence and chairman of the joint chiefs of staff should visit Tbilisi to discuss security co-operation. US-Georgian relations must be about substance, not ideology.
Europe’s divisions have been compounded by a Bush administration failure to forge a coherent response. Now is the time for US leadership to galvanise multilateral institutions and its allies. Silvio Berlusconi, Italy’s prime minister, for example, has been interfering for Russia. Italy watered down last Thursday’s EU statement, preferring that the G8 take the lead. As the main obstacle to European consensus, Mr Berlusconi should be outed and isolated.
The US must also bolster like-minded leaders such as Mr Sarkozy, who was humiliated by Russia when he secured an agreement to get Russian forces out of Georgia. Despite assurances, Russian troops occupied central Georgia, set up checkpoints on the east-west highway and established entrenched positions all the way to Poti on the Black Sea. They also turned a blind eye to South Ossetian militias who were conducting a brutal campaign of ethnic cleansing targeting Georgian villages.
Angela Merkel, the German chancellor, also needs support. The debate on how to respond to Russia has put serious strains on her coalition. With Russia providing 45 per cent of Germany’s natural gas, and domestic elections next year, there is a wide gap between Ms Merkel’s tough talk and the preference for the appeasement of Russia by Germany’s Social Democrats.
The US should call Russia on to the carpet at the United Nations Security Council for scuttling last week’s resolution endorsing a ceasefire and requiring the withdrawal of Russian forces. Let Russia veto a new resolution condemning its conduct. At least nine members of the council would be for it.
Coercive diplomacy should not be used to punish Russia. Yet Russia’s leaders have pursued a wilfully confrontational course.
 
To be sure, the west needs Russia’s co-operation in the fight against terrorism and on issues such as Iran. But it needs a real partnership. Real partners play by the rules. No greater challenge exists to transatlantic solidarity and western values than Russia’s violation of international law. A robust diplomatic response is the best way to prevent a new cold war. It would also send a reassuring signal to emerging democracies that question the west’s reliability.
NOTE: The writer is a senior fellow at the Atlantic Council and co-director of the Study Group on US-Russia and Georgia Relations at Columbia University’s Harriman Institute
 
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