AUR#903 Sep 4 EU Now Ukraine’s Largest Trading Partner; Bonds Fall; Market Will Punish Putinism

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

Ukrainian History, Culture, Arts, Business, Religion,
Sports, Government, and Politics, in Ukraine and Around the World       
Mr. Morgan Williams, Publisher and Editor, SigmaBleyzer
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Deutsche Presse-Agentur (DPA), Brussels, Belgium, Thu, 04 Sep 2008 
By Natalya Zinets, Reuters, Kiev, Ukraine, Wednesday September 3 2008
Reuters, Tokyo, Japan, Tuesday, September 2, 2008
Central-East Area Draws Big Bets On Property Promise
By William Boston, Special to the WSJ, The Wall Street Journal
New York, NY, Wed, September 3, 2008; Page C13

America’s Bunge expects to remain among leaders in booming Ukrainian agribusiness
By Jim Davis, BusinessUkraine weekly magazine, Kyiv, Ukraine, Monday, July 28, 2008


U.S.-Ukraine Business Council (USUBC), Washington, D.C., Thursday, July 10, 2008
Reuters, London, UK, Wednesday, September 3, 2008 
Moscow Times from Bloomberg, Reuters, Moscow, Russia Thu, 04 Sep 2008
Anti-Russian allies fail to cook on hot air.
John Helmer, Mineweb, London, UK, Wednesday, 03 Sep 2008
PRNewswire, Kiev, Ukraine, Tuesday, September 2, 2008
OP-ED: By Judy Shelton, The Wall Street Journal 
New York, New York, Wednesday, September 3, 2008; Page A23
EUbusiness, Richmond, England, UK, Wed, 03 September 2008
President Claims Premier Is Too Close To Pro-Russia Camp
By Andrew Osborn, The Wall Street Journal, New York, NY, Thu, Sep 4, 2008
By Roman Olearchyk and Stefan Wagstyl, Financial Times
London, United Kingdom, Thursday, September 4 2008
By Maria Danilova, Associated Press Writer, AP, Kiev, Ukraine, Wed, Sep 3, 2008
OP-ED: by Roman Kupchinsky, Special to Kyiv Post
Kyiv Post, Kyiv, Ukraine, Thursday, Sep 04 2008 
By Pavel Polityuk, Reuters, Kyiv, Ukraine, Wednesday, September 3, 2008
By Stefan Wagstyl, Roman Olearchyk and Jan Cienski
Financial Times, London, UK, Thursday, September 4 2008
By John D. McKinnon, The Wall Street Journal
New York, New York, Tuesday, September 2, 2008
BYuT Newsletter Inform, Issue 83, Kyiv, Ukraine, 2 September 2008
BYuT Newsletter Inform, Issue 83, Kyiv, Ukraine, 2 September 2008
The nature of nations, like people, never changes. Today’s political realists say economics rather than military might
has become the guiding principle of countries, but the conflict in Georgia shows otherwise, argues Robert Kagan.
Analysis & Commentary: By Robert Kagan, The Wall Street Journal
New York, NY, Saturday, August 30, 2008; Page W1
Deutsche Presse-Agentur (DPA), Brussels, Belgium, Thu, 04 Sep 2008 
BRUSSELS – Since the collapse of the Soviet Union brought independence to Ukraine and shattered the Stalinist economy, the European Union has become the country’s biggest trading partner.
The 27-member bloc, which has direct land borders to Ukraine via Poland, Slovakia, Hungary and Romania, buys 31 per cent of all Ukraine’s exports and provided 45.6 per cent of its imports, to a total value of 34.8 billion euros (50.6 billion dollars) in 2007, according to figures from the European Commission, the EU executive.
That makes Ukraine’s trade with the EU worth more than half again as much as its trade with Russia (21 billion dollars in 2007).
However, Ukraine is only the EU’s 16th most important trade partner, buying 1.8 per cent of its exports and providing less than 1 per cent of its imports. Russia’s trade with the EU is roughly seven times greater.
The EU’s main imports from Ukraine consist of agricultural products, energy, chemicals and machinery. Steel and textiles are also major trade goods but are limited by bilateral deals. EU imports from Ukraine doubled between 2003 and 2007.
The EU’s main exports to Ukraine are machinery, chemicals and transport equipment. Exports have soared in recent years, almost trebling between 2003 and 2007.
Ukraine is also a key transit country for energy supplies with Russia. Its row with Russian gas monopolist Gazprom in the new year of 2006 led to brief gas shortfalls across much of Western Europe.
According to EU figures, the bloc is far and away the largest investor in Ukraine, with investment there reaching 7.7 billion euros, or over 70 per cent of total investments, by the end of 2005 (the last year for which figures are available).
[return to index] [Action Ukraine Report (AUR) Monitoring Service]

By Natalya Zinets, Reuters, Kiev, Ukraine, Wednesday September 3 2008

KIEV – Ukraine’s finance minister said on Wednesday the country is sticking to its plans for a Eurobond and domestic debt issues — despite a fresh political crisis which may lessen appetite for the country’s debt.

“We will issue debt on both domestic and external markets when the suitable moment arrives,” Finance Minister Viktor Pynzenyk told Reuters.
Ukraine had previously been expected to issue a five-year $500 million Eurobond in September, having delayed the issue in July due to deteriorating conditions in the global credit market and rising premiums on its debt.
The situation has since become even less favourablen, first because of worries that Russia’s military conflict with Georgia could have wider implications for the region and then with the collapse of Kiev’s governing coalition and the threat of a snap parliamentary election [ID:nL3406225].
Ukraine’s five-year credit default swaps — instruments which bondholders use to insure themselves against a possible default or debt restructuring — rose to 453-463 basis points on Wednesday compared to 390 in early July.
Ratings agency Fitch told Reuters the political situation could deter foreign investment, but said it saw no immediate risk of a ratings downgrade.
Ukraine is still left with a 2008 planned budget deficit of 18.8 billion hryvnia ($3.97 billion) — or around 2 percent of GDP — and needs to find the cash to plug the gap, through borrowing and privatisations. It can borrow 7.8 billion hryvnia on the domestic market, and 8.1 billion abroad, according to the 2008 budget.
But the privatisation programme is frozen and so far Ukraine has only managed to borrow around 10 percent of the planned funds — less than 800 million hryvnia ($169 million) through domestic bonds plus a $150 million loan from the World Bank.
At the same time, spending is set to increase further with the approach of presidential elections as soon as early 2010. Next year’s budget plans are due to be submitted to parliament by Sept. 15, but Pynzenyk declined to forecast the size of the deficit that they may feature.
“Income will increase by about 28 percent (compared to 2008). But as for the size of the deficit, that decision will be taken by the government as it is a political question,” he said. (Reporting by Natalya Zinets, editing by Stephen Nisbet)
[return to index] [Action Ukraine Report (AUR) Monitoring Service]

Reuters, Tokyo, Japan, Tuesday, September 2, 2008

TOKYO  – Marubeni Corp will be able to earn about 1.5 million carbon dioxide emissions credits from a U.N. approved climate-friendly project to cut coal mine methane in Ukraine, Japan’s fifth-biggest international trading company said on Tuesday.
The United Nations on Aug. 25 registered the project as a joint implementation (JI) programme to cut greenhouse gas emissions, Marubeni said in a statement, making it the fifth such project in the world.
Under the Kyoto Protocol global climate pact, JI programmes are designed to offer rich countries low-cost ways of meeting their Kyoto emissions goals by gaining credits through investment in green projects in former communist nations.
Marubeni is one of the most active traders in procuring U.N.-approved emissions credits to Japanese customers, including the Japanese government.
The project, which Marubeni has been working on with Donetsk-based coal mining firm Zasyadko since 2004, is aimed at capturing methane, the combustible gas with far more global warming potential than CO2, and using it for power generation.
Marubeni said verified emission reductions from the project before the 2008-2012 Kyoto period started had totalled about 1.5 million tonnes of CO2 equivalent.
Since the Japanese and Ukraine governments have agreed such emissions credits will be counted as a part of sovereign carbon credits, called assigned amount units (AAUs), they will be transferred to the Japanese company once Ukraine emissions registries are linked to a U.N.-backed trading system.
Japan is among the few countries already connected to the U.N. system, called the International Transaction Log.
Between 2008 and 2012, the Ukraine project is expected to reduce 2 million tonnes of emissions in CO2 equivalent a year, or an annual 2 million emission reduction units (ERUs), Marubeni said. (Reporting by Risa Maeda; Editing by Chris Wickham)
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
Central-East Area Draws Big Bets On Property Promise
By William Boston, Special to the WSJ, The Wall Street Journal
New York, NY, Wed, September 3, 2008; Page C13

LODZ, Poland — In 1990, Jacek Szwajcowski disregarded the advice of friends and gave up a prospering engineering business to invest euro3,000 of his own money in his mother-in-law’s pharmacy.

Soon he was supplying a handful of local pharmacies in Lodz (pronounced “Wootch”) with medicines and his wholesale pharmaceuticals business was born. Today he is running a 4.4 billion-zloty ($1.92 billion) wholesale and retail pharmacy business with a 20% share of the Polish market. As Polska Grupa Farmaceutyczna SA grew, he built 12 distribution centers throughout Poland. Now he is about to expand into Central and Eastern Europe.
“We want to have 20% market share in each of the main Eastern and Central European countries in the next five years,” Mr. Szwajcowski says in his office overlooking a warehouse adorned with the initials PGF.
Mr. Szwajcowski is a perfect example of why frustrated property investors haven’t given up on Central and Eastern Europe as the U.S.-led economic slowdown has begun to hit emerging markets. As economies in Eastern Europe have grown, developers have been building everything from highways, warehouses and factories to high-rise apartment buildings, hotels and shopping centers to meet the demand.
Even as its growth slows, the region still outpaces Western Europe. Poland’s economy is expected to expand 5% next year, compared with 1.4% growth for the euro zone, according to the Organization for Economic Cooperation and Development.
The economic prospects across the region are attracting a number of property investors. Cash-rich German open-ended funds have been on a spending spree, using their strong euros to scoop up deals throughout the region. SEB Asset Management AG bought the Arkonska Business Park in Gdansk for an undisclosed sum earlier this month. Last year, SEB bought an office building from Philips Electronics in Lodz.
Quinlan Private, the Irish investment group owned by financier Derek Quinlan, raised some euro725 million ($1.06 billion) from Irish, U.K. and U.S. investors earlier this year to purchase European property.
But the case of PGF also tells another story. The company has almost reached the limits of growth in Poland and is moving farther east. PGF’s experience is typical of trends in industrial investment in the region.
Poland today is comparable to Western Europe. Property yields have converged with Western levels. Prime office rents are higher in Warsaw than in Berlin. Wage levels and manufacturing costs also are on the rise. Investors are searching for opportunities in southeastern Europe, the Balkans and in Ukraine, which is strategically located to serve growing demand in Russia.
“If you look at it like a curve, then foreign investment is falling in matured economies like Poland while countries close to joining the European Union, like Croatia, are in the middle and further out is Ukraine, which is at the beginning of the curve,” says Fadi Farra, an OECD economist.
To see the change, consider the levels of foreign direct investment in the region. Between 2004 and 2007, FDI grew about 7% a year and accounted for 3.8% of gross domestic product in Poland. OECD data show that FDI in Poland is actually falling in absolute terms. This is representative of Eastern European countries already in the EU, Mr. Farra says.
The central region is still attractive, investors say, because economic growth is solid and there is less risk than farther east. “Overall the core Central-Eastern European zone is the second-biggest growth zone outside Asia,” says Barbara Knoflach, chief executive of SEB Asset Management. “Countries like Ukraine and Moldava are for the opportunistic investors. It is too soon for core investors to go there.”
In Croatia, which could join the EU as early as 2010, FDI grew 22% during the same period and accounts for about 12.4% of GDP. Ukraine is just at the beginning of this investment cycle, with FDI surging 52% a year and accounting for 6.6% of GDP.
More-mature economies in the region, like Poland’s, face high land prices, high wages and a shortage of skilled labor, says John Palmer, who heads property consultant CB Richard Ellis’s industrial and logistics business in Central and Eastern Europe.
Today, Ukraine is comparable with Poland in the early 1990s. It is strategically located on the border of Russia and will benefit from infrastructure investment as 2012 host, together with Poland, of the European Cup soccer championship.
Mr. Szwajcowski also is confident that the scenario he experienced in his home market is about to be played out in neighboring countries to the east. PGF is putting together financing for an investment drive there.
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
U.S.-Ukraine Business Council (USUBC):
Promoting U.S.-Ukraine business relations & investment since 1995.
America’s Bunge expects to remain among leaders in booming Ukrainian agribusiness

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

A fairly recent addition to Ukraine’s major agriculture and food companies, nevertheless Bunge has since 2002 gained a reputation for its community
involvement and outstanding human resource practices. Founded in 1818 in Amsterdam as an export/import trading firm, Bunge has gone on to become a
recognised world leader in global agribusiness.

Bunge’s integrated operations, now headquartered in the United States, circle the globe, stretching from the farm field to the retail shelf. The
Bunge family in Ukraine is a part of 22,000 employees worldwide at over 450 facilities in 32 countries, all dedicated to improving the global
agribusiness and food production chain.


Bunge Ukraine’s operations are an extension of the company’s Agribusiness and Edible Oil Products divisions. The Agribusiness division is one of the
world’s largest oilseed processors and a major global grain trader, while the Food products division is a major supplier of edible oils and
shortenings to food processors and foodservice customers, and is a leading supplier of consumer edible oils and related products in select markets.

Bunge is the world’s largest seller of bottled vegetable oils to consumers and has played a major role in making Ukraine a world centre for sunflower
seed oil (sunoil) production and marketing.


Dmitry Gorshunov, Managing Director of Bunge Ukraine made it clear in an interview with Business Ukraine that the company considers its Ukraine
operations a part of the company’s long-term strategic plans. “Bunge fully intends to continue its growth in Ukraine. The Ukrainian environment is
challenging but with those challenges come opportunities,” Mr. Gorshunov says.

Bunge first invested in Ukraine through its 2002 purchase of Cereol, which at the time owned a Dnipropetrovsk facility that processes sunflower seed to
make bottled cooking oil. Since that initial purchase Bunge has increased the size of the Dnipro facility by 50%. In addition to its extensive sunoil
operations, Bunge has purchased several grain elevators and has also invested in construction of another oilseed processing facility in Illyichevsk.

Already a leading sunseed processor through its facility in Dnipropetrovsk, the company has recently finished commissioning a jointly-owned sunseed
processing facility in Illyichevsk. Bunge plans to operate the new plant during the coming season, and consider opportunities to crush alternative crops there as well, such as rapeseed.

In addition, Bunge have substantially grown its capabilities in grain origination over the past several years. In 2005/2006 (the last season in which grain exports were not restricted by government quotas), Bunge was the leading exporter of grains from Ukraine. Since then the company has invested in its grain elevators.


However, Bunge believes it is more important that the company has built a strong team to handle trading, risk management and logistical support. Bunge
has already negotiated a substantial throughput agreement with one export grain terminal, and is  working to negotiate another.

“High commodity prices have sent a call to farmers worldwide that more grain and oilseeds are needed.  Ukrainian farmers are uniquely positioned to
respond to that call, as there is a lot of room to improve farming practices and inputs, especially as funding becomes increasingly available.

“We at Bunge believe that Ukraine will become one of the world’s major suppliers of grain and oilseed products, and we intend to participate in that growth by investing further in the human and physical infrastructure needed to bring Ukrainian products to the world,” Gorshunov says.

On the food side of its operations Bunge is currently the second largest supplier of bottled oil to Ukrainian consumers. Its flagship brand, Oleina, was the first refined, bottled oil in Ukraine, and it remains one of the strongest brands in the market. Bunge says it will continue to invest in its food business and is actively exploring new avenues for growth including other categories beyond bottled oils.


Bunge has been the target of so-called raider attacks that have made life difficult for some other foreign investors in Ukraine. However, Gorshunov made it clear that such attacks will continue to be very vigorously repelled and will not discourage company management and employees who support the company’s strong position as a good corporate citizen.

“Bunge has for the past several years suffered repeated attacks from corporate raiders. These attacks have taken a wide variety of forms, ranging from lawsuits regarding our shareholdings and brands, to media attacks and even pamphlets making ridiculous allegations against the Oleina brand. These attacks have caused us to divert a lot of time and effort from our business into legal defences and public relations work, but they have not changed our
overall strategic direction in Ukraine.

“Throughout this process we have continued to build our business, invest in our people and invest in our infrastructure. Moreover, we believe that as
Ukraine is increasingly integrated into the community of nations through trade and through vehicles such as the WTO, such issues will subside and
Bunge will be able to focus its efforts on building its business, which in turn will help to bring economic growth and individual prosperity to
Ukraine,” Gorshunov concludes.


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

[return to index] [Action Ukraine Report (AUR) Monitoring Service]
U.S.-Ukraine Business Council (USUBC), Washington, D.C., Thursday, July 10, 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 ContourGlobal Ukraine has been approved for USUBC membership. The company is USUBC member number 87, according to Morgan Williams, SigmaBleyzer, who serves as president of USUBC.

ContourGlobal Ukraine is a subsidiary of ContourGlobal, an energy development company headquartered in New York, NY. ContourGlobal develops, acquires and operates electric power and district heating businesses around the globe.

ContourGlobal focuses on high-growth, under-served markets and innovative niches within developed markets. In Ukraine, ContourGlobal focuses on providing local, decentralized solutions for residential, commercial, industrial and public clients in need of efficient, reliable and economical sources of energy.

ContourGlobal develops its projects in partnership with public and state organizations, as well as through direct contracts with industrial consumers
of energy. ContourGlobal is also looking to develop renewable projects in Ukraine and is interested in the privatization of the generation companies.

ContourGlobal was founded in 2005 by its Chief Executive Officer Joseph Brandt and Reservoir Capital Group, an investment fund based in New York.
George Nizharadze is CEO Ukraine and Senior VP, Operations for ContourGlobal. Previously, Mr. Nizharadze held operating positions in US-based AES Corporation’s businesses in Latin America and between 2004 and 2007 served as Chief Operating Officer of AES’s two electrical distribution businesses in Ukraine. Nizharadze will represent ContourGlobal on the USUBC board of directors.

Active development in Ukraine

ContourGlobal currently consists of eight businesses on four continents with approximately 1,000 megawatts of installed capacity. They also have an
active pipeline of new development business totaling 10,000 megawatts.

Their current portfolio includes: KramatorskTeploEnergo (KTE), Ukraine (; Bogorodchany, Ukraine
(; Santa Cruz, Brazil; Sochagota, Colombia; SENCAP, Greece; ContourGlobal Togo, Togo;
PowerMinn, USA; and ContourGlobal Solutions, Europe and Africa.

Working closely with governments, development banks and private clients, ContourGlobal takes a “client first” approach to power project development,
utilizing its internal technical and commercial capabilities for rapid evaluation and implementation of new development, repowering of older energy assets and the acquisition of existing operations.


Over a short period of time, ContourGlobal developed two significant projects in Ukraine. In partnership with the City of Kramatorsk, in Donetsk Region, ContourGlobal acquired KramatorskTeploEnergo (KTE), a combined heat and power and district heating operation with installed operating electrical capacity of 120 MW, located in the city of Kramatorsk.
Upon acquisition, severely lacking in capital investments and effective operating practices, the project was failing to supply the city with heat. In 2007 and 2008, ContourGlobal implemented multi-million dollar investments to up-grade the capital equipment and convert two of the plant’s gas-fired boilers to coal, decreasing costs and increasing security of heat supply for the city.
The investment made by ContourGlobal in Kramatorsk is the largest investment made in the plant for over 40 years. In parallel, ContourGlobal is carrying out continuous improvement of the  operational efficiency of the project.
The second project, whose construction is expected to start in the fourth quarter of 2008, is located in the Bogorodchany industrial zone in the
Ivano-Frankovsk province of Western Ukraine. It will comprise a 30 megawatt combined heat and power plant.
The plant will use exhaust heat from the Bogorodchany KC21 compressor station on the Soyuz natural gas pipeline that transports Russian and Central
Asian natural gas through Ukraine to Western Europe.
The new facility will capture the exhaust heat from the seven gas turbine-driven compressor units at KC21 to generate electricity via five new heat-
recovery boilers and a steam turbine. The project cost is approximately $90 million. 
ContourGlobal has a fixed-price turnkey contract with PSG International of the Czech Republic, which includes industry-standard performance and
output guarantees.  Long term financing will be provided through the Czech Export Bank.
As an extremely low-cost power producer, the plant will be a highly competitive seller of electricity into the Ukrainian energy market. In addition,
as a zero emission facility, the plant will generate a substantial volume of carbon credits.


Reliable and efficient on-site generation and emission reduction initiative includes Ukraine

The Coca-Cola Hellenic Bottling Company S.A. and ContourGlobal, announced in January 2008 they are launching a major industrial emissions reduction initiative in Europe with plans to install a total of 15 CHP (Combined Heat and Power) plants at bottling facilities in twelve countries. The first phase of the project will utilize 19 GE Energy Jenbacher gas engines with a total capacity of 58 MW.

Utilizing modern state-of-the-art equipment and its engineering know-how, ContourGlobal will install its Quad-Generation plants at Coca-Cola Hellenic
Bottling Company’s  production facilities in Austria, Czech Republic, Greece, Italy, Northern Ireland, Poland, Romania, Slovakia, Russia, Ukraine, Serbia, and Nigeria to supply the Client with electricity, heat, chilled water and carbon dioxide. The plant in Kyiv, Ukraine is expected to come into operation in October 2009.

Additional information about ContourGlobal can be found on their website at:

“The U.S.-Ukraine Business Council (USUBC) is most pleased to have ContourGlobal Ukraine join the rapidly expanding USUBC membership.” said Morgan Williams, SigmaBleyzer, President of USUBC.


ContourGlobal Ukraine is the 87th member for USUBC, the 35th new member for 2008, and the 65th new member since January of 2007. USUBC
membership has nearly quadrupled in the past 19 months, going from 22 members in January of 2007 to 87 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, and AeroSvit Ukrainian Airlines.

The complete USUBC membership list and other information about USUBC can be found at:


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.
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
Reuters, London, UK, Wednesday, September 3, 2008 
LONDON – Credit ratings agency Fitch is concerned the collapse of Ukraine’s coalition government could deter foreign investment, it said on Wednesday, but saw no immediate risk of a ratings downgrade.
Fitch director of emerging Europe sovereigns Andrew Colquhoun told Reuters the agency remained much more concerned about macroeconomic stresses within the Ukrainian economy such as double-digit inflation, rising external debt levels and its current-account deficit.
“There is a risk this will increase worries over political stability and deter foreign investment,” he said. “Obviously, it would be positive for Ukraine’s creditworthiness to have a stable government able to take the necessary economic policies… we are much more worried about the macroeconomy.”
He said it was too soon to say what kind of a new coalition if any would emerge and what that would mean, but saw no immediate ratings action by Fitch.
Fitch rates Ukraine BB- with a stable outlook.
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
NOTE: Send in a letter-to-the-editor today. Let us hear from you.

Moscow Times from Bloomberg, Reuters, Moscow, Russia Thu, 04 Sep 2008
KIEV — Ukrainian bonds declined on Wednesday after the country’s ruling coalition split, fueling speculation the government will be dissolved.

The drop sent seven-year yields to a four-year high after President Viktor Yushchenko’s Our Ukraine Party withdrew from its alliance with Prime Minister Yulia Tymoshenko late Tuesday, two days after his office said her failure to condemn Russia’s war with Georgia may end their cooperation.

The two lawmakers have squabbled over issues, such as how best to curb the nation’s 26.8 percent inflation rate, since joining forces in early 2005.

The yield on the 6.875 percent note due 2011 climbed 15 basis points, the steepest daily gain in three weeks, to 8.17 percent, the highest level since May 2004. The 7.65 percent bond maturing in 2013 yielded 8.66 percent, up 12 basis points.

“The risk of new elections and the instability that would bring will probably see yields head even higher,” said Alexander Pecherytsyn, a fixed-income analyst with ING in Kiev. “This reduces the attention of government bodies to the economy,” he said.

The cost of protecting Ukrainian government debt from default rose 20 basis points to a record 465 Wednesday, according to CMA Datavision prices at 1:30 p.m. in London.

Ukraine’s hryvna snapped a three-day decline, rising to 4.7475 per dollar by 2:33 p.m. in Kiev, from 4.7600 Tuesday, when it slipped 1.7 percent.

Ukrainian Finance Minister Viktor Pynzenyk said Wednesday the country was sticking to its plans for a Eurobond and domestic debt issues. “We will issue debt on both domestic and external markets when the suitable moment arrives,” Pynzenyk said.

Ukraine had previously been expected to issue a five-year $500 million Eurobond in September, having delayed the issue in July due to deteriorating conditions in the global credit market and rising premiums on its debt.

Ratings agency Fitch said the political situation could deter foreign investment, but said it saw no immediate risk of a ratings downgrade.

Ukraine is still left with a 2008 planned budget deficit of 18.8 billion hryvna ($3.97 billion) — about 2 percent of GDP — and needs to find the cash to plug the gap, through borrowing and privatizations.  It can borrow 7.8 billion hryvna on the domestic market, and 8.1 billion abroad, according to the 2008 budget.

But the privatization program is frozen and so far Ukraine has only managed to borrow around 10 percent of the planned funds — less than 800 million hryvna ($169 million) through domestic bonds plus a $150 million loan from the World Bank.

Next year’s budget plans are due to be submitted to parliament by Sept. 15, but Pynzenyk declined to forecast the size of the deficit that they may feature.

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

Anti-Russian allies fail to cook on hot air.
John Helmer, Mineweb, London, UK, Wednesday, 03 Sep 2008

MOSCOW –  Russia demonstrated on Tuesday that it retains the backing of the major Central Asian gas producers and exporters to Europe – despite public calls from UK Prime Minister Gordon Brown and American figures that alternative,  non-Russian supplies of Europe’s gas should be developed swiftly.

In a ceremony in Tashkent on Tuesday, Prime Minister Vladimir Putin and Uzbek President, Islam Karimov,  agreed that Gazprom, Russia’s largest enterprise, will buy gas from Uzbekistan at European prices,  and build a new gas pipeline from Central Asia, transiting Russia, in order to boost gas purchases from Uzbekistan and Turkmenistan.
For lack of available gas-feed, the Tashkent deal dooms the Nabucco alternative pipeline, proposed by the NATO alliance to cross Georgian territory, and under the Black Sea  to Austria.
In March, Gazprom had agreed with Kazakhstan, Uzbekistan and Turkmenistan over gas purchases starting in 2009 at European prices that have already reached $400 per thousand cubic metres (tcm); this is 50% to 100% higher than the current purchase prices of Central Asian gas.
The first impacts of the new gas price will be the allies against Russia in the recent Ossetian war, Georgia and Ukraine, which are currently paying around $230 and $180 per tcm, respectively.
Before Georgia began deploying its US and Israel-supplied heavy artillery for the attack on Tskhinvali, triggering last month’s war, Gazprom had been briefing European gas consumers and energy strategists on the implications that crude oil price volatility was having on the future of gas pricing. In July, Gazprom chief executive Alexei Miller issued the public forecast that the price of crude oil might go to $250 next year.
In the small print, Miller was also predicting something equally, if not more dramatic – that gas prices are following oil upwards, but may stay up, even if oil retreats.  If the oil and gas prices decouple, Miller pointed out, leaving oil to move up and down in roller-coaster fashion, gas is likely to move ahead into uncharted premium territory.
Liquefied natural gas (LNG), according to market reports, is already close to parity with crude oil. When LNG cargoes sell for $20 a million cubic feet, as has been happening this year, this is the energy equivalent of about $124 per barrel of crude. In a year’s time, LNG market reports are forecasting that LNG may fetch a premium over crude oil.
“The oil price that I predicted is not surprising,” Miller has said. “The global energy consumption has been growing at a breakneck pace and looks almost price-insensitive. The last 10 years (1997-2007) saw the Chinese energy consumption almost double and the Indian one grow over 1.5-fold. It can be contributed not only to their industrial growth, but to a principal shift in the lifestyles of their populations. Asia has replaced bikes with scooters. What about the next step to cars?”
He then took issue with the idea that decoupling the gas price from crude oil would produce bargain gas pricing. “The proponents of gas-oil price decoupling mistakenly assume that free-floating gas prices would be lower than oil-pegged prices. But reality doesn’t substantiate the idea of lowering gas prices by this decoupling in the foreseeable future.  When converted to BTU, the pipeline gas supplied from Russia to Europe under various long-term contracts in May [2008] was 11% cheaper than fuel oil and much more advantageous in terms of environmental and customer friendliness.
“If we consider other markets, the picture will be even more illustrative. In the UK the gas price is not pegged to the oil basket and in May was 50% higher than the average price of our supplies to continental Europe. And currently the oil price rose to almost 140 dollars per barrel. So where are the advantages of free-floating gas prices?”
Igor Tomberg, an independent Moscow energy analyst, told Mineweb that Miller isn’t jawboning the price of oil upwards. “He is trying to warn that growth of gas prices can go faster than oil price growth. He is also warning that, if an international gas market exchange is established, this “would be very advantageous for Gazprom.”
Konstantin Simonov, general director of the Fund for National Energy Security in Moscow, believes that “decoupling is advantageous for Russia, as gas reserves are structured differently from oil. The main [gas] players here are Russia, Iran and Qatar. What is said about a gas OPEC is nothing but bogeyman tales. 
“What is true is that if there will be decoupling, different players will come to the table. What we are talking about here that within 20 years gas may substitute for oil as the main global energy resource. If this role of gas will be growing, then why should the gas price be defined by connection with oil?”
The Gazprom chief executive warns the international gas market that it faces a devil’s bargain. On the one hand, “at  present the BTU-adjusted gas price doesn’t exceed 70% of the current oil price. This is due to greater flexibility and consumer attributes of oil. But the development of liquefied natural gas brings the market qualities of oil and gas ever closer, specifically as gas is capable of becoming a universal motor fuel. All this strengthens the long-term gas/oil link.”
And on the other: “If the gas price oil peg is replaced by the supply and demand pricing principle, the gas market will lose its immunity to the influence of major suppliers.” With Russia and Gazprom in control of about 27% of world gas reserves – double those of Iran and Qatar, and with these three together, 60% — the geography of influence over energy pricing would shift to a far narrower axis than the current map of oil reserves allows.  
According to Simonov, the Russian interest probably favours decoupling.  “There is a nuance here, of course. For a long time, gas was viewed as a substitute for oil. But this raises the question – should it be viewed like this? Coal, for example is also a hydrocarbon fuel, but it is not viewed as a simple substitute of oil.”
Simonov concedes there is a downside for Russia, and Gazprom, in decoupling.  “Russia has long-term contracts for up to 30 years with its consumers – like Germany, Austria, Italy and France. If the price would be decoupled, this would impact on the contracts, since they use an oil-linked formula for the price. Still, let’s be clear about the fundamental stability of demand, which is driving the pricing formula in future.
“The prognosis of European experts is that Europe would need an additional 140bcm to 2015. Suppose Norway provides 30bcm, North Africa, 50bcm. Where would another 60bcm come from? It’s nonsense to say from LNG, because all the LNG  is contracted already. Thus, I consider that there will be growing demand for Russian gas in Europe at least for the next 20 years.”
Tomberg sees decoupling as inevitable. “Everything goes in that direction. Among the reasons there is the volatility of oil prices. Gas is slowly becoming one of the world’s commodities; it will be independently traded on the exchanges.”
For Gazprom, the global shift in energy demand towards China and India is another vector changing the way gas supplies should be priced. This is ironic, if to recall the way the Anglo-American market preached market liberalization to Russia’s state-dominated economy for the past eighteen years. Miller told Le Figaro recently:  “the more liberal market does not necessarily mean lower prices for gas”.
For the more liberal the market intermediation – without cartel structures, government-to-government undertakings, domestic price controls, export quotas, and the like – the more supply-demand conditions will expand Gazprom’s influence. The fact is that, nowadays, these also undermine the bidding power of Europe and North America, compared to Asia. 
A source close to Gazprom points out that Qatar has already declared its intention to redirect spot deliveries of LNG from the European market to Asia, where the bidding premium is more advantageous.
The view from Gazprom’s skyscraper in the south of Moscow is that the litany of free market competition, which the western powers brought to the capital after the collapse of communism in 1991, is no longer what the western powers want to accept themselves. They are now promoting market and investment controls in an effort to limit Gazprom’s access to their markets, and play one source of gas supply off against another.
The macro-economic shifts within the energy exporting countries are also favouring those gas producers, which can replenish their reserves faster than growth in domestic demand consumes them; and those which are politically stable enough to deliver on contract. On both counts Gazprom looks the safer bet. 
In Miller’s recent round of interviews, he claims that by 2010, the volume of Gazprom’s gas production will reach 570 bcm; in 2015, about 615 bcm; in 2010, between 650 and 670 bcm. The capex for this is estimated at more than $3 billion per annum. By the enbd of next decade, it is anticipated that roughly half of all Gazprom’s output will originate from new deposits – on the Arctic shelf, the Yamal peninsula, and in eastern Siberia.
If that’s the good news, what about the bad — the attempts to bet against Gazprom’s intention, or capacity, or what Russians call the Caspian paradox? A source at Gazprom explains: “We constantly hear the calls from the Caspian countries and elsewhere to create new gas-transport routes bypassing Russia.
The argument is that this increases competition of supply, and thus favours the bargaining position of European consumers of energy. What is happening, however, is the opposite of the intention.
The new gas hasn’t appeared in Europe yet, but the competition to buy has started up in the Caspian region. The first effect – prices have gone up. As that has happened, the advantage of Gazprom’s supplies and delivery routes looks plainer than before”.
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
PRNewswire, Kiev, Ukraine, Tuesday, September 2, 2008
KIEV – Lugansk Energy Interconnection Company LLC, one of the five largest electrical energy suppliers in Ukraine, a part of the Energy Standard Group, reports that it has received permission from the Ukrainian Anti-Monopoly Committee to purchase more than 50% of Teploelectrotsentral-3 CJSC (TEC-3), Kharkov, Ukraine.
TEC-3, in an oblast (province) adjacent to Lugansk, is one of Ukraine’s largest producers of heating and electrical energy, with annual production capacity of 100 Megawatts. Kharkov, in northeastern Ukraine, is the nation’s second largest city, with a population of 1.5 million.
Lugansk Energy Interconnection Company’s investment program for 2008 includes UAH252 million (approximately EUR37.5 million at current rates) for reconstruction and modernization, including of newly purchased assets.
This is a record amount for a private company investment in Ukraine’s electrical energy transmission system. Company investments for 2007 exceeded UAH160 million, 80% more than for 2006.
Lugansk Energy Interconnection Company also raised a US$130 million loan for business development from VTB Bank in July 2008. The company received the first tranche in the amount of US$40 million in August.
“The company’s achievements and investment programs are indicative of the company’s move to a new development stage,” Vitaly Tsado, Lugansk Energy Interconnection Company’s Deputy General Director, said. “We are focusing our efforts on raising market value and on technological development of the company.”
In line with the company’s plans to acquire more generating companies, it has also received permission from the Ukrainian Anti-Monopoly Committee to purchase more than 50% of SGS Plus, which leases and manages Sevastopol heat and electric power plant, in Crimea on the Black Sea.
About Lugansk Energy Interconnection Company LLC
Lugansk Energy Interconnection Company LLC is the only company supplying electrical power in Ukraine’s Lugansk region, a large industrial area with a large number of coal, metallurgical, chemical and heavy engineering companies.
The company includes six branches, each of which manages several regional electric energy networks. Lugansk Energy Interconnection Company controls and uses 83% of the power distribution networks in Lugansk region. Its license for the transmission and supply of electricity is based on state-set tariffs.
Lugansk Energy Interconnection Company is a part of the Energy Standard Group, the largest Ukrainian power engineering holding company, founder and owner of which is Konstantin Grigorishin. [ Distributed by PR Newswire on behalf of Lugansk Energy Interconnection Company LLC]
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
U.S.-Ukraine Business Council (USUBC)
Promoting Ukraine & U.S.-Ukraine business & investment relations since 1995. 
OP-ED: By Judy Shelton, The Wall Street Journal 
New York, New York, Wednesday, September 3, 2008; Page A23

The financial abyss is the deepest abyss of all; you can keep falling into it your whole life.
— Ilf and Petrov  “The Golden Calf” (1931)

In the early years of the Soviet Union, Marxist policies for a “workers’ paradise” wrought such devastation on the Russian economy that Vladimir Lenin was forced to restore certain aspects of market capitalism — limited private ownership, trade with foreign countries — to salvage the future of Bolshevism.
The line above comes from a famous Russian satire about two scoundrels who took full advantage of the widespread corruption under the New Economic Policy (NEP) to accumulate illegal fortunes.
Fear of financial failure is a recurring nightmare for Russians, who recall with angst the collapse of the Soviet economy at the end of the 1980s. The following decade, in August 1998, a newly constituted Russian Federation defaulted on its government bonds as the ruble lost two-thirds of its value in less than a month, plunging the nation back into bankruptcy.
While humiliation still lingers in the national psyche, Russia has seemingly entered a new phase in its struggle to reconcile totalitarian tendencies with capitalist rewards. Today, oil revenues ostensibly provide a bulwark against economic losses caused by government misjudgments.
But even as Russian tanks assert a physical claim on Georgian territory, Moscow is already feeling the consequences in fiscal terms. Foreign investment capital — the lifeblood of Russian equity and credit markets — is draining out as the world recoils.
Group of Seven leaders should take particular note of this spontaneous market phenomenon — and also take heart. Because no matter what sanctions the European Union might choose to impose, no matter how severely the world’s leading industrialized nations jointly condemn their “fellow G-8 member” — nothing will punish Russia more than to watch the dream dissolve yet again.
Vladimir Putin, who used to chase rats with a stick in the stairwell of his crumbling apartment block during his Leningrad boyhood, today seeks to thrash what he perceives as a hostile world order.
He vows to “put an end to the unipolar world ruled by the U.S.,” and has shown his willingness to raise the specter of financial ruin — his nation’s deepest fear — to indulge this obsession.
The irony of the story, and the tragedy, is that Mr. Putin needs little assistance from the U.S. and its trans-Atlantic allies to destroy Russia’s own standing in the international political and economic order.
The rout in Russian stock markets actually began before the invasion of Georgia, prompted by Mr. Putin’s rumblings of despotic displeasure in late July.
The shares of Mechel, one of Russia’s leading mining and metals companies, plunged 38% on the New York Stock Exchange after Russia’s prime minister publicly accused the company of selling raw materials to foreigners at lower prices than those charged domestically.
Perhaps it was Mr. Putin’s ominous advice (widely viewed as a sinister threat) to Mechel’s owner and director, who was hospitalized at the time — “I think Igor Vladimirovich should get better as quick as possible, otherwise we’ll have to send him a doctor” — that chilled investor sentiment, wiping out $6 billion in shareholder value in one day.
Only hours earlier, Robert Dudley, president of the Anglo-Russian energy company TNK-BP, was forced to flee Moscow after systematic harassment by government authorities.
Locked in a power struggle for managerial control, the joint venture is Russia’s third-largest oil producer; its Russian principals want to wring maximum cash payments out of the business while the British side argues for capital investment to increase future production.
Analysts suspect the Kremlin is fully complicit in the effort to oust the foreigners — denying visas to the company’s British employees, launching tax investigations, tapping residential phones.
Since the attack on Georgia began in early August, the decline in Russian financial markets has accelerated sharply. The benchmark RTS Index of leading Russian stocks has slumped to its lowest level in two years.
The ruble has registered its biggest monthly decline against the U.S. dollar in more than nine years as foreign investors rush to retrieve their capital — some $25 billion in the last three weeks, according to French investment bank BNP Paribas.
The amount of debt raised by Russian companies in August has fallen 87% from July levels. The issuance of new equity has come to a virtual halt — a mere $3 million was raised in August compared to $933 million in July.
To combat the alarming magnitude of capital desertion, officials at Russia’s central bank have scrambled to raise interest rates, allowing the yield on domestic ruble bonds to increase by 150 basis points. But complaints about the tightened credit situation have already begun among Russia’s powerful industrial oligarchs.
One of them, Vladimir Potanin, paid a recent visit to Mr. Medvedev to let him know that Russian companies’ restricted access to world financial markets was causing difficulties.
The billionaire businessman suggested that the government tap state reserves to ease the liquidity crisis. Mr. Medvedev quickly acquiesced, promising to unveil a new program of easy credit before the end of September.
It is part of the continuing pattern for Russia — forever trying to have it both ways with “private” companies in cahoots with the Kremlin, entrepreneurial ambition subject to Big Brother’s approval, and capitalism without democracy.
It’s a pattern that has consistently led Russia to blame outsiders for woes incurred as the result of its inherent dissonance, and to petulantly abandon earlier aspirations for global integration.
And it has always led to the financial abyss. Even now, the outlines of the old command-style economic blueprint are emerging as Mr. Putin promotes his 12-year development plan for the country.
The foreign capital required to fund it is disappearing by the minute, however, which means the plan must be altered. Expect the nastiness to ratchet upwards as Mr. Putin wields his stick against his purported enemies.
On Friday, he threatened to cut supplies to Europe of “oil, gas, petroleum chemicals, timber, metals, fertilizers” should it align with the U.S. in confronting Russian aggression against bordering nations. In Moscow, reports are circulating that Lukoil executives have been notified by the Kremlin to be prepared to restrict oil deliveries to Poland and Germany through the Druzhba pipeline. (In Russian, druzhba means “friendship” — a perfect tribute to Orwellian doublespeak.)
What Mr. Putin has yet to learn is that capital does not respond well to extortion. Global investors are not impressed by economic threats to cut off supplies to vital customers. Indeed, they abhor the elevated “country risk” associated with political adventurism.
But what can the West do to express its rejection of such tactics? Preventing Russia from joining the World Trade Organization means little to a country that disdains the rules of free trade — on Friday, Moscow banned poultry imports from the U.S. — and blatantly circumvents antimonopoly policies.
Russia’s refusal to acknowledge intellectual property rights is consistent, if unscrupulous; according to researchers at the Brookings Institution, Mr. Putin plagiarized much of his dissertation for a Ph.D in economics in 1997 from a management study written by two professors at the University of Pittsburgh in 1978.
The most farsighted move Western governments could make would be to set up a fast-track approach to European Union membership for the most vulnerable of Russia’s neighbors: Ukraine.
As a parallel step, an interim monetary facility should be arranged to help the country make an early transition to the euro; if the EU balks, the U.S. should offer Kiev the opportunity to dollarize. Investors will be drawn to the stability and freedom of conducting business in a major reserve currency.
Mr. Putin, who harbors dreams of a vast ruble zone across the former Soviet empire, won’t like it. But he has to understand: Sometimes the invisible hand strikes back.
NOTE: Ms. Shelton, an economist, is author of “The Coming Soviet Crash” (Free Press, 1989).
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
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EUbusiness, Richmond, England, UK, Wed, 03 September 2008
BRUSSELS – Ukraine’s hopes of becoming a candidate for EU membership, heightened by the conflict in Georgia, are set to be deflated at an EU-Ukraine summit next week, European diplomats said Wednesday.
France, which holds the EU’s rotating presidency, recently warmed to Ukraine’s candidature, according to the French ambassador here, and Kiev had hoped that Russia’s intervention in Georgia may have tipped the scales in its favour.
However after fresh talks by ambassadors of the 27 EU nations on Wednesday, a draft declaration prepared for an EU-Ukraine summit in Evian, France on September 9 tells another story, according to diplomats close to the issue.
On the plus side, the EU member states agree that the partnership agreement currently being negotiated with Ukraine should be called an “Association Agreement” — the term used for similar pacts with Balkan nations which have a recognised future within the European bloc.
However the draft summit declaration makes no mention of the key “European perspective” for Ukraine, which Kiev had been hoping for and which is familiar eurospeak for an eventual goal of EU membership.
The EU has been divided over whether the former Soviet state should be allowed to enter, perhaps even more divided than it is over strife-torn Georgia.
Poland and the Baltic countries, as well as Sweden and Britain, have always insisted that Ukraine is a European nation and therefore deserves a place at the table.
But the nations of “Old Europe,” led by Germany, are opposed, amid concerns about continued enlargement, and also about irritating Russia, which has flexed its energy and political muscles, as well as its military ones recently.
Ukraine had been hoping that after Moscow’s military intervention with fellow EU and NATO hopeful Georgia would work in its favour as fears of grow of a resurgent Russia seeking renewed influence in its former Soviet satellites.
However in the draft statement — drawn up for French President Nicolas Sarkozy, Ukraine’s President Viktor Yushchenko and EU Commission chief Jose Manuel Barroso to approve — the EU simply acknowledges “the European aspirations of Ukraine” rather than sharing them, and “leaves open the way for further progressive developments in EU-Ukraine relations”.
If the Georgian conflict has had any impact on Europe’s attitude to Ukraine it is “in the fact that we have held to our pre-summer position,” said one diplomat.
One consolation for Kiev is that the Europeans are prepared to discuss conditions for an eventual visa-free travel deal with Ukraine. However even this falls well short of a commitment amid EU fears of a new illegal immigration problem.
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
President Claims Premier Is Too Close To Pro-Russia Camp

By Andrew Osborn, The Wall Street Journal, New York, NY, Thu, Sep 4, 2008

Ukraine President Viktor Yushchenko withdrew his party from the pro-Western coalition government, saying that Prime Minister Yulia Tymoshenko had become too close to a pro-Russian opposition party. In a statement from his residence Wednesday, President Viktor Yushchenko threatened call early elections.

If a compromise isn’t found, there will be new parliamentary elections or a new coalition likely to be friendlier toward Moscow, as Russia’s war with
Georgia forces politicians across the region to choose sides and define their countries’ relationships with the Kremlin.

On national television Wednesday night, Ms. Tymoshenko urged Mr. Yushchenko to reverse his decision. Accusing him of imperiling Ukraine’s “European
choice,” she played down the idea that she intended to form a new coalition. “I believe that the [existing] coalition will be preserved,” she said.

Such infighting has been a staple in Ukrainian politics, and the jockeying comes as politicians position themselves ahead of a 2010 presidential election. “Above all, this is about domestic politics,” said Oleksandr Lytvynenko, a political analyst at the Kiev-based Razumkov Center.

Like Georgia, Ukraine harbors hopes of joining the North Atlantic Treaty Organization military alliance and the European Union. And like Georgia, those West-leaning ambitions have irked Moscow, which views Ukraine as part of its own sphere of influence.

U.S. Vice President Dick Cheney is due in Kiev Thursday to discuss the Russian-Georgian war and shore up relations with a country that is an important transit route for Russian gas to Europe.

He will be confronted with a government that is split both on the recent war and its strategic direction. A large majority of Ukrainians is strongly opposed to NATO membership, and the country is divided along a linguistic fault line, with the Russian-speaking east more comfortable with closer ties to Moscow than the Ukrainian-speaking west.

Analysts said the war in Georgia has forced Ukrainian politicians to accept a political reality that they have tried to wish away. “Ukraine remains economically dependent on Russia and has no hope of any effective security guarantee against it,” said Geoffrey Smith, a strategist at Moscow brokerage Renaissance Capital.

Ukraine buys oil and gas from Russia, has its uranium enriched there, and sends around one third of its exports eastward. If Russia imposed an economic or transport embargo on Ukraine, it would be devastating to the country’s economy, analysts say.

The Georgian war drove a wedge between Mr. Yushchenko and Ms. Tymoshenko, who have been fierce political rivals. Mr. Yushchenko, a close friend of Georgian President Mikheil Saakashvili, pushed for a parliamentary statement condemning Russian behavior.

But Ms. Tymoshenko and her party refused to back such action, as did the pro-Russian Party of the Regions, which complained that Mr. Yushchenko’s
support for Georgia had damaged relations between Ukraine and Russia.

Mr. Yushchenko said Ms. Tymoshenko’s behavior was tantamount to “treason,” a charge she denies. She insists she supports Georgia’s territorial integrity.

Mr. Yushchenko’s patience appeared to run out Tuesday when Ms. Tymoshenko’s party joined forces in Parliament with the Party of the Regions to vote
through changes that would significantly dilute his authority and the office of the president. In a TV address Wednesday, Mr. Yushchenko likened the vote
to a “political and constitutional coup.”

“De facto, a new parliamentary coalition has been created.” He said his rivals should now formally form a coalition and that he would be forced to call a snap parliamentary election if they failed to do so quickly.

That might be dangerous for his ratings. An opinion poll at the end of August by FOM-Ukraina gave Mr. Yushchenko just 5.3% support against almost
25% for Ms. Tymoshenko. [Write to Andrew Osborn at]


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

By Roman Olearchyk and Stefan Wagstyl, Financial Times
London, United Kingdom, Thursday, September 4 2008
Ukraine’s pro-west coalition collapsed yesterday, plunging the country into political uncertainty, hitting financial markets and undermining recent efforts by western leaders to show their support for Kiev following Russia’s intervention in Georgia.
President Viktor Yushchenko threatened to dissolve parliament and call snap elections unless a new coalition can be formed, blaming the crisis on supporters of Yulia Tymoshenko, his firebrand prime minister.
While Mr Yushchenko and Ms Tymoshenko joined forces in the 2004 Orange Revolution and both support west-oriented policies, they have engaged in a bitter personal power struggle that has persistently handicapped the government.
The upheaval comes just before Dick Cheney, the US vice-president, arrives in Kiev this week with a message of support for Ukraine and a few days before Mr Yushchenko is due to travel to France for a European Union-Ukraine summit. Kiev is seeking membership of both the EU and Nato and wants to secure increased western backing to counter growing Russian political and economic pressure.
Although the coalition has not yet been formally scrapped, ministers backing Mr Yushchenko yesterday walked out of a cabinet meeting and their Our Ukraine party threatened to quit the coalition.
Addressing the nation, Mr Yushchenko ac-cused Ms Tymoshenko’s followers of plotting an “anticonstitutional coup” by voting in tan-dem with the opposition Communist and -Moscow-leaning Regions parties in favour of legislation to cut the president’s authority. “Without a doubt, the collapse of the coalition was a well-planned action,” he said.
Ms Tymoshenko hit back, blaming the crisis on Mr Yushchenko’s “fight” for next year’s presidential election, in which both politicians are expected to run. She also denied being soft on the Georgia conflict, saying: “My position on Georgia is in line with the EU position, and is not to drag Ukraine into any conflicts.”
Russia’s military incursion in Georgia has raised fears in Kiev that Moscow could next target Ukraine, a much larger country of 46m where Russia and the west have also jostled for influence.
Moscow has denied suggestions it could challenge Ukraine’s territorial integrity, but has openly protested against the speedy westward integration drive adopted by Mr Yushchenko, especially plans to join Nato, pointing out that Ukrainians are themselves divided over joining the alliance.
Kiev hopes to conclude an agreement on closer integration with the EU at the summit in France, on September 9. Ukraine’s president also hopes Nato will grant his country a membership action plan in December.
Olexiy Haran, a political science professor in Kiev, said the political standoff in Kiev was rooted more in the ambitions of Ukraine’s political elite than in any plot by Russia to undercut Kiev’s pro-west path. But he warned that “Moscow would try to capitalise on it”.
“If the coalition collapses, Ukraine’s pro-western drive will not change in the long term, but it will suffer short-term setbacks. This scenario would complicate Ukraine’s efforts to integrate closer with Nato and the European Union in the near term.”
Mr Yushchenko’s camp has accused Ms Tymoshenko of siding with the Kremlin by refusing to adopt a resolution sharply condemning Moscow for its actions in Georgia.
Ms Tymoshenko said her position was in line with the EU’s and that she did not want to drag Ukraine into conflict.
A new coalition, which must be formed within 40 days to avoid elections, could include opposition parties that lean towards Moscow. Speculation has abounded that either Ms Tymoshenko’s or Mr Yushchenko’s party could join forces with the Regions party of Viktor Yanukovich, former prime minister, who also plans to run in next year’s presidential polls. Many politicians see all the bickering as pre-presidential election manoeuvring.
An early parliamentary poll could cost Mr Yushchenko’s party dearly as it is far behind the Tymoshenko and Yanukovich parties in opinion polls.
In financial markets, the Ukrainian currency re-mained largely stable but the PFTS index fell 3.8 per cent. Ukraine’s five-year credit default swap rate – the cost of insuring debt – rose from 445 to 463 basis points, a new high.
[return to index] [Action Ukraine Report (AUR) Monitoring Service]

By Maria Danilova, Associated Press Writer, AP, Kiev, Ukraine, Wed, Sep 3, 2008

KIEV – Ukrainian President Viktor Yushchenko gestures as he speaks at a news conference in Kiev, Ukraine Wednesday, Sept. 3, 2008. Ukraine’s president ordered the creation of a new governing coalition Wednesday and threatened fresh elections, accusing his rival prime minister and opposition parties of
attempting a “constitutional coup.”

Ukraine’s president called for a new governing coalition Wednesday and threatened fresh elections, accusing his rival prime minister and opposition
parties of attempting a “constitutional coup.”

Viktor Yushchenko’s statement, broadcast live on national television, came as the coalition hovered on the brink of collapse after the president’s allies in parliament walked out of the alliance late Tuesday.

Some political observers disputed Yushchenko’s call, saying he had no formal authority to push for a new coalition. Prime Minister Yulia Tymoshenko

also signaled she would not give in.

Yushchenko and Tymoshenko, likely rivals in 2010 presidential elections, have been engaged in a tug-of-war ever since Tymoshenko returned as prime
minister late last year.

Ukrainian politics have long been marked by bitter feuding between rivals and even allies. But this latest crisis comes as the country faces growing
uncertainty in its ties with Moscow after Ukraine condemned Russia’s war with Georgia last month.

Some Ukrainians are concerned that the Kremlin might seek to squeeze this strategically located ex-Soviet republic, whose pipelines carry Russian gas
to Western consumers and whose Black Sea port hosts a key Russian naval base.

The crisis comes on the eve of a visit by U.S. Vice President Dick Cheney, who is expected to express Washington’s support for Ukraine’s
Western-leaning government.

The Tuesday night walkout came after lawmakers loyal to the prime minister sided with opposition parties to pass a law weakening presidential powers
and boosting those of the prime minister.

“Yesterday, a political and constitutional coup began in parliament,” Yushchenko said, adding that he would veto that law. He ordered lawmakers to
form a new coalition and threatened to call early elections if no coalition is formed on time.

Under Ukrainian law, a parliament has 30 days to form a new coalition after one is dissolved, and another month to put together a Cabinet. Until then, the previous government continues its work. Analysts said with the current coalition still legally in force, the president had no formal authority to push for a new alliance.

Tymoshenko made it clear she would not give up easily. “Bloc Yulia Tymoshenko declares that there is no alternative to the democratic coalition,” her party said on its Web site.

Political analyst Ivan Lozowy said that Yushchenko is seeking to effectively sack Tymoshenko and possibly form a new alliance with the opposition Party
of Regions, which he hopes would be more cooperative.

“It’s in effect removing the government – if the coalition changes, then the government falls,” Lozowy said. “He is seizing back the initiative from

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

OP-ED: by Roman Kupchinsky, Special to Kyiv Post
Kyiv Post, Kyiv, Ukraine, Thursday, Sep 04 2008 
As the August drums of war beat in the Caucasus and the western alliance watched haplessly as columns of Russian tanks lumbered into a tiny mountainous country, politicians in Kyiv were busy devising a haphazard response to this act of Russian aggression.
The Russian war became the perfect opportunity for Ukraine’s embattled president, Victor Yushchenko, to kill two birds with one stone.
[1] The first was to draw attention to what he believed was the West’s historical error during the NATO summit in Bucharest by not granting Ukraine and Georgia the Membership Action Plan they needed for a future place in NATO.
[2] The second was to continue his full­court press on discrediting the government of Yulia Tymoshenko. Which goal took priority is difficult to say with any certainty.
The Ukrainian leadership knew full well that its options were severely limited. To dispatch Ukrainian armed forces to fight alongside its unofficial Georgian allies was immediately ruled out of the question.
A hasty statement threatening to prevent warships from the Russian Black Sea Fleet to return to their base in Sevastopol until the conflict was settled was seen as a bad joke by the Russian military command. It was so bad that two weeks later the Ukrainian side was forced to admit that it “had no conflict with Russia” and rescinded its “threat.”
Ukrainian support for Georgia was symbolized by Yushchenko grandstanding in Tbilisi, alongside Georgia’s President Mikheil Saakashvili, while his administration issued statements that Prime Minister Yulia Tymoshenko, by keeping silent on the Georgian issue, was nothing less than a traitor. Tymoshenko, according to the dubious Yushchenko scenario, was selling herself to Moscow allegedly to win the Kremlin’s support in her future bid for president.
Yushchenko’s main show of support for Georgia, once boiled down to its essence, was to declare war on Yulia Tymoshenko.
Only poorly informed optimists expected Western armed forces to come to Georgia’s aid in its war with Russia. And while most Western governments properly condemned Russian behavior, nobody in his or her right mind could understand why Saakashvili chose to knowingly subject his country to such punishment by sending Georgian tanks into South Ossetia. The Russian response was evident and most likely premeditated. A wiser leader would have taken measures to prevent such a tragedy.
Instead of moderation, the Georgians opted for confrontation and lost. Their Ukrainian “allies” proved to be fair weather friends – big on words but incapable of deeds.
And while the Georgians might have been provoked by Moscow to go to war, this does not absolve them of irrational behavior. National suicide is not the best method of defending a country’s independence.
Many observers were quick to point out that had Georgia been a member of NATO, the alliance would have been obligated to come to the country’s defense and, by doing so, precipitating a war with Russia.
Others, however, believe that membership in NATO would have prevented a Russian invasion. This debate will, no doubt, continue for years to come. Ukrainian political analysts should follow this debate carefully.
Will Ukraine become the next victim of Russian aggression?
The prevalent speculation in Ukraine and in the West is that “liberating” the Crimean Peninsula’s Russian population will be the next pretext for Russia to expand its grip on the post­Soviet space and gobble up Ukraine.
It is a scenario which needs to be carefully examined since it is feasible, but not probable, in the short run. The factors that should be considered are:
Ukraine will not become a member of NATO in the foreseeable future and therefore cannot count on Western military support.
Ukraine is not Georgia and any provocation aimed against Ukraine will be seen as a direct threat to the West. By the same token, the West will be hard­pressed to prevent any Russian move aimed at limiting Ukraine’s independence. Western security guarantees for Ukrainian territorial integrity are not likely to be concluded and will remain merely soothing phrases.
Ukraine might be forced to cut off Russian gas supplies to Europe as a weapon of last resort to force the Europeans to come to their assistance. This, in turn, would most likely evoke a harsh Russian response and could lead to an all­out war.
The Ukrainian military is not prepared or equipped to win a war against Russia. 
If Russia were to “play the Crimean card,” it would require an occupation of the peninsula to be successful. The prospects of this succeeding are slim at best, given that Crimea depends on Ukraine almost totally for its fresh water supplies. By turning off the spigots, the Crimeans could be brought to their knees within days. 
Ukrainian leaders must remain pragmatic and concentrate their efforts on consolidating the economic and diplomatic gains they have made over the past 17 years. Kyiv’s pro­Georgian and anti­Russian flag waving is not likely to produce any meaningful results. Offers to lease radar stations to NATO members on Ukrainian territory is no guarantee that, in case of war, NATO will rush in to defend the owners of the lease. 
The era of romantic Ukrainian nationalism should be remembered and revered, but past heroism cannot be the basis for a modern foreign policy. The days of the Ukrainian Partisan Army (UPA) are over. The tragedy of the Great Famine should be solemnly commemorated and not used to provoke endless fights with Russia.
Ukraine should abandon its futile tactic of trying to equate the famine – holodomor, or murder by famine – with the Jewish holocaust by outlawing “holod deniers,” getting the United Nations to pass resolutions declaring the famine “genocide,” and other such impractical initiatives. They will not generate public sympathy for Ukraine, which will somehow translate into support for Ukrainian policy goals or speed up Ukraine’s Atlantic integration.
Last but not least, the president of Ukraine should abandon his closest policy advisers and come to grips with reality. If the prime minister is indeed a “traitor,” she should be fired on the spot. If a “kitchen cabinet” is whispering in Yushchenko’s ear to make virulent nationalism state policy, then this lobby should be dispersed.
NOTE: Roman Kupchinsky is a partner in AZEast Group, a political risk consultancy based in the United States. He can be contacted at
[return to index] [Action Ukraine Report (AUR) Monitoring Service]

By Pavel Polityuk, Reuters, Kyiv, Ukraine, Wednesday, September 3, 2008

KYIV – UKRAINE’S defence sector has called for a big rise in funding for the military after Russia’s war with Georgia but its reliance on Russian supplies of weapons and parts poses a dilemma.

Ukraine’s leaders backed Georgia in the war over breakaway South Ossetia and expressed anger that Russia used ships from its fleet stationed in Ukraine’s Crimea region. Politicians have voiced fears Ukraine could be Russia’s next target, although analysts say an imminent invasion is most unlikely.
“Russia’s actions have compelled our generals to look at the possibility of using force and this has handed them the argument that we must strengthen the armed forces,” military expert Serhiy Zgurets said.
But Ukraine has limited options to overhaul its military. If it meets its aim of joining Nato, Russia is likely to withhold the components it still needs to assemble its weapons. Switching entirely to Nato weapons would be hugely expensive.
Ukraine is among the world’s top 10 arms exporters. After the collapse of the Soviet Union it inherited a defence industry producing tanks, planes, anti-aircraft and radar systems and technological backup.
However, it has not been able to afford to buy what it exports. Ukraine’s defence budget this year is just 10bn hryvnias ($2bn) or 1% of gross domestic product.
“The Ukrainian army buys nothing new. Financing goes only towards feeding soldiers and supporting their battle-worthiness at whatever level,” said Serhiy Bondarchuk, head of the state arms export company, Ukrspetsexport.
The 200,000-strong armed forces still use ageing Soviet-designed fighter jets such as the MiG-29 and Su-24 and tanks like the T-62. “Formally, all our technical resources are obsolete,” Zgurets said. “This does not mean that we will not use them.”
Artillery cannon, for example, last 15 years but Ukraine has had no new supplies since the Soviet days almost 20 years ago. Bondarchuk says unless the army receives a minimum of 3bn to 5bn hryvnias per year for modernisation and new purchases, soldiers will be coming out “on horses wielding sabres” at military parades.
Defence Minister Yuri Yekhanurov, supported by President Viktor Yushchenko, hopes this year’s budget will be amended to add another 5bn hryvnias to buy new weapons. He wants to triple the defence budget to more than $6bn in 2009.
According to defence industry publication Jane’s Industry Quarterly, Russia’s defence budget is $37bn this year, Britain spends $80bn, and the US $700bn.
“I think the situation in the world, which has recently seriously changed, will cause our politicians to think about the future of Ukraine. If they give us the possibility, we are ready to buy whatever is sitting in the factories,” Yekhanurov said.
Even if the budget is raised, Kiev must find a strategy that shrugs off reliance on Russia. In a legacy from Soviet times, the production process for weapons systems is split between factories in Russia and Ukraine. Manufacturing a missile, for example, would require bringing in components from Russia.
Russia said in June it would sever all defence industry ties should Ukraine join Nato and later said it would replace Ukrainian-made engines in its cruise missiles with local ones.
Analysts say the domestic defence industry could only meet 10% of the army’s needs. If Russia does cut defence ties, Ukraine’s armed forces would have to be totally overhauled to be able to buy from Nato members. “There is a strategic problem modernising even the basic components of our weapons,” Zgurets said.
The alternative could be to halt the process of joining Nato. But Yushchenko has made Nato membership a cornerstone of his policy of integration with the West and says it is the best way to protect Ukraine from any aggression.
Zgurets said if Ukraine turns its back on Nato it could continue buying from Russia, as well as other non-Nato military suppliers such as Sweden, known for its jets, and Israel, with its good logistical equipment.
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By Stefan Wagstyl, Roman Olearchyk and Jan Cienski
Financial Times, London, UK, Thursday, September 4 2008
Afew days after Russian troops marched into Georgia last month, Ukraine staged a military parade, with 3,500 soldiers trooping through central Kiev complete with tanks, armed personnel carriers and mobile rocket launchers.
Planned long in advance, the country’s first such display since 2001 had been intended as an opportunity for Ukrainians to show support for their armed forces. But events in the Caucasus changed everything. Georgia, the beleaguered little state facing the might of Russia, was never far from anybody’s thoughts.
“The Georgian conflict opened my eyes to the fact that the Russians had crossed the Rubicon and that Ukraine has no way now to challenge them,” says Anatoliy Marchenko, a 37-year-old entrepreneur who watched the march-past. “Some saw the parade as a demonstration of strength. But enlightened Ukrainians see our country is very weak.”
The shock of seeing Russian tanks engaged in an international conflict for the first time since the 1979 invasion of Afghanistan have reverberated around the world. But nowhere has it been felt more keenly than in the former Soviet Union.
While few in the region expect Moscow to launch another military action soon, the fact that it has sent troops across its borders once raises fears that it may do so again.
Toomas Hendrik Ilves, president of the Baltic republic of Estonia, says: “What we have seen is a complete paradigm shift in the security architecture of Europe. Everything we have done has been based on the assumption that Russia won’t engage in aggression . . . That premise is no longer operable.”
The upheaval has hit financial markets, not just in Russia but in surrounding states. Since the start of the Georgia crisis, the cost of insuring debt through credit default swaps has jumped by 30 per cent for Russia, about 15 per cent for Ukraine and Latvia and 30 per cent for Poland. Jorge Zukoski, president of the American Chamber of Commerce in Ukraine, says the crisis has made investors “pause a bit and take another close look at the factors in play”.
The big question is whether instability spreads from Georgia or whether a new balance of forces emerges, with Russia playing a bigger role. The answer depends on the Kremlin’s ambitions, its readiness to resort to force and its willingness to exploit its role as an energy superpower.
The responses of its neighbours will also matter, as will the reaction from the west, including the US, the European Union and Nato. Potential flashpoints include Ukraine, Moldova, the Baltic states and the energy-rich Caspian region.
Russia insists it was not the aggressor and argues it intervened only after Georgia’s prowestern President Mikheil Saakashvili sent forces to attack the Russian-backed separatists of South Ossetia.
But even those neighbours who sympathise with Moscow have been disturbed by the scale of Russia’s response and its readiness to redraw borders with its recognition of the independence of South Ossetia and Abkhazia, Georgia’s second breakaway territory. No former Soviet bloc country has followed suit in granting recognition.
There is little risk of another worldwide cold war. Moscow lacks the capacity to challenge Washington globally, with military spending just 5 per cent of America’s. Nor is today’s world easily divided into two camps, given competing power centres including the EU, China and India. But in the ex-Soviet bloc, the new era evokes cold war memories.
Karel Schwarzenberg, the Czech foreign minister, is one of many who has compared Russia’s Georgian intervention with the 1968 Soviet invasion of Czechoslovakia, saying it was a “sad coincidence” it had taken place on the 40th anniversary of that incursion.
Russian President Dmitry Medvedev this week implied that Russia’s Georgian action was, in political terms, no one-off when he said Moscow had “regions of privileged interest” in countries on or near its borders and added that it would defend “the life and dignity” of Russian citizens “no matter where they are located”.
This view is supported by most Russians, who see their country as the rightful dominant power based on its long imperial presence in the region. They have huge sympathy for the 20m ethnic Russians living in the states beyond Russia’s borders, including 8m in Ukraine, 4.5m in Kazakh-stan and more than 2m in the Baltic states.
The Kremlin believes the west took advantage of Russia’s weakness in the 1990s to expand the EU and Nato deep into Russia’s traditional sphere of influence.
Orchestrated by the authorities, public backing is strong for the campaign that Vladimir Putin launched as president – and continues as prime minister – to restore Russia’s lost pride by reestablishing regional dominance. Arkady Moshes, director of the Russia programme at the Finnish Institute for International Affairs, says the Georgia crisis shows Moscow is again ready “to back its words with deeds”.
The lessons are already painfully apparent in Ukraine. Like Georgia, Ukraine has applied to join Nato – and, like Georgia’s, its bid is fiercely opposed by Moscow. Having swallowed the accession of the Baltic states, the Kremlin has drawn red lines around Nato’s further expansion.
Ukrainian President Viktor Yushchenko has meanwhile riled Russia by questioning the lease pact under which Russia’s Black Sea fleet is based in the Ukrainian port of Sevastopol in Crimea.
His comments have in turn revived a dispute about the status of Crimea, a territory with a majority ethnic Russian population and to which some Russian nationalist politicians lay claim. Hryhoriy Nemyria, Ukraine deputy prime minister, says of the challenge facing Ukraine: “At issue is the sovereignty and integrity of my country.”
Ukraine’s armed forces, though much bigger than those of Georgia, are still dwarfed by Russia’s – with, for example, just 200 combat aircraft against 1,800.
The Georgian crisis yesterday helped precipitate the collapse of the coalition government formed by the parties of Mr Yushchenko and his firebrand prime minister, Yulia Tymoshenko. While both are broadly pro-west, they are bitter rivals.
The dispute, which could lead to early elections, creates opportunities for Viktor Yanukovich, the Russia-friendly opposition party leader, and for Russia itself, which has often interfered in Ukrainian politics, particularly in Russia-oriented eastern Ukraine. As Mr Mar-chenko, the businessman who watched the army parade, says: “The main threat to my country is our weak government institutions and heavy infighting among politicians.”
In neighbouring Moldova, the Kremlin is capitalising on its new-found confidence, with Mr Medvedev meeting Vladimir Voronin, Moldova’s veteran president, to press on him the need to settle peacefully a dispute with the Russian-supported separatist territory of Transdniestra.
EU officials say that while bilateral talks are acceptable, any deal must be done in a multilateral format that includes Brussels. They are concerned that Russia could try to revive the Kozak plan, an earlier attempt to end the row on terms that would give Transdniestran leaders, and their Moscow backers, a big say in the reunited country and leave Russian troops in place for 20 years.
Among Nato’s and the EU’s new members, the Baltic states feel most exposed, as former Soviet republics. There is little reason to expect Moscow will abandon efforts to increase its influence, including domestic political meddling, interruptions in oil supplies and, in Latvia and Estonia, vocal backing for big ethnic Russian minorities.
Mr Ilves says: “The threat is not military but Russia’s jingoistic rhetoric is unsettling. We live in post-modernist 21st-century Europe but we have a Russia which acts in a 19th-century premodern way.”
These concerns are shared by Poland, albeit less acutely. The combative President Lech Kaczynski has taken a more belligerent view than Donald Tusk, the mild-mannered prime minister, although their policy differences are smaller than their rhetoric would suggest. Pawel Swieboda, head of the Demos Europa think tank, says Warsaw is “building critical mass” in the EU for a more “realistic” view of Russia.
Elsewhere in central Europe, hostility to Moscow declines with distance from Russia’s frontiers and with the degree of dependence on Russian gas supplies, which is lower in coal-rich Poland than, for example, in Slovakia, Hungary and Bulgaria, which have all kept a low profile over Georgia.
In the Caspian region, the main effect of the crisis could be on US-backed efforts to persuade oil and gas producers to diversify export routes away from Russia in favour of the east-west corridor crossing Georgia.
Azerbaijan and Kazakhstan, the region’s two largest exporters, have for 15 years tried to reduce their dependence on Russia without offending Moscow. The consortium planning Nabucco, a Caspian-EU gas pipeline, says the Georgian crisis has not changed its plans. But the sight of Russian bombs landing close to the existing pipelines has raised questions about the project.
Much depends on the west’s response to the Georgia crisis. The US and the EU publicly reject Moscow’s claims to precedence in the ex-Soviet region. Dick Cheney, US vice-president, is this week visiting Azerbaijan, Georgia and Ukraine with words of support. But in practice, Washington and Brussels may struggle to develop policies for eastern Europe that do not implicitly acknowledge Russian “regions of privileged interest”.
The US, needing Moscow’s co-operation on issues such as Iran, has been measured in its criticisms. So has the EU, with its dependence on Russian energy and its divisions between hawks – led by the UK, Poland and the Baltic states – and doves, headed by Italy.
Nato diplomats are discussing how to strengthen the alliance’s backing for vulnerable members such as the Baltics, as Kurt Volker, the US Nato ambassador, told the FT this week. But given their concern about offending Russia, Germany and others are unlikely to rush to action.
The same applies to Georgia’s and Ukraine’s Nato membership bids. Both are classed as future members but both had their applications postponed at the spring Bucharest summit. It is doubtful that the position will change when Nato returns to the issue at the year-end.
At the same time, the EU is split over responding to Ukraine’s EU accession bid and reluctant even to contemplate a Georgian application, although last month’s events have prompted the Union to consider boosting support for both countries and Moldova.
Given the EU’s and Nato’s divisions, some east European states are turning directly to Washington for military support. Even before the Georgian crisis, the Czech Republic agreed to host a radar station that forms an element of the American missile shield. Poland, which had held out for better terms, did a deal with the US for a missile base within days of the Russian tanks rolling. Ukraine and Georgia are also seeking increased direct co-operation with the US.
How the US will respond is unclear, given the imminence of the American presidential election. But there should be no doubt that Moscow will be vehemently opposed or that, after Georgia, its possible responses include armed force.
[return to index] [Action Ukraine Report (AUR) Monitoring Service]

By John D. McKinnon, The Wall Street Journal, New York, New York, Tuesday, September 2, 2008

WASHINGTON — Vice President Dick Cheney will travel to Georgia and Ukraine this week in a trip that could help lay the groundwork for stiffer Western responses to last month’s Russian incursion of Georgia.
The trip also illustrates important foreign-policy differences between Republican presidential candidate John McCain and his Democratic rival, Barack Obama, amid growing tensions between Washington and Moscow.

But whether Mr. Cheney will succeed in rallying the world to Georgia’s cause — or rallying U.S. voters to Sen. McCain’s hawkish views on Russia — remains uncertain.
Many U.S. allies in Western Europe remain wary of escalating tensions with a resurgent Russia, and thus could be reluctant to grant Georgia and Ukraine membership in the North Atlantic Treaty Organization or kick Russia out of the Group of Eight leading nations, as Sen. McCain advocates. As a result, some friendly countries in the region are questioning the West’s ability to protect Georgia and its neighbors.
And even though Sen. McCain appeared to get a bump in polls in the wake of the Russian-Georgian clashes, many U.S. voters already are weary of prolonged conflicts in Iraq and Afghanistan.
The public could conclude that more defense commitments aren’t worth the potential price and side with Sen. Obama, whose responses to the Georgian crisis have emphasized diplomacy and consensus-building.
Mr. Cheney — who was scheduled to depart Tuesday on a tour that also includes stops in Azerbaijan and Italy — is expected to stress the depth of U.S. interests in Georgia and its neighbors, both for his overseas audience and his domestic one.
The Bush administration views the countries as bellwethers for the democracies growing up in Russia’s shadow, and also as an indispensable corridor for shipping oil and gas from the Caspian basin — a key to loosening Russia’s grip on the region’s energy supplies.
“I think the overriding priority…in Baku, Tbilisi and Kiev will be the same: a clear and simple message that the U.S. has a deep and abiding interest in the well-being and security of this part of the world,” John Hannah, Mr. Cheney’s national-security adviser, said at a briefing last week.
As part of that effort, the vice president could have a highly visible public meeting with U.S. military personnel who have been distributing humanitarian supplies in Georgia.
In private meetings, the vice president also will be sounding out Georgian President Mikheil Saakashvili and other officials about how the U.S. and its allies could help strengthen economic and military capabilities. (See related articles on page A20).
In the past, the U.S. has been careful not to go too far in military assistance in the region. For example, the U.S. avoided training and equipping Georgian armored units, even as about 100 U.S. military personnel in Tbilisi prepared Georgian troops for service in Iraq.
“It was part of a policy aimed at not being too provocative” with the Russians, says a U.S. military official with knowledge of the region. “We intentionally never touched their tanks or artillery or attacked aviation.”
Now that policy might be ripe for reconsideration, many experts say. An initial step could be to increase the number of U.S. military trainers in Georgia, some say.
More broadly, Mr. Cheney also appears to be exploring possibilities for security arrangements for the region in light of Russia’s new assertiveness.
“Russia’s actions in recent weeks have clearly cast grave doubts on its intentions, its purposes, and its reliability as an international partner,” a senior administration official said. “They merit and demand a unified response from the free world — one that…provides a long-term strategic framework going forward that will responsibly protect and advance our interests and values in the months and years ahead.”
Still, some experts say the apparent reluctance of European NATO powers such as Germany to get more deeply involved in protecting Eastern Europe could lead to the establishment of a new security framework with many former Soviet satellite countries such as Poland and the Baltic states, as well as with the U.S.
In addition to helping protect new democracies, beefed-up security understandings could help convince investors that the Azerbaijan-Georgia-Turkey energy corridor will remain viable for shipping oil and gas.
Part of Russia’s intent in its incursion, some experts say, was to send a message to the energy-rich countries of the Caspian region that it can shut off the Georgia shipping route any time it likes.
But Bush administration officials say Russia’s disproportionate response in Georgia shows that it would be willing to abuse its power as an energy supplier to Western Europe too. That makes the Azerbaijan-Georgia-Turkey corridor even more important.
“This is a major factor for why we should be concerned about Georgian independence,” over and above concerns about the Russian incursion, said John Bolton, Mr. Bush’s former United Nations ambassador.
“The fact that [Mr. Cheney] is going to both Azerbaijan and Georgia tells you that’s very much on his mind. If you can’t start [energy shipment] in Azerbaijan and put it through Georgia, there aren’t many places you can send it to” other than Russia or Iran.  [Write to John D. McKinnon at
[return to index] [Action Ukraine Report (AUR) Monitoring Service]

BYuT Newsletter Inform, Issue 83, Kyiv, Ukraine, 2 September 2008

KYIV – Deputy Prime Minister, Hryhoriy Nemyria has been active presenting the government’s position in the aftermath of the Georgia-Russia conflict.
Described in European Voice as being seen by many as “the most powerful man in Ukraine’s government after the prime minister,” Mr Nemyria spent much of last week doing the merry-go-round of international media interviews.

With the spotlight on British Foreign Secretary David Miliband’s visit to Kyiv, Mr Nemyria was interviewed by the BBC World Service and by veteran news anchor John Humphrys for BBC Radio 4’s Today programme. ‘Today,’ which is the UK’s heavy-weight morning drive-time news and political affairs radio programme, has a no-nonsense reputation for putting politicians on the spot.

True to form, Mr Humphrys wasted no time on pressing Mr Nemyria over his meeting with Mr Miliband. The deputy premier, responsible for European integration said that they agreed upon three conclusions.

[1] Firstly, that “unpredictable partners and unilateralism are dangerous,” [2] secondly that the security vacuum extends from the South Caucasus and covers the entire area, known as the “near abroad of Russia,” and [3] thirdly that Ukraine should not be left in such a vacuum. “Now is the time for the European leaders to exercise an efficient and effective leadership,” said Mr Nemyria.

Quizzed if this meant effectively joining NATO, the deputy premier argued that there was no single path that Ukraine could rely upon. He talked about two opportunities.

The first being Euro-Atlantic integration and the long-term opportunity to join NATO, which he stressed would be subject to a national referendum, and secondly, integration into the European security and defence policy (ESDP) to which he said, “Ukraine fits ideally the crisis management, peacekeeping and humanitarian tasks they mention.”

Mr Nemyria indicated that the British government was ready to throw its weight behind Ukraine’s application to join the NATO Membership Action Plan (MAP).

Last April, at its summit in Bucharest, NATO said it foresaw Ukraine and Georgia would one day become member states. However, assessment of their NATO MAP applications was deferred until the NATO summit in December.

When pushed to give a date for NATO membership, Mr Nemyria said “it would be premature to set a deadline.” He went on to say, “the EU seems to be ready to give a more profound integration path for Ukraine which includes a deep and comprehensive Free Trade Area and more involvement with European security and defence policy.”
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BYuT Newsletter Inform, Issue 83, Kyiv, Ukraine, 2 September 2008

KYIV – Last week the United Kingdom’s Foreign Secretary David Miliband visited Kyiv where he delivered a stark warning to Russia not to start another Cold War. The visit was widely interpreted as a clear signal of support for the former-Soviet state and sent an unambiguous message that Ukraine had not been forgotten.

Whilst in the capital, Mr Miliband met with President Viktor Yushchenko, Prime Minister Yulia Tymoshenko and Minister of Foreign Affairs Volodymyr Ohryzko.
In a speech he reminded officials that his presence was a commitment emanating from a bilateral agreement made previously between the two states for a deeper wide-ranging partnership.
 “My visit is designed to send a simple message: we have not forgotten our commitments to you. Nor shall we do so,” said Mr Miliband. He went on to say that the sight of Russian tanks in a neighbouring country on the 40th anniversary of the crushing of the Prague Spring has shown that the temptations of power politics remain.
In a message aimed directly at the Kremlin he said, “The Russian President says he is not afraid of a new Cold War. We don’t want one. He has a big responsibility not to start one.” 
Mr Miliband indicated that Ukraine had come a long way in reaping the fruits of democracy. He applauded its peaceful transition of power and the fact that, since 2004, it had delivered three free and fair elections. He praised the country’s “free, lively and diverse media,” its vibrant civil society and remarked that, while there was still work to be done to strengthen the economy, people appeared to better off than before.
Mr Miliband criticised Russia for having gone “far beyond the bounds of peacekeeping.” He called upon Moscow to clarify its attitude to the territorial integrity of its neighbours and its use of force to solve disputes, and to ask itself about the relationship between short-term military victories and longer-term economic prosperity.
Russia’s conflict with Georgia has impacted its stock market and currency markets. Official figures reveal that Russia’s foreign exchange reserves fell $16.4 billion during the week of 8 August, representing the largest outflow since the rouble crisis and financial meltdown of 1998. Furthermore, recognition of the breakaway regions of South Ossetia and Abkhazia on 26 August caused the benchmark Russian Trading System stock index to drop 4 percent, plunging the market to its lowest level in almost two-years.
Mr Miliband called for hard-headed-engagement by the West. By this he meant support for allies such as Ukraine; a rebalancing of the energy relationship with Russia; defending the rules of international institutions and renewing efforts to tackle unresolved conflicts.
So where does this leave Ukraine?
Significantly, the British government is supportive of Ukraine’s EU aspirations – a stance that was warmly received by the prime minister. Speaking on EU membership, Mr Miliband said, “once Ukraine fulfils the criteria, it should be accepted as a full member, and we should help you get there.” In the meantime, he pledged the United Kingdom’s support for negotiations for a New Enhanced Agreement and a deep and comprehensive Free Trade Agreement.
On the issue of NATO membership, Mr Miliband recognised the importance for the Ukrainian people to decide. He underlined that membership should not be viewed as a threat to Russia. “It is about strengthening your democratic institutions and your independence – things that will benefit Russia in the long term,” he said.
Publicly and in meetings with the president and premier, Mr Miliband stressed the need for political stability and unity in the quest for a prosperous and secure Ukraine. Political stability is regarded as a pre-requisite to EU integration and was a point reaffirmed by German Chancellor Angela Merkel in a telephone conversation with Ms Tymoshenko last week.
Fruitful Meeting with Ms Tymoshenko
In Mr Miliband’s meeting with Ms Tymoshenko and Hryhoriy Nemyria, Deputy Prime Minister, the British foreign secretary heard first-hand the premier’s unwavering support for Georgia’s territorial integrity and for the EU’s settlement plan for the region.
Ms Tymoshenko underlined the importance of closer cooperation on security issues between Kyiv and Brussels within the framework of a new agreement between Ukraine and the EU. “Ukraine has an important part to play in shaping future EU security and defence policy and we are ready to commit ourselves unreservedly to this purpose,” Ms Tymoshenko told Inform.
It is clear that Mr Miliband’s visit left a lasting impression on the rising political star tipped by many to be a future prime minister of his country. Writing last Friday in The Guardian newspaper he said: “Ukraine is a leading example of the benefits that accrue when a country takes charge of its own destiny, and seeks alliances with other countries.
 “Its choices should not be seen as a threat to Russia or an act of hostility. Equally its independence does demand a new relationship with Russia – a partnership of equals, not the relationship of master and servant.”
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The nature of nations, like people, never changes. Today’s political realists say economics rather than military

might has become the guiding principle of countries, but the conflict in Georgia shows otherwise, argues Robert Kagan.
The Wall Street Journal, NY, NY, Saturday, August 30, 2008; Page W1

Where are the realists? When Russian tanks rolled into Georgia, it ought to have been their moment. Here was Vladimir Putin, a cold-eyed realist if ever there was one, taking advantage of a favorable opportunity to shift the European balance of power in his favor — a 21st century Frederick the Great or Bismarck, launching a small but decisive war on a weaker neighbor while a surprised and dumbfounded world looked on helplessly.

Here was a man and a nation pursuing “interest defined as power,” to use the famous phrase of Hans Morgenthau, acting in obedience to what Mr. Morgenthau called the “objective law” of international power politics.
Yet where are Mr. Morgenthau’s disciples to remind us that Russia’s latest military action is neither extraordinary nor unexpected nor aberrant but entirely normal and natural, that it is but a harbinger of what is yet to come because the behavior of nations, like human nature, is unchanging?
Today’s “realists,” who we’re told are locked in some titanic struggle with “neoconservatives” on issues ranging from Iraq, Iran and the Middle East to China and North Korea, would be almost unrecognizable to their forebears. Rather than talk about power, they talk about the United Nations, world opinion and international law.
They propose vast new international conferences, a la Woodrow Wilson, to solve intractable, decades-old problems. They argue that the United States should negotiate with adversaries not because America is strong but because it is weak. Power is no answer to the vast majority of the challenges we face, they insist, and, indeed, is counterproductive because it undermines the possibility of international consensus.

Readers, what is the role of determined democratic communities in international politics today? What role do you think the U.S. should be playing in Georgia and other emerging geopolitical conflicts? Share your thoughts.They are fond of citing Dean Acheson, Reinhold Niebuhr and George Kennan as their intellectual forebears, but those gentlemen would have found most of their prescriptions naive.

Mr. Acheson, as Harry Truman’s Secretary of State, had nothing but disdain for the United Nations and for most international efforts to solve world problems. As his biographer, Robert L. Beisner, has shown, he considered such efforts evidence of the naive hopefulness of “people who could not face the truth about human nature” and “preferred to preserve their illusions intact.”
He strongly supported the NATO alliance but ultimately put his faith not in international institutions but in “the continued moral, military and economic power of the United States.” He aimed to build a “preponderance of power” and to create “situations of strength” around the world.
Until the United States acquired this predominant power, he believed, negotiations and international conferences with adversaries such as the Soviet Union were worthless. He opposed talks with Moscow throughout his entire time in office.
Those early realists had little faith in the persuasive influence of the community of nations or world opinion. “The prestige of the international community,” Mr. Niebuhr argued, was “not great enough…to achieve a communal spirit sufficiently unified, to discipline recalcitrant nations.” The great mid-century theologian warned against “a too uncritical glorification of co-operation and mutuality” between powerful nations with opposing interests.
Yet it is precisely the prospect of cooperation and mutuality that present-day realists glorify. They revere President George H. W. Bush, who spoke of a “new world order” in which “the nations of the world, East and West, North and South, can prosper and live in harmony,” where “the rule of law supplants the rule of the jungle,” where nations “recognize the shared responsibility for freedom and justice.”
Today the elder Bush is hailed by realists because he went to the United Nations Security Council, while the younger George W. Bush is condemned because he treated the U.N. as the delusion Dean Acheson said it was. Realism has pulled itself inside out.

A snapshot of military forces and budgets for the U.S., Russia and China in 2007, according to the International Institute for Strategic Studies.
Leading realists today see the world not as Mr. Morgenthau did, as an anarchic system in which nations consistently pursue “interest defined as power,” but as a world of converging interests, in which economics, not power, is the primary driving force.

Thus Russia and China are not interested in expanding their power so much as in enhancing their economic well-being and security. If they use force against their neighbors, or engage in arms buildups, it is not because this is in the nature of great powers. It is because the United States or the West has provoked them. The natural state of the world is harmonious; only aggressive behavior by the United States disturbs the harmony.
In such a world, the task of the United States is not to check the rising powers but to steer them gently along the path that the realists insist they are already on, toward the embrace of an international community with laws and rules to govern their behavior in ways that benefit all.
As the self-described realist Fareed Zakaria explains, “The single largest strategic challenge facing the United States in the decades ahead is to draw in the world’s new rising powers and make them stakeholders in the global economic and political order.”
China and Russia, along with India and Brazil, are “embracing markets, democratic government…and greater openness and transparency.” America’s job “is to push these progressive forces forward, using soft power more than hard, and to try to get the world’s major powers to solve the world’s major problems.” The world, after all, “is going the United States’ way.”
The original realists had no patience for such Candide-like optimism about the inevitable upward progress of mankind. “Whoever thinks the future is going to be easier than the past is certainly mad,” wrote Mr. Kennan in 1951, six years after the most destructive war in history, five years into the Cold War, and one year into what was widely seen at the time as disastrous and seemingly hopeless American intervention in Korea.
Mr. Kennan’s provocative assertion aimed to jolt Americans out of their yearning to believe that the future would be different. But now it is leading realists who embrace The End of History, with an unshakable faith in the inevitable convergence of humanity around shared values and common interests. These were exactly the hopes and dreams Mr. Morgenthau set out to vanquish decades ago.
The original realists were not without their flaws, some of them fatal. Mr. Morgenthau’s insistence that ideology and regime type are irrelevant to a nation’s behavior was a terrible blind spot for realism, then and now. Mr. Putin’s turn toward autocratic rule at home and his revival of old imperial pretensions abroad are intimately related. Mr. Putin himself argues that strength and control at home allow Russia to be strong abroad.
He and his ruling clique clearly believe that avenging the demise of the Soviet Union will help keep them in power. And who but a Russian autocrat would have regarded the “color revolutions” in Georgia and Ukraine as intolerable provocations? Alexander I took quite the same view of liberal rumblings in Poland and Spain in the early 19th century. To ignore ideology and regime today is to misunderstand gravely the motives of autocratic leaders, whether in Moscow or in Beijing.
Nor is the realists’ own hostility to democracy, including American democracy, particularly edifying. Mr. Kennan and the columnist Walter Lippmann flaunted their disgust at what they regarded as the stupidity and ignorance of the American public — Mr. Kennan likened American democracy to “one of those prehistoric monsters with a body as long as [a] room and a brain the size of a pin.”
Mr. Acheson was the great exception because he harbored no antidemocratic prejudices and actually believed the messy American democracy would nevertheless prove stronger in the long run. But most realists throughout the decades, including today, have complained bitterly about the influence of domestic political constituencies and the various ethnic groups that allegedly distort America’s understanding of its “true” interests.
Even so we could use a little dose of the old realism now, at least the part that would recognize a great grab for power like Mr. Putin’s and understand that it will take more than offers of cooperation and benevolent tutelage to address Russia’s revived appetites. Perhaps a bit of realism can challenge the widespread belief that a liberal international order rests on the triumph of ideas alone or on the natural unfolding of human progress.
This deterministic conviction that Francis Fukuyama popularized is an immensely attractive notion, deeply rooted in the enlightenment worldview of which all of us in the liberal world are the product. Many in Europe still believe the Cold War ended the way it did simply because the better worldview triumphed, as it had to, and that the international order that exists today is but the next stage in humanity’s march from strife and aggression toward a peaceful and prosperous coexistence.
It is a testament to the vitality of this enlightenment vision that hopes for a brand-new era in human history took hold with such force after the fall of Soviet communism. But a little more skepticism, and realism, was in order. After all, had mankind truly progressed so far? The most destructive century in all the millennia of human history was only just concluding.
Our modern, supposedly enlightened era produced the greatest of horrors — the massive aggressions, the “total wars,” the famines and the genocides — and the perpetrators of these horrors were among the world’s most advanced and enlightened nations.
Recognition of this terrible reality — that modernity had produced not greater good but only worse forms of evil — was a staple of philosophical discussion in the 20th century.
It was the great problem that Mr. Niebuhr wrestled with and which led him to conclude that for moral men to do good, they would sometimes have to play by the same rules as immoral men — and yes, he believed he could tell the difference. What reason was there to imagine that after 1989 humankind was suddenly on the cusp of a brand-new order?
The focus on the dazzling pageant of progress at the end of the Cold War ignored the wires and the beams and the scaffolding that had made such progress possible.
The global shift toward liberal democracy coincided with the historical shift in the balance of power toward those nations and peoples who favored the liberal democratic idea, a shift that began with the triumph of the democratic powers over fascism in World War II and that was followed by a second triumph of the democracies over communism in the Cold War.
The liberal international order that emerged after these two victories reflected the new overwhelming global balance in favor of liberal forces. But those victories were not inevitable, and they need not be lasting.
After the Second World War, another moment in history when hopes for a new kind of international order were rampant, Mr. Morgenthau warned idealists against imagining that at some point “the final curtain would fall and the game of power politics would no longer be played.” Moscow’s invasion of Georgia has opened a new act in the endless drama.
The only question now is whether the United States will play its part, and with the appropriate blend of realism about the world as it exists and idealism about what a strong and determined democratic community can do to shape it. As Mr. Niebuhr put it six decades ago, “the world problem cannot be solved if America does not accept its full share of responsibility in solving it.”
NOTE: Robert Kagan is Senior Associate at the Carnegie Endowment for International Peace [CSIS] and an informal adviser to the McCain campaign. His most recent book is “The Return of History and the End of Dreams.”
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
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