AUR#912 Oct 18 Political & Financial Turmoil; Fitch Downgrades; Holodomor Exhibition in Chicago

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

Ukrainian History, Culture, Arts, Business, Religion, Economics,
Sports, Government, and Politics, in Ukraine and Around the World       
                     
ACTION UKRAINE REPORT – AUR – Number 912
Mr. Morgan Williams, Publisher and Editor, SigmaBleyzer
KYIV, UKRAINE, SATURDAY, OCTOBER 18, 2008
 
INDEX OF ARTICLES  ——
Clicking on the title of any article takes you directly to the article.               
Return to Index by clicking on Return to Index at the end of each article
Andrew E. Kramer, The New York Times, New York, NY, Sat, Oct 17, 2008
 
Agence France Presse (AFP), Kiev, Ukraine, Fri, Oct 17, 2008
Fitch Ratings, London/Moscow, Friday, October 17, 2008
 
By Maryana Drach, Iryna Shtogrin, RFE/RL, Prague, Czech Republic, Ukraine, Thu, Oct 16, 2008
 
By Stefan Wagstyl, Financial Times, London, UK, Thursday, October 16 2008
Analysis & Commentary: By Bohdan Danylyshyn, Minister of Economy of Ukraine
Zerkalo Nedeli, Mirror Weekly, #38 (717), Kyiv, Ukraine, 11 -17 October, 2008
 
Ukraine’s economy is in trouble, there is no doubt about it.
Analysis & Commentary: By Edward Hugh, Macroeconomist, Barcelona, Spain
Global Economy Matters, Sun, Oct 12, 2008 & RGE Monitor, New York, NY, Sun, Oct 12, 2008
 
Editorial: International Herald Tribune, Paris, France, Tuesday, October 14, 2008
 
9SOFTSERVE, INC. JOINS THE U.S.-UKRAINE BUSINESS COUNCIL (USUBC)
Leading multinational software development and consulting company, member 93
U.S.-Ukraine Business Council (USUBC), Washington, D.C., October, 2008
 
Exhibition to feature fifty-four Holodomor artworks by Ukrainian artists
Ukrainian National Museum, Chicago, Illinois, Wednesday, October 15, 2008
 
Raphael Lemkin’s perception of the Ukrainian genocide is a solid recommendation to
the UN Assembly to finally recognize the Ukrainian tragedy for what it was – ‘a case
of genocide, the destruction of a nation. 
By Roman Serbyn, historian, professor, scholar, Montreal, Canada
Action Ukraine Report (AUR) #912, Kyiv, Ukraine, Satruday, October 18, 2008
Ukrainian National Information Service (UNIS), Washington, D.C. Friday, Oct 3, 2008
 
13CAN EUROPE SURVIVE GERMANY?
Analysis & Commentary: By Alexander Motyl
Professor of Political Science at Rutgers University-Newark
The Atlantic Council, New York, NY, Thursday, October 2, 2008  
Window on Eurasia, by Paul Goble, Vienna, Friday, October 3, 2008
 
Activities of the Security Service of Ukraine regarding declassification and publication
about the operations of the Soviet Union Securities Services and the history of the
Ukrainian Liberation Movement

Security Service of Ukraine (SBU), Kyiv, Ukraine, Thursday, October 2, 2008
SBU material translated into English for the Action Ukraine Report (AUR) #912
Morgan Williams, Editor & Publisher, Washington, D.C., Saturday, October 18, 2008
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1
 POLITICAL TURMOIL JEOPARDIZES FINANCIAL RELIEF FOR UKRAINE
 
Andrew E. Kramer, The New York Times, New York, NY, Sat, Oct 17, 2008
 
MOSCOW — Aid for Ukraine’s staggering economy may be endangered by the country’s continuing political instability. Like Iceland and Hungary, Ukraine is seeking aid from the International Monetary Fund to counter the global financial crisis. But Ukraine, its economy reeling from falling steel prices, is also struggling with political problems.
The infighting threatens an emergency loan from the monetary fund. The fund is seeking assurances from the cabinet that next year’s budget will be balanced, but President Viktor A. Yushchenko issued a decree this month dissolving Parliament and, with it, the cabinet.
That decree, which would lead to elections on Dec. 7, is being contested by the president’s opponents in Parliament. So until the decree’s validity is decided in the courts, it is unclear whether the current cabinet holds power. The prime minister, Yulia V. Tymoshenko, says it does, while the president’s office says it does not.
In the interim, a delegation from the monetary fund has been meeting with representatives of the prime minister and the president. The fund is offering a loan of as much as $15 billion to shore up the country’s finances as foreign investors flee.
Ms. Tymoshenko, who met with the delegation on Friday, expressed support for the loan. But if the president’s order to dissolve Parliament is upheld, she said, the cabinet will lack the authority to negotiate with the fund.
In that case, negotiations will be delayed until a new Parliament is formed after the elections. After previous elections, coalition-building in Ukraine has taken months.
“Alarm bells aren’t ringing yet,” Sergei Teriokhin, a former minister of the economy and member of Parliament in Ms. Tymoshenko’s bloc, said in a telephone interview. But if the contested status of the cabinet is not resolved, he said, the monetary fund will not know whom to meet with. “It is necessary that somebody in the country make guarantees on the budget policy of next year.”
Mr. Yushchenko and Ms. Tymoshenko have alternately collaborated and competed since they rallied crowds together on Independence Square in Kiev during the protests known as the Orange Revolution in 2004.
 
Most recently, his Our Ukraine bloc was in a coalition with Ms. Tymoshenko’s, an arrangement that gave her the prime minister’s post. But the two split after the Russian invasion of Georgia in August. Mr. Yushchenko accused Ms. Tymoshenko of muting her criticism of the Russian military action to please the Kremlin.
The political turmoil has coincided with a steep economic decline. On Friday, the international agency Fitch Ratings downgraded Ukraine’s sovereign debt rating and issued a negative outlook for the country.
 
A Ukrainian shipping company, Industrial Carriers, has gone bankrupt. The government has frozen rail tariffs for steel companies, and as foreign investment dries up, speculators are betting on a decline in the national currency.
In response, Ukraine plans to nationalize some commercial banks, which have liquidity problems, a member of Parliament told the monetary fund’s delegation on Friday.
Hungary, which has struggled to cope with the effects of the financial crisis, also received a vote of no confidence on Friday when Fitch cut its rating to negative from stable. Hungary’s large debt, much of it in foreign currencies, has made the country particularly vulnerable to the current external shocks.
The government scaled back its growth estimates for 2009 to just 1.2 percent from 3 percent. Hungary has lined up support from the European Central Bank and the monetary fund in an effort to reassure credit and currency markets. (Nicholas Kulish contributed reporting from Budapest.)
 
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2. CRISIS-HIT UKRAINE SEEKS IMF EMERGENCY LOAN
 
Agence France Presse (AFP), Kiev, Ukraine, Fri, Oct 17, 2008
 
KIEV – Ukraine held crunch talks Friday on an emergency loan from the IMF to prop up its fragile banking system, but moves to address the economic crisis were overshadowed by deepening political strains.
Prime Minister Yulia Tymoshenko, who is locked in a fierce battle with President Viktor Yushchenko over his decision to call fresh polls, said the loan of up to 14 billion dollars was “essential” to bail out the country.
As the talks continued with the International Monetary Fund, global ratings agency Fitch downgraded Ukraine’s credit rating and issued a stark warning about the ex-Soviet republic’s economic outlook.
 
“The downgrade reflects Fitch’s concern that the risk of a financial crisis in Ukraine involving a large depreciation of the currency, further stress in the banking system and significant damage to Ukraine’s real economy is significant and rising,” the agency said in a statement.
Tymoshenko on Thursday linked the outcome of the IMF talks to the cancellation of the December 7 parliamentary elections, which have become the subject of a bitter political tug-of-war. President Viktor Yushchenko on October 9 ordered the snap general elections. Tymoshenko immediately contested the order.
For Ukraine to receive credit, “it is necessary to postpone the elections, something the International Monetary Fund said in its statement,” news agencies quoted Tymoshenko as saying ahead of the loan talks.
The cabinet has blocked funding needed for the elections and a court suspended Yushchenko’s order. On Friday, Yushchenko’s backers said a higher court had overturned the earlier ruling and said the elections could go ahead.
Amid the infighting, the deputy chief of the country’s central election commission, Andriy Magera, indicated the timing of the elections remained in doubt.
“All deadlines for appropriate preparation for voting expired long ago,” Magera told Interfax-Ukraine news agency in an interview.
Earlier, both Yushchenko and Tymoshenko expressed hopes the IMF loan deal would go through. The IMF was “ready to give Ukraine a loan amounting to 14 billion dollars for the stabilisation of our state’s financial sector,” Yushchenko’s office said in an announcement of his meeting with the IMF team. Tymoshenko had earlier met with the head of that team, Ceyla Pazarbasioglu.
“We are very interested in our cooperation resulting in Ukraine receiving essential financial assistance from the IMF,” Tymoshenko said in a statement.
Ukrainian parliament speaker Arseny Yatsenyuk separately met with Pazarbasioglu and told her that Ukrainian authorities were planning to nationalise ailing commercial banks in Ukraine.
Yatsenyuk told the IMF official that “nationalisation of commercial banks was to be performed in order to save the Ukrainian banking system,” the Ukrainian parliament said in a statement published on its website. Local IMF representatives declined Friday to comment on the negotiations.
Ukraine stopped early withdrawals from savings accounts this month in a bid to halt a run on banks. The central bank has bailed out several banks and the Ukrainian stock market has lost more than 70 percent of its value this year.
Such problems have made the country one of Europe’s most vulnerable emerging economies, according to Capital Economics analyst Neil Shearing.
“The turmoil in global markets has raised concerns about a funding crisis in emerging Europe, with some investors fearing that Hungary could be the next Iceland (when) in fact Ukraine appears the more vulnerable to a balance of payments crisis,” Shearing said in a statement.
This was made worse, he said, by the political crisis that led President Yushchenko to call the December 7 general election after the collapse in September of the pro-Western coalition government.
 
“Once political risk is factored in, Ukraine could be most vulnerable to a balance of payments crisis, despite the fact that its overall external deficit is smaller,” Shearing said.
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3.  FITCH RATINGS DOWNGRADES UKRAINE TO ‘B+’

 
Fitch Ratings, London/Moscow, Friday, October 17, 2008
LONDON/MOSCOW – Fitch Ratings has today downgraded Ukraine’s Long-term foreign and local currency Issuer Default Ratings (IDRs) to ‘B+’, from ‘BB-‘ (BB minus). The Outlooks on both IDR remain Negative. The agency has also downgraded the Country Ceiling to ‘B+’ from ‘BB-‘ (BB minus) . The Short-term foreign currency IDR is affirmed at ‘B’.
“The downgrade reflects Fitch’s concern that the risk of a financial crisis in Ukraine involving a large depreciation of the currency, further stress in the banking system and significant damage to Ukraine’s real economy is significant and rising.
 
Such a scenario would damage the sovereign’s balance sheet. Nevertheless, Fitch believes risks to Ukraine’s ability to meet its sovereign obligations remain low in the near term owing to the sovereign’s modest refinancing needs,” said Andrew Colquhoun, Director in Fitch’s Sovereigns Group.
Ukraine has officially requested assistance from the IMF and a Fund team is currently in Kyiv. Fitch would view a sizable and appropriately-designed IMF programme as a positive factor, although the agency awaits precise details before drawing firm conclusions.
 
However, depositor confidence in the banking system may remain shaky and the economy will face a difficult adjustment even if a programme is arranged, extending Ukraine’s exposure to financial instability.
On 13 October, Fitch signalled rising concerns over the health of Ukraine’s banking system amid a sharp tightening in liquidity conditions and some deposit withdrawals from the system following the failure of sixth-largest bank Prominvest.
 
Fitch is unconvinced that the raft of emergency support measures announced by the central bank, including stepped-up liquidity provision and a ban on early redemption of term deposits, will be adequate to shore up depositor confidence and forestall further banking-system stress. New central bank rules restricting loan growth threaten to exacerbate a slowdown in the economy, which could hit banks’ asset quality relatively soon.
A relatively high share of FX-denominated lending (51% at end-August) exposes the financial system to risks from enhanced currency volatility. Ukraine’s currency, the hryvnia (UAH), fell to 5.6 against the USD by 8 October, down 10% on the month, before climbing back to around 5.2-5.3 on intervention by the central bank.
 
The UAH is likely to stay under pressure from a widening current account deficit, which Fitch projects at around 7% of GDP in 2008, versus 4.2% in 2007. Falling steel prices will intensify a terms-of-trade shock originating in a likely strong increase in Ukraine’s gas import price next year. Strong borrowing by the private sector took Ukraine’s gross external debt to USD100bn by end-June 2008, including USD28bn of private-sector short-term debt.
 
Hard numbers on private-sector external debt maturities for 2009 are not available, but Fitch estimates these could be around USD19bn for longer-term borrowing. With many private-sector borrowers likely to find it hard to refinance their maturing external borrowing, the sovereign may be forced to provide resources from official reserves, which are also needed to shore up confidence in the exchange rate.
Fitch continues to draw comfort from Ukraine’s moderate sovereign refinancing needs for 2009 of USD2.5bn, of which USD0.9bn are domestic (mostly in UAH) and USD1.6bn are external (including a USD0.5bn eurobond maturity in May), compared with the latest disclosure for official reserves of USD37.5bn on 9 October.
 
The country’s low general government debt/GDP ratio of 10% for end-2007 is well below the ‘BB’ median of 34% (and the ‘B’ median of 33%). However, worsening economic prospects and requirements for official support to the economy could erode Ukraine’s fiscal strength in the medium term.
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4.  IN UKRAINE, IMPACT OF GLOBAL CRISIS BEGINNING TO STING

By Maryana Drach, Iryna Shtogrin, RFE/RL, Prague, Czech Republic, Ukraine, Thu, Oct 16, 2008
KYIV — Political uncertainty is nothing new for Ukrainians. But financial uncertainty is something different — and deeply unwelcome. As the effects of the global financial crisis take hold around the world, money flows have become a source of extreme anxiety in Ukraine. On the streets of the capital, many residents expressed worry about the fate of their savings.

“I went to Privatbank to withdraw money from my active account, which I’m supposed to be able to use any time,” says one man. “They told me to go away; they didn’t give me anything. I’m still fighting about it. Tomorrow I’m going to go and file a lawsuit.” “I have doubts,” says another. “This is one of those situations where money is controlling people, rather than people controlling their money.”

Others were more sanguine. “I trust the banks. The interest rates haven’t gone down and our bank is working normally,” says one woman, adding, as an afterthought: “When my deposit comes in December, I can take the money out and put it someplace else.”

‘STRICT, BUT CORRECT’
Officials at Ukraine’s central bank are all too aware of the risks of public jitters. Citing a “psychological factor,” the National Bank of Ukraine (NBU) this week decided to impose limits on lending, foreign-currency trade, and early withdrawals of certain deposits.

The decision, taken October 13, came after National Bank depositors — unnerved by mounting inflation and a weakening currency — withdrew more than $1.3 billion from their accounts in just under two weeks. It’s hoped the steps will prevent a full-scale run on the bank by panicking citizens.

The NBU was also forced to provide a $1 billion stabilization loan to the country’s sixth-largest bank, Prominvestbank, which failed after panicked depositors in the eastern region of Donetsk rushed to withdraw their money.

Vyacheslav Yutkin, who serves as chairman of the board of the Ukrainian branch of Russia’s Sberbank, says the NBU’s measures were appropriate but too slow in coming.

“The methods of the Ukrainian National Bank are strict, but correct. It’s an important and necessary preventive measure,” Yutkin says. “If the National Bank had reacted two weeks earlier, banks would have had the chance to hold on to at least $1.5 billion in accounts, and the current liquidity crisis wouldn’t be so bad. But it took a long time for them to make a decision, and that made the crisis even worse.”

PIECES OF THE PUZZLE 
Some officials are still offering an upbeat assessment of the economic climate. Economy Minister Bohdan Danylyshyn on October 15 noted Ukraine’s 2008 GDP growth stayed steady at 7 percent through September, and still remains strong despite “some decline” in certain sectors.

Other authorities have expressed confidence that Ukraine will escape the worst of the damage brought on by the global financial crisis because the country’s still-developing stock exchange is less vulnerable to the vagaries of market fluctuations.

It is difficult to gloss over other indicators, however. Inflation peaked in May at 31 percent — putting Ukraine higher than any other country except Zimbabwe and Venezuela — before dropping to a less alarming 16 percent in September. The value of the local currency, the hryvnya, last week sank by 20 percent, forcing the NBU to intervene and sell dollars at an artificially low rate.

With such figures in mind, many economy-watchers acknowledge Ukraine will not be able to avoid the long-term effects of the crisis.

This will be particularly true if a global economic and construction slowdown shrink the global market for commodities like steel, which is Ukraine’s top export and responsible for 40 percent of its hard-currency earnings. Many steel mills have already slowed or stopped production because of a drop in worldwide demand.

A global recession would also have a dramatic impact on remittances for Ukraine’s large migrant workforce. Ukraine is second only to Russia in remittances in Central and Eastern Europe, sending home nearly $8.5 million a year — an estimated 8 percent of the country’s GDP.

WILD CARD
Then there is the critical factor of the price Ukraine will pay for Russian gas in 2009. Ukraine currently pays just $180 per 1,000 cubic meters. But Russia has repeatedly said it wants former Soviet states to switch to market prices, and has pointedly noted its fees for Western European markets exceeded $500 in October. A sudden hike in Ukraine’s gas prices could have a devastating effect on the country’s financial reserves — although not everyone is worried.

“We shouldn’t forget that Ukraine has almost $40 billion in reserves; that’s more than enough,” says Oleksandr Suhonyako, the head of the Association of Ukrainian Banks, a grouping of the country’s major commercial banks and credit institutions.

 
“But the financial crisis isn’t going to be over soon, and it just keeps growing every day. I think it’s not a matter of a month, but half a year, or even more. In order the meet the problems of the future, we need to start thinking about international loans now.”

Prime Minister Yulia Tymoshenko, speaking at a news conference on October 14, avoided answering a question of whether Ukraine was seeking help from the International Monetary Fund (IMF).

Such a move would be interpreted by many as a sign that Ukraine’s economy was in deep trouble. Instead, Tymoshenko — perhaps looking ahead to a presidential bid in 2010 — stressed that the government was doing “everything possible and impossible” to minimize the impact of the global crisis on Ukraine.

But an NBU official said on October 15 that Ukraine might seek support from an IMF credit program. Hungary, Serbia, and Iceland have already said they will approach the IMF for help gaining access to credit and defending their currencies investors’ risk aversion.

Finance Minister Viktor Pynzenyk has begun meeting with members of an IMF expert mission that arrived on October 15, and the two sides “discussed the situation concerning the world financial crises and the challenges facing Ukraine’s financial system,” Reuters reported.

The statement added that both sides agreed to produce “recommendations for Ukraine vital for the operation of the banking sector and macroeconomic stability for Ukraine, based on the experts’ assessment and taking account of the experience of other European countries.”

Reuters reported that the IMF’s Kyiv office made no comment on the mission, adding that it was expected to remain in Ukraine for at least a week. It cited estimates of the potential IMF largesse to Ukraine at $3 billion-$5 billion.

Speaking to reporters after a cabinet session on October 16, Reuters quoted Tymoshenko as saying that “we have information” that the IMF “is ready to examine special credits from $3 billion-$14 billion to stabilize the financial system,” but that it would be contingent on Ukraine calling off early elections announced last week by President Viktor Yushchenko.

NO RAPID REACTION?
Accordingly, it’s the government’s own internal struggles that may prove one of the greatest liabilities as the country fights against impending economic woes.

Ukraine in December is facing its third set of parliamentary elections in as many years, a result of intractable squabbling between Tymoshenko and Yushchenko. The pair’s Orange Revolution partnership in 2004 quickly devolved into an intense political rivalry that has mired Ukraine in a protracted political standoff and may continue until 2010, when the two are expected to face off for president.

Yutkin says Ukraine has grown accustomed to political uncertainty, and that the ongoing political drama will not have a noticeably adverse affect on economic conditions.

“I think politics are having only minimal influence in this situation,” he says. “The economic system in Ukraine adapted a long time ago to the conditions of political instability and inflation. Higher prices and political upheaval aren’t the main factors causing panic among bank depositors.”

The World Bank, however, warned this week that policymakers in Eastern Europe and Central Asia “need to be prepared to respond quickly to the rapidly changing international financial environment.” Some worry that Ukraine’s constant cycle of elections and political infighting mean little, if any, decision making will be done in the interim.

 
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5.  EASTERN EUROPE IS IN THE RED

By Stefan Wagstyl, Financial Times, London, UK, Thursday, October 16 2008
When Lev Partskhaladze, a Ukrainian property developer, was preparing to float his company on the London stock market three years ago, he saw no end to his country’s home and office construction boom. Today, with cranes standing idle over Kiev building sites and property sales evaporating, he admits the global credit crunch is bringing the boom to a halt.
“We are seeing a financial crisis transforming into an economic crisis in the world. It has not fully hit Ukraine yet but it’s close,” says the chairman of XXI Century Investments. With its shares down 97 per cent from their peak, the company is trying to raise cash by offloading projects to other developers.
Mr Partskhaladze is not alone in having to confront the region’s changed realities.
 
Across central and eastern Europe, the global crisis is biting hard, albeit very unevenly. In Russia, the authorities have set aside nearly $200bn (pounds116bn, euro149bn) for a financial market rescue, Ukraine is in talks with the International Monetary Fund over emergency loans of up to $14bn, Hungary was on Thursday bailed out with a euro5bn ($6.7bn, pounds3.9bn) loan facility from the European Central Bank.
Latvia and Estonia are suffering the region’s first recessions in a decade, while growth in oil-rich Kazakhstan has slowed to a crawl. Even in Poland, where Donald Tusk, the prime minister, insists his country is “an island of stability”, the crisis has raised doubts about Warsaw’s euro entry plans.
Stock markets have plunged accordingly, with Polish shares trading at less than half their peak levels and Ukraine’s down by three-quarters.
 
Property markets have slowed, even if developers are still trying to hold up prices. After riding high earlier in 2008, some currencies have come under pressure, notably the Hungarian forint. In Ukraine, where the central bank has intervened to support the hryvnia, the credit default swap rate, a risk measure, has soared 1,400 points to 1,900, among the world’s worst.
The financial whipsaw has cut billionaires down to size, not least Oleg Deripaska, the Russian metals oligarch, who has sold valuable stakes to raise cash. Others are grabbing opportunities to buy cheaply: Mikhail Prokhorov, the Russian nickel investor, acquired 50 per cent of Renaissance Capital, a Moscow bank, for $500m – about one-quarter of its value of a year ago.
With the global crisis still raging, despite the calming effects of this week’s support moves in the US and the European Union, it is impossible to predict how events will play themselves out in a region increasingly important to the west as an export market and low-cost production base. But hopes it might escape unscathed have evaporated. Apart from corporate casualties, some countries could run into difficulties funding current account deficits.
 
Erik Berglof, chief economist of the European Bank for Reconstruction and Development, says: “There is enormous uncertainty right now … These countries could deal with rising borrowing costs and an economic slowdown coming from the US and western Europe, but a complete shutdown of international borrowing – nobody can withstand that.”
The result of this shock will, as in the west, increase the state’s role in the economy once more – and possibly provoke political conflicts over the share-out of scarce financial resources. As in the west, there could be public anger against those who profited from the boom years, often spectacularly so. Hungary, which first ran into economic trouble two years ago, has already experienced social tensions.
Economic growth is slowing sharply, with the IMF forecasting a decline in real gross domestic product growth for central and south-east Europe from 5 per cent this year to just 3.5 per cent in 2009. For Russia and the former Soviet Union, it predicts around 7 per cent for this year and 5.5 per cent for 2009.
 
By global standards, with the US and western Europe facing recession, these are respectable numbers. In non-crisis circumstances, a moderate slowdown would even have been welcome in some countries. Until the summer their main danger was overheating, with inflation running as high as 31 per cent in Ukraine. Thanks to bumper harvests, tumbling food costs are helping to curb consumer price rises but inflation is still high in some countries, notably Russia, with 15 per cent.
Also, the region as a whole is less exposed to financial turmoil because companies and households have mostly taken less credit than in the west. Raiffeisen International, the Austrian bank, says bank assets were just 90 per cent of GDP in 2007 in central Europe and 65 per cent in Russia, compared with 250 per cent in the eurozone.
But these generalisations conceal many country risks. As Jan Krzysztof Bielecki, chief executive of Poland’s Bank Pekao, says: “The development of the situation over the last few weeks has shown that there is nothing more mistaken than calling this a single region. The differences between Poland and Kazakhstan are like the difference between heaven and hell.”
A key danger is the region’s dependence on external finance, especially bank credit. According to the Institute of International Finance, total private capital and credit flows into “emerging Europe” (including Turkey) are likely to fall from a record $394bn last year to $322bn in 2008 and $262bn in 2009.
 
Given that $262bn is still a high figure by historical standards, there is great scope for a much bigger drop. Within this total, bank credit is set to fall particularly fast, from $219bn in 2007 to $155bn in 2008 and just $74bn next year.
While foreign direct investment is forecast to increase modestly to nearly $90bn next year, it cannot compensate for the dramatic decline in bank lending. Nor will portfolio investment save the day: the flows are far too small, peaking last year at just $8.5bn.
The biggest financing needs are in Russia, where the central bank estimates $39bn in debt falls due this year and $116bn in 2009. Little wonder that bankers and oligarchs are queuing for credits the authorities are distributing from their $560bn in foreign exchange reserves. Russia is in no danger of default but banks are under pressure – with fears of a panic increasing this week after Globex, a midsized lender, banned depositors’ withdrawals.
If the crisis persists, even the wealthy Russian state will have to count its roubles. Relative to the size of the national economy, Moscow’s financial rescue package is bigger than the $700bn programme launched by the US. Russia’s budget spending is more than doubling to $586bn in 2010, just as the oil price has roughly halved from its peak. Further declines will put spending under pressure.
 
But with inflation high, driving up pay and pensions, there is little scope for painless cuts, especially as Russia is committed to huge infrastructure projects, including the Sochi 2014 winter Olympics.
IN UKRAINE ————
In Ukraine, banks have also borrowed heavily overseas to finance credit growth and are struggling to refinance themselves. At the same time, the current account deficit is widening as prices for steel, Ukraine’s main export, plummet. So Kiev’s external financing needs are growing just as credit is short and foreign direct investment, a big source of finance in recent years, is slowing.
Ukraine’s authorities insist the economy is in good shape. The central bank has maintained order by taking control of one bank and supporting 20 other lenders. But efforts to ease the crisis are hampered by political turmoil, with president Viktor Yushchenko calling early parliamentary elections for December. Yulia Tymoshenko, prime minister, on Thursday confirmed Kiev was turning to the IMF, which she said was considering lending “$3bn-$14bn”.
In central and south-east Europe and the Baltic states, many economists assumed countries would be protected from the global storm because their banks’ finance came not from markets but from the multinational banks that have bought most local lenders. But as Mr Berglof of the EBRD says, with parent banks now under pressure, this assumption may no longer apply. “This strength is turning into a vulnerability,” he warns.
Individual banks deny they have plans to pull out. But they have been raising the costs of foreign exchange denominated loans, which account for around half of corporate and household lending in central Europe. This week, leading Hungarian banks cut such foreign exchange lending, in moves which on Wednesday precipitated the biggest daily drop in the forint in five years.
 
On Thursday the currency rallied sharply after the authorities announced public support from the ECB – unprecedented for a country outside the eurozone – and liquidity boosting measures. Janos Veres, finance minister, says the IMF stands by to support Hungary but will intervene only in extremis.
Poland, the Czech Republic and Slovakia are in better economic condition than Hungary, having avoided the profligate public spending in which Budapest indulged until running into financial difficulties in 2006. The Czechs, with low local interest rates, are free of foreign exchange loans. But like Hungary, these countries are exposed to another painful shift – an expected steep decline in demand from western Europe. Slovakia, with its heavy dependence on a single industry – cars – is particularly vulnerable.
Except for Hungary, however, bankers are less concerned about central Europe than the Baltic states and south-east Europe, where current account deficits are high. All have relied heavily on a mix of foreign direct investment and credit for financing recent rapid growth. But with economies slowing, bankers wonder which countries can avoid a hard landing – or worse.
 
Estonia and Latvia, which ran into financial difficulties even before the global crisis, are already in recession. Lithuania is not far behind. But at least Baltic current account deficits are falling, from 18 per cent of GDP on average last year to 8.6 per cent in 2009, according to the IMF.
In south-east Europe, the Fund predicts deficits to stay at 14 per cent next year, including 21.5 per cent for Bulgaria. “Action is needed to rein in rising external and internal imbalances, mindful of more volatile external financing conditions,” the IMF says But whether that action will come in time is a moot point. Analysts at Citigroup rank Romania and Bulgaria alongside the Baltic states, Hungary and Ukraine as countries vulnerable to “a risk to financial stability”.
As credit growth decelerates across the region, putting a brake on economies, current account deficits should decline as credit-financed imports fall. So soft landings are certainly well within reach. The difficulty comes in bridging the financing gaps that are bound to emerge in the most hostile financial conditions in 60 years. If there is a crumb of comfort, it is that these ex-communist states have more experience than most of implementing tough economic policies under pressure. [Additional reporting by Jan Cienski in Warsaw, Roman Olearchyk in Kiev and Thomas Escritt in Budapest]
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6.  GLOBAL FINANCIAL CRISIS – A TEST FOR UKRAINE

 
ANALYSIS & COMMENTARY: By Bohdan Danylyshyn, Minister of Economy of Ukraine
Zerkalo Nedeli, Mirror Weekly, #38 (717), Kyiv, Ukraine, 11 -17 October, 2008
 
Before discussing future implications of the global financial crisis for Ukraine’s economy, let us consider if it has already affected us. The national economic system is integrated into the world economy closely enough to be involved in the global processes.
 
The eroded macro-stability of international markets could not but impact internal developments in Ukraine. The global financial crisis of 2007-2008, as any other, has been unfolding in several waves. We have survived the first two without big losses, although not without mistakes.
[1] The first wave rose in 2007, when stock indices of the world’s leading banks and financial institutions went down. Under the circumstances, risk capital looking for stable yet high-profitability markets moved from developed to emerging markets, which continued to show high growth rates and profitability.
 
According to financial experts, the risk to profitability ratio in those emerging markets was fairly attractive. As a result, stock markets in respective countries grew in 2007, China and Ukraine being leaders of such growth.
The inflow of credits was also substantial: in 2007, Ukrainian economy borrowed USD 24.3 billion in middle- and long-term credits.
[2] The second wave started in early 2008, when the ongoing fall in the world stock markets re-directed cash flows from one class of assets to another, in particular to commodities and energy resources. These assets became more marketable, and commodity prices soared up. In January-July, average metal prices in eight regions of the world rose by 81%; “Brent” oil price rose by 32%.
 
By the time first favourable forecasts appeared as to the global gross grain harvest in 2008/2009 marketing year, wheat prices (USA, FOB) for 2007/2008 marketing year had grown by 79%, on average.
Ukraine’s economy responded to the above challenges in the following way.
The overall inflationary background intensified. Inflationary spiral, set spinning in 2007, has been in motion in 2008. Political instability affected economy.
 
Over the first eight months of 2008, industrial manufacturers’ prices grew by 36.5%, especially in such sectors as mining of mineral resources (except for fuel-and-energy ones) by 70.4%; metallurgy and metal works by 68.1%, coke production by 64.3%; and the chemical industry by 55.9%. All of these sectors are oriented towards foreign markets or towards servicing export-oriented production.
The convergence factor (resulting from openness of the Ukrainian economy to global trends, e.g. to the 2008 consumer price rise in most countries of the world) also accelerated inflation processes in the domestic consumer markets.
 
In September CPI amounted to 101.1% (in January-September it amounted to 116.1%), but it was much less than in 2006 and 2007, when it grew by 2.0% and 2.2%, respectively. So in general, in Q3 Ukraine had the lowest rate of price rise in the last four years – as low as 0.5%. The overall inflation was driven, first and foremost, by rising prices (tariffs) for services.
The role of export-oriented production in the country’s economic growth increased. In early 2008, production growth in export-oriented sectors accelerated, and the financial resources of the national economy were re-distributed, in particular through the banking system, from other sectors into commodities and export-oriented ones.
 
Thus, in the first seven months of 2008, production growth in metallurgy was 3.5%; in the chemical industry it was 5.2%. It accounted for relatively high growth rates in industry at large –7.3%.
Over the same period, the share of profitable companies in the total number of enterprises increased from 65.1% in January-July 2007 to 66.9% in January-July 2008, and their profits boosted by 71.7% as compared to the corresponding period of 2007. Leaders of profitability growth were coke production and oil refinement (by 5.7 times), the mining industry (by 2.2 times), and chemical and petrochemical industries (by 2.5 times).
Lending also increased, especially in such sectors as agriculture (135.1%), coke production and oil refining (132.5%), machine building (132.1%), chemical and petrochemical industries (130,6%).
In early 2008, the Ukrainian economy remained attractive for foreign investors. The growth of total foreign capital investments in the national economy was 2.7 times as rapid as in the corresponding period of 2007. And again, most essential capital investments went to well-performing sectors: agriculture (149.7%), banking and financial activity (142.1%), coke production and oil refining (123%).
Against a backdrop of positive balance of payments and excessive supply of hard currency, the official exchange rate of hryvnia to the US dollar decreased by 3.96% to reach 4.85 UAH/USD in late August. In January-August, foreign currency reserves augmented by USD 56 billion – to USD 38.1billion.
The second wave of the global financial crises set off ripples in the Ukrainian stock market. The PFTS index lost 43.5% in the first seven months of 2008, primarily due to the withdrawal of some foreign investors (the so-called ‘jobbers”) from Ukrainian, as well as from the global, markets and to political instability in Ukraine.
 
Almost all companies listed on PFTS suffered a decline in share and securities prices. Under the conditions of free capital flows, the Ukrainian economy demonstrated market-driven tendencies to seeking super-profits, which enhanced its export-oriented and commodity components, especially given intensified commodity drivers in the global markets.
[3] The third wave of the global financial crisis is unfolding before our eyes.  It has already caused a series of bankruptcies of the world’s leading financial companies and financial crisis rollover to the real economy sector, drop in demand on global markets and, as a result, plummeting commodity prices and stagnation of leading economies. In August-September, average metal prices in eight regions of the world fell by 18.3%, and oil prices fell by 26.5%.
The Ukrainian economy has not yet felt the consequences of the third wave in full. At this juncture, it is hard to estimate their severity and duration, but some impact has been obvious.
Thus, in August, for the first time since October 2002, industrial production decreased by 0.5% (y-o-y), in particular in metallurgy – by 8.6%, the chemical industry – by 9.1%, and coke production and oil refining – by 4.9%.
In other words, a set of external shocks, coupled with the export-oriented companies’ strategy geared towards searching out niches in foreign markets while underestimating domestic ones, slowed growth, which, in the first eight months of 2008, was as low as 2% in metallurgy and 3.5% in the chemical industry. In general, rates of industrial production growth fell to 6.3% in the first eight months of 2008.
The PFTS index continued to go down, losing another 43% in the last two months. Bad news from mining industries and metallurgy had an adverse impact on the PFTS index, too.
In view of the above, the GPD growth of 7.1% was achieved at the expense of other sectors, chiefly, agriculture, where the harvest was unusually rich.
Devaluation processes became manifest in the currency market, and in September foreign currency reserves reduced by USD 0.6 billion. Negative inflation expectations contributed to the overall turmoil. A negative balance of sale/purchase of cash foreign currency by the population amounted to USD 1,321 million.
The third wave of global financial crisis forced governments in the world’s largest economies to revise their policy vis-à-vis financial markets. In particular, the governments of the USA, the UK, Germany, Russia, the Benelux States and other countries decided to support some of the troubled financial institutions.
Investors expect the government of Ukraine to take similar measures. However, the drivers of mortgage and financial crises in the USA and other developed economies and those forming potential negative tendencies in Ukraine’s economy are different.
In order to find solutions allowing for mitigation of the influence of the global crisis on the Ukrainian economy, we should analyze the most likely channels of this influence.
As matters stand, the channel relating to global stock markets is not the most powerful and painful for Ukraine’s economy. Of course, it puts certain pressure on the currency market as the risk (speculative) capital flows out, but it will hardly affect the development of the real economy sector in Ukraine.
 
For one thing, the organized stock market is underdeveloped – only 4.66% of all transactions take place on it. For another thing, foreign investors and other sources of funding, including stock market funds, account for as little as 5%-7% of all investments.
There are other channels of influence, more deeply-felt by the Ukrainian economy.
[1] The first channel is foreign trade. Widespread financial problems have already undermined demand in the international markets. Recession in the world’s leading economies will be accompanied by the decreasing investment demand and poorer dynamics of construction. This, in turn, will continue to drive down prices for metallurgy and machine building products.
Since the Ukrainian economy is highly dependent on exports making up more than 47% of the country’s GDP, the above trends in the global markets will be harmful for the development of export-oriented sectors, with subsequent repercussions on industries relying on exports directly and indirectly.
[2] The second channel is the banking system. The penetration of foreign capital into Ukraine’s financial institutions is considerable. The financial sector is one of the national leaders in attracting foreign direct investments (19% of total accumulated foreign capital).
 
The share of foreign capital in the banking sector amounts to 37.2% of total capital, which exceeds the threshold of economic security established at 30%; in the insurance sector it approaches the threshold value, currently constituting 28.1%.
Given the large share of transnational financial corporations on the Ukrainian banking sector, the global financial crisis could have an indirect adverse impact if mother companies suffer great losses or have liquidity problems.
In this context, it is noteworthy that investments and development of Ukrainian manufacturing companies hinge more on lending than on the stock market: 16% of investments in fixed assets are funded from loans. The most credit-dependent sectors are agriculture, construction, processing industries, including the chemical and petrochemical industry, the food industry, coke production and oil refining.
[3] The third channel of influence is debt. In June 2008, gross foreign debt made up 59.9% of GDP at USD 100.06 billion. Almost 85% of this debt was that of the private sector. According to IMF data, the maximum limit of foreign debt for low and middle income countries is set at 49.7% of GDP; once this limit is exceeded, the probability of financial crisis increases to 70%.
Deteriorating liquidity in global financial markets could slow up lending to the Ukrainian economy. As a result, Ukrainian borrowers will have difficulty refinancing their credit liabilities in external markets.
Furthermore, the share of short-term capital in foreign debt is large (28.2% as of late June 2008). Over the first six months of 2008, the ratio of short-term foreign debt coverage with reserves fell by 15% to 1.258. This capital, in the event of its sudden outflow could contribute to destabilization of the national currency exchange rate.
The current conditions of the national economy development differ a great deal from those of 1998 when Ukraine was also hit by a profound global financial crisis. Now the national economic system is less resistant to financial shocks. Whereas in 1997-1998 corporate debt was small and the corporate sector did not rely so heavily on foreign funding, today the national financial system is more dependent on external cash flows.
If worst comes to worst, and all of the above channels start working at once and in their full capacity, the global financial crisis will have grave consequences for Ukraine:
[1]  the deficit of foreign trade balance will increase sharply to go beyond 10% of GDP, which is critical for emerging economies;
[2]  the positive balance of account of capital transactions and financial transactions will dwindle;
[3]  the positive balance of payments, maintained over the last few years, will turn into a negative one.
In order to prevent dramatic devaluation, the National Bank of Ukraine will have to sell hard currency from its reserves. And yet, it will be a difficult task to achieve. Under the circumstances, GDP growth could slow down to 2.5%- 3%, CPI will go beyond 20%.
It is not about mere situation modeling, other things being equal. Nor is it about analyzing scenarios based on the “what if” principle. Since the 1998 crisis, the national economy has become much more integrated into international financial markets; its structure and development characteristics have changed significantly.
 
Today economic growth is determined by domestic potential, rather than external factors. Households’ consumer demand is growing rapidly, together with investments in renovation of fixed assets and introduction of modern technologies. Ukraine has become an international market player.
In light of the escalating global financial crisis, the government and National Bank have taken a number of measures allowing for the reduction of the risk of its profound destructive influence. They include a package of anti-inflation initiatives, steps to enhance banking sector stability and to minimize the impact of the global financial crisis on Ukraine’s economy.
 
In early 2008, the National Bank passed a resolution toughening requirements to calculating the banks’ regulatory capital adequacy (long-term asset transactions with time of floatation exceeding the time of funding should be additionally risk adjusted at 50% rate and so on), which enabled banks to adjust and improve their position.
In addition, Ukraine has an “insurance police” of sorts in the form of Euro- 2012. If the planned scope of work is fulfilled, the country will get a guaranteed inflow of foreign direct investments, mid-term and long-term loans, because investors worldwide view such events as image-building, promotional projects with low financial risks.
As a popular saying goes, hope for the best and prepare for the worst. The current challenges and threats require that public authorities and the private sector address them effectively and take additional preventive measures.
What can the government do?
Given the risks of reduction in export-oriented production due to weakening global demand and problems with payments under export transactions, the government should work to stimulate domestic demand for the group of export goods and, thus, enhance the role of domestic production. It can start with launching new infrastructure and residential construction projects funded from the state budget.
 
The government should prevent a sharp decline in grain prices by urging the Agrarian Fund to purchase grain of this year’s harvest. It will provide agricultural producers with sufficient resources to prepare and carry out the sowing campaign. It will also support, directly and indirectly, the development of metallurgy, coke production, the mining industry, oil refining, the chemical industry, the food processing industry, trade and transport.
In order to manage the financial instability risk, it is strongly advisable to revise the draft 2009 budget so as to increase capital expenditures, including in construction, without increasing the budget deficit. It is also important to set up a Stabilization Fund that will cover all governmental guarantees, which will gain more confidence in the governmental commitment to pursue a well-balanced and sound budget policy.
In times of financial crisis, the government’s strategy is to encourage investments into the real sector of the economy. To this end, alongside accelerating the implementation of projects related to Euro-2012, we should unblock privatization processes.
 
The government cannot do that alone, we need support from the Verkhovna Rada to get the State Privatization Programme adopted. Parliament should also pass a package of laws drafted by the government and geared towards boosting Ukraine’s investment attractiveness.
What can NBU do?
In order to prevent a banking crisis, NBU should establish principles of refinancing commercial banks that have short-term liquidity problems for the period of financial crisis. A currency crisis can be averted with a series of measures precluding the exchange rate destabilization by speculators. NBU should continue to pursue the policy of increasing the rate volatility in order to reduce risks to the balance of payments.
What can businesses and investors do?
Given the limited financial resources inside the country and shrinking access to foreign loans, businesses face a difficult choice: either to suspend production and lose markets, maintaining high prices in expectation of better times, or to reduce prices trying to restore demand and keep consumers.
 
The latter option is for those manufacturers who care about their future, expansion and economy of scale; the former is for profiteers who make large money quickly and drop the production.
The government can undertake to hold consultations aiming to sign memoranda with investors and large businesses on reducing prices for goods and services.
Only the concerted efforts of the government and National Bank, supported by Parliament and the business community will enable the Ukrainian economy to pass the maturity test in times of global financial crisis.
 
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[return to index] [Action Ukraine Report (AUR) Monitoring Service]
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7.  UKRAINE WOBBLES AS THE FINANCIAL GROUND BENEATH IT TREMBLES

Ukraine’s economy is in trouble, there is no doubt about it.
 
ANALYSIS & COMMENTARY: by Edward Hugh, Macroeconomist, Barcelona, Spain
Global Economy Matters, Sun, Oct 12, 2008 & RGE Monitor, New York, NY, Sun, Oct 12, 2008
 
       “The medium-term outlook is sensitive to external developments and policy responses. A benign external environment, featuring even
       higher steel prices and FDI, could produce growth in excess of 7 percent, but inflation could prove hard to control under a peg. Under
       an adverse external outlook, by contrast, the peg could lead to external sustainability problems.”  IMF 2006 Article IV Consultation
       Staff Report (February 2007) (http://www.imf.org/external/pubs/cat/longres.cfm?sk=20411.0)
UKRAINE’S ECONOMY IS IN TROUBLE, THERE IS NO DOUBT ABOUT IT. The cost of protecting debt against a sovereign default by Ukraine’s government soared to a record on Friday, following the arrival of a twin storm of both political and financial uncertainly.
 
The Ukraine president Viktor Yushchenko announced earlier in the week (only to be challenged on Saturday by his perpetual rival Julia Tymoshenko) that he was going to call what would be the country’s third parliamentary elections in as many years just as the central bank found itself forced to step in and take control of the country’s sixth-largest bank while the country’s currency – the hyrvnia – went for a nose-dive.
 
With the benefit of hindsight the IMF forecast cited in the paragraph above has been extremely prescient. During the “benign external environment stage” Ukraine’s economic growth has been substantial, steel prices have been high, and FDI flows (especially into the banking sector) strong.
 
As a result inflation went through the roof. Now we have entered the “adverse external environment” stage, and steel prices are falling while bank and other external finance flows reverse direction. The sustainability issues are evident, and the coming days are going to be critical.
Ukraine is not alone in having problems at this point (but here there is no strength or consolation to be found in company), and stock markets around the globe fell dramatically last week. Ukraine’s PFTS bourse was, thus, only one among several that found themselves compelled to suspend trading.
 
Ukraine’s stockmarket was closed for the second time in the week on Wednesday (trading had previously been suspended on Monday) following an 11 per cent drop in shares on Tuesday (with banks plummeting between 22 and 26 per cent, and metal producers slumping from 13 to 16 per cent).
 
Trading did recommence again on Thursday, only to see an additional 14 percent in value wiped out, and the doors firmly barred again on Friday. Markets will now remain closed until Monday, when, at the time of writing, they are scheduled to open once more.
 
The PFTS index has now lost 41 percent since the start of September, when the large scale investor pull-out from Russia really got underway, and is down 73 percent since the start of the year, a rollercoaster performance following the 130 percent rise last year. [To see the chart and a series of charts go to http://globaleconomydoesmatter.blogspot.com/index.html]
 
CREDIT DEFAULT SWAPS SOAR 
Credit-default swaps on Ukraine’s $14.9 billion state debt jumped by 473 basis points to 1,700, the biggest one-day advance, according to CMA Datavision prices in London. Ukraine now is priced as having the highest risk of default among Europe’s emerging markets.
Ukraine is highly dependent on foreign investment at a time when credit markets around the world are frozen. Ukraine’s current account deficit has surged strongly this year to a projected $7.7 billion (up from about $2 billion). At the same time annual inflation soared to a record 31 percent in May and was still stuck at 25 percent in September.
The central bank has already spent an estimated $1 billion supporting the hyrvnia after it fell as much as 12 percent against the dollar during September and early October. The intervention reduced foreign reserves to $36.5 billion yesterday and pared the decline in the hryvnia, which strengthened by 6.6 percent on Friday to reach 4.9987 per dollar. This followed a drop to 5.9 to the dollar on Wednesday (or a cumulative 20% devaluation since early the start of September).
 
All these numbers are large, whichever way you look at them. And this kind of intervention is expensive, and while Ukraine is not on the brink of bankruptcy (yet) it cannot continue for that long. Reserves already fell in terms of months of next period imports from 4 months to 3.7 between Q1 and Q2 2008 according to central bank data. At the same time Ukraine’s external financing requirements have risen sharply in recent years (see chart below). [To see the chart and a series of charts go to http://globaleconomydoesmatter.blogspot.com/index.html]

BANKS TAKE A BEATING 
The National Bank of Ukraine also took over the management of Prominvestbank during the week, and imposed a moratorium on payments to creditors for six months, triggering generalised credit rating downgrades.

The move came after nearly a week of local media reports, which were followed by queues outside banks and in front of ATMs, that Prominvestbank was in difficulties due to heavy involvement in Ukraine metal and real estate industries – both good earners until as late as last month, but now sectors which face massive losses due to falling international commodity prices and more costly credit.
Moody’s investor services expressed concern about the ability of Kiev-based Prominvestbank – which had a reported 27.6 billion hryvnia ($5.1 billion) of assets as of Sept. 30 ” to continue its operations as a viable stand-alone entity”.
 
In a report written by analyst Yaroslav Sovgyra, and was published Thursday, the ratings agency said “Prominvestbank’s franchise and the overall credit profile have been significantly impaired in light of the recently experienced run on deposits by the bank.” Moody’s cut its foreign-currency deposit grade for Prominvestbank to Caa2, the fourth-lowest ranking, and down from B2. Fitch Ratings cut Ukraine’s credit outlook to “negative” from “stable” on Sept. 25.
Ukraine’s banks owed a total of $38.4 billion as of July 2008, according to central bank data. To put things in perspective, this could be compared with the estimated $61 billion owed by Iceland’s three collapsed banks. But the foreign indebtedness of Ukrainian banks has grown rapidly in recent years, doubling in 2006 to $13.87 billion, from $6.75 million in 2005.
 
Much of the lending (around 50%) is forex denominated, and although the total private debt to GDP ratio (65%) is comparatively low, lending has been rising at a very fast rate (75% per annum).
Around 30% of Ukraine’s total foreign debt ($128 billion or around 65 percent of GDP in 2008 according to IMF estimates) is owed by commercial banks.
In an attempt to address the crisis, the Ukraine central bank has injected 7.795 billion hryvnia into the banking system since the beginning of October, following 5.96 billion lent to banks during September.
 
The problem is much more extensive than Prominvestbank itself, with shares in Raiffeisen Bank Aval, Ukraine’s second-biggest bank by assets, also down 74 percent this year. Shares in AKB Ukrsotsbank, the country’s fourth-biggest bank, have slumped 79 percent.
Ukraine’s banking sector appeared even more shaky following the Prominvest decision than it did before it, with numerous banks formally applying for government assistance. According to intefax a total of 25 loan institutions have filed requests for low- interest credits or other state financing.
Local newspaper Kommersant-Ukraina named Narda bank (another in the top ten) as one of the banks seeking government financing. Narda are set to receive a 290 million dollar bail-out package to cover approximately 230 million dollars of external debt, according to the report.
Other Ukrainian banks reported to be asking for help on Thursday were Rodovidbank, Alfa-Bank, Kreditprombank, and Finansi i Kredit bank, according to an article in Economicheskie Izvestia. The article said that the central bank had already approved 23 of 25 assistance package requests – and that they were worth in total around 620 million dollars,. Banks applying for cash injections account for something like 25 per cent Ukraine’s banking sector.
Apart from Kazakhstan, Ukraine is currently the only government among Europe’s emerging markets with credit-default swaps currently trading above the 1,000 basis points level. But even Kazakhstan debt is way below the Ukraine equivalent, with contracts on Kazakhstan jumping to 1,050 basis points from 759 basis points on Friday as the government increased sevenfold the limit on retail bank deposits guaranteed.
The problem is most certainly becoming a regional one, and extending across Eastern Europe, with contracts on Russian government debt up 179 basis points (to 559), their highest level since at least 2004. Credit-default swaps on Turkey rose 138 points to 552 points, while those on Hungary increased 116 points to 458.
As I have argued in a number of previous posts Ukraine is evidently suffering from a wide variety of problems, including institutional chaos and ongoing population decline, and it is not really surprising that it should be singled out as the country destined to lie at the heart of the forthcoming CEE “correction”.
STRONG GDP GROWTH 
        “The growth forecast for 2008 reflects strong performance during the first half of the year, terms-of-trade gains, and indications of a
        bumper harvest,” the October 2008 IMF World Economic Outlook report stated. “Going forward, growth is projected to decelerate
        markedly, reflecting weaker export market growth, slowing real wage increases, moderating terms-of-trade gains, and higher financing
The current events in Ukraine may well take some observers by surprise, since the general impression has been that the economic performance has been solid and GDP growth has been strong in recent years, and this has given the impression that the underlying reality was sound, which it basically hasn’t been.
 
The country has been bedevilled by constant infighting, while at the same time a combination of strong migration of Ukraine workers to external destinations and very long term low fertility has meant that the country endemically suffers from acute labour shortages as the population both ages and declines comparatively rapidly. Hence, in my view, the absurdly high levels of inflation we have been seeing.
Nevertheless, real GDP has grown by 7.5 percent a year on average since 2000, in line with other CIS countries, and indeed that rate has been higher than in most other transition economies: whether or not this growth was built on sand is what we are now all about to find out. [To see the chart go to http://globaleconomydoesmatter.blogspot.com/index.html]

GDP was up at a 7.1% y-o-y rate in the January to August period, and in fact the expansion has even been accelerating in recent months largely, due to the good harvest and the increase in agricultural output – up 24.4% January to August. Manufacturing output has also been doing well, driven by a seemingly unquenchable thirst for steel in Russia, and was up 7.3% y-o-y in the January-August period.

 
Construction, on the other hand, has now been in recession for some time, with output down 5.3% y-o-y in the first eight months of the year. The decline in construction is a reflection of the growing credit difficulties the economy has been having, and the slowdown has been making its presence felt in domestic consumption generally, with the rate of retail sales increase (while remaining strong) starting to taper off, falling from 10.4% y-o-y in Q1 to 8.2% in Q2.
 
And as we know, the recent Russian tank excursion through the Roki tunnel has meant that Russia is now nothing like so thirsty for steel (see below), and as a result, we should expect to see headline Ukraine GDP growth dropping fairly rapidly (we could be down to a 3 or 3.5% annual rate by the end of Q4, with more downward movement to follow as we move into 2009), as the country gets caught in the twin pincer of an internal credit crunch (sudden stop) and a sharp drop in external demand for its key product.
OVERHEATING AND THE INFLATION PROBLEM 
Evidently the Ukraine economy was pushed well beyond its short term capacity limits by a combination of expansionary fiscal and incomes policies (real, inflation adjusted, income was up 13.4% y-o-y in January-August) and high steel prices (both of which fuelled very strong domestic demand growth), and these were simply reinforced by very rapid money and credit growth.
 
These factors, together with rising food and energy prices, lifted CPI inflation to a peak of 31% percent in May (see chart below), since which time the rate has fallen back, but only as far as the 24.6% rate registered in September. [To see the chart go to http://globaleconomydoesmatter.blogspot.com/index.html]

Core inflation has also risen – with producer prices still rising at an annual rate of 42.7% in September (having peaked at 46.3% in July, see chart below), while real wage growth continues to be substantial, and inflation expectations remain at a very high level. [To see the chart go to http://globaleconomydoesmatter.blogspot.com/index.html]

CURRENT ACCOUNT DETERIORATION 

The Ukraine current account deficit has deteriorated sharply because of the very strong domestic demand growth and, more recently, the eroding competitiveness of Ukraine manufacturing industry. This has loss of competitiveness has occurred despite significant improvements in the terms of trade. This favourable situation is now coming to an end and in all probability even reversing as steel prices drop substantially.
 
Capital inflows, and especially FDI, which have been strong, may now well reverse. Private external debt and debt rollover have risen sharply, leaving the economy more sensitive to balance-sheet risks and deteriorating global liquidity conditions, according to the most recent staff report by IMF economists.
 
The IMF estimate (October 2008, WEO) that this years current account deficit will rise from 3.7% of GDP in 2007 to 7.2%. [To see the chart go to http://globaleconomydoesmatter.blogspot.com/index.html]

Fiscal policy has been dangerously expansionary in the face of the rising inflationary pressures and the deteriorating current account position. Nominal spending has risen by an average over 30 percent a year since 2003, stimulating domestic demand and increasing the size of the government sector. This growth reflected rapidly rising public-sector wages and social transfers and, in 2008, partial restitution of Soviet-era bank deposits that had been wiped out by hyperinflation.

Deficits have been moderate, as spending growth has been paid for by inflationary revenue windfalls that fiscal policy itself has helped bring about. Nevertheless, the fiscal stance has been procyclical and Ukraine is one of the few countries in Eastern Europe to have increased its fiscal deficit as capital inflows have surged.
STEEL DEPENDENT ECONOMY 
In what is now a sign of the times Ukraine’s biggest steel mill, owned by the ArcelorMittal group, reduced steel output by 10.5 percent to 5.471 million tonnes in January-September 2008, according to Ukraine news agency reports last week.
 
The reports suggested the ArcelorMittal mill had decreased rolled steel output by 12.4 percent to 4.663 million tonnes so far this year, while pig iron output fell by 9.3 percent to 4.935 million. The company had previously increased steel output to 8.103 million tonnes in 2007 from 7.6 million in 2006.
Just over the border, OAO Severstal, Russia’s largest steelmaker, also announced last week plans to slash output in Russia, the U.S. and Europe by as much as 30 percent in October and review full-year forecasts. Production is to be cut 30 percent in the U.S. and Italy, and 25 percent in Severstal’s home town of Cherepovets in Russia.
Steelmakers from China and South Korea to Austria and Russia are curbing output as demand for cars and buildings weakens, and as banks withdraw funding for new plants. OAO Magnitogorsk Iron & Steel, Russia’s third-largest producer, Posco, Asia’s biggest stainless steel maker, and Voestalpine AG, Austria’s top steel company, all signaled cuts in production plans this week.
The production and export of steel is an important pillar of the Ukrainian economy, and steel production accounts for more than a third of total goods exports (equivalent to some 12 percent of GDP). Thus real GDP growth in Ukraine is closely linked to steel prices. During the global economic upswing of the past few years, along with a wider surge in metals valuations, steel prices have risen dramatically, thus underpinning Ukraine’s mostly favorable export performance and impressive GDP growth ever.
 
Although steel prices had been holding up till very recently, the current global financial turmoil is having a dramatic impact on car, construction and investment activity, all of which impact steel prices and we may therefore expect significant adverse effects on Ukraine growth and export receipts. A key issue for the future is, of course, how Ukraine’s economy can be made less dependent on such global price volatility in one key product.
SHARP STEEL DOWNTURN 
As recently as Sept. 4 OAO Severstal had been suggesting that output would rise 31 percent to 23 million metric tons this year, so the slowdown has been very rapid indeed. Goldman Sachs Group Inc. yesterday cut its 2009 steel price forecast by 29 percent. Global export prices for hot-rolled coil steel, a benchmark, have declined 19 percent since July, according to Bloomberg Metal Bulletin data.
And the slump doesn’t only affect current output, investment is also affected. Thus Austrian steelmaker Voestalpine announced during last week that it is considering delaying a decision on building a new steel plant on the Black Sea due in part to the financial crisis. Voestalpine had been planning to build a plant with a 5.5 million tonne capacity in either Bulgaria, Romania, Turkey or Ukraine, with a cost which investment analysts estimate to be in the 5 to 6 billion euros ($6.7-8.2 billion) region.
HYRVNIA UNDER PRESSURE 
      While the official exchange rate is set as Hr 4.95 – plus or minus eight percent – to the U.S. dollar, some exchange booths were
       offering Hr. 5.5 to Hr 6 for $1. Kiev Post Report
The hyrvnia – Ukraine’s national currency fell to an eight-year low last Wednesday, following the decision of the National Bank of Ukraine to widen the currency’s trading band. The National Bank, which has $38 billion in foreign exchange reserves, is now engaged in a delicate balancing act since while on the one hand officials are promising “strong interventions” to keep the hryvnia at roughly five to the dollar, international financing sources are drying up and Ukraine is running a growing current account deficit, which hit nearly $8 billion in July.
The strategy appears to be not to waste foreign exchange reserves, defending an arguably un-defendable exchange rate, but to conserve reserves to support banks and corporates to meet external debt service payments falling due and, also, to more generally prop up the banking sector. The problem is that the NBU can either support the currency, or support the banks and corporates but it does not really have enough foreign exchange reserves to do both at once.
Ukraine’s central bank has weakened the currency’s official rate against the dollar and widened its trading limits on October 7. The currency’s new official rate until the end of the year was weakened to 4.95 per dollar from 4.85 and it will be allowed to rise or fall 8 percent from that level, compared with the previous 4 percent.
The hryvnia has slumped 18 percent against the dollar since Sept. 2, when President Viktor Yushchenko’s party broke from its coalition with Prime Minister Yulia Timoshenko. Yushchenko dissolved the parliament yesterday, calling for new elections.
The managed currency is also being pushed down by demand for dollars from local banks and companies who need to pay down debt which they can’t refinance so they have to buy dollars and pay back now. Exporters seeing this situation are also postponing selling dollars hoping for more local weakness down the road.
Nationalnyi Bank Ukrainy, which kept the hryvnia little changed against the dollar throughout 2007 and 2006, allowed it to trade more freely this year to help combat inflation, now at 26 percent. The bank strengthened the hryvnia’s official rate by 4 percent to 4.854 per dollar in June, after leaving it at 5.05 per dollar since April 2005.
DECLINING POPULATION THE ROOT OF ALL EVIL? 
One of the things we should all now be learning as we look out across what is currently happening right across Eastern Europe (and I do mean right across) is that what we have is an environment where a number of long term underlying problems persist.
 
These range from a lingering and heavy state presence in the economy, high and enduring inflation which steadily eats into the export competitiveness of manufactured goods and services, wage pressures which stem from labour supply shortages produced by out-migration and long term low fertility, and heavy balance sheet exposure due to an extensive euro- or dollarization of the banking sector (the later being the Ukraine case).
 
The large current account deficits which follow from the above, and the consequent ongoing dependence on the arrival of substantial capital inflows can create a vulnerability to short term shocks which puts the entire macroeconomic framework at risk. The current credit crunch is, of course, almost a text book example of just such a short term shock.
This danger of a strong correction in adverse times becomes even greater (as we are now seeing) if measures are not taken (which they weren’t in Ukraine’s case, see this post) to drain excess liquidity from the system (by running a fiscal surplus for example), to loosen labour supply constraints by facilitating inward migration of unskilled workers, and to accelerate the pace structural reforms – and particularly those which facilitate the development of “greenfield” investment sites which help channel capital flows towards productivity-enhancing uses and in so doing raise exports. Unfortunately, at least this time round, it would seem it is a little late in the day for this kind of advice.
So to answer the question I somewhat provocatively inserted at the head of this section, Ukraine’s declining population is not 100% of the problem, not by a long stretch it isn’t, but it is an important component, and does form a context in which the other parameters need to be situated, and this dimension of the current crisis in Ukraine is all the more important since it is one which is normally ignored, and even more to the point, has been left unattended for so long that it has become an issue which it is very hard to address.
 
A DECLINING AND AGEING POPULATION 
According to data from the State Statistics Committee , Ukraine’s population fell by 290,220 in 2007. That is a rate of only just short of a million people less every 3 years. Simply there are more people dying every year than are being born, with 472,657 births being registered (up 12,000 from 460,368 for 2006) and 762,877 deaths (down slightly from 758,093 in 2006).
 
What this means is that Ukraine’s population is now falling very fast, at an annual rate of 0.675%. And remember this is the natural decline, not counting out migration. As we can see in the chart below the Ukraine population peaked in 1993, and has been in some sort of free-fall ever since. [To see the chart go to http://globaleconomydoesmatter.blogspot.com/index.html]

There are a number of factors which lie behind this dramatic decline in the Ukrainian population.

 
[1] One of these is fertility, which is currently in the 1.1 to 1.2 Tfr range. In fact Ukraine’s fertility actually dropped below the 2.1 replacement level all the way back in the 1980s, but somehow people haven’t seen fixing this “bust” as being in any way particularly important.
[2] A second factor which is also important is life expectancy, and in the Ukraine case the trend in male life expectancy has been most preoccupying, since it has been falling rather than rising in recent years. In particular male life expectancy which is currently running at around 64.
 
Apart from stating the obvious here, we should note that the deteriorating health outlook which this low level of life expectancy reflects places considerable constraints on the ability of a society like Ukraine to increase labour force participation rates in the older age groups, and this presents a big problem since increasing later life employment participation is normally though to be one of the principal ways in which a society can compensate for a shortage of people in the younger age groups.
[3] The third factor influencing population dynamics is obviously migration. Ukranian out-migration since the turn of the century is distinguished by two key tends: a) a reduction in intensity when compared with the very dramatic population movements which were so characteristic of the 1990s, and b) a significant change in destinations. From migrating East the Ukrainians are now moving West.
 
There is little in the way of systematic data here, but there is national level data on the numbers of Ukrainians who now live and work in Portugal, Spain and Italy, together with plenty of anecdotal information about Ukranian migrant workers in Latvia, the Czech Republic, Poland and elsewhere in the EU 10.
According to information provided by Ukrainian diplomatic missions, 300,000 Ukrainian migrants may be working in Poland, 200,000 each in Italy and the Czech Republic, 150,000 in Portugal, 100,000 in Spain, 35,000 in Turkey, and another 20,000 in the US.
 
According to official information based on the number of permits issued by the Russian Federal Migration Service, some 100,000 Ukrainian citizens currently work in Russia, although the real number of Ukrainians working there is often estimated to be more in the region of 1million.
WITH FEWER AND FEWER PEOPLE AVAILABLE FOR WORK 
This out migration is very significant from the economic point of view, since the majority of those working abroad send money back on a regular basis (see chart below which shows World Bank estimates for Ukraine remittance flows) while at the same time are not present in the country to offer themselves for the work which this extra money creates.
 
So out migration and the accompanying remittances are one thing in a high fertility, growing population like that which is to be found in Ecuador or the Philippines, and quite another in the long term low fertility, declining population environment of Central and Eastern Europe. Hence all that demand driven wage inflation.
 
As we can see from the data in the chart below (which the World Bank Economists themselves recognise if surely a substantial underestimation) the flow of remittances into Ukraine has increased steadily in recent years. [To see the chart and a series of charts go to http://globaleconomydoesmatter.blogspot.com/index.html]
 
According to the World Bank remittances amounted to approximately 1% of Ukraine GDP in 2007, a number which seems rather small given the number of migrants involved, and one may suspect here that the data is rather underestimating the scale of the flows, but even as it is this amounts to a fiscal stimulus of 1% of GDP as a minimum.

As a result unemployment has been falling steadily over the last two years:

According to data from the Ukraine statistics office the official rate of unemployment stood at 1.8% of the economically active population in August 2008 (down from 2.4% in January).

 
Now these numbers are undoubtedly an underestimate of the true levels of unemployment (the ILO compatible rate is the much higher 6.2%, but given the very special health situation in Ukraine we need to ask ourselves just how many of those who are formally included in the ILO classification are actually fit for work in a modern economy) but they do give an indication of the trend, and it is clear that some parts of the Ukraine labour market have been suffering from acute labour shortages, and hence the wage-push inflation the country has been experiencing.
 
Wages have been rising (see chart below) [To see the chart go to http://globaleconomydoesmatter.blogspot.com/index.html] at a rate which has been way above the combined inflation and productivity increase levels for many years now, and although wages did start from a very low level, and some degree of “catch up” was not only inevitable but also desirable, the complacency of the relevant authorities (both nationally and internationally, IMF, World Bank etc) in the face of such levels AFTER inflation really started to take off really does strike the external observer as quite extraordinary.

In many ways Ukraine could be considered to be a rather important strategic component in the whole Eastern labour supply and demographic puzzle, as we are no about to see, since many have been hoping against hope that as the recent expansion steadily drained labour supply resources across the whole region, then Ukraine would simply be able to step up to the plate and offer countries as diverse as the Baltics, Poland, Hungary, the Czech Republic and Russia the labour they needed to keep their own inflation in check.

 
This view implied, in my opinion, that Ukraine was to become some kind of “fish farm” for the rest of Eastern Europe, and that view as we are seeing was always based on a huge misunderstanding, since a low fertility society simply cannot export labour indefinitely, and if it does try to do so, then internal wages simply explode.
IN CONCLUSION 
Of course, such demographic considerations may well seem to be rather distant from the very real and pressing drama which is breaking out in Ukraine.
 
Obviously there are a great many lessons to be learned from the current “undoing” of the Ukraine economy. One of these is undoubtedly the desirability of moving away from dependence on one or two key commodities (steel, agriculture) whose prices are known to be very volatile and tied-in intimately with the global business cycle.
 
Another would be the belated recognition that while FDI inflows are vital, such flows into the banking and financial sectors are not the same as inflows to fund greenfield industrial site development, and that an economy which is dependent on one or two primary commodities on the one hand, and construction associated business and financial services on the other simply is not a balanced or a stable one.
It is also clear that, whatever the well-wishing we would all like to make towards a rise in living standards for the Ukranian people, it is now abundantly clear that this cannot be achieved via a lack of vigilance towards the dangerous impact of spiraling wage-cost inflationary pressure, not can policy be adequately conducted under such circumstances by a central bank whose main priority is steering the value of a currency.
 
Laxity and tolerance towards the inflation menace ultimately comes at a very high price, especially when it is allowed to get out of control in the way it has been in the Ukraine.
Finally, even if in fighting the short-term battle for survival which is now going to confront the Ukraine economy and its banking sector longer term demographic concerns are inevitably going to take a back seat, I think we need constantly to keep in mind that a failure to come to grips with this key ingredient in Ukraine’s problem set will surely only lead to more of the same at some point in the future. So if you don’t especially like suffering – and who does – then act, and act now.
FOOTNOTE: Edward Hugh is a macro economist, who specializes in growth and productivity theory, demographic processes and their impact on macro performance, and the underlying dynamics of migration flows.

Edward is based in Barcelona, and is currently engaged in research on aging, longevity, fertility and migration, and the impact of all of these on economic growth. He is currently working on a book “Population, The Ultimate Non-renewable Resource?” He is a regular contributor to a number of economics weblogs, including India Economy Blog, A Fistful of Euros, Global Economy Matters and Demography Matters. He was, in fact, a founding member of all these weblogs.

Mr. Hugh follows in detail the Indian, Italian, Spanish, German and Japanese economies. He has a more than a passing interest in the economies of Turkey and Brazil and in the emerging economies of Eastern Europe. E-mail: ed.hugh@gmail.com

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LINK: http://globaleconomydoesmatter.blogspot.com/index.html
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8.  UKRAINE NEEDS TO SORT OUT ITS PROBLEMS ON ITS OWN

EDITORIAL: International Herald Tribune, Paris, France, Tuesday, October 14, 2008
 
Once again, the president of Ukraine, Viktor Yushchenko, has called for a parliamentary election – the third in as many years – in an attempt to resolve his never-ending political struggle with his two main rivals, Yulia Tymoshenko and Viktor Yanukovich, the current and former prime ministers.
We sympathize with Yushchenko and his vision of anchoring Ukraine economically and politically in the West. And if new elections help clear up the political mess in Ukraine, well and good. The main thing is to make sure these are elections by and for Ukraine, without meddling from Russia, or the West.
Yushchenko and Tymoshenko were favorites of the West in the 2004 “Orange Revolution.” Thousands of Ukrainians went into the streets to overturn the rigged election of Yanukovich, backed blatantly by Russia, as president. But the “Orange” allies soon fell out. Yanukovich was soon back in the Parliament and, for a spell, Yushchenko’s prime minister.
 
In all that time, the three rivals have dismally failed to find a way to share power, seriously hampering Ukraine’s development. Part of the problem is the division of Ukraine itself, with Yushenko supported in the European-looking west of the country, Yanukovich in the Russia-leaning east, and Tymoshenko moving back and forth.
The divisions are not going away anytime soon. And they will not be helped by any new meddling from Russia or the United States. After the nasty war in northern Georgia in August, both East and West should have no illusion about the danger of a conflict in the far larger and far better-armed Ukraine. The only way to avoid that, and to move toward political stability, is to leave the Ukrainians to sort out their own identities and prospects.
We still believe that Ukraine’s future is with the West. But we don’t believe that its Westward journey will be helped by pressures to join NATO so long as a sizeable portion of Ukrainians are against it.
 
At the same time, all three major political contenders have already declared their support for joining the European Union, which at this stage seems to be the best and most promising route for Ukraine.
 
Supporting the Ukrainians in this endeavor while staying out of their internal politics seems like the best support the EU and the U.S. could show for this young country.
 
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9.  SOFTSERVE, INC. JOINS THE U.S.-UKRAINE BUSINESS COUNCIL (USUBC)
Leading multinational software development and consulting company, member 93

U.S.-Ukraine Business Council (USUBC), Washington, D.C., October, 2008
 
WASHINGTON, D.C.
– SoftServe, Inc., a leading independent multinational software development and consulting company, has been approved for  membership in the U.S.-Ukraine Business Council (USUBC), according to the USUBC executive committee, in an announcement on behalf of the entire membership. SoftServe Inc. is USUBC member ninety-three.

 
SoftServe, Inc. helps global organizations enhance their customer’s competitive capabilities by providing the technology and processes that achieve strategic results. With over one thousand professionals on staff, SoftServe provides vendors with a wide range of software development, quality assurance, software maintenance and related services.
 
HEADQUARTERS IN LVIV, UKRAINE AND FORT MYERS, FLORIDA
SoftServe started in 1993 with two people in Lviv, Ukraine. SoftServe now has its European headquarters in Lviv while its development facilities are located throughout Ukraine.  As a next step in the implementation of its global strategy, SoftServe just recently opened its US headquarters in Fort Myers, Florida, expanding its strong presence in the region with numerous customers and two sales offices in Boston, Massachusetts, and Santa Ana, California.  
 
USUBC has been working with SoftServe now for several months according to Morgan Williams, SigmaBleyzer, who serves as president of USUBC.  “We
met in Lviv recently with Taras Vervega, Executive Vice President, Business Development, and Yuliya Kovalyova, PR Manager, to discuss the SoftServe program and their work in the United States. SoftServe can be very proud of what they have accomplished since 1993,” Williams said. Taras Vervega will represent SoftServe on the USUBC board of directors.
 
“The U.S.-Ukraine Business Council (USUBC) is very pleased to have SoftServe, Inc. as a new member. USUBC has grown very rapidly during the past 19 months and now has a membership base which allows USUBC to provide its members such as SoftServe with a full-time operation and a significantly expanded program of work,” according to president Williams.

 
EXPANSION INTO THE GLOBAL MARKETPLACE 
Through the years, SoftServe has been partnering with over hundred companies worldwide on a wide range of products and technologies offering superior level of capability in technical skills and project leadership. The company consistently succeeds by delivering to the highest levels of development outsourcing and by supporting clients with their long-term application support services.
 
Armed with solid commitment to supreme quality and world-class service delivery, SoftServe continues striving to further extend its expansion efforts into the global marketplace and develop new strategic partnerships in order to enable its distinguished client base around the world to yield even greater business value.
 
SoftServe’s state-of-the-art infrastructure, ISO- and CMMI-certified processes and unrivaled talent ensure the promise of excellence in even the most complex of projects.  The company clients gain the ability to accelerate their growth and expand their product offerings far beyond their internal capabilities, thereby increasing competitive advantage.
 
SOFTSERVE’S PARTNERS AND RANKINGS
Holding Microsoft Gold Certified Partner status since 2004, SoftServe has developed close partner relationship with Microsoft Corporation. In 2006 and 2007, SoftServe was chosen a Finalist of Microsoft Partner of the Year Award Program with its applications SalesWorks™ and RE3W.
 
In 2008, the company became the first exclusive Microsoft ISV NXT Partner in Central and Eastern Europe, and was recognized as Mobility Solutions Partner of the Year 2008 in this region.
 
In 2008, SoftServe was also ranked No. 5 in “Top 10 to Watch in Emerging European Markets” category by GlobalServices 100 – the elite rating of offshore outsourcing vendors based on leadership, innovation, and outstanding performance.
 
SOFTSERVE ACQUIRES ALVION UKRAINE
In September 2008, SoftServe announced the acquisition of Alvion Ukraine, a Sevastopol-based business intelligence services and ETL services provider. According to Taras Vervega, the EVP for Business Development at SoftServe, the move will enable the company to expand operations and services portfolio. The transaction is a part of SoftServe’s strategy to offer greater business value to the company’s clients along with expanding its presence in the southern part of Ukraine.

Post-acquisition, Alvion will be merged into SoftServe’s distributed development organization in Ukraine. In addition, the services portfolio of Alvion will be integrated into SoftServe’s portfolio, which will enable Alvion’s clientele to benefit from client partnerships of SoftServe. The acquisition will also allow SoftServe to achieve expertise in ETL technology and online customer support.

KEY SOFTSERVE EXECUTIVES: 

Chairman – Vilnis Ezerins
President – Taras Kytsmey 
Executive Vice President, Software Engineering – Yaroslav Lyubinets 
Executive Vice President, Business Development – Taras Vervega 
Executive Vice President, Delivery – Yura Vasylyk 
 
USA Address: SoftServe Inc., 13350 Metro Parkway, Suite 302, Fort Myers, FL 33966, USA; US tel.: 239 690 3111; 866 687 3588
European Address: SoftServe Inc., 52 V. Velykoho St., Lviv 79053, Ukraine; Europe tel.: +380-32-240-9090
Additional information about SoftServe can be found on their website: http://www.softservecom.com or by sending an e-mail to PR contact: Yuliya Kovalyova, PR Manager, info@softservecom.com.
 
USUBC MEMBERSHIP WILL TOP 100 IN 2008
SoftServe Inc. is the 43rd new member for 2008, and the 73rd new member since January of 2007. USUBC membership has quadrupled in the past 20 months, going from 22 members in January of 2007 to 93 members in September of 2008. Membership is expected to top 100 very soon.

The new USUBC members in 2008 include 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, Standard Chartered Bank, TNK-BP Commerce LLC, Rakotis, American Councils for International Education, Squire, Sanders & Dempsey LLP, International Commerce Corporation, and IMTC-MEI.

 
Additional new USUBC members in 2008 are: Nationwide Equipment Company, First International Resources, the Doheny Global Group, Foyil Securities, KPMG, Asters law firm, Solid Team LLC, R & J Trading International, Vasil Kisil & Partners law firm, AeroSvit Ukrainian Airlines, Anemone Green Capital Limited, ContourGlobal, Winner Imports LLC (Ford, Jaguar, Land Rover, Volvo, Porsche), 3M, Edelman, CEC Government Relations RZB Finance LLC (Raiffeisen), IBM Ukraine and SoftServe Inc.

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

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10.  “OUR DAILY BREAD” HOLODOMOR EXHIBITION TO OPEN IN CHICAGO OCT. 24

Exhibition to feature fifty-four Holodomor artworks by Ukrainian artists
 
“They put a gun to your head and made you swear you would bring in grain the next day.
Everyone cried. There was nothing left to bring!” Hanna Ikasivna Cherniuk, Holodomor survivor
 
Ukrainian National Museum, Chicago, Illinois, Wednesday, October 15, 2008
 
CHICAGO – “Our Daily Bread”, an exhibition of artworks commemorating the Ukrainian Holodomor-Genocide, opens Friday, October 24th at the Ukrainian National Museum, 2249 West Superior, in Chicago. 
 
“Our Daily Bread” officially opens at 6:30 PM with a program that features a short video by Ukrainian singer Oksana Bilozir and an opening statement by the granddaughter of a Holodomor survivor, Ms. Oryna Hrushetsky-Schiffman. 
 
In 1932 and 1933, between seven and 10 million Ukrainians were deliberately starved to death during the “Holodomor” – or death by starvation. This genocide was masterminded by Joseph Stalin and his inner circle, and was carried out by Soviets who confiscated every last bit of food from Ukrainian peasants who were resistant to collective farming – and who represented the backbone of the Ukrainian people.
 
This year, 2008, marks the 75th anniversary of the Holodomor, and the government of Ukraine as well as Ukrainians around the world have been organizing events in an effort to expose and publicize this crime against humanity while there are still survivors young enough to recall its horrors.
 
EXHIBITION FEATURES 54 HOLODOMOR ARTWORKS
In Chicago, the latest event commemorating the Holodomor is an exhibition at the Ukrainian National Museum opening Friday, October 24th. “Our Daily Bread” features 54 artworks that are part of the “Holodomor: Through The Eyes of Ukrainian Artists” collection. 
 
The founder and trustee of the unusual collection, U.S. businessman Morgan Williams, gathered the over 350 original Holodomor artworks in the collection during the last 11 years in Ukraine.  Williams is director, government affairs, Washington, D.C., for the SigmaBleyzer private equity investment group and serves as president of the U.S.-Ukraine Business Council (USUBC).

 
Most of the artworks were created after 1988, when Ukrainians were finally free to evoke the suffering and horrors of the Holodomor in the last days of the USSR, right before Ukraine declared independence in 1991. Before 1988 no one was allowed to talk about this tragedy let alone express themselves through artwork or writings.  Many Ukrainian artists may very well have only learned of the Holodomor at that time, after decades of extreme Soviet suppression of the atrocities.
 
The government of Ukraine has officially declared the Holodomor a genocide against the Ukrainian people and is asking the United Nations to do so as well. Just this past September, the United States House of Representatives passed a Resolution condemning the Holodomor and the former Soviet government’s deliberate confiscation of grain harvests, which resulted in the starvation of millions of Ukrainian men, women, and children.
 
It was a devastating chapter of Stalin’s reign of terror that wiped out one quarter of the peasantry – and later included the intelligentsia and other leaders of Ukrainian society who were shot and exiled by the hundreds of thousands in an attempt to destroy the Ukrainian nation. And it was carried out at a time when Ukraine, then officially the Ukrainian SSR, had one of the richest farmlands in the world – “the breadbasket of Europe.” 
 
The exhibition will also include a room depicting what life was like in Ukraine prior to enforced collectivization—as well as an evocative walk-through installation depicting the horrors of the Holodomor.
 
The “Our Daily Bread” Holodomor exhibition is on view through Sunday, November 30, 2008. The Museum hours are Thursday to Sunday from 11:00 a.m. to 4:00 pm.  The Ukrainian National Museum is located at 2249 West Superior Street in the Ukrainian Village neighborhood. Call 312-421-8020 or visit the Museum’s website, www.ukrainiannationalmuseum.org for more information.
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U.S.-Ukraine Business Council (USUBC) www.usubc.org.
Promoting U.S.-Ukraine business & investment relations since 1995. 
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11.  EXCERPTS FROM “SOVIET GENOCIDE IN THE UKRAINE”

Raphael Lemkin’s perception of the Ukrainian genocide is a solid recommendation to
the UN Assembly to finally recognize the Ukrainian tragedy for what it was – ‘a case
of genocide, the destruction of a nation. 
 
By Roman Serbyn, historian, professor, scholar, Montreal, Canada
Action Ukraine Report (AUR) #912, Kyiv, Ukraine, Saturday, October 18, 2008
 
MONTREAL – I have reproduced below, excerpts from “Soviet Genocide in the Ukraine”, the last chapter of a monumental History of Genocide, written in the 1950’s by the Jewish-Polish scholar Raphael Lemkin.
 
Unfortunately, the monograph has not yet been published and the chapter on Ukraine is known only to a few Lemkin scholars. The whole chapter (12 double-spaced pages) on Ukraine will soon be published in the original English language in the USA and eventually in other languages, in other countries.

Lemkin’s text deserves special attention by the Ukrainian community as it commemorates the 75th anniversary of the tragic events.

 
It should be noted that Lemkin, developed the concept and coined the term “genocide”, applies it to the destruction of the Ukrainian nation and not just Ukrainian peasants.
 
Lemkin speaks of:
 
a) the decimation of the Ukrainian national elites,
b) destruction of the Orthodox Church,
c) the starvation of the Ukrainian farming population, and
d) its replacement with non-Ukrainian population from the RSFSR as integral components of the same genocidal process.
 
The only dimension that is missing in Lemkin’s excellent analysis is the destruction of the 8,000,000 ethnic Ukrainians living on the eve of the genocide in the Russian Republic (RSFSR).

As Ukraine and the Ukrainian diaspora commemorates, in the coming months of October and November the 75th anniversary of the Genocide against the Ukrainians, it should be inspired by the all-encompassing approach to the analysis of the great Ukrainian catastrophe by the father of the concept of genocide and the man who did most to have it enshrined in the UN Convention of 1948.

 
Lemkin’s perception of the Ukrainian genocide is a solid recommendation to the UN Assembly to finally recognize the Ukrainian tragedy for what it was — “a case of genocide, the destruction of a nation.”

Roman Serbyn

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RAFAEL LEMKIN
 
SOVIET GENOCIDE IN UKRAINE (excerpts)
[…]
 What I want to speak about is perhaps the classic example of Soviet genocide, its longest and broadest experiment in Russification – the destruction of the Ukrainian nation. […]
 
[…] As long as Ukraine retains its national unity, as long as its people continue to think of themselves as Ukrainians and to seek independence, so long Ukraine poses a serious threat to the very heart of Sovietism. It is no wonder that the Communist leaders have attached the greatest importance to the Russification of this independent[-minded] member of their “Union of Republics,” have determined to remake it to fit their pattern of one Russian nation. For the Ukrainian is not and has never been, a Russian. His culture, his temperament, his language, his religion – all are different. […]
 
Ukraine is highly susceptible to racial murder by select parts and so the Communist tactics there have not followed the pattern taken by the German attacks against the Jews. The nation is too populous to be exterminated completely with any efficiency. However, its leadership, religious, intellectual, political, its select and determining parts, are quite small and therefore easily eliminated, and so it is upon these groups particularly that the full force of the Soviet axe has fallen, with its familiar tools of mass murder, deportation and forced labor, exile and starvation.
 
The attack has manifested a systematic pattern, with the whole process repeated again and again to meet fresh outburst of national spirit. The first blow is aimed at the intelligentsia, the national brain, so as to paralyze the rest of the body. […]
 
Going along with this attack on the intelligentsia was an offensive against the churches, priests and hierarchy, the “soul” of Ukraine. Between 1926 and 1932, the Ukrainian Orthodox Autocephalous Church, its Metropolitan (Lypkivsky) and 10,000 clergy were liquidated. […]
[…]
The third prong of the Soviet plan was aimed at the farmers, the large mass of independent peasants who are the repository of the tradition, folk lore and music, the national language and literature, the national spirit, of Ukraine. The weapon used against this body is perhaps the most terrible of all – starvation. Between 1932 and 1933, 5,000,000 Ukrainians starved to death, an inhumanity which the 73rd Congress decried on May 28, 1934. There has been an attempt to dismiss this highpoint of Soviet cruelty as an economic policy connected with the collectivization of the wheatlands, and the elimination of the kulaks, the independent farmers was therefore necessary.
 
The fact is, however, that large-scale farmers in Ukraine were few and far-between. As a Soviet writer Kossior [error: Kosior was party boss of Ukraine – R.S.] declared in Izvestiia on December 2, 1933, “Ukrainian nationalism is our chief danger,” and it was to eliminate that nationalism, to establish the horrifying uniformity of the Soviet state that the Ukrainian peasantry was sacrificed. The method used in this part of the plan was not at all restricted to any particular group. All suffered – men, women, children.
 
The crop that year was ample to feed the people and livestock of Ukraine, though it had fallen off somewhat from the previous year, a decrease probably due in large measure to the struggle over collectivization. But a famine was necessary for the Soviet[s] and so they got one to order, by plan, through an unusually high grain allotment to the state as taxes.
 
To add to this, thousands of acres of wheat were never harvested, were left to rot in the fields. The rest was sent to government granaries to be stored there until the authorities had decided how to allocate it. Much of this crop, so vital to the lives of the Ukrainian people, ended up as exports for the creation of credits abroad.
 
In the face of famine on the farms, thousands abandoned the rural areas and moved into the towns to beg [for] food. Caught there and sent back to the country, they abandoned their children in the hope that they at least might survive. In this way, 18,000 children were abandoned in Kharkiv alone. Villages of a thousand had a surviving population of a hundred; in others, half the populace was gone, and deaths in these towns ranged from 20 to 30 per day. Cannibalism became commonplace.
[…]
The fourth step in the process consisted in the fragmentation of the Ukrainian people at once by the addition to the Ukraine of foreign peoples and by the dispersion of the Ukrainians throughout Eastern Europe. In this way, ethnic unity would be destroyed and nationalities mixed. […]
 
These have been the chief steps in the systematic destruction of the Ukrainian nation. Notably, there have been no attempts at complete annihilation, such as was the method of the German attack on the Jews. And yet, if the Soviet program succeeds completely, if the intelligentsia, the priests and the peasants can be eliminated, Ukraine will be as dead as if every Ukrainian were killed, for it will have lost that part of it which has kept and developed its culture, its beliefs, its common ideas, which have guided it and given it a soul, which, in short, made it a nation rather than a mass of people.
 
The mass, indiscriminate murders have not, however, been lacking – they have simply not been integral parts of the plan, but only chance variations. Thousands have been executed, untold thousands have disappeared into the certain death of Siberian labor camps.
[…]
 
[…] This is not simply a case of mass murder. It is a case of genocide, of destruction, not of individuals only, but of a culture and a nation. […] Soviet national unity is being created, not by any union of ideas and of cultures, but by the complete destruction of all cultures and of all ideas save one – the Soviet.
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12.  HOLODOMOR MEMORIAL SITE APPROVED IN WASHINGTON, D.C.

 

Ukrainian National Information Service (UNIS), Washington, D.C. Friday, Oct 3, 2008
WASHINGTON, D.C.- On Thursday, October 2, 2008, the National Capital Planning Commission (NCPC) approved and awarded a parcel of federally owned land to the Ukrainian Government as the site for the Memorial to Victims of the Ukrainian Genocide of 1932-33. Public Law 109-340 authorized the memorial, as signed by President Bush on October 13, 2006.
 
The Ukrainian Famine-Genocide bill (HR562) was sponsored by Rep. Sander Levin (D-MI), co-chair of the Congressional Ukrainian Caucus, which
passed unanimously in the House of Representatives and Senate in 2005, 2006 respectively.
The adopted site is an approximately 3100 square foot triangular site located at the intersection of North Capital Street, Massachusetts Avenue, and F Street in NW Washington, DC. Office, government, institutional, and residential buildings characterize the general area surrounding the site.
 
The Postal Museum is across the street, and it is five blocks north of the U.S. Capitol. This open and visible site is situated in a busy and highly trafficked area that serves as a transition point between east and west Washington, DC.

The site is important as the first reservation west of Union Station, and is a significant entrance point from Union Station to NW DC through Massachusetts
Avenue, which is known for its international character.

Speaking about the accomplishment of the site selection, Alan Harwood a Principal with EDAW, Inc., the planning and design firm that is leading the
project team, “the Ukrainian memorial will be located on a wonderful and prominent site in the Nation’s Capital. It will be highly visible to many residents, employees, and visitors.”

Although the proposed memorial has not yet been designed, based on preliminary discussions, the Ukrainian Government has stated that it anticipates that the commemoration of this event will consist of a contemplative space with a memorial element appropriate for a landscaped setting. The proposed
memorial is anticipated to “include typical features such as an abstract or allegorical element in a landscaped setting.”

Initiated under the auspices of the Ukrainian Congress Committee of America in cooperation with Rep. Levin’s office, the process has been widely
supported by the Ukrainian American community. The National Committee to Commemorate the 75th Anniversary of the Ukrainian Genocide of 1932-1933 has taken upon itself financing of the Environmental Assessment for the project.

Its chairman, Michael Sawkiw, Jr., thanked the community for their continued financial support: “Without the support of Ukrainian Americans, our dream of having a memorial in Washington, DC would not have come to fruition yesterday during the site selection hearing.”

The Ukrainian Government is confident that it can create a successful and functional public space that befits the site’s prominence in the National Capital,
embracing the site’s natural openness, and seamlessly integrating the memorial into the surrounding environment.

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13.  CAN EUROPE SURVIVE GERMANY?

ANALYSIS & COMMENTARY: By Alexander Motyl

Professor of Political Science at Rutgers University-Newark
The Atlantic Council, New York, NY, Thursday, October 2, 2008  
If Europe ever dies, Germany will have killed it.

The community of values that Europe is supposed to be-one that claims to embody democracy and human rights and always gives preference to soft
power over hard-can survive only as long as its largest state shares those values.

Russia is the test that Germany failed. As Vladimir Putin steered his country in an unabashedly authoritarian and neo-imperialist direction, Germany showered him with praise.

 
When Chancellor Gerhard Schröder called Putin a “true democrat” at the height of Ukraine’s Orange Revolution in late 2004, he effectively declared democratic Ukraine’s Western aspirations incompatible with Germany’s relations with an authoritarian Russia and thereby repudiated democracy.

Last spring’s German declaration of solidarity with Putin’s opposition to Ukraine’s and Georgia’s possible NATO membership also revealed the triumph
of hard-nosed geopolitics over democratic values and soft power.

Chancellor Angela Merkel’s endorsement of the logic of Putin’s opposition-that foreign-policy decisions made by Ukraine’s democratically elected political elites are undemocratic while only those endorsed in popular opinion polls by its population are democratic-was a direct repudiation of Ukraine’s democratic institutions and a backhand endorsement of Putin’s dismantling of democracy in Russia.

Her September 10th designation of Russia’s invasion of Georgia as a mere “controversy” that should not overshadow Germany’s “shared interests” with Russia went even further than Schröder in sacrificing non-Russian democracy to Russian dictatorship.

Germany’s indifference to democratic values is a puzzle. After all, Germany should know better.

 
It devastated Ukraine, Belarus, and Poland in two world wars; it perpetrated the Holocaust along with a variety of other genocides against Roma and Slavs in Eastern Europe; and it was responsible for the deaths of almost 2 million Ukrainians in World War I and 8 million in World War II. (As Erich Koch, Hitler’s ruthless Reichskommissar of Ukraine, said, “I will pump every last thing out of this country. I did not come here to spread bliss.)

One would have expected Germany to be especially sensitive to the democratic aspirations and security concerns of the peoples it came closest to annihilating. Instead, Germany has consistently preferred authoritarian Russia to its democratic non-Russian neighbors.

Gas goes some way in explaining Berlin’s preferential option for the Kremlin, but not quite. After all, the Eastern Europeans most critical of Russia-such as Poland and the Baltic states-are far more dependent on Russian gas than Germany.

 
Lucrative pipeline deals and other commercial ties also don’t do the trick: economic logic should dictate a closer alliance with the United States, Germany’s largest trading partner, but instead German policy makers are frequently more anti-American in their rhetoric and policy than anti-Russian.

A closer look at history may help explain Germany’s anomalous behavior. In 1922, Weimar Germany signed the Treaty of Rapallo with Soviet Russia,thereby paving the way for extensive economic and military cooperation that isolated, and helped destabilize, the fledgling states of
East Central Europe. In 1938, the Molotov-Ribbentrop Pact led to the division of Poland by Hitler and Stalin.

 
Throughout the 1970s and 1980s, Germany willingly accepted Soviet hegemony in the satellite states (and even snubbed the Solidarity movement), in exchange for rapprochement with East Germany. The Schröder-Putin pipeline deal of late 2005 and Merkel’s endorsement of the logic of Putin’s opposition to Ukraine’s and Georgia’s integration into Euro-Atlantic structures continue this pattern.

In all five instances, radically different German regimes consistently pursued the same foreign policy goal. Whether unstable and democratic as in 1922, powerful and totalitarian as in 1938, stable and democratic as during the Cold War, or powerful and democratic as today-German elites, whether Christian Democrats, Social Democrats, or Nazis, forged alliances with an authoritarian Russia at the expense of their democratic neighbors in Eastern Europe.

 
This overarching vision of Germany’s interests is unabashedly geopolitical, pointing to a possible reassertion in today’s Germany of the Realpolitik political culture that dominated German foreign policy after unification in 1871 and that produced the disasters of the two world wars.

It’s hard to see how Europe-whether as an ethical community or as the European Union-can survive Germany’s return to great-power thinking and politics. A truly democratic club of countries cannot unconditionally prefer authoritarianism to democracy in all its dealings with its eastern neighbors.

 
A truly functioning EU-whether as a club of equals or as a super-state-cannot exist if its largest member is committed to its own interests above all others. (It was Schröder, after all, who in the run-up to the Iraq War declared that he would ignore a UN resolution to support the U.S. invasion.)

Since the problem is political culture, any effective solution must focus on it as well. The Holocaust points the way to just how German elites might be swayed to think differently about politics. The shame of six million dead Jews has kept Germany honest in its dealings with Israel.

 
The shame of the millions of Poles, Ukrainians, and Belarusians who were killed in two world wars may be the only way to remind Berlin that it cannot just ignore the values and interests of the countries that lie east of Germany and west of Russia in its ruthless pursuit of self-interest.
And the ethical community that is supposed to be Europe could only benefit from a recognition that human rights also exist outside the European
Union’s current borders.
 
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14.  TODAY’S STALIN CULT IN RUSSIA MORE INSIDIOUS THAN LATE SOVIET ERA ONE, ANALYSTS SAY

Window on Eurasia, by Paul Goble, Vienna, Friday, October 3, 2008

VIENNA – The cult of Stalin that has emerged in the Russian Federation over the last decade is more dangerous than its Soviet-era predecessor not only because it celebrates his crimes rather than ignoring them but also because it is finding an increasingly enthusiastic and almost completely uncritical audience among the young.

Christians have a special responsibility to counter this trend by promoting the restoration of historical memory among Russians, according to speakers at a Moscow conference on “Spiritual Resistance in the Church and in Society” organized by the Community of Orthodox Brotherhoods (www.blagovest-info.ru/index.php?ss=2&s=3&id=23080).  
The organizers asked participants to address three basic questions: Why after the opening of archives in the early 1990s did Russians not develop immunity” to the evil of Stalinism? “Why did our people turn out not prepared to do what, for example, Germans were able to do? And how can those who experienced Stalin’s rule find “a common language” with the young?
Irina Karatsuba, a historian at Moscow State University, told the meeting this week that Russia had lost 137 million lives during the 20th century from wars, revolutions and so on. Of that number, she continued, “the repressed formed a not insignificant fraction.” But today, all too few people are focusing on that.
Instead, she said, “surprising things are taking place in our time concerning recollections about this period of our history.” Indeed, she insisted, “now we are moving backwards in comparison even with how Khrushchev understood repressions.” In his time, Soviet textbooks “hid” what had happened. But now Stalin’s terror is presented as not only necessary but useful.
“In certain new textbooks,” she continued, the Soviet dictator’s actions “are presented as ‘an effective instrument without which industrialization and collectivization would have been impossible and without which the country would not have won the war and preserved its sovereignty – and [for the Kremlin and many ordinary Russians] sovereignty is ‘our all.'”
 
According to Karatsuba, the reason this has happened is that in the 1990s, “the root of [this] evil was not pulled out, the people did not repent, and there was not a Nurnberg Process against communism.” But she expressed the hope that “now it is still not too late” to do so and to ensure that Russians will be able “to distinguish good from evil.”
A second speaker, educator Yevgeny Knorre argued that “the waves of the revival of love for Stalin at the end of the 1960s and the first half of the 1970s and now in the 2000s … are connected with periods of ‘the crushing of hopes’ and stagnation” – Brezhnev’s “zastoy” in the first case and Vladimir Putin’s “stabilization” in the second.
In such times, which often are characterized by spiritual emptiness, people are looking for a father figure who can take care of them and lead them out of their difficulties, Knorre said. And he suggested that the Russian Orthodox Church must take a more active role in countering this emptiness much as the Catholic Church has done in Italy.
Oleg Ushakov, a lawyer who spoke third, agreed but suggested that many people in the Orthodox Church are themselves attracted to the idea of a little father tsar and remain attached to “a terrible monarchical ideal” which itself “is also connected with a loss of historical memory and spiritual understanding.”
 A fourth speaker, identified by Blagovest-Info.ru only as “an elderly artist from Yekaterinburg whose family was “subjected to repressions,” said she is shocked by the “nostalgia” for Stalin among his victims, but she added that she is even more “horrified” by school texts that seek to “justify” what Stalin did.
And a fifth speaker, Aleksandr Arkhangelsky, identified only as “not the television announcer,” said that these textbooks which argue that Stalin did the right thing are especially dangerous because in Russia today “there are already many young people who are ready to become active bearers of evil.”
“If the Church does not interfere,” he continued, “then the government will again make use of its ideological and repressive machine,” an action that could mean that many of the horrors of the 20th century in the Soviet Union will be repeated in the 21st century in the Russian Federation.
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15. OPENING OF SECURITY SERVICE (SBU) INFORMATION CENTER IN KYIV

Activities of the Security Service of Ukraine regarding declassification and publication
about the operations of the Soviet Union Securities Services and the history of the
Ukrainian Liberation Movement

 
NEWS RELEASE: OPENING OF SBU INFORMATION CENTER IN KYIV
Security Service of Ukraine (SBU), Kyiv, Ukraine, Thursday, October 2, 2008
SBU material translated into English for the Action Ukraine Report (AUR) #912
Morgan Williams, Editor & Publisher, Washington, D.C., Saturday, October 18, 2008
 
KYIV – In order to facilitate the impartial coverage of the Ukrainian history, consolidation of society and exposure of stereotypes and myths about the events of the 20th century, the Security Service of Ukraine, SBU, has engaged in the systemic work to declassify and publicize its archive documents throwing light on the operations of Soviet security services and the liberation movement in Ukraine.
 
Working group of historians to study OUN/UPA activities
In early 2008, a working group of historians to study OUN/UPA activities was set at the SBU. The group was made up of members of various state and public organizations: the Ukrainian Institute of National Memory, the State Committee of Archives of Ukraine, the Institute of History at the National Academy of Sciences, the Taras Shevchenko Kyiv National University, the SBU National University, the SBU archive and the Memorial Society.   
According to work group members, their research will focus on the liberation movement in Ukraine from 1920 through 1991. As separate aspects, the dissidents’ movement of the 1960s – 1970s as well as the democratic movement of the 1980s – 1990s will be examined. As a priority task, the group will study the documents of the SBU central and oblast archives. 
The work group goal is to attract scholars for the examination of archive materials and the implementation of joint research and publication projects.
The group’s chair is SBU head’s adviser Volodymyr Vyatrovych, Ph.D (History). His contact phone is (380 44) 239-70-93. 
 
Center for the study of documents related to the history of the Ukrainian liberation movement
At present, the SBU is possessor of the largest amount of materials related to OUN/UPA activities. However, these materials have been studied inadequately and were not accessible to the public. Given highly mixed and controversial feelings on these issues existing in Ukraine, the declassification and publication of archives is of crucial importance. 
Accordingly, the center for the study of documents about the history of the liberation movement was set up in June 2008. The center is part of the SBU state archive. The center’s main purposes are:
[1] searching, studying, systematization and declassification of archive materials related to the history of the liberation movement;
[2] creation of an annotated electronic directory of materials; 
[3] implementation of publication projects, preparation of books and articles, organization of public hearings related to OUN/UPA activities;
[4] enrollment of NGOs in the study of documents about the liberation movement, cooperation with domestic and foreign research and public organizations involved in the study of OUN/UPA history.
 
The center can be reached at: phone: (044) 256-98-32, fax: (044) 253-13-86, email: arhivsbu@ssu.gov.ua
SBU INFORMATION CENTER LAUNCHED OCTOBER 2, 2008 
On Oct. 2, 2008, the Security Service of Ukraine, SBU, launched its Information Center (IC) [in Kyiv] including an open electronic archive – to simplify access to materials stored in the SSU archive. [I attended this event in Kyiv, AUR Editor]
Over the past several years the SBU has been actively involved in declassifying documents related to the operations of Soviet security services and the history of liberation movement in Ukraine.
 
The IC provides an opportunity to get acquainted with electronic copies of archive documents. All documents have been arranged according to various topics (1932-1933 Holodomor, OUN/UPA Activities, Repression in Ukraine, Movement of Dissidents, etc.)
The IC also gives access to a large number of photographs, scientific journals and books, electronic versions of exhibitions and presentations. At present, the IC has 8 workplaces. The IC’s easy search system will be convenient to scholars, journalists and students of Ukrainian history working with original materials.
 
As declassification and conversion of materials into electronic form continues, the IC database is updated daily. Simultaneously, SBU has appealed to institutions, NGOs, and individuals who own archive documents related to the specified topics, asking them to make their materials available to IC visitors.  
 
The SBU Information Center is located at the following address: 4 Irynska St., Kyiv, Ukraine; Phone: 380 44 255-82-24.
 
Electronic archive of national memory
The SBU, jointly with the Ukrainian Institute of National Memory, has initiated the formation of an electronic archive of national memory. The archive will make it possible to facilitate the study of liberation movement history and contribute to the emergence of its uniform assessment by Ukrainians.
At present, the bulk of related materials is stored in state and law-enforcement agencies archives as well as the archives run by NGOs and individual researchers, both in Ukraine and abroad. The purpose of establishing the electronic archive is to create a unified database allowing a comprehensive study of the 20th century liberation movement history. Stage 1 of such work which is already under way is to convert SBU archive documents into electronic form.
Archive materials are being arranged according to the recommendations of Ukraine’s research institutions and scholars. The final analysis of documents is carried out by the Ukrainian Institute of National Memory, an authorized central executive body for restoring and preserving the national memory. The electronic archive database is to be published by the official sites of SBU and UINM.
 
Publication projects
A lot of attention is being given to the publication of documents from the SBU archive.
[1] The book titled “Declassified Memory. 1932-1933 Holodomor in Ukraine as reflected by GPU/NKVD documents” was prepared by the SBU with the assistance from the “Ukrayina 3000” international charity foundation, the country’s academic institutes and scholars as well as the Ukrainian Institute of National Memory.
The book, for the first time in the Ukrainian history, presents a complete range of Soviet security services documents (the State Political department, GPU, and the People’s Commissariat of Internal Affaires, NKVD), unveiling the causes, strategies and consequences of the 1932-1933 Holodomor, the most severe tragedy which afflicted Ukraine in the 20th century.
 
The documents throw light on massive political repression by state security agencies, including efforts to quash the truth about the Famine and providing a credible source for the study of activities by central and local executive officials and party leaders in 1932-1933. For over 70 years these materials were classified and not accessible to researchers.  The book also includes research articles analyzing various aspects of the Holodomor.
[2] “Roman Shukhevych in the Documents of Soviet State Security Agencies” is a collection of materials about various aspects of the life of UPA Commander-in-Chief Roman Shukhevych. The book was published jointly with the Center for Ukrainian Studies at Kyiv Shevchenko National University.
[3] Another book on the 1932-1933 Holodomor is currently being prepared jointly by the Interior Ministry and the Administration of Poland.  It is the 7th volume to be published within the framework of the “Poland and Ukraine in the 30s and 40s of the 20th century. Unknown documents in secret services archives,” research/publication project between Ukraine’s SBU and its Polish partners.
The book titled “1932-1933 Holodomor in Ukraine in the documents of Soviet and Polish secret services” will come out in the Ukrainian and Polish ahead of the 75th anniversary of the Holodomor. The book’s presentation is scheduled in Kyiv as part of the events to mark the Day of Memory for the victims of holodomors. Later, the book will be translated into English and presented in the United States, Canada and Europe.  
Volume 7 will include documents and materials presenting the points of view on the Holodomor taken by Polish and Ukrainian researchers. The book is unique as the materials have been studied by an international team of scholars. 
The book will contain materials from the SBU archive and Poland’s military archive. The Polish documents include the reports by the Polish police and diplomats hitherto unknown to the wide public. The documents provided by the SSU archive have also not been published before. This research/publication project, whose first volume came out in print in 1998, is supported by presidents Viktor Yushchenko and Lech Kaczynski.
 
Public hearings
With the participation of the work group of historians, the SBU launched a series of public hearings of scholars, journalists and members of the public in order to shed light and discuss the Ukrainian liberation movement, attracting newly declassified documents.
 
In 2008, for instance, the following public hearings were held: “Operations of secret agents and guerilla groups,” “UPA: its trail in history”, “Accusations against the Nachtigall Unit – historical truth or political games,” “OUN activities in Central and Eastern Ukraine,” “Role of Jews in the Ukrainian liberation movement.” Public hearings are open to interested individuals.   
 
Exhibitions
Based on declassified materials from SBU archives, three road-show topical exhibitions were arranged. Along with the already showcased “UPA: History of the Unconquered”, the two others are “Roman Shukhevych” and “Declassified Memory.” 
“Declassified Memory” which portrays the 1932-1933 Holodomor was showcased in all the regions of Ukraine, attracting about 100,000 visitors. Exhibition materials have been handed over to the foreign ministry for translation into other languages and presentation worldwide. 
 
LIST OF HOLODOMOR PERPETRATORS 
The SBU publicised and placed on its website the first list of high-ranking Communist party and state officials who were heads of punitive bodies OGPU (United State Political Department) and GPU (State Political Department) in 1932-1933 as well as the documents signed by these officials that formed a legal and organizational base for perpetrating the Holodomor and massive political repression. 
The documents give conclusive evidence of the fact that the 1932-1933 Holodomor-Genocide was deliberately engineered by the totalitarian Communist regime. 
To make the archive materials on the organizers and culprits of Holodomor as well as the documents signed by them more accessible, SBU offered website visitors an opportunity not only to familiarize themselves with the list of perpetrators but also access orders, Communist party politburo protocols, secret instructions to party activists, instructions on how to apply the notorious “Law on the Five Ears,” directives on arrests in the rural areas, etc.  
Such kind of publication initiates a new project involving SBU archives, and the Security Service of Ukraine urged the Ukrainian Institute of National Memory, the State Committee of Archives, lawyers, experts of other law-enforcement agencies’ archives, Holodomor researchers, members of NGOs to join in to evaluate the activities of Holodomor organizers and perpetrators and eventually bring them to justice for committing crimes in Ukraine.
 
Cooperation with other countries
The SBU is involved in cooperation with respective agencies in other countries of the world, primarily in the former CIS republics, with the purpose of finding and exchanging information about the victims of political repression by the totalitarian regime in the USSR.
Accordingly, the SBU cooperates with the Committee for National Security of Kazakhstan, having received information regarding 15,675 Ukrainians who were victims of repression and served their sentences in Kazakhstan in 1920s-1950s. 
Notably, the Kazakh security service provided a list of 7,103 Ukrainians and victims of the Steplah concentration camp and 915 victims of the Karlah camp (near Karahanda). In addition, regional branches of the CNS handed over lists of 7,657 Ukrainians who, according to their archives,  were kept in other concentration camps.
Simultaneously, the SBU handed over to Kazakh authorities a list of 85 natives of Kazakhstan who had been imprisoned or repressed in the Ukrainian SSR.   
Materials on the SBU website
Events announcements, news on SBU activities, electronic versions of publications and exhibitions, copies of archive documents, protocols of work groups and public hearings sessions are available on the SSU official site at www.ssu.gov.ua
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Power Corrupts and Absolute Power Corrupts Absolutely.
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