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Action Ukraine Report

"THE ACTION UKRAINE REPORT"
An International Newsletter
In-Depth Ukrainian News, Analysis, and Commentary

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

BUSINESS REPRIVATIZATIONS IN UKRAINE
Will there be 30 or 3,000?
President Viktor Yushchenko talks about 30 reprivatizations.
PM Yulia Tymoshenko says 3,000 privatizations will be contested.
There has been a considerable amount of conflicting information released
by the new Yushchenko government about the reprivatization process.

"THE ACTION UKRAINE REPORT" - Number 431
morganw@patriot.net, ArtUkraine.com@starpower.net
Washington, D.C. and Kyiv, Ukraine, THURSDAY, February 17, 2005

-----INDEX OF ARTICLES-----
"Major International News Headlines and Articles"

1. MCCAIN INTRODUCES BILL TO LIFT JACKSON-VANIK FOR UKRAINE
Office of Senator John McCain, United States Senate
Washington, D.C., Wednesday, February 16, 2005

2. ORANGE REVOLUTION ACTS AS BEACON TO INVESTORS
By Tom Warner, Financial Times
London, UK, Wed, February 16 2005

3. FOREIGN DIRECT INVESTMENT (FDI) IN THE UKRAINIAN
ECONOMY DURING 2004 WAS 1.93 BILLION DOLLARS
UNIAN news agency, Kiev, in Ukrainian, 15 Feb 05
BBC Monitoring Service, UK, in English, Tue, Feb 15, 2005

4. HIGHER RETURNS BOLSTER EMERGING MARKET FUNDS
Markets like Turkey, Poland, & Ukraine are attracting
investors
Funds in Brief: Higher returns bolster emerging market funds
Bloomberg News, NY, NY, Tuesday, February 15, 2005

5. TOP FOUR PROMISES OF NEW GOVERNMENT
TO BE, OR NOT TO BE?
By V. Sumar, The Institute of Mass Information [IMI]
Kyiv, Ukraine, Thursday, February 10,2005

6. UKRAINIAN POPULATION CONTINUES RAPID DECLINE
Population decreases by 341,000 in 2004 to 47.28 million
Interfax-Ukraine news agency, Kiev, in Russian, 14 Feb 05
BBC Monitoring Service,UK, in English, Mon, Feb 14, 2005

7. POLAND CHARGED WITH FAVOURING UKRAINE'S WTO
MEMBERSHIP BEFORE RUSSIA'S
Polish News Bulletin, Warsaw, Poland, Feb 15, 2005

8. BUSINESS BANKROLLED ORANGE REVOLUTION
Agence France-Presse (AFP), Kiev, Ukraine, Thu, Feb 17, 2005

9. PRESIDENT ENCOURAGES BUSINESSMEN TO SAVE ON BRIBES
UNIAN news agency, Kiev, in Ukrainian 0830 gmt 15 Feb
BBC Monitoring Service - United Kingdom; Feb 15, 2005

10.. UKRAINE PM SAYS GOVT WILL CONTEST PRIVATIZATIONS
Will contest in court around 3,000 privatizations
AFX Europe (Focus), Kiev, Ukraine, Wed, Feb 16, 2005

11. RUSSIAN RADIO SAYS UKRAINE'S PRIVATIZATION
PLANS TARGET RUSSIAN FIRMS
Radio Mayak, Moscow, in Russian 1200 gmt 15 Feb 05
BBC Monitoring Service - United Kingdom; Feb 15, 2005

12. YUSHCHENKO TARGETS PRIVATISATION 'THEFT'
Nick Paton Walsh in Moscow
The Guardian, London, United Kingdom; Feb 16, 2005

13. NO SWEEPING RE-PRIVATISATIONS IN UKRAINE
Itar-Tass, Kiev, Ukraine, Wed, 16.02.2005

14. YUSHCHENKO SAYS REVIEWING PRIVATIZATIONS
WON'T BE DISORDERLY VENDETTA
Natasha Lisova, AP Worldstream, Kiev, Ukraine, Feb 15, 2005

15. UKRAINIAN FIRST DEPUTY PREMIER KINAKH TO
HEAD CABINET'S PRIVATIZATION GROUP
Ukraine news agency, Kiev, in Russian 1714 gmt 15 Feb 05
BBC Monitoring Service, UK, in English, Tue, Feb 15, 2005

16. UKRAINE TO DRAFT "EXHAUSTIVE LIST" OF ABOUT
30 COMPANIES FOR REPRIVATIZATION
Interfax-Ukraine news agency, Kiev, in Russian 0830 gmt 15 Feb 05
BBC Monitoring Service, UK, in English, Tue, Feb 15, 2005

17. UKRAINIAN PRESIDENT SAYS PEOPLE FROM OLD
AUTHORITIES SHOULD NOT HOLD POSTS
Several other important statements made by Yushchenko
TV 5 Kanal, Kiev, in Ukrainian 1600 gmt 16 Feb 05
BBC Monitoring Service, UK, in English, Wed, Feb 16, 2005

18. UKRAINIAN PRESIDENT YUSHCHENKO THREATENS TO
CLOSE TAX-FREE ZONES TIED TO CRIME
UNIAN news agency, Kiev, in Ukrainian 1248 gmt 16 Feb 05
BBC Monitoring Service, UK, in English, Wed, Feb 16, 2005

19. UKRAINE: MOVEMENT TOWARD UNIFICATION OF PRO-
YUSHCHENKO CAMP STALLS
By Taras Kuzio, Eurasia Daily Monitor
Volume 2, Issue 33, The Jamestown Foundation
Washington, D.C., Wednesday, February 16, 2005 --

20. OUT OF THE BLACK HOLE
Flat tax rates in Estonia, Latvia, Russia and Ukraine have proved successful
COMMENTARY: by Rastislav Kacer and Marian Tupy
The Wall Street Journal, New York, NY
Thursday, February 17, 2005

21. NEWCOMERS PULL EUROPEAN UNION EASTWARD
Polish President Uses Ukraine Success As Leverage to Reorient Bloc
By Marc Champion, Staff Reporter
The Wall Street Journal, New York, NY
Thursday, February 17, 2005; Page A11
==========================================================
1. MCCAIN INTRODUCES BILL TO LIFT JACKSON-VANIK FOR UKRAINE

Office of Senator John McCain, United States Senate
Washington, D.C., Wed, February 16, 2005

WASHINGTON, D.C. - U.S. Senator John McCain (R-AZ) and
Representatives Henry Hyde and Tom Lantos today introduced legislation to
lift the Jackson-Vanik restriction on Ukraine. Senator McCain issued the
following statement:

"The recent 'Orange Revolution' in Ukraine marked a huge victory for the
advancement of democracy in the world. The Ukrainian people made clear
that they would not stand idle as a corrupt regime sought to deny them their
democratic rights. Now that the people of Ukraine have seized control of
their destiny, the United States must stand ready to assist them as they do
the hard work of consolidating democracy. The Jackson-Vanik amendment is,
with respect to Ukraine, now anachronistic and inappropriate. Therefore, I
am pleased to introduce legislation that would terminate it."

The bill would authorize the President to terminate the application of
Jackson-Vanik (Title IV of the Trade Act of 1974) to Ukraine. Ukraine would
then be eligible to receive permanent normal trade relations (PNTR) tariff
status in its trade with the United States.

"Beyond any benefits to our bilateral trading relationship," McCain said,
"lifting Jackson-Vanik for Ukraine constitutes an important symbol of
Ukraine's new democracy and its relationship with the United States. I led
a delegation of four senators and six representatives to Kiev last week,
where we met with President Yuschenko, Prime Minister Tymoshenko, and
students who led protests in Independence Square.

I was struck by the great enthusiasm for democracy and freedom that has
taken hold in Ukraine, and I wish the new leaders all the best as they begin
the challenge of governing. I pledged to them that I would work toward the
lifting of Jackson-Vanik on Ukraine, and today I am happy to take the first
step toward that end." -30- [Action Ukraine Report Monitoring Service]
==========================================================
2. ORANGE REVOLUTION ACTS AS BEACON TO INVESTORS

By Tom Warner, Financial Times
London, UK, Wed, February 16 2005

Standing between rows of transmission shafts on the expansive shop floor of
a Ukrainian truck factory, Stefan Laxhuber, a German fund manager, watches
intently as workers bolt the different pieces that make up a drive train on
to big steel frames gliding slowly down the production line.

"Some of their processes are very modern, and some are not," observes Mr
Laxhuber. He was one of about 20 western European fund managers who recently
took an excursion into Ukraine's industrial hinterland guided by Concorde
Capital, a local brokerage keen to encourage foreign investment. They hope
to be in the vanguard of a new wave of foreign investment in Ukraine, long
one of the most overlooked markets of eastern Europe.

They are betting that Ukraine's new pro-western president, Viktor
Yushchenko, will move quickly to implement the sweeping economic
liberalisation he is promising. Concorde calls it "Investing Orange", after
the Orange Revolution that helped to bring Mr Yushchenko to power.

The fund managers' first stop was AvtoKraz, a factory in Kremenchuk, central
Ukraine, which makes super-heavy trucks that look as if they could have
driven out of the 1970s. The company is growing quickly thanks to the
recovering regional economy and a contract to supply 2,000 trucks to the
Iraqi army.

Mr Laxhuber started buying Ukrainian equities in 2003, and since then they
have doubled or tripled in value. "I'm looking to increase the Ukraine
weight in my fund," he says.

Yesterday another group of more than 100 investors descended on Kiev for a
conference organised by Renaissance Capital, a Russian investment bank that
last year opened a branch office in Kiev. Some of the investors were due to
fly out to the eastern city of Dnipropetrovsk to visit a rocket factory and
a steel pipe mill.

Tomas Fiala, managing director of Dragon Capital, a Ukrainian brokerage,
says he sees most foreign investment falling into two broad categories.

Some investors want to produce goods for the domestic market, which is
growing rapidly: gross domestic product rose 12 per cent last year. Others
see Ukraine as a low-cost production base with easy access to the European
Union market. European clothes makers and contract manufacturers are
shifting production into Ukraine's western regions, just across the new EU
border.

The task for Mr Yushchenko's new government will be to translate the
curiosity shown by investors such as Mr Laxhuber into a sustained increase
in inward investment. Foreign direct investment (FDI) doubled from $690m
(Euro 532m, £366m) in 2002 to $1.4bn in 2003, but remained flat in 2004.

The Economist Intelligence Unit forecasts FDI will reach $1.9bn in 2005. But
Mr Fiala predicts it will reach $3bn. And he says it could be pushed higher
by one or more big deals, such as an expected resale of Kryvorizhstal, the
country's largest steel mill.

Production of mass commodities such as steel and chemical fertilisers is the
lifeblood of Ukraine's economy, and these remain largely insider-dominated
sectors. Close ties between the dominant business groups and the former
government scared off potential investors and led producers in the European
Union to demand protection from what they saw as unfair competition. As a
result, Ukraine sells most of its exports to other emerging markets,
especially Russia, China and the Middle East.

Mr Yushchenko hopes his democratic credentials will help to pry back open
the doors to EU markets. He says he is determined to shift the economic base
from commodities to higher-value-added products. But many Ukrainian
companies are ill prepared to break into western markets. AvtoKraz, for
example, sells its old-fashioned trucks mainly to developing countries,
where budgets are small and roads are bad.

Concorde is hoping to persuade AvtoKraz's owners to sell a stake of 25 per
cent plus one share, which would give the minority owner a veto over major
company decisions. Such a deal, worth up to $25m, would not change
AvtoKraz's world Mr Fiala says the company would need an investment of at
least $200m to compete against the big freight truck makers. But it would be
a first step. -30- [The Action Ukraine Report Monitoring Service]
==========================================================
3. FOREIGN DIRECT INVESTMENT (FDI) IN THE UKRAINIAN
ECONOMY DURING 2004 WAS 1.93 BILLION DOLLARS

UNIAN news agency, Kiev, in Ukrainian, 15 Feb 05
BBC Monitoring Service, UK, in English, Tue, Feb 15, 2005

KIEV - In 2004, foreign direct investment [FDI] in the Ukrainian economy
reached 1.93bn dollars, 80m dollars of which (or 4.2 per cent) came from
the CIS countries and 1.85bn dollars (or 95.8 per cent) from the other
countries of the world, the UNIAN agency reported on 15 February, quoting
the State Statistics Committee. -30-
==========================================================
4. HIGHER RETURNS BOLSTER EMERGING MARKET FUNDS
Markets like Turkey, Poland, & Ukraine are attracting investors

Funds in Brief: Higher returns bolster emerging market funds
Bloomberg News, NY, NY, Tuesday, February 15, 2005

Emerging market stock funds had their largest inflow of money in at least
five years in the week through Feb. 9, as investors shifted out of the
United States to tap share price gains in countries like Turkey and Poland,
according to EmergingPortfolio.com.
.
The funds attracted a net $1.33 billion in the week, the Boston-based
research company said Monday. That was the most since it began
compiling weekly data in 2000.
.
Investors are pursuing higher returns in emerging markets as the dollar
declines and interest rates in the world's largest economy rise. They have
added $1.8 billion into emerging market funds in the past year, pulling $1.6
billion from U.S. equity funds in the same period, according to
EmergingPortfolio.
.
"People are looking for growth - economic growth, earnings growth and
cheap valuations," said Eric Kraus, chief strategist at Sovlink Securities,
a brokerage firm in Moscow.
.
Emerging Europe funds received almost $500 million in the week ended
Feb. 9, also the most in at least five years, EmergingPortfolio said. The
funds, which invest in countries like Turkey, Russia and Ukraine, have
taken in more than $800 million over the past two weeks.
.
Latin America equity funds gained $84.1 million in new inflows,
EmergingPortfolio said, while Asia funds excluding Japan added $345.8
million. -30- [The Action Ukraine Report Monitoring Service]
==========================================================
5. TOP FOUR PROMISES OF NEW GOVERNMENT.
TO BE, OR NOT TO BE?

By V. Sumar, The Institute of Mass Information [IMI]
Kyiv, Ukraine, Thursday, February 10,2005

These past months Ukrainians hear too many fine promises. Looks like new
government much studied opinion polls, summarized the results and is about
to transform it in plan of actions. This first fragile balance should be
confirmed by concrete results, since Ukrainians' possible disappointment
with new power's activities could drive to fiasco at parliamentary
elections-2006.

PROMISE # 1 - To return "Kryvorizhstal"

One of the main points in Yushchenko's program. New government treats the
sale of the plant and tender conditions as a robbery of state property.
Inadmissible situation when State Property Fond, in fact, thrown out foreign
investors from the tender, and therefore, robbed them of their right to buy
the company.

Restitution of the "Kryvorizhstal" returns this company to the state clinch
and sends a clear message to two richest Ukrainians - Pinchuk and Akhmetov.

However, this promise could become darkened due to wary attitude of the
foreign investors to the notion of reprivatization. But new authorities are
assured they demonstrate support to western standards.

This promise of new government is quite real. It remains to clarify the way
of reprivatization and further destiny of the industrial complex.

PROMISE # 2 - Extermination of corruption

Many Ukrainians do not believe in it. Most of them are assured it became
stylish to state: "I won't steal." People in Sumy region (known as
motherland of new president and as a place of harsh protests against the
former authorities) roared with laughter after the new Governor of the
region promised them not to sneak.

Average wages in Ukraine equals to $100. At the same time, its clear the
Ukrainians are not vegetarians and must pay for public utilities and for the
gas for their cars. If they are not able to subsist on their salaries they
are condemned to turn into thieves. This is so-called instinct of
self-preservation that cannot be stopped by the dread of law-enforcement
bodies.

New Government is going to prejudice its reputation by declaring war against
corruption without guaranteeing legal profits. The disaffected people will
pilfer on the quiet as before and the new power will not be able to whip
them- it is hard to punish member of your own team publicly.

Many Ukrainians would have thought why President Yushchenko, man of
principle, eluded dismissal of top customs official and a chief of frontier
troops - chiefs of most bribable bodies. Little Ukrainians hardly would get
explanations like "political advisability" and "accord by Speaker's quota."

Finally, each of them are faced with the dilemma - how all these honest
ministers, governors and other top officials are going to live within their
salaries that equal to maximum $300.

PROMISE # 3 - Absolute Divorce of Politics and Business

New Government consists of many well-known and successful businessmen. For
example, Petro Poroshenko, Secretary of National Security and Defense
Council, with all his confectionery, shipyards and motor works. Yushchenko
insists on that in fourteen days his subordinates will be ready to sell
their businesses or to put them into the hands of hired managers.

Some people doubt Yevhen Chervonenko, current Transport Minister to stand
fast from granting contracts of the ministry to his transport company, even
if his business will not be lead by him, but by the managers.

Probably, it is very romantic to believe Yushchenko's words that businessmen
strived for power with aim to work on Ukraine days and nights and did not
ever think about their own profits.

PROMISE # 4 - Free Speech and Free Media

Yushchenko stated many times Ukraine's democracy is unavailable without
free media. Now he faced with problem to implement his declarations.

Until now the steps of President are logical enough - he signed a decree on

access to information further to the law already provided this standard
before. In addition Yushchenko promised to sign an agreement with media "on
non-interference."

At the same time, media business remains to be unprofitable and dependent on
general economic situation in the country. Moreover, media owners at the
moment do not agree with the appeals to follow western standards, i.e. to
realize that the profit is dead without audience's interest.

It is doubtless that free speech and media in Ukraine will also thrive after
performing of many other promises. -30-
-----------------------------------------------------------------------
http://eng.imi.org.ua/?id=read&n=136&cy=2005&m=thm
==========================================================
6. UKRAINIAN POPULATION CONTINUES RAPID DECLINE
Population decreases by 341,000 in 2004 to 47.28 million

Interfax-Ukraine news agency, Kiev, in Russian, 14 Feb 05
BBC Monitoring Service,UK, in English, Mon, Feb 14, 2005

KIEV - In 2004 the Ukrainian population decreased by 341,600 to 47.28m,
the Interfax-Ukraine news agency reported on 14 February, quoting the State
Statistics Committee. About 32m people live in cities, and 15.27m live in
rural areas, the agency added.

About 427,300 people were born, and 761,300 died last year, the agency said.
The number of people who emigrated from Ukraine decreased from 63,700 to
46,200 year on year, Interfax-Ukraine said. -30-
==========================================================
7. POLAND CHARGES WITH FAVOURING UKRAINE'S WTO MEMBERSHIP

Polish News Bulletin, Warsaw, Poland, Feb 15, 2005

Poland opposes admitting Russia to the World Trade Organisation (WTO)
before Ukraine gets there, say foreign diplomats participating in talks on
the issue. "We want both Russia and Ukraine to become WTO's members as
soon as possible, though Kiev is more advanced on the route [to the WTO]"
replied Poland's deputy Economy Minister Miroslaw Zielinski.

Foreign diplomats' opinion is that should Russia be admitted to the WTO
before Ukraine, it would be likely to impose harsh membership terms on Kiev.
Zielinski does not agree, saying that Ukraine would have to lag behind in
its preparations for membership for this argument to be true, which in fact
is not the case. Both countries should join the WTO this year before the
second round of talks scheduled to take place in Hong-Kong in December.
The simultaneous admittance of Russia and Ukraine is not certain since
negotiations with Ukraine are slightly more advanced. -30-
==========================================================
8. BUSINESS BANKROLLED ORANGE REVOLUTION

Agence France-Presse (AFP), Kiev, Ukraine, Thu, Feb 17, 2005

KIEV - In the bitterly cold days of Ukraine's peaceful street protests late
last year, a stylish black Land Rover was parked at the bottom of a hill in
central Kiev with its engine idling and the hand-written sign, "You can get
warm in here.'' Such support was crucial in the success of the
demonstrations as even the rich joined in - owners of all sizes of business,
wearied by corruption among officials, largely paid the hefty bill of
Ukraine's "orange revolution.''

David Zhvania, who was in charge of raising funds for Viktor Yushchenko's
presidential campaign for more than two years, said the price tag - more
than two years of campaigning as well as the cost of the protests - came to
more than US$150 million (HK$1.17 billion). It paid off - after being denied
victory in a rigged election, Yushchenko won a rerun vote after the Supreme
Court, under fierce pressure from the mass demonstrations, annulled the
earlier ballot.

"People in business were constantly dealing with government structures and
felt the pressure of a corrupt regime, saw first hand the chaos,'' said
Viktor Gusak, a manager of one of the many restaurants in Kiev's center that
slashed prices during the protests.

The money paid for more than two years of campaign activity and many of the
supplies for the protesters - from orange trucks with television screens to
tents and sleeping bags, fireworks and a virtual sea of orange
paraphernalia.

Zhvania set about procuring the funds in 2002, soon after the 37-year-old
became one of the nation's few leading businessmen to throw their lot in
with Yushchenko because it made good business sense. "I constantly had the
feeling that I had reached the limit in terms of developing my group of
companies,'' he said.

As he expected, Zhvania Brinkford business empire began to face legal
trouble shortly after he joined - not unusual under an authoritarian-leaning
regime, where corruption was rife and much business activity was controlled
by clans close to those in power.

Although many business owners shared his frustration, their fear meant the
business deputies in Yushchenko's Our Ukraine bloc ended up providing most
of the funds ahead of the presidential poll last autumn. "People were afraid
to shake our hands, never mind helping out financially,'' Zhvania said.

He said he spent tens of millions of dollars of his own money on Ukraine's
protests, though he declined to provide an exact figure. Other top donors
are believed to have been Yulia Tymoshenko, now Ukraine's prime minister,
and Petro Poroshenko, who has been named to head the national security
council.

Zhvania has been appointed the emergencies minister. The funds that were
attracted from the outside usually arrived in the same mysterious manner - a
car would drive up to Zhvania's house or office and the driver would drop
off a paper bag filled with cash - sometimes up to US$100,000 - and a note
that read "from a friend.'' "Only now are these friends coming out of the
woodwork and identifying themselves,'' he said, smiling. "Nothing could be
done here without bribes,'' Poroshenko said. "Bribes became the norm.''

"The tax system, the licensing system, registration of businesses was
organized in such a way that to follow the letter of the law was
impossible,'' Mykola Georgievsky, the president of a group that includes
several factories and a bank, said. "The old regime didn't leave any hope
that there could be normal business development,'' Georgievsky said. "Now
there is hope.''

Once the mass protests began, however, people had no qualms about showing
their allegiance. The orange ribbon colours of Yushchenko's campaign
appeared on nearly every luxury car in Kiev's upscale Lipki district, and
nearly five million dollars streamed into bank accounts alone in addition to
donations in clothing, food and money to the street protesters.

"People would come up to me on the street and just hand me wads of cash,'' a
spokeswoman for one of Yushchenko's top allies said. "One guy came down to
the tent camp one day, looked at the people camping out in the cold, and
left,'' one of the protest organizers said. "He returned a half hour later
with 50 brand new hiking boots and jackets that he bought at a sport
store,'' the organizer said -30- [Action Ukraine Report Monitoring]
==========================================================
9. PRESIDENT ENCOURAGES BUSINESSMEN TO SAVE ON BRIBES

UNIAN news agency, Kiev, in Ukrainian 0830 gmt 15 Feb
BBC Monitoring Service - United Kingdom; Feb 15, 2005

KIEV - Ukrainian President Viktor Yushchenko has called on foreign
businessmen not to offer bribes to Ukrainian civil servants. Speaking at the
first international conference of investors, which was organized by the
Renesens Kapital Ukraina [Renaissance Capital Ukraine] company, Yushchenko
said: "Do not give kickbacks, do not offer bribes." He said that foreign
investors can introduce a new entry in their business plans dealing with
Ukraine - "savings on corruption". Yushchenko said that this was his first
request to foreign investors.

Yushchenko said that his second request to foreign investors would be "after
the conference is over to take a notebook and write down on the first page
'Ukraine' as No 1 priority in life".

[Yushchenko also promised that a council of foreign investors would be
created under the president soon, according to UNIAN news agency, Kiev,
inUkrainian 0824 gmt 15 Feb 05.] -30-
==========================================================
10. UKRAINE PM SAYS GOVT WILL CONTEST PRIVATIZATIONS
Will contest in court around 3,000 privatizations

AFX Europe (Focus), Kiev, Ukraine, Wed, Feb 16, 2005

KIEV - Ukrainian Prime Minister Yulia Tymoshenko said that her government
and the prosecutor general's office would contest in court the past
privatizations of around 3,000 businesses, her spokesman told AFP. "On the
order of the prime minister, the prosecutor general presented a list of
privatizations that raise doubts, to say the least," Tymoshenko spokesman
Vitali Chepinoga said.

"This concerns around 3,000" enterprises, the spokesman said, adding that
authorities would open "judicial procedings to contest the legality of these
privatizations."

The figure of 3,000 dramatically contrasted with that put forward Tuesday by
Ukrainian President Viktor Yushchenko, who said the privatization of 30 to
40 top businesses would be re-examined by his new government as it takes a
second look at deals struck by his predecessor Leonid Kuchma.

The prosecutor general's office could not immediately confirm the figure of
3,000 put forward by Tymoshenko. "The prime minister's cabinet has indeed
just sent us a series of documents, but I cannot tell you the number of
enterprises concerned," Vyacheslav Astapov, spokesman for the prosecutor
general's office, told AFP.

Yushchenko was quoted Tuesday as saying that once the list of businesses
whose privatization was considered suspect by the government was drawn up
"we will not add anything to it."

Many enterprises once controlled by the Soviet state were privatized in the
1990s at rock-bottom prices, making overnight billionaires out of some of
the lucky few to acquire them in Ukraine, Russia and other former Soviet
republics.

Many foreign investors have also sunk billions of dollars into those now
privately-run enterprises and have been spooked by moves to review and in
some cases -- notably that of the Yukos oil giant in Russia -- revoke that
private ownership.

Analysts said the review in Ukraine was likely to affect purchases made by
Russian and other foreign investors. So far, only the privatization of the
massive Krivorozhstal steel plant has come under review.

The company was purchased in June in a strongly criticized deal by a group
of investors that included the son-in-law of Kuchma, Viktor Pinchuk, who was
reported in the local press as the former Soviet republic's second-richest
man.

The steel factory was purchased for 800 million dollars (617 million euros).
The bid was successful despite offers of 1.2 billion dollars by the Russian
steel giant Severstal and 1.5 billion dollars from the British-US consortium
of LNM Group and United States Steel Corp. Both cried foul after the sale.

Yushchenko said on Tuesday that the state hoped to raise three to four times
that sum in a re-sale after first briefly resuming control of the company.
dth/cb/hm/nh [The Action Ukraine Report Monitoring Service]
==========================================================
11. RUSSIAN RADIO SAYS UKRAINE'S PRIVATIZATION
PLANS TARGET RUSSIAN FIRMS

Radio Mayak, Moscow, in Russian 1200 gmt 15 Feb 05
BBC Monitoring Service - United Kingdom; Feb 15, 2005

KIEV - Ukrainian President Viktor Yushchenko declared a small-scale
nationalization programme today, returning 30 or 40 major industrial
facilities to state ownership. Our correspondent in Ukraine, Vladimir
Sinelnikov, reports that a definitive list of enterprises for potential
reprivatization will soon be compiled.

[Correspondent] The Kryvyy Rih steel works will certainly be nationalized.
It's a giant of Ukrainian metallurgy, producing 20 per cent of its steel.
Last July it was bought for nearly 800m dollars by the Investment Metallurgy
Union consortium, with Viktor Pinchuk, the son-in-law of the then president,
and Donetsk businessman Renat Akhmetov, both personally involved in the
sale. They are both regarded as among Ukraine's richest people.

President Yushchenko said today, and I quote: Whatever it costs my
government, we will return Kryvorizhstal to the state. End quote.

According to the president, Kryvorizhstal could be resold for three or four
times more money. President Yushchenko also said there would be no mass
revision of privatization. In other words, Yushchenko does not intend to
undo the past when he himself, as president of the National Bank and prime
minister and virtually almost all his team, which consists of the civil
service elite of the 90s, was directly involved in the privatization of
state property.

Secretary of the National Security and Defence Council Petro Poroshenko
has said, evidently with the president's agreement, that he intends to mount
a court challenge to the privatization of around 10 big firms, including
mining, metallurgy and iron smelting companies.

Meanwhile, in recent years Russian business has invested in just such
enterprises in Ukraine, buying up half-ruined facilities from the state and
putting hundreds of millions of dollars into upgrading them. So, this
dramatic but small-scale privatization will most probably target the
presence of Russian business in Ukraine. -30-
==========================================================
12. YUSHCHENKO TARGETS PRIVATISATION 'THEFT

Nick Paton Walsh in Moscow
The Guardian, London, United Kingdom; Feb 16, 2005

Viktor Yushchenko, Ukraine's new president, yesterday announced sweeping
reforms targeting his predecessor's controversial privatisation of state
assets and generous retirement package. Mr Yushchenko told a conference of
investors that the privatisation of around 30 companies owned by the state
would be re-examined.

He declined to "name names" but said one of the companies would be the steel
giant Kryvorizhstal, sold to the former president Leonid Kuchma's
son-in-law, Viktor Pinchuk, for $800m in June. Mr Pinchuk bid half as much
as his competitors. Mr Yushchenko, who has described the privatisation as
theft, added: "Many other companies will be put through the same procedure,"
according to the news agency Interfax. He said he would announce a final
list shortly.

The 10-year Kuchma administration, widely accused of nepotism and
corruption, presided over the dubious privatisation of many state assets. Mr
Yushchenko won a re-run election in December after leading weeks of protests
claiming electoral fraud by the Kuchma government.

He told the Guardian in an interview shortly after his victory that Mr
Kuchma would have to "answer under the law like any other citizen . . .
whether they are the president's son-in-law or his charlady in his office."

The new prime minister, Yulia Tymoshenko, who was once jailed by Mr Kuchma,
has ordered her government to draw up a revised retirement package for the
ex-president, who benefits from a generous pension, two cars, a cook, maid,
and other luxuries. It will be presented to cabinet today.

A series of criminal investigations into the former administration's conduct
have also been opened. One MP urged prosecutors to investigate claims the
old administration sold six nuclear-capable Kh-55 missiles to Iran and six
to China, against international treaties.

Yet greater focus has been placed on the death of the opposition internet
journalist Giorgi Gongadze, found beheaded in 2000. Mr Kuchma is heard on
secret digital recordings, apparently made by a former bodyguard, telling
his interior minister to "drive him out, throw [him] out, give him to the
Chechens". The ex-president denies the tapes are authentic or that he was
involved in the killing.

Mr Yushchenko has said that he "owes it to Giorgi" to pursue the
investigation of his death, and has declared he will rename the street where
Mr Kuchma's administration was based after the journalist. Mr Kuchma was
yesterday reported to have gone for a brief holiday to a 14th-century spa in
Karlovy Vary, 81 miles west of Prague, in the Czech Republic.

Mr Yushchenko has pledged to improve relations with Russia, who backed his
adversary in the electoral crisis, the former prime minister Viktor
Yanukovich, but insisted the neighbours' relationship will not impede his
goal of bring ing Ukraine into the EU. But on Monday he made a curious step
towards winning over Moscow when he appointed Boris Nemtsov, a prominent
Russian liberal MP and critic of Vladimir Putin, as a part-time adviser to
improve business ties with Russia.

Meanwhile, Washington moved to bolster the new-found democratic freedoms
they claim led to Mr Yushchenko's inauguration by giving Ukraine an extra
$60m (pounds 32m) in aid for this year and next. The White House said in a
statement the money, part of the Bush administration's budget supplemental,
"includes $60m to support the new government's ability to consolidate gains
Ukraine has made, establish the rule of law, combat corruption, and
accelerate economic reforms".

The US has given Ukraine $58m to support democracy over the past two years.
Russia claimed US financial support to such "democratic institutions" had
helped the opposition win. [guardian.co.uk/ukraine]
==========================================================
13. NO SWEEPING RE-PRIVATISATIONS IN UKRAINE

Itar-Tass, Kiev, Ukraine, Wed, 16.02.2005

KIEV, ---- There will be no sweeping re-privatisation in Ukraine, a high-
ranking official said. The head of the State Property Fund, Mikhail
Chechetov, told Itar-Tass on Wednesday that the Prosecutor General's Office
was probing into the sale of about 3,000 pieces of state property. "They
checked and will check, including in regions. This is a working process," he
said.

According to Chechetov, the State Property Fund "is severing agreements on
350 facilities through courts" because investors were not fulfilling their
obligations.

Courts have already handed down verdicts in 150 cases, and 200 cases are
pending. Chechetov said the Fund would not make any decisions on orders by
telephone. "The Fund did not, does not, and will not work by telephone
instructions. All decisions are adopted on the basis of government
instructions," he said.

Earlier, Prime Minister Yulia Timoshenko said the Prosecutor-General's
Office had submitted to the government the results of its probes into
privatisation over the last five years. Abuse was exposed in about 3,000
cases. "All will go before courts of law," Timoshenko said. Speaking about
the privatisation of Ukraine's biggest metallurgical mill, Krivorozhstal,
the prime minister said it had been sold by a criminal pattern and promised
to arrange for a "real contest and real evaluation."

President Viktor Yushchenko said the re-privatisation of a number of
facilities would make it possible to establish the truth and raise funds for
the budget. According to government estimates, the budget's latent deficit
is six billion dollars. Yushchenko also promised that the list of
enterprises subject to privatisation revision would not be changed in the
future.

"The Cabinet of Ministers will publish a list of facilities to be
scrutinised within the framework of privatisation projects," Yushchenko
said in Lvov. The list will be final and no more privatised facilities will
be added to it in the future. The president said it would be very wrong to
drop hints suggesting "this revision may continue on and on." "The revision
of privatisation will help establish the truth and raise funds for the
budget," Yushchenko said.

He specifically pointed out that privatisation revision should not be seen
as nationalisation. "I do not like the word 'nationalisation'. I do not like
the word 're-privatisation', either, However, in those cases where the law
was abused we should do everything that can be done to bring about the
triumph of the law," he said.

Meanwhile, the government intends to consider and approve a special
programme entitled "Property to the People" that is designed to ensure
"the regulation of relations with state property".

Timoshenko said, "It will be a powerful programme, and the government will
secure a legal and organisation groundwork for it and will strictly observe
it."

Yushchenko said at a conference of international investors in Kiev on
Tuesday that the list of privatised objects that will be returned into state
ownership would be "limited and closed, which means that after its approval
no new objects will be added to the list."

In his words, "more than one object" will be returned into state ownership
and drew special attention to Krivorozhstal. "Whatever it may cost to my
government, we'll return Krivorozhstal into the ownership of the state. If
Krivorozhstal is put for a resale, it can be sold at three or four times the
old price," Yushchenko said.

The president pointed out at the same time that the government would not
allow a mass revision of privatisation in Ukraine.

National Security and Defence Council secretary and head of the parliament's
budget committee, Pyotr Poroshenko, said the incumbent government planned
to file protests in court against the privatisation of 10 major enterprises,
including a number of mining, metallurgical, and ferroalloy plants.

Poroshenko said the new government would find arguments to convince the
court to rule "honestly and independently, without interference by any
branch of power, accepting the arguments of the government" that
"privatisation should be honest".

Therefore, according to Poroshenko, the owners of these enterprises will
have to take part in a new privatisation tender and pay "the real price for
these facilities".

In his view, this will give the national budget will receive an additional
10-12 billion hrivnas (over two billion U.S. dollars).
=====================================================
14. YUSHCHENKO SAYS REVIEWING PRIVATIZATIONS
WON'T BE DISORDERLY VENDETTA

Natasha Lisova, AP Worldstream, Kiev, Ukraine, Feb 15, 2005

KIEV - New President Viktor Yushchenko on Tuesday said his government
will review murky privatizations of state-run enterprises, but aimed to
reassure investors that the effort, which could include canceling some
deals, would be orderly and fair. In recent years, several major state-run
enterprises were sold under questionable terms and at apparently below-
market costs, sometimes to figures connected with previous President
Leonid Kuchma.

Yushchenko has promised a thorough investigation into alleged corruption
under Kuchma, including the possible cancellation of some privatizations,
and investment bankers have warned that the efforts could raise concern
about property rights and rule of law if they are seen as being driven by
political revenge.

Yushchenko tried to lessen those concerns at an investors' conference
Tuesday, saying the government will prepare a list of enterprises to come
under scrutiny that "will be limited and final and will not be extended
after its completion." He did not elaborate.

Yushchenko and government officials previously have said that one of the
major privatizations to be investigated is that of the Kryvorizhstal steel
mill. The mill, one of the world's most profitable, was bought at a
rock-bottom price last year by a consortium that included Viktor Pinchuk,
Kuchma's son-in-law. "We say Kryvorizhstal was stolen and at any cost we
will return it to the state," Yushchenko said at the conference. Last year,
two other key bidders, Russia's OAO Severstal and a consortium made up
of United States Steel Corp. and the LNM Group cried foul over the mill's
auction.

Analysts said if the mill is put up for a transparent resale, open to
foreign bidders, the government might receive more than double the US$800
million (Euro 665 million) it sold the mill for last year. Other companies
in the firing line could be Ukrrudprom, an iron-ore producer that was also
sold to a Pinchuk-linked group and the Petrovsky steel mill, in which only
local companies were allowed to participate.

Yushchenko said the government would crack down on widespread corruption.
"From morning until evening the president and the government are discussing
how to struggle with corruption," he said. "I reassure you that nobody in
this country will take bribes ... policemen will not take bribes, officials
will not take bribes," he said.

Yushchenko said Ukraine will apply for membership in the World Trade
Organization at its session in November. He also said Ukraine should become
a European Union member while retaining close ties with Russia, it's huge
neighbor, a key trade partner and energy supplier. -30-
=====================================================
15. UKRAINIAN FIRST DEPUTY PREMIER KINAKH TO
HEAD CABINET'S PRIVATIZATION GROUP

Ukraine news agency, Kiev, in Russian 1714 gmt 15 Feb 05
BBC Monitoring Service, UK, in English, Tue, Feb 15, 2005

KIEV - The Ukrainian government has formed a special group to deal with
problems of privatization, First Deputy Prime Minister Anatoliy Kinakh said
in Kiev today. Kinakh said he was tasked with heading the commission.

He added that public will be getting complete and unbiased information about
the commission's activities. President Viktor Yushchenko today said that
over the next few weeks they will come up with a complete list of companies
(comprising around 30 companies), the privatization of which will be
revised. -30- [The Action Ukraine Report Monitoring Service]
=====================================================
16. UKRAINE TO DRAFT "EXHAUSTIVE LIST" OF ABOUT
30 COMPANIES FOR REPRIVATIZATION

Interfax-Ukraine news agency, Kiev, in Russian 0830 gmt 15 Feb 05
BBC Monitoring Service, UK, in English, Tue, Feb 15, 2005

KIEV - "In the coming weeks Ukraine will submit an exhaustive list of about
30 companies to review their privatization, " Ukrainian President Viktor
Yushchenko said. "This is the fate of more than one facility. We shall
submit the list soon once the review is over. The list will be exhaustive.
It will be closed - I mean nobody will add to the list," Yushchenko said in
Kiev today, speaking at a conference for investors, which was organized by
the Russian company Renesans [Renaissance] Kapital. "There will be 30-40
facilities," Yushchenko specified.

As an example Yushchenko mentioned the Kryvyy Rih steelworks, saying
that the new authorities intend to return it to the state, declare an
international tender and receive three-four times as much for the
steelworks.

Yushchenko stressed that there would be no mass privatization. "I do not
like the words nationalization or reprivatization. Some 90-98 per cent of
Ukrainian businesses were created under the laws that were in place. Neither
myself nor my cabinet will allow a review of these processes," Yushchenko
said. "We respect property and we shall defend it," Yushchenko said.
=====================================================
17. UKRAINIAN PRESIDENT SAYS PEOPLE FROM OLD
AUTHORITIES SHOULD NOT HOLD POSTS
Several other important statements made by Yushchenko

TV 5 Kanal, Kiev, in Ukrainian 1600 gmt 16 Feb 05
BBC Monitoring Service, UK, in English, Wed, Feb 16, 2005

KIEV - Ukrainian President Viktor Yushchenko said in Lviv today that no
additions will be made to the list of plants subject to reprivatization once
it has been made public by his government. He presented the new regional
governor, Petro Oliynyk, and made a series of statements.

Yushchenko said the solving of the murder of [journalist] Heorhiy Gongadze
[killed in 2000] is a moral challenge to the current authorities, who should
resolve the case. The following are important statements made by Viktor
Yushchenko.

FIRST, the state will simplify travel to Ukraine by citizens of the European
Union in the near future. SECOND, talks are taking place on reconciliation
between veterans of the Soviet army and the Ukrainian insurgent army. THIRD,
he will dismiss the heads of the State Customs Service. FOURTH, the
president is optimistic about the solving of the case on his poisoning.

[FIFTH] One more signal from the president of Ukraine is that top posts in
bodies of authority should not be occupied by people from the previous
authorities or by people who took part in the presidential campaign on the
side of his opponent [Viktor Yanukovych]. In fact, Vasyl Kremen, the
previous education minister and former member of the politburo of the Social
Democratic Party of Ukraine (United) was appointed first deputy state
secretary on 9 February. -30-
====================================================
18. UKRAINIAN PRESIDENT YUSHCHENKO THREATENS TO
CLOSE TAX-FREE ZONES TIED TO CRIME

UNIAN news agency, Kiev, in Ukrainian 1248 gmt 16 Feb 05
BBC Monitoring Service, UK, in English, Wed, Feb 16, 2005

LVIV - Ukrainian President Viktor Yushchenko has said it would be advisable
to close free economic zones "if it is found that they developed together
with the criminal world". UNIAN reports that he said this at a briefing in
Lviv today when answering a question on the operation and closure of free
economic zones. There are two free economic zones in Lviv Region.

The president said that "if a free economic zone is operating effectively
and is not a corridor for laundering money from the shadow economy, then
it has the right to exist. If the zone works as a corridor for criminals
then it should be closed".

UNIAN reports that First Deputy Prime Minister Anatoliy Kinakh said that
the government will have a differential approach to the problems of free
economic zones and priority development areas.

There are currently 11 free economic zones in Ukraine. Companies located
in these zones take advantage of a host of taxation and customs privileges.
These privileges include duty free import of equipment, exemption of tax on
profits and investment, exemption of payment for land and duties to
budgetary funds. However, the question of whether such "greenhouse" terms
really do assist the development of innovational and manufacturing potential
in Ukraine has become a controversial one recently. -30-
=====================================================
19. UKRAINE: MOVEMENT TOWARD UNIFICATION OF PRO-
YUSHCHENKO CAMP STALLS

By Taras Kuzio, Eurasia Daily Monitor
Volume 2, Issue 33, The Jamestown Foundation
Washington, D.C., Wednesday, February 16, 2005 --

Among the political goals announced by Ukrainian President Viktor Yushchenko
is a plan to unify the political parties that comprise the "Our Ukraine"
bloc into a single political party (Ukrayinska pravda, February 13).
Yushchenko signed a "declaration of principles" regarding a new Our Ukraine
party (Ukrayinska pravda, January 21, February 2). Besides the Our Ukraine
members, the declaration was also aimed at the Center parliamentary faction
that broke away from the pro-Leonid Kuchma parliamentary majority in spring
2004.

Roman Bezsmertny, the man assigned to organize an Our Ukraine party, has
been skeptical that there will be sufficient interest in merging independent
groups into a single party. Bezsmertny also strained his relations with
Prime Minister Yulia Tymoshenko when he asked her to step down as head of
her own Fatherland Party after entering government (razom.org.ua, January
25).

The idea of creating a unified pro-Yushchenko party is nothing new. It
originally surfaced in 2000 when Yushchenko was prime minister, but few
national democratic parties would agree to a merger. Zerkalo nedeli
(January 29) believes the problem lies in the fact that each party inside
Our Ukraine wants to become the nucleus of the future unified party. Already
parties are maneuvering for that position.

Yuriy Kostenko acted first by renaming his wing of Rukh as the Ukrainian
People's Party (UNP), an attempt at imitating the European People's Party,
of which Our Ukraine is an associate member. The European People's Party
unites center-right conservative and Christian democratic parties in the
European Parliament (razom.org.ua, January 28).

Next, the Reforms and Order Party, led by Finance Minister Viktor Pynzenyk,
changed its name to "Our Ukraine," infuriating other members of the bloc.

Any unified Our Ukraine political party is likely to be more liberal in its
orientation than the traditionally national-democratic orientation of Rukh.
The Our Ukraine bloc includes the centrist Solidarity Party, led by Petro
Poroshenko, secretary of the National Security and Defense Council, and the
Razom group led by Deputy Prime Minister Oleh Rybachuk. Yushchenko
clearly favors Razom and Solidarity, as they obtained the largest number of
government positions and regional governor positions.

Yushchenko's revived interest in unifying the parties in Our Ukraine is
twofold.

FIRST, a unified pro-presidential party would support his democratic and
economic reforms. While supporting unification, Yushchenko himself has never
expressed an interest in leading such a party. Former president Leonid
Kuchma failed to create a pro-presidential "party of power" during his ten
years in office. An attempt to transform the People's Democratic Party into
a party of power after the 1998 elections when its leader, Valeriy
Pustovoitenko, was prime minister, proved disastrous.

SECOND, Yushchenko wants to have a unified party in place for the
March 2006 parliamentary elections, the first to be held using a fully
proportional election law. Under the mixed system used in 1998 and 2002,
only half of the seats were elected proportionally, with a four percent
threshold required. The remaining seats were based on a majority vote in
single-mandate districts.

The new election law has a compromise three percent threshold, which was
lowered to assuage the fears of the centrist camp, which traditionally had
performed better in single mandate districts. There are plans to raise the
threshold to five percent, which is the norm in other proportional systems.

Meanwhile, the political parties in the pro-Yushchenko camp are reluctant to
unify. If anything the opposite could be take place.

Kostenko, of the Ukrainian People's Party (UNP), warns that Our Ukraine,
which was created as a bloc for the 2002 elections and still has the largest
parliamentary faction with 101 deputies, may disintegrate (Lvivska gazeta,
February 14). He argues that Our Ukraine has fulfilled its purpose by
polling first in the 2002 elections and propelling Yushchenko into power.

Kostenko's party is one of two offshoots from Rukh, the main political force
that mobilized support for state independence in 1988-91. Both Kostenko's
UNP and Rukh, led by Foreign Minister Borys Tarasyuk, have stated their
unwillingness to merge into any new Our Ukraine political party. Instead,
Kostenko has called for the creation of a center-right bloc of two or three
parties to campaign for the 2006 elections. But, his plans may be thwarted
by two factors.

FIRST, Parliamentary Speaker Volodymyr Lytvyn has successfully changed
the name of his own People's Agrarian Party to the People's Party (UT-1,
February 11). The new name is very similar to Kostenko's UNP and will
inevitably confuse voters.

SECOND, there is already a "rightist" bloc led by Prime Minister Tymoshenko.
The "Yulia Tymoshenko Bloc" includes her own Fatherland Party, the Ukrainian
Republican Party "Sobor," and several less well-known parties. Kostenko's
UNP feels more at home in Tymoshenko's bloc than in Our Ukraine.

Tymoshenko's Fatherland Party grew out of discredited Prime Minister Pavlo
Lazarenko's Hromada, the first and only dissident oligarch party. Fatherland
then merged in 2002 with Stepan Khmara's Conservative Republican Party. The
liberal Yabluko party, led by Mikhail Brodsky, caters to Russophone leaders
of small- and medium-sized businesses and is also planning to merge with
Fatherland (maidan.org.ua, February 14).

Tymoshenko may actually have the best credentials for creating a unified
party. Fatherland is far better organized than any of the political parties
inside Yushchenko's Our Ukraine, itself a testimony to Tymoshenko's
organizational skills. Her position will be further enhanced in September,
when constitutional reforms will increase the role of parliament and
government at the expense of the executive. (End)
==========================================================
20. OUT OF THE BLACK HOLE
Flat tax rates in Estonia, Latvia, Russia and Ukraine have proved successful

COMMENTARY: by Rastislav Kacer and Marian Tupy
The Wall Street Journal, New York, NY
Thursday, February 17, 2005

Next week, President George W. Bush will visit Slovakia to meet Slovak
officials and hold a summit with Russian President Vladimir Putin. Though
Mr. Bush's trip will likely be dominated by foreign policy, his travel
destination should also be seen as an acknowledgment of the changes that
Slovakia has undergone the past few years. Once politically authoritarian
and economically unfree, Slovakia has made considerable progress toward
democracy and the free market. Moreover, some of the economic reforms that
Slovakia recently undertook are relevant to Mr. Bush's ambitious second-term
domestic agenda.

The last visit by a U.S. president to Slovakia dates back to November 1990,
when George H. W. Bush was in the White House and Slovakia was still part
of the Czech and Slovak Federal Republic. On Jan. 1, 1993, this federation
ceased to exist and Slovakia became independent. Slovakia's early years were
not easy, however. The government of nationalist Prime Minister Vladimir
Meciar became increasingly authoritarian and attempted to silence its
political opponents.

The privatization of state enterprises was deeply corrupt, with many
companies "sold" to government supporters at fire-sale prices. Worries about
Slovakia's political system delayed the country's entry to NATO and the EU.
Western leaders shunned the country. Madeleine Albright, the U.S. secretary
of state under President Clinton, went as far as to call Slovakia a "black
hole in the heart of Europe."

Much has changed since then. Mr. Meciar was ousted in 1998 by a coalition
led by Mikulas Dzurinda. But Mr. Dzurinda presided over an ideologically
disparate government and was thus unable to push through economic
liberalization. That changed after Mr. Dzurinda's re-election in 2002 and
the formation of Slovakia's first market-friendly government.

The government proceeded to improve Slovakia's microeconomic environment
by eliminating unnecessary business regulation. In recognition of these
improvements, the World Bank's "Doing Business in 2005" report declared
Slovakia the world's leading reformer and ranked it among the top 20
countries with the best business conditions.

As a consequence of economic liberalization, Slovak macroeconomic
performance improved as well. Between January 2000 and June 2004, cumulative
foreign direct investment to Slovakia rose five-fold. The list of foreign
investors included a number of American blue chips such as Citibank, Ford,
Motorola, U.S. Steel and Whirpool. Economic growth accelerated to 4.9% last
year from a low of 1.5% in 1999.

According to the Ministry of Labor, the Slovak unemployment rate fell from
19.8% in January 2001 to 13.1% in December 2004. In addition, Slovak
foreign-policy objectives were met in 2004 when the country joined both NATO
and the EU. Steve Forbes, who visited Slovakia in 2003, wrote in Forbes
Magazine: "The Slovak Republic is set to become the world's next Hong Kong
or Ireland, i.e., a small place that's an economic powerhouse."

But it is Slovakia's reform of its tax and pension systems that may be of
particular interest to Mr. Bush. On Jan 1, 2004, Slovakia adopted a 19% flat
income and corporate tax rate. The dividend tax and a plethora of tax
exemptions were eliminated. The tax reform has resulted in an increase of
tax revenues from SK 200 billion in 2003 to SK 209 billion in 2004 -- some
30% above government expectations. This tax reform is part of a regional
trend.

Flat tax rates in Estonia, Latvia, Russia and Ukraine have also proved
successful. More recently, the flat-tax club grew to include Georgia,
Romania and Serbia. As Alvin Rabushka of the Hoover Institution argues,
"President Bush's most effective way to promote tax reform [in the United
States] is to showcase the experiences of Eastern and Central Europe."

Like Social Security in the U.S., the Slovak pay-as-you-go retirement scheme
faced adverse demographic trends and, consequently, long-term financial
shortfalls. The Cato Institute's Jose Piñera, who as the former Chilean
minister of labor and social security presided over the original social
security privatization in Chile, helped Slovak reformers design legislation
that allows Slovak workers to invest half of their social security
contributions into private accounts. The legislation went into effect this
year. Already more than one-third of eligible workers have switched to
private accounts. Other European countries, including Hungary, Poland
and Sweden, also allow their workers to save privately.

Of course, much work still remains to be done in Slovakia. Government
spending as a percentage of gross domestic product and payroll taxes
continue to be high, impeding additional investment and growth. Although
Slovak parents already have an unrestricted choice of schools -- state,
private or parochial -- for their children, reform of higher education needs
to be accelerated. Initial steps toward liberalization of the health-care
sector will need to be followed up by a more wide-ranging reform.

Still, the tax and pension reforms in Slovakia and other countries of
Central and Eastern Europe represent a liberalizing trend that other
countries would find to their advantage to follow. Mr. Bush can see so
for himself next week. -30- [The Action Ukraine Report Monitoring]
----------------------------------------------------------------------------
Mr. Kacer is the ambassador of the Slovak Republic in the United States
and Mr. Tupy is the assistant director of the Project on Global Economic
Liberty at the Cato Institute.
==========================================================
21. NEWCOMERS PULL EUROPEAN UNION EASTWARD
Polish President Uses Ukraine Success As Leverage to Reorient Bloc

By Marc Champion, Staff Reporter
The Wall Street Journal, New York, NY
Thursday, February 17, 2005; Page A11

For Polish President Aleksander Kwasniewski, the next stop on his freedom
tour is Moldova.

Mr. Kwasniewski, a staunch U.S. ally and leader of the European Union's
largest new member nation, was a top mediator in peacefully resolving
Ukraine's presidential-election crisis late last year. "It showed we can do
this," Mr. Kwasniewski said in a recent interview, referring to the EU's
often-maligned capacity to conduct an effective common foreign policy. "Now
we have new challenges -- Moldova, Transdniestria, Belarus -- and Poland is
prepared to be involved."

Ukraine's revolution exchanged a Russian-oriented leadership in Kiev for a
Westward-leaning one, a hugely popular event in Poland and an important U.S.
and EU foreign-policy goal. Mr. Kwasniewski's role -- in which he called on
old friendships and helped dissipate a planned confrontation with
demonstrators protesting Ukraine's initial vote -- also showed clearly how
the former communist countries that joined the EU less than a year ago are
changing the bloc.

And at a time when some Poles are questioning what they gained from
supporting the U.S. invasion of Iraq and sending troops to run one of three
security zones there, Poland's role in Ukraine has shown how joining the EU
has drastically boosted Poland's influence in its eastern backyard.

"It's a really dramatic change in the way European policy is made," says
Timothy Garton Ash, who teaches European history at Oxford University in
Britain. "This is the first case where the new member states have changed EU
policy, and frankly, the smart money now has to be on Ukraine becoming a
member of the European Union."

Ukraine , Mr. Kwasniewski says, is just the start. Next up, he adds, is
Moldova. A small, poverty-stricken former Soviet republic squeezed between
Ukraine and Romania, Moldova is crippled by a breakaway territory that still
hosts a large Russian army base and is among the largest trafficking centers
for arms, drugs and other contraband in Europe.

"Why has Europe accepted this for such a long time, for 12 or 14 years
already?" Mr. Kwasniewski asks. With Western-leaning Viktor Yushchenko as
Ukraine's new president -- and elections in Moldova due in March that are
likely to weaken the ruling Communist Party's hold there -- Mr. Kwasniewski
sees an opportunity for reuniting Moldova and ultimately bringing it into
the EU with Ukraine .

None of this is going to make Mr. Kwasniewski, who was a minister in two of
Poland's last Communist governments in the 1980s, popular with the Kremlin,
already infuriated by his role in Ukraine . In December, Russian President
Vladimir Putin accused Mr. Kwasniewski of trying to isolate Russia.

But the new EU members' strategic impetus to promote stability in their
eastern neighbors and push for their eventual EU entry is strong. "The EU's
border would push further east, which is important for security reasons, and
it would put us further towards the center of the EU," says Mr. Kwasniewski,
who was joined by Lithuanian President Valdas Adamkus alongside EU
foreign-policy chief Javier Solana in the Ukraine mediation.

Mr. Kwasniewski for years has taken on a lonely post as Ukraine's defender
in the West at a time when the country, under former President Leonid
Kuchma, was dogged by allegations ranging from corruption to arms sales to
Iraq -- accusations denied by Mr. Kuchma.

So in November, when Mr. Kuchma found himself facing hundreds of thousands
of protesters -- contesting the results of a presidential election in which

Mr. Kuchma's favored candidate, Prime Minister Viktor Yanukovich, was
declared the winner -- Ukraine's former president called Mr. Kwasniewski at
1:30 a.m., according to the Polish president.

"I said, 'No violence, I'm coming to Kiev,' " recalls Mr. Kwasniewski, a
fluent Russian speaker. He says Mr. Kuchma sounded as though he was under
pressure to disperse the protesters. Mr. Kuchma said on the phone that he
never would authorize the use of force, according to Mr. Kwasniewski.

Later, driving from Mr. Kuchma's office on the day of the first of three
EU-mediated round-table talks, Mr. Kwasniewski says he got a phone call
warning him that miners from the Donetsk region in Eastern Ukraine were on
their way to confront the protesters in Kiev's central Independence Square.
He says he called Mr. Yanukovich's campaign manager, Serhiy Tyhypko.

"I said to Tyhypko, 'You remember that we worked together?' " Mr.
Kwasniewski recalls, adding that he had helped Mr. Tyhypko get a job in
Europe at one point. "I said, 'Please don't do such a stupid thing...it
means a bloody and unpredictable situation, maybe even civil war.' " (Both
Mr. Kuchma and Mr. Tyhypko have left Kiev for undisclosed locations since
the elections and couldn't be reached for comment.)

The miners were sent home and the first round of talks between the
candidates, Mr. Kuchma, Russia and the EU went ahead that night. The
negotiations concluded with an agreement that neither side would use force
and that the Supreme Court would decide, in an open session, whether the
first election was fraudulent.

Mr. Kwasniewski, who says he insisted on the open-court deliberations,
nonetheless stresses that his and the EU's roles in Ukraine's peaceful
revolution were marginal next to those played by Ukrainian demonstrators and
leaders. But he still rates the outcome as one of the four highlights of
almost 10 years in office that began when he beat Solidarity leader Lech
Walesa for the presidency in 1995. The others were taking Poland into the
North Atlantic Treaty Organization and the EU, and pushing through Poland's
first post-communist constitution.

EU diplomats acknowledge that Mr. Kwasniewski's contacts and Poland's deep
historical knowledge of Ukraine helped the mediation. But they say it was
possible only as part of an EU team, in which Mr. Solana effectively
represented the more traditional EU members, who are more cautious toward
Ukraine and anxious to avoid provoking Russia. -30-
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