ACTION UKRAINE REPORT - AUR

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

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

By the Organisation for Economic Co-operation & Development (OECD)

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

WASHINGTON, D.C., WEDNESDAY, SEPTEMBER 5, 2007

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

1. OECD ECONOMIC ASSESSMENT OF UKRAINE 2007
Morgan Williams, SigmaBleyzer
President, U.S.-Ukraine Business Council (USUBC)

Washington, D.C., Wednesday, September 5, 2007

2. DEAL CASTS DOUBT OVER UKRAINE TRANSPARENCY
By Roman Olearchyk in Kiev, Financial Times
London, United Kingdom, Monday, September 3, 2007

3. YULIA TYMOSHENKO BLOC (BYuT) SLAMS GAS PRICE CAP
BYuT opposed to economic interventionism, wants Decree 31 repealed
BYuT Inform Newsletter, Issue 46, Kyiv, Ukraine, Tue, 28 August 2007

4. UKRAINIAN PRESIDENT ORDERS PROBE OF GAS PRICING

SCHEME BY STATE OWNED NAFTOHAZ UKRAYINY
UT1, Kiev, in Ukrainian 0949 gmt 31 Aug 07
BBC Monitoring Service, United Kingdom, Fri, Aug 31, 2007

5. SHELL CONFIRMS INTEREST IN UKRANIAN MINERAL RESOURCES
Interfax, Kyiv, Ukraine, Thursday, August 23, 2007

6. "GAZPROM BECOMES INVOLVED IN UKRAINIAN ELECTIONS"
Impact of Gazprom pricing on Ukrainian election campaign examined
REPORT: by Mikhail Sergeyev
Nezavisimaya Gazeta, Moscow, in Russian 23 Aug 07
BBC Monitoring Service - United Kingdom, Aug 24, 2007

7. NO MORE CHEAP GAS FOR RUSSIA'S NEIGHBORS
Price for Ukraine is expected to be raised to $180 from the present $130.
OPINION & ANALYSIS: By Mikhail Khmelev
RIA Novosti economic commentator
NIA Novosti, Moscow, Russia, Friday, August 31, 2007

8. RUSSIA AND UKRAINE ARE DRIFTING APART
"If those Orange crazies get into the halls of power again, gas
prices for Ukraine would soar to $300 per thousand cubic meters."

INTERVIEW: With Petro Simonenko, Leader, Communist Party of Ukraine
By: Interfax Ukraine, Vremya Novostei, Moscow, Friday, Aug 31, 2007

9. UKRAINIAN IGOR KOLOMOISKY INVESTS US$110 MILLION TO
ACQUIRE AN INTEREST IN CME AND JOIN BOARD OF DIRECTORS
PR Newswire (US), Thursday, August 30, 2007

10. UKRAINE GOVT STOPS SALE OF ITS STAKE IN INSULIN
MAKER INDAR TO POLISH COMPANY BIOTON
By Malgorzata Halaba, Dow Jones Newswires
Warsaw, Poland, Monday, August 27, 2007

11. UKRAINIAN GROUP JOINS AUSTRALIAN CO BIDDING FRAY
Australian manganese and nickel miner Consolidated Minerals
Elizabeth Fry in Sydney, Financial Times, London, UK, Fri, Aug 31 2007

12. FRENCH CONTRACT TO BUILD SARCOPHAGUS AROUND

CHERNOBYL NUCLEAR REACTOR WORTH $500 MILLION
AFX Europe (Focus), Paris, France, Thu, Aug 30, 2007

13. FRANCE'S SOUFFLET, AUSTRALIA'S ABB GRAIN FORM

UKRAINIAN JOINT VENTURE FOR EXPORTING ACTIVITIES

Reuters, Paris, France, Wednesday, August 29, 2007

14. U.S.-UKRAINE FOUNDATION (USUF) JOINS THE U.S.-

By Morgan Williams, SigmaBleyzer
President, U.S.-Ukraine Business Council (USUBC)
Washington, D.C., Wednesday, September 5, 2007

15. FINLAND: HISTORY DICTATES TERMS OF RUSSIA TRADE
Stockmann wants to replicate its Russian and Baltic experiences in Ukraine
By David Ibison, Financial Times, London, UK, Tuesday, Sep 4 2007

16. EUROPE'S FUNK OVER ITS NEIGHBOURS
Countries such as Ukraine need the perspective of eventual
membership, however distant, not least as a lever for reform.
EDITORIAL: Financial Times, London, UK, Tue, September 4 2007

17. UKRAINE SEEKS DISTANCE FROM EU NEIGHBORHOOD POLICY
By Ahto Lobjakas, Radio Free Europe, Radio Liberty (RFE/RL)
Prague, Czech Republic, Monday, September 3, 2007

18. UKRAINE'S PARLIAMENT DEFIES PRESIDENT YUSHCHENKO
By Roman Olearchyk in Kiev, Financial Times
London, United Kingdom, Tue, September 4 2007

19. UKRAINE ELECTION UPDATE, ISSUE ONE

The PBN Company, Kyiv, Ukraine, Friday, August 31, 2007

20. INTEL INVESTS IN EDUCATION, NADRA BANK DONATES

MEDICAL EQUIPMENT, CSR MEDIA SEMINAR LAUNCHED
Ukraine Corporate Social Responsibility (CSR) Bulletin
The Eurasia Foundation, Kyiv, Ukraine, Tue, September 4, 2007

21. UKRAINIAN HIGHLANDERS: HUTSULS, BOIKOS, AND LEMKOS
Marko R. Stech, Internet Encyclopedia of Ukraine (IEU)
Toronto, Ontario, Canada, Tuesday, September 04, 2007

22. FIFTH WASHINGTON UKRAINIAN FESTIVAL, SILVER SPRING, MD
Saturday/Sunday, September 8-9, St. Andrew Ukrainian Orthodox Cathedral

Washington Ukrainian Festival Committee

Washington, D.C., Tuesday, September 4, 2007

23. UKRAINE'S QUEST FOR MATURE NATION STATEHOOD VIII
"Ukraine-EU Relations" Tue/Wed, October 16-17, 2007, Washington, D.C.

Steering Committee, Ukraine's Quest for Mature Nation Statehood

New York, New York, Tuesday, September 4, 2007
========================================================
1. OECD ECONOMIC ASSESSMENT OF UKRAINE 2007

Morgan Williams, SigmaBleyzer
President, U.S.-Ukraine Business Council (USUBC)

Washington, D.C., Wednesday, September 5, 2007

WASHINGTON - You will find below a news article about the release

of the Organisation for Economic Co-operation & Development's

(OECD) first ever "Economic Assessment of Ukraine 2007" report

and an executive summary of the contents and findings. USUBC is

pleased the OECD has prepared an economic assessment of Ukraine

and is working to distribute the OECD report to a wide audience.

If you would like to have a copy of the complete edition of the "OECD

Economic Assessment of Ukraine 2007" document with all the charts,

tables and graphs, please contact the USUBC at mwilliams@usubc.org.

The USUBC will send it to you as an attachment. The attachment is a

PDF 2.70 MP file.

For links to the executive summary, etc. see the OECD links at the end

of this article.

------------------------------------------------------------------------------------------------
REGULATORY AND COMPETITION REFORMS CRITICAL TO
UKRAINE'S FUTURE ECONOMIC GROWTH SAYS OECD REPORT

Organisation for Economic Co-operation & Development (OECD)
Paris, France, Tuesday, September 4, 2007

PARIS - Sustaining Ukraine's strong economic growth will require firm action
to cut red tape and bring down barriers to competition, says a new OECD
report.

It adds that opening up markets to domestic as well as foreign entrants
would boost productivity growth while public administration reform and a
stronger legal system are needed to improve the business climate and tackle
corruption.

In its first Economic Assessment of Ukraine, the OECD says the factors that
have helped boost average annual growth to over 7 percent over the past six
years are unlikely to last. Import prices for energy are set to rise as
cheap Russian gas becomes a thing of the past.

Meanwhile, the current boom in consumer credit is bound to slow as household
debt increases. Rapid productivity growth, which came quite easily during
the initial recovery from the economic crisis of the 1990s, is now becoming
harder to achieve.

Nevertheless, the OECD concludes that with the right policies and
institutions, the country should be able to sustain strong economic growth
over the longer term.

The key will be Ukraine's success in shifting to a pattern of
self-sustaining investment and innovation-led growth. But framework
conditions for business are poor, making any long-term undertaking
extremely risky.

Entrepreneurs are hampered by the uncertainty and unpredictability
surrounding much public policy as well as by heavy-handed regulation in
many spheres.

Excessive state intervention fuels corruption, as well as distorting
markets, while the weakness of the legal system undermines the security of
property rights.

The report recommends regulatory and other reforms to boost competition
and calls for a reduction of the role played by state-owned companies in the
economy.

According to the analysis of product-market regulation presented in the
Assessment, the regulatory burden in Ukraine is heavier than in any OECD
member country. Yet de-regulation can provide only part of the solution.
The report adds that Ukraine needs better, rather than simply less,
regulation.

It also needs continued prudent macroeconomic management. The report
praises the budgetary discipline that has kept debt low and public deficits
in check since 1999.

This has helped restore confidence and supported economic growth. But
taxes are too high and the scope to cut them is limited by the heavy burden
of pension spending, according to the study.

Allowing the Ukrainian hryvnia, nominally pegged to the US dollar, to
fluctuate more freely on the foreign exchange markets could help reduce
inflation volatility and reduce the risks associated with the increasing use
of the dollar inside the country.

Ukraine is not one of the 30 member countries of the OECD but has
participated in number of OECD studies in areas such as agriculture,
energy, the environment and investment policy.
--------------------------------------------------------------------------------------------------
----- CONTENTS -----

CHAPTER 1. MACROECONOMIC PERFORMANCE AND

POLICY: THE CHALLENGE OF SUSTAINING GROWTH

This Chapter presents an analytical overview of recent economic
performance and macroeconomic policy. Its main conclusions are as
follows:

Recent strong growth has been partly driven by factors that are likely
to prove transitory. If Ukraine is to sustain strong growth over the
medium-to-long term, it must make the transition to a pattern of
self-sustaining investment- and innovation-led growth.

Macroeconomic management kept debt low and deficits in check, but
pension system sustainability presents a serious challenge, and the
economy is already subject to a very high level of fiscal pressure.

A de facto nominal dollar peg remains the cornerstone of monetary policy.
While such a peg served Ukraine well in the aftermath of the 1998 financial
crisis, it is now contributing to inflation volatility and increasing risks,
particularly those associated with growing dollarisation.

The major challenges facing Ukraine as it seeks to embark on a sustainable
"catch-up" path include improving framework conditions for business,
reforming product markets to make entry and exit easier, and strengthening
competition.

SUMMARY OF CHAPTER ONE -----------

After a decade of crisis, Ukraine has been enjoying

a period of sustained strong growth -----------

Real GDP growth averaged an impressive 7.4% during 2000-06, as the
economy bounced back from the severe transition recession of the 1990s
(Table 1). Yet there is more at work here than simply a post-crisis
recovery.

The achievement of macroeconomic stabilisation together with the structural
policies of the late 1990s did much to harden firms' budget constraints and
to unleash at last the Schumpeterian processes of creative destruction that
drive economic development.

Like many CIS countries, Ukraine lagged the more advanced transition
countries of Central Europe with respect to market-oriented reforms, as
governments often focused more on preventing structural change than
facilitating it. Hence, there is much still to be done in order to make
strong growth more sustainable.

One of the major emphases of this report is therefore on what more Ukraine
can do to reduce the many remaining barriers to entry, exit and competition
and thereby to stimulate a greater degree of dynamism and flexibility than
its market economy has yet achieved.

Tackling these issues is all the more urgent now because, although Ukraine
continues to grow strongly and the scope for catch-up remains considerable,
a number of the factors that have underpinned growth since 1999 have
exhausted, or will soon exhaust, their potential.

Table 1. Basic economic indicators
Source: State Statistics Committee of Ukraine; National Bank of Ukraine;
IMF; and IFS database. [The various charts, tables and graphs could
not be included in this e-mail. Please refer to the links below or contact
Morgan Williams at the USUBC for a complete copy of the OECD
report.]

Growth has been driven by domestic consumption and

supported by rising terms of trade ----------

In the initial phase of its recovery after a decade of contraction, Ukraine
benefited from a sharp devaluation of the hryvnia and from the presence of
substantial spare capacity. Throughout the period, Ukraine has also enjoyed
comparatively low energy prices.

Growth has been broad-based across sectors, with the largest contributions
coming from services - the services share in total value added rose by 10
percentage points during 2000-05. On the demand side, growth since 2001 has
been driven chiefly by booming private consumption, although the investment
contribution has also been substantial.

Rapidly growing household consumption has been supported by rapid increases
in wages and social transfers, as well as spectacular growth in retail
credit (Figure 1).

Rising incomes have benefited the great mass of Ukrainian households, and
both unemployment and poverty have fallen sharply since 1999. Demand
growth was supported by a cumulative 17% increase in the terms of trade
during 2002-06.

This was primarily the result of strongly rising international prices for
metals, which account for around 40% of exports. In 2006, metals price
increases were sufficient even to offset the shock of a near-doubling of
import prices for Russian natural gas.

Figure 1. Credit growth Year-on-year; Source: National Bank of Ukraine.

Firms need to adapt to less favourable external conditions ----------

Despite healthy productivity growth in manufacturing and steadily rising
terms of trade, the non-mineral trade surplus has fallen rapidly in recent
years. This is in part because Ukrainian industry has largely exhausted the
post-crisis gains in labour-cost competitiveness.

Productivity gains far outstripped wage growth in the first years of the
recovery, thanks in large measure to widespread labour-shedding and more
active restructuring, but wages have been rising rapidly in recent years and
this gap has now closed. As a result, real appreciation in terms of unit
labour costs has been much faster than CPI-based measures.

A comparison of emerging economies with respect to dollar wage costs
indicates that they have now reached a level in Ukraine that roughly mirrors
the aggregate productivity of the economy (Figure 2).

Figure 2. Relative GDP per capita and the price/wage level (2005, OECD=100)
1. Ratio of PPPs for gross domestic product to exchange rates.
Source: OECD; Russian Federal Service for State Statistics and State
Statistics Committee of Ukraine.

Fiscal discipline has underpinned the recovery, but the

level of fiscal pressure is too high ----------

The maintenance of fiscal discipline since 1999 has been a major
achievement; keeping debt low and deficits in check has helped restore
confidence and support growth. However, the degree of fiscal pressure has
risen markedly since 2003 and is now probably excessive.

A sizeable and highly consumption-oriented shift in fiscal policy during
2004-05 pushed the expenditure-to-GDP ratio above 43%, mainly as a result
of a near-trebling of the basic pension in real terms.

In 2005, the government executed an impressive fiscal consolidation, chiefly
via the elimination of tax privileges for firms rather than expenditure
cuts.

The net result of these shifts in policy was a large-scale transfer of
resources from firms (with a higher propensity to save) to households (with
a higher propensity to spend).

Moreover, dramatic increases in pension benefits left the country with a
pension expenditure-to-GDP ratio in excess of 14%, one of the highest in
the world (Table 2). Given demographic trends, ensuring the long-term
sustainability of the pension system is likely to be impossible unless
current low retirement ages are adjusted upwards.

The heavy burden of pension spending also limits the scope for reducing
payroll taxes, which are exceptionally high and constitute a major incentive
to under-report wages and salaries.

The growth-impeding effect of Ukraine's high tax burden is reinforced by the
distortions created by the structure of taxation itself.

Despite evident progress in simplifying the corporate and personal income
taxes and reducing tax exemptions, there is still considerable room for
improving both tax administration and the design of the tax system while
broadening the tax base. The distortions created by the overly generous
simplified tax system are particularly problematic.

Table 2. Balance sheet of the pension fund (as a % of GDP)
Source: Ministry of Finance.

Reducing inflation should become the primary focus of
monetary policy ----------

A de facto nominal dollar peg remains the cornerstone of monetary policy.
While this nominal anchor helped Ukraine achieve macroeconomic stability
in the aftermath of the 1998 financial crisis, it is now contributing to
increasing inflation volatility and the risks associated with growing
dollarisation of households' and firms' assets and liabilities.

The current exchange-rate regime, combined with more attractive interest
rates on foreign currency loans, constitutes a particularly powerful
incentive to borrow in dollars (Figure 1).

Allowing the exchange rate to fluctuate more freely could make exchange-rate
risks more apparent to agents and thus help to reduce dollarisation. Greater
exchange-rate flexibility could also serve as the first step in a phased
transition towards an inflation-targeting regime.

Any transition to a new monetary policy framework will of necessity be
gradual, given the under-development of financial markets (particularly the
market for government securities), the relatively low level of monetisation
and the consequent weakness of the interest-rate channel.

Yet while the adoption of a fully fledged inflation-targeting regime must
therefore take some time, the authorities could begin by making greater use
of the exchange-rate channel, which appears to be relatively strong, to
reduce the level and volatility of inflation. Macroeconomic conditions now
appear to be broadly favourable for such a change.
--------------------------------------------------------------------------------------------
CHAPTER 2. REDUCING BARRIERS TO GROWTH: THE

ROLE OF INSTITUTIONAL AND REGULATORY REFORM

This chapter focuses on two aspects of economic governance in Ukraine.
The first concerns the basic institutions of Ukraine's market economy and
the framework conditions for business.

These remain a major impediment to sustained growth, in so far as they
deter investment. The issues here have primarily to do with the instability,
unpredictability and opacity of a great deal of public policy.

The second set of issues concerns the specific regulatory and institutional
barriers to entry, exit and restructuring, which constitute a related but
nevertheless distinct problem.

The overall burden of regulation in Ukraine is extremely heavy by OECD
standards and tends to distort, or at least mute, competition.

Exit mechanisms, in particular, function poorly in Ukraine: the empirical
evidence suggests that Ukraine has too little exit overall and that the link
between productivity and exit is very weak.

These findings highlight the potential contribution of competition-friendly
regulatory reform to Ukraine's long-term economic prospects.

SUMMARY OF CHAPTER 2 ----------

Continued strong growth now depends primarily on

improving the business climate ----------

The economy has now built up considerable momentum, and Ukraine still
has considerable scope for "catch-up" growth.

Nevertheless, some of the factors underlying recent growth are transitory:
the terms of trade are expected to deteriorate this year; energy prices are
set to rise further; the period of "easy" productivity gains via labour
shedding and increases in capacity utilisation has come to an end; and
consumer credit growth is bound to slow.

If Ukraine is to sustain strong growth over the medium-to-long term,
therefore, it will need to make the transition to a pattern of
self-sustaining investment- and innovation-led growth.

In addition to capital deepening and more efficient resource allocation,
this will require maintaining robust total factor productivity (TFP) growth
at a time when production factors are being used more intensively.

Poor framework conditions for business currently constitute the principal
obstacle to increasing the level and efficiency of investment. Entrepreneurs
face very high levels of legal, regulatory and policy uncertainty, making
any long-term undertaking highly risky (Table 1).

The uncertainty and unpredictability of state action stem in many cases from
a lack of transparency. These factors, in turn, fuel widespread corruption
and undermine property rights. Improving the quality of public
administration and strengthening the rule of law thus remain absolutely
critical priorities.

A consistent, broad-based policy of de-regulation could also do much to
address these problems, since excessive and often inconsistent regulation
tends to create opportunities for arbitrary bureaucratic action and
rent-seeking.

However, in many spheres, Ukraine needs better regulation rather than
simply less regulation. This will require correcting the many gaps and
contradictions that exist in legislative and regulatory frameworks.

Table 1. Governance indicators, 1996-2006 Percentile ranks (1)
1. A higher score denotes a better rank. Source: World Bank
Governance Research Indicator Country Snapshots (2007).

Barriers to entry and impediments to exit need to be reduced ----------

Stimulating robust productivity growth and increased innovation will also
require a profound reform of product markets in order to enable the process
of creative destruction to unfold. Cross-national empirical studies find
that higher firm turnover (i.e. higher entry and exit) is growth-enhancing.

Because the restructuring of large state-owned enterprises (SOEs) is fraught
with difficulty and often subject to considerable delay, reducing barriers
to entry and allowing the growth of new activities has been a crucial engine
of transformation in the more successful transition economies. Barriers to
entry and exit are still substantial in Ukraine.

The economy - particularly the industrial sector - is still dominated by
energy-intensive heavy industrial sectors, and this is one reason why so
much past policy has been oriented towards averting rather than facilitating
needed structural change. Empirical analysis of entry and exit confirms the
impression that Ukraine has particular problems with exit.

[1] Overall firm turnover rates in manufacturing (entry plus exit) tend
to be rather low by OECD standards, although entry rates rose sharply after
1995. Exit rates, by contrast, remain extremely low and appear to account
for most of the difference between Ukraine's turnover rates and those of
OECD members.

[2] Entering firms in Ukraine are significantly more productive than
incumbents - around 40% more productive on average, for the entire 1992-
2005 period. This may reflect entrants' awareness of the difficult
conditions in which they will operate - they will need to be exceptionally
efficient to have a reasonable chance to survive and grow.

[3] The selection of firms for exit in Ukraine appears to be
inefficient, as the link between productivity performance and exit is weak.
In particular, exiting new private firms are significantly more productive
than the surviving privatised firms and SOEs.

Implicit and explicit subsidies and excessive state

ownership add to the impediments to exit ----------

The weak link between productivity and survival is largely the product of
the wide array of explicit and implicit subsidies provided to particular
sectors and enterprises.

While these are not limited to "old" firms, it is fairly clear that such
subsidies enable poorly performing incumbents to remain on the market far
longer than they would otherwise.

Continued support for a large population of SOEs constitutes yet another
part of the problem with exit: on the official data, roughly 48% of the
country's capital stock was still in the hands of the state or municipal
authorities at the end of 2005, with a further 10-11% in mixed
public-private ownership.

The size of the SOE sector serves to limit both exit and restructuring;
this, in turn, reduces the scope for new entry, both because lack of exit
limits the resources available to new entrants and because SOEs often enjoy
formal or informal privileges that make it harder for entrants to compete
with them.

Moreover, the weak corporate governance of most SOEs means that many,
perhaps most, are easy targets for rent-seeking by insider-managers or well
connected outsiders.

In many cases, continued state ownership of such assets also distorts
competition and creates conflicts of interest for the authorities,
particularly where the state's role as regulator is in tension with its role
as owner. Over-regulation constrains firms' growth.

In Ukraine as elsewhere, barriers to entry, exit and reallocation are often
the product of excessive and often ill administered regulation.

A systematic assessment of product-market regulation (PMR) in Ukraine
using the indicators developed by the OECD Economics Department
highlights the potential contribution that competition-enhancing regulatory
reform could make to the country's economic performance:

[1] The level of overall product-market regulation is higher than that
of any OECD country in 2003 (Figure 1).

While Ukraine scores relatively well on some of the sixteen individual PMR
indicators, particularly in areas where reforms have recently been
undertaken, the burden of product-market regulation is well above the OECD
average with respect to all three major components of the aggregate
indicator: state control, barriers to entrepreneurship and barriers to trade
and investment.

[2] Overall, barriers to business growth appear to be more constraining
than barriers to entry. There has actually been considerable improvement
with respect to market entry in recent years, but the regulatory impediments
to growing businesses of whatever size remain extremely onerous.

The burden imposed by the excessive application of licensing and permit
regimes is particularly great (Figure 2), as is the cumulative cost of the
bewildering array of rules and regulations governing issues like property
registration and the conclusion of contracts. These serve little purpose
except to raise transaction costs, in terms of both time and money.

[3] Regulatory process is in some respects as much of a problem as
the substance of regulation. Ukraine scores rather poorly on indicators
concerned with such issues as the formulation of regulatory policy and
effective communication with the business community.

This reflects in part a failure to define with clarity the various roles
that the state is to play in the economy or to differentiate between them in
ways that avoid undesirable conflicts of interest.

Figure 1. Aggregate product-market regulation indicator
Source: OECD.
Figure 2. Product-market regulation indicator for licences and permits
--------------------------------------------------------------------------------------------------
CHAPTER 3. RAISING THE COMPETITIVENESS

OF THE ECONOMY

This chapter explores the challenge Ukraine faces in maintaining and
enhancing its competitiveness over the long term. Ukraine's current
international specialisation is rather narrowly based - it has revealed
comparative advantages in only a limited number of sectors.

Moreover, while productivity growth has been particularly impressive in
recent years, Ukrainian producers will come under increasing pressure in
future from rapidly rising energy and labour costs, and the tendency
towards real appreciation vis-Ю-vis dollar-linked Asian currencies.

Moreover, opportunities for relatively easy productivity gains via
labour-shedding and increased capacity utilisation are becoming rarer.
Enhanced competition could play a very important role in strengthening
competitiveness.

In Ukraine as elsewhere, competition stimulates better firm performance,
but competition in many markets in Ukraine is still too weak, owing to
structural factors, anti-competitive regulation and weak institutions.
Increased FDI inflows and renewed privatisation could also help Ukraine
maintain strong productivity growth.

The chapter presents the results of a study of the effect of privatisation
on multifactor productivity in Ukraine, which confirms the substantial
benefits of privatisation - to domestic or foreign owners - for productivity
growth.

SUMMARY OF CHAPTER 3 ----------

Maintaining external competitiveness is likely to prove

increasingly difficult in the years to come ----------

An analysis of Ukraine's revealed comparative advantages and disadvantages
reveals that the country's export competitiveness is very narrowly based:
its export structure is highly concentrated, chiefly in goods with a low
degree of processing (Figure 1).

Food products, minerals and metals accounted for 65% of the export bill in
2006, up from 59% in 2000.

Rapid wage growth has largely erased the labour-cost competitiveness gains
that Ukraine enjoyed after the 1998 crisis, and the competitiveness of the
export sector has been hit in recent years by sharp increases in the price
of natural gas imports and the tendency towards real appreciation vis-Ю-vis
dollar-linked Asian currencies.

Both these trends are likely to continue. The gas-price issue is
particularly sensitive, given that a large part of Ukraine's export bill
consists of energy-intensive manufactures.

Moreover, opportunities for relatively easy productivity gains via
labour-shedding and increased capacity utilisation are becoming rarer.
Finally, the evidence suggests that Ukrainian manufacturers find it
difficult to compete on quality in non-CIS markets.

Figure 1. Share of high and medium high-technology in manufacturing
exports to OECD countries As a percentage of manufacturing exports,
2004 Source: OECD, STAN Bilateral Trade Database 2006/I and OECD
calculations based on OECD ITCS database.

Competition-friendly regulatory reform could contribute

to stronger productivity growth............

The results of the PMR exercise suggest that regulatory reform could
contribute to greater efficiency of both resource allocation and production,
accelerating Ukraine's convergence with its more advanced neighbours.

Indeed, the potential benefits of increasing competition are likely to be
greater in Ukraine than in most OECD members or in many neighbouring
countries, because competition in Ukrainian markets, though increasing in
recent years, is relatively weak overall.

Markets tend to be very concentrated at national level and the high degree
of segmentation between regional markets means that competition is weaker
still at regional level.

The positive effects of enhanced competition find confirmation in an
econometric analysis of the impact of competition on labour productivity,
using enterprise-level data for 2000-05 (Table 1).

The following conclusions emerge from this analysis:

[1] Concentration has a negative and highly significant effect on
labour productivity growth.

[2] These results are robust for manufacturing as a whole, and there is
no evidence that the relationship is stronger when import- or export-
competing industries are considered separately.

[3] For market services, the effect is found to be weaker but still
substantial.

[4] Import competition has a positive impact on domestic firms'
productivity. The effect is stronger where foreign penetration is lower,
which may suggest that the initial opening to imports has a particularly
strong effect in stimulating local firms to raise productivity.

Table 1. Labour productivity regressions
Fixed effects estimations. t-statistics in parenthesis.
* significant at 10% level; ** significant at 5% level; *** significant at
1% level. 1. Distance to frontier is computed as the difference between the
highest productivity in the sector and firm's productivity.
Source: OECD calculations using the register of Ukrainian enterprises,
2000-05.

......and enhance Ukraine's attractions as a location for

foreign direct investment ----------

One of the major disappointments of Ukraine's performance to date has
been its relative failure to attract foreign direct investment (FDI): the
stock of FDI per capita reached only 372 USD in 2005, just over 16%
of the corresponding figure for neighbouring Poland.

This would appear to be far below Ukraine's potential, given its human
capital endowments and the comparative advantages conferred by relatively
low wages, proximity to EU markets and the size of the domestic market.

Institutions like the rule of law and the quality of bureaucracy are among
the most important determinants of FDI location, and the institutional and
regulatory problems identified above appear to constitute the major reasons
for low FDI inflows.

While the economy is very open in many respects, the PMR benchmarking
exercise highlights the exceptionally high regulatory barriers to trade and
investment in Ukraine.

However, one should not exaggerate the degree of discrimination: the main
barriers to investment are rooted in the overall institutional and
regulatory framework encountered by all firms, foreign and domestic. Given
the potentially substantial positive effect of FDI on domestic TFP growth,
Ukraine is missing a major opportunity to facilitate industrial
modernisation.

However, the corollary to this conclusion is that steps to address
regulatory and institutional weaknesses could bring significant benefits.

Accession to the World Trade Organisation (WTO) is likely to help. The
direct benefits of WTO accession, via tariffs changes and improved access
to foreign markets, are likely to be limited, but the welfare gains arising
from the reduction in formal and informal barriers to foreign investment,
the strengthening of property rights and the overhaul of technical
regulation are expected to be substantial indeed.

Further privatisation could magnify the benefits

of increased competition ----------

Research on developed market economies, developing countries and economies
in transition shows that private enterprises generally respond more readily
to increasing competitive pressures than do SOEs and that the gains from
privatisation tend to be greater where privatised enterprises are subject to
competition.

This complementarity between competition and privatisation suggests that
competition-enhancing reforms would achieve greater impact if accompanied
by a reduction in the role of SOEs in the economy. The loss of privatisation
momentum in Ukraine is therefore particularly unfortunate.

The defects of Ukrainian privatisation processes cannot be denied and
account for much of the criticism of privatisation within the country, but
they should not deflect attention from the positive impact of privatisation
on enterprise performance.

An analysis of longitudinal, enterprise-level data on manufacturing firms
finds that in the case of privatisation to domestic owners, total factor
productivity increases by between 10 and 25%, depending on the
specification used, during the seven years following privatisation (Figure
2).

The impact of privatisation to foreign owners appears to be even stronger,
though the results are less robust, owing to the sample size. Positive
effects appear within a year of privatisation and continue increasing
thereafter. This implies that the contribution of privatisation to aggregate
manufacturing productivity growth in recent years has been substantial.

Figure 2. Multi-factor productivity impact of privatisation
Source: Brown and Earle (2007), "The Productivity Effects of Privatization
in Ukraine: Estimates from Comprehensive Manufacturing Firm Panel Data,
1989-2005", Background paper prepared for the 2007 Economic Policy
Seminar on Ukraine, May.
-------------------------------------------------------------------------------------------------
LINK: Economic Surveys: www.oecd.org/eco/surveys/ukraine
LINK: Policy Brief: http://www.oecd.org/dataoecd/26/0/39196918.pdf

NOTE: If you would like to have a copy of the complete edition of the

"OECD Economic Assessment of Ukraine 2007" document with all the

charts, tables and graphs, please contact the USUBC in Washington, at

mwilliams@usubc.org. USUBC will send it to you as an attachment.

The attachment is a PDF 2.70 MP file.
-------------------------------------------------------------------------------------------------

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2. BUSINESS DEAL CASTS DOUBT OVER UKRAINE TRANSPARENCY

By Roman Olearchyk in Kiev, Financial Times
London, United Kingdom, Monday, September 3 2007

Ukraine's wealthiest man, Rinat Akhmetov, has significantly increased his
interest in a large electricity generating company through a controversial
debt-for-equity transaction that has cast a shadow over Kiev's ability to
privatise state assets transparently.

With snap parliamentary elections just weeks away, the deal has taken on
political overtones. Opposition parties have cried foul, alleging the sale
was fixed in favour of a businessman close to Ukraine's premier, Viktor
Yanukovich, and have pledged to challenge it.

Foreign investors who had their shares diluted through the deal are also
upset.

The deal is not expected to scare off the record amounts of foreign
investment flowing into Ukraine in recent years. However, it has left many
wondering if Kiev will improve its record on privatisations and put foreign
investors on an equal footing.

Officials representing the state's interest in Dnipro-energo agreed last
week to a 52 per cent share capital increase, boosting Mr Akhmetov's
interest more than four times to about 40 per cent. The stake has been
valued at $400m to $500m.

In return, energy companies controlled by Mr Akhmetov agreed to cover
$200m of Dniproenergo's debt to creditors, mostly state enterprises.

The government's interest in Dniproenergo was diluted by a third to 50 per
cent. Minority shareholder interests were also diluted.

Proponents of the deal, including Mr Yanukovich's government, point to
the need to pay off Dnipro-energo's debts.

A top manager at Mr Akhmetov's DTEK energy holding said the transaction was
"completely transparent" and legal, adding that his company would invest an
additional $200m into the debt-ridden company.

Critics argue the deal was conducted exclusively in the interests of Mr
Akhmetov. Some analysts said the government could have covered
Dniproenergo's debts and raised funds for state coffers by selling shares in
an open tender.

Tomas Fiala, director of Kiev-based investment bank Dragon Capital, said:
"It's kind of an inside deal and not very transparent. Mr Akhmetov was
allowed to buy at $100 per share, a big discount to the market price."

Opposition politicians, with an eye on the snap parliamentary elections at
the end of September, have said the deal illustrates how Mr Yanukovich's
government kowtows to the interests of allied business tycoons. Mr Akhmetov
is an influential member of Mr Yanukovich's Regions party.

"We see how this government is working in tandem with business," said Yulia
Tymoshenko, a former prime minister and leader of the opposition BYuT bloc,
which trails closely behind Regions with 25 to 30 per cent of voter support.

The government has denied giving preferential favour to Mr Akhmetov, who
was not available for comment.

Viktor Yushchenko, Ukraine's pro-western president, has sharply criticised
Mr Yanukovich's handling of privatisation.

The Dniproenergo transaction is the latest in a string of controversial
privatisation tenders through which domestic and Russian businessmen have
grabbed prized assets at fire-sale prices.

Ms Tymoshenko's bloc warned that the government might tender prized
assets to allies through rushed sales during the political campaign before
being swept out of power.

The government has recently announced plans to sell several large
enterprises this autumn, including a vast chemical plant valued at $1bn and
minority stakes in six electricity utilities.

Ms Tymoshenko said her party would seek to reverse bogus sales as she did
during her brief 2005 tenure as premier following the Orange Revolution,
when her government reversed the sale of Ukraine's flagship steel mill,
Kryvorizhstal, sold controversially in 2004 during Mr Yanukovich's first
tenure as premier.

Mr Akhmetov and a partner bought the Kryvorizhstal mill for $800m in a
tender process that excluded foreign bidders. It was resold in 2005 to
Mittal Steel for $4.8bn.
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http://www.ft.com/cms/s/0/1499e88a-59b6-11dc-aef5-0000779fd2ac.html

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3. YULIA TYMOSHENKO BLOC (BYuT) SLAMS GAS PRICE CAP
BYuT opposed to economic interventionism, wants Decree 31 repealed

BYuT Inform Newsletter, Issue 46, Kyiv, Ukraine, Tue, 28 August 2007

The issue of gas is inseparable from Ukrainian politics and is once more
grabbing headlines as the government is accused of dragging its feet in
brokering a gas deal for 2008, and surreptitiously ceding an increasing
portion of the nation's gas infrastructure to Gazprom - Russia's monolithic
state-controlled gas company.

But of equal significance is a piece of less-publicised legislation that
threatens the foreign investment needed to develop the nation's domestic gas
and oil industry.

The story begins in January 2007 when the coalition government passed new
budget law. At the stroke of a pen, Decree 31 obliges any foreign company
partnering through a Joint Activity Agreement to sell its gas to Naftohaz
Ukrainy at $1.50 per thousand cubic feet - a rate that not only falls below
the current market price but is even less than the cost of production.

If Ukraine is to be successful in ramping up its annual gas production from
its current 20 billion cubic metres to 30 billion cubic metres in five years
(as stated by the Fuel and Energy Minister Yuriy Boyko), its government must
first attract foreign investment - in terms of both capital and expertise.

"Decree 31 is having a negative effect," said Viktor Pynzenyk, BYuT deputy
leader and its leading economic advisor, "it is a crude attempt to swell the
nation's coffers but in reality it is turning investors off and entirely
counter-productive.

"It's a case of robbing Peter to pay Paul, taking from businesses to
subsidise the consumer in the short-term while failing to invest in the
future."

"The aim of these policies introduced by the Yanukovych government is to
control the price of gas for the population on a scale far greater than
temporary oil caps in 2005," wrote Taras Kuzio, a Research Associate of the
Institute for European, Russian and Eurasian Studies, Elliott School for
International Affairs, George Washington University.

Mr Kuzio was referring to a temporary measure by then Prime Minister Yulia
Tymoshenko to prevent escalating fuel prices. For her efforts Ms Tymoshenko
was branded a populist - a label only now being revised as commentators
understand that the 2005 fuel crisis was engineered by a Russian government
intent to deliver a broadside to the fledgling Orange administration.

Ironically, Decree 31 is seeing Mr Yanukovych pursue populist policies at
the expense of engendering conditions to attract much needed foreign
investment to develop exploration, development and production of gas in
Ukraine.

The country barely provides 28 percent of its own gas needs and although it
has made strides to reduce gas consumption, it remains heavily reliant on
gas from Central Asia provided though the shady Swiss-registered
intermediary RosUkrEnergo.

For over 10 years, Cardinal plc has undertaken the exploration, production
and sale of oil and gas in Ukraine. Daunted by Decree 31, the company has
decided not sell gas at unprofitable prices and is instead putting gas into
storage.

Rob Bensh, Chairman and Chief Executive of its subsidiary, Cardinal
Resources, said that his company had petitioned the head of Natftohaz -
Ukraine's national gas company, the fuel and energy minister and prime
minister but with little response.

Speaking to the Kyiv Post, Mr Bensh said, "Ideally, we would like to see the
Yanukovych government voluntarily withdraw this law, which is contrary to
the long-term interests of Ukraine and its people."

Experts say that the extraordinary price capping of gas contradicts
Ukrainian law, such as the Civil Code and the Law on Foreign Investment.

The British listed Europa Oil and Gas (Holdings) plc took the matter to
court and won an order allowing it sell gas at market prices. However the
government has so far ignored the ruling.

BYuT is opposed to economic interventionism and wants Decree 31 to be
repealed. In addition, the bloc has outlined a raft of strategic initiatives
to overturn the nation's dependence on monopolies for importing energy and
establish Ukraine as an exporter of energy in its own right.

"The path to energy independence lies in attracting foreign investment and
expertise to collaborate in exploiting existing and new reserves. To impose
a decree that forces partnering companies to sell gas at a loss is foolhardy
and will scare away the very investors we seek," said Mr Pynzenyk,
"ultimately ordinary consumers will be penalised."

Mr Kuzio summed up the situation, "Ukraine's post-election new government
should be committed to three policies: attracting foreign investment,
battling corruption and energy independence. The Yanukovych government

has proven that it has no commitment to any of these three policies."

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4. UKRAINIAN PRESIDENT ORDERS PROBE OF GAS PRICING

SCHEME BY STATE OWNED NAFTOHAZ UKRAYINY

UT1, Kiev, in Ukrainian 0949 gmt 31 Aug 07
BBC Monitoring Service, United Kingdom, Fri, Aug 31, 2007

Ukrainian President Viktor Yushchenko has ordered that the
Prosecutor-General's Office to probe the scheme of gas purchase and sale
by the country's oil and gas national company, Naftohaz Ukrayiny.

Speaking at a coordinating meeting of heads of law-enforcement bodies held
in Kiev on 31 August, he criticized the system of intermediaries involved in
gas supplies to Ukraine.

The intermediaries they receive "extra profits" by making end customers pay
nearly 150 per cent of the purchase price, Yushchenko said. Yushchenko's
remarks were broadcast live by Ukraine's state-owned UT1 television.

Yushchenko said: "A separate issue, which has already been raised today and
which will always concern us, is energy, oil and gas activities, the issue
of intermediaries and extra profits earned today.

I would like to mention one thing. After signing gas contracts in 2007, the
price per consuming person has grown by 50 dollars over the year. A certain
company will receive 50 dollars. This is not because of growing prices but
only due to a change of intermediaries.

"Gas is sold to utility companies at 95 dollars [per 1,000 cu.m.]. Let me
stress, it is no more than 95 dollars. But it already costs 145 dollars when
people finally receive it. Let me correct myself, it is 143 dollars. This
price difference has certainly ended up in one's pocket. This is not a
result of the pricing policy. This is a result of fraud and cheating in the
system of gas distribution in the utility sector.

"Corruption appears if there is a conflict of interests where state assets
come into contact with private assets. There is no corruption between two
private businesses. Corruption emerges between a state asset and a private
interest.

"I demand that the Prosecutor-General's Office investigate what is happening
today in the gas field with regard to the pricing policy in the utility
sector and the end-user price. I would like to ask them to check in a week's
time whether the current scheme of gas purchase and sale by Naftohaz
Ukrayiny has the signs of corruption.

"I think it is important for me as the president and for the authorities to
learn what our gas storage facilities currently hold for the winter, what
belongs to Ukraine and what belongs to Naftohaz Ukrayiny and the what are
conditions of this storage since this is one of the foundations of our
security."

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========================================================

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========================================================
5. SHELL CONFIRMS INTEREST IN UKRANIAN MINERAL RESOURCES

Interfax, Kyiv, Ukraine, Thursday, August 23, 2007

KYIV - Shell Exploration & Production B.V. (The Netherlands) has
confirmed its interest in prospecting and developing oil and gas deposits
in Ukraine, including in the country's portion of the Black Sea shelf.

Shell is interested in any deposits on Ukrainian territory, the company's
public relations manager Antonius Papaspiropoulos told Interfax.

"Despite losing a tender for a product-sharing agreement on the Kerch
stretch of the Black Sea shelf, the company hasn't given up and is ready
to bid in similar tenders," he said.

Papaspiropoulos said there was dynamic progress in additional prospecting
in the Shebelinskoye and Zapadno-Shebelinskoye fields in the Dnepr-
Donetsk basin, in cooperation with Ukraine's Ukrgazbydobuvannya
company.

Seismic exploration of the fields is due to begin in late 2007-early 2008,
and drilling is scheduled for the first half of 2009. lg md
---------------------------------------------------------------------------------------------

FOOTNOTE: Shell is a member of the U.S.-Ukraine Business Council

(USUBC) in Washington, D.C.
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[return to index] [Action Ukraine Report (AUR) Monitoring Service]
========================================================
6. "GAZPROM BECOMES INVOLVED IN UKRAINIAN ELECTIONS"
Impact of Gazprom pricing on Ukrainian election campaign examined

REPORT: by Mikhail Sergeyev
Nezavisimaya Gazeta, Moscow, in Russian 23 Aug 07
BBC Monitoring Service - United Kingdom, Aug 24, 2007

Russian gas is at the center of political battles in Ukraine again.
Ukrainian Deputy Prime Minister Andrey Klyuyev stated yesterday [ 22 August]
that the price for imported Russian gas would remain unchanged in 2008 and
that the hypothetical price increase would not exceed the inflation rate.
Experts regard these promises as excessively optimistic.

A day earlier, the Naftohaz Ukrayiny head even announced the exact price --
$143 instead of the current level of $130 per 1,000 cubic meters.

A very comfortable price for Russian gas became an "unbeatable trump card"
in the propaganda campaign being waged by Viktor Yanukovych's party on the
eve of the Supreme Council early election scheduled for 30 September.

Yanukovych's political opponents have no arguments against these promises,
because neither Viktor Yushchenko's Our Ukraine nor former premier Yuliya
Tymoshenko's supporters enjoy Moscow's favors.

Nevertheless, some of them admit that Gazprom is not making profits on
deliveries to Ukraine, since it purchases Turkmenistani gas at $100 and
resells it with a minimum markup to its Ukrainian joint venture RosUkrEnergo
for further distribution in Ukraine.

At the same time opposition politicians in Kiev insist that even a slight
price increase should invariably be accompanied by a revision of the fee
paid by Russia for its gas transit to Europe.

Besides, they regularly raise the issue of giving up RosUkrEnergo's
middleman services. They point out that Naftohaz Ukrayiny and Gazprom are
fully capable of reaching direct agreement and thus save more than $900
million, which was RosUkrEnergo's profit earned on middleman services last
year.

Admittedly, Gazprom managed a year ago to break the linkage between European
transit charges and the price of gas supplied to Ukraine, and it is unlikely
that Moscow will want to retreat to its former position again. Nor does the
concern see any reason to give up RosUkrEnergo's services.

"We are conducting negotiations and it is too early to speak about lowering
or raising prices. I think we will know by mid-September at what price we
will be receiving gas next year," Andrey Klyuyev stated on Wednesday [ 22
August].

At the same time he said: Ukraine expects that it will be paying "the
current price plus the inflation rate." While answering a question on the
possibility of increasing the transit fee, Klyuyev stated that Ukraine and
Russia "are conducting negotiations at the expert level, but there have been
no results so far."

Meanwhile, the question of revision of transit fees for Russian gas has
become all but the focal point of political clashes in Ukraine.

In response to Yuliya Tymoshenko's accusations of national treason, the
Naftohaz Ukrayiny state company management issued a statement that "in
accordance with existing agreements the transit fee is fixed at $1.6 per
1,000 cubic meters per 100 kilometers and cannot be changed before 2009."

Nezavisimaya Gazeta was explained at Gazprom that "the transit fee was set
in January 2006 for five years" and declined to comment on the progress of
the talks on the gas price for Ukraine in 2008.

RosUkrEnergo official representative Andrey Knutov told Nezavisimaya Gazeta
yesterday that "the volume of the gas price increase for Ukraine in 2008
will become known only during the course of negotiations which should take
place this fall."

According to him, disputes over the price may continue in September, as well
as October or November. The basic terms of delivery were approved by the
parties long ago, whereas the new price for 2008 can be set in an addendum
to the earlier agreements between RosUkrEnergo and UkrHazEnerho (Naftohaz
Ukrayiny's subsidiary), which resells Russian gas on Ukraine's territory.

Meanwhile, Yuliya Tymoshenko bloc member Oleksandr Klyus told Nezavisimaya
Gazeta yesterday: "Even the slightest price increase should be accompanied
with an increase in the transit fee, which is much lower than the average
European level of $2.2 per 1,000 cubic meters per 100 kilometers." At the
same time, Klyus emphasized: This demand fully reflects the fundamental
position of Yanukovych's opponents.

At the same time Viktor Yanukovych himself publicly promised at a Cabinet
meeting in September 2006 that the gas price for Ukraine "will remain better
than the price paid by its neighbors until 2010."

Naftohaz state company representatives also emphasize the preferential
character of the current Russian gas price for Ukraine. They underscore that
the price of $130 is "the most acceptable commercial proposal in the
region."

"Armenia purchases gas at $180, the Baltic states at $200-210, Poland at
$240, and Slovakia and Hungary at $250. Even Moldova, which is situated
farther away from natural gas suppliers than Ukraine, purchases fuel at
$160," Naftohaz Ukrayiny specialists wrote.

Having said that, the cited data does not fully reflect reality, for it does
not mention gas deliveries to Belarus at $100 per 1,000 cubic meters and
obviously overstates the price for Russian gas supplied to Armenia.

Yerevan proposed Gazprom co-ownership of a number of energy facilities

and will receive Russian gas at $110 per 1,000 cubic meters through 2009 in
exchange for this. Therefore, Viktor Yanukovych has not fully managed to
keep his promise.

Having said that, supporters of Viktor Yanukovych's Party of the Regions
could cite prices paid for Russian gas by Georgia and Moldova, the countries
that are at loggerheads with Moscow. Gazprom set the tariff at $235 per
1,000 cubic meters for Georgia.

At the same time, Gazprom spokesman Sergey Kupriyanov stated in July that
"Georgia is currently paying this price normally" and "the price will
probably remain at the same level in 2008."

As for Moldova, it was stated in Gazprom's press release that the country is
purchasing Russian gas at $170; "the price will gradually go up in 2008-2010
and will reach the level of average European prices by 2011."

Experts are not convinced that Viktor Yanukovych will manage again to
fulfill his promise that the price for Russian gas in 2008 will increase
solely to offset inflation.

"If Russian-Ukrainian relations do not sharply deteriorate after the
September election, we can fully expect a price increase of 15-20 percent in
2008," Aleksey Belogoryev, Institute of Natural Monopoly Problems analyst,
opined.

Having said that, the Supreme Council election will be over by the time of
setting the gas price for 2008, whereas the Party of the Regions will have
reaped dividends from its optimistic promises.

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========================================================
7. NO MORE CHEAP GAS FOR RUSSIA'S NEIGHBORS
Price for Ukraine is expected to be raised to $180 from the present $130.

OPINION & ANALYSIS: By Mikhail Khmelev
RIA Novosti economic commentator
NIA Novosti, Moscow, Russia, Friday, August 31, 2007

MOSCOW. - Gazprom, Russia's major natural gas producer and exporter, is
starting another campaign to drive up prices for the gas it supplies to the
Baltic states and the Commonwealth of Independent States (CIS).

For the third year running the gas giant has been trying to go over to
market prices for its neighbors. And every time the talks have run into
difficulties.

Russia's desire to practice pragmatism in its dealings with former Soviet
republics has set its partners on edge. But with present world energy prices
Russia cannot afford to sell its gas cheap. Even to its best friends.

In a few days Russia is to commence talks over gas prices with Latvia and
Estonia, and in October with Belarus and Ukraine.

Lithuanian distributors have already received offers to buy Gazprom gas at
$280 per 1,000 cubic meters (the current price is $190). The same price is
going to apply to the other Baltic countries. Belarus is most likely to pay
$125-150 for Russian gas in 2008 (it is paying $100 now).

The price for Ukraine is expected to be raised to $180 from the present
$130.

Currently, Russia's closest neighbors, former Soviet republics, are paying
about 40-70% of the average European price. And these prices are set by the
market, not by the gas monopoly.

Prices for European consumers are set by the so-called "European formula",
which depends entirely on world oil prices, and are pegged to Rotterdam
bourse oil quotes.

The price varies from country to country, depending on transportation costs
and agreements with local wholesalers and retailers. Long-term supply
contracts with European countries are usually concluded at $280-320 per
1,000 cubic meters.

It is important to bear in mind that Gazprom is not the only supplier to the
European market, and other companies charge about the same prices.

Russian gas on the post-Soviet space is heavily underpriced, but three years
ago practically none of Russia's neighbors paid even those low rates. In the
early 2000s, when European consumers were paying $200-250 per 1,000 cubic
meters, prices for the Baltic and CIS countries swung between $55 and $100.

For a long time Gazprom exported gas to CIS countries at a loss, with Russia
subsidizing neighboring economies for 13 years after the break-up of the
Soviet Union.

At the end of 2005, Russia decided to gradually introduce market prices.
There were a number of reasons for such a sweeping change. The Russian
authorities found that a policy of supporting neighbors with cheap energy
was bringing no dividends.

They did not rally into a viable alliance, nor did they turn into Russia's
friends. And then, it was argued, why export gas close to home at one-third
the market price, when Europe was willing to pay two to three times more.

The changeover to market prices for CIS countries was not smooth. In most
cases, Russia's partners gave up cheap gas grudgingly.

A doubling of the price for Ukraine early in 2006 (from $55 to $100 per
1,000 cubic meters) involved disruptions in supplies to Europe. The
agreement with Belarus was signed in the last minutes of 2006.

Ukraine and Belarus are major consumers of Russian gas, with 56 billion and
21 billion cubic meters respectively. Talks with other countries were less
difficult. In negotiations with the Baltic countries (Lithuania, Latvia and
Estonia), as European Union members, Russia agreed to a three-year
transition period starting from 2005.

Today these countries are paying $190-200 per 1,000 cubic meters. Other
buyers have accepted the new prices, too, although unwillingly. Armenia is
buying Russian gas at $110, Moldova at $170, and Georgia at $235.

As soon as Russia began increasing energy prices for its closest neighbors,
it was accused of using economic pressure against them. And this was at a
time when the European countries had been paying higher rates for years.
Does it mean Russia has been dominating Western Europe, too?

Gas prices in Europe and the rest of the world are firmly pegged to world
oil prices, and cheap gas is no longer a prospect. Nor is Russia going to
subsidize its neighbors any more.

"Competition" rather than "commonwealth" is now the operative word to
describe the situation on the post-Soviet space. Former Soviet republics
quickly forgot about the Soviet Union. They will have to do the same about
cheap Russian gas, too.
-------------------------------------------------------------------------------------------------
The opinions expressed in this article are the author's and do not
necessarily represent those of RIA Novosti.
LINK: http://en.rian.ru/analysis/20070831/75975200.html

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========================================================
NOTE: Send in a letter-to-the-editor today. Let us hear from you.
========================================================
8. RUSSIA AND UKRAINE ARE DRIFTING APART
"If those Orange crazies get into the halls of power again, gas
prices for Ukraine would soar to $300 per thousand cubic meters."

INTERVIEW: With Petro Simonenko, Leader, Communist Party of Ukraine
By: Interfax Ukraine, Vremya Novostei, Moscow, Friday, Aug 31, 2007

Question: What can you say about the campaign so far? Is anyone
using dirty tactics and administrative resources?

Petro Simonenko: In my view, it is going critical. President
Viktor Yushchenko heads a system of rigged elections inherited
from his predecessor Kuchma. Administrative pressure is really
incredible. Viktor Baloga, for instance, is the head of the
presidential secretariat and of the election center of Our Ukraine -
People's Self-Defense bloc. Heads of regional administrations
manage this bloc's election centers in the regions.

Over 2 million elderly citizens who can't come to the polling
stations for various reasons are not permitted to vote at home. What
is this if not use of administrative resources? Voters are under
constant psychological pressure - an aspect that inevitably affects
their views.

Our Ukraine and Yulia Tymoshenko's Bloc are using American
political consultants who force an anti-Ukrainian stance on these
blocs. I suspect that once Yushchenko has seen his hopes for an
Orange team frustrated, he will either try to disband the new Rada
or void the outcome of the election. Thus, the coalition of the
Communist Party of Ukraine and the Regions Party has to do
everything in its power to prevent the election from being
manipulated. We are already working on techniques that we hope
will prevent it.

Question: What are the odds of amending Constitution?

Petro Simonenko: I'm convinced that the Constitution should be
amended. Our proposed amendments promote the interests and welfare
of all groups in our society. Amending the Constitution requires 300
votes in the Rada. I believe as well that another process - that of
impeachment - should be set in motion. Yushchenko, the head of
state, supports the Orange forces alone - and therefore foments a
real threat of election manipulation.

Question: What is your opinion of Ukrainian-Russian relations
nowadays?

Petro Simonenko: They are constantly plagued with tension
because Kiev's policies are inconsistent. This is not what is
normally known as a neighborly policy. I mean all these speculations
on unilateral termination of gas contracts, the plan for joining
NATO, elaborations on permission to the Americans to install missile
defense elements in Ukraine...

Neither does Ukraine's penchant for membership in the European
Union and World Trade Organization and abandonment of the United
Economic Zone help matters in general.

There are also the problems of Tuzla Island and the Russian Black
Sea Fleet in Ukraine... I'd say that Russia and Ukraine are drifting
apart.

Question: And what do you think should be done to reverse this
trend?

Petro Simonenko: First, we should finally decide what is to be
done about the gas distribution framework. Secondly, matters in the
field of nuclear energy should be addressed. Uranium is mined in
Ukraine and Russia has uranium enrichment facilities. Besides, there
are no storage facilities in Ukraine for nuclear waste. We've always
counted on Russia in this matter.

I'd say that we must complete the cycle, establish a dialogue between
our states, and adopt international programs in this field. A customs
union with Russia will offer a whole vista of new opportunities for
our manufacturers.

Question: Do you think Russia might charge Ukraine a higher price
for gas in 2008?

Petro Simonenko: I met with the leadership of the Russian
Federation some weeks ago and I'm telling you right here and now
that if those Orange crazies get into the halls of power again, gas
prices for Ukraine would soar to $300 per thousand cubic meters.
(Translated by A. Ignatkin)

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9. UKRAINIAN IGOR KOLOMOISKY INVESTS US$110 MILLION TO
ACQUIRE AN INTEREST IN CME AND JOIN BOARD OF DIRECTORS

PR Newswire (US), Thursday, August 30, 2007

HAMILTON, Bermuda - Central European Media Enterprises Ltd. ("CME")

announced today that Igor Kolomoisky, a prominent Ukrainian businessman,

has acquired 1,275,227 shares of CME's Class A Common Stock for cash

consideration of US$ 110 million.

The price per share has been determined on the basis of a weighted average
trading price. This share purchase represents approximately 3.0% of CME's
total outstanding Common Stock. In connection with this investment, Igor
Kolomoisky has been invited to join the Board of Directors of CME.

Ronald S. Lauder, Non-Executive Chairman of CME, commented on the
transaction: "I've known Igor Kolomoisky for some time and admire him as an
extremely knowledgeable businessman with in-depth knowledge of Ukraine. Igor
understands the importance of independent television not only in Ukraine,
but throughout Eastern Europe. I'm delighted to welcome him as our newest
Director, and I am confident he will help CME enormously."

Michael Garin, CME's Chief Executive Officer, said: "Investors should
welcome this step as a major vote of confidence. The Apax investment last
year underscored their view of the growth potential of CME as a company.
Similarly, this investment by Mr. Kolomoisky should confirm CME's view that
Ukraine will be a powerful growth engine for the Company in the future.

As I said a few weeks ago when we released our second quarter earnings, 'We
are convinced that in the next few years Ukraine will become the largest
market in which we operate. We remain completely committed to Ukraine and
will continue to aggressively but prudently pursue opportunities to further
strengthen our presence there.' Today's announcement is a major indicator of
that commitment."

Igor Kolomoisky said: "CME is one of the fastest growing and best managed
media companies in the world and represents an exceptional investment
opportunity for me. I am impressed with the company's management team,
vision and disciplined financial approach. I look forward to working with my
new Board colleagues and the CME management team to build upon the CME
success story at a time when prospects are so bright both in Ukraine and in
the other markets in which the company operates.

Ronald Lauder has been a pioneer in helping the countries of Central and
Eastern Europe to establish the independent media outlets so critical to the
development of their economies and political systems. I've known Ronald for
a number of years, and I'm delighted to now join him on the Board of CME."

CME is a TV broadcasting company operating leading networks in six Central
and Eastern European countries with an aggregate population of approximately
90 million people.

The Company's television stations are located in Croatia (Nova TV), Czech
Republic (TV Nova, Galaxie Sport), Romania (PRO TV, PRO TV International,
Acasa, PRO Cinema and Sport.ro), Slovakia (Markiza, Galaxie Sport), Slovenia
(POP TV, Kanal A) and Ukraine (Studio 1+1, Studio 1+1 International, Kino,
Citi). CME is traded on the NASDAQ and the Prague Stock Exchange under the
ticker symbol "CETV".

Forward Looking Statements
This press release contains forward-looking statements, including statements
regarding the expected growth of the market in Ukraine, the future
performance of our operations and our business strategies and commitments.
For these statements and all other forward-looking statements, we claim the
protection of the safe harbor for forward-looking statements contained in
the Private Securities Litigation Reform Act of 1995.

Resume of Igor Kolomoisky
Igor Kolomoisky is a prominent international businessman with diversified
business interests, including ownership of significant industrial assets
worldwide and particularly in CIS countries. He is currently a controlling
shareholder and Supervisory Board Member of PrivatBank, one of the

largest and best known commercial banks in Ukraine.

Since 2003, he has been a major shareholder and member of the Supervisory
Board of Ukrnafta, Ukraine's largest oil and natural gas extracting,
processing and supplying company with a recent market cap of approximately
US$ 3.6 billion. He co-founded oil supplier Sentosa Ltd in 1991 and
continues to serve as Director of the company overseeing a full range of
management responsibilities.

Mr. Kolomoisky graduated from Dnipropetrovsk Metallurgical Institute in
Ukraine with a degree in Metallurgical Engineering. Central European Media
Enterprises Ltd.
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10. UKRAINE GOVT STOPS SALE OF ITS STAKE IN INSULIN
MAKER INDAR TO POLISH COMPANY BIOTON

By Malgorzata Halaba, Dow Jones Newswires
Warsaw, Poland, Monday, August 27, 2007

WARSAW - The Ukrainian privatization office, or FGI, decided not to

sell its stake in insulin maker Indar, the Ukrainian Internet site Delo.ua said
Monday, citing the FGI's statement.

The decision will have a serious impact on Polish biopharmaceutical company
Bioton SA (BIO.WA), which holds a 29.3% stake in Indar.

Bioton was in exclusive talks with the Ukrainian government to buy the
remaining stake in Indar and hoped to close the deal in the third quarter of
2007.

When presenting the company's second-quarter results earlier this month,
Bioton chief executive Adam Wilczega said it would be difficult to Bioton's
full-year sale target of 400 million zlotys ($142.9 million) due to delays
in completing the acquisition of Indar.

Bioton's officials weren't immediately available to comment on the Ukrainian
government's decision. At 1426 GMT Bioton shares were down 2.9% at

PLN1.34, compared to a 1% fall on the WIG20 index. (Company Web site:

www.bioton.pl)
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11. UKRAINIAN GROUP JOINS AUSTRALIAN CO BIDDING FRAY
Australian manganese and nickel miner Consolidated Minerals

By Elizabeth Fry in Sydney, Financial Times, London, UK, Fri, Aug 31 2007

An eleventh-hour takeover bid from a Ukraine-based mining investment house
is keeping Australian manganese and nickel miner Consolidated Minerals
firmly in play.

Palmary Enterprises, which is controlled by Privat Group, a $3bn banking and
industrial conglomerate, has mounted a A$902m bid for Consolidated Minerals,
trumping rival takeover offers pitched by Territory Resources and
Pallinghurst Resources. Palmary already holds a 14 per cent stake in

Consolidated Minerals.

Palmary's $3.95 per share offer is at a 10 per cent premium to the A$822m,
or A$3.60 per share, offer by Pallinghurst and a 23 per cent premium to the
cash and scrip offer from Territory Resources, which valued Consolidated at
A$913m.

The bid by Pallinghurst, a London-based natural resources investment fund
led by former BHP Billiton chief executive Brian Gilbertson, was earlier
recommended by the Consolidated Minerals board.

The board has now asked shareholders not to act while it assesses the latest
offer. Gennadiy Bogolyubov, Palmary's president, said, "Palmary's cash

offer represents excellent value for Consolidated Minerals shareholders."

Mr Bogolyubov said the offer represented a 55.2 per cent premium to the
mid-point of an independent expert's valuation.

The company's advisers stressed that the fully funded cash offer was a
'stand alone' bid, in an attempt to quash market speculation that Privat
might link with Territory to mount a joint bid.

Consolidated Minerals' shares jumped almost ten percent above the latest
bid price on expectations a fourth player will enter the fray or that
stockholders will receive a higher bid from Pallinghurst or Territory

Norway's Tinfos has taken a 5.1 per cent stake in the company, after buying
shares on market at A$3.65.

Territory lodged its bidder's statement Friday, saying it reserved the right
to vary its offer.

The Territory bid is backed by commodity traders Noble Group and

DECOmetal and investment bank Lehman Brothers. Palmary has a 90 per

cent interest in Ghana Manganese Co Ltd.

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12. FRENCH CONTRACT TO BUILD SARCOPHAGUS AROUND

CHERNOBYL NUCLEAR REACTOR WORTH $500 MILLION

AFX Europe (Focus), Paris, France, Thu, Aug 30, 2007

PARIS (Thomson Financial) - The contract won by a consortium of Vinci

and Bouygues to build a sarcophagus around the Chernobyl nuclear reactor

is worth more than 500 mln usd, the French government said.

Earlier this month Ria Novosti news agency said the group won the contract
after putting in a bid for 490 mln eur, which would be more than 660 mln
usd.
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13. FRANCE'S SOUFFLET, AUSTRALIA'S ABB GRAIN FORM

Reuters, Paris, France, Wednesday, August 29, 2007

PARIS - France's largest grain trading company Soufflet said on Wednesday

it had set up a joint venture with Australia's top barley exporter ABB Grain to
develop exporting activities in the Ukraine.

The venture, 50 percent owned by both companies, will incorporate the entire
capital base of Soufflet Ukraine, which is based in Kiev.

ABB Grain, a major barley exporter to Saudi Arabia, would provide new

market opportunities for the grain, Soufflet said in a statement. "Soufflet
group...doesn't intend to develop international trading operations alone
but, through this deal, wants to reach a significant size on the Ukrainian
market (...) and limit climate-related and political risks in the country,"
it said.

Ukraine has become an aggressive global grain exporter over the last few
years but recurring political turmoil in the country has sometimes disrupted
its flow of exports.
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14. U.S.-UKRAINE FOUNDATION (USUF) JOINS THE U.S.-

By Morgan Williams, SigmaBleyzer
President, U.S.-Ukraine Business Council (USUBC)
Washington, D.C., Wednesday, September 5, 2007

WASHINGTON - The Executive Committee of the Board of Directors

of the U.S.-Ukraine Business Council (USUBC) has just approved the

U.S.-Ukraine Foundation (USUF) as the 43rd member of the Council.

Nadia K. McConnell, Co-Founder and President of the Foundation,
informed us about USUF's interest in becoming a member of the U.S.-
Ukraine Business Council (USUBC). John A. Kun is Vice-President/
Chief Operating Officer and Markian Bilynskyj is Vice-President/
Director of Field Operations in Ukraine.

The U.S.-Ukraine Foundation, a 501(c)(3) tax-exempt organization
incorporated in 1991, is committed to the democratic and economic
development of Ukraine.

With a network of offices in Washington, Kyiv, Cherkasy, Donetsk,
Kherson and Lviv that aids in the implementation of comprehensive,
national programs, the Foundation has launched numerous economic
development initiatives incorporating communications, public policy
reform, and training elements.

Through its USAID-funded U.S.-Ukraine Community Partnerships
Project, for example, the Foundation incorporated training and education
in economic development for Ukrainian cities throughout the country.

Within the Foundation's U.S.-Ukraine Policy Dialogue Project, sponsored
by the U.S. Department of State, a Business and Economics focus area
targeted specific issues related to Ukraine's economic development.

Along with an effective, on-the-ground operational system in Ukraine, the
U.S.-Ukraine Foundation also has an expanding communications network.

This includes Internet websites, such as www.usukraine.org,
www.businessinukraine.org, www.traveltoukraine.org, www.buyukraine.org,
and www.exchangeusa.org, and e-newsletters, such as BizLinks and Update.

Realizing the importance of the Foundation's outreach assets, governmental
agencies, companies and entrepreneurs have sought the assistance of the
Foundation through various venues.

For example, within the past year, the Foundation webcasted a presentation
on investment prospects in Ukraine by Natalie A. Jaresko, Managing Partner
of Horizon Capital.

The Foundation has also focused attention on Ukrainian businessmen
visiting the U.S. in holding Business Roundtable Series events at the
Embassy of Ukraine.

To promote an open exchange of information from corporate, government,
educational and non-profit entities, the Foundation created the business
site, www.businessinukraine.org. The website includes business reports,
upcoming business events, laws and regulations in Ukraine, economic
statistical data and practical legal advice about doing business in Ukraine.

Understanding the importance of the travel sector to Ukraine's economy,
the Foundation wanted to promote its further development by launching
the website, www.traveltoukraine.org, this past year. The site is a
comprehensive informational resource for the business and pleasure
traveler to Ukraine.

The Foundation's business communications incorporates the e-newsletter,
BizLinks, a free publication promoting the 'market of Ukraine' by
advertising events, conferences, employment opportunities and reports
regarding business in Ukraine.

The Foundation continues to seek initiatives in Ukraine that promote
Ukraine's economic and democratic development. It is currently working
with the newly registered commercial operations arm of its Ukrainian sister
organization, the Pylyp Orlyk Institute for Democracy (POID), to explore
just such possibilities.

The U.S.-Ukraine Foundation appreciates the support and cooperation
of the business community in pursuing its mission.

USUF is the 21th new member for the U.S.-Ukraine Business Council
in the last eight months. The Council's goal is to double its membership
in 2007 to at least 50 to 60 members. The Council's membership is now

the largest it has been since it was organized in 1995.

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15. FINLAND: HISTORY DICTATES TERMS OF RUSSIA TRADE
Stockmann wants to replicate its Russian and Baltic experiences in Ukraine

By David Ibison, Financial Times, London, UK, Tuesday, Sep 4 2007

Pekka Sutela is a shy and friendly man given to explosions of enthusiasm for
a fascinating sideline to his official job as head of the Bank of Finland's
Institute for Economies in Transition.

Eschewing stodgy trade statistics in favour of "novels, memoirs, chronicles
and non-scientific biographies", he has opened a door on the complexity,
tension and occasional farce that underpins economic relations between
Finland and Russia.

His discussion article 'The Folklore of Finland's Eastern Trade' is replete
with tales of "almost undrinkable Georgian brandy", bribery, opportunism and
wiretapping.

"That was a hell of a circle," Mr Sutela quotes a prominent businessman as
saying about the Krushchev era. "We ate, drank, went to sauna, swam, ate and
drank." Another trader remembers: "We ate caviar like porridge."

One veteran trader smuggled a heated garage that occupied an entire railway
carriage into Russia as a bribe. Businessmen waited impatiently in hotel
bars, drinking. When meetings were finally made they required long walks in
the woods to avoid wiretaps - or yet another trip to the sauna.

The message behind these anecdotes is that while everyday Finnish and
Russian life went on with all its human foibles, looming in the background
was their painful history: empire, humiliation, war, patriotism, defeat,
reparation, collapse and recovery.

Finland's economic relationship with Russia has been governed by these
events and has oscillated from boom to bust as a result.

When Finland was an autonomous region of the Russian empire between

1860 and 1916, trade with Russia made up 40 per cent of total trade. This
collapsed with Finland's independence in 1917 and until 1944 Russia's share

of Finland's foreign trade averaged 2 per cent.

Everything changed again with the advent of the Soviet Union, which
accounted for an average of 16 per cent of Finland's foreign trade between
1945 and 1990 - peaking in the early to mid 1980s at about 25 per cent.
Russia then employed 150,000 Finns, or 6 per cent of the workforce.

In 1991, when the Soviet Union collapsed, Finland suffered a 3 per cent
decline in GDP, triggering an economic crisis. Later in the 1990s, Russia
generated 6 per cent of foreign trade before it collapsed again after the
1998 crisis. But by 2005, Russia was again Finland's largest foreign trade
partner with 12 per cent.

These figures make clear that the two countries share a volatile and
complicated rapport. So it should come as no surprise that the situation
today is just as convoluted.

According to the Bank of Finland, Finnish exports to Russia have grown by
25 per cent a year so far this decade, with major exports including
electrical equipment such as mobile phones, machinery and vehicles and

chemical products. But all is not as it seems.

It is estimated that about 25 per cent of Finnish exports are re-exports -
namely goods produced in another country and then exported to Russia via
Finland.

The fact is that the rest of the world is using Finland as a conduit to
Russia for its goods because it has a relatively well functioning border
compared to the Baltic states, creating 50km queues of trucks at the border
and roads in constant use.

The economic benefits to Finland of re-export trade are limited in terms of
employment and business creation.

Indeed, the endless queues and garbage create tension and resentment, as
does the damage to the roads that is paid for by Finnish taxpayers.

Another major issue is grey trade, which covers various schemes used by
traders to avoid custom duties and taxes. An analysis by Simon-Erik Ollus
and Heli Simola from the Bank of Finland reveals the complexity of the
schemes involved.

"Goods intended for importation into Russia are purchased from a Finnish or
other European supplier, not the actual importer. First they are stored in a
warehouse in Finland, then the shipment is divided in smaller fractions or
taken to pieces.

"Some low-value products such as table tennis balls are added to the
shipment. These new shipments are transported around several Finnish and
even Baltic warehouses before they cross the border to blur the route of the
goods.

"Transportation across the Russian border is carried out with lorries or
passenger cars to delude customs officials. In Russia, the more valuable
part of the shipment is taken to black warehouses whereas the low value
goods are declared to customs."

Russian import statistics record only about half the value recorded in
Finnish export statistics. The discrepancy was Euro1.1bn in 2000 and had
trebled by 2005.

The downside of these scams includes the exposure of Finnish firms - either
knowingly or unknowingly - to international criminal organisations,
increasing the risk of corruption or blackmail in Finnish business life -
something the Finns are nervous about as the cleanliness of its operating
environment is something of which it is justifiably proud.

The grey trade also distorts competition by favouring those involved in grey
trade over and above legitimate companies. Legitimate operators face further

problems.

Finland's Foreign Ministry and the Finnish-Russian Chamber of Commerce
have isolated several trade barriers, including the slowness,
unpredictability and inconsistency of Russian customs procedures, such as

"obscure and unexpected changes in the documentation required for customs

clearance".

Other issues include high customs tariffs and technical barriers to trade
such as Russian certification requirements differing from international
standards.

Understandably, the economic potential of trade with Russia is
anaesthetising Finland to these problems, even though they are unlikely to
go away.

"Rapid economic growth, increasing purchasing power, as well as the vast
number of consumers, make Russia's market potentially attractive to Finnish
companies and they are willing to participate despite the difficulties,"
wrote Mssrs Ollus and Simola. "Russia is a chance Finland cannot miss."

Stockmann places new market of 143m at centre of growth strategy

Finnish companies are casting their eyes eastwards towards the Russian
market with a mixture of fear and greed. Political liberation has brought
with it material aspirations and Russia's eager-to-consume population of
143m presents obvious opportunities.

But its notoriously tricky bureaucratic environment and occasionally
wayward legal system provide plenty of reasons to be cautious.

For those companies teetering on the edge of investing in Russia, the
experiences of Stockmann, the Finnish retailer, provide a degree of comfort.

The company began inauspiciously, making its first investment in Russia in
1989, the year the former Soviet Union collapsed, but despite the
uncertainties that have plagued Russia since, Stockmann has sufficient
confidence to place Russia at the centre of its future growth strategy.

Part of its success is undoubtedly attributable to the fact that selling
clothes and other items is not a strategic industry, freeing it from the
complications that have befallen other foreign investors in sectors such as
oil and gas.

But its operations in Russia do involve purchasing properties, importing
goods and employing staff - all of which rely on a functioning rule of law -
providing a degree of comfort that businesses can be built and run in
Russia's challenging environment.

Stockmann has three divisions: department stores under its banner Stockmann
brand, fashion stores under the Seppala brand and an online retail operation
called Hobby Horse.

It currently relies on Finland, where it has seven department stores and 126
Seppala stores plus the Hobby Horse operation, for 76 per cent of its sales
and 75 per cent of its profits.

In Russia, it has four department stores, 17 Seppala stores and 14
Bestseller stores, another fashion chain, generating 13 per cent of its
sales and just 4 per cent of profits. Its operations in the Baltic countries
of Estonia, Latvia and Lithuania generate 11 per cent of sales and 21 per
cent of profits.

Pekka Vahahyypa, chief financial officer, said he expected its Russian
operations to double sales from 13 per cent to 26 per cent in coming years
and for the company to generate about half of its sales and earnings from
its non-Finnish operations by 2011 compared to about 24 per cent now.

Part of this increase will be driven by the opening of a department store in
St Petersburg next year as well as the completion of its fifth store in
Moscow later this year.

It is also planning to open stores in Russian cities with a population of
more than 1m if feasibility studies indicate that a potential market exists.

It wants to replicate its Russian and Baltic experiences in Ukraine, which
has a population of 49m, and will open some Seppala stores in the country
later this year, Mr Vahahyypa said.

The rationale behind this diversification drive is not hard to ascertain.
Finland has a population of 5.2m and its economy is expected to slow in
coming years, a development that will likely undermine consumer spending.

In contrast, Russia's economy is growing at a forecast 6.5 per cent this
year and 6 per cent next, while the Baltic states, although somewhat
overheated, are expected to sustain high growth rates of between 7 and 9 per
cent for the next two years.

The combined population of Russia, Ukraine and the Baltics is 199m, 38
times more than the population of Finland.

It has not, however, all been plain sailing. Stockmann does not draw too
much attention to it, but it has been forced on occasion to flex its muscles
to ensure it is not taken advantage of.

For example, it is understood some local Russian politicians have become a
little brash in their expectations and forced the Finnish retailer to take
various issues to court in order to ensure that the law is enforced. There
have also been some problems importing its goods from Finland to Russia.

"There are maybe challenges on the border as Stockmann exports products from
Finland to Russia. There are sometimes very long queues and all the products
need licences, meaning there may be some delays getting products into
stores," says Tia Lehto, analyst at Carnegie, the investment bank.

But she adds that Russia's pending accession to the World Trade
Organisation, assuming it goes ahead, should mean that many of these
problems are alleviated.

Mr Vahahyypa also draws attention to taxation problems in Russia such as the
authorities refusing to return the VAT share of investments as is prescribed
under law and the high number of "non-deductible expenses" which increase
the effective tax rate.

But oddly this is where having taken the decision to make its first
investment in 1989 is starting to pay off.

Nearly two decades of experience means that Stockmann now knows its way
around Russia's notorious bureaucracy. "We understand the culture better as
we have a history," says Mr Vahahyypa.
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16. EUROPE'S FUNK OVER ITS NEIGHBOURS
Countries such as Ukraine need the perspective of eventual
membership, however distant, not least as a lever for reform.

EDITORIAL: Financial Times, London, UK, Tue, September 4 2007

For more than 30 years, the policy towards its neighbours of what has
evolved into the European Union has been straightforward: absorb them.
Invite them into the club as soon as they learn the rules. It all worked
rather well.

Then, the EU got so big that older club members, led by France and the
Netherlands, cried: "Enough!" The prospect of Turkey - big, poor and
Muslim - eventually joining certainly helped trigger this loss of faith in
the EU's most successful exports: stability and prosperity.

In truth, however, the EU was already running out of ideas on what to do
about the neighbours. So, not for the first time, it created a muddle and
called it a policy, the European Neighbourhood Policy, to be precise.

At this week's first ENP conference, of foreign ministers and senior
officials from the 27 EU member states and these 16 privileged neighbours,
JosИ Manuel Barroso, president of the European Commission, called the
policy a success. It is not. It is a mix of jumble and evasion.

The EU's opening stab at a neighbourhood policy was the Euro-
Mediterranean programme created in 1995. This aimed to set up a political
and economic partnership, underpinned by a free trade zone, with 12
Middle Eastern and North African nations, which, it was made clear, would
not be offered membership.

This had mixed results, but it was intellectually coherent. Serial meltdowns
in the Middle East have destroyed all other attempts to put in place
economic foundations for peace.

Yet some pillars of the Euro-Med policy are still standing: in particular a
string of bilateral association agreements with the EU and a big growth in
intra-regional trade.

But with the EU now in a funk about further enlargement, culturally and
geographically distant countries from Ukraine to Georgia have been parked
in this same policy, rebranded as the ENP. That is not coherent.

Countries such as Ukraine need the perspective of eventual membership,
however distant, not least as a lever for reform.

This, of course, goes to the heart of the debate over where Europe's borders
should be drawn. Poland, for instance, strongly supports Ukrainian
accession, whereas France, for example, does not. That is precisely why
leading member states defend the ENP. By mixing up apples and pears it
helps put off the enlargement debate.

The experience of the Middle East already shows that EU ability to induce
positive change in its surroundings diminishes when there is no prospect of
accession. Europe does not need to limit its influence in this way with
countries that might - one day - enter the club.
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17. UKRAINE SEEKS DISTANCE FROM EU NEIGHBORHOOD POLICY

By Ahto Lobjakas, Radio Free Europe, Radio Liberty (RFE/RL)
Prague, Czech Republic, Monday, September 3, 2007

BRUSSELS - Ukraine has reiterated its long-standing objections to being part
of the EU's European Neighborhood Policy.

Ukraine's Ambassador to the EU Roman Shpek told a high-level conference on
the ENP in Brussels today that the bloc's flagship foreign-policy instrument
remains "inadequate" for his country.

"The official position of Ukraine on the ENP was made public in February
2005 in a speech by President Viktor Yushchenko in the European Parliament,"
Shpek said.

"In the speech, the Ukrainian president pointed out that the ENP cannot be
accepted as an adequate basis for EU-Ukraine relations. We can only work on
the premise that Ukraine remains an integral part of [a] united Europe."

The ambassador said Ukraine sought full-fledged EU membership, but being
aware of EU "sensitivities" would not press the issue for now.

Shpek took part in the conference as Ukraine's highest representative. EU
diplomats said privately the absence of the country's foreign minister was a
significant gesture of displeasure.

Shpek said today that Ukraine viewed the EU's reluctance to receive its
membership application as a temporary phenomenon. He said that, meanwhile,
he did not expect the EU to force Ukraine into frameworks that may
complicate the country's accession prospects once the public mood changes in
the bloc.

Shpek said Ukraine would prefer "bilateral" links with the EU to the ENP and
cited the importance of negotiating a new enhanced partnership agreement.

The ambassador finished his speech with a quote from the previous European
Commission president, Romano Prodi, who told an EU summit in 2003 that
"the best instrument" to facilitate reforms in other countries was a
prospect of EU membership.
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18. UKRAINE'S PARLIAMENT DEFIES PRESIDENT YUSHCHENKO

By Roman Olearchyk in Kiev, Financial Times
London, United Kingdom, Tue, September 4 2007

Legislators backing Viktor Yanukovich, Ukraine's premier, on Tuesday
raised the stakes in an already tense election campaign by holding a
session of parliament of questionable legitimacy.

This act of defiance is expected to test the nerves of Viktor Yushchenko,
Ukraine's pro-western president, who dissolved parliament in the spring,
setting the stage for elections.

A group of 269 legislators backing Mr Yanukovich's coalition government
gathered in parliament on Tuesday. They passed two laws, accused the
president of illegally dissolving parliament and pledged to keep the
legislature open ahead of the September 30 vote. Ukraine's vague legislation
does not clearly specify whether parliament should immediately close when
dissolved, or serve until new legislators are elected.

Political analysts in Kiev said the reopening of parliament would provide Mr
Yanukovich's allies with a bully pulpit for rallying voter support.

It could also complicate preparations for an election that will gauge how
far Kiev's fragile democracy has matured since the Orange Revolution,
when street protests against election fraud propelled Mr Yushchenko to the
presidency over Mr Yanukovich. Mr Yushchenko is unlikely forcefully to
shut down parliament.

Doing so could spark rallies backing his foe and complicate election
preparations. In a televised address to the nation, aired the night before
the extraordinary parliament session, Mr Yushchenko said: "The driving
force of this provocation is a desire to sabotage the elections.

"It is motivated by the fear of losing power. Any decision by this
parliament will not be legitimate," the president said, stressing that
elections would proceed on schedule.

Government officials this week said elections could be cancelled if the
parliament functioned stably.

Mr Yanukovich called for calm. "We do not seek destabilisation of the
election campaign," he said. "A functioning parliament does not entail any
risk to the stability of the country."

After losing the presidential contest in 2004, Mr Yanukovich returned as
prime minister last summer after an inconclusive parliamentary poll. Both
leaders have since been locked in a battle for authority.

Mr Yushchenko convinced Mr Yanukovich to accept early elections this
summer after their spat escalated into a constitutional crisis.
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19. UKRAINE ELECTION UPDATE, ISSUE ONE

The PBN Company, Kyiv, Ukraine, Friday, August 31, 2007

Dear Friends and Colleagues:

On behalf of The PBN Company, I'm very pleased to provide for
your information and review the first issue of our Ukraine Election
Update.

In this issue we provide a brief synopsis of the upcoming pre-term
parliamentary election scheduled for September 30, an analysis of the
leading parliamentary parties and a few brief thoughts on potential
coalition scenarios and post-election governing.

While political developments on the ground in Ukraine will unfold very
rapidly in the coming weeks, our staff experts will go beyond the election
campaign politicking and hype to provide a balanced and sober view of
what is on offer for voters, investors and the international community.

In addition to this issue, we're planning another four covering the
campaign. This is a collective effort of our staff experts in Kyiv,
Moscow, London and Washington, DC.

The Ukraine Election Review can be found by clicking on:
http://www.pbnco.com/eng/files/Ukraine_Election_Update.pdf.

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21. UKRAINIAN HIGHLANDERS: HUTSULS, BOIKOS, AND LEMKOS

Marko R. Stech, Internet Encyclopedia of Ukraine (IEU)
Toronto, Ontario, Canada, Tuesday, September 04, 2007

Distinguished by their unique dialects and folklore traditions, the
Ukrainian highlanders in the eastern Carpathian Mountains are divided into
several ethnographic groups: the Lemkos, in the Low Beskyd and the
western part of the Middle Beskyd; the Boikos, up to the Bystrytsia
Solotvynska River; and the Hutsuls in the Hutsul region further east.

The central part of Transcarpathia is settled by the Zahoriany
(tramontanes) or Dolyniany (lowlanders), who are related to the Boikos
and speak a central Transcarpathian dialect.

The Hutsuls are renouned for their colorful, richly ornamented folk
dress and their handicrafts, such as artistic wood carving, ceramics,
handmade jewelry, vibrant handwoven textiles, embroidery, and
distinctive wooden folk architecture.

Engaged primarily in animal husbandry and agriculture, the Boikos have
preserved many ancient folk customs and rites that have disappeared in
other parts of Ukraine.

The Lemkos are a distinct ethnic group within the Ukrainian nation. Their
dialects and spiritual and material culture preserved some unique archaic
elements that have been lost by other Ukrainians. Almost all Lemkos were
resettled from their native territory to the USSR (in 1944-45) and western
Poland (in 1947)...

Learn more about the Ukrainian highlanders in the Carpatian Mountains by
visiting: http://www.encyclopediaofukraine.com/featuredentry.asp
or by visiting: http://www.encyclopediaofukraine.com
and searching for such entries as:

HUTSULS. An ethnographic group of Ukrainian pastoral highlanders inhabiting
the Hutsul region in the Carpathian Mountains. According to one theory, the
name hutsul was originally kochul ('nomad,' cf literary Ukrainian kochovyk)
and referred to inhabitants of Kyivan Rus' who fled from the Mongol
invasion into the Carpathian Mountains.

Other scholars believed that the name derives from a subtribe of the Cumans
or Pechenegs-the ancient Turkic Utsians or Uzians-who fled from the Mongols.
Since the 19th century the most widely accepted view has been that the name
comes from the Rumanian word for brigand, hotul/hot.

Archeological evidence of human existence in the region dates back 100,000
years. Certain localities (eg, Kosiv) were settled as early as the Neolithic
Period (6,000-4,000 BC). The Slavic White Croatians inhabited the region in the
first millennium AD; with the rise of Kyivan Rus', they became vassals of the

new state.

References to salt mines in the region are found in the Galician-Volhynian
Chronicle, and the earliest recorded mention of a settlement there (1367) is
that of the salt-mining center of Utoropy. Many other Hutsul settlements and
monasteries are mentioned in charters and municipal and land documents
beginning in the 15th century...

HUTSUL REGION (Hutsulshchyna). A region in the southeasternmost part of
the Carpathian Mountains of Galicia, Bukovyna, and Transcarpathia (the
basins of the upper Prut River, upper Suceava River, upper Bystrytsia
Nadvirnianska River, and upper Tysa River valleys), inhabited by Ukrainian
highlanders called Hutsuls. Except for eight settlements in Romania, the
Hutsul region lies within the present-day borders of the Ukraine.

In the southeast the Hutsul region borders on ethnic Romanian lands; in
the west, on the region of the Boikos; in the north, on the region of the
Subcarpathian Pidhiriany; and in the southwest, on long-cultivated
Transcarpathian Ukrainian lands.

The region is located in the most elevated and picturesque part of the
Ukrainian Carpathians. The gently sloping mountains are densely populated,
and the land there is cultivated to a considerable height owing to the
moderating climatic influence of the Black Sea and the massiveness of the
ranges, which make summers in the region warmer than in other parts of the
Carpathians. Highland pastures (polonyny) are widespread, and herding,
particularly of sheep, has traditionally been widely practiced.

BOIKOS. A tribe or ethnographic group of Ukrainian highlanders who inhabit
both slopes of the middle Carpathian Mountains, now in Lviv oblast,
Ivano-Frankivske oblast, and Transcarpathia oblast. The name boiko is
thought to be derived from the frequent use of the particle boiie by the
population.

The Boikos are believed to be the descendants of the ancient
Slavic tribe of White Croatians that came under the rule of the Kyivan Rus'
state during the reign of Grand Prince Volodymyr the Great. Before the
Magyars occupied the Danube Lowland this tribe served as a direct link
between the Eastern and Southern Slavs.

The Boiko region occupies all of the High Beskyd, the eastern part of the
Middle Beskyd, the western part of the Gorgany Mountains, and the Middle
Carpathian Depression south of these mountains. In the north the limits of
the Boiko region coincide with the borderline of the Carpathians; in the
south the region borders on the Middle Carpathian territory, inhabited by the
lowlanders (dolyniaky), whose dialect is considered the archaic Boiko
tongue.

In the west the Boiko population extends as far as the Solynka River, which
is a tributary of the Sian River and marks the border with the Lemkos, and in
the east it extends to the Limnytsia River valley.

LEMKOS. A Ukrainian ethnic group which until 1946 lived in the most western
part of Ukraine on both sides of the Carpathian Mountains and along the
Polish-Slovak border. The name seems to be derived from the frequent use of
the word lem 'only' by the Lemkos. They usually call themselves rusnaky or
rusyny (Ruthenians). Scholars and the intelligentsia began to use the name
Lemko for the western groups of Ukrainian highlanders in the mid-19th
century, and by the end of the century some Lemkos had accepted the name.

I is not used widely in the Presov region of Slovakia. The intrinsic
conservatism of the Lemkos preserved them from Polonization but at the
same time impeded the rise of Ukrainian national consciousness. The Old
Ruthenian cultural mainstream, led mostly by local priests, turned in a
Russophile direction in the 1900s and received support from the Russian
tsarist government. The Ukrainian national movement gained strength among
the Lemkos only toward the end of the 19th century and was centered in Nowy
Sacz and Sianik...

LEMKO REGION (Lemkivshchyna). The territory traditionally inhabited by the
Lemkos forms an ethnographic peninsula 140 km long and 25-50 km wide within
Polish and Slovak territory. After the deportation of Lemkos from the
northern part in 1946, only the southern part, southwest of the Carpathian
Mountains, known as the Presov region in Slovakia, has remained inhabited
by Lemkos.

The Lemko region occupies the lowest part of the Ukrainian Carpathian
Mountains-most of the Low Beskyd, the western part of the Middle
Beskyd, and the eastern fringe of the Western Beskyd. The landscape is
typical of medium-height-mountain terrain, with ridges reaching 1,000 m and
sometimes 1,300 m. Only small parts of southern Low Beskyd and the northern
Sian region have a low-mountain landscape. A series of mountain passes
along the Torysa River and Poprad River-Tylych Pass (688 m), Duklia Pass
(502 m), and Lupkiv Pass (657 m)-facilitate communications between Galician
and Transcarpathian Lemkos.
--------------------------------------------------------------------------------------------------
Dr. Marko R. Stech, Managing Director, CIUS Press
Project Manager, Internet Encyclopedia of Ukraine
Project Manager, Hrushevsky Translation Project
Canadian Institute of Ukrainian Studies, University of Toronto
256 McCaul Street, Rm. 303, Toronto, ON, M5T 1W5
tel: (416) 946-7326; fax: (416) 978-2672
www.utoronto.ca/cius; www.encyclopediaofukraine.com
------------------------------------------------------------------------------------------------
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22. FIFTH WASHINGTON UKRAINIAN FESTIVAL, SILVER SPRING, MD
Saturday/Sunday, September 8-9, St. Andrew Ukrainian Orthodox Cathedral

Washington Ukrainian Festival Committee

Washington, D.C., Tuesday, September 4, 2007

WASHINGTON - The Fifth Washington Ukrainian Festival is being

sponsored by the Ukrainian Festival Committee with the support of

the Ukrainian Embassy and local organizations. The Festival will be held

Saturday/Sunday, September 8-9, at the St. Andrew Ukrainian Orthodox

Cathedral, 15100 New Hampshire Ave, Silver Spring MD 20905.

Opening ceremonies will include Ecumenical Prayer led by His Eminence
Archbishop Antony plus greetings from the Ambassador of Ukraine to the
USA and from other Dignitaries.

Program includes: Syzokryli Dance Ensemble - from New York City
Not to be missed violinist virtuoso Vasyl Popadiuk from Toronto
Ukrainian Band - Lvivyany from Ukraine; A two-man Bandurist duet from

Ukraine, Ukrainian Dancers Veseli Kozachata from St. Andrew Cathedral
Sisters Oros - from New York And many others

Activities: All-Day Concerts and Performances (Main Stage by the Lake)

Market Place (Ukrainian crafts, arts, paintings, jewelry, clothing, music/

videos, books, novelties, and much, much more)
Activities for Children (horses, trampoline, moon bounce, play area,
popcorn, cotton candy, face painting etc.)
Ukrainian and American Food Concessions -- Picnic Area by the Lake
Kozak Beer Garden - featuring assorted Ukrainian Beers, Wines, and
Liqueurs, Plenty of tasty Ukrainian food

Last year we welcomed thousands of people!!! Please come and celebrate
with us this great event.

WHEN: Saturday/Sunday, September 8-9; Doors Open Saturday at

12:00 noon; ends at dusk, Opening Ceremonies at 1 pm
Dance/Zabava: Saturday at 9:00 PM - in St. Andrew Founders Hall with

live Lvivyany band and concert by violinist virtuoso V. Popadiuk ($10

for Adult)

WHERE: St. Andrew Ukrainian Orthodox Cathedral
15100 New Hampshire Ave, Silver Spring MD 20905
COST: To celebrate we have decided to have a Free Admission this year!

FOR MORE INFORMATION: Myroslava Semerey (410)947-0913;

Val Zabijaka (301)593-5316, Fax: (301)761-1774
E-mail festival@standrewuoc.org; URL http://www.standrewuoc.org
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23. UKRAINE'S QUEST FOR MATURE NATION STATEHOOD VIII
"Ukraine-EU Relations" Tue/Wed, October 16-17, 2007, Washington, D.C.

Steering Committee, Ukraine's Quest for Mature Nation Statehood

New York, New York, Tuesday, September 4, 2007

NEW YORK - You are respectfully invited to the eighth annual roundtable
of the Ukraine's Quest for Mature Nation Statehood series, to be held at
the Ronald Reagan International Trade Center in Washington, DC on
Tue/Wed, Oct 16-17, 2007. This year, the forum will be entitled "Ukraine-
EU Relations". Please mark these dates on your calendar and plan to

attend.

The two day conference will bring together government and key non-
government representatives of Ukraine, the EU and the US as well as experts
from the world of academia to examine and evaluate Ukraine's capacity to
"thrive alongside" its great Western neighbor as well as its readiness, if

asked to join, to eventually "thrive inside" the European Union.

To facilitate the said examination, the event will run four regular sessions
featuring eight panels, six focus sessions, two working lunches and two
conference receptions. In total, more than sixty speakers are expected to
address the conference proceedings.

Further information about registration for the roundtable will be provided

shortly. We hope you will save these dates and plan to attend this

important Roundtable.

William Miller, Co-Chair, Washington, DC
Bob Schaffer, Co-Chair, Denver, CO
Oleh Shamshur, Co-Chair, Washington, D.C.
Walter Zaryckyj, Program Coordinator, New York, New York

E-mail: waz1@nyu.edu

SPONSORS: American Foreign Policy Council; Atlantic Council;
Center For US-Ukrainian Relations; Columbia University/ECEC;
Democratic Initiatives Foundation; Embassy of Ukraine to the U.S.;
Harvard University/BSSP; International Republican Institute (IRI);
Johns Hopkins University/SAIS; Konrad Adenauer Stiftung;
Library of Congress/Open World Program;
New York University/LAP; National Democratic Institute (NDI);
Polish Ukrainian Cooperation Initiative; U.S.-Ukraine Business

Council (USUBC); U.S.-Ukraine Foundation (USUF)
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