Welcome to the U.S.-Ukraine Business Council


Reuters, Berlin, Germany, Saturday, July 11, 2009 

UEFA Chairman Platini hints towards a tournament organized by Poland and Germany
Daniël van Hoven, Krakow Post, Krakow, Poland, Monday, 13th July 2009

Interview with Irina Paliashvili, President, Ukrainian Legal Group
Interview by Ksenia Zabrodska, Yurydychna Hazeta, No. 21
Kyiv, Ukraine, Tuesday, May 26, 2009
Meanwhile, business, the main source of national wealth, is suffering great losses.
Analysis & Commentary: By Diana Smakhtina, Vice President,
Corporate Governance, Restructuring, Kharkiv Office, SigmaBleyzer
Dzerkalo Tyzhnia,Mirror Weekly # 22 (750), Kyiv, Ukraine, 20-26 June 2009

Kyiv seeks reassurance on Obama's overtures to Moscow
Analysis & Commentary: By Roman Kupchinsky
Eurasia Daily Monitor, Volume 6, Issue 133
Jamestown Foundation, Wash, D.C., Monday, July 13, 2009

The EU needs to better marshal its soft power in Eastern Europe. 
Analysis & Commentary: By Andrew Wilson and Nicu Popescu
Wall Street Journal Europe, London, UK, Tuesday, July 14, 2009

(Click here for the report)
Ukrsibbank, PNP Paribus Group, Kyiv, Ukraine, Monday, July 13, 2009


Reuters, Berlin, Germany, Saturday, July 11, 2009 

BERLIN - The economic crisis is not over and the problems that companies face in obtaining credit are a source of concern, the head of the European Bank for Reconstruction and Development (EBRD) told a German magazine.

"No the crisis is not over," EBRD President Thomas Mirow told German weekly Wirtschaftswoche, released on Saturday, when asked whether he shared the view that the global economy would enjoy a broad recovery next year.

"We could see some stabilization this year and then a period of weak growth in 2010. But it is too early to sound the all-clear -- especially because of growing problems that companies have obtaining credit for investments."

Within the European Union, Mirow said he was most concerned about the economies of the Baltic states of Latvia, Lithuania and Estonia, in that order, followed by Hungary.

Outside the European Union, he described the situation in Ukraine as "particularly critical." "We want to help, but Ukraine must show it is ready to reform,"

Mirow said. "Two issues worry us," he added, referring to Ukraine's role as a transit country for Russian gas flowing to Europe.

[1] "The first is that Ukraine is providing under-priced gas to its own clients, creating new structural deficits. [2] And even today we do not know exactly how much gas is being fed in at one end and how much gas, and for what purposes, is being pulled out at the other end."

Russia provides about 25 percent of Europe's gas requirements and pumps 80 percent of this via Ukraine. Europe saw its supplies cut in January amid a payment row between Kiev and Moscow in which the Russians accused Ukraine of siphoning off gas intended for export -- an allegation it denied.

Russia's gas export monopoly Gazprom (GAZP.MM) has warned that Europe may face further disruptions this winter if Ukraine is unable to pay its gas debts. (Writing by Noah Barkin, editing by Anthony Barker)

LINK:  http://www.reuters.com/article/GCA-CreditCrisis/idUSTRE56A11W20090711
UEFA Chairman Platini hints towards a tournament organized by Poland and Germany

Daniel van Hoven, Krakow Post, Krakow, Poland, Monday, 13th July 2009
KRAKOW, Poland - Another chapter in the more and more troubling road towards Euro 2012. Where Poland keeps improving, neighbour Ukraine are sinking deeper and deeper into trouble. The current affair is focused on the building of the stadium in Kiev, the site scheduled for the Euro 2012 final.

The public money, taken from taxes, for the building of the stadium was estimated to be 1.5 billion Ukrainian hryven (about 150 million euros, or 700 million Polish złotys), but after 2.2 billion already has been spent, the completion of the stadium in Kiev is nowhere in sight.

National Ukranian newspaper Dzis (Today) has discovered that the majority of the money and the unaccounted 0.7 billion hryven have not been invested in the Euro 2012 tournament or the building of the Kiev stadium at all, but somehow "disappeared".

An outburst of anger, discontent and shame has spread throughout the Ukranian media: "If we don't solve this very soon, the tournament will be taken away from us and we'll be the biggest embarrassment worldwide," the Dzis newspaper reported.

"This is public money, paid for by the people and Safiullin [chief of the investigating committee] had better quickly discover where the money went, or our country and the preparation of the tournament might be in serious trouble."

It also became known that the Ukranian Football Association and the leagues they organize have been declared bankrupt. UEFA Cup winner and Champions League contender Shakhtar Donetsk now have nowhere to play within their own country’s borders.

Next to the problems of financing and corruption, Ukraine still has not been able to present UEFA (the European Football Association) with a timetable, in which the country lays out the plan of preparing the its infrastructure (stadiums, roads, airports, public transport and hotels) for the upcoming event.

About a week ago, Michel Platini (chairman of UEFA) stated in French newspaper L’equipe that if Ukraine will not be able to manage "we’ll find the stadiums somewhere else."

He hinted towards the four cities in Poland already appointed to Euro 2012 (Warsaw, Gdansk, Wrocław and Poznań) plus the two reserve cities (Chorzów and Krakow) and then two cities in Eastern Germany, most probably the two cities that also hosted the World Cup 2006, Leipzig and Berlin. The final, in that case, would be held in Warsaw.

LINK:  http://www.krakowpost.com/article/1435          

Interview with Irina Paliashvili, President, Ukrainian Legal Group
Interview by Ksenia Zabrodska, Yurydychna Hazeta, No. 21
Kyiv, Ukraine, Tuesday, May 26, 2009

In addition to one’s daily routine and problems at work, in life there is always room for a holiday. A holiday that is at the same time work, but extremely interesting work that leaves only the best impressions.

This issue’s guest in a person who creates holidays for lawyers, who are often engulfed in daily problems and tied into a daily routine. She also shared her personal views on the crisis, business and PR strategies for a modern law firm. Our guest is Irina Paliashvili, President of the Ukrainian Legal Group.
Ms. Paliashvili, why did you become a lawyer?
I grew up in a family of lawyers. My father was a professor and chairman of the law department at Tbilisi State University. I grew up in this environment and guests at our home included some of the most prominent lawyers of the time from Moscow and other parts of the Soviet Union. That’s why I had no other desires or ideas regarding a future profession. I had wanted to be a lawyer since I was 7 years old and have never regretted this.
Tell us about the stages of your career.
I began my career prior to Ukraine’s independence – in the Soviet Union. The first interesting stage was my studies. I studied at the international relations and international law department at Kyiv State University. I got a great education. We were taught by the best professors and exceptional specialists. I wanted to specialize in international law and during the Soviet Union there were only two places where you could study this – in Moscow and Kyiv. 
Tell us more about your firm: what are your areas of specialization,
how did it start and what are your main business priorities?
Our firm was one of the first legal services firms in independent Ukraine. Prior to the firm’s first reincarnation in 1992, the concept of a “western-style law firm” didn’t exist here. The firm was called Grishchenko, Frishberg and Paliashvili.

Dmytro Grishchenko and I had already completed internships with American firms through the Soros program. Alex Frishberg studied in the US and worked at an American law firm in Washington, and so he had experience in this field. The Soviet Union fell apart when we returned from our internships and we decided to create a western-style law firm.

With time our paths parted and each of the partners established his own law firm. Our firm has existed in its second reincarnation since 1996 – so, almost 13 years. In 1994 I opened an office in Washington and this was the first firm from the CIS to open in the West. By the way, when I say “CIS” I mean the economic region, not political: in other words – the post-Soviet space.

The Washington office is still open. We closed our Moscow office after 1998 because following the crisis in Russia it was nearly impossible to maintain a legal business without being there and none of us wanted to move to Moscow. That’s why we concentrated on the Ukrainian market and worked with major clients.

We focus mainly on international corporate clients, and our specializations include oil and gas, intellectual property and a host of others. Relations with our clients began when they opened their representative offices in Ukraine. Later we reorganized them into subsidiaries and created limited liability companies. Our clients started expanding and investing here, and we grew and expanded along with the market and our clients. 
Why did you part ways with your clients?
This happened at the very beginning. Nobody quite understood which direction to move in. At the time we were going with the flow – we saw an opportunity and seized it. We ended up at the right place at the right time, and what’s important is that we had the necessary basic training. But nobody knew how to build a long-term strategy and partner relations.

We got together and created the firm, but then we all came up with different approaches as to how to develop this business. And it so happened that each of us decided to take our own shot with our own teams. It was all very civilized and we were able to maintain good relations.

I am friends with Alex Frishberg and we are in close contact. This is a normal market process – people come together, people break apart. This was our first experiment. I would also say that it was very successful because the team I worked with in 1996 – which included Viktor Kovalenko and Tamara Lukanina – harmoniously transformed into our current firm – Ukrainian Legal Group, and we have been working together successfully for many years.
What are your areas of expertise?
I specialize in contracts. I defended my thesis on international contracts for the sale-purchase of goods – the Vienna Convention. I work with contracts and corporate law. One other very interesting specialization is amicable settlement of disputes. Several years ago I took commercial mediation courses in New York and realized that I could do mediation. As a result, several clients turned to us for help in amicably settling serious disputes. In other words, I settle disputes using mediation techniques.

However, this isn’t full-fledged mediation because that requires a neutral mediator, and I am on the side of the client. Yet another extremely interesting specialization of mine for a long time has been oil and gas, especially production sharing agreements. I was involved in drafting Ukrainian legislation on production sharing agreements and since then we have always had work related to oil and gas.
In late June your firm will be organizing the fourth CIS Local Counsel
Forum. Tell us more about this event – its history and significance.
This will be the fourth time that we will be organizing a Local Counsel Forum. Previously we held them in Kyiv, Baku and St. Petersburg. The idea arose around 2004. In the mid 1990s I was constantly attending law conferences in the West. Unfortunately, there were very few representatives of the CIS legal community. Sometimes there was only one representative of a Russian law firm and one from Kazakhstan.

But in general the region wasn’t represented. At the time the region was actively developing, there was economic growth, and not only clients but law firms started gaining interest because they knew that their clients were becoming interested in the CIS.

A region appeared on the world economic map that presented new opportunities, but western law firms had nobody to talk to. Professional ties needed to be built. Our legal community basically isolated itself. I understand that at the time the legal market was only forming and only a handful could imagine that it was totally possible to go to a law conference in Paris or New York. A definite informational abyss developed.
At the time you were working with western law firms?
Yes. From the very first day our law firm worked as local counsel for foreign law firms. This accounts for approximately 30 percent of our business. It’s a very interesting niche and is very important for the development of the firm and our lawyers. This also helps build long-term contacts.

At that time we began to wonder: where is the CIS legal community and that of each individual country? Why have they isolated themselves and are hiding not only from one another but the world? The international legal community is looking for them.

The first idea was to get together within the CIS, introduce ourselves to one another and the global community – introduce international law firms and show them what we can offer, establish contacts that in the future may develop into mutually beneficial cooperation. For example, if a London firm has a project in Kyrgyzstan, make sure that they know the managing partner of a local firm.

This was the main idea. During preparations in 2004-2006 for the first forum in Kyiv, I discussed this idea with my colleagues from Ukraine other CIS countries, as well as western colleagues. Everyone I spoke to said this was a great idea, and therefore we decided to implement it. We worked on the forum concept for almost a year, to make sure that everyone understood its purpose. 
How was the first forum?
The first forum exceeded all our expectations! Up until a certain point we didn’t even know if people would come. But they did and all the CIS countries were represented on the highest level. And it turns out that the main idea was good and it works, but there are a number of “subsides” that also work very well. For example, it turns out that not only does the international legal community not know us, but we don’t know one another.

We are very important to one another because our clients don’t work in just one country, but the entire CIS. One of the most interesting vectors of cooperation that emerged during the first forum was the Kazakhstan-Georgia region. Many Kazakh clients invest in Georgia – in resorts and real estate.

But when Kazakh law firms were asked about the Georgian market, they had very little to say because they didn’t have anyone to turn to. And so during the forum there was a fraternization of CIS firms based on interest in region. So many channels opened up at once that at one point the largest western law firms at the forum were simply forgotten.

Our western colleagues wanted to get to know the CIS firms, but they were so caught up in one another that they had nearly no time to meet others. Another very interesting element was the extremely friendly atmosphere at the forum. No other conference has been so akin to a holiday. We didn’t just organize a professional meeting - we made it into a holiday complete with an evening program and attendance by guests, including husbands and wives.

Contacts are best established in a friendly and relaxed atmosphere, when people trust one another. That’s why at the very beginning we announced that the forum is a politics-free territory. We’re getting together to create business; politics has nothing to do with it. We try to ensure that nobody is left without attention. If we see a new delegate standing alone during a break, forum veterans will come and introduce themselves.

That’s why people run out of business cards by the first night. During the year there is a constant exchange of business. Firms send work to one another and business is generated. We know cases when business developed that otherwise may not have – two partners found a common ground and their business is flourishing. 
Is there an exchange of work directly at the forum?
Yes, without a doubt, a lot of client work is exchanged within the framework of the forum. For example, a partner in a large international firm in Vienna told me that one of their project partners in Georgia is a Georgian law firm. When I asked which one, it turns out that during the previous forum in Baku, the Austrian was sitting next to the managing partner of a Georgian law firm.

And when this multi-billion dollar projects came up, the western colleague turned to the lawyer that he knew personally thanks to the forum. Once you’ve met a person, it’s much easier to give them part of your work because there is trust. The human factor is the key element of the forum. 
The last forum was in St. Petersburg and few people then expected the
global financial crisis. How do you see cooperation under current conditions?
Back then nobody expected the crisis, but it’s hit everyone. The extent may differ by country, but everyone is experiencing difficulties. At first everyone was glad because during the boom in the market we were so swamped that we couldn’t fully handle the workload. Basically, the legal market couldn’t digest the entire flow of work that was being offered.

Many lawyers had to turn down clients and still work 24/7. Moreover, this boom spoiled the young lawyers because they saw that they are in great demand and were constantly being called by headhunters, so they didn’t necessarily need to work well. The older generation knew that there are good times and bad, and if things are good, the bad can soon follow. In any case, you need to work and dedicate yourself.

Several generations of young lawyers simply never knew bad times – only demand. And demand spoils. Senior lawyers and managing partners that I spoke with breathed a bit easier saying that they can finally survey the situation and think about their business development strategy, because during times of growth they weren’t able to.

It wasn’t possible to introduce reforms within the firm – there was a lack of time and will among the team to be involved in this. Why overwork themselves if they’re being offered positions in other law firms on a daily basis? Not just individuals but entire teams tried to win over lawyers. 
In fact, many lawyers complained that they were overworked.
But this wasn’t so with everyone. In any case, after many years of overexertion, everyone saw the crisis as an opportunity to rest and start working fresh. Nobody thought we would be rolling into a black hole. Then they slowly began to understand that this would last for a while and was truly serious, and that clients were cutting their budgets. That’s when they began to think about long-term strategic plans.
When did you feel the crisis?
We reacted back in October, but September was one of the more stressful months in our practice. There were due diligence assignments and several M&A’s, but we were gradually seeing where this was heading. In October we began implementing measures such as cutting expenses and introducing reforms, and that’s why it was much easier for us to reformat our client relations.

There was too much work and at times we had to turn it down and give it to someone else. We weren’t meeting the deadlines and this worsens relations between clients and lawyers.

Those who make the best decisions, provide the best services and have good relations with clients survive times of crisis. Crisis is a time for modernization and reform, when you can do everything that you put off for years. For example, we’re finishing up our work on a new image for the firm and will present it soon. We’re also working on a virtual internal office that will be accessible from anywhere across the globe.
Two major cornerstones during a crisis including lowering rates for
clients and letting staff go. What is your position on these problems?
These are normal and necessary processes. How can you survive a crisis if you don’t meet your clients half way? But we’re not just thinking about how to help our clients in a purely financial way. During the fourth forum an entire block of topics was dedicated to this problem. Of course the easiest way is to lower rates for clients. Now is the time to get together and think about what we can do for them in practice – see their business as our own and help them from inside.
What do you see as the key strategic directions of development of the legal business overall?
Some ideas about how the legal business will develop during the crisis are myths. During a conference organized by the International Business Association (IBA), one of their leaders tried to clarify these myths. We were always fed stories that a crisis is good for lawyers: there will be an increase in work, companies will start to fall apart, bankruptcy proceedings will begin, and there will be much work.

This hasn’t been the case because when clients cut budgets the first thing they cut is the budget for lawyers. They try to solve their problems using a business approach and involve lawyers as little as possible.  In reality the market has cracked.

Another myth is that during a crisis everyone will be going to court to claim unpaid debts. But suing takes long and is expensive and companies need results now. That’s why companies can’t and don’t want to invest in court cases. Businesses are reaching settlements on their own, without the involvement of lawyers.

We need to wait out this period, not with folded arms but by working actively and improving our practice in all directions. Then the firm will be ready for the new period of economic growth, which will certainly come. That’s what we’re doing – we have a wonderful team of lawyers and dedicated clients. That’s why the crisis doesn’t scare us. 
Does your firm have legal malpractice insurance?
Yes. We have insured our professional responsibility since day one. We’ve been working on the western market for a long time and this is obligatory there. So we don’t understand how one can not be insured. We have yet to have a client appeal to an insurance company and hope that this will continue to be the case. It’s rather expensive, but that’s how it’s done in the civilized world. Arguments against it are simply dropped. 
What is the role of legal press in your work?
It is becoming increasingly important. It doesn’t just provide informational support, it provides an environment where we can obtain new ideas and strategic concepts. Legal press is an important component in the development of the legal market.  
What is your opinion of PR?
We’re currently sticking to the strategy that our clients recommend us to their personal contacts. We also attend conferences and publish frequently. We’re a conservative firm and so when we were starting out, aggressive PR seemed even improper. In certain countries PR isn’t allowed. For example, in Belgium lawyers aren’t allowed to engage in personal PR.

We also never reveal the names of our clients, even if they’ve given us the right to, because we believe this is wrong. A law firm is like a doctor – it should maintain confidentiality. 

FOOTNOTE:  The Ukrainian Legal Group (ULG) is a member of the U.S.-Ukraine Business Council (USUBC), Washington, D.C.,  http://www.usubc.org. Irina Paliashvili, President of the Ukrainian Legal Group, serves on the Executive Committee of USUBC. 
LINK: Yurydychna Hazeta, www.yur-gazeta.com
Meanwhile, business, the main source of national wealth,is suffering great losses.

Analysis & Commentary: By Diana Smakhtina, Vice President,
Corporate Governance, Restructuring, Kharkiv Office, SigmaBleyzer
Dzerkalo Tyzhnia, Mirror Weekly # 22 (750), Kyiv, Ukraine, 20-26 June 2009
How much money does an investor want to put into a project or pay for corporate rights even if he has quite substantial resources? Naturally he won’t immediately pay as much as the seller asks. An investor wants to be sure that he’s not overpaying. But he also doesn’t want to underpay, because his goal is to “bring home the bacon” from the invested money. That’s why his investment needs to be efficient.

These are all truths you’ll find in any textbook or from experience working in the investment market, where investors aren’t afraid to go. But any knowledgeable and careful investor (and they’re usually always careful) is afraid of trusting Ukraine with his money.

And we’re not just talking about foreign investors. Ukrainians with free capital (or those who seek it for professional investments) are also not very confident in our investment market. Ukraine has definitely scared off foreign investors for what seems will be a long time.

The crisis isn’t the issue. Investors were weary about trusting their money before the crisis, are afraid to do so now during the crisis, and will be afraid to once it’s over.

According to the State Statistics Committee, in the first quarter of 2009, Ukraine received a mere 24.4% of direct investments as compared to the same period last year. Those who need it most – industrial enterprises, those who drive modernization – received only 9.5%, while earlier this figure exceeded 22%.

A crisis is a crisis, but decisions could have been passed as usual, new concepts could have been written, and measures could have been taken to improve the investment climate. All according to Parkinson’s Laws: "Work expands to fill the time available for its completion." But there’s no money and there won’t be any. Ukraine is reaping the fruit of its unsystematic work.

Breaking the practice of unsystematic work in Ukraine’s political system is a difficult and increasingly inevitable problem. It’s already a political problem. As a systematic approach would recommend, this problem needs to be tackled piecemeal, while understanding the contours of the whole system.

True, there are also problems when it comes to understanding the entire system in Ukraine. The most difficult issue to resolve (if it even can be resolved in the near future) is that of the end body that should ensure implementation of systematic decisions regarding the political system. It’s “jammed” our legislative and executive branches.

Without it, it is impossible to pass systematic decisions regarding the political system. But despite the hopelessness of the problem, this doesn’t mean that we can’t systematically work out or at least prepare to work on the functioning of separate units.

We can and must look for an answer to the question “what should we do?” starting, let’s say, with the investment market. Without laying claim to the sole correct truth, let’s take a look at one of the approaches to the systematic analysis of its problems.

Legislatively, everything directly related to investment market regulation is outlined in the Laws of Ukraine “On Investment Activity” (1991) and “On Foreign Investments” (1992). As we see, there was a timely understanding of the need to document investment legislatively for the investor to feel that his investments are protected.

Back then even the media cast the idea that the Ukrainian law on foreign investment was one of the best and its advantages were actively discussed. But if we continue with this example, we’ll end up saying: “If everyone is walking out of step, there can’t be someone walking in step.” If all the parts of a high order system and its related systems aren’t systematically linked, then even one ideally tailored part won’t work.

Let’s pause at one of the investment market’s systematic links – the stock market. The birth of the Ukrainian stock market was tied to the privatization process. Herein lies the reason for all the stock market’s problems: the grimaces of mass privatization in Ukraine disfigured its face too.

In the 1990s laws were appearing one after another, and while they were necessary, they were drafted according to the principle “faster, faster, we can’t do without this!” These include the Laws of Ukraine “On Business Entities” (1991), “On Securities and the Stock Market” (1991), “On the National Depositary System and Peculiarities of Electronic Circulation of Securities” (1998).

There’s no use now, given the experience gained in recent years, to reproach and blame those who were there at the beginning for all the stock market’s future problems. What was done had to be done.  But our state wasn’t able to to take a comprehensive and systematic approach to the system’s development.

The financial market regulators that emerged, feverishly trying to correct the mistakes in regulation given the lack of necessary legislative decisions, programs and executive government decisions, issue numerous bylaws meant to put into operation mechanisms for implementing laws. But they don’t exist!

To illustrate the abovementioned regarding the price an investor agrees to pay for corporate rights, let’s take for example the problem of price manipulation on the stock market. An investor wants to know the so-called fair price.

But the Ukrainian stock market is organized in such a way that this is practically impossible. Open trades account for less than 10% of the market, and there too are questions on determining the fair price (only now are they using measures to switch from market quotation to market orders).

Over-the-counter trades account for more than 90% of the market. There is no organizer of over-the-counter trading because that’s how the Law of Ukraine “On Securities and the Stock Market” (2006) set things. Article 20 clearly states that the trade organizers on the stock market will be stock exchanges.

Only today was an attempt made in the amendments to the law on state regulation of the securities market to determine an organizer not tied solely to the stock exchange. For comparison, in the Russian securities law (ratified in 1996) the trade organizer isn’t fixed to the stock exchange, which allows for a stricter approach to price manipulation.

By the way, that very Russian law (Section 2, Article 51 of the 2006 version) legislatively introduced the concept of manipulation and unfair emissions and sanctions for violating these legal requirements (Section 3 of the 2002 version). In Ukraine, the regulatory authority – The Securities and Stock Market State Commission (SSMSC) – is only now patching up this hole with normative documents.

By the way, investors were hit hard by the crisis, not lastly due to price manipulation. An investor can find out about a relatively fair price from the stock exchange index (I remind you that this is less than 10% of the market). As for prices for more than 90% of the market, at best he will find out at the end of the quarter from the SSMSC integral index.   

The over-the-counter market in Ukraine isn’t regulated. There is only the semblance of regulation through the regulator’s package of systematically unrelated normative documents. As an example, we’ll give you the information about the state of the market that was posted on the SSMSC website on June 1, 2009.

The analysis of the activities of the professional market participants was from 3Q 2008. The integral index – from 4Q 2007. But the integral index is the indicator that is calculated based on over-the-counter trades using traders’ reports. These are the 90% of over-the-counter deals that the investor is learning about only as of the fourth quarter of 2007.

We can provide many more examples of the lack of systematic decisions on the stock market, which certainly lowers Ukraine’s investment level below the bar. Moreover, feverish and unsystematic attempts to improve the investment climate are being made directly in legislation on the investment market. 

Draft law No. 3065 on introducing changes regarding investment activity is currently being readied for its second reading in the Verkhovna Rada. As always everything was done in a rush manner.

As always, we got burnt – we rushed to write it and approve it…And the fire is the problem of reconsidering the level of state interference in the market, an issue which is heatedly being debated today throughout the world.

The draft includes a proposal to supplement Article 2 of the Law of Ukraine “On Investment Activities” with a concept of investment activity. Moreover, the authors are formulating it such that it will require documents related to all forms of private investment to be in agreement with “methodological recommendations approved by the central bodies of executive power on securing state economic policy”.

One wouldn’t want to say that the style of preparation and approval of law and bylaws in Ukraine is completely unprofessional. But if drafts aren’t systematically coordinated with the environment, and the cause and effect of the proposed norms aren’t tracked.

Let’s take for example the recent case with information about Ukraine’s place at the “bottom of the list” of international corporate management ratings. In a hurry, so as to make sure we make it by the end of the year, we start writing a law “on improving it.”

And this, while the law on joint stock companies is just about to come into effect, even with a two-year extension, and while the regulator and stock exchanges are unable to strictly control the disclosure of information to issuers. Nevertheless, investors are very interested in this rating.

This picture we painted turned out rather bleak. It is naive, at the very least, to take on the task of instantly breaking the entire bureaucratic mechanism of political system formulation. But at the same time, shaping elements of the political system based on a principle of expediency or “faster, faster, we needed it yesterday” has become engrained in our bureaucratic apparatus.

Meanwhile, business, the main source of national wealth, which is suffering great losses, is not requiring that those it has trusted to manage the wealth work according to 21st century standards.

The created infrastructure, regulations, qualifications and mentality of market experts are all out-dated. We all lived in that time and created stereotypes of behavior based on the level of a bazaar – the investor isn’t first – his money is, and we want it now and more of it. And this is the answer to why the influx of investment into Ukraine is dropping.

We can’t patch up the holes in the stock market any more in our example. If Ukraine is to truly switch to western standards of working with investors, if we add new norms to old laws or normative documents, this will only deepen the problems related to the lack of a single state policy on stock market regulation.

In Directive 2004/39/EC of the European Parliament and Council, Article 19 of the section on provisions to ensure investor protection outlines required conduct of business obligations when providing investment services to clients. Meanwhile, Article 21 is about the “obligation to execute orders on terms most favorable to the client.”

Instead of patching up holes in legislation, there needs to be a strict goal-oriented approach. And the goal is to attract investors. Then, instead of endless disputes between competitors and them stepping on each other’s toes, a sound model with be developed for a Central Depositary.

A basic SWOT analysis of the strengths and weaknesses of different levels of state or private ownership will provide an answer to the question of how to reform the Ukrainian depositary system. Investors are very troubled by this issue given the scandals in Ukraine involving confiscation of property.

A systemically sound model for modern trading platforms, normative requirements for software and technical equipment, and obligations of traders and qualified investors will help resolve the issue of how many stock exchanges and traders there should be on the stock market.    

The crisis should force the market to come out of it renewed. If there’s a goal-oriented approach and the proposed goal is let’s say to attract investors, then systematic procedures will be chosen. These procedures require a conceptual approach to legislative and normative provisions and to defining the level and quality of regulation. Afterwards, given the causes and effects, a package of draft documents is prepared.

This package should be proposed to the Cabinet of Ministers and coordinated with other parts of the system, and submitted to the Verkhovna Rada. And look, during the recession, we’ll have time to prepare for the economic recovery. By that time, perhaps Ukraine will already have competent legislative and executive bodies.

The new head of the SSMSC Serhiy Petrashko told the media that one of his priority tasks is to analyze the legislative and normative base. Now is the time to provide investors with the systematic decisions they’ve been waiting for.     

FOOTNOTE: The above article was translated from Ukrainian into English by the U.S.-Ukraine Business Council (USUBC), Washington, D.C.. The SigmaBleyzer Emerging Markets Private Investment Management Group is a member of USUBC.

Link in English:  http://www.mw.ua/2000/2020/66475/
Link in Ukrainian:  http://www.dt.ua/2000/2020/66475/
Link in Russian:  http://www.zn.ua/2000/2020/66475/
Kyiv seeks reassurance on Obama's overtures to Moscow

Analysis & Commentary: By Roman Kupchinsky
Eurasia Daily Monitor, Volume 6, Issue 133
Jamestown Foundation, Wash, D.C., Monday, July 13, 2009

U.S. President Barack Obama's first summit meeting in Moscow with Russian leaders did not warrant headlines in the Ukrainian media. The top story, understandably, continued to be the seemingly unending political crisis in the country, as a consequence of which, American-Russian summitry was buried in the middle pages of the printed media and merited 15 second reports on television news broadcasts.

Despite the low level of coverage, Ukrainian political leaders nervously but closely monitored events in Moscow and considered what the discussions meant for their country's future.

Would the United States, Ukrainian analysts wondered, abandon its support for Ukrainian aspirations to join the E.U. and NATO or would Obama tell Dmitry Medvedev and Vladimir Putin that Moscow's quest to force Ukraine back into Moscow's sphere of influence was unacceptable?

This apprehension was evident in a comment by Ukrainian President Viktor Yushchenko who stated on July 7: "Ukraine hopes that it will not become the third side, through which other countries will make compromises to reach their interests" (UNIAN Press Agency, July 8).

The Ukrainian ambassador to Russia, Konstantyn Hryshchenko, told the UNIAN press agency: "The principled position of our country...is that matters pertaining to Ukraine will be decided in Ukraine by Ukrainian political leaders who have a mandate from the people." He added, "There is concern that discussions do not take place over matters which could constitute a danger to our interests."

Nonetheless, many in the Ukrainian policy making establishment were heartened by Obama's support for Ukraine's sovereignty during his speech to the graduating class of the New Economic School in Moscow where he stated: "State sovereignty must be a cornerstone of international order...Just as all states should have the right to choose their leaders, states must have the right to borders that are secure, and to their own foreign policies ... That is why we must apply this principle to all nations - and that includes nations like Georgia and Ukraine" (UNIAN Press Agency, July 8).

Volodymyr Fesenko, the chairman of the Kyiv-based Penta Center for Applied Political Studies noted that while Ukraine was not on the agenda in Moscow, "There were soft warnings from the American president to his Russian colleagues that it is better not to create problems on its borders. There were hints that it is essential not to allow anarchy in neighboring countries and additional conflicts. It was a signal that America is not indifferent to this" (Kyiv Post, July 10).

Yuriy Shcherbak, Ukraine's former Ambassador to the United States welcomed Obama's defense of Ukraine's sovereignty. "It is a very essential signal," Shcherbak said. "Obama clearly showed that the United States will not treat positively Russia's attempts to dominate the post-Soviet space and, especially, to impose on Ukraine any of its models or demands. After this visit, if Russia wants to [improve its relationship] with the United States, it must operate more carefully in post-Soviet space," he continued.

Speaking about the upcoming visit of U.S. Vice-President Joe Biden to Kyiv, Shcherbak commented: "Hopefully [Biden] will explain to Ukrainian leaders what was going on in Moscow and clarify the position of the American government" (Kyiv Post, July 10).

Commenting on the forthcoming Biden visit, the Ukrainian internet publication Ukrayinska Pravda wrote on July 8: "The visit [by Biden] will be closely observed in Moscow. Russian experts are convinced that Biden will have to explain to Kyiv and Tbilisi ‘who is the master.' Without this there can be no resetting of Russian-American relations."

This however, is the typical Russian point of view which has not changed for many years. "Will the Americans be able to formulate in two weeks a clear message to the post-Soviet space? Nonetheless, this message will in a large way determine how events evolve in the region," the report suggested.

The results of the Ukrainian presidential elections scheduled for early January 2010 might resolve the dilemma facing Washington, Moscow and Kyiv. If voters elect Viktor Yanukovych as their next president, the foreign policy agenda of Ukraine might be in for a monumental change.

The pro-NATO forces in Ukraine will find themselves more isolated than they are now and a new team of pro-Russian policy makers will aim to steer the country closer to Moscow on such matters as NATO enlargement, energy policy and greater cooperation in CIS security arrangements.

Moscow however, will be very cautious in welcoming a new Ukrainian government into its fold. The Kremlin has learned hard lessons from its turbulent relationship with Alyaksandr Lukashenka, the President of Belarus who, by any yardstick, has been more pro-Russian than Yanukovych. Any precipitate move by the Kremlin to embrace a Yanukovych government might also incur the wrath of Washington and escalate a new Cold War, one which Russia is incapable of winning.

LINK: http://www.jamestown.org
The EU needs to better marshal its soft power in the region.

Analysis & Commentary: By Andrew Wilson and Nicu Popescu
Wall Street Journal Europe, London, UK, Tuesday, July 14, 2009

Crisis in Eastern Europe has disrupted the last three holiday seasons. War in Georgia in August 2008 caught most European diplomats on the beaches. The gas crisis in Ukraine came during a very cold New Year. And the Moldovan parliament burned during Easter. The EU should be gearing up for another eventful summer.

New elections are due in Moldova on July 29, after the deadlocked parliament twice failed to elect a new president. Another gas row between Ukraine and Russia could erupt in July or August, as Gazprom struggles for revenue to boost its plummeting cash-flow and Ukraine struggles to pay.

Amid this flurry of activity, the EU is taking its ability to influence events in Eastern Europe for granted. That's a mistake. The EU expansions in 2004 and 2007 have actually managed to push the farther Eastern region further away. On a practical level, for instance, visas are now needed to travel from the region to new EU members like Poland or Hungary.

EU expansion has also created less tangible problems for the EU. People in corrupt and divided Ukraine, which sees the offer of EU membership recede over the horizon, ask how their country is so different from corrupt and divided Romania, which has been welcomed into the EU fold.

Recent polls in Ukraine, the "linchpin" state in the region, show 42% of the population in favor of integration with Russia, as opposed to 34% with the EU.

The local states are weak and are either unable or unwilling to adopt the EU's massive rule-book, which is necessary even to be considered for EU membership. Only in tiny Moldova is opinion solidly in favor of the EU.

The picture is not all bad. The practical benefits of the common market are pulling new member states closer to the West economically. As for the nonmembers in the region, five of the six -- Ukraine, Moldova, Georgia, Armenia and Azerbaijan -- now trade more with the EU than they do with Russia; Belarus, the sixth, is the exception. But the EU is failing to transform its economic role into political influence. Russia marshals its resources more carefully, and has learned the power of incentives.

It has offered neighborhood states concrete benefits, such as open labor markets, cheap energy and hard cash (loans and trade concessions) during the present economic crisis. As the war in Georgia showed, Russia also uses hard power -- not just with military force, but also with economic coercion. Russia has now had trade conflicts with all its neighbors, each one coinciding with a political row.

The EU isn't keeping pace with Russia in this regard. It doesn't really do hard power. Its occasional use of smart sanctions -- travel bans and asset freezes against the leadership of Belarus over faked elections and the rebel "Transnistrian Republic" in Moldova -- have not borne much fruit. Its soft power is also too often ineffective, particularly on the people-to-people level.

Its restrictive visa policy means that the fragile middle class of the eastern neighborhood is excluded from the European mainstream. Education exchanges are minimal, and the EU has no real mass media presence in Eastern European markets that are increasingly monopolized by Russian media and increasingly centralized local governments.

The inability of the EU to transform the region, and the tendency of weak states to play Russia against the West, make the problems so frequent. The crises are not only serious, but multiple and reinforcing. Some result from weak statehood, such as lack of territorial control and state capture by corrupt special interests.

Some stem from Russia's attempts to build a sphere of influence (Russia seeks to control the gas energy infrastructure and maintains a military presence in all six states). These problems were exacerbated by the economic crisis, which hit the region particularly hard.

The EU's policy toward the region should not be based on the remote prospect of accession, nor on "enlargement-lite" policies that are effectively trying to export the EU's rulebook and promote EU interests without offering accession or substantial financial assistance in exchange.

Instead, the EU should develop country-specific solidarity strategies to deal with underlying weaknesses, such as building on the March 2009 agreement with Ukraine to upgrade its gas pipeline system. Visa regimes for citizens of the neighborhood countries urgently need to be liberalized to boost the EU's waning soft power and promote travel for bona fide citizens of the neighborhood countries back and forth from the EU, rather than the current de facto reality of permanent illegal migration.

The EU also needs to start putting Eastern Europe back on the diplomatic map. The "Eastern Partnership" launched in May is a good start. It aims to re-energize EU policy in the East by offering the region a new set of association agreements, discussion on visa-facilitation, and regular summits. But it started in exactly the wrong way, when Angela Merkel was the only leader from the big EU states to attend the Prague summit.

What is needed is an "EU listening tour" of the region, in which leaders from EU states start taking into account the political and security concerns of the region and incorporate them in the emerging discussion between the U.S., Russia, and the EU on the new European security architecture. These discussions currently exclude the neighborhood countries.

While the region is beset by short-term crises, the EU's policies are too long-term. As the U.S. is discovering with its Mexican and Caribbean backyards, problems of poverty, corruption and weak statehood do not stop at the border. The EU is understandably preoccupied with its own internal problems, but these will only get worse if the EU is surrounded by a collapsing neighborhood.

NOTE: Messrs. Wilson and Popescu are policy fellows at the European Council on Foreign Relations where they co-authored the recent report: "The Limits of Enlargement-lite: European and Russian Power in the Troubled Neighbourhood."

LINK: http://online.wsj.com/article/SB124752205805035009.html
(Click here for the report)

Ukrsibbank, PNP Paribus Group, Kyiv, Ukraine, Monday, July 13, 2009

KYIV -- Ukrsibbank, BNP Paribus Group, in Kyiv, Ukraine has just issued their latest report, "Ukraine Macro Outlook, Hard Road to Recover." The entire 18 page report with many charts and graphs, in a pdf format, is attached to this e-mail.

[1] In a regional comparison Ukraine is hardest hit by this recession, but it would be somewhat quicker to recover comparing to other countries which also had experienced significant external disbalances in previous years (Bulgaria, Romania etc).

[2] Unfolding commodity exports will become a winning card for the economy in the medium term. Metallurgy is to deliver a firm comeback, albeit it would take two to three years to reach  production volume of 2007. Inefficiency of Ukrainian soviet-era steel plants has been largely offset by continuous weakness of local currency coupled with decisive government support.

[3] Household consumption still strong, but it will deteriorate over the course of the year as incomes suffer from inflation and mounting weakness in non-manufacturing sectors. Investment is to remain in doldrums scrunched by lack of credit, some de-freeze due to revival of infrastructure projects is expected in Q3.

[4] Currency market is to operate under dirty peg regime through the rest of 2009 and in 2010. In the short-medium term National bank will continue to  support local currency at “equilibrium rate” (levels needed to bring external trade roughly to zero). Currently UAH should be valued at around 7.7, with NBU probably defending domestic currency within +-5% from that point for Q3.

[5] Maintaining budget liquidity will be a challenge as budget will continue to experience drastic shortfalls. Our estimates imply that government would still see nearly UAH 40 bn funding gap, which most likely would result into either a) monetary emission and/or b) necessity to restructure some of state commitments.

[6] The key macroeconomic risk is excessive reliance on automatic stabilizers (such as large fiscal deficits)1, with little support programs being put into action. Indeed the size of stabilizers is huge so that can lead to significant distortions in distribution of domestic incomes, fragile hryvnya and higher inflation.

FOOTNOTE:  To read the entire "Ukraine Macro Outlook, Hard Road to Recovery" Report, July 2009, by Ukrsibbank, BNP Paribas Group, Kyiv, Ukraine, see the attachment to this e-mail.