Welcome to the U.S.-Ukraine Business Council

EUROPEAN BANK FOR RECONSTRUCTION AND
DEVELOPMENT (EBRD) ANNUAL MEETING IN KYIV

Three Articles: A Hot Spring, Legal Reform, Histories of Hope

U.S.-Ukraine Business Council (USUBC)
Kyiv, Ukraine, Monday, May 19, 2008

KYIV - The European Bank for Reconstruction and Development (EBRD)
is holding its annual meeting in Kyiv. This is the second time EBRD has
held its annual meeting in Kyiv. The first was ten years ago in 1998. 

Many members of the U.S.-Ukraine Business Council (USUBC) and
its president have been participating in the EBRD meetings. Around 
2,000 people are attending the meeting.

USUBC MEMBERS ON THE PROGRAM

USUBC members making presentations, chairing panels or participating on
panels listed in the EBRD program include: Steve Walsh, President & CEO,
AES Ukraine and Vice President, AES Corporation; Dmitri Gorshunov,
Bunge; Sarah Carey, Chair of the Board of Trustees, New Eurasia
Foundation and Senior Partner, Squire, Sanders & Dempsey, LLP;
Andrew Wilson, Regional Vice President for Ukraine, Belarus &
Moldova, Eurasia Foundation; Arkadiy Dobkin, CEO & President,
EPAM Systems; and Michael Bleyzer, President & CEO, SigmaBleyzer.

Members participating in the agenda of the Investment Forum “Ukraine:
Investments. Infrastructure. Euro-2012" held on Saturday were Trevor
Link, partner of LLC Ernst & Young in Ukraine and Oleksandr Strukov,
senior associate, DLA Piper Ukraine.

PARTICIPATING USUBC MEMBERS

Representatives of the following USUBC members have been seen at
the meetings and receptions: AES Corporation; ALICO/AIG; American
Express Bank/Standard Chartered group company; Baker & McKenzie; 
Bunge; Cargill; Case New Holland; Chadbourne & Parke LLP; DLA Piper
Ukraine, LLC; EPAM Systems; Ernst & Young LLC; The Eurasia
Foundation; International Environmental Trading Group; Kennan Institute,
Woodrow Wilson International Center for Scholars; Kyiv-Atlantic Group
of Companies; Magisters; Marathon Oil Corporation; Marks, Sokolov &
Burd LLC; The PBN Company; RULG - Ukrainian Legal Group, PA;
Salans; Shell Oil Company; SigmaBleyzer Private Equity Investment
Group; Squire, Sanders & Dempsey, L.L.P.; The State Export-Import
Bank of Ukraine; TNK-BP Commerce LLC; and UPS.

1.  A HOT SPRING IN UKRAINE
Bright hopes, Challenges to face, Rising food prices fuel inflation
Ukraine takes its place in the world economy

Message from Erik Berglof
Chief Economist and Advisor to the President
European Bank for Reconstruction and Development (EBRD)
Kyiv, Ukraine, Sunday, May 18, 2008

2.  LEGAL REFORM IN UKRAINE
Law in Transition 2008
Part II: Legal Reform in Ukraine
European Bank for Reconstruction and Development (EBRD)
Kyiv, Ukraine, May 2008

3.  HISTORIES OF HOPE
Personal reflections on transition in the EBRD region
New Book Compiled Edited by Andrei Kurkov
European Bank for Reconstruction and Development (EBRD)
Kyiv, Ukraine, May 2008
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1. A HOT SPRING IN UKRAINE
Bright hopes, Challenges to face, Rising food prices fuel inflation
Ukraine takes its place in the world economy

Message from Erik Berglof
Chief Economist and Advisor to the President
European Bank for Reconstruction and Development (EBRD)
Kyiv, Ukraine, Sunday, May 18, 2008

BRIGHT HOPES

Kiev is greeting the EBRD Annual Meeting in all its spring beauty. The city
is buzzing with activity from the mayoral election. Flag-waiving campaign
workers operating out of makeshift tents accost passers-by with prepared
speeches promoting the particular faction they support.

Competing stages have been erected for the rock bands enlisted by the
different candidates. While the leaders lending their names to these
campaigns are not always the best symbols of democracy, their grassroots
are.

The economy is also brimming with activity. Growth is broad in terms of
both regions and sectors. Domestic consumption is expanding rapidly, and
favourable commodity prices are fueling exports. But clouds are gathering.
Inflation soared to 30 per cent in April, the highest levels in our region.

Increasing prices of food and energy are mainly to blame, but rapidly
expanding credit and an expansionary fiscal policy have contributed. The
global credit squeeze is adding to the complexity of the economic situation.

In many ways Ukraine is representative of what is going on in the EBRD
region as a whole. Like most of our countries of operation Ukraine has
weathered the financial crisis and rising energy prices well so far, but
investors are more cautious, taking a second look at risks.

The Ukraine premium has come up compared to its low-point a year ago. The
fact that Ukrainian and Russian sovereign risks were judged to be about the
same, despite the huge difference in reserves, is an indication of how
reckless markets had become.

The key explanation for why Ukraine has done well is the same as for the
rest of the region - the strong fundamentals. In the Ukrainian case the
favourable prices on steel and other metals it is exporting have been
particularly beneficial.

But the economy has also been helped through the global liquidity squeeze
by the dramatic transformation of the country's financial system. The rapid
penetration of foreign banks, with four out of the five top banks now in
foreign hands, has helped ensure rapid growth in credit to the corporate as
well as to households.

CHALLENGES TO FACE

But the combination of the credit squeeze and rising inflation now puts the
National Bank of Ukraine in a very difficult situation with a limited set of
instruments at its disposal.

Through its peg to the dollar the country is importing the monetary policy
of the United States which has been focusing on easing the liquidity
situation at the expense of inflation.

With 30 per cent inflation, reinforced by the decline in the dollar relative
to the euro, Ukraine needs to go in the opposite direction.

A couple of weeks ago the central bank raised interest rates dramatically,
but its influence is limited. The provision of liquidity is now to a
considerable extent in the hands of the foreign parents of the local banks.

Even though exports are doing very well at the moment, the economy needs
to manage a "soft landing", akin to what the Baltic economies have tried to
achieve. The central bank must focus on inflation, and it is making steps in
that direction.

It is also showing greater flexibility in managing the exchange rate
allowing the currency to appreciate, as you can see from the prices quoted
in the exchange booths all around the city.

The government needs to restrain fiscal expansion and make sure that
one-time privatisation revenues do not lock the country into unsustainable
social programmes. Some of the large privatisations also look less likely to
happen anytime soon.

But as in the Baltic states there is also a need to coordinate with the
foreign banks active in the country. The problem in Ukraine is that the
number of banks is larger and, unlike the Baltics, they are not under the
same regulator. Needless to say, the banks in Ukraine are fighting
aggressively for market shares.

At the same time local banks without international parents and specialized
institutions relying on external funding models are struggling to cope with
the liquidity squeeze. To manage through this rough patch will take
extraordinary focus and determination.

Macroeconomic management is not the business of the EBRD, but we have
a responsibility to support the efforts of the responsible authorities.

We must use the increasing demands on the Bank to help banks adjust to
the new reality of more difficult funding conditions for banks and soaring
inflation.

Reigning in consumer credit expansion, reducing foreign exchange exposures
and improving capitalization and risk management are all part of this
adjustment.

There are signs that banks are reducing their growth targets and this should
help slow down consumption growth. This is critical because inflation
undermines financial development as households are less likely to leave
their money with the banks. Moreover, developing Ukraine's fledgling local
currency markets will prove even more challenging.

RISING FOOD PRICES FUEL INFLATION

One important reason for the higher inflation is the recent increase in food
prices, food accounts for 56 per cent of the consumption basket.

For Ukraine with its vast arable land this should be a boon, but years of
neglect of investment have meant that the short-term response capacity of
the country's agricultural sector is modest. Property rights are still
unclear, and the infrastructure for transporting and warehousing foodstuffs
is in poor shape.

A recent conference we organized in London demonstrated the need for
much more dialogue between the private sector and the government.

The Bank can play an important role in coordinating this dialogue and
promoting specific projects along the agribusiness value chain. If
successful, Ukraine can make a major contribution to solving the global
food crisis.

The changing global environment with higher premium on risk and reduced
capacity of banks to lend will particularly hit the more risky small and
medium-sized firms.

Often these firms also have less capacity to hedge themselves against
increasing foreign exchange risk. Again, the EBRD must maintain its support
for this sector so important for the Ukrainian economy.

The strong economic growth has taken place against a background of
infighting and indecision within the Ukrainian political elite.

Some observers suggest that this shows that politics really does not matter
for economic growth, or more strongly that impotent politicians are actually
good for growth. Both these views are fundamentally flawed.

Perhaps for the short-term challenges facing the country at the moment may
not require the immediate involvement of parliament and perhaps not even the
government, as long as the central bank functions properly.

But for the longer term Ukraine must implement a large number of important
reforms, including a new code, the joint stock company law, and the energy
law.

Efforts are also needed to reform the opaque gas monopoly, the unsustainable
pension system, and the poorly functioning domestic capital markets.

TAKING ITS PLACE IN THE WORLD ECONOMY

Yet the political activists pushing their mayoral candidates are an
encouraging sign. For all the bickering and gridlock within the political
class Ukrainian democracy is now firmly established.

Elections are routinely conducted in a fair and transparent fashion. Unlike
most of the countries in the CIS the country's democratic system has even
survived a political backlash without dramatic disruption.

Of course, the perennial question of Ukraine's international orientation
stemming from its history, geographical location and ethnic composition has
not been resolved.

But probably the most promising avenue at the moment is for Ukraine not
to choose between Russia and Europe but focus on its integration into the
world economy.

The recent membership in the WTO is an important step in this direction. In
the longer term this will undoubtedly bring Ukraine, and hopefully Russia,
closer to Europe.
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LINK: http://www.ebrd.com/new/speeches/berglof/index.htm
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2. LEGAL REFORM IN UKRAINE

LAW IN TRANSITION 2008 
Part II: Legal Reform in Ukraine
European Bank for Reconstruction and Development (EBRD)
Kyiv, Ukraine, May 2008, 95 pages

After a difficult period following the collapse of the Soviet Union, Ukraine
is making progress in its economic and political transition.

It is now seen as an important partner by its neighbours in the east and the
west, with a dynamic economy, a quickly growing domestic market and a
lively democratic society.

Ukraine has made its 'European choice' while at the same time recognising
the importance of good relations and extensive commerce with Russia.
Overall, for Ukraine, like for other Eastern European countries, the recent
years were good in many respects.

The quality of life has improved for the majority of the population,
business activity in general and foreign direct investments have been
constantly on the rise.

However, problems remain in many areas, and, notably, the lack of economic
and legal reforms together with certain political instability continue to
hinder the country's further growth.

In 2008 Ukraine is hosting EBRD Annual Meeting of Governors. Being the
largest institutional investor in Ukraine, for more than a decade the EBRD
has been playing an active role in boosting the country's transition to the
market economy.

The number of EBRD's operations has increased dramatically over the past
few years as Ukraine has become the Bank's 2nd largest investment region
after Russia. This strong growing tendency is expected to continue.

This section offers a variety of views and topics authored by practising
lawyers, bankers, economists, and academics.

In the first article, Valeriy Tsekhanovych and Anna Yegupova of the EBRD
provide the current state of affairs in key areas of Ukrainian commercial
legislation relevant to investment.

Part II . LEGAL REFORM IN UKRAINE

[1] Alan Rousso, Kamen Zahariev, Elisabetta Falcetti and Yevgeniya
Korniyenko, all of the EBRD, look into recent achievements, challenges and
trends in the private sector of the Ukrainian economy and describe the EBRD
response to these challenges.

[2] James Wilson of the EBRD looks into financing the construction of
properties leased to developers by Ukrainian municipalities, an increasingly
visible and attractive business activity.

[3] Irina Voytyuk, Rector of the Academy of Judges of Ukraine, shares her
experience in establishing a national system of education for Ukrainian
judges.

[4] Motria Onyschuk-Morozov, Senior Operations Manager, IFC and
Vladislava Rybota, Legal Adviser, IFC, focus on the promotion of good
corporate governance to private sector companies.

[5] Finally, Olexander Martinenko, Partner, CMS Cameron McKenna LLC,
and Yevhen Deyneko, Lawyer, CMS Cameron McKenna LLC, review the
long-awaited draft joint stock company law which has been under discussion
in the Ukrainian parliament.

TO READ THE DOCUMENT "LEGAL REFORM IN UKRAINE"
WITH THE FIVE ARTICLES ABOVE CLICK ON THE
FOLLOWING LINK:
http://www.ebrd.com/pubs/legal/lit08.htm.
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3.  HISTORIES OF HOPE
Personal reflections on transition in the EBRD region

New Book Compiled and Edited by Andrei Kurkov
European Bank for Reconstruction and Development (EBRD)
Kyiv, Ukraine, May 2008

Through the voices and emotions of fifteen prominent writers and essayists,
"Histories of Hope - Personal reflections on transition in the EBRD region"
brings together a diverse range of views on the social and economic changes
that have affected their countries since the end of communism in Eastern
Europe and the former Soviet Union.

Launched on the occasion of the 2008 Annual Meeting of the EBRD in Kyiv,
Histories of Hope gives a sense of the colossal historic changes which have
occurred across the Bank's region of operations, particularly in Armenia,
Azerbaijan, Belarus, Bulgaria, Croatia, Georgia, Kazakhstan, Kyrgyz
Republic, Moldova, Russia, Serbia, Tajikistan, Turkmenistan, Ukraine and
Uzbekistan.

This unique collection of reflections was compiled and edited by the
renowned Ukrainian author, Andrei Kurkov. For additional information
about the new book and how to order the free book click on:
http://www.ebrd.com/pubs/general/hh.htm.