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Analysis & Commentary by Edward C. Chow, Senior Fellow, Energy and
National Security Program, Center for Strategic and International Studies (CSIS)
Kyiv Post, Kyiv, Ukraine, Friday, January 29, 2010

Fundamental Reform of the Energy Sector is Necessary
Proposals for Ukraine: 2010 - Time for Reforms, Reform the Energy Sector
Chapter 5, Independent International Experts Commission
Kyiv, Ukraine, Feb 2010, p 45 - 51

16th-18th March 2010, InterContinental, Kyiv, Ukraine, Register Today
U.S.-Ukraine Business Council (USUBC), Wash, D.C., Fri, Mar 5, 2010
Software Development Lifecycle Provider Named to 2010 Global Outsourcing 100 List
SoftServe, Ft. Myers, Florida, Wed, Mar 3, 2010
The Largest Investment Gathering for Ukraine Worldwide
17-19 May 2010, Marriott Grosvenor Square Hotel, London, UK
U.S.-Ukraine Business Council (USUBC), Wash, D.C., Fri, Mar 5, 2010

EPAM Systems, Newtown, PA, Wed, March 3, 2010 
A new grand and elegant hotel found right in the heart of Kyiv
U.S.-Ukraine Business Council (USUBC), Wash, D.C., Wed, Mar 3, 2010

Analysis & Commentary by Edward C. Chow, Senior Fellow, Energy and
National Security Program, Center for Strategic and International Studies (CSIS)
Kyiv Post, Kyiv, Ukraine, Fri, January 29, 2010

In this moment of crisis, the next Ukrainian president will have a unique opportunity to invest political capital gained from a national mandate to clean up the energy sector.

Both candidates in the Feb. 7 runoff election for president of Ukraine proclaim reform in order to tap into voters’ deep dissatisfaction with dysfunctional politics and their leaders’ failure to cope with concerns of citizens in an economic crisis. Neither has much credibility, given that both twice served as prime minister and are perceived to have been as much part of the problem as the solution.

Whoever is elected will have a small window of time to use the electoral mandate to recover from the sadly squandered opportunity of the 2004 Orange Revolution by setting a bold new path for reform.

Nowhere is this more evident and urgently needed than in the energy sector, which has suffered two decades of decay, inefficiency and massive corruption. This area also concerns Ukraine’s international partners, whose own interests are at stake and who can help if there is political will from Kyiv to embark on reform.

Consequently, what the next Ukrainian president does on energy in his or her first 100 days in office will be watched carefully at home and abroad as the key indicator on whether it will again be business-as-usual or whether Ukraine will at last get a leader to enact changes its society demands.

For energy, the first order of business is to stabilize the critical gas relations with Russia, which have been plagued by many years of non-transparency and designed instability. When Central Asian gas was cheap and West European gas prices dear, billions of dollars per year were siphoned off in corrupt schemes by the politically privileged at the expense of ordinary citizens in producing and transit countries.

The market conditions of the 1990s transition period are gone forever. The Jan. 19, 2009, gas supply and transit agreements go some ways toward modernizing the gas relationship between Russia and Ukraine. However, they are inadequate, as evidenced by constant adjustments of critical terms, such as volume obligations and transit tariff, in the first year of what were supposedly 10-year agreements.

Any agreement that requires frequent political discussion by prime ministers and commercial renegotiation by heads of Gazprom and Naftogaz is inherently unstable. The objective for Ukraine should not be the lowest possible price for imported gas or the highest possible price for gas transit as some suggest.

Three-quarters of the gas from the direction of Russia to West European markets are shipped through Ukrainian pipelines. The fragile Russian-Ukrainian gas relationship is steadily eroding this important asset, inherited from geography and Soviet legacy. Expensive new pipeline projects such as South Stream and Nabucco are proposed for the principal purpose of replacing Ukraine as the vital transit corridor for gas to Europe.

With a couple of billion dollars, Ukraine can renovate and expand its pipeline capacity to carry the volume of gas to be transported by new pipelines, which will cost tens of billions of dollars each. As long as it is recognized as an unreliable transit country, gas producers and consumers will seek economically sub-optimal solutions in order to bypass Ukraine.

Pipelines on the drawing board and imports of additional liquefied natural gas can replace in time all the transit capacity of Ukraine. Without updating its gas transit relationship with Russia as the principal if not only shipper, investment projects to upgrade Ukraine’s pipelines are simply not bankable, as should be clear by now despite the March 23, 2009, declaration by Ukraine and the European Union in Brussels.

Russia and Ukraine must first agree to reasonable gas transportation terms with financially-secure volume guarantees by both sides and a tariff mechanism that reflects operational cost recovery and maintenance, as well as economically justified reinvestment, for a period of 20 years or longer. Then Ukrainian pipeline revenue can be protected and increased through volume growth, not just tariff increases.

Internationally standard long-term contracts take many months to negotiate properly and cannot be concluded in a couple of evenings or weeks as had been the Russian and Ukrainian custom, only to be followed by frequent renegotiations.

The new Ukrainian president should chart a course for mutually beneficial gas relations with Russia, starting with extracting Ukrtransgaz [the gas transit daughter company] out of the black hole that is Naftogaz and compelling it to operate in a transparent and credible manner. Without this essential condition, no external funding of investments in the gas transit and storage system will be forthcoming.

Restructuring Naftogaz itself will be a much more difficult and laborious task. One of the principal, but by no means only, reasons why Naftogaz is a bankrupt (un)natural state monopoly is multi-tiered domestic gas pricing. Naftogaz is forced to sell to different classes of consumers at prices lower than what it pays for imports.

At the same time, domestic gas producers are disadvantaged by having to sell at an artificially low price which is a small fraction of the imported price. In effect, expensive imports are subsidized by cheap domestic supply, leading to highly-corrupt grey market operations. Small wonder unqualified financial statements and audit reports in this majority state-owned sector are difficult to find.

As a consequence, legitimate domestic and foreign investors are discouraged from fully developing Ukraine’s ample oil and gas endowment while revenue and asset stripping of state assets are prevalent. The average consumer endures poor and undependable service even though low energy prices are justified in his name.

State assistance and subsidy should target the truly needy in society. Low overall prices instead lead to wasteful consumption by those with special access to cheap gas, while the rest of the population suffers spot shortages. Ukrainian industry has the highest energy intensity in the world. Energy efficiency will not improve substantially without prices being freed to market-clearing levels.

Advocating real energy reform requires political courage anywhere in the world. In this moment of crisis, the new Ukraine president will have a unique opportunity to invest political capital gained from a national mandate to lead desperately needed energy reform. Without it, Ukraine’s energy economy will be in even more dire straits in five years’ time.

By then, international financial institutions, the European Union and United States may no longer be so interested to offer financial and technical assistance as they are today. The world will have moved on, with or without Ukraine.

Mr. or Madam President-elect, in spite of their past disenchantment, your own citizens and your international partners anxiously await your next move on the energy front.

NOTE: Edward C. Chow is a senior fellow at the energy and national security program of the Center for Strategic and International Studies in Washington. He has been an occasional adviser to various Ukrainian governments over the past 10 years.

LINK:  http://www.kyivpost.com/news/opinion/op_ed/detail/58212/
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Fundamental Reform of the Energy Sector is Necessary
Proposals for Ukraine: 2010 - Time for Reforms
Reform the Energy Sector, Chapter 5
Independent International Experts Commission
Kyiv, Ukraine, Feb 2010, p 45 - 51
The paramount tasks in energy policy are to ensure stable energy supply, develop Ukraine’s energy production, raise the country’s energy efficiency, and enhance energy security. Accomplishment of these tasks demands a market economic environment in the energy sector, with the transformation of pricing policy, enterprise restructuring, improved governance, and introduction of a competitive market.

The Ukrainian energy sector is riddled with such serious problems that it receives its own chapter in this action program report.

[1] First, the Ukrainian economy is one of the most energy intensive in the world because of the very low prices offer no incentives to invest in energy saving. In the next five years, Ukraine should be able to cut its energy consumption by half relative to GDP, as Poland and Slovakia have done. Then, Ukraine would not need to import any natural gas.

[2] Second, current energy pricing subsidizes imports and penalizes domestic production, which boosts imports at the expense of domestic energy production.

[3] Third, the energy sector has probably been the main source of corrupt incomes in Ukraine.

[4] Fourth, because of the poor management of the energy sector, energy supplies are not sufficiently secure.

[5] Fifth, Ukraine has been losing transit business because of its poor reputation as a reliable transit country. The worst problems pertain to the gas sector, and the electricity sector is highly dependent on gas supply. The coal sector has its own problems. Oil trade is reasonably free, though oil pipeline transportation, ports, railways and terminals suffer from similar problems as gas pipelines. The energy sector is probably the biggest source of waste and corruption in the Ukrainian economy.

To resolve these problems, a fundamental reform of the energy sector is necessary. The key object of reform must be Naftogaz Ukrainy. Several reforms should be pursued in parallel. Naftogaz Ukrainy should be divided into several separate companies. Production should be separated from transportation.

Non-core activities should be sold off. The remaining state companies should be given proper governance with professional, competent supervisory boards, including independent directors, and international auditing of annual reports should be made public.

All energy prices should be raised to a level that will cover the costs of production plus a competitive profit margin. All price subsidies and cross-subsidization should cease, while social compensation should be provided for truly needy groups.

The pipeline system should offer equal access to all at market-related prices. Over time, producing companies should be sold off. Private investment and competition in the oil and gas sector in Ukraine should be given legal protection.

However, all these reforms have to be undertaken gradually and coordinated, as has been proposed by the European Union (EU) because presently, Naftogaz has such large debts and liabilities that it would go bankrupt if it lost its profitmaking parts.

Its creditors need to be consulted during its restructuring. Gas reform can deal a major blow to corruption; reduce Ukraine’s need for gas imports, turning its current account into surplus; improve state finances; and guarantee Ukraine’s energy security.

The energy sector harbors large commercial and bureaucratic interests, and any reform will hurt some of these interests. Therefore, a newly elected president needs to act fast and hard to accomplish energy reform, and Ukraine needs international support to carry out these complex reforms. The EU has engaged very constructively through its agreement with Ukraine on reform and investment in the Ukrainian Gas Transit System.

Gas reform should be carried out on the basis of this agreement, which is also supported by all the international financial institutions and the United States. Gas reform should include investment to modernize the Gas Transit System and generate energy savings.

One important purpose of gas transit reform is to make Ukraine attractive as a reliable transit country. Ukraine is making large revenues each year on gas and oil transit, which gives the country a large surplus in its service balance of payments.

At present, many pipeline projects are threatening to bypass Ukraine and reduce its market share: Blue Stream-2, Nord Stream, South Stream, and Nabucco for gas and the Baltic Pipeline System for oil. Ukraine has a vital interest in protecting and increasing its transit volumes and therefore income, and it must first prove itself as a reliable transit country.

A patent threat to Ukraine’s position as a seller of transit services has been its poor relations with Russian Gazprom. The Ukrainian-Russian ten-year agreement of January 19, 2009, on supply and transit of gas made great advances toward transparency, elimination of a middleman, and market-oriented pricing and thus toward more stable gas relations with Russia.

However, the volumes assigned in the agreement were far too large. They have been renegotiated for the first two years of the agreement, but it would be desirable to reach a more stable and flexible solution.
Recommendations for the Entire Energy Sector
       1.  The government should develop a realistic energy pricing policy. The Ukrainian government has agreed with the International Monetary Fund (IMF) that gas prices for all categories of privileged consumers of natural gas, electricity, and coal should be increased by 20 percent a quarter until they reach a cost recovery level. The abolition of all these price wedges will eliminate a major source of corruption, thus laying the foundation for energy efficiency. All energy prices should be brought to the level of full cost recovery plus a profit margin for operators as soon as possible.
       2.  The Cabinet of Ministers should draft and the parliament adopt the Law on the National Energy Regulatory Commission of Ukraine to reinforce and unify the regulation of all natural monopolies in one strong and competent independent regulator. It should control pricing of services provided by all natural monopolies, ensuring a balance of interests between producers, consumers, and state. It should guarantee reliable supply of high-quality services to consumers at fair prices, while making sure that the natural monopolies can make sufficient profits to be able to develop.
       3.  At the same time as the price hikes, the Cabinet of Ministers should introduce a new system of targeted social assistance for the least protected groups of consumers who suffer because of high gas, electricity, and coal prices.
       4.  Energy saving. Ukraine needs to elaborate, adopt, and implement a program for energy saving. The country should continue to engage in the sale of carbon emissions rights under the Kyoto Protocol and encourage investment in energy-saving technologies.
       5.  Investment opportunities in the oil and gas sector in Ukraine must improve for both domestic and foreign investors. At present, only a few, mainly small, private energy companies are producing oil and gas in Ukraine, besides subsidiaries of the state conglomerate Naftogaz Ukrainy. Although Ukraine has substantial oil and gas assets, its oil and gas production has been stagnating for many years.

            Moreover, vast gas assets are known to exist on the Ukrainian part of the Black Sea and Azov Sea shelves. Ukraine should set the target of doubling its production of oil and gas within a decade and become self-sufficient in energy. Investors and producers must be provided with secure property rights, free market prices, and stable and reasonable rules of taxation.
       6.  Open up state oil auctions. Throughout 2008, the prices at auctions for oil and gas condensate were much lower than market prices because the management of Ukrnafta kept down their prices in the interest of related businessmen, even though the state owns a majority of the shares in Ukrnafta.
            The Cabinet of Ministers has repeatedly tried to open up these “auctions,” most recently with a decree On Amendments to the Regulation on Organization and Implementation of Auctions for Sale of Oil, Gas Condensate, Natural and Liquefied Gas, and Coal, adopted on December 23, 2009. It prohibits related buyers from participating in auctions and sets a minimum price as per world prices. Yet, so far the Cabinet of Ministers has not carried sufficient weight to resolve this problem.
Gas Sector Reform: Crucial for Success
Gas reform is probably the most important reform in the Ukrainian economy. Ukraine’s gas sector is the most unreformed, highly monopolized, and non-transparent part of the economy, and it is characterized by extensive corruption. Most prices are far below the market level, as pricing is susceptible to political leverage.

In addition, restrictive regulation, poor property rights, and high taxes deprive producers of any economic incentive to increase production of natural gas, invest, or serve their consumers appropriately. Naftogaz Ukrainy, which was formed as late as in 1998 for political reasons, has never functioned acceptably and needs to be broken up.

Gas reform is necessary to ensure stable gas delivery to Ukrainian consumers and enhance the transit of gas through Ukraine to European consumers, increase the sector’s efficiency, attract investment for the reconstruction and modernization of the gas transit system, and fulfill its international obligations.

The key elements of reform are the creation of a competitive market for natural gas, economically sound gas price policy, and transparency.

Absence of a competitive gas market. The fundamental problem with the Ukrainian gas sector is the nonexistence of a market because of complete monopolization.

Economically unsound control of gas prices. The long-standing political practice of setting natural gas prices for the population, state-funded organizations, and municipal heating enterprises lower than what Naftogaz Ukrainy pays to Gazprom has made Naftogaz incur chronic losses to the tune of $2billion to $3 billion a year. The government has to scramble and exploit every opportunity to find funding for these payments to Gazprom.

It has used loans from state-owned banks, IMF funding, international reserves of the National Bank of Ukraine, and advance payments by Gazprom for gas transit to Europe. Naftogaz Ukrainy is heavily indebted and effectively bankrupt if it does not receive large annual allocations from the state budget.

Low tariffs on transportation, distribution, and delivery of natural gas. These low tariffs make it impossible for the operators to maintain or modernize underground storage facilities and gas pipelines. As a consequence, the whole infrastructure is neglected.

Poor payment discipline. During the first eleven months of 2009, Naftogaz Ukrainy was paid for only 87 percent of the natural gas it delivered to its consumers, and its indebtedness rose accordingly.

Non-transparency in the gas sector. Incredibly, although Naftogaz Ukrainy is a state-owned corporation, it publishes no annual report for itself or its many daughter companies. Natural corollaries are non-competitive and expensive procurement and high costs of borrowing.

Significant gaps in legislation. Legislation for the gas sector consists mainly of decrees and regulatory acts and not of laws, which makes enforcing rules impossible.

Poor compliance with international obligations. Ukraine has undertaken extensive international commitments in the gas sector:

        [a] the Joint EU-Ukraine Declaration, which was adopted at the International Investment Conference on the Modernization of the Ukrainian Gas Transit System on March 23, 2009 (the so-called Brussels Declaration);
        [b] the Memorandum of Economic and Financial Policies between the Cabinet of Ministers of Ukraine and the International Monetary Fund of October 26, 2009;
        [c]  accession of Ukraine to the Energy Community (on December 18, 2009); and 
        [d]  commitments to take measures to gradually bring national legislation into compliance with EU legislation in certain areas, including the energy sector, according to Article 51 of the Partnership and Cooperation Agreement between Ukraine and the EU and also its member states as of June 16, 1994.

Ukraine’s international commitments in the gas sector consist of specific tasks: harmonizing national legislation with EU legislation; reforming the pricing system; introducing market principles; developing and implementing gas sector reforms, including reforming Naftogaz Ukrainy; improving the independence of the regulatory authority; and preparing an action plan on the renovation and modernization of Ukraine’s gas transportation system.

The prerequisite for membership of the Energy Community and candidate status for accession to the EU is implementation of the energy chapter of the aquis communautaire in full. This obliges Ukraine to implement the provisions of the EU “third energy package.” Three important legislative acts concern an Agency for the Cooperation of Energy Regulators, conditions for access to natural gas pipelines, and common rules for the internal natural gas market.

Ukraine’s failure to fulfill its obligations to the European Commission, the IMF, and the Energy Community could prevent it from receiving further IMF funding as well as international credits for the reconstruction and modernization of the gas transit system, which would damage Ukraine’s international image. But the main thing is that Ukraine would suffer from the absence of real gas reform.

This is also the view of Ukraine’s international partners, notably the EU, the IMF the World Bank, and the United States. They all see gas reform as the key condition for Ukraine’s economic success. Therefore, they have concluded the three aforementioned agreements with Ukraine on gas reform.

Various Ukrainian bodies have drafted many bills on energy reform, which have tended to stay as drafts and rarely correspond to Ukraine’s international commitments. Recently the draft Law on the Principles of Functioning of the Natural Gas Market Functioning of October 22, 2009 was submitted to the Verkhovna Rada. It prescribes eliminating the natural gas monopoly, introducing competition in the domestic natural gas market, economically sound pricing, and energy-saving technologies,

Yet there is no need to reinvent the wheel. Ukraine has committed itself to quite specific reforms in its international agreements, which should guide Ukraine’s reforms. A key EU directive vital for Ukraine is to separate transportation of natural gas from production as well as distribution. Specifically, the Gas Transit System, that is, the company Ukrtransgaz, should be legally separated into an independent company.

The same is true for Ukrtransnafta, the trunk pipeline company. Similarly, the various functions of the company ChornomorNaftogaz should be divided into separate companies—production of oil and gas offshore on the Black Sea and Azov Sea shelves, gas transportation, and storage of gas in Crimea.

The recent EU laws and regulations in the “third energy package” adopted in July 2009 have not been addressed in the draft law. The key issue is This is an action program for the first year of a new presidency unbundling of natural gas transportation and distribution functions, and the new EU legislation has expanded the legal demands for market creation.

The EU member states can choose one of the three options to operate vertically integrated companies.

[1] The first option envisages compulsory separation of their property by selling pipelines to an independent operator without right to a controlling interest.

[2] The second option allows vertically integrated companies to remain the owner of their pipelines provided they are managed by an independent operator appointed by the national government upon prior approval of the European Commission.

[3] The third option foresees the retention of vertically integrated companies, monitored by a special supervisory authority, with an independent subsidiary in charge of daily operation of the pipelines. The vertically integrated company would keep the pipelines as financial assets on its balance sheet.
The current Ukrainian draft law is designed for the second and third options. The Ukrainian parliament has prohibited the privatization of the gas transit system and the gas reservoirs for fear of threats to the country’s national security. However, rules ensuring independence of a gas pipeline operator need to be reinforced. The powers and obligations of independent operators of gas pipelines and gas distribution should be explicitly stated.

An independent supervisory authority is also necessary. The Cabinet of Ministers should reinforce and reintroduce the Draft Law of Ukraine on Principles of the Natural Gas Market Functioning to bring Ukrainian legislation into full compliance with the provisions of EU gas sector legislation.
       1.  The Cabinet of Ministers should develop and the parliament adopt a Program for Gas Sector Reform to be implemented in 2010-2011 in line with the EU-Ukraine Brussels Declaration. It should aim at restructuring Naftogaz Ukrainy, which should be divided into separate companies specializing in production, transportation, and distribution. Non-core activities should be sold off. Corporate governance should be introduced in the resulting state companies with professional boards consisting of independent directors and public annual reports subject to international audit.
       2.  The Cabinet of Ministers should develop and adopt a Concept for Liberalization of the Gas Market in Ukraine, which should lead to the adoption by parliament of a Law on Principles of the Natural Gas Market Functioning to establish the principles for the natural gas market so that it performs transparently and efficiently, and stimulate competition. These principles should harmonize Ukrainian legislation with EU gas directives.

            This law should ensure legal and organizational independence of the gas transmission operators and prohibit cross-subsidization. The operation of underground gas storage should be separate from gas transportation. All enterprises should be guaranteed non-discriminatory and transparent commercial access to the gas transmission systems and storage. The gas supply and distribution functions should be unbundled.
       3.  The National Energy Regulatory Commission should propose and the parliament adopt laws and regulations for the Ukrainian natural gas market. They should include a Gas Network Code with rules for access to gas pipelines and underground storage, and so on, in line with Ukraine’s commitments as a party to the Energy Charter Treaty and its Transit Protocol.
       4.  In line with the EU-Ukraine Brussels Declaration, the government should develop a plan for the renovation and modernization of the gas transit system and attract financing from interested international financial institutions.
Electricity Reform
Ukraine undertook quite far-reaching structural reforms in the electricity sector in the mid-1990s. The power companies were restructured so that a handful of generating companies were created, while each region basically had its own distribution company. A public wholesale market was organized. The problem, however, was that electricity tariffs were controlled by the state at a level that was lower than the recovery cost, and then the wholesale market could not function well.

The largely state-owned generating companies make chronic losses and cannot generate any profits for the maintenance and modernization of existing electricity generation or the grid, which threatens stable supply of electric power to consumers. Nor do these conditions offer any incentive to increase efficiency. The whole power sector suffers from excessive wear and tear on equipment.

Excessive price control and growing cross-subsidization. The main problem in the power sector is low, regulated electricity tariffs. An evolving malpractice is to differentiate tariffs by category of consumers, with low tariffs offered to households. These privileges are being financed through cross-subsidies, as industry pays much higher tariffs. The growing number and volume of privileges increases cross-subsidization.

Impeded Wholesale Electric Energy Market Reform. In 2002, the Cabinet of Ministers adopted a Concept for the Ukrainian Wholesale Electric Energy Market, but it could not be implemented because of low state-controlled prices. Increasing cross-subsidization complicates any market development. As a consequence, administrative regulation is increasingly needed for the allocation of electricity. Not surprisingly, the extension of administrative allocation has been accompanied by increasing arrears and indebtedness of power companies.

The government presented a Draft Law on Amending the Law on Electric Power Industry’ to the parliament in October 2009, which is supposed to be based on the Concept for the Ukrainian Wholesale Electricity Market. It envisages a new electricity market model used in some EU countries with common rules for domestic electricity markets.

However, the draft law differs substantially from the adopted Concept and lacks many of its components. Its lack of provisions necessitates many regulatory acts, which preferably should be inscribed into law to offer clarity and permanence. The Cabinet of Ministers ought to submit a new version of the Draft Law on Amending the Law of Ukraine on Electric Power Industry with all the key elements of the already adopted Concept.
       1.  A functioning wholesale market should be developed by drafting and adopting a Law on Principles of the Wholesale Electricity Market. The draft law should be based on the Concept for the Ukrainian Wholesale Electric Energy Market Functioning and Development (approved by the Cabinet of Ministers on November 16, 2002) and the Action Plan for the Implementation of the Concept for the Ukrainian Wholesale Electric Energy Market Functioning and Development (approved by the Cabinet of Ministers on November 28, 2007).
       2.  Privatization of the remaining state-owned electricity generating companies and the regional power distributors should form an important part of the state privatization program. The remaining state-owned power companies and mines should be sold off before the end of 2011. These companies can be easily sold off, as prior privatizations show. Preferably, they should be sold to strategic investors.
Coal Mining Reform: Easy and Beneficial
Ukraine has a viable coal industry, but it has never seen any real reform. However, some coal mines have been privatized sporadically, and private coal mines have expanded their production, while the state-owned ones have shrunk. At present, private enterprises dominates the coal sector. Yet prices remain regulated at too low a level.

Coal products are priced on the basis of regulatory acts, not market forces. As compensation for low prices, the state pays all coal mines non-transparent and highly varied subsidies, depending on how much they bargain. Neither the distortion of coal prices nor the extensive state subsidies can be justified, as they do not encourage coal producers to produce more and become more effective.

Ukraine’s policy on coal mining has led to most unsatisfactory financial and economic performance. Discretionary state regulation and excessive state ownership are holding back the industry. Coal production has been stagnant. Labor productivity is low and falling, while costs are rising, and some very inefficient mines continue operating. Losses are large and rising, while payment discipline is poor.

Many Ukrainian coal mines are suffering from poor safety standards causing the death of many coal miners. Subsidies have increased every year. This is the result of wrong priorities, non-transparency, absence of clear guidance for state support, and the abandoning of basic principles of restructuring.

The main goal of coal sector reform must be a cardinal increase in efficiency. The main tasks of reorganization are: meeting the national economy’s needs for domestic coal; cost-effective and secure operation of coal-mining enterprises; and social and economic stability in coal-mining regions. The best way of doing all this is by privatizing and introducing a competitive coal market.

Ukraine can follow the successful Russian coal reform of 1998-99 that was spearheaded by the World Bank. The pillars of reform are privatization of the remaining public coal mines; liberalization of coal prices; simultaneous elimination of coal subsidies; and social support for restructuring. The private Russian coal industry has thrived for a decade after these reforms, developing a vibrant coal market, steadily expanding production, and generating substantial profits.
The Cabinet of Ministers should launch a comprehensive coal industry reform consisting of the following five elements.

       [1] First, the government should draft and the parliament adopt a Law on State Assistance to the Coal Mining Industry, which should conform subsidies to the terms and conditions common in the EU. Subsidies to the coal industry should be phased out gradually as coal prices are liberalized and chronically loss-making mines closed.

       [2]  Second, coal prices should be liberalized.

       [3] Third, the government and parliament should also adopt a Law on the Closure of Mining Enterprises, setting the rules for their closure and measures to mitigate the social consequences. The government should start selecting coal mines for privatization or closure.

       [4] Fourth, a Law on Principles of the Coal Market Functioning should establish the rules for a regular market for coal (after price liberalization) and set up an exchange market for the sale of coal products, as well as a direct purchase and sale contract market.

       [5] Fifth, the privatization of coal mines should form an important part of the state privatization program, and the remaining state-owned coal mines should be sold off.

LINK: http://www.usubc.org/AUR/aur954.php
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From 22 to over 100 Members in Two Years, Join Today
16th-18th March 2010, InterContinental, Kyiv, Ukraine, Register Today

U.S.-Ukraine Business Council (USUBC), Wash, D.C., Fri, Mar 5, 2010

WASHINGTON - The Adam Smith Conferences' 2nd Forum on "Agribusiness in Ukraine" will be held in Kyiv on 16-18 (Tuesday, Wednesday, Thursday) March 2010 at the InterContinental Hotel.  "Agribusiness in Ukraine" forum is the only event attended by the decision makers of ALL the leading players in the  Ukrainain agrarian industry, from both key international and Ukrainian companies. You will get to meet and talk with all the key movers in one place, at one time.

Many members of the U.S.-Ukraine Business Council (USUBC), www.usubc.org, will be attending the Agribusiness in Ukraine forum and will participate on the program.

More than 40 high-level speakers, all recognised leaders and experts in the domestic and international agrarian industry will present at the forum.  For full details on the programme, speaker line up and to register, visit http://www.adamsmithconferences.com/RUC5USB.

If you have any questions, Adam Smith Conferences staff will be happy to help.  Please contact Lyudmyla Durneva on +44 207 0177339/7444 or write to
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Software Development Lifecycle Provider Named to 2010 Global Outsourcing 100 List

SoftServe, Ft. Myers, Florida, Wed, March 3, 2010
FT. MYERS, FL - SoftServe, Inc., a leading global provider of custom software development and consulting services, has been recognized by the International Association of Outsourcing Professionals® (IAOP®) for its expertise in working with companies in the independent software vendor (ISV) and enterprise markets.  SoftServe was named to the best outsourcing service provider list in the "Rising Star" judging group of the 2010 Global Outsourcing100®. 
“Being named to The Global Outsourcing 100 and The World's Best Outsourcing Advisors is a great recognition, particularly given the strong competition, and these companies should be proud of achieving excellence in outsourcing,” said IAOP Chairman Michael Corbett and chair of the judges’ panel.
The IAOP is the global, standard-setting organization and advocate for the outsourcing profession.  With more than 100,000 members and affiliates worldwide, the IAOP helps companies increase their outsourcing success rate, improve their outsourcing ROI and expand the opportunities for outsourcing across their businesses. 

The Global Outsourcing 100 and its sublists are essential references for companies seeking new and expanded relationships with the best outsourcers and service providers in the industry.  The lists include not only today’s leaders, but tomorrow’s rising stars.
“Being recognized on the Global Outsourcing 100 is an enormous honor, and a testament to the unparalleled software development lifecycle management work performed by our project teams each and every day,” said Taras Kytsmey, President, SoftServe.  “This recognition validates our commitment to and record of success in providing leading independent software vendors and enterprises with high quality software delivered in the fastest time possible.”
SoftServe’s Abiliton™ methodology for software development lifecycle management focuses on leveraging the optimal combination of People, Process, Tools and Communication for each project.  To learn more, visit www.softserveinc.com.
About SoftServe:
SoftServe (www.softserveinc.com) provides commercial software product design, development, testing and lifecycle services to Independent Software Vendors and builds foundational strategic technologies for enterprise clients.  Every SoftServe team member is Abiliton Certified for experience, knowledge and commitment to client service, and utilizes SoftServe’s proven Abiliton framework to drive successful project delivery. 
Above all, SoftServe knows that its success is built on positive client relationships, and the Abiliton people, processes and tools that enable these relationships are the keys to that success.  With headquarters in Ft. Myers, Fla., and an award-winning development organization based in Ukraine and the Philippines, SoftServe has successfully completed more than 2,000 projects for more than 100 companies worldwide.

NOTE:  SoftServe is a member of the U.S.-Ukraine Business Council (USUBC), Washington, D.C., www.usubc.org.
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U.S.-Ukraine Business Council (USUBC): http://www.usubc.org
Promoting U.S.-Ukraine business relations & investment since 1995.
The Largest Investment Gathering for Ukraine Worldwide
17-19 May 2010, Marriott Grosvenor Square Hotel, London, UK

U.S.-Ukraine Business Council (USUBC), Wash, D.C., Fri, March 5, 2010

WASHINGTON, D.C. - The 6th annual Ukrainian Investment Summit will take place in London, UK, on Monday-Wednesday, May 17-19, 2010.  The event is renowned as “the largest investment gathering for Ukraine worldwide”, attracting up to 750 top level attendees from 25 countries. The event is sponsored by Adam Smith Conferences.

The Summit promises to be more timely than ever. It has been moved from its traditional time-slot of March to ensure that, following the Presidential elections, attendees will receive a comprehensive overview of the investment climate in Ukraine and will also hear first hand from the government about its key macroeconomic and financial priorities.

Many members of the U.S.-Ukraine Business Council (USUBC), www.usubc.org, will be attending the Ukrainian Investment Summit and will participate on the program.

As always, a 60-strong speaker faculty will feature senior officials from the new Ukrainian government and their international counterparts, top executives from leading Ukrainian corporates, the most high profile foreign strategic investors, as well as the most respected global financial institutions and advisors.

There will be a focus on all major Ukrainian industrial sectors, to ensure that there is a clear picture of how they are recovering from the global financial turbulence. These will include Metals & Mining, Banking & Finance, Agribusiness & FMCG, Real Estate, Retail, Transport, Media and Hi-Tech and Pharmaceuticals, amongst others. In addition, there will be a strong focus on preparations for Euro-2012 and the opportunities in infrastructure and Real Estate that it is generating.New and exciting interactive features for Summit 2010

There will be a panel discussion on what the new government needs to prioritise in order to improve the investment climate in Ukraine, featuring several of the most prominent and outspoken figures in the investment community. Also on the program is a head-to-head economic debate read featuring two of the most prominent economists covering Ukraine debating their forecasts for 2010 and beyond.

A CEO leadership panel will discuss what is required of the Ukrainian CEO post-crisis 2010 and beyond with the top executives of some of Ukraine’s most admired and dynamic corporates.  A Banking and Finance roundtable debate will feature Ukraine’s most prominent bankers putting forward their visions and solutions for the sector.

Fund managers and private equity experts responsible for hundreds of millions of dollars invested in Ukraine and the region identify where best to invest in Ukraine. A Ukrainian CFO Panel will be analysing the shift in priorities for Ukrainian CFOs and their plans for raising finance and featuring several of the most admired CFOs in Ukraine.

LINK: http://www.adamsmithconferences.com/en/yuc006
[return to index] [U.S.-Ukraine Business Council (USUBC), www.usubc.org]

EPAM Systems, Newtown, PA, Wed, March 3, 2010

NEWTOWN, PA - EPAM Systems, Inc., the leading software engineering and IT Outsourcing (ITO) provider in Central and Eastern Europe (CEE), has been selected as the "must-know" service supplier in Central and Eastern Europe by Everest Group, a global consulting and research firm.

Everest Group's Research Institute recently published the results of its study aimed to identify the remedies for global sourcing risk management issues. The report titled "Emerging Markets Suppliers: A valuable Lever for Risks Diversification" identifies the imperative for sophisticated buyer organizations to build a global portfolio of suppliers and to make it part of their delivery location management strategy that extends beyond an India-centric delivery model.

While considering additional sourcing locations, the analysts advise buyers to consider rapidly evolving IT outsourcing destinations such as Brazil, Central and Eastern Europe, Israel, Mexico, the Philippines, and South Africa. From the six alternative markets, Everest Group examines the six key suppliers they recommend for sourcing risk mitigation.

Their study concludes that these six vendors have "achieved meaningful operating scale and, through investments in delivery capabilities and adopting industry best practices, are successfully serving Global 1000 corporations.

"Over the past five years, emerging suppliers, such as the ones we profile in the study, have become strong, viable options for companies seeking to diversify their supplier and delivery location portfolios," noted Jimit Arora, Research Director at Everest. "Organizations should seriously evaluate these suppliers as they consider sourcing from these emerging geographies."

"Since 2008 a significant part of our new business has come from clients who have already had working relationships with vendors in India, and more than half of them today prefer to continue working with vendors in both geographies. It is good to see that Everest, who represents an unbiased expert opinion, has recognized the importance of this multi-location sourcing strategy for buyers and also highlighted Central and Eastern Europe as one of the world's leading destinations for complex software engineering work.

"We are especially pleased that the Everest report singled out EPAM Systems as the "must-know" service provider in our region. Such recognition is a result of more than 15 years of continuous success in providing quality services to the leading software product and technology companies as well as to Fortune 1000 multinational corporations around the globe," commented Arkadiy Dobkin, EPAM President and CEO. You can download a copy of the Everest report at http://www.epam.com/e-library-download-whitepapers.aspx.

About Everest
Everest Group is a global consulting and research firm that comprehensively serves the outsourcing and offshoring market. An industry leader since creating the sourcing consultancy practice in 1991, Everest has earned a worldwide reputation for ongoing innovation by helping clients capture optimum value through sourcing strategies and implementation. Everest provides information, insight, and advice to help buyers, suppliers, and enablers of services effectively navigate all stages of the sourcing lifecycle. Committed to thought leadership, Everest is noted for its fact-based analyses and insights on the outsourcing and offshoring marketplace. (www.everestgrp.com) (www.everestresearchinstitute.com)

About EPAM Systems
Established in 1993, EPAM Systems, Inc. is the leading global software engineering and IT consulting provider with delivery centers throughout Central and Eastern Europe. Headquartered in the United States, EPAM provides services to clients worldwide utilizing a global delivery model through its client facing operations in North America, UK, Germany, Switzerland, and Sweden, together with 4,500+ professionals deployed across delivery centers in Russia, Belarus, Hungary, Ukraine, and Kazakhstan.

EPAM's core competencies include complex software product engineering for leading global software and technology vendors, as well as development, testing, maintenance, and support of mission critical business applications and vertically oriented IT consulting services for global Fortune 2000 corporations. EPAM is recognized among the top companies in IAOP's "The 2009 Global Outsourcing 100" and in "The 2009 Global Services 100" by Global Services Magazine and neoIT. The company is the only CEE's IT services vendor included in the global "Top 10 Best Performers: IT Services" and also ranked 2nd among the world's "Top 10 Best Performers: Outsourced Product Development" according to the magazine's 2009 rating (www.epam.com)

Please contact Alena Busko, Marketing Manager us at press@epam.com  for additional information on the matter and/or to arrange interviews with the EPAM executives.

NOTE: EPAM Systems is a member of the U.S.-Ukraine Business Council (USUBC), Washington, D.C., www.usubc.org.
[return to index] [U.S.-Ukraine Business Council (USUBC), www.usubc.org]
A new grand and elegant hotel found right in the heart of Kyiv

U.S.-Ukraine Business Council (USUBC), Wash, D.C., Wednesday, March 3, 2010

WASHINGTON, D.C. - The InterContinental Kyiv, a new luxury hotel in the center of Kyiv, has been approved for membership in the U.S.-Ukraine Business Council (USUBC), the USUBC executive committee announced today on behalf of the entire USUBC membership of over 100 companies and organizations who have business operations, investments or other development programs in Ukraine. 

The hotel is part of InterContinental Hotels & Resorts (160 hotels in 65 countries) group which is part of IHG, an international hotel company. IHG has more guest rooms than any other hotel company in the world – rooms in nearly 4,400 hotels across nearly 100 countries. IHG operates seven hotel brands – InterContinental, Crowne Plaza, Hotel Indigo, Holiday Inn, Holiday Inn Express, Staybridge Suites and Candlewood Suites and has very large operations in the USA.

The InterContinental Kyiv is situated in the very heart of ancient Kyiv and has 272 rooms including a state-of-the-art Presidential Suite. It is near three of the main Ukrainian Orthodox churches, St. Sophia, St. Michael and St. Andrew's, as well as the other historical sites of the area.

Business travelers will appreciate the hotels proximity to corporate offices, government agencies and embassies. When it's time for leisure, a wealth of shopping, historical and cultural sights are nearby including the Opera House, Khreshchatyk (Kyiv Main Street), the Ukrainian House, the Philharmonic, the Parliament (Rada), Museum of Eastern and Western Art, the National Art Museum of Ukraine and the National Museum of Taras Shevchenko.

Close by is the historic Andriyivskyi Uzviz paved with cobble stones, lined with small shops and artist studios, that winds itself down a large hill to the Podil neighborhood and the Dnieper River.  Outdoor venders line the street each day selling Ukrainian arts, crafts, antiques and souvenirs. The InterContinental Kyiv hotel is located 2A Velyka Zhytomyrska Street in Kyiv, Ukraine.

USUBC was recently given a tour of the InterContinental Kyiv.  "The hotel has an amazing and elegant historical look and is really an stunning hotel that offers all the first-class facilities and services needed by the international business community," according to Morgan Williams, Director, Government Affairs, Washington Office, SigmaBleyzer Emerging Markets Private Equity Investment Group, www.SigmaBleyzer.com, who serves as President/CEO of the U.S.-Ukraine Business Council (USUBC).  

Additional information about the InterContinental Kyiv can be obtained at: www.intercontinental-kiev.com.

USUBC is very pleased to have InterContinental Kyiv as a member," said USUBC President Williams, "and we look forward to working with  the hotel".   "USUBC now has a membership base of over 100 companies and organizations which allows USUBC to provide its new members such as InterContinental a full-time operation and a significantly expanded program of work," according to USUBC program director in Kyiv, Ludmyla Dudnyk.   

Over One-Hundred Members, March, 2010, Membership in January of 2007 was 22.  The complete list of USUBC members can be found at: http://www.usubc.org/members.php.
[return to index] [U.S.-Ukraine Business Council (USUBC), www.usubc.org]
U.S.-Ukraine Business Council (USUBC): http://www.usubc.org
Promoting U.S.-Ukraine business relations & investment since 1995.