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Ukraine said to have the worst track record in the world regarding vat tax refund payments
For Immediate Release: U.S.-Ukraine Business Council (USUBC), Wash, D.C., Tue, Feb 17, 2009
By Roman Olearchyk in Kiev, Financial Times, London, UK, Tue, Nov 17, 2009 

Andrew Osborn in Moscow, Telegraph, London, UK, Sun, Nov 15, 2009

By Tony Barber in Brussels, Financial Times, London, UK, Wed, Nov 11 2009 
LEX Column, Financial Times, London, UK, Sun, Nov 15 2009

Commentary by Martin Wolf, Financial Times, London, UK, Nov 10 2009

Germany is aiding Russia's run around Central Europe.
Opinion Europe, by Alexandros Petersen
The Wall Street Journal, NY, NY, Mon, Nov 9, 2009  
By Timothy Ash, Royal Bank of Scotland Marketplace
Emerging Markets Strategy, EM Alert, CEEMEA
London, UK, Thursday, November 12, 2009

By Paul Goble, Window on Eurasia, Bloomsburg, Tue, Nov 10, 2009 
Teleconference and Live Audio Webcast, Tue, Feb 17, 2009
The American Bar Association Section of International Law
ABA Center for Continuing Legal Education, Wash, Tue, Nov 17, 2009
Ukraine said to have the worst track record in the world regarding vat tax refund payments

For Immediate Release:
U.S.-Ukraine Business Council (USUBC), Wash, D.C., Tue, Feb 17, 2009

WASHINGTON, D.C. - The government of Ukraine is once again holding back the payment of huge sums of value-added tax (VAT) refunds, for long periods of time, owed to grain exporters and other private companies. Ukraine is reported by many private companies to have the worst track record of any country in the world regarding VAT tax refund payments, according to the U.S.-Ukraine Business Council (USUBC). 

Many grain exporting companies report over and over again to the U.S.-Ukraine Business Council (USUBC) that they are owed more VAT tax refunds by the government of Ukraine for longer periods of time than they are owed by any other government in the world.  USUBC has always had the VAT tax refund problem as one of the top five issues it brings up regularly with the government of Ukraine.

Without a doubt one of the most negative aspects of the face that Ukraine now presents to the international business community is the government’s punitive and retrogressive attitude regarding the return of value-added tax refunds amounting to billions of hryvnia that are either now due or long overdue to many of Ukraine’s most dynamic international export earning companies, the U.S.-Ukraine Business Council (USUBC) said Tuesday.

The government of Ukraine wrongfully, corruptly and illegally uses the VAT tax refunds that belong to private companies to finance its spending operations.  The government uses the funds without the permission of the private companies and of course does not compensate them for the involuntary use of their private funds. 

This rather 'normal' operating procedure on the part of the Ukrainian government to exploit and abuse the private business sector needs to stop now.  The practice is not right, is not fair and is not legal according to Ukrainian law.


In a news conference last Thursday in Kyiv the Ukrainian Grain Association (UGA), which represents grain traders in Ukraine, urged the government to repay the delayed value-added tax (VAT) refunds to grain exporters as quickly as possible. The government's debt to agricultural commodity exporters is about UAH 3.5 billion (approximately $440 million), UGA President Volodymyr Klymenko stated at the press conference.  

The UGA urged that the government repay UAH 3 billion in debts to traders in November and December. Klymenko claims that the VAT refunds have become problematic because of insufficient funds stipulated in the national budget for them. In particular, he said that the 2009 state budget earmarks UAH 36.5 billion for VAT refunds, while the needed amount if the exports remain at last year's level stands at UAH 51 billion.

The UGA president says that the 2010 national budget foresees UAH 20 billion for VAT refunds. He said it is appropriate to increase the sum to UAH 50 billion. Klymenko said that agricultural financial experts say that the producers of grain and oil-yielding crops may lose up to UAH 10 billion from the 2009 harvest because of an increase in costs in the marketing chain and problems with VAT reimbursement," he added.

The American Chamber of Commerce in Ukraine in their morning news service last Thursday said, "Over the years, utilizing all available opportunities and advocacy communication channels, the Chamber in conjunction with many Members who represent different industry sectors, continuously raised the issue of VAT reimbursement expressing serious concern in regards to ongoing reimbursement delays, growing debts and corrupt refund schemes which the private sector unfortunately deals with in Ukraine.

"Particularly, the issue of VAT refunds within the Agrarian sector was raised at the Chamber Agrarian Market Leaders Breakfast that was held on Thursday, November 12th. CEOs, which represented the leading international and domestic companies who are among the biggest investors and employers within the agrarian sector, agreed that the systematic lack of VAT refunds is negatively impacting business operations, decreasing manufacturing volumes, causing employment reductions and harming the trust of investors as well as lowering the competitiveness of the industry and adversely impacting the profitability of Ukrainian farmers.
"According to the opinion of all participants, the country's investment attractiveness and competitiveness of the economy are also influenced by this particular problem, which is continuously communicated by all investors to their headquarters, Ukrainian and foreign media and international financial institutions who closely monitor the market.

"The attendees of the breakfast have agreed to further develop a position and strategy regarding the issues of VAT refunds within the agrarian sector with industry based associations the operating in the agricultural sphere, to continue the systematic and goal oriented campaign aimed at influencing the State authorities as well as attracting public attention to the consequences of the VAT issue for the general competitiveness of Ukraine.

"The Chamber will continue to advocate on behalf of the Membership regarding the implementation of systematic reimbursement of VAT and is thanking all Members for their proactive position and continuous support."

The U.S.-Ukraine Business Council (USUBC), on behalf of its over 100 member companies, joins with the Ukrainian Grain Association (UGA), the American Chamber of Commerce in Ukraine (Chamber), other business associations in Ukraine and their hundreds of private business members to urge the government of Ukraine to finally deal honestly and fairly with the VAT tax refund issue, allocate adequate funds to pay the refunds on time and to stop the government's exploitation of the private business section, the engine of economic growth that is creating news jobs and wealth for the people of Ukraine and taxes for the government.
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By Roman Olearchyk in Kiev, Financial Times, London, UK, Tue, Nov 17, 2009 

KIEV - There were tentative signs on Monday that Ukraine, one of the world’s hardest-hit economies, might be crawling out of its deep recession, in spite of a steep fall in gross domestic product in the third quarter. Industrial production was 5 per cent higher in October than September, although it is still well down on the beginning of the year.

And although the 15 per cent fall in annualised GDP reported on Monday is smaller than previous figures of 20.3 per cent and 17.8 per cent in the first and second quarters, Ukraine faces a daunting struggle.

With two months to go before presidential elections, the International Monetary Fund has frozen a bail-out amid stalled reform. There are fears Ukraine could sink deeper into financial trouble as politicians seek to win votes with spending promises. Economists say recent social expenditure increases could result in another year of double-digit inflation in 2010.

“The contraction of the economy overall is stabilising and there is some fragile recovery,” said Peter Vanhecke, chief executive of Renaissance Capital Ukraine. “But the speed of economic recovery is hampered by pre-election fever. Without this, the IMF aid would be there and it would speed up the recovery.”

The economy plunged last autumn after global demand for Ukraine’s main export, steel, collapsed, hitting foreign earnings, triggering a 40 per cent devaluation in the currency and sending the banking sector – in which European banks hold a 40 per cent market share – into the deep freeze. Concerns over financial and economic stability was widespread.

“Regardless of who wins the election, Ukraine’s new leader will have to deal with deep challenges if this economy is to demonstrate strong growth again,” said Georges Massoud, managing partner in Ukraine for McKinsey & Company.

Companies are deep in debt and struggling to restructure. Naftogaz, the state gas company, averted default this autumn after creditors agreed to roll over $1.6bn. But last week, the state railway defaulted on a $110m payment on a $550m loan issued by Barclays.

The European Union, which receives most of its Russian natural gas via Ukrainian pipelines, fears that a fresh energy spat with Moscow could erupt if cash-strapped Kiev fails to pay for its gas imports.

Ukraine has managed to stay financially afloat this year thanks to some $11bn in financial assistance from the IMF to cover a budget deficit and stabilise the currency.

But bitter political rivalries and the recent adoption of populist wage and pension increases have derailed co-operation with the IMF, which says it will not disburse a fourth tranche of $3.8bn from its $16.4bn aid package until Kiev’s leaders demonstrate political “consensus” and dedication to tough reforms.

The IMF froze funding this month after Victor Yushchenko, the president, signed into law a 20 per cent increase on wages and pensions, defying opposition from the IMF and Yulia Tymoshenko, his prime minister and bitter rival.

Ms Tymoshenko, a presidential frontrunner, accused him of trying to starve her government of cash, thereby undercutting her presidential bid, by deliberately derailing IMF co-operation.

LINK: http://www.ft.com/cms/s/0/f8db7334-d2fd-11de-af63-00144feabdc0.html
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Andrew Osborn in Moscow, Telegraph, London, UK, Sun, Nov 15, 2009

MOSCOW - Political in-fighting between the erstwhile heroes of Ukraine's pro-Western Orange Revolution has plunged the country into economic turmoil, derailing a crucial multi-billion dollar loan from the International Monetary Fund. 

Apparently keen to curry favour with voters, Viktor Yushchenko, the president, turned a blind eye to the appalling state of Ukraine's public finances and recently approved a 20 per cent hike in wages and pensions last month. But, by ignoring the advice of the International Monetary Fund, the European Union, and Yulia Tymoshenko, his own prime minister, Mr Yushchenko has jeopardised the disbursement of badly-needed IMF funds.

Mr Yushchenko justified the move by saying he was unwilling to solve the country's budget problems "at the expense of pensioners, poor people and the disabled." But the IMF has now suspended payment of a $3.8 billion loan, arguing that Ukraine needs austerity measures rather than profligacy. Ukraine needed the IMF money to plug gaping holes in its budget.

Five years ago, large-scale protests set up what was supposed to be a pro-Western dream team of Mr Yushchenko and Mrs Tymoshenko. But the duo's friendship has since turned to loathing even though the pair continue jointly to govern the ex-Soviet republic.

The two are now bitter rivals who will face off against each another in a January presidential election. Analysts warn their battle for power appears to be poisoning the country's economic prospects and could interfere again with the supply and transit of gas to the West in the coming winter.

The country's biggest strategic companies are saddled with crippling debts, including the state gas company which has struggled to meet Russian gas payments, only just managing a $500m payment this month.

Mrs Tymoshenko's supporters have accused Mr Yushchenko of raw populism and irresponsibility, intensifying a political standoff that opinion polls show Mr Yushchenko is losing. Polls show he has just 5 per cent support compared to Mrs Tymoshenko's 20 per cent.

Meanwhile the global economic crisis has caused the country's budget deficit to balloon, its inefficient Soviet-era factories to stagger, and international rating agencies have rushed to downgrade their view of economic prospects. The national currency, the hryvnia, has plunged by 60 per cent in a year, foreign direct investment has slowed to a trickle, and bad bank loans have multiplied.

Ironically, all this has left the Kremlin's candidate for the Ukrainian presidency in 2004 – Viktor Yanukovych – with a strong lead in the polls, making him the candidate to beat. The Kremlin is not publicly backing anyone this time round though after it was left red-faced five years ago when Mr Yanukovych's supporters were found guilty of vote rigging and his "victory" annulled.

LINK: http://www.telegraph.co.uk/news/worldnews/europe /ukraine/6574241/Ukraine-turmoil-puts-IMF-loans-in-jeopardy.html
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By Tony Barber in Brussels, Financial Times, London, UK, Wed, Nov 11 2009

BRUSSELS - All the European Union’s happy neighbours are like each other, but each unhappy neighbour is unhappy in its own way – starting with Ukraine. What can the EU do to ensure that, unlike Leo Tolstoy’s Anna Karenina, Ukraine’s story will have a positive ending?

Of all the former Soviet Union countries, none bar Russia matters as much to the EU as Ukraine – and none tries the EU’s patience as much.

For one thing, Ukraine is the conduit for 80 per cent of the EU’s natural gas imports from Russia. As the bloc learned to its cost in January, when a Moscow-Kiev dispute cut off gas supplies for two weeks, events in Ukraine can cause havoc in member states that depend entirely on Russian gas. Some experts fear another gas crisis in January.

However, gas is far from the whole story. With 46m people, a 1,400km border with four EU nations and frequent tensions with Russia that have nothing to do with gas, Ukraine is pivotal to the security of the EU’s eastern flank.

After Ukraine’s 2004 Orange Revolution, some EU strategists hoped that the path to liberal democracy, the rule of law and economic prosperity would become irreversible in Ukraine. But it has not turned out that way.

The Russian-Georgian war of August 2008 shocked the EU into realising that the Kremlin was prepared to use force if necessary to halt the expansion of western influence into former Soviet republics. With its southern peninsula of Crimea home to a restive ethnic Russian population egged on by Moscow, the implications for Ukraine’s territorial integrity and independence were worrisome indeed.

Then the global financial crisis laid low Ukraine’s economy, which at present survives on a $16.4bn loan from the International Monetary Fund. The crisis sharpened the rivalries that paralyse its politics and give an impression of endemic instability.

Worst of all, the Orange Revolution failed to clean up the corruption that runs deep in Ukraine’s business world, especially the energy sector. Corruption is bound up with the personal animosities and shadowy connections with Russian interests that bedevil Ukraine’s political scene. The EU feels irritation and helplessness. Since the January crisis, Ukraine’s authorities have done little to improve transparency in the energy sector.

All these difficulties explain why many in the 27-nation bloc are unwilling to offer Ukraine even a vague promise that it may one day be invited to join the EU. But the bloc increasingly senses that it cannot afford to let its relationship with Ukraine drift directionless for much longer.

Ukraine’s woes were the subject of a two-day conference staged in Brussels last week by Wilton Park, the UK event organisers. Several speakers predicted that the pivotal moment in EU-Ukrainian relations would be its January 17 presidential election. Anything less than a free and fair election, and a mature acceptance of the result by winners and losers alike, would be catastrophic for Ukraine’s image in EU eyes.

Ukraine is hoping to complete a so-called EU association agreement and a comprehensive free trade accord by the end of 2010. It may also be able to secure visa-free travel arrangements with the EU in advance of the Euro 2012 soccer tournament that Ukraine is to co-host with Poland. If these three agreements can be concluded over the next 12 months they will do more to “normalise” Ukraine than any steps since independence in 1991.

But an unsatisfactory election process in January could turn EU governments against Kiev, weakening support for the association and free trade accords. Even now, France and Germany are delaying Ukraine’s accession to the EU’s energy community treaty, which aims to create an integrated energy market in Europe and guarantee security of supply.

Moreover, Poland – which used to defend Ukraine inside the EU – is fed up with its poor progress in preparing for Euro 2012. Slovakia has been irritated with Kiev ever since its citizens suffered a mid-winter freeze because of January’s gas cut-off.

Ukraine has friends in the EU, but the balance is finely positioned. It will take an effort from Ukraine’s political leaders as well as the EU to make sure the scales do not tip the wrong way.
LINK: http://www.ft.com/cms/s/0/ec802c98-cee2-11de-8a4b-00144feabdc0.html
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Promoting U.S.-Ukraine business relations & investment since 1995.
LEX Column, Financial Times, London, UK, Sun, Nov 15 2009

LONDON - Europe is on tenterhooks over whether Russia will shut off gas to Ukraine and leave it shivering in January. If that happens, however, blame will fall on Kiev, not Moscow.

Recession-ravaged Ukraine’s political squabbling and populism has hit fever pitch ahead of presidential elections on January 17. That has led the International Monetary Fund to suspend co-operation and delay a $3.8bn loan payment, due on Sunday. The government had already backed off from commitments to increase long-subsidised domestic gas prices.

The final straw was President Viktor Yushchenko signing into law, against IMF objections, a parliamentary bill that will raise minimum wages and pensions by 20 per cent – costing 7 per cent of economic output in 2010.

Since Ukraine is reliant on IMF funding to make ends meet, it could struggle to pay its next two monthly gas bills – leading to another winter shut-off. It only just scraped together October’s payment. Yet, for all its bluster, Russia would rather keep the taps open.

The Kremlin has belatedly realised the damage to its reputation from shut-offs, and last January’s interruption to European supplies cost state-run Gazprom dearly. Hence Prime Minister Vladimir Putin’s exhortation that Brussels extend a loan to Ukraine.

And why meddle in Ukraine’s electoral process this time? Moscow’s bogeyman, Mr Yushchenko, trails badly in the polls. Either frontrunner, Prime Minister Yulia Tymoshenko or Viktor Yanukovich, is more acceptable to Russia.

Ukraine still has $28bn in foreign currency reserves; the central bank will probably allow some to be used to pay for gas. A bigger question is whether it will plug the budgetary gap by printing money. If so, inflation will result; if not, wage arrears beckon. Either option may put pressure on Ukraine’s currency and asset prices. Europe’s gas consumers must hope they do not become collateral damage.

LINK: http://www.ft.com/cms/s/3/4f8c0330-d216-11de-a0f0-00144feabdc0.html
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Commentary by Martin Wolf, Financial Times, London, UK, Nov 10 2009

“A crisis is a strange way to celebrate an anniversary.” This is the wry judgment of Erik Berglöf, chief economist of the European Bank for Reconstruction and Development. [1] Yet a crisis is what we see in countries that began the march from communism two decades ago. So, has capitalism failed, as communism did? In a word, “no”.

Some transition countries are in crisis; transition is not. The same judgment applies elsewhere: capitalist countries are in crisis; capitalism itself is not. But reform is necessary. The great virtue of liberal democracies and market economies is their ability to reform and adapt. They have shown these qualities before. They must do so once again.

For those born, like me, shortly after the second world war, the cold war was the defining intellectual and political struggle of our lifetimes. With the collapse of communism ended a catastrophic epoch of millenarian politics and the delusion of a rationally planned economy. The freedom offered by democracy and the prosperity supplied by markets won. The fact that communism expired not with a bang, but with a whimper, we owe largely to Mikhail Gorbachev.

Yet 2009 is a sobering year from which to look back. A year ago, capitalism careered over a cliff. With vast effort, states have put it back on the road. According to Piergiorgio Alessandri and Andrew Haldane of the Bank of England, in a superb new paper**, the total gross value of interventions on behalf of banks has been $14,000bn (euro9,400bn, £8,400bn). This is state capitalism.

What then does the crisis mean for the countries that exited from socialism two decades ago? What, too, does it mean for the world?

For the former, it has meant big falls in output. According to the EBRD, the fall in the gross domestic product of transition countries will average 6.2 per cent in 2009. Declines vary widely: from 18.4 per cent in Lithuania, 16.0 per cent in Latvia, 14.0 per cent in Ukraine and 13.2 per cent in Estonia – depression numbers – to 7.8 per cent in Slovenia, 6.5 per cent in Hungary, 6.0 per cent in Slovakia and 4.3 per cent in the Czech Republic. Poland’s economy is forecast to grow this year, by 1.3 per cent. In general, notes the EBRD, “the size of the output declines correlates with pre-crisis credit booms and external indebtedness”. The bursting of bubbles hurts.

These collapses are real and worrying. But they need to be put in context. First, many countries in transition experienced big increases in output after the initial and largely inevitable post-Soviet collapse (see charts). Poland was the star. In general, the successful countries were those that reformed most seriously.

Second, surprisingly perhaps, transition countries have made few reversals of reforms. As the EBRD report notes, “government changes since early 2008 have either led to no change with respect to the reform stance, or indeed favoured pro-reform parties”. This is quite consistent with what is happening in the emerging world, more broadly. The absence of a credible alternative economic model is evident. Populist adventurism also seems unattractive.

As recovery begins to gather force across the world economy, the great legacies of the collapse of the Soviet empire – the integration of much of Europe and the concomitant spread of freedom to Russia’s borders, if not beyond – remain intact.

Yet the crisis brings important lessons. The philosopher Karl Popper laid down the right approach. He distinguished the “piecemeal social engineering” intended to ameliorate specific ills from the “utopian social engineering” intended to transform society in its entirety – an aim that, in practice, “has led only to the use of violence in place of reason”.

The reformer must identify the cause of the malady before attempting treatment. In the case of this crisis, the failure lies not so much with the market system as a whole, but with defects in the world’s financial and monetary systems. Some of these failings are inescapable. The future is inherently uncertain. Big mistakes will be made. Where prevailing paradigms lead to risk-taking on an excessive scale, corrections are likely to be brutal.

Where risk-taking involves large-scale leveraging of the balance sheets of the financial sector, corrections are likely to mean a collapse in both intermediation and the economy. Should collapse not be prevented, the consequences may, history tells us, be dramatic.

Happily, governments and central banks have learnt the lessons of the 1930s and decided, rightly, to prevent collapses of either the financial system or the economy. That is precisely the right kind of “piecemeal social engineering”. Similarly, big efforts have been made to rescue the crisis-hit countries of central and eastern Europe.

Thus, support from the International Monetary Fund and the European Union has been between 4 and 6 per cent of GDP (or more) for the four eastern European countries that have accepted IMF programmes.

A similar pragmatism must now be shown in completing the escape from the crisis. That will require substantial rebalancing of global demand. It will also require further reforms. For transition countries, a reversal of financial integration is likely to be costly and unnecessary. The principal goals of reform must, instead, be to make the economy less vulnerable to shocks and to curb excessive credit growth in future.

Similarly, at a global level, radical reforms must be made in the financial and monetary systems. To put it bluntly, the banking system has been gaming the taxpayer on an intolerable scale. This must end, in one of two ways: the sector must be made subject to the market or become a heavily regulated ward of the state.

Again, the curbing of huge credit bubbles must be an integral element in the formation of regulatory and monetary policies. Finally, the dependence of the global monetary system on the currency of an over-indebted superpower is neither desirable nor sustainable.

Anniversaries are a good time for taking stock. The collapse of Soviet communism was a glorious moment. It remains so, despite mistakes and disappointments along the way. But today’s crisis tells us of the failings of a euphoric capitalism. Capitalism will not now perish, as communism did. But the signal ability of liberal democracy is to learn and adapt. We learnt from the 1930s. We must now learn the lessons of the 2000s.

[1] Transition Report 2009, www.ebrd.com/pubs/econo/tr09.htm
Banking on the State, www.bankofengland.co.uk

Martin Wolf, martin.wolf@ft.com
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Germany is aiding Russia's run around Central Europe.

Opinion Europe, by Alexandros Petersen
The Wall Street Journal, NY, NY, Mon, Nov 9, 2009  

Rügen is best known as a popular German tourist destination. But now the Baltic Sea island has taken on a new role as staging point for an energy project that is as ambitious as it is controversial: the Nord Stream gas pipeline from Russia to Germany. Next spring the first pipeline segments will likely be dropped to the sea floor in a line that will wind through Russian, Finish, Swedish, Danish and German waters—conspicuously avoiding the Baltic states and Poland.

This is because the Nord Stream project is part of an exclusionary agreement between Moscow and Berlin—nicknamed in circumvented Warsaw the "Molotov-Ribbentrop Pact," after the 1939 Soviet-Nazi deal to carve up Poland. It would have been much cheaper to build an overland pipeline through Eastern Europe, but the purpose of Nord Stream from the beginning was to bypass countries Moscow still considers to be part of its sphere of influence.

Russia's geopolitical message here is clear: It doesn't trust the new EU member states as transit countries or even as energy consumers and is willing to incur enormous costs to bypass them. The other message—or implied threat—is that Nord Stream will allow the Kremlin to cut off gas deliveries to Eastern Europe through current pipelines without reducing energy supplies to Germany. But what sort of message does Germany, a fellow EU member, intend to send to its neighbors?

Nord Stream was championed by former German Chancellor Gerhard Schröder, who now serves as one of its executives. From within her previous coalition government, current Chancellor Angela Merkel lobbied successfully for EU endorsement of the project even though the pipeline consortium is registered in Switzerland and controlled by Russia's Gazprom. Of the dozens of companies involved in the pipeline's construction, not one is from the Baltics, Central or Eastern Europe.

Germany's recent election results produced a ripple of hope among the countries on Russia's periphery. With the traditionally pro-Moscow Social Democratic Party out of the governing coalition, would Mrs. Merkel perhaps seek to change the terms of the Nord Stream agreement and push Russia to alter the route so that the pipeline would cross the waters or territories of Eastern EU members? Perhaps she would lobby Moscow to include also East European companies in the Nord Stream consortium?

At least, it was hoped, Berlin would throw its weight behind the Nabucco pipeline, which seeks to improve Central and Eastern Europe's energy security with the help of Caspian and Middle Eastern gas. After all, Germany's RWE is part of the Nabucco consortium and Mr. Schröder's pro-EU former foreign minister, Joschka Fischer, is now a lobbyist for the project.

Recent progress on Nord Stream, however, has dashed those hopes. The Nordic countries had until now delayed the project's approval, raising environmental concerns, which most interpreted as unease about the pipeline's geopolitical implications.

Last Thursday, though, Finland and Sweden—which holds the European Union presidency until the end of the year—joined Denmark in signing off on the project. It is this political momentum that has spurred the rush to get pipeline segments out to Rügen and other staging points.

The very realistic prospect that construction on Moscow's pet project might begin early next year is a symbolic blow to those seeking to reduce Europe's energy dependence on Russian gas. Most of all, it is a blow to any semblance of EU unity on energy security. Russia's neighbors, both within and without the EU, are already reeling from a sense of Euro-Atlantic abandonment following Washington's "reset" policy toward Russia and the EU's lackluster outreach to its Eastern neighbors.

It would be unrealistic to expect Berlin to change tack on Nord Stream so late in the game. But a newly re-elected Angela Merkal should carefully consider the foreign policy messages that come with laying pipe on the Baltic Sea floor.

In order to reassure fellow EU members and the institution as a whole, Berlin would do well to support what the European Commission considers its "strategic priority": The so-called Southern Corridor, which includes Nabucco and several smaller pipeline projects. As a European heavyweight, Germany's mere rhetorical and diplomatic support would go a long way in encouraging EU energy unity. Most importantly, it would send the message to

Moscow that its "divide and conquer" energy policy has its limits.

NOTE: Mr. Petersen is Dinu Patriciu Fellow for Trans-Atlantic Energy Security and associate director of the Eurasia Energy Center at the Atlantic Council, Washington, D.C.

LINK: http://online.wsj.com/article/SB10001424052748703567 204574499150087261242.html
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By Timothy Ash, Royal Bank of Scotland Marketplace
Emerging Markets Strategy, EM Alert, CEEMEA
London, UK, Thursday, November 12, 2009

LONDON - Fitch downgraded Ukraine's LT FC rating one notch to B- this morning, retaining a negative outlook. We now have Moody's rating Ukraine B2 (one notch above Fitch) and S&P with a CCC+ rating, i.e. a notch above Fitch.

Fitch's move was not entirely unexpected given parliament's approval on October 26 of a bill which hikes pensions/wages by 20%, and which appears to have scuppered chances of Ukraine securing the release of US$3.8bn in IMF financing before year-end. The government is challenging the pension/wage price hike in the Constitutional Court, albeit we doubt whether this will result in the law being pulled.

Hopes, meanwhile, that a last minute political agreement could be reached between Ukraine's main political factions to reign in the costs of the pension/wage hikes, and get the IMF programme back on track, appeared to be scuppered when the two sides meeting earlier this week failed to secure an agreement.

The IMF estimates that the wage/pension hikes will cost the budget the equivalent of 7% of GDP for the full year in 2010, and also add around US$1bn to spending in 2009. Fitch warns that the danger now is that without IMF financing the government is forced to rely on NBU financing to cover a larger deficit/budget financing shortfall, which will boost inflation and pressurise the UAH weaker.

We would tend to put a slightly different spin on the likely chain of events as above. The presidential administration has long criticised the IMF for being too soft on Ukraine, and in its mind becoming politicised, bank-rolling the incumbent Tymoshenko government in the run up to the presidential elections on January 17, 2010. Critics might highlight herein the Fund's decision to quietly drop the requirement for the government to hike domestic gas prices on September 1, and October 1.

The Fund seemed to accept that such a move would be too politically disruptive ahead of elections; albeit failure to hike gas prices would merely serve to boost the quasi-fiscal deficit by undermining the cash flow position of the state gas transit company, Naftogaz.

The hikes in wages/pension clearly were beyond the pale for the IMF, and hence the Fund has indicated it will stall further disbursements now until the political situation clarifies. The question though is whether the NBU would indeed continue to bank roll the government. Our sense is that it would not.

Herein, the NBU remains within the sphere of influence of the presidency, and with Yushchenko eager to prevent the government from engaging in extensive pork barrelling before the election, we think the NBU will in fact hold back from financing a wider budget deficit. In effect the ministry of finance will only be able to spend what it can raise in budget revenues and market financing; the latter of which is likely to be extremely limited.

The reality is hence thus likely to be an increase in arrears on wages, et al, which is obviously negative for the economy more generally but it will tend to act to cap monetary expansion/pressure on the UAH. By forcing through the wage/pension hikes the presidency has in effect hamstrung the Tymoshenko administration in the run up to the poll.

Presumably President Yushchenko and his supporters hope that this will hinder Tymoshenko's bid to secure the presidency for herself, albeit with the incumbent's own poll ratings in low single digits it is unlikely to save his own bid for re-election which now appears doomed.

And, as Fitch noted from the sovereign perspective, the plus is that the government has now met the hump in debt service in August/September, and has a light debt amortisation schedule until December 2010. Set against the above, the NBU still has US$27bn in FX reserves which does provide a considerable degree of insulation for sovereign creditors.

More worrying in our minds are reports this morning that the State Railway Transport Administration of Ukraine (Ukrzaliznytsnya) is looking to restructure a US$110m loan. It appears that this particular loan does not have a sovereign guarantee, but another US$700m loan by the same company does have a sovereign guarantee according to text presented in the recent Naftogaz offering circular (the latter of which extended a sovereign guarantee to US$1.65bn in external liabilities of the state-owned gas company).

This raises a major question mark as to whether there are cross default clauses between the two loans, and then on, potentially to the sovereign. This is potentially very serious, and needs monitoring closely.

NOTE: This material is for information only. It is not an offering document and its terms are qualified in their entirety by the final transaction documents in respect of the securities described therein. Certain transactions mentioned may give rise to substantial risks and may not be suitable for all investors. RBS may have positions, deal or make markets in these securities or related derivatives. Prices are based on current information, are subject to change, are not offers to transact and cannot be relied upon as representations that transactions can be effected at such prices. This material is based on information considered to be reliable, but we do not represent its accuracy or completeness.
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By Paul Goble, Window on Eurasia, Bloomsburg, Tue, Nov 10, 2009 
Tensions between the Russian and Ukrainian governments are “not an argument between colonizers and the enslaved” but rather a dispute between those who see the state and its continuity as more important than the individual and liberals who put their faith in individuals and society, according to Ukraine’s ambassador in Moscow.
That division, Konstantin Grishchenko argues in the current issue of “Zerkalo Nedeli,” falls “not along the line of state borders,” of course, “but within both Ukrainian and Russian society. [The two countries are] not so dissimilar in that, [but] they are different “in the proportion of supporters of the first and second sets of values” (www.zn.ua/1000/1600/67678/).
“Rational” people, the Ukrainian diplomat says, “cannot but be surprised that such questions of a humanitarian nature and not problems of economics and security define the tonality and content of Ukrainian-Russian dialogue.” But the reason is that since 1991, the two countries “have become very different.”
For Ukrainians, he continues, the entire Podrabinek case appears “extremely strange,” but a careful examination of it shows that over the last 18 years, Ukrainians and Russians, “while preserving a multitude of common interests have begun to set themselves apart both by models of societal development and by their worldviews.”
For the Russian “establishment, Grishchenko suggests, “the state is considered an important super-values, which forms around itself a system of firm values and priorities.” And equally, the Russian elite has accepted the “idea of the uninterrupted quality of the process of state construction.”
What that means, the ambassador says, is that “any power which has been able to achieve a strong position in Russia and to obtain legitimacy in the eyes of its own citizens will become an inalienable part of the historical fate of Russia and ‘the Russian path.’”  Thus, 1991 does not represent a moment of discontinuity for Russians the way it does for Ukrainians.
Many Russians as a result do not know what the Day of Russia on June 12th means because “the Russian political leadership avoids any reference to the events of August 1991 as ‘a democratic revolution.’” For both, “contemporary Russia didn’t break out of ‘the prison house of peoples’ but only appeared in place of a system which did not withstand the test of history.”
This attitude does not mean that the current Russian powers that be want to restore what was, but rather it suggests that “for the Russian elite, the underlying idea remains the unbroken quality of the state forming process and an orientation on the greatness of Russia as the key goal” of the current leaders.
“In Ukraine,” he says, “the historical process is not conceived of as integral. On the contrary, the period in which Ukrainian lands were within the Russian Empire and the USSR are viewed primarily as stages of national historical development which had for the most part negative consequences.”
Such a “lack of correspondence” in the assessment of the past “naturally leads to conflicts and contradictions  between Ukraine and Russia concerning the interpretation” of any particular event.  But in saying that, Grishchenko goes on, “it is important to correctly understand the internal essence of these discussions.”
They are “not so much an argument between colonizers and the enslaved as a dispute between those who focus on the state as the most important thing and liberals.”  Thus, for the former, Stalin’s industrialization and the great terror “exist as it were in parallel worlds,” but for the latter, the two can never be divorced one from the other.
These differences in worldview, in turn, affect politics. On the one hand, Ukraine and Russia have a very different political system. In the former, voters are unwilling to give any part an overwhelming majority and thus have contributed to political instability, while in the latter, the electorate has been prepared to do just that and helped erect the power vertical.
And on the other, the two countries dealt with the greatest crises since 1991 in very different ways: In 1993, Moscow used force to resolve the conflict between the president and the parliament; in 2003-2004, Ukrainians dealt with their political problems in a very different and far more peaceful way.
Such differences, Grishchenko argues, reflect “deeply held predispositions in the consciousness of the government elites of the two related peoples,” not only concerning the goals that are the most important but equally significant between the methods that each views as appropriate to achieve its aims.
The elites in each country must recognize these differences if they are to be able to live and work together as they should.  “Ukrainians,” their ambassador says, “are seeking to live with Russians as good neighbors in a well-ordered little village where people listen to advice from one another but do not seek to instruct or give orders.”
If one thinks about this, Grishchenko continues, “we are like adult brothers who after the age of 18 left their common home, sincerely love one another, but conduct their affairs independently, talk with one another, but resolve all questions on their own” rather than acting as they did when they were children.
Unfortunately, “it is sometimes suggested that we should again live in a single communal apartment where one of the residents controls the gas and the knobs in the common kitchen,” but the ambassador says, “I am convinced that ‘the times of communal apartments’ have passed away together with the Soviet Union.”
Moreover, he concludes, “Ukraine and Russian in their relations will inevitably move further and form new bases for cooperation and friendship if they acknowledge that we are not the same but that in our interrelationships, we can be strong and successful in the contemporary world.”
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Teleconference and Live Audio Webcast, Tue, Feb 17, 2009

The American Bar Association Section of International Law
ABA Center for Continuing Legal Education, Wash, Tue, Nov 17, 2009

TITLE: Enforcement of Arbitration Awards in Russia and Ukraine, Dream of Reality?
Date: Tuesday, November 17, 2009
Format: Teleconference and Live Audio Webcast
Duration: 90 minutes
11:30 AM-1:00 PM Eastern10:30 AM-12:00 PM Central
9:30 AM-11:00 AM Mountain 8:30 AM- 10:00 AM Pacific

A growing number of Western companies find that the arduous task of obtaining an arbitration award against a Russian or Ukrainian company is complicated ten-fold by the enforcement and collection hurdles rarely seen in the Western hemisphere. 

While both Russia and Ukraine are parties to the New York Convention or Enforcement of Arbitration Awards, issues with the judicial system, convoluted currency control regulations, unwieldy bailiffs and execution service, administrative pressure, and even, in some cases, possible criminal proceedings make the enforcement far from trivial even in cases where respondents have sufficient assets. 

In addition to the exploring current state of the relevant Russian and Ukrainian laws, this program provides practical points and tales from the front lines from seasoned practitioners to assist counsel from the early stages of preparation and prosecution of arbitration claims as well as explores possible alternatives to the enforcement.

Our program will: [1] introduce counsel to the basic principles of enforcement of arbitration awards; [2] overview legal grounds for enforcement of arbitration awards in Russia and Ukraine; [3] provide guidelines on possible steps claimants might consider prior to and during the arbitration to alleviate the enforcement hurdles; and [4] provide practical points which can be used from the early stages of the arbitration or even before the arbitration is commenced.

       [1] Gene Burd (Moderator), Marks Sokolov & Burd, LLC, Philadelphia, PA
       [2] Steven Gee QC, Stone Chambers, London, England
       [3] Maxim Kulkov, Goltsblat BLP, Moscow, Russian Federation 
       [4] Irina Nazarova, Engarde, Kyiv, Ukraine
CLE Credit: 1.5 hours of CLE credit in 60-minute states/1.8 hours of CLE credit in 50-minute states have been requested in states accrediting ABA teleconferences and live audio webcasts

TO REGISTER CLINK ON: http://www.abanet.org/cle/programs/t09eaa1.html
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U.S.-Ukraine Business Council (USUBC): http://www.usubc.org
Promoting U.S.-Ukraine business relations & investment since 1995.