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Ukraine Law Alert, Squire Sanders & Dempsey, Kyiv, Ukraine, Wed, Nov 19, 2009
By Timothy Ash, RBSMarketplace
Emerging Markets Strategy  | EM Alert | CEEMEA
Royal Bank of Scotland, London, UK, Thu, Nov 19, 2009

By Meena Thiruvengadam, Dow Jones Newswires
The Wall Street Journal, NY, NY, Friday, November 20, 2009

Inform Newsletter #131 - for the international community providing
views and analysis from the Bloc of Yulia Tymoshenko (BYuT)
Kyiv, Ukraine, Thursday, November 19, 2009

By Ulrike Dauer and William Launder, Dow Jones Newswires
Frankfort, Germany, Thursday, November 19, 2009 

By Natalia Bilousova, The Day Weekly Digest #33, in English
Kyiv, Ukraine, Tuesday, 17 November 2009 

The World Bank, Washington, D.C., Thursday, November 19, 2009 

InZero Systems, Herndon, VA, Wednesday, November 18, 2009

DLA Piper Ukraine, Kyiv, Ukraine, Tue, Nov 17, 2009

Asters Newsletter, Kyiv, Ukraine, Thursday, November 19, 2009

Ukraine International Airlines, Kyiv, Ukraine, Friday, Nov 13, 2009

Sponsors: MaryKay, Cargill, Horizon Capital, R&J Int, SigmaBleyzer, USUBC
U.S-Ukraine Business Council (USUBC), Wash, D.C.,  Fri, Nov 20, 2009

Ukraine Law Alert, Squire Sanders & Dempsey, Kyiv, Ukraine, Wed, Nov 19, 2009

KYIV - In 2009 Ukraine’s government announced a storm of state guarantees for various projects. In all, the government adopted 19 resolutions (the Investment Resolutions) regarding implementation of investment projects to be financed by non-Ukraine-based lenders with state guarantees.

The largest investment projects include road construction (8 billion UAH); development of EURO 2012 infrastructure (2.4 billion UAH); purchase of medical equipment and transport from companies from Austria (euro500 million), the United States (US$1.3 billion) and China (US$500 million); and purchase of agricultural and energy-saving equipment from suppliers from Ukraine (1.3 billion UAH) and other countries (US$1 billion).

Among the financial institutions that Ukraine’s government has named as potential lenders are the Export-Import Banks of China, the United States and Korea; Private Export Funding Corporation (USA); UniCredit; Canada-based export agency EDC; the Japan Bank for International Cooperation; and others.

With the flood of Investment Resolutions, Ukraine’s government has announced a willingness to issue state guarantees up to 53.8 billion UAH (approximately US$6.56 billion) (not including the state guarantee of approximately 16.4 billion UAH [approximately US$2 billion] for the debt restructuring of the state oil and gas company Naftogaz).

At the same time, the 2009 State Budget Law limits the government to issuing a maximum of 37 billion UAH (approximately US$4.62 billion) in state guarantees. It is not clear exactly how much the government has guaranteed to date, as the Investment Resolutions speak to a maximum issuance for certain projects and are not guarantees in themselves.

Nevertheless, if state guarantees in excess of the US$4.62 billion are issued in 2009, the next government (if it is formed by a political party adverse to the current prime minister) may refuse to satisfy the claim of a lender based on such state guarantees. In addition, if there is a change in the next government, a Ukraine court may find reason to refuse enforcement in Ukraine of a guarantee-based arbitration award granted in favor of a lender.

The president may suspend an Investment Resolution (as any other government resolution) if he believes that such resolution is "unconstitutional." Using this right, as of November 2009 the president already has suspended seven Investment Resolutions equal to approximately 17.3 billion UAH (US$2.11 billion); the last two were suspended on 10 November 2009.

The suspensions are disputable from a legal point of view, and the ultimate authority for resolving the issue, the Constitutional Court of Ukraine, may disagree with the president’s actions and uphold the legality of the Investment Resolutions.

Nevertheless, with presidential election campaigns underway, the president has been willing to veto or suspend much legislation proposed by the current prime minister, which means that suspension of other Investment Resolutions is possible. The question of whether such acts by the president are legitimate will not likely be resolved before 2010.

In such an environment, the main questions for potential lenders and suppliers relying on guarantees are (i) whether they should devote time and money to negotiate investment projects with the government and (ii) if so, how they can protect themselves from the risk that a respective Investment Resolution will be suspended, cancelled or invalidated.

Timing is the key for answering the first question. All Investment Resolutions provide that loan agreements must be signed and state guarantees issued by the end of 2009. This is despite the fact that a majority of the Investment Resolutions were adopted only in the second half of 2009 (four resolutions in July, two in August, two in September and four in October).

Therefore, if lenders or suppliers need the state guarantee component for their project to succeed, they should strive to ensure that a loan agreement is signed and a state guarantee is issued by year-end.

Understanding that suspension, cancellation or invalidation of an Investment Resolution may suspend or terminate the whole investment project is the key to answering the second question. To mitigate such risks, they should be shifted to the state. In the case of traditional project finance schemes, the lender may achieve such protection by including in the loan agreements such events of default as suspension, cancellation and invalidation of a respective Investment Resolution.

For the supplier of goods the same events should be included in the supply agreements as the basis for suspension or termination of the supply of goods. In addition, the text of a state guarantee should provide a warranty that such state guarantee will be issued within the limits provided by the 2009 State Budget Law (37 billion UAH).

Because almost all Investment Resolutions provide for prepayments for goods, proper attention also should be paid to how such prepayment should be applied in case of early termination of a supply agreement. The parties should keep in mind the "180 days rule," which provides that goods must be delivered and imported into Ukraine within 180 days of prepayment. Otherwise, if the prepayment is not returned, a Ukraine-based buyer would be subject to penalties of 0.3 percent of the prepayment amount each day following the 180-day period.

In pursuing a state guarantee, along with the advice listed above, the lender should keep in mind the following basic rules and principles to ensure protection:

       [1]  A state guarantee is a guarantee issued by the government to secure fulfillment of debt obligations of Ukraine-based entities.
       [2]  For the purposes of issuance of a state guarantee, the government is represented by the Ministry of Finance.
       [3]  A state guarantee may be issued only within the limits set by the State Budget Law for a particular calendar year.
       [4]  A state guarantee is not free. A borrower whose obligations are secured by a state guarantee must pay an interest to the state for issuance and maintenance of such guarantee.
       [5]  A state guarantee is always a term guarantee. It may not be issued for an indefinite period of time.
       [6]  A borrower whose obligations are secured by a state guarantee must provide to the state a counter-guarantee of banks. Such guarantee is irrevocable and unconditional, and an issuing bank must comply with the economic norms established by the National Bank of Ukraine for the period of 2007 to 2009. Alternatively, such borrower may provide some other appropriate security (mortgage, shares pledge, etc.).

If you have questions about the Investment Resolutions, Ukraine state guarantees or other related issues, please contact your principal Squire Sanders lawyer or one of the lawyers listed in this Alert: Peter Z. Teluk and Dmytro Sakharuk,

Founded in 1890, Squire, Sanders & Dempsey L.L.P. has lawyers in 32 offices and 15 countries around the world. With one of the strongest integrated global platforms and our longstanding one-firm philosophy, Squire Sanders provides seamless legal counsel worldwide. Squire, Sanders & Dempsey L.L.P., Leonardo Business Center, 19-21 Bohdan Khmelnytsky St., 16th Floor, Kyiv 01030, Ukraine.

LINK: http://click.ssdpublications.com/?qs=bf9707f5e4a15 c3262d683d7c989169fa830d3d56d679779fb48a85dd9874966.

USUBC NOTE:  Squire, Sanders & Dempsey is a member of the U.S.-Ukraine Business Council (USUBC), Washington, D.C., www.usubc.org.
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By Timothy Ash, RBSMarketplace
Emerging Markets Strategy  | EM Alert | CEEMEA
Royal Bank of Scotland, London, UK, Thu, Nov 19, 2009

LONDON  - Ukraine seems to be flavour of the month at the moment in terms of the number of investor calls I seem to be fielding. These seem to be driven by two main motivations/concerns.

[1] First, there is a sense that all the negatives are now in the price, and with yields back up at 14-15% the question on investors minds is whether it is finally worth a punt now rather than waiting until after the presidential elections.

[2] Second there is concern that attempts to restructure a loan by the state-owned railways company, Ukrzaliznytsya, could trigger cross default clauses into other debt of the company which has sovereign guarantees and thereby trigger a sovereign default.

Given that many of the questions I am fielding are of a similar vein I thought it might be simplest to give my responses in a Q&A format.

Here goes:

Q? Do you expect the Constitutional Court (CC) to over-rule parliament/the presidency and throw out the bill which hiked wages/pensions last month by 20%, thereby derailing the IMF programme?

Answer: Don't hold your breath. The CC has a tendency to sit on the fence/procrastinate at the best of times. I sense they are likely to do so this time around. Even then, the CC works in strange and mysterious ways at the best of times, but I really doubt they would do something which runs against "popular sentiment" in the country this close to elections. In the past it has been widely criticised for being overly politicised, and herein I doubt that the voices of reason this time around will weigh in behind the government. I also doubt that the government could garner a majority on the bench.

Q? What is the chance of the government and the opposition (including herein supporters of the president) cutting a deal at the last minute to bring the IMF programme back on track?

Answer: Ukraine is currently in the midst of election campaign so I do not see any incentive for the opposition to make life easy for the incumbent government. Arguably the whole reason that the opposition and supporters of President Yushchenko approved the wages/pension hikes was to make life difficult for the government by in effect cutting off external funding for the government. Members of the presidential administration had previously complained that the IMF was being too political, in allowing the soft interpretation of its own conditionality, so as to maintain funding to the government.

The opposition complain that the IMF in effect were pump-priming the government in the run up to the election. With approval of the wages/pension bill it has been impossible for the government to push an IMF-compliant budget through parliament, and in effect it has made it impossible for the IMF to continue to lend to Ukraine, at least this side of presidential elections.

Q?  What do you think will be the impact of the looming confidence motion on the Tymoshenko administration?

Answer: My base case is that the motion will fail as the Regions opposition are just short of a majority, while I am not sure if enough members of Our Ukraine will be willing to line up behind Regions to bring the minority Tymoshenko administration down. In the event I am not sure it actually makes that much difference, as even if the Tymoshenko's administration loses the confidence vote it will still have to serve in an acting capacity until after the presidential elections.

Perhaps more worrying are suggestions by Regions that they might resume a boycott/blockage of parliamentary activity, albeit I doubt much will be achieved by parliament this side of presidential elections anyway. I doubt that a budget for 2010 can be approved, and if not the budget will be run on the basis of the 2009 budget, pro-rata.

Q?  Is there any chance that the IMF will give Ukraine a break, and just resume lending to Ukraine without approval of the 2010 budget?

Answer: Cat and Hell do immediately spring to mind. The IMF has been very charitable in my mind thus far in its dealings with Ukraine, e.g. appearing to allow the government to stall on gas price hikes this side of presidential elections. But even the new touchy feely IMF has its limits. At the minimum it would need a reasonably achievable, fundable budget for 2010, and with the pension/wage hikes boosting the deficit by 7% of GDP or thereabouts the figures simply do not add up.

Q? So when do you anticipate the IMF programme resuming?

Answer: For some time now I have been working on the assumption that the IMF would return to Ukraine soon after the presidential election, resuming a programme/disbursements once a new government is in office. I hold by that forecast. The IMF (and key IMF shareholders) is clearly supportive of Ukraine, it sees the country as strategic to the region, given its importance to regional gas transit. Ukraine's banking sector reform programme is also going reasonably well, Fund officials have committed a lot of time to the programme, and want to ensure its successful completion.

Q? So what's your call on the outcome of the presidential election?

Answer: The leader of the opposition, Regions of Ukraine, Viktor Yanukovych is leading in the polls, with a rating of 25-28%. Yulia Tymoshenko is next with 15-20%, and the former speaker of parliament, Arsenyi Yatseniuk, is polling third with 5-7%. Incumbent President Yushchenko is miles behind with a low single digit rating.

This is essentially going to be a two horse rate. Yanukovych will win the first round vote, but will then face a run-off with Tymoshenko. Despite his ten point lead at present, Yanukovych lacks pan-Ukrainian appeal, while Tymoshenko tends to poll well across Ukraine.

Yanukovych will be unable to pick up many votes in more nationalist Western Ukraine. Tymoshenko is also a dynamo on the election trail, which is probably worth a good 10% points. And ultimately the Orange vote will tend to line up behind Tymoshenko. Also notable this time around is that Tymoshenko is likely to be backed both by the EU/US, and also by Russia. The West appreciate the fact that she has a pro-EU agenda, but also bit the bullet in making difficult decisions over the IMF programme.

Interestingly, while Yanukovych and Regions are typically seen as being pro-Russian, Russia has cultivated relations this time with Tymoshenko. Moscow sees Tymoshenko as being much more open to deal making, whereas historically the Regions camp have used the pro-Russian mantra but not really delivered much in reality on Russia's agenda.

Herein, arguably the oligarchs behind Regions need good relations with Russia to ensure cheap energy and access to markets but want to keep Russian capital out of Ukraine which they see as a threat to their own dominance over the domestic scene. Tymoshenko will the second round vote 52:48.

Q? And what's the likely outcome in terms of forming the next government?

Answer: The problem for much of the past four years has been there has been an uncomfortable unstable equilibrium in relations between Tymoshenko, Yushchenko and Yanukovych. Frequently, Tymoshenko and Yushchenko wanted to cut deals with Regions but were wary of losing the Orange vote in a future presidential election.

With the presidential election out of the way, I don't think any of the parties will be averse to deal making. Remember in terms of policy there isn't a huge gap between the three parties. They are all generally pro-business, with a tendency towards populism. Tymoshenko is marginally more pro-Western, but understands that this has to be balanced against the need to maintain reasonably normal relations with Moscow.

The most likely scenario is cohabitation between a Tymoshenko presidency, and a Yanukovych led government. This could prove quite stable, with the main issue being the distribution/allocation of political patronage between the various business groups which support the two factions.

The coalition might though prove surprisingly stable, and we might actually see progress on the IMF front, and on issues such as privatisation, previously stalled by President Yushchenko. Perhaps the key challenge would be figuring out the best form of cooperation with Russia, with Tymoshenko likely to be willing to give more concessions than Yanukovych.

Q? Do you expect another energy war with Russia this winter?

Answer: There is no reason for a conflict. Ukraine has enough gas in storage to ensure supplies. Russia has no real reason to use the political card given that its arch nemesis, President Yushchenko, is set to lose the presidential election. Russia also now needs the FX from energy exports given its own economic situation is not as favourable as several years back.

Gas consumption has dropped dramatically in Europe, and Russia faces more competition in the market. It wants to prove it is now a reliable supplier to Europe and hence is eager to ensure gas supplies to Europe. From Ukraine's perspective, technically there seems no reason for problems in gas transit, given that Ukraine bought around 25bn cu metres of gas into storage over the summer. It does need to cover the monthly bill for gas bought from Russia of around US$500m.

Clearly with the government failing to agree to hike domestic gas prices as originally agreed with the IMF, this leaves the gas transit/supply company, Naftogaz short of funds, and in need of state support. Budget finances are clearly stretched at the moment, but given that this has to be a number one strategic priority for the country, resources should be made available from the NBU.

With US$27bn in FX reserves at the NBU, and given the IMF programme is already off-track, meeting a US$500m monthly bill for energy imports from Russia should not be problematic. Even we cannot believe that the IMF would be too upset if FX reserves were used for such a strategic priority given it also assures energy supplies to Europe.

All this said the issue is clearly complicated by domestic politics in Ukraine, and whether President Yushchenko, through his effective control of the NBU, might seek to block gas payments for some political purpose. However, even herein, recent comments by members of the presidential administration have suggested that they are supportive of NBU resources being used to assist in meeting the cost of the monthly gas bill to Russia.

Note that PM Tymoshenko has threatened to double the price it charges Russia for gas transit through Ukraine from the current rate of US$1.7 per 1,000 cu metres over 100km. However, we think that such an increase was precluded by the gas price deal reached with Russia last year. This might though all be part of the negotiating process, as Ukraine seeks to manage down the high take or pay agreement (41 bn cu metres) which potentially leaves the country exposed to high additional charges for gas.

Q? Will Ukraine default on its sovereign liabilities?

Answer: Never say never. It should not, as sovereign liabilities falling due over the next year are light, i.e. up to US$3bn, and the NBU still has US$27bn in FX reserves. And indeed my base line is no such scenario over the next year at least. That said it is sometimes difficult to figure out exactly what the agendas are of all the interested parties are in Ukraine.

For example, with the Naftogas restructuring I still cannot figure out how this was in the best interests of Ukraine. If you are going to run such a restructuring which almost inevitably damages the reputation/credit worthiness of the country/company, the benefits should be significant. In this instance the NPV reduction was hardly worth the effort in my mind. But Ukraine is always unpredictable.

Q? So what's your take on the Ukrzaliznytsya saga.

Answer: Well this company is state-owned, and it seems to be struggling to cover the payments on part of its external liabilities which do not carry a sovereign guarantee. The company has other external liabilities which have a sovereign guarantee. So the question then is are there cross default clauses back between these two separate liabilities and then back to the sovereign? If there are, are they likely to be triggered by creditors? Herein the situation gets very murky. We have failed to get a clear cut answer on the first of these.

But assuming that there are cross default clauses which can stand up in court (not clear in my mind), I still don't see the rational for creditors on the part of the companies' liabilities with a sovereign guarantee to trigger a formal default and accelerate. One hopes herein that the sides in charge of negotiations though are fully aware of all the facts; not a given.

And, given that the sovereign still has resources to cover the payments if they fall due, and have to be paid, we still do not see why they would allow a chain of events to occur that would eventually lead to a sovereign default, especially given that the sums of the outstanding loans are relatively small, and the sovereign's liabilities falling are relatively modest this year.

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 Meena Thiruvengadam, Dow Jones Newswires
The Wall Street Journal, NY, NY, Friday, November 20, 2009
WASHINGTON -The International Monetary Fund continues to be locked in a standoff with Ukraine on the country's proposed 2010 budget. The IMF, which has extended a $16.4 billion loan to Ukraine, wants the country to revise a recently signed law that would boost government-sector wages and pensions 20%. Such an increase could cost Ukraine an unsustainable 7% of gross domestic product, according to the IMF.

The IMF has said the proposed compensation hike would not only boost Ukraine's budget deficit but could also lead to job losses. The IMF's loan program for Ukraine calls for a wage and pension increase of 10%, a figure the Fund maintains is in line with inflation.

"We need to have a full consensus behind a sustainable budget position that will avoid inflation or any increase in unemployment," IMF spokeswoman Caroline Atkinson said Thursday.
The IMF already has provided nearly $11 billion to Ukraine from its existing loan package. The next installment of loan funding for Ukraine--valued at about $3.8 billion--was due to be released this year, but could be delayed until January. 
By Meena Thiruvengadam, Dow Jones Newswires; 202-862-6629; meena.thiruvengadam@dowjones.com 

LINK: http://online.wsj.com/article/BT-CO-20091119-711232.html
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Inform Newsletter #131 - for the international community providing
views and analysis from the Bloc of Yulia Tymoshenko (BYuT)
Kyiv, Ukraine, Thursday, November 19, 2009
KYIV - The International Monetary Fund (IMF) has not abandoned Ukraine. This was the message from Deputy Prime Minister Hryhoriy Nemyria who told Inform that IMF officials could resume talks to discuss its next loan payment provided the president, national bank and the cabinet of ministers agree to implement clauses stipulated within the IMF cooperative agreement.

The comments came as Fitch Ratings downgraded Ukraine one notch to B-, maintaining a negative outlook. The basis of the Fitch downgrade is due largely to the IMF withholding a $3.8 billion next tranche payment from the $16.4 billion stand-by facility agreed last year. The loan is desperately needed to help bolster the government’s finances. Ukraine still finds itself in the grip of a severe recession and is bracing itself ahead of steep winter gas bills.
The path out of the recession was made harder when President Viktor Yushchenko refused to use his power of veto and signed into law huge rises in the minimum wage and pensions. The budget busting move, which Fitch estimates could result in an 11 percent budget deficit in 2009, contravened IMF conditions to reign in public spending and an agreed deficit for the year of 6 percent of GDP. Consequently, the IMF has put off any notion of making the next tranche payment to Ukraine unless the matter is resolved.
In a move that borders on the truly bizarre, President Viktor Yushchenko – after ignoring IMF advice – declared himself one of the world’s best bankers. “I'm an economist and financier. I think that I'm among the top five bankers in the world," he said last Thursday. As if to rub salt into the wounds he said that he could "easily" break down and unscramble any economic situation and problem. 
An unimpressed Prime Minister Yulia Tymoshenko told a meeting of G8 ambassadors that she intends to challenge the budget busting law in Ukraine’s Constitutional Court.
The President of the Centre for Social Studies, Andrey Yermolayev doubts Ukraine’s politicians will reach a consensus before next year’s presidential elections, which are slated for 17 January, 2010. “Maybe they will have consultations that will result in a declaratory document, let’s say a letter to the IMF, for instance. But it is imperative that legislators support such effort. Rada members are the only guarantors that any promises given by the government are supported by legislation and reflected in the budgets for 2009 and 2010. It is a possible but very unlikely situation.”
Pressure will be put on the government to urge the National Bank of Ukraine to print money to pay for the wage and pension rises, but this would only weaken the country further by causing inflation. Of more concern to Europe is the worry that without IMF support, Ukraine will be unable to meet future gas payments to Russia. Last Friday, Moscow’s EU envoy, Vladimir Chizhov, called on the EU to take measures, including financial, to prevent problems arising in Russian natural gas transit via Ukraine to Europe.
Yet Ukrainian officials have said that they do not envisage a rerun of last January’s bruising gas dispute. "We are taking extraordinary efforts to pay for natural gas, including for November, on time, without delay and in full," said Prime Minister Yulia Tymoshenko.
Mr Nemyria also pointed out that Ukraine has put into store 25 billion cubic metres of natural gas, which should ensure the uninterrupted flow of gas supplies to Europe.
On a positive note Ukraine’s state run gas company has completed successfully a restructuring of its external debt with the settlement of a new bond. This was a $1.595 billion five-year Eurobond with a sovereign guarantee in exchange for Naftohaz’s earlier Eurobond and three bilateral loans.

Its completion represents a notable market success despite initial resistance from some bondholders. And from a sovereign perspective, Ukraine is over the hump of debt needing to be serviced in 2009. Another state run business, Ukrzalyznitsya, the State Railway Transport Administration of Ukraine, is looking to restructure a $110 million loan. 
Meanwhile, government officials are frantically trying to bring about a resolution that will allow the IMF back to the table.  
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By Ulrike Dauer and William Launder, Dow Jones Newswires
Frankfort, Germany, Thursday, November 19, 2009 
FRANKFURT - Austria's Raiffeisen International Bank-Holding (RIBH.VI) is confident it has made enough risk provisions for its business in Ukraine, Chief Executive Herbert Stepic said Thursday. Speaking on the sidelines of a banking conference, Stepic also said the bank's foreign units would get additional capital if needed, but that from today's perspective they won't need it.

He added that he expects a gradual recovery of the global economy in 2010, of which the bank's foreign units, such as in Central and Eastern Europe, will likely benefit.  He said he hopes that the lower-risk provisions the bank had in the third quarter will turn out to be a trend, but can't yet confirm that. He said the bank will strive for a profit this year, but can't yet promise that the outcome will be a profit.

Even though non-performing loans have been particularly high in Ukraine, profits earned in Russia and Ukraine over the past several years are still compensating for the losses, Stepic said. Raiffeisen International doesn't plan to withdraw from any markets in Central and Eastern Europe, Stepic said.
"We believe in it," Stepic said. 

USUBC NOTE:  RZB Finance LLC, Bethel, CT, a wholly owned subsidiary of Raiffeisen Zentralbank Osterreich AG (RZB Austria), is a member of the U.S.-Ukraine Business Council (USUBC), www.usubc.org.
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By Natalia Bilousova, The Day Weekly Digest #33, in English
Kyiv, Ukraine, Tuesday, 17 November 2009 

Experts point out that the Ukrainian economy is in for yet another stormy season. The presidential election will start in less than two months. Economic growth is suspended, while the amount of investments and credits does not satisfy the appetites — all this happening while the rest of the world is expecting an economic revival next year. What steps Ukraine should take to have a firm foundation for economic growth in 2010? What steps shouldn’t be taken to avoid aggravating the situation?

Below is an interview with Oleksandr PASKHAVER, president of the Economic Development Center.

[The Day] We hear about forecasts about economic growth all over the world in 2010. What is your view of the tendencies in Ukraine?
[Oleksandr Paskhaver] “Our state is institutionally ineffective and poorly governed, and there are reforms that remain to be completed. We have fewer reserves to meet the challenges thrown on our way by the world financial crisis, so every problem is met here as though something that has come out of the blue. Proof of this is the situation with the preparations for Euro 2012, the ongoing financial crisis, and the flu epidemic. Most economic problems result from a lack of strategic work in this country.

"All governments constantly forget that rash decisions can’t solve systemic problems. By continuing to make such rash decisions they only increase expenditures, making such problems even harder to resolve. On the other hand, Ukraine does not fundamentally differ from the rest of the world and will find its way out of the crisis together with other countries, albeit lagging behind somewhat.

“The Ukrainian economy has been the hardest by the world financial crisis. It is also true, however, that Ukraine started the revival process ahead of America and Europe. Despite some experts’ negative forecasts, there hasn’t been a single systemic breakdown during the year of the crisis — not in the banking sector; nothing drastic has happened to Naftohaz Ukrainy or any municipal networks. Such drastic occurrences were avoided thanks to the government’s quick and efficient resuscitating measures that were taken proceeding from the central budget’s actual capacities. This is a positive aspect.

“Let us now analyze the current status of [Ukraine’s] economy. The banking and financial sectors are still convalescing, but a similar trend is observed elsewhere in the world. The real sector of the economy has been making headway since March 2009. This reviving growth will be quick and inexpensive for a while, considering that the businesses cut sharp on their expenses and maintained their production capacity.

However, the economic well-being in 2010 will depend on investments, credits, and consumer demand. At present, economic growth is hanging in midair because it has no solid footing (investments, credits, and consumer demand aren’t showing any significant growth).”

[The Day] What should we expect if the IMF refuses to give Ukraine another tranche?
[Oleksandr Paskhaver]  “Ukraine must receive another IMF tranche; otherwise the economic situation will get worse because Ukraine is still weak. If the IMF provides this tranche, this money should be used to boost Ukraine’s consumer demand. To get well, we must stimulate domestic production. It’s the only way our economy will start earning real money.

"However, the priorities of this growth should be determined by consumers, rather than bureaucrats. We can rely on the experience of advanced countries in stimulating our consumer demand. In the United States, the federal government financially supports a citizen who decides to buy a new car; an American citizen buying a home (for the first time) receives $8,000 from the federal budget.”

[The Day] How will our president’s signing of the law to raise social standards influence Ukraine’s economic growth?
[Oleksandr Paskhaver]  “Higher social standards are a political project. It lacks economic motivation and will only do damage to Ukraine. Personal incomes have to be increased, of course, but only when the existing economy has the resources to make this possible. What will happen next? Another political show Ukrainians have watched a hundred times: the government will make every effort to avoid implementing this law, while the opposition will be insisting on its implementation, using it as a tool to reach their campaign objectives.

"Such shows will continue forever unless our politicians realize that the economy and all of this country are facing reforms that have to be completed. Ukraine badly needs the pension, education, and health care reforms. Along with other social issues, they would provide budget funds for upgrading the economy. In the conditions of a market economy the budget is simply unable to sustain half of the population.

“Today’s economy is in a vicious circle formed by short-term problems, while everyone seems oblivious to the long-term ones. They keep asking me, ‘How will Ukraine pay for [Russia’s] gas supplies? Where will Ukraine find the money to cover the budget deficit?’ As a rule, all such problems are long-term ones. In the short-term perspective, these are not economic problems, so they are being solved as purely political matters. There is no point in considering them in this perspective.”

[The Day] What GDP percentage is believed to be optimal for financing social spending? [Oleksandr Paskhaver]  “I’m not sure about the percentage, but I can say that about one-third of [Ukraine’s] GDP stays in the central budget. This is very high centralization for a country with the incomes level that we have. A considerable part of the budget funds are being used toward apparent and concealed social expenditures. We’re supporting agriculture, the mining industry, and natural monopolists by using a system of low tariffs. This is social, rather than economic, support. We must change our inadequate social policy, the sooner the better; otherwise it will continue keeping our economy down.”

[The Day] Will Ukraine manage without loans in 2010?
[Oleksandr Paskhaver]  “Ukraine will have to take out loans in 2010. Cheap money won’t hurt us, considering that Ukraine is passing through the initial post-crisis phase of economic growth. I can’t see any reasons against borrowing money for the sake of our economic progress. Another thing is that this should imply a long-term clear-cut policy for securing the most effective way of using such loans.”

[The Day] What do you think has caused the large scale of hostile takeovers in Ukraine? What will happen if this process continues and becomes more established?
[Oleksandr Paskhaver]  “One shouldn’t look for reasons behind hostile takeovers in Ukrainian mentality. Hostile takeovers stem from inadequate governance. They are one of the vices that flourish in this kind of situation. This phenomenon can be overcome only by completing reforms, which means improving our legislation — today they are passing laws with the expectation that no one will be observing them.”

LINK: http://www.day.kiev.ua/283531/
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The World Bank, Washington, D.C., Thursday, November 19, 2009 
WASHINGTON - The World Bank’s Board of Executive Directors today approved a loan in the amount of US$ 60 million for Additional Financing to the Hydropower Rehabilitation Project in Ukraine. The original loan for the Hydropower Rehabilitation Project in the amount of US$106 million was approved on June 21, 2005, and became effective on February 3, 2006. 
The main objectives of the Hydropower Rehabilitation Project are to improve the reliability, efficiency, and safety of the operation of UkrHydroEnergo hydraulic structures and equipment, and to improve their environmental performance. The latter will be achieved through the reduction in emissions of greenhouse gases, the installation of nonpolluting turbine runners, and the elimination of oil leaks into Dnipro and Dnister Rivers.
“The reform and modernization of the energy sector is a key pillar of Ukraine’s sustainable economic development,” said Martin Raiser, World Bank Country Director for Ukraine, Belarus and Moldova. “We are very pleased to be able to continue to support UkrHydroEnergo in its efforts to increase the efficiency of the unique Dnipro cascade and thereby ensure Ukraine has access to cheap, reliable, and clean power.”
The project will help increase the installed capacity of the Dnipro Hydropower Cascade by about 400 MW and its production by about 500 GWh, which is equivalent to building a major new hydropower plant.  The project also pioneered the concept of Carbon Financing in Ukraine as it was the first Joint Implementation Project under the Kyoto Protocol in the country. The additional financing supports the rehabilitation of three hydroelectric units in the Dniprovska 2 Hydropower Plant (HPP) and three hydroelectric units in the Kremenchug HPP.
The Bank has supported Ukraine in its efforts to reform and restructure its energy sector through policy dialogue, technical assistance, and financing of adjustment and investment projects since the early 1990s.  The 2008-2011 Country Partnership Strategy (CPS) discussed by the Board on December 6, 2007, emphasizes the need for sustainable economic growth and improved competitiveness.

The Additional Financing will contribute to the CPS objectives by increasing reliability and reducing the cost of hydropower generation, as well as helping Ukraine better prepare to meet technical requirements of the EU power grid.

For more information about the World Bank in Ukraine, please visit http://www.worldbank.org.ua/. Contacts: Andrii Gulay, agulay@worldbank.org;
Michael Jones, Mjones2@worldbank.org
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InZero Systems, Herdon, VA, Wednesday, November 18, 2009

WASHINGTON, D.C. - "Today’s computer hardware is not designed to simultaneously address the security challenges of the internet while facilitating the rapid flow of information in our digital economy. Attempts to deploy security software fixes to remedy the situation have led to a constant game of catch-up between hackers and IT security companies – with no end in sight. Until now," InZero announced Wednesday in a news conference at the National Press Club in Washington, D.C.

InZero Systems has developed revolutionary new PC hardware that walls off intrusions and viruses, while allowing full access to the outside world. You are finally free to safely go anywhere you want. InZero provides a gateway to secure communication on the Internet, offering you freedom from fear of intrusion, loss of data, and intellectual property theft. This new technology offers unmatched security without compromising usability.

A Revolutionary Approach – InZero Secure PC
The InZero Secure PC is unique because it effectively contains two computers in one: a standard computing module and a secure “InZero Gateway” module. The InZero Gateway module is directly connected to the Internet. It hosts potentially dangerous network applications, processes incoming and outgoing files and transfers files to and from the computing module, which is permanently offline.

As a result of this dual-module approach, the PC is secure but remains capable of sending and receiving emails, processing attachments, browsing the internet, and downloading/uploading documents. This enables a high degree of productivity and functionality within an unprecedented security environment.

How it works - Unlike existing software solutions in use today, the InZero Gateway module does not detect malicious software but rather creates a physically separate, safe operating environment where the viruses cannot execute and compromise data security. In our case, the internet browser application is stored within the InZero Gateway module in an isolated operating memory segment which prevents malware from changing it. Once launched, the browser is continuously checked to make sure it has not been changed and is still running.

If either one of these conditions is determined to be compromised, the browser is shut down and restarted – with a clean copy from the read-only memory. This security extends to all applications housed within the InZero Gateway module. InZero’s proprietary hardware architecture, using separate computing and Gateway modules, creates the world’s first truly secure PC.

Applications: Secure Network
Beyond the secure PC, InZero Gateway modules can be interconnected within a company to create a secure network which enables powerful control over user’s permissions and access rights, giving important, confidential information to only those who need it. It also helps organizations to effortlessly extend their perimeters and allow secure remote access: no matter how many viruses are on the remote PC, this malware is unable to transmit data and/or propagate itself within the company network if InZero technology is deployed.

Applications: Secure Internet
In addition, InZero Gateway modules can create a secure internet by providing trusted connections between unfamiliar partners, based on the use of InZero technology. This can serve as a foundation for secure direct communications, secure cloud computing, secure grid computing, secure social networks, and secure online applications.

About the Company
InZero Systems began operations in 2005, with the goal of providing organizations with a far more effective, yet fundamentally different, approach to protecting sensitive data. Headquartered in Herndon, Virginia, the company is led by cyber security experts, entrepreneurs, and Fortune 100 senior executives and has grown to more than 60 employees.

USUBC FOOTNOTE:  If you are interested in contacting InZero Systems please write to Iryna Teluk, Membership Director, U.S.-Ukraine Business Council (USUBC), iteluk@usubc.org.  
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DLA Piper Ukraine, Kyiv, Ukraine, Tue, Nov 17, 2009

KYIV - The National Bank of Ukraine ("NBU") has adopted amendments ("the Amendments") to the Regulation on Organization and Performance of Currency Conversion Operations in Ukraine. The amendments will take effect on 20 November 2009 and will establish the following new rules for currency conversion operations:

       [1] Banks and other financial institutions will not be allowed to change foreign currency exchange rates in the course of any given operational day;
       [2] The commission fee on operations of sale and purchase of travelers cheques, foreign currency cash conversion, collection of foreign country bank notes and personal cheques shall be charged in Ukrainian Hryvnya only;
       [3] Banks and other financial institutions shall not be allowed to charge a commission fee for cash conversion of foreign currency into Ukrainian Hryvnya and vice versa; and
       [4] The NBU is entitled to fix a maximum margin between the exchange rate at which foreign currency will be sold and the rate at which it will be purchased.

In addition, the Amendments envisage a number of restrictions on the following currency conversion operations ("the Operations") of banks, other financial institutions and post offices:

       [1] Cash conversion of foreign currency into Ukrainian Hryvnya or another foreign currency by Ukrainian individuals;
       [2] Conversion back into a foreign currency of unused Hryvnya cash by non-resident individuals;
       [3] Sale and purchase of travellers cheques for a foreign currency or Hryvnya cash; and ▪ Collection of foreign currency bank notes and personal cheques.

In particular, the Amendments will establish the following restrictions on the Operations:

       [1]  Operations for amounts exceeding UAH 15,000 will only be able to be performed at a cashiers desk of a bank, a financial institution or an operational room of a post office and subject to the client providing a piece of personal identification;
       [2]  In order to perform the Operations for amounts exceeding UAH 50,000 the client must provide their passport and identification number certificate (if available). In such a case a bank, a financial institution or a post office must retain a copy of the client's relevant passport pages;
       [3]  Banks (financial institutions) will not be allowed to sell to any one client during the same operational day foreign currency in the amount exceeding an equivalent of UAH 80,000.

Please do not hesitate to contact us should you have any questions on the above. Oleksandr Kurdydyk, Partner; oleksandr.kurdydyk@dlapiper.com; Illya Muchnyk, Senior Associate, illya.muchnyk@dlapiper.com.

The matters covered in this newsletter are intended as a general overview. This newsletter is not intended, and should not be used, as a substitute for taking legal advice in any specific situation. DLA Piper Ukraine LLC will accept no responsibility for any actions taken or not taken on the basis of this newsletter. 

USUBC NOTE:  DLA Piper Ukraine is a member of the U.S-Ukraine Business Council (USUBC), Washington, D.C., www.usubc.org.
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Asters Newsletter, Kyiv, Ukraine, Thursday, November 19, 2009

KYIV - Asters provided legal advise on Ukrainian merger control law issues, including representation in in-depth merger control investigation by the Antimonopoly Committee of Ukraine (AMC) and obtaining merger clearance in connection with a merger of two global pharmaceutical companies– Schering-Plough Corporation and Merck & Co., Inc. The combined company will use the trade name 'Merck' in the USA and Canada, and ‘MSD' elsewhere.

Merck & Co., Inc. is a global research-driven pharmaceutical company that discovers, develops, manufactures and markets vaccines and medicines to address unmet medical needs. Schering-Plough is an innovation-driven, science-centered global health care company with activities in the human, consumer healthcare, and animal healthcare sectors.

The combined company is a global health care leader with a diversified portfolio of prescription medicines, vaccines, and consumer health products, as well as animal health products. The company now has approximately 106,000 employees and operates in more than 140 countries around the world, including emerging markets. The filing with the AMC was handled by associates Tetyana Buchko and Maryna Kovalko under the supervision of
partner Igor Svechkar .

Asters advising the European Bank for Reconstruction and Development on USD 27 million loan to finance the construction of the integrated logistics service centre in Ukraine

Asters acts as a legal counsel to the European Bank for Reconstruction and Development (EBRD) in connection with a USD 27 million loan provided to Euroterminal LLC to finance the construction of a logistics service centre on a 50-hectare land plot located in Odessa. According to the EBRD, the centre will provide several logistic functions which will support an integrated extension of the existing container handling facilities in the Odessa Sea Port.

The logistics centre will consist of four main facilities: Customs Terminal, TIR Parking Lot, Internal Road, and Container Depot. EBRD funding will contribute to improvements in the efficiency of container handling operations and promote the development of the inland infrastructure in the Port of Odessa. Asters’ banking and finance team working on this project includes partner Iryna Pokanay and associate Gabriel Aslanian.

Asters consults EBRD on eruo13 million loan to Maisadour Semences Ukraine to finance a part of the construction of the first modern seed production plant in Ukraine

Asters has acted as a legal counsel to European Bank for Reconstruction and Development (EBRD) in connection with the long term euro13 million loan provided to Maisadour Semences Ukraine ("MAS Ukraine") to finance a part of the construction of a green-field seed production plant in Ukraine. Maisadour Semences Ukraine ("MAS Ukraine") is a subsidiary of Maisadour Semences S.A. ("MAS").

MAS is a French seed production company which is a subsidiary of Maisadour Group (the "Sponsor") which owns 60%, and Syngenta Seeds which owns 40%. The Sponsor is a French cooperative operating in various agribusiness segments. Syngenta Seeds is a subsidiary of Syngenta, the Swiss agribusiness multinational focused mainly on crop protection and commercial seeds.

According to EBRD, MAS Ukraine will have the first modern seed production plant in Ukraine. It will work with the farmers to help them improve the quality and yield of their commercial seeds through agronomic assistance and training. The transaction will contribute to greater efficiency in the market as most of the commercial seeds used in Ukrainian agriculture are imported. The legal support of the transaction was provided by Asters’ banking, finance law and securities team headed by Partner Iryna Pokanay and associate Gabriel Aslanian.

Asters is a Kyiv-based Ukrainian law firm founded in 1995 as Shevchenko Didkovskiy & Partners. The firm is among the most recommended law firms for Ukraine according to reputable international legal directories The Legal 500, PLC Which Lawyer?, Chambers Global, IFLR 1000, and Ukraine's legal market research publications. A list of the firm's clients includes major international corporations, such as Beiersdorf AG, Coca-Cola, News Corp., Nissan Motor, Nokia Corporation, Philip Morris, Renault, Sopharma, Telenor ASA, Toshiba Corporation, and the world's leading financial institutions Barclays Capital, Citibank, Credit Suisse, Deutsche Bank, Dresdner Kleinwort Wasserstein, EBRD, IFC, ING Bank, Standard Bank and Swedbank AB.

USUBC NOTE:  Asters 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.

Ukraine International Airlines, Kyiv, Ukraine, Friday, Nov 13, 2009

KYIV - Commencing November 9, 2009 Ukraine International Airlines have added some new destinations on the airline’s web-site to the list of flights that allow online check-in for passengers with electronic tickets. The online check-in service allows passengers to considerably cut their queuing time at the airport.
Passengers departing from Kiev International Airport “Borispol” may now check-in at the airline’s web-site www.flyUIA.com for UIA scheduled flights Kiev-Amsterdam, Kiev-Paris and Kiev-Helsinki. The list of destinations available for self-check-in on the UIA web-site also includes the Lisbon-Kiev flight.

Ukraine International Airlines became the first airline in Ukraine to offer its passengers this new check-in online service. As of today the service is available for UIA scheduled flights departing from Kiev to Amsterdam, Berlin, Brussels, Dubai, Frankfurt, Helsinki, Lisbon, Milan, Nice, Paris, Rome, Tbilisi, Vienna and Zurich, as well as the Airline’s internal flights departing from Kiev to Lvov and Simferopol. UIA passengers may also check-in online for flights departing to Kiev from Brussels, Frankfurt, Lisbon and Zurich.    

A passenger who wants to choose a seat on the airplane and to check-in for the flight, goes to the UIA web-site, identifies himself/herself by their surname, booking code, electronic ticket number or by Panorama Club frequent flyer card. Having chosen the seat the passenger then receives a boarding pass, containing a special bar-code, emailed to his address and prints it out. This boarding pass is the equivalent of the traditional boarding pass issued at the check-in desk at the airport.

Passengers traveling with check-in baggage can also check-in online and on arrival at the airport drop-off their baggage at the business-class check-in desk, thus saving time.

Check-in online opens 23 hours before the scheduled flight departure and closes when the check-in desk starts to work at the airport – 2 hours before departure. In the near future Ukraine International Airlines plan to complete introduction of the web check-in service for all UIA flights departing from Kiev International Airport “Borispol”, including destinations demanding passport data insert – these data may be entered by the passengers into the system before arriving at the airport. 
Press-office of Ukraine International Airlines, Tel/fax: +38 044 238-2697; E-mail: press.service@flyuia.com

USUBC NOTE:  Ukraine International Airlines is a member of the U.S.-Ukraine Business Council (USUBC), Washington, D.C., www.usubc.org.
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Sponsors: Cargill, Horizon Capital, R&J Int, SigmaBleyzer, USUBC

U.S-Ukraine Business Council (USUBC), Wash, D.C.,  Fri, Nov 20, 2009

KYIV - Mary Kay Ukraine and the charity fund, Women's Health and Family Planning, took the lead in observance of Breast Cancer Awareness Day 2009 with a charity exhibition at Ukrainian House in Kyiv in late October. 
The event, an annual affair in Ukraine since 2005, is directed toward providing information on breast cancer prevention and detection for Ukrainian women and their families. The exhibition was not only to draw community attention to the problem of breast cancer but also to raise funds for a specially designed two-week rehabilitation program for women who have undergone breast cancer treatment, to be held in Crimea in the spring of 2010. Exhibition items were painted by breast cancer survivors during previous art therapy courses in Crimea.
Corporate sponsors for the event were Cargill Ukraine, Horizon Capital, R & J International and SigmaBleyzer, with the support of the U.S.-Ukraine Business Council (USUBC). 
In addition to the exhibition, the event included a presentation to remind participants that breast cancer remains by far the most prevalent type of cancer among women in the country. The good news is that women’s cancer death rates are going down thanks to early detection and medical advances made possible by charities like The Mary Kay Foundation.

From May 12 through December 15, 2009, $10 from the sale of each “Pink Dream” lipstick will go to the rehabilitation program in the Crimea for women who had breast cancer.
Following the traditions and heritage of Mary Kay Ash, in 2002 Mary Kay Ukraine established a charitable project that aims to conduct outreach on prevention and early diagnosis of breast cancer, as well as funding for rehabilitation of women who had the disease. Mary Kay’s permanent partner in this project is the Foundation for Women's Health and Family Planning. [www.womenhealth.org.ua]
For more information on Breast Cancer actions and events worldwide, go to the links below:
http://www.nbcam.org/; http://healthday.com/Article.asp?AID=631891; http://www.nbcf.org.au/

For a WHO report that further details the leading role of breast cancer in Ukrainian females, go to: https://apps.who.int/ infobase/report.aspx?rid=119&iso=UKR&generateReport=Generate+Report

USUBC NOTE: Cargill, Horizon Capital, R&J International, and SigmaBleyzer are members of the U.S.-Ukraine Business Council, Washington, D.C., www.usubc.org.
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