"THE ACTION UKRAINE REPORT - AUR"
An International Newsletter
The Latest, Up-To-Date
In-Depth Ukrainian News, Analysis, and Commentary
"Ukrainian History, Culture, Arts, Business, Religion,
Sports, Government, and Politics, in Ukraine and Around the World"
"THE ACTION UKRAINE REPORT - AUR" - Number 596
Mr. E. Morgan Williams, Publisher and Editor
Washington, D.C., Kyiv, Ukraine, MONDAY, November 7, 2005
--------INDEX OF ARTICLES--------
"Major International News Headlines and Articles"
1. UKRAINE PRESIDENT ADVOCATES WTO ENTRY IN RADIO
ADDRESS AHEAD OF ORANGE REVOLUTION ANNIVERSARY
Era Radio, Kiev, Ukraine, in Ukrainian 1600 gmt 5 Nov 05
BBC Monitoring Service, UK, in English, Sunday, Nov 6, 2005
2. YEAR AFTER 'ORANGE REVOLUTION', A TIRED, BITTER
BUT DETERMINED YUSHCHENKO
Agence France-Presse (AFP), Kiev, Ukraine, Sat Nov 5, 2005
3. ECONOMICS MINISTER SAYS UKRAINE IS IN "TRADE WAR"
WITH USA AHEAD OF WTO ENTRY
ICTV television, Kiev, in Ukrainian 1730 gmt 4 Nov 05
BBC Monitoring Service, UK, in English, Fri, Nov 04, 2005
4. UKRAINIAN PM BLAMES PREDECESSORS FOR WTO FAILURE
Did not persuade U.S. to grant Ukraine market economy status on trip
ICTV television, Kiev, in Ukrainian 1045 gmt 5 Nov 05
BBC Monitoring Service, UK, in English, Sat, Nov 5, 2005
5. UKRAINE'S HEROES TURN INTO FOES
By Stephen Mulvey, BBC News, Ukraine
United Kingdom, Tuesday, November 1, 2005
6. UKRAINE GOVN'T INITIATES END OF ECONOMIC CODE
By Vitaly Matarykin, ITAR-TASS News Agency
Moscow, Russia, Wednesday, October 19, 2005
7. WORLD BANK, IMF URGES MORE MARKET REFORMS IN
EASTERN EUROPE, EX-SOVIET UNION
World Bank, IMF call for farm subsidy cuts
New Europe, Athens, Greece, Monday, November 7, 2005
8. FACTORIES, FUNDS FLOW TO UKRAINE FROM JAPAN
The Asahi Shimbun, Japan, Saturday, Nov 05, 2005
9. MAJOR SLOVENIAN APPLIANCE MANUFACTURER CHOOSES
KHARKIV OBLAST FOR PRODUCTION EXPANSION
The facility would create 400 new jobs
Ihor Yatsenko, FirsTnews, Kyiv, Ukraine, Fri, November 04, 2005
10. ITALIAN CO ANTONIO MERLONI PLANS TO PRODUCE ARDO
WASHING MACHINES IN IVANO-FRANKIVSK IN 2006
Ukrainian News Agency, Kyiv, Ukraine, Friday, November 4, 2005
11. SUMY REGION DAIRY PLANT TO BUY NEW CHEESE LINE
Western NIS Enterprise Fund plans to increase investment
Ukrainian News Agency, Kyiv, Ukraine, Tue, November 1, 2005
12. CONTEMPOARTUKRAINE
Quarterly art magazine introducing today's Ukrainian artists
The Action Ukraine Report (AUR)
Kyiv, Ukraine, Monday, November 7, 2005
13. UKRAINE - CURRENT ECONOMIC SITUATION AND
PROPOSED MEASURES TO REVIVE INVESTMENTS AND GROWTH
Fundamental reform of public administration is the key
REPORT: ANALYSIS AND RECOMMENDATIONS
SigmaBleyzer and Bleyzer Foundation
Emerging Markets Private Equity Investment Group
Kyiv, Ukraine, November, 2005
=======================================================
1. UKRAINE PRESIDENT ADVOCATES WTO ENTRY IN RADIO
ADDRESS AHEAD OF ORANGE REVOLUTION ANNIVERSARY
Era Radio, Kiev, Ukraine, in Ukrainian 1600 gmt 5 Nov 05
BBC Monitoring Service, UK, in English, Sunday, Nov 6, 2005
Ukrainian President Viktor Yushchenko has said that Ukraine has chances to
join the WTO this year. In today's radio address to the nation ahead of the
first anniversary of the Orange Revolution sparked by the rigged 21 November
2004 presidential runoff, Yushchenko said Ukraine stands to win from WTO
entry.
He promised a further rise in pensions next year but said that the 2006
budget should be aimed at development rather than consumption. The
following is the text of Yushchenko's address by the Ukrainian private radio
Era on 5 November; subheadings have been inserted editorially:
[Presenter] We are relaying Ukrainian President Viktor Yushchenko's radio
address.
[Yushchenko] I greet you, dear friends. With the [first] anniversary of the
Orange Revolution drawing closer, each of us who stood on various squares
in Ukrainian towns and villages is facing questions about how the country has
changed in the passing year, what steps will be taken next, how the
authorities have changed and whether we are faithful to the ideals of the
Maydan [Kiev's Independence Square, heart of the Orange Revolution].
I think that freedom has been the main achievement of 2005. The main change
in the corridors of power is the awareness that the people is the source of
power. The voters convincingly proved a year ago that it was they who
elected their leaders.
For the first time, the Ukrainians have the authorities which are clearly
aware that they should hear their citizens and report to them on every step
taken. Dialogue with you is extremely important to me at present.
I want you to understand and support the actions of the authorities and the
logic of the reforms initiated. I want to dedicate my radio address
precisely to these topics.
My office receives more than 800 letters a day. The problems you raise in
your letters are the ground for a profound analysis of how the country and
each citizen live and what issues are of greatest concern to society.
You must hear the position of the authorities at first hand. This is why I
am going to talk to you about the most frequent problems mentioned in
letters to the president and about the essence of the changes the
authorities are working on. We must choose things together and see the
path Ukraine is taking.
A year ago, we set our main task - a worthy life for every individual, the
stability and development of the country, and Ukraine's authority in the
world.
PENSIONS TO RISE NEXT YEAR
This year, we have taken important steps to ensure people's wellbeing and to
protect property and property rights. We have raised wages and pensions. It
is planned that the minimum pension will be 350 hryvnyas [almost 70 dollars]
from 1 January 2006 and will reach 400 hryvnyas by the end of the year.
The main task of the 2005 budget policy has been the policy of protecting
the most underprivileged. But for the economy to develop, the budget for
2006 must not be a budget for consumption but a budget for development.
The authorities should create appropriate conditions for the development of
business and should take every opportunity available - both domestic and
international - to do so.
That is why I, as head of state, and my government see Ukraine's entry into
the World Trade Organization as a strategic aim.
Benefits of WTO accession
Until now, little has been said about the importance of WTO membership for
Ukraine. I know from your letters that the WTO issue is extremely
politicized. Some politicians are still trying to scare us with fables of
unpleasant surprises in store for domestic producers.
I state that accession to the WTO is a chance to win recognition on the
international markets, this is a chance to become a strong state that will
ensure well-being for its citizens and an attempt to be competitive.
The World Trade Organization includes 148 countries at present. Almost all
international trade is done within the framework of the WTO. Less than a
fifth of countries remains outside this organization. The WTO is the clear
rules according to which the civilized world lives.
They require us to be efficient, competitive and quick. If we don't play by
the rules, this will enable others to play against us, but without any
rules. We lose billions of dollars a year due to antidumping investigations
in various countries in the world. Experts believe that [Ukraine's] annual
losses amount to 8bn dollars.
Ukraine's income from trade with other countries will rise by 10 per cent
after WTO accession. Ukrainian producers will have better access to the
international markets. They will not be afraid that their goods will
suddenly be arrested or will be subject to humiliating checks or additional
duties.
These are great opportunities for Ukrainian business to find new partners in
other countries around the world.
The annual GDP growth rate will increase by 1.9 per cent as a result of
WTO accession. These are also additional new jobs, wages and, certainly,
pensions. Ukrainian textiles, metals, machine-building products and
agricultural goods are sold both in the East and in the West.
But the problem is not to produce competitive products but where to sell
them. The main task is to find new partners and fight for new markets every
day.
If we join the WTO, we will retain existing jobs and will create thousands
of new ones. We will be able to greatly increase the presence of Ukrainian
goods on foreign markets. In addition, Ukraine' entry to the world's elite
club is an important signal to investors.
National and foreign investment is actually the only way of creating new
jobs and raising wages without running the risk of increasing prices.
An honest sale of the Kryvorizhstal steelworks has been a serious
achievement of the new government in regaining the trust of foreign
investors in Ukraine. My team has proved that it is fulfilling my election
manifesto. a year ago I promised that we would return Kryvorizhstal to the
state and would then sell it again in an open auction, which would bring a
record sum to the state budget.
A working group has been set up to work on a plan to use the privatization
proceeds as effectively as possible. Billions of hryvnyas must be spent on
development projects.
Among the priority projects are energy saving, agricultural loans, building
new bridges and underground stations, projects in the public utility sector
and the high-tech sector. Every penny received from the sale of the
steelworks should work for Ukraine's development.
The success of the Kryvorizhstal sale is encouraging. The interest of
investors shows that trust in Ukraine's business climate is increasing. We
are perceived as a stable and reliable partner. They no longer expect
unpredictable statements or radical change of policy from us.
Entry into the WTO will only strengthen this trust. Joining this club, which
unites the world's strongest economies, will secure an increase in foreign
investment of at least 500m dollars a year.
All our neighbours are either WTO members or are quickly moving towards
it. Our national pride is telling us that if Ukraine is ready for the entry, it
should be done immediately.
CONCERNS ABOUT WTO ENTRY UNGROUNDED
I know that society has concerns about the destiny of national producers
when Ukraine joins the WTO and opens its markets. Protecting the national
interests and domestic producers are the government's priority. This is our
stance in talks with WTO members.
Joining the organization does not mean that we will become unprotected and
uncompetitive. Those who produce modern goods will manage to capture new
markets. The government's task is to help our businessmen to do this.
Ukrainian aircraft, flax and food are well-known world brands.
Our goods are recognized in the whole world. But they still bear a sticker
that they are produced outside the WTO zone. It is high time for us to
remove these marks of second grade. I want everyone of you to understand
one simple thing.
Statements that Ukraine is not ready to join the WTO and that it is not
competitive is the manifestation of mistrust in our country's potential and
in our potential. I am confident that Ukraine will manage to do what our
neighbours have done. I believe in our strength.
ENTRY PROSPECTS
What are Ukraine's prospects for joining the WTO by the end of this year?
The Cabinet of Ministers and the Supreme Council [parliament] have stepped
up their work in this area in the past month. The new government proposed
an effective format of relations with parliament.
Its ability to see joint goals and tasks, to hold a civilized dialogue and
find acceptable compromises has immediately produced positive results.
This week, parliament approved two more laws necessary for Ukraine's
entry into the WTO. I want MPs to cover the remaining path as quickly as
possible. It is necessary to approve eight more laws. But this is parliament's
responsibility.
If we had taken the necessary pace at the beginning of the year, Ukraine
would already have benefited from the WTO system. We remain optimistic
about our chances to join the WTO this year. But we should be frank.
The answer to the question whether Ukraine will be a WTO member in 2005
depends much from our partners and bureaucratic procedures. The time lost
before is working against us today, because it takes months to go through
all the technical procedures to join the WTO.
We are on the finishing line and have a chance of completing all the
necessary stages on time, which gives our partners an opportunity to take a
positive decision. The main thing is to exert maximum effort to achieve the
goal.
We will win and will become a powerful player on foreign markets. We are
capable of earning respect in honest competition. I believe in our success,
which will bring well-being to everyone of us.
[Presenter] We have relayed President Viktor Yushchenko's radio address.
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[return to index] [The Action Ukraine Report (AUR) Monitoring Service]
=======================================================
2. YEAR AFTER 'ORANGE REVOLUTION', A TIRED, BITTER
BUT DETERMINED YUSHCHENKO
Agence France-Presse (AFP), Kiev, Ukraine, Sat Nov 5, 2005
KIEV - A year after the "orange revolution" that swept him to power,
Ukraine's President Viktor Yushchenko is visibly tired, bitter about his
shattered revolutionary team, and as determined as ever to lead the
ex-Soviet nation on a pro-Western course.
In an interview with AFP in his spacious office overlooked by a large icon
above his desk, the Ukrainian leader reflected on a tumultuous year that
began with breathtaking images of peaceful "people power" and ended
with bitter infighting and recriminations amid the dream team that led the
revolt.
The president, under fire at home over the past several months, was a
much more subdued figure than candidate Yushchenko, whose final
election victory an adoring press corps greeted with applause and who
often smiled and joked when he spoke with reporters.
"I think that in many ways, I have become much more restrained,"
Yushchenko said, his onetime movie star-handsome face still bearing the
ravages of a yet unsolved poisoning. "Maybe I have become less
compromising and from that harder, although that's not my style."
His biggest regret during the past year was the break with his "orange
revolution" partner Yulia Tymoshenko, whom he fired as prime minister
in September.
"The bets were placed on the wrong horses," he said. "People who were
very important figures in the 'orange revolution' ... from heroes turned
into ordinary people."
"After such a beautiful victory it turned out that a large portion of the
team that stood by me did not find mutual understanding once in official
posts. That is their personal fault because ... personal ambitions started
to come into play."
"If I knew that about some of them 15 months ago, I would have done
things differently ... including in appointments."
Yushchenko admitted that the infighting among people he appointed to top
posts came at a high cost -- among foreign investors, whom he has been
trying to attract to the country but who have largely stayed away because of
the government's aggressive stance on reprivatization; and amid Ukraine's
voters, many of whom were shocked by the team breakup and who will elect
a new, much more powerful parliament next March.
"We lost lots of time." But he defended the changes that have taken place
in a country since his inauguration in late January.
"First and foremost is freedom -- freedom of press, freedom of political
competition," he said. "The (public) dialogue that we have today would have
been unthinkable 15 months ago. Unthinkable. Nobody would have been
allowed in here," he said, gesturing around his office.
Investor sentiment was bound to change after the repeat privatization of the
nation's steel giant, Kryvorizhstal, which was sold to the world's top steel
producer, Mittal Steel, for a record 4.8 billion dollars during an auction
televised live.
"I think that the Kryvorizhstal privatization is a good example of the fact
that practices and procedures change and our friends in business should
believe that the same has been accomplished in politics."
Yushchenko rejected criticism, often voiced in the domestic and foreign
press, that his administration had not achieved concrete results on its top
goal -- driving Ukraine toward European integration -- and that it was
slowly inching back into Russia's traditional sphere of influence.
"We have been received in Europe. We have held new rounds of talks with
practically all the leading countries in Europe."
"In a few weeks, Ukraine and the EU will sit down in Kiev" during a summit.
"I don't think that anyone would have come here a year ago. Today people
are starting to come here."
"With Russia, we changed the format of our relations ... and have raised
what may be uncomfortable questions ... (including) the demarcation of
borders, the Black Sea Fleet."
"I think that we have found quite wise answers in terms of our integration
both to the east and the west." -30-
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3. ECONOMICS MINISTER SAYS UKRAINE IS IN "TRADE WAR"
WITH USA AHEAD OF WTO ENTRY
ICTV television, Kiev, in Ukrainian 1730 gmt 4 Nov 05
BBC Monitoring Service, UK, in English, Fri, Nov 04, 2005
Economics Minister Arseniy Yatsenyuk has said that Ukraine is engaged in a
"trade war" with the United States and this is holding up its WTO accession.
Appearing on the Freedom of Speech talk show on ICTV TV on 4 November,
Yatsenyuk said, "I would like to reject the accusation that the government
is in a rush to join the WTO.
If we really were in a rush, we would have signed a protocol with the USA
long ago. We are engaged in an extremely tough trade war with the USA - in
defence of our own economic interests, while the USA is defending its
interests."
In particular, Yatsenyuk said that Ukraine had refused to set a zero rate of
customs duty on ferrous metal scrap and rejected the proposed conditions for
support of agriculture. "We are in a deadlock today, and that's why we have
not joined the WTO," he said.
Yatsenyuk also said that Ukraine has refused to sign a protocol with
Australia because it is demanding an increase in the quota for import of raw
sugar.
However, Yatsenyuk insisted that the benefits from WTO membership exceed
the drawbacks. "The task of the government is - together with parliament - to
identify what the drawbacks are and use the strongest measures to minimize
them," he said.
Yatsenyuk went on to reject suggestions by host Savik Shuster that the entry
of global players to the Ukrainian market after WTO accession would wipe
out the country's high-tech sector.
"Since 1995, foreign capital has been coming into the country. The barriers
that were created existed on paper only, and they were all overcome. Foreign
capital is already here, but this capital will now work for the Ukrainian
economy if the government sets the right rules," he said.
Among the other studio guests was Socialist Party leader Oleksandr Moroz.
During the programme Yatsenyuk and Moroz made clear their cordial relations.
"I am very pleased that this young minister has worked for a month, but we
have already seen that he's got a head on his shoulders, and this is clearly
influencing the process of preparing Ukraine for WTO accession," Moroz
said of Yatsenyuk.
Yatsenyuk expressed his gratitude to Moroz, saying that he had reached an
understanding with the Socialist Party "in some issues, not all" - in
particular, with the Socialist agriculture minister, Oleksandr Baranivskyy.
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4. UKRAINIAN PM BLAMES PREDECESSORS FOR WTO FAILURE
Did not persuade U.S. to grant Ukraine market economy status on trip
ICTV television, Kiev, in Ukrainian 1045 gmt 5 Nov 05
BBC Monitoring Service, UK, in English, Sat, Nov 5, 2005
KIEV - [Presenter] The Ukrainian Finance Ministry has presented its project
for distributing the proceeds from the privatization of Kryvorizhstal.
There are no plans to spend the 22.4bn hryvnyas [4.8bn dollars] on social
payments. The following main areas have been identified: to clear off budget
deficit not only this year but the next year too, to give affordable loans
to industrial companies, to invest in energy saving projects and agrarian
sector development. Our correspondent has more details.
[Correspondent] The cabinet meeting is already over. It mainly focused on
two issues - privatization and Ukraine's failure to join the World Trade
Organization.
[Prime Minister] Yuriy Yekhanurov indirectly blamed his predecessors [the
Yuliya Tymoshenko cabinet] for Ukraine's failure to persuade the USA to
grant us market economy status during his recent visit to the United States.
This is essential for Ukraine to be able to sell its goods in other
countries' markets without any restrictions.
[Yekhanurov] I would like to ask Economics Minister Arseniy Yatsenyuk to
sort out the mess created by our predecessors' unprofessional actions in
preparing this country for being granted [market economy status].
We have to admit all shortcomings and to make sure that we are ready to
produce all the necessary documents by January, so that we get market
economy status from the United States in January 2006.
[Correspondent] Yuriy Yekhanurov hopes that the EU will grant us market
economy status on 1 December 2005 [during the Ukraine-EU summit in
Kiev]. [Passage omitted: the cabinet also looks into ways to spend the
proceeds from the Kryvorizhstal repeat privatization.] -30-
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[return to index] [The Action Ukraine Report (AUR) Monitoring Service]
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5. UKRAINE'S HEROES TURN INTO FOES
By Stephen Mulvey, BBC News, Ukraine
United Kingdom, Tuesday, November 1, 2005
An Orange Revolution memorabilia stall on Kiev's chestnut-lined main
street, the Khreshchatyk, says quite a lot about the current state of
Ukrainian politics.
A t-shirt depicting the revolution's figurehead, Viktor Yushchenko -
now the country's president - has stopped selling and will not be
re-ordered, says saleswoman Viktoria Kucherenko.
But a t-shirt of the revolution's leading lady, Yulia Tymoshenko -
recently sacked as prime minister by Mr Yushchenko - is selling briskly.
To be fair, the Yushchenko shirt is an older product and the
Tymoshenko shirt is more popular partly because it is newer and more
topical.
But the way the two of them are going head-to-head in the shirt market
mirrors the personal rivalry that has now come out into the open and
which could be Ukraine's big political story for years to come.
The Tymoshenko shirt carries a quotation from the first television
interview she gave after her dismissal: "I'm not going to hide myself
away - I'm not going anywhere."
SECRET PACT
She aims to get her job back by winning the parliamentary elections in
March.
The result would be an uncomfortable "co-habitation", of the kind that
sometimes occurs in France, between a president and a prime minister
who do not see eye-to-eye.
However, in this case the differences would be on a personal more than
political level. Rank and file supporters of the revolution were dismayed
when the ex-comrades-in-arms fell out in early September and the
government dismissed.
Mr Yushchenko's illness in 2004 meant that Ms Tymoshenko had taken
on the full burden of the election campaign, criss-crossing the country
to promote his candidacy.
It was her fiery oratory that helped draw the crowds back to the
demonstration on Kiev's Independence Square again and again in the
freezing winter temperatures.
So when people voted Yushchenko, many were probably voting for a
package - Yushchenko and Tymoshenko, and their promise of a new
free, democratic Ukraine.
But according to one of the country's best-connected journalists,
Yulia Mostova, editor of Dzerkalo Tizhnya (Mirror of the Week), the
couple never liked each other and only joined forces for the election
because they knew that otherwise both would lose.
In September 2004, Ms Mostova says, they signed a coalition pact,
which had a secret protocol promising Ms Tymoshenko the premiership
in case of victory.
But when they won the election, she says, Mr Yushchenko tried to
persuade Ms Tymoshenko to release him from this promise.
"She said: 'If you don't want to fulfil your obligations, don't. But I
won't give in.' [As prime minister] she expected to be sacked every
day, because she understood the reality of their relationship -
hatred," says Ms Mostova.
AIMING HIGH
There is speculation that the pair could put aside their differences
again to form another bloc, either before or after the parliamentary
election.
But Ms Tymoshenko's campaign manager, Oleksandr Turchynov,
until recently head of the Ukrainian security service, says there is no
chance of this unless the authorities prosecute businessmen and
officials he has accused of corruption, including close allies of Mr
Yushchenko.
As he puts it: "They must return to promises we made together on the
Maidan [Independence Square], to throw out people suspected of
corruption and to halt the influence of oligarchs on politics."
Ms Mostova's worry is that the rival Orange factions will "drive each
other into the grave, leaving their former enemy without opponents".
Mr Yushchenko's and Ms Tymoshenko's natural supporters could be
so disheartened that a large proportion of them will not vote, she
suggests, while other voters go to the polls in force to ensure a
parliamentary victory for the losing presidential candidate, Viktor
Yanukovych.
Whatever happens in March, there is every prospect that Mr
Yushchenko and Ms Tymoshenko will have their sights on the 2009
presidential election from then on, and it seems unlikely that Ms
Tymoshenko will want to work for her rival a second time. -30-
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6. UKRAINE GOVERNMENT INITIATES END OF ECONOMIC CODE
By Vitaly Matarykin, ITAR-TASS News Agency
Moscow, Russia, Wednesday, October 19, 2005
KYIV - The Ukrainian government has initiated the abolishment of the
country's Economic Code, as it contradicts the Civil Code, chairman of
the state commission for securities and stock market Anatoly Balyuk told
journalists on Wednesday.
"The justice minister said he signed yesterday a recommendation for the
abrogation of the Economic Code," Balyuk said.
According to the official, contradictions between the two codes allow
courts to make incompatible decisions causing conflicts.
According to data cited by Balyuk, 26 joint stock companies in Ukraine
have two registrars and each of them defends the right to keep the register
on the basis of a court decision. The conflict around the Nikopol
ferroalloy plant is a bright example of this, Balyuk pointed out.
Ukrainian Prime Minister Yuri Yekhanurov on Wednesday stressed the
necessity of finding a solution to the problem of duplicate registers. "If we
have imperfect legislation and these intellectually developed bandits in good
clothes, as they say, are making use of this, it does not mean that we
should not fight this," the prime minister said. -30-
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7. WORLD BANK, IMF URGES MORE MARKET REFORMS IN
EASTERN EUROPE, EX-SOVIET UNION
World Bank, IMF call for farm subsidy cuts
New Europe, Athens, Greece, Monday, November 7, 2005
The chiefs of the major world development organisations called last Sunday
for countries to put aside "narrow interests" in the ongoing, endangered
Doha round of world trade negotiations.
With wrangling among the United States, France, the European Union and
developing countries over agricultural subsidies, the Doha round of World
Trade Organisation (WTO) talks have been deadlocked.
Developing countries have accused the United States and Europe of
distorting global prices for agricultural products through financial supports
that encourage their own farmers to overproduce, and the issue is at the
centre of the Doha round at the WTO.
The United States has offered major cuts in farm subsidies if Europe will
reciprocate. The EU has tried to make a counter offer, but France - seeking
to protect its highly subsidised farmers - has moved to block that effort in
Brussels.
Last Sunday, Rodrigo de Rato, International Monetary Fund managing
director, and World Bank President Paul Wolfowitz issued a joint statement
- without naming France - exhorting WTO members to move toward greater
subsidy reductions.
"Some important progress has been made in the last few weeks," the statement
said. "Success will now require key players to set aside their narrow
interests, show flexibility and forge the ambitious Doha outcome that the
world expects and needs. The stakes are too great to contemplate failure."
Rato and Wolfowitz said that the agriculture sector "remains riddled with
trade distortions that penalise consumers everywhere and the many poor in
developing countries who earn their living from it".
"Comprehensive and sharp reduction of tariffs in the largest countries will
deliver the greatest development gains," they said. "Trade-distorting
subsidies must also be cut, however, and not simply through technical
manoeuvres."
Moving globally toward more open markets has the potential for "lifting
millions of people in developing countries from poverty and boosting
growth in rich and poor countries alike," Rato and Wolfowitz said.
"This opportunity may be lost in the coming days unless key governments
face down interest groups that would perpetuate high trade barriers
benefiting relatively few at a cost to many."
They also called for increased aid for trade "to help the poorest countries
take advantage of new opportunities and cope with any adjustment costs."
Moreover, the World Bank highlighted that high unemployment in eastern
Europe and the former Soviet Union remained surprisingly persistent and
threatened support for market reforms.
Economic and policy uncertainty, corruption, high taxes and inefficient
courts are key factors in stifling entrepreneurial activity and thus job
creation, the bank said in a report.
"Unless the employment outlook improves, the substantial poverty reduction
in the region since 1998 could halt, undermining political support for
reform," warned Arup Banerji, Sector Manager in the bank's Central Asia
Region, who supervised the report.
The report analysed labour markets in 27 transition countries since the fall
of communism 15 years ago, looking at how economic transformation has
affected the labour market, how far countries have progressed and what
obstacle stand in the way of creating jobs.
Despite the region's economic success in moving from central planning to a
free market, the creation of productive jobs has brought lacklustre results,
the report found.
"While some transitional unemployment was expected, the surprise lay in its
persistence," said Jan Rutkowski, the World Bank's lead economist for the
region.
Structural shifts during the long transition have exacerbated the situation,
and many people are either long-term unemployed or work in low-paid menial
jobs, said report co-author Stefano Scarpetta.
"In some of the new member states of the European Union, as well as in
some acceding countries, the unemployment rate tends to be in double digits,"
Scarpetta said.
The report recommended that governments in Central and Eastern Europe
lower the costs of starting businesses, ease registration of property and
strengthen contract enforcement in order to create more jobs.
In Southeastern Europe, steps should be taken to reduce administrative
barriers and cut taxes on labour, the report said.
The report found that in middle-income countries such as Kazakhstan,
Russia, and Ukraine, joblessness is lower but under- employment is high
as many people work in low productivity jobs.
"Reducing administrative barriers is a top priority," the report said. "If
unemployment schemes and other programmes could be developed, fewer
people would feel compelled to hang on to dead-end jobs for survival."
Low-income countries in the Caucasus and Central Asia suffer from
underdeveloped institutions, poor governance and unreliable infrastructure,
the report found. Proposed solutions included removing customs barriers
and trade rules and encouraging investment in agricultural regions.
"Since small private firms create the jobs, governments need to push for
business-friendly reforms," Scarpetta said. "Job programmes and policies
to retrain workers or help the unemployed will not be enough to solve the
underlying problem," he continued. -30-
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8. FACTORIES, FUNDS FLOW TO UKRAINE FROM JAPAN
The Asahi Shimbun, Japan, Saturday, Nov 05, 2005
The Asahi Shimbun Japanese companies, particularly automakers, are
increasingly looking at Ukraine as both a manufacturing base and a market.
The growing attention is attributable largely to the improving investment
environment led by the inauguration of a pro-Western government.
The size of its economy, the second-largest among the former Soviet
republics after Russia, is also attractive to Japanese companies.
The Japan Association for Trade with Russia & Central-Eastern Europe,
which consists of financial institutions, trading houses and manufacturers,
sent its first mission to Ukraine in October. The delegation was made up
of about 30 participants, including Tasuku Takagaki, adviser to the Bank
of Tokyo-Mitsubishi.
They were greeted by Prime Minister Yuriy Yehanurov, who said he hoped
that Japanese businesses would increase their presence in his country.
Separately, President Viktor Yushchenko agreed with Prime Minister
Junichiro Koizumi to strengthen bilateral ties when he visited Japan in July
Isuzu Motors Ltd., which already operates a bus production plant in
Ukraine, plans to start truck assembly there. The truck maker expects to
use the country as a base for exports to former Soviet republics
Nissan Motor Co., which set up a sales company in Ukraine in March, plans
to begin selling its Infinity line of luxury passenger cars at the end of 2007.
Company officials said the country's economy is expected to expand
Ukraine is becoming a key investment destination because the country is
expected to join the World Trade Organization soon. The country could
also offer a springboard for neighboring markets, such as Poland, which
has joined European Union. -30-
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9. MAJOR SLOVENIAN APPLIANCE MANUFACTURER CHOOSES
KHARKIV OBLAST FOR PRODUCTION EXPANSION
The facility would create 400 new jobs
Ihor Yatsenko, FirsTnews, Kyiv, Ukraine, Fri, November 04, 2005
KHARKIV - Gorenje, a major manufacturer of home appliances based in
Slovenia, has decided to locate a factory in Kharkiv oblast, but the
location of the facility and other details of the project, including when
construction would begin, are still under consideration. Also a factor is
the potential of local manufacturers to produce parts that meet Gorenje's
standards.
According to Mirko Leskoshek, the company's deputy director, Gorenje is
considering whether to build a new factory from the ground up or utilize an
existing facility. The plan is to equip the plant for the capability of
completing the entire manufacturing cycle. The facility would create 400 new
jobs, though the location of the plant within the oblast is still under
discussion.
While Kharkiv, Ukraine's second largest city, is an obvious choice for the
site, Arsen Avakov, head of Kharkiv Oblast State Administration, suggested
the company could take advantage of lower tax rates by building in one of
the oblast's smaller cities like Lozovaya, Izium, Kupyansk or Chuguev.
Regardless of Gorenje choice of location, Avakov promised his personal
support. In addition, he ordered Viktor Kovalenko, head of the central
management for foreign and economic affairs, to create a working group for
consultations with Gorenje.
The first stage of the 12-15 million euro project envisages construction or
renovation of a factory with an annual capacity of 300,000 Slim edition
washing machines. The plan calls for increasing the manufacturing capability
to about 550,000 appliances, including gas stoves and refrigerators, adding
another euro 8 million to the price tag for the project.
According to a Gorenje representative, the planned investment is flexible
and could be revised in terms of needs. The company would prefer to use
locally produced parts for their appliances; however, the availability of
local manufacturers to supply quality components is an important factor in
the decision whether to import or not. Gorenje is assessing local
enterprises for their suitability.
"A factory is being considered, not just as an assembly line; our target is
to develop a complete industrial cycle," Leskoshek said.
Gorenje anticipates that much of the equipment manufactured by the Kharkiv
facility would be exported to Germany, France, and Scandinavian countries,
Gorenje's largest customers.
However, by locating manufacturing in Ukraine, the company is hoping to
strengthen its position in the Ukrainian market and adjacent countries.
According to a spokesperson from Foxtrot, a chain of home appliance
stores, a manufacturing facility in Ukraine could result in price decreases.
"Of course, it is much more comfortable and profitable to arrange agreements
for supply of home appliances in Ukraine rather than abroad. The equipment
itself would become cheaper while transportation cost would decrease
significantly," Foxtrot's representative said.
Gorenje, an international concern, is one of the seven largest European
manufacturers of home appliances. About 84 percent of 3.5 million products
manufactured annually by Gorenje are sold in Europe. The company's annual
turnover totals about euro 1 billion. -30-
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10. ITALIAN CO ANTONIO MERLONI PLANS TO PRODUCE ARDO
WASHING MACHINES IN IVANO-FRANKIVSK IN 2006
Ukrainian News Agency, Kyiv, Ukraine, Friday, November 4, 2005
KYIV - Antonio Merloni, an Italian company that produces domestic
appliances, intends to start the mass production of Ardo washing
machines at the Ukrainian-Italian joint venture Ukrainian Domestic
Appliance in Ivano-Frankivsk in 2006.
Ivano-Frankivsk mayor Zinovii Shkutiak announced this in a live interview
with the local TV channel Third Studio on November 3, asked by Ukrainian
News. "In 2006, Antonio Merloni is planning to start large-scale production
of 800,000 washing machines per annum," he said.
According to Shkutiak, the Italian company has already received a EUR 50
million credit and will invest it in its production in Ivano-Frankivsk.
The mayor also noted that Ukrainian Domestic Appliance has already
purchased 12 hectares of land near the Ivita factory (Ivano-Frankivsk),
which produces domestic appliances, to locate production facilities.
"However, the Italian company is asking to sell 40 hectares more in the
district of the Khryplyn industrial center," he said.
As Shkutiak said, Antonio Merloni is planning to build a full-fledged
factory on this land that would produce all kinds of domestic appliances.
A representative of Ukrainian Domestic Appliance told Ukrainian News that at
the moment, installation work and reconstruction of production premise are
being conducted at the factory, and the enterprise is receiving new
equipment.
As Ukrainian News reported, Antonio Merloni acquired a controlling stake in
the Ivita factory in 2003 and created Ukrainian Domestic Appliance on the
basis of its production facilities.
In early 2005, the Italian company said it planned to invest EUR 50 million
in production of the Ardo brand of washing machines at the Ukrainian-Italian
joint enterprise called Ukrainian Domestic Appliance in Ivano-Frankivsk in
2005.
In 2004, Antonio Merloni already invested EUR 600,000 in the production and
delivered equipment worth EUR 436,000. The Dnipropetrovsk-based Nord
concern attempted to re-launch production of washing machines at Ivita in the
2000-2001 period.
Production of automatic washing machines at Ivita started in 1992, but it
was later suspended. -30-
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11. SUMY REGION DAIRY PLANT TO BUY NEW CHEESE LINE
Western NIS Enterprise Fund plans to increase investment
Ukrainian News Agency, Kyiv, Ukraine, Tue, November 1, 2005
KYIV - The Shostka municipal dairy plant (Shostka, Sumy region) plans to
buy a third line for cheese production before the end of 2005. The plant's
director Larysa Rudanova informed about this at the conference titled
"Dairy World 2005."
She specified that the new line will be purchased through bidding, that has
to take place before the ends of 2005. She said that the new line with daily
output capacity of 15 tons of cheese will produce filled and piled cheeses.
Rudanova mentioned that after installing of the new line total capacity of
the enterprise will grow by 43% and reach 50 tons of cheese daily. "We want
to increase the share of the domestic market to 6-7%," Rudanova mentioned.
At present the plant possesses two lines for cheese production.
She also informed that the enterprise investor, the US investment fund
Western NIS Enterprise Fund (WNISEF) plans to invest about USD 7-8
million into reconstruction of the enterprise before the end of 2007. As
Ukrainian News earlier reported, WNISEF bought a controlling stake in
Shostka municipal dairy plant in April
Shostka town dairy plant is one of the largest producers of hard and spread
cheeses in Ukraine with 5% share of the market and production capacities of
950 tons of cheese per month. The plant produces over 100 types of
products, and it exports about 50% of its products to Russia.
The Shostka plant specializes in production of dairy products under Bili
Berehy trademark, and produces over 2% of the entire output of whole-
milk products in Ukraine. -30-
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12. CONTEMPOARTUKRAINE
Quarterly art magazine introducing today's Ukrainian artists
The Action Ukraine Report (AUR)
Kyiv, Ukraine, Monday, November 7, 2005
KYIV- ContempoARTukraine is an outstanding quarterly art magazine
designed to introduce and promote contemporary Ukrainian artists.
The magazine was first published in Ukraine in the summer of 2003 in
English. The magazine was founded by Walter Belanger who is
still the managing editor and lives in Kyiv.
Each issue features 10 different artists, of the more traditional art styles
[not modern art]. Each artist has six pages of full color reproductions
and a comprehensive article by a qualified art historian about their life,
styles and level of artistic experience.
Belanger told The Action Ukraine Report the aim of the magazine is to
show to the world the richness and quality of Ukrainian art. "The
publication, after three years, is turning into a mini-encyclopedia of
Ukrainian art, so far featuring over 80 outstanding painters and artists,"
Belanger said.
During the past three years ContempoARTukraine has also organized
15 art exhibitions of works by artists featured in the magazine in
California. With the active support of the U.S.-Ukraine Foundation
(USUF) of Washington, D.C., Ukrainian artists were introduced to
many U.S. art lovers.
Collectors of many national origins have now discovered Ukrainian art
and the list of collectors is growing with each exhibition. Managing
Editor Walter Belanger said, "California many not be the world but it
has been a good place to start. It is very gratifying that at our
exhibitions, since the Orange Revolution, we do not have to explain
anymore 'Where is Ukraine?'
Belanger wrote in his 'From The Editor' column in the fourth issue for
year 2004, "We dedicate this issues of contempoARTukraine to the
Orange Revolution. To the young people of the student organization
PORA! (Time has come!), to all the people of Ukraine who, at last,
could exercise their constitutional rights, and to the fairly elected new
president, Victor Yushchenko. May the Spirit of Orange guide them
now and in the future."
Walter Balanger spends a considerable portion of his time traveling
around Ukraine looking for, interviewing and then working with the
artists he chooses to feature in the magazine. He said he plans to
continue publishing the magazine and promoting Ukrainian art and
artists for many more years. -30-
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NOTE: All the past issues of the outstanding new magazine
contempoARTukraine are still available. For information on how to
purchase any or all of the past editions of the magazine or to purchase
a yearly subscription please contact ArtUkraine.com@starpower.net .
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13. UKRAINE - CURRENT ECONOMIC SITUATION AND
PROPOSED MEASURES TO REVIVE INVESTMENTS AND GROWTH
Fundamental reform of public administration is the key reform
REPORT: ANALYSIS AND RECOMMENDATIONS
SigmaBleyzer and Bleyzer Foundation
Emerging Markets Private Equity Investment Group
Kyiv, Ukraine, November, 2005
UKRAINE - CURRENT ECONOMIC SITUATION AND
PROPOSED MEASURES TO REVIVE INVESTMENTS AND GROWTH
WHY HAS UKRAINE'S GDP DECELERATED SHARPLY IN 2005?
Ukraine demonstrated an excellent macroeconomic performance over 2000-2004.
In 2004, real GDP grew by 12.1% year-over-year (yoy), one of the best GDP
growth rates among all transition economies, and even in the world. However,
since the beginning of 2005 it experienced a dramatic slowdown of economic
growth to 2.8% yoy over January-August.
In August alone, for the first time during the last six years, GDP showed
1.6% yoy contraction. In comparison with the outstanding growth rate last
year, in January-August 2005 GDP growth slowed by about 10 percentage
points.
Last year growth was primarily driven by good exports performance, private
consumption growth and moderate growth of investments. The main reason of
this year's economic growth deceleration is not a reduction of Consumption.
On the contrary, consumption continues to increase reflecting generous
social payments to the public which increased nominal expendable income by
42% (yoy) during January-August 2005. This means that the majority of the
population does not experience nor do they perceive a decline in living
standards as a result of the slowdown in GDP, explaining the popularity of
the previous government.
The main reasons for the decline in GDP this year are (1) a sharp
deterioration of exports, with a trade deficit of about $370 million in
January-August 2005 (compared to large surpluses in the last few years); and
(2) a decline in investments. These two factors explain about 70% and 30%
of the GDP slowdown, respectively.
Over the next few months these declines in exports and investments should
affect the exchange rate, the price level and consumption, thereby
generating a perception of declining living standards.
The poor export performance and low investments are reflected in a
substantial slowdown in the processing industry (particularly metallurgy and
machine building), a contraction in construction, and a decline in wholesale
trade.
In fact, of the overall decline in GDP of about 10 percentage points, these
three sub-sectors accounted for 6.5 percentage points, or more than 60% of
the total.
Poor exports performance is partly attributed to lower international prices
for steel and rising energy prices. However, another very important reason
is a substantial contraction in the exports of vehicles, machinery and
equipment particularly to the CIS countries, as major orders in these
countries were concluded.
The vehicles, machinery and equipment sector was unable to diversify and
capture new markets, in part due to inadequate investments in technology and
plant modernization. The considerable slowdown in investment activities is
related to political uncertainties and mixed signals given to the private
sector (re-privatization issues, attempts to introduce price regulations,
etc.)
WHAT CAN BE DONE TO REVIVE THE GROWTH?
Ukraine needs to increase the level of investments, both domestic and
foreign, not only to revive economic growth, but also to diversify its
production and exports and reduce energy intensity of domestic products,
which is currently one of the highest in the world.
In order to build sufficient private sector confidence to revive
investments, the government will need to give stronger signals that it is
addressing the main concerns of the private sector: that is, the concern
that the Ukrainian Government still retains many of the characteristics of
Soviet public institutions overloading the private sector with heavy and
unpredictable demands and requirements, including heavy interventions in
the workings of the market.
In fact, the appropriate and desirable "role" of government institutions has
changed significantly during the last decade, with the shift towards more
market-oriented development strategies. These new strategies imply a
re-orientation of many public agencies from a focus on rigid and detailed
control and regulations to that of monitoring and support.
These changes in the role of the Government suggest the elimination of many
institutions in the public sector and the establishment of private ones, and
the restructuring of others to operate in liberalized and more competitive
environments. These changes, however, have been slow in Ukraine.
Despite some progress, decision-making remains cumbersome, with unclear and
overlapping responsibilities among government agencies. This together with
widespread red-tape and government agencies' interference with private
sector activities have driven foreign investors away from the country while
local firms also reduced their investment plans.
COMPREHENSIVE PUBLIC ADMINISTRATION REFORM
Thus, the reform of public administration is the key reform that is needed
to facilitate liberalization and de-regulation of business activities in a
free and competitive market. This reform is also needed to make possible
the implementation of all other economic reforms.
In fact, the lack of capacity of public institutions to actually implement
economic reforms is one of the main reasons why progress in reforms has
been slow.
We realize, however, that comprehensive public administration reform can
not be carried out in the short-term. But some initial actions in this area
are possible and are important to send a clear message to business that the
public administration will be improved. These measures plus a short set of
other quick measures would help in reversing the current negative perception
about the government.
A. SHORT-TERM MEASURES
The actions below are recommended as relatively quick and concrete
measures to restore investors and business confidence. However, to reach
consensus and facilitate implementation, as an initial step, the government
should create an effective Task Force under the Prime Minister/President's
Secretariat, with the participation of private as well as government
experts.
This Task Force would evaluate and sort out the main issues for investors
with both, short term and long term implications. The Task Force must be
able to review and further elaborate points of recommendations with
immediate and longer term issues. It should define "how" to implement these
recommendations, which agencies and persons would be responsible for their
execution and the deadlines for their completion.
The Task Force would also identify the International Agencies (EC, World
Bank, EBRD, USAID, UK, Canada, etc.) that can provide foreign expertise to
implement the reforms. However, the work of the Task Force must be done in
conjunction with the appropriate Verkhovna Rada Committee in order to insure
effectiveness in passing the required reforms.
One of the glaring failures of the past has been the inability to create
consensus on reform and to forge ahead on real implementation.
The main recommendations for the SHORT TERM are as follows:
1. CLEARLY DEFINE THE OBJECTIVES AND ROLE OF THE
GOVERNMENT-----
As a first initial step to reform the public sector, the President must make
a clear and firm Policy Statement on the main objectives and role of the
government. To make it more credible, this statement must be endorsed
by the Prime Minister and the Chairman of the Rada.
The President should state that the government will concentrate only on
those activities that warrant government involvement because of their
"public interest".
The government role will be based on the premise that productive and
revenue-earning activities will be carried out essentially by the private
sector in a free and competitive market environment. The role of the
government will not be to compete with the private sector in revenue
generating activities.
Its role will be to support the private sector in these activities. The
government will also deliver essential services that are not normally
provided by the private sector, such as:
a. public goods (goods that would not normally be delivered
by the private sector due to externalities),
b. non-commercial activities in education, health and environment,
c. protection of the poor,
d. market-oriented regulations of trade, communications, labor
and other private sector activities,
e. law enforcement,
f. foreign affairs,
g. national security and defense,
h. and similar non-commercial activities.
This clear definition of the role of the government would be the basis for
the activities of ministries and public institutions and would orient the
subsequent reform of the public sector (see more below).
This clear Policy Statement should discourage some of the recent previous
government "initiatives" such as the creation of new state enterprises to
"complement" the private sector in such markets as oil refining, titanium
production, grain distribution, etc. It would also discourage excessive
interventions of the government on businesses.
Some of these interventions -- such as price controls -- interfere with
free market pricing and destroys business confidence discouraging
investments.
2. INCREASE PUBLIC TRANSPARENCY AND ACCESS TO
GOVERNMENT INFORMATION -----
As a second step in the reform of the public sector, the government should
immediately make government information more transparent and available to
the public, except for national security reasons. This can be achieved by
expeditiously passing legislation on "Free Access to Government Information"
on any non-national security matter. Public procurement procedures should
also be made more transparent.
These steps are needed because public institutions are not subject to the
test of the marketplace to ensure accountability and evaluate performance
based on a more clearly defined role for the government. In the absence of
a market test, transparency and openness of information and public processes
are the best ways to ensure accountability.
Open and transparent processes should be developed to define agency
performance, outputs and financial information, and to measure, monitor and
publish them widely. Agency management would be held accountable through
"open files" involving the publication and monitoring of such information.
Lack of performance should be meaningfully penalized, including dismissal of
those responsible. Emphasis should also be given to enhanced accounting
and auditing processes in the public sector.
In particular, the government may want to introduce "external audit" of
public sector activities, examining not only the accuracy of financial
accounts, but also identifying whether resources were allocated to priority
areas and in compliance with agency's purposes, assessing overall
effectiveness of decision-making process, practices and procedures. The
results of the "audit" should be made available to the public.
Improving information transparency and openness will also be an important
weapon to combat corruption, which is a major cause of distortions in public
sector behavior.
Information disclosure should also aim at building popular support -- among
businesses, unions, students, the press, the civil service -- for policy
reform and for the role of the Government.
3. ENACT PENDING KEY LEGISLATION FOR BUSINESS ACTIVITIES -
The government can give a clear message that it is acting boldly by pushing
through Rada some key business legislation, particularly:
a. Enact the Join Stock Companies law -- in a form that complies with
OECD Corporate Governance Principles,
b. Removal of conflicts between the Civil and Commercial Codes by
eliminating the Commercial Code and passing some of its provisions to the
Civil Code. The Commercial Code retains many Soviet provisions that
conflict with the Civil Code, creating uncertainties.
c. Enact the legislation required to gain access to the WTO, as this
access will show the commitment of the government to move towards
western standards and practices.
4. ACCELERATE IMPLEMENTATION OF A PROGRAM OF QUICK
DE-REGULATION OF BUSINESS ACTIVITIES -----
The business environment can be markedly improved by quick deregulation
through the adoption by the government of a regulatory guillotine process.
The regulatory guillotine is a means of rapidly reviewing a large number of
regulations, and eliminating those that are no longer needed without the
need for lengthy and costly legal action on each regulation.
It is clear, decisive, and fast. It can be used to create a comprehensive
and central regulatory registry with positive security. Results could be
achieved within a short period of time as the "guillotine date" may be set a
few months ahead. In general, the guillotine works like this:
a. The government instructs all government agencies to establish
lists of their regulations by a certain date;
b. As the lists are prepared (involving consultation with the private
sector and oversight from a central body), unnecessary, outdated, and
illegal rules are identified, and excluded from the list;
c. A centralized list is created by adding all the ministries' lists
together. When the deadline is reached, any regulation not on the list is
automatically cancelled without further legal action (the guillotine drops);
d. The list becomes a comprehensive registry of all regulations in
force, and is recognized in law as the legal database of regulations for
purposes of compliance;
e. In the future, all new regulations and changes are entered in the
registry within one day of adoption and/or publication. The registry
should have legal security - no regulation not in the registry can be
enforced against a business.
A guillotine has been used successfully in a number of countries such as
Sweden, Taiwan, Mexico, and Moldova to "clean the dirty pool" of existing
regulations. The guillotine is effective because it places the burden on
the regulatory agency (generally answerable to a ministry in Ukraine) to
justify which current regulations should be retained, not which ones should
be eliminated.
Ukraine could implement any scope of guillotine it chooses through amending
the current Law on Regulatory Policy in the Sphere of Economic Activity
(RPL) and creating a Commission to undertake it.
The Government should also de-regulate the creation of enterprises by
appointing local and foreign experts that would take measures to ensure that
the current "One-Stop Business Registration" process do work in fact at the
local levels.
5. PASS CLEAR SIGNALS THAT PROPERTY RIGHTS WILL
BE RESPECTED -----
These signals may include the following:
a. The government should enact a Law on privatization amnesty to
resolve the re-privatization issue, which is considered as one of the main
reasons for the worsening of Ukraine's investment climate and international
image this year.
b. It should make a clear policy statement on its privatization
strategy and make the privatization program for next years transparent and
available to the public in advance.
6. IMPROVE THE COUNTRY'S IMAGE: PUBLIC COMMUNICATIONS,
OPENNESS AND TRANSPARENCY -----
The government can increase confidence by making more periodic and regular
communications with the population. Starting immediately, the President
should communicate directly to the country about the actions that the
government is taking and the results achieved.
These communications should be at least once a week in a specified evening
of the week so that the population would look forward to them. Press
Conferences should also be scheduled on a regular, periodic and predictable
and timely manner, such as on a given time on a specific day of the week.
TV, radio and newspapers should be encouraged to attend these Press
Conferences.
In addition, Senior Government Official should participate in large Regional
Seminars in the Oblasts to maintain a direct dialogue with public and obtain
feedback about their views and concerns. Confidence can also be enhanced
by increased transparency. For this purpose, the government should
expeditiously pass legislation on "Free Access to Government Information"
on any non-national security matter.
Transparency in business should be improved by requiring all companies
filing tax returns to prepare financial statements based on International
Financial Reporting Standards (IFRS) starting on January 2007. This should
help in reducing corruption and the size of the shadow economy.
7. ACTIVATE THE INVESTMENT PROMOTION AGENCY -----
The government should activate the Investment Promotion Agency to promote
Ukraine as an investment location. The Agency should include a team of
highly skilled professionals that will coordinate the existing government
capacities in investment promotion.
A cost- effective way of expanding investment promotion activities abroad is
for the agency to involve embassies and consulates overseas. Many countries
employ their diplomatic service for investment promotion purpose after a
specific training performed for diplomatic staff in investment promotion and
investor targeting.
B. LONG-TERM MEASURES TO ELIMINATE BARRIERS TO
FOREIGN DIRECT INVESTMENT (FDI)
After April 2006, the government could initiate more fundamental and
time-consuming reforms, which may be politically sensitive. In the
meantime, the above-mentioned Task Force should elaborate the detailed
plans for the implementation of these reforms immediately after April 2006.
The following LONG-TERM reform measures are needed to attract foreign
direct investments to Ukraine:
1. IMPLEMENT FUNDAMENTAL PUBLIC ADMINISTRATION REFORM -
Public administration reform is needed to de-sovietalize public institutions
and ensure the successful and long-lasting implementation of administrative
decisions and policy changes. Today, the inadequate government apparatus is
one of the main constraints to the implementation of economic and social
reforms.
International experience suggests that without it, policy changes may not be
implemented and if implemented, they may be reversed soon thereafter.
Based on a clear and widely accepted definition of the Role of the
government as stated earlier, public administration reform will include (i)
a re-definition of the functions of individual government agencies; (ii)
improvement in their operations and modus operandi; and (iii)
modernization of its civil service.
In fact, the objective of public administration reform should be to
implement the redefinition of the role of the government to support the
private sector. Un-necessary functions would be eliminated.
Other functions could be transferred to local administrations which may be
given the possibility of raising their own budget funds. Other functions
could be transferred, outsourced or commissioned to the private sector.
The reform should also recognize that in Ukraine, the size of the Central
Government is small in terms of numbers of people. But there are an
excessive number of central public agencies with unclear roles and
overlapping responsibilities. There is therefore a need to define clearly
the role of the Government at all levels.
This role should change from excessive intervention in productive and
semi-commercial activities to a role compatible with a market economy,
particularly improving the environment for private sector investors and
producers.
According to the European Commission's annual study of civil service
capacities in various states, with continuous progress, it will take Ukraine
several years to meet European standards in public administration.
The government should start the reform by approving a plan of action for the
implementation of the concept of administrative reform. The plan of action
should take into account the experiences of other countries, which show that
a comprehensive and drastic reform of public administration has a better
chance of succeeding than piecemeal or incremental reform.
A number of countries have a successful experience in reforming their public
administration (such as Canada, New Zealand, Poland, and Ireland). Official
bilateral contacts should be used to identify the possibility that those
former government officials in countries such as Canada could be seconded to
the Ukrainian government to provide guidance and experience in reforming the
state administration.
2. ENSURE SUSTAINABLE FISCAL DEFICITS AND LOW
INFLATION IN THE LONG-TERM -----
Fiscal deficits are of concern to investors because it is normally the main
cause of inflationary pressures. High inflation discourages investments
because it makes sales, cost and profits more uncertain and difficult to
predict. For these reason, investors will require a much higher rate of
return limiting the number of possible investments.
A country experiencing high economic growth may afford fiscal deficit in
excess of 2% - 3% of GDP but this may be done only in a few years.
Otherwise public debt will increase, inflationary pressures would emerge
and the economy would slow-down.
To address fiscal deficit concerns in 2005, the government took a number
of measures to reduce the potential fiscal gaps, including elimination of
tax exemptions and privileges, increases in excise taxes, further accumulation
of VAT arrears, dealing with corruption principally at Customs, , etc.
Although these measures generated additional revenues, many of them have
generated uncertainties affecting negatively the business environment. Many
of these measures should be reversed, such as illegal elimination of
exemptions in Free Economic Zones, or accumulation of VAT arrears.
Despite the above measures, the remaining fiscal deficit may still be large
(the IMF and other institutions such as JP Morgan have estimated that the
deficit could be as large as 3% to 5% of GDP). This remaining deficit will
need to be financed either by debt or FDIs. But these solutions are
unlikely to be satisfactory over the long term.
Over the long term, the government will need to carry out a comprehensive
audit of the public sector expenditures on order to make them compatible
with a "reasonable" level of taxation and revenues. This audit should be
made within the context of the execution of public administration reform, as
noted earlier.
In fact, the reform of public administration reform as discussed earlier is
necessary to bring government expenditures more in line with revenues.
Countries such as Canada found that only through a comprehensive public
administration reform, fiscal budget deficits were brought under control.
For 10 years, from 1985 to 1995, Canada tried to reduce fiscal deficits by
adding some taxes and making budget cuts to individual ministries. But this
just produced general unhappiness as the ministries had to provide the same
function just with less money.
The answer was in actually eliminating from the government a large number
of unnecessary functions and transferring to the private sector or local
authorities other functions. This was done by the execution of a
comprehensive "audit" of government functions and activities. The
government became smaller but stronger and more efficient in the areas that
mattered most.
3. STRENGTHEN THE FINANCIAL SECTOR AND MONETARY
POLICIES -----
The NBU has to clearly enunciate its long-term monetary policy. If the
monetary policy were to move towards inflation targeting, the NBU will need
to develop the capacity to perform open market operations, including the
capacity to predict the statistical relationship between changes in the
holdings of securities, money supply and inflation. The development of this
capacity should be a priority task.
The Government should also enact the Financial Securities Reform Law and
improve SEC membership. Draft legislation has already been prepared with
the assistance of international advisers.
4. DEEPEN TRADE LIBERALIZATION -----
Following Ukraine's access to the WTO, a Task Force should be established
to prepare Ukraine to secure Free Trade Agreements with the European Union
and other regions. The Task Force should also carry out analytical work to
demonstrate the benefits for Ukraine of FTA's and counterbalance any likely
local opposition to them.
5. REMOVE UNCERTAINTIES IN THE LEGAL ENVIRONMENT
AND ENFORCEMENT OF BUSINESS CONTRACTS -----
The lack of a stable and predictable legal environment increases the cost
and risk of doing business in Ukraine. Current legal uncertainties are of
major concern to investors. Despite the enactment of the Law on the
Judiciary, the Judiciary is still weak and its lack of independence makes
its judgments more unpredictable.
In fact, Ukraine's weak Judiciary is one of the main reasons for violation
of property rights, as ownership rights and business contracts are difficult
to enforce. Measures should be announced to strengthen the Judiciary,
including the development of concrete action plans.
In particular, the government should provide adequate funds to the
Judiciary to raise salaries, train judges, develop legal data bases, and
facilitate court actions.
The government should appoint a Task Force to secure the stability and
predictability of the legal environment, particularly by (i) ensuring
consistency of new laws with the existing laws, (ii) better defining
processes and responsibilities for drafting and reviewing new laws, and
(iii) defining the required reform of the judiciary system to give it more
autonomy and adequate financing and training.
6. FULLY STAFF THE INVESTMENT PROMOTION AGENCY ---
The government should further strengthen the Investment Promotion
Agency to identify policy barriers to investments and to attract
large investors as well as small and medium firms. Some of its activities
are suggested below:
a. Measures to Attract Large Investors. In order to attract major
transnational corporations (TNCs) the Investment Promotion Agency
should develop a comprehensive investor targeting strategy that may
employ a combination of a top-down approach (identifying large foreign
investors) and bottom-up approach (offering opportunities in Ukraine).
-----Identify Transnational Corporations that are Planning Greenfield
Projects in the Region. The strategy should include a through
identification of large transnational companies that are currently
considering or planning major investments in Central and Easter Europe,
with a view to attract them to Ukraine.
Special promotional campaigns should be elaborated for each targeted
company to be followed by visits to the countries of origin to meet with
key people of these specific TNC by high-ranked Ukrainian officials.
To identify large potential investors, some countries have found it useful
to use their existing network of embassies.
In particular, such strategy was used by Israel's Investment Promotion
Center (that had only 10 people of staff) over more than a decade.
-----Prepare a General Promotional Campaign to Induce Investors to
Consider Ukraine as a Suitable Investment Location. A special program
should be developed with an objective to reach un-identified investment
decision-makers in TNCs and inform them of the unique opportunities in
Ukraine. The campaign should explain why Ukraine is a better location than
other economies in the region.
The program should include specific promotion materials about the country,
in-depth research analyzing the sector opportunities existing in the country
in comparison with other countries in the region, prepare articles for
international publications, arrange visits and meetings of government
officials with representatives of TNCs to initiate the first visit of the
country.
-----Identify Specific Sectors in Ukraine that could be of Interest to
Large Investors. The Investment Promotion Agency should prepare or
coordinate the preparation of in-depth sector reports that identify the
existing investment niches or advantages in Ukraine.
For instance, among Ukraine's advantages are its rich agricultural land that
favors agro-industries; educated and low cost labor; location at strategic
crossroads, large and rapidly growing domestic market. Investors need
reliable and detailed information about the country and its opportunities.
The list of specific sectors that may be targeted include high-tech
(software development, bio-technology, telecommunications, agro-
technology), agri-business, food processing, consumer services etc.
b. Measures to Attract Small and Medium Investors. Unlike large TNCs,
which have access to capital relatively easily and have a wide-ranging
marketing network at their disposal, small & medium investors are interested
in easy access to bank financing and to reliable information about the country.
The Investment Promotion Agency should:
-----Facilitate Access to Bank Credit. One of the most important things
for small and medium investors to set up and develop business is an easy
access to bank credits. At the current stage of development, Ukrainian
banking system could not satisfy existing demand for loanable funds due to
prohibitively high interest rates and poor system of credit risks
assessment.
Small and medium investors could not wait until the banking system will
be developed enough to satisfy the investment needs of their growing
businesses.
Therefore, it is necessary for the government to launch a lending program
aiming at provision medium and long debt financing for foreign equity
investors that would be planning to come to Ukraine.
For the implementation of this program the government should negotiate with
international agencies (such as IFC and the European Bank) to provide large
lines of credit to support potential foreign investors.
Such lines of credit could be provided through a state-owned bank (for
instance, UkrEximBank) or through a group of creditworthy commercial
banks.
-----Provide Reliable Information About the Business Environment.
Small and medium investors find difficult to obtain information about a
country.
This information includes data about the country, the economy, pertinent
business laws, licensing and registration requirements, etc.
An Investment Promotion Agency may perform this task via maintaining
an Internet Home Page, preparing leaflets, brochures and articles in
international periodicals, holding lectures and organizing seminars for
prospective investors. -30-
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return to index The Action Ukraine Report (AUR) #596 Nov 7, 2005
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