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Action Ukraine Report

An International Newsletter, The Latest, Up-To-Date
In-Depth Ukrainian News, Analysis and Commentary

Ukrainian History, Culture, Arts, Religion, Business, Economics,
Sports, Government, and Politics, in Ukraine and Around the World       

Business will move Ukraine forward in 2010 if given half a chance.

Mr. Morgan Williams, Publisher and Editor, SigmaBleyzer Emerging
Markets Private Equity Investment Group,

Clicking on the title of any article takes you directly to the article.
Return to Index by clicking on Return to Index at the end of each article

Analysis & Commentary: By Timothy Ash, SBS, GBM
Royal Bank of Scotland (RBS), London, UK, Thu, Jan 14, 2010

Analysis: Alexander Kolyandr, Dow Jones Newswires, Fri, Jan 15, 2010

PM Tymoshenko and U.S. Amb Taylor began work on agreement in Jan of 2008
Three 'Fluent in OPIC' Workshops Announced for Washington, Kyiv, New York City
U.S.-Ukraine Business Council (USUBC), Wash, D.C., Thu, Jan 14, 2010

By Gabriel Gatehouse, BBC News, Kiev, Ukraine, Thu, Jan 14, 2010

Sunday's elections will pose the same old politicians when investors just want a stable economy. 
By Parmy Olson, Forbes, New York, NY, Fri, Jan 15, 2010

Viktor Yanukovych and Yulia Tymoshenko will likely face off in second round
By Polya Lesova, Reporter, MarketWatch, Frankfurt, Germany, Thu, Jan 14, 2010

By Stefan Wagstyl, Financial Times, London, UK, Wed, Jan 13 2010

Agence France-Presse (AFP), Mariupol, Ukraine, Friday, January 15, 2010

By Gregory Feifer, RFE/RL, Prague, Czech Republic, Thu, Jan 14, 2010

By Stefan Wagstyl and Roman Oleachyk, Financial Times, London, UK, Fri, Jan 15 2010

Analysis, Mar'yan Zablotskyy, Analyst, Ernst Ukraine Research
Ernst Bank Group, Kyiv, Ukraine, Wed, Jan 13, 2010

Presidential elections could usher in political stability and give the dismal economy a chance to grow again 
By James M. Gomez and Daryna Krasnolutska, Bloomberg News Reporters
Business Week, New York, New York, Fri, January 15, 2010

By Stefan Wagstyl and Roman Olearchyk, Financial Times, London, UK, Jan 6 2010

Reuters, Kyiv, Ukraine, Tue, Jan 5, 2010 

Factbox, Reuters, Kiev, Ukraine, Tuesday January 05, 2010 

Raiffeisen owns the largest international lender in Ukraine
By Daryna Krasnolutska, Bloomberg, Kiev, Ukraine, Fri, Dec 25, 2009

"So what does Ukraine do to address those problems? Nothing. Literally, nothing."
By Marcin Sobczyk, WSJ Blogs, New Europe
Dispatches from Dow Jones writers across Eastern and Central Europe
The Wall Street Journal, NY, NY, Wed, January 6, 2010

bne (BusinessNewEurope), Kyiv, Ukraine, Mon, Dec 28, 2009

Travel Essay by Roman Skaskiw,  website, Fall, 2009

Help an elderly Ukrainian in Kyiv have clothing, food, medicine this year.
Katie Fox, President, American Friends of "For Survival", Wash, D.C., Mon, Jan 4, 2010

By John Pancake, Kyiv, Special to The Washington Post
The Washington Post, Wash, D.C. Wednesday, January 6, 2010

Royal Bank of Scotland (RBS), London, UK, Thu, Jan 14, 2010

LONDON, UK --- These elections do matter...

Ukraine goes to the polls on January 17 2010 in presidential elections which look set to be key in shaping the country's future direction and more immediately its ability to quickly bounce back from the global credit crunch which has had a devastating impact on the economy. they come at a time when the economy is facing huge challenges...

To summarise the economy's performance over the past year or so, and
therein the challenges facing the victor in Sunday's vote we would highlight:

(-) [1] As the global credit crunch hit from the summer of 2008, Ukraine saw key export markets (metals account for 40% of exports) collapse. Thus, exports by dollar value for the period January through October 2009 were down by close to 50% YOY. As a result of the shock from the loss of exports (volumes and prices were significantly lower), from peak to trough real GDP has probably declined by around 20%, with industrial output falling by around one-third over this same period.

(-) [2] Faced by a wide current account deficit, and a weight of external debt amortisations in 2009 (estimated at US$30-40bn), the UAH was "allowed" to weaken from an average of UAH5.26:US$1 in 2008, to an average of around UAH8:US$1 for the full year in 2009, and it remains around this level at present.

       The external financing gap was further closed over the course of 2009 through the deflation in domestic demand (as reflected in the sharp real GDP contraction noted above) which saw imports by dollar value fall by 54% YOY over the first 10 months of 2009, restructuring of some private sector external liabilities (e.g. the Naftogaz restructuring) at the margin, and a draw down of perhaps as much as US$15bn in official NBU reserves, or close to one-third accepting for IMF disbursements.

       For the full year in 2009 the current account deficit probably came in at just 1-2% of GDP, down from 6-7% of GDP in 2008, and was fully covered from net FDI (perhaps amounting to 2-3% of GDP).

(-) [3] The banking sector saw both the erosion of its deposit/funding base, and a marked and very significant deterioration in the quality of its asset base. Perhaps as much as one-third of deposits were drawn down through the crisis, while NPLs have risen to an excess of 30%, i.e. amongst the highest in the region (perhaps bar Kazakhstan). Banks' capital bases were as a result rapidly eroded.

       Encouragingly, foreign banks (perhaps now 50% of the sector by assets) have generally proved willing to recapitalise/refinance their local subsidiary operations in Ukraine, but the Ukrainian authorities were forced to fund the recapitalisation of many domestically owned banks (local oligarchs appeared more willing to fall back on state support, when push came to shove), at a significant cost (perhaps UAH50bn, or the equivalent of around 8% of GDP) to the public sector balance sheet, albeit assisted by IMF/WB funding programmes agreed in 2008.

(-) [4] From running small budget deficits for the period 2005-2008 (~2% of GDP), the budget deficit rose in 2008 through 2009, reaching an estimated 8-9% of GDP for the full year in 2009. With the IMF programme in effect suspended late in 2009, and with the government facing limited funding options arrears (e.g. for public sector wages) are thought to have been built later in the year.

       The deficit in 2009 was also augmented by the quasi-fiscal deficit from subsidies in effect paid to the state-owned gas transit company, Naftogaz, to cover the shortfall between gas import prices (~ US$250 per 1,000 cu metres) and domestic prices (~ US$150 per 1,000 cu metres on average).

(+/-) [1] As noted above, as a result of the crisis, Ukraine was forced to conclude an emergency IMF SBA for US$16.4bn in November 2008; of which some two thirds had been drawn to date.

..but light is just appearing at the end of the tunnel

Despite the developments noted above, we would argue that Ukraine's position is far from forlorn, and there is a chance of a significant bounce in 2010, albeit it crucially depends now on a stabilisation in the domestic political scene, the speedy resumption of IMF lending and for the government to push forward with key reforms, for example the privatisation of a number of key strategic assets remaining in state ownership, gas price liberalisation/reform, and broader reform of public finances, plus the completion of the bank reform/restructuring process.

Positives for 2010 which we would highlight include:

(+) [1] The depth of the downturn in 2009 has created a low base period effect which should act to spur something of a recovery; real GDP growth of 2-3% in 2010 is now statistically quite probable. Meanwhile, the recovery in global commodity prices, particularly metals, is already bringing some improvement on the ground, as reflected in MOM growth in industrial output from mid-year, and finally YOY growth in merchandise exports of around 7% YOY in November 2009; albeit admittedly from a low base.

(+) [2] As noted above the balance of payments has been squared or "balanced" and the UAH no longer appears over-valued, indeed on a number of measures it is arguably "cheap". The NBU, meanwhile, still has US$27bn in FX reserves - true, down from US$38bn at their peak in 2008, but nonetheless, providing 5-6 months of import cover (albeit somewhat artificially bolstered by the collapse in imports).

(+) [3] Problems in the banking sector are being worked through, with the support of foreign banks/IFIs. Russian interest in the sector is strong, and we expect substantial efforts by Russian banks to secure further market share in the Ukrainian market after the elections; they probably already have a good 15-20% market share.

       This will help in the recapitalisation of the sector, helping share the burden from the state; the plus still is that the sector is still relatively small, banking assets/GDP of ~ 70-80%, which will act to cap the size of the contingent liability on the sovereign.

(+) [4] N While the fiscal deficit is wide, the public sector debt/GDP ratio is still modest by regional comparisons, i.e. ~ 35-40% of GDP, albeit rising fast. Given that the nominal FX depreciation of the UAH, and the marked real GDP contraction, US$ GDP is much reduced, hence the actual numbers in terms of the size of the deficit are not large, and could be filled via a combination of official financing, and some bigger ticket privatisations.

       On the debt service front, public sector external liabilities falling due are modest (several billion US dollars at most) for 2010, and the risk of default is over-stated in our view, at least for 2010.

(+) [5] Relations with Ukraine's key trading partner, Russia, have improved markedly over the course of the Tymoshenko premiership. The gas price agreement reached in January 2009, which moved gas pricing/imports to market prices from 2010, with monthly payment for gas deliveries, has done much to help simplify/clarify the relationship (taking much of the politics out of the gas price issue), reducing scope for dispute. Moscow increasingly sees the incumbent prime minister, and her supporters, as people with which it, and Russian business, can do business with.

(+) [6] The West remains supportive of Ukraine. Evidence of this is provided, in our view, by the generally (some would say remarkably) constructive stance of the IMF in terms of its relations with Ukraine. Indeed, the IMF has shown remarkable flexibility with Ukraine through 2009, cutting the government slack over delayed domestic gas price liberalisation (gas prices were scheduled, under the SBA, to be hiked in September and October), and latterly by increasing the floor on NIRs to allow the NBU to help cover the December monthly gas import bill to Russia.

       Where the Fund was unable to compromise was on parliament's decision to hike pensions/wages by 20%, a move which (if implemented by the government) would have blown a huge hole in budget financing. What is clear though is that the Fund is eager to return to Ukraine, and get the existing programme back on track as soon as possible after the presidential elections.

        Ukraine's strategic position as a key energy transit route to Europe seems to be key in shaping the more constructive/supportive stance of the IMF and other official/bilateral creditors towards Ukraine.

(+) [7] Ukraine remains a large, important economy in a strategic location in Europe. With 48 million people it provides a large domestic market, a huge industrial/manufacturing base, it is a key transit route for energy supplies to Europe, and historically its black earth lands were the bread basket of Europe; the agricultural sector has huge albeit massively under-utilised resources.

     As a result Ukraine should continue to attract significant interest from strategic and direct investors; its potential remains huge as a market, a transit hub and as a manufacturing base, food/agricultural supplier, in its own right.

From a wide field, only half a dozen contenders are in the game...

Eighteen candidates are registered to run in the presidential election, with election by universal suffrage. Of these only perhaps half a dozen or so have potential to shape the domestic political landscape beyond the presidential poll. Note that in the 1994 presidential election, Leonid Kuchma came from relative obscurity and a lowly standing in the run up to the polls, to take the presidency, but we do not expect a surprise this time around.

[1] Victor Yushchenko, the incumbent president. He rose to international fame/acclaim during the Orange revolution around the 2004/05 presidential election. While initially seen as the great hope for Ukraine, he has generally failed to live up to expectations, and is currently languishing in opinion polls, with a low single digit rating. Indeed, he has virtually no chance of getting into the second round of the presidential vote and therefore of securing a second term in office.

As a result, his game plan at present seems to be to try and secure a sufficiently large share of the vote to put him in a position of being something of a king-maker, perhaps then forcing early parliamentary elections to take a position in parliament for himself and then to re-emerge perhaps as leader and prime minister in a new coalition government.

There has been speculation in the local media of a back-room deal being cut between Yushchenko and Regions of Ukraine (see below) which in the event of a victory by Viktor Yanukovych (Regions' candidate) in the presidential election would see Yushchenko leading a new coalition government as prime minister. We think that this is unlikely in practice (and likely very negatively received by the market), largely as Yushchenko now has few supporters either inside or indeed outside of Ukraine.

More particularly Yushchenko has greatly irked Russia over a vast range of issues (e.g. Georgia, NATO enlargement, gas supply, language rights, and responsibility for Holodomor, the famine of 1932/33 which saw the death of millions of Ukrainians, and indeed Russians, which was largely the result of Stalin's Kulakisation drive); that he is now Moscow's arch nemesis/enemy.

Meanwhile, Yushchenko's star has also waned in the West, as his inability to work with PM Tymoshenko, and indeed some would say obsession with keeping her from the presidency, has been seen as a major driver of political instability in Ukraine. If anything, the challenge is managing a smooth transition from the Yushchenko era.

[2] Yulia Tymoshenko, the prime minister, and former ally of Yushchenko during the Orange Revolution but who is now his arch nemesis/rival. Tymoshenko is eager to be seen as the true inheritor of the "spirit" of the Orange revolution, after Yushchenko's own fall from grace. Amongst the former leaders of the Orange she is best ranked in opinion polls, albeit lagging the front-running, Viktor Yanukovych.

Tymoshenko currently polls in the mid-teens, a good ten percentage points behind Yanukovych. Tymoshenko is though an electoral machine, highly charismatic, attracting extremes of opinion: you either love her or hate her.

She also enjoys support across Ukraine, something which cannot be said of any of the main candidates, with Yanukovych's support tending to be concentrated in Eastern Ukraine, amongst ethnic Russians. Tymoshenko has worked hard to canvass support throughout Ukraine and has a well honed and financed campaign organisation.

While her popular appeal has perhaps been reigned-in by her position as prime minister managing the economy through the worse crisis to have hit the country, since the mid-1990s, her big advantage this time is that she is seen as the best (or by some, least worse) candidate by Russia, the EU and even the US.

During her second stint as prime minister (she was forced from office in the first Orange administration by President Yushchenko in 2005) she has proven extremely pragmatic, particularly in terms of the seeking to normalise the key relationship with Russia.

Moscow sees her as someone with whom they can do business, and is seen as being relatively open to Russian (and indeed international) capital investment into Ukraine, perhaps in contrast with Yanukovych and Regions of Ukraine.

At the same time, Tymoshenko is keen to promote Ukraine's European democratisation/reform agenda, and for this she has won plaudits in the West. Meanwhile, her willingness to go the extra mile to keep the IMF programme on track in late 2009, e.g. going against parliament and seeking to block wage/pension hikes late in 2009 has begun to show that she is more than simply a populist icon.

She has the ability to be the game-changer for Ukraine, and very much sees herself as the Margaret Thatcher of Ukrainian politics. Whether she can live up to the billing is another matter.

[3] Viktor Yanukovych, the former prime minister and defeated candidate in the re-run 2004 election, who is currently leading in the polls with a mid-20s rating. Yanukovych leads the Regions of Ukraine (RU) party, the largest party in parliament, whose electoral base lies amongst ethnic-Russians in Eastern Ukraine. Yanukovych has proven to be a survivor, and a capable political operator, jettisoning accusations that he was just a front for other oligarchic leaders within RU, and emerging as something of his own man.

Yanukovych and RU have tended to sell themselves as the pro-Russian party, offering the prospect of stable and secure relations with Moscow; and cheap energy to boot - Yanukovych has suggested he could renegotiate the 2009 gas price agreement with Moscow to secure for Ukraine lower gas import prices.

In reality Tymoshenko has now emerged as a challenger for Russia's favour. Moscow seems to be eager to "play the field" or not make the same mistake it made in 2004 when it arguably put all its eggs in the Yanukovych basket, a strategy which backfired.

However, there is some frustration in Moscow that despite Yanukovych/RU promising Russia much over more than a decade (extending into the Kuchma era), in reality they have delivered little in terms of tangible benefits to Russia, and in particular control/ownership of strategic assets in Ukraine.

Cynics argue that while selling themselves as the pro-Russian party, RU's agenda is in fact to keep Russia sweet, but Russian oligarchs out of Ukraine, thereby defending the local market for oligarchic groups which underpin/support RU.

While currently leading in the polls, Yanukovych lacks pan-Ukrainian appeal; many Ukrainian nationalists in Western Ukraine could simply never stomach voting for Yanukovych and Regions. His current advantage is that he remains in opposition, and can escape some of the flak for the poor performance of the economy over the past year.

His core support is also loyal and will turn out and vote; the fear in the Tymoshenko camp is that a large chunk of the Orange vote, her natural constituency, might just not bother to vote given the general disillusionment with Orange leadership over the past 5 years. Yanukovych is certain to get into the second round presidential vote, and will run Tymoshenko hard this time around, albeit ultimately we think he will just lose out to Tymoshenko.

[4] Arsenyi Yatseniuk, the former speaker of parliament, former foreign minister and former economy minister. Young, articulate, a fluent English speaker, who had been seen as the great new hope for the Ukrainian political scene. His campaign got off to a good start initially, when from nowhere he had managed to secure ratings in the low teens just 5-6 months ago, and seemed a genuine challenger to Tymoshenko for second place in the first round presidential poll.

Since then though his campaign has gone off the boil, perhaps lacking clear focus/direction and amid uncertainty surrounding his funding and over his ultimate political allegiance. Critics argue that he lacks the political acumen of Tymoshenko or even Yanukovych. He is likely to poll in the 4-5% range, but could be important in creating momentum behind the two contenders in the second round poll.

[5] Volodymyr Lytvin, the leader of the Lytvin block in parliament which has 20 or so deputies and has proven in the past to be a kingmaker. He has run in several previous presidential elections, and has a solid core support of 5-6%, which gives him some political capital which he has tended to deploy with alacrity. Previously he has served as speaker of parliament, and he would likely use his solid showing in the presidential elections to boost his own, and his party's standing in parliament, and its ability to remain in the political mix. He is centrist, and has proven willing to work with all the main political camps in parliament.

[6] Serhiy Tyhikpo, a former minister in the Kuchma administration, who served as acting central bank governor for a time in the opposing camp to the Orange revolution. He then took something of a political sabbatical to run one of Ukraine's most successful private banks which was subsequently sold to a Western banking group. Has returned to the political scene over the past year, and has built bridges both with Regions and the Tymoshenko camps; he had been touted as a possible compromise candidate to replace the incumbent governor of the NBU (Stelmakh), after efforts by the Tymoshenko camp to force the incumbent from office.

He is another candidate who could score 4-5% of the first round vote (I simply do not believe a poll reported by the BBC which had Tyhipko up at 14%), and would then likely use this political capital to position himself for a new role in the new administration to emerge after the elections. He could end up as governor of the NBU, or even a compromise candidate as prime minister in a coalition government. Generally regarded as a reformer, and obviously he knows the Ukraine's banking system and the NBU well.

...Yanukovych will win the first round, with Tymoshenko second...

Having set out the runners and riders, its time for us to call the election result; no mean task this time around. What seems clear now is that Yanukovych is an almost cert to win the first round vote, but he will be unable to secure more than 50%, and hence the vote will go to a second round on February 7. We predict that Yanukovych will get around 35-36% in the first round vote.

Tymoshenko is almost equally certain to come second in the first round, but there is some uncertainty about how high her vote will be in the first round. Our best guess would be 25-27%. While she is currently only polling in the mid-teens, she does tend to do better in actual elections and this, along with her awesome campaign machine, and the dogged loyalty/zeal of her supporters, who will run the extra mile for her, is probably worth another ten percentage points.

...but the second round is difficult to call

The second round vote is much more difficult to call. Candidates falling by the wayside in the first round vote will be looking to extract promises of patronage from Tymoshenko and Yanukovych as the price of directing their supporters in the second round vote. Herein we just cannot see Yushchenko finding it in himself to back Tymoshenko, reflecting all the bad blood that now exists between the two candidates; that said I am not sure how far his supporters will follow his own lead.

Supporters of Yatseniuk will probably fall in behind Tymoshenko, in some kind of final act of loyalty to the Orange cause. Litvin and Tyhipko's supporters will probably split 60:40 for Tymoshenko, while the 5-10% or so Communist/Socialist vote will probably go mostly to Yanukovych. What seems evident therefore is that It will be an extremely close second round vote, with turnout likely to be crucial to the result, but our best guess still is that Tymoshenko will just carry the vote with a wafer thing majority.

We doubt that attempts to challenge the result will get much traction...

Tymoshenko has already signalled that she is preparing for a possible legal challenge (over postal ballots) to the vote, in the event of a narrow victory by Yanukovych. A similar challenge could come from Yanukovch on a Tymoshenko victory. However, this time around we expect a generally fair election, as the media is generally free, and scope for electoral fraud is significantly reduced given the likely significant oversight from various international observers (after the experience of 2004/05).

We do not expect a repeat of the mass demonstrations that followed the 2004 elections, also partly because the Ukrainian population is now generally much more disillusioned with the entire Ukrainian political class, and much less willing to get out on the streets.

Also we think that given the huge economic challenges facing the country, external pressure will be for politicians to get on with it (forming coalitions) and to govern more effectively, allowing the IMF to return in a timely manner. There will hence be much less truck with political game-playing/indulgence this time around. the focus will quickly turn to coalition building in parliament...

Once the second round vote is out of the way, and assuming no repeat saga over the soundness of the vote, the obvious question then is what next? Either Tymoshenko or Yanukovych will emerge victorious as president, but how will they manage to govern a country, parliament and even government riven by rivalries.

The first act for the new president will be to try and reshape the government, and this will require the formation of a majority coalition in parliament to back a new administration. There could be early parliamentary elections, but we doubt that these would fundamentally change the balance of power for either of the two main political parties.

Arguably the only person with an interest in early elections at this stage is incumbent President Yushchenko who sees early elections as a means to create a new power base for himself having departed the presidential palace and having seen his support in Our-Ukraine - Peoples Self Defence (the presidential party) eroded.

But it does not seem logical for either of the two main parties to play into Yushchenko's hands; indeed most in both camps would probably prefer his speedy departure from the domestic political scene. Rather we think Tymoshenko and Yanukovych will try and work with the current parliament to form a working and stable majority.

...which will not be easy...

Reviewing the current parliamentary math, Regions is the largest party in parliament with 172 deputies, followed by Block Yulia Tymoshenko (BYT) with 153, then Our-Ukraine/Self Defence with 71, the Communists with 27, the Block Litvin with 21, and there are 6 unaligned deputies.

The Communists will most likely line up with Regions, while the Litvin Block can swing both ways, i.e. it could ally with either BYT or Regions, depending on what political capital it can extract in either coalition arrangement. Our Ukraine/Self Defence is the most difficult to call, as while the party was originally formed in support of President Yushchenko, it has subsequently fractured into around 14 parties, and of the 71 deputies 40-50 (including Yatseniuk herein) are considered loyal/likely to back a coalition with Tymoshenko, rather than with Yanukovych.

 Under current electoral rules, the majority would carry the faction into an alliance with Tymoshenko, blocking a coalition with Regions. There is a question as to whether the rump of the party supporting Yushchenko could still act as spoilers herein preventing also a deal with Tymoshenko.

This might in effect then leave parliament "hung", i.e. with Regions/Litvin Block/Communists with only 222 deputies, and/or the BYT plus the Litvin Block with 174 deputies, and the rest, including OU-PSD remaining non-aligned.

...and our most likely scenario is "cohabitation"

The prospect of a hung parliament, with neither of the main factions, BYT and Regions able to form a majority without the other, does then open the possibility of cohabitation between BYT and Regions. Indeed, this is our most likely end-game in all this. Such a coalition would have a large majority in parliament, i.e. a good 330-odd deputies out of 450, and would avoid any need to horse trade with small minority parties.

Both camps could sell the alliance as some kind of "government of national unity", to face up to the remarkable and unprecedented challenges facing the economy. In terms of economic policy, I doubt there is that much clear blue water between the parties, perhaps the only difference might be openness to foreign capital, with BYT preferring a much more level/open playing field. Indeed, the main challenge will be dividing out ministerial portfolios/spheres of influence.

Interestingly over the past couple of years it is widely known that that the two factions have held extensive negotiations over trying to forge such a coalition, which has only in the end fallen at the last hurdle. Tymoshenko, in particular, is thought to have baulked at inking such a deal in the past for fear of isolating the Orange vote in the run-up to a subsequent presidential poll.

However, with the presidential election out of the way, and the Orange vote cast, she would perhaps feel less inhibited in going against the spirit/soul of the Orange revolution and allying with the former enemy, Regions of Ukraine.

In the bigger interests of Ukraine, even hardcore Orange supporters will perhaps see the bigger picture need for former enemies to work together. Hence, seeing through the murky political landscape in Ukraine - some might argue with somewhat rose-tinted spectacles - might suggest a more constructive outcome.

At least the elections offer the hope of an end to the hugely damaging trench warfare between President Yushchenko and prime minister Tymoshenko which has characterised most of the period since the Orange revolution, that is assuming Yushchenko does finally depart the domestic political scene.


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[return to index] [Action Ukraine Report (AUR) Monitoring Service]

Analysis: Alexander Kolyandr, Dow Jones Newswires, Fri, Jan 15, 2010

MOSCOW -- A victory by Yulia Tymoshenko is Ukraine's presidential elections would mean a faster resumption of the International Monetary Fund's austerity program, but whoever comes out ahead will be forced to stick to the plan because of the country's heavy debts and the steep economic contraction of 2009, analysts said.

A win by Viktor Yanukovych, meanwhile, is more likely to lead to a weaker currency, they added.

As Ukrainians go to the polls Sunday, none of the 18 presidential candidates is expected to win the first round outright with the required majority, and the runoff next month is likely to be between Tymoshenko, the current prime minister, and Yanukovych, a former prime minister who lost power during the "orange revolution" of 2004-2005.
A strong showing for Yanukovych, who has the support of the metals exporters that represent much of the country's economy, could bring about a weaker Ukrainian hryvnia that would increase the miners' and steelmakers' profit margins. For her part, Tymoshenko in the past has supported a strong currency.

Both are promising reforms long delayed by political divisions as well as renewed relations with the IMF, which were cut off when Tymoshenko's former ally, President Viktor Yushchenko, signed a wage and pension increase into law.

The rivalry between Yushchenko and Tymoshenko resulted in delayed disbursement of $3.9 billion from the IMF until after the elections, thus boosting the importance of renewed relations with the fund as soon as possible. This could happen more quickly if Tymoshenko wins, according to analysts.

Any major policy move demands substantial compromises between the president and prime minister, and both of the current leaders lack substantial support in the Rada, or parliament.

With a Yanukovych victory, "a minority government or broad coalition would struggle to push through tough measures to get the IMF program back on track," Neena Altaf from JPMorgan Chase & Co. said, adding that Yanukovych would probably end up having to call early parliamentary elections, delaying the IMF program until the third quarter. That probably wouldn't affect Ukraine's ability to service its debt, but payments for natural gas could become a problem.

But Tymoshenko might be able to put together a workable coalition without the need for early elections, paving the way for IMF-geared reforms.

To unlock the IMF financing, Ukraine would need to bring its budget deficit close to the target of 6% of gross domestic product, compared with an estimated 7.0% to 7.5% currently. The Rada has yet to adopt the 2010 budget.

"The country's fiscal situation remains the biggest concern for 2010, as the lack of political consolidation contributes to the risk of imprudent policy choices," said analysts at Moscow-based Troika Dialog.

Ukraine's private and public sector have to repay between $23 billion and $25 billion in debt in 2010, but there are few fears that the government wouldn't make good on its obligations.

"We continue to believe that the risk of sovereign default is low, despite a potentially longer delay to the IMF program," JPMorgan analyst said. Total external sovereign debt payments amount to less than $1.5 billion for the whole of 2010, while international reserves are running at more than $27 billion.

"Because of the light repayment schedule, it is still not prohibitively costly to honor sovereign debt obligations," Moscow-based Renaissance Capital said, adding that "as long as there is the ability to pay, there will be a willingness to do so."

Paying for badly needed Russian natural gas may be more difficult. Naftogaz, the Ukrainian natural gas company, has said it will pay the gas bills in full to avert any repetition of past crises that saw Russia turn off the flow of gas, triggering supply disruptions in Europe.

Yet Naftogaz, whose revenue comes from poorly collected payments for locally sold gas at subsidized prices, has had to rely on the IMF's money to pay for the latest deliveries.

October and November gas imports were paid for using the IMF's special drawing rights allocation of $2.1 billion, and the IMF reduced Ukraine's reserve floor by $2 billion, helping to pay for gas through March.

To secure the further payments, whoever is elected president would need the Rada's support to boost domestic gas prices as soon as possible.

However, despite their differences, any candidate's win would bring Ukraine a bit more stability as long as the losing party doesn't start questioning the results and taking people to the streets, as was the case five years ago.

"We see no reason for investors to prefer either figure, as any outcome will lead to political stability nationwide and an enhanced framework for political compromise as Ukraine will have a dual-polar political environment instead of the current tri-polar situation," analysts Maria Maiboroda and Andriy Nesteruk at Kiev-based Phoenix Capital said. 
By Alexander Kolyandr, Dow Jones Newswires; +7 495 232 9192; 

[return to index] [Action Ukraine Report (AUR) Monitoring Service]
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PM Tymoshenko and U.S. Amb Taylor began work on agreement in Jan of 2008
Three 'Fluent in OPIC' Workshops Announced for Washington, Kyiv, New York City

U.S.-Ukraine Business Council (USUBC), Wash, D.C., Thu, Jan 14, 2010

WASHINGTON, D.C. – The Overseas Private Investment Corporation (OPIC) of the U.S. government recently restored its financing and political risk insurance programs in Ukraine paving the way for American companies to increase their potential private sector investment in Ukraine over the next few years by hundreds of millions of dollars.  

The Overseas Private Investment Corporation (OPIC) announced on December 16, 2009, its programs were available for Ukraine, after several years of being closed for Ukraine, following the signing in Kyiv and Washington, D.C. of an agreement resolving a dispute over an insurance claim paid by OPIC in 1999 to the U.S. sponsor of a project in Ukraine.  

A prolonged inability to settle the dispute resulted in suspension of OPIC programs in the country. Previously, OPIC had provided more than $254 million in financing and insurance to 21 projects in Ukraine, in sectors ranging from manufacturing and construction to energy and financial services. 

Serious work on an agreement to restore OPIC programs for Ukraine was started in January of 2008 by the new Ukrainian Prime Minister, Yulia Tymoshenko, and the U.S. Ambassador to Ukraine at the time, William Taylor.  

To facilitate rapid implementation of the OPIC programs in Ukraine three "Fluent in OPIC" workshops are being officially announced today. The first workshop will be held in Washington on January 20th, the second in Kyiv, Ukraine on February 10th and the third one in New York City in March.

The workshops are being sponsored by the U.S.-Ukraine Business Council (USUBC) in cooperation with OPIC, the government of Ukraine, the U.S. government's Commercial Service and the Broad Street Capital Group with support from Marks Sokolov & Burd, SigmaBleyzer, Chadbourne & Parke and other sponsors.  Workshops are open to representatives of companies in the USA and in Ukraine. 

Substantial work on an agreement to restore OPIC programs for Ukraine began in earnest in January of 2008 when the new Prime Minister of Ukraine, Yulia Tymoshenko, met with the then U.S. Ambassador to Ukraine, William Taylor. Prime Minister Tymoshenko in February of 2008 appointed Deputy Prime Minister for European and International Integration of Ukraine, Hrygoriy Nemyria, to take the lead in the negotiations with OPIC on behalf of the Prime Minister and the new Cabinet of Ministers.

The signing of the agreement on December 17, 2009 was the culmination of a series of important meetings between PM Tymoshenko and U.S. Ambassador Taylor and other government officials which resulted in the steps leading to full restoration of OPIC programs in Ukraine, including the November 2008 conclusion of a memorandum of understanding between the two governments, and the July 2009 passage in the Ukrainian Cabinet of Ministers of a resolution facilitating settlement of the dispute.

Ukrainian DPM Hrygoriy Nemyria spoke to the annual meeting of the U.S.-Ukraine Business Council (USUBC), in Washington, D.C. on December 17th and said, "The Tymoshenko government worked hard over a two year period to facilitate the agreement with OPIC and accomplished what previous governments had failed to do.  The government of Ukraine strongly supports investment by U.S. companies and is most pleased to have the major OPIC economic development programs once again available to assist U.S. companies increase their investments in Ukraine." 

“OPIC is pleased to once again make available its support for U.S. investment in Ukraine, a development which we anticipate will send a highly positive signal to prospective investors in the country,” said OPIC Acting President Dr. Lawrence Spinelli on December 17th.

“This historic occasion is indicative of Ukraine’s ongoing efforts to improve its investment climate, and we commend the Ukrainian government for its hard work in bringing about this result. We look forward to working with both U.S. and Ukrainian businesses to facilitate new levels of American investment in Ukraine,' OPIC's Spinelli announced.

U.S. Vice President Joseph R. Biden also noted the significance of a future OPIC agreement during a visit to Ukraine in July of 2009. “I was pleased to learn that the government has taken the final decision necessary to bring the Overseas Private Investment Corporation back to Ukraine. That will make it easier for American companies to reinvest in Ukraine, and invest in the first place, which will help both our economies in the current downturn,” Mr. Biden said on July 21. 

The three "FLUENT IN OPIC" workshops will present a comprehensive "beyond the website" very practical, hands-on, look on how to effectively utilize OPIC to finance and/or insure business transactions for Ukraine.  The three workshops will address the application process, deal structures, sponsor requirements and commitments, approval procedure, realistic time frame estimates, costs, fees and legal and developmental issues.

The first "FLUENT IN OPIC" workshop will be held from 2:30 to 5:30 p.m. on Wednesday, January 20, 2010, followed by an "OPIC Open For Business In Ukraine Victory Celebration Reception from 6:00 p.m. to 8 p.m.  Both events will be held at the Embassy of Ukraine to the USA, 3350 M Street, N.W., Washington, D.C.  Information about how to register for the workshops can be obtained by writing to the U.S. Ukraine Business Council (USUBC) at and from the USUBC website,

 "The opening of the U.S. government's Overseas Private Investment Corporation's (OPIC) program for Ukraine is a great victory for the business community in Ukraine and the United States and will lead to a considerable increase in U.S. private business investments in Ukraine," said Morgan Williams, head of the SigmaBleyzer government affairs office in Washington, who serves as President of the U.S.-Ukraine Business Council (USUBC). 

"Getting OPIC open for business once again in Ukraine has been a top priority for the members of USUBC for many years" according to Williams.  "USUBC has worked with the U.S. and Ukrainian governments on this issue especially in the last two years.  The work to settle the OPIC issue was led on the Ukraine side by the Prime Minister of Ukraine, Yulia Tymoshenko and Hrygoriy Nemyria, Deputy Prime Minister for European and International Integration of Ukraine and on the U.S. side by former U.S. Ambassador to Ukraine, William Taylor, a member of the U.S. Embassy Economic Team, William Klein."

OPIC was established as an agency of the U.S. government in 1971. It helps U.S. businesses invest overseas, fosters economic development in new and emerging markets, complements the private sector in managing risks associated with foreign direct investment, and supports U.S. foreign policy. Because OPIC charges market-based fees for its products, it operates on a self-sustaining basis at no net cost to taxpayers.
OPIC’s political risk insurance and financing help U.S. businesses of all sizes invest in more than 150 emerging markets and developing nations worldwide. Over the agency's 38-year history, OPIC has supported $188 billion worth of investments that have helped developing countries to generate over 830,000 host-country jobs. OPIC projects have also generated $72 billion in U.S. exports and supported more than 273,000 American jobs. Visit OPIC on the web at

Instructors at the Washington, D.C. workshop will include Alexander M. Gordin, Managing Director, Broad Street Capital Group (creators of the "Fluent in Foreign" book and workshop series"); Gerald Stoltz, Esq., Partner, Thompson Coburn, LLP; Gene Burd, Managing Director, Marks Sokolov & Burd; Rod Morris, Vice President, Insurance, OPIC; Tracey Webb, Director, Structured Finance, OPIC, and others to be announced.  Morgan Williams, SigmaBleyzer, who serves as president of USUBC, will be the workshop moderator.

Participation in the "Fluent in OPIC" Workshop and Celebration Reception is complimentary for members of the U.S.-Ukraine Business Council (USUBC). The "Fluent in OPIC" Workshop and Celebration Reception registration fee for representatives of businesses/organizations who are not members of USUBC is $250.00.  Registrations are now being accepted. 

To register for the Workshops and/or the Receptions please send an e-mail to  There is no charge just to attend the Reception.  The registration fee is for the workshop.  Workshop One: Washington, D.C., January 20th; Workshop Two, Kyiv, Ukraine, February 10; Workshop Three will be held in New York City on a date to be announced soon.

If you have any questions please contact Iryna Teluk, USUBC membership director, at 240 505 9494, or e-mail
[return to index] [Action Ukraine Report (AUR) Monitoring Service]

By Gabriel Gatehouse, BBC News, Kiev, Ukraine, Thu, Jan 14, 2010
KIEV - As Ukrainians prepare to go to the polls to elect a new president on Sunday, European leaders will be aware that the outcome could affect the continent's vital energy supplies. Europe gets a quarter of its gas from Russia, and most of that arrives via an extensive network of pipelines running through Ukraine.

In the past few years, tensions between Moscow and Kiev have led Gazprom, the Russian energy giant, to switch off the taps on a number of occasions. With chilling results.  The latest incident came last January. Russia accused Ukraine of siphoning off gas meant for its European customers, and stopped the flow.

Hundreds of thousands of people in Central and Eastern Europe were left without heating in the middle of winter. Businesses and industries were forced to slash production.

In the past, incidents such as these had generally been regarded in the EU as a case of a powerful and assertive Russia bullying its smaller, more vulnerable neighbour.  This time though it became clear that Ukraine also shared some of the blame.

Offices stormed
The following month there were extraordinary scenes at the headquarters of Naftogaz, the Ukrainian state energy company, in central Kiev. Armed men in black combat fatigues and balaclavas stormed the company's offices, questioning staff and confiscating documents.

Ukraine's internal political tensions had spilled into the open: the security services, under the control of the president, had raided the state energy company, controlled by the prime minister. At stake was control of the multi-billion dollar gas import and transit business.

"There are many many people in [the Ukrainian] political elite who made money out of this and who are still making money out of this," said Nico Lange, the Kiev-based director of the Konrad Adenauer Foundation, a German think-tank close to Chancellor Angela Merkel's Christian Democrats.

Germany is one of the largest importers of Russian gas, and Mr Lange is a veteran observer of the gas trade between Russia and Ukraine. He believes these vested interests among the political elite will try to prevent reforms in the energy sector.

'Gas Princess'
Both the frontrunners in the upcoming presidential election have a strong interest in the gas trade. Viktor Yanukovych, currently ahead in the polls, has his political heartland in the east of the country, whose heavy industries need vast quantities of Russian gas to function.

His nearest rival, Yulia Tymoshenko, the current prime minister, made her money in the gas trade in the 1990s and has been nicknamed the Gas Princess.
On the face of it though, when it comes to trading gas between Russia and the EU, there should be no problem. Russia has huge reserves of natural gas, which Europe needs. The question is, how to get that energy from the gas fields of Siberia to its European customers.

Under Stalin, the Soviet Union began construction of what became an extensive network of pipelines running from the east, funnelling gas into vast storage facilities on its western border, from where it could be easily supplied to Europe. The trade continued even during the tense standoff of the Cold War. Supply and demand trumped ideology.

But when the Soviet Union collapsed, Gazprom, the newly created Russian state energy company, suddenly found that crucial elements of that network were located in a different country: independent Ukraine.

Endangered independence
Still, for a decade and a half, the trade continued uninterrupted. Ukraine got cheap subsidised gas in return for allowing Moscow to effectively control the pipeline and storage system.

Then everything changed.

The Orange Revolution in the winter of 2004 installed a pro-Western president in Kiev. Viktor Yushchenko made it clear early on that he was no longer willing to dance to the Kremlin's tune.

"Control over the Ukrainian gas system is a question of Ukrainian sovereignty and finally of Ukrainian independence," said Nico Lange. "If the Russian side - and this I think this has been and is still the long-term interest of the Russian side - gains control over the very huge transport system that is installed in Ukraine, this is a danger for Ukrainian independence."

New accord
The European Union has made it very clear it wants to see wholesale reform in the Ukrainian gas sector, to make the business more transparent. But Brussels has been frustrated by an apparent lack of resolve on the part of Ukrainian politicians.

This January, the anticipated gas crisis never happened. In November last year, Yulia Tymoshenko signed a new accord with her Russian counterpart, Vladimir Putin.

Russia agreed to waive stiff penalties for Ukraine, making it easier for Kiev to pay its bills. Mr Putin made it clear he was "comfortable" working with Mrs Tymoshenko when it came to the most sensitive - and lucrative - aspect of relations between the two countries. This amounted to a virtual endorsement of her candidacy for the post of president. It is not clear what, if anything, Mrs Tymoshenko promised Mr Putin in return.

Her rival, Viktor Yanukovych has criticised the deal, saying it is bad for Ukraine. But his policies on gas are still likely to be more acceptable to the Kremlin than those of the current president, Viktor Yushchenko.

Back-room deals
In an interview with the BBC, Mr Yanukovych's foreign affairs spokesman, Leonid Kozhara, said he could not rule out selling off part of Ukraine's network of pipelines and storage facilities to foreign companies, including Gazprom. 
"If we want to continue our role as the biggest transitor of Russian gas, we should think about the most effective transit system," he said. "Without Russian and European investment, this simply cannot happen."

Moscow has made no secret of the fact that it would like more control over Ukraine's gas transit system. The EU, on the other hand, wants to lessen its dependence on Russia and diversify its energy sources.

The current agreement between Moscow and Kiev seems to have averted a crisis this January. But much of the fine print has not been made public.
While the gas trade is conducted in back-room deals, shrouded in secrecy, it will continue to be a potential instrument of geopolitics, and Europe's energy supply remains far from secure.

[return to index] [Action Ukraine Report (AUR) Monitoring Service]
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Sunday's elections will pose the same old politicians when investors just want a stable economy. 

By Parmy Olson, Forbes, New York, NY, Fri, Jan 15, 2010

LONDON -- Elections used to be an exciting time in Ukrainian politics. The Orange Revolution of 2004 had seen Viktor Yushchenko wave to large crowds that were ecstatic at the prospect of political change, his face scarred with the pockmarks of an alleged dioxin poisoning by government agents. Apparent vote-rigging in favor of his opponent met public outcry, and Yushchenko eventually won the vote, ushering in a new era of high hopes for Eastern Europe's rising economic star.

This Sunday's election in Ukraine will be a more sobering affair.

Following years of political infighting, the now-hugely unpopular Yushchenko has ruled himself out of the running, leaving the race between his old rival from 2004, Victor Yanukovych, and incumbent prime minister Yulia Tymoshenko. Both are consummate politicians, but their fatigued electorate now needs more than charisma to get them out of the doldrums.

Ukraine's economy was one of the worst hit in the global financial crisis, its gross domestic product tanking by 14% in 2009 as capital hemorrhaged out of the country, while its currency, the hryvnia, went on a roller-coaster ride.

So distrusting is the bond market of Ukraine now that it is seen as the second most likely sovereign in the world to default on its debt, after Venezuela, according to credit market analysis firm CMA. Ukraine has a five-year cumulative probability of default of 54.6%.

At the height of the credit crisis, Ukraine's government made the mistake of issuing a moratorium on the withdrawal of local bank deposits, says Renaissance Capital's Ukraine analyst Anastasia Golovach. This heightened distrust among the populace, who withdrew individual funds in droves, drying up liquidity for the local banking system.

Facing a lack of funds itself, the government wasn't able to inject Ukranian banks with the capital they needed and sought external funding from foreign investors. Though this helped to an extent, the country desperately needed emergency funding from the International Monetary Fund. That eventually came through, with two tranches of loans and special drawing rights totaling $13 billion, and marking some of the only significant investment the country received last year. (See "Ukraine Is Europe's Problem.")

Today things are slowly improving, though Golovach points out this has nothing to do with the government's limited attempts at supporting the economy. Improvements in the global trade picture means the country's all-important steel sector, along with industrial output, is slowly recovering (November steel production reached its highest level since September 2008), banks are starting to lend again and the hryvnia has be stable since autumn 2009. Economist Ivan Tchakarov of Nomura International expects Ukraine's GDP to grow by 3.6% in 2010.

Yet politics are still important for the country's fragile economy. Drawn out political uncertainty will make foreign investors wary of putting their money back into Ukranian euro bonds or equities. And it could also affect the country's already-protracted talks with the IMF on the re-negotiation of its stand-by agreement.

Opinion polls suggest that none of the election candidates will manage to secure the 50% of the votes needed to win the election on Jan. 17. This means Tymoshenko and Yanukovych will probably have to advance to a run-off on Feb. 7. Yanukovych, the opposition-party leader who who is most preferred by the markets, is mostly likely to win, but that could also be followed by snap parliamentary elections in May, prolonging the political campaign until mid-year, says Tchakarov.

Worst-case scenario: the second round run-off between Yanukovych and Tymoshenko fails to produce a clear winner, leading to a lengthy political battle with challenged results.

But Tchakarov thinks this is unlikely. He's actually optimistic about Ukraine's economy, pointing out that the country lacks any major sovereign debt repayments in 2010--heartening news for those worried about a default.

Golovach agrees. "We think the main implication of the political situation is that politics are not damaging a rebound in the economy," she says. "Even if this election triggers political struggles and instability, I think the impact of this situation will be rather minimal. Fundamentally, we see positive trends in the economy."

So much for politics.

[return to index] [Action Ukraine Report (AUR) Monitoring Service]
Viktor Yanukovych and Yulia Tymoshenko will likely face off in second round

By Polya Lesova, Reporter, MarketWatch, Frankfurt, Germany, Thu, Jan 14, 2010

FRANKFURT -  Ukraine's upcoming presidential election may bring some measure of stability, but the deep economic crisis and the specter of more political volatility make this country a tricky place to invest.

No candidate is expected to win 50% or more of the votes in Sunday's election. The latest polls suggest that Viktor Yanukovych, seen as the pro-Russia candidate, and Yulia Tymoshenko, the prime minister, will likely face off in a second round.

Yanukovych is ahead of Tymoshenko in the polls, but given the high number of undecided voters, the result seems too close to predict. One thing seems certain, however: President Viktor Yushchenko, who led the so-called Orange Revolution of pro-democracy protests in late 2004, stands almost no chance of winning.

Tymoshenko, Yanukovych and Yushchenko have dominated Ukrainian politics in recent years, and the ongoing fights among them have spooked investors and largely paralyzed policy-making at a particularly dire economic time. The election is expected to abate some -- though not all -- of the political uncertainty in the country. 
"We expect more stability," said Aivaras Abromavicius, Kiev-based partner at East Capital, which is currently invested in Ukrainian stocks. "We're at a rock-bottom situation now with a very high cost of capital and still fragile banking system. Everyone realizes it all can change and improve when stability returns."

Ukraine, a country roughly the size of France, has a strategically important location between the European Union and Russia. Its economy contracted 15% in 2009, as demand for its key steel exports collapsed. The International Monetary Fund has provided a $16.4 billion aid package, but the fund recently suspended further loan disbursements because of Ukraine's failure to put in place tough economic reforms.

Investors have taken notice. As measured by CDS spreads, Ukraine is the second most likely country to default on its debt after Argentina, according to data from CMA Datavision. The local currency, the hryvna , has been very volatile, but finished 2009 basically flat against the U.S. dollar. Other emerging-market currencies, such as the Brazilian real, however, posted strong gains.

Both Tymoshenko and Yanukovych "realize they seriously need to address corruption and they need to resuscitate the economy," said Lilit Gevorgyan, an analyst at IHS Global Insight in London. "They desperately need to restart negotiations with the IMF."

The IMF is particularly important, since Russia is not in a position to help its neighbor financially because of its own economic troubles, Gevorgyan said.

Under Ukraine's political structure, the president, to be effective, has to cooperate closely with the prime minister. Both Yanukovych and Tymoshenko lack sufficient support in the Ukrainian parliament, the Rada, to muster a majority, so a period of political uncertainty after the presidential election appears inevitable.

"We expect a difficult political battle during and after the election to trigger a new round of negative news flow," said Anastasia Golovach of Renaissance Capital in Kiev. "Investors could decide to sell some instruments [stocks and bonds] because the stabilization of the political situation in unlikely in the short term," she said.

Ukraine's benchmark PFTS stock index rose 90% in hryvna terms last year after tumbling 74% in 2008. In dollar terms, the index rallied 83% in 2009, just as much as it dropped the previous year. Still, over the last decade, the index has surged 858% in dollar terms and 1,366% in hryvna terms, according to data from the PFTS Stock Exchange.

"Liquidity is very poor here, but if we have a stable political situation and a stable exchange rate for a few months, investors will start looking at this country," Abromavicius said.

The market capitalization of the PFTS, which consists of 20 companies, was $10.1 billion last year. The sectors that stand out are steel and iron ore, utilities and banks.

"Whoever wins the election, I really think it's going to be a positive watershed for Ukraine," said Jack Dzierwa, global strategist and co-manager of the $440 million Eastern European Fund at U.S. Global Investors. The fund had no investments in Ukraine as of last September.

"Having seen this rally last year, Ukraine -- considered one of the most risky markets - is not cheap, so you have to be selective and compare companies with their peers," especially in Russia, Dzierwa said.

Motor Sich, a manufacturer of aircraft engines, is one publicly traded company that investors should look at, observers say. Other potentially attractive firms include power generation company Centerenergo, Azovstal Iron and Steel Works, as well as Ukrtelecom, according to Dzierwa.

Investors can also get exposure through Ukrainian companies listed in London, such as Ferrexpo PLC /quotes/comstock/23s!e:fxpo (UK:FXPO 240.40, +9.25, +4.03%) , a Swiss-based producer of iron ore pellets with assets in Ukraine, poultry producer MHP S.A. and London-based JKX Oil & Gas PLC /quotes/comstock/23s!e:jkx (UK:JKX 292.40, -5.10, -1.72%) , whose principal interests are located in Ukraine and Russia.

Sugar producer Astarta-Kyiv and sunflower-oil producer Kernel Holding SA are among Ukrainian stocks listed in Warsaw.

Oleksandr Zholud, senior analyst at the International Center for Policy Studies in Kiev, said that investors see Ukraine as a risky and high-margin market. He expects the IMF to disburse the next tranche of money after the presidential election.

"All [presidential] candidates offer some additional social spending, and there is no means to increase budget spending other than by increasing the deficit," he said, adding that the central bank may have to finance the deficit by printing money.

"The question is whether the National Bank [of Ukraine] will be able to keep its ground and try to preserve the stability of the domestic currency," Zholud said.

The stakes are high not only for Ukraine's population of 46 million, but also for foreign investors. A number of international firms, especially banks, have moved into Ukraine in recent years, mostly by buying up local assets.

Austria's Raiffeisen International /quotes/comstock/11i!raiff (RAIFF 61.30, +0.65, +1.07%) , Hungary's OTP Bank, as well as France's BNP Paribas /quotes/comstock/24s!e:bnp (FR:BNP 58.05, -0.59, -1.01%) and Credit Agricole SA /quotes/comstock/24s!e:aca (FR:ACA 12.97, +0.07, +0.50%) all have a local presence. Russian banks, such as state-owned Sberbank and private lender Alfa Bank, are also represented.

Global steel producer ArcelorMittal /quotes/comstock/13*!mt/quotes/nls/mt (MT 46.58, -1.28, -2.67%) bought a major steel mill in 2005, while a Russian group is reportedly close to acquiring control of Industrial Union of Donbass, one of Ukraine's biggest steel companies.

"Ukraine is always promising," said Abromavicius of East Capital. "Let's hope that one day, sooner rather than later, it will live up to this potential."

[return to index] [Action Ukraine Report (AUR) Monitoring Service]

By Stefan Wagstyl, Financial Times, London, UK, Wed, Jan 13 2010

LONDON - Ukraine’s presidential election, the first since the 2004 Orange Revolution, is taking place in a far different atmosphere from the heady days of five years ago.

Then, many Ukrainians had high hopes the pro-west Viktor Yushchenko’s victory in a disputed poll would usher in a new age of fairness, stability and the rule of law.

But Mr Yushchenko has failed to deliver the political progress he pledged to make, in the face of political confusion, the power of corrupt vested interests and intense opposition from Yulia Tymoshenko, his prime minister and former ally, and Viktor Yanukovich, the opposition leader and Mr Yushchenko’s opponent in the 2004 election.

His failures have left many Ukrainians disillusioned with politics as they prepare to vote for a new president in two polling rounds, on January 17 and February 7.

To Mr Yushchenko’s fury, the opinion polls put Mr Yanukovich in the lead, with Ms Tymoshenko second and all other candidates trailing far behind, including the president himself. If the polls prove correct, Mr Yanukovich and Ms Tymoshenko will come out on top in the first round and fight each other in the second round run-off. Mr Yanukovich, with his base in the wealthy industrial east, has a strong core constituency.

But the charismatic Ms Tymoshenko, who is more popular in the west and centre, may have more success in gathering support from uncommitted voters and, in the second round, from those backing other candidates in the first round.

Mr Yushchenko’s likely defeat will remove from the presidency Ukraine’s strongest supporter of pro-west policies, including integration with the European Union and Nato. Ms Tymoshenko and Mr Yanukovich both seek to balance integration with the west with good ties with Russia, Ukraine’s powerful neighbour and principal energy supplier.

Both say that Nato membership is now off the agenda but insist they will not be in Moscow’s pocket and will persist with efforts to integrate with the EU. Mr Yanukovich, with his base in the east, has a long history of cooperating with Russia. But Ms Tymoshenko, as prime minister, has tried to convince Russian leaders that she has abandoned her former hostility towards Moscow.

The process of the elections and their aftermath may be as important for Ukraine as the identity of the winner. Deep in economic crisis, Kiev needs to persuade the International Monetary Fund to resume lending under a $16.4bn rescue programme that was suspended in the autumn after Ukraine failed to implement promised reforms. With gross domestic product down about 15 per cent last year, there is little time to waste if Ukraine is to fulfil hopes of modest growth of 3-5 per cent this year.

But there are dangers that the polls could be hit by claims of electoral fraud, which might take weeks to resolve, or be followed by uncertainty as the winning candidate tries to put together a majority in a fractious parliament. Early parliamentary elections cannot be ruled out.

Both leading candidates are committed to working with the IMF. The problem will be achieving the necessary political stability to implement tough IMF-linked economic reforms.

[return to index] [Action Ukraine Report (AUR) Monitoring Service]
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Agence France-Presse (AFP), Mariupol, Ukraine, Friday, January 15, 2010

MARIUPOL, Ukraine - Ukraine’s economy, which finds itself crippled when the crisis struck in late 2008, is expected to have deep impact on Sunday’s presidential elections, boosting the chances of opposition candidate Viktor Yanukovich of defeating his rival, Prime Minister Yulia Tymoshenko
Supporters of Ukrainian opposition Regions Party and presidential candidate Viktor Yanukovich hold his portrait during a rally in Kiev. AFP photo.

From the windows of his tiny bungalow Olexander Fyodorov surveys the smokestacks of the mammoth steelworks where he has just been sacked, another victim of Ukraine's economic misery.

"I was fired on Jan. 8. All my department was laid off," said Fyodorov, a 36-year-old father of two who worked for the Azovstal steel works in the city of Mariupol deep in the country's heavily industrial southeast. Ukraine's economy contracted 15 percent in 2009 and industrial output slumped even more, making it the European country worst hit by the global economic crisis.

Its Soviet-era heavy industry, hugely dependent on foreign exports, found itself crippled when the crisis struck in late 2008 and only now are economists detecting the slightest signs of recovery. The slump is expected to have a profound impact on Sunday's presidential elections, boosting the chances of opposition candidate Viktor Yanukovich of defeating his rival, Prime Minister Yulia Tymoshenko.

Fyodorov looks out at the grim industrial scene from his window where dozens of chimneys spit out plumes of smoke into the grey sky from the giant factory. "We will not be able to live on my wife's salary of 600 hryvnia ($75) a month. This will barely last for a week," he said.

Life for Mariupol's half million inhabitants is inextricably linked to industry, with the main employers being the Azovstal and Ilyich steelworks as well the Azovmash machine builders. "It's very difficult to find work in Mariupol. We are offered work like being a street sweeper for just 800 hryvnia ($100) a month," said Olexy Kostyliov, 34, who worked in construction and has been unemployed since August. "Before the crisis there were dozens of construction sites in Mariupol. But now there are only two. And the people who work there are earning much less," he added.

The director of the city's job centre, Yuri Chuprin, said that before the crisis there were 2,500 offers of employment for 1,300 registered unemployed per month. Now there are just 300-500 offers for 4,500 jobseekers. The downturn plays into the hands of Yanukovich, who has promoted himself as the champion of Ukraine's industrial east, where Russian rather than Ukrainian is the language of daily life.

Tymoshenko, prime minister since 2007, meanwhile has to defend her government's handling of the crisis. In her political broadcasts she has told Ukrainians they have managed to combat the worst of the crisis together. A crucial element of preventing meltdown has been a 16.4-billion-dollar standby credit from the International Monetary Fund.

But the IMF and independent economists were exasperated by populist wage and pension hikes agreed by parliament ahead of the election. The fund withheld the latest trance of the loan, and the head of its mission to Ukraine stepped down amid rumors she had grown frustrated with the government's policies. The World Bank forecast that the Ukrainian economy will see 2.5 percent growth this year, hardly impressive given the low comparative base.

But analysts are hoping for an improvement in investment once the elections are over. Unlike the industrialized east, the agriculture sector that is concentrated in the west enjoyed a bumper harvest in 2009. The government settled its December gas bill with Russia ahead of time, staving off fears another gas standoff between the two countries could leave Europe freezing. "The economy is emerging from the crisis," said the economist Olexander
Paskhaver, president of Kiev's Centre of Economic Development.

Investment bank Renaissance Capital said in a New Year's report on the Ukrainian economy that despite the grim data there was no longer a risk of a government default or economic meltdown. "Ukraine has been on the brink of what appeared to be a complete collapse many, many times in the past two decades. However, it has never quite gone the way expected, managing to rebound each time," the bank said.
[return to index] [Action Ukraine Report (AUR) Monitoring Service]

By Gregory Feifer, RFE/RL, Prague, Czech Republic, Thu, Jan 14, 2010

YENAKIEVO, Ukraine -- In this gritty town in eastern Ukraine, a small, derelict-looking brick cottage with a corrugated metal roof stands at the end of a snow-covered dirt track lined by bigger, wooden village houses. Barking dogs make the only sound here.

This is where Viktor Yanukovych lived a hardscrabble existence as a boy. Today, the 59-year-old politician is leading the polls ahead of Ukraine's presidential election on January 17 -- something former neighbor Alla Korotkaya says makes people here proud.

"He loved his teachers and parents," she says. "Those are good traits. He read books and respected the church. That's a good thing."

The future of Ukraine may hinge on the decision of voters like Korotkaya here in the industrial, largely Russian-speaking Donetsk region, where residents overwhelmingly support pro-Moscow Yanukovych. But in a country split between its east and west -- a division that brought thunderous change during the country's 2004 Orange Revolution -- issues are increasingly uniting both sides.

This is Ukraine's industrial heartland, in the Donbas coal basin. It's been walloped by the credit crunch and plummeting global metals prices brought on by the global financial crisis.

Although Korotkaya echoes general opinion here, after the microphone is turned off, some say Yanukovych's upbringing in a poor part of town, apart from the center, contributed to his troubled youth.

Jail Time
As a young man, Yanukovych served two jail terms for assault and robbery before becoming an electrician. He went on to climb the ranks of the Communist Party bureaucracy and twice served as regional governor before becoming Ukraine's prime minister in 2004.

That's when the Orange Revolution drove him from power after street demonstrations over his victory in a rigged presidential election. Heavyset and prone to gaffes -- he routinely confuses Austria and Australia, and famously misspelled the word "professor" on an election application -- Yanukovych briefly returned to power as prime minister in 2006.

Workers used to get 100 rubles a month, and they knew they could buy 100 kilograms of sugar with that. Now they get a thousand, which will buy you almost nothing. Now residents of Yenakievo hope if Yanukovych wins, he'll help their depressed town.

At a street market in the center of town, a loudspeaker announces advertisements as residents shuffle through slush and mud, avoiding the cars navigating potholed roads. Set amid fields and woods, central Yenakievo is a grim collection of old concrete-block apartment buildings, long stained dark grey. At one end hulks a massive Soviet-era metals factory belching smoke into the foggy air.

Oleksiy Kosach worked in Yenakievo's metals plant 48 years before being laid off last year. The weather-beaten 70-year-old says the Orange Revolution and the man it brought to power -- pro-Western President Viktor Yushchenko -- have done nothing for Ukraine.

"Just like the collapse of communism in 1991 did nothing for Ukraine," he says. "Workers used to get 100 rubles a month, and they knew they could buy 100 kilograms of sugar with that. Now they get a thousand, which will buy you almost nothing."

Like many here, Kosach says he's just able to survive on his pension and doing odd jobs. He supports Yanukovych's promise to improve ties with Russia and criticizes Yushchenko's drive to promote Ukrainian language. That's seen as a prerogative of western Ukraine, which became part of the Soviet Union only during World War II, and supports the leaders of the Orange Revolution.

But despite the cultural differences between east and west, there are growing signs Ukraine's two halves are increasingly united by common concerns.

The main issue for Kosach and the vast majority across Ukraine is jobs. Yanukovych's closest rival, Prime Minister and Orange Revolution heroine Yulia Tymoshenko, has been campaigning hard in eastern Ukraine, and is hoping she'll win enough votes here to beat Yanukovych in a second round of voting next month. 

Still, Kosach speaks for many here saying he'll vote for Yanukovych because he's "our guy," even though he doesn’t believe the election will do anything to improve his life.  "I'm not expecting anything good from the election," he says. "Whoever comes to power, they're all the same. They don’t care about us, only themselves."

Many Ukrainians say politics are inseparable from business, and that both are corrupt. Yanukovych's most important backer, tycoon Rinat Akhmetov, is Ukraine's richest man. He owns the metals plant here, which he runs from his base nearby in the city of Donetsk.

Boom Town
Forty minutes away from Yenakievo by car, Donetsk is considered the capital of the Donbas region. If you parachuted here, you'd be forgiven for thinking you'd landed in a provincial Russian city. Almost completely destroyed during World War II, most of its buildings went up under the Soviet Union.

A scattering of shiny new office and hotel buildings are the products of Ukraine's short-lived post-Orange Revolution economic boom, brought to a screeching halt by the financial crisis. Akhmetov owns many of the new structures. He's made himself popular for one of them: a world-class football stadium that opened last year ahead of the Euro 2012 competition that Ukraine will co-host with Poland. It's the one landmark residents insist visitors must see.

Inside the headquarters of Yanukovych's Party of Regions, office workers are preparing for the election. The head of Yanukovych's campaign, Oleksandr Kasyanyuk, himself acknowledges the near impossibility of separating business and politics. He says that's because Ukraine is still in the process of developing both its democracy and its economy.

"The state is still set up in a way that if you don't protect yourself politically," he says, "you may not be able to protect your business."

Critics say that "protection" includes officials channeling state funds to their parties and running smear campaigns against rivals on media owned by their business backers, something they accuse all sides of committing.

Kasyanyuk shows a leaflet showing Yanukovych in an unflattering pose he says was printed by the Tymoshenko campaign. Tymoshenko on January 13 accused Yanukovych of preparing massive vote fraud in the Donetsk region. Yanukovych shrugged off the accusations.

Tymoshenko's campaign organizers in Donetsk praise the Orange Revolution for bringing democracy and free speech to all of Ukraine, including the east. During the Orange Revolution, a protest here mustered only 150 people, who were dispersed and beaten by police. Tymoshenko's campaigners say that can't happen now.

Donetsk's new soccer stadiumNewspaper editor Serhiy Furmanyuk was a key opposition voice in 2004. He says Akhmetov and other business leaders here relied on criminal groups to maintain control and suppress competition.

"They're all still there," he says. "The criminals may no longer act so openly; in the past five years, people may have stopped sensing that they're returning to power. But all their old habits remain."

Furmanyuk criticizes Tymoshenko and Yushchenko for failing to reform a corrupt justice system and support civil society while they had the chance, instead of bogging down in the political infighting that has characterized much of the past five years in Ukraine.

Furmanyuk, for one, believes Tymoshenko's accusations that Yanukovych will rely on his support here to carry out electoral fraud. If either Tymoshenko or Yanukovych fails to accept the election's results, a standoff may prompt another political crisis.

Furmanyuk says the election is crucial for Ukraine's future. He predicts more mass street protests, only much uglier than in 2004. "The first Orange Revolution was optimistic," he says. "Those who witnessed it were lucky; they saw how wonderful humanity can be. But as they say, a tragedy repeated twice is a farce. The second time won't be a protest of belief, but a show of force."

This time, Furmanyuk says, Tymoshenko and Yanukovych will fight each other "to the end."

[return to index] [Action Ukraine Report (AUR) Monitoring Service]

By Stefan Wagstyl and Roman Oleachyk, Financial Times
London, UK, Friday, January 15 2010

KIEV/LONDON - Ukraine's business oligarchs are split over the country's presidential contenders, with some backing Viktor Yanukovich, some Yulia Tymoshenko, and others hedging their bets.

"Ukraine's elite is tied up in political rivalries," says Sergey Taruta, a steel billionaire who favours Ms Tymoshenko, the prime minister, in the first round of the election on Sunday. "Some leading business groups are actively involved in [politicians' battles], manipulating the political situation for personal gain."

Unlike their Russian counterparts, who have seen their freedoms curtailed, Ukraine's oligarchs retain considerable influence. The top 10 businessmen dominate the steel and chemicals industries, Ukraine's biggest exporters, own much of the media, and channel money into politics, including funds for election campaigns.

The economic crisis hit Ukraine hard, forcing many oligarchs to scramble for funds, lobby for state support and cut political spending. Vadim Karasiov, a political adviser to Viktor Yushchenko, president, says: "Their pockets are not as deep as they were."

But still deep enough to make a splash. In the first presidential election since Mr Yushchenko's Orange Revolution triumph in 2004, the biggest beneficiary of billionaire backing is Mr Yanukovich, the opposition leader then defeated by Mr Yushchenko but now the clear frontrunner.

He is supported by Rinat Akhmetov, Ukraine's richest man and president of Shaktar Donetsk, Ukraine's second most successful football club. Both men hail from the east Ukraine steel belt, where Mr Yanukovich launched his career and Mr Akhmetov founded his fortune. His other business backers include Dmitry Firtash, the gas trading billionaire, for whom the election is particularly important.

Mr Firtash was last year stripped by Ms Tymoshenko and Mr Putin of his key role in the east European gas business when Rosukrenergo, a company he co-owns with Gazprom, the Russian gas group, was cut from the trade. Mr Firtash's hopes of regaining influence rest on a Yanukovich victory.

Ms Tymoshenko's wealthiest backers are Mr Taruta and Vitali Gaiduk, former partners in ISD, a steel group. In 2004, they backed Mr Yushchenko but they moved to Ms Tymoshenko since Mr Yushchenko's perceived weaknesses as president emerged.

Mr Taruta says Mr Yushchenko, languishing among the electoral also-rans, failed to promote economic reform, involved himself in "political fights" and pursued pet projects "such as reawakening Ukraine's national identity".

Petro Poroshenko, a confectionery magnate once close to Mr Yushchenko, has also migrated to Ms Tymoshenko, alongside a successful younger oligarch, the 36-year-old Kostyantin Zhevago, majority owner of Ferrexpo, an iron ore company. Mr Yushchenko now receives only sporadic business support.

Businessmen hedging their bets include Igor Kolomoisky and Gennady Bogolyubov, shareholders in the Privat Group, a diversified industrial and banking combine. They stayed out of the electoral fight in 2004 and are doing the same now - avoiding giving one politician their support but retaining a keen interest.

Viktor Pinchuk, head of the Interpipe group and son-in-law of Leonid Kuchma, Mr Yushchenko's predecessor, is in a similar position. In 2004, as an MP he backed Mr Kuchma's choice, Mr Yanukovich, for the presidency. He has since left parliament, avoided day-to-day politics and concentrated non-business activity on promoting Ukraine's European Union integration. In the current campaign, Mr Pinchuk's television channels have given candidates equal time.

Despite their divisions, business leaders all claim to want political stability, effective government and EU-oriented reforms. While Ukraine has little hope of rapid EU membership, it is negotiating a deep free trade agreement with Brussels - a deal that would improve Ukrainian companies' access to markets.

In practice, oligarchs drag their feet over change that might hurt their positions. Viktor Pynzenyk, a former finance minister, says: "The business and political elite can adjust to competition from abroad and it would boost the value of their assets in the long run. But they avoid it."

Mr Taruta says: "We see that the government is split with each political grouping controlling separate branches of government for personal gain . . Monopolies are thriving in the fight and the infighting is not allowing Ukraine's economy to develop."

[return to index] [Action Ukraine Report (AUR) Monitoring Service]
U.S.-Ukraine Business Council (USUBC):
Promoting U.S.-Ukraine business relations & investment since 1995.

Analysis, Mar'yan Zablotskyy, Analyst, Ernst Ukraine Research
Ernst Bank Group, Kyiv, Ukraine, Wed, Jan 13, 2010

KYIV - On January 17, Ukraine will hold the first round of its presidential election. Two major candidates are expected take two leading positions: Viktor Yanukovych (runner up in the previous election) and current Prime Minister Yulia Tymoshenko. Neither seems to have the necessary support of 50% +1 vote and a second round is expected to be held on February 7.

Third place in the first round is likely to be battled for by Sergiy Tigipko (current CEO of Swedbank Ukraine, former head of the Ministry of Economics, the NBU), Arsenij Yatsenyk (former head of the NBU, Ministry of Economics, Ministry of Foreign Affairs) and current President Viktor Yushchenko (former PM and head of the NBU). The strong positions of Tigipko and Yatsenyk indicate the demand for qualified professionals and economic reforms.

The political news is overshadowed by ratings from numerous agencies. Often, these ratings are not unbiased and tend to favor a particular candidate. Even so, among the ratings published during December, none show a possible victory for Tymoshenko in the second round. Thus, any result other than a victory for Yanukovych on February 7 would come as a surprise.

Tymoshenko is often perceived (especially by Western media) to be a more investment-friendly and pro-Western candidate, as well as a proponent of an open market economy. However, there have been a number of policies and actions in recent years that have contradicted this image.

Examples include:

       (1) the surge in non-returns of VAT tax to exporters;
       (2) the state Treasury did not return collateral to bidders in a privatization auction;
       (3) the Naftogaz and Ukrzaliznytsa debt restructurings; and
       (4) the non-implementation of numerous obligations to the IMF.

Also, Tymoshenko's political party deputies in the Parliament proposed a law that was supposed to ban foreigners from getting top positions in commercial banks, as well as limit foreign banks' capital and asset shares in the Ukrainian market. There have been numerous attempts from the government to undermine the independence of the National Bank. Altogether, it would be difficult to assume increase in positive sentiment from investors in the case of a Tymoshenko victory.

Yanukovych's campaign has been based on promises of high social expenditures and a tax decrease in the longer term. Yanukovych was the proponent of the increase in social expenditures worth 5% of GDP for 2010. This became one of the main reasons why the IMF has refused to continue cooperation with Ukraine. Yanukovych is most commonly perceived by the Western media as a 'pro-Russian' politician, following Russia's strong backing in the previous elections.

However, unlike in previous elections, Russia's dominant political party United Russia has not provided any official backing for Yanukovych this ime. Currently, Yanukovych's official program does not propose EU integration, unlike that of Tymoshenko. However, both candidates' official programs are rich with promises of European standards of democracy, business and social environments.

Both candidates do not propose NATO membership for Ukraine. It is widely expected that, despite any tendencies in terms of foreign policies, the new president will be forced to follow national interests and adopt a pragmatic approach in this area.

Similarly, economical policies leave little room for maneuver. Fiscal consolidation and implementation of economic reforms are necessary. With all of the promised expenditures, Ukraine may find itself with financing needs close to 15% of GDP (up from 10% of GDP in 2009), which is hardly manageable.

Thus, it is quite likely that we will see steps quite different from those declared during the campaign. Otherwise, Ukraine will face the risk of high inflation or significant bilateral debt to foreign countries.

It is expected that the IMF mission will return to talks over the rest of the USD 17bn loan (USD 6bn for disbursement remains). The new mission chief will head the IMF mission this time - Athanasios Arvanitis, after Ceyla Pazarbasioglu decided to quit the position.

Should there be a joint position held by the president, government and NBU to implement fiscal consolidation and economic reforms, Ukraine would have good chances of receiving the next tranche of the loan from the IMF. However, such a joint position may prove problematic, as Tymoshenko at least formally still holds the majority of seats in the Parliament, which is necessary for electing the government. Thus, there are chances of preliminary parliamentary elections soon after the presidential election, should Yanukovych fail to gain comfortable support in the Parliament. This could put Ukraine in a full election cycle until June.

NOTE: This research report was prepared by Erste Group Bank AG ("Erste Group") or its affiliate named herein. The information herein has been obtained from, and any opinions herein are based upon, sources believed reliable, but we do not represent that it is accurate or complete and it should not be relied upon as such. All opinions, forecasts and estimates herein reflect our judgement on the date of this report and are subject to change without notice. The report is not intended to be an offer, or the solicitation of any offer, to buy or sell the securities referred to herein. From time to time, Erste Group or its affiliates or the principals or employees of Erste Group or its affiliates may have a position in the securities referred to herein or hold options, warrants or rights with respect thereto or other securities of such issuers and may make  a market or otherwise act as principal in transactions in any of these securities.
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
Presidential elections could usher in political stability and give the dismal economy a chance to grow again 
By James M. Gomez and Daryna Krasnolutska, Bloomberg News Reporters
Business Week, New York, New York, Fri, January 15, 2010
It's not even February yet, and 2010 is shaping up to be a bad year for Viktor Yushchenko, who survived a poisoning attempt by political opponents in 2004 and went on to be elected president of Ukraine. Voters are tired of Yushchenko and seem far fonder of two other candidates vying to succeed him this week: opposition leader Viktor Yanukovych and populist Prime Minister Yulia Timoshenko.

Yushchenko, 55, feuded with Russia and cozied up to the U.S. and the European Union, so should Western policymakers and investors be worried about a Ukraine tilted more toward Moscow? Probably not. Both Yanukovych, 59, who is ahead in the opinion polls, and Timoshenko, 49, say they want better ties with both Moscow and Europe.

Political stability under a new president could unfreeze a $16.4 billion bailout loan from the International Monetary Fund, ease conflicts with Russia, and improve the prospects for a free-trade accord with the European Union, predicts Sacha Tessier-Stall, head of foreign policy at Kiev's International Centre for Policy Studies. "No matter who wins, there will be an improvement," he says.

The election may also improve Europe's energy security. The EU relies on Russia for a quarter of its natural gas, and 80% of that passes through Ukraine, a country of 46 million that's about as big as France. Disputes over prices led Russia to turn off the gas to Ukraine in January 2006 and January 2009, which in turn caused fuel shortages in the EU.

In November, Timoshenko and Russian Prime Minister Vladimir Putin renegotiated the two countries' gas contract for 2010, easing concerns about a shutoff. "The risk to Europe has decreased," says Gergely Varkonyi, an energy analyst at Deutsche Bank (DB) in Budapest.

With 18 candidates competing, no one is likely to gain the 50% majority needed to win outright. That means Yanukovych and Timoshenko will likely face each other in a runoff on Feb. 7. Whoever emerges triumphant already knows how bad the path forward is. Ukraine's gross domestic product shrank an estimated 14% in 2009.

The country's currency, the hryvnia, was the world's worst performing vs. the U.S. dollar in the year ended in September. And Ukraine is the world's second-least creditworthy economy behind Argentina, as measured by the cost of credit-default swaps that protect bondholders.

High on the agenda for the new president will be unfreezing IMF money. Ukraine secured the loan in late 2008 after the global credit crisis crippled its exports and financial sector. But the IMF delayed a $3.4 billion installment in November after lawmakers failed to pass a 2010 budget while raising social spending. "The political infighting that has paralyzed the country has to stop," says Jorge Zukoski, president of the American Chamber of Commerce in Ukraine.

If Ukraine stabilizes its politics after the election, the country stands a chance of returning to growth. That could give foreign investment a boost. Since Yushchenko took over the presidency in early 2005, Ukraine has attracted some $36 billion in foreign direct investment from companies such as Luxembourg's Arcelor-Mittal (MT), Italy's UniCredit Group, and French retailer Groupe Auchan. Between 1999 and 2004, the country pulled in just $5.7 billion in foreign direct investment.

Under Yushchenko, the country won membership in the World Trade Organization and the EU declared Ukraine a market economy. Now, both Yanukovych and Timoshenko support signing an association agreement with the EU, which includes a free-trade pact. Says Ivan Tchakarov, an emerging markets analyst at Nomura Holdings in London: "Ukraine can be a positive surprise this year."

NOTE: Gomez is a reporter for Bloomberg News. Krasnolutska is a reporter for Bloomberg News.

[return to index] [Action Ukraine Report (AUR) Monitoring Service]

By Stefan Wagstyl and Roman Olearchyk, Financial Times, London, UK, Jan 6 2010

KIEV/LONDON - Vasyl Humeniuk, a veteran small-town Ukrainian politician, has changed his name in an attempt to capitalise on the crisis-hit country's widespread political disillusionment.

With Ukraine holding presidential elections this month, some voters are so disgusted with political turmoil, economic recession and rampant corruption that they want nothing to do with any of the main candidates. They can register their anger by putting a cross on the ballot form beside the words "against all". But many see this rejection of all candidates as a wasted vote. So the enterprising Mr Humeniuk is offering a new option. He is running under the name Vasyl Protyvsikh - or Vasyl Against All.

"I have now been watching for 19 years how the elite is ripping Ukraine off. It is time for a man of the people to take charge," says the 63-year-old head of a chamber of commerce in the western town of Ivano-Frankivsk. Mr Humeniuk is no democratic idealist, having worked closely with Leonid Kuchma, the former authoritarian president of Ukraine. He is an opportunist, seizing his 15 minutes of fame, but his candidacy shows the depths to which Ukrainian politics has sunk on the eve of the first presidential election since the disputed 2004 poll that sparked the Orange Revolution.

In spite of the public disillusion, however, the poll matters to Ukraine, a strategically important state lying between Russia and the European Union which was, pre-crisis, among the continent's top emerging markets.

The new president willneed to secure political stability, revive the recession-hit economy, maintain an International Monetary Fund rescue programme and balance the competing foreign policy demands of Moscow and the west. With Ukraine sitting astride the main route for Russia's EU-bound gas exports, Kiev can influence life far beyond its borders, as in last winter's gas dispute with Moscow when supplies to a big slice of eastern Europe were cut off for two weeks.

The victor's policy plans will matter less than his or her ability to stabilise the political order enough to permit economic recovery. Rory MacFarquhar of Goldman Sachs, the US investment bank, says that even more important than the identity of the winner is the way politicians handle the campaign, the election and any post-election manoeuvring. "There is a sense that anything is possible because the stakes are so high."

Eighteen candidates, including Mr Humeniuk/Protyvsikh, are standing in the first round on January 17, with the two who get the most votes going into a second on February 7. Whoever wins, the biggest loser is likely to be President Viktor Yushchenko, who is clocking under 5 per cent in opinion polls. The hero of the Orange Revolution wins praise for replacing Mr Kuchma's feared regime with multi-party democracy.

But, in the view of many Ukrainians, he has lost the public's trust by failing to control corruption or impose his authority on his rivals, including Yulia Tymoshenko, his prime minister, or Viktor Yanukovich, his opponent in 2004.

The president's heroic reputation has also suffered from some decidedly unheroic financial allegations. Ms Tymoshenko has accused his "inner circle" of profiting corruptly from the shady gas trade. Mr Yushchenko has denied the claim.

For the tens of thousands who took to the streets after the previous presidential election, it is a bitter disappointment. As Boris Kryvytsky, a 56-year-old businessman who helped organise the protests, says: "The ideas that we stood for in the Orange Revolution were right, but we made the mistake of trusting the wrong leaders. Nothing will change until we rid this country of the bandits."

To Mr Yushchenko's fury, the election frontrunners are Mr Yanukovich and Ms Tymoshenko. They differ greatly in style but not so much in policy - nor in the drive of followers hungry for the spoils of office.

In many European countries, Mr Yanukovich would have lost all political credibility for fighting in 2004 a campaign widely condemned as fraudulent. But in Ukraine he has retained control of the eastern industrial heartland and leads the largest party in parliament. He is also supported by key oligarchs, headed by Rinat Akhmetov, Ukraine's richest man.

The tough 59-year-old former lorry driver, who worked his way up the administrative ladder in Soviet times, has refashioned himself as a democrat. With the help of US public relations advisers, he has learnt to work the crowds, listen and smile. In interviews, he has adopted the soundbite. Serhiy Lyovochkin, an aide, says spending time out of power has changed Mr Yanukovich.

Ms Tymoshenko, 49, came to prominence in the 1990s by making a fortune in the murky Russia-Ukraine gas trade, in which little known companies act as intermediaries between Gazprom, the Russian gas group, and its customers. Since backing Mr Yushchenko in the Orange Revolution, she has comprehensively upstaged him and captured the support of the revolution's followers.

To her critics, she is an unpredictable populist with authoritarian instincts. After the Orange Revolution, she frightened business by threatening to renationalise scores of privatised companies - an attack on the oligarchs who, under Mr Kuchma, had won highly prized state assets in privatisations beset by charges of cronyism. She gave up in the face of overwhelming odds but the assault has not been forgotten.

In the past year, she has won some praise for her handling of the economic crisis and relations with the IMF. But business people have complained about her penchant for direct intervention in markets, with threats of caps on prices, margins and profits in key sectors, including agriculture.

Many in business are also sceptical about Ms Tymoshenko's goal of changing the constitution to end the division of power between parliament and the presidency in order to return to the strong presidential rule that prevailed before the Orange Revolution. While the chances of forcing such reforms through the fractured political system are low, the very idea worries her critics.

Even some liberals who backed the Orange Revolution now find themselves favouring Mr Yanukovich as the least bad choice. The pollster Ilko Kucheriv says: "If we have Yanukovich as president it will be shameful for Ukraine. But he is not as cynical as Yulia. Our parliamentary democracy has weaknesses but it is fundamentally better than the alternatives."

However, the price of a Yanukovich victory in the presidential election could be further political uncertainty because Ms Tymoshenko holds a majority, albeit slim, in parliament. Mr Lyovochkin says if there is even "a small chance" of forming a coalition, Mr Yanukovich will try. Otherwise there will be parliamentary elections, bringing extra turmoil. JPMorgan, the US bank, sees this risk as so significant that it backs Ms Tymoshenko, saying she would stabilise Kiev faster than Mr Yanukovich.

Post-election instability would bode ill for the fragile economy. The IMF came to Kiev's rescue in autumn 2008 with a $16.4bn loan to stabilise the crippled banking sector and the bud-get. But, with election drums beating, and president and prime minister in conflict, Kiev failed to deliver promised reforms; in October the Fund suspended a $3.8bn tranche.

Ukraine responded last month with a plea for emergency finance to help pay bills - including crucial monthly gas payments to Moscow. Citing a lack of political consensus, and desperate to stay out of Kiev's politics amid claims by Ms

Tymoshenko's critics that it has been soft on her government, the IMF declined. But late last month it allowed Kiev to stay afloat by approving a $2bn transfer to government accounts from IMF-backed central bank reserves to cover external liabilities including Russian gas bills.

The public finances are in "an extremely difficult situation", Hryhoriy Nemyria, deputy prime minister, told the FT last month, warning of risks of a spill-over to other states. "The cost of inaction is greater than the cost of action," he said.

Both Mr Yanukovich and Ms Tymoshenko have pledged to stick with the IMF programme, which includes spending cuts to reduce the budget deficit from about 10 per cent this year to 4 per cent. But they will not spell out the details before the polls.

After dropping about 15 per cent in 2009 in the biggest decline in Europe outside the Baltic states, Ukrainian gross domestic product is expected to stage a moderate recovery of 3-5 per cent in 2010. But the country remains vulnerable to new shocks.

One such surprise could come from the Russia-Ukraine gas trade. Ms Tymoshenko and Vladimir Putin, her Russian counterpart, have promised that this winter there will be no repeat of 2009's contract dispute and supply break. But that depends on Kiev's ability to pay its bills.

Ms Tymoshenko and Mr Yanukovich both approach Moscow pragmatically. Mr Yanukovich has a longer record of co-operating with Russia than Ms Tymoshenko. But, to Mr Putin's satisfaction, she has accepted chunky rises in gas prices. Mr Yanukovich's recent pledges to fight for a better deal for Ukraine will not have en-deared him to Mr Putin.

Both have distanced themselves from the pro-west policies of Mr Yushchenko, who irritated Russia by pursuing Nato membership. The Kremlin in 2008 made clear its intention to stop further Nato expansion through the war in Georgia, which had also hoped for membership before its defeat. Sergei Karaganov, head of Russia's Council on Foreign and Defence Policy, says a renewed Nato push into Ukraine would cause "a threat of a large-scale war in Europe". In Kiev, the matter is no longer on the agenda.

But integration with the EU remains popular. Among Mr Yushch-enko's few successes was securing World Trade Organisation membership, which opened the way for deep economic co-operation with Brussels, including a free trade agreement now under negotiation. However there are many difficulties, with institutions, notably the courts, falling far short of EU standards. Mr Kucheriv says: "We have a simulation of European behaviour. Not the reality . . . When

Ukraine's political leaders talk of integration with the EU they don't know what they are talking about."

Neither a Yanukovich nor a Tymoshenko presidency would change that very much. Ukraine's best hope is that the new president can provide the stability that has been missing in the past five years. That may sound meagre but, for a country mired in prolonged instability, it would be something.

With its 46m people and abundant coal and iron ore and farmland, Ukraine has great economic potential - but also suffers from instability, poor infrastructure and corruption. Foreign investors swallowed their doubts, contributing to growth of 8 per cent in 2007. But the economic crisis - which hit steel, the main export, hard - led to a fall in gross domestic product of about 15 per cent last year.

With support from an International Monetary Fund package, the country could enjoy a 3-5 per cent recovery in 2010, largely due to rebound effects and improvement in steel markets. But with the currency down about 50 per cent against the dollar since mid-2008, debtors may still struggle to pay foreign creditors. The credit default swap rate, a measure of perceived default risk, remains among the world's highest.

'There are all sorts of regulations, some useless, most unevenly enforced'

"I would not advise anyone to open a small business here," says Euan McDonald, the Scottish owner of Baraban, a bar in central Kiev that is popular with foreigners. "There are all sorts of regulations, some useless, most unevenly enforced. It's just one thing after another. As soon as you handle one problem, another comes along. The regulators can come after you any time to generate some extra pocket cash."

The daily struggle of Mr McDonald, unsure whether to shut or keep "bumping along" in Ukraine's muddy sea of graft and red tape, is not an exception. The country ranks among the worst in terms of corruption perceptions, according to Transparency International, the watchdog. It is 146th - alongside Russia and Zimbabwe - out of 180 states.

Ukrainians routinely bribe underpaid public officials to cut through red tape and secure access to services. Around $10-$100 can get traffic police, sanitation or fire safety officials to overlook alleged violations. Kiev's constitution guarantees free healthcare but doctors demand payments on top of their $100-$200 monthly official salaries for "quality care".

Securing favourable court rulings is big business. One regional judge, Ihor Zvarych, is awaiting trial for taking bribes, with more than $1m in cash found in his home. He has denied the claim.

Corruption is learnt from an early age. Students bribe teachers to pass exams. Politicians have been accused of purchasing diplomas without ever attending classes. Andriy Kislinsky was relieved of his duties as deputy head of the secret service late in 2009 after officials found his degree was illegitimate.

In one survey, 63 per cent of Ukrainians indicated they had been involved in corrupt transactions with officials over the past 12 months. An illegal payment to inspectors can, for example, quickly secure a building permit. If not, "it takes 476 days to get a construction permit for a two-storey warehouse in Ukraine. In the US it takes just 40 days," says Georges Massoud, managing partner in Ukraine for McKinsey, the consultancy.

This environment keeps investment at bay and stifles competition, leaving Ukraine's economy dependent on inefficient steel and chemical factories controlled by a handful of oligarchs.

In a break from normal diplomatic language, José Manuel Pinto Teixeira, the European Union representative in Kiev, recently said: "Corruption, red tape, administrative obstacles of every kind - these are only things that serve the interests of those who today control the economy because they do not want competition. They are allergic to competition."

Viktor Pynzenyk, a former finance minister, says: "The business and political elite can adjust to competition from abroad and it would boost the value of their assets in the long run. But they avoid it."

[return to index] [Action Ukraine Report (AUR) Monitoring Service]

Reuters, Kyiv, Ukraine, Tue, Jan 5, 2010 

KYIV - Ukraine holds a presidential election on Jan. 17, its first since the pro-Western "Orange Revolution" of 2004/5 which led to a re-run poll that was won by President Viktor Yushchenko. Most commentators expect there to be no outright winner on Jan. 17 and foresee a second round of voting on Feb. 7.

Following are key facts about Ukraine's politics and finances and why the ex-Soviet state is especially vulnerable to heightened risk aversion among international investors.

[1]  Ukraine has been plagued by political turbulence since "Orange Revolution" protests in 2004 brought to power President Viktor Yushchenko and a team committed to moving closer to the West and joining NATO and the European Union.
[2]  Rows pitting Yushchenko against his former ally Yulia Tymoshenko split the "orange" camp and brought down governments, blocked policy-making and delayed a $16.4 billion IMF lifeline earlier this year.
[3]  Ukraine fell into a deep recession marked by plunging steel exports and a much weakened currency which in turn destabilised the banking sector. The economy contracted by up to 15 percent in 2009.
[4] Ukraine's fractious political life reflects the country's longstanding division into the nationalist west and centre, which looks to the EU and United States, and the Russian-speaking east and south, which are friendlier towards Moscow.
[5]  Relations with Russia, bumpy throughout the post-Soviet period, have sunk to unprecedented lows under Yushchenko. The Ukrainian president denounced Moscow's military intervention in Georgia in 2008, while his Russian counterpart Dmitry Medvedev called him anti-Russian.
[6]  Ukraine depends heavily on Moscow for gas supplies and is a transit country for gas going to Europe. Disputes over gas prices between Moscow and Kiev have led to supply cuts to Europe, which receives 25 percent of its gas from Russia.

[1]  The hryvnia currency plummeted in late 2008 as the economic crisis took hold, losing over 60 percent of its value to the dollar as its exports sank.
[2]  It has since strengthened to about 8.0 per dollar, from a historic low of almost 10/$ in December 2008 and compared to that year's peak of 4.5/$.
[3]  Its weakness has made it difficult for millions of Ukrainians to pay back debt which they took out in dollars. That in turn has shaken the banking sector.
[4]  The central bank, using its reserves and IMF funds, has intervened on the foreign currency market on an almost daily basis since the start of the crisis to prop up the hryvnia.

[1]  Ukraine has received over $10 billion from the IMF since November 2008. The loan came on condition of fiscal prudence, recapitalisation of banks and a liberal exchange rate mechanism.
[2]  The Fund suspended its programme and refused to disburse a $3.8 billion tranche after parliament and the President raised the minimum wage contrary to the government's wishes, costing the budget potentially billions.
[3]  IMF chief Dominique Strauss-Kahn said the fund would resume work only after the presidential election.
[4]  But in a surprise move, the IMF did allow the central bank to spend $2 billion of its foreign currency reserves -- effectively answering Ukraine's demands made in December for an emergency loan of similar proportions.
[5]  Foreign exchange reserves as of the end of November dipped to $27 billion. The reserves amounted to $32 billion at the start of 2009 and were at record highs of almost $38 billion in the summer months of 2008.
[6] Analysts estimate the trade and current accounts as close to balanced in 2009 as imports dropped because domestic demand waned and exports become better priced because of the weakened hryvnia. 

[1]  The central bank estimates Ukraine's foreign debt obligations in 2010 will be about $20 billion, $18 billion of which is commercial debt.
[2]  The government said it had paid all its domestic and foreign debt due in 2009 on time and in full, despite investors' fears throughout the year of some sort of default.
[3]  It has however restructured a so-called quasi-sovereign bond of state energy firm Naftogaz by swapping its foreign debt for a new issue worth $1.6 billion.
[4]  It is also in the process of changing the terms of another quasi-sovereign bond of its state railway company, news of which sent jitters round European markets.

Ukraine was forced to restructure its debts in 2000 and made the final payments only in 2008. Credit default swaps -- a tradable instrument that measures risks of debt default -- have been the highest in the world for Ukraine. Compiled by Sabina Zawadzki; Editing by Charles Dick)
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
Ukraine Macroeconomic Report From SigmaBleyzer: 

Factbox, Reuters, Kiev, Ukraine, Tuesday January 05, 2010 

KIEV - Ukraine's central bank said on Tuesday it had liquidated the Ukrainian Financing Group -- a tiny commercial bank that is the seventh victim of the financial crisis that has gripped Ukraine for over a year.

The bank was 170th in assets out of over 180 operating in Ukraine. It had assets of 135 million hryvnias ($17 million).

The banking sector has been hit by a sharp depreciation of the currency -- 60 percent from a peak last year -- and a soaring number of non-performing loans as a deep economic recession hits companies and consumers alike.

The following is a list of banks placed in receivership, those allowed to go under, those helped by the government and also a list of the top foreign banks in Ukraine.

Banks' assets data taken from the central bank are correct as of Oct. 1, 2009.

Name Size Assets Date
million hryvnias ------

[1]    Nadra Bank * 11 25,893 10 Feb 08
[2]    Ukrprombank * 18 10,223 21 Jan 09
[3]    Rodovid 24 9,098 16 March 09
[4]    Hypobank 65 1,473 2 Oct 09
[5]    BIG Energya 75 1,135 16 March 09
[6]    Zakhidinkombank 98 775 13 Feb 09
[7]    Inprombank 105 660 11 Sept 09
[8]    Volodymyrsky 136 352 17 July 09
[9]    Transbank 143 301 2 March 09
[10]  Dnistr 146 277 17 April 09
[11]  Bank Stolitsa 154 207 20 July 09
[12]  Dialogue Bank 158 189 16 Oct 09
[13]  Arma 167 163 17 April 09

TOTAL ASSETS 890 billion hryvnias ($110 billion) - banks in receivership 51 billion hryvnias ($6.4 billion)

* Nadra and Ukrprombank are likely to be liquidated after the central bank transferred their deposits to freshly nationalised Rodovid Bank.

The central bank automatically freezes all withdrawals of deposits for six months when it places a bank in receivership.

Bank Size at the time

[1]  European 53
[2]  National Standard 70
[3]  Vostochno-Evropeyskiy 81
[4]  Regional Development Bank 94
[5]  Odessa Bank 111
[6]  Prichornomorya 144
[7]  Ukrainian Financing Group 170

Name Stake Size Assets Date; bought million hryvnias --------

[1]  Ukrgazbank $420 million for 84.21 17 12,941 June 09
[2]  Rodovid Bank $370 million for 99.97 24 9,098 June 09
[3]  Bank Kyiv $470 million for 99.93 40 5,300 June 09

Bank Parent Size Assets: million hryvnias ------

[1]    Raiffeisen Bank Aval Raiffeisen 3 60,236
[2]    Ukrsibbank BNP Paribas 5 48,454
[3]    Ukrsotsbank UniCredit 6 44,273
[4]    Alfa Bank Alfa Group 7 33,964
[5]    Prominvestbank VEB Bank 8 30,803
[6]    OTP Bank OTP 9 29,934
[7]    VTB VTB 10 28,258
[8]    Forum Commerzbank 12 18,645
[9]    Swedbank Swedbank 16 13,735
[10]  Erste Erste 20 11,238
[11]  ING Ukraine ING 22 9,572
[12]  Unicredit Bank UniCredit 23 9,240
[13]  Pravex Bank Intesa SP 28 6,989
[14]  Kredobank PKO BP 31 5,531
[15]  Sberbank Sberbank 32 5,500
[16]  Swedbank Invest Swedbank 34 5,386
[17]  Calyon Credit Agricole35 4,950
[18]  Citi Citigroup Inc 37 4,104
[19]  SEB Bank SEB 44 3,663

(Compiled by Sabina Zawadzki; editing by Stephen Nisbet)
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
Raiffeisen owns the largest international lender in Ukraine

By Daryna Krasnolutska, Bloomberg, Kiev, Ukraine, Fri, Dec 25, 2009

KIEV - International Finance Corp., a member of the World Bank Group, agreed to lend $105 million to Raiffeisen International Bank’s Ukrainian unit VAT Aval to strengthen the lender’s capital.

The Washington-based IFC’s board of governors approved the 10-year subordinated loan last week, Elena Voloshina, the institution’s Ukraine representative, said in an interview in Kiev late yesterday. The two sides will sign the accord in January, she added. “Aval is a big, systemic bank in Ukraine,” Voloshina said. “We’re not limiting the bank on how it spends the loan.”

Ukraine’s banking system was hit by the global financial crisis, which weakened the currency and dried up investment. About 20 lenders are relying on state aid to remain afloat, with the country’s financial plight contributing to an annual 15.9 percent economic contraction last quarter.

Raiffeisen owns the biggest foreign lender in Ukraine, where it has reported losses in the last four quarters. The company announced a 10 percent reduction in its 18,300-strong workforce in the country in February and plans further job reductions, Chief Financial Officer Martin Gruell said on Nov. 30. Ukraine is the Vienna-based bank’s “sore spot,” he said.

IFC plans to invest $500 million in Ukraine this financial year, which started on July 1. So far, the institution has disbursed $40 million to Ukrainian state-owned Export-Import Bank, $20 million to VAT Megabank and $20 million to OTP Bank Nyrt.’s Ukrainian unit, said Voloshina.
Nonperforming Loans

“The rest we will probably invest in the financial sector and agriculture in the next six months. We are now in talks,” she said, declining to elaborate.

Ukrainian nonperforming loans account for about 20 percent of total loans and may rise as high as 30 percent by the middle of next year if the economic outlook doesn’t improve, Moody’s Investors Service said on Nov. 30.

“Next year, nonperforming loans will be structured differently,” said Voloshina. “2010 will be the year of corporate non-performing loans.” The IFC also consults with banks on how to handle nonperforming loans, she said.

The IFC also plans to begin guaranteeing loans in a bid to make cheaper credit from other sources available to Ukrainian companies and banks in the first half of next year, she said.

To contact the reporter on this story: Daryna Krasnolutska in Kiev at


FOOTNOTE: RZB Finance, a U.S. company wholly owed by the Raiffeisen International Bank, is a member of the U.S.-Ukraine Business Council (USUBC), Washington, D.C.,
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
"So what does Ukraine do to address those problems? Nothing. Literally, nothing."

By Marcin Sobczyk, WSJ Blogs, New Europe
Dispatches from Dow Jones writers across Eastern and Central Europe
The Wall Street Journal, NY, NY, Wed, January 6, 2010

Polish computer hardware distributor Action decided to pull out of Ukraine and sell shares in its unit there.

Despite Action’s huge loss on the entire investment, analysts who cover this Warsaw-listed company offered a loud sigh of relief after the pullout as
Ukrainian operations continued to generate losses from quarter to quarter without any promise of a better tomorrow.

The company said it views the situation in Ukraine negatively, as declining gross domestic product, high inflation and unemployment mean the country’s
economy will be depressed for many quarters ahead.

Flashback to the early 1990s — some politicians, maybe listening to what Russia was saying or maybe just being useful idiots, were saying Poland was
wrong in reorienting its own economy from Comecon to the West. Why go West if you have the vast markets of the East, they would say?

Fortunately, Poland didn’t listen and now nearly 80% of its foreign trade is with other European Union countries, with more than 50% of the total with the euro zone.

In the meantime, Russia has repeatedly tried to block Polish exports, and even the Orange Revolution in Ukraine, which Polish politicians eagerly supported, has failed to change anything for Polish companies there.

Keep in mind that many Polish executives who are still active now also have the experience of the communist regime and its crazy economic logic, and they somehow got by. But present-day Ukraine just beats them.

A number of Polish companies that are covered by the financial media here have investment projects in Ukraine. This group includes or used to include radio broadcaster RMF FM, one of Poland’s largest banks PKO Bank Polski, media firm Agora and now South African-owned online communicator Gadu-Gadu, as well as a number of real-estate developers.

And they all complain that business rules in Ukraine are unstable, employees disloyal, corruption out of control. Leszek Czarnecki, a Polish financial tycoon with, to put it mildly, a lot of experience with communist Poland, has recently said his decision to invest in Ukraine was one of the biggest mistakes of his life.

Contrary to what many in old-EU countries think, there is no common culture in Poland and Ukraine, and the two countries are increasingly diverging. For many Polish investors the experience of Ukraine is a true culture shock.

So what does Ukraine do to address those problems? Nothing. Literally, nothing.

Several weeks ago I had the pleasure of speaking at a conference for Ukrainian journalists co-organized by the Polish Foreign Ministry. What surprised me most when I heard my Ukrainian colleagues was their obsession with politics — and their absolute disinterest with the economy.

For any post-communist country, real integration with the west and real security guarantees begin when economic stakes are high for foreign investors — billions of dollars of investments and billions of profits.

Instead, all I heard was: Will Yushchenko this, will Tymoshenko that. Will NATO accept us, will EU give us free travel. Will Poland advocate for us.

If there’s no cash incentive, who cares, really?

[return to index] Action Ukraine Report (AUR) Monitoring Service]
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bne (BusinessNewEurope), Kyiv, Ukraine, Mon, Dec 28, 2009

KYIV - The crisis year was horrible for Ukraine, which was harder hit than nearly any other country in the Commonwealth of Independent States. The combination of collapsing steel prices, devaluation of the national currency, bank sector woes, political instability and, worst of all, mismanagement of public finances all contributed to the tumbling GDP.

In 2010, much depends on the outcome of presidential elections slated to begin in January, but that could take until April to come to a definitive conclusion. Much has already been written about how the various presidential hopefuls could affect the country's prospects, however, the conclusion of the elections itself is probably the most significant event, as all of the prospective candidates are pro-business. An end to the infighting would have the biggest impact on the country's prospects.

Ukraine's analysts are all in agreement that the economy will return to growth in 2010, albeit at a slower pace, and the stock market, which has recovered most of its losses, still has another 25% of upside over the year, driven largely by improving earnings that come on the back of economic recovery. Some are even more optimistic, as despite all its problems, Ukraine remains one of the most attractive investment destinations in the CIS.

"We believe that Ukraine could well be the surprise performer in the first quarter. Elections in January will more than likely restore a government better able to manage the balance between the West and Russia. This in turn will ease tension over gas pipelines, and provide a government to which the IMF can reasonably lend. In this scenario, debt in particular looks attractive, with equity likely to follow the trend of declining spreads. We forecast 25% upside potential in the PFTS Index in 2010," say analysts with Renaissance Capital.

The PFTS Index was the worst performing index in 2008, losing more than 50% of its value (against Russia's 46% fall). But it had a very strong run in 2009, up over 100%. "This is remarkable considering the degree to which the country has been buffeted by the crosswinds of default fears, gas disputes, a severe GDP contraction and uncertainty about the upcoming presidential election," says Renaissance Capital.

Like the other countries in the region, the PFTS had stabalised at the end of 2009, but share prices will track the economy upwards over 2010, with a possible sharp uptick following the elections, but smaller movements before hand.

Ukraine's economy was the hardest hit of any country in the region by the crisis, but it was already bouncing by the end of 2009. The recovery will continue in 2010, but at a slower pace than with the other countries in the region. The bne consensus growth is for 3.8% growth in 2010.

The vertiginous fall of the GDP in Ukraine was truly horrific: down 20.3% in the first quarter, 17.8% in the second, and 15.9% in the third quarter of 2009. Analysts estimate that the total decline for 2009 will come in at about 12-13%. "While the economic contraction continues to ease, there are few signs of a fully fledged recovery any time soon. Producer confidence remains low and private consumption is subdued due to falling income and uncertainty over the exchange rate," says Elina Ribakova of Citigroup.

Ukrsibbank agrees and says that Ukraine will depend on an export-led recovery, as consumers are too shell shocked to deliver much in the way of economic stimuli and the main source of support for the consumer sector has become government largesse.

"Earlier in the decade, against the backdrop of rising exports, Ukraine became an attractive market, absorbing billions in debt and direct investment. This triggered a skyrocketing growth in domestic incomes and significant increase in wages. Since 2005, a large chunk of growth was generated by domestic demand, accelerated by rapid increases in consumer credit. Since financial flows to the country have collapsed last year, growth pattern has turned upside down. Nominal wage has stumbled recently, pulled down both by sharp fall in corporate earnings and rising unemployment. Double-digit inflation gnaws real incomes," says Ukrsibbank.

Clearly the fall was slowing as 2009 came to an end and the economy may return to growth, but most analysts assume will take at least two years for the economy to regain all the ground lost in 2009.

Ukraine has also been plugged into the global demand recovery story more than most. With 50% of its GDP reliant on exports (especially steel), equity revaluation has been far more a function of global trends than domestic drivers. The official position is that the economy will grow between 3.0% and 3.7% regardless of what happens outside of Ukraine.

"There will be a figure of 3% or a figure of 3.7%, and compared to the fall that we have in 2009, this figure is really achievable no matter how the situation develops," Economy Minister Bohdan Danylyshyn said in December.

Retail has also risen a little over the year from first-quarter lows, but the increases are in line with the small rises in income over the same period so no momentum is being built in this sector and growth remains a function of state largesse.

"The retail trade has shown stable month-on-month growth since May (with September the only exception), but the year-on-year decline, at -20.7%, is still very large. In our view, the population is not ready to spend its accumulated savings (outside the banking system) in light of uncertainty about further income, mainly, in turn, reflecting uncertainty surrounding the upcoming presidential elections in January," says Renaissance Capital.

Analysts estimate that the population is holding some $55bn in cash outside the banking system and remain reluctant to spend this money until some clarity about the future appears.

Ukraine's consumers are in a much more difficult position than their Russian counterparts as about half of the mortgage borrowing was done in dollars. The devaluation of the national currency has significantly increased the cost of repaying those loans as well as putting extra pressure on the banks and exacerbating the non-performing loans problems. Together these problems will hold back the recovery of both consumption and consumer lending.

Industrial production recovery remains tied to the recovery of commodity prices – and especially steel. However, while steel prices are up, analysts are unsure about the sustainability of the increase.

Industrial production recorded contraction of just 6.2% in October 2009 comparing to nearly 30% decline earlier this year. There are two fundamental factors driving the industrial recovery – an improvement in global demand and weakness of Ukrainian currency, which allows domestic companies to reap more benefits from global growth.

Metallurgy, currently representing about 20% of Ukrainian industrial production, has been the key recovery driver so far, creating demand for coke, ore and electricity. It will remain the backbone of the local economy in the mid-term, but it's also the most dependent on global trends.

The food industry is a bright spot both from the perspective of export capacities and strong local demand. The sector offers prospects provided that necessary capital and technology would arrive there on time. Local currencies of Ukraine's neighbours appreciated versus the hryvnia, creating exports opportunities to the EU and Russia, a large market with population over 150m.

Food industry key problems are painful de-leveraging, which froze investment projects across the industry, and some delays with certification of Ukrainian foodstuffs resulting from insufficient quality of inputs.

The contraction in capital investments is even greater than those of the sectors and the lack of investment will remain a drag on recovery. Capital investment was halved over 2009 and until the political uncertainty is resolved there is little prospect for its recovery.

Investment is well positioned to increase in 2010-2011, but this is subject to structural reforms that Ukraine has yet to begin. Currently investment is very modest, representing only UAH22bn, or close to 11% of country's GDP. It is well below the emerging market average of 30-40% GDP.

"Fixed capital investment contracted sharply, by over 57% on year in the first half of 2009, and we expect it will remain squeezed owing to the lack of credit and overall economic uncertainty. In turn, the government ability to stimulate the economy is limited by the considerable deterioration of budget revenues," says Citi's Ribakova.

In 2008, Ukraine was reporting the highest inflation rates in the region and amongst the highest rates in the world as inflation topped 31% in May 2008. The result of the crisis has been to depress demand and bring the rates down, but inflation remains high at an estimated 13-14% for 2009.

The central bank forecasts the rate will come down to 10% in 2010, but the government has promised several measures that could send the rate up again.

A social spending bill is in the Rada that would increase wages. Tymoshenko has also said that she will restart the payouts of defaulted deposits in Oschadny Bank. And the government has promised the International Monetary Fund (IMF) to hike domestic gas tariffs, which are half that the government pays Russia for the gas.

"While delays in gas tariffs for households and heating companies should help to limit consumer inflation this year, we believe domestic gas prices will eventually be adjusted in accordance with IMF recommendations after the presidential elections, set for January. Combined with the expected expansion of social spending and wage indexation, as well as the high level of monetisation of the fiscal deficit, this should prevent consumer price inflation from dropping significantly," says Citi.

The budget has been whacked by the crisis and the government has done little to tackle the issue. Initially agreeing to pass a zero deficit budget for 2009 as part of the IMF deal to tap $16.4bn of stand-by loans, the pressure of looming elections meant the government under PM Tymoshenko continues to spend freely. The IMF has proven to be incredibly soft on Kyiv (unlike its attitude towards the equally troubled Latvia) and finally the fund caved in to allow a 3% deficit.

However, the government overshot even this target and Citi analysts estimate that the deficit ended 2009 closer to 6%, but will fall to 4% in 2010. In fact, considerable confusion surrounds exactly what the government is spending and how the picture will look next year. Several investment houses in Kyiv have reported that the official reports on state spending are clearly wrong and it appears the government has been cooking the books in an effort to keep the IMF money flowing while it muddles through to the elections in early 2010.

"While analysis of public finances is complicated by the lack of reliable data on budget execution, available information provides some grounds for concern. The economic crisis has resulted in a considerable deterioration of budget revenues. Given this trend, the revenue target could be a major challenge.

"While the state budget deficit reached UAH24bn during the first nine months of 2009 and is below the UAH31.2bn level budgeted for this year, data published by Ministry of Finance in compliance with cash accounting do not show growing volumes of VAT arrears and tax payments made by Ukrainian companies in advance," says Citi's Ribakova, in one of the more restrained comments.

This confusion is highlighted in bne's consensus prediction for the level of the deficit in 2010, which is 4.9%, but estimates range from 4% to 6%. Whatever it ends up at, it is clear the deficit is too high.

However, Ukraine's companies are not helping, as many are sitting on their tax money and tax payment discipline has broken down while the government is distracted with elections. While the state budget deficit reached UAH24bn during the first nine months of 2009 and is below the UAH31.2bn level budgeted for this year, the amount of VAT arrears had reached UAH20bn by October.

And even Citi analysts, which estimates the 2010 deficit to come in at 4%, say this is unlikely and the deficit will go much higher. One the main unknowns is if the wage and social payments law that was passed at the end of 2009 is implemented, then the minimum wage will be increased by some 40% over 2010, adding UAH71bn to the budget spending bill, which would massively drive up the deficit unless some new sources of financing it can be found.

Ukraine's current account has registered a deficit for the past three years, reaching a peak of $11.9bn in 2008. This reflected significant growth in consumption of goods other than commodities, while imports of oil and gas comprised only 10-15% of total imports. Exports of ferrous metals amounted to about 40% of total exports. The trade balance in commodities was in surplus in 2008.

2009 saw a sharp drop in non-commodity imports thanks to a collapse in demand that has brought the balance of payments into balance and the country was even showing a small surplus in the last months of 2009, says Renaissance Capital.

Ukraine has built up significant amounts of external debt in 2009 as it cast about for ways to pay its gas bill. In all, it has to repay some $40bn in 2009 – equivalent to the country's hard currency reserves and then some. However, the state did manage to restructure some $19bn of debt repayments and the fears of an impending default receded in the last months of 2009 – a trend analysts expect to continue through 2010.

The Eurobonds redemptions schedule in 2010 will be tight for the corporate and banking sectors, while the sovereign area has a year-long pause till December 2010. Total volume of redemptions in 2010 will be approximately a third less than in 2009 that would result in -$6.3bn of net repayments.

According to "Fundamentals of monetary policy for 2010" published by the central bank, total payments on external debts in 2010 are estimated at $20.3bn, more than $18bn would make payments on corporate debts, around $2.3bn payments on state and state guaranteed debts, says Ukrsibbank.

Concorde Capital thinks that the level of total external debt will fall slightly in 2010 from 93% of GDP at the end of 2009 to 90% of GDP by the end of 2010. Renaissance Capital believes that the amount of external debt will fall faster in 2010 to about $30bn, with the same high level of rollovers as in 2009. At the same time the pressure will be taken off by the resumption of FDI, of which $4.5bn is expected to arrive and should pick up as the year wears on and investment sentiment improves.

The Ukrainian banking system has escaped the horror scenario for now. One important achievement is that it has survived a bank run and de facto collapse of three large banks, one of which was the leading financial institution in transactions and cash management. The consequences of this have been moderate, compared to what one could've expected, perhaps due to the low level of financial system development.

Ukrsibbank says that the majority of top-tier Ukrainian banks had excessive liquidity as of the end of 2009 as deposit runs stopped in the summer and the willingness of domestic banks to generate new loans was very limited.

Money market rates have been low for the most of this year, reflecting strong cash preference by domestic banks. To some extent, this preference can be explained by a) unwillingness to lend to real economy; b) strict conditions of NBU's refinancing loans (the central bank often demands additional restrictions); and c) there is no wide interbank market.

New lending barely exists, and commercial loans are rare and expensive - the interest rates on new six-month to one-year loans are typically ranging from 25% to 30% and there is still very limited number of banks offering lending products as of the end of 2009.

Non-performing loans (NPLs) are a big problem and will get worse. As of the third quarter, total credit portfolio of local banks was at UAH747.8bn, while amount of provisions stood at UAH92.7 bn. Ukrsibbank expects NPLs to reach 20% of the total loan portfolio which means full provisioning would require an additional UAH56.7 bn.

As of the third quarter, the capital of Ukrainian banks was at UAH118.0 bn. Subtracting additional provisioning would leave UAH61.1bn of net equity, which would be an equivalent of around 6.9% CAR. This compares to the healthy 15.6% reported in the beginning of October 2008. Given that some of the banks are extremely well capitalized (eg. state giant Oschadbank), the capitalization of selected banks could be significantly below the industry average.

"Ukrainian banks should be able to clean the mess of troubled assets over the course of 2010, but some serious handicaps are there, including weak local legal system which allows borrowers to delay or even avoid cession of the collateral in some cases. Tier III and Tier IV banks are well positioned to be the first to restart lending as they are better capitalized than Tier I and Tier II financial institutions," says Ukrsibbank.

[return to index] [Action Ukraine Report (AUR) Monitoring Service]
AUR ARCHIVE, 2003-2009:

Travel Essay by Roman Skaskiw, website, Fall, 2009

"There is a parable of Western Ukraine about a man who was born in Austria, educated in Poland, who went to war in Ukraine, fled to Germany and was executed in the Soviet Union, and he did it all without ever leaving his village."

It’s difficult to write about Ukraine without writing about history, and it’s difficult to write about Ukrainian history and still leave room for anything else. I want to write a travel essay.

My parents were encouraged to visit Ukraine in the 1970s after a friend of theirs did so and suffered only a long interrogation by Soviet agents. The lady happened to run a hotel in New York’s Catskill Mountains, and her interrogators revealed their knowledge even of the price of pierogies at her hotel’s restaurant.

My parents speculated that she aroused more suspicion than they would because her late husband had been a star on the famous Dynamo Kiev soccer team which refused to lose to the Germans, and one of the few athletes on the team who escaped execution. That made him a symbol of Ukrainian identity and an enemy to the Soviets.

When my parents visited Ukraine on their honeymoon in 1974, the trip was closely monitored.  Hotels were chosen by Intourist, the Soviet Union’s secret-police-run travel agency. Monitors watched the corridors. 

My mother arranged a clandestine meeting with relatives well ahead of their trip.  She explained in a letter her intention to pray at Saint George’s Cathedral on a particular day, and, in a separate letter, mentioned that she likes to sit in back at church.

When my parents wanted fruit, rather than admit none was available in the workers’ paradise, the Intourist tour guide, a young woman, provided them convoluted directions to a fruit stand which, in fact, didn’t exist. 

She fascinates me. The vast engines of Soviet oppression relied on people like her. I imagine her mind several ways: nobly defending the Soviet system against a perception of western capitalist propaganda, indifferent to anything beyond her paycheck, or inwardly conflicted but scared to speak out.

Perhaps this last guess reflects my idealism. The administration of government power through individual cruelty, large or small, doesn’t seem to be much of an obstacle in human history.

My father arranged a car to the village of his youth.  He ran up a hill for a long look at the place he’d left three decades earlier, then hurried back to the hotel.  Deviations from the official itinerary were forbidden, though not unheard of, which makes me guess the young Intourist lady was collecting a paycheck and not much else.

At the cathedral, my mother’s family camouflaged her obviously western appearance with a baggy old coat and kerchief. Contact with foreigners was discouraged, and her family didn’t want to arouse suspicion.

So for me, and perhaps for other children of refugees who squeezed themselves through the narrowing cracks of the descending Iron Curtain, who were filled with inherited longing for a country consumed by history, a country which (and this is a concept largely foreign to the west) ceased even to exist, whose language was forbidden, whose patriots were forgotten, whose history was Russified, whose culture and traditions seemed preserved only in Saint George’s Ukrainian Saturday school in New York City’s East Village where teachers constantly scolded us to speak Ukrainian, visiting Ukraine cast my childhood and family history in an entirely new light.

Perhaps my revelation is past its time. Ukraine has been independent for almost two decades now.  I should have gotten around to visiting earlier.
Upon hearing the language commonly spoken and seeing our flag, I felt strangely relieved. Part of me didn’t believe the place actually existed. Perhaps I felt relief from the burden of preserving all thing Ukrainian by myself, as the attitude at Ukrainian Saturday school seemed to suggest.

But looking more closely certainly does not lend clarity to the twists and shadows of history. There is a parable of Western Ukraine about a man who was born in Austria, educated in Poland, who went to war in Ukraine, fled to Germany and was executed in the Soviet Union, and he did it all without ever leaving his village.

Much like looking into a cherry blossom or into the face of a sunflower, things only get more complicated the closer you look. What’s this tension between Greek-Catholics and Orthodox faiths? Between Ukrainian and Russian Orthodox faiths?

Why do the Russians also claim the legacy of “our” Kozaks? What’s this Polish claim to Lviv? Who collaborated with Nazis? Who were the Soviets? What brought so much of the Russian language into Kiev? Who massacred whom? Which massacre was worst? Which statues should be destroyed? Which ones erected?

Even America’s refugee community represents only a fragment of Ukraine. In the aftermath of WWII, all displaced Ukrainians who were not from the west (the portion of Ukraine which had been under Poland when the war began) were forcibly repatriated to the Soviet Union, meaning executed or deported to Siberia -- by the hundreds of thousands. 

I was shocked to learn about the United States’ role in forced repatriation: Operation Keelhaul, aptly name for the medieval practice of tethering a sailor and dragging him beneath the keel of a ship.

I want to describe a bar in Lviv, but this too must begin with a history lesson.

During World War II, many Ukrainians fought with the Soviets, many fought with the Nazis, and many like the Sich Riflemen, fought in the Ukrainian Insurgent Army, which fought both the Soviets and the Nazis, and resisted the Soviet Union into the mid-1950s.

The partisans often operated from underground hideouts. Today, scouting organizations still make field trips to search for old hideouts in the woods.

A childhood friend of mine who now reports for an English-language newspaper in Ukraine took me to a bar in Lviv called “Kraeevka” or The Hideout.

There is no sign. The bouncer wore what looked like a model MP 40 sub-machine gun slug from his neck. “Are the Muscovites with you?” he asked.

“No, we’re Americans,” my friend told him. “Glory to Ukraine!” the bouncer said. “Glory to the heroes!” my friend replied.

During off-peak hours you might at this point in the ritual receive a free shot of honey vodka in a tin shot glass. The bouncer pulled one side of a bookshelf and opened it like a door, revealing stairs to the basement bar.

Camouflage netting hung from the ceiling.  The tables and benches were hammered together from roughly cut logs, old photos of armed partisans, alone or in small formations, hung everywhere, and Ukrainian rock music blared. The young servers wore Army-green shirts with a blue-yellow patch, the Ukrainian flag, and a black-red one, an old Kozak flag which had been adopted by the Insurgent Army and, more broadly, by Ukrainian nationalists.

We ordered vodka and a beer called “1715,” named for the opening year of Lviv’s first brewery, and bread, and, on the insistence of my friend, salo, or pig fat, a Ukrainian special and rumored cure-all. Think of the strips of fat on the edge of your bacon and imagine them alone.

A young artist sitting at our table sketched first my friend, then me. Another local pointed to Eurovision 2009 which played on a small television.

The Ukrainian star sang while men in ridiculous Spartan armor carried her around the stage. He told me Ukraine has had a shameful showing since Verka, a transvestite comedian/pop-star, won second place in 2007.

The bar and its dining area was crowded and full of lively conversations. At some point, a fiddler, an accordion player and a small, excitable man with a tambourine cut through the crowd.

They asked permission, then began playing folk songs which echoed in my memory back to Saint George’s Ukrainian School in the East Village. Everybody sang.

There was a man in a suit from the adjacent table who grabbed the fiddler’s elbow and spoke into her ear between songs. His eyes looked glazed from drinking, but besides that, he seemed to hold his alcohol well. She nodded and he began a ballad in a loud, droning voice. The musicians found his tune. He sang about betrayal and dead Ukrainian patriots.

The Germans call it Lemberg, the Russians Lvov, the Poles Lwow, and the Ukrainians Lviv.

Lviv is a gorgeous. Every step of the way, you find breathtaking architecture - statues built into buildings whose balconies rest on their shoulders, opulent renaissance works, remnants of Medieval fortifications, monuments, churches of various eras and denominations, cobbled streets.

There are statues of poets, Roman Gods, and one statue of Austrian writer and Lviv native Leopold von Masoch, after whom masochism is named.

Four universities fill the city with young people.  Street musicians seem to sing or play on every other corner.  I found an outdoor book-market beneath a monument to city’s first printer.

I want to write something for non-Ukrainian-speaking travelers. Unfortunately, I did not test other people’s English, as I chose to practice my own Ukrainian. I sensed that compared to other European cities, Lviv is largely unexplored, which is good for authenticity and price, but bad for ease of travel.

The older people do not seem to speak much English, but many younger ones do, though they don’t get as much practice as, say, those in Prague or farther west.

The tourism industry is only beginning to develop. There is at least one guided, multi-lingual tour of the city. There are internet cafes, ATMs, art galleries and museums. I could not find anyone who knew of a hostel or a place to rent cars outside of the capital, Kiev.

I made the trip with my mother. Her cousin, unsure of the date of our arrival, made three trips to Lviv’s airport on the unlikely chance of spotting us.

We felt like rock stars. Generations of distant relatives came to see us, their neighbors too.

My relatives included two blacksmiths, an art teacher, a laborer who travels as far as Spain and St. Petersburg for construction work, a computer programmer, a mechanic, and a security guard who gave me free tours of the museums he guards.

My mother and I took taxis or got chauffeured by family to the towns where they lived. We visited the place of my mother’s birth.  She had no memory of it, but related it to her parent’s stories -- they had run a grocery until they fled for fear of the Soviets. 

Like most homes there, it sat on a half-acre plot with a crowded garden, fruit trees, and chickens, and here again I felt an echo from my memories of childhood.

In the United States, and after years of hard work, my mother’s parents managed to buy a small retired farm in the Catskill Mountains where I spent my childhood summers.

I grew up around tangles of raspberries, sunflowers, rows of planted onions, tomatoes, cucumbers, garlic, and rhubarb. I climbed apple trees, ate pods of sweet peas from their vines and listened inattentively to my grandfather’s explanations about grafting sour cherry tree branches. I never realized how accurately my grandparents recreated their home in Ukraine.

Generations of family crowded around small tables bursting with food for day-long meals with us.  When our hostess noticed the small napkin in my mother’s lap, she apparently thought it insufficient for our American habit and sent one of the girls running to the next room to retrieve two bath towels for our laps, but that awkwardness soon passed.

We remembered the past and discussed our present lives. We toasted our gathering with vodka, toasted the vodka with cognac, and the cognac with beer and homemade wine. They were curious about our plane ride, the airports, why my sister, mother and I live so far apart, my military experience, and where

I learned to speak Ukrainian.

Most of my relatives grew their own vegetables, slaughtered their own chickens, caught their own fish, pickled their own preserves, cured their own cheese, fermented their own wine, and traded with neighbors for ham, sausage, milk and bread.

I met descendents from three of my four pairs of great-grandparents. Sadly, my father’s father’s parents remain unknown to me. I met no fellow Skaskiws, though, in a village cemetery, I saw dozens of tombstones that bore the name.

I went fishing with one third cousin and his brother-in-laws. They chopped wood with an axe and roasted chicken and pork and sausages, sprinkling the meats with beer that sizzled into the fire.  There were jars of pickles, and bread, and chocolate. We drank vodka from plastic cups, and cognac, and beer, and vodka, and cognac. I’ve never attended a fishing trip so exquisitely prepared for the contingency of not catching anything.

Another reason I regret not visiting a decade earlier are the vanishing stories.

The ghosts are still very much in the air -- one does not forget history in Ukraine as easily as you can in the United States -- but it’s generally the emotions best remembered and not the mundane details which give them flesh and blood. The stories are decaying peacefully in the minds of the elderly, and occasionally have their sentiments carved into stone, or etched onto metal placards.

We were told how one town’s Jewish population was wiped out during the Nazi occupation. There is a monument standing in a field where many Jews were executed en masse.

My mother’s cousin told us her family was scared to hide their Jewish neighbors in their home, but instead offered their field. Her parents grew furious at them because every time a car drove by, they would conspicuously crane their heads above the potato plants to see it. She keeps a photo of her neighbor’s daughter, Golda, in case anybody comes looking for her.

This part of the family had been fairly affluent, but the Soviets declared them Kulaks and pulled down their flax seed oil mill and confiscated their land.

Eventually, NKVD agents came to take her parents away, but the head agent took pity on them for their age and ill health, or perhaps he’d already met his quota of arrests.

The man noticed the icon of Saint Anna on their wall, and told them to pray to it because it was the luckiest day of their life. Her eyes welled with angry tears when she remembers all that was taken from them.

I am a little hesitant to acknowledge a sort of genocidal rivalry in Ukraine between the Holocaust and Soviet oppression, particularly Holodomor, the famine-genocide of 1932-1933.

Over dinner, one third cousin cited John Demyanyuk, the eighty-nine-year-old Ukrainian-American who’d just been deported to Germany for being a Nazi prison guard at Sobibor concentration camp, years after having been acquitted by Israel’s Supreme Court for of being a guard at Treblinka concentration camp.

“Him they’ll pursue to the end of the Earth whether he was a guard or not, but not one of the Soviets was arrested. Not one! Not for starving to death a fifth of Ukrainians, not for executing all our intelligensia, not for stealing my family’s land. Where are my reparations?”

Her husband and mother, who were with us at dinner, remained silent and seemed embarrassed by her sudden rage. Ukrainian history remains an open wound. Everybody knows it, but no one knows how to begin discussing it. That includes me.

In a town cemetery, a monument to the Sich Riflemen stands beside a monument to Soviet dead from WWII.

I went back to playing with her children - testing the English they studied at school. I pointed to my notebook. “And what letter is this?”  I asked. The boy read it correctly and rolled his eyes distractedly. He stood on his chair, squatted obscenely and gestured to his behind.  “And what letter is this?”  he asked.

He and his sister laughed.

We visited the 17th century Zbarazh Castle and browsed the art exhibits. A sculpture called “Wheel of History” depicted clay figures struggling to push a dark disk from either side with many perishing beneath its massive weight.

In the cemetery where one of my great grandfathers is buried, there is a monument to the Ukrainian Sich Riflemen, who fought against the Bolsheviks in the civil war which followed the Russian Revolution. Immediately beside it is a monument to Soviet dead from WWII. All young Ukrainian men from the area.

I already knew my grandfather had been in a Polish prison for the crime of working for a Ukrainian-language printer. I learned that in the chaos of Poland’s invasion by the Soviet Union, he’d been freed and began teaching Ukrainian in his town’s elementary school.

It was a Jewish neighbor who entered his classroom, and warned him that they, meaning the communists, were coming for him. He excused himself as if stepping out to the bathroom, exited the school through a window, took a back road to his home for a handful of rubles, and fled to Krakow, putting all his documents under his hat when he swam across the San River. He never saw his home again except once, when he returned to retrieve his family, including my then-four-year-old mother.

My mother’s cousin told us how for decades the family had no contact with them and assumed they’d all been killed. Some time in the sixties, a KGB agent arrived and showed her parents two photo’s of my grandfather taken from a distance and apparently without his knowledge. They’d been taken in America.

Details like this terrify me. They suggest a very dark, sinister world existing in parallel with the one I know. It’s difficult to know what to do with this knowledge. It’s like seeing a ghost no one else believes is real, you yourself doubting it. Why would Soviet agents know the price of pierogies in a hotel in America? Why would they photograph my grandfather?

In "The Gulag Archipelago,' Russian dissident writer Alexander Solzhenitsyn wrote, “We have been happily borne - or perhaps have unhappily dragged our weary way - down the long and crooked streets of our lives, past all kinds of walls and fences made of rotting wood, rammed earth, brick, concrete, iron railings.

“We have never given a thought to what lies behind them. We have never tried to penetrate them with our vision or our understanding. But there is where the Gulag country begins, right next to us.”

The family managed to hide their excitement, and denied any recognition of the man in the photo. Years later, my grandparents began corresponding, writing first to neighbors who relayed the correspondence, then later, directly to family, and in the 70s, my parents visited.

This story is unique only in my attempt to write it down. “Peasants are a silent people,” Solzhenitsyn wrote, “without a literary voice, nor do they write complaints or memoirs.” Everybody there knows people who fled, who were persecuted, deported, or executed. It is as much a part of their reality as their gardens.

A friend of the family showed us a monument remembering her father’s daring escape from a Soviet prison in 1939. One relative’s elderly mother spent most of her twenties in a Siberian labor camp.

I heard of people who were taken away for fighting the Soviets, for criticizing the Soviets, for supporting Ukrainian nationalism, for being wealthy, for being university professors, for being writers, for singing Ukrainian folk songs in a pasture, for being related to someone who was deported, for nothing.

Another relative told me of his grandfather who fought with the Red Army on the German front. Based on a rumor that returning Soviet soldiers were being deported to Siberia, he deserted and snuck back to his village.

A third cousin, who is my own age, described how during the later decades of the Soviet Union, members of the Young Pioneers scouting organization would guard the churches to keep people from blessing Easter baskets, or else they would spy on those who did, and precipitate their very public scolding at school.

The same third cousin and his friends would work as a team during Christmas, some standing guard while the rest sang carols for their neighbors.

They’d similarly collaborate when Polish merchants snuck into Ukraine to sell jeans and other western merchandise. Once or twice, the friend standing guard falsely called an alarm, shouting “Police!” so that the others could steal a pair of jeans in the chaos it created.

Many relatives showed me baby pictures of my sister and me which my parents had sent them.  They had begun corresponding more regularly after their visit in ‘74. In the background of one carelessly taken photo was the small Ukrainian crest which hung on our wall in our home in New York. “If the censors had noticed this,” my relative told me, “I would have gone to prison.”

On one hand, the oppression seems clearly hideous, but nothing is simple. Why are monuments in Ukraine vandalized? Why did Walter Duranty [an apologist for the Soviet regime] win a Pulitzer Prize? When oppression becomes culture does it ceases to be oppression? Which historians get to decide?

Another third cousin, also my own age, drove us to his father’s home in the village where my own father was born and raised.

The old, red-faced man did not hear us enter, and his son gently shook him awake.  He wore a shirt, slacks, and a belt wrapped one-and-a-half times around his thin waist. I think he dressed up for our sake. He returned from his dreams slowly, then saw us and rose from the couch. We greeted one another, hugged and kissed, and did not know what to say. I could see the fresh marks of a wet comb in his hair.

There was no great gathering of extended family and no meal, lavish or otherwise. He seemed to live alone with a photo of his long-dead wife and a filthy mirror. “My lungs hurt,” he said. “I cannot work like I used to.” He asked his son when he would help with the garden.

At the edge of the village lay the ruins of the Soviet-ear collective farm. Upon independence in 1991, it had been picked apart first by anyone who could exercise government authority, second by any gangster who could muster the threat of violence, and finally by villagers who even toppled the collective’s walls to scavenge bricks.

“In Soviet times,” the old man said, “everybody worked. Whether you wanted to or not, everybody had to work. And now, those who don’t feel like working don’t have to.” 

He threw up his hands and I wasn’t sure if he spoke with regret or relief, but be sighed a long, sad sigh and said “Pity those days are gone.” Many times during our visit, he shook his head and, more to himself than to us, said “What a pity.  What a pity.”

NOTE: Roman Skaskiw served as an infantry officer with the 82nd Airborne Division in Afghanistan and Iraq. He was recently recalled for another tour in Afghanistan with the Kunar Province Provincial Reconstruction Team.

He is a 2007 graduate of the Iowa Writers' Workshop. His work has appeared in The Atlantic, the New York Times, Stanford Magazine, Front Porch Journal, In The Fray Magazine, and elsewhere on He is shown here climbing Mt. Kilimanjaro.

LINK to article and seventeen photographs:
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Help an elderly Ukrainian in Kyiv have clothing, food, medicine this year.

Katie Fox, President, American Friends of "For Survival", Wash, D.C., Mon, Jan 4, 2010
WASHINGTON, D.C. - 2010 has arrived and I am writing to ask you to sponsor an elderly Ukrainian in Kyiv this year through a donation to "For Survival." As many of you know, I have assisted in running a small charity for several years that helps poor elderly Ukrainians in Kyiv buy food, medicine and other necessities.

The "For Survival" charity is entirely volunteer run and has no overhead costs - every cent you donate goes directly to an elderly recipient.  We are a small organization with a lot of hands-on oversight, another guarantee that your donation will be well spent.

A donation of $240 or $20 per month will help one Ukrainian pensioner in Kyiv cover basic needs, - warm clothing, food, medicine, and hospital bills, throughout 2010.  Your donation is full tax deductible and is especially important this year. 

The global economic crisis has hit Ukraine with particular force. Prices on staples, including food, are soaring.  At the same time, with charities forced to cut back, the competition for donor dollars is fierce.

Our group, "For Survival," was founded by a group of Ukrainian elderly women with two goals in mind: to improve the lives of poor elderly and to help active elderly to give back to society.  This year, in addition to distributing aid for generous supporters like you, the group sought and got a grant from the Lions' Club in Kyiv.

It has provided basic medical equipment, such as walkers, hearing aids and eyeglasses to Ukrainian elderly unable to afford them.  As part of "giving back," "For Survival" members also visit orphanages as 'surrogate grandparents." They also used Lions' Club support to buy books, CDs and DVDs
to use during visit to children in these institutions.

For more information please feel free to contact me at or by cell phone 240-423-8845. Or, visit our web site at

Please consider a donation today!  Your money will be well spent and deeply, deeply appreciated. To give safely on-line visit us at

Or, checks may be made out to "For Survival" and sent to me [Katie Fox] at 5333 42nd St. N.W., Washington, D.C. 20015.  American Friends of "For Survival" is a registered 501(c)(3) nonprofit organization. All contributions are tax-deductible.

Thank you very, very much.

Katie Fox, President
American Friends of "For Survival."
Washington, D.C.
Go to:

AUR: The American Friends of "For Survival", a non-profit organization in Washington, D.C., is well-known to many readers of the Action Ukraine Report (AUR). AUR readers have worked with and donated to American Friends of "For Survival" for several years.  Katie Fox is doing an outstanding job as president of American Friends of "For Survival." Your support will be most appreciated. Go to website:
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By John Pancake, Kyiv, Special to The Washington Post
The Washington Post, Wash, D.C. Wednesday, January 6, 2010

LVIV, UKRAINE -- In World War II, members of the Ukrainian underground fought to make their vision of an independent nation real. They battled Hitler and Stalin. Ultimately they lost, and the Soviets took control of most of Eastern Europe after the war.

The Ukrainians finally achieved independence when the Soviet Union collapsed in 1991. Now many in this fledgling nation would like to formally recognize those earlier nationalists -- the "brave defenders of the Motherland," as President Viktor Yushchenko has called them. Newly introduced legislation would honor members of the underground and provide them with benefits accorded to war veterans.

But the movement to pay tribute to the insurgent fighters has set off a national debate about exactly what happened more than six decades ago. Many say the underground collaborated with the Nazis, killed thousands of Jews and perpetrated a campaign of ethnic cleansing against Poles.

The legacy of the underground flows through Ukrainian culture today. Its best-known banner -- a red-and-black flag -- is seen at the rallies of nationalist politicians. In this western Ukrainian city, where the insurgency was active, members of the underground are buried in elaborate marble tombs in a historic cemetery.

Street vendors sell memorabilia commemorating the resistance. There is even an underground-themed restaurant outfitted as a bunker. In one corner, diners can do target practice using a picture of Stalin.

While those involved in the debate over the underground are somewhat polarized, they agree on one thing: It's complicated.

To begin with, the underground was made up of many factions, subfactions and rivals. In hindsight, some look better than others. Meanwhile, for the majority of Ukrainian families, the experience of "the Great Patriotic War" was fighting with the Red Army to defend the homeland. Some descendants of Red Army soldiers view members of the underground as traitors.

The effort to recognize the insurgents also is taking place against the backdrop of centuries of persecution of Jews in Ukraine, where pogroms were common.

The Cossack chieftain Bogdan Khmelnytsky, whose statue stands in the Ukrainian capital, fought for independence during the 17th century. But he also presided over the killings of tens of thousands of Jews, said Rabbi Alexander Dukhovny, head of the Religious Union for Progressive Jewish Congregations of Ukraine. "Was he a hero or an anti-hero? Even after 350 years, it is difficult to know," Dukhovny said.

Considerable research on the underground is underway in Ukraine and Canada, a center of the Ukrainian diaspora.

One of the key figures involved in the research is Peter J. Potichnyj. Born in a Ukrainian family in a village in what was then eastern Poland, Potichnyj experienced the horrors of the war firsthand. Soviet secret police executed his father. Poles massacred most of the people in his village.

In 1945, at age 14, he joined the Ukrainian Insurgent Army, or UPA, and fought against the Soviets until 1947. He eventually became a historian at McMaster University in Hamilton, Ontario, and helped edit 77 volumes about the Ukrainian underground.

Potichnyj, 79, said that although the underground may have had brief strategic alliances with the Germans, it was mostly fighting the Soviets. He said much of the anti-underground talk these days is orchestrated from Russia. 

"You know the Russians don't want to admit there were people fighting them -- not because they were cooperating with the Germans but because they were fighting for their own culture and the liberation of their own countries," he said.

As for the killings of Jews and Poles, Potichnyj argues that no matter where guerrillas fight for liberation, it's a messy affair. The Poles provoked the Ukrainians, he said.

"With respect to Jews," he said, "obviously, in the situation there must have taken place some killing of the Jews, although in 1943, when the UPA was quite strong, there were hardly any Jews left because the Germans had, unfortunately, killed them all off. But there were some remnants, and the remnants were either working with the Ukrainian underground or they were working with the Soviets." Those allied with the Red partisans were obviously enemies of the underground, he said.

Potichnyj said the underground made a terrible mistake in not condemning the Germans' efforts to exterminate the Jews. But he strongly denies that there is any document showing that the underground ordered the "systematic" killing of Jews.

John-Paul Himka, a historian at the University of Alberta, believes there was a systematic killing of Jews in some Ukrainian areas. Himka has written extensively on the Holocaust and Ukrainian history. He said he has read hundreds of accounts, composed in different places and at different times, of Jews who survived; many mention killings by the Ukrainian militia.

Of the plan to honor UPA fighters, he says: "This is really a problem area because they killed so many people, civilians." In addition to Jews, he said, they killed 60,000 to 100,000 Poles, as well as political opponents, Orthodox clergymen, teachers of Russian and many prisoners of war from eastern Ukraine. He estimates that UPA fighters killed several thousand Jews, "but perhaps the number was much higher."

"Although what UPA did to the Jews may not have been, in the larger scheme of things, a major contribution to the Holocaust, it remains a large and inexpugnable stain on the record of the Ukrainian national insurgency," he said.

Olexiy Haran, a professor of comparative politics at the University of Kyiv-Mohyla Academy, said Russian "propaganda" distorted the extent of the atrocities. The Ukrainian insurgents were fighting for independence, he insists.

"I believe that these people deserve to be veterans, maybe with the exception of those who committed crimes," he said. "This was guerrilla warfare, and it's difficult to imagine guerrillas without atrocities."

Many academics say the debate over the underground is part of a larger tug of war over Ukraine's national identity. Russia ruled most of what is now Ukraine for more than three centuries. But relations between the countries have been testy, and since Yushchenko's election in late 2004, Ukraine has distanced itself from Russia while moving toward the West.

Yaakov Bleich, whose title is chief rabbi of Ukraine, said of Yushchenko's effort to legitimize the insurgents: "His goals are noble; the means stink."

"What I mean is that we all understand that Yushchenko is trying to build up national pride, and we all understand that that is needed," Bleich said. "After 350 years that the Ukrainian people were subjugated, they have to rebuild national pride.

"But should we take things that are controversial -- heroes that are still of questionable repute -- and use them to do that?" he said. "At this point you have people out there living today [who suffered], and the image is one that would hurt people. The Ukrainian insurgents fought alongside the fascists. And maybe their intentions were good, but I will say that the road to hell is paved with good intentions." 

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