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Major Interview with U.S. Ambassador John Tefft

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"We support the sovereignty, independence, and territorial integrity of Ukraine."
Interview with John Tefft, U.S. Ambassador to Ukraine 
Interviewed by Mykola Siruk, The Day
The Day Weekly Digest in English #4, Kyiv, Ukraine, Thu, Jan 28, 2010

Analysis & Commentary: By Ildar Gazizullin, Senior Economist
International Centre for Policy Studies (ICPS) Newsletter #2 (465)
Kyiv, Ukraine, Monday, 25 January 2010

In the Ukraine, insurers have paid $50 million for private bank losses, and that is expected to rise significantly by the second quarter of this year.
By Mark E. Ruquet, National Underwriter P&C, Hoboken, NJ, Wed, Jan 27, 2010


U.S.-Ukraine Business Council (USUBC), Wash, D.C., Thu, Jan 28, 2010

By James Marson, The Wall Street Journal, New York, NY, Thu, Jan 28, 2010

KPMG Ukraine, Kyiv, Ukraine, Mon, Jan 4, 2010

Salans law firm, Kyiv/New York, Wed, Jan 27, 2010
Salans law firm, Kyiv, Ukraine, Tue, Dec 29, 2009 

Analysis & Commentary: by Peter Zeihan
Stratfor Global Intelligence, Austin, Texas, Tue, January 26, 2010

By Richard Boudreaux, The Wall Street Journal, New York, NY, Mon, Jan 25, 2010
"And we support the sovereignty, independence, and territorial integrity of Ukraine."

Interview with John Tefft, U.S. Ambassador to Ukraine 
Interviewed by Mykola Siruk, The Day
The Day Weekly Digest in English #4, Kyiv, Ukraine, Thu, Jan 28, 2010

KYIV - The newly appointed US Ambassador to Ukraine, John TEFFT, is a top-notch diplomat with a huge working experience in countries of the post-Soviet space.

During his 37-year long career as a diplomat, he held the “second job” in the US Embassy in Moscow, and headed US diplomatic offices in Lithuania and Georgia. Previously, working as the assistant of the Deputy Assistant Secretary of State for European Affairs, Tefft was responsible for US diplomatic liaisons with Russia, Ukraine, Moldova, and Belarus, as well as matters pertaining to non-proliferation and weapons control.

The question remains as to what are the main issues on the ambassadors agenda? And, how will the results of the upcoming presidential election influence cooperation between Washington and Kyiv?

Below find answers to these questions in The Day’s exclusive interview with US Ambassador to Ukraine, John Tefft.

[THE DAY] Mr. Ambassador, this past Wednesday marked one year since the current U.S. Administration took over the reins. Can you name some foreign policy successes of President Obama during this year?

[AMBASSADOR TEFFT] “First, I would say that President Obama has changed much of the atmosphere, and he has changed that not only through his speeches, but by changing a number of positions. I think it is pretty obvious to people, the engagement that we have made on climate change issues, not just the positions that the United States has taken, but also the role President Obama personally took in Copenhagen to try to get results.

"Now, we know that this is still a work in progress, but I think it’s significant. I think we’ve tried very hard to do a number of other things which, to be sure, are slightly different than the Bush administration. The President is going to close Guantanamo. This is not easy to do.

"Everybody understands and knows that. It is going to take a little more time than they thought. But it is an example of the kind of thing that the President feels very strongly undercuts America’s image and position in the world. As he also said recently it actually is used by Al-Qaida as a way to recruit people.

“There are a number of other areas where we have launched initiatives which are still not complete. Obviously, in this part of the world, people look at the reset policy with Russia. There are several issues with work still in progress. There is the START treaty that is still being negotiated.

"As someone who has worked on a lot of arms control in the past, I am not surprised it’s taken a little longer than people had hoped. There is a number of other things that we have done with Russia that relate to the reset, for example, shipping equipment to Afghanistan via Russian air space.

"We are working with Russia and China and our European Allies on the Iran threat and nuclear proliferation. Again, this is still a work in progress. It is an important security issue for everybody, not just the countries that are permanent members of the Security Council. It is a threat to international security, if Iran gets a nuclear weapon.

"Anyway, there are a lot of other efforts that are ongoing: Afghanistan and Pakistan, former Senator Mitchell’s work in the Middle East. These are tough problems that have been around for a long time and the Administration has put some new energy into them.”

[THE DAY]  How you can explain headline in American newspapers speaking about Obama’s decline, lack of audacity and losing allies in Eastern Europe?

[AMBASSADOR TEFFT] “I think the President has laid out his policy very clearly. I think everyone recognizes that there was some concern initially in Central and Eastern Europe among many of our friends about the reset policy, but I think both the President and the Vice President have tried to be very clear about that - not just when the Vice President visited here, but when President Obama was in Moscow, he was very clear in saying that we do not accept spheres of influence.

"He also said that state sovereignty must be a cornerstone of international order. The President added that, ‘just as all states must have the right to choose their leaders, states must have the right to borders that are secure, and to their own foreign policies…and any system that cedes those rights will lead to anarchy.

"That’s why we must apply this principle to all nations – and that includes nations like Georgia and Ukraine.’ Anyway, I think the President is working very hard. Probably the most important issue with regard to the success of the first year is the world economy. The President took huge risks in trying to work with our Central Bank to stabilize not only our economy, but the international economy.

"We were poised to experience the worst economic crisis since the Great Depression. And, while it has been bad - certainly bad here in Ukraine, where people are suffering; 14 percent contraction in GDP - it could have been much worse had there not been urgent and quick leadership.”

[THE DAY] Many experts think that the U.S. Administration’s announced “reset” of relations with Russia is not yielding results as expected. They point out that democratic and authoritarian regimes have little in common, leaving alone that their interests are largely opposite, and they talk different languages.

While the United States, in the words of its President and Secretary of State, talks about a multi-partner world, Russian leaders insist on a multi-polar world. Even in negotiating the new START treaty, there are problems, and the Russian Prime Minister started talking about developing offensive weapons to counter the U.S. anti-missile defense initiative. What is your comment?

[AMBASSADOR TEFFT] “START is a subject of very serious negotiations right now. Our main negotiator, Rose Gottemoeller, is my personal friend, and I know she is working extremely hard to get this done. I think we have been very clear from the President and Vice President on down that we have some serious differences with the Russians over the way they conduct relations with their neighbors.

"The Administration has been quite clear about the Russians in Georgia, and we have been very clear in stressing our support for the sovereignty, independence and territorial integrity in all of these countries, including Ukraine. That’s not just something said in public, it’s something that’s discussed in private. And, you know, we are going to disagree on that.

"But I think that the Administration’s effort is to try to focus on some of those areas where we can do something productive with Russia, such as Iran, nuclear proliferation, Afghanistan and terrorism, strategic arms – we need to work together on those issues even as we are very candid about our differences with Russia on other issues.”

[THE DAY]  Understandably, you cannot criticize your President – or maybe you can…but isn’t the “reset” of U.S.-Russia relations policy in contradiction to what you have been doing at your previous assignments and, probably, are going to continue here in Kiev – containing the Russian expansion in the post-Soviet territories? You have been called a specialist in containing Russian expansion.

[AMBASSADOR TEFFT] “I support President Obama and I don’t have any problem at all with the “reset” of U.S.-Russia relations. If you go back in my career, you will see that I worked in the 1980’s on arms control issues. I also worked very hard on our bilateral relationship with Russia, or at that time the Soviet Union, to include promoting the rule of law, and human rights, among other things.

"I think American policy since 1991, through both Democratic and Republican administrations, has been to try to have a good relationship with Russia, but also to support the independence of other countries that were part of the Soviet Union. Our record on that is quite clear. Whether it’s assistance or support, in a variety of ways, we have tried our very best, and I am proud of it.

"I don’t see any contradiction here at all. You can do a reset and still work hard to promote those issues that matter with regard to territorial integrity, with regard to human rights and democracy and other issues. We can do that and we will continue to do it”.

[THE DAY] In an earlier interview you have said that in your diplomatic career you always tried to improve relations between the United States and Russia, and also to promote the idea that the post-Soviet nations themselves would be better off having good relations with Russia.

Why, do you think, Tbilisi, where you headed the U.S. diplomatic mission, has not succeeded in establishing good relations with Moscow despite the efforts of the legitimate leadership of Georgia? Isn’t the problem in the Russia’s leaders’ obsession with keeping the post-Soviet territory, including that small nation in the Caucasus, within their sphere of influence?

[AMBASSADOR TEFFT] “I am not going to get into a discussion on the U.S.-Georgian relationship. Our Ambassador in Georgia, John Bass, is now in charge of that. I am the ambassador in Ukraine and I will talk about that. I will reiterate our policy to you.

"We have made it very clear: we don’t support the sphere of influence policy, we have serious disagreements with the Russians about that. And we support the sovereignty, independence, and territorial integrity of Ukraine. This isn’t just a slogan, those are real words that mean something to the Administration, and they mean something to me personally”

[THE DAY] Since they say an observer sees more than players, can you share your perspective on relations between Ukraine and Russia. How will the U.S.-Russia “reset” policy affect the improvement of relations between the two neighboring nations?

[AMBASSADOR TEFFT] “I think what I’ve said before, that countries in the region should have good neighborly relations, is accepted, it’s something that the leaders of the countries want. But it also means respect for sovereignty, independence and territorial integrity.

"I am not going to comment in any detail on the Ukraine-Russian relationship, but I will say the U.S. would support a relationship where there is an equality, a fairness, a mutual respect for the independence of each other – that should be the basis of relationships between states.

"In the United States we are very fortunate: we have very good relationships with our neighbors in Canada and Mexico. That does not mean that we don’t have problems, we have some serious issues with them, but we sit down, we talk with them as equals, and we work out solutions together to the problems.”

[THE DAY]  Going back to U.S.-Ukraine relations, can you name the objectives you set for yourself for the time of your assignment in Ukraine?

[AMBASSADOR TEFFT] “I have laid it out in my statement before the Senate Foreign Relations Committee. I have been sent here by the President and the Secretary of State to do everything I can to build the strategic partnership between our two countries. We have a Charter.

"Last December, Foreign Minister Poroshenko and Secretary of State Clinton met in Washington. In addition, a number of experts headed by U.S. Deputy Secretary Steinberg and Ukrainian Deputy Foreign Minister Yeliseiev, met to lay out the plans for implementing that Charter. That’s the guidepost for what the United States wants to do here.

"The Government of Ukraine said that they wanted to do that. I realize Ukraine is in the midst of the election period now, but it would be my strong hope that whoever is elected president, whatever administration is here, that we can continue on that path because it is not just in our interest, it’s in the interest of Ukraine to do this. It’s in the interest of independent and sovereign Ukraine to pursue that with us.”

[THE DAY] During the hearing at the Senate Foreign Relations Committee you said that “the depth of our relationship is clear from the size of our assistance program - 0 million this year.” We know, however, that some five-seven years ago the volume of assistance was much larger. At the same time, the U.S. assistance to Israel – a well-developed nation – stands at over billion.

Can one expect that your country will significantly increase assistance to Ukraine? It is in this case that one can hope that such assistance would tangibly impact the lives of common Ukrainians and improve the U.S. image as Ukraine’s true partner.

[AMBASSADOR TEFFT] “I don’t think any country should measure itself against Israel. Israel has a special relationship with our country. I think the amount that we provide every year is dependent on not only what we can do to be helpful to our Ukrainian friends, but it also depends on the Congressional appropriation.

"The fundamental point here is that the United States has continuously tried to support in Ukraine the goals that we believe the Ukrainian people share with us, promoting democracy, free market, rule of law, promoting the development of this country in all of its different manifestations. I think we are going to continue to do that. Maybe, this year’s assistance budget is not as much as it was in the past. But I think you will see us working hard to continue to do our best to help our Ukrainian friends.”

[THE DAY]  Perhaps you may help to attract American investors?

[AMBASSADOR TEFFT] “We are happy to do that. But frankly, this is also something that Ukraine has to do. Ukraine has to create a business environment to attract investors. I can’t tell an American company to invest here. The investor comes and looks at the situation, he talks to the other companies who are here, and they make an evaluation.

"I think it’s pretty obvious that in the world today, especially when we are talking about investments, there is great competition, and the bottom line is that Ukraine has to present itself in the best possible way as the best place to invest. I think many American companies see this country as one with the great potential. But there are a lot of other things that can be done to change the environment, to make it more hospitable to attract more companies here.”

[THE DAY] Opinions abound, both in our country and outside, that Ukraine has ended up in a “gray zone” in terms of security – between NATO and ODKB (Russia-led Collective Security Treaty Organization). Some point out that it is not only Ukraine’s own fault – the West could have, but did not, grant a Membership Action Plan to Ukraine at Istanbul’s NATO summit. Do you share this view?

[AMBASSADOR TEFFT] “With regard to NATO, the Bucharest decision was made that Ukraine will become a member. But everyone knows that the way you get into NATO is you have to prepare yourself. There is a national annual plan, there is MAP — there are a number of ways in which you can do this.

"As one of my friends said, do your homework. You have to prepare. We look not only at military reform and things like that, we also look at democracy and issues that relate to fundamental freedoms that NATO, which is the world’s greatest democratic alliance of nations, has established.

"In the end, a political decision is made by the countries that are members of NATO, and what a country has to do is to present itself in the best way it can, and the decision will be made. I think we just have to see what will happen with regard to future decisions, but my embassy will continue to work with our Ukrainian friends to fulfill the annual national plan, and to work to promote this.

"I would also say that these requirements for NATO are the kinds of things that will help Ukraine develop in a way, I think, its people want it to develop. It’s not something special.”

[THE DAY]  Mr. Ambassador, may it happen that Ukraine does not need MAP to become a member of NATO? It is now fulfilling the annual program, which is almost equivalent to MAP.

[AMBASSADOR TEFFT] “Our position is that there are a number of ways you can become a member of NATO and this annual national plan is one of those ways. We just have to work hard, we have good cooperation, we are working together.”

[THE DAY]  What support can the United States offer Ukraine on the path of integration into the North-Atlantic Treaty Organization? Could it be sale or lease of modern American arms to upgrade the combat readiness of the Ukrainian military? There was talk about some military ships, for example.

[AMBASSADOR TEFFT] “I don’t have any comment on the ships. I think that the annual national plan lays out very clearly an agenda that we should both follow to work on preparing Ukraine for possible membership in NATO.”

[THE DAY]  Lately, Ukrainian experts and officials call more and more vocally for granting Ukraine legally binding security guarantees, which would be an upgrade from the security assurances by the United States, Russia, and Great Britain given in the 1994 Budapest Memorandum in connection with Ukraine joining the Nuclear Non-Proliferation Treaty as non-nuclear state. Would the United States, as strategic partner, be willing to give such guarantees to our country or include them in the U.S.-Ukraine Strategic Partnership Charter that was signed in late 2008?

[AMBASSADOR TEFFT] “We have renewed our commitment to the Budapest agreement. But to be very frank, we don’t have separate security treaties with other countries. Our vehicle for giving security guaranties or participating in security arrangements is through NATO. ”

[THE DAY]  We know that during the Orange Revolution you came to Kiev and had talks with then incumbent leadership. Then, in 2004, could you expect that Ukraine will go through political instability, which some of the Ukrainian high officials call the period of turbulence?

[AMBASSADOR TEFFT] “I was here right before the Orange Revolution. As Secretary Clinton has said, we saw the great promise that came out of that. And my Vice President said, when he was here last summer, that there was certain amount of disappointment. But, the evolution of the country is ultimately up to the people and the politicians of that country. I know there has been a lot of disappointment on the part of some here in Ukraine.

"But I was encouraged last Sunday with the first round of the elections. By almost every monitor’s and observer’s estimate, the elections went off extremely well. It was much better than the previous presidential elections and it showed a level of development and, I think, maturity which was really quite good.

"The people of Ukraine had 18 different candidates that they could vote for. They had a choice and they could vote for whomever they wanted in free and fair conditions. This is the essence of democracy. So, I am encouraged. Now, a lot needs to still be done, and I made that clear in my statement to the Senate. There are clearly reforms that have to be taken.

"We have already discussed investment and business - things have to be done to encourage investment. If that happens, it will lead to development of the economy here. But this is going to be one of the big challenges for the new administration, whoever wins the elections.”

[THE DAY]  Some pundits express apprehension that the achievements of the Orange Revolution – freedoms of speech, of the media, of assembly – could be at risk after this election. Do you share what some media have been saying about the twilight of the orange era in Ukraine, and departure from democratic achievements, as a result?

[AMBASSADOR TEFFT] “I think the fundamental point is that Ukraine needs to continue to build its democracy. Almost everybody I’ve talked to admits that there are problems economically, there are problems in the area of the rule of law, there are problems with corruption. I am not saying anything new and different.

"Those are problems that are going to have to be addressed by the new administration. The United States has a number of programs to assist our Ukrainian friends in that regard, but the choices have to be made by the people and the politicians of Ukraine.”

[THE DAY]  You have met with both the front-running candidates for presidency. Have they made assurances regarding continuation of democratic development of the country and implementation of the necessary reforms? Have they asked for any assistance from the United States in this context?

[AMBASSADOR TEFFT] “I don’t talk about my conversations with government and political leaders. I can’t have a good dialogue with them unless we maintain some integrity to those discussions. I think the two candidates who will run, Mr. Yanukovych and Prime Minister Yulia Tymoshenko, understand the American position quite clearly.

"They have spoken with American leaders and I have laid out our position. I think there is no doubt in their mind where we stand. And we are prepared, as Secretary Clinton said, to work on a broad range of issues with whomever the Ukrainian people elect.”

[THE DAY] Can you share any details on discussions Liovochkin and Nemyria had in Washington?

[AMBASSADOR TEFFT] “I think the fact that both of them were received in Washington by the Administration is an example of what Secretary Clinton said: we meet with everybody, we will work with whomever the Ukrainian people elect in a free and fair election.”

[THE DAY]  Do you think there are valid reasons for some experts’ predictions that, even with such an influential diplomat as John Tefft as Ambassador in Kyiv, the U.S. influence in Ukraine will weaken?

[AMBASSADOR TEFFT] “I think that’s a judgment for other people to make. I was sent here by the President and the Secretary and their main advisers to do my very best to build that strategic partnership. I’ve been in the process over the last few weeks of meeting Ukraine’s political and economic leaders. I am still in the process of having my initial meetings with members of religious and social communities.

"I intend to do everything I can to continue to show America as a real partner in this country. One of the reasons I am doing this interview is so that you and your readers will know what we are about and what America stands for. I’ll keep working very hard at this, and I have a terrific staff here in the embassy who have been doing this for some time, and we’ll continue to do this as well.”

[THE DAY] We had Christmas Holiday season in Ukraine. Have you had a chance to taste kutia?

[AMBASSADOR TEFFT] “Unfortunately, I didn’t. I had to go back to Washington for a conference of ambassadors over Ukrainian Christmas. And my staff, one of the ladies who works for me in my residence, actually made some kutia when I was gone.

"My wife had some, but I did not get any. But I’ve been doing my best to eat other Ukrainian specialties, varenyky, and lots of other good dishes. I have a very good cook — I’m afraid too good a cook — at my house, so I have to watch so I don’t let my weight get out of control.”

[THE DAY] How do you spend your free time here in Kyiv? What do you explore, what do you read?

[AMBASSADOR TEFFT] “We’re trying to meet as many people as we can. Unfortunately, with the snow and the ice it’s hard to get out and sightsee. My wife and I have both been to Kyiv a number of times before. We have been to a number of beautiful sites here, in Kyiv, the Lavra and St. Sophia’s Cathedral. We’ve tried to get out and see a little bit, but the weather does not make it very easy.

"But we have a lot of plans, and particularly we have plans to get out outside of Kyiv, to other cities of Ukraine where we have never visited. In that sense, I am looking forward to the spring, when it will get a little bit easier to travel and to see some of this beautiful country and meet Ukrainians from all over — east to west, north to south.”

[THE DAY] … and maybe to speak with them in Ukrainian?

[AMBASSADOR TEFFT] “I’ll try. I took some Ukrainian lessons in Washington, just to start, and one of the things I’m going to do is to start with a teacher here. Partly because I was in Washington, partly because of the holidays and the elections I haven’t restarted language lessons, but it’s my plan. I need to do a lot of work on that, but I’ll do my best.”

[THE DAY]  Maybe our paper can help you, as we publish both Ukrainian and English versions.

[AMBASSADOR TEFFT] “Good. That way I can compare both Ukrainian and English versions. I learned Russian some time ago, and it’s very rusty. I have lots of work to do in this area.”

LINK: http://day.kiev.ua/291130 
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Analysis & Commentary: By Ildar Gazizullin, Senior Economist
International Centre for Policy Studies (ICPS) Newsletter #2 (465)
Kyiv, Ukraine, Monday, 25 January 2010

KYIV - Ukraine’s economy is slowly recovering after a financial crisis that peaked in 2008. Still, many sectors are unlikely to see output and profits return to pre-crisis levels any time soon. The new President will have to take a series of unpopular steps to prevent a catastrophe with the State Budget. ICPS Senior Economist Ildar Gazizullin writes about this and about the prospects of further economic growth.

Most sectors of Ukraine’s economy saw production fall even further during 2009. The one pleasant surprise was the farm sector, which came out even after a high baseline from last year, poor weather conditions and limited credit.

Still and all, the depth of the economic downturn has been slowly lessening since Q2’09, mostly because of rising world demand and higher prices for many of Ukraine’s export commodities. Ukraine’s economic recovery will continue into 2010. The ICPS forecast is for GDP growth to rise to 4%. In 2011 and 2012, the pace of growth should pick up to 5% and 6.7%.

Those sectors oriented on consumer products are seeing output rise slowly, as the level of consumption is not moving up especially quickly. In 2010, wages will grow modestly as business demand for labor will be low with the continuing high level of uncertainty in the economy. Lack of access to credit and lack of confidence among consumers regarding their financial futures will also make it hard for demand to leap forward.

Recovery will also be difficult in those sectors that depend on domestic investment demand. ICPS analysts expect such demand to remain weak in 2010, leaving the situation in construction and machine-building slow. Noticeable improvement will only be felt in 2011.

In addition, economic growth could prove unsustainable. The risk of a second wave of crisis remains. This could be caused by a rally on world stock and commodity markets that is not supported by the fundamentals and would lead to a further reduction in capital investment plans for 2010. This cause demand for steel, fertilizer and machinery, which are Ukraine’s main export commodities, to decline again.

One internal factor that creates risk is a soft Budget policy that, together with a rise in regulated prices for utilities and residential services after the election, could launch an inflationary spiral.

The Ukrainian Government’s anti-crisis measures during 2009 were largely ineffective, similar to many other governments, and had little serious impact on the economy. For instance, efforts to improve the regulatory environment - which, as a rule, does not require much in the way of Budget spending - failed: most of the related bills did not pass in the legislature. Ukraine was once again unable to raise its low rating significantly in the World Bank’s annual survey called Doing Business.

State assistance continues to be improperly directed and poorly administrated. Thus, instead of supporting projects that might spur growth across the economy, such as energy efficiency programs, the Government decided to provide assistance to selected sectors.

When the situation on external markets was extremely bad, the Government offered breaks to the steel and chemicals industries in the form of reduced rates for gas and electricity. However, it did not withdraw these benefits even when the situation on foreign markets improved markedly.

Until now, reforms have been largely urged on Ukraine by international financial institutions. Starting in 2000 and throughout the period of strong economic growth, not one Government felt enough incentive to undertake much-needed changes. In 2009, the International Monetary Fund was unable - or did not wish to - persuade the Government for the umpteenth time to start these reforms but simply withdrew its credit.

This means there is a risk that the Government and Verkhovna Rada will continue to do nothing, not only in the first quarter, but possibly throughout the first half of 2010 because of the high probability that another snap VR election will be called for Fall 2010.

Still, even if the new Administration hits the ground running with transformations, it will be unable to resolve the accumulated structural problems in the economy very quickly. This includes pension reform, which, like other reforms in the social sector, by its nature is a longterm process that can take as much as a decade to complete.

Meanwhile, raising residential gas prices, as is expected in 2010, will not be the magic wand to fix the problems of utility companies because it will not bring enough of an inflow of cash to cover Naftogaz Ukrainy’s debts. Moreover, there have been no real transformations in Ukraine for some time now, which might have not only led to the passing of individual laws but also to the modernization of existing institutions or the establishment of new ones.

It is these institutions and not outdated fixed assets or the lower numbers or poorer quality of the labor force that are the weakest point in Ukraine’s economy today. In the end, their inadequateness makes the entire economy vulnerable to external shocks and limits its potential for growth. 

NOTE: For additional information, contact ICPS senior economist Ildar Gazizullin by phone at (+38044) 484-4400 or via e-mail at ig@icps.kiev.ua.

The ICPS Newsletter is a bi-weekly publication of the International Centre for Policy Studies, delivered by electronic mail. To be included in the distribution list, mail your request to: marketing@icps.kiev.ua. ICPS Newsletter editor: Olga Lvova (olvova@icps.kiev.ua), Phone: (38044) 484-4400. Fax: (38044) 484-4402. English text editor: L.A. Wolanskyj.

The International Centre for Policy Studies (ICPS) is a leading independent think-tank in Ukraine. ICPS was established at the initiative of the Open Society Institute in 1994. ICPS’s mission is to support the further democratization and modernization of Ukraine through proactive, consistent Europeanization.
Address: vul. Pymonenka 13A, Kyiv, Ukraine 04050, Web-site: http://www.icps.com.ua/eng/.
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In the Ukraine, insurers have paid $50 million for private bank losses, and that is expected to rise significantly by the second quarter of this year.

By Mark E. Ruquet, National Underwriter P&C, Hoboken, NJ, Wed, Jan 27, 2010

CHICAGO - The danger of political and credit risk losses has surged as the global economic crisis takes a toll on world economies, according to an analysis by Aon Corp.

The Chicago-based insurance brokerage released its 17th annual Political and Economic Risk Map for 2010, and company executives said they are reevaluating political and credit risks in a number of countries after a 2009 spike in such claims.

Miles Johnston, director of Aon’s Political Risk team, said during a conference call today that “the rising risk levels in 2009 have led to a significant volume of political and risk claims in [the] international insurance market, which in turn has driven the downgrade of those countries.”

Roger Schwartz, senior vice president of Aon Trade Credit, said that while nine countries were upgraded, 18 received downgrades. Sudan, Venezuela and Yemen were moved into the very high category, joining Afghanistan, Congo Democratic Republic, Iran, Iraq, North Korea, Somalia and Zimbabwe.

Mr. Johnston said two examples of the type of claims insurers face are illustrated in Ghana and Ukraine, where bank defaults or breach in contracts has led to a shift in risk grade.

In the Ukraine, insurers have paid $50 million for private bank losses, and that is expected to rise significantly by the second quarter of this year.

In Ghana, state-owned oil refineries defaulted on $600 million in debt. While much of that is internal, he noted, so far $50 million has been paid by insurers for oil import contacts, and notifications of loss are still pending.

Mr. Johnston said that Lloyds has $500 million in claims notification waiting on political and credit risk as of Nov. 2009, all stemming from the private sector defaults in the Ukraine that can be traced to the global financial crisis. That number could rise to $750 million this year, he said.

Lloyds was reported to have paid out $50 million, but those payments are expected to rise significantly by the second quarter of 2010, according to Aon.

Mr. Johnston said Lloyds believes the notifications have peaked, but the full extent of the Ukraine loss is unknown.

Mr. Johnston said Lloyds is only a portion of the insurance assets underwriting this market. He said the Berne Union, an international association of credit and investment insurers, have paid an average of $500 million in claims in each of the last two years. The figures for 2009 are not yet available, but the expectation is there will be a major increase in notifications.

He noted that there is lag time between occurrence and the claim reaching insurance markets because there is a 180-to-360-day waiting period trigger. The purpose of the waiting period is to allow the parties time to work out their differences before it becomes an insurance loss.

LINK: http://www.property-casualty.com/News/2010/1/Pages/Aon-Political-And-Credit-Risk-Map-Finds-Loss-Areas-Rising-.aspx
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U.S.-Ukraine Business Council (USUBC), Wash, D.C., Thu, Jan 28, 2010

WASHINGTON - 2010 marks the 12th edition of the European Bank for Reconstruction and Development's (EBRD) highly acclaimed publication the "2010 Directory of Business Information Sources on Central and Eastern Europe." 

The publication has become a leading reference work of immediate practical value to researchers, economic and business analysts and potential investors in the important transition economies of Central and Eastern Europe and the CIS.

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U.S.-Ukraine Business Council (USUBC): http://www.usubc.org
Promoting U.S.-Ukraine business relations & investment since 1995.

By James Marson, The Wall Street Journal, New York, NY, Thu, Jan 28, 2010

KIEV – Ukrainian presidential front-runner Viktor Yanukovych said Wednesday that, if elected, he would force through social spending rises that could threaten vital loans from the International Monetary Fund.

The Fund suspended its $16.4 billion lending program late last year after parliament passed a law hiking wages and pensions. The rises, which the IMF opposed, threatened to bust the budget amid an estimated 15% economic contraction last year.

"Social standards must correspond to the real situation of life in the country. The authorities must protect the vulnerable in the population. These are first of all pensioners, the disabled, orphans and large families," Mr. Yanukovych said in an interview with a small group of foreign reporters. "This is what we demanded and passed the relevant law, which must be implemented."

"We will work out a program of cooperation that will suit the IMF and Ukraine," he added.

Mr. Yanukovych, who garnered 35% support in first-round voting on Jan. 17, will face Prime Minister Yulia Tymoshenko, who secured 25%, in a runoff on Feb. 7.

Mr. Yanukovych said he would not work with Ms. Tymoshenko after the elections, accusing her of an "ineffective approach" to reforms and the economy.

He signaled that snap parliamentary elections were likely, which could delay tough measures required by the IMF to resume lending. "The negotiation process to form a new coalition will begin immediately after the presidential election," Mr. Yanukovych said. "There will be a snap election if a coalition is not created."

Analysts and government officials say Ukraine needs further loans from the IMF, which has already disbursed almost $11 billion, to help cover payments including budget spending on wages and pensions and Russian gas.

Mr. Yanukovych also said he would seek to revise gas contracts with Russia to achieve a lower, "fair" price. Gas contracts signed by Ms. Tymoshenko last year foresee a market-based price for 2010, but Mr. Yanukovych indicated he would push for a discount from Moscow.

Eighty percent of Russian gas exports to Europe flow through Ukraine, and disputes over prices and payment in January 2009 led to cuts to supplies.

Write to James Marson at j.r.marson@gmail.com.

LINK: http://online.wsj.com/article/SB1000142405274870409 4304575029101823948766.html
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KPMG Ukraine, Kyiv, Ukraine, Mon, Jan 4, 2010

KYIV - As part of the government’s anti-crisis measures, the Ukrainian customs authorities exercise tighter control over the procedures of customs clearance of the imported goods. In particular, recently there have been a number of cases when the customs authorities challenged the customs value of goods declared by the Ukrainian importers and claimed that such customs value was to be increased.

This problem is becoming even more significant now that the prices for imported goods have generally decreased whereas the customs authorities claim that the customs value of the imported goods is to be determined based on the price levels applicable in the years before the crisis.

Our practice indicates that one of the main reasons for the customs authorities’ rejecting the arguments of the importer in support of the declared customs value of goods is the incompleteness and inadequacy of the supporting documents provided by the importer.

To support your position, we would be happy to assist you with proving to the customs authorities the correctness of the declared customs value of the imported goods. Our services could be provided at any stage of the importation of goods (i.e., planning, customs clearance, release under special customs regimes, customs audit, etc.).

In particular, we could help you to prepare:
       [1]  supporting documents (computation of cost, comparative analysis of prices and other documents) in the format acceptable to the customs authorities  to confirm the declared customs value of the imported goods;
       [2]  relevant requests to the specialized departments of the customs authorities of Ukraine;
       [3]  requests to the Chamber of Trade and Commerce of Ukraine;
       [4]  documents required to challenge the decisions of the customs authorities in pre-court trials and in court.

If the above issue is relevant for your company, we would be happy to discuss in more detail the problems faced by your company and propose our assistance given the specific circumstances.

Contacts: Sergey Popov, Partner, Tel. +380 44 490 5507, Fax. +380 44 492 8298, SPopov@kpmg.ua; Alexander Boboshko, Manager, +380 44 495 0339, fax. +380 44 492 8298, ABoboshko@kpmg.ua; Website; www.kpmg.ua

NOTE:  KPMG Ukraine is a member of the U.S-Ukraine Business Council (USUBC), Washington, D.C., www.usubc.org.
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Salans law firm, Kyiv/New York, Wednesday, January 27, 2010
KYIV/NEW YORK - Effective from January 1, 2010 Markian Silecky was appointed Partner at the international law firm Salans.  Markian will continue working in two Salans’ offices, in Kyiv and New York.  Markian specializes in general corporate law, mergers and acquisitions, cross-border transactions, real estate and environmental law.

Before joining Salans in 2008, Markian was the principal of an international law firm which he founded in 1988. He has been practicing in Ukraine since 1992 and has worked with various Ukrainian State Agencies including the Ministry of Transport, State Property Fund, Ministry of Environment and the Cabinet of Ministers of Ukraine, and has also represented the Embassy of the United States, the Canadian Embassy, and various diplomats with regard to their activities in Ukraine.

Markian graduated from the University of Toledo, Ohio (B.A. in International Relations, 1984) and received his Juris Doctor in 1987 from Case Western Reserve University School of Law, Cleveland. A native English speaker, Markian is also fluent in Ukrainian and Russian.

Salans is an international commercial law firm built on a pioneering spirit with 21 offices worldwide.  See www.salans.com for further information.

NOTE:  Salans is a member of the U.S.-Ukraine Business Council (USUBC), Washington, D.C., www.usubc.org.  USUBC congratulates Markian Silecky on his appointment as a partner in Salans.  Markian has been very active in the work and events sponsored by USUBC.
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Salans law firm, Kyiv, Ukraine, Tue, Dec 29, 2009 

KYIV - On 18 December 2009, the State Tax Administration of Ukraine (“STAU”) cancelled its “favourable” tax ruling [1] regarding the application of a 15% personal income tax (“PIT”) rate in respect of salaries paid to non-residents.

At the same time, on 23 December 2009, the STAU issued new explanatory letter No. 28593/7/17-0717, whereby Ukrainian employers must apply a 30% PIT rate in respect of salaries paid to non-residents.

Therefore, Ukrainian employers should consider applying the 30% PIT rate in respect of salaries paid to non-residents, starting from 18 December 2009. If after 18 December 2009 Ukrainian employers apply the 15% PIT rate, they may be subject to tax penalties.

[1] Order No. 50 “On Approval of Tax Clarification on Application of Certain Provisions of the Ukrainian Law ‘On Personal Income Tax’ regarding Foreigners’ and Nonresidents’ Taxation” dated 29 January 2004.

For further information regarding taxation in Ukraine, please contact: Igor Davydenko, Partner, idavidenko@salans.com; Sergiy Melnyk, Associate,  smelnyk@salans.com; Salans Kyiv, 49-A, Volodymyrska Street, 2nd Floor, 01034 Kyiv, Ukraine, T: +380 44 494 4774; F: +380 44 494 1991 kyiv@salans.com; www.salans.com.

NOTE:  Salans is a member of the U.S-Ukraine Business Council (USUBC), Washington, D.C., www.usubc.org.
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Analysis & Commentary: by Peter Zeihan
Stratfor Global Intelligence, Austin, Texas, Tue, January 26, 2010

Ukrainians go to the polls Feb. 7 to choose their next president. The last time they did this, in November 2004, the result was the prolonged international incident that became known as the Orange Revolution. That event saw Ukraine cleaved off from the Russian sphere of influence, triggering a chain of events that rekindled the Russian-Western Cold War.

Next week’s runoff election seals the Orange Revolution’s reversal. Russia owns the first candidate, Viktor Yanukovich, outright and has a workable agreement with the other, Yulia Timoshenko. The next few months will therefore see the de facto folding of Ukraine back into the Russian sphere of influence; discussion in Ukraine now consists of debate over the speed and depth of that reintegration.

Russia has been working to arrest its slide for several years. Next week’s election in Ukraine marks not so much the end of the post-Cold War period of Russian retreat as the beginning of a new era of Russian aggressiveness. To understand why, one must first absorb the Russian view of Ukraine.

Since the break-up of the Soviet Union, most of the former Soviet republics and satellites found themselves cast adrift, not part of the Russian orbit and not really part of any other grouping. Moscow still held links to all of them, but it exercised few of its levers of control over them during Russia’s internal meltdown during the 1990s.

During that period, a number of these states - Estonia, Latvia, Lithuania, Poland, Hungary, Romania, Bulgaria and the former Czechoslovakia to be exact - managed to spin themselves out of the Russian orbit and attach themselves to the European Union and NATO. Others - Azerbaijan, Georgia, Moldova, Uzbekistan, Kyrgyzstan and Ukraine - attempted to follow the path Westward, but have not succeeded at this point.

Of these six, Ukraine is by far the most critical. It is not simply the most populous of Russia’s former possessions or the birthplace of the Russian ethnicity, it is the most important province of the former Russian Empire and holds the key to the future of Eurasia.

First, the incidental reasons. Ukraine is the Russian Empire’s breadbasket. It is also the location of nearly all of Russia’s infrastructure links not only to Europe, but also to the Caucasus, making it critical for both trade and internal coherence; it is central to the existence of a state as multiethnic and chronically poor as Russia.

The Ukrainian port of Sevastopol is home to Russia’s Black Sea fleet, and Ukrainian ports are the only well-developed warm-water ports Russia has ever had. Belarus’ only waterborne exports traverse the Dnieper River, which empties into the Black Sea via Ukraine.

Therefore, as goes Ukraine, so goes Belarus. Not only is Ukraine home to some 15 million ethnic Russians - the largest concentration of Russians outside Russia proper - they reside in a zone geographically identical and contiguous to Russia itself. That zone is also the Ukrainian agricultural and industrial heartland, which again is integrated tightly into the Russian core.

These are all important factors for Moscow, but ultimately they pale before the only rationale that really matters: Ukraine is the only former Russian imperial territory that is both useful and has a natural barrier protecting it. Belarus is on the Northern European Plain, aka the invasion highway of Europe. The Baltics are all easily accessible by sea.

The Caucasian states of Armenia, Azerbaijan and Georgia are on the wrong side of the Caucasus Mountains (and Russia’s northern Caucasus republics — remember Chechnya? - aren’t exactly the cream of the crop of Russian possessions). It is true that Central Asia is anchored in mountains to the south, but the region is so large and boasts so few Slavs that it cannot be controlled reliably or cheaply. And Siberia is too huge to be useful.

Without Ukraine, Russia is a desperately defensive power, lacking any natural defenses aside from sheer distance. Moscow and Volgograd, two of Russia’s critically strategic cities, are within 300 miles of Ukraine’s eastern border.

Russia lacks any natural internal transport options - its rivers neither interconnect nor flow anywhere useful, and are frozen much of the year - so it must preposition defensive forces everywhere, a burden that has been beyond Russia’s capacity to sustain even in the best of times.

The (quite realistic) Russian fear is that without Ukraine, the Europeans will pressure Russia along its entire western periphery, the Islamic world will pressure Russia along its entire southern periphery, the Chinese will pressure Russia along its southeastern periphery, and the Americans will pressure Russia wherever opportunity presents itself.

Ukraine by contrast has the Carpathians to its west, a handy little barrier that has deflected invaders of all stripes for millennia. These mountains defend Ukraine against tanks coming from the west as effectively as they protected the Balkans against Mongols attacking from the east. Having the Carpathians as a western border reduces Russia’s massive defensive burden.

Most important, if Russia can redirect the resources it would have used for defensive purposes on the Ukrainian frontier — whether those resources be economic, intelligence, industrial, diplomatic or military — then Russia retains at least a modicum of offensive capability. And that modicum of offensive ability is more than enough to overmatch any of Russia’s neighbors (with the exception of China).

This view of Ukraine is not alien to countries in Russia’s neighborhood. They fully understand the difference between a Russia with Ukraine and a Russia without Ukraine, and understand that so long as Ukraine remains independent they have a great deal of maneuvering room. Now that all that remains is the result of an election with no strategic choice at stake, the former Soviet states and satellites realize that their world has just changed.

Georgia traditionally has been the most resistant to Russian influence regardless of its leadership, so defiant that Moscow felt it necessary to trounce Georgia in a brief war in August 2008. Georgia’s poor strategic position is nothing new, but a Russia that can redirect efforts from Ukraine is one that can crush Georgia as an afterthought.

That is turning the normally rambunctious Georgians pensive, and nudging them toward pragmatism. An opposition group, the Conservative Party, is launching a movement to moderate policy toward Russia, which among other things would mean abandoning Georgia’s bid for NATO membership and re-establishing formal political ties with Moscow.

A recent Lithuanian power struggle has resulted in the forced resignation of Foreign Minister Vygaudas. The main public point of contention was the foreign minister’s previous participation in facilitating U.S. renditions.

Vygaudas, like most in the Lithuanian leadership, saw such participation as critical to maintaining the tiny country’s alliance with the United States. President Dalia Grybauskaite, however, saw the writing on the wall in Ukraine, and feels the need to foster a more conciliatory view of Russia. Part of that meant offering up a sacrificial lamb in the form of the foreign minister.

Poland is in a unique position. It knows that should the Russians turn seriously aggressive, its position on the Northern European Plain makes it the focal point of Russian attention. Its location and vulnerability makes Warsaw very sensitive to Russian moves, so it has been watching Ukraine with alarm for several months.

As a result, the Poles have come up with some (admittedly small) olive branches, including an offer for Putin to visit Gdansk last September in an attempt to foster warmer (read: slightly less overtly hostile) relations. Putin not only seized upon the offer, but issued a public letter denouncing the World War II-era Molotov-Ribbentrop Treaty, long considered by Poles as the most outrageous Russian offense to Poland.

Warsaw has since replied with invitations for future visits. As with Georgia, Poland will never be pro-Russian — Poland is not only a NATO member but also hopes to host an American Patriot battery and participate in Washington’s developing ballistic missile defense program. But if Warsaw cannot hold Washington’s attention — and it has pulled out all the stops in trying to — it fears the writing might already be on the wall, and it must plan accordingly.

Azerbaijan has always attempted to walk a fine line between Russia and the West, knowing that any serious bid for membership in something like the European Union or NATO was contingent upon Georgia’s first succeeding in joining up. Baku would prefer a more independent arrangement, but it knows that it is too far from Russia’s western frontier to achieve such unless the stars are somewhat aligned.

As Georgia’s plans have met with what can best be described as abject failure, and with Ukraine now appearing headed toward Russian suzerainty, Azerbaijan has in essence resigned itself to the inevitable. Baku is well into negotiations that would redirect much of its natural gas output north to Russia rather than west to Turkey and Europe. And Azerbaijan simply has little else to bargain with.

Other states that have long been closer to Russia, but have attempted to balance Russia against other powers in hopes of preserving some measure of sovereignty, are giving up. Of the remaining former Soviet republics Belarus has the most educated workforce and even a functioning information technology industry, while Kazakhstan has a booming energy industry; both are reasonable candidates for integration into Western systems.

But both have this month agreed instead to throw their lots in with Russia. The specific method is an economic agreement that is more akin to shackles than a customs union. The deal effectively will gut both countries’ industries in favor of Russian producers. Moscow hopes the union in time will form the foundation of a true successor to the Soviet Union.

Other places continue to show resistance. The new Moldovan prime minister, Vlad Filat, is speaking with the Americans about energy security and is even flirting with the Romanians about reunification. The Latvians are as defiant as ever.

The Estonians, too, are holding fast, although they are quietly polling regional powers to at least assess where the next Russian hammer might fall. But for every state that decides it had best accede to Russia’s wishes, Russia has that much more bandwidth to dedicate to the poorly positioned holdouts.

Russia also has the opportunity. The United States is bogged down in its economic and health care debates, two wars and the Iran question - all of which mean Washington’s attention is occupied well away from the former Soviet sphere. With the United States distracted, Russia has a freer hand in re-establishing control over states that would like to be under the American security umbrella.

There is one final factor that is pushing Russia to resurge: It feels the pressure of time. The post-Cold War collapse may well have mortally wounded the Russian nation. The collapse in Russian births has halved the size of the 0-20 age group in comparison to their predecessors born in the 1970s and 1980s. Consequently, Russian demographics are among the worst in the world.

Even if Russia manages an economic renaissance, in a decade its population will have aged and shrunk to the point that the Russians will find holding together Russia proper a huge challenge. Moscow’s plan, therefore, is simple: entrench its influence while it is in a position of relative strength in preparation for when it must trade that influence for additional time. Ultimately, Russia is indeed going into that good night. But not gently. And not today.

NOTE: This report is republished with permission of STRATFOR. Link: http://www.stratfor.com.
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By Richard Boudreaux, The Wall Street Journal, New York, NY, Mon, Jan 25, 2010

MOSCOW – Russia ended a five-month diplomatic freeze with Ukraine on Monday, demonstrating the Kremlin's relief over President Viktor Yushchenko's failed re-election bid and its willingness to work with either of his successors.

Mikhail Zurabov, whose posting as Russia's ambassador had been delayed since August, arrived in Kiev and handed his credentials to Ukraine's foreign minister. He avoided the lame-duck president, who had angered Russian leaders with policies they considered hostile.

Mr. Yushchenko ran far behind the two frontrunners in the Jan. 17 election, who will face each other in a runoff next month. Before dispatching the new envoy, Russian President Dmitry Medvedev said last week he expected the Feb. 7 vote to produce "competent and effective authorities…open to the development of constructive, friendly, all-around relations with Russia."

Those relations have been severely strained since Mr. Yushchenko led Ukraine's pro-Western Orange Revolution of 2004.

Now Moscow's improved position is certain to complicate, if not reverse, Ukraine's political and economic integration with the West. It could also ease tensions that periodically led to price wars and halted winter supplies of Russian gas through Ukraine to a Europe.

Mr. Medvedev wrote a scathing open letter to Mr. Yushchenko in August, complaining of anti-Russian policies. That was widely interpreted as an appeal to Ukrainian voters to dump him for someone more accommodating.

But it was far less meddlesome than the Kremlin's ill-starred attempt to sway the 2004 vote. Vladimir Putin, then Russia's president, twice visited Ukraine that year to support Viktor Yanukovych's candidacy and rushed to applaud his tainted victory, only to be humiliated when poll results were overturned amid massive street protests against alleged fraud.

The Orange Revolution gave Ukraine a pro-Western government that appeared to stand as a model for other former Soviet republics seeking to distance themselves from Moscow. Mr. Yushchenko angered Russian leaders by seeking Ukrainian membership in NATO, supporting Georgia in its conflict with Moscow and campaigning to classify as genocide a Stalin-era famine that killed millions of Ukrainians.

Infighting among the Orange leaders paralyzed his efforts. Voters disillusioned by a limp economy turned against him.

Moscow's satisfaction with his demise is tempered by a wariness that its influence can go only so far, analysts say. Wary of another backlash, Russian leaders refrained from endorsing any candidate in January's first round of voting, while making it clear they could not work with Mr. Yushchenko, The Kremlin instructed Russian television networks to air balanced coverage of the race.

"Russia should be very happy that this strong anti-Russian trend in Ukraine is over," said Sergei Markov, a member of parliament from the ruling United Russia Party who observed the Jan. 17 election. "But I wouldn't call it a feeling of triumph. The mood is more cautious."

With Mr. Yanukovych back from disgrace and running again, the Kremlin cultivated both him and Ukrainian Prime Minister Yulia Tymoshenko, the Orange heroine who later turned against Mr. Yushchenko. She finished second to Mr. Yanukovych earlier this month and will face him in the runoff.

In November, Mr. Putin praised Ms. Tymoshenko's work as prime minister after striking a deal with her on gas prices. Later he denied favoring her candidacy and noted that United Russia is allied with Mr. Yanukovych's Party of Regions.

Both frontrunners said they would repair relations with Russia and shelve Mr. Yushchenko's bid to join NATO, even while pursuing closer ties to the European Union; neither is expected to continue the president's campaign on the genocide issue or his effort to restrict use of the Russian language.

"Russia played it subtle and smart," said Steven Pifer, a former U.S. ambassador to Ukraine and now a senior fellow at the Brookings Institution. "No matter who wins in Ukraine, there will be fewer points of tension with Moscow."

Mr. Pifer and other analysts believe, however, that either candidate would resist being drawn into a customs union with Russia at the expense of a trade accord with the EU. Russian partisans of Mr. Yanukovych, including Konstantin Zatulin, a member of parliament from the ruling party, view him as a tough adversary on gas prices and other trade issues.

"Russian-speaking voters in Ukraine like Yanukovych more, which means…more convenient leverage for Russia," Gleb Pavlovsky, a political scientist close to the Kremlin said on the Echo of Moscow radio station. Ms. Tymoshenko, he added, is less predictable, "but she will always find a reason to come to agreements and will always find a price."

LINK: http://online.wsj.com/article/SB100014240527487038089 04575025181169409918.html?mod=WSJ_latestheadlines
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U.S.-Ukraine Business Council (USUBC): http://www.usubc.org
Promoting U.S.-Ukraine business relations & investment since 1995.