Welcome to the U.S.-Ukraine Business Council

UKRAINE BUSINESS NEWS - TEN ARTICLES
Viktor's Choices; Investor Signals; EBRD; Agribusiness; Anticorruption Legislation

INDEX OF ARTICLES  ------
Clicking on the title of any article takes you directly to the article.               
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1.  VIKTOR'S CHOICES 
Editorial, Financial Times, London, UK, Thu, Feb 25, 2010

2.  NEW UKRAINE PRESIDENT GIVES RIGHT INVESTOR SIGNALS
By Sabina Zawadzki, Reuters, Kiev, Ukraine, Thu, Feb 25, 2010

3 YANUKOVICH SWORN IN AS UKRAINE PRESIDENT
By Roman Olearchyk in Kiev, Financial Times, London, UK, Thu, Feb 25 2010 
 
4 YANUKOVYCH SAYS UKRAINE SEEKS 'NON-ALIGNED' EU TIES
By Kateryna Choursina and Daryna Krasnolutska, Bloomberg, NY, NY, Thu, Feb 25, 2010
 
5 UKRAINE INVESTORS WILL BE CLOSELY WATCHING NEW PRESIDENT
By William Mauldin, Dow Jones Newswires, Moscow, Russia., Thu, Feb 25, 2010

6 EBRD PROCUREMENT AND CONSULTANCY OPPORTUNITIES
OPEN TO UNITED STATES COMPANIES
Sanford Owens, Senior Commercial Officer, U.S. Commercial Service Business
Liaison Office, European Bank for Reconstruction and Development (EBRD)
London, UK, Wednesday, February 24, 2010
 
7.  "AGRIBUSINESS IN UKRAINE: 2ND ANNUAL ADAM SMITH FORUM
16th-18th March 2010, InterContinental, Kyiv, Ukraine
Adam Smith Conferences, London, UK, Thu, Feb 25, 2010

8.  JPMORGAN TO TAKE ON MINING COMPANY CONTROLLED BY UKRAINIAN BILLIONAIRE GENNADIY BOGOLYUBOV IN AUSTRALIAN COURT OVER LEGAL FEES
By Peter Smith in Sydney, Financial Times, London, UK, Mon, Feb 22 2010

9.  NEW ANTICORRUPTION LEGISLATION OF UKRAINE
Vasil Kisil & Partners, Kyiv, Ukraine, Thu, Feb 25, 2010

10.  UKRAINE AMONG HARDEST HIT DUE TO TRADE FINANCE FREEZE
Analysis & Commentary: By Daniel W. Riordan
President, Zurich Surety, Credit and Political Risk
Kyiv Post, Kyiv, Ukraine, Fri, Feb 5, 2010
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1.  VIKTOR'S CHOICES 

Editorial, Financial Times, London, UK, Thu, Feb 25, 2010

Viktor Yanukovich, who is due to be inaugurated today as Ukraine’s new president, is getting his priorities right by picking Brussels for his first foreign trip.

But next week’s brief visit will not make a policy. Mr Yanukovich will have his work cut out convincing the European Union he is really committed to co-operation.

The burly ex-bureaucrat takes power after a bruising election in which he beat the leaders of the Orange Revolution – Viktor Yushchenko, outgoing president, and Yulia Tymoshenko, prime minister.

MANY UKRAINIANS SEE HIS ELECTION NOW AS A NATIONAL HUMILIATION
Mr Yanukovich first made international headlines for his unsavoury role in the 2004 election when his campaign was widely condemned as fraudulent. In most European states he would rightly have been wiped from political life. Many Ukrainians see his election now as a national humiliation.

So Mr Yanukovich has much to prove, starting with his democratic credentials. He must also revive a stalled International Monetary Fund rescue vital to bringing Ukraine out of financial crisis.

In foreign policy, he should clarify his intentions. Mr Yushchenko was unusual among Ukrainian leaders in openly backing rapid integration with the west. Mr Yanukovich is returning to the Kiev norm of balancing the west with Russia.

Mr Yanukovich is more comfortable in Moscow than in Brussels. But he is not naively pro-Russian. Ukraine’s business oligarchs, his big backers, would hate to have the Kremlin breathing down their necks, like their Russian counterparts. But they do want favours from Moscow, notably cheap gas.

EU MUST GIVE MR YANUKOVICH TIME TO EXPLAIN HIS PLANS
The EU must give Mr Yanukovich time to explain his plans. For example, he has pledged to join a Russia-led customs union as well as continuing talks with Brussels on a free trade agreement. But it is unclear if these aims are compatible.

He wants to bring Russia and the EU into a consortium to help run Ukraine’s vital gas pipelines. But on what terms? A genuine partnership that would stabilise the crisis-prone trade is one thing. A sell-out to Gazprom and/or shady businessmen quite another.

Ukraine missed chances after 2004 to accelerate integration with the EU. With Russia now stronger and the EU pre-occupied with other issues, a new rush to
the west is not feasible. Balancing Russia and the west is a reasonable choice.

But Mr Yanukovich must not forget most Ukrainians see their future in EU integration. Any short-term deal done with Moscow must not harm the long-term prospects. The EU should tell him so.

LINK: http://www.ft.com/cms/s/0/19cf7a64-217c-11df-830e-00144feab49a.html
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2.  NEW UKRAINE PRESIDENT GIVES RIGHT INVESTOR SIGNALS

By Sabina Zawadzki, Reuters, Kiev, Ukraine, Thu, Feb 25, 2010

KIEV - Ukrainian President Viktor Yanukovich sent positive signals to foreign investors in his inaugural speech on Thursday, but whether the ex-Soviet company manager succeeds in bringing them back remains to be seen.

Yanukovich was sworn in on Thursday after a bitter campaign against his election rival, Prime Minister Yulia Tymoshenko, and faces the tough task of consolidating his power to produce a stable government that can bring back vital IMF lending.

In his first speech as president, he said Ukraine faced "colossal debts, poverty, a collapsing economy, corruption", and vowed to win the trust of investors.

"What is needed for investors and international financial institutions to renew their trust in Ukraine is securing internal stability, overcoming corruption, restoring clear, and most importantly, constant rules of relations between the state and business," Yanukovich said.

He said his aim was not to strengthen the state's role in the economy "but the government's participation in the creation of effective market mechanisms".

"I am certain that direct interference by the state in the economy -- its manual control -- is a road to nowhere," he said.

INVESTORS HOPE FOR PERIOD OF POLITICAL STABILITY
Although managing the economy is not the remit of the president, investors hope Yanukovich's victory ushers in a period of political stability that would allow the government to focus on shoring up the state's finances and economic growth.

The International Monetary Fund suspended its $16.4 billion bailout at the end of last year in the wake of fierce political rows and broken spending promises. About $10.5 billion has been disbursed to date.

The finance ministry said a technical mission from the IMF is due to arrive in April 7. These missions are usually a prelude to a full-blown visit, after which a decision on resuming lending could be made. Yanukovich's Regions party instigated rises in the minimum wage, passed by parliament, that were the last straw for the IMF. The government had already reneged on a promise to raise domestic gas prices, which would have helped the state's finances.

"(Yanukovich's) statements point clearly in the direction of more stability, obviously a positive, as this is something that foreign investors have lost sight of in the past years," said Simon Quijano-Evans of brokerage Chevreux.

The Regions party is now trying to form a new coalition to oust that of Tymoshenko. If it does, and succeeds in forming a new government, talks with the IMF could resume.

"He will have to make some difficult decisions early in his regime, in particular on gas price hikes and reining in pension/wage promises, to bring the IMF programme back on track," said Tim Ash, head of CEEMEA research at Royal Bank of Scotland. "This will be a key short-term test of his willingness to bite the bullet."

LINK: http://www.reuters.com/article/idUSLDE61O0TO20100225

USUBC FOOTNOTE:  One of the largest concerns of the international business and investment community is the present high level of  'Crony Capitalism' found in Ukraine and whether this level will go up or down under the new President.  It is well known that the first priority for a high percentage of the politicians and government leaders at all levels over the past 19 years has always been to maximize their personal participation in and personal gains from the practice of 'Crony Capitalism," including private and government companies, their assets and earnings.
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3.  YANUKOVICH SWORN IN AS UKRAINE PRESIDENT

By Roman Olearchyk in Kiev, Financial Times, London, UK, Thu, Feb 25 2010

KIEV - Viktor Yanukovich vowed to steer Ukraine on a course between Russia and the west as he was sworn in as Ukraine’s president on Thursday. ”Ukraine will choose such a foreign policy that will allow the state to get the maximum results from the development of equal and mutually advantageous relations with Russia, the European Union, the US and other governments,” he said at his inauguration ceremony in the country’s parliament. 

Thursday’s inauguration completes Mr Yanukovich’s remarkable political comeback more than five years after the Orange Revolution overturned a fraud-marred presidential vote in his favour.

Backed by some of Ukraine’s wealthiest business oligarchs, the 59-year-old former mechanic takes over the strategically important country of 46m that borders the EU, where Russia and the west have jostled for influence.

Relations with Moscow soured under his predecessor Viktor Yushchenko, who pushed for Kiev to join Nato. To the satisfaction of Moscow, which strongly opposes Nato’s eastward expansion, Mr Yanukovich has pledged to keep Ukraine out of any military bloc. 

But the new president’s first foreign trip will be to Brussels on Monday, days ahead of a visit to Moscow.

Mr Yanukovich’s immediate task will be to calm Ukraine’s political infighting and stabilise the ailing economy, which saw gross domestic product plunge 15 per cent last year.

Despite a controversial background, which includes two stints in jail for petty crimes during his youth, Mr Yanukovich’s victory, in an election dubbed largely democratic, has been well-received by both Russia and the west. His inauguration was attended by senior officials from Brussels, Russia and former Soviet republics.

Mr Yanukovich’s political career seemed doomed after he lost the 2004 presidential contest as the Moscow-backed candidate. This time round he capitalised on bitter rivalries between the Orange Revolution leaders and narrowly beat Yulia Tymoshenko, prime minister, in a February 7 run-off vote.

Despite winning the presidency, Mr Yanukovich has yet to consolidate enough political power in Kiev to push through his agenda.  In the near term, he will seek to oust Ms Tymoshenko as prime minister, a position that holds more authority over domestic affairs than the presidency.

Backed by a fragile parliamentary majority, she continues to cling to power and accuses Mr Yanukovich of pandering to Moscow’s interests by pursuing “anti-Ukrainian and anti-European policies.”

Mr Yanukovich threatens to retaliate by calling snap parliamentary elections. Doing so could help him form a loyal governing coalition in the long term, but it could jeopardise short-term efforts to pull Ukraine out of recession.

PROLONGING THE STAY OF RUSSIA'S BLACK SEA FLEET
The most controversial of Mr Yanukovich’s alleged plans include prolonging the stay of Russia’s Black Sea fleet at a Ukrainian port.

JOINT MANAGEMENT OF UKRAINE'S GAS PIPELINE
Another controversial plan could give Russia, Europe and Ukrainian businessmen loyal to him a management stake in Ukraine’s strategic natural gas pipeline via a consortium.

Granting Russian official state language status would be welcome in the heartland of his support in eastern Ukraine, but it would alienate western Ukraine, which speaks Ukrainian.

Meanwhile, Brussels has urged Kiev to put an end to political infighting and stabilise its economy by resuming cooperation with the International Monetary Fund. The IMF froze a $16.4bn bail-out package late last year due to lack of political consensus and reforms. Should Mr Yanukovich get caught up in bitter rivalries with opponents, as Mr Yushchenko did throughout his presidency, his ability to govern will suffer.

LINK: http://www.ft.com/cms/s/0/20ace836-21fd-11df-98dd-00144feab49a.html
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4.  YANUKOVYCH SAYS UKRAINE SEEK 'NON-ALIGNED' EU TIES

By Kateryna Choursina and Daryna Krasnolutska, Bloomberg, NY, NY, Thu, Feb 25, 2010

KIEV - Ukraine President Viktor Yanukovych, who has signaled he wants closer ties with Russia, used his first inauguration speech to promise a non-aligned relationship with the European Union.

“Ukraine needs the EU in a global dimension, as a power to guarantee a peaceful coexistence of different civilizations and safety in the spheres of energy, environment and food,” Yanukovych said in Kiev today. “We are prepared to take part in such processes as a non-aligned state.”

Yanukovych’s election campaign promises to balance ties with neighboring Russia and the EU are under scrutiny after he asked for Russian help to ease gas flows into Europe and signaled he may allow Russia’s Black Sea naval fleet to remain based in Ukrainian waters. Former President Viktor Yushchenko, who defeated Yanukovych in 2004, targeted NATO membership and joining the EU to help free Ukraine from Russian influence.

“It’s a rebalancing act,” said Iana Dreyer, an analyst at the European Centre for International Political Economy in Brussels, by telephone. “The country has been divided into two for a long time between a western-orientated government and a Russian speaking, Russia-oriented east. I’m not surprised Yanukovych is seeking to restore the balance a bit. He doesn’t want to alienate Russia more.”

SOURED RELATIONS 
The ousted Yushchenko’s ambitions had contributed to a souring of relations between Moscow and Washington. Former Presidents George W. Bush and Vladimir Putin used Ukraine’s NATO goals as an excuse to ramp up antagonism between the two former Cold War adversaries and prompted fears of a military clash in the region.

The Kremlin curbed natural-gas deliveries to Ukraine in 2006 and 2009, withheld a new ambassador to Kiev and accused Yushchenko of supplying arms to Georgia during Russia’s war with its southern neighbor in August 2008.

Yanukovych, who was backed by Russia in the 2004 presidential election that sparked the Orange Revolution, wrote in a Feb. 17 article in the Wall St. Journal that Ukraine is “a nation with a European identity but we have historic cultural and economic ties to Russia as well. We will rebuild relations with Moscow as a strategic economic partner.”

“This is about Ukraine choosing a foreign policy that will allow it to get the maximum result out of its cooperation with Russia, the EU and the U.S.,” said Mykhaylo Pashkov, head of the international programs at the Razumkov Center for Political and Economic Studies.

SIGNALS
Russia, which traces its statehood to medieval Kiev, shares close economic, linguistic and religious ties to its neighbor. Without Ukraine, Russia stops being an empire with a foothold in Europe, former U.S. national security adviser Zbigniew Brzezinski wrote in his 1997 book “The Grand Chessboard.”

Even so, Ukraine may benefit equally if the EU stops delaying a so-called Association Agreement, which includes a trade pact, as the country’s political stalemate hampered fiscal, economic and legal reforms.

“It’s a signal that Yanukovych chose to make his first foreign trip to the EU” on March 1, Dreyer said. “In the minds of Ukrainian politicians it’s clear that joining the EU is not an option in the foreseeable future. The EU hasn’t been very keen to offer enlargement. But the Ukrainians do want a free trade agreement.”

Yanukovych will also visit Moscow on March 6, deputy head of his office Hanna Herman said today. She added that the president spoke to the U.S. delegation after his inauguration and discussed a visit to Kiev by Secretary of State Hillary Clinton, which may take place in the next three months.

ECONOMIC COLLAPSE
Ukraine’s economic collapse, which has left it relying on a $16.4 billion International Monetary Fund loan that has been frozen since the autumn has been exacerbated by political wrangling and the election campaign.

Yanukovych has pledged to set up a stable government to combat the deepest economic recession since 1994 and restore investor confidence. The hryvnia lost 41 percent against the dollar since September 2008 and was the world’s second worst performer after the Venezuelan bolivar.

The yield on Ukraine’s 2016 Eurobond fell 18 basis points to 10.07 percent at 1:25 p.m. in Kiev. The credit default swap spread on the country’s five-year debt narrowed to 936 basis points yesterday from 944 the previous day, according to Bloomberg data. A narrower CDS spread signals improved investor perceptions of credit risk.

LINK: http://www.bloomberg.com/apps/news?pid=20601085&sid =a89SZz9MfVt0
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5.  UKRAINE INVESTORS WILL BE CLOSELY WATCHING NEW PRESIDENT

By William Mauldin, Dow Jones Newswires, Moscow, Russia., Thu, Feb 25, 2010

MOSCOW - Investors will be watching closely as Ukrainian president Viktor Yanukovych seeks to pass a budget, pay about $6 billion in debt this year, and resume a lending program from the International Monetary Fund.

To do that, Yanukovych, who was inaugurated Thursday, will have to expand his own coalition in the parliament or reach out to the remaining supporters of outgoing president Viktor Yushchenko or even rival Yulia Tymoshenko, the runner-up in the presidential election who has resisted calls to resign as prime minister.

"Money matters, and there is an understanding that the IMF deal is crucial," said Marcus Svedberg, chief economist at East Capital Asset Management AB, which holds $5 billion in Eastern European equities. "They're going to work hard to actually fulfill the program."

Svedberg said that as Yanukovych works toward restarting the IMF program, requiring higher domestic gas prices and lower government wages and pensions, the country's financial markets will react positively, although some of that optimism is already priced in.

Ukraine's sovereign credit-default swap spreads--a key measure of credit risk--may fall to between 700 and 750 basis points in two or three months from 943 basis points currently, as the government works to restore IMF lending, said Timothy Ash, head of research for emerging Europe economies at the Royal Bank of Scotland Group PLC.

"They'll do a deal in the existing parliament, I think, either with the remnants of Yushchenko's party or with Tymoshenko," Ash said, adding that the IMF delegation could return to Kiev in late March or early April.

Meanwhile, Ukraine is planning to make an on-time payment of UAH5.1 billion ($639 million) for February deliveries of Russian gas, the country's acting finance minister told an official Russian newswire. Natural-gas bills will fall after the winter months.

A political agreement in parliament could help further reduce five-year CDS spreads on the country's sovereign debt, which stood at 943 basis points Thursday compared with a close last Friday of 988 basis points, according to CMA DataVision.

CDS are over-the-counter derivatives contracts that function like a default insurance for debt. If a borrower defaults, the protection buyer is paid compensation by the protection seller. Swap buyers may be protecting investments they own or simply making bearish bets against companies or countries.

Besides lowering the risk of holding Ukrainian bonds, a political rapprochement could also boost the stock market--which nearly doubled last year after ending 2008 as one of the world's worst performers--and lead the hryvnia to strengthen against the dollar.

"We're beginning to see people sniffing around the local foreign exchange market, seeing it as the next big trade if the politics get worked out," Ash said, pointing out that local-currency securities can yield 21%.

Even as market participants see the outlook for Ukraine's debt improving, it is still seen as one of the riskiest sovereign borrowers in the world after Argentina and Venezuela, and it may remain that way in the near term.

"I don't think investors expect radical changes," said Svedberg. "Investors in Ukraine don't have too-high expectations because we've had a lot of volatility for a long time."
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6.  EBRD PROCUREMENT AND CONSULTANCY OPPORTUNITIES
OPEN TO UNITED STATES COMPANIES

Sanford Owens, Senior Commercial Officer
U.S. Commercial Service Business Liaison Office
European Bank for Reconstruction and Development (EBRD)
London, UK, Wednesday, February 24, 2010

LONDON - Dear U.S. Company Representative: Please find below a link to our CS EBRD website listing recent procurement and consultancy opportunities, open to U.S. companies, available with the EBRD. We will send these to you periodically as appropriate.

You can find a complete history of EBRD opportunities at: http://www.ebrd.com/; under procurements, and additionally view completed project summary documents (PSD) at:  http://www.ebrd.com/projects/psd/psd2010/index.htm.

To access these opportunities, please click on the link below: http://www.buyusa.gov/ebrd/ebrd_procurement_opportunities.html. Please do not hesitate to contact our U.S. Business Liaison office for assistance in pursuing these opportunities.

Regards, Sanford Owens, Senior Commercial Officer
U.S. Commercial Service Business Liaison Office
European Bank for Reconstruction and Development
One Exchange Square, London, U.K. EC2A 2Jn
Tel: (+44) 20 7338 7493, sanford.owens@mail.doc.gov
Visit: www.buyusa.gov/ebrd
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7.  "AGRIBUSINESS IN UKRAINE: 2ND ANNUAL ADAM SMITH FORUM
16th-18th March 2010, InterContinental, Kyiv, Ukraine

Adam Smith Conferences, London, UK, Thu, Feb 25, 2010

LONDON - The Adam Smith Conferences' 2nd Forum on "Agribusiness in Ukraine" will be held in Kyiv on 16-18 (Tuesday, Wednesday, Thursday) March 2010 at the InterContinental Hotel.  "Agribusiness in Ukraine" forum is the only event attended by the decision makers of ALL the leading players in the Ukrainain agrarian industry, from both key international and Ukrainian companies. You will get to meet and talk with all the key movers in one place, at one time.

More than 40 high-level speakers, all recognised leaders and experts in the domestic and international agrarian industry will present at the forum.  For full details on the programme, speaker line up and to register, visit http://www.adamsmithconferences.com/RUC5USB.

If you have any questions, Adam Smith Conferences staff will be happy to help.  Please contact Lyudmyla Durneva on +44 207 0177339/7444 or write to
Lyudmyla@adamsmithconferences.com.
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8.  JPMORGAN CHASE TO TAKE ON MINING COMPANY
CONTROLLED BY UKRAINIAN BILLIONAIRE GENNADIY
BOGOLYUBOV IN AUSTRALIAN COURT OVER LEGAL FEES

By Peter Smith in Sydney, Financial Times, London, UK, Mon, Feb 22 2010

SYDNEY - JPMorgan Chase is today due to take on a mining company controlled by a Ukrainian billionaire in an Australian court - a rare legal case that sets adviser against client and shines a light on investment bank fee structures.

The US investment bank is seeking A$50.8m (US$45.7m) in fees for its role advising Consolidated Minerals, an Australian manganese miner bought for A$1.3bn by Palmary Enterprises , led by Ukrainian billionaire Gennadiy Bogolyubov.

The case will be closely followed by an investment banking industry that likes to keep its fee structures confidential. It also comes as the investment bank industry has been criticised for charging excessive fees. ConsMin received multiple takeover bids and approaches from four parties over a 14-month period between 2006 and 2007.

Pallinghurst Resources, an investment vehicle run by Brian Gilbertson, a former BHP Billiton chief executive, began the bidding war with an offer of A$2.08 a share but, after a series of counter offers, Palmary won the battle with a $5 a share cash offer. The difference between the first and last offers led to an uplift of more than A$800m for ConsMin's former shareholders.

After Palmary took control of ConsMin in 2008, it received a A$50.8m bill from JPMorgan covering fees for service, commission, retainers and expenses.

However, ConsMin believed its contract with JPMorgan had been superseded by a telephone call in 2006 between the parties that capped the bank's advisory fee at A$7m.  After receiving JPMorgan's invoice, it paid the bank A$20m in what it believed was a "full and final" settlement.

A legal battle then began with JPMorgan countering that, based on an alternative interpretation of contract clauses, including fees based on individual bids, it could be owed as much as A$86.9m.

JPMorgan is seeking the A$30.8m balance owed on its A$50.8m bill while ConsMin is counter-claiming, accusing the investment bank of misleading and deceptive conduct in relation to the A$7m fee cap, double and triple charging for the same service, and demanding money out of line with its practice with other clients. It wants A$13m of the fee paid refunded.

JPMorgan says it had a contract with ConsMin that allowed it charge a base fee of 0.75 per cent of the A$1.3bn transaction size or A$10.2m. It also believes it is entitled to two success fees. These are 3 per cent for the portion of the bid that was up to 25 per cent higher than the original offer, rising to 5 per cent once that bid exceeded 25 per cent of the original offer. It is unusual for an investment banking fee dispute to reach the courts, as most are resolved in private.

LINK:   http://www.ft.com/cms/s/0/ada444d0-1f52-11df-9584-00144feab49a.html
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9.  NEW ANTICORRUPTION LEGISLATION OF UKRAINE

Vasil Kisil & Partners, Kyiv, Ukraine, Thu, Feb 25, 2010

KYIV - This ALERT from the International Trade Department of Vasil Kisil & Partners is aimed updated information regarding current developments in the Ukrainian anticorruption legislative regulations.

1. Legislative framework
On June11, 2009 the Parliament of Ukraine adopted a number of new anticorruption laws, namely:

       [1] The Law of Ukraine “On Principles of Corruption Prevention and Counteraction” abolishing the effective Law of Ukraine “On Fighting Corruption” – currently being a major anticorruption act in Ukraine;
       [2] The Law of Ukraine “On Liability of Legal Entities for Commitment of Corruption Offences”;
       [3] The Law of Ukraine “On Amending Certain Legal Acts of Ukraine Regarding Liability for Corruption Offences”.

The said anticorruption laws were adopted pursuant to the international obligations undertaken by Ukraine while ratifying the United Nations Convention against Corruption, the Council of Europe Criminal Law Convention on Corruption and the Additional Protocol thereto.

Additionally, on December 8, 2009 the Cabinet of Ministers of Ukraine adopted 14 by-laws under the new laws, in particular: the Anticorruption Policy Concept, the Methodology of Carrying Out the Expert Examination of the Legal Regulatory Acts, the Order of Collection and Disclosure of the Information on Legal Entities Brought to Liability for the Corruption Offences etc.

2. Entry into force
Originally it was provided that the new anticorruption laws would enter into force on January 1, 2010. However, further on December 30, 2009 the Parliament postponed entering them into force until April 1, 2010 by the Law of Ukraine “On Amending Some Laws of Ukraine on Corruption Prevention and Counteraction” .

3. Key changes to be introduced
It is worth emphasizing that the new anticorruption laws have essentially amended the legislative framework in the field of fighting corruption e.g.:

       [1] Definition of “corruption” is substantially broadened and will relate not only to public, but also to private sphere. Moreover, either actual receipt or acceptance of a promise or an offer to receive material or intangible values shall be regarded as corruption;
       [2] List of persons to be brought to liability for corruption offences is amended substantially. According to the new anticorruption laws such list will include, among others, persons providing public services (e.g. auditors, notaries, experts, estimators/appraisers, independent intermediaries, arbitrators); persons occupying positions connected with performance of organizational/distributional and administrative/business related obligations in private legal entities and natural persons-entrepreneurs; and legal entities in cases set forth by law;
       [3] New anticorruption laws provide for substantially wider list of corruption offences;
       [4] Lists of administrative offences and crimes in the corruption sphere are essentially amended i.e. 13 additional administrative offences is added to the Code of Ukraine on Administrative Offences, while 7 additional crimes are added to the Criminal Code of Ukraine. In addition, provisions on a number of crimes in the Criminal Code of Ukraine are significantly revised;
       [5] New anticorruption laws strengthen administrative liability for administrative offences (1) and criminal liability for crimes (2) ;
       [6] Introducing a special liability of legal entities for committing on their behalf and in their interests certain crimes by a chief, a founder, a shareholder or other authorized persons. In such cases the following penalties may be imposed: fine (3); prohibition to conduct certain activities for the period from 3 month to 3 years; seizure of property and profits gained by the legal entity as a result of the said crimes commitment or liquidation of the legal entity;
       [7] In addition to administrative or criminal liability, for committing corruption offences legal entities may be prohibited for the period of 5 years to receive money and property from the state or local self-administration bodies, as well as to carry out activities in the name of the state or any other activities related to provision of state services on contractual basis; agreements concluded as a result of corruption offences shall be deemed as null and void etc.

4. Further developments
Adoption of the new anticorruption laws was considered as quite controversial. On November 27, 2009 the Supreme Court of Ukraine adopted a ruling to address the issue of the constitutionality of the said new anticorruption laws before the Constitutional Court of Ukraine. However, no decision has been adopted yet in this regard.

At the same time, there are a number of initiatives in the Parliament to suspend further the said anticorruption laws for a longer period as some MPs believe that the new anticorruption legislation has numerous shortfalls, is inconsistent and inaccurate, as well as does not comply with certain provisions of the Constitution of Ukraine and international treaties. Moreover, as of today there are a number of draft laws registered with the Parliament setting forth essential changes to the new anticorruption laws.

Therefore, as of today it is hardly possible to predict whether the new anticorruption legislation might come fully into force on April 1, 2010 and it is crucial to monitor any further developments in this regard.

FOOTNOTES:
1 - Fine amounting to from 10 to 500 nontaxable minimum individual incomes (about EUR 15 - 730) pending on the particular offence. In addition, seizure of unlawful benefit of material value received and of profits gained in case limitations as to carrying out of entrepreneurial activities and requirements to plurality are infringed can be applied
2 - Fine amounting to up to 1500 nontaxable minimum individual incomes (approximately up to EUR 2 200); correctional labour up to 3 years; an arrest up to 6 months; restricting of freedom up to 7 years; imprisonment up to 10 years. Additionally, deprivation of a right to hold certain posts or conduct certain activities up to 4 years and seizure of property can be imposed
3 - Amounting to from 1 000 to 15 000 nontaxable minimum individual incomes (approximately EUR 1 450 – 22 000)

CONTACT: Nataliya Mykolska, Senior associate, mykolska@vkp.kiev.ua; Anzhela Makhinova, Associate, makhinova@vkp.kiev.ua. Leonardo Business Centre, 17/52-A B. Khmelnitskogo St., Kyiv 01030 Ukraine, Telephone: +380 44 581 7777; Fax: +380 44 581 7770; E-mail: vkp@vkp.kiev.ua; Link
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10.  UKRAINE AMONG HARDEST HIT DUE TO TRADE FINANCE FREEZE
Trade finance crucial for post-crisis, frontier economies.

Analysis & Commentary: By Daniel W. Riordan
President, Zurich Surety, Credit and Political Risk
Kyiv Post, Kyiv, Ukraine, Fri, Feb 5, 2010

With the worst of the global financial crisis apparently behind us, we are left to survey the damage the storm has left behind. The effects of the crisis will be seen for years to come. Perhaps the most significant long term damage is that being inflicted upon the global trading system, and the impact will be most severe in post crisis emerging market economies such as Ukraine.

But before we get into more detail about Ukraine and why it was hit so hard, let me provide a bit of background to put the global nature and impact of this into context.

This year, the global economy will experience the sharpest contraction in trade in the post World War II era, over 10 percent by volume according to recent International Monetary Fund projections. This historically sharp decline reflects several factors.

[1] First is the reduction in global demand. [2] This is amplified by higher elasticity of global trade, caused by increasingly complex supply chains in which goods are often imported, exported, and re-exported several times before the finished product is purchased by the end user. [3] A third and often overlooked factor is the increased scarcity of trade finance.

The World Bank estimates a trade finance “gap” of $250 billion. This gap is beginning to close through extraordinary measures undertaken by multilateral
financial institutions and governments and as banks and other trade creditors rebuild their balance sheets and their risk appetites.

There is a real threat, however, that the decades old norm of preferential treatment of trade finance could be overturned by the actions taken by the governments of some crisis hit emerging markets. If continued, this may result in scarcer and more expensive trade credit, with the most severe consequences to be felt by post-crisis emerging market and frontier economies that stand to gain the most by integration into the global economy.

Trade finance often receives less attention than the more glamorous corners of finance due to the routine nature of its operations. But since 90 percent of trade transactions involve short term trade finance in the form of some version of credit, insurance or guarantee, it is vital to the functioning of the global economy. Trade finance is particularly important to frontier and post-crisis economies, such as Ukraine.

For these countries, it is often one of the few forms of international finance available. Because exporters are perceived to have preferential access to scarce foreign reserves, and because trade finance transactions can be structured so that goods provide security for loans, international trade finance often operates in markets that commercial lenders and investment bankers avoid.

Exporter credit agencies and private insurers, such as Zurich Surety, Credit and Political Risk, provide a critical facilitating role for trade finance. They allow trade finance creditors to manage their risk exposures through guarantees and insurance. Last year insurance for exports provided by members of the Berne Union, an international association of public and private export credit providers and investment insurance agencies, amounted to $1.4 trillion.

While trade finance may be one of the most basic and fundamental forms of global finance, because trade finance lines are short term and self liquidating, trade finance can quickly evaporate if it is not given priority treatment in times of crisis. As the IMF has noted in the past, "Sharp declines in trade credit have a number of adverse consequences, disrupting a country's trade and growth performance and possibly exacerbating the crisis."

Past crises have taught us that policy makers in crisis hit emerging economies must act decisively to restore trade finance before any vigorous recovery can get underway.

In 1998, Russia excluded some trade finance obligations from a 90-day moratorium on foreign exchange payments. In 2002, Argentina allocated a higher share of its scarce foreign reserves to debtors with foreign trade obligations, and recognized the central importance of maintaining trade flows and keeping financing lines in place by exempting debtors from obtaining Central Bank approval to convert and transfer payments to meet obligations insured by members of the Berne Union.

In 2001, when Turkey began to experience liquidity problems, the central bank quickly identified the maintenance of trade finance lines as a priority. After spending over $20 billion restructuring and recapitalizing the domestic banking sector, Turkey received commitments from trade creditors to maintain their lines.

In the current crisis, the most notable tests of the principle of preferential treatment of trade finance have occurred in Ukraine and Kazakhstan. Both of these countries suffered failures of systemically important banks with significant trade finance obligations. In each case, the commitment placed on the restoration of trade finance lines by government officials has been ambivalent at best. Likewise multilateral financial institutions have yet to provide clear support for the principle in their consultations with national authorities.

IN UKRAINE NO SERIOUS COMMITMENT
In Ukraine, where the bank failures have been widespread and the recession has been particularly severe, the Ministry of Finance has yet to demonstrate a serious commitment to the recapitalization of several systemically important banks or to offer appropriate restructuring terms to trade creditors.

Furthermore, a recently passed banking law aimed at improving the procedures for the financial rehabilitation of Ukrainian banks has undermined the rights of creditors, including trade creditors, by downgrading the ranking of trade creditors in case of a bank liquidation relative to obligations due to the Ministry of Finance and the National Bank of Ukraine.

In Kazakhstan, bank failures have been more limited, but the negotiations for the restructuring of the debts of BTA Bank, formerly Kazakhstan’s biggest lender, have been particularly concerning for trade creditors. BTA’s restructuring offer included a 82.25 percent haircut, with no exemption or referential terms offered to trade creditors.

As if those terms didn’t communicate the Kazakh government's stance clear enough, Grigory Marchenko, the chairman of the central bank of Kazakhstan, when asked if he was concerned that the harsh terms would raise concerns among investors, said:"Image is nothing."

FAILURE OF GOVERNMENT OF UKRAINE
The failure of the governments of Kazakhstan and Ukraine to place appropriate emphasis on the restoration of trade finance is undermining the recovery of their economies.

In Ukraine, by the second quarter of 2009, imports and exports were down by more than 50 percent year-on-year. While this is driven partly by demand, anecdotal evidence suggests the scarcity of trade finance is having a major impact on Ukrainian firms.

In recent months, Zurich has been contacted directly and through business forums by Ukrainian companies that are unable to import capital goods that are critical to maintaining or expanding their business.

Alexander Gordin, managing director of Broad Street Capital, a merchant bank with extensive experience structuring and arranging financing for trade in Ukraine, recently estimated to Zurich that some 30 percent of the drop in trade is due to lack of trade finance.

In assessing the fallout of the collapse in trade finance, Gordin said "We have seen numerous examples where… projects which are vitally important to the population are not getting done for lack of trade financing. Major manufacturers are forgoing the market and crossing it off their strategic plans since no financing is available."

It should not be surprising that the Ukrainian economy is believed to have contracted by 15 percent last year, the most severe recession of major emerging market economies.

Multilateral financial institutions must also recognize that the treatment of trade finance in this crisis will have implications far beyond Kazakhstan and Ukraine. A clear repudiation of the principle of preferential treatment of trade finance, with no response by the multilateral financial institutions, will increase pricing and reduce availability of trade finance for emerging market and frontier economies.

NOTE: Daniel W. Riordan is the President of Zurich Surety, Credit and Political Risk. Between 2005 and 2008, Zurich Financial Services underwrote trade credit and political risk insurance policies that facilitated $1.42 billion in trade and $465 million in foreign direct investment in Ukraine.

USUBC NOTE:  Zurich Surety, Credit and Political Risk, Washington, D.C., is a member of the U.S.-Ukraine Business Council (USUBC), Washington, D.C., www.usubc.org.

LINK: http://www.kyivpost.com:80/news/business/bus_general/ detail/58709
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