US-Ukraine Business Council

UKRAINE BUSINESS NEWS - SIX ARTICLES

1. UKRAINE ON THE BRINK
All eyes on the reset button, Washington has failed to notice Russia's meddling in a crisis next door. At the least, Obama should visit ailing Ukraine and prove that good relations with Russia don't meant forgetting the rest of the region.
Analysis & Commentary: By David J. Kramer and Damon Wilson
David J. Kramer and Damon Wilson's blog, ForeignPolicy.com,
Washington, D.C., Thursday, May 28, 2009

2. PUTIN TO THE WEST: HANDS OFF UKRAINE
By James Marson, Kiev, Time magazine, NY, NY, Monday, May 25, 2009

3. RAIFFEISEN BANK WILL NOT EXIT UKRAINE,
UNTHINKABLE TO LEAVE SAYS TOP EXECUTIVE
Ukraine is one of Raiffeisen's key markets where it owns the second-biggest bank
By Eva Komarek and Boris Groendahl, Reuters, Vienna, Austria, Wed, May 27, 2009

4. LIBYA AGREES TO GROW WHEAT IN UKRAINE
Reuters, Tripoli, Libya, Wednesday May 27 2009

5. WORLD BANK SIGNS $140 MILLION CARBON
EMISSION RIGHTS DEAL WITH UKRAINE
Reuters, Barcelona, Spain, Wed May 27, 2009

6. UKRAINE TO SELL $3.5 BILLION MORE KYOTO CARBON RIGHTS
By Michael Szabo, Reuters, Barcelona, Spain, Tue May 26, 2009
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Analysis & Commentary: By David J. Kramer and Damon Wilson
David J. Kramer and Damon Wilson's blog, ForeignPolicy.com,
Washington, D.C., Thursday, May 28, 2009

Russia has always had a knack for overshadowing its neighbors - and this time the West, focused on Moscow, is distracted from a crisis in Ukraine. As U.S. President Barack Obama gears up to "reset" Russia relations, Ukraine is in disarray. The country is teetering between economic collapse, Russian influence, and vague promises of Western support.

It will take decisive moves from Washington to help pull Ukraine back from the edge. At the least, Obama should visit ailing Ukraine and prove that good relations with Russia don't meant forgetting the rest of the region.

Economic decline is largely to blame for Ukraine's perilous predicament. The country paid heavily for of its massive corporate foreign debt, failure to push through serious economic reform, and unwillingness to clean up a terribly corrupt energy sector. The International Monetary Fund and World Bank forecast an 8 to 9 percent drop in GDP this year, and that might be a conservative estimate; the economy has contracted some 30 percent in the first quarter alone.

Ukraine's currency, the hryvnya, has fallen 40 percent against the dollar. Unemployment may reach 10 percent and mass protests are not out of the question -- especially in the troubled east.

Finger-pointing among Ukrainian politicians, already a national sport, will only accelerate as the country gears up for January 2010 elections for president (and possibly early parliamentary elections, too). Many, including Prime Minister Yulia Tymoshenko (who has been feuding with President Viktor Yushchenko since the Orange Revolution brought him to power in 2004) are calling for constitutional reform that would strengthen Ukraine's parliament and weaken the presidency.

Constitutional reform, important though that may be, is a divisive distraction at a horrible time. What would be more helpful is economic reform, as the IMF recommended as part of its $16.4 billion deal last year.

But politicians are desperate for quicker solutions, even ones that may not have Ukraine's long-term interests in mind.

ENTER MOSCOW
Enter Moscow, which has provided loans to the tune of several billion dollars already to Kiev and is interested in buying up more Ukrainian properties and assets. Russia might not be acting out of mere kindness of heart; a campaign to regain its sphere of influence might be at work.

If so, it's a campaign with strategic implications. Russia's Black Sea fleet is set to operate in Ukraine's port city of Sevastopol until 2017. In its current economic predicament, Ukraine will be in a weaker position in contentious negotiations with Moscow about whether to renew the arrangement.

The same is true as the country rejects Russian nationalist claims that Crimea, internationally recognized as part of Ukraine, really belongs to Russia. Clashes between the two countries over gas delivery to Europe are also likely to continue -- with Russia in a position to apply further pressure on Ukraine, (though Ukraine also needs to pay its bills so that future cutoffs are harder to justify).

WHY SHOULD THE INTERNATIONAL COMMUNITY BE CONCERNED
Why should the international community be concerned about Ukraine's fragility? In a word: location. The country of more than 46 million people is a strategically placed capitalist (albeit fragile) democracy on the fault line between Russia and the European Union. Messy and frustrating as Ukrainian politics may be, the country has been both peaceful and democratic since the Orange Revolution in 2004.

The media in Ukraine are freer than ever, and the parliament (the Rada) is no rubber stamp for the executive branch -- more than some of Ukraine's neighbors can say. Ukraine is central to achieving the goal of a Europe that is whole, free, and at peace. It's the right country in the right place. But if the West turns away, gains from the past five years could be lost.

VISIBLE U.S. SUPPORT FOR UKRAINE IS CRITICAL
Visible U.S. support for Ukraine is critical as the country struggles through the coming months. Obama should avoid boosting one politician over another prior to any elections. A visit to Kiev on the president's scheduled trip to Moscow in July would help, sending a powerful message that America will not seek to improve relations with Russia at all costs, neighbors included.

On his trip, Obama must make clear that he seeks better relations with Ukraine and other countries in the region even as he improves ties with Moscow. It's a delicate balancing act, but neither policy can succeed without the other.

NOTE: David J. Kramer is senior transatlantic fellow at the German Marshall Fund of the United States. He was assistant secretary of state for democracy, human rights and labor and a deputy assistant secretary responsible for Ukraine from 2005 to 2008. Damon Wilson is director of the international security program at the Atlantic Council. He served as special assistant to the president and senior director for European affairs at the National Security Council from 2007 to 2009.

LINK: http://experts.foreignpolicy.com:80/posts/2009/05/28/ukraine_on_the_brink; FOREIGN POLICY is published by the Slate Group, a division of Washingtonpost.Newsweek Interactive, LLC., Washington, DC.
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2. PUTIN TO THE WEST: HANDS OFF UKRAINE

By James Marson, Kiev, Time magazine, NY, NY, Monday, May 25, 2009

KIEV - Vladimir Putin, Russia's Prime Minister and former President, is not renowned for his love of literature. But on Sunday he gave Russian journalists an unexpected reading tip: the diaries of Anton Denikin, a commander in the White Army, which fought the Bolsheviks after the revolution in 1917.

"He has a discussion there about Big Russia and Little Russia — Ukraine," Russian news wires quoted Putin as saying after laying a wreath in Moscow at
the grave of Denikin, who is now portrayed as a Russian patriot. "He says that no one should be allowed to interfere in relations between us; they have always been the business of Russia itself."

WARNINGS TO WEST NOT TO MEDDLE IN UKRAINE
Putin's words are seen as the latest in an ongoing volley of pointed warnings to the West not to meddle in Ukraine, which has such close historical and cultural ties to Russia that the Kremlin considers the country firmly within its sphere of interests.

"The Russian leadership is very apprehensive about what it sees as Western moves designed to tear Ukraine away from Russia," says Dmitry Trenin,
director of the Carnegie Moscow Center, an independent think tank in Moscow. "Their central foreign policy goal is to create a power center around Russia. Any move by the West towards the former Soviet republics is seen as damaging Russia's interests."

Moscow has reacted angrily to Ukrainian President Viktor Yushchenko's attempts in recent years to gain NATO membership and to a recent agreement
in March under which the European Union would help modernize Ukraine's aging gas-transport system. "This agreement is Exhibit A in Moscow's collection [of complaints]," says Trenin. "It's evidence that Europe is concluding bilateral deals with Ukraine that undermine Russia's interests."

Russian leaders have also expressed concerns about the E.U.'s Eastern Partnership program, which was unveiled earlier this month and aims to deepen economic and political ties with six former Soviet states, including Ukraine. At the E.U.-Russia summit in Khabarovsk over the weekend, Russian
President Dmitri Medvedev said E.U. officials had "failed to persuade" him that it was not harmful to Russian interests. "What confuses me is that some
states ... see this partnership as a partnership against Russia," he said.

Putin's reference on Sunday to "Little Russia" — a term used during the Russian Empire to describe parts of modern-day Ukraine that came under czarist rule — has raised hackles in Ukraine, where many consider it demeaning and offensive.

PUTIN'S COMMENTS SHOULD BE TAKEN VERY SERIOUSLY
"These comments by Putin should be taken very seriously," says Olexandr Paliy, a political analyst with the Institute of Foreign Policy at the Ukrainian Ministry of Foreign Affairs' Diplomatic Academy. "Russia is engaged in a propaganda war against Ukraine, designed to convince the West not to support Ukraine. Russia doesn't understand cooperation with equals, only with subordinates."

Putin is not known for his tact when speaking of Russia's western neighbor, which declared independence from the Soviet Union in 1991. In April 2008, a
source told Russia's Kommersant newspaper how Putin described Ukraine to George Bush at a NATO meeting in Bucharest: "You don't understand, George, that Ukraine is not even a state. What is Ukraine? Part of its territories is Eastern Europe, but the greater part is a gift from us."

Such rhetoric led to fears that after its army's foray into South Ossetia in August, Russia would turn its attention to Ukraine's Crimean peninsula, which has a predominantly ethnic Russian population and is home to Russia's Black Sea Fleet.

In an article in Ukraine's Den newspaper on Thursday, Yuriy Shcherbak, Ukraine's former ambassador to the U.S., wrote that political analysts close to the Russian leadership were keen to portray Ukraine, which has huge economic woes and a political élite riven by infighting, as a "failed state."

"Aggressive conversations are taking place concerning Ukraine and the dividing of its territory ... at various levels of the Russian political, military and secret-service leadership," he wrote. In fact, other experts suggest, such belligerent talk is meant more as a corrective threat than a potential course of action.

But even if Moscow has no immediate designs on Crimea, the continued flow of baleful utterances from the Kremlin does reflect a desire for what
Medvedev has called Russia's "privileged interests" in the region to be respected - in terms of politics, business and culture.

KREMLIN HAS PLENTY OF LEVERS TO PULL
And the Kremlin certainly has plenty of levers to pull in Ukraine to make its views felt, with its control over gas supplies, alongside the popularity of Russian state-controlled TV in the east and south of the country, where pro-Russian sentiment is strongest.

"In certain sections of the Ukrainian political and business élite, there are links with Russia stretching back to Soviet times," says Paliy from the Institute of Foreign Policy. "There are also a large number of Russian-sponsored think tanks in Ukraine, which function freely and push the Kremlin's views."

These levers are likely to play a significant role in Ukraine's upcoming presidential elections, set for next January. Last time around, in 2004, Russia and Putin threw their weight behind then Prime Minister Viktor Yanukovych, whose initial victory was overturned after massive protests in Kiev against vote-rigging, which turned into the so-called Orange Revolution.

This time, analysts say the Kremlin will probably diversify its approach, with support for both Yanukovych and previously hostile Prime Minister Yulia
Tymoshenko, President Yushchenko's former Orange ally.

"The Russian leadership learnt one important lesson from 2004 — not to put all their eggs in one basket," says Trenin. Meanwhile, Russians and
Ukrainians alike will be watching for Putin's next trenchant explanation from literary history.

LINK: http://www.time.com/time/world/article/0,8599,1900838,00.html
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3. RAIFFEISEN BANK WILL NOT EXIT UKRAINE,
UNTHINKABLE TO LEAVE SAYS TOP EXECUTIVE
Ukraine is one of Raiffeisen's key markets where it owns the second-biggest bank

By Eva Komarek and Boris Groendahl, Reuters, Vienna, Austria, Wed, May 27, 2009

VIENNA - It would be "unthinkable" for the No. 2 emerging Europe lender Raiffeisen International [Bank] to exit crisis-ridden countries like Ukraine or Romania, the head of Raiffeisen's owner, RZB, said in an interview on Wednesday.

Raiffeisen's breakneck growth of the past years came to a screeching halt last year when the collapse of Western export demand and the global credit crunch suddenly pushed the former Communist countries of Europe into a deep economic crisis. "Of course this can be a long, dry spell," said Walter Rothensteiner, chief executive of cooperative bank RZB and chairman of its Raiffeisen International arm.

UKRAINE, ONE OF RAIFFEISEN'S KEY MARKETS
Ukraine, one of Raiffeisen's key markets where it owns the second-biggest bank, is particularly hit by the crisis, with economists expecting the economy to decline by 8 to 10 percent this year. But Rothensteiner said he would stay put there. "To take single building bricks out of (our network) would be unthinkable," he said. "It would be unacceptable for our overall strategy."

Raiffeisen's loan book grew 40 percent in 2007 and 20 percent in 2008 as companies invested and retail clients borrowed to buy houses, cars and refrigerators. But the bank will struggle to keep it stable this year.

At the same time, bad debt has started to rise and will eat up a big and rising chunk of income this year. Bad debt provisions at RZB rose to six times the level of last year in the first quarter of 2009 already.

"You'll have to sit down with clients and say, 'So what are we going to do?' And then you will lengthen clients' repayment schedules, and they will probably not repay in full. And you are going to see this in the risk provisions," Rothensteiner said.

But he added that the long-term growth prospects remained intact. The fact that there were still 50 to 60 million eastern Europeans who did not even have a bank account guaranteed that banking service would resume their growth at some point.

MELTDOWN FEARS OVERBLOWN
Rothensteiner criticised what he called alarmist warnings about a financial meltdown in emerging Europe which caused the region's currencies, bonds and stocks to collapse earlier this year.

He said that while the region was clearly in crisis, it was still manageable, and the sums needed to stabilise the region were small compared to those thrown into Western banks.

"With 10 or 20 billion euros of IMF loans, you can relieve the budget and the current account of an entire country," he said, comparing it to the 102 billion euro rescue of Germany's Hypo Real Estate. "We sometimes lose sight of those relative dimensions."

RZB, an unlisted bank owned by regional Austrian cooperative banks, is the main funding source for Raiffeisen, of which it owns 70 percent. Rothensteiner said a recent injection of 1.75 billion euros into RZB by the Austrian government would help it provide both capital and liquidity for Raiffeisen and its subsidiaries in 17 countries across emerging Europe.

"I would expect that central banks in some of the countries will demand to raise the capital," he said. "If Raiffeisen International needs money, they'll knock on our door." Asked if Raiffeisen would have to tap markets for equity to keep its capital ratios intact, he said: "Of course not."

NOTE: Reporting by Boris Groendahl and Eva Komarek; editing by Simon Jessop and David Cowell, boris.groendahl@reuters.com; +43 1 53112-258; Reuters Messaging: boris.groendahl.reuters.com@reuters.net, Keywords: RZB.

LINK: http://in.reuters.com/article/bankingfinancial-SP/idINLR98114320090527?sp=true
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4. LIBYA AGREES TO GROW WHEAT IN UKRAINE

Reuters, Tripoli, Libya, Wednesday May 27 2009
TRIPOLI - Libya has agreed with Ukraine to grow wheat on 100,000 hectares of land and export the grain to the North African country, Libyan state media reported on Wednesday.

Tripoli and Kiev also reached unspecified deals in military cooperation including "exchange of secret information" and "nuclear cooperation for peaceful uses", Libyan news agency Jana said.

"The agreement on farming 100,000 hectares in Ukraine is part of several deals between the two countries that include building an oil refinery and investment in several other agriculture projects," Jana quoted Libyan Prime Minister Al-Baghdadi Ali al-Mahmoudi as saying late on Tuesday.

"Libya would set up an investment centre in Ukraine to oversee its investment in several fields including oil, gas and investment in grains farming," Jana quoted Mahmoudi, who held a joint news conference with visiting Ukrainian Prime Minister Yulia Tymoshenko, as adding. (Writing by Lamine Ghanmi; Editing by Anthony Barker)
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5. WORLD BANK SIGNS $140 MILLION KYOTO
CARBON EMISSIONS RIGHTS DEAL WITH UKRAINE

Reuters, Barcelona, Spain, Wed May 27, 2009

BARCELONA - The World Bank signed a pact with Ukraine to buy 10 million metric tons of Kyoto carbon emissions rights, the parties said on Wednesday, in a deal worth up to $140 million, according to Reuters calculations.

Under the Kyoto Protocol, signatory nations that are comfortably below their greenhouse gas emissions targets can sell excess emissions rights called Assigned Amount Units (AAUs) to nations which are struggling to meet their targets.

The industry of former communist countries collapsed in the 1990s, making their Kyoto targets very easy, and their sales of AAUs now are making it effortless for polluting countries to meet their targets, green groups say.

AAU deals threaten to undermine a market in carbon offsets, which project developers can sell in return for avoiding greenhouse gas emissions through building wind farms or hydropower dams, for example.

As most AAUs are often the result of economic restructuring rather than investment in clean energy, buyers like the World Bank insist that 'Green Investment Scheme' clauses to be included in the contracts, to avoid scrutiny.

Green Investment Schemes ensure AAU revenues are invested by the seller in clean energy projects. "This memorandum of understanding and the expected transaction are a continuation of cooperation between World Bank and Ukraine to design and implement a Green Investment Scheme," the World Bank said in a press release.

The memorandum was signed by both parties on the sidelines of a carbon market conference in Barcelona. On Tuesday, Ukraine's government said it was looking to sell 150 million AAUs to two private companies. It was not clear whether these deals involved a Green Investment Scheme clause.

Japan's Nomura bank also said it was in advanced talks to buy 100 million-300 million AAUs from Ukraine, which would include a Green Investment Scheme clause.

Ukraine sold 30 million rights to Japan in March while the World Bank signed a similar agreement in December to buy 10 million rights from Poland. Both these deals were rumored to be worth around 10 euros ($14) per metric ton of carbon dioxide, sources said. (Reporting by Michael Szabo, additional reporting by Gerrard Wynn; Editing by Keiron Henderson)
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6. UKRAINE TO SELL $3.5 BILLION MORE KYOTO CARBON RIGHTS

By Michael Szabo, Reuters, Barcelona, Spain, Tue May 26, 2009

BARCELONA - Ukraine is in advanced talks to sell some $3.5 billion more sovereign carbon emission rights under the Kyoto Protocol to three companies, the government said on its website this week.

Ukraine's Cabinet of Ministers has asked the National Agency for Ecology Investments to sell at least 150 million more rights, called Assigned Amount Units (AAUs), to the UK arm of Japanese bank Nomura, Swiss-based Dighton Carbon SA and New Zealand-based Tawhaki International LP. The deals represent the biggest such transactions to date.

Laurent Segalen, managing director of commodities and environment at Nomura, said he represented a consortium of Japanese businesses looking to buy at least 100 million AAUs for between 5-10 euros ($7-$14) per metric ton of carbon dioxide, with a view to buying more if the initial deal was successful.

"We're in very, very advanced negotiations ... and expect to sign a mandate with Ukraine soon and a formal agreement by the end of the year," he told Reuters, adding that he was unfamiliar with the other two deals or the private buyers involved.

Ukraine said it also aimed to sell 100 million to Dighton Carbon and 50 million to Tawhaki, but no further details on the deals or the private companies were available. Online records show Dighton set up its carbon trading business within the past 12 months.

Through the most opaque of Kyoto's emissions trading schemes, nations comfortably below their greenhouse gas targets can sell excess rights to other countries that are emitting above their emissions targets.

UKRAINE MOST EFFICIENT
Critics have called AAUs "hot air," arguing that most were generated through restructuring in eastern Europe in the 1990s, when polluting industries in ex-communist countries were shutting anyway, rather than by new investment in clean energy.

Because of this, many buyers insist that AAU deals should be "greened," meaning their proceeds are transparently earmarked for investment in clean energy or energy efficiency, under so-called Green Investment Schemes (GIS). "Our deal is extremely green," Nomura's Segalen added.

Ukraine, which has around 1 billion AAUs to sell through 2012, signed a deal in March to send 40 million tons east, for around 10 euros each. Laurent said Nomura was in talks with other countries but that Ukraine was "by far the most efficient." This deals represent the largest to date involving private buyers.

On May 5, Slovak Prime Minister Robert Fico said he would fire his environment minister for mishandling a 10 million AAU sale to a private company.
The dismissal of Jan Chrbet came after fierce criticism of the 60 million euro contract with Washington-based Interblue Group, with the opposition Christian Democrat SDKU party saying Slovakia lost some 40 million euros on the deal. (Reporting by Michael Szabo; Editing by Anthony Barker)

LINK: http://www.reuters.com/article/GCA-GreenBusiness/idUSTRE54P3LE20090526?sp=true
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