Welcome to the U.S.-Ukraine Business Council

UKRAINE BUSINESS NEWS - TWELVE ARTICLES

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1.  U.S. & UKRAINE ANNOUNCE BILATERAL ENERGY SECURITY WORKING GROUP (BESWG)
Office of the Spokesman, U.S. State Department, Wash, DC, Wed, Oct 28, 2009
 
2.  UKRAINE AND U.S. SET UP ENERGY SECURITY WORKING GROUP 
Ukrainian News-on-line, Ukrainian News Agency, Thu., Oct 29, 2009 

3 U.S.-UKRAINE BUSINESS COUNCIL HOSTS ENERGY LUNCHEON IN WASHINGTON
U.S.-Ukraine Business Council (USUBC), Wash, D.C., Friday, Oct 30, 2009

4.  UKRAINE - IMF RELATIONS TAKE CENTRE STAGE
Timothy Ash, Royal Bank of Scotland
RBS Marketplace, Emerging Markets Strategy
London, UK, Thursday, October 29, 2009

5 IMF MISSION STATEMENT ON UKRAINE
IMF Press Release No. 09/366, Wash, D.C., Sun, October 25, 2009

6 IMF RESIDENT REPRESENTATIVE IN UKRAINE MEETS WITH TRADE UNIONS
IMF Press Release No. 09/370, Wash, D.C., Tues, October 27, 2009

7.  UKRAINE'S BAILOUT LOAN DEPENDS ON POLICY, IMF SAYS  
By Daryna Krasnolutska, Bloomberg, NY, NY, Mon, Oct. 26

8.  EU LEADERS CONCERNED OVER LAW ON RISE IN SOCIAL STANDARDS, SAYS UKRAINE'S VICE PREMIER HRYHORIY NEMYRIA
Interfax Ukraine, Kyiv, Ukraine, Thu, Oct 29, 2009

9.  UKRAINIAN PRESIDENT YUSHCHENKO REFUSES TO VETO
LAW INCREASING SOCIAL STANDARDS
5 Kanal TV, Kiev, in Ukrainian 0700 gmt 29 Oct 09
BBC Monitoring Service, UK, in English, Thu, Oct 29, 2009 

10.  UKRAINIAN FINANCE MINISTRY OFFERING NOT TO FULLFILL LAW ON RISE IN SOCIAL STANDARDS IF SIGNED BY THE PRESIDENT
UkrInform, Kyiv, Ukraine, Thu, October 29, 2009 

11 UKRAINE DPM NEMYRYA SEES NO 3RD "GAS WAR" WITH RUSSIA 
By Richard Balmforth, Reuters, Kiev, Ukraine, Thu, Oct 27, 2009

12.  UKRAINE - MACROECONOMIC ECONOMIC SITUATION - OCT2009 
Analytical Report: by Olga Pogarska, Edilberto L. Segura
SigmaBleyzer Emerging Markets Private Equity Investment Group
The Bleyzer Foundation, Kyiv, Ukraine, October, 2009
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1U.S. & UKRAINE ANNOUNCE BILATERAL ENERGY
SECURITY WORKING GROUP (BESWG)

Office of the Spokesman, U.S. State Department, Wash, D.C., Wed, Oct 28, 2009

WASHINGTON - The government of the United States and the government of Ukraine warmly welcome the creation of a Bilateral Energy Security Working Group (BESWG) under the auspices of the Strategic Partnership Commission. The BESWG is co-chaired by Ambassador Richard L. Morningstar, Special Envoy for Eurasian Energy, U.S. Department of State; and Sergiy Pavlusha, Deputy Minister, Ministry of Fuel and Energy, Ukraine.

On the U.S. side, participants included representatives from the departments of Energy, Commerce and Labor; the National Security Council; and the Agency for International Development. On the Ukrainian side, participants included representatives from the Secretariat of the President, Ministry of Foreign Affairs, Energoatom, and the Embassy of Ukraine in Washington.

At the inaugural session of the BESWG on October 28, 2009, the two sides discussed the importance of working together to strengthen energy security for Ukraine and Europe. They evaluated results of the implementation of projects in Ukraine aimed at enhancing Ukraine’s energy security.

In particular, the meeting focused on Ukraine’s energy sector reform initiatives, ongoing U.S. technical assistance to Ukraine in municipal heating reform and other sectors, and the potential for enhanced U.S.-Ukraine cooperation in energy efficiency and other new areas. The two sides also discussed promoting the participation of the U.S. and Ukrainian private sectors in energy development and the importance of successfully implementing cooperative projects in nuclear power.

LINK:  http://www.state.gov/r/pa/prs/ps/2009/oct/131024.htm
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2.  UKRAINE AND US SET UP ENERGY SECURITY WORKING GROUP 

Ukrainian News-on-line, Ukrainian News Agency, Thu., October 29, 2009 

KYIV - Ukraine and the United States of America set up a Bilateral Energy Security Working Group under the auspices of the Ukraine-U.S. Strategic Partnership Commission, reads a joint Ukraine-U.S. media note on energy security cooperation posted at the official website of the minister of foreign affairs.

The note also says that this working group is co-chaired by Ambassador Richard L. Morningstar, Special Envoy for Eurasian Energy, U.S. Department of State; and Ukraine's deputy minister of fuel and energy Serhii Pavlusha.

The Ukrainian part of the working group includes officials from the President's Staff, from the ministry of foreign affairs, the Enerhoatom national nuclear energy generating company, and Ukraine's embassy in the United States.

The U.S. side includes officials from the Department of Energy, Department of Commerce, Department of Labor, the National Security Council; and the Agency for International Development.

The note says, on October 28 the working group held its founding meeting, where the sides evaluated results of implementation of projects in Ukraine purported for enhancing energy security in the country.

In particular, the meeting focused on Ukraine's energy sector reform initiatives, ongoing U.S. technical assistance to Ukraine in municipal heating reform and other sectors, and the potential for enhanced U.S.-Ukraine cooperation in energy efficiency and other new areas.
Members of the working group also discussed promoting the participation of the U.S. and Ukrainian private sectors in energy development and the importance of successfully implementing cooperative projects in nuclear power.

As Ukrainian News earlier reported, Ukraine and the United States in July agreed on setting up a joint commission on strategic partnership.
In October Ukraine's Ambassador to the United States, Oleh Shamshur, said that prior to this commission's start to work they plan a founding meeting of the energy security workgroup.

USUBC FOOTNOTE:  Some of the governmental officials expected to attend the first meeting of the Bilateral Energy Security Working Group (BESWG) in addition to Ambassador Richard L. Morningstar, Special Envoy for Eurasian Energy, U.S. Department of State and Ukraine's Deputy Minister of Fuel and Energy Serhii Pavlusha were Jonathan Elkind, Principal Deputy Assistant Secretary for Policy and International Affairs, U.S. Department of Energy; Kristina Kvien, Director for European Affairs, National Security Council; Mark Bocchetti, Deputy Director, Ukraine, Moldova, Belarus Affairs, U.S. Department of State; and Dan Hall, Ukraine Desk Officer, Economic Affairs, U.S. Department of State.

Other attending were to include: Monica S. Bland, Economic Officer - Energy, Embassy of the United States in Kyiv, Ukraine; Tom Torgerson, International Economist, Office of Europe and Eurasia, U.S. Treasury Department; Camille Caliendo, Senior International Relations Analyst, Office of Policy and International Affairs, U.S. Department of Energy; Lana Ekimoff, Director, Office of Russian and European Affairs, Office of Policy and International Affairs, U.S. Department of Energy; Kirsten Brooks Selinger, Country Assistance Officer for Ukraine and Belarus, Office of the Assistance Coordinator for Europe and Eurasia, U.S. Department of State, and Christine Lucyk, Senior Policy Advisor, Office of Russia, Ukraine and Eurasia, International Trade Administration, U.S. Department of Commerce. 

Expected attendees from the government of Ukraine in addition to the Deputy Minister of Fuel and Energy, Serhii Pavlusha, were Bohdan Sokolovskyi, Presidential Representative for International Energy Security Issues, Secretariat of the President of Ukraine; Viacheslav Kniazhnytskyi, Ambassador-at-large for Energy Security, Ministry for Foreign Affairs of Ukraine and Olga Kravets, Vice-President, EnergoAtom, National Nuclear Energy Generating Company, Ministry of Fuel and Energy of Ukraine and officials from the Ukrainian Embassy, in Washington, Andrii Bukvych, First Secretary; and Yurii Ognivenko, First Secretary, Energy Issues.
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3.  U.S.-UKRAINE BUSINESS COUNCIL (USUBC) HOSTS
ENERGY SECURITY LUNCHEON IN WASHINGTON

U.S.-Ukraine Business Council (USUBC), Wash, D.C., Friday, Oct 30, 2009

WASHINGTON - The U.S.-Ukraine Business Council (USUBC), in cooperation with the Embassy of Ukraine to the U.S., hosted a small luncheon in Washington on Thursday for energy experts from the government of Ukraine, the government of the United States and representatives of private U.S. energy  companies operating in Ukraine. 

Several of the energy experts from the two governments had participated in the first meeting of the new Bilateral Energy Security Working Group (BESWG) which met in Washington on Wednesday.  During the luncheon issues were discussed related to various programs being implemented by the government of Ukraine to diversify the sources of energy in Ukraine, increase energy efficiency and to moderize Ukraine's gas pipeline network.

Five representatives of the government of Ukraine made short presentations at the luncheon: Bohdan Sokolovskyi, Presidential Representative for International Energy Security Issues, Secretariat of the President of Ukraine; Viacheslav Kniazhnytskyi, Ambassador-at-large for Energy Security, Ministry for Foreign Affairs of Ukraine and Olga Kravets, Vice-President, EnergoAtom, National Nuclear Energy Generating Company, Ministry of Fuel and Energy of Ukraine and two officials from the Ukrainian Embassy, Andrii Bukvych, First Secretary; and Yurii Ognivenko, First Secretary, Energy Issues.

Attending the luncheon from the U.S. were officials and energy specialists from the U.S. Department of State, Department of Energy, Chevron, Halliburton, Holtec International, Shell, SigmaBleyzer, Westinghouse, Atlantic Council of the U.S. and the U.S.-Ukraine Business Council (USUBC).
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4.  UKRAINE - IMF RELATIONS TAKE CENTRE STAGE

Timothy Ash, Royal Bank of Scotland
RBS Marketplace, Emerging Markets Strategy
London, UK, Thursday, October 29, 2009

LONDON - Market focus is squarely placed on the state of negotiations with the IMF over the release of the latest tranche of credits under the Stand-by arrangement agreed last year, alongside the course of the Naftogas restructuring process. The two may well be linked.

On the first of these, and perhaps crucially, President Yushchenko has indicated that he may not in fact veto the public sector wages and pension bill approved by parliament on October 20 which calls for a 20% hike in wages and pensions over the next year.

To recap the IMF issued a statement last week, following their mission to complete the latest review under the SBA, indicating that they would require the bill to be vetoed as a condition for the release of the next US$3.8bn tranche under the IMF programme; due by November.

On October 27, the IMF resident representative to Ukraine further nuanced the IMF's line, after meeting with trade union leaders that the IMF is pressing for wage and pension hikes for 2010 to be held to inflation which is expected to come in around 10%. Evidently the wage and pensions bill contradicts the demands for wage restraint currently being made by the IMF.

The IMF already seem to have cut the government a remarkable amount of slack by apparently backing off from earlier prior commitments under the SBA to raise domestic gas prices by 20% from September 1, and October 1, 2009. Note herein that in the IMF press release dated October 25, which details the requirement for the bill on pensions/wages to be vetoed, there is no mention of the government's failure to force through domestic gas price hikes.

Indeed, it seems that the Fund is buying into the line that gas prices will not now be hiked ahead of presidential elections due on January 17, 2009, and indeed, unlikely now for the 2009/10 heating season, given that presidential elections will likely drag out to February, given the second run off vote and reforming a government will likely extend political uncertainty for weeks/months thereafter. Given the latter apparent concessions it would now seem remarkable for the Fund to cut the government even more slack over the wages/pensions bill.

So what's the probability that President Yushchenko will bite the bullet on the IMF front, and veto this key bill? Herein, the president has over the past year called for Ukraine's various sides to pull together to ensure the IMF programme is held on track; indeed Yushchenko's protégé and likely presidential candidate, Arsenyi Yatseniuk, was instrumental last year in his then role as speaker of parliament in pushing reform bills through parliament to ensure the final sign off on the SBA.

However, with Yushchenko's nemesis PM Tymoshenko calling for the bill to be vetoed, there seems to be a strong possibility that the bill will not be approved; there is a tendency for Yushchenko to block anything which Tymoshenko is trying to do.

Indeed, Yushchenko's game-plan would likely be to use the issue to undermine Tymoshenko's position in the run up to the presidential elections, and Yushchenko's riding to the rescue of public sector employees/pensioners against the prime minister, might well play well with the electorate and into the hands of Tymoshenko's opponents.

It is important to note that Yushchenko himself is unlikely to secure a second term in office, as opinion polls show him to be acutely unpopular, polling in the low single digits, versus 15-20% for Tymoshenko and 20-25% for the leader of Regions of Ukraine (RU), Viktor Yanukovych.

Yushchenko's game plan seems to be, failing his own victory, to try and promote the cause of Yatseniuk, and not vetoing the wage bill might well work to this cause. Without the release of IMF funding, the government might struggle to fund itself to year end, or at the least would be starved of resources to pork-barrel in the run up to elections. His hope would be that another mini-crisis in the economy would inevitably backfire on the incumbent prime minister, boosting the chances of Yatseniuk.

Supporters of President Yushchenko have also in recent days been arguing that the IMF are unfairly biased in favour of the Tymoshenko administration, continuing to disburse credits when government compliance with the IMF programme has been lacking for some months yet; even though lack of compliance on issues such as privatisation typically reflect foot-dragging/obstinance by the presidency.

Indeed, his supporters appeared to be calling for the IMF to pull the plug on Ukraine, and particularly the Tymoshenko administration. It is somewhat ironic now that President Yushchenko himself seems to have the power to decide on the immediate fate of the programme. If he fails to veto the bill, it is difficult to see how the IMF could still disburse the latest tranche of funds.

While they may well have some sympathy for the position of the Tymoshenko administration, Yushchenko, alongside PM Tymoshenko was a joint signatory of the SBA. His failure to comply would surely make it difficult for the fund to continue to disburse under the programme in the run up to elections.

Indeed, continuing to disburse in a scenario when two key tenets of the programme (caps on wages/pension, and gas prices hikes) had been so flagrantly broken, would surely damage the IMF's credibility across the region; what hope would the fund have in trying to force through conditionality in other IMF programme recipients across the region, e.g. Latvia and Serbia.

The IMF resident representative to Ukraine, Max Alier, issued a statement this morning suggesting that talks over the next loan disbursement could be concluded by the end of next week, allowing for the disbursement of the next credit tranche in November. Our read of this is that this still depends on President Yushchenko, going for the greater good, aside from short term political gain, and vetoing the wages/pension bill.

Apparently he has 15 days from parliament's approval of the bill, i.e. to on or around November 15, to decide whether to veto, sign or simply sit on his hands. Anything but the veto is unlikely to satisfy even the new more touchy-feely IMF, surely. Our base case is that he does not sign the bill and the IMF takes a time out from Ukraine until the political situation clarifies after the presidential elections - well hopefully.

In terms of numbers, Alier also revealed, that including the costs of the banking sector bail-out, the state budget gap is likely to come in at a lofty 13-14% of GDP in 2009. Given the scale of the deficit, the government will struggle to fund itself without resort to official financing. Hence without IMF funding the government would be forced to cut spending, barring resort to NBU financing which seems unlikely given the central bank is still fairly closely tied to the presidency.

On the second issue, the Naftogas restructuring,, the acting minister of finance, Umansky has indicated that the government would today decide whether or not it would back the final Naftogaz debt restructuring deal. Frankly, this is a quite staggering announcement, as most bondholders and indeed Ukraine followers were working on the assumption that the government had already signed off on the deal, given that a key plank of it was the extension of a sovereign guarantee on the existing external debts of the company. Obviously we were all wrong.

But, presumably this explains the surprise decision earlier this week to delay the final settlement of the exchange until November 5. We are not sure if these things are all linked, but the November 5 data is also likely to be the deadline for President Yushchenko to decide on the future of the wages/pensions bill, as above, which makes one wonder if the deal will still go through if the IMF decides to take a time-out on Ukraine.

Things are never quite what they seem in Ukraine, but it does make one wonder if somehow, the Naftogas restructuring issue is being used as a stick/carrot to entice Yushchenko to veto the wages/pensions bill. In the UK November 5 is Fireworks/bonfire night, lets hope that there are n't any fireworks in Kiev on that day.

And, as an aside, the central bank released its latest estimates of GDP performance, with real GDP now thought to have contracted by 15.2% YOY in Q3 2009. This sounds gruesome, but it is actually an improvement from the 17.8% YOY posted in Q2 and the 20.3% YOY contraction in Q1. Overall it suggests that the full year could see a 15% or so YOY contraction.

NOTE: This material is for information only. It is not an offering document and its terms are qualified in their entirety by the final transaction documents in respect of the securities described therein. Certain transactions mentioned may give rise to substantial risks and may not be suitable for all investors. RBS may have positions, deal or make markets in these securities or related derivatives. Prices are based on current information, are subject to change, are not offers to transact and cannot be relied upon as representations that transactions can be effected at such prices. This material is based on information considered to be reliable, but we do not represent its accuracy or completeness.
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5.  IMF MISSION STATEMENT ON UKRAINE

IMF Press Release No. 09/366, Wash, D.C., Sun, October 25, 2009

WASHINGTON - An International Monetary Fund (IMF) mission headed by Ms. Ceyla Pazarbasioglu visited Kyiv to review the authorities’ economic program that is being supported by a Stand-By Arrangement with the IMF. The mission found that the economic and financial situation in Ukraine is stabilizing as a result of policies under this program. Preserving these gains will require policy discipline and corrective actions in some areas.

In its discussions with the Ministry of Finance and the National Bank of Ukraine, the IMF mission reached staff-level agreement on such actions, and it has departed Kyiv.

The mission is now awaiting endorsement of the agreed policy package from the signatories to the program—the President, the Prime Minister, the Minister of Finance, and the Governor of the National Bank—including assurances that the wage and pension law approved by Ukraine’s parliament, the Rada, this week, which is at odds with the objectives of the authorities’ program, will be vetoed.

LINK: http://www.imf.org/external/np/sec/pr/2009/pr09366.htm
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6.  IMF RESIDENT REPRESENTATIVE IN UKRAINE, MAX
ALIER, MEETS WITH TRADE UNIONS

IMF Press Release No. 09/370, Tues, October 27, 2009

WASHINGTON, D.C. - The International Monetary Fund (IMF) Resident Representative in Ukraine, Mr. Max Alier, met today with six union leaders from Ukraine.

The trade union delegation was headed by Mr. Hrygoriy Osovyi, Deputy Head of the Federation of Trade Union of Ukraine (FTUU), and included representatives from the trade union of the workers of the communal utilities, local industries and enterprises for personal services, the trade union of the fishery industry, the trade union of the city branch of the automobile transportation, as well as other members of the FTUU. The meeting was held at the IMF Resident Representative Office in Kyiv.

The discussions focused on issues of mutual interest to the IMF and the unions in Ukraine. It was established that we share a common goal in terms of macroeconomic stability and creating the conditions for a sustained improvement in the living standards of the population, with a particular emphasis on the most vulnerable groups in the society.

The trade union representatives expressed their support for the financial assistance provided by the IMF to Ukraine, but expressed concerns that the policy conditionality in the IMF-supported program may be contributing to the deterioration in living standards of the population. They conveyed their view that the policies under the program put an excessive burden of the adjustment on labor.

Mr. Alier explained that a key element of the program with Ukraine is to protect the purchasing power of wages and pensions, and underscored that a sizable part of the IMF resources provided to Ukraine have been directed to the state budget to ensure timely payment of wages and pensions by the government. He also noted that under the program public wages and pensions would increase in line with inflation—which implies an increase of about 10 percent.

Going beyond the inflation rate, however, would place an unsustainable burden on public finances. Mr. Alier also underscored the importance of a fair burden sharing of the adjustment between the different sectors of the society—particularly protecting the most vulnerable of groups. He noted the importance that the

IMF attaches to fighting the shadow economy and tax evasion, adding that the IMF has provided technical assistance this year in these areas and has made recommendations to the government. It was agreed that it would be mutually beneficial to continue a regular dialogue between union representatives and the IMF.

LINK: http://www.imf.org/external/np/sec/pr/2009/pr09370.htm
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7.  UKRAINE'S BAILOUT LOAN DEPENDS ON POLICY, IMF SAYS  

By Daryna Krasnolutska, Bloomberg, NY, NY, Mon, Oct. 26

KIEV - Ukraine’s government must endorse a package of policy steps and veto a wage and pension law approved by lawmakers before it gets the fourth chunk of a $16.4 billion bailout loan, the International Monetary Fund said.

The eastern European nation was due to receive $3.4 billion after a mission from the Washington-based fund arrived in Kiev on Oct. 12 to review implementation of economic reforms.

The IMF is demanding an “agreed policy package, including assurances that the wage and pension law approved by Ukraine’s parliament, which is at odds with the objectives of the authorities’ program, will be vetoed,” the fund said in an e- mailed statement yesterday.

Ukraine is relying on the loan, approved in November, to stay afloat after the global recession and credit crisis undermined demand for exports such as steel and hammered its banking industry. The IMF program was suspended for three months this year because of government disputes over state spending.

“Ukraine is interested in getting the IMF money as soon as possible as part of it is likely to be used to cover the state budget gap,” said Olena Bilan, an analyst at Kiev-based investment bank Dragon Capital. “I think it may take between two to three weeks for Ukraine to solve the issue.”

FAILURE TO COMPLY 
The loan program was renewed in May after Prime Minister Yulia Timoshenko pledged to narrow the state budget deficit. The country has received $10.6 billion in loan payments to date.

Ukraine’s 7.65 percent bond maturing in 2013 fell to 90.230 as of 10:15 a.m. in Kiev from 90.437 on Oct. 23 and its yield rose to 10.990 from 10.912, data compiled by Bloomberg show.

Ukraine has failed to comply with the loan’s terms, including raising natural gas prices for households and adopting laws needed to stabilize the financial system. At the same time, Ukraine’s parliament approved a law on Oct. 20 increasing social payments, including the minimum wage, in an effort to win voter support ahead of Jan. 17 general elections.

The IMF said in July that reducing the budget deficit would be key to releasing the next tranche. The government will run a budget gap equivalent to 8.6 percent of gross domestic product this year, the IMF estimates. That figure excludes the cost of rebuilding the financial industry.

“The mission found that the economic and financial situation in Ukraine is stabilizing as a result of policies under this program,” the IMF said yesterday. “Preserving these gains will require policy discipline and corrective actions in some areas.” Wage, Pension Law

Timoshenko said on Oct. 21 she would ask President Viktor Yushchenko to veto the wage law adopted by the parliament as it “undermines the budget and fuels inflation.” Yushchenko’s economic aide Roman Zhukovskyi declined to comment when asked whether the president will veto the law when called on his mobile phone today. 

The economy contracted an annual 17.8 percent in the second quarter, after shrinking 20.3 percent in the three months through March. Yushchenko and Timoshenko have clashed over fiscal policy. The president has criticized the government running a “huge” budget gap, while the opposition has blocked the passage of legislation through parliament until its demands for higher social spending are met.

To contact the reporters on this story: Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net;

LINK: http://www.bloomberg.com/apps/news?pid=20 601087&sid=aPJpZQpnJ9J0
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8.  EU LEADERS CONCERNED OVER LAW ON RISE IN SOCIAL
STANDARDS, SAYS UKRAINE'S VICE PREMIER NEMYRIA

Interfax Ukraine, Kyiv, Ukraine, Thu, Oct 29, 2009

BRUSSELS - Ukrainian Vice Premier Hryhoriy Nemyria has said that EU leaders have expressed concern over the law on a rise in social standards, which, in their opinion, jeopardizes the continuation of the International Monetary Fund's Stand-By program with Ukraine, as well as the possible provision of European Union macro-financial assistance to the country.

He said that Ukrainian President Viktor Yuschenko would be responsible for any negative consequences from this law. Nemyria met with European Commission President Jose Manuel Barroso, President of the European Parliament Jerzy Buzek, President of the European Council Swedish Prime Minister Fredrik Reinfeldt, and German Chancellor Angela Merkel as part of a summit of the European People's Party on October 29.

"It was clear that all of these leaders are attentively monitoring the situation in Ukraine, in particular, the latest events linked to serious threats to the continuation of the IMF's Stand-By program. All of them expressed concern over [Ukrainian President Viktor Yuschenko's] intention not to veto, but to sign the law on a rise in social standards. In their opinion, this is a step of great responsibility. If such a step is taken, he will be responsible for this," Nemyria said.

He said that if "such a step is taken, it will throw into question not only [Ukraine's] future programs with the IMF, but also prospects for providing, in terms of the time frames and amount, macro-financial assistance currently being discussed in the EU."

"I'll express this position to my government colleagues and tell them that all measures should be taken in order to remove a threat that jeopardizes the program with the IMF and prospects for macro-financial assistance from the EU," Nemyria said.

He also said that "if the scenario develops negatively, a number of issues that are to be discussed at the Ukraine-EU summit [in Kyiv] in December will be thrown into question."
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9.  UKRAINIAN PRESIDENT YUSHCHENKO REFUSES
TO VETO LAW INCREASING SOCIAL STANDARDS

5 Kanal TV, Kiev, in Ukrainian 0700 gmt 29 Oct 09
BBC Monitoring Service, UK, in English, Thu, Oct 29, 2009 

KYIV - [Presenter] The president [Viktor Yushchenko] will not veto the law increasing social standards. He said this during his working visit to Transcarpathian Region. Yushchenko said that politicians used the issue of social standards for speculation.

[Yushchenko] There is too much speculation here, my dears. Because when social standards have not been indexed to inflation for two years, nobody is responsible. This issue was raised, obviously, for the sake of political speculation. But excuse me, this issue was raised. And who raised it? The political force, which is a part of the political majority, did. And when parliament adopted this law, I agree with parliament.

[Presenter] Let me recall that last week, the International Monetary Fund [IMF] urged Ukraine not to increase social standards. After parliament on 20 October adopted the law increasing wages and pensions, the IMF hoped that the president would veto the law. If the IMF's requirement is not fulfilled, a 2.5bn-dollar fourth tranche of the loan will be in jeopardy.
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10.  UKRAINIAN FINANCE MINISTRY OFFERING NOT TO FULLFILL LAW ON RISE IN SOCIAL STANDARDS IF SIGNED BY THE PRESIDENT

UkrInform, Kyiv, Ukraine, Thu, October 29, 2009 

KYIV - The Ukrainian Ministry of Finance will offer the government not to fulfill the law on a rise in social standards if it is signed by President Viktor Yushchenko, acting Finance Minister Ihor Umansky has told the press on Thursday.

He said that the current law on the state budget 2009 does not contain relevant provisions on a rise in social standards, so there are no grounds for its fulfillment.  According to the ministry, a deficit of the pension fund budget in 2009, in the event of the document is entered into force, will make some UAH 8 billion (USD 1 - UAH 8.0).

Apart from this, Umansky underlined that if the President signs the law, this will complicate negotiations with the International Monetary Fund (IMF) on getting the fourth disbursement of the Stand-By Arrangement.

President Viktor Yushchenko has lately said he would not veto the law on a rise in the minimum living and minimum wage the parliament had passed on October 20.  As UKRINFORM reported, the Ukrainian government and an IMF mission earlier called on the President to veto the law. According to the Fund, the 'law is at odds with an IMF support programme'.
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11.  UKRAINE DPM NEMYRYA SEES NO 3RD "GAS WAR" WITH RUSSIA 

By Richard Balmforth, Reuters, Kiev, Ukraine, Thu, Oct 27, 2009

KIEV - A Ukrainian deputy prime minister expressed confidence on Tuesday that there would be no new end-of-year dispute with Russia over gas supplies, but conceded that meeting monthly bills was not easy.

Russia cut gas supplies to western Europe across Ukraine in January 2006 and again in January this year during a row with its ex-Soviet neighbour over gas prices and payments. A three-week standoff in the last dispute affected hundreds of thousands of Europeans and ended with a 10-year agreement being signed between Russia and Ukraine.

"I am confident that this year there are reasons to believe that there will be no third gas war," Deputy Prime Minister Hryhory Nemyrya said in an interview with Reuters. Ukraine's state energy firm Naftogaz pays the Russian Gazprom monthly according to a variable price for the quarter calculated by the two sides.

Asked specifically about the October bill, Nemyrya said Prime Minister Yulia Tymoshenko, due to meet her Russian counterpart Vladimir Putin for bilateral talks on Nov. 19 and 20, was doing everything to stop a new dispute breaking out.

EXTRA SPENDING?
But he said the situation was not easy. "I will be frank, it has not been easy because Ukraine and Russia, as in other countries, are doing this (seeking agreement with each other) in the conditions of a big economic crisis."

He linked gas payments to the difficulty the government would have in spending an extra one billion dollars this year if President Viktor Yushchenko, Tymoshenko's rival in a Jan. 17 election, refuses to veto a draft law raising the minimum wage.

"If adopted, (it) would result in additional spending of $1 billion in the next quarter which Ukraine cannot, just cannot afford," he said.

Not only would the increases strain the budget further, but the International Monetary Fund may not disburse $3.8 billion of its $16.4 billion bailout plan if Ukraine fails to veto the bill, according to its statement issued on Sunday.

Nemyrya said Yushchenko had two weeks to veto the law and the timing factor was "crucial" given the link with the IMF which has yet to decide on the fourth tranche. IMF funds have proved to be a lifeline for Ukraine, whose economy is expected to shrink by up to 15 percent this year after its heavy industries cut production, exports plummeted and the hryvnia currency plunged in value.

Only Yushchenko can veto the parliamentary bill, yet to be signed by the assembly's speaker and sent to his office. And parliament could overturn any veto should it garner a two-thirds majority. (Reporting by Richard Balmforth and Natalya Zinets)
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12.  UKRAINE-MACROECONOMIC ECONOMIC SITUATION-OCT2009 

Analytical Report: by Olga Pogarska, Edilberto L. Segura
SigmaBleyzer Emerging Markets Private Equity Investment Group
The Bleyzer Foundation, Kyiv, Ukraine, October, 2009

USUBC NOTE: The entire Ukraine Macroeconomic Situation analytical report for October 2009 from SigmaBleyzer/The Bleyzer Foundation, members of the U.S.-Ukraine Business Council (USUBC), is found below and is also found in a PDF format which includes several detailed statistical charts in color
at http://www.sigmableyzer.com/File/countries/ukraine/Ukr-Monthly-Ec-Report-10-09.pdf.

SUMMARY
[1]  Recent statistics on sector output provide increasing evidence that Ukraine’s economy has already passed the bottom of the recession.

[2]  Although economic activity in a number of sectors remains weak, a stronger recovery is expected in the second half of 2009.

[3] Despite the crisis and lower fiscal revenues, fiscal budget policies continue to be reasonably prudent, with deficits below the target of 6% of GDP for 2009.  During the first eight months of the year, the consolidated fiscal budget deficit stood at 3% of period GDP.

[4] The government committed to a 4% deficit in its draft 2010 fiscal budget.  Nevertheless, achieving this target may be challenging.

[5] During 2009, consumer inflation declined and since last May it has stabilized at 15% yoy.

[6] Commercial banks have not been able to restore bank credit operations, due to funding difficulties and the deteriorating quality of their loan portfolios. This is slowing down the pace of economic recovery.

[7] Last year’s deficit in the current account of the balance of payments has been brought under control.   During the first eight months of the year, the current account deficit was almost 8 times lower than in the respective period last year.

[8] Substantial financial support from international financial institutions covered a large deficit in the country’s financial accounts, associated with large repayments of private foreign debt.
 
ECONOMIC GROWTH 

Recent data on sector output provide evidence of continued (though slow) recovery of economic activity. These positive trends slowed down the pace of GDP decline from 20.3% yoy in the first quarter of 2009 to 17.8% yoy in the second quarter. For the year as a whole, GDP is expected to decline by 14%. Improvements in output were reported in transportation, manufacturing and domestic trade.

Nevertheless, in the second quarter of 2009, the value added in these sectors was still below last year’s level, declining by 8.6% yoy, 33% yoy and 17.6% yoy. A stronger recovery in these sectors is expected in the second half of the year. Indeed, the ongoing revival of the global output and trade, the need for inventory restocking and larger fiscal expenditures are setting the stage for output rebound.
 
Public investments related to preparations for the Euro 2012 football championship have provided some relief to the deeply depressed construction sector. This sector experienced the largest decline in output.  In fact, the value of construction works dropped by 53.6% yoy in real terms during the first eight months of the year.  While the support from public investments will strengthen the sector in the coming months, the recovery may be protracted due to the slow resumption of bank lending.
 
Agriculture has been the only sector supporting economic growth in 2009.  Better agricultural technologies and more investments led to a historical record grain output of 53 million tons in 2008. The Ministry of Agriculture estimates that Ukraine may harvest about 45 million tons of grain this year, which would still be significantly above the average output of 33 million tons for the last 20 years, but would represent a decline from 2008.
 
Economic data continues to show that the international liquidity crisis, which unfolded across the globe in the fall of 2008, has been affecting Ukraine more sharply than many other emerging economies. In particular, this crisis affected Ukraine through two main channels – tighter access to credit resources and falling exports.
 
Ukraine’s robust economic growth over the past few years was mostly driven by booming bank credit. This credit growth was funded principally by short term foreign loans and loose domestic monetary policies. However, the global financial crisis virtually closed access to the international credit markets for Ukraine's private sector.

The ensuing credit squeeze exerted a heavy toll on Ukraine’s highly leveraged sectors (construction, trade and industry). On the demand side, tight credit conditions caused a sharp drop in investments. With gross fixed capital formation falling by more than 50% yoy in real terms and large-scale inventory depletion, investments have been one of the main sources of economic weakness in 2009.
 
Furthermore, with exports accounting for almost 50% of GDP, Ukraine also suffered from an abrupt fall of world commodity prices (particularly for steel and chemical products) as well as from lower demand from Ukraine’s main trading partner countries. Thus, in the first half of 2009, the dollar value and physical volume of exports fell by 25% yoy and 52% yoy, respectively.

As a result, output in export-oriented industries, such as metallurgy, chemicals and machine-building, has been declining. In turn, cross-industry links tended to propagate difficulties in the export-oriented sectors to the broader economy. On the upside, this export orientation of the Ukrainian economy has a silver lining.

Indeed, the growth momentum appears to be recovering faster in some key trading partners (such as Germany, France, Poland, India, Brazil, China). This means that the resurgence of  foreign demand will help to mitigate the weakness of domestic consumption.  In fact, the rate of output decline in metallurgy, chemicals and mining has already moderated from 46% yoy, 50% yoy and 21.4% yoy at the beginning of the year to 21% yoy, 22% yoy and 12.5% yoy in August 2009, respectively.

Notwithstanding the scale of economic difficulties, Ukrainian consumers remain surprisingly resilient. In particular, a large informal economy  partially supported stronger private consumption, which declined by less than 12% yoy in the first and second quarter of 2009. In addition, consumption is likely to be supported by continuing growth in nominal disposable income, lower inflation and improved consumer sentiment. [1]

Disposable income grew by 5.5% yoy in nominal terms in the second quarter of 2009, up from 4.8% yoy in the previous period. This growth was supported by higher social expenditures [2] and some improvement in the labor market. [3] The Hryvnia devaluation as well as falling investments and private consumption helped to curb imports. As a result, the 45% yoy drop of imports added some support to GDP growth by restricting domestic spending on foreign goods.
 
All in all, there is increasing evidence that the Ukrainian economy has already passed the bottom of this recession. Nevertheless, despite a number of growth supporting factors, many uncertainties about the strength and sustainability of global economic recovery remain. On top of that, the forthcoming Presidential election in Ukraine add to the fragility of the nascent economic recovery. Hence, we maintain our forecast of GDP declining by about 14% in 2009.
 
FISCAL POLICY 
 
During the crisis, public finances have been under stress. Nevertheless, fiscal policies are reasonable, with deficits below the target of 6% of GDP agreed with the IMF. Over January-July 2009, the consolidated budget reported a deficit of UAH 17.8 billion, or about 3.6% of estimated GDP. This consolidated fiscal deficit came on the back of shrinking fiscal revenues and growing budget expenditures.
 
To a significant extent, worsening tax collections were related to recession-driven factors. Thus, on the back of weak consumption and falling imports, collection of  VAT and import duties considerably declined. Furthermore, decreasing corporate profits ate into the proceeds from the corporate profit tax (EPT).

Personal income tax (PIT) receipts fell as nominal household income grew slower, while unemployment increased. A solid increase in excise revenues was achieved thanks to an increase in excises on tobacco, tobacco products and alcohol. These higher excises were approved as a part of corrective fiscal measures of the government. 
 
On the expenditure side, consolidated budget expenditures have continued to increase, advancing by 10% yoy in nominal terms over the first half of the year. But the pace of expenditure growth decelerated to 7.5% yoy in January-August as the government cut capital expenditures. As a result, the consolidated budget deficit narrowed in August, amounting to UAH 16.7 billion, or about 3% of GDP over the first eight months of 2009.  At present, the government is committed to keeping the fiscal budget deficit at 6% of GDP in 2009, and 4% of GDP in 2010.
 
Nevertheless, with current expenditures (particularly public wages, pensions, purchase of medicines, and utility tariff compensation) accounting for a disproportionately large share in total public spending, further fiscal tightening may be challenging. First, some fiscal corrective measures have not yet been implemented, such as previously announced gas tariff increases for the population, which were supposed to come into effect on September 1st.

Higher gas tariffs could have saved public money spent on subsidies and helped to improve the financial situation of Naftogaz. Second, imposed limits on maximum pensions have been contested in courts. This may bring additional difficulties to the strained Pension Fund and the state budget. Lastly, there are a number of expansionary fiscal initiatives.

In particular, at the beginning of October, the Parliament preliminarily approved a bill that envisages a major increases in social spending.  Moreover, the Parliament approved a law that considers the transfer of NBU profits in the amount of UAH 10 billion to finance Euro-2012 infrastructure projects.  Maintaining good fiscal discipline in the run up to the presidential election may be a challenging task for the Ukrainian authorities.
 
In September 2009, the government presented a draft fiscal budget for 2010. State budget revenues are forecasted at UAH 285 billion, up by 19% yoy, while expenditures are planned at UAH 324 billion, up by 21% yoy. As agreed with the IMF, the government plans to contain the fiscal deficit at 4% of GDP. At the same time, successful execution of the 2010 budget may be difficult to achieve. First, it appears that key 2010 budget parameters, primarily nominal GDP and budget revenues, are overly optimistic. 
 
Second, the 2010 budget draft was developed on the basis of the new Tax Code, which proposes new principles of fiscal relationships between state and local budgets. In particular, the number of local budget units is to increase from about 700 to more than 12,000, complicating administration and control in the short term.   All in all, given the fragile political and economic situation, there is a high probability that the 2010 budget law in its current version will be modified to fix these problems.
 
MONETARY POLICY 
 
Consumer price inflation has been on a downward trend since the beginning of this year and has remained virtually stable since May at about 15% yoy.  This stability is built on several counterbalancing factors. A rise in excises, recent growth of energy prices as well as more expensive imports due to a weaker Hryvnia have been pushing consumer prices up.

At the same time, these pressures were offset by weak economic activity, deceleration in wage growth, delayed hikes of utility tariffs and a tighter monetary stance. Provided that the government avoids excessive monetary expansion to finance the budget deficits, inflation is expected to remain at around 15% yoy in 2009.

The annual growth of money supply (M3) has been rapidly decelerating since September 2008 and turned negative in August 2009. In September 2009, money supply was almost 2% lower than a year ago. Tighter money supply was the result of the NBU’s large foreign exchange interventions, measures to mop up liquidity, and an abrupt reduction in bank lending.
 
In the fall of 2008, the Hryvnia lost almost 60% of its value against the US Dollar on the back of a sharp deterioration in exports, an abrupt reversal in foreign capital flows,  high external debt repayments, and tight access to international credit markets. In addition, some inconsistencies in foreign exchange policy undermined population confidence. This resulted in an unprecedented surge in demand for foreign currency. According to NBU statistics, net purchases of foreign exchange [4] by the population amounted to more than $10 billion between September 2008 and September 2009.
 
Regular forex interventions, an introduction of administrative measures, a sharp reduction in imports and the stabilization of foreign financial markets helped to calm the foreign exchange market during March-July 2009. Since mid-July, however, depreciation pressures intensified on the back of higher external debt payments and the relaxation of the foreign exchange rate regime.

By increasing the size of its forex interventions and absorbing excess liquidity from the market, these pressures subsided at the beginning of September. Overall, between October 2008 and September 2009, the NBU spent about $20 billion of its forex reserves. This helped to reduce Hryvnia supply to the Ukrainian economy.
 
In April 2009, the NBU tightened its criteria for access to its refinancing window and increased the usage of its deposits facilities to absorb excess liquidity. These measures were partially triggered by the widespread misuse of refinancing funds allocated to banks during the initial stages of the crisis. During October 2008-March 2009, commercial banks received substantial refinancing funds to cope with liquidity shortages, intensified by deposit outflow (due to bank runs, the banking sector lost virtually ¼ of its deposits), external debt repayments and rising non-performing loans.

The support was aimed at maintaining lending that would cushion the crisis impact on the real economy.  This did not happen, however, and it seems that some commercial banks directed a portion of these funds to the foreign exchange market, adding to the high volatility of the Hryvnia foreign exchange rate.
 
Facing foreign and domestic funding difficulties, a lower deposit base and deteriorating asset quality [5], commercial banks had to abruptly curtail the growth of their credit activities. The stock of Hryvnia-denominated loans grew by only 13% from January to September 2009 (below the rate of inflation) compared to an almost 30% growth over the same period last year.

Foreign currency denominated loans, expressed in US Dollar terms, declined by about 19% during the first nine months of 2009 versus a 42% increase the year before. Hence, the sharp fall in bank lending stands on par with the export shock in explaining the severity of the economic downturn in Ukraine.
 
INTERNATIONAL TRADE AND CAPITAL 
 
The international financial crisis changed the outlook of Ukraine’s Balance of Payments performance in a very favorable manner. Over the first eight months of last year, very fast increases in imports (almost 60% yoy) caused a rapid deterioration in the current account, despite the fact that exports grew at a record high pace of almost 50% yoy. Up to September 2008, however, Ukraine did not experience problems in financing the current account deficit due to plentiful inflows of net FDI and borrowed funds from foreign financial markets.
 
In 2009, the economic downturn in Ukraine’s main trading partners significantly reduced the demand for Ukrainian commodity-based exports, particularly metals and chemical products. Coupled with a sharp downward adjustment in world commodity prices, this caused a 50% yoy drop in exports over January-August 2009. At the same time, on the back of weaker domestic consumption and depressed investment activity, imports fell even more sharply at 53% yoy.

As a result, the CA deficit narrowed to $1.1 billion over the period. In contrast to the previous year, however, the financial account balance moved into the red, which reflects large external debt repayments and other capital outflows. However, thanks to the timely financial support of the IMF and other international financial institutions, Ukraine successfully met its external financing requirements.
 
OTHER DEVELOPMENTS AND REFORMS AFFECTING THE INVESTMENT CLIMATE 
 
According to the latest World Bank/International Financial Corporation report, Doing Business 2010: Reforming Through Difficult Times, Ukraine’s ranking on the ease of doing business was slightly upgraded. The improvement was mainly related to the adoption of a new joint stock company law. The new version of the law proposes better regulation of interested parties’ transactions, increases disclosure requirements and regulates for pre-judicial conflict settlement.

However, amid other countries taking bolder reforms, Ukraine is still ranked low, holding 142nd place out of 183 countries. Complicated and time-consuming procedures to obtain construction permits, to pay taxes, to start and close a business, and to register property prevent Ukraine from a further ranking upgrade, pointing to a broad agenda for economic reforms

FOOTNOTES:
[1] The improvement was mainly attributed to the stabilization of the foreign exchange market in 2Q 2009 and relative employment stickiness.
[2] Despite an apparent drop in fiscal revenues, the government maintained social spending from the budget without major increase in arrears.
[3] According to ILO methodology, the unemployment rate declined from 9.5% in 1Q 2009 to 8.6% in 2Q.
[4] The difference between the amounts of foreign currency sales to and purchases at commercial banks by the Ukrainian citizens.
[5] According to IMF estimates, the share of non-performing assets in total loans grew from about 13% at the end of 2007/beginning of 2008, to almost 30% as of mid-2009.
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UKRAINE, BULGARIA, ROMANIA, & KAZAKHSTAN MACROECONOMIC REPORTS
NOTE: To read the entire SigmaBleyzer/The Bleyzer Foundation Ukraine Macroeconomic Situation update report for October 2009 in a PDF format, including color charts and graphics click on the following link:  
http://www.sigmableyzer.com/File/countries/ukraine/Ukr-Monthly-Ec-Report-10-09.pdf.

SigmaBleyzer/The Bleyzer Foundation also publishes regular Macroeconomic Situation reports for Bulgaria, Romania and Kazakhstan. The present and past reports, including those for Ukraine can be found at http://www.sigmableyzer.com/en/page/532.  SigmaBleyzer/The Bleyzer Foundation are members of the U.S.-Ukraine Business Council (USUBC), Washington, D.C.
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