Welcome to the U.S.-Ukraine Business Council


The following report about Ukraine is from Stratfor.  Stratfor, Austin, Texas, is one of the world’s leading online publishers of geopolitical intelligence. Their global team of intelligence professionals provides their members with insights into political, economic, and military developments to reduce risks, to identify opportunities, and to stay aware of happenings around the globe. More information about Stratfor and their services can be found at the link below.
This report is for informational and private use only.


Stratfor, Austin, Texas, Tuesday, November 18, 19, and 20, 2008

AUSTIN, TEXAS - Stratfor Intelligence Analysis - Ukraine,




Ukraine is a country at a crossroads. Not only is it among those being hit hardest by the current global financial crisis, but it is now flirting with actual dissolution. The country’s economy is fundamentally weak, and ongoing political strife has made economic reforms necessary but impossible.

Furthermore, the country is the cornerstone of the geopolitical battle between the West and Russia. Its weakness makes Ukraine dependent on outside
powers, but outside powers appear to be working to pull the country apart.


Stratfor Editor’s Note: This is the first part of a series on Ukraine.

Of all the countries being hit by the global financial crisis, Ukraine is one of the most profoundly affected because it is already coping with failing financial institutions, a collapsing economy and a domestic political scene too shattered to handle much of anything.

On top of that, it is unfortunate enough to be the centerpiece of the geopolitical turf war between Russia and the West. In short, Ukraine is so deeply troubled that it cannot exist or remain united as a state unless an outside power enables it. And right now, outside powers are doing just the opposite.


Ukraine is fundamentally unprepared to weather the global financial crisis. The country’s budget deficit is 2.8 percent of gross domestic product (GDP)
and is likely to increase before it decreases, as declining industrial output triggered by the global recession will inevitably reduce expected tax receipts.

Confounding the budget deficit is the parliament’s promise to increase minimum wages in 2009 — a promise that no party will want to back out of publicly when parliamentary and presidential elections could be held soon.

Ukrainian currency problems are also quite severe. Foreign investment has been leaving Ukraine’s equity markets (it declined almost 80 percent so far in 2008; only Iceland experienced a larger drop) and speculators have been attacking the currency, the hryvnia. The hryvnia has lost 20 percent of its value in the last month alone, and there are fears that a devaluation is on the way.

As confidence inside Ukraine slides, bank runs are taking place; Ukraine’s Central Bank President Vladimir Stelmakh estimated that customers withdrew
almost $3 billion — approximately 4 percent of the country’s total deposits — from accounts within a week.

As the hryvnia’s decline continues, all loans — both business and private — taken out in foreign currencies (whether Swiss franc, euro or dollar) will
begin appreciating, creating a very real possibility of defaults that domestic banks will not be able to cover.

This brings up the issue of total public and private sector debt. Ukraine’s debt is not exorbitant (private sector debt is at $80 billion and public is
$20 billion; combined, it is a moderately high 66 percent of GDP), but it is the speed with which it has accumulated over the past two years that is

With the decline in the hryvnia and upcoming debt service payments (around $46 billion due next year for private sector and $1.6 billion for public),
Ukrainian total foreign currency reserves — totaling $37 billion — could begin drying up fast, particularly if the government continues to try to use
the reserves to prop up the hryvnia.

Ukraine’s public sector debt, currently only 10 percent of GDP, could also begin to rise as the domestic banks face liquidity pressures and the
government is forced to intervene as well as it can, though it cannot afford bailouts like those in the United States, Europe and Russia.

The country’s sixth largest bank, Prominvestbank — which holds 4 percent of the market share in Ukraine’s banking sector — was already bailed out by the government on Oct. 8 to the tune of $1 billion, and the Ukrainian economy’s overall weakness indicates that more domestic lenders could follow suit.

However, much as in Central Europe, it could be the foreign banks that create havoc for Ukraine’s economy. Foreign banks already own roughly 50
percent of the country’s banking system: Austria’s Raiffeisen owns Bank Aval, Italy’s UniCredit owns Ukrsotsbank and the French BNP Paribas owns

These banks — both foreign and domestic — were particularly active in bringing about the Ukrainian explosion of mortgages and retail loans, most
of which were made in foreign currencies (euro and Swiss francs) so as to take advantage of a lower interest rate.

Ukraine is right behind the troubled Hungary, Croatia and Romania in terms of the percentage of total loans made in foreign currencies (roughly 50
percent of all loans in Ukraine). As the hryvnia depreciates, consumers and businesses will be less able to service these foreign-currency-denominated

This will lead to a potential mountain of unserviceable debt that could collapse domestic banks and spread the contagion to the rest of
emerging markets and potentially to foreign bank headquarters.

The International Monetary Fund (IMF) has offered Ukraine a $16.5 billion loan. However, Ukraine’s internal political chaos has suspended the country’s
ability to meet the IMF’s conditions or even make a decision on the IMF’s terms.

Beyond the current financial crisis, Ukraine’s economy is volatile at best — leaving little hope for the country to pull itself out of any difficulty. One problem is that each region in Ukraine is highly dependent on a specific industry for money; so when that industry fails, the entire region tends to fail.

Furthermore, most of Ukraine’s lucrative business is based in the eastern half of the country, which typically gives that half (and Russia) a bit more
political and economic power. Although Ukraine mainly depends on its metallurgical industry, it also gains much revenue from grain, military
exports and energy transit. However, each of these sectors is suffering from deep problems that could not be easily fixed even if the country had the
proper tools.

Ukraine is one of the world’s top 10 steel-producing and iron-ore-producing nations and is the third-largest exporter of steel. The metallurgical
industry accounts for 40 percent of Ukraine’s exports, nearly 30 percent of its GDP and 12 percent of its tax revenues — and it employs more than half a
million people.

However, the metallurgical industry is exceedingly inefficient and outdated. It is also highly dependent on expensive natural gas from its neighbor,
Russia, making the cost of Ukrainian steel already 25 percent higher than its Russian and Chinese competitors. To make matters worse, demand and
prices for many metals, especially steel, are collapsing globally.

Prices for steel soared for the past year, prompting many steel-producing countries such as Brazil, India, Russia, China and Australia to overproduce,
creating a global surplus. This leaves Ukraine horribly exposed since anyone who would have previously agreed to pay for the more-expensive Ukrainian
steel now has several other options.

Ukraine’s Industry Ministry has officially declared the metallurgical sector to be in crisis, with 17 of the 36 steelmaking furnaces closed. Moreover,
many of the metals heavyweights in Ukraine are foreign-owned — by firms such as ArcelorMittal and Rusal — and are already discussing massive layoffs. This will also greatly increase Ukraine’s account deficit. The bottom line is that Ukraine simply cannot compete on a global level in metallurgy,
though much of its economy is dependent on it.

Ukraine saw an increase in revenues from an abundant grain harvest and exporting; in the third quarter of 2008, Ukraine’s exports outpaced imports.
Grains account for approximately 6 percent of the country’s exports and brought in more than $2 billion the summer of 2008. The problem with grain
is that the revenue it generates is cyclical, and thus Ukraine will not see any more cash from it until mid-2009. That, combined with severe credit
constriction — which will stress farmers in the upcoming planting season — makes any dependency on the grain sector shaky.

Ukraine also depends on military exports to bring in cash. During and after the collapse of the Soviet Union, military units (including nuclear forces) were moved from Ukraine back inside Russia proper, but Kiev retained and commanded a great deal of Soviet military hardware and production facilities. Since around the mid-1990s, Kiev has sold that used equipment to countries as diverse as China, Sierra Leone, Kenya and even the United States.

Though Ukraine retains significant stocks of such equipment, those stocks continue aging and slipping further toward obsolescence, and there is a
(rapidly approaching) limit to how far the Soviet military legacy can carry Ukraine. There are a few discrepancies in estimates of how much money
military exports bring in for Kiev.

The official estimate by the Ukrainian Defense Ministry is around $1 billion a year; however, there are many within the government who claim it
generates three times that amount but some equipment is sold under the table to other parties (such as Georgia) that Kiev does not want to be formally
connected with.

The only other really substantial moneymaker for the country is energy transit. Eighty percent of Russia’s energy exports of oil and natural gas to
Europe transit through Ukraine. Currently, Ukraine receives approximately $1.9 billion a year simply for transiting Russian and Central Asian natural
gas to Europe, along with some compensation on its own domestic purchases — be that a small bartered amount in payment or discounted natural gas.

Ukraine announced Nov. 5 that it is planning on raising the amount it transports in 2009 in hopes of raising its revenues. However, the energy game is tricky for Ukraine because it also has to import 90 percent of its own domestic supplies of natural gas — something that typically gets the government into a $2 billion debt to Moscow every quart er — and Russia is considering raising its prices to Ukraine in the new year.



Within Ukraine there are several forces that, in theory, could steer the country in one direction or another. However, the political forces have been locked in a battle for control for the past four years. Meanwhile, Ukraine’s oligarchs and other forces with both economic and political clout are too distracted by the current global financial crisis to take action. Thus, Ukraine has been left with no ability to handle its own crisis or determine its own future.

Stratfor Editor’s Note: This is the second part of a series on Ukraine.

Ukraine’s government is simply far too shattered and chaotic to handle the country’s current financial and economic problems or make any of the reforms needed in its defunct financial, economic, military and energy sectors. Kiev has been a confused and chaotic mass of shifting coalitions and governments since the 2004 Orange Revolution, which was supposed to herald a new era in which Ukraine would be part of the West rather than a Russian satellite.

Former Ukrainian Prime Minister Viktor YanukovichFrom the Orange Revolution through today, Ukraine’s political scene has been dominated by three main parties (though there are myriad smaller parties):

Our Ukraine: The vehemently pro-Western party under current Ukrainian President Viktor Yushchenko

Bloc Yulia Timoshenko: A coalition of parties under current Ukrainian Prime Minister Yulia Timoshenko that can flip to either the pro-Western or pro-Russian side; and

Party of Regions: The vehemently pro-Russian party led by former Ukrainian Prime Minister Viktor Yanukovich.

Our Ukraine and Timoshenko’s bloc were the parties behind the Orange Revolution, though all three major parties have flip-flopped into different coalitions half a dozen times in the past four years. Most of the breaks and alliances among the three groups have not necessarily come about because of changes in ideology; rather, they are driven by the personalities and egos of Yushchenko, Timoshenko and Yanukovich.

Typically, with each turnover in the government and coalitions, the laws and reforms passed by the former ruling group are either undone or ignored. This has seriously retarded any restructuring or improvement in almost any sector or institution in the country. 

Furthermore, each political group generally controls a certain region of the country, so the parties look out for those industries, oligarchs and regional economics that pertain to their regions. This means that if a political party is booted from power, any restructuring or deals in place for its favorite region, industry or business can be overturned. The result is a business environment as chaotic and confusing as the political environment.

Ukraine is still suffering from political chaos. There has been one small internal shift: So many political figures outside of the big three personalities are so worn down from the constant bickering that they have started a wave of new political parties and groups.

Parliamentary elections could be held in December of January, with a presidential election in late 2009 or early 2010. And with 72 percent of Ukrainians saying they are tired of the political infighting, these new smaller parties could end up changing the political landscape and making Ukraine’s political future even more unpredictable.

As in neighboring Russia, Ukraine also has the political and economic force of the oligarchs — those who swooped in after the Soviet era to snatch up certain enterprises and businesses, making themselves incredibly wealthy and powerful very quickly. The oligarchs are very politically active. Some started out in politics and then seized wealth and position to become oligarchs; others began by securing wealth and position to use as leverage in politics.

Just as in Russia, Ukraine’s oligarchs either back certain political forces — paying for campaigns and receiving kickbacks once their chosen players are in power (such as the oligarchs backing Yushchenko and Yanukovich) — or they establish their own political parties as a means to influence distribution of resources and advantageous business deals (as with Timoshenko). This has helped fuel the constant government chaos and sustained a level of distrust in Ukrainian businesses and those who run them.

But at the moment, the oligarchs are unable to shape the political or economic landscape in Ukraine because they are being crushed by the economic crisis. According to some records, Ukrainian oligarchs’ assets have lost some 90 percent of their value in the past few months.

For example, Viktor Pinchuk (a Timoshenko backer), who controls Ukraine’s leading steel company Interpipe, has lost $2 billion. Sergei Taruta (a Yanukovich backer), who controls another metallurgical giant ISD, has lost $4.8 billion.

While Ukraine’s oligarchs are scrambling to keep their businesses and wealth intact, they are too preoccupied to be as politically active as usual. With two critical elections looming, there could be a shift in that the oligarchs will not be able to dole out cash as easily as in the past.

For example, Timoshenko has already heard from one of her financial backers — Konstantin Zhevago, who owns Financial and Credit Group and iron producer Poltavsky — that he will not be dishing out his usual funding because he recently lost most of his wealth. The crisis among the oligarchs has led both Timoshenko and Yanukovich to try to postpone elections, knowing they do not heave enough cash to run full campaigns.

Ukrainian oligarch Rinat AkhmetovThe one Ukrainian oligarch who is not absent from the political scene is the wealthiest in the country — Rinat Akhmetov, who owns assets in energy, steel, coal, banking, hotels, telecommunications, media and soccer. Most Ukrainian oligarchs are worth only a fraction of what Akhmetov is worth.

Much of his wealth was not in the hard-hit equity markets, and so he has only lost a reported $7 billion of his $36 billion in the economic slowdowns; thus, he still has quite a bit of influence to wield in politics and economics.

Akhmetov is looking to take advantage of others’ economic misfortune and wants to expand his reach over more assets (especially in coal and electricity) not only in Ukraine, but also in Russia, Poland, Romania and Hungary. He has long been the puppet master behind the Party of Regions and Yanukovich; Stratfor has learned from sources that he also holds a great deal of leverage over Yushchenko and Timoshenko.

Long kept in the shadows, Akhmetov is considering running for the presidency, knowing he has the financial capabilities, political backing from his leash holder (Russia) and enough clout against the big three political leaders to possibly really shake things up.

The only other forces in Ukraine that can affect the political or economic landscapes are the military, intelligence services and organized crime. As stated earlier, Ukraine’s military — much like its stockpile of Soviet weaponry — is seriously deteriorating without the political or economic backing needed to push for and coordinate modernization and reforms.

Ukraine’s intelligence and security apparatus — mainly the Security Service of Ukraine — is currently tangled in an identity crisis stemming from its break with its former master, the Soviet KGB, and the constant restructuring and leadership changes. Ukraine’s intelligence and security services consist of seven agencies and institutes that are responsible for identifying threats to Ukraine both at home and abroad, collecting intelligence and analyzing data.

All agency heads are appointed by and report to the president, but the parliament must approve the appointments — which means the intelligence and security services are another casualty of the political chaos as the president and prime minister fight for control.

Organized crime is another major political and economic force in Ukraine, having proliferated since the country gained independence from the Soviet Union in 1991.

Ukrainian organized crime started off as a function of physical security for the oligarchs who controlled Ukraine’s resources and backed favored politicians, but expanded because the country’s weak central government was unable to effectively police criminals. Organized crime became a pillar of the state through the political-criminal nexus in which politicians, businessmen and criminals provided each other with services and favors.

It has branched out considerably, with Ukrainian organized crime groups forming partnerships or acting alone in countries throughout Eastern and Central Europe — and because Ukraine remains essentially a weak state dependent on outside patronage, foreign organized criminal elements have found a market there for illicit goods and human trafficking.

But organized crime , just like other businesses, is suffering during the economic and financial crisis as criminal groups lose funds in foreign banks and customers have less cash to spend on services and goods.



Because Ukraine is vital to Russia’s defense and survival as any kind of world power, it has become the cornerstone of the geopolitical battle between Russia and the West. Russia has many levers it could use to influence the course of Ukraine’s future, though the West is not without its tools. The eventual outcome of the battle for Ukraine is uncertain.


Stratafor Editor’s Note: This is the third part of a series on Ukraine. 

Since Ukraine is essentially too internally shattered to make sweeping changes or reforms, its future is at the whim of foreign powers. Because of this — and because of Ukraine’s geographic location — the country is now the chief arena for the struggle between Russia and the West.

Following the collapse of the Soviet Union, the West (particularly under the guises of the European Union and NATO) has pushed eastward, making its way toward Russia’s doorstep. As the West tries to continue its advance and as Russia tries to stave it off, Ukraine has become paramount to both sides — not just as a potentially lucrative territory, but because Ukraine is the key to Russia’s defense and survival as any sort of power.

Although Ukraine hosts the largest Russian community in the world outside of Russia, the battle for Ukraine is about far more than ethnic kin. Even before the Soviet era, Ukraine was integrated into Russia’s industrial and agricultural heartland, and eastern Ukraine remains integral to the Russian heartland to this day.

Furthermore, Ukraine is the transit point for Russian natural gas to Europe and a connecting point for nearly all meaningful infrastructures running between Russia and the West — whether pipeline, road, power or rail.

Without Ukraine, Russia could not project political or military power into the Northern Caucasus, the Black Sea or Eastern Europe, and Russia would be nearly entirely cut off from the rest of Europe. Ukraine also goes deep into former Soviet territory, with borders a mere 300 miles from either Volgograd or Moscow, and the Ukrainian port of Sevastopol on the Black Sea has long been the Russian military’s only deep, warm-water port.

To put it simply, as long as Ukraine is in its orbit, Russia can maintain strategic coherence and continue on its path of resurging in an attempt to resume its superpower status. Without Ukraine, Russia would face a much smaller set of possibilities.

This is why the 2004 Orange Revolution that brought in Ukraine’s first pro-Western government was Russia’s deepest nightmare. Russia knows that the Orange Revolution was a U.S.-backed project, supported by U.S. allies such as Poland. Since that color revolution, Moscow has been content with simply destabilizing Ukraine in order to ensure it does not fully fall into the West’s sphere.

Russia has a slew of levers inside Ukraine to keep the country unstable. It also has quite a few tools it could use to either pull the country back into Moscow’s fold or break the country apart.

Politics: Russia is the very public sponsor of Viktor Yanukovich and his Party of Regions; though in the past three months, Moscow has also started granting its favor to Yulia Timoshenko — breaking the Orange Coalition and isolating President Viktor Yushchenko and his party. The topic of how to respond to a strengthening Russia has been a constant point of contention in Ukraine’s different coalitions and governments.

Energy: Since Russia supplies 80 percent of Ukraine’s natural gas, energy is one of Moscow’s favorite levers to use against Kiev. Moscow has proven in the past that it is not afraid of turning off the heat at the height of winter in Ukraine to not only hurt the country but also to push Kiev into the heart of a firestorm as European countries’ supplies get cut off when Russia cuts supplies to Ukraine. The price Russia charges Ukraine for natural gas is also constantly being renegotiated, with Kiev racking up billions of dollars in debt to Moscow every few months.

Economics: Russia controls a large portion of Ukraine’s metals industry, owning factories across the eastern part of the country, where most of Ukraine’s wealth is held. Russia also controls much of Ukraine’s ports in the south.

Oligarchs: Quite a few of Ukraine’s oligarchs pledge allegiance to Russia because of relationships from the Soviet era, because of assets held in Russia or because Moscow bought or supported certain oligarchs during their rise. Rinat Akhmetov is the most notable pro-Russian oligarch; not only does he do the Kremlin’s bidding inside Ukraine, but he is also rumored to have recently helped the Kremlin during Russia’s financial crisis.

Moscow controls many other notable Ukrainian oligarchs, such as Viktor Pinchuk, Igor Kolomoisky, Sergei Taruta and Dmitri Firtash. This has allowed the Kremlin to shape much in these oligarchs’ business ventures and have a say in how these oligarchs support certain politicians.

Ships from Russia’s Black Sea Fleet during the celebration of the fleet’s 225th anniversaryMilitary: Russia’s Black Sea Fleet is headquartered and based in Ukraine’s Crimea region, in Sevastopol. Compared to Kiev’s small fleet, Russian naval power in the Black Sea is overwhelming. Russia’s Black Sea Fleet also contributes to the majority of the Crimea region’s economy.

Though imposing a military reality on Ukraine would be another thing entirely from imposing a military reality on South Ossetia and Georgia, there is little doubt that Russia — and the ethnic Russian majority in the Crimea — is committed to retaining the decisive hand in the fate of the Crimea, even if the Russian Fleet withdraws in 2017, when its lease expires.

Intelligence: Ukraine’s intelligence services were essentially born from Russia’s heavy KGB presence in the country before the collapse of the Soviet Union. The Security Service of Ukraine originated in Moscow’s KGB presence in Ukraine, and the Foreign Intelligence Service of Ukraine sprung forth from Russia’s SVR foreign intelligence agency.

Many of the senior officials in both agencies were actually KGB trained and worked for them during the early days of their careers. Russia’s current spy agency, the Federal Security Service (a descendant of the KGB), has a heavy presence within Ukraine’s intelligence agencies. This gives the Russians a big opening they can use to serve their own interests in Ukraine.

Organized crime: Russian organized crime is the parent of Ukrainian organized crime and is still deeply entrenched in the current system (even among the oligarchs). Russia has been especially successful in setting up shop in the Ukraine involving shady natural gas deals, the arms trade, the drug trade and other illicit business arrangements. Population: Ukraine is dramatically split between a population that identifies with Russia and a population that identifies with the West.

It has a complex and multifaceted demography: A large Russian minority comprises 17.3 percent of the total population, more than 30 percent of all Ukrainians speak Russian as their native language and more than half of the country belongs to the Ukrainian Orthodox Church under the Moscow Patriarch.

Geographically speaking, Ukrainians living east of the Dnieper River tend to identify more with Russia than with the West, and those in Crimea consider themselves much more Russian than Ukrainian. This divide is something R ussia can use not only to keep the country in chaos, but to split the country in half should the need arise.

The West, on the other hand, is split over what exactly to do with Ukraine. In 2004, during the Orange Revolution, it was the United States’ time to push up against Russia; but other Western heavyweights such as Germany have never really liked or trusted any government in Kiev. Berlin would love to see a pro-Western government in Kiev to work with, but the Germans know that meddling in Ukraine costs them something, unlike the Americans.

This was seen in 2006, when Russia cut off natural gas supplies to Ukraine, which led to the lights going out in quite a few European countries as well. So the Europeans see the upheaval of Ukraine as yet another mess the Americans have gotten them into.

Since the Orange Revolution, the West has used two main levers — cash and protection — to try to keep Kiev on a pro-Western path. It has thrown cash at Ukraine, but there are two problems with this move. First, whoever has been in charge in Kiev has squandered and mismanaged any cash given to Ukraine rather than working to alleviate the economic, financial, institutional and systematic problems the country is facing.

For example, the West is offering Ukraine an International Monetary Fund (IMF) loan of $16.5 billion with only a few strings — banking reform and an end to government squabbling — attached, but Kiev cannot manage these changes, and now the IMF is considering withdrawing its offer. Second, as the West faces its own financial crisis, it is not in any position currently to offer Kiev any more help.

U.S. President George W. Bush (R) and Ukrainian President Viktor YushchenkoThe West’s other move — again championed by Washington — is to pull Ukraine into NATO. Ukraine is ill-qualified as a potential member of the Atlantic alliance, but the move would permanently break Russia’s hold over Ukraine.

Years of concerted, focused and well-funded military reform could move Kiev meaningfully toward eligibility, but there appears to be no firm consensus — especially with Germany and France against it — on pushing for Ukrainian admittance into the membership action plan. Also, NATO’s members have neither troops available to be stationed in the country nor the defense dollars to support such an expensive modernization and reform program.

The battle for the soul of Ukraine is on. The country is shattered internally in nearly every possible way: politically, financially, institutionally, economically, militarily and socially. The global financial crisis is simply showing the problems that have long existed in the country. In the near future, there is no conceivable or apparent way for any force within the country to stabilize it and begin the reforms needed.

It will take an outside power to step in — which leads to the larger tussle between the West and Russia over control of one of the most geopolitically critical regions between the two. Russia has far more tools to use to keep Ukraine under its control, but the West has laid a lot of groundwork in order to undermine Moscow, leaving the future of Ukraine completely uncertain.

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