[Ohio UZO News] Ukraine: FT; NYT; RFE/RL (2)

[Deychak, Orest]

Financial Times

www.ft.com

Divided stand

By Stefan Wagstyl and Roman Olearchyk 

Published: December 3 2008 

It has been a rough ride for Viktor Yushchenko, Ukraine's pro-west president, since his triumph in the 2004 Orange Revolution - and it is about to get much rougher.

The domestic political conflicts and persistent headaches of dealing with neighbouring Russia that have long plagued Mr Yushchenko's rule are now being compounded by a global crisis, pitching one of Europe's fastest growing economies into recession.

As a former central banker, Mr Yushchenko should be the ideal man to oversee an International Monetary Fund rescue. But, weakened by repeated battles with Yulia Tymoshenko, the prime minister, and Viktor Yanukovich, the formidable pro-Russia opposition leader, the president lacks the authority to lead from the front.

Much is at stake in Ukraine. The country of 46m is located in the uncertain middle ground between the European Union and a resurgent Russia. It controls the territory through which most of the EU's Russian and Central Asian gas imports pass.

The break-up of the pro-western Yushchenko-Tymoshenko partnership undermines hopes of closer ties with the west, notably with the EU and Nato, and creates new opportunities for Moscow, emboldened by its intervention in Georgia, to reassert its influence in Kiev. For the west this represents a challenge with implications far beyond Ukraine's borders. "The difficult domestic situation has an impact on the fragile external situation and vice-versa," says Hryhoriy Nemyria, deputy prime minister.

The global economic crisis has hit Ukraine particularly hard, ending an unprecedented eight-year growth surge. The credit crunch and a collapse in the production of steel, Ukraine's biggest industry, has heralded the steepest recession since the bitter aftermath of the Soviet Union's collapse in 1991.

Kiev has hastily put together an emergency economic package with the aid of a $16.4bn IMF loan. But this will not prevent a rapid drop in living standards or a big jump in unemployment, with the Fund forecasting that the economy will contract by 3 per cent next year, compared with growth of just over 4 per cent this year. The country's currency, the hryvnia, is down by nearly 50 per cent against the US dollar this year - and could fall further. "The average Ukrainian doesn't realise what's coming," says Jorge Zukoski of the American Chamber of Commerce in Kiev.

The credit crunch has revealed Ukraine to be among Europe's most vulnerable countries because of the heavy role of international debt in financing recent growth. While successive governments, despite their political weakness, kept public borrowing low, the private sector ran riot as both consumers and, especially, companies drove up domestic credit growth at up to 60 per cent annually.

Foreign banks bought local subsidiaries and foreign lenders piled in, raising the ratio of external debt to gross domestic product from 45 per cent in 2005 to nearly 60 per cent at the end of last year and a forecast 78 per cent next year, according to the IMF.

When the crunch came, banks and non-bank companies alike suddenly found it difficult if not impossible to refinance debts, just as the value of equities, property and other collateral fell. In a spectacular case, Kostyantin Zhevago, a 34-year-old billionaire, was forced to sell a 21 per cent stake in Ferrexpo, the leading Ukrainian iron ore group, and reduce his holding to 51 per cent to meet a margin call.

Meanwhile, the global commodity boom imploded, hitting steel badly. This summer, Ukrainian steelmakers saw their export prices fall by half and responded by cutting production in half - leading to a drop in sales revenues of up to 75 per cent. Thousands of workers went on short-time working or unpaid holidays.

Redundancy fears stalk Donetsk in the eastern Ukraine, the centre of the steel industry. "We see thousands of people being laid off in Europe," Mr Akhmetov, Ukraine's richest steel baron, told the FT recently. "It is hard to say what will happen."

With the current account deficit widening to an estimated 10 per cent this year, external funding evaporating and the currency falling fast, Kiev turned to the IMF to help fund its external financing needs of about $50bn a year. The deal, agreed last month, envisages rebalancing the economy, stabilising the banking system and cutting the current account deficit. Kiev has pledged reforms including tighter budgetary controls, better bank regulation and floating the hryvnia.

Bank restructuring has already begun, with Ukrainian businessmen buying two troubled lenders. Dmytro Firtash, a billionaire gas trader, has acquired control of Nadra Bank, while brothers Andriy and Serhiy Kluyev, both MPs, are buying Prominvestbank.

The authorities expect about a third of the country's 170 banks to close or merge. Other industries with opportunities for bottom-fishing investors include property, manufacturing and metals. In the biggest industrial deal so far, a 25 per cent stake in Mr Zhevago's Ferrexpo has gone to New World Resources, a Czech mining group.

But foreign investors, scared of emerging markets in general and Ukraine in particular, are unlikely to rush after the Czechs. The impact of the crisis on the real economy is only beginning to emerge, with a 20 per cent drop in industrial production in October. As well as steel workers and coal miners, employees in every sector from banking to bars fear for their jobs.

Concerns are growing about Ukraine's capacity to complete the investments needed for the 2012 European football championship, which the country is co-hosting with Poland. While oligarchs have largely financed stadium construction, the government still has much to do modernising transport while private developers building hotels have frozen many schemes.

The political impact of the economic crisis is uncertain. In the latest development, Mr Yushchenko has been forced to back off from an attempt to attack Ms Tymoshenko, his former Orange Revolution ally. He dissolved parliament and called early elections but had to postpone the plan when she refused to pass enabling legislation.

The political tension will not ease until the end of next year at the earliest, when voters will choose between Mr Yushchenko, Ms Tymoshenko and Mr Yanukovich in the first presidential elections since the historic 2004 poll.

Ukraine's main parties co-operated in supporting the emergency economic legislation needed for the IMF package but the 2009 budget is still in the air. Kiev is under pressure from the Fund to cut public spending to match falling tax revenues. But with inflation still high - 20 per cent is likely for 2008 - state employees and pensioners will make big demands. So will industrial lobbies seeking anti-crisis public investment.

Mr Yushchenko and Ms Tymoshenko struggled to work together after the Orange Revolution, with two parliamentary elections and three changes of government failing to break the deadlock. The allies patched up their differences after the last parliamentary elections in 2007 but split again this autumn.

With the Tymoshenko alliance dead, Mr Yushchenko could talk again to the Mr Yanukovich, despite their bitter rivalry in the disputed 2004 presidential election. Mr Firtash and some other business people insist the populist Ms Tymoshenko must be removed. She is "the main problem Ukraine has today," says Mr Firtash, arguing that a Yushchenko-Yanukovich alliance could deliver credible economic management, despite the political differences. But business is not united, with some other billionaires including Mr Zhevago backing Ms Tymoshenko.

The main beneficiary of the domestic turmoil is Russia. Moscow wants Ukraine to demonstrate that its post-Orange Revolution democracy is a failure to reduce the risk of similar upheaval in Russia. Vladimir Putin, Russia's prime minister, has often mocked the confusion of Kiev politics. Oleh Rybachuk, head of the Euro-Atlantic University and a former Yushchenko aide, says: "The Kremlin is happy as long as there is chaos in Ukraine."

Russia also opposes Mr Yushchenko's pro-west policies, especially his pursuit of Nato membership. It got its way earlier this year when Nato postponed decisions on Ukraine's and Georgia's Membership Action Plans. It looks unlikely to revive them.

Moscow's armed intervention in Georgia and its recognition of the independence of the breakaway territories of Abkhazia and South Ossetia have further raised tensions. "The region is divided between those countries in the west [such as Poland] that obtained a security guarantee [by joining Nato and the EU] and the east where there's a grey zone between Russia and the west. The Georgian crisis is an alarm bell," says Mr Nemyria.

While few Ukrainians expect Russian military intervention, the perceived political threats are serious. Kiev is concerned about Russia's Black Sea fleet, based in the Ukrainian port of Sevastopol, leased under an agreement expiring in 2017. Mr Yushchenko wants to start talks now on the fleet's post-2017 departure, but Moscow procrastinates.

While the Kremlin has never claimed Sevastopol, nationalist Russian politicians have, playing on pro-Russia sentiments in the port. They have also questioned the status of the whole Crimean peninsula, where loyalties to Moscow run deep.

Elsewhere in Ukraine, the traditional tensions between a nationalist Ukrainian-speaking west and a Moscow-friendly Russian-speaking east have declined since 2004, with Ukrainians rallying around a more modern sense of national identity, and a spread in Ukrainian language use. But such new loyalties have yet to be tested in an economic downturn.

Meanwhile, Moscow is again raising the pressure over gas supplies, with negotiations over next year's contract in full flow. Ms Tymoshenko wants to remove what she describes as "corrupt" intermediaries in the multi-billion-dollar gas dealings between Ukraine, Russia and Central Asia. She aims to cut out the principal trading company, Rosukrenergo, a joint venture between Mr Firtash and Gazprom, the Kremlin-controlled gas monopoly. It says it is transparent and intends to stay in the trade

Ms Tymoshenko says she has won an outline agreement from Mr Putin for an intermediary-free trade. But her government is struggling to finalise the deal and avoid a repeat of the disputes that have in recent years triggered supply disruptions for EU customers.

One sticking point is price, with Ms Tymoshenko seeking to avoid a fourth sharp annual increase. Gazprom warned Kiev it could pay $400 per 1,000 cubic metres, nearly double the 2008 price. Moscow and Kiev are also arguing over $2.4bn in unpaid gas bills.

Ms Tymoshenko may be unable to squeeze Mr Firtash out of the trade altogether because Rosukrenergo holds separate rights to use Ukraine's pipelines to export gas to the EU and other Firtash companies have invested heavily in domestic Ukrainian gas distribution.

Given the threat of early elections, the economic crisis, and the tensions over Crimea, the last thing Ukraine needs this winter is a gas war. But the prospect of going into recession with a huge hike in gas prices is equally dangerous. Even by Kiev's standards, these are difficult times.

Orange Revolution prompted investment 

When the Soviet Union collapsed in 1991, Ukraine suffered some of the deepest shocks of any of the former communist economies, with output falling by two-thirds.

It started to recover only in 2000 when Leonid Kuchma, the authoritarian former president, finally launched modest reforms, often favouring political cronies in his privatisations.

His successor, Viktor Yushchenko, and his 2004 Orange Revolution victory prompted western investors to summon up their courage and enter the capital-hungry country. In a key move Mittal Steel, the forerunner of Arcelor Mittal, the world's largest steelmaker, paid $4.8bn for Kryvorizhstal, a leading steelmaker, after the new government cancelled a Kuchma-era privatisation in which two local billionaires, Viktor Pinchuk and Rinat Akhmetov, had bought the company for $800m.

Altogether foreign direct investment soared fourfold to an annual average of almost $7bn (€5.5bn, £4.7bn). Economic growth in the years after 2000 averaged 7 per cent. Kiev was transformed into a boom town, with new cars, restaurants and fashion stores and hundreds of building sites. While the gains were initially concentrated among a few billionaire oligarchs, they later spread to an emerging middle class.

In industrial eastern Ukraine, steel - which accounts for 10 per cent of gross domestic product and 40 per cent of exports - output soared in response to strong global demand. Chemicals and food processing also prospered.

The growth helped integrate Ukraine into global markets and to bring it into the World Trade Organisation.

But caution in Brussels prevented Mr Yushchenko from realising his ambition of securing future European Union membership status.

Meanwhile, US efforts to promote Kiev's Nato candidacy were stymied by reluctance in Europe, fears of antagonising Moscow and a lack of popular support in Ukraine.

The New York Times
At Meeting With Allies, U.S. Backs Renewed Talks Between Russia and NATO 

By STEVEN ERLANGER 

3 December 2008

Late Edition - Final

6

 

BRUSSELS -- With the Bush administration's influence rapidly waning, the United States agreed on Tuesday to support a modest reopening of NATO's dialogue with Russia, despite Moscow's continuing occupation of the separatist Georgian territories of South Ossetia and Abkhazia, taken during fighting in August.

It was a concession by Secretary of State Condoleezza Rice at her final NATO meeting. In return, Germany agreed to allow NATO to accelerate work on preparing Ukraine and Georgia for eventual membership, while postponing any further decisions for the incoming Obama administration.

As the NATO ministers debated, elsewhere in Brussels the European Union resumed its own talks on Tuesday with Moscow on a strategic partnership, negotiations that were frozen for three months to protest Moscow's actions in Georgia and refusal so far to withdraw its troops to their positions before August.

NATO followed suit. ''Allies agreed on what I would qualify as a conditional and graduated re-engagement with Russia,'' NATO's secretary general, Jaap de Hoop Scheffer, told reporters after Tuesday's meeting. But he insisted that the decision did not convey approval of Russia's ''use of disproportionate force'' in August or its occupation of Georgian territory.

At the same time, he said, the foreign ministers reconfirmed that Georgia and Ukraine would eventually become NATO members. NATO, he said, agreed to ''maximize, to strengthen, its efforts'' to ready those countries for membership, for now, through NATO commissions rather than a ''membership action plan,'' or MAP, which Germany and other European nations had opposed at the NATO meeting in Bucharest in April.

The ministers agreed that the MAP program would survive, but decided to put off how Ukraine and Georgia would finally become members, or when. The compromise was worked out in a meeting of American, French, British and German ministers, and was suggested by the French foreign minister, Bernard Kouchner. The communique will mention MAP, as the Germans demanded, but ''without prejudice'' about whether it will be used for Georgia and Ukraine, as the Americans wanted.

The German foreign minister, Frank-Walter Steinmeier, said as he arrived for the NATO meeting that ''we must now look for ways of returning to dialogue with Russia because it's especially in difficult phases of our common ties that we need means of holding discussions.''

The Italian foreign minister, Franco Frattini, said that ''the time has come to resume negotiations'' with Russia, adding that he thought the decision should come no later than April, when NATO meets to celebrate its 60th anniversary.

Ms. Rice, fresh from playing Brahms on the piano before Britain's Queen Elizabeth II at Buckingham Palace, suggested American flexibility when she said she had no objection ''in principle'' to reopening low-level NATO talks with Russia. Still, she said, ''We should be very attentive to what the Russians are doing, and are they living up to their obligations.''

''There are certain types of activities, like military-to-military contacts, that seem to me to be problematic,'' she continued, ''when the Russian ministry is sitting in Georgian territory, in the separatist regions'' of South Ossetia and Abkhazia, which Russia has unilaterally recognized as independent countries.

Ms. Rice wanted to agree on language in the final NATO communique, to be issued on Wednesday, before leaving Tuesday night for a hastily scheduled visit to India, to show solidarity with New Delhi and to try to calm down the crisis with Pakistan.

The United States, which had pushed hard for Georgia and Ukraine to get a formal membership action plan at the April meeting in Bucharest, argued here that such a plan was unimportant. Rather, the Americans said that Georgia and Ukraine needed a lot of help over years to get ready for NATO membership and that the preparatory work could take place through NATO commissions -- the NATO-Ukrainian Commission, begun in 1997, and the NATO-Georgian Commission, established after the fighting in August.

But Germany and Mr. Steinmeier, who will run for German chancellor next year as head of the Social Democratic Party, said NATO should give no extra encouragement to Georgia and Ukraine and give Russia no further provocation. While Germany was opposed to MAP in Bucharest, it now insists that Germany and Ukraine go through a formal MAP program before being considered for membership.

Germany wants to be sure that there is no ''shortcut'' to NATO membership, a German official said, adding that Berlin does not want to eliminate the unanimous NATO vote required for a MAP program by giving Georgia and Ukraine the substance of MAP without the official program.

Ms. Rice said there would be ''no shortcuts to membership of NATO.'' But Washington and its supporters, especially Britain, say that NATO must continue to move, under whatever name, to help prepare Georgia and Ukraine for the eventual membership they were promised in April. The compromise that emerged Tuesday night will let practical work go ahead with Georgia and Ukraine through the commissions while leaving a NATO MAP decision to the future. ''We did not take up a MAP decision for Ukraine and Georgia,'' Ms. Rice said Tuesday evening. ''We did empower the commissions to intensify their work in helping these states'' to achieve NATO membership.

The British foreign secretary, David Miliband, rejected the suggestion that Russia was splitting NATO. ''I don't accept that NATO is fractious and divided,'' Mr. Miliband said. ''NATO is united in saying that the rule of law and not the rule of force is the way forward in the region. While there is a temptation for sturm und drang, there isn't actually any sturm und drang.''

NATO is also trying to find consensus on language about Russia itself, after Moscow's call for a review of European security arrangements, including NATO, that date from the start of the cold war. The French president, Nicolas Sarkozy, and the Germans have welcomed the Russian suggestion, but the United States, Britain and others believe that the current structure -- NATO, the Organization for Security and Cooperation in Europe and various other institutions built on the 1975 Helsinki Accords -- has been working well. 

 

Radio Free Europe/Radio Liberty

www.rferl.org

 

December 02, 2008 

NATO Affirms Ukraine, Georgia Ties, Agrees To Resume Russia Contacts 

(RFE/RL) -- NATO foreign ministers, meeting in Brussels, have reiterated a commitment that Georgia and Ukraine will eventually join the trans-Atlantic alliance, but held off on granting the two countries formal Membership Action Plans at this time.

The Western allies also agreed to gradually resume contacts with Russia, which were frozen after Moscow's war with Georgia in August, but stopped well short of a full-fledged revival of the suspended Russia-NATO Council, a forum that manages the relationship.

Speaking at a press conference in Brussels, NATO Secretary-General Jaap de Hoop Scheffer said that informal meetings of the NATO-Russia Council would resume. He stressed, however, that the alliance still has serious differences with Moscow.

"This graduated re-engagement [with Russia] does certainly not mean that we do now suddenly agree with the Russians on the disproportionate use of force in August in the Caucasus [or] on the recognition -- illegal recognition -- of Abkhazia and South Ossetia," he said.

The membership bids by Georgia and Ukraine and the alliance's relations with Moscow were the two main issues on the agenda as NATO foreign ministers gathered, just four months after Russia and Georgia fought a brief war over the separatist province of South Ossetia.

The United States, Britain, and new member states like Poland, the Czech Republic, and the Baltic states have strongly supported the aspirations of Georgia and Ukraine to join NATO. Germany and France have largely opposed their bids, arguing that it would unduly antagonize Moscow, which still sees those two former Soviet states as part of its sphere of influence.

De Hoop Scheffer told reporters that Georgia and Ukraine "have made progress" toward meeting the requirements for joining the alliance, but added that "both have significant work left to do."

He stressed, however, that a formal pledge to both that they will eventually become members -- made at NATO's summit in Bucharest in April -- is still in effect.

"All elements -- I repeat, all elements -- of the decisions regarding Ukraine and Georgia taken by the NATO heads of state and government in Bucharest still stand. All elements," he said. "And that includes, very much, that they will one day be members, if they so wish, of course. And important to add, when they meet NATO's standards."

The issue of granting Georgia and Ukraine Membership Action Plans (MAPs) became a contentious issue for Russia, since the MAPs are widely seen as the last step before full membership. A MAP is essentially a detailed blueprint of the political and military reforms a country must complete before full membership in the alliance.

De Hoop Scheffer said NATO would step up its efforts to assist reforms in Georgia and Ukraine in an effort to get them ready for membership.

"NATO will provide further assistance to both countries in implementing needed reforms as they progress, the countries, toward NATO membership," he said. "What does it mean? It means that NATO will maximize -- strengthen, if you wish -- its advice and assistance for those reform efforts in the frameworks of the NATO-Ukraine Commission and NATO-Georgia Commission."

The United States had been pushing for NATO to take a harder line against Russia. But U.S. Secretary of State Condoleeza Rice, who is attending her last NATO meeting, said Moscow is still paying a diplomatic price for its actions in Georgia, despite the revival of informal Russia-NATO Council meetings.

"Russia's invasion of Georgia cut off what had been a highly articulated program of engagement," Rice said. "So, no, it is not business as usual."

NATO foreign ministers are due to wrap up their two-day meeting on December 3. 

Radio Free Europe/Radio Liberty

Tough Medicine Needed For Ukraine's Economic Woes

December 3, 2008 

by Volodymyr Lanovy 

 

The economic crisis in Ukraine has become a reality: enterprises are halting production, bank branches are going into liquidation, employees are being laid off. It is hard to remember that as recently as three months ago economic-development indicators were steadily rising. One has the impression the country has been swept up in an unexpected tsunami.

The metaphor is apt, even though to a considerable extent the crisis crept into the homes of average Ukrainians bit by bit. In the first half of this year, interest rates soared and the hitherto stable value of the hryvnya was shaken. Investments in the economy dried up, and the construction sector slowed down.

But an economic tsunami did roll over us from the outside. And its effects were hard felt in Ukraine, a country that is neither among the high-technology countries of the West nor among the oil-and-gas giants of the East. Like most countries in the world, Ukraine is between the former and the latter and seems to have been hit from both sides.

First, Ukraine -- like all the other countries of the world -- has become an unwilling financial donor to a void that opened up in the United States. The outflow of capital from our country has resulted in a catastrophic plunge of the stock-market indexes and an abrupt decapitalization of Ukrainian enterprises. By contrast, the U.S. markets have seemed virtually stable. 

Second, Ukraine -- like many Western countries -- was vulnerable because the economy had been weakened by inflated global prices for oil and gas. Before the crisis struck, Ukraine was de facto a major contributor to the Stabilization Fund in Russia. Kyiv had no opportunity to build up its own reserves like Russia, many Persian Gulf energy producers, China, and other countries were able to do. Now those countries have funds to provide assistance to their own banks and companies and even to offer credit to Western countries. Ukraine is left to compete with other countries for help from the International Monetary Fund or to cope on its own.

Third, Ukraine's economy was relatively weak even before the crisis struck. It is already in its second year of a rapidly rising trade deficit and a negative hard-currency-payments balance. This situation meant that the halt of foreign-capital inflows brought on by the crisis has struck the national currency hard, producing a sharp decline in production and consumption.

Fourth, the slowdown of commodities markets abroad means a decrease in orders for Ukrainian industrial and agricultural products, decreases in the prices for key exports, and sharp losses for major enterprises.

Major Reform Needed

Clearly, Ukraine's recovery plan must extend beyond merely addressing the immediate effects of the crisis. Ukraine must not only cover financial deficits and credits, but it must also recover the position of its enterprises on global markets and ensure that production is sufficient for domestic demand. A recovery program should include both immediate, extraordinary measures to counter various financial implosions and a complex of structural and institutional reforms, without which we will be unable to compete in today's globalized and pitiless world.

Over the long term, global economics will come down to a struggle among countries for a share in the global investment flow. Therefore, it is essential that our national anticrisis program include reforms that will make Ukraine a worthy competitor in this struggle.

Ukraine must improve its hard-currency, credit, and investment markets. They must be deregulated, transparent, accessible to everyone globally, and protected against administrative interventions.

It must implement far-reaching tax reform to reduce corporate and individual taxes, while also introducing mandatory contributions to the state's pension, insurance, and environmental funds. It should impose taxes on real estate and the consumption of energy and natural resources.

Kyiv must reform the stock exchange to protect the rights of minority shareholders, mandate transparency in corporate accounting and reporting, and introduce online trading. It must create investment banks and encourage public share offerings. It must adopt a broad program of demonopolization and credible antimonopoly regulation.

It must introduce market-oriented reforms of key sectors that remain under state control: the fuel and energy complex, agriculture, machine building, transport, road management, telecommunications, housing and utilities, and others. The country must also face the fact that its management system is shortsighted, cumbersome, onerous, and inefficient.

Yes, there is work to be done.

Volodymyr Lanovy was Ukraine's economy minister and first deputy prime minister in 1992 and head of the State Property Fund in 1997-98. The views expressed in this commentary are the author's own and do not necessarily reflect those of RFE/RL

 

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