August 24, 2010

Building a Better Ukraine Policy

By Samuel Charap & Alexandros Petersen

an interesting article in the Kyiv Post:

Three interlocking crises are striking Russia simultaneously: the highest recorded temperatures Russia has seen in 130 years of recordkeeping; the most widespread drought in more than three decades; and massive wildfires that have stretched across seven regions, including Moscow.

The crises threaten the wheat harvest in Russia, which is one of the world’s largest wheat exporters. Russia is no stranger to having drought affect its wheat crop, a commodity of critical importance to Moscow’s domestic tranquility and foreign policy. Despite the severity of the heat, drought and wildfires, Moscow’s wheat output will cover Russia’s domestic needs. Russia will also use the situation to merge its neighbors into a grain cartel.

History of drought, wildfire

Flooding peat bogs appears to be bringing the fires under control. Smoke from the fires has kept Moscow nearly shut down for many days in the first half of Augus.. The larger concern is the effect of the fires — and the continued heat and drought, which has created a state of emergency across 27 regions — on Russia’s ordinarily massive grain harvest and exports.

Russia is one of the largest grain producers and exporters in the world, normally producing around 100 million tons of wheat a year, or 10 percent of total global output. It exports 20 percent of this total to markets in Europe, the Middle East and North Africa.

Cyclical droughts (and wildfires) mean Russian grain production levels fluctuate between 75 and 100 million tons from year to year. The extent of the drought and wildfires this year has prompted Russian officials to revise the country’s 2010 estimated grain production to 65 million tons, though Russia holds 24 million tons of wheat in storage — meaning it has enough to comfortably cover domestic demand (which is 75 million tons) even if the drought gets worse.

The larger challenge Moscow has faced in years of drought and wildfire has been transporting grain across Russia’s immense territory. Russia’s grain belt lies in the southern European part of the country from the Black Sea across the Northern Caucasus to Western Kazakhstan, capped on the north by the Moscow region. This is Russia’s most fertile region, which is supported by the Volga River. 

Though drought and wildfires have struck Russia over the past three years, they have not affected its main grain-producing region. Instead, they struck regions in the Ural area that provide grain for Siberia. Those fires tested Russia’s transit infrastructure, one of its fundamental challenges. Russia has no real transportation network uniting its European heartland and its Far East save one railroad, the Trans-Siberian. While its grain belt does have some of the best transportation infrastructure in the country, it is designed for sending grain to the Black Sea or Europe — not to Siberia. The Kremlin began planning for disruptions of grain shipments to Siberia during the droughts and fires of 2007-2009. During that period, Moscow established massive grain storage units in the Urals and in producing regions of Kazakhstan along the Russian border.
This year’s drought and fires do not primarily affect Russia’s transportation network, but rather the grain-producing regions in the European part of Russia that make up the bulk of Russia’s grain exports. These regions lie on the westward distribution network, with the port of Novorossiysk on the Black Sea handling more than 50 percent of Russian exports.

Russia has focused largely on being a major grain exporter, raking in more than $4 billion a year for the past three years off the trade. This year, the Kremlin announced Aug. 5 that it would temporarily ban grain exports from Aug. 15 to Dec 31. Two reasons prompted the move. The first is the desire to prevent domestic grain prices from skyrocketing due to feared shortages.

Russia’s grain market is remarkably volatile. Grain prices inside Russia already have risen nearly 10 percent. (Globally, wheat futures on the Chicago Board of Trade have risen nearly 20 percent in the past month, the largest jump since the early 1970s.)

The second reason is that the Kremlin wants to ensure that its supplies and production will hold up should the winter wheat harvest decline as well. Winter wheat, planted beginning at the end of August, typically fully replenishes Russian grain supplies. Further unseasonable heat, drought or fires could damage the winter wheat harvest, meaning the Kremlin will want to curtail exports to ensure its storage silos remain full.

Russia’s conservatism when it comes to ensuring supplies and price stability arises from the reality that adequate grain supplies long have been equated with social stability in Russia. Unlike other commodities, food shortages trigger social and political instability with shocking rapidity in all countries. As do some other countries, Russia relies on grain more than any other foodstuff; other food categories like meat, dairy and vegetables are too perishable for most of Russia to rely on.

Russia’s concentration on food volatility has a long history. Vladimir Lenin called grain Russia’s “currency of currencies,” and seizing grain stockpiles was one of the Red Army’s first moves during the Russian Revolution. In this tradition, the Kremlin will husband its grain before exporting it for monetary gain. And this falls in line with Russia’s overall economic strategy of using its resources as a tool in domestic and foreign policy.

Large segments of Russia and Ukraine’s grain-producing regions are suffering from drought and fires,
prompting export curbs on grain.

Exports, foreign policy

Russia is a massive producer and exporter of myriad commodities besides grain. It is the largest natural gas producer in the world and one of the largest oil and timber producers. The Russian government and domestic economy are based on the production and export of all these commodities, making Kremlin control — either direct or indirect — of all of these sectors essential to national security.

Domestically, Russians enjoy access to the necessities of life. Kremlin ownership over the majority of the country’s economy and resources gives the government leverage in controlling the country on every level — socially, politically, economically and financially. Thus, a grain crisis is more than just about feeding the people; it strikes at part of Russia’s overall domestic economic security.

Russia’s use of its resources as a tool is also a major part of Kremlin foreign policy. Its massive natural resource wealth and subsequent relative self-sufficiency allows it to project power effectively into the countries around it. Energy has been the main tool in this tactic. Moscow very publicly has used energy supplies as a political weapon, either by raising prices or by cutting supplies. It is also willing to use non-energy trade policy to effect foreign policy ends, and grain exports fall very easily into Moscow’s box of economic tool.

Russia is using the current grain crisis as a foreign policy tool even beyond its own exports, prices and supplies. It has asked both Kazakhstan and Belarus to also temporarily suspend their grain exports. Belarus is a minor grain exporter, with nearly all of its exports going to Russia. But Kazakhstan is one of the top five wheat exporters in the world, traditionally producing 21 million tons of wheat and exporting more than 50 percent of that. The same drought that has struck Russia also has hit Kazakhstan; production there is expected to be slashed by a third, or 7 million tons.

Kazakhstan traditionally exports to southern Siberia, Turkey, Iran and its fellow Central Asian states: Kyrgyzstan, Tajikistan, Uzbekistan and Turkmenistan. For the first time, Kazakhstan had planned to send grain exports to Asia. It had contracted to send approximately three million tons of grain east, with two million of those supplies heading to South Korea and the remainder to be split between China and Japan. The drought has forced Kazakhstan to reassess whether it can fulfill those contracts along with contracts for its immediate region.

Russia’s request that Belarus and Kazakhstan cease grain shipments does not seem primarily connected to Russia’s concern over supplies, but instead looks to be more political. The three countries formed a customs union in January, something that has caused much political and economic turmoil. Kazakhstan sought to lock in its president’s desire to remain beholden to Russia even after he steps down, while Belarus reluctantly joined as Russia already controlled more than half of the Belarusian economy.

For Moscow, however, the union was a key piece of its geopolitical resurgence. The Russian-Kazakh-Belarusian customs union was not set up like a Western free trade zone, where the goal is to encourage two-way trade by reducing trade barriers, but as a Russian plan to expand Moscow’s economic hold over Belarus and Kazakhstan. Thus far, the customs union has undermined Belarus and Kazakhstan’s industrial capacity, welding the two states further into the Russian economy.

Since the customs union has been in effect, Russia has quickly turned the club into a political too, demanding that its fellow members sign onto politically motivated economic targeting of other states. In late July, Russia asked both Kazakhstan and Belarus to join a ban on wine and mineral water from Moldova and Georgia after continued spats with each of the pro-Western countries. Russia has added another level of demands in light of the grain shortages. As of this writing, neither Astana nor Minsk has accepted or declined the demands from Moscow, with grain exporting season just a month away.

Given current Russian production and storage supplies, Russia doesn’t actually need Belarus or Kazakhstan to curb their exports. Instead, it is seeking to use the drought and fires to create a regional grain cartel with its new customs union partners.

And this leads to the question of the other former Soviet grain heavyweight, Ukraine. Ukraine, which does not belong to the customs union, is the world’s third-largest wheat exporter. In 2009, Ukraine exported 21 million tons of its 46 million-ton production. Also hit by the drought, Ukraine revised its projected production and exports for 2010 down 20 percent, with exports down to 16 million tons. Some fear Ukraine will have to slash its export forecasts even further. Moscow will most likely want to control what its large grain-exporting neighbor does, should it be concerned with supplies or prices. Despite Russia’s recent actions with regard to Belarus and Kazakhstan, however, Ukraine has not publicly announced any bans on grain exports.

If Russia is going to exert its political power over the region via grain, it must have Ukraine on board. If Russia can control all of these states’ wheat exports, then Moscow will control 15 percent of global production and 16 percent of global exports. Kyiv has recently turned its political orientation to lock step with Moscow, as seen in matters of politics, military and regional spats. But this most recent crisis hits at a major national economic piece for Ukraine. Whether Kyiv bends its own national will to continue its further entwinement with Moscow remains to be seen. Lauren Goodrich is an analyst with Stratfor, a private U.S.-based analytical service at www.stratfor.com

Read more: http://www.kyivpost.com/news/opinion/op_ed/detail/78489/#ixzz0wnnsqL2H

Opportunity for E.U. Sway in Ukraine

By JUDY DEMPSEY

Published: July 21, 2010

BERLIN — When Nico Lange arrived at the Kiev airport last month, border guards told him he was being expelled and deported to his native Germany.

Good article in the Kiev Post. Russians make moves on Ukraine’s steel industry.

As Ukrainian industry is driven toward consolidation by global trends, native son billionaire Rinat Akhmetov is fighting to hold his own dominating position in the nation’s lucrative metals sector against what looks like a stealth invasion from Russia.

Battles are currently being fought for control of two Ukrainian steel mills, with tactics ranging from the covert transfer of shares to intense struggles among competing bidders.

One such ownership tug-of-war is flaring over Mariupol-based Ilyich Steel Mill, the nation’s third largest, triggering President Viktor Yanukovych’s call this week for law enforcement officers to investigate what is happening.

When the dust settles, the question of who owns the nation’s top engines of industry and how they were acquired could send strong signals internationally. For one, it could gauge how far Ukraine’s economy will tilt under Russian control. Secondly, it could show whether the country is moving away from free-market levels of transparency back towards the wild 1990s decade of gangster capitalism where tycoons close to top political leaders grab assets at will.

For now, the question to what lengths the would-be consolidators of Ukraine’s metal sector will go is an open one that has many growing increasingly nervous.

Ilyich spokesman Serhiy Mahera, who claims his company is the target of a hostile takeover, said: “If this raider attack on Ilyich is successful, it will show that it’s no longer possible to conduct normal business in Ukraine.”

Nick Piazza, head of sales at BG Capital investment bank, said the stakes are high, but for slightly different reasons.

Piazza said steel-mill owners are driven by the need to be “vertically integrated” – meaning they need to control as many stages of production as possible, from acquisition of raw ore, which Ukraine has the world’s fourth-largest reserves of, to exports of finished products, where Ukraine ranks globally among the top 10, and everything in between, in order to be competitive globally.

Ukraine’s richest man Rinat Akhmetov is fighting to hold a dominating position in the nation’s metals sector. (Ukrinform)

Integration means survival of the fittest – and the fittest in Ukraine could end up being Russia and its oligarchs, who have started advancing into Ukraine quickly since the Moscow-friendly Yanukovych became president. “Akhmetov is the strongest domestic player in Ukraine, Russia is a regional giant and metallurgy is the sector where it’s all going to start,” Piazza said.

The first shots of the battle for Ukraine’s metallurgical industry, which accounts for 40 percent of the country’s exports, were heard at the start of 2010, when unspecified Russian investors took control of steelmaker Industrial Union of Donbass, including two of Ukraine’s top-five mills.

Now, just a few months later, the action is centered on two other top metallurgical facilities – Zaporizhstal (ranked 6th in production) and Ilyich. They are ripe for the picking due to their reliance on other sector players for iron ore.

On May 26, two men claiming to represent offshore companies registered in Cyprus, announced the sale of Ilyich to an unknown Russian investor. No banks were involved in the alleged transaction, which valued the $2 billion factory at only $30 million.

Ilyich chief executive officer Volodymyr Boyko, who manages the shares of the mill’s holding company, accused unidentified corporate raiders of trying to seize the asset.

A week later, at a June 2 press conference, the broker who actually transferred the shares in Ilyich, refused to reveal the seller in whose name he carried out the deal. “I am inhibited by client confidentiality,” Sergey Velikanov, director of GPI Brok, told journalists in Kyiv.

Ilyich spokesperson Mahera accused Velikanov of abusing his status as temporary custodian of the shares to push through the shady deal. “We let down our guard,” Mahera said, adding, however, that “not a single soul can prove that we authorized the broker to sell these shares.”

Another Ukrainian steel mill set to change hands is Zaporizhstal, which Akhmetov’s holding company System Capital Management, acknowledged it was trying to acquire. However, Ukrainian media have recently reported that more unspecified Russian investors had outbid Akhmetov in negotiations with Zaporizhstal’s owners – a grouping led by two Soviet-born businessmen: Toronto-based Alex Shnaider and Eduard Shifrin.

Akhmetov company spokesperson Anna Terekhova said, however, that her company is still in the running. “We submitted all documents but a final decision has not been taken yet,” she said.

So is there a link between the mysterious Russian investors in Ukraine’s metallurgical industry, which is ranked 7th worldwide?

Ivan Dzinka, an analyst at Kyiv-based investment bank Eavex Capital, said that although it’s not exactly certain who bought the controlling stake in Industrial Union of Donbass, it is highly likely that the same people are trying to buy Zaporizhstal.

“It’s a struggle between them and Akhmetov, and it’s continuing to this day,” Dzinka said.

He said that the non-transparency of the Industrial Union of Donbass deal and the speed with which the Zaporizhstal deal came about points to a coordinated campaign.

A link between Russian investors and Ilyich, which System Capital Management holds a small stake in, has yet to be made.

However, industry sources said that leading Russian steel players Evraz Group, co-owned by multi-billionaire Roman Abramovich, and Severstal are both interested in increasing their influence in Ukraine’s metal sector across the board, as is Metalloinvest, the Russian ore conglomerate controlled by Alisher Usmanov.

Back in 2005, when the nation’s biggest steel mill, Kryvorizhstal, was resold by the state to ArcelorMittal for a record-breaking $4.8 billion in a nationally televised auction, it looked like the sector was headed toward greater transparency and corporative governance. Now, the return of shadow investors and illegal seizures could mean that Ukraine is regressing to the crony capitalism of the 1990s, where tycoons close to political leaders forcefully grab top assets at will.

“Investors are primarily concerned about predictability and stability, and any signs of a possible increase of illegal corporate raider activity will cause great concern among the business community further highlighting a culture of weak corporate governance and the unfortunate existence of a broken system that allows this type of reprehensible behavior to take place,” Jorge Zukoski, president of the Chamber of Commerce in Ukraine, said.

In the meantime, the Anti-Monopoly Committee announced that it was “concerned” by media reports about a change in ownership at the two steelmakers as the president has ordered an investigation. “The president has sent out all the necessary instructions, including to law-enforcement agencies. I think that we will wrap things up there very soon,” Prime Minister Mykola Azarov told journalists in Kyiv on June 3.

This article in the Kiev Post illustrates that even with the great potential of investing in an emerging market like Ukraine, it is often too difficult given the stifling bureaucracy and endemic corruption. Companies and individuals are giving up, or delaying entry until the climate improves.

Predictability is the biggest challenge as the political situation has not stabilized the environment enough to make investment palatable…and the ability to realize returns, attractive. Ukraine has a long way to go before it attracts the kind of investment it desperately needs.

IKEA, HP and Cargill announce cuts to planned investments amid tough business climate

President Viktor Yanukovych has pledged to improve Ukraine’s business climate from its lamentable 142nd place out of 183 countries in the World Bank’s Doing Business 2010 report. But with three foreign companies recently announcing cuts to plans for investment in the country, he’ll have his work cut out to convince foreign investors that Ukraine is worth the risk.

The troubles of home furnishing retailer IKEA provide an insight into the impenetrability of Ukraine’s market. For more than a decade, the international big-box, flat-pack furniture giant has been struggling to roll out its solution for middle-class households. But with the sale of its three processing plants in western Ukraine earlier this year and the shelving of plans to open a store in Odesa in 2011, it may be another decade before cheap and chic beds and tables will appear on the local market.

IKEA is not the only big international firm pushing the retreat button. Cargill, the agriculture giant, and Hewlett Packard, the information technology company, have curtailed their plans for Ukraine since the start of 2010.

The multinationals are scaling back for economic and political reasons, said Volodymyr Klimenko, a member of the management board at Sokrat Investment Group. “Big companies like growing trade markets and predictable rules of work.”

Predictability, however, is in permanent deficit in Ukraine.

IKEA has been here long enough to be no stranger to the unpredictable environment. Having opened an office in 2005, the retailer obtained a land plot in Kyiv and another one on the Black Sea coast in Odesa. With the potential for some 25 outlets across the country, the company planned to debut in 2011. But not anymore, said Ukraine’s country manager Frida Malmquist.

“IKEA has decided to postpone its plans for establishing shopping centers in Ukraine. IKEA will follow the development in the country, and at some point re-evaluate its decision,” she said.

Leaving the Odesa plot empty for now, IKEA Group also sold three plants in western Ukraine at the end of April. They used to manufacture IKEA’s famous furniture for Russian markets. Danish lumber company DDS bought wood-processing firm Sten in Ivano-Frankivsk region. Romania’s Plimat took over Proza furniture factory and Karpaty wood-processing plant from Swedwood, IKEA’s daughter company.

“Ukraine has suffered more than any other western and eastern European countries in terms of main economic indicators,” said Klimenko. “It means that Ukrainian incomes tumbled further than others, so IKEA’s target group has diminished significantly. Klimenko predicted, however, that IKEA would return in the next three or four years.

A similar tide swept away Hewlett Packard’s expansion ideas in Ukraine. The company was gearing up to open HP Global e-Business Center in 2010, which would have serviced HP workers around the world. The information technology giant planned to hire 300 local people at the start of the project, eventually expanding it to a 1,000-staff office. Lviv authorities expected HP to invest $3 million to launch the project. But the plans have been halted “for a variety of reasons,” said Iryna Sokolovska, the company’s marketing manager.

Oleh Berezyuk from the Lviv mayor’s office blamed Hewlett Packard’s exit on the tax authorities. “We had to change one aspect of taxation, of absolutely no great importance,” said Berezyuk on April 27. “[But] they did not do this, and HP went to Egypt …. These were things that did not affect the amount of taxes, but impacted the term for paying taxes. Small items, which did not require changes of the budget code and tax law,” he said.

Sokolovska denied that Hewlett Packard chose Egypt over Ukraine. “Over the last couple of years, Ukraine’s government significantly improved its investment climate. But because a different team came to power now, we hope that they will not only support this strategy but work at improving conditions for foreign investors.”

One company that has had a hard time with tax issues is food and agricultural giant Cargill. The multinational has threatened to pull back from the grain market because of the state’s failure to refund value added tax payments.

In comments to Delo business daily on March 19, Vadym Miroshnichenko, head of Cargill’s commercial department, said that in 2010, the company “will export only 300,000 tons of grain,” which is four times less than in 2009.

The firm is not disclosing the amount the state owes Cargill. But officials working for the Donetsk mayor said, after a meeting with Cargill’s management in January, that the figure might be up to $100 million.

Anastasia Dudley, a spokesperson for Cargill, said that VAT issues are not unique to their company only. “For an investor like Cargill, VAT refunds are a routine part of day-to-day business. The lack of timely refunds reduces the attractiveness of Ukraine for foreign investments and limits the competitiveness of Ukrainian agriculture in world markets,” she said.

Sokrat’s Klimenko said that declarations to pull out are a method of pressure on government rather than a real intention. “Cargill may temporarily reduce volumes of operation but most likely will not do it because it will result in a smaller market share, and it’s not profitable for such a strong player,” Klimenko said.

Despite visible frustration with Ukraine’s economy, none of the three companies has slammed the door shut on the country yet. Representatives from all three said they are committed to working in Ukraine to find a workable solution.

Their complaints leave a bitter taste, however. “When respected firms depart or reduce business operations, it decreases the already small appetite of multinationals for Ukraine,” concluded Klimenko.

The debt crisis in Greece has been called the “canary in the coal mine for the Western European economies.  Indeed, the crisis could spread further to the U.K. and the USA, both of which share high levels of debt.  The effect will most certainly be felt in Eastern Europe given the source of funding for consumer loans and corporate funding and could hinder a recovery that was under way.

East Europe Threatened by West’s Debt, Euro Crisis, EBRD Says

May 17 (Bloomberg) — The Greek debt crisis, which is threatening to bring down the decade-old euro, may spoil east Europe’s nascent recovery, the European Bank for Reconstruction and Development said.

The EBRD, a London-based development bank that helps former communist states in eastern Europe and central Asia transform their economies, said May 15 that the 30 countries it invests in may expand a combined 3.7 percent this year. The struggle to contain the debt crisis in western Europe may ruin that forecast, especially on the Balkan peninsula, the EBRD said.

“We have the Greek crisis, and it poses a risk in particular to southeastern Europe,” EBRD Chief Economist Erik Berglof said during the bank’s annual meeting in Zagreb, Croatia. “But there is a broader risk for the region. Clearly this is something we are very concerned about.”

The former communist countries in Europe and the former Soviet republics in central Asia are recovering from the deepest recession since switching to free-market policies two decades ago. Challenges include adjusting to a slower pace of growth as the European Union, the largest export market for most of the region, grapples with mounting fiscal problems, the EBRD said.

The euro has fallen 3.9 percent to $1.2358 in the past seven days. It traded for $1.2311 at 9:14 a.m. Central European Time.

German Chancellor Angela Merkel said May 14 that Europe is in a “very, very serious situation,” even after a rescue package for the region’s most indebted nations. The Spanish newspaper El Pais reported the same day that French President Nicolas Sarkozy threatened to withdraw his country from the euro. Finance Minister Christine Lagarde and other government officials denied the report.

Euro Defense

EU Monetary Affairs Commission Olli Rehn told participants at the Zagreb conference that “it is important that markets read our package and see that we are serious about our defense of the euro area.”

Yesterday, Greek Prime Minister George Papandreou said his country may take legal action against U.S. investment banks that might have contributed to the country’s debt crisis.

The euro region’s tensions may affect eastern Europe through “a disruption of capital markets” as well as “a decrease in import demand from countries like Germany or France,” EBRD President Thomas Mirow said at the close of the annual meeting. “There are potential risks that can be channeled through the subsidiaries of Greek banks. Up until now we haven’t seen this materializing. We have to watch and encourage policy makers to bear this risk in mind.”

‘Uncertain’ Outlook

The EBRD raised its forecast for Russian economic growth this year to 4.4 percent from 3.9 percent. It also boosted the outlooks for Turkey, Poland, Hungary, and Ukraine, while lowering expectations for Romania and Bulgaria.

“The outlook remains very uncertain because of a shift in risks from the domestic to the external,” Berglof said. “External risks have risen dramatically.”

While the EBRD now expects most countries where it operates to rebound, the recovery will be protracted, it said. Growth rates will remain below pre-crisis levels and former drivers of expansion, such as investment from abroad and consumer spending, will remain subdued. The region grew at an average pace of 5 percent annually before 2008.

The EBRD’s shareholders increased the bank’s resources for the next five years. They approved raising the bank’s capital by 50 percent to 30 billion euros ($37.2 billion), enabling it to invest about 52 billion euros until 2015. That’s more than the bank’s combined investments since its 1991 inception.

Capital Increase

The capital increase will open the way to investments of 9 billion euros in each of the next two years and 8.5 billion euros in the succeeding three years. The bank this year will spend 8 billion euros on loans and company stakes. Funding reached 1.76 billion euros in the first quarter, 60 percent more than in the same period last year, the bank has said.

The bank also announced a plan to limit foreign-currency loans by east Europe banks, after they brought some countries to verge of default during the global credit crisis.

Underdeveloped financial markets, low saving rates and high local interest rates contributed to a surge in foreign currency loans during the boom years, the EBRD said.

East European banks struggled to refinance foreign-currency mortgages, car and consumer loans because their parents in Austria, Italy, Germany and Sweden reduced funding during the credit crisis.

The EBRD helped limit the impact of the financial crisis, which hit Europe’s emerging markets hardest, by persuading western banks to remain in the region and providing them with funds to lend.

The bank’s 63 shareholders also pledged to support an EBRD program designed to help countries with excessive reliance on raw-material exports, such as Russia, or few manufactured goods, such as central Europe, to diversify their economies.

April 27 (Bloomberg) — Russian Prime Minister Vladimir Putin proposed creating a nuclear power holding company with Ukraine as the two former Soviet republics rebuild ties.

“We have made massive proposals, referring to generation, nuclear power engineering, and nuclear fuel,” Putin told reporters after a meeting with Ukrainian President Viktor Yanukovych in Kiev today. Any cooperation may be phased, Putin said after the surprise visit to Kiev.

Russia and Ukraine have reached agreements on natural gas subsidies and a navy base since Yanukovych’s election in February improved ties between the neighboring states. Putin also met yesterday with his Ukrainian counterpart,Mykola Azarov, to discuss industrial cooperation.

Putin and Azarov plan to meet in Sochi on the Russia’s Black Sea coast on April 30, where an intergovernmental commission will meet, Putin said. Russia and Ukraine are also discussing aviation and shipbuilding, he said.

Yanukovych said the proposals are “interesting.”

Ukraine currently operates four nuclear power plants with 15 reactors, according to the World Nuclear Association database. It was the site of the world’s worst nuclear accident when a reactor at the Chernobyl facility exploded on April 26, 1986, spewing radiation across eastern and northern Europe.

Nuclear Upgrades

Russia is ready to take “an active part” in upgrading Ukrainian reactors and will allow Ukrainian partners on the Russian market, Putin said. Nuclear cooperation in third countries is also possible, he said.

Russia plans to boost the share of nuclear power in total output to 25 percent from 15 percent to 16 percent now, Putin told reporters near Milan yesterday.

Ukraine will get $40 billion to $45 billion of investment from Russia in the next ten years because of a gas agreement reached last week, with fuel supplies subsidized by Russia’s budget, Putin said. This year, Russia will run a deficit that is wider than Ukraine’s, if the neighboring country takes into account the reduced gas price, he said.

Russian President Dmitry Medvedev and Yanukovych reached the gas agreement in Kharkiv, eastern Ukraine, on April 21. Russia agreed to cut the price of gas for Ukraine by as much as 30 percent, and in exchange Ukraine agreed to allow Russia to keep its Black Sea fleet at the Ukrainian port of Sevastopol until 2042, with a possible five-year extension. The fleet’s lease was set to expire in 2017.

“The price they proposed to regulate the issue is excessive,” Putin said. “I could eat Yanukovych and the prime minister together for that money. Not a single military base in the world costs as much.”

The Ukrainian government may ratify the accord today.

Debates planned on the fleet in Ukraine are “surprising,” as Russia discussed the extension with the previous government led by Yulia Tymoshenko and received no objections, Putin said.

“But it is not just about money to us,” Putin said. “Cooperation with Ukraine and cooperation in the military sphere improves the level of trust between our countries.”

April 20 (Bloomberg) — Ukrainian monetary policy makers may lower the benchmark interest rate, the highest in Europe, if inflation slows, said Valeriy Lytvytskyi, an adviser to central bank Governor Volodymyr Stelmakh.

The Natsionalnyi Bank Ukrainy “will concentrate” on refinancing to boost the country’s economy, he told reporters in the capital Kiev today. While gross domestic product may have grown in the first quarter, it’s “too early to say” if Ukraine has exited its recession, he said.

Ukraine’s economy shrank 15.1 percent in 2009, the steepest decline since 1994, as the global credit crisis curbed demand for exports while shutting off capital flows. The central bank on March 9 cut its overnight rate to spur growth.

“We will cut rates,” once monthly inflation stays below 1 percent,” Lytvytskyi said. “The most important task is to reduce the gap between refinancing rates and key discount rates.”

The hryvnia traded at 7.9245 per dollar at 1:33 p.m. in Kiev, from 7.9165 yesterday. The currency has gained 1.5 percent this year. The central bank has bought about $1 billion at the interbank market this month, Lytvytskyi said, adding that he expects the exchange rate to remain stable.

Policy makers last month reduced the overnight rate to 12.5 percent from 15.5 percent when Treasury bills are used as collateral and to 13.5 percent from 17 percent for non- collateral loans. Overnight loans are the central bank’s main refinancing tool.

Inflation Slows

Inflation, the fastest in Europe, slowed to 11 percent in March, the lowest in 33 months, as the economic decline slowed the increase of food prices by cutting demand. The monthly rate fell to 0.9 percent, dipping under 1 percent for the first time this year. The producer-price index, an early indicator of inflation trends, rose to 18.6 percent in March, the highest in more than a year.

The country obtained a $16.4 billion stand-by loan with the International Monetary Fund at the end of 2008 to stay afloat. The former Soviet state has received $10.6 billion in several tranches, which were used to cover the 2009 budget gap and payments for Russian natural gas deliveries.

Ukraine based its 2010 state budget assuming a 13.1 percent December inflation rate. The government, which seeks to resume cooperation with the IMF to help cover the budget deficit this year, will need to increase the price of natural gas paid by households and the cost of utility services.

The economy had expanded each year from 2000 to 2008, driven by investment, domestic consumption and industrial production, which slid 21.9 percent last year. The outlook is “difficult” and the country needs more investment and increased consumer demand, Lytvytskyi said.

The parliament intends to cancel mandatory state registration of foreign investments. The parliament approved the first reading of the relevant draft law No. 6122 proposed by parliamentary deputies Yurii Poluneev of the Yulia Tymoshenko Bloc and Serhii Kliuev of the Party of the Regions was approved by 254 votes (only 226 votes were required for its approval).

In particular, the draft law provides for cancellation of the relevant provision of Article 13 of the law “On the Foreign Investment Regimen,” which stipulates that state registration of foreign investments is compulsory.

The draft law No. 6122 also provides for cancellation of the provision that stipulates that state registration of foreign investments in the form of currency values is to be effected in accordance with the procedures established by the National Bank of Ukraine.

In addition, the document provides for lifting several restrictions on foreign investments and international loans that were imposed by the anti-crisis law No. 1533.

In particular, the draft law provides for cancellation of the restrictions on obtaining foreign-currency loans and fulfillment of obligations to foreign investors.

According to the authors of the draft law, its adoption will make the Ukrainian economy more attractive to investment and lift the unjustified restrictions on loans and investments (thus allowing funds to be attracted more actively from abroad in the forms of loans and investments).

As Ukrainian News earlier reported, the parliament re-adopted the draft law No. 3585 proposed by Parliamentary Deputy Yurii Poluneev on October 22, 2009. This draft law provides for imposing restrictions on obtainment of foreign-currency loans from nonresidents and fulfillment of obligations to foreign investors.

Former president Viktor Yuschenko signed this law (given the No. 1533) in mid-November 2009.

It is always nice to hear when nations alter their visa regime to make it easier for Ukrainians to travel. This article in the Kiev Post suggest that this trend is likely to continue.

After two years in the doldrums, travel companies should receive a boost this summer as countries ease visa regimes for Ukrainians.
The initiatives by authorities in Croatia, Greece and Israel are expected to drive a new spurt in holidays abroad. With airlines rushing to launch flights to these new hot destinations, operators hope for a quick return to the pre-crisis market.

“The main reason is visa liberalization,” said Vyacheslav Burdyukov, general director of Wind Rose travel company.

As the crisis hit, incomes dropped and the hryvnia plunged, meaning Ukrainians had less money to spend on foreign holidays, and what they had didn’t go as far. In the last two years, tour operators report a drop in clients of 30 to 40 percent.

But the crisis also served as a spur for countries such as Croatia to open up their borders to try to attract more tourists and boost their struggling economies. Last year, the number of Ukrainian tourists to Croatia jumped to 37,000 from 31,000 in 2008, an 18 percent rise, after the need for a visa was waived during the summer months. The visa regime has again been cancelled from April 1 to Oct. 31 this year.

Greece was one of the European Union countries worst hit by the crisis, and is making a drive to attract tourists. Travel companies say they have an agreement with the embassy in Kyiv to ease applications for those who buy packages. The Greek embassy was unavailable for comment.

With hoteliers also expected to keep their prices low in order to boost visitors, operators are placing bets on Greece as a big hit this summer.

“Realizing that the number of tourists from Europe will drop, Greek hotels are eyeing up the [Ukrainian] market and offer a new balance of price and value,” said Arkadiy Maslov, commercial director of Tez Tour Ukraine, one of the largest tour operators on the Ukrainian market.

Turkey and Egypt are traditional favorites for tourists given their close location, affordability and the fact that a visa can be purchased on arrival. Croatia and Greece are expected to gain in popularity as they share a similar climate, miles of stunning coastline and reasonable prices.

According to various estimates of market players, the price for a seven-day vacation to Greece will range from 400 to 1,000 euros, depending on the month.

Airlines have also spotted the opportunities of these new destinations, starting up commercial and charter flights and making them even more attractive to holidaymakers.

“Before, the only way to get [to Croatia] was by bus. With several airlines on market, this will change,” said Burdyukov from Wind Rose, which already offers flights.

Ukraine International Airlines is set to begin regular flights to three Croatian towns from May.

“There will be a total of three or four air carriers to Croatia, which will make flights available for $250-350 for a round trip,” said Burdyukov.

Another country set for visa liberalization and an increase in airlines is Israel. The country has already significantly liberalized its visa requirements and is expected to cancel it by autumn 2010, when the travel season starts there.

With most people’s budgets still tight, planning your own trip is an increasingly popular, cheap way to travel. But Ukrainians are often reluctant to plan their own trips because of the difficulty of obtaining an EU visa, distrust in online booking and a lack of English.

Some companies offer special courses in arranging a trip to Europe, applying for a Schengen visa or even offer to organize a low-cost trip for you.
“My friends in Europe do not understand what I charge for,” said Orest Bilous, the founder of MakeMyTrip.com.ua, which sells ready-made, low-cost tours and personally tailored trips to destinations around the globe.

The company arranges trips using the web sites of nearly 30 low-cost airlines and hundreds of booking pages, available to everyone for free but unfamiliar to most, to offer discounts.

The crisis has also changed the shape of the travel industry in other ways. With many smaller travel agencies going out of business, the sector has consolidated and witnessed the arrival of several foreign tour operators.

European travel operator TUI Group this year purchased Kyiv travel agency Voyage-Kyiv, which owns Halopom po Evropakh, or Around Europe at a Gallop, a network of 60 tour shops across Ukraine. Another example is the acquisition of mid-size local travel company MIBS Travel by Russian tour operator Yuzhny Krest.

TUI Ukraine marketing and sales director Taras Demura said the company’s major focus will not be on offering cheap breaks, but guaranteeing quality.
He believes the Ukrainian travel market is likely to grow rapidly, as only two percent of the population currently travels abroad, compared to 60 percent in Germany.

Demura said it’s a question as much of attitude as of money, something he expects to change. “Ukrainians would rather buy new clothes than spend money on vacations, unlike Germans. We expect that priorities will change in the future and the percentage of travelers will grow to 15 percent within the next five years,” he said.

Kyiv Post staff writer Olga Gnativ can be reached at gnativ@kyivpost.com