(from www.kyivpost.com)

Social tensions are growing in Ukraine. Thousands of small businesses across the country have come together in recent weeks, in various cities across the country, to protest the government’s proposed tax code.
The situation is highly explosive.

The International Labor Organization, a body of the United Nations, put Ukraine on the list of the countries with a high risk of social instability. In contrast, France and Greece, where direct confrontations with police are taking place, are now rated as moderately instable.

The same can happen in Ukraine. But how has Ukraine’s government responded to our protests? The government shut their eyes to it, insisting the protests were politically motivated. To see the truth, all they need to do is open their eyes and see who is taking part in the protests.

People flocking to the protest also come from the eastern and southern regions of Ukraine which have been traditionally loyal to Viktor Yanukovych, his Party of Regions and helped elect him as president this year. In fact, the largest protests have materialized in Yanukovych territory.

It comes as no surprise, because voters in these regions truly believed Yanukovych’s promises as a presidential candidate to deliver on “tax-free holidays” for small and medium-sized business for five years. He promised it. He is failing to deliver it. And as you know, it’s just one small step from love to hatred.

This step has already been made by many financially struggling voters who see their personal well-being at risk.

It’s hard to list all of the Yanukovych’s mistakes during his first eight months as president.

Here are a few:

Attempting to adopt the tax code now, so late in the year, is illegal.

According to Ukraine’s tax legislation, any changes to the size of taxes and the order of their collection have to be made at least six months prior to the beginning of the budget year. But laws like this didn’t prevent Yanukovych’s government from introducing payments to the pension fund, angering many private entrepreneurs who are already pensioners and promising to adopt the new tax code two months prior to the new year.

Dubious moves like this plunge Ukraine to the lows in international ratings in terms of the ease of doing business in a country. Such action strengthens the perception that Ukraine is a country with unforeseen regulatory policies.

The government’s policy on businesses with private entrepreneur status is bad and will backfire.

About 80 percent of private entrepreneurs that paid taxes within the flat tax system were not, until the recent Oct. 20 deadline, required to make payments to the pension fund.

For the majority of small private entrepreneurs who operate in the small town or rural areas, the extra Hr 300-400 payment that they will now need to make to the pension fund on monthly basis eats up one third of their monthly income. With such action, the government is simply pushing them into the shadows.

The government doesn’t understand the consequences of their policies to Ukraine’s economy.
That’s the only way to explain tax changes they plan which would freeze cooperation between small businesses that operate on a flat tax system and businesses that operate on the general taxation system. The function of the small business is to create the work places and to quickly meet market demands.

But the government does not seem to understand or care. The proposed tax changes will severely hit small businesses. All the small cleaning and catering companies, self-employed lawyers, human resources specialists, auditors and marketing specialists that didn’t ask anything from the government will be brutally squeezed out of the market.

The biggest absurdity is that the proposed new tax code won’t bring more money to state coffers. What they will “achieve” is to destroy six million workplaces created by small businessmen that operate on the flat tax system.

Does Ukraine need this huge army of unemployed? Will people just sit idle when they see how their well-being is destroyed? I doubt it.

Small business has made many attempts to express its opinion in a less radical way. Since the draft of the Tax Code was made public, thousands of amendments have been proposed. But most of them fell on deaf years.

The president and the government have very little time to stop their flywheel. Otherwise, on the eve of the regional elections, Ukraine will face a wave of the mass protests. A victory of the Party of Regions would look very strange on the background of such events.

And all of this would occur on the backdrop of the 6th anniversary of the Orange Revolution, which was empowered and motivated by the same middle class that the government now ignores.

If Ukraine’s government is not feeling the deja vu already, they will soon face it.

Oleksandr Danylyuk is one of the organizers of a recent wave of protests by small businesses against the government’s proposed tax code. He is also head of the All-Ukrainian Center for Business Support.

(from the Kyiv Post)

Ukraine’s banking sector remains in a holding pattern following a crisis that saw depositors rush to withdraw cash in late 2008 and borrowers struggle to pay back U.S. dollar loans as the hryvnia plummeted against the greenback in the wake of the global financial crisis.

The Kyiv Post sat down with Steven Fisher, who recently arrived from Moscow to head Citibank Ukraine, to discuss what the Ukrainian authorities need to do to spur the banking sector out of its continuing malaise, how China could soon become a big player in Ukraine, and how Citi – which currently offers corporate and commercial banking services – is actively looking at starting a consumer banking arm.

KP: How would you compare working in Russia and Ukraine?
SF: When you’re doing banking, the same rules still apply. The Ukrainian market offers some advantages. It’s a smaller country so you can get to know your clients a lot faster. You can visit their operations faster. This allows you to quickly form a more holistic view of their overall needs and future directions. In general, I believe Ukrainian corporations are more open to working with foreign banks, especially since the crisis when lending significantly decreased.

KP: What will kick start lending?
SF: It’s starting to pick up. Most of the large banks have a lot of liquidity they’d like to employ. It’s a question of lenders finding the right opportunities. Now, we are seeing previously postponed expansion or capital equipment replacement plans being reinvigorated. Or, look at the agricultural sector. The key players are acquiring more productive land, and are seeking funding for acquisitions, and construction of silos and elevators for storage and transportation. That’s a good story.
The other story which isn’t good, but could be good, is that the steel sector is in deep morass. All of the restructurings need to be finished. There are competitive pressures mounting. There has recently been a significant amount of progress in corporate restructurings which make me believe that in 2011, most of the key players would be able to return to some form of normalcy in operations. With the recent upturn in the steel markets and progress in restructurings I refer to, 2011 should certainly be a better year for this sector. And accordingly, banks will again become more active.

Banks are just not acting as banks right now

KP: What should the National Bank of Ukraine be doing?
SF: The NBU should continue certain reforms. The remaining troubled banks have to be either recapitalized or liquidated. We would like to see the NBU support certain changes to the current legal procedures and methodology regarding bankruptcy and on provision of security to come closer to international best practices. This would support an increase in lending activity. At the minute it’s inhibiting making loans. Banks are just not acting as banks right now.
The NBU’s independence also needs to be addressed. I’m not sure we have that yet.
The deposit guarantee fund system should be reformed. This would introduce greater confidence into deposit making activity as well as reduce the costs the government incurs in providing the guarantee insurance. Developing local capital markets infrastructure is also crucial. Currently, we can’t say there is any long-term borrowing market. This is important for project finance, for infrastructure projects and in general, for financing any intensive capital expenditure program with a longer payback period. The insurance and pension sector and the investment fund sector have to be improved to become a more integral part of the long term capital market infrastructure in the country.

KP: What can the government and the NBU do to support lending?
SF: First, they need to look at consumer lending. They have to revise how credit bureaus work. Banks aren’t required to submit certain information to credit bureaus, and credit bureaus aren’t allowed to share their information. Banks are requested to provide information only if it is negative, but why not also positive information? Greater and more complete flow of information can increase lending confidence.
Second, the basic rules concerning the provision of security need updating. If a bank wishes to lend to someone who wants to set up a new factory, the regulations don’t allow the lender to take security on an unfinished facility. This reduces the ability and flexibility of the potential lender interested in supporting such a project.
Third, the rules on bankruptcy have to be changed because creditor protection rights are not perfect. There are a lot of loopholes in the system which borrowers can use to delay procedures, or assets can be sold without having creditors involved.

KP: What’s your take on the current authorities and the much-trumpeted stability?
SF: Stability is a fact because enormous progress has been made in the past seven months. Ukrainian sovereign bond rates have rallied impressively in the last three months in particular although compared to other emerging market countries, they are still high. The newly approved International Monetary Fund program for Ukraine continues to be backed up by consistent Ukrainian government statements and actions.
There remain definite economic pressures though. Inflation and the pressure for the government to raise more money are two areas of continuing concern. It’s a tough act, but the IMF program approval was a key in maintaining international financial market confidence. For that to not have happened would have been a serious issue.It would have really set everyone back.

China’s a big player, doing a lot of investing. Russian money is good, but it comes tied. It’s a different game than the Chinese money. The Chinese money is larger, it’s cheaper, and it’s tied only economically, not politically.

KP: What are the risks that threaten this stability? Do you see any on the horizon?
SF: The main threat is the government bowing to various political, sectional, regional pressures to water down their commitment on IMF reforms. Second – spending needs to be cut. One of the risks is tax receipts. The government did well collecting revenues in the first half of the year, and there were some big one offs. The second half of the year is more challenging.
This country still has a lot of challenges both in terms of its current macroeconomic situation, the state of industry, the need for various reforms and very low level of foreign direct investment. Ukraine has achieved a period of stability right now, but no one should get too comfortable with that as its the initial stage out of a crisis and there’s a lot more that needs to be done and keeping the course is going to be tough.

KP: What do you think about Russia and China seeming to want to get more involved in Ukraine?
SF: We’re very excited about this. China’s a big player, doing a lot of investing. Russian money is good, but it comes tied. It’s a different game than the Chinese money. The Chinese money is larger, it’s cheaper, and it’s tied only economically, not politically. The Russian money is a little more complex and a little more focused. You can understand why, because they’re neighbors and they have a much larger agenda. The Chinese are looking to build business and I think they’ve been underrepresented in Ukraine, so think of the growth opportunities.

KP: What sort of projects will the Chinese be looking for?
SF: Oil development, rigs, telecom equipment, automotive. Agriculture could be very interesting. The steel sector, once it emerges from restructuring.

KP: What about foreign banks in Ukraine? There was a huge jump before the crisis, and many seem to have overstretched. What’s the future?
SF: I don’t believe we’ll see any new foreign bank acquisitions in the near future. Looking back, those that came in paid far too high premiums and found themselves saddled by a lot of problems and complexities that they didn’t expect. They are still in a stage of indigestion. If Citi wanted to expand, we’d do it organically rather than by making an acquisition.

KP: What are your aims at Citi? What do you want to change or do differently?
SF: I think we’re good at choosing our customers and procedures. We want to continue to be even more proactive members of the community. I would like to continue the growth of our local client base and increase our lending activity. We’ll do it in a measured way, but we’re definitely looking upward. We’re evaluating starting our own consumer retail bank here. No final decisions have been taken, but we’re actively looking at that. We’d do that from scratch, not purchase, and we’d bring in the latest in technology. Our consumer banking arm in Russia is large, and it’s a model we could use.

KP: Who are Citi’s main clients in Ukraine?
SF: Citi is the banking partner for most international companies doing business in Ukraine. If you look at the top 100 Ukrainian corporations, we’re very heavy in there. We’re working with 50 percent of them. That’s a conscious decision: We want to be working with the best firms in each sector.

KP: Is there any moment where will be more interested in small- and medium-sized enterprises?
SF: It’s a natural progression. We first work with the big multinationals. Then very quickly we expand into the key industrial sectors. We like to work with the top names. The next logical step is moving down to the SMEs. In some countries we work on the microfinance level. Finally, there is consumer lending, which is totally different.

(from the Kyiv Post)

Despite all the jawboning and promises made by EU politicians and bureaucrats, it is still very difficult for Ukrainians to get visas….

Spurned applicants say that decisions appear arbitrary.

The arrival of low-cost airlines to Ukraine and ease of booking trips on the Internet has made travels to Europe easier and cheaper. But applying for Schengen visas – needed for travel to many European Union countries – can be a stressful and expensive process for Ukrainians.

Many are left bitter after refusals or complications, especially when they feel they have submitted all the necessary documents and met all requirements.

Yevheniya Boyko and Maksym Zaitsev planned to celebrate their engagement with a two-week trip to Spain and France via Germany. But they had to cancel their trip after Boyko was not granted a Schengen visa by the German Embassy, even though they thought she had fulfilled all the requirements.

Boyko applied twice for a visa at the German Embassy. She was told after her first refusal that the problem was her unemployed status, even though she had just graduated from university. She got her new employer to issue a letter confirming she would start work on Oct. 11. Zaitsev wrote to confirm he was paying for the trip and provided a bank statement – a common procedure if the person is not paying for his own trip, according to Schengen rules.

Boyko blamed personal antipathy from the embassy staff for the refusal.

The couple had to cancel their trip, losing 700 euros each paid for flights and hotels and 120 euros for the two failed visa applications.

Ukrainians complain that decisions often seem arbitrary and requirements can differ between embassies, despite the introduction of a Visa Code by the European Union in 2009 harmonizing rules for visa issuance.

“The situation varies in different embassies, and in absolutely the same situation one embassy can issue a visa without any questions while another will decline,” Oleksandr Sushko, head of the Institute for Euro-Atlantic Cooperation.

The German Embassy, for example, asks for confirmation of full hotel payment, despite the fact that absolute majority of hotels take a few percent of the price from customer’s credit card as booking confirmation. “Booking confirmation is enough for every embassy, except the German and sometimes the Polish one,” said Orest Bilous, head of a tourist firm who helps clients with visa applications.

“The person has to ask the hotel to withdraw the full amount from his card, which few hotels want to do. Despite this, the embassy still can decline visa and then the person loses money.”

The German Embassy said the check was necessary to confirm that accommodation costs are covered. But the requirement appears to go beyond that of the EU’s Visa Code, which stipulates that the applicant should provide “documents in relation to accommodation, or proof of sufficient means to cover his accommodation.”

One of the biggest problems for Ukrainians is proving their salary, as a large proportion of employees are paid most of their salary in an envelope, rather than officially into their bank accounts.
Taras Lopuszansky had a problem getting a visa from the Slovenian Embassy after he rented a villa near Lake Bland where he planned to spend vacation with family. He booked via U.K.-based website villarenters.com, but in the Slovenian embassy he was told the consul can call only Slovenian numbers to verify his booking.

“He refused to call a non-Slovenian number and asked for a Slovenian one. This after an interview where I was interrogated regarding the goal of my trip for 20 minutes despite presenting all documents, insurance and credit cards,” Lopuszansky complained.

The Slovenian Embassy declined to comment on specific cases.

Lopuszansky said he feels by pressing this kind of requirements European countries are treating Ukrainians like second-class people.

Experts say each country has the right to refuse anyone entry, and many are cautious because of some Ukrainians who overstay their visas.

“There is a mistaken belief that a visa is an entitlement, but in reality every country has the right to allow or refuse entry to anyone for any reason it deems fit,” said an international immigration expert, speaking on condition of anonymity because of his official position.

“There are instances where decisions are made arbitrarily, prompted by a subjective opinion of a consular officer, however most decisions are based on the merits and fact pattern presented by the applicant,” he added.

The German Embassy said the most common reasons for refusal are either doubts regarding the purpose of the trip or the applicant’s willingness to return.

Experts also point out that the rejection rate for Schengen visas is relatively low – 4.6 percent, according to Europe without Barriers, a Ukrainian nongovernmental organization.

However, it is still higher than the 3 percent considered acceptable for countries like Ukraine that are seeking to sign a visa-free agreement with the EU.

Meanwhile, the likelihood of receiving a visa shapes people’s travel destinations.

“The majority of Ukrainians prefer to travel to countries where you either get a visa upon arrival or do not need visa at all,” said Olena Shapovalova, head of the Ukrainian Tourist Business Association.

“Egypt and Turkey are not trendy just because they are cheap, but because the person does not have to collect documents and then wonder whether he or she will be granted a visa with vacation plans hanging in balance. The situation will not change until the EU softens its visa policy.”

Shapovalova said many, especially those who have been denied a visa, feel so angry and humiliated they do not want to try again out of principle.

Percentage of Ukrainians rejected for visas applications in 2009
Spain 14.7
Germany 10.9
Latvia 10.2
Belgium 9.0
Greece 9.0
Italy 7.1
Portugal 6.1
Netherlands 5.9
France 5.7
Denmark 4.3
Czech Republic 4.2
Slovenia 4.2
Finland 3.8
Estonia 3.6
Poland 3.3
Sweden 2.8
Austria 2.6
Lithuania 2.3
Hungary 2.2
Slovakia 2.1

Source: Europe Without Barriers

Read more: http://www.kyivpost.com/news/nation/detail/84568/#ixzz115ws8v2G

It is already one of the most difficult and challenging places to do business in. The flat tax was a way of making it a bit easier to do some types of business, though it looks like the government wants more money and is not interested in business creation or growth. These types of policies always fail.

In the new draft tax code, the government has excluded a wide range of professions from the simplified tax system that allows entrepreneurs to pay a small, relatively flat income tax. This could mean higher taxes for them and their employers, if parliament adopts the legal change. Those include people employed in these professions:

1. entertainment business;
2. trade of excise goods (except for beer);
3. production and retail sales of fuels and lubricants;
4. lifting and processing of precious metals;
5. lifting and selling of mineral deposits;
6. financial activity;
7. real estate activities;
8. wholesale and intermediary wholesale services;
9. rendering television and radio broadcast services;
10. activities in the field of transport and extra transport services;
11. foreign economic activities, except for exports of software services for remote support programs, etc.;
12. activities to provide e-mail service and communications;
13. activities in the field of security and investigations;
14. activities in the field of law;
15. activities in the field of accounting and auditing;
16. activities in the field of engineering, geology and geodesy;
17. advising on the commercial real estate and management;
18. business management;
19. advertising;
20. activities in the field of technical tests and studies;
21. selection and provision of personnel;
22. resale of collectibles and art;
23. retail products from precious metals;
24. retail trade “second hand”;
25. retail trade through the Internet and vending machines

(from the Kyiv Post)

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