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UKRAINE

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Area (sq.km) 
603,700 

Population 
48,055,439

Principal 
ethnic groups 
Ukrainians 72.7%
Russians 22.1%
Jews 0.9%. 

Capital 
Kiev

Currency 
Hryvnya

President 
Leonid Kuchma 

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Update No: 284 - (27/08/04)

Ukraine faces the most serious event in its post-communist history, presidential elections commencing on October 31st.
There is no doubt that the coming presidential elections in Ukraine are the most important in its existence. They will decide the future of the country. The West realises this.

The US lays down the rules
The United States Senate has unanimously urged the Government of Ukraine to ensure a democratic, transparent, and fair election process for the presidential election set for Oct. 31. The resolution also outlines measures Ukrainian authorities need to take -- consistent with their own laws and international agreements -- to ensure an election process that enables all of the candidates to compete on a level playing field. 
The measure was sponsored by United States Helsinki Commission Co-Chairman Senator Ben Nighthorse Campbell (R-Colo.). Helsinki Commission Ranking Member Senator Christopher J. Dodd (D-Conn.) and Senate Foreign Relations Committee Ranking Member Senator Joseph R. Biden (D-Del.) were original cosponsors of the resolution. Other Commission cosponsors were Senators Saxby Chambliss (R-Ga.), Russell D. Feingold (D-Wis.), and Gordon Smith (R-Ore.). 
"The October elections will be vital in determining Ukraine's course for years to come. This resolution is a concrete expression of the commitment of the U.S. Senate to the Ukrainian people," said Co-Chairman Campbell. "Ukraine's elections should be a watershed for the future direction of that country of great potential. Ukrainian authorities need to radically improve the election environment if there is to be hope for these elections to meet OSCE standards. By doing so, they will go a long way in restoring the trust of the citizens of Ukraine and strengthening Ukraine's independence and democracy."
Opposition candidate Viktor Yushchenko remains the leading presidential hopeful in Ukraine, according to a poll by the Razumkov Ukrainian Centre for Economic and Political Studies. 27.9 per cent of respondents would vote for Yushchenko of the Our Ukraine (NU) party, while 21.1 per cent would support current prime minister Viktor Yanukovych of the Party of Regions (PR). This is a highly doctored score. 
Petro Symonenko of the Communist Party (KPU) is third with 9.8 per cent, followed by Oleksandr Moroz of the Socialist Party (SPU) with 5.6 per cent. 
Nobody in Ukraine one talks to is going to vote for Yanukovych, while everybody is for Yushchenko. The officialdom in charge of these polls seem to be preparing for a 'surprise result.' Yanukovych wins after all. 
Late last year, Ukrainian lawmakers close to current president Leonid Kuchma suggested changing the country's electoral law. Their plan called for the abolition of the presidential election by popular vote, to allow members of the legislative branch to pick the head of state. The proposal was narrowly defeated in the Supreme Council in February.
In April, Kuchma tabled Yanukovych as a presidential candidate. Yushchenko is widely regarded as the best chance for the opposition against Kuchma's hand-picked successor in the election.
If no candidate garners more than 50 per cent of all cast ballots in the October election, a run-off would take place on Nov. 14. In a potential second round, Yushchenko holds a 7.7 per cent lead over Yanukovych.
Rarely can so much have depended upon one electoral result. Yushchenko is well aware of this. He has stated categorically that he is not prepared to be premier in a Yanukovych administration, nor would he want Yanukovych as his prime minister. Something very momentous is in the offing in Ukraine. By November we will know what it is.

Kuchma tilts to Putin
What Putin and Kuchma like about each other is that they know they are both rogues. Kuchma has turned sideways in the last few months to curry favour with Moscow.
Above all he did a somersault in July, reversing a decision made in June. He now favours the Russian side in the Odessa pipeline dispute. Oil is to flow from Northern Russia to Odessa and hence to the West, rather than from the Kazak sector of the Caspian to Odessa and on to Brody in Poland and beyond. Ukraine is apparently back in the Russian fold, pending the elections.

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ARMAMENTS

Ukraine launches tank upgrading programme

The main manufacturer of armoured hardware in Ukraine, the Malyshev Plant (Kharkiv), has started fulfilling a state order for modernization of the domestic T-64B tank. A contract has been signed between the Defence Ministry and the plant setting the start for a huge job - renewing the armoured pool of the Ukrainian armed forces. Generals, politicians and military experts in the country have been talking about the need for this for a long time. Implementation of the project as early as this year will make it possible to hand over 17 upgraded T-64B tanks to active units of the Ukrainian armed forces. After modernization, the tank will be named the BM Bulat [damask]. In the event of successful continuation of the work, in the near future Ukraine will receive an armoured pool at the level of the world's contemporary armies, Defense-Express web site reported.
In recent years many military ranks have often raised the question of the combat effectiveness of the country's armed forces and have pointed to the danger of losing military hardware and weapons if funds are not soon allocated for their modernization. The previous defence minister, Volodymyr Shkidchenko, noted that a considerable amount of military hardware and weapons had almost exhausted their life span. In particular, he said, operational tactical missiles of the air defence troops had exhausted their technical fitness by 80-90 per cent. Among other obsolete types of Ukrainian army hardware, infantry combat vehicles, armoured personnel carriers and T-64 tanks were named.
In spring this year, attention to the problem was sharpened by Deputy Defence Minister Valeriy Muntyan. He said that Ukraine's army, because of the worn-out nature of hardware and weapons, may become combat ineffective as early as 2005. Every year the combat potential of the armed forces is dropping by 9 per cent. By the end of 2005, 70-80 per cent of basic types of artillery rocket weapons, about 50 per cent of fighters and reconnaissance aircraft, 60 per cent of bombers and 20 per cent of assault aircraft will be unfit for use. Today about 60 per cent of weapons and military hardware has been in use for over 15 years. According to Muntyan, the overwhelming majority of technically complicated complexes and models has already exhausted itsuseful life or will end in 2004-06. On the other hand, every 10-14 years there is a doubling of the cost of the latest weapons and each succeeding year there is a 10 per cent increase in the cost of upgrading and modernization.
In 2004, of the total sum of the defence budget, 92 per cent was spent on maintaining the armed forces, and the model of "spending everything on food" meant that spending on maintenance exceeded the critical 75 per cent mark, not leaving resources for upgrading and development of the armed forces, nudging them towards degradation. In his turn, the present defence minister, Yevhen Marchuk, recently said that over 12 years the Ukrainian army had not received a single tank, aircraft or helicopter, and its re-equipment with contemporary hardware was impossible in the next five to seven years.

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BONDS

US$500m 5-yr Eurobond issue

The Ukrainian government adopted a resolution on July 30th that confirms the terms for an issue of US$500m in 5-year Eurobonds denominated in US dollars, New Europe reported recently. 
The coupon rate is confirmed at 6-month Libor +337.5 basis points. Earnings are to be paid annually on February 5th and August 5th. On July 29th Ukraine placed 5-year Eurobonds to the tune of US$500m with a floating coupon rate at 6-month Libor +337.5 basis points, it was reported earlier. The issue's lead manager is a bank syndicate involving Citigroup, Credit Suisse First Boston and Dresdner Kleinwort Wasserstein.

Kharkiv to place over US$50m in Eurobonds

Kharkiv is planning to issue US$50-70m in Eurobonds in 2004, Mayor Vladimir Shumilkin, said at a press conference on July 30th. He said that the city planned to place 100m hryvnias this year (about US$18.8m), Interfax News Agency reported.
However, he said that when entering the international debt market it is expedient to place papers amounting to not less than US$50m. The Kharkiv mayor said that the municipal administration hopes to attract cheaper resources on the international market, to be invested in the city's economy. Kyiv places Eurobonds at 8.0-9.0% per annum and Kharkiv may also attract resources under similar conditions, or a little worse, given that this is the city's first attempt, he said. 
Shumilkin plans to travel to Germany with a group of specialists to hold talks on preparations for the Eurobond placement. He said that the city council earmarked 400,000 hryvnias at its last meeting to pay two rating agencies to assign the city a rating. The city council should consider the Eurobond placement in fall 2004. The funds from the placement should be received by the city budget at the start of 2005. "We would like to receive funds at the start of next year," he said. He said that the money will be used to implement a number of projects with short payback periods, and also to finance social programmes, such as the modernisation of water supply systems, the heating grid, and to maintain residential buildings and build roads.

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CREDIT RATINGS

Moody's rates Kyivstar's bond issue

Moody's Investors Services assigned a (P)B2 rating to Kyivstar's GSM's ("Kyivstar" or the "company") proposed issuance of approximately US$285.0m in senior unsecured notes on April 16th, New Europe reported recently. 
Under the proposed transaction, Dresdner Bank AG will issue Loan Participation Notes (without recourse to Dresdner Bank AG), the proceeds of which will be loaned on a senior unsecured basis to Kyivstar. This note structure is substantially identical to the structure of the existing US$160.0m in 12.75% senior unsecured notes due 2005. The new notes are expected to have a maturity of up to 5 years, the agency said in a statement. Moody's has also assigned a B2 rating to the company's new US$75.0m in senior secured revolving credit facility maturing in 2007. The ratings outlook on the new notes and new credit facility is positive. Concurrently, Moody's has also affirmed all existing ratings to positive. Affirmed ratings are as follows: B2 senior implied rating; B2 unsecured issuer rating; B2 rating on the company's existing US$160.0m 12.75% senior unsecured notes due 2005 (funded via loan participation notes issued by Dresdner Bank AG). Following the completion of the exchange offer and defeasance of these notes, the instrument rating will be withdrawn.

S&P raises Ukrainian ratings

Standard & Poor's Ratings Services said recently it raised its long-term sovereign credit rating on Ukraine to B+ from B, reflecting improved external liquidity and economic prospects, New Europe reported. 
At the same time, the rating agency said in a press release, that it affirmed its B short-term rating on Ukraine. The outlook is stable.
"The upgrade is supported by the country's continued improvement in external liquidity and government debt levels, together with its recent robust economic performance and its growth potential," said Standard & Poor's credit analyst, Helena Hessel.
The IMF's approval of its 12-month Stand-By arrangement for Ukraine, following almost two years of discussion, is also an important factor supporting the upgrade, the press release read. The National Bank of Ukraine's foreign exchange reserves increased to almost US$9bn by the end of June 2004, up from less than US$7bn at calendar year-end 2003. As a result, estimated gross external financing requirements (current account balance plus amortisation of long-term debt and short-term debt) to reserves should decline to 142% at year-end 2004, down from 176% at year-end 2003, with further improvement expected in 2005.
Macroeconomic stability and the economy's incipient reforms have supported better investment opportunities and improved export potential. This has strengthened the economic base and led to significantly stronger-than-expected economic growth in 2003 (9.4%) and so far in 2004.
"Although political uncertainty connected with the upcoming October 2004 presidential elections has not lessened and remains significant, the strengthened external liquidity and economic structure and lower government debt burden counterbalance the political risk to a greater extent than in 2003," Hessel noted.
"We expect that the election will not lead to worsening relations with the international community and obstruct access to external financing," Hessel said. "Further improvement in creditworthiness is predicated on significant improvement in the political situation," she added.

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ENERGY

Ukrainian pipeline filled with Russian process oil

An operation to pump the first shipment of Russian process oil worth 25,000 tonnes into the Odessa-Brody pipeline began on August 1st, ITAR-TASS News Agency reported. 
A public relations officer of the Ukrainian Ukrtransnafta oil company said that the filling started from the 52nd kilometre of the pipeline. At least 250,000 tonnes of process oil will be pumped into the Odessa-Brody pipeline in August. 
Ukrtransnafta signed an agreement for attracting a US$108m credit to purchase 425,000 tonnes of process oil. Ukrtransnafta earlier signed a contract with the Russian-British TNK-BP oil company for buying process oil to fill the Brody- Yuzhnyy [oil terminal in Odessa] oil pipeline. Under the agreement the oil is to be transported for three years. The Odessa-Brody pipeline will carry up to 9m tonnes of oil every year.

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FOREIGN LOANS

Kuchma inks IBRD Internet loan deal

Ukrainian President, Leonid Kuchma, has signed an agreement for a US$5m International Bank for Reconstruction and Development (IBRD) loan for an Internet programme. The loan is to be extended for 20 years and includes a five-year grace period. The Verkhovna Rada (parliament) had ratified the deal on July 1st. The funds will be used for the "Ukraine - Development via the Internet" programme. This is aimed at designing and implementing working models for electronic state procurement and electronic documentation for increasing the efficiency and transparency of government activities. Plans also call for the creation of the legal and regulatory environment needed to ensure favourable conditions for electronic business, New Europe has reported.

World Bank, Ukraine agree state statistics loan

Ukraine and the World Bank signed a US$32m loan agreement on July 15th for a project for developing the state statistics system for monitoring socioeconomic transformation in Ukraine. Finance Minister, Mykola Azarov, said at a conference that the project goals are creating a statistical system corresponding to international standards and the introduction of cutting-edge technology for collecting and analysing statistical data, Interfax News Agency reported.
The World Bank board of directors confirmed the loan for the 5 year statistics programme back in March. The overall project price tag is US$38m, and the Ukrainian government will make up the rest. The credit is extended for the World Bank standard 20 years with a 5-year grace period.
Ukraine is looking to improve technical outfitting at the State Statistics Committee's structural subdivisions, increase the quality and timeliness of statistical data and train Committee personnel. Azarov and World Bank Director for Ukraine, Belarus and Moldova, Luca Barbone, signed the loan agreement, which still requires ratification by the Ukrainian parliament.

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