Books on Ukraine
Update No: 300 - (03/01/06)
A falling-out with Russia
Leverage is everything in international relations. The Russians have the
Ukrainians in an energy vice. They are totally dependent on Russia for oil and
gas. The Russian leadership is deeply upset by the repercussions of the 'Orange
Revolution' in Ukraine in December 2004 and are seeking ways to take their
revenge for what is seen as a profoundly anti-Russian development. To use the
energy weapon is the obvious way to do so.
This they dramatically did on New Year' Day, cutting off three of the five
pipelines taking Russian gas to Ukraine and the West. Gazprom had insisted on a
massive over-fourfold jump in payment to near world market rates from US$50 per
1,000 cubic metres to US$220-230. This was simply a commercial matter, Gazprom
insisted. But of course it was not; nor was it meant to seen to be.
Moscow was prepared to offer three months' grace and a huge US$7bn loan to
facilitate the transition. But Kiev would then have found itself back in
subservience to Russia, the whole point naturally of these 'generous' offers. It
is understandable that the Ukrainians in their new-found independence refused.
They are to hold parliamentary elections shortly, in which the chances of the
pro-Russian opposition, doing well in the polls, might have been thought by the
Kremlin hard-liners to have been enhanced here. But they are so reminiscent of
the bullyboy tactics of Moscow in the past that they could well backfire.
The crisis could have profound implications beyond Russian-Ukrainian relations.
Already gas supplies to Poland and Hungary are down by 25%, as Ukraine is
siphoning them off to make up for its own shortfall. Germany, France and Italy,
who all take 25% of their gas supplies from Russia, say that they are not
worried. But of course they are. Nobody is speaking their true mind in this
They must all be reconsidering their long-term energy policies in the light of
the move. The Netherlands, the UK and Norway offer alternatives in Europe,
Algeria and the Middle East abroad, none of whom would ever have done anything
so drastic, concerned with commercial considerations primarily. One always gives
a valuable customer a period of grace to adjust gradually to an upward movement
Russia may have made a major miscalculation. To have an energy weapon is one
thing; to use it another. It smacks of Soviet times in its crudeness.
The irony is that it has been done just when Russia is assuming the presidency
of the G8. Putin is likely to be given a grilling by the original G7 leaders. He
can no longer be assured of an easy ride by Germany, no longer led by his own
chum, Shroeder (now ironically on the board of the subaltern company to Gazprom
building a pipeline skirting the land-mass and to take gas under the Baltic Sea
directly to Germany by the end of the decade), but by Angela Merkel, less
inclined to let Russia off lightly.
It is curious in a way that Putin did not wait until then to use the weapon when
it would not have imperilled Russia's relations with the West, one more
indication perhaps that he means it when he says that he is stepping down in
2008 at the end of his second term, that the constitution requires.
The dispute is not likely to lead to any serious problems this winter, as
everybody involved has at least four months' supplies in reserve. But events
over the next few months are likely to be extremely tense. Nobody likes to see
their reserves depleted to near-zero.
Ukraine has its response
Kiev has its own means of retaliation. Russia has large armed forces in
Ukraine, dependent on Kiev's good graces. It can also give tit for tat.
Russian Deputy Prime Minister and Defence Minister, Sergei Ivanov, Putin'
closest friend and tipped to be his successor in 2008, said on December 9th that
Ukraine's statement that it would revise the terms for the Russian Black Sea
Fleet's stay in Ukraine if Russia raises its natural gas price was a nervous
reaction. "The functioning and system of payments for the Black Sea bases
are fixed in basic agreements," Ivanov said. "I can also say that
Sevastopol [a city in the Crimea where the fleet is based] receives 60% of its
budget from Russia."
Earlier, Ukrainian presidential secretariat official, Anatoliy Matviyenko,
said Ukraine might revise the terms for the Russian Black Sea Fleet's lease in
Ukraine if Russia raised its natural gas price. "If we are switching to
world prices, Ukraine obviously has the right to raise the question of world
tariffs for foreign forces present on another state's territory," he said.
EU entry a long way off
Ukraine is looking westwards for its salvation, not assuredly to Russia. But
the time is not yet ripe for Ukrainian membership of the European Union (EU) to
be put on the negotiating table.
There are two paramount reasons for this. Firstly, Ukraine does not meet either
the economic or military standards required of European membership. Secondly,
the EU is not ready to admit Ukraine right now: it needs a break after the mass
accession of East and Central European countries, and has to deal with more
pressing issues, such as how to handle the immigration problem in the wake of
recent events in France and whether to admit Turkey.
It may appear at first that these two factors completely block Ukraine's road to
the West and that the failure of its government, which linked its future to this
scenario of the nation's development, will soon become evident. But the
situation is more complex than that. In its attitude toward Ukraine, the West
has adopted the 'one step at a time' approach, which is intended to show that it
is slowly but surely progressing toward its new home in Europe.
During her visit to Kiev in early November, Condoleezza Rice could have conveyed
a more encouraging message to the Ukrainian authorities, confirming that sooner
or later the country would join the West. This would have provided grounds for
optimism ahead of the parliamentary election due in 2006.
Shortly before her visit, the Ukraine passed several stages on its way to
Europe. First of all, the US House of Representatives agreed to abolish the
Jackson-Vanik amendment for Ukraine. Not many people remember today that the
amendment was adopted during the Cold War as a way of protesting against the
Soviet ban for Jews to leave the country. The ban was abolished fifteen years
ago, as Russian-based Jewish organizations keep reminding the Americans. But the
amendment is still in place. Its abolition seems to be a sign that a country has
passed the democracy exam with flying colours. The examiners are, of course, the
The second stage on the way to Europe was obtaining the status of a market
economy, which Ukraine failed to secure under former president, Leonid Kuchma,
although Kiev maintained that there were objective reasons for this. No one in
Europe was interested in helping Kuchma and his Prime Minister, Viktor
Yanukovich, win political points. Pro-Western Viktor Yushchenko is another
matter, all the more so as any success at the beginning of the election campaign
is especially important.
The third stage was Ukraine's full membership in the Ministerial Council of
South-East Europe set up ten years ago on the US initiative. The organization
comprises Italy, Greece, Turkey, Slovenia, Bulgaria, Romania, Croatia, Macedonia
and Albania. It is easy to see that this is a regional branch of NATO: the first
six countries on the list are already full members of the bloc, and the rest are
moving in this direction.
The fourth stage was the foundation of the Union of Democratic Choice, which
comprises both NATO members and potential candidates. Its membership in the
Union makes Ukraine look like the leader of CIS member states that have made
pro-Western foreign policies their priority. Moreover, this structure can
influence political processes in Belarus, where presidential elections will be
held next year. For President Lukashenka's opponents it is important to
emphasize that they are supported not only by the West, but also by a Slavic
Orthodox state like Ukraine. It is no coincidence that Alexander Milinkevich, a
candidate from united Belarussian opposition, attended the Union's forum in Kiev
to emphasize that he was backed by Ukraine.
What other stages does Ukraine have to pass on its way to the West? Its
accession to the World Trade Organization is coming up: Prime Minister, Yuri
Yekhanurov, has already requested support on this issue from EU Trade
Commissioner, Peter Mandelson. Kiev was eager to join the WTO this year, but has
failed to carry out its ambitious plan. Next year seems much more plausible. The
market economy status and WTO membership are necessary requirements to starts
talks on establishing a free trade zone between Ukraine and the European Union.
Does all this mean that Ukraine's itinerary to the EU will be harmonious,
although longer than other countries had? This is unlikely, taking into account,
as we have seen, that Kiev's pro-Western policies have earned the understandable
disapproval of Russia, which has a number of arguments to try to adjust the
stance of the Ukrainian authorities.
The latter do want to join the West, but with low gas prices and continued
bilateral cooperation with Moscow in the defence industry, which is vital for
the nation's economy. Membership in Europe is an attractive goal, but in its
pursuit Ukraine needs to avoid bankruptcy.
After all, the West is not ready to provide for one of Europe's largest
countries, even if it does have a market economy status and top marks in the
democracy field after the Orange Revolution. Turkey, a candidate for much
longer, is receiving priority. There is everything still to play for.
BNP seeks stake in Ukraine bank
French bank BNP Paribas SA said it is in exclusive talks with Ukrainian bank
UkrSibbank about acquiring a 51% stake in the company, the Wall Street Journal
UkrSibbank, with assets of US$1.4bn as of June 30th, has a network of
approximately 750 branches and is estimated to have 4% of the Ukrainian
retail-bank market. Industry analysts estimate that its potential value is
Efforts to contact officials at UkrSibbank weren't successful.
BNP Paribas's move into the Ukraine is part of a strategy to take early
advantage of a market with strong economic growth. As measured by gross domestic
product, the Ukrainian economy expanded 12.1% in 2004, though inflation was 15%.
Pol-Louis Martin, an analyst at Natexis Bleichroeder, said the market in
Ukraine, with 47 million people, benefits from exposure to commodity industries
and business with Russia, its main trading partner.
He said BNP's strategy is "similar to what the Spanish banks have done in
Latin America, where they have become major players in the retail market and are
then able to offer investment-banking products."
BNP Paribas already has a consumer-finance business in Poland and a specialised-finance
operation in Romania.
Croatia, Ukraine sign bilateral protocol
At a meeting of a working group in Geneva, Croatia and Ukraine signed a
bilateral protocol on November 24th on access to commodities and services
markets on consideration of Ukraine's application to join the World Trade
Organisation, Interfax News Agency reported.
Though the countries had firm positions regarding access to the markets for
goods and services of Ukraine, the two countries' delegations managed to reach
consensus and to sign a bilateral protocol, the press service noted.
MINERALS & METALS
Ukraine to resell Nikopol metals plant
Encouraged by the highly successful re-privatisation of the Kryvorizhstal steel
mill, Ukraine will resell Nikopol Ferroalloy, another of the country's biggest
metals plants, Viktor Yushchenko, the president said, the Financial Times
Yushchenko told an investors' conference he remained committed to ending legal
challenges to privatisations that had taken place under the previous pro-Russian
government, a policy he admitted had hurt the investment climate.
But he still planned to resell Nikopol Ferroalloy, which was taken over by
Viktor Pinchuk, a businessman and son-in-law of Ukraine's former president
Leonid Kuchma, in 2003.
Pinchuk bought a stake of 50 per cent plus two shares in Nikopol for US$80m (68m
Euro) in 2003, but Kiev's economic appeals court ruled in August that the sale
was illegal and the stake should be returned to the state.
Pinchuk has appealed to the Supreme Court, which has not yet clarified whether
it will review the case.
Nikopol's current market capitalisation is about US$470m.
Yushchenko's government successfully resold Kryvorizhstal to Mittal Steel for
US$4.8bn, six times as much as Pinchuk and two partners paid for the mill in a
2004 privatisation, which was cancelled by the courts after Yushchenko came to
power in January.
The dispute over Nikopol was one of the main reasons that Yushchenko fired his
former prime minister, Yulia Timoshenko for favouring the plant's minority
shareholders, who have urged the government to renationalise and resell
Since then, Yushchenko and Ms Timoshenko have tried to patch up their old
alliance and are discussing a possible coalition after elections in March.
Yushchenko said he also planned auctions of Ukrtelecom, the national telecoms
Ukraine may sell stake in Kryvy Rih iron ore mine
Ukraine plans to sell its stake in the incomplete Kryvy Rih Oxidized Ore Mining
and Beneficiation Plant at the start of 2006, Ukrainian Industrial Policy
Minister Volodymyr Shandra told reporters in Bratislava, Interfax News Agency
Shandra also said he had secured Romania's consent to Ukraine's proposed terms
for privatising the mine at a meeting with the Romanian economics and foreign
trade minister. Earlier, Shandra said that Slovakia supported the conditions for
selling the mine. He said that international auditors would value Ukraine's
stake in the mine and companies with an interest in metallurgy would bid for the
stake. Shandra said the Ukrainian government estimated it would cost between
US$500 million and US$1 billion to get the mine operating, and that the licence
to develop the iron ore deposit might add to the cost of the Ukrainian stake.
Following the collapse of the Soviet Union, construction of the Krivy Rih mining
complex, which began in 1985, passed to Ukraine. Completing and commissioning
the first phase of the plant will cost an estimated US$200 million. The budgeted
construction cost for the mine was US$2.4 billion, of which US$1.65 billion has
Siemens plans to double turnover in Ukraine in 3 years
Siemens is planning to double turnover in Ukraine over the next three years,
where the company's interests are represented by its subsidiary Siemens Ukraine
with 100 per cent foreign capital, the company said in a financial report. The
positive results of the financial year from October 2004-September 2005 are a
good basis for Siemens to achieve its ambitious goals of doubling turnover in
Ukraine in three years, New Europe reported.