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UKRAINE


 

 
Key Economic Data 
 
  2002 2001 2000 Ranking(2002)
GDP
Millions of US $ 41,380 37,600 31,300 54
         
GNI per capita
 US $ 770 720 690 144
Ranking is given out of 208 nations - (data from the World Bank)

REPUBLICAN REFERENCE

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 

  

Background:
Richly endowed in natural resources, Ukraine has been fought over and subjugated for centuries; its 20th-century struggle for liberty is not yet complete. A short-lived independence from Russia (1917-1920) was followed by brutal Soviet rule that engineered two artificial famines (1921-22 and 1932-33) in which over 8 million died, and World War II, in which German and Soviet armies were responsible for some 7 million more deaths. Although independence was attained in 1991 with the dissolution of the USSR, true freedom remains elusive as many of the former Soviet elite remain entrenched, stalling efforts at economic reform, privatisation, and civic liberties. 

Update No: 278 - (01/03/04)

Presidential poll forthcoming
The Ukrainians are expecting a fast one to be put over them by their rogue of a president, Leonid Kuchma, who is due to step down at the end of the year. Somehow nobody thinks that it will happen. He has been a fixture for ten years and it is difficult to see him going gracefully
His regime is a by-word for corruption, even by lax post-Soviet standards. There is a move afoot to transform the presidency into one elected by parliament, not the people. Parliamentary elections are easier to rig than presidential ones. Moreover everybody knows that Kuchma would never win in a fair fight.
Even if implemented by parliament this spring, the next election is still on course to be held in October. The favourite to win in a fair contest would be easily Victor Yushchenko, the former premier and central banker, who oversaw a turn-around in the economy in the early 2000s. But the election is not likely to be fair.
Yushchenko heads the democratic, Western-oriented Our Ukraine coalition. It is a suitable name, for at the moment Ukraine is anything but the property of its people. Parliament is full of former Soviet stooges who have enriched themselves at the people's expense. It is an even more corrupt set up than in Russia. A question of the rise not of liberal democracy, but of liberal kleptocracy.

Tax offices squeeze the opposition
Yushchenko reported to a conference on Ukraine's place in Europe and the world on February 21st that the tax authorities were applying pressure upon 30 companies which support his party and his candidature. "The state tax administration is being used as a means of political persecution," he said.
The aim is to strong-arm the changes to the constitution through parliament. The government claims that power has become too skewed to the presidency, which under Kuchma has, indeed, some truth.
In the western city of Lvov, an opposition stronghold, legislators in the local parliament have found their companies being subjected to legal probes, when they have ties to the opposition. Consequently many of them have defected to the pro-Kuchma outfit, the Social Democratic Party (United). It is very much a case of keeping in with the powers that-be.
The SDP(U) now has 28 members in the Lvov Parliamenr, up from 16, the defections being from the Business Lvov party. The local tax inspector until recently was Serhy Medvedchuk, brother of Kuchma's chief of staff and head of the SDP (U), Viktor Medvedchuk, one possible presidential contender. Now Serhy Medvedchuk has moved to Kiev, where he is in charge of national taxation affairs. The techniques honed in Lvov can now be used nation-wide.

Albright and Bildt urge caution
At the conference on February 21st Madelaine Albright, former US Secretary of State, and Carl Bildt, former premier of Sweden, were present and urged Kuchma not to manipulate the constitution. But they are out of power and are not likely to deter him from his course. Too much is at stake fir himself and his cronies.
Yushchenko would need to carry out something of a revolution, such as happened in Georgia just recently, to change things. The auguries of that are not so good given the general fatalism, indeed apathy, of the population, an ingrained Ukrainian trait. But there can always be a first time.

The Odessa file
A massively important issue dominates Ukraine's relations with the wider world at the moment, that of the Odessa-Brody pipeline, running from the Black Sea to the Polish border, where an extension onwards to Western Europe is the logical route. But that is only if the oil flows from south to north.
An alternative being proposed by the Russians is for oil to flow in a reverse direction from north to south, taking crude from Russia's Far North and even from Siberia to Odessa and the Bosporus and beyond. The ultimate destination would be Western Europe, but the reversal of flow would exclude a logical route for oil to flow from the Caspian Sea to Western markets. The oil would be from the Azeri and ultimately the Kazak areas of the sea.
An enormous amount is at stake here. Nothing less than whether Russia's dominance of the energy space of the former Soviet world is to be partially at any rate sustained. Actually also at stake is Ukraine's place in the world. Is to remain always in the shadow of Russia or is it to become truly independent?
The same is true of Kazakstan. It desperately needs an alternative route to world markets for its oil than Russia. Azerbaijan is in a different position with the option of the Baku-Supsa-Ceyhan pipeline route, linking it to Georgia and Turkey. This is almost certain to go ahead. Oil has long been flowing via Georgia to tankers in the Black Sea.
All of this places Ukraine in a central role to decide the geopolitics and economics of the Post-Soviet space. Hence a furious amount of diplomacy late last year and early this year. The US Vice-President, Dick Cheney, was the host at a meeting with the Ukrainian Prime Minister, Victor Yanukovich, a more welcome figure than Kuchma, in Washington in October. Cheney was concerned to see if the Odessa-Brody pipeline would be available to take oil from the Black Sea to Poland and beyond, instead of being used in the reverse direction, as Tyumen Oil (TNK) plans to do, to transport oil from Russia to Turkey. TNK is in partnership with BP, which bought 50% of its stock recently.
No Western major has yet made a definite proposal for the pipeline, says the premier. The issue is still open, he said. Azeri and Kazak oil from the Caspian could one day be using the pipeline.
Indeed the US and others lobbied hard to keep the option open. A decision was postponed by three months and will be early made in the New Year. The Russians are very annoyed about this and are doing a lot of lobbying of their own to get a decision in Russia's favour

The Russian bear growls
The influence of Russia, Ukraine's main supplier of energy and much else, remains enormous in Kiev, whatever the outcome of the Odessa file. It is exercised in a forceful fashion by no less a potentate than Viktor Chernomyrdin, former premier of Russia and head of Gazprom, who, unlike other former Yeltsin intimates, has kept up a rapport with Putin. He, rather than the jailed Khodorkovsky, is in all probability Russia's wealthiest man, if it is not Mayor Luzkhov of Moscow.
He insists that Ukraine will have to pay world prices for its gas and oil from Russia, even after the agreement to share a common economic space, made at Yalta in October. The Eurasian Economic Union comprises Russia, Belarus, Moldova, Kazakstan, Kyrgyzstan and Tajikistan, all with substantial Russian populations or troops on their soil.
This removes a carrot the Russians could have used to get the decision over Odessa in their favour by an inducement of lower prices. They prefer to employ the big stick. They cannot do it by withholding gas supplies, since the Ukrainians could retaliate by diverting gas destined for Western consumption to their own uses.
They are preferring a more direct approach to cow the Ukrainians once again. On the very same day that Presidents Putin, Kuchma and Nazerbayev of Kazakstan were signing a new accord in Yalta, Russian naval forces, with no warning, began building a causeway into the Kerch strait of the northern Black Sea in an attempt to seize control of an island and the adjacent shipping channel from Ukraine. The work was suspended as soon as Kiev rushed forces to the area. But Moscow has achieved its aim. Kuchma has had to agree to talks to surrender control of the strategic waterway and the adjoining Sea of Azov. The Sea of Azov may contain large reserves of oil. Big Brother is back.

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CREDIT RATINGS

Fitch upgrades First Ukrainian International Bank


Fitch Ratings, the international rating agency, last week upgraded First Ukrainian International Bank's (FUIB) long-term rating to B- (B minus) from CCC+ and short-term rating to B from C, New Europe reported recently. 
At the same time, the agency has changed the outlook to stable from positive. FUIB's other ratings have been affirmed at Individual D and Support 5, New Europe reported recently.
The ratings upgrades reflect improved credit risk procedures and the improved operating environment. Additionally, the growing loan portfolio and rising fee and commission income should have a positive impact on profitability in 2004.
Fitch also notes the active involvement of Fortis Bank in the management of the bank, the reasonable diversification of its funding base (for a CIS bank) and its acceptable capitalisation, despite a high level of fixed assets reducing "free" capital. However, FUIB's loan book remains concentrated by customer, general loan loss reserves (LLR) are low, and liquidity is being reduced.
Following the improvements made to the credit approval process in late 2001 and the subsequent cleaning out of the loan book, the gross loan portfolio fell by a third in 2002. However, the bank has successfully grown the loan book by two-thirds in 2003, although concentration of the loan book by two-thirds in 2003, although concentration remains high. Specific LLR cover is adequate, but in Fitch's opinion the general LLR remain low for an operating environment such as Ukraine's.

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ENERGY

Kiev plans to pump oil to Europe via odesa-brody pipeline

The Ukrainian government decided on 4th February that the Odesa-Brody oil pipeline will be used to transport Caspian oil to Europe, as originally planned, despite mostly Russian pressure to pump oil in the opposite direction, Interfax News Agency reported. 
Energy Minister, Serhiy Yermylov, said the pipeline, which has been idle since 2002, can transport 4 million-5 million tons of Caspian oil as early as this year. The pipeline has been the focus of a political tug-of-war, with the European Union and the United States pushing for its originally designed use and Moscow proposing a reversal of its use. "This will enhance the energy independence of Ukraine, and we believe that it will be a big long-term and even short-term advantage for Ukraine's oil industry," U.S. Ambassador to Ukraine, John Herbst, said of the decision.

Ukraine to export electricity to Balkans

Ukraine plans to export electricity to the Balkans jointly with Unified Energy Systems of Russia, Ukrainian Energy Minister, Serhy Yermilov, said. "We have joint plans with UES to export electricity to the Balkans," he said, Interfax News Agency reported.
The minister did not mention any concrete export volumes and said that these are restricted by technical capacities. In particular, to organise exports to the Balkans, Ukraine should restore a power cable from southern Ukraine Nuclear Power Plant to Isakcha in Romania and install equipment on this line to make it possible to connect the Ukrainian energy system with the European system. He said that at the moment capacity utilisation in the Ukrainian thermal electricity sector is only 28%.
He also said that the Ukrainian Energy Ministry plans to diversify electricity exports and will start to export to new markets this year, to Romania for example. However, he noted that this is not yet possible as the Romanian system is not yet connected to the unified European system, but that this will be done this year, at least on a trial basis.
The minister said that Ukraine does not plan to cooperate with UES to export electricity to Romania and will not import Russian electricity for sale on the Ukrainian market. On the contrary, Ukraine plans to export its electricity to Russia. Yermilov also said that Hungary's System Consulting would be the only operator for supplies of Ukrainian electricity to Hungary until the end of 2004.
Yermilov said that a temporary halt in exports to Hungary was due to the fact that System Operator did not agree to acquire Ukrainian electricity at the higher prices proposed by Ukrinterenergo. Agreement has since been reached. The minister said that due to a shortage in electricity supplies in Hungary caused by an accident in 2003 at the Paks Nuclear Power Plant in Hungary, the Hungarian government asked the Ukrainian government to keep electricity supplies stable in 2004.
Ukraine increased electricity exports 84.3% in 2003 to 5.156bn kWh, including 3.17bn kWh to Hungary, 931m kWh to Poland, 176m kWh to Slovakia and 878m kWh to Moldova.

Ukrtransgaz to set up JV for energy equipment output

Ukraine's Ukrtransgaz, a Naftohaz Ukrainy subsidiary, plans to set up a joint venture with Spain's Interenergo SL, to build centrifugal expanders to produce electricity at the company's gas distribution stations. A source in Naftohaz Ukrainy said that the company's board approved the Ukrtransgaz decision to set up the venture ZAO Energotechnologia at a meeting on January 15th, Interfax News Agency reported.
Ukrtransgaz has not yet made any announcement about the distribution of shares in the venture, however a source in the company's press service told Interfax that at the initial stage the project would mainly be implemented by the Spanish side. Naftohaz Ukrainy said in a press release that one of the first projects proposed by Energotechnologia is to be submitted to the company's investment committee for approval in the near future. This involves installing a centrifugal expander at the Obukhov station near Kiev. These units will produce electricity at gas distribution stations using the energy released when gas passes from high-pressure pipelines into mid- and low-pressure pipelines. Ukrtransgaz is a monopoly transporter of gas from Russia to the EU and handles 70% of Russia's gas exports. The gas export system includes 36,000 km of gas pipelines, 71 compressor stations and 12 underground reservoirs with a total capacity of 32bn cubic metres of gas. The system is capable of receiving 288bn cubic metres of gas per year.

Ukrtransnafta and Pern set up venture for Odessa-Brody

Ukrtransnafta President, Alexander Todiychuk, and head of Poland's PERN, Stanislaw Jakubowski, signed an agreement in Warsaw on January 16th dealing with preparations for the joint implementation of the Odessa - Brody - Plotsk - Gdansk project, Interfax News Agency reported recently.
Ukrainian Deputy Prime Minister, Andrei Klyuev, said after the document was signed that the agreement involves setting up a joint venture, the aim of which will be to prepare designs and business plans for the completion of the pipeline, and also to develop a mechanism for attracting investment.
This venture will be registered in Poland in the near future. The deputy prime minister said that Ukraine is counting on support from financial structures in the European Union to implement this project. "We consider that this is a first real step. The next steps should be very rapid," he said.
The agreement, which will come into effect in 30 days, noted that the project consists of three phases: preparation and analytical work to establish sources of financing and the necessary level of investment; negotiations with other regions that will participate in the project; construction and operation of the pipeline.
The Ukrainian government at a session recently approved an agreement on the integration of the Odessa-Brody pipeline system with the Polish system.
The Odessa-Brody pipeline, which is 674km long and 1,020mm in diameter, and the Yuzhny oil terminal were completed in May 2002. The first stage of the Odessa-Brody transport system has capacity for 9.0-14.5m tonnes of oil per year, and 200,000 cubic metres of tank farms.
The port of Yuzhny is capable of accepting tankers with deadweight of up to 100,000 tonnes and can be expanded to handle 40-45m tonnes of oil a year with capacity to store 600,000 cubic metres of storage. Discussions have been underway for several months in Ukraine over various options for the use of the pipeline: to Europe to transport Caspian oil - or to the Black Sea coast - to transport Russian oil.
The Ukrainian government plans to reach a decision on this at the start of February.

Turkmenistan and Ukraine to sign 25-year gas deal

Turkmenistan and Ukraine plan to sign a 25-year agreement for gas supplies in 2007-2032, decided during a recent official visit to Turkmenistan by Ukrainian President, Leonid Kuchma, a source in the Turkmen presidential press service said recently, Interfax News Agency reported. 
These plans were confirmed during a meeting between Turkmen President, Saparmurad Niyazov, and Ukrainian Ambassador to Turkmenistan, Vadium Chuprun. The press service quoted the Ukrainian diplomat as saying that the Ukrainian government is ready "to develop a long-term partnership with Turkmenistan further, based on principles of equality and mutual gain." Turkmenistan is a major supplier of gas to Ukraine and accounted for 45% of the Ukrainian gas market in 2003. In turn, Ukraine is a large buyer of Turkmen gas. At the moment, under a 5-year contract for 2002-2006, Ukraine annually receives 34-36bn cu m of gas from Turkmenistan at US$44 per 1,000 cu m. Ukraine pays for 50% of this gas in cash and 50% in goods and services. As part of this contract the Ukrainian side is implementing a number of investment projects in Turkmenistan, including the construction of a drainage tunnel in Ashgabat, a railway bridge across the Amudarya River, and compressor stations on trunk gas pipelines. Ukrainian companies have also been directed to build an elite residential complex outside Ashgabat.

Ukraine to set up national energy company

Ukrainian President, Leonid Kuchma, has instructed the Cabinet of Ministers to set up the Ukrainian Energy Company, the Ukrayinski Novyny news agency has reported. The Ukrainian Energy Company will be a state-owned joint-stock company established by pooling state-held stakes in regional energy-supplying companies,.
The goal of the move is to raise the efficiency of the energy industry and ensure the economic and energy security of the state.
This document was signed for the purpose of creating an integrated energy complex in order to ensure the economic and energy security of the state, to secure efficient functioning and development of the electric energy industry, to improve the industry's ability to meet the demand of Ukrainian industrial consumers and individuals for electric and thermal power.
Kuchma has ordered the government to approve a statute for the Energy Company and to form a statutory fund by handing state-held stakes in energy companies over to it. The president has also instructed the Cabinet of Ministers to include 100 per cent of shares in the companies Ukrenerho and Ukrinterenerho in the statutory fund of the company being created after they are turned into joint-stock companies and are put on a list of companies not subject to privatization.
The government has also been asked to propose a candidacy for the top executive post in the company and to set up its board.
It should be recalled that Kuchma stated his intention to set up a national joint-stock energy company in December 2003.
Thirteen Ukrainian regional energy companies out of 27 are currently in private hands, as well as four out of five producing electric energy at thermal power plants.

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FOREIGN ECONOMIC RELATIONS

Ukrainian, Bulgarian speakers discuss trade

Trade between Ukraine and Bulgaria can be tripled, the chairman of the Bulgarian parliament said at a meeting with Ukrainian parliament speaker Volodymyr Lytvyn, who was in to Sofia on a two-day visit. The structure of trade between the two countries will radically change after [Ukraine's] joining the World Trade Organization [WTO]. Tetyana Ankudynova reports from the Bulgarian capital.
Ukraine and Bulgaria are strategic partners. The Bulgarians promised to share with us their experience of EU integration and support Ukraine on its road to joining the EU and the WTO, UT1, Kiev reported recently.
However, there are unsettled issues in relations between Ukraine and Bulgaria. In particular, such a bone of contention is the Kryvyy Rih ore refinery. Lytvyn discussed that problem with Bulgarian President, Georgi Purvanov. Bulgaria demands that Ukraine pay for construction works at the Kryvyy Rih plant. An intergovernmental commission has tried to reach a consensus on that issue for several years.
We should agree on a single figure at governmental level, Lytvyn said. This is not a problem in relations between Ukraine and Bulgaria. You know that the programme was carried out within the framework of the Council for Mutual Economic Assistance in Soviet times. The Supreme Council [Ukrainian parliament] has already adopted the bill on completing that plant.
Lytvyn also discussed trade and economic relations between the two countries with the Bulgarian parliament chairman, Ognyan Gerdjikov. The speakers noted that partnership is developing fast, but the potential is much bigger. Ukraine is one of Bulgaria's top 10 trade partners. Bulgaria also occupies a place in Ukraine's top 10 trade partners.
The sides expressed hope that the next sitting of the Ukrainian-Bulgarian intergovernmental commission, which will take place in Varna in June 2004, will develop a specific programme to improve trade between the two countries.

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FOREIGN LOANS

EBRD opens credit line for Aval Bank

New Europe reported recently that the European Bank for Reconstruction and Development has opened a US$15m line of credit to Aval Bank in Kiev that will be used to finance small- and mid-scale companies, said an Aval press release. The loan will be allocated at Libor plus 3.5% for at least five years. A third of the money will be used to implement a micro-crediting programme.

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MINERALS & METALS

LNM Group mulls over investment in Ukraine

The LNM Group, the world's second biggest steel producer, would like to invest in Ukraine's steel industry and delivery joint projects in the country, Interfax quoted Lakshmi Mittal, the group's head, said at a recent meeting with Ukrainian President Leonid Kuchma, New Europe reported recently. 
Mittal expressed "the company's serious interest in investing in the metallurgical industry" and its readiness to implement joint projects in Ukraine.

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