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UKRAINE


 

 

In-depth Business Intelligence

Key Economic Data 
 
  2003 2002 2001 Ranking(2003)
GDP
Millions of US $ 49,537 41,380 37,600 55
         
GNI per capita
 US $ 970 770 720 137
Ranking is given out of 208 nations - (data from the World Bank)

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REPUBLICAN REFERENCE

Area (sq.km) 
603,700 

Population 
47,732,079

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

Capital 
Kiev

Currency 
Hryvnya

President 
Viktor Yushchenko




Update No: 294 - (28/06/05)

Revolutions are very exciting. But then come the practical problems. What next?
That is where Ukraine is after its Orange Revolution late last year. The new regime has been beset by enormous difficulties especially in the sphere of energy. The Russians are proving to be difficult negotiating partners, as if to punish the Ukrainians for voting the wrong way in December. The recently-announced project to build a gas pipeline from Northern Russia to Germany under the Baltic Sea, by-passing Ukraine, hitherto its main route to the west, is another such snub and a costly one to Ukraine who lose the potential transit fees.

Ukraine, Turkmenistan probe gas deal
But, if Russia can diversify its energy options, so can Ukraine! Energy issues were the forefront of discussion during late March trip talks between Ukrainian President Viktor Yushchenko and his Turkmen counterpart Saparmurat Niyazov in Ashgabat, otherwise two rather unlikely bedfellows. The visit, indeed, ended without an agreement on a gas deal. At the same time, both leaders sent signals that they would like to escape from under Russia's energy dominance. 
Yushchenko pressed for a 15-year deal under which resource-rich Turkmenistan would supply Ukraine with nearly all of its gas needs. The Western-oriented Yushchenko administration is keen to achieve energy-import diversification so as to decrease its economic dependence on Russia, overwhelmingly its main supplier hitherto. Doing so would weaken Moscow's political leverage over Kiev. 
The mercurial Niyazov, who has built a far-reaching personality cult during his nearly 15 years in power of independent Turkmenistan, rejected Yushchenko's proposal. At the same time, the self-proclaimed Turkmenbashi, or father of all Turkmen, held out the possibility that a deal could be struck down the road. Niyazov's interest in continuing negotiations with Kiev seems driven by a desire to open energy export routes that bypass Russia. 
Despite the lack of agreement, Yushchenko sounded upbeat at the joint news conference that concluded his Ashgabat visit. "Our countries and our people have good traditions and we maintain unique political and economic relations, which we will raise to a higher level," Yushchenko said during a news conference broadcast by Turkmen state television. "We will act in the most rational way and with success." 
Ukrainian political analysts noted that Yushchenko, the leader of Ukraine's Orange Revolution, and Niyazov, Central Asia's foremost tyrant, are political opposites and, thus, would seem to make awkward negotiating partners. Energy, however, is responsible for making these political opposites attract. 
Though having divergent political systems, Ukraine and Turkmenistan are generally regarded as sceptics within the Commonwealth of Independent States grouping of post-Soviet nations. Accordingly, both have expressed an increasing preference in recent years to pursue their strategic interests through bilateral, rather than multilateral initiatives. 
Ukrainian-Turkmen cooperation in the energy sphere is a central element to both nations' economic policies. Turkmenistan is the second largest exporter of natural gas in the CIS after Russia, and Niyazov is extremely interested in expanding his country's export possibilities. In its turn, Ukraine, under the terms of gas delivery agreement covering 2002-2006, buys annually 36 billion cubic meters of Turkmen gas. This makes Turkmenistan the largest gas supplier to Ukraine. The rest of the country's demand is met by Russia's state-controlled gas giant Gazprom and other Russian suppliers, as well as by limited domestic gas extraction. The trade volume between Ukraine and Turkmenistan is second only to Kiev's trade relations with Moscow. 
Beginning in January 2007, however, most Turkmen gas will go to Russia's Gazprom. In April 2003, Russian President Vladimir Putin and Niyazov signed a 25-year energy agreement, under which Russia gained the right to purchase the majority of Turkmenistan's gas production. The deal has the ability to make Ukraine more dependent than ever on Russia for energy supplies. As one commentary published in the Vremya Novostei daily suggested, the long-term Russian-Turkmen contract means that "very soon" Gazprom could become Ukraine's major supplier of gas - a situation that would carry with it unpleasant geopolitical implications for Kiev. 
Ukraine has developed a three-pronged strategy to prevent this scenario from happening. First, Kiev seeks to secure the steady supplies of non-Russian gas, namely from Turkmenistan. An indicator of Kiev's eagerness to cut a deal with Ashgabat was evident in January, when Niyazov hiked the price of gas deliveries to Ukraine by 32 percent and Ukrainian officials immediately agreed to pay. Gazprom, meanwhile, declined to pay the higher price. 
During the Ashgabat talks, Niyazov reportedly assured Yushchenko that "in principle" Turkmenistan could meet its supply obligations to Gazprom -- roughly 60-70 billion cubic meters of gas annually -- and deliver approximately the same amount of energy to Ukraine. To make it happen, Niyazov suggested, a Caspian littoral pipeline needed to be built, which raises major geopolitical questions about this route and the finance involved. 
Yushchenko quickly endorsed the concept. But a number of Russian and Ukrainian experts are wary about whether such a plan is feasible. Many believe that Turkmenistan is incapable of making such a dramatic increase in production, noting Turkmenistan's current extracts amount to around 55 billion cubic meters of gas annually. Given the doubts about Turkmenistan's future production capacity, Oleksiy Volovych, director of the Odessa branch of Ukraine's National Institute of Strategic Studies, warned in an interview with the Novye Izvestiya newspaper that "today Ukraine runs the risk of finding itself on the periphery of global struggle between the world giants over the diminishing supply of energy resources."
In general, Ukrainian analysts are cautious on whether a Ukrainian-Turkmen gas deal will ever be reached, and then adhered to. Niyazov, they note, has a history of not honouring contracts. Turkmenistan's January gas price hike from $44 to $58 per 1,000 cubic meters is but one example of Ashgabat's capricious behaviour. Turkmenistan also has proven a difficult negotiating partner in the five-nation Caspian Sea talks. 
Yushchenko came under some criticism at home for his willingness to engage Niyazov. Political analyst Vitaly Portnikov said Niyazov used Yushchenko as a prop to enhance the Turkmen leader's personality cult, when the two presidents had a stroll - hand in hand -- amid the posh Ashgabat palaces in front of the TV cameras. "Such a Yushchenko his voters haven't seen yet," Portnikov wrote in a commentary posted on the Politcom.ru website. 
Some Ukrainian analysts believe Niyazov may be trying to use Ukraine in order to get Russia to pay a higher price for Ashgabat's gas. But even if his desire to work out a deal with Kiev is genuine, many Ukrainian analysts believe that Russia will work hard to scuttle any possibility of a bargain. Andriy Yermolayev, director of the Kiev-based Centre of Social Research "Sophia," said Russia isn't interested in Ukraine's "independent game" in Turkmenistan. That's why Yushchenko's attempts at "establishing direct ties with alternative energy sources and bypassing Russia are unlikely to succeed," Yermolayev was quoted as saying by the Novosti-Ukrayina news agency.

On to the EU
The second main element of Kiev's gas strategy is an attempt to exploit the European Union (EU)'s interest in diversifying its own energy supplies. Some Brussels strategists argue that the EU is potentially vulnerable to price fluctuations due to an existing over dependence on Russian natural gas supplies. In this area, Yushchenko has managed to score a couple of important points. The Ukrainian government has unveiled a proposal to create a Ukrainian-German-Polish consortium that would sell non-Russian gas to the EU. The group will pursue possible deals involving Turkmen and Kazakh gas, which would then be resold to EU countries. The biggest obstacle in this scheme is the lack of a reliable export route. 
An upgraded Caspian littoral pipeline could address the export route shortage. To enhance the prospects of a deal getting done, Yushchenko and Niyazov said that Kazakhstan and Russia should be invited to participate in the project. Its technical and commercial details were discussed by Niyazov and the head of Gazprom, Alexei Miller, when the latter visits Ashgabat in mid-April. The logic of Kazakstan is obvious, but how good a partner would Russia be if the project was primarily aimed at challenging their monopoly of supply? Without Russia - what will be this geopolitical note? It's not obvious.

New regime is gas transit
The third piece of Ukraine's energy strategy consists of an effort to expand the number of participants in the consortium that manages Ukraine's gas transit network. At present, Ukraine and Russia each hold 50 percent stakes in the network. The new head of Ukraine's oil and gas monopoly Naftohaz Ukrayiny, Oleksiy Ivchenko, recently urged the expansion of the consortium's membership to include EU members, as well as Turkmenistan and Kazakhstan. "We're trying to maximally expand the number of participants in the gas transit consortium, taking into account the geopolitics of this project," Ivchenko told the Kyiv-based weekly Zerkalo Tyzhnya. 

Odessa-Brody pipeline interests Kazakstan
Kazakstan and Ukraine launched negotiations recently to cooperate in the development of infrastructure for Ukraine which included Kazakstan's participation in the development of Ukrainian oil infrastructure, Kazak President Nursultan Nazarbayev said at a press conference in Ukraine. He remarked that Kazakstan is interested in the continuation of the Odessa-Brody oil pipeline to Polotsk and then further to Gdansk. 
"The Odessa-Brody section is significant. Kazakstan is ready to take part in the oil pipeline construction to own a share of stock," he added. "We also listened to the appeal of the Ukrainian party to construct an additional 52km of Dnepropetrovsk oil pipeline. We are ready to finance and to build this section that will be the property of Kazakstan or a joint venture," Nazarbayev concluded.

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AUTOMOBILES

VW opens Bentley dealership in Ukraine

Germany's Volkswagen Group recently opened the dealership of an ultra-luxury British car brand Bentley in Ukraine. This is the group's first venture in the former Soviet republic, New Europe reported.
The Kiev-based car dealer, Vipkar, got the dealership rights from Bentley and opened the showroom in the Ukrainian capital's plush Arena shopping mall. The latest model of 2005 Bentley Continental Flying Spur was displayed with a 144,000 Euro price tag during the opening ceremony. According to Bentley's regional Director for Europe, Geoff Dowding, two cars were sold at the same time and there was an order for six more cars. He added that the Russia-based dealership sold around 70 cars last year. He is very hopeful that its sales in Ukraine will also improve substantially.

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AVIATION

Iran mulls joint production of Ukraine passenger jet

Iran is considering joint production of a Ukraine-designed passenger jet, Interfax News Agency reported recently. 
Abbas Fallakh, director of the Iranian government aerospace company NESA, made the announcement during a visit to the Ukrainian city Kharkiv. The twin-engine Antonov-148, a short-range aircraft designed for fuel economy and low-cost operation, is a good fit for Iran's aerospace industry, Fallakh said. Iran already manufactures under licence the twin-engine turboprop An-140 wholly designed by Antonov. "We are very much looking forward to this new airplane," Fallakh said. "We would very much like to make it in Iran." Antonov's manufacturing headquarters, and the centre of Ukraine's aircraft-building industry, are in Kharkiv. The An-148 is a leading-edge technology airplane aimed at the international market. The plane at US$17m a copy will be 25 to 30% cheaper to operate than competing aircraft currently produced, its designers claim. Ukrainian Antonov is heading up the An-148 project, with more than 200 subcontractors including companies in Russia, the US, Germany, and France providing parts and operating systems. The first serial production An-148 is planned for 2006.

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CREDIT RATINGS

Moody's gives Aval Bank B2 rating

Moody's Investors Service has assigned Ukraine's Aval Bank a B2 long-term and Not-Prime short-term foreign currency deposit ratings and a D- Financial Strength Rating (FSR), and all ratings carry stable outlooks, New Europe reported recently.
"The bank's foreign currency deposit ratings are currently constrained by Ukraine's country ceiling for such ratings and are likely to follow any upward movement in the country ceiling up to the level commensurate with the bank's fundamental credit strength," a Moody's press release said. "The bank's D- Financial Strength Rating (FSR) takes into account the bank's strong market position as the second largest bank by total assets in Ukraine with significant market shares of loans and deposits, its high name recognition in the local market and its positive image as a market-oriented bank independent of any major financial or industrial groups, its good asset quality and the higher-than-average granularity of the loan portfolio, and the bank's experienced management with a strong focus on the upgrading of IT systems to handle increasing business volumes," the release read.

S&P raises Kiev rating to B+

Standard & Poor's Ratings Services said recently that it raised its long-term issuer credit rating on the Ukrainian City of Kiev to B+ from B, following the upgrade on Ukraine (now rated foreign currency BB-/Stable/B; local currency BB/Stable/B), Interfax News Agency reported. 
The outlook on Kiev remains positive, the agency said in a statement. "Ukraine's improved economic policy environment, strong growth potential, and incipient reform of the economy will have a beneficial effect on Kiev, the capital and largest city of Ukraine," said Standard & Poor's credit analyst Boris Kopeykin. Further strengths are the city's strong financial performance and high liquidity. The rating remains constrained, however, by Kiev's growing foreign exchange debt, limited fiscal flexibility due to the central government's control of major revenues, and evolving inter-budgetary relations. The rating on the city also reflects significant infrastructure financing needs and the need to improve management sophistication and transparency. Standard & Poor's expects that the growing economy and investments will lead to significant growth in the city's budget revenues. Future positive rating actions will depend on the city's ability to keep debt growth in line with or below revenue growth, with stabilisation of debt at less than 60-70% of revenues. Rating actions will also depend on the improvement of the balance after capital expenditure from 2006, together with further improvement in transparency and management sophistication, the statement said.

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ENERGY

Power-sharing deal struck in Crimea

A power-sharing agreement for Ukraine's restive Crimean peninsula was signed recently ending months of political chaos over rights for the region's ethnic Tartar minority, Deutsche-Presse-Agentur (dpa) reported.
The next executive government of the semi-autonomous region will include a quota of 3 cabinet posts to be filled exclusively by Tartars, said Mustafa Dzhemilyev, the group's leader.
Although previous Crimean legislatures in both pre- and post-Soviet Ukraine had from time to time included Tartar representatives, they were never as a result of a quota set by negotiations between Tartar and ethnic Slav political leaders.
The predominantly Muslim Tartars will receive 2 ministry portfolios and the post of deputy prime minister, Dzhemilyev said according to a Black Sea television news report.
The deal came after days of intense talks between Dzhemilyev and Crimean prime Minister Anatoly Matviyenko, an appointee of Ukrainian President Viktor Yushenko.
Crimea's parliament approved the terms of the Dzhemilyev-Matviyenko deal recently with a strong 74 out of 90 present majority, the Interfax News Agency reported.
The quota was "the best compromise possible under the circumstances," Dzhemilyev said. The agreement ended nearly 4 months of administrative chaos in the multinational Crimean peninsula.
Crimea's legislature had been due to name a new government last January, in the wake of Ukraine's Orange Revolution which saw Yushchenko appointed president.
Tartar MPs however over the next 4 months boycotted the local parliament's sessions, preventing the formation of a quorum needed to pass laws.
The Tartar boycott was imposed to receive guarantees from the ethnic Slav majority for "Tartar" executive branch posts in the new government.
The deadlock threw the Crimea's already-poor public services into chaos by effectively cutting off legislative funding for the regional government.
Crimea's previous regional chairman, Communist Leonid Hrach, refused to deal with the Tartars, saying he "would not submit to political blackmail."
Yushchenko eventually forced Hrach out of office and replaced him with Matviyenko. "This leaves me very vulnerable," Black Sea TV reported Matviyenko as answering, when asked how the terms of the deal with the Tartars would affect his political pull with the region's ethnic Russo-Ukrainian majority. During the Orange Revolution Ukrainian Tartars almost without exception supported the Europe-leaning Yushchenko. Most ethnic Slavs living in Crimea however supported Yushchenko's opponent Viktor Yanukovich, who favoured closer relations between Ukraine and Russia.
Roughly 20% of Crimea's population is ethnic Tartar. Soviet dictator Josef Stalin exiled the Tartars, who trace their lineage back to the Mongolian Golden Horde, from Crimea in 1944. More than 300,000 have returned to the region since the collapse of the Soviet Union.
Conflicts over land ownership- as recently as last summer pitting entire villages against one another in mass fist fights - are endemic between Crimean Tartars and ethnic Ukrainians and Russians, who descendants settled the region during the Tartars' absence.
The most valuable Crimean land, the tourist-frequented Black Sea shore, is owned almost without exception by ethnic Ukrainians or Russians. The presence of Russian troops in the region exacerbates tensions. Many ethnic Slavs living in modern Crimea believe Russia, not Ukraine, should own the region.

Ukraine to buy 2m tonnes of oil per year from Libya

Ukrainian national oil company Naftogaz Ukrainy plans to annually acquire 2m tonnes of oil from Libya in excess of the volumes that the company will receive under production sharing agreements signed earlier, company CEO Alexei Ivchenko told journalists in Kharkov recently, New Europe reported. 
He said that Naftogaz Ukrainy plans to supply this oil to Italy and other markets in Europe and receive Russian oil and gas under a swap scheme. Commenting on Naftogaz Ukrainy activity to produce oil and gas abroad, Ivchenko said that he would travel to Kazakstan with Ukrainian President Viktor Yushchenko to sign a memorandum for joint production of oil and gas.

World Bank to revamp Ukrainian power plant

Serhy Tytenko, the deputy energy minister and head of the agency for Ukrainian hydropower plant restructuring, said recently that the World Bank will lend US$100m to revamp Ukrhydroenergo, New Europe reported.
The minister said the agreement has been worked out and will be signed shortly. Tytenko said the loan will be provided for the period of 14 years for the renovation of large Ukrainian hydropower plants. Libor+1% will be the interest on loan and in 2007 the principal debt repayment scheduled will be started.

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FOREIGN COOPERATION

Ukraine, India vow to boost space research cooperation

Ukraine and India will boost bilateral ties and cooperate in space research, President Viktor Yushchenko and his Indian counterpart, Abdul Kalam, said at a joint press conference in Kiev on June 2nd, New Europe reported.
To improve the trade relations between the two countries the talks were held on issues from international politics to science and technology. India with its candidature to United Nations Security Council, also seeks support from Ukraine which is an influential CIS country. Ukraine said it supports the idea of making India a permanent member of the UN Security Council, Yushchenko said.
The two leaders also discussed UN reform. "To my mind, the UN is one of the most authoritative organisations in the world. Its role is growing year to year, and a reform is quite natural," Yushchenko said.
UN reform may include increasing the number of UN Security Council permanent members. India, Brazil, Germany and Japan are candidates for permanent membership on the council. During his four-day stay, the Indian president was also expected to visit a missile factory.

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FOREIGN LOANS

Ukrsotsbank seeks US$75m syndicated loan in 2005

The Kiev-based financial institution Ukrsotsbank plans to raise a syndicated loan of US$75-80m this year, a bank press statement said recently, New Europe reported.
With the bank striving for deposits in the national currency hryvnia and to receive loans in US dollars, raising syndicated loans can be taken as a way to address the problem of filling its out forex resources, CEO Boris Timonkin said in the statement. One important way to do this is issuing Eurobonds, he explained. Founded in 1990, Ukrsotsbank is one of Ukraine's biggest banks, with 507 sub-divisions in its branch network.

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MINERALS & METALS

Ukraine increases 4-mo aluminium output

Zaporizhiya Aluminium Combine (ZalK), Ukraine's only aluminium smelter, increased primary aluminium output 3.4% year-on-year to 36,782 tonnes in the first 4 months of 2005, Interfax news agency reported recently. ZalK, which is controlled by Russia's SUAL aluminium group, said in a statement that it raised alumina production 2.1% year-on-year to 87,350 tonnes and that ferrosilicon output jumped 20.9% to 8,720 tonnes. Production of technical silicon rose 0.9% to 2,674 tonnes. In April alone, aluminium production rose 5.2% year-on-year to 9,275 tonnes, alumina production rose 2.3% to 21,900 tonnes, ferrosilicon grew 5.1% to 2,011 tonnes and technical silicon soared 24.5% to 707 tonnes. Aluminium output grew 1.2% to 108,763 tonnes in 2004. Alumina output grew 1.2% to 707 tonnes. Meanwhile, Ukraine's Nikolayev (Mikolayiv) Alumina Plant (NGZ), the FSU's biggest alumina producer, raised output 1.8% year-on-year to 447,400 tonnes of alumina in the first 4 months of 2005, the company said. April output was 105,600 tonnes. Alumina production grew 8.7% to 1.302m tonnes in 2004. Russian aluminium giant RusAl controls NGZ.

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TELECOMMUNICATIONS

Mobile phone use rocketing in Ukraine

Ukrainian cell phone use is rocketing and shows no sign of slowing down, Deutsche-Presse-Agentur (dpa) reported recently, citing local data. 
The number of cellular phone users in the country currently stands at some 16.8m, roughly a third of Ukraine's entire population, a government report said. Mobile phone penetration in the country was less than 10% 5 years ago. Subscribers under contract with one of the country's operators has increased by 36% since April 2004, according to a report from the Kiev-based Dragon Capital investment house. Aggressive campaigns to sign up new customers by the 2 top players in Ukraine's mobile phone market and rising real income for most Ukrainians are the main reasons for the increases, the report said. Ukrainian Kyivstar and the European-Ukrainian joint venture UMC control over 96% of the country's mobile phone market, according to a ministry of communications statement. Real incomes for Ukrainians have increased by as much as 40% since the beginning of the year. At present growth rates mobile phone penetration into the Ukrainian market could be as high as 54% or 26m users by the end of the year, the Dragon Capital report predicted.

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