Ukraine Threatens To Sue Russia Over Gas

KIEV, Ukraine -- Ukraine will take Russia to court if Moscow does not agree by mid-October to lower the price it charges Kiev for gas, a top Ukrainian official said Wednesday in the two countries' latest energy spat.

"If we do not reach an agreement, Ukraine will go to court," the senior official told reporters on condition of anonymity.

Ukraine has been trying for months to renegotiate the terms of a controversial 2009 gas deal that it signed with Russia to settle a dispute that saw its supplies cut off in a Kremlin move that also affected other parts of Europe.

The 10-year deal sets higher prices for Ukraine than some EU members states and has been condemned by members of President Viktor Yanukovych's new government.

It provides for disputes to be referred to the Stockholm court of arbitration.

Yanukovych's political rival Yulia Tymoshenko is in detention and on trial on charges of abuse of power for signing the deal while prime minister.

Yanukovych had an unproductive meeting with Russian President Dmitry Medvedev in August and later sent his energy minister to Moscow for more talks.

Russia has said it was willing to lower the price from the $400 Ukraine currently pays for 1,000 cubic metres, if Kiev joined a new Moscow-led customs union and gave up a 50 percent stake in its state energy company Naftogaz.

Ukraine has flatly rejected the idea and insists it remains interested in EU membership within the next 10 years.

Russian President Dmitry Medvedev reiterated Moscow's position on Wednesday, saying Kiev wanted "non-stop indulgence" from Moscow.

"It seems to me that we have made a clear proposal: if you want gas at a lower price, you must be part of the common area (union)," he was quoted as saying by the Interfax news agency.

"If you do not want that, make us a commercial proposal that is advantageous to Russia ...," the agency quoted him as telling journalists.

But "they don't want the one or the other," the president said.

The Ukrainian official has said the negotiations must be concluded before the start of the season of highest heating demand, thus by mid-October.

Ukraine To Allow Hryvnia To Fluctuate As Much As 5% A Year

KIEV, Ukraine -- Ukraine will allow the hryvnia to fluctuate as much as 5 percent annually to comply with International Monetary Fund demands, First Deputy Central Bank Governor Yuriy Kolobov said

“We have certain obligations to the IMF to increase the amplitude of the hryvnia fluctuation,” Kolobov said today at a press conference in Kiev.

“There are no grounds for sharp revaluation or devaluation.” The bank didn’t see any reason for the hryvnia to fluctuate annually either way by more than 2 percent to 5 percent, he added.

Ukraine’s central bank controls the hryvnia exchange rate by buying and selling foreign currency on the interbank market.

In July, the bank bought $837.8 million and sold $1.1 billion, allowing the hryvnia to depreciate 0.16 percent, according to Bloomberg data.

The hryvnia rose less than 0.1 percent to 7.9985 as of 5:32 p.m. in Kiev from 8.0000 yesterday.

Ukraine has $38.2 billion in gold and foreign currency reserves, Kolobov said.

The nation’s central bank hopes to reach an agreement with the IMF to unlock lending frozen for the sixth month, Kolobov said, adding that the Washington-based multilateral lending agency “doesn’t’ have any questions for the central bank.”

An IMF mission will visit Ukraine to review government policies from Aug. 29 till Sept. 9 as the country seeks $3 billion in assistance by the end of next month, Deputy Prime Minister Serhiy Tigipko said June 22.

Ukraine obtained its second IMF bailout in three years last July after the global recession cut demand for exports and the budget deficit swelled.

The country has so far received two payments totaling $3.4 billion.

A third, expected in March, was delayed after the government failed to raise the retirement age and increase household energy prices to help balance the budget, conditions set by the IMF.

“We followed our state budget agreements with the IMF, we set up a special regulator that is responsible for utility tariffs, we adopted a pension law,” said Anatoliya Myarkovskyi, first deputy finance minister, at the same press conference.

The financial situation at the state-run energy company NAK Naftogaz Ukrainy is the “hottest” topic in current discussions with the IMF, he said.

The IMF wanted Ukraine’s government to raise natural gas prices for households to eliminate Naftogaz’s budget deficit so it doesn’t put pressure on the state budget.

Myarkovskyi said the government’s budget deficit reached 8.6 billion hryvnia ($1.1 billion) in the first seven months of the year, more than three times less than in the same period a year earlier.

Inflation will reach around 10 percent this year before slowing to 7 percent to 8 percent next year, Kolobov said.

Life of Ukrainians worsens, but far from poverty of late 1990s

Despite a recent fall in standards of living, the number of Ukrainians who do not have enough money for food (17.5%) is still three times less than in late 1990s (52%), the director of Kyiv International Institute of Sociology (KIIS),Volodymyr Paniotto, said in an interview with the Dzerkalo Tyzhnia. Ukraine weekly newspaper.

"The poverty peak in Ukraine was in 1998. Then 52% of population said that they do not have enough money for food. During crisis, Ukrainians even did not reach the indicator: first they spent their deposits and in April 2009 they reached a certain level of poverty (20.8% of those who did not have money for food). In December 2010, 13.7% of respondents said that there was no enough money for food and by March 2011 their number grew to 17.5% [due to a recent increase in prices]," the sociologist said.

The KIIS said that in the past six months the number of those who can afford buying some expensive goods (such as a TV set or a refrigerator), but cannot buy everything they want fell from 7.1% to 4.9%. The number of those who can afford buying everything fell from 0.2% to 0.1%.

"In theory, the situation should have improved, as governments of many countries announced recovery from crisis and slight growth. However, the price growth in our country hit everyone," Paniotto said.

Ukraine’s ‘Most Important Task‘

President Viktor Yanukovych on June 23 heard the same drumbeat of criticism that’s been playing in national leaders’ ears for more than a decade.

If the message is getting through, it somehow isn’t getting carried out.

“Address the systemic and pervasive corruption that…touches the lives of every citizen at every level,” Thomas Mirow, president of the European Bank for Reconstruction and Development, said at an investors’ council meeting chaired by Yanukovych.

Some of the largest foreign and domestic investors in Ukraine came to tell Yanukovych what they thought of his plans to improve the economy and investment climate, two key components of the president’s plan to transform the country.

Foreign direct investment is expected to reach $5.81 billion this year, due to “reforms carried out by the Ukraine state and an improving climate for investment,” Ernst & Young’s 2011 Ukraine foreign direct investment report stated. In 2010, FDI inflows stood at only $4.15 billion

Ukraine ranked 10th in Central and Eastern Europe for the number of FDI projects – 178 – and number of jobs created – 7,487 for the years 2006-2010.

Ukraine is a high-risk destination for investment. According to the June Euromoney Country Risk Survey, Ukraine remains among the 10 riskiest countries in Central and Eastern Europe.

Kononchuk said government government institutions need to be strengthened, laws adopted that treat everyone equally.

Speaking at the investment council meeting, Ukraine’s richest man, a longtime backer of Yanukovych, was upbeat. “We’re going in the right direction,” said billionaire Rinat Akhmetov. “There’s a favorable investment climate in Ukraine today.”

Speaking with the Kyiv Post, Cargill’s CEO Greg Page stressed that a vast amount of investments could pour into Ukraine to help develop the nation’s promising agriculture sector, double harvests within a decade and, in turn, feed an increasingly hungry world.

But he warned that if protectionist policies such as last season’s grain export restrictions persist along with preferences for insiders, Cargill, which has invested $150 million in Ukraine thus far, could roll back on investments.

“This is a great place for the world to grow more food. But all the gifts that nature provides can be undone with bad policies,” Mr Page said.

No gas deal for Russia and China yet

Russia and China will not be signing a long-awaited gas contract at this week’s St. Petersburg International Economic Forum.

Gazprom Export head Alexander Medvedev said that disputes about gas prices had not been ironed out,

Russian President Dmitry Medvedev had earlier said that two sides were finalizing a 30-year supply deal which could be worth $1 trillion.

Ukraine hopes to get 3 billion dollars from IMF in August

The Ukrainian cabinet hopes to get 3 billion U.S. dollars from the International Monetary Fund (IMF) in August after pension reform adoption, said Ukrainian Deputy Prime Minister and Minister for Social Policy Sergey Tigipko here on Wednesday.

"To my mind, in the beginning of August we will have a decision from the IMF Executive Board if our Parliament will approve the pension reform between July 4 and July 8," Tigipko said during a briefing.

According to Tigipko, Ukraine could get two tranches at the same time, because there was a pause in the IMF's funding to Kiev. The amount of combined loan could reach 3 billion dollars.

In July 2010, the IMF agreed to cooperate with Ukraine on a new stand-by program of more than 15 billion dollars. Kiev has since got two tranches of funding. But in February 2011 the IMF mission to Ukraine decided to conduct additional negotiations with Kiev before allocating the next loan.

The IMF wants Ukraine to approve a pension reform, which is common in most western countries. It involves raising retirement age for women from 55 to 60. Kiev should also solve the problem of low-price natural gas for households. According to IMF experts, the prices should rise by 50 percent.

Recovery lagging, Putin warns

Vladimir Putin has issued a stark warning that Russia’s economy has only recovered two-thirds of the way to pre-crisis levels. As the country’s heads into an election season, the premier’s comments are the bluntest signal yet that his government is struggling to sustain growth while maintaining key social benefits.

Addressing the International Labor Organization in Geneva on Wednesday, Putin pointed to a “conflict of interest” between businesses and government – and insisted that he has no plans to increase the working week.

“The government, businesses, international political and financial organizations have no right to forget about their fundamental responsibility before citizens, about their social mission,” he said in televised remarks. “This is one of the key lessons of the economic crisis that we need to keep in mind as we work out a long-term development strategy.”

Speaking just days ahead of President Dmitry Medvedev’s address at the International Economic Forum in St. Petersburg, Putin was sending a clear message that he would remain very much in charge of the economy – a stance that observers were likely to interpret as a sign of rivalry ahead of the 2012 presidential elections, analysts said.

And while Putin has prided his government on increasing pensions by some 45 percent during the recovery from the crisis, the message was clear: social programs and spending aren’t going to be scaled back, especially during an election year.

“Some populist remarks are inevitable in a period before the election,” Roland Nash, chief strategist at Verno Capital, told The Moscow News, adding that Putin was still just as focused on reviving the economy.

“There’s still a lot of work to be done. It helps to get that message across,” he said. “The pain that Russia’s feeling now is much less, we’re past any disaster scenario. Now it’s worth focusing on what needs to be done. Businesses are still suffering. The ability to borrow is curtailed.”

But while Putin’s insistence on social programs sometimes runs counter to statements made by key liberals in President Dmitry Medvedev’s camp, experts saw no real contradiction.

“My view is that they are a lot closer than reports would suggest,” Nash said.

Nor is there a contradiction within Putin’s long-term economic strategy, some economists said.

In another remark that suggested Putin planned to remained in charge for many years to come, he outlined Russia’s aims to become one of the top five economies of the world, raising per capita GDP from $19,700 currently to $35,000 by 2020.

“To achieve this, it is necessary to double productivity at the least – and in non-resource based, high-tech sectors, productivity should be tripled or quadrupled,” Putin said.

Putin’s remarks about not increasing the working week were a clarification, not a rebuttal to this spring’s remarks by business tycoon Mikhail Prokhorov in favor of a 60-hour work week, said Alexei Yurtayev, a project coordinator for the Center for Strategic Development – a think tank that advises Putin’s government.

“The problem isn’t that we work too few hours,” Yurtayev told The Moscow News. “The problem is that our workers have very low productivity levels. In eight hours, we produce less than our competitors abroad.”

Putin’s prescription to improve the investment climate involves creating 25 million new jobs by 2025, Yurtayev noted. These industry sector jobs were aiming to boost productivity in the work force and create a demand for innovative technology, he said.

Putin’s comment that Russia’s economy had recovered only two-thirds of the way was seen by experts as a signal of a continuing debate over policy.

“There’s going to be a focus much more now on how to get back to a growth rate to 6 percent,” Peter Westin, chief equity strategist at Aton brokerage, told The Moscow News. “There are structural issues that need to be dealt with. The issue that we come back to all the time is lowering corruption. Because it’s a tax. Under Putin the labor force has increased by 5 per cent, and the number of bureaucrats has increased by 25 percent. Go back to 1999 levels for the number of bureaucrats, and there’s a solution.”

Russia, Ukraine Eye Customs Union With EU

BRUSSELS, Belgium -- Russian and Ukrainian officials said their relationship with the EU could take the form of a customs union in the next 15 to 20 years, with Russia admitting it was willing to get closer to the Union "as far as possible," excluding only membership.
A panel discussion at the European Business Summit in Brussels yesterday (18 May) took the form of a visionary brainstorming session, resulting in a rather consensual view that Russia, Ukraine and the EU would eventually forge a common economic area in the long run.

Oleg Fomichev, Russia's deputy minister for economic development, said Moscow shared the EU's values and had no problem whatsoever in deepening its relations, including at a political level.

"We want to go as far as possible without being a member of the European Union," he said. Considering Russia's size, which is three times that of the EU, Moscow could not possibly be considered as a potential future EU member, he explained.

Regarding a possible customs union, Fomichev said that a period of 10-15 years was necessary for negotiations, but also for introducing regulations and boosting the competitiveness of Russian industry.

"If you integrate without being ready, you can ruin the whole thing," he warned.

Fomichev described three stages in the development of Russia-EU relations. In the short term, a visa-free regime should be put in place, he said.

In the medium term, the Russian official said a free-trade agreement (FTA) should be introduced, and in the longer term, "maybe in 20 years," a customs union could be set up.

EU relations 'a key priority' for Ukraine

Valerii Pyatnitskiy, deputy economy minister of Ukraine, said relations with the EU were "one of the key priorities" of his country, admitting that a customs union could be set up in the next 15 years.

However, he appeared to indicate that an even closer relationship with the European Union would be possible in the longer term.

"In 10 or 15 years, it won't matter if it is a customs union or another form of integration," he said.

The official also outlined his country's European agenda, saying he hoped that Ukraine's Association Agreement with the EU would be finalised this year.

"We believe that this will be an absolutely comprehensive type of relations. We are talking about the political dimension, justice and home affairs, sectoral cooperation, the establishment of a deep and comprehensive Free Trade Area, about a visa agreement, about approximation of our legislation, and improving the capacity of our institutions and the capacity of our business to compete on the EU internal market," he explained.

Two prominent representatives of the business community who participated in the panel concurred with the idea that putting in place a customs union would take about 15 years.

Andrew Cranston, senior partner in Russia at consulting firm KPMG, said that some sectors of the economy needed time to adapt.

Energy Commissioner Günther Oettinger, who also participated in the debate, insisted that Russia's gas pipeline projects that bypass Ukraine – Nord Stream and South Stream – were "not a solution".

He said that today, 100% of Russia's gas to the EU transited through Ukraine, and "tomorrow", with the pipelines operational, this proportion would rise to 50%.

At the moment, Russia's main economic activity is to produce energy, while Ukraine serves as a transit partner and the EU acts mainly as a buyer, Oettinger pointed out.

"We need a next level, meaning competition, meaning joint ventures, meaning reverse flows, meaning innovative partnerships, EU technologies used in Russia and Ukraine for energy saving," he said.

Ukraine: Hundreds Protest Rising Prices, Demand Higher Wages

KIEV, Ukraine -- Hundreds of Ukrainian opposition activists are protesting rising prices and demanding higher wages and pensions.
About 1,500 demonstrators gathered outside Ukraine's legislature in central Kiev on Thursday, also urging President Viktor Yanukovych's government to lower household utility bills and taxes.

Electricity and gas bills for Ukrainian families have risen sharply in recent months as the government seeks to reform the natural gas, tax and banking sectors.

The reforms have been set as a condition for receiving International Monetary Fund aid. Ukraine is in desperate need of loans after its economy was very hard hit by the global crisis.

The activists vowed to hold more protests until their demands are met.

US billionaire to sell stake in Moscow hotels

Billionaire Ronald Lauder is being asked to sell his stake in 12 Moscow hotels that include Moskva Hotel next to Red Square, Vedomosti reported, citing sources in City Hall. This request is being ascribed to a possible change in plans over the future of the land on which Rossia Hotel used to sit.

The Moscow government holds an 80 per cent share in the Hotel Company, a holding that controls the 12 hotels in question and was originally going to develop the Rossia Hotel land. Lauder’s Russian Real Estate Fund purchased a 20 per cent stake for 5 billion rubles in late 2009.

The “divorce” between Lauder and Hotel Company is expected to be amicable, with a source close to the Hotel Company telling Vedomosti that Russian Real Estate will sell its share to the Moscow government.

Lauder will sell his stake due to the Hotel Company’s plans to build a parliamentary center on the land slated for the company’s most prized asset, Rossia Hotel, which was originally supposed to be rebuilt, Vedomosti reported. The Hotel Company was created in late 2009, with the Moscow government due to transfer shares to 18 hotels, including Moskva and Rossia.Rossia, National and Budapest were dropped from the list, Vedomosti reported.

A source at the Hotel Company said he could not comment on shareholders’ decisions.

But the Rossia Hotel was the most attractive asset in the holding, he told The Moscow News, and uncertainty over its future may lead to shareholders reconsidering their plans.

“We don’t have information on what will be decided about the land slated for Rossia,” he said. “The concept has changed, so yes, a lot of things are under consideration.”

Because the Moscow government will have to pay Lauder back the 5 billion rubles he invested, it may have to sell 49 per cent of shares in Dekmos, a company that controls the Moskva Hotel, to billionaire Suleiman Kerimov, a source close to the company told Vedomosti. Kerimov has not commented on the potential deal.

Yanukovych: Kyiv could sign package agreement on cooperation with Customs Union in '3+1' format

Ukrainian President Viktor Yanukovych has called for closer relations between Ukraine and the Belarusian-Kazakh-Russian Customs Union.

"I believe the further development of relations with the Customs Union will rest on a new legal basis regarding free trade agreements and possibly a package agreement on cooperation by a 3+1 formula," Yanukovych said in an annual address to the nation he presented at the Verkhovna Rada on Thursday.

The president said this will help pursue a course toward closer ties between the European and Eurasian economic areas.

Foreign minister: Ukraine intensifies work in CIS

Ukraine is hoping to join the CIS Humanitarian Cooperation Council in the nearest future, Ukrainian Foreign Minister Kostiantyn Hryschenko said.

"We are now working on joining the Humanitarian Cooperation Council and the Interstate Humanitarian Cooperation Foundation […] We are hoping to make the needed headway within the shortest time possible," Hryschenko said opening the meeting of the CIS Foreign Ministers Council in Kyiv on Friday.

Ukraine is currently in the process of joining various CIS bodies and is intensifying its activities in the CIS, he said.

The intensification of Ukraine's activities in the CIS is confirmed by the fact that Ukraine will host the 6th CIS creative and scientific intelligentsia forum in fall 2011.

European solutions to Ukraine-Russia gas disputes

Early in 2011, Ukrainian President Viktor Yanukovych publicly attacked Russian gas pipeline policy at the World Economic Forum in Davos, Switzerland.

His speech was the most recent sign of growing tensions between the two countries over the gas politics that many believed would subside after Ukraine’s election of a seemingly pro-Russian president. These tensions between Ukraine and Russia are not new, but their resurgence bodes ill for European energy security.

The latest argument between Europe’s largest gas-supplying country and its key transit state is symptomatic of the wider disagreement between Kyiv and Moscow over gas transit and pricing. This should be a warning flag to Europe that, despite efforts by the International Monetary Fund and numerous countries, the underlying causes of the dispute that left Europe without gas for heating and electricity for nearly two weeks in 2009 remain unresolved and require European intervention.

Following Yanukovych’s 2010 election, Russia agreed to a new gas pricing arrangement that lowered Ukraine’s import prices and was perceived as a return to Russia’s policy of subsidized gas prices for friendly states. In reality, political hype aside, the deal did little more than bring Ukraine’s prices in line with the rates paid by other European consumers as a result of falling market prices.

At the same time, it revived the old practice of mixing political interests with gas pricing by packaging the deal with a Ukrainian extension of Russian basing rights for the Black Sea Fleet. Having pocketed the basing agreement, Russia can continue to play with the terms of the gas pricing deal if it chooses to seek further concessions in the future. Ukraine’s leaders are already voicing buyer’s remorse.

The real culprit in the dispute is the unstable underlying incentive structure in the relationship between the two countries. Gas pricing disagreements between Russia and Ukraine lead to a game of brinksmanship in which each threatens to cut off gas flows to Europe if the other will not back down. For Ukraine, a breakdown in negotiations means losing access to the gas that powers its industry and heats it homes. For Russia, a serious dispute could result in Ukraine cutting access to European customers, making Russia appear an undependable supplier to markets that could look elsewhere for solutions to their energy needs.

Timely action is in Europe’s best interest. It continues to be vulnerable to ongoing gas disputes as Russia supplies more than 40 percent of the European Union’s gas and 80 percent of this arrives via Ukrainian pipelines. This situation will only worsen in the future as dwindling domestic supplies and burgeoning demand are projected to result in a 37 percent increase in gas imports for Europe by 2030. This dependence, however, is not one-sided. Russia’s government relies on European gas exports for 20 percent of its operating budget and needs Ukrainian pipelines to transport the gas to market. Meanwhile, Ukraine remains heavily dependent on Russian gas for a large portion of its domestic energy use. A stable gas pricing and transit arrangement is important for all parties involved.



Looming in the background is Ukraine’s infrastructure problem. Its gas transit system is so old and decrepit that it offers both Ukraine and Russia an overwhelming incentive to make deals and then cheat on them. Both sides abuse the lack of transparency in the system to make claims and accusations during disputes while blaming each other for subsequent gas cutoffs.

This is compounded by the fact that both Russia and Ukraine’s energy industries are state-controlled and their business negotiations are largely conducted by national leaders. As a result, gas contracts are not constrained by market discipline, but rather are subject to political considerations in the context of relations between the two countries.

These dynamics have resulted in a situation that destabilizes Europe’s gas supply and provides Russia with cover to use gas as a political lever against Ukraine and potentially Europe. IMF loans to Ukraine and recent agreements with Russia have created a temporary degree of stability, but long-term solutions are imperative in the near future to provide for both Ukraine’s fiscal future and Europe’s energy security.

Arguably the simplest way to alleviate the supply problem between Russia and Europe is to dilute Ukraine’s centrality by building alternative pipelines – an option which Gazprom is currently pursuing in the North and South Stream lines. But even if both pipelines are built and operate at maximum capacity, they will not keep pace with projected growth in European demand.

Additionally, neither is yet operational and it is not clear that Russia can secure sufficient gas to fill the new pipelines as its Shtokman field remains undeveloped and Turkmenistan is now also selling to China. Economically it makes more sense to upgrade Ukraine’s transit system which will remain an integral piece even if these projects are completed. Politically, however, Russia may be looking for alternate routes to European customers which would allow it to shut off gas selectively to some in the future. This would enable it to further leverage its energy supplier role in individual relationships with European states.

At the recent Davos meeting, Yanukovych argued that the best solution is for Russia to invest into Ukraine’s deteriorating gas infrastructure – a move that would modernize the transit system and increase its capacity by 20 to 60 billion cubic meters of gas.

Yanukovych contends that a $5 billion Russian investment in Ukrainian infrastructure will yield similar or better results than the $25 billion being spent on the South Stream pipeline, which Russia is pursuing instead. However, while Ukraine does not have the money to modernize itself, Russia has historically demonstrated interest only in agreements where it obtains the dominant interest with minority partners who defer to Gazprom.

Late last year, following an agreement between the EU and Ukraine on cooperation in Ukrainian infrastructure modernization, Gazprom announced that it would seek a joint partnership with Naftogaz, bluntly stating that Russian funding of the modernization would accompany a merger between the two companies. This move affirmed beliefs that future Ukrainian negotiations with Gazprom will only come as part of a larger discussion on at least partial Russian ownership of Ukraine’s infrastructure.

Yanukovych and Ukraine are running out of cards to play against the Russians, having already exchanged an extension of Russian basing rights in the Black Sea for a 30 percent “reduction” in gas prices. As Ukraine’s negotiating position weakens, opportunities grow for Gazprom to achieve its ultimate goal – acquisition and control of Ukrainian infrastructure and consolidated control over the gas flow to Europe. Ukrainians cherish pipeline ownership as part of their national sovereignty and a key source of leverage, but they cannot survive on IMF loans forever or even afford to maintain their infrastructure. Without active European involvement and investment Russia will continue to chip away at Ukraine until it acquires a controlling share of its energy infrastructure.

As pro-Russian as Yanukovych originally seemed, he is on a desperate quest for balance, possibly found through European investment in Ukraine. Indeed, the proposal for greater EU investment that emerged from the March 2009 International Investment Conference on the Modernization of Ukraine’s Gas Transit System was a good first step in this direction. Opening Ukraine to foreign investment and partnership with the EU represents a practical step towards resolving the volatility of gas disputes and the problems plaguing Ukrainian energy infrastructure.


If the European Union is willing and able to invest money in a modernization and reform program, its capital would come with strings attached – including demands for market transparency, privatization of Naftogaz, and the raising of domestic prices to market levels. An EU presence would bring modernization to the transit infrastructure, transparency into natural gas transport, and limit the ability of either Ukraine or Russia to use technical issues as a negotiating tactic. It would also temper the possibility that future disputes will turn into energy crises. Given Europe’s dependence on both Ukraine and Russia for natural gas, breaking the bilateral nature of the negotiations carries a host of benefits for Europe and provides a degree of stability and mediator in the event of gas disputes.

Such an arrangement would give Ukraine an invested ally and financial capital, but not at the expense of losing a key pillar of its sovereignty. Russia would also gain from a long-term, stable and dependable energy partner. Moreover, a serious EU investment does not preclude Russian investment, only denies control. While this step would go a long way, the foundation for an energy security framework that ensures stability of supply to Europe will not be found in a single solution. Alternative pipelines, if they materialize, will relieve some of the dependence on Ukraine’s infrastructure and a foreign-capitalized modernization program would significantly improve its reliability while locking the country into long-needed domestic energy reforms.

The dire state of the Ukrainian economy should provide the EU with the necessary impetus to act. Time is a factor as Ukraine’s negotiating position continues to weaken. Ukraine cannot be viewed as a business opportunity alone, but rather as a long-term partner imperative to ensure European energy security. Without greater EU investment, Gazprom will likely force Ukrainian cession of ownership rights over its pipeline network in future negotiations over gas prices and modernization. While partnership with the EU will not fully fix the Ukrainian energy sector, it is certain to reduce the volatility of future pricing disputes and is the only solution that does not leave Europe’s security solely in Russian hands.

Richard B. Andres is a professor of national security strategy at the National War College and senior fellow and chair of the energy & environmental security policy program with the Institute for National Strategic Studies at National Defense University in Washington, D.C.

Ukraine Needs To Improve Business Environment, Says IMF Resident Representative

KIEV, Ukraine -- Ukraine needs to take steps to improve its business environment, Resident Representative of the International Monetary Fund in Ukraine Max Alier has said.
"…An important issue, which needs to be considered but doesn't receive enough attention, is the business environment. At the macro level, the indicators seem to be positive, and this can be seen in several sectors: demand is reviving, consumption is resuming, the economy is emerging from crisis. However, problems are being exposed, ranging from tax legislation, management, administration, laws, and customs. In agriculture, there are quotas on grain exports that are allocated absolutely non-transparently," Alier said during the 4th Annual Summit "Ukrainian Real Estate and Construction" organized by Adam Smith Institute in Kyiv on Wednesday.

According to Alier, the business environment in Ukraine is not getting better, but worse.

He noted that without improving its business environment, the country would not be able to realize its full potential and significantly speed up its economic growth.

Alier also stressed the need for structural reforms in the country.

There are some structural reforms that are currently lagging behind in Ukraine, compared with other countries, but it is very important that they should be carried out, he said.

EU Official Predicts Free-Trade Deal With Ukraine By 2013

KIEV, Ukraine -- A senior European Union official on Thursday predicted a free-trade deal with Ukraine could be concluded by 2013, the Interfax news agency reported.
I am absolutely sure that we can sign this agreement by the end of the year,' said Philippe Cuisson, who heads a European Commission delegation in Ukraine for talks on the free-trade zone.

Such an agreement would go into effect beginning in 2013, with duty barriers to be completedly eliminated by 2019, he said.

'Ukraine will be fully integrated with the European economy in 10 years, like Switzerland or Norway,' he said.

Ukraine's government has identified economic integration with the EU as one of its top priorities, seeing it as means to expanding exports and attracting foreign investment.

The EU is a major consumer of Ukraine's top export products, particularly metals and agricultural goods.

Ukraine's biggest imports from the EU are machinery, transport equipment, chemicals and textile products.

Ukraine Launches Pension Reform

KIEV, Ukraine -- The pension reform, initiated by President Viktor Yanukovych, was announced today. The Cabinet of Ministers of Ukraine submitted the draft law on pension reform to the Parliament.
The draft law intends to bring the Ukrainian pension system into compliance with European standards, which include creating alternative pension funds, in addition to the only existing government fund, and raising retirement age.

The key development that the pension reform aims to introduce is the three-tier system. This includes so-called mandatory state unfunded, mandatory state funded, and voluntary private pension schemes.

Existing in most of the EU countries, such a system enables an individual to accumulate any size of pension that he or she would want to receive at retirement.

The key elements of the draft law also include raising of the retirement age, cutting down the maximum pension size, and creating savings funds.

The non-governmental funds will be created to operate along with the existing governmental one to secure pensions through insurance companies. Announcing the reform, the Prime Minister of Ukraine Mykola Azarov said: "Decreasing of the Pension Fund's deficit is not the main goal of the reform.

The deficit itself will be liquidated in three to four years. The reform's main objective is to create an opportunity for people to accumulate a pension that they need or want, based on their revenues. The pension savings funds will become both a guarantee of decent pensions and a source of long-term investments for the country."

According to the Prime Minister, the existing pension system has been very unbalanced, causing a huge gap between different layers of society. While the minimum monthly pension in Ukraine is 723 UAH ($90 USD), some people receive up to 40 thousand UAH ($5,000 USD) per month. Therefore, the draft law, if enacted, will reduce the maximum pension size.

As the Ukrainian population is aging and the Pension Fund's deficit is growing, the draft law foresees gradual increase of the retirement age for women from 55 to 60. It is planned that the process will take 10 years by raising the retirement age by 6 months each year

Ukraine: Migrants and Asylum Seekers Tortured, Mistreated

KIEV, Ukraine -- Migrants and asylum seekers, including children, risk abusive treatment and arbitrary detention at the hands of Ukrainian border guards and police, Human Rights Watch said in a report released today.
Some migrants recounted how officials tortured them, including with electric shocks, after they were apprehended trying to cross into the European Union or following their deportation from Slovakia and Hungary.

The 124-page report, "Buffeted in the Borderland: The Treatment of Asylum Seekers and Migrants in Ukraine," is based on interviews with 161 refugees, migrants, and asylum seekers in Ukraine, Slovakia, and Hungary. It shows that although some conditions in migration detention facilities have improved, Ukraine subjects many migrants to inhuman and degrading treatment and has been unable or unwilling to provide effective protection for refugees and asylum seekers.

"EU states are returning people to Ukraine to face abuse," said Bill Frelick, Refugee Program director at Human Rights Watch and a co-author of the report. "Despite a readmission deal and money the EU has poured in, Ukraine apparently isn't up to the task of respecting the migrants' rights and protecting refugees."

The readmission agreement between the EU and Ukraine that came into force on January 1, 2010, provides for the return of third-country nationals who enter the EU from Ukraine. In recent years, the EU has spent millions of Euros to improve Ukraine's migration and asylum system.

But Human Rights Watch noted that neither the agreement nor that funding absolve EU member states of their obligations under the EU charter of fundamental rights to provide access to asylum and not to return people to face torture or ill-treatment or of the EU members' responsibilities toward unaccompanied children.

More than half of the migrants interviewed who had been returned from Slovakia and Hungary said that they were beaten or subjected to ill-treatment in Ukraine. Most had tried to seek asylum in Hungary or Slovakia, but said their claims had been ignored and they were quickly expelled. Both countries also expelled unaccompanied children.

Readmission agreements are a cornerstone of the European Union's so-called externalization strategy for asylum and migration. The core of this strategy is to stop the flow of migrants and asylum seekers into the EU by shifting the burden and responsibility for migrants and refugees to neighboring countries they pass through.

"The EU should suspend its readmission agreement until Ukraine demonstrates its capacity to provide a fair hearing for asylum seekers, to treat migrants humanely, and to guarantee effective protection for refugees and vulnerable individuals," Frelick said.

While Human Rights Watch did not document evidence that would suggest torture of migrants is routine in Ukraine, those interviewed said it does occur. An Iraqi man spoke of his interrogation after his arrest by Ukrainian border guards in late April:

The treatment was savage. They beat us and kicked us and abused us verbally. They also electric shocked me. They shocked me on my ears. I admitted that I wanted to cross the border and that we were smuggled.... I felt my heart was going to stop. I was sitting on a chair. I just admitted everything, but they didn't stop torturing me.

Many migrants who were not tortured nevertheless alleged that they were subjected to beatings, food deprivation, or other inhuman or degrading treatment. All of these abuses take place in a climate of impunity, Human Rights Watch found, with victims fearful of reporting the abuse and perpetrators not held to account.

Although conditions of migrant detention in Ukraine, such as severe overcrowding and unsanitary conditions, appear to have improved since the publication in 2005 of a Human Rights Watch report about Ukraine, "On the Margins: Rights Violations against Migrants and Asylum Seekers at the New Eastern Border of the European Union," serious problems in migration detention remain.

They include ill-treatment, lack of access to the asylum procedure, detention of children, co-mingling of men with unrelated women and of children with adults, corruption, and the arbitrary and disproportionate use of migrant detention in general.

From August 2009 through August 2010, Ukraine was unable to recognize or provide protection to refugees because the asylum system was paralyzed by a political standoff. Although asylum processing has resumed, the system remains dysfunctional, Human Rights Watch said.

Because so many asylum seekers said they had to bribe migration officials to file asylum applications, get an interpreter for the asylum interview, or obtain required documentation, Human Rights Watch called on the authorities to investigate allegations of corruption and ensure appropriate disciplinary or criminal sanctions.

Human Rights Watch found that State Border Guard Service officials frequently fail to submit applications from detained asylum seekers to the Regional Migration Service, which conducts asylum interviews. The number of people released from border guard-controlled temporary holding facilities because their asylum applications had been accepted by the regional migration service fell dramatically, from 1,114 in 2008 to 202 in 2009.

Asylum seekers interviewed by Human Rights Watch complained that the Regional Migration Service's asylum interviews were superficial, that interpreters were often unqualified, and that the interviewers were sometimes harsh and judgmental. An Afghan who appeared to have a plausible claim said that his interviewer told him during the interview, "One hundred percent of you will be rejected."

The asylum system also has major legal gaps. Ukrainian law does not provide for protection of those who flee generalized violence and war or for trafficking victims. Only two Somalis and one unaccompanied child are known to have been granted refugee status, and children are barred from entering asylum procedures altogether in some regions of the country.

Unaccompanied children face particular obstacles to getting needed documentation and access to the asylum procedure because they can only file a claim with a legal representative, and the authorities in some regions refuse to appoint legal representatives for them. Decision-making is slow, and many children become adults before their applications are decided, which works against their claims.

Worse, border guards may detain children for weeks in a jail-like facility euphemistically called a "dormitory." Border guard officials put children's safety at risk by detaining them in this dormitory jointly with unrelated adults, including girls with boys and men, Human Rights Watch found.

"Despite the abysmal treatment these children receive in Ukraine, both Slovakia and Hungary have summarily returned unaccompanied children," said Simone Troller, senior children's rights researcher at Human Rights Watch and a co-author of the report. "In practice, they are returned on the same basis as adults, without considering their vulnerability and lack of protection in Ukraine."

A 17-year-old unaccompanied Afghan boy described his experience in Ukraine after being deported from Slovakia:

We passed the Slovakia border, but we were caught. We asked the police to help us. After one day and one night we were deported....I could not understand the paper I signed.... I'm scared to talk about Ukrainian soldiers at the border. They beat us a lot. They beat us to speak Russian. As soon as they took us they started beating us.... It was nighttime.... We walked to another room. A man in civilian clothes was just beating me. "How did you pass the border?" He took us one at a time. He kicked me and also hit me with a police stick and punched me for an hour, beating me the whole time. At first it was just him, then three or four others in uniform hit.

Despite a six-month limit on migration detention, severely overworked Ukrainian courts are usually not able to review cases in that time frame. In several instances, migrants said they were issued a six-month detention order but were never presented before a judge or given an opportunity to challenge their detention.

Many, including children, reported that border guards threatened to keep them detained for the full six months unless they paid a bribe.

Nothing in Ukrainian law prohibits the authorities from re-arresting migrants shortly after release and detaining them for another six months. Human Rights Watch met a number of migrants who had been detained multiple times. A 23-year-old Pakistani detainee at the Zhuravychi Migrant Accommodation Center said:

They just open the gates and tell you to leave. We are 40 kilometers from Luts'k. When we Pakistanis come out of jail, there are mafia people [waiting outside] with a list. They ask for US$1,500 and if we pay they will help and if not they will tear up our documents and we will go back for another six months of detention.

Ukraine's Finance Ministry Claims Previous Government Embezzled USD $375 Million

KIEV, Ukraine -- The Minister of Finance of Ukraine Fedir Yaroshenko stated in a press briefing today that the Ministry's investigation of the recently conducted international audit had revealed the embezzlement of 3 billion UAH (USD $375 million) by Yulia Tymoshenko's government.
The Minister also said that the Ministry's auditing report on public spending in 2008-2009 had already been submitted to the General Prosecutor's Office and to the Ukrainian Parliament.

The main violations according to the above mentioned report are the breaches of public procurement procedure for sugar, vaccines, and expensive foreign cars. There were violations even when selling carbon credits to other countries.

The Minister also added that according to an internal audit carried out by the Main Control and Revision Office of Ukraine (MCROU, Public Spending Inspection) released on 22 October 2010, the total amount of Yulia Tymoshenko's government violations in spending of Ukraine's public funds in 2008-2009 reached 53 bln UAH ($6.6 billion USD).

The audit was conducted by three US-based companies, Trout Cacheris PLLC, Akin Gump Strauss Hauer&Feld LLP and Kroll Inc. and was released on October 14. The fees that the Ukrainian government paid to international auditors amounted to USD $2.9 million.

As a result of the audit, the present Ukrainian government filed two lawsuits in the UK and US courts with the aim to recover the funds misspent by Yulia Tymoshenko's government from various companies which had been found involved in the money laundering schemes.

Ukraine May Export 4 Million Tons Of Grain By March, UkrAgroConsult Says

KIEV, Ukraine -- Ukraine may export about 4 million metric tons of grain by the end of next March even if the government lengthens caps on outbound shipments, according to UkrAgroConsult.
An extension of the limits until March 31 would still allow traders to ship 1 million tons of grain a month, Liza Malyshko, an analyst at the Kiev-based researcher, said today by phone.

Exporters have made shipments equating to about 11 percent of the current quotas, she said.

The Economy Ministry yesterday proposed extending the caps, scheduled to expire Dec. 31, through 2011’s first quarter. It also suggested adding an extra 1 million tons of corn and 500,000 tons of wheat to the current 2.7 million-ton export quota.

The government imposed the curbs in October after dry weather damaged crops.

Ukraine has exported 5.3 million tons of grain since the current marketing year started on July 1, of which 250,000 to 300,000 tons fell under the quota, according to Malyshko. That leaves about 2.4 million tons to be used, she said.

The current quota comprises 2 million tons of corn, 500,000 tons of wheat and 200,000 tons of barley.

Ukraine’s grain-export potential for the current marketing year is between 14 million and 15 million tons, depending on final stockpile calculations by the national statistics office later this month, Malyshko said.

Export potential in the year may be about 6 million tons for both corn and wheat and about 3.6 million tons for barley, according to UkrAgroConsult. Ukraine has shipped 2.22 million tons of wheat, 2.3 million tons of barley and 440,000 tons of corn so far in the period, Malyshko said.

Ukraine And Poland To Revive Odessa-Brody Pipeline

KIEV, Ukraine -- The Prime Minister of Ukraine Mykola Azarov and the Marshal of the Polish Senate Bogdan Borusevich discussed the plans of the two countries to revive the use of the Odessa-Brody pipeline.
The high officials also mentioned a possibility of constructing a new leg of the pipeline. Presumably, it will stretch all the way to the Northern Polish city of Gdansk, and thus will make one step forward towards the establishment of a new route to transport the Caspian oil to the EU countries.

During his meeting with Mykola Azarov, Bogdan Borusevich stated that he considers the stretching of the Odessa-Brody pipeline to Gdansk, Poland, being prospective. Borusevich mentioned that realization of the project will become ever more relevant for Poland now that oil transfers through Druzhba pipeline might get reduced.

Druzhba is the world's largest pipeline system carrying oil from European Russia through Ukraine, Belarus, Poland, Hungary, Slovakia, Czech Republic, and Germany. Marshal also pointed out that Polish investors have purchased oil refinery in Lithuania.

In this respect there is a possibility to build a branch of the Odesa-Brody pipeline to the refinery.

"The Ukrainian side has already built its part of the pipeline, but Poland, unfortunately, has not", Borusevich added. "I was pleased to hear that Azarov's government is interested in the Polish-Ukrainian cooperation on this and other projects in the field of energy security".

On November 23, 2010, the Ukrtransnafta company completed the testing of the Odesa-Brody pipeline in the direction of Druzhba's southern branch. In 2009, a Polish pipeline company Sarmatia made a prediction that the construction of the conduct pipe in question would reach Plotsk and Gdansk before 2012.

The Odesa-Brody pipeline is a crude oil pipeline between the Ukrainian cities of Odesa on the Black Sea, and Brody near the Ukrainian-Polish border.

The usage and the direction of the Odessa-Brody pipeline is viewed to be of considerable geopolitical significance, since it provides a new route to diversify oil supplies to the EU.

The pipeline was originally intended to reach Gdansk in order to transfer oil from the Caspian Sea (mainly from Kazakhstan) to the Polish Baltic Sea port and from there to the rest of Europe.