Chocolate Factory, Trade War Victim

KIEV, Ukraine -- From the Baltic to the Black Sea, a chocolate wall has descended across the continent of Europe. The output of the sprawling brick factory, formerly known as the Karl Marx chocolate works, has never before been so hard to sell in Russia. Since July, when Russian regulators banned all chocolate, cake, cookie and candy imports from its Ukrainian parent company, Roshen, ostensibly over health concerns, production at the plant here has plummeted 14 percent. “It’s not pleasant at all to be in this situation,” Viacheslav Moskalevskyi, the president of Roshen, Ukraine’s largest confectionery company, said in an interview. The Ukranian chocolate factory shares a problem with many businesses in the countries that lie between the European Union and Russia. It is caught in a no-man’s land for trade, a place increasingly precarious as each side tries to recruit countries into exclusive trade deals. The European Union wants Ukraine and Moldova to sign so-called Association Agreements while Russia wants these nations in its Customs Union. Ukraine and Moldova must decide by a Nov. 28-29 summit meeting in Vilnius, Lithuania, whether to sign the Association Agreement. And Russia is willing to play rough to ensure that does not happen. Russia banned wine from Moldova. This fall, after Russia banned milk imports from Lithuania as part of a struggle for economic influence, yogurt and kefir piled up at checkpoints. Lithuania is already in the European Union, but the Kremlin restricted dairy imports anyway, apparently in anger that the former client state was being a strong advocate of bringing in the other former Soviet states. When Lithuanian authorities said they might complain to the World Trade Organization, Russia’s former chief sanitary inspector, Gennady Onischenko, replied that if that happened, the restrictions would remain in place “for an incredibly long time.” Members of the European Parliament expressed their solidarity with Lithuania by eating a type of Lithuanian sweetened cottage cheese dessert in front of photographers, but the economic dividing line in Europe is hardening. It was this nearly same landscape that Winston Churchill in a 1946 speech heralded the Cold War, saying, “from Stettin in the Baltic to Trieste in the Adriatic, an iron curtain has descended across the Continent.” The line of contact in this trade war has taken a twist on that name, sometimes being called the Milk Curtain. The zone separating the European Union from the Russian-backed Customs Union, a mini-rival trade bloc, has become a hazard for businesses, as the case of Roshen indicates. The ban on Roshen chocolates is widely understood to have resulted from its owner, Petro Poroshenko, advocating for Ukraine’s integration with the European Union, rather than the Customs Union. The company had recently invested in a robotic assembly line for a crushed hazelnut and dark chocolate candy that is popular in Russia. But since the ruling, the line is underused, though still making reduced quantities of a devilish little sweet, called Evening in Kiev, only not for the Russians. And all of Ukraine is stuck in the same sticky box. Moody’s, the bond rating agency, downgraded Ukraine’s sovereign debt rating last month, in part over concerns the country will not obtain a gas price discount from Russia while this trade war persists. Ukraine’s economy contracted in the first half of 2013. Ukraine’s economic woes are deepening. Just on Tuesday, Aleksei B. Miller, the chief executive of the giant Russian energy company, Gazprom, appeared to escalate the standoff by threatening to invoke a clause in the Ukrainian gas contract demanding payment in advance for winter heating. “This is a dire state of affairs,” Mr. Miller said in a statement, whose tone recalled warnings that Gazprom had issued before shutting off gas to Ukraine in energy embargoes in 2006 and 2009. The Customs Union of Russia, Belarus and Kazakhstan, a pet project of President Vladimir V. Putin, will never truly rival the European Union. The output of the Customs Union states was $2.3 trillion in 2012, compared to $16.6 trillion for the European Union, according to the International Monetary Fund. Ukraine’s economic output of $176 billion last year would only modestly bolster the Russian bloc. But bulking up with Ukraine’s 46 million consumers would narrow the population gap with the European Union. A Customs Union that included Ukraine would have a total population of about 215 million people, compared to the total population of the 28 nations in the European Union of about 501 million people. “Putin and his team are pressuring Ukraine because Eurasian integration cannot happen without Ukraine,” Mikhail Pogrebinsky, a political analyst in Kiev, said of the tactics such as those being brought to bear on Roshen. Russian officials have suggested they are merely conveying to business owners in the region what loss of market access would result if their country’s officials choose to remain outside the Russian-backed trade group. With that sentiment conveyed, what is known here as the chocolate war began. The company, one of Eastern Europe’s largest candy makers, had sales of $1.2 billion in 2012, up from $1 billion the year before. The company exports 320 different types of candies to 30 countries, but specializes in treats preferred by residents of the former Soviet Union. Until the ban, Roshen exported 8,000 tons of sweets to Russia monthly, even during the world recession. “Recession affects real estate but not chocolate,” Mr. Moskalevskyi, the director, said. While the company has been able to redirect some chocolate to Ukraine, the drop in output shows Ukrainians can’t eat it all. Ukrainian businesses are also squeezed from the other side. The European Union’s high tariffs on agricultural goods such as those contained in cakes and chocolate all but rules out sales to Western Europe, at least until any easing of tariffs takes place under the Association Agreement. Also, European confectionery companies and candy makers have themselves been investing in Russia, seen as having a higher potential for growth than Europe, which is saturated with sweets, Mr. Moskalevskyi said. Tastes for chocolate vary by region and Roshen specializes in former Soviet consumers. Hershey’s, for example, had little success selling its Kisses in the former Soviet Union — they were too sweet and milky. Retooling for exports to Western Europe would be costly for even a company like Roshen. “The money I made in Russia cannot be made up somewhere else,” Mr. Moskalevskyi said. Roshen had 5 percent of the market in Russia, competing well with the likes of Kraft, Mars and the dominant Russian domestic candy maker, the United Confection Company, a sort of Gazprom of sweets. Roshen was doing so well in Russia partly because it introduced a Russian Classic line of chocolates, reviving 18 Soviet brands like the Seagull bar, a plain milk chocolate slab with a Socialist Realist style beach scene on the wrapper. But this year, Roshen has missed Teacher’s Day in Russia, a big day for giving chocolate gift boxes. Mr. Moskalevskyi is hoping the dispute will resolve itself before the New Year’s holidays —payday for chocolate makers everywhere east of the Danube River. “All of this is leaving a very negative impression,” Anatoly Radchenko, a chocolate factory worker, said glumly of the Russian trade restriction. “It seems Russia is against us. I don’t want to think it, but I do. We are brother Slavs. They should never have started this chocolate war.”

Russian PM Plays Down Talk Of Gas Wars, Warns Ukraine On EU

MOSCOW, Russia -- Russian Prime Minister Dmitry Medvedev said he saw no reason for Moscow to cut gas supplies to Ukraine over an unpaid bill for now, playing down talk of an imminent "gas war" that might disrupt gas flows to Europe. He denied Russia's demands for payment had anything to do with opposition to Ukraine signing agreements with the European Union this month which would mark a historic shift away from former imperial master Moscow. But the 48-year-old former president said the "special relationship" between the two former Soviet republics would change if Ukraine moved closer to Europe and that Kiev should no longer come to Moscow seeking loans. Russian gas export monopoly Gazprom said on Tuesday that Ukraine, which is dependent on supplies of Russian gas, had failed to settle a $882 million bill for August deliveries and demanded it be paid urgently. Medvedev said they had yet to pay. "We understand that they have economic difficulties, but they still have to pay, especially after we gave them loans and financed transit," Medvedev said in the interview on Thursday, adding the transit fees cost billions of dollars. "It's the law - you have to pay for delivered goods. It's normal practice around the world. Let them pay." Medvedev said Russia could resort to a system of advance payments if Ukraine did not respond to its demands. As it nears a payment crunch to service its debt over the next 18 months, Ukraine has asked for leniency from Russian creditors, including trying to extend the term of a $2 billion loan from Russia's Gazprombank by five years. Just last month, Putin said Russia would lend $750 million to Ukraine. LET EUROPE PAY Medvedev said if Ukraine signed the agreement with the European Union at a summit on November 28-29, Brussels could then foot the bill, denying Russian pressure over the unpaid bill was connected to Kiev's choice of closer ties with the West. "This is the sovereign choice of Ukraine, but let's hope they don't kick themselves when they see that they will not receive those dividends, those benefits which they counted on, and lose the advantages that exist because of what we have now ... a special relationship with them, an exclusive relationship," he said. Asked whether there would be a reduction in gas supplies to Ukraine, he replied: "No. In this sense I think that for now everything is okay ... I don't expect any complications." Harsh language used by Gazprom in the gas dispute has raised concerns of a new "gas war" over prices between the neighbors, similar to those in the winters of 2006 and 2009 which caused supplies to be disrupted to Ukraine and the rest of Europe. Ukraine's energy minister acknowledged on Wednesday the country may have fallen behind in payments for monthly supplies of Russian gas but said he expected the matter to be settled with Moscow very soon. Ukraine, which must meet conditions including releasing former prime minister Yulia Tymoshenko from prison for the EU agreements, may have a safety net provided by the International Monetary Fund if Russia cuts it ties. Russia fears Ukraine could be moving out of its sphere of influence and it will stymie President Vladimir Putin's dream of a Moscow-led customs union to replace, at least in part, ties broken with the collapse of the Soviet Union in 1991. Russia has put pressure on its neighbor, by tightening customs rules and banning some imports. Medvedev said it was simple choice between forming a trade pact with the 28-nation bloc or the customs union with Russia and two other former Soviet republics, Belarus and Kazakhstan. "It's their position, and it has to be respected, but they have to understand that relations with us will be different," he said. "They constantly turn to us for credits, for example. In the end, if they have such advanced relations with Brussels ... let them get credits from Brussels."

Exclusive: EU, IMF Coordinate On Ukraine As Russia Threat Looms

KIEV, Ukraine -- The European Union is in advanced discussions with the International Monetary Fund on providing standby financing to Ukraine should the country come under economic pressure from Russia later this year, senior EU officials have said. Ukraine is expected to sign a free trade and association agreement with the European Union at a summit in Lithuania on November 28-29, as long as it meets remaining conditions, including releasing former prime minister Yulia Tymoshenko from prison. Ex-Soviet Ukraine's shift closer to the EU and away from Russia's sphere of influence has irritated Moscow, which has threatened to interrupt gas supplies to its neighbor and has demanded Kiev repay outstanding loans. The standoff is shaping up to be one of the most sensitive geopolitical moments between East and West since the end of the Cold War. For Moscow it cuts to the heart of a sense of diminished power in its backyard, with Ukraine seen by many in Russia as culturally and historically Russian. If the EU-Ukraine pact is signed, and the Kremlin does retaliate in the ways many expect, the EU has plans in place to supply Ukraine with natural gas, as well as arrangements with the IMF for emergency financing - even if some analysts doubt the IMF and Ukraine can bridge long-standing differences. "The IMF plays a very important role and there are ongoing discussions with them about standby arrangements," said a senior EU official, speaking on condition of anonymity. A second EU official directly involved in talks on Ukraine added: "There are ongoing discussions to support the IMF and find a way for standby arrangements to be concluded soon." The head of the IMF's mission in Ukraine said there was no link between Ukraine signing the EU deal and receiving help. "There is no connection between the possible signing of an association agreement between Ukraine and the EU and the discussions on a possible Fund-supported program," Nikolay Gueorguiev said in an emailed statement. Ukrainian officials declined to comment on the EU role, noting that Ukraine was already in talks with the IMF directly. CONDITIONS It is not clear exactly how much money Ukraine would need, but bankers and asset managers familiar with the distressed financial situation of the nation of 45 million suggest a standby facility between $10 and $15 billion may be necessary. That would come with strict conditions which have already proved a stumbling block in a series of loan arrangements between the Fund and Ukraine. The last, $15-billion, agreement was suspended in early 2011 because Ukraine refused to remove subsidies on household gas supplies. However, the EU officials indicated that the IMF could introduce more flexibility into the program to take into account Ukraine's circumstances. The EU has worked intensively with the IMF on loans to troubled euro zone states over the past three years where similar flexibility has been necessary. "The discussions are not in any way telling the IMF what they should do, or even telling them to lower the bar," said the second European Union official, referring to conditions the IMF sets borrowers to protect its prospects of being repaid. "It's not a case of telling them not to push on conditionality," the official said, adding that the Washington-based global lender was looking at ways that could help Ukraine meet the conditions. "The IMF is actually thinking about maybe looking at the calendar of implementation and a certain road map, rather than demanding that everything is done tomorrow, whatever the political and social implications of that may be." The IMF mission in Ukraine on Thursday again called on the government to raise natural gas prices for domestic consumers and introduce a flexible exchange rate for the national currency - two long-standing demands it has made in continuing negotiations on an assistance package. GAS WARS As well as standby financing - critical for a country where foreign reserves to fund imports stand at barely $20 billion and upcoming debt repayments total more than $60 billion - the EU has contingency plans in place to supply Ukraine with gas. The country currently imports nearly all its gas from Russia and is also the major transit route for Russian gas to the EU. The EU depends on Russia for about a quarter of all its gas, around 60 percent of which passes through Ukraine. Russia and Ukraine have waged two "gas wars" in the past - in the winters of 2006 and 2009 - with Moscow halting deliveries to both Ukraine and by extension the rest of Europe. EU officials say they will find ways of supplying Ukraine with gas via other routes, potentially through the Nord Stream pipeline that flows from Russia to Germany, bypassing Ukraine. That gas could be diverted to Ukraine via Slovakia using a reverse flow in the pipeline. That is politically sensitive in Slovakia, which worries about the impact on its own supplies and pricing. But officials say it is feasible and would be the most likely method used should Russia isolate Ukraine. However, such a "back-fill" means of supplying gas to Ukraine could only be used for a limited number of weeks, energy analysts say, and it would probably diminish supply in other areas, pushing European gas prices sharply higher. "There are discussions with the Ukrainians and EU states to create favorable conditions for Ukraine to be able to import gas from sources other than Russia, or from the same source, but via a different route," the second source said. "Together with the IMF discussions, it is an extremely important issue." QUESTIONS As well as the potential IMF standby facility, the EU has set aside 610 million euros ($840 million) that it could lend to Ukraine. It has so far linked the disbursement to Ukraine meeting conditions for help from the IMF. While the contingency planning by the EU and IMF may go some way to calming international concerns about the fragility of Ukraine's economy, some investors are not convinced a standby IMF loan deal will be feasible. "Even if the IMF is not that strict with Ukraine in terms of conditionality, their positions are still miles apart," said Viktor Szabo, a portfolio manager at Aberdeen Asset Management. Szabo indicated that Ukraine's unwillingness to let the hryvnia currency depreciate in a free float, and its reluctance ahead of elections in 2015 to end subsidies for household gas, ruled out a meeting of minds with the IMF. Still, if an arrangement were made - with the EU working closely with the IMF to make it happen - foreign investment could quickly flow into Ukraine to take advantage of the deal. "There's probably quite a lot of money sitting on the sidelines," said Szabo. "In some circles, there is the expectation that if the EU and IMF do come in, then significant investments could flow, although it will take some time."

Russia And Ukraine Halt Giant Antarctic Marine Sanctuary Plan

SYDNEY, Australia -- Russia and the Ukraine on Friday again scuttled plans to create the world's largest ocean sanctuary in Antarctica, pristine waters rich in energy and species such as whales, penguins and vast stocks of fish, an environmentalist group said. The Commission for the Conservation of Antarctic Marine Living Resources wound up a week-long meeting in Hobart, Australia, considering proposals for two "marine protected areas" aimed at conserving the ocean wilderness from fishing, drilling for oil and other industrial interests. "It seems pretty clear that a small group of countries led by Russia wanted to wreck the agreement," Steve Campbell, director of the Antarctic Ocean Alliance which campaigns for protecting the Antarctic seas, said by phone from London. For the sanctuary proposals to pass, they need backing from all 200 delegates from 25 member countries, many of which have conflicting interests. Russia and Ukraine also actively blocked the two proposals in July, with China withdrawing support for one. "This is a dark day not just for the Antarctic, but for the world's oceans," Andrea Kavanagh, director of the independent Pew Charitable Trusts' Southern Ocean sanctuaries project, said. Tony Fleming, director of the Australian Antarctic Division, hoped for a more favorable outcome the next time the proposals are discussed next year. "If we work with members throughout the year, I believe we can bring a proposal back to next year's meeting which will hopefully achieve consensus," he said. He did not elaborate. Antarctica is home to more than 10,000 species including most of the world's penguins, whales, seabirds, colossal squid and Antarctic tooth fish. It is considered one of the least altered marine ecosystems and provides a global reference point for assessing the consequences of climate change. "While many other marine ecosystems in other parts of the world have been devastated by development, pollution, mining and over-fishing, many of Antarctica's ocean habitats remain intact with all of their predator species still thriving," the Antarctic Ocean Alliance says on its website.

EU-Ukraine Agreement Won't Be Signed, Says Putin Aide

MOSCOW, Russia -- An Association Agreement between the European Union and Ukraine will not be signed because it would go against Ukraine's privileged relationship with Russia, an aide to President Vladimir Putin said. The agreement cannot be signed because it is contrary "to Ukraine's economic interests, to our spiritual and historical traditions, and is disadvantageous for Europe, Russia, Belarus and Kazakhstan," aide Sergei Glazyev said on Rossiya 24 television channel. "The agreement is unfavorable for everyone except the mad politicians who have called for it," he said. Glazyev also argued that the signing of such an agreement would breach the Russia-Ukraine Treaty on Friendship, Cooperation and Partnership signed in 1997, Interfax reported Tuesday. Article 13 of the treaty stipulates that Russia and Ukraine are committed to harmonizing national legislation and to creating a single economic space. Glazyev's statement comes amid Moscow's efforts to persuade Kiev to join its Customs Unions with Belarus and Kazakhstan. By joining the union, Ukraine stands to gain $10 million thanks to gas price adjustments and the removal of export duties on Russian oil deliveries, Glazyev said. However, if Ukraine signs an agreement with the EU its GDP will drop to minus 1.5 percent by 2020, Glazyev said, citing calculations "agreed with Ukrainian researchers." "These figures are defended at all levels. No one disagrees with them," he said. In what could be a pivotal moment in the tug-of-war over Ukraine between the EU and Russia, Ukraine will take part in the EU's third Eastern Partnership Summit at the end of November in Vilnius. The summit's stated objective is to build "safe, economically strong and pro-European Eastern neighbors."

Ukraine Debt Worries Bring Another Downgrade

MOSCOW, Russia -- Standard & Poor’s has cut its assessment of Ukraine’s creditworthiness with a downgrade to B minus. S&P is concerned about Ukraine’s falling foreign exchange reserves and its ability to refinance its debt. This follows a recent similar move by Moody’s. Kiev faces a payment crunch to service its debt over the next 18 months. It has asked for leniency from Russian creditors. But Moscow is not a mood to agree to that if Ukraine signs a free trade and association agreement with the European Union at the end of November. Medvedev says ‘special relationship’ could change Russian Prime Minister Dmitry Medvedev said on Friday that he saw no reason for Moscow to cut gas supplies to Ukraine over an unpaid bill for now, playing down talk of an imminent “gas war” that might disrupt flows to Europe. In an interview with Reuters, he denied Russia’s demands for payment had anything to do with opposition to Ukraine signing agreements with the European Union this month which would mark a historic shift away from former imperial master Moscow. But Medvedev said the “special relationship” between the two former Soviet republics would change if Ukraine moved closer to Europe and that Kiev should no longer come to Moscow seeking loans. IMF pressure The International Monetary Fund could help Ukraine, but only if the government raises domestic gas prices and reforms the economy, both unpopular steps which Kiev has previously rejected. IMF mission leader Nikolay Gueorguiev laid out the Fund’s view at the end of a 12-day visit to Ukraine on Thursday, saying the country required a “set of comprehensive and credible reforms” to stabilise the economy and revive growth. “Ukraine’s significant external financing needs remain a key vulnerability,” Gueorguiev said in a statement, referring to foreign debt repayments looming for gas deliveries from Russia and for servicing loans and credits, including to the Fund itself. He zeroed in on the loss-making energy sector and called again for an end to the unprofitable practice of Soviet-era subsidies in which state run oil and gas company Naftogaz sells gas to households and other domestic consumers at prices way below the level at which it buys from Russia. “The large loss-making energy sector needs to be reformed,” he said.

Ukraine U-Turn: Gazprom Kicks Off Bulgarian Part Of South Stream

SOFIA, Bulgaria -- Gazprom, Russia’s state-owned natural gas giant has broken ground on the €3.5 billion ($4.8 billion) Bulgarian onshore section of the South Stream pipeline Disputes between Moscow and Kiev are resurfacing and Russia wants to speedily complete the pipeline. In return, Gazprom CEO and Chairman Aleksey Miller promised customers would get discounts on the gas supplies that travel through Bulgarian territory. Miller also said other local energy suppliers will have access to the South Stream system, a condition the company has never before agreed to. Bulgarian Energy Holding, a state-owned group, will borrow 620 million euros ($854 million) from Gazprom at an annual interest rate of 4.25 percent over 22 years, Economy and Energy Minister Dragomir Stoynev said at Thursday’s briefing in Sofia. The agreed interest rate is almost half the before discussed 8 percent. A big portion of the work will be done by Bulgarian companies, and Stoynev expects the project to yield revenues of $3.1 billion between 2013-2014. The only collateral on the loans will be dividends Gazprom receives from transporting gas through Bulgaria. Gapzrom has agreed to fully compensate for any leftover unused material post-construction, Stoynev said. Even though Sofia was among the first countries to sign an intergovernmental agreement in 2008, negotiations over the 540km-long (336 miles) part of the pipeline were the most difficult for Gazprom, Kommersant reports. As gas disputes between Gazprom and Kiev's Naftogas intensify, the importance of the South Stream project as a bypass to the traditional route through Ukraine is increasing. “With the South Stream transit risks are gone forever,” said Gazprom CEO Aleksey Miller. Transit through Ukraine stood at 61 billion cubic meters in the first nine months of 2013, while in FY 2012 the figure was at 84.2 billion cubic meters. The South Stream pipeline will stretch 2400 km (1,491 miles) and by 2019 could have a 64 billion cubic meter annual capacity, delivering natural gas to Bulgaria, Serbia, Hungary, Slovenia, and Austria and Italy in one direction and Croatia, Macedonia, Greece and Turkey in a second. The undersea portion that runs the Black Sea will be able to transport 15.8 billion cubic meters of Russian gas to Eastern Europe. Gazprom pumps 17.8 billion cubic meters of gas annually to Bulgaria through Ukraine and Romania, Bloomberg News reports. Bulgaria spends as much as 1.4 billion euros ($1.9 billion) annually on gas imports Most recently, Gazprom demanded Ukraine urgently pay a $1 billion overdue gas bill, raising fears of a new "gas war". Pricing disputes over advance payments in have caused major supply disruptions, both in 2006 and 2009, when Russia shut off gas to Ukraine, leaving many customers without heat. The first effort to circumvent Ukraine was the Nord Stream project, which connects Russia and Germany under the Baltic Sea. It is estimated to have cost $7.4 billion and opened in November 2011.