Oops she did it again

Graham Stack in Chisinau  for business new europe (www.businessneweurope.eu)

Oddly for someone thrown out of mighty Russia on charges of being a threat to state security and planning the violent overthrow of the government, 25-year-old journalist Natalia Morar looks as if sugar wouldn’t melt in her mouth. And for someone facing up to eight years in jail on charges of inciting mass riots, she seems remarkably bright and fresh – and as surprised as anyone about the scale of the protests that followed Moldova’s parliamentary elections on April 5.

Morar’s current problems all started the morning after Moldova’s elections. She and six like-minded friends from their informal pro-democracy group Hyde Park met at a café for a brainstorming session on what to do about the seemingly rigged elections. President Vladimir Voronin’s ruling Communist Party had got precisely the right number of seats in parliament to allow them to name the next president without having to talk to the opposition parties. Voronin himself must stand down after two terms in office, and has openly said he would seek a Den Xiaoping status for himself, referring to the late Chinese leader who never held office as the head of state or head of government, but served as the de facto leader of China for almost 20 years.

The elections results were just too neat to be true, Morar and her friends thought, although the Organisation for Cooperation and Security in Europe (OSCE) had largely given the vote a clean bill of health. But on the internet, rumours abounded of voting lists packed with the names of dead souls and emigrant workers.

Morar’s friends decided to organize a flash mob for that evening to take place using Twitter, Facebook and the Russian social network site Odnoklassniki, plus good old-fashioned sms. They counted on getting together a crowd of a several hundred at the most, Morar told bne at a secret location in Chishinau. Instead of the hundreds they expected, tens of thousands turned out – estimates range from 10,000-20,000. Moreover they returned the next day as well.

The crowd was initially peaceful, but very suddenly on the Tuesday after midday, the mood turned ugly. Stones rained down on the under-equipped and undermanned police. Protestors burst through the police cordon into the parliament building and presidential office. Fire broke out in the left wing of the parliament, and protestors defenestrated computers and files. “The violence had nothing to do with us,” explains Morar. “At that time, we together with the political opposition leaders had called on the crowd in front of the parliament to disperse and join the official demonstration in front of the government building.”

Conspiracy or cock up?

The outbreak of violence was so unexpected and unusual for Moldova that it has given rise to a host of conspiracy theories. According to Morar and other opposition activists, there were police provocateurs among the crowd, who incited and organized the violence with the aim of discrediting the democratic opposition. Many neutral observers also report that there emerged unidentified micro-leaders in the crowd giving instructions how to act.

The Voronin administration has its competing conspiracy theory: that the protests were engineered by Romanian agents with the aim of destabilizing Moldova and initiating reunification of the two countries. The government points to the fact that the protestors hung out a flag of Greater Romania on the parliament, which, it should be noted, encompasses not only Moldava, referred to by Romanians as Bessarabia, but also Ukraine’s Bukovina region around Czernowitz, which belonged to Romania before the war.

The Kremlin also has its conspiracy theory: that it was an attempt at a US-inspired “coloured revolution”, with Morar and Hyde Park playing the role of youth organizations like Ukraine’s Pora and Serbia Upor.

However, while it is perfectly possible that all three conspiracy theories have an element of truth, taken on balance, the cock-up theory is preferable.

The first major cock-up related to Moldova’s non-existent crowd policing. Before the violence started, observers report that protecting the parliament building from tens of thousands of demonstrators stood a thin blue line of sometimes not more than 10 local bobbies. This can be attributed to surprise at the numbers, but is also a result of the extremely negative international media response to police violence against demonstrators in Russia and Georgia in 2007-2008. In Tbilisi in April, there was a minimal police presence despite 50,000 demonstrators turning out.

Additionally, Moldova, Europe’s poorest country with no recent history of mass protests, seems simply to lack any trained and properly equipped riot police, just as it lacks tanks, luckily. Even after the protests turned violent and stones started to rain down on the police, reinforcements wore helmets mostly lacking visors, and carried non-transparent steel shields, greatly limiting their ability to defend themselves. This turned policemen into sitting ducks for stone throwers. Policemen were seen reduced to tears by the assault, where they weren’t masked in blood. Many simply ceased to offer resistance.

This also does not seem to have been feigned weakness to provoke an attack. This correspondent’s room in Chisinau looked directly on to the courtyard of the Interior Ministry, where in the days following the protests, hasty but fairly desultory attempts to train police on how to use seemingly new plexiglass riot shields could be seen.

The second major cock-up relates to the crowd. Activating young people via Internet and sms does not necessarily mean getting a crowd of peace-loving democratic Euro-youth together, as activists such as Morar might have hoped for. The most connected population group are the 14- to 20-year-old boys in computer-game and football-fan age, and these are also the most likely to have a go at under-equipped and outnumbered police on the first warm day of spring. A fair proportion of the protesters were minors. Add to this that Chisinau’s universities are all within walking distance of where the demonstrations took place; it was no coincidence that protests turned nasty when lessons ended at 1pm.

Moreover, this segment of the population is most prone to hold nationalist convictions as a surf through the chatrooms of the region shows. Nationalism in Moldova among the younger generation is Greater Romanian nationalism, dreaming at unification, and as such deeply anti-Communist, though not necessarily democratic. 120,000 young Romanians have already taken up Romania’s offer of dual citizenship. Add to this the desolate economic situation in Moldova – where many qualified young people are forced to take menial work abroad due to lack of chances home – and you have a very disaffected youth.

Morar, while alleging the presence of government provocateurs, also told bne that, organizing the protests, she and her friends crucially underestimated two factors – the unpredictable power of social networking technologies, and the political convictions of Moldovan youths. Now Morar’s groups are the inadvertent victims of the protests they triggered, but did not control. On April 15, Morar was placed under house arrest and is facing up to eight years in jail on charges of inciting mass riots.

Yushchenko least popular president in Ukrainian history

In opinion poll results comparing current popularity of incumbent Ukrainian president Viktor Yushchenko with his two predecessors in the post, Leonid Kuchma and Leonid Kravchuk, Yushchenko trails in 3rd place, according to the results of the Omnibus national monthly poll conducted amongst 1,200 respondents in March 2009 by the TNS Ukraine company.

A mere 7% of respondents named Yushchenko as Ukraine’s best president.

Despite Yushchenko’s having been swept into power in 2004 by the people power of the Orange Revolution, directed against the previous president Leonid Kuchma and his circle, some 39% said they now consider Kuchma the country’s best leader to date.

Another 21% named Leonid Kravchuk, Ukraine’s first president 1991-1994 the best, despite the complete economic collapse Ukraine experienced during his presidency.

Over one fourth of respondents (27%) were undecided and 6% refused to be polled.

INTERVIEW: Future still looks sweet for Astarta Kyiv

Graham Stack in Kyiv  for business new europe (www.businessneweurope.eu)

Viktor Ivanchyk, CEO, founder and co-owner of Warsaw-listed sugar producer Astarta Kyiv, one of Ukraine’s top-three agribusinesses, got advanced warning of the coming crisis in September direct from the Chinese leadership.

“We were attending the 2008 ‘New Champions’ forum in Tianjin, China,” he recalls, “and on September 27 Chinese Premier Wen Jiabao talked at the opening about the gravity of the crisis. Taking into account how cautious Chinese leaders are in their statements, we realized how serious things were becoming. On the same day we got back to Kyiv, we started our anti-crisis planning.”

This didn’t prevent Astarta announcing ambitious capital expenditure plans in October, which had to be slashed only weeks later. But the company was wise to decline an expensive tied loan in October, and instead took out a five-year $25m credit facility from the Netherlands development bank FMO, which Ivanchyk calls “a credit of confidence.” And Astarta was able to completely finance the processing of its sugar beet crop in the fourth quarter 2008.

Coping with the global financial crisis would be enough to handle, but 2009 had two further unpleasant surprises in store for Ukraine’s sugar industry. First came a surge in first-quarter gas prices after the gas conflict with Russia. Gas prices account for 15% of Astarta’s costs. Then the consequences of Ukraine’s fast-tracked WTO accession in 2008 came home: Ukraine’s government had agreed to very soft conditions, especially regarding sugar, conceding large quotas for import of raw cane sugar at mini 2% tariffs. As a result, Doomsday scenarios are now rife – local media are reporting that up to 50% of Ukraine’s sugar refineries could close in 2009, spelling an end to the sector that won Ukraine the sobriquet, “the sugar bowl of the Soviet Union.”

Sweet prospects

Despite these difficulties, of all Ukrainian companies that have IPO’d in recent years, Astarta Kyiv’s share price has held up best, according to a recent PBN report, with a drop of only 38.55%. But it’s not just Astarta: sunflower seed and oil producer Kernel Holding has also fallen by “only” 48.75%. These results compare favourably with the previously booming real estate and construction sector, where companies such as XXI Century Investments have had almost total share price collapses verging on 100%.

This is partly because investors see good chances for leading agribusinesses such as Astarta to act as consolidators in highly fragmented sectors. Ivanchyk prefers to emphasise organic growth, but admits that much of 2008’s 50% surge in production was down to the acquisition of the Narkevychi refinery in Western Ukraine. With sugar refineries shutting up shop as they lose access to funding, and sugar beet producers going out of business as raw cane sugar imports come on the market, it’s large integrated farming and refining operations like Astarta that will pick up the pieces.

Secondly, despite the short-term shock caused by WTO accession, Ivanchyk argues that trade liberalisation is the road ahead, giving Astarta the chance to expand its export business, especially grain exports. Sugar beet cultivation requires extensive crop rotation, meaning that Astarta is also a producer of grain and dairy products, and the company’s long-term strategy sees the non-sugar business accounting for 50% of revenues, and nearly 100% of foreign exchange revenues. “We haven’t yet felt the benefit of WTO accession,” he says.

Tellingly, instead of criticising the government for agreeing disadvantageous WTO terms, he lashes out at the decision in 2006 to impose restrictions on grain exports that lost producers foreign markets. He also attacks new protectionist EU restrictions on grain imports imposed in the autumn of 2008.

The third big potential gain could be the long-awaited end of the current moratorium on sales of agricultural land. Incredibly for a country with such agricultural potential as Ukraine, an investment-stifling populist moratorium on all land sales still holds sway, meaning that Astarta only leases its land. Despite government promises, a majority of deputies in the parliament continue to block the move “out of populist considerations,” laments Ivanchyk. “Political will is needed,” he says, “but it will not happen before the January 2010 elections. We expect it to go through immediately after.”

“Removing the moratorium will significantly increase both the attractiveness for agriculture for investors and also the efficiency of agriculture in Ukraine,” says Ivanchyk. Business, he says, is far more efficient when companies own the land directly and can also use the land as security to obtain funding. “It should have been done three-four years ago,” says Ivanchyk. “Because of this, Ukraine has missed out on hundreds of billions of dollars in investment that would have already changed the face of Ukrainian agriculture.”

Russia and Ukraine’s phony Gogol war

The rival celebrations of Nikolai Gogol’s 200th anniversary in Russia and in Ukraine seem to have missed the point. The current attempts by Ukrainian cultural nationalists to claim Gogol as one of their own are contradictory, especially since Ukrainian schoolchildren must read Gogol only in a Ukrainian translation. But equally, the boorish Russian rejection of Gogol’s Ukrainian roots ignores the heterogeneity at the heart of the Russian culture: not only was Gogol, who founded the modern Russian prose tradition, a Ukrainian, but his friend Alexander Pushkin, who fathered the modern poetic tradition, was the descendant of an African.

In his first incarnation, Gogol was the Ukrainian Walter Scott: fascinated by his native country’s former martial traditions, but politically—100 percent committed to the union with Russia.

The secret to understanding Nikolai Gogol’s relationship with Ukraine lies not in his home village of Sorochyntsi in the Poltava district, but a long way outside of both Ukraine and Russia, in Scotland, in a picturesque locality in the Borders region called Abbotsford.

It was here that in 1815 the “north British” writer Walter Scott wrote Waverly, the world’s first historical novel describing, in brilliant technicolor, the glorious but doomed 1745 uprising of the Scottish Highland clans against the Hanoverian dynasty in London. The novel succeeded where the uprising had failed – in rescuing the Gaelic culture of the Scottish highlands from the tip of a historical eraser. Scotland’s highlands and Western Isles were transformed from a despised mountain desert into one of Europe’s premiere tourist attractions – arguably the site where modern tourism was born. From the Urals to the Atlantic, Scott’s potboiler – written to pull its author out of bankruptcy – was the first commercial bestseller – the Da Vinci Code of the early 19th century.

The Russian Empire fell as much under the spell of the “Scottish enchanter” as the rest of Europe, and his influence shaped a generation of writers. Derring-do, historical drama and battlefield action ceased to be the preserve of poetry and painting, and became subjects that a novel (until then, largely an epistolary form for female edification) could handle just as well, if not better.

When writing his Ukrainian masterpiece Taras Bulba, Gogol was thus inspired less by the Ukrainian folk culture than by this new Scott-induced craze for the romantic past and the historical novel sweeping across fashionable Europe. Taras Bulba slotted in perfectly. It bears witness not so much to Gogol’s Ukrainian roots, as to his European consciousness.

But this is not to say that both Gogol and Scott were apolitical. The opposite is true. Scott’s politics were Gogol’s politics: unionist. Unionist politics are evident in the very structure of the “historical novel” a la Scott and Gogol. The antiquarian interest in history the writers demonstrate focuses on the color and exoticism of the past as such – as having passed. Gogol’s love of the Cossack tradition had the same register as Scott’s fascination with the Highlanders – a stirring evocation of something splendid gone forever.

Scott’s and Gogol’s politics were the very opposite of nascent nationalism. Their politics was committed to the irrevocable union of their native countries, Scotland and Ukraine respectively, with their larger neighbors, England and Russia. Indeed, Scott was so stalwartly a “unionist” figure that no eyebrows were raised when in the Scottish capital of Edinburgh, the second city of the British Empire, a hulking great memorial was erected in his honor in 1846 – shortly after the 1844 Irish famine had once more made nationalism a potent threat to Britain.

Likewise Gogol, far from being a visionary precursor of Ukrainian nationalism, would have been its antagonist. The second version of the novel Gogol published in 1844, with a pro-Russian slant missing in the original, only makes explicit this position.

Russians like to use this fact to prove that the great writer had more in common with Russia than with Ukraine. This boorish Russian rejection of Gogol’s Ukrainian roots is epitomized for the Ukrainians by former the Gazprom head, prime minister, and now Russia’s ambassador to Ukraine Viktor Chernomyrdin. In a recent interview to a Ukrainian glossy, Chernomyrdin slated Ukrainian cultural politics, thereby demonstrating profound ignorance of the issue. “For instance, let’s take the case of a student here who decides to read the recent Ukrainian translation of Gogol’s Taras Bulba,” said Chernomyrdin. “What does he discover? In this so-called ‘translation’ all mentions of Rus are omitted. And the student will really believe that this is what Gogol wrote. But Nikolai Vasilevich did not write this. He couldn’t have written it. This is the result of ‘diplomatic’ translations – it’s a disgrace.”

In saying this, Chernomyrdin simply appears to be unaware of the fact that there was a first version of Taras Bulba. In the first version, the Russian national theme, so strong in the second, is almost absent, and Gogol’s celebration of Cossack derring-do takes pride of place. And whereas in the second, the hero Taras Bulba is burnt alive by the Poles, with a vision of a Russian ruler coming who will set wrongs to right, in the first version he lives to fight another day. “Our favorite ambassador yet again wanted only the best,” said Vasil Shlyar, a translator and well-known Ukrainian writer. “But the main thing is that Gogol [who famously burnt his sequel to the classic Dead Souls shortly before his death] never burned the first edition of Taras Bulba. Nor did the first edition burn Taras Bulba himself.”

Moldovan elections to strengthen Euro-communism in one country

Graham Stack for Russia Profile (www.russiaprofile.org)

Analysts Say That the EU Will Push Ahead with Europeanizing Moldova in Partnership with the Ruling Communists

Moldova might be “Europe’s poorest country,” but it is rich in anomalies. The parliamentary elections held there on April 5 only added to these. It all went off a little too smoothly in the end. President Vladimir Voronin’s ruling Communist Party took just under 50 percent of the popular vote, but won just over the necessary number of seats in the parliament (61 out of 110) to ensure that the Communists will name the next president. Voronin is due to step down after the two terms in office stipulated by the constitution.

The Organization for Security and Cooperation in Europe (OSCE), while noting skewed media coverage, confirmed the results. “I am delighted with the progress of democracy in Moldova. These elections were very good, and they gave me great confidence in the future of this country,” said Petros Efthymiou, the head of the delegation of the OSCE Parliamentary Assembly and a special coordinator of the OSCE short-term observers.

The results roughly dovetailed with the exit polls, but the number of mandates was marginally more than predicted, meaning that the results could have been fiddled with to ensure a sufficient number of seats to elect the president. Moldova’s constitution is a unique mix of parliamentary and presidential – the president is elected by the Parliament in a secret ballot, with up to two rounds of voting. However, in other respects it is a presidential republic, with the president appointing the prime minister, and the executive branch separate from legislative one. The president also determines foreign policy.

The parliamentary elections were thus also de facto presidential elections. Since the incumbent president Vladimir Voronin, by far the most dominant figure in Moldovan politics, has to step down after two terms, a lot rested on the outcome of these elections.

Voronin has openly stated that he would pursue a Den Xiaoping outcome, allowing him to continue to determine the country’s trajectory while not holding the highest office. This lent the Communist Party a powerful motive to force through an unchallengeable electoral result, similar to that achieved by United Russia in the 2007 Duma elections in Russia, intended as a future power base for then President Vladimir Putin.

“The elections of 2009 were neither free nor fair,” said Igor Munteanu, the director of Chisinau’s Institute for Development and Social Initiatives. “The reason is that the ruling party has acquired almost unlimited resources to influence and advocate its interests. With no counterbalance force from the judiciary, and with the main opposition parties largely fixed into internecine wars, these elections provided a textbook study on how to not conduct elections, rather than following the general standards of the OSCE/CoE.”

Sixty-eight year old Voronin is unlikely to seek the post of prime minister, however. Munteanu believes that Voronin will most probably remain in the Parliament, meaning that the whole construction of his party will change, with the focus of the “vertical of power” shifting elsewhere and “leaving the presidency more as a decorative institution.”

The exact identity of the Communists’ candidate for the presidency is still a mystery. “Since he [Voronin] personally tried to reduce the chances of any potential rival/candidate inside of the ruling Communist Party, all candidates that were suggested by the media were met with criticism or ostracism from the presidential office,” said Munteanu.

Marian Lupu, the former speaker of the Parliament, is one person often mentioned as a possible next president. While apparently loyal to Voronin and a disciplined member of the party, he had in the past even spoken out in favor of future NATO membership for Moldova. “Voronin will look for a less intelligent and more faithful figure to occupy the presidential seat, which he will keep under control while taking the office of the parliamentary speaker,” said Sergiu Panainte, a project coordinator at the Soros Foundation Romania.

Moldova is not only anomalous in terms of its constitution and its geography (it counts as a Black Sea littoral state although it is landlocked). It is also one of the few countries to be both attempting to reintegrate a secessionist region — the tiny self-proclaimed Transdnestr republic–while staving off attempts to be absorbed by the neighboring big brother Romania, with which it shares history and language.

Its foreign policy is equally anomalous: in the 1990s, Moldova strove to reunify with Russia within the Russia-Belarus union, until Russia’s refusal to play ball caused the same Communist Party to make a smooth shift in 2005, and aim at EU membership and cooperation with NATO instead. Experts see the elections as having paradoxically strengthened the Communists in negotiations with the EU, and thus given new impulses to Moldova’s integration with the union.

Independent political analyst Ion Marandici said that “the Moldovan Communists have declared very often that their goal is to join the European Union. That is why, paradoxically, they will go on with the economic reforms while continuing to infringe on media freedom, freedom of expression and more generally on human rights, in order to combat their political competitors.”

Marandici sees the elections as having strengthened Moldova’s hand in negotiations with the EU. “The victory of the Communist Party will force the EU to regard the Moldovan Communists not merely as a historical accident, but as legitimate representatives of the Moldovan voters,” he said. “The EU dealt carefully and decided to keep some checks on the Communist elite before elections, and indirectly conditioned the signing of the Enhanced Agreement [the document replacing the expired Partnership and Cooperation Agreement] with the conduct of free and fair parliamentary elections.”

With the OSCE observers having declared the elections free and to a certain extent fair, the EU will now have to continue its negotiations with the Communist Party, believes Marandici. “That is why probably in the near future, we will witness the signing of an Enhanced Agreement between the EU and Moldova that would envisage the status of an ‘associated member’,” he said. “The European soft power approach succeeded in Europeanizing the Moldovan communists.

Unfortunately, it failed to delete some of their Soviet-era habits and parts of their biography. These are simply incompatible with European values.” Igor Munteanu, however, believes that this core incompatibility will limit EU openness to Moldova. “The election of Communists has clear implications for EU’s offer to Moldova. Since their rule is not equivalent to democratic rule, Moldova will be met with open suspicion and mistrust, which could further encourage its leadership to seek ‘consolation’ in a tango with Russia.”

But in view of disappointment with the results of the “colored revolutions” in Serbia, Georgia, Ukraine and Kyrgyzstan, the year 2008 seems to have seen a shift in European thinking regarding the feasibility of revolutionary change in what are very weak and fragile states. In 2008, the EU even started talking to and opening doors for “Europe’s Last Dictatorship,” Belarus, next to which Moldova looks much more democratic. Instead of a U.S.-sponsored regime change, the new European strategy seems to be to persuade existing undemocratic regimes to change their ways peacefully, using the positive incentive of increasing integration with Europe.

In fact, this is not really anything new. In neighboring Romania, most of the work in getting the country ready for NATO and the EU was done in the 1990s by the Party of Democratic Socialism (PSD) under President Ion Iliescu – direct heirs of the notoriously repressive Ceausescu Communist dictatorship, in comparison to which Alexander Lukashenko’s Belarus is a shining example of democracy.

Kudrin and Aven sound the alarm on banks

President of Alfa Bank Pyotr Aven yesterday March 26 said the level of overdue loans in the Russian financial system in 2009 could reach 15-20%, and that hundreds of banks could disappear. Deputy Prime Minister Aleksei Kudrin  in separate comments put the current level of non-performing levels at already 10%.

“We can expect that the level of overdue loans for the whole system might reach 15-20 per cent” by the end of the year, Aven told the Financial Times March 26.

“Maybe the 20-30 biggest banks, including Alfa, will receive state support – we’re sure. But the future of hundreds of small banks is under big question … we believe that hundreds of banks will disappear by the end of the year,” the FT quotes Aven as saying.

Royal Bank of Scotland’s emerging market analyst Tim Ash says Aven’s comments meanthat, “we are still far from convinced that we are anywhere near the end of the adjustment process in the bigger picture credit crunch/global de-leveraging/de-globalisation process.” “We would expect a similar feed through from the real economy slowdown to banks/public finances across the CEEMEA region,” adds Ash.

Deputy Prime Minister Alexei Kudrin recently warned that non-performing loans would constitute the ‘third wave’ of the financial crisis in Russia. Yesterday Interfax reported that during a meeting with bankers Kudrin estimated the ‘real’ level of NPLs in the banking system at close to 10%. Although as of end of February, ‘official’ NPLs stood at only 3.4%, Kudrin attributed the difference to banks’ unwillingness to recognise all bad debts as such,including debts subject to restructuring.

According to the newswire, he suggested that such a level of overdue loans might provoke the situation in the sector to deteriorate further in
the near future.

VTB Capital’s Dmitry Dmitriev writes, “we believe Kudrin’s estimate to be realistic if restructured loans are also included in the overdue numbers (which they are not in the CBR’ statistics). Nevertheless, we believe that the official data will converge with Kudrin’s assessment and are reiterating our forecast of 10% NPLs in 2009 and 14% in 2010.”

Alfa president Aven, in his comments to the FT, criticised the Russian central bank for keeping refinancing rates high at 15 to 19 per cent. He said this forced commercial banks to lend on at even higher rates of 25 per cent, making loans expensive.

Aven anticipated bankruptcies hitting the banking system in the third quarter 2009, when loans start to fall due. Aven also anticipated serious changes in the ownership of industrial groups. “When we are at the bottom we shall see some very serious bankruptcies,” the FT quotes him as saying.

EBRD head calls for European solidarity with Ukraine

In a speech given by European Bank of Reconstruction and Development (EBRD) President Thomas Mirow at the London School of Economics, 10 March, Mirow called on European solidarity for Ukraine to prevent it turning into a “no man’s land”. Specifically he said West European states should not restrict their domestic banks from using financial support they receive to assist subsidiaries in Eastern Europe.

Mirow called Ukraine EBRD’s “biggest concern,” where “an inherently instable political situation only exacerbates a grave economic situation.” The ERBRD president called on Ukrainian decision-makers “to honour their commitments” saying the problem was “not only about much-needed finance, but also about restoring trust in the country.”

He said however he was encouraged by the recent declarations of unity among Ukrainian politicians, the appointment of a new vice prime minister in charge of crisis management and the imminent return to Kiev of an IMF delegation.

Mirow argued Ukraine was “a test case for international solidarity,” and called for West European states to allow funds channelled to their domestic banks to also flow to their subsidiaries in Eastern Europe.

“As a signal of European solidarity but also of economic sense we endorse the view taken at last week’s EU Summit that in providing support to their own banks, west European countries must not prevent those funds being used to help their subsidiaries in eastern Europe,” Mirow said.

“The stability of Ukraine is of crucial importance for the future of all Europe. Many scholars hold that the modern name Ukraine is derived from “ukraina” in the sense of “borderland, frontier region”. We must not allow it to become a no-man’s land,” he concluded.

Graham Stack for business new europe (www.businessneweurope.eu)

Ukraine moves towards IMF agreement

After signing a joint declaration to the Fund together with the president and central bank governor last week, Ukraine’s government yesterday March 12 made further steps towards renewing the IMF’s $16.5bn lending Program, according to Interfax. Deputy PM Hryhoriy Nemyrya said it was very likely the IMF would approve disbursement of the second loan tranche to Ukraine by the end of March.

Nemyrya said yesterday following a meeting between President Viktor Yushchenko, Prime Minister Yulia Tymoshenko, National Bank of Ukraine (NBU) head Volodymyr Stelmakh, and Verkhovna Rada Speaker Volodymyr Lyvtyn that the government made several decisions to ensure the independence of the NBU, make changes to the state’s bank recapitalization program and cancel contentious articles in the state budget law for 2009. He said the measures made disbursement of the second tranche of the IMF stand-by credit attainable by the end of March.

Regarding central bank independence, NBU Deputy Head Anatoliy Shapovalov said amendments to a government decree introduced yesterday meant that the Bank was no longer required to coordinate disbursement of refinancing loans with the government, though it would continue to report on its refinancing decisions.

Regarding the deficit, IMF Resident Representative in Ukraine Max Alier said the Fund and Ukrainian authorities reached an “understanding” with respect to the budget deficit. He did not provide any numbers, but mentioned ageement on an “acceptable and adequate level.” Alier alluded to decreased government spending, and sources report the government and IMF agreed to a 3% deficit, according to Galt & Taggart.

Dragon Capital’s Olena Bilan likewise expects the IMF to agree to a deficit of 1-2% of GDP net of bank rehabilitation costs, “or even higher if Ukraine makes the revenue target more realistic in view of the ongoing economic decline and succeeds in securing non-inflationary financing on top of IMF aid.”

The Cabinet meeting was held with the presence of IMF and World Bank representatives, who confirmed that the decisions made at the meeting complied with the IMF agreement.

The Cabinet also approved the budget of Naftogaz Ukraine with a surplus, which may signal that the Cabinet has also approved increased tariffs for natural gas supplies to households, according to Alfa’s Denis Shauruk.

“Nemyrya’s involvement and cooperative rhetoric, as well as wide agreement among key domestic figures, point to an improvement in Ukraine-IMF collaboration in the near future” says Galt & Taggart analyst Danylo Spolsky.

Further negotiations will probably center on budget parameters and ways to reduce budget expenditures without hurting the most vulnerable social groups, according to Dragon’s Bilan.

Graham Stack for business new europe (www.businessneweurope.eu)

Hungary and Russia sign off on cheaper South Stream

Gazprom chief Alexei Miller and Janos Eros, president of the Hungarian Development Bank, yesterday March 11 signed a deal to create a joint venture to build Hungary’s section of the South Stream gas pipeline by 2015. According to the Russians, the estimated cost of the project has fallen over half to 10bn euros, and the pipelines projected capacity has increased.

South Stream is a joint project of Gazprom with Italy’s Eni to pipe Russian gas to Italy and Austria through countries including Hungary, Serbia and Greece.

The Russians reported improved parameters for the pipeline. Russian Prime Minister Vladimir Putin, attending the signing ceremony, stated that due to lower materials and services prices, the cost of building the South Stream pipeline is expected to fall to about 10bn euros compared to the previous estimates of 25bn euros, according to Interfax.

Gazprom CEO Alexei Miller also announced that total transportation capacities of the pipeline could be higher than previously estimated, with the Hungarian section alone could pump up to 10 bcmpa.

Hungary’s Prime Minister Ferenc Gyurcsany was also present. Gyurcsany said the deal would help his country improve its energy security. Hungary currently receives all its gas through Ukraine, and was directly affected by January’s cutoff of supplies in connection with the Russia-Ukraine gas dispute.

“Hungary is not interested in there being one gas pipeline or one oil pipeline,” he said. “Hungary is interested in having as many pipelines as possible.”

Gyurcsany also said the South Stream project should not be considered a rival to the US-sponsored Nabucco pipeline, intended to pipe gas from Azerbaijan and the Caspian basin to Europe. He argued Budapest would benefit from transit fees from both pipelines.

The deal also includes Gazprom and Hungary’s oil and gas giant MOL building a large underground gas storage facility in Hungary for 1bn cubic meters of gas. Gyurcsany said existing such facilities helped Hungary cope with the gas shortages resulting from January’s dispute between Russia and Ukraine, according to Itar Tass.

The South Stream pipeline will bypass Ukraine and directly link Russia and Central and Western Europe. The pipeline will run beneath the Black Sea to the Bulgarian coast and then split into two branches – one heading South to Italy and one going North to Austria with a total combined capacity of 31-47 bcmpa.

Gazprom has already signed intergovernmental agreements with Bulgaria, Greece, Serbia and Hungary and negotiations with Slovenia and Austria are on schedule.

According to UralSib’s Victor Mishnyakov , “questions remain. We welcome Gazprom’s intention to diversify gas routes and increase its presence in the key European market. We regard this news as positive from a strategic perspective but neutral at the moment, as many questions remains unanswered.”

“In particular,” says Mishnyakov, “the Southern regions of Russia do not have sufficient gas deposits to supply the South Stream and the high-sulfur Central Asian gas would need to be treated before being transported. We also doubt that the current macroeconomic environment makes the project economically viable and do not believe that it will be built by 2015, as originally planned.”

Alfa’s Ron Smith is also downbeat about South Stream prospect: “We are still less-than-certain that South Stream will ever be completed. It is not clear that there will be enough European demand for Russian gas to justify the additional route, especially if Russia’s relations with Ukraine eventually quiet down.”

However, Russia’s PM Vladimir Putin had a quick response to doubters yesterday, according to Moscow Times. “If we aren’t able to build South Stream, which I doubt,” said Putin, “we’ll liquefy our gas and sell it to you for more.”

Ukraine’s government starts to implement IMF conditions

Deputy Prime Minister Hryhoriy Nemyria  announced that Ukraine’s government has approved all decisions required by the International Monetary Fund (IMF) prior to disbursement of the second tranche of a $16.5bn stand-by credit. Russian Finance Minister Alexei Kudrin is also considering Ukraine’s request for a $5bn loan.

“I would like to note that due to constructive cooperation between all of the components of the process today at a meeting of the government, we took an agreed decision, which we think will allow us in the near future to achieve practical results regarding the return of the IMF mission, and after some time, [allow the IMF] to make a decision to provide the second tranche of the loan,” Nemyria said at a briefing in Kyiv on Wednesday, March 11, according to Interfax Ukraine.

Nemyria also said that “a number of important decisions” were made at the meeting of the government to ensure the independence of the National Bank of Ukraine (NBU).

Nemyria said a number of other issues had been resolved in a way acceptable to the IMF: amending a resolution of the Cabinet of Ministers and the NBU on bankrefinancing; amending a government resolution on the issue of the state participation in bank capitalization; canceling Articles 84 and 86 of the Law of Ukraine on the 2009 national budget.

The Association of Ukrainian Banks today cited Steen Edzerskov, the advisor for the NBU from the IMF, as saying the IMF wanted Ukraine “to simplify the procedure of receiving of refinancing by banks and removal of subjective factors in decision making on refinancing of banks.” This refers to abolishing the present requirement for case-by-case government consent for NBU refinancing of banks.

Resident IMF representative Max Alier, yesterday told Troika Dialog analysts that the IMF had agreed to soften the budget deficit target criteria from its previous zero deficit less bank recapitalization costs, according to Troika. However, no specific number was mentioned.

The IMF had previously said it would soften its stance on the deficit if Ukraine could find non-inflationary ways of financing it, such as loans from foreign countries. This week Russian finance officials confirmed that Ukraine had officially requested a $5bn loan. Russian finance minister Alexei Kudrin said yesterday March 10 that he was considering the request.

Such a loan is however likely to be politically very divisive. President Viktor Yuschenko has compared Prime Minister Yulia Tymoshenko’s negotiations with Russia for a $5 billion loan with the Molotov-Ribbentrop Pact between Nazi Germany and the Soviet Union in 1939.

Leading political forces – the Prime Minister, the President, the speaker, the governor of the NBU and the opposition leader – are set to meet today as part of the necessary process in acquiring the second tranche of the IMF loan. The previous letter – drafted after similar meetings – was considered by IMF officials and returned to the authors with relevant remarks.

“One of the IMF’s main concerns is the restored independence of the central bank as well as a realistic forecast for the state budget deficit and sources of its financing,” says Alfa Bank’s Denis Shauruk, adding, “we expect all disputed issues to be addressed by the end of March.”