Ukraine’s new foreign minister Poroshenko “will not oversee” EU free trade negotiations

Graham Stack, Berlin / Kyiv

According to Ukraine’s ambassador to Germany, Natalia Zarudna, new foreign minister Petro Poroshenko will not oversee trade negotiations with the EU, despite being tasked by President Viktor Yushchenko with achieving an associate membership agreement with the EU as soon as possible.

“Petro Poroshenko will not oversee negotiations on the free trade part of the Ukraine-EU associate membership agreement,” Zarudna told this correspondent in an interview. “This will be done separately by ministry trade experts, with Poroshenko overseeing only the political component of the agreement.”

Zarudna says this rules out any conflict of interest with Poroshenko’s business dealings: Poroshenko is not only a close associate of President Viktor Yushchenko and political high-flyer. He is also a top businessman, and his assets are held to include Ukraine’s second largest car producer Bohdan Corporation, although he does not officially acknowledge ownership of the car maker.

“Poroshenko may be a shareholder in Bohdan, but he is not involved in operational control of the company, since this would contradict Ukrainian legislation,” explains Zarudna.

The issue is pertinent, because Bohdan Corporation is one of the principle victims of Ukraine’s economic crisis, with its revenues down 87.4% in the first half of 2009, and losses totaling $27.1m.  Analysts are questioning whether the company can continue servicing its debt, after having come close to default in August.

In an interview with this correspondent earlier in the year, Bohdan Corporation CEO Oleg Svinarchuk demanded a government U-turn on trade policy, with a shift from free trade to protectionist tariffs to save Ukraine’s car industry. Svinarchuk also bitterly criticized the terms of Ukraine’s accession to the World Trade Organisation.

This indicates Poroshenko’s ties to Bohdan Corporation could clash with his duties as foreign minister – in particular concerning trade negotiations, where higher import tariffs on cars would directly benefit Bohdan Corporation.

There are already signs Poroshenko’s appointment will benefit the company. Immediately following his appointment, the government announced a raft of measures to help Poroshenko’s automotive holdings. Prime Minister Yulia Tymoshenko called Bohdan “a strategic partner in bus production,” and announced a government order for 750 school buses worth UAH 150m, and orders for Euro 2012. There is also talk of a government credit line to modernize bus production facilities, according to sources at Bohdan.

Tymoshenko’s generosity contrasts with previous animosity between herself and Poroshenko, whom she openly accused of corruption in 2005, days before Yushchenko ended her first spell as prime minister. However, considering that votes from Tymoshenko’s party Bloc Yulia Tymoshenko were crucial for Poroshenko’s confirmation by Ukraine’s parliament, the Rada, it is likely that some wider deal is in place, believes Yelena Biberman, Ukraine foreign policy expert at Brown University.

“It could involve Poroshenko buying into Tymoshenko’s more pro-Russian foreign policy line,” says Biberman. Biberman points out that among Poroshenko’s first actions as foreign minister was to reject US radars in Ukraine as part of the US anti-missile defence system. Poroshenko said such plans, aired by U.S. Deputy Defense Secretary Alexander Vershbow, would “contradict the constitution.”

According to Zarudna, however, Poroshenko’s appointment does not signify any shift in Ukraine’s foreign pro-NATO policy. “But because of the crisis, foreign policy may be temporarily more oriented to trade and aid,” she concedes.

Meanwhile, the foreign ministry itself is pinning its hopes on Poroshenko to secure more budget funds. “The foreign ministry suffered disproportionately from budget cuts in 2008, compared to ministries more loyal to the prime minister,” complains Zarudna. “We think that Poroshenko will use his ‘special diplomatic skills’ to get more funds for the ministry.”

According to Zarudna, Ukraine’s foreign representations have had funding cut to 40% of 2008, with budget funding down 20% and hryvnia devaluation doing the rest. “We are being inventive and attracting sponsors to help with our functions,” Zarudna says.

Erste Bank Ukraine’s first bank to admit to double digit bad loans

Erste Bank has become the first of Ukraine’s banks to officially acknowledge that its bad loans are in the double digits, declaring 10% of the gross loan portfolio to be non-performing at the end of the second quarter. However, the bank claims the figure is actually well below the true market average, and more a sign of the bank’s strength than weakness.

“We do not do window dressing. Honesty is the best policy,” Jozef Sikela, the 42-year-old CEO of Erste Bank Ukraine, Austria’s Erste Bank subsidiary and 22nd largest bank in the country, tells bne in an interview. “The result is considerably healthier than the real market average.”

Sikela declines to provide a figure for the sector as a whole. National Bank of Ukraine (NBU) statistics hold that the level of non-performing loans (NPL) stood at 4.9% as of June 1, but the consensus is the real level is nearer 15-20%. Ukrainian banks have developed numerous ways of jiggering the NPL figures they publish – by extending or rolling over loans that are obviously non-performing – and thus avoiding mandatory requirements to create provisions for loan losses.

According to Sikela, Erste in fact ran a far more conservative lending strategy than most other Ukrainian banks, especially locally-owned banks. Sikela accuses Ukrainian-owned banks of inadequate risk management during the last few years’ lending splurge. “Ukrainian-owned banks were lending in a specifically flexible manner in comparison to international banking groups like Erste,” he says. “Our customers were complaining of how conservative our lending policy was one year ago, now they are entrusting their deposits to us.”

Sikela says Erste never entered the consumer loan market, and almost all its loans are collateralized with tangible assets. As such, he expects international banks like Erste – which constitute around 50% of the banking system – to dominate in post-crisis Ukraine, while local banks will wither away. “The system will remain loss-making for the time being, and only foreign-owned banks will be able to access the resources to continue functioning.”

Staying the course

Sikela’s comments indicate the bank will get the supports it needs from the parent group. Indeed, CEO of the parent Erste Bank Group, Andreas Treichl, told bne in Vienna following the release of the bank’s second-quarter results at the end of July that while Ukraine is not a core market for his institution, in the long term he sees huge potential in the country and so there are absolutely no plans to pull out.

However, the NBU sees things differently. Erste Bank Ukraine posted a €31.9m loss for the first half of 2009, partly due to increased provisions for NPLs. The NBU now views all loss-making banks with great suspicion, and on July 22 issued regulations placing significant restrictions on their activities. Among other things, the regulator prohibited loss-making banks from paying bonuses, growing intangible assets and providing unsecured loans, steps that Sikela decries. “There are different reasons for losses, and different capacities to cope with them. You cannot treat large international banks the same as small local institutions with minimal possibility to inject new equity.” Sikela says the measures effectively freeze his bank’s development, stymieing IT investment and bonus-motivated projects.

Another major headache is pending populist legislation aimed at “protecting” mortgage borrowers against repossession. Erste was a leader in mortgage lending in Ukraine, “traditionally regarded as one of the safest forms of lending if done properly,” says Sikela. Mortgages account for round half of Erste’s retail portfolio, which in turn is two-thirds of its total loan portfolio. If the legislation goes through, critics fear the measure will encourage even solvent borrowers to suspend payment. “You can’t explain something like this to international shareholders,” warns Sikela, who adds that he is “very surprised” the International Monetary Fund (IMF) has been silent on the issue.

At stake is the larger issue of whether the Ukrainian authorities will exploit foreign banks’ continued loyalty to Ukraine rather than reciprocate it. This could crucially tip the scales when parent banks decide on whether to continue to support subsidiaries or withdraw altogether from Ukraine, as Dutch bank ING has done with its retail operations.

A Moody’s Investors Service report published on July 31 highlights potential rating implications for Raiffeisen, Erste, Societe Generale, UniCredit and KBC due to their Central and Eastern European commitments. In particular, according to the report, the “Austrian banking system is most exposed as Eastern Europe accounts for nearly half of that country’s global bank claims.” The report points to a possible vicious circle arising where “deteriorating financial strength of East European subsidiaries has a negative spillover effect on their West European parents,” which in turn reduces parents’ capacity to support subsidiaries, forcing them to choose which country subsidiaries to support and which to drop.

A report published on August 13 by Kyiv investment bank Sokrat argues that parent banks will continue to support their Ukrainian subisidiaries due to the amount of money already invested, the strengthening position relative to local competitors, and image damage for the parent bank should a subsidiary get into trouble.

A crucial factor in the equation will be the hryvnia exchange rate. Erste is typical of Ukrainian banks in having 70-80% of its credit portfolio denominated in foreign exchange, so the ongoing devaluation of the hryvnia should cause NPLs to soar further. This means that in Ukraine a second wave of the crisis resulting from bad assets is widely expected in the autumn.

For his part, Sikela doesn’t expect any second wave. “The country is still buried under the first wave,” he argues. “There are two major factors. Firstly, there is the ongoing credit crunch, there is basically zero lending going on, so no liquidity even for survival. Secondly, borrowers have to make repayments from their working capital, and will be unable to pay suppliers and workers.”

Vadim Grib sets up Ukraine’s first distressed fund

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

Vadim Grib’s TEKT investment group, with 14 years on the market one of Ukraine’s oldest, is marking the seismic downgrade of Ukraine’s economic reality by putting its asset management funds up for sale in August and switching its focus to a private equity fund for distressed assets, Ukraine’s first distressed asset fund.

While TEKT is not the first company to quit the moribund Ukrainian stock market, it’s the first to go the whole hog and open a private equity fund for distressed assets. “I’ve always been more interested in investing in specific projects rather than finance, and I focus on a company’s profitability instead of capitalization,” says Grib, chairman and owner of TEKT.

Grib is one of Ukraine’s most colourful and even controversial investment figures due to his track record of hostile takeovers. Speaking 11 years to the day from the Russian economic collapse of 1998, he recalls that, “the 1998 crash confirmed my approach – in 1994 I lost a lot of money in banks, and in 1998 I lost nothing, and made use of the chance to make some very profitable acquisitions. And this is what I intend to do now.”

Distressed and depressed

According to Grib, TEKT Private Equity Fund I is looking to take controlling stakes in distressed companies that are either crisis-proof or likely to respond quickest to the start of an economic recovery. “Our approach is very simple: we are mainly interested in companies with stable operating revenues, but crippled by a heavy debt burden,” he says. The surging amount of non-performing loans in Ukraine “opens significant opportunities for distressed assets funds. We can offer companies capital instead of debts.”

Grib is planning a small, but highly profitable, closed-end distressed assets fund. For each of the around 10 holdings, Grib specifies a minimal annualized return of 45% and a target of 100%. Grib says he generally exits projects within 18 months after a 150% annual return. TEKT will only buy controlling stakes in companies, with each deal in the region of €1.5m-8m. The fund’s target volume is UAH500m (€43m).

Grib’s distressed asset fund differs in crucial aspects from worldwide equivalents. In Ukraine, there is no legal framework for a key worldwide investment technique – buying companies’ debts off banks at a discount. On the other hand, loopholes in Ukraine’s legislation let TEKT pay out on exited projects immediately, without waiting for the fund to close after its four-year term expires. This fits with Grib’s project-focused approach. He says he prefers to talk with potential investors about projects rather than about the fund’s overall strategy and profit algorithm. “You just end up talking hot air about abstract concepts and philosophy when the crucial thing is implementation,” says Grib, who is not known for mincing his words. “In general, investors here know me and my reputation of at least 50% annualized returns.”

He also admits he is not particularly interested in foreign investors who will require detailed explication of the fund’s technology. “There are plenty of resources in Ukraine for investment, so foreign investors are not a priority at the moment.” Grib says it took him only one week to raise the fund’s UAH500m and that with only talking to 20% of the people on his list. “25% of the money is mine, and the rest belongs to private individual investors,” he says.

Grib lists companies that are niche monopolists as primary acquisition targets. “No land or real estate,” he says. “Also no agriculture – there is simply not the institutional framework.”

In contrast to most private equity funds, Grib’s fund will settle for nothing less than a controlling stake in any of the companies. “This has simply always been my philosophy never to trust anyone. Ukraine suffers from bad corporate governance, and without a controlling stake you will find your investment may be worthless.”

Ukraine’s media have often accused Grib of “raiding,” and indeed some list him as Ukraine’s number-one raider. Grib is having none of it. “One man’s investor is another man’s raider. I simply buy first, and then insist on my rights. Obviously in the case of a hostile takeover, it is easy for the losing side to cry ‘raider’, but I have never used blackmail or illicit methods.”

Did Biden meet with a murderer in Kiev?

Graham Stack in Kiev

Among the eternally quarreling Ukrainian politicians Joe Biden met during his visit to Kiev 20-22 July, one of the more pleasant interlocutors may have been speaker of parliament Volodomyr Litvin. Litvin’s ironic charm is a vital resource when bringing calm to Ukraine’s tumultuous and corrupt parliament, where fist fights are common place, and deputies openly conclude shady deals on their mobile phones during speeches. In a culture where looks are vital to political appeal, the 54 year old’s debonair features, coiffed silver hair and a past career as eminent scholar lend him sophistication lacking among the country’s notoriously unruly officials.

But for all his charisma, Litvin may be hiding a secret that could make Biden soon want to forget their meeting.

At exactly the same time as Litvin met Biden in Kiev on the afternoon of Tuesday July 22, security forces detained former police general Oleksiy Pukach, Ukraine’s most wanted man, in a village not far from the capital.

Pukach, in hiding since 2004, was in March 2005 found guilty in absentia of the brutal murder of journalist Heorhiy Gongadze, a journalist bitterly critical of former Ukrainian president Leonid Kuchma. Gongadze’s headless corpse was discovered in a shallow grave November 2000.

Three weeks later, a disgruntled presidential security officer produced audio recordings that implicated Kuchma and his then chief of staff directly in the murder. Kuchma’s chief of staff was none other than current parliamentary speaker Volodomy Litvin, at the time nicknamed ‘the grey cardinal’ of Ukrainian politics.

Litvin has understandably always denied the claims that he ordered the murder of Gongadze. However, investigators say he has refused to provide recorded voice samples needed to verify the authenticity of the recordings. And no one doubts that Pukach was acting on orders from above when carrying out the murder. With Pukach finally apprehended, everyone in Kiev is waiting for the next round of revelations.

They may not have long to wait. According to deputy head of Ukraine’s security service Vasyl Hrytsak, Pukach is singing like a nightingale after a long night of interrogation. “He has confessed to the murder and also confirmed the complicity of individual officials – there will be a lot of interesting information,” Hrytsak told the press. Hrytsak also said Pukach would lead investigators to the place where he buried Gongadze’s head.

Now the vultures are gathering around Litvin.

They may not have long to wait. According to deputy head of Ukraine¹s
security service Vasyl Hrytsak, Pukach is singing like a nightingale after a long night of interrogation. He has confessed to the murder and also confirmed the complicity of individual officials – there will be a lot of interesting information,” Hrytsak told the press. Hrytsak also said Pukach
would lead investigators to the place where he buried Gongadze¹s head.

Sources in the secret service were quoted today saying Pukach had named three former officials as having ordered the killing. One of these ‘occupies a very high position’, according to the sources, and one is dead. This would dovetail with the evidence contained in the tapes: with Litvin the high official, ex=president Kuchma the second still alive, and the deceased third man former interior minister Yuri Kravchenko, who shot himself after Kuchma lost power in 2004.

Ukraine’s President Viktor Yushchenko, himself the target of a near-fatal
and unsolved poisoning when he unseated Kuchma in 2004, confirmed “the public will soon learn very explosive things.” Yushchenko on taking office swore to find and prosecute Gongadze’s killers.

Litvin today accused Yushchenko of “politicising” the arrest of Puchak and the Gongadze murder.

Gongadze’s widow, 37 year old Miroslava, who has fought unceasingly to keep the memory of her husband alive, told the press, “there is every
reason for Leonid Kuchma to be afraid, and there is every reason for
Volodymyr Litvin to be afraid.”

The secret service has said that Puchak will take investigators to where he buried Gongadze’s head. That, together with justice for the men who ordered the murder, may finally bring her closure – nine years too late.

Litvin’s debonair cool may be in for its toughest challenge yet.

And US officials may take note just how deceptive appearances can be in Ukraine and other former Soviet countries.

Gongadze murderer could cause political earthquake in Ukraine

Graham Stack in Kiev

Ukraine’s Security Service deputy head Vasyl Hrytsak told a briefing that Oleksy Pukach, arrested July 21 for the murder of journalist Heorhiy Gongadze in 2000, has named the people who ordered the crime.

“[Oleksiy] Pukach has confirmed his complicity in that crime. He has also confirmed the complicity of individual officials – there will be a lot of interesting information,” Hrytsak said, according to Interfax.

President Viktor Yushchenko also said that “the public would learn very interesting things” following Pukach’s detainment.

Opponents have called the timing of the move to detain Pukach political. It turned out that Pukach had been living in a village near Kiev since 2005, and under secret service surveillance.

Gongadze, a fierce critic of former President Leonid Kuchma, disappeared in September 2000, and his headless corpse was found soon after. Tape recordings of conversations between Leonid Kuchma and top officials, including current parliamentary speaker Vladimir Litvin who met with US VP Joe Biden yesterday, indicated Kuchma’s displeasure with the journalist. Kuchma appeared to recommend Gongadze be “turned over to the Chechens.” The authenticity of the tapes, leaked by former head of Kuchma’s security detail Melnikov, has never been proven.

Gongadze’s murder and subsequent revelations played a key role in the development of democratic opposition to Kuchma, culminating in the Orange Revolution 2004.

Three former police officers have since been sentenced to 12 year prison sentences for the murders. They said they were operating under Pukach’s orders. Pukach went into hiding in 2005.

Cut the budget deficit and raise energy prices, Biden tells Ukraine

Graham Stack in Kyiv

In a speech in Kiev yesterday July 23, on the last of his Ukraine visit, US vice president Joe Biden told Ukraine to do exactly what the IMF says, and on two specific points: “The Fund requires that your government, and your government agreed to critical reforms to cut the budget deficit, revive a striving [sic*] banking system, and phase out energy subsidies, which I know from experience is a very difficult thing to do. Carrying out this agreement requires very hard choices and tough action, but it will help put you on the road to growth and competitiveness.”

Biden told Ukraine that, “moving toward market pricing for energy is brave, but also absolutely necessary pre-condition.”

Biden argued that shifting to market prices would strengthen Ukraine’s energy security. However, it also the Russian position that Ukraine must shift to market prices for gas.

If the US is resetting its relationship with Russia, it appears the US is also rethinking its relationship with Ukraine.

Biden as expected committed to Ukraine’s independence and sovereignty, and praised Ukraine’s democracy as the ‘the freest country in the region.” He emphasized however NATO or EU membership would be entirely Ukraine’s choice, and that the US would not push Ukraine to join. “The USA supports Ukraine’s deepening ties to NATO and to the European Union. But again, we recognize they are your decisions, your choices, not ours whether you choose the EU or seek to, or NATO. We recognize that how far and how fast to proceed on your choices is, again, a uniquely Ukrainian choice — it is not ours.”

Yesterday, Biden warned that the sustainability of Ukraine’s democracy was threatened by economic collapse and pervasive corruption.

“Mature democracies survive because they develop institutions such as a free press, a truly independent court system, an effective legislature – all of which serve as a check on the corruption that fuels the cynicism and limits growth in any country, including yours,” Biden said. Referring to Ukraine’s economic problems, Mr Biden asked: “Can you name me a place where democracy has flourished where the economic system has failed?”

He also harangued ruling politicians for their failure to work together. “Communications among leaders has broken down to such an extent that political posturing appears to prevent progress.”

Committing the US to respect for national sovereignty is a retreat from the neocon supremacist position, and, although delivered with an anti-Russian twist in the Georgian context, in facts coincides with longheld Russian and Chinese demands for the US to abide by international law.

Underlining the shift, Biden said the US was committed to a “multi-polar world” – an expression straight out of the Putin / Primakov phrasebook.

Ukraine’s poisoned president launches doomed bid for second term

Graham Stack in Kiev

Ukrainian president Viktor Yushchenko, the world’s most unpopular president according to opinion polls, climbed Ukraine’s highest mountain Sunday July 19 to prove his fitness for a second term in office. At the summit of Mount Hoverla (2016m) in the Carpathians, with a view westwards to the Europe he aspires to, Yushchenko announced officially that he would run for a second term in office in elections in January 2010.

“I would like to officially announce here that I will be running for the Ukrainian presidency in January,” he said.

A small band of supporters who had followed him to the peak in beautiful summer weather struggled with tears after his announcement. Opinion polls give Yushchenko an approval rating of only 2% – less than the margin of error – meaning he is facing utter humiliation in the elections. Pollsters point out that his rating constitutes a world record for unpopularity. His motorcade regularly encounters a hostile cacophony of blaring horns as it winds through Kiev streets.

Yushchenko’s record-breaking unpopularity is astonishing considering his initial approval rating of over 60% on taking office in January 2005. Yushchenko was swept to power by mass protests against electoral fraud in late 2004, known as the Orange Revolution. In the run-up to the rigged elections, opponents poisoned Yushchenko with dioxin. The images of his severe facial scarring that resulted have become an icon of people’s struggle for democracy.

The scarring, the medical term for which is chloracne, and facial immobility are still very obvious. The subtext of yesterday’s ascent of Hoverla was not only symbolic, but also simply to prove that the president is physically fit enough for high office in times of crisis.

Poisoned chalice

Leading international toxicologists familiar with the case argue however that the poison has massively impaired the president’s performance. They dispute Yuschenko’s claim that his body has got rid of 95% of what was one of the highest dioxin doses in humans ever recorded.

“My belief is that he will suffer many ill effects of dioxin for many years, including possible brain damage,” says dioxin expert University of Texas professor Arnold Schechter. “His chloracne not only affects the face, but the whole body – as every single follicle may be involved in severe cases as the one of president Yushchenko is,” agrees Vienna’s Alexandra Geusau.

Yuschenko has traditionally said little about the effects of the still unsolved poisoning, except to claim he is in good health. Last month, however, he admitted he had undergone 26 secret operations in the first two years of his presidency. “Nobody knew about the operations, because they were carried out at the weekend, on Friday evenings, and on Monday I was already back at work,” Yushchenko told journalists, adding that each operation lasted over three hours.

Toxicologists say Yushchenko’s out-of-touch performance in office is a direct result of the poisoning.

During the Orange Revolution, the poisoning added fuel to the popular fury at stolen elections. But according to Valery Khmelko, president of Kyiv International Institute of Sociology, “following the poisoning, Yushchenko became more interested in his presidential palaces, amateur history and bee-keeping than in running the country.” Crisis-hit Ukrainians see their president as out of touch with reality and incapable of exercising power.

British toxicologist Alastair Hay of Leeds University lists lethargy, enervation, numbness, liver damage and weakened immune system as medium-term consequences of dioxin poisoning

“Yuschenko’s behaviour is what you might expect from someone exposed to dioxin in the quantities he was,” says Hay. “The chloracne indicates he is genetically susceptible to dioxins, so he may have many systems of his body damaged. It must have taken an effort of will to continue in his high-octane job.”

Now, in a bitter irony of history, the clear favorite to win the upcoming elections is the man whom the Orange Revolution prevented seizing power in 2004, pro-Russian former Prime Minister Viktor Yanukovych.

A further bitter blow is the decision on the part of Barack Obama’s new US administration to send only the vice president to Ukraine, while Obama himself visited Moscow last week without any stop-over in Kiev. Yushchenko has staked everything on a pro-US foreign policy aiming at NATO membership, and Obama’s rapprochement policy with Moscow is making this look like a dead end.

Earlier this week, Yushchenko’s foreign policy spokesman said pointedly that the main topic of discussion with Biden would be to negotiate a visit to Kiev by Obama himself.

Say no to NATO, US experts tell Ukrainians

Graham Stack in Kyiv for Russia Profile

Following the Russian-U.S. reset, a new American policy institute has opened in Kiev to dissuade Ukraine from its bid to Join NATO. Its fellows argue that Ukrainian NATO membership would be bad for both the United States and Ukraine. But while their message is in tune with Ukrainian public opinion, they face an up-hill struggle convincing the foreign policy establishment in both countries.

“Ukraine’s NATO membership is not in Ukraine’s interests. Nor is it in U.S. interests. All that it will create is a nuclear trip wire at the heart of Europe,” argued Anthony Salvia, director of the American Institute in Ukraine (AIU), a non-commercial organization founded this year in Kiev, funded by U.S. citizens. “In Ukraine, U.S. opinion is often represented as being monolithically in favor of Ukraine’s future membership of NATO,” he added. “We’re here in Kiev to show this is definitely not the case.”

AIU is unique in being an American organization campaigning overseas against NATO expansion. “Other American organizations in Ukraine, many of which are funded by the U.S. government, actively promote Ukraine’s entry into NATO at the earliest possible date, despite the fact the majority of Ukraine’s population is opposed to NATO accession,” said Salvia, who served in Ronald Reagan’s White House.

The AIU is aligned, but not affiliated, with the Nixon Center, headed by legendary former U.S. Secretary of State Henry Kissinger, and which publishes the influential journal “National Interest”. In March 2009, the Nixon Center released a review of Russian-U.S. relations arguing that Ukrainian or Georgian NATO membership “could decrease rather than increase Europe’s overall security.” The review called for U.S. policy makers to “work closely with U.S. allies to develop options other than NATO membership to demonstrate a commitment to [Ukrainian and Georgian] sovereignty.”

“The U.S. should refrain from making promises to Ukraine it cannot honor, but which might embolden Ukraine to provoke a conflict. The Ukrainians should realize that the US will never fight Russia over Ukraine,” argued Doug Bando, senior analyst at the conservative Cato institute, and a recent AIU guest speaker in Kiev. The August 2008 Georgian war looms in the minds of all those warning against extending NATO deep into the unstable former Soviet Union. “Ukraine must learn to rely on its own resources for securing its sovereignty, and not to trust to U.S. promises,” said Bando.

“Ukrainian NATO membership, by ruining relations with Russia, would make Ukraine less secure than it is, not more. And it would also harm U.S. security, by ruining the chances for cooperation with Russia over vital issues such as Afghanistan, North Korea and Iran, all issues that the new administration has said it will prioritize,” agreed Salvia.

“There are other mechanisms available for strengthening Ukrainian security,” he added. “One is a new European security treaty, similar to that being proposed by Dmitry Medvedev. The other is for European Union membership. The Kremlin is basically open toward Ukraine’s future EU membership, especially if it is an alternative to Ukraine’s NATO membership”.

Reset in Action

The AIU is in fact part of a wider battle waged over the new U.S. administration’s Russia policy. U.S. President Barack Obama has famously called for “pressing the reset button” in Russian-U.S. relations, but he is advised on Russia by Zbigniew Brzezinski and Michael McFaul, both historic advocates of a tough line with Russia. “We hope Obama listens to a wider range of opinion,” said Salvia.

Underlining the potential of cooperation with Russia, on the other hand, last week’s Moscow summit between Obama and Russian President Dmitry Medvedev saw the Russians sensationally agree to the United States transiting weaponry through Russia to Afghanistan.

And equally sensationally, although little noticed in the West, Obama, speaking to Moscow students, said that NATO membership would require a majority of any country’s population to be in favor – which is not the case in Ukraine. He also said that America would not press any country to join the alliance.

Ukraine’s bid for NATO membership, and Russia’s adamant opposition to this, put the United States in a bind. Washington is unwilling to openly privilege Russian interests over Ukrainian. Changing the situation on the ground in Ukraine could help U.S. policy makers out of this dilemma, hopes the AIU.

It should also not be too hard, given that Ukraine public opinion is solidly anti-NATO. Polls have consistently shown support for joining NATO to hover at around only 20 percent of respondents, with over 50 percent against.

But at the other end of the scale, Ukraine’s powerful foreign policy bureaucracy has an entrenched ideological commitment to joining the military alliance, according to Yelena Biberman, a U.S. embassy policy specialist engaged in research on Ukraine’s foreign ministry.

“Foreign ministry officials are ideologically anti-Russian and nationalist to the extent that they may not always be able to objectively assess Ukraine’s real national interests,” said Biberman, who has interviewed many top foreign ministry officials. “They believe that Russia is inherently imperialistic and bent on regaining control over Ukraine as a step to rebuilding its empire, and NATO membership is the only way to stop this. Even for a new Ukrainian president, it will be very hard to change their perspective.”

This means that for AIU, it is work with opinion makers in the media that matters most. “We don’t engage in lobbying, but work exclusively in the public field holding conferences, talks and round table discussions,” said Salvia. “What we are trying to tell Ukrainians is simply that you can be pro-America and pro-European without having to want to join NATO.”

Ukraine prepares for EU exports with Europe’s largest poultry plant

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

Once Europe’s breadbasket, Ukraine is only now pulling its agriculture sector out of the post-Soviet slump. Its revival is being driven by brash exchange-listed companies introducing new technologies and management techniques, for whom the devaluation of Ukraine’s currency has opened up new opportunities both at home and abroad.

The swank glass and steel headquarters of Ukrainian agricultural concern MHP glitters in the sun, and stepping into the marble-paved foyer it seems you have entered a five-star hotel. And the premises are all the more impressive for the view they afford of the surrounding countryside on the outskirts of Kiyiv: MHP’s headquarters look on to an open-air museum park of Ukraine’s rural past, dotted with ancient windmills and carved wooden huts. “The windmills don’t belong to us,” jokes Yury Kosyuk, owner and CEO of MHP, and Ukraine’s 12th richest man, according to Korrespondent magazine. MHP has a 39% share of Ukraine’s commercially produced poultry market, and is building Europe’s biggest and most modern poultry facility. With the second stage completed, the $550m Myronivsky poultry plant has an annual output of more than 200,000 tonnes of meat.

An inspection team from the EU’s Directorate General for Health and Consumer Affairs wrapped up a visit to Ukraine on June 18 concerning the certification of Ukrainian poultry plants for export to the EU, including MHP’s facilities. The official report will be released in July, though the commission met with Ukraine’s agriculture minister, Yuriy Melnik, and the chairman of the Ukrainian Committee for Veterinary Medicine, Petro Verbitsky, to discuss some of the results. According to Verbitsky, the commission has only a few concerns, and those relate to Ukrainian legislation rather than the quality and security of poultry facilities. In particular, he noted the inconsistency between Ukrainian and EU standards on the frequency of internal product testing (which occurs every 10 days in Ukraine compared with every seven days in the EU). He also mentioned discrepancies with regard to entities issuing export quality certificates for poultry in both the EU and Ukraine. “If the EU commission confirms that Ukrainian poultry producers satisfy its quality requirements, we believe that the next step should be an agreement on import quotas and tariffs,” say analysts at investment bank Troika Dialog. “Overall, we consider the news to be neutral to positive for MHP. Although it generates positive sentiment, there is still a great deal of uncertainty regarding the commission’s final ruling on import quotas and tariffs, as well as its timing.”

Kosyuk says the preliminary feedback from the EU inspectors has been positive, but he still fears increased protectionism on the part of the EU. MHP’s poultry products would be highly competitive in Europe, due to the weak hryvnia and lower operational costs. Prices for poultry products in Europe average 30-40% more than Ukrainian prices. “If they don’t certify us, it will only be because of politics,” he sighs.

Spring chicken

41 years old, suave and fluent in English, Kosyuk is the opposite of the reactionary kolkhoz manager that has shaped large-scale Ukrainian agriculture until now. Kosyuk talks about “delivering high-quality protein” rather than farming chickens, and discusses finance as readily as crop planting. He is, however, consumed by a passion for agriculture and food-processing that has seen him build up a billion-dollar business in the course of 10 years, leading to a successful float on the London Stock Exchange in 2008 – only Ukraine’s second LSE listing and the first company from the agricultural sector. Ukraine now boasts three international-listed agriculture set-ups, with sugar makers Astarta Kiev and grain producer and trader Kernel listed on the Warsaw stock exchange. These three flag-bearers of capitalist Ukrainian agriculture share not only Western-style high corporate governance standards, but also a vertically integrated business model, from field to factory, that creates high efficiency and synergy effects.

MHP, for example, farms 180,000 hectares of land to ensure self-sufficiency and high quality in chicken feed. The fields are in close proximity to its poultry plants, cutting transport costs, and fertilized with chicken manure, protecting against soaring fertilizers prices. At the other end of the production line, MHP runs its own meat sales franchise selling its “Nasha Ryaba” branded products. The franchise sales 50% of its produce, and thus reduces price pressure from supermarket chains. “Companies in the West would love to have such a structure,” argues Kosyuk, “but it too late for most of them to set it up.”

In many ways, vertical integration has been thrust upon these companies due to the stagnation and legal uncertainty afflicting Ukraine’s massively inefficient agricultural sector. MHP’s motto, according to Kosyuk, is “if you want something done well, do it yourself.”

“Vertical integration was born of fear,” says Kosyuk. “We were afraid of market pressure from supermarkets, so we set up our own franchise. We were afraid of problems with egg suppliers, so we set up our own incubation plants. We were afraid of low grain quality for fodder, so we organized our own crop production.”

Furthermore, “Everything we do here is basically green field,” says Kosyuk. “Our factories would not look out of place in Denmark.”

Agriculture could lead Ukraine out of crisis

Agriculture is the only part of the Ukrainian economy to have registered growth (1.5%) in the first quarter of 2009, reflecting the extent to which it has been decoupled from the rest of the economy. Now, thanks to devaluation, both Ukraine agriculture exports as well as producers oriented to the domestic market are doing fine. For MHP, the loss of agricultural subsidies and protection due to Ukraine’s accession to the World Trade Organisation (WTO) accession has been at least partially offset by the devaluation and also the fact that in times of crisis consumers tend to buy cheaper chicken rather than pork or beef.

The long-term prognosis for meat consumption is also good. Ukraine currently lags 15% behind Russia in terms of meat consumption, not to mention Western Europe.

Institutionally, agriculture is still hindered by a ban on sales of agriculture land. This means that MHP has to administer around 150,000 individual leases for land plots averaging 1.5 hectares for an average period of 15 years. Kosyuk does not believe the moratorium on land sales will be lifted “within the next five years.”

At the other end of the spectrum, Ukraine’s accession to the WTO in 2008 meant that its agriculture sector is part of the global trade regime. Although Kosyuk publicly criticized the terms of Ukraine’s WTO accession in 2008 for being too soft and leaving Ukraine agriculture insufficient protection, he says he only did so on the part of the sector as a whole. MHP, he insists, has nothing to fear from international competition.

Post gas war, Ukraine’s gas market remains a can of worms

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

Ukraine’s Prime Minister Yulia Tymoshenko touted January’s gas agreements between Russia’s Gazprom and Ukraine’s main energy company Naftogaz Ukraine as creating transparency in the sector by eliminating the gas trader Rosukrenergo. But while Rosukrenergo has definitely exited, the Ukrainian gas market is a far as ever from transparency – and Naftogaz Ukraine is far from being the only provider of gas to industry.

“Naftogaz has cut off our gas since May 5th, the plant has completely stopped working,” a source close to management of Rivneazot, West Ukraine’s largest nitrogen fertilizer producer, told bne. “And the reason is the Prime Minister [Yulia Tymoshenko]’s personal feud against Dmitry Firtash. We have no debts to Naftogaz.”

Dmitry Firtash was the man who until January 2008, as co-owner of Swiss-registered gas trade Rosukrenergo, appeared to hold all the strings in Ukraine’s notoriously opaque gas industry. For this reason he was the personal bete noir of firebrand Prime minister Yulia Tymoshenko.

In 2008, she declared it her mission to eliminate Rosukrenergo, and all intermediaries in general, from the gas trade. She claimed to have achieved this in the gas agreement finally signed between Ukraine’s domestic energy operator Naftogaz and Gazprom in January 2009, ending a stand-off between Russia and Ukraine that saw gas supplies to Europe interrupted. The agreement stipulated that Gazprom would in the future sell gas directly to Naftogaz, with Naftogaz granted the status of monopolist gas importer for Ukraine.

In May, the conflict then took another twist, when Naftogaz cut gas supplies to three chemical companies owned by Firtash – Rivneazot, Crimean Soda Plant, and Crimean Titan. Supplies to the Crimean plants, but not to Rivneazot, were later restored. Naftogaz claimed the companies had run up debts for gas supplies, while the companies argued they were consuming gas they has purchased earlier.

Demonstrating how politicized Ukraine’s gas market has become, Naftogaz’ decision to restore supplies to Firtash’ Crimean companies led to the dismissal from the company of deputy CEO Vladmir Trikolich on May 25, according to media reports that were confirmed by Rivneazot. “Tymoshenko demanded his head for the decision,” said bne’s source.

The episode with Firtash’ companies goes to show that the elimination of Rosukrenergo may have increased government control over the gas sector in Ukraine, but it has not created the hoped-for transparency.

In fact, the move may have done exactly the opposite, thanks to the ongoing collapse in Ukrainian industry. Supplying gas to industrial customers is the only profitable part of Ukraine’s gas sector, with gas supplies to households and utilities tightly regulated by the state. So when Tymoshenko vowed to remove intermediaries, part of the idea was to improve Naftogaz’s hitherto disastrous financial position by giving the company a dominant position on the market for industrial customers.

But in times of crisis, having a state-run and budget-subsidized company supply energy to cash-strapped industrial customers has one huge disadvantage: any decision to cut off gas to a major industrial plant, because of debts, becomes a political decision taken at highest level, opening the door to populism, cronyism and corruption and cronyism. Government officials ultimately decide the fate of tens of thousands of workers, and of their oligarch employers.

According to Ukraine’s Centre of Energy Studies, industrial companies’, excluding utilities, payment discipline is at 86.1%, with total debts of $2bn.

So while Firtash’ chemical companies had their gas switched off for (alleged) debts of less than $1m, other oligarchs can run up substantially larger debts with apparent impunity, as seems to be the case with metallurgical giant Industrial Union of the Donbass (IUD), owned by oligarch’s Sergei Taruta and Vitaly Gaiduk. A letter leaked to business daily Kommersant-Ukraine June 10 showed that Naftogas’s deputy head Igor Didenko had directly ordered supplies to be continued to IUD plants, despite IUD having run up nearly $51m in debts.

N.B: Vitaly Gaiduk also just happens to be head of Tymoshenko’s advisory service, and Naftogaz head Oleg Dubinin, until moving to Naftogaz Ukraine in December 2007, was CEO of IUD-owned Dzherzinsky Metallurgical Combine. IUD is one of the most heavily indebted industrial groups, with an estimated $3bn total debt, of which $500m is still due in 2009.

Privat Group’s private gas supply

Privat Group, co-owned by billionaire Ihor Kolomoyskiy, is another oligarch structure for which Tymoshenko is said to have a soft spot for. In 20005, since she backed Privat in its attempt to take Nikopol Ferroalloy Plant from Viktor Pinchuk in scandal that led to her first exit from government.

Privat is also, via Ukrnafta, Ukraine’s largest oil and gas producer, owner of a large stockpile of gas estimated at being from 3bn to 10bn cubic meteres held in underground storage. Ukrnafta. While the state in fact holds a 51% stake in Ukrnafta, Privat group, with a 42% stake exercises operational control over the company via management appointments.

Ukrnafta, as a state-owned company, is by law allowed only to sell its gas to households at prices around 11 timed lower than those charged to industrial customers. Privat has for this reason since 2007 blocked any sale of Ukrnafta’s gas, which is where the stockpile comes from.

But when in late February 2009, deputy chairman of Ukrnafta, Valentin Franchuk, linked to Privat Group, moved to become deputy chairman of state-controlled Naftogaz, analysts held it only a question of time before Ukrnafta’a gas seeped through to industrial consumers. Sure enough, at the end of May, the first sketchy reports provided by trading structure insiders surfaced of Ukrnafta gas finding its way to industry, unhindered by the government.

Analysts agree that Ukrnafta has been selling its oil for artificially low prices to Privat-affiliated companies. Since the Privat group comprises gas-guzzling metallurgical and chemical plants, it would not be far-fetched to think that the same scheme is going on with its gas, although this has not been confirmed.

Gazprom Sbyt of the action

The biggest winner from Tymoshenko’s elimination of Rosukrenergo as intermediary is, potentially however, Gazprom itself, in the form of its fully-owned Ukrainian subsidiary, Gazprom-Sbyt Ukraine, as well as a possible direct supplier of Ukraine’s chemical sector itself.

According to the gas agreements signed between Naftogaz Ukraine and Gazprom, Gazprom Sbyt gained the right to purchase up to 25% of gas imports, reselling a maximum of 7.5bn cubic meters to industrial customers. According to Gazprom Sbyt’s CEO Anatoly Podmishalk’skii, the company aims to sell 4-5bn cubic meters in 2009,

“It’s a myth that Tymoshenko got rid of intermediaries,” Bogad Sokolovsky, adviser to President Yushchenko on energy issues, told bne. “What is Gazprom Sbyt, if not an intermediary and indeed one that surpasses all that went before. And explain to me how it is that Gazprom Sbyt Ukraine is managing to conclude contracts with the most solvent companies in the country?”

Gazprom Sbyt cannot undercut Naftogaz in price, since it buys its gas back from Naftogaz at the import price, and has to earn a margin on this. However, in crisis times, it crucially has the resources to offer considerable more flexible payment conditions and also more supply security than cash-strapped Naftogaz. This means it is likely to attract the more solvent companies that can afford to pay the mark-up to get the added payment flexibility, where Naftogaz demands prepayment from industrial customers. This will then leave Naftogaz with the dross who are struggling to pay their bills.

It is however not just Gazprom Sbyt that is filling the void left by Firtash. Big brother Gazprom itself is starting to loom as a potential direct supplier of Ukrainian industry – with the Ukraine’s crisis-stricken chemicals plants serving as a bridgehead.

Ukraine’s industry minister Volodymyr Novitsky announced June 3 that six nitrogen fertilizer producers would be allowed to purchase gas directly from foreign companies. “Nitrogen fertilizer producers are in a very special position,” a source in Ukraine’s Union of Chemical Producers, which was involved in lobbying the resolution, told bne. “Gas for them is not just a source of energy, but their key raw material, comprising around 70% of costs”.

“The suppliers could be famous Russian companies,” the source explained. “This would be a step towards demonopolisation of the gas market. After all, what is Naftogaz Ukraine if not a giant intermediary itself?”

But the move has prompted apprehensions that any company supplying cheaper gas directly to these companies would then be in a prime position to acquire or privatize them. President Yushchenko has been bitterly resisting the government’s attempts hitherto to privatize Odesa Portside Plant, Ukraine’s most strategic chemical asset, and one of the companies on the list. Russia’s largest petrochemicals holding, Sibur, is a Gazprom affiliate.

“The whole thing seems unclean,” Bogdan Sokolovsky says, referring to the government announcement. “It in fact directly contradicts the gas agreement between Gazprom and Naftogaz that stipulates Naftogas as monopoly importer. How will it then be possible?”