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Kyiv Post Articles by Igor Eros

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  • 1. Transparency issues loom despite growth in banking sectorby Igor Eros, Kyiv Post Staff WriterMar 06 2007, 23:44© KP Media, photo by Konstantin KlimenkoDirk Haboeck, the general manager of ProCreditBank, said that the lack of transparency is anongoing problem in the Ukrainian banking sector that needs to be resolved if the sector is todevelop along Western standardsContinuing a nearly two-year bank-buying spree by Western financial giants, the boom inUkraine’s commercial banking sector is set to endure, with foreign financial players looking tosnatch up more of the country’s banks, market insiders say.However, market insiders agree that a lack of transparency still continues to plague the sector.The surge in interest by foreign financial groups in the sector began in October 2005, whenAustria’s Raiffeisen Banking Group acquired Bank Aval, one of Ukraine’s top banks in terms ofnet assets and branch network size, for just over $1 billion, creating Raiffeisen Bank Aval. It wasthe first time one of Ukraine’s largest banks was sold to a major European banking group.A series of other sales of large Ukrainian banks followed, transferring control of nearly a quarterof Ukraine’s banking market to European banking groups.The sale of Bank Aval was followed by the sale of a 51 percent stake in Ukrsibbank to France’sBNP Paribas for about half a billion dollars.Italy’s Bank Intesa inked a deal a little more than one year ago to purchase more than 85 percentin Ukrsotsbank for just over $1 billion.In June, Raiffeisen Banking Group was on the move in the Ukrainian banking market again, thistime, to sell 100 percent of its Ukrainian subsidiary, Raiffeisenbank Ukraine, to Hungary’s OTPbank for more than $830 million. That deal marked the first instance of a foreign bank located inUkraine being traded between foreign buyers.Ukraine has more than 160 banks, though the top 10 control a significant chunk of the country’straditional banking market.The rest largely serve as so-called pocket banks for Ukrainian business groups, although inrecent years they have attempted to diversify their clientele base in an effort to transformthemselves into stable, Western-style banking operations, and market insiders say the trend willcontinue.“We developed strategies for entering the Ukrainian commercial banking market for a bigRussian bank, for a big European bank that entered the Ukrainian market, and for a bigUkrainian investment fund,” said Konstantin Mezentsev, the principal and head of the Kyivoffice of Berlin-based Roland Berger Strategy Consultants. “There will be many moreacquisitions,” he added.Mezentsev said, however, that a lack of transparency still plagues the Ukrainian banking sector,making it more difficult for foreign capital to enter the market.“There’s no scoring [system] that would allow making preliminary evaluations. Ukrainian banksoften do not provide the necessary statistics for foreign banks to develop a model,” he said.1|Page
  • 2. He added that Western banking groups eyeing the Ukrainian market are sometimes also remissin scrutinizing the Ukrainian banking sector, thus causing their own problems.“Before entering Ukraine, every foreign bank mainly looks at the number of branches that a bankhas in Ukraine and, sometimes, that’s the only figure they consider,” Mezentsev said.“A lot of them simply do not perform the necessary due diligence. Often, they first buy banksand only then pay close attention and, sometimes, they become surprised when they find out thatone of the functions, such as risk management, is simply absent.Despite the problems, Mezentsev said that dynamic growth in Ukraine’s banking sector willcontinue, both in terms of foreign players acquiring more Ukrainian banks, as well as nicheswithin Ukrainian banking, such as the mortgage and consumer loan segments of the business.Dirk Haboeck, the general manager of ProCreditBank, said that the lack of transparency was anongoing problem in the Ukrainian banking sector that needed to be resolved if the sector is todevelop along Western standards.“We are convinced that social responsibility for the development that banks have should be atthe very top [of the banking sector’s agenda], especially in countries with transitional economies,such as Ukraine,” Haboeck said.“It’s really important in the context of Ukraine – especially considering the recent big changes inthe financial sector – that banks’ management switch from trying to make profits, no matterwhat, to working ethically,” he added.Haboeck said that the dearth of such social responsibility can be seen in the consumer loansegment of the sector.“Looking at consumer crediting, for example, I would say there’s little responsibility for anumber of reasons,” he said. “Actual [interest] rates are much different from those that areannounced and advertised.”“We think it’s more important to grow organically and provide high-quality services, rather thanexpand for the sake of expansion and growth,” he said.2|Page
  • 3. Real estate growth continuesby Igor Eros, Kyiv Post Staff WriterFeb 14 2007, 23:14© KP Media, photo by Konstantin KlimenkoYuriy Nartov, the managing director of the Ukrainian operations of Colliers International, aglobal real estate consultancy, said that the current situation on Ukraine’s commercial real estatemarket is characterized by a lack of quality space.Following several years of sustained growth, Ukraine’s commercial real estate market continuesto heat up, building on a recent trend that has seen more foreign institutional investors eyeing thesector, while growing demand, and a shortage of space, have been driving property pricesthrough the roof.Industry insiders say that the demand for commercial real estate in Ukraine is still far greaterthan the supply of office, retail and industrial space available on the market.Meanwhile, an underdeveloped legislative base that gave rise to an over-bureaucratized systemof building permits years ago continues to stymie the growth of the sector.The result, according to insiders, is a growing backlog of foreign businesses that are looking toenter Ukraine but are unable to do so due to the deficit of suitable commercial space in thecountry, while enterprises already established here are literally left with no room for expansion.A hot spot“Ukraine finally appears to be a hot spot for investors in terms of commercial real estate,” saidRuslan Oleksenko, the managing partner of DEOL Partners, a Kyiv-based commercial real estateservices firm.“That, in turn, has created a sort of rush to the market. The sell side cannot put a price together asa result. This, together with other factors, has contributed to a sort of chaos in Ukraine’scommercial real estate sector,” he added.Oleksenko said that while 2004 and 2005 saw more speculative venture capital enteringUkraine’s commercial real estate sector, a larger number of foreign institutional players begancropping up on the market last year, and they currently comprise the market’s main investorbase.“The next cycle [of investors] will bring a critical mass of professional developer products and adecreasing interest in venture real estate. The future is in the construction of business parks, andbuilding plants from the ground up, but not reconstructing old premises,” he said.According to Oleksenko, the foreign investors entering the market are typically companies thatprefer buying completed real estate projects, with all of the construction permits already in place,since “They are not ready to get involved in difficult legislative processes.”“Those who are closer to the permit-issuing structures have more opportunities to obtain andcapitalize on construction permits, and that’s what some Ukrainian companies are good at,”Oleksenko added.He said that of the three fastest developing sub-sectors of the Ukrainian commercial real estate –office, retail, and industrial space – it was difficult to say which would see the greatest expansion3|Page
  • 4. in the next several years, adding, however, that the office sector has shown the most growth todate.“Investors that have come to the market have eyed Kyiv’s central business district. Sooner orlater, there won’t be any land plots left, and that’s when developers will start looking at plotsavailable for constructing business parks,” he said.According to Oleksenko, real estate construction, leasing and sales companies continue toconcentrate their efforts in Kyiv, where construction costs for building an office center, forexample, are around the same as in the rest of the country, but lease and sale prices are higher,while the time it takes for a tenant or buyer to occupy the space made available is shorter.“So, net income is always higher in Kyiv,” he said.With respect to the retail end of the market, Oleksenko said that sector is hampered by unclearzoning regulations in Kyiv, with plots that can either be used to construct low-lying malls, ormulti-storey housing.“Apartment building will always be more profitable than a two-storey mall,” he said.“People won’t see much quality retail space until there are more strategic regulations from theside of the city administration,” he added.“Retailers have a greater interest in expanding to markets in other regions, and that’s why we cansee and will see a lot of activity in this regard in the nearest future.”As for industrial real estate, Oleksenko said it is the least profitable of the three fastestdeveloping commercial real estate sub-sectors on the market.“As a result, this segment will get more attention only when it gets too tight in the other sectors,”he said, adding that the industrial real estate sector may present development opportunities forforeign investors that specialize in that area.Lack of quality spaceAccording to Yuriy Nartov, the managing director of the Kyiv-based operations of ColliersInternational, a global real estate consultancy, the current situation on Ukraine’s commercial realestate market is repeating itself this year, and is characterized by a lack of quality space.“And this relates to all the segments of commercial real estate,” Nartov said.“Companies that plan to enter the market or improve their space face real difficulties, as there’svery little stock available to satisfy their requirements,” Nartov said.“As a result, companies have to choose between staying [where they are], not being able toexpand, or finding a solution, such as moving out of the city center.”He said that while many real estate projects are currently in the pipeline, their completion stillwon’t be enough to satisfy demand.“Also, completion takes much longer than expected for a number of projects,” Nartov said.4|Page
  • 5. He added that among the biggest problems contributing to the protracted completion and lowsupply of commercial office space on the market is the process of procuring land plots, as well asrecently introduced regulations that have made developing real estate even more complicatedthan before.“There’s no lack of capital,” Nartov said. “A lot of Western players want to enter the market.”Partnering upHowever, while foreign companies may prefer leasing or buying ready-made commercial realestate in order to avoid bureaucratic permit-issuing complications, unlike DEOL Partners’Oleksenko, Colliers’ Nartov said that such companies may actually be better off trying todevelop real estate projects from scratch.“That’s where a lot of companies consider possible partnership relations with some local playersthat have more access to land plots and possess some other strengths, such as the ability to solveadministrative issues, obtaining permits, and so on,” Nartov said.He said that real changes will begin to occur on Ukraine’s commercial real estate market in thenext several years, as institutional investors have only begun to study and research the country’sreal estate market.“It’s not enough for serious players to have one or two projects. They want to have a portfolio ofprojects,” he said.Arthur Ohanesyan, the managing director of Parker & Obolensky, a Kyiv-based real estateagency, agrees with Nartov that most foreign companies that want to start and complete realestate projects in Ukraine find partners among local companies to meet their goals.“There are no other options,” Ohanesyan said.“There are quite a number of examples of foreign companies that tried to do something on theirown and failed,” he said, adding, “The state is taking all possible steps to defend the interests ofnational companies, hurting the interests of consumers.”5|Page
  • 6. Ukraine business of Big Four boomingby Igor Eros, Kyiv Post Staff WriterFeb 08 2007, 00:42© KP Media, photo by Serhiy ZavalnyukVladimir Vakht, managing partner of the Ukraine operations of Big Four auditing companyDeloitte & Touche.Ukraine’s audit and accounting firms have seen demand for their services booming over the lastseveral years in response to the increasing number of foreign companies entering the country forbusiness and investment, as well as Ukrainian enterprises looking to expand their operations athome and abroad.Following the global trend of dominating their sector virtually wherever they go, the Big Four –PricewaterhouseCoopers, Deloitte & Touche, KPMG, and Ernst & Young – have managed tograb the lion’s share of the fat contracts in the audit and accounting business in Ukraine sinceentering the market in the 1990s.“Fast-growing demand for auditing and accounting services will continue, and that willchallenge the quality of those services,” said Vladimir Vakht, the managing partner of Deloitte &Touche, which established its operations in Kyiv in 1993.“Today I see a much greater understanding [among businesses] of how valuable auditing andaccounting is for a company,” Vakht said.According to Alexei Kredisov, the managing partner of Ernst & Young in Ukraine, which hasbeen in operation since 1991, Ukraine’s current government is planning to carry out reforms inthe state sector, especially with governmental organizations, which will further drive demand forauditing and accounting services.Kredisov said that demand for these services will also increase as a result of the growing numberof Ukrainian businesses looking to expand their presence as investors in other countries.“We could see some Ukrainian companies investing abroad, which had never been the casebefore. We helped make some of those deals happen,” he said, adding, “The business of the BigFour is a sort of reflection of the country’s economic potential.”Serhiy Balchenko, the managing partner of Dnipropetrovsk-based BDO Balance Audit, said thatUkrainian audit and accounting firms have not gained leading positions in the sector in Ukrainemainly due to the financial resources, international reach and experience that Western firms haveat their disposal.“Foreign companies use their extensive international experience when providing auditing andaccounting services,” Balchenko said.“The range of the services they provide is much more diverse [than those provided by Ukrainianaudit and accounting firms],” he said, adding that the international firms invest in training theirpersonnel, leaving “Ukrainian companies behind.” “Still, we can understand local needs betterand provide quality services at noticeably lower prices.”According to Deloitte’s Vakht, the globalization of the audit and accounting business in Ukrainehas resulted in an increasing number of mergers and acquisitions among small and mid-sizedUkrainian firms looking to survive in the sector.6|Page
  • 7. Changing market conditionsAccording to Vakht, Ukraine’s maturing business environment, including its increasingly activesecurities market, has given rise to tougher regulatory requirements for auditing firms over thelast year that Vakht said is part of a trend in the sector which is set to continue.“Regulators, such as stock exchanges and commissions, both foreign and domestic, havetoughened their requirements,” Vakht said.“All the companies of the Big Four went through what is called the PCAOB [Public CompanyAccounting Oversight Board] examination last year,” he said.The PCAOB is a private sector non-profit corporation created in 2002 by U.S. federal law thatoversees the auditors of public companies to protect the interests of investors.“All these examinations resulted in reports with comments and remarks concerning auditingfirms’ activities,” he added.However, while trading activity on Ukraine’s securities market has been steadily on the rise, anda number of Ukrainian companies have floated initial public offerings (IPOs) on internationalstock exchanges in the last year, Vakht said that the number of Ukrainian businesses able to tradetheir securities outside Ukraine will likely remain low for the next year or so.“Even though a few Ukrainian companies entered international stock exchanges in the lastcouple years, which also increases demand for audit and accounting services, there’s no real[IPO] activity in Ukraine at the scale comparable to Russia,” said Vakht.“I’m a bit skeptical about all the announcements that come from various companies, since weknow how complicated the way to international exchanges is,” he added. “Placing shares on theLondon Stock Exchange is somewhat different from placing them on the one Warsaw, forexample.”“Tens of Ukrainian companies announced their intensions to list their shares through IPOs.However, I think very few will be able to make the placements next year,” Vakht said.“I’d say I see three companies at most entering international exchange platforms that areconsidered to be most liquid and attractive [the London and New York Stock Exchanges] nextyear.”According to Kredisov, many Ukrainian companies have gone through auditing processes intheir quest to become more transparent and attractive to investors through IPO issues. He saidthat Ernst & Young is currently working with around five companies that are preparing to listtheir shares on international exchanges through IPOs.“Even though it’s difficult to say when this is going to happen, we think it’s realistic for aroundfive companies to enter international stock exchanges,” he said.The growing market for audit and accounting services in Ukraine has also seen firms in thesector developing business advisory services in other areas, according to industry experts.7|Page
  • 8. “Auditing services comprise about 50 percent of our business in Ukraine,” Vakht said. “Theother 50 percent are advisory services of all kinds [law, tax, management, IT and strategic].”“Our business, just as other companies’ business, started with providing auditing services,” saidKredisov, adding that Ernst & Young’s first major clients in Ukraine were internationalcompanies and large banks entering the Ukrainian market starting in 1991. Ernst & Young laterbegan adding Ukrainian businesses to its client portfolio, resulting in continued growth and thefirst Big Four accounting firm office in the industrial city of Donetsk last year, according toKredisov.“Now our company is entering a phase where not only auditing, but also advisory services aregaining increasingly in importance,” he said.“A couple of years ago, auditing services accounted for 80 to 85 percent of our business. Now itaccounts for 60 to 65 percent,” he added. “Demand for advisory services is growing faster thandemand for auditing services.”HR challengeThe boom on Ukraine’s auditing services market has resulted in greater competition amongaccounting firms for the best professionals in the field in Ukraine.“Our main challenge, at the moment, is to find and school the right people,” Vakht said. “Thedemand for our services is growing faster than supply, driven by the increasing trust of investorsin the Ukrainian market.”“Our firm, in the region, [Byelorussia and Ukraine] currently employs 400 people, which isalmost two times more than last year. And this growth has been taking place for about five yearsalready, doubling every year,” Vakht added.Kredisov described auditing firms’ ongoing search for professional talent in Ukraine as amongthe main trends currently characterizing the sector. He said Ernst & Young in Ukraine hiredaround 100 professionals last year.“Quite a number of companies try to get our talented people. The owners and management ofmidsize and large Ukrainian businesses now increasingly understand that talented people are thekey driver behind business success,” Kredisov said.“It’s one of the trends that is good for the national economy, and this is inherent to the businessof the Big Four. Some people decide to leave the firm to work for other companies,” he added.“Sometimes we even refuse to provide services just because we don’t have enough capacity.”8|Page
  • 9. Radio station alters ownership to dodge lawby Igor Eros, Kyiv Post Staff WriterNov 30 2006, 19:07An American expatriate who owns a leading Ukrainian radio station claims that a new law onmedia ownership is driving him into the shadows.The deputy chairman of the National Television and Radio Broadcasting Council, YuriyStorozhuk, told journalists on Nov. 22 that American-owned Gala Radio had recently registeredchanges in its ownership.Joseph Lemire, a United States national with a majority stake in Gala, told the Post on Nov. 28that his radio station is now officially in the name of another owner, as a cosmetic solution torestrictive legislation passed earlier this year.Lemire, who has a history of conflict with Ukrainian regulators, said he didn’t sell his controlover Gala, but simply changed the license to counter official pressure directed at him personally.“The regulation was designed specifically for Gala Radio,” Lemire told the Post on Nov. 28.The legislation in question, which came into force in March this year, makes it illegal for theforeign founder of a Ukrainian radio station to own more than 30 percent of the station.“They’ve officially said I was a founder of the company, when I never founded Gala Radio, butbought it years ago,” said Lemire.The American media entrepreneur said the regulators are promoting the interests of a pro-presidential lawmaker with broadcast media interests at the expense of Gala, which boasts top-five ratings in Kyiv.Lemire said he used to own 99 percent of Gala, but that now his license shows only a 29.5percent stake.“This law does not allow non-residents of Ukraine to own 100 percent of radio companies’shares,” Lemire said, adding, however, that “the real ownership [in Gala] has not been affectedin any way by these changes.”Lemire said he continues “receiving proposals from people who want to get a piece of thecompany.”Bohdan Balkhovetsky, the general director of another leading Ukrainian radio station underforeign ownership, said he has been unaffected by the new legislation.Nashe Radio, which was acquired by a Dublin-based media company called CommunicorpGroup at the end of 2005, is apparently not vulnerable to the 30 percent restriction.Communicorp, which is owned by Irish billionaire Denis O’Brien, acquired nationwide NasheRadio from Alfa Bank, which is controlled by the Moscow-based Alfa Group.Around the same time, Communicorp bought Kyiv-based Apelsin from the Cartel PublishingGroup, which is based in Ukraine.9|Page
  • 10. “The law does not place any restrictions on ownership of existing companies, but does not allowforeigners to be founders of radio companies in Ukraine and own more than 30 percent of a radiocompany simultaneously,” Balkhovetsky told the Post.He said because his company was not foreign-founded, it did not face any difficulties withregulators.Gala, founded in 1995, operates in 12 Ukrainian cities.According to Lemire, Ukrainian officials have hampered his radio station’s expansion since dayone, refusing his applications for licenses and subjecting it to tax checks.In a 2005 interview with the Kyiv Post, Lemire said that during his 10 years with Gala, he’dgone through everything from beatings by off-duty police officers to having his station takenover when he was out of the country.There are 1,268 licensed TV and radio companies operating in Ukraine, 35 percent of which arecity owned, 3 percent state-owned, and 62 percent private, according to the National Televisionand Radio Broadcasting Council.The All-Ukrainian Ad Coalition estimates that in 2005 the combined ad revenues on radiostations in Ukraine totaled $20 million, up 54 percent over 2004. The coalition forecasts $26.5million in market growth, or a 33 percent increase, by the end of 2006.10 | P a g e
  • 11. World Bank blasts government’s grain quotasby Igor Eros, Kyiv Post Staff WriterDec 13 2006, 22:12The World Bank (WB) has joined grain traders and Western diplomats in sharply criticizingUkraine’s controversial quotas on grain exports, which the government of Prime Minister ViktorYanukovych unexpectedly imposed in October.In a report compiled jointly with the German Advisory Group, a Kyiv-based think tank financedby the Ukrainian and German governments, the WB called the introduction of the quotas “notjustified” and the administration of the quota system “highly non-transparent.”According to the WB report, which was released on Dec. 7, “Ukrainian food consumers gainvery little from the quota,” while grain exporters are subject to “large losses.”Kyiv has argued that the quotas were introduced to keep the country’s grain from being sold outon the international market, where prices skyrocketed this year after poor harvests in some partsof the world.“Domestic grain supply is amply adequate to cover all domestic needs and allow considerablyhigher grain exports than estimated by the government,” reads the WB report.“This year’s grain production is well above the average of the last 10 years.”Prices for bread, as well as meat and dairy products, are only marginally determined by wheatprices, the WB said.Poverty “may actually increase,” as a result of the quotas, as a large percentage of poorUkrainians are engaged in agriculture, according to the report.The quotas are intended to help the government increase stockpiles at state reserves. But analystshave sharply criticized the move, arguing that the quotas do not only hurt large internationalgrain trading corporations. Most susceptible are Ukraine’s cash-strapped farmers who areprevented from selling crop at market prices.The WB estimated total lost export revenues by the end of this year at $300 million, raising thespecter of smuggling and insider deals.“Companies able to secure an export quota can presently cash in,” the report reads.“The negative impact of the quota on grain producers and traders and the risks of corruptionnegatively affect Ukraine’s investment reputation,” the report concludes.During a news conference last month, the German, Dutch and United States ambassadors toUkraine warned that the quotas could damage Kyiv’s WTO prospects and damage the country’sfood sector.“It is regrettable that the government of Ukraine decided to interfere with the grain market ratherthan making extra efforts to work with the firms in the sector to address any potential supplyproblems,” reads a joint statement released to the media by German Ambassador ReinhardSchafers, Dutch Ambassador Ron Keller and U.S. Ambassador William Taylor.11 | P a g e
  • 12. We are also concerned that the government’s decisions on how to allocate the quotas amongtraders did not proceed in a fair and transparent manner.”The leading grain traders active in Ukraine include Germany’s Toepfer, US-based Cargill andBunge, and Rotterdam-based Glencore Grain B.V.The Yanukovych governing coalition first announced in September that traders would have toobtain licenses to export their grain. A few weeks later, the Cabinet replaced this measure with asystem of quotas that limit exports of wheat, barley, corn and rye to just over 1 million tons untilthe end of the year.The Ukrainian grain association responded by suing the government, alleging that both thelicenses and the quotas were illegal. The association is a national, nonprofit organization thatunites 52 Ukrainian and international companies involved in the trade of grain, feed products,herbicides and fuel.The government said earlier this fall that it had imposed the administrative measures to avoidbeing forced to pay grain prices “two times higher than what we sell it for,” Yanukovych toldjournalists in Kyiv on Oct. 16.The important thing, according to the premier, was not to “end up without wheat,” due to risingprices, and thus, demand on world markets.“As soon as we solve these issues, the measures will be canceled,” he promised.12 | P a g e
  • 13. Rada goes forward on WTO bidby Igor Eros, Kyiv Post Staff WriterNov 16 2006, 18:03In a rare display of support for the pro-Western policy goals of President Viktor Yushchenko, theleftist-laden parliamentary coalition has taken serious, if tentative steps toward joining the WorldTrade Organization.The embattled Ukrainian head of state has made WTO entry a priority, seeking to receivebillions of dollars in net annual gains from the country’s improved access to foreign markets.Weeks ago, Yushchenko expressed hope that Ukraine could join the trade organization by theend of this year, but he conceded recently that membership would only be possible by early nextyear as the governing coalition of Viktor Yanukovych has been slow in pushing legislationthrough the parliament.The list of signed bilateral protocols with current WTO members is all but complete, shifting thefocus of the fight for entry into Ukraine’s cantankerous parliament, which has begun movinglegislation along in recent weeks.Parliament on Nov. 14 passed legislation in the first reading, affecting import onto the sensitivesugar market. Ukraine’s low-yield sugar beet producers are vulnerable to high-yield sugar caneimports.A wide majority of lawmakers also adopted bills affecting pesticides and decreased scrap metalexport tariffs. Ukraine’s steel industry depends on cheap scrap to feed its furnaces. Ukraine’svast agricultural business is a key market for world pesticide producers.Earlier this month, legislators passed other key laws required for WTO membership.Yushchenko has been locked in a power struggle with the parliament, led by his politicalnemesis, Yanukovych.The president has recently expressed his concern over the fate of his country’s WTO chances,which he hopes a WTO working group will secure on Dec. 21.“I am convinced that if Ukraine doesn’t use its chance now, and that chance exists exclusivelyuntil December of this year, then it will get bogged down in this process,” he said on Nov. 15.“We will lose bad and for a long time,” he added.The president said that everything depended on parliament.Borys Bespaliy, a lawmaker in the president’s Our Ukraine faction, expects more requiredlegislation to be passed this month through a compromise deal between the president and theparliament over the budget for next year, also a source of discord.“There’s a sort of trade off that is going on between the president and the government. Theruling coalition will take the necessary steps for Ukraine to enter the WTO this winter inexchange for the president’s signature on the state budget plan,” he told the Post on Nov. 15.“It is realistic to assume that Ukraine will enter the WTO this winter,” he said.13 | P a g e
  • 14. WTO Director General Pascal Lamy said earlier in October that Ukraine was unlikely to join bythe end of the year.Meanwhile, market analysts are hopeful that Ukraine will become a member by early next year.“The government’s target entry date of February is beginning to look realistic,” said TomWarner, an analyst for Kyiv-based investment bank Concorde Capital.Andriy Honcharuk, an adviser to Yanukovych, said Ukraine should become some 10 percentricher if it joins the WTO.In a Nov. 9 interview with Ukrainian broadsheet Den, Honcharuk said that although Ukraine’sagriculture’s industry will initially lose, the country’s export-oriented metals industry will winbig.“There are currently 24 anti-dumping sanctions operating in 11 countries in relation to[Ukrainian steel.] We will receive the possibility to defend the interests of our metallurgists moreeffectively,” Honcharuk said.“Domestic agriculture will be the most vulnerable in the new liberal conditions,” he added.“After all, WTO membership requires that full market reform of the agrarian sector is carried outand access to the agricultural produce market liberalized. An unfavorable factor here will also bethat the agricultural sector, which provides about 16 percent of jobs and 14.5 percent of thecountry’s gross domestic product, is insufficiently reformed at the same time. And thereforeglobal interventions in its work may be very painful at first. Internal pricing support should bereduced over a period of five years by 20 percent in comparison with the base period.”14 | P a g e
  • 15. Parliament opening up bank sectorby Igor Eros, Kyiv Post Staff WriterNov 22 2006, 22:26Ukraine appears ready to open its doors a bit wider to foreign banks eager to capitalize on itsconsumer lending spree.Following in the wake of a string of purchases of top 10 Ukrainian banks by European financialgroups, the parliament has begun pushing through a bill allowing foreign banks to open branchoffices in the country.Part of President Viktor Yushchenko’s drive to enter the World Trade Organization by early nextyear, the legislation nevertheless has some domestic banks concerned.A wide majority of lawmakers approved the first reading of the bill on Nov. 16, following itsintroduction by Yushchenko. Three successful readings of a bill are required before the presidentcan sign it into law.In a statement released the same day, Association of Ukrainian Banks President OleksandrSuhonyako harshly criticized the bill.“As a consequence of the unchecked entry of foreign banks’ branch offices onto the Ukrainianfinancial market, the majority of banking operations will soon be concentrated in their hands,” hesaid.According to Suhonyako, “Access of the branch offices to cheaper and longer-term foreigncredit will make them more profitable than domestic Ukrainian banks.” “Under such conditions,Ukraine will undoubtedly and completely lose control over its financial system and economy,”he added.According to the bill, any bank with a statutory fund of no less than $180 million, and withassets of at least $12 million, can open a branch in Ukraine.Another qualifying criterion is that the foreign bank must be based in a country that cooperateswith the Financial Action Task Force on Money Laundering, an intergovernmental bodydeveloping and promoting policies to combat money laundering and terrorist financing.Yevhen Zinovyev, an analyst at Hungary’s OTP Bank, which recently bought a Ukrainiansubsidiary of a major European bank, is positive about the bill.“We expect deposit rates to decrease as foreign banks substitute expensive Ukrainian resourceswith cheaper foreign resources,” he told the Post.“Apart from deposit rates, credit rates are not supposed to decrease substantially. Also, weexpect some liquidity growth of the banking system as foreign banks bring financial resources toUkraine.”“Competition in the banking market will grow, which will stimulate improvement of bankingservices and product line expansion. Growing competition will also cause a series of mergers andacquisitions, as small banks will not be able to compete with huge foreign banking groups,” headded.15 | P a g e
  • 16. “In general, we expect the banking system to become more stable.”Having recently completed its purchase of Raiffeisenbank Ukraine, Hungary’s OTP Bank plansto expand its network to 200 branches within the next two years, according to Zinovyev.Oleksandr Slobodyanyk, strategic management and corporate development chief at UkrainianTop 10 Bank Nadra, said the arrival of large foreign financial groups in Ukraine was“sufficiently predictable.”According to Slobodyanyk, their opening of branch offices “will increase already toughcompetition on the Ukrainian banking market.”But, he added, the sector shouldn’t undergo any “cardinal changes.”Foreign capital has been pouring into Ukraine’s banking sector, with smaller bank purchasesfollowing hot on the heels of landmark deals that saw major Ukrainian bank assets sold forbillions of dollars to foreign buyers within the last year.Starting last fall, cumulative purchases of Ukrainian banks by foreign buyers have resulted inforeign capital occupying nearly a quarter of the total capital in Ukraine’s banking sector to date.Ukraine has more than 150 banks, though the top 10 control nearly half of the country’straditional banking market. The rest largely serve as so-called pocket banks for Ukrainianbusiness groups, though they have in recent years attempted to diversify their clientele base in aneffort to transform themselves into stable, Western-style banking operations.16 | P a g e
  • 17. Investment flows into auto business amid growthby Igor Eros, Kyiv Post Staff WriterNov 09 2006, 00:47Better access to loans and other factors have continued driving up new car sales this year, whileUkraine’s automobile manufacturers are increasingly tapping into Western capital markets tofund bold expansion efforts.According to Kyiv-based auto industry consultancy Auto-Consulting, 272,000 new cars weresold in the first nine months of this year, a 42 percent increase year-on-year.The rising demand for new cars has Ukraine’s leading automobile manufacturers, which mainlyassemble cars from imported kits, seeking ways to boost production in Ukraine. They are alsoseeking opportunities to capture market share abroad by exporting cars or by launchingproduction on foreign turf.Take, for example, Eurocar, which assembles German Volkswagens and Czech Skodas fromimported car kits at a facility in Transcarpathia Region. The company announced Oct. 23 that ithad inked a $28 million syndicated loan with a maturity of seven years. The loan was providedby three banks with German roots: HVB Munich, HVB Ukraine and DEG.“The loan will be poured into the construction of new plant facilities, the acquisition of newequipment and to develop infrastructure,” Eurocar said in a statement.Eurocar, which posted a turnover of $262 million last year, assembled 16,521 cars in the first 10months of this year, about 5,000 more than in 2005. The company assembled 14,921 CzechSkodas, 1,066 German Volkswagens and 64 Italian Siats.Eurocar launched auto assembly operations in late 2001 at a $19 million facility at Solomonovo,a small town on Ukraine’s border with Hungary and Slovakia.The facility currently assembles using ready-made car kits. The process involves installation oftires, engines, seats and other parts, allowing the company to sell cars at prices lower thanimports by avoiding a large share of duties slapped onto finished cars upon import.Bold expansion plans are also underway at Ukraine’s other two auto producers, Zaporizhya-based ZAZ, which specializes in assembling Korean Daewoo cars, and Bogdan Corporation,which produces Russian Ladas and buses from imported Asian parts.Both have expressed interest in raising hundreds of millions of dollars on international marketsthrough various financial instruments to fund expansion of production.As part of an effort to streamline its operations, Bogdan relocated its passenger carmanufacturing from Lutsk Region to a site in Cherkassy Region, where its buses were producedearlier. Meanwhile, bus manufacturing has been relocated to Lutsk.Bogdan’s spokesperson Serhiy Krasulya said the relocation strategy at his company is intendedto “improve overall logistics” and should fully be completed by 2008.What’s more, Bogdan and ZAZ are reported to be holding talks on joint participation on theconstruction of a $300 million production facility in Russia.17 | P a g e
  • 18. ZAZ expects to boost automobile production this year to 190,000 from 148,160 churned out lastyear and 125,970 produced in 2004.In the first half of this year, Bogdan’s subsidiaries increased production of passenger cars by86.84 percent year-on-year to 22,097 and buses by 64.92 percent to 1,199.The WTO factorUkraine’s auto manufacturers are currently in a transitional phase, seeking to expand operationsat their Ukrainian facilities and to adapt to changes expected in line with Ukraine’s plans to jointhe World Trade Organization – a move which will require the lifting of import duties on cars.Eurocar plans on expanding its production facility in Ukraine, enabling it to take more of a roleas a manufacturer of cars rather than just an assembler. Lower labor and energy costs in Ukraineare seen as cost-cutting advantages to producing cars in Central and Western Europe. Theseadvantages could open the prospects for assembling cars for European markets in Ukraine, saidEurocar Spokesperson Olena Havinska.“All cars [produced by Eurocar] are being sold exclusively in Ukraine currently, but Eurocar hasset a goal to start exporting cars,” she added.Havinska said that Eurocar hopes to use funds from foreign borrowings to increase its role in theauto manufacturing process to 50 percent by the end of 2007.Bogdan’s Krasulya, however, expressed concern about the consequences Ukraine’s auto industrywill face if the country completely lifts import duties on finished cars in connection with plans tojoin the WTO. Lobbying efforts against the lifting of protection barriers in parliament by theauto industry have played a major role in delaying the passage of legislation required forUkraine’s WTO membership aspirations.“It’s possible that neither Bogdan Corporation nor Eurocar will receive their return oninvestment [on these bold expansion projects] if Ukraine enters the WTO without leavinglegislation in place to protect national automobile producers,” Krasulya said.“Ukraine’s automobile market has shown an approximate annual growth of 30 percent during thelast three years. But if the world’s giant automobile producers enter the market [en masse] anytime soon [by launching their own production facilities or flooding Ukraine with imports,] thecountry’s manufacturers will have no choice but to leave the market,” Krasulya added.18 | P a g e
  • 19. Court favors Aerosvit in land battleby Igor Eros, Kyiv Post Staff WriterOct 12 2006, 02:45© Courtesy photoThe building of Aerosvit Airlines terminal at Kyiv’s Boryspil International Airport, thecountry’s main airport, shown from an aerial view, was initially planned to be completed byMarch 2006.A three-year conflict between Ukraine’s largest airline and the country’s main internationalairport has taken another twist, following a recent decision by the country’s highest court.But the battle between Aerosvit Airlines and the administration of Kyiv’s Boryspil InternationalAirport for ownership of airport land, on which the two warring camps each want to build newterminals, could drag on for a few more years if a compromise isn’t reached.Ukraine’s Supreme Court ruled on Sept. 26 against a March 9 decision by the country’s HighEconomic Court, which had canceled Aerosvit’s 2003 purchase-leasing agreement to obtain a 35hectare plot of land on both sides of the road leading up to the airport.In a series of lawsuits going back to early 2005, Boryspil officials have argued that Aerosvitobtained the land illegally, through political influence under then President Leonid Kuchma.Boryspil and Aerosvit had each announced multimillion-dollar investment plans for theconstruction of new terminals in anticipation of capitalizing on some of the lucrative transittraffic from flights between Europe and Asia.Aerosvit paid nearly Hr 2.2 million ($400,000) for 27 hectares of the land that it purchased; therest was leased to the airline. Soon thereafter, the airline announced plans to invest about $100million into the construction of a new terminal, originally scheduled for completion by April2006.Boryspil airport officials claimed the purchase impeded their own expansion plans, for which theairport had secured a 30-year $172-million low-interest loan from the Japanese Bank forInternational Cooperation.Now, both projects could be held up in court for a couple of more years, according to Aerosvitspokesman Serhiy Kutsy, as the Supreme Court’s Sept. 26 ruling calls for the case to bereviewed by the initial judicial venue.“For all sides of the conflict, it would be more logical to restart negotiations that began in Julybut never came to an end,” he said in a written statement to the Post received on Oct. 2.“The Ministry of Transport and Communications, Aerosvit and Boryspil have discussed possiblejoint construction of a terminal complex, in accordance with Aerosvit’s project, providingfinancing for construction work from both sides,” he added.According to Kutsy, construction work on Aerosvit’s project “started at the end of 2004 andcould be built two to three years earlier than the second project [Boryspil’s].”“We have a good opportunity to stop confrontation and gradually implement both projects inturn. First – using joint financing, second – using Japan’s credit provided to Boryspil,” theAerosvit spokesman said.19 | P a g e
  • 20. Yaliy Kostyantyn, the head of Boryspil’s legal department, told the Post that neither he noranyone else from Boryspil has had a chance to familiarize themselves with the recent SupremeCourt decision.“We have not seen the details of the court’s statement yet, and thus cannot make any decisions oragree on any proposals coming from Aerosvit,” he said Oct. 10.But Yaliy sees Aerosvit’s project as a threat to Boryspil’s development plans.“There’s some pressure coming from the Japanese investors, because one of the points of ouragreement was that Boryspil shouldn’t allow a decline in its economic competitiveness,” he said.“Aerosvit could, in fact, become a second airport right next to Boryspil airport, and it’s notsomething we should let happen,” he added.Valeriy Polishchuk, Boryspil’s first deputy director, told the Post earlier this year that Boryspilhad already started receiving the Japanese money, which is being used to design the airport’sterminal, adding that the work had been contracted to Japan Airport Consultants, Inc., an airportsystems and terminal management consulting company.The design work was to be completed this year, while construction of the new terminal wasscheduled for 2007 through 2009, he said. The total cost of the project is estimated at $236million.According to statements made by Polishchuk in early 2005, the 2003 purchase-leasing deal waspushed through because the now former governor of Kyiv Region, Anatoliy Zasukha, putpressure on the airport’s director at the time, Mykola Shmatko, to approve the transaction.Polishchuk said that at the request of former President Leonid Kuchma, the government lobbiedthe interests of Kuchma’s son in law, Viktor Pinchuk.According to Aerosvit’s supervisory board co-chairman Hryhoriy Hurtovy, at the time, Pinchukwas linked to one of the airline’s shareholders.Aerosvit reported a turnover of $264 million in 2005, as compared with $196 million in 2004and $116 million in 2003.20 | P a g e
  • 21. Cop murder puts new Cabinet at oddsby Igor Eros, Kyiv Post Staff WriterSep 14 2006, 02:18© Courtesy photoPolice officer Roman Yerokhin, pictured above, was found murdered Aug. 20 in what theinterior minister says may have been a hit ordered by an MP.It’s been just over a month since the government began being restocked by members of the so-called Donetsk clan, but the recent slaying of a senior policeman who had been investigatingfinancial crimes in the eastern industrial region has again raised the specter of criminals in thehalls of power.Moreover, the gruesome killing, reminiscent of the politically charged journalist murders thatcharacterized the administration of former President Leonid Kuchma, looks set to further dividethe fragile new Cabinet.The handcuffed body of Roman Yerokhin, a senior officer of the Directorate for FightingOrganized Crime (UBOZ) who had disappeared on July 27, was found on Aug. 20 outside Kyiv.He had been shot eight times in what has been widely described as a contract hit connected toYerokhin’s work against money laundering in Donetsk Region.Following statements made by Ukrainian Prosecutor-General Oleksandr Medvedko, a one-timeDonetsk Region prosecutor, an investigation into the murder launched by Interior Minister YuriyLutsenko could be sidetracked or halted, while partisan parliamentary infighting is likely toprevent businessmen with legislative mandates from facing prosecution.Unnamed MP accusedSpeaking at a press conference on Aug. 11, Lutsenko, whose post brings law-enforcement inUkraine under his control, said that Yerokhin had been investigating a large money conversionoperation linked to a Donetsk financial establishment before being kidnapped and killed.Lutsenko said Yerokhin had been a former deputy head of the Donetsk UBOZ, but wastransferred to the main directorate in Kyiv in February 2006 for his own safety after receivingthreats related to his police work.Following the discovery of Yerokhin’s body, Lutsenko said Aug. 23 that all the key figures inthe murder had been arrested – including Vadym Klikovskiy, a former UBOZ employee who hadgone into hiding in Ternopil Region.In an interview with Ukraine’s Dzerkalo Tyzhnya weekly published Sept. 2, Lutsenko said thatan MP with ties to a Donetsk-based financial establishment, which he did not name, had orderedthe killing. He said that “if we can find out who ordered the hit, then this may have seismicconsequences, and could be a very serious blow to the methods of forming party lists, to whichpoliticians, both in the opposition and in power, resort to.”Prosecutor’s denialHowever, Prosecutor General Oleksandr Medvedko, whose office is now handling theinvestigation, played down any connection that the murder might have to MPs, telling a pressconference Sept. 8 that much about Yerokhin’s murder has been exaggerated, particularly by themedia.21 | P a g e
  • 22. “In the criminal case file, there is not even the smallest piece of information that people’sdeputies were involved,” Medvedko said.Lutsenko’s response to Medvedko’s comments was immediate, warning at his own pressconference the same day that the investigation had reached an impasse and was in danger offalling apart.“All this time, the prosecutor’s office, having taken the case away from us, has from the verystart passed it from regional prosecutors to the city, then to the PGO’s office, but it has notundertaken any investigations.”Lutsenko said that PGO investigators have not even bothered to question the prime suspect in themurder, Klikovskiy, who is currently in custody. Lutsenko said that, instead, the PGO has calledin Lutsenko’s own investigators for questioning.“I think that all this points to attempts to drag out this case, and possibly, to conceal the truth.The investigation into this matter is obviously under threat,” he said.Lutsenko is among a handful of ministers appointed under Prime Minister Yulia Tymoshenko in2005 following the Orange Revolution, who have retained their posts under the new governmentrecently formed by Prime Minister Viktor Yanukovych, leader of the Donetsk-based RegionsParty, which heads a pro-Russian majority coalition in parliament.Prior to his reappointment as interior minister under the new government, Lutsenko, a SocialistParty member, had said that he would resign from the post if Yanukovych, the OrangeRevolution’s arch enemy during his fraud-filled grab for the presidency in 2004, became primeminister.Lutsenko left the Socialist Party after its leader, Oleksandr Moroz, abandoned the pro-presidential Orange Coalition in parliament in early July and used his party to form the newmajority coalition with the Regions, acquiring the parliamentary speaker’s seat for himself aspart of the deal.When Yanukovych was confirmed premier on Aug. 4, Lutsenko was in hospital withhypertension, but accepted the post of interior minister under Yanukovych just days later.In addition to raising the question of how effectively Lutsenko and his ministry can work underthe current Donetsk-dominated government, Yerokhin’s murder also raises the issue of strippinglawmakers’ immunity and sanctioning their arrest for committing crimes.To date, Pavlo Lazarenko, who served as premier in 1996-1997, is the only senior Ukrainianofficial to have been tried and sentenced, albeit abroad. He is also the only MP to have beenstripped of immunity.“I think enough proof has been gathered to confirm our main theory [of Yerokhin’s murder], butthe grounds are not sufficient to charge a citizen who holds a high position,” Lutsenko toldDzerkalo Tyzhnya.He said that in addition to Yerokhin, Donetsk tax police chief Mikhail Serbin, who was firedfrom his post in the spate of recent sackings carried out on the basis of political affiliation, hadalso been investigating financial institutions in Donetsk.22 | P a g e
  • 23. “According to the information which he [Serbin] presented, financial abuses resulted in lossesthat ran into many millions,” Lutsenko said.Opinions dividedTaras Chornovil, an MP of the ruling Regions party, told the Post Sept. 6 that Lutsenko’sstatements should not be taken seriously.“I’ve stopped commenting on Lutsenko’s statements a long time ago. He constantly makesunfounded statements,” he said.“When making those [statements] he did not refer to any document or factual events. It wassomething more personal,” he added.Regarding the similarity of this case to the high profile murder of journalist Georgiy Gongadzein 2000, or the investigation into the 1999 death of his dissident father, Vyacheslav Chornovil,Chornovil said “Lutsenko’s statement on the investigation into my father’s death seemed muchmore reasonable than the ones he made on the Yerokhin case to me. At that time, he supported itwith evidence - documents and facts,” Chornovil said.Parliamentary deputy Andriy Shevchenko of the opposition Yulia Tymoshenko Bloc is alsohesitant to acknowledge that one of his colleagues in parliament has any involvement in themurder: “the theories that come up are very different.”However, Shevchenko said that he would support a move to strip a criminal parliamentarydeputy of immunity regardless of party affiliation.“For me, the party that a criminal belongs to does not matter. I will vote in favor of his immunitybeing taken away in order for justice to be served,” he said.Shevchenko also said he would support the creation of a parliamentary ad-hoc commission toinvestigate the Yerokhin murder, adding, however, that he doesn’t “see this killing as being at allsimilar to the Gongadze case.”However, Boris Penchuk, the chief of the Anticorruption Fund and a Donetsk businessman, seesa political angle to the Yerokhin case.Penchuk, who fought Boris Kolesnikov, an ally of Regions money bags Rinat Akhmetov, overownership of a shopping center in Donetsk, said that everything surrounding the Yerokhin caseis an attempt to discredit Lutsenko. The aim, said Penchuk, is to pay back Lutsenko for puttingKolesnikov, then the head of the Donetsk regional council, into jail for four months in 2005 foralleged wrongdoing involving ownership of the shopping center.Pinchuk told the Post Sept. 12 that “Yerokhin’s death was convenient for the people who wererepressed some six to 18 months ago [during the two Orange Cabinets]. It served to discreditLutsenko and lead him out of the game.”Penchuk added that “Yerokhin was possibly kidnapped in order to get information that woulddiscredit Lutsenko. It’s probable that he was a Trojan horse in Lutsenko’s entourage. There is areal war going on between the [Cabinet] representatives of Akhmetov and President [Viktor]Yushchenko. Somebody simply wants to crush Lutsenko.”23 | P a g e