[18.07.03]

WEEKLY BRIEFING ON KEY DEVELOPMENTS IN UKRAINE

Political Developments

Ukrainian Peacekeepers Ready To Ship Military Hardware For Their Mission In Iraq. The loading of Ukrainian peacekeeping contingent's military hardware and weapons for use in Iraq is reportedly complete and is scheduled to be shipped from Ukraine's port of Mykolayiv sometime this week. The Ukrainian Defense Ministry said that the hardware will arrive in Kuwait early in August, where the Ukrainian 5th Brigade personnel will be flown in mid-August. The 5th Brigade will be joined by the Ukrainian decontamination battalion which was deployed in Kuwait at the start of the U.S. military operations against the Saddam Hussein regime. Then, the Ukrainian peacekeeping force totaling some 1,800 servicemen is scheduled to be deployed in Iraq on 1 September.

The Ukrainian servicemen will be paid the following salaries: officers - $960-1,200, warrant officers - $890-920, enlisted men - $600-650.

The Turkish sea ferry Und Sofit Bey with the crew and materiel of the 5th separate mechanized brigade of Ukraine's Armed Forces, which will be a part of the multinational stabilization forces in Iraq set out from the port Zhovtnevyi in Mykolayiv to the Kuwaiti port of El-Kuwait. The ferry will start out on July 21 late in the evening and is expected to arrive in the port of destination on August 8.

The Ukrainian peacekeepers will replace U.S. marines in the Wassit province. They will take over the responsibilities for patrolling two major highways in the area and monitoring a long border with troublemaking Iran.

Ukrainian Speaker of Parliament Sends Draft Bills On Constitutional Reform to the Constitutional Court. On 14 July Speaker of the Parliament Volodymyr Lytvyn forwarded two draft bills on constitutional amendments to the Constitutional Court. One draft proposed by President Leonid Kuchma and supported by the majority of lawmakers in Parliament while the second one had been proposed by the opposition legislators. The President almost immediately stated that he was considering withdrawing his proposed draft bill from the Constitutional Court.

Commentary: The President's intent was to have his proposed draft reform bill endorsed by Parliament and forwarded to the Constitutional Court. Two conflicting bills will only confuse things on political reform and the political reform itself will hardly receive the required approval of the Constitutional Court. Moreover, the procedure of sending the bills contradicts previous rulings of the Constitutional Court (it refused to study some drafts because they weren’t send by the Verkhovna Rada majority). So the Constitutional Court may refuse again to consider the drafts.

Probably President Kuchma will recall his draft bill. After that he, it is believed, may change his draft and submit it later in the fall.

He seems to be firmly intent on creating a presidential-parliamentary political system where there would be a strong Prime Minister dependent on the Parliamentary majority formed by the political parties who won the elections. He sees this as the only way to create a balance of power between the President and the Prime Minister.

The opposition's and particularly Viktor Yushchenko's rejection of Kuchma's reform goals are particularly puzzling because they were in the lead criticizing both President Kuchma and Ukraine's presidential political system as autocratic and devoid of necessary checks and balances.

Head of Presidential Administration Victor Medvedchuk Weds TV Personality. President Kuchma's Chief of Staff Victor Medvedchuk married over the weekend well-known Ukrainian TV reporter Oksana Marchenko. Head of Ukrainian Orthodox Church Patriarch Volodymyr Sabodan conducted the ceremony which was attended by some 30 guests including President Kuchma and his wife, Prime Minister Yanukovich, and Russia's Prime Minister Kasyanov and his wife. The wedding took place in Crimea.

New Mrs. Medvedchuk hosts a popular television program called "Names" where she discusses critical issues with top government and business officials as well as with prominent personalities from the media and the arts.

Both have children from previous marriages.

On July 20 President Kuchma met with young winner of the Eurovision International Competition of Young Dancers Jerlene Ndudi. He gave him documents ("order") for a small apartment.

Commentary: Jerlene Ndudi a Ukrainian citizen of an African descent (he is called an Afro-Ukrainian - joke). An orphan until recently he lived in a poor family of his guardians, in a small apartment.

An apartment even a small one in Ukrainian conditions is a substantial help for the young and talented dancer.

On July 23 President Kuchma signed the decree "On measures for the development of the system to counter legalization (laundering) of criminal incomes and financing terrorism". The Decree provides for a number of additional measures. In particular the President obliged the government to ensure the introduction of 40 FATF recommendations, and by to set up an Interagency Working Group to study methods and tendencies of money laundering till September 1, etc.

On July 25 Friday Moscow saw the opening of the 6th Meeting of the High-Level Group for the Formation of Common Economic Space (CES) of Russia, Belarus, Ukraine and Kazakhstan.

Vice premiers of four states take part in the meeting: Viktor Khristenko (Russia), Andrei Kobyakov (Belarus), Mykola Azarov (Ukraine) and Sauat Mynbayev (Kazakhstan).

According to Ukrainian vice prime minister Mykola Azarov Kiev intends to agree on all points of the Agreement on the Creation of the Common Economic Space. "There is no question about any special conditions for Ukraine", M. Azarov said in an interview.

Economic Developments

An economic Forecast Upbeat on Ukraine. In a forecast released last week by the University of Michigan's prestigious William Davidson Institute contains forecasts that Ukraine, Russia and the Baltic countries will experience a GDP growth that is about one-third higher than most earlier projections had anticipated. The latest indicators from these countries paint a striking picture of current and future expansion, as compared to the dwindling rates in developed countries. The report notes that these countries are on track for strong growth despite continuing decrease in the price of oil. These countries also are demonstrating an internally-driven engine on demand and trade.

Commentary: The William Davidson Institute (WDI) is a business/government assistance research organization at the University of Michigan. The Institute has been analyzing and promoting economic, business and policy changes in transition and emerging market economies. Unlike other forecasts, the WDI's forecast is based on quarterly data and will generate it quarterly in addition to the usual annual forecasts. As such, WDI's quarterly forecast provides more timely signals of changes in economic performance.

TNK-Ukraine To Invest $27 Million On Refinery Upgrade. TNK-Ukraine, a sister company of Russia's third largest oil company TNK, announced late last week that it planned to invest some $27 million to modernize its Lysychanskiy oil refinery to raise quantity and quality of its products and to start exporting them. The company's president said that the modernization would raise the output to 6.2 million tons in 2003 from 5.8 million tons. The refinery produced 1.8 million tons of motor gasoline in 2003.

Commentary: TNK, one of Russia's fastest growing companies, bought Ukraine's Lysychansk refinery in 2000 and has been aggressively developing Ukrainian market. The company is probably hoping to export some of its improved gasoline to countries in Central and Eastern Europe. It has also build the largest network of gasoline service stations in Ukraine. TNK is currently negotiating a merger with British Petroleum (BP) which envisions the British oil giant will take 50 percent of a new joint venture between the two companies.

Ukraine and the World Bank

First vice prime minister and Ukraine's minister of finances Mykola Azarov and regional director of the World Bank Luca Barbone on July 23 signed a protocol on negotiations conducted on the Second Program System Loan (PSL-2) extended to Ukraine.

A package of documents adopted according to the protocol determine lending conditions, the matrix of institutional and structural reforms for which the lending was designed and other parameters of cooperation between the World Bank and Ukraine.

The Program System Loan is the basis for funding Ukraine by the World Bank Ukraine within the framework of the cooperation strategy for 2001-2003. It consists of three separate loans $250 each.

The first PSL-1 was received by Ukraine in a two-tranche loan at the end of 2001.

According to the strategy adopted Ukraine was to receive PSL-2 in 2002, but allocation of these funds was postponed since Ukraine failed to meet conditions set by the World Bank.

The signing of the protocol is considered by the Ukrainian side as recognition of positive changes in the economic situation in the country and as the progress in meeting the World Bank's recommendations.

The first tranche of the World Bank in the amount of US$75 million Kiev may receive as early as the end of the current year. The rest may arrive only after the relevant decision of the Bank's Board of Directors.

Most of the tasks for obtaining the loan have already been performed by Ukraine. Among them: regular payment of the salary for governmental employees, reform of the accounting system and the system of bank supervision, creation of the legislative framework for copyright protection and the campaign for informing the public about Ukraine's access to the World Trade Organization.

At the same time the World Bank representatives speak about low financial discipline in the budgetary field and the power sector and consider it necessary to radically reduce tax privileges and credit rates in the Ukrainian banks. One of the main conditions for the second tranche of the World Bank's loan is resuming privatization of the regional power sector.

Resumption of the World Bank loans and cooperation with the IMF are considered in Ukraine first of all as a method of raising investment attractiveness of the nation, as a positive signal for private foreign investors. Over the years of independence Ukraine succeeded in attracting approximately only US$ 6 billion of direct foreign investments (for comparison Poland's attracted some US$ 50 billion).

Therefore improvement of Ukrainian economy's attractiveness is regarded by Ukraine's leadership as a first-priority task.

Information. Ukraine entered the World Bank in 1992. At present the World Bank's funding planned for Ukraine reached US$ 3.5 billion within the framework of 28 projects.