Playing Both Sides

Economic News

22 Jul 2010
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Ukraine continues to face competing interests as Europe uses investment and Russia uses energy and other economic measures to pull the country into their respective spheres of influence.

While in September Prime Minister Viktor Yanukovych publicly sabotaged Ukraine's plans to join NATO, upsetting the EU, the State Statistics Committee of Ukraine published the new figures for direct foreign investment in the first half of 2006. This amounted to $13.5bn from EU countries, or 73.7% of the total, compared with just $4.9bn for all of 2005. According to the committee, and the Cabinet's press office, European investors are most interested in finance, metallurgy and metal processing, wholesale and trade intermediary services, immovable operations, food industry and agricultural product processing.

Germany was the top EU investor for this period, accounting for 40.6% of the total, followed by Cyprus, Austria, Great Britain and Holland.

The EU has also made Ukraine's membership in the World Trade Organisation part of the accession criteria. The director of the European Commission's directorate on Eastern Europe, Hugh Patrick Mingarelli announced the news this week, possibly due to the cancellation for plans for the country to enter NATO. Russia is deeply opposed to Ukraine in NATO and less than half of the country's population supports membership.

Mingarelli said that Ukraine has 21 laws left to adopt before entry is possible. The bills are expected to be submitted to the cabinet in early October.

The prime minister has continued to voice support, albeit with reservations, for WTO entry. While emphasising that the country will indeed join the body, he has said publicly that joining by the end of 2006 could endanger Ukrainian interests, and that a slower pace would ensure the correct steps are taken to ensure a smooth transition in its trade regime. The Declaration of National Unity he signed in August in order to secure President Viktor Yushchenko's necessary support for him to become prime minister included WTO entry by 2006, as well as NATO membership.

Ukraine's membership in the trade body would be less troubling to Russia than the presence of NATO bases belonging to its former Cold War enemy. Indeed, far from opposing the move, in a joint press conference with Russia's Prime Minister Mikhail Fradkov, Yanukovych said that Ukraine and Russia would work to "minimise the negative consequences" of unsynchronised accession to the WTO.

"We have agreed that this work will be performed at the level of ministries, we will hear a joint report and discuss measures for protecting our markets - both Ukraine and Russia," said Yanukovych.

The US has said that it will continue to support Ukrainian accession to NATO, though such an event looks highly unlikely.

Meanwhile, Ukraine has suffered from soured relations with Russia since 2005's Orange Revolution, particularly with increased tariffs on gas transported into the country by Russian gas monopoly Gazprom. The country relies on natural gas to heat its homes and fuel its vital industrial sector, particularly in the east of the country where the prime minister has his support base. Russia has indicated in recent months that it will be easier to negotiate with Yanukovych.

But while Ukraine is dependent on gas sent from Russia, and would be severely affected by and significant rise in tariffs from the current $95 per 1000 cu metres, Russia could be facing an energy shortage this winter, according to Russia's electricity distributor RAO UES.

"Russia is facing an electric power deficit and has asked us for help," said Aleksei Sherbertstov, the deputy minister of energy and fuel.

Russia has agreed to hold the tariff at its present level though the end of year despite the fact that the Turkmen gas it supplies to Ukraine has increased from $60 per 1000 cu metres to $100 in September. RAO UES has complained that Gazprom does not supply it with enough gas to generate levels of electricity to meet the country's needs. In this context the distributor asked the Ukrainian ministry of fuel and energy, headed by Party of the Regions member Yuriy Boyko, to help it with electricity supplies this winter.

The ministry and RAO UES are discussing a supply of 1900 MW per month, which would be generated from Ukraine's gas supplies, some of which will go to the Krasnodar Territory, a region bordering Ukraine. He went on to say that Ukraine has capacity produce excess power of some 5m KW at three of the country's power plants.

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