[Ohio UZO News] Ukraine: Economist; FT; EDM

[Deychak, Orest]

The Economist
Ukraine's government 

A political soap-opera, continued

May 29th 2008 | KIEV 
>From The Economist print edition

The politicians fight among themselves, and the liberalizing reforms
cease.

WELCOME to the latest episode of Ukraine's political soap-opera,
starring Yulia Tymoshenko as prime minister and Viktor Yushchenko as
president. Here is the plot so far. Ms Tymoshenko, the white-clad
heroine of the "orange revolution", reunites with Mr Yushchenko and
scores a famous victory in a parliamentary election last October. The
"villain" (and former prime minister), Viktor Yanukovich, is defeated
and recedes into the background. After three months of bargaining Ms
Tymoshenko becomes prime minister and forms a coalition government. 

Then Mr Yushchenko gets jealous of his more popular partner. Instead of
letting her run the government as he promised, he starts interfering in
almost every decision and publicly scolding Ms Tymoshenko. She tolerates
this humiliation for several months, then explodes. 

On May 13th Ms Tymoshenko's party blocked the podium to stop Mr
Yushchenko addressing the Rada (parliament), the first time a
parliamentary majority has done this. Enter a supporting character:
Viktor Baloha, the president's chief of staff, who is plotting against
the coalition and accuses Ms Tymoshenko of building a "fascist regime".
The episode ends with the orange alliance at breaking-point-and a
paralysis of decision-making in Ukraine. 

The country has two heads of the state property fund, but neither
achieved any privatisations. Ms Tymoshenko and Mr Yushchenko have not
spoken for six weeks; both are said to have talked to Mr Yanukovich
instead. In the meantime, inflation is approaching 30%, corruption is
thriving and reforms have stalled. 

Few ideological differences separate Mr Yushchenko and Ms Tymoshenko.
Both want Ukraine in the European Union and NATO, both advocate a
free-market economy. When they work together, they can be effective, as
they were in bringing Ukraine into the World Trade Organisation. But
with a presidential election due by the end of 2009, short-term
political manoeuvres now take precedence. 

In truth, rivalry and squabbles have haunted Ukraine ever since the
orange revolution. But because the economy has been doing well, most
Ukrainians have paid little heed. Now this luxury is disappearing. One
reason why inflation is so high is that Ukraine's central bank, which is
under Mr Yushchenko's control (he once ran it), is keeping the hryvnia's
peg to the dollar, thus "importing inflation". Anders Aslund, an
economist, argued recently that Mr Yushchenko "seems more interested in
harming [Ms Tymoshenko] politically than in capping inflation". 

Ms Tymoshenko's populism does not help. She has started to compensate
Ukrainians for their savings lost in the high inflation of the early
1990s. Public spending has not increased overall, but it is now skewed
more to social payouts. Ms Tymoshenko might prefer to be fired (again)
than to be blamed for failing to curb inflation. But that is precisely
why Mr Yushchenko wants to keep her as long as possible. "Both sides
know that the coalition does not work, but neither wants to pull the
plug," says a foreign diplomat. 

There is little doubt that Ms Tymoshenko is a politician obsessed with
power, whereas Mr Yushchenko is more driven by his vision of Ukraine as
a democratic European country. But that does not, of itself, make him
more effective. Even his allies blame him in part for the current mess.
He has surrounded himself with shadowy advisers and been dragged into
petty squabbles between rival camps. He has not allowed Ms Tymoshenko
the freedom to do her job. Hryhory Nemyria, deputy prime minister, says
that the president's office issued 800 instructions to the government in
just 100 days. 

A deeper reason for the chronic political crisis is that Ukraine's
constitution does not satisfactorily divide the powers of the president
and prime minister. Both camps want to change this, but each wants to
serve its own interests, says Oleh Rybachuk, Mr Yushchenko's former
chief of staff. Ms Tymoshenko wants a stronger role for the prime
minister. This, she argues, would be better for Ukraine's EU aspirations
and less divisive. "Presidential elections split the country between the
west and east," says Mr Nemyria. 

This would be more convincing if Ukraine's parties were not simply
vehicles for their leaders and their financial backers. "If you remove
Ms Tymoshenko from her party, it would simply cease to exist," says Mr
Rybachuk. At times, Ms Tymoshenko's party resembles a cult, but her
charisma does not extend to her colleagues. In the recent mayoral
election in Kiev, her candidate lost to the incumbent, despite her
insistence that "he is me without the plait". 

Unlike Ms Tymoshenko, Mr Yushchenko does not have much of a following,
even within his own party. "After the orange revolution, Our Ukraine had
a chance to become a really democratic party and include people who had
stood on Maidan Square. Instead it has become a party of the
nomenklatura," concedes Mr Rybachuk. 

For all its chaos, however, Ukraine is now a recognisable democracy with
free media and a strong opposition. The all-pervasive fear is gone. In
this respect, it is a lot healthier than Russia, where the prime
minister and the president act almost as one. But being more democratic
than Russia is no longer enough. Corruption, one of the country's
biggest problems before the orange revolution, is little better and
infrastructure is still poor. 

Indeed, a senior executive of IKEA says that it seems harder to open a
store in Kiev than in Moscow. Judging from the mayoral election, things
are unlikely to improve. Its winner was the incumbent, Leonid
Chernovetsky, nicknamed "Cosmos" for his spaced-out and erratic
behaviour and his allegiance to a local sect, the Embassy of God, which
professes that "wealth is not for sissies". It is impossible to say how
the recent crisis will play out-probably in a messy compromise-but
Ukrainian politicians are on borrowed time. 

One sign that many voters are fed up is their strong interest in past
leaders. A record number took part in a popular television show, "Great
Ukrainians" (based on its British equivalent). The winner was Yaroslav
the Wise, an 11th-century Kiev prince. Yaroslav once warned his children
that "if you dwell in envy and dissension, quarrelling with one another,
then you will perish yourselves and bring to ruin the land of your
ancestors." So far his advice has fallen on deaf ears.

Financial Times

Kiev and Moscow in dispute over naval port

By Stefan Wagstyl and Roman Olearchyk 

Published: May 28 2008 

"There's one," says Gennady Basov, pointing to a Russian flag on a car
aerial in the Black Sea naval port of Sevastopol. "There's another, and
another."

It could be a children's game. But Mr Basov is 37 and has an entirely
adult agenda - he is a pro-Russia activist promoting a Russian sense of
identity in a city that Moscow lost to Ukraine with the collapse of the
Soviet Union. 

He says: "Sevastopol really belongs to Russia, not Ukraine. Documents
prove it."

To many Ukrainians, Mr Basov's comments are highly inflammatory. But in
Sevastopol itself, with its large ethnic Russian population and historic
ties with Moscow, these are mainstream views.

The city of 340,000 has become the latest focus of tensions between
Ukraine and Russia. Kiev this month banned Yuri Luzhkov, Moscow's mayor
and a strong supporter of Russian claims to Sevastopol, over a speech he
made in the city. 

Moscow responded by prohibiting Yevhen Korniychuk, Ukraine's first
deputy justice minister, from travelling to Russia after he proposed a
ban on Vladimir Putin, the Russian prime minister, for suggesting
Ukraine was "not a proper country".

The war of words has escalated since Ukraine this year announced its bid
for a Nato membership action plan, a formal step to joining the
alliance. Nato rejected the application but has promised to reconsider
later this year. Viktor Yushchenko, Ukraine's pro-west president, has
pledged to keep banging on the door.

Moscow opposes Nato enlargement and is determined to stop Kiev's
accession because of the deep links between Russia and Ukraine. It is
flexing its muscles in the ex-Soviet Union by supporting Russia-oriented
regions and populations in neighbouring states, notably in breakaway
Abkhazia in Georgia.

With 60 per cent of Crimea's 2m population ethnic Russians, the entire
region is of interest to Moscow. Ukraine has accused Russian politicians
of interference, notably in relations between the ethnic Russian
majority and the 250,000-strong Crimean Tartar minority, which is very
loyal to Kiev. 

But Sevastopol matters most as it is home to the Russian Black Sea
fleet, which this month marked its 225th anniversary with rousing
parades and rallies. Under the agreements that split the Soviet Union,
the former Soviet Black Sea fleet was divided between Russia and
Ukraine, with Moscow securing the lion's share and rights to remain in
Sevastopol. In 1997, Kiev granted Moscow a 20-year lease on the base. 

The Russian navy dominates the city, with scores of ships moored in its
harbours and an imposing headquarters building on a promontory
overlooking Sevastopol bay. Russian naval buildings are scattered across
the city centre, including an officers' club and a museum. Unlike many
provincial Russian and Ukrainian cities, central Sevastopol is in good
trim, the white-washed public buildings standing proud against the blue
waters and sky. Russian officers stride about in full uniform; off-duty,
they drink in waterside bars. 

Visiting Russian politicians gather large crowds. Even in their absence,
Mr Basov and his local colleagues maintain the pressure with pro-Moscow
rallies staged in the central square named after Admiral Pavel Nakhimov,
a hero of the Crimean war. 

Mr Luzhkov and other nationalist Russian politicians say bluntly that
all Crimea, including Sevastopol, belongs to Moscow. They claim it was
never historic Ukrainian territory but was included in Ukraine only in
1954, when Nikita Krushchev, the Soviet leader, transferred Crimea from
the Russian republic inside the USSR to the Ukraine. In communist times,
this made little difference but it meant that with Ukrainian
independence in 1991, Crimea went to Kiev.

Mr Luzhkov's supporters further claim that Sevastopol itself was not
included in Khrushchev's gift because, as a military city, it was ruled
directly from Moscow, even after 1954. Kiev counters that Russia has
acknowledged Ukraine's borders in treaties since 1991 and explicitly
recognised Ukraine's ownership of Sevastopol, not least through the 1997
lease.

Mr Putin has not publicly questioned Crimea or Sevastopol's status. But
he has said he wants the fleet to stay after 2017 and he has implicitly
questioned Ukraine's sovereignty. 

Mr Yushchenko, who generally keeps a low profile over Sevastopol, this
month proposed a draft law on terminating the fleet agreement. 

Mr Korniychuk, the banned Ukrainian official, says: "It's very sad that
relations between Russia and Ukraine are deteriorating. We can settle
the issues between us. But now may not be the right time to make these
decisions."

Eurasia Daily Monitor

www.jamestown.org <http://www.jamestown.org/> 

 

May 30, 20008

OIL REFINERY CONSTRUCTION PROJECT EXAMINED AT THE KYIV ENERGY SUMMIT

The Energy Summit in Kyiv (see EDM, May 28, 29) looked at a detailed
proposal for construction of a refinery in Ukraine to process Caspian
oil. The underlying idea is to reduce Russia's strong influence on
Ukraine's refining industry and oil-product market by building a
large-capacity, technologically advanced, internationally competitive
refinery in Ukraine.

Intentions to build oil refining capacities in independent Ukraine have
not met with success thus far. Ukraine's six existing refineries, dating
from the Soviet era, generally operate with obsolescent equipment at low
refining margins and short of European standards for product quality.

Of those six refineries, three are fully Russian-owned (Lukoil's Odessa,
Alliance Group's Kherson, and TNK's Linos-Lysychansk); another one is a
Ukrainian-Russian joint venture (Kremenchug, owned by Naftohaz Ukrainy
and Russia's Tatnafta); and only the two smallest refineries are
Ukrainian-owned (Nadvirna and Drohobych, with majority stakes in private
ownership through Pryvat Group and minority stakes in state ownership).

Ukraine depends heavily on importing Russian crude oil, which covers
some three quarters of Ukrainian demand at present. Russian oil
deliveries to Ukraine have declined in recent years, down to 9.8 million
tons in 2007, causing refineries to operate far below capacity.
Nevertheless, Ukrainian dependence on Russian oil has remained constant
or even increased, largely due to the cessation of Kazakh oil exports to
Ukraine. Ironically, those deliveries ceased in 2003 and 2004 despite
Bush Administration assurances that American companies in Kazakhstan
would deliver oil for the Odessa-Brody pipeline.

Refineries in Ukraine were only utilized at 30 percent of the total
capacities in 2007, down from 41 percent in 2004 and from 57 percent in
2000. The overall utilization rate, a key indicator of efficiency, has
fallen due to aging equipment, temporary shutdowns at some refineries,
shrinking deliveries of Russian crude oil, and the lack of Ukrainian
access to Caspian oil.

These refineries' product mix and product quality are also inadequate.
Overall, they produce insufficient gasoline, diesel, and jet fuel, far
below the levels of demand in Ukraine and adjacent parts of neighboring
countries. At the same time they produce excess fuel oil, at low or even
negative margins. Only one refinery (Lisichansk) is capable of meeting
Euro IV quality standards for oil products, but none can meet Euro V
standards, implementation of which is expected to begin by 2009.

In this situation, the construction of a modern, large-capacity refinery
in Ukraine is seen as an especially attractive proposition. Mott
MacDonald, one of the leading energy consultancies worldwide, presented
this proposal at the Kyiv summit. It envisages building a
technologically advanced refinery with a processing capacity of 10.5
million tons of crude oil annually, or some 200,000 barrels per day. Its
production would target the large and growing markets in Ukraine and
parts of neighboring countries, where high demand is forecast for diesel
fuel and jet fuel in the years ahead, while demand for fuel oil plummets
in Ukraine. The proposed refinery could significantly reduce Ukraine's
imports of refined products and petrochemicals.

The proposed Ukrainian refinery would accordingly maximize gasoline, jet
fuel, and diesel fuel in its product mix while minimizing fuel oil. It
would target gasoline largely at regional markets, jet fuel and diesel
largely at the internal market. And from the outset it would produce in
conformity with the Euro V standard, thus with a strong potential for
export.

Capital expenditures for the project are estimated at $3 to $4 billion;
construction time at three to five years (depending on the choice of
location and other variables); and operating expenditures after
completion at $400 million annually. The refinery could be configured to
process the Urals Blend of Russian oil from the Druzhba pipeline, or
alternatively Azerbaijani light oil, or the Caspian Pipeline
Consortium's (CPC) Blend, which mixes Kazakh light oil with the
lower-grade Urals Blend and is delivered through the CPC pipeline from
Kazakhstan to Russia's Black Sea port of Novorossiysk.

The first and third of these options, however, would not seem consistent
with the proposal's overall strategic rationale to reduce Ukraine's
dependence on Russian oil.

That goal is attainable through deliveries of Azerbaijani or Kazakh oil
via Georgia's Black Sea and onward by tankers to Ukraine. Rising Caspian
oil production and recent acquisitions of Georgian maritime terminals by
the state oil companies of Kazakhstan and Azerbaijan (see EDM, May 20)
have created that possibility.

The proposed refinery's location, and the question of whether it would
be linked in some form to the Odessa-Brody pipeline, are yet to be
decided. A working group was tasked at the Kyiv summit with moving the
refinery project forward.

Meanwhile, Azerbaijan and Kazakhstan are showing interest in acquiring
ownership shares in oil refineries and product distribution chains
around the Black Sea region. While in Kyiv, President Ilham Aliyev
confirmed Azerbaijan's interest in extending the Odessa-Brody pipeline
into Poland or building a refinery near Brody. The State Oil Company of
Azerbaijan would participate not just as an oil supplier but as a
partner in the consortium for building the pipeline or the refinery with
a network of fuel stations (Mott MacDonald, "Market Study for the
Construction of a New Refinery in Ukraine," Kyiv Energy Summit, May
2008; UNIAN, www.azer.taj, May 22, 23) 


--Vladimir Socor

 

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