UKRAINE REPORT

February 28, 2007

Author: Sergiy Polovenko, BISNIS representative in Kyiv, Ukraine

The report summarizes commercial, political and business development news in Ukraine for February 2007. The information is received from the Ukrainian news agencies (UNIAN, Ukranews, Interfax-Ukraine, Ukrinform, Ekonomicheskie Izvestiya), regional periodicals (Kyivpost, Korrespondent, Kyiv Weelky), PR departments, and web-cites of the regional governments and local companies.

Some of the figures listed in the text are in local currency – Hryvna (UAH). Current exchange rate is 1 USD = 5.05 UAH.

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Agriculture:

The Cabinet of Ministers has lifted a limitation on fodder grain export from Ukraine. The limitation resulted from fear to provide the Ukrainian internal market with insufficient amount of grain, as warm winter may influence poor yield in 2007.

Indykpol, a Polish company, intends to invest up to USD 50 million in construction of a poultry processing plant in the Vinnytsia region.

Aircrafts:

A new jet aircraft AN-148 has held 8 world records and about 20 national records. In particular during the flight, which took place on February 24., the world record has been held in the 25-35-tone-take-off weight aircraft sub-class on the 1000-km closed route with 2- and 5-ton freight at 828.5-km/h. The plane has also lifted 10-ton freight at a record airspeed of 12,900 meters. According to national standards, the AN-148 has held a maximum cruising altitude of 13,655 meters.

India is going to ask Ukraine to submit proposals on modernization and extending the service lives of the Indian Navy's fleet of An-32 airplanes. The first stage will involve repair and extension of the service lives of the Indian Navy's fleet of An-32 airplanes while the second stage will involve modernization of the airplanes.

The joint-stock company "Motor Sich" (Zaporizhzhya city, South Ukraine) is engaged in negotiations on participation in the Russia-India Project on the light transport aircraft "MTA" development (Multirole transport aircraft). The Project's initiators "India-Russia transport aircraft" (IRTA), which is also known as Il-214 and Multirole Transport Aircraft (MTA), have proposed to the Antonov scientific and technical complex to provide a large amount of work on the new aircraft designing. As a result, Kyiv's designers have prepared a comprehensive action plan.

Automotive:

The Swedish automobile concern "SCANIA" will supply bio-powered buses to Poltava (Central Ukraine) within the framework of a special project. According to experts, using at the city's routes highly economical buses, powered on a relatively cheap bio-fuel, will be able to settle economic challenges and improve a quality of transportation while keeping current passenger fare.

Environment:

Ukraine and the Board of Deutsche Bank have signed a protocol of intent on participation of the Deutsche Bank in a tender for operator of quota realization, which Ukraine has gained under the Kyoto Protocol. According to the Minister for Natural Environment Protection, the Deutsche Bank offered to set the mechanism of Ukraine's Kyoto quotas realization through the Deutsche Bank units, while the protocol provides that these will be realized through a tender and the Deutsche Bank will participate in the tender.

Food sector:

The Swiss confectionery "Nestle" will invest 50 million USD in construction of a plant in the Volyn region in 2007. The plant will be engaged in manufacture of ketchup, souses and children food. The plant will provide additional 1,200 new jobs.

Initiatives:

Project of citizens' active participation in combating corruption presented in Ukraine

The US Agency for International Development (USAID) presented in Kharkiv the project of promoting citizens' active participation in combating corruption "Worthy Ukraine".

The project will focus on challenges, set by the Ukrainian Government in the program of cooperation with the Millenium Challenge Corporation, judicial reform, executive power monitoring and introduction of ethical and administrative standards, development and introduction of regulatory procedures, combating corruption in higher education.

The project consists of two parts: representative supporting and public interest protecting, public monitoring, media investigations and other anti-corruption initiatives on the part of the mass media.

European Commission permits import of Ukrainian eggs and milk

Upon a resolution by the European Commission the list of animal and plant products, which are permitted to be exported to EU countries from Ukraine, has been enlarged by milk and eggs, according to the sources of the Ukrainian Mission to the EU.

The decision resulted from the European Commission-conducted analysis of monitoring plans and checks by EC experts into an opportunity for Ukraine to export these to the EU.

The Cabinet of Ministers has tightened control over circulation of cut and uncut diamonds by adopting a resolution introducing mandatory attestation of commercial consignments of diamonds. The attestation procedures are to be drafted and approved by the Finance Ministry.

Attestation is a mandatory condition for commercial operations involving diamonds.

The resolution will come into effect on March 1.

International community excludes Ukraine from the list of countries with highest level of intellectual property piracy. Ukraine started combating piracy more efficiently, in 2006 as many as 812 crimes in copyright breaking were revealed, which was almost by 70% more than in 2005. In 2007 some 3,689 samples of audio/video products to the tune of over 6 million UAH (one USD=5.05 UAH) were withdrawn and activities of 48 underground workshops stopped.

Investment:

Direct investments into the Ukrainian economy in 2006 amplified by 37.1% up to 6,260,527 USD and amounted to 23,150,576 USD in January 2007. Huge amount of investments was registered in the sectors of financing, whole sale, real estate, metallurgy and food industry at 2, 419,800 USD, 2,264,000 USD, 1,773,400 USD, 13,398,300 USD and 1,247,600 USD, respectively.

The International Finance Corporation (IFC), posing as a department of the World Bank Group intends to invest into development of the finance and agrarian sectors of Ukraine as many as 295 M. USD.

Infrastructure:

European banks will invest almost 500 million EUR into development of the Ukrainian gas transportation system (GTS), as a part of a program, which will be drafted together by EU and Ukraine. Next year Ukraine is invited to take part in construction of stripped gas terminals in Europe.

European Investment Bank has granted Mykolayiv city a lax credit for the reconstruction of the municipal water supply system. The credit amount of 15.5 million EUR is given under Government guarantees.

UN "Municipal governance and sustainable development" together with Swiss Cooperation Office in Ukraine are to invest into development of Vinnytsia region's public utilities sector. The project will run through 2015 and is evaluated at 3 M. Euros.

The Northern Investment Bank stated its interest in fulfilment of municipal infrastructure development projects in Ukraine. The bank operates within 8 countries, including Finland, Sweden, Denmark, Norway, Island, Latvia, Lithuania and Estonia. The bank is engaged in granting long-term investment loans in the sectors of environmental protection, energy and small business crediting.

Mining:

US introducing new long coal-well-drilling system in Donetsk region. Within the framework of the Ukrainian and US governments' cooperation it is expected to introduce a new directional coal-well-drilling system in the Donetsk region; the system is designed for drilling of over 1,000-meter-long wells. The "Bilozerska" coal mine will be the first to apply the system. The US company "REI Drilling Ins" experts will advise Ukrainian party on the project. The US Department of Labour took a decision on financing technical assistance programs on promoting coal miners labour safety in Ukraine in 2004.

Heavy industry:

The Ukrainian company InterPipe and the Italian company Danieli have signed a contract on construction of a steel plant in Dnipropetrovsk. It is the first plant to be constructed in Ukraine for the past 40 years. The project realization will take 26 months and according to preliminary estimations, the plant's construction will result in reduction of using gas 8.5 fold and 2.5 to 10 times decreasing natural environment pollution. The enterprise's capability will amount to about 1.32 million tons of steel per year.

The European Commission has backed an agreement on creation of the world's largest aluminum production company, in which the Mykolaiv alumina factory will be included.

The new company will be founded through a merger of the following aluminum and alumina companies: RUSAL (to which the Mykolaiv alumina factory belongs), SUAL, and Glencore International AG (Switzerland). These companies concluded the agreement on creation of the aluminum company. According to the agreement, RUSAL will own 66% of the shares in the new aluminum company. The new company will be the largest producer of aluminum and alumina in the world, employing 110,000 people in 17 countries with annual produce of about 4 million tons of aluminum and 11 million tons of alumina. It will have a 12.5% share of the world's aluminum market and a 16% share of the world's alumina market.

Telecommunications:

The European Bank for Reconstruction and Development is considering granting Ukraine a credit for re-equipment of the Radio Broadcasting, Radio Communication and TV Concern (KRRT), with a view of introducing digital TV. The Cabinet of ministers in November 2006 adopted the concept of the state program of digital television introduction. The project financing by 2015 reaches over 560 million UAH (one USD=5.05 UAH) without considering inflation rate that is to build the whole network some 60 million UAH is needed annually.

Transport:

The European Bank for Reconstruction and Development is considering opportunity to granting the 75 M. USD credit for the "Ukrainian River Fleet". The project on modernization envisages construction of three vessels, the "Buh" and 30 river barges "Europe-M".

The "Ukrainian River Fleet" performs 45% of river and sea transportation through water, among 40 ports.

BISNIS (www.bisnis.doc.gov) is part of the U.S. Commercial Service (www.export.gov).