Survey indicates that Ukrainians’ New Year’s holiday spending will increase from last year, despite crisis.

by Adrian Erlinger, The PBN Company, Washington, DC

It would seem logical that the past 12 months of gruesome financial conditions (13% GDP contraction and 13% inflation) would force Ukrainians to economize. But according to an annual survey of European holiday consumer trends released by Deloitte, a consultancy, the average Ukrainian plans to spend 2,500 hryvnias ($313) on New Year’s revelry — 300 hryvnias more than last year.

While two-thirds of Ukrainian citizens complain that the economic downturn has affected their personal financial situation, up from 50% last year, Ukrainians will spend an average of 1,250 hryvnias on gifts. Approximately 53% of Ukrainians will do their shopping during the holidays – when prices reach their peak. Still, the majority of Ukrainians remain budget conscious and 10% of those surveyed will complete a New Year’s budget for the first time. Cash, computers and cosmetics ranked high on the wish list, says Komsomolskaya Pravda v Ukraine. With 2010 as the Year of the Tiger, orders of feline statuettes are in roaring demand.

A side-effect of the recent swine flu pandemic, Ukrainians are increasingly relying on e-commerce this year to avoid crowded markets and malls, according to Zerkalo Nedeli. In Kyiv alone there are 60 online stores in operation specializing in handmade toys, folk art, ceramics and other gifts – a twelve-fold increase since 2006. 80% of online orders are made by people under 40, and the non-affluent customer is now more likely to click a mouse instead rather than brave the malls.

Delovaya Stolitsa reports that the crisis has led corporate customers, now unwilling to overpay for pricey spreads, to significantly scale back New Year festivities at Kyiv restaurants. In turn, the prospect of empty rooms has forced dining and entertainment establishments to massively reduce prices by two-fold from 2007 levels. Financial institutions still remain the most reliable customers for restaurant parties. Despite this, the standard corporate party has shrunk in half and now rarely exceeds 100 people. With food inflation soaring this year 20-30%, there is little in the budget for pop stars and other kinds of entertainment.

But for most Ukrainians, the holiday will be spent at home surrounded by family and friends at home. On average, 850 hryvnia will be spent on the old-fashioned sumptuous spreads complete with vodka, oranges and an evergreen tree – despite the fact that prices for these products from last year have increased 11%, 57% and at least 25%, respectively.

Sociologists and economists alike are peeking into such consumer behavior as a bellwether for what hopes to be a better year ahead. For the second year, Ukrainians are gathering around the New Year’s tree amidst an economic crisis. The year 2009 is certain to go down as the annus horribilis of the decade for many, and in a few weeks’ time holiday cheer will help Ukrainians forget a year marked by economic protraction, swine flu, and yet another cycle of elections.

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By Amanda Lahan, The PBN Company, Washington, DC

The Customs Union between Russia, Belarus and Kazakhstan has been officially established. The leaders of the three countries signed a formal agreement creating a unified customs union at a November 27 meeting of the Eurasian Economic Community (EurAsEC) in Minsk. A unified system of external tariffs will be put in place by January 1, 2010, while the unified Customs Code, still in the draft stage, will take effect on July 1, 2010.

Approximately 92% of the new tariffs are identical to Russia’s existing tariff system, meaning that Russia won’t have to change much. Considering that Russia has a larger number of tariffs than either Belarus or Kazakhstan, these two countries will have to increase their duties on some goods or put brand new duties into place. Kazakhstan alone will have to raise tariffs on more than 5,000 goods. Once the tariffs are in place, any increase or decrease will have to be negotiated by the governments of all three countries, making any changes a complicated process.

Other tariffs are yet to be determined. Russia currently has much higher import duties on cars - especially used cars - than Belarus or Kazakhstan, and is concerned that lowering these duties will result in a flood of imported used cars from these two countries, especially Belarus. While Russia has export duties on oil in place, Kazakhstan does not. Both of these thorny issues are not expected to be resolved any time soon.

While customs controls between Russia and Belarus are scheduled for removal on July 1, 2010, customs posts between Russia and Kazakhstan will remain until July 1, 2011 due to security concerns along Kazakhstan’s porous southern borders. Kazakh officials have proposed eliminating customs controls between the two countries a year earlier, simultaneous with the change on the Russia-Belarus border. The Russians have agreed to consider their proposal, but as of last Friday’s signing, the plan to remove the borders in 2011 remained in place.

Questions about Russia’s World Trade Organization (WTO) accession remain. On November 18, President Dmitry Medvedev said that Russia remains committed to joining the WTO and wants to complete membership talks as quickly as possible - alone or with trade partners Belarus and Kazakhstan. Undoubtedly, however, the creation of the Customs Union will decelerate the accession process.

As noted above, the fact that vast majority of the new tariff structure reflects existing tariffs, Russia will be required to change some of its customs duties, which may mean a renegotiation of some agreements with WTO members. Since relatively few of its tariffs will change, it seems unlikely that Russia will have to renegotiate all of its WTO agreements, as this would mean starting the accession process all over - an option no one advocates. However, it is possible that Russia may have to revise some of its agreements, and a timetable for this is nowhere in sight.

So, while it seems that Russia fully intends to enter the WTO, when it will actually happen is still up in the air.

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In addition to the 14 named companies, which hail primarily from the infrastructure sector, there are 435 smaller companies that would collectively account for less than a third of the total proceeds the government hopes to raise. According to The Moscow Times, the government’s target figure for next year’s tranche of privatizations is 77 billion rubles ($2.7 billion).

This announcement comes at a time in which state corporations are coming under increasing scrutiny for lack of accountability and corporate responsibility. Earlier in November, Prosecutor General Yury Chaika presented a scathing analysis of Russian state corporations, citing misuse of state funds, wrongful disposal of property, unsanctioned bonuses and absent supervisors. As a result of the prosecutor’s investigation 22 criminal cases have been opened in connection with the activities of state corporations.  As Dmitry Medvedev continues to push for economic modernization - a major theme of his State of the Nation address on November 12 - there is hope in the presidential camp that the privatizations will help raise standards at these companies, in addition to helping bridge the fiscal gap.

The 14 Major Companies for Privatization

Source: The Moscow Times

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“We will have to take into account this style of dealing with partners in the future, though this scornful approach toward partners mainly affects the Europeans, not us. GM did not warn anyone, did not speak to anyone … despite all the agreements reached and documents signed. Well, I think it is a good lesson.”

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By Martina Bozadzhieva, The PBN Company, Washington, DC

On September 10th President Medvedev surprised both Russian and international observers with an unexpectedly honest and critical article about Russia’s strategic challenges. Medvedev decried Russia’s “primitive raw materials economy, chronic corruption,” “inefficient economy…weak democracy,” and “negative demographic trends,” causing a flurry of comment and speculation. The fact that the article appeared in Gazeta.ru, an online news source often critical of the Russian government, only made it more unusual.

The initial reaction was one of skepticism, especially among Russians who were asking why he published such a scathing commentary now. Having been president of the country for a year and a half, critics charge that Medvedev hasn’t done anything to solve the problems he identified. A common criticism by both journalists and readers who posted comments on the Gazeta website was that Medvedev’s ambitious agenda for turning Russia into a high-tech, knowledge-based economy was impossible without true political liberalization. Very few seemed to buy Medvedev’s argument that “the more intelligent, smarter and efficient our economy is…[the more] our political system and society as a whole will also be freer, fairer and more humane.”

Many observers considered the article’s message to be yet another example of Medvedev’s tendency to speak eloquently about democracy and liberalism without doing enough to turn his words into reality. Others , however, have started to see “Go, Russia!” as a part of a larger attempt by Medvedev to separate himself politically from Prime Minister Putin. Medvedev’s statement before the Valdai forum that he might run for a second term has been interpreted as a part of an emerging pattern.

One litmus test of how serious the Russian president is about pursuing his modernization agenda could be more substantial personnel changes in the Kremlin. Since assuming the presidency, Medvedev has mostly kept his predecessor’s staff, a powerful group that arguably has vested interests in perpetuating Putin’s policies.

In this context, Medvedev’s appointment on October 7 of two new speechwriters - one as his head speechwriter and the other one to work alongside Vladislav Surkov, First Deputy Chief of Staff - might have a larger significance. Analysts are divided on whether the move is a first step in an overhaul of Putin’s supporters in the administration, or whether it is just a cosmetic change of no importance. Meanwhile, there are rumors that more changes in the administration are in the offing, including replacing the head of the presidential administration with the current justice minister, Alexander Konovalov.

In addition, in the past few months Medvedev has disagreed with Putin on how Russia is to join the WTO, a debate he seems to have won when Russia, Kazakhstan and Belarus announced on October 16 that they would join individually rather than together as a Customs Union. In terms of concrete actions, however, he has not substantially challenged Putin’s hold on power.

Behind the different perspectives on the significance of the president’s moves lie different assessments of Medvedev’s ability and desire to establish himself as a leader in his own right - and potentially to challenge Putin. Russia does have a history of leaders (Gorbachev and Putin, to name two) keeping a low profile for a few years after being elected as they consolidate their power, and then coming out to challenge openly the status quo. However, to make such a move Medvedev would need a strong support base for his agenda, both among the population and within Russia’s political elite. This might explain why “Go, Russia!” was clearly targeted at Russians critical of the government and interested in greater political as well as economic reform. It might also indicate that more changes to the Kremlin staff are forthcoming.

At the same time, there is some serious skepticism about Medvedev’s ability to mobilize popular support for his goals, not because many Russians disagree with his assessment of Russia’s problems, but because few believe Medvedev is willing and able to face the inevitable opposition. Several comparisons between the messages of “Go, Russia!” at Gorbachev’s glasnost were not optimistic about the prospects of the strategy. Medvedev himself seems to recognize the difficulty of mobilizing popular support. In his article he recognizes that Russians are in the habit of “relying on the state…or anyone else but themselves in solving their own problems.” Paradoxically, or perhaps predictably, his agenda is based precisely on the assumption that the state will lead society in reforming Russia.

As is typical, some of the more interesting questions in Russian politics remain veiled in mystery. Whether “Go, Russia!” is a crystal ball into Russia’s future remains to be seen.

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On the one hand, Russian Finance Minister Alexei Kudrin has been notably optimistic. In early September, he stated that Russia would be on its way to recovery as early as the third quarter of 2009. Later in the month, he said that the new forecast allowed him to predict a 1.6% GDP increase in 2010, with 3% in 2011 and 4.5% in 2012. He went so far as to estimate that Russia’s GDP will reach its pre-crisis level in the third quarter of 2012, although he did admit that adverse developments in the world economy would have a negative impact.

More in the middle of the spectrum, President Dmitry Medvedev has shown signs of optimism but has been more cautious than Kudrin. In discussing the results of anti-crisis efforts over the past year, he spoke of a slight GDP increase in the third quarter of 2009, as “just the first sign of recovery,” admitting that “it is too early to speak of a steady growth.”

On the more pessimistic side is Medvedev’s top economic advisor, Arkady Dvorkovich. In a September 17 statement he said, “There are no grounds to say that we have rebounded and are now growing stably. So far all the growth we are seeing comes from the injection of state funds.”

First Deputy Prime Minister Igor Shuvalov, who heads up Russia’s anti-crisis commission, shares these concerns - at the end of September he announced that the Russian government would begin privatizing strategic assets in order to raise capital in the face of a mounting budget deficit caused by falling energy prices and spending commitments.

And in discussing the draft 2010 budget, Prime Minister Putin bluntly cautioned against viewing the situation with rose-colored glasses - “I want to say it again,” he emphasized, “We can’t afford unjustified optimism.”

With the economic situation far from certain, indicators changing continually and a statistic to support virtually all viewpoints, it is not surprising that there are diverse assessments within the Russian leadership. What remains to be seen, however, is which viewpoint will dominate future fiscal and monetary policy.

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By Amanda Lahan, Account Manager, The PBN Company, Washington DC

After a summer of uncertainty, Russia’s World Trade Organization (WTO) accession process seems to be back on track - but the Russian government seems also be looking to get the best of both worlds. While it is voicing support for a timely accession to the WTO, it still supports the creation of a Customs Union with Belarus and Kazakhstan and simultaneous WTO entry for all three countries, despite the fact that Kazakhstan and Belarus are far behind Russia in terms of their accession negotiations.

In mid-September Prime Minister Putin again voiced his support for the three countries joining the WTO as a group, while at the same time asking the US to drop restrictions on trade with Russia.  Several days later, First Deputy Prime Minister Igor Shuvalov stated that Russia aimed to finish its WTO negotiations in 2010, and that WTO negotiations for Kazakhstan and Belarus should be conducted simultaneously. However, he also cautioned that the leaders of the three countries could change their plans if Kazakhstan and Belarus slowed Russia’s accession process. Shuvalov then reiterated his support for the countries’ accession as a group at a meeting of Customs Union members in Almaty on September 25th.

But although government leaders are apparently trying to pursue both routes simultaneously, not all of Russia’s bureaucracy is convinced. The Russian Ministry of Finance and the Federal Customs Service (FCS) have both come out with concerns about the implications of the Customs Union, particularly as it would affect excise tax distribution. Earlier this month, Vladimir Ivin, head of the analytical department at FCS, was quoted by Vedomosti as saying that the lack of mechanisms for distributing export tariffs is hampering the creation of the Customs Union. In Russia there are hundreds of export tariffs, while there are practically none in Belarus or Kazakhstan. How the tariffs will be collected and redistributed has not yet been clarified, and Ivin is concerned that this lack of clarity could threaten both the interests of Russian producers and the coffers of the FCS.

Russia’s Ministry of Finance is also concerned. Ilya Trunin, Director of the Department for Tax and Customs Policy, was quoted as saying that “the Ministry is carefully studying this question [of the Customs Union] - any losses to the budget would be highly undesirable.” Other officials at the Finance Ministry claim that the export tariff issue will be resolved during the second phase of the Union’s creation, sometime in 2010.

In summary, negotiations on the Customs Union are going forward and it seems that the Russian government, especially Putin and his team, still support Russia, Belarus and Kazakhstan acceding to the WTO as a group. It also appears, however, that Russia wants to leave itself an avenue to go it alone if accession as a Customs Union proves impractical. Crucially, getting the Russian entire government - and the associated bureaucracies - to support the Union will mean proving that there will be concrete financial benefits, and that it is not just an attempt to exert Russia’s influence in the region.

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– a quote from Respublika magazine’s open letter to Sberbank chief German Gref, after rumors circulated that the Russian bank would take over BTA following a court ruling that the magazine’s reporting played a role in causing a run on BTA deposits.

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Last week Russia’s Cabinet approved the draft 2010 budget. Prime Minister Putin promised to cut spending by government departments while also stressing social provisions, including “maternity capital.” Galina Khatiashvili, Intern, The PBN Company, Moscow, examines how the scheme to boost Russia’s population is being received.

When Russian parents have a second child, they are eligible for what is know as “maternity capital” - a benefit currently worth 312,162.50 rubles, or just under $10,000. Prime Minister Putin recently said that an estimated 300,000 families will receive 102 billion rubles next year as part of the scheme. But although it looks good at face value, its actual usefulness is limited, making it difficult for families to take advantage of the income boost.

Maternity capital can be claimed for three different purposes: to improve living conditions, to pay for education and to supplement a mother’s pension. To draw the benefit, families must justify the purpose through a complex and lengthy administrative process designed to help prevent fraud. And it can only be claimed as a credit to pay, for example, a building contractor, rather than be withdrawn as cash to use directly.

However, in light of the financial crisis, the ways that the benefit can be used are being expanded and restrictions are being eased. Families are now being allowed to withdraw 12,000 rubles cash with no strings attached. President Medvedev has also announced additional changes, including allowing families to withdraw cash to refurbish their house or apartment on their own rather than having to go through a contractor.

Experts, however, are skeptical about the actual effects of these changes. Many say it will lead to more abuse of the system without actually benefiting the families that need the money.

The Russian blogosphere tends to agree. To get their 12,000 rubles, people must fight through an even more cumbersome bureaucracy, which takes more time and effort than such a small sum is worth. Plus, the overall value of the benefit still doesn’t come close to subsidizing effectively the average cost of, say, refurbishing a city flat (although it admittedly goes further in small towns and villages).

But for many families, of course, especially in the difficult times, anything is better than nothing - or, as the Russian saying goes, “A tuft of wool from a mangy sheep is still wool.”

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By Yuliya Sobko, Head of Financial Communications and Investor Relations, The PBN Company, Kyiv

From the outside things have seemed particularly grim in Ukraine of late, with a combination of pre-election politicking and energy issues dominating international headlines. But in the midst of the severe economic slump Ukrainians are strikingly optimistic – about economic recovery (we hope we see production bottoming out in August) and the ability to cope with any policy mistakes that may come our way.

Ukrainians are stubborn survivors and optimists, and the government is more optimistic than ever. Ukraine’s Economy Minister Bohdan Danylyshyn, upbeat about the country’s future economic prospects, recently said that Ukraine has the resources to prevent the country from defaulting on its debts. “We have got the crisis under control and, little by little, Ukraine is overcoming it,” he offered as reassurance.

The draft State Budget, submitted to parliament on September 17, is also infected with bullish forecasts. The government expects GDP to grow by 3.7% in 2010, with inflation at 9.7% (compared to 1.5% GDP growth and 13.4% inflation forecasted by the World Bank). Based on these projections, the UAH 1.27 billion budget foresees a 19% increase in revenue and a 21% rise in expenditures compared to the 2009 budget (and the 2009 budget was based on rather upbeat forecasts as well). The budget deficit is predicted to increase by 49.9% in 2010 to UAH 46.7 billion, while UAH 4.5 billion is needed to cover credits and UAH 11.7 billion for credit arrangements. The fly in the ointment for the government? The fractious political situation makes it unlikely that the budget will be passed before the January elections.

Ukraine has been relying almost entirely on international institutions like the IMF to implement the reforms needed to kick-start recovery. Very little progress has been made, however. President Yushchenko has expressed his dissatisfaction with Ukraine’s failure to carry out the reforms in the IMF agreement, and former Finance Minister Ihor Mityukov has warned that Ukraine won’t be able to maintain an exchange rate of UAH 8.00-9.00 per $1.00 without IMF support.

However, the IMF has (for better or for worse) been unbelievably flexible with regard to Ukraine’s failure to comply with the requirements set out in its $16 billion bailout package. The IMF review to release the next $3.5 billion tranche is in November, and Ukraine has not yet implemented gas tariff reforms or a bank restructuring and recapitalization program. It has persisted in manipulating the exchange rate and failed to cap spending or proceed with tax and pension reform. And President Yushchenko has failed to push some of his attempts to curb spending through the legislature – parliament overrode his veto to approve the full program of spending for the Euro 2012 football tournament.

Seen in these terms, the situation on the ground is rather grim, but Ukrainians continue to remain hopeful. The World Bank recently confirmed a $400 million loan to revive and stabilize Ukraine’s banking sector and is discussing a three year investment program in roads and road safety.

But can more debt really salvage the situation? Until the government becomes a more active player in facilitating recovery, international institutions can only accomplish so much. And with political stalemate likely to continue until the election, Ukrainians can only cross their fingers and hope for the best.

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As The Guardian reports, Putin has been displaying a penchant for spontaneous generosity of late - last month the son of a Siberian shepherd was another lucky recipient of a Swiss timepiece.

Russia’s renowned luxury goods market may be suffering of late, but at this rate Putin will at least keep the up-market jewelers in business.

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The economic crisis has done little to dampen the enthusiasm of Kazakhs for lavish weddings. Yekaterina Syrtsova, Associate Account Manager, The PBN Company, Almaty, marvels at the glitz and wonders how it all adds up.

If you have ever visited Almaty, chances are you have been stuck in traffic amid two or three honking wedding corteges. This summer it has often felt like one happy couple’s celebration is everyone else’s traffic jam.

Wedding-induced bottlenecks have been prevalent this year, and looking at the splendor of the wedding corteges lined up in front of the Almaty Central Civil Registry Office every weekend, one might think that the crisis had actually passed Almaty by.

This year, the typical traffic-snaring Almaty wedding has not only featured Hummers and while limos. It is a two-day celebration with over 100 guests and complete with western designer clothing, a hired tamada (toastmaster), musicians, dancers, fireworks and even white doves liberated at the ceremony. All adding up to a minimum $8,000 price tag.

What is significant is that these newlyweds are not just the nouveaux riches with cash to burn. Relatively average income couples and their families are taking out massive loans to foot the bill. The Kazakh banks may be surviving on state support, shoring up their balance sheets and refusing mortgages, but it seems that bank managers are still saying ‘I do’ in granting wedding loans.

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By Bruce Wilson, Senior Consultant, The PBN Company, Almaty

Karim Masimov, Kazakhstan’s Prime Minister, has floated the idea of requiring foreign businesses that operate in Kazakhstan to keep a share of their funds in domestic banks. The need to help Kazakh banks is understandable, but would the proposal have a detrimental impact on the economy?

Kazakhstan’s banking sector still has serious problems, despite significant emergency investments by the government. Many banks, burdened by enormous foreign debts, are also mired in corruption scandals, and the damage to their reputations has further dampened economic activity throughout the country. Foreign investors, so the theory goes, are the ideal candidates to step in and help to bolster the banks’ balance sheets.

Foreign businesses have a vested interest in Kazakhstan’s economic health in general and the viability of the financial sector in particular. However, the merits of Masimov’s idea must be off-set against the additional damage that may be done to Kazakhstan’s international reputation. The proposal will be seen abroad as an additional challenge to investing in Kazakhstan - a constraint adding to the existing costs and risks of doing business in the country. If foreign businesses reduce their investments as a result the plan will backfire, further hampering Kazakhstan’s ability to attract capital and technical know-how. Ultimately, it may reduce the competitiveness of Kazakh products in the global market, raise prices for local Kazakh consumers and hinder rather than expedite Kazakhstan’s economic recovery.

Further details on Masimov’s proposal are currently awaited. The Prime Minister’s comments were sufficiently vague that if he wishes he can back away from the idea by saying that he merely wanted to explore ways of encouraging foreign businesses to use local banks, or to set targets that would be voluntary rather than obligatory. It is also possible, however, that the Prime Minister is motivated by a belief that foreign companies in Kazakhstan are not being good corporate citizens. He may even argue that they are wrong in their analysis of Kazakh banks’ cost/risk profile, and therefore have an irrational bias against those banks.

The delicate calculation that the Prime Minister appears to be making is that the negative effect of these requirements on the investment climate will be balanced by the support it provides to the banking sector. Unfortunately, the very fact that a debate has been opened on the topic is cold water on an already stifled economy.

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By Yekaterina Syrtsova, Associate Account Manager, The PBN Company, Almaty

Kazakh and western retail companies are pushing ahead with expansion plans despite the crisis.

Earlier this month Metro Cash & Carry, the German retailer, laid the foundation stone for its first supermarket in Astana and announced plans to build 10-15 stores in Kazakhstan. Arzan, a big local market player, unveiled two shopping centers in Almaty last year, and Magnum Cash & Carry followed suit, promising to establish supermarkets across the country. In a further sign that the sector is undergoing a shakeup, at the start of 2009, the chain SM-market bought supermarket chain Gross.

According to research published in newspaper Panorama, the annual turnover of the Kazakh retail sector is $2.5 billion for food sales and $8 billion for other goods. This is leading economists to speculate about a possible ‘hand off’ within the economy, whereby consumer spending takes over from oil and metals as drivers of growth, or at least as a counterweight to recession.

Consumers may be able to play this sort of role in shaping Kazakhstan’s economy, but key issues must first be addressed. Logistics is a major problem, particularly the lack of distribution platforms and storage facilities, as Stephen Kreeger, Country Director for Metro Cash & Carry Kazakhstan, told Kapital. Andrey Revin, Finance and Business Development Director of Eurasia RED, a big local developer, also cites the lack of both quality selling space and local franchisers selling international brands.

The arrival of big market players may be a catalyst, forcing Kazakh retail to restructure and address these issues. The beneficiaries, however, will be to local and international modern format retailers. Traditional family-owned kiosks will suffer from the double blow of crisis and competition as consumers increasingly favor large supermarkets with lower prices and frequent discounts and promotions. Open-air markets, a habitual destination for bargain hunters, will start to feel the pressure as well, particularly as the cash and carry model spreads.

At the moment - judging from the still busy shopping malls of Almaty, at least - the Kazakh people’s enthusiasm for shopping is undimmed. Kazakhstan’s consumers are certainly willing, but time will tell if they are also able to spend their way to recovery.

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The Russian economy has had a rough year, but information released on August 11 by Russia’s state statistics agency indicates that things may be levelling off.

According to the second quarter data, Russia’s GDP fell by 10.9% year-on-year but grew by 7.5% compared to Q1 09. But while the figures are giving rises to some cautious optimism, the emphasis is definitely on the word “cautious.” Yulia Tseplayeva, Chief Economist at Bank of America-Merrill Lynch in Russia, told The New York Times that “it is very likely that Russia has bottomed out and that recovery has started.” But at the end of June, the Russian government downgraded its overall GDP forecast for the year to predict an 8.5% decline, and unemployment and wage arrears remain major issues.

The situation in the markets is also putting a damper on ideas of recovery. The Central Bank has been forced to intervene in currency markets to help bolster the ruble, and the debate about possible devaluation has revived. And in June the MICEX Index slipped into bear territory.

Nevertheless, the 7.5% GDP increase from the first quarter is certainly a positive sign, and things will look even brighter if the Q3 figures show a similar trend.

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by Jonti Small, Senior Account Manager, The PBN Company

“A year after Russia fought a war with its former-Soviet neighbor Georgia…” begins the Wall Street Journal’s report on the fractious relations between the two countries. Why does this description sound off-key?

Putting aside questions regarding who fought with whom, it is the short phase ‘former-Soviet neighbor’ that makes a clanging sound. The more often one reads this clunky piece of journalistic shorthand, the more discordant it is. Hyphens are invaluable in heading off ambiguity, particularly in adjectival phrases – “a man-eating shark” is different to “a man eating shark” – but the WSJ’s phrase is so peculiar that it actually creates ambiguity.

Geographically Russia and Georgia are neighbors. And Georgia can be accurately, if unhelpfully, labelled a “former-Soviet country”. What I quibble with is the elision – the definition of Georgia as Russia’s “former-Soviet neighbor”. Georgia was part of the Soviet Union, and not its neighbor. (Except from 1917 to 1921 when Georgia technically was a neighbor to the Soviet Union, but this distant period is not what the WSJ is alluding to.) Newspapers aim to provide facts and context in as brief and accurate way as possible. In this case, the phrase is concise but the context is muddied and the accuracy lost, which is unhelpful in an article that meditates on which country was the aggressor in a recent war.

The use of ‘former-’ is frequently confusing, often reveals the writer’s bias and can easily become absurd. (Imagine the WSJ writing that “Gordon Brown visited the UK’s former-colonial neighbor Ireland.”)

More fundamentally, the present is complicated enough without being stuck in the past. Defining things by what they were, or how they were perceived to have been, is unimaginative at best. Otherwise news reports might as well write ‘former evil empire’ as a synonym for Russia …

The ‘former-Soviet’ shorthand has lost any valuable meaning it may once have had. As a coinage it has not only lost its value, it has be become counterfeit. Anyone seeing the phrase should suspect a forgery. It is time to take it out of circulation.

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During the interview, President Medvedev also noted that Russia was “striving to create a modern, competitive country” with “normal ties with the world.” Official transcript is available here.

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The negotiations were more straightforward this time than they were in May, when the second tranche was approved after delays. The IMF seemed generally pleased with the progress Ukraine has made, although  concerns remain about falling levels of output and industrial production.

In order to pass muster with the IMF, Ukraine has ostensibly agreed to reform Naftogas, the state gas company, and the gas supply system generally. This includes boosting the transparency of the traditionally opaque company, as well as implementing a schedule of gas price increases to help address Ukraine’s on-going gas payment issues with Russia. Ukrainian gas sector reform has, however, long been a hobbyhorse for international institutions, and it remains to be seen whether these IMF conditions will result in any substantive change.

Other conditions relate to pension, tax and banking sector reforms, all of which faced opposition in the legislature. The IMF also made concessions on the original loan agreement, allowing for a deeper budget deficit.

All eyes are now on Ukraine to see what sort of concrete progress is made. With elections now on the horizon, the IMF will be watching with particular care as the next review approaches.

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By Myron Wasylyk, Senior Vice President & Managing Director, The PBN Company, Kyiv

US Vice President Joe Biden’s visit to Ukraine this week accomplished three very important objectives not only for the US-Ukrainian bilateral relationship, but also for communicating Washington’s security policy views to Central and East Europeans.

First, Biden affirmed for official Kyiv the continuity of US-Ukrainian relations and their strategic importance to both sides on a wide range of issues. This ended speculation in both capitals about the status and nature of the bilateral relationship and affirmed that an independent, democratic and prosperous Ukraine remains a strategic priority for America.

During meetings with Ukraine’s political and business leaders, Biden specifically affirmed Washington’s support for the 1994 Budapest Memorandum, which gave Kyiv security assurances from the United States, United Kingdom and Russia in exchange for Ukraine’s getting rid of its nuclear weapons arsenal, one of the world’s largest at the time. The term of the memorandum expires this year and the Ukrainians were keen to receive a signal of support from Washington.

In another important step for Kyiv, the Charter on Strategic Partnership signed by Presidents George Bush and Victor Yushchenko was renewed. Biden announced a bilateral commission would be established to focus on economics, trade, energy, security and rule of law with an inaugural meeting of the commission scheduled for this autumn in Washington, DC Biden also affirmed US support for Ukraine’s Euro-Atlantic integration without mentioning NATO by name.

Official Kyiv also received confirmation of plans for a visit of US Secretary of State Hillary Clinton and a possible meeting between Presidents Barack Obama and Yushchenko this fall.

While the Ukrainians received almost all the items on their bilateral “wish list,” how Ukraine ranks with regard to America’s other global priorities remains to be seen. Debates among Washington bureaucrats and policy wonks continue regarding Ukraine’s importance and relevance to the US-Russia relationship. Nonetheless, Biden’s high-level assurances in Kyiv this week about Ukraine’s importance to the US have left a positive impression here.

Secondly, Biden offered Ukrainians and other Eastern Europeans a wider view of the Obama Administration’s thinking and rhetoric with regard to US foreign policy and international relations in the region. His remarks at the Munich Security Conference earlier this spring and Obama’s “reset theme” in US-Russian relations has caused trepidation and misunderstanding throughout East European capitals.

Last week, 22 intellectuals and former leaders from Central and East European countries signed a letter to Obama stating their fear that spheres of influence are being re-established in the region with a “revisionist Russia.” They fear the U.S. will trade off its support of Central and East European democracies in exchange for securing Russia’s support for America’s nuclear disarmament agenda, particularly in Iran.

The intellectuals stated: “We know from our historical experience the difference between when the United States stood up for democratic values and when it did not. Our region suffered when the United States succumbed to “realism” at Yalta. And it benefited when the United States used its power to fight for principle during the Soviet era.

Biden explained that a reset in US-Russian relations is not a threat to Kyiv or any other capital in the region. He said the United States is not seeking to build spheres of influence or domination in the region, countering that “zero-sum thinking” is a 19th century idea with no relevance in the 21st century, where “America recognizes state sovereignty as the cornerstone of the existing international order.”

Biden echoed earlier remarks made by Secretary of State Clinton, who said the US wants to create a multi-partner world, as opposed to a multi-polar one, where partnerships are not aimed against anyone. He assured Ukrainians that the US is looking for strong partners and called upon them to help meet common challenges.

Thirdly, Biden delivered to Ukrainians a bitter pill on their economic policies and an indication of what Washington expects from Kyiv in the coming weeks and months. If Ukraine’s government wants to receive assistance from international financial organizations and US support on a number of policy fronts, ranging from economics and energy sector reforms to international security cooperation, Biden said unpopular moves are required.

So far, Ukraine’s government has been reluctant to take austere and unpopular economic decisions due to a January 2010 presidential election.

Instead, government subsidies continue on a wide range of social programs that have widened Ukraine’s budget deficit to historic levels. It’s currently predicted to reach 6 percent of gross domestic product this year. On the other hand, opposition calls for populist measures such as raising the minimum wage as Ukraine’s unemployment soars and private sector contracts; and has blocked the work of parliament for the past several weeks. These two facts alone have turned away international investors from Ukraine this year and possibly next year too.

Biden said the International Monetary Fund program was “an opportunity for Ukraine,” if the government cuts the budget deficit, enacts tax reforms, revives the banking sector and removes energy subsidies. “Energy efficiency alone,” he said, “would be a boon to Ukraine’s economy.”

In summary, Biden’s visit to Kyiv helped soothe the nervous mood in Eastern European capitals with affirmation of US commitments to regional security issues that have been on the back burner since the transition from one American administration to another. However, with regard to Biden’s message to Ukraine on domestic economic policies, this author believes a bare minimum will be done by government officials in the run-up to the 2010 elections. Unfortunately, Ukraine’s political elite still does not understand that economic prosperity and global competitiveness are just as important a factor to Ukraine’s national security as the security promises made by world leaders through treaties, memorandums and various charters.

This article first appeared in the Kyiv Post on July 23, 2009

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