Posted: Sep 18, 2008, 12:25 PM CST
HMMMMMMMMM Interesting political climate in the Ukraine....Dashed Hopes for Ukraine's Economy?
A government scandal threatens growth and could jeopardize EU & NATO membership...
When it was privatized in 2000, the Odessa Oil & Fat Plant was a rusted hulk in the grimy Moldavanko section of Odessa, a Ukrainian city on the Black Sea. But Konstantin Grigorishyn, 36, a politically connected former physicist who built a fortune trading computers and currency in the 1990s, thought it had potential. After buying a controlling stake in the plant, he spent $12 million on top-of-the-line equipment. Sales have climbed from $20 million to $80 million since privatization, and the factory has captured 28% of the Ukrainian margarine market. Thanks to investments such as Grigoryshin's, Ukraine's $38 billion economy is on track to grow 4% this year.
So is it finally time to cheer for this former Soviet Republic as entrepreneurs rebuild an economy devastated by a decade of industrial banditry? No--it may be time to weep. A country with a history of political tragedy, Ukraine can't seem to avoid more heartache. A government scandal is threatening the country's budding but still-fragile economy and may thwart its long-range goals of membership in the European Union and NATO.
At the center of the tempest is President Leonid Kuchma, a 64-year-old former Soviet factory director. According to audio tapes secretly made by Kuchma's former bodyguard and recently authenticated by the Bush Administration, Kuchma, back in 2000, approved the sale of a Ukrainian-made Kolchuga aircraft-detection system to Iraq. The sophisticated device is capable of helping Saddam Hussein shoot down U.S. and British warplanes patrolling Iraq's airspace. It's not clear whether the system was actually delivered, but such a transaction would violate U.N. sanctions against Iraq. The Bush Administration, which has suspended $55 million in U.S. aid while it ponders further action, is not accepting Kuchma's denial that he approved the sale. "Ukraine is at a crossroads," says a U.S. diplomat. "To be a part of the West, Ukraine has to act like the West."
With its vast swathe of fertile black earth and well-educated population of 49 million, Ukraine is an emerging market worth playing for. Big Russian conglomerates are snapping up refineries, metals factories, telcos, and milk plants. Western multinationals such as McDonald's Corp., with 51 outlets in Ukraine, Philip Morris Cos., with a $60 million tobacco plant, and Nestlé, with a $20 million candy factory, are establishing footholds. "They're all making money," says Jacques Mounier, head of the Crédit Lyonnais branch in Kiev. He estimates their returns at 20% to 30%.
But the Kuchma scandal is rattling markets. Mobile-telcom Kyivstar GSM recently halved a scheduled $200 million Eurobond placement, a first for a Ukrainian company. The Kuchma regime itself could have trouble placing the $500 million to $600 million Eurobond offering it needs to roll over debts coming due next year. "There is a chance of default," says economist Tetiana Sytnyk at the International Center for Policy Studies in Kiev. On Nov. 12, Standard & Poor's voiced concern over the "fragile integrity" of Kuchma's government and changed the outlook on Ukraine's B rating to negative.
The Iraq scandal is merely the latest embarrassment for Kuchma. The ex-bodyguard's audio tapes also implicate him in the gruesome beheading last year of a Ukrainian investigative journalist, Giorgi Gongadze, and a Kiev appellate court recently opened a corruption probe against him. Kuchma has denied any involvement in the murder.
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