29898 ukraine

UKRAINE: A Business-Risk Assessment

May 13, 2011

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UKRAINE: A Business-Risk Assessment Editor’s Note: As requested by BMC Software, Inc., this report discusses the risk of doing business in Ukraine, focusing on the country’s political stability, economy, regulatory environment, security and labor issues as they relate (where possible) to the software sector. STRATFOR has also provided a forecast on any major shifts that might occur in these current conditions over the next three years.

Introduction Outside of Russia, Ukraine is the most strategically important of all former Soviet states. Physically, Ukraine is the largest country in Europe, lying east of the European Union. Ukraine borders seven countries and the Black Sea. Ukraine has historically been Slavic, even as it was integrated and divided into and among various empires over the centuries. Seventy-eight percent of the population is Ukrainian and 17 percent Russian, and nearly a third of all Ukrainians consider Russian their first language. Almost all Ukrainians speak Russian as their second language.

Since the 19th century, Ukraine has been part of the Russian Empire then the Soviet Union before gaining independence in 1991. Hence, it is nearly impossible to talk about Ukraine without discussing Russia. Ukraine is the cornerstone to Russia’s defense and survival as any sort of power. The former Soviet state hosts the largest Russian community in the world outside of Russia -- approximately 15 million -- which resides in a zone geographically identical and contiguous to Russia itself. Ukraine has traditionally been the Russian and Soviet breadbasket, and it is tightly integrated into Russia’s industrial heartland. It is the location of nearly all of Russia’s infrastructural links not only to Europe but also to the Caucasus, making it critical to Russia for both trade and internal coherence. The most important piece of this infrastructure moves 80 percent of Russia’s natural gas supplies destined for Europe. Russia also houses its strategic Black Sea Fleet in Ukraine, not in Russia.

Ukraine gives Russia the ability to project political, military and economic power into Eastern Europe, the Caucasus and the Black Sea. Ukrainian territory also pushes deep into Russia’s sphere of influence (it is only 300 miles from Ukraine to both Volgograd and Moscow). Without Ukraine, Russia would have fewer ways to become a regional power and would have trouble maintaining internal stability.

Moreover, so many in Ukraine consider their ties to Russia not only as a form of protection but also as an inextricable bond.

Political Stability This deep connection to Russia is why Ukraine’s pro-Western 2004 Orange Revolution was a nightmare for Russia and many Ukrainians. The change in government in Kiev during the revolution brought in a president, Victor Yushchenko, who was hostile to Russian interests and with him a slew of scenarios that could harm Russia, including the possibility of Ukraine being integrated into the European Union or NATO. The Orange Revolution also deepened the Ukrainian-Russian divide within the country.

Ukraine’s population is divided between those that look east toward Russia and those who look west to the EU. The divide nearly runs perfectly down the Dnieper River, meaning half of Kiev and the eastern and southern parts of Ukraine are highly pro-Russian, while the rest of the country is pro-Western.

Such a divide can be clearly seen in political allegiances with the pro-Western parties that came to power during the Orange Revolution, which were supported almost exclusively by voters in the western part of the country.

However, the wave of change generated by the Orange Revolution did not materialize into the proWestern country Europe and the United States had hoped for. The deepening divide exacerbated already existing political tensions. Pro-Western forces under Yushchenko and former Prime Minister Yulia Timoshenko struggled to hold onto power while being completely ineffective in actually 2

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implementing any Western reforms. In short, the Orange Revolution led only to chaos. After 2004, Russia did not attempt a full counter to the Orangists. Instead, Moscow was content merely to meddle in Ukrainian affairs in order to keep the country destabilized and prevent it from falling completely into the orbit of the West.

The rolling back of the Orange tide began in 2007 when Victor Yanukovich’s pro-Russian Party of Regions won back the parliament and began to pick away at Yushchenko and Timoshenko’s popularity.

Helping Yanukovich were internal squabbles between Yushchenko’s Our Ukraine party and Timoshenko’s eponymous bloc. Moreover, the Ukrainian people began to grow tired of a chaotic government. The only real stability the country knew was under Moscow’s wing, a realization that led to the inevitable change in government in 2010 that brought pro-Russian Yanukovich into the presidency while also holding together a coalition with a majority in the parliament.

Under Yanukovich, the political theater has calmed by Ukrainian standards. Having Moscow’s meddling end with a pro-Russian government has settled the upheaval of the previous five years. But this does not mean that all the chaos is over; Ukrainian politics are inherently dramatic, unstable and unpredictable. Orange leader and former President Yushchenko has nearly dropped out of the public eye altogether, while his partner Timoshenko is still attempting to be an opposition figure against Yanukovich, though her popularity has been in heavy decline since the elections. Since Timoshenko is a political survivor, however, she could return at some point as a real force.

Another possible destabilizing factor is whether Yanukovich’s coalition, which consists of his party, a handful of independents, the Communist Party and the Litvin bloc, breaks apart. After the 2010 elections, Yanukovich gave nearly all his Cabinet positions to his own party with only a few doled out to the Litvin bloc. So far the coalition partners (including those without Cabinet positions) have not contested Yanukovich’s domination of the government, but egos are a driving factor in Ukrainian politics, and a break in Yanukovich’s bloc cannot be ruled out.

Typically, with each turnover of the government and coalitions the laws and reforms passed by the former ruling group are either undone or ignored. This has seriously retarded any restructuring or improvement in almost any sector or institution in the country.

Economic Overview Ukraine’s economy is volatile at best, leaving little hope for the country to pull itself out of any difficulty. One problem is that each region in Ukraine is highly dependent on a specific industry for money. When that industry fails, the entire region tends to fail. Furthermore, most of Ukraine’s lucrative businesses are based in the eastern half of the country, which typically gives that half (and Russia) a bit more political and economic power. Although Ukraine’s economy depends mainly on its metallurgical industry, it also gains much revenue from grain, military exports and energy transit.

However, each of these sectors is suffering from deep problems that could not be easily fixed even if the country had the proper tools.

Ukraine did not start to pull out of its post-Soviet economic slump until around 2000, when the country began to see the results of rebuilding and modernizing its core sectors -- heavy industrial manufacturing and agriculture. But the 2008 global economic crisis hit Ukraine hard, shrinking its economy by 15 percent in 2009. A major component of this was steel demand, which fell 43 percent in 2009. During the crisis, inflation soared to 16.4 percent, and the value of Ukraine’s currency, the hryvnia, dropped by 38 percent against the dollar. Ukrainian banks faced depositor flight during the crisis due to instability and lack of confidence, forcing the government to nationalize more than a dozen banks.

The International Monetary Fund (IMF) planned on loaning $16.43 billion to Ukraine, though only $2.2 billion has been released -- the rest of the world, especially other European countries, were begging for funds as well. The IMF money that was released showed little effect, entangled as it was in the 3

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volatile political situation at the time, with every faction fighting for (and stealing) funds. Russia also stepped up to help Ukraine, issuing a $5 billion loan, which also became entangled in the factional fighting.

With the new and more stable government coming into office in 2010, Ukraine’s economy has seen some recovery. Inflation has fallen to around 7 percent, growth for 2011 is projected to be 4.5 percent and private consumption and investment is starting to pick back up, due mainly to plans for the Euro 2012 football (soccer) tournament (more on this below). Ukraine’s economic activity is expected to surpass its pre-crisis peak by 2013.

Regarding information technology specifically (including software), the sector now ranks fourth among Central and Eastern European countries. The IT sector was virtually immune to the global financial and domestic political crises that hit Ukraine, since it is isolated from the country’s strategic economic sectors, which rise and fall together, and has not been as affected by government interference.

Ukraine’s IT industry has actually grown since 2004 and this growth is expected to continue.

Infrastructure Ukraine’s transportation infrastructure used to be on the low end by Western standards, and the minimal maintenance it received after the fall of the Soviet Union led to nearly holistic degradation.

Today, this infrastructure (roads, rails, seaports and airports) is still in desperate need of modernization. One reason it has not been a priority is the cultural divide in the country, which has most people traveling very little outside of their respective regions. As a result, Ukraine has uncommonly high transport costs. This could all be changing, however, as transportation infrastructure as well as real estate and commercial development become top priorities for Kiev in the run-up to the Union of European Football Associations (UEFA) Euro 2012 football tournament in June and July 2012.

Telecommunications is much stronger sector in Ukraine than other types of infrastructure, though this depends on the region. Nearly all regional capitals have modern digital infrastructure, and analog and digital cellular services are available in many areas. In rural areas, however, telephone services are outdated, inadequate and of low-density, and a large demand for landline telephone service remains unsatisfied.

Overall, infrastructure deterioration has become the norm in Ukraine mainly because Kiev still expects foreign groups to come in and fund modernization projects even though the government runs the large strategic firms and organizations needed to invest in the projects. This is a lingering effect of the 2004-2010 disarray in government and factional disagreement about what is needed to move the country forward.

Business and Regulatory Environment Following the fall of the Soviet Union, Ukraine’s transition to a market economy has been the most challenging of all of the major transitional economies in the former Soviet Union (FSU). According to the World Bank, Ukraine is the second-worst FSU state in Eastern Europe to do business in, behind only Uzbekistan. In Ukraine, state institutions are weak, markets are small and volatile and the business culture has not easily adapted to the change. The transition has been halting, incomplete and dogged by corruption at every turn. Kiev still has not implemented the basic steps that are essential to a free market economy such as transparency, shareholder management, financial accountability and the rule of law, steps that the former Communist states in Central Europe had moved beyond by 1995.

The governmental chaos of 2004-2010 only set the process further back. In Ukraine, ownership structures are still sketchy, competition weak, transparency rare and conflicts of interest chronic.

In other FSU states, the country’s capital is the traditional financial center. Not so in Ukraine, where business and industry can be run out of any number of economic hotspots in addition to Kiev, including Donetsk, Dnipropetrovsk, Zaporizhia, Sevastopol and Luhansk.

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Of all Eastern European and former Soviet states, Ukraine has the most severe restrictions on foreign equity ownership. This applies to many sectors and is particularly acute in metals, agriculture, media and telecommunications. Some of the newer sectors like IT are less restricted, though there are still limits on equity ownership among those businesses. The World Trade Organization has pressured Ukraine, which became a member in 2008, to lift such restrictions, though such movement has been slow. Most foreign operations in Ukraine require full outside financing, since the vast majority of Ukraine’s banks are attached either to the state or to the country’s oligarchic networks, which consider bank lending to be an exotic income source.

However, there are many reforms under way that have cast the international view of doing business in Ukraine in a more optimistic light. This view has been brightened particularly over the past year, as a more stable government assumed office and the overall political situation began to stabilize. Under President Yanukovich, a bulk reform package has been put in place to overcome these business obstacles, though most businesses have yet to see any tangible progress. Some headway has been made in reducing the minimum capital required to start and run a business, making it easier to obtain construction permits, allowing electronic tax filing and streamlining local and national regulations.

However, the planned reforms will take years to be fully implemented (if they are at all) and even longer to become an ingrained, traditional practice.

Meanwhile, the government, still struggling to overcome the chaos following the Orange Revolution, has yet to consider judicial and legal reforms. Ukrainians also have a reputation for changing the rules of the game quickly and frequently, which makes it extremely difficult for foreign businesses and investors to change even minor details in most legal documentation. Complying with all laws is often impossible because many of the regulations are contradictory. There are old Soviet laws, newer Ukrainian laws, regional laws and contradictory regulations from various bureaus and agencies. This has opened the way for bureaucratic corruption and eroded Ukraine’s competitiveness for foreign investment.

The enforcement of investor rights is always sketchy in Ukraine, even in the courts, but paying attention to legal details can help firms avoid most problems. If at all possible, it is recommended that any foreign firm establish a working relationship with a Western law firm already operating in Ukraine as one of the first steps toward beginning its own operations. In Ukraine, unlike other FSU and Eastern European states, Western lawyers are held in unusually high regard and are more effective than most Ukrainian lawyers. The U.S. Embassy in Kiev offers a list of vetted lawyers and consultants to help U.S. businesses in Ukraine.

Another major hurdle to doing business in Ukraine, according to STRATFOR sources and to a World Bank survey, is tax issues. The corporate tax code is confusing, probably on purpose so that the state can manipulate corporations as needed. Taxes for all sectors, both manufacturing and nonmanufacturing, do not follow the typical formula of requiring businesses to pay a certain percentage of their income. Among Central and Eastern European states, Ukraine has the highest corporate taxes.

Although the official corporate tax rate is only 25 percent, this does not take into account the barrage of other taxes (state, value-added, etc.) that elevate the actual rate to about 55 percent. Proposed reforms would ease the burden on businesses at least in terms of pension, social security and insurance taxes. And electronic tax filing has reduced the time it takes to pay taxes, though it still takes three times longer to pay taxes in Ukraine than in any other Central or Eastern European country. Tax issues in Ukraine will continue to be burdensome for the foreseeable future.

Permits and inspections continue to be another serious barrier in the private sector. Businesses are hindered by excessive government control and an extremely strict system for obtaining permits. It is estimated that in Ukraine, the number of permits needed to operate a business are three to five times the number required in other FSU states. According to the World Bank, companies in Ukraine spend approximately $13 million in labor costs just trying to obtain permits. This is why so many Ukrainian businesses operate unofficially. It is estimated that approximately 25 percent of domestic businesses operate without permits, although foreign enterprises are required to maneuver through these permit hurdles to legally operate in the country. Also, Ukraine has more than 10 times the number of state 5

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inspections of businesses than the other FSU states. Many requirements imposed on businesses are outdated, overly complex and too expensive to meet, confusing businesses in determining how to comply. The harshest inspections are carried out by Ukraine’s State Tax Administration, State Fire Safety Inspectorate and State Sanitary and Epidemiological Service. On average, companies in Ukraine lose more than $37 million a year in dealing with such authorities.

With reforms under way, businesses are starting to feel the effects of laws adopted in 2006 that have cut the processing time for permit applications in half. Other reforms under consideration would create one consolidated national list of required permits instead of haphazard regional lists that are continually changing without notice.

Although Ukraine is considered one of the worst countries in which to do business, its IT sector is emerging as one of the most viable and one that people have confidence in as a promising business avenue. During the Soviet era, Ukraine was a major hub of scientific research, particularly regarding the space program, and after the dissolution of the Soviet Union many of the scientists and facilities converted to high-technology fields, including IT. This sector received a significant boost in 2006, when the West began pouring more money into Ukraine after the Orange Revolution, assuming that the country would be Westernizing.

Business Partners Establishing a relationship with a local partner can help a foreign business make its way through the red tape. Local partners know the area, are familiar with business practices and local officials and are already established. However, many foreign investors report being cheated by their local partners, so comprehensive due diligence is required. Also, a foreign company teaming up with other foreign companies has traditionally been frowned upon in Ukraine, though this mentality is slowly changing.

There is also occasional backlash from Ukrainian firms involved in the same field as foreign firms.

Ukrainian businesses tend to act more on personal whim than common corporate sense, and in finding a foreign company to partner with -- whether from Ukraine or another country -- it is best to choose a company that has operated in Ukraine for a few years and has a good understanding of how the country functions.

Working Within the System After years of political and state stagnation in the aftermath of the Orange Revolution, trust in the Ukrainian government is very low. Many Ukrainians see their government as selfish, corrupt and exerting a level of control over business activity that is far too intense and at the same time ineffective in providing a fair, competitive environment. Dealing with the government can be a dizzying experience for any company, largely because there are so many competing factions and agencies within the government and such a variety of local, state and regional administrations.

As mentioned above, Ukraine is a divided country, so political connections with the more pro-Western officials in Kiev and the western parts of the country could backfire on a company also trying to work in the eastern or southern parts of the country, which are more pro-Russian. Foreign businesses wanting to avoid being politicized should be aware that, in Ukraine, geography matters; where a business operation is established can leave an indelible mark on that business and affect its future operations elsewhere. Having a more consolidated government in Kiev does suggest that these conditions could ease up in the next few years, though Ukraine has a hard time changing habits that have been entrenched in its culture for decades.

Beyond government, the primary factions in Ukraine are the country’s financial-industrial groups -- the oligarchs. These are no more than a few dozen men who made their millions (or billions) by fleecing the state or each other in the aftermath of the Soviet collapse. Most control some sort of vertically integrated series of businesses in steel, agriculture, energy and media. For the foreseeable future, the oligarchs will remain a dominant part of Ukraine’s economic landscape, though their power will rise and fall with politics in the country, since most oligarchs are allied with one political figure or another.

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Most foreign lending institutions, particularly multilateral ones, avoid contact with the oligarchs.

Investors coming in, however, often find themselves stepping onto the oligarchs’ self-perceived turf.

As Ukraine develops new business sectors like IT, the oligarchs will have less knowledge of those fields and less of a claim over them, though their control over certain regions of the country means there are other ways to cross their paths.

Corruption Although local laws prohibit bribery, extortion and corruption, all three are common in the Ukrainian business environment. According to the World Bank, nearly 63 percent of business owners in Ukraine resort to such methods when dealing with regulatory authorities. Transparency International estimates that Ukrainians pay nearly 20 percent of their income in bribes. When a U.S. business operator resorts to bribery to facilitate his business operations, there is little the U.S. Embassy can do to assist that operator in any resulting business or legal dispute.

Businesspeople operating in Ukraine report that those who choose to bribe officials are very conscientious about it. First they make sure that whoever is seeking a bribe actually holds some leverage over the business. Bribing someone completely unrelated to a business’ interests has been known to set up blackmail situations in which money can be continually extorted. Cash, whether in U.S. dollars, euros, hryvnia or rubles, has been the best medium for bribery in Ukraine, but in situations where law-enforcement observation is an issue, many businesspeople have used luxury items such sport utility vehicles and jewelry.

Labor The Ukrainian labor force is highly educated but lacks many of the skills necessary to operate in a modern technocratic economy. Consequently, the country’s labor market is driven entirely by supply, and most foreign firms operating in Ukraine, particularly small- and medium-sized businesses, cite labor shortages as a chief threat to their survival. Shortages are particularly acute among sales agents, engineers of all types, IT specialists, personnel managers, project managers and financial specialists. This is a regional issue, as the level of education and modern technical skill rises the further west in the country one goes. Kiev sees the highest level of skill, while the rest of the country is exponentially behind.

The first reason for such a gap is that the global economy has grown in size and advanced technologically since the Soviet collapse, but the Ukrainian educational system has either regressed or stalled. The result is that, while Ukrainian workers have a high educational level, they have not been able to update their skills very much over the past two decades. The second reason for the gap is demographic: Ukrainian birth rates are abysmally low and the country has the fastest growing HIV/AIDS population in Europe.

Meanwhile, labor unions in Ukraine have a tumultuous relationship with the government, with most labor concerns unrecognized by any court system. Labor unions are not guaranteed the right to strike or to engage in collective bargaining. However, there is a mentality of “worker obedience” in Ukraine left over from the Communist era. Worker strikes and employer lockouts, common in the late 1990s during the economic crisis, have been rare over the past five years.

Overall, the largest problem specific to the IT sector is the labor pool. Compared to other sectors, IT labor costs can be two- to three-times higher as businesses are forced to develop the necessary yet hard-to-find skills through in-house training. This requires braving Ukraine’s bureaucratic maze, since most types of training require government licensing. Consequently, strong retention programs are necessary to prevent the loss of skilled employees to an increasingly expensive labor market. Intern programs are also highly recommended because they allow employers to keep the most promising individuals. In Ukraine, typically, about half of all interns stay on staff after their program is completed.

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Security Unlike most of the other former Soviet states, Ukraine has no major security threat. There are no international territorial disputes, acts of terrorism or wars. Although it does provide a base for Russia’s Black Sea Fleet on the Crimean Peninsula, Ukraine is not part of, nor does it intend to join, any major military alliance like NATO or the Collective Security Treaty Organization.

However, Ukraine is deemed by the U.S. State Department as a high-risk country for business security. This is because of corruption, but organized crime, petty crime and “hooliganism” are also common. Petty crime in Ukraine is prompted by poverty and exacerbated by the lack of police pressure. Tourists and foreign businessmen are often targeted by pickpockets, muggers and robbers.

In Kiev, street crime -- often committed by gangs that rob foreigners at knifepoint -- does specifically target tourists and Westerners.

Hooliganism is a large problem in Ukraine, as it is in most of Europe, and is usually centered around football matches. Packs of drunken or angry youths storm the streets looking to destroy property or rough up pedestrians. “Skinhead” violence also is on the rise in the major cities, particularly on and around Hitler’s birthday (April 20). People of African or Asian descent are sometimes targeted during this time. Such hooligan and skinhead activity can include small bombs being detonated at banks or in parks, though the scale of such attacks has never been large. (It is important to note that acts of crime and hooliganism can be rather sophisticated, if not large in scale, since Ukrainians can easily obtain military-grade explosives on the black market.)

Politically motivated violence aimed at Westerners and Western interests has been known to occur following political disagreement between the West and either Ukraine or Russia. This was seen in 1999 during the U.S.-NATO military intervention in Kosovo, when Westerners were attacked on the streets in Kiev. The same is true for politically motivated attacks against Russia by pro-Western Ukrainians, such as the homemade bombing of a church in Zaporijia in July 2010 when Russian Orthodox Patriarch Kirill I was visiting.

Most violent crimes in Ukraine are linked to organized crime, though these groups rarely target Westerners. Still, dealing with Ukraine’s omnipresent organized crime is sometimes unavoidable.

Organized-crime groups in Ukraine can operate by business sector or by geographic area, so businesspeople can find themselves being targeted by more than one group. Fighting these groups is not only costly but also dangerous, since most groups will not dwell long on the decision to eliminate competition or resistance with lethal force. Many Western firms employ security services, though this provides no guarantee of safety.

Human trafficking in Ukraine continues to be a problem, which was recently demonstrated by an agreement signed by the United States and Ukraine in February 2011 to fight human trafficking. It is estimated that since the fall of the Soviet Union, 100,000 Ukrainian citizens have been smuggled to Western Europe to work as prostitutes or indentured laborers. No information is available on whether foreign business travelers to Ukraine have ever been abducted and trafficked, and the U.S. Embassy has reported no known instances of any U.S. citizens being kidnapped.

According to the FBI, a major concern for foreign businesses, particularly those in the software sector, is that Ukraine has become a hotbed for cybercrime. In October 2010, several members of a major ring of cybercriminals were arrested in Ukraine and the United States after an FBI investigation found they had created a global cyberscheme using Trojan horses to steal more than $70 million. Even a leading Internet service provider (ISP) in Ukraine, Hosting.ua, was reportedly involved in hosting spam and malware. Organized crime is believed to be involved in Ukraine’s cybercrime trend.

Copyright theft in Ukraine is also commonplace. The International Intellectual Property Alliance reported in 2010 that copyright theft in Ukraine was “rampant and intractable,” with piracy rates in 8

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certain industries exceeding 80 percent. Openly operating in Ukraine, with billboards to promote them, are two of the world’s 15-largest BitTorrent file-sharing protocols, which are used to distribute pirated downloads over the Internet. Vendors in open-air markets sell pirated software, music and videos in the open. Even the Ukrainian government reportedly uses pirated and unlicensed software.

Police forces in Ukraine do not commonly employ English-speaking officers, which makes it difficult and time consuming for some foreign visitors to coordinate preventative security measures with, and report criminal activity to, local police. Many times, law enforcement agencies in Ukraine are part of the crime problem rather than the solution. With low salaries, poor training, corruption and lack of equipment, Ukrainian police forces are not considered highly reliable or effective. Indeed, the current situation in Ukraine favors criminals, not law-abiding citizens or foreign visitors.

Another security issue comes from federal security forces -- both Ukrainian and Russian -- which are omnipresent in Ukraine. The Ukrainian Security Service (SBU) and its Russian counterparts (the FSB and SVR) have close ties, and these services are considered the most powerful friend or enemy that anyone in the country can have. Foreigners should exercise good judgment in all situations that may involve SBU, FSB or SVR agents and keep in mind that these security services represent Ukraine’s anti-foreign and nationalist factions. Traditionally, the security services do not meddle in everyday businesses that are not deemed strategically significant. The one exception is technology theft, which these services often engage in, with Western firms as their primary targets.

What Next?

Russia vs. the West Russia considers the tussle to bring Ukraine back under its wing wrapped up for the most part. It isn’t looking to reintegrate Ukraine back into Russia as it did during the Russian imperial or Soviet days, but it does want to ensure that it can influence Ukraine’s orientation and prevent Western influence from permeating this strategically important buffer.

The West hasn’t given up, however. Although the United States is currently preoccupied in the Middle East and South Asia, quite a few influential European states, especially Poland, Romania and Sweden, are still intent on Westernizing Ukraine. Europe knows that as long as Moscow has a strong influence in Kiev, Ukraine will never really be up for EU accession. Moreover, many EU states do not want Ukraine as an EU member for three basic reasons: They fear the European Union is already too unwieldy; they have an aversion to including such a poor and chaotic country; and they want to avoid irritating Russia.

Instead, the Eastern Partnership (EP) project launched in 2008 has been the consolation for those looking to Westernize Ukraine. The EP initiative, which has been slow to get off the ground, is a kind of “friends of the EU” program for FSU states. Under the EP, Europe is hoping to liberalize visas and boost economic investment and aid. No matter which government is in power in Kiev, it welcomes the EP for the economic benefits it brings. Moscow has not been too concerned about the EP because it is such a loose alliance and many EU states are not very enthusiastic about it. However, should the EP start to really transition into an alliance with political influence, or as a superhighway to EU accession, Moscow will be quick to crush Ukraine’s involvement in the nascent organization. It is unlikely that the EP will reach that stage in the next decade or so.

Though Moscow is looking mainly to exert influence over Ukraine, there are many inside Russia who want some sort of economic integration. Discussions are under way to determine if Ukraine should join Russia’s new customs union, which has already integrated the economies of Belarus and Kazakhstan with Russia’s. But the discussions thus far have been merely rhetoric. Should Ukraine actually join, it could crush some of the country’s most important economic sectors under the new regulations. At this point, Ukraine does not appear to be on the path toward joining the customs union, although speculation about its integration will continue to be widely reported.

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UEFA Development The decision to hold part of the UEFA Euro 2012 football championship in Ukraine was made in 2007, when the Orange Revolution was still fresh and the West assumed Ukraine was going to fall into its fold. Since the shift to an anti-Western government in 2010, there is a lingering level of resentment in Europe about the games being held in Ukraine.

Generally speaking, UEFA-stipulated infrastructure requirements have caused Ukraine to go into overdrive. Ukraine expects more than 600,000 tourists to visit Ukraine for the games. Most new infrastructure will be modern roads and rail connections from the Ukrainian border to all the host cities (Kiev, Donetsk, Kharkov and Lviv). The wave of new construction also includes hotels (70 are planned for Kiev alone), airport upgrades in each host city, restaurants and large stadiums.

There is concern that Ukraine will not complete any more of the planned infrastructural expansion, upgrades or new construction than the minimum requirement called for under the UEFA regulations.

One problem for all the construction projects is the permitting structure mentioned above. As it is, most of the required projects are far behind schedule, and sponsors are concerned that some may not be completed by the time the games begin.

The government master plan has changed more than 20 times since 2010. Actual financial figures surrounding the plan are hard to come by due to lack of government transparency. The Ukrainian Finance Ministry estimates that the government spent roughly $3.5 billion on Euro 2012-related projects from 2008 to 2010. Over the next two years, the latest government plan released in April indicates that taxpayers will spend $7.2 billion, though independent estimates are closer to $12 billion.

Another $7.5 million will come from city coffers and “other sources� of financing. Roughly 70 percent of these other sources will be public or semi-public companies, namely the state railway company Ukrzaliznytsia ($2.2 billion) and the state roadwork company Ukravtodor ($1.1 billion). (The latter is also expecting some $2.5 billion in government orders.) The government is hoping to cover part of the bill with borrowed money (mainly Eurobonds and low-interest loans from Japan and China).

For a government already in dire financial straits, the UEFA games are an incredible burden. Over the long term, however, the construction projects that are completed will be a boon for a country that has lagged behind in modern infrastructure development. There is hope that the new transit links will also help spur trade into and across Ukraine.

Security during the games will be a major issue. Traditionally, the European games are much more rowdy than the World Cup because football hooligans and skinheads can travel more easily on the continent than they can around the world. Past UEFA games in England and Portugal saw thousands of incidents of violence and property damage, mainly fights between rival spectator groups, broken windows and a car turned over here and there. Thus far, Ukraine has not planned to implement any alcohol restrictions, which tend to fuel such violence.

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