American Ukrainian Chamber of Commerce and Industry and its partners have created news updates on the leading topics of interest for individuals and companies pursuing trade and investment in the Ukraine.
November 1st, 2010
News Updates
KYIV - Energy independence is consistently flagged as key to the country\'s development. But with natural gas production declining, Ukraine remains addicted to increasingly expensive Russian imports.
In an interview with the Kyiv Post, Patrick Van Daele, general manager in Ukraine for global energy major Royal Dutch Shell, said major foreign investment is needed simply to maintain current output. He called on the government to eliminate the barriers to bringing in badly needed Western money and technology.
Shell is the only multinational energy company with a presence in Ukraine, including a controlling share in a growing chain of gas stations and, since 2006, an exploration agreement with Ukrgazvydobuvannya, a subsidiary of state-owned Naftogaz.
Van Daele, a Belgian national with 27 years of experience at Shell, attributed the recent drop in gas production to the dominance of energy giant Naftogaz on the market. Ninety percent of Ukrainian gas is produced by cash-strapped Naftogaz, with the rest coming from tiny and often embattled independents.
Van Daele said independents\' production levels were flat or inching up, while that by Naftogaz is declining. \"They know [the reason] themselves and they\'ve said it many, many times: We have no money to reinvest in our oil and gas fields,\" he said.
The price of gas imported by Russia has risen from $50 per 1,000 cubic meters in 2005 to the $230 agreed earlier this year, a 30 percent discount on a higher price in return for an extension on the Russian navy\'s stay in Crimea until at least 2042.
But Ukrainian households and industry continue to be heavily subsidized at the expense of Naftogaz, which houses the state\'s exploration and production together with importing and sales under one roof.
As a result, Naftogaz cannot raise the hundreds of millions of dollars needed to maintain current production levels.
BRING IN MORE MULTINATIONALS
The solution to this problem, according to Van Daele, is to bring in more multinationals under production sharing agreements or joint ventures with Naftogaz to give Ukraine the financing and technology it so badly needs to get at Ukraine\'s hard-to-reach gas reserves, much of which is deeply embedded in rock or the Black Sea.
But despite a widely acclaimed law overwhelmingly passed by Ukrainian lawmakers in July that envisions the liberalization of Ukraine\'s gas sector in line with European legislation, the country is still a long way from facilitating foreign investment.
The law foresees the unbundling of Naftogaz into its separate entities of gas transportation (which is profitable), sales (which is not) and production (which could be).
Van Daele, like many others, is cautiously optimistic, but raises certain concerns.
\"The gas law is a big umbrella law. Underneath there are many secondary bits of legislation, the small rules that determine what really goes on. A lot of this still has to be changed, and one of the concerns that we\'ve expressed is: Ok, the agreement on this umbrella is fine, great, necessary and timely. So now all this secondary legislation needs to be brought in line with the big umbrella,\" he said.
And although Shell is aware of a government plan to fill the umbrella law with more detailed legislation, the umbrella law itself contains serious flaws namely, in its defining of the role of a sector regulator.
\"The regulator should see how the market is developing, respond to that, making sure that everyone gets their gas on a monthly basis, balancing all the needs of the various customers. He should not have an open telephone line to the cabinet of ministers that influences what goes on at the regulator.\"
OBSTACLES TO SHELL\'S EXPANSION INTO GREATER PRODUCTION
Meanwhile, Shell is itself feeling penned in by Ukrainian legislation.
Obstacles to Shell\'s expansion into greater production include yearly changes to the country\'s budget law, which affects licensing. \"There is the oil and gas law, there is the subsoil code those are the pieces of legislation that determine by 90 percent what you can and cannot do and how you should do it. But there is 10 percent of legislation that is stipulated in the budget law, and this changes from year to year.\"
Another obstacle for Shell and other foreign companies interested in seeking a production sharing agreement with the Ukrainian government is a new amendment, passed on Sept. 23, which removes the \"stabilization clause.\"
\"Stabilization means that if you entered into a production sharing agreement, then you will execute this agreement for its duration under the rules and typically its 30 to 50 years under the rules that were agreed at the time of signing. So any subsequent changes to the tax code or whatever legislation will not affect you.
\"A production sharing agreement is typically for investments that will require billions of dollars. Nobody is going to put that money on the table unless you have some guarantees that the rules of the game are not changed mid way. Someone has decided that the stabilization clause should not be in there anymore, and has removed it. And I can tell you if that stabilization clause doesn\'t go back again, then nobody in his right mind will be willing to come and invest here.\"
NOTE: Kyiv Post staff writer John Marone can be reached at marone@kyivpost.com .
LINK: http://www.kyivpost.com:80/news/business/bus_general/detail/84558/
2. CRITICAL ISSUES ON UKRAINIAN OIL AND FUEL MARKET
U.S.-Ukraine Business Council (USUBC), Wash, D.C., Fri, Oct 1, 2010
WASHINGTON, D.C. - Today the business environment on the Ukrainian oil and fuel market is reported to be basically in crisis which seriously disturbs the international investors in this sector according to reliable sources. Since August of 2010 a torrent of reportedly illegally imported crude oil and motor fuel is said to have been entering Ukraine, which is brusquely distorting competition and causing notable underpayments of taxes and fees to the state budget of Ukraine.
In just over one and a half months around 330 thousand tons of motor fuels and crude oil is reported to have been imported questionably or in some cases probably illegally. Most importantly, these volumes seem to be growing on a weekly basis and are already not limited to solely energy products.
What seems to be happening is possible, it seems, thanks to the revival of what some in Ukraine are calling \'fraud schemes\' that are currently reported to being utilized actively by some market players. One of the \'schemes; reportedly allows an importer to basically not pay and probably evade paying excise, VAT and import fees at the customs point.
CONTROVERSIAL COURT DECISION
The \'scheme\' was \'legalized by the controversial court decision that referred to the provisions of the Law of Ukraine \"On Foreign Investment in Ukraine\", which was effective in 1992, granted the right to a number of companies to import oil and oil products (including motor fuels) under a tax-free regime.
However, the court some how ignored the fact that the law\'s force was terminated back in 2000 by a decision of the Parliament of Ukraine.
Meanwhile, all other law-abiding international and local investors in Ukraine (both producers and importers) are still paying all the applicable taxes and fees in a timely manner and in full. As of today around 130 thousand tons of motor fuels and over 80 thousand tons of crude oil is reported to have been imported using this scheme.
The other \'scheme\' seems to provide \'importers\' with the possibility to bring products into the country by-passing customs during August-September 2010 some believe around 90 thousand tons of so-called \'smuggled\' motor fuels have reportedly entered Ukraine.
In total, both schemes could have already cost the state budget of Ukraine more than $100m in tax underpayments.
Such a disturbing situation puts the law-abiding international investors operating on Ukrainian oil and fuel market on the edge of survival.
UNDERMINES FAIR AND TRANSPARENT COMPETITION
Providing some individual market players with what has been called unprecedented tax incentives really undermines the very grounds of transparent and fair competition and threatens this current multibillion international investments in Ukraine as well as discourages any further ones.
Along with other still pressing critical issues such as the widely reported \'fraud\' auctions on the sale of Ukrainian crude oil and the possible deferral of Euro-4 fuel standards introduction, and the \'illegal\' import and tax discrimination the result is that the investment climate of Ukraine deteriorates and the fuel and energy industry feels the full negative impact of such actions.
Finally, the above mentioned \'privileges\' reportedly granted to some individual companies contradict numerous international obligations of Ukraine.
(1) First of all, WTO Membership Agreement prohibits Ukraine from using taxation mechanisms (particularly VAT and excise fees) for discrimination and/or granting preferences.
(2) Secondly, above mentioned court\'s decision is not in line with Ukraine\'s intentions set out in the Memorandum with IMF where it obliges to \"improve tax administration with aim to strengthen the discipline, fight fraud schemes and eliminate tax pits (tax evasion mechanisms)\".
(3) Thirdly, according to the Draft EU Association Agreement (and future EU-Ukraine Free Trade Area agreement) Ukraine pledges to undertake efforts to ensure effective customs control, which would support the development of legal trade and commerce while combating fraud \"shadow\" schemes.
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3. HORIZON CAPITAL ACQUIRES UKRAINIAN LIFE INSURANCE COMPANY FORTIS
Horizon Capital, Kyiv, Ukraine, Thu, Sep 16, 2010
KYIV - Horizon Capital, a leading regional private equity fund manager, announced today that it has reached agreement to acquire 100% of Fortis Life Insurance Ukraine from its current shareholder Ageas. The funds will come from Horizon\'s $390 million EEGF II fund, which was raised in 2008. The financial terms of the transaction have not been disclosed.
This is Horizon Capital\'s first investment since the onset of the financial crisis in late 2008 into the financial sector where it has already built a strong portfolio including Platinum Bank in Ukraine, MTBank in Belarus and Fincombank in Moldova, as well as Universalna Insurance Company in Ukraine.
Fortis Life Insurance Ukraine is the #6 player on the life insurance market in Ukraine. The Company started operating in 2003. Since then it has successfully developed a nation-wide agency network and considerably expanded its distribution capabilities in the broker, corporate and bancassurance channels over the past years. It is led by a talented and dedicated management team with both international and local managers.
Natalie Jaresko, Co-Managing Partner of Horizon Capital, commented on the deal: \"With the investment into Fortis Life Insurance Ukraine we continue to back sector leaders. The Company has an effective business model and is well-positioned to capture a considerable share of an underpenetrated market in the future. The experienced management team has proved it knows how to achieve growth in the number of satisfied customers by providing value to them and thus growing the company\'s top and bottom lines.\"
Gijs Jeuken, CEO of the Company, said: \"In Horizon Capital we\'ve found a long-term investor that has an excellent reputation, strong regional presence, and solid expertise in the financial sector. This is an exceptional opportunity for us to grow the Company and make it the first choice for our clients.\"
The transaction is expected to close by the end of 2010.
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4. UKRAINIAN POLITICAL RISK AND CREDIT INSURANCE NEWS
WASHINGTON, D.C. - The market for political risk and credit insurance in Ukraine has loosened up some in recent weeks, according to Paul Gregory,
Paul told USUBC that \"One of the companies he has worked with in the past regarding insurance for Ukrainian risk, Willis Ltd (London), now has access to a private facility that will accept Ukrainian risk for qualifying companies with adequate size, reputation, and experience in the political and credit risk category.\" This is a new development Paul reported.
\"The main alternative thus far has been the Overseas Private Investment Corporation (OPIC) and OPIC remains an alternative. The emergence of the private facility presents considerable advantages for those that qualify,\" Mr. Gregory stated.
For further information contact Paul Gregory, PaulGregoryNY@aol.com ;http://www.PaulGregoryInsurance.com.
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