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News Analysis

But other experts say that it

depends on whose property rights we are talking about and who is going to court.

Independent political analyst

Viktor Nebozhenko views it as follows: “The country is divided into two countries. In one Ukraine there will be rule of law, there might be a point to invest there. And the other Ukraine is at best left to its own devices, and at worst, robbed by the government. They want to separate ‘good’ businesses connected to the so-called ‘Donetsk circles’ (not necessarily in Donetsk) and ‘bad’ businesses. If you are an investor who wants to make sense of Ukraine, first of all look for a ‘Donetsky businessman’, and he, in turn, will sort out all your problems….offering transparency, stability and return on your investment. But if you are connected to non-Donetsk businessmen, you are at risk.”

Gas is such a sore question in

Ukraine that it has become a cliché to say that Ukraine is hooked on the gas needle. Industries are in no rush to modernise and reduce their reliance on cheap gas to be competitive. And the state, dependent on exporters’ taxes for its coffers, tries its best to provide it.

One of the most controversial

acts of the new President was signing the Kharkiv agreements with his Russian counterpart Dmitri Medvedev, which allowed the Russian Black Sea Fleet to extend the lease on the Sebastopol naval base until 2042 in exchange for a 30% discount for Russian gas. Yanukovych’s


explained that Ukrainians could not face the gas price hikes, that the extra lease would bring US $40 billion of extra money to improve social standards and defence. The previous government was always vehemently opposed to these agreements. But some experts argued that the deal

Some experts now question the

‘naval base for cheap gas’ deal. The senior economist for the CASE Ukraina Centre for Social and Economic Research Volodymyr Dubrovsky says: “Yanukovych provided discounted gas for his side’s companies, at a price of some very non-transparent foreign policy concessions. If Russia paid the lease for its Black Sea Fleet base in Crimea into Ukraine’s budget in such a way that it could be used to avoid raising taxes, avoid piling on extra debt, and the gas prices became a headache for the chemicals and steel businesses - in that case, as an economist, I could understand the value of the Kharkiv Agreements to Ukraine.”

Dubrovsky, however, says that

raising gas tariffs for consumers was an unpopular but necessary step which Tymoshenko’s government had avoided but Azarov’s had to take to get the IMF loan. Many consumers are not happy. But as it turns out, the gas story is far from over for the industries either. On the 19th of August, a local court in Kyiv legalised the ruling of the Stockholm Arbitration Institute that the state of Ukraine owes RosUkrEnergo close to US $5 billion for gas expropriated at the height of the gas crisis in 2009. Reasons for the Shevchenkivsky court’s decision are being quesitoned and Naftogaz has appealed, but if Ukraine does end up paying the money, it could mean gas price increases for industry. And this issue has caused the first cracks of disagreement to appear in the ruling coalition.

Political analyst Viktor

Nebozhenko, notes, “The biggest divide in the Party of Regions is between those who own gas (like Dmytro Firtash and his company, intermediary RosUkrEnergo)

did, in fact, serve the interests of Ukrainians: gas is the biggest expense for many. Recently, however, gas tariffs for consumers surged about 50%.

Non-residents gain access to Public procurement

As part of its clampdown on actual and perceived corruption, the Yanukovych government has tightened up the laws surrounding public procurement with the aim of ensuring the bidding process is more open and transparent.

Probably the most important

innovation among these new provisions is that under Ukraine’s newly adopted Law

on Public Procurement (the ‘Law’), officially approved and effective from 30 July 2010, non-residents are now able to compete in public procurement procedures on an equal basis with Ukrainian residents.

These regulations permitting access to public bidding by

non-residents reverse the earlier situation where under the previous rules, non-residents could only be admitted to public procurement procedures if the goods/services being bought could not be purchased from residents of Ukraine.

The procedure for conducting public procurement, such as open

bids, two-step bids, procurement from the sole participant, etc, has been modified and further clarified to make these procedures more transparent. The Law also made qualification requirements for participation in bids tougher (eg submission of relevant statements from the bidder’s bank confirming the absence of indebtedness under the credit commitments), which would prevent companies with defaults from participating in public tenders.

Under the Law, the Anti-Monopoly Committee of Ukraine

(the AMC) will perform the role of an administrative appeals authority with regard to disputes arising out of public procurement procedures. Previously the tender participant’s appeals had to be addressed to the Ministry of Economics or directly to the tender organiser (ie the customer).

Importantly, the Cabinet of Ministers of Ukraine has set a level

of fees to be charged for submission of appeals. Specifically, the appellant will have to pay UAH 5,000 to appeal regarding the public procurement of goods/services and UAH 15,000 to appeal about the procedures regarding the public procurement of works. On the one hand, such a level of fees will reduce the number of unreasonable appeals, but on the other hand it may prevent some small entrepreneurs participating in public procurement from enjoying their right to protect their interests, especially when the order price under the public procurement is not that high.

The Law is also introducing some other public procurement

rules, most of which are aimed at making public procurement procedures non-discriminatory and more transparent. UBi

Contributed by Olga Belyakova, Senior Associate at CMS Cameron McKenna LLC (Kyiv).

October/November 2010 UkraineBusiness insight 7

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