The U.S-Ukraine Foundation's Business E-Links

April 11, 2003

The following information provides an update on current business and economic news regarding Ukraine for the last two months. For more information or to submit a story, please contact Irene Mokra at bizlinks@usukraine.org or visit  www.usukraine.org

In This Issue:

- COMMENT on National Bank of Ukraine RESOLUTION On Transfer of Money in National and Foreign Currency for payment of works and services of non-residents

- IMF Upgrades Ukrainian GDP Growth Forecast to 4.5% in 2003

- Economic Development Program in Ukraine Funded by GILLETTE, Managed by the  INTERNATIONAL EXECUTIVE SERVICE CORPS

- LAND O’LAKES, Inc., APK-INFORM and SPARKS COMPANIES, Inc. win USAID Tender in Ukraine 

- UKRAINE AND GERMANY SEEK TO INCREASE TRADE TURNOVER BY 15.4% TO USD 3 BILLION IN 2003

- VOLKSWAGEN to Assemble Cars in Ukraine


                                
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COMMENT on National Bank of Ukraine RESOLUTION On Transfer of Money in National and Foreign Currency for payment of works and services of non-residents

(Article prepared by Igor Taranenk and Andrew Mac of, PricewaterhoouseCoopers Kyiv)

On February 12, 2003, the National Bank of Ukraine (⌠NBU■) issued Resolution Number 58, On Transfer of Money in National and Foreign Currency for payment of works and services of non-residents. This Resolution was registered by the Ukrainian Ministry of Justice on February 17, 2003 and came into force on February 27, 2003.

The Resolution provides rules and procedures for transferring money for payment of works and services, provided by non-residents. As is written in its preamble, the Resolution was issued to achieve the following lofty purposes:
∙ to prevent illegal capital outflow and increase transparency of payments;
∙ to prevent money laundering schemes that use inflated pricing mechanisms for goods and services; and
∙ to protect Ukrainian producers from foreign competition.

In order to achieve such goals, the Resolution enacts rules and procedures for the following three broad range of transactions:
1. transactions for works or services with non-residents for less than EUR 50,000;
2. transactions for works or services with non-residents for more than EUR 50,000 that obtain approval from the State Information and Analytical Center; and
3. transactions that require NBU consent.

The Resolution provides for a number of new rules for the payment of goods and services to non-residents for even small transactions. These rules require that before a bank transfers payment (for works and services) to a non-resident service provider, the following documents are presented to the bank:
∙ a copy of the works or service agreement;
∙ documents evidencing the services or work were actually performed; and
∙ if required, a license from the NBU (the Decree by the Cabinet of Ministers of Ukraine on the System of Currency Regulation and Control requires certain transaction obtain a special license from the NBU).

The above rules are relatively straightforward. However, they only apply when the amount of a transaction performed during one day to the favor of the same person or connected persons does not exceed EUR 50,000 or if the amount of one service agreement is not valued over EUR 50,000. If such a transaction or agreement exceeds EUR 50,000, the Resolution requires the following special procedures to obtain permission for such a payment:
∙ an expert price valuation by the State Informational and Analytical Center for the monitoring of external commodity markets determining whether prices for services subject to the agreement(s) are in compliance with the market rate; and
∙ confirmation from the non-resident that calculation of costs for provided services are accurate.

It is not yet clear how to obtain an evaluation from the State Informational any Analytical Center. Furthermore, the Resolution does not mention what specific information and standards the evaluating body should use to determine whether prices for services are in compliance with the market rate.

If the State Analytical and Informational Center does not certify compliance with the market rate, then NBU consent is required. In order to obtain such consent, the Resolution requires numerous documents be submitted to the NBU. Foremost among them, are the following:
∙ original or copy of the findings of an auditor’s who is properly registered as conducting business activities in Ukraine, or the findings of an international auditing company who is not registered in Ukraine, in an offshore zone or in the territory of a country under FATF sanctions;
∙ originals or copies of documents confirmed by established procedures evidencing actually provided services (if such services have already been provided); and
∙ original or officially confirmed copy of calculation costs of provided services certified by the non-resident.

This procedure also needs further clarification and modification. In certain cases, it is not clear how a resident of Ukraine should provide documents such as an auditor’s finding relating to the financial expenses of a non-resident service provider. For example, if a non-resident provides a resident with audit services, does one need an additional third-party independent auditor’s confirmation? Also, the calculation of costs of provided services certified by a non-resident maybe of a confidential nature and there is no provision to ensure such confidentiality in protected. Finally, it will be very difficult to ascertain the real value of long-term service agreements as they are constantly subject to change. Furthermore, since NBU consents is only valid for 30 calendar days from the date of issuance, does this mean that long-term agreements will require monthly consents?

Overall, the Resolution goes a long way to minimize illegal capital outflows by creating more transparent payment mechanisms for non-resident service providers. The regimes established by the Resolution will, however, need fine tuning to be commercially and legally effective. In addition to technical issues, enforcement of the Resolution in its current form may be difficult. For example, one very simple way around the Resolution, would be to enter into numerous services agreement for less than EUR 50,000. Undoubtedly, the NBU is likely to issue other resolutions addressing such matters in the near future.

This article is for information purposes only and is not intended to be technically comprehensive. Professional advice should be sought before taking action or refraining from taking action on any item contained herein.

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IMF Upgrades Ukrainian GDP Growth Forecast to 4.5% in 2003
(Interfax-Ukraine)

The International Monetary Fund (IMF) has upgraded the forecast for Ukraine's real GDP growth from 4% to 4.5% in 2003. It has retained the forecast for 2004 at 4%, which is smaller than the growth of the two previous years - 9.2% and 4.6%. The updated forecast is made in a world economic review released by the IMF on Wednesday. The IMF forecasts Ukraine's average annual inflation at 5% in 2003 and 2004, following inflation's decline from 12% in 2001 to 0.8% in 2002.

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Economic Development Program in Ukraine
Funded by GILLETTE, Managed by the  INTERNATIONAL EXECUTIVE SERVICE CORPS
(Ukraine Market Reform Group)

WASHINGTON, Mar 25, --The International Executive Service Corps (IESC), a non-profit economic development organization, and The Gillette Company pronounced that eight communities in Ukraine, six in the Kharkiv region, the others in Pavlograd and Pryluky, were selected for a special program managed by IESC and funded by Gillette.

The program provides assistance to help communities establish local economic development agencies. The eight communities include five disricts in the Kharkiv region; Pavlograd in the Dnipropetrovsk region; and Pryluky in the Chernihiv region. The winners reflect a broad spectrum of Ukraine's economy -- three are farming areas and five are commercial and manufacturing centers.

"We remain passionate about supporting the communities in which we do business," commented John F. Manfredi, Senior Vice President, Corporate Affairs, The Gillette Company. "This project will be key to developing the economic environment in this region of the world and will clearly benefit
both business and more importantly the men, women and families who seek financial stability within their communities."

Under the program, local government officials are receiving training in the skills essential to creating effective public-private partnerships. These partnerships are key to developing sustainable economic growth. The program enlists the support of IESC's skilled experts, who are experienced in assisting clients achieve their objectives. One of those experts is Frank Henderson of Post Falls, Idaho, a former mayor and county commissioner, who is volunteering his time and expertise. As a veteran of other IESC projects in Hungary, Kazakhstan, Russia, Ukraine, and other countries, Mr. Henderson was selected to lead a volunteer team skilled in fostering public-private partnerships.

Later this spring, community participants will have a chance to observe successful economic development programs in other regions of Ukraine and Eastern Europe, when they participate in an "East-to-East Study Tour." As a partner, USAID's Kyiv mission is funding activities that complement the Gillette/IESC initiative. In addition, the following organizations are providing training and support: U.S.-Ukraine Foundation, Regional Business Assistance Center, Bizpro, Center for Economic Initiatives, Agency for Municipal Development, Perspectives, Peace Corps and the East-West Institute.

The program will conclude after a national conference on local economic development in June 2003. In late summer, the program is scheduled to be evaluated and results are expected to be published in the fall.


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LAND O’LAKES, Inc., APK-INFORM and SPARKS COMPANIES, Inc. win USAID Tender in Ukraine   

APK-Inform Information Consulting Company, largest US based agricultural and food cooperative Land O’Lakes, Inc., well-known US consulting company Sparks Companies, Inc. and other partners have been chosen to implement the USAID technical assistance project "Agricultural Market Project." The Project is aimed to improve the marketing of agricultural products, produced by small and medium commercial family farmers. Under the Project, APK-Inform will be responsible for providing timely information and carrying out of market studies jointly with experts from Sparks Companies, Inc. The prime focus will be the fruits and vegetables market and the animal produce market. It is planned that the project will be working in six oblasts of Ukraine.

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UKRAINE AND GERMANY SEEK TO INCREASE TRADE TURNOVER BY 15.4% TO USD 3 BILLION IN 2003

Ukraine and Germany are seeking to increase their mutual trade turnover by 15.4%, from USD 2.6 billion to USD 3 billion by the end of 2003.

Based upon the information of the State Statistics Committee, the volume of Ukrainian-German trade turnover in 2002 rose by 14% in comparison with 2001, totaling USD 2.6 billion. Specifically, exports grew by 5.6%, comprising USD 0.9 billion, and imports grew by 18.9%, totaling USD 1.7 billion.

Among the main commodities, which are being exported by Ukraine to Germany are: clothes, ferrous metals, machines and equipment, copper and goods made from it. Among the main category of commodities that are being imported by Germany to Ukraine are: machine and equipment, land transport facilities (besides railway), electrical machines, plastics and goods made from it, pharmaceutical products, paper and cardboard.

The total volume of Germany’s direct investments to Ukraine as of 1 January 2003 totaled USD 312.1 million, which consists of 5.8% of the total volume of foreign direct investments to the economy of Ukraine.

In particular, the volume of German investments to Ukraine in 2002 increased by USD 62.6 million. 972 enterprises are registered in Ukraine with the participation of German investments, of which 600 of these enterprises are joint ventures.

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VOLKSWAGEN to Assemble Cars in Ukraine
(by Reuters and Interfax)

April 10, 2003 - Volkswagen said it would start building VW brand cars in Ukraine this summer as part of a bid to double its sales in the country. Ukraine's Eurocar (Uzhgorod) General Director Oleh Boyarinand Germany's Volkswagen executive Detlef Wittig signed a protocol of intent in Germany. Boyarin said that the volume of Volkswagen sales in Ukraine significantly exceeds sales by other foreign cars, therefore the German company considers the Ukrainian market to be very promising.

Volkswagen said it had signed a declaration of intent to start assembling Passat, Golf, Bora and Polo models in Ukraine, where it sold around 3,000 VW brand cars last year, half as many again as in the previous year.

"Ukraine is an attractive market for Volkswagen given the overall market developments there over the past three years," the company said in a statement, adding that the VW brand was currently the third most popular car import in the country.

A Volkswagen spokesman said the cars built in Ukraine would be for the local market, and said it was too early to give any production volume targets or say whether the plan would create new jobs.

Industry experts predict car sales will double within the next five years in Central and Eastern Europe, although they still lack the volume needed to support a big increase in high-volume production.

                                   
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The U.S.-Ukraine Foundation (USUF) is a not-for-profit non-governmental organization established in 1991 to facilitate democratic development, encourage free market reform and enhance human rights in Ukraine. In promoting business and economic development between Ukraine and the U.S., the USUF seeks to facilitate an open exchange of information between business entities. WHILE MAKING EVERY EFFORT TO OBTAIN ACCURATE INFORMATION, THE U.S.-UKRAINE FOUNDATION DOES NOT GUARANTEE THE VALIDITY OF CLAIMS MADE IN THE COMPANY PROFILES NOR DOES IT ENDORSE ANY CORPORATE ENTITIES MENTIONED HEREIN. The Foundation provides no opinions or judgments regarding the likelihood of success or failure of any possible venture. We, therefore, recommend due diligence on the part of any potential business partners.