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14 October 1998
For immediate release
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Change Of Government Under Existing Conditions Is Certain To Lead To Political Crisis, States Leonid Kuchma

I share Mr. Tkachenko's opinion about effectiveness of Cabinet's sessions attended by VR committee heads, faction leaders and parliamentarians, stated President Leonid Kuchma summing up the outcome of the October 12 session of the Cabinet of Ministers. He stressed the importance of the session held on the eve of the government report's hearing in parliament. The president cautioned the government members against efforts to blame for all blunders the global and Russian financial turmoil. We should first search for the reason in our own activities, he stated. We must admit that in this period no structural changes have occurred in the economy, including the metallurgy where a considerable setback in production has been recorded, and which is operating at a loss, the president continued. As Leonid Kuchma reminded, 40 percent of Ukraine’s industry in the Soviet Union fell on the share of the military and industrial complex. There was no money for its conversion in Soviet times, nor have we any funds to this end nowadays. Nevertheless, some measures should be undertaken, first and foremost, aimed at electric power saving. If we have failed to produce in seven years, for instance, our own combine grain harvester, it is not the crisis to blame but our lack of ability and desire to get at the root of all problems, he stressed. President Kuchma referred to actions by the National Bank of Ukraine in response to the Russian crisis as professional, but at the same time underscored the need for the banking system's urgent reform. We need a transparent banking system, he said. The President reminded the parliamentarians about the bill on the National Bank of Ukraine under consideration in parliament, and stressed the need for its urgent consideration. As President Kuchma pointed out, the banking system's reform refers not only to the NBU but to all commercial banks as well. Speaking about the October 13 report by the government to the Verkhovna Rada, Leonid Kuchma said in particular that a change of government is certain to lead to a political crisis which is fraught with grave consequences for the economy.

Tkachenko Calls Upon Initiators Of Government's Resignation To Withdraw Their Signatures

On October 12, VR Chairman Oleksandr Tkachenko held a meeting attended by committee heads and parliamentary faction leaders. The meeting focused on the parliament's agenda in October-November 1998, in particular, issues on election of judges, the approval of the Economic Code, activities of assistants/advisers. Mr. Tkachenko called upon initiators of the government's resignation to withdraw their signatures, and to give the Cabinet an opportunity to submit a draft budget to the parliament. According to him, there is no point in raising an issue of the government's resignation now.

Cabinet Of Ministers Is Ready To Accept Any Constructive Proposals By Verkhovna Rada Aimed At The Economy's Stabilisation

There were all conditions for the economic growth at the year's start, stated Prime Minister Valeriy Pustovoitenko at the October 13 session of the Cabinet of Ministers. However, the global financial crisis and situation on the Russian financial market have affected the Ukrainian economy quite adversely. Despite preventive anti-crisis measures taken by the government and the National Bank of Ukraine, hryvnia was devaluated by 51 percent as to the official exchange rate in September, and by 79 percent versus the year's beginning. The inflation rate amounted to 3.8 percent, the last two years' high. At the same time, prices for industrial products increased 2.5 times. All this has resulted in the aggravation of the socioeconomic situation in Ukraine, stated Premier Pustovoitenko. He profoundly analyzed the cause of the setback in most Ukrainian industries, and referred to the evolved situation as "threatening". Without declining the responsibility of the government for a shaky state of Ukraine's finances and economy, the premier spoke up for the more active creation of the legislative base which would meet today's macroeconomic requirements. The Premier stressed a need for a closer cooperation with Verkhovna Rada aimed at resolving pressing problems of the Ukrainian economy. We are ready to accept any proposals aimed at the economy's stabilization, underscored Premier.

President Kuchma Says Currency Exchange Rate Is Main Budget Issue

President Leonid Kuchma said on October 6, that he will not sign an unrealistic budget. He was speaking during a meeting with regional council heads, who are presently undergoing courses at the Ukrainian Academy of State Management. Mr. Kuchma, however, said that there remains little time to adopt a realistic budget. He did not rule out the possibility of a repetition of 1997 budget situation, as a result of which Ukraine was unable to obtain loans from international financial organizations. Mr. Kuchma said the draft 1999 budget is in a poor shape because it is unclear on which hryvnia exchange rate the budget should be based. "Today, the main budget issue is the exchange rate," Mr. Kuchma said. According to him, the National Bank of Ukraine will be able to make a decision on the issue only after the Ukrainian delegation meets with the World Bank and International Monetary Fund representatives. He disclosed that the National Bank of Ukraine has assured him that the hryvnia's exchange to the dollar will remain within the existing trading band. Mr. Kuchma expressed conviction that the current budget crisis was caused by the current financial crisis. "In the past years, it was healed through currency emissions, foreign loans, and, later, the pyramid of domestic and external loans. Ukraine's OVDP pyramid collapsed because it had no real foundation," Mr. Kuchma said. Analyzing the reasons behind the Ukrainian financial crisis, the Ukrainian leader said it would be improper to blame it solely on the global financial turmoil and the Russian crisis. "We made a lot of mistakes ourselves. The fathers of stabilization so much wanted the hryvnia to be more stable than the dollar. It reached an extent to which the dollar fell and the hryvnia did not," he said.

Parliament Approves Draft Law On Regulation Of Barter Operations In Foreign Trade

On October 6, Parliament adopted the first reading of the government's draft law on regulation of barter operations in foreign trade. The draft law permits barter operations in foreign trade, including export of highly liquid Ukrainian goods by barter, but stipulates stricter conditions for importing goods for which such Ukrainian goods are bartered - they must be imported within 60 days instead of 90 days for other goods. Deputy Minister of Foreign Economic Relations and Trade Viktor Gladush told parliament that trade with CIS countries in ruble and hard currency collapsed after August 17. According to Mr. Gladush, permitting barter trade with CIS countries, particularly Russia, will boost exports. He forecast that export by barter will rise from 8% to 9%, including from 16% to 25% with Russia. Mr. Gladush said reduction of the deadline for importing goods bartered for highly liquid Ukrainian goods would stimulate the sale of highly liquid goods for foreign currency since the deadline for paying hard currency for exported goods remains 90 days. The draft law is expected to be redrafted by parliamentary committees and adopted before the end of this month. Several deputies, including Speaker O. Tkachenko, stated the need for the draft law to provide for gradual reduction of barter operations in foreign trade. Barter operations in foreign trade are currently regulated by the July 26, 1995 presidential decree "On Additional Measures to Regulate Barter (Commodity Exchange) Operations in the Sphere of Foreign Economic Activity." According to the decree, goods imported under barter agreements are to be imported into Ukraine not later than 90 days, after which fines are to be imposed for each day of delay. Moreover, the Ukrainian laws "On Value Added Tax" and "On Taxation of Enterprises' Profits" provide for taxing barter operations. Exports from Ukraine under barter agreements totaled $ 584.3 million in January-July, including exports totaling $ 427.1 million (73.1%) to CIS countries. Imports totaled $567.5 million, including $ 449.1 million from CIS countries. Barter accounted for 8.1% of total exports and 6.6% of total imports in that period. In 1994 (before the enactment of the presidential decree), exports accounted for 46.4% of exports; highly liquid goods accounted for 60-70% of the goods exported by barter; the value of exports under barter contracts exceeded imports by $ 2 million. Barter accounted for 31% of export operations in 1995, 20% in 1996, 9.8% in 1997, and 7.7% at the start of 1998.

Verkhovna Rada Endorses Bill On Procedures For Setting Tax And Duty Rates

On October 14, the Verkhovna Rada of Ukraine passed the Law on Procedures for Setting Rates of Taxes and Duties in the second hearing. Commenting on the fact, MP Ivan Chyzh, chairman of the VR Committee on Freedom of Speech and Information, interpreted it as testifying to the Ukrainian lawmakers' willingness to cooperate with the Government of Ukraine. Under the law, the Cabinet has the authority to set tax and duty rates, which is viewed as an anti-crisis move. In Mr. Chyzh's opinion, excise and importation duty rates, however, should remain the Parliament's prerogative.

Amendments To Law On Excise And Importation Duty Rates Expected To Protect Domestic Oil Refineries

Commenting on the Ukrainian Parliament's amendments to the Law of Ukraine on Excise and Importation Duty Rates, which were approved on October 14, MP Yaroslav Fedorin, who holds a Doctor degree in physics and mathematics, said these are aimed, among other things, at protecting Ukrainian oil refineries as allowing not to lower the excise levied on imported petroleum products. According to him, Ukrainian oil refineries are currently working at barely 15 to 20 percent of the projected production capacity, while low quality petroleum products are being imported.

Verkhovna Rada Has Turned Down Only 9 Of President's 61 Economics-Related Decrees

Speaking at a briefing in Kiev on October 7, Pavlo Gaidutsky, Deputy Head of the Presidential Administration Office, stressed that over the past several months President Leonid Kuchma has issued as many as 61 decrees on pressing economic problems, of which only nine have been rejected by the Verkhovna Rada. So far, 47 economics-related decrees have come into effect to be joined by five decrees later in October, Mr. Gaidutsky said. He is not inclined to view the nine rejected decrees as not enough topical. Rather, the Verkhovna Rada's political coloring is to blame, as the said decrees involve such controversial matters, as privatization and management of state-owned property and bankruptcy procedures. For "unknown" reasons, the Parliament has turned down the President's decree on protecting investors on the Ukrainian stock market, Mr. Gaidutsky went on. Yet, despite the Parliament's rejection of the decrees, some of their provisions have been incorporated in draft laws submitted by relevant VR committees to the ongoing plenary session for early hearings.

Parliament Rejects New Draft Of Law On Foreign Economic Operations Involving Give-And-Take Raw Materials

Parliament on October 1, considered the new draft of the law "On Operations with Give-and-Take Raw Materials in Foreign Economic Operations", and decided to return it to the government for redrafting. According to deputies, the latest draft of the law will "stimulate export of capital." Deputies also opposed granting the government the right to regulate foreign economic operations involving give-and-take raw materials.

European Union Granting Ukraine 150 Million ECU In Loans

The European Union's Council of Finance Ministers on October 12, was to considered granting a 150 million ECU (about 165 million dollars) balance of payment loan to Ukraine, Tamara Solyanyk, deputy head of the Ukrainian National Agency for Reconstruction and European Integration, told Ukrainian news. "The probability of a positive decision is very high. We have agreed to negotiate the terms of the loan in Kiev on October 19," she said. According to information from the Ukrainian Presidential Administration, President Kuchma will attend a Ukrainian-European Union summit on October 14-16. The government is experiencing a shortage of funds to service its external debts, following the depletion of the National Bank of Ukraine's currency reserves to a critical level. In accordance with the payment schedule drafted by the government at the beginning of this year, a total of $ 375 million is to be paid on external debts in October-December.

Foreign Investors Convert 1,070 Million Hryvnia In Ukrainian Domestic Bonds

Foreign investors converted 1,070 million hryvnia in Ukrainian domestic bonds, the Finance Ministry's press service said in a statement. "As a result of the conversion effected from September 21 to October 8, 1,070 million hryvnia in bonds from nonresidents' portfolios were converted at face value. They constituted about 99% of the total volume of bonds subject to conversion," the statement said. No further details of the conversion were provided in the statement. The government on September 9 announced the commencement of nonresidents' bond holdings into hryvnia bonds with a hedged dollar yield of 22% per annum, maturing in the year 2000. The deadline for the conversion was extended four times until October 2. The government later proposed that nonresidents also convert their bonds into dollar eurobonds maturing in the year 2000 with 20% annual yield. Under the terms of the conversion, the Finance Ministry is to pay cash compensations equaling 20% of the values of bonds whose yields were hedged by the NBU. The Finance Ministry paid 198.9 million hryvnia to redeem the T-bills that were not converted. The NBU, however, refused to convert the money into dollars. According to Cabinet of Ministers, the volume of the domestic debt market as of August 21 was 11,922 million hryvnia, out of which 1,871 million hryvnia belonged to nonresidents.

Official Inflation Rate For September Stated At 3.8%

The monthly inflation rate rose to 3.8% in September from 0.2% in August, according to the State Statistics Committee data. However, specialists consider the official September inflation figure to be understated. The hryvnia's official exchange rate fell by more than 51% in September, prompting a sharp rise in inflationary expectations. The inflation figure for the first nine months of this year was 6.1%. The 1997 annual inflation was 10.1%.

Procedures Of Working Group For Administrative Reform Approved

The Cabinet of Ministers is to set up a working group to reform central bodies of the executive power, according to the October 6 presidential decree on regulations of the working group. The working group will draft recommendations. Implementation of administrative reform is one of the conditions of the International Monetary Fund's EFF loan program, under which Ukraine is to receive loans totaling about $ 2.2 billion over three years. Ukraine has received the first tranche in the amount of about $ 260 million.

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