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Country Commercial Guides for FY 2000: Ukraine |
Chapter V: Leading Sectors for U.S. Exports and InvestmentA. Best Prospects for Non-Agricultural Goods and Services
The following is a list of FCS, Kyiv commercial specialists and the major sectors of their responsibilities:
Ruben Beliaev - Information Technologies (Telecommunications, Computers) Lesia Polyshchuk - Building & Construction, Environmental Technologies Yuriy Prikhodko - Tourism Victoria Sergeeva - Energy, Oil & Gas Olena Stephanska - Banking & Finance, Health Care Olexandr Zavhorodniy - Transportation, Heavy Industry, Chemicals Vacant - Agricultural Machinery & Equipment, Food Processing
All figures below are provided in $ millions, unless otherwise noted. Exchange rates (effective June each year):
1997 $1.00 = HRV 1.86 1998 $1.00 = HRV 2.05 1999 $1.00 = HRV 4.00
1. Agricultural Chemicals (AGC)
In the last six years it has been increasingly difficult for Ukrainian producers to secure necessary pesticides and other agricultural chemicals. Local pesticide and agricultural chemical production meets only 20% of the country's annual needs and is based upon the ability to purchase imported raw materials. While the local production of pesticides utilizing local compounds is expected to meet 25% of the total demand by the year 2000, Ukraine will still need to rely on imported chemical compounds to meet the demand for pesticides. Despite the government's move to foster and increase the country's pesticide production base, a lack of capital and technology and unfavorable tax policies hinder such development. It is generally more economical to import pesticides than it is to product them domestically.
The Ukrainian agricultural sector offers U.S. companies opportunities in joint production or in simply providing the Ukrainian market with the necessary seeds, pesticides, and herbicides. Many farms have large debts owed to agrochemical companies, and the government tends to lay first claim of grain and produce; therefore, financing is a critical issue.
Market Size Data (in $ Millions) 1997 1998 1999 A. Total Market Size N/A 150 160 B. Total Local Production N/A 30 25 C. Total Exports N/A -0- -0- D. Total Imports N/A 120 110 E. Import from the U.S. N/A 41 40 (The above statistics are unofficial estimates.)
2. Agricultural Machinery and Equipment (AGM)
Many opportunities are available for U.S. companies in the Ukrainian agricultural machinery market. There is currently a critical demand for dependable farm machinery, due to the lack of reliable domestic manufacturing. Production rates at Ukrainian plants are running at 10-20% capacity and 60% of domestic machinery has fully-depreciated. U.S. agricultural machinery enjoys a good reputation. The best prospect for U.S. companies is to invest in the manufacturing of equipment in Ukraine. Simply exporting agricultural equipment to Ukraine can be costly: the Ukrainian government plans to increase import duties on agricultural machinery, has no plans to purchase equipment under government sovereign guarantee, and will support domestic manufacturing.
According to local and U.S. companies active in Ukraine, the agricultural equipment market is not easily accessible. There are many indirect barriers such as certification procedures, licensing, taxation, and lack of local financing. Financing is considered a very critical issue for local end-users; there is an estimated 48% difference between demand and purchasing power.
(The above statistics are unofficial estimates.)
Market Size Data (in $ Millions)1 997 1998 1999 A. Total Market Size 425 430 495 B. Total Local Production 315 330 360 C. Total Exports 100 100 104 D. Total Imports 180 200 210 E. Imports from the U.S. 120 150 150 3. Airport/Ground Support Equipment (APG)
The modernization of air navigation in Ukraine is a high priority of the government. The inefficient Air Traffic Control (ATC) system, a lack of adequate air traffic services, and disrepair of the air navigation and communications systems and infrastructure in Ukraine all have a direct impact on the country's ability to attract additional flights, carriers, and air routes. Additional air carriers would be more willing to market new routes in and out of Ukraine if the conditions for air traffic services were to improve. While no firm estimates are available, it is estimated that Ukraine is under-utilizing its airspace and losing millions of dollars annually in lost overflight charges, landing fees, gate fees, aircraft service, etc. This poses a significant cost to the country. Improvements to Ukraine's air traffic control would generate additional revenues, which could then be used to finance additional investments and improve air traffic services. In order to streamline the aviation sector activities in the country, the President of Ukraine issued a Decree in June 1997, which created the State Aviation Administration of Ukraine (SAAU) and merged the functions of the former State Air Transport Department (ATD) in SAAU. The SAAU is responsible for performing all regulatory functions such as aviation safety, security, air transport, and airspace use rules.
The Ukrainian Air Traffic Services Authority (UkSATSE) reports directly to SAAU and is responsible for the provision and operation of the Ukrainian air navigation system (ANS). Much of the equipment and infrastructure used in providing ANS services in the Ukrainian airspace is in need of modernization. UkSATSE has initiated a modernization program. Major projects currently underway include the following:
1. Replacement of equipment at the Boryspil and L'viv Area Control Centers (ACC); 2. Replacement of the Aeronautical Fixed Telecommunications Network (AFTN); 3. Installation of VORs and DMEs.
In late 1998, the European Bank for Reconstruction and Development provided a $25.4 million loan to UkSATSE, based on a sovereign guarantee from the government of Ukraine, for several additional projects as part of its airspace and Air Traffic Control modernization program. UkSATSE will need to import all of the equipment financed under the EBRD loan. Excluding the cost of some foreign experts to supervise the construction portions of the loan, all funds will be allocated to equipment and spare-parts procurement. The total potential for U.S. exports, therefore, is approximately $25 million for this initial stage of the project. UkSATSE estimates that the second stage investment will be in the range of an additional $25-30 million for upgrading all tower facilities, communications systems, and ATC systems. This will offer U.S. firms an additional export potential in the amount of $25-30 million.
(The above statistics are unofficial estimates.)
Market Size Date (in $ Millions) 1997 1998 1999 Total Market Size N/A 25.4 55 Total Local Production N/A N/A N/A Total Exports N/A N/A N/A Total Imports N/A 25.4 55 Imports from the U.S. N/A N/A N/A 4. Building Materials (BLD)
With the collapse of the Soviet supply system for building materials, the developing Ukrainian construction industry has been looking for new supply sources and links. Since 1991, domestic production of building materials has dropped by approximately 30%. Given the current energy crisis in Ukraine, prices for locally produced products have increased drastically. Most domestic materials are low quality and outdated, presenting opportunities for western quality products.
The Ukrainian market for building materials offers sound opportunities for exporters, and especially for investors. The renovation and construction of Western-standard apartments, offices, and supermarkets remains a lucrative business in Ukraine. Some western consultants rank the Ukrainian construction market among the top four in all Europe in short-term market potential, and in the top two in long-term potential.
Although there are no official statistics on the Ukrainian market for building materials, the contractor market (residential and non-residential construction for Ukraine) can be estimated at $4,600 million in sales a year, and the market for renovation of residential property is estimated at $610 million in sales a year. Industry specialists are forecasting that domestic production will increase by approximately 10% due to the increase in joint manufacturing of building materials in Ukraine.
The market for building materials is becoming competitive: German, Italian, Scandinavian, French, and Spanish exporters are aggressively promoting their products in the Ukrainian market. Approximately 80% of the building materials used by contractors are of European origin. However, the system of distribution is still in the process of development. It consists of a collection of small, poorly organized stores with low inventories. Even leading distributors cannot serve as one-stop shops, and consumers spend much time searching for quality products at competitive prices.
(Market Size Data is not available for this sector.)
5. Computers & Peripherals (CPT)
The Ukrainian computer market is the first and perhaps the only industrial sector which has developed on primarily free market principles and remains one of the most dynamic sectors in Ukraine. Despite the general downturn of the Ukrainian economy, computer production and trade offer strong prospects for U.S. exporters. Only 10-15% of the overall potential computer market has been tapped. The national computer and software market was expected to increase by 20 percent in 1998, with sales of approximately 160,000 computers (second hand PCs not included), compared with approximately 130,000 computers sold in 1997. However, the market was severely affected by the economic crisis, and actual sales of computers and software matched 1997 performance levels. As opposed to state agencies and large enterprises, whose purchasing potential has been severely affected by macroeconomic hardships, small and medium businesses continue improving their computer equipment. Demand in 2000-2001 should grow as state agencies and enterprises seek to upgrade their PCs, numbering more than 350,000 pieces. The main problem is the lack of financing, which is not likely to change until at least the year 2001.
The Pentium processor (133, 166 MHz) is most popular, with full peripheral complements assembled in Ukraine, the United States, or Western Europe. Major U.S. computer manufacturers have strong brand-name recognition, but pricing is usually the key consideration for the Ukrainian purchaser. Approximately 20-25 percent of the computer market belongs to brand names; 30 percent of the market is dominated by 5-7 major local manufacturers, and about 40-50 percent of total PCs sold in Ukraine are either imported by small local companies or manufactured from imported and local components. The above figures do not include products generated by a "shadow" economy, which reportedly controls up to 30 percent of the market. Major local companies sell between 10,000 to 20,000 PCs annually. Apple, Compaq, DEC, Dell, Hewlett Packard (HP), IBM, Intel, Microsoft and ECGData are among the numerous U.S. computer companies active in the Ukrainian market. Local assembly of PCs from imported components is thriving. Of the nearly 700 companies involved with PCs and active in the market, approximately 66 of them are engaged in local assembly or manufacturing of PCs. Although increasing, home use of PCs is still very limited. U.S. companies can maximize their export potential by tapping into an increasingly sophisticated network of agents and distributors throughout Ukraine who are able to reach a wide range of clients. Real opportunities in telecommunications and transport networks exist in the regional and city administration level.
(The above statistics are unofficial estimates.) 6. Computer Software & Services (CSF)
Market Size Data (in $ Millions) 1997 1998 1999 A. Total Market Size N/A 130 130 B. Total Local Production N.A 30 50 C. Total Exports N/A -0- -0- D. Total Imports N/A 100 80 E. Imports from the U.S. N/A 30 30 Ukraine's expanding private sector will require various software solutions and packages. However, the poor enforcement of intellectual property rights in Ukraine is a factor to be noted by U.S. companies interested in entering the market. Microsoft's MS-DOS and Windows programs are currently the most widely used word processing and spreadsheet software packages in Ukraine. This software is installed on approximately 98% of all PCs operating in the country. However, many software packages and applications are developed locally. The presence of many talented programmers, combined with weak International Property Rights (IPR) legislation and enforcement, have encouraged piracy and flagrant misuse of software. It is estimated that illegal software may comprise 10-40% of the software used by the government, 10-30% used by corporate customers, and 50-100% used by small and medium businesses. Foreign software dominates the market for legitimate software for corporate customers reaching 95%, while the share of local products doesn't exceed 5%. A more legitimate and transparent market for computer software is slowly taking shape, which is largely attributable to dealers selling computer hardware with preinstalled, legally acquired software. In April 1999, the government of Ukraine made a major step to legalize the software market by allocating $13.8 to replace pirated software with legal Microsoft products on 54,000 governmental PCs. Ukraine has witnessed an increasing demand for specialized financial, statistical, management, and manufacturing software, presenting major opportunities for U.S. companies. For maximum market exposure and penetration, U.S. companies are advised to develop bilingual (Ukrainian/Russian and English) software, as well as to provide the necessary bilingual written instructions and after-sales service. The existing legal environment in Ukraine does not include many important norms that would regulate the localization of software products. Legitimate localization of foreign software products is almost non-existent, which is partially due to competition from products localized in Russia.
(The above statistics are unofficial estimates.)
Market Size Data (in $ Millions) 1997 1998 1999 A. Total Market Size 22.5 22.0 35.8 B. Total Local Production 1.0 1.0 1.0 C. Total Exports 0 0 0 D. Total Imports 21.5 21.0 34.8 E. Imports from the U.S. N/A N/A N/A 7. Drugs & Pharmaceuticals (DRG)
Local pharmaceutical production can satisfy only around 30% of demand, and along with the widespread growth of private distribution networks, this offers a considerable incentive for U.S. companies. Firms should note that the Ukrainian government is unable to purchase large volumes of expensive drugs; cheap generic drugs are more realistic for a predominantly state-run health sector. Large Western pharmaceutical companies are focusing their attention on private regional distributors who enjoy financial support from local companies and maintain strong ties with local health care authorities and facilities.
American companies are also advised that burdensome certification and registration procedures present significant, but potentially manageable, obstacles in this underdeveloped market. U.S. firms will also need to develop a strong public awareness campaign to educate Ukrainian consumers, given their minimal exposure to advanced medicines. Strong sales support should also be available to address these issues.
(The above statistics are unofficial estimates.)
Market Size Data in (in $ Millions) 1997 1998 1999 A. Total Market Size 450 600 N/A B. Total Local Production 200 250 N/A C. Total Exports 50 70 N/A D. Total Imports 250 350 N/A E. Imports from the U.S. 4 7 N/A 8. Electrical Power Systems (ELP)
Following the overall economic reforms initiated in 1994, Ukraine has sought to restructure and commercialize its outdated and tightly state-controlled power generation systems. While the vast electrical power sector will require sweeping reform and billions of dollars in investment, major opportunities (largely dependent on financing from international financial institutions) lay ahead for U.S. companies. U.S. firms can tap existing consulting and procurement projects offered by the U.S. Agency for International Development, the World Bank, and the European Bank for Reconstruction and Development, which are assisting the Ukrainian government with reforms and the creation of an independent energy sector.
According to Ukrainian legislation, thermal power generation companies and regional power distribution companies must be privatized. Ukraine's thermal power plants are old, their equipment is antiquated, their technology is obsolete, and they lack modern pollution control equipment. New hydropower utilities, that will reduce dependence on imported energy resources, are in the process of being built. Ukraine's nuclear power plants (NPP) also have to be upgraded. Three NPP units are currently under construction: on Khmelnytsky NPP, Rivne NPP and South Ukraine NPP (currently suspended due to lack of funding.) Two more units on Khmelnitsky NPP are planned to be built.
The centralized municipal heating systems, which are in use in most Ukrainian cities, are worn out and unreliable. They need rehabilitation and technical upgrading. There is increasing demand for autonomous heating systems for private cottages, and for the basement/roof based boiler houses for multi-story buildings.
Export opportunities for U.S. companies include:
- electric motors for feeder pumps, portal cranes, and conveyor belts; - accumulator batteries, assorted bearings, circuit breakers, disconnectors; - current and voltage transformers, support insulators, generating sets; - low and medium-capacity boilers and auxiliaries, tubular stacks for boilers, boiler pipes, steam ejectors, assorted valves, superheaters; - fans and spare parts for them; - pump meters, nickel-steel tubing; - steam and gas turbines and auxiliaries.
(The above statistics are unofficial estimates.)
Market Size Data (in $ Millions) 1997 1998 1999 A. Total Market Size 220 230 250 B. Total Local Production N/A N/A N/A C. Total Exports N/A N/A N/A D. Total Imports N/A N/A N/A E. Imports from the U.S. 154 170 190 9. Energy Efficiency (EE)
Energy efficiency was an oxymoron in the former Soviet economy, where energy was cheap and plentiful. The breakup of the USSR, however, quickly forced Ukrainian industries and citizens alike to cut energy use, given the quick transition to world prices for Russian and Kazakh oil, and for Russian and Turkmen gas. The Ukrainian government has pushed to establish a true market for energy and remove extensive state subsidies, resulting in a more than 1,000% increase in electricity costs between 1994-98. Gas prices have also skyrocketed, increasing over 1,000% from 1994-98, prompting many Ukrainians to install gas meters to accurately record use.
There are many areas for energy saving equipment and technology implementation. Due to poor control over the use of fuel and energy resources, Ukraine's energy efficiency is still two to three times lower than that in developed countries. The country ranks sixth in the world in gas consumption, and third in gas import after the United States and Germany. Approximately, 30% of the hot water supplied to houses and public buildings is used inefficiently or simply wasted. Almost 40% of the total heating energy generated is lost in transport from generator to consumer.
In the short-to-medium term, U.S. companies should explore commercial opportunities in energy efficiency demonstration projects (targeted at both residential and industrial consumers); district heating/hot water supply projects to curb waste and shorten the prolonged outages of heat/hot water (which are common in Ukraine); and urban and apartment block lighting projects to save electricity and brighten Ukraine's streets. Longer-term projects will emphasize controlling the profligate waste of energy by Ukrainian industries - a step that is closely tied to privatization and to putting heavy industry on a market footing. Several energy efficiency projects with U.S. company involvement are already underway. The majority of projects focus on control systems, gas meters, energy-efficient technologies, and monitoring devices to measure and regulate electricity use.
Best prospects for U.S. companies include: efficient gas turbines; hydraulic turbines; central heating boilers and advanced boiler technologies; energy conservation technologies in the heat-exchange systems and furnaces; modern digital control systems; gas and heat metering systems for industrial, domestic and commercial use; monitoring devices to measure and regulate electricity use; rehabilitation and replacement of compressors for transmission systems; efficient drilling machinery; coal quality control equipment; energy-efficient technologies; consulting services in energy conservation, energy audit, etc.
(Market size data is not available for this sector.)
10. Food Processing & Packaging Equipment (FPP)
The food processing and packaging equipment (FPP) sector offers good prospects for U.S. exports and long-term investment. FPP operations in Ukraine are primitive and outdated, with some canning operations dating back to the 1950s. As a result, the variety and quality of processed foods is very poor. Packaging materials are limited and packaging itself is barely functional. With upgraded processing and packaging technology, Ukraine can conceivably become an important exporter of processed food to the former Soviet republics, Central Europe, and the Black Sea basin.
The FPP market will likely expand rapidly in the next several years, especially in the following areas: (a) equipment for higher value-added processing or secondary processing; (b) energy-efficient equipment; (c) small-capacity production equipment (especially for large agribusinesses that have split into small- and medium-sized companies); and (d) packaging equipment that ensures a longer shelf life and proper hygienic conditions for processed products. The best sales prospects for FPP (including used or refurbished equipment) are: dairy equipment, baby food production equipment, pasta and bread-making equipment, equipment for breweries, equipment for producing and bottling soft drinks and juices, fruit and vegetable processing equipment, vegetable oil (especially sunflower) extraction and refining equipment, and equipment for candy production and packaging.
The number of joint ventures or fully-owned food processing enterprises in Ukraine is currently small, but growing. Western Foods/C.I.L. Limited, a Ukrainian-American joint venture, is working with a Khmelnytskiy-based enterprise to process and package high-quality beef and pork for sale on the Russian and Ukrainian markets. This JV, an example of a successful joint venture in this subsector, uses U.S. meat processing and packaging equipment such as Multivac. Kraft General Foods purchased a candy factory in Trostynanets (Sumy oblast) and is currently producing chocolate products which are in high demand.
U.S. agribusiness firms such as Cargill have shown interest in Ukrainian sunflower oil production. The Dnipropetrovsk Oil Extraction Factory, with investment from Swiss Ilta-Holdings, received a loan from EBRD to upgrade its production facilities. In mid-1997, McDonald's began opening the first of the many restaurants the company plans to establish throughout Ukraine, a further sign of the tremendous potential for this Ukrainian sector. As of summer 1999, twenty one restaurants were open - nine in Kyiv, three in Kharkiv, three in Dnipropetrovsk, three in Odesa, one in Donetsk, one in Chernihiv, and one in Cherkasy.
Market Size Data (in $ Millions) 1997 1998 1999 A. Total Market Size 50.0 58.0 61.0 B. Total Local Production 35.0 30.0 30.0 C. Total Exports 5.0 3.0 3.1 D. Total Imports 10.0 15.0 16.5 E. Imports from the U.S. 4.6 4.0 4.2 (The above statistics are unofficial estimates.)
11. Medical Equipment (MED)
In the past, most Ukrainian medical equipment manufacturers were part of the Soviet defense industry structure and neither the Ministry of Health nor any statistical agency could provide accurate figures on domestic production. Following Ukraine's independence in 1991, some medical equipment manufacturers were placed under the authority of the Ministry for the Military-Industrial Complex and Conversion and many others became state corporations or enterprises leased from the state.
The majority of the Ukrainian health care system is still state-owned, and is financed from the state budget. Equipment in use is typically obsolete and/or worn-out. Given the financial impoverishment of many health institutions, replacement of equipment is slow to come or non-existent. Long awaited health insurance reform is expected in the near future. The restructuring of the medical care system may be a very good target for technical assistance funds, and such efforts may eventually help to develop a real market for medical supplies. U.S. companies are advised to concentrate business development efforts in the emerging Ukrainian private sector.
The Ukrainian government would like to create a self-sustaining Ukrainian medical industry, but this would require billions of dollars in investment. Domestically produced medical equipment is not competitive on a global scale. However, the large know-how and technological potential of the military-industrial complex could be channeled into the manufacturing of quality medical equipment.
Ukraine has encouraged the combined efforts of imports and heightened local production, especially through joint ventures, to meet the country's needs. There are more than 215 major medical equipment manufacturers in Ukraine producing over 1,300 different types of equipment, including diagnostic systems, ultrasound scanners, spectrometers, radiothermascopes, and EKGs. The technological components of the equipment produced locally are sound, but assistance is required in design, packaging, and international marketing.
Dealers of medical equipment are prime contacts for U.S. businesses entering the Ukrainian market as they have extensive distribution networks. Major purchasers of medical equipment are regional and "vidomichi" (departmental) hospitals, the latter being owned by various ministries and enterprises. The most promising direct exports are: electro-medical equipment, dental equipment, laboratory equipment, laser surgery devices, sterilization devices, diagnostic systems and disposable items.
The market potential for electro-medical equipment in Ukraine is high. Dental care providers' demand for dental equipment (i.e., dental stations (in particular, mobile), hard-alloy dental drills, instrument sets for therapeutic and orthopedic dentistry, instruments for endodentistry, disposable dental instruments, scalers, dental restorative and adhesive materials) is increasing. Opportunities also exist for laboratory equipment (i.e., centrifuges, ultracentrifuges, spectrophotometers, nuclear counters, and blood grouping systems).
The Ukrainian market is receptive to high-quality, advanced diagnostic and therapeutic equipment. Innovative technologies such as laser-optics in vascular surgery, urology, gastroenterology, dermatology and neuro-surgery, and new diagnostic devices are becoming more popular. Modern equipment offering ease of use and cost savings is required in the fields of microsurgery, radiology and biomedicine.
Most buyers are still not familiar with U.S. medical equipment and sometimes question its operational life span and support infrastructure in the difficult conditions of Ukraine. Furthermore, the narrowing price gap between new locally produced equipment and used Western equipment has made used equipment less attractive. However, a potential market for used medical equipment does exist, with the best approach possibly being the creation of a joint venture for imports.
Market Size Data (in $ Millions) 1997 1998 1999 A. Total Market Size 170 185 N/A B. Total Local Production 150 170 N/A C. Total Exports 60 70 N/A D. Total Imports 80 85 N/A E. Imports from the U.S. 6 8 N/A (The above statistics are unofficial estimates.)
12. Oil and Gas Field Machinery (OGM)
In Soviet times, Ukraine had an abundance of subsidized oil and gas from Russia. Today, Ukraine's petroleum industry is in a state of decay - broke and unable to sustain itself. Technology and equipment is years behind that in the United States. Ukraine does not have pumping equipment capable of producing below 6,000 feet, even though many of the fields are at depths of 10,000 to 15,000 feet. Stimulation technologies such as hydraulic fracturing and acid stimulation are not available. Three-D seismic has not been used on-shore, and drilling equipment is antiquated and limited to 15,000 ft. It takes three to five years to drill a well to 15,000 feet, and there is no domestic manufacturing of equipment for drilling deeper than this. Major reserves, developed and underdeveloped, are below 15,000 feet and impossible to exploit without outside financing and modern equipment. There is very limited domestic production of drilling machinery; it has been mostly imported from Russia and Romania.
Ukraine has the second largest potential refinery capacity in the Newly Independent States (NIS), with a capacity potential of 53.6 million tons per year at six refineries. However, capacity utilization is very low. About 60% of petroleum products consumed in Ukraine are imported. Most of Ukraine's refineries date from before World War II, and are therefore unsophisticated, with little modern technological capacity to process crude oil into valuable light products such as gasoline, diesel fuel, aviation fuel, kerosene, and liquefied petroleum gas. Refined products yield (the ratio of light products to the total refined) in Ukrainian refineries constitutes only 57 percent in average, versus a desired target 75 percent.
The Ukrainian government has made the development of the oil and gas sectors one of its top priorities. There are several planned projects that may offer potential purchases of U.S.-made equipment and services: Ukrainian refineries modification; exploration of the Azov-Black Sea shelves (upon adoption of the Law on Production Sharing Agreements); construction of the $216 million Pivdenny (Odesa) Oil Terminal; construction of the Pivdenny-Brody pipeline which would be part of the Eurasian Oil Transport Corridor, a transit route for Caspian oil to reach Central Europe; and the rehabilitation of the 35,000 kilometers gas pipeline that delivers nearly 35% of Western Europe's natural gas.
The best prospects for U.S. companies include: pipeline construction equipment (compressors and pumps for pipeline applications; gas transmission systems; gas pipeline leaks control systems; gas pipe fittings and applications; welding machines, cranes, pipe-cleaning equipment, and line trend machines); advanced and highly efficient oil and gas exploration and drilling equipment and technologies (pontoons supported on columns, hoisting cranes, drilling rigs, bits, electric motors, winch rollers, rotary tables, sheds, hoisting blocks, monkey boards, crown blocks, gin holes, shackles, cutting, roller and diamond bits, casing sleeves, chemicals, stimulation technologies, modern 3-D seismic, particularly for offshore projects where Ukrainian technology is very limited); equipment for atmospheric-vacuum oil refining; modernization increasing hydro-cracking and catalytic cracking capacities; units for catalytic transformation of distillates; industrial automation, control and monitoring systems for refineries, gas processing and petrochemical plants; desulfurization and quality control facilities; safety systems; fuel dispensers, fuel storage tanks, fuel level monitoring and accounting systems.
Market Size Data (in $ Millions) 1997 1998 1999 A. Total Market Size 110.0 107.0 105.0 B. Total Local Production N/A N/A N/A C. Total Exports N/A N/A N/A D. Total Imports 47.0 44.0 42.0 E. Imports from the U.S. 30.0 26.0 24.0 (The above statistics are unofficial estimates.)
13. Pollution Control Equipment (POL)
The Ukrainian government has placed a high priority on the need to address the critical state of the environment. In June 1991, a basic environmental legislation - the Law on the Protection of the Environment - was adopted. During the last several years, a number of environmental laws and regulations were adopted in Ukraine in order to consolidate internal and external resources for resolving environmental problems. Unfortunately, most of these documents are merely declaratory, and lack the proper enforcement mechanisms. In addition, due to the lack of sufficient funds, most existing projects targeted to improve the environmental situation in the country have been precluded. Ukraine lacks a serious national ecological treatment program. Without centralized planning and procurement, local enterprises have resorted to informal trading to acquire the equipment they need. Few enterprises can afford the installation of air and water control systems.
Although significant, the pollution control equipment market in Ukraine can't be calculated using traditional methods. Market size analysis is complicated by the overall economic crisis in the country and the difficulty in obtaining exact statistical data from Ukrainian institutions. Virtually all municipal water and air treatment facilities and industrial pre-treatment systems are in need of reconstruction and installation of new pollution control systems. The Ukrainian industry for water control and treatment equipment is in the process of development. During 1997-1999 a number of joint ventures and domestic enterprises launched their activity to produce local water purification equipment and units. The market for home water purification units and independent water supply systems is flooded with products of U.S. and German origin. The domestic industry of air and soil remediation and control equipment is in an embryonic stage, and the market is open for this kind of equipment.
During 1998-1999, the legislative base of the waste recycling industry in Ukraine underwent a number of changes. By a Decree of the Cabinet of Ministers, the State Company Ukrtarapererobka was established to facilitate and coordinate a national program on waste recycling in Ukraine. Ukrtarapererobka plans on holding tenders for international and domestic providers of technologies and exporters of equipment for participation in waste recycling projects in Ukraine.
(Market size data is not available for this sector.)
14. Security & Safety Equipment (SEC)
American-made security and safety equipment is one of the most promising industrial sectors for export to Ukraine. Rising crime, weak law enforcement, and the emergence of a strong business mafia have compelled many Ukrainian citizens to take matters into their own hands. While existing legislation restricts the purchase and use of firearms by the average citizen, many citizens rely upon a variety of security devices and alarms for their homes and cars; such items include car alarms, house alarms, advanced technology locks, and closed-circuit TV. The rapid growth of private banks has been accompanied by an increased demand for safety deposit boxes, safes, metal detectors, pagers, smoke detectors, and sophisticated turn-key security and access control systems. Ukrainian companies are often willing to pay top dollar for an effective security package, as seen by the proliferation of Ukrainian security companies. Domestic manufacturers are unable to meet demand, both in terms of quantity and quality desired. U.S. companies are advised to use trade exhibition opportunities to make valuable contacts and to directly contact private Ukrainian security firms. U.S. firms should also note that the import of security and safety equipment requires certification from the Ukrainian Ministry of Internal Affairs, which is often a cumbersome process.
(Market size data is not available for this sector.)
15. Telecommunications (TEL)
Telecommunications in Ukraine expanded tremendously over the past few years. As a result of developments in both wired and wireless communications, Ukraine now possesses the potential to engage in sophisticated telecommunications in line with European standards.
Ukraine's wireline networks, however, remain far from optimal. First, fees for new line installation can reach $1000, and may require long waiting periods. Secondly, although an increasing amount of digital equipment is in place, many regional switches continue to connect customers using outdated equipment. Therefore, the quality of connection cannot be guaranteed. Almost all local loops remain analog with obsolete and worn-out equipment, which prohibits the introduction of new billing systems. Users pay a symbolic fee of $2-3 per month. Only in large cities has a new billing system based on per minute billing been introduced. Almost all local loops are unprofitable. Two companies dominate the national and long-distance wireline networks: Ukrtelecom and Utel, respectively. Ukrtelecom subsidizes local loops with revenues received from unrealistically high rates for international calls, line installation, and registration.
In small towns and villages, the situation is even worse. At times there is only one line in a village of several thousand people; the wait for a line can range between 7-11 years. In addition, the number of phone lines varies throughout the regions. Kyiv has the highest density (43 percent), followed by the industrial regions in the east (19 percent). Lines are scarce in the western agricultural regions of Transcarpathia and Carpathia.
Ukraine's hesitation to liberalize its telecommunications industry gave Ukrtelecom a substantial degree of clout in both the political and business communities. Privatization of Ukrtelecom, which was repeatedly proposed by the Ukrainian Government in 1997 and 1998, has so far been delayed by fierce opposition by different political forces in the National Parliament. This privatization, when it happens, will certainly reshuffle the structure of the telecommunications market in Ukraine.
Nine independent cellular networks are being built or expanded using NMT-4, GSM-900, DCS1800, DAMPS, CDMA and TDMA standards. Ukraine has joined the Global Star and Iridium satellite networks. All of the above projects are designed to eventually provide countrywide coverage. Specialists agree that there will be tremendous growth in Ukraine's telecommunications sector, particularly in satellite, cellular, and fiber optics. Several national projects are anticipated to upgrade administrative and finance infrastructures, including the development of a nationwide credit payment system. Because of the excellent reputation of American-made telecommunications equipment, U.S. firms can position themselves to meet the demand for equipment in satellite, mobile communications, and electronic data transmission and processing.
Conversion of certain frequencies, formerly restricted to the military, law enforcement, and air-traffic control authorities, has been opened up to the private sector. This facilitates a market for more paging, cellular, and mobile equipment. With the Ukrainian government planning for massive development in the telecommunications sector (including total conversion to a digital system and expansion in rural areas), opportunities will be available for U.S. telecom companies.
The Ukrainian telecommunications industry desperately needs financing. To upgrade the national communications network to world standards, the industry would require around $10 billion in investments. At this point, the industry generates enough funds to reinvest no more than $200 million annually, but even these funds are diverted to more urgent government needs. Unfortunately, so far Ukraine has failed to create an attractive environment for potential strategic investors in its telecommunications industry. Mobile Communications: Mobile Communications (MC) has been the main focus of foreign investors in the Ukrainian telecommunications sector. None of the MC service providers in Ukraine are 100-percent Ukrainian; each MC provider has a foreign partner which contributes to the joint venture's financial capital, technology, equipment, and know-how. The peculiarity of the local MC market is that typically most operators have one manufacturer relationship (Ericsson, Motorola, Qualcomm, Hughes), which either provides an open equipment credit line or is a shareholder of the operating firm. Small local operators are still short of funding and are dependent upon equipment credit lines, which do not allow freedom of choice as far as equipment and technology are concerned. Since September 1997, five operators and six networks of cellular communication (standards NMT-450, DCS1800, D-AMPS, GSM900) have been operating in Ukraine. The number of cellular communication subscribers in Ukraine is close to 170,000.
Fierce competition between MC operators led to a substantial decrease in tariffs and differentiation of payment and service packages offered by operators. The major technical problem facing operators of GSM900 networks in Ukraine is sharing 900 MHz frequencies with 64 Ukrainian airports that use this spectrum for navigation and commercial use. The spectrum available for commercial use varies throughout Ukraine. The range of available frequencies is expanding step by step as frequencies are being converted towards commercial use. MC operators cannot function independently of Ukrtelecom (the Ukrainian state-owned telephone company), which requires a limited share in each company. Without Ukrtelecom's cooperation, an MC operator would not have access to fixed line networks and public switches. There are too many MC operators for the small market that currently exists in Ukraine. However, at least two more companies, International Telecommunications Company and Astelit, plan to become MC operators in the near future. Currently, the best mobile communications prospects are: Ukrainian government agencies, the Administration of the President, regional (oblast) and district (rayon) administrations, the National Tax Inspectorate, the Ministry of Interior, major metallurgical and pharmaceutical enterprises, and the national railroads.
16. Travel and Tourism (TRV)
Most of Ukraine's tourism facilities are worn out, and Ukraine may be viewed as a promising market for those companies involved in development of the tourism infrastructure. U.S. companies that specialize in hotel and resort development, theme park development, winter sports facilities, tour development, concept design, convention business, alternative tourism, construction and redevelopment of airports, marina development, information technologies and advertisement have the best opportunity to participate in the upgrade and expansion of Ukraine's tourism infrastructure. Despite an overall economic slump, tourism has become one of the key drivers of the Ukrainian economy, generating $3.8 billion or 8.6% of the nation's GDP in 1998. It also one of the fastest growing industries. There are three absolute tourism centers in Ukraine, attracting almost 90 percent of tourists: Kyiv, Crimea and the Black Sea coast near Odesa, and the Carpathian region (including L'viv, Ivano-Frankivsk, and Chernivtsi).
After eight years of independence, Ukraine still does not have a single international hotel. Of those projects in the pipeline, only Radisson SAS and Hilton may be realistic to launch operation in Kyiv by 2001. The key obstacle for hotel development is the land ownership issue: Ukrainian law prohibits private ownership of land, therefore, all existing hotel projects shall be carried out on a land lease term for 49 or 99 years. The Kyiv City Administration has recently announced its plans to attract investors for extensive hotel refurbishment and new projects.
Seaside tourism, with centers in Crimea and Odesa, faces a relatively short season and faces stiff competition from other destinations. This region was the number one center of recreational tourism in the former Soviet Union, and is therefore flooded with outdated resorts and sanatoriums formerly managed by trade unions. Crimea offers ideal climatic conditions, many curative mineral waters, peat and mud. In order to extend the tourism season in Crimea, local private companies and municipalities have developed attractive investment projects involving construction of winter sports facilities, hiking, marina development, entertainment centers, cruising and golfing. Crimea also has a plethora of historic sites connected with the Ancient Greek and Ottoman periods. In 1999, the Ukrainian Parliament granted VAT exemption for tourism companies in Crimea. In addition, a Presidential Decree gave Yalta, Alushta, Sudak, Feodosiya and other resort towns the status of territories of priority development, thereby granting substantial incentives for investors and tourism project developers in these areas.
The Carpathian region provides a unique combination of mountains, clean air, curative spas, historic sites and ethnic culture. This is where most travelers from the United States, Canada and Western Europe tend to come. Development of resort hotels, ski facilities, spas, hiking grounds, and convention centers may provide excellent opportunities for investors. There is the prospect of combination tours to cover Poland, the Slovak Republic, Hungary and western Ukraine. L'viv, included in the UNESCO list of historic treasures, may be especially interesting for construction and design companies.
National and regional transportation infrastructures are inadequate and act as the main obstacle to the development of the tourism sector. Particularly noticeable is the low quality of airline service and poor road conditions across the country. The State Tourism Committee is trying to encourage foreign companies to get involved in the development of a ground travel infrastructure, including motels, restaurants, service stations, as well as information programs. Currently, the Ministry of Transportation is looking for investors to implement several airport redevelopment projects in L'viv, Ivano-Frankivsk, Simferopol, Kharkiv, Odesa, and Kyiv Zhuliany.
Another impediment to the development of tourism is very poor marketing by the Ukrainian travel sector. Foreign individual travelers and travel companies complain about the excessive cost of a Ukrainian visa ($75-165).
B. Best Prospects for Agricultural Products and Services
Domestic food and beverage prices in Ukraine remain significantly lower than those of imported goods. Imported foods and beverages are much more expensive for several reasons; duties up to 50%; a high value-added tax (VAT) on imported goods; excise duties for alcoholic beverages, cigarettes, coffee, and chocolate; and high profit margins set by local sellers of imported products.
Despite such barriers, imported food products are in high demand. Approximately 30% of Ukrainian food expenditures are on imported products.
1. Alcoholic Beverages
Ukraine has 87 plants that are licensed to produce alcohol. They can process up to 900,000 tons of grain and 1.1 million tons of molasses per year, producing roughly 320 million liters and 300 million liters respectively. In addition, there are hundreds of other producers of spirits, liqueurs, wine, and cognac.
According to a 1998 Presidential Decree, the State Committee of Ukraine for Monopoly on the Production and Turnover of Ethyl Alcohol, Alcoholic Beverages, and Tobacco Products was established. This Committee is authorized to: (1) control production, export, import, transportation and sale of the above-mentioned goods; (2) issue relevant licenses; (3) fine violators of legislation; and (4) submit proposals for introducing minimum prices for alcohol and tobacco.
According to "Ukrpyvo" (the Ukrainian beer trade association), the size of the beer market in Ukraine is estimated to be 100 million hectoliters (10 billion liters), while in 1997 domestic breweries produced just 61.1 million hectoliters (6.11 billion liters). Annual per capita beer consumption is 12 liters. Approximately 85% of the total beer supply is locally-produced. After the financial crisis in late 1998 and a sharp increase in the currency exchange rate, the share of imported beer decreased by 5-10%. The largest six breweries control 64.4% of the total domestic market: CJSC "Obolon" (20.3%), JSC "Brewery Rohan" (16.1%), JSC "Slavutych" (15.3%), CJSC "Donetsk Brewery" (14.9%), JSC "Chernihiv Brewery Desna" (13.6%) and JSC "Mykolaiv Brewery Yantar" (13.6%). The profitability of beer sales in these breweries is 20-40%. But industry specialists believe that the real profitability rate is much higher.
Current major investors include: INVESCO CEAM Investment Company (registered in Cyprus) working with breweries in Odesa and Mykolaiv; "Sun Group" British-Indian Investment Company provides financing for the "Krym" Brewery in Simferopol; BBH (Baltic Beverages Holding AB) works with "Slavutych" in Zaporizhzhya; Belgium "Interbrew" Investment Company works with "Desna" in Chernihiv.
Currently, there are no local manufacturers of brewery equipment. Ukrainian breweries primarily use equipment imported from Western Europe. U.S. companies would be well-advised to explore opportunities in Ukrainian breweries and micro-breweries, given the strong demand in adjacent CIS and Eastern European markets.
2. Poultry Products
Since 1994, U.S. poultry exports to Ukraine have experienced enormous growth. Local consumers prefer chicken leg quarters, which are competitively priced, easy to cook, and contain more fat than local poultry. Market niches exist for other products, such as ground chicken and turkey, turkey leg quarters, and poultry sausage. Consumption of imported poultry is likely to grow, especially during colder seasons when it is easier to store these products. U.S. exporters should be certain that they secure in advance all the necessary documentation required by the Ukrainian government, particularly Veterinary Certificates. Competition exists primarily from the Netherlands, Germany, and other European countries.
Market size data (in thousands of metric tons) 1997 1998 1999 A. Total Consumption 248.9 265.5 N/A B. Total Production 192 214 N/A C. Total Exports N/A N/A N/A D. Total Imports 56.9 51.5 N/A E. Imports from the U.S. 48.6 37.2 N/A (The above statistics are unofficial estimates.)
C. Significant Investment Opportunities
As enterprises within the machine building and high-technology defense sectors convert their production to commercial and consumer goods, opportunities exist for U.S. investment in the production of such items as: computer equipment, components, and peripherals; the creation of specialized software; building materials; the joint manufacturing of telecommunications equipment (primarily satellites and fiber optics); and the production of security and safety equipment. The following is an overview of key investment opportunities in the most promising sectors. Where appropriate, opportunities arising from bilateral foreign assistance or multilateral development bank-funded projects are discussed.
1. Electrical Power Systems (ELP)
Ukraine's seven power generating companies supply electricity to the national grid. Four thermal power generating companies, Dniproenergo, Donbasenergo, Zakhidenergo and Tsenterenergo, manage 14 large thermal power plants (TPPs). Two hydro power generating companies, Dniprohydroenergo and Dnisterhydroenergo, comprise a cascade of six hydro power plants (HPPs) and one hydroelectric pumping storage power station (HPSPS) located along the Dnipro River, and one HPP located on the Dnister River. Energoatom national nuclear power generation company manages five Ukrainian nuclear power plants (NPPs): Khmelnytsky, Zaporizhzhya, Chornobyl, Rivne and South Ukraine plants. Twenty-seven Ukrainian power distribution companies, seven of which are now privately controlled, receive electric power through the wholesale market ("Energomarket") at wholesale tariff from generating companies. The retail market for power energy consists of the direct consumers of power energy. Electricity is transported through the high-voltage central transmission networks, which belong to Ukrelectroperedacha power transmission company, then through local middle and low-voltage transmission lines, which belong to the regional distribution companies, and then to the consumers. The National Dispatch Center (NDC), which includes eight regional dispatch centers, controls the stability in the energy grid.
Ukrainian legislation provides that thermal power generation companies and regional power distribution companies must be privatized. Privatization of regional power distribution companies began in December 1997. As of mid-October 1998, out of the 18 competitions announced for sale of 20-36 % stakes in power distribution companies, only nine winners had been announced. The government lost controlling stakes in seven of the power companies, in which 66 to 72 % of shares were sold. Winners of the tenders also gained the right to manage state-owned shares in power companies. The stock distribution plans of the 27 power distribution companies provided that the state retains 25% of the authorized funds plus one share. Thus, according to the plan, upon completion of privatization of regional power distribution companies, seventy-five percent of the power companies would be privately held, with the state holding a minority interest. The stock distribution plans of four thermal power generating companies stipulate that the state would retain a 50% plus one share for five years; 25% would be sold on privileged terms, primarily to enterprise employees, the remaining 24% would be sold on a tender. Ukrainian power companies need investments for their technical upgrade, and thus need to be privatized by experts in management of electric power utilities, with straightforward investment programs. The newly appointed Minister of Energy Plachkov set as his first priority the continued privatization of the power sector.
The electric power sector offers possibilities for U.S. companies and investors to participate in the upgrading of thermal and hydropower plants, especially the improvement of control systems and the supply of gas meters and energy efficient technologies. Excluding Chornobyl, the estimated total investments envisaged for the power industry in both non-nuclear generation and nuclear generation equal $3.88 billion in 1996-2000 and $5.22 billion in 2001-2005. The Ministry of Energy's thermal rehabilitation project requires capital investments of about $500 million per year (1996-2005). The estimated cost of the turbine replacement program for hydropower plants is $45 million in 1996-2000 and $28 million in 2001-2005. The completion of the Dnistrovska Pumping Storage Power Station is estimated at $454 million.
There will be tenders for procurement of various categories of equipment and services within the Chornobyl Shelter Implementation Plan. The project/plan is financed by the Chornobyl Shelter Fund, which is administered by the EBRD. The total estimated cost of the procurements for this project will amount to $ 40 million. Energoatom national nuclear power generation company will procure the following goods and services contracts, over the next nine months: computer hardware and software equipment, management support equipment, civil engineering, operations and monitoring, emergency systems, fuel containing material, radiation protection and monitoring equipment and services, and support facilities and utilities.
Procurement under the World Bank tender procedures is also taking place for a World Bank loan for the Dniprohydroenergo power generation company for the Dnipro Cascade Hydropower Rehabilitation and System Control Project. The total project cost is estimated at $190 million; the World Bank provided a $114 million loan, co-financing provided by the Swiss, Canadian and Norwegian governments. Project scope includes installation of new turbines and generators, assembly of the dam's safety control system, improvement of the communication system, dispatching service and management. Tenders have been conducted since October 1998. As of April 20, 1999, the tender was expected for consulting services in dispatching. The Darnytsia Power Plant Modernization Project is under consideration by the EBRD. Total estimated project cost is $158 million. The project is supposed to be implemented by the Ukrainian-Canadian joint venture Ukr-Can Power, managing the Darnytsia Power Plant. The project proposal is to modernize the plant using efficient gas turbines, advanced boiler technology, up-to-date power generation installments, and proper control systems. The implementation of the new equipment and advanced technologies will allow cutting the plant's fuel consumption in half. It is expected that the project will begin in 1999 and will be completed by the end of 2001.
2. Energy Efficiency (EE)
A number of opportunities exist for investors to provide technical assistance, training, and energy efficient technologies. Immediate efforts to save energy are focused upon low-cost/no-cost programs in industry energy efficiency and heat and power boiler efficiency. Both are short-term, high-payback measures that involve energy audits, training in energy management practices and financial analysis, and provision of low-cost energy efficiency equipment. This short-term approach supports a transition from government to the private sector by introducing modern management practices in industries that are unable to mobilize capital for larger investments.
There are several measures that can be undertaken in the immediate term to provide a basis for substantial energy efficiency investments over the next 2-5 years. Project preparation opportunities for energy efficiency investments include: industry efficiency investments, district heating projects, transmission and distribution investments, generation and plant rehabilitation, and the construction of alternative fuel and energy facilities. In particular, the State Committee for Energy Conservation proposed to implement the following pilot projects:
- reconstruction of the heat network and boilers at the Boryspil Airport in Kyiv; - reconstruction of town boilers and enhancement of the district heating efficiency in the cities of Kyiv, Sevastopol, Dnipropetrovsk, and L'viv; - feasibility studies for production of turbine expansion gas energy engines on the basis of gas reduction stations; - transferring of steam boilers that function in accordance with the pot-boiler method to the water heating method. Potential financing for energy efficiency includes commercial banks, private sector third party financing, energy utilities, and multilateral lending and investment. The U.S. Trade & Development Agency could partially finance feasibility studies on the prospective energy efficiency projects.
On May 21, 1998, the World Bank approved a $200 million loan to Ukraine for a Kyiv District Heating Improvement Project that will increase the efficiency of central heating in Kyiv. The loan agreement was ratified by the Ukrainian Parliament on March 23, 1999; international tenders are expected to begin in August 1999. The project will replace and increase heat production capacity to better meet existing and expected future demand for district heating, introduce modern technologies and materials to extend the life of the Kyiv heating system, and also promote cost recovery policies and practices. A project providing $30 million for upgrading the Sevastopol district's heating system is under consideration by the World Bank.
The State Committee for Energy Conservation plans improving energy efficiency in Kyiv public buildings: schools, hospitals, kindergartens, and public administration buildings. The project is supposed to modernize over 1600 buildings by installing meters for measuring heat energy consumption and other energy saving equipment. The World Bank is supposed to finance $40 million for this project.
In May 1998, the State Committee for Energy Conservation coordinated the establishment of Ukraine's first energy service company (UkrESCO), which will identify and implement energy-saving investments in small and medium-sized enterprises (SMEs) and public sector institutions throughout Ukraine. In May 1998, the EBRD agreed to provide a sovereign loan of $30 million for this project. In May 1999, the loan agreement was ratified by the Ukrainian Parliament. International tendering for energy conservation equipment and services began in June 1999 and is ongoing.
In December 1997, the EBRD signed a sovereign loan agreement for $73.3 million with Ukrgas, a state-controlled corporation in charge for natural gas distribution, for a gas meters installation project. Total project cost is estimated at $88.3 million. Ukrgas was supposed to acquire and install over one million gas meters in households, commercial and industrial facilities. The project consisted of installation of gas meters throughout the Dnipropetrovsk Region and was to contribute to improving the efficiency of gas use. In July 1998, Ukrgas was liquidated, and Naftogas of Ukraine state holding acquired its state-owned stake of shares. As of June 1999, the project is on hold; the EBRD is reviewing the terms of the loan agreement since the borrower has changed, and the project remains to be ratified by the Ukrainian Parliament.
3. Oil & Gas Services (OGM)
Soviet industrial policy of the 1970s chose to develop Siberian oil and gas deposits, resulting in an underdeveloped and almost forgotten oil and gas sector in Ukraine. Ukraine's current oil and gas production meets only 10-12% and 20-24% of domestic needs respectively. The domestic fuel producing industry is complex and consists of approximately 240 companies performing crude oil extraction and transportation, natural gas extraction and transportation, oil and gas refining, and petroleum products storage and distribution. Continual reliance on crude oil imports from Russia and Kazakhstan, and natural gas from Russia and Turkmenistan has forced Ukraine to reexamine both tapped and potential reserves located in eastern and western Ukraine, as well as in Crimea. The Ukrainian government has declared the development of this sector as one of its top priorities.
The national holding company "Naftogas of Ukraine", created in early 1998, secured state-owned stakes in major Ukrainian oil and gas extraction, transportation and storage companies - such giants as Ukrgasprom and Chornomornaftogas (gas exploration), Ukrgas (distribution of gas to end-users), Ukrnafta (crude oil exploration), major oil pipelines Prydniprovski and Druzhba, Azmol (oil refining). The main purpose of "Naftogas of Ukraine" was to consolidate numerous state oil and gas holdings in order to facilitate reorganization of the industry. However, there were concerns that this could lead to further monopolization and strengthening of the state control over the companies. The sector, particularly oil and gas extraction and transportation, remain highly state-controlled. However, there are a number of joint ventures with foreign investments operating in oil and gas exploration and extraction. Some foreign companies have lease agreements for transportation and storage facilities, which are mostly state-owned.
Privatization of Ukrainian oil refineries resulted in 32 to 75 percent of the refineries now being privately held. On March 31, 1999, the Russian oil companies Lukoil and Syntez Oil jointly won the privatization tender for the 51.9 percent share of stock in the Odesa Oil Refinery. The winner had to pay $ 6.9 million for the share. Total investment obligations on the share of stock include the clearance of half of the Odesa Refinery's debt to the Ukrainian bank Ukrinbank (about $ 19.1 million), disbursement of $ 1.2 million for the rehabilitation and technical upgrade of the Odesa Refinery, and the annual supply of 2.4 million tons of crude oil over 5 years. The state retained ownership of a 25-percent share of stock in the Odesa Refinery, but is considering transferring its management to the Lukoil - Syntez Oil joint venture. Currently, Lukoil and Syntez Oil are the major foreign investors in the oil refining industry of Ukraine. The most advanced sub-sector in terms of privatization is that of ancillary industries, such as petroleum product storage and distribution.
Ukraine's carbon resources are estimated at the equivalent of 7-8 billion tons of fuel. There are three prolific areas in Ukraine located in the west (Carpathian region), in the east (Dnipro-Donetsk region), and in the south (the Black Sea and Crimean regions). There are 8,000 potentially profitable oil and gas fields in Ukraine, of which more than 300 have been developed with significant output. The total number of operational extraction wells exceeds 4,400 units. Ukraine has approximately 35,000 kilometers of gas pipelines. Input capacity of the gas transport system of Ukraine is 290 billion cubic meters annually. Annual output capacity (to the countries of western, central and eastern Europe as well as to Moldova and the south of Russian) is almost 170 billion cubic meters.
There are several areas for investment in the oil and gas sector. Investment requirements in natural gas exploration and extraction are estimated at $160 million (1996-2000) and $150 million (2001-2005). The needed upgrading and replacement of transmission system compressors requires $250 million (1996-2000) and about $100 million (2001-2005). The cost of increasing transmission capacity is estimated at $500 million (1996-2000) and $1.5 billion (2001-2005). Continued expansion of the domestic distribution system (according to Naftogas of Ukraine's plans) requires about $470 million (1996-2000) and $500 million (2001-2005).
Oil and gas extraction has potential for expansion using up-to-date Western technologies (deep drilling, 3-D seismic, well-logging, reservoir characterization, directional drilling, etc.) to locate new traps or untapped zones, or to rejuvenate older fields. Already discovered, high pressurized gas fields are largely beyond the capability of Ukrainians themselves to develop. Naftogas of Ukraine came up with investment projects for recovering old fields (Gutzulin gas field, Pylypiv and Dobleslav fields), and developing new oil and gas fields (Odesa shelf, Lokachiv gas field, Glino-Rozbyshiv and Kokaniv oil fields).
Total investments needed for these projects are estimated at $ 250 million. The Azov-Black Sea shelf presents interesting investment possibilities in capacity expansion and hydrocarbon extraction. There is a state program on the Black Sea shelf development, which has been declared a priority by the President of Ukraine. Shell International Petroleum (Netherlands) and Pecten International (U.S.) won the first tender in July 1996 to prospect for and extract oil in the Black Sea shelf. Some American companies are interested in participating in the second bidding round upon implementation of the production sharing law. In June 1999, the Law on Production Sharing Agreements was accepted by the Parliament. Hopefully, it will be adopted later in 1999-2000; it should encourage foreign investment in the oil and gas sectors. (In early August, the President vetoed the law and returned it to Parliament.)
Naftogas of Ukraine has some investment projects in oil and gas transportation, including reconstruction of compressor stations in Dolyna and Lubny, and construction of the Kherson-Crimea and Dolyna-Uzhhorod gas pipelines. Total $ 300 million in investments are required for these projects.
Investments relating to the modernization of existing refineries are expected to be commercially viable. Of six refineries, all except the Kremenchuk refinery have been partially privatized. If the domestic and foreign trade of crude oil and petroleum products completely liberalizes and prices for oil products are fully decontrolled, refineries should be able to attract both commercial loans and equity investors to finance required projects. The cost for modernizing four of the six existing refineries (Lysychansk, Kremenchuk, Odesa, and Drohobych) was estimated at $4.5 billion. The government of Ukraine has been negotiating with the EBRD for a $101 million loan to upgrade Ukraine's refineries.
Construction of the facilities which would be part of the Eurasian Oil Transportation Corridor began as a result of the necessity to fully meet the demand for crude oil and the desire to open a transit route to Europe for Caspian oil. The construction of an oil terminal at the Pivdennyy seaport near Odesa, and a 667 kilometer, 1020 millimeter diameter pipeline link between Odesa and Brody would make it possible to supply industrial cities in Ukraine and Europe with approximately 40 million tons of crude oil per year.
The Committee for Oil and Gas of Ukraine is coordinating the Pivdennyy Oil Terminal Construction Project - intended to improve the security and diversity of Ukraine's crude oil import supply, and worth a total of $216 million. The project is co-sponsored by state enterprises responsible for the national pipeline network (the Prydniprovski Main Oil Pipeline Company and the Druzhba Oil Pipeline Company), and by Uknaftoterm state company. The project includes construction of a marine oil transferring complex 30 kilometers east of Odesa that will handle and store crude oil to be transported through Ukraine's pipelines for export. It will have an annual capacity of 12 million tons of oil after completion of the first phase of the project, and 40 million tons after completion of the second phase. It is anticipated that the first phase of the project will by completed by mid 2000; foreign investments are needed to complete the second phase.
In September 1998, the U.S. Trade & Development Agency provided partial funding of $ 750,000 for a feasibility study of the Odesa-Brody pipeline construction project, with an expected total cost of $ 470 million. The study is being carried out by the U.S. company Gulf Interstate Inc., and is scheduled to be completed by the end of July 1999. The pipeline would include two pumping stations along its route - in Fedorivka and Kotovsk. The new oil pipeline could transport oil to the southern branch of the Druzhba oil pipeline, which at present is operating below capacity by five-six million tons of oil a year, and would allow for the delivery of crude oil to refineries in Slovakia, the Czech Republic, Hungary, and after the construction of short connecting oil pipelines - to Austria (Schwechat Refinery), and Germany (Leuna Refinery). The extension of the Pivdenny-Brody oil pipeline to the Polish city of Plock would connect the system to the western branch of the Druzhba oil pipeline and allow delivery of Black Sea oil to new markets in Poland, Germany, and the Baltic Sea (through the port of Gdansk in Poland).
Meanwhile, the construction of the pipeline and Pivdennyy terminal is proceeding slowly. According to Valeriy Shuliko, Deputy Head of the Committee for Oil & Gas, as of April 14, 1999, about 56 percent of the Odesa-Brody pipeline and about 20 percent of the Pivdennyy oil terminal have already been constructed using Ukrainian investments.
The Ministry of Coal Industry has been negotiating with the World Bank for financing the Coal Mining Improvement and Coal Bed Methane Recovery Project, which would include improvement of mine safety, improvement of coal quality, environmental and occupational health improvements, technical assistance and training. Total project cost is estimated at $ 150 million, of which the World Bank is expected to provide $ 100 million. Project preparation is under way; consulting services are to be determined.
The Ukrainian government has also been negotiating with the World Bank for financing the project for the rehabilitation of Ukraine's natural gas transit network, which carries some 35% of Western Europe's natural gas supplies. This $477 million project would improve network reliability and provide for compressor stations and pipelines for four major export routes.
4. Telecommunications (TEL)
Privatization of Ukrtelecom remains a major potential investment opportunity in Ukraine, as it has been for more than a year and a half.
Ukrtelecom was created in 1993, when the Ukrainian Ministry of Communications reorganized the national telecommunications structure by merging several telecom departments and regional PTTs into the Ukrainian State Telecommunications Corporation (Ukrtelecom). Owning all transmission facilities, Ukrtelecom administers the national wire line infrastructure. The company employs more than 130,000 people. Ukrtelecom's net profits totaled $ 100 million in 1995, grew to $ 130 million in 1996 and $220 million in 1997. Estimates for 1998 were thought to be around $ 500 million net profit, but devaluation of the national currency reportedly brought gross revenues to $ 714.4 million and net profits down to $ 140.6 million.
Ukrtelecom's special attractiveness is also due to the fact that the Ukrainian Law on Communications established a provision under which the foreign share in a company that provides telecom services in Ukraine cannot exceed 49 percent. For this reason, in addition to the actual monopoly on the local loop, Ukrtelecom usually either gets a share in any private or public telecom company operating in Ukraine, or signs a memorandum of cooperation with the operating firm. Therefore, control over Ukrtelecom means control over the national telecommunications market.
The Ukrainian telecommunications industry desperately needs financing. To upgrade the national communications network to world standards, the industry requires around $10 billion in investment. The only way to obtain these substantial investments is through privatizing Ukrtelecom. Ukraine's hesitation to liberalize its telecommunications industry gave Ukrtelecom a substantial degree of clout in both the political and business communities. Privatization of Ukrtelecom, which was repeatedly proposed by the Ukrainian government in 1997 and 1998, has so far been delayed by fierce opposition by different political forces in the National Parliament.
Reportedly, at least four draft laws on privatization of Ukrtelecom have been submitted to the Parliament. Although Ukrtelecom's audit by PricewaterhouseCoopers is expected to be completed in mid July, Ukrainian government officials already announced their plans to sell 25% of Ukrtelecom shares for $0.7-1 billion and delegate the management of the company to the strategic investor in question.
It is expected that because of the aggravated economic situation, telecom privatization will be at the top of the agenda immediately following the presidential elections. The privatization of the Ukrainian telecommunications industry will be a long and painful process. It is very likely that industry interests will be viewed as being of minor importance. However, this privatization, when it happens, will certainly reshuffle the structure of the telecommunications market in Ukraine.
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