Full Speed Ahead for Rail and Roads

President Viktor Yushchenko describes Ukraine’s location as “a gift from God.” The country sits astride eastern Europe, at the center of transport corridors that link Poland to Russia and the Balkans to Scandinavia, making its transport system – roads, rails, air-routes and pipelines – one of its most valuable resources.

Evgen Chervonenko, who was transport and communications minister until September, believes Ukraine can gain huge benefits from being a bridge between West and East and between North and South.

Ukraine has one of the largest railroad networks in Europe. However, at present, just half of its 13,000 miles of track is electrified and only 1,250 miles of its roads can be classified as highways – far fewer than in France, Germany or Italy.

Its airports – which are experiencing an extremely satisfying annual increase in passenger levels of more than 30 percent – also need huge investment if they are achieve their full potential.

Freight trains in the Ukraine

Much needs to be done, but Kamen Zahariev, director of the European Bank for Reconstruction and Development, puts this into perspective.“Let’s not forget that Ukraine may not have the best transport infrastructure, but it does have infrastructure,” he says. “This is not Africa. And Ukrainian railways are profitable. How many railways can describe themselves as profitable?”

This profitability, he says, stems from the fact that the Ukrainian railroad network has a much larger share of industrial and freight transportation than any other European country. Some of its freight trains pull 100 trucks, whereas elsewhere in Europe 50 is the maximum.

Nevertheless, the investment needs are enormous. The general director of UkrRailways, Zenko Aftanaziy, says the renewal of the infrastructure and the rolling stock requires a yearly input of $1.5 billion. There is a need for freight cars, passenger cars and electric locomotives. “But the priority,” he says, “is the electrification of the whole infrastructure and its modernization.”

As well as the purchase of new rolling stock, electrification will require construction of track facilities that meet contemporary European standards and allow speeds of 108 mph.

“Each dollar spent on UkrRailways transforms into $10 if we are involved in joint enterprises to produce equipment.”
Zenko Aftanaziy,
General director, UkrRailways

In cooperation with Siemens, UkrRailways is in the process of producing a new fourth-generation locomotive which will replace old trains of Czech and Russian origin. State-of-the-art technology will also enable UkrRailways to supply Russia and Kazakhstan with locomotives.

But Aftanaziy says: “We now need a financial resource to be able to proceed.” His target is to have 90 percent of the railroad network electrified and capable of high speeds by 2010.

Although the emphasis is on electrification, the post-Soviet region still relies heavily on the use of diesel and Ukraine hopes to benefit from that. The design center for diesel locomotives, established during the Soviet period, remains operational in Ukraine. The aim of UkrRailways is not only to use railroad equipment, but to construct it. In association with General Electric, it is hoping to purchase the latest diesel locomotives from abroad and then start production of the engines itself.

“Each dollar spent on UkrRailways transforms into $10 if we are involved in joint enterprises to produce equipment,” says Aftanaziy. “Since Ukraine has always had a significant position in machinery construction, our main task is to bring Western technologies here so that we can make progress in this industry.”

Vadym Gurzhos, chairman of the state road administration of Ukraine, says that at the moment only $5,166 is spent on the maintenance of each mile of highway, which, he says, is ten times less than in France.

The program for extending the country’s highways has begun with the completion of the first ?75 million section of a highway from Kiev via Lviv to Chop that by 2010 will connect the Ukrainian capital with the border of the European Union.

The total cost of about ?300 million is being met by the EBRD and the European Investment Bank. A similar project for a highway from Kiev to Odessa is also under way. A $480 million credit from DeutscheBank has enabled a middle section of just over 150 miles to be completed in two years by more than 100 private construction companies from eight countries including Russia and Turkey.

“This compares with road-building speeds in China and Korea and for a European project it is worthy of the Guinness Book of Records,” says Gurzhos.

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Lifting of Sanctions Aids Exports

It took Washington eight months after the Orange Revolution in December to lift the trade sanctions that it had imposed on Ukraine in 2002.

It did so in August, a month after the Ukrainian parliament adopted a new law aimed at cracking down on piracy of intellectual property, including American movies and computer programs. This was the measure which, at least to a limited extent, met the requirements of the United States.

The legislation is expected to stem the illegal production and trade in CDs and DVDs in Ukraine which, three years ago, was regarded by the U.S. as the base of the largest production and export center for pirated visual media in Europe.

Bootlegged CDs and videos in downtown Kiev

Lifting the punitive 100 percent tariffs on $75 million worth of Ukrainian exports to the U.S. was a welcome, if modest, fillip for President Yushchenko’s administration, at a moment when the prospect of Ukraine joining the World Trade Organization before the end of the year as had been hoped was rapidly receding. Although the Ukrainian parliament has ratified much of the legislation required, key draft laws have been blocked by the farming lobby. This setback has disappointed the Ukrainian business community and added to the general sense of public disappointment that has followed the euphoria brought about by the Orange Revolution.

Salaries and pensions have increased, but their value has eroded by rising food and utility costs, higher prices at the gas pumps and the government’s decision to strengthen the hryvnia against the dollar.

Yushchenko has promised reforms to the tax system next year in the belief that high taxes are the main incentives driving both corruption and the extensive, tax-avoiding shadow economy. He argues that under his government the shadow economy has already shrunk by 5 percent this year, but admits that it still accounts for about 40 percent of the economy.

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Shop Window for Growth

Free-market competition is nowhere fiercer in post-communist Ukraine than it is between the country’s two leading vodka companies, Nemiroff and Soyuz-Victan.

The most widely known brand is Nemiroff, which increased its sales by 44 percent last year to 7.2 million cases, with its export sales exceeding domestic consumption for the first time. Most of those exports – 90 percent – went to Russia, which consumes a staggering 150 million cases of vodka annually compared to Ukraine’s relatively more moderate, but still considerable, 40 million cases.

Soyuz-Victan is dominant domestically with a 16 percent share of the market, compared to Nemiroff’s 11 percent. The ferocity of the competition between the two companies can be judged by the fact that they are locked in a trademark dispute over the Na berezovyh brunikah name. In September the chamber for patent cases of the Russian Federal Department on intellectual property rejected Nemiroff’s appeal on registration of the trademark, which belongs to Soyuz-Victan.

Yakov Gribov, president of Nemiroff, says the company began its operations during the financial crisis that came to a head in 1998, in the belief that alcohol would always be in demand.

“At that time it was much more profitable to produce vodka outside Russia than within the country,” he says. “An early significant strategic decision for the company was based on the fact that the Ukrainian market had competition in price rather than quality. We made the right decision to reject cheap products in favor of quality. This fair price allowed us to develop and improve our facilities and to invest in marketing.”

Gribov says there are no plans to sell the business, but it would consider a merger of independent companies for distribution or the entry of a strategic partner who had a strong presence in a market where the brand could be promoted.

Yaroslav Bondarenko, head of export marketing at Soyuz-Victan, says the company’s priority this year is to establish its product as a premium imported vodka in the U.S. market, which could act as a springboard to focus on Poland, the U.K. and other European markets. Last year it launched in Russia, registered sales of 850,000 cases and plans to triple this figure this year.

“Although we’ve always been proud of Ukraine, what has changed now is that the Orange Revolution has given our country a profile and has increased its perception in the minds of Western consumers,” he says.

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Fact Pack

Capital: Kiev Population: 47.8 million Currency: hryvnia (UAH) Exchange rate: hryvnia per $1= 5.05 GDP per capita: $6,300 GDP composition by sector: Industry: 45.1 percent Services: 36.9 percent Agriculture: 18 percent Budget: revenues $13.57 billion Expenditures $12.26 billion Natural resources: iron ore, coal, manganese, natural gas, oil, salt, sulphur, graphite, titanium, magnesium, kaolin, nickel, mercury, timber, arable land Industries: coal, electric power, ferrous and		nonferrous metals, machinery and transport equipment, chemicals, food processing Agricultural products: grain, sugar beets, sunflower seeds, vegetables, beef, milk Industrial production growth: 16.5 percent Oil reserves: 395 million bbl Natural gas reserves: 560.7 billion cu m Export partners: Russia 17.4 percent; Turkey 7.1 percent; Italy 5 percent Import partners: Russia 31.9 percent; Germany 11.9 percent; Turkmenistan 5.8 percent; Italy 4 percent Neighbors: Poland, Belarus, Russia, Romania, Hungary, Slovakia, Moldova