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Testimony of Anders Aslund, Ph.D.
Director, Russian and Eurasian Program
Carnegie Endowment for International Peace (CEIP)
Committee on International Relations, Subcommittee on Europe
U.S. House Of Representatives, Wash, D.C., Wed, May 12, 2004
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Anders Aslund
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Mr. Chairman, I would like to thank you for this opportunity to speak on
an
important topic. In my view, no political event in Europe this year is more
important than Ukraine's presidential elections next October. They amount to
two clear-cut choices between democracy and dictatorship as well as between
a Western and Eastern geopolitical orientation.
The United States is well liked and highly influential in Ukraine. The U.S.
can do a great deal to influence that country's choice. The main objectives
for U.S. policy on Ukraine should be to support democracy. If only democracy
is secured, Ukraine is most likely to choose a Western geopolitical
orientation.
As a matter of disclosure, I first visited Ukraine in 1985 and have kept in
close touch with the country ever since. I worked as an economic advisor to
the Ukrainian government from 1994 to 1997, and I have continued to follow
its economic and political development.
Recent Economic and Political Developments
To make sense of recent developments in Ukraine, it is probably most
illuminating to start with its economic metamorphosis. It is been
transformed from moribund to a highly dynamic economy which has undergone
swift structural developments since 2000. For the last four years, Ukraine
has enjoyed an average growth rate of 7.3 percent a year, and growth seems
to be accelerating. For the last year, three other economic indicators are
also telling. Industrial output surged by 16 percent, machinebuilding output
by as much as 36 percent and exports by a whopping 28 percent. The Ukrainian
economy is not only dynamic, but it is also rapidly becoming more
sophisticated and integrating into the world economy.
These recent economic developments stand in sharp contrast to the 1990s.
Until 1999, Ukraine underperformed even other post-Soviet economies, while
a handful of tycoons or oligarchs made fortunes on government subsidies and
regulations. In Soviet times, Ukraine's GDP per capita was slightly higher
than Russia's, but it has slipped to less than half of Russia's. Yet,
eventually, macroeconomic stabilization, liberalization and privatization
took hold, and a market economy was formed.
The real breakthrough occurred in 2000, when a new government under Prime
Minister Viktor Yushchenko carried out momentous market reforms, slashing
subsidies to oligarchs and leveling the playing field. Since then, Ukraine's
state budget has been close to balance and inflation under control. About
two-thirds of national income is produced by private enterprises. Yushchenko
's deputy Yuliya Tymoshenko minimized subsidies in energy. In revenge, the
oligarchs ousted both of them after slightly over a year. Even so, sound
market economic reforms have continued. From this year, a flat personal
income tax of 13 percent has been introduced.
The whole nature of Ukraine's business changed. Until 1999, Ukraine's
dominant businessmen were shady commodity traders, who made more money
on the government than on the market. Today, these traders have been
replaced by real companies. Ukraine's four largest enterprises are healthy
metallurgical corporations, namely System Capital Management and the
Industrial Union of Donbass in Donetsk, as well as Interpipe and Privat in
Dnepropetrovsk. Ukraine has comparative advantages in steel production, and
steel accounts for nearly 40 percent of Ukraine's exports. Light industry
and food processing have developed well for years, and trade has come of
age. Recently, machinebuilding has taken off. Ukraine also has an impressive
computer programming sector. Many sound corporations of all sizes are also
flourishing on a competitive market, although the bureaucracy is deeply
corrupt and the rule of law not very stringent.
My contention is that, with such a strong competitive market economy,
Ukraine needs to make very serious political mistakes to fail.
Unfortunately, that cannot be excluded. Whereas the economy is modernizing
at great speed, the political system is pretty retrograde.
To understand Ukraine's economy and politics, one must comprehend its
oligarchic groups, which remain the political and economic base of the
country. The three most important oligarchic groups are regional: the
Donetsk group, the Dnepropetrovsk group and the Surkis-Medvedchuk group
in Kiev. These groups are both economic and political. At present, the
strongest group by far is the Donetsk group. Its leader is Rinat Akhmetov, a
businessman who owns System Capital Management, Ukraine's biggest
corporation, focusing on metallurgy. Prime Minister Viktor Yanukovich and
the Deputy Prime Ministers for energy and finance also hail from the Donetsk
group. Its parliamentary faction, the Regions, has some 65 members out of a
total of 450.
The second most important group is the Dnepropetrovsk group, whose business
leader is Viktor Pinchuk, who owns the metallurgical company Interpipe. Its
party, Labor Ukraine, has about 40 parliamentarians and is led by the
Chairman of the National Bank, Serhiy Tyhypko. Pinchuk owns three TV
channels. The Kiev businessman Hryhoriy Surkis and President Kuchma's chief
of staff Viktor Medvedchuk form the third group, which is much more
state-oriented. Unlike the other groups, it has not developed normal private
enterprises as yet. Medvedchuk controls the three biggest TV channels, and
he plays a great role in law enforcement. Their United Social Democratic
Party comprises some 40 parliamentarians. President Leonid Kuchma rules by
playing off these and other less important oligarchic groups against one
another.
Ukraine is a country in swift development, and the transformation of the
oligarchic groups might be seen as one of the keys to development.
Privatization and the leveling of the playing field means that in both
Donetsk and Dnepropetrovsk enterprises have becoming more independent
from one another, and they have become competitors.
They are also facing competition from other groups, which are independent
or support opposition parties. Therefore, their status as oligarchic groups
is becoming tenuous, but they still have their political parties, which hold
about half the seats in parliament and the government, and they control
media, too. Although they are rivals, they still gang up against the
democratic opposition. Moreover, the Surkis-Medvedchuk group is hardly
modernizing, but rather digging into the state administration, notably law
enforcement.
The Ukrainian parliament is a rather curious creation. Virtually all of
Ukraine's businessmen are members of the parliament, which serves as their
meeting place. It is frequently stated that about two-thirds of the
Ukrainian parliamentarians are dollar millionaires, and the Ukrainian
parliament might actually appear more reminiscent of the New York Stock
Exchange than the U.S. Congress. One reason for all these businessmen
sitting in parliament is that parliamentarians enjoy legal immunity, but
their often large corporate interests mean that they are easily subject to
repression from various state inspections of their enterprises. Another
reason for their presence in parliament is that government interference in
business remains excessive.
Ukraine possesses a strong and reasonably well-organized political
opposition. The democratic opposition is mobilized around West-oriented
former Prime Minister Viktor Yushchenko, who leads the center-right bloc Our
Ukraine, which holds just over 100 out of the 450 seats in the parliament.
In addition, the like-minded block of Yuliya Tymoshenko and the Socialist
Party of Olexander Moroz have about 40 more seats. The eight oligarchic
party factions supporting President Leonid Kuchma can barely mobilize a
majority. The communists hold 65 seats, and independents hold the balance.
In the latest parliamentary elections in March 2002, no less than 70 percent
of the votes went to the opposition to Kuchma in the proportional part of
the elections. The oligarchs succeeded in getting almost half the seats
through elections in one-man constituencies, where money plays a greater
role. Surprisingly, the oligarchic parties have legislated a political
reform this year. They have adopted a new electoral law, which makes the
next parliamentary elections in 2006 entirely proportional, which will
presumably undermine the oligarchic representation, while reinforcing the
center-right and communist parties.
Another intended part of the political reform proposed by the oligarchs was
to reduce the power of the President, while enhancing the power of the Prime
Minister and the Parliament. The obvious purpose was to reduce the power of
the President, in case the next president would not be the oligarchs' man.
Their apparent assumption that they might lose the presidential elections
underscores that these elections are a real opportunity for the opposition.
In spite of an alliance with the socialists and the communists, who favor a
parliamentary system out of principle, the oligarchs failed to mobilize the
required two-thirds majority, as Our Ukraine and the Bloc of Yuliya
Tymoshenko opposed the amendment to the Constitution.
President Kuchma persuaded the Constitutional Court to give him the right to
run as a presidential candidate for a third time although the Constitution
allows for only two five-year terms. The excuse was that the Constitution
was adopted in 1996, two years after Mr. Kuchma's first election. Even so,
it appears unlikely that Mr. Kuchma will try to run again, because a solid
majority opposes him. His opinion poll rating does not reach higher than 7
percent.
The Significance of the Ukraine-Russia Economic Relationship
Russia is a natural benchmark for all discussions about Ukraine. The
countries are similar in many ways, both in their history and in their
current development. After communism, both have undergone an oligarchic
phase. In Ukraine it still lasts, while it has ended with the reinforcement
of the state in Russia. Because of earlier reforms, Russia has a stronger
economy.
In the 1990s, the relationship between Russia and Ukraine was dominated by
the gas trade, which consists of Ukraine's importation of natural gas from
Russia and the large Russian transit of natural gas through Ukraine's
pipelines to Europe. Each year, a small number of Russian and Ukrainian gas
traders made a few billion dollars on this trade at the expense of their
governments and populations. After the Ukrainian energy reforms in 2000 and
the change of management of Russia's gas monopoly company Gazprom in 2001,
these malpractices have been brought under control. While the trading
arrangements are still nontransparent, their implications are much less
damaging.
The main features of Ukrainian-Russian economic relations have instead
become trade and investment, while pipelines remain important. With the big
liberalization of the Ukrainian economy, large foreign investment occurred
in Ukraine, primarily from big private Russian business groups. In
particular, four different Russian oil corporations bought four large
Ukrainian oil refineries, and two large aluminum companies were also
purchased. More recently, Russia's two largest mobile phone companies have
bought the two leading mobile phone companies in Ukraine, and two different
Russian groups have been buying up Ukrainian public utilities. By and large,
Russian investment in Ukraine has been economically and socially beneficial.
Because of earlier market reforms in Russia than in Ukraine, the Russian
companies have tended to be more commercially and legally advanced than
their Ukrainian competitors, and they have greatly helped the revival of the
Ukrainian economy. The oil companies are a case in point. They have sharply
raised production at the Ukrainian refineries, developed a network of modern
gas station, and they have driven down gas prices through competition.
The trade relationship between Russia and Ukraine has been troubled.
Ukraine's share of trade with Russia has persistently fallen and has now
reached one quarter of Ukraine's foreign trade. Part of this decline has
been an economically justified adjustment, but part of it has been caused by
mutual protectionism. Formally, Ukraine and Russia are supposed to have
free trade with one another according to an agreement between all twelve
members of the Commonwealth of Independent States from 1993. In reality,
free trade has frequently been violated.
Whenever Ukrainian enterprises were particularly successful in their sales
to Russia of, for instance, steel pipes, vodka or chocolate, Russia raised
severe trade barriers. Ukraine did the same to successful Russian exporters
to Ukraine. The problem with the CIS trade arrangement is that it contains
no arbitration or penalty mechanism, so the agreements are not really
implemented. Rather than trying to solve this problem, Russia has proposed
one new trade arrangement after the other, which have remained little but
formalities. Ukraine has regularly turned these initiatives down.
Last year, however, Russia came up with a new nebulous initiative called a
Common Economic Space, designed for Russia, Ukraine, Kazakhstan and
Belarus. Initially, it is supposed to be a free trade area, and then to
become a customs union, and ultimately even a currency union. The Ukrainian
public and government were divided over this new agreement. The dominant
faction in the government decided to adopt it, and it was recently ratified
by the Ukrainian parliament. The government argued that it was important
for political relations with Moscow, that it would facilitate trade with
Russia, and that it would not harm Ukraine's Western integration.
The opposition and a minority within the government opposed the agreement's
far-reaching plans and feared that it would block Ukraine's integration with
Europe, the WTO and NATO. The immediate effect has been a substantial
increase in Ukrainian exports to Russia by 30 percent last year, as the
Russian and Ukrainian economies are being reintegrated. This is especially
true of the swiftly expanding machinebuilding industry.
To solve their problems with mutual trade, however, both Russia and Ukraine
need to join the World Trade Organization (WTO). The WTO possesses the
necessary trade agreements and an arbitration mechanism, and it can pass
deterring penalties. Both applied for membership in the WTO in 1993, but for
many years neither country pursued WTO membership seriously. Now, both
countries are close to joining. The Common Economic Space idea has been a
serious distraction, but since it does not solve any problems in principle,
both countries have as great a need for WTO membership. If Ukraine would
join the WTO before Russia, it would be able to resolve all its trade
problems with Russia, because Russia would then have to negotiate with
Ukraine to gain WTO membership.
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Anders Aslund
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The Outlook for Ukraine after the Presidential Elections
Hardly anybody doubts that the presidential elections on October 31 will
take place and be a watershed in modern Ukrainian history. It is commonly
recognized as the most important political event since Ukraine's national
independence in December 1991. The stakes are high:
· Democracy or authoritarian rule;
· Russian or Western geopolitical orientation;
· Cleaning up of Ukraine's pervasive corruption;
At present, the two dominant candidates are likely. The democratic
center-right candidate will be former Prime Minister Viktor Yushchenko, who
is the Chairman of the Center-right bloc Our Ukraine. He will most likely be
supported by the Bloc of Yuliya Tymoshenko as well. Together these two
political forces represent about one-third of the popular vote. Yushchenko's
main opponent will be Prime Minister Viktor Yanukovich, who is the leading
politician from Donetsk. Yanukovich was recently nominated as the candidate
of all the oligarchic factions, which gathered the support of one-quarter of
the electorate in the last parliamentary elections.
In addition, the communist leader Petro Symonenko is likely to run as
always, with a steady electorate of barely twenty percent. Other candidates
will be minor. The real drama will presumably be a duel between Yushchenko
and Yanukovich. So far, Yushchenko is far ahead in all opinion polls, but
Yanukovich is gradually catching up. In a free and fair election, Yushchenko
is likely to win, but the government is using all means to skew the election
to the advantage of its candidate. The only way in which Yanukovich can win
is by credibly depicting Yushchenko as an extreme Ukrainian nationalist.
In their political activities, the regime-friendly oligarchs are driven by
several concerns. Partly, they are defensive. They are all worried about
losing their booty if a new government comes in, and they fear retribution.
They suspect that they would lose out to big businessmen who are supporting
the opposition, being well aware of how much hardship they have caused their
enemies. Yushchenko has tried to console them with public statements that no
revenge will be taken and that no redistribution of property will ensue.
Partly, they are offensive. Some oligarchs hope to continue benefiting from
state largesse and property, but that does appear less important. In short,
the oligarchs prefer to have a state that serves as their client, and they
have little interest in democracy.
The resources that are being mobilized for the presidential elections are
truly enormous. A common assumption is that the total election funds will
amount to $200-300 million, that is, more than President Bush's current
election campaign, although Ukraine's GDP in current dollar comprises merely
half a percent of the U.S. GDP. This money will largely be put up by big
businessmen in Donetsk and Dnepropetrovsk. In order to deter businessmen
from providing financing to the opposition, the State Tax Inspection and the
state prosecutors often undertake selective actions against such
businessmen.
Two oligarchs control Ukraine's six main television channels, leaving little
media for the opposition or independents. Foreign radio stations - the BBC
World Service, Radio Free Europe/Radio Liberty and Voice of America - still
play a vital role in Ukraine. The best current information is provided by
internet sites, often supported by Western financing. One independent media
outlet after the other has been closed down. Various excuses have been used,
such as licenses, tax violations and excessive libel penalties. The
government's domination over media is tempered by a solid popular distrust
of, and disinterest in, official media. Ukrainians are well aware of their
government trying to manipulate them.
In the parliamentary elections in March 2002, there were many
irregularities, but the ultimate results appear to have been reasonably
representative in most of the country. The big exception was the Donetsk
region, where vote rigging was blatant. The fear is that the "Donetsk model"
will be applied in the whole country this time around. Ukraine has a large
number of regional and local elections, which are spread out over time. The
authorities appear to try to manipulate them ever more, by disqualifying
opposition candidates, prohibiting the public appearance of opposition
candidates, or through fraudulent vote counts. It appears as if they are
intent on systematically denigrating elections so that fraud becomes the
standard by the time of the presidential elections.
The regime is by all kinds of innovative means trying to stop the opposition
from holding meetings. The utilization of public premises is widely blocked,
and even electricity is being turned off. A number of special police forces
are being used for a variety of repressive actions. A few journalists and
politicians die under mysterious circumstances, mostly in traffic accidents
or purported suicides, each year. Although the methods are crude, the
repression is comparatively mild, and it does not deter the opposition or
the population much.
One of the most important factors in the Ukrainian presidential elections is
Russia. In the parliamentary elections in March 2002, President Putin and
his chief of staff engaged personally in publicized meetings with the
leading oligarchic representatives and the communist leader. At present,
official Russian media are overwhelmingly positive on Prime Minister
Yanukovich, the leading oligarchic candidate, and highly critical of
Yushchenko and Our Ukraine. The official Russian position will have
significant influence in Russophile eastern Ukraine. In the last elections,
Russian political advisors played a major role, but to judge from the
election results their utility appears to have been muted. Russia can use
all kinds of means to influence the outcome of the presidential elections.
Given the regression of democracy in Russia, Russia is unfortunately likely
to oppose democracy in Ukraine.
Russian businessmen active in Ukraine will also play a major role in the
elections, but their role is not obvious. In the last elections, they tended
to support individual candidates belonging to different parties, making sure
that they had reliable lobbyists in different factions. This time around,
they are likely to be pressured by the Russian government to support the
oligarchic candidate, but, given the current Russian government campaign
against big businessmen in Russia, their real interest might be to limit the
influence of the Russian state in Ukraine. Therefore, the Russian
businessmen might be the wild card in the forthcoming Ukrainian elections.
Until recently, Russia appeared more democratic than Ukraine, but today
democracy appears to have much better odds in Ukraine than in Russia.
Ukrainian media are far worse than Russian media, and the methods of
repression in Ukraine are somewhat cruder than in Russia. Even so, Ukrainian
society appears more open than Russian society. The fundamental reason is
that Russian power has been consolidated in the centralized law enforcement
apparatus. That is not true of Ukraine. Ukrainian state power is not yet
consolidated in the security police, because President Kuchma has skillfully
played off various groups against one another. The oligarchic groups remain
politically much stronger in Ukraine, and their system is quite competitive.
Another contrast to Russia is that the Ukrainian opposition is strong and
structured. Nor are Ukrainians taken in by government-controlled media.
Furthermore, Ukraine does not suffer from any imperial hangover, and it is
much closer and largely sympathetic to the West. At present, Ukraine may be
described as semi-democratic in the sense that the opposition has a real
chance of winning the presidential elections, but we can harbor no illusion
that the elections will be free and fair. There is a substantial chance that
these elections will mark Ukraine's definite democratic breakthrough. That
is what the U.S. should work for.
Economically, the outlook appears much more obvious. Ukraine is on a great
growth trajectory of about 8 percent a year. Its growth is based on private
ownership, macroeconomic stability, competitive domestic markets and an open
economy. Ukraine is swiftly being integrated into the world economy. Very
serious mistakes have to be made to stop this economic growth, which is
characteristic of the post-Soviet region.
Usually, corruption falls with economic growth, more open government,
increasing foreign trade and democracy. If Ukraine becomes a full-fledged
democracy, corruption is likely to decline faster than if it becomes more
authoritarian, but because of the strong economic growth corruption is
likely to dwindle in any case.
The Current State of U.S.-Ukraine Relations
Beside Russia, the U.S. has persistently been the country that has devoted
the greatest interest to Ukraine. The Unites States is well liked in
Ukraine, and every statement in Washington about Ukraine, such as this
hearing, is carefully scrutinized in Kyiv. For the U.S., a great deal is at
stake. Two aspects of Ukraine's current developments are of fundamental
importance to the United States.
1. Will Ukraine become a democracy or an authoritarian state?
2. Will Ukraine integrate with the West or not?
The U.S. can do a great deal in both regards. Ukraine is tied to democracy
through a large number of international agreements, notably to the United
Nations, the Organization of Security and Cooperation in Europe (OSCE) and
the Council of Europe. Publicly, the Ukrainian government strongly professes
the values of democracy, and it has repeatedly committed itself to such
values in agreements with the U.S. The U.S. can and should insist on the
Ukrainian government honoring all its international commitments with regard
to democracy.
a. Sometimes, U.S. authorities protest when independent media are being
closed down, but it could be done more firmly and at a higher official
level.
b. The Ukrainian government uses the State Tax Inspection as its main agency
of repression. Businessmen who support the opposition have been extensively
investigated and harassed. The U.S. Ambassador to Kyiv, John Herbst, has
rightly protested, but again these abuses should be given more high-level
attention.
c. Both the U.S. and the EU have protested sharply against the aggravated
malpractices in regional and local elections, but again more high-level
attention would be useful.
d. The big test will be the presidential elections on October 31.
International election observers are accepted. The U.S. can do a great deal
to make sure that the actual elections are free and fair.
In the course of this year, little is as important in U.S. policy on Europe
as democracy in Ukraine.
The second aim for U.S. policy on Ukraine is its integration into the West.
Ukraine is already a member of most international organizations, including
the IMF, the World Bank, the OSCE and the Council of Europe. The three
remaining organizations of relevance are the WTO, NATO and the European
Union.
a. For the U.S., the first interest is to have Ukraine accede to the WTO as
soon as possible. Few obstacles remain. The main outstanding U.S. demand is
that Ukraine adopt a new and more stringent law on intellectual property
rights. With little doubt, Ukraine will adopt such a law after the
presidential elections regardless of their outcome. Second, the U.S. should
recognize Ukraine as the market economy it is, which is of importance for
how the U.S. treats Ukraine in anti-dumping disputes. Third, strangely, the
Jackson-Vanik Amendment to the U.S. Trade Law of 1974 about the freedom
of Jews to emigrate from the Soviet Union still applies to Ukraine, although
it is not the Soviet Union and Jews have no complaints about any problems
emigrating from Ukraine. This anachronism should just be abolished.
b. Ukraine has a close cooperation with NATO, which is likely to proceed
further.
In March 2003, the oligarchic majority in the Ukrainian parliament, with
partial support from Our Ukraine, voted for sending some 1,600 Ukrainian
troops to support the U.S. in Iraq. President Kuchma's obvious purpose was
to improve Ukraine's poor relations with the U.S. The troop presence in Iraq
is very unpopular in Ukraine, and several Ukrainian soldiers have died.
Ukrainian troops participate in various peacekeeping efforts in former
Yugoslavia, as well.
c. Since 1996, Ukraine has officially asked for membership in the European
Union, but it has been cold-shouldered by the EU. Yet, the democratic
opposition is much more committed to its "European Choice" than the
government is. Recently, the President of the European Commission, Romano
Prodi, repeated his statement that the EU has no plans for letting Ukraine
become a member of the EU. Although Ukraine is now the neighbor of three
EU countries (Poland, Slovakia and Hungary), it has a minimum of agreements
with the EU.
In particular, its trade access to the EU is very limited, as Ukraine
primarily exports such sensitive goods as steel, foods, chemicals and
textiles. Moreover, the possibilities for Ukrainian citizens to travel west
have been sharply reduced with the enlargement of the EU to countries
that previously did not require visas for Ukrainian citizens. It would be
desirable that the EU open its markets to Ukraine through a free trade
agreement, but a natural EU demand is that Ukraine first become a
member of the WTO.
Regardless of other policies, the U.S. needs to help build up a cadre of
well-educated Ukrainians who understand Western economies and politics.
For this purpose, a larger number of scholarships need to be given for
doctoral degrees at U.S. universities.
Oddly, the U.S. administration has devoted great attention to whether an
unused small pipeline from Odesa in southern Ukraine to Brody in western
Ukraine will be utilized in that direction, or whether it will be turned
around, taking Russian oil from the north to the south instead. Given that
Ukraine has a sound competitive oil market, this does not appear to be a
question of major U.S. interest.
The current dilemma in U.S. policy toward Ukraine may be sharpened as a
choice, on the one hand, between the relative importance of Ukrainian troops
in Iraq, and democracy in Ukraine, on the other. Recently, President George
W. Bush wrote a letter to President Leonid D. Kuchma, thanking him profusely
for sending Ukrainian troops to Iraq. Meanwhile, mid-level State Department
officials are complaining about a variety of abuses of democracy in Ukraine.
No observer can draw any other conclusion than that troops in Iraq
supersedes everything else. This balance in U.S. policy toward Ukraine needs
to be redressed.
E. Morgan Williams, Coordinator
The Action Ukraine Coalition
Senior Advisor, Government Relations
U.S.-Ukraine Foundation (USUF)
Publisher and Editor, "The Action Ukraine Report"
Ukrainian News Website: http://www.ArtUkraine.com
P. O. Box 2607, Washington, D.C. 20013
202 437 4707
Office In Kyiv: 380 44 212 5586
Mobile in Kyiv: 380 50 689 2874
http://news.bbc.co.uk/2/hi/europe/3701867.stm
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