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Ukraine: Companies Face Hardship Due To Russian Crisis

Kyiv, 5 October 1998 (RFE/RL) -- Ukraine's Motor-Sych appeared to have it all: direct government support, an expanding Russian customer base, and cheap labor and materials. And the Zaporizhia-based company, Ukraine's largest engine maker, could rely on a weak hryvna to exploit these advantages even further.

Then the Russian financial crisis set in, sending the ruble into a freefall. Motor Sych's customer base of large Russian aerospace companies dried up almost immediately. The few customers that remained operational could pay only in rubles. Moreover, a number of Russian suppliers of key components shut down their production lines.

Motor Sych is among a host of companies paying for Ukraine's inability -- or unwillingness -- to loosen the economic bond with Russia.

The recent price of maintaining such close ties has been steep. Falling exports to Russia have crippled key industries such as metallurgy and machine building. And it has forced the government to devalue the hryvna.

Through August, Russia had accounted for almost half (44.3 percent) of Ukraine's general trade turnover in 1998. Most exports (55 percent) to Russia were products of the former Soviet military-industrial complex: metallurgical products (15 percent), heavy machinery (14 percent), and chemicals (10 percent).

In July, Russia slapped a 3 percent import duty on Ukrainian industrial and agricultural commodities. Then the crisis hit.

The hryvna's downslide, rooted in Ukraine's long-standing foreign currency crunch, might also have been prompted by a calculated effort by the government to make exports competitive.

Paul Gregory, head of the research section at Alfa Capital Kyiv, told RFE/RL that "one way for the Ukrainian government to increase income is to increase the volume of its exports." He said "one means of doing that is worsening the hryvna's exchange rate against other currencies, so Ukrainian products become cheaper."

But Gregory also said that even if the Ukrainian exchange rate winds up lower relative to the ruble than it was before the crisis, it won't effect trade statistics until some time next year.

The Donetsk Iron and Steel Works (DISW), one of Ukraine's metal exporters, was another company hit first by the Russian excise duty, and then the fall of the ruble.

Oleksander Pilipenko, DISW's vice-president, told RFE/RL that his company is not currently getting many new orders from Russia. He said the main reason is that Russian companies are short of funds.

A partially-privatized mill and a leader in the Ukrainian steel industry, DISW was in the process of expanding and modernizing its product line when the Russian crisis hit. The crisis put a damper on that process.

Pilipenko said that as of the beginning of September, many Russian firms stopped sending payments to his company. He said Russian companies only buy 10 percent of his firm's products, but said "non-payment by any customer is by no means good news."

With some 80 percent of its products traditionally labeled for Russia, Motor Sych is worse off. Vladislav Matvienko of Motor Sych's import-export division said its "Russian customers are experiencing certain problems in settling contracts agreed with earlier." He said Russian firms "are still paying, but sometimes with a delay." And when they pay, he added, they do it often in rubles, which only adds to Motor-Sych's problems.

He said that "like many other companies", his is having trouble exchanging rubles paid by Russian firms. Matvienko said his company sometimes must exchange into a third currency -- a so-called multi-stage currency exchange -- in order to get the currency it needs to make its own payments.

The Ukrainian government has curtailed sales of dollars and conversion of rubles on Ukrainian exchanges, making the Russian currency essentially worthless.

There are no clear prospects that the situation will change any time soon.