Poland: Economic Relations with Ukraine

UNCLAS SECTION 01 OF 02 WARSAW 003249

SIPDIS

SENSITIVE BUT UNCLASSIFIED

STATE FOR EUR/NCE
STATE PASS USTR FOR DONNELLY/ERRION
E.O. 12958: N/A
TAGS: ETRD PREL EINV PL
SUBJECT: Poland: Economic Relations with Ukraine


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SUMMARY
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1. (U) Sensitive But Unclassified. Not for Internet
Distribution.


2. (U) Ukraine is Poland's second largest CIS trade partner,
after the Russian Federation (due mainly to energy imports).
Improving trade statistics demonstrate the increasing
significance of Ukraine to the Polish economy, with Polish
exports to Ukraine up 30 percent to nearly $2 billion in

2004. Meanwhile, imports from Ukraine increased 41 percent
to more than $1 billion in the same period. Despite this
impressive growth, Poland's share of Ukraine's exports still
hovers at just 2.7 percent, while Ukraine accounts for just
1.2 percent of Polish imports. Nonetheless, Economic
Ministry officials believe Poland must assist Ukraine in its
transformation of to a market economy, as well as in
obtaining WTO and EU membership. End Summary.

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TRADE FLOWS: ENERGY RULES . . .
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3. (U) Poland's imports from Ukraine are dominated by
natural gas, along with iron ore, ferrous metals and steel.
For its part, Ukraine imports primarily spare parts and
motor vehicles from Poland (see para 5). The overarching
importance of energy supply is apparent from these products.
According to Polish officials, completion of the Odessa-
Brody-Plock pipeline is a key economic objective and will
likely continue to influence energy-related trade flows.

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. . . BUT INVESTMENT MORE DIVERSE, ALTHOUGH SMALLER
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4. (SBU) According to a report by a Polish diplomat posted
in Kiev, Polish capital investments in Ukraine amounted to
$153 million in late 2003, 56 percent of which was in the
industrial sector and 27 percent in banks. At the end of
2004, the total value of all FDI in Ukraine was estimated at
$7.8 billion, of which $200 million is accounted for by
investments made by Polish businesses. The report
identified Can-Pack Ukraine as Poland's biggest investor in
Ukraine (the company makes packs and tins for beverages,
relying heavily on automation technology). Polish
investment accounts for over two-thirds of the Credit Bank's
total capital. In addition, a substantial portion of Polish
investment is currently focused in the manufacture of
furniture, particularly, in Kharkiv Artemovsk, Ivano-
Frankivsk and the Volyn region.


5. (SBU) Unfortunately, recent Ukrainian government actions
are responsible for some hesitancy in investment. Polish
investors say their projects were hurt by a fundamental
change in investment conditions in Ukraine in late March
2005, when the Ukrainian government abolished tax breaks for
special economic zones. The move prompted protests from a
number of foreign investors, forcing some to change their
development plans almost overnight.


6. (SBU) Polish media say the Ukrainian government is
considering measures to compensate Polish entrepreneurs for
their losses in a way that does not violate the principle of
equal treatment for other business organizations. However,
our contact at the Ministry of Economy said that Polish
investment in Ukraine will be limited so long as the
Ukrainian budget legislation maintains a de facto moratorium
on free economic zones. She added that Poland faced a
similar problem in adjusting Polish legislation to EU
requirements. Meanwhile, total Ukrainian direct investment
in Poland currently is estimated to amount to only $350,000,
a figure which is insignificant given the size of two-way
trade flows. However, this figure may jump significantly
this year due to one significant Ukrainian investment that
appears to be moving ahead.

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AUTOS, STEEL MAY DRIVE UKRAINIAN INVESTMENT UPTURN
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7. (SBU) According to press reports earlier this summer,
the Polish Ministry of Finance initialed an agreement with
the Ukrainian company AwtoZAZ providing for the sale of a
Finance-held stake in the FSO car factory in Warsaw. At
present, some 80 percent of FSO shares are held by the
Korean conglomerate Daewoo. However, Daewoo has given up
operational control over FSO. As a result, the Polish
Government, which holds an approximate 20-percent stake in
FSO, enjoys more than 80 percent of the voting rights. The
GOP plans to sell its shares to AwtoZAZ. The Ukrainian
company already buys most of the cars manufactured by FSO.
These cars make up the largest item in Polish exports to
Ukraine.


8. (SBU) Ukrainian Embassy Economic Counselor Sergiej
Skrypko notes that another major Ukrainian investment, in
the Polish steel mill Huta Czestachowa, should be finalized
in October. He said that there are "complicated" legal
issues slowing the firm's privatization, but that the
Ukrainian company Industrial Union of Donbass, should
acquire the Polish government shares in the fall.

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EU AND MULTILATERAL ISSUES
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9. (SBU) Polish sources say the European Union plans to
offer Ukraine more preferential terms of trade, effectively
supporting the country's aspirations for early accession to
the World Trade Organization and the transformation of its
economy, a program oriented toward closer economic ties with
the EU. Krzystof Januszek, formerly Poland's WTO
representative in Geneva and now Director of the Trade
Policy Unit in the Economics Ministry, offered that Ukraine
may well be ahead of Russia in its WTO accession bid. He
thinks, however, that hopes for a final working group
package by the Hong Kong ministerial are extremely
optimistic. Januszek did say that political will in Kiev is
very much in evidence, and that this is a major change in
style, if not substance, since the Orange Revolution.

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COMMENT
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10. (SBU) Uncertainties in the Ukrainian investment
environment continue to limit business opportunities between
the two neighbors. We also asked our Ukrainian contact
about guesstimates for remittances from Ukrainians working
in Poland. He politely demurred on venturing an amount,
noting that the Polish Ministry of Economy Ukrainian
Ministry of Labor in holding talks on the issue of work
permits for Ukrainians currently working (illegally) and
seasonally in Poland. In sum, bilateral trade and
investment, although growing rapidly, do not yet represent
large percentages of each nation's overall economic
activity. However, as evidenced by continued Polish desire
to bind Ukraine to the West through EU mechanisms, the WTO,
and political support, money isn't everything. Long-
standing historical links and desire to see Ukraine's
democracy succeed insure that Poland will continue to be one
of Ukraine's strongest supporters in Europe for some time to
come. End Comment.