US embassy cable - 05WARSAW3249

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, Economy 
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.