Russians Extracting Most From Orange Revolution

KIEV, Ukraine -- For the Kremlin, Ukraine's Orange Revolution was a serious political defeat. But Russian business sees the end of Leonid Kuchma's authoritarian regime and the election of president Viktor Yushchenko as a big economic opportunity.

Kiev's hotels are full of foreign business people, including Poles, Germans, and Americans, investigating opportunities created by Mr Yushchenko's promises to open an economy with huge potential. But the largest contingent is Russian.

Two conferences last month drew scores of Russians - one hosted by Alfa Group, the Russian conglomerate, which is among the biggest investors in Ukraine, and the other by Renaissance Capital, a Moscow-based investment bank.

"We are very much interested in Ukraine," says Peter Aven, president of Alfa Bank, an Alfa subsidiary. "Everybody is very optimistic about Ukraine."

At first sight, this enthusiasm might seem odd, given that the Kremlin originally backed Mr Yushchenko's rival for the presidency - the former prime minister, Viktor Yanukovich.

Mr Yanukovich, Mr Kuchma's favoured successor, was seen as the pro-Russian candidate, while Mr Yushchenko offered the prospect of closer ties with the west. But, as far as Russian business was concerned, a Yanukovich victory would not have been an unalloyed blessing. The former prime minister is linked to Ukraine's business oligarchs who tried to restrict competition from foreigners, including Russians.

Their success was highlighted last year in the controversial privatisation of Krivorizhstal, the country's top steel mill, which was sold for $800m to Viktor Pinchuk, Mr Kuchma's son-in-law, and Rinat Akh metov, a steel baron allied to Mr Yanukovich. Foreign bidders, including Russia's Severstal, offered more money but were disqualified.

A victory by Mr Yanukovich might have encouraged more such domestic-only deals. However, a victory by Mr Yushchenko also presents Russian companies with serious challenges.

Groups that developed ties with the Kuchma regime must now survive without them. They include members of the Russian Club, Russian business people who backed Mr Yanukovich and who can now expect no favours from Mr Yushchenko.

Alfa Group was also close to Mr Kuchma. Together with Ukraine's Ukrsibbank, it bought control of Storm, a privately owned company controlled by Yuri Tumanov, Mr Kuchma's brother-in-law, which owned 43.5 per cent of Kyivstar, Ukraine's second largest mobile phone network.

Mr Yushchenko's planned review of privatisations is also causing uncertainty among investors from Russia as well as the west. For example, his government is threatening to re-nationalise a 30 per cent stake in the huge Mykolayiv alumina plant controlled by RusAl, the Russian metals group, on the grounds that investment commitments were not fulfilled.

Such talk, say Russian business people, damages Ukraine's hopes of attracting new investment.

But in spite of those concerns, Russian investors remain focused on the country's huge economic potential. Ukraine lags behind other ex-Communist states in economic development. Whole industries including chemicals, metals and agriculture are in need of modernisation. Other sectors, such as banking and retailing, are ripe for expansion. Russian companies are also attracted by Mr Yushchenko's aim of integrating Ukraine with the European Union. If he achieves that, this country of nearly 50m people might follow central European states into the EU.

For Russian companies, operating in the uncertain Russian political environment, investing in an EU-oriented Ukraine would offer a way of diversifying while remaining on familiar turf.

Russian business people accept that Mr Yushchenko could favour western groups to encourage ties with the west. He might, for example, overlook Russian investors in future flagship privatisations such as Ukrtelecom, the state telecoms group.

But in spite of the Kremlin's support for Mr Yanukovich, there is no general anti-Russian sentiment in Ukraine, except in a few nationalist pockets in western Ukraine. If Mr Yushchenko fulfils his pledge to create a liberalised economy, then Russians say their companies will have important competitive advantages.

They include historic, social and trade links, with Russia last year accounting for 18 per cent of Ukraine's exports and 41 per cent of imports, including oil and gas supplies.

Russian companies are convinced that they can build on this base even if there is more competition from the west than there was in the past.