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Price War Threatens Ukraine's Economy

KIEV -- A row with Russia that could see dramatic gas price rises will put the brakes further on Ukrainian economic expansion next year and eat into profit margins of major exporters, analysts and officials said on Friday.

"A sharp increase in energy prices is coming. It will be a big blow to the steel and chemicals sectors, which provide over 30 percent of export revenue," said Anatoly Danilenko, deputy head of the Academy of Sciences' Economic Forecasts Institute.

Ukraine has a Soviet-style economy in which exports account for over 60 percent of gross domestic product. Industry is dominated by steel and chemicals, both requiring vast supplies of gas.

Heavy reliance on exports has already cost Ukraine, with the economy contracting by 2.7 percent year on year in November. That took growth for the first 11 months of the year to just 2.2 percent, the slowest pace in five years.

A further slowdown could set in next year. Some analysts predict a contraction due to the gas dispute with Russia, political uncertainty and delayed implementation of reforms as politicians gear up for a March parliamentary election.

Kiev and Moscow have been at loggerheads over gas prices and transit since Viktor Yushchenko took power in Ukraine in January, propelled to victory over a Kremlin-backed candidate in the Orange Revolution. But rhetoric has toughened as the parliamentary election campaign becomes more intense.

Anatoly Kinakh, secretary of the National Defense and Security Council, said if gas prices climbed over $95, most Ukrainian chemicals companies would go into the red.

Industrial Minister Volodymyr Shandra said steelmakers' profit margins would slump to under 3 percent from 13 percent. "The industry will survive but profitability will be very different," he said, adding the only way out was to improve energy efficiency.

(The Moscow Times 19.xii.05)

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