By Myron Wasylyk, Senior Vice President and Managing Director, PBN-Kyiv

The European Union's expansion poses a number of challenges and opportunities for countries that now make up the new "eastern border." On the downside, EU expansion to many citizens of Ukraine, Moldova and Belarus means immediately stricter visa requirements for those accustomed to easy travel across the border to Poland, Lithuania, Hungary, Slovakia and Romania. Yet, in the long-term, for the economies of the three independent former Soviet countries now located between Russia and Europe, EU expansion may result in a windfall of new business and investment opportunities.

To begin with, EU expansion is expected to result in increases in consumer prices and production costs, as the new EU states adjust to the Eurozone and the strict fiscal and monetary controls required by member governments. The expected rise in production costs is causing many companies in the EU to consider shifting their production resources to Belarus, Ukraine and Moldova.

Ukraine's Business Allure

This year, authorities in Kyiv reduced the personal income tax rate to 13 percent and the corporate income tax rate to 25 percent to motivate local companies to switch from hiding wages and profits to paying taxes legally. More reductions in Ukraine's tax system are expected again in January 2005 in order to keep the country's economic rebound running for a fifth consecutive year.

International law and business consulting firms in Ukraine have already seen an increase in the number of inquiries from German, Czech, Polish and Hungarian companies. Given that average monthly salaries in western Ukrainian regions are about $100, cheap labor coupled with low taxes and single-digit inflation may prove an attractive combination for companies, especially western companies seeking to reduce production costs.

Many analysts highlight Ukraine's political instability vis-a-vis the scheduled 31 October presidential elections. However, the two expected front-runners in the race, current Prime Minister Viktor Yanukovich and former Prime Minister and Central Bank Chief Viktor Yushchenko, are both considered pro-western and pro-business. Regardless of the election outcome, the business environment in Ukraine is likely to change for the better after the election and thus attract greater foreign investment.

Economic Outlook for Moldova and Belarus

The economic situations in Moldova and Belarus are not as encouraging. A reformed-communist president runs Moldova and a neo-communist dictator presides over Belarus; neither country's economy is poised to accommodate the potential influx of production capital coming from Europe's eastern border countries.

Time will tell exactly how EU expansion will shape relations between a stronger Russia and those countries that remain between it and the new EU. While some analysts point to greater Russian influence on bordering states, others look at EU expansion as an economic opportunity to strengthen and prepare border states, including Russia, for eventual EU membership.

Email Myron: myron.wasylyk@pbnco.com