MBS Blog

This article from www.unian.net describes the monetary activities of the central bank of Ukraine over the last several months. It gives a good indication of how the bank reacted to the credit crisis as well as its course for the future.

Ukraine will probably see a wave of bank mergers in 2009. Before that happens however, there will be some notable failures as the central government does not have the resources to prevent some banks from tanking. For depositors, the maximum guarantee in that event is $10,000USD.

Principal tendencies of Ukraine’s monetary market development in 2008

Under complex macroeconomic conditions and influence of the global financial crises, the monetary policy in 2008 was directed to exercising the principal function of the National Bank of Ukraine - maintaining stability of the national monetary unit.

According to the information posted at the official web site of the Central bank of Ukraine, since beginning of 2008 in the context of anti-inflation actions the National Bank of Ukraine has continued to conduct  interest policy targeted for increasing value of the national currency and has taken measures for encouraging positive tendencies in the structure of banks` active-passive transactions. However, such actions not intended to mechanically restrict money supply. As of beginning of October the banking system was fully liquid - banks` liquid deposits twice exceeded their needs, related to the current activity.

Though, at the beginning of October 2008 (under development of the world financial crisis) there was observed strengthening of strain in the Ukrainian financial market, caused by negative information background and deliberately provoked discredit of some banks` financial position. The above-mentioned caused some withdrawal of funds from bank clients` deposit accounts.

Under increase of strain in the Ukrainian financial market in October - November, the National Bank of Ukraine directed its efforts to provide due settlement of banks` accounts, decrease of outflow of funds from the bank system and balancing of the foreign exchange market.

In this context the National Bank of Ukraine has extended banks ability on maintaining their liquidity via refinancing mechanisms, alleviated reserve requirements, restricted performing of some active bank foreign exchange transactions, improved regulation of foreign exchange transactions.

Stabilization arrangements of the National Bank of Ukraine contributed to some decrease of strain at the monetary market of Ukraine, which was followed by gradual discontinuation of outflow of deposits from the banking system, including funds of individuals, increase of bank system liquidity, stabilization of the inter-bank credit market.

Since the end of November the National Bank of Ukraine has started to implement the second phase of stabilization arrangements, the main target whereof is to decrease speculative demand for foreign exchange, as well as to maintain positive tendencies of the banking system stabilization. This phase of stabilization arrangements envisages, in particular:

to limit backing of banks liquidity - regulation of the banking system liquidity is currently exercised by standard procedures, which were used prior to strengthening strain in the market in October;

to adjust formation of banks` required reserves with increasing appeal of national currency active-passive transactions - as of today the required reservation in national currency is decreased to zero;

to undertake actions for increasing national currency value (incl. through increase of interest rates on active-passive transactions of the National Bank of Ukraine) with the purpose of establishing extra incentives   to return deposits to the banking system. Particularly, since December 19 interest rate on overnight credits increased up to 22% (against security) and 25% (blank), and the average weighted interest rate on mobilization transactions increased up to 16.8% annual (in November - 6.0% annual).

To maintain the banking system liquidity, the National Bank of Ukraine granted in December refinancing credits to the total amount of 30.7 UAH billion (including 6.1 UAH billion of overnight credits), comparing to 45.5 UAH billion in November (of which 24.3 UAH billion of overnight credits). Totally since the year beginning the granted refinancing credits amounted to 169.5 UAH billion (of which 91.8 UAH billion of overnight credits).

 In addition, to improve redistribution of provisionally spare money between banks, the National Bank of Ukraine continued effecting transactions on mobilization of banks` funds. In December the mobilization transactions amounted to 3.4 UAH billion (since the year beginning they equaled  57.2 UAH billion).

To enlarge its ability in maintaining banks liquidity, the National Bank of Ukraine has not decreased interest rates on its transactions, following its anti-inflation policy. In 2008 the average weighted interest rate on liquidity maintaining  transactions amounted to 15.3%, comparing to 10.1% in 2007.

Due to the restrained approach in performing refinancing transactions, the banks correspondent accounts slightly decreased in December by 3.3% up to 18.6 UAH billion (since the year beginning - by 2.2%).

However, the seasonal increase of demand for money in the last month of the year (the cash flow outside banks increased in December by 9.5 %, since the year beginning - 39.3%) caused accelerated increase of the monetary base. The monetary base increased in December by 8% (31.5% for the year 2008) - up to 186.7 UAH billion.

To some extent the flow of money supply was influenced by policy of the Government on budget funds control. The government funds in national currency on accounts with the National Bank of Ukraine following their 3.9 time increase - up to 17.0 UAH billion within first 11 months of 2008, decreased in December by 54.6% - to 7.7 UAH billion.  It became a significant factor of accelerating monetary aggregates increase in the last month of the year.

It should be noted, that the National Bank of Ukraine (according to December results) has managed to keep  quantitative criterion of effectiveness of the monetary base (190 UAH billion), stipulated at the Memorandum on Economic and Financial Policy under the International Monetary Fund “Stand-by” programm.

The growth of money supply in December was moderate and amounted to  6.4% (since the year beginning  it increased by 29.9%) up to 514.7 UAH billion.

The natural persons deposits increased in December by 4.3% up to 215.6 UAH billion (since the year begin they increased by 31.1%).  Legal persons` deposits increased by 7.6%  to 142.3 UAH billion (since the year beginning -  by 23%).

The total deposits increased in December by 5.6% (since the year beginning they increased by 27.7%) up to 357.8 UAH billion.

The volume of credit deposits increased in December by 9.3% (since the year beginning - by 71.9%) up to 733.9 UAH billion. Credits granted to legal persons increased in December by 10.2% (since the year beginning - by 69.7%) up to 460.5 UAH billion). Credits granted to natural persons increased by 7.7% in December and by 75.9% since the year beginning up to 273.4 UAH billion. 

Such growth indicators of credit and deposits was greatly influenced by the exchange rate revaluation of previously granted credits.

The value of deposits continued to increased in  December which was the effect of bank actions on stimulation of return of deposits to banking system. So, the average weighted rate on deposits in national currency increased in December from 12% to 13%, in foreign exchange it slightly decreased from 8.3% to 8.2%.  The integral interest rate on deposits increased from 10.8% up to 11.2%.

Technorati Tags: Ukraine, central bank, Anton Olff, MBS Ltd., bank mergers, credit crisis, monetary market, macroeconomic conditions, global financial crisis, National Bank of Ukraine, stability, Central Bank of Ukraine, anti-inflation actions, foreign exchange market, liquidity, inter-bank credit market, required reserves, interest rates, hryvnia, International Monetary Fund, Memorandum on Economic and Financial Policy, money supply, deposits

I just love articles like this. It gives you an idea of where a culture is heading. Seems that the names of children born in Ukraine follow more established traditions, with a few exceptions.

In the United States-where I was spawned- and as I imagine elsewhere, the names given to children go through cycles. During some periods, traditional, historic or religious names are the norm. At other times, the names of artists (movie stars are considered “artists” in the USA) or political figures are all the rage.

Right now, I am sure there are a lot of newborn girls being named Angelina, and boys being named Brad in the USA. I only shudder to think how many boys are going to be named Barack or Obama, just as a few years ago the “hot” name was Usama/Osama in certain parts of the World.

Most popular children names in Ukraine in 2008

Nazar and Anastasia were the most popular children names in Ukraine in 2008.

According to the press-service of the Justice Ministry of Ukraine, referring to Justice Minister Mykola Onyshchuk, around 30 names have been the most popular in Ukraine last year.

As for male names, the most popular were Nazar, Danylo, Maksym, Vladyslav, Mykyta, Artem, Kyrylo, Yegor, Illya, Andriy, Bohdan, Denys, Dmytro, Yaroslav, Oleksander, and Volodymyr.

As for female names, the most popular were: Anastasia, Angelina, Alina, Daria (Daryna), Diana, Kateryna, Maria, Natalia, Sophia, Yulia, Victoria, Yelyzaveta, Anna, Veronica, Ulyana, Oleksandra, and Christina.

According to the Justice Minister, some Ukrainians prefer extraordinary names. Thus, lately in Ukraine there have been registered boys Khrystofor, Adam, Franko, Atos, Spartak, and girls Vesna, Krasunya, Madonna, Danaya, Sara Malka, Zinaida, Maya.

Technorati Tags: MBS Ltd., Anton Olff, baby names, Ukraine, United States, Brad Pitt, Angelina Jolie, Barack Obama, Usama bin Laden, Justice Ministry of Ukraine, www.unian.net,

Although the world financial crisis has many causes, the solutions will ultimately come when government intervention is limited to removing the obstacles for the creation of wealth and jobs so that individuals and businesses can move forward. It is very probable that governments will make things worse with their clumsy, heavy handed and ineffective interventions, and that this will lead to further political and social instability. That is already the case for Ukraine.

As the article below from www.bloomberg.com indicates, the political infighting among the incestuous inner circle of the main factions, is prolonging the agony of Ukrainians and is preventing the country from a speedier recovery. 

We can only hope that the power struggles at the top of the pyramid, don’t lead to a collapse of the whole structure.

Ukraine Stares Into an Economic-Political ‘Abyss’ (Update2) 

By James M. Gomez and Daryna Krasnolutska

Jan. 27 (Bloomberg) — For Europeans, last week’s resumption of Russian natural gas shipments ended a two-week energy dispute. For Ukraine, it may have ended any hope of weathering the global financial crisis.

The accord with Russia will increase Ukraine’s spending on gas by almost 7 percent, to $9.16 billion, at a time when soaring bond yields are raising the specter of default. Already, Ukraine is living on the first installment of a $16.4 billion bailout from the International Monetary Fund. Further payouts will depend on whether the country balances its 2009 budget, cancels a tax on foreign exchange and strengthens banking laws.

Ukraine hasn’t been so fragile since the early 1990s, following the breakup of the Soviet Union. The economy may shrink as much as 10 percent this year, which would be the deepest recession in Europe except for Iceland’s. President Viktor Yushchenko’s support is close to zero and clashes with Prime Minister Yulia Timoshenko may bring down the government.

“The country is staring into the abyss, both politically and economically,” saidNeil Shearing, an analyst at London-based Capital Economics Ltd. “I can’t think of another country that will be hit harder this year” in eastern Europe.

The 2004 Orange Revolution, which brought Yushchenko and Timoshenko to power when both favored joining the European Union and the North Atlantic Treaty Organization, seems far away.

Stalled Membership?

A promise of EU membership hasn’t been offered, and NATO ruled out near-term entry for Ukraine and Georgia last December, though support for Ukraine in the longer term would keep the region stable, said Czech Deputy Prime Minister Petr Necas, whose country holds the EU’s six-month rotating presidency.

“We are interested in having a stable and economically prosperous Ukraine,” Necas said in an e-mailed answer to a Bloomberg question yesterday. “Ukrainian workers undoubtedly contribute to the economic growth in the Czech Republic and we do not regard them as a threat.”

The outcome of the energy controversy has strengthened Russian Prime Minister Vladimir Putin, 56, who said on Jan. 8 that Ukraine’s leadership was “highly criminalized.” Over time, Ukraine’s income from transit fees for natural gas may be jeopardized as Europe seeks or builds more stable supply routes.

Sinking Steel

The dispute with Russia that left Ukraine and other eastern European countries without gas is only the latest in a series of events that brought the country to the brink of collapse.

Global steel prices have fallen 50 percent since a record in July, hurting the country’s largest export and cutting sales for VAT ArcelorMittal Kryvyi Rihand Metinvest BV. The higher gas costs will deepen this year’s expected contraction. Gross domestic product will shrink as much as 10 percent, according to Shearing, and 9 percent based on HSBC Holdings Ltd. forecasts.

Yields on Ukraine’s $105.4 billion of government and company debt, now at 25.67 percent, are the highest of any country with dollar-denominated debt except Ecuador, which defaulted in December.

The gross foreign debt includes direct state debt, including loans from the IMF, the European Bank for Reconstruction and Development; domestic Treasuries owned by foreigners; bank borrowing, including bonds and loans; and corporate debt, including bonds and loans.

The Ukrainian currency, the hryvnia, has lost 38 percent in the past year against the dollar and the benchmark stock index has plunged 75 percent.

Non-Diversification

Like fellow Russian gas customers Bulgaria and Slovakia, Ukraine failed to diversify its power sources or budget for a gas- price increase that Russia has been trying to impose since Yushchenko took office at the beginning of 2005. The agreement between Russian gas exporter OAO Gazprom and NAK Naftogaz Ukrainy will make Ukraine pay market prices starting next year.

The bickering between Yushchenko, 54, and Timoshenko, 48, has gone on since they began sharing power, crippling the government’s ability to pass legislation to strengthen the banking and economic systems and sell unprofitable state assets.

“You can start by putting the Ukrainian government on the stand,” saidFredrik Erixon, director of the Brussels-based European Centre for International Political Economy. “One can blame other factors, but the simple fact is you can avoid the situation you have seen in Ukraine with better policies.”

A Dec. 17-28 survey conducted by the Kiev-based Democratic Initiatives Foundation showed that 84 percent of respondents believed the country was moving in the wrong direction even before the gas crisis started. That compares with 48.6 percent in 2007. The poll of 2,012 people had a margin of error of 2.2 percent.

Poll Results

The poll also found that if presidential elections scheduled for January 2010 were held today, 22.3 percent would support former Prime Minister Viktor Yanukovych, the pro-Russian opposition leader. Another 13.9 percent would pick Timoshenko and 2.4 percent would choose Yushchenko. Almost half said no politician could deal with the financial and economic crises.

“The government was not ready to meet such obvious worldwide financial threats and currently is not able to protect Ukrainians,” said Oleksandr Slobodyanyk, 27, who lost his job more than two months ago as a broker at Concorde Capital in Kiev. “I see no other option but to look for a job abroad.”

The government broke down in October after Timoshenko joined the opposition in stripping the president of some powers. Plans for early elections on Dec. 14 were later dropped after the two leaders re-formed the Cabinet and promised to work together.

Pressure on Central Bank

Now, Yushchenko blames Timoshenko — who went to Moscow and negotiated with Putin — for giving in too far to Russian demands. She is trying to oust central bank Governor Volodymyr Stelmakh, an ally of Yushchenko’s.

Former Soviet republics Latvia and Lithuania to the north experienced rioting this month because of anger over government failure to limit the effect of the financial meltdown.

“Ukrainians, generally speaking, have had enough of the government,” said Tanya Costello, the London director for New York-based Eurasia Group. “I don’t think there is a political leader in whom the public has its trust at the moment. So it’s more likely you will see pockets of social unrest.”

Banking update from www.reuters.com  The banks here in Ukraine are in a precarious stage, and it will be interesting to see which ones survive the crisis. In the meantime, some banks are offering 20%+ interest on dollar and euro deposits. 

Ukrainian banks should merge to survive crisis-S&P

Most Ukrainian banks need additional capital to withstand the effects of the global financial crisis and the best way may be through consolidation in the sector, a Standard & Poor`s analyst said on Monday, Reuters reported.

Yekaterina Trofimova, S&P`s analyst for banks in the former Soviet Union, said the credit crunch had left Ukrainian banks in the lurch, and the central bank had limited means to help because of the conditions for its $16.4 billion IMF loan.

The majority of banks in Ukraine need additional capital either linked to the fact that their real economic capital is already negative, or because the quality of their assets is deteriorating,” Trofimova told Reuters.

She did not state the banks that S&P considers to be struggling, or how much recapitalisation the sector needed.

“Mergers among banks could be one of the ways of solving the problem of a lack of capital, but we have not seen any active moves for such deals, particularly from solid banks,” she said.

The lack of mergers was linked to “uncertainty over the market, uncertainty in the future and fears of skeletons in the cupboard, including hidden costs which often occur after a merger or acquisition”, she said.

There are more than 180 banks in Ukraine, the sector experiencing rapid growth in recent years, although no single bank has more than 10 percent market share.

Foreign lending helped credit sector to develop, with Ukrainians borrowing for the first time in their lives to buy homes and cars.

Banks` lending portfolios rose more than 70 percent in 2008. Foreign currency lending amounts to 59 percent of all credit, up from 50 percent at the start of 2008, and is worth 433.8 billion hryvnias ($56 billion), central bank data showed.

Many Ukrainians borrowed in dollars, because interest rates were lower than hryvnia-denominated loans as inflation soared. The strategy backfired when the hryvnia fell sharply in the last four months of 2008, making the loans far more expensive.

Now there are fears of default.

“Careless decisions were made when the number of new credits (lending) was on the rise. The economy, after a long period of free access to sources of credit, cannot adapt quickly to their almost total curtailment,” Trofimova said.

“We believe more than 20 percent of loans have signs of problems and that number is still rising,” she said.

S&P cut Ukraine`s rating to B from B+ in October because it was concerned about recapitalisation.

At Jan. 1, 2009, 184 banks were operating in Ukraine with a total capitalisation of 121.4 billion hryvnias ($16 billion) and assets worth 972 billion hryvnias ($126 billion).

Ukraine`s largest bank is privately owned Privatbank, followed by Raiffeisen Bank Aval, belonging to Raiffeisen, UkrSibbank, majority owned by BNP Paribas and Ukrsotsbank, owned by UniCredit.

The country`s No.5 bank, Prominvestbank, was bought by Russian state-controlled VEB bank after spending several months in receivership. Officials said a run on its deposits in October was unconnected to the financial crisis.

Last week, the country`s No. 15 bank, Ukrprombank, was also placed in receivership.

We spotted this on a Ukrainian news site (originally reported by the Associated Press) and could not restrain ourselves from a chuckle. As any visitor to Ukraine can tell you, Bentley was and is…for now at least… the ultimate symbol of wealth, prestige and status in Russia and Ukraine.

During the boom years, when money was easy, oil prices were high and the champagne flowed freely, Bentleys could be seen with great frequency on the streets of Moscow, Kiev and Odessa. Perhaps it was the import duties that doubled the U.K price, which made them so desirable. You really had to be “liquid” to own one.

Up until very recently, there was a plethora of Bentleys parked near our offices-including a red Bentley that pedestrians enviously remarked, was the “mistress machine” of some oligarch. Lately, Bentleys seem to have disappeared. Perhaps a few of the oligarchs…whom once considered Mercedes to be rather ordinary-like a LADA for lower class businessmen-have traded their prized chariots for cash? Wouldn’t surprise anyone here. People everywhere are scrambling to cover debts and day-to-day needs.

Bentley Motors to halt production

Luxury automaker Bentley said Thursday it was halting production at its manufacturing plant in central England for seven weeks as Britain`s car industry continued to suffer amid plummeting demand,

Bentley Motors Ltd. said it would stage a staggered shutdown of its manufacturing operations at Crewe, about 170 miles (275 kilometers) northwest of London, beginning in early March and lasting until April.

Spokesman Mike Hawes said a global drop in demand for cars had forced the company`s hand. “We`re like a number of other motor manufacturers facing similar challenges,” he said.

He declined to say how much the company, which is owned by Volkswagen AG, hoped to save by stopping production. The Crewe plant produced 7,600 of the top-end cars last year, a 24 percent drop on the year before. Bentleys typically retail for anything between 125,000 and 250,000 pounds ($170,000 to $340,000) each in the U.K.

Like its counterparts across the globe, the British automotive industry has been badly hit by the global financial crisis. Figures released Thursday by the Society of Motor Manufacturers and Traders, or SMMT, showed vehicle production in Britain slumped by nearly half in December from the same month the year before.

The trade group said nearly 48 percent fewer cars were made in December 2008 compared with the previous year, meaning that in 2008 as a whole car production dropped by almost 6 percent.

Its not just car makers who are suffering: Optimism in the country`s manufacturing sector as a whole has slid to a near 30-year low — despite a rapidly falling pound.

In its quarterly assessment of the manufacturing sector, the Confederation of British Industry found that 70 percent of companies are less optimistic than three months ago, while just 6 percent are more positive. The figures were the worst since July 1980, when Britain was mired in a deep recession.

The CBI said demand for manufacturing goods has fallen sharply in the last three months with more businesses reporting a drop than at any time since July 1991.

The confederation said the outlook for the next three months is grim despite the big falls seen in the pound, particularly against the dollar and the euro. A falling currency should make exports cheaper but the faltering U.S. and European economies are more than offsetting that.

“Most firms expect conditions to get even worse, with further falls in orders expected, leading to more job cuts,” said Ian McCafferty, the CBI`s chief economic adviser. The CBI forecast that almost 50,000 manufacturing jobs were lost in the fourth quarter of 2008 and 60,000 could be lost in the first quarter of 2009.

Technorati Tags: Bentley, Ukraine, Russia, Anton Olff, MBS Ltd., Odessa, Moscow, Kiev, wealth, prestige, status, champagne, United Kingdom, Lada, Mercedes Benz, oil prices, England, car industry, Crewe, London, Volkswagen AG, Society of Motor Manufacturers and Traders, SMMT, Confederation of British Industry, recession, dollar, euro, United States, Europe, Ian McCafferty, manufacturing jobs, Associated Press

A short video of the Privoz Market here in Odessa. A good snapshot into the day-to-day life of Ukrainians.

Privoz Market in Odessa, Ukraine

Ukraine Macroeconomic Situation

SigmaBleyzer January 22, 2009

According to preliminary data, Ukraine’s real GDP grew by 3.6% yoy over January-November 2008. Given the sharp deterioration of real sector performance during October-November, unfavorable prospects for the global economy and domestic financial turmoil, we now expect GDP to grow by 2.0% yoy in 2008 and to contract by about 3.0% yoy in 2009 with still significant downside risks.

• Ukraine’s fiscal position remained strong during January-October 2008 as the consolidated budget was in surplus of 0.9% of period GDP. As a result of budget amendments at the beginning of December, the targeted budget deficit was raised to 2.5% of GDP.

• In late December, the Ukrainian parliament approved the 2009 budget with a planned deficit of 3% of GDP contrary to the IMF commitment to have a balanced budget in 2009. Additionally, there are a number of other issues suggesting that 2009 will be quite a challenging fiscal year for Ukraine.

• Consumer inflation is estimated to be around 22% yoy in 2008 and about 15% in 2009.

• The reversal of international capital flows and worsening macroeconomic fundamentals caused the Ukrainian Hryvnia to depreciate. These pressures, amid the lack of transparency and coordination among monetary and government authorities, transformed into a full-scale currency crisis. As a result, the Ukrainian Hryvnia lost more than 50% of its value with respect to the US Dollar in 2008.

• Our estimates of Ukraine‘s net external financing needs indicate that although 2009 will be a difficult year for the country, the situation still looks manageable.

• Ukraine failed to agree with Russia on a new gas contract for 2009. The new gas dispute may have both positive and negative consequences for Ukraine.

Economic Growth

Economic conditions in Ukraine have been deteriorating more sharply and earlier than we expected.

Hit by the combined shock of rising risk-aversion on the global financial market amid growing worries over the health of the Ukrainian banking system, falling world commodity prices and domestic policy tightening, Ukraine’s gross domestic product shrank by 2.1% yoy in October and 14.4% yoy in November. This brought cumulative January-November GDP growth to 3.6% yoy, down from 6.9% yoy in January-September. Significant contributors to a steep deterioration in overall growth were industry, domestic trade and construction, the sectors that used to be engines of growth in previous years. The value added growth in these sectors eased to -0.5% yoy, 2.3% yoy and -12.7% yoy in January-November, down from 5% yoy, 9.4% yoy and -16.1% yoy respectively in the first nine months of the year. In November, only agriculture and transportation/ communication sectors still reported vigorous value added growth, advancing by 18.0% yoy and 9.3% yoy respectively. At the same time, November’s performance in these sectors was slightly worse than in the preceding month (over the first ten months of the year, value added grew by 18.3% yoy and 10.4% yoy respectively).

Industrial performance was disappointing. Industry reported an almost 20% yoy decline in production in October. Moreover, the situation worsened in November as industrial output contracted by 28.6% yoy. Thanks to decent growth in the first nine months of the year, industrial production declined cumulatively by 0.7% yoy over January-November.

The deterioration was particularly sharp in export-oriented and consumer-credit-sensitive branches (metallurgy, chemistry and transport vehicles).

Abated by high input prices and a continuing fall in world steel and chemical prices, metallurgical and chemical production sank by 35.6% yoy and 19.2% yoy in October and almost 50% yoy and 35% yoy in November respectively. Closely linked to metallurgical performance, the mining industry showed 10% yoy and 60% yoy declines in output in October and November on the back of a 21% yoy and 60% yoy drop in ore extraction respectively.

Higher credit costs and tighter lending standards as well as declining import demand from CIS countries (the main destination for Ukraine’s export of machinery and transport equipment) caused an 18% yoy decline in production of vehicles in October and an almost 52% drop in November. The overall production in the machine-building industry declined by about 40% yoy in November, while it grew by 14.6% yoy just two months before. Food processing production continued to fall, declining by 9% yoy in November. Despite a record-high harvest this year, the industry experienced an acute deficit in agricultural raw materials (due to the presence of significant lags, the supply of a number of agricultural products such as meat, milk, etc., continued to be affected by the poor 2007 harvest).

The outlook for the rest of this year and the next one is quite bleak. A number of claims suggest a severe deterioration in the labor market since September.

Growing unemployment and pro-cyclical fiscal tightening (in accordance with the IMF program), combined with the ongoing credit squeeze and depreciating national currency signal for more retrenching consumer behavior in the future. As private consumption was the main driver of economic growth over the last five years and accounts for almost 60% of GDP, its downturn will exact a significant toll on economic growth. Moreover, exports (an important source of economic growth accounting for about 50% of GDP) and earnings are likely to experience difficulties in 2009. The benefits from the weaker national currency for Ukrainian exporters may be eroded by the global downturn and low commodity prices.

Here is another look at Ukraine from our good friend Stuart. He is an English teacher whom has many years navigating through the maze of living and working in Ukrainian society.

Below, Stuart writes about his recent experiences dealing with day-to-day life and the effect on Ukrainians. 

“In September last year I was looking for a new apartment to rent. Greedy landlords and agents were rubbing their hands with glee, telling me how prices which had already doubled in 2008,would continue to rise in 2009 so I had better decide quickly. I was looking for a new secretary at the same time. My salary offers were considered unworthy and downright offensive.

Just 4 months later it is clear that “what goes around comes around,” something of course we Westerners have plenty of experience but something that’s quite new here. Now of course I’m glad my landlady has reduced the rent so much. Should I be? No, because reducing rents and property prices are signs of what’s really happening and it’s going to hurt us all by reduced revenues, So, such small savings bear no comparison to the losses we are now experiencing.

The World economic crisis is beginning to hurt Ukraine in a big way now. Although foreigners living here obviously get a feel for the economic climate, they don’t always know how acute the problems are unless their businesses are being affected. We get a lot of our real information from speaking and socializing with native Ukrainians. Whilst it’s true that there are many very wealthy people here who may not be affected at all by the downturn, most people are working class or small entrepreneurs and they are feeling the pinch.

Generally revenue, salaries and wages are in local currency but bills other than household utilities are paid in dollars. As the dollar is currently at 8.0- 8.5 hryvnia against the norm of last year’s 5.00 to the dollar, people aren’t earning any more than they were last year, people are effectively worse off, and that means they really are poorer.

Most working class people were struggling before, now they’re getting desperate. If people are paying their rent in dollars, as most do and on the basis that traditionally rent is 50% of their income, the most important issue for them now is how to earn enough just to survive. Small businesses have to increase their turnover just to stay still because they have to convert their revenues into dollars to pay their suppliers and rents. And often it’s not possible to even buy dollars or they have to pay well above published rates. So it’s no wonder people are tightening their belts.

One source told me that 7 Kilometers Market just outside Odessa-one of the largest outdoor markets in Europe- is half closed, despite container rents dropping from an average $4000 per month to a mere $500. As people are reluctant to spend on anything but the basics, business is suffering. Many people have savings but even those are threatened. Although banks are still offering high interest accounts, who will trust them with their hard-earned cash when banks are folding everywhere?

One Ukrainian friend who had struggled over the years to save up $10,000 for her future and believed banks were safe havens in this bright new Ukraine, has been told that the bank has no money. They aren’t yet contemplating bankruptcy but the message is ‘we’ll pay you when we get some ourselves!’ Another friend pays $600 to rent a table and a chair in a flower market. Such excessive pricing we’ve become used to over the last few years as inflation and pure greed have accelerated in a way we Westerners could never imagine.

Whilst rents and consumable prices are reversing into freefall, prices for basic essentials such as food, gas, electricity and water are rocketing into the stratosphere. Utility prices have doubled in the last 6 months at a time when most wages have effectively halved through currency variations.

Technorati Tags: Stuart Biddulph, Ukraine, Odessa, English teacher, Anton Olff, MBS Ltd., apartments, global economic crisis, ex-pat, foreigners, 7k Market, entrepreneurs, salaries, wages, utilities, hryvnia, U.S. dollar, small business, Europe, savings, food, gas, electricity

With currency devaluations continuing almost daily in Russia, and Ukraine’s hryvnia losing value, it may not be too long before BOTH nations flirt with default. Russia has currency reserves to stave off a collapse for longer time than Ukraine, but both economies are struggling. For many, it is…to paraphrase American baseball legend Yogi Berra…”déjà vu all over again” as memories of the painful 1998 crisis rise to the surface.

Vulture investors should be prepared to pick up some heavily discounted debt instruments from both countries very soon. See article below from www.bloomberg.com:

NOTE: one of the effects of high oil prices as well as the gas crisis has been to jump-start the moribund nuclear power industry in Europe. Italy has begun construction on a nuclear power plant with the latest technology. Germany-which had planned to scrap some nuclear power plants due to internal political pressure of the “green” kind, has now suspended the suspensions.  Full speed ahead is the current mantra.

Here in Ukraine, there will be also be some movement towards more nuclear power plant construction. Despite the 1986 Chernobyl disaster, Ukraine still gets a majority of power from Soviet era nuclear plants. In fact, there are 4 plants downwind of Odessa near Nikolaev with plans to add generating capacity.  

Ukraine Bonds Signal Default as Russia Has ‘Upper Hand’ on Gas 

By Laura Cochrane

Jan. 19 (Bloomberg) — Four years after Ukraine embraced the West with the election of President Viktor Yushchenko in the Orange Revolution, the former Soviet nation’s economy is collapsing and investors expect the country to default.

Even with the International Monetary Fund’s $16.5 billion bailout, Ukraine’s finances are deteriorating as the country battles with Russia over natural gas prices and the cost of steel, its biggest export, sinks.

Yields on Ukraine’s $105 billion of government and company bonds are the highest of any country with dollar-denominated debt except Ecuador, which defaulted in December. The currency, the hryvnia, weakened 40 percent in the past 12 months against the dollar. The benchmark stock index lost 85 percent, the biggest drop in the world after Iceland, data compiled by Bloomberg show.

“The market is telling us there is a high probability of a default,” said Tom Fallon, head of emerging-markets at La Francaise des Placements in Paris, which manages $11 billion and sold its Ukrainian holdings six months ago. “It’s an advantage that the country is committed to policy measures that the IMF is prepared to back, but that is no guarantee it won’t default.”

The gap in yields between Ukraine’s bonds and Treasuries tripled in the past four months to 23 percentage points. The country’s bonds yield 11.5 percentage points more than debt sold by Argentina, which defaulted in 2001 and has yet to compensate all holders, according to JPMorgan Chase & Co. data.

Gas Dispute

Ukraine is getting battered after European steel prices plummeted 56 percent since August, according to data from Metal Bulletin. Industrial production fell 48.8 percent in November, the steepest decline in Europe, as the global economic slowdown cut international demand.

The country’s dispute with Russia over natural gas prices disrupted supplies across Europe and will probably increase fuel costs for Ukraine, slowing industry, analysts led by Vienna-based Martin Blum at UniCredit SpA wrote in a research note this month.

Russian Prime Minister Vladimir Putin and his Ukrainian counterpart, Yulia Timoshenko, are scheduled to sign the terms of an agreement today in Moscow in which Ukraine will pay higher European prices for Russian gas from 2010, after a 20 percent discount this year. In return, 2009 transit fees for Russia will remain at last year’s level. The European Union said it will reserve judgment on the deal until the resumption of flows to the 27-nation bloc after a halt of almost two weeks.

“Russia does have a bit of an upper hand, but an excessively weak Ukraine would not be a benefit to Moscow either,” said Ivailo Vesselinov, a senior economist at Dresdner Kleinwort in London. “The Kremlin has to balance keeping Ukraine stable so that does not spill over into a chaotic break-up, and preventing a move away from Russia politically.”

Divided Nation

The nation’s 46 million people are 45 percent ethnic Russians and 55 percent ethnic Ukrainians. While the U.S. is supporting membership to the North Atlantic Treaty Organization, Russia has warned the move would break the country into two states and prompt Moscow to aim missiles at Ukraine.

A feud between Yushchenko and Timoshenko has made matters worse as the collapse of their coalition government in September hampered policies to reassure investors. The central bank seized Prominvestbank, Ukraine’s sixth-biggest lender by assets, in October.

The crisis led the IMF to provide $4.5 billion of emergency loans in November. Conditions for the credit include moving toward a flexible exchange rate, tackling inflation and running a balanced budget even though Ukraine’s parliament approved a 2009 deficit of 2.96 percent of gross national product. The government will partly cover the shortfall by selling bonds, according to the plan reached last month. Ukraine’s inflation rate is the highest in Europe at 22.3 percent.

IMF Mission

An IMF mission is scheduled to visit Kiev this month before it provides a second payment in February.

“Without rapid correction, this could undermine the outlook for the second tranche,” said Ali Al-Eyd, an economist at Citigroup Inc. in London.

Ukraine’s economy, which expanded at an average annual rate of 7 percent since 2000, grew 2.1 percent last year. Gross domestic product may shrink 5 percent this year, Oleksandr Shlapak, the president’s deputy chief of staff said in November.

The slump coupled with the hryvnia’s decline increased concern that the government and companies will default after a fourfold jump in foreign debt since January 2004, according to data on the central bank’s Web site.

Maturing Debt

Citigroup, Credit Suisse Group AG and UBS AG arranged more than $8 billion of bond sales for the Ukrainian government since 2004, according to data compiled by Bloomberg. The country has to repay $1.4 billion of maturing foreign debt this year, according to Citigroup.

“I doubt Ukraine will default on the public debt, but at these sorts of high bond spreads the market doesn’t see it that way,” said Paul McNamara, who helps manage $1.2 billion of emerging-market debt at Augustus Asset Managers Ltd. in London, including Ukraine government and City of Kiev securities.

Investors demand higher yields from Ukraine than the average 18.1 percent yield on Argentina’s debt in October 2001, just before the Latin American nation defaulted. Ukraine’s yields are more than double the 10.8 percent Russian yields in the month before it defaulted in August 1998.

While a default by Ukraine is “not impossible,” it is not “imminent,” said Dmitry Sentchoukov, an emerging-market strategist at Dresdner in London.

Default Swaps

Ukraine’s yield spread narrowed to 23.67 percentage points from a record 27.38 percentage points on Dec. 30, JPMorgan data show. Ecuador, which stopped making payments in December on $3.9 billion of debt, has a yield spread of 36.7 percentage points.

AKIB UkrSibbank, the Ukrainian unit of BNP Paribas SA, sold $200 million of bonds in July 2007 at face value to yield 7.375 percent. The securities are now quoted at 57 cents on the dollar with a yield of 51 percent.

The cost to protect bonds sold by Ukraine against default jumped more than 12-fold in the past year to about 3,450 basis points, the second-highest worldwide after Ecuador, according to London-based CMA Datavision prices for credit-default swaps.

The contracts, conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A basis point is worth $1,000 on a credit- default swap protecting $10 million of debt.

“There are definitely going to be credit events,” said Dresdner’s Vesselinov. “And we will expect a lot of corporate defaults.”