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MBS Blog » 2010 » January
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Archive for January, 2010

Ukraine Economy May Grow Despite All

Thursday, January 28th, 2010
Ukraine Plans to Sell Up to $1 Billion in Bonds Next Quarter

By Halia Pavliva

Jan. 28 (Bloomberg) — Ukraine will seek to borrow $500 million to $1 billion by selling Eurobonds as early as next quarter, Economy Minister Bohdan Danylyshyn said, as Europe’s hardest hit economy looks for ways to restructure its debt.

“We have been analyzing the whole debt system,” Danylyshyn said in an interview in Kiev yesterday. “We are in talks with potential participants of the restructuring from the European Union, the U.S. and Japan.” While the country is considering different currencies for the sale, Danylyshyn said he thinks the bonds should be denominated in euros.

The former Soviet state needs to get through a presidential runoff vote on Feb. 7 before turning to markets for financing, Danylyshyn said. Prime Minister and presidential candidate Yulia Timoshenko and her opponent Viktor Yanukovych have both said they’re ready to dispute the outcome of the ballot if they suspect vote rigging. That would prolong the period of political uncertainty that’s left Ukraine’s $16.4 billion International Monetary Fund loan frozen since November.

“The major risk to the economy is the political risk,” Danylyshyn said. Ukraine plans to choose banks to manage the placement in the second half of March, he said.

Ukraine last sold international bonds in June 2007, when it offered investors $500 million in notes at 6.385 percent. The country has $5 billion of foreign-currency bonds outstanding, including 35.1 billion yen ($388 million) of 3.2 percent securities due in December 2010, Bloomberg data show.

The cost to insure against nonpayment by Ukraine using credit-default swaps is the world’s third highest, behind Venezuela and Argentina. Ukraine’s five-year default swaps have dropped to 910 basis points from a record 5,384 basis points in March. This compares to 483 basis points for Latvia and 179 basis points for Russia, Bloomberg data show.


The extra yield investors demand to own Ukraine debt instead of U.S. Treasuries fell 10 basis points to 7.47 percentage points as of 10:20 a.m. in Kiev, down from a peak of 35.93 percentage points in March, according to JPMorgan Chase & Co.’s EMBI+ Index.

Acting Finance Minister Ihor Umanskyi said yesterday Ukraine is in talks to borrow abroad as early as April, and wants to sell debt that will mature in two to three years and pay a “one-digit” interest rate.

The IMF last month agreed to allow Ukraine access to $2 billion more than originally agreed from its foreign reserves to help the country pay for Russian gas. The concession was made to keep the government liquid through the election without releasing loan funds.

Reserve Floor

Even so, the central bank has signaled it may limit access to reserves, which stood at $26.5 billion at the end of December, as policy makers try to avoid fueling inflation. Consumer prices grew an annual 12.3 percent last month, from 13.6 percent in November, the State Statistics Committee said on Jan. 6.

Danylyshyn said the central bank should agree to print as much as $2.7 billion this year and next to help revive growth and resurrect the economy from 2009’s contraction, which he last month estimated at between 12 percent and 12.5 percent. Output shrank 15.9 percent in the third quarter after declining 17.8 percent in the second and a record 20.3 percent in the first three months of 2009.

“This money should be spent for production, not for consumption and that would allow us to keep inflation under control,” he said. “Inflation is not a problem and there are good chances it will stay below 10 percent this year.”

The winner of the presidential runoff vote will probably keep the current Cabinet in place until the next parliamentary elections, due in 2012, Danylyshyn said.

Cabinet Outlook

“There are no reasons for any talks about the new Cabinet in the near future,” he said. “The Cabinet is backed by the majority in the parliament.”

Gross domestic product will expand between 3 percent and 3.7 percent in 2010, as prices for Ukraine’s key exports such as metals, grains and chemicals recover, Danylyshyn said. If the central bank agrees to print more money to finance industrial projects, the economy will probably grow between 5 percent and 6 percent this year and next and 7 percent in 2012, he said.

“We have passed the peak of the crisis,” Danylyshyn said.

The “Comeback Kid” of Ukraine?

Friday, January 15th, 2010

Joseph Sywenkyj for The New York Times

Hundreds gathered Tuesday at a rally in Dneprodzerzhinsk, Ukraine, for Viktor F. Yanukovich, who lost power during the Orange Revolution.

Published: January 14, 2010

DNEPRODZERZHINSK, Ukraine — Viktor F. Yanukovich was swept aside five years ago in the Orange Revolution, derided as a barrel-chested party boss and Kremlin stooge whose career was over asUkraine embraced the West.

Viktor F. Yanukovich is leading in polls for Sunday’s election.

Now, though, Mr. Yanukovich is close to exacting his revenge, leading in opinion polls in advance of a presidential election on Sunday and drawing large crowds like the one that gathered here this week in a light snowfall in this smokestack region in the southeast.

Ukraine, it seems, is in the throes of a revolt against the revolution.

“Together, we have suffered through this Orange nightmare,” Mr. Yanukovich said at a rally here. “Let us consign this history to the black pages of our lives.”

Mr. Yanukovich, a former prime minister, has capitalized on the nation’s deep disillusionment with a limp economy and the Orange leaders, who promised to modernize the country and move it away from Moscow. Instead, they have been consumed with infighting that has paralyzed the government.

Under the tutelage of an American political consultant with ties to Senator John McCain, Mr. Yanukovich has put the Orange Revolution on trial in recent weeks. He has echoed another American politician, Ronald Reagan, by asking Ukrainians whether they feel better off now than they did five years ago.

“Do we want to keep living as we have lived these five years?” he asked. “When you know the answer to that, then you will know how to vote.”

The Orange Revolution shook the former Soviet Union, ushering in a pro-Western government in Ukraine that seemingly stood as a model for the many post-Soviet states seeking to emerge from authoritarianism.

The movement broke out after protesters asserted that Mr. Yanukovich had triumphed in the 2004 presidential election over Viktor A. Yushchenko only because of widespread fraud. A new election was held, which Mr. Yushchenko won. He had already garnered worldwide attention when he was poisoned by dioxin during the campaign, a crime never solved.

In recent weeks, polls have shown Mr. Yanukovich leading by 10 or 15 percentage points, but the race remains volatile. He is likely to be forced into a runoff next month against the other front-runner, Prime Minister Yulia V. Tymoshenko, an Orange leader known for her impassioned speeches and peasant braid.

If Mr. Yanukovich does become president, it will be a victory for the Kremlin, which has worked assiduously in recent years to discredit the Orange movement and ensure against a pro-Western realignment in its backyard.

But perhaps not the total victory the Kremlin may hope for. Since his defeat five years ago, Mr. Yanukovich has sought to avoid being pigeonholed as the Kremlin’s candidate. Sounding somewhat like an Orange politician, he said he supported Ukraine’s integration with Europe, as well as a robust, multiparty democracy at home.

But Mr. Yanukovich said he would repair relations with Russia, which has been especially angered by President Yushchenko’s attempt to seek NATO membership.

“We do not want to join any military bloc,” Mr. Yanukovich said an interview, explicitly rejecting NATO membership.

Speaking of Russia, he said: “Relations should be natural, as they are between the Ukrainian people and the Russian people. They must be friendly, they must be pragmatic, they must be strategic.”

The Kremlin, in fact, is trying to maintain ties with both front-runners, indicating that tensions may be soothed however the election turns out. Prime Minister Vladimir V. Putinof Russia has had warm words recently for Ms. Tymoshenko, and she has reciprocated.

Left behind has been President Yushchenko, an Orange leader and Kremlin foe who, rightly or wrongly, has been widely blamed for the economic troubles. He is seeking re-election, but his favorability ratings are in the single digits.

Lately, he seems mostly intent on destroying the candidacy of Ms. Tymoshenko, his former ally, as if he would rather Mr. Yanukovich win than she.

Mr. Yanukovich began his comeback in 2006, when relations between President Yushchenko and Ms. Tymoshenko collapsed, and Mr. Yushchenko named Mr. Yanukovich as prime minister. Mr. Yanukovich then lost the job to Ms. Tymoshenko after parliamentary elections in 2007.

Politically, Ukraine remains divided along geographic lines, with Mr. Yanukovich’s base in the Russian-speaking east and south. It is unclear whether he will be able to broaden his appeal to areas where the Ukrainian language dominates.

But Orange voters are disenchanted, and some may not show up at the polls.

Ms. Tymoshenko has been running a populist campaign, trying to paint Mr. Yanukovich as a front man for the country’s business elite.

“The oligarchs want a weak puppet leader who can be easily managed and ruled,” she said.

But political experts here said she faced a challenge overcoming the Orange backlash.

“There is this element of positive experience and timing,” said Andrei Yermolayev, director of the Sofia Center for Social Research in Kiev. “There is a certain stereotype that the years when Yanukovich was prime minister were years of success, and the years when Tymoshenko was prime minister were years of conflict and problems.”

Mr. Yanukovich has been assisted by Paul J. Manafort, an American political consultant who has been advising him since 2005. Mr. Manafort’s business partner is Rick Davis, who managed Senator McCain’s 2008 presidential campaign, though Mr. Davis has no role here. (And Mr. Manafort said he did no work for Mr. McCain.)

Mr. Manafort declined to discuss in detail his relationship with Mr. Yanukovich, but he acknowledged that he was pursuing a classic anti-incumbent strategy.

“Despite the great expectations from the Orange campaign promises of five years ago, the world and the people of Ukraine see that Tymoshenko has failed,” Mr. Manafort said.

He is not the only American consultant involved in Ukraine. The former firm of David AxelrodPresident Obama’s senior adviser, is working for Prime Minister Tymoshenko. President Yushchenko is advised by the firm of Mark J. Penn, the strategist for the Clintons.

Mr. Manafort’s influence was apparent on Mr. Yanukovich’s visit this week in Dneprodzerzhinsk. His old style tended toward rambling speeches that seemed more suited for a Politburo meeting than a campaign rally. But throughout his day, he spoke in short, crisp sentences that rarely strayed from his theme of the Orange Revolution’s failures.

It seemed, however, that Mr. Yanukovich’s advance team could have used a strategy session. This city is named for Feliks Dzerzhinsky, founder of the Soviet secret police, and the campaign put Mr. Yanukovich right in front of a statue of Mr. Dzerzhinsky himself.

Ms. Tymoshenko is a native of this region, but it is now a Yanukovich stronghold. And there were people in the crowds who were once Orange backers.

“I voted for Yushchenko,” said Marina Sazonova, 44, a lawyer. “I was sitting home, breastfeeding my baby, watching with tears in my eyes our people getting up off their knees. There was this impression that everybody was united.

“People hoped that it would make their lives better,” she continued. “But nothing of the kind happened.”

A Turning Point for Ukraine

Wednesday, January 13th, 2010
The upcoming election this weekend is pivotal for Ukraine. In many ways, the nation has been in limbo for years due to political stalemate. Regardless of who wins, Ukraine needs stability which it has not had since the breakup of the Soviet Union.
As we have mentioned in this blog in the past, the best route for Ukraine would be greater economic ties with both Europe and Russia, but with an eye towards remaining more neutral when it comes to East-West geo-political issues.

Ukrainians can be proud of their nation. More than any other post Soviet republic, Ukraine has moved the most towards real democracy and civil society. Some credit is due to President Yushchenko and the Orange Revolution that brought him to power. It is sad that he was never able to follow through successfully. In any case, Ukraine’s current crop of potential leaders-regardless of their party and affiliation-know that they cannot go backwards. Ukraine must go forward.
Yushchenko Leaves Orange Revolution Promises Undone

By James M. Gomez and Daryna Krasnolutska

Jan. 13 (Bloomberg) — Ukrainian President Viktor Yushchenko has feuded with Russia and struggled to forge links with the European Union since taking power in the 2004 Orange Revolution. Voters may now turn to his rivals to mend ties with both East and West.

Yushchenko is unlikely to survive the Jan. 17 first round of the presidential election, according to two December polls showing 3.7 percent of respondents supported him. Opposition leader Viktor Yanukovych, who favors closer links with Russia, and Prime Minister Yulia Timoshenko, another Yushchenko adversary, placed first and second and probably will face each other in the Feb. 7 second round.

A Yushchenko departure may bolster Ukrainian markets, unfreeze a $16.4 billion bailout loan from the International Monetary Fund, ease conflicts with Russia and improve the prospects for a free-trade accord with the EU, said Sacha Tessier-Stall, head of foreign policy at the International Centre for Policy Studies in Kiev.

“No matter who wins, there will be an improvement,” said Tessier-Stall. “Yushchenko exacerbated tensions with Russia, thinking it would get himself into the EU. But he failed to see that bad relations with Russia are bad relations with the EU.”

Yushchenko yesterday said the election would be “a national referendum about Ukraine’s European future.” Speaking to reporters in Kiev, he said his policies were “simple and clear: Let’s go home, to Europe.”

Stalled Accord

Both Timoshenko, 49, and Yanukovych, 59, have promised better relations with Russia and publicly supported concluding a free-trade agreement that has stalled over European objections to the country’s economic management.

“I want a new president to be flexible,” 60-year-old accountant Valentyna Lozova, an undecided voter, said yesterday in Kiev. “I want the president to be oriented to the European Union, but at the same time the president must set up good relations with all neighbors. I do not like conflicts.”

The former Soviet republic’s disputes with Russia led to two gas cutoffs to Europe, in January 2006 and in January last year, as Prime Minister Vladimir Putin accused Ukraine of stealing the fuel. Yushchenko, 55, Timoshenko and state-run NAK Naftogaz Ukrainy denied the charge.

About 80 percent of Russian natural gas destined for Europe is shipped through Ukraine, a country of 46 million people that lies between Russia and the EU. A quarter of the gas the EU consumes comes from Russia.

Orange Revolution

Yushchenko was swept to power in 2004 in the so-called Orange Revolution, when millions of demonstrators demanded new elections. A ruling by the Supreme Court found that Yanukovych’s initial victory was based on fraud.

The president, whose face still bears the scars from what his Austrian physicians said was dioxin poisoning, won the re- vote. His victory over Russia-backed Yanukovych raised investor optimism he would make it easier to exploit Ukraine’s geographic position and wealth of raw materials.

Ukraine attracted $36 billion in foreign direct investment from the start of Yushchenko’s presidency through November 2009. FDI totaled $5.7 billion between 1999 and 2004. The country also won membership in the World Trade Organization and the EU declared Ukraine a market economy.

Timoshenko has served as prime minister twice in an off- again, on-again alliance with Yushchenko. Parties loyal to her and Yanukovych prevented parliamentary votes last year on improving the banking system and passing the 2010 budget.

Record Decline

That violated requirements for the IMF loan, accorded when the credit crisis undermined demand for exports and crippled the financial sector. The IMF delayed Ukraine’s $3.4 billion tranche due in November as a result of the lack of spending discipline.

Ukraine’s economy shrank a record 20.3 percent on an annual basis in the first quarter of 2009. Gross domestic product declined 17.8 percent in the second quarter and 15.9 percent in the third.

It is the second-least creditworthy of economies behind Argentina, as measured by the cost of credit-default swaps that protect bondholders against default. Contracts on Ukraine’s debt were trading at 934.207 basis points as of 2:54 p.m. in Kiev, compared with 499.997 basis points for Latvia, according to prices from CMA Datavision in London.

Goals ‘Partly Met’

The currency, the hryvnia, was the world’s worst performer versus the dollar from September 2008 to September 2009. The 6.75 percent government bond maturing in 2017 sank to a record- low 34.215 on March 9. It was unchanged today at 83.36.

EU Commission President Jose Barroso said on Dec. 4 that Yushchenko “only partly met” goals to prepare Ukraine for closer trade ties and eventual EU membership. Barroso delayed signing a so-called Association Agreement, which includes a free-trade component.

A Dec. 12-24 poll by the International Institute of Sociology in Kiev found Yushchenko would get just 3.7 percent of the vote, putting him in fifth place. Timoshenko had 15.8 percent and Yanukovych led with 30.3 percent. The margin of error was 2 percentage points and more than 4,000 people were surveyed.

The Kiev-based Democratic Initiatives Foundation, in a poll of 2,010 people from Dec. 12-26, found the same percentages for Yushchenko, 19.2 percent for Timoshenko and 33.6 percent for Yanukovych. The margin of error was 2.3 points.

A Yushchenko departure would allow the country to regain its footing and attract investors, said Ivan Tchakarov, an analyst at London-based Nomura Holdings Inc.

“Ukraine can be a positive surprise this year,” he said. “A lot more political capital has been expended building up spheres of influence than doing good. It is high time to change that.”

Ukraine is a bargain

Thursday, January 7th, 2010

Some would say that the vultures are circling over head, but whatever analogy is used, it does bespeak of opportunity. Ukraine has a lot of unrealized potential and investors like Mark Mobius who sniffs them out in emerging markets, understand this. The upcoming elections will be pivotal in determining investment inflows.

Vietnam, Nigeria are Among ‘Cheap’ Frontier Markets, Mobius Says

By Shiyin Chen and Caleb Goddard

Jan. 7 (Bloomberg) — Vietnam, Nigeria, Kazakhstan and Ukraine are among so-called frontier markets that look “particularly cheap,” according to Mark Mobius.

“We’re finding some very interesting opportunities in those markets,” Mobius, who oversees $34 billion of developing- nation assets at Templeton Asset Management Ltd., said in a Bloomberg Television interview in Singapore. Still, liquidity may be an issue for some of the markets, he also said.

Sri Lanka’s stocks, last year’s best performer in Asia, have “gone up a little bit too high and we would like to see a correction from where we are now,” Mobius said.

Ukraine to grow in 2010?

Monday, January 4th, 2010

It seems that the technical indicators are suggesting that some investment instruments may see an increase in values. Indeed, Ukraine may have been oversold and with elections this month, there could be a positive re-evaluation of growth prospects.

Ukraine Inverted Yield Curve ‘Overstates’ Risks

By Denis Maternovsky

Jan. 4 (Bloomberg) — Ukrainian Eurobonds may surge early this year as investor concerns the country faces potential default are “overstated,” according to Renaissance Capital.

The CHART OF THE DAY shows Ukraine’s bonds due in 2012 yield more than notes maturing four years later, suggesting investors are speculating that the nation will struggle to pay its debts in the next couple of years.

The securities may deliver gains of more than 15 percent in the first quarter as a “positive shift in investor attitudes” drives a recovery in values, Renaissance analysts led by Alexei Moisseev in Moscow wrote in a research note.

The cost to insure against nonpayment by Ukraine using credit-default swaps is higher than for any other government. Ukraine default swaps have dropped to 1,241 basis points from a record 5,384 basis points in March. The country is reliant on a $16.4 billion International Monetary Fund bailout amid the worst recession in a decade, while political battles between President Viktor Yushchenko and Prime Minister Yulia Timoshenko ahead of presidential elections next month limit the government’s ability to tackle the economic crisis.

The economy is likely to return to growth in 2010, justifying “aggressive purchases” of the country’s sovereign and quasi-sovereign debt, said Moisseev in the note dated Dec. 24. There’s “no chance” of the political situation being made any worse by the presidential election, he said.

Ukraine dollar bonds due in 2012 yield 1,200 basis points more than two-year U.S. Treasuries, compared with an average spread of 330 basis points before the global credit crisis began in 2007, according to Renaissance data. A decline in spreads to “fair” levels of 550 basis points would trigger a price jump to full face value from 85.9 cents on the dollar on the 2012 bonds today, according to Renaissance. City of Kiev dollar bonds could gain as much as 20.5 percentage points, the report said.