MBS Blog

Today a new President was sworn here in Ukraine. With the boom of canons saluting the new leader, and Ukrainians basking in well earned pride at an election process that was more open and fair than in many states neighboring this nation, Ukraine may be poised for an economic boom as well. After years of stalemate, political bickering and economic disaster, Ukraine has an opportunity to move forward and the new President wasted no time signaling his intention to steer a positive course.

New Ukraine President gives right investor signals

KIEV (Reuters) - Ukrainian President Viktor Yanukovich sent positive signals to foreign investors in his inaugural speech on Thursday, but whether the ex-Soviet company manager succeeds in bringing them back remains to be seen.

Yanukovich was sworn in on Thursday after a bitter campaign against his election rival, Prime Minister Yulia Tymoshenko, and faces the tough task of consolidating his power to produce a stable government that can bring back vital IMF lending.

In his first speech as president, he said Ukraine faced “colossal debts, poverty, a collapsing economy, corruption”, and vowed to win the trust of investors.

“What is needed for investors and international financial institutions to renew their trust in Ukraine is securing internal stability, overcoming corruption, restoring clear, and most importantly, constant rules of relations between the state and business,” Yanukovich said.

He said his aim was not to strengthen the state’s role in the economy “but the government’s participation in the creation of effective market mechanisms”.

“I am certain that direct interference by the state in the economy — its manual control — is a road to nowhere,” he said.

Although managing the economy is not the remit of the president, investors hope Yanukovich’s victory ushers in a period of political stability that would allow the government to focus on shoring up the state’s finances and economic growth.

The International Monetary Fund suspended its $16.4 billion bailout at the end of last year in the wake of fierce political rows and broken spending promises. About $10.5 billion has been disbursed to date.

The finance ministry said a technical mission from the IMF is due to arrive in April 7. These missions are usually a prelude to a full-blown visit, after which a decision on resuming lending could be made.

Yanukovich’s Regions party instigated rises in the minimum wage, passed by parliament, that were the last straw for the IMF. The government had already reneged on a promise to raise domestic gas prices, which would have helped the state’s finances.

“(Yanukovich’s) statements point clearly in the direction of more stability, obviously a positive, as this is something that foreign investors have lost sight of in the past years,” said Simon Quijano-Evans of brokerage Chevreux.

The Regions party is now trying to form a new coalition to oust that of Tymoshenko. If it does, and succeeds in forming a new government, talks with the IMF could resume.

“He will have to make some difficult decisions early in his regime, in particular on gas price hikes and reining in pension/wage promises, to bring the IMF program back on track,” said Tim Ash, head of CEEMEA research at Royal Bank of Scotland. “This will be a key short-term test of his willingness to bite the bullet.”

The election is over and time to move forward. While voter fraud may have been committed (by one side only?), it would be better if the stalemate created by the challenge to the election were set aside for now. The last thing this country needs is another round of court challenges, or additional elections.

Ukraine needs stability and predictability more than anything else. There will be more than enough time later for an opposition to emerge and challenge the government.

Feb. 16 (Bloomberg) — Ukraine’s first foreign debt sale in almost three years may fail as the political deadlock following the presidential election keeps emergency funds frozen and drains international investor confidence.

The Economy Ministry said in January it plans to sell as much as $1 billion in foreign-currency debt next quarter, its first international sale since June 2007. Ukraine needs to finance a budget deficit of about 13 percent of gross domestic product and cover $500 million in domestic debt coming due in April.

Half a decade after the Orange Revolution, the former Soviet republic doesn’t have enough funds to stay afloat without emergency relief. The International Monetary Fund has shelved its $16.4 billion loan since November after Ukraine’s Cabinet was unable to commit to budget cuts, and the Feb. 7 presidential election has yet to end the political unrest that’s crippled theeconomy.

The Eurobond sale “will only be possible with an IMF program in place,” Oliver Weeks, an economist at Morgan Stanley in London, said in an e-mailed reply to questions. “Without the IMF monitoring or some sign it’s imminent, I don’t think investors will have enough confidence the fiscal position is getting back on a sustainable path to lend at reasonable commercial rates. There is always some price you can borrow at, but I think in this case it would be too high.”

Political Powerplay

President-elect Viktor Yanukovych’s party has said it wants to topple Prime Minister Yulia Timoshenko’s government and is preparing a no-confidence vote this week.

If Yanukovych’s allies succeed, they’ll have about a month before the planned debt sale to form a new Cabinet and agree on budget cuts that the current administration has been unable to pass since October. If it fails to regain IMF favor by April, Ukraine may be without external funds until autumn.

“If Yanukovych can’t get a parliamentary majority to oust Timoshenko, he’ll have to call elections, which might be held in September,” said Andriy Nesteruk, an analyst at Kiev-based Phoenix-Capital investment bank. “If that happens, the IMF won’t return to Ukraine until October.”

Morgan Stanley’s Weeks said that even without a parliamentary election, the IMF program probably won’t be resumed until summer.

“We don’t have money to cover our state budget gap,” Nesteruk said. “We have significant budget problems, the situation is close to catastrophic.”

‘Tight’ Outlook

Ukraine’s debt is the third most expensive in the world to insure after Argentina’s and Venezuela’s, according to credit default swap spreads. The five-year CDS contract rose 6 basis points last week to 977, signaling a heightened perceived credit risk. The yield on the existing Eurobond, which matures in 2016, has risen 17 basis points since the election to 10.452 percent yesterday, the highest since Jan. 6.

“Investors don’t like uncertainty,” Frank Gill, a credit analyst at Standard & Poor’s Ratings Services in London, said in an e-mailed response to questions. “The outlook for financing in 2010 continues to be tight.”

S&P rates Ukraine’s foreign currency debt CCC+, seven levels below investment grade. Moody’s Investors Service ranks Ukraine’s debt B2, five notches below investment grade, while Fitch Ratings grades the country’s credit B-, the sixth-highest junk grade.

“It’s probably not the best time for them to be borrowing,” said Ian McCall, Director of Argo Capital Management Ltd in London, which manages about $500 million in emerging market debt. At the same time, McCall said, with lenders enjoying great leverage, “for us as investors, that can be one of the most interesting times to be lending to a sovereign.”

‘The Other Way’

Before the election, CDS swaps had eased from 1,232 basis points at the beginning of the year to 949 basis points on Jan. 18, one day after the first round of the election that ousted President Viktor Yushchenko.

“The market had rallied back on the expectation of an IMF deal,” said Timothy Ash, head of emerging market research at Royal Bank of Scotland Plc in London. “They will need to clarify the situation with the IMF pretty soon or we could see the market going the other way.” The government won’t be able “to fund the state budget deficit without IMF financing.”

The lack of funds is unlikely to trigger a sovereign default, economists said. Without external financing, the government can cover domestic debt obligations by asking the central bank to print money, though that would fuel inflation. Consumer prices rose an annual 11.1 percent last month, compared with a peak of 31.1 percent in May 2008, according to the State Statistics Committee in Kiev.

Ukraine can also finance its next payment for Russian gas, due on March 7 for February consumption, through a procedure approved by the IMF last year: It deposits Treasury notes at the central bank, the bank converts them into foreign currency from international reserves, and the currency is used to pay for the gas.

‘A Bit Dangerous’

The country can survive until September without IMF help, according to Dmitry Gourov, a Vienna-based economist at UniCredit CAIB AG, a unit of Italy’s biggest bank. “It’s September when the level of reserves would become a bit dangerous,” he said.

Gourov estimates the government would only be able to attract investors to an international bond sale without the IMF program back on track if it offered about 10 percentage points more in interest than investors would be willing to accept with the Fund monitoring the country’s finances.

That rate of interest hasn’t been announced, though Deputy Finance MinisterIhor Umanskyi said on Jan. 27 Ukraine expects to pay a “one-digit” interest rate on the borrowing.

The country’s gross international reserves stood at $25.3 billion at the end of January, according to central bank data.

Ukraine’s economy contracted an annual 7 percent last quarter, the statistics office said yesterday, bringing the average decline last year to about 15 percent.

Ok…the elections are over…or are they? Seems like they are dragging on and on without a resolution. Of course, nothing moves forward until some clear direction is obvious.

It might be best if the current players took a deep breath and reconsidered their positions. Ukraine is waiting and the world is waiting to loan, invest, and do business with Ukrainians.

Feb. 11 (Bloomberg) — Prime MinisterYulia Timoshenko’s government says it won’t step down voluntarily, suggesting Ukraine’s transfer of power after this month’s presidential election won’t be smooth.

“The government will resign only if there is a new coalition in parliament and if that coalition dismisses the existing government,” First Deputy PremierOleksandr Turchynov told reporters after a Cabinet meeting in Kiev today.

Viktor Yanukovych, 59, who beat Timoshenko in the Feb. 7 presidential run-off, has urged his rival to concede defeat, dissolve her government and move aside so he can start putting together a new Cabinet with majority support in the Parliament. A legislative impasse threatens to stall Ukraine’s International Monetary Fund bailout and leave the country short of funds to pay for Russian gas that flows through to Europe.

While Timoshenko, 49, has remained silent since the election, her allies have conceded nothing. Turchynov, who ran her campaign, yesterday asked for a recount in more than 900 polling stations, claiming that “falsification” influenced the election results.

“Timoshenko is not a politician who leaves quietly,” said Ariel Cohen, a senior fellow at the Heritage Foundation in Washington.

Damaged Reputation

“She damaged her reputation as a democratic leader very much and is showing now that she was prepared to only one possibility of herself to win,” said Ivan Tchakarov, an economist at Nomura in London, in phone interview today. “If she resigns, it will be very beneficial for her. She will get applauds from abroad,” Tchakarov said.

The Central Electoral Commission said yesterday it sees grounds for recounting votes in several constituencies, Ukrayinska Pravda reported. The commission has received complaints of vote count violations and in certain constituencies will conduct a recount, the news service said.

Timoshenko has submitted 60 appeals for recounts, Borys Kolesnikov, an ally of Yanukoych, told reporters in Kiev today. So far, 24 appeals have been rejected, he said. Yanukovych still hopes that Timoshenko will resign voluntarily from the post of premier, Kolesnikov said.

The commission is due to publish the official election results on Feb. 17.

No Plan B

Even so, Timoshenko’s room to challenge the election results may be limited, Cohen said, given that the Organization for Security and Cooperation in Europe and the U.S. Embassy in Ukraine have already called the vote democratic. That may lead her to concede the election and focus on trying to maintain her clout in government.

“Her silence means she was sure she would win and she did not have a decent plan B,” Cohen said. “Timoshenko’s hope for the courts to overturn the results is not huge. I do not exclude the possibility that Timoshenko now tries to reach some accord with Yanukovych to keep her post.”

Today’s government meeting in Kiev was the first since the election. While Timoshenko’s agenda was filled with administrative issues, such as spring planting and fire safety, Turchynov’s comment signals the Prime Minister and her allies discussed how to stay in power.

Prolonged Battle

Yanukovych, whose first presidential election victory in 2004 was overturned by the courts, won 48.95 percent of the vote while Timoshenko got 45.47 percent, according to the Central Electoral Commission.

“I officially ask the Prime Minister to resign and move into opposition,” Yanukovych said yesterday on his Web site. “Another political crisis is not needed for the country.”

A prolonged post-election battle may worsen Ukraine’s economic plight and delay the resumption of a $16.4 billion emergency loan from the IMF, adding to pressure on the hryvnia and government bonds. The country needs to adopt the 2010 state budget to resume cooperation with the IMF to stay afloat and pay for natural gas imports.

“The new Cabinet has to audit Ukraine’s financial and economic situation and work out the state budget as soon as possible,” Yanukovych said in his statement. “It also needs to address our creditors, our neighbors and economically developed countries to ask for financial help to combat the economic crisis.”

‘Not Easy’

The need to move forward on those issues may give Timoshenko leverage in any negotiations with her rival over remaining as prime minister, some analysts say. She and her allies have a majority in the parliament and could block the passage of this year’s budget and pass other IMF-imposed laws.

Yanukovych will “have to organize prime ministerial elections and try to have her removed, but it’s not going to be easy,” said Nick Day, London-based chief executive officer of the security and intelligence research group Diligence Inc. in an interview on Feb. 9. “She still has a very strong bloc of support and he doesn’t have an overriding mandate.”

Another analyst, Anastasia Golovach, at Renaissance Capital in Kiev, says Timoshenko may find it more advantageous politically to resign as premier.

“The best way is for her to move into opposition,” Golovach said. “She can just do nothing and just comment on the new government’s actions as they will have a big bunch of problems to deal with. The new Cabinet will have to implement unpopular measures, like to raise natural gas prices for households in order to curb budget spending. So she can criticize them.”

‘Unlikely’

Timoshenko is “unlikely to pull parliament support,” said Ivan Tchakarov. “If she concedes, Ukraine will have the government much sooner,” Tchakarov said.

Investors are watching the political stalemate closely. Ukraine’s government debt is the third-most expensive to insure in the world after Venezuela and Argentina, based on credit default swap prices. The hryvnia has lost 42 percent against the dollar since the beginning of September 2008.

Credit-default swaps linked to Ukrainian government debt jumped to 17.2 percent upfront and 5 percent a year, from 16.8 percent yesterday, according to prices from CMA Datavison in London. That means it costs $1.72 million in advance and $500,000 a year to protect $10 million of the nation’s debt from default for five years. The hryvnia gained 0.44 percent against the dollar to trade at 8.0320 at 14:03 p.m. in Kiev.

Ensure Stability

The central bank is ready to support hryvnia stability if political turmoil hits local financial markets, said First Deputy Governor Anatoliy Shapovalov yesterday.

“Natsionalnyi Bank Ukrainy will ensure stability as the nation is interested in stability on the foreign-exchange market as well as in the banking system in spite of political squabbles among politicians,” Shapovalov told reporters. “We have the resources necessary for intervention” to assist the hryvnia if it becomes volatile, he said.

Golovach at Renaissance Capital says Timoshenko’s maneuvering may be nothing more than posturing and is likely to be in vain.

For Timoshenko to “challenge the results through the courts is not tragic for economy, it is just unpleasant,” Golovach said. “As soon as the IMF sees that a consolidation of power is possible under Yanukovych, they will help Ukraine.”

Feb. 4 (Bloomberg) — When Yuri Davydov needed investors to expand his Ukrainian food company, he looked west to the European Union, not east to Russia, even though his VAT Creativ Industrial Groupis in the Russian-speaking part of the country.

“We have good connections with Russia, but we prefer to trade with non-Russian companies,” Davydov said after a Jan. 19 presentation to potential investors in Vienna. “If the European Union removes barriers, we can find a niche.”

His attitude may explain why both contenders in the Feb. 7 runoff presidential election, Viktor Yanukovych and Yulia Timoshenko, have vowed to sign atrade accord with the EU. They favor it even though Yanukovych had Russian backing for his first run in 2004 and Timoshenko accused President Viktor Yushchenko of being too confrontational toward Russia.

The EU is looking more attractive to executives from Ukraine’s eastern industrial centers of Donetsk and Dnipropetrovsk, as well as in Kiev and Lviv farther west. The need to diversify from Russia, Ukraine’s largest single trading partner, has business leaders pushing politicians for easier access to the 27-nation EU. Its market of 449 million people is more than triple the population of Russia.

Opposition leader Yanukovych, 59, topped 18 candidates in the Jan. 17 first-round election with 35 percent support. Prime Minister Timoshenko, 49, took 25 percent, while Yushchenko was eliminated after garnering 5.5 percent. Polling less than two weeks before the vote is prohibited.

Trade Accord

Both finalists say they will repair relations with Russia that deteriorated under Yushchenko, and they question entry into the North Atlantic Treaty Organization. Both plan to work with the International Monetary Fund to unblock $5.8 billion in loan funds that were frozen in November when the parliament failed to adopt a budget or cut spending.

Timoshenko says she wants to abolish the value-added tax, while Yanukovych would cut that tax rate to 17 percent from 20 percent and cut the corporate tax rate to 19 percent in 2011 from 25 percent now.

Both also promise to sign a trade deal this year with the EU. The accord is part of a pledge made by Yushchenko, a former central bank governor, after the 2004 Orange Revolution.

Yanukovych’s presidential bid that year, against Yushchenko, was supported by then-Russian President Vladimir Putin and outgoing Ukrainian PresidentLeonid Kuchma. Kuchma courted Russia and picked Yanukovych, his prime minister at the time, as the candidate to succeed him.

Changing Laws

Talks over the EU trade accord have been stalled for more than a year. European Commission President Jose Barroso said on Dec. 4 that Ukraine has only “partly met” its promises to change laws needed for closer EU ties. The next discussions are set for early March in Brussels.

Ukraine needs more trade: Gross domestic product probably shrank 15 percent in 2009, Yushchenko’s office estimates, as the global financial crisis cut demand for Ukraine’s products, dried up investments and weakened the currency. Exports make up more than 40 percent of GDP.

The accord is intended to ease trade in all goods and services, including energy, and to eliminate a range of tariffs on both sides. The plan would also provide a blueprint for making Ukraine’s regulations on competition, public procurement and customs more transparent, according to the EU’s Web site.

‘European Perspective’

“For Ukraine, it is very important to have a European perspective,” Yanukovych said in an interview on Jan. 21 while campaigning near the Black Sea. “The most important thing is to create a real mechanism for real integration into the EU.”

Timoshenko and Yanukovych were both invited by Ukrainian billionaire Viktor Pinchuk, Kuchma’s son-in-law and a 2004 supporter of Yanukovych, to address investors at a luncheon at the World Economic Forum in Davos via satellite on Jan. 29.

The two also attended the opening of a soccer stadium in Donetsk financed byRinat Akhmetov, Ukraine’s richest man. Grammy-winning singer Beyonceperformed at the August event.

A political leader who wants to support business needs to promote easing trade restrictions to the west, said Jathan Tucker, head of trading at BG Capital investment bank in Kiev.

“Most business leaders lean towards a free trade agreement with the EU,” Tucker said an interview. “It would open up a new market for exports that they could take advantage of.”

The EU restricts the import of agricultural products that don’t meet EU norms, as well as limiting such manufactured goods as steel pipes and imposing tariffs on chemicals and drugs.

Exports to Russia

Exports to the 11-nation Commonwealth of Independent States, which includes Russia, Belarus and Kazakhstan, accounted for 34 percent of Ukraine’s $35.6 billion in international shipments in the first 11 months of last year. Exports to Russia alone totaled 21 percent.

Exports to the EU, including steel, food and chemicals, were 24 percent of the total, the government said Jan. 13.

“Ukraine needs to win western market share, we need to export more,” saidMykola Tolmachov, chief executive officer of TMM Real Estate Development Plc, Ukraine’s largest property developer, in Kiev. “We believe our investors are not in Russia.”

TMM is among Ukrainian companies that have raised money by selling shares in the EU, including in Frankfurt, London and Warsaw, the largest bourse in the EU’s eastern states, rather than in Russia.

Kharkiv-based Sintal Agriculture Plc, which grows grains, raised $13 million in October on the Frankfurt Stock Exchange through a private placement of a 17.2 percent equity stake.

Creativ offered shares on the Frankfurt Stock Exchange in 2007. After falling 75 percent from October 2007 to April 2009, the stock has soared 135 percent since then.

Davydov is CEO of the company, based in Kirovograd, a Russian-speaking city 299 kilometers (185 miles) southeast of Kiev. He was at the ViennaEuromoney magazine conference seeking as much as $50 million to expand and improve production of his cooking-oil products.

His EU market is limited to Italy and Spain because meeting EU standards reduces the products the company can ship there.

“Ukraine has a great possibility to export” to the EU, he said. “Standards are very high and only a small quantity of Ukrainian enterprises are certified.”

The agricultural sector in Ukraine is the one of the least sold, under publicized or appreciated investment vehicles in the world today.  That will change in the next couple of years as Ukrainians begin to realize the potential of the world’s best growing region.

I bet the students at this school in Lviv can teach Westerners a few things about life. Living and working in the one of the most challenging developing nations in the world is an education in itself. When combined with the type of business education the article from Financial Times below highlights, and an emphasis on ethics though real world illustrative case studies, Ukrainian graduates will be prepared for the demands of business in a nation that has a huge untapped potential.