MBS Blog

While most of the press has focused on Ukrainian relations with Russia, the EU as well as the USA, China is barely mentioned. As this article in the Moscow Times indicates, this could change rather quickly. China could become a key player in Ukraine in economic as well as in geo-political terms.

In fact, the bi-lateral relations between the two nations could become as important as China’s relationships with some other more well known developing regions, as Ukraine has a lot to offer from a large market for Chinese consumer and industrial goods, to export of food to China. For Ukraine, closer relations with China offers a counterweight to Russian influence, EU and U.S. pressure, as well as providing additional finance for development.

China’s Ukrainian Moves

22 March 2010

March 15 (Bloomberg) — Ukraine President Viktor Yanukovych hasn’t acted on a pledge to Group of Eight and European Union representatives to seek a court ruling on the legitimacy of his parliamentary coalition, which was formed after a last-minute legislative change.

“We have not received any requests from Yanukovych so far,” said Henadiy Chernenko, deputy head of the Kiev-based Constitutional Court’s press service, by telephone today.

Yanukovych on March 10 told western leaders he had “decided to ask” the court “whether a coalition and a government formed under the new law would be legitimate.” His first bid for the presidency five years ago was thwarted when the country’s Supreme Court sided with Orange Revolution forces that made Viktor Yushchenko head of state,

The parliament on March 11 created a coalition and a government sympathetic to Yanukovych, prompting opposition allegations that the legislative amendments forced through to enable the move were unconstitutional. The Constitutional Court, which in 2008 upheld Prime Minister Yulia Tymoshenko’s coalition because it was based on party blocs that represented a majority even after individual lawmakers switched sides, may have no legal choice but to brand the government illegitimate.

Even so, some analysts said the court may find ways to avoid any destabilizing move.

‘Legally Dubious’

“Legally dubious changes to the coalition-building mechanism paved the way for the new majority,” Troika Dialog analyst Iryna Piontkivska wrote in a March 12 note. “The recent changes to parliamentary procedures do not seem to jibe with the constitution. However, petitioning the court” may “prove to be a lengthy process, even though there seems little doubt among legal experts that the Constitutional Court will consider the revised coalition mechanism unconstitutional.”

Yanukovych’s newly appointed prime minister, long-time ally Mykola Azarov, and his Cabinet won majority support last week only after the parliament adopted a law allowing coalitions based on individual lawmaker affiliations instead of party groups. In 2008, Yanukovych failed to undo Tymoshenko’s majority after the court upheld a law allowing only coalitions based on party blocs.

The new government’s shaky legitimacy may cloud its attempts to approve a budget for this year and meet the terms of a $16.4 billion bailout from the International Monetary Fund. Disbursements have been frozen since November, putting in jeopardy the nation’s ability to pay for Russian gas that flows through to Europe and cover basic budgetary needs.

‘Fruitful’

The IMF’s resident representative in Kiev, Max Alier, on March 12 said a team from the fund will visit Ukraine this week to discuss the 2010 budget, which has yet to be passed. Alier said he had “fruitful” discussions with Deputy Prime Minister Serhiy Tigipko on the outlook for resuming the IMF program.

Yanukovych’s new coalition, called Stability and Reforms, has 235 lawmakers in the 450-seat assembly and includes his Party of Regions, the Communist Party, Speaker Volodymyr Lytvyn’s group and 16 lawmakers from the parties of Yushchenko and Tymoshenko, who was dismissed by parliament last week.

Tigipko said last week the coalition is “stable” and will increase in size. Azarov has promised lawmakers to submit a budget proposal within a month. He’s also said Ukraine needs an IMF program that “takes into account today’s reality.”

Overplayed

Azarov is “expected to focus on day-to-day government work rather than engage in political intrigues,” Kiev-based Dragon Capital said in a March 12 note to clients. His Cabinet “looks capable of implementing unpopular measures.”

The IMF requires the government to cut the budget deficit to 4 percent of economic output from an estimated 11.5 percent shortfall last year.

According to Dragon, “concerns about the Constitutional Court’s potentially pronouncing the current majority illegitimate” are “greatly overplayed.” The west is “unlikely to have any issues about the current coalition as long as it proves capable of reining in political instability and restarting reforms.”

In 2008, only one of the Constitutional Court’s 18 judges ruled in favor of allowing coalitions to be formed outside party blocs. All 18 judges are sitting today.

Still, the court “has proved on numerous occasions in the past to be very cautious and deliberate when deciding on sensitive political issues and reluctant to engage in open confrontation with the powers that be,” Dragon said. “We thus see no serious threats to the new ruling coalition stemming from the potential litigation.”

‘Awkward Position’

The judges may be forced to find legal loopholes to avoid the blatant inconsistency a ruling in favor of Yanukovych’s coalition would require, some analysts said.

If the judges decide “legislative changes which enabled the majority were constitutional, the court will put itself in an awkward position by making a decision which contradicts its previous” ruling, said Yuriy Yakymenko, an analyst at the Razumkov Center for Economic and Political Studies in Kiev. It may resort to “hair-splitting” to avoid an “awkward situation” by deciding “not to consider the case on the grounds that it already studied a similar case.”

If the legislative change is ruled unconstitutional, Yanukovych will dissolve parliament and call early parliamentary elections, said Hanna Herman, deputy head of the president’s administration, on TV Channel 5.

Q&A with Anna Dudchenko, deputy chief executive officer of Sintal Agriculture, who speaks about her sector’s prospects. While much of Ukraine’s economy has been severely punished by recession, many agriculture firms in the “breadbasket of Europe” prospered last year. Their future will be even brighter if investment pours in, as expected. To learn more about the sector’s prospects, the Kyiv Post turned to Anna Dudchenko, deputy chief executive officer of Sintal Agriculture, one of the nation’s larger agricultural groups.

Sintal, which raised $13 million late last year by selling a 17 percent equity stake on the Frankfurt (Germany) Stock Exchange, controls nearly 100,000 hectares of farming land. It produces sugar and has a hog farm.

Investors, meanwhile, are increasingly viewing Sintal and other agriculture companies as strong investment opportunities that give them exposure to the country’s potentially hot food and farming sector.

KP: Why is Ukraine’s agriculture sector increasingly considered attractive for investors?

AD: There are many reasons. Firstly, if you look from the global perspective, agriculture is attractive for a lot of reasons. As the world’s population grows, the demand for food products is also on the rise. Secondly, as far as Europe goes, Ukraine holds the largest agriculture land resources. It is known historically and internationally that Ukraine’s soil is among the most fertile worldwide. Thirdly, the costs facing the agriculture business in Ukraine are still much lower compared to Europe. But our producers sell their products on global markets, for European prices.

In terms of lower costs in Ukraine, first and foremost we are referring to lower expenditures on land, such as leasing land. The cost of leasing agriculture land in Ukraine is one of the lowest in Europe. In addition, labor costs are also much lower. Meanwhile, the rest of the costs – fertilizers and fuel – are the same as in Europe. Hence, our profitability is much higher.

Investors are interested to put their money into big companies that have huge growth potential. In Ukraine, agricultural growth potential is almost unlimited thanks to its rich land resources. A big company can, with investments, increase its land assets and business dramatically. These are all the factors that make Ukraine’s agriculture sector so attractive for investors.

KP: If the potential is so huge and interest high, do you think foreign companies will snap up the lion’s share of Ukraine’s agricultural market soon?

AD: The majority of agricultural companies operating in Ukraine are still controlled by Ukrainian owners, but many have already attracted foreign investors, giving them a stake in the business. Given the complexities of doing business in Ukraine, I think that this balance will remain for some time.

First of all, it’s more convenient for investors. When they put their money into a big and experienced company, whose management has demonstrated growth and solid strategy, they take upon much less risk than entering market by themselves and building a company from scratch.

Moreover, it is still not clear when the moratorium banning the sale of agriculture land will be cancelled. And even if it is cancelled, there are many rumors that foreigners will be prohibited to buy Ukrainian agriculture land directly and easily. So, there it is not likely that foreigners will flood the market and buy it all up for themselves. They are more likely to work in cooperation with domestic partners.

KP: How does the moratorium on land sale affect the agricultural market? Doesn’t it keep a lot of investment and development for the sector at bay?

AD: There has been total misunderstanding of such policies a concern on how companies can operate with land that they don’t own. Investors often consider it to be a very big risk. But after some time, and after more precise study of the market and experience, they realized that for Ukrainian companies it is actually a benefit under the current circumstances.

Normally, agriculture companies lease their land resources from 7 to 25 years, the longer the better. It costs less than to buy. Currently, the annual rent fee, depending on the region and land quality, varies from $30 to $80 per hectare. Though it is difficult to estimate, should the moratorium be cancelled, the price of purchasing this very same land could be in the $300 to $500 range per hectare. Hence, agriculture companies would need to amass a huge investment to buy 100,000 hectares. It would be a challenge for many agriculture companies. They don’t have such assets now.

In this sense, the moratorium is a plus for Ukrainian companies, not a minus. But if the moratorium is finally cancelled, it will be a good sign for investors. Companies that are capable to find assets to buy out their land will become owners of a huge long-term asset. And as owners, they could find it easier borrow more from creditors by using these assets as collateral.

KP: How did the recession affect Ukraine’s agriculture market? Has or could it yet fuel merger and acquisition activity?

AD: As in other business areas, most big players grew bigger while smaller players were hit harder. Some of strong and publicly listed companies have used the recession as a chance to strengthen their market position by buying up distressed competitors or expanding by building new facilities.

Sintal, for example, attracted investment to expand during this period, increasing its land resource bank, for less than the cost before the recession. Also, we are planning to build a new grain elevator, construction of which will cost less than before the crisis.

There haven’t been a lot of big deals thus far. [Note: Kernel Group, a leading Ukrainian agriculture group controlled by lawmaker Andriy Verevsky, purchased competitor Allseeds early this year in a deal valued at roughly $200 million.] Rumors are flying around, though. I think there will be many merger-and-acquisition deals on the agriculture market in coming years. Many big companies are in a good position now to acquire smaller, less effective or bankrupt ones. And foreign investors are also eying acquisitions.

KP: Is Sintal eyeing an acquisition?

AD: Yes, we plan to expand our land bank by 30,000 hectares by buying two to three smaller agricultural companies in Kherson oblast.

KP: In the near future, will your current owner maintain majority ownership, or sell the company?

AD: For now, our owners see vast potential ahead and don’t want to concede. But, I would not rule out that Sintal would during the next 2-3 years attract more investment in equity on the external markets, and that the share of foreign capital in our company will increase.

(from the Kyiv Post)

Ukraine’s Teetering Pyramid

Its unsustainable governmental debt policies are growing more precarious.

The thaw after a long winter has begun and this applies to Ukraine’s political situation. Politics does make for strange bedfellows. As this article states, an alliance between old foes may be just the sort of pragmatic move necessary to get Ukraine moving forward. Investors…like the IMF… are waiting on the sidelines and will pounce when the political situation stabilizes. Indeed, Ukraine could grow 5% or more this year.

March 4 (Bloomberg) – Yulia Tymoshenko’s defeat in Ukraine’s parliament yesterday may push President Viktor Yanukovych to team up with his other Orange Revolution rival as he relies on supporters of his deposed predecessorViktor Yushchenko to form a majority.

Yushchenko’s Our Ukraine Party “is considering the possibility of taking part in creating an effective new coalition which would form the government, with Yushchenko as prime minister,” party leader Vira Ulyanchenko, who was Yushchenko’s chief of staff until Yanukovych ousted him from the presidency, said yesterday.

Yanukovych, whose ability to push legislation through the parliament hinges on his choice of prime minister, may need Our Ukraine to create a stable coalition. Lawmakers have yet to pass a 2010 budget, leaving in limbo a $16.4 billion International Monetary Fund loan needed to help the nation stay afloat. Investors are demanding yields in excess of 20 percent on hryvnia debt to compensate for the perceived risk of holding government bonds.

“Yanukovych secured a victory yesterday” in ousting Tymoshenko but “it will be difficult for his party to put together a majority,” said Kaan Nazli, director at New York- based Medley Global Advisors LLC. Tymoshenko was defeated in a no-confidence vote after some of her and Yushchenko’s followers changed sides and supported the new president.

Stability Is Key

“Negotiating with Our Ukraine and” supporters of Parliament SpeakerVolodymyr “Lytvyn is the most realistic scenario” for Yanukovych’s Party of Regions to pursue, Dragon Capital said in a note to clients.

Stability is key to ensuring Ukraine’s economic survival and investors have punished the country for its political turmoil.

Ukraine’s debt is the third-most expensive to insure in the world after Argentina’s and Venezuela’s, credit default swap spreads show. Ukraine this month paid the highest borrowing costs in six weeks on domestic debt as investors pushed the average yield up to 22.92 percent. The government sold just 150 million hryvnia ($18.8 million) of the 1.4 billion hryvnia offered at auction.

The yield on Ukraine’s dollar-denominated bond due 2016 jumped 15 basis points to 9.14 percent at 9:07 a.m. in Kiev, according to Bloomberg data.

Fickle Support?

While a parliamentary coalition that includes Regions of Ukraine and Our Ukraine would create a solid majority, the rivalry between the two party leaders may undermine any smooth legislative process.

The outlook remains uncertain and Yanukovych may push through amendments on how coalitions can be formed to avoid having a government whose support may be fickle, Dragon said. His Party of Regions yesterday submitted a bill that would allow coalitions to be created based on individual lawmaker affiliations, rather than on blocs of political parties.

“If Regions moves to implement the bill, it would be a big mistake,” said Yuriy Yakymenko, an analyst at the Razumkov Center for Political and Economic Studies in Kiev. “It will undermine the constitution from the inside and rule out any constitutional logic behind forming a majority.”

According to Yakymenko, Yanukovych’s party is using the bill as a “manipulation attempt” to “pressurize opponents in Our Ukraine. I don’t think they realize the negative consequences of this bill.”

Orange Days

Yanukovych’s first bid to be head of state in 2004 was overturned by the courts after millions swept on to the streets in the so-called Orange revolution, claiming the vote was rigged. Yushchenko, backed by Tymoshenko, won the court-ordered re-run.

Yushchenko, who twice made his Orange partner Tymoshenko prime minister during his term, also fell out with her, firing her once, re-appointing her and in October ratifying a deficit- swelling opposition bill that prompted the IMF to suspend its program.

Some commentators say Yushchenko is unlikely to team up with Yanukovych as the partnership would complicate any future attempt to run for president.

“It is not clear why Yushchenko would like the post,” said Nazli. It “is almost certain to require difficult economic decisions and would thus deprive him of the ability to make a political comeback later.”

Elections?

Yanukovych, 59, has 30 days to form a majority in parliament and a further 30 days to appoint a new head of government and get the budget approved. If he fails, early parliamentary elections will be called.

Investors would be quick to reward a stable government, analysts said.

“Capital inflow will be strong as soon as political stability is in,” said Timothy Ash, head of emerging market research at Royal Bank of Scotland Plc in London. “Foreign investors, hedge funds will come to Ukraine as the government domestic debt offers attractive rates, while the country’s economy may expand 5 percent this year.”

With stability as evasive now as before the presidential election, the country may face a difficult economic future.

Ukraine may find it “challenging” to raise funds in financial markets to service its foreign and domestic debt unless a stabilization of the political situation reopens dialogue with the IMF, Danske Bank A/S said in a research note.

“With Yanukovych hamstrung by the presidency’s weak powers and struggling to form and sustain an inclusive government, Ukraine faces more instability and uncertainty,” Nazli said.