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MBS Blog » 2011 » April
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Archive for April, 2011

Good news for some Ukrainians seeking visa for USA

Wednesday, April 27th, 2011

US simplifies visa regime for Ukrainians

Today at 15:05 | Interfax-Ukraine

The Ukrainian Foreign Ministry has said that the United States has unilaterally simplified its visa regime for Ukrainians, and citizens who obtained visas a year ago will not now have to be interviewed to obtain them again.

Ministry spokesperson Oleksandr Dykusarov said at a briefing on Wednesday that in order to implement the agreements reached after the third session of the United States-Ukraine Commission on Strategic Partnership, the heads of the consular services of the Ukrainian Foreign Ministry and the U.S. Embassy in Ukraine had held a working meeting at the ministry on April 7 this year.

“In the context of the further liberalization of the visa regime and the deepening of interpersonal contacts, the U.S. side has announced its unilateral decision to cancel from April 20 this year for the citizens of Ukraine who have already received U.S. visas in the last 12 months the need to have an interview during further applications for several types of visas,” he said.

Dykusarov also noted that according to the statistics of the U.S. Embassy in Ukraine, “more than 10% of the total number of potential applicants” would qualify for this simplification.


Ukraine plays the reluctant “bride” towards Russia

Tuesday, April 26th, 2011

Ukraine’s President Resists Russia on Trade

by James Marson

KIEV, Ukraine—President Viktor Yanukovych brushed off Moscow’s latest efforts to woo Ukraine into a Russia-led trade bloc, insisting in an interview that Kiev wants special terms that would allow it to develop relations with the European Union as well.


European Pressphoto Agency

Ukraine’s President Viktor Yanukovych shook hands with Russia’s Prime Minister Vladimir Putin during Mr. Putin’s visit to Kiev earlier this month.

The comments Monday highlight the difficult balancing act that Mr. Yanukovych, who came to office in 2010 promising to repair relations with Moscow without giving up ties to Europe, faces as he tries to navigate his country of 45 million between east and west.

In recent weeks, Moscow has stepped up pressure on Ukraine to join its Customs Union, which already includes former Soviet republics Belarus and Kazakhstan.

Russian Prime Minister Vladimir Putin said on a visit to Kiev on April 12 that membership would bring benefits of up to $9 billion a year for Ukraine. Other officials suggested Ukraine could save $8 billion a year on its gas bill to Russia if it joined the Customs Union.

In the interview, Mr. Yanukovych dismissed such offers as “political statements,” and said that “Ukraine hasn’t received any concrete proposals.”

He all but ruled out full membership of the Customs Union, which would preclude the EU free-trade deal Ukraine is currently negotiating. Instead, he suggested Ukraine would seek a free-trade agreement and other cooperation with the post-Soviet bloc in what he called a “3+1″ format. Ukrainian Foreign Minister Kostyantyn Hryshchenko told Parliament on Friday that this meant cooperation “outside the framework of formal membership.”

Mr. Yanukovych declined to speak in detail about the shape these relations would take, saying that would be “crystal ball-gazing” because negotiations have yet to start.

Some observers say Kiev’s tough line could be at least partly a negotiating tactic. Russian President Dmitry Medvedev will visit Ukraine on Tuesday to commemorate the 25th anniversary of the Chernobyl nuclear accident, and he is expected to discuss the Customs Union with Mr. Yanukovych.

Mr. Yanukovych’s choice is seen as a bellwether for Kiev’s geopolitical direction. The EU agreement would be a major step toward deeper economic, political and cultural integration and offers Ukraine access to a larger, wealthier market. A deal with the Customs Union would tie Ukraine more closely to its former Soviet neighbors, but could bring short-term benefits to the country’s struggling economy and its powerful industrial tycoons.

Russia seemed to be tightening its grip on Ukraine after Mr. Yanukovych agreed in April 2010 to a controversial deal that extended the leasing of a Ukrainian port to Russia’s Black Sea Fleet until 2042 in return for a big discount on natural gas. He also pledged to end his predecessor’s pursuit of membership of the North Atlantic Treaty Organization, which had irked Moscow.

But Mr. Yanukovych balked at Russian proposals for even closer cooperation, such as merging Russian state energy giant OAO Gazprom with its Ukrainian counterpart Naftogaz.

Mr. Yanukovych, brought up in Ukraine’s Russian-speaking east, was long seen as favoring Moscow. He received Russian backing in his 2004 bid for the presidency, but was thwarted by the Orange Revolution, which propelled pro-Western Viktor Yushchenko into office. Since coming to power, however, Mr. Yanukovych has balanced the revival of relations with Russia by stepping up negotiations with Europe on a free-trade agreement.

Talks with the EU have come a long way, Mr. Yanukovych said, and a number of differences had been overcome. “We haven’t agreed yet on some of the questions, and that process is continuing,” he said.The Ukrainian government has said it wants to iron out remaining differences with the 27-nation bloc by the end of the year.

Mr. Yanukovych said Ukraine had proposed seeking compromises with individual countries over their demands, which could then be adjusted in the EU’s negotiating mandate.

Opposition leader and former Prime Minister Yulia Tymoshenko criticized Mr. Yanukovych for not coming out more clearly in favor of an agreement with Europe. “He’s treading water while the country is stagnating,” she told reporters Friday.

Ms. Tymoshenko and around a dozen members of her former government are under investigation in criminal probes that have been criticized by U.S. and EU officials as politically tinged. Mr. Yanukovych brushed off the concerns.

“There’s no politics here,” he said, adding that the investigations were part of an anticorruption drive and that a court would decide whether those being investigated were guilty or not.

Write to James Marson at


Ukraine agriculture “rotting on the vine”

Friday, April 15th, 2011

Agribusiness losses mount amid damaging ‘Great Grain Robbery’

Yesterday at 22:58 | Morgan Williams

Morgan Williams writes: Ukraine’s huge potential is being unmet.

Ukraine historically has been called “the breadbasket of Europe.” Even this underestimates Ukraine’s potential. The nation today can be a huge “market basket” of high-value products, not a “breadbasket” of low-value products.

Agribusiness is Ukraine’s most promising sector. But experts generally agree that Kyiv is moving in the wrong direction in this industry, with severe restrictions and monopolization. An environment for high growth is not being created.

Some government leaders are talking about the same issues today as they were in the early 1990s, such as whether the private or public sector can do a better job of developing agribusiness, or whether it is good or bad to have international investors.

Huge potential unmet

Year after year, Ukraine has been an underperformer. Everyone is tired of talking about “potential.”

Most discussion centers on alarming trends and troublesome conditions, the lack of confidence in the business and financial community, the deteriorating and damaging investment climate, the obstacles being created by government agencies and instability in the marketplace.

The people of Ukraine need and deserve an abundant supply of high quality, reasonably priced food products. The world is counting on Ukraine to do its part to substantially increase the world’s food supply in the next 15 years to feed the growing population.

Investor appetite is lower. The basic philosophy of some government officials towards private economic development is not positive and friendly. Business and investors report that expansion plans are on hold. There is increased frustration.

Wrong direction

Investors say they could double investments in agribusiness if the environment was right. Bankers and investors say lending and investment is far below what is possible. Many are not willing to finance the planting of 2011 crops due to government policy.

In light of the announced economic goals, it is a surprise to find the high speed train of agribusiness economic development in Ukraine is moving rapidly in the wrong direction and on the wrong track.

Many talk about the “Great Grain Robbery” in Ukraine when discussing the major grain export restrictions which began in August and continue today.

Policies since August

Here are the major problems the business community has identified:

1. Value-added tax: The VAT system remains non-transparent and subject to manipulation. There has been pressure on exporters from tax authorities and the legal/security services, including criminal charges for alleged violations. Automatic VAT reimbursement will not apply to all and arrears persist.

2. Export restrictions: A whole series of export and other market restrictions have been introduced since August. Their justification and subsequent quota allocations lack any sort of transparency or accountability. Most international traders have been excluded from the export market. The major players in the private sector logically assume corruption and control is the driving force.

3. Monopolistic state control: Several programs have been put in place through government regulations which basically allows the government to monopolize and restrict in key areas, including grain exports, seed imports, cane sugar imports, detention of grain ships and forcing local commodity sales at below market prices. Also, several laws that give the government monopolistic power have been introduced in parliament.

These actions have caused huge losses and disruptions from the farming fields to family tables. Hundreds of millions of dollars of losses have been incurred by farmers, domestic and international agribusinesses, and other businesses in the food chain.

Experts estimate that the farmers’ direct losses due just to export restrictions for the 2010/2011 marketing year will be more than $2 billion through depressed local prices.

Losses in the food chain could reach $5 billion. Long-term losses could reach $15 billion if present practices continue.

Positive changes needed

Most major players are loudly urging government to review their actions, to change course as soon as possible.

The government should open a real dialogue with the private business sector, bring transparency to the market, and provide new market tools such as pledges of long-term leases, pre-harvest financing, hedges, real commodity exchanges, crop insurance, liberalization of central bank rules and other such positive actions.

The people of Ukraine need and deserve an abundant supply of high quality, reasonably priced food products. The world is counting on Ukraine to do its part to substantially increase the world’s food supply in the next 15 years to feed the growing population.

The amount of high value, high quality food products Ukraine could produce in the next 15 years is staggering – easily more than double what is now being produced.

The amount of food the world needs and wants to buy from Ukraine is also staggering. All of which will produce needed jobs for Ukraine, income for the people, taxes for the government, wealth for Ukraine, overall economic growth and prosperity all the way down to the village level.

But for this to happen, Ukraine’s potential in agribusiness will have to become reality – the sooner the better.

Morgan Williams is director of government affairs at the Washington D.C. office of SigmaBleyzer. He serves as President of the U.S.-Ukraine Business Council (USUBC),


Ukraine is not living up to its potential

Friday, April 8th, 2011

Where’s the growth in emerging Europe? Russia and Ukraine ‘disappointing’

Timothy Ash

Most economies in Emerging Europe have now posted fourth quarter and full year 2010 real gross domestic product growth performance data. The over-riding story herein is of a region in recovery mode, but the pace of recovery across the region varies quite markedly.

Turkey, for example, leads the growth/recovery pack posting a stellar 8.9 percent year-on-year growth rate, and with growth actually accelerating to 9.2 percent year-on-year in Q4 2010. Commodity-driven Kazakhstan follows with 7 percent full year growth, Israel at 4.6 percent year-on-year, and with commodity-based economies Ukraine (+4.2 percent) and Russia (+4 percent) following some way behind. Of Emerging European EU member states, Poland managed to post the strongest growth rate of 3.9 percent for 2010, albeit note that Poland had managed to win the accolade for 2009 of being the only economy in the region (barring Israel) to post real GDP growth, and indeed was the only EU-27 member state to manage to record real GDP growth in 2009. This does suggest a higher base of comparison which did act as more of a drag on growth for 2010. At the bottom of the growth/recovery stakes were the Balkan/Baltic economies with Croatia, Latvia and Romania still posting real GDP declines in 2010 and with muted growth across the rest of the region, varying from 0.2 percent year-on-year in Bulgaria to a more stellar 3.1 percent in the case of Estonia.

Russia and Ukraine remain commodity based economies with similar characteristics to Kazakhstan, and hence are currently benefitting from favorable terms of trade from the hike in commodity prices partially driven by political instability in the Middle East.

In terms of Q4 national accounts, as an indicator of economies likely to surprise on the upside in 2011, Turkey as noted above again led the field posting real GDP growth of 9.2 percent, with Estonia surprising on the upside with 6.7 percent year-on-year growth, Israel growing by 6.2 percent year-on-year, alongside Lithuania (+4.8 percent year-on-year). The recovery in both Estonia and Lithuania, and indeed to a certain extent Latvia (+3.6 percent year-on-year), is particularly encouraging given the shear extent of the real GDP contraction these economies have experienced (up to one quarter) through the global crisis and offers some hope that the ‘domestic depreciations’ these economies have gone through provides some hope for the future. Croatia and Romania continue to lag on the growth/recovery stakes in Q4 2010, both remaining in recession. Indeed, Romania has now posted eight straight quarters of real GDP decline, albeit this reflects IMF-imposed fiscal austerity with the hope that after this “balance sheet cleansing” the economy will be in a much fitter state to expand.

Reviewing the above data and trying to explain the winners and losers

The dynamism of growth in Turkey has surprised most observers, including yours truly and the government, which had earlier forecast real GDP growth of only around 4.5 percent year-on-year in 2010. Turkey’s strengths include relatively clean balance sheets (public, household/corporate and banks), stable politics/policy with the AK party government heading for a third term in office after elections this June, a relatively good business environment, banks which have felt able/willing to lend to the real economy, and consumers of credit with appetite to borrow at near record low interest rates given the downward push in inflation.
Favorable demographics, success in job creation (partially publically driven), a vibrant manufacturing sector, and more diversified economy have all helped. The AK party government might argue that Turkey is entering a new paradigm, as with the party offering an almost unprecedented period of political stability and economic/political reform, the stop-go economy/policies of the past have been finally been relegated to a bygone era, and now Turkey has more characteristics of high growth Asian economies than their slower growth European peers.

In contrast to commodity-scare Turkey, Kazakhstan’s great advantage remains its huge resource base/potential and ability to continue to attract large foreign direct investment inflows into this sector; an average of around 9 percent per annum in net FDI inflows over the past decade which is three times the regional average.

The sovereign’s clean balance sheet (public sector debt/GDP ratio of only around 15 percent) also gave the government much scope to pump prime growth, which helped to offset the drag from continuing weakness/problems in the banking, real estate and construction sectors, stemming from the banking crisis which hit the economy hard from late 2007 and forced two of the country’s largest banks to restructure their external liabilities (equivalent to around 14 percent of GDP). These latter sectors are expected to continue to be a drag on growth going forward over the next 2-3 years, as banks in particular remain weighed down by high non-performing loan levels (20-30 percent) and are now understandably risk averse still in terms of (re)expanding balance sheets given their painful experience with un-seasoned borrowers through the recent global crisis.

The fact that Kazakhstan went into the global crisis early, from August 2007 on-wards, was nevertheless with hindsight, a key positive as it meant that counter-measures were already in place early, and around a year before the collapse of Lehman. The maintenance of high commodity prices for much of the past 3-4 years also helped cushion the adjustment.

Israel’s continued resilience/dynamism reflects a combination of relatively clean balance sheets, small-open economy status and recent success in attracting FDI into high tech sectors, which gives the economy more of an Asian feel than of Emerging Europe. In this respect its problems have been more to do with controlling evidence of over-heating, e.g. particularly inflation and this has seen the BOI move pre-emptively to hike/normalize its main policy rate from 2009 onwards. The Israeli economy’s close historical/cultural/political and economic ties with the US, and its Diaspora there, inevitably provides some underpinning, particularly given the US guarantee over a weight of the country’s still hefty public sector liabilities.

Russia and Ukraine remain commodity based economies with similar characteristics to Kazakhstan, and hence are currently benefitting from favorable terms of trade from the hike in commodity prices partially driven by political instability in the Middle East. Growth/recovery has lagged in both economies due to a combination of factors, prime amongst these have been deep structural vulnerabilities laid bare through the crisis in these economies, in particular weak banks/institutions around credit, including relatively lowly willingness to pay in stress situations, lack of openness to FDI, and a poor business environment more generally.
Ukraine, like Kazakhstan, has been through a brutal banking crisis (NPLs ~ 30 percent) and hence banking, real estate and construction are likely to be drags on growth over the medium term. Relatively speaking, and given the tailwind provided by low base period effects, fiscal stimulus, and terms of trade Russia’s and Ukraine’s performances in 2010 was relatively disappointing in our view and a reflection of the structural weakness revealed above. That said, and with the tailwind provided by high oil/commodity prices, and in Russia’s case continued fiscal stimulus in the run up to the parliamentary elections (already talk of another RUB300bn in new budget spending allocations) due in November, and presidential elections the following March, growth should be sustained in the 4-4.5 percent range for 2011, and 2012.

Poland’s durability through the global crisis reflects a range of factors, but including its large, closed economy status, which benefitted from existing plans to ease fiscal policy in 2009 via hikes in pensions/public sector wages, relative durability in terms of employment (evidence that Polish companies were slower to shed labour through the global crisis), exchange/interest rate flexibility through the crisis, relatively healthy banks with better “behaved” borrowers, lower value added export profile, plus strong trading relations with core Europe, e.g., Germany.

The Czech Republic has surprised on the downside in terms of its growth/recovery story, suffering a steeper recession in 2009 than its Polish peer, and a much more subdued recovery subsequently. Clearly The CR’s small, open economy status left it vulnerable, especially in the context of its large auto/manufacturing sector. That said, its relatively clean balance sheet (Sovereign, households and banks) and strong trade integration into core-European economies would suggest a more robust real GDP growth bounce back than the mediocre 2.3 percent growth delivered in 2010, and 2.9 percent in Q4 2010. A combination of persistently high unemployment (9.6 percent), a tightening in fiscal policy and the strength of the crown is perhaps weighing on growth/recovery, plus also the relatively prudent nature of Czech consumers of credit and banks.

Relatively speaking, and given the tailwind provided by low base period effects, fiscal stimulus, and terms of trade Russia’s and Ukraine’s performances in 2010 was relatively disappointing in our view and a reflection of the structural weakness revealed above.

Hungary emerged from recession in 2010, posting 1.2 percent real GDP growth, which arguably surprised on the upside, after a deep recession in 2009 (minus 6.7 percent) and two prior years of very weak growth (sub-1 percent) as Hungary was hit with its own crisis (double digit deficits) from late 2006 onwards. The government is putting much faith in its new pro-growth agenda (which amongst other things aims to create 1 million jobs over the next decade), and while much has been done to stabilise markets - assure the sovereign’s financing position - recent higher frequency indicators suggest recovery might be running out of steam somewhat on the back of high unemployment, weak banks/credit environment and little scope for fiscal stimulus.

Bulgaria, Croatia and Romania arguably all fit into a similar basket of economies that were hit hard by the Lehman crisis as previous sources of growth (FDI, real estate and credit were all hit badly) and they are now struggling to identify new sources of growth. Croatia, in particular, suffers from unfavourable demographics, a high cost base, high tax environment, perhaps an over-reliance on the tourism sector and lack of broader diversification, and deeper structural reforms are required. Bulgaria and Romania appear more competitive, but the same issues remain for these economies, i.e. what are the new sources of growth over the medium to longer term as base period driven growth begins to run out of steam.

What are the new regional drivers?

In aggregate reviewing the regional drivers for growth, what remains clear is that the region faces significant headwinds which would still suggest underperformance relative to peers in Asia and Latin America.

Foreign direct investment

Prime amongst the new impediments to growth is the new found dearth of foreign direct investment (FDI). Herein it is important to remember that FDI inflows were a powerful source of growth, structural reform and typically non-debt forms of financing wide current account deficits for much of the decade prior to the collapse of Lehman. We estimate that net FDI inflows into Emerging Europe over the decade to 2009, amounted to around 3.5 percentage points of GDP, a hugely powerful driver for the convergence trade across the region. The fact that a weight of these inflows were bank-related (e.g. foreign banks buying local entities) and that foreign banks subsequently leveraged up aggressively offshore to expand their balance sheets in a region recognized as being under-banked but offering high growth potential as compared to their seasoned home markets, gave this initially FDI flow huge additional weight/power. These bank-related inflows probably added another couple of percentage points onto the flow, drove currency appreciation and attracted yet more portfolio investment as a result. Remarkably, and running somewhat against the textbook theory of FDI which has these flows as being relatively sticky, FDI inflows to Emerging Europe have dropped by 40-50 percent in the period since the collapse of Lehman, and are showing little evidence of recovery.

The fact that FDI inflows have fallen off a cliff reflects a combination of factors but prime herein being that a weight of these flow were bank-related, and foreign banks (aside from perhaps Gulf, Turkish and Russian banks/investors - with intra-regional flows being the new trend) have little appetite, post Lehman, to put new money to work in the region. Second, there has been little evidence of multinationals engaged in manufacturing looking to re-locate from higher cost Western Europe to cheaper locations in Emerging Europe. Anecdotal evidence suggests that given the weak growth outlook and still balance sheet problems (particularly in banks) in Emerging Europe, MNCs typically see themselves as being over-invested in the region. What seems clear therefore is that the FDI cake is going to be much reduced over the medium to longer term, and that countries in the region will have to work that much harder to attract FDI, which means offering the best business environment, and the best tax/incentives regimes. Even then FDI as a major driver for growth is set to take something of a back seat relative to the past decade.

Banks and credit growth

The other key driver of growth over the past decade, and linked above to the weight of inflows of FDI has been credit growth/expansion; many Emerging European economies saw credit growth rates running at 50-70 percent year-on-year in the years immediately prior to the collapse of Lehman, albeit from relatively low levels. Understandably credit extension collapsed post Lehman and the recovery has been slow-moving though, even in economies where NPLs remained relatively well contained. For those economies such as in Ukraine, Kazakhstan and the Baltics where NPLs ballooned, banks remain extremely risk averse to quickly re-extending credit to households and corporates. All these latter economies are likely to experience several years of very low single digit credit growth, as banks concentrate on cleaning up existing balance sheets, and profitability of banks will be largely determined by their ability to write back looses incurred through the crisis. More generally foreign owned banks in the region generally lack appetite to aggressively extend out credit, given the experience through the global crisis, and deleveraging still remains the dominant occupation.

There are some exceptions to the above credit “lite” environment, with both Turkey and Russia seeing a marked recent pick up in credit growth. In Turkey, the robust recovery in the economy, its “outperformance” through the crisis and the relatively clean balance sheet position of banks (NPLs of less than 4 percent) plus some pent up demand for credit in the household sector has seen credit growth pick up to 30-35 percent in late 2010/early 2011. This has in turn led to concern that the economy is overheating as reflected in the wide current account deficit (~7 percent of GDP) and the CBRT forced to respond with aggressive macro-prudential measures, including aggressive hikes in reserve requirements. In Russia, and despite weaknesses in the institutions around credit exposed through the global crisis (e.g. NPLs of around 10 percent), state-owned banks are currently aggressively re-extending credit to the economy, and particularly the household sector. Russia and Turkey though seem to be the exceptions, with the regional story still being for very subdued credit growth in aggregate across the region.

Exports - close proximity to core Europe

With core-Europe showing strong evidence of growth/resilience through the global crisis there is a sense that proximity to core European markets could provide an important growth ticker for some economies in the region. Economies most closely integrated into the EU, and then Germany in particular, tend to be those in Central Europe, and in particular the Czech Republic and Hungary. In the Czech Republic’s case over 30 percent of exports by value are Germany-bound, with a ratio of in excess of 25 percent for Hungary and Poland. Correlations between German and CEE-3 growth tend to be high - around 0.8 percent. That said, the Czech and Hungarian economies have struggled for traction on the export side to gain ground in the rest of the economy, partly a reflection of the drag on domestic demand from persistently high unemployment, and on-going fiscal adjustment (see below). The message herein seems to be that while close proximity to Europe can be important, it should not be relied upon to be the prime driver for growth, and economies in the region look at other options.

Commodity kicker

Emerging Europe, in general is a net commodity importer, with the exceptions of Russia, Kazakhstan, South Africa and Ukraine (metals). Already high oil/commodity prices seems to be spurring a recovery across the CIS, albeit experience has shows that the benefits of high oil prices are something of a twin-edged sword, as it has in the past tended to create reform inertia and builds concern over so-called Dutch disease. In Russia’s case this just creates higher vulnerability to downward shifts in commodities prices, e.g. with the Federal budget now thought to balance at an oil price of around USD115 per barrel, four times the level a decade ago. Higher oil/commodity prices should act as a drag on growth in the higher energy/commodity importing credits in the region, in particular, Turkey, Poland and Romania. Interestingly, in the case of Turkey while the combination of high rates of real GDP growth, and high oil commodity prices, are creating concern over overheating of the economy, recent months have seen a pick up in capital account inflows which anecdotally appear to consist o recycling of petrodollars from the Gulf to the newly-tagged “safe-haven” Turkey.

Internal sources of demand

Domestic drivers for growth in economies across CEEMEA remain fairly moribund, perhaps with the exception herein of Israel and Turkey. Problems herein remain the drag of unemployment sustained through the global crisis and the relatively limited fiscal space to pump prime growth with the exception herein of perhaps Russia and Kazakhstan.

Unemployment has emerged as a significant problem across the region, with rates rising by as much as eight-ten percentage points at the extreme in some of the Baltic republic since the global crisis hit. Note that in some economies (Turkey/Russia) unemployment rose quickly as the global crisis initially hit, but has subsequently been quick to recede a reflection of relatively flexible labour markets and dynamic public job creation projects - both benefitted from relative fiscal space to maintain such pro-job policies. Elsewhere, e.g. the Czech Republic and Hungary, unemployment has proven much stickier and is evidently acting as a significant break on growth/recovery.

Fiscal drivers for growth have also varied enormously across the region, a reflection of both solvency/liquidity. Russia and Kazakhstan, for example, although significantly impacted by the global crisis, benefitted from the fact that sovereign indebtedness was low (public sector debt/GDP ratios of 10-15 percent of GDP), they were running budget surpluses in the run up to the collapse of Lehman, and had sizeable fiscal reserves (close to USD200bn in the case of Russia). This gave both economies a substantial ability to run aggressively countercyclical fiscal policies, secure in terms of their financing. In Russia’s case its anti-crisis programme accounted for around 10 percent of GDP. Beyond Russia/Kazakhstan, fiscal space to loosen through the global crisis as fairly limited, not particularly due to concerns over solvency, as the region benefitted from relatively lowly public sector debt/GDP ratios (less than 40 percent for Emerging Europe still, i.e. half the EU average) but liquidity, as access to financing at the outset through the global crisis were fairly limited. To some extent where budget funding shortfalls (liquidity) pressures were most extreme (Belarus, Hungary, Latvia, Lithuania, Romania, Serbia, Ukraine) IMF/EC support programmes were extended, but these typically came with IMF/EC conditionality. The EU’s own concerns over sovereign debt sustainability in along the EU periphery meant that efforts to loosen policy with more pro-growth strategies, e.g. in Hungary and Latvia, were quickly nipped in the bud. At the extreme, in Latvia, real government spending was cut around 20 percent over the period 2009-2011, with similarly large cuts of 8.8 percent in Lithuania. Interestingly, Bulgaria, which arguably had some fiscal space to loosen policy through the crisis, given its low public sector debt/GDP ratio (~15 percent) and over EUR 3bn (10 percent of GDP) held in its fiscal reserve, because of the rigours of its fixed exchange rate regime, tightened policy fairly aggressively which added to the extent of the slowdown and is perhaps now still acting as a drag on growth/recovery. A question for next few years is that with Emerging Europe generally benefitting from low sovereign leverage and with financing (market & IMF) generally assured, will policy makers, and multilaterals feel willing now to provide a little more kick to growth with loosening fiscal policy, particularly in economies where policy has tended to be tightest, e.g. the Baltic states and Balkans. Given the maintenance of fixed exchange rates, and past track record of building up large external imbalances once growth rebounds.

Timothy Ash is global head of emerging markets research at the Royal Bank of Scotland in London.


Poland & Ukraine

Friday, April 1st, 2011

It is not just the capital markets that are different. European Union member Poland is light years ahead of Ukraine in other areas of development as well. Much of it has to do with the different cultures and respective historical influences, though parts of Western Ukraine certainly have much in common with Poland and could enjoy some of the same progress if it were not tied to the more Russified or Sovietized East. This is not to advocate an independent Western Ukraine, but to point out the possibilities for all of Ukraine if it were to move more in the direction of Poland.

Business Sense: In every way, Poland ahead of Ukraine in capital markets

Mar 31 at 22:19 | Danylo Spolsky

Danylo Spolsky writes: Polish pension funds manage 70 billion dollars in assets, while Ukraine’s is heavily in the red.

It’s a tale of two completely different capital markets.

Ukraine’s is heavily underdeveloped, impeded by currency controls, by concerns of transparency and corruption and by bureaucratic roadblocks.

Poland’s, on the other hand, has leveraged its pension fund system to make it one of the largest asset management markets in Central and Eastern Europe and a regional financial hub.

For comparison, at the end of 2010, the Warsaw Stock Exchange had 400 listed stocks including 29 foreign equity issuers, with a total market capitalization of $295 billion and stock trading volumes of $82 billion last year.

Ukraine’s main bourse, the RTS Ukrainian Exchange, had 167 listed stocks, no foreign issuers, a market capitalization of $40 billion and annual trading volumes of less than $3 billion last year.

In contrast to the Polish system, Ukraine’s state-run pension fund is heavily in the red and consistently subsidized using budget funds.

The difference is further highlighted by the primary equity issuance markets – the last real share placements locally came back in 2007, whereas the Warsaw exchange played host to three initial public offerings from Ukraine in 2010 – dairy producer Milkiland, agricultural holding Agroton, and coal miner and trader Sadovaya Group.

The three companies raised $165 million for business development in November-December 2010.

Along with Ukraine’s largest sugar maker Astarta and largest sunflower oil producer Kernel, which debuted in Poland in 2006 and 2007, the Warsaw exchange now boasts five Ukrainian stocks. With another handful of companies eyeing Warsaw listings in 2011, the exchange plans to launch a dedicated Ukrainian stock index.

So why has Poland been so successful in developing its stock market and establishing itself as a regional financial center, and why is Ukraine again on the outside looking in?

Poland’s stock market success is largely predicated on its national pension system. Individuals pay 7 percent of taxable income into private open pension funds, the so-called second pillar of a pension fund system.

The funds themselves are mandated and largely limited to investing in Polish-listed securities and they form Poland’s key institutional investor base. Monthly net inflows average over $600 million, which creates consistent demand for investable securities.

The establishment of a Polish-style multi-tier pension fund system would allow domestic earnings and savings to be captured and recycled via the pension system back into national investments.

As of November 2010, 14 Polish pension funds managed more than $70 billion in assets, with more than a third invested in stocks, according to the country’s financial regulator.
The pension funds are extremely active on the primary market, absorbing an estimated 30-50 percent of newly issued stock in initial public offerings and secondary offerings.

In contrast to the Polish system, Ukraine’s state-run pension fund is heavily in the red and consistently subsidized using budget funds.

The creation of a second pillar of non-state pension funds, like in Poland, is a distant and vague goal for the authorities. To rub salt in the wound, Ukraine’s stock and bond markets are also victims of currency controls that make repatriating foreign currency from Ukraine an arduous and, at times, impossible task.

That said, Ukraine’s many shortcomings imply significant room for improvement and for market growth. Liberalizing currency controls and establishing the conditions for offshore capital to begin returning home are two initial steps that would help domestic capital markets develop.

Most importantly, the establishment of a Polish-style multi-tier pension fund system would allow domestic earnings and savings to be captured and recycled via the pension system back into national investments.

That type of reinvestment can benefit small- to mid-sized companies that have few financing alternatives to bank loans by giving them the chance to raise capital for development purposes.

Being better providers of competition and innovation, smaller companies can provide an outsized percentage of growth in a dynamic economy.

Pension system reform, or for that matter any reform of capital markets, will not be a simple task but it is a much-needed one for Ukraine. And as with any large-scale reform this one will require significant political will, government support, and time.

Danylo Spolsky is a sales associate at Kyiv-based investment bank BG Capital, the investment arm of Bank of Georgia. He can be reached at More details on BG Capital can be found at