From www.reuters.com:

Fitch sees more E.Europe downgrades

Ratings agency Fitch expects more downgrades in emerging Europe after cutting Russia`s rating this week, it said on Thursday, warning political risk was a mounting threat to creditworthiness in the region, Reuters reported.

Head of emerging European sovereigns Edward Parker said that with nine countries in the region on negative outlook and the financial crisis deepening, creditworthiness in a string of countries was deteriorating.

“I would expect that we would see more negative ratings actions,” he told Reuters in a telephone interview.

Parker said deepening economic pain and rising unemployment across the region heightened the risk of political instability and governments failing to take austerity measures out of fear of rising unrest.

“Clearly, there is going to be a rise in political risk,” he said. “Obviously, political shocks by their nature are often unpredictable but as well as that we would be particularly concerned over the risk of governments failing to pursue prudent and responsible policies.”

He would not say which country would likely be next to follow Russia, which on Wednesday suffered its first rating cut from Fitch in a decade on slumping reserves, corporate and banking problems and economic contraction.

But he said Fitch was watching the upcoming review of Ukraine`s International Monetary Fund deal particularly carefully.

Fitch has said previously that any failure of that deal would lead to a further negative move on Ukraine, which has suffered a currency slump and deep recession as its steel industry and banking sector suffered from the global financial crisis.

In contrast, he said that Turkey might be able to survive without an IMF deal with its current rating intact. Turkey has held back from concluding an IMF deal ahead of local elections.

“We would see an IMF deal as a positive development for Turkey,” he said. “But if one was not agreed they might be able to find other financing and it would not alone be enough for negative ratings action.”

Parker said Fitch was continuing to watch Russia closely in the aftermath of its downgrade, with ongoing low oil prices, any further loss of reserves, worsening of corporate balance sheets or difficulty refinancing debt or rising political risk potentially prompting further action.

Both Russia and Kazakhstan have allowed their currencies to depreciate after spending considerable reserves defending them. Parker said those devaluations had been necessary to take into account the drastic fall in oil prices.

With the Baltic states also entering deep recessions, some analysts believe their currencies — either pegged or trading in narrow bands — might also be forced to devalue.

Parker said this would potentially be negative for their ratings.

“It would make it more difficult for companies and others to repay foreign currency debt and it would undermine balance sheets,” he said.

Currency falls in Central and Eastern Europe were already having a similar effect, he said, with the high proportion of foreign currency loans in Hungary making it more vulnerable than other regional economies such as Poland and the Czech Republic.Technorati

Tags: www.reuters.com, Anton Olff, MBS Ltd., Fitch, Europe, Russia, credit rating, unemployment, austerity, oil reserves, International Monetary Fund, steel industry, Ukraine, Turkey, Kazakhstan, Baltic States, Eastern Europe, Czech Republic

This is the right way to close out 2008!! The most tumultuous year in decades was a turning point for everyone in the wake of a global economic tsunami.  As the tide recedes…the doubters, deniers, dreamers and dogmatists some of whom once thought socialism was the way forward, have begun to pillory the very system that has brought the greatest amount of wealth, prosperity and progress to humankind.  Capitalism..or at least what is referred to describe the current system-if that is possible-is again the enemy. 

On the eve of a new year, Caroline Baum writing on www.bloomberg.com , nails the manifesto-however old and tattered- to the public square of the internet for all to see. In the light of examination and reflection, her thesis stands.

Happy New Year from MBS, Ltd!

Capitalism Is Worst System Except for the Rest

Commentary by Caroline Baum

Dec. 30 (Bloomberg) — The year 2008 will be remembered as one that exposed the fatal flaws in free-market capitalism, sending it to an untimely death.

Or will it?

That capitalism’s obituary is already being written suggests the enemies of the free market were waiting to pounce.

Last week, Arianna Huffington, co-founder of the Huffington Post, wrote that laissez-faire capitalism, “a monumental failure in practice,” should be “as dead as Soviet Communism” as an ideology.

On National Public Radio, Daniel Schorr pronounced “the death of a doctrine” in his year-end review.

All I could think of was Winston Churchill’s assertion about democracy. Capitalism is surely the worst economic system, except for all the others that have been tried.

With its ideology under fire and its practice falsely maligned, it is to the defense of free markets that I devote my final column of the year.

Before you can declare free markets a failure, you have to establish that they exist, says Paul Kasriel, chief economist at the Northern Trust Co. in Chicago.

“We do not have free markets in credit in the U.S. or anywhere else that I know of,” he says. “The price of short- term credit is fixed by central banks. It would only be by accident that a central bank would fix the price of short-term credit” at the precise level that a free market would.

Chosen People

Fixing the price of any other commodity, including labor, has proven to be a failure, an affront to the inviolable invisible hand. Yet when it comes to setting the interest rate that will keep the economy on an even keel, we put our faith in a chosen few to get it right.

All sorts of unintended consequences flow forth from central bankers’ fixing of a short-term rate. Hold the rate too low, and it leads to a misallocation of capital into, say, housing or dot- com stocks. That’s what happened in the late 1990s and again in the early part of this decade.

“We are now experiencing the economic and financial market fallout from (Alan) Greenspan’s interference with the free market,” Kasriel says.

In a true free market, risk-takers are punished for bad bets. Not so in the current crisis, where financial institutions — with the exception of Lehman Brothers — are deemed too big to fail and rescued, merged or recapitalized.

Army of Regulators

One supposed nail in capitalism’s coffin is the assertion that deregulation created the problems. This is curious, given that banks, which are at the root of the credit crunch, are among the most highly regulated institutions.

“There is a small army of people overseeing the banking industry,” says Paul DeRosa, a partner at Mt. Lucas Management Corp. in New York. And yet “we’ve had a banking crisis every 15 years since 1837. The number of people devoted to regulation doesn’t seem to matter.”

Regulators from the Federal Reserve, Securities and Exchange Commission, Office of the Controller of the Currency and New York State Banking Commission are “on the premises 365 days a year,” he says.

The regulatory structure may have been antiquated and overlapping. That’s no excuse for the regulators to be caught napping.

Censuring the free market is a way of deflecting blame from the true source, according to Dan Mitchell, senior fellow at the libertarian Cato Institute in Washington.

Compromised Overseers

“The genesis of the problem is bad government policy,” Mitchell says, pointing to everything from easy money to “affordable lending schemes” to the “corrupt system of subsidies from Fannie Mae and Freddie Mac” to the tax code’s favorable treatment of debt (the interest is deductible) versus equity.

Fannie’s and Freddie’s generous campaign contributions (anywhere else, these would be called bribes) encouraged Congress to look the other way as the two housing finance agencies used their implicit government guarantee to increase their leverage and buy riskier mortgages.

Those clamoring for more regulation as a solution to the current crisis are forgetting that Congress has oversight responsibility for the regulator of those agencies.

“I have no confidence regulation will solve the problem,” says Allan Meltzer, professor of economics at Carnegie Mellon University in Pittsburgh. “Lawyers and bureaucrats make regulations. Markets figure out how to circumvent the costly ones.”

Imperfect Like Us

As a case in point, Meltzer pointed to the Basel Accords, which “required banks that hold more risky assets to hold more reserves. So they held them off their balance sheet, where they went from being poorly monitored to not monitored at all.”

Capitalism has spread across the globe, lifting millions out of poverty as “a direct consequence of government stepping out of the way,” DeRosa says.

Yet critics of free-market capitalism are implicitly arguing for a bigger role for government.

Alas, government isn’t some benevolent matriarch acting in the public interest, even if it knew what that was. It is a conglomeration of politicians acting in their own self-interest, guided by payoffs from special-interest groups. That’s a poor substitute for the market’s price signals, not to mention a guarantee of inefficiency and waste.

“Capitalism is the only system that produces both growth and freedom,” Meltzer says. Unlike socialism and communism, “it doesn’t depend on someone’s ideas of perfection.”

Yes, markets are guilty of excess, greed, even corruption.

“We’re not perfect people,” Meltzer says. “Capitalism matches mankind.”

Technorati Tags: 2008, turning point, global economic crisis, capitalism, Anton Olff, socialism, MBS Ltd., Caroline Baum, www.bloomberg.com, free markets, Arianna Huffington, Huffington Pos, Soviet Union, Communism, National Public Radio, Daniel Schorr, Winston Churchill, democracy, ideology, Paul Kasriel, Northern Trust Co., Chicago, central banks, short-term credit, commodity, labor, Alan Greenspan, risk takers, Lehman Brothers, deregulation, credit crunch, banking industry, Paul DeRosa, Mt. Lucas Management Corp., New York, Federal Reserve, Securities and Excahnge Commission, Office of the Controller of the Currency, New York State Banking Commission, Dan Mitchell, Cato Institute, Washington D.C., Fannie Mae, Freddie Mac, debt, equity, Congress, Allan Meltzer, Carnegie Mellon University, Pittsburgh, lawyers, bureaucrats, Basel Accords, special interest groups, freedom, greed, corruption, mankind

The last week here in Ukraine has been interesting. Just when you think you have seen or heard it all, you get surprised. Well…the surprise for us here “on the ground” are the depths people will go to convince themselves that things are OK when they know they are not.

I am referring-indirectly-to the real estate market here in Ukraine. While there are new market realities, it seems that the average Ukrainian, and landlords in particular, have not gotten the message. Many still believe that the global economic crisis is happening somewhere else to someone else. Of course, the standard line in Russia and Ukraine is that it is America’s fault.

Even as their friends are fired from jobs, or their own pay is cut or their salary unpaid for the last 3 months, there is a stubborn streak within the Ukrainian soul that does not allow it to acknowledge the obvious. Of course, there is a global economic crisis out there and everyone, everywhere is affected. Wealth, businesses and jobs are disappearing.

As we have noted on this site for the last month, the value of the Ukrainian currency is evaporating quicker than a drop of water in the desert. You would think that would change the perspective of people here.  

When I went to look at a new apartment for myself over the last week, few of the landlords I met with considered negotiating the rents down a bit from pre-crisis bubble prices…even when foreign currency is offered as the form of payment. You would think they would look at the value of the hryvnia shrinking every day and be happy to take a bit less, knowing that they are being paid in a currency that still has some value (for how long Mr. Obama and Mr. Bernanke?).

Of course, the Ukrainian Government is playing the “if you can’t beat them, confuse them” strategy with the currency. A late week intervention by the Government pushed the value of the hryvnia  up quite a bit. Naturally, people took that as a sign that things weren’t that bad after all (those Americans are just spreading gloom and doom!!) so they stopped talking real estate price adjustments, and went shopping. Reports from friends in four Ukrainian cities suggest that the crowded stores I was seeing here in Odessa were no aberration.

Well…the news this morning was that the Prime Minister (the super wealthy blonde with the braid) had accused the President (the formerly handsome one of Orange Revolution fame) of playing currency games so that his cronies could make some money on some contrarian bets. Of course, as soon as the games end the hyrvnia will go back to its original trajectory (it has dropped over 50% since May 2008). Is the IMF watching?

Meanwhile, I am out of the market until after the holidays. I figure once the holidays end, the “hangover” is going to be just the time to talk with people about real estate. In fact, many of businessmen we know are headed here from Europe and the USA, but with investment real estate plans on their minds.

Technorati Tags: Ukraine, currency, hryvnia, Ukrainian Government, President Obama, Prime Minister, President, Orange Revolution, USA, IMF, Ben Bernanke, , Anton Olff, real estate, rentals, landlords, Russia, global economic crisis, wealth, regulations,

Here is the weekend update from MBS staff…and an article from www.businessneweurope.eu

While we agree with much of Ben here, we note the wide disparity not only between Ukrainian Government projections-which are optimistic to say the least-but also among the various firms tracking the Ukrainian economy.

We find it ironic that Ukraine’s economy is considered more diverse than many other economics, yet the emphasis is still on steel prices. The consensus would be that it is the lynchpin of the Ukrainian economy.

The one thing we believe will happen are more privatizations. We also don’t think the Ukrainian Government projection of a 7.30 hryvnia to the U.S. dollar as the average rate for 2009 is realistic. We believe the hryvnia will depreciate further in 2009. That could however, accelerate reforms. However, Ukraine will have to endure economic pain during that transition period. 

UKRAINE 2009: tough times ahead

Ben Aris in Berlin  December 20, 2008                Ukraine will have a harder time of it in 2009 than any other country in the region. It enters the year in recession and the prospects for growth in the second half of the year depend heavily on what happens to the global economy.  In general, the economy remains more resistant to external shocks, as it is relatively well diversified by Eastern European standards and the large consumer base helps. However, public finances are in mess and monetary policy is weak. The banking system was also teetering on the brink of collapse in late 2008 when the National Bank of Ukraine had to resort to administrative measures to prevent bank runs and a total meltdown.  The crisis was feeding through into the retail sector by the end of 2008 as retail turnover fell by 1.1% in November after growing by 16% the month before, bringing a consumer boom that has been running for years to an end.  An emergency $16.5bn loan from the International Monetary Fund (IMF), of which $4.5bn was already disbursed before the end of 2008, saved Ukraine’s bacon during the worst of the instability.  Still, the outlook for the second half of 2009 is rosier and Ukraine has made a lot of progress in recent years. “By many measures, Ukraine is currently much more immune to cyclical shocks: foreign exchange reserves have increased substantially, foreign capital increased its share on the local financial market (which is now well capitalized and profitable), the fiscal system has a strong budget code (with defined roles and responsibilities in the budget process) and the [World Trade Organisation] has liberalized external trade,” Maryan Zablotskyy, macroeconomist at Erste Bank Ukraine, points out.  Ukraine’s economic policy is weak both fiscal and monetary wise. On the one hand, the state budget has had a good balancing influence on fiscal policy - since 2000, the average budget deficit has stood at just 0.75% of GDP. However, budget planning was only conducted for one year, which meant that the government has tended to increase spending in nominal terms during times when steel prices and growth were increasing and this tends to amplify the economic cycle and the impact of steel price volatility on the economy. Consequently, the sudden plummeting of steel prices in the current crisis caught the government off guard.  ECONOMIC FORECAST  Ukraine will see the sharpest slowdown of all the countries in Eastern Europe in 2009. The cabinet released its macroeconomic forecast for 2009, projecting real GDP growth of just 0.4% on year. These numbers are based on the Economy Ministry’s optimistic scenario and assume an improvement in foreign demand and effectiveness of the government’s anti-crisis measures. Earlier, the ministry announced an estimated 5% GDP decline based on the pessimistic scenario, which the ministry has not released.  Dragon has a bit more pessimistic scenario, with GDP declining by either 0.7% in case of a fast global recovery, or by 4%, in a more pessimistic case. Fitch forecasts a contraction in Ukraine’s real GDP in 2009 by 3.5%. Erste analysts project a recession of 2.5% of GDP in 2009, with economic growth returning only in the second half of 2009.  “Despite clearly having very strong international support, it will take some time to sort out the imbalances. Still, as the political sphere is now united by a foreign anchor (International Monetary Fund loan), we believe that there is a good chance that Ukraine might finally start implementing the reforms that it did not do for 10 years,” says UBS.  If it does, the medium term looks good: “GDP growth will return to its potential growth of 5-6% in 2010, while inflation is likely to come down to a single-digit figure,” conclude Erste analysts.  Ukraine had the highest rate of inflation in Europe in 2008, but the crisis was a blessing in that it at least helped slow to 22.3% in November the galloping price rises. “We consider the government’s one-digit inflation forecast much less realistic as the hryvnia’s sharp depreciation will put significant pressure on domestic prices. We currently expect inflation in Ukraine to rise by 14.2% on year (base case) or 16.9% on year (pessimistic case) in 2009,” says Dragon  inflation forecasts  Government 9.5%  Dragon 14.2% (base) - 16.9% (pessimistic)  Fitch 17.5%  Foyil Securities 14.5%  DEVALUATION  Ukraine is vulnerable to external shocks to its currency as nearly 50% of total lending in Ukraine is in foreign currency. After spending more than $7.5bn – 20% of its reserves – to support the hryvnia in October and November, the NBU lowered both its official rate repeatedly, and its interbank intervention rate to finally unify them both at the IMF’s behest.  The hryvnia lost nearly 60% of its value from its high in May 2008 of UAH4.5/USD as a result of the crisis. By the end of December the currency had probably oversold and was trading at UAH8.2/USD, at which point the government said it would stabilize.  The optimal level of the UAH/USD will depend on steel prices and Erste analysts project the optimum level to be around UAH7 per dollar, which suggests the currency has overshot at UAH8/USD. However, ultimately the value of the currency will depend on where steel prices settle.  In order to remove some of this unpredictability from the public finances, one of the strings the IMF has attached to its loan is the government must set up a UAH40bn stabilisation fund that can be used to issue stabilisation loans and bail out banks. The fund will be maintained in the future partly from privatisation receipts and the whole privatisation programme has been put back on the agenda for 2009.  The average exchange rate in 2009 will be UAH7.30/USD, according to the government. However, the currency will be affected by Ukraine’s unpaid gas debts to Russia and the price it has to pay for gas imports.  However, the really big change is the current crisis has effectively smashed the foreign currency trading band inside which the NBU has kept the hryvnia more or less constant at about UAH5/USD for most of the last five years.  CURRENT ACCOUNT DEFICIT  The government is hoping to reduce the current account deficit in 2009 as a result of the devaluation. “I hope that a fall in fuel prices, a very moderate rise in gas prices and the exchange rate will bring a zero or a deficit of the current account at 1-2% [of GDP],” Deputy Governor of the National Bank of Ukraine Oleksandr Savchenko said in December.  Fitch estimates the current account deficit will rise to $4.5bn, while the total foreign debt that needs to be paid in 2009 is $45.6bn, equivalent to 157% of Ukraine’s international hard currency reserves. Andrew Colquhoun, the director of sovereigns group at Fitch Ratings, said that clearly Ukraine will not be able to meet these payments unless it can raise some external financing.  With steel exports falling and the compensatory inflow of foreign direct investment (FDI) also slowing, balancing the current account has become a major challenge going forward. FDI in Ukraine in 2008 is projected at $8bn-9bn and in 2009 at over $5bn, said the NBU’s Oleksandr Savchenko.  BANKS  Ukraine’s fast growing bank sector came close to collapse and the rescue measures are likely to have far reaching consequences on the whole sector.  “The government received the right to borrow money in foreign currency on the local market and use government bonds to buy troubled banks [as part of its new crisis powers]. These, alongside the increase in the state fund guarantee for deposits from UAH50,000 to UAH150,000 (covering 99% of individual accounts) and the increase in refinancing activities by the NBU are meant to secure overall banking system stability, which is likely to go through a period of large-scale evolutionary changes,” say analysts at Erste. “The IMF and Ukraine have effectively agreed on driving further consolidation in the banking sector. Even with minimum capital requirements twice those in Europe, Ukraine has some 170 banks, a number that could fall by as much as 30% in 2009 and 2010.”  An attempt to rescue the troubled Prominvestbank seems to have failed and is likely to be nationalised. The whole sector should enter a period of consolidation running into 2009.  EQUITY  After equity prices rose 136% in 2007, the Ukrainian equity market lost nearly 80% in 2008, wiping out all the gains for the last several years in the process. By the start of 2009, Ukraine was one of the cheapest markets in the world in terms of P/E ratios. Only Russia is cheaper.  “Ukraine’s premiums over Russia are justified in our view, as the Ukrainian economy is to a large extent hedged against decreasing commodity prices,” explain analysts at Galt & Taggart. “The country is a large net importer of hydrocarbons, which impact directly on production costs for energy-intensive Ukrainian industries. We believe any potential natural gas price hike in 2009 is more likely to be symbolic. Despite Gazprom’s fear-mongering rhetoric, reference prices are falling and Ukraine holds the transit and storage keys to the bulk of Russian gas exports to Europe. In addition, a bottom-up inspection offers a number of national champions like Enakievo Steel and Ukrsotsbank, among others, which have some of the lowest valuations in their Eastern European peer groups.”  But comparisons to Russia are of limited value due to the vast difference in the size of the markets. Daily trading volumes on the Russian markets are in the billions of dollars whereas in Ukraine the volumes have crashed from between $30m-60m down to about $1m a day as of the end of 2008. Such tiny liquidity makes prices extremely susceptible to shocks.  “Given the liquidity and volatility issues are likely to plague the Ukrainian market until the world finds answers to the financial upheaval, we recommend investors look at shares traded abroad, namely London and Warsaw. Liquidity on those markets remains better than on the local market due to stricter disclosure requirements, better market infrastructure and the presence of ‘quality’ long-term investors. For all intents and purposes, the Ukrainian agricultural sector is represented only on foreign bourses and we see the sector as a solid performer in uncertain times,” says G&T.

Technorati Tags: MBS Ltd., fiscal policy, commodity prices, Galt & Taggart, natural gas prices, Gazprom, Romania, Hungary, Poland, equity, P/E ratios, Prominvestbank, Oleksandr Savchenko, bank sector, Andrew Colquhoun, Fitch Ratings, foreign direct investment, FDI, current account deficit, foreign debt, Russia, NBU, inflation, domestic prices, slowdown, recession, economic growth, monetary policy, budget planning, Maryan Zablotskyy, economic cycle, GDP, steel prices, external trade, World Trade Organization, Erste Bank Ukraine, foreign exchange reserves, International Monetary Fund, IMF, instability, East Europe, National Bank of Ukraine, Anton Olff, retail sector, reforms, hryvnia, U.S. dollar, depreciation, privatiziations, www.businessneweurope.eu, Ukraine, economy,

As we have been reporting on this space, the Russian and Ukrainian currencies have been declining along with their economies. While Russia has been able to stave off a complete collapse due to the foreign currency reserves it holds, it is only a matter of time before the ruble descends to much lower levels.

For now though, the Russian Government has managed a slower depreciation. When the foreign reserves decline further, and oil & gas prices continue their current trend, capital flight will accelerate in 2009. This will force the ruble lower. 

For Ukraine there are fewer options. No cash reserves or oil resources means that Ukraine is subject to the whims of a volatile market in crisis. The recent emergency loan from the International Monetary Fund (IMF) to Ukraine stabilized the markets here to a great extent, but the real stabilization will come when the market hits bottom and government reforms. The loan from the IMF in fact, was contigent on reforms. 

As for 0900 this morning of Friday the 19th of December, the Ukrainain currency-the hyrvnia (UAH) is selling at 7 to 1 U.S. dollar at local kiosks here in Odessa. Yesterday it was at 10 to 1 U.S. dollar.

As we have mentioned in an earlier post on this blog, it is a seasonal ritual.  During the holiday season or summer tourist season, the Ukrainian Government shores up the hryvnia against foreign currencies. This past summer for example, the hryvnia was at 4.6 to 1 U.S. dollar. As soon as the tourists departed, it went back up to the 5 to 1 U.S. dollar rate where it had been averaging for the past several years in a tight trading range or “peg.”

In the end, neither the Russian or Ukrainian Governments will not be able to over-rule the markets.

Technorati Tags: Russia, Ukraine, U.S. dollar, Anton Olff, currencies, Odessa, ruble, hyrvnia, UAH, International Monetary Fund, IMF, economy, foreign reserves, foreign currency, Russian Government, depreciation, oil, gas, capital flight,

Although this article from the Russian News & Information Agency at www.en.rian.ru states that money will make its way to Switzerland and Cyprus. OOPS!! They don’t actually say that…but wherever it winds up, it will not be in Russia.

We believe that capital outflows will be higher than $90 billion if the crisis continues. On the other hand, much of this capital will eventually return to the Russia when the crisis passes as investors see beyond the current mess to burgeoning opportunities in this emerging market.

MOSCOW, December 18 (RIA Novosti) - Capital outflow from Russia is expected to continue, and hit $90-91 billion next year, a deputy economics minister said on Thursday.

Andrei Klepach said Russia’s international reserves are expected to decline $110-140 billion amid the ongoing global financial crisis, but remain above $300 billion.

Russia’s Central Bank announced on Thursday that its international reserves, which hold foreign exchange and gold, stood at $435.4 billion as of December 12, down $1.6 billion against $437 billion on December 5.

International reserves declined $28.9 billion in November, $71.5 billion in October, $25.6 billion in September and $14.3 billion in August. The reserves had been increasing in the months prior to August.

Inflation in Russia in 2009 could drop to 10-12% from the economics ministry’s revised 2008 forecast of 13.4%, Klepach said.

Russia is expected to keep its foreign trade balance favorable at $18 billion, with $303 billion in exports and $283 billion in imports, Klepach said.

In its macroeconomic forecast for next year, the ministry also said that crude exports from Russia were expected to decline 3.8%, year-on-year, in 2009 to 235 million metric tons (1.7 billion barrels).

Natural gas exports from Russia are expected to grow from 203 billion cubic meters in 2008 to 208 billion cubic meters in 2009, the ministry said.

Russia’s oil production is expected to decline 1.6%, year-on-year, in 2009 to 480 million metric tons (3.5 billion barrels) while natural gas output is likely to increase 0.7% to 670 billion cubic meters, the economics ministry said.

Technorati Tags: Russia, Andrei Klepach, natural gas, oil production, natural gas, inflation, foreign trade balance, international reserves, global financial crisis, Russian Central Bank, foreign exchange, gold, Moscow, RIA Novosti, Russian News & Information Agency, www.en.rian.ru, Anton Olff, Switzerland, Cyprus, capital outflows, emerging markket,

As a resident of Odessa, I can attest to the fear out there regarding the free fall of the hryvnia.  People are downright scared and the empty stores, restaurants and cafes indicate they are not spending.

As this article from www.unian.net states, it is extremely difficult to get dollars and euros at banks or kiosks.

On a positive note, this could force the Ukrainian Government to enact needed changes which were put off during better times. After the crisis recedes, and with economic reforms, Ukraine will be at the forefront of emerging markets.

Panic as Ukraine’s currency plummets

The national currency of Ukraine, whose pro-West government wants to join the European Union, has almost halved in value in the last six months, prompting panic amongst its heavily indebted population.
The sudden fall in the hryvnia has sent Ukrainians rushing to exchange booths to change local money for hard currency, in scenes that recalled the hyperinflation suffered by the country in the early 1990s.
Not only do Ukrainian consumers have to pay back loans taken out in more prosperous times but many will also have to pay them back in dollars.

The hryvnia (UAH) was on Friday trading at 7.49 UAH against the dollar compared with 5.05 UAH at the beginning of the year and 4.84 UAH in July.

The National Bank of Ukraine has allowed the hryvnia to trade freely in line with the conditions of a 16.4-billion-dollar (12.8 billion euro) IMF loan aimed at helping the country through the financial crisis.
The hyrvnia — a currency introduced in 1996 and named after money used in ancient Kiev — has endured the ignominy of suffering one of the worst devaluations, along with the Icelandic krona, in the global financial crisis.

“I consider myself a cultivated gentleman. But at the moment I`m thinking of taking petrol and a lighter and setting the National Bank of Ukraine on fire,” said Egor Sobolev, a journalist who owes 60,000 dollars for his flat.

“We are paid in hryvnia and for the moment our family budget allows us to make monthly payments of 1,000 dollars, but if the hyrvnia falls to 10 or 15 to the dollar the Bank has a big chance of going up in flames!”

As of December 1, Ukrainian consumers had notched up debts of 235.5 billion hryvnia (31 billion dollars) some 70 percent of which (176 billion hryvnia or 23 billion dollars) has been taken out in foreign currency.

Dollars and euros were almost impossible to buy in banks and exchange offices in Ukraine in November as people flocked to trade their hyrvnia for stronger currencies.

The growth in hryvnia-denominated bank deposits was replaced in October by an outflow amounting to 10 percent of investments.

The panic reached a peak earlier this month when a newspaper reported that all dollar bank savings could be converted into hryvnias, a rumour vehemently denied by the authorities.

“Savers can only feel that they have been duped and have reason to be scared of similar surprises in the future,” said the Dzerkalo Tyjnia weekly.

“Who is going to answer for for the devastation of entire layers of Ukrainian society?”

President Viktor Yuschchenko oversaw the currency`s introduction when he was working as head of the central bank in the 1990s.

Ukraine has been among the countries hardest hit by financial turmoil as the plunging price of steel, the country`s main export, has exacerbated a credit crunch and a sharp fall in stock prices.

Underlining the country`s difficulties, Ukrainian industrial production is in freefall, crashing 15.2 percent in November compared to the previous month and 28.6 percent compared to November 2007.

Metals output in November was 23.5 percent lower than in October and a whopping 48.8 percent lower than the same figure for November 2007.

Out of the three major economies of the former Soviet Union — Kazakhstan, Russia and Ukraine — Ukraine is to see the sharpest slowdown, analysts at UBS said in a bleak research note.

“Ukraine will see the sharpest slowdown among the three countries despite support from the IMF. Its currency will have to devalue given that it has the worst net international asset position,” the UBS analysts said.

But they added that with the conditions of the IMF loan there is a “good chance” that Ukraine might finally start implementing the reforms that it had put off for 10 years.

Technorati Tags: Odessa, Ukraine, hryvnia, www.unian.net, Anton Olff, dollars, euros, Ukrainian Government, economic crisis, European Union, consumers, National Bank of Ukraine, UAH, Kiev, devaluations, Icelandic krona, Egor Sobolev, Dzerkalo Tyjnia, Viktor Yuschenko, stell, credit crunch, industrial production, Soviet Union, Russia, Kazakhstan, IMF, reforms

The short term outlook for foreign investment in Ukraine is not positive. As this assessment by Oxford Analytica on www.forbes.com indicates, this is partially due to the continued slide of the hryvnia as well as the inability of the Ukrainian Government and Central Bank to intervene successfully on a consistent basis.

As this article hints, foreign currency controls may be imposed. This will almost crimp foreign investment and trade to an even greater extent.

Global Financial Crisis

Ukraine: Currency Slide Stalls Foreign Investment

Oxford Analytica, 12.11.08, 06:00 AM EST

Sporadic, counter-productive market interventions could reignite liquidity problems.

Newly elected parliamentary Speaker Volodymyr Lytvyn announced yesterday that Prime Minister Yulia Tymoshenko and President Viktor Yushchenko would reform their fractious governing coalition. Lytvyn’s selection as speaker will help break Ukraine’s legislative deadlock, but it remains uncertain whether Yushchenko and Tymoshenko can cobble together a functioning government.

One of the most critical challenges the authorities face is the severe devaluation of the hryvnia, which has fallen to all-time lows against major foreign currencies in the last two months. Furthermore, Ukraine’s domestic currency markets are now experiencing the worst deficit of foreign currency since the regional financial crisis of the late 1990s.

Questionable Policies?
Given the extent of the ongoing currency devaluation, it is hardly surprising that the wisdom of the central bank’s policies has been widely questioned.

–Sporadic market interventions.Rising devaluation pressures have prompted the National Bank of Ukraine to resume its active presence on the wholesale currency market. Earlier in the year–and especially in the aftermath of the most recent one-off currency revaluation in May–the bank clearly preferred to keep its presence at the minimum needed to ensure nominal currency stability. However, in the ensuing crisis, the NBU took its time in responding to the changing currency situation; it was not until early October that the first large-scale interventions were actually conducted.

Even then, such interventions proved surprisingly sporadic, and were only able to temporarily slow, not prevent, the devaluation. Moreover, after having spent as much as $6.6 billion in foreign reserves in October to support the hryvnia, the NBU sharply scaled back its spending in November to around 2.2 billion dollars.

Apart from obvious concern over the rapid depletion of foreign reserves, the drawdown apparently reflected the bank’s belief that it could still retreat to the very last “line of defense” for the currency. NBU chief adviser Valery Litvitski has suggested that it will now defend the current trading rate with all the resources at its disposal.

–Counter-productive refinancing. The NBU has also had to increase its financial aid to domestic commercial banks, many–if not all–of which have been suffering from the financial crisis. In November, the NBU provided just over 35 billion hryvnia in loans to commercial banks, up from approximately 30 billion in the previous month. By comparison, the cumulative volume of refinancing in the first nine months of 2008 amounted to 63 billion.

However, the NBU has either failed or neglected to properly control recipient banks’ use of such resources. As a result, rather than being subsequently lent to the real economy, most of the hryvnia-denominated resources obtained in the last three months have found their way to the currency market, only exacerbating devaluation pressures. It is mainly for this reason that Yushchenko has recently chosen to publicly criticize the NBU’s overall handling of the raging currency crisis.

Outlook 
Although the latest trading week saw the market rate essentially stalling at a ceiling of 7.5 hryvnia per dollar, this may well be a temporary point in the hryvnia’s downward slide. Decreasing foreign investment inflows, compressed external borrowing and falling export revenue mean any firm stabilization of the currency will come slowly.

Furthermore, additional short-term factors threaten to delay the stabilization–of particular concern is state holding company Naftohaz’s planned foreign currency purchases to repay debt owed for

In any case, the NBU is likely to face difficulties in fulfilling its freshly declared task of preserving the hryvnia. In terms of possible market interventions, the regulator is constrained by the International Monetary Fund’s requirement that it hold no less than $26.7 billion in net foreign reserves by the end of 2008–a condition attached to the $16.4 billion loan Ukraine recently received.

As of December, gross reserves stood at $32.7 billion. Should the NBU be forced to focus on reducing foreign currency demand by purely monetary methods, restrictions will almost certainly reignite liquidity problems. This could exacerbate the real economy’s deterioration.

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Although this article in the Wall Street Journal (www.wsj.com)  is about a so-called “trend,” taking place in the United States due to the financial crisis, it is really old news for those who live and work in emerging markets.  Keeping money someplace other than a bank is normal in Ukraine, as well as Russia.  

China-which has seen the biggest growth of any economy in the last 30 years and has a more developed banking system, insurance (private…and nothing like the Federal Deposit Insurance Corporation in the USA), annuities, as well as brokerage accounts- money is literally stored in the mattress…or nearby… by a majority of people.

Mistrust of government and financial institutions particularly, is deeply ingrained in Chinese as well as other Asian cultures. Numerous financial panics throughout Chinese history may have something to do with it. The Chinese are big savers as a result.

By some estimates, the average Chinese person saves almost 40% of their income. This is true whether they reside in mainland China, Hong Kong or Taiwan or have migrated elsewhere. This thrift is also a contributing factor to the huge amount of foreign currency reserves that the Chinese Government can draw upon. “Mattress savers” make bank deposits too…at least in China.

Actually, for Americans…what is “new”, is also old. Our parents and grandparents were savers. They did not have credit cards, overdraft protection for their checking accounts, and were frugal due to memories-real or indirect-of the Great Depression. Interesting that my generation is re-learning what we used to dismiss as quaint stories from a bygone era.

By MARK PENN

With E. Kinney Zalesne

As the financial crisis swept across the nation these past few months, one of the first microtrend groups to emerge is the New Mattress Stuffers — people who have lost their trust in the financial world, and are preparing for the next meltdown.

Just as 9/11 created a vast industry in building security, so the recession could create a big industry in personal financial security — a new kind of survival kit. New Mattress Stuffers don’t care about the 10% interest rate on GE preferred stock that Warren Buffett snapped up; they care about making it through if hard times get even worse. As a result, firms which can offer ironclad guarantees of safety will appeal to this new group. These are people who have lost their faith in the housing market, the stock market, their bank, their big corporate employer, their auto company, and their last president. What is left but themselves? 

Forget about huge, sweeping megaforces. The biggest trends today are micro: small, under-the-radar patterns of behavior which take on real power when propelled by modern communications and an increasingly independent-minded population. In the U.S., one percent of the nation, or three million people, can create new markets for a business, spark a social movement, or produce political change. This column is about identifying these important new niches, and acting on that knowledge.

In the old days, Mattress Stuffers literally hid all their assets in their homes — construction crews today are still discovering tin cans of cash in walls hidden 75 years ago by people who died without having told anyone about their nest eggs. The New Mattress Stuffers aren’t crotchety misers, though — they’re active Baby Boomers who, until just a few months ago, were heading happily into their 60s with inflated assets, unlimited second-job opportunities, and IRAs crammed full of stocks.

Now, the shocks they are feeling are taking them into strange and uncharted territory. Most Americans are so far removed from holding physical assets that their first reaction is to stuff their money into Treasury Bills instead of into a tin can. But there are other ways they can calm themselves.

The price of gold is down as hedge funds unwind their positions, but the sale of gold coins is up — because New Mattress Stuffers are stockpiling them for themselves and their children. And this was happening even before the crisis hit in full force. Between May and September of this year alone, sales of U.S. Mint gold coins grew by more than 600 percent. Over one million coins have been sold so far this year.

While almost every company in America is seeing a downturn, sales of home safes and vaults are surging. Sales of guns this year are up 8 to 10 percent.

And cash is the new plastic. Our own just-completed Holiday Spending Survey shows that most Americans are going to use more cash and charge less on their credit cards than in the past. Although most of us have lived in a plastic world so long we can barely remember people like my dad who carried around wads of bills, Americans are now seeing the first real dip in credit card sales in decades. Fear of credit and credit cards is a renewed emotion.

To take advantage of these trends, some of the dying post offices might want to open spots for safe deposit boxes instead of P.O. boxes. Investment advisers may start talking about return of your money instead of return on your money. And jewelers may start to tell you to “don’t forget to stash away a diamond or two.”

If the post-war economic expansion brought us the baby boom, this crisis may bring us a baby squeeze — a sharp reduction in births nine months from now, as refraining from having kids is the ultimate consumer pull-back. And instead of staying home, the evidence shows that more couples are going to the movies, with attendance up for this relatively low-cost evening.

People don’t talk much about their mattress-stuffing behavior. It kind of defeats the purpose if you tell people where your stash is. But there’s a hunger out there for security hedges — a gun, some cash, a little gold, a small safe in the bedroom — in case all the ATMs suddenly shut down. The TV shopping channels could be hawking that “Safe Haven” combination right now, a complete home solution.

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Some of my associates have asked me why I have not posted any news about the recent reformation of the Orange Coalition within the Ukrainian Government.  Well…to be honest, I did read the news with some delight. It is not that I am a supporter of any political faction. On the contrary, my focus is business…and business craves stability and predictabilty.  The financial crisis has forced political rivals to set aside their differences and come together and address the problems facing Ukraine. MAYBE.

I hate to sound like Machiavelli here, but is there anyone out there who believes that this grand alliance will be nothing more than temporary? There are “no permanent allies, only permanent interests” to paraphrase the Renaissance philosopher.  Human nature being what it is-and it is a spectacle to behold-is not about to change because a few politicians have sheathed their metaphoric swords and embraced each other.

Ultimately, Ukraine will be stabilize when its politicians realize that they can benefit more from that stability, even if it means that they have to temper their personal ambitions to the greater good. This could come as a result of crisis, or it could come when Ukraine grows-and it will continue to do that-to the point when its politics have evolved. So far…and to its credit…Ukraine has not devolved to a command and control economy, nor has the democratic political trajectory been altered.

The bottom line for many of us who live, work and invest in Ukraine is that things will improve over the long term. Ukraine is in fact, more advanced than many of her critics want to admit-including some Western Europeans who recently used this to deny a road map to NATO.

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