“Best kept secret in Europe!”  That is the cornerstone behind the founding of MBS Ltd.  Our philosophy is that we can help companies navigate and mitigate the pitfalls and obstacles of doing business here, to take advantage of the many opportunities. This requires vision, and a LONG TERM perspective. For those individuals and companies that have that, the rewards will be great as Ukraine is a “virgin” market, untapped and ready to be reshaped.

We believe Ukraine will at some point, break free from current restraints and “leap frog” over many of its more developed neighbors like Poland. With MBS Ltd. and very soon BOZONGO.COM, investors and entrepreneurs will have the tools they need to realize their goals here.

Hard-Core Investors Staying Put Despite Endless Crises

KIEV, Ukraine — Weak competition, high profits still make nation a promised land for some businesses. No matter what Ukraine throws at them, a small, hard-core group of foreign investors – from giant multinational corporations to lone expatriates – weathers the turbulence.

A conveyor line at the Trostyanets chocolate factory in Sumy Oblast, the biggest Kraft Foods factory in Ukraine.

They stay through crisis and boom times, “blue” and “orange” politicians, a hryvnia worth 4.6 to the dollar and a national currency that trades closer to 10.

They stay put when other foreigners get scared away by headlines of rampant corruption, a sea of bureaucratic red tape and political chaos. Who are these determined businesspeople? Do they make a lot of money here? If so, how do they manage to swim in Ukraine’s muddy waters?

“Ukraine is the best kept secret in Europe,” insisted George Logush, vice president of Kraft Foods International and area director for Ukraine, Eastern Europe and Central Asia. “The European media did a wonderful job, focusing on negative things and rarely showing positive aspects. [To them, I say]: ‘Thank you for sheltering this market for us from the competitors.”

Kraft Foods Ukraine is part of Kraft Foods, the world’s second-largest food and beverage company. It is one of the most successful investors in Ukraine, known by Ukrainians for Korona and Milka chocolate, Jacobs coffee, Lux potato chips, holding a leading position in all three categories. In 14 years, Kraft invested more than $150 million into Ukraine’s economy and increased its business by 100 percent, Logush said, a feat that “would not be possible in very many countries.” Today, the Kraft group boasts annual revenue in Ukraine of about $400 million on domestically-produced products, and more on imports, such as coffee.

The company arrived in 1995, when the economy was still reeling from the collapse of the Soviet Union four years earlier. The hryvnia, the new national currency, had not yet arrived. In its place, until 1996, Ukrainians used the karbovanets, a coupon-like form of payments.

One of the keys to Kraft’s success, Logush said, has been the company’s ability to take advantage of hard times to introduce new product lines. “Now we launch biscuits,” Logush said. “Crisis is the time when you can shake up the established order, because it’s being shaken anyway.”

Yet Kraft remains one of a relatively small number of multinational corporations and foreign investors who have ventured into Ukraine, a vast and largely untapped market of 46 million citizens.

The nation has attracted a mere $35 billion in foreign investment since independence. By comparison, nearly $200 billion has poured into neighboring Poland, a European Union member with eight million fewer citizens than Ukraine, since the Soviet Union’s collapse.

Many investors have stayed out because of corruption, red tape and political squabbles between ex-Prime Minister Victor Yanukovych’s “blue” forces and the “orange” ones led by the now-dissolved alliance of President Victor Yushchenko and Prime Minister Yulia Tymoshenko.

Jorge Zukoski, president of the American Chamber of Commerce, said Kraft’s success is shared by many foreign investors brave enough to tiptoe into the market. They stay, Zukoski said, because they’re generating higher profits than they might in other nations. By establishing themselves first, companies such as Kraft grew fast, faced limited competition and can look forward to high growth rates ahead.

Zukoski said it helps to be in a place for the long run.

“At the end of the day, the large strategic and institutional investors that we represent see the current global financial crisis as a short-term blip on the radar screen. They look at Ukraine as a 50- to 75-year play and understand that there are very few countries left in the world that have the potential to drive future growth for their companies.” Despite the challenges and difficulties, chamber members keep striving for a Ukraine that is “competitive and well-positioned when global growth resumes,” Zukoski said.

But for some investors, the headaches of doing business in Ukraine are simply too much. And, while normal economic cycles are manageable, sometimes Ukraine’s off-the-charts corruption is not.

“The crisis did not affect our business in Ukraine as much as the corruption,” said Hanan Mor, owner of an investment company, in an interview with Israel’s Calcalist newspaper. “That is why we are stopping any business initiatives in this country.”

But the cheerleading and individual success stories cannot hide the fact that, by many measures, Ukraine’s business climate remains unfavorable. The list of grievances is long: unstable legislation, corruption, red tape, non-transparent taxation system, raider attacks, abuse of intellectual property and auctioneer rights.

Politicians are aware of the problems, even if they seem unwilling or unable to improve the situation. As parliamentarian Nataliya Korolevska told an investors’ conference in February: “As the world investment capital reaches $1.5 trillion, Ukraine has to do everything to participate in the process under competitive terms.”

Hard-core investors say instability is part of the game.

“I’ve been here for 15 years and this country has never been stable. I wouldn’t advise anybody to stay out of Ukraine, just because they want to wait for the next election,” said Glen Willard, a 15-year business veteran in Ukraine and founder of Willard, an advertising and public relations company.

Willard admitted that the worst part of doing business in Ukraine is its unpredictability. “Other than that, business is not easy anytime, anywhere,” Willard said: “So just get over it.”

Kraft’s Logush also said Ukraine is not for the squeamish.

“If you need to find an excuse to leave the country, you’ll find it,” Logush said. “Particularly, in terms of political instability, I think people are just extremely shortsighted and purposely blind. How long has democracy been in Ukraine?”

American businessman Paul Waters is one of hundreds of expatriates who have thrived on the Ukrainian market. Since arriving 17 years ago, Waters appears to have done a little bit of everything in Ukraine and he has no intention of leaving. From steel trading to the construction business, software and solar panel systems development, Waters said that “Ukraine has been very kind to me. I could be sitting on my boat in California fishing. But in Ukraine, I am enjoying everything. It’s not a Disneyland, it is real,” Waters said.

Waters did, however, confess that it took him awhile to get accepted. He also was cheated several times by Ukrainian partners.

“When I arrived, there were all these Soviet bosses, running businesses and, certainly, they were not as open to our ideas,” Waters said. Ukrainian companies still lack efficient administrators, but they have plenty of highly educated people, computer wizards and other professional standouts to choose from, according to Waters.

Seasoned foreign investors have had success in the financial, insurance and telecommunication sectors, as well as food production and construction, according to Konstantin Stepanov, chief analyst at Sokrat investment group.

The leading individual foreign direct investment in Ukraine’s all-important metal sector came from the $4.8 billion re-sale of the former Kryvorizhstal steel mill in Kryviy Rih, the nation’s largest steelmaker, to ArcelorMittal Steel in 2005. The sale followed a scandalous purchase by a group led by Ukrainian billionaires Rinat Akhmetov and Victor Pinchuk, who bought the steel mill for six times less than what ArcelorMittal, the world’s largest steel company, paid in an open auction.

So, 18 years after independence, Ukraine still represents a big gamble with big potential payoffs – and terrible downsides. It’s a high-risk, high-reward game, Logush admitted. But many are betting that emerging economies will get out of the crisis more quickly than developed ones.

“Which of them will [foreign investors] gamble on first? The ones with the greatest multiplier effect, the largest scales, like China and Brazil. But they always want to spread the risks,” Logush said. “I think those who’ll go into the Ukrainian economy will do very well.”

(from the Kyiv Post)

“We must be a non-aligned state. We have to learn to live independently,” he said at a meeting with citizens of the town of Hadiach in Poltava region on Tuesday.

According to the head of the parliament, the question of whether Ukraine should join NATO or not NATO could be a source of conflict in the country.

The position of the people must be taken into account, and most of them oppose Ukraine’s joining NATO, Lytvyn added.

At the same time, he noted that the question on Ukraine’s joining the North Atlantic alliance is not a primary issue now.

(from Interfax)

The World Bank has also revised their economic outlook for Ukraine…and it is not very positive.

“Ukraine’s faltering economy will plunge into a deep recession and shrink by 9 percent this year, far worse than previously expected, according to the World Bank”

After nearly a decade of robust growth, the economy is being hit hard by the deterioration of the global economy and the national government’s failure to implement anti-crisis measures, the Bank said in a statement.

Inflation will hit 16.4 percent this year, better than last year’s 22.3 percent but still very high.

In December, the Bank had forecast that Ukraine’s economy would shrink by 4 percent and projected inflation at 13.6 percent. The International Monetary Fund expects the economy to contract by at least 6 percent this year.

Those estimates contradict sharply with government expectations of 0.4 percent growth and 9.5 inflation this year, which many analysts dismiss as unrealistic.

Ukraine’s economic crisis is one of the worst in Europe. Industrial output slumped by 32 percent in January and February compared with a year ago, and output in the construction industry dropped by 57 percent during that period, according to the World Bank.

The national currency, the hryvna, has lost about 40 percent of its value to the dollar since the crisis hit last fall.

Furthermore, constant political turmoil has worsened the effect of the global crisis on Ukraine by stalling the implementation of key anti-crisis policies.

The IMF withheld the second tranche of an emergency $16.4 billion loan this year after the government failed to trim spending and adopt other stabilization measures.

(from AP)

Ms. Tymoshenko feels Eastern Europe is “cast adrift.” She looks to France for leadership to push through a new free trade accord with Europe (and cash, too). Free trade is, of course, critical to the success of Ukraine, but free trade is more than just allowing foreign products to be sold domestically without unfair import duties. Free trade is also about making it easier to do business at home for both domestic and foreign companies. Kyiv must create a fair and level playing field for all businesses to compete. This job requires in the utmost transparency in markets and regulatory decisions and an end to the rampant corruption that stymies entry to the Ukrainian market for all but the largest and most powerful corporations — and those willing and able to pay bribes.

If Kyiv wants the rest of the world to take it seriously, it must first put its own house in order. The country remains sealed in a post-Perestroika cocoon awaiting rebirth and neither France nor any other country has an appropriate vision for breaking Ukraine out of its nascent state. A new vision for Ukraine must come from within via a new domestic debate. We at MBS only hope that vision will be one of neutrality in foreign relations and greater freedom for all Ukrainians. From our perspective, the enormous potential of Ukraine can only be unlocked by what Karl Popper called an “open society” that recreates a “country of laws and not of men” as Thomas Jefferson commanded of a new America. Such a reality must not be fantasy, but civil society in Ukraine has a long way to go. The first step is a new attitude from Ukrainian society and some sort of “born again” experience by leaders in Kyiv. Recent cuts in politicians’ wages are a start. Perhaps real reforms can only come from Ms. Tymoshenko’s successor as she clearly misses the boat here. Without a new debate, the future of Eastern Europe’s wobbling domino is lost in uncertainty.  Although the situation may seem dire, there is hope.  The world is looking for a new haven for freedom and liberty.  Why not Ukraine?

(more…)

There is a mad scramble for capital now. People are looking for loans from banks. The banks are looking for loans from governments. Governments are looking for loans from each other and eventually governments will have to get the money from their citizens…

Eastern Europe has been especially hard hit. It will interesting to see if nations in the European Union-who have the largest share of foreign investment in Eastern European emerging markets-will come to the rescue. With limited resources, and their own credit and banking problems, European nations are going to have a bit of trouble loaning to Eastern Europeans, especially when their own populations are also suffering.

If the situation in Eastern and Central Europe worsens however-and that is the expectation at this point-then Western Europe could be forced to help since the geo-political repercussions would be quite negative.

this from the Associated Press:

Ukraine seeks euro500 mln from EBRD

Ukrainian President Viktor Yushchenko on Wednesday met with the chief of the European Bank for Reconstruction and Development amid efforts to secure a euro500 million investment package to rescue this ex-Soviet republic`s devastated economy, AP reported.

The bank is considering investing the money into recapitalizing some Ukrainian banks, shaken by the global credit crunch and a confidence crisis. Three Ukrainian banks have been put in receivership and another one has been sold to a Russian institution after being taken over by the central bank.

The economy is struggling to stay afloat after the International Monetary Fund withheld a key second tranche of a $16.4 loan over a failure to meet loan obligations earlier this month, prompting Kiev to turn to G-7 members and Russia for aid.

The loan problems led the international rating agency Fitch to downgrade Ukraine`s ratings, while another agency, Standard and Poor`s, threatened a similar move.

The IMF said Ukraine had failed to cut government spending and reconsidering this year`s budget, as had been agreed on. Finance Minister Viktor Pynzenyk resigned last week in a row with Prime Minister Yulia Tymoshenko over the same concerns.

Yushchenko told EBRD President Thomas Mirow that a failure to receive the expected $12 bln in aid from the IMF this year could severely hurt the economy and that is why Ukraine was turning to the EBRD for help.

“The situation is complicated,” Yushchenko told Mirow, according to the Interfax news agency.

Industrial output slumped by a staggering 34.1 percent in January, year-over-year, in what officials said was the biggest fall in the country`s history.

The national currency, the hryvna, has lost 40 percent of its value since last fall, due to a drastic fall in exports.

The crisis, coupled with a higher gas bill from Russia has also led to gas shortages in the eastern city of Dnipropetrovsk and the southern Crimea peninsula. Officials said, however, that hot water and heating supplies had been restored in most households in those regions by Wednesday morning.

Technorati Tags: capital, loans, Europe, Ukraine, Russia, Anton Olff, MBS Ltd., Eastern Europe, Central Europe, Associated Press, President Viktor Yushchenko, European Bank for Reconstruction and Development, EBRD, Soviet Union, recapitalization, global credit crunch, International Monetary Fund, Kiev, G-7, Fitch, Standard & Poors, Yulia Tymoshenko, Viktor Pynzenyk, Thomas Mirow, industrial ouput, hryvna, exports, gas shortages, Dnipropetrovsk, Crimea

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

The unwritten rule regarding the blog here at MBS, Ltd., was that we would focus on macro & micro economic and business issues ONLY. We would not stray into the murky and dangerous waters of politics.

Having stated such, we decided to dive into the political pool (or cesspool?) with this entry. The motivation for this diversion is the topicality and relationship of the subject matter to BUSINESS in emerging markets like Eastern Europe, Russia, Georgia and Ukraine. The subject is NATO.

Nick Witney’s article in the Moscow Times (www.moscowtimes.ru) captures, dissects and congeals the truth like few others have recently.  The fact is, NATO in its current form is an obsolete, expensive and largely political club, where military and security matters are of primary importance mainly to its newest members and aspirants.

The subject of NATO is a divisive issue here in Ukraine, as well as further east.  The inclusion or exclusion of Ukraine and Georgia into the current NATO organization, will affect the economic direction of these nations.

Some argue very coherently, that a byproduct of NATO inclusion is the acceleration of political-or what we could call “philosophic integration” between new members and “the West,” as well as increased trade. The hope among the practitioners of “realpolitik” in the West, is that an expanded NATO will act as a check on Russian, as well as Asian influence and ambitions in Europe.

The main problem with this thesis is that it ignores the weakness of NATO and the shifting alliances that have resulted.

Anton Olff

Technorati Tags: MBS, Ltd., EU, Turkey, Moscow Times, Nick Witney, Winston Churchill, Charles de Gaulle, Barack Obama, Cyprus, Warsaw Pact, Serbia, Slobodan Milosevic, Kosovo, Afghanistan, ethnic cleansing, realpolitik, Asian influence, security, trade, economic integration, Business, Europe, Georgia, Russia, Ukraine, Eastern Europe, NATO,

Economics has often been called the “dismal science.”  Having known many economists in my past life working as a wage slave in the corporate world, I can say that it was not the “science” that was necessarily dismal, but the practitioners. This is especially true these days. The same economists that were saying “the fundamentals” of the Global Economy were sound 6 months ago, are now in the doom and gloom mode. In  other words, it is not going to just rain…but rain for 40 days and 40 nights!! 

A person of means and resources might want to start building an ark…or maybe just buy gold bullion and store it in a bank vault in Switzerland…but the rest of us will have to learn to swim in some very deep water (or in sewage) if the deluge comes.

The Nostradamuses of our age…Gerald Celente for example, is predicting Depression II, another American Revolution with widespread tax riots in the United States by 2012. Certainly, it is a possibilty given the recent riots in Iceland. However, those of us with a eye for opportunities (entrepreneurs, shameless exploiters and capitalists) know that would be an excellent time to own a factory making Ronald Reagan AND Che Guevara t-shirts. 

….and what is the current forecast? Well…it depends on whom you ask. Most of the data out there suggests that the economies of the developed world will not be growing at all…but NOT the emerging market economies. According to the European Bank of Reconstruction and Development (EBRD), Russia is projected to grow at over 3% versus the 7.3% it had been prior to the Global Meltdown (and declining oil prices).  Indeed, most of Eastern and Central Europe will see positive net growth. Whatever the forecast, there will be a lot of pain…but also a lot of long term opportunities.

Bring an umbrella. However, make sure to turn it upside down on occasion as it could be raining “pennies from heaven”

Anton Olff

Technorati Tags: Central Europe, Che Guevara, Depression, Eastern Europe, EBRD, Economics, European Bank of Reconstruction and Development, forecast, Gerald Celente, Global Economy, gold, Iceland, Ronald Reagan, Russia, Switzerland, United States

An in-depth and insightful look at the mortgage market in emerging economies of Central and Eastern Europe (including Russia & Ukraine),  as well as Central Asia by the European Bank for Reconstruction and Development (EBRD).  

In pdf format..a must read for anyone currently investing in real estate or securities in these markets or considering future investment. 

http://ebrd.com/pubs/legal/mit.htm

NOTE: The MBS referred to in this report are Mortgage Backed Securities and not MBS, Ltd. 

Anton Olff