The tension between Europe and Ukraine is increasing on another front. This article at www.unian.net seems to confirm some of the rumours swirling about; Ukraine is threatening to end the visa free regime that Europeans enjoyed over the last several years.  No word on how or if this will affect citizens of the United States or the U.K.

Several years ago, Ukraine broke with the cumbersome and expensive Soviet visa scheme still practiced in Russia. This has brought a small but measurable wave of investment, new business and tourism into Ukraine.

It has certainly made it easier for entrepreneurs to work and develop new businesses here. The continuation would certainly go a long way towards increasing further investment when the global economic crisis eases, and will facilitate an even greater transfer of wealth from West to East.

Many companies in Europe will relocate their manufacturing in the next decade. A positive atmosphere as evidenced by a visa free regime, would help with this process just as a streamlined visa process did in China during the 1990s. This does not take into account the agricultural sector which will see a flood of Euro investment when laws regarding the sale and leasing of land change.

As expats who look towards the future with optimism and hope for even more business and opportunities, let’s hope that this latest threat is merely a negotiation ploy designed to get the attention of bureaucrats in Brussels.

The Ukrainian government is certainly correct about the lack of reciprocity from the EU in terms of visa issues as well as immigration. The EU continues to treat Ukraine more as a threat than as an asset and until this mentality changes within the councils of Europe, Ukraine will have to swallow some pride, be tough and creative with regards to policy, and walk the “tightrope” between the EU and Ukraine’s powerful neighbor to the East.

Ukraine considers re-introducing visas for Europeans soon - official

Kiev, Apr 04, 2009 (BBC Monitoring via COMTEX) – 

Visa-free travels between Ukraine and Europe will be cancelled soon, maybe even before 7 May, the deputy head of the presidential secretariat, representative of the president [Viktor Yushchenko] in the Supreme Council [parliament], Ihor Popov, said in an interview with the Radio Liberty on Saturday [4 April].

“We will cancel visa-free regime with Europe soon and we will benefit from this. This will happen very soon, maybe even before the summit in Prague on 7 May 2009,” Popov said.

He said that “law-enforcement agencies complain that since Europeans come to Ukraine without visas, every three months police catch some kind of a ‘paedophile’ or a ‘maniac’”.

“Entering Ukraine, a foreigner shows a passport on the border, 10 seconds and off he goes. Later it appears that the man should not have been let in. As a result, he is put on the national wanted list since he entered without a visa and is not registered in the database,” Popov said.

Popov also said that this action can “push Europeans to cancellation of visas for us”.

Source: UNIAN news agency, Kiev, in Ukrainian 1843 gmt 4 Apr 09

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

I don’t agree entirely with this article from russiaprofile.org, though I think the author does make some very valid points applicable to both Russia and Ukraine.

The current economic crisis has caused a great deal of hardship and uncertainly for which the respective governments of Russia and Ukraine seem ill equiped to deal with.  The real question will be how people cope? What will they do in the absence of effective actions by their governments?

Revolution is no stranger in Russian history, nor for Ukrainians. However, apathy is also ingrained to a fair degree in the culture as well. Without a fully developed political structure or the means to redress problems, it may only be a matter of how bad things get before apathy is replaced by outrage.

The same could also apply to Europe as the protests in orderly, peaceful Iceland indicate. Indeed the United States may not be immune to radical change if the political process fails to bring about relief.

The soaring rhetoric of newly elected President Obama is already at odds with some of his actions…as the words spoken by Ukrainian leaders during the Orange Revolution days were not matched by deeds.  Apathy may wither rather quickly and replaced with a fervor that will be difficult to supress.

Technorati Tags: apathy, Russia, Ukraine, MBS Ltd., Anton Olff, economic crisis, revolution, protest, culture, Europe, President Obama, Orange Revolution, Shaun Walker, russiaprofile.org, Russian industry, Magnet Mountain, Stephen Kotkin, Magnitogorsk, Soviet Union, monogorod, Urals, Uralasbest, Asbest, asbestos, Vladimir Putin, President Medvedev, Gary Kasparov, The Independent

Standard & Poors has joined Fitch in lowering Ukraine’s rating. The news here is not the new rating. The real story is that the continuing political stalemate in Kyiv. At some point the government will have to change course to respond to the crisis. Options are running out.

This from www.reuters.com:

S&P may cut Ukraine’s ratings on refinancing worries

Standard & Poor`s Ratings Services warned on Monday it could cut the foreign and local sovereign ratings of Ukraine in the next 90 days as it doubts the country`s ability to implement the IMF`s loan agreement, Reuters reported.

S&P said it could cut Ukraine`s B foreign currency rating and B-plus local currency rating by one or more notches. For a full text of the agency`s statement please double-click on [ID:nHKG238893].

“Ukraine`s political commitment to implementing the IMF loan`s conditions, including structural fiscal tightening and banking-system consolidation, is wavering against a backdrop of sharply contracting growth, weakened terms of trade, and approaching presidential elections,” the agency said in a statement.

S&P said it was awaiting the government`s clarification on the IMF programme before deciding on the rating and warned the economy faced refinancing risk because both the government and private sector suffered from a lack of funding sources.

“The near total closure of the external borrowing channel has contributed to a loss of confidence of domestic economic agents in the stability of the exchange rate and the banking system,” S&P said.

It said that as of end-January, Ukraine`s external reserves covered just over 100 percent of this year`s banking sector repayments leaving nothing for corporate obligations, estimated at $9.5 billion. The figure excludes trade financing.

Technorati Tags: www.reuters.com, Standard & Poors, Anton Olff, MBS Ltd., Fitch, Kyiv, Ukraine, IMF,

Whom do you think is more accurate in predicting the future: economists OR astrologists? If I were a betting man, I would go with the astrologists. OK…I know that sounds a bit crazy, but answer this question: have economists been any better about predicting the future?

At least we can laugh a bit when astrologists put on their pointy hats and pontificate. We assume…perhaps correctly so, that there is no real science behind their rants. Why trust economists? If we measured the predictions of many economists and astrologists, we would probably find them about equal in their forecasting abilities.

 At least the prognostications of astrologists can have a comforting effect, since we can realistically believe that stellar, solar and lunar movements control events to a great extent. Economists tend to fixate on their own version of stars as well as theories based upon arcane data that only they know how to decipher.

Shakespeare did point us in the right direction: the fault is not in the stars, but in our selves.

from www.unian.net

Crisis in Ukraine may last for five years – astrologists

Astrologist Olena Kalantarova forecasts that Ukraine will see a year of ordeal, and the crisis in the country will last for not less than five years.

O.Kalantarova disclosed her forecast to “Segodnya” daily (#26 dated February 10, 2009).

“The situation will stabilize more or less late in March-early in April. And May will bring a financial vortex. A critical situation will loom in October, when we may be drawn into an international conflict. A scandal, connected with the President of Ukraine, will happen in this period. Many riots will take place in 2009”, the astrologist unveiled.

Another astrologist, Ihor Syvak, also forecasts a peak of social protests in September and October.

According to Ihor Nikishyn, head of the Ukrainian Astrologic Institute, February and March will be the most critical period for the national currency – hryvnia. “Hryvnia’s value will begin to stabilize in April, but it will again fluctuate in August and early in October”, I.Nikishyn forecasted.

In his opinion, the national currency may finally stabilize by end of year.

“Since end of April, we may also expect for a growth of demand for steel, on which our economics depends. But the growth will take place very slowly”, the astrologist forecasted.

Although there may be gloating on the part of some Russians regarding the fate of their neighbors in Ukraine, this article from Russia Today (ww.russiatoday.com) does reflect the reality here.

As the Ukrainian government goes begging for loans around the World with the IMF holding  back on the next tranche of a promised loan, the hryvnia experiencing new lows daily, and workers being laid off throughout Ukraine, the “crisis” is certainly getting worse. The political stalemate is adding to the pain.

Workers suffer under deepening economic crisis in Ukraine

The economic crisis in Ukraine is escalating, and while the government is pointing fingers at each other, social unrest is growing as people lose their jobs or remain unpaid for months.

The crisis is most visible in the Ukrainian city of Kherson, where more than a thousand workers at a combine harvester factory have not received any wages since September.

“They were forcing us to retire. But I didn’t. Where else do we have to go? It’s the same thing everywhere,” said one disgruntled factory worker.

The average salary here is around $US 200, which is barely enough to make ends meet as prices in Ukraine are growing rapidly.

Aleksandra Tkachenko works at the factory and says that she lives in the fear that tomorrow she’ll have nothing left to be able to feed her family. Her entire family now lives off the pension of Aleksandra’s husband, which is less than $US 100 a month.

Recently, her husband suffered a brain hemorrhage and the strain is taking its toll.

“You can’t imagine what a life we life. I’ve spent half of the pension on medicine for my husband, but that won’t even last till the end of the month,” says Tkachenko.

The owners of the factory say they can’t pay the salaries because the combine harvesters are not being sold. The situation in Kherson is one of the first explosions of public rage in Ukraine over the current economic crisis. Experts claim work at almost all factories and mines in the country is either suspended or under threat.
 
By spring, unemployment is expected to grow by four times, topping almost four million people. The public outcry to the consequences of the economic crisis that is gripping Ukraine is getting louder, as more workers put down their tools to protest. 

Unemployment in Ukraine is soon expected to hit levels not seen since the fall of the Soviet Union. Public opinion indicates that what people want is for the government to stop the infighting and to give them the helping hand they desperately need. The crisis of trust among the country’s political elite isn’t helping the situation either.

The president and the opposition blame the government of Yulia Timoshenko for failing to tackle the crisis, or find the right ways to spend the billions of dollars loaned from the International Monetary fund.

Timoshenko says the government needs more money and fewer obstacles from both the parliament and the president. Her latest move – a request for more loans, including five billion dollars from Russia – has yet again provoked the wrath of the president.

“President Yushchenko says the step undertaken by the government without his knowledge is unacceptable and has obvious signs of corruption,” says Irina Vannikova from the Ukrainian Presidential Administration.

With the president and his government failing to agree upon ways out of the crisis, the country plunges ever deeper into a recession, leaving millions of people without work, and in the fear that they will soon have nothing to put on the table.

OK…it is one thing for Ukraine to send letters begging for money to the USA, the EU, even China…but Russia? What are they thinking in Kyiv? Sure…Russia will loan you the money. They may be running a bit short due to propping up rubles and oligarchs, but they will find some spare cash as they know they will gain considerably from any arrangement.

After all, they promised the Kyrgyz Republic some money too. However, the conditions-regardless of what is officially denied-is that a U.S. base be closed. Imagine what they will demand of Ukraine?

From www.ft.com:

Ukraine pushes for loans to meet shortfall

By Roman Olearchyk in Kiev

Ukraine has appealed for emergency loans from the world’s richest countries to help support its economy, which has been battered by the global financial crisis.

Yulia Tymoshenko, prime minister of Ukraine, said her government had sent letters to the US, Russia, China, Japan and the European Union asking for loans to fill a shortfall in budget revenues for this year.

 “We have already received a positive response from some countries, including Russia,” Ms Tymoshenko said at the Munich Security Conference at the weekend. “Russia is ready to sign such loan agreements.” She did not clarify how much Kiev was seeking to borrow but reports in Ukraine suggested Russia could lend $5bn (€3.9bn, £3.4bn).

Ms Tymoshenko said Ukraine was keen to harmonise relations with Moscow, soured after last month’s gas prices dispute. She insisted Kiev would stick to a western integration agenda that included efforts to join the European Union and Nato.

News that Ukraine was seeking emergency loans amid frozen credit markets comes days after a senior International Monetary Fund delegation warned of “serious problems” brewing in Ukraine’s economy.

The fund delegation ended its one-week visit to Kiev last week but provided no clear signal on whether it would grant further disbursements from a $16.5bn standby facility agreed last year.

Ukraine received a first tranche of $4.5bn last November. Future disbursements depend on the implementation of tough conditions and are needed to keep Ukraine’s currency, the hryvnia, stable. It lost nearly 40 per cent of its value in 2008.

The IMF’s concerns centre on Kiev’s 2009 budget, which has a 3 per cent deficit in spite of a fund stipulation it be deficit-free. It also seeks a freeze on social spending at a time when more than 1m out of a population of 46m have lost their jobs.

Ukraine’s gross domestic product is expected to contract by around 5 per cent this , thus curbing budget revenues, complicating the state’s ability to rescueshaky banks and to provide unemployment benefits.

Ukraine is struggling to tame annual inflation of more than 20 per cent and toadjust to a fourth stiff price rise on natural gas imports from Russia in as manyyears.

The US and other western nations are keen to stabilise Ukraine for geopolitical as well as economic purposes, given its important position in Eastern Europe as a neighbour of Russia.

Technorati Tags: Ukraine, Russia, United States, European Union, China, Kyiv, MBS Ltd., Anton Olff, Kyrgyz Republic, military bases, loans, Roman Olearchyk, global financial crisis, Japan, Munich Security Conference, Yuliya Tymoshenko, Moscow, NATO, International Monetary Fund, hryvnia, gross domestic product, natural gas, geopolitics

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

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.

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