MBS Blog

A few weeks ago, two of my business partners and I traveled by car from Odessa to Western Ukraine. On our way back to Odessa, we decided to stop and see Hitler’s wartime bunker in Vinnitsa, about 150km west of the Ukrainian capital of Kyiv. We had heard that it was more like a Roman ruins, and we were not surprised that there wasn’t much to see in terms of a structure that one could easily identify as a bunker.

What we found were bits and pieces of reinforced concrete in the area, scattered about since the bunker and the surrounding above ground structures were bombed. The actual bunker-called Werewolf-is sealed off. Recently, a team of Russian engineers surveyed it and proclaimed that it is unsafe and cannot be opened to the public since it was mined by retreating Germans. Apparently, live munitions remain in place, though this could be just a canard to keep the curious as well as neo-Nazis out.

The area where the bunker was built looks similar to an alpine forest in Germany. The bunker and barracks complex-which housed an army of SS- was easily concealed from aerial views by the woods. The surrounding fields-beautiful spans of Ukrainian farmland-were ideal for massing tanks and aircraft.

Hitler was transported by air to this command post.  From this vantage point, he directed Operation Barbarossa…the invasion of the Soviet Union…and watched his evil fantasy of “Lebensraum” unfold. Living space for Germans in the vastness of Ukraine and Russia was never realized, though the deaths of millions of Jews and Slavs unfortunately was.

One of the strangest aspects about visiting Hitler’s Bunker, is seeing what it has become: a Ukrainian National Park (see photo of sign below), where families stroll with their young children and couples congregate. Although it is a picturesque area, it is difficult to comprehend why Ukrainians would want to be there, other than to appreciate it’s historical significance. One would think that the death of millions of Ukrainians and Russians at the hands of Nazis who built this bunker for their beloved Fuhrer, would weigh on the minds of those spreading their picnic blankets about.

On the other hand, perhaps a park is a way of turning a negative into a positive? I however, found another form of expression. Before I departed the area where the most physical evidence of the Nazi invasion persists-a large piece of concrete from the bunker structure-I relieved myself on the remains of this edifice. Pissing on Hitler’s Bunker was my way of turning a “negative” into a “positive.” Maybe the grass will grow a little a little greener as a result?

…and coincidentally, just as I was finished “watering” an area where the Fuhrer might have walked more than six decades ago, a friend of mine in Odessa called me. Since my business partner wanted to hear as well, I put the call on speakerphone. The caller was walking through the center of Odessa where many street musicians play for small change and the music was now being broadcast over a good portion of the bunker area…excuse me; Ukrainian National Park. At that very moment, a familar piece of music was now echoing out: Hava Nagila.

Hearing Jewish folk music waft across a graveyard of Hitler’s dreams: perfect!!

Even the most jaded Odessa local, expat or tourist will enjoy the new restaurant cafe Kakadu (Russian for the tropical bird Cockatoo)  located in the courtyard just behind McDonalds on Deribasovskaya and Krasnyi Lane.

Kakadu has a genuinely eclectic menu and is reasonably priced with generous portions of food (our favorite so far, is the Caesar salad). The interior of the restaurant has the sort of masculine style of expensive martini bars one would find in New York, yet it maintains an intimate and romantic atmosphere. The courtyard seating evokes the feeling one gets sitting outside a villa in Italy or Western Europe and is a nice respite steps from Deribasovskaya.

Kakadu has just started a “Ladies Night” every Thursday evening (free drinks with a coupon) and if the past two Thursdays are an indication, the event is gaining in popularity as some of the most beautiful women in Odessa are starting to congregate there. Let’s just hope that the place doesn’t become too popular and they start charging a cover.

Went for my run today along beautiful Primorskiy Bulvar here in Odessa. As I crossed the pedestrian bridge I noticed workers cutting and removing all the “love locks” that are attached to the iron bars of the bridge. The attachment of metal locks-some modern, some antique- are an informal tradition for couples who often scroll their names and dates of weddings and/or anniversaries on the locks.

This is one of the most beautiful and romantic areas in the historical center of the city. Nearby, are the famous Potemkin Steps.

While the workers removed the locks so they can give the bridge a fresh coat of badly needed paint, it would be a shame if the locks are discarded. That appears to be the case. One can only hope that couples return to the bridge, renew their vows, and replace the locks.

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,

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

Two articles of interest. The first is a currency update from www.businessneweurope.eu  The consensus on “the street,” in Odessa and Kyiv, is that the hryvnia will continue its slide as the Ukrainian government will not have the resources to intervene in the currency markets.

The second is from www.ukrnews.com This article deals with the anticipated temporary rise in the hryvnia that occurs around holidays. Anyone visiting Ukraine during this summer will recall that the hryvnia was pegged at a seemingly unrealistic 4.60 to the U.S. dollar, only to depreciate significantly once the season had ended.

After the holidays, may come the hangover!!

Ukraine moves to flexible exchange rate as hryvnia slides 50%

James Marson in Kyiv
December 3, 2008

With Ukraine’s central bank curtailing moves to support the free-falling hryvnia, the local currency has slid further from 5.79 to the dollar on November 18 to 7.24 on December 3, marking an almost 50% drop in value since the start of the year. The central bank now believes the market has almost found the “satisfactory” rate.

After massive currency interventions in October caused the country’s foreign exchange reserves to drop by $6bn, the National Bank of Ukraine (NBU) has started to move towards a flexible exchange rate, a condition of the $16.4bn loan the country got from the International Monetary Fund. “Without a flexible exchange rate, we can’t overcome the crisis. No amount of currency reserves would be sufficient,” Oleksandr Savchenko, deputy chairman of the NBU, told a conference organized by Fitch Ratings on November 27.

Currency auctions have been introduced to smooth the hryvnia’s slide to its equilibrium rate. “The market is looking for the satisfactory rate,” Savchenko said. “We believe it has almost been found.”

The hryvnia has come under pressure from all sides as the country’s exports plummeted, demand for dollars shot up to repay dollar loans and people converted their savings out of the national currency. “People have been rapidly converting into dollars - there’s low trust in the hryvnia,” says Olena Bilan, an analyst at Dragon Capital. “When the hryvnia started to fall in October, people rushed to get rid of their hryvnia holdings.” NBU figures show that Ukrainians bought $2bn more in foreign currency in November than they sold.

On the positive side, the hryvnia’s fall is a boost to struggling exporters and should help Ukraine close its current account deficit, which reached 7% of GDP in the second quarter of 2008. “The implications of a weak hryvnia are huge,” says Oleksandr Klymchuk, an analyst at Concorde Capital. “It raises the competitiveness of exporters and gives locally produced goods a price advantage over imports.”

But it’s also a threat to banks, as Ukrainians struggle to pay back their loans, 50% of which are denominated in dollars. Fitch on Friday downgraded the outlook for 11 of the country’s banks, citing concerns about the deterioration in asset quality and the threat to confidence in the currency. “The devaluation pressure will persist into next year. It’s difficult to predict where the exchange rate will move, as it’s a question of confidence,” Bilan said.

A recovery of the hryvnia next year is likely, analysts say, as people convert their money back into hryvnia to spend, and a tight monetary policy from the NBU restricts hryvnia supply. If currency inflows from foreign direct investment and privatization pick up, the hryvnia should stabilise around 7.5, Klymchuk believes. If not, he predicts the rate could slide as far down as 9 or 10 hryvnia against the dollar.

Bankers Expecting Traditional Strengthening Of Hryvnia On Eve Of New Year (16:09, Wednesday, December 3, 2008)

Bankers are expecting the traditional strengthening of the hryvnia on the cash market on the eve of New Year to take place this year.

“I think that there will be a situational strengthening,” said Viacheslav Utkin, a member of the supervisory board of Enerhobank.

According to Utkin, the hryvnia will strengthen because of winter holidays and vacations.

“There will be large expenditures ahead of the holidays, the vacations,” Utkin said.

According to him, the hryvnia’s cash rate could reach 7 UAH/USD.

Erik Naiman, the head of the department of financial instruments at Ukrsotsbank, is also not ruling out the possibility of the cash rate of the hryvnia rising before New Year.

“That happens [traditionally] because people sell dollars in order to have a good holiday,” he said.

Naiman declined to forecast the margin by which the hryvnia with strengthen, but he said that it would be insignificant.

AvtoZAZbank’s Board Chairman Vladyslav Bairak was unable to forecast a possible strengthening of the hryvnia on the eve of New Year.

“At present, I do not have such confidence,” Bairak said.

According to him, citizens have shown a lack of confidence in the hryvnia in the past month.

As Ukrainian News earlier reported, the hryvnia fell by 5 kopecks to 7.45 UAH/USD on the inter-bank currency market on December 2.

Technorati Tags: currency, bankers, AvtoZAZbank, Vladyslav Bairak, cash, Erik Naiman, Ukrotsbank, Viacheslav Utkin, Enerhobank, monetary policy, devaluation, current account deficit, GDP, Oleksander Klymchuk, Concorde Capital, Dragon Capital, Olena Bilan, National Bank of Ukraine, NBU, International Monetary Fund, IMF, Oleksandr Savchenko, flexible exchange rate, www.businessneweurope.eu, Odessa, Kyiv, Ukraine, www.ukrnews.com, Anton Olff, hyrvnia,

Doing business in an emerging market like Ukraine is challenging. One of the biggest challenges is the lack of predictabilty. Sometimes, you just don’t know what to expect. People dissappear without reason, rules and regulations change without notice, and even things like running water and electrical power can never be counted on. 

At least some are determined to inform and prepare people so they can manage their expectations. Below is a menu insert from one of the better restaurants here in Odessa. The last line says it all. 

Anton Olff

Technorati Tags: Ukraine, emerging markets, Odessa, restaurants, rules and regulations, running water, electrical power

Spoke with a good friend a few days ago whom is a customs broker here in Odessa.  She stated that business overall has declined precipitously over the last several months. She emphasized that container traffic at the busiest port of Ukraine has slowed to a trickle. This is borne out by anecdotes of others we have contacted whom are connected with trade and logistics services. 

Technorati Tags: Odessa, Ukraine, container, www.komersant.com, Russia, trade, logisitics, imports, wine, Customs Warehouses, financial turmoil, alcohol, Moscow, Federal Customs Service, Solntsevo, CIS,