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Posts Tagged ‘World Trade Organization’
Tuesday, April 21st, 2009
The economic policies described below should do wonders for the Russian economy. Sarcasm aside, Putin’s well intentioned (whatever one thinks of Putin, he believes he is a Russian patriot) restrictions-like all protectionist policies designed to help domestic industry-will backfire as the productivity that technology provides will not be available. That will be the effect of tariffs.
It is no surprise that xenophobic Russia employs protectionism. This fits into a historical pattern of encouraging development periodically, and then squashing it just as it bears fruit. A vast nation like Russia with an incredible array of resources should be the richest nation in the World, but protectionist and other anti-growth policies keep it underdeveloped. The excuse of protecting domestic companies and jobs is always used, though an examination of nations that allow competition shows that it increases wealth, tax revenues, and creates a greater numbers of jobs.
Our hope is that Ukraine does not adopt these restrictions. Given the cultural similarities between Russia and Ukraine, as well as the shared oligarchic influences in both governments, we would not be at all surprised if Ukraine went down the same road. It would be even more damaging to Ukraine since it does not have the same resources of Russia and must rely more on the industrial, service and consumer sectors of the economy.
Restrictions and tariffs on farm equipment and machinery in a nation sitting on an under-utilized agricultural sector with the best farm land in the World, would damage a nation that has already suffered through ill conceived socialist collectivization decades ago.
Putin’s Tariffs Stall Russian Growth for Caterpillar
By Melita Marie Garza and Paul Abelsky
April 20 (Bloomberg) — Prime Minister Vladimir Putin’s trade measures are starting to keep Deere & Co. combines and Caterpillar Inc. trucks out of Russian wheat fields and coal mines, dimming the companies’ prospects for expansion abroad.
Deere and Caterpillar, reeling from the longest U.S. recession in a quarter century, were the companies most affected by loan restrictions and tariffs of as much as 25 percent that Putin imposed this year, according to a U.S. Chamber of Commerce survey of the top 50 American businesses operating in Russia.
Putin is trying to boost Russian industries with tariffs on everything from drugs to farm equipment as declining oil revenue saps the nation’s economy. The policies are hurting sales by Caterpillar, Deere and Agco Corp. in a market where revenue was forecast to rise as much as sixfold in the next decade.
“The new tariffs kicked these guys in the knees when they were down,” Larry De Maria, a New York-based analyst with Sterne, Agee & Leach Inc., said in a telephone interview. “Russia was supposed to be a $3 billion market in 2008 with potential to grow to $20 billion, possibly in as little as a decade.”
Emerging-market sales likely fell so far this year for Deere and Caterpillar, which reports first-quarter earnings tomorrow, De Maria said. Caterpillar is expected to report profit excluding certain items of 5 cents a share, the average estimate of 20 analysts surveyed by Bloomberg. The company earned $1.45 a share a year earlier.
“We are really going to struggle this year in Russia,” Ken Harding, Caterpillar’s regional execution manager for the Commonwealth of Independent States, said in a telephone interview.
‘Low’ Expectations
Caterpillar’s “expectation is low” that it will sell any of its 60-ton trucks, used for quarry and construction work, in Russia this year after selling eight last year, Harding said.
Starting in January, Peoria, Illinois-based Caterpillar and other foreign makers of off-highway trucks faced duties of 25 percent, an increase from 5 percent last year. BelAZ, a Belarusian equipment producer that dominates the region’s truck industry, isn’t subject to the tariff and will benefit, Harding said.
Caterpillar declined 59 percent on the New York Stock Exchange in the 12 months through April 17. Deere fell 56 percent, and Agco dropped 64 percent.
Deere, the world’s largest maker of agricultural equipment, and Duluth, Georgia-based Agco are being hurt by a program that gives Russian farmers a 20 percent discount on loans from Russia’s Central Bank if they buy domestic machines.
Loan Program
The deal is for loans made through OAO Sberbank, Russia’s largest lender, and Rosselkhozbank, the Russian Agricultural Bank, which both have local offices that farmers rely on for financing, Michael Considine, director of EurAsia issues for the Washington-based Chamber of Commerce, said in an interview.
“If a Russian farmer had the cash to buy a Deere combine, it would cost substantially more because of the tariff increase,” Considine said. “And if you didn’t have the money, you could just forget about it because you’d only be able to get the money to buy something made in Russia.”
Putin undertook the measures after a December visit to Rostov, Russia-based Rostselmash, the country’s leading combine maker.
Putin’s press secretary Dmitry Peskov wasn’t available for comment. Valeriy Khromthenkov, a Russian official in Washington with oversight of agricultural issues, declined to comment. A spokesman for Finance Minister Alexei Kudrin, who also is deputy prime minister, wasn’t available to comment.
‘Dramatically Reduced’
Agco’s sales are “dramatically reduced” in the region, because borrowing for a foreign tractor is now almost impossible, Greg Peterson, Agco’s head of investor relations, said in a telephone interview.
In its first-quarter earnings announcement in February, Moline, Illinois-based Deere said sales will decline in Central Europe and the Commonwealth of Independent States for the year. Ken Golden, a spokesman for Deere, declined to comment.
“Our main problems have been the lack of state subsidies on loans combined with insufficient operating cash and the general economic downturn, not the import tariffs,” Alexander Altynov, the general director of AgroSnab, an official John Deere dealer in Russia, said in a telephone interview.
Market Decline
Altynov predicted the foreign machinery market in Russia will decline as much as 75 percent this year.
Deere was expected to post second-quarter profit excluding certain items of $1.08 a share, the average estimate of 17 analysts in a Bloomberg survey.
The U.S. Trade Representative has worked with the U.S. combine harvester industry and at a meeting in Moscow in March expressed concern about the tariff, Nefeterius McPherson, a spokeswoman for the trade representative, said in an e-mail.
The tariff runs counter to Russia’s G20 pledge to avoid protectionist measures and is contrary to a November 2006 bilateral agreement that Russia will maintain a 5 percent tariff on combines until it joins the World Trade Organization, McPherson said.
The ruble’s 31 percent decline against the dollar since July also has made foreign products more expensive. Russia’s Economy Ministry estimates that imports have tumbled more than 30 percent in the first quarter of this year.
Last month, Russia allocated 25 billion rubles ($746.7 million) to OAO Rosagroleasing, the nation’s largest farm- equipment leasing company, and 45 billion rubles to state-run Rosselkhozbank as part of a 3 trillion-ruble stimulus package.
Rosagroleasing spent the money on Russian-made equipment, including 5 billion rubles on OAO KamAZ trucks, Agriculture Minister Yelena Skrynnik told Putin during a meeting on April 17, according to a transcript on the government’s Web site.
Farm Equipment
Russia’s Union of Farm-Equipment Producers, known as Soyuzagromash, asked the government last week to extend the 15 percent import duty on combines to all farm equipment. The tariffs may boost domestic market share for farm machines to 60 percent, the union said.
“The government wants both to help the domestic producers and keep the state funds allocated to the agricultural sector inside Russia,” said Mikhail Pak, an analyst with IFC Metropol in Moscow.
Putin’s efforts may hurt U.S. companies’ operations in the rest of the world, said De Maria, of Sterne Agee.
“There is a worry that these measures could spread to China and other emerging-market countries,” De Maria said. That “would be a blow to the Deere brand and others, stifling their growth strategy as local companies build share.”
(from www.bloomberg.com)
Tags: AGCO, agriculture, Alexander Altynov, Alexei Kudrin, Anton Olff, Belarus, BelAZ, Caterpillar, China, collectivization, Commonwealth of Independent States, consumer sector, Deere, Dimitry Peskov, domestic companies, farm-equipment leasing company, farmland, G20, Greg Peterson, IFC Metropol, industrial sector, Ken Golden, Ken Harding, Larry De Maria, MBS Ltd., Michael Considine, Mikhail Pak, Moscow, Nefeterius McPherson, New York Stock Exchange, OAO Rosagroleasing, OAS Sherbank, Rosselhozbank, Rostelmash, Russia, Russian Agricultural Bank, Russian Central Bank, Russian farmers, Russian ruble, Soviet Union, Soyuzgromash, state subsidies, Sterne Agee & Leech Inc., tariffs, trade restrictions, U.S. Chamber of Commerce, U.S. Trade Representitive, Ukraine protectionism, United States, Vladimir Putin, World Trade Organization, www.bloomberg.com, xenophobia, Yelena Skrynnik
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Saturday, December 20th, 2008
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.
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UKRAINE 2009: tough times ahead |
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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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Tags: Andrew Colquhoun, Anton Olff, bank sector, budget planning, commodity prices, current account deficit, depreciation, domestic prices, East Europe, economic cycle, economic growth, economy, equity, Erste Bank Ukraine, external trade, FDI, fiscal policy, Fitch Ratings, foreign debt, foreign direct investment, foreign exchange reserves, Galt & Taggart, Gazprom, GDP, hryvnia, Hungary, IMF, inflation, instability, International Monetary Fund, Maryan Zablotskyy, MBS Ltd., monetary policy, National Bank of Ukraine, natural gas prices, NBU, Oleksandr Savchenko, P/E ratios, Poland, privatiziations, Prominvestbank, recession, reforms, retail sector, Romania, Russia, slowdown, steel prices, U.S. dollar, ukraine, World Trade Organization, www.businessneweurope.eu
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