MBS Blog

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?

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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

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

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

Global Financial Crisis

Ukraine: Currency Slide Stalls Foreign Investment

Oxford Analytica, 12.11.08, 06:00 AM EST

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

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

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

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

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

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

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

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

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

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

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

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

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

Technorati Tags: Ukraine, foreign investment, Naftohaz, commercial banks, NBU, NBU, currency market, liquidity, Volodymyr Lytwyn, Yulia Tymoshenko, Viktor Yushenko, Oxford Analytica, www.forbes.com, Ukrainian Government, National Bank of Ukraine, Anton Olff, foreign currency, hyrvnia, currency controls, Global Financial Crisis,