EMERGING MARKETS SPOTLIGHT – UKRAINE

President Petro O. Poroshenko at his inauguration in Kiev last year. He promised to end corruption, but his government faces misconduct charges. CreditSergei Supinsky/Agence France-Presse — Getty Images

KIEV, Ukraine — The country is on the cliff of bankruptcy. A spate of politically motivated killings and mysterious suicides of former government officials has sown fear in the capital. Infighting has begun to splinter the pro-European majority coalition in Parliament. And a constant threat of war lingers along the Russian border.

A year after the election of Petro O. Poroshenko as president to replace the ousted Viktor F. Yanukovych, and six months after the swearing in of a new legislature, Ukraine remains deeply mired in political and economic chaos.

“Poroshenko, whether you like him or not, he’s not delivering,” said Bruce P. Jackson, the president of the Project on Transitional Democracies, an American nonprofit group. “The Ukrainian government is so weak and fragile that it is too weak to do the necessary things to build a unified and independent state.”

Efforts to forge a political settlement between the government in Kiev and Russian-backed separatists who control much of the eastern regions of Donetsk and Luhansk have hit a deadlock over procedural disputes, despite a cease-fire in February calling for decentralization of power and greater local autonomy as the linchpins of a long-term accord.

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Protesters occupied the center of Kiev last year in the revolution that led to the election of Petro O. Poroshenko as president and Arseniy P. Yatsenyuk as prime minister.CreditSergey Ponomarev for The New York Times

The shattered economy keeps sinking, with the G.D.P. plummeting 17.6 percent in the first quarter of 2015. Hoping to avoid default, senior officials have been in protracted negotiations with creditors, but they have failed so far to secure a deal. Officials also now fret openly that more than $40 billion pledged by the International Monetary Fund and allies, including the United States and the European Union, will not be enough to keep the country afloat.

In perhaps the greatest disappointment to the protesters who seized the center of Kiev last year, the new government led by Mr. Poroshenko and Prime Minister Arseniy P. Yatsenyuk has so far failed to deliver on promises to root out endemic corruption. Instead, it has become ensnared in new allegations of misconduct and charges of political score-settling.

The Parliament, in which pro-European parties control a huge majority, voted last month to create a special committee to investigate accusations that Mr. Yatsenyuk, a suave English speaker admired in the West, and his cabinet have presided over the embezzlement of more than $325 million from the state.

The government and its supporters deny any wrongdoing and say it has gone further than any of its predecessors in trying to shake off Ukraine’s post-Soviet legacy of mismanagement and malfeasance. They point out that Parliament has adopted a slew of reform initiatives, notably an overhaul of the notoriously crooked natural gas industry and installing new leadership at the national bank.

The continuing disarray is becoming a source of friction between the Ukrainian government and its European allies, especially Germany and France, whose leaders helped broker the cease-fire and are increasingly frustrated with the slow pace of change.

“We don’t have simply Russian aggression against the victim Ukraine,” Mr. Jackson said. “We have a predictably aggressive Russia against an unpredictable and unreliable Ukraine. Ukraine is now seen as not to be trusted. What the E.U. is saying is: Where is the decentralization? Where is the commitment? Where are the reforms?”

Adding to the tumult, Mr. Poroshenko recently declared a crackdown on the country’s richest and most powerful businessmen, known as oligarchs, in a bid to curtail their influence and to win back popular support. Yet the assault risks making enemies of the country’s biggest employers, who until now have backed the government.

“When you don’t want to do anything and you don’t have anything to report on what you have already done, you need an enemy,” said Dmitry V. Firtash, a former patron of Mr. Yanukovych who is a major target in the so-called de-oligarchization campaign. “It’s very convenient to use rich people as scapegoats.”

For Kiev, there is no greater problem, and no greater test, than the as-yet futile fight against corruption. Even officials on the forefront of the effort say it has so far largely gone nowhere.

David Sakvarelidze, the deputy prosecutor general, who helped carry out sweeping changes to the judicial system in his native Georgia, has been given Ukrainian citizenship and a mandate to overhaul the prosecutor’s office.

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Prime Minister Arseniy P. Yatsenyuk CreditFilip Singer/European Pressphoto Agency

“They are still corrupted, and no systemic changes have been made in law enforcement agencies and in courts,” Mr. Sakvarelidze said in an interview in his office in Kiev.

He described a criminal justice system that needs to be rebuilt nearly from scratch. For example, he said, there was no effective system of plea bargaining to allow prosecutors to resolve cases swiftly, and no clear goals that set national priorities in law enforcement.

“We do not have any criminal policy,” he said. “None of the prosecutors have clear guidelines.”

Instead of existing government agencies taking action, Mr. Sakvarelidze said, the Parliament has been overly focused on adopting legislation that creates even more bureaucracy.

One of the major promises to come out of the Maidan revolution was a new anticorruption bureau, which is expected to employ 700 enforcement officers. On April 16, after long delays, Mr. Poroshenko finally selected the bureau’s first director, Artem Sytnyk, a former Kiev city prosecutor.

Because of the delays, the government has been unable to deliver on pledges of swift restitution. Most notably, it has failed to recover any of the billions of dollars believed to have been stolen by the former president, Mr. Yanukovych, his family and closest associates.

Nor have Mr. Yanukovych or any of the senior officials who fled with him been arrested, with many now in Russia. Corruption investigations against other former officials and executives of state-owned companies have largely stalled.

Egor Sobolev, an organizer of last year’s protests who is now a member of Parliament and chairman of its Committee on Corruption Prevention and Counteraction, said his panel was flooded with complaints.

“The biggest problem in the country is we do not have a real system of justice, we do not have judges, most of them are people from Yanukovych’s time, very corrupted,” he said. “The same situation with prosecutors.”

“And another problem, a very big problem,” he added, was that “Mr. Poroshenko as the president is not ready to fire them.”

Mr. Sobolev is not alone in his lack of trust in the new government. Many of the Maidan demonstrators who are now in government posts say they are uncomfortable with Mr. Poroshenko and Mr. Yatsenyuk, who were opponents of Mr. Yanukovych but also longtime veterans of the Ukrainian political system that the demonstrators wanted to dismantle.

This is one reason there was strong support in Parliament to create a special committee to investigate allegations by Nikolai Gordienko, the former head of a state financial inspection agency, who accused Mr. Yatsenyuk’s government of benefiting from a major embezzlement scheme.

To a great extent, the frustrations are to be expected, analysts say. “A year out, everybody is always disappointed from any revolutionary upheaval, that’s a statement of social science law,” said Michael A. McFaul, a Stanford University professor and former American ambassador to Russia who is an expert on revolutions and visited Kiev last month.

“There’s never a case where people are saying, ‘Oh, things are going even better than I thought.’ It’s always, ‘The government is not doing enough.’ It’s always, ‘Reform is slow.’ ”

Mr. McFaul said that he had hope for Ukraine’s efforts. “I am impressed with the number of reforms that they have already passed. I think that is underappreciated in the West,” he said.

Still, he said, the task ahead is gargantuan, especially given the demands of Western benefactors. “They just don’t have the state in place to do the kind of things they are being asked to do right now,” Mr. McFaul said.

Boris Lozhkin, Mr. Poroshenko’s chief of staff, said the president had five priorities: “de-shadowing, de-monopolization, de-oligarchization, deregulation and decentralization,” with de-shadowing referring to bringing new transparency to the economy and the government.

“The oligarchy as a basis of the country’s political and economic life must cease,” Mr. Lozhkin said.

But the confrontation has only added to a sense of fear in Ukraine, particularly among business figures and officials who had ties to the Yanukovych government.

At least six such officials have died in apparent suicides this year, and a seventh, Oleg Kalashnikov, a former member of Parliament from Mr. Yanukovych’s Party of Regions, was shot dead outside his home in Kiev last month.

Prosecutors have opened investigations but say they do not believe the killings and suicides are connected.

While the government says it fears a renewed invasion by pro-Russian forces could come at any time, some analysts said there was little reason for renewing hostilities while the Ukrainian side was fighting with itself.

“Russia is just waiting for the internal problems of Ukraine to make it less attractive for the West,” said Alexander Baunov of the Carnegie Moscow Institute, a research group. “Putin’s hope is Russia doesn’t need to make Ukraine weak. Ukraine will be weak by itself, and he can just wait awhile and take advantage of its weakness sometime in the future.”

Doing Business in Ukraine Becomes Easier
According to the World Bank experts, business environment in Ukraine is gradually improving. In the ranking “Ease of Doing Business 2015”, Ukraine has achieved significant success, rising from 112th place to the 96th during a year.
Thus, Ukraine has finally returned to the first hundred of the World Bank rating which consists of 189 countries.
The World Bank recognizes that Ukraine has achieved the greatest success in the areas of registration of property and taxation. According to these indicators, the country has improved its ranking by more than 25 positions. Now Ukraine ranks # 108 on the ease of paying taxes (although until recently it was on the penultimate position), and 59 on the ease of property registration. Ukraine has relatively good ratings under “starting a business” (76th position as all procedures take 21 days), “building permits” (70th position as all procedures take 64 days) and contracting (43th position). Ukraine is leading on the ease of obtaining credit (17th position).
The Government of Ukraine is committed to implementing new reforms that will make the business environment in Ukraine more attractive for investors.

Is Ukraine a new Titanic?

“What happens in Ukraine will have global impact.”

308fbb9 Recent events in Ukraine have shaken the entire world. Armed conflicts in the middle of Europe and redrawing of the borders under the barrels of heavy military equipment in the 21st century seemed surreal. All this as the human civilization was becoming more sophisticated and technologically advanced: multinational space exploration and studies of Mars, latest advances in quantum physics, amazing special effects used to enhance global entertainment events like Olympic games – all fostered hope that our world is evolving towards a new peaceful order. Even the remnants of the severe global financial crisis and discrete regional conflicts around the world could not cloud a pretty bright and optimistic picture of the world’s future.

Against this background the Ukrainian events resonated around the world with even greater intensity. Today, citizens of that country nostalgically look at the map, which not even two months ago had Crimea as part of its borders. Before this it was part of USSR , but now it de facto is part of Russia.
Armed conflicts are taking place in the Eastern parts of Ukraine. Government buildings are being taken over in the eastern cities of Donetsk Luhansk, Kharkiv. Long lines for foodstuffs are reminiscent of the Soviet era. Schools and offices close as women and children are afraid to go outside. Gangs of armed men and military equipment can be seen in the cities of Slavyansk, Mariupol, Kramators where clashes with authorities already produced first victims.Media constantly shows reports of military helicopters circling, military vehicles deployed around the cities and armed separatists securing various sites. Ukrainian police, named “Berkut”, whose riot division was disbanded by the new government for their participation in Maidan, is are refusing to serve and majority of them are putting in their resignations. Words like “collapse”, “chaos”, “destruction” and “banderovtsy” are the most popular in the Ukrainian internet space. The most asked question is “What to do?”
I tried to speak to a number of Ukrainian politicians to find an answer to this question. Some folks simply tried to use the dialog as a personal PR opportunity, others honestly admitted that they no longer understand what is going on and were waiting for the results of the upcoming presidential elections in Ukraine to try and make sense of the situation. There were a few who still talked about the bloodshed of the February Maidan and their calls to arms, whether legally, or not, were of radical nature. One of the folks I spoke to was Sergiy Klyuyev, a Member of the Ukrainian Parliament, whom I met in Washington some time ago. Up until the recent events Mr. Klyuyev was part of the government majority. We planned a brief skype chat and ended up speaking for an hour on skype. During out talk it became clear that Sergiy was very concerned about his Eastern Ukrainian constituents and became very emotional every time the subject was discussed. Overall his point of view stood apart and I thought it may offer the reader a different prospective on what should be done to try in bring Ukraine from the brink of the abyss.
Our conversation began with discussion of the mood of the people who live in the Donbass region of eastern Ukraine (primarily Donetsk and Luhansk regions were most military style takovers are taking place). Do those people of the coal land consider themselves Russians or Ukrainians? Most important fact, says Klyuyev, is that the majority of the locals there remains for united Ukraine and wants to keep the country whole. On one hand most people want peace and do not want to see the conflict escalated, on the other hand the current economic conditions in the region, still not resolved language issue and extraction of all the regional tax revenues by the central government authorities are no longer acceptable to the people here.
The folks of Donbass also do not like procrastination of the authorities with making key decisions to deal with the situation. However, the factor that scares local people the most, is the gigantic amounts of military style weapons that ended up in the hands of the protestors after the events of Maidan on February this year. Use of weapons on the streets has become somewhat more tolerated in a country where this was unthinkable even as recent as four months ago. Yet little has been done to end the parading of armed paramilitary factions on the streets of Ukrainian cities often condoning those actions as “revolutionary necessity”. As result of this lack of enforcement, a number of armed conflicts, which should have been prevented by firm actions of the new government, continued to grow. These conflicts exacerbated an already dire economic situation and had a devastating effect on Ukrainian businesses, which practically came to a standstill.
So what can be done to avoid an impending collapse to which the new government is heading so far? The answer is as follows: To save Ukraine it is necessary to conduct four-party negotiations between Ukraine, Russia, USA and EU. Meeting in Geneva is a good start, but the parties must be willing to make meaningful concessions as inability to come to terms will threaten not only the sovereignty of Ukraine, but the overall global stability. “To negotiate does not mean to show weakness or give in”, says Klyuyev.
But besides the Geneva talks, the destiny of Ukraine will also be determined in Kyiv. Instead of settling personal scores and grabbing powerful political posts, the politicians must focus on creating a true Government of National Unity, one where all regions and significant economic subjects are properly represented. The government should focus on addressing issues which fuel separatism and the Parliament should work developing the new constitution taking the version of 2004 as basis and amending it to reflect the changes that took place in the country since then. Undertaking real efforts to stamp out corruption in the country will unite Eastern and Western parts of the country. It is important to address underlying causes, which fuel corruption and deal with simplifying laws on doing business, breaking up decision making process to eliminate controlling monopolies over some decisions which foment corrupt behavior, reduce bureaucracy and increase pay of state workers to levels where corrupt behavior will no longer be attractive.

Strong state and corruption are incompatible concepts, thus in order for Ukraine to prosper, corruption in the government must be stamped out. In order to rebuild a strong prosperous state it is important for the government to empower the regional authorities and provide them with resources needed to help the local businesses strive and improve the municipal services to help improve residents’ quality of life. Delegate some of the decision making to the regional authorities and make local referendums and town hall style discussions a part of the normal political process.  The way the centralized budgeting system in Ukraine is set up, the central government first extracts all regional tax revenues and then rebates a small portion back to the local authorities. Thus not a single governor or mayor has any incentive to implement or reward economic development programs as they know that no matter what, the funds generated by such activity will still end up in Kyiv. Also, of the 24 regions comprising Ukraine, only very few are contributors to the budget to begin with, the rest are subsidized by the federal government. The size of those subsidies is dependent on the each region’s political prowess in Kyiv and not on the real needs of the folks living in that region. The new central government today is promising to start a dialog with the representatives of the Donbass region. Assuming that this will be an earnest dialogue and not a farse, the main themes of it should be as follows:

  • Local governors should be elected by the people, not appointed by the President
  • Central government should not get involved in the matters which can be resolved by the local authorities
  • Regional tax collections should be apportioned by regional authorities, not in Kyiv, as it is stipulated today by the Budget Code.
  • No appointments, mandates, programs or empowerments should take place locally, if sufficient provisions to finance them are made in the budget.

As result of the above changes the entire country will become more prosperous and resident will feel more empowered and involved in shaping their destinies. Finally, rebuilding bankrupt and crumbling economy should be addressed in a systematic and strategic manner. After the current situation is stabilized, it is vital that the government enacts measures to improve the investment climate both for foreign and domestic investors and promotes economic development programs to foster growth in key areas where Ukraine can and should effectively compete globally: agriculture, IT, aerospace, machine building, energy generation and mining sectors. Let us not forget that our European neighbors present a terrific example of a highly successful society that can credit a large portion of its economic success to a well-developed decentralized form of government. “I am a well established person. I have my own independent civic position, beautiful family talented grown kids, but we still have to prove to ourselves and to the world our ability and entitlement to live in a free and blossoming country” sums up our dialog Mr. Klyuyev.

These days, many compare Ukraine to Titanic after it already hit the iceberg, got damaged and had its crewmembers argue among themselves as to who should be the captain. The question is if the Ukraine is the Titanic, can it pull the entire European continent to the bottom, as it sinks.It is time for all parties involved to step back, soberly evaluate the situation and sit down at the negotiating table to help Ukraine make the right moves out of this crisis.
By David Stephan for Princeton Council on World Affairs
Opinions expressed in this column are not necessarily those of the Publisher
Ukraine - Proprietary Fi180 Country Profile - page 1 of 4

Image: A Ukrainian worker turns off a tap at the new gas-compressor station 'Bobrovnytska' in Mryn villageSERGEY DOLZHENKO / EPA FILE13 hours

Why Billions in Bailout Money for Ukraine Could End Up in Russia

BY DINA GUSOVSKY, NBC.Com

Ukraine is desperate for a financial bailout after its economy had suffered from months of protests and political conflict in the former Soviet state, and the West is eager to hand over the funds. But a lot of that cash could end up going to Ukraine’s chief antagonist: Russia.

“That money could very well indirectly make it toward Russia, given the amount of economic and financial transactions between Kiev and Moscow,” said Stratfor Eurasia analyst Eugene Chausovsky.

Ukraine has been in a recession since the middle of last year, and its economy has been hit by deflation. The Kiev government said last month that its budget deficit rose 21.2 percent in 2013 over the previous year.

In response to its economic struggles and Russia’s invasion of the Crimea region, the European Union said on Wednesday it’s ready to give $15 billion in loans and grants to Ukraine. The Obama administration has called for $1 billion in loan guarantees for the country, and House Majority Leader Eric Cantor has said Congress will consider such a package soon.

“That money could very well indirectly make it toward Russia, given the amount of economic and financial transactions between Kiev and Moscow.”

Alexander Gordin, managing director of Broad Street Capital, who has had extensive business dealings in Russia and Ukraine for two decades, told CNBC that some of the money will likely be used to pay back Russian loans to Ukraine and to buy Russian natural gas. Ukraine buys 60 percent of its natural gas from Russia.

Access to natural gas is a card Russia has repeatedly played against Ukraine and other European countries, and the Atlantic Council’s Adrian Karatnycky said that Sevastopol, a Crimean city that serves as the base for the Russian Navy’s Black Sea Fleet, is the only reason Ukraine has gotten a reasonable price on gas in the past.

“If Crimea were ever to become Russian, which is doubtful, it will be a slow economic death to Ukraine,” Karatnycky said.

Stratfor’s Chausovsky said he believes that although the European Union has said that financial assistance given to Ukraine will not be used to pay for Russian natural gas, it could happen anyway.

Lilit Gevorgyan, senior economist at IHS Global Insight, said much depends on what develops with Ukraine’s plans for keeping itself supplied with natural gas this year and beyond.

“However, it is expected that a large chunk of this loan will go into covering the current account gap and also financing the budget deficit,” Gevorgyan said. “The Russian gas bill will also be a significant drain, although it also depends how much gas Ukraine is planning to import from Russia in 2014 and onward.”

Every oligarch for himself: Crazy days in Ukraine

Ukraine’s oligarchs are struggling to preserve their wealth, and that means getting in with the new leadership and distancing themselves from the old regime as Ukraine plunges deeper into turmoil, according to regional experts and businessmen interviewed by CNBC.
“Right now, they are afraid of the new leadership,” said a prominent Russian businessman who spoke to CNBC on the condition of anonymity.

Alexander Khudoteply | AFP | Getty Images  Rinat Akhmetov, Ukrainian steel and coal magnate.
Amid the political turbulence rattling Ukraine, some oligarchs have scored new government jobs. Billionaire Ihor Kolomoyskyi, for example, was named head of Dnipropetrovsk Regional Administration on Sunday. Also Sunday, Sergey Taruta, another billionaire businessman, was appointed as the new regional governor of Donetsk, where pro-Kiev demonstrations this week have overtaken pro-Moscow demonstrations in size, Reuters reported Thursday. Kolomoyskyi and Taruta did not return phone calls from CNBC requesting comment. Oligarchs perceived as being especially close with the leadership of fugitive president Viktor Yanukovych, who fled the country last month, face a particularly difficult situation. Sergey Kurchenko, for example, a former Yanukovych ally whose wealth accelerated when the president was in power, has already been accused of money laundering by members of the new Ukrainian government. Stratfor Eurasia analyst Eugene Chausovsky told CNBC that Kurchenko’s assets would likely be targeted by the new Ukrainian government—and even possibly by the West. Then there’s Ukraine’s wealthiest man, Rinat Akhmetov. The oligarch is believed to be worth $15 billion—for perspective, that also happens to be the amount of aid the European Union is preparing for Ukraine in order to help the country regain its economic footing. Chausovsky and other analysts said that Akhmetov can monetarily influence who will be in power in Ukraine in the first place, since would-be leaders would most likely require his support to finance campaigns and other political projects. “However, he may come under greater pressure from Russia, and will walk a very fine line and be careful with Moscow,” Chausovsky said.

Viktoriya Isenko | Anadolu Agency | Getty Images  Ukrainians hold giant national flag during a rally in support of a single Ukraine in Donetsk, Ukraine on March 5, 2014.
Alexander Gordin, managing director of Broad Street Capital, who has had business dealings in Russia and Ukraine for more than two decades, said it’s not a bad idea to put oligarchs in power—a sentiment echoed by another Russian businessman who spoke with CNBC. “They were asked to be in charge. This is the wise thing to do though because they are smart, they know how to lead, and they have money,” Gordin said. “At this point, they are united with the people. It sounds strange, but maybe such blatant Russian aggression has united them.” Sources both within the region and without accused officials and oligarchs of benefiting themselves financially under the old regime. “The unbridled ability of Ukrainian officials” to benefit from the access their jobs gave them “led to this situation in the first place,” said Edward Mermelstein, an attorney and adviser on cross-border investments in Russia. (Read moreWhy Crimea matters)

Play Video
Wealth, GDP & corruption in Ukraine
CNBC’s Steve Sedgwick and Michelle Caruso-Cabrera discuss the huge amount of tension in Ukraine, and how significant the country is economically.
The main question, said Ian Brzezinski, a senior fellow at the Atlantic Council who focuses on trans-Atlantic security, is how much the oligarchs will be willing to sacrifice for the good of Ukraine. “If they don’t, clearly the nation’s ability to leverage this defining moment will be undercut, and they will be responsible for a historic failure,” he said. —By CNBC’s Dina Gusovsky. Follow her on Twitter at @DinaGusovsky. CNBC’s Ted Kemp and Michelle Caruso-Cabrera contributed to this report.

ONE FAMILY’s BUSINESS IN UKRAINE

By David Stephan, UKRAINEBUSINESS2014

In most of the world family business means orderly multigenerational creation of economic value, In Ukraine over the last four years «Family Business» meant something completely different, as it came to be identified with the total and complete usurpation of power, corruption and unjust enrichment. Viktor Yanukovich could have single-handedly altered the course of Ukraine’s economic development. Such chances are very rare and are only accorded to lucky few. It so happened, that after the Orange Revolution of 2004, the country, although slowly, was inching forward. Thus it was not difficult for Mr. Yanukovich to win the election of 2010 against the leaders of the Orange revolution who by 2010 were absorbed in their own infighting. All the future president had to do was to assure stable and predictable environment to the country’s business interests, as well as prospective foreign investors, and promise increase in living standards to the majority of the population. Thus as the country’s business would flourish and population would enjoy better life, president’s approval rating would continue to increase or at the very least remain at current lofty levels.  Couple that with Mr. Yunukovich’s reclaim of the massive Presidential powers through return to the Constitution of 1996, he effectively became the principal representative of his country and positioned himself to benefit on the world arena from any success that ukraine would enjoy. Even if the newly elected President did not have the experience and the ability to effectively manage this vast country of 44 million, all he had to do was not interfere. Business in Ukrane, though not without its problems, has proven very capable and resilient and fully capable to control its own destiny. Some companies effectively borrowed from western banks and Export Credit Agencies. A number of Ukrainian companies started to adapt western standards and place their IPOs on London, Warsaw, Hong Kong and other exchanges.  A crumbling infrastructure remaining from the Soviet days has slowly begun to change. Ukraine began to attract major foreign investors. Shell, Chevron and Exxon came in to develop shale gas deposits, Eni and Elitricite de France wanted to explore the bottom of the Black Sea for oil. Appearance of such notable and powerful foreing investors became yet another factor guarantying the country’s stability and boosting its image on the global stage. Additional areas for economic success in Ukraine were also in place. Budding IT sector, creation of new transit zones through Crimean Peninsula, creation of new clusters of economic development such as 3-D printing, alternative energy, agriculture, aerospace and other all pointed to a potential for brighter future. If Singapore took slightly less than 20 years to transition from a third world country to one of the leading economies, President Yanukovich had a chance to get there within two election cycles. Couple the potential economic development with the prospects of Eurointergration, where eurpoean leaders were eager to sign the Association agreement and Mssrs. Yanukovich and Arbuzov were received at the highest levels at the EU’s Brussels headquarters.  Ukraine could have been positioned at the very least as a credible regional leader, with a strong global voice. Of course missteps were made, as it is not a good sign when the President pursues selective political persecution and jails his oponent on trumped up charges, uses securiry forces to dispurse peaceful demonstrations and mutilates members of the oposition. Yet given the above mentioned factors, Ukraine led by Yuanukovich ostensibly had a chance for a brighter future and superb presidential legacy. Yet none of it was to be… Instead Mr. YAnokovich and his family chose another course.  In a little over four years, Mr. Yanukovich aided by his sons has created a system of corrupt rule and total power usurpation during which, according to Forbes magazine, the net worth of his eldest son Aleksandr trippled just in 2013 and during that time he became a billionaire. Noone else in Ukraine, just him. Thus instead of becoming known for 3-D printing technologies, Ukraine became known as the land of the «golden toilet» – a symbol of corrupt excesses. Instead of European standards, ten percent «family» tax became the daily life of the Ukrainian business owners. Instead of being known as a progressive leader of a rapidly developing country, Presdent Yanukovich quickly became a parody of an «iron Hand Ruler» among his own people. According to multiple press sources, the «Famiily» has illegally spirited $12 billion out of Ukraine during its rule. These funds were misappropriated at the time when Ukraine desperately needed money and was practically begging either the IMF or Russia to extend it a $15 billion loan to cover its looming obligations. At the time when Russia was seeking to extract additional concessions from Ukraine in exchange for lower gas prices, it has been widely known that certain young «cutouts», such as Mr. Kurchenko, known in Ukraine as «NedoOligarkhs» were monopolizing the smugling oil products into the country and manipulating the markets for Liquid NAtural Gas (LNG) causing a $4 Billion shortage in the Ukraine’s annual budget and stunting the exploration of the local oilfields as the result. As the country’s budget ws lacking billions of dollars to pay its pensions and other social obligations, the «family» created a near monopoly on winning state tenders in the coal and construction industries and made billions in the process for themselves. Given that the coal industry was the domain of the Donetsk region, it makes sense, as most of the former members of the Admisntration hail from there. Yet it is unlikely that young Aleksandr Yanukovich, the former Minister of the Tax and Revenue Klymenko and the Head of the Central Bank Arbuzov were taught how to use state property as their own, at the Donetsk State University. As it became apparent to the country’s inhabitants that it was not possible to compete with the «Family» Business, since at best the business of those voicing protest could have been expropriated and at worst a jail term would await, the middle level buraucrats at all levels from the traffic police to the tax police joined in and began to feed at the trough.  The Ministry of revenue and collections under Minister Klymenko was an undisputed champ by intorducing new requirements, taxes and policies. The prevailing theme was that both the «Family» and the tax men «needed to eat». So after the unfortunate events of the past for months in Ukraine the following has become apparent. All that happened in the business and political arenas of Ukraine since 2010 is the result of the Yanukovich presidency and the «Family Business» run by his son. Since turning away from the constitution of 2004 and usurping power, the President had sole decision to appoint Ministers in lusing the now infamous Minister of the Interior Mr. Zakharchenko. Instead of listening to his Government members, the President really listened to two people – his son Aleksandr and his confidant Mr. Arbuzov.  According to well placed sources, the order to shoot, or not to shoot the demonstrators on Maidan could have only come from the President’s son – the CEO of the «family Business». Now the world knows the unfortunate choices «the family» made. Many parties can be blamed for what happend in Ukraine, from the oligarkhs, to the members of the former government led my PM Azarov, former Heads of the Presidenatial Administration Mr. Lyovochkin, and Klyuev, who at the time of the unfolding events already could not even secure an audience with the President. Yet there is no way to explain execution of a 100 peaceful protesters at Maidan at the time when there was no real threat to the President’s safety and there was no need to escalate the conflict in the first place by disappearing and letting others puppeteer from behind the scenes. Yes many can be blamed, but the ultimate responsibility falls on President Yanukovich and the «Family». They took a wealthy, rapidly emerging market economy and in corrupt pursuit of power and money left a once mighty country teetering on the brink of collapse

WHY CIVIL UNREST IN UKRAINE MATTERS TO SMALL BUSINESS [in the US]

BY 

Yuriy Boykiv, the founder of an advertising agency and a Ukrainian immigrant living in New York City, explains the stake entrepreneurs have in the outcome of the turmoil plaguing the European nation.

Ukraine is my homeland; it’s the country where I spent my childhood and most of my young adulthood. It provided me with a unique background, and it played a large role in shaping me into the person I am today. When I came to the U.S. at the age of 19, I still had hopes of going back to Ukraine one day. Unfortunately, recent events have proven to me that Ukraine is on the brink of collapse. Rather than operating as an independent nation, Russia wants Ukraine to be its satellite state; the larger country is using its natural gas supply as a bargaining chip to get Ukraine to join the Russian version of the free trade zone. However, the European Union wants Ukraine as a new member. This move would enable the EU to sell European goods to 45 million Ukrainians. The Ukrainian government supports Russia, but an oppositional force that supports the EU is thriving. Neither side hesitates to use violence to get its point across, leaving civilians sandwiched in the middle. Many people fear martial law–and a civil war–is on the horizon.

A Strong, But Threatened Market for Labor and Exports

This may sound like a lot of politics, but American businesses have a real stake in what’s happening in Ukraine. According to Bloomberg, Ukraine is one of the top 30 outsourcing countries to the U.S. Many American startups make use of its highly skilled technical labor force to build websites, apps, and health care software.

Not only is Ukraine developing into an outsourcing powerhouse, but it also has physical advantages on its side. It is the second-largest country in Europe, with an area of more than 233,000 square miles, which provides significant agricultural capabilities. Ukraine used to be called a European breadbasket. It has a population of more than 45 million people, which represents a significant market for American products. Unlike some other countries with similar backgrounds, Ukrainians love all things American, from iPhones to jeans to food.

Many Ukrainian outsourcing companies work with American and Western European clients. Since protests and bloodshed are mostly happening in Kiev, where the majority of the outsourcing companies are located, it is increasingly difficult to operate in such an environment. A Kiev-based company, Ciklum, which serves American clients such as RR Donnelley, CBS Interactive, and ComScore, is feeling the pain of employees not being able to get to work. The subway system has been blocked for the last few days and cars are piled up in the middle of the city, creating an apocalyptic scene right out of a Hollywood movie.

What’s Tripping the Country Up

Despite its potential, Ukraine has a lot of internal problems. It ranked 144th of 177 nations in Transparency International’s 2013 Corruption Perceptions Index, tying it with Iran and Nigeria. That signals that the country is still rife with secret negotiations and abuses of power. The corruption is not Ukrainian entrepreneurs’ only problem. Many small-businesspeople in Ukraine cannot understand the country’s tax code and wish it were simplified. Lately, under President Viktor Yanukovych’s leadership, a large portion of business revenue has gone directly into the president’s family’s hands. There is a new term among Ukrainian entrepreneurs: “working for the family”–meaning the family of Yanukovych.

What Makes the Protests Devastating

More than 3 million Ukrainian immigrants have moved to the U.S., claiming either Russian or Ukrainian origin. Many of those who claim to be ethnically Russian actually come from Ukraine. Among those with Ukrainian heritage are Max Levchin, co-founder of PayPal, as well as film titans Dustin Hoffman and Steven Spielberg, whose parents and great-grandparents, respectively, came from Ukraine. When I was leaving Ukraine, I hoped that one day I could go back and build a company there. I was born in Berezhany, a town in the western part of the country, which historically had pro-Western views. My dream was to help people like myself attend Western universities, then come back to Ukraine and build a new elite that would help the country create transparent systems in which entrepreneurs could flourish. I still hope that will happen one day, but current events show that Ukraine is as divided as ever. I don’t blame the government or the opposition for the escalation of conflict; I blame the corrupt elite who stole cents on every dollar the country was producing and used it to buy expensive cars, apartments, and houses in the West–and completely abandon its own country. For these individuals, Ukraine is merely a place to make money. I believe that, at the moment, the best the U.S. can do is negotiate a deal with Russia. New presidential elections in Ukraine are scheduled; after their conclusion, the protesters will have to go back home. And in this way, democracy will start to take effect, one small step at a time.

Foreign direct investment in Ukraine slows significantly

Kyiv Post
Nov. 14, 2012 | Business — by Interfax-Ukraine
The growth of foreign direct investment (FDI) in Ukraine in the form of equity capital in January-September 2012 amounted to $2.6 billion.
The growth of foreign direct investment (FDI) in Ukraine in the form of equity capital in January-September 2012 amounted to $2.6 billion, which was 29.4% down year-over-year, the State Statistics Service said on Wednesday. FDI in the third quarter of 2012 grew by a mere $240 million, which was five times down on the same period of 2011, and is one of the worst results in the past years. In particular, FDI growth in the second quarter of 2012 was estimated at $1.52 billion, and in the first quarter $850 million. Last year FDI grew by $4.56 billion, including by $880 million in the fourth quarter, $1.26 billion in the third quarter, $1.6 billion in the second quarter, and $830 million in the first. According to the State Statistics Service, foreign investors injected $4.319 billion into the Ukrainian economy in the first nine months of 2012, but they withdrew $817 million over the period under review, whereas these indicators were $4.742 billion and $685 million respectively for the same period of 2011.

Foreign investors say renewable energy market closed to them

Oct. 11, 2012, — by Yuriy Onyshkiv, Kiyv Post

Foreign developers are worried that Ukraine’s parliament might next week adopt amendments to increase requirements that renewable energy developers use a share of domestic content when constructing power plant from the current 30 percent to 50 percent.
Foreign investors in renewable energy are complaining that the sector is stacked against them in favor of a handful of domestic companies.

Peter Justin O’Brien, country manager for EuroCape, a wind power developer that is building a wind power station in Zaporizhya Oblast, says that “the playing field for foreign and domestic investors is not the same.” O’Brien and other investors say local renewable energy companies benefit from their government connections to access land, hook up to energy grids and qualify for green tariffs on favorable terms. “It has the effect of closing the entire sector,” O’Brien told the Kyiv Post in an Oct. 10 interview.  The same view was expressed during a press conference the same day by representatives of European-Ukrainian Energy Agency, representing foreign investors working in the industry, including EuroCape. Foreign developers are worried that Ukraine’s parliament might next week adopt amendments to increase requirements that renewable energy developers use a share of domestic content when constructing their power plants, from the current 30 percent to 50 percent. If companies do not fulfill the local content requirement, they would not be able to qualify for green tariffs – high prices the government pays for electricity from renewable energy sources. These amendments are co-authored by three pro-presidential Party of Regions’ lawmakers, including Yulia Lyovochkina, the sister of Presidential Chief of Staff Serhiy Lyovochkin, and Yuriy Miroshnychenko, the president’s representative in parliament. They did not immediately respond to requests for comment. EuroCape’s O’Brien says that it is really tough “when the rules of the game are being changed in the middle of the game.” He fears that banks won’t be willing to finance such projects if developers are forced to purchase less reliable Ukrainian wind turbines that might break down and make it impossible to pay off bank loans. “It would be very difficult to deal with [such an increase], but it would be possible,” he said. In his view, if the tougher requirements become law, some foreign companies might drop out of the small but growing sector, costing the country in potential future investments. “Development companies generally do not complain, but it’s getting to the point that we can’t work in this industry,” he said. And, as a result, “you could see some good companies leave and the investment capital would not be here.” If the law is adopted, the EuroCape Ukraine chief predicts that some developers might lose close to $40 million they have already invested. If the conditions don’t improve, the alternative energy market might remain starved of billions of dollars of contemplated investment to add 3,000 megawatts in renewable energy capacity. Besides the local content requirement, O’Brien cites land acquisition and connection to the electrical grid as two other market entry obstacles for foreign investors in the renewable energy market in Ukraine right now. “Connection to the electrical grid is almost impossible because they (the authorities) are not giving out grid connection permission. It’s a political issue, not a technical issue,” O’Brien stressed. Investors also complain that the green tariff does not give enough incentive the way it works at the moment. The Ukrainian government grants the green tariff – one of the highest for wind and solar in the world – only after a project is completed, which makes an investment risky. In most countries, the green tariff is granted at the beginning of a project.

Peter Justin O’Brien

EuroCape’s country manager says that his company and some other foreign investors will be asking for a meeting with President Viktor Yanukovych to discuss the issue after the Oct. 28 parliamentary elections. “There could be a reasonable compromise,” he said optimistically. O’Brien says they are not entirely against the local content rule and as a compromise offer to tie the percentage of the local content share to the green tariff rate. That is, the bigger the local content in the renewable electric station facility, the higher the green tariff such companies should be getting. He believes that the current philosophy is “we, meaning several companies, do not want competition, we want to own this market.” He said that three companies in Ukraine are the most active in “lobbying for the local content increase to 50 percent.” According to him, those companies are DTEK, Activ Solar, and Donetsk-based Wind Parks of Ukraine. DTEK did not respond to a Kyiv Post inquiry. Activ Solar’s press service said their company “is not lobbying and has never lobbied for such an amendment.” Vladyslav Yeremenko, director of Wind Parks of Ukraine, told the Kyiv Post that they are “supporting the amendment, but not lobbying for it,” because it will create more jobs locally. He also said that foreign investors “missed time and now want to amend legislation” and added that “if they want to work in Ukraine, they have to follow the legislation.” Wind Parks of Ukraine is often tied to Anatoliy Blyzniuk, minister of building and housing, an allegation Yeremenko denies. It took Wind Parks of Ukraine some two years in order to launch and get green tariffs for their two wind power stations totaling 100 megawatts capacity. EuroCape has spent the last four years on a 500-megawatt wind power project, which it hopes to complete by 2016. Owned by billionaire and Yanukovych ally Rinat Akhmetov, DTEK finished its first 60-megawatt wind power facility in Zaporizhya Oblast last week in less than four years. Activ Solar, which is linked to Ukraine’s Security and Defense Secretary Andriy Klyuyev, installed solar parks with a total 270 megawatts of capacity in two years. The company has some 99 percent of all solar energy capacity in the country. Kyiv Post staff writer Yuriy Onyshkiv can be reached atonyshkiv@kyivpost.com

Getting Through the White Noise.

The Importance of on the Ground Risk Assessment When Entering Foreign Markets 

By: Alexander Gordin                                

In the November, 2011 issue of the New York Enterprise Report (www.nyreport.com), U.S. Congressman Michael Grimm (Staten Island, NY, R) highlighted Ukraine as a potentially attractive market for U.S. investors.  Since that time a flood of negative publicity focusing on corporate raids, political fallout from the arrest of the former prime minister, and expectations of economic contraction after the upcoming Euro 2012 Soccer Championships, have put a damper on investors’ desire to consider Ukraine as a potential business destination. With this in mind, I wanted to use Ukraine as an example of the need to perform internal comprehensive risk- and opportunity-analysis in the face of conflicting, publicly available information, misinformation or lack of balanced coverage — all that I call  white noise. The problem of risk opportunity assessment in international expansion is not unique to Ukraine.  Every country has its share of inherent risks, which both local and foreign businesspeople need to determine and overcome in their quest for good returns.  Yet Ukraine, with its sizeable population, complex business and political environments, abundant natural resources and important geopolitical location, represents a broad spectrum of tempting opportunities and risks that threaten to undermine investors at seemingly every corner. So let’s suppose your company decides to explore entering the Ukrainian market and initially begins exporting, with an eye for setting up local operations in the next 2-3 years.  Scanning recent press articles available on-line, you could see that a company controlled by U.S. shareholders was recently raided and its ownership allegedly snatched away from them by a state sanctioned criminal enterprise.  You would also see in a different article a prediction of economic collapse for the country immediately following the end of the soccer tournament finals in July.  There are other articles published around the world criticizing the Ukrainian president on jailing the former prime minister, along with a lot of statistical analysis with trailing indicators.  On the flip side you would also see a 100-plus page comprehensive report put out by the American Chamber of Commerce in Ukraine saying that the greatest investment opportunity sectors are agriculture, alternative energy, retail and pharmaceuticals. When you look at the just-published Fi3 Country Appeal Indices™ available at (www.fluentinforeign.com), you will see that Ukraine is ranked somewhere in the middle of all 180 countries on the forward-looking business appeal scale.  Much of the information you’d read, both positive and negative, is true, yet it should represent no more than 5-10% of your decision-making equation. To do business in emerging markets, you need to become a bit of a detective, building your own local network and getting to know the lay of the land for yourself.  If you are unwilling to invest the time, stay home and continue to read the news on the Internet. If you are serious about international expansion, this is what I recommend. • During your preliminary research, identify potential issues, dangers and opportunities. These will form your initial thesis, which you will either confirm or not during your initial visits into the country.  Notice I said visits, as one visit is not nearly enough. • Talk to as many people as you can about the issues.  Start with representatives of the U.S. Commercial Service, AMCHAM U.S. Ukraine Business Council staff and the members, interview law firms operating in the country, talk to local government officials and get their side of the story.  When you are between meetings, talk to taxi drivers, waiters, hotel clerks and local business people.  Some will be wary to talk to strangers, some will be more than happy to provide their honest opinions.  If you talk to many people, a true picture will emerge. •  Go out on the streets and observe people’s activities in restaurants, markets, shopping malls and entertainment venues. Trust your gut.  During your trips, you need to be methodically focused on understanding the true situation and flushing out opportunities for YOUR company’s business.  Do not get sidetracked by the massive amount of mud slinging and politics in which opposing forces often engage.  Yet, by the time you are done, you need to have a complete picture of all political, economic and criminal forces controlling the country and the industry you plan to enter.  You also need to understand your potential competitors, their allegiance and powerbase. • It is very important to understand the forces which affect the particular sector your company plans to enter. For instance, if you carry out your due diligence correctly, you may find out that although Ukrainian pharmaceuticals and alternative energy are listed as very attractive sectors, they are controlled by powerful interests which would greatly hamper any attempt to bring new medicines into the country or develop large scale solar or wind projects.  Fantastic opportunities, however, exist in smaller scale solar development, conversion of gas boilers to woodchip and export of woodchip production to nearby EU nations. • You may also find you that corporate raids in Ukraine, just like muggings in New York, do take place, but that does not mean one should be afraid to set up business in Ukraine (same as the notion that a person should not stop walking through New York streets at night).  Yet, just like walking alone on a dark abandoned New York City street, one should use prudence and caution when setting up a business abroad. • Choose your partners very carefully, perform thorough background checks through the U.S. Commercial Service and, if necessary through private investigation agencies.  Consider buying political risk insurance, which protects U.S. business interests from a number of perils, including expropriation, creeping expropriation and nationalization. Once you are done with your comprehensive due diligence explorations, amend your thesis, share it with some of your local advisors and begin to plot all-inclusive business plan that takes into account the information learned and risks identified during your research phase. For Ukraine the thesis may be something like this:  The country is risky and difficult to do business in, yet its educated population, industrial base, fantastic agricultural resources, growth potential and location make it a very attractive place to set up shop.  Industries like retail, automotive care, small-scale alternative energy conversions, hospitality, American franchises, private healthcare systems, private education, e-commerce, oil and gas, all make Ukraine a fantastic place to invest in or supply into right now.  Agriculture, industrial modernization and municipal rehabilitation are attractive in the mid- to long-term.

UKRAINE 2012 – FT Special Report

©Corbis

Download report  http://www.ft.com/intl/cms/0c2fdab2-005d-11e2-a30e-00144feabdc0.pdf

IN THIS ISSUE

Kiev finds itself caught between the east and the west as elections loom

State in a struggle for identity and direction

Kiev finds itself caught between the east and the west as elections loom, write Neil Buckley and Roman Olearchyk

Democracy: Ballot under scrutiny

There is intense international pressure for the parliamentary poll to be conducted fairly, writes Roman Olearchyk

Kiev residents walk past a sale sign©Bloomberg10:07pm

Economy: Reforms will be needed to stimulate growth

Recession has hit the nation hard. Neil Buckley and Roman Olearchyk consider why and look at hopes for recovery

10:07pm

Mykola Azarov: Good relations with EU and CIS are ‘vital’

The right-hand man to President Viktor Yanukovich talks to Neil Buckley

a McDonald's in Kiev©Bloomberg10:07pm

Foreign direct investment: ‘Risky’ state also has its attractions

Despite the difficulties, there is still much to draw investors, says Roman Olearchyk

Seismology exploration trucks, operated by Vikoil Ltd©Bloomberg10:07pm

Energy: Outsiders boost power sector

Kiev is heading for independence from Russian supplies, writes Roman Olearchyk

10:07pm

IPOs: Companies still look westward for cash

London has been a top destination for initial public offerings but Warsaw is also proving popular, writes Jakub Parusinski

view of Lviv©Michal Parusinski10:07pm

Lviv: Habsburg jewel is a historic survivor

Jakub Parusinski finds a destination buoyed by Euro 2012 and hoping to reach the big league

Farmers work on a field as a cyclist passes by in front of chimneys of a factory near the village of Kostyantynivka©Reuters10:07pm

Agriculture: Room for profitable growth in the fields of black earth

The bread basket of Europe produces just a fraction of its potential yield, says Mark Rackevych

UKRAINE – MACROECONOMIC SITUATION –

JULY 2012

 
ANALYTICAL REPORT: by Olga Pogarska, Edilberto L. Segura SigmaBleyzer Private Equity Investment Firm & The Bleyzer Foundation (TBF), Kyiv, Ukraine

Published by U.S.-Ukraine Business Council (USUBC), Washington, D.C., Tuesday, September 4, 2012 WASHINGTON, D.C. – The “Ukraine – Macroeconomic Situation – July 2012” analytical report prepared by the SigmaBleyzer private equity investment firm and The Bleyzer Foundation (TBF), Kyiv, Ukraine, members of the U.S.-Ukraine Business Council (USUBC), http://www.USUBC.org, is found below.

SUMMARY POINTS —–  
          (1)  Further deterioration in the external environment hit the Ukrainian economy in June: industrial production fell by 1.4% yoy and exports dropped by 11.3% yoy in US Dollar terms. (2)  Robust domestic consumption and acceleration in agriculture supported real sector performance in June. (3)  Consumer prices fell for the third month in a row in July. (4)  The National Bank of Ukraine continued to support a strong Hryvnia peg to the US Dollar through sizable foreign exchange interventions and maintaining tight banking liquidity. (5)  Tight liquidity led to a notable increase in the cost of borrowing for the private sector, further undermining credit growth. (6)  Due to a wider current account deficit and larger external debt repayments, Ukraine’s BoPs switched to a $1.5 billion deficit in June, but may turn into a surplus by next month thanks to a $2
                 billion sovereign Eurobonds placement. (7)  Ukraine reported a 40% yoy lower state budget deficit in 1H 2012 thanks to strong budget revenue growth and control over non-social expenditures. At the same time, public finances will
                 remain under pressure in the short-term, requiring solid fiscal consolidation measures after the elections.EXECUTIVE SUMMARY —–
According to early State Statistics Committee of Ukraine estimates, real GDP growth accelerated to 3% yoy in 2Q 2012, up from 2% yoy in the previous quarter. The acceleration may be attributed to stronger private consumption, an earlier harvesting campaign and co-hosting of the Euro-2012 football championship.
Thus, loose fiscal policy and record low inflation underpinned a 16.5% yoy increase in real wages in 2Q 2012 compared to about 14.7% yoy in 1Q 2012. Thanks to strong real wage growth and the European football tournament held in June, retail sales picked up by 16% yoy over January-June 2012, while output production in food processing maintained growth momentum, advancing by 3% yoy in June.Agriculture production, which was up by 28% yoy in June compared with 2.5% yoy a month before, helped offset weaker construction and industrial sector performance. With the completion of infrastructure upgrade projects related to the Euro-2012 football championship, construction declined by almost 9% yoy in June 2012.
Renewed Eurozone sovereign debt woes and slowing world economic growth weighed on world commodity prices, which fell sharply in June. In addition, domestic lending remains sluggish, constraining economic activity.
As a result, Ukraine’s industrial production declined by 1.4% yoy in June on weaker performance of export-oriented and capital intensive industries. Thus, the chemical industry lost steam, expanding by about 6% yoy in June from almost 15% yoy a month before. Output in metallurgy, machine building and manufacturing of construction materials fell by about 1% yoy, 9% yoy and 5% yoy in June, respectively.
Although robust domestic demand will continue to support economic growth through the rest of the year, due to a more subdued global growth outlook in 2H 2012 and sluggish domestic credit growth than we initially expected, real GDP growth is forecast at around 2% yoy in 2012.Ukraine witnessed a drop in its consumer prices in July, for the third consecutive month. In annual terms, however, the index fell by 0.1% in July compared to 1.2% the previous month. Slower decline may be attributed to an easing favorable statistical base impact on food prices and increases in railway transportation and phone service tariffs. Considering price developments from January to July 2012, our year-end inflation forecast was adjusted downwards to 6% yoy.May-July 2012 showed that within the NBU’s complex policy mix of stimulating anemic credit growth and maintaining the Hryvnia exchange rate peg to the US Dollar, the latter target has prevalence over the former. To contain currency movements in July, the NBU continued to intervene in the foreign exchange market by selling almost $1.2 billion of its international reserves on a net basis and keeping banking sector liquidity tight.
Liquidity constraints and high credit risks pressured credit rates upwards and affected credit availability for the real sector. The stock of bank credit grew by only 3.8% yoy in June and was only 0.1% higher since the beginning of the year.The Balance of Payments switched to a $1.5 billion deficit in June amid higher external debt repayments and a worsened current account. While a deficit on the financial account was anticipated, the deterioration in the current account balance was sharper than expected. Weaker overseas demand and falling world commodity prices caused deep declines in exports of metals, chemicals and mineral products, which together accounts for more than half of Ukraine’s exports.
Although agricultural exports kept growing at a solid pace, total export of goods fell by 11% yoy in US Dollar terms in June compared to a 9.6% yoy increase the previous month.
A financial account balance is expected to turn into a surplus by July thanks to successful issuance of $2 billion of sovereign Eurobonds. Despite a favorable near-term outlook, Ukraine’s BoPs will remain under pressure in the short and medium term due to high external financing needs amid a challenging external environment.At the beginning of 2Q 2012, Ukraine amended its state budget law to implement generous social spending increases. Unlike expectations, compensatory measures, such as a wealth tax, were not introduced.
However, robust revenue growth and control over ‘non-social’ expenditures helped keep the state budget deficit 40% lower in 1H 2012 than in the respective period last year. Near-term fiscal financing needs have eased thanks to robust privatization receipts, a $2 billion Eurobond issuance and a VTB loan rollover.
However, public finances are likely to remain strained in the short-term as the annual state budget revenue target looks overly optimistic, given slower economic growth and inflation than projected by the government, reliance on NBU profit transfers to the budget, and expected acceleration in expenditures through the end of the year. A notable increase in state budget guarantees at the end of July adds to fiscal sustainability concerns. Hence, solid fiscal consolidation measures will be needed to ease these concerns after the elections.ECONOMIC GROWTH —–
Renewed fears over the Eurozone sovereign-debt crisis and worries of a faster-than-expected slowdown in Asian economies hit the export-dependent Ukrainian economy in June through weaker external demand and world commodity prices.
However, economic growth remained relatively strong thanks to buoyant domestic consumption and acceleration in agriculture. Thus, according to State Statistics Committee of Ukraine estimates, real GDP growth sped up to 3% yoy in 2Q 2012, up from 2% yoy in the quarter before.Agriculture was the largest contributor to economic growth in June. The sector’s output production leaped up by 28% yoy in June compared with 2.5% yoy a month before, according to NBU estimates. Such a rapid acceleration, however, should be primarily attributed to a favorable statistical base effect due to the early start of a harvesting campaign this year.Thanks to loose fiscal policy and very low inflation, real wages grew by 15.6% yoy in 1H 2012, benefiting demand-driven sectors. In addition, the 2012 UEFA European Football Championship, which Ukraine co-hosted with Poland in June, contributed strongly to the consumption boost in June.
Thus, retail sales turnover picked up by 16% yoy in January-June compared with 15.5% yoy for the first five months of the year. Restaurants reported acceleration in turnover to almost 9% yoy in 1H 2012. Food processing has maintained growth momentum, expanding by 3% yoy in June. Passenger transportation also improved its performance that month.
 
At the same time, completion of large infrastructure projects and subdued credit growth weighed on construction sector activity. Real value of construction works was 1.9% yoy lower in 1H 2012. Industrial production fell by 1.4% yoy in June 2012 mainly on account of weaker performance in metallurgy, chemicals, machinery and domestic oil-refining.
Amid a sharp drop in world commodity prices in June and lower external demand, Ukraine’s production of metallurgical products was 0.8% yoy lower in June, while the growth in chemicals slowed to 6.2% yoy that month compared to almost 15% yoy a month before.Output production in machine-building, the fourth largest industry after metallurgy, food processing and electricity production, declined by about 9% yoy in June. Decaying demand (both domestic and foreign) for Ukraine’s automobiles has contributed the most to the decline in the industry and may be attributed to changing consumer preferences, [1] high credit costs [2] and intensified competition on foreign markets, particularly in CIS countries. [3]
The near-term outlook for the industry looks even more challenging as Russia, the principal export destination for Ukraine’s vehicles, is introducing a salvage fee on cars, which will make imported automobiles more expensive. [4] To stimulate the automobile industry in Ukraine, the Ukrainian government has been considering an increase in import duties on cars by about 6.5%-15%.
The effectiveness of this measure looks doubtful, however. Domestic auto-making requires significant investments to renovate existing capacities. At the same time, limited access to financial resources (both domestic and foreign) and a complicated investment climate hinder investments in the sector. Moreover, it may raise concerns over the country’s compliance with WTO regulations and may further complicate the situation around FTA with the EU.On the upside, mining and production of electricity continued to demonstrate healthy growth rates in June. Amid expensive Russian natural gas imports this year, Ukraine has been increasing domestic production of energy resources. Thus, extraction of fuels and energy minerals grew by 4% yoy in June and 3.4% yoy over 1H 2012. Improved export opportunities and higher domestic demand due to hot weather underpinned a 6.6% yoy increase in production of electricity in June.For the rest of the year, we expect the Ukrainian economy to slow down, mainly as a result of sluggish global growth, tight domestic credit conditions, political uncertainty related to parliamentary elections and waning favorable effects (early harvesting, Euro-2012 championship). Real GDP is forecast to increase by about 2% yoy in 2012.FISCAL POLICY —– The fiscal situation was also better than expected in 1H 2012, though deeper data readings present a less favorable picture. Rather unexpectedly, state budget revenue growth accelerated to almost 17% yoy in nominal terms in 1H 2012, up from about 12% yoy over January-May. The acceleration was achieved despite worsening industrial sector growth and foreign trade performance in June as well as record low inflation for the period.
Strong consumption growth, higher excise taxes, tighter tax administration and improved customs procedures have supported the increase in budget revenues. Thus, proceeds from VAT, a consumption tax, rose by a nominal 13.6% yoy in 1H 2012, up from 10.4% yoy in the previous period. Receipts from excise taxes on imported goods and import duties soared by an impressive 47% yoy and 35% yoy in 1H 2012.Despite a solid increase in tax revenues, the NBU transfer of its profits for 2011 in the amount of UAH 4.5 billion ($0.6 billion) in June was the principal contributor to June’s speed-up in state budget revenues. Thus, according to the 2012 state budget law, the NBU should quarterly transfer a tally of UAH 9.6 billion of its 2011 profits. As of the end of June 2012, the NBU had already transferred more than 80% of this amount.
Moreover, at the beginning of July, the annual target for NBU profit transfers was raised to UAH 10.6 billion. These developments may signal that the government budget revenue plans are strained. An expected slowdown in economic growth in 2H 2012 and higher budget expenditures add to near-term fiscal pressures.So far, state budget expenditures rose by a nominal 13.3% yoy in 1H 2012, virtually the same pace as in January-May as higher social spending (27.5% yoy vs. 21% yoy respectively) was offset by slower rise in other expenditures (infrastructure projects, security and defense, etc.). As a result, the state budget deficit, standing at UAH 6.7 billion ($0.8 billion), was almost 40% lower than in the corresponding period last year.
At the same time, state budget expenditures are likely to accelerate through the rest of the year as fulfillment of pre-election social initiatives only started to gain momentum in May and expenditures are usually skewed toward the end of the year. Thanks to a more active privatization process this year, an issuance of $2 billion Eurobonds in July and a rollover of a $2 billion VTB loan, Ukraine may have sufficient resources to cover its short-term needs.
However, recurrent pre-election social expenditures, a delay in energy sector reform, domestic borrowings in foreign currency and generous state guarantees, envisaged by July’s amendments to the 2012 State Budget Law, challenge fiscal sustainability in the medium term.In particular, at the end of July, the parliament increased the maximum limit of state budget guarantees, which may be granted in 2012, by 4.6 times to UAH 68.8 billion (about $8.5 billion, or 4.6% of projected full-year GDP.)
According to Ukrainian officials, the new guarantees will be provided for agriculture and natural gas substitution projects, principally in accordance with the Memorandum of Cooperation between Ukraine and China in energy and agricultural sectors.
According to the Memorandum, Ukraine may receive up to $3 billion from the Export-Import Bank of China for agricultural projects and about $3.6 billion from China Development Bank for energy projects. So far, however, there are no details of the agreements. Such a notable increase in state budget guarantees adds to fiscal sustainability concerns as public and publicly guaranteed debt may approach 40% of GDP in 2012.MONETARY POLICY —– Consumer prices in Ukraine have been falling for the third month in a row. Deflation, however, was relatively moderate in July, as the index fell by 0.1% yoy compared to 1.2% yoy a month before, which may be attributed to a waning favorable base effect. For the same reason, the decline in food prices, the main contributor to easing inflationary pressures over the last year, slowed to 4% yoy compared to 6.4% yoy in June.
Moreover, dry hot weather during July-beginning of August may adversely affect yields of locally produced fruit and vegetables, which means they are likely to be dearer this summer and fall. On a positive note, food inflation is projected to stay moderate through the rest of the year, benefiting from high grain and other foodstuff stockpiles, a solid harvest this year, lower energy costs and a modest increase in utility costs and other administratively-regulated prices.In particular, domestic petroleum prices reported a monthly decline for the second month in a row in July amid easing world energy prices. In annual terms the growth moderated to 4.9% that month compared to 6.2% yoy a month before. The existence of floating excise duties on fuels, introduced at the end of May 2012, hampered faster disinflation within this sub-group.
However, the fall in fuel prices was sufficient to offset the cost increases in phone services and railway transportation. Due to government reluctance to raise tariffs ahead of parliamentary elections, utility services were only 1.4% yoy more expensive in July 2012. Early summer sales in clothes and footwear stores this year were behind a 1.2% yoy drop in clothing and footwear prices in July 2012.
As a result, the overall consumer price index in July 2012 was 0.1% lower than in December 2011. Expected adjustments in administered prices after parliamentary elections will cause consumer price inflation to accelerate to about 5% at the end of the year. However, it will be the third lowest in Ukraine’s independent history.Monetary conditions remained tight in July 2012. Sizable NBU sale interventions, which amounted to $1.2 billion on a net basis in July, to support the Hryvnia exchange rate had a sterilizing effect on Hryvnia supply. At the same time, due to higher refinancing operations in July and a decline in cash balances on government accounts with the NBU (by almost 35%), the monetary base increased by 0.7% mom in July. In annual terms the growth moderated to 3.9% in July compared to 6.6% yoy a month ago.
In contrast, the growth of money supply (M3) accelerated from 8.9% yoy in June to 9.6% yoy in July, which may be attributed to a faster increase in deposits. Amid liquidity shortages (overnight credit rates on interbank market, one of the most common measure of liquidity stance in the banking sector, stood at about 15-20% pa during most of July), commercial banks have been raising deposit rates to attract more deposits.
In July, the average weighted rate grew on Hryvnia term deposits grew to 13.8% pa, up from 12.6% pa in June. Intensified population demand for cash foreign exchange in June-July caused commercial banks to increase rates on forex deposits too. As a result, the stock of deposits rose by 12.4% yoy in July compared to 9.9% yoy in June.A rise in the cost of funds for commercial banks, coupled with still high share of non-performing loans and high credit and economic risks, made financial institutions follow an even more conservative lending strategy and increase lending rates.
In particular, interest rates on Hryvnia loans grew to 19.6% pa on average in July, up from 17.7% pa in June. The nominal cost of borrowing was always relatively high in Ukraine, which was one of the main causes driving the massive entry of foreign banks into the Ukrainian market during 2004-2008.
However, strong credit growth during those years (in excess of 50% pa), inter alia, was the result of declining and even negative real interest rates. This year, the deflationary environment made the borrowing particularly expensive for the private sector. As a result, the stock of bank loans was only 3% yoy higher in nominal terms at the end of July and declined 0.1% since the beginning of the year.Stimulation of credit growth was declared one of the priority tasks of monetary policy in 2012. In 1H 2012 the NBU took some steps to boost lending activity (the regulator cut its discount rate and the cost of refinancing resources, relaxed procedures for commercial banks to form reserve obligations[5], etc.).
However, with intensified Hryvnia depreciation pressures since mid-May 2012, the NBU policy measures to maintain a strong Hryvnia peg to the US Dollar undermined the effectiveness of credit stimulus efforts. Although the NBU officials announced the gradual shift towards a more flexible exchange rate regime, we do not expect foreign exchange policy to change until after parliamentary elections.
Hryvnia exchange rate stability for this period will be maintained thanks to NBU interventions and a tight monetary stance (liquidity squeeze, administrative measures to reduce demand for foreign currency, etc.). As a result, credit growth is likely to remain weak this year.
INTERNATIONAL TRADE AND CAPITAL —– Deepening concerns over the Eurozone debt crisis and fears about a faster-than-expected slowdown in Asian economies weighed on business sentiments globally, leading to further weakening in world commodity prices and external demand for Ukrainian goods in June. Exports fell by 11.3% yoy in US Dollar terms in June compared to a 9.6% yoy increase the previous month.
Poor export performance was mainly the result of deep declines in export of metals, chemicals and mineral products (-21% yoy, -6% yoy, and -42% yoy, respectively), which together account for more than half of Ukraine’s exports.
In addition, exports of machinery and equipment decelerated sharply from 26% yoy in May to only 3% yoy in June amid intensifying competition on the CIS markets (the main destination of Ukraine’s machinery exports) and Russia’s indirect protective measures of its local car industry. [6]
On the upside, export of grains and food products kept growing at a solid 11% yoy rate in June, although the growth also lost momentum in June compared to the previous two months. While the deceleration may be attributed to a lower agricultural harvest this year, we believe expectations of a further increase in world grain prices amid poorer harvest outlooks in a number of grain-producing countries (such as US, Kazakhstan, some EU countries, etc.) are a more probable reason.Due to weaker industrial and export performance, imports also decelerated in June, advancing by 2% yoy, down from almost 11% yoy a month before. Despite deceleration, imports notably outpaced exports, which led to worsening of both foreign trade and current account balances.
In June, the current account deficit widened to $1 billion, bringing the cumulative balance to -$3.6 billion in 1H 2012. In addition, due to higher external debt repayments, the financial account switched to a $0.5 billion deficit that month. As a result, the Balance of Payments (analytic presentation) reported a $1.5 deficit in June, which was covered by a reduction in gross international reserves.The financial account balance may turn into a surplus by July thanks to a $2 billion issuance of Ukraine’s sovereign Eurobonds. Moreover, there are signs that world commodity prices may have bottomed out in June. In addition, grain prices on international markets are likely to continue growing, supporting Ukraine’s export performance. As a result, in the near-term outlook for the BoP looks relatively favorable.
However, high external debt obligations and strengthening population demand for foreign currency ahead of parliamentary elections will continue straining Ukraine’s BoP in the short and medium term. As a result, the Hryvnia is likely to be under depreciation pressures, but they are expected to be minimized by NBU interventions and administrative measures to contain demand for foreign currency.FOOTNOTES: [1]  According to Auto-consulting, the share of SUVs (sport utility vehicles, which also includes crossovers) in the Ukrainian car market grew from about 14% in 2007 to over 26% in 1H 2012. [2]  Although commercial banks have maintained their focus on car loans, a liquidity squeeze and higher political and economic uncertainties caused lending rates to increase in recent months. [3]  Russia has been rapidly increasing production of light vehicles in recent years, to a notable extent, thanks to government policy of encouraging domestic production of foreign car brands. In 2011,
       production grew by 44.5% yoy, according to Rosstat, and 11 out of 15 global car-manufacturers had their assembly lines in Russia. [4]  A new salvage fee will be enforced from September 1st, 2012. Though it will be levied on both foreign-made and domestically produced cars, domestic car makers will be allowed to issue a warranty 
       that ensures the future car recycling, while importers will be required to pay the fee upon importation of the vehicle. [5]  The NBU relaxed a requirement for commercial banks on the amount of funds that should be kept on a separate account with the NBU, from 60% to 50% of total obligatory reserves. The decision
       took effect at the end of May. At the same time, the amount of obligatory reserves that should be kept on the correspondent account at the NBU at the beginning of the operating day was increased
       from 30% to 40%. The latter move was made to better control commercial banks liquidity. In the second half of June, the NBU further raised the portion of obligatory reserves to be kept on the
       correspondent account at the NBU at the beginning of the operating day to 50%. In addition, reserve requirements for forex-denominated current deposits were increased by 1-1.5 percentage points. [6]  See footnote 4 in this report for greater details.

Ukraine to triple solar power capacity in 2012

Aug. 1, 2012, 8:25 a.m. | Business — by Interfax-Ukraine

Ukraine in 2012 will increase the capacity of solar power plants by 400 MW, to 600 MW, forecasts Macquarie Research on the basis of information from the European Photovoltaic Industry Association, Germany’s Solarbuzz and other sources. © AFP
Ukraine in 2012 will increase the capacity of solar power plants by 400 MW, to 600 MW, forecasts Macquarie Research on the basis of information from the European Photovoltaic Industry Association, Germany’s Solarbuzz and other sources.
According to the analysts, Ukraine by 2016 will construct and commission new PV facilities with a total capacity of 1.8 GW, which is almost equivalent to the capacity of two nuclear reactors. According to Macquarie Research’s estimates, Ukraine, which for the first time was included in the forecast, in 2012-2013 will annually put in operation 400 MW of new PV facilities, in each of 2014 and 2015 – 500 MW. Meanwhile, according to the updated draft Energy Strategy of Ukraine, prepared and promulgated by the Energy and Coal Industry Ministry, the installed capacity of solar power stations will increase to 1.5-2.5 GW by 2030. However, many Ukrainian and foreign experts point out that the indicators of the solar power development proposed by the energy ministry do not correspond to the actual rate of the sector’s development. Analysts from Macquarie Research believe that the solar power sector will develop more rapidly in Ukraine than in Bulgaria, Slovakia, the Czech Republic, Austria, Portugal, the Netherlands, Switzerland, Sweden and Denmark, but more slowly than in Germany, France, Italy, Belgium and Greece. The leaders in the industry’s development in the next four years will be China, the United States and Germany. As reported, over the past two-and-a-half years Ukraine constructed and commissioned more than 20 solar power plants with a total capacity of over 270 MW. In particular, at the end of last year it launched the Perove solar farm of over 105 MW in Crimea, which is the largest solar park in Europe and the CIS. In addition, Ukraine’s parliament in July at first reading approved a bill aimed at simplifying the access of households to the mechanism of a feed-in tariff. The adoption of this document might give a new impetus to the development of solar energy in Ukraine, as it will make the installation of PV panels on the roofs of citizens’ own homes economically attractive.

Ukraine: Risk update Real GDP growth slowed to 2% yr/yr in Q1 from 5% in Q4 2011. The main driver was private consumption (up 9.8% after 16.8% in Q4). Fixed investment growth moderated to 7.6% (16.8% in Q4), which suggests that there was large inventory destocking in the first quarter. Exports continued to decline, by 6.8% in Q1 (-9.2% in Q4). Imports also fell, by 4.3% (+2.4% in Q4). Early Q2 data for industrial output (weak) and retail sales (robust) indicate a continuation of Q1 trends. External liquidity risk remains high, reflected in a continuing current account deficit (USD2.6bn in January-May), increased investment outflows in Q2 and a 24% yr/yr fall in FX reserves in June. Downward pressure on the quasi-fixed UAH/USD exchange rate has intensified recently.

Statement By The IMF Mission To Ukraine (Text)

By Ainhoa Goyeneche, Bloomberg

Following is the text of the mission statement from the International Monetary Fund visit toUkraine: IMF Executive Board Concludes 2012 Article IV Consultation with Ukraine On June 29, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Ukraine.

Background

Ukraine had a strong economic recovery in 2010-11, following the deep recession ensuing from the 2008-09 global crisis. However, recovery is now slowing. Lower demand for Ukraine’s exports and slow credit growth are weighing on economic growth, which is projected at 3 percent this year. Inflation is projected to rise to 7.4 percent during the year, reflecting wage pressures and rising food prices. Weakening external demand is expected to widen the current account deficit to 6.5 percent of GDP. Risks remain elevated in an uncertain global environment. A significant contraction in global demand, commodity price shocks, or deleveraging by European banks would pose risks to external stability given Ukraine’s high external financing requirements. Following a 3.1 percent of GDP government deficit improvement in 2011, the fiscal position is now under pressure. Public debt fell from 41 to 36 percent in 2011 and pension reform improved medium-term fiscal prospects. This year, a supplementary budget has increased wage and pension expenditures and absent increased revenue collection to finance this, staff projects the general government deficit at 3¼ percent of GDP, compared to a target of 1.8 percent. The state-owned gas company’s deficit is projected to reach 2 percent of GDP this year, adding to the weight of the general government deficit on public finances. The current tight monetary stance aims at addressing external risks and containing inflation. However, this combined with deleveraging by banks has constrained credit growth. Liquidity tightening as well as prudential and administrative measures have contributed to exchange rate stability. Banking sector reforms have advanced although balance sheets remain week. The banking system appears well capitalized. Nonetheless, profitability is near zero, nonperforming loans remain high, and banks balance sheets remain exposed to currency movements. Measures have also been taken to deregulate the economy and to simplify the tax and customs codes that have the potential to improve the business environment.

Executive Board Assessment

Executive Directors welcomed the progress made by Ukraine since the 2008-09 crisis, including the rebound in growth, and the decline in inflation and in the general government deficit. Directors also commended the authorities’ efforts to advance several reforms, particularly the approval of the pension law and the new tax and customs codes. They noted, however, that the country faces lingering vulnerabilities due to low reserve cover, large external and fiscal funding needs, and the difficult external environment. Directors stressed the need for strengthened policies and reforms to reduce these vulnerabilities, build buffers for domestic and external stability, and improve mediumterm growth prospects. Directors underscored that fiscal consolidation remains a priority. They welcomed the authorities’ determination to meet the 2012 deficit target and encouraged them to identify quickly contingency measures to safeguard against possible shortfalls. Over the medium term, continued efforts will be needed to strengthen public revenue, reform the public sector, and reorient spending towards growthenhancing priorities. Directors stressed that a comprehensive reform of the energy sector is critical to reduce the strain on the budget and gain energy independence. They urged the authorities to gradually increase gas and heating tariffs and enhance payment compliance. Increases in domestic energy prices will be essential to bring supply and demand into balance, alongside increased investment in domestic energy production. Energy efficiency improvements and bettertargeted subsidies to protect the poorest should also be important components of the energy sector strategy. Directors advised that monetary policy should focus more on price stability. They noted that a tighter monetary stance would be warranted if balance of payments or inflationary pressures intensify. Directors concurred that gradually increasing exchange rate flexibility would help mitigate external shocks, strengthen reserves, and preserve competitiveness. Increased flexibility should be supported by efforts to reduce balance sheet mismatches in the financial sector, along with fiscal, monetary and wage policies consistent with maintenance of price stability. Directors welcomed the progress made in the banking sector. They urged the authorities to address the remaining weaknesses, notably the high level of nonperforming loans, low profitability, and currency mismatches, to allow the sector to fully support economic growth. Directors welcomed the plans to reduce banking system exposure to foreign exchange risks, including through limited sales to banks of foreign currency linked bonds issued by the government. More broadly, Directors encouraged the authorities to press ahead with their efforts to unwind crisis era policies. Directors welcomed progress under the President’s Economic Reform Plan which aims at promoting growth, improving the business climate, and attracting investment. Achieving these objectives will require implementation of comprehensive structural reforms, including stronger governance and further privatization. SOURCE: International Monetary Fund http://www.bloomberg.com/news/2012-07-06/statement-by-the-imf-mission-to-ukraine-text-.html

To contact the reporter on this story:
Ainhoa Goyeneche in Washington at  agoyenechecu@bloomberg.net

Kiev profits from Euro 2012

June 29, 2012 by Roman Olearchyk, Financial Times

Kiev is in an extra cheery mood this weekend, expecting a record inflow of fans for the Spain vs Italy Euro 2012 European football championship final hosted in the Ukrainian capital on Sunday. The authorities hope that the final will cap what’s been a successful tournament for Ukraine. Even though the national team was knocked out early in the competition, the economy has done well.  Euro 2012 seems to have attracted about 1m fans to Ukraine, twice as much as pessimists predicted and roughly in line with (optimistic) official predictions. Despite being battered by foreign media in the run-up to the games over political persecution and racism that was described by some British football players as too dangerous to risk attending games, Ukrainian officials say about one million fans visited the country as of June 25. “According to border guards, the number of passengers crossing Ukraine’s borders has since June 5 increased by 25 percent, totalling six million people. That is, around 900,000 [football fans visited Ukraine],” Interfax-Ukraine news agency quoted Markiyan Lubkivsky, director of UEFA Euro 2012 in Ukraine, as saying. There will be at least “a million fans,” about what was hoped for, Lubkivsky added. Attendance at stadiums has averaged 98 percent to the joy of their owners, not to mention food and drink vendors. Officials said all four Ukrainian host cities – Kiev, Lviv in the west, and eastern industrial cities Kharkiv and Donetsk – fared well. Many European Union-based fans said their visit to Ukraine for the games exceeded expectations, stressing that they experienced no racism, only fun and high levels of hospitality. Only about 30,000 fans from Britain and France travelled as far east as Donetsk, where their teams played a fair share of games. But nearly 40,000 fans from Russia crossed the border, said Donetsk city mayor Oleksandr Lukyanchenko. Another 50,000 EU-based fans poured in this past week to see Spain’s victory over Portugal. In Lviv, the closest city for many travellers and a potential tourist haven thanks to picturesque architecture, officials have estimated that the hundreds of thousands of fans spent on average 110-120 euros per day. According to news agency Interfax-Ukraine, as of June 21, visitors of Kyiv’s central fan zone alone had drunk more than 200,000 litres of beer, and eaten 8 kilometres of sausage, 18,000 ice creams and 60,000 hot dogs. A more comprehensive summary of figures breaking down the nation’s Euro 2012 earnings, including visitor numbers from this weekend’s finals, are expected to be presented during a July 4 press conference by President Viktor Yanukovich. History has shown that hosting major sporting events does not always equate to big earnings for host nations. But so far, it looks like a success for Ukraine and Poland. London-based consultancy Capital Economics has estimated in a May 28 report that the “economic benefit of Euro 2012 for Poland and Ukraine are more significant than is usually the case with major sporting tournaments.” Spending by one million tourists could boost GDP by “around 0.2 per cent of GDP in Poland and 0.4 per cent of GDP in Ukraine,”  said Capital Economics. These numbers are always a bit rough-and-ready. But the anecdotal evidence looks very positive.

Ukraine’s Soccer Party a Success Despite Image Problem

01 July 2012
Reuters

A Femen protester wielding a rubber stick against police at a rally outside Kiev’s Olympic Stadium on Sunday.

Efrem Lukatsky / AP

A Femen protester wielding a rubber stick against police at a rally outside Kiev’s Olympic Stadium on Sunday.

KIEV — Ukraine kept the embarrassing case of jailed former Prime MinisterYulia Tymoshenkolargely out of sight, the West’s token protests barely registered, and Ukraine, in the end, threw a smiling, trouble-free party that made it many friends among Europe’s football-going public. The only crowd violence — a persistent fear of organizers at big football feasts — took place not in Ukraine but in co-host Poland, when Poles and Russian fans clashed early in the tournament. So Ukraine, which went into the three-week Euro 2012 dogged by foreign media charges of racism, homophobia and corruption, has grounds for saying it proved many of its critics wrong. Italy and Spain met in the final in Kiev late Sunday. But once the final whistle has been blown and the last drinks’ marquee has come down, PresidentViktor Yanukovychwill have to go back to handling his fractious relations with Europe, which is troubled by his lack of commitment to democracy. Thousands of European fans were deterred from visiting by adverse Western media reports, high prices for accommodations and huge distances between the four match-hosting cities. But a long June of nonstop street partying has brought thousands of Ukrainians together with those of Europe’s football faithful who did make the long trip to a country that, 20 years after independence, is still far off the beaten tourist path. They’ve drunk, danced and whooped it up in front of the big “fan zone” screens. Without any common language, they’ve shared each other’s success on the pitch and helped drown each other’s sorrow. Despite the huge numbers of foreign supporters — there were 20,000 Swedish fans alone in Kiev — few incidents, racist or otherwise, have been reported. At times in the early hours, drunken supporters had to be coaxed — or pulled — down from the graceful chestnut trees that line Kiev’s main thoroughfare. But the groups of red-bereted riot police waiting in side streets in the city center were only occasionally called to divide groups of supporters squaring off against each other. So in many ways, Yanukovych has good reason to ride a mood of national joy after hosting Sunday’s final at Kiev’s Olympic Stadium. But analysts say Yanukovych still has to resolve the dispute with the EU over the jailing of Tymoshenko if he wishes to capitalize on the goodwill generated by the tournament. “At the people’s level, Ukraine was a nice revelation for the fans, but I don’t think the successful organization of the tournament will shift the perception of politicians about Ukraine,” said Olga Shumylo-Tapiola, a visiting scholar of Carnegie Europe. Boycotts by Britain, France and Sweden passed largely unnoticed as sports carried all before it in the tournament’s opening stages. Ukrainian authorities, anxious to avoid embarrassment, put the Tymoshenko affair on the back burner. Tymoshenko’s appeal of her conviction, and a new trial on charges of tax evasion and attempted embezzlement, were postponed until after the tournament. Few, though, would deny that Ukraine confounded its critics by its organization of facilities. The creation of a vast pedestrian-only “fan zone” along Kiev’s main boulevard and central Independence Square turned the city center into a vast playground that throbbed and pulsated with partying — even on nonmatch nights. Only the church and a neo-feminist group fretted: A branch of the Ukrainian Orthodox Church denounced the sinful “monkey” frenzy of fans, while activists from the Femen group, which says Euro 2012 encourages prostitution, abused fans and kicked their drinks off tables. A local weekly, Kyiv Post, quoted city sex workers and monitoring agencies as saying there had been no increase in demand for sex services during the tournament. “After the championship started, I spoke to girls in Kiev and other host cities, and none of them spoke about crowds of clients,” Olena Zuckerman, who heads the Legalife sex workers protection group, was quoted as saying. “So people who invested in the sex business [for Euro 2012] will be disappointed.” Much-publicized charges in the British media of racism in Ukrainian football rang hollow, too. In Donetsk, one of Ukraine’s match cities, England fans towed a mock coffin through the street, denouncing England footballer Sol Campbell. He had warned supporters before the tournament to stay at home “because you could end up coming back in a coffin.” “If it had not been for the Tymoshenko problem, the Euros would have really helped Ukraine,” said Volodymyr Fesenko, an analyst of Penta, a think tank. “It was a test for Ukraine to see whether it could handle such a complicated task as organizing the Euros. But our internal political problems have detracted from any positive [Euro] effect,” he said.

The Moscow Times

 _______________________________________________________________________________________________

As Ukraine and Poland co-host EURO-2012 soccer (football) finals starting this week, we thought that it would be a good idea to spotlight these countries from the economic angle and track their development pre, during and post the EURO 2012 tournament.  Both these countries represent very interesting examples of emerging markets, each with a full set of issues, solutions, problems and potential business opportunities.  To help us achieve our goal we set up special pages on this blog called “Emerging Markets Spotlight  – Ukraine and Poland respectively.    On these pages we will profile each country and will attempt to highlight more interesting and pressing issues, both domestic and external.  We will also interview with various parties involved in economic landscapes of these countries.  Our first interview is with the Mr. Sergiy Arbuzov, The Governor of the National Bank of Ukraine.  Full text of the interview is found below, following the Getting Through the White Noise article.

An Interview with 

the Governor of the National Bank of Ukraine – Sergiy Arbuzov.

National Bank of Ukraine June 8, 2012 Today, as the world economy overcomes financial turbulence and experiences probably the most difficult period  since times of Great Depression, we interview The Governor of the National Bank of Ukraine Sergiy Arbuzov to find out how Ukraine, and particularly its financial community, is dealing with the these complex economic times.  Governor Arbuzov believes, that today’s challenges and problems require non-standard approaches from all participants of the financial market. With this objective NBU recently suggested considering a possibility of inclusion of platinum in the international reserves of the central banks. As of today, out of all precious  metals only monetary gold is included in reserves of the central banks; though values of other rare metals, such as silver, platinum, and palladium, etc., continue to grow. Leading economic experts consider these metals for possible inclusion as additional currency reserve metals. If the world financial community will support Governor Arbuzov’s initiative, one more useful financial tool for management of tumultuous processes in the world economic markets will be created. Recently Publisher of Fluent In Foreign blog, together with the Governor of National Bank of Ukraine discussed the work of the National Bank of Ukraine over the last year and explored interest of investors in new tools of NBU, which are currently under development and review.  Exclusive excerpts of this interview follow below:

  • Governor, how do you assess the development of the economic situation in Ukraine already this year? What key factors determine it?

Ukraine has achieved significant progress in the implementation of a comprehensive strategy. Now we follow the large-scale transformation of all aspects of the economy and the social sphere. We introduce pension, customs, and tax reforms that are materializing into real results. Deregulation of the economy is taking place. The reform of the judicial system and criminal justice as well, is under the process of implementation. The National Anti-Corruption Strategy for the years 2011-2015 is approved. This year new laws to fight corruption started to operate. New Labor Code. – is under the process of devevelopment. We have some success in the macroeconomic sphere. According to our estimates, in 2012 Ukraine’s economy will grow by 2-3%. As a result of stabilization in the sphere of public finance deficit of the State budget will amount to 1.8% of GDP. The level of inflation for the second year in a row beats minimum historical records, now it is 0, 6% in annual terms. Our inflation forecast for this year is about 5%. For Ukraine, it is an extremely good result. The National Bank of Ukraine will continue to make all the efforts to keep inflation stable at a low-level. Development of economic situation in Ukraine is to a large extent dependent on external factors.  Together with the Government, we are following the developments in the global financial markets, and we have a comprehensive plan of action in case the negative external effects on the economy of Ukraine would happen.

  • How NBU would change its policy and support banks in case of a deterioration of the situation?

We will continue to strengthen the role of the hryvnia in economic turnover and dedollarize economic relations. We have already tightened supervision of the banking system, launched the international mechanisms for the protection of the reserves, currency exchange rate and currency market as a whole from the pressure of demand on the cash market. Undoubtedly, the NBU must have additional tools to support the banking sector in the event of a worsening of the situation. We are aware of our responsibility and are developing these tools. We working together with the banking community and consulting with IMF concerning our activities. In addition to have a good feel of the market, we always communicate with bankers, domestic and foreign investors, as well as representatives of hedge funds.  We intend to continue this dialogue with the purpose of creation of  favorable conditions for investing in Ukraine.

  • What were main obstacles to the growth of investment in Ukraine last year? What did the Government and NBU do to make investors feel more comfortable?

I regularly meet with foreign and domestic investors and often hear complaints about imperfections of the legislative field, the bad reputation of the courts, overregulation and risks of working on the Ukrainian investment market.  Last year, the National Bank was focused on steps aimed at improving at least part of these issues. Last year, with the Bank’s initiative, Rada adopted four important laws: on the protection of the rights of the lender; about improving the transparency of banks; about supervision on a consolidated basis; about the peculiarities of corporate governance in banks (adopted in the first reading). Moreover, the banking community and the international financial organizations were closely involved in development of each bill. This year Government adopted a law on the system of supporting deposits of individual persons. We handed over the withdrawal of problematic assets of banks from the market to the Fund supporting deposits of individual persons. Also we simplified mechanism of repatriation of dividends to foreign investors: reduced package of documents, cancelled the confirmation of mandatory payment of all taxes from the income. In addition, we improved procedure of return on investment for operations of purchase-sale of securities on the stock exchanges. In the course of liberalization of the foreign exchange market, we have also allowed banks to conclude the currency swaps that would allow banks to attract cheap funds in the future, and issue other financial instruments both on domestic and international markets.

  • Which priorities and tasks of the NBU for this year? Is there among them to improve the investment climate? What specifically you can offer investors?

As contribution to the improvement of the investment climate, The National Bank carries out  the support of price stability in the country, promoting the stability of the banking system and support the economic policy of the Government. Of course, we will pay attention to other activities, for example, improving the functioning of the stock market, which should become the main source of long-term capital for domestic investment. The market of investment gold coins is functioning already (as well as silver and platinum). By the way, there is a high demand for this tool. We are discussing the question of Ukraine’s Development Fund creation.  We plan an expansion of lending instruments for banks. In particular, we want to allow lending to enterprises that own a license for mining, using the license itself as collateral. In the final stages is the development of the program, which deals with improvement of the current  payment systems in Ukraine. We want to solve the problem comprehensively. In particular, we aim to seriously increase the share of cashless payments, reduce the underground component of this market and develop a system of electronic money. A lot already has been done in the arena of Land Bank creation. After all, our calculations show that the launch of the land reform will increase the volume of investments into the economy of Ukraine and will give an additional impetus to the development of the financial market. We switched to payments for external contracts with Russia in the national currency. Also in the final stages are talks with China. The projects on improvement of the financial literacy of the population have been launched. The Bank started broadcasting channel-Bank TV.

  • Is there intent by the National Bank of Ukraine to initiate  the issue of  inclusion of new financial assets as part of  global international reserves? What should be done to achieve this?

Searching of new approaches to the recent calamities and challenges that the world economy faced during recent years, is still very important.  In this regard, we pay close attention to the leading economies, as well as to the International Monetary Fund for development of innovations aimed at softening the world’s financial crisis and accelerating the recovery of sustainable growth of the world economy. However, many of the initiatives undertaken, have a limited impact on the  emerging market countries (particularly Ukraine), mostly because the leading economies are themselves the beneficiaries of the innovative measures.   In this context, the National Bank of Ukraine appealed to the leadership of the International Monetary Fund with the initiative to consider the feasibility of expanding the spectrum of  international monetary gold reserves, and inclusion as part of them other  precious metals such as platinum. On the one hand, the adoption of such a step would stimulate the general tendency of price increases for these metals on world markets. On the other, in contrast to countries, whose currency is freely convertible on internal markets,  economies with emerging markets do not have such advantages. Thus monetary easing  for them turns out to be much more difficult, because there will always remain risks of  impairment of their national currencies.  A reduction  of such risks and currency options for various countries could result from expansion of the list of monetary metals that are taken into account by the international community in the reserves of the central banks.

  • How will IMF’s support for your initiative on this issue affect the level of international reserves of Ukraine?

Of course the enrolment of new financial assets in international reserves in Ukraine will increase their volume. Now, when there has been some turbulence on world currency markets, it is necessary to maximally improve the potential stabilization of our country, increasing its international reserves is one such instrument. That is why the actions of the National Bank of Ukraine are primarily aimed at finding new sources of their replenishment. At the same time, as already stated, the question must be treated in a wider context. It is about finding the extra liquid instruments, which have a global recognition and can be used in international currency dealings. Under this perspective, we believe it is necessary to consider the interests of not one country, but of the entire international financial community.

  • Why the NBU is actively initiating increase of gold mining, and that will be offered to investors this year?

Ukraine has significant deposits of gold – more than 3 thousands tons. Given the significant growth of gold prices in the world, we started work on expanding gold production with the purpose of replenishment of the international reserves of the National Bank. To do this, the decision of the Cabinet of Ministers on gold-mining enterprise “Pivnichgeologia”  has been transferred to the balance sheet of the National Bank.  At this time, on the initiative of the National Bank, The State Service of Mining Exploration and Geology of Ukraine decided to issue to this enterprise special permits for subsurface  exploration of five new gold mines  Again I want to underline that following extraction of these deposits, gold in the future will be melted, processed and added to the international reserves of Ukraine.

  • What advice would you give to our readers on investing in Ukraine?

Investing in Ukraine is promising. The country was on the path of reforms and transformations. We do everything to ensure that investors receive high dividends in the future.

  • Thank You, Governor.

Ukraine - Proprietary Fi180 Country Profile - page 1 of 4

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