OPIC reopens programs in Ukraine

Paving the way for millions of dollars in potential U.S. private sector investment in the country, the Overseas Private Investment Corporation (OPIC) has restored its programs in Ukraine, following the signing on December 16 of an agreement resolving a dispute over an insurance claim paid by OPIC.

By virtue of the agreement, OPIC is now able to provide financing and political risk insurance to American companies investing in Ukraine.  Previously, OPIC had provided more than $254 million in financing and insurance to 21 projects in Ukraine, in sectors ranging from manufacturing and construction to energy and financial services.

“OPIC is pleased to once again make available its support for U.S. investment in Ukraine, a development which we anticipate will send a highly positive signal to prospective investors in the country,” said OPIC Acting President Dr. Lawrence Spinelli.

Consessions may be simplified in Ukraine

Ukrainian parliament supported amendments to the law on Concessions (#4674), which will make concessions more operable in Ukraine. As of now it is much simpler to work on contracts of rent. Few consession projects that have been started so far did not succeed. Public-private partnership projects in the country are stalled by inefficient consession law. The new law if adopted will make consessions more attractive to investors. However, it is unlikely that consessions will start working in Ukraine any time soon, at least not for a couple of years. It is likely that the parliament will get re-elected in Autumn 2010 and the law on consessions will have to be considered by the new parliament, which will bring significant delay in making that mechanism work.

IMF to pay wages and pensions?

Kommersant Ukraine newspaper sources tells that although IMF will not issue next tranche to Ukraine prior to presidential elections there might a compromise of another nature with Ukrainian authorities. The money that IMF has already transferend to National Bank of Ukraine may be transfered to the government to finance the budget deficit. The last tranche from IMF in that way will be redistributed to pay for wages of state employees as well as other social payments from the budget instead of being used for support of the financial sector.

Ukraine's debts - main risk of 2010

Ukraine's obligations both government and corporate on short-term debts in 2010 is about $20 bn. Same obligations on long-term debts in 2010 is $10 bn. Therefore, overall Ukraine should pay off $30 bn in 2010. Thus the magnitude of default in the country totally lies with creditors. In their turn creditors will assess the situation in Ukraine depending on the power change in the country. Ukraine's presidential elections will slowly move into local elections and then there is a risk of Autumn re-election of the parliament. Therefore, 2010 promises to be a difficult year for Ukraine both politically and financially. Source.

Ukraine's probability of default on sovereign debt accoring to CMA Datavision is lower only to Venezuala, and both countries have probabilities of default above 50%. Source.

Russia and EBRD - biggest investors in Ukraine in 2009?

According to Delo Vneshekonombank whose board is chaired by Mr. Vladimir Putin, made the largest investment into financial sector of Ukraine buying Prominvestbank for about $200 mln and augmenting its capital by UAH 4 bn. EBRD in 2009 made a record in financing investment project portfolio worth EUR 1,1 bn, including investments into financial sector. Source.

Fitch downgrades Interpipe rating to Restricted Default

Fitch downgraded Interpipe Limited long-term default rating to ‘RD’ on Dec 18. Lowered ratings of the company are due to lack of understanding between the company and creditors as well as with Eurobond holders ($200 millions outstanding).

Fitch sees a considerable risk that Interpipe can default on paying back the loans once the period of extension agreed with the creditors runs out. Further postponement of payments should be agreed upon in January 2010 and Fitch expects these negotiations to be difficult.

Overall Interpipe owes $900 million at the end of the III quarter 2009. In September it was announced that Interpipe will seek additional financing from Barclays Capital and Citigroup Inc., which arranged the loan for the company in May 2008.

Earlier this year it was reported that Ukrainian billionaire Viktor Pinchuk wants to sell shares of Interpipe Ltd. in an IPO by the end of 2011.

Ukraine's stocks pay off 900% over a decade

Ukraine -- in spite of the fractiousness of its political elite in recent years -- that offered an unbeatable return of nearly 900 percent over the decade, data compiled by Reuters show.

Along with Peru and Sri Lanka, Ukraine was also among the top 10 performing stock markets in 2009, a year that saw emerging equities. Ukraine's PFTS Index .PFTSI managed to double in dollar value in 2009 despite the economy's dependence on a $16.4 billion bailout programme from the International Monetary Fund.

Over the decade, the market capitalisation of the Ukrainian bourse has increased tenfold to $26 billion, fuelled by large-scale privatisation of state assets and the explosion of new securities sales. Source.

Ukrainian Railways - another struggling state giant

Prime Minister Julia Tymoshenko promises increasing railway tariffs for passengers to help struggling Ukrainian Railways (UR). Tymoshenko also said that there will be no privatization of railways. Strategic plans to reform UR have long been on the table, but once cross-subsidization of passanger traffic by industrial tariffs was working nobody cared. Currently, industry is no able to cover the rift in tariffs and cost for passenger transportation and UR is struggling on the brink and starts to miss on external debt payments, just as it did with USD 110 mln that it had but failed to transfer to Barclays earlier this year. It is forecasted that with UAH 38 bn of income there will be UAH 9 bn losses for the UR in 2009.

Cabinet of Ministers adopted 16 decisions on reforming Ukrainian railways by 2011. Quality of this reform should be further evaluated, but it is expected that there will be no speedy improvement in the UR situation. The program of reforms does not require corporatization of UR as the first step - a step long ago requested by donors and creditors of UR. It is likely that UR is on the road of becoming another Naftogaz in the portfolio of state assets.

Ukrainian companies restructure debt

Banks and companies in Ukraine continue to restructure their foreign debts offering their creditor higher dividends in return for longer maturity. Konstantin Zhevago's bank Finance and Credit decided to restructure 95% of its debt until 25th January 2014 increasing the coupon payment to 10,5% (instead of 10,375%) with twice a year payments. UR has mentioned that Zhevago's Ferrexpo was recently successful in attracting USD 230 m financing facility. Vlast Deneg Journal (50/2009) also mentions that Viktor Pinchuk's Interpripe Limisted started negotiations with its eurobond's holders on concluding contracts that will make them refuse any actions leading to cross-default.

The year of 2010 will become critical for lots of Ukrainian companies who just approached default in 2009. Looks like next year we will see much more corporate defaults in Ukraine. Ukraine's economy will stabilize, just as the IFIs tell us, but it is likely to be a stabilization at the bottom of a deep well. Thus, unable to generate profits to pay off their debts corporations and banks will hit tough times about the spring of 2010.

Therefore, those who look ahead desperately try to restructure their debts now.

UPDATE. On Dec 18 Fitsch downgraded Pinchuk's Interpipe Limited company from "CCC" to "RD" - restricted default rating. 

National's Bank dilemma

National Bank of Ukraine (NBU) is currently facing a dilemma: help real sector get loans but endanger stability of the banking system, or stabilize the banking system but let the real sector's credit lines run dry. Bad credit in the economy currently is evaluated at around 30-40% of outstanding credit portfolio. Letting the banks credit the enterprises means letting the banks somewhat loose. Making the banks deal prudently with bad credit means cutting credit in the economy and letting real sector suffer without credit. UR sources say that the price of all bad debt portfolio in Ukraine as of now might be worth about USD 30 m - not a very promising figure.

IMF witholds financing to Ukraine

As UR has already pointed out in November there will be no financing from IMF to Ukraine until after the presidential campaign. IMF grew tired of Ukraine's lies, willingess to use money for financing electoral promises, no budget and discord between president and prime minister. USD 3.5 bn should have been transfered to Ukraine as a part of a USD 16.8 bn loan, but now that tranche is on hold.

As Judy Dempsey writes in NYT until there be consensus among elite in Ukraine there will be no financing from IMF and that basically means until after the presidential elections. Ms. Pazarbasioglu previously heading missions to Ukraine is now likely to step down, apparently being tired of dealing with Ukrainian leadership.

Although Mr. Strauss-Kahn has quite frankly said in November that there will be no co-operation with Ukraine until the end of the presidential campaign, Ukrainian authorities played it in a way that the tranche was going to be paid. However, that game did not seem to succeed afterall. 

Gas distribution networks - civil gas war

Instead of having a usual winter gas war in Russia Ukrainian authorities decided to move the gas war to domestic terrain this year. The idea is that the state wishes to take control over the gas distribution networks previously rented out by private gas distribution companies - oblgases. January 1, 2010 rent agreements become void and the state decided that it does not want to prolong these agreements that easy. Temporary contracts may be signed, but there is no talk about long term contracts so far. Needless to say that the private owners of the distribution companies are getting the value of their companies diminishing to zero dollars. The big fight between the state and owners is ready to begin.

The management of the gas distribution networks is to be accumulated under the roof of Naftogaz - state monopolist in the gas sector. After that the state will have a second wave of privatization in the gas distribution sector giving long-term management contracts to new firms, or may be will condescend to giving these contracts to good old owners of oblgas enterprises, but on entirely new conditions. Naftogazmerezhi, an enterprise that will now manage all state gas distribution networks, is ready to start a long fight or getting all the networks under its control, with litigation if necessary.

Businessmen like Mr. Firtash, oligarch mainly known for owning intermediaries in Ukraine-Russia trade, may be pushed out of the distribution market. Instead Gazprom is likely to enter, perhaps through new chain of intermediaries. Certainly, the result of the civil gas war in Ukraine will be fully determined by who is going to be in power in Ukraine after presidential elections. Should Yulia Tymoshenko win it is most likley that the state will win the control over the distribution networks and Gazprom is likely to enter the market. In case of Viktor Yanukovich unlikely victory status quo in the industry is likely to be preserved.

Ukraine and Kyoto protocol

500 NGOs at UN Conference on climate change think Ukraine is occupying the most destrucitve position of all countries in the world. Ukraine got the title of the Fossil of the Day, a title that is presented for the most destructive approach to negotiations on the climate change, according to reps of 192 countries.

Ukraine would like to cut CO2 emissions by 2020 by 20%, which means the raise of the emission level by 75% compared to 1990. In order to be honest UR must notice that Ukraine has cut its emissions massively during the times of economic recession in the 1990s. Therefore, restoring emission levels just means restoration of Ukraine's economy, which suffered a major collapse after the fUSSR break-up. However, Ukraine's position during negotiations could be much better justified by its negotiators, who even fail to show up in the room of Copenhagen conference.

Another related story is how Ukraine spends its Kyoto protocol money that it currently gets from Japan for the sale of the country's emission quota. The money that it gets should be spend for investments that diminish CO2 emissions, however, these investments are currently just not happening with the Japanese money sitting in dedicated Treasury accounts. Hopefully, Ukraine is not caught spending these money on financing budget deficit. Should it be so it will completely disqualify itself from climate change process.

Civil society prays for reforms in Ukraine

For a number of years international organizations present in Ukraine and civil society organizations work on publishing lists of systemic reforms that Ukraine needs. There are a number of documents that has been published already, e.g. coalition agreement drafts, Blue Ribbon Commission reports etc.

Coming presidential elections just as previous rounds of elections spur the activity of the independent think-tanks in reform writing exercises. Another report called Modernization of Ukraine has come out authored by a coalition of think-tanks under George Soros Foundation (IRF) in Ukraine. Quality of the report leaves a lot to be desired with some parts better than the others.

The report just repeats numerous previously issued lists of reforms. Authorities in Ukraine pay little attention to these voluminous documents, provided the issues raised come out just before elections and are never persistently kept up on the agenda afterwards.

Real estate market shows no signs of mid-term revival

Number of transactions on the housing market is minimal. This atumn only 1500 transactions per month was registered on the Kiev market, compared to 8900 in 2008 and 13000-15000 in 2007. Experts in the field do not believ that any revival is due for the next half a year. Then it all depends on whether the situation with bank loans improves. Source.

National Bank will evaluate banks early January 2010

 

Martin Reiser, World Bank (WB) director for Ukraine, Belarus and Moldova, said that National Bank of Ukraine (NBU) will conduct new diagnostic evaluation of Ukrainian banks in the first weeks of 2010. Such an evaluation will be used by WB for the decision on aid for rehabilitation of Ukraine's banking sector. First such evaluation was conducted in early 2009.

WB reps think that the worst scenario for Ukraine's banking sector was averted. Now the banks should work more on transparency of their ownership and protection of their clients.

Another point of critique is the policy of management of Ukraine's state banks. Oschadbank is said to be in a risky position due to issuing loans to Naftogaz, Ukraine's oil and gaz state holding. WB reps think that institution like Oshadbank should be restructured or liquidated. Interfax.

Steel demand ready to rebound?

Recently many signs point to a chance of a recovery in the steel industry. Chinese demand drives iron ore prices upwards, however, there are reservations wrt to sustainability of this demand. Capacity utilization in steel industry grew in 2009 compared to 2008 and steel production shows an upward trend in the recent months according to World Steel Association (see graph below).

EU and US grow tired of Ukraine

Ukraine fatigue spreads among Ukraine's Western partners in Europe and in the US. Economist publishes an article basically saying that US will not endanger its "reload" of relations with Russia, which basically means Ukraine will not be in the Washington's eye that much anymore.

EU in its turn, as the article in Telegraph says, is losing patience with Ukraine. For some strange reason European officials don't like that Ukrain doesn't move with reforms and finances with electoral promises with international money.

Ukraine is a difficult partner to deal with lately, especially with elections coming up. Hopefully things will change after the president is elected and local and national parliamentary elections are done.

Steel and chemical industry get cheaper gas in 2010

Dec 2, Cabinet of Ministers announced gas price forecast for 2010 to be at USD 331 per thousand cubic meters. Apparently is is the price of import Russian gas at the border of Ukraine. Naftogaz reps say that this price is inflated because it is based on the oil price forecast of USD 90 per barrel.

Razumkov Center expert Volodymyr Saprykin says that realistic gas price of imported gas at the border is the one Gazprom is quoting, that is USD 280 per tcm. However, he notes that with add-ons (such as VAT, transportation and distribution tariffs as well as profit margin of Naftogaz and distribution companies) the gas for industrial companies will be more expensive. Also, he thinks that population will also get more expensive gas in the second quarter of 2010.Steel industry and metallurgy will get their gas cheaper and will likely to be cross-subsidized by more profitable sectors.

Its apparent that the gas for population and for heat will not get more expensive in the first quarter due to presidential elections. This is likely to be a reason of a blow to financial stability of Naftogaz in the beginning of the year due to inability to charge cost-covering prices and because of slacking payment discipline. Source.

Ukraine's macro outlook for 2010 according to UkrSibBank

Ukrainian economy is to deliver moderate (2.7%) growth next year, bouncing
back from distressed levels. Consumption would remain broadly stable in
nominal terms providing opportunities for import substitution. Growth is to
be net-export driven.

Some adjustments take place in current account and export mix, improving
resistance to possible fluctuations on steel market. Still, vulnerability of

Ukrainian economy to movements of global steel prices remains
pronounced. Ukraine would see C/A surplus next year due to weak currency.

Ukraine will go through election cycle in early 2010, while the IMF
cooperation is likely to be frozen for some time.

Public finance will see the second consecutive year of double-digit deficits
as a percentage of GDP. The budget is likely to be redrafted with
participation of IMF technical experts over 2010.

CPI is declining due to subsiding pressures on demand side, but it would
remain high slipping in single-digit zone only in 2011.

Local currency is cheap comparing to CEE peers, but high public deficits
coupled with Ukraine’s sensitivity to global conjuncture introduce downside
risks over the course of 2010.

Banking system can cope with asset quality, albeit it might still need capital
injections and would not be able to restore growth soon. Central bank
should seek ways to inject UAH funding to the system.

Domestic interest rates are well in double digits and would remain high in
1H2010 due to crowding-out by public debt, de-leveraging of external debt
and limited inflow of deposits to domestic banking system. From 2H2010
onwards we expect domestic rates to decline.

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