A letter to IMF from Ukrainian businessman

publicaffairs@imf.org
RR-UKR@imf.org

To Whom It May Concern

I am a private businessman engaged in publishing and online book trade in Ukraine.

As you are aware, this year Ukraine entered into a Stand-By Arrangement (SBA) with the International Monetary Fund. The mission of the IMF headed by Mr Thanos Arvanitis is currently here and is described as quite successful in its talks with the Ukrainian Government.

Understandingly, we are not informed by the Government of all the requirements imposed on Ukraine under the SBA. However, the government officials continuously report in the press that all the legislative novelties, in particular, the Tax Code under discussion in the Ukrainian Parliament, directly result from or imposed on by the IMF requirements.

I have to say that the draft Tax Code is generally regarded by the Ukrainian small-business community as draconian and aimed at eliminating the small business in the country. This very realization has already caused numerous protests all over the country. More protests are planned for November 16 when the Parliament is to approve the Code.

It is common knowledge that the small businesses make the backbone of any civilized economy. It generates self-employed people who do not depend on the state support and do not seek one.

Small businesses are still thin on the Ukrainian ground. Such a fragile community would require specific attitude in good times. At times of an economic crisis with its shrinking activities, lesser demand and higher prices, the need to help small businesses is crucial as it is small businesses that make countries all over the world successfully recover of the economic calamity. According to SME and Entrepreneurship Outlook, OECD, 2005, In OECD countries, SMEs represent 95% of all enterprises, accounting for two-thirds of employment and being the main source of new job creation. As such, SMEs in many countries around the world are the major source of economic recovery and assist the return to sustainable growth.

It is then surprising the the IMF seems (or is so reported) to approve all the economic moves of the Ukrainian Government with respect to small businesses. It is even more surprising to realize that the IMF seems (or is so reported) to press the Government to complicate the terms of business in the economy which is still far from being an embodiment of liberal approaches.

Among its provisions, the mentioned draft Code narrows the applicability of a so-called Simplified Procedure of Accounting and Reporting (SPAR) introduced in 1999 to foster small business development that gave millions of Ukrainians a chance to switch from the state employment to self-employment.

The Code complicates the reporting, lowers by half the threshold for a small business to operate under the SPAR, gives more powers to tax inspections, raises the tax rate thrice the current amount, introduces new payments to the pension fund, etc.

It is not just feasible to list here all the new taxation provisions the Code introduces and the IMF seems (or is so reported) to approve of.

Unfortunately, I do not represent any small business association, but I believe that the IMF mission should not just meet the government officials but listen to those who in their everyday activity try and make Ukraine a prospering, modern and sustainable economy.

Best regards,

Oleksandr Voroshylo

successfully sent to all the above addresses Nov. 11, 2010, 12:43

German investment is sought after in Ukraine, but will it listen?

Ukrainian President Viktor Yanukovych said during an official visit to Germany on Monday that he hoped to see an increase in German investment in his country.

The Ukrainian president told journalists in Berlin that Germany had invested some $6 billion in Ukraine's economy since the collapse of the Soviet Union in 1991, while investment in Russia was "ten times higher."
"It is very little for Ukraine, especially since Ukraine is closer to Germany geographically [than Russia]," he said.

Gas deal: still many things are unclear

President of Ukraine Viktor Yanukovych and President of Russia Dmitriy Medvedev agreed to apply a 30% discount to the price formula for gas imported to Ukraine from Russia. However, according to Astrum investment management experts, the absolute amount of this discount is capped by USD 100 per 1,000 cubic meters. The discount comes into effect as of 2Q10. The parties agreed that Ukraine will import 30 bln cubic meters of natural gas in 2Q10-4Q10 and 40 bln cubic meters in 2011. According to our estimates, the discount for the price formula essentially means that Ukraine will obtain imported gas for USD 233 per 1,000 cubic meters in 2Q10, for USD 245-255 in 3Q10, and for USD 255-265 per 1,000 cubic meters in 4Q10. As Ukraine has already imported as much as 6.5 bln cubic meters of natural gas in 1Q10 at a price of USD 305 per 1,000 cubic meters, the average price for imported natural gas in 2010 should be close to USD 260 per 1,000 cubic meters, up 24% compared to the average 2009 price of USD 210 per 1,000 cubic meters.

What remains less clear is the physical volumes of gas to be imported in 2010. The parties agreed that Ukraine will import 36.5 bln cubic meters in 2010, including the 6.5 bln cubic meters already imported in 1Q10. However, our estimates show that 33 bln cubic meters of imports will be enough for the economy. If the 33 bln cubic meters option materializes, then Naftogaz will have to pay USD 2.3bln less for the imported gas. However, if Ukraine indeed does import 36.5 bln cubic meters of gas in 2010, the total 2010 imported gas bill should amount to USD 9.3-9.4 bln, which is only USD 1.4-1.5bln less than the scenario envisaged according to the previous agreement although Ukraine will import an additional 3.5 bln cubic meters. We think that the latter scenario is more probable and downgrade our external trade deficit forecast for 2010 from USD 2.3bln to just USD 0.9bln. We also adjust our current account forecast for 2010 from a deficit of USD 0.5bln to a surplus of USD 1bln.

The impact of the new gas accords on internal gas prices remains unclear. As the average 2010 imported gas price should still be 24% higher than the 2009 price, we expect that there will not be any significant gas price cuts for industrial consumers. We see the most likely scenario is the freeze of these prices throughout 2010. At the same time, the issue of gas price increases for households and municipal utilities is still high on the agenda. We maintain our view that the government will still have to increase these prices in 2010. However, the government is likely to negotiate with the IMF about a residential tariff increase in 2010 which should be much less than the 95% cumulative growth we previously envisaged. Thus, we put our inflation forecast for 2010 under review.

Russia suspends duty-free imports of Interpipe's pipes

Astrum

Since April 1, the Federal Customs Service of the Russian Federation started levying duties on imported pipes of Interpipe due to the lack of agreement on the size of 2Q10 quota for dutyfree imports. The final decision on the quota prolongation and its size should be approved on April 15.

In the case that there is no positive decision on the prolongation of the duty-free import of Interpipe’s pipes to Russia, the Group’s sales should go down significantly.

In 2009, Russian pipe market accounted for up to 40% of the Group’s sales, while Interpipe controlled Nyzhnyodniprovsk Pipe (NITR: U/R) and Novomoskovsk Pipe (NVTR: BUY) sold to Russia 46% and 26% of their pipes.

China may give opportunity to Ukrainian steel makers

The projected increase in procurement prices of iron ore for Chinese steel makers will be favorable for Ukrainian steel makers.

According Steelguru, Vale, Rio Tinto and BHP Billiton, the world's leading exporters of ore, reachred agreement with Japanese steel company Nippon Steel and Sumitomo Metal Industries regarding 90% increase in price for iron ore to $ 100-110 per ton at the II quarter of 2010, with subsequent quarterly review.

Chinese steel makers consume about 75% of total world iron ore traded. Syncom Capital investment company forecasts that if they are “convinced” in a similar price increase for iron ore, then China may become netto-impoter of steel in next months, especially considering substantial increase in prices for coke for China.

This created possibilities for Ukrainian steel producers to increase their market share in world steel market.

Portnov becomes Yanukovich's lawyer

Interfax

Ukrainian President Viktor Yanukovych has signed a decree on the appointment of Andriy Portnov deputy head of the presidential administration in charge of legal reform and judicial system.

The decree was posted on the presidential Web site on Friday.

Portnov is a member of the parliamentary faction of the Bloc of Yulia Tymoshenko. He was Tymoshenko's representative at the Supreme Administrative Court in a suit challenging the Central Election Commission's decision to declare Yanukovych the winner of the presidential race.

yanukovich warns of a new vote

Reuters

Ukrainian President Viktor Yanukovich said Friday he would call a snap parliamentary election if a court ruled that the creation of the ruling coalition broke constitutional rules.

Parliament amended the rules on forming coalitions earlier this month, paving the way for the new government of Prime Minister Mykola Azarov -- a close ally of Yanukovich who was elected to the top post last month.

Former Prime Minister Yulia Tymoshenko, a bitter rival of Yanukovich in the presidential election, had called the amendment a "constitutional coup d'etat."

"If the decision of the Constitutional Court will be that the coalition was formed illegally, then I will take a decision on a snap election," Yanukovich told a delegation from the European Parliament.

"I will never go down the path of breaching the constitution that is in force."

Yanukovich said the Constitutional Court had already begun reviewing the case. It was unclear when it could issue a ruling. On urgent matters the court rules within weeks but on matters deemed less urgent it can take months or even longer. ...

Shadow economy as a % of official GDP of Ukraine

“Guess NBU rate” game

During last days, the Ukrainian FX market continued to be guided by the NBU. National Bank of Ukraine changed its behavior and begun to enter the market at the end of the day instead of the morning. Thus, market players are now playing the game “let’s guess what the NBU’s intervention rate for today will be”, experts of Astrum Investment Management say.

They maintain their view that the NBU will not go far with its exchange rate adjustments, as it continues to pursue its de facto fixed exchange rate policy.

At the same time, the NBU will need to show some degree of “fluctuations” to the IMF, as the Fund does not favor a fixed rate policy. Thus, further “cosmetic” exchange rate adjustments are possible. During the last week, the hryvnia gained less than 0.2% against the dollar.

Ukraine mistakenly put itself into FATF “black list”

On Friday, 19th of March, hundreds of Ukrainian news sources reported that Ukraine Financial Action Task Force (FATF) has put the country into list of states that have serious deficiencies in their strategies for countering money laundering and terrorism financing.

This fact shows how far is Ukraine from the outer world. The initial information on list of problematic countries was released by FATF took place a month before, on 18th of February. Ukraine WAS NOT in the black list. The country was mentioned as one that made significant progress in fulfilling FATF recommendations.

It is important that this list is NOT the synonym of FATF “black list”. The latter term usually refers to countries which it perceives to be non-cooperative in the global fight against money laundering and terrorist financing. It is divided into three groups.

First of them is jurisdictions subject to a FATF call on its members and other jurisdictions to apply countermeasures to protect the international financial system from the ongoing and substantial money laundering and terrorist financing (ML/TF) risks emanating from the jurisdiction. Now only Iran is in this group.

Second group includes Angola*, Democratic People's Republic of Korea (DPRK), Ecuador and Ethiopia. These are jurisdictions with strategic AML/CFT deficiencies that have not committed to an action plan developed with the FATF to address key deficiencies as of February 2010. The FATF calls on its members to consider the risks arising from the deficiencies associated with each jurisdiction. Despite the FATF’s efforts, these jurisdictions have not constructively engaged with the FATF or an FSRB as of February 2010 and have not committed to the international AML/CFT standards.

Pakistan, Turkmenistan and São Tomé and Príncipe are in the third group. The group constist of jurisdictions previously publicly identified by the FATF as having strategic AML/CFT deficiencies, which remain to be addressed as of February 2010.

Ukraine is not present in any of these problematic groups. It is mentioned in the list of countries the FATF and the FSRBs will continue to work with and to report on the progress made by them in addressing the identified deficiencies. The FATF calls on these jurisdictions to complete the implementation of action plans expeditiously and within the proposed timeframes. The FATF will closely monitor the implementation of these action plans.

FATF notes that “Ukraine has demonstrated progress in improving its AML/CFT regime; however, the FATF has determined that certain strategic AML/CFT deficiencies remain. Ukraine has made a high-level political commitment to work with the FATF and MONEYVAL to address these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing (Recommendation 1 and Special Recommendation II), (2) enhancing financial transparency (Recommendation 4); and (3) establishing and implementing an adequate legal framework for identifying and freezing terrorist assets (Special Recommendation III).”

Couple of notes on Ukrainians’ propensity to borrow

According to reports from local collectors, on average 65% of the total number of debtors, as a rule, are residents of large cities. (Surely, for each bank this figure may vary).

Collectors say that residents of small cities and villages are less likely to study loan contracts thoroughly, therefore the amount of penalties and similar additional payments are often surprise for them.

Also, because the debtors in the cities tend to have higher income levels, their frequency and amount of loan repayments is higher. In rural areas, it is common that loans are taken by the borrower who initially can not afford it, yielding to momentary impulse.

The structure of the debts of the inhabitants of large cities and smaller settlements is similar - the lion's share of them are small retail loans and debts on credit cards.

Ukraine's short-term expenses

Bloomberg provides us with future expenses that Ukraine has to undergo in April:

• pay Russia $700 million next month for its natural gas consumption 
• pay $748 million obligation to cover domestic debt coming due

 These payments should be done under no state budget for 2010 yet approved and no financing from IMF forthcoming. We don't think that there is a risk of non-payment, however, the situation is quite tough for the new governmnet.

Ukraine's foreign and local currency sovereign ratings rise

S&P raised Ukraine’s foreign currency sovereign credit rating by one notch to ‘B-/C’ from ‘CCC+/C’ and the local currency rating to ‘B/B’ from ‘B-/C’, with a positive outlook on the country. The agency said the new governing coalition and cabinet pave the way for a renewal of relations with the IMF and better policy coordination that will allow Ukraine to restore economic and fiscal sustainability. S&P noted the positive outlook on Ukraine indicates “upward pressure on the ratings building this year and next if fiscal and external pressures abate.” Additionally, the agency noted greater investor confidence post-election will favour a higher external debt rollover rate and larger FDI inflows to the country, thus improving Ukraine’s financial account balance in 2010. Ukraine was downgraded to ‘CCC+/C’ in February 2009 on the back of risks to IMF funding to the country.

Yanukovich's stability has come?

It is second day of unprecedented growth of Ukrainian stock market. While European indexes were moving lower, Ukrainian ones were setting new record highs for 2009-10. As experts of Astrum investment management company point out, Ukrainian stock market continued on its winning streak setting fresh records on solid gains in steel, electricity generation and machinery shares.

At the end of the day, the UX index jumped a whopping 3.8% setting a new record at 2,022 points, while the PFTS index also added 3.8% to close at 782 points. Equity volume on the UX totaled strong UAH 70m. Motors Sich (+6.3%) was among the biggest growth catalysts on the news about new future contracts for aircraft and helicopter engines. The biggest outsider was Bank Forum, down 3.2% on the unwinding of speculative long positions.

FX market is quiet under tight control of NBU. The hryvnia continued to stand firm at the UAH/USD 7.98 mark. The NBU made its regular pro-dollar intervention at this rate and market players continued to stick to this reference point.

PS Of course it is necessary to mention CDS that are cheaper now. Is it Yanukovich's arrival or Timoshenko's departure?

Couple of words on Ukrainian mobile operators' future

New political order in Ukraine will influence telecom market. In detail, major operators of cellular networks may face changes. In this post, we will cite some thoughts on this matter from Roman Khimich, one of the leading experts in Ukrainian telecommunications.

First, reorganization of system of state regulation of the market is possible. Russian model may serve as an example, where all the regulatory functions are concentrated in one administration for communications. Now local telecom market is regulated by several government institutions, from which national commission for regulating communications (NCRC) and Antimonopoly committee are the most important ones.

Astelit (Life trademark) operator possibly can gain a lot from recent political changes. However, the experience of previous years show that System Capital Management (SCM), who is a stakeholder of Astelit, hasn’t show propensity to influence systematically the government policy in telecom sector. SCM has enough lobbysts but the level of ideas that they offer, to experts’ opinion, doesn’t correspond the role of the corporation that it plays on Ukrainian telecom arena. At least, at present time.

For Antimonopoly committee, hard times has come. It is easy to take some decision that is not favorable for ruling political group. Therefore, we will repeat it again, NCRC will play the prominent role in sector’s regulation.

Stocks extend gains in line with European markets on strong commodity prices

The Ukrainian stock market on Wednesday traded in line with its European counterparts which extended their gains for the fourth consecutive trading session, says report by Astrum investment management company.

European and American markets were higher on Wednesday due to the better than expected data on retail sales and PMI Services in Germany, as well as ISM Services index in the US. As a result the DAX index rose more that 0.8% to as high as 5,830 points and the oil price advanced to above USD 80 per barrel once again.

The UX index added 1.1% to close at 1833 points, with the gains pretty much across the board. The PFTS index gained 0.7% to 718 points. Trading activity was well above average, equity volume on the UX totaled UAH 47m. Bank Forum was the leading and most actively traded issue, shooting up 7% on UAH 6m trading volume.

The stock was up on the rumours of the sale of the minority interest by Leonid Yurushev to Commerzbank which should open the way for the Bank's recapitalization.

Consensus forecast for Ukraine in 2010: moderate growth is coming.

Members of the regular public consensus forecast improved forecast of economic growth in Ukraine in 2010 from 3,5% to 4%. However, the average expected fiscal deficit worsened immediately by 30 billion hryvnia - up to 85 billion hryvnia (7.4% of GDP). According to the median forecast of participants, in 2010 nominal GDP will exceed a trillion hryvnia.

The consensus forecast of economic growth was improved due to accelerating consumption (+0.4 percentage points compared with the forecast of December 2009) and investment (+0,6 percentage points). Among the sectors, the best expected dynamics is for the the industry (6.8%) and transport (6%). The most dynamic industries in 2010 promise to be mechanical engineering (11.3%) and steel (+10%).

The participants of the forecast improved their outlook for employment. Expected unemployment rate fell by 0.5 percentage points to 8,5% among people 15-70 years old (the methodology of the ILO). At the same time, the expected growth of real incomes of the population remains at that level of 2% (while some have predicted the fall of this index).

Analysts and research institutions, banks and other financial institutions have kept the average forecast exchange rate at 8.20 UAH / USD. (range of forecasts narrowed to 7,80-8,80).

Forecasts of inflation are sharply volatile. Average growth of CPI (December to December) was 13,3%, despite the fact that the maximum projection of one of the participants reached 20%. Prices of industrial producers will grow faster than the consumer, that is clearly associated with an acceleration in the industry.

Forecasting budgetary performance remains a matter of great difficulty for the participants because of lack of information about the actual state of the treasury. The outlook on the state of public finances has provided only half of participants.
In 2010, the deficit of public finances ranges from 4,4% to 9,8% of GDP. The main source of deficit is external borrowing. Participants of the consensus forecast also believe that the capitalization of banks may require from 10 to 25 billion hryvnia public funds this year.

The data for the current wave of the consensus forecast was provided by Astrum Investment Management, Concorde Capital, Dragon Capital, Erste Bank, FOREX Club, Gainsfort Research, OTP Bank, BTA Bank, Institute for Economic Research and Policy Consulting, International Bleyzer Fund, Ukrainian business magazine "Expert", investment group "Socrat", International Center for Policy Studies.

The results of the consensus forecast (average, minimum and maximum difference between the minimum and maximum values, the number of forecasts for each parameter), as well as assumptions that guided the participants in forecasting, attached to this release. Information about prognosis in the context of each participant is closed, since 6 out of 13 participants were asked not to disclose details of their forecasts.

Consensus forecast project is conducted by Expert business magazine.

If you want some additional info regarding macroeconomic or sectoral forecasts for Ukraine in 2010 please contact Igor Lutsenko (ilutsenko at gmail.com).

Yanukovych has started to act

New president of Ukraine Mr Yanukovych has started to act and first he ordered a research or better say an audit of state budget expenditures as well as disbursements from the IMF loan facility. The audit order was given to a consortium of State Prosecutor and the Accounting chamber. President also complained that exporters get their VAT on an ad hoc basis and that the prosecutor should also look into that as well as into all the state officials who do not complain to the law of Ukraine.

All this is to create pressure on Julia Tymoshenko who is still a Prime Minister and refuses to quit. Verkhovna Rada will hold a vote of no-confidence on the governmnet on March 2, which is likely to be successful. So far Tymoshenko has reacted only through convening an extraordinary meeting of the Cabinet scheduled for March 1.

New president was also outraged by the tax administration's idea that the taxes could be paid by firms "voluntarily" 3 months in advance of the due date. Such a method is used by tax authority to manipulate with the cash flow to the budget in order to avoid state coffers getting sort of empty. Indeed, this method shold be avoided if Ukraine is to speak of restoring any kind of fiscal discipline.

Looks like until Tymoshenko is still in CabMin the State Prosecutor Medved'ko will be new president's de-facto both Minister of Economy and of Finance.

IMF Mission will come to Ukraine April 7? (Update)

Technical IMF Mission will come to Ukraine April 7 as the press office of the Ministry of Finance reports. The mission will be busy with drafting a new memorandum with the new government of Ukraine and prepare the grounds for the IMF mission to come to the country for negotiations.

UPD. However there were news on TV that the IMF mission will not come to town on April 7 as the Ministry of Finance has said that it is too early to discuss the IMF missions to Kyiv.

Due to Russian investors IUD gets further deferral of debt repayment

Ukrainian corporation Industrial Union of Donbass (IUD) whose controlling stake was recently bought by consortium of investors managed to persuade its creditors to allow it to pay only interest on its debt of USD 3.3 bn until March 2010. Such an agreement was in place till the end of the 2009, however, former owner of the controlling stake Sergei Taruta could not manage to persuade creditors to prolong the agreement. It is said that the new agreement with creditors was mainly achieved due to Russian businessment that enter into the investment consortium that owns controlling stake in IUD

IMF now thinks freedom of capital is not such a good thing (incl. for Ukraine)

WASHINGTON—International Monetary Fund economists, reversing the fund's past opposition to capital controls, urged developing nations to consider using taxes and regulation to moderate vast inflows of capitalso they don't produce asset bubbles and other financial calamities. It said emerging markets with controls in place had fared better than others in the global downturn.

The recommendation is the IMF's firmest embrace of capital controls and a reversal of advice it gave developing nations just three years ago. The IMF has long championed the free flow of capital, as a corollary to the free flow of trade, to help developing countries prosper. But the global financial crisis has prompted the fund to rethink long-held beliefs. It recently suggested the world might be better off with a higher level of inflation than central bankers now are targeting.

New regional investment and trade facilitaition project is open for Ukraine

EAST-INVEST is a new regional investment and trade facilitation project covering the period from 2010 to 2013, and the countries of Ukraine, Belarus, Moldova, Armenia, Azerbaijan, and Georgia. EAST-INVEST will contribute to the economic development of the Eastern Neighbourhood region and to the improvement of its business environment within the context of developing networking between EU and Eastern Neighbourhood Region public and private organisations.

Reference: EuropeAid/129289/C/ACT/ESU

Call for Proposals has been launched. Deadline for submission of applications: March 4, 2010

For full details about this call for proposals please consult the website of EuropeAid: https://webgate.ec.europa.eu/europeaid/online-services/index.cfm?do=publi.welcome&nbPubliList=15&orderby=upd&orderbyad=Desc&searchtype=RS&aofr=129289

Yanukovych - Uncovered

Today I have presented the analytical piece authored by me and my colleague, which analyzes in detail Viktor Yanukovych's possible future steps in Ukriane.

Have a look!

Structure of Ukraine's debts

The Y axis - mln USD
Blue - Corporate debt
Orange - Sovereign debt
Greenish - Banks
Source

Kiev real estate at below the market rate prices

Real estate agents started to not a larger than zero number of deals with luxury property in Kiev and its suburbs. The 750 sq. m. house with a pool and 35 sotkas of land was sold at $400,000 instead of $1 mln, which was the initial asking price, with a single condition that the money are paid in cash in 2 weeks.There were about 10-15 deals of that sort in the last several weeks. Real estate agents tie this to the presidential elections, saying that some businessmen are shedding property to help their business withstand the power change or may be to leave the country.

In Janurary 2010 there were about 200 deals with real estate registered on the market of which 10% with luxury properties. Therefore the trend of shedding the luxury property in exchange for fast cash may seriously drop the prices in the segment.

Ukraine's vodka producer Nemiroff to be sold to CEDC?

Despite the higher than expected downfall of Ukraine's economy in Q4 (7% instead of predicted 2-4%) things are not so bad in the "vodka" industry.

Central European Distribution Corporation (CEDC) representatives tell that CEDC is interested in buying 70-80% of Ukraine's vodka producer Nemiroff. Though Nemiroff representatives openly decline that the company is going to be sold there are rumors of pre-sale activities within it.

Earlier several beverage companies received investment memorandum from ING on the wish of current Nemiroff owners to sell the business.

Nemiroff is the third largest vodka seller in the world.

Trade deficit contracted by 9.6 times in 2009

Ukraine's trade deficit decreased by 9.6 times in 2009 to $1 bn 380.7 mln against $13 bn 307.6 mln in 2008. Negative balance of trade in goods in 2009 was $5 bn 732.7 mln, and positive balance of trade in services was $4 bn 352 mln against $18 bn 580.9 mln and $5 bn 273.3 mln respectively in 2008.

Q4 2009 GDP of Ukraine is down 7%,

GDP of Ukraine in fourth quarter of 2009 in comparison to the same period in 2008 was down 7% in constant prices of 2007 (preliminary figures of Ukrainian Statistics Committee). 

Earlier president Victor Yushchenko has said that GDP was down 15% in 2009. 

In Q1-Q3 decreases in GDP were 20.3%, 17.8% и 15.9% respectively.

Freight transit through Ukraine has grown in 2009 due to pipelines

	Freight transported through Ukraine in 2009, thousands of tons	In % to 2008
Freight transit overall	337000.08	103.6
including
Rail	63780.00	68.3
Road	3394.74	69.2
Sea	1937.16	55.6
River	0.12	02
Air	1.17	76.1
Pipelines	267811.46	119.8
Other	75.43	71.5

Ukrainian banks to recover soon?

Oxford Business Group undertook a study of a Ukrainian banking sector. Here are the conclusions:

Officials are hoping that banks will start opening the taps soon, and are planning to take some steps to encourage them to do so. On January 19, Valeriy Lytvytsky, the head of the group of advisors to the governor of the NBU, said it would be appropriate for the reserve to accelerate the adoption of a resolution intended to boost the credit activity of commercial banks.

Though details of how the NBU is to prompt banks to return to the loan market are lacking, predictions that the economy should move out of recession in the coming months and post modest growth by the end of 2010 may spark some interest amongst Ukraine’s banks to resume lending.

.............

While it will take time for Ukraine’s banks to regain the confidence to re-enter the loan market, the worst appears to be over for the sector, with some underperformers winnowed out and the remaining players potentially made stronger by the experience.

Moscow or Brussels - artificial dilemma

As Ukraine is prepared to meet its new president experts and diplomats chat deciding where Mr Yanukovich, the most likely candidate, will go for the first international visit. Certainly, the most likely win destinations are Brussels and Moscow. Previous president Yushchenko went first to Moscow to turn Ukrainian-Russian relations in a 5 year confrontation and misunderstanding. Some say that Yanukovich will go first to Brussels. To do the same to Ukraine-EU relations? We think that it is not that important where the president will go first. It will be rather important what follows. However, we would like the new president to consider an alternative destination to the Moscow-Brussels axis.

Just consider Ukraine's neighbours Moldova and Belarus and their recent successes with Beijing. China last July signed a memorandum of understanding to lend Moldova $1 billion -- equal to a tenth of the east European country's gross domestic product, and easily the biggest loan it will have received from anywhere. Last June, it agreed to invest more than $1 billion to build power plants and roads in Tajikistan, an impoverished ex-Soviet state with limited natural resources. In March, China's central bank agreed a three-year currency swap worth 20 billion yuan ($2.93 billion) with another former Soviet republic, Belarus.

Ukrainian banking sector registers losses in 2009

In 2009 Ukrainian banks has lost UAH 38,45 bn (~$4.76 bn) in comparison to the profits of UAH 7.3 bn (~$0.9 bn) in 2008 Association of Ukrainian Banks reports. 

As of January 1 2010 assets of the banking system were at the level of UAH 880.3 (~$109 bn). During 2009 assets decreased by UAH 45,8 bn. 

The main cause of assets decrease was the decrease in credit operations, which account for 79.2% of all assets. The level of bad loans increased by 3.88 during the last year. 

Liabilities of the banks also decreased by UAH  41.7 and were at the level of UAH 765.1 bn (~ $94.8 bn)

Statutory fund of the banks has increased by 44.6% in 2009 to the level of UAH 36.9 bn (~$4.54 bn). Source.

Swedbank declares huge losses due to Ukraine's branch

Sweden's Swedbank has bought TAS-Kommerzbank and TAS-Investbank in Ukraine in 2007 from one of the current presidential candidates Sergiy Tigipko. He as a banker has built these banks for sale and perhaps was too liberal in raising their value too fast.

Swedbank has said that 53.46% of all loans in their Ukrainian branch are bad loans as of the end of the last year. This figure was at the level of 4.97% in the beginning of 2009. Overall Swedbank's losses in 2009 are at the level of $1,46 bn, of which $1,01 bn due to Ukrainian branch, formerly Tigipko's TAS-Kommerzbank and TAS-Investbank

It remains to be seen if Swedbank starts a suit against Mr. Tigipko, who sort of sold them a lemon...

But Swedbank's share fell marginally, by 0.5 percent, to 65.40 kronor ($8.79) on the Stockholm stock exchange.

Interpipe fails to pay on Eurobond coupons

UR has written earlier about Interpipe's problems with its creditors. On February 5 Interpipe's Eurobond owners were waiting for the coupon payment, which have never materialized. The tranche on July 2007 $200 mln Eurobond issue should have amounted to $8.75 mln. Now the repayment of Eurobonds themselves, which is planned for August 2, 2010, is under threat.

It is rumored that most of the Eurobond issue belongs to Interpipe now and that non-payment of the tranche is a method of pressuring other Eurobond owners to agree for debt restructuring, once Interpipe offers it.

S&P does not believe in Ukraine's default in 2010

Rating agency S&P does not believe that Ukraine will default on its sovereign debt in 2010. Representatives of the agency say that political instability in 2010 will delay the pension and energy sector reforms, however, even with significant budgetary pressures Ukraine is going to go through the year default free.

Ukraine's currency reserves decrease

National Bank's currency reserves decreased by 4,6% or by $1,219 bn to the level of $25,286 bn due to the decrease in currency volume held by the NBU. According to the NBU's data its position as of now consists of the foreign currency for $24.273 bn, gold reserves for $949,19 mln., special borrowing rights - $0,063 bn and reserve position in IMF - $0,3 mln.

In 2009 international reserves of the regulator decreased by16% or by $5.038 bn.

Ukraine's 2010 policies: do you guesswork carefully

Ukraine's elections bring a need for those interested in things Ukrainian to find out "Who is Mr. Yanukovich?" as he is the likely winner of the presidential campaign. Provided Ukrainian parties are build around personalities rather than around policies and ideologies it is very hard to understand as of now what specific stance will be taken by the new president on this or that issue. We are going to devote more attention to specific aspect of future economic, foreign and domestic policies to be expected in 2010. As of now - a a factbox from Reuters on what to expect from Ukraine's election front-runners. Read on under the cut.

Slippery ground of forecasts: 10%, 12% or 15% gap?

We're going to share some rumors. It is hard to come by honest sociology in Ukraine in the wake of presidential elections, so we'll present you the assortment of evaluations, if only to check our sources later on for accuracy. According to pro-Tymoshenko's internal sociology the gap between the candidates will be about 10% in favour of Yanukovich, pro-Yanukovich internal data tells of 12% gap, other "trustable surveys" say that the gap may reach 13-15%. 

We assume that there’s significant probability that Tymoshenko will try to delegitimize second election round. The gap of at least 10% makes it difficult for Tymoshenko to fight for the third round, but even if it is scheduled a miracle is needed for Tymoshenko to win.

Short-term risks for Ukrainian economy still remain high due to increased propensity to resort to radical moves by the two major political groups. Examples are the assault on Ukraina printing house (where voting ballots are printed), Party of Region’s attempts to dismiss the head of police loyal to Tymoshenko, and PoR's pressure on Central administrative court.
 

In case of prolonged political standoff there are risks for the National bank of Ukraine and the whole banking system. Deposits outflow is probable, as well as grivna devaluation pressure and sharp rise of prices for certain food products.

At the same time, we do not forecast the situation to get as radical as it was during the 2004 Orange Revolution.

To do list for Ukrainian president

Today FT publishes an article Daunting task ahead of poll winner which briefly highlights the tasks ahead of the new Ukraine's president. As the election day comes closer the thoughts of the public get directed into the "checklists" for the new head of state.

Here is the list according to FT (with minor comments from UR):

1) Renew IMF aid package for Ukraine, which means undertaking two unpopular tasks - cutting budget and increasing gas price. As of now both candidates are uneasy saying what they going to do if elected.

2)  Paying monthly gas bill to Russia.

3) Investment climate improvement. Ukraines business climate is notoriously bad and improving it is a first priority. At least stabilizing politics will greatly help.

4) Reforming pension system.

5) Seek new growth sources to overcome economy's high dependence on export-oriented sectors, such as steel and chemical industries.

6) Improving public services and infrastructure.

7) Fighting corruption.

There is no point in arguing with this list - it is all true. As it was just 5 years ago (take away the IMF program and the gas bill). The trick in Ukraine is not the lack of knowledge of what needs to be done - most of things are well explained in numerous reports - but the ability to implement the necessary actions. To do that the new president will have to work on the foremost issue - making the state machine able to get things done, preferably according to a mid-term plan.

Gas consortium - a topic for the presidential candidates

Julia Tymoshenko has declared that her idea for the development of the Ukrainian gas transit system is radically different from that of Mr. Yanukovich and Mr. Tigipko. Both Yanukovich and Tigipko said that they support the idea of a gas consortium to manage Ukrainian gas transit system. While Yanukovich was less clear about the membership in the consortium Tigipko was more clear: 50% in Ukrainian ownership, 25% in Russian and 25% in European. That kind of consortium according to Tigipko would guarantee that the consortium is stable and guarantees Ukrainian interest.

In the recent Focus on Ukraine note from German Marshall Fund its Senior Fellow Jorg Himmelreich seems to support Mr Tigipko (or vice versa):

But more than this: the EU should think about buying into or leasing stakes in Naftogaz by the European Bank for Reconstruction and Development (EBRD) or other international financial institutions. Such an EU investment touches Ukrainian sensibilities about its sovereignty, because gas pipelines and storage capacities are perceived as assets of Ukraine’s sovereignty. But the EU stakeholdership should also be seen as strengthening Ukraine’s negotiating position with Gazprom. The European Union as a stakeholder could then enforce the transparency of Naftogaz and Ukraine’s energy sector—and that would unblock Ukraine’s political and economic transformation.

 Recipy from GMF is enticing. Indeed the time has shown that Ukraine is unable by itself to untangle the gas knot named Naftogaz. European and Russian participation in the gas consortium would seem to guarantee the bright future of the enterprise. However, Russia is interested in making its gas more competitive and EU also wouldn't mind cheaper gas. These interests make Russia and EU perfect collaborators in taming Ukrainian side.

Steel and chemical industry get subsidized electricity

National Electricity Regulation Committee decided to leave the electricity prices for chemical and steel industry intact at least till March 2010. Electricity prices remain stable for these industries since October 2008. Currently, depending on volume of consumption these industries pay UAH 0.4221 per kWt/h or UAH 0.5624 per kWt/h.

Despite promises to reform its energy sector and increase tariffs to cost-covering levels the practices of cross-subsidization in the energy sector persist in Ukraine.

Ukraine to conduct extraordinary OVGZ placement

The Ministry of Finance will be holding its next placement of Ukraine's domestic bonds (OVGZ) today (Thursday, January 28) and offer two bonds series with maturity dates July 28, 2010 and January 26, 2011.

Accoridng to the view of Astrum investment company, the extraordinary placement announcement is down to the government’s need to attract funds in the current month. At the same time, MinFin is attempting to attract funds without any increase in yields. At this current auction, the Ministry will be selling not so popular bond series – 6-month and 12-month OVGZs. It is hard to predict the yields level and the volume of the placement.

It is highly possible that that the government has reached an agreement with a number of banks. However, to Astrum’s opinion, market demand will be moderate due to the fact that major players are waiting for the February placements and the expected yield increase for 2-year and 3-year OVGZs.

JKX (JKX LN) to raise 37.8 mln pounds to fund development

Reuters reports that Russia and Ukraine-focused oil producer JKX Oil & Gas (JKX.L) plans to raise 37.8 million pounds ($61 million) through a placing of new shares to fund the development of reserves to boost production.

The FTSE 250 company said the proceeds of the placing would finance the building of a second rig at its Rudenkovskoye field and a liquefied petroleum gas (LPG) facility, both in Ukraine, and help it continue its well workover programme in Russia.

It added that the additional cash would also enable it to maintain the ability to make selective acquisitions.

JKX is targeting production of 20,000 barrels of oil equivalent per day in 2011 up from 13,657 bpd in the three months to the end of September 2009.

It said the $11 million LPG facility would enable it to extract increased value from its Ukrainian gas production. To date, the Russian workover programme was "encouraging" with the first sales of gas expected by the end of this year, it added.

The placing, being conducted through an accelerated bookbuilding by Oriel Securities and Brewin Dolphin was priced at 265 pence per share, a discount of 4.7 percent to the closing price on Jan. 25.

The placing shares will represent about 9.1 percent of the existing ordinary shares or 8.3 percent of the enlarged share capital.

Shares in JKX were down 3.3 percent to 269 pence by 0846 GMT, having doubled in value over the last twelve months.

Two Ukrainians made it to FT's 50 emerging market leaders

Rinat Akhmetov and Viktor Pinchuk (who likes to be written as Victor though) are two Ukrainians who made it to the top 50 emerging market business leaders chosen by the Financial Times. Certainly, Rinat Akhmetov and Viktor Pinchuk are the most internationally visible and richest businessmen in Ukraine. Both of them have invested significantly lately to gain social and international recognition, which is definitely reflected in their being included in the list. Moreover, if compared to Russian oligarchs Ukraine's representatives are somewhat poorer they may boast more independence from the state.

30 billions to pay in 2010

According to Sigma Bleyzer fund leading analyst Oleg Ustenko, government and private Ukrainian entities have to repay from 20 to 30 billions USD to their foreign lenders during the current year.




Surely large part of this amount will undergo restructuring. Nevertheless the remaining part will create significant devaluation pressure on grivna. Considering that each month National Bank of Ukraine lets the government take USD 500-600 mln from NBU's foreign currency reserves, we expect that Ukrainian currency will loose part of its value in 2010.

Despite the fact that experts do not foresee significant current account deficit in this year, capital account may be the source of negative shock. Debt pressure is one of the main risks in 2010. Roughly speaking, total Ukrainian debt is now almost equal to GDP.

Land plot prices near Kiev

Land plot price in Kiev oblast has decreased by 25% during the 2009. In January 2010 the prices were up 0.5%, which is basically in the error range, signifying lack of activity on the market in January. We publish the list of prices in various rayons of Kiev oblast in $ per "sotka". Sotka is a usual unit of measurement for small land plots in Ukraine and is equal to 0.01 of Hectare. Acre consists of about 42 sotkas.

These prices are indicative only as the land plot prices vary greatly within one rayon depending on whether it is closed to infrastructure, highway etc. Also it is only the official asking prices, which may very well drop significantly once the deals are done. 

Kiev-Sviatoshyn - $6 351/sotka;

Obukhov - $4 584/sotka;
Boryspil - $4 085/sotka;
Vyshgorod - $2 908/sotka;
Brovary - $2 873/sotka;

Vasylkiv - $2 504/sotka;
Borodyansky - $1 833/sotka;
Makarov - $1 856/sotka;
Kaharlyk - $1 434/sotka;
Fastov - $1 152/sotka;
Bila Tserkva - $1 177/sotka;
Baryshiv - $1 109/sotka;
Ivankiv - $1 068/sotka;
Pereyaslav - $1 047/sotka.

Dava of SV Development

Presidential elections: interim reflections

Elections were fair and free. There were not many mechanisms for fraud in the electoral law this time, because both camps of the front runners were not sure that they can exert enough influence to control these mechanisms to their own benefit.

Big surprise was the amount of votes that a relatively "new" face of Sergei Tigipko won - 13%. Former NBU Head and ex-Vice-Prime Minister refuses to ask his voters to support one of the candidates, making a bet on their support during local elections in May 2010 (perhaps coinciding with early parliamentary elections). However, his refusal to support other candidates may be due to his electoral base being relatively new. That is it may not be likely to follow Tigipko's call to support one of the front-runners, but will only deem Mr. Tigipko to be a technical candidate thus reducing trust in him. That in turn can diminish his future May success on local elections.

Certainly, Ms Tymoshenko, one of the front-runners, who loses about 10% to Mr Yanukovich, is in a difficult position. Her chances of victory are slim. One of the interesting scenarios for her would be to step down from electoral battle and to ask her supporters to vote for Mr. Tigipko, thus making him a winner. That would make Tigipko a president, remove Mr Yanukovich from the playing field as well as preserve Yulia Tymoshenko as a Prime Minister of the country - a post that might be prefereable to weak presidential office.  That scenario is just one of the many and is not very likely, but... a really interesting one.

Second round of elections is expected on February 7 with a new president stepping into the office by March 29 should everything go on schedule. It is interesting to note lack of published polls predicting who the victor of the second round may be under different scenarios and what turnout to expect.

Dead gas consortium to rise?

Victor Yanukovich, possibly next president of Ukraine, made a statement regarding so-called gas consortium. According to Interfax news agency he said that he will make a proposal to create a consortium to manage existing gas transit system in Ukraine, and to conduct system’s reconstruction in order to raise the volumes of gas transit.



These goals for the consortium seem to have little to do with reality. First, raising volumes of gas transit doesn’t depend on Ukrainians’ efforts now. Due to economic downturn, the demand for Russian gas in Europe is falling. In 2009, only 95 billions of cubic meters of gas was transported from Russia through Ukraine towards EU, which is 24.4 bns lower than in previous year. Total capacity of Ukrainian gas transit system is at least 140 bns per year. Obviously, it is not necessary to expand these capacities, especially if we consider that Gazprom’s gas production is falling down.

Second. The funniest thing here is that the consortium had already been created long time ago, during late Kuchma’s era. Literally the goal for it was the same. However, the child was born dead – the consortium didn’t manage to fulfill the role of operating center for Ukrainian gas pipeline system.

Creditor's of Ukraine's defaulted banks can expect 40% recovery

Standard & Poor's Ratings Services said today that although recovery rates for creditors of defaulted banks in Kazakhstan, Russia, and Ukraine (KRU) have historically been muted, they could improve with support from the state.

"We believe that recoveries could be restricted and unpredictable, largely because of limited bank supervision and what we see as arbitrary frameworks for bankruptcy and bank restructuring in KRU," said Standard & Poor's credit analyst Sergey Voronenko. "In our view, this situation may be exacerbated by the approach of the banks' management and what appears to be asset stripping before default, as has been alleged in some recent bank liquidations. These aspects together with other factors have historically constrained our ratings on KRU banks."

"We expect the average recovery prospects for creditors to be less than 40% through the cycle, with strong disparities in individual cases," added Standard & Poor's credit analyst Ekaterina Trofimova. "This is despite some progress, most notably in Russia, from the previous decade. Recoveries may be even lower in 2010 and 2011, owing to the likely continuation of weak economic conditions in KRU.”



Source

Igor Kolomoisky buys TV stations from CME

One of the leading Ukrainian TV stations 1+1 as well as Kino TV station was bought by Igor Kolomoisky from Central European Media Enterprises Ltd.(CME) for $300 mln plus $19 mln for settling the transaction. First payment of $30 mln should be paid before February 1, 2010 and the rest should be paid  by April 2010.

It looks like buying a leading TV channel by one of Ukrainian oligarchs just prior to the second round of presidential elections may be indeed a strategic investment.

Ukraine: it is somewhere between Togo and Liberia

Heritage Foundation and Wall Street Journal publishes 2010 Index of Economic Freedom. Ukraine occupies proud last place out of all European countries and 162 out of 179 evaluated countries, finding itself just between Togo and Liberia. Ukraine gets high scores for Fiscal, Monetary and Trade Freedom, but is ranked quite low in Business, Investment, Financial freedoms. Also Ukraine gets low scores on Property rights protection and Freedom from Corruption. Source

Apparently biggest opportunity for Ukraine lies in improving its business climate, property rights protection and fighting corruption. These tasks are no surprise and have been apparent for years, however, they have never been popular with Ukraine's political elite.

Post-election redistribution of property: is it coming?

Presidential elections in Ukraine will stop the times of duality in Ukrainian power. The conflict between Orange revolution leaders Yulia Tymoshenko and Viktor Yushchenko are over whatever the result of the election. It is likely that early parliamentary and local elections will cement the victory of a presidential winner, whoever it will be. Once the power gets consolidated in the hands of one political camp the question is - will the other camp suffer or rather how exactly will it suffer.

Certainly, many bureaucrats will lose their positions due to elections (more in case of Yanukovich victory, provided YuliaTymoshenko already controls Cabinet of Ministers and is rather influential with many courts). But it is likely that some property is also destined to change hands. Many oligarchic businesses were built on shaky ground of discretionary bureaucratic decisions with respect to licenses, permits, access to monopolistic markets etc. Those kinds of businesses are likely to suffer after the president gets settled in his or her seat.

One of the likely targets in case of the Tymoshenko win will be Mr. Firtash, who has already lost his intermediary business in gas trade between Russia and Ukraine and is now trying to defend remnants of his business empire. Today OstChem Ukraine publishes a press-release that its stake in Crimean Titan enterprise is under threat due to government's decisions, which may lead to raider attack. Other likely targets of the second round of re-privatization may be in Mr. Pinchuk's business empire.

After Orange revolution Yuliya Tymoshenko has initiated reprivatization process, which came to a halt after a loud sale of Kryvorizhstal' plant to Arcelor Mittal. Kryvorizhstal' was privatized by a consortium of Viktor Pinchuk and Rinat Akhmetov for fraction of the market price.

In case Viktor Yanukovich wins property redistribution may also be likely, but it is less probable, provided his camp has suffered from it in 2005 and ardently protested any kinds of privatization revision. However, being the victim of the process in opposition is one thing - it is much harder to stay away from it once the opportunity is there.

Steelmakers keep losses low

Ukrainian steelmakers' 2009 preliminary net loss reached UAH 5bln (USD 600mln), down from the 2008 net income of UAH 17bln (approx. USD 3bln), according to Vasiliy Kharahulah, CEO of the Metallurgprom Association. We consider this a comparatively good result, taking to account the fact that 2009 sales dramaticall dropped (almost by 37%).

According to opinion of Astrum investment company, the drop of rolled steel output by 16% and rolled steel prices by 24% (in hryvnia terms) will result in a 36% drop of Ukrainian steelmakers’ net sales in 2009. Expert expect Azovstal, ArcelorMittal Kryvyi Rih and Mariupol Illich will be the only profitable steelmakers in 2009 in terms of net income.

In 2010, growth is predicted: net sales should grow by 39%, driven by output growth by 11% and prices growth of 25%. The 2010 net income margin should be 4%-6% on average.

We would like to outline that it is sharp devaluation of grivna gave a nice chance to steelmakers to increase their profitability and keep the losses low. Ukrainian currency lost almost 40% of its value since the beginning of financial crisis, softening the effect global downturn on local exporters.

Steelmakers are number one Ukraine’s exporting sector, traditionally accounting for about 40% export sales. This is compatible to share of oil in Russia’s exports.

Industrial production down 21.9% in 2009

Statistics Committee presented the data on industrial production in 2009. It appears to be down 21,9% compared to the previous year. Chemical industry is down 23.2% and steel industry srinked by 26.6%, both industries, however, stabilized in the end of the year. Volyn' region suffered the highest "de-industrialization" with industrial production falling 48.3% (however, not many people were suspecting that there was much industry in Volyn' oblast in the first place).

The growing production in 2009 was noticed in gas extraction, meat, sunflower oil, gasoline and vodka production. Source

Business expectations turn to positive

Research by National bank of Ukraine indicated that expectations of top management of Ukrainian enterprises had shifted to modest positive zone in 4th quarter of 2009. In detail, 10% of business entities expect sales to rise in next 12 months, compared to 8% in 2nd and 3rd quarter of 2009. Also, the share of those who expect sales to go down narrowed to 24%.

For the year 2010, business sector expects inflation at the level of 15.1%. It is an optimistic estimate, considering rising gas prices and tariffs for heating etc. Also almost 60% expect devaluation of grivna in this year.

Experts outline that the balance of general expectations about the economic and financial state of companies in the next 12 months turned from a negative 2% in 3Q09 to positive 6.6% in 4Q09, becoming positive for the first time since the crisis entered its harsh stage in 4Q08.

The NBU has published its survey of business expectations in 4Q09. The survey is based on interviews with 1,245 companies across Ukraine, and provides a good representation of the Ukrainian business community.

Ukraine's stocks: what to wait for after presidential elections

Here are some quotes from Market Watch article on possible impact of elections on Ukraine's stocksi. The main idea of the article is that elections will bring political stability and that Tymoshenko's win will bring such a stability faster for she has to spend less time to consolidate power than Yanukovich, who'd have to fill the whole power structure of Ukraine with new personnel.

"We expect a difficult political battle during and after the election to trigger a new round of negative news flow," said Anastasia Golovach of Renaissance Capital in Kiev. "Investors could decide to sell some instruments [stocks and bonds] because the stabilization of the political situation in unlikely in the short term," she said.

Ukraine's benchmark PFTS stock index rose 90% in hryvna terms last year after tumbling 74% in 2008. In dollar terms, the index rallied 83% in 2009, just as much as it dropped the previous year. Still, over the last decade, the index has surged 858% in dollar terms and 1,366% in hryvna terms, according to data from the PFTS Stock Exchange.

"Liquidity is very poor here, but if we have a stable political situation and a stable exchange rate for a few months, investors will start looking at this country," Abromavicius said.

The market capitalization of the PFTS, which consists of 20 companies, was $10.1 billion last year. The sectors that stand out are steel and iron ore, utilities and banks.

Freight turnover is down 22% in 2009

Freight turnover is down 22% in 2009 compared to 2008 says State Statistics Committee. Most of the freight in Ukraine is transported by railway and pipelines. While railways mainly service steel sector, pipeline transport's main client is Russian transit gas going to Europe. Both these sectors were hard hit in 2009: railway freight turnover contracted by 24% and pipeline freight turnover by 21%. These numbers reflect downfall in steel production and contraction of the Russian transit gas volumes going through Ukraine.

Source.

Ukraine's retail down 20% in 2009

State Statistics Committee publishes the info on retail trade and restaurant business turnover in 2009. It appears that the number is down 20% in 2009 compared to 2008. In 2009 turnover in the retail sector was UAH 229.9 bn, which is about $28.5 bn at the current exchange rate. It is likely that the downfall in retail turnover is not over yet and is to continue in 2010.

The city of Kyiv is down 22%. Donetsk oblast is the leader in retail contraction - 26%, while Kyiv oblast (excluding Kyiv) turned out to be the most resilient to contraction - only 9.8% down.

Source

Sell-side firm forecasts grivna exchange rate for 2010

Dragon Capital, one of the largest Ukrainian investment companies, forecasts foreign exchange rate to be 7.5 grivna for 1 USD at the end of 2010. UR sees this prediction as too optimistic, considering recent sudden and sharp fluctuation of Ukrainian currency rate after the end of New Year vacations. Since 7th of December, grivna has lost almost 2.5% of its value against dollar during 4 days, reaching its September’09 levels – 8.20. Only due to intensive market interventions by National Bank of Ukraine, hryvna/USD rate is now 8.07.

These fluctuations are the reason for doubts regarding the peaceful future of grivna in 2010. According to Dragon’s forecast, the revalutaion will be supported by inflow of capital (strange assumption, considering worsening of financial condition of Ukrainian leading corporations) and economic growth (almost eqal to zero).

What was left out in Dragon Capital's assumptions is growth of public debt, worsening of quality of credit portfolios of Ukrainian banks, and predicted defaults of construction companies. All these factors, as well as possibility of sovereign defaults of emerging countries can cause zero capital inflow in Ukraine in 2010.

Regarding IMF loans, it is possible to predict that Fund will provide limited loans sufficient only for preserving national currency from sharp devaluation. Restriction of cooperation with the IMF in 2010 will be caused by overwhelming populism of Ukrainian government with its desire to control NBU and currency reserves.

To summarize, Dragon capital’s opinion represents the desired scenario for a sell-side company. Nevertheless, it seems to us in UR that the map of risks for Ukraine is a bit different.

Deficit of Ukraine's foreign trade in goods over eleven months shrinks by 3.7 times

The deficit of Ukraine's foreign trade in goods January through November 2009 was estimated at $4.815 billion, which was 3.7 times down on the same period in 2008 ('minus' $17.857 billion), the State Statistics Committee reported.

The export of goods in the eleven months was estimated to be worth $35.603 billion (56.6% of the January-November 2008 period), and imports amounted to $40.418 billion (50.1%).

As the State Statistics Committee said, the deficit of Ukraine's foreign trade in goods was due to trade in certain groups of commodities – energy materials, oil and fuel ('minus' $11.2 billion), pharmaceuticals ('minus' $1.743 billion), and polymers and plastic materials ('minus' $1.583 billion).

The ratio of coverage of imports by exports January through November 2009 was 0.88, whereas in the same period last year it was 0.78. Source.

50% plus two stock of ISD sold to consortium of investors

Alexander Katunin, the owner of Swiss metal trader Carbofer Group and the former co-owner of Russia's Evraz Group, together with a group of financial investors and with the participation of Russia's Vnesheconombank (VEB), has purchased a controlling interest in Donetsk-based Industrial Union of Donbas (IUD) Corporation. The new partners have helped the company to strengthen its position on the global market, the IUD said in a press release.

Alexander Katunin (who was a co-founder and a shareholder of Evraz Group until 2004), an owner of the international steel and iron products trader Carbofer Group S.A. as well as logistic and production companies, have bought a 50% plus two stocks package in the IUD. A 49.99% share still belongs to Serhiy Taruta and Oleh Mkrtchan," the press release reads.

The IUD, founded in 1995, is an integrated holding company that owns or manages stakes in mining and metals enterprises. The group's core assets are the Alchevsk Iron & Steel Works (AMK), Alchevsk Coke-Chemical Plant and Dzerzhynsk Iron & Steel Works (DMK) in Ukraine, as well as Dunaferr in Hungary, and ISD-Huta Czestochowa in Poland. Source.

Naftogaz to have $4 bn deficit in 2010?

According to prediential representative on energy security Mr. Sokolovsky Naftogaz should have about $4 bn deficit in 2010. In a simple addition substraction game he told that in 2010 Naftogaz should pay Russia about $10 bn for gas, while Ukrainian market is forecasted to generate in payments about $5 bn. Where will the other $5 bn come? Mr. Sokolovsky thinks that there will be a contraction in gas demand for about $1 bn. In the end we have 10-5-1=4, which is $4 bn that Naftogaz will miss. Source.

FDI into Ukraine drops almost trifold in 2009

Ukraine has been hard hit by the credit crunch and the crisis. As a result of that FDI into Ukraine drops almost trifold in first 9 months of 2009. From $8 bn in the first 9 months of 2008 to $2.97 bn in the same period of 2009. It is the city of Kyiv that got most of the FDI flow, receiving $1.2 bn. Other top performers include Kharkiv, Lugansk, Lviv and Kyiv oblast. Disinvestment was occured in Chernigiv and Poltave oblasts.

During the times of independence Ukraine got $837.5 of FDI per capita, provided the population shrinks that number has a built-in improvement trend... Source.

Cabinet of Ministers pumps up control over prices in pharmaceutical industry

During the meeting with reps of pharmaceutical business in Ukraine Yulia Tymoshenko, prime minister of Ukraine, ordered to create a coordination commission to check the fairness of price-setting in pharmaceutical industry. As of now no concept of price-setting apart from vague remarks of the prime minister has been suggested. However, prime minister told that if the price-setting is found unfair the licenses of drug stores will be revoked for good.

The commission will consist of reps of the Tax administration, Anti-monopoly committee, State inspection on price cotrol, and Association of producers of medical products. Source.

The price-setting mechanism for medical products in Ukraine is a question of corruption for a long time, esp. when the government agencies buy drugs at artificially inflated prices. However, back then no questions to price-setting mechanism were asked. Prior to presidential campaign the government played the card of "flu epidemics threatening the nation" and drug-stores became the culprits of deficit and speculation with flu prevention drugs. Following the scandals with drug-stores getting filthy rich speculating on first aid drugs the government continues to develop the story increasing its intervention in and discretionary power over the pharmaceutical business in Ukraine.