Welcome to the U.S.-Ukraine Business Council

Case for Ukraine (Aslund); Eastern Europe Needs Our Help Including Ukraine (Senator Kerry); Banks to Receive Euro24.5 Billion Loan;
February 27, 2009

By Anders Aslund, Senior Fellow
Peterson Institute for International Economics
RealTime Economic Issues Watch, Global Financial Crisis
Washington, D.C., Thursday, February 26th, 2009

We can't risk losing 20 years worth of gains in the region.
America should support call for EU to support economies including Ukraine
OPINION EUROPE: By U.S. Senator John Kerry
Wall Street Journal Europe, Friday, February 27, 2009

By Alan Beattie in Washington, Financial Times, London, UK, Fri, Feb 27 2009

The Associated Press, Kiev, Ukraine, Thursday, February 26, 2009

Ukrinform, Kyiv, Ukraine, Thu, February 26, 2009 

Ukrainian News Agency, Kyiv, Ukraine, February 26, 2009 

By Stefan Wagstyl, Financial Times, London, UK, Thu, Feb 26 2009

By Anders Aslund, Senior Fellow
Peterson Institute for International Economics
RealTime Economic Issues Watch, Global Financial Crisis
Washington, D.C., Thursday, February 26th, 2009

Pessimists believe that Ukraine is on the verge of default. Fortunately, such a calamity is unlikely, but Ukraine badly needs more international financial support to handle a tremendous external shock.

A year ago, Ukraine’s economy was in sound health after eight years of an average annual economic growth of 7.6 percent. Ukraine has maintained a minimal budget deficit, and its public debt was as small as 12 percent of GDP in 2007.

Ukraine’s mistake, however, was to keep its exchange rate pegged to the US dollar, which encouraged speculative short-term capital inflows, driving up inflation to 31 percent last May and the current account deficit to 6.7 percent of GDP last year.

These flaws were not major, but Ukraine became a prime victim of the freezing of international financial markets after the Lehman Brothers bankruptcy. Without credit, most construction just stopped. Steel is Ukraine’s main export product, accounting for over 40 percent of exports, and both prices and volume of sales plummeted by half.

The blow to the Ukrainian economy has been horrendous. In January, industrial production fell by no less than 34 percent over January 2008, and GDP is estimated to have plunged by 20 percent. Steel production, mining and construction have fallen by half.

In current dollars, Ukraine’s GDP is likely to plummet by 40 percent this year. Exports are likely to drop by half, and imports even more, reducing the current account deficit to an insignificant level. Millions of workers are being laid off, and the stock market has contracted by 90 percent.

No other country has been hit as hard as Ukraine, and it needs all the support it can get to mitigate the social shock. The Ukrainian government reacted swiftly, asking the International Monetary Fund for support last October. Within four weeks, Ukraine and the IMF had agreed on a large, strong two-year standby agreement with $16.4 billion of IMF credits.

The IMF had three key demands: A balanced budget, a floating exchange rate, and bank restructuring. Ukraine has delivered. It has done more on bank restructuring than most Western countries. After some hesitation, the National Bank of Ukraine let the exchange rate float. It has depreciated by about 50 percent and stabilized, endowing Ukraine with new cost competitiveness. The Ukrainian government has maintained the budget close to balance in spite of collapsing state revenues. Inflation has fallen to 22 percent.

The international financial institutions recognize Ukraine’s dilemma and the government’s heroic achievements. The World Bank, the European Bank for Reconstruction and Development, and the European Investment Bank have contributed some $3 billion in new funds.

Their support is sufficient to avert default. Ukraine still has $28 billion in reserves, which reassuringly corresponds to eight months of imports. The only reason for talk about default is the loud, public acrimony between President Viktor Yushchenko and Prime Minister Yuliya Tymoshenko, who accuse each other of treason and corruption.

But we should not complain about open democracy. Apart from the Baltic countries, Ukraine is the only bona fide democracy with free media in the former Soviet Union, and it is committed to Euro-Atlantic integration. Such a country needs support when in peril.

Amazingly, Ukraine has so far seen minimal social unrest, but unemployment is bound to skyrocket, especially in the East with its steelworks and mines. Naturally, the Ukrainian government is anxious to reinforce its social safety net and insists on a budget deficit of a moderate 3 percent of GDP.

The IMF understands the government’s predicament, but it cannot approve a budget deficit of more than 1 percent of GDP without additional financing. The finance gap in this year’s balance of payment amounts to $5 billion, quite a moderate amount.

Seventeen international banks have just given their vote of confidence in Ukraine’s economic policy, by making commitments to invest $2 billion of their own capital in their Ukrainian subsidiaries. Western governments should follow the example of their hard-tested banks.

The European Union has a vital interest in saving its banks that are heavily invested in Ukraine, and for the United States, Ukraine is of major geopolitical importance. The United States and the European Union should stand up and deliver. Ukraine has long been a loyal friend of the West. Now the time has come for the West to prove its friendship toward Ukraine.

NOTE: RealTime Economic Issues Watch: A website forum in which senior fellows of the Peterson Institute for International Economics discuss and debate their responses to global economic and financial developments as they occur each day and offer insights that others might overlook.
Global Financial Crisis: Views on the current crisis in global financial markets, their impact on the real economy and the public policy choices confronting the United States and other countries.

FOOTNOTE: Anders Aslund has served for several years as a Senior Advisor to the U.S.-Ukraine Business Council (USUBC), Washington, D.C., www.usubc.org.

LINK: http://www.petersoninstitute.org/realtime/?p=507

We can't risk losing 20 years worth of gains in the region.
America should support call for EU to support economies including Ukraine

OPINION EUROPE: By U.S. Senator John Kerry
Wall Street Journal Europe, Friday, February 27, 2009

Twenty years ago, the Berlin Wall and the repressive Communist regimes of Eastern Europe came crashing down to usher in a new era of political and economic freedom. Today, it is Eastern Europe's banks and economies that are threatening to crash.

The Polish zloty is down 38% against the dollar in the last six months alone. Hungary's forint is down 32%. Ukraine posted a staggering 34% drop in January industrial output from a year earlier. While the entire world is reeling, right now the eye of the global financial storm has moved to Central and Eastern Europe.

If Western nations do not act quickly to address the snowballing financial crisis that is brewing from Latvia to Hungary, we risk replacing an era of promise and progress in Eastern Europe with one of soaring unemployment, instability and a weakening of the influence and ideals we have spent decades building.

While many Americans are rightly focused on our domestic troubles, we must also recognize the global dimensions of the current crisis. Last week, Latvia became the second government, after Iceland, to collapse as a result of a financial crisis that has already sparked riots in the Baltics and Greece and is likely to be a driving geopolitical force for a long time.

Eastern Europe's currencies are plummeting as investors instead seek the safety of the dollar and the euro. This means that Eastern European countries, companies and individuals face increasing challenges to pay back their large foreign-currency loans -- which only deepens the currency problems to create a vicious circle.

At first glance this may seem like a traditional emerging-markets crisis like those we saw in the late 1990s. But in fact it's far worse. This is a truly global financial crisis in a highly connected financial world, and Eastern Europe is feeling the brunt.

Many of the region's banks are foreign-owned -- in the case of Hungary, more than 80% -- and many of those banks are now contemplating unprecedented protectionist steps, pulling back lending operations to their home countries. Meanwhile, as larger countries consume more of the world's capital in refinancing their own debt, emerging markets like those of Eastern Europe are likely to find the bank windows closed to them.

The result is that the economies of Eastern Europe are already falling faster and further than anyone expected. There is a real danger that, if every country affected by this crisis defines its interests narrowly, several strategically vital countries could fall through the cracks.

For example, Ukraine's dire situation could trigger a domino effect, not only destabilizing Western Europe banks with large exposure to East European markets, but actually changing the geopolitical map as well.

America should support World Bank President Robert Zoellick's call for the EU to lead a coordinated global effort, alongside the IMF, World Bank and other development banks, to support the economies of Central and Eastern Europe. Austria, too, deserves credit for trying to focus Europe's attention on the plight not just of eastern member states such as the Baltics, but also of non-EU neighbors like Ukraine.

But Eastern Europe will not be the last financial fire the world will have to help put out in this crisis. Nor will our problems be confined to traditionally unstable corners of the globe. Our oldest European allies are also in deepening financial trouble, and three of our most important partners in the Muslim world, Turkey, Indonesia and Pakistan, today all face acute balance-of-payments crises.

We also need to ensure that the U.S. Treasury and State departments have the capacity to deal with these fast-moving crises in real time even as they turn our domestic economy around.

That means the Senate must make clear its willingness to quickly confirm the Obama administration's nominees for posts vital to international economics and finance, such as the international staff at Treasury and the economic staff at the State Department, once the administration nominates them.

Our needs at home are urgent and great. We must put our own economic house in order and we will. But as we balance the domestic and global demands of this crisis, we should be warned that, in cutting corners today we risk incurring far greater costs down the road.

A retreat into our domestic problems will not only leave us diminished on the world stage -- because our world is so economically and financially interconnected, it may well also worsen our own economic crisis.

Instead, as we restore confidence in our own markets, we will also need to find a strategy to project leadership, share burdens, build the capacity of institutions like the IMF and spread stability as this crisis continues to reverberate world-wide.

We have already lost a great deal in the last few months. But two decades of prosperity, democracy and institution-building in Eastern Europe is one investment that America must not allow to go up in smoke.

NOTE: Mr. Kerry, a Democratic senator from Massachusetts, is chairman of the Senate Foreign Relations Committee.

LINK: http://online.wsj.com/article/SB123570279503890141.html


By Alan Beattie in Washington, Financial Times, London, UK, Fri, Feb 27 2009

WASHINGTON, D.C. - A group of multilateral lenders are preparing a lending package of up to euro24.5bn to help central and eastern Europe’s battered banking systems weather the financial crisis.

The World Bank, the European Bank for Reconstruction and Development and the European Investment Bank will announce the package on Friday in London. The move follows widespread financial turmoil across the region, as the western European institutions that own large parts of eastern Europe’s banking sector pull back capital to their home bases.

Several central and eastern European countries including Ukraine, Hungary and Latvia have also borrowed from the International Monetary Fund, the World Bank’s sister institution, to plug the gap in their capital flows.

The European Investment Bank said it would provide euro11bn for small and medium enterprise lending, of which euro5.7bn is ready for immediate disbursement. The EBRD will provide up to euro6bn in 2009-2010 for the financial sector in a mixture of equity and debt finance, and the World Bank group euro7.5bn.

Robert Zoellick, World Bank president, said: “This is a time for Europe to come together to ensure that the achievements of the last 20 years are not lost because of an economic crisis that is rapidly turning into a human crisis.”

LINK: http://www.ft.com/cms/s/0/efa7ff5a-0475-11de-845b-000077b07658.html


The Associated Press, Kiev, Ukraine, Thursday, February 26, 2009

KIEV, Ukraine - Ukrainian President Viktor Yushchenko said Thursday he was hopeful the country would soon receive an emergency loan from the International Monetary Fund, saying it is the only chance for the ex-Soviet nation to stay intact in the financial storm.

Yushchenko said he was confident his political rival, Prime Minister Yulia Tymoshenko, and parliament would agree to trim government spending — a key condition set by the IMF to secure the $16.4 billion rescue program.

The IMF froze a second installment of the loan earlier this month after Tymoshenko refused to cut spending, prompting downgrades from rating agencies.
"I think I have a strong enough case to convince the government to amend the budget," Yushchenko told a meeting of IMF representatives and G-7 ambassadors.

Ukraine, like many countries in eastern Europe, has been hit hard as panicked investors have fled emerging markets, dumping local stock and currency. The Ukrainian currency, the hryvna, has lost 47 percent of its value since September, trading at 9.2 to the dollar on the foreign currency exchange Thursday.

In his strongest language to date, Yushchenko said that the IMF loan was the economy's only chance to survive. "The question of whether Ukraine will overcome the financial crisis lies in the dimension of our relations with the IMF," Yushchenko told the meeting.

Meanwhile, Standard and Poor's downgraded three large Ukrainian banks, Ukrsots, Alfa and Kredo from B/B to CCC+/C. That followed its downgrade of the country's sovereign credit rating, citing political instability and the IMF loan freeze.

The central bank has so far taken control over eight banks as the financial system suffers from a liquidity shortage and confidence crisis.

Ukrinform, Kyiv, Ukraine, Thu, February 26, 2009 

KYIV - The USA call on Ukraine to elaborate a common position for all power branches in order to ensure cooperation with the IMF, U.S. Ambassador to Ukraine William Taylor stated at a meeting of President Viktor Yushchenko with Ambassadors of the G7.

“Our relations with Ukraine and the IMF are very important. And we share your worry over the present situation, but, in our opinion, primarily it is necessary that the President, the Government, the National Bank and the Verkhovna Rada worked together in order to elaborate a common position and allow the IMF to work with its mission here”, Taylor stated.


Ukrainian News Agency, Kyiv, Ukraine, February 26, 2009 

KYIV - President Viktor Yuschenko will hold a meeting with participation of Prime Minister Yulia Tymoshenko, Verkhovna Rada Speaker Volodymyr Lytvyn, and acting National Bank Governor Anatolii Shapovalov on February 27 to agree the position of the Ukrainian authorities on resuming cooperation with the International Monetary Fund.  Yuschenko said this while meeting with G7 ambassadors.

The president expressed hope to find a compromise and draft a coordinated letter of Ukrainian authorities about resuming IMF loans for Ukraine.
Yuschenko regards IMF loans as an important driver to help Ukraine overcome the economic crisis.

To resume cooperation with IMF Ukraine must introduce certain amendments to the state budget-2009 and approve the second part of the bailout plan, Yuschenko emphasized.  Yuschenko is confident he will be able to persuade Tymoshenko into amending the state budget-2009.

The presidential press service said that the February 27 meeting would focus on coordination of the actions of all government agencies and political forces aimed at developing the national economy during the current crisis.  The meeting will begin at 10:30.

The National Bank of Ukraine's Chairman Volodymyr Stelmakh and the Party of the Regions' leader Viktor Yanukovych were invited to the meeting in addition to Tymoshenko and Lytvyn.

As Ukrainian News reported, the Cabinet of Ministers has called on President Viktor Yuschenko to sign a joint declaration on Ukraine's readiness to continue cooperation with the International Monetary Fund within the framework of a joint program.

Yuschenko considers it senseless to send such a declaration to the IMF.  The IMF has postponed disbursement of the second tranche of its Stand-loan to Ukraine (planned for February 15) and called on the Ukrainian authorities to reduce the deficit of the state budget, tighten monetary policy, and regulate the banking sector.


By Stefan Wagstyl, Financial Times, London, UK, Thu, Feb 26 2009

This should have been a year of celebration in central and eastern Europe. It is 20 years since the Berlin Wall fell, the 10th anniversary of Nato's eastward expansion and five years after the European Union began its enlargement into the region: from the Baltic to the Black Sea, the countries that escaped from Soviet rule have much to commemorate.

But the global economic crisis has spoilt the party. Instead of building on the achievements of the past two decades, the region's leaders are feeling the economic foundations shaking under their feet.

All of Europe is heading towards its worst economic crisis since the 1930s. But compared with the wealthy west, central and east European nations are in a weaker position to respond. The dangers are so great that European Union leaders meeting in Berlin last Sunday agreed to back a doubling of International Monetary Fund resources to $500bn (£348bn, euro391bn) to support the CEE countries in what Angela Merkel, German chancellor, called an "extraordinary international crisis".

At risk is not only the economic development of vulnerable countries but even their political stability. Nobody expects a repeat of 1930s evils. But mounting anger over recession, unemployment and debt could fuel populism with unpredictable consequences. As in western Europe, there could be social and ethnic tensions. Reformist governments, multinational companies and banks could all become the targets of public protest when livelihoods are threatened.

"The economic crisis will impact . . . eastern Europe more than western Europe because the political and economic systems in eastern Europe are more vulnerable," says Carl Bildt, Sweden's foreign minister.

The EU itself, the region's political and economic lodestone, is running into trouble amid signs of western leaders responding to the crisis by putting national interests before Union-wide solidarity, notably over state aid for finance and industry. Having worked hard to bring their countries into the globalised European mainstream, some central and east European leaders feel betrayed.

Pavol Demes, a former Slovak foreign minister and head of the CEE office of the German Marshall Fund, a US think-tank, says: "People are questioning liberal democracy, the markets and the EU. They see countries like France going for national solutions when international solutions are needed. They feel excluded."

He and others applaud the Czech Republic, holder of the EU's rotating presidency, for challenging Nicolas Sarkozy, the French president, over suggestions that aid to France's carmakers might be tied to preserving French jobs rather than those the marques provide in central Europe. Mirek Topolanek, Czech prime minister, spoke for many in the CEE region when he said the response of eurozone countries "has deformed the joint project of the euro more than any other imaginable event".

For all the anti-government demonstrations in Bulgaria and Lithuania, violent protests in Latvia and a surge in anti-Roma rhetoric in Hungary, however, CEE is not a region about to collapse into disorder. Despite the worries about EU solidarity, the 27-nation bloc's new members remain committed to enhancing their integration. Poland, for example, is accelerating plans to join the eurozone. "What we need is more Europe, not less Europe," says Eugeniusz Smolar, head of Warsaw's Centre for International Relations.

Whatever happens, different countries are likely to go through the crisis with widely differing results. At one extreme are nations under particularly severe financial pressures, headed by Hungary, Latvia and Ukraine, which have secured IMF rescue packages.

At the other stand Poland, the Czech Republic and Slovakia, a base of relative economic stability in the central European heartland. Manfred Wimmer, chief financial officer of Erste Group, the Austrian bank with big CEE operations, warns: "What's been lost in this crisis very often has been the ability of people to differentiate."

Still, there is a sense of gathering gloom even in countries that have so far escaped the worst. In Croatia, record numbers of skiers have holiday-ed abroad this winter, property prices on the Adriatic coast remain high and the nightspots of Zagreb, the capital, are busy. But all is not well, says Davor Butkovic, a commentator at the daily Jutarnji List.

Speaking in Zagreb's fashionable Bulldog bar, he says: "We don't have an economic crisis yet but there's a feeling that something bad is coming. At Jutarnji List there is a 30 per cent drop in advertising this year."

After nearly a decade of rapid growth, still at nearly 5 per cent last year, gross domestic product in the region - including central and south-east Europe and Ukraine but excluding Russia - is set to fall in 2009 for the first time since the post-communist chaos of the early 1990s.

Migrants are returning home from the faltering economies of western Europe and Russia. Foreign direct investment is being postponed, as with Fiat's euro1bn ($1.3bn, £890m) plan to modernise Serbia's Zastava car plant.

Worse, some of the international banks that fuelled the recent economic growth are struggling to fund local subsidiaries, raising fears of collapses in credit. According to the Bank for International Settlements, the central banks' grouping, at the end of September eastern Europe's loans from foreign banks (local and foreign currency) were $1,656bn - three times more than in 2005 and mostly borrowed from west European banks.

This month's market turmoil has highlighted the dangers. The European Bank for Reconstruction and Development, the region's multilateral bank, estimates the banking sector needs $200bn in refinancing this year and $100bn-$150bn to recapitalise in order to cope with bad loans.

The question is how much of the loan books turn sour as economies slow and currencies fall. Foreign exchange loans, ranging to 90 per cent of lending in Latvia, are a particular concern because of the extra burden on borrowers who make repayments out of local currency earnings.

If banks cover only 70 per cent of their subsidiaries' needs, governments and multilateral institutions might face demands for about $100bn - a big sum but not overwhelming given the scale of west European and US bank bail-outs.

Robert Zoellick, the World Bank president who has estimated a lower figure of $40bn-$45bn, is urging EU governments to support the IMF, the World Bank and the EBRD in raising funds, saying the issue is crucial to Europe's future. He told a German newspaper this week: "I would consider it an immense tragedy if Europe were to break into two parts again."

Not everybody is queuing at the IMF, however. Slovakia and Slovenia are safely inside the eurozone. Poland and the Czech Republic insist they need no support and say recent market upheavals are partly due to panicked investors mistakenly viewing the region as an undifferentiated disaster zone.

The social and political impact of the crisis will also vary. Latvia's government collapsed last week over IMF mandated austerity.

In Ukraine, the economic turmoil has become the latest battleground between President Viktor Yushchenko and Yulia Tymoshenko, his prime minister.

In Bulgaria the crisis has boosted support for Gerb, a populist anti-corruption grouping that hopes to win power in elections this summer. Elsewhere, however, the crisis has strengthened governments. Donald Tusk, Poland's liberal prime minister, is more popular today than when he took power in 2007.

But these are short-term developments. A prolonged crisis could undermine support for market-oriented policies and generate conflict and confusion. Krisztian Szabados, head of the Political Capital Institute, a Budapest research group, worries about increased far-right activity, particularly in countries with significant gypsy minorities. "The right wing is on the rise," he says, pointing to Jobbik, a far-right Hungarian party that won 8.5 per cent of the vote in a local election last month.

A bigger test for the likes of Jobbik will come in this summer's European parliament elections. The issue for CEE leaders may not be the size of the extremist vote. After all, few rightwing parties in the region have done as well over time as France's National Front. But managing shows of extremism will be hard.

Public institutions are weaker than in the west and officials are sometimes unable or unwilling to impose their authority. Mr Szabados cites the example of the recession-hit Hungarian city of Miskolc where a police chief, removed for blaming gypsies for a crime wave, was reinstated after demonstrations in his support.

Ivan Krastev, head of the Centre for Liberal Studies in Bulgaria, worries about a collapse in middle-class morale if people lose their jobs and are engulfed by their mortgages: "These people identified with the west and now feel betrayed. 'We did our best,' they say. 'We followed the best practices and now we are told these were the worst practices.' And no other models are available."

He draws parallels with the 1998 Russian financial crisis, where middle-class people who lost their savings turned their backs on liberal democracy and came to support the authoritarian Vladimir Putin. "There could be a loss of faith in the west, as there was in Russia," Mr Krastev says.

But this seems too apocalyptic a view for most of the CEE region. With the benefits of EU membership in full flow, from farm aid to political security, elites will fight hard against populist efforts to change course. Democratic and market-oriented institutions are far stronger than in 1990s Russia.

Also, even in recession, the region's economies are this year forecast to perform better than those of western Europe. CEE's advantage of low-cost, high-quality labour remains in place. As Erik Berglof, the EBRD's chief economist, says: "Despite the crisis, the long-term integration of central and eastern Europe with western Europe will go on. The development model is the right one."

LINK: http://www.ft.com/cms/s/0/7ebeacce-03a5-11de-b405-000077b07658.html