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World Must Act to Support Ukraine; European Solidarity Needed; No Default; Renew Trust; No Grand Bargain With Russia Please

March 13, 2009

World must act to prevent financial meltdown in Ukraine.
Analysis & Commentary: by Jean-Pierre Saltiel, Investment Banker; Board
Member, Yalta European Strategy (YES) supporting Ukraine’s European integration; 
Former French Diplomat; President of Rothschild Conseil International, 1999-2004.
Published in the Kyiv Post, Kyiv, Ukraine, Thursday, March 12, 2009

bne Ukraine Daily List, Berlin, Germany, Thursday, March 12, 2009

Interfax Ukraine, Kyiv, Ukraine, Thursday, March 12, 2009

Interfax-Ukraine, Kyiv, Ukraine, Thursday, March 12, 2009

While improved ties with Moscow are desirable.......
Analysis & Commentary: by David J. Kramer, Former Assistant Secretary
of State for Democracy, Human Rights and Labor as well as Deputy Assistant
Secretary of State responsible for Russia, Ukraine, Belarus and Moldova 
Published by The Washington Post, Washington, D.C., Fri, Mar 6, 2009; Page A15
World must act to prevent financial meltdown in Ukraine.

ANALYSIS & COMMENTARY: By Jean-Pierre Saltiel, Investment Banker; Board
Member, Yalta European Strategy (YES) supporting Ukraine’s European integration; 
Former French Diplomat; President of Rothschild Conseil International, 1999-2004.
Published in the Kyiv Post, Kyiv, Ukraine, Thursday, March 12, 2009

Ukraine is under the threat of a financial meltdown which could lead to an economic collapse.

Unless immediate and drastic actions are undertaken now by the Ukrainian authorities and the international community, the world will witness a major economic, social and geopolitical disruption on the doorstep of the European Union.

Ukraine’s economy deteriorated rapidly last fall. Gross domestic product slumped by over 14 percent in November 2008 compared to November 2007. Ukraine’s currency, the hryvnia, lost more than 40 percent of its value in three months. In January 2009, unemployment figures surged.

For the first time in the last three years, Kyiv streets are free of traffic jams. January industrial output slumped by 34 percent compared to January last year, and GDP was down 20 percent. The International Monetary Fund forecasts 2009 GDP will decrease by 5 percent.

While the macroeconomic situation is depressing, the real danger comes from the collapsing financial system. Banks are confronted with a dual threat. In terms of cash outgoings, they have to fund a massive withdrawal of deposits by the population already amounting to 25 percent of total individual deposits.

In terms of assets, banks have to face 20 percent of non-performing loans in their credit portfolio. The cost of repaying consumer loans and mortgages, 60 percent of which are in dollars, has soared. Daily disposable income for domestic expenses is reduced accordingly.

All this is creating an unprecedented liquidity and solvency problem for the banking sector. Such a situation will soon become unbearable, as banks will be unmanageable without resources and enough solvent customers.

Already nine Ukrainian banks, including Nadra Bank, one of the largest in the country, are under temporary administration introduced by the National Bank of Ukraine because of their imminent risk of bankruptcy. Customers are queuing in front of branches, unable to withdraw their deposits. The situation is worsening rapidly, as this dual threat on the banking system is fueled by the total lack of confidence by the population and investors in the authorities’ ability to withstand the crisis.

The ongoing personal battle between President Victor Yushchenko and Prime Minister Yulia Tymoshenko exacerbated by the forthcoming presidential elections in January 2010, and their incapacity to work together and implement a coherent financial policy, gives little cause for hope.

The National Bank of Ukraine has been publicly accused of ineffectiveness, lack of transparency and corruption in this never-ending power struggle. Figures show a direct correlation between, on the one hand the political struggle, and on the other hand, the massive deposit withdrawal by the population and the collapse in the hryvnia.

In November 2008, the government and central bank secured a $16.5 billion loan from the IMF to fund the balance of payments and bail out the banks under threat. But the IMF refused to pay the second tranche on Feb. 15 due to an unrealistic state budget deficit, but most of all because the Ukrainian authorities were unable to act together.

The IMF justifiably demands coordinated commitment and action from the president, government, the central bank and lawmakers.If no agreement is found with the IMF on the second tranche in the coming weeks, the collapse of the financial system will accelerate dramatically. An agreement with the IMF would provide the banking system with badly-needed oxygen for a few more months, but it would not save the system.

If things go on as they are, given the total lack of trust in the authorities’ capacity to work together before the forthcoming presidential elections, it is unfortunately quite probable that the financial system will melt down before the fall.

Whereas countries throughout the world do their best to face the economic storm and coordinate their efforts to find a way out, Ukraine offers a peculiar and dramatic picture. Its leadership is fighting for command, unable to provide any directions to the boat. Moreover, this internal fight is in itself damaging and sabotaging the boat and jeopardizing the chances for the crew to survive the storm.

The consequences of a financial collapse would be dramatic for Ukraine. It would lead to massive corporate defaults, huge unemployment and poverty, as well as potential massive protests and social upheaval.

The international consequences would be frightening as well. The collapse of the Ukrainian economy would hurt the whole European Union economy, starting, of course, with Poland and Austria, and snowballing to the West. This failure would also question the international community’s capacity to effectively withstand the current international economic crisis.

Is there any hope to avoid the worst? We believe that a scenario like Argentina or Indonesia can still be avoided. But there is very little time left. The responsibility lies primarily in the hands of the Ukrainians themselves, but the international community cannot watch the boat sinking without reacting.

[1] First of all, there must be an international diplomatic initiative to finally put an end to the catastrophic battle between the president and prime minister. A stable political solution must urgently be agreed by the Ukrainian leaders with the international community's help.

[2] Second, the international community must set up a clear procedure to ensure that coherent and effective financial policies are implemented and to prevent any dramatic populist move like forcing the banks to transform their dollar loans into hryvnia loans. The international community must also strictly ensure that the funds provided by the IMF are used properly.

[3] Third, the European countries, and first of all France, Austria, Italy, Hungary and Sweden, must ensure that their banks will retain their presence on the Ukrainian market and properly recapitalize their subsidiaries in Ukraine, regardless of the worsening crisis. Western banks represent 30 percent of the Ukrainian banking sector. If they are properly supported, they may save the system.

[4] Fourth, once the second tranche of the IMF is agreed, the international community must join the initiative of the World Bank to raise $2.5 billion to balance the 2009 state budget deficit. Strong conditions must be attached to this loan in order to finally pass laws on essential structural reforms to modernize the economy.

Exceptional times call for exceptional actions. Ukraine and its 46 million inhabitants are at risk. The European Union and the international community must engage with the Ukrainian leadership in a strong, friendly and persuasive way in order to avoid the worst. It is in the interest of both the Ukrainian people and the rest of the world.

FOOTNOTE: Jean-Pierre Saltiel is an investment banker and board member of the Yalta European Strategy, a non-profit supporting Ukraine’s European integration. It is funded by Ukrainian billionaire Victor Pinchuk, son-in-law to ex-President Leonid Kuchma. Former French diplomat, Saltiel served as president of the Rothschild Conseil International from 1999 through 2004.

LINK: http://www.kyivpost.com:80/business/bus_general/37188/print

bne Ukraine Daily List, Berlin, Germany, Thursday, March 12, 2009

LONDON - In a speech given by European Bank of Reconstruction and Development (EBRD) President Thomas Mirow at the London School of Economics, 10 March, Mirow called on European solidarity for Ukraine to prevent it turning into a "no man's land". Specifically he said West European states should not restrict their domestic banks from using financial support they receive to assist subsidiaries in Eastern Europe.

Mirow called Ukraine EBRD's "biggest concern," where "an inherently instable political situation only exacerbates a grave economic situation." The EBRD president called on Ukrainian decision-makers "to honour their commitments" saying the problem was "not only about much-needed finance, but also about restoring trust in the country."

He said however he was encouraged by the recent declarations of unity among Ukrainian politicians, the appointment of a new vice prime minister in charge of crisis management and the imminent return to Kiev of an IMF delegation.

Mirow then called Ukraine "a test case for international solidarity," and called for West European states to allow funds channeled to their domestic banks to also flow to their subsidiaries in Eastern Europe.

"As a signal of European solidarity but also of economic sense we endorse the view taken at last week's EU Summit that in providing support to their own banks, west European countries must not prevent those funds being used to help their subsidiaries in eastern Europe," Mirow said.

"The stability of Ukraine is of crucial importance for the future of all Europe. Many scholars hold that the modern name Ukraine is derived from "ukraina" in the sense of "borderland, frontier region". We must not allow it to become a no-man's land," he concluded.

LINK:  http://businessneweurope.eu

Interfax Ukraine, Kyiv, Ukraine, Thursday, March 12, 2009

LONDON - Ukraine is unlikely to default on its sovereign debt, despite the devaluation of the hryvnia and poor economic indicators, according to experts attending an investment summit held this week in London.

The senior fellow of the Peterson Institute for International Economics Anders Aslund said during the summit that there are no economic reasons for a sovereign debt default of the country, although Ukraine's prospects depend most on the political situation inside the country. Aslund stressed the importance of revising the state budget of Ukraine for 2009 and increasing the level of budget discipline.

However, Ukraine will face in 2009 some debt restructuring and default in the private sector, said the head of emerging-market research at the Royal Bank Scotland, Timothy Ash.

The head of Ukraine's parliamentary committee for finance and banking activity, Mykola Azarov (from the Regions Party opposition faction), said that " state default for Ukraine is absolutely impossible," although Ukraine's economy is under extremely high pressure, caused, in particular, by the state policy to stimulate consumption.

"Our traditional [major] industries are on a steep downward slope, and one can see no end of it so far… The state budget has turned into a creditor of the Pension Fund," he said. According to Azarov, from January-February 2009, state budget revenues were only 8% of the annual plan.

He called for the channeling of funds attracted by Ukraine from the International Monetary Fund to the support of the country's banking system, and not for "mending holes in the budget."

FOOTNOTE:  The following members of the U.S.-Ukraine Business Council (USUBC), Washington, D.C., were registered for the Adam Smith Conferences 5th Annual Ukrainian Economic Summit meeting held in London, UK this week:  Asters, Baker & McKenzie, Chadbourne & Parke, ContourGlobal, DLA Piper, First International Resources, Horizon Capital, IMTC-MEI, Kraft Foods, Magisters, Salans, Shell, Squire Sanders & Dempsey, TNK-BP, U.S.-Ukraine Foundation, Vanco and Vasil Kisil & Partners.  USUBC was represented by President/CEO Morgan Williams.

Interfax-Ukraine, Kyiv, Ukraine, Thursday, March 12, 2009
KYIV - The renewal of trust in the authorities, the banking sector, and an effective court system will assist in attracting foreign investment to Ukraine, U.S. Ambassador to Ukraine William Taylor has said.

He said this to students during a lecture at the National Academy of Prosecutors of Ukraine in Kyiv on Thursday. Asked what could attract foreign investors to Ukraine, Taylor answered that "the first thing Ukraine needs to do is to restore trust in the authorities, the National Bank of Ukraine, the banking sector, and the national currency."

According to Taylor, significant distrust in the banking system and the hryvnia has been observed, and that leads to the currency's devaluation. Taylor said it was very important for investors to see in Ukraine a mechanism for the fair resolution of disputes, which requires an effective court system.
While improved ties with Moscow are desirable.......

ANALYSIS & COMMENTARY: by David J. Kramer, Former Assistant Secretary
of State for Democracy, Human Rights and Labor as well as Deputy Assistant
Secretary of State responsible for Russia, Ukraine, Belarus and Moldova 
Published by The Washington Post, Washington, D.C., Fri, Mar 6, 2009; Page A15

Russian officials should like what they are seeing from the Obama administration: President Obama has exchanged public comments and personal letters with President Dmitry Medvedev. Vice President Biden declared last month that we ought to press the "reset button" on U.S.-Russian relations.

In her meeting today with Foreign Minister Sergei Lavrov, Secretary of State Hillary Clinton is expected to continue ratcheting down tensions. But while improved ties with Moscow are desirable, the Obama team should rein in expectations and avoid the "grand bargain" that some in the United States and Europe have recommended.

The "bargain" is simple: In exchange for Russian cooperation on containing the Iranian nuclear threat and other strategic issues, the United States would, to varying degrees, scale back its relations with Russia's neighbors, pause on missile defense plans and stay quiet about Russia's deteriorating human rights situation.

For the United States to hush up about the crackdown would have been unthinkable before Clinton's disappointing suggestion in China last month that we should not allow human rights problems to "interfere" with more important matters. If they are smart, the Russians will seek a similar arrangement.

Many questions are raised by such a trade-off: What price would secure Russian cooperation on Iran? Who exactly is going to tell Ukraine or Georgia that we have returned to a "Russia first" policy? Does anyone believe that saying nothing about Kremlin crackdowns on domestic opponents would keep Moscow on board? And what if all this isn't enough? Moscow is likely to keep raising the fee for its cooperation -- in effect, extorting the United States.

For years, Bush administration policy toward Russia revolved around efforts to work with Moscow wherever possible but to push back whenever necessary, especially after the invasion of Georgia. Our Russia policy was far from perfect the past eight years, but the chief problems lie in Moscow, and improved relations are unlikely until they are sorted out.

Moscow sees its surroundings in revisionist, zero-sum terms. Russia has tried to maintain a "sphere of influence" along its borders, regardless of neighboring states' desires to lean westward. Moscow is threatened by Ukrainian and Georgian ties with NATO, even though NATO's eastward growth has been a source of stability over the past decade.

Russia views multiple pipeline routes from Central Asia and the Caucasus as a risk to its monopolistic hold on regional energy resources. It has supported secessionist movements in Georgia and Moldova, and it even wants to establish military bases in the separatist regions of Abkhazia and South Ossetia, both of which it has recognized.

And Moscow's role in Kyrgyzstan's decision to close a key U.S. air base last month raises questions about what sort of cooperation Russia's leaders would offer on Afghanistan. Moscow's thinking must change if the principal source of friction between Russia and the West and Russia and its neighbors is to disappear.

Just after Obama's election victory, Medvedev threatened to install short-range missiles near Poland if the United States continued with a missile defense system that the Bush administration advanced to counter an Iranian nuclear threat.

Russia cannot accept that Poland and the Czech Republic are independent states -- much less members of NATO and the European Union -- that are cooperating with the United States on a missile system focused on Iran. Nor can it accept that they are not a threat to Russia's own (massive) nuclear capability.

The United States and Russia should be working together to counter Iran. It is in neither country's interest for Iran to become a nuclear state. Yet despite eventually agreeing to watered-down U.N. resolutions on Iran, Russia has sold Tehran anti-missile systems and threatens to sell the mullahs more advanced weaponry. In February a Russian deputy foreign minister rejected the idea that Moscow would get "tougher" with Tehran. And this week Medvedev rejected any missile defense-Iran deal.

Russia's deteriorating economy and domestic discord are spooking Kremlin authorities, as was clear from Moscow's decision to send special forces to shut down protests in Vladivostok in December because local authorities weren't trusted to maintain control. Murders of journalists and human rights activists continue with no accountability and amid a growing sense of fear. Cracking down is the only approach Russian leaders seem to know.

Any "grand bargain" the United States makes with Russia would be viewed in Moscow as a sign of U.S. desperation. A major American shift in missile defense policy absent a real retreat by Iran would be seen as a sign of weakness and would undercut friendly governments in Warsaw and Prague.

Yes, the United States should work with Russia on issues including Iran, North Korea, counterterrorism, arms control and Afghanistan. But both sides must show interest in cooperation; above all, we must not bargain away our relations with Russia's neighbors or our own values.

FOOTNOTE: The writer, David J. Kramer, was assistant secretary of state for democracy, human rights and labor as well as deputy assistant secretary of state responsible for Russia, Ukraine, Belarus and Moldova in the George W. Bush administration.

LINK: http://www.washingtonpost.com/wp-dyn/content/article/2009/03/05/AR2009030502825.html