Welcome to the U.S.-Ukraine Business Council

Monday, April 6 to Friday, April 10, 2009

Executive Summary:

       1. Ukraine may miss gas bill payment tomorrow, Gazprom sets up international alliance to counter Brussels, Ukraine
       2. Ukraine's banking system contraction goes on sustainable path
       3. Yushchenko appeals against presidential election date
       4. Ukraine's Finance Ministry expects $500mn World Bank financing gap loan

       5. Naftogaz, Gazprom reach agreement to use clear investing scheme for Ukrainian gas pipelines upgrade
       6. Alfa suggests merger of VimpelCom and Kyivstar
       7. Ukraine's bank deposit outflows moderate in March, hryvnia lending up
       8. Privat co owner increases stake in JKX Oil & Gas to 17%

       9. Akhmetov forgoes dividends to help his companies
       10. IMF mission's arrival in Kyiv may strengthen hryvnia
       11. Stirol's co-owner to bid on Odesa-Port-Side Plant privatization together with foreign investors
       12. Naftogaz meets March gas payments

       13. IMF's mission returns to Ukraine
       14. Naftogaz says disputed gas clears customs
       15. Yushchenko says ready for simultaneous parliamentary, presidential elections
       16. Privat shows signs of financial distress
Ukraine may miss gas bill payment tomorrow, Gazprom sets up international alliance to counter Brussels, Ukraine bne April 9, 2009

Ukraine may fail to pay its gas bill tomorrow on April 10 turning up the heat in a new gas row with Russia. Moscow is mad at the EU and Ukraine after they declared they would upgrade Ukraine's transit gas pipeline and Russia is determined not to be excluded from the lucrative contracts.

Several senior members of the Ukraine government, most notably Ukrainian Prime Minister Yulia Tymoshenko, have publicly said that Russia should be included in the work. The EU terrified of causing another round of gas cuts has also come out strongly in favour of including Russia in the job.

However, the Kremlin is not convinced. Its line with Ukraine has been hardening rapidly since the announcement was made in Brussels on March 23.
The CEO of state-owned gas monopolist Gazprom, Alexei Miller, reversed a promise this week not to fine Ukraine for taking less gas than it contractually agreed to in a deal that resolved the gas dispute in January.
Ironically Miller told the Belarusian's the opposite yesterday, April 8. The Russian Finance Ministry has also held up approval of a $5bn short-term loan made by Ukraine last month to cover the expected budget shortfall this year.

Now Gazprom says it will set up its own European alliance to carry out the work as a counterweight to the declaration signed in Brussels by Ukraine and the European Union. The Russian company says it already has its main western European partners on board including:  German company E.On and Italy Eni, in a classic bit of divide and rule.

Western Europe is in a weak position. The EU has failed to developed a coordinated energy policy amongst member states and Gazprom has successfully appealed to some individual governments that are more interested in securing their own energy supplies than towing the Brussels line. While Gazprom provides about a third of western Europe's gas supplies, Italy, for example, gets over 80% of its gas from Russia and its partners, as a function of Italian geography and the pipe routes.

Russia is taking advantage of Ukraine's financial problems. Ukraine's next gas bill is due soon and the Ukrainian national gas company Naftogaz Ukrainy only just managed to scrap together enough to pay the February bill. The chances that it will miss the next payment or subsequent payments are high.
At that point Gazprom would be allowed to fine Ukraine and also demand pre-payment going forward. According to reports Naftogaz doesn't have the money to meet the March gas bill yet, which is due tomorrow, April 10.

Moreover, the bill is going to rise in the coming months as Ukraine has been importing almost no Russian gas in the last month, drawing it down from its reserve tanks. However, these reserves will have to be replaced at some point, causing a spike in deliveries. VTB Capital in Russia issued a report on Wednesday saying it could not account for some 9.1 billion cubic meters fall in Gazprom's exports and at least part of this is due to Ukraine relying on reserves rather than deliveries. Naftogaz says that it will cost UAH37bn ($4.8 billion) to refill the storage tanks against the $700m odd the company paid for its February gas. The whole issue testifies to just how poor Ukraine's financial position is.

Ukrainian Prime Minister Yulia Tymoshenko's government is clearly playing for time and hoping that it can raise fresh cash from an international donor. The World Bank has just promised to lend the country $500m to tide it over and the IMF mission arrives in Kyiv today to discuss conditions that Kyiv will have to meet before the second $1.9bn tranche of a stabilisation loan agreed in November can be released.

Gazprom change of heart began on April 3 after Miller reported to Prime Minister Vladimir Putin on his April 2 meeting with executives from E.On Ruhrgas AG, Eni, and Gaz de France. Miller said: "This meeting was initiated by our partners. It touched upon the issue of the declaration signed in Brussels recently by the EU and Ukraine. We all take the view that this declaration was developed without involving Russia, Gazprom as the gas supplier, or Europe's leading gas consumers.

Naturally, we also agree that such an approach is fundamentally flawed, making the declaration unviable. In other words, it is impossible to put into practice." Miller added that the meeting resolved to establish a working group, which will assemble "within four to six weeks for an equally high-level meeting," the Russian press reports.

Eni and E.On are not just major consumers; they are also Gazprom's partners in key Russian energy projects - the South Stream and Nord Stream gas pipelines (Gaz de France also wants to get involved in Nord Stream) - which will provide new gas routes that bypass Ukraine.

The Ukrainian government met yesterday on April 8 to discuss the March gas bill. A source told Russian daily Kommersant that Russia has been offer a $5bn loan to cover the gas payments, but it is unclear if that offer still stands. Russian Russian president Dmitry Medvedev said on March 24 that he was calling off inter-governmental talks until the questions raised by the Brussels's declaration was settled.

"Intergovernmental consultations were scheduled for April 8. In the expected scenario, Ukrainian Prime Minister Yulia Tymoshenko would announce that gas payments had been made on schedule, and Vladimir Putin would propose making arrangements for a $5 billion loan to cover the cost of Russian gas for Ukraine's underground storage tanks. But the Brussels declaration has mixed up all the cards, disrupting these plans," a Ukrainian source told Kommersant.
Ukraine's banking system contraction goes on sustainable path Ukrsibbank April 8, 2009

NBU published monetary statistics for March on April 7. According to regulator, narrow money inched up 0.8% while broad money fell 1.5%, indicating ongoing growing liquidity and contraction of the banking system in size. Cash outside of the banking system declined 0.3%. Total deposits were down mere 2% (in the first two months - over 10%) and loans declined 0.1%.

Deposits from individuals - a thermometer of domestic banking system - were down 2.4% in domestic currency and 2.5% in FX. Loans to individuals contracted by 2.3% in UAH and by 1.3% in FX. Restructuring of retail FX loans, conducted by key Ukrainian banks in order to relieve customers from growing debt service cost burden must have contributed to lower FX portfolio contraction speed.

Statistics on legal entities' loans is distorted by large credits to quasisovereigns by government controlled banks. We saw some unmotivated growth in UAH deposits and loans (0.6% and 3.4% respectively) which could be most likely attributed to Naftogaz of Ukraine and likes.

Our view: the best possible scenario for the banking system is about to materialize - a moderate contraction in deposits and loans, cushioned by growing narrow money. Given the situation does not change dramatically we see almost all TOP30 banks completing the tasks of retaining both liquidity and solvency under assumptions that a) their bilateral external debt maturing 2009 is restructured b) government steps in to substitute domestic shareholders.

There are significant liquidity risks though. It could be a reasonable assumption that majority of deposits returning to the banking system are placed for a very short term and could be sensible to political turbulence, especially as presidential elections are approaching. -2-090409
Yushchenko appeals against presidential election date bne April 9, 2009

Ukraine's President Viktor Yushchenko filed an appeal with the Constitutional Court against the parliament's decision this week to set the next presidential elections for October 25, Interfax reports.

Previously the elections were slated to happen at the end of January 2010.
The president is not happy with the early date as he is almost certain to loose. In the more recent polls in March Yushchenko's popularity was running at under 3%, or less than the poll's margin of error. In other words it is possible the president could garner no votes whatsoever. In any case Yushchenko is probably the most unpopular leader in the world today and even if he wins his appeal it is highly unlikely that he can "pull a Yeltsin"
when the Russian president eventually won 1996 presidential elections after starting the ratings in single digits.

Yushchenko refuses to give up and retire gracefully. He argued that the resolution on an earlier date does not comply with Part 5 of Article 103 of the Constitution, which he argues implies the elections must be held in the last month of the fifth year of the president's tenure, or in this case on January 17, 2010.

"Given the enormous public and constitutional importance of the issue, I request that the Constitutional Court hear the appeal immediately,"
Yushchenko wrote.

The Rada moved to bring the elections forward as Yushchenko was threatening to hold a referendum on the constitution that would have clipped the parliaments powers. Under the constitution referenda cannot be held in the last six months before an election.

The constitutional court has one month to rule on the president's appeal.

Galt & Taggart sadi: "With certain significant reservations, the president has verbally agreed to simultaneous parliamentary and presidential elections, possibly in order to ensure his party crosses the electoral threshold and gains seats in the next parliamentary convocation. However, the political gridlock of recent years has made cross-party political consensus on significant issues, which is not yet present on either the presidential or pre-term parliamentary elections, a necessity. A protracted legal battle over election dates is possible."  4-090409
Ukraine's Finance Ministry expects $500mn World Bank financing gap loan Galt &Taggart, Kyiv April 9, 2009

Ukraine's Finance Ministry yesterday announced it expects to attract a $500mn loan in 2009 to finance part of the budget deficit, Interfax reported. Estimates place the current budget deficit at approximately 3% of GDP, roughly UAH35bn ($4.5bn).  -3-090409
Naftogaz, Gazprom reach agreement to use clear investing scheme for Ukrainian gas pipelines upgrade bne April 8, 2009

Kyiv's proposal to upgrade its gas transit pipeline network sparked a fresh row with Russia, which insists it be included in any work on the system.
Ukraine's national energy company Naftogaz Ukrainy and Russia's state-owned gas producer Gazprom say they have reached an agreement to use transparent scheme to commission work on the pipeline system.

Moscow was afraid its interests would be ignored in the upgrade and has stalled paying out a $5bn emergency loan requested by the Ukrainian government until the pipeline work issue is resolved.

The project was announced last week during a Ukrainian delegation visit to the EU, prompting fears in Moscow that all the lucrative contracts would go to western European firms. However, the EU has been quick to fold and backed Russia's calls for a role in the work, afraid of fanning the glowing embers of dissent between the two countries.

The agreement was reached in a regular round of talks between the two companies in Moscow on Monday, Naftogaz CEO Oleh Dubyna said in a statement on Tuesday, reports Interfax.

IN other news  Dragon Capital reports that Naftogaz Ukrainy has paid in full for 1 bcm of natural gas imported from Russia's Gazprom in March and announced the price of Russian gas will decline to $270-271/tcm in 2Q09 from $360/tcm in 1Q09.

Dragon's Dennis Sakva said: "The announcement is in line with our price estimates. Ukraine imported 2.5 bcm of gas from Russia in 1Q09, or half of the originally contracted volume, and plans to buy another 30.5 bcm in 2Q-4Q09."

The deal comes after Moscow applied maximum leverage to Kyiv and threatened to fine Ukraine for taking less gas than it agreed to in a deal signed in January. Gazprom's exports have plunged in recent months as a result of the gas dispute with Ukraine at the start of this year and falling demand due to the economic crisis.

Ukraine has all but stopped importing gas from Russia in recent months prompting Russia's state-owned gas giant Gazprom to threaten fining Naftogaz for buying less gas than contractually agreed to. Naftogaz has already asked to renegotiate the contract to reduce volumes as domestic demand for gas has slumped on the back of collapsing production.

Gazprom CEO Alexei Miller threatened possible sanctions over lower-than-agreed gas imports: "We are discussing this with our Ukrainian colleagues. This is spelled out in our agreements," he said, reports Interfax.

Previously Russia said it would not impose fines, but the turnabout is probably driven by a row over who will do the work on an upgrade of Ukrainian's transit pipeline system. (see related article)

The good news is that gas prices are likely to fall. The price Ukraine must pay Russia for natural gas is expected to fall to $271 per 1,000 cubic meters in April-June, down from $360 per 1,000 cubic meters in January-March, a Ukrainian government source told ITAR-TASS Tuesday, citing a proposal on the price sent by Gazprom to Ukraine.  -5-090409
Alfa suggests merger of VimpelCom and Kyivstar Rencap, Russia Wednesday, April 8, 2009

Event: According to both Vedomosti and Kommersant today (8 Apr), Alfa has suggested the merger of VimpelCom and Kyivstar in order to reconcile the shareholder dispute with Telenor. Alfa suggested that it will control the merged company on a par with Telenor, except for VimpelCom's 25% free-float.
Alfa and Telenor would each receive 40% of the votes on the board, with the remaining 20% allocated to independent directors who would have the right to nominate management. The merger was already discussed in 2006.

Action: We reiterate our BUY rating on VimpelCom stock.

Rationale: The potential deal structure is unclear at this stage, although, according to Vedomosti, Alfa has suggested two options: 1) Alfa and Telenor would pay with their Kyivstar shares, for VimpelCom's additional share issue; or 2) Alfa and Telenor would create a new company that would combine VimpelCom and Kyivstar. We think if such a deal happens it could potentially solve most issues around the shareholder conflict between the two. We believe a merger rather than a swap of assets is the better of the possibilities at the moment, as it would not entitle an exchange of cash and hence would be easier for parties to agree to at the currently low levels of valuations. The merger would also consolidate the Ukrainian market and improve its fundamentals, helping all players and propelling VimpelCom from
laggard to leader in the Ukrainian market. Ivan Kim      -6-090409
Ukraine's bank deposit outflows moderate in March, hryvnia lending up Dragon Capital, Kyiv April 8, 2009

Hryvnia-denominated deposits at commercial banks inched down 1.1% m-o-m in March to UAH 177bn (-13.5% y-o-y) while F/X deposits dropped by 3.1% m-o-m to an estimated $18.1bn (-8.4% y-oy).

Hryvnia loans rose by 2.0% m-o-m to UAH 310bn (+28% y-o-y) and F/X lending declined by 1.7% m-o-m to an estimated $52.8bn (+12% y-o-y) over the period.
(NBU) Outflows of both hryvnia- and foreign currency-denominated deposits slowed sharply last month to UAH 2.0bn and $0.6bn, respectively, vs. UAH 8.7bn and $1.3bn in February on account of both households and businesses.
Hryvnia lending rose again (+UAH 5.9bn on top of UAH 6.8bn disbursed in February), with new loans provided largely to commercial entities (most likely to related parties) as lending to households continued to decline. At the same time, F/X loans shrank by another $0.9bn following a $1.5bn decline in February as bank customers continued to repay their outstanding debts but were reluctant to take out new F/X loans, a trend we expect to continue in foreseeable future. Olena Bilan //IMG:0409_Ukraine_Bank_deposits_up_Mar09.gif:IMG// -8-090409
Privat co owner increases stake in JKX Oil & Gas to 17% Troika, Russia Wednesday, April 8, 2009

Privat co owner Igor Kolomoisky has increased his stake in JKX Oil & Gas (via Ralkon Commercial) from 16% to 17%, according to an LSE regulatory announcement.

Troika's view: Kolomoisky has been steadily increasing his stake in JKX Oil & Gas since the beginning of 2008. We believe that he is likely to ask for a seat on the company's BoD once he has accumulated 20%. However, such a move would have to be approved by the current BoD and shareholders. The board now consists of nine members, so Kolomoisky influence would be very limited in any case. Overall, we regard this news as neutral, and we reiterate our HOLD recommendation on the stock and 12 month target price of $3.21 per share.
Peter Keller  -7-090409
Akhmetov forgoes dividends to help his companies bne April 7, 2009

There is going to be some belt tightening in the Rinat Akhmetov house.
Having seen his personal wealth go from billions of dollars in the early teens to fall to single digits in only six months, Urkaine's richest man says that he will not take dividends on 2008 and plough the money back into his companies instead.

The decision emerged after Akhmetov submitted his income statement to Ukraine's tax authorities this week. Akhmetov declared an income of UAH9,135,140 ($1m) that included dividends, royalties and investment interest, as well as his salary as a member of Ukraine's parliament of UAH
187,349 ($23,000), which he actually gave away to charity.

He also declared two apartments in Kyiv and one in Donetsk where his company Systems Capital Management is headquartered and said he has UAH45,348,160
($5.6m) in banks as of January 1 2009. Akhmetov said SCM will invest its entire revenues for 2007 of UAH19,528,944 and passed on his right to take dividends. 9-090409
IMF mission's arrival in Kyiv may strengthen hryvnia ING April 7, 2009

The closing exchange rate was flat on Friday at 8.0/USD while real market transactions saw the hryvnia strengthen slightly, with the demand for foreign currency slightly lower than supply. It is already a tradition that the UAH/USD exchange rate shows a small rise on Fridays - because of the special currency auctions. The NBU sold more foreign currency through a special auction on Friday (US$44m) at an unchanged rate of 7.8/USD.

Although the unsuccessful attempts of the government to pass all the anti-crisis laws as well as the blocking of parliament by the opposition party last week might frighten market players that the IMF will further postpone its loan, the announcement at the end of Friday that the IMF mission will come to Ukraine this week should reduce devaluation fears and push foreign currency supply up further. In addition, we believe that some excess supply of foreign currency may soon come from banks that will have to sell their foreign currency positions in anticipation of a corresponding NBU decree on limiting banks' currency positions, to be effective in several weeks.

Thus we can expect further hryvnia strengthening and the approach of the rate of market operations to the closing exchange rate on the market this week. We also do not exclude that a positive IMF decision on resuming its loan to Ukraine may see the hryvnia return back to the range of 7.8-8.0/USD within the nearest 2-3 weeks. A 0.6% and 1.6% DoD strengthening in the 1-month and 3- month NDF rates to 8.55/USD and 9.40/USD correspondingly, support our view that the market does not see considerable reason for the
hryvnia to devalue at least within the nearest 1-2 months.   -10-090409
Stirol's co-owner to bid on Odesa-Port-Side Plant privatization together with foreign investors bne April 7, 2009

The co-owner of Ukraine's Stirol Concern, Mykola Yankovsky,  says that he will bid in the up coming privatisation of the Odesa-Port-Side Plant, but only if he can find a foreign partner.

"In the future, if we take part [in the privatization of the plant], it will be only in partnership with a large foreign company," Yankovsky said in an interview with the Vlast Deneg magazine reports Interfax.

The Odesa-Port-Side Plant is one of Ukraine's industrial jewels and is due to be sold off this year. the company earned UAH 797m in 2008 in revenues, more than double the result a year earlier. Around 88% of the plant's products are exported, including ammonia to Belgium, the United States and France and carbamide to Switzerland, the United States and Germany.
Naftogaz meets March gas payments
Galt &Taggart, Kyiv
April 7, 2009

Ukraine's state-owned gas giant Naftogaz announced it successfully paid for March gas supplies from Gazprom, Bloomberg reported this morning citing the company's spokesman. Naftogaz paid roughly US$ 350mn for the 1bcm consumed last month. Gazprom has yet to confirm the fund transfer.  -11-090409
IMF's mission returns to Ukraine
Rencap, Russia
Monday, April 6, 2009

According to Reuters, the International Monetary Fund (IMF) said on Friday
(3 Apr) it would send a mission to Ukraine this week to renew discussions on a standby loan arrangement. For the record the Fund's mission left Kiev in February without making a decision on a second tranche of about $1.8bn, and without setting a date for its return. The delay in the second tranche of the IMF's standby loan, we believe, was mainly triggered by the lack of cooperation among the key decision makers in Ukraine, and the transfer of funds required a unified position from the president, the cabinet and the National Bank of Ukraine (NBU) on the NBU's independence and Ukraine's budget deficit. Recently, the Ukrainian parliament voted for changes to the
2009 budget increasing the NBU's independence and improving the fiscal position of the state budget, while some drafted laws, which are important for the reduction of the budget deficit, have not yet been voted on (or
discussed) in the Rada.

According to the IMF, it had received strong assurances from the president and prime minister regarding their intentions to obtain parliamentary approval (during the week of 13-17 Apr) of laws to strengthen the financial position of the pension fund and Naftogaz, and laws agreed on with the IMF and the World Bank to facilitate the implementation of the bank
restructuring strategy.  Anastasiya Golovach     -13-090409
Naftogaz says disputed gas clears customs Galt &Taggart, Kyiv April 6, 2009

Naftogaz representatives yesterday announced the 11bcm of natural gas, which earlier belonged to Swiss RosUkrEnergo (RUE) and is the subject of a heated dispute between RUE and Naftogaz, has been cleared by Ukraine's customs service and is in Naftogaz's possession. The state company said it paid a required VAT of UAH 6.6bn (US$ 857mn) on the gas.  -14-090409
Yushchenko says ready for simultaneous parliamentary, presidential elections Dragon Capital, Kyiv April 6, 2009

President Viktor Yushchenko announced Friday he was ready to participate in potential early presidential elections if they were conducted simultaneously with a snap parliamentary poll.

Yushchenko said he would agree to hold such joint elections if parliament abolished legislators' immunity from prosecution and changed the parliamentary election system to switch from closed to open party lists.
(Interfax) Organizing concurrent presidential and parliamentary elections will require a special legislative resolution and depend on a compromise with parliament since, according to the Constitution, early parliamentary elections are called by the president upon his dissolution of the legislature while the date of presidential elections is set by parliament.

The prospect of concurrent parliamentary and presidential currently looks remote, though, as the proposal to remove the parliamentary immunity from prosecution is very unlikely to find much support in the legislature.
Moreover, PM Yulia Tymoshenko's bloc, parliament's second-largest faction, is known to be opposed to the open list electoral system (in closed list elections, voters have no influence on which candidates they choose since the order of people on the list is fixed by the party itself; but in open lists, voters can indicate both the party they like and their favored candidate).

Regardless of the above, Yushchenko's latest statement signals his readiness to compromise. As we wrote before, holding a snap parliamentary election together with a presidential poll could in fact help towards earlier resolution of the country's political troubles since there is an almost consensus view in the local political establishment that the future president, to be elected in January 2010 at the latest, will seek to disband parliament anyway to try to put together a more loyal coalition.  Viktor
Luhovyk       -16-090409
Privat shows signs of financial distress Alfa, Russia Monday, April 6, 2009

Interfax reports that Privat Group's ferroalloys production declined 70% in 1Q09. Privat's three ferroalloys plants - Nikopolsky, Stakhaniv and Zaporizzhia - saw declines in 1Q09 output of 69%, 70% and 74% y-o-y, respectively. Another of Privat Group's core assets - Privat Bank, Ukraine's largest - may be experiencing financial difficulties, as evidenced by its request to the Ukrainian state for a capital injection. We estimate that Privat Group shareholders hold nearly 10% in Russia's Evraz Holding and Ferrexpo, a mining company.

Pressure on the core businesses could require the group to sell off these minority positions. We speculate that this could be one of the reasons why Evraz, which is a minority shareholder, has underperformed Mechel YTD, despite both firms' similar valuation levels at the beginning of the year and comparable solvency risk. Barry Ehrlich  -15-090409