Welcome to the U.S.-Ukraine Business Council

Monday, April 13 to Friday, April 17, 2009

Executive Summary:

        1. Ukrainian authorities name banks for state recapitalization
       2. Forum to boost share capital 22-49%, looks to attract US$ 100mn EBRD loan
       3. Subsidies to balance Naftogaz budget
       4. IMF funds will be used to cover budget deficit?

        5. Ukraine: Unsupported Optimism Could Be Punished
       6. A couple of interesting developments over the past 24H in Ukraine worthy of comment
       7. Yushchenko gives his estimations on total debt due in 2009
       8. Industrial production up 8.3% MoM in March; YoY drops to 31.9% for

         9. Ukraine confirms Gazprom has warned on fines
       10. Yushchenko will run for presidency and parliament, but not in October
       11. Ukraine's cabinet adopts measures to meet the IMF's requirements, though Rada declines
       12. Rally comes to an end

       13. Yushchenko least popular president in Ukrainian history
       14. NBU proposes 7 banks for budget-funded recapitalization
       15. Market Comment: Back in positive territory YTD
       16. EBRD To Name Banks On Its Recapitalization List In May
Ukrainian authorities name banks for state recapitalization Rencap April 17, 2009

According to Deputy Finance Minister Ihor Umansky yesterday (16 Apr), the Ministry of Finance and the National Bank of Ukraine (NBU) have identified seven banks for recapitalisation by the state. The banks are Nadra (ranked ninth in terms of assets) Ukrprombank (15th), Finance and Credit (14th), Ukrgazbank (17th), Rodovid (20th), Imexbank (30th) and Kyiv Bank (39th). The total capital needed for these banks is currently estimated at UAH20bn. It was previously reported by the NBU that Nadra needs UAH5bn (about $600mn) and Ukrprombank between UAH3.5-7.0bn.

According to Umansky, the ministry and NBU will:

Conduct a simplified audit of the banks

Prepare a programme aimed at improving their financial health

Determine the value of shares of current shareholders

Determine the exact capital needs of each bank

Agree upon a schedule for the injections of new capital

According to Umansky, the programme aimed at improving the banks' financial health should be ready in two to three weeks, and he expects the capital injections to begin in a month. -1-170409
Forum to boost share capital 22-49%, looks to attract US$ 100mn EBRD loan Galt & Taggart April 17, 2009

Commerzbank-owned Bank Forum (FORM UZ) intends to increase share capital by between UAH 500mn and UAH 1.1bn (US$ 65-143mn), or 22-49%, over the course of the year depending on the bank's needs, Ukrainian News reported.
Management said its shareholder structure will not change as a result of the share capital increases. The bank is also planning to attract a US$ 100mn, 7-year subordinated loan facility from the EBRD as part of the EBRD's planned EUR 500mn support package to the Ukrainian banking sector.

Galt & Taggart: The significant share capital increase reinforces statements made last week by Commerzbank management that the bank is committed to its Ukrainian unit. The lender has already doubled share capital over the last
12 months to UAH 2.3bn (US$ 299mn), and the announced increases for 2009, combined with the potential EBRD facility, will strongly support the bank's capital adequacy position. -2-170409
Subsidies to balance Naftogaz budget
Galt & Taggart
April 17, 2009

The Cabinet of Ministers yesterday approved a plan to balance state gas company Naftogaz's budget. The company will receive UAH 3.5bn (US$ 455mn) in subsidies from the difference between gas purchase and sale prices that will allow it to meet 4Q08 tax arrears, Kommersant reported. Citing a source in the company, Kommersant reported the government decided to decrease Naftogaz's tax arrears in order to increase its creditworthiness in the eyes of banks.
IMF funds will be used to cover budget deficit?
April 17, 2009

Yesterday Head of International Relations of the National Bank of Ukraine said that the IMF considers possibility of increasing the standby loan amount to cover budget deficit. He also noted that the IMF mission was to leave Ukraine in two day (in a day, as of today).

Andrii Parkhomenko: This piece of news raises our confidence that the approval of the extension of the second tranche (USD 1.85 bln) of the IMF loan could come next week. The IMF does not usually finance fiscal shortfalls, but we think that additional USD 1-2 bln could be allocated for this purpose.
Ukraine: Unsupported Optimism Could Be Punished VTB Capital April 16, 2009

Optimism towards Ukraine, proxied by credit spreads, has been rising over the past month and a half; however, we are still highly cautious over the prospects for the country as the economic reality remains particularly grim and we have seen little progress by the Ukrainian authorities (which continue to be torn by factional infighting) on the IMF loan programme - a crucial foundation for sovereign credibility.

In our Ukraine: Sovereign Ratings Under Pressure of 25 February, we argued that Ukraine's overall creditworthiness was at stake and that successfully negotiating with the IMF to obtain the second USD 1.88bn tranche of the USD 16.4bn loan programme (and, indeed, subsequent tranches) was essential to avoid a sovereign default.

At that time, the perception of Ukrainian risk was very high, as reflected by the 5-year CDS trading at a high 4,287bp (see Figure 1). Since then, however, expectations of a sovereign default have eased and optimism returned to the markets, and those same CDS have now eased to their current sub-3,500bp level.

However, in our view the current perception of Ukrainian risk is overly optimistic and we see no fundamental reasons to suggest that it might be sustainable, because:

- no major progress has been made with the IMF on loans;

- the political situation shows no signs of the much-needed unity;

- economic indicators remain highly negative.

For as long as the current round of global investor optimism sweeps along, Ukraine is likely to go with the flow, but the moment we see the increasingly expected turnaround it will be among the first to be hit. Based on the country's current economic and financial performance, and if progress with the IMF continues to stall, we would expect to see a new round of rating downgrades before the end of spring, which could lead to a noticeable revaluation of Ukraine as an asset. -5-170409
A couple of interesting developments over the past 24H in Ukraine worthy of comment Tim Ash / Royal Bank of Scotland April 16, 2009

First, the cabinet of ministers signed off on a series of 19 bills which it hopes will jump start the stalled US$16.4bn IMF SBA. The government is seeking to ensure the disbursement of the stalled US$1.84bn in the second credit tranche, alongside the US$3.7bn due to be released in the third tranche in May. The government had initially attempted to secure parliamentary backing for the legislation, but deputies from the Regions and Communists blocks, together with elements within President Yushchenko's Regions of Ukraine party had blocked approval of the legislation. The bills include measures to hike domestic electricity and gas prices, hike taxes and cut entitlement to the state pension system. Overall the bills aim to cut the budget deficit to 3% of GDP, to be compliant with IMF targets.

Cabinet approval of the reform package was welcomed by the visiting IMF mission, albeit there is still surely a question mark as to whether cabinet approval of the legislation will be legally watertight across the whole array of bills approved; the cabinet of ministers does have the right to hike utility prices, albeit it is less clear cut in terms of its ability to legislative over pension-related reforms. Encouragingly though, President Yushchenko appeared to come out in favour of the government's decision.

Second, and less encouraging, President Yushchenko is reported to have called for commercial banks to restructure their external liabilities falling due to year end. Presumably this excludes foreign-owned banks (around 50% of bank assets at present), but it is unclear whether this proposal extends to both state owned (Ukreximbank and Oschadnyi bank) and private domestically owned banks. Ukreximbank in particular has a syndicated loan for US$345m falling due for repayment on April 16, and a further issue due in September. We still think that the bank's developmental orientation would suggest it will continue to honour its obligations, likely supported in this by the IMF; the Fund's objective surely still is to ensure the speedy restart of private sector lending back into Ukraine, and Ukreximbank would still appear to be a first conduit for this.

That said, we have long argued that Ukraine's external financing gap will ultimately be closed via a combination of forces, including the restructuring of private sector external liabilities (on a case by case basis), devaluation, official financing and some draw down of official reserves, and the deflation in domestic demand more generally narrowing the current account deficit. Arguably all the above factors are on-going, but a more formal process, perhaps supported by the actions of the NBU, would obviously be a major credit negative. Yushchenko, et al, would perhaps highlight that efforts by policy makers in Kazakhstan to facilitate the restructuring of some private sector bank liabilities has set something of a precedent; albeit in Kazakhstan this process is still running on a case by case basis.  Timothy Ash -6-170409
Yushchenko gives his estimations on total debt due in 2009 Rencap April 16, 2009


Ukraine President Viktor Yushchenko met yesterday (15 Apr) with senior officials of the National Bank of Ukraine (NBU) and an International Monetary Fund mission in Ukraine to resolve differences and restore the flow of the IMF's stand-by loan to Ukraine. At this meeting the president said that, according to his estimation, Ukraine should redeem $24bn of its total foreign debt by the end of 2009, and that it had already redeemed $4.4bn in 1Q. These numbers are in line with our estimations of $29bn of sovereign and corporate debt due this year (click here to view our 19 Feb 2009 report Ukraine in 2009: Financial hurricane gathers strength).

According to the president, Ukrainian banks have to repay $12.5bn of foreign borrowings by the end of 2009, while corporate sector debt redemptions are about $9.5bn and $2bn is needed to service sovereign debt to the end of the year. Yushchenko highlighted that in giving these numbers, the IMF's loan is needed to support the NBU's foreign reserves otherwise they could drop to $14-14.9bn YE09, while at the end of March they were at $25.4bn.  -8-170409
Industrial production up 8.3% MoM in March; YoY drops to 31.9% for 1Q09 Rencap April 16, 2009

According to the State Statistics Committee, in March Ukraine's industrial production increased MoM for the second month in a row. Growth was 8.3% MoM vs 5.4% MoM in February. As a result, the YoY figure slightly improved; the
1Q09 slumped to 31.9% YoY vs 32.8%YoY for Jan and Feb 2009. In March there was slowdown in the output growth of metals (4.6% MoM vs 12.3% MoM in Feb) and engineering (5.9% MoM vs 21.8% MoM in February). However, the substantial MoM growth in February was mainly due to a low base of comparison (in January there was a notable drop in industrial production).

Overall, growth in the extraction and manufacturing sectors was 9.1% MoM and 9.4% MoM respectively, while the YoY drop continued to be substantial at 32.9% YoY and 37.2% YoY respectively. A poor industrial production performance in 1Q09 may trigger a comparable drop in GDP. According to Ukraine President Viktor Yuschenko, real GDP in Jan and Feb 2009 declined about 25-30% YoY. Official indicators for real GDP in 1Q09 are expected to be released 13-15 May 2008.  -7-170409
Ukraine confirms Gazprom has warned on fines bne April 14, 2009

Ukrainian presidential advisor on energy security Bohdan Sokolovsky has confirmed that Naftogaz of Ukraine is facing fines from Gazprom for consuming less gas than contractually stipulated.

" I would like to point out that there are legal grounds for such a letter, because the January 19, 2009 gas contracts envision such fines," Sokolovsky told Interfax on Tuesday, April 14.

Russian Prime Minister Vladimir Putin had originally said Gazprom would waive the fines due to Ukraine's 'pre-bankruptcy' state. "One doesn't finish off ones' partners," he said.

However, after Russia was excluded from a 1.5bn euro EU-Ukraine deal to modernize Ukraine's gas transportation system (GTS), the Russian position has changed.

Sokolovsky, speaking yesterday, assured that Russian companies would definitely be invited to bid in tenders for selecting companies that would organize, carry out, and finance various phases of the GTS modernization project. 9-170409
Yushchenko will run for presidency and parliament, but not in October bne April 15, 2009

In an interview published in today's Kommersant Ukraine, President Viktor Yushchenko dismissises the idea of presidential elections taking place on October 25.

"Forget about that date, it has no justification whatsoever," Yushchenko said in the interview.

Yushchenko indicated that the constitutional court would decide when presidential elections should take place. He said that he would call for them to be held simultaneously with pre-term parliamentary elections.

Asked if he was planning to stand, he told Kommersant-Ukraine that he would run for both the post of president and a seat in parliament. -10-170409
Ukraine's cabinet adopts measures to meet the IMF's requirements, though Rada declines Rencap April 15, 2009

Yesterday (14 Apr), Ukraine's parliament again declined to place the cabinet's draft laws to meet the IMF's recent requirements on its agenda (see Political calm in Ukraine - Near or far?, dated 1 Apr). The government's suggestions included: 1) an increase in the single tax (a type of flat tax) on private entrepreneurs; 2) a reduction in pensions to deputies and some other governors; and 3) UAH6.1bn of additional subsidies for Naftogas, to cover the difference between the import price of gas and gas tariffs for households and utilities.

To resolve these issues, the government had to adopt a list of resolutions to ensure the approval of legislation needed to restore the IMF's standby loan. The complete package of measures has not yet been disclosed. However, Prime Minister Yulia Tymoshenko mentioned that the cabinet had decided to increase gas and utility tariffs for some categories of households and to renew a 2% markup to gas tariffs for industrial consumers, thereby improving the financial state of Naftogas without additional subsidies from the budget.

Moreover, changes to the regulation of the pension fund aimed to reduce budget spending and a programme of recapitalisation of Ukrainian banks by the state were also mentioned by the governors.

Tymoshenko highlighted that the government is not going to send the drafts laws to the parliament again (as now there is no need) even though adopting anti-crisis measures via laws is more efficient than it is via government resolutions. The chief of the IMF mission in Ukraine, Ceyla Pazarbasioglu, said that despite these measures being "difficult", they could have a positive impact on Ukraine's ability to fight the crisis. Pazarbasioglu added that Ukraine's recent request to receive the second and third IMF loan tranches together, is under discussion and that it is too early to comment this issue.

Galt & Taggart writes: Several less significant bills still need to be passed, but the laws bring Ukraine closer to meeting the IMF's requirements for further loan cooperation. However, the government adopting laws behind parliament's back raised concerns that the PM overstepped her authority in passing legislation, which may stir up discontent within opposition parliamentary factions. -12-170409
Rally comes to an end
April 15, 2009

It seems that the more than month-long rally is coming to an end after US retail sales and PPI data indicate that economic recovery is still a long way off.

PPI deflation in March and decline retail sales signaled that more bailouts are needed to support the financial system, producers and consumers, and to prevent sharp deflation in prices. The fundamental problems of the global economy have not been addressed and governments around the world are continuing to stimulate markets with short-term measures. In this environment, stocks on the PFTS stopped growing, e.g. Ukrnafta, Enakievo Steel Plant, and Centerenergo; however, the PFTS index was still up (+3.12%). Tomorrow markets will most likely see more declines among the most liquid stocks, with a correction of the PFTS Index looking inevitable.  -11-170409
Yushchenko least popular president in Ukrainian history bne April 14, 2009

In opinion poll results comparing current popularity of incumbent Ukrainian president Viktor Yushchenko with his two predecessors in the post, Leonid Kuchma and Leonid Kravchuk, Yushchenko trails in 3rd place, according to the results of the Omnibus national monthly poll conducted amongst 1,200 respondents in March 2009 by the TNS Ukraine company.

A mere 7% of respondents named Yushchenko as Ukraine's best president.
Despite Yushchenko's having been swept into power in 2004 by the people's power of the Orange Revolution, directed against the previous president Leonid Kuchma and his circle, some 39% said they consider Kuchma the country's best leader.

Another 21% named Leonid Kravchuk, Ukraine's first president 1991-1994 the best, despite the complete economic collapse Ukraine experienced during his presidency. Over one fourth of respondents (27%) were undecided and 6% refused to be polled, according to Interfax. -13-170409
NBU proposes 7 banks for budget-funded recapitalization Galt & Taggart April 14, 2009

The NBU yesterday proposed a list of seven banks, among them Nadra (NADR UZ) and Ukrgazbank (UGZB UZ), to be recapitalized using state budgetary funds, Interfax reported. Central bank management said it will confirm the list by the end of the current week in the scope of Ukraine's cooperation with the IMF. Capital injection procedures are expected to begin immediately following the approval of the list of banks. -14-170409
Market Comment: Back in positive territory YTD Alfa April 14, 2009

The PFTS Index (+3.1%) is finally in positive territory for the year (+0.9% YTD), and has passed the 300-point psychological benchmark. Despite the holidays in Europe, the market continued to rise, confirming sustainable demand from domestic investors. Nevertheless, Monday's increases were somewhat less pronounced, indicating the possibility of profit-fixing in the coming days and that investors are pausing to reassess Ukraine's economic prospects. Investors continued to buy liquid names, pushing up quotes of Azovstal, Ukrnafta, Centrenergo and Zakhidenergo. These blue-chip names
remain the driving force behind the recovery.   -16-170409
EBRD To Name Banks On Its Recapitalization List In May Troika April 14, 2009

Anton Usov, spokesman for the EBRD's Kyiv office, has denied media reports that the EBRD has signed deals to recapitalize a number of large Ukrainian banks. Usov said that the list of banks to be recapitalized by the EBRD will only be known in May after approval by an EBRD shareholders meeting. He confirmed that at this stage, the EBRD is ready to provide $600 mln, which will either take the form of subordinated debt or equity participation. Usov added that following the recapitalization, the EBRD may provide loans to the recapitalized banks to help foster SME lending.

Troika's view: Confirmation of the EBRD's plans to provide $600 mln in new capital to Ukrainian banks is clearly positive news for the system, especially given the intention to reinforce the move with SME-dedicated refinancing afterward. We estimate that the announced sum will cover approximately 13-14% of Ukrainian banks' additional capital needs in 2009.
We also believe that the announcement of the list of banks to receive capital from the EBRD will significantly enhance the reputation of these institutions and will help them benefit from a flight to quality as clients switch from other banks -15-170409