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bne (BusinessNewEurope), Kyiv, Ukraine, Mon, Dec 28, 2009
Commentary: By Paul Richardson, Acting Director of the Office of Economic Growth
U.S. Agency for International Development (USAID) in Kyiv
Radio Free Europe/Radio Liberty, Prague, Czech Republic, Sat, Jan 02, 2010

By Chris Kirkham, Bloomberg, London, UK, Thu, Dec 31, 2009

By Denis Maternovsky, Bloomberg News, Moscow, Russia, Mon, Jan 4, 2010 
The 2010 budget should include expenditures on promising R&D projects
Interview with Volodymyr Lanovy, President, Market Reforms Center
Interviewed by Nataliia Bilousova, The Day Weekly Digest in English #37
Kyiv, Ukraine, Tuesday, 15 December 2009

Reuters, Funchal Portugal, Fri, December 11, 2009

By Simon Shuster, Associated Press Writer, Kiev, Ukraine, Wed, 9 Dec 2009
By Kateryna Choursina and Stephen Bierman, Bloomberg, Moscow/Kiev, Dec 29, 2009

By Daryna Krasnolutska and Kateryna Choursina, Bloomberg, Kiev, Ukraine, Mon, Dec 7, 2009

Help an elderly Ukrainian in Kyiv have clothing, food, medicine this year.
Katie Fox, President, American Friends of "For Survival", Wash, D.C., Mon, Jan 4, 2010

bne (BusinessNewEurope), Kyiv, Ukraine, Mon, Dec 28, 2009

KYIV - The crisis year was horrible for Ukraine, which was harder hit than nearly any other country in the Commonwealth of Independent States. The combination of collapsing steel prices, devaluation of the national currency, bank sector woes, political instability and, worst of all, mismanagement of public finances all contributed to the tumbling GDP.

In 2010, much depends on the outcome of presidential elections slated to begin in January, but that could take until April to come to a definitive conclusion. Much has already been written about how the various presidential hopefuls could affect the country's prospects, however, the conclusion of the elections itself is probably the most significant event, as all of the prospective candidates are pro-business. An end to the infighting would have the biggest impact on the country's prospects.

Ukraine's analysts are all in agreement that the economy will return to growth in 2010, albeit at a slower pace, and the stock market, which has recovered most of its losses, still has another 25% of upside over the year, driven largely by improving earnings that come on the back of economic recovery. Some are even more optimistic, as despite all its problems, Ukraine remains one of the most attractive investment destinations in the CIS.

"We believe that Ukraine could well be the surprise performer in the first quarter. Elections in January will more than likely restore a government better able to manage the balance between the West and Russia. This in turn will ease tension over gas pipelines, and provide a government to which the IMF can reasonably lend. In this scenario, debt in particular looks attractive, with equity likely to follow the trend of declining spreads. We forecast 25% upside potential in the PFTS Index in 2010," say analysts with Renaissance Capital.

The PFTS Index was the worst performing index in 2008, losing more than 50% of its value (against Russia's 46% fall). But it had a very strong run in 2009, up over 100%. "This is remarkable considering the degree to which the country has been buffeted by the crosswinds of default fears, gas disputes, a severe GDP contraction and uncertainty about the upcoming presidential election," says Renaissance Capital.

Like the other countries in the region, the PFTS had stabalised at the end of 2009, but share prices will track the economy upwards over 2010, with a possible sharp uptick following the elections, but smaller movements before hand.

Ukraine's economy was the hardest hit of any country in the region by the crisis, but it was already bouncing by the end of 2009. The recovery will continue in 2010, but at a slower pace than with the other countries in the region. The bne consensus growth is for 3.8% growth in 2010.

The vertiginous fall of the GDP in Ukraine was truly horrific: down 20.3% in the first quarter, 17.8% in the second, and 15.9% in the third quarter of 2009. Analysts estimate that the total decline for 2009 will come in at about 12-13%. "While the economic contraction continues to ease, there are few signs of a fully fledged recovery any time soon. Producer confidence remains low and private consumption is subdued due to falling income and uncertainty over the exchange rate," says Elina Ribakova of Citigroup.

Ukrsibbank agrees and says that Ukraine will depend on an export-led recovery, as consumers are too shell shocked to deliver much in the way of economic stimuli and the main source of support for the consumer sector has become government largesse.

"Earlier in the decade, against the backdrop of rising exports, Ukraine became an attractive market, absorbing billions in debt and direct investment. This triggered a skyrocketing growth in domestic incomes and significant increase in wages. Since 2005, a large chunk of growth was generated by domestic demand, accelerated by rapid increases in consumer credit. Since financial flows to the country have collapsed last year, growth pattern has turned upside down. Nominal wage has stumbled recently, pulled down both by sharp fall in corporate earnings and rising unemployment. Double-digit inflation gnaws real incomes," says Ukrsibbank.

Clearly the fall was slowing as 2009 came to an end and the economy may return to growth, but most analysts assume will take at least two years for the economy to regain all the ground lost in 2009.

Ukraine has also been plugged into the global demand recovery story more than most. With 50% of its GDP reliant on exports (especially steel), equity revaluation has been far more a function of global trends than domestic drivers. The official position is that the economy will grow between 3.0% and 3.7% regardless of what happens outside of Ukraine.

"There will be a figure of 3% or a figure of 3.7%, and compared to the fall that we have in 2009, this figure is really achievable no matter how the situation develops," Economy Minister Bohdan Danylyshyn said in December.

Retail has also risen a little over the year from first-quarter lows, but the increases are in line with the small rises in income over the same period so no momentum is being built in this sector and growth remains a function of state largesse.

"The retail trade has shown stable month-on-month growth since May (with September the only exception), but the year-on-year decline, at -20.7%, is still very large. In our view, the population is not ready to spend its accumulated savings (outside the banking system) in light of uncertainty about further income, mainly, in turn, reflecting uncertainty surrounding the upcoming presidential elections in January," says Renaissance Capital.

Analysts estimate that the population is holding some $55bn in cash outside the banking system and remain reluctant to spend this money until some clarity about the future appears.

Ukraine's consumers are in a much more difficult position than their Russian counterparts as about half of the mortgage borrowing was done in dollars. The devaluation of the national currency has significantly increased the cost of repaying those loans as well as putting extra pressure on the banks and exacerbating the non-performing loans problems. Together these problems will hold back the recovery of both consumption and consumer lending.

Industrial production recovery remains tied to the recovery of commodity prices – and especially steel. However, while steel prices are up, analysts are unsure about the sustainability of the increase.

Industrial production recorded contraction of just 6.2% in October 2009 comparing to nearly 30% decline earlier this year. There are two fundamental factors driving the industrial recovery – an improvement in global demand and weakness of Ukrainian currency, which allows domestic companies to reap more benefits from global growth.

Metallurgy, currently representing about 20% of Ukrainian industrial production, has been the key recovery driver so far, creating demand for coke, ore and electricity. It will remain the backbone of the local economy in the mid-term, but it's also the most dependent on global trends.

The food industry is a bright spot both from the perspective of export capacities and strong local demand. The sector offers prospects provided that necessary capital and technology would arrive there on time. Local currencies of Ukraine's neighbours appreciated versus the hryvnia, creating exports opportunities to the EU and Russia, a large market with population over 150m.

Food industry key problems are painful de-leveraging, which froze investment projects across the industry, and some delays with certification of Ukrainian foodstuffs resulting from insufficient quality of inputs.

The contraction in capital investments is even greater than those of the sectors and the lack of investment will remain a drag on recovery. Capital investment was halved over 2009 and until the political uncertainty is resolved there is little prospect for its recovery.

Investment is well positioned to increase in 2010-2011, but this is subject to structural reforms that Ukraine has yet to begin. Currently investment is very modest, representing only UAH22bn, or close to 11% of country's GDP. It is well below the emerging market average of 30-40% GDP.

"Fixed capital investment contracted sharply, by over 57% on year in the first half of 2009, and we expect it will remain squeezed owing to the lack of credit and overall economic uncertainty. In turn, the government ability to stimulate the economy is limited by the considerable deterioration of budget revenues," says Citi's Ribakova.

In 2008, Ukraine was reporting the highest inflation rates in the region and amongst the highest rates in the world as inflation topped 31% in May 2008. The result of the crisis has been to depress demand and bring the rates down, but inflation remains high at an estimated 13-14% for 2009.

The central bank forecasts the rate will come down to 10% in 2010, but the government has promised several measures that could send the rate up again.

A social spending bill is in the Rada that would increase wages. Tymoshenko has also said that she will restart the payouts of defaulted deposits in Oschadny Bank. And the government has promised the International Monetary Fund (IMF) to hike domestic gas tariffs, which are half that the government pays Russia for the gas.

"While delays in gas tariffs for households and heating companies should help to limit consumer inflation this year, we believe domestic gas prices will eventually be adjusted in accordance with IMF recommendations after the presidential elections, set for January. Combined with the expected expansion of social spending and wage indexation, as well as the high level of monetisation of the fiscal deficit, this should prevent consumer price inflation from dropping significantly," says Citi.

The budget has been whacked by the crisis and the government has done little to tackle the issue. Initially agreeing to pass a zero deficit budget for 2009 as part of the IMF deal to tap $16.4bn of stand-by loans, the pressure of looming elections meant the government under PM Tymoshenko continues to spend freely. The IMF has proven to be incredibly soft on Kyiv (unlike its attitude towards the equally troubled Latvia) and finally the fund caved in to allow a 3% deficit.

However, the government overshot even this target and Citi analysts estimate that the deficit ended 2009 closer to 6%, but will fall to 4% in 2010. In fact, considerable confusion surrounds exactly what the government is spending and how the picture will look next year. Several investment houses in Kyiv have reported that the official reports on state spending are clearly wrong and it appears the government has been cooking the books in an effort to keep the IMF money flowing while it muddles through to the elections in early 2010.

"While analysis of public finances is complicated by the lack of reliable data on budget execution, available information provides some grounds for concern. The economic crisis has resulted in a considerable deterioration of budget revenues. Given this trend, the revenue target could be a major challenge.

"While the state budget deficit reached UAH24bn during the first nine months of 2009 and is below the UAH31.2bn level budgeted for this year, data published by Ministry of Finance in compliance with cash accounting do not show growing volumes of VAT arrears and tax payments made by Ukrainian companies in advance," says Citi's Ribakova, in one of the more restrained comments.

This confusion is highlighted in bne's consensus prediction for the level of the deficit in 2010, which is 4.9%, but estimates range from 4% to 6%. Whatever it ends up at, it is clear the deficit is too high.

However, Ukraine's companies are not helping, as many are sitting on their tax money and tax payment discipline has broken down while the government is distracted with elections. While the state budget deficit reached UAH24bn during the first nine months of 2009 and is below the UAH31.2bn level budgeted for this year, the amount of VAT arrears had reached UAH20bn by October.

And even Citi analysts, which estimates the 2010 deficit to come in at 4%, say this is unlikely and the deficit will go much higher. One the main unknowns is if the wage and social payments law that was passed at the end of 2009 is implemented, then the minimum wage will be increased by some 40% over 2010, adding UAH71bn to the budget spending bill, which would massively drive up the deficit unless some new sources of financing it can be found.

Ukraine's current account has registered a deficit for the past three years, reaching a peak of $11.9bn in 2008. This reflected significant growth in consumption of goods other than commodities, while imports of oil and gas comprised only 10-15% of total imports. Exports of ferrous metals amounted to about 40% of total exports. The trade balance in commodities was in surplus in 2008.

2009 saw a sharp drop in non-commodity imports thanks to a collapse in demand that has brought the balance of payments into balance and the country was even showing a small surplus in the last months of 2009, says Renaissance Capital.

Ukraine has built up significant amounts of external debt in 2009 as it cast about for ways to pay its gas bill. In all, it has to repay some $40bn in 2009 – equivalent to the country's hard currency reserves and then some. However, the state did manage to restructure some $19bn of debt repayments and the fears of an impending default receded in the last months of 2009 – a trend analysts expect to continue through 2010.

The Eurobonds redemptions schedule in 2010 will be tight for the corporate and banking sectors, while the sovereign area has a year-long pause till December 2010. Total volume of redemptions in 2010 will be approximately a third less than in 2009 that would result in -$6.3bn of net repayments.

According to "Fundamentals of monetary policy for 2010" published by the central bank, total payments on external debts in 2010 are estimated at $20.3bn, more than $18bn would make payments on corporate debts, around $2.3bn payments on state and state guaranteed debts, says Ukrsibbank.

Concorde Capital thinks that the level of total external debt will fall slightly in 2010 from 93% of GDP at the end of 2009 to 90% of GDP by the end of 2010. Renaissance Capital believes that the amount of external debt will fall faster in 2010 to about $30bn, with the same high level of rollovers as in 2009. At the same time the pressure will be taken off by the resumption of FDI, of which $4.5bn is expected to arrive and should pick up as the year wears on and investment sentiment improves.

The Ukrainian banking system has escaped the horror scenario for now. One important achievement is that it has survived a bank run and de facto collapse of three large banks, one of which was the leading financial institution in transactions and cash management. The consequences of this have been moderate, compared to what one could've expected, perhaps due to the low level of financial system development.

Ukrsibbank says that the majority of top-tier Ukrainian banks had excessive liquidity as of the end of 2009 as deposit runs stopped in the summer and the willingness of domestic banks to generate new loans was very limited.

Money market rates have been low for the most of this year, reflecting strong cash preference by domestic banks. To some extent, this preference can be explained by a) unwillingness to lend to real economy; b) strict conditions of NBU's refinancing loans (the central bank often demands additional restrictions); and c) there is no wide interbank market.

New lending barely exists, and commercial loans are rare and expensive - the interest rates on new six-month to one-year loans are typically ranging from 25% to 30% and there is still very limited number of banks offering lending products as of the end of 2009.

Non-performing loans (NPLs) are a big problem and will get worse. As of the third quarter, total credit portfolio of local banks was at UAH747.8bn, while amount of provisions stood at UAH92.7 bn. Ukrsibbank expects NPLs to reach 20% of the total loan portfolio which means full provisioning would require an additional UAH56.7 bn.

As of the third quarter, the capital of Ukrainian banks was at UAH118.0 bn. Subtracting additional provisioning would leave UAH61.1bn of net equity, which would be an equivalent of around 6.9% CAR. This compares to the healthy 15.6% reported in the beginning of October 2008. Given that some of the banks are extremely well capitalized (eg. state giant Oschadbank), the capitalization of selected banks could be significantly below the industry average.

"Ukrainian banks should be able to clean the mess of troubled assets over the course of 2010, but some serious handicaps are there, including weak local legal system which allows borrowers to delay or even avoid cession of the collateral in some cases. Tier III and Tier IV banks are well positioned to be the first to restart lending as they are better capitalized than Tier I and Tier II financial institutions," says Ukrsibbank.

LINK: http://businessneweurope.eu/story1917/UKRAINE_2010_The_only_way_is_up
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Commentary: By Paul Richardson, Acting Director of the Office of Economic Growth
U.S. Agency for International Development (USAID) in Kyiv
Radio Free Europe/Radio Liberty, Prague, Czech Republic, Sat, Jan 02, 2010

KYIV - An extensive study has revealed how little information Ukraine’s largest banks are willing to share about their finances and their management.

Ukrainian banks are “troeshniki” (C students) in information disclosure: They disclose only 48 percent of the information they should be revealing by international standards, according to the extensive research done by Standard & Poor’s and Ukraine’s Financial Initiatives Agency, with support from USAID’s Capital Markets Project.

Such a level of transparency is insufficient for investors, both foreign and domestic, who, particularly in times of crisis, tend to look closely at where they put their money. It is also insufficient for the general public. After all, Ukrainians are themselves already investors in the financial sector, and their deposits allow banks to function, invest, and lend. These ordinary Ukrainians’ deposits are the lifeblood of any bank – as the recent bank crisis in Ukraine shows.

Timely and accurate information disclosure is critical. It is the foundation that stable banks and corporations are built upon. Without proper disclosure about their business, finances, and management, banks cannot become the pivotal financial institutions the market (and the people) need. Why?

[1] First, disclosure standards are like x-ray goggles, giving an almost unobstructed view of the inner workings of a bank.

[2] Second, adequate information disclosure acts as an early warning system when something is wrong with a financial institution. Disclosure requirements concerning financial statements force companies to publish data that tell market experts about possible dangers, like overexposure to foreign debt or nonperforming loans. An ordinary bank deposit holder would also get advance notice of possible problems. Banks, knowing this, would possibly adapt their strategy to make it less risky.

Disclosure rules about management and its structure force companies to reveal who the people running the company are: what is their education, their previous work experience, and their business and personal reputation? In well-regulated markets, the motto is: “Disclosure is the best disinfectant, and sunshine is the best policeman.”

Information disclosure rules also act as a deterrent to affiliated party transactions and other abuses: the chances are greater that a manager will resist temptation to use the bank as a cookie jar if he knows its finances are transparent. And so are the chances that he will abstain from hiring his first cousin out of family loyalty.

But for now, information disclosure by Ukrainian banks is insufficient to satisfy these needs.

That said, many market participants and government representatives understand that increasing transparency is crucial. That’s why the Joint Stock Company Law was finally passed last year. Among many other good features, it sets higher transparency standards for these companies.

Another positive step is the Electronic System of Comprehensive Information Disclosure (ESCRIN). It is being implemented by the Securities and Stock Market State Commission (SSMSC) with support from USAID’s Capital Markets Project, as part of USAID’s 15 years of commitment to develop Ukraine’s financial sector.

As soon as the implementation process is over early next year, it will become mandatory for all publicly listed and traded companies to disclose information according to the ESCRIN requirements, bringing Ukraine one step closer to international standards and to building investor confidence in the capital market.

Once ESCRIN is in place, any investor can access the ESCRIN data through the SSMSC website, type in the name of any publicly listed and traded company, and find an unprecedented amount of quality information about the issuer. This information will be in real-time to allow investors to make timely decisions. It will also be free of charge, to allow wide public exposure.

ESCRIN will include descriptive parts, understandable to people who do not have a higher financial education, to people who have bank accounts, mortgages, investments in pension funds -- and, therefore, have the right to know. As these disclosure obligations are being put in place, they have to be enforced in a timely and -- once again! -- transparent fashion.

Ukraine is taking essential steps to develop its economy in accordance with international best practices for all its citizens. Yes, the crisis continues adversely to affect Ukraine and its citizens, but it can also show the way to a more vibrant, honest, and transparent economy.

NOTE: Paul Richardson is the USAID acting director of the Office of Economic Growth of the U.S. Agency for International Development (USAID) in Kyiv. The views expressed in this commentary are the author's own and do not necessarily reflect those of the U.S. government or RFE/RL.

LINK: http://www.rferl.org/content/Working_Toward_Banking_ Transparency_In_Ukraine/1919557.html
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By Chris Kirkham, Bloomberg, London, UK, Thu, Dec 31, 2009

LONDON - Ukraine won approval from the International Monetary Fund to tap into reserves and cover gas payments, though the Fund will continue to freeze loan disbursement until parliament can commit to budget cuts.

“The IMF Executive Board agreed to the government’s request to modify the performance criterion on Net International Reserves (NIR), as specified in the current Stand-By Arrangement, to lower the end-December NIR floor by about $2 billion,” the IMF said in a statement late yesterday. This will enable Ukraine “to use existing resources to make external payments. It does not involve any new disbursement by the IMF.”

Ukraine was due to receive a $3.4 billion tranche of its $16.4 billion bailout in November, though that installment was delayed after the government failed to meet budget demands, including spending cuts. The former Soviet state is relying on the IMF cash to stay afloat and to pay Russia for natural gas on time after the credit crisis undermined demand for its exports such as steel and crippled its financial sector.

The IMF’s decision to lower the reserve floor is “a somewhat remarkable move,” Timothy Ash, head of Europe, Middle East and Africa research at Royal Bank of Scotland Group Plc in London, said in a note. “It would appear that the IMF has opted to cut the government some considerable slack, clearly with an eye to the serious potential regional repercussions. The IMF is mindful not to be the cause of Europe freezing again this winter.”

The government needs funds to bridge the difference between what NAK Naftogaz Ukrainy pays Russia for gas shipments and the lower price the state gas supplier charges the domestic market for the fuel. Russia halted natural-gas exports through Ukraine to Europe on Jan. 7 for the first time in three years, creating shortages in at least a dozen countries across Europe at the coldest time of year.

“The government can now ask the National Bank of Ukraine to use the newly available resources,” Dragon Capital said in a note to clients. “However, uneasy relations between the government and the central bank, compounded by the upcoming presidential elections, may delay the transfer of freed-up reserves.”

The IMF’s move to lower the end-December reserve floor by $2 billion means Ukraine needs foreign currency holdings of at least $12.9 billion to fulfill the terms of its loan, Dragon Capital said. That compares with official reserves of $27.3 billion in November, according to central bank data.

The Washington-based Fund’s announcement comes as Ukraine prepares for presidential elections on Jan. 17. President Viktor Yushchenko, who has tried to reduce Ukraine’s ties with Russia, is set to lose the vote, polls show, leaving Prime Minister Yulia Timoshenko and her rival Viktor Yanukovych to contest the presidency.

The IMF said it is continuing to discuss, within the context of formulating a 2010 budget, “how to ensure that the Ukrainian economy is placed on a sustainable growth path and, particularly, that the most vulnerable groups in society will be protected.”

Agreement on a 2010 budget, with broad political support, “would provide the basis for renewed progress and a resumption of disbursements under the Fund-supported program,” the IMF said.

The budget for next year must be approved by parliament in three readings. Lawmakers rejected the Cabinet’s 2010 draft in a first reading, forcing
Timoshenko to approve an “operational budget” until lawmakers approve the official budget.

The economy is in a recession after nine years of growth as demand slumped for its exports, which make up more than 40 percent of gross domestic product. The economy sank 15.9 percent in the third quarter after shrinking 17.8 percent in the second and a record 20.3 percent in the first three months of 2009. The country will use part of the IMF loan to cover the budget deficit, which will reach 13 percent of GDP this year, according to the lender.

Ukraine also needs the IMF funds to pay for Russian gas, on which it relies for more than 50 percent of its energy needs. Deputy Prime Minister Hryhoriy Nemyria said on Nov. 10 that the country may face payment difficulties starting from January if the IMF doesn’t release funds by then.

Standard and Poor’s, which rates Ukraine’s debt CCC+, lowered the outlook on the country’s credit rating to stable from positive on Oct. 31, citing concern that cooperation with the IMF may be stalled. Fitch cut the rating to B-, six levels below investment grade, on Nov. 12, citing the delayed IMF payment.

NOTE: To contact the reporter on this story: Tasneem Brogger in London at tbrogger@bloomberg.net.

LINK: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=acEcuiMY6kQM
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By Denis Maternovsky, Bloomberg News, Moscow, Russia, Mon, Jan 4, 2010

MOSCOW - Ukrainian Eurobonds may surge early this year as investor concerns the country faces potential default are “overstated,” according to Renaissance Capital.

The CHART OF THE DAY shows Ukraine’s bonds due in 2012 yield more than notes maturing four years later, suggesting investors are speculating that the nation will struggle to pay its debts in the next couple of years.

The securities may deliver gains of more than 15 percent in the first quarter as a “positive shift in investor attitudes” drives a recovery in values, Renaissance analysts led by Alexei Moisseev in Moscow wrote in a research note.

The cost to insure against nonpayment by Ukraine using credit-default swaps is higher than for any other government. Ukraine default swaps have dropped to 1,241 basis points from a record 5,384 basis points in March.

The country is reliant on a $16.4 billion International Monetary Fund bailout amid the worst recession in a decade, while political battles between President Viktor Yushchenko and Prime Minister Yulia Timoshenko ahead of presidential elections next month limit the government’s ability to tackle the economic crisis.

The economy is likely to return to growth in 2010, justifying “aggressive purchases” of the country’s sovereign and quasi-sovereign debt, said Moisseev in the note dated Dec. 24. There’s “no chance” of the political situation being made any worse by the presidential election, he said.

Ukraine dollar bonds due in 2012 yield 1,200 basis points more than two-year U.S. Treasuries, compared with an average spread of 330 basis points before the global credit crisis began in 2007, according to Renaissance data.

A decline in spreads to “fair” levels of 550 basis points would trigger a price jump to full face value from 85.9 cents on the dollar on the 2012 bonds today, according to Renaissance. City of Kiev dollar bonds could gain as much as 20.5 percentage points, the report said.

NOTE: Editors: Gavin Serkin, Mark Gilbert; To contact the reporter on this story: Denis Maternovsky in Moscow at +7-495-771-7721 or
dmaternovsky@bloomberg.net. To contact the editor responsible for this story: Gavin Serkin at +44 20-7673-2467 or gserkin@bloomberg.net.

LINK: http://www.bloomberg.com/atts/news?pid=newsarchive&sid=adRLOSB.iXlI
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The 2010 budget should include expenditures on promising R&D projects

Interview with Volodymyr Lanovy, President, Market Reforms Center
Interviewed by Nataliia Bilousova, The Day Weekly Digest in English #37
Kyiv, Ukraine, Tuesday, 15 December 2009

KYIV - Volodymyr LANOVY, Ph.D. in Economics, president of Market Reforms Center, deserves to be called one of the leading Ukrainian practicing economists. He held various state offices, such as the Minister of Economy, advisor to the President of Ukraine, MP, etc., in which he mastered and implemented in real life various economic models and approaches.

The Day has asked Lanovy about the policies Ukraine should pursue in 2010, the reforms that need to be implemented, and the best areas to channel budget money into.

[The Day] In your opinion, what kind of model for the post-crisis development of the economy has to be built to prevent the same kind of situation from happening again?

[Volodymyr Lanovy] “The economy will become powerful if millions of people get interested in opening their own business in its different fields. The task of the post-crisis Ukraine is to offer new goods on international markets. I personally have not seen any new Ukrainian goods, such as cell phones or airplanes, appear after a year of crisis.

"We had no breakthrough in creating innovative high-quality goods that would help Ukraine to carve out new niches on international markets. That is why the state now has to help the small business in all possible ways rather than emphasize a few priorities. The year 2010 is the time to stake on inventiveness, business activity, and building modern intellectual economy.

“On the other hand, the problem of upgrading equipment in the industrial, energy, transport, and agricultural sectors is already long overdue. There is a need for a complex state target program that would include new approaches to collecting taxes, amortization, customs regulation, purchasing know-how technologies, attracting long-term international loans, etc.”

[The Day] What mechanisms of economic stimulation should be reflected in the budget in order to cause the GDP rate to grow and avoid provoking inflation?

[Volodymyr Lanovy] “A deep economic crisis cannot be overcome by means of some distributive or regulatory mechanisms. Certain expenditures have to be earmarked in the budget including expenditures on implementing some serious changes in major industry spheres, the development of the accompanying infrastructure (big transport systems, communications, energy objects, ports, and airports), and making Internet available to every family.

"Instead of being a resource-providing appendage, in the future Ukraine has to be a state that generates innovative ideas, technologies, and models, just like Japan is doing now. Unlike Japan, we have natural resources, which are our potential for success, but we keep ignoring it or putting it aside until later. In my opinion, the greatest part of budget money has to be spent on creating an economic platform for an innovational leap.

“The present budget project does not contain such an investment component. Instead, for unknown reasons, they plan to spend 50 billion hryvnias on bank recapitalization. Why are they so generous, and why is there no explanation exactly what this money will be used for?

“If we want to see new technologies in Ukraine in five or six years from now, there have to be expenditures on these long-term tasks in the 2010 budget. The government have to invest into such risky but promising R&D projects on partnership conditions with private investors, in particular commercial banks. It also sure has to completely change financing education and finally realize the program to modernize the healthcare system. The state has to invest into creating laboratories, producing medications and medical equipment, and founding pharmaceutical and diagnostic complexes and centers.

“Another task for the government is the social support for citizens and unemployment rate control. If this is not done, society degrades, crime spreads, and it all leads to moral and intellectual abyss. The needs of social and humanitarian development should receive from 7 to 10 percent of GDP. To stimulate GDP growth in the long-term perspective, we need to reform the taxation system to make it facilitate business development and foster energy saving.”

[The Day] In your opinion, is it better to boost the economy by stimulating consumer demand directly or via the banking system?

[Volodymyr Lanovy] “Stimulating consumer demand is a wrong method for an economy. It is only possible to stimulate consumers when domestic production is absolutely flexible toward the demand, which means it can react to the demand increase right away. However, this is a utopia. For example, yesterday you bought a kilogram of apples and tomorrow you will be given more money, and you will decide you want two kilograms.

"But it is impossible to grow twice as many apples in a day. There will be a deficit of apples, the salesmen will buy more apples abroad, imports will increase, and it will lead to the balance of payments deficit. This will devaluate the national currency.

“It means that such consumer demand stimulation only undermines the value of money and weakens the economy. In my opinion, it makes sense to develop domestic market by encouraging production instead of providing consumers with more money. Therefore, the government has to stimulate the growth of the number of effective consumers on the domestic market. Then there will be no inflation.”

[The Day] What do you think about reinvigorating the economy by way of refinancing provided by the National Bank of Ukraine?

[Volodymyr Lanovy] “The imperfection of the banking system refinancing, in particular using the pawn method and auctions for money emission distribution, create a possibility for artificial monetization of the economy and undermining its monetary system. This is exactly what happened in the last few months of 2008.

"The excessive amount of issued hryvnias, a total of more than 100 billion, which were given to commercial banks undermined the exchange rate, the paying capacity of economic agents, and devalued tangible assets. It led to the loss of credit worthiness of the entire banking system and the mass capital outflow abroad.

“That is why refinancing banks the way it is being done now is extremely ruinous. Besides, these methods channel new credits into the sphere with accumulated passive funds, like real estate or plots of land, and old products stocked in a great number in warehouses. For structural reforms to take place, credits have to be channeled into new spheres and growing market segments.”

[The Day] In your opinion, what should the new principle for refinancing banks be?

[Volodymyr Lanovy] “We have to finally get rid of the wrong thought that the National Bank is the bank that provides credits to other banks. It is not the main moneylender in the country. What has been created in Ukraine is a mixture of the old Soviet approach, when the money simply printed, and the predatory capitalistic model of its distribution among financial oligarchs.

"Its reformation should involve monetary emission to the secondary gold and currency markets and state-guaranteed debt securities. Those banks that have these instruments will receive centralized refinancing. Credit institutions will find other resources of refinancing on the interbank debt market and the deposit market through the mechanism of subordinated debt, and other market sources.

“At the same time, the National Bank of Ukraine (NBU) has to transformed into a reserve bank. It means that banks’ obligatory reserve funds have to stay on special accounts in the NBU and will be used to provide individual reorganization aid to the institutions that have lost their liquidity.”

[The Day] What steps should the banks take to win back people’s trust?

[Volodymyr Lanovy] “When there is a 20-percent inflation rate and the bank offers only a 19-percent interest rate on deposits, not one person with knowledge of economics will wait to make purchases and instead put his money on a deposit account. Banks won’t be able to win people’s trust back again without inflation reduction, minimization of financial risks, and stabilization of the hryvnia’s exchange rate.

"The indefiniteness of the monetary policy (the NBU Council has not defined any macro-financial reference points in the 2010 budget), negative experience with inflation and devaluation, and Ukrainian citizens’ memories will slow down the process of restoring trust.”

[The Day] The hryvnia is strengthening now. What is your forecast about what will happen to the national currency in 2010?

[Volodymyr Lanovy] “Ukraine has enough currency reserves (about USD 26 billion) to make up the possible payments deficit. There are no objective reasons now for the hryvnia rate to go down because of lack of dollars. It will continue to be like this only if there is no exchange rate revaluation as the Cabinet of Ministers wants to have it. (They used the rate of 7.5 hryvnias for one dollar for the Law on the 2010 State Budget.)

“I want to mention one more factor of the hryvnia’s stability. In the past two or three months the situation on the Ukraine’s currency exchange market calmed down as a result of the NBU taking measures aimed at reducing the amount of money in circulation and suspending banks refinancing. The National Bank is also very cautious about offers from the government to buy public bonds. If such monetary politics is continued, the hryvnia’s stability will be maintained.

“However, we can’t be sure that there won’t be any sudden changes or manipulations with currency that would result in exchange rate fluctuations – something we saw in the past years. That is why we need a goal-oriented and predictable monetary policy.

"In my opinion, it has to contain such components as the moderate, slow exchange rate devaluation, the NBU’s obligatory currency interventions on the market if the exchange rate exceeds its permitted deviation (three to four kopecks), stimulation of exports and foreign currency earnings, etc.

"It would be good to borrow quite a few things from China’s experience in credit and currency control. However, Ukraine’s goal perspective is a European model of monetary integration. We should begin implementing it.”

LINK: http://www.day.kiev.ua/289213/
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Reuters, Funchal Portugal, Fri, December 11, 2009

FUNCHAL, Portugal - Ukrainian cities Kiev, Lviv, Donetsk and Kharkiv will host matches in the 2012 European soccer championship, UEFA said on Friday, with the capital confirmed as the venue for the final.

European football's governing body had delayed the decision over hosting matches in all the proposed Ukrainian cities except Kiev after the slow progress of infrastructure projects.

"I'm pleased to tell that thanks to the tremendous efforts of the Ukrainian government we can finally give the green light to a symmetrical tournament with four cities in Poland, and Kiev, Lviv, Kharkiv and Donetsk in Ukraine," UEFA president Michel Platini told a news conference.

"There remain considerable work to be done and considerable hoops to jump through. I entirely trust Ukraine and Poland as hosts," he added.The tournament is being co-hosted with Poland, where four cities -- Poznan, Wroclaw, Warsaw and Gdansk -- had already been confirmed by UEFA as able to
host matches.

"Today Ukraine won, the people of Ukraine won," Ukrainian Prime Minister Yulia Tymoshenko told local television.

UEFA has been frustrated by the slow progress of work in Ukraine and in May gave the four cities six months to show significant improvement, with Platini decrying 'huge' problems with airport infrastructure, transport networks and suitable accommodation for a huge influx of fans.

"Mr. Platini, the great player and president, has given us a new opportunity, an opportunity to show what we are made of," Ukrainian FA president Grigoriy Surkis told the news conference.

"We are going to make sure that Euro 2012 will be at least as successful as the previous two tournaments. Now isn't a time to rest on our laurels. "We've suffered a great deal in the runup to this decision, a lot of difficulties have been experienced but...the red light has been averted because those warnings were heeded," he added.

"We're going to modernise our infrastructure, build what remains to be built, prepare for a wonderful spectacle. We're going to leave no stone unturned to maintain the prestige of UEFA.

"It would have been so terrible to let this tremendous opportunity slip through our fingers. This enables us to ensure a promising future for our country. It's not a Christmas present for me, it's a Christmas present for all Ukrainians."

Surkis said he had missed his father's 90th birthday to attend the meeting on the island of Madeira. "Elderly people understand the importance of these
transformations. He was present when World War Two was won. My father has had a very difficult life; this is a heart-warming decision for him."
[return to index] [U.S.-Ukraine Business Council (USUBC), www.usubc.org]

By Simon Shuster, Associated Press Writer, Kiev, Ukraine, Wed, 9 Dec 2009
KIEV, Ukraine - Ukraine will provide Iraq with $2.5 billion worth of weapons and military equipment under a deal intended to shore up Iraq's fledgling armed forces before the planned pullout of U.S. troops, a senior Ukrainian lawmaker said Wednesday.

Anatoly Grytsenko, head of the Ukrainian parliament's security and defense committee, said the agreement with the Iraqi ministry of defense calls for Ukraine to produce and deliver 420 BTR-4 armored personnel carriers, six AN-32B military transport planes and other military hardware to Iraq.

"It's worth around $2.5 billion," Grytsenko, who previously served as Ukraine's defense minister, told The Associated Press after being briefed on the deal Wednesday by state arms exporter UkrSpetsExport. UkrSpetsExport, which is handling the contracts, declined numerous requests for comment Wednesday.

"The deals have been concluded. They are now formalizing the contracts," Grytsenko said. "The contract is to be carried out in stages and, from what I was told, just the first stage is worth $400 million."  Grytsenko said the deal also included repair work on two Mi-8T military helicopters for Iraq.

President Barack Obama laid out plans to withdraw troops from Iraq and pass security operations in the country back to Iraqi police and armed forces.
The United States is providing billions of dollars in military aid to ready the Iraqis for the task of policing a country still plagued by insurgents and suicide bombings. A string of suicide bombings Tuesday killed at least 127 people and wounded over 500 in the Iraqi capital.

The deal will be the largest in Ukraine's history and could elevate the former Soviet nation to the ranks of the top arms dealers in the world this year, said Sergei Zgurets, head of research at the Center for Army, Conversion and Disarmament Studies (CACDS), a Kiev-based think-tank.
[return to index] [U.S.-Ukraine Business Council (USUBC), www.usubc.org]

By Kateryna Choursina and Stephen Bierman, Bloomberg, Moscow/Kiev, Dec 29, 2009

MOSCOW/KIEV - Russia and Ukraine signed an oil- transit agreement for 2010, averting a possible cut-off in supplies to Europe almost a year after a pricing dispute disrupted natural-gas deliveries to the region.

Russia agreed to pay 30 percent more to transport oil to Europe via Ukraine next year, Valentyn Zemlyanskyi, a spokesman for Ukrainian state energy company NAK Naftogaz Ukrainy, said today by telephone from Kiev. The two countries signed an accord late yesterday, he said.

Irina Yesipova, a spokeswoman for Russia’s Energy Ministry, confirmed the signing, without elaborating. Igor Dyomin, a spokesman for Russian oil shipper OAO Transneft, wasn’t immediately able to comment.

Russia said yesterday it had notified the European Union and countries fed by the Druzhba oil pipeline, including Slovakia, Hungary and the Czech Republic, of its talks with Ukraine under a so-called early warning mechanism. The mechanism was established in November to help prevent and manage energy crises such as the halt in Russian gas deliveries in January.

“The European Commission has been informed by the Russian government that there is no longer a risk of disruption of Russian oil supplies to the EU via Ukraine,” the commission, the EU’s executive branch, said today in an e-mailed statement. The mechanism has been a “useful communication tool,” it said.

Russia said earlier today it would maintain oil exports to eastern Europe even if no new transit deals could be reached with Ukraine by Jan. 1. The country’s dispute with Ukraine in January over pricing and debt curbed gas supplies to at least 20 European nations. Russian oil exports to Europe were interrupted in January 2007 when Belarus sought to tax transits.

To contact the reporters on this story: Kateryna Choursina in Kiev at kchoursina@bloomberg.net; Stephen Bierman in Moscow at sbierman1@bloomberg.net.

LINK: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a2NdOUXaaJjY
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By Daryna Krasnolutska and Kateryna Choursina, Bloomberg, Kiev, Ukraine, Mon, Dec 7, 2009

KIEV - Ukraine’s inflation rate, Europe’s highest, declined in November for a fourth month as the recession curbed domestic consumption. The rate fell to 13.6 percent, the lowest since July 2007, from 14.1 percent in October, the Kiev-based state statistics committee said today in a statement on its Web site.

The median estimate of eight economists in a Bloomberg survey was 13.7 percent. In the month, prices increased 1.1 percent.

The economic contraction, including a record annual 20.3 percent slump in the first quarter, is helping subdue inflation, which the government has been unable to push below 10 percent since 2003. The central bank has cut its key interest rate twice since June as the recession blunted price pressures.

“It’s a decent number as deflationary pressure in the economy outweighed the impact of loose fiscal policy,” said Oliver Weeks, a London-based economist at Morgan Stanley. “But it’s hard to get too optimistic given household natural gas prices will eventually have to rise sharply.” The hryvnia strengthened to 7.9949 versus the dollar as of 2:03 p.m. in Kiev, compared with a close of 8.0045 on Dec. 4, Bloomberg data shows.

Annual growth in utility prices declined to 16.1 percent in November from 22.3 percent the previous month, while the rise in transport costs fell to 20.9 percent from 22.2 percent, according to the committee. Food prices rose 10.3 percent, compared with 8.8 percent in October.

Ukraine depends on Russia for more than 50 percent of its gas needs. Russia has increased the price of gas Ukraine pays more than four times since 2006, while the cost for households has remained unchanged since the end of 2006.

Ukraine was to raise gas prices by 20 percent for households and for utilities that provide hot water and heating this autumn to meet a condition of a bailout loan from the International Monetary Fund. The unpopular increase was delayed ahead of January presidential elections.

“There is an inflation risk next year because sooner or later the authorities will have to increase gas prices for households,” said Andriy Nesteruk, an analyst at Kiev-based Phoenix Capital investment bank. “And it is not clear what monetary policy the central bank will have as we will have a new central banker after the presidential elections.”

Inflation, which peaked at 31.1 percent in May 2008, slowed from February through May, allowing the central bank to cut the discount rate to 10.25 percent. The government wants rates to fall further to spur economic growth.

Output has been shrinking since the fourth quarter of last year as demand for exports such as steel and chemicals plunged, investments waned and the currency weakened. The IMF, which approved in November 2008 a $16.4 billion two-year loan for Ukraine to support banks and the currency, said on Nov. 4 the economy remains “highly fragile.”  The Washington-based lender estimates an average inflation rate of 14 percent this year and 9 percent in 2010.

Producer prices, an early indicator of inflation, increased 0.4 percent on the month in November, according to the statistics office. Annual producer prices rose 13.2 percent.

NOTE: To contact the reporters on this story: Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net;

LINK: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aaTAgbs1Yeqs
[return to index] [U.S.-Ukraine Business Council (USUBC), www.usubc.org]
Help an elderly Ukrainian in Kyiv have clothing, food, medicine this year.

Katie Fox, President, American Friends of "For Survival", Wash, D.C., Mon, Jan 4, 2010

WASHINGTON, D.C. - 2010 has arrived and I am writing to ask you to sponsor an elderly Ukrainian in Kyiv this year through a donation to "For Survival." As many of you know, I have assisted in running a small charity for several years that helps poor elderly Ukrainians in Kyiv buy food, medicine and other necessities.

The "For Survival" charity is entirely volunteer run and has no overhead costs - every cent you donate goes directly to an elderly recipient.  We are a small organization with a lot of hands-on oversight, another guarantee that your donation will be well spent.

A donation of $240 or $20 per month will help one Ukrainian pensioner in Kyiv cover basic needs, - warm clothing, food, medicine, and hospital bills, throughout 2010.  Your donation is full tax deductible and is especially important this year. 

The global economic crisis has hit Ukraine with particular force. Prices on staples, including food, are soaring.  At the same time, with charities forced to cut back, the competition for donor dollars is fierce.

Our group, "For Survival," was founded by a group of Ukrainian elderly women with two goals in mind: to improve the lives of poor elderly and to help
active elderly to give back to society.  This year, in addition to distributing aid for generous supporters like you, the group sought and got a grant from the Lions' Club in Kyiv.

It has provided basic medical equipment, such as walkers, hearing aids and eyeglasses to Ukrainian elderly unable to afford them.  As part of "giving
back," "For Survival" members also visit orphanages as 'surrogate grandparents." They also used Lions' Club support to buy books, CDs and DVDs
to use during visit to children in these institutions.

A brochure with more information on "For Survival," including how we screen recipients and use-donated funds is attached to this e-mail.  For more
information please feel free to contact me at info@forsurvival.org or by cell phone 240-423-8845. Or, visit our web site at www.ForSurvival.org.

Please consider a donation today!  Your money will be well spent and deeply, deeply appreciated. To give safely on-line visit us at www.ForSurvival.org.
Or, checks may be made out to "For Survival" and sent to me [Katie Fox] at 5333 42nd St. N.W., Washington, D.C. 20015.  American Friends of "For Survival" is a registered 501(c)(3) nonprofit organization. All contributions are tax-deductible.

Thank you very, very much.

Katie Fox, President
American Friends of "For Survival."
Washington, D.C.
Go to: http://www.ForSurvival.org.

USUBC FOOTNOTE:  The American Friends of "For Survival" nonprofit organization in Washington, D.C., is well-known to several members of the U.S.-Ukraine Business Council (USUBC).  USUBC members have worked with and donated to American Friends of "For Survival" for several years.  Katie Fox is doing an outstanding job as president of American Friends of "For Survival." Your support will be most appreciated. Go to website: http://www.ForSurvival.org.