Welcome to the U.S.-Ukraine Business Council

UKRAINE'S LARGEST NATIONAL INVESTOR CONTINUES TO HAVE POSITIVE VIEW OF LONGER–TERM INVESTMENT IN UKRAINE

Presentation Talking Points: By Jock Mendoza-Wilson, Director
International & Investor Relations, Systems Capital Management (SCM)
1st Annual International Forum on the Economic Development of Ukraine
Newseum, Washington, D.C., Thursday, October 15, 2009

WASHINGTON, D. C. - Firstly, thank you for the generous introduction and I would like to thank Morgan Williams, the U.S.-Ukraine Business Council (USUBC) and the Ministry of the Economy for inviting me to take part and speak at this event. I shall keep my remarks to 8-10 minutes as I would rather focus on discussion and questions.
 
(2)  While I know that many of my Ukrainian colleagues here today are very familiar with System Capital Management, it is probably valuable to give a brief overview to our American colleagues who may not be too familiar with our business.
 
(3)  System Capital Management is Ukraine’s leading financial and industrial group.  We are the largest domestic investor in Ukraine and arguably the largest Ukrainian investor in the US, at least as far as investing in the real economy is concerned. And I will talk specifically about our investment in the United States in a moment.
 
(4)  SCM focuses on six core areas of business, mining and metals, energy, banking and finance, telecommunication, media and real estate.  We are a major contributor to Ukraine’s GDP and the nation’s single largest tax payer.  Just to give you an idea of scope and size of our business and the contribution it makes to the Ukrainian economy here are some key figures.  Our accounts, audited by PriceWaterhouseCoopers to international (IFRS) standards confirm that in 2008 SCM had:

                     Total Assets of $18.075bn
                     Total revenue $15.985bn
                     Number of people employed 150,000
                     Profit $3.000bn
                     Tax paid $0.805bn
 
(5)  SCM plays an important role in the Ukrainian economy, not just because of our revenue, profitability and contribution to the national budget, but primarily because of our openness, transparency good corporate governance and our mission to meet the highest international standards in each area of our operations.
 
(6)  In line with this commitment to be an open and transparent business, our consolidated financial figures to IFRS standard have been published each year since 2004. Last year we were the first Ukrainian financial and industrial group to publish a sustainability report covering corporate  responsibility issues produced to GRI standards and audited by Ernst and Young.

We are also a founding signatory in Ukraine to the United Nations global compact, the world’s leading programme on corporate responsibility.
 
(7)  Why do I mention these points? Well to illustrate the point that SCM is a Ukrainian business which in its structure, operations, values and standards mirrors that of any leading US or European business.

(8)  This commitment to the global standards has helped SCM and companies in the group to compete in global markets and also to be able to access international capital markets to invest in the long term future of our businesses, both in Ukraine and internationally.
 
(9)  SCM is already a truly international business.  Metinvest, our vertically integrated metals and mining business, has operations in Italy, Switzerland, Bulgaria the United Kingdom and the US. While our energy business, DTEK, (which is also vertically integrated) is already exporting coal to Turkey and the EU, and in the future plans to export electricity to EU markets.

The recent signing of the memorandum of understanding of Ukraine’s membership of the EU Energy Community mentioned earlier this morning by Vice Prime Minister Nemyria will help in making these plans a reality.
 
(10)  Here in the US, SCM has already made a significant investment. As many of you in the room today are aware, in April this year, Metinvest made its largest and most significant investment with the purchase here in the United States of the United Coal Company.  

(11)  UCC has 4 mines in Virginian, West Virginia and Kentucky and primarily produces high energy, metallurgical coal which is used to produce coke, a vital component in steel production.  The company has coal reserves of 160m tones and an annual production capacity of 5.1m tones and employs 1089 people directly.
 
(12)  The purchase of United Coal added to Metinvest’s existing mining operations in Ukraine will give the company complete coverage of its needs for coking coal.   The coal will be exported from the U.S. to Ukraine and already two shipments have been sent.  Metinvest’s import of metallurgical coal will grow through time as it moves away from using natural gas in the steel making process to using higher quantities of coke.

The company is also in the process of developing a new port facility at the black sea city Sevastopol to handle bulk imports of coal from the US.
 
(13) We have plans for significant growth and development of UCC’s mines, increasing production from about 4 mil. metric tones of clean coal to 8-9 mil. metric tones in the long run. To implement the plan for significant growth and development of UCC mines, we will make significant further investment here in the US.
 
Let me now turn my attention briefly the question of improving the investment climate in Ukraine
 
(14) We have heard some excellent contributions today on the economic climate in Ukraine and how the country has responded to the difficult environment.  While the Ukrainian authorities are to be applauded for their quick reaction last year to the crisis and involving the IMF at an early stage one of the key problems since then has been the continued political instability.

This fact has led to a lack of quick and clear decision making, particularly on key economic policy questions, has undermined the economy’s real performance and, in the minds of investors and bankers, increased dramatically the risk of investing in Ukraine. I hear this point consistently from international bankers and potential investors in the country.

This instability has had real economic consequences for business and for investment. As Michael Bleyzer said earlier today, market sentiment is a powerful force and it is currently negative towards Ukraine.
 
(15) While at this point the country should be considering its move out of recession instead it faces potentially a further uncertain six months due to continued political instability in the run up to presidential elections and  with the IMF placing question marks around the continued disbursement of the standby facility.
 
(16) However, despite the short-term challenges, we continue to have a positive view for longer-term investment in Ukraine. SCM is the country’s largest national investor and we continue to believe that it offers excellent opportunities for investing now and in the future.  

What we would ask of this or future governments is a focus on good governance and reform and a return to stability so that business can continue to grow and develop and so that foreign direct investors will attracted to take advantage of the excellent medium and longer-term opportunities the country offers.

FOOTNOTE:  The 1st Annual International Forum on "The Economic Development of Ukraine" was held in the Knight Conference Center of the internationally acclaimed Newseum, 555 Pennsylvania Avenue, NW, in Washington, D.C. on Thursday, October 15, 2009.  The theme of the first Forum was be, "The Impact of the Global Liquidity Crisis on Ukraine and the Road to Economic Recovery." Major speakers in Washington, D.C. at the proceedings of the first international forum on "The Economic Development of Ukraine" will include Ukrainian Vice Prime Minister Hrygoriy Nemyria, Minister of Economy Bohdan Danylyshyn, and top experts from the U.S. government, international think-tanks, international financial institutions, private business and others organizations.  For more information go to www.usubc.org.