ACTION UKRAINE REPORT - AUR
An International Newsletter, The Latest, Up-To-Date
In-Depth Ukrainian News, Analysis and Commentary
Ukrainian History, Culture, Arts, Business, Religion, Economics,
Sports, Government, and Politics, in Ukraine and Around the World
ACTION UKRAINE REPORT - (AUR) - Number 931
Mr. Morgan Williams, Publisher and Editor, SigmaBleyzer Emerging
Markets Private Equity Investment Group, www.SigmaBleyzer.com
WASHINGTON, D.C., MONDAY, MARCH 2, 2009
INDEX OF ARTICLES ------
Clicking on the title of any article takes you directly to the article.
Return to Index by clicking on Return to Index at the end of each article
1. COCA-COLA UKRAINE TO BUY ZAPORIZHZHIA BEVERAGE PLANT
Production of fermented drink 'Kvas' produced under the "Yarylo" brand
Sokrat Daily, Kyiv, Ukraine, Friday, February 27, 2009
2. THE CASE FOR UKRAINE
By Anders Aslund, Senior Fellow, Peterson Institute for International Economics
RealTime Economic Issues Watch, Global Financial Crisis
Washington, D.C., Thursday, February 26th, 2009
3. EASTERN EUROPE NEEDS OUR HELP
We can't risk losing 20 years worth of gains in the region.
America should support call for EU to support economics including Ukraine
Opinion Europe: by U.S. Senator John Kerry
Wall Street Journal Europe, Europe, Friday, February 27, 2009
4. UKRAINE: YUSHCHENKO PLEDGES ACTION FOR IMF, WORLD BANK
Reuters, Kiev, Ukraine, Saturday, February 28, 2009
5. CENTRAL AND EASTERN EUROPEAN BANKS TO RECEIVE EURO24.5 BILLION LOAN
By Alan Beattie in Washington, Financial Times, London, UK, Fri, Feb 27 2009
6. EU READY TO HELP UKRAINE ONLY WITHIN IMF FRAMEWORK
Itar-Tass, Moscow, Russia, Sunday, March 1, 2009
7. IMF MISSION CHIEF TO UKRAINE HOLDS PRESS CONFERENCE
ON ECONOMIC PROGRAM OF THE UKRAINIAN AUTHORITIES
Press Conference Transcript with Ceyla Pazarbasioglu, IMF Mission Chief to Ukraine
International Monetary Fund (IMF), Washington, D.C., Friday, February 27, 2009
8. RECENT DEVELOPMENTS IN UKRAINE REGARDING FINANCIAL CRISIS
Four Ukraine leaders make some agreements; IMF issues a statement
RBS EM Strategy Update - Ukraine/IMF Relations
By Timothy Ash, Head of CEEMEA research, Royal Bank of Scotland
9. UKRAINE: SIGNS OF POLICY ACTIONS REGARDING FINANCIAL CRISIS
RBS EM Alert: Ukraine - Signs of Policy
By Timothy Ash, Head of CEEMEA research, Royal Bank of Scotland
London, United Kingdom, Friday, February 27, 2009
10. THE ODOR ACROSS THE ODER
What's gone wrong in Eastern Europe
Review & Outlook, The Wall Street Journal, NY, NY, Sat, Feb 28, 2009
11. RUSSIA TOPS STOCK GAINS, STRENGTHENING PUTIN AS UKRAINE TUMBLES
Ukraine needs foreign funds to close its $12.3 billion current-account deficit
By Emma O’Brien & Laura Cochrane, Bloomberg, NY, NY, Mon, Mar 2, 2009
12. UKRAINE: DEFAULT RISK LIES IN CORPORATE SECTOR
Oxford Analytica, UK, Thursday, February 26, 2009
13. STANDARD & POOR'S (S&P) DOWNGRADES UKRAINE TO CCC+
RBS EM Alert - Ukraine - S&P Downgrades Ukraine to CCC+
By Timothy Ash, Head of CEEMEA research, Royal Bank of Scotland
London, United Kingdom, Wednesday, February 25, 2009
14. UKRAINE'S INSTABILITY THREATENS CRISIS, WEAKENS ITS
CANDIDACY FOR NATO, EU, WARNS COUNCIL ON FOREIGN RELATIONS
(CFR) REPORT BY FORMER U.S. AMBASSADOR TO UKRAINE STEVEN PIFER
Council on Foreign Relations, Washington/New York, Tue, Feb 24, 2009
15. UKRAINE TEETERS AS ITS CITIZENS BLAME BANKS AND GOVERNMENT
By Clifford J. Levy, The New York Times, NY, NY, Monday, March 2, 2009
16. EU REJECTS A RESCUE OF FALTERING EAST EUROPE
By Charles Forelle, The Wall Street Journal, New York, NY, Mon, Mar 2, 2009
17. GAZPROM TO UKRAINE: PAY NOW OR PAY LATER
Kostis Geropoulos, New Europe, Issue 823, Brussels, Belgium, Sun, 1 Mar 2009
18. RUSSIAN PRESIDENT TO OFFER IDEAS FOR NEW ENERGY CHARTER
To help resolve disputes such as gas conflict between Russia and Ukraine
The Moscow Times, Moscow, Russia, Monday, 02 March 2009
19. UNAVAILABILITY OF CAPITAL & DEVALUATION OF THE HRYVNIA ARE TOP
PROBLEMS FOR UKRAINIAN COMPANIES ACCORDING TO ERNST & YOUNG SURVEY
Natalia Partach, Senior PR Specialist, Ernst & Young, Kyiv, Ukraine, Tue, Feb 24, 2009
20. UKRAINE: EXTRA CHARGES ON IMPORT DUTY ON CERTAIN GOODS
Tax Newsletter, DLA Piper Ukraine, Kyiv, Ukraine, Thursday, February 26, 2009
21. DEFENSE TECHNOLOGY INC. (DTI), HUNTSVILLE, ALABAMA,
JOINS THE U.S.-UKRAINE BUSINESS COUNCIL (USUBC)
Providing defense technology, military aviation sales, parts & service
U.S.-Ukraine Business Council (USUBC), Wash, D.C., Thu, Feb 19, 2009
22. UKRAINE: SIVERSKODONETSK AZOT ASSN, MAJOR PRODUCER
OF FERTILIZER, TO LAUNCH FIRST STAGE OF ERP SYSTEM BASED
ON MICROSOFT DYNAMICS AX
Ukrainian News Agency, Kyiv, Ukraine, Monday, February 2, 2009
23. KRAFT FOODS UKRAINE LAUNCHES PRODUCTION OF 'I LOVE MILKA'
CHOCOLATE CANDIES WITH VANILLA, NUT AND STRAWBERRY FILLING
Kraft owns chocolate factory and potato chips/snacks factory in Ukraine
Viktoria Miroshnychenko, Ukrainian News Agency, Kyiv, Ukraine , February 15, 2009
24. UKRAINE'S AES RIVNEENERHO ENERGY DISTRIBUTION COMPANY
TO INVEST UAH 32.28 MILLION IN 2009
Ukrainian News Agency, Kyiv, Ukraine, Mon, Jan 19, 2009
25. TAX ESSENTIALS UKRAINE....SHORT TAX GUIDE
DLA Piper Ukraine, Kyiv, Ukraine, Tuesday, February 24, 2009
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1. COCA-COLA UKRAINE TO BUY ZAPORIZHZHIA BEVERAGE PLANT
Production of fermented drink 'Kvas' produced under the "Yarylo" brand
Sokrat Daily, Kyiv, Ukraine, Friday, February 27, 2009
KYIV - According to Interfax, Coca-Cola is going to acquire the non-alcoholic beverage plant in Zaporizhzhia. The plant’s main activity is the production of the fermented drink ‘Kvas’, which is produced under the “Yarylo” brand. As stated by Mr. Hill, the CEO of Coca-Cola Beverage Ukraine, the company is going to develop the “Yarylo” brand further, as well as a range of other drinks.
Moreover, Mr. Hill stated that the company is looking for other investment opportunities in Ukraine and plans to invest a total of EUR 25 mln, excluding the sum spent on acquiring the plant in Zaporizhzhia.
OUR VIEW: The current economic situation is creating the necessary prerequisites for merger and acquisition deals. We believe that, due to problems with liquidity and UAH devaluation, which is making the repayment of loans denominated in foreign currency almost impossible, forcing weaker players to leave the domestic market.
For Coca-Cola it’s a good time to strengthen its position on the domestic market, especially when its competitor – Pepsi Co – last year acquired “Sandora”, a juice producer with a domestic market share of 44%.
In comparison, the market share of Coca-Cola in 2007 amounted mere 2-3%. Earlier this year in the press,, the possible acquisition of Vinnie Fruite (whose 2007 market share was 5%) by Coca-Cola was announced; however, both the management of Vinnie Fruit and Coca-Cola are denying that a deal has occurred. We believe that, in 2009, Coca-Cola will substantially expand its market share on the Ukrainian juice market.
FOOTNOTE: Coca-Cola is a member of the U.S.-Ukraine Business Council (USUBC), Washington, D.C., www.usubc.org.
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[return to index] [Action Ukraine Report (AUR) Monitoring Service]
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2. THE CASE FOR UKRAINE
By Anders Aslund, Senior Fellow, Peterson Institute for International Economics
RealTime Economic Issues Watch, Global Financial Crisis
Washington, D.C., Thursday, February 26th, 2009
Pessimists believe that Ukraine is on the verge of default. Fortunately, such a calamity is unlikely, but Ukraine badly needs more international financial support to handle a tremendous external shock.
A year ago, Ukraine’s economy was in sound health after eight years of an average annual economic growth of 7.6 percent. Ukraine has maintained a minimal budget deficit, and its public debt was as small as 12 percent of GDP in 2007.
Ukraine’s mistake, however, was to keep its exchange rate pegged to the US dollar, which encouraged speculative short-term capital inflows, driving up inflation to 31 percent last May and the current account deficit to 6.7 percent of GDP last year.
These flaws were not major, but Ukraine became a prime victim of the freezing of international financial markets after the Lehman Brothers bankruptcy. Without credit, most construction just stopped. Steel is Ukraine’s main export product, accounting for over 40 percent of exports, and both prices and volume of sales plummeted by half.
The blow to the Ukrainian economy has been horrendous. In January, industrial production fell by no less than 34 percent over January 2008, and GDP is estimated to have plunged by 20 percent. Steel production, mining and construction have fallen by half.
In current dollars, Ukraine’s GDP is likely to plummet by 40 percent this year. Exports are likely to drop by half, and imports even more, reducing the current account deficit to an insignificant level. Millions of workers are being laid off, and the stock market has contracted by 90 percent.
No other country has been hit as hard as Ukraine, and it needs all the support it can get to mitigate the social shock. The Ukrainian government reacted swiftly, asking the International Monetary Fund for support last October. Within four weeks, Ukraine and the IMF had agreed on a large, strong two-year standby agreement with $16.4 billion of IMF credits.
The IMF had three key demands: A balanced budget, a floating exchange rate, and bank restructuring. Ukraine has delivered. It has done more on bank restructuring than most Western countries. After some hesitation, the National Bank of Ukraine let the exchange rate float. It has depreciated by about 50 percent and stabilized, endowing Ukraine with new cost competitiveness. The Ukrainian government has maintained the budget close to balance in spite of collapsing state revenues. Inflation has fallen to 22 percent.
The international financial institutions recognize Ukraine’s dilemma and the government’s heroic achievements. The World Bank, the European Bank for Reconstruction and Development, and the European Investment Bank have contributed some $3 billion in new funds.
Their support is sufficient to avert default. Ukraine still has $28 billion in reserves, which reassuringly corresponds to eight months of imports. The only reason for talk about default is the loud, public acrimony between President Viktor Yushchenko and Prime Minister Yuliya Tymoshenko, who accuse each other of treason and corruption.
But we should not complain about open democracy. Apart from the Baltic countries, Ukraine is the only bona fide democracy with free media in the former Soviet Union, and it is committed to Euro-Atlantic integration. Such a country needs support when in peril.
Amazingly, Ukraine has so far seen minimal social unrest, but unemployment is bound to skyrocket, especially in the East with its steelworks and mines. Naturally, the Ukrainian government is anxious to reinforce its social safety net and insists on a budget deficit of a moderate 3 percent of GDP.
The IMF understands the government’s predicament, but it cannot approve a budget deficit of more than 1 percent of GDP without additional financing. The finance gap in this year’s balance of payment amounts to $5 billion, quite a moderate amount.
Seventeen international banks have just given their vote of confidence in Ukraine’s economic policy, by making commitments to invest $2 billion of their own capital in their Ukrainian subsidiaries. Western governments should follow the example of their hard-tested banks.
The European Union has a vital interest in saving its banks that are heavily invested in Ukraine, and for the United States, Ukraine is of major geopolitical importance. The United States and the European Union should stand up and deliver. Ukraine has long been a loyal friend of the West. Now the time has come for the West to prove its friendship toward Ukraine.
NOTE: RealTime Economic Issues Watch: A website forum in which senior fellows of the Peterson Institute for International Economics discuss and debate their responses to global economic and financial developments as they occur each day and offer insights that others might overlook.
Global Financial Crisis: Views on the current crisis in global financial markets, their impact on the real economy and the public policy choices confronting the United States and other countries.
FOOTNOTE: Anders Aslund has served for several years as a Senior Advisor to the U.S.-Ukraine Business Council (USUBC), Washington, D.C., www.usubc.org.
LINK: http://www.petersoninstitute.org/realtime/?p=507
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3. EASTERN EUROPE NEEDS OUR HELP
We can't risk losing 20 years worth of gains in the region.
America should support call for EU to support economics including Ukraine
OPINION EUROPE: By U.S. Senator John Kerry
Wall Street Journal Europe, Friday, February 27, 2009
Twenty years ago, the Berlin Wall and the repressive Communist regimes of Eastern Europe came crashing down to usher in a new era of political and economic freedom. Today, it is Eastern Europe's banks and economies that are threatening to crash.
The Polish zloty is down 38% against the dollar in the last six months alone. Hungary's forint is down 32%. Ukraine posted a staggering 34% drop in January industrial output from a year earlier. While the entire world is reeling, right now the eye of the global financial storm has moved to Central and Eastern Europe.
If Western nations do not act quickly to address the snowballing financial crisis that is brewing from Latvia to Hungary, we risk replacing an era of promise and progress in Eastern Europe with one of soaring unemployment, instability and a weakening of the influence and ideals we have spent decades building.
While many Americans are rightly focused on our domestic troubles, we must also recognize the global dimensions of the current crisis. Last week, Latvia became the second government, after Iceland, to collapse as a result of a financial crisis that has already sparked riots in the Baltics and Greece and is likely to be a driving geopolitical force for a long time.
Eastern Europe's currencies are plummeting as investors instead seek the safety of the dollar and the euro. This means that Eastern European countries, companies and individuals face increasing challenges to pay back their large foreign-currency loans -- which only deepens the currency problems to create a vicious circle.
At first glance this may seem like a traditional emerging-markets crisis like those we saw in the late 1990s. But in fact it's far worse. This is a truly global financial crisis in a highly connected financial world, and Eastern Europe is feeling the brunt.
Many of the region's banks are foreign-owned -- in the case of Hungary, more than 80% -- and many of those banks are now contemplating unprecedented protectionist steps, pulling back lending operations to their home countries. Meanwhile, as larger countries consume more of the world's capital in refinancing their own debt, emerging markets like those of Eastern Europe are likely to find the bank windows closed to them.
The result is that the economies of Eastern Europe are already falling faster and further than anyone expected. There is a real danger that, if every country affected by this crisis defines its interests narrowly, several strategically vital countries could fall through the cracks.
UKRAINE'S DIRE SITUATION
For example, Ukraine's dire situation could trigger a domino effect, not only destabilizing Western Europe banks with large exposure to East European markets, but actually changing the geopolitical map as well.
America should support World Bank President Robert Zoellick's call for the EU to lead a coordinated global effort, alongside the IMF, World Bank and other development banks, to support the economies of Central and Eastern Europe. Austria, too, deserves credit for trying to focus Europe's attention on the plight not just of eastern member states such as the Baltics, but also of non-EU neighbors like Ukraine.
But Eastern Europe will not be the last financial fire the world will have to help put out in this crisis. Nor will our problems be confined to traditionally unstable corners of the globe. Our oldest European allies are also in deepening financial trouble, and three of our most important partners in the Muslim world, Turkey, Indonesia and Pakistan, today all face acute balance-of-payments crises.
We also need to ensure that the U.S. Treasury and State departments have the capacity to deal with these fast-moving crises in real time even as they turn our domestic economy around.
That means the Senate must make clear its willingness to quickly confirm the Obama administration's nominees for posts vital to international economics and finance, such as the international staff at Treasury and the economic staff at the State Department, once the administration nominates them.
Our needs at home are urgent and great. We must put our own economic house in order and we will. But as we balance the domestic and global demands of this crisis, we should be warned that, in cutting corners today we risk incurring far greater costs down the road.
A retreat into our domestic problems will not only leave us diminished on the world stage -- because our world is so economically and financially interconnected, it may well also worsen our own economic crisis.
Instead, as we restore confidence in our own markets, we will also need to find a strategy to project leadership, share burdens, build the capacity of institutions like the IMF and spread stability as this crisis continues to reverberate world-wide.
We have already lost a great deal in the last few months. But two decades of prosperity, democracy and institution-building in Eastern Europe is one investment that America must not allow to go up in smoke.
NOTE: Mr. Kerry, a Democratic senator from Massachusetts, is chairman of the Senate Foreign Relations Committee.
LINK: http://online.wsj.com/article/SB123570279503890141.html
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4. UKRAINE: YUSHCHENKO PLEDGES ACTION FOR IMF, WORLD BANK
Reuters, Kiev, Ukraine, Saturday, February 28, 2009
KIEV - President Viktor Yushchenko has promised Ukraine's biggest creditors, the IMF and the World Bank, that the country's authorities will work together to protect loan deals, including cutting the budget deficit.
Yushchenko sent a letter to both institutions late on Friday after the International Monetary Fund said it was willing to adjust its $16.4 billion credit programme, given a deterioration in global conditions since it was clinched last October.
The IMF has, in effect, suspended the release of the second tranche of that credit, worth about $1.84 billion, because of differences over the way Ukraine is fulfilling the programme.
The global economic crisis has slashed demand for Ukraine's steel and chemical exports, and investors have also been spooked by politicians' resistance to meeting the terms of the IMF deal. Two international rating agencies have downgraded the ex-Soviet state's debt. "Next week, state institutions and political parties will produce agreed positions on unresolved issues and turn them over to the IMF office in Washington," the president wrote.
"Laws deemed necessary by the latest IMF mission will be presented to parliament. This will enable us to significantly reduce the 2009 state budget deficit. Through these steps, Ukraine will show it is ready to resume dialogue with the IMF."
Yushchenko dispatched the letters after a day of talks with his main rival, Prime Minister Yulia Tymoshenko, the speaker of parliament and a senior opposition leader.
At the close of the talks, the president urged politicians to end quarrels as Ukraine gears up for a presidential election early next year. Yushchenko and Tymoshenko, allies in the 2004 "Orange Revolution" that swept pro-Western leaders to power, now disagree on nearly all issues. Leaders agreed to produce documents on cooperation with international financial institutions on Monday.
"What a difference a credit rating downgrade makes," said Tim Ash at RBS in London. While the latest downgrade was "very harsh on Ukraine ... it does appear to have sparked the first signs of reconciliation and policy action in Kiev," Ash said. "Perhaps Ukrainian politicians are getting the message."
The influential weekly Zerkalo Nedeli said Friday's talks also produced agreement between the president and prime minister to leave in place central bank chairman Volodymyr Stelmakh. Tymoshenko has demanded the president dismiss the central bank chief over a decline in the hryvnia currency which, at one point late last year, fell to 50 percent of its former value.
The IMF mission chief to Ukraine, Ceyla Pazarbasioglu, told reporters in Washington on Friday that the Fund was willing to consider different options for the budget deficit. A balanced budget or a gap of no more than 1.0 percent of gross domestic product was no longer feasible, she said, but Ukraine had to secure further financing. The budget now provides for a deficit of about 3 percent of GDP.
Pazarbasioglu expected a Fund mission to return to Kiev next week and said the IMF could further downgrade its GDP growth forecast for Ukraine to a deeper contraction beyond 6.0 percent for 2009. Tymoshenko's government has a forecast for 0.4 percent growth, denounced by the president as excessively optimistic.
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U.S.-Ukraine Business Council (USUBC): http://www.usubc.org
Promoting business and trade relations between U.S. & Ukraine since 1995
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5. CENTRAL AND EASTERN EUROPEAN BANKS TO RECEIVE
EURO24.5 BILLION LOAN
By Alan Beattie in Washington, Financial Times, London, UK, Fri, Feb 27 2009
WASHINGTON, D.C. - A group of multilateral lenders are preparing a lending package of up to euro24.5bn to help central and eastern Europe’s battered banking systems weather the financial crisis.
The World Bank, the European Bank for Reconstruction and Development and the European Investment Bank will announce the package on Friday in London. The move follows widespread financial turmoil across the region, as the western European institutions that own large parts of eastern Europe’s banking sector pull back capital to their home bases.
Several central and eastern European countries including Ukraine, Hungary and Latvia have also borrowed from the International Monetary Fund, the World Bank’s sister institution, to plug the gap in their capital flows.
The European Investment Bank said it would provide euro11bn for small and medium enterprise lending, of which euro5.7bn is ready for immediate disbursement. The EBRD will provide up to euro6bn in 2009-2010 for the financial sector in a mixture of equity and debt finance, and the World Bank group euro7.5bn.
Robert Zoellick, World Bank president, said: “This is a time for Europe to come together to ensure that the achievements of the last 20 years are not lost because of an economic crisis that is rapidly turning into a human crisis.”
LINK: http://www.ft.com/cms/s/0/efa7ff5a-0475-11de-845b-000077b07658.html
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[return to index] [Action Ukraine Report (AUR) Monitoring Service]
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6. EU READY TO HELP UKRAINE ONLY WITHIN IMF FRAMEWORK
Itar-Tass, Moscow, Russia, Sunday, March 1, 2009
BRUSSELS - The European Union is ready to render financial support to Ukraine only within the framework of the International Monetary Fund (IMF), Czech Prime Minister Mirek Topolanek said after the EU special summit on Sunday.
EU leaders refused to adopt a common assistance plan for East European nations and EU neighbors. They said any decisions concerning possible
financial and economic assistance would be made individually.
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7. IMF MISSION CHIEF TO UKRAINE HOLDS PRESS CONFERENCE
ON ECONOMIC PROGRAM OF THE UKRAINIAN AUTHORITIES
Press Conference Transcript with Ceyla Pazarbasioglu, IMF Mission Chief to Ukraine
International Monetary Fund (IMF), Washington, D.C., Friday, February 27, 2009
WASHINGTON, D.C. - MS. LOTZE: Good day, everybody. Welcome to this conference call on Ukraine with the IMF Mission Chief, Ceyla Pazarbasioglu. I’m Conny Lotze of Media Relations.We don't have any documents to hand out, but there will be a transcript of this call posted on our website later, and I will have a sound file of the call, an audio file, right after this briefing.
Ceyla will have some opening remarks, and then we will turn over to your questions. Thank you very much. Ceyla?
MS. PAZARBASIOGLU: Thank you, Conny. Hello, everyone. Thank you very much for listening in to this conference call. I should start by saying that we are very encouraged by today's meeting of the authorities—the key decision makers—and their determination to move their economic program forward. We have already discussed it with key officials, and we are very glad to hear about this process.
We will continue to consult with them on the next steps and the measures that will pave the way for the conclusion of the first review under the Stand-By Arrangement. We are looking forward to continuing our discussions with the authorities next week in preparation for our return to Kiev.
I should also note that we have an excellent dialogue with the authorities. In the last two weeks, since returning back from Kiev, we have had several very productive conference calls with the Prime Minister, her team, the Ministry of Finance, the Presidential Secretariat, and the National Bank of Ukraine.
All of these have been extremely good, very collaborative, trying to work out a program that fits the needs of Ukraine.
As you know, we are in the midst of a global financial and economic crisis. And everyone is looking for ways to address the challenges they are facing. And every day, we are confronted with new challenges, new issues that need to be addressed. In this context, we have worked together with the authorities.
As President Yushchenko noted today, we have been working on a draft Letter of Intent. The authorities confirmed to us and also to the press earlier today that they will send us comments early next week that will form the basis of our discussions when we go back to Kiev.
In the last few weeks, our discussions with the authorities have focused on the implementation of a comprehensive Bank Resolution Strategy, which is a key component of the program; exchange and monetary policies; and the appropriate fiscal stance for 2009. And I would briefly like to mention to you where we stand vis-a-vis each of these issues.
You have heard these also from the authorities, so there is not that much new, but I thought maybe you would like to hear it from our perspective as well.
We strongly believe that resolute implementation of the Bank Resolution Strategy is key to restore confidence in the financial sector, to start bank lending, and to facilitate economic or recovery.
This is very important for Ukraine. And, as you know, in many countries, authorities are trying to address the challenges faced by the banking system.
The National Bank of Ukraine should be commended for designing and professionally implementing the diagnostic phase in line with international best practices.
I should note that these diagnostic studies were conducted by reputable audit companies for each bank based on agreed-upon principles which were designed by the NBU. These audits included stress tests to identify potential capital needs under adverse macroeconomic conditions. As you know, these were designed in October and November, and, again, I think the NBU deserves credit for going ahead with the methodologies that are being considered by some of the industrial countries today.
Based on the results of the diagnostic phase, the NBU conducted discussions with the largest 17 banks, accounting for about two thirds of the total banking sector assets. And most of them signed an agreement pledging to raise capital. The next phase of the bank recapitalization program involves potential public recapitalization support to viable banks in the context of an acceptable business plan.
In this context, we believe it is very important to appoint a high-level official, authorized by all coalition partners, to coordinate together with the National Bank of Ukraine the implementation of the Bank Resolution Strategy.
In terms of exchange rate policy, a consistent implementation of a flexible exchange rate regime is very important to cushion the economy and against the large external shocks it has been facing and it still faces.
The credible implementation of the monetary policy in the context of the floating exchange rate arrangement requires a strong and independent central bank, together with a very sound communications strategy.
However, the NBU’s efforts have been hampered so far by political interference, as well as numerous and, at times, conflicting public statements by various officials, participants, and so on about what the exchange rate should be, what banks are facing which issues and so on.
Given the fragility of public confidence, we believe it is of key importance that such statements are made by high-level NBU staff only; and that others respect this and allow the key policymakers—in this case, the National Bank—to make statements on such important issues.
Regarding fiscal policy, the deeper recession that has emerged since the inception of the authority’s economic program in October justifies a revision of the program’s initial target. We already mentioned that in our press statement before leaving Kiev.
The initial program had a balanced budget for 2009, but this is actually misleading, because the program has adjusters for bank recapitalization costs, which are expected to be about four and a half percent of GDP maximum, and any infrastructure investment financed by IFIs.
So, in October, when the program was designed, it was a preemptive bank recapitalization strategy, and the need for infrastructure investment, which was built into the program. However, since October, the global conditions have deteriorated. The economic and financial conditions of the major trading partners of Ukraine have deteriorated.
So, given these conditions, we had minus three percent outlook for growth in 2009. We have revised it to minus six. We may need to revise it, given the continuing deterioration of the trading partners of Ukraine. So a balanced budget, given the sharp decline in revenues, does not seem feasible at this point in time.
However, it is very important to keep the government deficit at the level consistent with available, and non-inflationary financing. In this regard, we are fully supportive of the authorities’ efforts to raise additional funding from multilateral and bilateral creditors.
We have been collaborating very closely with the World Bank. And if these efforts are successful, a higher deficit than originally envisaged, based on realistic macro assumptions, it can be built into the program to soften the economic downturn while making sure that the medium-term sustainability of government finances are preserved.
In this context, fiscal corrective measures are needed, as mentioned by the Prime Minister earlier this week and the President today; that these include improving the financial situation of the pension fund and actions to reduce the structural deficit of Naftogaz.
The authorities are also taking measures to ensure that the most vulnerable are protected through well-targeted social safety net programs, which is, again, a key component of the IMF-supported program as well.
I’ll stop here, and take questions. Thank you.
QUESTIONER: Thank you for the briefing, I simply didn't hear what you were saying. What are you expecting next week to come from the authorities in the Ukraine? What documents that will be a basis for further discussion?
MS. PAZARBASIOGLU: Right. What would be the key steps is basically, as it was announced by the authorities themselves today. They have signed a joint declaration. They have shown their determination that they will collaborate and move the economic program forward, which was, for us, a very important sign. So we are very encouraged by it.
We have had discussions with the Authorities for the past two weeks, as well during our visit in Kiev. And we have put together a draft Letter of Intent, which forms the basis for the revised program.
The authorities are now working on it, and, as the President announced earlier today, they are expecting to come back to us early next week with their own suggestions. As you can appreciate, this is their own program. They are taking ownership of it and coming back with what works out in the case of Ukraine.
Based on these discussions, we hope to go back to Kiev in the coming weeks. I also understand that the authorities will put to parliament some legislation which would allow them to correct the fiscal situation, especially in terms of the pension fund and other issues.
And we will be in discussions with them during the week and hope to be back to Kiev soon.
QUESTIONER: And secondly, if I may, more substantively, what do you say to those who say that the program was under-funded to begin with for Ukraine. And even if it was not under-funded, how likely is it that the Ukrainians will soon enough get the money, either from the program or from the bilateral donors whom you mentioned to tide them over for the time being, because I understand time is of the essence here.
MS. PAZARBASIOGLU: Right. The program, when designed in October—and even now—is not under-funded in terms of balance of payments needs, which is what the IMF provides financing for. And from that perspective, the program remains well diagnosed and properly funded.
However, what one has to acknowledge is since October, with the recession, it has become very difficult for Ukraine to sustain the fiscal balances, because, as you know, with a recession, revenues come down, and even though the budget may be stringent, it has wage payments, pension payments, and so on. And, therefore, to be able to make sure to meet the budgetary needs, additional financing is necessary in the case of Ukraine.
Now, because the banking system is in fragile condition, because depositors are still taking out their deposits from the system—as confidence to the system has not yet returned, it is difficult for the authorities to finance the deficit by borrowing from domestic sources.
As you know the external sources are close to most countries, because of the global financial de-leveraging and financial conditions. Therefore, the only option for Ukraine to be able to run a budget deficit is to monetize it. And, as you know, this has implications for exchange rates and inflation and so on.
Therefore, as I said in my opening remarks, we support the authorities efforts to raise additional financing to balance the budget, to finance the budget, with some structural measures to make sure that in the medium term, and currently, that this is not inflationary, and that these are fiscally sound practices.
So, from that perspective, we will be working together with them and the World Bank to agree on a fiscal stance as well as the financing of such a stance.
And I think if the Authorities show commitment in terms of structural measures and corrective measures, I would hope that they would get the support from the World Bank, other multilaterals, and as well as bilateral support.
This, of course, includes us, and we have a program already, and we have been discussing in the context of our program the steps going forward. Thank you.
QUESTIONER: I would like to ask you what is the main question that the Ukrainian authorities need to accomplish to receive the second tranche of the credit. The Ukrainian authorities seem to be very optimistic about their chances to get the money. How do you assess this possibility? So which development is more likely to happen? Thank you.
MS. PAZARBASIOGLU: I think the authorities—as we have seen from the discussions today, including the Prime Minister, the President, the central bank, and even the opposition—are putting together their own anti-crisis package and measures. And that is very encouraging. In this context, the IMF has been supportive since October or even before October, and will be supportive of the authorities’ efforts.
If these discussions that we will continue next week provide assurances that the authorities are committed to the program and that this is a program which will be important and successful for Ukraine, for the people of Ukraine, the IMF will be supportive.
So I think it’s not possible to speculate at this point in time, but I think we are doing our best, the authorities are doing their best, and in these circumstances, I think it will be feasible to agree on a common, a joint stance, as I said, which would be positive for the country as a whole.
QUESTIONER: What about the budget deficit?
MS. PAZARBASIOGLU: As I just tried to explain to the first questioner, the budget deficit, because it was designed in late December and based on November projections, it is based on optimistic revenue figures. It's based on optimistic growth figures.
And, therefore, as the President already mentioned today and the government knows this very well, the budget needs to be assessed in a more realistic framework. And authorities haven’t been doing that. We have been discussing this with them. In that context, some collective measures are necessary to make sure that the budget is financeable with resorting to inflation or without leading to major depreciation of the currency.
So what we have discussed with the authorities is trying to look at the revenues from a more realistic perspective. And we have agreed with them that if they could take measures, some legislative changes which could lead to some savings, then we would be ready to discuss a higher deficit than the one percent we were discussing back in Kiev. In Kiev, we were focusing on a one-percent of GDP deficit. But this is based on, as I said, more realistic assumptions.
If the authorities are able to find World Bank and bilateral support to finance the deficit in a non-inflationary way and take some measures to make sure that the fiscal situation is sustainable going forward, […] because we need to have a medium-term perspective. We can't just have a two-, three-month perspective. So if that’s the case, then I think we could agree on a budget deficit which is higher than the one percent we discussed back in Kiev.
QUESTIONER: I mean, up to three percent? Up to five percent?
MS. PAZARBASIOGLU: I don’t think it’s good to speculate right now. We are discussing these issues with the Authorities. I don’t think it helps anyone to put figures down now, because the starting point is different.
The authorities have, as you know, a growth forecast of 0.04 percent of GDP. Our growth forecast is different from that, which implies different projections for revenues and a different deficit than what is in the budget right now.
So, as I said, we will discuss with the authorities and everyone has the same objective. We want to make sure that the fiscal balances are sustainable, and that it’s financed through non-inflationary means.
So we have agreed on this end objective. And the key is how to get there without having to go through very harsh measures or austerity measures. And in that context, it's important to be able to mobilize some additional financing to be able to not resort to such measures, which could mean hardship for people or which could be difficult given the recession which is already ongoing.
So I don’t think it helps to talk about a specific figure at this point in time. I think what you should take from this is that the objective is to come up with measures, with additional financing, and a fiscal stance which would mean that the end result is not inflationary and that there are no major harsh measures for people. And so this is the objective. And how we get to that, we will have to see in the coming weeks.
QUESTIONER: How much external financing do you think that Ukraine is going to need to be able to comfortably deal with the budget deficit of three percent or more?
MS. PAZARBASIOGLU: I think what the authorities have been envisaging is about US$5 billion in additional financing. This is what the Prime Minister has said in her press briefing. I think this would be comfortable for them, to be able to reach a public finance stance as I just discussed before. But in our projection, even more limited amounts would allow them to reach a fiscally sustainable stance.
QUESTIONER: Have you spoken about limits on the currency reserve and has that changed at all?
MS. PAZARBASIOGLU: You mean the international reserve target?
QUESTIONER: Correct, yes.
MS. PAZARBASIOGLU: No; the authorities have been adhering to those targets so far, and also according to the end December target, so there hasn’t been much discussion on that yet.
QUESTIONER: Okay. And when are you going back to Kiev?
MS. PAZARBASIOGLU: As I said, we are hoping to hear from the authorities early next week. I understand that next week is a busy week for them, with some discussions at the Parliament, some key appointments. So based on that, they have told us that they will send us a letter Monday or Tuesday telling us when they would like us to go back, and accordingly, we will plan it.
QUESTIONER: I just had a question about whether you expect that there would be much possibility at all of Ukraine getting money from private sector lenders, or just to clarify your position, is that now looking extremely unlikely?
MS. PAZARBASIOGLU: What I meant by that is that domestically it’s difficult because Ukraine doesn’t have an institutional investor base. The banking system is recapitalizing and trying to deal with its own challenges. So domestically, it’s difficult to raise financing.
Externally, the CDS spreads have been very high, and therefore, the cost of financing externally from the private sector is currently very costly. Now, once the authorities—their plans and their anti-crisis measures and some progress is made, I would hope to see those spreads come down, because I think they are rather exaggerated, from our perspective. But as the cost of financing comes down, and as the global financial situation improves, I would think there would be much more interest in the country which has enormous potential.
I have seen in the news some real sector companies increasing their presence in Ukraine. And most recently I think I have read about Coca Cola increasing its presence. So I would think that with a large population and demand, there would be private sector involvement going forward in the country.
But I’m sure at this point in time, the private financial sector is looking at the commitment, the crisis management strategy, not only in Ukraine, but all sorts of other emerging market countries, as well. So that will be the crucial point that will determine how access to private sector financing will be feasible.
In terms of foreign banks which are currently present in Ukraine, they have been very committed. As you know, they have announced that they are
recapitalizing their banks. The parent banks made specific announcements that they are committed to roll over the debt that is owed by the subsidiary. So from that perspective, these are all positive news, that there’s commitment to the subsidiaries of these parent banks.
Obviously, continued equal treatment of the banks in Ukraine is going to be critical to maintain that type of positive approach from the foreign banks. And in that context, the NBU has to make sure that its operations are transparent, that they’re equally provided to all banks; and my understanding is, the NBU has been working on that.
QUESTIONER: My question is, what do you think are the main risks for the banking system this year, specifically with regard to consumers likely to default on their mortgage loans denominated in dollars? Thank you.
MS. PAZARBASIOGLU: I think this is a very good question, but a very difficult question to answer, because this is, as you know, this is not a question which is applicable to Ukraine only. Many countries in the region are facing similar problems, where non-performing loans are increasing due to exchange rate changes or unemployment increases or other reasons which affect the payment capacity of the borrowers.
In the case of Ukraine, my understanding is that the banks have been working closely with the borrowers to be able to provide terms for restructuring these debts in terms of lengthening maturities and so on. There was an effort coordinated by Minister Pynzenyk in December, and the NBU has also been working on this.
But more importantly, in the context of the recapitalization program, which was precisely built on this forecast, that as the economy goes through a more difficult time, the banks would need additional capital to be able to roll over their loans or restructure their loans so that you wouldn’t have a capital crunch and a credit crunch.
From that perspective, I think Ukraine is in a very good position, having done the diagnostics, having allowed the banks or asked the banks to recapitalize themselves so that they are in a much better position to sit down with the borrowers and agree on terms—which is basically burden sharing. So that the borrowers can have some terms which would allow them to pay back, and that way the banks can benefit from continued payment on these loans.
So I think it is a challenge, it’s going to require on both sides decisions and some coordinated action, and also from the authorities’ side close monitoring and making sure that there are standardized contracts, that the banks are in a good position to be able to roll over or restructure these loans.
And then in that sense, there needs to be progress. And it is important that the government, together with the NBU, puts together such a strategy. There has been some work on it, but I think more needs to be done going forward.
QUESTIONER: Is there a critical percentage for these non-payments after which basically the system is going to collapse or – I mean didn’t you give this 30 percent stress-figure to the banks? Is there a critical point beyond which it’s unrepairable? Thank you.
MS. PAZARBASIOGLU: The banks have worked on diagnostic studies which have a stress test which looked at the depreciation of the currency, the decline in GDP, and so on, and the banks’ non-performing loans have been increasing, but they’re not at the same level as the stress test yet. And therefore, this effort to recapitalize them and to sit down and agree on terms that the borrowers can adhere to is critical in making sure non-performing loans do not exponentially increase.
Like you said, we have looked at many other countries’ experiences, and the key lesson from bank restructuring is prompt resolution and prompt diagnostics and promptly capitalize the banks. The possibility, as I said, of coming with terms which will lead to a voluntary restructuring, and therefore, allowing the non-performing loans to moderate is going to be possible.
I don’t think it’s possible to come up with a figure at which, you know, X percent in the system becomes impossible to salvage. I don’t think that’s a very meaningful discussion. But I think the key point is to make sure that the banks consistently, realistically look at how they are performing, what’s happening with the loan, and ensuring that the authorities and the NBU are taking the action and the measures necessary to address these challenges.
QUESTIONER: I just wanted to ask you whether you had a reaction to the size of the commitment that the EBRD and the World Bank announced this morning for central Europe in light of some of the sort of estimates that you have of the external financing needs in addition that Ukraine would need to, you know, for sort of an acceptable deficit figure to be arrived at and so on?
MS. PAZARBASIOGLU: My understanding of this is more support of the parent banks in order to allow their subsidiaries to be well capitalized and to avoid the situation that the previous questioner asked. It’s not necessarily budget support, per se, it’s more support to the banks, the parent banks, which will help their subsidiaries to address the challenges they are facing in the region.
QUESTIONER: I was wondering if there’s been any discussions regarding Ukraine’s currency, the difference between the official and the market rate?
MS. PAZARBASIOGLU: I think, yes, we have been discussing this with the Central Bank. As you know, the letter that was signed by the authorities, the idea is to make sure that the official exchange rate is in line with the market exchange rate, and this is one of the issues that we will be discussing with them going forward, especially in the coming weeks.
What the authorities have done is, they have introduced in November and December foreign exchange reserve auctions, where it’s a transparent and a good process. They have been going on with these auctions. But we have to also acknowledge that, in the case of Ukraine, in the last few months, there have been so many public statements about what the exchange rate should be or what it is and all sorts of announcements, that this has also triggered a major move towards foreign exchange.
And in that context, I think, as the Central Bank puts together these instruments and tries to stabilize the market so that you don’t see these drastic daily movements, it’s very important that the communication strategy is left to the Central Bank, that the others refrain from making all sorts of comments about what the exchange rate should be.
So I think if the Central Bank can achieve, and from the discussion today of the party, the President, the Prime Minister, the opposition party, as well as the Central Bank, the President did say that, going forward, it will be important to allow the institutions responsible to make the necessary announcements about the policy rates or the exchange rate policy and so on.
I think if that environment is reached, with the tools available to the National Bank, and confidence returning to the system, we should see much better practices going forward.
QUESTIONER: Could you maybe just speak more generally about how dire the situation is? I mean we can read into the figures, we can see what’s going on. I mean from your experience, I mean how dire is the situation in Ukraine? And speed seems to be the big issue here, and you know, how quickly they can access that external financing, as well, is another issue. Do you have anything to say on that?
MS. PAZARBASIOGLU: Well, I think the situation in the world is dire, so we live in the U.S., the situation here is very difficult. Compared to a few months ago, many of these countries are going through a difficult time. We can’t keep up with projections. The projections keep going down and down and down. So the situation, I would say, is dire globally. Even countries which were seen as immune from the crisis, it’s very clear that they haven’t been.
The exports of many of the Asian countries have been declining by 40 – 50 percent and so on. In the case of Ukraine, they were hit very early on because of the steel price, and steel price declined by 60 percent between July and October, and this is 40 percent of their exports and their major industry. So they were hit much earlier, and they actually reacted very quickly.
They came to the IMF, they put together a program and so on. And I think at the time, it looked like some of that was temporary, but it looks now that a lot of the problems, global financial problems, global economic problems, are going to be more protracted than were seen earlier on.
So, yes, that makes Ukraine’s challenges difficult. But we think that these challenges are manageable, that they can address these challenges. And as the President said today, the government keeps saying, the key is to agree on a strategy and to implement it.
As long as it’s done, I think the crisis will be manageable. But we should all accept and acknowledge it as difficult. It’s difficult for people, it’s difficult for the industry, because the last five years we were in a booming economy, and everyone could borrow, and all that has changed now.
We need to adjust to the new circumstances. But Ukraine has also a very flexible economy, with good crisis management, with good decision-making. We really think they should be able to overcome this crisis.
OPERATOR: And I have no questions in the cue at this time. I’d like to turn the call back over to management for any closing remarks.
MS. PAZARBASIOGLU: All right. Thank you very much for listening in. These are difficult times for everyone concerned. And I would like to end with a positive turn that we are very encouraged by today’s announcements by the authorities, and their solid determination to move the program forward, and also working together with the opposition. And as the IMF, we have been very supportive of Ukraine, and we will work very hard with them so that the crisis is not so hard on the country. Thank you.
MS. LOTZE: Thank you very much. We conclude the conference call here.
LINK: http://www.imf.org/external/np/tr/2009/tr022709.htm
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8. RECENT DEVELOPMENTS IN UKRAINE REGARDING FINANCIAL CRISIS
Four Ukraine leaders make some agreements; IMF issues a statement
RBS EM STRATEGY UPDATE - UKRAINE/IMF RELATIONS
By Timothy Ash, Head of CEEMEA research, Royal Bank of Scotland
London, United Kingdom, Sunday, March 1, 2009
LONDON - A couple of interesting developments over the past 24-48 hours in Ukraine which are I think worthy of comment.
[1] First it has been announced that Friday’s meeting between President Yushchenko, PM Tymoshenko, the speaker of parliament (Lytvyn) and a
representative of the main opposition party, Azarov (the former finance minister under Regions), agreed that the incumbent governor of the NBU, Stelmakh, should continue in his position until the presidential elections in January 2010.
The parties also agreed that politicians would refrain from talking about policy within the competencies of the NBU, e.g. exchange rate policy. Note that PM Tymoshenko’s BYT supported a vote in parliament, removing Stelmakh, whom she accused of malpractice.
Subsequently Yushchenko sought to block the move in the courts, with Stelmakh taking a very Soviet-style leave of absence in the interim on “sick-leave”. It appears that, given the severity of the crisis being faced by Ukraine, Stelmakh is back for the time-being.
Despite our, and indeed the market’s doubts, as to the competency of the NBU there does appear to be a benefit in having some continuity at the NBU in the current environment, especially given concern as to who could potentially replace Stelmakh.
[2] Second, and as we noted on Friday, the meeting convened by the President also agreed that the various Ukrainian parties would come up with a new anti-crisis programme, and draft a new Letter of Intent to the Fund, aimed at getting the IMF programme back on track, and securing the release of the stalled second credit tranche (US$1.8bn).
[3] Third, the IMF has published the transcript of the press briefing held by the IMF mission chief, Ceyla Pazarbasioglu, on its website (see www.imf.org). This makes interesting reading and gives some considerable insight into the state of relations between Ukraine and the IMF.
Herein some brief take-outs from this:
[3A] The general tone of the commentary from IMF officials remains very supportive; a view we also gleaned from the statement following the last IMF mission to Kiev; which failed to agree on the latest disbursement. We would contrast this with recent statement from IMF missions to Serbia, which have been much more abrasive – we would still argue that the policy environment is much better in Serbia than Ukraine – suggestive that the IMF is treating Ukraine somewhat more leniently.
[3B] Pazarbasioglu noted that the economic environment both globally, and specifically facing Ukraine has deteriorated significant from October when the programme was drawn up. At that time they had assumed a contraction in real GDP of 3%, but have subsequently revised this to minus 6% and the
indications are that this might still prove optimistic. The original programme worked on the assumption of a balanced budget, but this excluded around 4.5% in costs of bank recapitalisation/restructuring.
During the last review mission it appears the Fund was willing to allow a budget deficit of 1% of GDP, but the two sides were unable to reach a
compromise at that time. Partly this reflected the government’s passage of a budget which planned for a 3% of GDP deficit, based on the assumption that the economy would still manage to post slight growth. Given the much more difficult global environment, the Fund is now willing to accept a wider deficit, but this has to be based on more realistic growth, and thereby budget revenue assumptions.
The Fund is, however, only prepared to accept a wider deficit if it is funded in a non-inflationary way; e.g. by Ukraine finding new sourced of
external borrowing.
Interestingly, it appears that the Fund are not willing to put new money on the table, as Pazarbasioglu was keen to point out that existing funds are earmarked for balance of payments support; in our view, and as the current account moves into surplus (given the scale of the UAH correction, and the deflation in domestic demand) the problem is becoming more a fiscal than a balance of payments issue, so some flexibility on use of Funds by the IMF might be appropriate.
Interestingly, the Fund hinted that the US$5bn in financing (from Russia) mentioned by the prime minister should be more than enough to cover the budget financing needs; indeed it may require less than this. The key though was not to resort to printing money as in Ukraine current environment this would just likely feed through into exchange rate weakening and inflation.
[3C] The IMF also highlights the need to address deficits on the pension scheme and the structural deficit at Naftogaz; essentially this requires hikes in domestic gas prices to close the gap with import prices.
[3D] The Fund seems comfortable in the NBU’s management of FX reserves, and that it is meeting commitments as per the Net International Reserve target. The Fund commended the NBU for the introduction/use of daily FX options, but noted that it needed to improve its communication with the market – see comment above about too many policy makers feeling the urge to comment on exchange rate policy. Indeed, when it comes to exchange rate policy, less is often more when it comes to managing sentiment with respect to the market.
The IMF stressed the importance of respect for the independence of the central bank, and presumably took some assurances from decisions taken by
policy makers at Friday’s meeting convened by the president. In general our sense is that the IMF is now comfortable with the level of the UAH (as we
are) in term of its ability to help the adjustment on the BOP, but it is now more a question of confidence/management of expectations.
Clearly the currency can still go weaker, if confidence in the banking sector is not shored up, but from a trade/BOP position the 50%-odd devaluation should be enough to close the external financing gap.
[3E] The IMF appears reasonably happy with progress in bank recapitalisation/restructuring. The Fund commends the NBU for running the diagnostic test regime, with internationally recognised auditors, which covered the top-17 banks, accounting for two thirds of the banking sector by assets.
The process of recapitalising banks is underway, and the Fund appears pleased with commitments made from foreign banks (42% of banks by assets –
possibly more given VEB’s recent decision to buy Prominvestbank, the country’s 6th largest bank).
Pazarbasioglu noted that the sector is currently not at the point of reaching the stress points assumed in the basic diagnostic test. The Fund appears to be waiting for key legislative acts still around the bank recapitalisation programme; our understanding was that a new bill bringing together various legislative acts around the programme was to have been approved early last month but this seems to have fallen by the wayside.
Key herein is appointing a head of a bank restructuring agency, and indeed figuring out the funding structure for such an entity. Again this is something the Fund is probably looking for clarity over the next week or so.
[3F] Pazarbasioglu, herself a former sell-side investment bank analyst (she also served as a key official in Turkey’s highly successful bank restructuring “Istanbul approach” bank restructuring process after the 2000-2001 crisis), noted that CDS spreads (at 3,500-4000bps currently implying a very high probability of default) on Ukraine were currently “exaggerated” but accepted that this in effect limited Ukraine’s ability to fund itself from the market at present.
[3G] In commenting how difficult the current situation facing Ukraine is, interestingly Pazarbasioglu drew the wider comparison with problems in the global economy and Ukraine’s peers in the region and described the global situation as “dire”. We would absolutely share this view, and acclaim the IMF for finally accepting this fact; after all the prior focus on EM decoupling.
[3H] Another Fund mission is expected to return to Kiev over the next couple of weeks; probably the week after next, given that policy makers still have to come up with a new LOI next week, and presumably make some progress on the legislative front.
Reading the above, and after the round table of key policy officials from Friday in Kiev, our take-out is that there is now a reasonable chance of the resumption of IMF lending, which should begin to pare back market fears over near term default. Again we would stress that Ukraine’s situation is
manageable, albeit it requires policy makers to pull together, something which has been sadly lacking in recent months.
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9. UKRAINE: SIGNS OF POLICY ACTIONS REGARDING FINANCIAL CRISIS
RBS EM ALERT: UKRAINE - SIGNS OF POLICY
By Timothy Ash, Head of CEEMEA research, Royal Bank of Scotland
London, United Kingdom, Friday, February 27, 2009
LONDON - What a difference a credit rating downgrade makes. And, although we think a CCC+ is very harsh on Ukraine, and does not adequately capture the risks (neither does 5Y CDS at 3,500+), it does appear to have sparked the first signs of reconciliation and policy action in Kiev.
Indeed, for weeks Ukrainian politicians have had their attentions elsewhere, on domestic political dog-fights. This endured even through last months crucial IMF first review mission to Kiev, with the result being that the mission came and went without agreement on the disbursal of the latest US$1.8bn credit tranche.
A month on, after a two-notch credit rating cut to CCC+ by S&P, which even provoked a long piece in this week’s Economist, and also after the loss of
around US$2bn in reserves from the NBU, and perhaps Ukrainian politicians are getting the message.
This week President Yushchenko and Prime minister Tymoshenko both called for compromise, and for the various sides to put their differences behind them to ensure the IMF programme was put back on track and any talk of default was silenced. Yushchenko convened a meeting with his prime minister this
morning, also attended by the speaker of parliament, Lytvyn.
The parties seem to have agreed to set up a working group to ensure that outstanding problems with the IMF programme are resolved. Yushchenko has
proposed an anti-crisis programme to be submitted to the IMF by March 3. This will aim to maintain existing social programmes, but cut budget spending, while supporting manufacturing, conserving energy use and pushing forward with tax reforms. This seems ambitious.
Amongst other things, the IMF appears to have been uncomfortable with the government’s plan to run a budget deficit of 3% in 2009, versus the prior
commitment to run a deficit of just 1% of GDP. The Fund, and indeed the former finance minister (Pynzenyk) were also unhappy with the broad macro
framework upon which the budget was drawn, including the assumption that the economy would grow by 0.4% in 2009, with the CPI at 9.5%.
With industrial output down by close to one-third in January, most independent observers expect real GDP to contract by 8-10% YOY in 2009; press reports suggest the NBU is working on the assumption of a 9% YOY decline. The IMF’s latest forecasts assume a 6% GDP contraction in 2009, double their previous forecast.
The IMF resident representative and the desk chief for Ukraine have both given interviews to the press today. The key sticking point for the Fund still appears to be the budget in terms of signing off on the latest credit tranche. The Fund appears understanding that the economic environment has significantly deteriorated from the time the original SBA was framed.
They appear willing to sign off on a wider budget deficit – 3% of GDP, but the condition now seems to be that the government must find non-inflationary
financing of this deficit, i.e. unlike the consensus in the US/UK for printing money, Ukraine must avoid funding itself from the NBU; there is some logic herein as in Ukraine’s crisis situation printing money would surely just further undermine the UAH.
We understand that this means that the IMF is comfortable with the prospect of the government tapping other bilateral creditors, e.g. Russia, for additional financing. A preferred non-debt creating source would be privatisation receipts, with the government indicting that it is still interested to sell Ukrtelekom; albeit the question is whether this would be signed off by the president.
We also think that President Yushchenko would baulk at signing any deal which was underpinned by Russian funding. Presumably herein some politicking
is under way. By going thru the motions of opening the way for Russian funding, PM Tymoshenko has forced Yushchenko’s hand, i.e. if he isn’t prepared to accept Russian financing, he has to work to find budget financing elsewhere, or find alternative sources of financing. Ukrainian politicians will though have to make trade-offs. Arguably this is spreading the blame for any budget cuts which are forced as a result of the current process.
So where does this leave us?
Policy makers in Ukraine are going to have a “busy” weekend, to make the March 3 deadline. It will be interesting to see how the presidency, government and NBU “pull” together, given they have been pulling in separate directions over the past few months. Assuming that they are able to cook up something suitably palatable, an IMF mission is expected to return over the next couple of weeks, which in theory would open the way for the next loan disbursement next month.
Note that we still do not expect a sovereign default by Ukraine this year, as appears to be being priced in by the market; and increasingly inferred by some of the rating agencies. All sides (including the multilaterals) do seem to realise that getting private sector lending back on stream remains a priority – ultimately helping Ukraine to navigate itself out of the current crisis.
A sovereign default/restructuring would close international capital markets to Ukraine for the foreseeable future, and would make it much more reliant on official financing, which is surely in no-one’s interest.
It is encouraging that a credit rating down-grade, and heightened media speculation about default, is finally encouraging policy action.
As an aside note that the Economist expressed concern as to whether Naftogaz had the resources to pay for gas imports in February, as per the scheduled
payments by the first week of March. Our understanding is that Naftogaz has bought sufficient FX over the past few weeks to be able to make these payments in full, thereby avoiding another gas supply scrap with Russia/Gazprom.
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10. THE ODOR ACROSS THE ODER
What's gone wrong in Eastern Europe
Review & Outlook, The Wall Street Journal, NY, NY, Sat, Feb 28, 2009
To the global recession, add an emerging market meltdown. This time Southeast Asia and Latin America are ceding the dishonors to Eastern Europe. The old Soviet bloc shot up this decade. But then the credit crunch hit and capital fled, and it has spiraled down fast.
Three countries have already gone hat in hand to the International Monetary Fund, and more may be on the way. The lesson isn't about market failure or the downside of open borders for capital. It's about the importance of sound economic policy. From far away, the region east of the Oder River blends into a single space of collapsing living standards. But there is more than one Eastern Europe.
The Baltics and Balkans succumbed to the same bubblenomics as house-happy Central California or Iceland. Double-digit growth in Latvia, Lithuania and Estonia was fueled by debt and short-term capital inflows. Now these gains are being reclaimed, with GDP slated to fall by double digits in the Baltic states this year.
The scene of the crash looks familiar. Residential mortgage debt as a share of GDP in Latvia and Estonia climbed, respectively, to 33.7% and 36.3% -- worryingly high because a lot is denominated in foreign currency, though still not as high as Iceland's 121%.
The government in Latvia, a regional banking hub, fell last week after the IMF imposed austerity measures. Standard & Poor's downgraded its debt to junk; Romania is the other noninvestment grade member of the European Union. In Russia, Vladimir Putin spooked investors with his assault on property rights, and the collapse in oil prices did the rest last year.
The Moscow stock market fell further than any other in the world, straining companies that borrowed heavily overseas. For now, Russia has deep enough reserves to avoid a repeat of its 1998 default-devaluation.
UKRAINE ISN'T AS FORTUNATE
Ukraine isn't as fortunate. It suffered when prices for its chief export (steel) fell while its chief energy input (natural gas) rose. Though a vibrant democracy, Ukraine isn't blessed with a mature political class able to put its economy on stable footing. The IMF has stepped in there, as it has in Hungary.
Elsewhere more virtuous behavior has partially shielded countries with stronger fundamentals. The Czech Republic and Poland avoided the worst of easy-money mania and attracted capital for direct investment, often in export industries, that can't flee at the first hint of trouble. Their economies have made the transition from communism to a market economy built on the rule of law.
But in a global downturn, they're also seeing growth fall and unemployment rise. The Polish zloty has dropped 15% against the euro this year, the hardest hit of the non-euro EU currencies. The Czech koruna is down as well on (by most accounts, exaggerated) fears about mortgage debt and current account difficulties. Tainted by association with an ugly neighborhood, the Poles and Czechs now better realize that safety from currency attacks can only come with the euro.
The EU needs to keep close watch, what with Western European bank exposure to the region at $730 billion. On Sunday, the European Union will discuss ways to prop up weakened financial systems and get credit flowing. (Sounds familiar to an American.) The bloc's bright idea is to double funding for the IMF, which can help with emergency cash as long as it leaves its antigrowth ideas in Washington.
After the global boom, the bust is hitting all -- but not equally. The worst affected in Eastern Europe repeated mistakes made in Asia and Latin America in previous crises. It's a painful, but potentially useful, lesson.
LINK: http://online.wsj.com/article/SB123578504639298537.html
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11. RUSSIA TOPS STOCK GAINS, STRENGTHENING PUTIN AS UKRAINE TUMBLES
Ukraine needs foreign funds to close its $12.3 billion current-account deficit
By Emma O’Brien & Laura Cochrane, Bloomberg, NY, NY, Mon, Mar 2, 2009
LONDON/MOSCOW - Russia, the worst-performing major stock market in 2008, was Europe’s best last month as the ruble rose and reserves stabilized. Every neighboring market crumbled.
The Micex equity index climbed 6.6 percent in February as the world’s second-biggest oil producer stopped speculators from driving down the ruble and depleting its $382 billion of foreign exchange reserves. In Ukraine, the central bank’s holdings fell 24 percent since August and the benchmark PFTS Index lost 21 percent last month. Latvia’s OMX Riga Index dropped 8 percent.
While Russia’s government said the economy will contract for the first time in a decade and currency reserves are down 36 percent from August, the nation’s relative strength is raising Prime Minister Vladimir Putin’s influence over former Soviet states. Ukraine discussed borrowing $5 billion.
Kazakhstan wants Russia to buy ailing BTA Bank. Belarus is asking for $3 billion in loans, on top of $2 billion granted last year. “Russia isn’t looking at a straight-line deterioration into oblivion,” said Kieran Curtis, who helps manage $800 million in emerging-market fixed-income assets in London at Aviva Investors Ltd. “It has enough liquid assets to take stakes in all kinds of things in the former Soviet states.”
Last year, international investors fled Russia after its war with Georgia, a 77 percent decline in the price of Urals crude, and the global credit crisis sent the Micex down 68 percent. Speculators targeted the ruble, driving it 30 percent lower against the dollar and 20 percent versus the euro. Bank Rossii spent $216 billion to keep the currency’s seven-month drop from turning into a rout.
DOWNGRADED
Standard & Poor’s cut Russia’s credit rating in December by one level to BBB, the second-lowest investment-grade ranking. The government expects to run a budget deficit of about 8 percent of gross domestic product this year.
The central bank steadied the ruble, which gained 0.5 percent against the dollar last month, by pledging to raise interest rates and curtailing loans that banks were using to bet against the currency. Investors anticipate government plans to provide $200 billion in loans and reduce taxes will bolster the economy and push up the Micex, which is down 66 percent from its record high in May.
Russia is “still better off than others, mostly because of the reserves,” said Beat Siegenthaler, chief emerging-markets strategist in London for TD Securities.
POLITICAL RIVALRY IN UKRAINE
Eighteen years after the collapse of the Soviet Union depleted Moscow’s power, Ukraine needs foreign funds to close its $12.3 billion current-account deficit after the global recession curbed demand for steel and international credit dried up. The currency, the hryvnia, dropped 45 percent against the dollar in the past six months. The country’s 22 percent inflation rate is the highest in continental Europe.
Ukraine estimates a budget deficit at 5 percent of GDP for 2009 and risks violating terms of a $16.4 billion International Monetary Fund loan agreement. Foreign-currency reserves fell 24 percent since August and are below the $30.2 billion the IMF required. The second portion of the credit, due in January, hasn’t been approved.
The country has also been weakened by the political rivalry between Prime Minister Yulia Timoshenko and President Viktor Yushchenko, who led the so-called Orange Revolution in late 2004 when the country’s pro-Russian government was peacefully overthrown.
Ukraine tried to increase ties with western Europe and the U.S., seeking membership to the North Atlantic Treaty Organization last year and the European Union. Russia shut off natural gas shipments through Ukraine over a price dispute in January.
PUTIN FLEXING MUSCLE
Now, the sinking economy is giving Putin, 56, the advantage. Timoshenko requested aid from Russia, the U.S., the European Union, China and Japan this year and Russia gave a “positive response,” she said Feb. 9. Yushchenko shut down what he called “unauthorized” negotiations for a loan.
“This crisis is the best opportunity that Russia’s had to rein in Ukraine and make sure nobody else moves in on their backyard for a long time,” said Chris Weafer, chief strategist at Moscow-based bank UralSib. Interfax news agency reported last week that Russia hasn’t started talks to provide a loan, citing Russian Finance Minister Alexei Kudrin.
Russia may be willing to draw on its reserves to prop up neighboring economies, said Ivan Tchakarov, an economist at Nomura Holdings Inc. in London. “Ukraine will require more than the $16 billion from the IMF, so they will need Russian money,” he said. “It’s the perfect time for Russia to flex its muscles.”
DEFAULT RISK IN UKRAINE
Russia’s foreign-currency debt is rated eight levels higher than Ukraine. S&P cut Ukraine’s credit rating by two levels last week to CCC+, seven below investment grade and the lowest in Europe. S&P also cut Latvia to below investment grade.
Investors demand a record 27.4 percentage points more in yield on Ukrainian government bonds than Russian, compared with a gap of 3 percentage points six months ago, according to JPMorgan Chase & Co. indexes. As recently as 2003, Ukraine’s bonds yielded 2 percentage points less than Russia’s.
Contracts to protect Ukraine government bonds against default imply a 69.6 percent chance Ukraine will fail to pay its debt in the next two years and 91.8 percent odds in the next five years, according to CMA Datavision prices for credit-default swaps last week.
Kazakhstan is seeking to sell its 78 percent stake in Almaty-based BTA Bank, the country’s largest, to Russia’s government-controlled lender OAO Sberbank, Arman Dunayev, deputy chief of Kazakhstan’s state oil fund, said Feb. 2.
BELARUS, KYRGYSTAN
Belarus, which borders Russia and Poland, has a $2.46 billion credit line from the IMF in addition to loans from Russia.
Kyrgyzstan got a $2 billion loan from Russia and was promised a further $150 million in economic aid on Feb. 3. The same day, Kyrgyzstan’s government announced it would shutter the military base the U.S. Air Force has used for supplying troops in Afghanistan.
“I welcome Russia’s efforts to try and create stronger economic linkages because for investors it’s stabilizing,” said Jerome Booth, head of research at Ashmore Investment Management Ld. in London, which manages $36 billion of emerging-market assets. “It’s looking for relationships it wants to solidify in the region.”
NOTE: To contact the reporters on this story: Emma O’Brien in Moscow at eobrien6@bloomberg.net; Laura Cochrane in London at lcochrane2@bloomberg.net. LINK: http://www.bloomberg.com:80/apps/news?pid=20601087&sid=aqjypgZ3wpUI&refer=home.
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12. UKRAINE: DEFAULT RISK LIES IN CORPORATE SECTOR
Oxford Analytica, UK, Thursday, February 26, 2009
EVENT: Standard & Poor's yesterday downgraded Ukraine's long-term sovereign foreign currency rating to CCC+, suggesting that the country is "currently
vulnerable to non-payment" of its external debts.
SIGNIFICANCE: As Ukraine's economic performance continues to deteriorate amid the global recession and worsening domestic conditions, the ability of both the state and the corporate sector to meet their external debt obligations is increasingly being called into question. Credit default swaps on Ukrainian-issued eurobonds stand at over 4,000 basis points, currently the highest cost in the world to insure sovereign debt.
ANALYSIS: Following the January release of a UN publication warning that Ukraine might be facing sovereign default this year, there has been no lack
of international speculation about the probability of such a scenario. Although the majority of domestic experts do not share this pessimistic forecast, recent developments have increased Western investors' and ratings agencies' concerns over the possibility of a Ukrainian sovereign default.
Indeed, recent statistics on Ukraine's industrial output, labour market and trade imbalance have darkened the country's overall economic outlook.
Deepening decline. Data on Ukraine's vast industrial sector was far worse than expected:
[1] According to the State Statistics Committee (SSC), in January, industrial output fell by over 34% year-on-year.
[2] This was the steepest rate of decline Ukrainian industry has ever experienced; the previous record was set in January 1994, when output fell by 33%
year-on-year.
[3] SSC data also show that Ukrainian industrial output has contracted consistently since last July, and has returned (in nominal terms) to production
levels experienced in late 2004.
Although the SSC has decided to publish data on Ukraine's GDP only on a quarterly basis, the National Bank of Ukraine (NBU) recently estimated that the economy contracted by a catastrophic 20% last month. If the NBU is correct, this would represent the worst economic performance Ukraine has experienced in its post-Soviet history.
Persistent trade deficit. Although imports of goods have continued to contract due to the sharp devaluation of the hryvnia, Ukraine's overall trade balance has remained firmly negative, thereby perpetuating rather than alleviating the domestic shortage of foreign currency:
[1] The Economy Ministry reported that in January -- even in the absence of usually large purchases of natural gas Ukraine's merchandise trade deficit
amounted to around 640 million dollars.
[2] While this is one-third less than the deficit recorded a year ago (975 million dollars), this was still not much of an improvement relative to results for the previous month (718 million dollars in December, the lowest monthly deficit in 2008).
[3] Furthermore, export revenue has continued to fall, and in January was only slightly more than half of December revenue (2.4 billion against 4.1 billion dollars, respectively).
[4] With the exception of grain, all Ukrainian exports contracted in January, with metals exports -- by far the single most important source of revenue -- dropping by nearly 45% year-on-year IMF uncertainty. Ukraine's dire economic circumstances have been worsened by the authorities' failure to secure the planned receipt of the second tranche of the IMF's stand-by loan.
The latest disbursement of the loan was supposed to take place by mid-February, but an IMF monitoring mission left Kiev without making any formal recommendation to the Fund's board of directors on whether to release the next 1.9 billion dollar tranche.
According to the mission, it has yet to complete discussions with the Ukrainian authorities, as a few key issues remain "outstanding", including the size of the 2009 budget deficit. The IMF is almost certainly concerned by Prime Minister Yulia Tymoshenko's government's decisions to adopt a budget that envisages a deficit of almost 3% of GDP and not to undertake any comprehensive fiscal reforms for the time being.
As a result, the IMF has (at best) postponed further disbursements to Ukraine, which may be harming the country's reputation among international investors and lenders.
Default prospects. Nonetheless, despite dismal economic performance and persistent political chaos, the situation with Ukraine's external debt is not necessarily critical:
[1] State debt. According to the Finance Ministry, Ukraine's external state and state-guaranteed debt stood at 18 billion dollars as of January 1 (11.2 billion and 7.6 billion dollars, respectively). Nearly half of that sum -- around 8.2 billion dollars -- is owed to international organisations such as the IMF, the World Bank and the European Bank for Reconstruction and Development. Given that the country's nominal GDP in 2008 totalled over 900 billion hryvnia, or around 150 billion dollars at the-then official exchange rate, total external state debt was equivalent to only 12.6% of GDP.
Most macroeconomic standards suggest that a state's debt-to-GDP ratio is problematic if it exceeds 50-60%. Not surprisingly, the Ukrainian government
has repeatedly cited Ukraine's low debt-to-GDP ratio as solid evidence that the country simply could not default on its sovereign debt in the near term.
Furthermore, Ukraine's sovereign debt repayments for 2009 total only 1.7 billion dollars (mostly in eurobonds), and this sum appears to be manageable, even accounting for increasing strain on the state's limited fiscal resources.
[2] Corporate debt. However, the total external debt of Ukrainian corporations is five times larger than the country's sovereign debt. The Economy Ministry has estimated that by the end of 2008, total external corporate debt reached 89.7 billion dollars, having declined by around 1.5 billion dollars in the fourth quarter as a result of scheduled repayments. This year, Ukrainian corporations will need to pay much more on their external debt obligations -- close to 5.2 billion dollars:
[2A] Repayments are expected to peak in the third quarter of 2008.
[2B] Roughly 70% of debt repayments due this year come from banks, in the form of payments on eurobonds (around 1.1 billion dollars) and syndicated
loans (almost 2.6 billion dollars).
[2C] The most indebted banks in Ukraine are (in order of the total size of their debts): Alfa Bank, Raiffeisen Bank Aval, UkrSibBank, Bank Forum,
Pryvatbank, First Ukrainian International Bank and Finance and Credit Bank.
[2D] With regard to eurobonds, the most immediate problem for some banks could arise if eurobond holders choose to exercise their right to require
pre-term repayments when issuers' ratings deteriorate.
[2E] Furthermore, a number of large commercial banks with foreign capital will have to repay a total of 5.7 billion dollars on lines of credit opened by their parent companies. These banks only face a serious risk of default if their parent companies withdraw financial support to Ukraine-based subsidiaries, thereby depriving the latter of debt refinancing opportunities.
CONCLUSION: In contrast with Ukraine's relatively manageable sovereign debt, banks and non-bank corporations are heavily indebted to foreign
creditors. This is where the real risk of default lies. However, if the Ukrainian authorities proceed with plans to recapitalise crisis-hit banks and enterprises in exchange for partial state ownership, at least part of this corporate debt may be transferred onto the state's balance sheets, potentially increasing the risk of sovereign default over the medium term. LINK: http://www.oxan.com/.
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13. STANDARD & POOR'S (S&P) DOWNGRADES UKRAINE TO CCC+
RBS EM ALERT - UKRAINE - S&P DOWNGRADES TO CCC+
By Timothy Ash, Head of CEEMEA research, Royal Bank of Scotland
London, United Kingdom, Wednesday, February 25, 2009
LONDON - S&P just cut Ukraine’s LT FC rating to CCC+ from B-. Not entirely surprising, given it was on negative rating watch, and the rating agencies
seem to be taking no chances when it comes to Ukraine; perhaps mindful of recent crises in Iceland et al.
The downgrade though contrasts with y/day’s EMTA session where most of the buy/sell side analysts still thought Ukraine would pay in 2009; they also
thought it unlikely that we would see an EM sovereign default this year; a view which we share. Still 5Y Ukraine protection at 4,000bps is clearly putting a high probability on default – so there is a dis-connect here between investors perceptions, CDS and the rating agencies.
It is worth looking at the S&P definition for a CCC+ rating:
“An obligation rated CCC is currently vulnerable to non-payment, and is dependent upon favourable business, financial and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation”.
Well it is fair to say that we are in an environment of unfavourable business, financial and economic conditions – bit of an under-statement herein.
In any event Ukraine is now rated on par with Pakistan and two notches above Ecuador (CCC-). Interesting that EMTA panellists also liked Pakistan – at
least with spreads in the stratosphere, investors are being paid for the risk seems to be the view. Indeed, these three credits are now the lowest rated credits out there. Iceland, by contrast, is still rated BBB- by S&P (get that?).
I would have thought that Iceland came quite close to falling within the same definition as above but then again I have been a long held bear on Iceland - always seemed like a pack of cards, and the shear size of the banking sector always seemed like it would ultimately sink the sovereign (Ukraine's banking sector assets/ GDP ratio is not much more than 100%, i.e. multiples lower than Iceland's).
Ukraine had a stock of public sector debt of US$24.6bn as of the end of 2008, of which US$19bn comprised external debt. Arguably you could add in
another US$5bn or so of quasi-sovereign liabilities (Naftogaz, Ukreximbank), which would give around US$30bn, equivalent to 30% of GDP (assuming an
exchange rate of 10, and a 10% real GDP contraction and inflation of 15% - arguably worst case, albeit this does imply a near halving in nominal US$ GDP in 2009).
Adding in IMF/official disbursements scheduled for this year, plus assuming an IMF-style cost of recapitalising the banking sector (11% of GDP – albeit
much of the cost is already been assumed by the foreign banks) and you still end up with a public sector debt/GDP ratio sub 50%. This does not suggest
still an insolvent sovereign, albeit as we have learned from the on-going crisis liquidity is key and obviously can end up undermining credit solvency.
The NBU indicated yesterday that they lost US$3bn defending the UAH since the start of the year, which suggests FX reserves fell to US$27.8bn
(according to the IMF gross reserves were US$30.8bn as of the end of 2008); they also suggested that the current account ran a surplus in January –
albeit the problems are clearly now on the capital account.
External liabilities falling due for the sovereign this year though amount to little more than US$3.5bn, which seem manageable still given the FX reserve cover. The NBU has lost around US$14bn, one third of the total, defending the currency since August last year, i.e. over the past 6 months. Over this time the UAH has lost more than 50% of its value, and we are seeing some benefit in terms of an improvement on the merchandise trade/current accounts.
A plus for the sovereign is that the lack of FX reserves/political discourse means that agreement is unlikely on extending a sovereign umbrella on corp
liabilities falling due, i.e. unlike Russia, aside from a small crew of systemically important domestically important banks. Corporates will have to
restructure their external liabilities where they lack FX, but the public balance sheet will not bear much of the pain herein.
Meanwhile, PM Tymoshenko y/day affirmed that she had no intention of defaulting on the sovereign external liabilities; willingness to pay sees to be strong. Admittedly, other politicians have warned that Ukraine is on the brink of default, including those close to President Yushchenko.
Talk is cheap though and we still doubt that a Ukrainian political leader is ready to allow default on their watch. Tymoshenko for her part still is eager to be seen as the business/investor friendly politician, and we doubt that she is ready just yet to throw the towel in on relatively modest sovereign external liabilities.
The government has also signalled that it expects the IMF missions to return to Kiev over the next few weeks and aims to get IMF lending back on stream
by March. Hopefully by then Ukraine will have a finance minister, relations between the President and prime minister will have come back from the brink,
and the MOF and NBU will be have a normal working relationship. Hopefully S&P’s move will concentrate minds in the cabinet of ministers, the
presidential palace, and the central bank.
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14. UKRAINE'S INSTABILITY THREATENS CRISIS, WEAKENS
ITS CANDIDACY FOR NATO, EU, WARNS COUNCIL ON
FOREIGN RELATIONS (CFR) REPORT BY FORMER U.S.
AMBASSADOR TO UKRAINE STEVEN PIFER
Council on Foreign Relations, Washington/New York, Tue, Feb 24, 2009
WASHINGTON/NEW YORK - Ukraine's political infighting and tensions with Russia threaten its path to stability and integration with the West, warns a new Council on Foreign Relations (CRF) Special Report. "A more divided Ukraine would be less able to formulate a coherent foreign policy course with which the U.S. government could engage; it could even be driven to reorient itself on a more Moscow-focused course," says report author Steven Pifer, a visiting fellow at the Brookings Institution's Center on the United States and Europe and former U.S. ambassador to Ukraine.
On the crucial NATO question, the report, "Averting Crisis in Ukraine," urges the United States to support continued Ukrainian integration with the alliance, though it recommends waiting to back concrete steps toward membership until Kiev achieves consensus on this point. "What happens to Ukraine will matter to Washington," says the report, sponsored by CFR's Center for Preventive Action (CPA).
It says that the U.S. administration, "should maintain the goal of Ukraine's development as a stable, independent, democratic, and market-oriented country, increasingly integrated into European and Euro-Atlantic institutions."
Pifer analyzes the country's difficulties related to domestic conditions-such as fractious politics, a deeply divided public opinion, and economic recession. He also examines Russia's increasingly assertive foreign policy-including issues related to the continued presence and eventual withdrawal of Russia's Black Sea Fleet, Ukrainian and European dependence on Russia's energy, as well as Ukraine's potential membership in NATO.
"The Kremlin believes that an unstable Ukraine is in its interest. Such instability makes Ukraine an unattractive political model for Russians as well as an unattractive candidate for NATO or the European Union," says Pifer.
The report encourages the Obama administration to adopt a strategy that includes:
[1] Restoring regular high-level dialogue. "The administration should restore a high-level channel with Kiev. ...This could ensure that bilateral problems
are resolved in good time and offer a channel to convey candid, even tough, political messages."
[2] Counseling Ukrainian leadership. "Washington should quietly counsel [President Viktor] Yushchenko on choosing his fights with Russia in a
difficult political year. ...Washington must ensure absolute clarity in Kiev as to how much support Kiev can expect if it gets into a confrontation with
Moscow."
[3] Targeting technical assistance to promote economic opportunities in Sevastopol. "Drawing on the United States' experience with military base
closures, U.S. assistance should help to generate economic and business opportunities in Sevastopol so that the local economy does not face potential
devastation by the Black Sea Fleet's withdrawal."
[4] Increasing technical assistance to promote energy security. "Ukraine's energy dependency on Russia creates a major vulnerability. Washington
should target technical assistance to help Kiev adopt transparent arrangements for purchasing and transiting natural gas, expand domestic sources of
energy production, and allow energy prices within Ukraine to rise to market levels to promote conservation and greater domestic energy production."
[5] Supporting NATO integration. "The Obama administration should continue to support Ukraine's integration into NATO. However, given the
political turmoil in Kiev and allied reluctance to approve a membership action plan (MAP)," the administration should wait to support Ukraine's MAP
until it achieves "a greater degree of internal coherence on the NATO question, and [also builds] support among the elite and broader population."
For full text of the report, visit: http://www.cfr.org/content/publications/attachments/Ukraine_CSR41.pdf
Council for Foreign Relations Special Reports (CSRs) are concise policy briefs that provide timely responses to developing crises or contribute to debates on current policy dilemmas. CSRs are written by individual authors in consultation with an advisory committee. The content of the reports is the sole responsibility of the authors.
CFR's Center for Preventive Action (CPA) seeks to help prevent, defuse, or resolve deadly conflicts around the world and to expand the body of
knowledge on conflict prevention.
The Council on Foreign Relations (CFR) is an independent, nonpartisan membership organization, think tank, and publisher dedicated to being a
resource for its members, government officials, business executives, journalists, educators and students, civic and religious leaders, and other
interested citizens in order to help them better understand the world and the foreign policy choices facing the United States and other countries.
LINK: http://www.cfr.org/publication/18423/averting_crisis_in_ukraine.html
NOTE: Steven Pifer serves as a Senior Advisor to the U.S.-Ukraine Business Council (USUBC), Washington, D.C., www.usubc.org.
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15. UKRAINE TEETERS AS ITS CITIZENS BLAME BANKS AND GOVERNMENT
By Clifford J. Levy, The New York Times, NY, NY, Monday, March 2, 2009
KIEV, Ukraine — Steel and chemical factories, once the muscle of Ukraine’s economy, are dismissing thousands of workers. Cities have had days without heat or water because they cannot pay their bills, and Kiev’s subway service is being threatened. Lines are sprouting at banks, the currency is wilting and even a government default seems possible.
Ukraine, once considered a worldwide symbol of an emerging, free-market democracy that had cast off authoritarianism, is teetering. And its predicament poses a real threat for other European economies and former Soviet republics.
The sudden, violent protests that have erupted elsewhere in Eastern Europe seem imminent here now, too. Across Kiev last week, people spoke of rising anger about the crisis and resentment toward a government that they said was more preoccupied with squabbling than with rallying the country.
The sign held by Vasily Kirilyuk, an unemployed plumber camped out with other antigovernment demonstrators here in the past week, summed up the pervasive frustration: “Get rid of them all,” it said. Mr. Kirilyuk did not hesitate to take that further. “There will be a revolt,” he said. “And people will come because they are just fed up.”
Mr. Kirilyuk, 29, was standing in the same central square where throngs in 2004 carried out the Orange Revolution, a seminal event that brought to power a pro-Western government in Ukraine. He said he was a fervent supporter then of the protesters, but now he and a few dozen others who have set up tents here are demanding that the heroes of that revolution step down.
It is not hard to understand why world leaders are increasingly worried about the discontent and the financial crisis in Ukraine, which has 46 million people and a highly strategic location. A small country like Latvia or Iceland is one thing, but a collapse in Ukraine could wreck what little investor confidence is left in Eastern Europe, whose formerly robust economies are being badly strained.
It could also cause neighboring Russia, which has close ethnic and linguistic ties to eastern and southern Ukraine, to try to inject itself into the country’s affairs. What is more, the Kremlin would be able to hold up Ukraine as an example of what happens when former Soviet republics follow a Western model of free-market democracy.
“Ukraine is a linchpin for stability in Europe,” said Olexiy Haran, a professor of comparative politics at Kiev Mohyla University. “It is a key player between the expanding European Union and Russia. To use an alarmist scenario, you could imagine a situation in Ukraine that Russia tried to exploit in order to dominate Ukraine. That would make for a very explosive situation on the border of the European Union.”
That Ukraine can cause problems for Europe was highlighted in January when Ukraine engaged in a dispute with Russia over how much it would pay Russia for natural gas, as well over gas transport to the rest of Europe. The Kremlin shut off the gas for several days, and some European countries went without heat. The Kremlin also shut off gas to Ukraine in 2006 in a pricing dispute.
While Ukraine’s economy is dependent on exports of steel and chemicals, which have plummeted, the crisis has cut deeply because people are disillusioned with the government.
President Viktor A. Yushchenko, a leader of the Orange Revolution, who garnered attention around the world in 2004 when his face was scarred in a poisoning episode, is so widely scorned that a recent poll found that 57 percent of people wanted him to resign.
His rivals have also lost popularity, as the public has become exasperated by years of political bickering. In February, the International Monetary Fund refused to release the next installment of a $16.4 billion rescue loan to Ukraine because the government would not adhere to an earlier agreement to pare its budget. Around the same time, Ukraine’s finance minister resigned, saying that the job had been “hostage to politics.”
On Friday, the monetary fund projected that Ukraine’s economy would shrink by 6 percent this year, and said that it was continuing to work with the government to find a way to disburse the rest of the rescue loan.
A presidential election is coming, probably to be held next January, and this prospect is making politicians, especially Prime Minister Yulia V. Tymoshenko, reluctant to adopt an austerity program that might alienate voters.
Mr. Yushchenko and Ms. Tymoshenko were pro-Western allies during the Orange Revolution, but have bitterly feuded since then, and he fired her once. A third rival, Viktor F. Yanukovich, a former prime minister who heads an opposition party that favors closer ties with Russia, also wants to be president.
On Friday, Mr. Yushchenko and Ms. Tymoshenko held a public meeting in an effort to demonstrate that they were working together. Mr. Yushchenko said he wanted “to show the readiness of all sides to take political responsibility for decisions which today are not easy.”
Even so, the two did not announce further anticrisis measures. All over Kiev have been signs that tensions are building. On the city’s outskirts, more than 200 tractor-trailer rigs were parked Thursday, their drivers threatening to block roads if the government did not help them with their debts, which they said were caused in part by the drop in the value of Ukraine’s currency, the hryvnia. The truckers dispersed Friday, only after the government said it would try to address their demands, but they said they would be back soon if they were ignored.
“The government is to blame for all this,” said a trucker, Viktor V. Zarichnyuk, 26, who had been at the protest for 12 days. “We want the government and the national bank to agree that the money allocated by the International Monetary Fund, at least part of it, should go to regular people.”
At a branch of the Rodovid Bank across town, a tense crowd gathered Friday morning. The bank, close to failing, was allowing withdrawals of only $35 a day. And so people, some of them pensioners fearful for their life savings, have been trooping each day, ever more aggravated, to try to get what they can.
“Every day we come here — it’s insulting — in the cold and line up,” said Alevtina A. Antonyuk, 58, an engineer. “They are nothing at this bank but a bunch of thieves.”
Who is to blame, she was asked. Before she could answer, Dmitri I. Havrilkiv, 78, a retired crane operator, interrupted. “The government has to be replaced,” he shouted. “They just can’t handle it!”
LINK: http://www.nytimes.com/2009/03/02/world/europe/02ukraine.html?ref=world
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16. EU REJECTS A RESCUE OF FALTERING EAST EUROPE
By Charles Forelle, The Wall Street Journal, New York, NY, Mon, Mar 2, 2009
BRUSSELS -- European Union leaders, led by German Chancellor Angela Merkel, rejected a call by Hungary for a sweeping bailout of Eastern Europe, as the bloc struggled to find consensus on an approach to the spiraling financial crisis at a summit Sunday.
The global recession has greatly strained the bonds holding together the 27 nations that now make up the European Union, formed in the wake of World War II, and poses the most significant challenge in decades to its ideals of solidarity and common interest.
Ms. Merkel said she couldn't see the need for a broad grant of aid to Eastern Europe. "The situation is very different" in Europe's economies. "We cannot compare Slovakia nor Slovenia with Hungary," she told reporters.
Hungarian Prime Minister Ferenc Gyurcsany, who proposed a bailout package of up to euro190 billion ($240.84 billion), warned that without aid a "new Iron Curtain" would descend on Europe and again separate East from West. Hungary has been battered by declining demand for its exports and a plummeting currency -- straining Hungarians who borrowed in euros to buy houses that have now sunk in value.
The summit was originally called by Czech Prime Minister Mirek Topolanek to discuss concerns about rising protectionism in stimulus plans being proposed by individual nations. With the recent collapse of the government in Latvia, Eastern Europe's growing problems became the main focus. But leaders left Brussels with few concrete decisions and no indication that the richer EU states of Western Europe would be white knights for the East.
Consensus was hard to find even in Eastern Europe: leaders of relatively stronger countries -- fearful of appearing weak and being tarnished by international markets to which they need access for borrowing -- split with their neighbors over the wisdom of bailouts.
"Our position is that we must differentiate between countries that are in difficulties and those that are not," Polish Finance Minister Jacek Rostowski said. Poland, which benefited from years of healthy economic growth, is in better shape that some of its more-indebted neighbors. But it has seen a substantial fall in the value of its currency as investors scramble out of the region.
Hungary also proposed speeding up adoption of the euro -- now generally used by the Western European countries -- in the East. Strict EU rules meant to maintain the euro's strength require that countries have strong fiscal positions before adopting the common currency. That has left out Eastern European nations grappling with budget deficits, inflation -- or both.
The fall of Iceland -- whose banks failed in part because Iceland's currency collapsed -- has reinvigorated calls by a number of countries to make it easier to join the safety and stability of the euro.
But both the bailout and calls for Eastern European countries to join the euro sooner were coolly received by Western European nations. Ms. Merkel and French President Nicolas Sarkozy both separately suggested that Eastern countries should look elsewhere -- to the International Monetary Fund, for instance -- for help.
Behind the tensions: The recession has struck the 27 EU nations with widely varying force. Large and steady economies such as Germany's are facing an inevitable slowdown, but smaller peripheral states such as Latvia, Bulgaria and even Ireland have been brutally whipsawed from an era of heady growth to shockingly fast decline.
The impact on Eastern Europe, which boomed in recent years, has been especially intense. Latvia, which financed its own expansion by borrowing from abroad, is literally running out of money as the credit crunch shuts those spigots off. Last week, Standard & Poor's cut Latvia's credit rating to junk.
And, as some in Eastern Europe warned, deep pain could well emerge elsewhere. All eyes are on Ireland, which is slashing public-sector pay as it scrambles to close a budget deficit that could reach nearly 10% of gross-domestic product. A protest last month in Dublin drew more than 100,000 people.
Other large countries, such as France and the U.K., face substantial domestic troubles and have little desire to persuade their populations to add the East's problems to their own.
The EU's disinclination to fund a regional bailout suggests that the IMF and other multilateral institutions will take on an even larger role in coming months -- a role that IMF officials have said they recognize. The IMF is looking to double its war chest for lending to $500 billion, and the EU is weighing whether or not to make a loan for that purpose.
Last week, the World Bank, the European Bank for Reconstruction and Development and the European Investment Bank said they would provide euro24.5 billion in financing for banks in Eastern Europe. The IMF has been active on Europe's periphery: Iceland, Hungary, Latvia and Ukraine have turned to the agency for aid.
Most critical was the cold shoulder from Germany, which, as Europe's largest economy and the one with most access to borrowing, would play the largest role in financing any aid. Germany, the EU's strongest economy, is unwilling to unwind its own fiscal discipline to pay for the spending excesses of others. Admitting countries with weaker finances could hurt the strength of the euro or push up inflation across the euro zone.
At present, 16 of the 27 EU members use the euro. In Eastern Europe, only Slovakia and Slovenia do. To join, countries must keep budget deficits, government debt and inflation below specified ceilings. The recession has complicated some of those aims, particularly as some governments take on more debt. Another requirement calls for countries to hold their currencies within a preset range to the euro for two years.
That has wreaked havoc on euro-adoption plans in Hungary and Poland, where currencies have tumbled. Of the 11 EU members that don't use the euro, only Denmark could be reasonably close to adopting it. The misadventures of Iceland have provided an ample demonstration of the safety the euro offers in a storm. The North Atlantic island is not an EU member, though it shares many EU rules as part of the European Economic Area.
Iceland's three big banks -- virtually the country's entire banking system -- had expanded abroad by borrowing heavily in euros and sterling. When the credit crunch cut off their funding and the Icelandic krona fell precipitously, Iceland found itself without enough foreign currency to bail out the banks, a situation possibly avoidable if Iceland had used the euro. All three banks collapsed, and some on the island are pushing for quick accession to the EU.
Mr. Topolanek of the Czech Republic, whose country is among the strongest in Eastern Europe, said "the EU is going to leave no one in the lurch." Mr. Topolanek also said leaders had agreed to have further discussions about the EU rules for euro adoption, but that there was "broad agreement" that "it would be an error to change the rules of the game now."
The EU resolved one contentious issue on the eve of the summit: It approved France's much-criticized plan to give €6 billion in low-interest loans to domestic car makers. The French plan had drawn howls of protectionism -- particularly from the Czech Republic, where PSA Peugeot Citroen SA makes small cars -- since it made the aid contingent on the car makers keeping French factories open.
NOTE: Peppi Kiviniemi, Leos Rousek, Gabriele Parussini and Leila Abboud contributed to this article. Write to Charles Forelle at charles.forelle@wsj.com.
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17. GAZPROM TO UKRAINE: PAY NOW OR PAY LATER
Kostis Geropoulos, New Europe, Issue 823, Brussels, Belgium, Sun, 1 Mar 2009
BRUSSELS - It is unlikely the European Union will face a new cutoff of gas supplies from Russia in March if Ukraine fails to pay its gas bills, the European Commission said. “I personally don’t think so. None of the parts want to have another crisis again, but it’s a fact that there are some financial problems on the Ukrainian side so we’ll see what happens.
They have until Saturday next week to pay (March 7),” Ferran Tarradellas Espuny, spokesman for EU Energy Commissioner Andris Piebalgs, told New Europe on February 26. Earlier on February 26, the Russian gas monopoly was considering cutting off gas supplies to Ukraine in a row over Naftogaz Ukrainy’s debts, Kommersant reported.
Concerns are growing at Gazprom that the Ukrainian gas distributor could miss a USD 400 million payment due by March 7, forcing Gazprom to cut off gas supplies to Ukraine on March 8.
Kommersant quoted a source as saying the head of Gazprom’s Finance Department, Andrey Kruglov, has expressed concern about the situation with payments by natural gas consumers in Ukraine. “If USD 400 million has not been paid by March 7, we will have to again switch off the gas to Ukraine March 8,” the source quotes Kruglov as saying at a meeting of the Gazprom management on February 24.
The situation follows an earlier gas dispute between Russia and Ukraine in January which sparked widespread shortages in the EU. The Gas War was finally resolved when Gazprom and Naftogaz signed a long-term gas supply contract. Ukraine will now have to pay market prices for its gas. According to the contract, Gazprom also has the right to demand 100 percent pre-payment for gas upon the first missed payment.
Naftogaz has been unable to collect overdue gas bills from customers who have been spoiled for more than a decade by low gas prices by numerous Ukrainian governments, which have, in cahoots with the Kremlin, manipulated gas prices for political reasons. Another aspect of Naftogaz payments to Gazprom is the additional pressure on the hryvnia that these payments will cause.
Asked by New Europe if the European Union was considering lending Ukraine the money to avoid another crisis, the EU energy spokesman said, “This is not something we are considering at this point in time.” Tarradellas Espuny confirmed that the EU and Ukraine plan to hold a conference devoted to Ukraine’s gas and transport system modernisation involving the EU representatives on March 23 in Brussels.
Russia could demand that Ukraine pay the debt by allowing Gazprom to purchase a share of the Ukrainian gas pipeline to Russia. “Gazprom has sets its eyes on our transportation pipeline to the EU for years,” a Ukrainian official told New Europe, talking on condition of anonymity. “There are likely to bring this issue up again,” he said.
The prospect of a repeat of January’s gas dispute with Ukraine, after Gazprom set the March 7 deadline “for arrears to be cleared, may temporarily boost the gas price in Europe and, along with it the price of Novatek,” Russia’s second largest gas firm, Chris Weafer, chief strategist at Moscow’s UralSib investment bank, wrote in a note to investors on February 27.
However, if Russian gas supplies to the EU were to be blocked once again, Ukraine might lose all credibility as a transit country. It may also give a coup de grace to Gazprom‘s reputation as a reliable supplier, hampering prospects for future EU-Russian energy cooperation. A deal on Russian-EU energy cooperation is seen as vital for Gazprom and the Russian gas industry, which is experiencing increasing economic hardship in light of the global economic crisis and needs European investments to speed up projects like the Nord Stream pipeline to Germany and the Shtokman field in the Barents Sea.
Deputy speaker in the Russian State Duma, Valery Yazev, was quoted as saying by the press that Russia is ready to start elaborating on the new energy agreement which is meant to replace the hapless EU Energy Charter. Russia has long refused to ratify the EU document regulating relations between producers and consumers in Europe, arguing that it is not beneficial to Gazprom.
The Energy Charter has long been a stumbling stone in Russia-EU relations and is likely to be discussed in the upcoming Russian-European Union summit to be held in Khabarovsk in the Russian Far East on May 21-22.
LINK: http://www.neurope.eu/articles/93158.php
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18. RUSSIAN PRESIDENT TO OFFER IDEAS FOR NEW ENERGY CHARTER
To help resolve disputes such as gas conflict between Russia and Ukraine
The Moscow Times, Moscow, Russia, Monday, 02 March 2009
MOSCOW - President Dmitry Medvedev plans to present proposals for a new Energy Charter to help resolve disputes such as the gas conflict between
Russia and Ukraine that disrupted Europe's supplies in January.
The new accord should "address the concerns of producers and transit states," in contrast to the current "consumer-oriented" agreement, Medvedev said in an interview with Spanish media, according to a transcript posted on the Kremlin web site Sunday.
Russia has signed but not yet ratified the Energy Charter Treaty from 1994, which establishes rules for resolving disputes in the industry. Medvedev said he expected to present his proposals on Monday during a meeting of the Group of 20 industrialized and developing countries.
Gas supplies to more than 20 European countries from Russia via Ukraine were disrupted for almost two weeks in January amid a spat over prices and
transit fees. Russian lawmakers have cited disagreements over transit issues as a reason for not ratifying the current Energy Charter.
Under an agreement to end the gas dispute, Ukraine's state-run energy company, Naftogaz Ukrainy, is due to pay Gazprom $400 million for gas imports from Russia in February by Saturday. The company has said it will not miss the payment.
Should Ukraine fail to pay on time, Russia will only supply the fuel on "a prepayment basis," Medvedev said. "Of course, we hate turning back to the
previous scenario, this is certainly not our choice, but I can tell you frankly that we will have to act correspondingly if they refuse to pay," he said.
The January cutoff, which echoed a similar conflict three years earlier, led to renewed calls for the European Union to diversify its sources of energy away from Russia.
Medvedev criticized the reaction in Spain to a possible bid from LUKoil, Russia's largest nonstate oil producer, for a stake in Repsol. Claims that the proposal would endanger Spain's security were based on "stereotypes" and contradicted "the idea of a united Europe," he said.
"In this case, we are simply dividing all investments into good and bad ones, as well as investors into right and wrong ones, which is a new Berlin Wall, but this time in the economy," Medvedev said. "As far as I know, the companies are still in talks," he said.
A LUKoil spokesman declined to comment on the remarks. He asked not to be identified, citing company policy. Kristian Rix, a spokesman for Repsol, said by telephone that the company reiterated the statement made by chief executive Antonio Brufau on Feb. 26.
Any possibility of LUKoil buying a stake in Repsol is "history," Brufau told reporters that day. Medvedev also said Russia should avoid social unrest as the first recession in a decade approaches because improvements to the economy and welfare systems have made the country far more robust than it was in the 1990s.
LINK: http://www.themoscowtimes.com/article/1009/42/374904.htm
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19. UNAVAILABILITY OF CAPITAL & DEVALUATION OF THE
HRYVNIA ARE TOP PROBLEMS FOR UKRAINIAN COMPANIES
ACCORDING TO ERNST & YOUNG SURVEY
Natalia Partach, Senior PR Specialist, Ernst & Young, Kyiv, Ukraine, Tue, Feb 24, 2009
KYIV - The second Ernst & Young’s survey Impact of the Economic Crisis on Ukrainian Companies shows that 84% of the polled companies reported devaluation of the Hryvnia their top business issue. 66% are struggling with delayed payments by partners and clients; 54% are trying to reduce overall operating expenses while 53% are worried about the increased cost of financing (NOTE: for complete survey results see the attachment to this e-mail.)
Overall, 107 major Ukrainian and foreign companies working in Ukraine participated in the survey run by Ernst & Young with the support of the European Business Association from 30 January to 13 February 2009.
Analyzing changes that happened after September-October 2008, survey participants noted that most of all the following aspects of running business suffered: ability to access loans/capital (76% of the respondents), ability to invest in capital programs (70%), and cask position (69%). Meanwhile businesses also received new opportunities for development, though only 26% of the participants noted that.
Companies’ sales volumes continue to fall. 58% of businesses are already seeing lower quarter to quarter sales volumes in Q4 2008 than in Q4 2007.
Alexei Kredisov, Managing Partner of Ernst & Young, said “Today survey participants name decreased access to loans and capital and devaluation of the Ukrainian Hryvnia as their top problems.
"Here we witness Ukraine moving into the next phase of the economic crisis on the back of local finance and currency issues. Financing the business and cost reduction are at the top of the agenda.”
77% of companies reported that they will treat cost reduction with much more importance given the foreseeable market conditions. Businesses opt for traditional ways of reducing their costs: 80% of respondents reported they are reducing or have already reduced administrative expenses, 57% are negotiating better terms with landlords or property owners, 51% are streamlining their operations, and 47% are going through reductions in personnel.
Two-thirds of respondents are planning their 2009 budget in a currency other than Hryvnia. The Euro is the most popular currency, with 40% of respondents reporting they are going to use it. For budgeting and planning, the range of exchange rate used was surprisingly wide - between 7.50 and 13.20, the average was 10.40. 34% of businesses use the Ukrainian Hryvnia as a major budgeting currency.
Finally, 23% of respondents use the US Dollar for budgeting purposes. The exchange rates used range from 5.05 to 9.00, according to most of the respondents.
Adlai Goldberg, Business Advisory Services Leader with Ernst & Young Ukraine says, “Over the three month period since the last survey, profit outlook has sharpened, either significantly improving or worsening. Overall, the poll shows that the Ukrainian business community has become more pessimistic with regard to their business results in 2009.”
Most respondents (65%) anticipate lower profits in 2009 than in 2008: 39% of respondents anticipate moderately lower profits, while 26% expect profits to fall dramatically. Meanwhile only one-third expects the same level or even higher profits in 2009 than last year. (NOTE: See attachment to this e-mail)
ABOUT THE SURVEY
The second Ernst & Young questionnaire survey of the impact of the economic crisis on Ukrainian companies was conducted among companies working in Ukraine from 30 January to 13 February 2009. Overall, 107 companies participated in the survey; 18% were domestic enterprises and the other 82% were foreign companies working in Ukraine (multinational, European and regional).
50% of participants represent small businesses (up to 200 employees); 27% – medium businesses (200-1,000 employees); and big businesses (more than 1,000 employees) accounted for 23%. Companies that took part in the survey work in the retail and consumer products sector (18%), real estate and construction (13%), IT and telecommunications (13%), financial services (10%), and other areas. (NOTE: See attachment to this e-mail)
ABOUT ERNST & YOUNG
Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 135,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve potential.
In Ukraine Ernst & Young established its practice in 1991. Ernst & Young Ukraine now employs more than 570 professionals providing a full range of services to a number of multinational corporations and Ukrainian enterprises. For more information, please visit www.ey.com/ukraine.
CONTACT: Natalia Partach, Senior PR Specialist, Marketing and Business Development, Ernst & Young LLC, Khreschatyk Street 19A, 01001 Kyiv, Ukraine; Phone: +380 (44) 490 3000 ext 8714, Mobile: +380 (67) 659 0388 E-Mail: Natalia.Partach@ua.ey.com, Website: www.ey.com/ukraine
FOOTNOTE: Ernst & Young Ukraine is a member of the U.S.-Ukraine Business Council (USUBC), Washington, D.C., www.usubc.org.
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20. UKRAINE: EXTRA CHARGES ON IMPORT DUTY ON CERTAIN GOODS
Tax Newsletter, DLA Piper Ukraine, Kyiv, Ukraine, Thursday, February 26, 2009
KYIV - Further to our previous alerts, on 20 February the President [Yushchenko] signed law #923-VI introducing 13 percent extra import duty and simultaneously applied to the Constitutional Court of Ukraine with regard to its constitutionality. Additional import duty will apply to the following goods:
0202 – frozen beef
0203 – fresh, chilled and frozen pork
0206-0210 – meat food products and sub-products
0504-0506 – products of animal origin (including entrails, bones, floss and feather)
0509 – sponges of animal origin
0511 – other food products of animal origin
0808 – apples
1601-1605 – meat sausages, processed meat food products, homogenised products, fish and seafood
1701 – sugar
1702 – other sugar products
2204-2208 – wines, vermouths and alcohol
2701 – stone coal products
4203, 4303 – leather and fur clothing
57, 60-65 – carpets and other floor covering; clothes and other textile; footwear
6806 – mineral wool and insulation products
6901 – stone blocks
7201, 7301, 7321 – iron products, ferrous materials, heating
8401 – nuclear reactors
8414, 8418 – air and vacuum pumps, refrigerators
8501 – refrigerators
8516 – electric heaters
8702, 8703, 8704 – motor vehicles
Initially it was planned that the duty would apply to all goods except for critical import. In the final wording of the law a different approach was
adopted and the scope of the duty was narrowed to the above list of goods.
The law was published on 24 February 2009 and will come into effect after 10 days following the publication date. The duty will apply during the next six
months (this term may be prolonged if the country's balance of payment remains in its current critical state).
There still remains hope that the Constitutional Court would invalidate the new law. However, court hearings may last for several months, during which the customs will collect the duty from the importers. Even if the court declares the law unconstitutional, it is unclear whether the companies will be able to refund the duties already paid. Please do not hesitate to contact us should you have any questions on the above.
DLA Piper Ukraine – Tax team:
[1] Svitlana Musienko, Legal Director, Head of Tax, T +380 44 490 9564, E svitlana.musienko@dlapiper.com
[2] Yulia Logunova, Senior Associate, T +380 44 495 1787, E yulia.logunova@dlapiper.com
[3] Illya Sverdlov, Senior Associate, T +380 44 490 9575, E illya.sverdlov@dlapiper.com
[4] Dmytro Donets, Associate, T +380 44 490 9575, E dmytro.donets@dlapiper.com
[5] Lilia Sylvestrova, Associate, T +380 44 490 9575, E lilia.sylvestrova@dlapiper.com
DLA Piper Ukraine LLC is part of DLA Piper, a global legal services organization. International Law Firm of the Year 2008 in Ukraine Kyiv switchboard: +380 44 490 9575. The matters covered in this newsletter are intended as a general overview. This newsletter is not intended, and should not be used, as a substitute for taking legal advice in any specific situation. DLA Piper Ukraine LLC will accept no responsibility for any actions taken or not taken on the basis of this newsletter. Web: www.dlapiper.com.
FOOTNOTE: DLA Piper Ukraine LLC is a member of the U.S.-Ukraine Business Council (USUBC), Washington, D.C., www.usubc.org.
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21. DEFENSE TECHNOLOGY INC. (DTI), HUNTSVILLE, AL,
JOINS THE U.S.-UKRAINE BUSINESS COUNCIL (USUBC)
Providing defense technology, military aviation sales, parts & service
U.S.-Ukraine Business Council (USUBC), Wash, D.C., Thu, Feb 19, 2009
WASHINGTON, D.C. - Defense Technology, Inc. (DTI), Huntsville, Alabama, has been approved as a member of the U.S.-Ukraine Business Council (USUBC), the Executive Committee announced today, on behalf of the entire USUBC membership of over 100 companies and organizations.
DTI is a certified HubZone company founded in 1999. DTI provides the U.S. Department of Defense and the MODs of other NATO Governments with military hardware from the Former Soviet Union.
DTI is a registered arms trading company in Ukraine with 10 years of direct, in-country experience. DTI is also a registered defense company in Russia, Poland and the Czech Republic. DTI maintains satellite offices in Kiev, Moscow and Manama.
SUPPLIER OF AIRCRAFT AND MILITARY SPARE PARTS FROM FORMER SOVIET UNION
DTI is a leading supplier of Sukhoi, Mig, Antonov and Mil aircraft and associated spare parts. In addition to work performed in the United States, DTI is currently under contract to provide Antonov and Mi-17 spares to support the international coalition in Afghanistan. All aircraft supplied by DTI come with authorized air worthiness certificates, full documentation/passports, and reliable spare parts support.
DTI will be a member of the new USUBC Defense and Aerospace Committee. More information about Defense Technology, Inc. (DTI) can be found at http://www.defensetechnologyinc.com.
"USUBC is very pleased to have Defense Technology, Inc (DTI) as a new member" said Morgan Williams, Director, Government Affairs, Washington Office, SigmaBleyzer Emerging Markets Private Equity Investment Group, www.SigmaBleyzer.com, who serves as President/CEO of the U.S.-Ukraine Business Council (USUBC).
"USUBC has increased its membership four times over the past 26 months and now has a membership base of over 100 companies and organizations which allows USUBC to provide its members such as Defense Technology, Inc. (DTI) with a full-time operation and a significantly expanded program of work," according to USUBC's membership director Iryna Teluk. Even in difficult financial times companies realize the importance of joining together to continue working for the advancement of private enterprise in Ukraine," Teluk said.
NEWEST USUBC MEMBERS:
The last group of new USUBC members have included: 3M Ukraine; AeroSvit Ukrainian Airlines; Aitken Berlin LLP/ASIA; AnaCom, Inc; Asters law firm; CEC Government Relations; ContourGlobal Ukraine; Doheny Global Group; Edelman; Foyil Securities; IBM Ukraine; KPMG Ukraine; Kyiv Mohyla Foundation of America (KMF); Mars Ukraine; Microsoft; Pratt & Whitney - Paton; R & J Trading International; RZB Finance (Raiffeisen Group); SE Raelin/Cajo , Inc.; SoftServe, Inc.; Solid Team LLC; The Washington Group (TWG); Ukraine International Airlines (UIA); Vasil Kisil & Partners law firm; Winner Imports Ukraine (Ford, Jaguar, Land Rover, Volvo, Porsche), Zurich Surety, Credit, & Political Risk, and Defense Technology Inc. (DTI).
PRIVATE, MEMBER BASED TRADE ASSOCIATION
The U.S.-Ukraine Business Council (USUBC) is a private, non-profit, member-based, trade association working since 1995 to develop, strengthen and expand commercial ties and two-way trade between the United States and Ukraine. USUBC's strong membership base now includes over 100 large, medium-size and small companies and organizations.
Based in Washington, D.C., with a representative in Ukraine, USUBC promotes U.S. and Ukrainian business relations and private market-driven economic development through constructive engagement with U.S. and Ukrainian business, government, civil society and other leaders and through USUBC information, advisory, advocacy, and program services.
USUBC also analysis and promotes an ongoing series of policy, legal and regulatory changes which will enhance a stronger business environment, based on the rule of law, between the two countries and eliminate trade and investment barriers. For more information about USUBC go to www.usubc.org.
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22. UKRAINE: SIVERSKODONETSK AZOT ASSN, MAJOR PRODUCER
OF FERTILIZER, TO LAUNCH FIRST STAGE OF ERP SYSTEM
BASED ON MICROSOFT DYNAMICS AX
Ukrainian News Agency, Kyiv, Ukraine, Monday, February 2, 2009
KYIV - The Siverskodonetsk Azot Association (Siverskodonetsk, Luhansk region), a major producer of ammonia and nitrogen fertilizers, is intent to launch first stage of an ERP (Enterprise Resource Planning) system based on Microsoft Dynamics AX by July, reads the company statement, the text of which has been made available for Ukrainian News.
"Presently the project is being pre-tested for such modules as "Staffing Table", "Human Resources" and "Timekeeping and payroll preparations".These modules will be put into commercial operation on July 1," the statement reads.
A spokesman of the enterprise specified, Azot has not yet determined the exact list of all the system modules that will be installed at the enterprise, nor approximate day of completion of the system implementation.
He stressed, decision for these questions and for further project funding will be taken after operation of the introduced modules is evaluated. "The introduced modules are first step, a touchstone, it will take years to implement the system," the spokesperson marked. He did not specify the project costs though said it is quite expensive.
EnTechEco (Kharkiv) is Azot's partner in implementation of the system at the enterprise. Designed for midsize and larger companies, Microsoft Dynamics AX is a multilanguage, multicurrency ERP solution. With core strengths in manufacturing and e-business, there is an additional strong functionality for the wholesale and services industries. It covers production and distribution, supply chains and projects, finance and business analysis means, relations with customers and employees.
As Ukrainian News earlier reported, Siverskodonetsk Azot Association ended 2007 with a net profit of UAH 43.584 million. Siverskodonetsk Azot Association is a major producer of ammonia, carbamide, and ammonium nitrate. Worldwide Chemical LLC (a subsidiary of IBE Trade Corp of the United States) owns 60% of the shares in Siverskodonetsk Azot Association, which is a closed joint-stock enterprise, while the State Property Fund owns 40%.
FOOTNOTE: Microsoft Ukraine is a member of the U.S.-Ukraine Business Council (USUBC), Washington, D.C., www.usubc.com.
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U.S.-Ukraine Business Council (USUBC): http://www.usubc.org
Your voice for a strong, independent, democratic, properous Ukraine
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23. KRAFT FOODS UKRAINE LAUNCHES PRODUCTION OF 'I LOVE MILKA'
CHOCOLATE CANDIES WITH VANILLA, NUT AND STRAWBERRY FILLING
Kraft owns chocolate factory and potato chips/snacks factory in Ukraine
Viktoria Miroshnychenko, Ukrainian News Agency, Kyiv, Ukraine , February 15, 2009
KYIV - The Kraft Food Ukraine company has launched the production of 'I Love Milka' chocolate candies, the press service of the company said. The candies are of three types: with vanilla, nut and strawberry filling.
The new produce is presented in the following formats: with nut filling in the box of 155 grams (price recommended UAH 25.3); and with vanilla and strawberry filling in the box of 123 grams (20.08). According to the specialists, the economic fall inconsiderably affects the consumption of chocolate products, compared to other categories of foodstuffs.
As Ukrainian News earlier reported, Kraft Foods Ukraine owns the Ukraina chocolate factory in Trostianets (Sumy region), while the Vyshhorod affiliate of Kraft Foods Ukraine in Stari Petrivtsi owns a factory producing potato chips and snacks under the Liuks, Estrella, and Cerezos trademarks and a factory packaging coffee. In the Ukrainian market Kraft Foods Ukraine sells Carte Noir, Maxwell House, and Jacobs coffee brands. Kraft Foods Ukraine is an affiliate of Kraft Foods.
FOOTNOTE: Kraft Ukrainia is a member of the U.S.-Ukraine Business Council (USUBC), Washington, D.C., www.usubc.org.
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24. UKRAINE'S AES RIVNEENERHO ENERGY DISTRIBUTION
COMPANY TO INVEST UAH 32.28 MILLION IN 2009
Ukrainian News Agency, Kyiv, Ukraine, Monday, January 19, 2009
KYIV - Energy distribution company AES RivneEnerho is planning to invest in its development UAH 32.283 million (including VAT) in 2009. This investment volume is envisaged by the company's investment program endorsed by the National Electricity Regulation Commission.
Particularly, the company intends to channel UAH 22.74 million for construction, modernization and reconstruction of power grids and equipment, UAH 5.335 million for reduction of excessive electricity spending, UAH 0.519 million for introduction and development of the automatic control system.
Apart from this, the company is planning to spend UAH 0.914 million on information technologies, UAH 0.008 million on communication and telecommunication systems, UAH 2.275 million on purchase and modernization of transport means, and UAH 0.493 million on other things.
As Ukrainian News earlier reported, AES RivneEnerho had the intention to invest UAH 31.2 million in its development in 2008. The company ended 2007 with a net profit of UAH 28.130 million. In 2001, AES Washington Holdings B.V. (the Netherlands) purchased 75%+1 share in each KyivOblEnerho and RivneOblEnerho.
Later, the companies were renamed into AES KyivOblEnerho and AES RivneEnerho. AES Corporation runs 113 energy generating facilities and 17 energy distribution companies in 27 countries of the world.
LINK: AES is a member of the U.S.-Ukraine Business Council (USUBC), Washington, D.C., www.usubc.org.
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25. TAX ESSENTIALS UKRAINE....SHORT TAX GUIDE
DLA Piper Ukraine, Kyiv, Ukraine, Tuesday, February 24, 2009
KYIV - DLA Piper Ukraine has issued a new report entitled, "Tax Essentials Ukraine...Short Tax Guide." The entire report is published below. The contents are: Corporate Profit Tax; Withholding tax on foreign legal entities; VAT; Personal income tax; Payroll Taxes; Other Taxes; Tax assessments and penalties; Foreign investment tax structuring; Exchange Controls; Challenging tax environment; and the DLA Piper Ukraine - Tax Team.
OVERVIEW OF MAJOR TAXES
Corporate profit tax, including capital gains 25% *
Withholding Tax (Foreign legal entities) 15% *
VAT 20% *
Personal Income Tax 15%/30% *
Payroll Taxes around 41% **
* Different rates apply to some types of income, as explained in the relevant sections.
** Payroll tax base is capped at approximately UAH10k per month ($1.3K), therefore effective tax rate is less for midlevel and top salaries.
CORPORATE PROFIT TAX
Companies incorporated in Ukraine are recognised tax residents and taxed on their worldwide income. Permanent establishments of foreign entities are taxed on their Ukrainian-sourced income. Non-residents without a presence in Ukraine may be exposed to a withholding tax (see below).
The standard tax rate for residents and permanent establishments is 25%. Insurance companies apply a different tax regime, with either a 0% or 3% tax rate.
Tax accounting rules differ significantly from financial accounting rules. Many companies keep separate tax accounts and do not reconcile them with the IFRS or local statutory accounts. The effective tax rate is often higher than the nominal tax rate due to various restrictions in deducting operating expenses.
A tax year is a calendar year. Tax returns are filed quarterly, and an interim return is filed for 11 months. Tax is also paid quarterly and after 11 months. If a company pays out a dividend, an advance payment of corporate tax must be made simultaneously, at the rate of 25% on top of the dividend amount.
Tax losses may be carried forward indefinitely, according to the law. However, the government has introduced loss cutoffs and temporary limitations on several occasions, which may happen again in the future. Tax carry back is not allowed.
Anti-avoidance rules address transfer pricing, thin capitalisation and dealings with blacklisted tax havens. Yet, Ukrainian anti-avoidance measures are much less developed than those of Western jurisdictions.
WITHHOLDING TAX ON FOREIGN LEGAL ENTITIES
Dividends, interest and royalties paid to non-resident companies are subject to a 15% withholding tax. The same applies to capital gains, lease payments and certain types of service (engineering, agency). Income from transportation (freight) is taxed at 6%. A separate tax, payable at the expense of the Ukrainian entity, is levied on advertising fees (20%) and certain types of insurance income (12%).
Double tax treaties usually reduce or eliminate withholding taxes, but not the tax on insurance and advertising income. Ukraine has double tax treaties with other EU countries (excluding, however, Luxembourg, Ireland and Malta), as well as with the United States, several African, Middle Eastern and Asian countries, and CIS member states. Treaties are predominantly based on the OECD or UN model, however, the authorities seldom use the relevant
commentaries for their interpretation.
Tax reduction or relief under a treaty is granted upfront, provided that a valid tax residence certificate is available.
VAT
20% VAT applies to domestic supplies and imports. Export supplies are zero-rated. Crossborder services are taxed according to special rules that are not exactly in line with the standard approach adopted by the EU and other Western jurisdictions.
Exempt transactions include, inter alia, banking services, securities trading, medical services and supplies of pharmaceuticals, supplies of printed periodicals and transfer of land. VAT returns are filed monthly and the tax is payable within 10 days after the filing deadline.
The VAT refund procedure is extremely inefficient and may last several years. To restructure its multimillion debt, the Ukrainian government has recently proposed to convert outstanding VAT refunds into five-year bonds which can be traded.
PERSONAL INCOME TAX
Residents are taxed at a rate of 15% on their worldwide income. Reduced rates apply to income from mutual investment funds (5%), disposals of passenger cars (1%), disposals of real estate (0% or 1%), certain types of gift and inheritance (0% or 5%). An increased rate (30%) applies to income from lotteries and prize drawings. Some types of fringe benefit may be exempt from tax, if properly structured.
Non-residents’ income from Ukrainian sources is, in principle, taxed at 30%. However, a 15% rate applies to interest, dividends and royalties. The tax on salaries of expatriate personnel is also often reduced to 15%. Double tax treaties may offer more attractive tax rates.
Salaries and other income from employment are taxed on a pay-as-you-earn basis. Employers are responsible for the proper calculation of tax and timely withholding. For income which is not taxed at source, individuals must file annual tax returns by 1 April of the following year.
PAYROLL TAXES
Social insurance contributions are paid by employers and employees. Currently, there are four separate charges (for retirement pensions, temporary disability relating to illness or pregnancy, unemployment and work accidents). The government announced plans to replace these with a unified social tax. As of December 2008, the average total charge makes 41% of the total payroll, of which 37.5% is paid at the employer’s expense and 3.5% is withheld from the salary.
The rate of work accident insurance varies from industry to industry depending on professional hazard levels. The tax base for social insurance contributions is capped at 15 times the official living wage. Currently, the cap is UAH10k, or $1.3k at the December 2008 exchange rate. Therefore, the
maximum possible charge is slightly above $500 per person.
The companies that do not meet the 4% employment quota for disabled people pay an additional charge equal to one average salary for each vacant position within the quota.
OTHER TAXES
Real estate transfer taxes apply to the transfers of land (1%) and other immovable property (2%), and are payable prior to the deal notarisation. Transfers of passenger cars are subject to a 3% tax.
The purchase of any foreign currency through a bank account gives rise to a special currency conversion tax (referred to as the Pension Fund levy) withheld by the bank. The tax rate is currently 0.2% of the transaction amount. Excise taxes apply to imports and domestic supplies of cars, tyres, alcohol, beer, tobacco and fuels.
Import customs duties are charged on most types of commodity. Privileged rates apply to imports from the WTO member states. Goods imported from the CIS member states and Macedonia are exempt from duty under the free trade regime, with some exceptions. Export duties apply only to a few groups of commodities (oil seeds, livestock, raw hides and metal scrap).
Other important taxes include land tax, car owner tax, environmental charges and some industry-specific taxes. Small businesses and agricultural companies may opt for an alternative simplified tax regime.
TAX ASSESSMENTS AND PENALTIES
Most taxes are levied on a self-assessment basis. The penalties for understating tax liabilities and late payment are very high, sometimes reaching 100% to 200% of the unpaid tax. An alternative 5% self-assessment fine applies when a taxpayer adjusts the mistake prior to a tax audit.
Certain tax offences give rise to a pledge on the total assets of a person or a temporary arrest of the bank accounts and other assets. Tax reassessments are possible within the 1,095-day statute of limitation. However, no limitations apply for withholding taxes and for the underpayments caused by tax evasion.
FOREIGN INVESTMENT TAX STRUCTURING
Foreign companies usually structure their Ukrainian presence through a resident limited liability company or a non-commercial representative office. Doing business through a branch or a partnership has not been popular due to the uncertainties in their tax treatment. As an exception, partnerships (referred to as joint activity agreements) are often encountered in oil and gas projects, for non-tax reasons. The preferred holding jurisdictions are Cyprus and the Netherlands. Other treaty-protected countries are also used in tax structuring.
When purchasing shares of an existing Ukrainian company, a full-scale tax due diligence is recommended in all cases, as many companies would have material historical tax risks. An investment through an asset deal reduces the tax exposure. However, since capital gains on an asset transfer are subject to tax in Ukraine, sellers prefer to structure the transaction as a share deal, usually at an offshore level.
The tax incentives for foreign investment are very limited. The most important privilege is the full exemption from import customs duties which applies to in-kind capital contributions. There are also temporary incentives for certain industries (eg shipbuilding and aircraft) and incentives for energy-saving projects. Special economic zones existed in different parts of Ukraine but were abolished overnight in 2005.
EXCHANGE CONTROLS
Ukraine has a complex and restrictive system of exchange controls, which has been further tightened in response to the global financial downturn in order to prevent capital flight.
Some of the most important rules are listed below: Outward investment and lending, as well as some other crossborder transactions, may not be performed without a National Bank licence. Ukrainian companies and individuals are not allowed to keep their money outside Ukraine without a National Bank licence.
Foreign currency may not be used for payments between Ukrainian entities. Inbound investment should be registered to facilitate profit repatriation. In some cases, foreign investors are required to channel money via a special-purpose investment account in a Ukrainian bank.
Inbound loans must be registered with the National Bank prior to receipt. The National Bank establishes interest rate caps on such loans from time to time.
Service, licensing and lease agreements are subject to price controls when the contract value exceeds euro100,000.
Prepayments for imported goods and services may not exceed 180 days. Similarly, a delay in payment for exported goods and services may not exceed 180 days. Written contracts must be put in place for most types of crossborder transaction and the formal requirements for these transactions must be observed.
To purchase foreign currency, a company has to provide the bank with a set of supporting documentation, the scope of which is established by the National Bank.
CHALLENGING TAX ENVIRONMENT
The Ukrainian tax system has gone through many reforms over the last 17 years and is still evolving. The country has no tax code. Numerous tax laws and subordinate legislation are often contradictory, while the tax authorities are reluctant to issue official interpretations of the tax rules. Tax rulings are not binding and may be overruled by a senior tax authority or revoked. As a result, companies face continued uncertainty in their tax affairs.
A form-over-substance approach prevails in tax assessments. Excessive documentation is required to support routine expenses, and sometimes companies have to put considerable effort into explaining the rationale of more complex transactions to the authorities, where such transactions are not directly addressed in the law.
Tax audits are frequent and often result in unfair charges, as tax inspectors have informal collection targets for each audit. A non-transparent and inefficient court system makes the appeals against tax reassessments costly and time consuming.
Overall, the administrative burden of tax compliance is high. Ukraine has been rated 180th out of 181 countries surveyed by the World Bank Group for the ease of paying taxes.
At the same time, tax evasion is widespread and little is done to fight it. Corruption is often named as one of the major reasons behind low tax morale. In addition, tax authorities lack technical knowledge and professional skills to identify and eliminate tax fraud.
Despite all these challenges, Ukraine remains an attractive investment destination. By placing greater emphasis on the tax function and risk management, foreign investors can avoid tax pitfalls and achieve success with their Ukrainian projects.
DLA PIPER UKRAINE – TAX TEAM
[1] Svitlana Musienko, Legal Director, Head of Tax, T +380 44 490 9564, svitlana.musienko@dlapiper.com
[2] Yulia Logunova, Senior Associate, T +380 44 490 9587, lia.logunova@dlapiper.com
[3] Illya Sverdlov, Senior Associate, +380 44 490 9575, lya.sverdlov@dlapiper.com
[4] Dmytro Donets, Associate, +380 44 490 9575, ytro.donets@dlapiper.com
[5] Lilia Sylvestrova, Associate, +380 44 490 9575, lia.sylvestrova@dlapiper.com
DLA Piper Ukraine LLC is part of DLA Piper, a global legal services organisation. International Law Firm of the Year 2008 in Ukraine. Kyiv switchboard
T +380 44 490 9575
The matters covered in this guide are intended as a general overview. This guide is not intended, and should not be used, as a substitute for taking legal advice in any specific situation. DLA Piper Ukraine LLC will accept no responsibility for any actions taken or not taken on the basis of this guide. If you would like further advice, please contact the Tax Team at +380 44 490 9575. DLA Piper Ukraine LLC is part of DLA Piper, a global legal services organisation, the members of which are separate and distinct legal entities. For further information please refer to www.dlapiper.com/structure. A list of offices can be found at www.dlapiper.com. Ukraine Switchboard +380 44 490 9575.
FOOTNOTE: DLA Piper Ukraine LLC is a member of the U.S.-Ukraine Business Council (USUBC), Washington, D.C., www.usubc.org.
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