US-Ukraine Business Council

UKRAINE BUSINESS NEWS: FOUR ARTICLES
Why Ukraine Must Act Now To Implement an Anti-Crisis Plan; Tymoshenko Government Acts; Raisa Bogatyreva in Wash; SigmaBleyzer on Stock Market
April 15, 2009

1. WHY UKRAINE MUST ACT NOW TO IMPLEMENT AN ANTI-CRISIS PLAN
OP-ED: Martin Raiser,World Bank Director Ukraine, Belarus & Moldova
Nerkalo Nedeli #13 (741), Kyiv, Ukraine, Monday, 13-20 April 2009

2. UKRAINE ADOPTS REFORMS FOR IMF AID
Associated Press, Kiev, Ukraine, Tuesday, April 14, 2009

3. GEORGIA, UKRAINE SEEK US ASSURANCES ON RUSSIA
Georgian Foreign Minister Grigol Vashadze and Ukrainian Secretary of
National Security and Defense Raisa Bogatyreva in Washington
By Desmond Butler, Associated Press, Tue, Wash, D.C., April 14, 2009

1. WHY UKRAINE MUST ACT NOW TO IMPLEMENT AN ANTI-CRISIS PLAN

OP-ED: Martin Raiser, World Bank Director Ukraine, Belarus and Moldova
Nerkalo Nedeli #13 (741), Kyiv, Ukraine, Monday, 13-20 April 2009

The current global economic crisis is unprecedented and the recovery is likely to be slower than many had hoped. For Ukraine, the crisis has hit at a difficult time, politically, as the country looks towards presidential elections. Yet, the country cannot wait to tackle the crisis until a clear political mandate emerges from the polls.

It needs to find enough compromise to take a comprehensive set of measures to withstand the crisis and enable recovery. The next session of parliament starting April 13 offers the opportunity to take one step in that direction. It should not be squandered.

In October 2008, Ukraine was among the first countries to correctly seek and rapidly receive large scale financial assistance, from the International Monetary Fund, the World Bank, the European Bank for Reconstruction and Development as well as scaled up technical assistance from a range of bilateral donors.

Since then, some positive steps have been taken, but a lot remains to be done to implement a coherent package to deal with the crisis. At the outset, it is important to get expectations right: Ukraine is likely to suffer a deep recession. Given external imbalances and the lack of access to capital markets muddling through is not a viable strategy.

An anti-crisis action plan for Ukraine needs to contain four key elements:

     (i) adequate and continued implementation of macroeconomic policies under the program supported by the IMF,
     (ii) the re-orientation of budget spending towards growth enhancing investments in public infrastructure to support the real sector and employment,
              coupled with efforts to mobilize resources for the protection of the poor and vulnerable,
      (iii) a clear strategy to protect depositors and rehabilitate the banking sector, and
     (iv) reforms to enable business entry and attract private investment. All these elements are closely inter-linked and are mutually reinforcing.

Effective implementation of these elements will require the Government, the Presidency, and the National Bank of Ukraine to work closely together, and it will require support in parliament. Taking decisive first steps in these areas will help stabilize market expectations, ensure continued assistance from the International Financial Institutions and mobilize additional support from bilateral creditors.

With the IMF mission returning to Kyiv there are now good prospects for progress on the first dimension. Below, we outline the key challenges in the other three areas that would complement and support prudent macroeconomic policies and are at the core of the World Bank’s dialogue with the authorities.

On the fiscal side, Ukraine shares with many other emerging markets the predicament of the absence of financing to close a large fiscal gap. Based on World Bank assumptions for growth, inflation and resulting tax revenues, we believe the underlying fiscal deficit in the 2009 budget is significantly larger than the 3% of GDP assumed in the budget law, without counting the costs of bank recapitalization.

Measures adopted by parliament on March 31 contribute to closing this gap by some 0.6% of GDP. Additional measures to be considered by parliament, in particular to address the growing imbalance in the pension fund, could add another 0.3%.

These steps would signal Ukraine’s willingness to tackle its fiscal problems and could unlock external financing. More fiscal measures may be needed and in our view there is significant scope in Ukraine’s budget to reduce non-targeted spending and wasteful subsidies and tax exemptions to inefficient producers and wealthy consumers. But at this stage doing something is what counts. Parliament should support the proposed additional measures.

In the banking sector, the diagnostics for the largest banks have revealed significant capital shortfalls. Encouragingly, many private shareholders, including western banks have already started to recapitalize their banks. For systemically important banks whose shareholders are unwilling or unable to recapitalize, the state has a role to play.

The process by which the government would acquire control in these banks, ensure deposits are safe and tax payers’ money is spent prudently is now being elaborated. Its implementation will require consistent collaboration between NBU and the Government and its success will depend on careful design and communication to the public.

At the same time, insolvent banks that are not eligible for recapitalization need to be intervened fast to prevent the loss of confidence and the risk of contagion for the rest of the system. To do this job, NBU requires a larger arsenal of resolution tools that would allow depositors and good assets to be transferred to viable banks whilst carving out bad assets for subsequent liquidation, and existing shareholders to be written down in accordance with current capital valuations. To be able to do this, the legislation needs to be amended – this should be urgently considered by parliament.

Finally, the re-launching of structural reforms is critical for Ukraine to come out of this crisis in a robust and competitive position. Ukraine can no longer rely on cheap money to finance the modernization of its old industrial sector. Many projects that were viable before the crisis may no longer be so after it.

Thus Ukraine will need to go through a period of accelerated structural change. For this it needs to lower barriers for businesses to enter and exit, so that existing resources can be reallocated. Ukraine will need to set appropriate incentives for business to innovate and modernize through a predictable tax and regulatory system, through appropriate pricing policies for energy and other public services and resist the temptation to slow structural change through subsidies and tax breaks. And – as importantly – Ukraine will need to modernize its public services to become more efficient and to deliver better quality.

The structural reform agenda is long. However, in the short-run, a few critical pieces of legislation could go a long way to set the stage for an early recovery. Legislation now before parliament would reduce the number of permits and lower minimum capital requirements for private businesses.

The government has also prepared a new law on public procurement that signals Ukraine’s commitment to international standards of competition, whilst saving the state large amounts of money. This legislation should be adopted.

The international crisis has exposed the risks inherent in the growth model Ukraine followed during the boom years, as in many other countries in the region. Ukraine deserves international assistance to cope with the huge shocks that have unhinged this growth model. But to benefit from such assistance and emerge from the crisis with its economy poised for a return to sustained growth, Ukraine needs to accept and to tackle its own problems and shortcomings.

There is no time to wait.

LINK: http://www.mw.ua:80/2000/2020/65893/
----------------------------------------------------------------------------
2. UKRAINE ADOPTS REFORMS FOR IMF AID

Associated Press, Kiev, Ukraine, Tuesday, April 14, 2009

KIEV - Ukraine's Prime Minister Yulia Tymoshenko on Tuesday went around President Viktor Yushchenko and his supporters in parliament and unilaterally adopted anti-crisis reforms necessary to get more International Monetary Fund aid.

Tymoshenko's government took the dramatic measure after parliament again failed to adopt a package of laws needed to launch the reforms, this time because President Viktor Yushchenko's allies in parliament refused to support the vote.

Talks on receiving a second $1.9 billion installment of the $16.4 billion rescue loan have been under way for months, but the stabilization measures were never fully enacted due to Tymoshenko's bitter rivalry with Yushchenko and political turmoil ahead of the presidential vote set for the fall.

Tymoshenko said Tuesday's government decisions essentially substituted the necessary legislation and won't need parliament approval. The reforms are aimed at trimming government spending and include increasing pension fund payments for businesses and raising electricity and heating bills for well-off consumers. The IMF wants Ukraine to run a budget deficit not exceeding 3 percent of economic output.

There was no immediate comment from Yushchenko's office or from parliament, but the move was likely to prompt more infighting and turmoil.

Ceyla Pazarbasioglu, the head of the IMF mission to Ukraine, praised the move, even though it showed a lack of unity between the country's branches of power. "It's encouraging to see that progress is being made," she told reporters at a joint news conference with Tymoshenko.

Ukraine, which is suffering from a severe financial crisis, one of the worst in Europe, desperately needs the IMF money. Its economy shrank by nearly 30 percent in the first two months of this year, the national currency lost nearly half of its value against the dollar and nearly 1 million people are unemployed.
---------------------------------------------------------------------------------
3. GEORGIA, UKRAINE SEEK US ASSURANCES ON RUSSIA
Georgian Foreign Minister Grigol Vashadze and Ukrainian Secretary of
National Security and Defense Raisa Bogatyreva in Washington

By Desmond Butler, Associated Press, Tue, Wash, D.C., April 14, 2009

WASHINGTON, D.C. - Georgian and Ukrainian officials were seeking assurances from the Obama administration Tuesday that they would not lose out as the United States seeks greater cooperation from Russia.

Georgian Foreign Minister Grigol Vashadze was meeting U.S. Secretary of State Hillary Rodham Clinton, while Ukrainian Secretary of National Security and Defense Raisa Bogatyreva was meeting other top administration officials. The two visiting officials said they discussed documents signed during the final months of the Bush administration that outlined ways to deepen cooperation with the United States.

The meetings follow efforts by the Obama administration to improve Russian relations after years of tensions that peaked after Russia's invasion of Georgia in August.

In interviews with The Associated Press Tuesday, both Vashadze and Bogatyreva said they were confident the United States would continue its support for their aspirations to join Western institutions, including NATO and the European Union. They pointed to statements by the U.S. administration that it rejected Moscow's claim of a sphere of interest in their region.

As the administration moves to win cooperation from Moscow on key policy goals, including reigning in Iran's nuclear ambitions, Russia continues to bristle at the idea of NATO membership for the two former Soviet republics and U.S. military support of Georgia.

"It is very important to us that nothing takes place at the expense of the security of other countries," Bogatyreva said. Ahead of his meeting with Clinton, Vashadze said he did not see signs that Georgia was slipping down the list of U.S. foreign policy priorities.

Bogatyreva said U.S. officials, including national security adviser James Jones, had promised help in improving Ukraine's energy security and infrastructure. She said that Jones also had promised to send a team of economic advisers soon to assess how the United States can help support Ukraine's economic troubles.

Vashadze said that both countries remained opposed to Moscow's assertion of a sphere of influence. "Neither Georgia nor Ukraine nor our neighbors will ever accept this," he said.
-----------------------------------------------------------------------------

4. UKRAINE GOVERNMENT STILL NOT RECOGNIZING IMPORTANCE OF STOCK MARKET TO ECONOMY ACCORDING TO DIANA SMAKHTINA OF SIGMABLEYZER
Interfax-Ukraine, Kyiv, Ukraine, Tuesday, April 14, 2009

KYIV - Any improvement in Ukraine's investment climate is only possible if decisive and practical actions are taken to form a proper Ukrainian stock market, according to the director of investment company SigmaBleyzer, Diana Smakhtina.

Any serious investor, before coming to Ukraine, analyses the condition of its stock market, she said in a article published in the Dzerkalo Tyzhnya newspaper
"The main task that direct investors face before making an investment decision is to determine the capital gains on the return of the investment. Risks – industrial, regional, political – are taken into account. But before making decision on moving towards Ukraine, such an investor will first check what is going on at the stock market," she added. At the same time, she noted, the government does not yet recognize the importance of the stock market to the country's economy.

"The stock market in our country is perceived as something exotic, which has appeared and exists … because it part and parcel of a market economy. The connection of that market to the country's economy is not clear to the country's leaders," the expert said.

According to Smakhtina, analysts of the Ukrainian stock market closely monitor the processes occurring within the market and discover the laws of present securities circulation as they relate to the processes of the financial sphere and the real economy.

'Unfortunately, it looks like this is interesting … only to a narrow circle of specialists. These analyses find no serious reflection [of the state of the economy] in the anti-crisis programs that have been produced," the expert added.

According to her, even after the crisis, the position of the Ukrainian stock market will not change.

"For the state, the stock market is not a priority for development. It is still uncertain, as before, whether the stock market will be able to process the financial flows required by the economy after the crisis ends. And, accordingly, one cannot expect investments to come into Ukraine, despite all the measures taken to improve the investment climate," Smakhtina said.