In-Depth Ukrainian News, Analysis and Commentary
Sports, Government, and Politics, in Ukraine and Around the World
SigmaBleyzer Emerging Markets Private Equity Investment Group,
The Bleyzer Foundation, Kyiv, Ukraine, Monday, December 8, 2008
In the hangover of the credit crisis where neither Baugar nor Budapest are safe – the rescue business is seeing a comeback.
By Helia Ebrahimi, Telegraph, London, UK, Monday, 08 Dec 2008
Reuters, Kiev, Ukraine, Wednesday, December 3 2008
Deutsche Presse-Agentur, Kiev, Ukraine, Wednesday, Dec 3, 2008
By Geoffrey Smith, The Wall Street Journal, New York, NY, Wed, Dec 3, 2008
Commentary & Analysis: By Volodymyr Hrytsutenko
Professor of Current Ukrainian History, Lviv Franko University, Lviv, Ukraine
EPAM Systems, Lawrenceville, New Jersey, Monday, December 1, 2008
14. UKRAINE’S THREAT REDUCTION PROGRAM SUPPORTED BY U.S. NOW SUPPORTED BY $37
1. UKRAINE MACROECONOMIC SITUATION REPORT, NOVEMBER 2008
Monthly Analytical Report: By Olga Pogarska, Edilberto L. Segura
SigmaBleyzer Emerging Markets Private Equity Investment Group,
The Bleyzer Foundation, Kyiv, Ukraine, Monday, December 8, 2008
• Ukraine’s real economy has continued to perform well with a real rate of GDP growth of 6.9% yoy in January-September 2008. However, Ukraine’s
near term outlook has worsened substantially, although medium-term prospects remain good.
• Over the first nine months of 2008, the consolidated budget was in surplus of UAH 11.8 billion ($2.3 billion) or 1.6% of period GDP, backed by
above-target revenues and tight control over expenditures. With weak prospects of fully covering the planned financing gap and the likely shortfall in revenues through the rest of the year, the government started to revise their expenditure plans. As a result, the fiscal deficit is likely to be significantly below target.
• Following two months of inflation relief, consumer prices returned to growth, advancing by 1.1% month-over-month in September. Though inflation continued to decelerate in annual terms, government plans to adjust a number of service tariffs will notably hinder this process in the coming months.
• With rapidly widening trade and current account deficits, large external debt financing needs and high banking system exposure to credit and foreign
currency risks, Ukraine was and remains extremely vulnerable to adverse external shocks. On the back of heightened global financial instability since September, falling world steel prices and a weakening global economy, these risks started to materialize during September-October.
• Reflecting growing stress to the Ukrainian economy, major international rating agencies downgraded Ukraine’s sovereign rating.
• Despite the recent turbulences, the prompt government and monetary authorities’ response as well as gained support from international financial
institutions increases the chances that Ukraine may be able to weather the storm with relatively moderate pain.
ECONOMIC GROWTH
Buoyed by outstanding performance in agriculture, real GDP growth picked up to an impressive 10.4% yoy in August, bringing cumulative growth to 7.1% yoy. At the same time, the Ukrainian economy is likely to lose steam through the rest of this year and also 2009, courtesy of both external and domestic factors.
Resilient so far, Ukraine’s heavily export-oriented and external-financing-dependent economy looks increasingly vulnerable to the recent financial crisis. Weakening external demand has already manifested through plunging world commodity prices, while foreign investors’ flight-to-quality and risk aversion may dry up foreign capital inflows to emerging markets.
On the domestic front, lingering inflationary pressures and political instability, weaknesses in the domestic banking system, a rapidly widening trade deficit
and large private sector indebtedness subdue Ukraine’s economic outlook in the near future.
Already in September, real GDP growth slowed to 5.5% yoy on the back of weaker industry, domestic trade and construction. Cumulatively, however,
economic growth decelerated only marginally to 6.9% yoy, supported by strong value added growth in agricultural and the transportation and communication sectors.
Thanks to a 15-year record grain harvest, agriculture expanded by 15.7% yoy over the first nine months of the year. At the same time, due to unfavorable weather conditions in September, the harvest of corn, sugar beets and some other crops and vegetables turned out to be less successful than previously expected. This explains value added growth deceleration in January-September compared to an explosive 24.4% yoy increase in January-August.
Transportation and communication kept expanding at a robust 10.4% yoy over January-September, virtually the same rate as in 1H 2008, according to the revised State Statistics Committee data.
On the other hand, construction plunged by 10.3% yoy over the first nine months of the year, affected by tight access to credit. The industrial sector also
continued to decelerate and grew by only 5% yoy due to weaknesses in the global demand for iron, steel and chemical products. In particular, following
several months of deceleration, metallurgical production has been contracting in annual terms since August, in line with the sharp decline in world steel prices.
In September, output in industry fell by 17% yoy, driving cumulative growth below zero. October is likely to see another major decline in industry as a number of metallurgical producers announced production and employment cuts.
The depression in the metallurgical sector will exact a significant toll on the whole Ukrainian economy as the sector accounts for more than 45% of total
export revenues and about 25% of total industrial production. In addition, poor metallurgical performance will also affect a number of other industries
and sectors, including the extractive industry, machine-building, construction, and transportation.
Expectations that the new harvest will improve food processing performance did not materialize. Industrial production grew by a modest 2.2% yoy over the first nine months of the year, decelerating from about 10% yoy at the beginning of the year. Weak external demand was among the main reasons of worsening chemical industry performance.
Over the nine months, output growth in export-oriented chemical production slimmed down to 2.9% yoy compared to 9% yoy growth at the
beginning of the year.
After all, warning signs of economic weakness were already evident in the second quarter of 2008. In particular, investments advanced by only 6.3% yoy as tighter monetary policy limited access to banks’ credit. Private consumption growth decelerated to 13.3% yoy, down from almost 18% yoy in the previous quarter. A domestic trade slowdown to 9.4% yoy in January-September from 13% yoy in 1H 2008 foretells further weakening of domestic
consumption in 3Q 2008.
Moreover, while exports rebounded at a strong 9% yoy (up from less than 1% yoy in 1Q 2008), imports continued to outpace exports, expanding by a record high 25.6% yoy in 2Q 2008. Ukraine’s deteriorating current account balance puts pressure on economic growth and increases the country’s dependence on external capital flows.
On the back of easing steel prices, tight external and domestic credit markets amid large external financing needs, a cooling world economy and recent
turbulence on the domestic financial market (which is likely to cause a further credit squeeze and aggravate domestic banking sector weaknesses),
Ukraine’s near-term outlook has worsened substantially. Economic growth is forecasted to decelerate to 6.3% yoy in 2008 and enter a downturn in 2009.
At the same time, the country maintains a good medium-term outlook, supported by a large domestic market, great agricultural potential, a cheap and skilled labor force, good prospects for signing a free trade agreement with the EU and greater chances of reform acceleration (in part thanks to recently applying to the IMF financing).
FISCAL POLICY
Ukraine’s public finances remained in a good shape as the country ran a consolidated budget surplus of UAH 11.8 billion ($2.3 billion) though the end of
September, which is equivalent to 1.6% of period GDP. Public spending rose by a nominal 41% yoy over the first nine months of the year, underpinned
by higher spending on public wages and social transfers.
In particular, remuneration to public sector employees grew by a nominal 38.1% yoy, while current transfers to the population advanced by 48% yoy. Despite strong growth, fiscal expenditures were still below target mainly due to under-execution of capital spending. The government refrained from tightening social expenditures in view of the turbulent political environment and looming presidential elections (scheduled for early 2010).
At the same time, though expenditures notably increased, they were still below the targeted amount. According to the State Treasury, expenditures from the general fund of the state budget were under-executed by about 3%. Together with above-planned revenues, this secured a budget surplus for the period.
During January-September, consolidated budget revenues grew by 43.7% yoy in nominal terms over the first nine months of the year backed by a 53% yoy increase in tax receipts. As in the previous periods, value added tax proceeds, advancing by almost 70% yoy in nominal terms, were the main contributor to tax revenue growth over the period. Defined usually as the tax on consumption, impressive growth in VAT receipts this year is explained by high inflation, robust imports, and improved tax administration.
In parallel, however, the authorities started to accumulate VAT refund arrears, as it became clear in the middle of the year that the targeted amount for
VAT refunds, envisaged in the 2008 budget law, was significantly underestimated. In January-September, VAT reimbursement was 43% above the planned amount. According to expert estimates, VAT refund arrears amounted to UAH 11 billion (about $2 billion) at the end of September, up from about UAH 8 billion in the middle of the year.
However, the situation is unlikely to improve until the end of the year, as a reduction in arrears will require a budget revision, the likelihood of which looks quite low. At the same time, the accumulation of further arrears may lose speed substantially through the rest of the year given notable export weakening.
Execution of other taxes, particularly corporate and personal income taxes, has been good in January-September, as proceeds from these taxes picked up by a nominal 57% yoy and 38% yoy respectively. Despite current favorable budget performance, successful budget exercise through the rest of the year looks quite worrisome.
First, due to further projected worsening of economic performance through the rest of the year and government initiatives to introduce tax benefits for a number of industries affected by a sharp deterioration in the external environment, budget revenues risk being substantially under-executed.
However, above-target revenues and strict control over expenditures allowed the government to accumulate significant cash balances on its Treasury account (about UAH 16 billion at the end of September).
Second, the financing gap, targeted at about UAH 19 billion, or 1.8% of expected 2008 GDP, looks insurmountable. The budget deficit was planned to be financed by new government borrowings (both external and internal) and privatization proceeds.
Despite the greater reliance on domestic debt financing this year, Ukraine’s fiscal authorities still planned to raise UAH 8.1 billion ($1.6 billion) in foreign borrowing, including about $1 billion by placing Eurobonds, for which a road-show was conducted in June.
However, on the back of tight external credit markets and investors’ flight to safety, the government decided to shelve the bond issuance. At the same time, reliance on domestic debt issuance also was not very successful. Given frankly unattractive yields amid high domestic inflation, the authorities raised only UAH 1.4 billion into state coffers in January-September, or less than 20% of the targeted amount for this year.
And finally, government plans to receive UAH 8.8 billion ($1.5 billion) in the form of privatization receipts this year will not materialize. At the end of September, the accumulated privatization proceeds amounted to less than 4.5% of the annual target.
With the deteriorating prospects for an already slowing economy and the lack of targeted fiscal deficit financing, the government started to revise their expenditure plans. In particular, the President and the Cabinet of Ministers issued a number of Decrees, envisaging expenditure cuts on public administration.
Moreover, the government is likely to continue to tightly control expenditures through the rest of the year. This would mean moderate expenditure
loosening in the last couple of months. However, the year-end fiscal deficit may turn out to be significantly lower than previously expected.
Presented in September, the draft Budget Law for 2009 is likely to be recalled or significantly amended, as it was developed prior to financial stresses on both the external and domestic markets and deteriorated prospects for the next year. Moreover, the targeted deficit of UAH 17.4 billion ($3 billion), or 1.4% of GDP, is not in accordance with the government’s commitment to the IMF to maintain a balanced budget in 2009.
A prudent fiscal stance is considered the most effective measure to cool aggregate demand, tackle inflation and narrow the foreign trade deficit. Given the turbulent political environment, it looks like the 2009 budget law will be approved next year.
MONETARY POLICY
Monetary policy tightening, appreciation of the national currency in May, and a record harvest caused prices to fall during July-August. As a result, annual inflation continued to decelerate, reaching 26% yoy in August, down from its peak of 31.1% yoy in May. However, two-month deflation was a temporary relief as in September, monthly inflation advanced by 1.1%.
However, inflation kept slowing in annual terms to 24.6% due to a high statistical base. A rise in monthly inflation reflects a 3.8% mom increase in utility tariffs (starting September, natural gas prices for the population were increased by 13–14%), 21.2% mom growth in the cost of education services and 1.2% mom more expensive services in restaurants and hotels and higher excises on tobacco.
Some relief was brought by declining gasoline prices (down by 6% mom in September) consistent with falling world crude oil prices.While inflation is expected to decelerate further through the end of the year, its pace will be much slower.
First, easing inflation provided the government authorities with some room to adjust a number of regulated prices and tariffs. A 20% rise in communication tariffs since the beginning of October, another 35% increase in natural gas tariffs for households since the beginning of December, and multi-fold increases
in utility tariffs for legal entities and transportation tariffs in Kyiv, the capital and the largest city of Ukraine, were already announced.
Second, the recent sharp depreciation of the national currency may spill-over into domestic inflation as it will make imported goods more expensive. Although the substitution effect will be present, it may be quite limited for a number of inelastic goods such as medicines, energy, etc. Annual inflation
is expected to slow moderately to about 22% yoy in 2008.
Unfavorable sentiments formed amid recent intensification of global financial turmoil and Ukraine’s deteriorating fundamentals prompted foreign investors
to more actively withdraw capital from the country. A combination of falling world steel prices and weakening external demand, a large current account deficit and sizable payments due on private sector external liabilities, weaknesses in the banking system (high exposure to credit and foreign exchange risks) as well a new wave of political instability since September tilted the balance towards sharp Hryvnia depreciation.
The NBU refrained from active support of the exchange rate, allowing it to depreciate, which was consistent with May’s decision to switch towards a managed float regime. The NBU, however, wanted a smooth exchange rate adjustment to its market clearing level by selling limited amounts of foreign currency on the interbank foreign exchange market.
This strategy resulted in a loss of $4.5 billion in the NBU’s foreign exchange reserve during September-October and in a depreciation of the Hryvnia by about 27% of its value against the US dollar over the period (to UAH/USD 5.95 on average on the interbank market at the end of October).
Devaluation may also intensify stress on the banking sector due to existing currency mismatches of banks’ assets and liabilities. Although the level of
indebtedness of the Ukrainian private sector is far below that of developed countries, more than half of all loans issued by commercial banks are denominated in foreign currencies.
This means that local borrowers are particularly exposed to currency risks. On top of that, the sixth largest Ukrainian bank suffered a bank-run by depositors in September. Although the National Bank of Ukraine responded quickly by providing UAH 5 billion (about $1 billion) of emergency refinancing and later took control of this bank, this occurrence undermined confidence in the banking system.
To minimize counterparty risks in the banking sector, commercial banks cut or closed their bilateral credit limits, restraining commercial bank access to
domestic finances. In addition, the population rushed to withdraw funds from their deposit accounts. The NBU’s active support of a number of
commercial banks with liquidity through its refinancing operations calmed these fears. In October, it provided UAH 29.3 billion (about $5 billion).
To avoid bank-runs, the NBU has imposed a six-month freeze on the early withdrawal of savings deposits from commercial banks. Simultaneously,
an increase in the deposit guarantee was suggested to UAH 150,000 (about $25,800), tripling from the previous level. The NBU has also imposed tight limitations on the capacity of the commercial banks to expand their credit portfolio.
Although the NBU softened this restriction a few days later, trying to avert a local credit crunch, the ban on foreign currency loans to borrowers without
foreign currency income was left intact. The NBU strengthened its monitoring capacity of external private sector debt. In particular, it required commercial
banks to report data on their and their clients’ external liabilities maturing each quarter over the next 12 months.
Government officials have also considered the establishment of a stabilization fund, which would work with a government-owned Asset Recovery Company to buy and resolve some of the distressed assets of the banks.
Ukrainian authorities applied for IMF financing support and on October 26th, an agreement was reached on a two-year $16.5 billion stand-by IMF loan. Given the above measures and support from the international financial institutions, Ukraine may still weather the storm with relatively moderate pain.
INTERNATIONAL TRADE AND CAPITAL
Ukraine’s foreign trade data, released by the State Statistics Committee for January-August, still demonstrate a rather favorable picture. Exports kept increasing fast, advancing by an impressive 48.5% yoy over the first eight months of the year. An outstanding harvest triggered a surge in grain exports,
which expanded by 120% yoy over the period.
High world iron ore, coal and energy prices over the period underpinned an almost 70% yoy increase in mineral products exports, whose share grew to 10.4% of total merchandise exports, up from 9% in the respective period last year.
Weakening of world steel prices, which was observed since July, had a minor impact on Ukraine’s exports of metallurgical products in August. Export of the weightiest group of commodities surged by 60.6% yoy, bringing cumulative growth to 54.5% yoy.
Robust economic growth in Ukraine’s main trading partner countries supported a 40.5% yoy increase in exports of machinery and transport equipment. At the same time, export growth started to decelerate in August as exports in value terms were by about $1 billion lower compared to the previous month.
Although a decline in world iron ore, steel and energy prices, tighter domestic credit conditions and slower growth in real households’ income contributed
to a deceleration in imports in August, rates of growth remained at an impressive 63% yoy that month (down from almost 70% yoy in July) and 58.3% yoy to date.
As imports continued to notably outpace exports, the FOB/CIF merchandise trade deficit widened to $12.5 billion over the first nine months of this year. A deteriorating foreign trade balance is the main cause of the widening current account gap. According to preliminary estimates of the NBU, the CA gap widened to $7.5 billion in January-August, representing 6% of period GDP.
Over the period under review, this amount was fully covered by foreign direct investments, estimated at $8.1 billion over the period. However, the
current account gap is expected to reach $12–13 billion, or about 7% of GDP, in 2008.
In addition to this, Ukraine will need to serve significant foreign short term debt. As of June 2008, out of total external debt outstanding of $100 billion,
about $28.2 billion was due up to one year. At the same time, the NBU registers external debt by original maturity.
This means that if the short-term portion of the long term debt is included, the total amount of external debt refinancing may be as high as $40–45 billion. Although a portion of this sum is either due by subsidiaries to parent companies or represents more stable trade credits, the net external financing requirements still remain at a substantial $25–30 billion.
While this amount looks manageable, amid a turbulent global environment marked by risk aversion and worsening macroeconomic fundamentals, raising it may be very difficult, which points to rising stress on Ukraine’s balance of payments.
Although official data is not available yet, very high risk premiums on Ukraine’s securities, a decline in portfolio investments, partly as a result of which the country’s stock exchange (PFTS) index has declined by more than 80% year-to-date, and finally sharp currency depreciation during September-October show that the above risks have started to materialize.
On a positive note, declining world crude oil prices increase chances that the natural gas price increase on imported gas in 2009 may be significantly lower than in was previously anticipated. Coupled with the implementation of a government program developed in close cooperation with the IMF to restore financial and macroeconomic stability, current account pressures will ease substantially. The current account gap is now forecasted to decline to
about 3% of GDP in 2009.
OTHER DEVELOPMENTS AFFECTING INVESTMENT CLIMATE
Following rapid deterioration of macroeconomic fundamentals, currency pressures and increased worries over banking sector health, international
rating agencies downgraded Ukraine’s sovereign ratings as well as individual ratings of a number of private companies and commercial banks.
For the same reasons, the Ukrainian authorities applied for IMF financial support at the beginning of October. On October 26th, a tentative agreement
was reached on a two-year $16.5 billion stand-by agreement. The final decision was conditioned on the parliament’s approval of a number of legislative
initiatives, including approval of a bank recapitalization program and a firm commitment to prudent fiscal policy coupled with tighter monetary policy.
Despite a turbulent political environment, the government authorities promptly developed the “stabilization” package, which was approved by the parliament at the end of October. For the Parliament vote to be legitimate, the President has suspended the dissolution order of the Rada. Moreover, early
parliamentary elections called by the President at the end of September are likely to be delayed until spring of next year.
Although the approval of the IMF financial support package is not a panacea, it sends positive signals about the possibility that Ukraine may weather the storm with relatively moderate pain.
The IMF support also opens other alternative external sources of financial assistance to Ukraine. In particular, the World Bank has already announced it is
revising its program of cooperation with Ukraine to provide rapid assistance in hot areas, such as restructuring and recapitalization of the banking sector, improving support to the poor, deepening of structural reforms to restore Ukraine rapidly to sustainable economic growth, etc.
UKRAINE, BULGARIA, ROMANIA, & KAZAKHSTAN MACROECONOMIC REPORTS —–
NOTE: To read the entire SigmaBleyzer/The Bleyzer Foundation Ukraine Macroeconomic Situation update report for November 2008 in a PDF format, including color charts and graphics click on the attachment to this e-mail or go to the following link, and click on Ukraine November 2008,
http://www.sigmableyzer.com/publications/monthly_reports. SigmaBleyzer/The Bleyzer Foundation also publishes monthly Macroeconomic Situation reports for Bulgaria, Romania and Kazakhstan. The present and past reports, including those for Ukraine can be found at http://www.sigmableyzer.com/en/page/532.
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
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2. DEFAULTING COUNTRIES REACH OUT TO IMF AND FINANCIAL FIXERS
In the hangover of the credit crisis where neither Baugar nor Budapest are safe – the rescue business is seeing a comeback.
By Helia Ebrahimi, Telegraph, London, UK, Monday, 08 Dec 2008
LONDON – Exactly one year on from having its resources slashed and it relevance questioned, the International Monetary Fund has put record amounts of
emergency loans to work.
A staggering $41.8bn (pounds28.6bn) of cash was carved up in November alone between Iceland, Hungary, Serbia, Ukraine and Pakistan, with a further $10bn bail-out being finessed this weekend to pull Turkey back from possible default.
But the IMF is not the only one saving sovereign states.
The buccaneers of restructuring, already busy breathing oxygen into the lungs of debt-choked companies, like retailer Baugar, are parleying what they do for corporates, multi-nationals and financial institutions into a tool kit to help them fix the breakdown of entire finance ministries and the economies they run.
One restructuring boss who has been advising several governments said: “The game has moved on. Now it is not just companies, it is entire countries that
need our services. They need to be restructured and that will mean outside help.”
But some of the crews manning the lifeboats will include firms that prospered greatly in the days before the storm clouds had gathered and have themselves been partly blamed for causing the tempest.
Names such as Blackstone, Goldman Sachs, Credit Suisse and Deloitte who earned billions of pounds in the deal and debt frenzy are now at the
forefront of clearing up its aftermath.
Kari Hale, strategy partner at Deloitte’s, says that good advice could mean the difference between survival and going bust. Mr Hale was on the Anderson
team that along with McKinsey and Credit Suisse rode in to repair the systemic failure of the Swedish banking system in 1991.
Along with his boss at the time, Mark Carawan, who is now head of internal audit at Barclays, 70 senior partners at the three advisory powerhouses
spent 180 days tearing apart the financial structures of the Scandinavian state and rebuilding the entire system with a mandate for change and a
unified strategy.
been dumped – became the template exported to other places where the IMF also lent money to, including Korea, Venezuela and Thailand.
But as the world economy grew and defaulting countries became a distant memory, the celebrated engineers of state administrations became redundant
and teams were closed down and the professionals moved to other more common place projects.
Now, the call has again been sounded and re-cast corporate fanciers, private equity principles and auditors are, with a gleam in their eyes, again making
up the rank and file of the restructuring world.
Blackstone, which advised Northern Rock in the run up to its nationalisation, was drafted into Iceland, where KPMG is also doing some work. Goldman Sachs advised the Treasury as it took over the ailing bank.
Amongst other European projects, the American private equity firm is working in the Ukraine alongside Credit Suisse, which has also seen its client list
grow with Government mandates such as Kazakhstan, Belgium and project based work for the UK Treasury on RBS, Lloyds and HBOS.
Experts predict countries in freefall calling in the financial fixers or making deals with the IMF could include Latvia, Bulgaria, even Ireland, Greece and Italy.
At its inception in the 1940’s, the IMF was created up to help countries with bombed out balance sheets amidst the post-war yearning for a global
economic security. Representatives from 45 countries met in the town of Bretton Woods, New Hampshire in the United States and agreed on a framework for international co-operation to be set up after the Second World War.
Over the years it developed a special trust fund for low income countries lent money at 0.5pc interest rates to help reduce poverty and foster global
market stability.
But essentially, the IMF acts as a safety-net and insurance policy for its 185 member states. The members pay a subscription and at times of financial
crisis the IMF can offer medium term debt until a commercial solution can be arranged. It also sends out its economists to spot problems and early
warning signs of systemic economic failure.
time – a $3.9bn loan in 1976 to Jim Callaghan’s cash-strapped UK Government.
But in a world awash with cheap debt and exuberant trade surpluses, the Fund slipped from the forefront of the world stage and became regarded as at best
diminished and at worst irrelevant.
Only a year ago the IMF’s managing director Dominique Strauss-Kahn, a former finance minister in the French government and also a one-time presidential
candidate announced the fund had to cut up to 15 per cent of its workforce in a desperate attempt to sort out its finances as demand for its loans continued to weaken.
But now, thanks to a recent $100bn commitment from Japan, the Fund is sitting on more than $300bn ready to help rescue a dozen more countries that
could face default within the next few months.
There is increasing pressure on Middle Eastern countries to follow Japan’s example which has helped create a brand new short term liquidity facility.
Before this, the IMFs loans lasted five years. But the new product allows countries that are still fundamentally financially healthy but need quick access to cash to take out a three month loans at market rates. No money has been drawn from this facility yet but Turkey could be the
first.
Caroline Atkinson, an IMF director and part of the 24-strong management team of the institution, says the Fund has geared up at this time of
unprecedented financial crisis and could again start re-hiring, this time from the financial sector.
‘We are able to disburse money to applicant countries in just a matter of weeks if needed,’ says Atkinson. ‘We run very lean three to six person teams
that get into the crisis countries and negotiate funding packages directly with the government in very quick turn-around times,’ she said.
Mr Strauss-Kahn’s former colleague Simon Johnson – who a year ago was the IMFs chief economist, says: “There will be many many more countries out
there who will be calling on the IMF.
“They didn’t know it then but the world had drunk Kool-Aid. They believed the story that things would always be good and could only get better.”
Mr Johnson, now a senior fellow at the Peterson Institute and professor at MIT’s Sloane school of Management said: “There is a systemic shift in the
action the global economy needs,” he said. “And the IMF is best placed to deliver what is needed.”
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3. UKRAINE SEEKS ADVISER IN CASE OF EARLY DEBT PAYMENT Reuters, Kiev, Ukraine, Wednesday, December 3 2008
[return to index] [Action Ukraine Report (AUR) Monitoring Service]
4. UKRAINE RESTRICTS BANK WITHDRAWALS TO AVERT LIQUIDITY CRISIS
The Kiev-based Natsionalnyi Bank Ukrainy said in a letter to commercial lenders on Dec. 6 that early withdrawals of deposits “leaves liquidity of some banks under threat,” according to a statement on the bank’s Web site.
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5. UKRAINE INFLATION, EUROPE’S FASTEST, SLOWS TO 22.3% IN NOVEMBER
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6. UKRAINE GOVERNMENT WORSENS ECONOMIC PREDICTIONS
Deutsche Presse-Agentur, Kiev, Ukraine, Wednesday, Dec 3, 2008
KIEV – The Ukrainian government worsened official predictions for the economy on Wednesday, halving expected annual GDP growth for 2009 to between 3 and 4 per cent.
The former Soviet republic’s economy already has moved into a full recession, with GDP contracting 2 per cent during December alone, and annual
inflation standing at 21 per cent, a Ministry of Economy official said.
Ukraine’s Ministry of Economy as recently as June had been estimating that the country would over the course of 2008 see 7 per cent annual GDP growth,
and 15 per cent inflation.
Falling government revenues due to lower GDP growth had placed Ukraine’s 2009 state budget in jeopardy, and a budget review was ‘critical’ said Serhy
Romaniuk, Vice Economics Minister, at a Kiev press conference.
Ukraine’s pro-Europe government had for more than a month dragged its feet on even admitting the economy was teetering, with officials claiming
international economic weakness would leave Ukraine’s GDP growth and inflation numbers practically unchanged.
Political chaos making Ukraine’s leaders unable to deal with the crisis effectively was a key cause for the Kiev government’s unwillingness to admit
the economy was in trouble, observers said.
Ukraine’s parliament has been without a ruling coalition since September. Ukrainian President Viktor Yushchenko called for new elections to be held
December 15, but in-fighting between political factions and a state cash shortage has prevented Yushchenko’s administration from preparing for the
vote, and placed the poll in doubt.
Rewriting the national budget to take into account worsened economic performance was impossible, Romaniuk conceded, because the hung parliament
would be unable to consider new legislation, and due to the rapid weakening of the national currency, the hryvna.
Independent observers have for some time been pessimistic on the Ukrainian economy, with Fitch Ratings predicting Ukrainian 2008 GDP growth of 4.5 per cent, and inflation in excess of 25 per cent, according to an Interfax news agency report.
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[return to index] [Action Ukraine Report (AUR) Monitoring Service]
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7. CURRENCY FALL REFLECTS UKRAINE’S WOES
Ukraine’s hryvnia has lost more than 60% from a peak of 4.50 to the U.S. dollar in the spring.
By Geoffrey Smith, The Wall Street Journal, New York, NY, Wed, Dec 3, 2008
KIEV, Ukraine — Ukraine’s currency spiraled to a new low Wednesday as data showed the country’s population ditching the hryvnia in favor of the dollar
faster than ever.
The former Soviet republic is entering a full-blown economic and financial crisis as global demand for steel, its main export, collapses, while Russia
continues to threaten it with an ever-higher bill for its gas imports. Confidence in the politically divided government’s crisis plan, which is backed by a $16.5 billion loan from the International Monetary Fund, is fading.
November data released by the National Bank of Ukraine showed it had already hemorrhaged almost 80% of the first part of the emergency IMF loan within a month of receiving it. The National Bank’s gross foreign reserves rose by only $820 million in the month to $32.74 billion, despite its receiving $4.5 billion from the IMF through a hastily arranged stand-by arrangement.
The central bank also said it spent $3.4 billion in foreign-exchange interventions in the course of the month to prop up the currency. From a peak of 4.50 to the U.S. dollar this spring, the hryvnia has lost more than 60%. The dollar surged to 7.51 hryvnia on the interbank market Wednesday, above the central bank’s official rate of 7.23.
The atmosphere at the country’s exchange booths has become increasingly tense in recent weeks, with many running out of foreign currency, first due
to the refusal of banks to comply with new central-bank regulations and then due to the sheer weight of demand. Net purchases of dollars by the
population more than doubled last month to $2.3 billion from $930 million in October.
Panic was further stoked by media reports earlier this week that President Viktor Yushchenko, onetime hero of the 2004 Orange Revolution, was preparing
a decree ordering the forced conversion of the population’s dollar deposits into hryvnia. Mr. Yushchenko denied the reports as “nonsense” Wednesday,
vowing he wouldn’t intervene in the central bank’s monetary policy.
However, his spokeswoman, Irina Vannikova, had told a briefing earlier this week that Mr. Yushchenko would take “extreme measures” against the NBU if it failed to bring the currency crisis under control. Her comments were widely taken at the time as a veiled threat to sack the central-bank’s chairman,
Volodymyr Stelmakh. (Write to Geoffrey Smith at geoffrey.smith@dowjones.com)\
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8. NATIONAL BANK OF UKRAINE: STELMAKH COVERS UP BULLS AND BEARS
By Serhij Lyamets, The Ekonomichna Pravda, in Ukrainian, Kyiv, Ukraine, Monday, Dec. 1, 2008
It is the National Bank of Ukraine that provokes panic among Ukrainians and the crisis on the currency market by its actions, or rather the lack of actions.
I would like to hear your comments, Mr. Governor.
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9. UKRAINE’S CENTRAL BANK HELPS MAKE $23-BILLION DENT IN POCKETS OF UKRAINIANS
Professor of Current Ukrainian History, Lviv Franko University, Lviv, Ukraine
Meanwhile, the causes of the high dollar value can be seen with a naked eye.
Many experts maintain that there were no real causes for the hryvnia downfall. The blame for it must be taken by the NBU and Pres Yushchenko as well as the cabinet for failing to react adequately to what the first two were doing.
When the dollar craze began in Ukraine, the country’s trade balance was the same as Armenia’s, Georgia’s, Moldova’s and Tadjikistan’s. Although some of these countries have even a worse trade balance, their national currencies were sinking by a mere 1.5-2% in a month.
The NBU has a lot of levers to rectify the situation but, strangely, it has not used them. On Dec. 1, Viktor Yushchenko gave a stern warning to NBU Governor Stelmakh, saying he would fire him unless the hryvnia stabilized. The incumbent even specified the exchange rate of 5.8 to 5.9 per $1 he wants for the hryvnia. Nothing has happened ever since, neither the first nor the second. Result: Stelmakh is still NBU governor.
LAWMAKERS THREATEN PROBE INTO NBU OPERATIONS
Meanwhile, Rada lawmakers have threatened to bring Stelmakh to account. Dec. 2, Anatoly Hrytsenko, head of VR committee on defense and security, proposed opening a criminal investigation into Volodymyr Stelmakh’s track record as NBU governor.
It is becoming common knowledge in Ukraine that all personnel appointments by the president seem to have their concrete monetary dimension – in terms of kickbacks. A group of people have lined their pockets as a result of the hryvnia fluctuations. If the group’s profits were low, Stelmakh wouldn’t be governor of NBU.
This is the bottom line of what is happening around the Ukrainian currency. No doubt, like in the similar past hryvnia downfalls, in a couple of weeks the hryvnia will be stabilized, but the wallets of ordinary Ukrainians have already been made lighter by 160 billion hryvnia ($23 billion), Yury Kostenko said (incidentally, a loyal Yushchenko supporter), putting forward his Ukrainian People’s party demand to the incumbent to fire Stelmakh).
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10. TOUGH MEDICINE NEEDED FOR UKRAINE’S ECONOMIC WOES
The metaphor is apt, even though to a considerable extent the crisis crept into the homes of average Ukrainians bit by bit. In the first half of this year, interest rates soared and the hitherto stable value of the hryvnya was shaken. Investments in the economy dried up, and the construction sector slowed down.
But an economic tsunami did roll over us from the outside. And its effects were hard felt in Ukraine, a country that is neither among the high-technology countries of the West nor among the oil-and-gas giants of the East. Like most countries in the world, Ukraine is between the former and the latter and seems to have been hit from both sides.
First, Ukraine — like all the other countries of the world — has become an unwilling financial donor to a void that opened up in the United States. The outflow of capital from our country has resulted in a catastrophic plunge of the stock-market indexes and an abrupt decapitalization of Ukrainian enterprises. By contrast, the U.S. markets have seemed virtually stable.
Second, Ukraine — like many Western countries — was vulnerable because the economy had been weakened by inflated global prices for oil and gas. Before the crisis struck, Ukraine was de facto a major contributor to the Stabilization Fund in Russia. Kyiv had no opportunity to build up its own reserves like Russia, many Persian Gulf energy producers, China, and other countries were able to do. Now those countries have funds to provide assistance to their own banks and companies and even to offer credit to Western countries. Ukraine is left to compete with other countries for help from the International Monetary Fund or to cope on its own.
Third, Ukraine’s economy was relatively weak even before the crisis struck. It is already in its second year of a rapidly rising trade deficit and a negative hard-currency-payments balance. This situation meant that the halt of foreign-capital inflows brought on by the crisis has struck the national currency hard, producing a sharp decline in production and consumption.
Fourth, the slowdown of commodities markets abroad means a decrease in orders for Ukrainian industrial and agricultural products, decreases in the prices for key exports, and sharp losses for major enterprises.
MAJOR REFORM NEEDED
Over the long term, global economics will come down to a struggle among countries for a share in the global investment flow. Therefore, it is essential that our national anticrisis program include reforms that will make Ukraine a worthy competitor in this struggle.
Ukraine must improve its hard-currency, credit, and investment markets. They must be deregulated, transparent, accessible to everyone globally, and protected against administrative interventions.
It must implement far-reaching tax reform to reduce corporate and individual taxes, while also introducing mandatory contributions to the state’s pension, insurance, and environmental funds. It should impose taxes on real estate and the consumption of energy and natural resources.
Kyiv must reform the stock exchange to protect the rights of minority shareholders, mandate transparency in corporate accounting and reporting, and introduce online trading. It must create investment banks and encourage public share offerings. It must adopt a broad program of demonopolization and credible antimonopoly regulation.
It must introduce market-oriented reforms of key sectors that remain under state control: the fuel and energy complex, agriculture, machine building, transport, road management, telecommunications, housing and utilities, and others. The country must also face the fact that its management system is shortsighted, cumbersome, onerous, and inefficient.
Yes, there is work to be done.
NOTE: Volodymyr Lanovy was Ukraine’s economy minister and first deputy prime minister in 1992 and head of the State Property Fund in 1997-98. The views expressed in this commentary are the author’s own and do not necessarily reflect those of RFE/RL.
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Mars started operations in Ukraine 14 years ago. It was a representative office until year 2004 when full fledged business operations were established. Since that time Mars Ukraine has become one of the fastest growing FMCG companies in the country. Today Mars Ukraine is undisputed leader in both categories where it competes: Chocolate Bars and Pet Care. In Ukraine Mars is present with its global brands M&M’S®, SNICKERS®, PEDIGREE®, WHISKAS®.
USUBC MEMBERSHIP WILL TOP 100 IN 2008
The new USUBC members in 2008 include MaxWell USA, Baker and McKenzie law firm, Och-Ziff Capital Management Group, Dipol Chemical International, MJA Asset Management, General Dynamics, Lockheed Martin, Halliburton, DLA Piper law firm, EPAM Systems, DHL International Ukraine, Air Tractor, Inc., Magisters law firm, Ernst & Young, Umbra LLC., US PolyTech LLC, Vision TV LLC, Crumpton Group, Standard Chartered Bank, TNK-BP Commerce LLC, Rakotis, American Councils for International Education, Squire, Sanders & Dempsey LLP, International Commerce Corporation, and IMTC-MEI.
Additional new USUBC members in 2008 are: Nationwide Equipment Company, First International Resources, the Doheny Global Group, Foyil Securities, KPMG, Asters law firm, Solid Team LLC, R & J Trading International, Vasil Kisil & Partners law firm, AeroSvit Ukrainian Airlines, Anemone Green Capital Limited, ContourGlobal, Winner Imports LLC (Ford, Jaguar, Land Rover, Volvo, Porsche), 3M, Edelman, CEC Government Relations RZB Finance LLC (Raiffeisen), IBM Ukraine, SoftServe Inc., The Washington Group (TWG), SE Raelin/Cajo, Inc., AnaCom, Inc., Pratt & Whitney – Paton and
The complete USUBC membership list and additional information about USUBC can be found at: http://www.usubc.org.
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12. UKRAINE: IMB GROUP BEING REBRANDED, ALLOCATES $100 MILLION
KYIV – IMB Group (Public) Limited, a parent company of International Mortgage Bank and Family Credit ™, a leader of the Ukrainian consumer loan market, last week made the decision to update its strategy.
LINK: http://www.horizoncapital.com.ua/files/press_2008/press_release/Press%20Release_IMB%20Group_Eng.pdf
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13. EPAM SYSTEMS ADVANCES TO 190TH PLACE WITHIN THE LIST
EPAM Systems, Lawrenceville, New Jersey, Monday, December 1, 2008
LAWRENCEVILLE, NJ – EPAM Systems, Inc. , the leading software engineering and IT Outsourcing (ITO) provider with delivery centers in Central and
Eastern Europe (CEE), announced today that it has advanced to the 190th place on Software Magazine’s annual ranking of the world’s 500 largest
software and service providers — The Software 500.
EPAM is proud to be named on the prestigious The Software 500 list along with 29 of its ISV (Independent Software Vendors) clients, ranging from
promising start-ups to global software leaders including three of the Top 10 honorees on the list.
Since its inception in 1993, EPAM has enabled ISVs and other technology focused organizations to build, maintain and support world-class software
products.
Today, utilizing the talent and experience of thousands of engineers located in advanced development centers across Central and Eastern Europe, EPAM
covers the complete software development lifecycle from research to prototyping and development, testing, deployment, maintenance and support for variety of products including world’s leading ERP and eCommerce applications as well as specialized embedded software that controls some of the most sophisticated electronic devices.
In addition EPAM offers its unique ability to deliver complex distributed professional services including architecture level consulting, product
customization, porting and cross-platform migration, as well as deployment of mission critical enterprise level highly customized solutions built on
top of the standard product functionality.
and to leverage each other’s strengths,” commented Arkadiy Dobkin, EPAM’s President and CEO, noting: “We are also confident that many of our younger,
but nevertheless innovative and fast growing clients will make the list in coming years.”
ABOUT DIGITAL SOFTWARE MAGAZINE, THE SOFTWARE
professionals, software developers and business managers involved in software and services purchasing.
According to the results of the survey, the software industry continues to grow in total revenue, representing growth of 14.7% from the previous year,
while the total employee growth rate of 1.3% shows modest increase compared to 2007. “The Software 500 helps CIOs, senior IT managers and IT staff
research and create the short list of business partners,” said John P. Desmond, Editor of Software Magazine and softwaremag.com.
Digital Software Magazine, the Software Decision Journal, has been a brand name in the high-tech industry for 30 years. Softwaremag.com, its Web
counterpart, is the online catalog to enterprise software and the home of the Software 500 ranking of the world’s largest software and services companies, now in its 26th year. Software Magazine and Softwaremag.com are owned and operated by King Content Co., www.softwaremag.com.
ABOUT EPAM SYSTEMS
Established in 1993, EPAM Systems, Inc. is the leading global software engineering and IT consulting provider with delivery centers throughout Central and Eastern Europe (CEE). Headquartered in the United States and serving clients worldwide, EPAM provides software development and IT related
services through its more than 4,500 professionals deployed across client delivery centers in Russia, Belarus, Hungary, and Ukraine.
EPAM’s core competencies include complex software product engineering for leading global software and technology vendors, as well as development,
testing, maintenance, and support of mission critical business applications and vertically oriented IT consulting services for global Fortune 2000
corporations.
EPAM is ranked among the top companies in IAOP’s “The 2008 Global Outsourcing 100” and in “2007 Top 50 Best Managed Outsourcing Vendors” by
Brown-Wilson Group’s Black Book of Outsourcing. Global Services Magazine recognized EPAM in its “2008 Global Services 100” list as the No.1 company in the “Emerging European Markets” and included EPAM into the global Top 10
“Best Performing IT Services Providers” .
For more information on EPAM Systems, Inc., please visit www.epam.com. For further information contact Alena Busko, Marketing Manager
EPAM Systems, Delivering Excellence in Software Engineering, Office phone: +1 (609) 613-4031, ext. 50474, E-mail: press@epam.com.
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14. UKRAINE’S THREAT REDUCTION PROGRAM SUPPORTED BY U.S.
Southern Research Institute is a nonprofit 501(c)(3) scientific research organization that conducts basic research in drug discovery for cancer, emerging infectious diseases, and diseases of the central nervous system; contract preclinical drug and vaccine development, and advanced engineering research in materials, systems development, environment and energy.
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Atlantic community. At present, Ukraine is caught between the old, post-Soviet world and the new, European one that it says it wants to join. Nowhere is this clearer and more consequential, both for Ukraine and for the Euro-Atlantic community, than in Ukraine’s natural gas industry.
onshore and offshore in the Black Sea. It has a capable energy workforce, and long experience in the exploration, production, transportation, and refining of
oil and gas. Most prominently, it is strategically located and has large-scale infrastructure.
This gas originates variously in Russia and Central Asia, and it passes Ukraine en route to European clients who are the best-paying customers of the Russian gas titan, OAO Gazprom.
Despite this resource potential, strategic location, and existing infrastructure, the country struggles with energy security. The reasons are an incomplete transition to market economics, chronic underinvestment, and profound opaqueness of policymaking, which fuels corruption.
structure of the energy sector, particularly of the oil and gas industry, is a cross between a Soviet branch ministry and private interest groups. The state-owned company, NAK Naftohaz Ukrainy, contains many able and knowledgeable professionals but is overly politicized in leadership, overstaffed, mismanaged, impoverished, and operates under numerous fundamental conflicts of interest.
production (E&P) activities. At the same time, other Naftohaz subsidiaries, some of which have controlling private owners despite being predominantly
state-owned, are also in the business of extracting crude oil. Naftohaz’s subsidiary UkrTransNafta, therefore, is determining pipeline access for private E&P investors even as they compete with other Naftohaz subsidiaries.
Ukrainian gas economy.
countries which has been imported from, or transported across, Russian territory. Under the January 2006 gas agreement, Ukraine pays RUE in kind by giving it more than 20 percent of the total delivered gas, which is 15 bcm of the 73 bcm that were nominally contracted for 2007.
and improve reliability are lost because short investment horizons dominate. In infrastructure-dependent, capital-intensive, long lead-time industries like oil and gas, such actions severely damage the prospects for progress and development. Consequently, the condition of Ukraine’s oil and gas industry continues to deteriorate.
that are completely out of proportion to the size of its economy. (3) Its consumption equals that of all the Visegrad countries – Czech Republic, Hungary, Poland, and Slovakia – combined. Its energy intensity is not only higher than Western European countries, but it is twice as high, or twice as
inefficient, as neighboring Poland. Ukrainian officials and lawmakers make ritualistic comments about the need to reduce energy intensity, but the extent of
real action is very limited.
reform, increasing public expectations. Three years later, none of the stated intentions and expectations has been met. Most conspicuously, the gas sector
remains as convoluted and impenetrable as ever. In March 2005, Yushchenko declared that gas trade with Russia would be conducted on a cash basis rather than through non-transparent in-kind payments.
extract if a contract were in place. In the midst of a bitterly cold winter throughout Europe, Ukraine apparently retaliated by taking unsanctioned gas from the pipeline system. Foreign governments, especially in Europe and the United States, reacted quickly, criticizing the Russian cut-off and calling for the
two sides to reach a negotiated settlement. Early on January 3, Russia returned the gas pipelines to normal operations, appearing to concede that it had lost the battle for international public opinion.
Gazprom and RUE. To those who had been monitoring the mounting crisis, the agreement was as incomprehensible in its logic as it was unprofessional in its form. Regrettably, it also established the pattern for two subsequent years of negotiations. The result of the early 2006 negotiations was unfavorable to
Ukraine inasmuch as it gave away the previously-agreed nominal gas price of $50 per thousand cubic meters and accepted a nominal price of $95.
same period, both Belarus and Bulgaria successfully negotiated multi-year gas supply agreements with pricing mechanisms and multi-year periods for transition to ”European” pricing levels with Russia.
the Ukrainian public into thinking they were getting a better deal than they are, and have created a disincentive to engage in gas sector modernization, a faulty logic that is based on the fear that Ukraine could not survive economically if it were required to pay European gas prices. False prices and faulty contract compliance also allowed the Russian side to accumulate debt obligations from Ukrainian entities, thus setting the stage for predatory buy-outs by entities with the right connections (whether Russian, Ukrainian, or other).
demand). To receive that volume of gas for domestic use, Ukraine must actually buy 73 bcm of gas, out of which 15 bcm is transferred to RUE for the ”service” of delivering the total volume of gas to Ukraine. As a result, the actual price paid by Ukraine is significantly higher than the nominal price, since approximately one of every five cubic meters that Ukraine purchased (15 of 73 bcm) is actually being turned over to RUE, with its beneficial owners pocketing the handsome profits.
Over the past three years, Ukraine’s negotiating leverage has eroded greatly.
technical default of its international bond obligations – makes Gazprom the only potential purchaser of its remaining valuable assets, namely the trunk gas
pipeline and storage facilities. Gazprom’s dominant position gives Russia the possibility of taking over Ukraine’s decaying infrastructure and strengthening its control over gas exports to Europe, including those from Central Asia, even without having to construct all the bypass pipelines it is planning.
dysfunctional. Domestic production is stagnant to declining at the time when it should be booming. Investment in exploration and production of Ukraine’s oil and gas resources, which could have been substantial at a time of historically high international prices and constrained access to new prospects, has amounted to a trickle at best.
increase potential bids from competing companies. Then in 2006, with the country experiencing political turmoil associated with imminent parliamentary
elections, bids were collected under an ill-conceived process, and a small independent American oil company with modest experience in offshore west
Africa, Vanco, was announced the tender winner.
formalized by the outgoing government. The timing struck knowledgeable industry observers as unusual, a long-term deal concluded in haste by a lameduck
government just before its departure. Most observers assumed the deal would be overturned by an incoming government, and unfortunately they were
proven right.
Complex (DTEK), which is owned by Ukraine’s richest man, Rinat Akhmetov, the force behind the now-out-of-power Regions Party of Ukraine, as well as
other mysterious entities whose ownership and expertise have never been revealed.
numerous efforts, no major foreign investor has been able to achieve any success in Ukraine’s upstream oil and gas sector, including Royal Dutch Shell and
Marathon.
Atlantic community. If developing the country’s domestic hydrocarbon resources is a priority for Ukraine, as it should be, and if foreign investment is
essential to the country’s ability to develop those resources in a timely manner, and it is, then it is important to acknowledge that, at present, the investment
climate of Ukraine is highly unattractive.
individuals and key political forces, milking the energy sector, particularly the oil and gas industry, for personal enrichment and as sources for political funds. The present state of affairs underscores the most essential prerequisite for change in Ukraine’s oil and gas sector: political will. The needs of the nation, for today and tomorrow, are consistently overridden by short-term political expediency and personal gain, creating a corrosive effect on the entire political system, as it contributes to a broad loss of faith in the political process among the Ukrainian public.
more settled than Ukraine, struggle to make good choices in energy policy. Effective energy policy requires political leadership, economic analysis, public
dialogue, consensus building, commercial awareness, planning, and professional execution, not the enunciation of lofty goals.
Ukrainian energy strategy. Ukraine could credibly set the goal of reducing its reliance on imported gas from the current level of approximately 75 percent to
50 percent within the next five to seven years. Achieving this objective would require a range of efforts, some related to domestic supply and some to demand.
their country is a reliable transit partner, but a short conversation with virtually any European gas industry executive will reveal that this self-perception does not correspond to the understanding of industry experts outside Ukraine. Nearly seventeen years of post-Soviet experience have taught Europeans that Ukraine is the part of the supply chain that often leads to disputes, mutual recriminations, and endless charges and counters charges. It is the weak link.
systematic internationally-sanctioned assessment of the condition and investment requirements of the Ukrainian international gas transit system (IGTS).
consistent financial losses, reflects a conscious dual choice on the part of successive rounds of Ukrainian legislators, cabinets, prime ministers, and
presidents: first, the choice not to address the utter insolvency of the oil and gas sector and, second, the choice to engage in asset-stripping and rent-seeking.
delivered fuel. In addition, Naftohaz and all its lenders must be informed that there will be no further government bailouts of the company. Naftohaz’s
operations must be rid of non-core functions, and inherent conflicts among the various Naftohaz functions must be resolved once and for all. In the long run, the essential functions of energy production, transportation, and distribution will need to be unbundled, consistent with European reform efforts, and with
creating a competitive market. In short, Naftohaz must be transformed so that it is no longer a big black hole.
distribution need to be unbundled. implementation, this arrangement could open opportunities for new intermediary companies to establish themselves in the same way as RUE and others did, with all the attendant risks that are discussed above.
is that domestically-produced gas, which is nominally designated for public and household consumption, may get sold on the gray market to domestic industrial users or export buyers who are willing to pay European prices. These illicit sales fuel corruption and muffle the market signal that would otherwise promote increased domestic production and decreased consumption. Serious pricing reform is required – based on a sensible, transparent, and easily understandable rate methodology that allows gas producers or sellers to recoup their costs plus a reasonable rate of return.
execution, but only after the political will for energy reform is in place. Serious energy sector reform would not only help Ukraine but would also stabilize the economic undergirding of all European gas importing countries.
1. Press Office of President Viktor Yushchenko, ”Joint Address to NATO Secretary General”, January 11, 2008, http://www.president.gov.ua/en/news/8645.html.
3. Gas consumption figures drawn from the BP Statistical Review of World Energy 2008, available at http://www.bp.com/productlanding.do?categoryId6929&contentId7044622. GDP figures are purchasing power parity estimates, drawn from CIA’s World Factbook, available at https://www.cia.gov/library/publications/the-world-factbook/index.html.
4. To compare (in a rough manner) the price of gas delivered to a given European country X and the price of gas delivered to Ukraine, one needs to subtract from the gas price in country X the price of transit from Ukraine’s eastern border to country X. For example, in January 2007 Russian gas delivered to France cost on the order of $295 per thousand cubic meters. If one deducts gas costs of transit between Russia and France, the comparable price in Ukraine would have been roughly $230. This is only an indicative comparison and should not be interpreted as implying that there is a standard or an ”accepted” gas price in Europe. Gas prices under a given contract reflect the full range of factors from competitive gas supply to quantity of demand, and from available alternative fuels to skill of the commercial negotiators.
5. Since Ukrainian regulators never based their rate-making calculations on the actual price of gas (rather, they used the nominal price for their calculations) Ukrainian customers never paid the actual replacement cost of the gas they consumed. This fact allowed debt to pile up, which then provided the basis for more non-transparent deals.
7. Alexander Bor, ”Ukraine Orders $1.7 billion Naftogaz Bailout,” Platts Oilgram News 86, no. 198 (October 7, 2008): 7.
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2. UKRAINIAN FEDERATION OF AMERICA (UFA), Zenia Chernyk,
Vera M. Andryczyk, President; Huntingdon Valley, Pennsylvania
3. KIEV-ATLANTIC GROUP, David and Tamara Sweere, Daniel
Sweere, Kyiv and Myronivka, Ukraine, kau@ukrnet.net
4. RULG – UKRAINIAN LEGAL GROUP, Irina Paliashvili,
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IT work in Ukraine. Contact: Yuriy Sivitsky, Vice President, Marketing,
Kyiv, Ukraine, yuriy.sivitsky@softline.kiev.ua; Volia Software website:
http://www.volia-software.com/.
Mr. E. Morgan Williams, Director, Government Affairs
Washington Office, SigmaBleyzer, The Bleyzer Foundation
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