UKRAINE BUSINESS NEWS: THREE ARTICLES
1.UKRAINE ABOVE THE REST IN CRISIS MANAGEMENT
Analysis & Commentary: by Anders Aslund, Senior Fellow
Peterson Institute for International Economics, Washington, D.C.
The Moscow Times, Moscow, Russia, Wednesday, 22 April 2009
2.THE EU DAIRY & MEAT MARKET - REAL OPPORTUNITIES FOR UKRAINE?
Two policy papers on the dairy and meat sectors in Ukraineand the EU
Dr. Igor Burakovsky andDr. Heinz-Wilhelm Strubenhoff
Institute for Economic Research and Policy Consulting
German-Ukrainian Policy Dialogue in Agriculture, Kyiv, Ukraine
U.S.-Ukraine Business Council (USUBC), Washington, D.C., April 22, 2009
3.INVESTORS AND THE UKRAINIAN STOCK MARKET
By Diana Smakhtina, Vice President, Corporate Governance,
Restructuring, SigmaBleyzer, Kharkiv Office
Dzerkalo Tyzhnia, No 13 (741), Kyiv, Ukraine 13-20 April 2009
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1. UKRAINE ABOVE THE REST IN CRISIS MANAGEMENT
Analysis & Commentary: by Anders Aslund, Senior Fellow
Peterson Institute for International Economics, Washington, D.C.
The Moscow Times, Moscow, Russia, Wednesday, 22 April 2009
A month ago, I wrote a column about Russia's return to sane economic policy, but Ukraine has undertaken an even more impressive turnaround. Few countries have been more misunderstood than Ukraine, which has been particularly hurt by the global financial crisis.
In the wake of the Lehman Brothers bankruptcy, international finance froze throughout the world. Ukraine suffered from an underlying problem -- its high dependence on steel exports, whose prices and demand collapsed in fall 2008. In the first half of 2008, steel accounted for no less than 42 percent of Ukraine's exports. This year all of Ukraine's exports are likely to drop by almost 50 percent, but imports even more, so the current account deficit will become insignificant.
Ukraine's Central Bank made one serious policy mistake. It insisted on maintaining a fixed peg of the hryvna to the U.S. dollar. Because of the apparent safety and obvious profitability, foreign banks transferred short-term, speculative funds to Ukraine, which expanded the domestic money supply as the exchange rate was fixed and boosted inflation similar to what happened in Russia but worse.
In 2007, Ukraine's money supply surged by 51 percent and inflation peaked at 31 percent in May 2008. The speculative currency inflow widened the current account deficit to 7 percent of gross domestic product in 2008. This was not tenable, although Ukraine's budget deficit was minimal and its public foreign debt was only 12 percent of GDP in 2007.
What ultimately scared foreign investors was Ukraine's open political feuding. International investors are a strange anti-democratic lot who get worried by open arguments between politicians. They prefer strict authoritarian regimes like in China, Azerbaijan and Kazakhstan.
By Oct. 1, the Ukrainian economy suddenly halted. Steel production, mining and construction plummeted by about 50 percent in no time. The largest harvest ever could not salvage the economy. Astoundingly, industrial production contracted by more than 30 percent in the first quarter of 2009 over the same time one year earlier, and GDP probably plunged by 20 percent in this period. In addition, the stock market dropped by 90 percent from its peak last year.
Fortunately, the Ukrainian government acknowledged its crisis in early October and asked for help from the International Monetary Fund. Within four weeks, Ukraine concluded a deal with the IMF -- a large, strong two-year standby agreement with $16.4 billion of credits.
The IMF program was standard with three key demands: a nearly balanced budget, a floating exchange rate and bank restructuring. Ukraine has delivered. After some hesitation, the country's Central Bank let the exchange rate float. Although it depreciated by about 50 percent, it has since stabilized, giving Ukraine a new cost competitiveness.
Together with the international financial institutions, the Central Bank has examined all of Ukraine's banks and quantified their bad debt. Compared to the West, Ukraine's share of toxic debt is small.
Seventeen Western banks have committed themselves to recapitalizing their subsidiaries in Ukraine with $2 billion this year. In addition, it is estimated that two-thirds of the country's refinancing needs this year will be met. Most of this is done by European banks. So far, not a single foreign bank has withdrawn from Ukraine. Their prospects are just too attractive. Similarly, the three big Russian banks --VEB, VTB and Sberbank -- have increased their activity in Ukraine despite the crisis.
The Ukrainian authorities have taken seven private Ukrainian-owned banks under administration, and they have mobilized $2.6 billion for their recapitalization from the World Bank, the European Bank for Reconstruction and Development and the European Investment Bank. All of them understand Ukraine's financial dilemma. The IMF assesses the total need for recapitalization of no more than $5 billion.
Yet the Ukrainian government had problems receiving its second tranche of the IMF loan because GDP declined much more than expected, and thus state revenues. The IMF assessed the budget deficit would be untenable at 6 percent of GDP, even leaving a possible public bank recapitalization of 4.5 percent of GDP aside.
The Ukrainian parliament agreed to increase excise taxes on alcohol, tobacco and diesel, and the prime minister decreed further revenue measures to reduce the budget deficit by 2 percent of GDP. With substantial financing from various international financial institutions, the IMF mission considered that the shortfall was almost covered and recommended a second enlarged tranche.
At the same time, the Ukrainian government has made a break with nontransparent gas-trading arrangements through the gas agreement with Russia on Jan. 19 and the agreement on the gas transit system with the European Union on March 23. These two decisions might belong to Ukraine's most fortuitous reforms. Fortunately, it joined the World Trade Organization in May last year, securing reasonable market access.
On April 1, the Ukrainian parliament voted by an overwhelming majority to hold the next presidential election on Oct. 25, which will help the country to clarify the political situation. The fundamental political problem, however, lies in the confusing constitutional compromise of December 2004, which was one of the most significant results of the Orange Revolution.
Now all major parties demand a transition to a purely parliamentary system that would make it impossible for a president to block all decisions. They also call for open-party lists to make it impossible for wealthy businesspeople to purchase seats in parliament.
Ukraine has not faced the level of social unrest that other countries have experienced, despite the serious blows to its economy. During television talk shows, both the government and opposition speak their minds freely, and the people hear their arguments until they are satisfied -- or bored.
Thanks to early and resolute anti-crisis actions, international reserves remain reassuring at $25 billion, or eight months of imports. Industrial production increased in both February and March over the preceding month, suggesting that Ukraine might already have turned the corner (although GDP will probably still decrease by 8 percent to 10 percent this year). Even the bond and stock markets have soared in the last month.
Ukraine has shown exemplary crisis management thanks to a few Ukrainian top officials --notably Prime Minister Yulia Tymoshenko -- and a good job by the international financial institutions.
NOTE: Anders Aslund, economic adviser to the Ukrainian government from 1994 to 1997, is a senior fellow at the Peterson Institute for International Economics and author of "How Ukraine Became a Market Economy and Democracy." Dr. Aslund has served for many years as a Senior Advisor to the U.S.-Ukraine Business Council (USUBC) in Washington, D.C., www.usubc.org.
LINK: http://www.themoscowtimes.com/article/1028/42/376481.htm
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2. THE EU DAIRY & MEAT MARKET - REAL OPPPORTUNITIES FOR UKRAINE?
Two policy papers on the dairy and meat sectors in Ukraineand the EU
Dr. Igor Burakovsky andDr. Heinz-Wilhelm Strubenhoff
Institute for Economic Research and Policy Consulting
German-Ukrainian Policy Dialogue in Agriculture, Kyiv, Ukraine
U.S.-Ukraine Business Council (USUBC), Washington, D.C., April 22, 2009
WASHINGTON, D.C. - The U.S.-Ukraine Business Council (USUBC) received the following letter today from the Institute for Economic Research and Policy Consulting, German-Ukrainian Policy Dialogue in Agriculture inKyiv, Ukraine. USUBC thought this key information would be of interest to our members:
Institute for Economic Research and Policy Consulting
German-Ukrainian Policy Dialogue in Agriculture
Kyiv, Ukraine
Tuesday, April 21, 2009
Dear Friends,
We regularly share with you major findings of our applied research and policy advisory work. Today, we attach for your consideration two policy papers on the dairy and meat sectors in Ukraine and the EU. May Ukrainian exporters of dairy and meat products in the near future expect to get access to the EU market? If yes, what should the Government and private companies do to make this happen?
[1] The EU Dairy Market – Real Opportunities for Ukraine? by Mariya Ryshkova, Sebastian Hess and Bernhard Voget, Policy Paper AgP19
LINK TO PDF File of Entire 48 Page EU Dairy Market Policy Paper: http://ierpc.org/ierpc/papers/agpp19_en.pdf
[2] The EU Meat Market – Real Opportunities for Ukraine? by Anja Kuznetsova, Sebastian Hess and Bernhard Voget, Policy Paper AgP24,
LINK TO PDF File of Entire 48 Page EU Meat Market Policy Paper: http://ierpc.org/ierpc/papers/agpp24_en.pdf
The first paper [Dairy] has already been published at the end of last year. However, we think that both papers together give a more complete picture. So we decided to attach both papers. All information materials can be down-loaded free of charge from the website of the Institute in English and Ukrainian language: www.ier.kiev.ua; [English version: http://www.ier.kiev.ua/English/news_eng.cgi]
[Policy Papers Link: http://www.ier.kiev.ua/English/papers/papers_eng.phtml]
The papers give an overview on the current situation and future trends of the dairy and meat sectors and policies in the EU. Likely policy changes in the EU and the Free Trade Agreement of the EU with Ukraine will create opportunities.
Of particular importance are quality standards of the EU and of retail chains. These standards will be crucial for opening the door to new markets in Europe and beyond. Even for domestic meat and dairy markets European standards are considered to be important to develop more investment opportunities.
BOOK: AGRICULTURE, BIOENERGY AND FOOD POLICY IN UKRAINE
At the same time we would like to draw your attention to our book publication: “Agriculture, Bioenergy and Food Policy in Ukraine – Analyses, Conclusions and Recommendations”. Free copies in English and Ukrainian language are available on request.
Currently, we are working on genetically modified organisms (GMO) in agriculture comparing legislation, perspectives and policy options in the EU, USA and Ukraine.
Looking forward to an excellent further collaboration. Yours Sincerely,
Dr. Igor Burakovsky Dr. Heinz-Wilhelm Strubenhoff
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For further information contact: Iryna Slavinska
Institute for Economic Research and Policy Consulting
German-Ukrainian Policy Dialogue in Agriculture
Reyterska 8/5 A, 01034 Kyiv
Tel. office (+38044)235-7502, 278-6360
slavіnska@ier.kiev.ua, www.ier.kiev.ua
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3. INVESTORS AND THE UKRAINIAN STOCK MARKET
By Diana Smakhtina, Vice President, Corporate Governance,
Restructuring, SigmaBleyzer, Kharkiv Office
Dzerkalo Tyzhnia, No 13 (741), Kyiv, Ukraine 13 - 20 April 2009
Even people not involved in the investment business are now saying that we need to deal ASAP with the problem of foreign and domestic investments that “escaped” Ukraine. So far “the process is at a standstill.” The world is feverishly watching the ups and downs of global stock market indices and trying to forecasting when, where and how much to invest as the crisis passes.
Everything is much simpler in Ukraine. Many people are already observing with interest the stock index curve of basically the only stock market that functions under market conditions – the PFTS. But when it contracted fivefold in 2008, this didn’t trigger an analysis of the cause and effect relationships: the global crisis – problems with financial resources – global economic recession – investors leaving Ukraine – Ukrainian stock market slump – economic recession in Ukraine. Everyone is used to our stock market being “free” - thereby not related to anything, in general, a totally “independent” market, that is in its early stages – they they’d didn’t even bother with analysis and conclusions.
The first responses to appear and catch the media’s attention were about “speculators having left” the Ukrainian stock market. This is indeed the case because in crisis situations portfolio investors are among the first to leave dangerous markets and look for more reliable environments to put their money.
However, it’s become the norm in Ukraine to associate the word “speculators” with the word “swindlers” that this information was treated very disparagingly. So they left – we don’t need speculators. Not understanding of the essence of stock markets, it’s easy to brush aside the fact that Ukraine lost this important component.
Naturally, those professionally tied to the stock market performed deeper analysis. But their voices weren’t heard. In Ukraine the stock market is viewed as something exotic that appeared and existed, even had its own state regulatory body, simply because that’s what a market economy is supposed to have. Our leaders don’t quite understand the connection between this market and the country’s economy. But what understanding of the role of stock markets can there be given the rapid changes in the “supreme commander of the economy” and constant changes in political priorities.
A stock market requires knowledge and an ability to analyze its impact on the economy…Right now this knowledge is imperative. All the claims concerning the need to improve the investment climate without an understanding of the role of the stock market, moreover in a post-crisis period that we should already be thinking about, remind me of the saying “fine words butter no parsnips.”
So what does Ukraine have today? There are no investors, the stock market has sunk deeply, and it’s not known what will attract investors to Ukraine and when. Let’s take for example the most convenient investments – so-called direct investments. An investor has available resources and is looking to invest them for a period of time to then recoup his investment plus profit. For companies this type of investment is in fact convenient - they’re not burdened with debt obligations and can use the resources received for development.
From the outside this all looks like investments unrelated to the stock market. For “direct” investors, the main task prior to making an investment decision is to calculate the return on investment, taking into account the sectoral, regional and political risks. But before making a decision to move towards Ukraine, this investor will first look at the stock market, even despite its rudimentary state.
Shares in companies, even leading ones, have fallen; corporate bonds have fallen sharply in terms of emission and sale; state securities aren’t being bought; IPOs in terms of numbers and volumes have dramatically declined, and planned IPOs have been cancelled. And somehow this is all on the background of mass departure by portfolio investors, who are called speculators, but who are the first to signal the state of affairs in our economy - worn out from the rapid change in programless governments.
But, let’s say that clear economic programs appeared and the global crisis loosened it powerful grip. Our “direct investor” not only successfully bought the company that dropped in price during the crisis, but is convinced that it hasn’t completely gone under, that it can be built up, and likely with additional corporate resources from that very stock market. As they say “the same old sixpence…”
Everyone will change while the country seeks a way out of the financial and economic crisis. In the banking system the strong will survive, companies will either grow some muscle or leave the market…but the stock market, based on the first year of the crisis, will likely remain as is.
What does an investor want to see from our stock market? What will draw his attention to Ukraine? What will help him become convinced that his property here won’t be lost in battles with competitors or due to excessive corporate interest by those very structures that register this property? What will allow him, if necessary, to invest money into the company he bought at a market rather than manipulated price? Will he be able to buy only a portion of the company, as ends up happening now? But disrespect for any non-controlling share in a joint stock company has long since scared off those investors who could provide a company with money, having, let’s say, a 20 percent share in its ownership.
The stock market’s problems can and should be viewed from various angles, while understanding and interpreting the systematic relations. Ukrainian stock market analysts are closely following the ongoing processes. Their statistics and analysis rather correctly link the circulation of securities with processes in the financial sector and real economy. Unfortunately, it seems that this subject is of interest for a rather small circle of experts.
This analysis is not seriously reflected in any of the anti-crisis programs. Interestingly enough, we have yet to see or hear any stock market experts on the numerous talk shows. There have been many discussions and accusations about the formula for calculating the gas price, about the economic grounds for various tariffs, and about the rate of the hryvnia…as they say – the people will eat it up. But talk shows aren’t to blame for these same people not understanding the impact the stock market has on their pockets.
Ukrainians, to great extent, learn about market economy from talk shows. When they suddenly lose or find money in their wallets, the media and talk shows are the first to respond. They all try to figure out where the money went or came from. They mention the stock market only when there are loud scandals over the loss of money through stocks. The broad reasons for the stock market’s problems aren’t exposed or named. But the names of the “swindlers” and their companies flash on tv screens and in newspaper columns.
There is nobody to discuss the reasons for the drop in these stocks because the usual talk show personalities and media aren’t knowledgeable in these issues…and I have yet to see any stock market experts on the screen. But let’s emphasize once again that these mass shows and publications aren’t at fault – they simply reflect the sad reality. Our leaders and their teams don’t understand the role of the stock market in hyping up the crisis and therefore don’t speak about this.
And what about investors? Those who are more knowledgeable will review the experts’ statistics and analysis. By the time those who aren’t learn the “scandalous facts” - the PFTS has fallen again. Careful, something’s amiss in Ukraine!
They waited it out - the real economy is getting back on its feet, the credit system has lowered its interest rates to reasonable levels, the exchange rate has become more or less forecastable and adequate. Our direct investor (let’s continue with this example because they’re impatiently waiting for his investments) believes that the company he likes based on price and opportunity for growth, will bring him the expected returns on his direct investment. We sympathize with the naïve. However, when it comes to Ukraine, there probably aren’t such naïve investors any longer. They got burned and are awaiting positive changes in the stock market.
Let’s say an investor plans to buy 85% of shares, take on a leading corporate management role proportional to the size of his shareholdings, within time attract additional resources through public (open) emission, thereby lowering his shareholdings to 75%; then, having strengthened the company, find a strategic investor and sell all his shares “into good hands” and leave a good impression about himself on the investment market. He didn’t ruin the company but strengthened it, and even during the sale selected a strategist that will ensure the company’s further growth, which will leave our investor with the normal reputation and not “buy low - sell high.” Ukraine’s dream is to find such investors!
But the harsh realities of the stock market await our investor. While we crawl our way out of the crisis (with complete lack of government attention to this market and to development its legal and normative base) our investor will think thrice before entering Ukraine. And even the ratification of the long-awaited law on joint-stock companies and persistent attempts by the regulator – the State Commission on Securities and the Stock Market – to bring the normative base in line with the realities of the global stock market experience, aren’t easing our investor’s worries.
But perhaps many already understand the truism that the joint-stock form of capital is convenient given its ability to attract investments. The stock market isn’t among the state’s development priorities. Nobody is convinced that by the time we emerge from the crisis the stock market will be able to secure the financial inflows that the economy needs. And we won’t be pressed to wait for investments in Ukraine even with all the measures to “improve the investment climate.”
Let’s trace the obstacles that our direct investor will encounter in implementing his abovementioned plans. We’re not even considering ill-fated corruption, corporate raidership and bureaucratism. We’ll simply look at the state of the legislative and normative base and the registration of the ownership rights to the purchased 85% shareholdings. The current Law “On the National Depositary System and Peculiarities of Electronic Circulation of Securities in Ukraine,” adopted in 1998 (and much needed back then), should have been reviewed a long time ago taking into account the realities of the development of depositary systems around the world. Meanwhile, legislators will never get around to ratifying a new version, let alone a needed new law.
The prepared draft Law of Ukraine “On the Depository System of Circulation of Securities” raises more questions than answers due to the general practice of preparing and approving laws. Mechanisms for enacting laws aren’t adequately worked out. Usually this only involves the legislative coordination – and rather scant at that - between the new law and existing laws. Nobody is bothering with issues related to the systematic coordination of procedures in Ukraine, which opens the way for mistakes, corruption and corporate raidership. The regulator clearly does not have enough functions to ensure enforcement of laws.
Rather, the function is outlined in article 7, paragraph 23 of the Law “On State Regulation of the Securities Market” (define procedures for effective securities legislation enforcement). But the principles, goals and methods of state regulation of the securities market is a separate and extensive topic, especially when there are lively discussions going on about the degree and role of government influence on the market during a global crisis. In acquiring 85% of shares, our investor enters the minefield that is corporate management. It’s expected that he’ll be able to circumvent some mines starting on April 29, 2009, when the new Law of Ukraine “On Joint Stock Companies” goes into effect.
There are also more questions than answers regarding the procedure for executing this law. For certain companies, the old law on business entities will still apply for another two years. It won’t be easy for our investor to sort through these cobwebs. We should also remember that according to the new law, which protects the interests of minority shareholders, minority shareholders have the right to demand that our investor buy their shares. But at what price? Try to make sense of article 8 of the law and its concept of market value. Stock market experts are still holding lively discussions, while investors are thinking of ways to circumvent this norm.
Our investor is getting ready to sell his package of shares and so far has decided to lower it to 75%. He makes a public issue, which allows him to give the company a financial injection for its development. Having learned from his own bitter experience or that of his fellow investors, he won’t lower his shareholdings below 60%. Battles between investors for a place in corporate management in Ukraine have made news around the world. Having carefully read the norm in the new law on quorum for general shareholders’ meetings at 60%, he won’t get burnt a second time.
Therefore, he opts for emission. The 2006 Law of Ukraine “On Securities and the Stock Market” and a host of normative documents issued by the State Commission on Securities and the Stock Market have made the procedure for emissions more or less clear. Unfortunately, these procedures don’t outline the regulator’s concrete and strict responsibilities.
Article 15 of the 1996 Law “On State Regulation of the Securities Market” on the responsibilities of the Commission and its officials “as established by Ukrainian legislation” includes nothing about the responsibility for efficient handling of the issuer’s documents. If they find a mistake in the submitted documents, they make the issuer correct it. Later they find one more mistake and the process repeats itself. As a result, instead of the set normative timeframe, the process is dragged out for a month, while the company and Ukrainian economy wait for money…
It’s often the case that this can be explained by the ineptness of the issuer and his specialists. But Ukraine needs investments, so there should be a procedure that minimizes the time for receiving finances. And there needs to be control over executive discipline. Then there won’t be hallway conversations about bribes to get through normal procedures envisaged by the regulations.
Now our investor is ready to exit the investment. If he didn’t think about this process from the very beginning, then he’s in for endless mess due to discrepancies between tax norms, currency norms, the foreign investor’s status in Ukraine.
The terms in our example were very simplified. We didn’t look at involving professional institutional investors (ICI) in the joint stock company. We didn’t look at problems of stock market operations when shares in our companies are in free circulation and the investor expects an objective assessment of the company’s capitalization, which will help give him a certain reputation and return on the sale of the investment.
And so we wait for the crisis to end, investment climate to improve and investments to increase. As for the stock market – “the same old sixpence.” Per instructions from the Cabinet of Ministers, a new draft “Concept on the Strategic Development of the Financial Sector in Ukraine through 2015” is being prepared. But without a program for getting the stock market through the crisis with concrete decisions and timeframes, without programs for other strategic sectors in Ukraine, we’ll never see these needed investments.
We need to start with a systematic analysis of the stock market’s legislative and normative base and clarifying all the cause and effect relationships. Who can and should do this? The State Commission on Securities and the Stock Market can’t hack it alone. And after all, this research doesn’t fall within its competence. Moreover, there are quite a few regulators in Ukraine who control the circulation of securities. An added plus is that each has its own infrastructure. Ukraine has wonderful experts who should be working on this together with the regulators.
The eternal question remains – where to get the money? After all, the cheap always end up paying double. If we want investments, we have to spend. We’re not talking about pumping tens or hundreds of millions like we’re doing to rescue strategic industries. We’re talking about financing the development of programs. But regulators shouldn’t be developing them alone. Let’s not forget one of the principles of the stock market – the division between making rules and applying rules. Business needs such a program and will find a way to involve its experts in its development.
We could, of course, continue our grand meetings about improving the investment climate in Ukraine, attracting investors, especially western ones. Out of nothing we’ll get nothing. Without decisive and real actions to develop the Ukrainian stock market, our investment climate won’t get through the challenges it faces. During this forced pause and economic recession, our legislators and government institutions are simply duty-bound to use all necessary measures and make a decision regarding the stock market.
NOTE: Diana Smachtina has been working for SigmaBleyzer since its foundation in 1993. She is well known in Ukraine as the leading specialist in issues of privatization and stock market development. She was one of the organizers and is a permanent member of the governing council of the Ukrainian Stock Market. (Ukrainian Association of Securities’ Traders and the Ukrainian Association of Investment Business (UAIB). Under her supervision, SigmaBleyzer was the participant of a pilot project implemented in Ukraine by USAID and PriceWaterhouse.
For more then 15 years, Ms. Smachtina has given lectures on economy and management. She is certified in privatization, asset management of investment funds, and stock brokerage. She has developed creative approaches to modern education.
In 1995, under her supervision and with SigmaBleyzer’s direct participation, Ukrainian Association of Investment Business (UAIB) published a directory titled “Investment business: professionally from professionals”. Her interviews in the mass media and appearances at conferences constantly attract attention due to her deep understanding of the problems of privatization and corporate culture in Ukraine. www.sigmableyzer.com
LINK: http://www.dt.ua/2000/2020/65877/
NOTE: Article translated into English for the U.S.-Ukraine Business Council (USUBC), Washington, D.C., www.usubc.com. SigmaBleyzer, www.SigmaBleyzer.com, is a member of the USUBC.