UKRAINE'S STANDING IN REGIONAL & INTERNATIONAL MARKETS
U.S.-Ukraine Business Council
Thursday, September 11, 2008
1. STEEL AND ENERGY HEAD UKRAINE LIST IN TOP 500 COMPANIES CENTRAL & EASTERN EUROPE
By Roman Olearchyk, Financial Times, London, UK, Wed, September 10 2008
2. REVERSAL OF FORTUNE FOR EMERGING MARKETS
The hardest hit stock markets in dollar terms is Ukraine, which has fallen 58.8 per cent
By David Oakley in London, Financial Times, Thursday, September 11 2008 03:00
3. UKRAINE: COUNTRY FORECAST SUMMARY
The Economist Intelligence Unit 5 Year Forecast Summary
Economist Intelligence Unit Limited, New York, NY, Friday, September 5, 2008
4. UKRAINE RANKS VERY LOW IN EASE OF DOING BUSINESS SURVEY, 145 OUT OF 181
Doing Business 2009: Eastern Europe and Central Asia Region Leads in Regulatory
Reform, with Newcomers Making Big Gains; Azerbaijan is World's Top Reformer
World Bank and IFC, Washington, D.C., Wed, September 10, 2008
5. HEADY MIX OF THREATS AND OPPORTUNITIES IN CENTRAL AND EASTERN EUROPE
By Stefan Wagstyl, Financial Times, London, UK, Thursday, September 11 2008
6. UKRAINE RANKED NEAR THE BOTTOM IN INDEX OF WORLD'S MOST DEVELOPED FINANCIAL SYSTEMS
London joins New York at the top. Ukraine ranked 50th out of 52 countries just above Nigeria and Venezuela.
By Francesco Guerrera in London, Financial Times, Tuesday, September 9 2008
7. EU PLEDGES CLOSER TIES TO KIEV IN CAUTIOUS MOVE
By David Gauthier-Villars, The Wall Street Journal, New York, September 10, 2008; Page A9
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1. STEEL AND ENERGY HEAD UKRAINE LIST IN TOP 500 COMPANIES CENTRAL & EASTERN EUROPE
By Roman Olearchyk, Financial Times, London, UK, Wed, September 10 2008
KYIV - Once called the “Bread Basket of Europe”, Ukraine is famous for its rich black soil and prospects for becoming an agriculture powerhouse.
But when this vast country of 46m citizens declared independence in 1991, it also walked away with a large chunk of the Soviet Union’s industry, including factories that churned out rockets, military tanks and naval ships. It should therefore be of no surprise that four Ukrainian steel groups rank among the
country’s top 10 companies in the CEE500 [Central & Eastern Europe Top 500 Companies]
Leader of the pack is Metinvest, the steel holding controlled by billionaire Rinat Akhmetov, Ukraine’s richest tycoon. Owning steel mills and mines, the group last year purchased UK-based Spartan steel mill and Italy’s Trametal.
To power all of Ukraine’s industry – which matches in size the combined factories of peers in central Europe – Ukraine is a massive consumer of energy, including gas, oil and electricity.
What is more, the country’s vast pipeline system is the main channel for Russian natural gas and oil supplies pumped to Europe. Energising Ukraine’s industry, and exporting power, is the business of the leading Ukrainian energy companies.
To the benefit of state-owned Naftogaz, Kiev’s government is this year squeezing gas trader Ukrgaz-energo out of business. Oil refineries Lisichansk Petroleum Investment Company and UkrTatNafta are profiting from booming car sales, much like the Zaporizhia carmaker ZAZ.
UKRAINE TOP 10 COMPANIES IN CEE500
8 Ukrgazenergo
11 Energorynok
30 MetInvest Holding
34 ArcelorMittal Kryvyj Rih
38 Ilyich Steel & Iron Works
41 NJSC Naftogaz
47 Azovstal
66 Lisichansk Petroleum Investment Company (LiNIK)
68 UkrTatNafta
74 Zaporizhzhia Automobile Building Plant (ZAZ)
* Position in CEE 500
2. REVERSAL OF FORTUNE FOR EMERGING MARKETS
The hardest hit stock markets in dollar terms is Ukraine, which has fallen 58.8 per cent
By David Oakley in London, Financial Times, Thursday, September 11 2008 03:00
LONDON - Outflows from emerging markets bond and equity funds reached $29.5bn over the past three months, the highest level since at least 1995, with withdrawals gathering pace over the past week.
Investors headed for the exits as rising fears over slowing world growth and the state of the banking system over the past week added pressure on emerging markets - which were already reeling from weaker commodity prices, inflationary pressures, a stronger dollar and geopolitical concerns.
Investors switched $1bn out of equity and fixed income funds on Monday, one of the highest daily outflows since records began in 1995, said EPFR Global, the data provider. Last week there were outflows of $1.6bn, bringing the total since June 4 to $29.5bn, the largest three-monthly figure since 1995.
Nick Chamie, head of emerging markets research at RBC Capital Markets, said: "Since July, investors have finally become aware of the severity of the global slowdown. The emerging markets are a leveraged play on global growth, so in a serious downturn, investors will naturally sell them."
David Lubin, emerging market strategist at Citigroup, said: "Emerging market asset prices rose strongly in a world of rapid growth and high commodity prices, creating something like a virtuous circle.
"Now we're faced with the risk that this process is unwinding. The strength of the dollar has put emerging economies' currencies under pressure just at the point where a rise in global risk aversion is pushing investors away from exposure to developing countries."
The benchmark MSCI emerging market index yesterday fell 1.27 per cent to 857.44, the lowest level since March 2007. The fall extended its decline to 4.8 per cent over the past week and 22 per cent over past three months.
HARDEST HIT STOCK MARKET IN DOLLAR TERMS WAS UKRAINE
The hardest hit stock markets in dollar terms are Ukraine, which has fallen 58.8 per cent; China, down 57 per cent; Romania, down 49 per cent; Pakistan, down 46.7 per cent; and Vietnam, down 46.4 per cent. Russia has dropped 46 per cent since its May 19 peak.
Emerging market sovereign bond yield spreads have risen to 330 basis points over Treasuries- highs not seen since mid-2005.
Paul Biszko, senior emerging market strategist, said: "here has been a realisation in the past few months, and even more clearly this week, that the emerging markets are not immune to the problems in the developed world."
LINK: http://www.ft.com/cms/s/0/3c20bb4a-7f99-11dd-a3da-000077b07658.html
3. UKRAINE: COUNTRY FORECAST SUMMARY
The Economist Intelligence Unit 5 Year Forecast Summary
Economist Intelligence Unit Limited, New York, NY, Friday, September 5, 2008
Following Russia's military intervention in Georgia, the risk of a destabilising escalation in tensions with Russia has increased, in view of the ambitions of the president, Viktor Yushchenko, for Ukraine to join NATO, and the presence in Crimea of a large ethnic Russian population and the Russian Black Sea Fleet.
Domestic political stability will remain elusive over the coming years, with the scene broadly divided between the "Orange" parties and the Party of Regions (PoR). Consensus will be hard to find on vital issues, such as a clear division of constitutional powers. Political tensions are likely to increase in the run-up to the next presidential election, which is due in early 2010.
The early parliamentary election in September 2007 returned a divided legislature, with the Orange parties in possession of only a slim majority. The Orange coalition lost their majority in mid-2008, and the collapse of the government looks like being only a matter of time.
Ukraine joined the World Trade Organisation (WTO) in May 2008 and is expected to make continued progress on the reforms needed for closer economic ties with the EU, as there is consensus across the political spectrum on the issue. Nevertheless, the influence of big business on policymaking can be expected to remain significant.
Increased imbalances, reflected in high inflation and a widening current-account deficit, will pose the main threat to macroeconomic stability. A growth slowdown early on will be driven by a correction, as well as by a less favourable external climate in terms of demand and financing. Growth should pick up in the later years of the forecast period, assisted by a more favourable external environment and modernisation in key industries.
Strong import demand and real currency appreciation, combined with rising gas import prices and an undiversified export base, will keep the current-account deficit large. Inflows on the financial account should remain strong, but they may be insufficient to cover the current-account gap.
The Economist Intelligence Unit expects timely repayment of sovereign Eurobond and multilateral debts. Borrowing by Ukraine's banks and corporations has risen sharply, although attendant risks have risen. Total external debt is forecast to fall to below 30% of GDP by the end of the forecast period.
Key indicators 2007 2008 2009 2010 2011 2012
Real GDP growth (%) 7.7 6.2 5.5 5.8 6.3 6.5
Consumer price inflation (%) 12.8 24.9 14.9 10.5 8.5 7.5
Consolidated budget balance (% of GDP) -1.1 -2.1 -1.4 -1.2 -1.3 -1.9
Current-account balance (% of GDP) -4.2 -6.9 -7.7 -7.6 -7.2 -7.0
Commercial banks' prime rate (av; %) 13.9 24.5 17.0 13.0 11.0 10.0
Exchange rate HRN:US$ (av) 5.05 4.94 5.00 5.08 5.10 5.11
Exchange rate HRN:euro (av) 6.92 7.61 7.59 7.37 6.99 6.74
4. UKRAINE RANKS VERY LOW IN EASE OF DOING BUSINESS SURVEY, 145 OUT OF 181
Doing Business 2009: Eastern Europe and Central Asia Region Leads in Regulatory
Reform, with Newcomers Making Big Gains; Azerbaijan is World's Top Reformer
World Bank and IFC, Washington, D.C., Wed, September 10, 2008
WASHINGTON, D.C., - Reforms to business regulation reached record numbers this year, with Eastern Europe and Central Asia leading among world regions for a fifth consecutive year, according Doing Business 2009-the sixth in an annual series of reports published by IFC and the World Bank.
Between June 2007 and June 2008, 23 of the region's 25 countries implemented 62 reforms that make it easier to do business -over 25 percent of the total
worldwide.
Four of the 10 economies making the most regulatory reforms are in Eastern Europe and Central Asia, and the trend is moving eastward as newcomers join
the list. The top 10 are, in order, Azerbaijan, Albania, the Kyrgyz Republic, Belarus, Senegal, Burkina Faso, Botswana, Colombia, the Dominican Republic, and Egypt. [Ukraine ranked 145th out of the 181 countries in the survey, a very low rating]
Doing Business ranks economies based on 10 indicators of business regulation that track the time and cost to meet government requirements in starting and
operating a business, trading across borders, paying taxes, and closing a business. The rankings do not reflect such areas as macroeconomic policy,
quality of infrastructure, currency volatility, investor perceptions, or crime rates.
Azerbaijan, the world's top country in reforming business regulations, rose from 97 to 33 in the global rankings on the ease of doing business. The
country undertook reforms in seven of the 10 areas studied by the report-speeding business start-up, contract enforcement, and property registration; easing tax administration burdens and employment restrictions; and strengthening investor protections and credit information.
Albania, the runner-up in reforming regulations, rose from 135 to 86 in the global rankings on the ease of doing business, with reforms in four areas.
These made it easier to start a business, eased tax burdens, and strengthened investor protections and credit information.
"Countries in Eastern Europe and Central Asia continue to lead the world in easing the regulatory burden on business and in sustaining their reform
agendas," said Svetlana Bagaudinova, a coauthor of the report. "We see many of these countries advancing to the top 30 in the overall rankings on the
ease of doing business. Many countries that made improvements this year looked to earlier pacesetters for ideas on how to reform their regulations," she added.
"Economies need rules that are efficient, easy to use, and accessible to all who have to use them. Otherwise, businesses are trapped in the unregulated,
informal economy, where they have less access to finance and hire fewer workers, and where workers lack the protection of labor law," said Michael
Klein, World Bank/IFC Vice President for Financial and Private Sector Development. "Doing Business encourages good rules, and good rules are a
better basis for healthy business than 'who you know,'" he added.
Singapore leads the global rankings on the overall regulatory ease of doing business for a third consecutive year. New Zealand is runner-up, and the
United States third.
Top-ranked countries in Eastern Europe and Central Asia are Georgia (15), Estonia (22), Lithuania (28), Latvia (29), and Azerbaijan (33).
Doing Business 2009 ranks 181 economies on the overall ease of doing business.
The top 25 are, in order, Singapore, New Zealand, the United States, Hong Kong (China), Denmark, the United Kingdom, Ireland, Canada, Australia,
Norway, Iceland, Japan, Thailand, Finland, Georgia, Saudi Arabia, Sweden, Bahrain, Belgium, Malaysia, Switzerland, Estonia, Korea, Mauritius, and
Germany.
LINK: To Ukraine Ease Of Doing Business Rating, http://www.doingbusiness.org/Documents/CountryProfiles/UKR.pdf
5. HEADY MIX OF THREATS AND OPPORTUNITIES IN CENTRAL AND EASTERN EUROPE
By Stefan Wagstyl, Financial Times, London, UK, Thursday, September 11 2008
The unprecedented surge of growth in the economies of central and eastern Europe that began in the grim days after the collapse of Communism may now
be slowing. But the pace remains fast enough for the region to remain an economic dynamo for years to come.
The region covered in this special report, which consists of central Europe, southeast Europe, the Baltic states and Ukraine (but excludes Russia and
Belarus), is forecast to see a slight decline in gross domestic product growth this year to about 5 per cent, down from 6 per cent in 2007. A further decline is in prospect next year, assuming the global economy slows as expected.
But, over the past decade, the region's economies have grown at an average rate of 4 per cent, compared with 2 per cent for western Europe. Economists
calculate that if these trends continue, central and eastern Europe's GDP will double within 20 years.
That is a mouth-watering prospect for the region's many investors, both domestic and foreign. But to gain the full benefits, governments and companies alike face some serious challenges.
At the national level, politicians are struggling to overcome "reform fatigue" and complete the market-oriented reforms - including privatisation - started after 1989, and to contain global inflationary pressures stemming from high fuel and food prices. Some countries, notably in the Baltics and the Balkans, have run into serious difficulties managing current account deficits.
At the corporate level, managers are fighting to control costs, especially rapid increases in wages and salaries, with top executives already securing
remuneration comparable to western European standards.
For the region's companies, all this represents a heady mix of threats and opportunities, in which advances can be made much faster than in western
Europe but in which big problems can emerge with unexpected force.
The tables prepared by the corporate finance team at Deloitte, the advisory group, for this report show that, as in western Europe, the region's corporate hierarchy is dominated by oil and gas companies, utilities, telecommunications groups and banks.
In the principal list of companies ranked by 2007 revenues (excluding banks which are listed separately), the top two entries are national energy groups - Poland's PKN Orlen, and Hungary's Mol, with two electricity groups - PGE of Poland and CEZ, the Czech generator, ranked fourth and fifth.
But what is striking is the strong showing by the region's carmakers, with three Volkswagen subsidiaries in the top 10 companies - Skoda Auto of the Czech Republic, Audi Hungaria and Volkswagen Slovakia. Altogether, there are 50 auto companies in the CEE500 list, a reflection of the shift in the industry's centre of gravity from western to eastern Europe.
With big producers still to come fully on stream - for example Kia Motors, the South Korean group in Slovakia - and others, such as Germany's Daimler
in Hungary, yet to start manufacturing, the sector seems certain to grow further in significance.
Not far behind are steel companies with 10 groups in the top 100, including a strong showing by ArcelorMittal, the world's largest steel group, which
has operating companies in Poland, Ukraine, Romania and the Czech Republic.
Among telecommunications groups, the region's largest is Telekomunikacja Polska of Poland. The biggest high-technology manufacturer is the Hungarian
subsidiary of Finland's Nokia.
But, as Deloitte points out, there is "not much technology" in the region. Only 45 of the top 500 companies come from the technology media and
telecommunications sector - and that includes the telecoms utilities.
This under-representation reflects the concerns economic policymakers express about the difficulties the region has faced in developing high-technology, high-skill companies.
There will be little relief in the short-term as the telecoms utilities, the largest companies in the sector, are - as elsewhere - struggling with declining revenues from fixed line telephones.
Among banks, which are listed separately by assets, the Czech Bank CSOB, owned by Belgium's KBC, comes out on top, followed by Pekao, the Polish
subsidiary of Italy's Unicredit, and PKO BP, the Polish state-controlled bank. Deloitte says the table shows the largest Polish banks are less efficient than, for example, Czech banks. Assets per employee are as low as euro990,000 at PKO BP and euro1.5m at Pekao, compared to euro4.2m at CSOB.
The tables highlight the key role played by foreign investors in the region. While the data are estimates and do not account for inter-company sales, the
report shows Volkswagen to be the largest foreign investor with revenues of euro23.8bn in 2007, far ahead of ArcelorMittal in second place at euro10.7bn
and Metro, the German retailer, third with euro9.9bn.
While the bulk of foreign investors are west European groups, the list includes Russian, Asian and US companies. Of the top 25, all except three
reported revenue increases in 2007, with the biggest at Samsung Electronics, the South Korean group which is expanding production in the region.
One contrast with western Europe is the heavy presence of state-owned groups, which account for 120 of the top 500 companies, including 48 from
Poland. This is a reflection of the difficulties governments have faced completing privatisation, especially in politically-sensitive sectors such as energy.
Deloitte says: "This can be seen very clearly in Poland, where the state treasury has been trying either to privatise its 'crown jewels' through (partial) public offers that enable it to retain control or simply leave certain companies on the privatisation 'shelf'."
Only 71 of the top 500 companies are listed on stock exchanges - with the rest owned by the state, local entrepreneurs and foreign investors. This is
a reflection of the slow accumulation of capital in the region and the delayed development of capital markets.
On December 31 2007, by far the largest company in the region bv stock market value was CEZ on euro30.3bn, followed by Pekao on euro16.6bn, and PKO BP on euro14.7bn.
The tables show the region's companies reported strong growth last year, with average revenues rising 12 per cent in local currency terms and 15 per
cent in euros. The top 100 companies saw a 12 per cent rise in local currency terms, but the bottom 100 reported a gain of nearly 20 per cent. The top 10 companies saw a 15 per cent rise but much of this was attributable to acquisitions, such as those carried out by PKN Orlen and
CEZ.
However, the numbers also show that profitability is a bigger challenge than revenue growth in the region. Deloitte's calculations show that profitability fell slightly last year, because of the growing cost of labour, currency appreciation and measures to boost sales.
"The vast majority of the region's companies have failed to generate sufficient profits to cover their cost of capital," says the firm. "It appears that profit growth expectations have not materialised to the extent expected by investors."
This is a critical point. With global capital markets now passing through a difficult time, international investors will pay more attention to profitability. Companies that have failed to match big revenue increases with solid profit gains may come under pressure.
It is difficult to generalise, however. Many companies in the region are still in the early phases of developing big investments - their profitability should increase as these investments come fully on stream. But it will not happen of its own accord. Managers must watch their bottom lines.
5. UKRAINE RANKED NEAR THE BOTTOM IN INDEX OF WORLD'S MOST DEVELOPED FINANCIAL SYSTEMS
London joins New York at the top. Ukraine ranked 50th out of 52 countries just above Nigeria and Venezuela.
By Francesco Guerrera in London, Financial Times, Tuesday, September 9 2008
LONDON - London's efforts to challenge New York as the dominant financial centre will receive a boost today with a new study by the World Economic
Forum showing that the UK ranks alongside the US as the world's most developed financial system.
The US and the UK came out as joint leaders of the WEF's first "financial development index", followed by Germany, Japan, Canada and France.
The index is an attempt to measure the health of the financial systems of 52 countries by looking at factors ranging from the stability of the banking
sector to the soundness of the regulatory and political environment.
UKRAINE RANKS NEAR THE BOTTOM OF THE INDEX
Venezuela was at the bottom of the index, just below Ukraine and Nigeria, according to the report.
WEF officials say they will present the report, which was led by Nouriel Roubini, the New York university professor, to regulators and bankers around
the world over the coming months.
They believe the study can help policymakers and industry leaders to improve national financial systems at a time of severe strain by highlighting their
respective strengths and weaknesses.
Despite being virtually tied at the top of the index, neither the US nor the UK received full marks from the WEF. Weaker points for the US included the
regulation of security exchanges, the protection of intellectual property rights and the relatively high risk of banking crises - an issue that has come to the fore since the onset of the credit crunch.
Corruption and the regulatory burden were also seen as areas of weakness for the US, the report said. However, the US edged out the UK at the top of the
rankings for financial markets - a finding that will bolster New York's efforts to present itself as the world's pre-eminent capital markets hub.
The UK also scored poorly on the regulatory front and was in the bottom half of the index when it came to corporate taxation and the "cost of doing
business" - the price of obtaining licences and registering property.
In a surprise finding, the report ranked Malaysia's banking system as the second best in the world, based on its size, efficiency and financial disclosure, behind the US but ahead of the UK.
LINK: http://www.ft.com/cms/s/0/55322674-7e08-11dd-bdbd-000077b07658.html
7. EU PLEDGES CLOSER TIES TO KIEV IN CAUTIOUS MOVE
By David Gauthier-Villars, The Wall Street Journal, New York, September 10, 2008; Page A9
PARIS -- The European Union said it would build closer economic and political ties with Ukraine but stopped short of inviting its neighbor to join the 27-nation bloc, despite hopes in Kiev that Russia's incursion into Georgia would prompt a stronger signal of European support.
After a meeting in Paris with Ukraine President Viktor Yushchenko, French President Nicolas Sarkozy, who holds the rotating presidency of the EU, said both sides would finalize an "association agreement" by March 2009 to gradually eliminate trade barriers and travel restrictions.
The EU's cautious step reflects the limits of what some of its most important members are willing to do to challenge Moscow on behalf of its neighbors. Germany and France have long opposed giving any guarantee of eventual membership to Ukraine, a nation of some 46 million that would have a major impact on budgets and power-distribution in the EU.
At a news conference with Mr. Yushchenko and EU Commission President José Manuel Barroso, Mr. Sarkozy summarized the EU's position toward Ukraine as "this is the maximum we can do."
Since the breakup of the Soviet Union, Ukraine has tried to free itself from Russian tutelage. Although Ukraine has a large Russian ethnic minority, Mr. Yushchenko was elected four years ago on the promise that he would drive his country toward EU membership by 2020.
After Russia unilaterally recognized the independence of two Georgian separatist territories last month, it has been widely suggested that Moscow may covet other parts of its former empire, such as parts of Ukraine -- though Russia has dismissed the idea. In early 2006, however, Moscow showed it could punish Kiev for its aspirations to join the West, severing natural-gas deliveries to Ukraine for several days.
Mr. Yushchenko said Tuesday he wanted to renegotiate with Russia a set of rules governing the use of the Black Sea Fleet, a group of Russian warships anchored in the Ukraine city of Sebastopol.
Ukraine didn't do itself any favors last week, when the government entered yet another political crisis. Mr. Yushchenko withdrew his party from the pro-Western coalition government, saying that Prime Minister Yulia Tymoshenko had become too close to a pro-Russian opposition party.
Asked at Tuesday's news conference whether he continued to nurture hope Ukraine would join the EU one day, Mr. Yushchenko said: "We are patient."
[Write to David Gauthier-Villars at David.Gauthier-Villars@wsj.com]
LINK: http://online.wsj.com/article/SB122099395243616295.html