www.kyivpost.com: Business Sense http://www.kyivpost.com/news/business/business-sense/ Business Sense Business Sense: Ukraine needs overhaul of its economic system http://www.kyivpost.com/news/business/business-sense/detail/113394/ Business Sense Fri, 23 Sep 2011 01:31:30 +0300 Editor’s Note: Business Sense is a feature in which experts explain Ukraine’s place in the world economy and provide insight into doing business in the country. To contribute, contact chief editor Brian Bonner at bonner@kyivpost.com.]]> James Roberts and Andriy Tsintsiruk write: Ukraine is at the crossroads of Eastern Europe and Eurasia. Its global economic integration among free, democratic, and prosperous nations should be an important American foreign policy priority. A rebirth of economic freedom in Ukraine could have a positive impact not only on Eastern Europe but also in Russia and other post-Soviet states. This article, reprinted with the authors' permission, was originally published at the Heritage Foundation website here.

Achieving this desirable outcome, however, will require the government of Ukrainian President Viktor Yanukovych to implement long-delayed structural reforms aimed at establishing a free-market democracy.

Opportunities, obstacles

In the 20 years since independence, Ukrainians have dismantled the old Soviet political apparatus and centrally planned economy and, in so doing, transformed Ukraine’s economic, social, and political institutions. Between 1996 and 2005, Ukraine shot up by 15 points in the Index of Economic Freedom. In that same period, the country’s GDP per capita increased by more than 30 percent.

More recently, however, serious obstacles to economic freedom in Ukraine have surfaced, as evidenced by the country’s low rankings on several international indices.

Politically connected groups have acquired controlling stakes in state-owned enterprises through non-transparent, insider privatization deals.

Despite upbeat rhetoric promising free-market reforms, the country continues to suffer from rampant corruption, a large shadow economy (according to experts, at least 40 percent of GDP), and an escalating demographic crisis caused by the high mortality rate and the extensive out-migration of the workforce, including a “brain drain” of skilled labor.

As a result, Ukraine, like several other post-Soviet countries, is gradually regressing into an oligarchic, state capitalist system in which politics, business, and non-transparent economic activities intersect.

The lack of political commitment to the free market and consistently poor economic decision making may derail Ukraine’s chances to integrate successfully into the European and global economies.

Why does future matter?

Ukraine’s territory is Europe’s largest (excluding Russia). Its 46 million consumers constitute the biggest market in Eastern Europe; it is an ideal platform for manufacturing and exporting to both Russia and the EU. Its extensive transportation infrastructure positions Ukraine as a major international trade hub.

In the energy sector, Ukraine could develop coal and natural gas fields as well as vast Black Sea offshore and shale gas reserves to counterbalance Russia’s aggressive strategy to dominate European energy markets.

Of the 15 nuclear reactors currently operating in Ukraine, which generate about half of the country’s electricity, none are of the Chornobyl design.

Ukraine is the most democratic among the Commonwealth of Independent States, with four free and fair national elections since 2004. The U.S. has been a major supporter of Ukraine’s quest for democratic and free-market transition as well as one of its largest foreign investors.

The U.S. is also home to about 1 million Americans of Ukrainian origin. They care about its fate and constitute a reservoir of know-how for reviving their ancestral homeland.

Post-Soviet struggle

In recent years, Ukraine has been on an economic rollercoaster. Although economic growth between 2000 and 2007 averaged 7.5 percent, Ukraine saw the worst declines of any European country in 2009, with GDP contracting more than 15 percent. The lack of significant structural reform makes its economy especially vulnerable to external shocks.


Ukraine has fallen behind Central European neighbors like Poland, Hungary, the Czech Republic, Slovakia, and the Baltic countries, which have managed to attract foreign direct investment and transform their economies—now successfully integrated into the EU.

Economic integration

Ukraine is probably the most important economy in Russia’s foreign policy strategy. Moscow views Ukraine as belonging to its sphere of privileged interests, and the Kremlin seeks to exert its power and influence there through energy dependence and hostile mergers and acquisitions.

James Roberts

In exchange for cheap Russian gas, Ukraine signed the 2010 Kharkiv agreement extending the lease for Russia’s Black Sea Fleet in Sevastopol until 2042.

Gazprom is trying to take over Ukraine’s gas pipeline infrastructure, which transports 80 percent of Russian gas to Europe, while simultaneously launching the Nord Stream gas pipeline to bypass Ukraine (and Belarus).

Russian financial institutions have acquired controlling stakes in a number of Ukraine’s large banks as well as metallurgical and chemical companies.

Crucial choice ahead

Political tensions between Ukraine and Russia are likely to intensify, as Kyiv is currently faced with a critical decision: It must choose between concluding negotiations on the Deep and Comprehensive Free Trade Agreement (DCFTA) with the EU by the end of 2011 or membership in the Moscow-led Customs Union (CU) with Belarus and Kazakhstan. Ukraine may choose only one; simultaneous membership is not possible.

It should be abundantly clear to the Yanukovych administration that the short-term gains of reversion to an inward-looking Eurasian economic sphere represented by the CU fall far short of the long-term benefits of looking Westwards—beginning with the DCFTA.

Evidence strongly suggests that Euro–Atlantic integration would increase Ukraine’s productivity, attract FDI in sectors other than raw material extraction, and, through technology and management skills transfers, make Ukraine more competitive and innovative.

Crucially, making Ukraine’s business regulatory environment consistent with European legal norms would have spillover effects in areas such as competition law, transparency in privatization procedures, public procurement, and more adequate anti-corruption mechanisms.

Moreover, once certified by the EU, Ukraine’s exports to the rest of the world would also increase significantly.

In contrast, were Ukraine to join the CU, its trade policy, liberalized when it joined the World Trade Organization (WTO) in 2008, would be adversely affected. Import duties would increase to the level of the CU common tariff, hampering Ukraine’s global economic integration.

Also, below-market energy prices from Russia would delay long-overdue reform of the country’s inefficient and wasteful energy infrastructure. Finally, Ukraine would not be able to access the WTO’s dispute settlement system, since none of the CU members are in the WTO.

Recommendations

A Ukraine that gets back on the road to free-market democracy is in the best interests of Ukraine and the West. U.S., EU, and European policymakers should develop a cohesive long-term approach toward Ukraine that recognizes its strategic role between Western Europe and Eurasia.

A free and prosperous Ukraine would enjoy further reductions in poverty and more job creation through private-sector-led trade and investment. To realize these goals, the government of Ukraine should continue reforms; drastically curb corruption; promote a professional and independent judiciary system by prosecuting corrupt judges, prosecutors, and police officials; strengthen property rights; decentralize governing institutions; and make them more effective.

President Yanukovych should prioritize the attraction of FDI and incentivize free-market-led economic growth. Rules for an open, fair, and transparent privatization process are in place—they should be implemented.

The government should ensure the sanctity of contracts and take all necessary measures to bring an end to hostile anti-market practices such as asset stripping and corporate raids.

An important crossroad

Andriy Tsintsiruk

Ukraine’s 20th anniversary of independence is a good opportunity for the U.S. to re-focus on Ukraine as it seeks to revive its economy, raise the standard of living for its citizens, and integrate with the global economy.

President Obama and Secretary of State Hillary Clinton, along with the leadership of Congress, should send strong signals of concern to Ukraine’s leadership.

James M. Roberts is research fellow for economic freedom and growth in the Center for International Trade and Economics at The Heritage Foundation. Andriy Tsintsiruk is assistant director of government relations and communications at the U.S.-Ukraine Business Council in Washington, D.C.]]> Business Sense: Jet fuel prices reflect nation’s competitiveness issues http://www.kyivpost.com/news/business/business-sense/detail/112983/ Business Sense Fri, 16 Sep 2011 16:44:48 +0300 oil prices, or the cost of transportation, storage or refining. It will have everything to do with the government’s approach to ensure that all the market players have equal rights and domestic producers will not only be surviving, but also become competitive with imports.
Unless Ukraine acts promptly to impose duties that will equalize the cost of imported and domestic petroleum products, the government will doom domestic refineries to unprofitability. That’s not just bad news for consumers and oil companies: Refineries that are shuttered or operating far below capacity contribute to market instability, increase unemployment, impair the creation of strategic petroleum reserves, and hobble retailers’ ability to provide high-quality fuel at stable market prices.

Unless Ukraine acts promptly to impose duties that will equalize the cost of imported and domestic petroleum products, the government will doom domestic refineries to unprofitability. That’s not just bad news for consumers and oil companies: Refineries that are shuttered or operating far below capacity contribute to market instability, increase unemployment, impair the creation of strategic petroleum reserves, and hobble retailers’ ability to provide high-quality fuel at stable market prices.

Plus, the adverse effect on budget revenues through taxation is staggering: In 2010, TNK-BP’s Lisichanskiy (LINIK) refinery alone paid Hr 3.5 billion in taxes at all levels. Reduced refinery operations result in decreased budget revenues.

An Interagency Commission on International Trade has been conducting an investigation into the need to support petroleum products since January. The decision of the commission will be crucial for the future of the refinery business in Ukraine, since it transmits the government willingness to have (or not to have) one of the core strategic industries operating for the country. It is in the hands of the commission to take actions regarding implementation of the measures and in particularly what these measures would be and how they may affect the business.

Three options are possible: If measures to protect Ukraine’s producers are not introduced, TNK-BP will maximize its customer-owned oil refining (otherwise known as tolling operations); if a decision is postponed or delayed, TNK-BP will increase its tolling operations until a final decision is made; or if the commission decides to impose import duties, we will increase production to reflect the level of duties imposed. If the duties meet WTO standards (5 percent of the price of gasoline, 2 percent of the price of diesel fuel), we will balance customer-owned processing and refining effective, so that we can achieve a profitable level of processing. If the duties eliminate the price advantage enjoyed by plants in the Customs Union, we will completely abandon tolling processing and switch to supply only the Ukrainian domestic market, operating the LINIK refinery at maximum capacity. The level of fees should be equal to the cost advantage of plants of the Customs Union, for example, the average cost advantage for 8 months of 2011 is $124 per ton.

The government needs to take decisive action now. Ukraine’s petroleum refining industry won’t be viable much longer without intervention.

Ukraine’s refineries have benefitted from foreign direct investment. Over the last decade we’ve invested $600 million in the LINIK refinery alone, yet production levels remain far below that required for self-sufficiency, and much of the refined petroleum Ukraine consumes each day is imported from other countries.

The impact of duties is staggering: In 2005, Ukraine dropped duties and Russian exporters benefitted: When duties were in force, imports accounted for just seven percent of all oil consumed in the country. By last month, imports had climbed to a whopping 70 percent!

Because our refineries cannot profitably process oil for domestic sale, we have turned to tolling operations. Of the 410,000 tons of oil that the LINIK refinery will process in September, only 40,000 tons will be owned by TNK-BP and destined for the Ukrainian market. Therefore, a relatively insignificant amount of aviation fuel to be produced next month will cover just 15 percent of the jet fuel required by our clients.

TNK-BP is making every effort to relieve the tension in the market caused by the paucity of aviation fuel. The shortages on both the domestic and international markets have resulted in higher costs for imported aviation fuel and we are compelled to pass them along.

Last year, TNK-BP in Ukraine posted a consolidated loss of $68 million. This is a clear statement for those who claim profitability of the refineries in Ukraine. We shifted to tolling as the one and only option, which keeps the refinery operating. Were we able to refine and sell our own petroleum products on a level competitive field, we would definitely supply the domestic market needs in all the fuels.

Many nations use quotas, duties and import licensing to control market access. Moreover, effective measures to protect Ukrainian petroleum product manufacturers will improve the investment climate, stimulate FDI and boost GDP, improving the trade balance and stability of the hryvnia.
Imports are strangling Ukraine’s refining industry. In 2004, Ukraine had the capacity to process 30 million tons of petroleum per year, and actually processed 22 million tons. In 2010, Ukrainian refineries processed only nine million tons.

Imports are strangling Ukraine’s refining industry. In 2004, Ukraine had the capacity to process 30 million tons of petroleum per year, and actually processed 22 million tons. In 2010, Ukrainian refineries processed only nine million tons. Ukrtatnafta posted a net loss of Hr 470 million. The Kherson and Odessa refineries operate only part-time. LINIK survives by processing oil for other companies. This is not the strong, healthy oil industry that the country needs, deserves, and could have.

Didier Casimiro is the president and CEO of TNK-BP Commerce LLC for Ukraine and Belarus. He can be reached at DCasimiro@TNK-BP.com.]]> Business Sense: Rising oil prices stand to hit energy-inefficient Kyiv hard http://www.kyivpost.com/news/business/business-sense/detail/109114/ Business Sense Thu, 21 Jul 2011 21:58:48 +0300
The majority of new finds either have very complicated geological characteristics, are located in difficult areas or require innovative extraction techniques like oil sands.

It’s a mystery why the sorry state of the international oil industry is usually disregarded in calculations of the growth of demand. The growth in demand from China cannot on its own account for the leap in the oil price as China re-exports much of this oil in the form of everything from plastic toys to motorcars.
The crisis has revealed the dangerous fragility of the global energy supply system. Fortunately, it stopped just short of Saudi Arabia, the place where a doomsday scenario could have begun.


A substantial share of the increasing Chinese energy-intensity simply reflects the geographic relocation of industrial activity, as the West cedes the manufacture of almost everything to cheap economies.

None of this was ever a surprise. What was a surprise was the current crisis in the Middle East, as angry populations attempt to unseat authoritarian leaders.

The crisis has revealed the dangerous fragility of the global energy supply system. Fortunately, it stopped just short of Saudi Arabia, the place where a doomsday scenario could have begun.

The controversial concept of Peak Oil – the time when maximum output is reached, after which it will enter terminal decline – appears to be drawing nigh.

Depletion of the world’s super-giant fields is fairly advanced, and, while new oil is being discovered, it is very inconveniently located, with extraction costs mandating an ever-higher break-even price. Currently, to extract one barrel of oil on average requires energy equal to that contained in a barrel of oil.

After dropping during the 2009 recession, oil prices are back at $110 per barrel levels or higher. There is a good bit of financial speculation in the oil price, with speculators driving the price up and down and creating volatility.

But the price is given added volatility by Western policy decisions, most notably the air strikes against Muammar Gadhafi’s regime in Libya. This conflict is heading toward stalemate and has an unpredictable outcome.

In addition, the West has lost credibility among the Gulf monarchs for having abandoned Egyptian leader Hosni Mubarak, as well as their perceived failure to block Iranian advances in the Gulf.
The inevitable result is that Ukraine will suffer the consequences of an oil price spike even more than the rest of Europe, which for a long time has been trying to limit its dependence on black gold.

A nightmare scenario for oil prices would materialize if the Sunni oil-states launch a desperate solo attack on Iran.

Were this to happen, and the missiles to fly, there would simply be no available source to compensate for the huge loss of oil output, threatening the global economy with a collapse into a new ice age.

What does this mean for Ukraine? First, it means higher prices for natural gas, the majority of which Ukraine imports from Russia. Since the 2009 gas agreement, Ukraine buys Russian imports at prices pegged to that of oil and gasoil.

That means that heating bills this winter will bite harder. Second, almost one-third of Ukrainian commercial cargo traffic is powered by various oil products. Any hike in the oil product prices will be passed on to end consumers, kicking inflation higher.

Third, despite more than 20 years of heated debates and hand combat in parliament, there has been no serious attempt to create a more energy-efficient economy, cutting reliance on hydrocarbon fuels.

The inevitable result is that Ukraine will suffer the consequences of an oil price spike even more than the rest of Europe, which for a long time has been trying to limit its dependence on black gold.


Andrei Liakhov is a partner at Integrites, a Kyiv-based law firm.]]> Business Sense: Will nation’s cities become more energy efficient after Euro 2012? http://www.kyivpost.com/news/business/business-sense/detail/109181/ Business Sense Thu, 21 Jul 2011 21:55:56 +0300
New constructions for the tournament – roads, hotels, sports stadiums, airports and other transport – have been made from scratch, and they definitely are more energy efficient than the old ones.
For Euro 2012 to have a positive legacy, it is crucial that the authorities learn how to integrate the energy-hungry new buildings into city plans, coordinating development of the local area to improve its energy efficiency, and make sure that the objects are used afterward.

For Euro 2012 to have a positive legacy, it is crucial that the authorities learn how to integrate the energy-hungry new buildings into city plans, coordinating development of the local area to improve its energy efficiency, and make sure that the objects are used afterward.

Lighting is a typical example of how planning and long-term visions can help increase energy efficiency and save money by cutting energy bills.

Euro 2012 objects have mostly been designed by leading architectural studios that place an emphasis on energyefficient lighting and energy solutions.

The best architects understand that they may pay a little more today for better technology, but this will allow money to be saved in the future. A good example of this way of creating an efficient object is the Donbass Arena in Donetsk, one of the most modern stadiums in Europe where energy efficient solutions were used.

For example, the latest development of high efficient sports floodlights allowed the number of projectors used to be reduced by 10 percent while still maintaining necessary light levels. This means a decrease in energy consumption of 10 percent compared to any other alternative lighting solution.

Even though modern buildings are more energy efficient, the truth is that they actually consume more energy than their predecessors. Imagine an old stadium and its energy needs: a couple of floodlights and some lighting in the director’s office and changing rooms.

The modern stadium is not just a lawn and stands for spectators. It’s a complicated object with wide food courts, powerful media centers, numerous advertising constructions and office facilities. All these features require a lot of energy.

The same holds true for other objects: New Ukrainian airports are larger than the old ones and consume more electricity. Connecting such facilities to the cities’ energy networks creates the problem of energy capacity shortage. Local authorities have to tackle this problem by putting new capacities into operation.

The point here is that the plan for Euro 2012 should not only include the construction of new objects, but also the renovation of surrounding areas as well as nearby roads.


In this work, local authorities can use the smart solutions learned and implemented in the modern buildings in order to reduce energy consumption. Such energy planning may compensate for the increase in consumption by the new facilities and mitigate the need to create additional energy generating capacities.

Thus, the overall energy efficiency of the city will be improved, and as a result, the burden on local budget will decrease.

Unfortunately, no one appears to be taking the lead at the moment. When there are several budget holders at one facility, it usually results in no one seeing the whole picture.
Ukrainians are working very hard to meet deadlines. The biggest deadline for the Ukrainian infrastructure is coming quickly, and of course we all hope, that Euro 2012 projects will be finished on time. But the most important thing for the country is to not stop moving forward.

Because all state and local budgets are tight, every person responsible for lighting in cities and on roads is interested in buying the cheapest lighting solution on the market with limited consideration of the problems that might arise in the future.

Among them are higher energy consumption, more maintenance spending and shorter service terms.

The choice of city lighting does not only affect energy consumption. In fact, our research in various countries shows that high-quality, pleasant lighting makes streets safer, enhances tourism potential, increases time spent by tourists in cafes, restaurants and souvenir shops.

After all, Ukraine wants to earn from tourists, doesn’t it?

Ukrainians are working very hard to meet deadlines. The biggest deadline for the Ukrainian infrastructure is coming quickly, and of course we all hope, that Euro 2012 projects will be finished on time. But the most important thing for the country is to not stop moving forward.

We all know the example of the Olympic Games in Greece in 2004, where inefficient use of Olympic facilities brought more problems than benefits to the country.

The main mistake of the Greek Olympics was the lack of thought put into the construction of some objects and inability to change them after the Games to fit the country’s needs. As a result, today some of the facilities, such as a baseball field, are not in use.

If these freestanding objects were surrounded by entertainment zones, they would be more popular. And this is an important lesson for Ukraine.

It is not always enough to build a huge modern object. To be successful, it should be situated in a zone of high interest with a lot of extra benefits for the visitors, and coordinated to fit into a wider city plan. Ukraine should create a strategy for infrastructure development and focus on its realization. There is still some time to benefit from past experiences and make sure we build for the future beyond Euro 2012.


Reiner Schlatmann is general manager and chairman of the management board at Philips Ukraine.]]> Business Sense: Time to fix laws on renewables http://www.kyivpost.com/news/business/business-sense/detail/109111/ Business Sense Thu, 21 Jul 2011 21:47:38 +0300
Over the years, the process of achieving this goal of independence has transformed into a series of short sprints made by legislators at various times in order to achieve immediate gains for a particular politician or a political party.

The absence of a clear-sighted, systematic and consistent approach to these issues resulted in a bulk of concepts and declarations documented in various laws which are often found to be contradictory and, as a rule, lack detailed implementation mechanisms.

Thus, for example, Ukraine has a number of laws related to renewable energy sources – Laws “On Electricity,” “On Alternative Energy Sources,” “On Energy Efficiency,” “On Combined Production of Thermal and Electrical Power (Co-Generation) and Utilization of Waster Energy Potential,” “On Alternative Types of Fuel,” and so on.
The Electricity Law is silent on the funding source of the green tariffs, which is a state subsidy to remunerate the renewable-source electricity generators above the market price.

Despite the fact that some of these laws have been around for quite some time, they still remain largely inoperative and do not provide for a clear and unhampered mechanism for tpopularization of renewable energy sources in Ukraine.

On the other hand, in those cases where such mechanisms do exist, they tend to be burdensome and non-transparent.

One such example is the so-called “green tariff” for electricity produced by alternative sources of energy, which was introduced into the Electricity Law in 2008.

Presently, the law declares the following mechanisms for stimulation of utilization and development of renewable energy:

- green tariff – a special tariff for purchase of electricity which is established for the renewable energy producers until Jan. 1, 2030;

- obligation of the wholesale electricity supplier to purchase the renewable-source electricity not sold directly to the consumers or distribution companies;

- prohibition for the electricity suppliers that carry out the transmission of electricity by means of their own electricity networks to refuse renewable electricity producers to access such networks;

- renewable electricity producers should receive full payment in monetary form for electricity produced with no set-off;

- electricity suppliers have the right to include losses incurred by connecting renewable-source electricity producers to their networks into their investment programs; and

- the wholesale electricity tariffs may include costs of financing of renewable energy development.

The successful implementation of the green tariff will depend on a number of factors.

The Electricity Law is silent on the funding source of the green tariffs, which is a state subsidy to remunerate the renewable-source electricity generators above the market price.


This creates uncertainty for generators and investors, despite the “guarantee” wording contained in the Electricity Law. There are essentially two options for the source of funding: the state budget and a surcharge to the electricity prices.

While it appears that the second option was meant by the Ukrainian legislators – in which case such producers will be compensated by Energomarket State Enterprise, raising these funds from adjusting the wholesale market price – the subsidy source for direct sales to end consumers or distribution companies remains unclear.

Furthermore, there is no absolute clarity regarding which renewable energy facilities are eligible for the special tariff. Three distinct aspects which need to be clarified are:

Eligibility of renewable energy producers that starter operation before the introduction of the green tariff;

Protection against changes in law for renewable energy producers that are in the process of construction, as currently only renewable energy generators that have started operation and are already receiving the green tariff are protected.

This creates uncertainty for investors, who have undertaken their investment planning based on the existing green tariff system.

As the law states that a minimum of 15 percent of Ukrainian content (materials, assets, works, services) is required in the construction of the energy object as of Jan. 1, 2012 in order to obtain the green tariff, increasing to 50 percent by 2014, the definition of “Ukrainian content” and how it is calculated should be clearly defined to protect investors.

Yet another serious drawback of the Electricity Law is that it establishes the green tariff only for vegetable biomass.

Such a definition fails to meet the definition given in the Law “On Alternative Types of Fuel” whereas “biomass” means biologically renewable organic matters that undergo biodegradation, such as agriculture waste, crop growing and cattle breeding, forestry and related industries, as well as the organic part of industrial and municipal waste.

The rationale for such differentiation is not clear and it essentially demotivates investors from developing renewable energy facilities working on non-vegetable organic biomass.

It is also notable that the green tariff establishes a single rate for all biomass produced energy. Even with the current narrow definition of biomass this is a very substantial problem. A single tariff for biomass cannot reflect the wide range of biomass fuels, conversion technologies and scale.

This may lead to distorted development of biomass electricity production in Ukraine favoring production from selected types of biomass only and based only on certain technologies.

The above illustration is not complete and can be continued to be painted with further examples and commentaries. It is clear, however, that Ukrainian legislation on renewable energy sources has many areas where improvements would be very important and are necessary for the further successful development of alternative energy sources in Ukraine.


Svitlana Romanova is a partner in the Kyiv office of Baker & McKenzie, an international law firm. She is actively engaged in natural resources projects in Ukraine, both mining and oil and gas. ]]> Business Sense: Better branding strategy could help many in Ukraine http://www.kyivpost.com/news/business/business-sense/detail/108240/ Business Sense Fri, 08 Jul 2011 00:22:52 +0300
The physical is easier to understand than the intangible.

This is a problem particularly in Ukraine, where developers tend to ignore the crucial role of branding in a real estate project. Ukraine is an increasingly competitive market, but developers are failing to react by investing in strategic branding approaches.

I was reminded of this current developer blind spot when asked last year to join a panel of judges reviewing latest and planned shopping centers in Ukraine. They asked for my views on branding and architecture for the eight centers involved.

My immediate reaction was the absence of any clear branding strategy and concept virtually in all cases. Similarly, the center buildings presented could not be ranked as architecture if your definition is the creation of buildings which are an attractive addition to the environment and a pleasure to visit and experience.
This is a problem particularly in Ukraine, where developers tend to ignore the crucial role of branding in a real estate project. Ukraine is an increasingly competitive market, but developers are failing to react by investing in strategic branding approaches.

There was little attempt to build on a name and image to create a real sense of a special destination and a distinctive center theming.

Typically exteriors were simply facades covered in tenant brand signs and interiors devoid of any attempt at customer communication and personality.

If forced to name names, Sky Mall has modern contemporary interior but no recognizable brand and communication strategy.

Externally, despite its potentially great location facing the river, there has been no attempt to build an attractive architectural landmark – simply an anonymous concrete structure covered with random tenant signs.

Sky Mall is potentially a powerful name if developed as a distinctive theme but there appears no attempt to create a real personality and reputation as a great first-choice location in Kyiv.

Names are a starting point not an end point and I noted some pleasant possibilities – Riviera, Komod, Festival, Lubava for example, whereas others were impenetrable like Global UA. This clear gap in developer aspirations and priorities and the poor understanding of what makes an attractive long-term destination brand are regrettable.

The reality is, however, when there is more competition, having simply a large trading building in a prime spot will no longer be enough.

The consumer is king, and adopting a customer-centric approach is where developers and real estate professionals have to catch up and embrace the true value and potential of effective branding to best meet their investors’, stakeholders’ and customers’ demand for added value.

A simple test of a company’s customer focus is whether the marketing director, if there is one, is on the main board. Often there is only a manager not a director which immediately indicates the value placed on the role of marketing and branding.
As the number of shopping malls in Ukraine continues to rise, competition will heat up. The ones that will succeed are those that embrace the idea that while numbers matter, they ultimately depend on the success of the brand that underpins sales.

Developing a brand requires coordinating its development through marketing and public relations – sadly, difficult department activities to defend when executives are asking for numbers to demonstrate performance and return on investment.

This is ironic in today’s world of brand-led commercial activity. While it is accepted that Coca Cola’s major financial valuation is based on its brand equity rather than its physical assets, the same logic is rare in real estate development.

Ultimately, all value is based on attaining maximum sales. A shopping center that attracts the best tenants and enjoys the highest visitor purchases creates the optimum capital value.

What drives this? A center’s visitor experience. Every touch point creates the potential brand perception – the image and reputation required to sustain and improve repeats visits and optimum tenant turnovers. The architecture, visitor journey – digital and physical – and culture of the centre’s staff and management all directly contribute to the destination brand experience – the centre’s brand equity and capital value.

Architects are the first people who need to understand this principle for new centers if branding is not to be reduced to cosmetic packaging and marketing activity. The architecture, planning and environment of a centre are the most expensive and long-term aspects of creating venue’s distinctive character and profile.

Accountants understand commercialization – the income producing activities apart from rentals. But unfortunately this is often viewed as simply an operationally based sales opportunity, selling space and activities to the highest bidder.

This results in elevations covered with uncontrolled tenant signs and advertising, screens full of indiscriminate advertising and malls jammed with poorly planned kiosks. The result is frequently a potential total disconnect between strategic longer-term brand equity development and short-term tactical promotion to drive footfall and sales.

Achieving an effective balance is vital if hard-won reputation is not to be lost overnight with inappropriate image-diluting initiatives.

As the number of shopping malls in Ukraine continues to rise, competition will heat up. The ones that will succeed are those that embrace the idea that while numbers matter, they ultimately depend on the success of the brand that underpins sales.


Clive Woodger is director at SCG London, a British brand agency and consultancy based in London. He can be reached at clive@scglondon.com.]]> Business Sense: Nation’s risky market curbs great agriculture potential http://www.kyivpost.com/news/business/business-sense/detail/107797/ Business Sense Thu, 30 Jun 2011 23:12:33 +0300
Ukraine should be a major beneficiary and now offers liquid exposure for investors through agriculture companies listed on European markets. With the end of the 10-year moratorium on land sales expected on Jan. 1, 2012, Ukraine is likely to have the foundation to enter a new decade of fast growth to realize its agriculture potential.

Today, listed farming-food companies are generally difficult to find. Agriculture equity investments often consist of indirect plays such as fertilizers, tractors or seed producers, most of which trade in developed markets.



Ukraine is offering a new way to invest in agriculture with a rapidly rising number of real land-farming operations coming to the public markets. Over the last three years, more than $10 billion of capitalization and 15 firms have been successfully listed, despite difficult conditions, with several names delivering triple-digit returns.

These companies typically have 100,000 hectares under operation through lease agreements. They represent less than 10 percent of a total land bank of 32 million hectares available.

The average quality of the agribusinesses is in many ways superior to what Ukraine has been used to offer to investors, which was typically a handful of non-transparent, old legacy asset companies with poor disclosure and liquidity.

Ukraine is seeing a boom in new agribusinesses seeking to list abroad, particularly in Poland. Warsaw has recently become the new magnet for Ukrainian companies and this is now also starting to attract companies from other sectors.

The Warsaw stock exchange, unlike the Ukrainian one, has strict requirements and quarterly International Financial Reporting Standards statements as well as an established $87 billion pension fund industry. This has facilitated capital raising for Ukraine companies and allowed investors to reinvest in Ukraine following the crisis.

Sadly, Ukraine is again missing out on one of the biggest opportunities to develop its stock market and more importantly to offer its population the possibility to own shares in a key strategic sector such as agriculture, which employs more than 20 percent of the population. It is instead Polish pensioners who benefit from growth.

The strategic importance is obvious. Ukraine’s territory has a large network of rail transport, covering 70 percent of the land with strategic access to the Black Sea and large port operations capable of handling nearly 35 million metric tons of grain exports – nearly as much as total annual production.

Ukraine could in theory produce 100 million tons of grain, more than double today’s 40 million tons. This would represent 16 percent of the world market.

The structure of the agri-food companies differs as well from other countries, as they fully integrate the land in their operation unlike Brazil or North America where contract farming is more common practice. Ukrainian food-processing companies have therefore a natural hedge against rising input price as well as land appreciation upside.

The business model also differs from other classic producer models with vertical integration and specialization rather than horizontal business segmentation. This important value added element is realized through further integration in high margin food processing.

In the longer run the gross domestic product and export structure of Ukraine could be transformed.



(Click to enlarge)

For example, today the world chicken trade is only 12 percent of global production, of which Brazil and the U.S. are the leaders. Ukraine continues to narrow its gap of imported chicken, which still stands at 200,000 tons per year.

An industrial agri-food producer such as Ukraine’s MHP listed in London, representing already 50 percent of the local production, will be able to meaningfully export starting in 2015. For that purpose, the largest and most modern European chicken processing plants are currently being built in the Vinnytsya Oblast.

This model can also be replicated for other types of food products such as egg, meat, dairy products and high margin vegetables.

Another specific element to Ukraine is land reform. Today, Ukraine values its land at a fraction of its fair value. This is the result of a law enforcing a moratorium on land sales, which was activated in 2001. It is expected that this will be lifted as soon as next year.

The impact here as well is significant, as financing through land collateralization will become possible, which should facilitate bank lending.

Ukrainian agriculture companies historically used mostly equity financing, but with lands on the balance sheet, companies will be able to get better financing terms, freeing up resources for acquisitions of machinery and working capital.

The structure of the Ukrainian economy would evolve with the gas and steel industry seeing a gradual reduction in their dominance. Banks would also find new sources of growth, providing much needed diversification and stability to a system still ravaged by a property bubble.

If global soft commodity prices continue to grow, it will accelerate the entire process and improve further the attractiveness of these companies. Nonetheless, inherent risks such as government intervention, a relatively weak judicial system and political instability could mitigate the investment appeal for foreigners.

For investors willing to get exposure to Ukraine agriculture, it still seems safer to invest with well established, large companies listed abroad, where interests between managements, minorities and owners are better aligned and transparency is higher.

Ukrainian agribusinesses remain the best way today to capitalize on rising global soft commodities prices, as well as playing the upside in land appreciation in one of the most fertile and large land banks in Europe.


Anton Khmelnitski is the managing director of Kyiv-based Elbrus Capital, a fund management group. He has more than 12 years of experience investing in Eastern Europe and can be reached via anton.khmelnitski@elbrus-capital.com ]]> Business Sense: Local financial market culture ignores carrot, needs more stick http://www.kyivpost.com/news/business/business-sense/detail/107360/ Business Sense Thu, 23 Jun 2011 22:10:43 +0300
Importantly, these new market names have overwhelmingly been choosing to list on foreign exchanges.
The difference in corporate culture between companies listed abroad and those listed in Ukraine is stark.


The hotspot for local initial public offerings is the Warsaw Stock Exchange, where six of the 10 Ukrainian placements in 2010-2011 have landed.

There has not been an IPO in the last three years on either of Ukraine’s major trading platforms, the Ukrainian Exchange (UX) or the PFTS.

The difference in corporate culture between companies listed abroad and those listed in Ukraine is stark.

Both Warsaw and the other popular destination, London, promote good governance through a list of “comply or explain” rules – essentially requiring companies to get with the program or explicitly state why and how they don’t.

As a result, their governance practices are far more developed and regarded by investors.

In this regard, local financial market standards are clearly lacking. Ukraine’s Securities and Exchange Commission does have a Corporate Governance Code, but it is voluntary and was last updated in 2003.

True transformation is impossible without mandated change.

That’s why 2009’s “Law on Joint Stock Companies,” which significantly strengthened the legal protection of minority shareholders, was so important. That’s also why we’re closely watching another new legislative mandate – in early May, parliament passed a law requiring mandatory annual reports by International Financial Reporting Standards (IFRS) from public companies, banks and insurers beginning Jan. 1.
Currently, locally listed corporations publish their financial results according to Ukrainian Accounting Standards, which in a high percentage of cases, leaves something to be desired.


Could it be that Ukrainian companies will finally learn to speak IFRS, the financial reporting language of choice for the discerning international investor?

To be sure, so far there has been little movement by public Ukrainian companies to pick up IFRS on their own. According to our sources, only 26 listed Ukrainian companies released public IFRS financial accounts in the last year.

Tellingly, all but one these corporations were listed on international exchanges (mostly Warsaw or London) or were banks (where standards and regulatory oversight are stricter).

This means the obligatory requirement to put out IFRS accounts should have a mammoth impact on the hundreds of companies with stock listed locally.

Currently, locally listed corporations publish their financial results according to Ukrainian Accounting Standards, which in a high percentage of cases, leaves something to be desired.

Concorde Capital has monitored the quality of these statements for a few years now. In 2011, we found evidence of “inventive” accounting by 29 percent of companies listed locally and abroad that our team of analysts looked at.


Rather significantly, this group of several serial fibbers and transfer pricers with suspect financials includes 40 percent of the market’s blue chips: Alchevsk Iron & Steel, Avdiyivka Coke, Stakhaniv Wagon Factory, Stirol chemical plant, Ukrnafta hydrocarbon company, and Yenakiieve Steel.

The new IFRS law follows years of market anticipation and government talk about a gradual transition to IFRS (a relevant program was initiated by the Securities & Exchange Commission in 2007).

It also follows an announcement by neighboring Russian President Dmitry Medvedev a month earlier that Russia would require annual IFRS accounts by Russian public joint stock companies as of 2012.

Initiatives like this are important to ensure that the Ukrainian financial market matures in line with its larger eastern neighbor and as Ukraine moves further toward its strategic goal of European integration.

Transparent financial reports according to IFRS are an important symptom of quality corporate governance.

We are already seeing this with the aforementioned new market entrants: those companies aren’t flinching at investor demands for years of audited IFRS accounts and the only ones being successful are being successful raising new money now in IPOs.
Change is not going to happen overnight, especially with something like IFRS.


These fresh faces know they must be fluent in investor-speak and fervent corporate governance crusaders.

Change is not going to happen overnight, especially with something like IFRS. This year companies have still been moving into full compliance with the 2009 “Law on Joint Stock Companies.

” The move to IFRS could take even more time, considering training and updating of internal accounting systems, but any step out of the occasionally dark and murky netherworld of Ukrainian Accounting Standards is a clear step forward for the overall market.

Legislators and regulators need to apply a bit of stick for Ukrainian companies to make that move, and we don’t think we’ll be alone in cheering if they continue to beat compliance with global governance standards into the local financial market with it.


US-born Brad Wells is a corporate governance and political analyst at Concorde Capital, an investment company based in Ukraine that provides a full range of brokerage, investment banking and asset management services. He can be reached at bw@concorde.com.ua.]]> Business Sense: Repeal of tax exemptions on services to affect many http://www.kyivpost.com/news/business/business-sense/detail/106899/ Business Sense Thu, 16 Jun 2011 22:38:18 +0300
Since the tax code came into force at the start of 2011, most service industries were considered exempt from value-added tax.

This affected providers and consumers of consulting, engineering, legal, accounting, audit and information technology services, allowing a number of firms to de-register for VAT.

But parliament decided recently to cancel this exemption. President Viktor Yanukovych signed the changes into law this month.

When they take effect on July 1, such services will be subject to 20 percent VAT for Ukrainian clients.

It appears that this change of mind on the part of the government has come about due to shortages in government revenues.

But in the aftermath, this measure will have a significant impact on many businesses.

The supply of consulting, engineering, legal, accounting, audit and IT services will be subject to 20 percent VAT (17 percent from 2014) if provided to Ukrainian clients.

This VAT will become a cost for individuals and for those industries that perform VAT-exempt activities, such as banks, and will represent an additional cash flow issue for exporters and others.

Supply of such services by non-residents to Ukrainian residents will be subject to VAT under the reverse-charge procedure.

For Ukrainian residents providing services to non-residents, VAT will not be charged, but such residents will be required to pro-rate their input VAT.


Slava Vlasov is a partner with the tax
and legal department at PricewaterhouseCoopers in Ukraine.

In addition, providers of consulting, engineering, legal, accounting, audit and IT services will need to consider a number of other issues.

First, when the exemption was introduced, VAT payable by the service providers to their suppliers became an additional business cost for them (although this VAT was tax deductible for corporate profits tax services).

As a result, many providers were forced to negotiate an increase of service fees with their customers in order to cover the related VAT costs.

Once the exemption is cancelled, those customers may wish to renegotiate the level of fees being charged.

Second, with the introduction of the exemption, service providers were required to recognize deemed sales of their assets and pay VAT on these deemed sales to the budget. This represented an additional tax cost for service providers.

Once the exemption is cancelled, service providers need to consider technical arguments to recover VAT on deemed sales of assets from the government.

The tax code does not clearly address this issue and perhaps the service providers will need to address it to the upper level of the State Tax Administration.

Third, companies that have de-registered for VAT will need to re-register.

At the time of the introduction of the VAT exemption, government officials were not able to explain why the exemption should be introduced and it appears that they were not aware of the negative impact this would have on the budget.

Rather, they focused on their concerns about the ability of some businesses to generate dubious costs for such consulting and marketing services (and connected VAT) to reduce their VAT liabilities to the state or increase their refunds from the state.

In our view, the cancellation of the exemption makes economic sense, but the discrimination that exists between exporters of services and exporters of goods should also be remedied.

Ukraine has a great opportunity to develop its service industry sectors with enormous potential to attract foreign investors, increase export earnings and reduce unemployment.

However, the service sector is disadvantaged when compared to other sectors of the economy.

An exporter of goods is (technically) entitled to recover their input VAT, but an exporter of services is deprived of this entitlement.

Ron Barden is the lead partner with the tax and legal department at PricewaterhouseCoopers Ukraine. He can be reached atron.j.barden@ua.pwc.com.

Slava Vlasov is a partner with the tax and legal department at PricewaterhouseCoopers in Ukraine. He can be reached atslava.vlasov@ua.pwc.com.]]> Business Sense: Hydrofracking for shale gas stirs environmental worries http://www.kyivpost.com/news/business/business-sense/detail/106419/ Business Sense Thu, 09 Jun 2011 23:20:40 +0300
Ukraine, according to different estimates, has two to 30 trillion cubic meters of shale gas – a type of natural gas trapped in rocks beneath the earth’s surface. If Ukraine did have 30 trillion cubic meters of the shale gas, it would be enough to satisfy the demand for gas in Ukraine for 600 years.

International oil and gas majors Chevron, Shell, Exxon Mobil and TNK-BP have shown interest in exploring shale gas in western Ukraine and coal bed methane in Donetsk Oblast using hydraulic fracturing – or hydrofracking -- a controversial technology that has helped the U.S. become a world leader.

However, the technology raises serious environmental concerns, including pollution of water sources, such as rivers and underground aquifers.

The Ukrainian government is taking necessary steps to ensure that legislation favorable to these international companies is in place. However, it has made little effort so far to establish strict regulations for hydrofracking in order to protect the Ukrainian environment and people from possible negative consequences.

The Ukrainian government is taking necessary steps to ensure that legislation favorable to these international companies is in place.

However, it has made little effort so far to establish strict regulations for hydrofracking in order to protect the Ukrainian environment and people from possible negative consequences.

The involvement of foreign companies in extracting Ukrainian shale gas is important because they have the necessary technologies and experience, and the funds to invest in researching shale gas deposits.

The primary hurdle on their way to the Ukrainian gas market is unfavorable tax legislation for foreign investors.

Parliament passed tax laws in May that will make the Ukrainian gas market attractive for foreign companies. A Canadian company Transeuro Energy Corp. has already taken advantage of them by testing a well in the “Karlivske-101” deposit and is going to use vertical drilling and hydrofracking to extract gas.

The Ministry of Ecology and Natural Resources asked the deputies of Lviv, Ivano-Frankivsk and Ternopil oblast councils to allow the foreign companies to extract shale gas. They were asked to pass a few resolutions about the technical and ecological regulations of shale gas extraction that will also become criteria for the tender.

The deputies of these regions, however, are not acquainted with hydrofracking and need to study the technology before passing resolutions.


View of a drilling rig exploring for shale gas in the eastern Polish village of Grzebowilk on April 27. Initial estimates suggest Poland and Ukraine have huge reserves of shale gas. Both nations hope development of the sector will boost national energy security. (AFP)

Hydrofracking is part of a new drilling method that involves injecting a mixture of millions of liters of water, sand and chemicals into a well to keep fractures in the rock open and allow gas trapped in shale or coal to come up to the surface. The well has a cement casing to protect groundwater from contamination.

The waste water, or produced water, that comes up to the surface is stored in a pit.

But there are possibilities for contamination. Fractures made by the blasting of the mixture can connect to natural fractures that can go up to the surface or into the groundwater, potentially contaminating water or air with gas, which can escape via these routes.

Another possible reason for contamination is that the pressure of injecting the mixture can be so high that the cement casing breaks, allowing the gas to escape through cracks. The greater the depth of the gas deposits, the greater the pressure required. Deposits in Ukraine are deeper than in the U.S.

Final piece in the jigsaw – learning from the U.S. experience with hydrofracking and passing certain regulations to prevent environmental problems – must not be forgotten.

The waste water, which could contain chemicals, is a further problem. It is stored in a pit until it is moved to a sewage water treatment facility, but if it stays outside for a long time, it can evaporate or leak into the environment if heavy rain floods the pit.

Furthermore, most of the chemical mixture remains underground, posing unknown risks to the environment and people’s health.

A study by U.S. scientists published in May showed that methane gas levels in water wells close to the drilling zone were 17 times higher than in areas further away. The U.S. Department of Interior said that the concentration of methane was “dangerous and requires urgent hazard mitigation.

The scientists, from Duke University, concluded there was a link between the gas extraction and water contamination.

In 2005, the U.S. Congress exempted hydrofracking from most environmental regulation, meaning that oil and gas companies could use hydrofracking without being responsible for the consequences. Since that year, the number of reported water contaminations has increased dramatically. Water in some people’s wells and houses is so polluted that it bursts into flames when lit.

Because of the failure of national lawmakers to regulate hydrofracking, many states are conducting their own studies and recommending appropriate regulations. These states have been avoiding the most serious problems by imposing strict regulations.

If Ukraine considers using hydrofracking, it should first adopt some of these regulations:

First, companies should be obliged to disclose all fluids and chemicals used during hydraulic fracturing. Although the effect of some of the chemicals on the environment is unknown, it’s important to know what they are for future studies.

Second, the pressure of injected fluid should be reported, and allowed only at safe levels.

Third, thick, high-quality cement casings should be installed to protect groundwater from contamination. Fourth, the method of storing waste water should be reported, and it should be transported for treatment within a short period. This pit should be constructed in a way that will protect the environment from leakages.

These measures are particularly important as the government plans to permit hydrofracking in western Ukraine, a region that is known for its pure mineral water and health resorts visited by many tourists. Any water contamination caused by hydrofracking could endanger these industries.

It seems like everything is in place for Ukraine to lessen its dependence on Russian gas: the tax laws are fixed, the coal bed methane and shale gas deposits are promising, and the foreign investors are eager to invest millions of dollars in exploring these resources.

The Ukrainian government is gaining foreign experience of shale gas extraction through hydrofracking and is ready to rely on foreign technologies and experts.
But the final piece in the jigsaw – learning from the U.S. experience with hydrofracking and passing certain regulations to prevent environmental problems – must not be forgotten.


Oksana Polhuy is researching the consequences of hydrofracking at DePauw University in Indiana. She can be reached at oksanapolhuy_2014@depauw.edu.

Editor’s Note: Business Sense is a feature in which experts explain Ukraine’s place in the world economy and provide insight into doing business in the country. To contribute, contact senior editor Brian Bonner at bonner@kyivpost.com ]]> Business Sense: Robbing the ‘Breadbasket’ http://www.kyivpost.com/news/business/business-sense/detail/105909/ Business Sense Thu, 02 Jun 2011 21:19:39 +0300
It has become hostage to its mercantilist government. In October, the Ukrainian government, presided by a former apparatchik, Prime Minister Mykola Azarov, enacted a resolution requiring quotas and licenses for exporting grain.

The objective was to stabilize food prices and prevent a food shortage caused by last year’s poor harvest.

While the protectionist policy came under harsh criticism from both foreign and domestic observers, the government kept the export grain quotas for eight months.

On May 25, the Ukrainian government finally announced that it would replace the grain export quotas with export duties of 9-14 percent.

TheUkrainian delegation in the World Trade Organizationhas not submitted the official documents about the replacement of export quotas with export duties yet.

While the WTO is waiting for the papers, the Ukrainian government must answer several important questions.

Why did the state use non-transparent practices of allocating export quotas and licenses, wherein an unknown company Khlib Investbud received a lion’s share and gained the market power in the grain export industry?

The grain industry generates 15 percent of Ukraine’s exports – $7.5 billion. How did the controversial regulation kill the spirit of competition in the domestic grain market and push it towards monopolization?

What does the change in the current trade policy mean for the export-oriented Ukrainian agriculture and world food prices?

Who gains and who loses from the protectionist policy?

Quota and license are usually imposed to limit the quantity of a product and raise its price.

The grain export license is given to a company by the state to buy the grains from domestic farmers at the domestic price and resell these grains at the world price to foreign buyers.

Since the world price is higher than the domestic price, whoever receives the export license is guaranteed a profit of a middleman.

Moreover, the export grain quota limits the quantity of export that results in a price markup. For all grains exported with the quota, the markup could total to billions of dollars.

Thus, a licensed company that has an export quota receives a profit that is not earned through market competition.

The government regulation creates the profit for the middleman which causes market inefficiency and market monopolization and wastes society’s resources.

Replacing export quota with export duties is an old trick. The export duty that is a sales tax on export has the same effect as export quota.

The export duties discourage grain exports, reduce quantity of grain exports, and raise grain prices.

Foreign observers have criticized Ukraine’s trade policy on the grounds of its inefficiency.

Morgan Williams, the president of the U.S.-Ukraine Business Council, estimated that losses in the domestic food industry could reach billions of dollars as a consequence of the protectionist policy.

According to Martin Raiser, the World Bank’s country director for Ukraine, Belarus and Moldova, the present grain export quota system is inefficient and restricts the inflow of investment.

Even with these sharp criticisms from foreign observers, the Ukrainian delegation in the WTO defended the export quota system as essential to food security because of a poor harvest.

Since the government announced the replacement of export quotas with export duties, the Ukrainian delegation in the WTO has to come up with a new sales pitch for the continuing protectionist policy.
Officials must end policy that benefits one insider firm at a major cost to whole nation.

Grains that fall under the regulation are crops produced by most domestic farmers: wheat, buckwheat, corn, barley and rye.

In fact, the Ukrainian government has already lied to the WTO and the rest of the world to defend the protectionist policy. A “poor harvest in 2010” was a big fat lie.

According to Ukraine’s State Statistics Committee, the “poor harvest of 2010” was above average if you looked at the record of Ukraine’s grain production in the last two decades.

On average, Ukraine’s agricultural sector produced 36.1 million tons of grain between 1990 and 2010.

Ukraine’s agriculture hit the bottom in 2003 with a harvest of 20.2 million tons of grain while it reached the peak in 2008 with 53.2 million tons of grain.

Thus, the “poor harvest of 2010” that was 39.2 million tons exceeded its average by 3 million tons.

And we do not even taken into account 6 million tons of grain rolled over from the harvest of 2009.

The current protectionist policy is an absolute failure because it hurts Ukraine’s economy. The protectionist policy brought back nepotism.

It also sent a clear signal to foreign companies that Ukraine’s economy went back in the domain of the oligarchs.

The distribution of quotas was not transparent. Grain traders had only seven days to apply for the export quota after the government resolution was enacted.

As a result, most of the companies were unable to receive the grain availability certificate while an unknown company, Khlib Investbud, received the largest share.
Moreover, the export quota system that was designed to stabilize food prices failed to keep food prices from rising.

Domestic food prices have increased by 20 percent since the quota system was introduced. Ukraine’s State Statistics Committee reports that prices of bread, sunflower and corn oil have increased by 12 percent since January.

The grain prices rose by 15 percent in the first quarter of 2011. The domestic consumers are outraged with surging food prices.

The current economic situation is actually very drastic. In Ukraine an average pensioner receives around $100 per month. Given rising food prices, a large number of elderly Ukrainians find themselves below the poverty threshold.

Furthermore, the protectionist policy hurt domestic farmers. The cash-strapped farmers were forced to sell their grain at lower than expected prices because the Khlib Investbud company used its market power to dictate the prices in the domestic grain.

The Ukrainian government does not care that the protectionist policy hurts both sides of the international trade, exports and imports.

Lower profit margins do not allow the cash-strapped farmers to purchase essential machinery and fertilizer that are mostly imported from Russia, Belarus and the United States.

Khlib Investbud seems to be the only winner. However, any criticism of the trade policy or questioning the role of the Khlib Investbud is suppressed by the state.

Meanwhile, Ukraine’s government has made several trade policy concessions recently.

In March 2011 the government dropped corn from the original list and increased the total size of the quotas by 1.5 million tons to 4.2 million tons, or 10 percent of last year’s harvest.

On May 25, the government declared that the grain export quotas would be replaced with export duties of 9-14 percent.

The seemingly confusing policy has perfect timing. Since October 2010 Khlib Investbud backed up by Grain Ukraine has used its market power to accumulate around 2 million tons of grain.

Moreover, Khlib Investbud had exported 800,000 tons of grain before the government replaced the export quotas with the export duties.

As a result, the government gave Khlib Investbud a huge advantage over other grain exporters that must play by the new rules. Backed by the state, Khlib Investbud robbed the breadbasket!

The current trade policy signals domestic grain producers and foreign grain traders that President Viktor Yanukovych’s administration sticks to protectionism.

It also shows that the government can change policy without any legitimate economic reason at all.

The current protectionist policy can destroy the agricultural sector of Ukraine. If this policy continues, we will see capital leaving the agricultural sector for other industries.

If this outrageous grain robbery is not stopped, the European breadbasket will be completely emptied out for the benefit of a single company.

If Ukraine is still a democratic state, the government must explain why the benefit of a single company comes at the cost of the whole nation!

Leo Krasnozhon is a visiting assistant professor and graduate advisor with the Department of Economics at the University of Texas in Arlington.]]> Business Sense: Ukraine’s agriculture policy: perfect for hurting farmers http://www.kyivpost.com/news/business/business-sense/detail/105905/ Business Sense Thu, 02 Jun 2011 21:13:47 +0300
The five- or 10-year programs announced now and then by successive governments have nothing to do with policy. They usually include a set of wishes that are forgotten as soon as they are articulated.

The current Ukrainian government is no different. It sees agriculture as one of its public relations tools. It also frequently adjusts regulations to the interests of their loyal business backers.

There is some progress, but it’s slow. Back in the 1990s, we fought against grain transportation bans imposed by regional governments.

Now we are fighting against the same thing on a central government level. Back in the 1990s, we successfully fought against a ban on the slaughter of animals by privatized farms.

So, things do change, but Ukraine is very far behind. Twenty years after the end of the Soviet Union, many economic and social policies that hail from that era continue to restrict agriculture sector development.

The same old questions – all of which have obvious answers for farmers, grain traders and most level- headed economists – remain unanswered by government officials.

How can such a stupid move as last year’s introduction of restrictions on grain exports, with the state aim of keeping the bread prices under control, be possible 20 years after the end of Soviet era?

Why would the government try to help wealthy Ukrainian urban consumers save 20 kopecks per loaf at the expense of the poorest part of the country – the rural population that produces the grain?

Why would the government want to push away already limited foreign and local investments from the agricultural sector to support bread prices for all, including oligarchs?

And what does corn – the export of which was also restricted – have to do with the bread prices?

Why would Ukraine, which has a huge budget deficit and whose currency is very hard to keep stable even with the billions of dollars from International Monetary Fund, want to limit its export revenues?
Regulations are often set to benefit those loyal to government at expense of farmers.

One of the answers to these questions is very simple. Some influential senior government members are developing livestock businesses and they see the cost of grain as one of their major cost items.

It also looks nice to common people to see how hard our prime minister is fighting for bread prices. So it is a done deal and kills two birds with one stone.

But this is not a policy. Having a policy means having a long-term vision about production efficiency and not about the number of tons collected.

It is about seeing Ukrainian milk products sold to 150 countries in the world and not reporting on the number of cows in the country, and so on.

Ukraine’s agricultural policy should focus on innovations, new product ideas, adding value, being environment-friendly and export-oriented, striving to feed the world, as Ukraine well could. We need to get leading international companies in all sectors to establish research and development centers in the country by creating attractive conditions.

We need to create conditions for equipment and machinery manufacturers to start production here. We need to get agricultural education up to global standards, invite the best minds here and build the knowledge base in the country.

We need to export not only products but technologies and experience to produce or process these products. This is much more profitable.

We need to make it a law that the government will let the market decide prices and will not interfere. We also have so much energy wasted in agriculture; efficiency could decrease our dependence on energy imports.

We need to develop an agricultural policy and all the activities of Agriculture Ministry should be based on it.

Until we accomplish all of this, we will continue in our frustration when trying to explain the actions of our current government, whose agricultural policy seems to be based on killing growers of grain and supporting imports.

Andriy Yarmak is an independent agribusiness expert. He has worked on agriculture development issues in 10 countries, serving as an adviser and independent board members for agribusinesses in Ukraine and has developed market information systems for APK-Inform, a Ukrainian agriculture consultancy.]]> Business Sense: Collecting debts could help unlock lending http://www.kyivpost.com/news/business/business-sense/detail/105903/ Business Sense Thu, 02 Jun 2011 21:03:26 +0300
This is especially true for developing economies, which are dependent on responsible borrowing in order to finance their rapid growth.

Therefore, banks’ ability to recover past-due debt, for example, from thousands of small retail clients assures the availability of fair-priced loans to new customers.

In Ukraine, by some estimates, the amount of unpaid consumer debt exceeds $10 billion, with $2 billion spent on cell phones, kitchen appliances or expensive vacations.

Those $2 billion, if repaid, would be available for new loans allowing hundreds of thousands of ordinary people to improve their lifestyles.

It is people like a former landlady, Lyudmila Vladimirovna, who would have been able to take out a loan to buy a dishwasher only if some young gentleman had paid off his loan for an expensive smart-phone, and the banks were able to charge a lower rate for its good customers.

Lyudmila Vladimirovna knew exactly how much she collected in rent every month and could do the easy math to figure out the maximum amount of monthly payments she could afford.

Unfortunately, a lot of people didn’t want to go through the trouble and the rates remained sky-high for everyone.

The dishwasher never came.

Long lines to withdraw deposits of people’s hard-earned money were fundamentally part of the same problem.

One of my colleague’s friends was left to borrow from everyone she knew because her deposit was stuck in one of the banks that lent money to people who considered loan repayments as optional.

Consumers who took out loans are not, of course, the only ones to blame: Lenders often handed out loans irresponsibly in the pre-crisis years and then hiked repayments when problems hit in 2008.

In Ukraine, the debt purchasing and collections industry is relatively new.
Christian Schuller

As re-starting retail lending is one of the economic priorities of the government, the National Bank of Ukraine, the State

Financial Services Committee and the tax authorities would be well advised to make it easier and more advantageous for banks and collections companies to cooperate.


The NBU could encourage banks to clean up their balance sheet rapidly by selling; the SFSC should create a clear legal framework within which retail debt portfolios can be reliably traded and the tax authorities should allow the recognition of distressed debt portfolio as a distinct asset (with internationally recognized depreciation methods) instead of trying to enforce unwieldy banking methodologies (which can lead to impossible tax liabilities).

There are many reasons why banks turn to collections companies for help or even sell their receivables at discount.

First, the purchasers of defaulted loans can make cash available to banks immediately so the selling banks can issue new loans to deserving clients earlier.

Second, the specialized agencies are more focused than banks at working with defaulting borrowers as they have more resources to dedicate to what is a core business for them – to locate missing debtors – this in turn means there is greater recovery from the debt, which means more to share with the bank.

Finally and somewhat more technically, selling debt to a collector allows a bank to optimize the timing of profit recognition and, therefore, allows it to remove “bad loans” from their balance sheets at their convenience.

So far there are not many success stories in this market. Ukrfinance is one.

The group has recently attracted substantial institutional capital from Horizon Capital, a regional private equity fund, and is using these funds to bulk-purchase non-performing loans from

Ukrainian banks and corporations. The banks, from which UkrFinance purchased such loans, are already issuing new loans, recycling those funds to deserving borrowers all over the country.
In buying bad loans, collectors give banks fresh cash to lend out.

The potential is huge. The volume of such trading in the West is significant.

In the U.S., for example, the market is estimated at over $10 billion with the largest companies employing thousands of people.

In Western and Central Europe, this market is also extremely well-developed with pan-European companies operating throughout the European Union.

In Poland, the market has been growing strongly since early last decade and plays a significant role in the general health of the banking system.

Ukraine should be next.

Mark Khavkin is an investment director at Horizon Capital, a private equity fund manager investing in Ukraine, Belarus and Moldova.

Christian Schuller is chief executive of UkrFinance Group, a debt-purchasing and collections company.]]> How to increase agricultural industry’s competitiveness, efficiency http://www.kyivpost.com/news/business/business-sense/detail/105747/ Business Sense Wed, 01 Jun 2011 12:00:13 +0300 agricultural industry. Ukraine has an immense amount of arable land with highly coveted “black soil” that can produce a wide variety of crops that are in high demand as the global population grows and agricultural commodity prices remain high. Unfortunately, we continue to talk about the gap between reality and the unrealized potential. Our organization, the American Chamber of Commerce of Ukraine, thinks it is a priority to develop a competitive and efficient agricultural industry in line with free-market principles.]]>
Ukraine plays an important role on global food markets and has a unique opportunity to become a leader in production and processing of agricultural commodities. Since Ukraine gained independence, much has been achieved in developing a market-oriented agricultural industry, which in turn attracted billions of dollars of strategic investment. The industry players that we represent have a goal to convert Ukrainian agriculture into a structured and competitive system that is appealing to potential European partners and traditional trading partners as well as for local producers and farmers. This market-based system will be a reliable platform for investment which will bring new technologies, growing crop and food production, increased budget revenues and jobs. Everyone wins.

But the existing challenges facing domestic and foreign investors, including a lack of clear policy, create confusion. We have witnessed conflicting declarations as well as regulations, legislation, tariff and non-tariff barriers that directly interfered in the activities of investors and ushered in non-market mechanisms that skewed the playing field and added uncertainty. These actions halted legitimate investment into more than doubling production over the next 10 years, in line with the stated goals by the president of Ukraine.
In these tough economic times and looming elections, we see that the prevalence of old habits of market intervention and a desire by some to enrich themselves through their positions will require the chamber and our members to engage actively to protect our investments.
What has been done to address some of these issues?

The industry has come together to develop and communicate strategies and has strengthened our dialogue with key decision-makers. The productive dialogue has revolved addressing issues of: quotas, tariffs and non-tariff barriers to trade; untimely value added tax reimbursement; financing for farmers; the absence of laws and mechanisms that would enable farmers to offer collateral to forward contracting and refinancing brought to the table by investors; plans on how to implement a support system to protect the most vulnerable citizens from rising food prices; aligning agricultural policy with requirements for the upcoming free trade agreement with the European Union and other issues. If properly addressed, solutions in these areas will help the sector to grow and develop.

Recent decisions by President Viktor Yanukovych, the government and parliament have helped create a more cautiously optimistic outlook. We are proponents of free markets, level playing fields, predictable rules, transparency and equity in application of those rules. We will continue to work with the leading industry players, both domestic and foreign, as well as key policymakers, to do our part in ushering Ukraine down the road to stability through reforms in this important sector.

In these tough economic times and looming elections, we see that the prevalence of old habits of market intervention and a desire by some to enrich themselves through their positions will require the chamber and our members to engage actively to protect our investments. If we are successful, we can create an environment that will attract more investments and jobs. Therefore, we strongly urge policymakers to make the right decisions that are good for Ukraine, the business community and the world.


Jorge Zukoski is president of the American Chamber of Commerce in Ukraine which unites leading companies from more than 50 nations across the globe.]]> Business Sense: New privacy legislation must balance interests of individuals, businesses http://www.kyivpost.com/news/business/business-sense/detail/105389/ Business Sense Thu, 26 May 2011 21:52:41 +0300
The law was adopted to ensure respect for the right of every individual to privacy with regard to the processing of his or her personal data. Every legal entity or private entrepreneur has personal databases, for example of employees, customers and suppliers.
The law requires legal entities and private entrepreneurs that use personal data bases to stipulate specific internal regulations and appoint a specific employee to fulfill the requirements set forth by the legislation

The law requires legal entities and private entrepreneurs that use personal data bases to stipulate specific internal regulations and appoint a specific employee to fulfill the requirements set forth by the legislation.

Moreover, the owners of personal databases have to obtain unequivocal consent from all individuals whose personal data is included and processed in a database. In addition, such consent has to be given in writing; otherwise it is very hard for the owners of a database to prove that this consent has been obtained.

Upon receipt of written consent, it is also required to notify each individual whose personal data are included in a database in writing within 10 days.

Can you imagine obtaining individual written consent and notifying in writing each individual whose personal data is included in a database of 500,000 people?

Moreover, every single personal database has to be registered with the State Service of Ukraine for Protection of Personal Data following a procedure that has not even been stipulated yet.

At the same time, the liability for violating the requirements has not yet been stipulated. Parliament is expected to vote on this within months.

The law affects only legal entities and private entrepreneurs that process personal data. Individuals who use personal data for professional purposes – such as journalists and artists in performing their professional activities – are exempt from provisions of the Law.

Therefore, if you have a list of contacts in your email account, which is used exclusively for your matters, take it easy, the law will not affect you.

What is a personal database? It is a set of personal data in electronic format or in the form of personal data cards. The definition of personal data base is quite broad and at first glance it seems that almost any set of personal data will be considered a personal database, however it is not exactly true.

There is no doubt that new regulations on personal data will be adopted in the near future. Let’s keep our fingers crossed that this time Ukrainian legislators balance the interests of businesses with individual rights to privacy.


For example, a set of business cards chaotically stored on your desk most likely will not be considered as a personal database, since it is not structured according to certain criteria, has no title and no aim of processing. If you decide to enter all the data from business cards into a spreadsheet, this will be a personal database. However you are still free to use it solely for individual purposes.

But what if thedatabase is then used for commercial activity, such as sending emails, or advertisements? Then such a situation will be covered by the law.

The Cabinet of Ministers has been given a six-month period to adopt specific regulations to bring legislation into line with the requirements of the personal data law. Let’s hope that these specific regulations will bring more clarity, which is currently lacking.

Meanwhile, business should take the following steps to avoid any complications.

First, create internal regulations on the procedure of processing personal data, and appoint a department or person responsible for organization data. Second, request written consent from individuals whose personal data is listed in a database.

There is no doubt that new regulations on personal data will be adopted in the near future. Let’s keep our fingers crossed that this time Ukrainian legislators balance the interests of businesses with individual rights to privacy.


Yevgen Bobyk is an associate with PARITET law firm. He can be reached at yevgen.bobyk@paritet.ua.

Editor’s Note: Business Sense is a feature in which experts explain Ukraine’s place in the world economy and provide insight into doing business in the country. To contribute, contact chief editor Brian Bonner at bonner@kyivpost.com]]> Business Sense: A few bright lights exist on mergers & acquisitions scene http://www.kyivpost.com/news/business/business-sense/detail/104259/ Business Sense Thu, 12 May 2011 23:09:59 +0300
However, the European financial giants that entered the market in the second half of the last decade aren’t exactly beating a retreat, while Ukrainian chains of everything from supermarkets to electronics continue to either expand organically or stick it out in hopes of better offers to come.

On the upside, the national supermarket chain Furshet continues to open new and remodel existing stores, which now exceed well over 100 across the country.

But beyond the top 10 percent of Ukraine’s food retail sector, brands are weak, debts are high and assets largely limited to stock, making it difficult to find investment.

Mix of large and small acquisitions by Ukrainian and foreign investors should continue into the near term.
Nevertheless, at least one Polish private equity firm, Abris Capital Partners, has responded to the call for consolidation, following up from its 2008 purchase of the west Ukrainian retail chain Barvinok with the 2010 acquisition of another west Ukrainian chain, Torgovy Svit, in what could turn out to be an example of regional consolidation.

The Ukrainian do-it-yourself and hypermarket chain Epicenter is rumored to be taking a different track: seeking acquisitions of suppliers in nearby Poland and financing them on the Warsaw Stock Exchange.

As was the case with its retail sector, Ukraine’s banking was hit particularly hard by the 2008 financial crisis. But having spent billions of dollars to enter the market, European giants such as Austrian Raiffeisen or Italian Unicredit are not expected to write off their losses and sell.

Swedbank, which has less of a strategic interest in Ukraine than other European parents do, is already looking for a buyer, according to Kommersant Ukraine.
However, other banks are waiting for an expected rise in gross domestic product to fuel consumption and thus borrowing.

Another possible option is equity finance from the European Bank for Reconstruction and Development, which already has already helped out most of its fellow European lenders in the past.

The EBRD recently announced its purchase of a 15 percent stake in UkrSibbank, which is part of France’s BNP Paribas Group. More such deals could be in the works for Ukraine’s biggest investor.

In another trend, a growing number of smaller and mostly Ukrainian agricultural companies are taking the initiative by courting institutional investors through IPOs held on the Warsaw Stock Exchange.

The real buzz word for Ukrainian mergers & acquisitions these days, however, is agriculture. This is despite all the negative press that the country has gotten from the government’s heavy-handed restriction of grain exports and the legal confusion that surrounds an anticipated cancellation of the ban on farmland sales.

But while the country’s agri barons bask in their newly attained status as Forbes billionaires, the greater number of M&A deals in this sector are happening below the radar screen, with foreign investors being just as cautious and focused in their purchases as smaller Ukrainian players.

Yury Kosiuk’s Mironivsky Hlibo­product, the listed, largest Ukrainian chicken producer, is planning acquisitions in Poland, Parkiet reported.

Kernel, the listed agricultural group owned by billionaire Andriy Verevsky, continues to flex its acquisition muscles, looking at Ukraine as well as the near abroad.

The same can be said of Oleg Bakhmatyuk’s egg-making Avangard, whose sister company Ukrlandfarming was widely reported to be behind the purchase of debt ridden Rise Group earlier this year.

But few have probably heard about the 2010 purchase of a Ukrainian corn grits plant by listed Mexican corn flour and tortilla producer Gruma for $9 million; or of listed Ukrainian sugar maker Astarta’s purchase of two sugar processers in Ukraine this year alone.

This mix of large and small acquisitions by Ukrainian and foreign investors should continue into the near term.

In another trend, a growing number of smaller and mostly Ukrainian agricultural companies are taking the initiative by courting institutional investors through IPOs held on the Warsaw Stock Exchange.

Warsaw, closer and less expensive than London, is becoming the place where tiny agro newcomers such as Agroliga, midsized newcomers such as Agroton and internationally recognized giants such as Kernel sell their stock.

Lastly, don’t write off the energy sector, despite the difficulties experienced by London-traded mainstays such as Regal and Cadogan. While the multinationals are still clamoring to get in on production of increasingly high priced gas and oil, smaller and more agile foreign investors are already on their way to exploring for shale gas or building wind farms.

Ukraine’s green tariff has leveled the playing field for foreign investors, and modern-day wildcatters such as U.S. BNK Petroleum and Australian Basgas are already on the ground looking for alternative gas prospects.


John Marone, a former Kyiv Post chief editor, is a journalist with mergermarket.com.]]> Business Sense: Where real estate market is heading after its big crisis http://www.kyivpost.com/news/business/business-sense/detail/103180/ Business Sense Thu, 28 Apr 2011 22:48:20 +0300
Looking back at the recent cycle of 1999 – 2009, one can hope that the first generation of development or the first part of the learning curve has been completed. Analyzing the outcome of the recent bust-boom-bust, many problems come to the surface.

Most of the completed developments were low-to-average quality, and most of them were carried out by first-time developers who generated the funds in typically commodity trading businesses.

There were virtually no professional development organizations operating in either Kyiv or nationally, and most companies were operating one or two properties.

Most pre-crisis projects were of overblown and unrealistic proportions, none of which materialized. For example, several international $100 million-plus investment acquisitions took place typically at overpriced levels before the economic downturn.

Most prime projects were sold to international investors pre-crisis. The portfolio of the few companies which completed or planned international public offerings were mostly comprised of unrealized projects. Moreover, land speculation was the fad of the time.

The ensuing downturn resulted in vast increase in vacancies in the three main commercial segments: office, retail and warehouse. It also led to low-to-moderate vacancies in the prime segment due to extremely short supply.

It also led to demand for exclusively prime properties, but none trading, as oftentimes they were nearly the only source of stable income for their holders, and the sales price was at typically 50 percent of the cost and way below the mortgage debt.

The present-day reality is this:

- Virtually no prime product available for sale due to a continued disparity of cost and present-day valuations;
- First post-crisis development projects in offices likely to continue in secondary market, with retail likely to be in prime;
- Very few international developers operating and little chance for new entrants pre-2012 (a handful of entries is expected in 2012);
- Little chance for international investment pre-2013 when new quality product enters the market;
- Much focus on hospitality segment which was nearly non-existent pre-crisis but which showed strong resilience during the crisis; and
- Emergence of a handful of powerful developers backed by cash rich oligarchs.

The good news for most players in the market is that this time it appears the recovery will be much quicker than in the aftermath of the 1998-99 downturn.

With the economy at large much stronger, the financial sector much more developed (although still licking its wounds) and the real estate market noticeably more populated, the pace of recovery is showing signs of unexpected acceleration.

In particular, it is noticed in the retail segment, where consumers are growing accustomed to the modern concept of shopping experience.

The government took a few meaningful steps to improving the playing field, although by and large no needed revolutionary steps were undertaken to making the market transparent and predictable.

On the surface of things, looking at the opportunities ahead, one can identify prime retail and office development as areas of strategic opportunity. These segments are evidently leading the pack due to the following advantages:

- Stronger resilience during economic downturns;
- Stronger occupational and end user (latter in case of retail) demand;
- Higher rental rates;
- Low supply;
- Low competition;
- Quality aware occupiers in case of offices, where the market is becoming more sophisticated as a result of occupier size;
- Virtually guaranteed prime yield exit, as there is always a buyer for a properly concepted, built and populated property; and
- Still relatively moderate entry cost due to a limited amount of borrowed [read: speculative] funds in the market.

A particularly important element to succeeding with a quality scheme is the ability to deliver quality product from the very first stages of project realization.

With development funds available for the “primest of the prime” only, the developer must demonstrate the ability to secure a site in a prime location, develop the proper international grade project concept, documentation and a set of quality permits versus questionable arrangements, with all of it backed by its own portion of equity capital.


Sergiy Sergiyenko is the managing partner in Ukraine for CB Richard Ellis, a global leader in real estate services. ]]> Business Sense: Time to remove unfair barriers that stifle agricultural sector http://www.kyivpost.com/news/business/business-sense/detail/102690/ Business Sense Thu, 21 Apr 2011 23:05:27 +0300 Jorge Zukoski writes: The main beneficiary of this nontransparent process was a quasi-state company, Khlib Investbud.]]>
The law envisages distribution of grain export quotas through selling them at auctions. This contravenes free market principles, current legislation and obligations Ukraine has with the World Trade Organization (WTO) and General Agreement on Tariffs and Trade (GATT).

The Chamber believes that failure of the Ministry of Agricultural Policy and Food to issue stock confirmations that resulted in unfair and nontransparent distribution of export quotas in November 2010 and January 2011 is discriminatory towards major foreign grain exporters.
The main beneficiary of this nontransparent process was a quasi-state company, Khlib Investbud.”

– Jorge Zukoski, president of the American Chamber of Commerce in Ukraine.

Such actions demonstrate unequal treatment of market participants, in particular in the view of the newly adopted Law #8324 “On Amendments to the Certain Laws of Ukraine regarding Provision of the State Support for Development of Agriculture.”

As a result, a group of companies received quotas for free while others would have to pay for them at auctions.

The Chamber stresses that it is also a bad signal to the market that those companies that failed to perform on their commitments before (received quotas in January and were unable to ship by March 31) are getting an extension for free while those who did not receive quotas would have to pay for them at auctions.

The main beneficiary of this nontransparent process was a quasi-state company, Khlib Investbud, a previously little known player on the market which received a large share of the quotas. Such developments destroy trust in the development of a predictable and equitable policy geared toward free markets in the agriculture industry in Ukraine that will attract and retain much-needed investment and technologies.

In the official letter disseminated on April 14, the Chamber requests President Viktor Yanukovych to veto law #8324 as it is against Ukraine’s international commitments and violates Article VIII of the General Agreement on Tariffs and Trade of 1994 and Article 3 of the World Trade Organization Agreement, of which Ukraine is a signatory and member.


Representing the biggest investors in Ukraine’s agriculture sector, food processing, logistics and trade, the Chamber is highly concerned about further developments in the grain market.

– Jorge Zukoski, president of the American Chamber of Commerce in Ukraine.
The Chamber requests the president’s support in ensuring the development of a competitive agricultural market that will promote free market principles and equal treatment of all operators.


The Chamber is also advocating for the immediate cancellation of the Cabinet of Ministers resolution that extended grain export quotas until June 30 and for the right for companies with stocks to freely export or to amend the resolution and allocation procedure of quotas allowing companies that were discriminated against before to receive the right to export their property without further delay.

Representing the biggest investors in Ukraine’s agriculture sector, food processing, logistics and trade – which have invested several billion U.S. dollars into the economy – the Chamber is highly concerned about further developments in the grain market as currently there is a lack of clarity about the government’s agricultural policy.

This lack of clarity will influence the decisions of companies in relation to investing in the new crop campaign due to the lack of predictability and transparency in policy and process.

The Chamber remains committed to working with key policymakers to assist in developing legislation that will introduce the predictability, stability and transparency that is necessary to ensure the agricultural industry is competitive and is able to attract the much needed investment to expand production and play a significant role in feeding the growing global population.


Jorge Zukoski is president of the American Chamber of Commerce in Ukraine which unites leading companies from over 50 nations across the globe.]]> Agricultural investments in peril http://www.kyivpost.com/news/business/business-sense/detail/102424/ Business Sense Thu, 14 Apr 2011 23:12:27 +0300
However, their investments are now in peril, due to a sequence of steps and decisions made by the Ukrainian government and parliament. The list of missteps is long and frustrating.

The lack of a clearly communicated and rational agricultural policy has only brought speculation and conspiracy theories as to goals and objectives.

The sector has moved away from the principles of a free market economy in many ways. These include:

- market interventions by closing exports through unjustifiable detention of grain vessels in September and October 2010;

- unfair and non-transparent distribution of export quotas in November 2010 and January 2011;

- legislative initiatives aimed at monopolizing the market;

- failure to refund value-added tax combined with growing pressure from law enforcement agencies for companies to withdraw VAT claims.

All these facts have led major agricultural companies to conclude that the Ukrainian government lacks understanding of the key role for agriculture.

The latest law passed by parliament mandates the sale of export quotas at auctions. Its enactment would mean an actual expropriation of the assets of grain traders that could not be exported due to barriers created by the government.

As a business community, we remain cautiously optimistic and will continue assisting national decision makers in improving the legislative and regulatory base in order to develop a more efficient and competitive agricultural industry based upon free market principles.


After losing hundreds of millions of dollars due to vessel demurrage costs, failure to deliver to international customers and six months of storage costs, the companies will now have to buy the right to export their assets. This is simply unacceptable.

Therefore, the American Chamber of Commerce has sent a request to President Viktor Yanukovych to veto this law.

The legislation contradicts a number of Ukraine’s laws and international agreements. Furthermore, it is detrimental for the whole agricultural sector in general and Ukrainian farmers in particular. These export restrictions are dramatically driving down domestic prices of agricultural commodities.

Farmers are in need of cash at this time of the year – up to $9 billion – to prepare for the next sowing season. They could easily get it if domestic market prices were not depressed.

However, if the quotas stay in place – in accordance with recent government decisions they will be auctioned until July 1 – Ukrainian farmers may lose $1.9 billion to $2.6 billion due to export restrictions. This equals 1.3 percent to 2 percent of total Ukrainian gross domestic product.

Also, there is still the unresolved issue of reimbursement of overdue and outstanding VAT refunds to exporters.

So far, many companies that export agricultural commodities are neither receiving past due refunds nor qualifying for automatic VAT refunds, due to technicalities and barriers that have been erected along the way.

The American Chamber of Commerce is continuing a targeted advocacy campaign aimed to ensure the equitable and transparent repayment of past due VAT.

The focus needs to be on reforming the current VAT system to provide a long term, sustainable solution to the issue of VAT arrears.

It is our sincere hope that these issues can be resolved and Ukraine can once again embrace the concept of free markets in this important sector to the economy.

The agricultural industry needs to be more competitive and attract desperately needed investment so that the sector can truly tap into its full potential and expand production dramatically.

A wide variety of issues are on our agenda during conversations with Agriculture Minister Mykola Prysyazhnyuk and other key policymakers.

An example of a concrete outcome of our recent meetings with Prysyazhnyuk was an agreement to establish an American Chamber of Commerce Agriculture Committee/Ministry of Agriculture Working Group to address issues throughout the entire industry.

The message from our side continues to be the importance of creating and communicating an agricultural policy that will encourage increased production through the participation of local and foreign investors on a level playing field that does not favor any organization, regardless of composition or nationality of capital.

Market interference or monopolization of agricultural markets, leading to discriminatory treatment of investors, is detrimental to the building of a competitive industry.

As a business community, we remain cautiously optimistic and will continue assisting national decision makers in improving the legislative and regulatory base in order to develop a more efficient and competitive agricultural industry based upon free market principles.


Jorge Zukoski is president of the American Chamber of Commerce in Ukraine, which unites leading companies from more than 50 nations.

Editor’s Note: Business Sense is a feature in which experts explain Ukraine’s place in the world economy and provide insight into doing business in the country. To contribute, contact chief editor Brian Bonner at bonner@kyivpost.com

]]> Agribusiness losses mount amid damaging ‘Great Grain Robbery’ http://www.kyivpost.com/news/business/business-sense/detail/102421/ Business Sense Thu, 14 Apr 2011 22:58:53 +0300
Agribusiness is Ukraine’s most promising sector. But experts generally agree that Kyiv is moving in the wrong direction in this industry, with severe restrictions and monopolization. An environment for high growth is not being created.

Some government leaders are talking about the same issues today as they were in the early 1990s, such as whether the private or public sector can do a better job of developing agribusiness, or whether it is good or bad to have international investors.


Huge potential unmet

Year after year, Ukraine has been an underperformer. Everyone is tired of talking about “potential.”

Most discussion centers on alarming trends and troublesome conditions, the lack of confidence in the business and financial community, the deteriorating and damaging investment climate, the obstacles being created by government agencies and instability in the marketplace.
The people of Ukraine need and deserve an abundant supply of high quality, reasonably priced food products. The world is counting on Ukraine to do its part to substantially increase the world’s food supply in the next 15 years to feed the growing population.


Investor appetite is lower. The basic philosophy of some government officials towards private economic development is not positive and friendly. Business and investors report that expansion plans are on hold. There is increased frustration.


Wrong direction

Investors say they could double investments in agribusiness if the environment was right. Bankers and investors say lending and investment is far below what is possible. Many are not willing to finance the planting of 2011 crops due to government policy.

In light of the announced economic goals, it is a surprise to find the high speed train of agribusiness economic development in Ukraine is moving rapidly in the wrong direction and on the wrong track.

Many talk about the “Great Grain Robbery” in Ukraine when discussing the major grain export restrictions which began in August and continue today.


Policies since August

Here are the major problems the business community has identified:

1. Value-added tax: The VAT system remains non-transparent and subject to manipulation. There has been pressure on exporters from tax authorities and the legal/security services, including criminal charges for alleged violations. Automatic VAT reimbursement will not apply to all and arrears persist.


2. Export restrictions: A whole series of export and other market restrictions have been introduced since August. Their justification and subsequent quota allocations lack any sort of transparency or accountability. Most international traders have been excluded from the export market. The major players in the private sector logically assume corruption and control is the driving force.

3. Monopolistic state control: Several programs have been put in place through government regulations which basically allows the government to monopolize and restrict in key areas, including grain exports, seed imports, cane sugar imports, detention of grain ships and forcing local commodity sales at below market prices. Also, several laws that give the government monopolistic power have been introduced in parliament.

These actions have caused huge losses and disruptions from the farming fields to family tables. Hundreds of millions of dollars of losses have been incurred by farmers, domestic and international agribusinesses, and other businesses in the food chain.

Experts estimate that the farmers’ direct losses due just to export restrictions for the 2010/2011 marketing year will be more than $2 billion through depressed local prices.

Losses in the food chain could reach $5 billion. Long-term losses could reach $15 billion if present practices continue.


Positive changes needed

Most major players are loudly urging government to review their actions, to change course as soon as possible.

The government should open a real dialogue with the private business sector, bring transparency to the market, and provide new market tools such as pledges of long-term leases, pre-harvest financing, hedges, real commodity exchanges, crop insurance, liberalization of central bank rules and other such positive actions.

The people of Ukraine need and deserve an abundant supply of high quality, reasonably priced food products. The world is counting on Ukraine to do its part to substantially increase the world’s food supply in the next 15 years to feed the growing population.

The amount of high value, high quality food products Ukraine could produce in the next 15 years is staggering – easily more than double what is now being produced.

The amount of food the world needs and wants to buy from Ukraine is also staggering. All of which will produce needed jobs for Ukraine, income for the people, taxes for the government, wealth for Ukraine, overall economic growth and prosperity all the way down to the village level.

But for this to happen, Ukraine’s potential in agribusiness will have to become reality – the sooner the better.



Morgan Williams is director of government affairs at the Washington D.C. office of SigmaBleyzer. He serves as President of the U.S.-Ukraine Business Council (USUBC), www.usubc.org.

Editor’s Note: Business Sense is a feature in which experts explain Ukraine’s place in the world economy and provide insight into doing business in the country. To contribute, contact chief editor Brian Bonner at bonner@kyivpost.com




]]> Ukraine plays hard to get with Russia and EU http://www.kyivpost.com/news/business/business-sense/detail/101928/ Business Sense Fri, 08 Apr 2011 12:20:52 +0300 lucrative offer to Kyiv if it decides to walk away from on-going negotiations to sign a Free Trade Agreement with the European Union, and joins the Customs Union between Belarus, Kazakhstan and Russia which came into effect earlier this year. Officials in Moscow have indicated that should Ukraine opt to join the CIS Customs Union it could get a huge discount on natural gas import prices, potentially saving the economy $8 billion per year, equivalent to around 6 percent of gross domestic product.]]>
The figure of $8 billion sounds top heavy. Historically Ukraine imported around 50-55 billion cubic meters of natural gas from Russia, but this dropped dramatically through the global crisis, to around 35-37 billion cubic meters. In April 2010 Ukraine and Russia agreed that Moscow would provide a $100 per 1,000 cu meters discount sold to Ukraine, in exchange for extending the lease on the Russian Black Sea Feet until 2042. In effect Ukraine paid around $260 per 1,000 cu meters for gas supplies in 2010, which reduced to around $235 per 1,000 cubic meters in the first quarter of 2011.


Ukraine is a class act in terms of milking both cows, extracting maximum concessions from the West and Moscow as its plays on the country's geopolitical significance to both through its energy transit hub position.


Assuming that Ukraine ends up paying Russian prices for gas, i.e. $50-80 per 1000 cubic meters, this would still only deliver a saving of around $6 billion annually, but presumably Moscow is working on the assumption of rising Ukrainian gas consumption as the economy recovers, plus also higher global gas prices, as demand in Asia in particular increases (Chinese consumption is expected to rise to 400 bcm annually over the next decade or so).

A gain of $6 billion is nevertheless not to be sniffed at as it represents the equivalent of 4 percent of GDP, and would likely push the current account back into surplus. It would also clearly provide a huge, and much needed boost to Ukrainian industry. On the political front, it would also ease pressure on the government to push forward with the very sensitive issue of liberalizing domestic gas prices.

Second, the benefits of Ukraine's entry into such a CIS Customs Union would accrue also to Russian energy companies, as presumably they would improve their ability to sell to clients in Ukraine, and hence increase their overall reach/dominance across the CIS economic space. This would presumably lead to questions as to the future of domestic gas suppliers. Note that the Ukrainian government has recently held out the option of pushing ahead with the partial privatization of the state-owned gas transit company, for which there would likely be strong interest from Russia, given it views the pipeline as hugely strategic.

Third, this is far from being a “done deal,” as Ukraine is a class act in terms of “milking both cows,” i.e. extracting maximum concessions from the West and Moscow as its plays on the country's geopolitical significance to both through its energy transit hub position.

Ukraine has continued to play “hard to get” with Moscow, with President Viktor Yanukovych suggesting over the past few days that it is still eager to seek a deal on an Association Agreement with the EU this year, with a FTA being part of that process. Negotiations on the FTA are already well in advance, but Moscow has made it clear that it could impose sanctions on Ukraine if Kyiv presses ahead with these plans.

Ukraine might feel more comfortable moving to a "3+1" agreement with Moscow over its own Customs Union, given that Moscow has indicated that it is eager to secure WTO entry this year, and ahead of Belarus and Kazakhstan. Ukraine is already a WTO member, and arguably would see Moscow's membership as providing some defense in terms of possible trade-related disputes as part of a wider agreement over a Customs Union. Yanukovych has also spoken about a FTA with Moscow, rather than full membership of the CIS Customs Union.


Perhaps the Yanukovych regime assumes that a dalliance again with Moscow might see leverage exerted on the IMF from Western governments/EU to cut the government some slack on the reform front.


Fourth, politically in Ukraine a move to EU accession, or deepening relations with the EU, is probably still seen as more palatable than varying degrees of "economic" re-integration with Moscow. Herein, while NATO membership has clearly been put on the back burner, the population does still seem to appreciate the democratic anchor provided by the goal of EU accession - even though in Ukraine's case (perhaps similar to Turkey) the accession process would likely be very long moving.

As a result, even President Yanukovych,previously seen to lean more to Moscow, has put much effort into deepening the relationship with Brussels, and negotiations over a FTA have been part and parcel of that project. Ultimately all this may well have just been part of the strategy of extracting maximum concessions from both the West and Moscow, while keeping Ukraine's options open.

For Yanukovych, in particular, note that he is currently entering into potentially difficult negotiations with the International Monetary Fund, as he seems set in stalling key pension reform this side of parliamentary elections; pension reform is regarded by the IMF as the key for maintaining disbursements under the current IMF program. Perhaps the Yanukovych regime assumes that a dalliance again with Moscow might see leverage exerted on the IMF from Western governments/EU to cut the government some slack on the reform front.

Timothy Ash is global head of emerging markets research at the Royal Bank of Scotland in London.

Click here to read about this report on www.kyivpost.ua.

Click here to read more about this this topic on www.kyivpost.ua.]]> Where's the growth in emerging Europe? Russia and Ukraine ‘disappointing’ http://www.kyivpost.com/news/business/business-sense/detail/101925/ Business Sense Fri, 08 Apr 2011 11:53:54 +0300


Russia and Ukraine remain commodity based economies with similar characteristics to Kazakhstan, and hence are currently benefitting from favorable terms of trade from the hike in commodity prices partially driven by political instability in the Middle East.
In terms of Q4 national accounts, as an indicator of economies likely to surprise on the upside in 2011, Turkey as noted above again led the field posting real GDP growth of 9.2 percent, with Estonia surprising on the upside with 6.7 percent year-on-year growth, Israel growing by 6.2 percent year-on-year, alongside Lithuania (+4.8 percent year-on-year). The recovery in both Estonia and Lithuania, and indeed to a certain extent Latvia (+3.6 percent year-on-year), is particularly encouraging given the shear extent of the real GDP contraction these economies have experienced (up to one quarter) through the global crisis and offers some hope that the 'domestic depreciations' these economies have gone through provides some hope for the future. Croatia and Romania continue to lag on the growth/recovery stakes in Q4 2010, both remaining in recession. Indeed, Romania has now posted eight straight quarters of real GDP decline, albeit this reflects IMF-imposed fiscal austerity with the hope that after this "balance sheet cleansing" the economy will be in a much fitter state to expand.



Reviewing the above data and trying to explain the winners and losers

The dynamism of growth in Turkey has surprised most observers, including yours truly and the government, which had earlier forecast real GDP growth of only around 4.5 percent year-on-year in 2010. Turkey's strengths include relatively clean balance sheets (public, household/corporate and banks), stable politics/policy with the AK party government heading for a third term in office after elections this June, a relatively good business environment, banks which have felt able/willing to lend to the real economy, and consumers of credit with appetite to borrow at near record low interest rates given the downward push in inflation.

Favorable demographics, success in job creation (partially publically driven), a vibrant manufacturing sector, and more diversified economy have all helped. The AK party government might argue that Turkey is entering a new paradigm, as with the party offering an almost unprecedented period of political stability and economic/political reform, the stop-go economy/policies of the past have been finally been relegated to a bygone era, and now Turkey has more characteristics of high growth Asian economies than their slower growth European peers.

In contrast to commodity-scare Turkey, Kazakhstan's great advantage remains its huge resource base/potential and ability to continue to attract large foreign direct investment inflows into this sector; an average of around 9 percent per annum in net FDI inflows over the past decade which is three times the regional average.

The sovereign's clean balance sheet (public sector debt/GDP ratio of only around 15 percent) also gave the government much scope to pump prime growth, which helped to offset the drag from continuing weakness/problems in the banking, real estate and construction sectors, stemming from the banking crisis which hit the economy hard from late 2007 and forced two of the country's largest banks to restructure their external liabilities (equivalent to around 14 percent of GDP). These latter sectors are expected to continue to be a drag on growth going forward over the next 2-3 years, as banks in particular remain weighed down by high non-performing loan levels (20-30 percent) and are now understandably risk averse still in terms of (re)expanding balance sheets given their painful experience with un-seasoned borrowers through the recent global crisis.

The fact that Kazakhstan went into the global crisis early, from August 2007 on-wards, was nevertheless with hindsight, a key positive as it meant that counter-measures were already in place early, and around a year before the collapse of Lehman. The maintenance of high commodity prices for much of the past 3-4 years also helped cushion the adjustment.

Israel's continued resilience/dynamism reflects a combination of relatively clean balance sheets, small-open economy status and recent success in attracting FDI into high tech sectors, which gives the economy more of an Asian feel than of Emerging Europe. In this respect its problems have been more to do with controlling evidence of over-heating, e.g. particularly inflation and this has seen the BOI move pre-emptively to hike/normalize its main policy rate from 2009 onwards. The Israeli economy's close historical/cultural/political and economic ties with the US, and its Diaspora there, inevitably provides some underpinning, particularly given the US guarantee over a weight of the country's still hefty public sector liabilities.

Russia and Ukraine remain commodity based economies with similar characteristics to Kazakhstan, and hence are currently benefitting from favorable terms of trade from the hike in commodity prices partially driven by political instability in the Middle East. Growth/recovery has lagged in both economies due to a combination of factors, prime amongst these have been deep structural vulnerabilities laid bare through the crisis in these economies, in particular weak banks/institutions around credit, including relatively lowly willingness to pay in stress situations, lack of openness to FDI, and a poor business environment more generally.
Ukraine, like Kazakhstan, has been through a brutal banking crisis (NPLs ~ 30 percent) and hence banking, real estate and construction are likely to be drags on growth over the medium term. Relatively speaking, and given the tailwind provided by low base period effects, fiscal stimulus, and terms of trade Russia’s and Ukraine's performances in 2010 was relatively disappointing in our view and a reflection of the structural weakness revealed above. That said, and with the tailwind provided by high oil/commodity prices, and in Russia's case continued fiscal stimulus in the run up to the parliamentary elections (already talk of another RUB300bn in new budget spending allocations) due in November, and presidential elections the following March, growth should be sustained in the 4-4.5 percent range for 2011, and 2012.

Poland's durability through the global crisis reflects a range of factors, but including its large, closed economy status, which benefitted from existing plans to ease fiscal policy in 2009 via hikes in pensions/public sector wages, relative durability in terms of employment (evidence that Polish companies were slower to shed labour through the global crisis), exchange/interest rate flexibility through the crisis, relatively healthy banks with better "behaved" borrowers, lower value added export profile, plus strong trading relations with core Europe, e.g., Germany.

The Czech Republic has surprised on the downside in terms of its growth/recovery story, suffering a steeper recession in 2009 than its Polish peer, and a much more subdued recovery subsequently. Clearly The CR's small, open economy status left it vulnerable, especially in the context of its large auto/manufacturing sector. That said, its relatively clean balance sheet (Sovereign, households and banks) and strong trade integration into core-European economies would suggest a more robust real GDP growth bounce back than the mediocre 2.3 percent growth delivered in 2010, and 2.9 percent in Q4 2010. A combination of persistently high unemployment (9.6 percent), a tightening in fiscal policy and the strength of the crown is perhaps weighing on growth/recovery, plus also the relatively prudent nature of Czech consumers of credit and banks.



Relatively speaking, and given the tailwind provided by low base period effects, fiscal stimulus, and terms of trade Russia’s and Ukraine's performances in 2010 was relatively disappointing in our view and a reflection of the structural weakness revealed above.
Hungary emerged from recession in 2010, posting 1.2 percent real GDP growth, which arguably surprised on the upside, after a deep recession in 2009 (minus 6.7 percent) and two prior years of very weak growth (sub-1 percent) as Hungary was hit with its own crisis (double digit deficits) from late 2006 onwards. The government is putting much faith in its new pro-growth agenda (which amongst other things aims to create 1 million jobs over the next decade), and while much has been done to stabilise markets - assure the sovereign's financing position - recent higher frequency indicators suggest recovery might be running out of steam somewhat on the back of high unemployment, weak banks/credit environment and little scope for fiscal stimulus.

Bulgaria, Croatia and Romania arguably all fit into a similar basket of economies that were hit hard by the Lehman crisis as previous sources of growth (FDI, real estate and credit were all hit badly) and they are now struggling to identify new sources of growth. Croatia, in particular, suffers from unfavourable demographics, a high cost base, high tax environment, perhaps an over-reliance on the tourism sector and lack of broader diversification, and deeper structural reforms are required. Bulgaria and Romania appear more competitive, but the same issues remain for these economies, i.e. what are the new sources of growth over the medium to longer term as base period driven growth begins to run out of steam.

What are the new regional drivers?

In aggregate reviewing the regional drivers for growth, what remains clear is that the region faces significant headwinds which would still suggest underperformance relative to peers in Asia and Latin America.



Foreign direct investment

Prime amongst the new impediments to growth is the new found dearth of foreign direct investment (FDI). Herein it is important to remember that FDI inflows were a powerful source of growth, structural reform and typically non-debt forms of financing wide current account deficits for much of the decade prior to the collapse of Lehman. We estimate that net FDI inflows into Emerging Europe over the decade to 2009, amounted to around 3.5 percentage points of GDP, a hugely powerful driver for the convergence trade across the region. The fact that a weight of these inflows were bank-related (e.g. foreign banks buying local entities) and that foreign banks subsequently leveraged up aggressively offshore to expand their balance sheets in a region recognized as being under-banked but offering high growth potential as compared to their seasoned home markets, gave this initially FDI flow huge additional weight/power. These bank-related inflows probably added another couple of percentage points onto the flow, drove currency appreciation and attracted yet more portfolio investment as a result. Remarkably, and running somewhat against the textbook theory of FDI which has these flows as being relatively sticky, FDI inflows to Emerging Europe have dropped by 40-50 percent in the period since the collapse of Lehman, and are showing little evidence of recovery.

The fact that FDI inflows have fallen off a cliff reflects a combination of factors but prime herein being that a weight of these flow were bank-related, and foreign banks (aside from perhaps Gulf, Turkish and Russian banks/investors - with intra-regional flows being the new trend) have little appetite, post Lehman, to put new money to work in the region. Second, there has been little evidence of multinationals engaged in manufacturing looking to re-locate from higher cost Western Europe to cheaper locations in Emerging Europe. Anecdotal evidence suggests that given the weak growth outlook and still balance sheet problems (particularly in banks) in Emerging Europe, MNCs typically see themselves as being over-invested in the region. What seems clear therefore is that the FDI cake is going to be much reduced over the medium to longer term, and that countries in the region will have to work that much harder to attract FDI, which means offering the best business environment, and the best tax/incentives regimes. Even then FDI as a major driver for growth is set to take something of a back seat relative to the past decade.



Banks and credit growth

The other key driver of growth over the past decade, and linked above to the weight of inflows of FDI has been credit growth/expansion; many Emerging European economies saw credit growth rates running at 50-70 percent year-on-year in the years immediately prior to the collapse of Lehman, albeit from relatively low levels. Understandably credit extension collapsed post Lehman and the recovery has been slow-moving though, even in economies where NPLs remained relatively well contained. For those economies such as in Ukraine, Kazakhstan and the Baltics where NPLs ballooned, banks remain extremely risk averse to quickly re-extending credit to households and corporates. All these latter economies are likely to experience several years of very low single digit credit growth, as banks concentrate on cleaning up existing balance sheets, and profitability of banks will be largely determined by their ability to write back looses incurred through the crisis. More generally foreign owned banks in the region generally lack appetite to aggressively extend out credit, given the experience through the global crisis, and deleveraging still remains the dominant occupation.

There are some exceptions to the above credit "lite" environment, with both Turkey and Russia seeing a marked recent pick up in credit growth. In Turkey, the robust recovery in the economy, its "outperformance" through the crisis and the relatively clean balance sheet position of banks (NPLs of less than 4 percent) plus some pent up demand for credit in the household sector has seen credit growth pick up to 30-35 percent in late 2010/early 2011. This has in turn led to concern that the economy is overheating as reflected in the wide current account deficit (~7 percent of GDP) and the CBRT forced to respond with aggressive macro-prudential measures, including aggressive hikes in reserve requirements. In Russia, and despite weaknesses in the institutions around credit exposed through the global crisis (e.g. NPLs of around 10 percent), state-owned banks are currently aggressively re-extending credit to the economy, and particularly the household sector. Russia and Turkey though seem to be the exceptions, with the regional story still being for very subdued credit growth in aggregate across the region.



Exports - close proximity to core Europe

With core-Europe showing strong evidence of growth/resilience through the global crisis there is a sense that proximity to core European markets could provide an important growth ticker for some economies in the region. Economies most closely integrated into the EU, and then Germany in particular, tend to be those in Central Europe, and in particular the Czech Republic and Hungary. In the Czech Republic's case over 30 percent of exports by value are Germany-bound, with a ratio of in excess of 25 percent for Hungary and Poland. Correlations between German and CEE-3 growth tend to be high - around 0.8 percent. That said, the Czech and Hungarian economies have struggled for traction on the export side to gain ground in the rest of the economy, partly a reflection of the drag on domestic demand from persistently high unemployment, and on-going fiscal adjustment (see below). The message herein seems to be that while close proximity to Europe can be important, it should not be relied upon to be the prime driver for growth, and economies in the region look at other options.

Commodity kicker

Emerging Europe, in general is a net commodity importer, with the exceptions of Russia, Kazakhstan, South Africa and Ukraine (metals). Already high oil/commodity prices seems to be spurring a recovery across the CIS, albeit experience has shows that the benefits of high oil prices are something of a twin-edged sword, as it has in the past tended to create reform inertia and builds concern over so-called Dutch disease. In Russia's case this just creates higher vulnerability to downward shifts in commodities prices, e.g. with the Federal budget now thought to balance at an oil price of around USD115 per barrel, four times the level a decade ago. Higher oil/commodity prices should act as a drag on growth in the higher energy/commodity importing credits in the region, in particular, Turkey, Poland and Romania. Interestingly, in the case of Turkey while the combination of high rates of real GDP growth, and high oil commodity prices, are creating concern over overheating of the economy, recent months have seen a pick up in capital account inflows which anecdotally appear to consist o recycling of petrodollars from the Gulf to the newly-tagged "safe-haven" Turkey.



Internal sources of demand

Domestic drivers for growth in economies across CEEMEA remain fairly moribund, perhaps with the exception herein of Israel and Turkey. Problems herein remain the drag of unemployment sustained through the global crisis and the relatively limited fiscal space to pump prime growth with the exception herein of perhaps Russia and Kazakhstan.

Unemployment has emerged as a significant problem across the region, with rates rising by as much as eight-ten percentage points at the extreme in some of the Baltic republic since the global crisis hit. Note that in some economies (Turkey/Russia) unemployment rose quickly as the global crisis initially hit, but has subsequently been quick to recede a reflection of relatively flexible labour markets and dynamic public job creation projects - both benefitted from relative fiscal space to maintain such pro-job policies. Elsewhere, e.g. the Czech Republic and Hungary, unemployment has proven much stickier and is evidently acting as a significant break on growth/recovery.

Fiscal drivers for growth have also varied enormously across the region, a reflection of both solvency/liquidity. Russia and Kazakhstan, for example, although significantly impacted by the global crisis, benefitted from the fact that sovereign indebtedness was low (public sector debt/GDP ratios of 10-15 percent of GDP), they were running budget surpluses in the run up to the collapse of Lehman, and had sizeable fiscal reserves (close to USD200bn in the case of Russia). This gave both economies a substantial ability to run aggressively countercyclical fiscal policies, secure in terms of their financing. In Russia's case its anti-crisis programme accounted for around 10 percent of GDP. Beyond Russia/Kazakhstan, fiscal space to loosen through the global crisis as fairly limited, not particularly due to concerns over solvency, as the region benefitted from relatively lowly public sector debt/GDP ratios (less than 40 percent for Emerging Europe still, i.e. half the EU average) but liquidity, as access to financing at the outset through the global crisis were fairly limited. To some extent where budget funding shortfalls (liquidity) pressures were most extreme (Belarus, Hungary, Latvia, Lithuania, Romania, Serbia, Ukraine) IMF/EC support programmes were extended, but these typically came with IMF/EC conditionality. The EU's own concerns over sovereign debt sustainability in along the EU periphery meant that efforts to loosen policy with more pro-growth strategies, e.g. in Hungary and Latvia, were quickly nipped in the bud. At the extreme, in Latvia, real government spending was cut around 20 percent over the period 2009-2011, with similarly large cuts of 8.8 percent in Lithuania. Interestingly, Bulgaria, which arguably had some fiscal space to loosen policy through the crisis, given its low public sector debt/GDP ratio (~15 percent) and over EUR 3bn (10 percent of GDP) held in its fiscal reserve, because of the rigours of its fixed exchange rate regime, tightened policy fairly aggressively which added to the extent of the slowdown and is perhaps now still acting as a drag on growth/recovery. A question for next few years is that with Emerging Europe generally benefitting from low sovereign leverage and with financing (market & IMF) generally assured, will policy makers, and multilaterals feel willing now to provide a little more kick to growth with loosening fiscal policy, particularly in economies where policy has tended to be tightest, e.g. the Baltic states and Balkans. Given the maintenance of fixed exchange rates, and past track record of building up large external imbalances once growth rebounds.



Timothy Ash is global head of emerging markets research at the Royal Bank of Scotland in London.]]> Business Sense: New law may help construction industry get back on its feet http://www.kyivpost.com/news/business/business-sense/detail/101867/ Business Sense Thu, 07 Apr 2011 23:19:01 +0300
Long-awaited by the construction businesses, Ukraine’s parliament on Feb. 17 adopted new legislation signed into law by President Viktor Yanukovych.

The new law is a positive step for developers, investors, construction companies, banks and other key players involved in construction and affected by city planners.

The law simplifies construction procedures, makes the process more transparent, reduces construction time frames and costs. What more could investors – domestic and foreign – have asked for?]]> Permit simplification

Firstly, the number of required construction permits has been reduced by about four times, from 93 to 23.

Second, legislation envisions that the timeframe for obtaining all necessary construction documents is to decrease by nearly seven times, from the previous 415 days to just 60.
The benefits for the Ukrainian economy still struggling to crawl out of recession are obvious and huge. But there’s more positive news in this story."

- Dmytro Biryuk.

Thirdly, the law introduces tacit consent and declarative principles in construction permitting.

These improvements alone will make construction projects more predictable, less corrupt and more efficient.

Some experts are already saying that the legislation, if implemented properly, could cut construction costs of residential real estate development projects by 10-20 percent. This should, in turn, make residential property more affordable for buyers, possibly cutting final costs by a third.

The implications are huge. If residential real estate becomes more affordable, citizens could start buying again.

This, in turn, could help revive the nation’s ailing construction business. And if new projects hit the market, that would increase demand on a large range of construction materials produced domestically, starting with steel and concrete.

The benefits for the Ukrainian economy still struggling to crawl out of recession are obvious and huge. But there’s more positive news in this story.


Transferring assets

The new legislation will allow developers to transfer frozen, unfinished construction projects, along with their permit documentation.

Construction permits will no longer be tied to a specific developer and general contractor. So, if one firm can’t get things going, another contractor and developer will be able to pick up the project with ease.

Troubled developers will now be able to more easily sell, pass along or dispose of unfinished construction that they can’t get off the ground.

The above improvements should sharply help reduce bureaucracy and corruption in the construction industry."

- Dmytro Biryuk.


Balance of interests

The law also balances the interests of developers and communities in public hearings that pertain to city planning.

This should allow developers to avoid unfair practices of sham hearings and unwarranted objections to construction projects.

The law reserves the rights of communities to participate in discussions of the general plans, zonings and detailed territory plans.

The number of community representatives in the conciliation commissions, which consider controversial issues arising in the course of public hearings, must account for 50 to 70 percent of the commission's membership.


Introducing zoning

The law introduces zoning and requires local authorities to approve this previously unheard of but crucial practice for Ukraine throughout the nation.

This major reform should put an end to years of chaotic development that has triggered the anger of citizens who saw their neighborhood playgrounds and trees torn down and replaced by new buildings that also blocked the sunshine from their windows.

There will now be more control over what is developed where, with the overall interests of citizens and the city taken properly into account.

Although city planning documentation is, for now, largely absent in Ukraine, the legislation calls upon local authorities to produce proper city planning plans by Jan. 1.

If local authorities fail to do so, the law prohibits them from transferring state or municipal property into ownership or lease of individuals or legal entities. Since local governments significantly depend on land and construction-related payments to fill their budget coffers, compliance is expected to be high.


Combating corruption

The above improvements should sharply help reduce bureaucracy and corruption in the construction industry.

In addition, the law reduces authorities’ influence on construction procedures.

Some experts predict that corruption in the sector could be reduced by a whopping 90 percent. If this happens, it would be a major step forward for builders, their suppliers, homebuyers and the nation.


Dmytro Biryuk is an attorney and senior associate with the Kyiv offices of law firm Schoenherr. He can be reached at d.biryuk@schoenherr.eu]]> Business Sense: In every way, Poland ahead of Ukraine in capital markets http://www.kyivpost.com/news/business/business-sense/detail/101311/ Business Sense Thu, 31 Mar 2011 22:19:37 +0300
Ukraine’s is heavily underdeveloped, impeded by currency controls, by concerns of transparency and corruption and by bureaucratic roadblocks.

Poland’s, on the other hand, has leveraged its pension fund system to make it one of the largest asset management markets in Central and Eastern Europe and a regional financial hub.

For comparison, at the end of 2010, the Warsaw Stock Exchange had 400 listed stocks including 29 foreign equity issuers, with a total market capitalization of $295 billion and stock trading volumes of $82 billion last year.

Ukraine’s main bourse, the RTS Ukrainian Exchange, had 167 listed stocks, no foreign issuers, a market capitalization of $40 billion and annual trading volumes of less than $3 billion last year.
In contrast to the Polish system, Ukraine’s state-run pension fund is heavily in the red and consistently subsidized using budget funds.

The difference is further highlighted by the primary equity issuance markets – the last real share placements locally came back in 2007, whereas the Warsaw exchange played host to three initial public offerings from Ukraine in 2010 – dairy producer Milkiland, agricultural holding Agroton, and coal miner and trader Sadovaya Group.

The three companies raised $165 million for business development in November-December 2010.

Along with Ukraine’s largest sugar maker Astarta and largest sunflower oil producer Kernel, which debuted in Poland in 2006 and 2007, the Warsaw exchange now boasts five Ukrainian stocks. With another handful of companies eyeing Warsaw listings in 2011, the exchange plans to launch a dedicated Ukrainian stock index.

So why has Poland been so successful in developing its stock market and establishing itself as a regional financial center, and why is Ukraine again on the outside looking in?

Poland’s stock market success is largely predicated on its national pension system. Individuals pay 7 percent of taxable income into private open pension funds, the so-called second pillar of a pension fund system.

The funds themselves are mandated and largely limited to investing in Polish-listed securities and they form Poland’s key institutional investor base. Monthly net inflows average over $600 million, which creates consistent demand for investable securities.
The establishment of a Polish-style multi-tier pension fund system would allow domestic earnings and savings to be captured and recycled via the pension system back into national investments.

As of November 2010, 14 Polish pension funds managed more than $70 billion in assets, with more than a third invested in stocks, according to the country’s financial regulator.

The pension funds are extremely active on the primary market, absorbing an estimated 30-50 percent of newly issued stock in initial public offerings and secondary offerings.

In contrast to the Polish system, Ukraine’s state-run pension fund is heavily in the red and consistently subsidized using budget funds.

The creation of a second pillar of non-state pension funds, like in Poland, is a distant and vague goal for the authorities. To rub salt in the wound, Ukraine’s stock and bond markets are also victims of currency controls that make repatriating foreign currency from Ukraine an arduous and, at times, impossible task.

That said, Ukraine’s many shortcomings imply significant room for improvement and for market growth. Liberalizing currency controls and establishing the conditions for offshore capital to begin returning home are two initial steps that would help domestic capital markets develop.

Most importantly, the establishment of a Polish-style multi-tier pension fund system would allow domestic earnings and savings to be captured and recycled via the pension system back into national investments.

That type of reinvestment can benefit small- to mid-sized companies that have few financing alternatives to bank loans by giving them the chance to raise capital for development purposes.

Being better providers of competition and innovation, smaller companies can provide an outsized percentage of growth in a dynamic economy.

Pension system reform, or for that matter any reform of capital markets, will not be a simple task but it is a much-needed one for Ukraine. And as with any large-scale reform this one will require significant political will, government support, and time.


Danylo Spolsky is a sales associate at Kyiv-based investment bank BG Capital, the investment arm of Bank of Georgia. He can be reached at dspolsky@bgcap.ge. More details on BG Capital can be found at www.bgcapital.ge.]]> Business Sense: Nation has lessons to learn from far-away Argentina http://www.kyivpost.com/news/business/business-sense/detail/100781/ Business Sense Thu, 24 Mar 2011 23:20:16 +0200 Richard Ferguson writes: Monopolies are bad, competition is good.]]>
Agriculture companies are supposed to see this as positive. However, when it was first formulated as a forecast by the United Nations, sometime in the 1990s, it was also a sign that you ought to buy General Motors stock because everyone would want a car.

The problem with these maxims is that they lapse into investment clichés. Once we accept this as conventional wisdom, we start to make the wrong investment decisions.

Let’s not talk about 9 billion people on the planet by 2050, how the Chinese are eating more protein and how soft commodity prices will likely stay high for a long time.
If Brazil is a positive lesson for Ukrainian agriculture, then Argentina is a warning."

- Richard Ferguson.

For sure, all these mantras drive the agricultural investment decision-making process and they are interesting themes to discuss but, in reality, they are of less importance than other factors common to all investment decisions – not just in agriculture.

But let’s return to the idea of what makes a successful investment destination and why Ukraine faces many challenges in this regard.

Consider previous “hot” investment destinations. My current favorite is the view of Brazil as an agricultural superpower and the much-vaunted Mato Grosso as some kind of agricultural nirvana with few peers around the world.

What people omit is the fact that the Mato Grosso is almost 2,000 kilometers from a port, the soil structures are actually quite acidic, water isn’t quite as plentiful as you might believe and the logistics are dire.

If Brazil is a positive lesson for Ukrainian agriculture, then Argentina is a warning.

Despite a lengthy history of industrial farming that stretches right back to the 19th century, good soils and excellent growing conditions, Argentina went from being the 8th richest nation in 1910 to the 62nd richest nation in 2010.

Worryingly, Argentina’s eclipse as a major agricultural power and recently established status as an investment no-go area took effect in an era when our views of emerging markets were being altered for the better and one in which commodity prices boomed.

So, why was it that, between December 2001 and October 2006, a couple of years before the whole world collapsed did Brazil attract foreign direct investment of some $55 billion compared to Argentina’s $15 billion?

The fact is that Argentina, in common with Ukraine, has a range of assets which are exemplary – soils, climate, precipitation, geography and so on. But these come at the expense of the intangible factors which genuinely drive progress and investment.
Argentina, in common with Ukraine, has a range of assets which are exemplary – soils, climate, precipitation, geography and so on. But these come at the expense of the intangible factors which genuinely drive progress and investment."

- Richard Ferguson.
Let’s consider the ownership of assets. How is it that 20 years after the failure of state planning, some places still see foreign ownership of assets as a bad thing?

Let’s look at this through a business, which reflects my cultural heritage – whisky.

Today some 40 percent of the Scottish industry is in foreign hands.

If you count the English as foreigners, that figure would probably rise to more than 80 percent.

However, the product is still made in Scotland and always will be. Its vast export earnings still pile into the U.K.’s central treasury via taxes.

In fact, one reason why the Scotch whisky industry is in foreign hands it is for the simple reason that half the managers of the Scotch whisky industry in the 1980s were simply not up to the task. Ukrainian farming groups should be allowed to think along these lines.

Let’s turn to another investment essential: the enforceability of contracts and the rule of law.

Let me extend this into another place: Colonial Hong Kong, a place that shouldn’t have worked. However, what did work was the fact that rule of law and an independent judiciary capable of enforcing contracts allowed the place to flourish and made Hong Kong one of the wealthiest places in the world.

Try to imagine what would happen to agricultural investment in Ukraine if it had Hong Kong’s legal code. It is a lesson Ukraine could do well to learn if it is not to repeat the Argentine calamity.

And what about competition?

Let me put it bluntly: monopolies are bad and competition is good. It isn’t just companies that require competition. Nations do as well. A nation that allows its companies to compete against one another will build an enduring business environment replete with opportunities.
Government interference in the sector hinders investment."

- Richard Ferguson.

However, state-sanctioned monopolies – as in Ukraine’s possible creation of a state grain-trading monopoly, will simply drive investment to alternative destinations.

The Argentine government’s persistently meddlesome behavior in the agriculture sector has had a devastating impact on farmers over the last 50 years. In an era when the sector should have flourished, it became instead an investment backwater. Does Ukraine really want to be in a similar position in the future?

What it proved was that government interference in the sector hinders investment.

In 20 years, there will be some farming companies that are international in scope and diversity.

They will manage millions of hectares with some of the most sophisticated capital and, above all, they will be household names. Whether they are Ukrainian remains to be seen.


Richard Ferguson is the global head of agriculture for Renaissance Capital, which offers financial, investment and management expertise in high-opportunity emerging markets around the world.
]]> Business Sense: Political risks down, same economic challenges remain http://www.kyivpost.com/news/business/business-sense/detail/100779/ Business Sense Thu, 24 Mar 2011 23:04:33 +0200 Editor’s Note: Timothy Ash made this assessment after visiting Kyiv on March 17-18.]]>
Reforms are, however, proving controversial (e.g. pension reform, hiking the retirement age) and the government has seen its popularity fall.

The administration may want to get difficult reforms out of the way this year, clearing the path for parliamentary elections in October 2012.

The ruling coalition thus far continues to take advantage of the fact that the opposition is in disarray.
Economic growth seems to be picking up steam, helped by the strength in metals prices."

- Timothy Ash.

Perhaps the biggest risk on the political and economic front appears to come from relations with Russia, as Moscow has threatened to close borders if Ukraine signs up to a free trade agreement with the European Union.

This may just be a negotiating ploy to secure access to assets in Ukraine.

Economic growth seems to be picking up steam, helped by the strength in metals prices.

Inflation has moderated, and while the trade/current account deficits look set to widen, they remain financeable, and the hryvnia looks set to remain stable.

Budget trends generally remain encouraging, with the 2011 deficit target appearing attainable.

The public sector debt service schedule also appears manageable, helped by $1.3 billion raised from the privatization of fixed-line telephone monopoly Ukrtelecom and recent success in borrowing from the domestic/external markets.


Lower risks

Political risk has fallen significantly over the past year, following Yanukovych’s election on Feb. 7, 2010.


A woman shouts slogans and beats to bucket during a mass rally on Independence Square in Kyiv, on Nov. 25, 2010. (AFP)


Yanukovych’s control of the executive and legislative branches has ensured a much more effective decision-making process.

It stands in some stark contrast to the fractured state of governance under the former Orange Revolution coalition of former President Viktor Yushchenko and Prime Minister Yulia Tymoshenko, who were almost in constant conflict.

The administration is currently facing a wave of criticism for what are seen as its over-centralizing power and, some would say, undemocratic tendencies.

Tensions also appear to exist within the ruling administration, a reflection of competition between the competing clans which make up the Party of Regions. Critics argue that this is undermining the effectiveness of policy in areas such as privatization, as the various clans compete for resource allocation, and to counter the activity of their rivals.

One respondent aptly compared the Regions Party to a joint-stock company, with a number of competing shareholders (in this case the oligarchs) each lacking a majority but struggling to control the company.


International relations

The Ukrainian government is, however, making good progress now in laying the technical ground work for concluding a free trade agreement with the EU.

The prospect has, however, caused some irritation on the part of Russia, which is also currently pushing forward with economic/trade integration within the its own union with Belarus and Kazakhstan.
Moscow has threatened sanctions and, in particular, the nuclear option of closing its border with Ukraine."

- Timothy Ash.

Russian Prime Minister Vladimir Putin has warned Ukraine that signing a free-trade agreement with the EU would be incompatible with its own bilateral trade agreements with Russia and its partners.

Moscow has threatened sanctions and, in particular, the nuclear option of closing its border with Ukraine.

Potentially this could prove highly destabilizing for Ukraine and the wider region. Moscow might also look to re-negotiate the preferential gas price agreement it concluded in 2010, which has given Ukraine a $100 per 1,000 cubic meters discount on imported gas.

In Moscow, there appears to be some frustration that the Yanukovych administration, widely perceived to be pro-Russian, has delivered little in terms of Russia’s business interests in Ukraine.

This has though been the track record of Regions- led administrations, i.e., of marketing itself as the pro-Russian party, but delivering little to Russia in practice.

The strategy enables Ukrainian business interests to dominate the domestic economy.


Pension reform

To secure a $15.6 billion IMF loan, difficult reforms have been forced through – including hiking energy prices, restructuring the banking sector, introducing a new tax code and pushing through administrative reform.

At present the focus is on pension reform, which has been set as a high priority by the IMF."

- Timothy Ash.


At present the focus is on pension reform, which has been set as a high priority by the IMF. Current government plans are to hike the retirement age for women by five years, from the current age of 55, and to reduce entitlement more generally.

The reform aims to address a huge structural deficit in the pension/social security fund which, given the country’s poor demographics and high dependency ratio, is set only to deteriorate still further.

The reform is obviously unpopular, but the government does seem determined to force the reform bill through parliament, and likely over the next month.

Given progress with pension reform, and elsewhere, this would allow the IMF to release the latest tranche of $1.6 billion.


Energy price hikes

The issue of energy price reform/liberalization remains controversial.

The government has already hiked gas prices by 50 percent in August 2010, and electricity prices were also raised by around one third in March.

Further energy price hikes are planned for 2011, which would entail a doubling of gas prices, in effect, over the past year.


Government cuts

Ongoing and quite brutal administrative reforms – which have seen the head count in government departments slashed by up to 50 percent – suggests that the government still has the stomach to make the required changes.

There is some concern that reform fatigue will set in as the date of parliamentary elections approaches.

Government officials reassured that while they are no longer in need of IMF financing, they are committed to the IMF program as it offers an important straitjacket for reform, which also helps provide a key signal/benchmark for the market.

Criticism of the new tax code has been pretty endemic.

- Timothy Ash.


They reiterated that remaining current on the IMF program was important in terms of reining in the government’s borrowing costs.

I heard mixed views on some of the other legislative efforts, particularly those pertaining to the business environment.


Tax code critics

Criticism of the new tax code has been pretty endemic.

There is a sense that it penalizes small-and-medium sized businesses versus big business.

I also heard complaints that VAT refunds are still being delayed and selectively applied.

Frustrations with agricultural policy also seem to be building, while a bill currently being debated would create a new monopoly for the procurement and export of agricultural production.

There is also some suggestion that it would act as a holding company for state-owned land.

Foreign agro-commodity trading companies are understandably up in arms and are lobbying their governments to intervene.


Farm sector lags

The continued poor performance of the agricultural sector remains a conundrum in Ukraine, whose rich farming land is best soil in Europe.

Given its natural advantages, and the sheer size of the cultivated area in the country, Ukraine should be the “breadbasket” of Ukraine.

It is not because agricultural policy reform has been neglected over the past two decades.

Infrastructure around agriculture remains a constraint on development, including poor storage, processing, transport and marketing systems."

- Timothy Ash.
Perhaps key here has been the moratorium on land sales, which in effect precludes the development of land market and hence the use of land by farmers as collateral to secure credit.

Infrastructure around agriculture remains a constraint on development, including poor storage, processing, transport and marketing systems.

To put things into perspective, grain production in Ukraine typically averages 20-40 million tons per year, with yields of around two ton per hectare.

There is no reason, with proper infrastructure developed around the farm gate, that yields could double or even triple, which could suggest production rising to 100 million tons or more.

Key here will be lifting the moratorium on land sales which may occur as early as 2012.

Budget deficit

In terms of the budget and budget financing, current plans are to run a deficit of around Hr 50 billion in 2011, equivalent to around 3.5 percent of gross domestic product.

The government plans to raise Hr 43 billion from the domestic debt market and Hr 32 billion from external borrowing.

Hr 10.6 billion was set as the target for state asset sales, which has already been reached with the sale of Ukrtelecom.


Depressed economy

Full year real growth in gross domestic product came in at 4.2 percent for the full year in 2010, largely being export-driven, helped by the recovery in metals prices.

Investment growth has been slow to recover, particularly in the private sector, but over 2011 and 2012, investment related to the Euro 2012 football championship should begin to kick in."

- Timothy Ash.

The domestic economy largely remained depressed, pulled down by continued contractions in construction, real estate and banking, and also a poor harvest. Expectations are for growth to accelerate to around 4.5 percent, with continued growth in metals, something of a recovery in agriculture and some stability/modest growth in construction.

Investment growth has been slow to recover, particularly in the private sector, but over 2011 and 2012, investment related to the Euro 2012 football championship should begin to kick in.

The real estate market remains depressed, with prices on average still running at 50-60 percent of their pre-crisis peak. Banks remain unwilling to extend credit for housing loans/mortgages, which remains a key bottleneck.


Poor demographics

Ukraine, like Russia suffers poor demographics, and large net out-migration. Estimates suggest that the population of 46 million will continue to contract by around 200,000 per year.

The departure of the young, skilled and better educated to jobs overseas obviously creates a huge challenge. A weak business environment still, and uncertain investment environment continues to deter investment both by locals and foreigners.

Inflation has dipped in recent months and state officials have indicated that the weak state of domestic demand, base effects, and a likely better harvest, plus the stability of the Hryvnia should cap upside pressure for 2011. There was even an assumption that inflation could surprise on the downside, remaining in single digits.


Banking sector

The sector continues to struggle with adjustment/restructuring as a result of the 2008-2010 crisis.
The banking sector is unlikely to be a key driver of growth for the next 2-3 years."

- Timothy Ash.

The sector remained loss-making in 2010, but losses were reduced to Hr 13 billion, from Hr 38 billion the year earlier.

Most banks remain loss-making but the hope is that the sector will begin to show a profit towards the end of 2011.

Banks have been recapitalized, while the authorities are continuing with work out procedures for those banks taken into state administration, with either new owners found or the banks closed.

Uncertainty surrounds the outcome in a number of these latter cases, including the troubled Nadra Bank under government supervision.

The sector is again seeing asset growth, with expectations that assets will grow around 18 percent this year.

Banks generally remain cautious over expanding their loans, a reflection of the high level of non-performing loans run up through the recent crisis – perhaps as high as 35 percent.

The banking sector is unlikely to be a key driver of growth for the next 2-3 years.

Banks are instead focusing on improving risk management procedures, maintaining liquidity/capital buffers and there will also be an acceleration of mergers & acquisitions in the sector.

A recent trend has been for Russian banks to seek to expand rapidly into the sector. Russian banks seem eager to expand their market share to around 35 percent; they appear amongst the few now aggressively lending.


Timothy Ash is global head of emerging markets research at the Royal Bank of Scotland in London. He can be reached at timothy.ash@rbs.com.]]> Business Sense: Markets hopeful about Ukraine http://www.kyivpost.com/news/business/business-sense/detail/100774/ Business Sense Thu, 24 Mar 2011 22:52:55 +0200 Viktor Luhovyk writes: But government has only until end of year to make inroads into solving serious problems.]]>
Yields on government Eurobonds are hovering at record lows of 4-8 percent. And local corporations are on course to attract billions of dollars of fresh capital from foreign markets this year.

Over the past year, we have seen foreign portfolio investors return to Ukraine in growing numbers, their money flowing into stocks and bonds of companies in agriculture, the financial sector, metallurgy and mining, to name a few sectors.

As is usually the case, capital markets were first to react, and this was their natural response to Ukraine becoming over the past year a more secure and predictable market for foreign investors to be in.

But it is also true that much of the markets’ improved perception of Ukraine owed to expectations that, apart from ending years of political infighting, the country’s new administration led by President Viktor Yanukovych will be quick to deliver on announced reforms and improve the country’s investment climate.

Restoring governance in the public sector, implementing fiscal austerity measures, approving the tax code, repealing the foreign-exchange tax, starting to cut red tape for business and enacting unpopular but overdue tariff hikes were all long-awaited steps in the right direction.

But all this leaves one with a feeling that what has been done, and possibly much more, could have been accomplished in a much shorter time span.

Corruption and weak rule of law, compounded by the state’s tightened regulatory grip over agriculture and other sectors, are probably the most glaring examples of as-yet-untackled problems, at least according to the foreign business community in Ukraine.

Without progress in these areas, most of the announced ambitious targets, such as making Ukraine a G-20 country by 2020, will continue to seem barely achievable.

The government has yet to prove its commitment to transparent privatization, as the recent sale of fixed line telecommunications monopoly Ukrtelecom can hardly be held up as the case in point.

The upcoming sales of thermal power generators and electricity distributing companies will hopefully be a different story.
There is a risk, highlighted by the newly emerged stumbling blocks in talks with the International Monetary Fund, that the authorities may slow the pace of unpopular utility tariff hikes and delay pension reforms for fear of popular backlash."

- Viktor Luhovyk.
Last but not least, there is a risk, highlighted by the newly emerged stumbling blocks in talks with the International Monetary Fund, that the authorities may slow the pace of unpopular utility tariff hikes and delay pension reforms for fear of popular backlash.

The realization that the government needs a working IMF program to keep foreign debt markets accessible on favorable terms for itself and private business will most likely prevail in the end. However, the window of opportunity may be closing soon.

Realistically, the government has until the end of the year to make serious inroads into the most problematic areas.

After that, the campaign for October 2012 parliamentary elections, and with it inevitable populism, will kick in.

Streamlining public administration, deregulating the business environment, transforming the pension system and launching other comprehensive structural reforms cannot, by definition, have immediate positive impact on the electorate.

Postponing these difficult decisions until after 2012 may start to look an increasingly tempting prospect with each passing month.

Last year, it was still permissible for Ukraine’s current administration to blame the country’s weak competitiveness and economic hardships on the previous disorganized and splintered government.

But with the presidential elections now distant history, political power fully consolidated on all levels and the global economic background largely favorable, the government is going to be judged based solely on its deeds.

Promises of reform and clich?d mantras about Ukraine’s huge consumer market of 45 million people, cheap production base, strategic location, and so on, have been repeated too often to continue to make a lasting impression on investors, and will hardly postpone the day of reckoning for much longer.

Markets are giving Ukraine another thumbs up, and the ball is now firmly in the government’s court.


Viktor Luhovyk is research production director at Dragon Capital, Ukraine’s largest investment bank. He can be reached via luhovyk@dragon-capital.com.]]> Business Sense: Euro-2012 should be free of ticket speculation http://www.kyivpost.com/news/business/business-sense/detail/100531/ Business Sense Tue, 22 Mar 2011 19:04:35 +0200 Oleg Dorofeev writes: The Euro-2012 football championship to be hosted next year in Ukraine and Poland will pioneer a new way of selling tickets for football matches. According to experts, this method will help combat “scalping” – speculation and re-selling of tickets at inflated prices – and will give all football fans an equal chance to see matches in person.]]> How to buy

Only 41 percent of the total number of tickets will be available for sale to the public. The other tickets will be allocated to federations, sponsors and members of the Union of European Football Association’s “family.” The tickets available for sale will be sold to the public according to a special three-stage procedure.

First, a prospective purchaser should set up a personal account on the official UEFA Euro-2012 website. Registration is already possible. Then, during the second stage (from March 1 to March 31, 2011), fans should send in their requests to purchase tickets. The actual purchasers will be selected by lottery. In the final stage, to be held in April 2011, the winners of the lottery (estimated to be one of every 50 applicants) will be emailed a voucher number, which later, after payment, can be exchanged for a ticket.

After payment, paper vouchers will be printed and sent to their owners via post several weeks before Euro-2012 starts. Winning purchasers will be able to exchange their vouchers for tickets at special stores located in each Euro-2012 host city. At this time, UEFA is choosing a company to carry out the exchange of vouchers for tickets. Each ticket will show the name, last name and document (ID number) of the purchaser.

It will be possible to pay for tickets using a credit card. Ticket prices will be from 30 to 600 euros. Until May 2012, tickets will only exist in virtual form. This security measure was adopted in order to combat the black-market trade in tickets and to reduce costs.

Separate lotteries of 2,000 tickets per match will also be held for the population of each host city.

The above mentioned multi-level procedure of personalized ticket sales has a number of advantages. First of all such a scheme is fair – the number of potential visitors to European Championship matches, unfortunately, exceeds the number of seats available in the stadiums.

Second, tickets sold according to this procedure cannot be resold and only four tickets may be sold to a single purchaser. Third, in this way UEFA and the organizers of the tournament will be able to control fans who are on the “black list” and keep fans without tickets from travelling to other countries and cities in order to purchase tickets there.

“No” to speculation!

If a purchaser wishes to sell his ticket, he is free to do so via the official UEFA website, but only at the initial purchase price. Resale will be possible beginning July 1, 2011. Further, those who wish to resell a ticket must provide the resale service with data about the ticket. From the other side, a person who is searching for such a ticket will get information about the ticket for sale.

However, the resale service is set up so that the seller and purchaser are never able to contact one another directly. The purchaser pays through the website for the ticket. After payment, the purchase price is transferred to the seller. The person who sold the ticket cannot identify or choose the purchaser in any way.


Responsibility for speculation

In spite of these measures, there are fraudulent websites which claim to sell tickets or “permits” for championship matches which bypass the official registration and lottery procedures. However, UEFA warns fans that the association is the exclusive seller of tickets for matches and that all other sellers are illegal.

Article 10 of the Law of Ukraine “On the Organization and Holding of the Final Part of the 2012 European Football Championship in Ukraine” states that sale, offer and promotion of tickets for football matches by any person not authorized by UEFA is prohibited.

A person who has been found liable for a breach of this law may suffer administrative or criminal liability depending on the severity of such breach. Such an act could be punishable as fraud or forgery of official documents. The punishment for such crimes includes fines or imprisonment.

Oleg Dorofeev is an attorny-at-law at the Kyiv offive of Noerr, an international law firm headquartered in Germany.]]> Business Sense: Outsourcing payroll gains popularity as way to cut costs in tough economy http://www.kyivpost.com/news/business/business-sense/detail/100122/ Business Sense Thu, 17 Mar 2011 22:11:53 +0200
A key element of the growth of global human resources outsourcing is global deals, where a multinational company outsources human resources functions in its multiple locations to a single provider. Ukraine is a big country in Eastern Europe, so many major global corporations have their offices and representatives here.

In most cases, Ukrainian human resources functions have become part of the global outsourcing deals. This means that local human resources and finance managers get a “recommendation” from their headquarters to follow global policy and outsource non-core human resources and finance and accounting.

In Ukraine, the payroll normally falls under the responsibility of the accounting department, while globally is dealt with by human resources.

The 2008 global financial crisis and 2009 world recession has made companies pay more attention to the process of optimization and increasing efficiency. This made many global corporations revise their accounting and human resources procedures and follow their global practices in Ukraine.

Payroll has moved from accounting to human resources and this has caused additional difficulties for local human resources managers. It is hard to control a process that you don’t know how to manage, since it wasn’t previously in your remit.

With the global economic downturn, cost reduction has become paramount for businesses. Payroll is just one of the areas that are more commonly outsourced due to the inherent complexity of the function and accuracy required.

Research carried out by leading auditing firm PwC and ADP, a payroll outsourcing provider, showed up the hidden costs that can be associated with payroll when done in-house, as compared to when outsourced. Research showed that organizations that retain payroll in-house spend on average 18 percent more than those that use outsourcing.

In Ukraine the impact of global tendency toward outsourcing of finance and accounting and human resources is quite extensive. It constantly provokes rapid growth of demand for such services.

Along with global factors, the new tax code is good motivation for such development. In a situation where even state authorities do not explain the procedure of filling personal income reports, for example, transferring company risks to a third party provider might be a magic pill.

The economic slowdown has provoked growth in the outsourcing market, as this is aimed at decreasing costs. According to research by Intercomp Global Services, the payroll outsourcing market in Ukraine has doubled in the past two years.

There are a number of local outsourcing service providers along with companies that are present in other regions. It should be also mentioned, that consulting and audit companies can also deliver human resources and finance and accounting.

And it’s not just the big foreign companies that are turning to payroll outsourcing companies. Interest from Ukrainian companies is also on the rise.

Overall, the outsourcing of non-core activities is gaining popularity in the country. In the next few years we will see further strengthening of the Ukrainian outsourcing market, closely following global tendencies.


Daniil Shash is sales and marketing director for Ukraine and Kazakhstan at Intercomp Global Services, a payroll and accounting services company. He can be reached at ukraine@intercompglobal.com.]]> Business Sense: Employees have too little power in draft labor code http://www.kyivpost.com/news/business/business-sense/detail/99509/ Business Sense Fri, 11 Mar 2011 00:28:42 +0200
The government is gallantly fighting for good standing in the international community, telling anyone who’ll listen that everything’s great here, that the rule of law and democracy are still going strong, that they are observing all principles of international law, the economy is growing and legislation is being improved in line with European standards.

But the draft of the labor code does not correspond with international standards, leaving legal loopholes for employers and others to exploit.

Most outrageously, it includes discrimination against workers by allowing employers to increase the working week to 48 hours (and even 60 hours in agreement with the worker) in spite of the fact that Ukraine has ratified a number of international documents that set the principle of decreasing the working week to 40 hours.

In Ukraine, there are several modes of work, including record of cumulative hours worked, used when there is no possibility to keep a daily or weekly duration of working time.

The current labor legislation strictly determines that if this mode of work is introduced (only after coordination with a trade union), then the duration of work shall not be more than 40 hours per week. For example, on Monday and Tuesday the employee works nine hours, on Wednesday and Thursday 10 hours, then on Friday the working day of the employee cannot be more than 2 hours.

The problem with the new bill is that it doesn’t say how long the normal duration of work should be for employees working according to this scheme.
Under plan, work week could increase to 48 hours

According to the provisions of the bill there is no need to coordinate with a trade union when introducing the record of cumulative hours worked if the duration of work is not more than 48 hours per week and 12 hours per day.

If the employer wants to increase the duration of work, the maximum may be set in its joint agreement with trade union, or, if there is no joint agreement, by order of the employer.

Not all employers have joint agreements with trade unions, thus this is the peculiar loophole that employers may exploit. This means that any firm can set its maximum duration of work per week.

By this logic, not only taxi drivers, long-distance truck drivers and nannies can have a 12-hour working day, but everyone else as well.

The bill’s authors wanted to make things better by limiting the duration of a worker’s shift. But it’s turned out as always, by allowing an increase in the working week to 48 or even 60 hours.

Many honest and responsible workers already work more than 10 hours per day without any or proper compensation for overtime. Perhaps the initiators of the bill wanted to legalize such relations, as the Code of Labor Laws of Ukraine is being violated anyway and it’s time to change it.

The key question is: How can the weaker side in labor relations – the worker – be protected without limiting the employer’s business activity and interests and, most importantly, allowing everyone to live amicably according to the law?

Many people assert that the remnants of the Soviet system does not protect the worker, instead leaving him alone against the all-powerful employer, thus it needs to be dismantled. Many are casting doubt on whether the current bill being considered is the right one to replace the current code.

Legislators need to carefully consider these factors and eliminate any misunderstandings that could arise in the new labor code. They should demonstrate and embed the practice of equality before the law, without exception, even for the country’s leaders.

Otherwise, everything will stay the same under the useless slogan: “The authorities are with the people.”

On the surface, the idea of systematizing labor relationships is a good one. The draft proposes, for example, to legalize the procedure of announcing a vacancy, thus increasing competition, and testing the jobseeker matches requirements for the vacancy.

From a legal point of view, of course, the process of “resetting” relations between the authorities and the middle class, between employer and employee, needs to be continued.

But that’s just part of the story. Included in this package should be a fair justice system, fair taxes, the resolution of questions in court (not in the office of judges or prosecutors), and compliance with the law for all, and not selectively.

In our case, a sharp change in labor laws could bring about an even greater storm of negative emotions. This could be connected with raising the legal culture of Ukraine’s citizens and finally changing Ukrainian mentality and recognizing the need to match up legislative acts with the equality of all citizens before the law.

And we shouldn’t forget about the examples of many years of history, which have shown that any new ideas or changes are received gratefully by people only if they are brought in gradually.

Valeriia Gudiy is a lawyer with Ilyashev & Partners, a Kyiv-based law firm. She can be reached at gudiy@attorneys.com.ua]]>