Two news stories published on Oct. 18
are quite telling. The first involves DTEK, Ukraine’s largest private
energy company, which obtained a 416 million euro ($541 million)
syndicated loan from a group of Western European and Russian banks.
The two-installment medium-term loan at undisclosed interest rates
will be used to upgrade the company’s production facilities, finance
modernization programs and for other purposes, according to the
company’s press-release. DTEK, a division of System Capital
Management group, is owned by Rinat Akhmetov, Ukraine’s wealthiest
person and a soccer aficionado who charged
his team Shakhtar Donetsk with winning the
Champions League this season. Akhmetov also happens
to be a key financier of the incumbent ruling Party of Regions as
well as a member of parliament.
The second story came from the city of
Donetsk on the same day. It’s the home region of current President
Viktor Yanukovych and much of the Party of
Regions’ top leadership, including Akhmetov. There an investment
conference was held at Akhmetov’s steel-making arm Metinvest. It
also staged the official public launch of newly-installed machinery.
President Yanukovych attended both events and effusively praised SCM,
and Akhmetov in particular, for his leadership in attracting foreign
investments to Ukraine.
The common purpose in both of these
stories is an implicit encouragement by the
authorities to maintain the status-quo in economic
policymaking. While Ukraine’s leaders
defend the policy of intervening to hold the hyrvnia-dollar
exchange rate at its current level, the consequence is high
interest rates, which have essentially halted domestic local currency
bank lending.
Most small and medium enterprises rely
on the domestic banking market for financing and do not have access
to capital market-based financing, such as Eurobonds, or the foreign
syndicated loan markets. With little access to credit, small and
medium-sized businesses simply cannot expand.
By contrast, the few large private
business groups which enjoy access to large-scale financing, often
via western markets – one of them being Akhmetov’s DTEK – ignore
the difficulties of obtaining hryvnia-denominated financing, securing
their financial needs in hard currencies, mostly dollars and euros, instead.
Until recently, this was not a major
problem. Ukraine’s economy functioned well with annualized real gross
domestic product growth above the 4 percent threshold since the end
of 2010 up until mid-2012.
In the third quarter of the year,
however, growth slowed dramatically, and quite possibly contracted.
Thus we arrive at a fork in the road – small businesses have to
deal with extremely high domestic credit costs while
big ones access cheap loans in dollars. Such a situation is
unsustainable, and we predict a dramatic change over
the next two quarters.
Ironically, President Yanukovych paid a
tribute to this kind of economic paradigm. It is certain that his
next speech on the same subject risks being about troubles that the
scheme produced.
In the short term this system can
survive. In the longer run, however, unless external financing for
the country is secured, the economy is headed for a very bumpy ride
as long as the same one-sided reliance continues to be encouraged.
Alexander Valchyshen is
the head of research at Kyiv-based investment bank ICU
