The European Parliament adopted an ambiguous resolution on the presidential elections in Russia. The resolution serves two masters, as they say. On the one hand, the European Parliament described the electoral process in Russia as "not free and unfair." On the other hand, the parliament is optimistic about the future and the further dialogue with Russia.
However, Russia could expect nothing else from Strasburg, which has been trying to put pressure on Moscow over its stance on Syria. Practically all world leaders - from Merkel and Cameron to Obama - congratulated Vladimir Putin on his victory.
The European officials particularly believe that the Russian voters had been given a "limited choice," because the Central Electoral Commission refused to register the candidate of Yabloko party, Grigory Yavlinsky. The Commission denied registration to Yavlinsky after it had rejected, about 25% of signature sheets in his support (that were actually photocopies).
European MPs called on the Russian authorities to "thoroughly and openly" investigate the violations, which observers, including OSCE/ODIHR representatives, pointed out. However, the MPs called upon themselves to look into the future, rather than the past. The European deputies also stated that the European Union was determined to continue the development of the strategic partnership with Russia.
The European resolution pleased the co-chairman of People's Freedom Party (known for the Russian initials as PARNAS), Mikhail Kasyanov. Upon his return from Strasbourg, the politician told Interfax that he was "satisfied with the fact that European politicians open their eyes wider to the deteriorating situation with human rights and political freedoms in Russia. This political assessment coincides with both my position and that of PARNAS," the opposition politician stated. It appears that Mr. Kasyanov has decided to ignore the other side of the story.
The Executive Director of the Russian Foundation for Free Elections, Igor Bogdanov, expressed his opinion about the European resolution in an interview with Pravda.Ru. According to him, "the Russians elected their new president in a unique, well-organized and well-conducted election." "It was unique because so many web-cameras have never been used at poll stations anywhere in the world before," he added.
According to the expert, the presidential election campaign had certain violations and drawbacks. "But it's a natural process that accompanies any election campaign," said Bogdanov. "Assessing any campaign in Europe or in the U.S., one can find even a larger number of drawbacks," he said. "And it is not objective to question the election, which took place in our country, especially if it is being done by the people, who have never been here, but who instead listen those who scream and shout about mass violations," says Bogdanov.
A recent poll conducted by the All-Russian Public Opinion Center showed that only a third of respondents admitted "minor fraud" which did not eventually affect the outcome of the vote (34%). Those who do not believe in the announced victory of Vladimir Putin are in the minority (14%). Moreover, according to sociologists, only 2 percent of respondents said that they had noticed violations with their own eyes. On the whole, 78 percent of voters do not doubt the legitimacy of the elected president.
The head of the Russian Public Institute of the Electoral Law, Igor Borisov, said that the European Parliament resolution "had nothing to do with reality." "Official representatives of the European Parliament (it goes about the delegation), were not observing the elections in Russia. They make their statements from the words of Russian politicians - the losers, who reside in Europe and who constantly tell some sort of horrible things about the Russian elections," Borisov told Pravda.Ru.
"We had five European MPs working at the independent group of international observers. They were present here and could personally observe all of the voting and counting procedures," Igor Borisov added. "All of them highly estimated the voting process and the counting of votes. Moreover, they recommended to use some elements of the electoral system for the elections to the European Parliament. I would like to see the transparency of the procedures, through which the European Parliament is formed," concluded the expert.
Indeed, one may assume that the elections in the EU or in the United States are perfect in contrast to the "dirty Russia." In France, for example, the candidate of the National Front far-right party, Marine Le Pen, did not have the right to participate in the presidential campaign just before March 15. And all of her appeals to the Constitutional Court were wasted. In Estonia and Latvia, the so-called non-citizens have no voting rights at all.
Do we need to say anything about the manipulations with voting lists or about the use of administrative resources in the United States? Democrats still accuse Florida governor Jeb Bush of giving decisive help to his brother during the presidential campaign in 2000.
There are no perfect democracy role models. However, the European Parliament does not want to understand that.
Showing posts with label economics. Show all posts
Showing posts with label economics. Show all posts
Sunday, 18 March 2012
Ukraine Hires Lobbyist To Influence IMF
KIEV, Ukraine -- The Ukrainian government, facing a deadlock with the International Monetary Fund over resumption of its $15.5 billion loan program, has hired a U.S. lobbyist firm to try to get the money, a newspaper reported Wednesday.
The Washington-based firm, APCO Worldwide, on March 2 circulated a letter among its senior advisors around the globe, including former diplomats and elected officials, seeking assistance in dealing with the IMF.
The letter, apparently sent by Brent Crane, Program Manager at APCO Worldwide, was aimed at helping Ukraine to get around the key IMF demand of hiking natural gas prices for households, something the government has been refusing to do.
“We are looking for persons with strong ties to relevant IMF personnel who could be in the position of querying those personnel about whether there are opportunities for creativity here to avoid the gas price hikes, which still could achieve IMF objectives,” said the letter, which was obtained and published by Ukrayinska Pravda online newspaper.
“We would take that information and discuss it with the government of Ukraine, and try to build bridges between the IMF and Ukraine with the goal of moving beyond what is now a year-long impasse,” the letter said.
The government has earlier hired U.S. law firms to check whether the previous government, led by then Prime Minister Yulia Tymoshenko, misspent any state money.
But the hiring of APCO comes after many government officials, including Prime Minister Mykola Azarov, have repeatedly said that Ukraine would be able to handle its foreign debts payments even without the IMF money.
The letter, called the ‘Urgent Request,’ mentions that “Finance Minister Valeriy Khoroshkovskiy has been seeking to find ‘compromise’ with the IMF,” but those talks failed.
Khoroshkovskiy was appointed the finance minister on January 18, but was on February 22 dismissed as the finance minister and moved to the position of the first deputy prime minister by President Viktor Yanukovych.
Yuriy Kolobov, who replaced Khoroshkovskiy as the finance minister, is supposed to visit Washington later this month for talks with the IMF, Azarov reported Tuesday.
Kolobov, who is believed to be a close ally of Oleksandr Yanukovych, the son of the president, is expected to meet Chris Jarvis, the recently appointed IMF’s new mission chief for Ukraine.
The $15.5 billion loan was frozen in early 2011 after the government had failed to increase by 50% natural gas prices for households and utility tariffs to balance the budget.
Ukraine may ask the IMF to resume the lending that would automatically go towards repaying its debts to the Washington-based lender, Azarov has suggested earlier this week.
Ukraine needs to repay about $3.2 billion to the IMF by the end of the year, and has been struggling with raising enough funds from capital markets.
The government paid $575 million to the IMF in February.
Serhiy Tyhypko, deputy prime minister in charge of social issues and one of the key negotiators with the IMF, on Wednesday admitted the talks were at impasse.
“I don’t know about the American lobbyists, but it is the fact that we have reached an impasse,” Tyhypko said at a press conference.
He said the only reason for suspended lending is the government’s refusal to hike gas prices for households, but said the government will not resort to hiking the prices this year.
“We are not going to do this,” he said.
In the letter, requesting assistance, APCO said the government believes raising the gas prices now would be “politically suicidal” for the governing Regions Party ahead of October 2012 elections.
APCO Worldwide was founded in 1984 and is an independently owned global communication consultancy with offices in major cities throughout the Americas, Europe, the Middle East, and Asia.
Its clients include corporations and governments; industry associations and nonprofit organizations; and seven of the top 10 companies on Fortune’s Global 500.
The Washington-based firm, APCO Worldwide, on March 2 circulated a letter among its senior advisors around the globe, including former diplomats and elected officials, seeking assistance in dealing with the IMF.
The letter, apparently sent by Brent Crane, Program Manager at APCO Worldwide, was aimed at helping Ukraine to get around the key IMF demand of hiking natural gas prices for households, something the government has been refusing to do.
“We are looking for persons with strong ties to relevant IMF personnel who could be in the position of querying those personnel about whether there are opportunities for creativity here to avoid the gas price hikes, which still could achieve IMF objectives,” said the letter, which was obtained and published by Ukrayinska Pravda online newspaper.
“We would take that information and discuss it with the government of Ukraine, and try to build bridges between the IMF and Ukraine with the goal of moving beyond what is now a year-long impasse,” the letter said.
The government has earlier hired U.S. law firms to check whether the previous government, led by then Prime Minister Yulia Tymoshenko, misspent any state money.
But the hiring of APCO comes after many government officials, including Prime Minister Mykola Azarov, have repeatedly said that Ukraine would be able to handle its foreign debts payments even without the IMF money.
The letter, called the ‘Urgent Request,’ mentions that “Finance Minister Valeriy Khoroshkovskiy has been seeking to find ‘compromise’ with the IMF,” but those talks failed.
Khoroshkovskiy was appointed the finance minister on January 18, but was on February 22 dismissed as the finance minister and moved to the position of the first deputy prime minister by President Viktor Yanukovych.
Yuriy Kolobov, who replaced Khoroshkovskiy as the finance minister, is supposed to visit Washington later this month for talks with the IMF, Azarov reported Tuesday.
Kolobov, who is believed to be a close ally of Oleksandr Yanukovych, the son of the president, is expected to meet Chris Jarvis, the recently appointed IMF’s new mission chief for Ukraine.
The $15.5 billion loan was frozen in early 2011 after the government had failed to increase by 50% natural gas prices for households and utility tariffs to balance the budget.
Ukraine may ask the IMF to resume the lending that would automatically go towards repaying its debts to the Washington-based lender, Azarov has suggested earlier this week.
Ukraine needs to repay about $3.2 billion to the IMF by the end of the year, and has been struggling with raising enough funds from capital markets.
The government paid $575 million to the IMF in February.
Serhiy Tyhypko, deputy prime minister in charge of social issues and one of the key negotiators with the IMF, on Wednesday admitted the talks were at impasse.
“I don’t know about the American lobbyists, but it is the fact that we have reached an impasse,” Tyhypko said at a press conference.
He said the only reason for suspended lending is the government’s refusal to hike gas prices for households, but said the government will not resort to hiking the prices this year.
“We are not going to do this,” he said.
In the letter, requesting assistance, APCO said the government believes raising the gas prices now would be “politically suicidal” for the governing Regions Party ahead of October 2012 elections.
APCO Worldwide was founded in 1984 and is an independently owned global communication consultancy with offices in major cities throughout the Americas, Europe, the Middle East, and Asia.
Its clients include corporations and governments; industry associations and nonprofit organizations; and seven of the top 10 companies on Fortune’s Global 500.
Saturday, 3 March 2012
Staring Into The Ukrainian Economic And Political Abyss
BARCELONA, Spain -- Ukraine’s efforts to seek cheaper natural gas from Russia rather than comply with the terms of a bailout have alarmed investors, propelling the former Soviet republic’s credit risk above Argentina’s for the first time in two years.
The government is shunning the International Monetary Fund as it struggles to agree on discounted fuel imports from Russia, with whom clashes halted European gas transit twice since 2006.
That’s fanned concern over its ability to meet $11.9 billion in debt costs this year, with default risk rising more than any country Bloomberg tracks except Greece in the last six months.
Ukraine is once more getting into a mess.
Part of the problem is political, part of it is economic, and part is a combination of the two.
On top of which Ukraine has one of the most severe demographic problems in the CEE, which is itself a region of severe demographic problems.
So what we have are a cluster of problems just waiting for the perfect storm to gather.
As is well known, Ukraine was one of the worst affected countries following the onset of the global financial crisis.
Industrial output slid – great depression style – by more than 30% in a matter of months, largely due to a massive overdependence on steel, the price of and demand for which had fallen off a cliff.
The onset of the crisis also brought to light the way the country had been living on an unsustainable credit boom fueled by short term forex borrowing in the years prior to its arrival, and as the fund flows which had been financing this rapidly reversed Ukraine was sent running into the arms of the IMF, and rapidly accepted a $16.5 billion standby loan in November 2008.
As the IMF put Ukraine’s current account and growth performance relied strongly on favorable terms of trade.
From 2003 to mid-2008, the price for steel, which accounted for 40 percent of Ukraine’s export and 15 percent of GDP at the time of the crisis, had increased fourfold and prices for gas imports were still far below world market prices, providing little incentive to improve Ukraine’s dismal inefficiency in energy use.
Nevertheless, by 2007 the current account had already deteriorated strongly as imports had surged on the back of a credit and real estate boom and an overheating economy.
Private sector balance sheet imbalances widened sharply with foreign currency loans accounting for nearly 60 percent of total loans, often extended to borrowers without foreign exchange income, and bank funding increasingly relying on short-term borrowing from abroad.
Well, for those familiar with the region there is nothing particularly strange about the imbalances and the credit bust.
But as the Fund itself makes clear in its ex-post evaluation of the first crisis programme, relations between the multilateral institution and the Ukraine administration have been far from easy over the years:
Ukraine has had long but complicated program relations with the Fund.
From 1994 to 2005, the Fund supported Ukraine through six arrangements.
Completion of reviews tended to be difficult, as only 13 of the envisaged 24 reviews were completed, of which 10 with delay or involving waivers.
The Ex Post Assessment of Longer-Term Program Engagement in 2005 found that “Fund-supported programs had a mixed record in achieving their objectives.
While the programs were quite effective in supporting macroeconomic stability, they did not succeed in accelerating the build-up of more market-friendly institutions.”
Unfortunately things did not go that much better this time, and the initial programme was terminated after the second review and a disbursement of $10.4 billion:
Program implementation was difficult against the backdrop of sharp political divisions.
Only two of the envisaged eight reviews were completed, with the first review already delayed by three months due to failure to reach understanding on fiscal and banking related policies in the midst of political wrangling between the president and the prime minister.
After the second review was completed on time in June 2009 — reflecting some progress with the bank resolution strategy, announcement of future plans to increase gas prices, the adoption of a restructuring strategy for Naftogaz, and a slowdown in foreign exchange interventions — the Fund remained closely engaged with the authorities.
But the program went off track as ownership vanished and fiscal policy diverged further from the program.
In fact here we see three of the key Ukraine issues all lined up together – energy prices and the fiscal deficit, problems in the banking system and constant foreign exchange interventions to maintain a currency peg with the US dollar, a peg which encourages unnecessary forex borrowing while fueling inflation at continually high levels.
Running such consistently high inflation simply leads to rigid monetary policy, high interest rates, and inadvertently enhances the attractiveness of foreign exchange borrowing (which is the ultimate undoing of these pegged economies) since interest rates are much lower elsewhere, the currency is fixed (so where’s the risk) and wages keep going up and up along with the inflation.
You seem to be getting better off than your peers in the country you peg to, but in fact you are simply sliding steadily towards the precipice.
In many ways things on the Euro Areas Southern fringe are only different in terms of degree.
I can still remember Spain’s now ex-Prime Minister José Luis Rodriguez Zapatero telling his compatriots that they were steadily moving towards the top of the EU per capita wealth league, overtaking Italy, and then France, just before the bubble burst, and the house valuations which lay behind those impressive appearances started tumbling.
Frustrated and fed-up, the IMF cannot simply ignore the country.
Ukraine is simply too large and too strategically situated to be allowed to go AWOL.
So when the new Ukraine government requested a further standby arrangement in the early summer of 2010 there was little alternative but to agree (shades of Greece and the EU) and make an additional $15.1 available to the country, bringing the outstanding borrowing to $25.5 billion.
And here comes the rub: according to the IMF, Ukraine is due to repay $2.4 billion this year; $3.5 billion in 2013 and $1.3 billion in 2014.
This is quite an onerous schedule for a country which is now struggling to finance itself in the financial markets.
Many of the current IMF programmes in Europe have the look of success, until the time comes to pay back.
Predictably the second programme didn’t proceed any more smoothly than the first one, and the first review was only approved after a lengthy tussle about pensions, with the Ukrainian government eventually ceding to pressure and in July 2011 passing a pension reform whereby the female retirement age was raised from 55 to 60, and the duration of pension contributions needed for entitlement increased by 10 years.
We will return briefly to this topic, but it is instructive to note that while most economic analyses of the current crisis (everywhere, not just Ukraine) fail to mention the underlying demographic issues, the problem of how to pay for pensions keeps cropping up time and time again.
The need for the reform was obvious, with a rapidly ageing population the country, despite being poor, had one of the most generous systems on the planet.
In 2010, the last year before the reform, Ukraine spent 18% of its GDP on pensions and had a pension fund deficit of UAH 34.4 billion ($4.2 billion) or 3.2% of GDP.
Despite this relations between the fund and the Ukraine administration failed to improve substantially (they have now been bitten too often) and at the end of August 201 an IMF staff team was sent to Kiev to carry out the second review of the new program me.
The review was never formally completed, and the IMF announced on November 4 that negotiations had been broken off.
Gas prices are an issue everywhere, and especially in election years, but in Ukraine, due to the geopolitical situation, they take on a special significance.
Negotiations between Ukraine and Russia over the supply and payment of gas and terms of transit for Russian gas to Europe have been a recurrent theme since the end of the Soviet Union.
During 2011, as gas prices rose by an annual 60%, Ukraine repeatedly sought to renegotiate the 10-year contract signed in January 2009.
Ukraine administration considers the gas price formula unfair and the gas price – currently US$416/mcm in 1Q12 – too high.
The two sides have now been working for some months in an attempt to reach an agreement, but it is still not clear one will be reached.
Gas is a core issue for both the Ukraine and the IMF due to its impact on both the current account deficit and on the level of domestic consumption.
It is evident that Ukraine growth is now slowing and coming under threat from rising energy prices.
Morgan Stanley estimate that the country had a non-energy current account surplus of 8.2% of GDP in 2011, but since it ran an energy deficit of 14.1% of GDP, the outcome was a current account deficit of 5.5% of GDP.
To slow the rate at which this current account deficit is eroding reserves and undermining the stability of the currency, Ukraine central bank has tightened monetary policy sharply, which in turn has contributed to the rapid deceleration in growth, which consensus forecasts put at around 3.0% in 2012, but which may eventually turn out to be significantly lower.
To put this slowdown in perspective, despite the fact that Ukraine’s economy has been growing steadily since the 2009 annus horribilis, output levels are still below the pre crisis peak.
As Capital Economics’ Neil Shearing puts it:
Ukraine grew by 5.2% last year, which, on the face of it at least, seems a decent outturn. But context is crucial.
In 2009, output contracted by a whopping 15% – a recession from which the economy is still recovering.
What’s more, the pace of recovery has actually been somewhat disappointing.
Output is still well below its pre-crisis peak yet growth already appears to be slowing.
In Q4 GDP expanded by 4.6% y/y, down from 6.6% y/y in Q3.
At current rates of growth, it will take another two years for output to return to pre-crisis levels.
But even this could be a tall order given how vulnerable the economy is to a fresh escalation in Europe’s debt crisis.
In addition to the energy price constraint domestic consumption in Ukraine is still weighted down by the indebtedness problems created by the earlier boom.
Non-performing loans are still running at a very high level, although no one really seems to know quite how high, since there are major question marks hovering over the official figures.
The IMF’s permanent representative in Ukraine Max Alier estimated in the spring of 2011 the figure might be as high as 30% of total loans.
And with every 1% drop in the value of the hryvnia the proportion rises, due to the extent of forex borrowing.
In addition, with many Ukraine banks being owned by parents in other EU countries, the credit crunch in the west is rapidly transmitted to the east.
Corporate lending growth is slow, and the steady contraction of household borrowing is following a path which looks very similar to that seen in Southern Europe, or the Baltics.
Ukraine – like Hungary – badly needs an agreement with the IMF to facilitate the financing of debt which needs to be rolled-over this year.
These rollovers will put significant strain on the system, Neil Shearing estimates something of the order of 34% of GDP.
Meanwhile, Ukraine faces external debt servicing costs of $52.5bn (around 30% of GDP) this year.
A large chunk of this debt is in the banking system, but roughly $5.4bn is owed by the government ($3.5bn of which is due to the IMF).
Put together, we estimate that Ukraine’s external financing needs are close to $58bn this year – equivalent to 34% of GDP.
Obviously, with so much debt needing to be rolled over, the country is very exposed to any sudden reversal in risk sentiment, just as it was in 2008.
It needs to be under the sheltering wing of the IMF, but this time round the dynamics are rather different.
In particular, countries which once got a large net benefit from IMF lending are now facing the moment of truth – when they need to start paying back.
Unfortunately, and for whatever reason, the programmes sponsored by the IMF – in Ukraine, in Latvia, in Hungary, in Romania, in Greece, in Ireland, in Portugal – are not yielding the benefits which were initially claimed for them by the advocates of the “structural reform path”, in particular in the growth area.
In addition, years of fiscal austerity are now starting to take their toll on the populations concerned.
Expectations are not being fulfilled, and a backlash is underway.
Regular readers will be aware that my baseline case in Europe is that these misguided/insufficient programmes will steadily destabilise the political systems on Europe’s periphery, leading to unstable and unpredictable outcomes.
Not the kind of stuff would-be investors like.
Evidently it would be unfair to blame the Fund itself for the kind of problem which exists in Ukraine.
Clearly it is a very complex and difficult-to-handle situation. But if you haven’t gotten hold of the full extent of the problem in the first place, then it is hard to offer recipes which open a sustainable path forward.
Read as much as I can, I still fail to be able to find any single mention of the issue Ukraine’s dire demographics presents for future growth prospects in the IMF literature.
The country’s population is falling steadily, due to a long run excess of deaths over births and a steady outflow of working age population, leaving to seek a better life elsewhere.
This is not only causing the population to shrink, it is also leading to a dramatic change in the age composition of the population, increasing the average age of the workforce, and lowering the number of those employed per person retired.
This is the strategic importance of health and pension system reforms in a country like Ukraine.
Naturally structural reforms are important, but they need to be part of a mix of policies, and among these doing something to address the country’s demographic death-spiral should be given a great deal more importance than it is presently – where in fact the issue is almost absent from economic debate.
At this point it is hard to say how the present stand off between the IMF and the administration will work out, but as in the Hungarian case I have the feeling that most mainstream bank analysts are underestimating the capacity of the political system to produce “bad outcomes”.
The macabre ”culebron” associated with the apparent medical condition of the country’s former Prime Minister – in prison for having signed the last gas deal – only adds to the sense of surreal drama associated with the country’s potential default.
Ukraine’s ex-premier Yulia Tymoshenko is ill and in constant pain, Canadian doctors who examined her in prison said, adding that authorities denied her key blood and toxicology tests.
A team of Western doctors went last week to the prison where Ms Tymoshenko is held to examine the opposition leader amid complaints about her treatment and health.
The three Canadian and two German medics included a cardiologist and a nervous system expert, the former Soviet republic’s penitentiary system said in a statement.
After meeting and examining Ms Tymoshenko, it was the Canadian opinion that she required confidential blood and toxicology testing,” doctor Peter Kujtan said in a letter to Ukraine’s ambassador in Ottawa, Troy Lulashnyk.
The medical team had been invited by Ukraine to carry out the examination and even brought along diagnostic equipment which could produce on-the-spot test results, Dr Kujtan said.
“But Ukrainian authorities refused to allow its use, stating that we would be breaking several laws of the land and could face prosecution,” he said.
Now here’s the “official version” via interfax:
Ukraine’s jailed former Prime Minister Yulia Tymoshenko needs no surgery, the State Penitentiary Service cited a seven-member medical panel as saying on Friday after Tymoshenko had extra checkups on Thursday.
The findings of an X-ray test confirmed the previous diagnosis and meant there was no need to revise “the recommendations for her preliminary treatment, while changes that have been detected do not warrant surgical treatment,” a statement from the Penitentiary Service cited the seven doctors as saying in their assessment.
Tymoshenko, who had herself requested the additional checkups, was examined at a clinic in Kharkiv, the city where her prison is situated.
She had an X-ray test, a computed tomography scan and a magnetic resonance imaging scan.
However, she again refused to have a blood test, the Penitentiary Service said, adding that foreign doctors would need the results of a blood test for the final diagnosis and treatment recommendations.
Naturally this sort of thing is not new in the country.
And if you have the kind of sense of humour I have about technical issues, you might appreciate this short list of concerns about the way the bank problem resolution issue was handled by the central bank, as voiced by the IMF in their ex-post first standby agreement review:
a) Liquidity provided to insolvent banks: As it was difficult to distinguish between solvent and nonviable banks, liquidity support was likely extended to the latter.
Moreover, the maturities of NBU loans, which originally ranged from 14 to 365 days, were later converted up to seven years providing de facto solvency support.
b) Relaxation of collateral requirements: Banks’ own shares were accepted as eligible collateral despite the significant risk for the NBU.
c) Mandatory purchases of bank recapitalization bonds: The NBU was required to purchase at face value recapitalization bonds issued by the government, a practice that the Fund staff advised against.
The first point is an important one in any traditional approach to bank resolution, distinguishing between the rescuable and the un-rescuable, but, of course, none other institution than the ECB itself has now crossed the line, and with the 3 year LTROs (which will, naturally, be extended) the central bank is offering, as the IMF suggest in the Ukraine case, solvency support to a number of otherwise insolvent banks.
On the collateral side, the ECB isn’t accepting bank shares as collateral, yet, although it is accepting nearly everything else, and this idea of the central bank buying recapitalization bonds, wasn’t it first tried and tested in Ireland, and hasn’t it be applied to some extent in Greece? Nuff said, I think.
So where do we go from here?
The IMF have dug their heels in about gas, but this is only a symptom of a much deeper sense of frustration.
The fund has been financing the Ukraine deficit and cheap gas, but will the money disbursed ever get returned, or will the can be continually kicked down the road.
It is worth remembering that the initial financing of 11 billion SDRs was equivalent to 802% of the country’s quota, a very large quantity in terms of the standards of 2008. As the fund puts it in the review:
No major shift in policy making occurred and political economy considerations continue to drive policy making in Ukraine.
Efforts to tackle the underlying structural and institutional weaknesses stalled.
Bank resolution remained incomplete, the exchange rate regime returned to pre-crisis practices, the energy sector remained largely unreformed with quasi-fiscal deficits widening, and legal and governance reform fell short of objectives.
Put crudely, the fund was being used to finance cheap energy to win votes for populist governments.
The frustration to be seen in the above summary suggests to me at least that coming to a new agreement won’t be as easy as many think.
Especially with a number of other countries looking on. It all used to be called moral hazard I think.
Only industrial users in Ukraine currently pay the full cost of gas.
Residential users pay something like 30% of the cost of the gas they consume.
This subsidy is a key cause of the loss suffered by the state-owned oil and gas company, Naftogaz, which was UAH 21 billion or US$2.6 billion, equivalent to 1.6% of GDP in 2011.
A planned 50% hike in gas tariffs in April 2011 was negotiated down to 30% hike in two tranches in return for unspecific “offsetting measures” to keep the wider fiscal deficit at 3.5% of GDP.
However, eventually, the tariffs were not hiked at all in 2011, widening the actual deficit to 4.3% of GDP.
The result of all this is that the IMF have their foot firmly put down, and it will be hard to get it lifted again.
So one possibility is that the Ukraine government, seeing their approval ratings dropping, will consider the political costs of household gas tariff hikes to be too high, and not seriously pursue a renewed IMF deal, hoping that the cut in the current account deficit due to the lower gas import price plus any other investment commitments or payments which would arise from of a Russian gas deal will be enough to reduce pressure on reserves to a sustainable level.
The Bank has spent nearly $7bn – or 20% – of its reserves since last August, and with reserves now approaching $30 billion this strategy is clearly becoming unsutanable.
There is, of course, another possibility, and that is that there is no Russia deal and no IMF deal.
This could occur if the government baulks at both of the possibilities on the table: either selling a stake in the gas transit corridor to the Russians or raising household gas tariffs.
Under this scenario Ukraine government could follow in the footsteps of Hungary’s Prime Minister Viktor Orban which involves seeming to cooperate (in this case with both parties) but doing nothing, and in the meantime hope to muddle through – at least in this case till the elections in October.
However, against the backdrop of falling reserves, a rising current account deficit and external funding markets which are closed to Ukraine, a sharp devaluation could become virtually unavoidable if there is neither a gas deal and nor a resumption of the IMF programme.
Following the decision of the ECB to introduce 3 year LTROs and the agreement on the terms of a second Greek bailout global risk sentiment has improved significantly in recent weeks, but it would be foolhardy to imagine that this situation will become permanent.
Too many risk elements are still in play, and there are still far too many loose cannon floating around on the EU upper deck for vigilance to relax.
But that is exactly what may happen, in which case, if disaster does strike in Ukraine, it will surely be disaster.
The government is shunning the International Monetary Fund as it struggles to agree on discounted fuel imports from Russia, with whom clashes halted European gas transit twice since 2006.
That’s fanned concern over its ability to meet $11.9 billion in debt costs this year, with default risk rising more than any country Bloomberg tracks except Greece in the last six months.
Ukraine is once more getting into a mess.
Part of the problem is political, part of it is economic, and part is a combination of the two.
On top of which Ukraine has one of the most severe demographic problems in the CEE, which is itself a region of severe demographic problems.
So what we have are a cluster of problems just waiting for the perfect storm to gather.
As is well known, Ukraine was one of the worst affected countries following the onset of the global financial crisis.
Industrial output slid – great depression style – by more than 30% in a matter of months, largely due to a massive overdependence on steel, the price of and demand for which had fallen off a cliff.
The onset of the crisis also brought to light the way the country had been living on an unsustainable credit boom fueled by short term forex borrowing in the years prior to its arrival, and as the fund flows which had been financing this rapidly reversed Ukraine was sent running into the arms of the IMF, and rapidly accepted a $16.5 billion standby loan in November 2008.
As the IMF put Ukraine’s current account and growth performance relied strongly on favorable terms of trade.
From 2003 to mid-2008, the price for steel, which accounted for 40 percent of Ukraine’s export and 15 percent of GDP at the time of the crisis, had increased fourfold and prices for gas imports were still far below world market prices, providing little incentive to improve Ukraine’s dismal inefficiency in energy use.
Nevertheless, by 2007 the current account had already deteriorated strongly as imports had surged on the back of a credit and real estate boom and an overheating economy.
Private sector balance sheet imbalances widened sharply with foreign currency loans accounting for nearly 60 percent of total loans, often extended to borrowers without foreign exchange income, and bank funding increasingly relying on short-term borrowing from abroad.
Well, for those familiar with the region there is nothing particularly strange about the imbalances and the credit bust.
But as the Fund itself makes clear in its ex-post evaluation of the first crisis programme, relations between the multilateral institution and the Ukraine administration have been far from easy over the years:
Ukraine has had long but complicated program relations with the Fund.
From 1994 to 2005, the Fund supported Ukraine through six arrangements.
Completion of reviews tended to be difficult, as only 13 of the envisaged 24 reviews were completed, of which 10 with delay or involving waivers.
The Ex Post Assessment of Longer-Term Program Engagement in 2005 found that “Fund-supported programs had a mixed record in achieving their objectives.
While the programs were quite effective in supporting macroeconomic stability, they did not succeed in accelerating the build-up of more market-friendly institutions.”
Unfortunately things did not go that much better this time, and the initial programme was terminated after the second review and a disbursement of $10.4 billion:
Program implementation was difficult against the backdrop of sharp political divisions.
Only two of the envisaged eight reviews were completed, with the first review already delayed by three months due to failure to reach understanding on fiscal and banking related policies in the midst of political wrangling between the president and the prime minister.
After the second review was completed on time in June 2009 — reflecting some progress with the bank resolution strategy, announcement of future plans to increase gas prices, the adoption of a restructuring strategy for Naftogaz, and a slowdown in foreign exchange interventions — the Fund remained closely engaged with the authorities.
But the program went off track as ownership vanished and fiscal policy diverged further from the program.
In fact here we see three of the key Ukraine issues all lined up together – energy prices and the fiscal deficit, problems in the banking system and constant foreign exchange interventions to maintain a currency peg with the US dollar, a peg which encourages unnecessary forex borrowing while fueling inflation at continually high levels.
Running such consistently high inflation simply leads to rigid monetary policy, high interest rates, and inadvertently enhances the attractiveness of foreign exchange borrowing (which is the ultimate undoing of these pegged economies) since interest rates are much lower elsewhere, the currency is fixed (so where’s the risk) and wages keep going up and up along with the inflation.
You seem to be getting better off than your peers in the country you peg to, but in fact you are simply sliding steadily towards the precipice.
In many ways things on the Euro Areas Southern fringe are only different in terms of degree.
I can still remember Spain’s now ex-Prime Minister José Luis Rodriguez Zapatero telling his compatriots that they were steadily moving towards the top of the EU per capita wealth league, overtaking Italy, and then France, just before the bubble burst, and the house valuations which lay behind those impressive appearances started tumbling.
Frustrated and fed-up, the IMF cannot simply ignore the country.
Ukraine is simply too large and too strategically situated to be allowed to go AWOL.
So when the new Ukraine government requested a further standby arrangement in the early summer of 2010 there was little alternative but to agree (shades of Greece and the EU) and make an additional $15.1 available to the country, bringing the outstanding borrowing to $25.5 billion.
And here comes the rub: according to the IMF, Ukraine is due to repay $2.4 billion this year; $3.5 billion in 2013 and $1.3 billion in 2014.
This is quite an onerous schedule for a country which is now struggling to finance itself in the financial markets.
Many of the current IMF programmes in Europe have the look of success, until the time comes to pay back.
Predictably the second programme didn’t proceed any more smoothly than the first one, and the first review was only approved after a lengthy tussle about pensions, with the Ukrainian government eventually ceding to pressure and in July 2011 passing a pension reform whereby the female retirement age was raised from 55 to 60, and the duration of pension contributions needed for entitlement increased by 10 years.
We will return briefly to this topic, but it is instructive to note that while most economic analyses of the current crisis (everywhere, not just Ukraine) fail to mention the underlying demographic issues, the problem of how to pay for pensions keeps cropping up time and time again.
The need for the reform was obvious, with a rapidly ageing population the country, despite being poor, had one of the most generous systems on the planet.
In 2010, the last year before the reform, Ukraine spent 18% of its GDP on pensions and had a pension fund deficit of UAH 34.4 billion ($4.2 billion) or 3.2% of GDP.
Despite this relations between the fund and the Ukraine administration failed to improve substantially (they have now been bitten too often) and at the end of August 201 an IMF staff team was sent to Kiev to carry out the second review of the new program me.
The review was never formally completed, and the IMF announced on November 4 that negotiations had been broken off.
Gas prices are an issue everywhere, and especially in election years, but in Ukraine, due to the geopolitical situation, they take on a special significance.
Negotiations between Ukraine and Russia over the supply and payment of gas and terms of transit for Russian gas to Europe have been a recurrent theme since the end of the Soviet Union.
During 2011, as gas prices rose by an annual 60%, Ukraine repeatedly sought to renegotiate the 10-year contract signed in January 2009.
Ukraine administration considers the gas price formula unfair and the gas price – currently US$416/mcm in 1Q12 – too high.
The two sides have now been working for some months in an attempt to reach an agreement, but it is still not clear one will be reached.
Gas is a core issue for both the Ukraine and the IMF due to its impact on both the current account deficit and on the level of domestic consumption.
It is evident that Ukraine growth is now slowing and coming under threat from rising energy prices.
Morgan Stanley estimate that the country had a non-energy current account surplus of 8.2% of GDP in 2011, but since it ran an energy deficit of 14.1% of GDP, the outcome was a current account deficit of 5.5% of GDP.
To slow the rate at which this current account deficit is eroding reserves and undermining the stability of the currency, Ukraine central bank has tightened monetary policy sharply, which in turn has contributed to the rapid deceleration in growth, which consensus forecasts put at around 3.0% in 2012, but which may eventually turn out to be significantly lower.
To put this slowdown in perspective, despite the fact that Ukraine’s economy has been growing steadily since the 2009 annus horribilis, output levels are still below the pre crisis peak.
As Capital Economics’ Neil Shearing puts it:
Ukraine grew by 5.2% last year, which, on the face of it at least, seems a decent outturn. But context is crucial.
In 2009, output contracted by a whopping 15% – a recession from which the economy is still recovering.
What’s more, the pace of recovery has actually been somewhat disappointing.
Output is still well below its pre-crisis peak yet growth already appears to be slowing.
In Q4 GDP expanded by 4.6% y/y, down from 6.6% y/y in Q3.
At current rates of growth, it will take another two years for output to return to pre-crisis levels.
But even this could be a tall order given how vulnerable the economy is to a fresh escalation in Europe’s debt crisis.
In addition to the energy price constraint domestic consumption in Ukraine is still weighted down by the indebtedness problems created by the earlier boom.
Non-performing loans are still running at a very high level, although no one really seems to know quite how high, since there are major question marks hovering over the official figures.
The IMF’s permanent representative in Ukraine Max Alier estimated in the spring of 2011 the figure might be as high as 30% of total loans.
And with every 1% drop in the value of the hryvnia the proportion rises, due to the extent of forex borrowing.
In addition, with many Ukraine banks being owned by parents in other EU countries, the credit crunch in the west is rapidly transmitted to the east.
Corporate lending growth is slow, and the steady contraction of household borrowing is following a path which looks very similar to that seen in Southern Europe, or the Baltics.
Ukraine – like Hungary – badly needs an agreement with the IMF to facilitate the financing of debt which needs to be rolled-over this year.
These rollovers will put significant strain on the system, Neil Shearing estimates something of the order of 34% of GDP.
Meanwhile, Ukraine faces external debt servicing costs of $52.5bn (around 30% of GDP) this year.
A large chunk of this debt is in the banking system, but roughly $5.4bn is owed by the government ($3.5bn of which is due to the IMF).
Put together, we estimate that Ukraine’s external financing needs are close to $58bn this year – equivalent to 34% of GDP.
Obviously, with so much debt needing to be rolled over, the country is very exposed to any sudden reversal in risk sentiment, just as it was in 2008.
It needs to be under the sheltering wing of the IMF, but this time round the dynamics are rather different.
In particular, countries which once got a large net benefit from IMF lending are now facing the moment of truth – when they need to start paying back.
Unfortunately, and for whatever reason, the programmes sponsored by the IMF – in Ukraine, in Latvia, in Hungary, in Romania, in Greece, in Ireland, in Portugal – are not yielding the benefits which were initially claimed for them by the advocates of the “structural reform path”, in particular in the growth area.
In addition, years of fiscal austerity are now starting to take their toll on the populations concerned.
Expectations are not being fulfilled, and a backlash is underway.
Regular readers will be aware that my baseline case in Europe is that these misguided/insufficient programmes will steadily destabilise the political systems on Europe’s periphery, leading to unstable and unpredictable outcomes.
Not the kind of stuff would-be investors like.
Evidently it would be unfair to blame the Fund itself for the kind of problem which exists in Ukraine.
Clearly it is a very complex and difficult-to-handle situation. But if you haven’t gotten hold of the full extent of the problem in the first place, then it is hard to offer recipes which open a sustainable path forward.
Read as much as I can, I still fail to be able to find any single mention of the issue Ukraine’s dire demographics presents for future growth prospects in the IMF literature.
The country’s population is falling steadily, due to a long run excess of deaths over births and a steady outflow of working age population, leaving to seek a better life elsewhere.
This is not only causing the population to shrink, it is also leading to a dramatic change in the age composition of the population, increasing the average age of the workforce, and lowering the number of those employed per person retired.
This is the strategic importance of health and pension system reforms in a country like Ukraine.
Naturally structural reforms are important, but they need to be part of a mix of policies, and among these doing something to address the country’s demographic death-spiral should be given a great deal more importance than it is presently – where in fact the issue is almost absent from economic debate.
At this point it is hard to say how the present stand off between the IMF and the administration will work out, but as in the Hungarian case I have the feeling that most mainstream bank analysts are underestimating the capacity of the political system to produce “bad outcomes”.
The macabre ”culebron” associated with the apparent medical condition of the country’s former Prime Minister – in prison for having signed the last gas deal – only adds to the sense of surreal drama associated with the country’s potential default.
Ukraine’s ex-premier Yulia Tymoshenko is ill and in constant pain, Canadian doctors who examined her in prison said, adding that authorities denied her key blood and toxicology tests.
A team of Western doctors went last week to the prison where Ms Tymoshenko is held to examine the opposition leader amid complaints about her treatment and health.
The three Canadian and two German medics included a cardiologist and a nervous system expert, the former Soviet republic’s penitentiary system said in a statement.
After meeting and examining Ms Tymoshenko, it was the Canadian opinion that she required confidential blood and toxicology testing,” doctor Peter Kujtan said in a letter to Ukraine’s ambassador in Ottawa, Troy Lulashnyk.
The medical team had been invited by Ukraine to carry out the examination and even brought along diagnostic equipment which could produce on-the-spot test results, Dr Kujtan said.
“But Ukrainian authorities refused to allow its use, stating that we would be breaking several laws of the land and could face prosecution,” he said.
Now here’s the “official version” via interfax:
Ukraine’s jailed former Prime Minister Yulia Tymoshenko needs no surgery, the State Penitentiary Service cited a seven-member medical panel as saying on Friday after Tymoshenko had extra checkups on Thursday.
The findings of an X-ray test confirmed the previous diagnosis and meant there was no need to revise “the recommendations for her preliminary treatment, while changes that have been detected do not warrant surgical treatment,” a statement from the Penitentiary Service cited the seven doctors as saying in their assessment.
Tymoshenko, who had herself requested the additional checkups, was examined at a clinic in Kharkiv, the city where her prison is situated.
She had an X-ray test, a computed tomography scan and a magnetic resonance imaging scan.
However, she again refused to have a blood test, the Penitentiary Service said, adding that foreign doctors would need the results of a blood test for the final diagnosis and treatment recommendations.
Naturally this sort of thing is not new in the country.
And if you have the kind of sense of humour I have about technical issues, you might appreciate this short list of concerns about the way the bank problem resolution issue was handled by the central bank, as voiced by the IMF in their ex-post first standby agreement review:
a) Liquidity provided to insolvent banks: As it was difficult to distinguish between solvent and nonviable banks, liquidity support was likely extended to the latter.
Moreover, the maturities of NBU loans, which originally ranged from 14 to 365 days, were later converted up to seven years providing de facto solvency support.
b) Relaxation of collateral requirements: Banks’ own shares were accepted as eligible collateral despite the significant risk for the NBU.
c) Mandatory purchases of bank recapitalization bonds: The NBU was required to purchase at face value recapitalization bonds issued by the government, a practice that the Fund staff advised against.
The first point is an important one in any traditional approach to bank resolution, distinguishing between the rescuable and the un-rescuable, but, of course, none other institution than the ECB itself has now crossed the line, and with the 3 year LTROs (which will, naturally, be extended) the central bank is offering, as the IMF suggest in the Ukraine case, solvency support to a number of otherwise insolvent banks.
On the collateral side, the ECB isn’t accepting bank shares as collateral, yet, although it is accepting nearly everything else, and this idea of the central bank buying recapitalization bonds, wasn’t it first tried and tested in Ireland, and hasn’t it be applied to some extent in Greece? Nuff said, I think.
So where do we go from here?
The IMF have dug their heels in about gas, but this is only a symptom of a much deeper sense of frustration.
The fund has been financing the Ukraine deficit and cheap gas, but will the money disbursed ever get returned, or will the can be continually kicked down the road.
It is worth remembering that the initial financing of 11 billion SDRs was equivalent to 802% of the country’s quota, a very large quantity in terms of the standards of 2008. As the fund puts it in the review:
No major shift in policy making occurred and political economy considerations continue to drive policy making in Ukraine.
Efforts to tackle the underlying structural and institutional weaknesses stalled.
Bank resolution remained incomplete, the exchange rate regime returned to pre-crisis practices, the energy sector remained largely unreformed with quasi-fiscal deficits widening, and legal and governance reform fell short of objectives.
Put crudely, the fund was being used to finance cheap energy to win votes for populist governments.
The frustration to be seen in the above summary suggests to me at least that coming to a new agreement won’t be as easy as many think.
Especially with a number of other countries looking on. It all used to be called moral hazard I think.
Only industrial users in Ukraine currently pay the full cost of gas.
Residential users pay something like 30% of the cost of the gas they consume.
This subsidy is a key cause of the loss suffered by the state-owned oil and gas company, Naftogaz, which was UAH 21 billion or US$2.6 billion, equivalent to 1.6% of GDP in 2011.
A planned 50% hike in gas tariffs in April 2011 was negotiated down to 30% hike in two tranches in return for unspecific “offsetting measures” to keep the wider fiscal deficit at 3.5% of GDP.
However, eventually, the tariffs were not hiked at all in 2011, widening the actual deficit to 4.3% of GDP.
The result of all this is that the IMF have their foot firmly put down, and it will be hard to get it lifted again.
So one possibility is that the Ukraine government, seeing their approval ratings dropping, will consider the political costs of household gas tariff hikes to be too high, and not seriously pursue a renewed IMF deal, hoping that the cut in the current account deficit due to the lower gas import price plus any other investment commitments or payments which would arise from of a Russian gas deal will be enough to reduce pressure on reserves to a sustainable level.
The Bank has spent nearly $7bn – or 20% – of its reserves since last August, and with reserves now approaching $30 billion this strategy is clearly becoming unsutanable.
There is, of course, another possibility, and that is that there is no Russia deal and no IMF deal.
This could occur if the government baulks at both of the possibilities on the table: either selling a stake in the gas transit corridor to the Russians or raising household gas tariffs.
Under this scenario Ukraine government could follow in the footsteps of Hungary’s Prime Minister Viktor Orban which involves seeming to cooperate (in this case with both parties) but doing nothing, and in the meantime hope to muddle through – at least in this case till the elections in October.
However, against the backdrop of falling reserves, a rising current account deficit and external funding markets which are closed to Ukraine, a sharp devaluation could become virtually unavoidable if there is neither a gas deal and nor a resumption of the IMF programme.
Following the decision of the ECB to introduce 3 year LTROs and the agreement on the terms of a second Greek bailout global risk sentiment has improved significantly in recent weeks, but it would be foolhardy to imagine that this situation will become permanent.
Too many risk elements are still in play, and there are still far too many loose cannon floating around on the EU upper deck for vigilance to relax.
But that is exactly what may happen, in which case, if disaster does strike in Ukraine, it will surely be disaster.
Saturday, 21 May 2011
Ukraine To Sign EU Agreement During Poland’s Presidency?
WARSAW, Poland -- Ukraine has indicated that it aims to sign an associate agreement with the EU during Poland’s presidency of the European Council in the second half of this year.
At a joint press conference attended by Polish and Ukrainian foreign ministers in Kiev on Monday, Poland’s head of diplomacy Radek Sikorski said that “We want to ensure that during the upcoming Polish presidency of the EU [Ukraine’s relations with the EU] takes another leap forward.”
However an EU-Ukraine summit to hammer out the deal, which was going to take place this September, has been put back to December, prompting a ‘high ranking official’ to tell the Kommersant-Ukraina newspaper last month that, “I'm not sure that we will be able to finalize taks”.
An EU official told the same newspaper that Brussels suspects Ukraine of playing ‘double-bluff’ with both the EU and Russia, which Kiev wants to conclude a customs agreement with.
Poland’s six-month presidency begins on 1 July.
Prime Minister Donald Tusk said on a recent trip to the Balkans that he hopes to conclude accession talks with Croatia this year as well.
At a joint press conference attended by Polish and Ukrainian foreign ministers in Kiev on Monday, Poland’s head of diplomacy Radek Sikorski said that “We want to ensure that during the upcoming Polish presidency of the EU [Ukraine’s relations with the EU] takes another leap forward.”
However an EU-Ukraine summit to hammer out the deal, which was going to take place this September, has been put back to December, prompting a ‘high ranking official’ to tell the Kommersant-Ukraina newspaper last month that, “I'm not sure that we will be able to finalize taks”.
An EU official told the same newspaper that Brussels suspects Ukraine of playing ‘double-bluff’ with both the EU and Russia, which Kiev wants to conclude a customs agreement with.
Poland’s six-month presidency begins on 1 July.
Prime Minister Donald Tusk said on a recent trip to the Balkans that he hopes to conclude accession talks with Croatia this year as well.
Sunday, 6 March 2011
While IMF Takes Pause, Ukraine Considers Ailing Banks
KIEV, Ukraine -- The mission of the International Monetary Fund (IMF) completed its work in Kyiv on February 14, but more difficult talks are ahead. Ukraine still has to prove that it qualifies for the next $1.6 billion IMF loan tranche.
The government of President Viktor Yanukovych like its predecessor, whose economic populism prompted the IMF to freeze assistance in late 2009, failed to meet its commitments as many reforms remain unfinished.
The IMF approved a $15 billion loan for Ukraine last July and $3.4 billion arrived last year in two tranches. If the tranche expected in March is delayed, the schedule may be changed so fewer than four tranches would be received this year.
This may strain public finances ahead of the crucial Euro-2012 soccer championship, a costly event which Ukraine will co-host with Poland.
The IMF mission stated on February 15 that though the economy performed well last year and the economic program supported by IMF loans had been broadly on track, more discussions would be held. In particular, agreement was yet to be reached on household gas price hikes. The mission said a more gradual schedule of hikes was agreed than planned earlier.
Last year, the government promised to hike gas prices for households by 50 percent from April 2011, in addition to a 50 percent hike last August. It is not clear how the combined deficit of the government and the debt-ridden national oil and gas company Naftohaz Ukrainy would be narrowed to 3.5 percent this year as promised to the IMF without the April hike.
On February 17, the IMF released on its website documents dated December 10, 2010 containing Ukraine’s obligations under the mutually agreed reform plan. The publication of the documents had been delayed by the IMF apparently at the government’s request in order to avoid negative reactions in Ukraine as many of the reforms agreed with the IMF are likely to prove unpopular.
The agreements with the IMF were reached in the wake of the popular protests against a new tax code last fall so the precaution was apparently justified. Now that more than two months have passed, it is clear than many obligations have not been met.
The government promised a 5.5 percent state budget deficit in 2010, yet the target was exceeded. It pledged to approve pension reform by January 2011, however parliament plans to pass it only in March.
The government admitted that Naftohaz’s deficit would be reduced to 0.4 percent of GDP in 2011 rather than to zero as promised earlier. At the same time, the government pledged to hike household gas prices by 50 percent in April. However, the government made clear to the IMF mission this month that this plan was abandoned.
Ukraine’s central bank reportedly rejected the IMF’s advice that only one of the three mid-sized banks which were bailed out in 2009, Ukrhazbank, should be rescued. Instead, the government is going to revive at least two of these banks plus the large ailing bank Nadra.
In order to rescue Nadra, the central bank plans an increase in the capital of the state-owned Oshchadbank so that Oshchadbank should issue a loan to the equivalent of $440 million to Nadra while the same sum should be contributed by private investors.
Another large state-owned bank, Ukreximbank, should lend to Rodovid, which is in the worst condition among the three bailed-out banks. Later, Rodovid should be transformed into a “bad bank” for the toxic assets of Ukrgazbank, the Kyiv bank and possibly Nadra, while Kyiv would be merged with Ukrgazbank, according to the plan.
Later on, IPO’s would be conducted for several of those banks. The IMF has yet to approve the plan.
Central bank governor, Serhy Arbuzov, confirmed most of these developments in a recent interview. Arbuzov also said the IMF was recommending remedies which had been used elsewhere but could not be implemented in Ukraine.
The government has invested over $2 billion in Rodovid, Ukrgazbank and Kyiv since 2009, but an audit conducted in late 2010 showed that more should be invested. Nadra has been in limbo since late 2008 while the central bank’s plan has been to rescue it jointly with the energy and chemical tycoon Dmytro Firtash who co-owns the RosUkrEnergo (RUE) gas intermediary with Gazprom.
International and independent domestic experts have been against state participation in Nadra, arguing that either Firtash should rescue the bank on his own or Nadra should be liquidated otherwise it will continue to drain public funds.
The government has invested over $2 billion in Rodovid, Ukrgazbank and Kyiv since 2009, but an audit conducted in late 2010 showed that more must be invested.
Nadra has been in limbo since late 2008 while the central bank’s plan has been to rescue it jointly with the energy and chemical tycoon Dmytro Firtash who co-owns the RosUkrEnergo (RUE) gas intermediary with Gazprom.
International and independent domestic experts have been against state participation in Nadra, arguing that either Firtash should rescue the bank on his own or Nadra should be liquidated otherwise it will continue to drain public funds.
Firtash should have cash to rescue Nadra as RUE will receive 12 billion cubic meters (bcm) of gas from Naftohaz this year as emerged from the December 10 documents released by the IMF.
Last year, courts ruled that the former Ukrainian government illegally seized 11 bcm of gas from RUE in early 2009. Naftohaz was ordered to return the gas plus damages. Naftohaz started returning the gas to RUE last December and RUE will sell it in Europe.
Meanwhile, former Prime Minister Yulia Tymoshenko, who reportedly thwarted Firtash’s intention to take over Nadra in early 2009, has opposed the new plan for Nadra. Tymoshenko predicted that the plan to help Firtash rescue Nadra with the help of Oshchadbank would spark a corruption scandal.
The government of President Viktor Yanukovych like its predecessor, whose economic populism prompted the IMF to freeze assistance in late 2009, failed to meet its commitments as many reforms remain unfinished.
The IMF approved a $15 billion loan for Ukraine last July and $3.4 billion arrived last year in two tranches. If the tranche expected in March is delayed, the schedule may be changed so fewer than four tranches would be received this year.
This may strain public finances ahead of the crucial Euro-2012 soccer championship, a costly event which Ukraine will co-host with Poland.
The IMF mission stated on February 15 that though the economy performed well last year and the economic program supported by IMF loans had been broadly on track, more discussions would be held. In particular, agreement was yet to be reached on household gas price hikes. The mission said a more gradual schedule of hikes was agreed than planned earlier.
Last year, the government promised to hike gas prices for households by 50 percent from April 2011, in addition to a 50 percent hike last August. It is not clear how the combined deficit of the government and the debt-ridden national oil and gas company Naftohaz Ukrainy would be narrowed to 3.5 percent this year as promised to the IMF without the April hike.
On February 17, the IMF released on its website documents dated December 10, 2010 containing Ukraine’s obligations under the mutually agreed reform plan. The publication of the documents had been delayed by the IMF apparently at the government’s request in order to avoid negative reactions in Ukraine as many of the reforms agreed with the IMF are likely to prove unpopular.
The agreements with the IMF were reached in the wake of the popular protests against a new tax code last fall so the precaution was apparently justified. Now that more than two months have passed, it is clear than many obligations have not been met.
The government promised a 5.5 percent state budget deficit in 2010, yet the target was exceeded. It pledged to approve pension reform by January 2011, however parliament plans to pass it only in March.
The government admitted that Naftohaz’s deficit would be reduced to 0.4 percent of GDP in 2011 rather than to zero as promised earlier. At the same time, the government pledged to hike household gas prices by 50 percent in April. However, the government made clear to the IMF mission this month that this plan was abandoned.
Ukraine’s central bank reportedly rejected the IMF’s advice that only one of the three mid-sized banks which were bailed out in 2009, Ukrhazbank, should be rescued. Instead, the government is going to revive at least two of these banks plus the large ailing bank Nadra.
In order to rescue Nadra, the central bank plans an increase in the capital of the state-owned Oshchadbank so that Oshchadbank should issue a loan to the equivalent of $440 million to Nadra while the same sum should be contributed by private investors.
Another large state-owned bank, Ukreximbank, should lend to Rodovid, which is in the worst condition among the three bailed-out banks. Later, Rodovid should be transformed into a “bad bank” for the toxic assets of Ukrgazbank, the Kyiv bank and possibly Nadra, while Kyiv would be merged with Ukrgazbank, according to the plan.
Later on, IPO’s would be conducted for several of those banks. The IMF has yet to approve the plan.
Central bank governor, Serhy Arbuzov, confirmed most of these developments in a recent interview. Arbuzov also said the IMF was recommending remedies which had been used elsewhere but could not be implemented in Ukraine.
The government has invested over $2 billion in Rodovid, Ukrgazbank and Kyiv since 2009, but an audit conducted in late 2010 showed that more should be invested. Nadra has been in limbo since late 2008 while the central bank’s plan has been to rescue it jointly with the energy and chemical tycoon Dmytro Firtash who co-owns the RosUkrEnergo (RUE) gas intermediary with Gazprom.
International and independent domestic experts have been against state participation in Nadra, arguing that either Firtash should rescue the bank on his own or Nadra should be liquidated otherwise it will continue to drain public funds.
The government has invested over $2 billion in Rodovid, Ukrgazbank and Kyiv since 2009, but an audit conducted in late 2010 showed that more must be invested.
Nadra has been in limbo since late 2008 while the central bank’s plan has been to rescue it jointly with the energy and chemical tycoon Dmytro Firtash who co-owns the RosUkrEnergo (RUE) gas intermediary with Gazprom.
International and independent domestic experts have been against state participation in Nadra, arguing that either Firtash should rescue the bank on his own or Nadra should be liquidated otherwise it will continue to drain public funds.
Firtash should have cash to rescue Nadra as RUE will receive 12 billion cubic meters (bcm) of gas from Naftohaz this year as emerged from the December 10 documents released by the IMF.
Last year, courts ruled that the former Ukrainian government illegally seized 11 bcm of gas from RUE in early 2009. Naftohaz was ordered to return the gas plus damages. Naftohaz started returning the gas to RUE last December and RUE will sell it in Europe.
Meanwhile, former Prime Minister Yulia Tymoshenko, who reportedly thwarted Firtash’s intention to take over Nadra in early 2009, has opposed the new plan for Nadra. Tymoshenko predicted that the plan to help Firtash rescue Nadra with the help of Oshchadbank would spark a corruption scandal.
Sunday, 19 December 2010
France Ski Resort Courchevel To Host Ukraine Magnate's €5 Million Birthday Party
LONDON, England -- Residents of the chic French ski resort of Courchevel, known as the winter playground of the rich and famous, are used to visitors throwing money around.
The town boasts 11 five-star hotels, at least three Michelin-starred restaurants and numerous diamond dealers to attract the well-heeled, including Beyoncé, the Beckhams and a fair few Russian oligarchs. Conspicuous consumption is nothing new.
However, in the middle of a worldwide economic crisis, the Ukrainian billionaire Victor Pinchuk may have pushed the boundaries of good taste when it comes to lavish spending.
Reports that the 50th birthday party he is throwing in Courchevel this weekend – featuring five-star food and vintage wines and champagne – is expected to cost €5m ($6.6m) have caused a certain froideur in the ski resort that has nothing to do with the latest snowfall.
Certainly the celebration will not be to everyone's taste. "Five million for a party ... it's indecent," said one skier, who asked to remain anonymous. "It's particularly scandalous because so many people in France are having trouble making ends meet, let alone buying Christmas presents, because of the crisis."
Metal magnate Pinchuk, who also owns a media empire including six television stations and three newspapers, has rented 2,000 sq metres of land where an army of staff is constructing an enormous marquee for tomorrow night's party.
An estimated 300 guests, flying in from all over the world, will be served an haute cuisine buffet prepared by the master of Gallic gastronomy, Alain Ducasse, the French chef with the most Michelin starred restaurants.
They will be entertained by Cirque du Soleil, whose performers are flying in from Canada, followed by a firework display. Amid frenzied rumours over the secret guest list – Pinchuk counts Elton John, Paul McCartney and Bill Clinton as friends – there are reports that Christina Aguilera, in France to promote her new film Burlesque, is also to sing for guests.
Officials at Courchevel's town hall said Pinchuk had rented the area in the multi-level resort at the usual price – €12 ($16) per square metre per day. The owner of a quad bike business that had been using the site was asked to go elsewhere, according to reports.
The resort's mayor, Gilbert Blanc-Tailleur, insisted there was nothing shocking about the party. "If this gentlemen didn't celebrate his birthday in Courchevel, he would no doubt go somewhere else abroad in a Swiss or Austrian ski resort. That would be a pity for our country," he said. "So it's a good thing for France and for our resort where the quality of services is well known and where it will give business to our hotels."
He added that the Courchevel authorities had asked for 150 children to be allowed to see the circus rehearsals.
Adeline Roux, director of Courchevel's tourist office, agreed with the mayor. "It's a private event so there's nothing to say," she said.
Pinchuk, who is married to the daughter of Ukraine's former president Leonid Kuchma, is worth an estimated £1.9bn ($3.0b) and has one of the world's largest private modern art collections. Time magazine named him one of the 100 most influential people.
His press office refused to comment on the party. However a young chambermaid at the ski resort was not impressed. "I slave away all winter for a miserable wage and then when I see how some people can spend millions in a single evening it disgusts me," she told Le Parisien.
"We are on another planet here."
The town boasts 11 five-star hotels, at least three Michelin-starred restaurants and numerous diamond dealers to attract the well-heeled, including Beyoncé, the Beckhams and a fair few Russian oligarchs. Conspicuous consumption is nothing new.
However, in the middle of a worldwide economic crisis, the Ukrainian billionaire Victor Pinchuk may have pushed the boundaries of good taste when it comes to lavish spending.
Reports that the 50th birthday party he is throwing in Courchevel this weekend – featuring five-star food and vintage wines and champagne – is expected to cost €5m ($6.6m) have caused a certain froideur in the ski resort that has nothing to do with the latest snowfall.
Certainly the celebration will not be to everyone's taste. "Five million for a party ... it's indecent," said one skier, who asked to remain anonymous. "It's particularly scandalous because so many people in France are having trouble making ends meet, let alone buying Christmas presents, because of the crisis."
Metal magnate Pinchuk, who also owns a media empire including six television stations and three newspapers, has rented 2,000 sq metres of land where an army of staff is constructing an enormous marquee for tomorrow night's party.
An estimated 300 guests, flying in from all over the world, will be served an haute cuisine buffet prepared by the master of Gallic gastronomy, Alain Ducasse, the French chef with the most Michelin starred restaurants.
They will be entertained by Cirque du Soleil, whose performers are flying in from Canada, followed by a firework display. Amid frenzied rumours over the secret guest list – Pinchuk counts Elton John, Paul McCartney and Bill Clinton as friends – there are reports that Christina Aguilera, in France to promote her new film Burlesque, is also to sing for guests.
Officials at Courchevel's town hall said Pinchuk had rented the area in the multi-level resort at the usual price – €12 ($16) per square metre per day. The owner of a quad bike business that had been using the site was asked to go elsewhere, according to reports.
The resort's mayor, Gilbert Blanc-Tailleur, insisted there was nothing shocking about the party. "If this gentlemen didn't celebrate his birthday in Courchevel, he would no doubt go somewhere else abroad in a Swiss or Austrian ski resort. That would be a pity for our country," he said. "So it's a good thing for France and for our resort where the quality of services is well known and where it will give business to our hotels."
He added that the Courchevel authorities had asked for 150 children to be allowed to see the circus rehearsals.
Adeline Roux, director of Courchevel's tourist office, agreed with the mayor. "It's a private event so there's nothing to say," she said.
Pinchuk, who is married to the daughter of Ukraine's former president Leonid Kuchma, is worth an estimated £1.9bn ($3.0b) and has one of the world's largest private modern art collections. Time magazine named him one of the 100 most influential people.
His press office refused to comment on the party. However a young chambermaid at the ski resort was not impressed. "I slave away all winter for a miserable wage and then when I see how some people can spend millions in a single evening it disgusts me," she told Le Parisien.
"We are on another planet here."
Saturday, 2 October 2010
Yanukovych Looks For Partners For Ukraine Beyond EU
YALTA, Ukraine -- Ukraine will push for reforms that would allow it to join the European Union, but will also develop cooperation with other world powers, including Russia and the United States, Ukrainian President Viktor Yanukovych said on Friday.
Ukraine has no alternative for the European choice, but since the EU is not ready even to discuss the Ukrainian membership, we will choose the pace, forms and methods of integration by ourselves, in accordance with our national interests," Yanukovych told participants in a forum of the Yalta European Strategy (YES) organization promoting Ukraine's integration with Europe.
"Integration should stimulate the development of the national economy. We will continue maintaining active cooperation with other international political and economic centers," he said.
The development of economic links with Russia, especially in the aircraft construction and energy spheres, maintains one of the main planks of Ukrainian foreign policy, the president said.
"We are returning again to cooperation and strategic partnership," he said.
Relations between Russia and Ukraine sunk to post-Soviet lows during the presidency of Yanukovych's pro-western predecessor Viktor Yushchenko, but ties have improved significantly since Yanukovych's election in February.
Ukraine also intends to develop its ties with the United States and developing countries, Yanukovych said.
"We are planning to raise relations with China, India and South Korea to a strategic level," he said.
Ukraine has no alternative for the European choice, but since the EU is not ready even to discuss the Ukrainian membership, we will choose the pace, forms and methods of integration by ourselves, in accordance with our national interests," Yanukovych told participants in a forum of the Yalta European Strategy (YES) organization promoting Ukraine's integration with Europe.
"Integration should stimulate the development of the national economy. We will continue maintaining active cooperation with other international political and economic centers," he said.
The development of economic links with Russia, especially in the aircraft construction and energy spheres, maintains one of the main planks of Ukrainian foreign policy, the president said.
"We are returning again to cooperation and strategic partnership," he said.
Relations between Russia and Ukraine sunk to post-Soviet lows during the presidency of Yanukovych's pro-western predecessor Viktor Yushchenko, but ties have improved significantly since Yanukovych's election in February.
Ukraine also intends to develop its ties with the United States and developing countries, Yanukovych said.
"We are planning to raise relations with China, India and South Korea to a strategic level," he said.
Tuesday, 31 August 2010
Germany, Ukraine Want To Modernise Gas Pipelines
BERLIN, Germany -- Germany and Ukraine want to work together to modernise gas pipelines in the former Soviet satellite state, the two countries' leaders said on Monday.At a joint news conference with Ukrainian President Viktor Yanukovich, German Chancellor Angela Merkel said the two countries would launch a business forum this autumn as a platform for the expansion of energy ties and German investment.
"In particular, the possibility should be discussed of how and to what extent Germany can play a constructive role in the restructuring of the Ukrainian gas market," Merkel said.
Ukraine runs the main transit route for Russian gas headed to Europe, and Kiev and Moscow have a history of gas pricing disputes that have disrupted European supplies.
However, those disputes took place amid badly strained relations between the Kremlin and Ukraine's pro-Western former President Viktor Yushchenko.
Yanukovich, who has tilted foreign policy sharply back towards Russia since taking office, said he had proposed certain plans to Merkel, but did not mention specifics.
"Ukraine wants to be, and will be, a dependable partner for both Russia, a gas supplier, and Europe, an end user," he said.
It was in Europe's interest to help modernise the pipelines in order to gain influence over their use, he added.
Yanukovich says that taking Ukraine into the European mainstream is the focus of his foreign policy.
Ukrainian President Pledges To Tackle ‘Ransacking’ Corruption
BERLIN, Germany -- Ukrainian President Viktor Yanukovych said the former Soviet republic needs to tackle corruption that’s “ransacking” the state’s budget in order to lure investors and forge ties with the European Union.
The Ukrainian parliament will begin passing laws reforming the court system next month as a way to rebuild trust among international investors, Yanukovych said in a speech today in Berlin.
“Today we confront the terrible cases of corruption and the ransacking of the budget,” Yanukovych said. “The country cannot go on like this.”
During a meeting with German Chancellor Angela Merkel, Yanukovych said Ukraine would be a “trustworthy partner” for the west, citing disputes with Russia over natural gas that have disrupted deliveries to Europe twice since early in 2006.
Merkel took aim at Ukraine’s press freedoms, saying that “we still have questions” on the issue.
Yanukovych’s seven-month-old government has bolstered relations with Russia and scrapped policies of his Western- oriented predecessor, Viktor Yushchenko. Russian President Dmitry Medvedev in April cut Ukraine’s gas price by about 30 percent, while the Ukrainian government agreed to extend Russia’s lease on a naval port in the Black Sea.
Merkel said she supported an association treaty between the EU and Ukraine, which ships about 80 percent of Russia’s gas exports to Europe.
“We are obligated to find a solution that can really exclude any future instability as far as gas delivery is concerned,” Yanukovych said after meeting with Merkel.
The Ukrainian parliament will begin passing laws reforming the court system next month as a way to rebuild trust among international investors, Yanukovych said in a speech today in Berlin.
“Today we confront the terrible cases of corruption and the ransacking of the budget,” Yanukovych said. “The country cannot go on like this.”
During a meeting with German Chancellor Angela Merkel, Yanukovych said Ukraine would be a “trustworthy partner” for the west, citing disputes with Russia over natural gas that have disrupted deliveries to Europe twice since early in 2006.
Merkel took aim at Ukraine’s press freedoms, saying that “we still have questions” on the issue.
Yanukovych’s seven-month-old government has bolstered relations with Russia and scrapped policies of his Western- oriented predecessor, Viktor Yushchenko. Russian President Dmitry Medvedev in April cut Ukraine’s gas price by about 30 percent, while the Ukrainian government agreed to extend Russia’s lease on a naval port in the Black Sea.
Merkel said she supported an association treaty between the EU and Ukraine, which ships about 80 percent of Russia’s gas exports to Europe.
“We are obligated to find a solution that can really exclude any future instability as far as gas delivery is concerned,” Yanukovych said after meeting with Merkel.
Tuesday, 10 August 2010
Ukrainian Leader Puts Economic Recovery Ahead Of Democracy
KIEV, Ukraine -- Anti-national measures and attacks on democracy have become a feature of the new presidency of Viktor Yanukovych of Ukraine.
In July, in an article entitled "The New Political Regime in Ukraine: Toward Sultanism Yanukovych-Style?" American political scientist Alexander J. Motyl predicts the imminent collapse of the Yanukovych presidency in Ukraine.
The new leader, he writes, is a figure of ridicule and will either fail to initiate reforms, leading to a new economic crisis, or else he might initiate them but undermine his own power base in the Sovietized Donbas region in eastern Ukraine.
Motyl's conclusions appear premature. Indeed what is happening in Ukraine currently is less "Sultanism" than a gradual takeover by a determined, if not ruthless political force -- the Regions Party -- combined with perceptible economic recovery and increasing popularity of the Yanukovych leadership.
This popularity has been generated in part by the introduction of a semblance of order into a situation that appeared earlier to be one of total chaos.
How has this occurred and what does it mean for the future of Ukraine?
In the first place, the Yanukovych team has extricated itself from many of the commitments of the president's predecessor, Viktor Yushchenko. Ukraine no longer seeks to join NATO and has declared itself to be neutral and non-aligned. It has blatantly favoured the Moscow Patriarchate of the Orthodox Church, which has 9 million members, far less than the Kyiv Patriarchate.
In other areas, it has improved relations with Russia and ended the "gas war," but without committing itself to the CSTO or Russian ambitions for the independence of South Ossetia and Abkhazia.
Conversely, Ukraine in the long-term remains hopeful of attaining membership of the European Union, a move that has the support of Donetsk steel magnate Rinat Akhmetov, Ukraine's richest man and a key member of the Regions team.
The Yanukovych cabinet, heavily weighted in favour of his home region, Donetsk, contains its share of Neanderthals. Prime Minister Nikolai Azarov (nee Pakhlo), a native of Kaluga, Russia, who moved to Donetsk in 1984, elected not to appoint a single woman to his cabinet.
Minister of the Interior Anatoly Mohylyov has boosted the powers of the police and abolished the Department for the Monitoring of Human Rights. Education Minister Dmytro Tabachnyk, a historian, is an advocate of Russian-language rights in Ukraine.
The opposition, meanwhile, is subdued and divided. The Regions Party has the support of about 265 deputies in the 450-member parliament, based on its alliance with the bloc of Speaker Volodymyr Lytvyn. It engineered this majority by a combination of bribery and persuasion to entice individual MPs and former members of other factions to join with Regions.
The government has largely taken over the media and only a handful of outlets now offer serious criticism of the new leadership. It has revamped Ukraine's security service, the SBU, which has begun to monitor real and potential oppositionists at a level not seen since the days of Leonid Kuchma (president from 1994 to 2004).
Yulia Tymoshenko, the opposition leader, is badly discredited, largely a result of the economic implosion that occurred during her tenure as prime minister. Although she came close to winning the presidency earlier this year, her political eclipse seems complete.
But no other leader has emerged to replace her in what was once believed to be a potentially strong opposition. Instead, the Regions team is rapidly entrenching itself for a lengthy period in power.
That is evident from preparations for the October 2010 municipal elections. Once again the government has introduced new rules, disenfranchising political blocs and parties in operation for less than one year. In one stroke, therefore, some of the main opposition forces have been disbarred, including the Yulia Tymoshenko Bloc, and Ukraine's newest political party, For Fairness and Prosperity, founded only in July.
Yanukovych and his team have undermined democracy, flouted the constitution at will, and imperilled national development. Some analysts have described the situation as the "Putinization" of Ukraine.
And yet Motyl's prediction of an imminent collapse -- at least by 2012 -- is far-fetched. Opinion polls suggest at least 45 per cent of the electorate believes Ukraine is heading in the right direction. GDP will rise between three and five per cent in 2010 following a fall of over 15 per cent last year.
Standard and Poor raised Ukraine's long-term sovereign foreign currency rating from B to B+ on July 30. Austerity measures, including higher prices for gas, paved the way for the $15.15 billion standby loan from the IMF, with $1.89 billion available immediately to allow Ukraine to meet its current payments.
The economic reform program is in the hands of a non-member of the Regions team, Serhiy Tyhypko, who placed third in the 2010 presidential election and was appointed one of six deputy prime ministers. However, he is far too independent-minded for the government and his departure will likely soon follow now that the IMF loan has been secured.
That the president is an awkward public speaker, clownish, prone to mixing up events and places, and has a checkered past is well known. But his personal foibles and his government's assault on democracy and Ukrainian national interests appear to be less important to the population than economic recovery.
This attitude, which may reverse the democratic gains of the Orange Revolution, is undoubtedly shortsighted but it is borne of difficult -- even desperate -- economic times.
In July, in an article entitled "The New Political Regime in Ukraine: Toward Sultanism Yanukovych-Style?" American political scientist Alexander J. Motyl predicts the imminent collapse of the Yanukovych presidency in Ukraine.
The new leader, he writes, is a figure of ridicule and will either fail to initiate reforms, leading to a new economic crisis, or else he might initiate them but undermine his own power base in the Sovietized Donbas region in eastern Ukraine.
Motyl's conclusions appear premature. Indeed what is happening in Ukraine currently is less "Sultanism" than a gradual takeover by a determined, if not ruthless political force -- the Regions Party -- combined with perceptible economic recovery and increasing popularity of the Yanukovych leadership.
This popularity has been generated in part by the introduction of a semblance of order into a situation that appeared earlier to be one of total chaos.
How has this occurred and what does it mean for the future of Ukraine?
In the first place, the Yanukovych team has extricated itself from many of the commitments of the president's predecessor, Viktor Yushchenko. Ukraine no longer seeks to join NATO and has declared itself to be neutral and non-aligned. It has blatantly favoured the Moscow Patriarchate of the Orthodox Church, which has 9 million members, far less than the Kyiv Patriarchate.
In other areas, it has improved relations with Russia and ended the "gas war," but without committing itself to the CSTO or Russian ambitions for the independence of South Ossetia and Abkhazia.
Conversely, Ukraine in the long-term remains hopeful of attaining membership of the European Union, a move that has the support of Donetsk steel magnate Rinat Akhmetov, Ukraine's richest man and a key member of the Regions team.
The Yanukovych cabinet, heavily weighted in favour of his home region, Donetsk, contains its share of Neanderthals. Prime Minister Nikolai Azarov (nee Pakhlo), a native of Kaluga, Russia, who moved to Donetsk in 1984, elected not to appoint a single woman to his cabinet.
Minister of the Interior Anatoly Mohylyov has boosted the powers of the police and abolished the Department for the Monitoring of Human Rights. Education Minister Dmytro Tabachnyk, a historian, is an advocate of Russian-language rights in Ukraine.
The opposition, meanwhile, is subdued and divided. The Regions Party has the support of about 265 deputies in the 450-member parliament, based on its alliance with the bloc of Speaker Volodymyr Lytvyn. It engineered this majority by a combination of bribery and persuasion to entice individual MPs and former members of other factions to join with Regions.
The government has largely taken over the media and only a handful of outlets now offer serious criticism of the new leadership. It has revamped Ukraine's security service, the SBU, which has begun to monitor real and potential oppositionists at a level not seen since the days of Leonid Kuchma (president from 1994 to 2004).
Yulia Tymoshenko, the opposition leader, is badly discredited, largely a result of the economic implosion that occurred during her tenure as prime minister. Although she came close to winning the presidency earlier this year, her political eclipse seems complete.
But no other leader has emerged to replace her in what was once believed to be a potentially strong opposition. Instead, the Regions team is rapidly entrenching itself for a lengthy period in power.
That is evident from preparations for the October 2010 municipal elections. Once again the government has introduced new rules, disenfranchising political blocs and parties in operation for less than one year. In one stroke, therefore, some of the main opposition forces have been disbarred, including the Yulia Tymoshenko Bloc, and Ukraine's newest political party, For Fairness and Prosperity, founded only in July.
Yanukovych and his team have undermined democracy, flouted the constitution at will, and imperilled national development. Some analysts have described the situation as the "Putinization" of Ukraine.
And yet Motyl's prediction of an imminent collapse -- at least by 2012 -- is far-fetched. Opinion polls suggest at least 45 per cent of the electorate believes Ukraine is heading in the right direction. GDP will rise between three and five per cent in 2010 following a fall of over 15 per cent last year.
Standard and Poor raised Ukraine's long-term sovereign foreign currency rating from B to B+ on July 30. Austerity measures, including higher prices for gas, paved the way for the $15.15 billion standby loan from the IMF, with $1.89 billion available immediately to allow Ukraine to meet its current payments.
The economic reform program is in the hands of a non-member of the Regions team, Serhiy Tyhypko, who placed third in the 2010 presidential election and was appointed one of six deputy prime ministers. However, he is far too independent-minded for the government and his departure will likely soon follow now that the IMF loan has been secured.
That the president is an awkward public speaker, clownish, prone to mixing up events and places, and has a checkered past is well known. But his personal foibles and his government's assault on democracy and Ukrainian national interests appear to be less important to the population than economic recovery.
This attitude, which may reverse the democratic gains of the Orange Revolution, is undoubtedly shortsighted but it is borne of difficult -- even desperate -- economic times.
Thursday, 15 July 2010
Kudrin urges higher pension age
Finance Minister Alexei Kudrin and President Dmitry Medvedev seem to be locked on a collision course over retirement ages.
The pair differed once again on Tuesday, with Kudrin telling delegates at an investment forum that Russians would have to work longer for their pensions before the president pointedly ignored the issue in his budget speech.
Faced with an ageing population and a likely shortfall in revenue to feed the national pension pot, Kudrin is eager to push the official retirement age up by as much as five years, from 60 for men and 55 for women.
In a country where male life expectancy hovers around 59 years, the prospect of delaying retirement age is unlikely to be supported by voters.
“If the government increases the pension age, it is a sign for people that the system is tightening – so it is not good for their election approach,” said Olga Kuzina, a socio-economist at the Higher School of Economics.
Hours after Kudrin had spoken at the Renaissance Capital annual conference, Medvedev delivered his budget speech – making no mention of a longer working life for Russians.
He acknowledged that there were “serious challenges” facing the system, but stopped well short of endorsing – or even referring to – Kudrin’s call to raise retirement ages.
Kudrin had acknowledged at the forum that his plan would come to fruition “maybe not today, and maybe not tomorrow but sometime”, quoting dialogue from Humphrey Bogart in Casablanca. Kuzina said the decision was likely to be delayed until after the 2012 presidential election.
The difference between the positions was perhaps summed up by Kudrin, who explained that his job was simply to ensure a balanced budget.
The president, mindful of the 2012 election, used his budget speech to court groups most affected by the crisis as the government remains aware of potential social tensions.
“What’s especially important is that we were able to maintain social stability, mitigate the social impacts of the [economic] crisis, and ensure – even in this difficult economic setting – a real increase in the level of support provided to our most vulnerable citizens, including pensioners,” Medvedev said.
Pensions are expected to grow between 33 per cent and 42 per cent this year from the January average of 7,100 roubles a month.
“Pensioners are very good at turning out in elections and choosing the proper candidates,” said Kuzina.
Russia has one of the lowest retirement ages in Europe – and attempts to increase it have divided political parties.
Nikolai Levichev, leader of the nationalist Just Russia party’s faction in the State Duma, told Gzt.ru that the president had deliberately ducked the issue, adding that he did not understand Medvedev’s position.
But there was support from United Russia Duma deputies, mindful of upcoming elections and the dangers of inflicting unpopular measures on the public.
United Russia deputy chairman Valery Ryazan agreed with Medvedev’s reluctance to raise the age limit.
“We need to improve working conditions and increase employers’ contributions to the pension fund,” he informed.
Medvedev, however, recently introduced new legislation which would force state employees to step down at 65.
Wednesday, 16 June 2010
Azarov: Talks With IMF Difficult Due To Loss Of Its Confidence In Ukrainian Authorities
KIEV, Ukraine -- Ukraine's talks with the International Monetary Fund (IMF) about the start of a new cooperation program are being delayed due to a loss of the fund's confidence in Kyiv, caused by the failure of the country's former leadership to fulfill their promises, Prime Minister Mykola Azarov has said
"None of the conditions of the previous program, which was signed by the previous government and [former] President [Viktor Yuschenko], have been implemented. But the money was coming... And the IMF has lost confidence in the Ukrainian authorities and the government, and the main difficulty of the talks lies in this," he said in the Exam for the Authorities program on the First National TV Channel on Monday.
Azarov said that the government was trying to prove that the deficit of 5.3% of GDP foreseen in the 2010 state budget is realistic and to confirm its desire to keep the deficit within these limits, noting that the deficit totaled 1.4% GDP in the first five months of 2010.
He said that the previous government had not tried to fulfill their promises to the IMF, in particular, to raise tariffs for the population.
"She was very trusting," Azarov said, while speaking about Ceyla Pazarbasioglu, the former IMF mission chief for Ukraine who served at this post until January 2010.
He noted that the program of cooperation with the IMF, under which Ukraine received about $11 billion in 2008-2009, was terminated last autumn, and that a new program with new conditions was currently being drafted.
"We'll not act as irresponsibly as our predecessors did," Azarov said.
He said that the IMF's demands were reasonable and that the government shared these positions, in particular, to limit the deficit of the budget and the Pension Fund, switch Naftogaz Ukrainy to profitable work and bring tariffs in line with the prime cost.
Azarov said he was optimistic about the prospects for approval of a new program, despite the complexity of negotiations with the IMF.
The IMF in autumn 2008 decided to disburse about $17 billion under the Stand-By Arrangement (SBA). Since then, Ukraine has already received three tranches worth almost $11 billion.
The first $4.5 billion tranche was given to the National Bank of Ukraine (NBU) in November 2008. The IMF's second tranche - worth about $3 billion - was extended in May 2009, with those funds being split between the NBU and the government of then Prime Minister Yulia Tymoshenko.
The third tranche (worth $3.5 billion) was provided in August 2009 and was at the disposal of the Tymoshenko government alone.
The allocation of the fourth tranche, worth $3.8 billion, was scheduled for November 2009 following the third review of the IMF's cooperation program with Ukraine. The IMF mission ended its work in Kyiv late in October 2009, but did not issue a positive statement on the completion of the review.
The new Ukrainian government plans to receive $19-20 billion from the IMF in the next two-and-a-half years under a new cooperation program. According to Ukraine's national budget for 2010, $2 billion is to be raised for direct financing of the budget this year.
Deputy Director of the IMF's European Department Poul Thomsen and IMF Mission Chief for Ukraine Thanos Arvanitis agreed during their visit to Kyiv last week that the IMF mission would start working in Ukraine on June 21 to work out the draft of the new program of cooperation.
"None of the conditions of the previous program, which was signed by the previous government and [former] President [Viktor Yuschenko], have been implemented. But the money was coming... And the IMF has lost confidence in the Ukrainian authorities and the government, and the main difficulty of the talks lies in this," he said in the Exam for the Authorities program on the First National TV Channel on Monday.
Azarov said that the government was trying to prove that the deficit of 5.3% of GDP foreseen in the 2010 state budget is realistic and to confirm its desire to keep the deficit within these limits, noting that the deficit totaled 1.4% GDP in the first five months of 2010.
He said that the previous government had not tried to fulfill their promises to the IMF, in particular, to raise tariffs for the population.
"She was very trusting," Azarov said, while speaking about Ceyla Pazarbasioglu, the former IMF mission chief for Ukraine who served at this post until January 2010.
He noted that the program of cooperation with the IMF, under which Ukraine received about $11 billion in 2008-2009, was terminated last autumn, and that a new program with new conditions was currently being drafted.
"We'll not act as irresponsibly as our predecessors did," Azarov said.
He said that the IMF's demands were reasonable and that the government shared these positions, in particular, to limit the deficit of the budget and the Pension Fund, switch Naftogaz Ukrainy to profitable work and bring tariffs in line with the prime cost.
Azarov said he was optimistic about the prospects for approval of a new program, despite the complexity of negotiations with the IMF.
The IMF in autumn 2008 decided to disburse about $17 billion under the Stand-By Arrangement (SBA). Since then, Ukraine has already received three tranches worth almost $11 billion.
The first $4.5 billion tranche was given to the National Bank of Ukraine (NBU) in November 2008. The IMF's second tranche - worth about $3 billion - was extended in May 2009, with those funds being split between the NBU and the government of then Prime Minister Yulia Tymoshenko.
The third tranche (worth $3.5 billion) was provided in August 2009 and was at the disposal of the Tymoshenko government alone.
The allocation of the fourth tranche, worth $3.8 billion, was scheduled for November 2009 following the third review of the IMF's cooperation program with Ukraine. The IMF mission ended its work in Kyiv late in October 2009, but did not issue a positive statement on the completion of the review.
The new Ukrainian government plans to receive $19-20 billion from the IMF in the next two-and-a-half years under a new cooperation program. According to Ukraine's national budget for 2010, $2 billion is to be raised for direct financing of the budget this year.
Deputy Director of the IMF's European Department Poul Thomsen and IMF Mission Chief for Ukraine Thanos Arvanitis agreed during their visit to Kyiv last week that the IMF mission would start working in Ukraine on June 21 to work out the draft of the new program of cooperation.
Thursday, 22 April 2010
Ukraine Has $1.4 Billion In Domestic Debt Payments
KIEV, Ukraine -- Ukraine’s government must pay 11 billion hryvnia ($1.4 billion) by the end of next month to service domestic debt, as the country waits for international loan donors to resume payments needed to fund its budget.
The government has to repay 6 billion hryvnia this month and 5 billion hryvnia next month, Prime Minister Mykola Azarov said at a meeting with the confederation of industrial companies in the capital Kiev today. The government also needs to cover about 4 billion hryvnia in pension costs, Azarov said, without elaborating.
“This is a bomb under our financial stability,” he said.
Borrowing costs rose to 15 percent at an auction of 3.3 million hryvnia last week, compared with 11.42 percent at the end of March, as investors wait for the International Monetary Fund to resume its $16.4 billion program to help Ukraine cover its financing needs. Credit default swaps on five-year debt rose 20 basis points yesterday to 523, the biggest jump since Feb. 4.
The former Soviet state has received $10.6 billion from the Washington-based lender to date. Deputy Premier Serhiy Tigipko said in an April 15 interview his government struck a deal to extend its IMF program.
The government is also trying to reduce its budget deficit by negotiating a lower price for gas imports from Russia. Azarov said today those talks were “extremely difficult,” as he urged manufacturers to reduce their energy consumption.
“Everything depends on Russia’s good will,” Azarov said. Manufacturers need to consume less energy because Ukraine “cannot buy such expensive gas,” he said.
The government has to repay 6 billion hryvnia this month and 5 billion hryvnia next month, Prime Minister Mykola Azarov said at a meeting with the confederation of industrial companies in the capital Kiev today. The government also needs to cover about 4 billion hryvnia in pension costs, Azarov said, without elaborating.
“This is a bomb under our financial stability,” he said.
Borrowing costs rose to 15 percent at an auction of 3.3 million hryvnia last week, compared with 11.42 percent at the end of March, as investors wait for the International Monetary Fund to resume its $16.4 billion program to help Ukraine cover its financing needs. Credit default swaps on five-year debt rose 20 basis points yesterday to 523, the biggest jump since Feb. 4.
The former Soviet state has received $10.6 billion from the Washington-based lender to date. Deputy Premier Serhiy Tigipko said in an April 15 interview his government struck a deal to extend its IMF program.
The government is also trying to reduce its budget deficit by negotiating a lower price for gas imports from Russia. Azarov said today those talks were “extremely difficult,” as he urged manufacturers to reduce their energy consumption.
“Everything depends on Russia’s good will,” Azarov said. Manufacturers need to consume less energy because Ukraine “cannot buy such expensive gas,” he said.
Russian quarterly economic growth 'slows to 0.6%'
Russia's economy grew by 0.6% from January to March, slower than during the previous two quarters, according to the economic development ministry.
Minister Elvira Nabiullina said there were signs of revival, but "investment and consumer demand is not yet stable".
Russia's statistical agency, Rosstat, will not issue its preliminary estimate of the country's first-quarter GDP until mid-May.
Russia, hit hard by the global crisis, saw its economy fall by 7.9% in 2009.
The country spent a year in recession before returning to growth in the third quarter of 2009.
The economy expanded by 2% in the July-September period of 2009, followed by growth of 1.7% in the final three months of the year, according to Ms Nabiullina.
Russian Prime Minister Vladimir Putin said on Tuesday that Russia's recession was over, but not the crisis.
"The situation really has been quite complicated," Mr Putin told the Russian parliament.
"It is now far from benign, but the gloomiest predictions were not realised - and not because we were simply lucky."
She added that Russia's gross domestic product rose in March by 4.9% in comparison with the same month a year ago, while in February, the Russian economy grew 3.9% year-on-year.
Russian Finance Minister Alexei Kudrin told journalists on Tuesday that the country's GDP growth might reach 4% this year, more than the initial official forecast of 3.1%.
The country's economy is heavily dependent on oil and gas revenues.
Sunday, 11 April 2010
US data stalls Russian markets
The nine-day winning streak on Russia's bourses ran out of steam on Wednesday as heavy profit-taking in utilities and disappointing US economic data brought markets down to earth.
The dollar-denominated RTS was down 1.2 per cent following the 7.8 per cent rally, the longest since 2005, led by OGK-3, which dropped 9 per cent. Despite the losses, utilities names are one of the strongest performers of the year, up more than 40 per cent, and analysts say the fundamentals remain strong.
The capacity market remains crucial for further growth because it will provide around 50 per cent of revenues for firms, but uncertainty over a government decree on its development has made investors wary.
"Growth was not based on fundamentals but on expectation of capacity market implementation, and now there is still uncertainty related to that," said Sergey Beyden, senior utilities analyst at Metropol.
According to Beyden, while some upside remains many investors have already factored in the deal on the capacity market even though generators and consumers are yet to reach a deal.
The government originally wanted to get an agreement by the end of March, but the deadline is becoming more pressing if authorities want the market to open up next year - and any resolution could send stocks either way.
"We are seeing a correction now related to [the capacity market] but it will be complicated and will take time before it is factored in," said Beyden. "There will be a rally or correction dependent on what sort of capacity market is implemented."
The generators best placed to exploit the capacity market will have the largest upside once the decree is issued but most of the OGKs are likely to be the beneficiaries of any deal.
"OGK-2 and some other names like OGK-4 will be most exposed to this growth," said Skryabin.
However, the generators were down further on Thursday as Moscow's bourses continued ailing after US exchanges fell slightly overnight and oil dropped back by $0.90 a barrel.
The RTS was down 1.38 per cent by midday on Thursday ahead of interest rate announcements by the Bank of England and the European Central Bank, though no changes were forecast.
Meanwhile, Moscow's MICEX index is weighing up an offer for the RTS after they finish consolidating new assets, Central Bank's head of financial markets, Sergei Shvetsov, as saying on Wednesday.
Sunday, 21 March 2010
Australia: Uranium allows sales to Russia, but not to India
CANBERRA, Australia — Any Australian uranium sales to Russia would meet nonproliferation requirements, but the government remains firmly against sales to India, Trade Minister Simon Crean said Friday.
The government on Thursday rejected a 2008 parliamentary report's recommendation that Australia not proceed with an agreement to sell uranium to Russia.
The report expressed concerns that the uranium could be stolen or diverted for weapons use.
The government said it has not yet made a final decision on whether to ratify the agreement, signed in 2007 by former Prime Minister John Howard and Russian President Vladimir Puton, who is now Russia's prime minister.
But it said the agreement met Australia's long-standing condition that the country's uranium only be used for peaceful purposes.
"We have taken considerable time on our part to ensure we're satisfied, the International Atomic Energy Agency is satisfied, that the strictest of safeguards are in place," Crean told Australian Broadcasting Corp. television on Friday.
But Crean said Australia would not restart negotiations with India on uranium sales to fuel its expanding nuclear power industry.
Howard's conservative government started negotiations with India on uranium sales just months before Prime Minister Kevin Rudd's center-left government was swept to power in 2007 elections but ruled out exports unless it signs the Nuclear Nonproliferation Treaty.
"The signal to India ... is that this is the way in which they can be recipients of our supply and it's for India to respond to that," Crean said.
If the Russian agreement is submitted to Parliament for ratification, it is expected to easily pass because the main opposition party backs nuclear trade with Moscow.
Environmentalists including the Australian Conservation Foundation, however, oppose uranium exports to Russia.
The government on Thursday rejected a 2008 parliamentary report's recommendation that Australia not proceed with an agreement to sell uranium to Russia.
The report expressed concerns that the uranium could be stolen or diverted for weapons use.
The government said it has not yet made a final decision on whether to ratify the agreement, signed in 2007 by former Prime Minister John Howard and Russian President Vladimir Puton, who is now Russia's prime minister.
But it said the agreement met Australia's long-standing condition that the country's uranium only be used for peaceful purposes.
"We have taken considerable time on our part to ensure we're satisfied, the International Atomic Energy Agency is satisfied, that the strictest of safeguards are in place," Crean told Australian Broadcasting Corp. television on Friday.
But Crean said Australia would not restart negotiations with India on uranium sales to fuel its expanding nuclear power industry.
Howard's conservative government started negotiations with India on uranium sales just months before Prime Minister Kevin Rudd's center-left government was swept to power in 2007 elections but ruled out exports unless it signs the Nuclear Nonproliferation Treaty.
"The signal to India ... is that this is the way in which they can be recipients of our supply and it's for India to respond to that," Crean said.
If the Russian agreement is submitted to Parliament for ratification, it is expected to easily pass because the main opposition party backs nuclear trade with Moscow.
Environmentalists including the Australian Conservation Foundation, however, oppose uranium exports to Russia.
Sunday, 31 January 2010
Chinese bubble threatens Russian resurgence
Russia's fragile recovery could be threatened by the bursting of dangerous bubbles in the global economy, economists warn.
Central among these concerns is that Chinese growth, fuelled mainly by government spending, could collapse, the World Bank said in a report released last week.
"[The Chinese] are taking tentative steps to control their budget by forcing banks to curtail lending, and they had previously talked about putting caps on industrial capacity to slow it down because you have all the characteristics of a bubble developing," said Chris Weafer, chief strategist at Uralsib.
China could be the most vulnerable economy, despite being the success story of the crisis and propping up the world with cheap exports, demand for natural resources and GDP growth of 8.7 per cent last year.
Russia - thanks to its reserves and stabilisation fund - is likely to be immune from many symptoms of a double-dip crisis, but if demand does fall, Russia could be hit hard by collapsing commodity prices.
China's boom has had a positive knock-on effect in commodities-dominated Russia, which was boosted by rises in the oil price and commodities market last year.
Oil prices shot up from lows of $30 to around $80 in 2009, propping up the Russian economy and line the government's coffers but signs that the recession isn't over could send the price of oil spiralling.
"The oil forecasts are based on the view that the global economy is going to get back to the growth rates we saw midway through last decade and we simply don't think that is the case," said Neil Shearing, an economist at London-based Capital Economics.
Following the scare in Dubai and concerns about Greece's sovereign debt, emerging markets have looked most at risk, but developed economies are also facing the same demon.
The US budget deficit hit $1.4 trillion, or 11.2 per cent of GDP, in 2009 and governments are going to have to start lowering the debt burden as they emerge from the crisis, according to some economists.
Influential US economist Nouriel Roubini, who accurately predicted in advance the financial crisis of 2008, has warned that prolonged fiscal deficits could put a "chokehold on growth".
"Right now we have prevented too much slowing down [with fiscal spending] but in future this will keep recovery rates low and they could be low, even if the government has no debt," said Vladimir Bragin, chief economist at Trust Bank.
Like Greece, which is facing demands to cut budget spending, other countries in the EU are going to be forced into a no-win situation of either raising taxes or cutting spending."There is no chance of avoiding this process because if stimulus is withdrawn now, it will slow down the economy even further," said Bragin.
Europe has shown how dependent some sectors are on government stimulus after the German government withdrew its "cash-for-clunkers" scheme, causing sales across Europe to drop off rapidly."We saw this huge surge in exports, 50 per cent of which was in the vehicles sector, and that was almost exclusively owed to clash for clunkers," said Shearing.
Russia does not have the same problem as many other countries, having not borrowed externally to finance its deficit of 5.9 per cent of GDP, and could potentially spend its stabilisation fund on stimulus packages."There is little pressure to reign in fiscal policy but [Finance Minister Alexei] Kudrin seems hell-bent on it and that will be to the detriment of growth," said Shearing.
Kudrin's tough stance on the budget deficit, along with his claim that the RTS was overvalued following its 129 per cent gain last year, demonstrates his concern that the stock market is bubbling over before real economic growth returns.
Investors, however, still see Moscow's bourses as cheap compared to other markets, with 2010 price-to-earnings ratios still below 10.
"I don't agree with some of the concerns that the stock market has risen so fast it is causing a bubble, because people are looking at ... what happened in 2009 and not 2008," said Weafer.
Meanwhile, Russia's real economy remains in the doldrums. Key indicators such as GDP and property prices are not yet recovering, although the decline has been halted.
Risks remain to Russia if a second dip occurs worldwide, as earnings will slide and investors will look for safety in the dollar, taking their money away from Russia's risky assets.
"While the overall market and the economy are not showing characteristics of a bubble, the companies that have shown that pace of price appreciation on the back of the Chinese bubble are more at risk than the rest of the market," said Weafer.
Central among these concerns is that Chinese growth, fuelled mainly by government spending, could collapse, the World Bank said in a report released last week.
"[The Chinese] are taking tentative steps to control their budget by forcing banks to curtail lending, and they had previously talked about putting caps on industrial capacity to slow it down because you have all the characteristics of a bubble developing," said Chris Weafer, chief strategist at Uralsib.
China could be the most vulnerable economy, despite being the success story of the crisis and propping up the world with cheap exports, demand for natural resources and GDP growth of 8.7 per cent last year.
Russia - thanks to its reserves and stabilisation fund - is likely to be immune from many symptoms of a double-dip crisis, but if demand does fall, Russia could be hit hard by collapsing commodity prices.
China's boom has had a positive knock-on effect in commodities-dominated Russia, which was boosted by rises in the oil price and commodities market last year.
Oil prices shot up from lows of $30 to around $80 in 2009, propping up the Russian economy and line the government's coffers but signs that the recession isn't over could send the price of oil spiralling.
"The oil forecasts are based on the view that the global economy is going to get back to the growth rates we saw midway through last decade and we simply don't think that is the case," said Neil Shearing, an economist at London-based Capital Economics.
Following the scare in Dubai and concerns about Greece's sovereign debt, emerging markets have looked most at risk, but developed economies are also facing the same demon.
The US budget deficit hit $1.4 trillion, or 11.2 per cent of GDP, in 2009 and governments are going to have to start lowering the debt burden as they emerge from the crisis, according to some economists.
Influential US economist Nouriel Roubini, who accurately predicted in advance the financial crisis of 2008, has warned that prolonged fiscal deficits could put a "chokehold on growth".
"Right now we have prevented too much slowing down [with fiscal spending] but in future this will keep recovery rates low and they could be low, even if the government has no debt," said Vladimir Bragin, chief economist at Trust Bank.
Like Greece, which is facing demands to cut budget spending, other countries in the EU are going to be forced into a no-win situation of either raising taxes or cutting spending."There is no chance of avoiding this process because if stimulus is withdrawn now, it will slow down the economy even further," said Bragin.
Europe has shown how dependent some sectors are on government stimulus after the German government withdrew its "cash-for-clunkers" scheme, causing sales across Europe to drop off rapidly."We saw this huge surge in exports, 50 per cent of which was in the vehicles sector, and that was almost exclusively owed to clash for clunkers," said Shearing.
Russia does not have the same problem as many other countries, having not borrowed externally to finance its deficit of 5.9 per cent of GDP, and could potentially spend its stabilisation fund on stimulus packages."There is little pressure to reign in fiscal policy but [Finance Minister Alexei] Kudrin seems hell-bent on it and that will be to the detriment of growth," said Shearing.
Kudrin's tough stance on the budget deficit, along with his claim that the RTS was overvalued following its 129 per cent gain last year, demonstrates his concern that the stock market is bubbling over before real economic growth returns.
Investors, however, still see Moscow's bourses as cheap compared to other markets, with 2010 price-to-earnings ratios still below 10.
"I don't agree with some of the concerns that the stock market has risen so fast it is causing a bubble, because people are looking at ... what happened in 2009 and not 2008," said Weafer.
Meanwhile, Russia's real economy remains in the doldrums. Key indicators such as GDP and property prices are not yet recovering, although the decline has been halted.
Risks remain to Russia if a second dip occurs worldwide, as earnings will slide and investors will look for safety in the dollar, taking their money away from Russia's risky assets.
"While the overall market and the economy are not showing characteristics of a bubble, the companies that have shown that pace of price appreciation on the back of the Chinese bubble are more at risk than the rest of the market," said Weafer.
Wednesday, 20 January 2010
Putin Wants Reform of Agriculture Regulations
Prime Minister Vladimir Putin on Tuesday proposed a reform of veterinary regulations that would curb corruption, protect manufacturers and cut costs.
"[We] should switch over to modern, market-driven forms of control, make use of accreditation, insurance mechanisms and the capabilities of independent institutions to provide the evaluation of product quality and security," he said Tuesday chairing an agriculture meeting. "The reduction of excessive bureaucracy should be accompanied by an increase in the responsibility of all market participants."
Putin said a total of 8 billion rubles ($270 million) had been spent by the agricultural sector on certificates and permissions in 2009 alone.
"Under the most conservative estimates, businessmen spent 4 billion rubles to get certificates from the Federal Veterinary and Phytosanitary Inspection Service in 2009 alone," he said, adding that a similar amount was spent on other regional bureaucratic procedures.
In order to transport imported fruits and vegetables from St. Petersburg to Chelyabinsk, one needs to get a veterinary certificate from every town where even one box of produce is dropped off, he said.
Agriculture Minister Yelena Skrynnik estimated that the reforms will result in a 70 percent drop in the bureaucratic burden on the agriculture sector, adding that about half of the current regulations would be changed.
A road map for improving regulations and legislation will be drafted in the next two years, Skrynnik said, adding that the duplication of functions between federal and regional regulators is currently the major cause of problems in veterinary control.
"[We] should switch over to modern, market-driven forms of control, make use of accreditation, insurance mechanisms and the capabilities of independent institutions to provide the evaluation of product quality and security," he said Tuesday chairing an agriculture meeting. "The reduction of excessive bureaucracy should be accompanied by an increase in the responsibility of all market participants."
Putin said a total of 8 billion rubles ($270 million) had been spent by the agricultural sector on certificates and permissions in 2009 alone.
"Under the most conservative estimates, businessmen spent 4 billion rubles to get certificates from the Federal Veterinary and Phytosanitary Inspection Service in 2009 alone," he said, adding that a similar amount was spent on other regional bureaucratic procedures.
In order to transport imported fruits and vegetables from St. Petersburg to Chelyabinsk, one needs to get a veterinary certificate from every town where even one box of produce is dropped off, he said.
Agriculture Minister Yelena Skrynnik estimated that the reforms will result in a 70 percent drop in the bureaucratic burden on the agriculture sector, adding that about half of the current regulations would be changed.
A road map for improving regulations and legislation will be drafted in the next two years, Skrynnik said, adding that the duplication of functions between federal and regional regulators is currently the major cause of problems in veterinary control.
Thursday, 7 January 2010
Russians Circle Ukraine Group
MOSCOW, Russia -- An unnamed Russian group is close to buying control of one of recession-hit Ukraine’s largest steel groups, in a deal that risks causing political controversy in Kiev in the run-up to this month’s presidential election.
It has been learnt that the debt-laden ISD Corporation, which has plants in Poland and Hungary as well as Ukraine, could be sold later this month in a transaction valuing the group up to $2bn (€1.4bn, £1.3bn) with Vnesheconombank, the Russian state bank, playing a role in the acquisition.News of the deal could raise political tensions in Ukraine, where Yulia Tymoshenko, the prime minister, and Viktor Yanukovich, opposition leader, are both bidding to succeed the pro-west Viktor Yushchenko as president. Mr Yushchenko, who is fighting a losing battle to retain office, has repeatedly accused both Ms Tymoshenko and Mr Yanukovich of co-operating too closely with Moscow.They deny the claims. But Mr Yushchenko has kept up the attack and on Sunday said: “Tymoshenko and Yanukovich are the finest representatives of a single Kremlin coalition.”Analysts said the deal is also evidence of Russia’s bid to expand its industrial grip over former Soviet Union countries.While Russian companies have invested heavily in Ukraine, mostly without controversy, the timing of the latest deal could prove difficult for Kiev’s politicians. Two creditors familiar with the situation at ISD, which has struggled to restructure more than $3bn in debts amid falling demand, said they were told by the group’s Ukrainian shareholders that the acquisition would close this month.Vnesheconombank said on Tuesday it was only providing financing for the deal and not taking a stake.The potential buyers include Alisher Usmanov, the mining magnate, and Evraz, a metals group in which billionaire Roman Abramovich has a stake. Both have in recent years expressed interest in ISD. Representatives of Mr Abramovich and Mr Usmanov were not immediately available for comment.The creditors said they were told by ISD the Russian group would take a 50 per cent plus one share stake. Sergei Taruta, Ukrainian billionaire, and his partner, Oleg Mkrtchan, would each retain 25 per cent stakes. Their former partner, Vitali Gaiduk, an adviser to Ms Tymoshenko, would fulfil his ambition to exit the business.Tomas Fiala, managing director of Dragon Capital, a Kiev-based investment bank, put ISD’s enterprise value, equity plus debt, at $4.3bn-$5.3bn.That is far less than ISD’s owners had sought in previous years “For ISD, this was the best option on getting out of a complicated situation with too much debt,” Mr Fiala said. “From our information, the debt restructuring talks were not going well.” Mr Fiala said ISD’s creditors included Citibank, Austria’s Raiffeisen, Société Générale, ING, Calyon Bank, the European Bank for Reconstruction and Development and the International Finance Corporation, a member of the World Bank Group.Troika Dialog, an Moscow investment bank which is acting as exclusive financial advisor on the deal, would say only that the stake was being acquired by ”a group of profile and financial investors”.However, Ruben Vardanian, chairman of Troika, said the deal represented a big move to consolidate metals assets in Russia and Ukraine and boost cooperation between the two countries.”The deal is aimed at realising a strategy of consolidating metals assets across the territory of the [former Soviet Union] and could potentially lead to an expansion of cooperation between Russia and Ukraine, including in the growth of markets for the distribution and consumption of ... coal and iron ore.”
It has been learnt that the debt-laden ISD Corporation, which has plants in Poland and Hungary as well as Ukraine, could be sold later this month in a transaction valuing the group up to $2bn (€1.4bn, £1.3bn) with Vnesheconombank, the Russian state bank, playing a role in the acquisition.News of the deal could raise political tensions in Ukraine, where Yulia Tymoshenko, the prime minister, and Viktor Yanukovich, opposition leader, are both bidding to succeed the pro-west Viktor Yushchenko as president. Mr Yushchenko, who is fighting a losing battle to retain office, has repeatedly accused both Ms Tymoshenko and Mr Yanukovich of co-operating too closely with Moscow.They deny the claims. But Mr Yushchenko has kept up the attack and on Sunday said: “Tymoshenko and Yanukovich are the finest representatives of a single Kremlin coalition.”Analysts said the deal is also evidence of Russia’s bid to expand its industrial grip over former Soviet Union countries.While Russian companies have invested heavily in Ukraine, mostly without controversy, the timing of the latest deal could prove difficult for Kiev’s politicians. Two creditors familiar with the situation at ISD, which has struggled to restructure more than $3bn in debts amid falling demand, said they were told by the group’s Ukrainian shareholders that the acquisition would close this month.Vnesheconombank said on Tuesday it was only providing financing for the deal and not taking a stake.The potential buyers include Alisher Usmanov, the mining magnate, and Evraz, a metals group in which billionaire Roman Abramovich has a stake. Both have in recent years expressed interest in ISD. Representatives of Mr Abramovich and Mr Usmanov were not immediately available for comment.The creditors said they were told by ISD the Russian group would take a 50 per cent plus one share stake. Sergei Taruta, Ukrainian billionaire, and his partner, Oleg Mkrtchan, would each retain 25 per cent stakes. Their former partner, Vitali Gaiduk, an adviser to Ms Tymoshenko, would fulfil his ambition to exit the business.Tomas Fiala, managing director of Dragon Capital, a Kiev-based investment bank, put ISD’s enterprise value, equity plus debt, at $4.3bn-$5.3bn.That is far less than ISD’s owners had sought in previous years “For ISD, this was the best option on getting out of a complicated situation with too much debt,” Mr Fiala said. “From our information, the debt restructuring talks were not going well.” Mr Fiala said ISD’s creditors included Citibank, Austria’s Raiffeisen, Société Générale, ING, Calyon Bank, the European Bank for Reconstruction and Development and the International Finance Corporation, a member of the World Bank Group.Troika Dialog, an Moscow investment bank which is acting as exclusive financial advisor on the deal, would say only that the stake was being acquired by ”a group of profile and financial investors”.However, Ruben Vardanian, chairman of Troika, said the deal represented a big move to consolidate metals assets in Russia and Ukraine and boost cooperation between the two countries.”The deal is aimed at realising a strategy of consolidating metals assets across the territory of the [former Soviet Union] and could potentially lead to an expansion of cooperation between Russia and Ukraine, including in the growth of markets for the distribution and consumption of ... coal and iron ore.”
Tuesday, 29 December 2009
Bankers and Bureaucrats Predict a Tough 2010
As bankers and government officials were clearing out for the New Year’s holiday this week, there was little cause for cheer. Their full-year targets and forecasts were shattered by a global banking collapse, and no one was in the mood to bet on the coming 12 months.
There was a consensus: It’s going to be bad.
But as the Russian economy has begun to stabilize, the country’s prognosticators are returning to the table, and with them comes the task of manufacturing — and managing — expectations.
The government has stayed cautious with its full-year gross domestic product forecasts, trying to find figures that can’t fall short but that will also be of some use for budget planning. Banks are more optimistic on the economy’s prospects, but they also warn that the return to growth could start pushing prices back up.
“If the government’s forecast is below the real figures, then that’s OK, but when the official forecast looks too optimistic by the end of the year, the government faces political consequences,” said Vladimir Tikhomirov, chief economist at UralSib.
The Economic Development Ministry last week updated the three scenarios for its 2010 economic forecast, with pessimistic growth of 1.3 percent, a baseline scenario of 3.1 percent and possible growth of 3.5 percent if oil prices continue to stay above the $58 per barrel forecast used to calculate the 2010 budget.
The ministry’s pessimistic scenario sees an average Urals crude price of $58 to $60 per barrel and combined GDP growth of about 5.3 percent for 2010-2012. The base scenario puts crude at $65 per barrel in 2010, increasing to $70 to $71 in the next two years for three-year GDP growth of 11.1 percent.
The optimistic scenario predicts that crude will average $69 next year, $74 in 2011 and $81 in 2012 — bringing GDP past the precrisis 2008 level by 2.7 percent.
“We forecast that the economic results in Russia in 2010 will be much better than official government forecasts,” UralSib analysts wrote in a research paper. They said GDP would fall 6.9 percent in 2009, year on year, better than the ministry’s expected drop of 8.5 percent.
The economy will return to growth of 5.5 percent in 2010 and 5.9 percent the following year, they said.
Alexander Osin, chief economist at Finam, had a more cautious forecast, although it was still at the high end of the Economic Development Ministry’s guidelines. GDP will grow 3.5 percent in 2010, with a major upturn of 1.4 percent quarter-on-quarter growth coming in the third quarter before slowing back to a quarterly rise of 0.6 in the last three months of 2010, he said.
“GDP growth will be driven by increases in budget expenses and a net export surplus, and therefore we assume the peak of these activities will be in the second and third quarter,” Osin said.
Increased social spending added 2.9 trillion rubles ($97 billion) to the 2010 deficit, according to federal budget documents published earlier this month.
Another major point of contention was inflation, which is now widely expected to register at about 9 percent for 2009.
The government forecasts inflation of 8.8 percent to 9 percent for 2009, according to last week’s revised Economic Development Ministry numbers. Next year, prices may rise 6.5 percent to 7.5 percent, it said.
“The positive momentum of lower inflation is expected to continue into the first half of 2010, as the lower rate in the second half of 2009 came partly from seasonal factors (cheaper food) and partly because of the change in the Central Bank’s monetary policy,” the report said. “Expect a higher global inflation trend from mid-2010, and that will have some contagion for Russia. The expected general economic improvement in Russia by midyear will also add inflationary pressures.”
Anton Pletenev, an analyst at Raiffeisenbank, said he expected average inflation of 8.5 percent to 9 percent next year, while Finam’s Osin said the figure would be 9 percent to 11 percent, depending on what the state does.
And while the Economic Development Ministry may have submitted its best guesses, that hasn’t stopped senior policy makers from offering their macro forecasts for 2010. A number of top officials, most recently President Dmitry Medvedev, have said the economy could grow 5 percent next year — although virtually all have attributed the figure to “experts.”
Alexei Ulyukayev, a Central Bank first deputy chairman, and the Komsomolskaya Pravda newspaper in October made a bet — setting the consumer basket of goods used to calculate the effects of inflation on households as their wager — that full year inflation for 2009 would be less than 11 percent.
The newspaper on Monday conceded defeat and said it would pay him a “consumer basket of the future,” including caviar, crab meat and pineapple instead of the standard items like flour, eggs and sugar.
Last year, Ulyukayev lost a similar bet with Izvestia. He delivered a case of wine to the newspaper after inflation turned out to be higher than in 2007.
Economic Forecasts for 2010
Indicator
Average
Median
Min / Max
GDP, %
3.3
3.3
-1 / 7
Inflation, %
8.3
8.5
5.5 / 11
Industrial Production, %
4.1
4.7
-3 / 8.2
Fixed capital investment, %
5.3
4.2
-4 / 20
Retail goods sales, %
4.2
4
0.5 / 10
Nominal wages, &
8.5
9.3
1.2 / 16.6
Real household incomes, %
3.4
3.1
1 / 8.4
Exports, $Bln
358
353
290 / 413
Imports, $Bln
230
226
184 / 270
Current account balance, $Bln
56
61
16 / 103
Capital inflows / outflows, $Bln
10
16.5
-60 / 60
Direct foreign investment, $Bln
39
45.5
6 / 70
Central Bank refinancing rate
7.9
8
6.5 / 9
Lending rate to nonfinancial sector
12
12.3
10 / 13.6
Increase in lending volume to nonfinancial sector, %
11.4
10
6 / 18
Increase in consumer lending volume, %
9.5
7.6
2 / 18
Average Urals crude price, $ / barrel
72.1
73.4
60 / 90
Ruble / dollar rate at the end of 2010
28.4
28.5
26.2 / 33
Unemployment, %
7.7
7.6
7 / 9
Participants: Alfa Bank, Bank of Moscow, BDO Unicon, Center for Macroeconomic Analysis and Short-Term Forecasting, Citibank, Higher School of Economics’ Development Center, HSBC, ING, Merrill Lynch, Otkritie, Renaissance Capital, Sberbank Macroeconomic Forecasting Center, Troika Dialog, Trust National Bank, UralSib
There was a consensus: It’s going to be bad.
But as the Russian economy has begun to stabilize, the country’s prognosticators are returning to the table, and with them comes the task of manufacturing — and managing — expectations.
The government has stayed cautious with its full-year gross domestic product forecasts, trying to find figures that can’t fall short but that will also be of some use for budget planning. Banks are more optimistic on the economy’s prospects, but they also warn that the return to growth could start pushing prices back up.
“If the government’s forecast is below the real figures, then that’s OK, but when the official forecast looks too optimistic by the end of the year, the government faces political consequences,” said Vladimir Tikhomirov, chief economist at UralSib.
The Economic Development Ministry last week updated the three scenarios for its 2010 economic forecast, with pessimistic growth of 1.3 percent, a baseline scenario of 3.1 percent and possible growth of 3.5 percent if oil prices continue to stay above the $58 per barrel forecast used to calculate the 2010 budget.
The ministry’s pessimistic scenario sees an average Urals crude price of $58 to $60 per barrel and combined GDP growth of about 5.3 percent for 2010-2012. The base scenario puts crude at $65 per barrel in 2010, increasing to $70 to $71 in the next two years for three-year GDP growth of 11.1 percent.
The optimistic scenario predicts that crude will average $69 next year, $74 in 2011 and $81 in 2012 — bringing GDP past the precrisis 2008 level by 2.7 percent.
“We forecast that the economic results in Russia in 2010 will be much better than official government forecasts,” UralSib analysts wrote in a research paper. They said GDP would fall 6.9 percent in 2009, year on year, better than the ministry’s expected drop of 8.5 percent.
The economy will return to growth of 5.5 percent in 2010 and 5.9 percent the following year, they said.
Alexander Osin, chief economist at Finam, had a more cautious forecast, although it was still at the high end of the Economic Development Ministry’s guidelines. GDP will grow 3.5 percent in 2010, with a major upturn of 1.4 percent quarter-on-quarter growth coming in the third quarter before slowing back to a quarterly rise of 0.6 in the last three months of 2010, he said.
“GDP growth will be driven by increases in budget expenses and a net export surplus, and therefore we assume the peak of these activities will be in the second and third quarter,” Osin said.
Increased social spending added 2.9 trillion rubles ($97 billion) to the 2010 deficit, according to federal budget documents published earlier this month.
Another major point of contention was inflation, which is now widely expected to register at about 9 percent for 2009.
The government forecasts inflation of 8.8 percent to 9 percent for 2009, according to last week’s revised Economic Development Ministry numbers. Next year, prices may rise 6.5 percent to 7.5 percent, it said.
“The positive momentum of lower inflation is expected to continue into the first half of 2010, as the lower rate in the second half of 2009 came partly from seasonal factors (cheaper food) and partly because of the change in the Central Bank’s monetary policy,” the report said. “Expect a higher global inflation trend from mid-2010, and that will have some contagion for Russia. The expected general economic improvement in Russia by midyear will also add inflationary pressures.”
Anton Pletenev, an analyst at Raiffeisenbank, said he expected average inflation of 8.5 percent to 9 percent next year, while Finam’s Osin said the figure would be 9 percent to 11 percent, depending on what the state does.
And while the Economic Development Ministry may have submitted its best guesses, that hasn’t stopped senior policy makers from offering their macro forecasts for 2010. A number of top officials, most recently President Dmitry Medvedev, have said the economy could grow 5 percent next year — although virtually all have attributed the figure to “experts.”
Alexei Ulyukayev, a Central Bank first deputy chairman, and the Komsomolskaya Pravda newspaper in October made a bet — setting the consumer basket of goods used to calculate the effects of inflation on households as their wager — that full year inflation for 2009 would be less than 11 percent.
The newspaper on Monday conceded defeat and said it would pay him a “consumer basket of the future,” including caviar, crab meat and pineapple instead of the standard items like flour, eggs and sugar.
Last year, Ulyukayev lost a similar bet with Izvestia. He delivered a case of wine to the newspaper after inflation turned out to be higher than in 2007.
Economic Forecasts for 2010
Indicator
Average
Median
Min / Max
GDP, %
3.3
3.3
-1 / 7
Inflation, %
8.3
8.5
5.5 / 11
Industrial Production, %
4.1
4.7
-3 / 8.2
Fixed capital investment, %
5.3
4.2
-4 / 20
Retail goods sales, %
4.2
4
0.5 / 10
Nominal wages, &
8.5
9.3
1.2 / 16.6
Real household incomes, %
3.4
3.1
1 / 8.4
Exports, $Bln
358
353
290 / 413
Imports, $Bln
230
226
184 / 270
Current account balance, $Bln
56
61
16 / 103
Capital inflows / outflows, $Bln
10
16.5
-60 / 60
Direct foreign investment, $Bln
39
45.5
6 / 70
Central Bank refinancing rate
7.9
8
6.5 / 9
Lending rate to nonfinancial sector
12
12.3
10 / 13.6
Increase in lending volume to nonfinancial sector, %
11.4
10
6 / 18
Increase in consumer lending volume, %
9.5
7.6
2 / 18
Average Urals crude price, $ / barrel
72.1
73.4
60 / 90
Ruble / dollar rate at the end of 2010
28.4
28.5
26.2 / 33
Unemployment, %
7.7
7.6
7 / 9
Participants: Alfa Bank, Bank of Moscow, BDO Unicon, Center for Macroeconomic Analysis and Short-Term Forecasting, Citibank, Higher School of Economics’ Development Center, HSBC, ING, Merrill Lynch, Otkritie, Renaissance Capital, Sberbank Macroeconomic Forecasting Center, Troika Dialog, Trust National Bank, UralSib
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