Business in Ukraine

(AP) - Ukraine’s central bank (NBU) will let the official exchange rate for its currency move closer to the market’s exchange rate, fulfilling a key condition to receive an International Monetary Fund loan, officials said Friday.

Serhiy Kruglyk, head of the foreign relations department at the central bank, told The Associated Press that the bank will next month begin to set the daily exchange rate based on the average rate at the foreign currency exchange recorded during the previous day of trading.

Currently, the central bank exchange rates differ significantly from market rates. The official rate is set based on the market rate and other economic factors. The central bank does not publicize the exact formula.

The central bank rate was 5.15 hryvna to the dollar Friday, while the hryvna traded much lower on currency markets, at over 6.0 hryvna to the dollar, reaching a new all-time low since its 1996 introduction.

Experts hailed the move, saying the central bank was taking a further step toward liberalizing the currency market, after it earlier abandoned the practice of keeping the national currency within a tight corridor to the dollar. However, the planned measure still did not amount to a full free float of the hryvna, as the central bank would continue to intervene on the market.

“This is movement in the right direction, the direction of market reforms,” said Oleksandr Klymchuk, an analyst with Concorde Capital Investment bank.

The hryvna has lost over 20 percent in the financial crisis that has hit Ukraine hard. The currency fell to its historic low Thursday, trading at 6.01 per US$1 on the foreign currency exchange. The fall was due to a shortage of foreign currency because of a 40 percent fall in exports and a run on banks that stripped the banking sector of US$3.4 billion this month.

The IMF loan of up to US$14 billion is expected to help stabilize the financial sector, but the deepening political crisis threatened to block the deal. Allies of Prime Minister Yulia Tymoshenko broke parliament’s electronic voting system Friday as they protested against President Viktor Yushchenko’s order to hold early elections.

Parliament spokesman Andriy Zhigulin said that members of Tymoshenko’s faction clogged lawmakers’ voting machines with coins, paper clips and pieces of tinfoil.

The heroes of the 2004 Orange Revolution, Yushchenko and Tymoshenko have turned into fierce rivals ahead of the 2010 presidential election. Yushchenko ordered a new parliamentary vote in December, but Tymoshenko is fighting to avoid the vote and retain her job.

Tags: Macroeconomics by Vitaliy Tretyakov
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 Much ado has been made recently over Ukraine’s prospects of EU accession. Any subtle hint of the possible expansion of cooperation with the European Union is interpreted by Ukrainian officials as a major breakthrough toward full EU membership.

However, high ranking officials of the European Commission and representatives of the old EU msember states (“old Europe”) have their own interpretation of the situation. They immediately refute such statements and insist that, in the next ten years or even longer, Ukraine’s EU integration is impossible.

As a matter of fact, there is little point in speculating about Europe’s true attitude toward Ukraine. It is better to review actual examples of Ukraine-EU relations. Maybe it is time to put forward arguments that would enable us at least to minimize our losses, — or even more, lead to a dialogue with Europe as equals…

Common truths

While breaking lances over Ukraine’s joining or not joining the EU, Ukrainian experts and officials only roughly outline its major goal. This goal is positive economic effect, which could be appreciated by every Ukrainian. I am not referring to immediate increase in minimal wages up to a certain virtual quantity which governments, say in Great Britain or France, allegedly force employers to pay to their workers.

In pragmatic terms, the positive economic effect of a higher degree of cooperation with the EU should be revealed through the achievement of two major goals.

In the short term, it is the improvement of access for major Ukrainian exports (the products of metallurgy, metal-working, chemistry, textile and, to a certain extent, agriculture) to the global European market.

In the mid-to-long term, it is the attraction of investment, technology and know-how in order to change the production structure. This structure is currently dominated by products with low manufacturing processing, and is hampered by the limited access of Ukrainian producers to the world markets thanks to restrictive EU tools and mechanisms.
The improvement of Ukrainian living standards is only possible as a result of the improvement of the market position of every individual Ukrainian enterprise.

These are common economic truths. However, Ukrainian officials do not attach due importance to them. Yet, the actions of all European politicians and officials are based on them. Even while sending friendly “messages” to Ukraine, the Europeans will keep on protecting their market with the tools that are sometimes not very pleasant for us.

Tubing “non grata”

To understand better the attitude of the EU to Ukraine in the sphere of trade, let us remember the fact that, during the last two or three years, the EU was gradually becoming a “state” (in terms of a single foreign policy), which initiated the largest quantity of investigations into dumping charges.

In the mid-to-late 1990s, the EU was the world’s leader in investigations into dumping charges. At the beginning of the new century, it yielded this title to the USA, but last year the EU restored its status of the “world’s trade police.” In 2005, 24 anti-dumping investigations were lunched in the EU, which was twice as many as in the USA.

An anti-dumping investigation into the case oseamless tube imports to the EU, started by the European Commission in March 2005, is one of the most illustrative examples of the perseverance of EU in the protection of its market. The investigation will soon come to an end and result in new anti-dumping dues on Ukrainian tube products.

This is a very old story. An anti-dumping investigation into the import of seamless tubes from Russia, Romania, the Czech Republic, Hungary, Poland and Slovakia was launched in 1996. In one year, it resulted in anti-dumping dues on products from those countries.

Similar investigations were launched based on charges against Ukraine and Croatia in 1998.

At the first stage of this anti-dumping “spiral,” the European Commission maintained certain parity between imports from all of the above states.

Another issue that stood apart and was criticized by the Ukrainian side, was the rejection of market economy status to Ukraine. As a result, significantly higher anti-dumping dues were imposed on Ukrainian products. At the same time, the European Commission let Ukraine make voluntary price and quantity commitments.

Unfortunately, when making these commitments, Ukrainians didn’t have any experience in this area. They failed to come up with the proper price formula that would bring the prices stated in its commitments in accordance with the price fluctuations on the European pipe market. By mid-2002 it was obvious that the price difference was so great that it was simply impossible to deliver products under those commitments. So Ukrainian producers recalled them, and Ukrainian tubes were imposed a 38.5% tariff.

When the European Union expanded in May 2004, anti-dumping measures were “automatically” adopted by 10 new EU members. Accordingly, Ukrainian tube producers effectively lost their traditional markets of Central and Eastern Europe. Their arguments were not heard and the European Commission remained impervious to their request for temporary customs benefits.

The events that took place starting from mid-2004 revealed a biased and discriminatory attitude toward Ukrainian tube producers. Thus, in July 2005 the European Commission suspended import dues on Russian and Romanian tubes. The EC said that there was a punitive deal between Japanese and European tube producers during the anti-dumping investigation and that market conditions could have been distorted. This, in its turn, could have influenced the calculation of the dues for Russia and Romania.

The European Commission suspended import dues on Russian and Romanian seamless tubes based on these assumptions even without any evidence (after all “could have been distorted” does not mean “were distorted”). At the same time, the official decision states that the EC cannot confirm that dumping imports from these countries no longer cause any damage to the European pipe industry.

Thus, by suspending import dues on Russian and Romanian pipes, the European Commission in fact violated European legislation.

At the same time, the EC simply ignored all arguments from the Ukrainian side; in particular, that suspension of import dues for certain countries, in violation of European legislation, discriminated against producers from other countries and would lead to replacement of some producers with the others as a result of market preferences.

Now, Ukrainian seamless carbonaceous tubes are assessed a 38.5% import tariff, while Russian and Romanian pipes are imported duty-free.

Since July 2004, such actions of the European commission have effectively forced the Ukrainian producers out of the EU seamless carbonaceous tube market and made them concentrate on the more expensive alloyed seamless tube market.

Moreover, these moves of the European Commission caused an uncontrolled increase in the supplies of Russian and Romanian carbonaceous tubes on the European market. This resulted int an anti-dumping investigation into the import of seamless tubes from Russia, Romania, Ukraine and Croatia in March 2005.

This time, the European Commission didn’t find it necessary to specify the type of tubes and determined effectively that all types of weldless tubes - both carbonaceous and alloyed - that can be supplied to the EU are subject to investigation. The basic argument for this decision was the criterion of their weldability. If the same criteria were used in relation to automobile construction, it would sound like this: Cars, motorcycles and busses are one and the same product because they all have wheels and they all can be driven.

During the assessment of tariffs as a result of damage caused by tube imports to European industry, Ukraine was assessed together with the aforementioned countries. So, Ukraine, whose supply of tubes to the EU dropped by 35% from 2002 - 2004, was place in the same category as Russia, whose supply of tubes to the EU grew by 81 % over the same period, as well as Romania and Croatia (with the growth rates of 45% and 65%, respectively). And no clear explanation was given as to why the USA and Argentina, whose supplies grew as well while prices were even lower than that of the Ukrainian producers, were not subjected to investigation.

A License for Targeting Major Producers?

During the investigation, the European Commission adjusted electricity and gas prices for Ukrainian producers despite the granting of market status to its individual enterprises and the status of market economy to Ukraine in the end of 2005. At the same time, it did not adjuste electricity prices for Russian tube producers in spite of their much lower prices.

The Commission would not listen to the arguments of Ukrainian producers that during the investigation the prices of electricity and gas in Ukraine stayed at the level of the low prices for energy sources in the EU countries.

In fact, everything was done to even out the dues for Russian and Ukrainian producers, given that the prices for the Russian tubes were much lower than for Ukraine’s on the European market.

Another tendency that became apparent during the investigation was the obvious determination of the European commission target major producers from Russian and Ukraine. Thus, enterprises supplying the EU with 75% to 80% of tube imports were imposed the highest fees.

The unwillingness of the European commission to listen to any comments from Ukrainian producers looks quite inexplicable in such a context.

For example, one of the affected producers carried out an analysis of the calculations of the European Commission and found many mistakes. The producer told the Commission about this. The company submitted a detailed description of every mistake, the analysis of its effect on the final size of the fee as well as the correct calculations based on the data the Commission used to determine the dues. As a result, the actual due made up only 9% compared to 26%. The EC ignored this data. Moreover, as if in mockery, it reduced the fee to this producer from 26% to 25%.

Nevertheless, even under such conditions, the Ukrainian tube producers, with the assistance of the government, Economics Ministry and Foreign Ministry, managed to achieve unique results in the history of EC anti-dumping investigations into Ukrainian imports. It was for the first time in the history of independent Ukraine that, at a meeting of the Anti-Dumping Consulting Committee, (which has historically approved sanctions unanimously against Ukraine), four out of its 25 members (one representative from each EC country) voted against the sanctions, while six of its members abstained from voting. At the same time the majority of the states spoke in favor of a special examination of the matter of sanctions against Ukraine.

Only the “unsporting” behavior of the European Commission prevented Ukrainian producers from protecting fully their interests. The Commission, in fact, insisted that if no sanctions against Ukraine were adopted, no sanctions against Russia, Romania, Croatia would be adopted, and consequently, European industry would suffer.

Forecasts and Consequences

What are we to expect of the anti-dumping investigation that is coming to an end in the EU?

Most likely, anti-dumping dues will be imposed on all seamless tubes imported from Ukraine to the EU countries starting from July 1, 2006. They will equal 25 - 26% for most Ukrainian producers, and will in fact obstruct the supplies of seamless tubes to the EU.

The loss incurred as a result of reducing supplies by 100 - 110 thousand tons may well exceed 100 million dollars per year. This is, of course, a major loss to the Ukrainian economy as a result of EU anti-damping sanctions against the country. In fact, the last large group of Ukrainian competitive products of a rather high manufacturing quality is being kicked out of the European market.

At the nationwide level, this will result in an increasing negative trade balance with the EU. In 2005, the negative trade balance was a record 2.2 billion dollars.

At the level of regions and individual enterprises, one can expect a decrease in the income of local budgets, dismissal of workers (more than 2 thousand people, according to the estimates of Ukrtrubprom), and salary and social insurance cuts.

It is very doubtful that, under such conditions, tube producing enterprises will be able to implement energy saving programs, vital because of energy price growth, or programs for equipment manufacturing and high technology products.

One should also realize that not only tube manufacturers will incur losses. Metallurgists, producing work parts for tubes, as well as the entire infrastructure connected with tube enterprises in Ukraine will also incur losses.

Meanwhile…

What actual measures could be taken to protect the interests of Ukrainian tube manufactures and to prevent further discriminatory actions of the governments of other states?

Ukraine should fight until the last gasp for the interests of its producers, and Yuriy Yekhanurov and Arseniy Yatsenyuk should be supported in their efforts.

We should conduct an investigation in line with Article 29 of the Law of Ukraine On Foreign Economic Activities to reveal discrimination against Ukrainian products by the European Commission during its anti-dumping investigation into import of seamless tubes. Should such facts be found, the Ukrainian side has the right to impose special anti-discriminatory sanctions on EU imports in an amount similar to tariffs imposed on Ukraine.

Even after such sanctions, Ukraine would have the right to dispute them within the WTO framework by applying to a special body for settlement of trade disputes (pseudo arbitration).

Unfortunately, a lawsuit is very unlikely in terms of changing current sanctions. The shortest trial of such a trade case in the European Court was 49 months, while on average such a procedure takes more than 60 months (five years). Thus, anti-dumping dues would expire earlier than the court passes its final verdict.

Even Russia, whose relations with Ukraine are currently rather strained, was fairer to Ukraine and maintained access for Ukrainian tubes to the Russian market within the framework of the anti-dumping investigation. Note that Ukrainian tube manufactures are direct competitors of Russian manufactures.

The EU supports Ukraine in word, yet it has effectively eliminated access for Ukrainian tubes to the European market, in which European industry traditionally does not operate. This market has always been, and will always be, satisfied with the products of third states.

The ban on supplies of Ukrainian products to the European market will result in the entry of cheap Chinese tubes to the EU. It will also lead to an increase in imports of Russian products thanks to both the low prices of these products, which are lower than Ukraine’s, and to artificial restriction of the competition.

In fact, the European Commission preferred the manufactures of other states to Ukraine’s without any sufficient grounds, even thought it uses the slogan of protection of its own manufactures as a cover.

Tags: Macroeconomics by Vitaliy Tretyakov
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DONETSK – As Donetsk’s industrial plants have slowed production, locals say they have noticed an improvement in the city’s air quality. But this small blessing has hardly left the inhabitants of the capital of Ukraine’s eastern industrial heartland breathing more easily, as concern over wage cuts and layoffs grows.

Huge global demand for the steel that is the Donetsk region’s main export has brought several years of impressive economic growth. Wealth has trickled down from the super-rich oligarchs to blue-collar workers. But while local business and political leaders were advertising Donetsk’s great potential for future investment at the International Investment Summit last week, workers spoke of fears in the present. The global financial crisis and economic slowdown have seen prices and demand for steel plummet. And now their effects are starting to be felt throughout the local economy.

“There are no jobs. The steel factories are working four-day weeks and many people have been sent on holiday with no pay,” said Alik, a coal miner who had just emerged from his shift at a mine on the outskirts of the city. “We’re worried that the mines are next. People are worried about not getting paid.”

Factories across Ukraine’s industrial East have been slashing production and sending workers on leave as Ukraine’s export-oriented economy was hit by a slide in global demand. On Nov. 1, all three Ukrainian ferroalloy plants started phased shutdowns. Serhiy Taruta, chairman of the leading steel producer Industrial Union of Donbas, told the Kommersant newspaper last month that his company plans to lay off around 20,000 people.

“It’s not our fault,” he said. “We just can’t provide these people with a wage.”

The steel factories may have been the worst hit so far, with daily steel output dropping 50 percent since July, but there is fear that the turmoil is spreading quickly to the mines, as demand for coking coal used in the steelmaking process drops.

“We haven’t sold a single kilogram of coking coal since Aug. 25,” said Vera Lyashchenko, press officer for Makiyivvuhillya, which runs nine coal mines in the mining heartland of Makiyivka, 25 kilometers outside Donetsk.

Vladimir Boiko, director of steelmaker Illich, announced last week that it was shutting a mine in Luhansk, citing lack of demand.

“Most of the coking coal mines are still working at the moment and storing the coal,” said Anatoliy Akimochkin, deputy head of the Confederation of Independent Trade Unions (CITU). “But if the demand does not pick up, some could be forced to close.”

Many coal mines have not yet been affected by the crisis, as the demand for thermal coal, used in power stations, remains high. Mykola Lysenko, director of Makiyivvuhillya’s Butivska mine, even reported that he has been taking on new workers in the past few months on the back of a successful two years.

But the decreased demand for coking coal, which accounts for 60 percent of Makiyivvuhillya’s production, is starting to affect other mines.

“Young people felt stability and took out loans for cars,” Lysenko said. “Now they are coming from other enterprises looking for jobs. They ask me for help, but what can I do if no one is ordering coal?”

According to Akimochkin, there are more delays in wage payments to miners than usual, although 90 percent have already been paid for September.

It is not just Donetsk’s metallurgy and mining sectors that are starting to suffer. Easy credit and the stable hryvnia-dollar exchange rate drove a consumer boom in recent years as the growth spread throughout the local economy. Nationwide, consumer loans totaled Hr 213 billion in September, up from Hr 33.5 billion in 2005, according to national bank figures. But as the hryvnia has slid from a relatively stable 5 to the dollar to a high of around 7 last week, the pinch is being felt in all walks of life.

“I took a car loan in dollars,” said Mykola, a local taxi driver. “But now I’m struggling to pay it back with the exchange rate so high. I’m not getting as many customers and I’m counting the kopecks.”

And there is a widespread feeling that the worst is yet to come, with experts estimating an exchange rate ranging 7.5-10 hryvnias per dollar next year and unemployment predicted to hit 7.7 percent by the end of 2008.

“The average Ukrainian doesn’t realize what’s coming,” said Jorge Zukoski, president of the American Chamber of Commerce in Ukraine (ACC). “But they will when a family member or a neighbor loses their job and if the hryvnia continues to slip.”

People are clear about who they blame. “How can politicians sort the country’s problems out when they can’t even agree to work properly themselves?” said Mykola, the taxi driver. “We need a strong hand.”

Russian Prime Minister Vladimir Putin and Belarusian President Alexander Lukashenko are popular figures here for their perceived ability to get things done and help the people.

Although Victor Yanukovych, leader of the Donetsk-based Party of Regions still enjoys popularity among some workers, others are angry.

“Yanukovych can’t be the strong hand,” Mykola continued. “He makes many promises, but he doesn’t fulfill any of them. I’ll vote for him, but only because he’s from Donetsk.”

If politicians are taking most of the blame, oligarchs, many of whom have become rich after picking up industrial plants at cheap prices in quick-fire privatizations, are still widely respected as successful entrepreneurs who invest money in improving Donetsk.

Stories abound on the streets and in the media of Rinat Akhmetov’s generosity and help in reconstructing the city. Akhmetov is majority shareholder in System Capital Management and Ukraine’s richest man.

One local told how his granddaughter came back from her first day at school with a brand new diary, provided to all first-year pupils by Akhmetov. “This might be small change for him,” said Alik, the miner. “But at least he is doing something.”

And there is a great feeling of reliance on the business leader as a man who can help the region through the crisis. “Akhmetov knows what he is doing,” Alik continued. “He’s a clever man. I don’t expect he’ll let the steel factories close.”

At the International Investors Summit, business leaders were not keen to talk about immediate plans. The Financial Times reported that Akhmetov refused to comment in detail on the impact of the recession on jobs and wages, but pledged to avoid lay-offs at all costs.

Akhmetov made clear in his speech at the opening that the long-term strategy should focus on the development of the internal market. “I am convinced that not the metallurgists should be assisted, but the consumers of steel,” Akhmetov said. “We need a building boom. It is very important for the state to increase investments in large infrastructural projects: construction of airports, highways and bridges.”

Mykhailo Volynets, head of CITU, agreed, telling RBC news agency that one job in the construction industry created up to four jobs in connected industries.

This boom in infrastructure investment could come as early as next year as Ukraine prepares to co-host the European Football Championship in 2012. Preparations ahead of the tournament, including the reconstruction of roads, airports, railways and investment in new hotels, is estimated to cost more than $30 billion. Although analysts predict that Ukraine will fall into recession in the first half of 2009, they see the outlook for the second half of the year as more positive as exports benefit from the hryvnia’s expected fall and an anticipated rise in demand for steel.

There was much talk at the summit of getting through the turmoil and preparing for recovery. “There will be a need to scale back investment programs if the crisis continues,” said Jock Mendoza-Wilson, director of international and investor relations at Akhmetov’s SCM. He confirmed, however, that SCM intends to carry through on its 10-year, $5 billion investment into steel mill Azovstal because of the “competitive advantages” Ukraine offers.

But the immediate future looks far from easy for Donetsk’s blue-collar workers. As the turmoil continues and the business leaders try to come up with answers, there is little more that the workers can do than remain resolute. “All we can do is work hard and believe that things will get better,” said Lysenko, the mine director.

Tags: Macroeconomics by Vitaliy Tretyakov
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Just days after lending $2.1 billion to Iceland, the International Monetary Fund is set to give a far bigger $16.5 billion loan to Ukraine. The fund hopes it will help stabilize Ukraine’s faltering economy–assuming the country’s squabbling government can agree to reform its banking sector.

An IMF staff mission reached the agreement with Ukrainian authorities on Sunday. The loan, like Iceland’s, would be spread over two years. “The IMF is moving expeditiously to help Ukraine,” IMF Managing Director Dominique Strauss-Kahn said in a press release.

Ukraine is lucky to have secured an IMF loan, particularly one bigger than reports had previously suggested. The behavior of the country’s government has been as chaotic as the financial markets, with very public squabbles between President Viktor Yushchenko and Prime Minister Yulia Tymoshenko. In mid-September, their pro-Western coalition officially collapsed. Yet the country has promised the IMF that it will set a balanced budget and reform its banking sector in exchange for the loan.

Ukraine’s economy has looked shaky lately: Its currency has tumbled, its large steel industry has been hit by a fall in steel prices, and its property boom (particularly in the capital, Kiev) has turned into a bubble on the verge of bursting.

But there’s also a general increasing concern about emerging-market economies, which the IMF will be watching closely. The value of most emerging-market currencies dropped between 6% and 10% against the dollar over the course of last week, according to Barclays Capital analyst Koon Chow, as the world’s hedge funds (three-quarters of which are dollar-based) and other investment funds bailed out of their foreign investments and repatriated their money (see “Flight To The Dollar And Yen”).

Those investors seem spooked by the aggressive action taken by several emerging-market central banks, particularly in Brazil in Hungary, to shore up their currencies. Capital flows to emerging markets have been huge in the last few years, leading to booming property and export markets. But many of these economies have limited capital reserves and high debt-to-GDP ratios. As Western investors bring their money home, many emerging-market central banks are limited in what they can do to shore up their economies, so they turn to the IMF.

Ukraine’s IMF loan is 800 times the size of its “quota,” or the amount of money the country pays to be a member of the IMF. The IMF funds itself primarily through these quotas, which are assigned to each country upon entry based on the size of its economy. At the end of August 2008, the IMF had $341 billion available from these combined payments.

The organization, no doubt, is hoping it will be enough. Hungary, Pakistan and Belarus are reportedly also in talks with the IMF about accessing loans.

Tags: Macroeconomics by Vitaliy Tretyakov
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Although Ukraine still lags behind most other Commonwealth of Independent States countries in terms of per capita foreign direct investment, this somewhat belies its record of unprecedented growth in inward foreign investment over the last several years.

Until recently, Ukraine’s economic performance had made it an increasingly attractive destination for foreign investment. However, current domestic and external conditions will test the country’s ability to continue attracting FDI.

Ukraine suffered from a precipitous economic decline throughout the 1990s and was devoid of any large-scale inflows of FDI until well into the 2000s. Until 2003, registered inward FDI barely exceeded $1 billion per year. However, FDI inflows have rapidly accelerated since 2005, growing by no less than $5 billion per year, or over $100 per capita.

At first, the acceleration was due almost entirely to the one-off reprivatization of the Kryvorizhstal steel plant for $4.8 billion. However, solid growth in FDI inflows has continued. While foreign investors have focused on the country’s financial and real estate sectors, FDI has by no means been confined to one particular area of the Ukrainian economy.

However, according to quarterly data from the State Statistics Committee (SSC), net FDI inflows slowed in the second quarter of 2008. This is a result of both domestic and external factors:

– Economic fundamentals. Although the Ukrainian economy has continued to expand at a relatively strong and steady pace, this growth has been coupled with severe inflation. Apart from creating serious risks of stagflation, galloping inflation has prompted the central bank to resort to controversial countermeasures, such as a sharp currency revaluation. The one-time 4% appreciation of the hryvnia in late May correspondingly lowered the value of monetary resources brought in by investors from abroad.

– Global crisis. As important as the domestic factors may have been, the global credit crunch and ensuing financial crisis have also had an obvious negative impact on Ukraine’s FDI inflows. Crisis-inflicted risks and challenges have forced many investors either to revise or suspend their plans for emerging markets in general, and Ukraine in particular. Even investors who were willing to invest in Ukraine may no longer be able to do so with the same diversity or quantity of resources.

However, the full impact of the global financial turbulence is not yet reflected in the SSC’s relevant FDI statistics. Given that a typical investment cycle lasts 12-18 months, investments that came into the country in the first quarter of 2008 were probably the result of decisions made prior to the serious financial deterioration that began in late 2007.

Outlook. Considering the lingering effect of the global credit crunch, as well as the traditional seasonal slowdown in investment activities during the summer months, the slowdown in FDI inflows will likely extend at least into the third quarter. Perceptions of increased political risk have also risen in the aftermath of the Russian-Georgian conflict, which had a particularly acute impact on foreign investment in Russia. Estimated gross outflows from Russia may total as much as $40 billion since the conflict began on Aug. 7 and 8.

The danger for Ukraine is that the conflict could not only frighten investors away from the warring countries, but also from the CIS region as a whole. Furthermore, investor confidence in Ukraine is hardly going to be enhanced by the serious domestic political infighting that culminated in President Viktor Yushchenko’s withdrawal from the governing coalition on Sept. 3. With new parliamentary–or possibly even presidential–elections on the horizon, Ukraine appears to be heading toward yet another period of protracted political uncertainty. To read an extended version of this article, log on to Oxford Analytica’s Web site.

Oxford Analytica is an independent strategic-consulting firm drawing on a network of more than 1,000 scholar experts at Oxford and other leading universities and research institutions around the world. For more information, please visit oxan.com. To find out how to subscribe to the company’s Daily Brief Service, click here.

You may also sign up to The World Next Week, Oxford Analytica’s free weekly service providing depth and context to next week’s important international issues.

Tags: Macroeconomics by Vitaliy Tretyakov
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An International Monetary Fund mission held consultations last week with the Ukrainian authorities on a possible stand-by lending facility. These were the first consultations between the two sides in years that focused specifically on lending. They were reportedly initiated by Ukraine, which may have good reason to request IMF assistance as the financial crisis rages across the world.

Until recently, the Ukrainian economy seemed somewhat isolated from the troubles many developed economies had been experiencing as a result of the global credit crunch. Such impressions were enhanced by the country’s observed relative currency stability–despite the sharp one-off currency revaluation conducted by the central bank (NBU) last May–and indicators of continued robust, roughly steady and, at times, even accelerating growth.

However, as the effects of the crisis have reached further and further, some are already being felt across developing economies, too, with Ukraine no exception.

– Tumbling stock market. Traditionally attracting mostly speculative foreign capital rather than classic portfolio investors, the local stock market has always been prone to excessive volatility. If this weakness was hidden during 2007, its best-performing year, it has been fully revealed this year.

– Banking sector’s woes. The main problem that Ukrainian commercial banks face in connection with the global credit crunch lies in the sharply deteriorated conditions for their external borrowing. Over the past three or four years domestic banks have relied heavily on foreign loans to finance not only their credit operations at home but the repayment of loans already received from the same sources. Having accumulated large debts to foreign counterparts, banks may no longer service them from new external borrowing.

– Currency pressures. In the absence of sufficient external financing, the need to mobilize resources to pay debt drove a sharp increase in banks’ demand for foreign currency available domestically. In combination with such factors as reduced inflows of foreign investment, due in part to the demise of the securities market, and falling revenues from exports of metals, unusually strong pressures were exerted on the hryvnia.

Outlook. Since the global financial crisis is likely to prove enduring, Ukraine may have to grapple with its effects largely on its own. When the world economy eventually recovers, financial resources will first and foremost go into investment in high-grade assets in the developed economies, with whatever resources are left coming into emerging markets such as Ukraine later.

However, some financing cushion against the crisis appears to be readily available from the IMF. The assumed $3 billion to $10 billion credit line that could be opened under a stand-by arrangement should help Ukraine cover a widening current account deficit. However, it is not clear if and when an agreement with the IMF is going to be concluded.

Until then, much if not all in the way of crisis management will continue to depend on the central bank’s ability to maintain currency stability while supporting banking system liquidity at appropriate levels. Both look attainable, but in the current conditions their efficient achievement may require far greater policy flexibility than has been the case to date.

To read an extended version of this article, log on to Oxford Analytica’s Web site.

Oxford Analytica is an independent strategic-consulting firm drawing on a network of more than 1,000 scholar experts at Oxford and other leading universities and research institutions around the world. For more information, please visit oxan.com. To find out how to subscribe to the company’s Daily Brief Service, click here.

You may also sign up to The World Next Week, Oxford Analytica’s free weekly service providing depth and context to next week’s important international issues.

Tags: Macroeconomics by Vitaliy Tretyakov
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KIEV, Ukraine -  Ukraine’s parliament on Wednesday approved legislation that the International Monetary Fund set as a condition for an emergency loan, raising hopes that this ex-Soviet republic, hit hard by the global crisis, will avoid a meltdown.

But chances for a quick recovery were hit by a dramatic fall in the national currency and signs of a rapid economic slowdown, caused largely by falling global demand for steel, the country’s main export.

Lawmakers gave overall backing to a series of bills necessary to secure the $16.5 billion loan that will be spent on shoring up a banking sector, shaken by the global credit crunch and confidence crisis, and the hryvna, which has lost more than a quarter of its value.

The legislation is essentially a set of stabilization bills that force the government to tighten its purse strings and prop up the banks. The IMF considers these moves critical before it can hand over the loan.

Central Bank chairman Volodymyr Stelmakh warned Wednesday that the aid, which still needs to be approved by the IMF board, is vital to help avert a default on foreign lending by the nation’s banks and large corporations.

Stelmakh warned that any failure to secure the IMF loan will undermine public confidence in the government and lead to a default.

“It will concern every Ukrainian,” Stelmakh said at a news conference.

Experts hailed the parliament vote, saying it will help Ukrainian companies to service their foreign debt and shore up the banking sector, but warned that it would not save the export-oriented economy if the global crisis were to deepen.

Iryna Piontkivska, an analyst with Troika Dialog Ukraine, said the country will overcome the crisis if the loan manages to restore confidence in the domestic banking sector among Ukrainians and if the world economy begins a recovery. “If not, it will be tough.”

Ukraine has been one of hardest-hit emerging markets and there were more signs the country was in trouble Wednesday.

President Viktor Yushchenko’s top aide Oleksandr Shlapak said the nation would plunge into a recession next year with the economy contracting by 2 percent. Ukraine’s economy has been growing at an average 7.4 percent over the past few years.

Earlier this month, the IMF forecast growth to slow to 2.5 percent next year from this year’s 6.3 percent. Dragon Capital Investment bank also slashed its growth forecast for next year from some 2 percent to no growth or an up to 5 percent decline, if the global crisis continues.

The hryvna continued its fall, reaching a new low of 7.2 to the dollar on the foreign-currency exchange Wednesday, according to the agency Inter Business Consulting, shedding over 25 percent of its value since the start of the year.

The main stock market, the PFTS, which has lost over 75 percent of its value this year, ignored the positive news of the IMF loan and closed with a 0.52 percent loss Wednesday, despite rising Asian and European stocks.

Lawmakers in the 450-member Verkhovna Rada, which has been paralyzed for nearly two weeks due to a political standoff, voted 248-2 to pass the bills in the first of two required readings. Other lawmakers didn’t vote.

In line with the IMF recommendations, the package envisages adopting a balanced budget by cutting social spending, boosting the banking sector by selling the country’s troubled sixth-largest bank, Prominvest, to a state bank, providing liquidity to other banks in need, increasing retail deposits insurance and other measures.

“They understand the challenges and the need to act,” IMF mission head Ceyla Pazarbasioglu told reporters Wednesday.

Pazarbasioglu said the IMF board has not set a deadline for a board meeting to give final approval for the loan and will give Ukraine time to pass the bills. She said that details of the loan were still to be finalized, but similar IMF loans are to be paid over five years with a floating interest rate, which stands at 3.7 percent.

Ukraine’s severe financial crisis has been further complicated by a fierce standoff between President Viktor Yushchenko and Prime Minister Yulia Tymoshenko which has left the parliament in a deadlock. Tymoshenko is fighting Yushchenko’s order to hold early parliamentary elections in December, in which she risks losing her job and her faction has paralyzed parliament’s work for nearly two weeks. In a blow to Yushchenko, parliament on Wednesday rejected a bill on funding the early vote, likely further delaying the election.

Ukraine was quick to suffer from the global crisis. Output in the steel industry, which accounts for 6 percent of gross domestic product and 40 percent of the country’s exports, is down by 30 percent because of falling global demand.

That has widened the trade deficit to $12.5 billion so far this year. A run on banks has stripped the banking sector of $3.4 billion this month.

Yushchenko expressed optimism Wednesday, that the country would muddle through.

“We will cope with all challenges,” he said at a business forum in the eastern city of Donetsk. “It is hard, but it is not fatal. And we will cope with it.”

Tags: Macroeconomics by Vitaliy Tretyakov
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LONDON - As Ukrainian energy monopoly Naftogaz begged Deutsche Bank for a loan of $1.55 billion to buy gas, a Ukrainian businessman, who last May listed his family-owned business, started a European road show to convince investors to pump more money into his poultry business.

But the timing of Yuriy Kosyuk, chief executive of MHP, to start trading publicly couldn’t be worse in a market that seems to lack a clear direction. “I share the pain of investors leaving the market. But there is only one way to regain their trust and that is by outperforming expectations,” Kosyuk told Forbes.com in an interview at the Dorchester Hotel in central London.

Amid the current market turmoil and as the world’s political forces enter a new “cold war” following the Russian invasion of South Osetia, Ukraine has become the forefront of the new power play. In this context, Kosyuk, who describes himself as a nationalist, understands the mindset of businessmen with big pockets.

Forbes: What is your reaction to the current financial situation?

Kosyuk: It is a very hurtful situation for me because my firm’s performance beat analysts’ expectations ( last Wednesday MHP posted a 441.0% higher first-half net profit) but the market situation has been difficult. Investors also tend to associate Russia and the Ukraine and put them in the same boat.

What’s the feedback you are getting from investors?

They’re saying we like everything you’re doing. And if your overperformance wasn’t as good as it is, your shares would be worth nothing. The fact that they are worth something is good.

It is an awful situation at the moment.

I’m quite nervous about the situation but people put their trust in me and my country … investors know me very well and we are very open to them. And while other big players in my industry are declaring losses in their production, our profitability is going up and our sales are going up as well.

What are your long-term plans?

What I am expecting from Europe is investment and trust. By 2012, our company will start pushing Americans and Brazilians from the poultry market and supply the poultry meat to Europe as Ukraine has been traditionally the breadbasket of the continent.

Some argue business in Ukraine is undermined by a Soviet Era-like mentality.

Political populism is one of the main drivers of inflation, as politicians try to win votes by giving people extra salaries. But I would say this is not just Ukraine’s disease.

After the invasion of South Osetia by Russian troops, some argue Ukraine is next.

I think the conditions in Ukraine and Georgia are different–we don’t have any breakaway republics in the Ukraine. We are also hoping for membership in NATO.

What needs to happen for Ukraine to enter NATO?

For this to happen, the West need to see the difference between Ukraine and Russia. All we want is investors to see this difference. Ukraine has a democracy, Russia is living under a Tzar. Investors still see Ukraine as part of the old Russia, which means investment and the availability of cash in the country and the economy may be negatively affected.

In a nutshell, how would you describe yourself?

I am a convinced nationalist. I mean first I love the country in which I live and work. I love it and trust it endlessly. But I am also a businessman and I realize that all love and relationships must be seen in terms of supply and demand.

Tags: Macroeconomics by Vitaliy Tretyakov
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— What is your opinion about the current situation in the global financial markets? Does the current situation really have so many negative aspects?

— In my opinion, the difficulties in the global financial markets are much exaggerated. Especially concerning the situation with the European financial sector. The mortgage securities crisis was actually born in the USA. It was a result of a very aggressive financial policy by mortgage operators including several big ones, such as Countrywide Financial that incurred huge losses and was bought out by the Bank of America.

John Joseph Smyth – a member of the International Mortgage Union’s council and chairman of the board of Empeira - Conformance and Performance Consultancy. Mr. Smyth is a professional consultant on corporate management issues with huge experience in the financial markets of Ireland and Great Britain. His experience is quite extensive: executive director of the First National Building Society / First Active plc, Past Chairman of the Irish Mortgage & Savings Association and the Irish Building Societies Association, Current Council member of the Institute of Directors in Ireland, Former Vice President of the European Mortgage Federation.

John Smyth is a Founding Council member of the Ombudsman Council for the Banking Institutions in Ireland (informal body for settling disputes between banks and their clients) and an independent director of several structures including Ukrainian Ukrgasbank. Thus, he has an opportunity to compare the actual state of affairs in different countries with the realities reflected in financial statements and not just from emotional comments on the news. Mr. Smyth shares his opinion on the world and Ukrainian banking system with ZN readers.

Their financial strategy was based on giving high-risk loans to borrowers with weak credit histories. The high risks of those loans defined their high profitability, which was quite attractive for the lenders and insured quick growth of the financial sector.

This practice, like in the USA, was used in some parts of Great Britain, but it didn’t spread to the entire European market.

Therefore, the fall of securities issued by American banks, which were seriously involved in high-risk mortgage loans and dealings with mortgage bonds, was not accidental. These operations caused many-billion losses and led to the bankruptcy of a very big investment bank, Bear Sterns. In the case with European banks, which, to tell the truth, turned out to be involved in subprime lending too, the lowering of European shares actually reflects the generally negative tone of the markets.

— However, several big European banks, for instance, Swiss UBS (Union Bank of Switzerland) and German Deutsche Bank also acknowledged huge losses from subprime lending. In the first quarter of this year, UBS’ losses from real estate operations and operations with financial products connected to American subprime mortgages were USD 19 billion, and total losses of the bank were USD 12 billion.

— Yes, UBS is one of the main examples, as well as Deutsche Bank. However, they don’t indicate a general European trend in this sphere since other big European operators, such as Unicredit, Royal Bank of Scotland, Banco Santander and BNP Paribas, were not involved in those type of operations as seriously as the key American players were.

— Analysts from Merrill Lynch have even raised their recommendations on European banks, assuming that the worst has already passed. However, can we trust those estimates considering that Merrill Lynch itself suffered serious losses in the subprime market?

— It is hard for me to asses the situation in the entire European Union. My opinion is based on the situation in Ireland, which is a comparatively small market in the European Union. In my country, banking shares were falling down due to excessive investments into real estate and mortgage lending, although these types of investments are supposed to be quite acceptable from the point of risks.

A lot of loans were given to businesses working in the construction sector. This process was enabled by a steady growth of the Irish economy during the last ten years. However, international investors lowered ratings of Irish banks assuming that the banks were too much dependent on the risks of investments into real estate, the market value of which was falling.

Nevertheless, as you noticed, the situation with European banking shares has been improving lately; investors’ confidence is growing. For instance, demand for newly issued preferred stock of Lehman Brothers was much higher than anybody could guess…

That’s why we can contend that a lot of investors are now looking for the opportunities to buy banking shares, which have started to grow.

The banking system is, undoubtedly, the base of any economy. If there are no banks, there is no economy. The economic growth of any country is impossible without an efficient baking system. Recent developments on the global financial markets have been extraordinary. My forecast is that the situation will improve by the second half of this year.

— Anyway, you have mentioned the fall of the market value of banking shares. How can this affect intentions of European operators regarding Ukraine and a possible purchase of local banks?

— I would say that many foreign banks are interested in the Ukrainian financial market, because they are short on space for further development in their domestic markets. A country with a population of around 47 million and with a quite rapidly developing economy is considered to be a market with perfect possibilities for growth.

Considering the size of Ukrainian economy and low level of the local market development, there will be a lot of influential players interested in coming there despite their past losses in capitalization. I’ll be surprised if we don’t hear about consolidation or purchase of some of Ukrainian banks this year.

— Could you mention specific names?

— As an independent director, I can’t divulge this information. Well, there are quite well-known names on this list. According to market experts, the Ukrainian banking sector is an object of a big interest today.

— You are well aware of the fact that the Ukrainian financial market is very much dependent on the international lending market. Could you forecast when Ukrainian banks will get an opportunity to access international markets and place long-term bonds, like those Russian Gazprom recently placed?

— In last quarter of 2007, Ukrgasbank intended to enter the Eurobond market. However, the collapse of international markets forced it to postpone these plans. We were not alone in this. One of the biggest Irish banks, AIB (Allied Irish Bank), had to postpone its intention to issue Eurobonds also.

Banks have stopped giving credits and lending funds to each other. During the past time, we have heard of only single cases of a long-term financing. Nevertheless, lending and the attraction of capital are the basis of the banking business. Thus, sooner or later, this process will resume.

The bad news is for potential borrowers – the market value of loans won’t reach its past level very soon. Ukrgasbank’s board monitors the situation on the global financial markets and is consulted by foreign financial advisors on this matter. We should be ready now – when the situation improves we will take the opportunity to place Eurobonds.

— What market value of loans could be acceptable for the financial institutions like Ukrgasbank? In other words, what price is your bank ready to pay for a loan?

— As an independent member of the supervisory board, I shouldn’t intrude into the sphere of the bank’s board authority. Our main task is to receive loans for the most suitable price. As it is known, in the end of 2007, despite financial crisis, Ukrgasbank could enter the market and refinance its previous syndicated credit. Thus, the task is to find the most optimal ratio between the terms, volumes and the price. Hope that foreign counselors will help us with this.

— Today, Ukrainian banks are quite often criticized for spending foreign loans on consumer crediting. Do you think it is normal when the amount of consumer loans is doubling for several years in a row? Is it necessary to take preventive measures in this situation?

— Here, almost everything depends on the level of asset diversification and quality of applied lending procedures that vary in different financial organizations. In Ukrgasbank’s experience, the most significant growth of the credit portfolio was in 2007, when the volumes of active operations increased by 2.3 times compared to the previous year. It is unlikely to reach that figure this year, even though the growth will continue. It will simply slow down to 50-60%.

Concerning the quality of assets, I would like to emphasize that Ukraine is a competitive market, and Ukrainian banks are segmenting their businesses. Our credit portfolio is also divided into several segments. For instance, there are a lot of people wishing to buy automobiles today. This can be considered as the desire of citizens to take missed or earlier unavailable opportunities.

On the other hand, the growing number of clients is a result of the expanding of banks’ retail chains. During the last several years, our retail chain has grown up and is going to grow. The same is happening with many other banks. The higher is the number of our clients, the greater are our possibilities to diversify the business. In my opinion, this process is quite normal and risks, at least in Ukrgasbank, are adequately controlled. As far as I know, Ukrgasbank isn’t giving unsecured loans (to purchase TVs, refrigerators and so on) when a lot of Ukrainian banks have started to give such loans recently.

—The retail chains of many Ukrainian banks are becoming inadequate at meeting real demand. Bank branches are being established very quickly and often thoughtlessly so that most of them work at a loss.

— It is certainly so. However, the process of growth is always accompanied with some “illnesses” that will actually help rationalize business in the future. When foreign banks come here, they will introduce their managerial experience and optimize the structure of the banks.

For instance, the total number of banking employees in Ukraine is much higher than in Western countries. There is a lack of qualified banking specialists, that’s why unqualified office workers very often receive jobs in Ukrainian banks. However, when the intensive growth of the baking sector in Ukraine is finished and banking business is rationalized, many people will become unemployed.

Another example is the fact that in Ukraine, there is a difference between the term “branch of the bank” and the term “department of the bank”. This is new for me. We don’t have anything like that in Ireland. We use an integrated approach and centralized accounting in the entire retail chain of the bank.

— Do the standards of bookkeeping and financial statements applied by Ukrainian banks comply with European standards?

— Concerning Ukrgasbank, its accounting is conducted in compliance with international standards. Delloitte&Touche is helping our bank with this. Additionally, the bank’s financial statements according to Ukrainian national standards are prepared with the help of other firm – Grant Thornton.

I would like to note that our bank has improved the quality of its financial statements lately. Some time earlier, Delloitte&Touche used to not only approve its audit but also to prepare the financial statements. Today, our employees prepare the statements by themselves, and Delloitte only approves them.

Any Ukrainian financial institution aiming to attract a strategic investor by issuing Eurobonds has to go through such procedures. Investors, certainly, would like the bank’s statements be prepared in the same form as they are prepared in their own banks. It is actually unusual to see two auditors that analyze the statements of a bank according to two different standards. However, this is a requirement of the law and another example of a more strict legislation.

— Is the creation of credit bureaus essential for the further development of the Ukrainian banking system?

Credit bureaus are vitally important for any economy. However, the creation of a credit bureau requires coordinated efforts of all financial institutions and banks.

In Ireland, the credit bureau is co-owned by all Irish banks. Any credit, any deal goes through the credit bureau’s database. This is a very effective system to help lower banking risks. This type or a similar system is also necessary for the Ukrainian market. As far as I know, this question is the key one on the agenda of the Ukrainian Banks Association.

— Standard & Poor’s recently described the situation in the Ukrainian banking system very pessimistically. In its survey, according to the quality of credit portfolios of the financial sector, Ukraine (as well as Georgia) occupies the last place among the NIS and developing European states. Do you support this point view?

— It is obvious that foreign investments improve the market and bring in positive structural changes. In my opinion, rating agencies are paying too much attention to the political risks in Ukraine when making their assessments. When they analyze the Ukrainian market from the outside, their estimates are disfigured by the Ukrainian political factor.

This agency has its own point of view; some other agency might state a different view. Incidentally, one of the agencies has already announced about reconsideration of its opinion on 22 Ukrainian banks. International investors, which have already entered the Ukrainian market, estimate Ukrainian risks and the entire banking system in more positive tones than Standard & Poor’s. The Ukrainian economy continues to grow and develop despite all the tension between those in power and opposition.

Additionally, the standards applied by the National Bank of Ukraine (its regulations and supervising procedures) are very high. As far as I know, the level of compliance of local banks with these requirements is also very high.

Regarding some neighbor-states with higher ratings, Ukraine is able to leave them behind in terms of economic growth and stability of banking system. For instance, I reference Hungary since I have some connection to companies there.

In my opinion, the current dynamic growth of the banking sector in Ukraine is full of risks but this is quite a normal process. The increase in incomes of the citizens will insure the increase in consumption, which, in its turn, will require additional banking resources. On the other hand, high incomes insure growth of savings, and this is also conductive for the development of the banking sector in Ukraine.

Tags: Macroeconomics by Vitaliy Tretyakov
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by Oksana Faryna, Kyiv Post Staff Writer

Aug 20 2008, 18:16

After overheating for the last few years, Ukraine’s economy is finally cooling down, analysts say.

Contruction and building materials are among the several sectors of the economy already in decline, raising what could be false hopes for prospective homebuyers about a drop in real estate prices. Even if property prices fall, the cost of borrowing is going up.

Bad news is also coming from the food and metallurgical industries. Moreover, with exports on the verge of decline, and a current­account deficit surging, experts warn that the country’s currency could slide. There is even talk of a recession.

“The recession danger will only materialize if the National Bank of Ukraine continues pressuring the money supply after inflation gets back on track. If this measure is applied for too long, affecting consumer demand, it can cause significant industry decline,” said Hlib Vyshlinsky, Custom Research Director GfK­Ukraine market research firm.

The first cold shower for the economy came this spring, when the government and central bank scrambled to control spiraling inflation. The central bank tightened reserve fund requirements for commercial banks as a part of its anti­inflation measures, and allowed the domestic currency to appreciate. Some experts defended the moves as desperate but needed attempts curb inflation, which reached 15 percent by mid­year.

As a result of these measures, however, banks tightened up their crediting policies, and the cost of borrowing rose suddenly. This, in turn, dented costly long­term investment businesses. The volume of real estate construction projects, for example, inched down by 1.2 percent in the first half of this year.

With the onslaught of the worldwide credit squeeze and Ukraine­specific factors, “banks don’t want to give loans to either builders or real estate buyers,” said Serhiy Kostetskiy, from the marketing department of SV Development.

After a steady growth of the construction industry since the 1990s, big companies are complaining about low sales. Kyivmiskbud said investments have dropped by 30 percent this year. Prices for newly­built apartments in Kyiv are also declining, slightly thus far. Experts said prices could drop by some 10 percent this autumn – long­awaited news for consumers. Yet the lower prices could be countered by rising borrowing ?osts.

Suppliers and producers of building materials say they are also feeling the pinch. According to a report in Korrespondent, a Russian­language sister publication of the Kyiv Post, the industry has incurred $2.2 billion in losses thus far this year. According to Ukrainian Business Resource portal, sales dropped by 40 percent in the summer months alone, compared to the same period last year. The shocking sale figures made some market players reconsider their long­term strategy. Among them are German producer of building materials Knauf, which has already invested 80 million Euros into production facilities in Ukraine.

“Unsold goods with millions of Euros are accumulating at our [Ukraine] warehouses … that’s why [Knauf] is canceling investment programs for the next two to three years,” Nicolaus Knauf, the company’s co­owner said.

Ukraine’s food industry also declined 3 percent in both June and July compared to the same periods last year, which analysts said could be rooted in weak purchasing power and imports flooding the market.

“The import of goods and services increased three­fold in the first six months of this year,” said Oleksandr Zholud, an economist at Kyiv’s International Center for Policy Studies.

By year’s end, the downward trend in the food industry may reverse due to an exceptionally good 43 million ton harvest this year. But other industries are also showing signs of decline.

The export­oriented metallurgical sector, Ukraine’s main foreign currency source, could be on the verge of the first steel price decline in recent years..

“This could be the beginning of a big decline and would be a big blow to Ukraine’s economy. Metallurgy accounts for more than 40 percent of Ukraine’s exports,” Zholud warned.

Falling steel prices coupled with a widening current account deficit, forecast at 9.3 percent of GDP, has economists predicting that Ukraine’s national currency could slide due to the pressures.

“In 2009, we doubt that the Ukrainian economy will once again benefit from a positive terms of trade shock, which in our view will translate into slower growth, greater financing difficulties and a weaker currency,” reads a July report by JPMorgan.

Some economists predict a growth and currency slide. ICPS has a cautious prediction. Ukraine’s GDP growth rate will finish off the year at 6.5 percent, almost one percent lower than last year.

“In recent years, the economy was overheated,” said Vyshlinsky. “We had extremely high growth rates for salaries and prices rising combined with the high economic growth.”

If the government pursues a calm and wise economic policy, fear of recession may turn out to be groundless.

“Our current economic situation thus far may be characterized as a rather soft landing,” he added.

Tags: Macroeconomics by Vitaliy Tretyakov
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