Business in Ukraine

The events in Georgia are making the Ukrainian leadership rethink the country’s military doctrine, a daily has written. Quoting a high-ranking source at the Ukrainian Defence Ministry it said that more attention is going to be paid to protecting national interests in Crimea and Ukraine’s eastern regions bordering Russia. This will be accomplished by deploying new air defence units there. The following is the text of the article by Fedir Oryshchuk, entitled: Ukraine pointing missiles eastwards published in the Ukrainian daily Delo on 19 August; subheadings are as published:

The war in Georgia is changing the concept of Ukraine’s national security. The military are starting to strengthen defence in the country’s south-east.

The Georgian-Russian military conflict is forcing the leadership of Ukraine to step up the state’s defence capability. As early as this autumn the Defence Ministry will demand that parliament increase funding for the army. Previously the ministry had planned to allocate an additional 2bn hryvnyas, but now the requests of the military will grow significantly. It is planned to spend the extra funds on the formation of new subunits and weapons upgrading in existing army units in the south and east of the country. In the words of a high-ranking source in the Defence Ministry, the relevant conversation has already been held with the president [Viktor Yushchenko]. The head of state has given preliminary agreement to the proposal of the military.

Newspaper headlines like Crimea will be next did not passed unnoticed for the Ukrainian authorities. Assumptions that Ukraine might become the next object for Russian aggression are forcing our military to take unprecedented steps. Starting as early as this year, the state is planning to allocate additional funds for the defence of Crimea and the east of the country from a potential attack. As the high-ranking source in the Defence Ministry told Delo, the strengthening is due to affect air defence units first of all.

According to the deputy chief of General Staff of the Defence Ministry, Ihor Romanenko, a new air defence anti-aircraft missile regiment was already formed last year in the east of Ukraine. Its task is to provide a defence umbrella over Donetsk and Luhansk regions. We are not standing still, but are improving ourselves in accordance with the challenges that are appearing in the world, is how he commented on the need to create the new regiments on the left bank of the Dnieper.

Apart from that, starting from this year, the Defence Ministry will be focusing on the defence of the state’s southern regions, in particular Crimea. It may be a matter of a numerical increase in air defence forces, redeploying anti-aircraft missile complexes and fighter planes from other regions and upgrading existing missiles and anti-aircraft missile complexes (AMC).

Missiles already being tested

Apart from that, active funding of our own multi-functional missile complex is continuing at the present time. Work on its development has been carried out for several years, and especially intensively over the past three years. The main designer is the Dnipropetrovsk-based Pivdenmash missile plant. In the words of Lt-Gen Romanenko, the complex offers the unified use of air defence missiles for infantry and aviation troops, as well as for naval forces. The same basic missile will be used in the ground to air, ground to ground, shore to ship, ship to shore and ship to air schemes, the General Staff deputy chief says. Testing of individual elements of the multi-functional complex will start after 2010, he said. The new air defence system will be of entirely Ukrainian manufacture, with the exception of an insignificant number of parts.

In the framework of increased funding, in the words of the Defence Ministry source, it is intended to raise in parliament this autumn the question of allocating additional funds to conduct exercises of air defence subunits. This question, according to Delo’s information, has already been discussed with the president. Yushchenko assured the military that the funds will most probably be allocated.

At the present time firing training from AMCs is being conducted at the only test site in Ukraine, Chauda, near Feodosiya. At the same time, at exercises here in Ukraine, Ukrainians can use only AMCs like Buk, S-300 and Osa. Firing from the most powerful S-200 complex, which in 2001 accidentally shot down a Tu-154 Russian passenger plane over the Black Sea, has been banned since then. For this reason, our anti-aircraft forces have been forced to conduct exercises at test sites in Russia. In Romanenko’s words, depending on the location of the test site, Ukraine pays Russia from one to two million dollars a year for this service. Incidentally, it is not ruled out that following the statements by Russian Federation representatives about the participation of Ukrainian air defence specialists in combat actions on the side of Georgia, the question may arise of a ban on Ukraine carrying out such measures on Russian territory, in spite of the fact that Ukraine has officially denied the participation of its military specialists in the Caucasus war.

Replacement for nuclear weapons

In the words of a former adviser to the president on military questions, Maj-Gen Vadym Hrechaninov (retired), the Defence Ministry raised the question of strengthening the defence capability of Ukraine’s eastern and southern regions back in the early 1990s. After the collapse of the USSR, the army was concentrated primarily on the territory of the western regions of Ukraine. However, in the 1990s it was difficult to finance the redeployment of troops to the south and east. Apart from that, it was virtually impossible from the political point of view. For that reason, the reorganization was deferred. But today Russia is strengthening its grouping in the North Caucasus, and this means Krasnodar Territory, our neighbours, and we need to think about this (strengthening the defence of south-eastern Ukraine - Delo), the major-general says. In Hrechaninov’s words, after renouncing nuclear weapons, Ukraine was forced to look for new means of preventing war. In place of nuclear weapons, a strong air force and powerful ground-based missiles complexes may serve as such a means for Ukraine.

In any case, the military conflict in South Ossetia gave a chance to the Ukrainian army to draw the attention of the authorities to itself. It is not ruled out that thanks to the new argument - the Russo-Georgian war - the Defence Ministry will succeed in gaining appropriate funding for the army at a level of 2 per cent of GDP.

This year, the ministry’s budget amounted to about 10bn hryvnyas, which is only 1 per cent of the country’s GDP.

Tags: Politics 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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The monopoly by held by Ukrtelecom limits competition and quality of 3G service

Millions of people around the world are using their cell phones to hold video conferences, surf the internet at fast speeds and to watch TV using the latest and greatest technology, so-called third generation (3G) communication.

But in Ukraine, such conveniences appear to be distant or expensive realities due to the lack of competition caused by the state’s go-slow strategy. That means consumers appear destined to suffer from low quality and a lack of choices.

Government officials have their reasons for taking this tack. They are trying to beef up the market value of state-owned Ukrtelecom, the only 3G license holder and one of the nation’s most valuable enterprises not yet privatized.

On July 16, a court stripped Ukraine’s largest mobile phone company, Kyivstar, of the right to attain a license offering third-generation telecommunications, leaving the state’s fixed-line telephone company, Ukrtelecom, with a monopoly. Experts say the decision will put off Kyivstar’s plans to kick start 3G mobile phone, internet and data communication service to thousands of subscribers this year.

The monopoly held by Ukrtelecom will limit competition and, therefore quality, of this hi-tech service that has grown in popularity in other countries. The company officially launched its 3G service late last year under the Utel brand, and claims its network is available in Ukraine’s largest cities.

But Ukrtelecom officials claim their 3G business is growing steadily, 20 percent each month, and currently has some 20,000 end subscribers of its own for 3G services.

Other companies that market 3G service in Ukraine use a less advanced CDMA technology, but Kyivstar and other leading privately-owned telecoms have pushed for regulators to open up the market so that Ukrainians could get a taste of real 3G, which includes video calling, mobile television services and high-speed internet connections in the 3.6-megabit range.

Their most recent effort in the two-year battle against Ukrtelecom’s monopoly license rights hit another snag this month.

Last December, Kyiv’s District Administrative Court ruled in favor of a Kyivstar appeal, arguing in its decision that the company should have the right to acquire a 3G license. But no license has since been granted and an appeal from Ukraine’s telecoms market regulator, the National Communications Regulatory Commission, was upheld on July 16. The Kyiv Administrative Appeal Court has ruled in favor of the national regulatory commission, reversing the previous court ruling that argued that Kyivstar should have a right to a license.

Meanwhile, it is unclear when Ukrtelecom will be sold by the government.

The sale of the telecommunications giant was first approved in 2000. But it has been mired in political squabbles.

The government’s most recent attempt to sell Ukrtelecom came in April this year, when it approved a $2.4 billion starting bid to privatize a 68 percent stake of the company.

The privatization, scheduled for this year, attracted a handful of big potential buyers, including Rinat Akhmetov’s System Capital Management, Russia’s Sistema (MTS) and Alfa Group, Turkcell, Magyar Telecom, Telecom Austria and Transtelecom.

Ukrtelecom has almost 80 percent of Ukraine’s fixed line market with subscriber base of 10 million people. More than 92 percent of the company’s stock is owned by the government, while another 7 percent belongs to the company’s employees.

Since 2005, Ukrtelecom exclusively owns third generation connection license in UMTS standard.

After repeated protests from privately-owned telecom competitors, officials last year approved tender procedures to sell additional 3G licenses, but the process was again hung up in bureaucratic delays.

Serhiy Konnov, senior partner at Konnov & Sozanovsky law firm, believes that the state’s tactics of blocking 3G licenses are simply designed to maximize the value of Ukrtelecom ahead of privatization.

“The situation definitely has a political motive. Government wants to increase Ukrtelecom’s capitalization by means of such non-material assets for its further privatization. Its [Ukrtelecom’s] position of the monopoly 3G license holder raises its market value,” Konnov said.

Officials at Kyivstar, Ukraine’s largest mobile communication provider in terms of subscribers, said their company will now face more uphill court battles to defend its rights for a 3G license. Yulia Shilina, the head of Kyivstar’s public relations office, said that the company plans to appeal to a higher court.

Until it wins a license, Kyivstar and other operators will need to offer 3G services to customers via Ukrtelelcom’s network, paying a fee for access.

Maksym Blahonravin, a telecoms expert, said Ukrtelecom’s monopoly hampers development.

Today third generation connection is provided by several operators in Ukraine. With service cost ranging from $5 to $60, the companies provide 3G connection based on CDMA technology. Kyivstar and Beeline provide this service through the only available UMTS 3G network operated by Ukrtelecom.

“We currently provide our 3G services through Utel’s network. As a result, our 3G service development is limited by Utel’s resources, which as you know, are quite limited,” Shilina said. If we would have our own license, we would be able to cover about 99 percent of the country, because our network is very well developed,” Shilina said.

According to a report by Advanced Communications & Media (AC&M), a research and consulting agency, the mobile telecommunication market has reached saturation and requires massive investment into new technologies, such as 3G.

Mobile phone subscribers have now reached 55 million. Future revenue growth is dependent on operators’ ability to offer new services. In two years, estimates are that 30 percent of the world’s mobile subscribers will be 3G users.

For now, consumers in Ukraine are wanting for competitive and quality 3G services to be made available in Ukraine. Dariya Polishchuk, a 3G subscriber for almost a year, said “the connectivity is not very good, the price is quite high.  [Western European] 3G services are…much better,’” she added.

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Kishor H. Sridhar is head of international business at the German IFAK Institute, which has been in Kyiv since 2007. The company evaluates cultural mentalities and their impact on consumer behavior. Before joining IFAK, Sridhar worked for the American Gallup Institute. Sridhar says Ukrainian businesses are slowly adopting modern market research techniques and still rely on old­fashioned approaches.

 Kishor H. Sridhar is head of international business at the German IFAK Institute, which has been in Kyiv since 2007.

KP: Please tell us briefly about the major trends currently driving Ukraine’s market research sector?

KS: The Ukrainian market is fast­moving and quickly adapts new approaches and technologies. We are overwhelmed on how well perceived innovative technologies are. Modern online shopping­shelf simulations are in demand as well as the new eye­tracking method that measures what people look at while they move along the street, at the shop or when reading a newspaper. This has definitely changed compared to a few years ago.

On the other hand, Ukrainian customer research still applies some rather old­fashioned approaches. We still do a lot of our work in classical ways, for example, person­to­person and telephone interviewing.

In Western European countries, the latter method holds a small share of the market research market but in Ukraine, it will remain a major source of data gathering for years to come.

KP: What are the major factors that are driving the market growth?

KS: The major factors are stronger competition in the consumer goods sector and a greater product diversification. It’s only natural that when competition increases and growth is harder to gain, companies turn to market research.

Knowledge and information are the keys to success and many Ukrainian companies know it. Companies without a detailed knowledge of their market or customers get left behind. This is a natural development. This also works for advertisement. With customers being flooded by advertisements, you need to make sure that yours stand out. We have seen a major growth in campaign testing in Ukraine over the past years.

KP: What are the main challenges that market researchers face today?

KS: The main challenge for all market research players is the lack of willingness of their potential client’s decision makers to hear the truth. It is difficult to hear straight facts about what your customers think of your product, and what your market chances are, if the findings are negative. When you are ill, you don’t treat yourself, you go to a doctor for an honest evaluation. The same should be true for market research, but it isn’t. Many corporate decision makers prefer to use their own people for market research, but most lack modern know­how. Naturally, many base their findings on their bosses’ views. This is called alibi research.

If executives want to be successful, they need independent market research and consulting on which they can base their decisions. Good market researchers are comfortable telling the truth, and the findings are highly confidential, like any good doctor’s medical opinions. But this open­mindedness among the country’s executives still needs to develop. That is why only 15 percent of market research in Ukraine is done by independent market research companies. We are very sure that this will change quickly but this is something we as independent market research companies actively need to work on.

KP: So the demand for market research in Ukraine is underdeveloped?

KS: No it is not sufficiently developed. There are many international market research companies expanding into the Ukrainian market but opening offices does not guarantee the real demand is met. The Ukrainian market is a very dynamic yet special market. Demands are different in Ukraine so the main challenge for international market research companies is to adapt their approach to the country’s unique market and clients.

KP: What are the main differences in the research you do in Ukraine and Western companies?

KS: There are three major differences. First, it is the clients: Ukrainians are very dynamic, fast thinking and move quickly. In the West, in Germany for example, market research clients will plan weeks ahead. Projects in Ukraine come on short notice and require a quick turn­around.

The other difference is the way participants are interviewed. Cell phone usage rates in the Ukraine are on a very high level and landline penetration in the major cities is too. That is why telephone interviewing works well here. In the regions it is better to conduct market research in person. This communication mix will last for the next years to come. Last but not least are the challenges Ukrainian clients face and thus the fields of research. For example real estate research is very big in Ukraine, meaning the detailed evaluation of a location where a retailer plans his store, the evaluation of the area, the demographics around the store, family structure, income, mobility, etc. In Germany their meta­surveys continuously monitor customer behavior. In Ukraine data is gathered more on an individual, case­driven basis.

KP: What is your forecast for the development of the market research sector in Ukraine?

KS: The annual 30 percent growth rate will continue for the next 3 years.

Among the most areas in demand of market research will be in real estate, mobile communication, banks and retail.

In terms of technology we first have to fully develop telephone interviewing and the transition to internet data gathering will take another three to five years. The internet offers possibilities still beyond anything we have seen so far in market research. I am quite sure that online market research will catch on even faster in Ukraine than it did in the UK, Germany or France.

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The growing sophistication of Ukrainian businesses is propelling demand for detailed market information and specialized studies. This means booming business for market research firms. With annual revenue growth of 25 to 30 percent, this segment of the economy is one of the fastest­growing in Europe, according to the Ukrainian Association of Marketing.

“Although, if we would consider 17 percent inflation, then the real growth would be 13 percent,” cautioned Dmitri Rodenko, director of International Marketing Group Ukraine.

The structure of the market has evolved since the late 1990s when it was dominated by large international firms. “Now we are talking about many medium­sized market research businesses entering the market,” says Alexander Fedorishin, director of GfK Ukraine. “Today, 60 percent of the market is controlled by international outfits, the remainder by domestic firms.”

The industry restructured because Ukrainian companies are becoming market savvy and require specialized research. It’s the smaller companies that provide the tailored services. “Ukrainian research companies are filling the new narrowly defined niches,” says Rodenko. The examples of niches new in the Ukrainian market are automotive lubricants, construction materials, entertainment and leisure research. “The companies in these niches use sophisticated methods such as price elasticity studies and customer satisfaction indexes (CSI),” said Tatyana Zheltomyrska, managing partner at TouchPoll Research.

That doesn’t mean the firms focusing on traditional market sectors are suffering. Large market leaders are flourishing with the rising demand for research in traditional sectors such as fast­moving consumer goods and media, both of which are experiencing tremendous growth.

The market is still dominated by a handful of firms, which control nearly 75 percent of the market. “Today, 25 percent Ukraine’s market is controlled by GfK, 14 percent belongs to The Nelson Company retail research specialist, and UP and TNS control 13 and 12 percent respectively,” Fedorishin said.

The possible merger of international giants GfK and TNS will have little impact on the local market, said Fedorishin, although it will strengthen his company’s hold on the market here and make GfK “overall, the number one research company in the world.”

But the merger remains merely a possibility. WPP, one of the largest market research firms in the world, held up GfK’s TNS buyout by offering to purchase the company for almost $2.1 billion. Since then, TNS has been courting other potential buyers. At this point, Fedorishin says “we definitely will not merge with TNS, but someone will buy TNS,” adding, “whether it will be us or WPP will be determined through negotiations.”

Experts forecast that intensifying competition and the growing number of research firms will only benefit industry clients. Over time, companies will implement more modern techniques that allow yet more tailored research. “Of course, Ukraine will follow the international trend of using online surveys and internet panels,” said Olena Zhytnyk, marketing director at InMind market research agency.

Insiders see only more robust growth ahead. “In 2009, we can expect 30-­35 percent growth,” said Serhiy Golub, head of analytics department at Kanzas Research Company. Demand from real estate, pharmaceutical and automotive sectors “will be the leading trend for research companies in Ukraine over the next three to five years,” Rodenko said.

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