Business in Ukraine

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.

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Tags: Macroeconomics by Vitaliy Tretyakov
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LONDON - The days of easy credit may be over for American investors, but nobody seems to have told Ukrainian billionaire Rinat Akhmetov. The coal and steel magnate’s holding company Metinvest received a loan of $1.5 billion on Thursday, the largest ever given to a private Ukrainian firm, courtesy of four major European banks.

Metinvest, which produces over 20% of Ukrainian steel, said that the syndicated loan of $1.5 billion would be used to upgrade production facilities and develop new technologies. The company added that it hoped to invest $4 billion in its businesses over the next five years.

“The loan is unique in many respects,” said Metinvest’s Chief Financial Officer Sergei Novikov. He said it was the largest credit ever given to a private Ukrainian company, and that the margin on the loan was a record 1.7% premium to the London interbank offered rate, or Libor.

The banks teaming up to lend the money are ABN Amro (nyse: ABN - news - people ), BNP Paribas (other-otc: BNPQY - news - people ), Deutsche Bank (nyse: DB - news - people ) and ING (nyse: ING - news - people ). The first slice of $1 billion, received on July 23, will be backed up by a $500 million line of credit.

The loan also points to the “attractiveness of Ukrainian companies in the international market for syndicated loans,” according to Sergei Boichenko, BNP Paribas’ head of financing for the Commonwealth of Independent States. The Commonwealth was formed in 1991 and currently contains 11 former republics of the Soviet Union.

Despite the political turbulence of Ukraine, characterized by revolving-door governments and an awkward co-habitation between arch-rivals Prime Minister Viktor Yanukovych and President Viktor Yuschenko, its economy has been on the up since it first registered economic growth in 2000. Between January and April, gross domestic product grew by 7.9% year-on-year, and overnight interest rates have fallen 1.5 percentage points to 8.0% since 2005.

And lender BNP Paribas has first-hand experience of Ukraine’s tempting growth environment: in 2005 it acquired a controlling stake in UkrSibbank, the fourth-largest bank in Ukraine. And on Friday, BNP joined forces with French insurer AXA to buy 99% of Ukrainian insurer Vesko, the sixth-biggest in the country.

Rinat Akhmetov, owner of Metinvest and SCM Holdings, is Ukraine’s richest business oligarch and has been accused in the past of shady dealings in the criminal underworld and tax evasion. (See “Ukraine Builds Tax Case Against Billionaire”)

Tags: Opportunities by Vitaliy Tretyakov
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