Business in Ukraine

The cloud of crisis that looms over the country has a silver lining: the authorities are not ignoring the people anymore and have to heed industrial managers, bankers, and experts. Ukrainian politicians are still unable to reckon with anything other than their personal interests and popularity ratings, so at most councils and consultations they focus on their image instead of looking for effective responses to the challenges that are confronting the national economy.

Yet, it is vitally necessary to find a cure for the crisis through an honest diagnosis. This was the subject of the interview with Ukrgazbank Board Chairman Vadym LYASHKO.

— Will you please answer the question which is put to all bankers these days: how painful is the crisis for our banking system and how much will the recovery cost?

— To answer this question we should see first why this crisis has taken on such a form and depth in this country. We shouldn’t put the blame on the global financial crisis alone. We should admit honestly that the degree of our vulnerability and the depth of our integration with the global financial system don’t quite correlate.

We should admit that apart from external factors there are “homemade time bombs” which detonated all at once. We simply availed ourselves of favorable circumstances on global markets but did nothing to make our economy and financial system really competitive. Moreover, I have a feeling that the word “competitiveness” became just a fetish to us. We ignored the essential nature of competitiveness as one of the key prerequisites for sustainable development. Instead, we tried to earn more and more, using the favorable environment on external markets which existed until mid-2008 and increasing the gap between economic growth and consumption growth. In the last three years of such “prosperity,” individual consumption grew three and a half times faster than production. We were so sure that our banks were safe and that our metal and workforce would be in demand forever. Under the spell of this illusion we forgot to diversify our economy, reduce energy consumption, modernize basic assets, improve the business climate, stimulate small private entrepreneurship, and do many other things needed for stability.

As a result, we found ourselves unprepared for the global crisis, though its early symptoms were seen more than a year ago.

Moreover, the political show that we’ve been watching for the last few years wouldn’t have been possible under different external market circumstances. There was an illusion that the national economy was immune to political developments. Being minimally integrated with the global financial-economic system, we had good chances to avoid the head-on impact of the global crisis, but we missed them.

The national banking system as the locomotive of integration was objectively destined to feel the impact, because the crisis was caused by aggravated monetary-credit relations involving debt, the exchange rate, liquidity, trust, and the conduct of financial agents. Besides, one-third of Ukraine’s external debt is bank debt.

I think the steps taken in October to stabilize the national banking system helped to minimize the loss of our most valuable asset – the people’s trust in banks. Their further activity depends directly on the people’s activity and attitude to them.

— Do you think you can seriously count on their positive attitude after the ban on the preterm withdrawal of cash from deposit accounts?

— This moratorium is one of the most difficult and painful factors in our relations with clients. We build them on the principle of mutual respect. Our bank takes a flexible approach to each client. It makes exceptions, considering individual social and humanitarian circumstances, and takes measures to minimize our clients’ losses from exchange rate fluctuations. It concentrates on satisfying their financial needs even at the expense of its development. It has also reinforced and improved its ATM network.

The measure taken by the National Bank [the ban on the preterm withdrawal of deposits], even though questionable in legal terms, was a reasonable alternative to panic and long lines at bank tellers’ desks. Further steps should be aimed at creating and developing economic and administrative compensators and counterbalances that would mitigate the pain.

— What exactly do you mean by pain?

— The first painful spot is our balance of payments, balance of trade and quality of investments into our economy in the last three years. The main problem is not that our total foreign debt constitutes about 60% of GDP, but its short-term nature. Hence, we are really exposed to global crisis that, in the first turn, affected our financial market due to the outflow of short-term speculative capital. Afterwards, we realized that we were not able to refinance our current debt liabilities.

Secondly, we must look at currency policy. It is no secret that the panic in the foreign exchange market was provoked by the expectation that hryvnia would be devalued. That’s why it is very hard today to substantiate and implement a reasonable policy on exchange rate volatility. Nevertheless, this task should be accomplished as a response to currency swings that took place in summer and fall of this year. This policy should be based on fundamental and not on situational factors of cost formation and should be financed by additional stabilization resources.

The uncoordinated policy conducted by the government and the National Bank of Ukraine is only aggravating the pain. The decisions on import stimulation and “acupuncture” of inflation with the help of the exchange rate became just another challenge for the balance of trade and trust to the national currency.

The deliberate aloofness of the Prime Minister from the problems of hryvnia stabilization can hardly mislead anybody, especially considering the political and economic decision on revaluation made last summer. However, it is more important today to keep the National Bank from dissociating itself from the current problems. If it does, the national currency’s exchange rate would be stable even without liquidity, but our economy would slip into a recession…

Nevertheless, I am sure that that we will be able to reverse the situation not owning to the pro-Ukrainian conjuncture, but rather owing to this very crisis which, I hope, will force us to conduct the necessary reforms. I always agree with those that say that crisis is a high temperature that any creature affected by the infection has, and it is a quite natural reaction of a viable organism to infection or parasites.

— Do you think that the organism we are talking about is viable?

— Undoubtedly, it is. I can proof my opinion with a number of arguments. Peculiarities of the traditional sectors of economy, favorable geographical location, reserves of natural resources, professional manpower, traditions and culture – all these make our economy viable. We have not taken advantage of these factors, but we still possess tremendous potential.

The new trendy interest in agricultural investments, infrastructure potential, as well as rapid growth of small and medium-size businesses demonstrates that our economy may become quite strong in the future.

— Does your bank cooperate with small and medium-size businesses? How actively do you work with them?

— Small and medium-size businesses currently comprise about 90% of our corporate clients. These are enterprises that earn less than UAH 20 million per year. However, the share of these entities in our credit portfolio is not more than 12%.

— Speaking of small and medium-size businesses, the main restraint for the banks to work in this segment more actively is high risk: small enterprises quite often don’t have collateral that qualifies; the percent of failures to disburse loans is very high is this segment …

— I consider this thesis to be groundless. Unfortunately, we have established a “re-marginal” banking business in Ukraine. Why “re”? Because we have adopted a banking system similar to the systems in western developed countries, but it is absolutely alien to the post-Soviet economy and demands.

I have already said that rapid growth is akin to fast downfall. We have been thoughtlessly developing retail chains for the last three to four years. Competition for a greater share in the retail market overshadowed the problems connected with a lack of adequate sources of funding, risk and infrastructure assessment, and led to the usage of surrogate sales networks, deprived the retail chains and distorted the structure of consumption.

The only reasonable explanation for all that was tremendous demand for Ukrainian banking assets on the part of strategic investors interested solely in retail banking.

As a result, we witnessed considerable growth in retail business. Today it accounts for 30% of all banking assets. Actually, this is not very much. However, let’s remember that Ukraine has got the second lowest standard of living in Europe; Moldova is the only state that is worse. We knew that!

About 85% of retail loans were in foreign currencies. We transferred exchange rate risks to our borrowers and tried to reassure ourselves with the knowledge that there were no open foreign currency positions on our balances. However, it was just an illusion of security. When the hryvnia’s exchange rate was surging, all the bankers prayed: “Stop the exchange rate!” What does the exchange rate more than six hryvnia for one dollar mean? It means that it is not reasonable and almost impossible to pay off debts.

We consider most of our clients to be very responsible borrowers. However, if the exchange rate is more than six hryvnia for one dollar, their debts grow by 20-30% and it becomes impossible to pay them off. As a consequence, the biggest share of retail portfolio – around UAH 200 million – would have been written down as losses the same way the American banks did.

Therefore, comparing retail banking services and services to small and medium-size businesses, you can’t say that banks don’t develop this segment because of high risks. On the contrary, the risks are much lower than in retail since it is absolutely clear on what small and medium-size businesses are spending their loans and the mechanisms of reproduction of this money are also understandable.

The second aspect you mentioned is collateral. Let’s analyze the current structure of mortgages. We allegedly have about UAH 80 billion in mortgage loans. However, we forget that only 30-40% of that sum is loans issued to borrowers for the purpose of buying real estate.

The remaining 60-70% is real estate taken as collateral for the loans that borrowers received for some different purposes. Thus, the greater part of mortgage loans includes loans issued to entrepreneurs who decided that it was more gainful for them to receive loans as individuals and spend them on the development of their businesses.

That’s why I believe that when the work of the banking systems is resumed, when the banks formulate their new business-models and establish new priorities, they will, undoubtedly, start financing small and medium-size businesses.

— You have mentioned the risk connected with the devaluation of the hryvnia – risk of mass failures to repay loans. On the other hand, it is, obviously, very hard to stabilize the situation with balance of trade without correcting the exchange rate. What exchange rate can counterbalance the interests of all sides?

— My opinion on this matter is definite: (+/-) 6 UAH/USD. There are no economic preconditions for it to be lower than that.

Any exchange rate higher than 6 UAH/USD is dangerous from the standpoint of repaying debts and the validity of banking capital. It is no secret that foreign currencies account for approximately 30-40% of the assets of the banking system. Thus, reassessment of those assets at the 5.75-5.80 UAH/USD rate can practically make the banking system lose its validity.

Nevertheless, I would like to note that validity is a secondary factor here. It is more important to keep economic reasonability, motivate borrowers to repay debts and keep deposits.

— However, 6 UAH/USD is also a 20% increase of debt load on a borrower who took out a loan in foreign currency…

— Sure it is. You have asked me to define a level at which a compromise between common sense, demands of the economy, expectations of the citizens and requirements of the International Monetary Fund can be found. My opinion is that it is 6 UAH/USD. Any attempt to strengthen the hryvnia is bluffing and might cost us more since no fundamental factors for this currently exist. Making the exchange rate lower or higher is dangerous for the entire financial system.

— Was the loan received from the International Monetary Fund a reasonable step under the current circumstances?

— It is absolutely clear today that the loan received from the IMF was necessary for securing the National Bank of Ukraine and for maintaining the stability of the hryvnia.

I am not aware of the details of the agreement with the IMF and I think that the full list of the IMF requirements in known only to a selected few. However, if we could not create compensators taking advantage of a favorable conjuncture, if we had ask for help from the international organization, then the loan received from the IMF actually demonstrates the existence of a crisis.

There is a saying: “What does ‘the golden rule’ mean?” “It is a rule established by the one that has gold.” This is true for the IMF’s loan – they now establish rules for us.

In my understanding, IMF’s loan is an “anabolic steroid” for our state power. It might help improve the economy and the system of management. However, if we ourselves don’t undertake any steps to improve our system, to reform regulative, fiscal and investment policy, to renew our state management team, nothing will happen. We will just have a diseased liver as it often happens with those that misuse anabolic steroids.

— How useful from the practical point of view is the formation of a stabilization fund and the possibility to refill it at the expense of distressed banks?

— The operation of stabilization funds in some form is a common practice in developed countries. However, the creation of stabilization fund without any transparent mechanisms for control over its resources is not rational in our country.

If there is no effect from the very fact that such a fund has been created as a preventive stabilization measure, its effectiveness is questionable.

That’s why it is very important today to demonstrate our capability to boost the solvency of the banks which are experiencing problems. The recovery of Prominvestbank would be a good test to assess the prospects of employing the mechanisms of crisis management offered by the stabilization fund.

— Do you agree with the opinion that raiders are the only ones to be blamed for the problems of Prominvestbank?

— No, I don’t agree. Raiders’ attacks were only one factor. Who is a raider? A raider is a person that takes advantage of an entity’s weaknesses. Anyway, the problems that Prominvestbank had been experiencing were the main cause of the panic in the market. That’s why I think that the news that Prominvestbank and Nadrabank have an investor is one of the reasons to hope for the better.

I think that if there is progress in the process of attracting the investor (i.e. helping these banks recover), then it will be a great, reassuring sign for the entire market which can be compared with the loan from the IMF. And this is the first important circumstance.

Secondly, this may help to restore trust in our capability to reorganize financial establishments effectively.

Thirdly, it is a positive example that shows that there actually is a real investor ready to support the banking system. When we talk about a “real investor” we mean that the investor has all the necessary resources to confirm his or her intention to fulfill investment obligations.

Fourthly, which is very important to me, is that this investor is Ukrainian. And the fact that the investor, as it was announced, has a fundamental status, not intermediate, should reinforce our trust in national investment opportunities.

— Where can local investors get their funds? Shouldn’t we worry about their origin?

— What the NBU has to do now is to liberalize the procedures for the formation of banking capital. If we act in accordance with the instructions and regulations developed in the last century, then we will not be able to stimulate the national investor to support the banking system.

I think that today, unfortunately, is the most suitable time for the liberalization of capital. It is necessary to do that to attract more money into the official turnover. It is necessary to create favorable conditions for the financial and industrial groups as well as individual persons to invest into the banking system.

If Mr. Ivanov or Mr. Petrov or Mr. Sidorov are ready to support the national banking system, then I am not interested in where did they got their money.

At the same time, I think that the latest developments should force the NBU to improve its regulative base and simplify procedures for the consolidation of banks, including compulsory incorporations.

— Your opinion is that the state should reorganize and replenish the banks’ capital only in extraordinary cases, after all other alternatives are exhausted, correct?

— My opinion is that the state should not reorganize, but rather do its best to stimulate the unconscious interest of national and foreign investors in the national banking system. Those that will buy or support the banks should be afforded the opportunity to gain control over the banks promptly in order to provide them with operative financial support. There is not any regulative base for this yet. It is necessary to create the preconditions for this. I am sure that there will not be 180 banks in our country.

— Therefore, you support the idea about the consolidation of banking capital, don’t you? However, the efficiency of a bank is defined not according to the size of its capital but rather according to its ability to fulfill obligations. If some small specialized bank (district or town) complies with all the standards, why can’t it also operate?

— I am not talking about consolidation as the liquidation of small district banks. I am talking about the creation of the preconditions necessary for operative reorganization in case of emergency. It is necessary to create conditions for the voluntary incorporation of financial establishments and enable unhealthy banks to integrate with more healthy ones so that the latter can reorganize the former with the help of the state’s financial support.

— Are the interests of depositors sufficiently secured in this case?

There are a couple of problems in this regard. For example, the fact that we have raised the level of security deposit reimbursement is not enough. It is necessary to reform the entire system of deposit reimbursement, make it more selective. We should form a caste of the most efficient banks by banning some financial establishments from working with the population.

One more issue is the unification of regulative and monitoring bodies. Our small financial market can’t have three regulative bodies, the powers of which are very similar. How can, for example, credit unions be licensed and regulated by a separate supervisory body when they operate in the same sphere as banks. It is unreasonable and inefficient.

Additionally, the owners and top managers of the banks are now able to review their own strategies, improve their operation and optimize their structures and expenses. Intensification is the main alternative to conquering the market share at “any cost.” There are a lot of reserves in this regard: in revenue structure, in the specialization of sales network, in the centralization of business-functions.

All the necessary reforms and improvements of the banking system can’t be delayed as it is exactly the banking system – recovered and effective – that should and is able to stabilize the situation.

Tags: Finance by Vitaliy Tretyakov
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Unlike the devastating flood in Western Ukraine, the surplus of grain did not catch the government unaware. The rich grain harvest had been announced beforehand, with forecasts varying between forty and fifty million tons. The government reassured farmers, saying it would employ the State Reserve, the Agrarian Fund, state holding Khlib Ukrainy, and regional food funds to cope with the amount and prevent a price dive.

So far, however, the government has not intervened, leaving grain traders to their own. This marketing year, they have already exported 1,500,000 tons of grain. The price of feed wheat has dropped to a bargain-basement UAH 700 – UAH 650 per ton [$1 = UAH 4.845 ].

As the harvesting campaign was getting into full swing, Khlib Ukrainy President Ivan Rishnyak assured the public that his holding would play a role on the grain market. He had good reason to say so: Khlib Ukrainy has the capacity to store 6,230,000 tons of grain and process about 4,700,000 tons into flour, cereals, mixed feed, etc. It has grain elevators in geographically advantageous places – at commercial ports in Odessa and Mykolaiv, with capacities of 1,500,000 tons and 600,000 tons, respectively.

According to Rishnyak, due to the oversaturation of the grain market and shortage of free granaries this marketing year, Khlib Ukrainy gives preference to storage and plans to purchase 1,500,000 tons. The storage price at Khlib Ukrainy granaries has risen by a quarter – up to UAH 10.57 per ton, but other companies have doubled their price, so the prospects appear to be bright, but Rishnyak’s previous managerial experience calls his statements into question.

Rishnyak has only recently regained the post he occupied in 1999-2002. He said a lot of good words then about Khlib Ukrainy as “the locomotive force of the national grain market”, but almost all his steps turned out to be wrong. It looks like this time he will also not be able to follow-through, considering the heavy burden of numerous debts. Khlib Ukrainy owes traders and government-run structures UAH 670 million and has to clear the debt if it wants to become a full-fledged operator of grain purchasing, storage and a powerful exporter.

The holding has been experiencing financial problems since late 1998. In 2006 it even planned to sell some of its non-processing facilities for UAH 130 – UAH 170, but it only transferred a high-liquidity granary worth USD 25 million to a Dutch creditor – HSH Nord Bank. As a result, Khlib Ukrainy reduced its debt to the bank to USD 10.5 mln and got better sanation prospects, but nothing more than that.

However, the debt is not the only reason why grain producers keep away from Khlib Ukrainy. They remember how its daughter structures made millions by understating the class of grain and writing off “waste”. Almost all granaries do that, though…

On June 25, a few days before the harvest started, the government permitted the State Reserve to purchase grain directly from exchanges, bypassing lengthy tender procedures. One week before, the State Reserve had announced a tender to purchase 200,000 tons of new grain. The bidders were to supply it exclusively to state-run enterprises. The auction never took place because there was only one bidder.

The alternative way – purchase grain through accredited exchanges, which might prove to be effective, but even then the State Reserve would hardly purchase more than 400,000 tons of food grain.

With the holding’s financial and managerial problems, the government wanted to entrust the “first fiddle” to the Agrarian Fund. The fund was supposed to accumulate a grain reserve equal to 14 percent of domestic consumption: 803,000 tons of wheat and 78,000 tons of rye. The money was supposed to come from repaid credits and proceeds from the sale of land. The Verkhovna Rada standing committee on agrarian policy and land relations found such a source unreliable and obliged the government to allocate UAH 1.3 billion for the Agrarian Fund directly from the Treasury. In the revised version of the 2008 national budget, the government offered UAH 818 million, but President Yushchenko found the sum insufficient and demanded to increase it to UAH 1.5 billion.

As of July 1, however, the Agrarian Fund was penniless since parliament had not passed the budget amendment bill. It had to hold the first auction with the money provided by the Agrarian Ministry at the expense of outlays for other programs. The ministry also promised to give the fund another UAH 250 million later, but even that sum was far smaller than UAH 1.5 billion.

The government looked high and low for a way out: Agrarian Minister Yuri Melnyk proposed to disburse money allocated for the Agrarian Fund three months ahead of schedule, and MP Ivan Kyrylenko of the Tymoshenko Bloc suggested a loan that the fund would return immediately after the adoption of the revised budget.

The plans, if any, were canceled by force majeure – the devastating flood that hit six western and southwestern regions in late July and made lawmakers interrupt their summer vacations for an extraordinary session. They were forced to pass a budget amendment bill (which they had turned down during the regular session) in order to fund flood relief operations, repair and restoration works, and compensation to affected people. Along with the emergency allocations, they also “granted” one billion hryvnyas to the Agrarian Fund.

It should be noted that since the Agrarian Fund started functioning on July 6, 2005, it has never received enough money from the government.

Meanwhile, excessive supply is flooding the national grain market. Farmers are pushing out their new grain. They badly need money for harvesting late crops and plowing land.

The current price drop affects mid-sized farms most: unable to influence the grain market, they have to put up with the terms and prices set by the lessees of their land. They have to sell their grain cheaper now in order to save money on storage.

And that is where traders “come to the rescue”. In fact, they save the rest of the world from the global food crisis and leave Ukrainian farmers high and dry, buying grain from them for less than the input costs.

The imminent result of sharp price fluctuations and the government’s indifferent passivity is quite predictable: next year, the area under winter wheat is likely to shrink considerably. Then, if the harvest is poor and the country is short of grain, the same traders will sell it, but this time to the world.

In Russia, the situation is different: six companies, mostly transnational, control 60 percent of grain exports, and this year a state-run company is going to join the grain export business. The Russian government is founding the new trader on the basis of a state-run public corporation named Agency for Food Market Regulation. By 2011, its share in Russian grain exports (which are currently estimated at USD 4.5 billion - USD 5.5 billion) is expected to reach 40-50 percent. Twenty-eight companies with government stakes in the statutory funds and some private commercial structures are also expected to fall under the agency’s wing.

The Ukrainian government does not know what to do about its three interveners and the interveners do not know what to do about the surplus of grain. They accuse transnational companies of “cartel collusion”, but aren’t those companies among the most active exporters of Ukrainian grain?

Ukrainian producers of meat are concerned about increasing imports of American chicken legs and appeal to the government for help. Didn’t Ukraine strive so long and hard for WTO membership? Didn’t its leaders promise the people liberal trade and wider access to foreign markets and goods? Didn’t they say that the national agricultural sector would gain more from WTO membership than it would lose? Now they have received this “grain warning” – hopefully, not the last…

Tags: Agrarian Sector by Vitaliy Tretyakov
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(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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Against the backdrop of the global financial crisis, little heed was paid to the news released on 5 November by the Association of Ukrainian banks (AUB) about a meeting the AUB Board members and CEOs of the AUB member banks had a day before with NBU Governor Volodymyr Stelmakh and his First Deputy Anatoliy Shapovalov.

According to the AUB report, while discussing the current refinancing procedure, the Association Board members insisted on providing all banks (irrespective of their authorized capital) with equal access to operative re-financing facilities stipulated by NBU Resolution #328. It was also mentioned in passing that “the discussion of the AUB proposals was fairly emotional; the parties wanted to hear each other, yet not always succeeded in achieving this goal.”

As a meeting participant told ZN, the latter quotation was a gross understatement of the passions running high at the meeting between the NBU top managers and bankers.

Another serious showdown occurred on Thursday at the meeting of the NBU Supervisory Board. Representatives of the NBU Management Board reproached Petro Poroshenko, chair of the supervisory board, for exceeding his authority when attending to the needs of Prominvestbank. Mr. Poroshenko demanded that all such allegations be withdrawn; otherwise, he threatened to tender his resignation immediately, announcing it publicly at a press conference scheduled for the end of the meeting. He also warned about possible recriminations against the NBU management, allegedly engaged in exchange rate manipulations and providing selective access to the NBU refinancing.

What were the reasons for high passions and the scandal that followed?

It is no secret that the banking market is struggling to improve liquidity (i.e. to find cash). First, deposits are no longer a reliable source of money. Second, foreign borrowing has become practically unavailable to Ukrainian financial institutions. Third, the inter-bank resource market is almost non-operational. Whereas in August, for example, the annual trade never dipped below UAH 5 billion (sometimes amounting to UAH 7.5 billion or more), over the last couple of months it has shrunk to a little more than UAH 3 billion. The reason is that cautious bankers, should they get hold of free liquidity, prefer to keep it for their own needs.

The balance on banks’ correspondent accounts in NBU has been sinking since 10 October when it exceeded UAH 20 billion. As of 31 October, it had plummeted to a record-low level of UAH 11.8 billion, hardly covering the mandatory provisions set at about UAH 11 billion.

According to the NBU data, the average weighed inter-bank rate on that day reached 28.6%. In some cases the money market rates were as high as 50% per annum.

In November, the situation has not improved: on Friday morning, the balance on banks’ correspondent accounts was under UAH 13 billion; the average weighed inter-bank rate calculated by NBU has been steadily over 25% per annum (in many cases, the “mass market” rates are even higher).

Under the circumstances, the only source of funding for banks is NBU refinancing. However, as many bankers would argue, it is difficult to obtain, even though the NBU’s management declared ensuring liquidity of the banking system to be the regulator’s top priority.

Why is it so? Most probably, the National Bank is at a deadlock, facing the need to provide liquidity to the banking system, on the one hand, and to maintain the hryvnia/dollar exchange rate, on the other. It sees no painless way of ending the deadlock. The extensive refinancing of banks in order to support their liquidity is tantamount to printing large amounts of new money, which eventually flows onto the currency market, adding pressure to the unsteady exchange rate.

The national Bank has to resort to large scale interventions in order to sustain the exchange rate, selling currency reserves for commercial banks’ hryvnias, which automatically withdraws the latter from circulation. As a result, the banking system looses free liquidity. Last month, the NBU intervention on the currency marker amounted to USD 4 billion. At the same time, it withdrew UAH 20 billion from circulation, which will have to be offset by refinancing. A vicious circle has emerged.

It should be broken, as reserves are dwindling rapidly. In October they decreased by USD 5.6 billion (about 15%) to USD 31.9 billion as of 31 October.

A sensible market-oriented solution would be to stabilize the exchange rate and make hryvnia short in supply and, thus, fairly expensive in the domestic market (in terms of interest rate) so that it would not be advantageous to sell it for dollars. According to analysts’ estimates, the hryvnia-denominated interest rate should rise to at least 25%-30%.

Thanks to case-by-case management and administrative restrictions, the National Bank has stabilized the currency market situation. Yet the NBU is also confronted with the grave and imminent threat of resource market paralysis. It is clear that the banking system cannot feel comfortable about liquidity with the 30% interest rate. It is also clear that the demand for NBU refinancing (which is twice as cheap) will surge under these conditions.

The NBU refinancing rules are established in the Guidelines on Regulation of Ukrainian Banks’ Liquidity by the National Bank (Resolution # 378 of 26 September 2006). As per the document, banks that cannot boast large portfolios of government bonds and regular revenues in foreign currency could (until recently) get long-term (up to 12 months) NBU refinancing either through participating in tenders for supporting bank liquidity or through applying to NBU for so-called “stabilization loans.”

Banks considered the latter option to be the last resort since stabilization loans are extended as a “measure of financial institutions’ rehabilitation.” The accompanying procedures are cumbersome and distressing, and the very fact of application mars the bank’s reputation indelibly.

Spiteful tongues argue that a lot of the refinancing loans made by NBU in October could qualify as stabilization loans. The applicants, however, were prepared to borrow at any price and on any terms to avoid getting into the category of stabilization fund users.

The NBU refinancing tenders – the former option – are held weekly but it is only once a month that the regulator offers annual resources. The abovementioned Guidelines list a wide range of financial instruments that the bidding banks can pledge as collateral to get refinancing.

On the face of it, everything seems simple: if you need money, you should take part in the tender. Yet the devil is in the details. Few banks have high-liquidity securities (government bonds, NBU deposit certificates or municipal bonds) in their portfolios, while other types of collateral have to meet additional requirements, and bureaucrats can always challenge their eligibility. Those who still think bureaucrats can be sympathetic should try and collect the necessary package of tender documents…

The liquidity regulation guidelines also require that every bidding bank provide only homogeneous collateral, i.e. either government bonds alone or deposit certificates alone, etc.

As matters stand, bank portfolios of securities are scanty: as of 1 October 2008, their share in bank assets was slightly over 4%. Therefore, not all financial institutions can afford forming appropriate collateral for every tender. NBU experts concur that most banks lack liquid securities. According to them, only 12 out of the 17 largest Ukrainian banks (and 49 out of 181 banks operating in the country) had securities eligible for NBU refinancing in their portfolios.

The latest refinancing tender took place on 6 November: 48 banks obtained refinancing in the amount of UAH 3.8 billion. According to NBU statistics, at the tender held on 8 October about 20 banks received UAH 1.655 billion for 359 days at the interest rate of 16.8% per annum. Put bluntly, each of them got “crumbs.”

In view of the liquidity problem, the NBU issues a notorious resolution (#319 of 11 October 2008), which, inter alia, imposed a ban on the pre-term withdrawal of bank deposits. Clause 1 of the resolution spelled out the regulator’s commitment to “broaden opportunities for maintaining liquidity due to financial rehabilitation programmes.”

The list of eligible types of collateral was expanded, indeed. However, this provision proved useless to most banks as it referred to the “financial rehabilitation programmes” which banks fear like death. On 16 October, the NBU issued Resolution #328, which could have become a magic wand to banks suffering from liquidity shortages. Financial institutions were given a long-awaited chance to receive so-called “operative refinancing” from the regulator.

Resolution #319 was supplemented with a provision enabling banks “to apply to the National Bank for liquidity enhancement” should their deposit amounts fall by 2% within five working days. The terms and conditions include the instantaneous submission of a duly formalized agreement of pledging shares of the respective bank’s major shareholders to the National Bank, which is a pledgee under this agreement.

Very soon, though, to the bankers’ bitter disappointment, a series of explanatory letters followed. One of them (#14-011/3668-14302 of 22 October 2008) clarified Resolution #328, whereby NBU undertook to consider “loan applications only from those banks, which are incorporated as open (public) joint-stock companies and have the authorized capital of UAH 500 million and more.” The new requirement was substantiated with the good intention to “facilitate the increase in banks’ capitalization and urge bank shareholders to work towards this end.”

The crux of the matter is that only 25 banks operating in Ukraine as of 1 October 2008 can meet the minimum authorized capital criterion. The NBU knows this perfectly well. Excluding banks incorporated as closed (private) joint-stock companies and limited liability companies, one will get less than a score of financial institutions, most of which (12) are subsidiaries of foreign banking structures that are not in need of NBU operative refinancing.

The remaining 160 banks (88.88% of Ukrainian banking system), most of which represent national banking capital, are supposed to handle their problems independently. Under the current situation, this means that these banks might need to approach the National Bank for stabilization loans.

Considering such a possibility, the next regulative act of the National Bank (the 353^rd one) prescribed including property rights that banks acquire for issuing substandard credit loans into the list of possible collateral for its refinancing loans.

When during the meeting with the heads of the National Bank the bankers demanded an explanation as to why 160 Ukrainian banks were discriminated against, they were told that the board of the National Bank, which would examine requests of operative refinancing, might not be able to cope with their probable amount.

A high-ranking official of the NBU blabbed out that the National Bank is first of all worried about the 17 biggest “backbone” financial establishments (first group) which are accountable for 60% of assets of the banking system. All the rest will have to take part in tenders according to the general rules or employ stabilization procedures.

However, when the officials heard the question “Is that an official position of the National Bank and does it mean that the National Bank is not concerned about the remaining 40%,” they retracted these careless words.

It is no secret that the largest banks were the first banks affected by crisis and that they approached the NBU for help. The bankers are outraged by the fact that the status of “backbone” allows them to solve the problems on more favorable terms than the rest of the banks.

On Tuesday, just before the next tender on refinancing, the NBU informed the banks of its decision to include into the list of possible collateral for its refinancing loans property rights that banks acquire for issuing standard credit loans.

The reader might say that the NBU has actually extended the list of collateral for its loans. Yes, but the thing is that the opinions of the officials and the bankers’ opinions on which loan can be considered to be standard might differ a lot.

One of the bankers, speaking on condition of anonymity, explained the situation as follows: “The problem is that the current regulative acts on the terms of long term refinancing are composed to let the officials to make final decision on whether or not to issue a loan. A reason to refuse refinancing can be found very easily. This makes the current situation and system ripe for various abuses and corruption. There are rumors that it is possible to solve the problem with refinancing and it costs a definite sum of money. Therefore, it turns out that those bankers that know how to “solve problems” at the necessary level can receive more favorable terms at the expense of the others.”

Tags: Finance by Vitaliy Tretyakov
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If at the end of summer, it was possible to buy one dollar for 4.7 hryvnia, then on October 8^th, the exchange rate surged up to 6.0 hryvnia for one dollar in some exchanges. This shows that hryvnia has lost more than 20% of its value over the past incomplete one and a half months.

After its extraordinary meeting on Tuesday, the Board of the National Bank of Ukraine (NBU) made an announcement concerning expanding its forecasted corridor for hryvnia’s exchange rate fluctuations – from 4.85 hryvnia for one dollar (plus/minus 4%) to 4.95 hryvnia for one dollar (plus/minus 8%). When commenting on this decision, the head of the Board of the National Bank, Petro Poroshenko, tried to insure Ukrainians that there are no reasons for hryvnia’s devaluation and no problems with the liquidity of banks.

However, how can we believe in this if the same night, the Board of the NBU extended a five billion credit line to PromInvestBank, one of the largest operators of the Ukrainian financial market, and decided to establish a temporary administration in the bank as well as announce a moratorium on savings withdrawal? Some mass media assumed that bankruptcy of PromInvestBank might threaten other financial institutions…

The entire banking system of our country, which until recently displayed a surprising immunity to global financial crisis, virtually turned out to be under threat of replication of the 2004 scenario. After a series of multi-billion interventions, the NBU actually managed to lower the exchange rate of the hryvnia. Friday’s trading at the interbank foreign currency exchange closed with a quite comfortable rate of 5.2 hryvnia for one dollar. First deputy chairman of the NBU Anatoliy SHAPAVALOV gave ZN his comments on the recent events in the country’s financial market.

— Anatoliy Vasyliovych, what caused the recent surge of the dollar’s exchange rate in commercial banks’ exchanges?

The currency exchange market appeared under the influence of a number of factors, which, by the way, were mentioned the other day by the chairman of the NBU. The first factor is a decrease in the inflow of foreign currency from exports due to a decreased demand for national metallurgical and chemical products in the foreign markets. The second is the influence of seasonal factors: seasonal increase in the citizens’ demand for foreign currency, more intensive purchasing of energy supplies and advanced payments within international contracts.

And the third factor is considerable aggravation of access for the national financial institutions to resources in foreign markets due to the global financial crisis at the time when they have to buy foreign currency to pay off their loans received earlier.

As you know, the Board of the NBU considered the current situation and widened its forecast of exchange rate fluctuations (from 4.85+/- 4% to 4.95 +/-8%, or 4.55 – 5.35 hryvnia for dollar). I consider this step to be reasonable. However, I would like to emphasize once again that the issue is not about the devaluation of the hryvnia. It is a correction of the exchange rate forced by the current circumstances.

— Do the aforementioned factors justify an instant surge of the quotations in the exchanges up to 6 UAH/USD? If not, then why did the National Bank allow this to happen?

— Apart from the abovementioned, a number of other factors in both domestic and global markets affected the situation. The global markets were consumed with panic after the news about the downfall of Germany’s largest mortgage bank, Iceland’s banking system being in the prior to default state and bankruptcies of the Russian banks.

In addition, a conflict around PromInvestBank has suddenly escalated in Ukraine. It is a quite longstanding conflict but, the mode it has finally entered is an unpleasant surprise to us.

Certainly, all these events had a strong but mostly (90%) psychological impact on the domestic market that made bankers and depositors feel nervous. I would like to emphasize that none of the significant changes in the economy justifying such surges of the exchange rate could occur during just one week. Outflow of speculative capital from the Ukrainian stock market estimated around UAH 300 million is no serious threat.

— Speaking of PromInvestBank: Do you agree with the statement that the bank became a victim of a raider’s attack or was it the fault of the bank’s main stockholders?

— So far, it is hard to definitely assert who is responsible – stockholders or raiders. However, when flyers and SMS’s with a message “the bank is bankrupt, withdraw your money as soon as possible” appear, the depositors can hardly stay calm. And PromIvestBank had more than 4 million depositors. The customers rushed to the bank and withdrew more than UAH 3 billion in a few days.

What bank is able to withstand such a situation independently? In just one day before the temporary administration was instituted, the bank lost more than UAH 1 billion. A full-scaled customers’ panic was obvious. The only way to save the bank was to establish a temporary administration and announce a temporary moratorium on paying out the deposits.

My opinion is that we will manage to return back the deposits and rescue the bank. It has good high yielding assets. PromInvestBank’s profit during the last eight months was about UAH 500 million.

— Was it not possible to forecast such an excess situation? Wasn’t the National Bank too optimistic by being unprepared for this?

— You shouldn’t put the question this way. We have forecasted the development of negative scenarios in the global markets and began to implement preventive measures starting in May last year. The banks actively working with nonresidents’ money were the key objects of attention then.

The next stage of our preventive work was a considerable restriction of our credit and monetary policy this year which resulted in a rise of interest rates in the interbank market up to 25-30%. The rates stayed at this level for almost two months.

At first, the Nation Bank evoked a wave of criticism for these actions. However, afterwards, many bankers even thanked us for forcing them to review their market policy and approaches to liquidity management.

— What is your estimation of the current liquidity of the banking system?

— The National Bank pays a lot of attention to issues connected with the liquidity of the banking system. Last summer, we have resolved to carry out an easier monetary and credit policy, supporting the level of quick ratio between 6 and 8 billion.

Due to these measures, it was possible to provide a necessary balance. Neither the crisis in the global markets along with the news about bankruptcies, injections and nationalizations, nor the internal political conflicts with the, to put it mildly, incautious statements of some politicians could cause serious shocks in the domestic financial market. On the other hand, the monetary policy we conducted was moderately restrictive which helped slow down the growth of monetary aggregates and reduce the amount of consumer loans.

From the beginning of October, balances on the banks’ loro accounts have surpassed UAH 20 billion, and from Wednesday – UAH 21 billion, UAH 12.9 billion of which are obligatory reserves. Thus, disposable money is more than UAH 8 billion. We have also sterilized another UAH 5 billion as an additional buffer. Therefore, we have a surplus liquidity in the banking system today. However, there is not enough trust between the bankers.

We tried to assure the bankers: “You see each other perfectly well; you monitor each other’s balances on a daily basis. The situation is quite stable. Start working: insure yourselves, secure yourselves, but start lending.” They promised: “Yes, we will.” However, they prefer to be overcautious.

Both Volodymyr Stelmakh and I asserted that liquidity of the banking system is high enough, that we are ready to refinance and support good banks with high yielding assets in current conditions of aggravated access to the foreign markets.

We are operating in a normal mode and are employing traditional banking instruments. It was a scheduled and not an extraordinary trading on Wednesday, during which we extended UAH 1.66 billion refinancing to twenty one banks. Some time earlier, we extended an ordinary loan to Nadra Bank (not extraordinary, as many mass media asserted) for its refinancing purposes. Under the current circumstances, using the received refinancing to redeem its external debt would be more profitable for the bank.

Unfortunately, the media misrepresents information quite often, causing additional worries in the market and among the citizens.

— Anatoliy Vasyliovych, perhaps, you are not active enough, are you? You seldom conduct meetings with the bankers or you are not convincing enough, are you?

— We are able and are ready to hold meetings with the bankers. However we didn’t consider it necessary to put them off their direct work since the liquidity in the interbank was high enough, which was proved by the rates at the level of 3 to 7%.

Besides, consultations with representatives of the largest operators are constantly being held anyway. We examine and analyze their proposals. We consider some of the proposed measures to be quite reasonable and some premature and inexpedient. For instance, many banks proposed limiting a permissible margin for fluctuations of the exchange rate in the exchanges that work with cash.

Our experience shows that this measure is inefficient and leads to a deficit and the appearance of shady exchanges. And it is extremely hard to account the volumes of such illegal operations. Therefore, this measure does not solve the problem but creates additional difficulties.

By the way, I would like to note in this context that I don’t understand those bankers who for the sake of a three cent profit are ready to provoke their own customers to withdraw their savings.

— Doesn’t the inaction of the National Bank that allowed the dollar’s exchange rate to surge up to six hryvnia provoke worries among the citizens?

— The leadership of the National Bank has already announced that it is ready to support the foreign currency exchange market with currency interventions. Yesterday and the day before yesterday [this interview took place on Thursday night October 9^th – Yu. S.], we have already proved our announcement by selling 175 million dollars and 475 million dollars for 5.0 UAH/USD. We are going to enter the market on Friday if it is necessary to calm down roaring demand. My opinion is that we will able to lead the market to a rational exchange rate, close to the official rate, in the near future.

— Do you mean a 4.8 - 5.0 UAH/USD range for exchange rate fluctuations, which, according to Volodymyr Stelmahk, is possible considering an objective estimate of the current economic situation in Ukraine?

— It is possible that the exchange rate will be higher than that for some time since the correction of the rate should compensate the influence of seasonal factors and lower the impact of aggravated export conjuncture. These as well as other possible misbalances are what the National Bank is trying to accomplish by liberalizing the process of exchange rate formation.

— What is the most optimal exchange rate in your opinion?

— My opinion is that it should be 5.10 UAH/USD

— How soon will the market achieve this point?

—It depends on many factors including the development of the situation in the global markets. A number of leading central banks have already lowered their discount rates.

As far as we know, the International Monetary Fund is now discussing the possibility of extending credit lines within insurance stand-by program to developing countries with negative foreign trade balances in order to prevent possible financial shocks. After an agreement on this matter is concluded, it will be possible not to use these resources. However, if problems occur, it is possible to receive them immediately. We plan to propose considering this possibility on Friday’s meeting with the President.

Tags: Finance 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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Tags: Euro 2012 in Ukraine by Vitaliy Tretyakov
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Who can comprehend the government’s logic? Why does it limit seed-oil exports, causing the closedown of 15 oil-extracting plants and the loss of 15 thousand jobs, when the domestic market supply exceeds demand fourfold? Why did it open the national borders to all sugar based products, in addition to the World Trade Organization (WTO) quota of 260 thousand tons of raw sugar, jeopardizing domestic sugar beet production? Why did it kick up a fuss in the domestic grain market with the belated abolition of export quotas, destabilizing global grain trade?

The government explains thatthe need to curb inflation dictated the above measures. However, they have not had any effect apart from paralyzing the budget-forming sectors and causing a decline in consumer demand.

The usual “fair” distribution

What drove the Ministry of Agrarian Policy to cut seed-oil exports, given that three months before the start of sunflower seed harvesting Ukraine has stockpiled about 800 thousand tons of seed-oil? The domestic consumption is 120 thousand tons. What shall we do with the surplus? Dump it into the Black Sea?

The Agrarian Ministry has problems matching their balances to the actual situation. This time one of the deputy ministers, upon studying the available data, concluded that in this marketing year Ukrainians… did not consume a single gram of seed oil. According to the deputy minister, seed-oil production should be 1.8 million tons, of which 0.5 million tons should be consumed domestically, and 1.3 million tons – exported. So far, so good.

Oil-extracting plants exported one million tons of seed-oil, and 217 thousand tons are stored in tanks. Does it mean the population does not use seed-oil? An obvious mismatch, especially given that the sunflower-seed oil consumption grew from 7 to 17.2 kilograms per capita.

In 2006, the yield of sunflower seeds was 5.3 million tons. How could the industry market 3.2 million tons through all channels and produce 2.4 million tons of sunflower-seed oil? Last year 4.2 million tons of sunflower seeds were harvested, and oil-extracting plants should have produced 1.8 million tons of oil (the figure cited above). As a matter of fact, about 500 thousand tons of sunflower seeds (equivalent to 200 thousand tons of sunflower-seed oil) in the Ukrainian domestic market are unaccounted for. Thus, the real gross yield was almost 4.8 million tons – a glaring difference with official statistics.

Instead of putting house in order, first of all, with regard to business entities’ accounting and declaring their yield of sunflower seeds and next – to oil production and sales, the officials cut exports to 300 thousand tons. As per Resolution #189 of the Cabinet of Ministers dated 12 March 2008, starting 22 March the export of sunflower seeds and oil is subject to licensing.

On 18 March 2008, the Prime Minister held a special stakeholders’ meeting to discuss the situation in the oil-and-fat market of Ukraine. She asked processors to reduce their prices by 15%. The companies agreed on two conditions: first, their VAT (over UAH 1 billion) should be fully refunded; second, the Antimonopoly Committee’s decision to reduce fines for two major producers should be revised. Eventually, each was fined for UAH 1 million instead of UAH 60 million as awarded.

Seed-oil producers thought it practical to distribute the quota amongst exporting plants. The government, however, widened the circle of eligible exporters to include, alongside 25 large oil-extracting plants, 15 other business entities (intermediaries, trading houses, etc).

Every potential exporter estimated its capacity and came up with an export application, the total volume being 703 thousand tons. The difference in permitted and sought amount did not discourage nor antagonize the applicants. Had the distribution been equal, they would have been happy with 0.43 of their sought export volume. Yet the Cabinet of Ministers decided to allocate quotas in its usual “fair” manner.

On 19 March 2008, it passed Resolution #229, reading: “The total export quota for sunflower-seed oil shall be distributed as follows: 60% – proportionally among applicants according to their declared export capacity; 40% – in addition, proportionally among applicants that were selling bottled oil in the domestic market from 1 September 2007 to 1 March 2008, with relevant authorization by the Ministry of Agrarian Policy.”

As a result, five companies supplying the domestic market received a quota of 218 thousand tons, whereas the other 35 companies got as little as 82 thousand tons of seed-oil. Another remarkable fact: Kernel and Bunge Ukraine hold 80% of Ukraine’s seed-oil market. These two companies’ quota is 158 thousand tons out of the total 300 thousand tons of seed-oil.

Of course, the 60:40 proportion was lobbied by the domestic operators that reduced their selling price to UAH 9.3-9.8 per litre. Some of them did not have enough oil to use up the quota, and they had to buy oil from their less lucky peers. From the start, the privileged exporters counted on purchasing seed-oil at a low price from the plants with limited export opportunities. The latter were not tricked with the monopolists’ ruse: they simply suspended production. A trifling price reduction in exchange for export monopoly caused not only financial but also moral damage, both in Ukraine and internationally.

Tarnished reputation

The introduction of export quotas coincided with a series of complaints coming from Europe about the contamination of Ukrainian seed-oil with mineral components. A batch of 40 thousand litres was supplied to Switzerland, France, Spain, Greece, the Netherlands, Italy… Although the tests showed the presence of not more than 0.4—0.74% of technical oils (which poses no hazard to health), the seed-oil was rejected as defective.

There are several versions of how the contamination could have occurred. First, there were traces of petrochemical products in cisterns used to transport seed-oil to the port terminal, wherefrom it was delivered to Europe by sea. Producers dismiss this version as groundless: they do use “petrochemical” type cisterns but those have served to transport seed-oil for years. After the incident a special marking “seed-oil” or something like that will, most probably, be introduced.

The ingress of foreign substances in the process of production is out of the question. Seed-oil is produced employing imported equipment featuring state-of-the-art technology. Over the last five years, investments into the industry have amounted to USD 500 million, and its capacity has doubled. Exporting plants operate on the basis of technical regulations with detailed requirements for all stages and processes of seed-oil production, storage and transportation; critical points are clearly identified and the frequency of checks is defined, together with the personnel in charge of monitoring and supervision.

The plants have accredited laboratories whose experts control the quality of inputs and outputs, certifying the quality of every batch. A sealed sample of produced oil is kept in a special lab room for 1-3 months for arbitration purposes should the sellers’ and buyer’s tests show different results.

The authorized lab representative ascertains that the transportation tank is clean and permits oil to be poured inside. Relevant entry is made in a special log, indicating the number of the vehicle’s sanitary passport, shipment number, date and time. Then the vehicle is sealed. Exporting plants have introduced the international standards ISO 9001, ISO 22000, НАССР and ISO 14000; they are certified within both the national and international accreditation systems.

When seed-oil is exported from sea-port terminals, quality and safety control is exercised by independent surveyor companies in laboratories accredited by FOSFA (Federation of Oils, Seeds and Fats Associations) against criteria set by this organization. Independent laboratories take three samples and seal them. The first sample is tested immediately in the laboratory, the second is kept as back-up and the third is handed over, together with the accompanying documentation, to the vessel captain for delivery to the purchaser.

At the point of destination, the product is taken by another independent FOSFA-accredited laboratory contracted by the purchaser. It allows to trace all transportation stages and, if need be, perform another test so as to establish when foreign components got into the seed-oil shipment. The latter is exactly what concerned Ukrainian ministries and agencies are busy doing at the moment.

So, on the one hand, extraneous materials are effectively screened out due to the above meticulous procedure, but on the other, those materials were, in fact, detected in Ukrainian seed-oil. Our political leads hurried to blame Europe for tolerating unfair competition. It will be extremely detrimental to Ukraine’s reputation and economy if our 55% share of the European seed-oil market shrinks because of the incident. Over the last decade, there have been no serious complaints about Ukrainian seed-oil quality.

One should not look for saboteurs in Europe: it would help to pore over the quota’s opponents. They could have taken revenge for being denied better export opportunities without fully realizing what harm they were doing to their industry and Ukraine as a whole.

One thing is clear: many failed the test of high prices. Some show symptoms of delirium, others – of aberration. Seed-oil producers waged marketing wars against one another and, unfortunately, started loosing professional unity, which had distinguished them from other food-processing industries for years.

Yellow color of dislike

It would be better if Yulia Tymoshenko’s government didn’t interfere with the seed-oil industry. Many previous governments tried to shake this industry. There also were the lovers of yellow color among the MP’s of several cadences, who, as Van Hog, draw their “sunflowers” released from 17% export duty.

Initiators of the abolition of the export duty played into Europe’s hands since the EU is provided with raw materials only for 50% and needs to import Ukrainian sunflower-seeds. We could turn into a raw materials-producing agrarian appendage as Hungary and Bulgaria. The introduction of a 17% export duty on sunflower-seeds saved Ukraine; we also managed to make Russia and Europe buy our seed-oil.

Every Ukrainian government thought that it was necessary to interfere with the seed-oil producing industry, where, unlike other industries, the interests of agricultural producers, traders, seed-oil-processing enterprises and consumers are well-balanced. Last year, Viktor Yanukovych’s government was worried about the quick increase in the price of seed-oil and threatened to establish a 15% export quota beginning November 1^st. Then, as today, Kernel and Bunge Ukraine lowered their wholesale prices on seed-oil by 6-10% and the situation stabilized.

Yulia Tymoshenko also ordered that prices on seed-oil be lowered, although everybody understands that the flexibility of several companies is constituted nothing more than temporary collusion and party solidarity. It is not possible to produce cheap seed-oil from expensive seeds. At present, the price of the seed-oil rose only two times while the price of its raw components rose fourfold. The Antimonopoly Committee calls this situation “cartel collusion”, because world tendencies and world market trends influence the domestic market anyway.

How will the actions of the government affect an obviously export-oriented industry? Due to standstills of the oil-extraction plants, the state budget of our country didn’t receive UAH 100 million in April and UAG 150 million in May. In fact, the seed-oil industry contributes about UAH 2 billion into the state budget every year. And its part in the total export of agricultural products is 25%.

The limitation of exports creates long-term problems in the economic and social sphere. And, as a consequence, will lead to the next increase in the price of seed-oil, margarine and mayonnaise. The President understood this and organized a meeting with representatives of grain and seed-oil industries. His reaction to increased administrative regulation of the sunflower seed-oil production was expressed in the letter to the Prime Minister: “It is necessary to hold a meeting with agricultural producers and representatives of agricultural businesses to discuss the situation in the industry and make a decision about cancellation of limitations of export of grain and seed-oil… I am sure that these steps will let Ukraine improve its investment climate and strengthen its image in the international arena.”

The government responded to the President’s proposal with a draft resolution “On cancellation of some of the resolutions of the Cabinet of Ministers”, which was signed by three ministers: Bohdan Danilishyn, Yuriy Melnik and Viktor Pynzenyk. This document proposed to cancel licensing and the introduction of quotas on seed-oil exports. Unfortunately, this resolution is still just a draft because Yulia Tymoshenko has yet to sign it .

In fact, those “seed-oil manipulations” resemble a complete capitulation of the industry within the WTO. Ukraine should lower the export duty on sunflower products by 1% every year. This means that we should get ready for the flow-out of the sunflower products abroad, where the prices are higher than in domestic market.

Incidentally, officials’ distaste for yellow can be also seen in the rapeseed industry. Ukraine has considerable production capacity for rapeseed processing. However, this strategically important raw material for production of bio-diesel is flowing abroad. From the last year’s harvest of 1 million 53 thousand ton rape seeds, national plants processed only 47 thousand tons.

And the government stimulated agrarians to grow rape by paying them subsidies and compensating added value tax to those agricultural producers that exported rape. The government paid a total UAH 1 billion to supply producers from other countries with raw materials. Perhaps, somebody is happy with such a re-orientation, but not me.

I would like to recall 1998, when the harvest of sunflower seeds was about 2 million tons and the government allowed its export. Then, we had to import low-quality seed-oil from Turkey, which was mixed with dielectric oil. The market was full of counterfeit products covered by famous brands. Is the present Cabinet of Ministers preparing a similar scenario for us?

Tags: Agrarian Sector by Vitaliy Tretyakov
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