Wednesday, February 24, 2010

Ukraine's options remain open

Ukraine's presidential elections put the country back into the spotlight of the international media, probably for the first time since the Orange Revolution in 2004. Back then, on a tide of optimism and immense hope for change and reform, Ukraine received generally positive opinions from analysts all over the world. Now, having just passed the first severe economic crisis in its independent history, the country is uniformly condemned for being plagued with corruption, having no clear direction and economic policy, and lacking stability - in other words, for not living up to the high hopes of 2004.

In many ways this criticism is justified. The fact that the outgoing president, Viktor Yushchenko, received a humiliating 5.5% of total votes in the first round of presidential elections on January 17 and failed to advance to the runoff is a clear sign of the nation's disappointment with him and reflects a strong desire for change. The country's policymaking has suffered from a long-lasting deadlock between the main branches of power; its obscure legislation has spurred corruption; the judicial system can hardly be relied upon; and growing a successful business in such conditions is a real challenge.

What cannot be justified, however, are the audacious claims we hear that Ukraine has no option but to choose from either slipping into national default or sacrificing its independence for the sake of a Russian bailout. On the contrary, against the backdrop of difficult internal issues and challenges it faced during the global crisis, the country's economy has coped with the situation comparably well and is now putting itself back on a recovery path. The banking sector has stabilized due to the joint efforts of the International Monetary Fund (IMF), the National Bank of Ukraine (NBU) and the government, as well as the active support lent to local foreign-owned banks by their parent institutions. The revival of global commodity markets is supporting the recovery of Ukraine's steel giants, having kept exports and GDP on the rise for three successive quarters. Unemployment has stabilized at approximately 9%, which compares comfortably with other countries in the region. Foreign investor interest in the domestic market is clearly reviving, with the local stock market index up 273% from its bottom in March 2009 and 14% since the beginning of 2010.

Debt/GDP level is manageable

Ukraine's level of gross public and private debt had stood at a reasonable 57% of GDP just before the crisis erupted in the autumn of 2008. On this measure, Ukraine had a considerably more secure position compared to many of its peers in emerging Europe and beyond. Ukraine's debt ratio then surged due to the national currency's depreciation and the contraction of GDP, hitting 84% in the third quarter of 2009. This level is still considerably below the debt/GDP ratios of such regional peers as Hungary (177%), Bulgaria (116%) or Kazakhstan (100%).

Looking at the composition of gross debt brightens the picture further. Despite the influx of nearly $13bn of IMF financing - including a $2bn special drawing right allocation (SDR) - Ukraine's external public debt amounts to $24bn, or less than 21% of GDP and 23% of its total external liabilities. The government needs to repay a mere $1bn out of this amount in 2010 - a fraction of the country's current international reserves totalling $26.5bn. Domestic public debt amounts to $12bn or 10% of GDP.

The private sector debt should also be analyzed more accurately. External liabilities in the private sector amounted to nearly $80bn in the third quarter of 2009. According to NBU estimates, approximately $18bn-20bn of this amount matures in 2010 (net of trade credits). Refinancing the bulk of these liabilities does not seem a "miracle scenario" at all if one keeps in mind that out of $28bn that fell due in 2009, 75% was rolled over. The primary reason is related-party lending, which accounts for a majority of the above liabilities. This type of lending is a commonly used form of direct equity investing in Ukraine. The rollover rate may be even higher this year, as the anticipated post-election political stabilization should open access to new external financing.

Not surprisingly, the state budget suffered from the economic downturn, as did budgets all over the world. We estimate that last year's budget gap reached 8-9% of GDP (including the consolidated budget deficit and the deficits of the Pension Fund and the state-owned Naftogaz), or approximately $10bn. In the course of the year, the IMF provided $7bn for budget support (including $2bn of SDRs used for budget purposes), leaving little need for money printing. Unlike in many other economies, Ukraine's central bank has kept a firm grip on the money supply, which has created conditions necessary to stabilize the currency and reduce inflation to approximately 12.3% in 2009 from above 20% in 2008.

Foreign investors reconsider the market

IMF lending remains key to unlocking access to non-inflationary sources of budget deficit financing for Ukraine. IMF representatives have indicated that they are likely to restart lending following the presidential elections, and president-elect Viktor Yanukovych has confirmed his intention to continue cooperating with the Fund.

Despite the bitter aftertaste left by the recent crisis, foreign investors' appetite for Ukrainian risk is growing. Following the buyout of ISD, one of Ukraine's biggest industrial groups, at the beginning of January, the local stock market surged by 14% in 21 trading days, with some blue-chips gaining as much as 50%. Braving the looming elections, prices on Ukrainian sovereign bonds rose by 2-3%, while yields declined to 8.5-10.8%, moving closer to their pre-crisis levels. Average daily liquidity went up by more than 100% in January compared with December 2009, driven by both local and foreign money.

Ukraine is not straightforward, true, but it is a large, well-educated and aspiring European nation restarting its growth from a very low base. To say the least, this place merits an in-depth and careful analysis, and on any account is worth a short visit to form one's own judgment.

By Tomas Fiala. Published on 24 February 2010
Copyright (c) 2010. bne, Inc. Reprinted with the permission of BusinessNew Europe
The views expressed in this article are the author's own and do not necessarily reflect those of S & D.

Wednesday, February 10, 2010


The situation in Ukraine following the second round of presidential elections last Sunday was the subject of EP debates this evening.

Leading S&D MEPs urged the newly elected president to be a reliable EU partner, with specific regard to enhancing stability in the region.

They also encouraged the commitment to the irreversibility of the democratic process and the strengthening of political, social and economic reforms in the country.

Said Adrian Severin, S&D Group vice-president and one of the authors of the EP's resolution on the situation in Ukraine: "The hope of the Ukrainian people who are increasingly looking at the EU must be kept up by offering further concrete steps towards integrating politically, economically and socially into the European family.

"The political forces of Ukraine have to overcome divisions, cliché-ridden attitudes or prejudices and to continue the reform agenda, especially judiciary and constitutional reforms.

Ukraine needs real reforms more than illusionary revolutions.

"Ukrainian-European cooperation is desirable and profitable to both partners. It is also a common challenge and a responsibility.

"EU-Ukraine dialog on visas has intensified and there is a stronger political will to reach the final goal of a visa-free regime. In this respect, we support the initiative to set up a working group on visa facilitation", stressed Mr. Severin.

S&D MEPs appealed to respect the democratic choice of the Ukrainian people.

Said Kristian Vigenin, S&D coordinator of the foreign affairs committee, who was on the EP observer delegation for the second round of Ukrainian presidential elections last Sunday:

"This election clearly showed that Ukraine is moving consistently towards political stability and maturity. The next step should be to restart the long postponed reforms of the country for the benefit of Ukrainians".

Mr. Vigenin, who is also one of the authors of the EP resolution on the situation in Ukraine, added:

"It will not be possible to improve the election process in Ukraine without tackling the issue of rules for the financing of political parties and electoral campaigns".

The resolution on the situation in Ukraine will be voted in the February II plenary.

Monday, February 8, 2010

Statement by HR Catherine Ashton on the Ukrainian presidential elections

Catherine Ashton, High Representative of the Union for Foreign Affairs and Security Policy, and Vice President of the Commission made today the following statement:

“I welcome the completion of the second round of voting in the Ukrainian presidential elections and the positive assessment given to the process by the OSCE/ODIHR-led International Election Observation Mission.

The generally calm atmosphere in which the elections were conducted, the open campaign in the media and the fact that the electorate were provided with a genuine choice represent important achievements in Ukraine’s democratic development.

I should in particular like to congratulate the people of Ukraine for the high turn out in both rounds of the elections and the strong commitment demonstrated to the democratic process.

The European Union remains committed to deepening the relationship with Ukraine and supporting it in implementing its reform agenda. It looks forward to working with the new President to this end”

Published: Brussels, 8 February 2010

Monday, February 1, 2010

Georgian Offer Of Afghan Transit Unlikely To Tempt NATO

The United States generally welcomes all assistance in Afghanistan, where Washington is leading NATO efforts in a high-stakes struggle to stabilize the country.

Georgia, however, may prove the exception. It has twice offered its territory as a potential transit corridor for Western military shipments to Afghanistan -- first in February 2009, and again this week, when President Mikheil Saakashvili revived the proposal in an interview with the Associated Press.

Neither the Pentagon nor the White House has commented substantially on the proposal, which is likely to remain just that, with NATO officials suggesting privately the plan is unfeasible both politically and logistically.

Daniel Korski, a senior analyst at the European Council for Foreign Relations (ECFR) in London, says that NATO does not appear to be convinced the Georgian route is either viable or cheaper than the alternatives.

Korski says the question is whether Georgia is "logistically prepared" and "the infrastructure is actually in place. And so far, despite this offer having been on the table for almost a year, NATO has clearly felt that the Pakistani route and also the more northerly route, the one that goes through Russia and some of the Central Asian states, is more viable."

Transit Options

The Georgian plan involves NATO ships crossing the Black Sea to its ports, where their cargo would be loaded onto trains, taken to Azerbaijan, ferried across the Caspian Sea, then driven across Kazakhstan and Uzbekistan in freight trucks. Tbilisi is also offering to refuel NATO cargo planes at its airports.

Saakashvili told the AP he believes the other countries involved would give their assent to the plan.

Pakistan remains NATO's primary transit route to Afghanistan. Although vulnerable to insurgent attacks, it's by far the most convenient overland transit corridor to Afghanistan's restless southern provinces, which form the focal point of the new U.S. military strategy.

The rail route via the Baltic states, Russia, Uzbekistan, and Tajikistan is lengthy, but functional. Its main weakness is that it does not allow NATO allies to transit lethal military goods. Thus far, Germany is the only NATO member state to have been able to negotiate an exception.

The United States and Russia have also negotiated an agreement on the air transit of lethal military shipment. But the deal, which envisioned more than 4,000 overflights a year, has so far amounted to only a handful of flights, with sources on both sides suggesting discord remains over the terms.

NATO Back Door

Under such circumstances, Saakashvili might have reason to hope Washington would welcome a transit alternative. The Georgian leader, who is eager to bring his country closer to the NATO fold, is also contributing 900 troops to NATO-led troops in Afghanistan, as part of the envisioned U.S. "surge."

But NATO is wary of the Georgian proposal. An increased NATO presence on the Black Sea is certain to irritate Russia, which went to war with Georgia in August 2008. The United States and NATO are still gingerly trying to patch up valuable strategic ties with Moscow following that conflict.

Although Saakashvili in his interview denied any political motivation behind his offer, NATO capitals suspect Tbilisi is trying to find a back door into the alliance. Its membership bid was frozen in April 2008 -- largely on the account of resistance from Germany and France, which have close ties with Russia. Moscow fiercely opposes the NATO bid by both Georgia and fellow former Soviet republic Ukraine.

The current leadership of Ukraine, like Georgia, has attempted to keep itself close to the NATO fold. It this week became the first non-NATO member to contribute forces to the alliance's flagship NATO Response Force.

The ECFR's Korski doesn't think the attempts by Ukraine and Georgia to curry NATO's favor by offering it troops or transit will have any effect on the two countries' membership prospects.

"I think the truth is that it is immaterial at this stage," Korski says. "The question of NATO membership for both Ukraine and Georgia is not going to be decided on whether they support the [NATO] campaign or whether they allow transit across their countries."

However, Saakashvili's calculation may be even simpler. Any NATO or U.S. presence is reckoned across all of Eastern Europe to be better than none -- and security, however slender, against future Russian aggression.

By Ahto Lobjakas. Published on 29 January 2010
Copyright (c) 2010. RFE/RL, Inc. Reprinted with the permission of Radio Free Europe/ Radio Liberty
The views expressed in this article are the author's own and do not necessarily reflect those of S & D.