21 November 2014

Ukraine - One year on (21st November)

Today it is one year since the start of the events that led to the 'Revolution' in Ukraine.

Who would have thought that it would lead to the country being at war with Russia?

The economy is weaker than ever. It will be very difficult to attract genuine foreign investors to Ukraine.

Is the country set on a course of surviving from hands outs from the EU, IMF and others?

Andrey Kurkov on the BBC web site says:

It is unclear how the current chapter of Ukrainian history will end. I remain optimistic in spite of the pain I feel remembering those who died in the battle for a new Ukraine and those who are still dying and risking their lives on the Donbas frontline.
I do believe Ukraine will withstand it all and will maintain her independence and that the Ukrainian people will hold on to their desire to live in a civilised state cleared of a corrupt elite and corrupt judiciary.
But without the European Union's help, Ukraine will not be able to achieve this. Not because the Ukrainians lack determination, but because beside Ukraine stands a Russia which needs Ukraine to remain as it was under Yanukovych and other presidents - weak, passive and corrupt.
See the article here

10 November 2014

Ukraine Currency Collapse

Although many people are commenting on the collapse of the Russian ruble, they should be very concerned about the Ukraine Hrvynia.

The currency has devalued by over 47 percent since the start of the year. Exchange rates today stood at:

UAH/USD - 15.50
UAH/EUR - 19.00
UAH/GBP - 24.00

But I'm sure it might have changed while I was writing this.

The NBU (National Bank of Ukraine) claimed today that the Hryvnia will not go any weaker than 16.00 to the USD. I would not gamble on it.

For those of us in business who need to purchase foreign currency for transactions it is beyond any joke.

05 November 2014

Corruption in Ukraine Continues

The owner of the Kyiv Post in Ukraine, Mohammad Zahoor recently wrote an article that appeared in the FT on the continuing problem of corruption in Ukraine.

I agree with his comments. Corruption is very deeply seated in both the public and private sectors in Ukraine. Far too many government officials (state employees) carry too much power and use it to extract financial gain from both individuals and businesses.

BUT.........I blame the people, the general public and business owners for continuing to support the corrupt system in Ukraine. Although many will claim they have no choice but to pay bribes or their businesses will suffer if they do not give in to demands from corrupt officials, it is THEY who maintain the system.

If the people of Ukraine really want to bring about CHANGE in the country and stop all this crazy corruption THEY THE PEOPLE can do it, just like they came out onto the streets in 2013 to start demanding change. They can do it again.

Moreover, the only thing people need to do to stop corruption is to STOP PAYING any bribes to government officials or anyone in the private sector. STOP giving money to police officers when they stop you for a so called speeding offence. STOP paying bribes to junior government employees to 'help you make things easier'. STOP paying anything to those higher up. No matter how much they may claim they will make your life difficult if you do not pay. YOU can make their life difficult by reporting them.

The days of being afraid are over. My advice to the people of Ukraine is to stand up and be counted once again and put a stop to all this continuing problem of corruption that is holding the country back from moving forward.

25 October 2014

Ukraine Elections - 26th October 2014

On Sunday 26th October 2014, Ukrainians will have another opportunity to vote and choose which political parties will be responsible for the management of the country. Although Ukraine still maintains an unusual system of elections via a ‘party list’ system mixed with other systems, it is an opportunity for the people to choose the future direction of Ukraine.

The majority of the population have already decided that they wish to see a free and democratic country develop along a ‘Western European’ system.

Ukraine will need another 5-10 years to rebuild its economy and develop a system of governance and for its politicians to demonstrate that they can put people first and eventually cast off the old methods of soviet era bureaucracy, systemic corruption and the stigma of selfish greed among the so called elite.

The time has arrived for fresh, young albeit inexperienced people to start making decisions that will benefit the population as a whole.  Let’s all hope that we will see many new faces appearing in the Verkhovna Rada (Parliament) next week.

16 October 2014

The People of Ukraine

I think this simple short video explains how Ukrainians feel about their country.

Where is Ukraine?

01 September 2014


Timothy Ash from Standard Bank in London provides an excellent summary of the current situation in Ukraine. Maybe he should give up the day job and become a full time journalist.

Commentary & Analysis, Timothy Ash, Standard Bank, London, UK, Mon, 1st Sept, 2014 

LONDON ---- I am amazed by the generally poor media & business commentary around Ukraine/Russia relations, which often belies a fundamental lack of understanding of the issues – maybe the demands of 24/7 news drives that to an extent. This is also apparent from commentary from high level Western diplomats and political leaders – either they do not understand, or would rather not understand the realities with respect to the Ukraine crisis.

So let’s try and make this as simple as possible.

Let’s start at the beginning, or at least for most of the recent focus on Ukraine. And therein, the Maydan protests are the obvious starting point – we could go back to the Vilnius process, but that’s possibly getting a bit too deep for a simplified analysis.

Maydan earlier in the year was about a bulk of Ukrainians’ desire to have a European perspective – to live by common European values, not necessary EU or Nato membership at that point of time. It was more about things like democracy, human rights, rule of law, protection of property rights, but really about living in a normal European country.

And they felt that the incumbent Yanukovych administration was not willing or able to deliver on that, arguably because of the anchor of too close ties to Russia. Only by securing an EU perspective did they think that their country could be reformed towards European core values, and bringing real improvements in their way of life.

Evidently Moscow finds the whole Maydan thing a threat to its model of development and security – and is particularly nervous about any NATO aspirations of Ukraine. Many Russians have also never really accepted that Ukraine is an independent country (albeit it has been fully independent for 23 years now) or indeed that Ukrainians are a different and distinct ethnic group – indeed,  seeing the collapse of the USSR in 1991 as a mistake, at least as it resulted in the “mistake” of bringing Ukrainian independence.

BULK OF UKRAINE'S POPULATION WANT A EUROPEAN PERSPECTIVESo the gist of it is that the bulk of Ukraine’s population want a European perspective, and to finally break away from domination by Russia, and Russia wants to stop this process, and through the recent advent of the CIS/Eurasian Union to actually pull Ukraine closer in terms of economic and political integration.

Whether it was security concerns or a desire to stall/destabilise Ukraine’s momentum towards Europe, Russia moved to annex Crimea back in March, and then actively promoted/supported separatist movements in South-East Ukraine – in the event, these only secured traction in two further oblasts/regions of Ukraine, i.e. Donetsk and Luhansk, collectively known as ‘the Donbas’ – Ukraine’s industrial heartland.

Note prior to the on-set of separatist demonstrations and unrest in April, there was scant evidence in Ukraine of any particular separatist cause/movement – opinion polls also showed 90%+ support across Ukraine for an independent Ukraine, and only around one-third support even in Donetsk for the separatist cause, with a majority still favouring an independent Ukraine. Opinion polls showed no oblast in Ukraine had majority support for joining Russia – and by a large margin, perhaps with the exception of Crimea.

In any event protests and conflict broke out in Donetsk and Luhansk, and these evolved into a war to all intents and purposes, with large scale casualties now on all sides. Throughout there have been strong indications that arms/fighters have been supplied across the border from Russia – separatist leaders have suggested at least 4,000 of the 10-15,000 separatist fighters are of Russian origin (either retired Russian soldiers, or soldiers “on leave”).

The Ukrainian military eventually regrouped, and managed to deploy around 50,000 troops to Donbas, eventually seeing significant gains on the ground – which up to a week or so ago laid the prospect that unless Russia escalated with the use of more formal troop deployments to Ukraine, that the separatist cause in Donbas would whither away. This led to some debate about whether Russia had achieved its objectives in Ukraine through the annexation of Crimea – and the destabilisation of Donbas, sufficient to stall/slow Ukraine’s drive to EU/NATO membership.

The assumption by some therein was that Moscow would assume that it had sowed sufficient uncertainty in the minds of Western leaders for them in effect to veto Ukraine's future NATO/EU membership. This charitable interpretation of Russian strategy assumed a benign de-escalation by Russia.

EVENTS ON THE GROUND IN RECENT DAYS NOW APPEAR TO HAVE CHANGED THE ABOVEEvents on the ground in recent days now appear to have changed the above. In particular, the government in Kyiv and NATO have signalled much larger and more direct Russian intervention in fighting in Donbas, which seems to have slowed/reversed the advances of the Ukrainian military – even suggesting a broadening of the conflict south towards the industrial port city of Mariupol.

The message now from the most recent Russian escalation (“invasion” or “incursion”) is that Moscow has made clear that it is unwilling to allow the defeat of the separatist cause in Donbas, and is willing to further escalate, by pumping yet more arms/kit into the conflict.

Moscow’s aim is seemingly (and perhaps now clearly) to force a military stalemate on the ground whereby a large swathe of Ukrainian territory – and important territory, given that it is Donbas – is beyond the reach of the Ukrainian government. Their assumption is that this will force the government in Kyiv, and the West, back to the negotiating table to negotiate over the long term future of Ukraine – and therein the agenda for Russia is No NATO, No EU and No Maydan (Moscow wants a broader coalition in office in Kyiv, more amenable to representing its views).

To restate, for Russia this is not really about backing the separatist cause in Ukraine, it is about shaping the long term future of the whole of Ukraine, and Ukraine’s geopolitical, economic and strategic orientation back east, and certainly away from the West.  Indeed, if Russia was doing all this really in support of the minority rights in Ukraine it would surely have rallied to the cause of minorities in Russia itself – and recent history therein has been about pulling back from a Federalist agenda/model.

RUSSIA HAS PUT THE BALL BACK IN THE COURT OF THE WEST/KYIV BY ITS RECENT ACTIONSIn effect Russia has put the ball back in the court of the West/Kyiv by its recent actions in Ukraine.  Herein the Poroshenko administration now faces a number of choices, with hugely difficult consequences and calculations to be made:

FIRST, First, negotiate a ceasefire with separatists and their backers in Moscow, and secure a longer term agreement which would require assurances of a pull back from Western orientation, and hence assurances of No Nato or EU membership for Ukraine. Moscow will also likely demand a Federal constitution to be enacted in Ukraine, with much more power decentralised to the regions, but whereby the regions have veto rights over key decisions at the national level, e.g. covering NATO and EU membership.

In effect by so-doing Kyiv would secure the return of Donbas to its de-jure (if not necessarily de-facto, as per Crimea) administrative “control”. This would likely make short term economic development/recovery easier. However, the price would likely be a return to the model of development prior to Maydan – of autarchic oligarchic elites plundering the population and the economy not really going anywhere fast, but this would rather be a model for stagnation and decline.

All the above would be difficult for any Ukrainian government to sell to the people of the Maydan, or indeed the wider population, which now appears to have changed through the current conflict to become much more ardent in support of Ukrainian independence, and the Western orientation.

Therein note that support for NATO membership for Ukraine, which was always low, pre-Maydan (single digits) is now in a majority, and support for the EU is now approaching two-thirds. Thus, it seems that delivering on Russia’s “terms” might just result in the destabilisation of the domestic political situation in Ukraine itself. Such a scenario buys short term peace, but ultimately results in long term failure for Ukraine.

I find the chances of the above at this stage to be fairly low – maybe 10-15%.

SECOND ----  Second, try and pursue a military solution. This would require re-arming, and heavy investment in the Ukrainian military, but the plan would be to raise the stakes and cost for Russia of its continued stay in Donbas. This might also suggest a long-running conflict, with huge human and economic costs for both sides.

For Ukraine, it also might imply an uncertain outcome, as Ukraine could lose such a conflict with Russia, and hence lose even more territory than currently occupied by Russian troops and separatists. But the strategy would be to ramp up the cost to Russia that it blinks first and backs-off – Ukraine could become Putin’s Afghanistan, and hence ultimately the source of his own decline.

The chances of the second scenario are perhaps 35-40%.

THIRD ---- Third, the authorities in Kyiv could simply accept the status quo in Donbas and Crimea, but reach a temporary ceasefire with Russia and the separatists, but without giving up on its Western orientation. In effect the result would be a frozen conflict scenario, akin to that in Trans-dniestr, Abhazia, South Ossetia or even Nagorno-Karabakh or Northern Cyprus. The government in Kyiv would try as best to get on with the task of rebuilding the rest of the economy, and delivering on the IMF reform agenda.

They would have the advantage therein of a strong, and re-invigorated feeling of national identity on the part of the bulk of the population, and willingness to sacrifice for the national good and to ensure independence and security. The problem with this strategy is though rebuilding and recovery will be acutely difficult with Donbas remaining out of the control of Kyiv, as the region accounts for 13-18% of GDP and around 27% of industrial output.

There is nothing to suggest that oligarchs would pump money back into the Donbas economy with such uncertainty over its long term future – similar in many respects to the problems currently besetting Crimea. We would also add that this also assumes that Moscow opts not to further escalate – to try and make life even more difficult for the government in Kyiv, and to try and ensure the failure of the Maydan administration and the re-orientation of Ukraine back eastwards.

The assumption has to be that Russia will still go out of its way to make life difficult – via trade disruptions, sanctions, blockades, and using the energy and default card via the 2015 Russian “bail-bonds”.  Ukraine’s only hope in this latter regard would be massive financial support/backing from the West – to make up for the loss of Donbas, and this would require something much larger than the existing USD17bn IMF programme – there has been talk of a “Marshall Plan for Ukraine”, albeit things therein seem to be moving very slowly.

In effect though the West needs to give the government in Kyiv enough assurances that its Western orientation will be supported both through real progress in technical preparations connected to NATO/EU membership, and cash, to ensure the survival of the Maydan administration.

I would probably attach a similar probability to the third as to the second scenarios.

The balance hence would be any other scenarios, of which I am sure there are many.

Disclaimer: This material is non-independent research. Non-independent research is a "marketing communication". The above commentary represents a personal view, is not investment advice or Standard Bank research, but may contain extracts from published research.
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A FEW UPDATED THOUGHTS ON DEVELOPMENTS IN UKRAINE

Commentary & Analysis, Timothy Ash, Standard Bank, London, UK, Sun, Aug 31, 2014

LONDON ---- Obviously late last week the crisis in Ukraine took yet another turn for the worse, with the government in Kyiv and NATO claiming increased Russian intervention in SE Ukraine. The reports suggested more open and substantive Russian involvement on the side of separatists, with the latter seemingly opening another front to the South of Donetsk and Luhansk, on the approaches to the large industrial and port city of Mariupol.
The intervention of more substantive Russian forces appears to have stemmed the tide of Ukrainian military victories which had appeared in the weeks prior to be offering the prospect that Ukrainian forces could clear Donbas and re-secure Ukraine's borders thereby bringing a speedy end to the conflict.

What we have perhaps learned from the separatist assault towards Mariupol, and indeed Putin's own new statements of support for Novorossiya, is that Russia is not content with letting the separatist cause die a death in Donetsk and Luhansk as some had claimed - remember some had claimed that changes in the leadership of the separatists in recent weeks indicated preparation for perhaps a withdrawal by Russia.
RUSSIA'S STRATEGY IS MUCH CLEARER
It now seems much clearer that Russia's strategy is not just about Crimea, but rather and in addition perhaps to create a frozen conflict on the ground in Donbas. Such a scenario creates scope either for enlargement of Russia's borders, partially through the concept of Novorossiya, or to deliver on Russia's broader objectives of preventing Ukraine's Western orientation partially by destabilising Ukraine through military intervention.

Clearly Putin is not willing to accept defeat in Ukraine, and has constantly proven his willingness to raise the stakes, through ever greater intervention and escalation.

Note that the above suggests the scenario playing out of further Russian intervention in Ukraine - as we presented in our own scenarios analysis from a few weeks back.

Interestingly, the Russian media focused on an inteverview given by Putin this weekend, whereupon he hinted that talks needed to be held over potential "statehood" for SE Ukraine. If true this would be a notable development, and further strain relations between Russia and Ukraine/the West.
Albeit not that Putin's press secretary has subsequently denied that Putin meant the breakaway of SE Ukraine from Ukraine proper, albeit after the annexation of Crimea, Ukraine and the West will no doubt be cautious in interpretating Putin and Russia's statements in this regard.
Perhaps this was all meant as a subliminal warning as to what could happen if Russian interests were not taken on board in re shaping Ukraine's future. That is this was meant to improve Russia's negotiating position in any subsequent peace talks.
HUGE DILEMMAS FOR POROSHENKO AND THE WEST

The above creates huge dilemmas for both the Poroshenko administration in Kyiv but also the West, in terms of how to counter this new and present danger/threat from Russia.

For Poroshenko the problem is a frozen conflict in Donbas arguably fundamentally threatens the durability and sustainability of an independent Ukraine. Donbas is critically important to the Ukrainian economy - accounting for anywhere between 13% and 18% of GDP, and containing some major industrial and transport infrastructure, including steel plants, oil refineries and coal mines.
Arguably this is why Russia has focused its intervention in Donbas, as it assumes that it will force Kyiv back to the negotiating table with Moscow to deliver on its broader strategic objectives of No NATO, No EU and No reform minded Maydan administration.
Therein is the huge dilemma for Poroshenko as the past year has arguably fundamentally changed Ukraine, with Maydan, the loss of many lives during the ousting of the Yanukovych regime, and now several thousand killed in the conflict in SE Ukraine, opinion in the country has now decisively turned away from Russia, and towards Europe.
NATO MEMBERSHIP UNLIKELY
By way of example, on the critical issue of NATO membership, while before the outbreak of the Maydan protests, and the unrest in SE Ukraine, popular support for Ukraine's NATO membership was in single digits, recent opinion polls now show majority support.
Therein the Ukrainian government is currently pushing thru legislation facilitating a drive for NATO membership - even though NATO itself is likely now to be reluctant to accept Ukraine as a member as long as Russia is opposed.

Simply put, how can a Poroshenko presidency compromise on such key tenets of popular thinking now in Ukraine, as EU/NATO membership and a broader reform agenda. Compromise is also made that much more difficult by the onset of the campaign for early parliamentary elections set for October 26.
Those same elections are expected to bring a large majority for Ukrainian statehood parties, and those likely opposed to any move back away from a Westwards orientation.

The best perhaps that can now be hoped for is for some form of temporary ceasefire on the ground, which halts the fighting but which unlikely addresses the underlying issues. Donbas would remain beyond the reach of the administration in Kyiv, which would add deadweight to an already hugely challenging economic policy challenge - and piecemeal support therein from the West.
Ukraine would, meanwhile, likely focus on re-armament, and for Russia would increasingly pose an even greater security threat - in effect the two states would likely remain daggers drawn, with the border resembling more that between Turkey and Greece, or Armenia and Azerbaijan.
RUSSIA WILL CONTINUE TO TRY AND MAKE LIFE DIFFICULT FOR UKRAINE
Russia will, meanwhile, continue to try and make life difficult for Ukraine by imposing trade restrictions and in effect embarking on a trade war with Ukraine. The danger of a larger, full blown conflict between the two sides will likely remain ever present.

The more immediate focus will be various efforts to broker some sort of ceasefire and peace agreement.

Poroshenko has himself promised to reveal some sort of peace plan over the next week, albeit this is unlikely to be that different from plans already tabled, and including the offer of some decentralisation of powers to Donbas (but stopping short of Federalisation which remains acutely unpopular in Ukraine), on the proviso that separatists lay down their arms, foreign fighters depart and the OSCE assumes monitoring over the long Ukraine-Russia border.
We doubt that Russia will accept anything which hinders its ability to re supply separatists in SE Ukraine, and indeed the de facto control of territory already in the hands of separatists.

The EU has, meanwhile, given itself one week to decide on another round of sanctions to be rolled out against Russia - presumably in coordination with the US. The assumption is that the EU wants to give negotiations to secure some form of ceasefire/peace in the Russo-Ukraine conflict a further chance - albeit numerous efforts/rounds of talks over the past 10 months to try and resolve the on-going crisis have achieved very little.
The one week delay probably says more of the weak state of Europe and the divisions therein over its approach towards Russia, than the chances of some form of peace agreement being reached within the week.
MANY EUROPEAN LEADERS ARE CLEARLY DESPERATE TO AVOID ROLLING OUT FURTHER SANCTIONS
 Many European leaders are clearly desperate to avoid rolling out further sanctions, for fear of damaging their own business interests and relations with Russia - personal and professional. Therein it is still fairly remarkable that both the EU and the US have failed to adequately describe events on the ground as a Russian invasion, but prefer instead to use the term "incursion".
The difference is obviously in the assumption as to the timeframe for Russian intervention - invasion implies something large in scale and permanent, incursion is rather smaller in scale and temporary. That said there is little to suggest that Russia's intervention in Ukraine is temporary, and as events surrounding Crimea, Abkhazia, South Ossetia, and Trans-Dniestr have proven, such interventions can quickly become permanent when it comes to Russia's recent interventions in the near abroad - there is now a well honed script for these.

Our assumption still is that reaching a permanent peace deal will be acutely difficult still. And this still suggests the likelihood of yet more Western sanctions iterations, however weak and feeble these may end up being. Suffice to say that we do not expect the "sanctions malaise" which currently hangs over Russian markets or the economy to lift that soon.

What form of sanctions can we expect? Well the problem is still that securing unanimity within the EU for any such sanctions is painfully difficult, with the pace/scope only really driven by the weakest link - and there are many.
Many might still argue that it is incredible how soft and feeble existing sanctions have been despite the remarkable events we have seen on the ground, including the Russian annexation of Crimea (which trampled over international agreements), the downing of an international airliner, the loss of well over 2,500 lives in the conflict to date (including the loss of Russian troops this figure could perhaps be much higher than this), and clear evidence of a direct Russian invasion/incursion into Ukrainian sovereign territory.
LIKELY EXPECT MORE RUSSIAN INDIVIDUALS AND CORPORATES TO BE SANCTIONED
We can likely expect more Russian individuals and corporates to be sanctioned, and this time perhaps deeper sanctions on arms trade with Russia - there has also been hints of restrictions on SWIFT transactions with Russia, albeit it may yet be too early for such action to be rolled out.

NATO is, meanwhile, meeting on September 3 in Wales - the English and Welsh fought for centuries despite also having many common roots, which is hardly auspicious in terms of the current Russo-Ukraine conflict. Ukraine is probably hopeful of some signal of its potential membership, albeit I would expect NATO members to hold back from this at this stage for fear of further infuriating Russia.
NATO also seems likely to hold back from agreeing to directly arm Ukraine - albeit there is nothing to stop individual NATO and EU member states deciding to increase unilaterally their own level of military backing for Kyiv. NATO is likely to make some strong statements of disappointment with Russia's actions in Ukraine - talk if cheap after all - and perhaps push forward preparations for reinforcing members bordering Russia in the event of more direct and specific threats appearing.

In summary, the West is struggling to come to terms with a new and more aggressive Russia. Many would rather ignore the facts on the ground, as they face difficult choices and risk damaging business interests.
MANY IN THE WEST WOULD PREFER THE GOVERNMENT IN KYIV TO APPEASE MOSCOW
Many in the West would prefer the government in Kyiv to appease Moscow, but the problem therein is selling any such scenario to the people of Ukraine who now more than ever appear set on their Westward course, and away from Russia.
Large numbers of lives have been lost and what we are perhaps seeing still is the birth of a Ukrainian nation. Ukrainians seem willing to fight in defence of their country and, if this is added to Russia's determination to keep a tight grip on Ukraine, this all bodes ill still for the future.

NOTE:  The above commentary represents a personal view, is not investment advice or Standard Bank research, but may contain extracts from published research.

26 August 2014

The Battle for Cyprus

The island of Cyprus is reliant on tourism which represents approximately 12% of GDP.  The latest figures from the Cyprus state statistical service shows a 22.6% increase in the number of visitors from Russia in July 2014. Over 116582 Russians visited the island compared to 96641 in July 2013.

There was a small dip in the number of visitors from Britain but still the largest number at 127152 for July 2014 compared to 132566 in July 2013.

The total figures for the first seven months of this year are: British 478882, Russians 372457, Sweden 57676 plus many tourists from other countries around the world. During 2013 Cyprus welcomed 2.4 million visitors and it looks like 2014 will see an increase on the previous year. Tourism income brings in around €2.0 Billion per year.


Cyprus is still seen an an ideal location for those who are seeking to purchase a holiday home or retirement or investment property.