Ukraine wants to join the EU in 2022

The Prime Minister of Ukraine has gone on record to declare that Ukraine intends to become a member of the EU by 2022.
This is a question I put forward to the PM at the recent 'British Business Days in Ukraine' event in Kyiv. " Does the government of Ukraine intend to 'proactively' seek membership of the EU, a simple yes or no answer is acceptable". An answer for yes or no was not forthcoming but I understand it provoked discussion between the British Ambassador and the Prime Minister of Ukraine. (Unfortunately I could not be there).

So what do people think? Will Ukraine become a member of the EU by 2022?

see:http://www.kyivpost.com/news/politics/detail/101246/

Ukraine Current Situation

Timothy Ash - Global Head of Emerging Markets Research - Royal Bank of Scotland

Ukraine | Trip notes

We visited Kiev on March 17- 18, meeting with officials from the Ministry of Finance, the State Statistical Committee, the IMF, alongside local banks and members of the diplomatic community. The NBU failed to respond to requests for a meeting.

Summary view: Political stability appears relatively assured, with the Regions of Ukraine (RU) administration enjoying a solid parliamentary majority, and control over the presidency, parliament and executive. The administration seems to be making solid progress on an IMF-reform agenda, and we expect this to ensure the release of the latest credit tranche of USD1.6bn in April/May. Reforms are, however, proving controversial (e.g. pension reform, hiking the retirement age) and the government has seen its popularity fall. The administration may want to get difficult reforms out of the way this year, clearing the path for parliamentary elections in October 2012. The ruling coalition thus far continues to take advantage of the fact that the opposition is in disarray. Perhaps the biggest risk on the political/economic front appears to come from relations with Russia, as Moscow has threatened to close borders if Ukraine signs up to a Free Trade Agreement with the EU. This may just be a negotiating ploy to secure access to assets in Ukraine. Economic growth seems to be picking up steam, helped by the strength in metals prices. Inflation has moderated, and while the trade/current account deficits look set to widen, they remain financeable, and the UAH looks set to remain stable. Budget trends generally remain encouraging with the 2011 deficit target appearing attainable. The public sector debt service schedule also appears manageable, helped by the UAH10.6bn raised from the sale of Ukrtelekom and recent success in borrowing from the domestic/external market. The sovereign is expected to tap the Eurobond market again before year end. We expect further outperformance by Ukrainian sovereign debt. We would also recommend exposure to UAH-denominated debt, un-hedged, albeit the problem herein is the lack of liquidity.

See full report here: http://strategy.rbsm.com/Tools/Content/ContentViewer.aspx?subscribe=1&key=VGDgfRXRwzmQDpsgKgXoXpSzseu8axTP4glzOPAizC7jGMNcHlul+A%3D%3D

Kyiv Post interview with British Ambassador

The British Ambassador in Ukraine - Leigh Turner talks to the Kyiv Post.
He is trying his best to promote the UK.

See: http://www.kyivpost.com/news/business/bus_focus/detail/100784/

The Rule of Law in Ukraine - Corporate Problems

Not always good news for foreign investors in Ukraine.

See: http://www.kyivpost.com/news/business/bus_focus/detail/100783/

British Budget 2011/12

Yesterday British Chancellor George Osbourne presented his budget to the UK Parliament.
The token gesture to business was a 2p reduction in corporate rate tax.
The controversial air tax on passengers will be frozen but is still very high at GBP93 and GBP186 for business class.

Personal allowances were raised so a person can now earn GBP 7475 free from tax and then the next GBP 35000 will be at 20% tax. From annual earnings of GBP 42475 people will pay 40% tax on all earnings over this amount. The 50% tax rate applies from earning GBP 150,000 plus.

I think many people will be looking forward to retirement after he announced that a flat rate pension will be introduced of GBP 140 per week. However, people will not be retiring until they are into their 70's.

During 2011/12 the British government will spend GBP 710 billion. Lets hope it gets spent wisely.

British Business Days in Ukraine - Report

Last weeks British Business Days in Ukraine' event was a success.
Here is a report in the Kyiv Post

see: http://www.kyivpost.com/news/opinion/op_ed/detail/100427/

Ukrainian Business Week - London - 21-26 March

Today we see the start of Ukrainian Business Week in London organised by Centralex.

Full programme available here: http://www.ub-week.com/index.php?option=com_content&view=article&id=93&Itemid=104&lang=en

619000 Millionaires living in the UK

The number of millionaires living in the UK has risen by 17 per cent over the last two years as the wealthy start to recover from the 2008 credit crisis, according to Barclays Wealth.

Barclays Wealth claim there were 619,000 millionaires - including property assets -- currently living in the UK at the end of 2010, up from 528,000 in 2008.

It added that the number of millionaires in the UK would grow by a third by 2020, meaning that Britain would be home to 826,000 millionaires.

Makes you think how many of these are actually BRITISH people ?

Strange how millionaires from other countries like to settle in London. Protected by a strong legal system and free from any undue government pressures. But BRITISH born millioniares tend to look elsewhere to live (or claim they live) in places like Jersey or the Cayman Islands etc.

See: http://www.dailymail.co.uk/news/article-1368160/Budget-2011-More-millionaires-UK-wealthy-bounce-credit-crunch.html

British Business Days in Ukraine

The British Business Days in Ukraine event starts today in Kyiv.The British Business days in Ukraine event starts today in Kyiv.(Globus Centre, Kyiv 17019 March). Today is a Business to Business seminar with various speakers.

Tomorrow a special meeting will be held with the prime Minister of Ukraine to discuss various issues. I will not be there but I have submitted a question:

"Does the government of Ukraine intend to 'proactively' seek membership of the European Union?.......A Yes or No answer is acceptable

18-19 March will be a public event. If you are in Kyiv please try to go along.

An Open Letter to the Government of Ukraine

Kyiv, Tuesday, March 15, 2011

OPEN LETTER

from the Ukrainian League of Industrialists and Entrepreneurs,

Ukrainian Agrarian Confederation, Ukrainian Grain Association

to top officials of Ukraine

regarding the situation on the grain market of Ukraine

Kyiv, March 14, 2011

Industrialists and entrepreneurs are concerned over the state and future of the agrarian complex of Ukraine due to the negative trends emerging at a time when the country’s business community and government should be using modern methods for management and promoting development should be rallying around the implementation of the provisions of the Program of Economic Reforms for Ukraine for 2010-2014 regarding agriculture.

Government decisions passed recently are unjustified, disagree with the experience in agriculturally developed countries and are leading to excessive and non-transparent administration of the agrarian complex and reduction in investment attractiveness and competitiveness.

Particular pressure under these conditions is being put on the Ukrainian grain market, which in recent years, through cooperation between government and business, including foreign capital, has achieved great success and recognition and made Ukraine one of the top grain-producing countries in the world.

Nevertheless, despite the disparity with global experience, opposition from agricultural organizations and warnings from the Anti-Monopoly Committee and Ministry of Justice of Ukraine, the Cabinet of Ministers Resolution from Dec. 13, 2010 No. 1254 “Certain issues regarding the execution and registration of foreign economic contracts” that essentially introduced a monopoly by the State Agrarian Exchange on the execution and registration of foreign economic contracts for basic agricultural products.

Of particular concern, given their distinctive autonomy from the official position of the government, are several recent draft laws of Ukraine the main provisions of which may destroy the basic foundations of the organization and functioning of agricultural, particularly grain, markets, and proven practices introduced over the past 20 years.

Several draft laws of Ukraine have been very negatively received in Ukraine and abroad, including: No. 8053 “On amending the Law of Ukraine ‘On state support of agriculture in Ukraine’ (concerning export of goods subject to state price regulations)” and No. 8163 “On amending the Law of Ukraine ‘On grain and the grain market in Ukraine” (concerning grain export through foreign economic agreements (contracts)”.

The key common features of these bills are the attempt to monopolize the markets for agricultural exports, discrimination of leading exporters, which are major investors in the creation in Ukraine of modern agrarian logistics and processing systems, by imposing on them non-core functions and obligations which is practiced nowhere else in the civilized world.

Monopolization of agricultural, including grain, markets, eliminating competition in procurement, especially of grain on the domestic market of Ukraine for further export will lead to catastrophic loss of income for producers and, consequently, to the progressive degradation of the agricultural sector of Ukraine.

The adoption of these bills will cause irreparable damage to Ukraine ’s already tarnished image as a country with a market economy and rule of law because the regulations introduced by them would violate the rights of investors to benefit from the proper use of investment, which is a sign of expropriation.

The ULIE, UAC and UGA are categorically against the destruction of market institutions, non-transparent management of administrative processes and monopolization in the agricultural sector of Ukraine that would result from the adoptions of the above mentioned laws.

In order to prevent the irreversible consequences that may result for Ukraine should these and other bills be passed that contain similar unacceptable and harmful provisions for the further development of the agricultural sector in Ukraine , we propose:

President of Ukraine Viktor Yanukovych:

1. Require officials of Ukraine in their work to strictly adhere to the provisions and requirements of the Program of Economic Reform for Ukraine for 2010-2014 on agriculture, including the need to declare on behalf of the government the rejection of forced interference in price setting and sale, including export, of agricultural products, as a guarantee against the adoption today and in the future of bills such as No. 8053 and No, 8163, and other regulations that could return Ukraine to the sidelines of global economic development and cause irreparable damage to the European integration efforts of the country’s leadership.

Chairman of the Verkhovna Rada of Ukraine Volodymyr Lytvyn :

1. Initiate parliamentary hearings in April 2011 on the situation on the grain market of Ukraine and prospects for its development, with broad participation by professional agricultural organizations, representatives of agribusiness, investors, international institutions and agricultural producers.

Prime Minister of Ukraine Mykola Azarov

1. Review Cabinet of Minister Resolution No. 1254 from Dec. 13, 2010 “Certain issues regarding the execution and registration of foreign economic contracts” and remove the provisions that established a monopoly by the State Agrarian Exchange on the execution and registration of foreign economic contracts for basic agricultural products and provide other commodity exchanges the right to engage in such activities.

2. Establish closer communication with parliamentary committees in order to prevent the initiation and adoption without government notice of draft laws that are contrary to the provisions and requirements of President Yanukovych’s Program of Economic Reforms for Ukraine for 2010-2014 on agriculture, and may cause considerable damage to the state economy, as in the case of draft laws No. 8053 and No. 8163.

3. Restart the work of the Coordinating Council on Agrarian Issues under the Cabinet of Ministers of Ukraine with participation by agricultural organizations.

A. K. Kinakh, President of the Ukrainian League of Industrialists and Entrepreneurs

L. P. Kozachenko, President of the Ukrainian Agrarian Confederation

V. H. Klymenko, President of the Ukrainian Grain Association

The three organisations listed above called a meeting in Kyiv yesterday of their members and others concerned about the agribusiness economic development of Ukraine to discuss the very alarming situation found on the grain market of Ukraine today. The OPEN LETTER above was agreed to at the meeting.

United Kingdom reduces job opportunities for non-EU citizens

The UK government has decided to reduce the number of non-EU citizens that will be entitled to work in the country. The figure has been reduced from 500,000 to 230,000
So, this means that it will be more difficult for those living outside the EU to find a job in the UK.

Many British people will this as a positive move as the country suffers from high unemployment already. Some think that the figure should be ZERO.

The route will still remain open for the those who have invest GBP 1 million plus into the country or for entrepreneurs who have GBP 200,000 ready to start a business in the UK.

Maybe the UK could start using the same methods used in Ukraine. i.e. When a Ukraine company wants to employ a non Ukrainian citizen, they have to provide evidence that a Ukrainian is not available or qualified to do the job.

see: http://www.dailymail.co.uk/news/article-1365960/Finally-British-workers-come-Jobs-migrants-slashed-half-visa-clampdown.html

Agriculture and Government in Ukraine

WHY AGRICULTURAL PRODUCERS LOSE HUGE MARKET OPPORTUNITIES WITH

STATE MONOPOLIES – INTERNATIONAL EXPERIENCE AND UKRAINIAN EVIDENCE

Two draft laws were introduced to the public in February 2011 that might cause many problems for the agriculture and food sectors of Ukraine. A Draft Law #8053 as of February 2, 2011 “On amendments to the Law of Ukraine “On State Support to Agriculture” (as to the peculiarities of exports of products subject to state price regulation)” and a Draft Law #8163 as of February 25, 2011 “On amendments to the Law of Ukraine “On Grain and Grain Markets” (concerning the grain exports)” effectively aim at granting to the State a monopoly of the export of various agricultural products in the former and of the grain in the latter case.

What does the global and Ukrainian experience say about state monopolies? In the following we briefly shed some light on this fundamental issue for developing the Ukrainian agrarian potential.

URGE UKRAINIAN LAW MAKERS TO THINK TWICE
Global experience, in particular the Canadian Wheat Board (CWB) and the Australian Wheat Board (AWB) highlight several important factors that urge Ukrainian law makers to think twice about its current plans to monopolize agriculture and food exports.

The AWB and the CWB historically were seen almost as sister agencies. AWB engaged in wheat while CWB in wheat and barley (in more recent times) trade. Both used price pooling mechanisms (1) and enjoyed export monopolies as well as monopoly power on their respective domestic markets (2). Both also benefited from government underwriting and guarantees of their payments to producers and of export loans that they extend to customers/farmers.

The empirical evidence about the success of the CWB and AWB (the use of market power to extract price premiums) is, however, at best inconclusive. Most of empirical studies that do find evidence of a success were produced either by or for the CWB and AWB, were not subject to peer review, and are not replicable, as they are based on data which are not publicly available.

Some of the independent studies, however, registered even losses of AWB operations in farmer’s premiums of roughly -1.31 US$/t. Also, many ‘proofs’ of the successful exercise of market power have been advanced by the Boards themselves, generally taking the form of assertions that cannot be confirmed independently (3).

Both the AWB and the CWB have, however, relied on private grain traders, including large multinational ones (MNT), to execute significant proportions of their export transactions. This fact is an implicit admission that private enterprises, including (MNT), are capable of outpacing the state monopoly in terms of marketing efficiency. Some sources assert almost one-half of the CWB’s wheat exports and well over one-half of its malt barley exports went via accredited exporters (4).

The fact that the MNTs have dominated international grain trade for so many decades in relatively stable composition underlines that attempting to develop an efficient grain exporting system without these firms would be unlikely to succeed.

Direct comparisons in term of market efficiency shows that Australia and Canada both lagging behind the US. For example, grain producers in Australia were paying at least US$ 5 per ton more for grain handling and transportation than their counterparts in the US (5).

Both AWB and CWB owe their long existence to strong producer support. Moreover, contrary to the initiative in Ukraine, creation of the wheat boards (at least in Canada) followed a bottomup
approach, under the farmers’ pressure. Both operated with the express purpose of increasing/maximizing grower returns, and both were controlled or at least strongly influenced by grain producers over much of their history.

Pressure for increased accountability to farmers led to the implementation of a new corporate structure for the CWB in 1998; a perceived lack of accountability led to the elimination of the AWB’s monopoly exporter status following the oilfor-food scandal in 2007.

Centralized bureaucracy like CWB and AWB tend to grow, adding personnel and other expenses that increase costs and reduce competitiveness of the whole value chain over time. For example, the CWB administrative expenses increased from 1.83 to 3.47 CAN$/t between 1995-1997 and 2005-20076.

Apart from AWB and CWB, the global trend is to eliminate State monopolies on trade in agricultural products, and frequently to eliminate State participation in such trade altogether in countries where this has been the case. For example, state agricultural trade monopolies were removed in El Salvador in 1990, in Colombia and in Jordan in 1990s, in Honduras in 1991 and not long afterward in Peru.

In economic terms, if look only at the supply side of the problem, a state monopoly is a form of a non-tariff trade barrier that restricts/controls trade, for it makes the decisions on how much of each agricultural product is to be exported each year and its timing of delivery.

Additionally State Agents are not as experienced and quick in trade as private traders that increases transaction costs in the sector and might, for example, exacerbate a downward seasonal trend in producer prices.

HARMING FOOD SECURITY IN THE COUNTRY
The net economic effect of this policy step is evident and harming the food security in the country. There is an international consensus that export restrictions discourage production of that product by downward pressure on the farm gate prices and thus providing disincentives for finance and investment into the sector.

Decades of applied research on this issue demonstrate that the future production will rise or fall approximately in proportion to price changes (7). Applying this result to Ukraine, a conservative estimate, for example, of the domestic price drop after introduction of the export grain quota in the fall 2010 is about 16% (8).

Other things being equal, it will reduce the future grain crops in Ukraine approximately in the same proportion. This in turn will have markedly negative effects on the sector’s finance, investment and growth prospects in the long run thus exacerbating shortages and price hikes in the future. The burden of this measure will be especially felt in the export oriented sectors (which is definitely the case for Ukraine) and will seriously stall/backward the development of the sector.

OLD-FASHIONED SOVIET MANNER
The drafts, in particular #8163, in an old-fashioned Soviet manner explicitly blame middlemen and foreign [grain] traders for robbing Ukrainian farmers. This argument is populistic and not based on facts. On the contrary, there is a unanimous global consensus that middlemen and private traders perform a very important role in the market economy, and the development of the grain and oilseed sector in Ukraine only corroborate it.

[Foreign] traders do not only trade but make international capital available to help farms with liquidity constraints during harvesting and seeding campaigns. International companies in most of the cases are very reputable and creditworthy, and have access to the cheap credits. Independent experts estimate that Ukrainian farmers receive from traders about USD5-10 bln in cash for their grain during the harvest campaign to pre-finance their seeding or pay back the loans; farmers urgently need this liquidity in the post-harvesting period and grain traders provide it to them.

Moreover the traders basically pay for the farmers the storage costs that they would otherwise incur. Will the State be able to mobilize these funds (several times more than the current agricultural budget) to farmers? Given the current problems with the budget deficit, this looks very unlikely. Many farmers remember the time when the State order was in place and how much they received for their produce?

Very often the farm-gate price was as low as USD30/t, or about 30% of the corresponding fob or world market price. At the moment, farmers receive at least a half of the world market prices. Farmers could get even more unless the lion share of the difference between farm-gate price and world market price is lost through inefficient infrastructure, stock losses and [political] risks (due to, e.g. abrupt grain quotas etc). Empirical evidence shows that because of the fierce competition among traders, the actual trade margin in grain markets make up only USD1-2/t.

In this short note we have not covered other not less important economic consequences that would, for example, increase inflation pressure in the country and threatening the food security or indirectly lead to the reduction of the State budget revenues.

But we think that the supply side effects as well as the global experience with state monopolies are evidence enough to get these two drafts down. Otherwise this would seriously stall/backward the development of the Ukrainian potential to produce more and profitably agriculture and food products.

FOOTNOTES:
1 The mechanism works as follows. Farmers deliver their wheat or barley to an elevator, receive an initial payment from the State agent (e.g. equivalent to 70-85% of the final price in case of the CWB). All proceeds from the sale of grain on domestic and export markets are pooled, minus operating costs and the costs of the initial payments. The net of the pool is allocated among farmers as a final payment to ensure that each gets the same return on his grain, minus cost of delivery and corrected for the quality of the grain.
2 World Bank (2009): A State Trading Enterprise for Grains in Russia? Issues and Options. Report No.: 45925 - RU
3 See footnote 2
4 Informa Economics (2008): An Open Market for CWB Grain – A study to determine the implications of an open marketplace in western Canadian wheat, durum and barley for farmers. June 2008.
5 Booz, Allen and Hamilton (1995). Milling Wheat Project: Consultant's Report to the Australian Grains Council. Canberra.
6 See footnote 2 mechanisms
7 Norton R. (2004) Agricultural Development Concepts: concepts and experiences. FAO, (p 81)
8 Getreideexportquoten: Zum Umgang mit Chancen und Verantwortung. Ausgabe 28, Dezember 2010. Newsletter,

INFORMATION: Iryna Slavinska, Institute for Economic Research and Policy Consulting, German-Ukrainian Policy Dialogue in Agriculture; Reyterska 8/5 A 01034 Kyiv; Tel.office: +38044 235-7502, +38044 278-6360; Mob.:+38 099 655 30 63; E-mail: slavіnska@ier.kiev.ua; www.ier.com.ua

Controlling stake in UIA sold

The Ukraine government has sold its controlling stake in the national air carrier - Ukraine International Airlines (UIA).
The shares were sold to other existing shareholders.
As usual in any deal in Ukraine, we do not know who are the real shareholders behind some of these shareholder companies registered in other countries.

see: http://www.flightglobal.com/articles/2011/03/03/353902/state-sells-ukraine-international-stake-to-existing.html

Ukraine - Country Risk

Foreign investors are needed in Ukraine. Big time. Based on the fact that Ukraine is a low cost economy, the country should be able to offer a competitive advantage to international companies who are looking to enter the market in Ukraine for many reasons. Apart from Ukraine being a potential large domestic market, it could also offer opportunities to companies who are looking to establish a production/manufacturing base to serve the much wider markets in the EU and further.

Marketeers always need to consider the risks associated with market entry into any country.
All countries offer opportunities but also present a range of barriers to entry. The age old approach to consider is usually based on a PEST analysis. Political, Economic, Socio-cultural and Technology factors.

Unfortunately for Ukraine, the biggest barriers by far are the risks connected to political factors.
This is where a market research analysis has to be honest and give the thumbs down to many market entry plans in Ukraine at a very early stage.

An article today in the Kyiv Post presents some of these political risks in a simple way:
see: http://www.kyivpost.com/news/politics/detail/98619/

Ukraine with SUN

People keep asking me what it’s like living in Sri Lanka for the winter
My usual answer is: “It’s like Ukraine…. only with sun”
Recently I have been thinking about the similarities between Sri Lanka and Ukraine.
I asked myself the following questions.
---------------------------------------------------------- Sri Lanka--Ukraine
Driving – Do people drive like maniacs.---------------Yes-------Yes
Is corruption widespread across the country.---------Yes-------Yes
Are organisations steeped in bureaucracy.------------Yes--------Yes
Is the service in restaurants, very slow/bad.----------Yes-------Yes
Do shop keepers tell you they have no change.--------Yes--------Yes
Is it a cash economy –with a ‘grey’ sector.-------------Yes-------Yes
Do the people smile a lot and look happy.--------------Yes--------NO
Are foreign visitors/tourists made to feel welcome.----Yes--------NO
Is the GDP per capita about $2500.-------------------Yes-------Yes
Do many people speak English.------------------------Yes--------NO
Can you get daily newspapers in English language.-----Yes--------NO
Do people throw rubbish everywhere, assuming that------------------.
someone else will pick it up later.----------------------Yes--------Yes
Do people blame the government for all problems.-----Yes--------Yes
Is the average temperature 28-32c all year round.----Yes--------NO
Does it ever snow.-------------------------------------NO--------Yes
Can a foreigner buy land without any problems.-------Yes--------NO
Does the food taste good.------------------------------Yes--------Yes
Do I want to live here all the time.--------------------- ? ---------NO