| NEW FINANCE MINISTER, STRESSES IN THE ECONOMY, NO CHEAP GAS DEAL |
U.S.-Ukraine Business Council (USUBC) Thursday, January 19, 2012 UKRAINE BUSINESS NEWS - THREE ARTICLES 1. UKRAINE'S SECURITY SERVICE CHIEF TO HEAD FINANCE MINISTRY KYIV - Ukraine’s Security Service Chief Valery Khoroshkovsky will replace Finance Minister Fedir Yaroshenko, who resigned earlier today, President Viktor Yanukovych said. Yaroshenko, 62, said he decided to step down after consulting with Prime Minister Mykola Azarov, according to comments posted today on Yanukovych’s website. Yaroshenko, who was appointed in March 2010 after Yanukovych won office, didn’t give a reason for his departure. Yanukovych appointed Khoroshkovsky, 43, as security service chief in March 2010. He served as economy minister in 2002-2004, when Yanukovych was prime minister, and has been president of Russian steel company EvrazHolding LLC and the head of Ukraine’s customs service, according to a biography posted on the security service’s website. “Khoroshkovsky is not the worst candidate,” Alexander Valchyshen, head of research at Investment Capital Ukraine in Kiev, said by phone. “He has some experience as he was an economy minister as also he probably knows how to speak to investors as he was president of EvrazHolding.” Ukraine’s current-account deficit has widened on increased natural-gas imports, according to the central bank, which has tapped reserves to support the hryvnia. A 2010 bailout loan from the International Monetary Fund has been frozen since last March because the government didn’t raise household gas tariffs, a step the lender has demanded to trim losses at the state-owned energy company. Ukraine wants cheaper gas from Russia instead. ‘BROADER STRESSES’ The yield on the government’s dollar bonds maturing in June 2016 declined to 11.135 percent after rising to 11.432 earlier today. The yield was 11.324 percent yesterday and 6.718 when the paper began trading in July 2011, according to data compiled by Bloomberg. Credit-default swaps that insure the country’s debt against non-payment have jumped 74.77 basis points this year to 930 points on Jan. 18, according to data provider CMA. CURRENT ACCOUNT, RESERVES Ukraine’s current-account deficit widened to $8.75 billion in the first 11 months of last year compared with $2.13 billion in the same period of 2010, the central bank said Jan. 4. Gold and foreign-exchange reserves shrank to $30.4 billion at the end of 2011 from $38.2 billion in August as the regulator supported the hryvnia. The currency slid to 8.0505 per dollar at 6:33 p.m. today in the capital, Kiev, from 8.0252 yesterday. The government faces $8.2 billion in debt payments in 2012. Ukraine’s economy grew 5.2 percent in 2011, the fastest pace since 2007, helped by a good harvest and exports, Azarov said yesterday. Growth may slow to 3.9 percent this year, the government forecasts. Erste Group Bank AG said Jan. 17 the rate may be as low as 1 percent as export demand wanes. Ukraine’s budget deficit reached 4.3 percent of gross domestic product in 2011, swelled by a 20.6 billion-hryvnia ($2.6 billion) shortfall at state energy company NAK Naftogaz Ukrainy and measures to recapitalize banks, according to the Finance Ministry. Excluding those effects, the gap was 2.7 percent, the ministry said Jan. 14 on its website. Talks with Russia over cheaper natural-gas imports failed to make a breakthrough yesterday, with negotiations to continue at an unspecified date, Russia’s gas export monopoly OAO Gazprom said. --------------------------------------------------------------------------------------------- 2. UKRAINE'S YANUKOVYCH DISMISSES FINANCE MINISTER ANALYSIS: Timothy Ash, Royal Bank of Scotland, London, UK, Wed, Jan 18, 2011 LONDON - Has been on the cards for some time. Probably reflects broader stresses at the moment in the economy, as the government battles against declining popular support, a weakening budget and external financing position set against a break in relations with the IMF, and problems in closing an agreement to deliver cheap gas/energy from Russia. In many respects the Yanukovych administration has put all its eggs in one basket in terms of external support, burning bridges with the EU/IMF while at the same time hoping that Russia provides cheap energy/gas to offset the need for unpopular energy price hikes. Russia is though looking to play very hardball with Ukraine - a repeat of the strategy it pursued with neighbouring Belarus. Essentially Russia is likely willing to provide cheap energy, but on its terms which means Russian control of energy sector assets in Ukraine. This is proving a tough one for the Ukrainian side to accept, as they see the control of these assets as the one strategic card they hold, and any deal which cedes control to Russia would be seen as a political own goal in the run up to elections in October. Without cheap Russian energy though, and without domestic energy price hikes, a big hole appears in budget/quasi budget financing, and the current account deficit continues to widen - already running at 7% of GDP, which then raises questions over exchange rate policy. My sense herein is that the Russians will not give way - they think time is on their side, as proved the case in Belarus. I think Yanukovych et al will likely end up going back, "cap in hand" to the IMF, but only likely in the Spring. I guess their assumption herein is that if the price of IMF support is gas price hikes it will be less politically painful to implement after the heating season ends in April. The one potential fly in the ointment herein is the continued detention of the main opposition leader Yulia Tymoshenko which the EC et al have argued is politically motivated. This might encourage some Western EU shareholders to try and stall any future IMF programme to the country, without assurances of progress on the political front in Ukraine - where democratic standards appear to have receded in recent months. --------------------------------------------------------------------------------------------- 3. UKRAINE WILL PAY $416 PER 1,000 C/M OF GAS THIS QUARTER: MINISTER BOYKO ANALYSIS: Timothy Ash, Royal Bank of Scotland, London, UK, Wed, Jan 13, 2011 LONDON - Very disappointing for the Ukrainian side that they have not been able to cut a cheap gas deal with the Russians. This will put pressure on the fiscal and external financing side, with the current account deficit already widening and reserves dwindling.The Russians are probably looking to do a Belarus, i.e. tighten the grip as much as possible on Ukraine to try and get concessions - cheap assets or even commitments to participate in the new Eurasian Customs Union/economic space. The Yanukovych administration might now regret having burned its bridges with the EU/IMF etc over issues such as the treatment of Yulia Tymoshenko, et al. Yanukovych faces tricky parliamentary elections in October with his popularity dwindling, and limited cash in the bank - the question is how he will fund the elections, and will he decide to try and rebuild bridges now with the IMF and EU? Something has to change from the current policy mix. --------------------------------------------------------------------------------------------- This communication has been prepared by RBS plc, RBS N.V. or affiliated. 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