Welcome to the U.S.-Ukraine Business Council


U.S.-Ukraine Business Council (USUBC)
Washington, D.C., Monday, October 20, 2008


Reuters, Kiev, Ukraine, Monday, October 20, 2008 

Sabina Zawadzki, Reuters, Kiev, Ukraine, Monday, October 20, 2008 

By Daryna Krasnolutska, Bloomberg, Kiev, Ukraine, Monday, October 20, 2008

Fitch Ratings, London/Moscow, Monday, October 20, 2008 

Reuters, Kiev, Ukraine, Mon Oct 20, 2008 

KIEV - Prime Minister Yulia Tymoshenko expressed confidence on Monday that talks with the International Monetary Fund would prove successful and that Ukraine would secure "substantial" financial assistance. [UA-M] Officials have suggested the IMF could lend Ukraine a sum ranging from $10-14 billion.

Following are key facts about why Ukraine is vulnerable to heightened risk aversion among international investors.

(1)  Ukraine has been plagued by political turbulence since "Orange Revolution" protests in 2004 brought to power President Viktor Yushchenko and a team committed to moving closer to the West and joining NATO and the European Union.

Rows pitting Yushchenko against his former ally Yulia Tymoshenko, who twice served as his prime minister, undermined the "Orange" camp and brought down governments. The president dissolved parliament this month and called a December parliamentary election, the third in as many years.

(2)  Upheaval -- and trouble forming a stable ruling coalition -- reflect Ukraine's longstanding division into the nationalist west and centre, which looks to the EU and United States, and the Russian-speaking east and south, friendlier towards Moscow.

(3)  Relations with Russia, bumpy throughout the post-Soviet period, have sunk to unprecedented lows over Yushchenko's denunciation of Moscow's military intervention in Georgia. Ukraine depends heavily on Moscow for energy supplies.

(1)  The hryvnia currency hit an all-time low of 5.9/$ on Oct. 8, weakened by growing global risk aversion and regional tensions after Russia's conflict with Georgia.

(2)  In mid-2008 the hryvnia had strengthened as far 4.5/$, after the central bank abandoned a policy of keeping it in a corridor of 5.00-5.06 per dollar within a 4.95-5.25 band.

(3) The central bank's council and executive board have sent mixed messages about future actions and clashed in May over revaluing the hryvnia's official rate. The board appears to take less notice of the currency band, set by the council.

(1)  The central bank has said foreign exchange reserves as of the end of September at $37.5 billion covered 3.7 months of imports.

(2)  The current account deficit was running at 7.9 percent of GDP in the first half of this year, up from 4.2 percent in 2007.

(3)  Analysts based outside Ukraine forecast its current account deficit at $21-25 billion, or 10-12 percent of gross domestic product, by year-end; Ukraine-based analysts give lower forecasts of about 6 percent of GDP.

(4)  Prices for Ukraine's steel exports are forecast to drop, while Russia's Gazprom has suggested next year's price for gas imports could soar to $400 per 1,000 cubic metres from $179.50 now.

(1)  The central bank risks encouraging imports and further widening the trade gap if it supports the hryvnia. However, letting it float would remove an important anchor for domestic and foreign businesses in Ukraine's export-driven economy. * Many people hold debt in foreign currency and would have to pay more to service it if the hryvnia weakened.

(2) Consumers are extremely sensitive to currency movements -- they lost savings when the Soviet Union collapsed and again through hyper inflation and a currency crisis in the 1990s that more than halved the hryvnia's value to about 4/$ and beyond.

(3) Ukraine was forced to restructure its debts in 2000 and made the final payments on that restructuring just last year.

Ukraine's foreign debt totalled just over $100 billion as of July 1, of which about $15 billion was government debt.

(1) The central bank has said it expects banking sector debt worth $1-1.2 billion to mature in the final quarter of this year.

(2) Citi analysts estimate Ukraine's 2009 external financing requirement to be $55-66 billion, of which $32-40 billion is in the private sector. Foreign banks own 40-42 percent of total banking assets and 25 percent of short-term banking debt is owed to parent banks. (Compiled by Sabina Zawadzki; Editing by Ruth Pitchford)

LINK: http://www.reuters.com:80/article/bondsNews/idUSLK27995520081020


By Sabina Zawadzki, Reuters, Kiev, Ukraine, Mon Oct 20, 2008 

KIEV - The International Monetary Fund and Ukraine discussed on Monday the conditions Kiev needed to meet to secure a loan officials say may amount to up to $14 billion, the offices of the country's top leaders said.

The IMF delegation, in Kiev since last week, met President Viktor Yushchenko and Prime Minister Yulia Tymoshenko for the second time. The premier said she was sure the talks would enable Kiev to secure "substantial" financial assistance.

"A package of measures was discussed which, if fulfilled, would enable Ukraine to receive financial and stabilisation support," a statement on the government Web site said.

"Prime Minister Yulia Tymoshenko stressed that the talks would come to a successful conclusion and that it was very likely Ukraine would receive substantial financial assistance."

The presidential Web site quoted the head of the delegation, Ceyla Pazarbasioglu, as saying that the Fund had already "formulated a range of measures that are required".

Neither office described what conditions would be imposed for the loan. The IMF has made no comment on its visit. Analysts have said the Fund is likely to require greater currency flexibility, higher interest rates and more reforms to the banking sector, though demands were expected to be less stringent than during the 1997 Asian crisis.

Hungary, Iceland and Serbia are also seeking help from the IMF to cushion them from the impact of the global crisis. The chief concern for Ukraine is the ability of the government, banks and firms to refinance their debt with global lending grinding to a halt. Ukraine has been unable to issue a Eurobond this year, vital to cover any budget deficit.

Tymoshenko later told a news conference that this year's budget would be amended to cut spending. The current budget sees a deficit of $3.9 billion, or 2 percent of GDP.

Another worry is the hryvnia currency, depressed by a gaping current account deficit. With European and the U.S. economies slowing down, foreign direct investment may no longer provide support for the hryvnia, which hit an all time low on Oct 8.

The IMF expects Ukraine's economy to slow dramatically next year to 2.5 percent from 6.4 percent this year as prices fall for steel -- a key export.
Financial woes are compounded by constant political turmoil in the ex-Soviet state, now facing its third parliamentary election since the 2004 "Orange Revolution" which swept Yushchenko to power.

Rows between Yushchenko and Tymoshenko -- allies in the Revolution -- have stalled reforms in the past year since she became prime minister for the second time.

Ratings agency Moody's cut its outlook for Ukraine to 'stable' from 'positive'. This follows a downgrade from Fitch on Friday to B+ from BB-. Standard & Poor's put its B+ rating on review for possible downgrade last week.


By Daryna Krasnolutska, Bloomberg, Kiev, Ukraine, Monday, October 20, 2008

KIEV - Moody's Investors Service lowered Ukraine's outlook as the global liquidity crunch adds pressure to an economy already beset by racing inflation and political instability.

The outlook for the former Soviet republic's foreign- and local-currency debt ratings was cut from positive to stable, Moody's said today in an e-mailed statement from New York. Moody's downgrade follows moves by Fitch Ratings and Standard & Poor's.

The worldwide financial turmoil is prompting investors to shun riskier assets in emerging markets. Ukraine has the worst creditworthiness of Europe's emerging markets, based on the cost of credit-default swaps, which protect bondholders against default.

The country is also heading for early elections on Dec. 7 after the second collapse of a ruling alliance between President Viktor Yushchenko and Prime Minister Yulia Timoshenko.

"Although Ukraine's government balance sheet remains strong at the moment, the current global market turmoil heightens the existing vulnerabilities,'' said Moody's Vice President Jonathan Schiffer said in the statement.

The hryvnia fell 3.7 percent 5.4400 to the dollar, its weakest level in more than a week, as of 2:25 p.m. in Kiev. The hryvnia has slumped 16 percent against the dollar since early September because of turmoil in global financial crisis, the government coalition collapse, and new nation elections, scheduled for Dec. 7.

Fitch cut Ukraine's credit rating to B+ on Oct. 17 and Standard & Poor's put it on review for downgrades on Oct. 15. "There has already been speculation against the local currency, with its attendant adverse affects for inflation, debt servicing and the asset quality of the banking system,'' said Schiffer.

The current-account deficit will probably widen to $15 billion this year, weakening the hryvnia, said central bank Governor Volodymyr Stelmakh on Oct. 13.

The shortfall reached 7.2 percent of gross domestic product in the first seven months, or $7.7 billion, as higher energy costs and domestic consumption boosted imports, the central bank said on Aug. 29.

The country is seeking a loan of as much as $14 billion from the International Monetary Fund to help cover the gap, said Oleksandr Shlapak, the first deputy chief of President Viktor Yushchenko's staff, Oct. 17.

The economy may face the risk of recession as prices for its main exports, including steel, dropped, as demand weekend at world's market, according to Shlapak.

Worldwide inflation, driven by food and energy prices, was exacerbated in Ukraine by higher government spending. The annual rate almost tripled in a year to a record 31.1 percent in May before easing back to 24.6 percent in September.

Ukraine's foreign-currency denominated bonds are currently rated Ba3 by Moody's, a high-yield, or "junk,'' level three steps below investment grade. The local-currency debt is rated a step lower at B1. (To contact the reporter on this story: Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net.

LINK: http://www.bloomberg.com/apps/news?pid=20601095&sid=a4mdxDmYO0XA


Fitch Ratings, London/Moscow, Monday, October 20, 2008 

LONDON/MOSCOW - Fitch Ratings has today downgraded two Ukrainian companies’ foreign currency ratings, revised the foreign currency Outlook on three others and affirmed the ratings of six companies following today’s Sovereign downgrade of the Ukraine to ‘B+’/Negative Outlook, and in view of current and/or prospective liquidity constraints facing these companies. A full list of ratings follows.

Ukranian companies whose foreign currency ratings have been downgraded are:

Metinvest B.V. (Metinvest)
Long-term (LT) foreign currency (FC) IDR: downgraded to ‘B+’ from ‘BB-‘ (BB minus). The Outlook remains Negative. This rating is constrained by the Ukrainian sovereign rating.
LT local currency (LC) IDR is affirmed at ‘BB-‘ (BB minus). The Outlook remains Stable.
Short-term (ST) FC IDR: affirmed at ‘B’.
National LT rating is upgraded to ‘AA+(ukr)’ from ‘AA’(ukr) with Stable Outlook, due to a recalibration of Fitch’s National Ukrainian scale.
National ST rating: affirmed at ‘F1+’(ukr).

OJSC Naftogaz of Ukraine
LT FC IDR: downgraded to ‘B’ from ‘B+’ and remains on Rating Watch Negative
LT LC IDR: downgraded to ‘B’ from ‘B+’ and remains on Rating Watch Negative
The FC senior unsecured rating on the company’s USD500m eurobond dated 2009 is downgraded to 'B+' from 'BB-' (BB minus). Recovery rating of ‘RR4’ is affirmed.

Ukranian companies whose FC IDR outlooks have been revised and ratings affirmed are:

Corporation Industrial Union of Donbass (ISD)
LT FC IDR: affirmed at ‘B+’. The Outlook is revised to Negative from Stable. This rating’s outlook is constrained by the Ukrainian sovereign rating’s outlook.
ST FC IDR: affirmed at ‘B’

DTEK Holding Limited
LT FC IDR: affirmed at ‘B+’. The Outlook is revised to Negative from Positive. This rating’s outlook is constrained by the Ukrainian sovereign rating’s outlook.
ST FC IDR: affirmed at ‘B’
Fitch has assigned a LT LC IDR at ‘B+’ with Positive Outlook
National LT rating: affirmed at ‘AA-(ukr)’ with Positive Outlook
National Senior Unsecured rating on a UAH500m bond affirmed at ‘AA-(ukr)’

Interpipe Limited (Interpipe)
LT FC IDR: affirmed at ‘B+’. The Outlook is revised to Negative from Stable. This rating’s outlook is constrained by the Ukrainian sovereign rating’s outlook.
FC Senior Unsecured: affirmed at ‘B+’ with a Recovery Rating of ‘RR4’
ST FC IDR: affirmed at ‘B’

Ukranian companies whose ratings and have been affirmed are:

OJSC Myronivsky Hliboproduct (MHP)
LT FC IDR: affirmed at ‘B’ with Stable Outlook
LT LC IDR: affirmed at ‘B’ with Stable Outlook
FC Senior Unsecured rating of ‘B’, RR4 with Stable Outlook has been affirmed.
National LT rating: affirmed at ‘A(ukr)’ with Stable Outlook.

CJSC Donetsksteel Iron and Steel Works (Donetsksteel)
LT FC IDR: affirmed at ‘B-’ (B minus) with Stable Outlook
LT LC IDR: affirmed at ‘B-’ (B minus) with Stable Outlook
ST FC IDR: affirmed at ‘B’
ST LC IDR: affirmed at ‘B’
National LT rating: affirmed at ‘BBB+’(ukr) with Stable Outlook.
National ST rating: affirmed at ‘F2’(ukr)

OJC Concern Stirol
LT FC IDR: affirmed at ‘CCC’ with Stable Outlook
ST FC IDR: affirmed at ‘B’
The FC senior unsecured rating of ‘CCC+’ and RR4 on UkrChemCapital BV’s bond is today withdrawn as the bond has been repaid in full.

The rating downgrades for Metinvest and Naftogaz, and FC Outlook changes for Donbass, Interpipe and DTEK reflect the sovereign rating action. Fitch also took into consideration the immediate liquidity constraints within the Ukrainian banking system which affect daily liquidity requirements for these companies, as well as the impact of a slower economic environment for the county and region.

Fitch also notes that whilst the financial performance of Metinvest, Donetsksteel and ISD has not been helped by recent steel commodity price declines, their ratings have not been based on the companies maintaining their previous peak prices or volumes.

Many of Fitch-rated corporates have a significant portion of USD-denominated debt. Given current market volatility, Fitch has focussed on the companies’ immediate debt maturities to January 2009.and has assumed foreign currency-providing banks (mainly local subsidiaries of foreign-owned banks, who are themselves increasingly capital-constrained) lending to Ukrainian companies on short-term facilities may not refinance those lines.

This means companies without foreign currency (mainly USD and/or EUR)-denominated net revenues will have to rely on a weakened domestic banking system. In this regard, over the long-term, MHP is particularly exposed since it has less USD-denominated receipts than other rated entities although its key bond maturity is not until 2011.

The Ukrainian central bank has imposed limitations on banks' ability to extend assets in most categories above the end-13 October 2008 level. As a result, any new debt - if available - will be expensive, in Fitch’s view.

Today’s sovereign downgrade reflects Fitch’s view that Ukraine faces a significant and rising risk of a financial crisis involving a substantial depreciation of the currency. Such depreciation would significantly increase corporates’ foreign currency-denominated debt service obligations in local-currency terms. Companies without a currency hedging programme in place or foreign currency revenues could face a greater debt burden.

For related commentary see today’s “Fitch Downgrades Ukraine to ‘B+’, Outlook Remains Negative” and “Challenging Times for Ukrainian Banks”, dated 13 October 2008, and both available on www.fitchratings.com.

LINK: http://www.cbonds.info/all/eng/news/index.phtml/params/id/412879