Country Profile:
Ukraine
Ukraine
Despite a period of political turmoil, Ukraine's economy remains in robust shape with growth progressing across the board, buoyed by an increase in private investment and a rapidly rising standard of living. Moreover, the formal accession of Ukraine into the World Trade Organisation (WTO) in May 2008 should benefit many sectors and boost exports overall. It should also help to make continued progress on the reforms needed for closer economic ties with the EU, while maintaining a stable relationship with its influential neighbour to the east. Meanwhile, preparing to host the European football championship in 2012 is boosting infrastructure development.
ISBN: 978-190202339-03-0
ISSN (Online): 1759-3263
ISSN (Print): 1759-3255
TABLE OF CONTENTS
COUNTRY PROFILE
This section provides a quick overview of some facts about the country, its population, natural resources, geography, climate, language, religion and culture.
POLITICS
Since Ukraine gained its independence in 1991 there has been a constant struggle that has divided the country. The population is split between those looking for greater integration with the West and those who continue to hold ties to the East. However, since Yulia Tymoshenko, who is an ardent supporter of closer integration with Western Europe, was voted in as prime minister again in December 2007, her popularity has continued to increase throughout the country, attesting to her political promise. Her pro-Western orientation and tough reformist leanings have garnered her a few enemies in the political arena, including her Orange Revolution partner President Victor Yuschenko and the Party of Regions. For instance, the vexed issue of constitutional reform emerged as a main area of contention for Tymoshenko and Yushchenko. Despite this political warfare, however, it is possible that Ukraine has now finally turned a corner, as the country has adopted a more reformist agenda. Ukraine became a World Trade Organisation (WTO) member in May 2008, after years of negotiations and reforms, and is expected to make continued progress on the reforms needed for closer economic ties with the EU, including a possible free trade agreement, as there is consensus across the political spectrum on the issue. The country is also flirting with the idea of NATO membership, much to the dislike of its neighbours to the east. As Ukraine continues to build its ties with both Europe and NATO, its relationship with Russia is beginning to show signs of strain, particularly over issues such as the Russian language and Crimea. The delicate relationship between Ukraine and Russia is further compounded by the fact that Ukraine, much like the rest of Europe, is dependent on natural gas from Russia. However, Tymoshenko is planning to align the country more with European standards and gradually loosen Russia's strong influence on its domestic policies, including cleaning up the country' s gas deals with Russia.
The chapter includes interviews with President Viktor Yushchenko; Yulia Tymoshenko, Prime Minister of Ukraine; Peter Mandelson, EU Commissioner for External Trade and Richard Spring, MP, Chairman, British-Ukrainian Society.
THE ECONOMY
Despite the political to-ing and fro-ing, Ukraine's economy remains in robust shape with growth progressing across the board and foreign investors undeterred by the strife. Despite the growing political tension, Ukraine continues to thrive, achieving one of the highest real GDP growth figures in the region for 2007 at – 7.6%. Growth has mainly been driven by a rapidly rising standard of living, which is pushing demand for consumer goods, by an increase in investment , and by Ukraine's its export-based industries, thanks to increased global demand for metals, machinery and chemicals. Yet , the country also faces a number of challenges: inflation is high and the current account deficit is widening due to increased imports along with increased expenditure o n social items. Additionally, the state is likely to have a major role in boosting much-needed capital expenditure and infrastructure development. But various inflows have helped reduce d the impact , such as the strong growth of foreign direct investment, remittances from Ukrainian s working abroad and the service payments that come from the oil and gas transportation fees charged by the country for the pipelines that cross its territory. Despite the political deadlock in relation to the budget for 2008, privatisation receipts and foreign borrowing are expected to help the government keep control of its budget deficit. World Trade Organisation accession should benefit many sectors and boost exports overall. Meanwhile, debate continues over the currency peg. The hryvnia has more or less been linked to the US dollar for nearly a decade, and energy costs, generally priced in US dollars, have been one of the main factors influencing the rate of inflation in Ukraine. The scenario is evolving, however, with the move away from the peg in mid-2008. To combat inflation, the government has moved away from the peg and revalued the Ukrainian currency, which is widely seen as a step towards a flexible exchange-rate policy. The overall positive effects for the economy ar e likely to become apparent in the second half of 2008.
This chapter includes interviews with Victor Pynzenyk, Minister of Finance; Bohdan M. Danylyshyn, Minister of Economics of Ukraine; Morgan Williams, President, US-Ukrainian Business Council and Michael Bleyzer, President and CEO, SIgmaBleyzer.
BANKING
Until recently, banks were the fastest-growing part of the economy, expanding their assets by over 50% every year. However, the worsening liquidity conditions worldwide and rising inflation have significantly changed the sector's dynamics as both domestic and foreign banks alter their strategies and attempt to minimise risk exposure while managing down their growth expectations. The National Bank of Ukraine (NBU), the country's central bank, has enforced a more restrictive monetary policy, and this is expected to be in place until inflation is brought under control. In addition to monetary tightening, the central bank has adopted prudential measures to curtail banking lending growth, which has resulted in a drastic fall in consumer lending, and decided to relax a fixed-exchange rate policy to stimulate local currency deposits in the short term. The worst hit are small banks that have no access to foreign capital, which has forced them to increase interest rates on deposits, losing market share to the bigger banks. The difficulty with this is that the market is already crowded with foreign participants, whose total share of Ukrainian banking assets is close to 40%. Most big foreign players, such as Austria's Raiffeisen, France's BNP Paribas and Italy's Unicredit have now got a foothold in Ukraine. New acquisition activity is expected to take place among the second-tier banks, especially as the business environment makes it easier for foreign entrants to ac quire an existing bank following Ukraine's entry to the WTO. Foreign banks have access to cheaper long-term funding than the domestic banks, which has helped them establish their current dominant position in Ukraine's mortgage finance market.
This chapter includes an interview with Allesandro Profumo, CEO, UniCredit Group and a Round Table with Dmitri Zinkov, Chairman of the Management Board, OTP Bank; Jean-François Varlet, Chairman of the Supervisory Council, UkrSibbank; and Vladimir G Khlyvnyuk, Chairman of the Board, Finance & Credit.
CAPITAL MARKETS
With the global downturn in the first half of 2008, interest among foreign investors in the Ukrainian capital markets has been a story of two parts. On the one hand, with much of the Ukrainian market dependent on foreign investment funds, the downward spiral elsewhere has led to some investors cashing in their chips in Kiev in order to offset losses incurred elsewhere, leading to less liquidity and trading activity in Ukraine. Additionally, the increasingly risk-averse climate internationally, has led to the postponement of many IPOs scheduled for the first half o f d 2008. Yet on the other hand, there are some major sectors within equities that continue being favourable picks, while long-term foreign interest is also evident in recent moves by overseas exchanges to get a slice of the market, either by listing Ukrainian companies on their exchanges, or setting up Ukrainian bourses of their own, signaling an expansion in the market's depth and width. However, domestic bonds may have to wait for a growth in liquidity. To better promote Ukraine's capital markets, the government has developed and begun implementing roadshows and education campaigns that will target local businesses.
This chapter includes an interview with Irina Zarya, President, PFTS Stock Exchange.
INSURANCE
The Ukrainian insurance market is hotting up/ gathering steam. Increased public trust, rising disposable incomes and a surge in car sales, coupled with mandatory automobile and lo an insurance required by banks, have given a huge boost to Ukraine's non-life insurance market. In 2007 the most popular insurance types were obligatory motor third-party liability insurance (OMT-PL), collision insurance (CASCO) and property insurance. Mortgage and real estate insurance are also expected to see rapid growth as more Ukrainians are qualifying for loans that require mortgage security. This has made the sector, which has suffered a poor reputation in the past as a result of tax fraud schemes posing as insurance providers, attractive to overseas players. For example, These include Italy's Generali Group, which bought a 51% stake in Garant Avto and Garant Life, and Vienna Insurance Group (VIG), which acquired stakes in Ukrainian Insurance Group (62 %), Knyazha (50%), Globus (51%) and Jupiter (73%). German Allianz Group acquired more than 90% in Rosno Ukraine. Russian insurers have also made strong inroads into the local market. Meanwhile, other large multinational insurance companies are looking to enter the local market, but are waiting for regulatory changes that will allow for new products and services to be introduced. Though premiums generated by the risk insurance market are still less than 1% of GDP, the arrival of large foreign insurers in Ukraine has underscored their current trust in future returns, while the increased competition is expected to introduce higher standards. To In the future, life insurance is expected to develop.
This chapter includes an interview with Olena Bolotova, Chairman, Oranta.
TRANSPORT
The UEFA European Championships in 2012, which Ukraine is co-hosting with Poland, is making the upgrading of the country's transport infrastructure an urgent priority. The challenges are obvious: ageing rolling stock, shoddy roads, declining traffic to the country's ports and an outdated airport infrastructure. With foreign investors keen to get in on the clean-up act, a legal framework allowing concessions , and progress in structural reforms and red tape is a must. The last cabinet drew up a bill to modify the law to make it easier and more transparent to set up public-private partnerships (PPPs). But with the change of government, no progress has been made on this front. For now the state is relying on raising money from big-name lenders such as Morgan Stanley and the European Investment bank. The football championships are not the only issue bringing the poor state of the nation's infrastructure into question – the growing number of vehicles and cargo using the roads, for example, means an overhaul is urgently required. To this end, the government plans to build 800-km of new roads. Additionally, it is hoped to get that rail transport will get back on track through the transforming state railway company , Ukrzaliznytsya. The government plans to invest some 12bn euros into the network, with the purchase of around 20 high-speed passenger trains, expected to be ready for service before 2012. With more and more Ukrainians flying, airports in Kiev, Donetsk, Dnipropetrovsk and Odessa are a ll set to receive millions of dollars in investment. The country's plan to join the European Common Aviation Area in 2009 is expected to open the way for Ukrainian airlines to break into international markets as well as draw more foreign carriers to Ukraine. The government has given conflicting signals over whether it will keep the airports in state hands or hand them over to private owners. Overall, financing for modernisation programmes will come from state and local budgets as well as private investment.
This chapter includes an interview with Yuri Miroshnikov, President, Ukraine International Airlines.
ENERGY
Relations between Ukraine and Russia over energy supplies are often tense, especially over prices, as Ukraine is highly reliant on Russia for supplies, while Ukraine is important to Russia in that it carries 84% of its gas supply to European markets. Years of cut-price Russian gas came to an abrupt end in the winter of 2005-06 when Moscow briefly cut the gas supply for Ukraine's use in a dispute over payments and announced it would be raising its prices towards market rates. Starting January 1, 2009, Russia is expected to charge Ukraine the market rate of $410 per 1000 cu metres of gas, a jump from the 4 179.50 it charged in June 2008, marking a turning point for energy security in the region as a whole. With roughly two-thirds of all Ukraine's gas coming from Russia, this crisis reinforced thinking in Kiev and beyond about how the country could diversify its supply. The government of Prime Minister Yulia Tymoshenko has been trying to restructure the way in which gas is brought into the country and then redistributed. She is seeking to establish joint ventures with a view of giving Ukraine a say in the provision of gas to the border and the possibility to directly sell gas inside the country. Meanwhile, the Ukrainian government, aware of its insecurities in hydrocarbons, is seeking to boost domestic output, with a stress on exploration and production. The government is urging companies to upgrade facilities and equipment and move away from high-energy consumption, while concentrating on extracting from more difficult deposits, such as deepwater in the Black Sea. With surging global oil and gas prices, there is plenty of incentive for more difficult deposits to be explored and developed. Due to some of these issues, coal and nuclear energy are experiencing a renewal of interest. Indeed, coal is the only energy source that Ukraine possesses in large amounts, although Soviet era infrastructure prevents cost-effectiveness.
This chapter includes interviews with Yuriy Prodan, Minister of Fuel and Energy; Andris Piebalgs, EU Commissioner for Energy while Patrick Van Daele, General Manager Shell Ukraine, provides a viewpoint on energy investment.
TOURISM
The tourism sector was given a remarkable boost in 2007 when the UEFA, European football's governing body, announced that Ukraine had been selected to co-host the 2012 European Football Championships, along with Poland, which could help establish ing Kiev as a hub for regional destinations and as well as boosting Ukraine's profile in Europe. The second piece of news for the sector was the 20% growth in visitors to the country in 2007 to 23m. A huge majority of the visitors hailed from former Eastern Bloc coun tries such as Russia, Poland and Moldova, which are geographically close to Ukraine and have a legacy of their inhabitants visiting. But there are hopes of increasing the number of European travel l ers. The prospect of so many visitors heading for Ukraine i s proving to be a catalyst for long-awaited coordination within the public and private sector, which are increasingly getting their act together. A draft law formulated in 2007 would reduce the VAT rate to zero specifically for tourist service providers to non-Ukraine residents, solving many of the problems faced by hotels and tour operators concerning attracting foreign visitors. In this regard, the Ministry of Culture has been busy pro-actively promoting the country as a holiday destination, launching a huge advertising campaign across the EU called "Ukraine invites". A major challenge for the future lies in improving the service culture through training programmes. The increasing number of visitors being drawn to the country by the prospect of big savings on dental care , could also help. The most popular destination for this kind of discounted dental work is Hungary, but prices in Ukraine undercut those of Hungarian dentists by almost 40%.
This chapter includes an interview with Bernard Micallef, Managing Director, Donbass Palace Hotel.
CONSTRUCTION & REAL ESTATE
Preparing to host Euro 2012 is providing a massive boost to the construction sector. The government is planning to spend $4.43bn on extensive programmes of infrastructure development and renewal, including the development of the road system, the upgrading of the country's airports, as well as the construction of new football stadiums and visitor accommodations. While the government will provide a certain proportion of the funding for these projects, estimated at 27%, private investment is expected to fill the gap. This provides a great opportunity and wide scope for more foreign companies to enter the Ukrainian market as both construction companies and as suppliers of heavy equipment. Moreover, with the formal accession of Ukraine into the World Trade Organisation (WTO) in May 2008, the government is committed to completely removing barriers to entry for foreign construction firms.
The real estate market is proving busy across the board – in the residential, retail, office and industrial segments – as investors look east. While foreign demand has traditionally been centered around Kiev, 2007 saw growth in demand for property in regional cities such as Odessa, Donestsk, Dnipropetrovsk and Kharkiv. A trend for developing larger projects, as well as shopping centres on the outskirts of the capital, has emerged. Given the current shortage of supply and strong demand, along with the declining dollar, prices in all segments of commercial real estate will remain high in the near future, but it is expected that as the market matures and supply increases, prices will begin to moderate.
This chapter provides an interview with Lev Partskhaladze, Chairman of the Board, XXI Century.
TELECOMS & IT
In a matter of only three years, the Ukrainian mobile telecoms segment has moved from being one of the least penetrated in Europe to reaching saturation point. Indeed, the number of mobile phone SIM cards in use in the country is now higher than Ukraine's total population – hovering around 120%. The focus now for industry leaders Kyivstar and the Ukrainian Mobile Communication company (UMC), which account for 79% of the current subscriber base, is retaining existing customers, implementing different loyalty programmes, and offering new services such as high-speed data transfer services in a bid to ratchet up average revenue per user (ARPU) levels. However, new entrants have been posing an increasing threat to the leading operators. The biggest challenge has come from Astelit, controlled by Turkish firm Turkcell, and Beeline, which have pursued aggressive marketing strategies. Increased competition from mobile services providers and higher demand for value-added connections from consumers are also creating several new opportunities for fixed-line telecoms firms, which are now bringing together mobile and fixed-line technologies with the aim of offering higher-quality connections to businesses. Meanwhile, 3G remains one of the more important issues for operators in the Ukrainian market, and it is hoped that the licensing issue will be resolved by the end of 2008. In addition, the entire market is closely watching the possible Ukrtelecom privatisation, which could mean the entry of an international telecoms giant into the market.
Despite possessing many advantages when it comes to the IT sector, Ukraine is still falling short of its potential. The country enjoys a well-educated workforce, relatively low costs and proximity to Europe yet its software systems and internet penetration rates lag behind those of its neighbours. There are some bright spots though – sales of computer hardware have grown at a rate of about 40% in 2007. Increased competition and the entry of large international players - such as Norwegian IT holding EDB, who bought a 60% stake in Miratech, one of Ukraine's leading software development and IT outsourcing companies - have introduced better quality standards that in turn have spurred demand for software products and IT services. The future of the sector is seen as positive, with real gains expected over the next few years.
This chapter provides an interview with Jon Frederik Baksaas, President and CEO, Telenor.
INDUSTRY
Ukraine's steel production is the chief source of revenue for the economy, while its chemicals industry is growing rapidly. This situation looks likely to continue as both sectors are now well positioned to take advantage of the surge in global demand for steel and fertilisers. Exports were up 27% in 2007, with metals, chemicals and machinery accounting for over half of the total. The strong performance was mostly due to a rise in demand for automobiles from the domestic market, combined with a period of investment in machine building. At the same time, the sector benefited greatly from accession to the World Trade Organisation (WTO), as quotas come down and anti-dumping measures are strengthened. Another factor that has been fundamental to the growth of Ukraine's industries in an increased concentration on cost reduction, particularly in the field of energy, which has led to significant investment in modernisation. At the same time, the strengthening of the local currency is expected to have some impact on certain export-driven industries, while making imports cheaper. This will likely lead to increased competition.
This chapter provides interviews with Kostyantin Zhevago, Non-Executive Chairman, Ferrexpo and Alexander I, Kirichko, CEO, Interpipe.
DONBASS
In terms of economic growth, Donbass – an informal union of three regions, namely Donetsk, Lugansk and a part of Dnepropetrovsk – is the leading region in Ukraine, holding over a fifth of the country's population and making up 27.4% of the country's GDP. Donbass is an extremely attractive region for investment due to its massive resources potential. The region holds the most lucrative mining reserves, concentrates most of the country's ferrous metallurgy production and provides more than 25% of Ukraine's total industrial output. The region's other key industrial sectors include the chemical industry and heavy machinery building, attracting international attention from countries such as Russia and China, who are interested in mining equipment. The total volume of foreign investment in Donbass increased by 36% in 2007 to $29.5bn. A further increase in investment is expected as the region prepares for the arrival of Euro 2012.
This chapter provides an interview with Anatoliy Blyznyuk, Chairman, Donetsk Regional Council.
AGRICULTURE
A bumper grain harvest this year seems set to boost Ukraine's farming sector and the broader economy. Last year's poor crop and high inflation led the government to ban exports to secure domestic supply. Export quotas were then introduced on wheat, barley, corn and rye, but summarily lifted in May as the grain output increased 30%. The increase in grain production and the restoration of foreign earnings should provide a powerful fillip to the economy. The net contribution of agriculture to the economy continues to rise and is projected to account for up to 18% of GDP in 2008. Additionally, WTO membership, finalised in May 2008, is expected to boost the sector, opening up vast new export markets as well as raising standards. With the advent of rising global oil prices, the country is making a foray into biofuel production to secure energy self-sufficiency and is promoting the cultivation of rapeseed, offering incentives to farmers to undertake the transition. The area is attracting foreign interest: BioDiesel Vienna from Austria and KMT and HarvestMoon from the US are currently in the planning stages of projected biodiesel plants in Ukraine. Meanwhile, having generally been a net importer of sugar, Ukraine's oversupply of sugar beet in 2006 has led many farmers to turn to new, more profitable crops, such as soybeans. Looking to the future, the potential for growth is substantial, with up to 5m ha of land lying uncultivated. Liberalising government policies, such as the removal of export quotas, or the end of the current moratorium on the sale of agricultural land, should help Ukraine achieve its full agricultural production potential.
THE BUSINESS GUIDE
In conjunction with partners Ernst & Young we provide an overview of the taxation system and how it affects foreign investors, examining, in particular, the major changes to tax laws introduced in 2007, while our legal partner highlights the legislation issues concerning some of Ukraine's key sectors.
This chapter provides an interview with Jorge Zukoski, President, American Chamber of Commerce, while Volodymyr Kotenko, Tax & Legal Partner, Ernst & Young-Ukraine and Oleg Batyuk, Managing Partner, Salans Kiev, offer viewpoints on the taxation and legal systems respectively.
THE GUIDE
This section includes hotel, government and other listings, alongside useful tips for visitors on topics like currency, visas, language, communications, dress, business hours and electricity.
