12 December 2012

What is this thing called the law?

This week I attended one of those ‘Breakfast Seminars’ in Kyiv organised by one of the ‘Big Four’ international accounting/consulting firms. Like many of you, I receive many breakfast seminar invitations each week and usually politely decline the invites. But this week the subject on offer was of interest to me.  e.g. Updates on current taxation for expatriates working in Ukraine plus recent changes from the authorities about personnel and Employment Law.

One of the really interesting things about living and working in Ukraine is the fact that legislation changes very rapidly. Moreover, when new laws are supposedly introduced very few people in government and the civil service have any idea what these new laws are all about. The law makers don’t know because they didn’t think it through. The law makers assume that ‘someone…somewhere’ will work it out and make it happen. The various government ministries don’t understand the new laws. The people working in the multitude of government offices have absolutely no idea what these laws are all about. Lawyers and accountants/consultants are probably the people who will try and get their heads around any new laws so they can see where the ‘loop holes’ exist. The people who should be most affected by these laws have absolutely no understanding of what is going on.

During the questions and answers session at the above mentioned breakfast meeting, one attendee asked about the benefits for a foreigner obtaining a permanent residents permit. The answers provided by the ‘experts’ from the big four company were good and in line with my understanding of the benefits. However, I was surprised when they discussed the negative aspects of the permanent residents permit indicating that once a foreigner holds this permit they fall under the exact same rules as a Ukrainian citizen. E.g. Ukrainian citizens are not allowed to hold a foreign bank account in a country outside Ukraine, nor are they allowed by law to own shares in any business outside Ukraine unless they obtain permission from the relevant government department. (Visions of soviet days spring to mind).
The ‘expert’ from the big four company explained that foreigners holding a residents permit should give up holding money in any foreign country. All their ‘wealth’ must be held in Ukraine.

I could not hold back the laughter any longer. I then proceeded ask if she was serious about this remark.   ‘It’s the law’, she replied. (The thought of all the wealth held by Ukrainians in offshore bank accounts brought another smile). So I then asked, WHO exactly would have the power to close my bank accounts held in other countries? The answer came back ‘Well we are not aware that anyone has experienced this yet’.  Nor are they likely to in my opinion. Anyhow I was pushed for time and had to leave the seminar.
But it got me thinking…….

22 November 2012

Can the Ukraine Economy be 'De-dollarised'?

Important New Banking Rules in Ukraine
Commencing 28th November 2012 – Individuals (Residents and Non-Residents)
will be allowed to receive a maximum equivalent of UAH 150,000 per month (approx. $18200) when transferred from another country into Ukraine. Any amount received over this limit will be automatically converted into UAH by their bank. This applies to all major currencies – EUR, GBP etc.  This is a National Bank of Ukraine ruling.
Since 19th November 2012 – 50% of ALL proceeds in foreign currency received in Ukraine
from export operations will automatically be sold and converted to UAH within ONE Banking day upon receipt by a Ukrainian Bank. The terms for settlement of cross border transactions has also been reduced from 180 days to 90 days.
This is not good for citizens or businesses in Ukraine.
It is clearly an attempt by the NBU and the Government to take control of the 'dollar economy' in Ukraine. For many many years people in Ukraine have made all arrangements in USD and recently in EURO. Citizens just do not feel comfortable dealing in their own currency the UAH.

Will people start dealing in UAH only? I very much doubt it.
The implications of these changes could be:
* Forcing even MORE money into the black economy (which is already one of the largest in   
* More 'offshore' deals taking place.

The UAH is expected to devalue further towards the end of 2012.
Foreign companies and most individuals will choose not to invest in Ukraine.
This is bad news.

18 November 2012

Jaguar and Land Rover to be built in CHINA from 2014

Who would have thought it? Who would have thought that one day classic icon brands like Jaguar and Land Rover would be manufactured in CHINA.
This week news hit the UK that the owners of JLR (Jaguar Land Rover), TATA an Indian owned group have formed an agreement with the Chinese car manufacturer Chery to start making Jags and Landy's in China from 2014.
As many people have declared that just about everything will soon be made in China, perhaps they never expected this to include brands like Land Rover. British people are already forecasting a complete end to any manufacturing or assembly of these famous brands in the UK.

The success of Jaguar and Land Rover has for many years been due to the image of these cars being built to a high quality by British firms in the UK. Both brands have enjoyed an increase in sales recently.
China has now overtaken the US has the largest car market in the world, so maybe the move by TATA group is logical. Oh...by the way let's not forget the cheaper labour and manufacturing costs in China.
JLR company profits can only increase.

See the story here in the Daily Mail: Land Rover Story

11 November 2012

Remembrance Sunday 11 November 2012

Today is Remembrance Sunday. Where the UK and Commonwealth countries remember all those who lost their lives as a result of war. A simple poppy (paper copy) is sold in the weeks leading up to the 11th November all over the UK and Commonwealth. (see image below). Money raised from the sale of these poppies is donated to the Royal British Legion Society.

Text below copied from Wikipedia:
In the United Kingdom, although two minutes of silence are observed on 11 November itself, the main observance is on the second Sunday of November,Remembrance Sunday. Ceremonies are held at local war memorials, usually organized by local branches of the Royal British Legion, an association for ex-servicemen. Typically, poppy wreaths are laid by representatives of the Crown, the armed forces, and local civic leaders, as well as by local organizations including ex-servicemen organizations, cadet forces, the ScoutsGuidesBoys' BrigadeSt John Ambulance and the Salvation Army. The start and end of the silence is often also marked by the firing of a cannon. A minute's or two minutes' silence is also frequently incorporated into church services. Further wreath-laying ceremonies are observed at most war memorials across the UK at 11 a.m. on the 11th of November, led by the Royal British Legion. The beginning and end of the two minutes' silence is often marked in large towns and cities by the firing of ceremonial cannon and many employers and businesses invite their staff and customers to observe the two minutes' silence at 11:00 a.m. 

20 September 2012

Election?......What Election?

Last month I wrote that the general election campaign had started in Ukraine and that nothing appeared to be happening. Well here we are with just 38 days to go to polling day and nothing much has changed.
This election may well be remembered as the most boring in the history of Ukraine.

There is plenty of media coverage of paid for campaigns on various TV channels and plenty of outdoor advertising from various political parties. Plus candidates are touring the country making speeches as is normal in any parliamentary election process.

But it is so boring...........zzzzzzzzzzzzz.

I just had a look at the web site for the Party of Regions POR (current majority holders in parliament).
Much to my surprise the site is also in English language. I was looking for any signs of a manifesto, which all political parties in so called democracies publish in advance so that the electorate can read about what the party intends to do if elected into power. The POR have produced a 'Programme'.
See: http://www.partyofregions.org.ua/en/about

This is the first manifesto I have read which contains absolutely NO FIGURES. There is no explanation from the POR as to how they would spend the national budget. No forecast of how much they would spend on Education etc. Critics could say, well, they just submitted the real budget last week in parliament. But this is not the point. ALL political parties should be clearly stating exactly HOW they would spend the peoples money. Ah.........I hear you laughing. Here in Ukraine that is the big difference. Those in 'power' consider the national budget to be their money and not the peoples money.

Still a long way to go in Ukraine, but then again the country has only enjoyed independence since 1991.

29 August 2012

Back to work in Kyiv city

Traffic jams have returned this week to Kyiv city centre. It would appear that everyone has return from their summer escape at the same time. That great feeling of driving in the summer city centre has gone for another year. Let's hope that the 'great return' will help to inject some life into the economy. Sadly, I'm not so positive as I know full well that the upcoming Parliamentary Elections will cast a shadow on the decision making process in almost every board room and CEO office in Ukraine. Everyone is waiting to see what happens next. But the 28th October is a long way off yet. Lets all hope that at least the election campaign will become interesting and add some interest to life in Ukraine. Right now we all need it.

26 August 2012

Politics and Business in Ukraine

Its well known in Ukraine that the majority of the members of parliament are business people in some form.
It reminds me to a small degree of the Thatcher years in the UK, when almost every Government Minister had a successful track record in business.
As many of the members of parliament here in Ukraine have business 'interests', you would expect to see these people acting like 'professional business people'.  The bad news is..NO, they cannot act like professional business people as they have very little experience in actually managing a business. They just 'own things', which is not the same.

As there is an election campaign currently underway, you would expect to hear much talk about the usual things that elections are all about, e.g. The Economy. Business, Jobs, Education, Healthcare, Social Justice etc etc. But not here in Ukraine. Well maybe not yet. Lets hope that things will get serious before election day on 28th October 2012.

The Government of Ukraine has a very 'hands on' approach when it comes to their approach to businesses in the economy. Sometimes, I think they assume that all the money circulating in the economy belongs to THEM...The Government, or maybe just those 450 members of the VIP club we call Parliament here.

Foreigners and foreign owned businesses here have helped to highlight how out of date government policies are towards business in Ukraine. For Ukrainians who have never worked in a small/medium size business or in fact worked in a business in another country it is difficult for them to understand how BAD the system really is in Ukraine.

An example is the pressure applied to banks by the ever present National Bank of Ukraine, Ministry of Economy and the State Tax Administration.  A business person operating under the 'private entrepreneur' scheme will come up against many barriers from his/her own bank when they are doing business.
An attempt to withdraw money from a business bank account will be met with a request from the bank employees for the business person to prove FIRST that they have paid their due taxes this month!!!.
Unless proof can be provided immediately, funds cannot be withdrawn from the bank.
Banks are still acting as unpaid agents of the government.

It would be interested to hear from some of those politicians up for re-election, how they intend to approach this subject. Will they just support its continuance or suggest alternatives to this overbearing policy.

20 August 2012

Doing Business in Ukraine - The 'obsession' with minutiae

Look for mistakes....look and find. Try to find a problem. We MUST find a problem.

I'm almost convinced that from an early age Ukrainians have been taught how to concentrate on finding something WRONG with something. Particularly when it comes to documents.

Its a well know fact across the foreign community here in Ukraine that doing business here is driven by the obsession with documents, lots of them and making sure they are 100% correct in every small detail.
If a small mistake is found........OH NO........(Or maybe OH YES) we have a BIG PROBLEM now.

Please don't misunderstand me, I know that its important to get documents correct first time to help protect an individual or business from a legal standpoint. But there is clearly a major problem in Ukraine which I can only describe as an OBSESSION WITH MINUTIAE.

A well known obsession is the 'wrongly transliterated' name problem. Usually arises where a Ukrainian company or Ukrainian business owned by a foreign shareholder and/or when doing business with a foreign company and agreements are prepared in dual languages, usually English and Ukrainian.
Names of Directors can be translated in many different ways leading to the major problem of.............
''OH NO.......one letter is wrong in the name''

I recently witnessed a case where a foreign owned Ukrainian company had entered into an agreement with an overseas foreign company. The foreign company ( a very large multinational) had prepared the agreement and sent it to Ukraine for signatures. The Ukrainian company, eager to win the business signed and returned the agreement and prepared a translation of the agreement into Ukrainian language.  Weeks later when the Ukrainian company received payment from the overseas client, the suppliers bank requested to see the agreement to justify why payment had been received.

Shock horror, when some eagle eye bank employee discovered a major error with the agreement.The name of one of the Directors of the Ukrainian supplying company was spelled incorrectly on the original agreement in English and had also been translated the wrong way in Ukrainian. What was this major error?

The name 'Poroshenko' had been written as 'Porsohenko' ( this is an example, not the real name from the company). The bank claimed this was a major problem and the money would have to be sent back to the paying company overseas.

The main shareholder and director of the company explained to the bank that both his company and the client company were already doing business and had no problems. The company had supplied the goods/services and here was the client paying the invoice. Why was the bank trying to cause a problem.
The bank employees replied that they were just doing their job according to rules applied by the National Bank of Ukraine. The fact that the name was spelled correctly on every other document the company produced to the bank was completely ignored.

A clear example of 'obsession with minutiae'.  Maybe the bank employee(s) were looking for a financial reward to take away the problem.

Plus the bank added that old excuse, the foreign client had 'FAILED' to apply the company STAMP to the agreement.
How many times do foreigners have to explain to people in Ukraine that the majority of foreign companies NEVER use any kind of stamp to prove who they are. Just a simple signature, name written in block capitals and a date are enough.

The rest of the world should not be obliged to meet so called Ukraine standards.
Banks in Ukraine should not be expected to continue as unpaid agents for the Tax authorities.
Common sense should become the order of the day instead of poor excuses for holding back everyday business.

Until change is introduced, Ukraine will continue to be known as one of the most difficult places in the world to do business.

14 August 2012

IT Outsourcing in Ukraine 2012

Ukraine is still a very active market for IT outsourcing. Here in Ukraine we have some of the very best local IT development companies in the world. Some are owned and managed by 'western parents' who saw the opportunity to establish a working office in Ukraine. Lower rates of pay compared to the US and UK help to control costs but it's not always about low cost. Skilled IT professionals are in demand in Ukraine and the collective skills in some small companies contributes significantly to the core value of these companies.

During the past 8 years, the volume of software development and IT outsourcing services in Ukraine has increased by over 100%.

A very interesting report has just been published by the Ukrainian Hi-Tech Initiative, leading association of Ukrainian software development and IT outsourcing companies. The report includes useful information about Ukraine, its infrastructure and some specifics on doing business in Ukraine. This information will be useful for those considering Ukraine as an outsourcing provider or setting up their own office here.

The report can be downloaded here:  http://bit.ly/Tc3jQj 

28 July 2012

London Olympics 2012 Opening Ceremony

Well…..what a truly great opening ceremony we witnessed last night at the London Olympics 2012.

The British Club celebrated the event at the Bacchus Restaurant and Wine Bar in Kyiv where we watched the event on the big screen. A bit of a surprise when we realised that BBC World was not showing the ceremony but just news reporting. It took us a few minutes to find the right channel but we did it and all was OK. (Unfortunately about four or five people ‘threw the dummy out of the pram’ while we were searching for the best channel and departed…..but that’s life).

Maybe the biggest surprise for everyone around the world was Her Majesty The Queen when she was seen to be taking part in the humour of the event from the beginning alongside actor Daniel Craig (aka 007 James Bond). Internationally recognised faces like Rowan Atkinson (aka Mr Bean), Paul McCartney, David Beckham and many many others.  

The opening ceremony proved to be a truly great British event.  We can all look forward to a few weeks of entertaining sport which will no doubt contain some surprises and yet more breaking of records.

19 July 2012

Kyiv, Ukraine - Early Holidays?

During the recent Euro 2012 Football Championships in Ukraine, it was so easy to drive in and out of Kyiv city centre. Many local people took the opportunity to escape from the crowds and decided to visit their country houses/dachas and many went further on overseas holidays.
Since the end of Euro 2012 Kyiv city centre remains somewhat empty. It is so EASY to drive around the city these days at any time of the day.
Holidays have come early this year. We usually see a deserted city centre during the month of August each year. But maybe Euro 2012 put people in a very early holiday mood.
The majority of business people are already into the holiday mood which is easily identified through the complete lack of wanting to make any decisions. ''Let's wait until September'', is the normal phrase you will hear these days.
However, maybe we will witness an ever longer holiday mindset this year due to the pending Ukraine Parliament elections due on 28th October 2012. I'm sure people will use this event as yet another reason to delay any major decisions until they can see what will happen on the political front.

So my friends.......enjoy the very long summer.

11 July 2012

The Great London Olympics Party in Kyiv

      The Great London Olympics Party
       Kyiv, Ukraine, 27 July 2012 at 8pm
        Join the celebration at the opening ceremony
        of the 2012 London Olympics here in Kyiv, Ukraine.
           Watch the Opening Ceremony live on TV via BBC World News
            2100 GMT (2300 Kyiv time) on the BIG SCREEN

            Come and celebrate with the British Club.
            We hope to bring together most of the British community in Kyiv
            and guests.

           Venue: Bacchus Restaurant & Wine Bar (
see map)
           Date: Friday 27 July 2012
           Time: 8pm - Ceremony starts at 11pm

           Registration: administrator@bbcu.com.ua
            Tel: +38067 320 1584

We look forward to seeing you there

30 June 2012

Euro 2012 Football Championships in Ukraine draw to a close

Tomorrow will be the final game in the Euro 2012 Football Championships. Italy v Spain here in Kyiv.
I'm sure many people will agree that the whole tournament has been a great success. For many, the month of June has been like one big party. The centre of Kyiv city was converted into one big fan zone which was well attended for every match in the tournament including those played in Poland. Moreover, fans were happy that the price of beer was not too expensive at just UAH 25 per 500 mil.

Perhaps the biggest turnout of fans came from Sweden. They even had their own 'Swedish Corner' in the Kyiv fan zone. A sea of yellow shirts could be seen across Kyiv from the Swedish supporters.
England fans were not so many in numbers but they made up for it in the singing capacity. It was entertaining for local people to come and witness England supporters at first hand. I think the really interesting matches were between England v Sweden, England v Ukraine and England v Italy. (Well I would say that).

I'm sure that all first time visitors to Kyiv must be thinking that the city is a lively and interesting place.
Tonight (Saturday 30 June) we will see a major event in the fan zone with Sir Elton John and Queen performing live. I'm sure the closing ceremony and the final game on Sunday will see a massive turnout at the Kyiv Olympic stadium and on the streets of the city centre.

22 June 2012

Where did all those Police women come from?

Since the start of the Euro 2012 Football championships in Ukraine, I have witnessed something I have never seen before in Kyiv city. Police women on the streets. Police patrols can now been seen all over the city centre consisting of two male officers and a female. This is a first and must surely bring a smile to the face of local people. It is so obvious that this has never been done before. Those police 'girls', wearing their brand new uniforms look like they have just been recruited or have perhaps always been hidden away in some police office somewhere.

It's good that the Kyiv police are trying to put on a 'new face' for the many first time visitors to the city but I can't think that it just smacks of hypocrisy. We all know that the police here have a very bad reputation, are aggressive and corrupt and certainly never seen to raise a smile to anyone.

I'm sure these new found police women will be happy after 1 July when the Euro 2012 tournament comes to an end and they will all just disappear as quickly as they appeared on the streets in the first place.
Perhaps the police will be happy to get back to their normal way of operating in Ukraine.
Like so many things here in Ukraine it's a 'facade'. All front and nothing under the surface.
Sorry to sound so negative but the truth hurts sometimes.

07 June 2012

Euro 2012 Football Championships - Kicks Off

Friday 8 June 2012 sees the official kick off of Euro 2012 in Ukraine and Poland. Although the first games in Ukraine will not be until 9 June in Kharkiv and Lviv.
England have their first game in Donetsk against France on Monday 11 June.

During the past few weeks much has been written in the media about Ukraine. I'm sure the current 'leadership' in Ukraine did not expect to see so many 'negative' stories from other European media outlets. These stories have focused on racism, anti-gay movements, anti-semitism and of course the concerns expressed by many European and US politicians concerning the imprisonment of former Prime Minister Yulia Tymoshenko and her former ministers.  Plus one or two stories about homeless children in Kyiv. It's a taken for granted assumption that journalists will try to find something negative to write about Ukraine. This a is a normal practice in all free societies. If the government of Ukraine don't like it..tough.  I suggest they start accepting it. The British government have officially declared that they will not be attending.

There are many positive things to write about in Ukraine. Although it is part of Ukrainian culture to always leave EVERYTHING until the last minute, they have done well to prepare for Euro 2012. I have not visited the other cities of Donetsk, Kharkiv and Lviv recently, so I cannot comment. But in Kyiv its good to see so many new roads. It's a good feeling to be able to drive around on roads which remind me of the roads in many Western European countries. Kyiv certainly needed to do this. The bad condition of roads all around Ukraine have been the subject of jokes for many years. (We have plenty of bad roads and fools driving on them...etc).

Many buildings have had a new coat of paint. Many first time visitors to Kyiv usually declare that ''The whole place looks like it needs a coat of paint''. Well its been done. The main airport Kyiv Borispil has a new terminal building and is also looking good. Flower beds have been created at many intersections using the Euro 2012 logo. Restaurants and cafes/bars have updated their menus into English language, but I suspect that prices have also been upgraded just for Euro 2012.

Kyiv city centre has been closed off to vehicle traffic and a huge 'Fan Zone' has been created complete with extra large video screens and an area for musical performances. One of the main sponsors of Euro 2012 - Carslberg, have created many 'Beer and Food Tents' along the main street Khreschatyk and the prices are reasonable. Beer at UAH 20 (EUR 2 or GBP 1.50)

Lets hope that the Euro 2012 Football championships are a great success for Ukraine.

01 June 2012

Euro 2012 - Transliteration v Translation

Nice to see that Kyiv city is making an effort by transliterating Cyrillic script into Latin script for Euro 2012.
e.g. Metro (underground) and some bus signs and street signs.
However, I wonder if anyone thought about the difference between Transliteration and Translation.
For example:

Майдан Незалежності

has been transliterated from the Cyrillic into Latin.
Maidan Nezalezhnosti

Now, I do not expect everything to be translated into English. Transliteration into the Latin alphabet is a start.

But, how many foreigners will ask the question: ’’Can you tell me the way to Maidan Nezalezhnosti ?

I’m sure they will ask for ’’ Independence Square’’.

Like wise,

On the buses, I notice they have ‘transliterated’

площa Льва Толстого into Ploscha L’va Tolstogo

Surely it will be easier for someone to ask: ’’Can you tell me the way to ’Lev Tolstoy Square’.


Get my point?

25 May 2012

Idiots in Ukraine Parliament

Soccer thugs in Ukraine have just been given a prime example of how to behave in front of the cameras by their own Members of Parliament. This is not the ideal way to promote the image of Ukraine with the upcoming Euro 2012 Football Championships due to start in a few weeks. Complete Idiots.

10 Years in Ukraine

10 Years in Ukraine
Today is the tenth anniversary of my first visit to Ukraine. So I thought I would reflect on the changes I have witnessed during these past ten years. I will only talk about Kyiv city.
What I remember most about Kyiv back in 2002 and how it compares to present day 2012:

The People – At first sight anyone would assume that Ukrainian people are the most miserable people on the planet. Smiling in public is just not part of the culture. They can be offensive and rude. But we must remember one golden rule; who are we to judge? If we think people are offensive and rude…compared to what? Our ‘western’ view of life on the planet. Once you get to know Ukrainian people, you will find them to be very friendly and warm people. Back in 2002, I visited a Ukrainian home for the first time and tried to understand why our hosts had prepared a feast for twenty people when there were just four of us? Ukrainian people will give you all the food in their home to welcome you as a guest. Drinking vodka with a foreigner was considered a national sport as your host knew full well that you would be unable to stand up at the end of the party. During the 2002-2009 period I think Ukrainians remained very optimistic people, they were always talking and thinking about a brighter future for themselves and their country. 2012 = People are more pessimistic these days. Mainly as a result of the depressing political situation.  But they are a hardy people and will overcome the present climate of uncertainty.

Bureaucracy – I’m sure there has always been an obsession since Soviet Union times with paperwork and accuracy. The ‘Passport’ is required to complete almost any transaction in Ukraine. Plus the right paperwork is always required when dealing with a public sector office or even private company. In the early days from 2002, I was convinced that people were just determined to stop me from doing anything. The word NO has always been much easier than YES in Ukraine. The translation of foreign names from the Latin alphabet into Cyrillic has always been a challenge. If one document has just one letter different than another document, then you have a big problem. 2012 = Things have not changed much. Even though most organisations have computer systems, Ukrainians still have this obsession with original documents. The ‘stamp’ is one of the most important, as every organisation must use its ‘stamp of authority’ on all its documents. For Ukrainians this is like a signature. But they find it difficult to comprehend that we do not use these stupid things in other countries.

Traffic – Car Ownership.  I was amazed to find a city where you could travel in a taxi from one side of the city to another side without any traffic jams. There were very few cars on the streets. 2012 = Crazy situation with traffic these days. Private car ownership has increased significantly thanks to the banks providing easy credit during the boom years. Traffic jams in Kyiv are just as depressing as in other European capital cities.

Driving – In 2002 it was obvious that ‘safety’ was not a word commonly understood by anyone in Kyiv. Drivers would acquire a license, not as a result of a driving test or after many hours of learning to drive under the instructions of a qualified person. No, they just got a license. 2012 = A dangerous situation in Kyiv. Ukrainian people drive cars like they have been possessed by some evil spirit. There is no common courtesy for other drivers on the roads. There are not many cities in the world where driving along the pavement at speed is considered acceptable. The high number of deaths on the roads in Ukraine is also unacceptable.

Green City.  Most first time visitors to Kyiv will remember how impressed they are by seeing the ‘green city’. Trees still line most streets and is a refreshing change from other European cities. 2012 = Kyiv can still be called a ‘green city’, only because it has many trees. But what most people now understand by the phrase ‘green’, as in eco-friendly green, then unfortunately Kyiv has a long way to go.

Police/Traffic Police – I remember back in 2002 local people telling me that if you have a problem in Ukraine the last people to call are the police. The police have a reputation for creating problems not solving them.  Tourists and foreign visitors have always been looked upon as easy prey for the police.  The sole objective of any policeman in Ukraine is to extract money from anyone they come into contact with. Ukrainian policemen must be the most corrupt in the world. 2012 = Nothing has changed. However, I have never paid a bribe and I will never pay a bribe in Ukraine.

Public Transport – One of the plus points about Kyiv is the reliability and the choices of public transport. The metro (underground) system must surely be one of the best in the world. Old as it is (but only since 1960) it is reliable and you can travel around the city quickly and very cheaply. I remember when it was just 50 kopecks (GBP 0.04) to travel anywhere, today its UAH 2 (GBP 0.15). Kyiv also offers Trams, Trolleys Buses and an assortment of public and private sector buses at cheap prices compared to other European cities. 2012 = Getting even better.

Restaurants/Cafes/Bars – In 2002 I was amazed to find so many McDonalds restaurants in Kyiv. Later I found out that McDonalds were the best places to visit if you needed to find a toilet in Kyiv city centre. There are still very few public toilet facilities in Kyiv. Kyiv offers a range of different restaurants and cafes/bars. The food is not just Ukrainian but international and of good quality. HOWEVER, back in 2002 I was frustrated by the very very very very poor service provided in these places. 2012 = You will receive very good service in the very expensive restaurants in Kyiv city centre. But the prices in these restaurants are CRAZY. The prices on the menu’s at most Kyiv city centre restaurants will make London and Paris restaurants look cheap by comparison. In ALL other restaurants/cafes/bars the level of customer service remains very very very POOR. It still amazes me how long it takes to serve just two beers. The owners of the many restaurants/cafes/bars in Kyiv have taken the time to design these places with interest and have invested considerable time and money in getting these places looking good. However, they always fail to invest any money in the training of their staff. People in Ukraine just do not understand customer service.

Doing Business – The reason why so many foreigners choose to come and do business in Ukraine is initially due to the fact that very little competition exists in Ukraine. In 2002 it was obvious that Ukraine was a country that was developing and needed a whole range of new industries and services. This created many opportunities in Ukraine. But actually ‘doing business’ in Ukraine was and still is a challenge to foreigners. Ukrainians do not trust each other, why should they trust foreigners? The mentality of doing business in Ukraine still revolves around producing paper documents. Documents and stamps still continue to dominate the business culture in Ukraine.
However, there is one significant benefit to doing business in Ukraine. People expect to pay for goods and services in advance! This is refreshing and avoids any misunderstandings. People tend to focus when they have to pay BEFORE they receive the goods/services. Unfortunately, many Ukrainians still assume that to succeed in business you need to have an expensive looking office/reception/furniture etc. It’s amazing how many companies in Kyiv city centre operate from offices that look like a Hollywood film set. It’s all a façade. 2012 = To avoid frustrations, It’s much easier to do things the Ukrainian way. It will be a long time before anyone can do business here according to normal European standards.

Banking – In 2002 the banking industry in Ukraine was dominated by local banks. ATM’s were already working but it proved difficult getting money during the long electricity black outs. Moreover foreigners were always ‘suspects’ when attempting to do any banking transactions. Trying to complete any banking business involving international transfers was a nightmare and people needed to dedicate many long days to tolerate the lack of know-how from banks in Ukraine. But then many foreign banks entered the Ukraine market and things began to change. The foreign banks started to provide staff training in how to take care of those people called customers. However the National Bank of Ukraine continues to demonstrate its power and the majority of banking employees live in constant fear of violating some NBU rules/procedures. Moreover, banks are still unpaid agents for the tax authorities. There cannot be many countries in the world where when you go to withdraw money from a business account, the bank will ask you if you have paid your taxes and may require you provide proof before they will allow you to withdraw money. 2012 = The situation has improved. But it can still take more than one hour to complete all the documents and withdraw cash from a simple banking account. Cheques are never used in Ukraine. Even today, if a company or individual receives a payment from a foreign account the bank may refuse to accept the funds until they see the agreement/contract you have with the ‘foreigner who sent you this money’. Still a long way to go.

Taxes – Ukraine has one of the most complex tax systems in the world. However, it’s obvious that very few people in Ukraine actually pay any taxes. During the period 2002-2012 I have witnessed very few changes in the system. Naturally the government will claim that they have made things easier, but many will disagree. The personal rate of taxation is very low between 15 – 17%, so much lower than other European countries. All salaries in Ukraine are negotiated net of taxes. Employees never discuss gross salaries as they do not consider taxes to be their responsibility but those of the employer.  However the corporate rates can only be described as prohibitive. The payroll tax is the killer and can be as much as 50% payable to the government. 2012 = Not much has changed.

The Black Economy – Back in 2002 it was almost impossible to pay by credit/debit card in Ukraine. Cash was king and is still the same today. The majority of people and businesses in Ukraine will try hard to obtain cash in most situations. Cash is difficult to trace for tax purposes. Plus the majority of people are still paid wages/salaries in cash. The driving factor for business operators is to avoid the dreaded payroll tax. Many Ukrainian business people will openly declare that if they had to pay all taxes they would go bankrupt. 2012 = Although it’s much easier to pay by credit/debit card these days in many restaurants/supermarkets etc., the majority of retailers will try to avoid non-cash payments. The usual excuse ‘Sorry, our card machine is not working’ is common. Some estimate that the black economy makes up more than 60% of the national economy in Ukraine.

Leisure/Sports/Pastimes – Due to the fact that the majority of people in Kyiv live in apartments (they do not have a garden), they tend to get out and do things collectively. Spring and summer is always a great time in Kyiv where thousands of people can be found taking a ‘shashlik’ (picnic) break in one of the many forests around the region or at the side of a lake or along the great Dnieper river. In Ukraine you can stop just about anywhere and have a picnic with a real fire for your barbeque meal. In most areas on the left bank of Kyiv, you will still find shared sports facilities from Soviet Union times including a running track. 2012 = Recently we have witnessed the development and growth of new sports/fitness clubs in Kyiv. These new places complete with all the latest equipment for busy people to go and keep fit are probably better than you will find in Western Europe. Kyiv city becomes a very quiet place in summer as people escape to their dachas.

Kyiv is not Ukraine. Those living in other cities and far off places in Ukraine will share different experiences. Plus the rest of Ukraine tends to be a low cost experience. But during the past ten years I have witnessed some interesting changes. Ukraine is one of those countries that you like very much one day and hate the next. There is always something interesting going on in Ukraine. The political situation is complex. The people of Ukraine deserve better governance and only if they could start to understand that THEY have power in their hands they can start to make changes.
It is possible to do business here if you are prepared to submit to the ‘Ukrainian way’, otherwise you could end up being a patient in a mental institution.  It’s worth remembering that the country has experienced only twenty years of freedom. Living in a developing economy is interesting and more enjoyable than some boring developed country.

21 May 2012

Euro 2012 in Ukraine. - The English Experience

With just 20 days to go before the first England game in Euro 2012 kicks off, things are getting interesting. Let's hope the current great weather in Ukraine continues.
The important dates for England are:

11 June in Donetsk -  England v France
15 June in Kyiv -       England v Sweden
19 June in Donetsk -  England v Ukraine

It will be interesting to see how many England fans come to Ukraine. Getting to Donetsk from Kyiv is not easy.
It's approximately 600k (373 miles) from Kyiv. That is the same as travelling from London to Aberdeen in Scotland. A very long way according to British mentality.

I have received a lot of emails from England asking me many many questions about travelling in Ukraine.
The route I recommend is to try and fly direct to Donetsk if possible. Buying a train ticket in Ukraine is not easy at anytime if you do not speak Russian or Ukrainian. THIS IS A FACT.
Some people have even asked me if it is possible to take a taxi from Kyiv to Donetsk. Sure......but I can only imagine the crazy price the driver would demand. Renting a car could be an option, but the thought of England supporters getting stopped by the DAI is not a nice one. Plus can you imagine trying to buy petrol at a petrol station when you don't understand that you must pay in advance before you try to put petrol in the car. The chances of someone speaking English in a petrol station are low. Donetsk is not exactly a tourist friendly city in Ukraine. THIS A FACT.

The match in Kyiv should be easier. A new terminal building at the airport was opened last week. It is not difficult getting a taxi from the airport to Kyiv city centre. Getting a bus is easy.
Kyiv is more 'user friendly' for tourists. I must say that from what I have seen during the past few days all around Kyiv is that the city is trying hard to get things right. At last we have a decent road all the way from the airport into the city centre. For the first time visitor to Kyiv, I think the journey from the airport into the centre will be impressive.

However, there is a dark side to Euro 2012 in Ukraine. Many reports in the British media are concerned with  the threat of racist attacks on non-white foreign tourists/football fans. Plus many England supporters think it will be just that much easier to stay home and watch the games on TV or in groups at the local British pub.

A recent article in The Independent newspaper highlighted the concerns of one 'non-white' supporter.
Bristol student Raj Chande, a member of the FA's official fans' group, explains why he has decided to cancel his trip to Ukraine.
See the full article here:

19 May 2012

Great.......It's too difficult to get into Britain.

The British public have been complaining for many years that the United Kingdom is a soft target for illegal immigrants and anyone seeking asylum. Millions of citizens from the EU have entered the UK taking advantage of EU laws that allow them to settle in the UK and claim benefits and support from the UK system.
Thousands of foreign students (Non-EU) enter the UK each year to attend British universities. Many of these students after graduation seek to stay in the UK.

The previous Labour government in the UK are blamed for 'opening the gates' and allowing far too many foreigners to settle in the UK. During the past year the 'CONDEM' (Conservative - Liberal Democrat) government have been pressured by the media and public to do something about the problem of more and more immigrants arriving each day in the UK.  The message that still needs to be communicated is that the UK is FULL.

All around the world, each day British Embassy Visa offices are full of people seeking a visa to visit/work/settle in the UK. Many of these visa processing services have been outsourced to a private company. Here in Ukraine, the 'Visa Office' is managed by a private company who are responsible for accepting, checking, processing, collecting fees and then passing visa applications to the UKBA (United Kingdom Border Agency) for approval or rejection by an immigration officer.

These people employed by the UKBA carry a lot of power. They know that they are free from any 'interference' from local Embassy staff including the local British Ambassador. Only the UKBA decides who gets a visa to enter the UK.

In the 'good old days', when visa offices were the sole responsibility of British Embassy staff, people seeking a visa to enter the UK would request help from their 'contacts' at the Embassy. Those days are over.
The British Ambassador in Ukraine - Leigh Turner admits that he is unable to help people with visa applications and he has no influence in the decision making process. To the majority of Ukrainians find this difficult to comprehend.

Within the British Business Club in Ukraine we receive many requests for help with a visa application.
The best help we can provide is to make sure that the application and supporting documents are 100 percent correct. We understand the frustrations that Ukrainian people experience when dealing with visa applications. Moreover, many British people living in Ukraine are married to Ukrainians and their spouses need a visitors visa if they wish to accompany them on visits to the UK. The procedure for obtaining a visitors visa is the same over each time and has to be started from the beginning each time, even though many Ukrainians have been to the UK time and time again.

But, lets return to the problem of too many immigrants entering the UK. The British public would be more than happy if the government just closed the borders and made the process for entering the UK even more difficult.  Some international companies based in the UK may claim the new tough line on visas is making it hard for them to attract talented people from Non-EU countries and many British universities are already complaining that it is more difficult to recruit international students (Non-EU).

With the Olympics ready start in London very soon it will be interesting to see how the UKBA manage to process the millions of people passing through UK airports without causing to many delays.
A recent article in The Ukrainian Week by Michael Binyon 'Britain is Closing Down' explains the situation well.

See: http://www.ukrainianweek.com/World/49770http://www.ukrainianweek.com/World/49770

17 May 2012

Ukraine - Trip Notes - Timothy Ash

Political risk; IMF; macro outlook; parliamentary elections; relations with Moscow; liqudity issue; banking sector
By Timothy Ash, Global Head of Emerging Markets, Research & Strategy
Royal Bank of Scotland (RBS), London, UK, Wednesday, May 16, 2012
LONDON --- We visited Kiev on May 14-16, 2012 meeting with officials from the MOF, the IMF, the World Bank, alongside meeting with deputies from the Verkovna Rada, and diplomats, local journalists, banks, and corporates. Officials from the NBU did not make themselves available to meet investors.

SUMMARY VIEW: Political risk has again taken centre stage with the conviction and jailing of leading opposition figures in recent months provoking heavy criticism from the EU/US and raising the potential for a freezing of the country's EU integration bid. This comes as relations with Russia remain difficult, as Moscow refuses to provide cut-price energy without securing control of strategic assets in the energy sector; near impossible for any Ukrainian politician to deliver just before elections.
The resumption of IMF lending seems unlikely until after parliamentary elections due in October, and hence the government will have to get by under its own resources until then. The elections are expected to be close run, with concern that gerrymandering by the ruling Regions party could see further international isolation and potential street protests. The government seems intent on holding the UAH fixed until elections, but more flexibility is expected after this date.
Recent durability on the balance of payments front could be tested in the run up to elections, when locals typically buy FX, and given broader global risks – the Eurozone crisis, plus a sharper slowdown in China, a key market for Ukraine's main export product, metals.

Political risk perceptions have increased noticeably over the past year, and specifically since the arrest, subsequent jailing and conviction of a number of prominent opposition politicians, including the leader of the main opposition party (Batkivshina) and former prime minister, Yulia Tymoshenko, and her ally and the former minister of interior, Yuriy Lutsenko. These arrests appear to have divided opinion within Ukraine.
Both politicians have been charged and convicted of abuse of office, and Tymoshenko also faces new charges of corruption relating to her stints running a large energy utility in the 1990s. The opposition politicians and indeed diplomats we met argued that the charges appear politically motivated, aimed at ensuring that Tymoshenko – arguably the strongest, most dynamic politician on the campaign trail in Ukraine – is unable to run in parliamentary elections due to take place on October 28, 2012.
Note that under the current Ukrainian penal/criminal code, a conviction for abuse of power bars politicians from running in elections – there has been external pressure on the Yanukovych administration to decriminalise this offense but thus far there has been little legislative progress. Supporters of the ruling Yanukovych regime instead argue that the case/conviction against/of Tymoshenko and other opposition politicians is simply judicial, as the administration aims to clean up domestic politics and root out corruption/abuse of office.
The opposition and foreign diplomatic community counter that the cases against Tymoshenko/Lutsenko were flimsy, and imply selective use of justice as similar claims/cases could easily be made against members of the ruling Yanukovych administration and its allies. The opposition and the foreign diplomatic community also argue that the convictions of Tymoshenko, et al, are now part of a worrying trend towards greater authoritarianism in Ukraine, where basic democratic rights and freedoms (hard won during the Orange revolution) are being undermined.
The proponents of this view highlight that this started soon after Yanukovych victory in the 2010 presidential election with changes to parliamentary procedure that enabled the formation of a majority Regions administration by allowing deputies to "cross the floor", rulings by the constitutional court that strengthened the role of the presidency, revisions to the electoral law creating a duel PR/first past the post system, which is likely to favour the ruling party and, more generally, intimidation of opposition MPs, and business leaders. They argue that all this raises the risk that parliamentary elections due in October will not be free and fair.

The Tymoshenko affair has stepped up a gear in recent weeks, following allegations of mistreatment of Tymoshenko in jail, and this has led to a number of EU member states announcing political boycotts of the forthcoming UEFA European Football Championship in Ukraine, while also reducing cooperation with Ukraine more generally, including the boycott of a recent meeting of regional leaders in Yalta.
More damaging perhaps to Ukraine, the EU is delaying signing its Association and FTA with Ukraine, which has been long in preparation and is seen by both sides as providing an important European anchor for Ukraine. Relations between Ukraine and the EU reached something of a low point over the past week when Angela Merkel, the German Chancellor, drew a comparison between Ukraine and Belarus, by suggesting both were dictatorships in Europe.
Most observers we met (from both sides of the political spectrum) suggested that Merkel's comments over-stepped the mark, and were particularly insensitive coming from a German leader in a week where Ukraine, and other CIS countries, were engaged in their annual commemoration of those that died during WWII.
However, the comments have encouraged both sides to take something of a time-out, for reflection. The EU, while eager to encourage the Yanukovych regime to respect basic democratic standards, is also eager not to push Ukraine further away, into the Eastern sphere of influence, with the risk indeed that it eventually lurches more towards an authoritarian model.

There seemed to be widespread unease among locals and diplomats we met, over the Tymoshenko case and some incredulity as to the motivations behind the arrests of opposition leaders. Clearly these are high-risk moves by the administration that we think could easily backfire, both in terms of undermining foreign relations but also by potentially boosting support for the opposition in the run up to the parliamentary elections.
The hope from the EU, US, and even Russia (Putin has called for Tymoshenko's release) is that Tymoshenko will be freed before elections, and the penal code changed to allow her to run in parliamentary elections. That said, the over-whelming opinion of the diplomats/journalists and analysts we met was that Tymoshenko is unlikely to be released any time soon.

Opinions as to the motivations behind Tymoshenko's arrest were diverse. Included in the various explanations given were the following:

          (1) The official line is as above, ie, that this was simply a judicial process, and she is now paying the price for past abuse of office, and potentially alleged corrupt practice if follow-up charges are

          (2) The opposition/diplomats argue that this was simply a political calculation by Regions, to boost its chances of winning the parliamentary elections – ie, by taking out key opposition figures in a very
               closely run election.

          (3) A further conspiracy theory is that Tymoshenko's arrest was somehow related to the dispute with Russia over gas pricing, and was undertaken as a means to improve Ukraine's negotiating
               position with Moscow. The logic herein seems to be that as the conviction of Tymoshenko related to her signing of the 2009 gas price agreement with Russia, any suggestion that she had acted
               illegally has the potential to undermine the legal basis of that agreement, perhaps allowing Ukraine a window to renegotiate that deal. We note that the Yanukovych administration argues that the
               2009 agreement was unfair to Ukraine, allowing Russia to charge prices for gas exports to Ukraine above the regional norm.

          (4) Fourth, her arrest simply reflects a settling of scores between elites, and particularly reflects the bad feeling that exists between Yanukovych and Tymoshenko – during the 2010 presidential
                election campaign Tymoshenko launched a bitter and scorching personal attack on Yanukovych.

Among those we met there was a fairly universal view that Yanukovych is now unlikely to sanction the early release of Tymoshenko. The feeling was that the administration has increasingly dug itself into a corner over the issue and is now unlikely to want to be seen to back down for fear of being seen as weak, and thereby undermining its position in the run up to elections. There was also an assumption that if the arrest/conviction related to domestic party politics there would still be a strong incentive on the part of Regions to keep Tymoshenko out of the election campaign.
Finally, the argument was made that by pursuing legal action against Tymoshenko et al, the Rubicon had in fact now been crossed, and the incumbents in power would fear similar treatment from their own victory should they now be forced from office.

Opinion polls suggest a closely fought contest is now likely in October's parliamentary elections. Support for the ruling Party of the Regions has collapsed to 15-20% (halving over the space of two years, and noticeable even in the party's heartland in eastern Ukraine), a reflection perhaps of Ukraine's relatively weak recent economic performance and the lack of adequate trickle-down effects, concern over the Tymoshenko case, and arguably the broader ineffectiveness of the Regions regime to bring a meaningful change in ordinary Ukrainian's lives – the gap between the Oligarchs/elite "family" clan around Yanukovych and ordinary Ukrainian just appears to be widening in many peoples' perspectives.

The problem for the opposition is that they are struggling to capture voters disenchanted with the incumbents, as general malaise with Ukraine's political class currently runs deep. Note herein the in-fighting/divisions between the leaders of the Orange revolution during the presidency of Viktor Yushchenko, have also left the pro-Europe, Orange constituency significantly disillusioned with all parties, and not just Regions.
The opposition have attempted to counter these trends by consolidating for the elections, with Tymoshenko's party, running on a joint party list with the Front for Change of Arseny Yatseniuk another prominent opposition leader, in a two plus four formulation of two large opposition parties and four smaller parties (including the nationalist Rukh party). Opinion polls, however, show the united opposition only polling on par with Regions of Ukraine, suggesting a tight-run contest come October.

Changes to the electoral law, combining a PR and a first-past-the-post voting system, also present another threat to the opposition. The first-past-the-post system is likely to see a large number of independents, and oligarchs/business leaders, being returned to parliament in the constituency elections (50% of seats will be decided on this basis). Past experience has, however, suggested that party allegiance of deputies is generally weak, as political patronage by the party in power has traditionally been a powerful tool for deputies switching allegiance.
There is also some concern as to whether the formal opposition alliance of parties will hold together, especially as Yatseniuk himself served under the former Yanukovych administration. The fear is thus that Yatseniuk and his supporters will eventually forge a ruling coalition with Regions, suggesting status quo in terms of Regions' domination. In recent months though Yatseniuk has been a much more ardent critic of the Yanukovych regime, highlighting its weakening democratic credentials and speaking out in defence of the opposition leaders currently in jail.

One focus for discussion during the trip was how the electorate would react to a situation where Regions managed to secure a parliamentary majority with only a small share of the popular vote – either through the failings of the new electoral law, using political patronage to capture independent deputies, and/or outright vote rigging. Members of the opposition we met signalled that opinion polls reveal a high willingness on the part of the population to partake in street protests (>50%), indeed much higher ratings than the low single digits in favour of such action seen prior to the Orange revolution.
The suggestion is thus that the population is now much more ready to protest. However, a key question is who would lead such street protests, if the key dynamo from 2004/05, Yulia Tymoshenko, remains jailed, while Yatseniuk appears as a much more cautious political leader, with more limited mass oratory skills. Arguably the Orange revolution happened due to a complex range of factors coming together at one time, but the question is would similar factors align this time around. Herein we heard very mixed views.

The other related question discussed was how the EU/US would react to elections that are deemed not adequately free and fair – unlikely to be the case if key opposition leaders remain in prison and unable to participate/campaign. Such opposition might be dissipated if Yatseniuk is somehow brought into the Yanukovych regime, and/or the regime then decides to release opposition leaders and push ahead with broader reforms, including trying to bring the IMF programme back on track.

One commonly held thesis is that the cornerstone of Ukraine's post-independence foreign policy has been that of "milking both cows", ie, playing Russia, to which Ukraine has strong historical, cultural and economic ties, off against the West, and the EU in particular, membership of which many Ukrainians still aspire. This thesis would suggest that Ukraine's push for EU/NATO membership has been played as a means to secure economic concessions from Russia, in particular market access for Ukrainian products, and cheap energy imports.
For much of the post-independence era this strategy succeeded in that Ukraine consistently managed to secure discounted Russian gas/energy and favourable payment terms/loans from Moscow. After the Orange revolution, and the assumption by Moscow that Ukraine was plying a much more European-bound course, Moscow became much less willing to give way in terms of supplying cheap energy.
After several mini-energy wars this eventually resulted in the 2009 gas price agreement, which in effect ended cut price energy supplies to Ukraine – at least on the state level, albeit individual Ukrainian business groups are still thought to benefit from favourable gas pricing terms from Moscow.

The Yanukovych administration has sought to renegotiate the 2009 agreement and in 2010 managed through the Kharkiv agreement, to get a one-off, one year long, USD100 per 1,000 cu metres discount on imported Russian gas. This agreement ended in 2012, and this year Ukraine has been paying over USD400 per 1,000 cu metres of gas imported from Russia (42 billion cu metres of gas contracted to be imported on a "take or pay" agreement), over 4 times the level charged before the Orange revolution.
The government is still pushing for a new deal with Russia, but with the deterioration in the relationship with the EU over the Tymoshenko case, and failure to secure new IMF financing, Ukraine appears to have undermined its own negotiating position, burning the bridge with the EU, and leaving it now wholly dependent on Moscow for financial support. Moscow seems eager now to exploit this new potential dependency. Thus from a policy of "milking both cows" the new strategy appeared to be one rather of "putting all its eggs in one basket".

The assumption within the Yanukovych regime appears to have been that, faced with the prospect of being able to draw Ukraine back into its sphere of influence, Moscow would eventually cave in, providing cheap energy and financing for Ukraine. However, events seems to suggest that the Yanukovych regime miscalculated, misreading the evolving strategy of Russia towards the "near abroad" perhaps now best reflected in how Moscow has recently managed support for neighbouring Belarus in the wake of its own balance of payments crisis.
Moscow's overall strategic goal appears to be to bind back former Soviet states to Moscow, via is newly created CIS Customs Union, and the planned Eurasian Union which is closely modelled on the EU itself. Economic and eventually perhaps political (re)union appears to be the long term vision in Moscow for the near abroad, but hard business and strategic interests also underpin this. In the case of Belarus and Ukraine, Russia wants control of strategic assets, more particularly energy transit infrastructure, e.g. gas pipelines.
In both Belarus and Ukraine this has been the goal since the collapse of the CIS, and each year Moscow has undergone a painful bargaining cycle with both Kiev and Minsk offering cheaper energy but trying to secure ownership/control of pipelines. In both cases the strategy failed as elites saw these assets as one of their few remaining levers with Moscow to ensure long-term discounted gas deliveries. Moscow has always tended to blink first in the past, perhaps worried over a popular backlash against Russia across the region.
However, the past year saw a much harder stance from Moscow. Thus, in the case of Belarus' appearing willing to allow a BOP crisis/devaluation before finally providing bail-out loans and cheap energy but only after hard contracts were negotiated allowing control over energy sector assets. This strategy now appears to be being pursued towards Ukraine – after the new, hard nosed, policy appeared to work to finally deliver control of assets in Belarus.
Moscow has thus resisted every Ukrainian overture calling for cheap energy/bail-out loans this year, and would appear willing to see the UAH tumble this time around unless control over pipelines in ceded. While there would appear to be some in the Yanukovych administration willing to cede control of energy sector assets to Russia, the consensus is that this would be all but political suicide for any Ukrainian administration this side of elections, and especially for the incumbent regime which is suffering from such low opinion poll ratings.

The Yanukovych administration has thus more or less isolated itself from its two prior financing sources, the West/EU and international capital markets in effect, and also Russia. The Yanukovych administration has thus had to fall back on its own resources, and this currently appears to be the plan.

The existing SBA agreement reached with the IMF soon after the presidential elections in March 2010 went off track in a matter of months after its launch over the moot issue of energy pricing. The IMF had demanded a staggered process of energy price hikes beginning in 2010, to move domestic prices to cost recovery levels. In the event the government appeared reluctant to raise gas prices, as demanded by the IMF, fearful of the domestic political cost – household gas prices stand at a fraction of cost recovery levels, and impose a hefty burden on the state budget via resulting subsidies paid to the state owned gas transit company to cover losses.
The government has asked the IMF for flexibility over the gas pricing issue, arguing that if it is able to find alternative budget savings to cover the cost of energy subsidies, and to ensure the maintenance of the 2.5% fiscal deficit agreed with the IMF for 2012, then the Fund should cut them some slack. The Fund has thus far refused to budge, arguing that energy price hikes are important not only for ensuring longer-term fiscal sustainability but also more broadly ensuring broader efficient resource allocation and energy efficiency/conservation.
With the government now refusing point blank to raise gas prices this side of parliamentary elections, and the Fund now also raising wider questions as to the sustainability of broader fiscal targets given weaker macroeconomic fundamentals, and budget spending revisions made in April which add around 2% of GDP to public expenditure, it is difficult to imagine IMF funding resuming this side of elections, unless Ukraine suffers another BOP/financing crisis in the interim, and the government is then forced to go cap in hand to the IMF.
Note though that the general assumption is that after elections the Yanukovych government will then likely return to the negotiating table with the IMF, and then will be more willing to concede gas price hikes – assuming the elections produce a clear victory for Regions and its allies.

The Yanukovych administration now appears intent, even confident, that it can survive until elections, from its own resources.

HOLDING THE UAH TO ELECTIONS WILL STILL BE TOUGH On the external financing front, fears over near term devaluation risk have receded, with the assumption that the NBU can maintain the current exchange rate peg until after elections – beyond then the NBU policy is expected to be pragmatic, likely responding then to IMF pressure for more FX flexibility, which is likely at that point to result in FX weakness.

NBU FX reserves, which dropped quite precipitously in H2 2011 (dropping USD8bn in the space of six months, and by USD3bn in September 2011 alone), have stabilised at just under USD32bn. Reserve flight accelerated in mid-2011 due to a combination of factors, including a deterioration in the political environment (arrest of opposition leaders), the lack of agreement with the IMF, concern over a copy-cat BOP crisis as was playing out in Belarus not helped by Ukraine's own widening CAD and large external financing requirement (CAD ~ 5% of GDP, plus >USD50bn in external debt amortisations falling due over the year), plus broader global risk factors (Eurozone).
The NBU managed to stabilise the situation by tightening domestic liquidity and hiking policy rates, and was helped by an easing of global pressures (LTRO-II) and some evidence of a moderation in the CAD, as tightening policy slowed import growth and high metals prices underpinned exports – note that in our recent Turkey visit, Turkish steel producers complained of dumping by their Ukrainian counterparts.
There was also evidence of a pick up in FDI inflows, and relative success by Ukrainian corporates/banks in rolling over external debt liabilities – note a high share of these liabilities consist of intercompany loans which are more liable to be rolled in times of crisis. On this latter note there is a sense that domestic oligarchs began to bring capital back on-shore, perhaps encouraged by opportunities on the privatisation front, and maybe some vested interest in supporting the incumbent regime.

Expectations for the run up to parliamentary elections are that the CAD will remain on a flat/improving trend, perhaps helped by inflows associated with Euro-2012, albeit these are only likely to amount to several hundred million dollars. There is also an assumption that the reverse capital flight will continue – friendly oligarchs will be encouraged to bring cash/capital back on shore to support the incumbent Yanukovych regime.
This ability to self-finance itself, via oligarchic inflows should not perhaps be underestimated, given estimates of as much as USD70bn in cash existing outside the banking sector, and offshore. Meanwhile, the NBU can still draw on its FX reserves, and is expected to do, to hold the UAH this side of elections – a strong currency is generally seen as a sign of health in Ukraine.

The above said, significant caveats need to be added herein. First, assumptions over oligarchic inflows/outflows are subjective by nature given these individuals tend to try to keep their wealth beyond official sources. Second, Ukrainians have a track record for buying FX in the run up to parliamentary elections. The general assumption domestically is that the UAH will hold till October, but then be allowed to weaken thereafter, which might suggest some individuals might start buying early.
The experience of Ukraine in September 2011, and indeed Belarus early last year, was that this retail buying of FX can become a powerful self fulfilling force, and official FX reserves could easily be quickly depleted in such a scenario. A weak global backdrop – note on-going FX weakness amongst regional peers (PLN, HUF, RUB) - could also easily spook the market, especially when domestic risks/concerns are building.
The assumption that the CAD might continue improving might also prove optimistic, if the expected fiscal pump priming begins to seep into import demand, and the extra UAH liquidity pumped into the market, might also eventually feed back out into increased demand for FX. A weakening in China growth might also more heavily weigh on metals/steel prices, again undermining exports and the CAD position in the process.

On the budget financing front, at face value the MOF's position looks difficult but not untenable. Budget plans for 2012 target a budget deficit of UAH25.1bn (1.8% of GDP estimated at UAH1,500 for the full year), which with debt amortisations of UAH65.9bn (UAH34.6 domestic, UAH31.3bn external), implies a gross financing requirement of UAH90.1bn.
The MOF actually planned gross issuance of UAH98.5bn for the full year, with an additional UAH10bn in receipts expected from privatisation – suggesting sources of financing, if fulfilled, of UAH108.5bn. The excess from central budget financing (UAH17bn) was scheduled to cover UAH12.5bn in transfers to the state gas transit company, and an additional UAH5.5bn to fund the recapitalisation of the same entity.

YTD the MOF reported UAH32bn in gross issuance, with some success in FX-denominated and FX linked instruments, benefiting from relatively flush liquidity in the banking system – banks were reported to have over USD9bn in USD and over EUR 2bn in correspondence accounts. The government had also managed to generate around UAH5bn from state asset sales to date (oblenergos) and appeared confident that the full-year target for privatisation receipts could be met, especially given recent deals for the sale of oil exploration rights which yielded as much as UA6bn.

As of this week, according to the MOF, it had UAH12bn in FX and UAH3-bn in cash on its single Treasury account.

In terms of other sources of financing, the MOF appeared optimistic that a deal had been done to significantly refinance the USD2bn loan extended by a Russian state owned bank, with suggestions that this will be partially rolled into a new Eurobond, with some cash repayment. Assuming half is rolled into a new Eurobond, this implies UAH45bn of the UAH117bn financing sources have thus far been covered as of mid-May, with note still of the UAH15bn in the single Treasury account.
Presumably also the now close relationship between the MOF and the NBU also provides the prospect that in a worst-case scenario the NBU might creatively look to cover the government's financing needs by perhaps going through state owned banks to provide liquidity to the sovereign.

The government seemed confident that the UAH12.5bn plan for subsidies paid to the state owned gas transit company could be capped, despite no domestic gas price hikes, and higher energy import prices this year.

On the question of the target for the central budget deficit, UAH25.1bn, again government officials appeared confident that this could still be attained, despite large hikes in pensions, public sector wages and other state spending approved by parliament in April as part of a package worth the equivalent of 2% of GDP. The government assumes that budget revenues will increase by an equivalent amount, hence they have kept the 2.5% of GDP budget deficit target agreed with the IMF.
The obvious concern is that with real GDP growth likely to underperform expectations and inflation also moderating, nominal GDP growth will also be contained, likely putting a cap on budget revenue growth. Government officials though again seemed confident that increased tax compliance could ensure higher budget revenue targets are met, keeping an overall cap on the budget deficit. Indeed, thus far this year budget revenue growth has been strong YOY (>12% revenue growth for the period January – April 2012).
Anecdotal evidence does suggest that pressure is being put on both companies to pre-pay tax ahead of elections, to bolster the government's election war chest. Indeed, this has been a tendency in the run up to previous elections, suggesting tighter revenue conditions once elections are out of the way.

There was some discussion as to why the market appeared to penalise Ukraine, by demanding much higher spreads than its peers, despite the relatively modest debt/GDP ratios (~30%). Ukraine's problems though are more ones of liquidity than solvency, at least in public finance space, and especially where external sources of financing have been closed off to the elections because of the deterioration in the political environment.

First quarter real GDP growth disappointed, moderating to just 1.8% YOY which probably reflects a tightening in monetary policy as the NBU sought to stabilise the UAH, and perhaps given broader regional concerns, eg, the Eurozone.
Fiscal pump-priming in the run up to elections could boost growth in Q2 and Q3, but last year's bumper agricultural season provides unfavourable base period effects, while we think the new government emerging after parliamentary elections in October will need to tighten policy to rein in the electoral excess which will in turn slow growth. Hence, real GDP growth is likely to come in at 1-2% for the full year in 2012, below the government's 3.5% forecast.

Inflation has dropped to low single digits, benefiting still from the good agricultural season ,stalled utility price hikes, relative stability in the UAH, plus tight policy by the NBU. These factors are likely to begin to unwind later in the year, while base period effects will turn less positive.

As noted above, the current account deficit is expected to come in at 4-5% of GDP this year. Fears over strong upward pressure from higher gas import prices have been partially alleviated by much reduced overall imports of gas, as the country has been able to draw upon gas imported and held in storage in 2011 when import prices were lower. There also appears to have been continued efforts at energy conservation which has reduced energy consumption further.


The banking sector appears to be gradually emerging from the problems of 2008-2011, with the sector beginning to show profits and some balance sheet expansion. Foreign owned banks (40% of the sector) remain cautious, with much of the on-going expansion concentrated in a small number of aggressive domestically owned banks.
NPLs remain high – 30%+ across the sector – albeit NPLs on new loans appear much lower a reflection of the stability/growth in the economy plus perhaps better risk management by banks themselves. The sector remains relatively liquid, and the government has taken advantage of this to increase issuance of domestic government debt.

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