By Yuliya Sobko, Head of Financial Communications and Investor Relations, The PBN Company, Kyiv

From the outside things have seemed particularly grim in Ukraine of late, with a combination of pre-election politicking and energy issues dominating international headlines. But in the midst of the severe economic slump Ukrainians are strikingly optimistic – about economic recovery (we hope we see production bottoming out in August) and the ability to cope with any policy mistakes that may come our way.

Ukrainians are stubborn survivors and optimists, and the government is more optimistic than ever. Ukraine’s Economy Minister Bohdan Danylyshyn, upbeat about the country’s future economic prospects, recently said that Ukraine has the resources to prevent the country from defaulting on its debts. “We have got the crisis under control and, little by little, Ukraine is overcoming it,” he offered as reassurance.

The draft State Budget, submitted to parliament on September 17, is also infected with bullish forecasts. The government expects GDP to grow by 3.7% in 2010, with inflation at 9.7% (compared to 1.5% GDP growth and 13.4% inflation forecasted by the World Bank). Based on these projections, the UAH 1.27 billion budget foresees a 19% increase in revenue and a 21% rise in expenditures compared to the 2009 budget (and the 2009 budget was based on rather upbeat forecasts as well). The budget deficit is predicted to increase by 49.9% in 2010 to UAH 46.7 billion, while UAH 4.5 billion is needed to cover credits and UAH 11.7 billion for credit arrangements. The fly in the ointment for the government? The fractious political situation makes it unlikely that the budget will be passed before the January elections.

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By Myron Wasylyk, Senior Vice President & Managing Director, The PBN Company, Kyiv

US Vice President Joe Biden’s visit to Ukraine this week accomplished three very important objectives not only for the US-Ukrainian bilateral relationship, but also for communicating Washington’s security policy views to Central and East Europeans.

First, Biden affirmed for official Kyiv the continuity of US-Ukrainian relations and their strategic importance to both sides on a wide range of issues. This ended speculation in both capitals about the status and nature of the bilateral relationship and affirmed that an independent, democratic and prosperous Ukraine remains a strategic priority for America.

During meetings with Ukraine’s political and business leaders, Biden specifically affirmed Washington’s support for the 1994 Budapest Memorandum, which gave Kyiv security assurances from the United States, United Kingdom and Russia in exchange for Ukraine’s getting rid of its nuclear weapons arsenal, one of the world’s largest at the time. The term of the memorandum expires this year and the Ukrainians were keen to receive a signal of support from Washington.

In another important step for Kyiv, the Charter on Strategic Partnership signed by Presidents George Bush and Victor Yushchenko was renewed. Biden announced a bilateral commission would be established to focus on economics, trade, energy, security and rule of law with an inaugural meeting of the commission scheduled for this autumn in Washington, DC Biden also affirmed US support for Ukraine’s Euro-Atlantic integration without mentioning NATO by name.

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By Yulia Sobko, Head of Financial Communications and Investor Relations, The PBN Company, Kyiv

A Russo-Ukrainian gas dispute has, since 2005, been a recurring winter event that threatens serious repercussions for EU gas supplies. This year, however, the annual disagreement has been worse than ever, rearing its head each month and even dragging on into the summer. This situation has not only caused irrevocable damage to both Ukraine and Russia’s international image, but also has serious economic consequences that have been exacerbated by the recession.

Ukraine, which continues to be fully reliant on Russian gas, has been hard hit by the credit crunch and has severe budgetary problems. A revised supply deal signed in January gave Gazprom more favorable terms, and Ukraine is already in arrears on its gas payments.

In early June, Naftogaz, the Ukrainian gas supply company, said it will struggle to pay future bills and that it needs to raise a whopping $4.2 billion. Given that Russia supplies 25% of EU gas, and 80% of those supplies flow to Europe through Ukraine’s pipeline network, Ukraine was hoping for European funding to meet its obligations. It also put forward an alternative supply proposal in which the European gas companies supplied via Ukraine would pay Russia directly and then ‘store’ their gas in Ukraine, eliminating Naftogaz as the financial middleman. German utility RWE expressed interest in the idea and said it has put proposals on the table. However, Germany’s biggest gas company, E.ON Ruhrgas, has ruled out the idea. European industrial group Eurogas said it was still consulting its members and could not yet gauge their response.

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By Yulia Sobko, Head of Financial Communications and Investor Relations, The PBN Company, Kyiv

As June comes to close, the Ukrainian banking sector is able to take a bit of comfort from recent events. The government has finally set a bank bailout in motion by allocating 1% of GDP (UAH 9.6 billion) to recapitalize Rodovid Bank, Ukrgazbank and Bank Kyiv in exchange for majority stakes. Nadra and Ukrprombank are also waiting in the wings, pending resolution of issues with creditors.

Prominvestbank, the first victim of the banking crisis that was nationalized in late 2008, recently paid back its loan. Finance&Credit decided it doesn’t need state support as its financial situation has markedly improved.  And even though banking sector experts don’t exclude the possibility of insolvencies in other systemically important banks, it is hoped that the bailout, together with the generally more optimistic market sentiment, might mean we are on a path of a gradual strengthening of the system.

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By Oksana Monastyrska, Deputy Managing Director, The PBN Company, Kyiv

Ukraine’s stereotypical national mentality comprises a mix of industriousness, integrity and bravery combined with a certain reverie, romanticism and nonchalance.  While these sorts of generalized national characteristics are always slightly misleading, they do provide an interesting prism through which to look at how the recession is changing Ukrainian consumer values.

Recent research by GfK Ukraine and IFAK Ukraine sheds some light on this topic.  Both surveys show beyond doubt that Ukrainians are feeling the effects of the crisis - according to IFAK, 51% of Ukrainians have experienced a reduction in income, and 45% of respondents say that their living standards have deteriorated.

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President Yuschenko’s chief of staff, Victor Baloha, has resigned, accusing his former boss of cronyism and of betraying promises made during the 2004 Orange Revolution. Myron Wasylyk, Senior Vice President and Managing Director, The PBN Company Kyiv, analyzes Baloha’s performance

Victor Baloha’s tenure as head of the Presidential Secretariat, akin to presidential chief of staff, has been filled with very important political victories for President Victor Yuschenko, as well as a number of failures.

Baloha’s parting words show him as a spiteful and disloyal lieutenant whose limited intellectual boundaries became ultimately inconsistent with the strategic vision of his former boss.

But Baloha did help Yuschenko in some ways as chief of staff.

Immediately after his summer 2006 appointment, Baloha moved quickly to bring relevance and order back to a Secretariat left disorganized by two Yuschenko allies not known for their political astuteness or management skills – Oleksandr Zinchenko and Oleh Rybachuk.

Then Victor Yanukovych had just won the plurality in regularly scheduled parliamentary elections and put together a coalition with Socialist MPs, who betrayed Orange Revolution allies in exchange for seating Oleksandr Moroz as Verkhovna Rada’s speaker. A series of nationally televised roundtable sessions were held and a political agreement on pursuing a pro-Western policy was signed by Yanukovych and all other political players except Yulia Timoshenko.  This paved the way for Yuschenko to fulfill his constitutional obligation of submitting Yanukovych’s nomination for the premiership.

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By Viktor Kovalenko, Account Manager – Government Relations, The PBN Company, Kyiv

On May 12 Interior Minister Yuri Lutsenko resigned after a drunken incident in Frankfurt airport. Lutsenko’s resignation is the first time that a Ukrainian politician has resigned for violating moral standards.

The incident began on May 6 when Yuri Lutsenko and his 19-year old son Olexander were not allowed to board a Lufthansa flight from Frankfurt to Seoul and were detained by the police. According to the German tabloid Bild, the Ukrainian minister and his son were very drunk and behaving in a disorderly fashion. After airline officials refused to let them board the plane, the minister and his son became angry and attacked Lufthansa’s personnel and police officers.

As reported in the paper, the Frankfurt police chief and police press secretary stated that the Lutsenkos beat police officers, spat and threw mobile phones at them. The Lutsenkos were detained for drunk and disorderly conduct.

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By Yulia Sobko, Financial Communications and Investor Relations Manager, The PBN Company, Kyiv

On the eve of Victory Day, the IMF gave the green light to disburse the second tranche of its loan to Ukraine.  The second tranche totals $2.8 billion, bringing the IMF’s total loan to $7.3 billion to date.

Ukraine has had difficulties obtaining this second tranche. The original IMF loan agreement stipulated certain monetary and fiscal conditions to be met in time for the Q2 review for the second tranche, and many of those conditions became contentious domestic political issues.  After some haggling over terms, the IMF has now met Ukraine part way, granting waivers on particularly controversial issues such as budget deficit and exchange rate, currency and import restrictions (which will now have to be removed promptly).

Under the revised terms, Ukraine is allowed a budget deficit of 4% of GDP in 2009, as opposed to the original requirement for a balanced budget, and the IMF has strongly recommended certain key structural reforms, including pension and tax reform.  Ukraine’s National Bank has also committed to implement a flexible exchange rate policy and to discourage dollarization of the economy, which should mitigate the effect of external shocks on the economy and help focus monetary policy on inflation.

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By Viktor Kovalenko, Account Manager - Government Relations, The PBN Company, Kyiv

In the middle of May, a special meeting of Ukraine’s National Security and Defense Council is scheduled to discuss the problems associated with launching nationwide digital broadcasting (DB).  According to official data, Ukraine has the infrastructure to enable 85-95% of households to receive a digital signal.  But despite this, DB has gotten off to a slow start in Ukraine - it was only six months ago that some TV channels started test digital broadcasting in Kyiv and Odessa, two of the biggest cities.  Other countries in the region have left Ukraine in the dust - Belarus has already started digital broadcasting, and even Kyrgyzstan has launched a digital network.

The delays are due to the fact that DB has become a contentious political issue - yet another example of the notorious rivalry between President Viktor Yuschenko and Prime Minister Yulia Timoshenko.  At the beginning of the process, there were two rival agencies competing for the state’s DB mandate, which would give control of a budget worth millions: the Ministry of Transport and Communications controlled by Prime Minister Timoshenko and the National Council for TV & Radio, which supports President Yuschenko.  The Ministry’s scheme would cost UAH 4.3 billion, while the Council’s plan came in at more than UAH 6 billion.

After more than three years of deadlock, on April 22 of this year President Yuschenko finally signed decree #259/2009, awarding the DB mandate to Timoshenko’s Ministry. The decision seems to be budgetary - in this time of crisis the President went for the cheaper offer.  Some communications experts, however, say that the Ministry plan was also better developed, and that from a technical standpoint the President made the correct decision.

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By Yulia Sobko, Financial Communications and Investor Relations Manager, The PBN Company, Kyiv

As with many of our friends in their thirties, my husband and I almost gave up hope of ever being able to buy a house. Since we got married three years ago we have been waiting for house prices to come down. In the last eight months prices have plummeted spectacularly, falling 20-30%. But while Ukrainians with sufficient savings and those still in work  cheered and started to scope out affordable deals, the majority of these buyers still need mortgages – which the banks are increasingly reluctant to give.

Last week in the UK, the Times reported that prospective British buyers who don’t have a 40% deposit are being excluded from the most competitive mortgage deals. Economists argue that this is  preventing the UK housing market from stabilizing and ultimately recovering.

Ukraine is in a similar predicament. Only one bank, Ukrsotsbank (recently acquired by Unicredit Group), is offering general loans for the purchase of both new and renovated homes (22% interest in UAH, 30% down payment for 25 years). Three other banks – CreditPrombank, Kyivska Rus and Swedbank – are only lending for new housing built by specific developers. This restricts the choice of property but allows for superb loan conditions: 15%-26% interest with a 25%-40% down payment for 25-30 years, discounts of up to 20%, and guarantees that that housing will actually be built (all of the buildings claim to be over 75% ready).

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By Yulia Sobko, Financial Communications & Investor Relations Manager, The PBN Company, Kyiv

Foreigners visiting Kyiv over the past 15 years have often wondered how people are able to sell or rent office space given that one doesn’t see any FOR SALE signs on the streets. In the 1990s, people didn’t put up signs for fear of racketeers; then people feared tax inspectors checking up on their small businesses. A few years later, the rule of law was increasingly enforced and people were used to paying taxes but FOR SALE signs still did not appear - they were simply not necessary, as demand for high-quality real estate left supply light years behind.

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By Yulia Sobko, Financial Communications & Investor Relations Manager, The PBN Company, Kyiv

Will the IMF stabilization loan come through before Easter, which Ukraine and Eastern Orthodox Churches celebrate on April 19?

The IMF intends to return to Kyiv next week to continue discussions with the government, having received “strong assurances” from the President and the Prime Minister that in the week of April 13 parliamentary approval will be obtained for laws designed to restructure banks, strengthen the pension fund, and shore up Naftogaz.  These laws form part of the conditions agreed with the IMF and the World Bank as part of the loan agreement

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By Yulia Sobko, Financial Communications & Investor Relations Manager, The PBN Company, Kyiv

The global crisis is in large part a ‘crisis of confidence’. Many economists agree that fears and negative sentiments are playing a role in making the crisis worse. Conversely, when expectations improve, the markets should also pick up quickly.

On an anecdotal level in Kyiv, the first signs of economic recovery may have appeared. The city’s restaurants were virtually empty for most of the winter. With the welcome return of sunshine, they are now full with local and visiting customers again.

More significantly, plummeting consumer confidence has stopped its tailspin. From September 2008, the Consumer Confidence Index (CCI) fell by more than a half, from 96% in August to 41.8% in January, according to ICPS, a local policy think tank. At the end of winter consumer confidence showed a slight improvement rising by 0.5% to 42.3%, which is linked to a degree of economic stabilization, especially on the currency and labor markets.

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