UKRAINE: POLITICAL AND ECONOMICAL FREEDOM

There's been a lot of uncertainess on UAH stabilitity during the last 2 years. When global crisis started, central bank was forced to depreciate local currency in front of USD 60% to today's actual exchange rate ( 8 UAH = 1 USD ). During last year, a lot of rumours were around regarding the collapse of the local currency. State could not manage to level income and expenses of national budget, and fears of Central bank of Ukraine using the increase of monetary mass ( M1 ) as a way for the State to be able to execute payments of pensions and debts in the inside market were very frequent.

During 2010, state buget reached a record high deficit of 11% and inflation went higher than expected reaching double figures. At some point, during last summer, new goverment was facing a very strong problem due to the shortage of revenues to be able to pay expenses.

At that point, Goverment had 3 possible solutions:

a.Issue of  10 year State Bonds.
b.Look for Private Creditors on the International Banking Arena.
c.Ask IMF for new trench of the agreed loan for Ukraine.

Each of this options depended on the attitude of the Ukraine Goverment towards political and economical questions which would satisfy possible lenders.

Financial markets did not recieve very enthusiastically the announcement of the new issue of SB. For these reason, Ukraine Goverment decided to cancell this plan as yield was rating up to 8,75% year which was not acceptable, in our opinion with the right decision, for the Ukranian Goverment.So, Goverment had 2 options left.

With a much more pragmatical approach on their relationship towards Russia, new Goverment  has been able to ease problems with Kremlin, which has opened the possibilty to collaborate more closely with russian state and private organizations. As a result of that, VTB agreed to lend at a very political 6,7% year interest rate a loan of 2 bilion $ which has been recently extended for another 6 months which has eased situation and pressure to the UAH.

From the other side, IMF approved during last August 2010 a loan of approx. 15 bilion $ at a 3% year rate which helped the Goverment to secure its financial stability for 2010.

Both loans, are based on strong promises from Ukranian authorities to undertake reform which will not be very popular and could harm its popularity. Goverment has to tackle the main problem which remains the fact that, at least, 50% of economy continues on the shadow. New legislation and more control should improve this situation. From the other side, State has been 'forced' to privatize part of its more 'strategical' assets including Ukrtelekom and some heating and electricity distribution utilities. Obviously, companies and persons favoured by this process will be related to the decision taken to provide these loans to save state financial stability during 2010. It is difficult to say, if it has been a good decision by the Goverment, but the urgency of the situation did not allow them to analize possible 3rd options.

Goverment and politicians seem to have understood that either they are able to stabilize State Budget increasing revenues and controlling increases of expenses or their independence to take decisions will be seriously jeopardize.

State Budget for 2011 forecasts an increase on revenues around 10,5% and an increase of expenses of 4,6%, in an scenario with a GDP growth of 4,5% and an expected inflation of 8,9%. It is hard to see how this results will be obtained...specially what refers to inflation as increase of prices of energy at international level will have consequences on prices at local level. Rergarding revenues, we will have to ckeck success of measures taken by Goverment in order to increase income with companies and private persons still under pressure from economical crisis and lack of financing due to previous collapse of local banking system which has seen its international sources of financing being dramatically reduced.

If these goals are reached, Goverment will be able to finish 2011 with a State deficit of 3% which would be a very satisfactory result bearing in mind situation during previous 2010.

In case these results are not obtained, Ukraine could enter a very dangerous spin down, being forced to depreciate again its currency, being unable to control its inflation and facing a situation where it would be unable to run its own political and economical strategy but the one being dictated by those ones who would be financially rescuing it.

UKRAINE: AGRICULTURE WONDERLAND ?

When referring to Ukraine, everybody talks about its huge potential to be a huge exporter of all kind of food products. It's more than 350,000 km2 of arable land, more than 57% of the total territory, considered to be the best and most fertile land in the world, should allow Ukraine to become a major player in the world when speaking about agriculture commodities such as grain, sunflower seeds, dry peas, sugar beat.



 Unfortunately, although this sector occupies more than 20% of local workforce, it does only count as approx. 6% of the GDP of the country.
 Ukraine exports grain ( 1,6 mil. Mt ), Sugar beat ( 1,4 mil. Mt ), Sunflower seeds ( 117,000 Mt ), Berries ( 115,000 Mt ) etc...but this could be 5-10 times more !!!!

 Why this situation is not changing for the last years although every goverment always speaks about the necessity to undertake changes on legislation to improve situation on this sector ?

 It is very hard to find a unique explanation for today's situation and at the same time, there is not a magical solution to improve it in the next years.

 Although there is always been a huge interest to invest in Ukraine's agriculture sector, not many companies or privates have succeed, specially if we refer to foreigners. There's a huge controversy, about the fact to give access to property of agriculture land to foreigners, which is till today forbidden. On the new draft being prepared by the Goverment, this question is being silenced, and our opinion is that, the situation will remain as till today. Some local tycoons and politicians are taking huge benefit of today's situation as they do have access to control huge extensions of land, which in many cases, they do not owe and just rent, getting a huge profit on the explotation of them. Anyway, although investment has been done in the last few years, specially in machinery to harvest, actual owners are not investing or putting as much attention as they should on increasing the performance per Ha. Low prices on labour, cost of rent of land ( 120-300 $/ Ha. ), do not motivate actual companies involved on this business to improve its performance. In many cases, these structures are supporting politicians which are blocking any changes or amendments on situation in this sector ignoring the general interest of the people of Ukraine.

 Let's have a look on a absolutely different scenario. Imagine foreigners are given the chance to buy agriculture land. This will provoke a sharp increase of prices as companies from abroad, which in some case can achive results 5 or 6 times better using techniques already applied in other countries, will be willing to pay a much higher price for purchasing the land than local investors.

 Of course, there is a very difficult balance in this question. How can be 'national interest' preserved but at the same time can we assure a improvement in agriculture sector in Ukraine ?  How can we launch a reform that could allow local farmers to keep control of its land and allow foreigners to have access and invest in agriculture in Ukraine ? In our opinion, this can only be done, first by creating a very safe enviroment for foreign investment, assuring a long-term access to land to these companies either by rent or sale of land. In these conditions, companies would be investing in technology, equipment, transfering technology to local partners and employees to launch their activities in Ukraine.
 At the same time, in order to sell their production at profitable prices, these companies should have an easy access to export channels or possibility to sale at competitive prices to local wholesale companies in a competitive economy.

 Unfortunately, today we do not have the legal system and laws which guarantee investment from foreign players in this sector. Channels to sell abroad are monopolized by few companies or individuals not willing to give away their privileges. Neither we have an open internal competitive market which would allow producers to sell at good prices to wholesalers nor supermarkets.

 All these isssues have to be readdress from new Goverment, if we want this sector to be one of the main players on the future growth of living standards of the country. In other case, we will continue watching people leaving villages as salaries and conditions of life are not improving, we will continue to see a very low qualified workforce willing to work in this sector ( with very low salaries ) and we wil continue to listen to people crying that Ukranian rural life is dying out.

 When we realize about situation which is facing our world, with an increase of population, increase of prices of food products, we do need to believe that situation will improve as world needs Ukraine to be a major producer of food products and Ukrainians need this to happen to assure a better future for themselves.