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.

THE PROMISED LAND

  During 90's many western companies arrived to former USRR, as people flew to the West during the famous 'gold rush', expecting fast ROI and ready to take over main assets from 'poor, unexperienced-capitalist locals'.
 
  Local elites in order to cope with the new situation used the best card they had on their hands. Knowledge of local 'athmosphere' to block many foreigners to plunder and take over their countries.
 
  Of course, methods used to prevail were not the most ethic and westeners were not expecting that hard  job to try to put their legs on this new market. Acces to control on raw materials was, di facto, closed to foreigners and all was run by new groups related to the structures of power of USSR in each of the republics. Locals adopted a very unfriendly attitude towards foreig investors.
 
  Some people will consider this situation as not logical and not acceptable by international standards of relationship. In this blog, we do consider this situation as natural.
 
  Step by step, this situation starts to change when Russia, Ukraine elites go abroad, look for recognition from world business forums and realize that they are strong enough to go abroad but at the same time, they have the obligation to open its countries to foreign investors. Besides, they do not fear anymore any take over from them as they already have a reasonable financial strenght which allows them to compete with other world players.
 
  Efforts to reduce corruption, to ease burocracy are related to this new relationship being built with the rest of the world. Of course, Baltic States were the first to be friendly to foreign investment. Things are getting better in Russia and we expect some changes in Ukraine as promises during Mr.Yushenko's presidency were not implemented.
 
  Anyway, the most required change in these countries is related with law enforcement. Till today, court and judges have been too often related to bribes, fraud etc...strong local structures which control these institutions, do use them to take advantatge in front of other locals and foreigners. That creates an athmosfere of unsecurity which stops many players to get involved in investments in these countries.
 
  President Medvedev and other mandataries from these countries have promised improvements and transparency in the law system. We expect changes. 

TAXING IN UKRAINE

  During last 20 years Ukrainian Goverment has been creating and updating Tax Code in order to organize a rational system of collection of taxes in Ukraine.

  During the 90's overwhelmingly, situation could be described as full caos. In a young new state, organization and control of Tax Dpt. and inspection of fullfillment of obligations by companies and private persons was fully conditioned by a system of corruption which did not help to build up a reasonable Taxing System which could be used to cover expenses to be covered by Goverment, mainly in education, health and pensions.

  Country had a very unbalanced budget as expenses were much higher than income generated by taxes. Besides, many state companies were operating, theoretically, in losses, before being dismantled and privatize for lower price that its actual real market price.

  First decade of the new century, did bring and increase on income due to a more effective control on Taxing System. Anyway, still far from what could be desirable in a country which pretends to be part of the 1st world. Periodically, -privatization of main assest of the State ( p.e. Krivoi Rig Steal Factory ), followed by hints of corruption as selling prices, again, were lower than real market value of these assets-, helped to balance the Nartional Budget to hide the real situation of the State finances. Just postponing problems.

 Finally, last two years, due to decrease on income because of economical crisis, ukranian politicians and economists, have to approach international institutions, as IMF, asking for credits to be able to pay the most urgent payments they have to execute to pay state expenses, as salaries as pensions etc.. At that point, they do realize that international financial community is changing its attitude towards countries like Ukraine. The experience of 20 years waiting for changes which would favour investment, spread state corruption and lack of trust on local politicians means that things will be very different from now on.

 Ukraine faces a new situation. Either creates a system where all companies pay taxes and state has an income which will allow them to cover state budget expenses or faces a situation, where increase mass of local currency, will bring a very dangerous situation with a non-controled inflation and new serious devaluation of local currency ( UAH ). That's today reality. Foreign investment, will not be able to compensate in any case, actual situation. Either Tax Dpt. starts to operate properly collecting taxes from ALL companies and  private person, duties from customs are paid and not eluded ( today's estimation is that aproximately 90% of goods are smuggled into the market not paying customduties ) or the country faces a financial collapse.

 The big question is: how can Ukraine be able to have a reliable tax collection based in a stable and acceptable legislation for ukranian and foreig companies operating in the country ? How can corruption be eliminated in State organizations assuring state employees a decent salary to live ?

 This is one of the main challenges that faces the new Ukranian Goverment. In case, it does not succeed, Ukraine will enter a very dangerous scenario...depending fully on aid from foreing institutions and countries, which will jeopardize its politicial autonomy in the world arena.

 We see some attemps on these days from Ukranian goverment to tackle this problem and create a new Tax Code. Proposals made from goverment are facing strong opposition from many business sectors and private persons. Situation will be clarified during this spring. Country can not wait more to balance its national budget. Anyway, politicians have not to forget, that future growth will also depend on the friendly enviroment created for companies which are asking for a lower taxing, reduction of burocratical controls and absence of corruption.

LANGUAGE POLICY ON THIS BLOG

As we do want to get as many inputs as possible from different people, we will try to run this blog in several languages. At least, we can assure you that english, russian, catalan, spanish, ukranian and more seldom french or italian will be present here. Unfortunately, we will not be able to post in more languages as we do not know all languages !!!

FEEL YOURSELF FREE TO LEAVE YOUR COMMENTS IN ANY LANGUAGE !!! We will publish them, be sure about it !!!

UNA VISIO MOLT GENERAL

Quan mirem els països de l'antiga URSS, tendim a fer simplificacions, producte de la poca informació i sovint de molt precària qualitat que ens ha arribat d'aquestos països, sempre passant pels filtres de les agencies de noticies occidentals.

Per a poder entendre aquest entorn, el primer que hauríem de fer es una divisió molt simple en 4 grans grups: bàltics ( Estònia, Letònia, Lituània ), eslaus ( Rússia, Bielorússia, Ucraïna ), asiàtics ( Kazakhstan, Uzbekistan, Kirguizistan, Tadjikistan, Turkmenistan ), caucàsics ( Armènia, Geòrgia, Azerbaidjan ).

Moldàvia no entraria en cap d'aquestes categories. Ens quedaria fora i realment, es difícil col.locar-la en cap grup, encara que segurament, el mes raonable seria fer-ho en l'eslau, malgrat ser un país de cultura llatina, donades els molts segles d'influencia eslava.

La meva intenció es fer una molt breu introducció d'aquestos 4 grups, per a que aquells que sou llunyans a aquesta realitat pogueu com es diu col.loquialment 'situar-vos'.


1.Baltics: Aquestos països, malgrat patir l'ocupació per part de les forces soviètiques durant 45 anys, sempre varen mantenir un tarannà diferent en la seva manera de fer, malgrat estar sota les 'ordres de Moscou' i ja durant aquells anys, eren considerades pels propis habitants soviètics, un lloc 'europeu i civilitzat' a diferència de molts racons de la URSS.Per tant, culturalment son països de l'entorn germano-escandinau, amb importants bosses de població d'origen eslau, especialment a Letònia i Estònia.
Durant aquestos 20 anys, en els quals han passat de l'economia planificada a ser membres de la UE, els 3 països han experimentat uns canvis molt forts en les seves estructures econòmiques, quedant desmantellades les soviètiques per aparèixer, especialment a Estònia, una nova economia, amb una població amb una formació alta, lamentablement envellida i amb una alta tasa d'emigració cap a altres països de la UE.
El gran handicap es la seva dimensió, i la limitació duanera amb el mercat rus. Si aquestes qüestions es solucionen en el futur, aquestos països seran un centre logístic/transport i financer molt important entre l'oest i la nova gran Rússia. Tot dependrà de la geopolítica i de la voluntat de les parts de tancar antigues ferides i del paper que els hi tinguin reservat alemanys i russos, els grans actors polítics i econòmics en la zona.

2.Eslaus: 3 germans...amb relacions molt convulses i alhora molt solides. Rússia es el gran actor de la zona i cada cop mes, amb la seva potencia econòmica, en relació als altres dos, va ocupant esferes de poder econòmic en aquestos països. La dependència energètica, de Bielorússia i Ucraïna, avui en dia, es encara tan gran, que limiten molt, l'autonomia política d'aquestos països davant de Rússia. L'actuacio decidida del govern rus, involucrant a les seves empreses privades, 'obligant-les' a participar en la 'reconquesta economica' d'aquestos dos països, es un element de molt important embranzida per aquestos 2 països, però per altra banda, aixeca molts interrogants sobre el seu futur com estat sobirans 'di facto' en aquest context.
Rússia i Ucraïna son països molt rics en recursos naturals i tenen economies que son fins a cert punt, bastant complementàries. Dependrà de l'equilibri de forces, del respecte de Rússia pels seus veïns eslaus, que aquesta relació sigui profitosa per totes bandes o estigui basada en una 'dictadura energetica'. El paper de la UE, especialment d'Alemanya, caldrà també no ignorar-lo, donat que Ucraïna es un país molt donat a jugar aquest rol 'dual', buscant en cada moment, el partner més interessant pels seus interessos puntuals. Menció a part, mereixen les elits polítiques, econòmiques d'aquestos països...en molts casos, sorgides de turbulentes situacions durant els anys 90. Dependre molt de la seva decisió i actitud cap a l'adopcio de noves maneres d'actuar, diguem-ne mes occidentals, el benestar de les seves poblacions i el seu desenvolupament en els propers anys. Els 3 països, juntament amb Kazakhstan, constitueixen un mercat d'aprox. 225 mil. de persones, molt interessant per a les grans corporacions, que busquen, malgrat les dificultat legals, jurídiques i practiques d'implantar-se en alguna d'aquestes repúbliques com a porta cap a les altres. Definitivament, son països condemnats a un constant creixement, el grau del qual dependrà de la seva predisposició a participar de l'economia global, de la formació del seu capital humà, de l'estructuració del mercat financer i de la conjuntura internacional.

3.Asiàtics: Aquestos països, en diferents graus, han patit durant els últims 20 anys, allò que podríem anomenar ´africanització´. Es a dir, s'han convertit en estats, dominats per dictadures o pseudodemocràcies, recolzades internacionalment, en funció dels interessos sobre les matèries primeres, molt abundants en alguns d´aquestos països, especialment, al Turkmenistan ( gas ) i al Kazakhstan ( tota la taula de Mendeliev !! ). Rússia conserva grans interessos en alguns d´aquestos països, herència de l'època soviètica, però la seva influència ha baixat prou en detriment de la força que han agafat països com la Xina, Turquia fins i tot EEUU. Aquesta situació, lligada a la creixent inestabilitat en alguns països, per motius religiosos, especialment al Tadjikistan i Uzbekistan, ens fan veure un futur bastant poc esperançador per a les poblacions locals, i un creixement social molt limitat. Societats que durant l'època soviètica varen fer un aparent gran salt a la modernitat, han tornat a estructures arcaiques d'organització i malauradament, la seva població, en general, gaudeix d´un baix grau de formació, provocat en gran part per l'aïllament històric de moltes zones. Cal esperar gran interes de les gran potencies en la zona, per la seva riquesa en matèries primeres, que en alguns casos, com pot ser Kazakhstan, Turkmenistan pot anar acompanyat d´oportunitats per a empreses estrangeres, especialment en el terreny energètic o de les infraestructures. La seva distancia geogràfica de la UE, converteix aquest països, en un mercat natural per als productes asiàtics, especialment els xinesos.


4.Caucàsics: Volem referir-nos als 3 països que han aparegut al sud del mont Elbrus: Geòrgia, Armènia i Azerbaitjan, i afegir-hi, els territoris dels anomenat ´territoris federals del sud´de Russia, entre els quals destacaríem, llocs tristament famosos com Txetxènia, Ingushetia, Daguestan etc...
Ens referim, a la zona segurament mes covulsa políticament de tot el mon, i on les possibilitats de conflictes armats en els propers anys es més alta que en cap altra zona propera. El mosaic de cultures, idiomes, religions, grups etc...fa que la convivència en aquesta part del mon, estigui marcada sempre pel conflicte entre veïns, fet que ha condicionat molt el creixement econòmic i social d´aquests països i regions. En el bloc, en parlarem sovint, sobretot pel gran interes a nivell etnogràfic que te la zona, però difícilment, trobarem gran motius per a justificar aproximacions als inversors a aquestos països, malgrat els progressos fets per Armènia, gracies a la seva diàspora, Azerbaitjan, gracies al petroli, i Geòrgia, gracies al recolzament occidental en la seva particular batalla per la independència geopolítica de Rússia.
Un dels territoris amb els paisatges més bells del planeta amb una conjunció única de mar, muntanyes, boscos...on el desenvolupament turístic, estarà permanent condicionat per l'actualitat política i el conflictes actius en cada moment.

Be, disculpin, però, per avui ho deixarem aquí, sense oblidar Moldàvia a qui dedicarem un capítol a part, en futur posts.

Today we start...

 Finally, I have decided to create my own blogspot. After 18 years living in former USSR, I do feel, I need to share my 'experience' in these countries with other people who plan to come to work, to invest or to visit this world.

 Years of isolation have built a invisible thick barrier between these countries and western european people. We do have to break them, we need both realities to get closer, to get more transparent. We have to share our futures.

 Economically, politically, culturally, we need to create one reality from Lisbon to Vladivostok. This blog pretends to be a brick on this very much needed brigde to reunite this world.

 We will be back very soon !!!