Ukraine’s econ­omy in 2017 – when dreams of growth meet geopo­lit­i­cal re­al­ity

The Baltic Times - - UKRAINE - Gene Zolotarev

Those who fol­low the ups and downs of Ukraine’s econ­omy can­not help but ask one ob­vi­ous ques­tion — what is the “cause” be­hind all this “ef­fect”? While the ob­vi­ous dis­con­nect be­tween the eco­nomic data and mar­ket per­for­mance is some­times baf­fling, we need to lis­ten closely to the sources that mat­ter more, such as the In­ter­na­tional Mone­tary Fund (IMF), the US Depart­ment of State, etc. and less to those that mat­ter less — the Ukrainian Min­istries of Econ­omy, Fi­nance, and the Cen­tral Bank, etc.

In this anal­y­sis, we also re­fer to Eurobond pric­ing as the mar­ket, at least as its clos­est in­di­ca­tor, given the cata­tonic state of the Ukrainian do­mes­tic stock mar­ket, and the few Amer­i­can De­pos­i­tory Re­ceipt (ADR) that are listed in Lon­don and else­where.

So, once again, if one lis­tens to the for­mal sources of such in­for­ma­tion, ev­ery­thing ap­pears to be go­ing well. Ac­cord­ing to a Reuters’ poll of 15 an­a­lysts car­ried out at the end of Jan­uary, Ukraine’s econ­omy will show more sus­tain­able growth in 2017, com­pared with the slug­gish re­cov­ery that was ex­pected in 2016, af­ter a two-year re­ces­sion.

If we look at their me­dian fore­casts, the an­a­lysts from the Ukrainian banks, bro­ker­ages and think tanks ex­pect Ukraine’s gross do­mes­tic prod­uct will rise by 1.2 per cent in 2017 and 2.3 per cent in 2018. If we add in the World Bank’s join­ing in, Ukraine’s GDP will grow, against the back­drop of the im­proved sit­u­a­tion in the sphere of se­cu­rity and the ef­fec­tive­ness of the re­forms that have al­ready been un­der­taken. Growth in 2017 is ex­pected to reach two per cent, which is un­changed, com­pared with the fore­casts that were made in June 2016.

How­ever, with Eurobonds trad­ing at YTM’S (yield to ma­tu­rity) in the high sin­gle dig­its, any­one with a de­cent mem­ory of re­cent events should only have one thing on their minds — sell!

Here’s why: the econ­omy is in­her­ently un­sus­tain­able and is heav­ily de­pen­dent on ex­ter­nal in­vest­ments such as di­rect in­vest­ment from the IMF, the Euro­pean Cen­tral Bank (ECB), the Euro­pean In­vest­ment Bank (EIB), and open mar­kets via the Eurobond pro­gramme. Pri­vate di­rect in­vest­ment, de­spite an im­pres­sive num­ber of Turk­ish and Pak­istani busi­ness­men be­ing booked into Kiev’s ho­tels, is yet to come in any tan­gi­ble form. In­vest­ments from Ukraine’s largest and most nat­u­ral trad­ing part­ner, Rus­sia, also seem un­likely as those Rus­sians who are al­ready in­vested are be­ing kept busy keep­ing them safe from preda­tory hands.

The Eurobond mar­kets are un­likely to be tapped into again in the im­me­di­ate fu­ture, be­cause of a re­cent re­struc­tur­ing, which forced a 20 per cent cut. That leaves Ukraine with state aid from the US/EU, which is heav­ily in­flu­enced by geopo­lit­i­cal fac­tors. The EU is likely to be less en­thu­si­as­tic about its role in Ukrainian aid, de­spite its clear mo­ti­va­tion for keep­ing over 40 mil­lion Ukraini­ans from head­ing to Europe and dis­rupt­ing its own, al­ready frag­ile econ­omy. This leaves us with the only re­main­ing op­tion for keep­ing the Ukrainian econ­omy afloat — the US and its newly elected leader of the free world — Pres­i­dent Trump!

This is where skies darken — it seems that the Ukrainian gov­ern­ment has badly mis­placed their bets. That can best be sum­ma­rized by a re­cent and very well re­searched ar­ti­cle by Politico called--ukrainian ef­forts to sab­o­tage Trump back­fire. It seems that se­ri­ous ef­forts were made to pub­li­cize the Trump team’s eco­nomic links to Rus­sia and as Politico writes: “Ukrainian gov­ern­ment of­fi­cials tried to help Hil­lary Clin­ton un­der­mine Trump by pub­licly ques­tion­ing his fit­ness for of­fice. They also dis­sem­i­nated doc­u­ments im­pli­cat­ing a top Trump aide in cor­rup­tion, and sug­gested they were in­ves­ti­gat­ing the mat­ter, only to back away af­ter the elec­tion. And they helped Clin­ton’s al­lies to re­search dam­ag­ing in­for­ma­tion on Trump and his ad­vis­ers.“

How­ever, the most se­ri­ous threat to Us-ukraine re­la­tions is its lack of com­mu­ni­ca­tion chan­nels with the cur­rent ad­min­is­tra­tion. There is fierce com­pe­ti­tion for the at­ten­tion of the cur­rent US ad­min­is­tra­tion for the Ukrainian con­text: from Pres­i­dent Poroshenko, from his po­lit­i­cal op­po­nents, and from Rus­sia, which sees this as an­other low-cost, high-im­pact op­por­tu­nity to weaken Ukraine.

In all of this un­cer­tainty, there is one thing that is cer­tain — the Krem­lin will test the US ad­min­is­tra­tion on Ukrainian mat­ters. Given Mr. Trump’s at­ti­tude to giv­ing fi­nan­cial aid to those who do not ap­pre­ci­ate it, it seems that US sup­port, both eco­nomic and po­lit­i­cal, is far from cer­tain. Should the US drop its sup­port pro­grammes, this would send Ukraine’s econ­omy into a tail­spin, re­mov­ing any su­per­fi­cial per­cep­tion of nor­mal­ity that it is presently ex­hibit­ing.

The only way for­ward for Ukraine seems to be some­thing ev­ery­one has been sug­gest­ing all along: eco­nomic self-re­liance through rad­i­cal mar­ket re­forms, strong busi­ness in­cen­tives to boost job cre­ation, and a gut-level ren­o­va­tion of its ad­min­is­tra­tion of pub­lic of­fices. It is a huge coun­try with huge po­ten­tial, but only de­ci­sive ac­tion will save it from a melt­down.

Gene Zolotarev is the founder and main share­holder of the Max­imus Group. Prior to found­ing the Max­imus Capital, he worked in the in­vest­ment bank­ing and as­set man­age­ment fields for two decades. He held a num­ber of se­nior ex­ec­u­tive po­si­tions at the largest US, Rus­sian and Baltic com­mer­cial and in­vest­ment banks. He worked at Parex Bank, where he was re­spon­si­ble for capital mar­kets, as­set man­age­ment, bro­ker­age, in­vest­ment bank­ing, etc. He was also Se­nior Vice Pres­i­dent at the Repub­lic Na­tional Bank of New York.

Gene Zolotarev is the founder and main share­holder of the Max­imus Group

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