Yesterday, in my previous post it was mentioning about Sigma Bleyzer analytical materials.
The Bleyzer Foundation position paper "is a brief summary of the key economic challenges facing Ukraine. The disproportionately large impact of the recent international liquidity crisis on Ukraine, compared to other peer economies, calls for a thorough assessment of pre-crisis economic conditions and policies. A good understanding of these issues is necessary to evaluate the effectiveness of adopted anti-crisis measures. More than that, this analysis will help to calibrate current macroeconomic policies in order to achieve a quick and sustainable economic recovery."
The major issues covered by the position paper are:
1. Why did the international liquidity crisis affect Ukraine more than other emerging economies?
2. Ukraine’s main vulnerabilities to the financial crisis in 2008.
3. Why the local currency depreciated more than the currencies of other countries.
4. Why the real sector, including GDP and exports, declined so dramatically.
5. What measures taken by the Ukrainian authorities to deal with the crisis were adequate and what measures were inadequate.
6. Measures that the country could undertake to avoid deepening the crisis during the Presidential election period and until a new government is in
place.
7. Measures that the country should undertake in the medium term to accelerate economic development.
Today you can download this excellent report.
From Interfax-Ukraine
Despite the first signs of economic recovery, the situation in Ukraine in the near-term will remain challenging: Ukraine's GDP may fall by 14% in the 12 months of 2009, experts have said.
This opinion was shared by participants in a press conference in Kyiv on Wednesday, which summed up the First Annual International Forum on the economic development of Ukraine.
The forum, which took place in Washington, the United States, on October 15, 2009, was attended by over 300 representatives from the world's largest companies, international institutions, financial organizations, namely from the International Monetary Fund, the European Bank for Reconstruction and Development, the World Bank, the European Union, as well as high-ranking officials. In particular, among the forum's attendees were Ukrainian Vice Premier Hryhoriy Nemyria and Ukrainian Economy Minister Bohdan Danylyshyn.
Speaking at the press conference in Kyiv, Director of the Institute for Economics and Forecasting under the National Academy of Sciences Valeriy Heyets said that despite the fact that the pace of economic decline in Ukraine has slowed recently, the general economic situation remains challenging.
The CEO of the Bleyzer Foundation, Oleh Ustenko, agreed. He said that the long-term economic forecast for Ukraine remains favorable, although the state of affairs of business environments should be improved to attract investment as a key source of economic growth.
According to the analytical materials issued at the press conference, Ukraine has survived one of the most serious downturns and the strongest devaluation of the national currency at the peak of crisis: in autumn 2008 the national currency fell by over 50% against the U.S. dollar, and the PFTS stock index plunged by over 70%, while real annual GDP shrank by 8% and 19% in Q4, 2008 and in H1, 2009 respectively. Moreover, over the last two months 2008, exports of goods fell by 16% in the annual terms, and in January-July 2009 they fell by 49%.
Starting from spring 2009, more signs that the economic adjustment has reached bottom in the industrial, trade and construction sectors have appeared.
"The further improvement of the economic situation this year will continue thanks to a low statistical base and thanks to recovery of commodity and material stocks and the introduction of fiscal stimuli. The reinforcement of the international economy will promote the more rapid recovery of Ukraine," the experts said.
Among the key achievement of the Ukrainian government in fighting the crisis were agreements with the International Monetary Fund (IMF, the Stand-By program worth $16.4 billion), and with the World Bank and other international financial institutions, which mitigated refinancing of the short-term foreign debt; the high level of fiscal discipline; the cut of the budget's deficit in 2010 to 4% of GDP and satisfaction of IMF quantity criteria regarding the monetary base.
However, the experts said that the Ukrainian government has not drawn up a common coordinated strategy for overcoming the crisis, has not allocated enough funds to support the domestic economy, while the rise in crediting stopped too sharply. The use of funds given by the cabinet to support liquidity was not controlled in the proper manner.
"It's likely that the funds were spent on the purchase of foreign currency to take aboard and not on the recovery of the domestic crediting market. This strengthened the devaluation pressure on the hryvnia," the experts said.
The Ukrainian cabinet has not implemented an IMF requirement to increase prices of gas for households, and on utility public services, to realize a comprehensive strategy aimed at restoration of solvency of Naftogaz Ukrainy and the Pension Fund, to realize initial privatization plans, which affected the financing of the national budget, the experts said.
According to the press conference materials, it is important to receive financial support from the IMF to avoid a worsening of the downturn within the next six months. The authorities should introduce a number of key economic measures agreed with the IMF, reads the document.
"In 2009, the deficit of the national budget should not exceed 6% of GDP, and the national budget for 2010 should foresee a deficit not exceeding 4%. This means that the increase of pensions and minimum wages should not be higher than inflation. Tax relaxations and a moratorium on tax audits should not be adopted.
"The financial state of Naftogaz Ukrainy and the Pension Fund should be improved to a level that will prevent there being a need for extra aid using budget funds," read the materials.
As for monetary policy, the experts said that the NBU should try not to print too much money and refuse proposals to finance projects linked to preparations for the Euro 2012 European football championship using the NBU's profit; to avoid monetization of the deficit of the national budget; improve the transparency of the bank refinancing policy and strictly control target usage of funds allocated to banks.
"The Ukrainian authorities will have to use new ways to increase direct domestic and foreign investment, which will promote growth in production and the creation of new jobs to boost the pace of economic development," the experts said.
It was pretty interesting to meet with point of view from current Minister of Economy of Ukraine, Mr. Danylyshyn. Sounds great, but life is correcting some of points. Particularly, taking into the possible fate of given Government.
From Zerkalo Nedeli
From Fitch Rating
The numbers just added up, they agreed, it would be the “next Poland”. The large and increasingly affluent population clearly need offices and retail outlets, while its location with Russia to one side, and Poland, Romania and Hungary on the other, seemed neatly positioned for industrial requirements. Strategically, it is at the crossroads between Europe and Asia.
Now, these predictions seem to be coming true, with the Ukraine believed by many regional experts as an essential market to invest. The problem, however, is that the speed of acceptance of the country could mean that returns are coming down too quickly in a country where there are still risks to Western investors.
The Ukraine is the second-largest country in Europe, with a population of more than 46m people. It is still a poor country, however, with almost 40 per cent of its population below the poverty line, according to 2003 statistics.
The most obvious risk about conducting business in the Ukraine is in the political sphere following a crisis last spring that sparked an early legislative election and, by December, a new prime minister.
Analysts say that the government could do more to improve the investment outlook, including more efforts to crack down corruption, the development of the capital markets and improving the legislative framework.
On the long-term economic horizon, there is the potential threat of a reinstatement of tax, trade, and customs privileges, and a government promise to maintain restrictive grain export quotas.
But the Ukraine’s economy remains buoyant in spite of the political turmoil and background concerns about the mechanisms of government. Real gross domestic product growth reached almost 7 per cent in 2006-07, fuelled by strong consumption, which was in turn spurred by rising pensions and wages.
This is why many developers see the country as ripe for retail development, in particular, to soak up some of this money. Developers predict that the country has capacity for at least one substantial mall in every significant city. And a significant city in the Ukraine is one with several million people.
Property advisor Cushman & Wakefield says that the economy has mostly ignored the political problems, adding that “following recent elections some normality is returning to the Ukrainian market”.
The market is still relatively undeveloped outside the capital city of Kiev, which has already attracted Western companies. Investment in the country is primarily by developers at the moment, with comparatively little good quality commercial property for investors to buy even if they wanted to.
Fund managers say that Ukraine has significant scope for opportunistic strategies, despite the higher country risks and the poorly developed real estate market practices.
The market has attracted London-listed investment company Raven Russia, which recently received shareholder permission to extend its remit into the Ukraine. Although it will remain focused on Russia, the developer sees the country as an important market for future growth.
“Ukraine has great potential,” says Glyn Hirsch, executive deputy chairman of Raven Russia, “particularly logistics development. Investors need to be very sure what they are doing and do their homework, but the returns could be very good.”
Yields in Ukraine are still relatively high compared to neighbouring counties, which makes agents predict a growing investment market.
“Countries to watch are Ukraine and Turkey where a few property opportunities exist but are not well known yet,” says Simon Moore, analyst at Collins Stewart, who points to the potential for greater capital growth and possibilities in the “property development stages”.
But there are worries that the market is just not ready for the levels of capital being targeted at the Ukraine.
Mark Mogull, founder of Benson Elliot Capital Management, warns that the weight of money could cause a bubble. “The Ukraine has a relatively small economy, and so there is a limit to how much capital it can absorb before causing a dangerous liquidity bubble.”
There are more practical problems. Land ownership is key for a developer, says one local agent, and the Ukraine seems prone to having disputes about who exactly owns what.
Because of this, many developers have established relationships with local partners, which is also useful for aspects of construction such as installing utilities.
There is also a currency risk to the Ukraine, as with all countries outside the EU, and investors are advised to hedge the risk through one of the many complex instruments such as currency options and swaps, or buy currency protection through an insurer. Any hedging method is likely to cost disproportionately, which needs to be factored into any investment.
Monthly Economic Monitor Ukraine from Institute for Economic Research and Policy Consulting. Here is November issue.
The official results on pre-term elections to the Verkhovna Rada were published on October 27, with two weeks delay.
Real GDP growth was 7.3% yoy between January and September, relying mostly on high private domestic demand.
Exports of grain harvested this year will start not earlier than in December due to cumbersome quota administration procedures.
Between January and September the current account deficit increased to USD 2.5 bn, but was sufficiently covered by high inflows of long-term capital.
Central fiscal deficit widened to UAH 7.5 bn (1.5% of GDP) in September.
Inflation accelerated to 14.8% yoy in October.
The NBU revised the regulations on the costs of external borrowings.
This report is kindly presented by Jiri Vacek, who is the leader of construction research project, performed at the University of Economics in Prague and sponsored by KPMG Czech Republic.
To obtain this report you have to send me your company name, business sector you operate and email.
More info
Monthly Economic Monitor Ukraine from Institute for Economic Research and Policy Consulting. Here is September and October issues.
October 2007
Preliminary election results: five parties will be represented in the new Parliament.
Real GDP growth decelerated to 7.5% yoy between January and August due to slowdown in agriculture value added.
The President blocked the privatisation of Odessa By-Port Plant and suspended the sales of oblenergo shares.
Current account deficit widened to USD 2.0 bn (3.4% GDP) in the first half of the year.
Central fiscal deficit went down to 1.0% of GDP in August, primarily due to under-execution of expenditures.
The Draft State Budget 2008: social standards are to be further increased.
Inflation accelerated to 14.4% yoy in September.
First Internet transaction took place at the PFTS.
Parliamentary election campaign is going forward.
Real GDP grew at 7.7% yoy between January and July backed by still high agricultural growth.
The subordination of the National Commission on Communication Regulation remains unclear.
According to the Derzhkomstat, the positive service trade balance started to shrink due to lower volumes of gas transit through Ukraine.
In July the central fiscal deficit increased to 1.2% of GDP.
Although reduced, unemployment is still more widespread among females, youth, and rural population.
The NBU tries to impose new capital controls.
Inflation accelerated to 14.2% yoy in August.
The World Bank expects that GDP growth in Ukraine in 2007 will be 6.7%, while earlier the forecast was 6%. According to a World Bank report, the index of consumer prices is expected to grow by 12.5% in 2007, though the bank's previous forecast was 9.7%.
According to the bank, in 2008, 2009 and 2010, Ukraine's GDP is expected to grow by 5.5%, 5% and 5% respectively. Inflation in these years is expected to be 9.6%, 8.3% and 7.4% respectively.
Earlier this year, in July, the World Bank reviewed its forecast for Ukraine's real GDP growth in 2007 upwards from 5.5% to 6%, while the inflation forecast was changed from 10.9% to 9.7%.
Ukraine's real GDP growth was 7.1% in 2006, while in 2005 it was 2.7%. The government forecasts a GDP growth slowdown to 6.5% in 2007, along with a fall in inflation from 11.6% to 7.5%.
Ministry of Economy have also improved their GDP forecast: in October their forecast for GDP growth for 2007 was 7%, while in July it was 6.9%, according to a posting on the
Ministry's official Web site. However, the ministry said that the inflation forecast for 2007 had risen in October to 11.6% from 8.6% in July.
According to an October consensus projection, GDP growth in 2008 will be 6.4% with 9.8% inflation, while in July 2007 these figures were 6.4% and 7.9% respectively.
The exchange rate by late 2007 will be UAH 5.05/$1, while in July it was forecasted at UAH 5.07/$1, and by late 2008 it will be UAH 5.06/$1 (UAH 5.11/$1).
At the same time, World Bank experts stress that it would be expedient to make the exchange rate of the hryvnia, Ukraine's national currency, more flexible, as the revaluation of the hryvnia could slow the pace of inflation in the country.
Although Ukraine was possibly not ready for a shift to a free floating exchange rate, the revaluation of the hryvnia could, under current conditions, treat the fever on the markets.
Dragon Capital, Ukraine's top investment bank, expects initial public offerings from the country to more than double to $1.5 billion in 2007 and to reach $3 billion next year.
The Kiev-based investment bank, which accounts for about one-third of Ukraine's equity capital markets transactions, has completed seven IPOs this year, raising $500 million in total.
Last year, Ukrainian issuers raised a combined $482 million via initial public offerings.
"The pipeline is so full that we need more people to examine the deals," Brian Best, an investment banking director at Dragon Capital told Reuters after attending the Ukraine Capital Markets Forum in London.
"Investor appetite is still strong for Ukraine deals. The credit crisis doesn't have a huge impact, as investors look for high yields and fast growth," said Best.
The experts were selected among investors, developers and constructors. About 17% of respondents planned to enter on the real estate market during the year, about 83% is already working in. Among the experts were representatives of large and medium-sized businesses that develop projects in different regions and sectors of the real estate market, with various capital structure.
The main research questions were related to corruption on the business matters, expert evaluation of the corruption level RE, etc.
Aaron Haber, Swiss Realty Group' Director of investment department said: "We had hoped to see trend to reduce dependence market from corruption, but found that most market participants are support the corruption, and was unable to work on the market without it. Many international investors have stops high level of corruption in Russia and CIS countries, but they do not change their plans to come on the market. "
According to Ilya Shershnev, BDM Director of the company, more than 50% of respondents believe that corruption costs them from 25% up to 50% of their profits, and 5-10% of business turnover. In general, Swiss Realty Group experts still tend to believe that the level of corruption in the real estate market in Russia, Ukraine and Kazakhstan remained steadily high.
I'd like to present you a "The Rough Guide to Taxation in Ukraine 2007" from Deloitte Ukraine. I see that Ukraine RE market newbies pay much attention to legal issues, as well as blog audience. For sure, for more mature players it could be quite well known, but additional information from respected source does make sense to know.
I appreciate to Brian Mulholland, Director of Tax and Legal - friend of mine and blog' reader, too. There is no advertising from my part. Just well done job.
Table of content
Monthly Economic Monitor Ukraine from Institute for Economic Research and Policy Consulting. Here is August issue.
Main topics:
The President issued the fourth decree on the dissolution of the Verkhovna Rada.
Real GDP growth remained at 7.9% yoy during the first half of the year.
Current account deficit increased to USD 1.9 bn (3.2% of GDP) in the first six months of 2007.
The subordination of the National Commission for Telecommunications Regulation was changed.
Central fiscal balance turned into deficit in June and amounted to UAH 2.6 bn (0.9% of GDP).
The Constitutional Court renewed social privileges postponed by the Law on the State Budget for 2007.
Inflation accelerated to 13.5% yoy in July.
Highly recommended article!
By Sara Seddon Kilbinger, The Wall Street Journal
Ukraine has caught the eye of real-estate investors chasing higher returns. Roughly $293.75 million in commercial real-estate deals were transacted in the country in the first half of 2007.
Almost all -- $231.25 million -- were office sales, with retail accounting for the rest. This compares with $497.2 million in deals for all of last year and $22 million in 2005, according to real-estate advisory firm Jones Lang LaSalle. More than 90% of this year's deals were in the capital, Kiev.
One of the most active buyers is London & Regional Properties. The London-based real-estate investor and developer has acquired three properties in Kiev -- an office, a shopping center and a warehouse - since entering the market in March. It also intends to develop real estate there.
"Central Europe has got very expensive, which is why we started looking at Russia last year. Our presence in Ukraine is an extension of that strategy," says Max Fowles-Pazdro, head of Central and Eastern European acquisitions at London & Regional, based in London. "We've invested $2 billion in Russia in the past 18 months and would like to do the same in Ukraine."
London-based real-estate asset manager Invesco Real Estate is also looking to invest in Kiev, says Paul Kennedy, head of European real-estate research at Invesco.
The firm would like to buy two or three Kiev properties in the next 18 months for its Central European Fund II. Invesco will also consider buying developments before they are completed as well as joint ventures with local partners, says Dr. Kennedy.
The yields are tempting. Good-quality office and retail properties can generate as much as 10%, says Jones Lang LaSalle, compared with less than 5% in many Western European markets. (The yield is the annual percentage return, expressed as the ratio of annual net income to the capital value of a property.)
But the high yields in Ukraine reflect the higher risk, due to political instability and continuing problems with corruption. Last year, former Prime Minister Pavlo Lazarenko was sentenced to nine years in prison by a U.S. court for extortion, fraud and money laundering through U.S. banks.
According to Mykola Orlov, a partner in Kiev-based law firm Sayenko Kharenko, foreign investors are often better off working with a local consultant than joining forces with a local partner. A local partner can take advantage of a foreign investor in a number of ways, he says, including by siphoning off funds.
Another obstacle for investors is the market's opacity, with many deals completed off market for undisclosed sums, says Nick Cotton, managing director of real-estate advisory firm DTZ Holdings PLC in Kiev.
Such challenges aren't deterring many would-be investors. Asset-management firm Catalyst Capital LLP intends to enter the Ukraine market this year in conjunction with a local partner whose interests range from brick making to insurance, says Kean Hird, managing partner of Catalyst Capital's emerging-markets arm in London.
The firm's push into Ukraine is "a natural extension" of its activities in Central Europe, he says. Catalyst Capital will focus initially on Lviv - because it is near the Polish border -- before moving onto Kiev, he says. "It's a very good time to go into the market as it is still very undersupplied," says Mr. Herd.
"While we don't have a target in terms of how much we plan to invest there, we will initially develop industrial stock, such as sheds near the airport or major roads. We are also interested in developing supermarkets, ideally with international anchors. While consumer spending is still quite low, it is increasing all the time."
Private consumption -- the main driver of economic growth -- rose 18% last year, up from 12% in 2005, according to DTZ. As a result, international retailers are starting to consider Ukraine. German retail giant Metro AG opened five cash & carry stores last year, according to spokesman Martin Brüning.
"What we see is a growing middle class with more disposable income, which is the driving force behind our expansion into Central and Eastern Europe," he says.
Metro has opened 13 stores in Ukraine since it entered the market in 2003 and intends to open more this year, he says. Turnover in its Ukraine stores reached Euro615 million ($837 million) last year, almost twice the Euro338 million of 2005. The company is also considering launching its Real supermarket chain in Ukraine next year, he adds.
Retail space is still thin on the ground, making the market ripe for development: Kiev has just 290,000 square meters, similar to Warsaw in 1999. There are a number of plans in the pipeline, according to DTZ, including a 130,000-square-meter store that will mark Ikea AB's foray into Ukraine.
The hotel sector, while fledgling, is also growing. Hilton Hotels Corp. will arrive in Kiev in 2009 and is exploring opportunities in several other cities according to Nicola McShane, Hilton's European communications director.
By John Marone, Kyiv Post Staff Writer
Ukrainian officials have been promising since early last year that their country's membership in the World Trade Organization is right around the corner, but as the deadline continues to be pushed back, the sincerity of the government's efforts looks increasingly suspect.
Joining the WTO would promote efficiency, foreign investment and greater integration with the European Union, but it could also pose a threat to some domestic industries, as well as Russian interests.
THE PROMISES
The latest meeting of the WTO-Ukraine working party, which consists of representatives from 43 of the WTO's 150 member countries and is tasked with examining Ukraine's progress toward membership, was held in Geneva on July 23.
Two days later, on July 25, the Economy Ministry released a statement suggesting that Ukraine's bid was moving along as planned.
"The member countries of the working party stated their support for Ukraine's prompt completion of talks on obtaining WTO membership, and they agreed to hold the next meeting in the beginning of October," reads a statement posted on the ministry's website.
The ministry statement went on to explain where Ukraine needs to go from here, including further work on a couple of bills.
The previous meeting of the working party was held on May 14, about two weeks before parliament approved what it said were final amendments to WTO-related legislation.
"Formally, Ukraine has fulfilled all its obligations to the working party on joining the WTO," First Deputy Prime Minister and Finance Minister Mykola Azarov announced on Ukrainian TV in late May.
As early as last December, just before a working party meeting was to be held, the government had made similar boasts.
It was in December that Ukraine's parliament proudly announced that it had passed the last of several bills needed for the country to join the WTO.
Since then, everyone from President Viktor Yushchenko, who has made WTO entry a top policy goal, to his political nemesis Prime Minister Viktor Yanukovych, who has been accused by his political opponents of derailing the bid, have bandied 2007 around as the likely year of accession. This summer, Yushchenko said Ukraine would join by the end of this year.
IN THE BALANCE
Ukraine has been negotiating WTO entry for 13 years. But the country's prospects only began to look realistic when Yushchenko became president in 2005.
By early 2006, the United States had recognized Ukraine as a market economy and cancelled the stigmatizing Jackson-Vanik amendment. Yushchenko began predicting WTO membership by the end of 2006, as part of a wider policy of European integration.
The European Union has made WTO membership a precondition to a bilateral free-trade agreement much coveted by Ukraine. At the same time, officials in Brussels continue to express support for Kyiv's WTO efforts.
Russia has suggested that Ukraine and Russia join the WTO simultaneously.
Serhiy Teryokhin, a lawmaker in the opposition Byut faction and a former economy minister, said the Kremlin is concerned that Kyiv would get the upper hand in outstanding trade issues if Ukraine achieves WTO membership first.
According to WTO rules, an applicant country must sign bilateral agreements with all relevant WTO member countries as a precondition to accession.
Teryokhin said one issue that Ukraine could hold over the Kremlin's head is Russia's oil export tariffs, which effectively tax importing countries like Ukraine instead of Russian producers.
The opposition deputy said he personally suspects the government-led majority in Ukraine's parliament of purposely crafting faulty WTO legislation to slow down Ukraine's bid.
The parliamentary majority, comprised of Communists, Socialists and Yanukovych's big-business-backed Regions party is widely considered to lean more toward Moscow than the West.
"What this is really about is synchronization of Ukraine's and Russia's WTO bids," Teryokhin told the Post. Teryokhin said he raised his concerns about faulty legislation passed in May but was ignored.
Another issue that is preventing Ukraine from joining the WTO, in addition to incomplete legislation, is a final bilateral agreement that it must sign with Kyrgyzstan, a WTO member.
According to Teryokhin, Kyrgyzstan's conditions for signing the agreement are "ridiculous" and demonstrate that the small Central Asian country is doing Moscow's bidding.
Russian continues to negotiate for WTO membership but observers say a lot of trade issues remain for Moscow to resolve. The West-allied country of Georgia, itself a WTO member, has pledged to block Moscow's bid in retaliation to trade restrictions and border disputes.
Ukrainian Foreign Minister Arseniy Yatsenyuk, a close ally of President Yushchenko, denied during his July Brussels visit that Ukraine was holding up its bid to please Russia. "Russia has its path and Ukraine has its. We are not going to synchronize these issues."
MISSION IMPOSSIBLE?
A source close to Ukraine's WTO negotiation process said at least one of the two obstacles to Ukraine's bid, the bilateral agreement with Kyrgyzstan, could easily be resolved by "a single high-level meeting."
The Kyrgyz government's main demand has been that Ukraine pay what it says is a $28 million debt going back to Soviet times.
There are two reasons why the Ukrainian government wouldn't want to resolve the issue, the source told the Post: Either in support of synchronized entry with Russia and/or lobbying by industries who fear large foreign competition that will enter the market when Ukraine joins the WTO.
According to Oleg Riabokon, the managing partner of Kyiv-based law firm Magister & Partners and a specialist on international trade issues, WTO membership will be tough for uncompetitive sectors of Ukraine's economy.
"Ukraine's entry into the world trade club would certainly create uneasiness for industries that have not been able to find their competitive edge since the privatization took place," he said. But the overall economy will gain, he added. "Ukraine's economic future depends on those who can fight."
In the mean time, however, the country's journey along the road to the WTO is anything but over. For Ukraine to get into the WTO by the end of this year, as the country's authorities have promised, the government will have to finish up all technical issues "flawlessly," the source close to the talks said.
Then parliament, which won't be operational until after the Sept. 30 snap elections, will have to enact necessary legislation. Finally the working party will have to meet again to approve Ukraine's draft report and pass it on to the WTO General Council for a final decision.
The Ukrainian Parliament must ratify the decision before the country actually becomes a member.
Optimism Amid The Confusion In Ukraine by Yuri Bender, Financial Times
A man can have a beautiful woman or a good horse, but never both, according to an old Ukrainian proverb. The choice between the two most valuable assets of old-style Ukrainian rural life is today mirrored by the choice between what seem to be two mutually exclusive national goals: political stability and economic growth.
However, investment markets have continued to perform well against an often volatile political undercurrent, says Alexander Tarabukhin, director at Kiev-based brokerage and asset manager On-Line Capital. "Stock and real estate markets have grown dramatically, in spite of the political situation," says Mr Tarabukhin, pointing to the PFTS index doubling from 500 to more than 1,000 in six months, during a period of political, and occasional physical, skirmishes between the central and west Ukrainian court of President Viktor Yushchenko and the eastern, industrial powerbase of Viktor Yanukovich, prime minister.
On-Line Capital has established the Amadeus funds house, which runs two closed-ended Ukrainian funds, one UAH17m (€2.5m, £1.7m) actively managed fund and a $1.6m (€1.2m, £802,000) index tracker, and is in the process of launching a real estate fund. The company is already handling real estate projects worth $90m.
As well as investing in Kiev's business centres, the fund will seek commercial real estate opportunities to the east of the capital, in the industrial cities of Dnipropetrovsk and Kharkiv and the Black Sea port of Odessa to the south.
According to Yuri Nartov, managing director of Colliers International in Kiev, such vehicles will not have problems raising money from institutions, with an estimated $10bn in international capital seeking a Ukrainian home.
The problem, when making an investment, is that the playing field is not a level one, according to Alex Frishberg, partner at Kiev law firm Frishberg & Partners. "Ukrainian real estate is not based on open competition, where you can be judged on your reputation and assets when you bid for a tender," Mr Frishberg told investment banks attending a recent London seminar organised by solicitors Olswang and the Ukrainian-British City Club. As important as your purchasing power, says Mr Frishberg, whose clients include BT, Hewlett Packard and KLM Royal Dutch Airlines, are who you know and what you know.
"Retailers, who are mainly Russian and Polish franchisees of London-based tenants, are making huge profits, starting in Kievand moving to the regions," says Alex Podell, who setup the 1849 PLC property company to buy up and lease out Ukrainian shopping centres.
While new developments in Luhansk, a poor city next to Ukraine's eastern frontier with Russia, are leased out at a monthly rent of $100 per square metre, rents in "really bad Soviet shopping centres" in Kiev are nudging $350.
Among contracts being closed is a $180m deal by the London and Regional Investment Fund to buy the underground Globus Centre, based on Kreshchatik, Kiev's premier shopping thoroughfare. This is Ukraine's most expensive real estate.
Market participants also cite the "football factor" as grounds for optimism. "We are very excited about the 2012 European football championships coming to Ukraine," says architect Genadiy Shulga. Mr Shulga's practice has received commissions to design hotels in the proposed stadium complex in Lviv, west Ukraine's historic regional capital and one of the host cities for the championships.
Mr Shulga has also finished the blueprints for Eagle Valley, a block of high specification apartments near the so-called Carpathian "resort" of Slavsk, a growing, picturesque but neglected settlement.
Alex Abramovych, who is marketing the development through his estate agency UAproperty.com, says property prices in Kiev and Donetsk are beginning to stabilise, after annual gains of 150 per cent two years ago halved last year, and are grinding to a halt. "In Kiev, we are not seeing growing prices at the moment, due partly to the political situation, although there are signs of a resolution."
While both sides have been fighting for assets and power, early elections are now scheduled for September. "More importantly, they are agreed on a code of how to handle foreign investors, so the economy is still growing," says Mr Abramovych.
SUMMARY
[1] The Ukrainian economy has continued to show robust growth, demonstrating a solid immunity to political instability.
[2] For January-May, real GDP grew by 7.9% yoy. Due to the droughty weather, the grain harvest is expected to be notably lower than previously expected. However, poor agricultural performance is unlikely to have a substantial effect on total GDP growth in 2007.
[3] For the first five months of the year, the state budget ran an unusually high surplus for this period due to higher than expected budget revenues and under-execution of budget expenditures.
[4] Despite a high fiscal surplus so far, the government resumed issuance of external and domestic debt in June to secure enough funds for the planned budget deficit.
[5] The consumer price index keeps reporting double-digit growth; however, the government forecast of 7.5% year-end inflation may still be realistic.
[6] Ukraine continued to demonstrate very strong export performance this year; however, buoyant import growth resulted in further widening of the merchandise trade deficit. A modest service trade surplus and a larger deficit in the income account caused the current account deficit to widen by almost 70% yoy in 1Q 2007.
[7] Robust capital inflow covered not only the CA gap, but also helped replenish the gross international reserves of the National Bank of Ukraine.
[8] In mid-June, the EU and Ukraine officially started negotiations on a new enhanced agreement.
Download full report
By Stephen Bandera, Kyiv Post
Nearly 40 percent of Ukraine's economy remains in the shadows, according to a recent report from a government think tank.
The experts of the State Scientific Research Institute of Informatization and Economic Modeling (DNDIIME) estimated on July 27 that Ukraine's "shadow GDP" will amount to Hr 443 billion (nearly $89 billion) in 2007, while the country's "official" gross domestic product will exceed Hr 692 billion ($138 billion).
The institute that provides research services for the Economy Ministry estimates that Ukraine's economy will exceed Hr 1 trillion ($200 billion) in value in 2007.
DNDIIME's methodology is based on a complex calculation of macro-economic factors ranging from demand for cash in the economy and term deposit rates offered by banks to real income levels.
The shadowiness of the economy is caused by the "unjustifiably high burden on personal and business incomes. An inexplicable paradox exists: Labor is the most utilized factor in production and is the main source of budgetary revenues at the same time," according to the report.
"It's well-known that Ukraine currently occupies an unflattering position in the world 'GDP per capita' rating at a time when the country is very rich in natural and human resources," said Yuri Kharazishvilli, deputy director of DNDIIME and one of the report's authors.
"If we are so rich, then why are we so poor?"
"One of the primary indicators that provide the real picture of a country's socio-economic development is the share of payments for labor in GDP," Kharazishvilli said.
Wages in Ukraine account for slightly more than a quarter of the country's GDP. By contrast, that number stands at nearly 60 percent in the United States, while wages account for half of GDP in countries like Germany and France.
According to experts, the shadow segment of average monthly wages in Ukraine amounts to Hr 2,700 ($540), more than double of the official average monthly wage of Hr 1,300. Combined, the average monthly wage in Ukraine is around Hr 4,000 the study found.
The experts noted that in 2006, the value of underground economic activity in the industrial sector stood at 132 percent. In other words, shadow industrial activity surpassed officially-reported industrial activity by nearly one-third.
The analogous figure stood at 73 percent in agriculture, 71 percent in construction and 32 percent in the services sector.
Another government report based on data from the State Statistics Committee painted a somewhat rosier picture of the shadow economy claiming that it stood at 27 percent of GDP in 2006, or 2 percent lower than in 2005.
The report, made public on the Ministry of Economy website on July 27, did note that underground economic activity is on the rise in real estate transactions, insurance and automotive sales and remains high in the construction and wood-processing sectors.
Economist and former cabinet minister Viktor Lysytskyi said that "we can argue about exact shadow economy statistics forever." "But it's absolutely certain that the shadow sector is enormous," he added.
According to Lysytskyi, large shadow economies are present in most post-Soviet states and Ukraine is not alone in this respect. "I am sure that in Russia the shadow economy is the same in terms of its share in the economy."
Nevertheless, the fact that such a large part of the economy is underground has its blessings, as the economy develops certain immunity to external factors.
Original article
Monthly Economic Monitor Ukraine from Institute for Economic Research and Policy Consulting. Here is June issue.
Main topics
The President and the Prime Minister agreed to hold early parliamentary elections.
In the first quarter the real GDP increased by 8.0% yoy.
The State Property Fund law was passed by Verkhovna Rada.
Ukraine's membership in the WTO is likely to be postponed until 2008.
Central fiscal surplus reached 1.4% of the GDP due to high tax revenues and considerable under-execution of expenditures.
Between January and March real wages grew by 14.8% yoy.
Inflation accelerated to 10.5% yoy in April.
