Country Profile:
Ukraine
Ukraine
Ukraine, which has a population of 46m, is a mixture of Russian and European identity, history and influence. Spanning an area of 603,700 sq km, Ukraine is the second-largest country in Europe after Russia, and possesses a wealth of natural resources, along with fertile, arable land and soil. Indeed, as part of the Soviet Union, it generated over a quarter of the country's agricultural output and its heavy industry sector was vital. Independence in 1991 saw domestic output plummet and inflation rise, but, despite a period of political turmoil, the country is tackling these growing pains and getting back on track, buoyed by an increase in private investment and reforms to the economy's structures.
ISBN: 1-90202339-XX-X
ISSN (Online): 1755-2354
ISSN (Print): 1755-2346
TABLE OF CONTENTS
COUNTRY PROFILE
This section provides a quick overview of some facts about the country, its population, natural resources, geography, climate, language, religion and culture.
POLITICS
Fresh elections are scheduled for September 2007 in Ukraine, heralding hopes that the political maelstrom, which has existed since the Orange Revolution of late Autumn 2004, will calm. Indeed, the only surety in Ukrainian politics is to expect the unexpected. The big names on the circuit are the President, Viktor Yushchenko, of the Our Ukraine Party; Prime Minister Yuri Yanukovych of the Party of the Regions and Yulia Tymoshenko, the president's former ally but now his rival, who enjoys much popular support with her eponymously titled party. Much of the problem comes from two distinct Ukraines: one nationalist and Western-looking and the other the heavily ethnic Russian east and south. Out with the political in-fighting between the top trio, Ukraine's relations with the EU are cordial, and, despite stopping short of anything close to a promise of EU membership, an enhanced agreement between Brussels and Kiev has been signed, fostering political, trade and energy cooperation. The chapter includes interviews with President Viktor Yushchenko; Yulia Tymoshenko, Head, Yulia Tymoshenko Electoral Bloc; Javier Solana, EU High Representative, Common Foreign and Security Policy, Secretary-General, Council of the EU and Ihor Kharchenko, Ukrainian Ambassador to the United Kingdom.
THE ECONOMY
Despite the political to-ing and fro-ing, Ukraine's economy remains in robust shape with growth progressing across the board and foreign investors undeterred by the strife. Its major advantages include a qualified workforce that is less costly than that of its neighbours; a large internal market; the rapidly rising standard of living, which is pushing demand for consumer goods; and coal and steel assets. There are also challenges: infrastructure development; the issue of persuading expatriate Ukrainian workers to return home; and the role of the state in the economy, which sometimes places bureaucratic and administrative obstacles in the way of business. World Trade Organisation accession should add some impetus to ongoing reforms of this sort of legislation, with Ukraine being forced to align with WTO norms. The country's fiscal performance has proved to be relatively solid and the financial deficit looks to be in line to meet government targets of 2.5-2.9% of GDP at the end of 2007. The National Bank of Ukraine (NBU), acclaimed as an independent regulator, maintains a healthy distance between itself and government and intervenes to manage the liquidity of the banking system through exchange rates and interceding in the issuance of certificates of deposit. Meanwhile debate continues over the currency peg. The hryvnia has more or less been linked to the US dollar for nearly a decade. The NBU has indicated of late that when the current turmoil in Ukraine's administration has settled, it will investigate ways to move away from this situation. The chapter includes an interview with Serhiy Rusnak, Director, InvestInRivne Agency.
BANKING
Ukraine's banking sector is enjoying something of a quiet revolution, with both the people and the economy enjoying the effects of this vibrant industry. Indeed the industry has acquired a momentum of its own, and has recently seen more foreign acquisitions that any other Eastern European country making banking now second only to steel in terms of foreign direct investment – the value of foreign acquisitions transactions since 2004 has exceeded $3bn. A total of 12 foreign players have entered the market in the past two years, including Credit Agricole through its acquisition of Index Bank, and the recent acquisition of TAS-Commerzbank by the Swedish Swedbank saw an entry-price multiple of over six times the book value. To the future, the outlook remains bullish, with rising consumer income levels, a large domestic market, healthy interest rate margins and relatively low levels of retail banking penetration, while some analysts believe that the central bank, National Bank of Ukraine, should tighten capital adequacy definition, thus forcing some of the smaller, undercapitalised banks into mergers. Another challenge is that of long-term funding and the divide between foreign assets and domestic liabilities, while political uncertainty could constrain what could otherwise become a full-blown boom in the sector. The chapter includes an interview with Jan Lidén, CEO, Swedbank.
INSURANCE
The Ukrainian insurance market is hotting up, with the advent of rising domestic capitalisation, a growing number of Ukrainians starting to ensure their personal property and banks increasingly issuing consumer loans. This has made the sector, which has suffered a poor reputation in the past as a result of tax fraud schemes posing as insurance providers, attractive to overseas players. For example, the Austrian UNIQA Group acquired a 35% stake in Credo-Classic, while Italy's Generali Group signed an agreement with car manufacturer UkrAvto Group for the acquisition of a 51% stake in Garant Avto and Garant Life. The sector should be further helped by the recent passage of laws imposing licensing requirements for insurance activities and establishing minimum thresholds for insurance companies‚ statutory funds, making the industry more transparent and accountable. To the future, third party motor liability, which every driver has required by law since 2004, is seen as possessing the highest growth potential, while life insurance is expected to develop. Further consolidation of the country's crowd of insurance companies, which stood at 398 as of January 2006, is also predicted, given that ten companies control the lion's share of the life market and only 50 regularly collect premiums on risk-based products. Companies are also working to increase consumer confidence, through training programmes and a focus on client service. The chapter includes an interview with Werner Moertel, Board Member, Generali Holdings Vienna.
TRANSPORT
The UEFA European Championships in 2012, which Ukraine is co-hosting with Poland, is making the upgrading of the country's transport infrastructure an urgent priority. The challenges are obvious: ageing rolling stock, shoddy roads, declining traffic to the country's ports and an outdated customs infrastructure. With foreign investors keen to get in on the clean-up act, a legal framework allowing concessions and public-private partnerships is a must. And, although a draft law on concessions has been drawn up, alongside a draft law for ports, there are questions as to whether this legislation will still be valid following the scheduled 2007 elections. The football championships are not the only issue bringing the poor state of the nation's infrastructure into question – the rising number of vehicles and cargo using the roads, for example, means an overhaul is urgently required. To this end, the government plans to plough $15bn into the network, building 500-km of new motorway over the next seven years, with financing expected from a consortium of local and international companies. It is hoped to get rail transport back on track through transforming state railway company Ukrzaliznytsya into a joint stock company, with some of its subsidiaries open to private carriers, while the government has signed a memorandum of understanding with France's Alstom for the purchase of around 20 high-speed passenger trains, expected to be ready for service in 2010. The Port Administration, meanwhile, is seeking foreign port operators to manage some of its terminals and authorities have completed the first draft of a new law on ports establishing a framework for this. At the same time, more foreign freight forwarders, such as Frans Maas Groep, are establishing a presence in the country, while foreign entrants are also heating up competition in air travel. The chapter includes an interview with Aron Mayberg, Director General, AeroSvit.
CAPITAL MARKETS
Although small, Ukraine's capital markets have been attracting global interest of late, with liquidity expanding and consolidation moving ahead, prompting share values to display the sort of growth which other markets might envy. Ukraine has seven stock exchanges, which are licensed by the regulator, the Securities and Stock Market State Commission, but the main platform, the First Securities Trading System, accounts for around 90% of all organised equity trading. Consolidation looks likely. To the future, there is work to do: boosting the trading volume and range of equity vehicles on offer, increasing the free float of shares and making improvements in the sector's overall accounting, infrastructure and legislation. The bond market holds promise, once the current political situation settles, while improved transparency is necessary. Yet, with plenty of new IPOs and issues to come, further growth of the market remains a certainty. Share analysis and data is provided by Foyil Securities while the chapter includes an interview with Irina Zaya, President, First Securities Trading System.
ENERGY
The Ukrainian government, aware of its insecurities in hydrocarbons, is seeking to boost domestic output, with a stress on exploration and production – to this end, authorities have announced spending of $1.8bn by 2016. Meanwhile, the government is urging companies to upgrade facilities and equipment and move away from high-energy consumption, while concentrating on extracting from more difficult deposits, such as deepwater in the Black Sea. The country's energy prices are largely dependent on the state of relations with Russia, on which Ukraine is to some extent reliant for supplies, while Ukraine is important to Russia in that it carries 84% of its gas supply to European markets. Due to some of these issues, coal and nuclear energy are experiencing a renewal of interest. Indeed, coal is the only energy source that Ukraine possesses in large amounts, although Soviet era infrastructure prevents cost-effectiveness. The partial privatisation of the electricity sector, meanwhile, is bringing in its wake calls for wider unbundling, with many regional distribution outfits or “oblenergos” up for sale in 2007. The chapter includes an interview with Patrick van Daele, General Manager, Shell Ukraine.
TOURISM
The tourism sector, largely overlooked since 1991, was given a boost when, in early 2007, Viktor Yushchenko, tasked his cabinet with the goal of designing a strategy for its development, including establishing the right economic conditions to stimulate tourism, the construction of new resorts and renovation of existing ones, and the development of more visitor-friendly infrastructure. Ukraine welcomed 6.1m guests between January and August 2006 – an increase of nearly 8% on the previous year. A huge majority of the visitors hailed from countries such as Russia and Poland, which are geographically close to Ukraine and have a legacy of their inhabitants visiting. The areas of Ukraine that are viewed as possessing the most potential to attract tourists are the Carpathian Mountains, including the city of Lviv and the Crimea, which was the favoured holiday spot of the former Soviet Union but is now in need of updating in terms of its hotels and resorts. Meanwhile there are hopes of increasing the number of business travellers to the industrial heartland of Eastern Ukraine. A major challenge for the future lies in improving the service culture through training programmes. The presence of a low-cost airline operating from Europe could also help, establishing Kiev as a hub for regional destinations and boosting Ukraine's profile in Europe. The chapter includes an interview with Udo Heine, General Manager, Opera House, Kiev and the Donbass Palace, Donetsk.
CONSTRUCTION
After hitting a rough patch in 2005, Ukraine's construction industry has bounced back and is predicted to grow by 11.5% over 2006-10. On the back of rising salaries and more accessible mortgages, residential projects are rising up. Retail expansion is being spearheaded by a number of international players such as Praktiker, Billa and the Metro Group, while the country's transport infrastructure is being repaired with financial aid from the European Bank for Reconstruction and Development and low-interest credit provided by lenders such as Deutsche Bank and Citibank London. All of this activity also spells good news for construction materials producers, such as Dyckerhoff Zement, which posted 2006 production up 7.75% on 2005. Indeed, in many cases, the supply of construction materials cannot meet demand. And there are other hurdles for international players: finding land to build on, for one, and identifying a local partner. However the situation is expected to ease in the medium term.
REAL ESTATE
The real estate market is proving busy across the board – in the residential, retail, office and industrial segments – as investors look east. The Kiev property market, it is reported, saw its largest turnover ever in 2006. The hospitality sector, which is currently woefully undeveloped, is seen as ripe for development, especially with the shot in the arm the 2012 European Football Championships, which Ukraine is co-hosting with Poland, should provide. Indeed, analysts are warning that potential investors should move quickly as competition hots up and prices boom.
TELECOMS
In a matter of only three years, the Ukrainian mobile telecoms segment has moved from being one of the least penetrated in Europe to reaching saturation point. Indeed, the number of mobile phone SIM cards in use in the country is now higher than Ukraine's total population – above 100% on the back of an almost 70% subscriber base growth in 2006. The focus now for industry leaders Kyivstar and the Ukrainian Mobile Communication company (UMC), which account for 85% of the current subscriber base, is on gaining new revenue from existing customers through the provision of new services and products to halt the decline in average revenue per user (ARPU). In the fixed line field, times are hard, with state incumbent Ukrtelecom's customer base growing by just 3% in 2006. The government's decision to list 5% of its shares on the domestic and 37.8% on foreign stock exchanges could afford the company access to cheap capital to finance its expansion, particularly in to 3G.
IT
Despite possessing many advantages when it comes to the IT sector, Ukraine is still falling short of its potential. The country enjoys a well-educated workforce, low costs and proximity to Europe yet its hardware systems and internet penetration rates lag behind those of its neighbours. There are several reasons behind this. Political uncertainty and a lack of infrastructure can deter investors, while the bulk of Ukraine's IT companies are offshoots of scientific research institutes and do not possess the marketing clout and know-how to showcase their skills. There are some bright spots though – sales of computer hardware have grown at a rate of about 40% recently, for example – and the future of the sector is seen as positive, with real gains expected over the next two years.The section includes an interview with Pavel Pavlovsky, General Director, Ukraine Mobile Communications.
INDUSTRY
Historically the main driver of Ukraine's economy, the industrial sector has seen a shift recently towards the development of manufacturing and service based industries. Steel is still the heavy hitter though, responsible for 40% of GDP. But, alongside chemicals and machinery, it is facing a strong challenge from overseas, and the three segments are working on major modernisation of plants and equipment to meet this. Pipe production, an important sub-sector of the steel industry, also has to modernise and upgrade to compete. The car production market is on the up, thanks to economic growth and rising incomes and while Soviet legacy AvtoVAZ remains the most popular brand, Western-, Korean- and Japanese-branded vehicles are starting to attract attention. To the future, World Trade Organisation (WTO) accession is set to have an important impact, both positive and negative and, with rising GDP and personal incomes, the consumer goods and retail sector is seen as possessing potential.
MEDIA
One benefit of the Orange Revolution was that it heralded a new dawn for the media, leading to the end of direct government interference in the editorial content of print and broadcast. Still, ownership of today's media outlets is spread among Ukraine's oligarchs, who utilise the channels to promote the ambitions of the politicians they favour. Also hobbling any real commitment to journalistic independence are the country's tough libel laws. And the attacks on journalists that happened pre-Orange Revolution have not disappeared – for example, Lillia Bujurova, editor of the weekly paper Pervaya, had her home set ablaze in March 2006 after her paper published a list of candidates in local parliamentary elections with alleged links to organised crime. The state is, however, promising to clamp down on such atrocities by taking the perpetrators to court and punishing them. Another practice affecting press impartiality is that of paid journalism, in which a person or organisation pays a journalist to write a favourable piece. While newspaper circulation is on the decline in Ukraine, magazine circulation is rising. Television is a popular medium, with more home-grown output becoming available, while radio is starting to operate along more Western lines, with different stations targeting niche markets.
ADVERTISING
Many multinational advertising agencies have set up shop in Ukraine, but the sector has its challenges. The practice of paid journalism is one, fuelling something of a grey economy, while high staff turnover is another. The sector is, however, maturing with a move away from importing international campaigns to creating original alternatives for the Ukrainian market. Television accounts for the lion's share of the market (40-45%) with billboards in second place. To the future, as the reliance on paid journalism diminishes and local staff gain from the knowledge of international players, the advertising sector possesses huge potential for growth, especially as the internet becomes more popular.
AGRICULTURE
Ukraine is, albeit slowly, beginning to achieve its full agricultural production potential. Indeed, FDI is driving not only increased efficiency in the sector's production output, but also a different approach to human resources. With the advent of rising fuel prices, biofuels have become one of the hottest topics in the sector: in April 2007 the Ukrainian parliament passed a draft law stimulating the production and application of biofuels. Meanwhile, the country is making a foray into ethanol production with, for example, Koron Agro LLC announcing a construction project at Zolotonosha in Cherkasy to produce ethanol and other related feed products. Both areas are attracting foreign interest: Cargill has, for example, reportedly invested around $20m in boiler heating units that use sunflower husks as fuel in two of its crushing plants. Challenges remain in the agriculture sector however – the quality of farm equipment is one, the lack of an agriculture futures market system another. To the future, the open sale of agricultural land is set to become a reality in 2008, heralding, analysts believe, a chaotic period in which prices reach those paid for prime patches of farmland in Europe and the US.The chapter includes an interview with Dexter Frye, Vice-President, Bunge Eastern Europe.
THE BUSINESS GUIDE
In conjunction with partners Ernst & Young we provide an overview of the taxation system and how it affects foreign investors, examining, in particular, the real estate market, while our legal partners Baker & McKenzie highlight the legislation issues concerning some of Ukraine's key sectors. Trevor Link, Partner, Head of Tax & Legal Practice, Ernst & Young-Ukraine and James T Hitch III, Managing Partner, Baker & McKenzie-Kiev offer viewpoints on the taxation and legal systems respectively.
THE GUIDE
This section includes hotel, government and other listings, alongside useful tips for visitors on topics like currency, visas, language, communications, dress, business hours and electricity.
