Belarus turns to IMF for loan, as current account deficit grows

Graham Stack for business new europe (www.businessneweurope.eu)

For all its image as ’safe haven’ and its low level of international integration, Belarus became the latest East European country to turn to the International Monetary Fund (IMF) for a loan last week, as its current account deficit widens. But deputy chairman of the National Bank of Belarus Yury Alymov told bne that the banking sector is still stable.

Belarus appealed on Thursday October 24 to the IMF for a $2bn loan to stabilise the country’s economy in the face of the global financial crisis. This makes Belarus the third East European country following Ukraine and Hungary to turn to the IMF in October. Belarus is also negotiating a $2bn loan from Russia.

«It is small wonder that Belarus has asked for an IMF loan. The global financial turmoil has caused cash deficiency, and our trade partners have delayed payments for our services and products” NBB Spokesman Anatoly Drozdov told Prime-Tass October 24.

But most analysts agree the problem goes a lot deeper than merely delays in payment. Instead, Belarus is facing a widening trade deficit. Hard currency revenues are plummeting along with global commodity prices, while domestic demand for imports is still driven by the peak in commodity prices earlier in the year.

Add to this the fact that Belarus was already struggling to deal with successive price hikes for Russian gas in 2007 and 2008.

Commenting to bne before last week’s application for an IMF loan, the deputy chairman of the National Bank of Belarus, Alymov explained that the 2007 hike in the gas price caused the current account deficit to reach -6.6%, but that the economy had quickly adjusted to the new price. In the first half 2008, despite a second 20% gas price hike at the start of the year, the current account deficit in fact dropped to -5.5%.

But already in the third quarter of 2008, as the value of commodity exports dropped precipitously, the deficit doubled again to reach $1bn. Foreign currency reserves fell by $459.7m in September alone, to reach $4.12bn as of October 1.

With NBB reserves falling, and FDI likely to slow rather than accelerate as washoped, the situation is becoming critical. And adding insult to injury, Belarus does not stand to benefit from falling oil prices, since it already receives subsidised oil and gas from Russia. Instead it is faced with another substantial gas price hike come the new year.

Peaking commodity prices skewer capital accounts

Belarus has been caught out by the same double whammy as Russia and Ukraine.

With the start of the financial crisis in 2007, money moved out of securities into commodities, causing prices for everything from wheat to oil and gold to soar all round the world. According to the Minsk Institute of Privatisation and Management, in 2007, the value of Belarus exports increased by 20%, almost entirely due to rising commodity prices. Belarus is a major exporter of fertilisers, especially potash, and of refined oil products.

But as the global financial crisis developed, the record-breaking commodity prices proved shortlived. As speculators started to get nervous about a looming global slowdown, they moved out of commodities – into dollars. And commodity prices dropped like a stone- exemplified by the world oil price halving over five months.

This lurch is now putting pressure on the currencies of commodity exporters, as their trade deficits widen.

Crucially, as Renasisance Capital analyst Elena Shapirova has argued for commodity exporting countries, there is a time lag between the impact of a price drop on export revenues, and its impact on domestic demand for imports. While hard currency receipts drop with commodity prices, domestic demand for imported consumer goods is staying high, as last year’s windfall still works its way through the economy.

And now this time lag is causing the trade balance of commodity exporter countries like Belarus, Ukraine and Russia to do the splits, causing exchange rates to wobble, – and the IMF to arrive in town.

Banks still standing

However, while the growing trade deficit is looking ominous, Belarus’ banks are still holding up better than in Russia and Ukraine. But NBB’s Alymov does not deny that the global crisis could still hurt the domestic banking sector.

«Over the last few years, Belarus banks have constantly increased their level of borrowing from non-residents,» explains Alymov. «At the same time, their level of lending in foreign currency has accelerated, mostly using funds borrowed from non-residents. Funds borrowed from non-residents, are, however, to a very large extent short-term.»

This means, according to Alymov, that «a potential threat … posed by the global financial crisis could be difficulties for Belarus banks in borrowing on international financial markets and problems connected with foreign currency liquidity.»

Alymov, however, also points out that increased international borrowing by Belarus banks has been accompanied by increased involvement of foreign banks in the sector.

«The arrival of new foreign investors can compensate decreased borrowing opportunities on foreign markets through growth in equity and capital and also make it easier to attract foreign loans.»

«In addition,» says Alymov, «it’s important to note that in the case of difficulties, banks belonging to large western financial concerns can count on effective support from their foreign shareholders.»

However, the theory that banks with strong foreign parents are safer than local banks is increasingly being questioned. This week throughout Eastern Europe there were reports that foreign banks, facing problems at home, are restricting lending to their local subsidaries – thus exporting the financial crisis by the back door.

Alymov refused to comment on rumours that Germany’s Commerzbank, which in the summer seemed on the verge of acquiring 100% in Belinvestbank, Belarus’ fourth largest, is backing out of the deal.

He did say unsurprisingly that the planned London IPO for the country’s largest bank, state-owned Belarusbank, had now been postponed due to the «unpleasant market situation.»

But as a silver lining, Alymov sees opportunities beckoning for Belarusbank to develop as a ‘national champion’ by expanding internationally through acquisitions. «We believe that such a large banking institution as Belarusbank, uniting 38.8% of the country’s banking assets and 28.8% of capital, is perfectly capable of expanding onto global financial markets through acquiring subsidiaries in countries to which we are closely linked by trade and economic ties.»

Conditions unclear as IMF grants Ukraine $16.5bn stand-by loan

Graham Stack for business new europe (www.businessneweurope.eu)
The IMF announced on Sunday October 26 it would grant Ukraine a SDR 11bn ($16.5bn) stand-by loan, conditional on Ukraine passing a raft of stabilisation measures the details of which are not known. The move follows last week’s massive intervention by the National Bank of Ukraine (NBU) to support the hryvnia.

The Bank had to intervene with a massive sale of its international reserves in October as devaluation pressure mounted on the hryvnia. Plummeting steel prices, external debt repayments and a sharp rise in retail demand for cash foreign currency, caused NBU reserves to drop by $3.2bn over the first 20 days of October (down 8.6%), to $34.3bn.

The intervention could not prevent the hryvnia weakening by 19% since the beginning of the month, to UAH 6.03:USD on October 24, according to Bloomberg.

The loan amounts to about just under 50% of NBU international reserves as of Oct. 21, and is larger than envisaged by Ukraine authorities, who spoke of $10-15bn as likely amount.

There are still no detail of the legislative measures Ukraine has agreed to, and which Ukraine’s fractured parliament will be confronted with tomorrow. The IMF said in a press release the program would address “financial sector liquidity and solvency problems by smoothing the adjustment to large external shocks and by reducing inflation. At the same time, it will guard against a deep output decline by insulating household and corporations to the extent possible.”

According to Galt & Taggart’s Danylo Spolsky, Ukraine’s central bank governor Volodymyr Stelmakh noted that besides changes to banking legislations, the package will focus on measures to rein in the current account deficit. The deficit is expected to widen as metallurgy, the leading exporting sector, contracts.

Troika’s Iryna_Piontkivska also expects the IMF to make conventional requirements such as tightening of fiscal policy and privatisation.

Most analysts believe the loan – given approval by the IMF board and Ukraine’s fulfilling all conditions – should suffice to prop up the hryvnia

According to Alfa’s Andriy Gubachov, “should Ukraine obtain the loan, it would completely remove all current pressure on the currency and ease speculative demand for foreign currency.”

Dragon’s Olena Bilan is less optimistic, expecting the hryvnia “to remain under strong devaluation pressure until end-2008 and for most of 2009. Although Ukraine’s C/A deficit, expected at $15bn this year, 8% of estimated 2008 GDP, may narrow in 2009 due to contracting domestic demand, an estimated $30bn of external debt, which we think is unlikely to be rolled over and will have to be repaid next year, is set to weigh on the hryvnia,” says Bilan.

However, she adds that she expects “thanks to the IMF backing, the NBU will have enough resources to help private companies and commercial banks meet their foreign obligations falling due in the next 12 months.”

An additional unknown is the coming price hike for natural gas imported from Russia. Ukraine has been delaying settling the price until the end of the year, as world oil prices are falling.

According to Troika analysts, “the recent sharp correction in oil prices, to which gas prices are expected to react with a typical lag of six to nine months, may enable Ukraine to negotiate a gas price below $300/tcm, i.e. our current base-case estimate.” Ukraine currently pays $175 / tcm, so this would have a major negative impact on Ukraine’s current account deficit.

Today, the dollar and euro exchange rate continued to grow relative to the hryvnia, reaching UAH6.00-6.23 at some currency exchange booths, according to Korrespondent.net.

This is the lowest level since Ukraine adopted the hryvnia in 1996.

Belarus stock exchange is finally in the starting blocks

Graham Stack for business new europe (www.businessneweurope.eu)

Belarus is staying true to its tradition of bucking trends. In the 1990s, Belarus stuck to state ownership and dirigism, while its neighbours embraced privatization and the free market. And in 2008, with the world’s stock markets in freefall, Belarus is about to finally launch its stock market, and expects share prices to soar when trading takes off.

“Stock market participants here are like sprinters waiting on their starting blocks,” says Valery Kalazhenko, deputy head of the Belarus Ministry of Finance’s Securities Department, responsible for regulating the stock market. “Everything is ready and in place, all they are waiting for is the starting gun.”

An equity market has been a long time in coming in Belarus. The Belarus Currency and Securities Exchange (BSCE) is 16 years old, but in 2007 share trading comprised a miniscule 0.7% of trading volume, with the lion’s share trading in state securities. And yet, says Kalazhenko, there are formally over 3,000 public companies in Belarus as a result of the mass privatisation launched in 1992.

But that privatization effort was mothballed just as it began to roll. The state imposed a moratorium on the selling of shares obtained by the public for their privatization cheques. And following a backlash against market reforms symbolised by Alexander Lukashenko’s rise to power in 1994, the state introduced a “golden share” rule for privatized companies, giving it the right to intervene in company management in a wide range of scenarios. As a result of these two measures, says Kalazhenko, “although all the necessary infrastructure for the stock market has been created, there has until now been nothing to trade.”

This all changed in 2008. On January 23, the government passed a programme on “Development of the Equity Market 2008-2011,” envisaging the emergence of a fully-fledged stock exchange. Implementation of the programme started almost immediately, says Kalazhenko, with a presidential decree in February abolishing the state’s golden shares, which he calls “a revolutionary step.”

The government followed up by slashing capital gains tax from a prohibitive 42% to a profit tax level of 24%, and then with the abolition of the moratorium on alienation of shares held by the population as of June 1. “These measures will ensure development of a Belarusian stock market,” claims Sergei Tinnikov, deputy head of the BCSE. “All that is required is for them to be fully implemented.”

False start

Instead of a big bang, however, the June date proved to be a false start. Similar to the hesitant steps it is making toward some democratization, the Lukashenko administration, while liberalizing the economy, is also intending to keep control of its “commanding heights.” As a result, a list is still being drawn up of around 150 strategic companies that will be excluded from exchange trading, at least in the initial phases. And until the list appears, the moratorium remains in effect. “We’re all waiting for this list to appear,” says Tinnikov. “Only when it does, will the market will take off.”

However, even when the list does appear, it will only mark the start of phasing out the moratorium over three stages. Firstly, this year the moratorium will only be lifted on companies where there is either no state stake, or the state owns over 75%. Then in 2009, shares will be admitted to trading for companies where the state owns over 50%. Only in 2011 will the shares of companies where the state is only a minority shareholder start to trade. “This is to allow our colleagues in the State Property Fund time to optimize the state holdings,” explains Kalazhenko, indicating the state is likely to increase its stake to a majority one in companies it wishes to retain control over.

Added to this is the fact that key Belarusian companies such as petrochemical giant Belneftekhim and potash giant Belaruskali, accounting together for around 40% of budget revenues, are state unitary companies yet to be corporatised. “But there remain a huge number of companies where the state is already a majority shareholder,” says Tinnikov, “and these will be free for trading very shortly.”

In fact, according to Tinnikov, while potential blue chips remain in state hands, too many run-of-the-mill companies will list on the exchange, many of them of little interest to investors. This is partly a legacy of the mass privatization in the 1990s. It is also due to the government’s decision in the interest of transparency to close the over-the-counter (OTC) market. As of June, all share trading must take place via the exchange. “We don’t need 1000 companies, we only need 100 good companies that are interesting for investors,” Tinnikov says. “We are not very happy about the decision to end OTC trading, since it means we will have far too many companies on the exchange.”

Not only will there be a huge number of companies, but also a huge number of shareholders. According to Kalazhenko, a legacy of the 1990s mass privatization is that there are around 1.5m shareholders in Belarus, out of a population of just 10m. “Our stockbrokers are currently occupied fulltime with entering shareholder data into their systems,” says Tinnikov.

The government is thus not only concerned with retaining control over strategic companies, but is also intent on avoiding a rerun of the chaotic Russian mass privatization of the 1990s that saw companies bought for pennies. Banning OTC trading is intended to stop the workers selling company shares too cheaply, especially to company management, says Kalazhenko.

Another problem is that over the last decade and a half, many shareholders have forgotten they have shares deposited at the central depository. Former workers may have died without their heirs knowing about their shares, and many Belarusians have emigrated. “Companies may find it difficult to get a quorum for their shareholders’ meetings,” says Kalazhenko.

In addition, with such an overhang of shares, Kalazhenko and Tinnikov are concerned lest punters divest their shares too quickly and too cheaply in the initial phase, before the market has formed realistic prices. “We say – wait, don’t be in any rush to sell. Prices will rise,” says Tinnikov. “But many people will think ‘a bird in the hand is worth two in the bush,’ and sell their shares straight off for easy money. In general, people here have no experience with the share market, and do not regard shares as a form of investment that will grow in value over the long term.”

Bluish chips

Most analysts say that share prices will be way undervalued at the start and are set to soar initially. With the Belarusian economy powering ahead at 8-10% growth per year, and seemingly immune to the global financial crisis so far, most companies are profitable.

However, with around 1.5m small shareholders looking to sell, it is still not very clear who is going to be buying. “We have very few structures that are potential investors,” admits Tinnikov. “Banks and insurance companies are not allowed to work on the stock market because of the risks, and the population is used to keeping money in the banks. And, most significantly, in Belarus there is still simply no such thing as a collective investor, although legislation is being considered.”

Tinnikov also expects Belarusian private capital to buy heavily into public companies. “Belarusian oligarchs will emerge – this is simply how business develops, capital concentrates. Up to now, the state has held this development back, but, as we say in Russian, ‘money goes to where money is’.”

Management ownership is also a possibility – but, as Kalazhenko emphasizes, management can buy shares in “their” companies only via the exchange and after six months notice to ensure transparency. Far from welcoming the development, Tinnikov says Belarusian factory directors are often disconcerted by the process. “Factory directors have little experience in dealing with minorities, and they are worried about what will happen with such a wide dispersion of shareholders. If large groups compete for control of the company, will they change management?”

Moreover, state companies still get cheap credits from state banks, meaning the stock market does not figure in their plans for raising finance. “But,” says Tinnikov, “the state will stop or restrict cheap credits, and then the only option is to IPO, change communication with shareholders, do everything that is completely natural in the West, and even in Russia.”

Tinnikov is expecting foreign investors to arrive. “Russians, Ukrainians, our neighbours, will buy stakes in companies they know because they work with them.” Kalazhenko emphasizes that foreign investors are also perfectly free to trade on the exchange. “The system is totally open for non-residents. You just need to open an account in the depository, and buy shares and bonds. There’s no need for approval, except when buying banks. There are only questions of tax and currency to handle, and there is very good earning potential.”

Neither Tinnikov nor Kalazhenko believe that the Belarus stock market is going to be a major regional player in the near future. But they believe it will be interesting for foreign investors as a safe haven as Russia and Ukraine nosedive. “In five years time, it won’t not a large market here, even compared to Ukraine, but there we should reach $2bn-3bn annual turnover.” says Tinnikov. “There will be 20-30 companies with good trading volume. Not fully blue chips, but certainly somewhat blueish.”

Ukraine could be facing financial meltdown

Graham Stack for business new europe (www.businessneweurope.eu)

With the hryvnia depreciating rapidly due to a soaring trade deficit, and banks downgraded across the board, the International Monetary Fund is in town to bail out Ukraine. But only if its politicians finally get their act together.

On Wednesday, October 22, the hryvnia fell on the interbank market from $5.45-$5.55 to $5.7-5.75 at close of trading, a drop of 4.3% on the day. At some exchange points, dollars were being sold for UAH6. This, despite National Bank of Ukraine (NBU) intervention that has seen reserves fall $3.2bn in October to $34.3bn, the NBU head Vladimir Stelmak said. $34.3bn covers three months imports.

UkrSib analyst Evgeniya Afonina said that the dollar was expected to rise to UAH6 on the interbank market Thursday, meaning the hryvnia will have depreciated by one-third since reaching its peak of UAH4.5 per dollar in June this year.

The hryvnia’s difficulties are due to a trade deficit that has widened hugely in the second half of 2008 as Ukraine’s key steel sector was hard hit by the collapse in world prices. Exporters have few dollars to sell, and importers are desperate for dollars at any price to keep up payments on credits.

Demand for dollars is also increasingly coming from the population transferring their savings into hard currency as their hryvnia deposits mature. NBU’s Stelmak said today that individuals had withdrawn UAH 13.5bn in the course of October.

The NBU has now imposed a ban on preterm redemptions, which will cover the lion’s share of savings account. Analysts are calling for the ban to be extended to all deposit withdrawals. “If narrow money continues to explode via deposit withdrawals, the NBU may have difficulties since it would need to kill excessive supply by one hand and provide refinancing to ailing banks by another, virtually printing UAH,” wrote UkrSib analysts.

UkrSib’s Afonina emphasizes that the situation in the country was still “quite civilized,” with no long queues in front of banks or exchange booths. However internet forums are full of semi-hysterical premonitions of a looming meltdown.

It’s not just punters who are getting edgy. Anders Aslund, a sometime advisor to Russian and Ukrainian reformers, circulated a note Wednesday calling for an immediate disbursal of an IMF rescue package to Ukraine. “Speed is vital,” wrote Aslund. “Everyday, Ukrainian companies fall off the financial cliff for no good reason. Their only fault is that they have taken a foreign loan. The slightest delay in an IMF agreement can lead to a run on the Ukrainian currency, the collapse of the Ukrainian bank system, mass bankruptcies, a double-digit fall in output, mass unemployment, and undoubtedly political unrest.”

Storm clouds

The clouds have been gathering since mid-October. Yields on Ukraine’s Eurobonds have shot up to 20%, a level characteristic of countries in external default.

On Friday, October 17, Standard & Poor’s put Ukraine’s foreign and domestic currency ratings on a global and domestic scale on CreditWatch with a ‘Negative Outlook’. S&P cited Ukraine’s high level of private foreign currency debt against the background of currency instability, depreciation of the financial sector’s asset quality and a reversal of the country’s international trade flow. This was followed by Moody’s and Fitch downgrading 10 Ukrainian banks, making it hard for them to roll over short-term debt.

Now the fall in the hryvnia is going to add further pressure on companies with payment due on foreign debts. Ukraine has only $15bn public foreign debt. However, it had $85bn private foreign debt as of July 1, making gross external debt around 50% of GDP. Citibank analysts estimate Ukraine’s 2009 external financing requirement at $55-66bn, of which $32bn-40bn is in the private sector. Most worryingly, the NBU has said it expects banking sector debt worth $1bn-1.2bn to mature in the final quarter of this year.

There are some straws to clutch at. For instance, 25% of short-term banking debt is owed to the big foreign parent banks that own 40% of banking assets. And in the first two weeks of October, there was a sharp drop in imports, as banks froze retail lending and the falling hryvnia raised prices.

On the other hand, all this is taking place against a homemade backdrop of political crisis and personal feuding on an operatic scale. Preterm elections were called for December 7, postponed to December 14, then to January and then apparently cancelled. All in the course of a week. Then on Thursday, President Viktor Yushchenko said the elections could take place on December 7 after all. His prime minister, Yulia Tymoshenko, bitterly opposed to the elections, is refusing to pass anti-crisis laws she suspects contain hidden measures for funding them.

And looming on the horizon is a major gas price hike from Russia come the new year. As yet nobody knows how large. Worst-case scenarios say the hike could be from the current $175 per 1000 cubic meters to $400, which would really sink the hryvnia.

Steel – Ukraine’s Achilles’ Heel

The root of Ukraine’s problems – in the context of the global financial meltdown – is the collapse in world steel demand and prices. The Industry Ministry earlier in October officially declared the crucial metallurgical sector to be in crisis, with 17 of 36 steelmaking furnaces out of play, as steel prices have fallen by half.

Steel is for Ukraine what oil and gas are for Russia, accounting for 27% of GDP and 39.9% of the export revenues. But there is an important difference: over years of soaring oil and gas prices, Russia has cannily channelled much of the revenues into rainy day stabilization funds it can draw on now; Ukraine has no such “air bag” to cushion the blow.

A further crucial difference is that the oil price will get political support from Opec to break its fall. Obviously there is no such safety net for steel – and due to the soaring prices all last year right up to a few months ago, there is now surplus capacity in the world. This leaves Ukraine looking horribly exposed to the plummeting steel prices. The current account deficit, which in 2007 amounted to 4.2% and was easily covered by FDI, is set to widen to $21.3bn, 11.1% of estimated 2008 GDP, according to Dragon analysts. And this is before any gas price hike kicks in.

IMF to the rescue

Most analysts are still hopeful that the IMF rescue packet being negotiated now in Kyiv could still pull Ukraine out of hot water. Dragon analysts quoted PM Tymoshenko as saying Wednesday that the loan agreement was 90% finalized, with the loan amount expected to be $10bn-15bn. And newswires quoted Tymoshenko as saying the IMF would announce the loan and conditionality that day. However, this did not happen. “We do not expect the IMF package to be finalized until next week,” reckons UkrSib’s Afonina.

When such a package does come through, it will still depend on Ukrainian politicians implementing the conditions. And with the current fractured political situation in Kyiv, even this can’t be taken for granted

Russian officials dismiss devaluation as ruble falls to two-year low

Graham Stack for business new europe (www.businessneweurope.eu)

Russian Deputy Prime Minister Igor Shuvalov today assured the Financial Times that the government is not intending to devalue the rouble but would use reserves to support the currency. As trading started on Moscow's MICEX, the ruble fell to a two year low against the dollar.

“We don't have any plans for this [devaluation]. We consider that a devaluation would be harmful… We are thinking, 'These are reserves, let us use them as reserves,' the FT quotes Shuvalov as saying.

However, the ruble fell to a two-year low against dollar in the first minute of trading today Wednesday 22 October. The dollar gained 32 kopecks against the ruble, trading at 26.91 rubles, a level not seen since the summer of 2006.

With oil prices falling to under $70 per barrel, rumors of looming devaluation of the ruble started to circulate at the end of last week.

By end of day Friday, October 17, the rate at private exchange bureaus had dropped to 5-7% below the official rate.

Answering such rumours with deeds instead of words, Monday October 20, the CBR first cut the currency swap facility on Friday evening. It placed a limit (50 billion rubles a day, while activity had reached $10 billion) on currency swap, that is, short-term credit using foreign currency as collateral.

As a result, foreign banks were extremely short of rubles, raising domestic interest rates to sky-high levels: overnight rates jumped above 20%, according to Alfa Bank.

On Monday, the CB then appreciated the ruble against the basket by some two kopeks (1%) to stabilize the market.

However this has proved to have been a short lived trend.

According to business daily Kommersant, analysts say that, in the long-term, the ruble will weaken as a consequence of oil prices and the situation on the credit market, and this may even start this week. They expect the ruble to fall about 5 percent.

In comments made to journalists yesterday, October 22, Deputy Prime Minister and Finance Minister Alexei Kudrin said Central Bank's $540bn reserves were sufficient to ensure exchange rate stability.

“The exchange rate will be stable with such a volume of gold and forex reserves,” he said, adding that, “speculators on the currency's exchange rate will be very disappointed,” according to Interfax.

Russia forms ‘Gas Opec’ with Iran and Qatar

Graham Stack for business new europe (www.businessneweurope.eu)

Russia, Iran and Qatar, the world’s top three countries by gas reserves, who together control 60% of global gas resources, yesterday agreed to start forming a “Gas OPEC” or “Gas Troika” in Moscow.

The three countries agreed to set up a ‘technical committee’ as a prelude to creating a natural gas equivalent to oil cartel OPEC. The committee will be responsible for drafting the organisation’s charter to be presented at the next meeting of the Gas Exporters Countries’ Forum (GECF), to date a largely informal structure.

The goals of the new organisation are not  clear yet, with cooperation expected in the areas of gas production, processing and marketing, according to Rencap analysts. The new body will hold regular meetings three to four times a year, with the first meeting to take place within weeks.

According to UralSib analyst Victor Mishnyakov, Russia views the gas OPEC as a platform to discuss logistic and pricing mechanisms, not as a political instrument.

Mishnyakov says forming a price cartel similar to the oil OPEC would mean “that Gazprom would have to shift away from signing long-term “take-or-pay” gas contracts, which provide for less volatile export prices and guaranteed gas deliveries.” Gazprom is thus highly unlikely to support such a move.

When then President, now Prime Minister Vladimir  Putin first backed the idea of a Gas Opec at a press conference in January 2007,  he also emphasised it would not be a price cartel like oil Opec, but a forum for cooperation.

Indeed, according to analysts, an effective unified pricing mechanism is unfeasible because Gazprom exports natural gas via pipeline and there is no tradable exchange instrument for natural gas (like Brent for crude oil). The Persian Gulf countries export LNG, for which prices are volatile and set differently than under Gazprom’s natural gas contract prices.

There is currently therefore no such thing as a world gas market such as there is for oil. Shortages in one part of the globe have little or no impact on the supply/demand balance in another part of it.

This will change over time, believe analysts from Alfa bank, as liquefied natural gas (LNG) becomes a larger part of the gas supply chain. However, LNG will not have a material effect on international pricing for at least a decade.

Centrifugal forces

There is also considerable scepticism about whether the three countries have enough shared interests for the new organisation to be coherent.

Russia usually competes with OPEC gas producers such as Qatar and Iran for the European market. A topical example is the current rivalry between the planned  Nabucco and South Stream gas pipelines. The Nabucco project is intended to supply gas from Iran as an alternative to Russian gas due to be supplied through South Stream.

Consequently, Alfa’s Ronald Smith believes that “while this story captures headlines, in reality it should have little impact on the fundamentals of Gazprom for at least a decade, even should the proposed cartel hold together.”

UralSib’s Mishnyakov argues that the powerful centrifugal forces in the cartel will be exacerbated by Russia’s close cooperation with non-cartel members in Central Asia. “The creation of a gas OPEC must not neglect the interests of the CIS gas producers – Turkmenistan, Uzbekistan and Kazakhstan – or of Belarus, the main transit country for European deliveries. In our view the gas OPEC may create additional difficulties for Russia as it will now have to balance the interests of the Persian Gulf producers and its historical partners in the CIS,” says Mishnyakov.

Uncertainty mounts in Ukraine, as Yushchenko calls all change

Graham Stack for business new europe (www.businessneweurope.eu)
President Viktor Yushchenko, in a pre-recorded televised message played last night, announced the dissolution of the Verkhovna Rada and today, in a decree posted on his website, called preterm parliamentary elections for Sunday December 7. Yushchenko invoked his constitutional power after parties failed to form a new coalition within one month of the breakup of the last coalition in September.

In his televised address late Wednesday, Yushchenko blamed the coalition’s collapse on Prime Minister Yulia Tymoshenko, leader of the eponymous bloc.

“I am convinced, deeply convinced that the democratic coalition was ruined by one thing alone — human ambition. The ambition of one person,” he said in his address.

He also told viewers that Tymoshenko had exhibited unrelenting “thirst for power”.

Tymoshenko’s BYuT party immediately said it would consider challenging the constitutionality of the dissolution.

Andriy Portnov, a deputy leader of BYuT’s parliamentary faction, was quoted by Interfax as saying, “we deem this step anti-constitutional and senseless. What has happened was certainly provoked by the president. It is he who stands behind the coalition’s breakup.”

“We will not vote for any bill aimed at legitimating these anti-constitutional steps by the president,” he added.

The constitution states that the president has the formal authority to dissolve the legislature if no majority coalition has been formed within 30 days after the collapse of its predecessor.

However, lawmakers still have to adopt changes to the current legislation in order for early elections to be held legitimately, as some clauses of the existing law are impossible to implement by December 7. The legislature must also allocate money for holding elections out of the state budget for 2008.

A further potential legal quibble arises from the date of Yushchenko’s decree, according to Rencap analysts.

On 3 September, the President announced he would use his constitutional right to dissolve the Rada if a new coalition was not formed in the next 30 days.

However, the break-up of the ruling coalition was first officially announced in the Rada on 16 September, meaning that Yushchenko’s decree dissolving the Rada and calling new elections could be ruled premature.

This means that there is likely to be continued political uncertainty in the coming weeks about how and when elections are going to take place.

“Tymoshenko seems intent on derailing or at least delaying the upcoming vote to take advantage of widespread disapproval of new snap elections among voters ,” says Dragon’s Viktor Luhovyk.

Ukrainian roulette

Beyond likely legal disputes, the outcome of the elections themselves, when they take place, is equally uncertain, due to floating voters, electoral fatigue, a plethora of small parties and a low threshold of only 3%.

“Voting day comes 14 months after the last elections,” says Galt & Taggart’s Spolsky, “and with Ukraine’s population suffering election fatigue the president is risking a very low turnout on elections.”

Polls show a drift away from established parties to small parties, making the outcome in terms of a governing coalition is thus even more open, according to analysts. So even after elections, coalition negotiations are likely to be even more protracted than was the case last year.

According to recent polls, BYuT is supported by 18-24% of the electorate (vs 30.7% at the previous elections), the Party of Regions has 20-26% (vs 34.4% last year) and OU-PS 4-10% (vs 14.2 %), say Rencap analysts.

Support for smaller parties is on the increase, with the Lytvyn Bloc possibly getting 5-7% (vs 4.0%) of votes and the Communist Party – 4-6% (vs 5.4%), according to Rencap.

According to Concorde’s Verbyany, “looking at current poll numbers, both the Party of Regions and Tymoshenko blocs have good chances of increasing their seats in parliament – while the pro-presidential Our Ukraine party risks not breaking the 3% threshold to get in. A number of smaller parties will again stand in the election, and considering voter’s distain for current political personalities, they could very well make the cut.”

Galt & Taggart’s Spolsky comments, “with several parties fracturing internally – some quite severely – the political landscape could see some changes, especially with a few better-known politicians set to change allegiances, establish new parties, or make the jump from municipal to federal politics.”

Orange eats itself: Yushchenko vs. Tymoshenko

A number of analysts argue that Yushchenko’s move is aimed at removing Tymoshenko from government in the run up to next year’s presidential election campaign, and that the president is ready to reestablish the coalition with current opposition Party of Regions, with current defence minister Yury Yekhanurov as prime minister, that fell apart in spring 2007.

“The opposition Party of Regions, which lost power after last year’s elections, has tacitly taken Yushchenko’s side and is eagerly awaiting a new vote to return to government office, possibly by forming a majority coalition with the president’s party in the next parliament,” comments Dragon’s Luhovyk.

Foyil’s Ismail Safaraliyev argues that “although Prime Minister Yulia Tymoshenko’s eponymous bloc (BYuT) will remain a force to be reckoned with, we can expect Regions of Ukraine to win more seats in Parliament than it now controls, with Ukraine’s Communists returning as allies to create a bloc of MPs that would be enough to build a stable ruling coalition. In this scenario, which we find the likeliest, Regions would nominate its leader and former PM Victor Yanukovych as Prime Minister, with Mrs. Tymoshenko going into opposition to both President Yuschhenko and Mr. Yanukovych.”

G&T’s Spolsky argues trenchantly, “President Yushchenko’s main goal in the month-long political turmoil was the end of Yulia Tymoshenko’s premiership. Both Tymoshenko and Yushchenko have their sights firmly set on the battle for president in early 2010, and President Yushchenko deemed it necessary to remove Tymoshenko from her post in an effort to discredit her and reap the public opinion benefits. The president chose elections, and it is widely believed that no matter the outcome, Tymoshenko will not find herself in the prime minister’s chair come the new year.”

Yushchenko’s move to dissolve the Rada and break political deadlock thus can hardly be seen as a move to some new stability, but as exacerbating instability, just as the effects of the global financial crisis start to bite deeper into the Ukraine economy.

Concorde’s Volodymyr Verbyany comments, “from the political view, the Rada’s dissolution could be a logical attempt at resolving the deadlock that has paralyzed Ukraine’s parliament. But from the economic point of view, amid the C/A deficit concerns and exchange rate volatility, and particularly considering the population’s staunch opposition to new elections, the call to dissolve parliament is a very risky move.”

And Foyil’s Safaraliyev says tersely,”considering that the global financial crisis is starting to seriously affect key industries of the Ukrainian economy, the last thing this country needs is more political uncertainty.”

Parties play blame game as Ukraine counts down to Rada dissolution

Graham Stack for business new europe (www.businessneweurope.eu)
Ukrainian President Viktor Yushchenko has set parties a deadline of Tuesday, October 7 to reach a new coalition agreement, otherwise he will dissolve Ukraine’s parliament, the Verkhovna Rada, and call fresh elections.

As of October 3, Yushchenko has had the constitutional right, but not the obligation, to dissolve parliament following the collapse in September of the coalition between the Bloc Yulia Tymoshenko (BYuT) and the president’s Our Ukraine/People’s Self-Defence (NU-NS).

“I fully understand that I am absolutely entitled to dissolve the parliament today,” the presidential press service quoted Yushchenko as telling journalists on Saturday October 4. However, Yushchenko said he could wait until October 7 to see if a coalition appeared.

But hopes for renewing the previous “democratic” coalition by taking on board the small Volodomyr Lytvyn Block led by former speaker Volodomyr Lytvyn were dashed on October 3. Members of the Lytvyn Bloc declared that the coalition negotiations were merely “a cynical political game,” according to Lytvyn’s faction leader Oleh Zarubinskiy. “The coalition of the three [ByuT, NU-NS, and Lytvyn Bloc] is impossible,” he said at a briefing, according to Interfax.

Including the Lytvyn Bloc in the coalition could have restored its majority in the Rada. The coalition had been technically a minority government following the defection of two deputies in June. Without including the Lytvyn Bloc, restoring the coalition would have done little to overcome the political instability and deadlock.

Blame game

Zarubinskiy’s comments adds grist to the mill that the various party leaderships are now only interested in avoiding the blame for unpopular and expensive new elections they are already secretly preparing for. For his part, Zarubisnkiy put the blame for the breakdown of talks squarely on the presidential administration, telling Interfax that, “script writers and directors at N11 in Bankovaya Street are not interested in any coalition in the Verkhovna Rada and are doing everything to make sure that there is no coalition.”

Prime Minister Yulia Tymoshenko, leader of the eponymous bloc, also blamed Yushchenko for the Lytvyn Bloc’s exit from talks. bne reported October 1 that President Viktor Yushchenko said during a summit in Washington that he had given up hope of re-forming the coalition between BYuT and NU-NS and is preparing for new elections. Yushchenko expressed scepticism October 3 about the genuineness of recent conciliatory moves by Tymoshenko, leader of BYuT. Such moves included a promise to retract the bills passed September 2 that transferred powers from president to parliament that originally caused the coalition to collapse.

On October 3, Tymoshenko went one step further by finally adding her signature to a statement on the Georgian crisis of August that implicitly criticizes Russia. She then claimed at a press conference that BYuT had now complied with all conditions NU-NS and the president had specified for renewing the coalition, passing the buck back to Yushchenko.

Tymoshenko’s BYuT party stands to gain at the expense of the pro-presidential NU-NS in the event of fresh elections. This makes Yushchenko’s claims that Tymoshenko is only going through the motions of talks very plausible.

However, BYuT is still only neck-and-neck with the opposition pro-Russian Party of Regions (PR) at 25%. Thus, for Tymoshenko to form a stable government following elections, she has to take votes off PR. The best way for her to do this is to shift to a (relatively) pro-Russian platform by deemphasizing, and perhaps dropping altogether, the divisive policy of Ukrainian accession to Nato. This is what Tymoshenko seems about to do. During the Georgian conflict, she kept a conspicuously low profile, and has sounded conciliatory notes towards Russia. This has met with a warm response from Moscow and rewards.

On October 2, Tymoshenko flew to Moscow for talks over crucial gas imports with Russian Prime Minister Vladimir Putin. She came home with a deal going forward that was considerably softer for Ukraine than many had anticipated, especially with Putin simultaneously accusing Ukraine of supplying arms to Georgia. The gas deal provides for a three-year transition for gas delivered by Russia to Ukraine to reach European price levels minus transit differential. There were fears Russia would demand world market prices staring in 2009. Even so, the final 2009 price has not yet been specified, meaning that Moscow is retaining leverage until a later date.

However, Tymoshenko’s shift towards Moscow, aimed at taking votes off PR, has opened up an unbridgeable chasm between her and Yushchenko. Members of Yushchenko’s entourage have openly accused Tymoshenko of treason, and the Ukrainian secret service SBU has investigated her on suspicion of actions harmful to national interests.

The standoff between the two reached new heights as Tymoshenko was preparing to fly to Moscow on October 2. The government plane that she was meant to travel on was commandeered at the last minute by Yushchenko to take him to the West Ukrainian town of Lvyv. Tymoshenko was forced to charter a Slovenian jet instead. The presidential administration claimed that the presidential jet had been damaged, and there was no reserve plane. However, adding to the farce, the Transport Ministry informed journalists that the presidential plane had been in perfect working order.