Kudrin and Aven sound the alarm on banks

President of Alfa Bank Pyotr Aven yesterday March 26 said the level of overdue loans in the Russian financial system in 2009 could reach 15-20%, and that hundreds of banks could disappear. Deputy Prime Minister Aleksei Kudrin  in separate comments put the current level of non-performing levels at already 10%.

“We can expect that the level of overdue loans for the whole system might reach 15-20 per cent” by the end of the year, Aven told the Financial Times March 26.

“Maybe the 20-30 biggest banks, including Alfa, will receive state support – we’re sure. But the future of hundreds of small banks is under big question … we believe that hundreds of banks will disappear by the end of the year,” the FT quotes Aven as saying.

Royal Bank of Scotland’s emerging market analyst Tim Ash says Aven’s comments meanthat, “we are still far from convinced that we are anywhere near the end of the adjustment process in the bigger picture credit crunch/global de-leveraging/de-globalisation process.” “We would expect a similar feed through from the real economy slowdown to banks/public finances across the CEEMEA region,” adds Ash.

Deputy Prime Minister Alexei Kudrin recently warned that non-performing loans would constitute the ‘third wave’ of the financial crisis in Russia. Yesterday Interfax reported that during a meeting with bankers Kudrin estimated the ‘real’ level of NPLs in the banking system at close to 10%. Although as of end of February, ‘official’ NPLs stood at only 3.4%, Kudrin attributed the difference to banks’ unwillingness to recognise all bad debts as such,including debts subject to restructuring.

According to the newswire, he suggested that such a level of overdue loans might provoke the situation in the sector to deteriorate further in
the near future.

VTB Capital’s Dmitry Dmitriev writes, “we believe Kudrin’s estimate to be realistic if restructured loans are also included in the overdue numbers (which they are not in the CBR’ statistics). Nevertheless, we believe that the official data will converge with Kudrin’s assessment and are reiterating our forecast of 10% NPLs in 2009 and 14% in 2010.”

Alfa president Aven, in his comments to the FT, criticised the Russian central bank for keeping refinancing rates high at 15 to 19 per cent. He said this forced commercial banks to lend on at even higher rates of 25 per cent, making loans expensive.

Aven anticipated bankruptcies hitting the banking system in the third quarter 2009, when loans start to fall due. Aven also anticipated serious changes in the ownership of industrial groups. “When we are at the bottom we shall see some very serious bankruptcies,” the FT quotes him as saying.

EBRD head calls for European solidarity with Ukraine

In a speech given by European Bank of Reconstruction and Development (EBRD) President Thomas Mirow at the London School of Economics, 10 March, Mirow called on European solidarity for Ukraine to prevent it turning into a “no man’s land”. Specifically he said West European states should not restrict their domestic banks from using financial support they receive to assist subsidiaries in Eastern Europe.

Mirow called Ukraine EBRD’s “biggest concern,” where “an inherently instable political situation only exacerbates a grave economic situation.” The ERBRD president called on Ukrainian decision-makers “to honour their commitments” saying the problem was “not only about much-needed finance, but also about restoring trust in the country.”

He said however he was encouraged by the recent declarations of unity among Ukrainian politicians, the appointment of a new vice prime minister in charge of crisis management and the imminent return to Kiev of an IMF delegation.

Mirow argued Ukraine was “a test case for international solidarity,” and called for West European states to allow funds channelled to their domestic banks to also flow to their subsidiaries in Eastern Europe.

“As a signal of European solidarity but also of economic sense we endorse the view taken at last week’s EU Summit that in providing support to their own banks, west European countries must not prevent those funds being used to help their subsidiaries in eastern Europe,” Mirow said.

“The stability of Ukraine is of crucial importance for the future of all Europe. Many scholars hold that the modern name Ukraine is derived from “ukraina” in the sense of “borderland, frontier region”. We must not allow it to become a no-man’s land,” he concluded.

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

Ukraine moves towards IMF agreement

After signing a joint declaration to the Fund together with the president and central bank governor last week, Ukraine’s government yesterday March 12 made further steps towards renewing the IMF’s $16.5bn lending Program, according to Interfax. Deputy PM Hryhoriy Nemyrya said it was very likely the IMF would approve disbursement of the second loan tranche to Ukraine by the end of March.

Nemyrya said yesterday following a meeting between President Viktor Yushchenko, Prime Minister Yulia Tymoshenko, National Bank of Ukraine (NBU) head Volodymyr Stelmakh, and Verkhovna Rada Speaker Volodymyr Lyvtyn that the government made several decisions to ensure the independence of the NBU, make changes to the state’s bank recapitalization program and cancel contentious articles in the state budget law for 2009. He said the measures made disbursement of the second tranche of the IMF stand-by credit attainable by the end of March.

Regarding central bank independence, NBU Deputy Head Anatoliy Shapovalov said amendments to a government decree introduced yesterday meant that the Bank was no longer required to coordinate disbursement of refinancing loans with the government, though it would continue to report on its refinancing decisions.

Regarding the deficit, IMF Resident Representative in Ukraine Max Alier said the Fund and Ukrainian authorities reached an “understanding” with respect to the budget deficit. He did not provide any numbers, but mentioned ageement on an “acceptable and adequate level.” Alier alluded to decreased government spending, and sources report the government and IMF agreed to a 3% deficit, according to Galt & Taggart.

Dragon Capital’s Olena Bilan likewise expects the IMF to agree to a deficit of 1-2% of GDP net of bank rehabilitation costs, “or even higher if Ukraine makes the revenue target more realistic in view of the ongoing economic decline and succeeds in securing non-inflationary financing on top of IMF aid.”

The Cabinet meeting was held with the presence of IMF and World Bank representatives, who confirmed that the decisions made at the meeting complied with the IMF agreement.

The Cabinet also approved the budget of Naftogaz Ukraine with a surplus, which may signal that the Cabinet has also approved increased tariffs for natural gas supplies to households, according to Alfa’s Denis Shauruk.

“Nemyrya’s involvement and cooperative rhetoric, as well as wide agreement among key domestic figures, point to an improvement in Ukraine-IMF collaboration in the near future” says Galt & Taggart analyst Danylo Spolsky.

Further negotiations will probably center on budget parameters and ways to reduce budget expenditures without hurting the most vulnerable social groups, according to Dragon’s Bilan.

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

Hungary and Russia sign off on cheaper South Stream

Gazprom chief Alexei Miller and Janos Eros, president of the Hungarian Development Bank, yesterday March 11 signed a deal to create a joint venture to build Hungary’s section of the South Stream gas pipeline by 2015. According to the Russians, the estimated cost of the project has fallen over half to 10bn euros, and the pipelines projected capacity has increased.

South Stream is a joint project of Gazprom with Italy’s Eni to pipe Russian gas to Italy and Austria through countries including Hungary, Serbia and Greece.

The Russians reported improved parameters for the pipeline. Russian Prime Minister Vladimir Putin, attending the signing ceremony, stated that due to lower materials and services prices, the cost of building the South Stream pipeline is expected to fall to about 10bn euros compared to the previous estimates of 25bn euros, according to Interfax.

Gazprom CEO Alexei Miller also announced that total transportation capacities of the pipeline could be higher than previously estimated, with the Hungarian section alone could pump up to 10 bcmpa.

Hungary’s Prime Minister Ferenc Gyurcsany was also present. Gyurcsany said the deal would help his country improve its energy security. Hungary currently receives all its gas through Ukraine, and was directly affected by January’s cutoff of supplies in connection with the Russia-Ukraine gas dispute.

“Hungary is not interested in there being one gas pipeline or one oil pipeline,” he said. “Hungary is interested in having as many pipelines as possible.”

Gyurcsany also said the South Stream project should not be considered a rival to the US-sponsored Nabucco pipeline, intended to pipe gas from Azerbaijan and the Caspian basin to Europe. He argued Budapest would benefit from transit fees from both pipelines.

The deal also includes Gazprom and Hungary’s oil and gas giant MOL building a large underground gas storage facility in Hungary for 1bn cubic meters of gas. Gyurcsany said existing such facilities helped Hungary cope with the gas shortages resulting from January’s dispute between Russia and Ukraine, according to Itar Tass.

The South Stream pipeline will bypass Ukraine and directly link Russia and Central and Western Europe. The pipeline will run beneath the Black Sea to the Bulgarian coast and then split into two branches – one heading South to Italy and one going North to Austria with a total combined capacity of 31-47 bcmpa.

Gazprom has already signed intergovernmental agreements with Bulgaria, Greece, Serbia and Hungary and negotiations with Slovenia and Austria are on schedule.

According to UralSib’s Victor Mishnyakov , “questions remain. We welcome Gazprom’s intention to diversify gas routes and increase its presence in the key European market. We regard this news as positive from a strategic perspective but neutral at the moment, as many questions remains unanswered.”

“In particular,” says Mishnyakov, “the Southern regions of Russia do not have sufficient gas deposits to supply the South Stream and the high-sulfur Central Asian gas would need to be treated before being transported. We also doubt that the current macroeconomic environment makes the project economically viable and do not believe that it will be built by 2015, as originally planned.”

Alfa’s Ron Smith is also downbeat about South Stream prospect: “We are still less-than-certain that South Stream will ever be completed. It is not clear that there will be enough European demand for Russian gas to justify the additional route, especially if Russia’s relations with Ukraine eventually quiet down.”

However, Russia’s PM Vladimir Putin had a quick response to doubters yesterday, according to Moscow Times. “If we aren’t able to build South Stream, which I doubt,” said Putin, “we’ll liquefy our gas and sell it to you for more.”

Ukraine’s government starts to implement IMF conditions

Deputy Prime Minister Hryhoriy Nemyria  announced that Ukraine’s government has approved all decisions required by the International Monetary Fund (IMF) prior to disbursement of the second tranche of a $16.5bn stand-by credit. Russian Finance Minister Alexei Kudrin is also considering Ukraine’s request for a $5bn loan.

“I would like to note that due to constructive cooperation between all of the components of the process today at a meeting of the government, we took an agreed decision, which we think will allow us in the near future to achieve practical results regarding the return of the IMF mission, and after some time, [allow the IMF] to make a decision to provide the second tranche of the loan,” Nemyria said at a briefing in Kyiv on Wednesday, March 11, according to Interfax Ukraine.

Nemyria also said that “a number of important decisions” were made at the meeting of the government to ensure the independence of the National Bank of Ukraine (NBU).

Nemyria said a number of other issues had been resolved in a way acceptable to the IMF: amending a resolution of the Cabinet of Ministers and the NBU on bankrefinancing; amending a government resolution on the issue of the state participation in bank capitalization; canceling Articles 84 and 86 of the Law of Ukraine on the 2009 national budget.

The Association of Ukrainian Banks today cited Steen Edzerskov, the advisor for the NBU from the IMF, as saying the IMF wanted Ukraine “to simplify the procedure of receiving of refinancing by banks and removal of subjective factors in decision making on refinancing of banks.” This refers to abolishing the present requirement for case-by-case government consent for NBU refinancing of banks.

Resident IMF representative Max Alier, yesterday told Troika Dialog analysts that the IMF had agreed to soften the budget deficit target criteria from its previous zero deficit less bank recapitalization costs, according to Troika. However, no specific number was mentioned.

The IMF had previously said it would soften its stance on the deficit if Ukraine could find non-inflationary ways of financing it, such as loans from foreign countries. This week Russian finance officials confirmed that Ukraine had officially requested a $5bn loan. Russian finance minister Alexei Kudrin said yesterday March 10 that he was considering the request.

Such a loan is however likely to be politically very divisive. President Viktor Yuschenko has compared Prime Minister Yulia Tymoshenko’s negotiations with Russia for a $5 billion loan with the Molotov-Ribbentrop Pact between Nazi Germany and the Soviet Union in 1939.

Leading political forces – the Prime Minister, the President, the speaker, the governor of the NBU and the opposition leader – are set to meet today as part of the necessary process in acquiring the second tranche of the IMF loan. The previous letter – drafted after similar meetings – was considered by IMF officials and returned to the authors with relevant remarks.

“One of the IMF’s main concerns is the restored independence of the central bank as well as a realistic forecast for the state budget deficit and sources of its financing,” says Alfa Bank’s Denis Shauruk, adding, “we expect all disputed issues to be addressed by the end of March.”

Rising Ukrainian car star Bogdan brought low by crisis

Graham Stack in Kyiv for business new europe (www.businessneweurope.eu)
“2008 was our best ever year. It was very exciting – we earned over $2bn profit, opened new facilities, and produced and sold over 110,000 vehicles,” sighs Bogdan Corporation’s CEO Oleg Svinarchuk. But with the crisis causing the domestic market to collapse and Ukraine’s accession to the WTO making foreign imports a whole load cheaper, Svinarchuk admits it’s back to the drawing board

2008 followed almost a decade of double-digit expansion of the Ukrainian automobile market. Bogdan’s car production figures quadrupled in the five years from 2004 to just under 90,000. With only 150 cars per 1,000 people compared with 600-700 in Western Europe, this seemed to be only the start of the journey.

Bogdan specialises in assembling budget cars, above all Russia’s Soviet-era AvtoVaz models known in the West as Lada. Svinarchuk admits the lasting popularity of the brand, still the top seller in Ukraine, is a “forced love” linked to the unbeatable price at $3,000-4,000. But he argues that the brand enjoys real kudos linked to its past as the number-one Soviet chick magnet – and also its ease of service.

And with times changing and the availability of cheap car credits spreading in Ukraine thanks to foreign banks, Bogdan has expanded its product range, launching Hyundai, Kia, Subaro, and Isuzu models. Kia and Hyundai now rank among Ukraine’s top-10 brands.

With a market share of almost 20% in 2008, Bogdan’s ambitions were underlined by its launching of a brand new plant in the town of Cherkassy for Hyundai models, with an annual capacity of 150,000 units. Bogdan also has production lines for 21,000 trucks, 19,000 special vehicles and 9,000 buses. “In addition to the Cherkassy plant, in 2008, we expanded our bus production at our Lutsk plant, and launched assembly of Isuzu trucks,” says Svinarchuk.

“Our long-term goal is for Bogdan Corporation to be present in all spheres of automotive industry with a product range encompassing cars, buses, trolleybuses, trucks, and plans for trams, electric and metropolitan trains, including all required metal processing capacities,” he explains.

And as a further step towards this goal, In the course of 2008, Bogdan consolidated its diverse assets into a vertically integrated holding.

The logical next step was for Bogdan to find a strategic investor among global car majors – and this dream nearly came true for Bogdan in 2008, according to Svinarchuk. “We had a very serious offer from an international structure towards the end of 2008 – but the crisis meant that nothing came of it.”

Car crash

Instead of attracting strategic investment, Bogdan found itself having to pay back huge debts. “We took out a lot of loans to finance last year’s investment plans. We have over $300m in long-term loans directed towards these projects,” says Svinarchuk. “Unfortunately we also had large short-term debts we used to purchase components.” Bogdan has paid back over $400m in short-term debt, with another $250m of short-term debt to be paid back this year.

Bogdan also suffered “huge losses” as a result of the collapse in the hryvnia. The proceeds from a 3% private placement bought in January by UK private equity group NLV for $13m “went purely to fill the hole in our operating capital this left.”

But the most serious blow the crisis dealt to Bogdan has been the terrifying collapse of demand for cars. Previous years’ rocketing demand for cars was a result of snowballing credit expansion by foreign banks doling out cheap loans. Some 50% of cars sold in 2008 were purchased on credit. “30-40% per annum growth over the last few years was of course driven mainly by this credit expansion. But it was not a bubble, at least regards us. We reinvested all our profits in production,” says Svinarchuk.

But with the credit market now dead, demand for cars has collapsed. And this is before the effects of salary cuts and soaring unemployment kick in. Not to mention the market flooding with repossessed cars. Sales figures for January show demand for cars plummeted 55.5% on the year, according to IAG Autoconsulting.

As a result of the market collapse, some analysts anticipate a merger between Bogdan and Bogdan’s main competitor, Ukravto, Ukraine’s largest car producer. Svinarchuk says this is not an immediate prospect, “but never say never – we have very good personal and business relations with Ukravto”.

WTO blues

Most galling for Bogdan’s CEO is that devaluation brings the company no price advantage relative to foreign imports – because almost all Bogdan’s component parts are imported despite Ukraine having a giant steel industry. “Ukraine simply produces no steel high-grade enough for use in car production,” he laments.

And if that was not enough, Ukraine’s much touted fast-tracked World Trade Organisation (WTO) accession in 2008 saw the government dispense with all protective measures for domestic car markers, with immediate effect. Previous to WTO accession, protective tariffs added almost 50% to the price of foreign imports. The government’s failure to negotiate even a transitional period appalls Svinarchuk. “No single other country failed to negotiate a transitional period for removal of protective tariffs,” he complains.

Svinarchuk argues that the current crisis exposes the fatal flaw in Ukraine’s development – the government’s failure to develop productive capacities and technology transfer. Instead, a misplaced focus on free trade has led to a flood of imports. Svinarchuk calls for a radical change in economic policy. “There is only one scenario for development,” he outlines. “Cutting corporate taxes, cutting consumption taxes, but raising import duties and encouraging import of technologies through FDI and free economic zones, while restoring those industries where we were leaders in Soviet times: defence, ship-building, aerospace.”

“But we know why foreign companies won’t set up production here: the high level corruption and the bureaucracy – you can spend five years trying to get the land to build a factory, and in the end you still won’t get it.”

“How can it be that, paradoxically, just at the moment when people’s incomes are falling due to the crisis, prices are rising after devaluation? The answer is that everything we buy here is imported. There will be no import substitution in Ukraine, because we don’t produce any finished products here. And this is our great failure over 18 years of independence.”

Romania’s budget needs revising as IMF aid looms

Graham Stack in Kyiv for business new europe (www.businessneweurope.eu)
Hardly a week has passed since Romanian President Traian Basescu signed into law the budget for 2009. But with news emerging March 2 that the government has started preliminary talks with the International Monetary Fund on an aid deal to help patch up the country’s strained finances, the budget is already in urgent need of revision.

Passing the 2009 budget was difficult enough. A hard-fought, high-spending election year in 2008 – which saw salaries for teachers hiked by 50% in November, weeks before parliamentary elections – left Romania ill prepared for the belt-tightening needed in the wake of the financial crisis that impacted in the last quarter of 2008.

However, a new broom belonging to Prime Minister Emil Boc, only sworn in on December 15, pushed through a crisis budget that bravely slashed the budget deficit to 2% from 5% in 2008, and froze public sector wage growth. This, despite the fact his government depends on a coalition between his own Democratic Liberal Party (PD-L) and their traditional bitter rivals, the leftist Social Democratic Party (PSD).

But less than a week after President Basescu signed the budget into law, a growing chorus is saying that the underlying growth forecast of 2.5%, and consequently the planned budget deficit of 2%, is wildly unrealistic. “The target for the budget deficit becomes unrealistic under our assumptions of a 3.5% GDP contraction in 2009, as this will have a very strong impact on revenues. Our forecast is for a 7.3% GDP deficit,” Nicolaie Alexandru-Chidesciuc, senior economist at ING Bank Romania, tells bne. “Any target below 5% of GDP would require additional cuts in spending and/or hikes in taxes.”

The rating agency Standard and Poor’s, which in October sensationally downgraded Romanian debt to junk status, also predicted on March 2 that the budget deficit would reach 5.0-6.2%. Such gloomy prognoses are backed by January’s economic data, which showed several main budget revenue items falling 8% in January on the year in nominal terms as the global crisis took its toll on the domestic economy. The budget that President Basescu signed into law on February 25 envisages 18% growth in revenue in 2009.

Romania’s budget problems are, however, not only the result of the global economic crisis, but are also homemade. Recent years’ stellar economic growth went hand in hand with weakening budget discipline, which is now coming home to roost. “Government spending doubled between 2005 and 2008, and the public sector wage bill nearly tripled over these three years due to high wage increases combined with a large increase in government employment,” an IMF mission to Romania said in a statement on February 4, a point tacitly admitted by the prime minister.

“It’s a shame that we failed to capitalise on economic growth, to set aside some money for a more difficult year,” PM Boc lamented in February.

IMF medicine political poison for coalition

With financial markets effectively closed, yawning capital account and budget deficits together with a banking system threatened by foreign-denominated loans and a depreciating leu mean that Romania has now been forced to look for emergency funding sources.

First up is the EU with which Romania is conducting official negotiations for financial support. But Romanian officials confirmed to newswires March 2 that a team led by the central bank’s deputy-governor, Cristian Popa, had been dispatched to Washington for preliminary talks with the IMF.

The IMF already stated February 4 that it would require Romania’s budget deficit to be further reduced before disbursing any loans. But Romania, like troubled neighbour Ukraine, is now embroiled in the run-up to presidential elections in late 2009, meaning it is a bad time for swingeing budget cuts. PM Boc is a party colleague of President Basescu, who is up for re-election in December.

At the same time, the PD-L’s coalition partner is its traditional foe, the leftist PDS, which took the largest share of the vote in November’s elections. The PDS, with ties to organized labour, will be even more allergic to cuts in state spending. “Given Romania’s history of poor industrial relations, the government may struggle to impose budget cuts in practice, which suggests a somewhat strained outlook for relations with the IMF,” reckons Royal Bank of Scotland’s head CEE analyst Timothy Ash.

Boc is still fighting shy of the IMF, arguing that 20% of budget expenditure slated for 2009 is infrastructural investment that will stimulate the economy. He insisted March 2 that the only official talks Romania is engaged in are with the EU. But many analysts see an IMF agreement as inevitable for Romania, given the capital account and budget deficits that resemble those of the new IMF-debtor nations Latvia, Ukraine and Hungary.

ING’s Alexandru-Chidesciuc suggests a compromise could eventually be found, with some required spending cuts deferred to 2010. “I think the IMF would accept a budget deficit probably even slightly higher than 3% of GDP this year,” he says. “It will concentrate on a programme aiming gradual and sustainable correction of the budget deficit. This would imply a much lower budget deficit in 2010, but I don’t believe the IMF will ask for a budget surplus even in 2010.”