Problems bubble up as Tymoshenko cooks Ukraine’s books

Graham Stack in Kyiv for business new europe (www.businessneweurope.eu)
Naftogaz’ payment difficulties could be first sign that Tymoshenko’s budgetary house of cards is folding.

“We have doubts about Ukraine’s ability to pay,” said Russian President Dmitry Medvedev on Friday, May 22, referring to whether Ukraine’s gas monopoly Naftogaz would find the $4bn Medvedev says it needs for stockpiling of gas for the winter.

Medvedev’s comments were hardly off the cuff: he was speaking at a press conference together with EC President Jose Manuel Barroso following the EU-Russia summit in Khabarovsk. He went on to call on the EU and Russia together to syndicate a loan to cover Ukraine’s gas needs.

Naftogaz has had cash flow problems all this year, but these were a problem of hard currency liquidity. With liquidity problems receding in Ukraine, and considering the strategic significance of summer gas stockpiling for energy security in winter, the new payment problem points instead to Ukraine’s overstretched state budget. Naftogaz is massively dependent on direct and indirect state subsidies, so much so that the International Monetary Fund (IMF) wants its finances consolidated as part of the budget

How overstretched is not yet clear. Naftogaz has apparently settled a large part of its April gas bill against future 2009 transit payments from Gazprom, meaning the company is already burning up future revenue flows.

“The government is concealing the fact that Naftogaz cannot collect the money from consumers to pay for the imported gas it is using. In these conditions, the company is forced to turn to Gazprom to get an advance against future services in transporting gas to European customers,” said Roman Zhukovsky, head of Ukraine’s Main Service of Social-Economic Development, in documents published on the website of Ukraine’s president Victor Yushchenko in May.

“Naftogaz is not paying for the gas it receives from Russia, and instead settling up against future transit fees, which means basically that it is running a deficit,” authoritative former finance minister Viktor Pinzenik told Ukrainian weekly Zerkalo Nedeli May 16. Pinzenik resigned his post in February on questions of principle regarding a budget for 2009 he regards as wildly unrealistic.

“The country cannot continue continue to sell gas to the population at a price several times cheaper than it buys it for. But that’s exactly what it does, creating a huge hole in the budget,” Pinzenik added.

Cooking the books

If Naftogaz can’t find the cash to stockpile crucial gas for the winter, this is the first indicator that the Ukrainian budget is in big trouble, despite or because of the government’s attempts to paper over the cracks.

Prime Minister Yulia Tymoshenko, who recently declared her candidacy for presidential elections in January 2010, has been fighting tooth and nail to protect an expansionist budget, and the high level of vote-winning pension and social payments it contains. The budget remains predicated on 0.4% GDP growth assumption for 2009, despite an economic collapse of 8% of GDP on the year in fourth quarter 2008, and accelerating in the first quarter of 2009.

The method she has used to do this, according to critics and experts, is essentially the same as used for Naftogaz – using future revenues to prop up current finances, leaving a budget black hole gaping later in the year.

As a result, Sergei Buryak, head of the State Tax Administration, could announce May 13 to general disbelief that tax revenue collection plans as laid down in the 2009 budget had been fulfilled and even exceeded in the first four months of the year.

However, ever the killjoy, President Viktor Yushchenko weighed in against these claims. The Presidential Secretariat published on its website an in-depth analysis of the manipulations employed by the government to attain these miraculous results.

Their analysis of how Tymoshenko has cooked the budget books is widely accepted by experts.

“Everyone was surprised by the tax collection rate, but after we saw the analysis done by the Presidential Secretariat, we understood what was happening. I largely agree with their analysis,” Renaissance Capital’s Anastasia Golovyakh told bne.

“If you take the Secretariat’s view, along with the quasi-neutral view put forth by ex-Finance Minister Pinzenik, and add in the unwillingness shown by the government to report first quarter GDP results, all signs point to an attempt to present the books in a better light,” agrees brokerage Galt & Taggart’s analyst Danylo Spolsky.

Even the Tymoshenko government seems to agree with the Secretariat’s analysis – it promptly imposed a statistics embargo on the Presidential Secretariat following publication of the detailed report.

The basic argument of Yushchenko’s number-crunchers is that the government boosted its revenues in the first four months of 2009 at the cost of revenues in the second half of the year: by having companies make advance payments on taxes due in 2009, (i.e. having companies pay tax due for the whole year straight off); delaying payment of VAT rebates for exports; having the National Bank of Ukraine (NBU) pay its entire annual contribution to the budget straight off in the first quarter; and one-off customs charges on gas owned by gas trader Rosukrenergo and now transferred to Naftogaz.

In addition, media have reported that the State Tax Administration has been overtaxing companies at the end of each month, booking the cash, and promptly returning the difference in the next month, thus inflating revenues.

The Secretariat’s analysis also details that payment of Pension Fund contributions is off track: the Pension Fund has simply revised downwards monthly collection targets to avoid registering a deficit. This means the sum remaining to be collected later in the year rises.

The motivation for such short-term machinations is apparently to create superficially acceptable parameters allowing the IMF to sign off on the second and third tranches of its $16.5bn stabilization loan.

The IMF seems to have turned a blind eye to the manipulations, and is otherwise showing unprecedented patience with Ukraine. Despite its articles specifying that funds be used to only tackle balance of payments problems, it has even agreed to cover part of Ukraine’s planned 4% budget deficit – a first for the IMF.

Ukraine’s government has also found an unprecedented way of helping the IMF help it. It has delayed publishing its GDP data for the first quarter of 2009 until July. By postponing publication until after the IMF has reached a decision on the second and third tranches, the government ensures that the 4% deficit will be measured for the last available GDP figure – for the fourth quarter of 2008.

Estimates of subsequent GDP collapse in the first quarter of 2009 range from 10% to 25% ,=meaning that the actual budget deficit as GDP proportion will be considerably higher.

Kazakhstan’s BTA loses control over top Ukrainian insurer

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

Kazakhstan’s BTA Bank, nationalized in February by the country’s sovereign wealth fund, looks like losing all influence over top Ukrainian insurer Oranta. This is despite the fact that BTA paid $100m for a stake of 25% plus one share only two years ago, and reportedly controlled 85% of Oranta as late as mid-2008.

Ukraine’s competitive privatisation of a blocking stake in its top insurer Oranta in December 2007 was hailed as a landmark deal. BTA paid $100m for the stake, valuing the company at $396m. But far from being a breakthrough deal, the privatization turned out to be Ukraine’s last large privatization deal to date. And it’s now being overshadowed by the inauspicious end to BTA’s investment in Ukraine as control over Oranta shifts murkily to Ukraine-based IMG Holding, previously affiliated with BTA as a structure managing the Kazakh bank’s international assets.

As late as June 2008, according to a report authored by Renaissance Capital analyst Vladimir Dinul, BTA controlled 85% of the insurer, with companies affiliated with BTA having acquired additional stakes totalling over 45.3%. But in April of this year, following Kazakhstan’s nationalization of BTA in February and the ousting of former BTA management under Mukhtar Ablyazov, Oleg Spilakh, chairman of Oranta’s supervisory board, told newswires that BTA now only controlled 14% of Oranta. This means BTA’s current stake is less even than the 25% stake it had bought directly in 2007. The company’s website in fact still lists BTA as owning the blocking stake. The 38-year-old Spilakh said in the same interview that control over Oranta now lies not with BTA, but with IMG Holding, which he also heads. Ukraine-registered IMG Holding was established in 2008 to manage BTA’s Ukrainian and other international assets.

BTA’s incredible shrinking stake in Oranta contradicts statements made by former chairman Ablyazov as late as December. In an interview with Interfax, he reiterated BTA’s commitment to its Ukrainian investments and was committed to its Ukrainian subsidiary bank BTA-Ukraine. However, BTA-Ukraine announced abruptly in April that its parent bank’s stake had been reduced from 49.99% to 9.99%. The parent bank’s new state-appointed management claims its stake remains unchanged at 49.99% and has filed criminal charges in Ukraine against the changes.

According to Renaissance analyst Milena Ivanova-Venturini, “asset stripping just before Samruk-Kazyna [Kazakhstan's sovereign wealth fund] injected capital, effectively taking over BTA, has been one of our concerns for a while. The legal complexity and the web of ownership structures across BTA subsidiaries is anything but transparent, and we may yet hear of more such ‘changes’.”

Ivanova-Venturini also suggests that BTA’s former management might be seeking to retain control over BTA’s foreign assets: just days before the February nationalisation, BTA’s shareholders approved as new supervisory board members of BTA-Ukraine Roman Solodchenko, former BTA CEO, and Khalil Kamalov, former financial director of BTA.

BTA’s spokesperson Valentina Vladmirskaya told bne she did not know when BTA’s 25% stake had been reduced to 14%. But IMG spokesperson Alena Kulakova says BTA’s stake in Oranta fell as a consequence of a rights issue in 2008. She denied that IMG Holding, now managing over 50% of Oranta shares, had links to BTA’s former management.

Next steps

Ukraine’s insurance sector has boomed in recent years, and Oranta along with it. However, that boom was predicated almost entirely on the cheap credit bubble, and with the bubble bursting, Oranta and the rest of the sector are in trouble.

The credit bubble boosted the insurance sector by the surge in car ownership it induced, as well as the growth in bank retail lending, which constituted a major sales channel for insurance products. Car-related products accounted for 64% of the total gross written premiums in Ukraine in 2008. Compulsory third-party liability and voluntary damage insurance grew in 2007 at an estimated 74% and 113% on year, respectively. The logic behind this growth is very clear given that growth in the volume of new car sales in 2007 was 46%.

But the crisis has seen Ukraine’s car sales drop by an astonishing 70% on year in the first quarter. Accordingly, the drop in car insurance premiums exceeded 30% in the first quarter, according to an April 29 cry for help penned by the Ukrainian Insurance Federation, of which Oranta is a founder member. Overall, insurance premium collection in January to March 2009 fell by over 20% from the year before. Adding salt to the wound, payments on claims rose by 10% over the same period, due to the hike in the cost of imported spare car parts following the steep devaluation of the hryvnia.

Ukraine insurance companies were not only exposed to the credit boom through car insurance, but through reliance on banks’ retail credit operations as a sales channel. “About 30% of the insurance business in Ukraine was funnelled via commercial banks, but now this source of business has dried up,” says Foyil’s Agshin Mirzazade.

Moreover, according to the Ukrainian Insurance Federation, insurers are also suffering from Ukraine’s stricken bank sector not paying out on insurance company deposits, thus causing insurers to delay their own payments on policies.

Analysts estimate that two-thirds of Ukraine’s 495 insurance companies will quit the market as a result of the crisis. Oranta’s chief five competitors are all foreign-owned, including Generali Vienna Insurance Group, Allianz and Vesko Insurance, and there is speculation that Oranta will need a strategic investor to retain its position.

Oranta’s shareholders decided on a rights issue at the annual general meeting on April 17 to increase shareholder equity 4.4 times and bolster the company in the face of the storm. BTA representative Pavel Prosyankin said BTA hasn’t yet decided whether to participate.

Ukraine cities given extra time for Euro 2012

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

European football’s governing body UEFA decided May 13 to confirm only Ukraine’s capital Kyiv as a host city for the Euro 2012 football championships, with three other cities being given a deadline of November 30 to prove their suitability. A face-saving, two-venue solution is looking increasingly likely for Ukraine come the final deadline in November.

Newswires have been quoting French sports journalist Eric Champel, confidante and biographer of UEFA President Michel Platini, saying that Platini felt let down by Ukraine, and was ready in Bucharest to slash to a minimum the number of Ukrainian venues hosting Euro 2012.

Champel had reported before the UEFA decision that the organisation would name four Polish cities and only two Ukrainian – Kyiv and Lviv. Champel proved to be spot on about the Polish cities, and is now sticking to his guns about Ukraine, despite UEFA giving three candidate cities – Donetsk, Kharkiv and Lviv – until November before a final decision on their suitability is made.

UEFA in fact only confirmed capital city Kyiv as a host city – and did so grudgingly at that, mentioning a number of significant shortcomings that need to be rectified. Before the decision, Platini had made clear that if the capital city failed to qualify as a venue, the country as a whole would lose its right to host the prestigious championships.

Backing up Champel’s version of events, Ukraine’s business daily Delo quoted a source from Ukraine’s delegation to UEFA alleging that UEFA was originally intending to make a final decision naming Kyiv as only Ukrainian venue. According to Delo, only a letter personally addressed to Platini, signed by Ukrainian President Viktor Yushchenko, Prime Minister Yulia Tymoshenko and Parliamentary Speaker Volodomyr Lytvin, giving a guarantee of improvements to Ukraine’s preparation staved this off, saving Ukraine’s four-four parity status for now. However, the “4+2″ outcome is looking most likely. Platini pointedly stated in the run-up to the decision that Euro 2012 could take place in as few as six host cities.

Lviving it up

Champel’s naming of Lviv as potentially the only Ukrainian host city besides the capital Kyiv sounded initially strange. Picturesque but poor, Lviv has been widely criticized for its backwardness in preparations, connected with its inability to find investors for a stadium and airport. There were expectations that reserve city Kharkiv would burst through to knock Lviv off the list

However, if UEFA were to scale down Ukraine’s participation to only two cities, as Champel suggests, Lviv would for purely logistical reasons be the natural second Ukrainian venue. The formerly Polish city is located close to the Polish border, with close transport connections to Polish venues. A single eastern Ukrainian venue, on the other hand, whether Kharkyv or Donetsk, would be logistically isolated from the main body of the event.

Opting for Lviv according to this logic would, however, be tough justice for eastern Ukraine, the heartland of Ukrainian football, and arguably way ahead of Lviv in terms of preparation for Euro 2012. Kharkyv and Donetsk are having their stadia and airport infrastructure modernised by the image-challenged oligarchs who also own the local football teams and have bankrolled their clubs’ impressive run of European victories this year.

In UEFA’s decision, Kharkiv even made the jump from reserve city to candidate host city, not least thanks to backing of oligarch Aleksandr Yaroslavskii, owner of DSN holding and of Kharkiv’s Metallist team, who reached the UEFA cup quarter finals this year. “It would be hurting if Kharkiv were not to be chosen,” Elena Derevyanko, adviser to Yaroslavskii, tells bne. “Michel Platini promised that the cities would host Euro 2012 that were best prepared to do so. Kharkiv is better prepared than all the others, because no other Ukrainian city has made so much progress in all respects. In some cities there is a stadium, but it needs improvement, and there’s no financial guarantees for airport reconstruction. In some, there are hotels, but neither a stadium nor an airport, and no investors willing to build them. Only in Kharkiv are all ingredients present.”

Kharkiv and Donetsk, however, are roughly as near to Moscow as to Kyiv, let alone Lviv, let alone the Polish venues, and, in the event of Euro 2012’s centre of gravity shifting west to Poland, this will inevitably count strongly against them. But preference shown by UEFA to western Ukraine on geographical grounds is unlikely to go down well in Ukrainian football’s Eastern heartland.

Moldovan wine goes upmarket

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

Beyond the clamour and colour of Moldova’s “Twitter revolution” in April, a silent revolution in the tiny ex-Soviet country’s wine industry might change the country more fundamentally. A 2006 Russian ban on Moldovan wine forced leading wineries to raise their sights and aim for western markets.

First the bad news: Moldova’s thousand-year-old wine culture has suffered three severe set backs over the last century and a half. At the end of the 19th century, it was devastated by phloxera. Then, under Mikhail Gorbachev’s Perestroika-era anti-alcohol campaign, 50% of vines were grubbed up. The latest affliction came in 2006 in the form of a Russian prohibition on wine exports, motivated by Moldova’s flirting with Nato.

Considering that winemaking accounts for 20% of Moldovan GDP, 28% to 30% of export revenues, employs around 27% of the labour force, and that around 85% of Moldovan wine was exported to Russia, this was more than a major problem. By January 2007, Moldova had lost an estimated $180m in sales. Wineries soon found themselves unable to service their bank debts, and 30% of them had been taken over by banks or were facing bankruptcy.

The good news, though, is that Moldova’s leading private wineries used the shock to “desovietise” and began switching their focus from the Russian market to European markets, changing their product and whole business approach in the process.

More of an odour than a bouquet

Every second bottle of Soviet wine was Moldovan, but this spoke about quantity not quality. Wine in Soviet times was little more than alcoholic fruit juice to be swashed down before the real drinking began, packaged in gimmicky bottles, and vinified semi-dry or semi-sweet. Quality dropped further in the nasty 1990s. Former top Georgian politician Irakli Okruashvili infamously described the wine that Georgia exported to Russia as “shit,” and the epithet could equally have applied to Moldovan produce at that time.

With economic growth restarting in 2000, Moldovan wineries started to invest in western equipment. The closing of the Russian market in 2006 then forced them to go the whole hog and try their luck on Western markets. “In 2007, six wineries formed an association, the Moldovan wine guild, to position themselves more strongly on foreign markets,” says Dumitru Tcaci, marketing director of winery Château Vartely and also of the Moldovan Wine Guild. The other members include Acorex Wine Holding, DK-Intertrade, Lion-Gri, Vinaria Purcari and Vinaria Bostavan.

“These six companies constitute one-third of Moldova’s total wine exports,” says Tcaci. “We want to become a strong marketing organization and boost the international competitiveness of each individual member. The six companies are the leaders in supplying Moldovan wines to the European market, and have all won awards in prestigious international contests.”

The Moldovan wine guild was supported by USAID, the US economic assistance agency. According to Douglas Griffith, the chief consultant employed by USAID to refocus Moldova’s wine industry towards European consumers, marketing alone wasn’t enough. “The product has to change as well and our work consisted of helping the wineries develop new skills and adopt new practices for producing new internationally recognized styles, such as the younger, fruitier wines produced in Australia, California, and Chile.”

“The newly founded Moldova Wine Guild demonstrates the commitment of seven major Moldovan wineries to create a category of high-quality Moldovan wines that can compete internationally; and it is already putting Moldovan wine on the map.,” believes Griffiths.

The basic shift was from Soviet-style sweet wines to the dry reds acceptable to European palates. This was coupled with developing internationally appealing brands. DK-Intertrade’s Firebird Legend is now widely available across Eastern and Western Europe, with a UK listing. Acorex developed the “Taking root” brand.

According to Tcaci, 12% of the value of Moldovan wine exports in 2008 went to the EU, up 27% on 2007. Admittedly, almost 40% of this amount went to Poland. But the Moldovan wine guild is also aiming to break through to Western European markets. UK sales doubled from 2006 to 2007, albeit from a low base.

Moldovan wine is also gradually finding its ways back to Russia after the import restrictions were eased in late 2007. Sales to Russia grew by 50% in 2008. However, a strict new regulatory regime means additional expense, so that Moldovan wines have moved up a price category. Now they compete in the same price category as the Bulgarian, Argentinean and Chilean wines that replaced them on Russian shopshelves during the ban.

In addition, market research shows that Russian tastes are changing from Soviet to European, ie. from sweet to dry wines. So the virtues developed by the Moldovan wine guild members will be just as needed to regain their previous share of the Russian market as to crack Western markets.

Ukraine hopes for economic stimulus from gas transit system overhaul

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

The Russian-Ukraine gas dispute in January set alarm bells ringing about the condition of the Ukrainian gas transit system (GTS) that transports 80% of Russia’s gas to Europe. Its organizational and technological backwardness meant it wasn’t possible to verify the conflicting Russian and Ukrainian claims about gas flows through the system. Another point of contention was the amount of “technical gas” that Ukraine needed to pump gas through the system, due to outdated compressor stations.

And as if the January dispute wasn’t enough, in April a major Ukraine-Bulgaria gas pipeline exploded in Moldova, causing supplies to Bulgaria to fall by 70%. The pipeline, it transpired, was over 40 years old. One week later, on April 9, the same thing happened to a Soviet-era pipeline in Turkmenistan. This confirmed dire warnings by Ukrainian experts in 2008 that the former Soviet Union’s over 40-year-old GTS was already living on borrowed time. And that Ukraine, at the heart of the system, was most threatened.

So the EU-Ukraine declaration of March 23 that committed Ukraine to revamp its GTS in return for billions of EU and international investment was long overdue. “We have been aware of the potential need for investments to modernize the GTS and of its importance as an economic asset for Ukraine for some time,” Martin Raiser, head of the World Bank mission to Belarus, Ukraine and Moldova, and one of the signatories to the EU-Ukraine Declaration tells bne. “With rising gas import prices and the move to more transparent gas trading relations between Russia and Ukraine, there is now an opportunity to realize this potential.”

Engineering a boost

Soviet Ukraine was not only at the heart of the gas transport system. The main engineering companies building and equipping this system were also located in Ukraine, which is why Gazprom still sources approximately 75% of its engineering needs from Ukraine. This means that any investment in the modernization of the GTS could have knock-on effects for Ukraine’s crisis-stricken engineering industry.

“Ukrainian companies are standing ready to participate in the GTS modernization, including Sumy Machinery Plant, Motor Sich, Khartzysk Pipe Plant, and Novomoskovsk Pipe Plants,” says Alfa Capital Ukraine analyst Denis Shauruk. “If Ukrainian producers will supply the modernization project with domestic equipment, the economic impact from such modernisation may range from 0.5% to 3% of GDP contribution annually, depending on the amount of investment in any particular year.”

Ukraine’s master plan for the modernization of the GTS, incorporated in the EU-Ukraine declaration, envisages a first phase of modernizing the existing transport and storage infrastructure, requiring $3.5bn over seven years, before a second phase sees new pipelines being built. Half of the sum for the first phase would to go to new compressor stations, with the rest divided between improvement of pipelines, underground storage facilities, and gas measuring stations at entry and exit points. This first phase holds most promise for machinery producers such as Sumy Machinery Plant, Gazprom’s supplier of choice, and turbine manufacturer Motor Sich, which can supply high quality gas compressor stations and gas pumping aggregates.

Ukraine’s authorities have apparently been quick to seize on the beckoning opportunities for local manufacturers. Ukrainian media reported in early April that Ukraine’s Fuel and Energy Ministry had taken steps to prioritise local companies in awarding contracts. According to Kommersant Ukraine, immediately following the EU-Ukraine declaration, a memorandum was signed by the Fuel and Energy Ministry, Ukraine’s pipeline operator Ukrtransgaz, state gas planners Urkgazproect, the Ukrainian Oil and Gas Institute, and engineering companies Zorya-Mashproect and Sumy Machinery Plant. The memorandum ascertains that the Ukrainian companies are “capable of satisfying all the needs of Ukraine’s GTS,” says the newspaper, and that pipeline operator Ukrtransgaz has named them as its “most likely suppliers” due to their positive collaborative history to date.

However, Ukraine’s authorities might not find it that easy to channel GTS modernization orders to Ukrainian companies. The memorandum in fact contradicts the sixth point of the EU-Ukraine declaration, which specifies the observation by Ukrtransgas of “best practice international procurement rules,” ie. competitive international tenders. Raiser emphasizes that the World Bank, as well as the European Bank of Reconstruction and Development (EBRD) and the European Investment Bank (EIB), prescribe procurement rules ensuring competitive and open tendering of goods and services. But this need not be to the detriment of Ukrainian companies. “Our rules do allow for some preferences for domestic manufacturers, and our experience shows that Ukrainian suppliers can often win under competitive tenders, particularly in civil works,” says Raiser.

However, funds provided directly by the EU or national governments are likely to be tied to procurement sourced in those countries. “Ukrainian manufacturers can supply both high-quality pipe and compressor equipment, but the major share of any EU loan is likely to be spent on imports of goods and services from the EU. This is a normal condition of governmental loans,” believes Mikhail Korchemkin, director of East European Gas Analysis.

Germany and Japan, both of which have shown interest in financing the GTS modernisation, have advanced engineering companies specialized in the natural gas sector, namely Man Turbo and Mitsubishi respectively.

Moreover, Prime Minister Yulia Tymoshenko agreed on April 29 with her Russian counterpart Vladimir Putin that Russian companies will also be involved in the work, possibly in exchange for Russian funding. This means that Ukrainian engineering companies could find that their slice of the action is less than they initially hoped. “The impact of the GTS modernisation plan on the Ukrainian economy may differ, depending on the degree of participation of Ukrainian companies, in the modernization contracts,” says Alfa’s Shauruk. “If a consortium of international banks will provide financing for modernisation of GTS and these funds will be channelled to purchasing imported equipment, the impact on the Ukrainian economy will be short term and negligible.”

But World Bank’s Raiser points out that Ukraine’s GTS is a priceless asset in and of itself. “The benefit is not just the linkages that investment spending has on domestic producers, but also the maintenance of a critical asset, earning several billions of dollars in revenues a year,” he says.