Erste Bank Ukraine’s first bank to admit to double digit bad loans

Erste Bank has become the first of Ukraine’s banks to officially acknowledge that its bad loans are in the double digits, declaring 10% of the gross loan portfolio to be non-performing at the end of the second quarter. However, the bank claims the figure is actually well below the true market average, and more a sign of the bank’s strength than weakness.

“We do not do window dressing. Honesty is the best policy,” Jozef Sikela, the 42-year-old CEO of Erste Bank Ukraine, Austria’s Erste Bank subsidiary and 22nd largest bank in the country, tells bne in an interview. “The result is considerably healthier than the real market average.”

Sikela declines to provide a figure for the sector as a whole. National Bank of Ukraine (NBU) statistics hold that the level of non-performing loans (NPL) stood at 4.9% as of June 1, but the consensus is the real level is nearer 15-20%. Ukrainian banks have developed numerous ways of jiggering the NPL figures they publish – by extending or rolling over loans that are obviously non-performing – and thus avoiding mandatory requirements to create provisions for loan losses.

According to Sikela, Erste in fact ran a far more conservative lending strategy than most other Ukrainian banks, especially locally-owned banks. Sikela accuses Ukrainian-owned banks of inadequate risk management during the last few years’ lending splurge. “Ukrainian-owned banks were lending in a specifically flexible manner in comparison to international banking groups like Erste,” he says. “Our customers were complaining of how conservative our lending policy was one year ago, now they are entrusting their deposits to us.”

Sikela says Erste never entered the consumer loan market, and almost all its loans are collateralized with tangible assets. As such, he expects international banks like Erste – which constitute around 50% of the banking system – to dominate in post-crisis Ukraine, while local banks will wither away. “The system will remain loss-making for the time being, and only foreign-owned banks will be able to access the resources to continue functioning.”

Staying the course

Sikela’s comments indicate the bank will get the supports it needs from the parent group. Indeed, CEO of the parent Erste Bank Group, Andreas Treichl, told bne in Vienna following the release of the bank’s second-quarter results at the end of July that while Ukraine is not a core market for his institution, in the long term he sees huge potential in the country and so there are absolutely no plans to pull out.

However, the NBU sees things differently. Erste Bank Ukraine posted a €31.9m loss for the first half of 2009, partly due to increased provisions for NPLs. The NBU now views all loss-making banks with great suspicion, and on July 22 issued regulations placing significant restrictions on their activities. Among other things, the regulator prohibited loss-making banks from paying bonuses, growing intangible assets and providing unsecured loans, steps that Sikela decries. “There are different reasons for losses, and different capacities to cope with them. You cannot treat large international banks the same as small local institutions with minimal possibility to inject new equity.” Sikela says the measures effectively freeze his bank’s development, stymieing IT investment and bonus-motivated projects.

Another major headache is pending populist legislation aimed at “protecting” mortgage borrowers against repossession. Erste was a leader in mortgage lending in Ukraine, “traditionally regarded as one of the safest forms of lending if done properly,” says Sikela. Mortgages account for round half of Erste’s retail portfolio, which in turn is two-thirds of its total loan portfolio. If the legislation goes through, critics fear the measure will encourage even solvent borrowers to suspend payment. “You can’t explain something like this to international shareholders,” warns Sikela, who adds that he is “very surprised” the International Monetary Fund (IMF) has been silent on the issue.

At stake is the larger issue of whether the Ukrainian authorities will exploit foreign banks’ continued loyalty to Ukraine rather than reciprocate it. This could crucially tip the scales when parent banks decide on whether to continue to support subsidiaries or withdraw altogether from Ukraine, as Dutch bank ING has done with its retail operations.

A Moody’s Investors Service report published on July 31 highlights potential rating implications for Raiffeisen, Erste, Societe Generale, UniCredit and KBC due to their Central and Eastern European commitments. In particular, according to the report, the “Austrian banking system is most exposed as Eastern Europe accounts for nearly half of that country’s global bank claims.” The report points to a possible vicious circle arising where “deteriorating financial strength of East European subsidiaries has a negative spillover effect on their West European parents,” which in turn reduces parents’ capacity to support subsidiaries, forcing them to choose which country subsidiaries to support and which to drop.

A report published on August 13 by Kyiv investment bank Sokrat argues that parent banks will continue to support their Ukrainian subisidiaries due to the amount of money already invested, the strengthening position relative to local competitors, and image damage for the parent bank should a subsidiary get into trouble.

A crucial factor in the equation will be the hryvnia exchange rate. Erste is typical of Ukrainian banks in having 70-80% of its credit portfolio denominated in foreign exchange, so the ongoing devaluation of the hryvnia should cause NPLs to soar further. This means that in Ukraine a second wave of the crisis resulting from bad assets is widely expected in the autumn.

For his part, Sikela doesn’t expect any second wave. “The country is still buried under the first wave,” he argues. “There are two major factors. Firstly, there is the ongoing credit crunch, there is basically zero lending going on, so no liquidity even for survival. Secondly, borrowers have to make repayments from their working capital, and will be unable to pay suppliers and workers.”

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)

Raiffeisen Bank Aval deputy CEO calls for direct EU support for Ukraine

Graham Stack in Kyiv

With the Ukrainian economy in freefall, Austria’s Raiffeisen International, owner of Ukraine’s second-largest bank Raiffeisen Bank Aval, has taken the lead in calling for an EU support package for troubled Eastern European economies.

“If a country goes from an economic forecast of plus 7% to minus 5% in a short space of time, even if that country is not an official EU candidate, we think that a country the size and strategic position of Ukraine should get EU support to avoid a total collapse of the financial system, and consequently of the real economy,” argues Raiffeisen Bank Aval’s deputy CEO, Gerhard Boesch.

“It is Raiffeisen’s position that there should be action on a European basis to prevent such a collapse,” adds the Austrian. “The IMF package [for a $16.5bn standby loan agreed early November] is simply no longer enough to guarantee even relative stability, because the situation has changed so dramatically in the last three months.”

Head of Raiffeisen International, Herbert Stepic, has assembled a powerful lobbying group calling for EU support for Central and Eastern European countries – both EU and non-EU. As well as Raiffeisen, the group includes Italy’s UniCredit Group and Intesa Sanpaolo, Austria’s Erste Bank, Société Générale from France, Belgium’s KBC, German Bayern Landesbank, Sweden’s Swedbank and SEB, and EFG Eurobank from Greece. At the recent Davos Economic Forum, the financier George Soros also voiced his support for the initiative.

However, such arguments have been largely rejected in Brussels. The European Commission and the European Bank of Reconstruction and Development have acknowledged the extent of the crisis in the emerging markets of Europe, but said it’s the responsibility of the foreign parent banks themselves, backed by their national governments, to support their subsidiaries. However, Boesch counters that, “if a country like Ukraine can be stabilized, then it is in the interests of all Europe.”

According to Boesch, the loan exposure of Austrian banks, including Bank-Austria owned UniCredit, to the CEE region is around €180bn. “This is roughly two-thirds of Austrian GDP,” he points out. Countries at risk account for around 40% of the exposure, says Boesch, with Ukraine the most threatened.

Acknowledging such support is unlikely to be popular in the EU, Boesch points out that Western national bank bailouts have also been unpopular, but they have been seen as necessary. “The headline figure [of a support package] would look small compared to such national bank bailout packages. It’s simply a fact that the parent banks cannot increase our exposure to the region at the same time as all international investors pull back. These countries, especially Ukraine, might now face a real credit crunch beyond what we have seen.”

Parent trap

Boesch says that the parent banks are now feeling the pinch themselves. “There is no doubt that the situation for parent banks is not the same as it was. The parent banks are also affected by the crisis.”

“Raiffaisen Bank Aval was very successful in raising financing 2007-2008 – from the parent company, bonds and as syndicated loans. We raised a lot of capital, and most of these 80-90 investors are very reluctant to prolong. So we will need to pay back all of these loans.” Raiffeisen Bank Aval has to pay back a $500m syndicated loan in April, and $80m in June, and won’t disclose private transactions.

The parent bank has provided extensive support to date with over $600m cash in the fourth quarter of 2008, so that the actual recapitalization requirement calculated by the IMF is assessed as moderate by the bank. But the parent companies in general, says Boesch, cannot replace wholesale funding that isn’t rolled over. The resulting large capital outflow, as foreign currency loans are paid back, will pressure the currency, creating a vicious circle. Further depreciation will also worsen banks’ asset quality. “On balance, the pure numbers are not unmanageable,” says Boesch of Ukraine’s finances. Ukraine has low public sector debt and a low current account deficit. “But the situation has been exacerbated by the global situation and political crisis.”

Boesch makes no bones about the political mess that Ukraine is in, which has seen European enthusiasm after the Orange Revolution in the winter of 2004 turn to hand wringing. Specifically, he sees a lack of credible central bank independence as a factor in the chaotic devaluation of the hryvnia. European intervention, he argues, could help focus minds and overcome the political paralysis. “In the long term, an offer to Ukraine to become an EU candidate might be the preferable solution,” believes Boesch.

Deposits at risk

Besides further hryvnia depreciation, a ‘Negative’ outlook from Moody’s Investors Service on Ukrainian banks at the end of January identified hemorrhaging deposits as a second systemic risk. A rough total of UAH60bn, around a third of all deposits, have been withdrawn since October on deposits maturing. The situation would have been worse but for the National Bank of Ukraine imposing a moratorium on preterm withdrawal of deposits in October to stem a run on the banks. However, the IMF has called for this moratorium to be lifted, and influential chairman of the NBU advisory board, Petr Poroschenko, suggested February 1 that this could soon happen.

Boesch sees such a move as fraught with risks, despite the moratorium contradicting civil law. “Lifting the moratorium would be a risky test of the degree of nervousness among the population.” Raiffeisen Bank Aval, says Boesch, has always paid out 100% of deposits in any currency on any client requesting, and could benefit from a flight to quality, with pressure on Aval deposits easing in January relative to November-December.

“But we already see other Ukrainian banks unable to pay out deposits that have expired, or current account deposits. And many more banks give you $100 a day, so it takes 3 weeks to withdraw $2,000. In other banks you can see people queuing up,” he says. “If a lot of people decide to withdraw, a large number of banks are going to be in trouble. The price that would be paid then would be a rather big one.”

The management of distressed assets will be an important business line in 2009, says Boesch. Raiffeisen Aval put a brake on its loan book growth in the first half of 2008, while other banks were still steaming ahead. “We lost market share as a result, with credit growth of 17% against market growth of 35%,” says Boesch. But caution was rewarded when the currency collapsed.

Even so, Aval NPL figures amount to 2.7% at the end of 2008. “We are now seeing a deterioration in the ability of clients to service their debts. It’s easy to see that, if the currency falls by 60-70%, a lot of customers are going to be simply unable to pay 60-70% more at the same time that the economy is going into recession, people are seeing income decrease or losing their jobs.”

The bank has limited options. “Aggressive repossession would simply put huge pressure on asset prices,” says Boesch. Instead, the bank hopes to draw on its extensive branch network to work with customers in restructuring loans. Staff who previously issued credits are now busy restructuring them. However, the bank will still lay off 10% of its 17,000 strong workforce.

Boesch argues that one of the systemic flaws in the Ukrainian banking has been the population’s overwhelming preference for dollars over the local currency – simultaneously for both credits and deposits. “It’s actually an irrational position – the population has gone long on dollar deposits, and at the same time has a huge short position in dollar credits,” he points out. “It was basically an enormous carry trade, which is now just starting to unwind. The unwinding is going to take several years and be extremely painful.”

Poroshenko says moratorium on preterm deposit withdrawal could end

Chairman of the National Bank of Ukraine’s supervisory board, Petr Poroshenko, said yesterday on Ukrainian TV that the National Bank might lift the moratorium on preterm withdrawal of bank deposits imposted in October, according to newswires

Speaking on the zerkalo nedeli programme, Poroshenko said that the moratorium had not been effective, since it had not stopped the withdrawal of UAH 60bn (about 6bn euros) worth of deposits from banks.

The IMF, currently in town to decide whether conditionality has been met for the disbursement of a second loan tranche, has also advised that the moratorium be lifted, although it is not a condition for disbursement.

However, the lifting of the moratorium could be catastrophic for a number of banks, say analysts. “We believe that if the ban is lifted, the probability of term deposit runs will remain high,” write Rencap analysts.

Similarly, Royal Bank of Scotland analyst Timothy Ash, in Kiev last week to examine the situation on the ground, names deposit flight as the greatest current systemic risk. “The NBU still has close to US$30bn in FX reserves, but even this amount will not be sufficient if the existing run on bank deposits accelerates… On this latter note we heard different figures with one source suggesting stability over the past 4-6 weeks, and another very credible “official” source suggesting continued hefty flight (up to UAH60 billion lost from the end of November),” writes Ash.

Lifting the ban might encourage retail deposits to flow to the largest international banks, still regarded as a fairly safe bet. However, considering how alarmed Ukrainians are at the combination of economic crisis and political chaos, the chances are many will see ‘green’ and go for dollars as the safest option, leading to a further collapse of the hryvnia.

Many retail deposits have only a one year term, meaning that the effect of the moratorium in stemming deposit outflow is limited.

Belarusbank: Local hero to turn national champion

Graham Stack for business new europe

Belarusbank, the country’s state-owned no 1 commercial bank, sticks out like a steady rock amid the global storm. Deputy chairman Vladimir Novik tells bne how Belarusbank is flourishing despite the international crisis and increasing domestic competition.

The Belarus banking sector has attracted recent attention mostly due to high profile acquisitions by European institutions – with Austria’s Raiffeisen taking a controlling stake in Priorbank, and Germany’s Commerzbank looking set to buy Belinvestbank. But Vladimir Novik, deputy chairman of 100% state-owned Belarusbank, says he has no apprehensions about such competition. Belarusbank was, is and will remain Belarus’ biggest commercial bank.

“In 2007-2008, Belarusbank continued to hold leading positions in all spheres of the national banking system: The bank now accounts for 40% of the total assets of Belarusian banks, and holds 60% of total national private deposits,” he points out.

“The bank also accounts for 40% of loans to corporate clients and about 60% of retail business in Belarus. So as you can see,” says Novik, “the bank’s share of all basic banking activities is extremely high.”

Lender of first resort

Before the recent retail lending boom sweeping the region, Belarusbank’s main role was funding the industrial giants that powered the ‘Belarusian economic miracle’: GDP growth around 10% since 2003. 58% of its loan book still goes to corporate customers.

“The most impressive part, around 40%, of our clients belong to the oil and chemical industries,” says Novik. “We also deal with transport, mining, machine-building, telecommunications, pharmaceuticals, and food processing.”

Novik reels off a list of Belarusian household names, and potential future blue chips, who are its major clients. The list includes Belarusian Railway, Mozyr Oil Refinery, Belaruskali (potash mining and refining), Minsk Tractor Plant, Belshina (tire manufacturing), MAZ (heavy trucks), Polymir (chemical production), Belpochta (mail services), Beltelecom and Skidel and Gorodeya Sugar Refineries.

“Our top 50 corporate clients account for approximately 80% of our total resources from corporates. Most of them have annual sales of more than USD 1 billion,” he says.

Regarding retail, Belarus Bank originates from the Soviet savings bank system, and thus “inherited a solid clientele and a vast network of branches,” says Novik.

This network, he argues, gives the banks a huge advantage when it comes to attracting deposits.

“Alone since 31 December 2007 through 30 June 2008 retail deposits grew 16% to USD 3.6 bn. The bank is by far the largest retail operator in the country with roughly 60% of private client deposits.”

Ironically, this infrastructure inheritance from Soviet times has also helped the bank fund the retail credit and consunption boom of recent years.

Belarusbank now has more than 950,000 retail borrowers, and provides about two-third of all retail loans on the market. Retail loans grew by 47% in 2007 and 42% in 2006.

“Consumer loans are now the second largest product after housing loans in the retail portfolio with a 25.6% share. House purchase loans and car loans account for just above 14% each,” Novik says.

Rock steady amid the global storm

For the last three years the bank’s assets more than doubled: from $3,631m in 2005 to $9,807m in the first half of 2008. In June 2008, the share capital amounted to $770m. The bank boasts a capital adequacy ratio of 16.90% against a statutory minimum of 8%. Non-performing loans comprise a mere 0.78% of the total loans.

Customer deposits (corporate and individual) account for 79% of total funding. Funds of National Bank and other banks comprise 18%, while debt financing only comprises 3% of funds.

So while diversification of funding for banks across eastern Europe means increasing the share of deposits, for Belarusbank it means the opposite.

“Belarusbank’s lending still depends mainly on deposits attracted from the customers, but we are trying to diversify our funding structure to lower potential liquidity risks,” says Novik.

With Belarusbank funds comprising 41% of all national banking funds, it is no surprise that the cost of international financing is cheaper than for other Belarus borrowers.

In September 2007 the Bank attracted the largest syndicated loan, of $105m, ever issued to a Belarusian borrower.

“And we also had a Eurobond issue planned, but current market turmoil prevents us from accessing the international bonds market. We will make an attempt to issue Eurobonds next year,” says Novik.

Incredible as it may sound, given current global financial mayhem, “in spite of the current financial crisis and lack of liquidity we are quite optimistic about a possible IPO.”

However, underscoring what a pioneering move this would be in Belarus, Novik says it is not just international market conditions, but also the need for domestic legislative amendments that are the main current hitch.

“Currently we have draft proposals of potential IPO arrangers from the leading financial institutions of the world,” Novik adds. “Belarusbank analysts are researching the market in order to identify windows of opportunity for an IPO. The bank will finish all pre-IPO formalities in 2009-2010 – but the final decision will, indeed, depend on the health of the market.”

Belgazprombank: A bank for Belarus’ budding private sector

Graham Stack for business new europe
Interview with Sergei Shaban, deputy chairman of Belgazprombank

Q: How did it come about that Belgazprombank – whose two main shareholders are Russian state-owned giants Gazprombank (48.1%) and Gazprom (48.1%) – has its main focus on private small and midsize enterprises?

A: The Bank was founded in 1990 under another name and bought by Gazprom in 1997. But in those seven years, we had decided on this strategy of targeting small and medium enterprises. When Gazprom acquired us, it set Belgazprombank the task of handling gas payments beween Belarus and Russia. But we made sure we retained the SME business line. In two years, we had unraveled the gas payments, and settled the indebtedness of the Belarusian structures to Gazprom, and were finished with the main task. Then we focused again on our work with SMEs”

Q: So what does your loan book look like?

A: 99% of our credits go to private business. We have a 10-25% market share of SMEs in Belarus, and two thirds of the market for microcredits from $1000-10,000, where we have a partnership with the European Bank for Reconstruction and Development (EBRD). And in retail, 30% of the car loan market, which is 52% of our retail loans.

We credit businesses across all sectors. Import operations for retail, however, are declining in significance. Our client basis has outgrown that stage, which makes us very happy. Only 23% of our loan portfolio goes to trade now, with 18% going to construction and real estate, and 14% to manufacturing. 42% goes to private individuals. We are proud to have credited construction of the first modern logistic centres in Belarus, and the Vitebsk Condensed Gas Plant.

Q: Is the SME segment not very restricted in Belarus, where government policy has traditionally focused on state-owned large industry?

It is true that small and medium business is still only a niche in Belarus, but, thanks to the new investment climate created by the government, we expect it to grow very rapidly.

We’re very happy about government reforms, especially the state programme for support of small and medium sized towns with less than 50,000. They have created a whole series of special conditions ranging from tax rebates to lifting price controls. Food producers have a big future here.

But we’re also proud to have financed larger projects such as Belarus’ first state of the art logistics centre and the Vitebsk Plant for Condensed Gas.

Q: How does it help to have such powerful backers as Gazprombank and Gazprom?

A: It of course makes a fundamental difference, especially in times of financial crisis. Gazprombank and Gazprom took the decision in April this year to increase shareholders’ equity from $45m to $195m over two years. After disbursal of the first tranche, shareholders’ equity has risen to $120m, making Belgazprombank third largest in the country in terms of shareholder equity. As a result of this expansion, Belgazprombank can now issue credits of up to $30m.

Q: Is there demand for such credits?

A: No, there’s no demand for $30m credits. Not yet anyway. The previous maximum credit we could give was $10m, so our customer base is oriented towards that size of crediting – around $5-7m. Now we have three times the potential, we still have to create a new client base to match the new possibilities.

Of course, such clients will not be from import operations, but from construction and production – such as financing the Vitebsk Plant for Condensed Gas. And there are a lot of large real estate projects.

Q: How will privatization affect your client base?

A: The largest Belarus companies are going to stay under state control for the foreseeable future. But midsize companies will more and more shift to private hands. And this creates chances for us.

By the way, the start of the privatization drive was marked by Gazprom’s purchase of Belarusian pipeline operator Belgaztrans, another of our shareholders. When this deal was completed, and nothing terrible happened, the state realized it had nothing to fear from privatization”

Q: Does Russia use the gas price issue to persuade Belarus to open its economy to investors?

A: Yes of course, it is definitely a lever of influence. I believe Russia has understood that it is more effective to use economic levers than political ones. If Russia raises prices gradually, giving Belarus the chance to adapt economically while becoming more open to Russian investment, then it is profitable for both sides.

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

Financial crisis causes assets to change hands

Graham Stack for business new europe (www.businessneweurope.eu)
State-owned VEB, also known as the Development Bank, agreed to buy a 98% stake in top thirty private bank Sviaz Bank, which failed to meet obligations last week. This was the first government bail out of a major private bank since the stock market sell off and liquidity crunch last week.

Sviaz Bank, although a private bank, is involved in distribution of pension money, making it too important to be allowed to fail.

“Svyaz Bank bears a large social responsibility for transferring money for the payment of pensions and social benefits … across the entire country,” a Sviaz Bank statement said yesterday.

Sviaz Bank is closely connected with state company Russian Post that distributes pensions through its vast network of post offices.

Sviaz Bank CEO since autumn 2007 is Alla Alyoshkina. Alyoshkina held a senior position in Russia’s largest bank Sberbank until Sberbank management was changed last autumn.

Alyoshkina is seen as very close to Andrei Kazmin, former Sberbank CEO until the management change last year. Media reports allege she is his common law wife.

Kazmin was reshuffled from head of CEO to head of Russian Post, and Alyoshkina move to head Sviaz Bank was obviously connected with his move to the post office.

As of August, Svyaz Bank held 60 percent of its assets in Russian equitiesand found itself unable to answer margin calls from its creditors last week.

Investment bank KIT Finance found itself in a similar position last week, and sold out to Leader asset management company, a Gazprom affiliate.

And on Monday September 22, Russian investment banking was shocked by the news that metals oligarch Mikhail Prokhorov had agreed to buy a 50% stake in top investment bank Renaissance Capital for only $500m.

Despite the deal, Fitch Ratings downgraded RenCap’s individual rating to D from C/D and the outlook for its default rating to negative from stable yesterday September 23. Standard & Poor’s placed Renaissance’s long-term rating on credit watch for a downgrade, citing liquidity concerns.

On Monday September 22 rumours were also swirling that Sberbank was in talks to take a stake in Renaissance’s arch rival investment bank Troika Dialog. Later in the week, Sberbank denied it was considering acquiring Troika.

IN other banking sector ownership changes, Rossiisky Promyshlenny Bank, or Rosprombank, has been sold to a foreign investor, a banking source told Prime-Tass Tuesday, September 23.

Also, Ivan Tyryshkin, the former CEO of Russian investment bank Aton Capital, has bought Russia’s Pioglobal Asset Management, according to Prime Tass.

Pioglobal Asset Management was owned by its CEO Yevgeny Kogan and Russian tycoon Alexander Gaidamak, according to business daily Kommersant. Kogan and Gaidamak also own investment bank Antanta Capital.

The deal comes in the wake of severe losses incurred by Pioglobal Asset Management as a result of the recent stock market meltdown, Kommersant reported.

Finally, Deutsche Bank, which took over United Financial Group from former Finance Minister Boris Fyodorov in the period from 2004 to 2006, has recently concluded a deal to buy another of Fyodorov’s assets, UFG Asset Management, according to Kommersant.

Russian state banks make headway in Ukraine

Graham Stack for business new europe

In his first policy speech as a presidential candidate back in February, Dmitry Medvedev called on Russian companies to expand abroad via foreign acquisitions. Russia’s leading banks have followed the president’s orders to the letter.

Since taking over at the helm of Russia’s biggest bank Sberbank in November last year, German Gref has launched a new expansion strategy and the first port of call was Ukraine. True to his word, within two months of his appointment Sberbank had acquired a Ukrainian subsidiary, the smallish Kyiv-based NRB.

In March, Gref explained his strategy for NRB: to inject $150m into NRB capital in the short term, an 11-fold increase, and $400m over the longer term, thus lifting NRB into the country’s top-10 list of banks within three years. Gref said the number of branches would surge 10-fold by 2010 from the current 25 to 250. Implementation of the bank’s new strategy took its first big step in August with a full-scale rebranding of the bank from NRB to its new name Sberbank Rossii – making no bones about whose bank it is.

Although this was a pioneering strategy for Sberbank, it was merely following in the fresh footprints of Russia’s second largest bank, state-owned VTB.

In the first half of 2007, VTB acquired two Ukrainian banks and merged them in the second half. “After a period of rapid growth, VTB is [Kyiv stock exchange] listed and shot up to become Ukraine’s 11th biggest bank,” says Millennium Capital’s Viktoriya Bezverkha. “In the first seven months of 2008, VTB Ukraine’s assets have grown 60% compared to 20% for the industry, mainly due to extremely rapid retail expansion.” VTB has set its sights on being one of the top-three banks within two or three years, an aim that Bezverkha finds “very plausible.”

With much of the Ukrainian banking sector overly reliant on wholesale funding from abroad to fund its business growth, having a large parent bank like VTB or Sberbank lends a considerable competitive advantage. Most analysts believe Russian state banks, with their huge assets, stand to gain relative to their private competitors as the credit crunch dries up access to cheap foreign funds, which in turn will boost the competitive position of their subsidiaries in Ukraine.