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Where there is no law, but every man does what is right in his own eyes, there is the least of real liberty
Henry M. Robert

ECONOMY FOR THE WEEK 

25 May, 1999 - 00:00

Scared as a Scalded Cat
The new Russian Premier, Sergei Stepashin, noted last week that his Cabinet
is like a scared cat, jumping from one pressing problem to the next. His
Ukrainian counterpart, Valery Pustovoitenko, has on more than one occasion
demonstrated his desire to get out of his day to day troubles and work
on matters relating to the next decades. We all remember the numerous strategies
and programs noisily presented, he is unable to plan more than a month
or two ahead, and even such short-term projects require pressure to be
implemented.

About six months ago The Financial Times echoed sources close
to the IMF when it wrote for the first time that Western creditors will
also have to take part in financial rescue missions in Ukraine, in view
of the cataclysms following massive capital outflow from the developed
markets. With time such an approach to the financial lame ducks became
standard practice and the IMF spring session seriously discussed the possibility
of linking international aid to private credit investment, and the fund's
most radical donors demanded that aid be granted only in the presence of
private capital.

In early August last year, the Danish ING Bank N. V., wishing to help
Ukraine redeem its earlier liability toward the Japan's Namura Bank, gave
a loan in the form of government securities at 17.5% annual interest in
dollars, and placed its own derivative securities with Western investors.

In October 1998, the Ukrainian Finance Ministry, inspired by such effective
refinancing of an old debt, took advantage of the situation, restructuring
75% of payments under Chase Manhattan and Merrill Lynch loans, reinvesting
this money into 2-year eurobonds maturing in 2000 and 2001.

However, in May 1999, IMF officials began to discuss restructuring again,
urging the Finance Ministry to talk creditors into deferring maturation.
In other words, IMF is resolutely opposed to its loans being used to repay
debts to private creditors. The fund is also afraid that the credits will
not suffice and Kyiv will announce default on its foreign debt. It is necessary
to bear in mind Ukraine's extremely low reserves, so any investment the
creditors could make in strengthening Ukraine's position in terms of reserves
should be accepted with gratitude, stresses Henri Gesquer, senior IMF representative
to Ukraine.

The weekly Zerkalo nedeli (Mirror of the Week), referring to
a Cabinet resolution (perhaps a document marked "not for publication,"
a copy of which was received confidentially), writes that on May 8 the
government decided to restructure 80% payments under the ING Barings loan.
In pursuance thereof, the bank was officially approached about redeeming
20% of the obligations with cash, with the remaining 80% being reinvested
in 3-year eurobonds. According to Finance Minister Ihor Mitiukov, the bank
will ponder the proposal until May 28 (at the end of last week it was reported
to consider the proposal unacceptable). The reader should recall that the
obligations mature on June 9, meaning $155 million plus $27 million in
interest, On February 5, 1999, the Finance Ministry made a timely transfer
of $46.8 million to redeem the first coupon of additional internal government
bonds. The next payment peak falls on June: some $260 million payable on
account of servicing the external debt. NBU will have to pay IMF another
$170 million.

All told, Ukraine's foreign debt amounts to $12.4 billion (as of May
1). In 1998, it rose by $1.933 billion - from $9.555 to $11.483 billion
(Vitaly Lysovenko, head of the external debt management department, attributes
this increment to the ratification of Ukrainian-Russian Black Sea Navy
division accords and clearing Ukrainian debts to Russia, something the
Finance Ministry did not take into account previously). In addition, Presidential
Aide Valery Lytvytsky says that Ukraine is experiencing "dramatic" foreign
trade reductions, as commodity-service exports dropped by 24.7% in the
first quarter of 1999, compared to the same period last year. The red ink
amounted to UAH 426 million and direct foreign investment went down 51.4%
compared to the last quarter of 1998. The State Statistics Committee points
to a simultaneous increase in nonresident capital withdrawal. In January-March
1999, the outflow registered $66.1 million, compared to $47.8 million in
the last quarter and $39.8 million in the first quarter of 1998.

Probably overwhelmed by the downpour of financial data and statistics,
The Financial Times sagely warned its readers on May 19 that Ukraine
is again on the verge of default, since the government cannot afford to
pay its debts and the creditors refuse to defer payments any further. True,
it also quoted Mr. Lytvytsky as saying that things are not as bad as they
might seem. He believes that Ukraine will be able to come to terms with
ING, considering that the latter is interested in a long-term presence
in Ukraine.

Meanwhile, the Ukrainian leadership is not sitting on its hands. While
trying to talk some into accepting the proposed terms, President Kuchma
negotiate other terms with Merrill Lynch. According to Andriy Chirva, head
of the presidential press service, Merrill Lynch representatives declared
at a meeting that they are interested in cooperating with Ukraine, particularly
in terms of investing in telecommunications and electricity. It is possible
that the firm will discuss the possibility of refinancing the ING debt.

Another move to arrange for urgent foreign capital injections took place
on May 21-22 in Kyiv: the third session of the President's Foreign Investment
Consultative Council. For obvious reasons it cannot be regarded as an expression
of the top leadership's long-term interests. Here one should probably agree
with Roman Shpek who thinks that it was another publicity stunt meant to
demonstrate Ukraine's investment potential.

In fact, while ranking domestic bureaucrats see foreign investment as
something akin to the ambulance racing to the scene of a car wreck, Western
investors regard their presence in Ukraine as having definite strategic
value. Experts consider that the world investment market is entering a
crucial phase to form a worldwide oligopoly. In this case it will mean
simply dividing the investment market between the several largest groups
of investors. The first four have already been identified: Goldman Sachs,
Merrill Lynch, Solomon Smith, Barney, and Morgan Stanley Dean Witter controlling
10-13% of the market (incidentally, Credit Suisse First Boston is part
of the second and ING in the third echelon. Both are cooperating with the
Ukrainian government).

Thus, it cannot be ruled out that Ukraine's domestic defaults present
an opportunity for the giant investors to crowd out their rivals, even
if from a very potential market.

 

By Iryna KLYMENKO, The Day

 

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