Sevki ACUNER: There is constant interest in Ukraine

The following is an interview with Sevki ACUNER, EBRD Director for Ukraine.

Our president has signed a bill allowing international financial institutions, including the EBRD, to issue bonds in the national currency, UAH. What is the EBRD planning to do in this respect?

“This is a very important event. First, it will have an impact on the development of the local market that operates in local currency. Second, the president’s signature allows us to finance your business in local currency and this, in turn, will allow your businesses to avoid foreign exchange risks. However, a number of technical matters and procedures have to be resolved before the EBRD can start issuing UAH loans. Our Treasury in London is working on this and my predecessor Andre Kuusvek is monitoring the process at the main office.”

Will UAH loans start being issued before the end of 2013?

“I can’t give you the exact date as technicalities are being worked out with the Commission for Securities and Stock Market of Ukraine, with the Verkhovna Rada’s pertinent committee, and with partner banks. This takes time.”

UKRAINE’S IMAGE AS A DIFFICULT BUSINESS ENVIRONMENT MUST BE DESTROYED

How do you see Ukraine’s business environment in terms of foreign inland investment? What should be done to improve it?

“Ukraine has a far greater potential than meets the eye. This country can and must do more to improve its business environment and attract investments. The main thing is to improve this environment for domestic and foreign investors. Ukraine’s image as a difficult business environment for all market operators must be destroyed. You must solve the problem of corruption because this problem makes businessmen think twice before trying to do business in Ukraine. And, of course, your business environment must be predictable. This is uppermost on the potential investor’s mind. Predictability is a sure guarantee that investments will increase. There are several other aspects affecting investments, particularly the signing of the Association Agreement with the EU, further cooperation with the IMF, the status of public finances. All of these things add up to a single image, a holistic impression of Ukraine.”

How do you feel about Ukraine in the context of investments?

“It is necessary to improve the competitiveness of Ukrainian businesses, in terms of both cost effectiveness and energy efficiency. We are concerned about the low added value of primary industrial production. In order to be investment-attractive, Ukraine must diversify its production and switch from low to high added value exports. It is also important to phase out the traditional energy-intensive industries, concentrate on more technological ones, and use your huge manpower resources, considering that a large part of them remain unused. The agricultural sector must become your number-one industry. Of course, all this is possible only after carrying out structural reforms in the energy sector and infrastructure, after carrying out the tariff reform.

“Selective subsidies are the main obstacle on the road to competitiveness. This leads to an imbalance in the distribution of resources and eventually other industries suffer losses. If the central budget continues to subsidize energy sources, the economy will continue to cultivate a consumer rather than reformist approach. As it is, there are no stimuli for energy saving and for the development of competition. Government subsidies for certain sectors of the Ukrainian economy will lead it to a dead end and make it totally uncompetitive.”

Speaking at the forum “Government and Business: Partners,” you called on the government to do everything possible to make the regulatory authorities stop milking businesses. Which of the problems in Ukraine would you consider to be the greatest evil?

“Corruption and unfair competition are the biggest challenges for Ukraine today. Investors have to take commercial risks. This and the burden of corruption (a risk one cannot foresee) make the owner of free capital turn away from Ukraine. That’s what predictability is all about.”

What inferences would you draw from the six-month dynamics of EBRD loans issued in 2012-13, in regard to the business environment in Ukraine?

“Your economy is stagnating. The arithmetic values and the number of loans show that the first half of the year is not very significant. Major loan agreements are traditionally made in the third and fourth quarter of the year. Judging by the portfolio of potential projects, an increase in their number can be expected by the end of 2013, but the overall amount of loans will most likely be lower: between 800 and 900 million euros. The specificity of the EBRD’s performance is such that we may simply have no time left for signing larger projects before the end of the year, but we’ll do our best.”

Is the foreign investor showing a bigger or smaller interest in Ukraine?

“The interest in Ukraine is constant and will stay that way, because the investor is attracted to Ukraine’s large and diversified resources. The big question is how quickly this interest will turn into actual investments. Improving the business environment is a task to be fulfilled by the people who determine the Ukrainian policy and development strategy.”

Recently, a number of international media wrote that the financial situation in Ukraine will become unstable in the fall. What do you think?

“Let’s leave such precise estimates on the conscience of such analysts. Practice shows that often, if you keep saying that everything is bad and concentrate only on negative aspects, bad things really happen. This, of course, has a bad effect on the investor’s confidence.”

What would you tell a foreign investor when asked whether such media reports are true?

“We provide them with facts relating to the actual economic situation and warn them that there are financial risks, so they can decide on the next move.”

Do you think that Ukraine may fail to meet its financial obligations in the fall?

“Ukraine is facing financial challenges. There are a number of risks (decrease in gold reserves, general economic stagnation, lack of economic growth, difficult situation on foreign capital markets) that are not in favor of Ukraine. Will these negative forecasts be justified? Everything depends on how your government will act, whether it will help improve the financial health of Ukraine. How can this be accomplished? There is no simple formula, but there are general approaches. To keep the public finance system healthy, it is necessary to strengthen fiscal discipline, find a clear answer to the question of association with the EU, receive mandatory access to foreign capital markets and clarify the relationship with the IMF. Your economy must work by the market rules.”

EBRD STRATEGY IN UKRAINE WILL REMAIN UNCHANGED

A new CEO more often than not makes changes in the company policy. Will the EBRD strategy in Ukraine undergo any changes following your appointment? If so, how will it change?

“The strategy will remain unchanged, although some operational priorities will be updated. I believe it is important to pay more attention to the EBRD’s regional diversification, in terms of small and medium business, and the competitiveness of Ukrainian businesses. I would also like to stress the importance of developing the Ukrainian agricultural sector because it stimulates growth in the parallel sectors (processing, packaging, logistics, transportation).”

Which projects and in which sectors will remain in the center of the EBRD’s financial attention?

“Focus on loans will remain unchanged. We proceed from market demand. On the other hand, our Bank will continue to pay special attention to the development of stable power engineering. Why is this important? If Ukraine wants to be energy-independent, it has to develop alternative energy sources and promote energy saving. For this purpose, the EBRD practices grant funding that helps implement municipal projects.”

ENERGY HAS A STRONG POLITICAL COMPONENT, SO UKRAINE’S POLICY HAS TO BE WISE AND FARSIGHTED

The EBRD has repeatedly said it’s planning to take part in the upgrading of the Ukrainian Gas Transportation System. Will it do so?

“The EBRD does not intend to change its plans. A memorandum was signed in 2009. It has a plan for such funding, but first we must be sure that Ukraine will comply with the terms and conditions of this plan, then we will give you money for the upgrading of the GTS. There will be no money until we see actual progress in the implementation of reforms in the energy sector.”

What are the main obstacles?

“It is the commercialization and separation of the structure of Naftohaz Ukrainy, raising the tariffs to an economically viable level, and stopping large-scale housing subsidies.”

How about the additional clauses in that plan? Our sources say there are two of them: enactment of the Gas Networks Code and resumption of cooperation with the IMF, and that Ukraine must comply with them to get the money for the implementation of the Urengoy-Pomary-Uzhhorod pipeline project.

“There are no new clauses. All these clauses were in the original text.”

How can Ukraine become energy-independent?

“Ukraine isn’t the only energy-dependent country. I believe the problem of energy supplies should be regarded not in the context of increased supplies, but primarily in terms of energy efficiency for the entire economy. In other words, how energy-intensive this economy is, how resources are expended, how much is lost in transmission. If you look at this problem as a whole, it will be easier to solve it, you will find additional resources. That’s what happened in Turkey, Japan, and Germany.”

If and when Russia starts using bypass pipelines, will Ukraine and its networks remain interesting for Europe?

“Ukraine will remain an important transit partner for the EU unless global tectonic cataclysms occur and the map of the world changes. This doesn’t mean that you can sit twiddling your thumbs. Ukraine has to build a transparent system of use and management of its pipeline, so all can see who is the ultimate consumer, supplier, and transporter of gas. All gas relationships of Ukraine must be more transparent. Energy has a strong political component, so Ukraine’s energy policy has to be wise and farsighted.”

You believe that Europe wants to see Ukraine as a partner, but recently Slovakia, being a member of the EU, blocked reverse gas supplies to Ukraine.

“Such important decisions are made in Europe depending on long-term benefits. Short-term decisions aimed at satisfying the temporary needs of some of the participants [in the process] simply won’t work.

Europewill give reverse gas supplies the green light when it sees transparent arrangements with suppliers, transit countries, and consumers.”

AGRICULTURAL LOANS IN EBRD PORTFOLIO MAY INCREASE TO 300 MILLION EUROS

What role does the EBRD assign to loans for the Ukrainian agroindustrial complex?

“Your agricultural sector is showing a good growth rate. Every year EBRD loans here increase by more than 20 percent, amounting to some €200 million euros. This isn’t coincidental because Ukrainian agroindustrial complex is the driving force of your economic growth; it makes other industries show better progress. The agricultural loans in the EBRD portfolio may gradually increase to €300 million euros, but the main thing is market demand. This demand is increasing, especially on the part of processors of agricultural products. We are interested in financing the entire chain of production, from growing to retail.”

Previously, the EBRD actively financed big businesses in Ukraine. Recently, we heard that the Bank will focus on small and medium businesses. Why?

“We will give loans to various businesses, big and small alike. We haven’t financed small and medium business for several years because we couldn’t open UAH credit lines. After UAH bonds are issued, we expect to liven up this loan segment, although I wouldn’t say that the share of small and medium businesses in EBRD loans will be big. A large number of loans will be granted, but they won’t amount to much, because each such loan is small as a rule.

“Besides, the EBRD isn’t going to independently finance small businesses. This will be done by our partner banks and we’re in the process of selecting them. Which banks these will be remains to be seen, considering that there are few financial institutions with which the EBRD will collaborate. Most Ukrainian banks do not meet the EBRD requirements in terms of transparency, reputation, and current business practices. Today, finding reliable intermediary banks for lending to small and medium businesses is a big problem – and we need considerably more than one or two such banks.”

Is it true that the EBRD’s switching to lending to small and medium businesses is the result of high reputation risks involved in dealing with large Ukrainian companies, and that the Bank doesn’t want to take these risks?

“The EBRD is an organization that uses taxpayer money, so our principled stand is that we won’t deal with businesses owned by politicians or civil servants, even if covertly.”