Rating Up, Investments Down

The JP Morgan Investment Bank has named Ukraine the most investment-friendly country of the year 2001. According to the bank’s experts, Ukraine managed to top the list by paying last year a 57.1% premium on total investments in its national economy, the BBC Ukrainian service quoted last Tuesday Time Magazine. Ukraine is followed in the list of the five most investment-friendly countries by Russia (55.8%), Nigeria (36.3%), Ecuador (30.5%), and Ivory Coast (29.5%). Trailing the list are Venezuela (5.6%), Uruguay (4.6%), Egypt (3.3%), the Dominican Republic (2.4%), and Argentina (-66.9%).

It has not been a rare occasion lately to give such a high appraisal of the Ukrainian economy. Last December, the Standard & Poor’s international rating agency assigned Ukraine a “B” long-term and short-term local and foreign currency sovereign credit rating. The agency’s December press release says the long-term credit outlook has been reaffirmed as “stable.”

This agency’s previous rating for Ukraine was “triple S,” a grade lower. The agency also points out that the ratings were raised because Ukraine has achieved fundamental progress in attaining macroeconomic and financial stability.

However, one must apparently take the still-more-frequent complimentary appraisals of Ukraine with a grain of salt. For example, commenting on assigning the “stable” forecast, Standard & Poor’s notes that this reflects the political instability and fragility of the ongoing political and economic reforms in Ukraine, as well as S&P expectations that the current political will to practice fiscal austerity will continue. S&P points out that what keeps Ukrainian ratings in check are serious problems in the political sphere, which is being reformed much too slowly. As a result, this country preserves a highly-centralized decision-making mechanism, while the democratic bases and political institutions of society are still in their infancy. An underdeveloped system of government and legal institutions, including inadequate control over the application of law, promotes further consolidation of influential vested interests and wide proliferation of political patronage and corruption, the document says. According to the agency, Ukraine still has a structurally-weak economy beset with the difficult problems caused by privatization in such politically-sensitive major sectors as the mining and heavy industries, as well as by restructuring and privatization in an inefficient energy sector.

In the opinion of Ukrainian experts, a higher investment rating is sure to make it easier for domestic companies to secure foreign credit. Simmultaneously, many of them point out that this will bring about no striking changes. For instance, according to Serhiy Budkin, a Bank Austria Kreditanstalt Ukrayina representative, the upgraded B rating “is unlikely to revitalize the Ukrainian stock market” because of its small size. “The market being small, there’s almost nothing to buy at it. So money will not come here,” he believes. Viktor Zinchenko, treasury chief at the First Ukrainian International Bank, in general positively appraising the assignment of an upgraded rating, still told Interfax-Ukraine that “we should not expect a sudden inflow of investment” into the Ukrainian economy.

Western experts also share the skepticism of their Ukrainian counterparts about the ratings this country was assigned. The New-York-based Lehman Brothers rating company, which had been studying stability in ten emergent-economy countries to determine the investment-risk Legsi index, noted reduced stability in Ukraine throughout last November.

They believe this was caused by social and political tension triggered by the attempts of Ukrainian authorities “to impose tough fiscal measures” and the resulting resistance.

Meanwhile, last year the Ukrainian authorities also came under the fire of foreign investors themselves. William Taylor, coordinator of US aid to the newly independent states, noted at the end of last November during a session of the Joint US-Ukrainian Committee for Economic Cooperation, “We have repeatedly raised the question of Ukraine flouting court rulings... Ukraine will be more attractive for American investments under conditions of economic growth,” Mr. Taylor emphasized.

Yevhen Palenka, financial manager of the Poltava Gas and Oil Company, a joint Ukrainian-British venture, told The Day, commenting on the investments situation, “A high rating of Ukraine’s investment attractiveness can be explained by the President’s and government’s activities aimed at industrial growth. However, the events concerning our company (attempts to get hold of our property, which triggered an international scandal and forced Ukraine’s ambassador to apologize to the British government) show that highly-placed public officials not only ignore these efforts but also deliberately undermine this country’s investment attractiveness.”

Although the aggregate statistics on foreign investments in Ukraine in 2001 are still to be published, the available information for the nine months of last year cause no euphoria. According to the State Statistics Committee, foreign investors contributed $529.4 million to the Ukrainian economy in January to September, down 10% from the same period of the previous year. At the same time, nonresidents withdrew $158.7 million, 36% up on the previous year’s figure.

COMMENT

Oleksandr NARBUT, president, Pulsar Company:

“As far as I understand, JP Morgan made its investment attractiveness ratings on the basis of the income foreign investors gained from Ukrainian eurobonds. Earlier last year, our eurobonds were quite low in price because they were being sold at a 30-40% discount and secured higher income, for Ukraine had paid the investors all the necessary interest and arrears. This fact, the ABCs of any investment process, just shows that Ukraine’s securities, rescheduled by the Yushchenko government, were, to put it mildly, of a not terribly high purchase price, which allowed Western investors to secure a wide profit margin in these operations. This also shows that Ukraine could at that time have rescheduled its securities at a lesser profit to foreign investors. The current rating is merely proof of this. All the other rated countries have also rescheduled their foreign debts, but they did it more wisely, ensuring lesser profitability. This finally shows that what is positive for the investor can be negative for the state which ensures such high profitability. As to industrial investors, no such statistics exist, because the sources of income having many channels are characterized not only by dividends but also by so-called transfer prices inside its affiliates, which makes it possible to gain a profit outside Ukraine.