Ukraine: As the orange era stalls...The banking revolution grows

THE DRAMATIC EVENTS of the winter of 2004, when hundreds of thousands of protesters packed the snow-covered streets of Ukraine’s cities to demand a change of government, helped to change the country’s destiny. Almost at a stroke Ukraine went from being viewed as a Russian puppet state to a wannabe member of the European Union. More than three years on since the so-called dream team of president Viktor Yushchenko and prime minister Yulia Tymoshenko first came to power, has it delivered on its promise of wholesale political and economic reform?

Among bankers and investors there is an almost universal belief that the Orange Revolution transformed the political perception of Ukraine for the better. "Before the Orange Revolution, Ukraine had slid into a hole," says Natalie Jaresko, managing partner of private equity firm Horizon Capital and a Kiev resident since the early 1990s. She adds that the country had been bedevilled by a variety of allegations including the claim that the state had sanctioned the murder of journalists and made illegal arms sales, all of which had helped to choke off foreign investor interest in the country. It’s a view shared by Dominique Menu, chief representative for BNP Paribas in Ukraine, who says: "Before the Orange Revolution Ukraine had a pretty shady reputation."

As a result, the country largely missed out on the investment boom that began in most of the rest of central and eastern Europe in 2000. "FDI in 2000-04 was negligible," says Jaresko, adding that the international media coverage of the Orange Revolution helped change investor perception of the country almost overnight. "In January 2005, the planes coming to Ukraine were suddenly full of investors coming to check out the investment opportunities." Jaresko says that in contrast to the recent violent political unrest in Armenia and Georgia, the fact that the Orange Revolution in Ukraine was essentially a bloodless one had an especially galvanizing effect on investors, who she says were impressed by the willingness of protesters to brave the freezing cold of a Ukrainian winter in pursuit of a peaceful transfer of power. "The economy may not have changed dramatically in the last few years, but the investment climate certainly has," she says.

The price of change

Jacques Mounier, president of Calyon Bank Ukraine, and another long-time Kiev resident, is also firmly convinced that the Orange Revolution had a transformational effect on Ukraine’s international image. "Through the Orange Revolution, Ukraine delinked itself from Russia," he says. "Ukraine is no longer seen as a Russian satellite and it no longer wants to be seen as such," adding that even if Ukraine’s integration into the EU might take 20 to 30 years, the perception of the country as a convergence play has been instrumental in attracting foreign direct investment over the past three years. Nicholas Piazza, a director at local investment bank Concorde Capital, is in no doubt that the Orange Revolution team has delivered on the promise to boost civic society and Ukraine’s democratic credentials. "The Orange Revolution has been good for the media in Ukraine, which is much freer than it is in Russia." But the shift to a true multi-party democracy, which clearly distinguishes Ukraine from Russia, has brought with it disadvantages as well as advantages. Piazza says that the increased political turmoil that the country has seen in recent years has stymied the pace of restructuring and ultimately poses a threat to Ukraine’s long-term economic development.

"The pace of capital market reforms, for example, has disappointed," says Piazza, adding: "Short term that hasn’t harmed our business, but in the long term we need stock market reform." Although the country boasts eight stock exchanges, the clear market leader, with about a 95% share of overall trading, is the PFTS bourse in Kiev, a state-owned operation, which has come in for fierce criticism in recent months for the poor performance of its electronic trading system.

"The PFTS’s trading system is a joke," says Michael Finko, head of fixed income and equity sales at Foyil Securities in Kiev. "The system can go down for hours at a time." Although PFTS management has announced a modernization and upgrade programme, there’s clear dissatisfaction with PFTS among the Ukrainian banking community and many would welcome foreign participation in the bourse. The two leading exchanges in the region, Vienna and Warsaw, are both seen as potential buyers or cooperation partners for the PFTS. Russia’s RTS exchange has been conducting negotiations with a number of the smaller Ukrainian exchanges with a view to establishing a serious rival to the PFTS.

Patchy record

In terms of economic management, bankers in Kiev say that the Orange revolutionaries have a mixed record. Mounier at Calyon says that while they may have been long on vision when in opposition, they have ultimately come up short on execution when in power. One concern is the growing divide between president Yushchenko and prime minister Tymoshenko. Having first come to power on a common platform, there are increasing signs that the pair are becoming political rivals rather than allies.

"The relationship between Tymoshenko and Yushchenko has soured," says Menu at BNP Paribas. "Both are clearly positioning themselves for the presidential elections in 2010 and there is likely to be a bumpy road ahead politically." Having spent much of 2006/07 out of power, Tymoshenko returned to the premiership in September 2007 on the back of an unashamedly populist economic platform, including big increases in minimum wage levels, and social security and pension payments. Jaresko at Horizon says: "Populist economic policies aren’t wrong in themselves, but they need to be backed up by other measures which aren’t getting passed." One prime concern is that privatizations earmarked for this year could get delayed by political disputes over what should and what should not be sold off.