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Kuchma: his heavy hand over state |
With Russia, Hungary, Poland and other transition economies offering ever-decreasing yields, investors are snapping up any emerging-market new issue that offers decent spreads. That means they should favour the new issue planned by Ukraine, for $600 million, which the country plans to bring to the bond markets this quarter.
After all, Ukraine had a very good year financially in 2002. Its $2.5 billion of Eurobonds returned 20% – one of the best sovereign performances in the world. Its finances continued the strong rebound of the past few years – with GDP growth at around 4%. This may be a dip from the 9% growth of 2001 but is still a substantial improvement on 1994’s terrible negative 23%. Inflation has plummeted, thanks to some canny work on the part of the central bank, and both the trade balance and the current account balance are healthily in the black. International reserves grew by 33% last year, to $4 billion.
Yet when Ukraine did a $250 million tap issue in December 2002, lead managed by CSFB, Parex Bank and DrKW, it wasn’t a huge success, pricing at a discount to outstanding bonds. Parex Bank’s Dainis Barups, managing director of capital markets at Parex, admits: “The Ukraine struggled a bit.”
The reasons might be investors’ suspicion of the name – after all, Ukraine restructured its debt in 1998. Some investors see it as an opportunist borrower without investors’ long-term interests at heart. That perception was not entirely dispelled when the country abruptly returned to market in mid-December to capitalize on a sudden improvement in market conditions with a further unannounced $150 million offer. According to one source, this was planned and executed in an hour.
But above all, the problem is political. Ukraine had as bad a year politically as it had a good one financially. Every other eastern European country was welcomed with pomp and ceremony at the Nato summit – a fact that gave a big lift to the bonds of all of them. Ukraine was pointedly not invited, and when its president, Leonid Kuchma, gatecrashed the do, he was given the cold shoulder by the US delegation. Behind this snub was the allegation that Kuchma’s government had sold radar equipment to Iraq, in contravention of the UN embargo.
That was just the latest in a long series of scandals to beleaguer Kuchma’s presidency, the most virulent of which regards the mysterious disappearance of Heorhii Gongadze, editor of the Ukrayinska Pravda newspaper, two years ago. A decapitated body found outside Kiev is thought to be his. His death has been linked to elements in Kuchma’s regime – an allegation the president denies. However, the editor’s death continues to inspire large demonstrations in Kiev, the latest of which was in September 2002.
Kuchma, in a bid to hang on to power after a weak performance in the March 2001 parliamentary elections, has been pressing state officials to declare their allegiance. This led him to fire the central bank governor, Volodyr Stelmakh, in December 2002 and replace him with a political ally, Serhiy Tyhypko. This could delay further structural reforms.
In November, he fired prime minister Anatoly Kinakh and the entire cabinet, having only appointed them to the job in April 2001. This, the eighth change of prime minister under Kuchma, prompted Standard & Poor’s to change its outlook on the country to negative. Lead manager Parex also said it was one of the reasons the tap issue struggled somewhat.
And finally, in mid-December, the Financial Action Task Force, the global anti-money-laundering body, identified Ukraine as a non-cooperative country, which prompted some countries – the US included – to pass measures whereby any company doing business in Ukraine has to report to its domestic country’s authorities.
All these blunders and allegations of corruption have translated into great popular resentment against Kuchma – 72% of Ukrainians want him to resign, according to a poll last year, and 52% want him to be impeached. The population does not feel safe under his regime – 91% thought human rights infringements were common. And this translates into an atmosphere of pessimism, rather than the optimism one would expect with such an improving economic climate – only 12% of Ukrainians expect the economy to continue to improve.
Given this political environment, it is perhaps a good result that Ukraine managed to bring a bond deal to market at all, let alone an increased deal.
Indications of prudence
The new issue should have some things in its favour that the tap issue lacked. First, the government moved quickly to pass money-laundering laws to appease the Financial Action Task Force, which is reviewing its stance towards Ukraine in February 2003. Secondly, the 2003 budget, passed in December – described by a source at the finance ministry as “the most realistic budget in the Ukraine’s history” – has been welcomed by investors as another indication of Ukraine’s fiscal prudence.
Thirdly, Kuchma is leaving office in 2004. As one banker says: “Investors are looking forward to 2004, and a change in direction.” Many in western markets are hoping the pro-western, pro-market reformist Viktor Yushchenko will win the election.
Both the US and Russia, which have waged a quiet war of influence over Ukraine for the past 13 years, are plunging into the election battle, while heartily accusing the other side of meddling in another country’s affairs. The two countries have accused each other of setting up think-tanks to peddle propaganda – for the US, in favour of Viktor Yushchenko; for Russia, in favour of Kuchma. The Ukrainian president has also enlisted the help of Putin’s spin-doctor, Gleb Pavlovsky, to improve his image in the run-up to the 2004 elections.
The continued jostling for influence is one reason why relations between the US and Ukraine aren’t even worse than they are. Ukraine, after all, has a large stockpile of weapons and thus remains of strategic importance. One banker says: “Investors are taking the view that the US is not going to cut off ties, despite aggravation over such issues as money laundering and radar sales to Iraq. It’s not the right strategy to take.”
The US administration’s continued support for Ukraine is underlined by Josh Braverman, a debt adviser to Ukraine from the US Treasury. “Ukraine is a very interesting story,” he says. “The authorities recognize they need a more efficient, liquid source of financing, so they are in the process of building the yield curve.” This public support is likely to warm investors to Ukraine’s new issue.
But investors that are hoping the pro-western, pro-market faction will ultimately win in Ukraine and that it will even eventually become an EU convergence story may be disappointed. Yushchenko, the lonely reformist figure in the Ukrainian political scene, has rarely looked less powerful than he does now, and Ukraine has rarely looked more pro-Russia than at present. Indeed, Putin is, at the time of writing, in Kiev, celebrating the Year of Russia in the Ukraine with Kuchma. Closer ties to Russia, say Ukrainian analysts, mean slower reforms, particularly in human rights.
Russia is likely to support any measures Kuchma introduces to hang on to power – even if that means sacking all political appointees opposed to him. Taras Kuzio, a Ukrainian political analyst, says Kuchma may try to change the country’s constitution so the new president is elected by parliament rather than the people. This would let Kuchma put a groomed successor in power, so he can continue to exert influence from the sidelines.
Yushchenko, who has limped off to the US this month to try to rebuild trust, has warned that the country is in the first stages of a coup d’état. However, a banker who works closely with the Ukraine government says phlegmatically: “What we are seeing is stability. And investors like stability.”
