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BSEF 2013 invest/crimea Aleksey_Golubovich

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  • 1. UKRAINE – EU INTEGRATION: NEW DRIVER OF ECONOMIC GROWTH (by Global Vision Advisory Services and One Baltic Group) October 2013
  • 2. Ukraine-EU Association Agreement economic consequences in brief Ukraine and the EU are going to ratify an Association Agreement. The consequences of this step for Ukrainian economy will be the following:  Positive influence on Financial Account and domestic Lending To intensify capital inflows Ukraine needs deep, but quick reforms in banking sector and financial markets liberalization (esp. for European banks).  Longer-term positive effect on Foreign Direct Investments To attract strategic investors Ukraine needs to reform the court system to restore investors trust to the Courts and to local authorities. Investor’s protection is the key issue to rise foreign capital at rapid pace and repeat the success of Poland in early 1990s.  Negative impact on Ukraine’s Trade Balance in the first 1-3 years after ratification (depending of the Russian trade policy) To minimize trade balance deterioration Ukraine needs currency devaluation, improvements in standards of goods quality and detailed plan for integration with the EU. 2
  • 3. Higher risks of Ukraine’s economy are mainly overstated There are a lot of speculations in press regarding higher risks of Ukrainian economy these days. But the fears are predominantly overstated:  Sovereign default Association Agreement with the EU will significantly raise chances for Ukraine’s government to receive stabilization loans from IMF and reopen external capital markets for Ukrainian debtors.  Currency devaluation Current exchange rate policy (peg to US dollar) is unjustified by economic reasons. Hryvnia devaluation will be positive for Ukrainian economy due to trade balance improvement and increase of Ukrainian producers competitiveness.  Collapse of trade with Russia Recent Russia-Ukraine trade relations worsening is caused by political, not economic reasons. So the full-scale trade war is not very likely and won’t last for long even if it begins. 3
  • 4. Association Agreement with the EU will reopen external capital markets for Ukrainian banks and unfreeze domestic banking lending  Association Agreement with the EU will create the necessary condition for Ukraine to receive significant ($15-25 bn for several years) stabilization loans from IMF and EU financial institutions.  Stabilization loans will restore investors confidence in Ukraine’s government as well as in Ukrainian banking system credibility and reopen external capital markets for Ukrainian borrowers in private sector.  Association Agreement with the EU will also encourage European financial institutions to invest in Ukrainian branches and to buy local banks. It’s the only way to ease lending terms for local borrowers.  Lower capital costs and easier lending terms are needed to increase capital inflows from the EU to Ukraine (primarily in form of loans). That will improve Ukraine’s Balance of Payments, unfreeze domestic banking lending and become the main driver of economic growth in the forthcoming years. 4
  • 5. Ukrainian banks lost $17.3 bn of foreign capital since mid’2008. Financial capital from the EU are required to restore it. Cumulative capital inflows to banks and non-financial sector since 2000, $ mln 50000 40000 $17.3 bn outflow from Ukraine banks Cumulative inflows to Non-financial sector Cumulative inflows to Banks 30000 20000 10000 0 2000-Q1 2001-Q1 2002-Q1 2003-Q1 2004-Q1 2005-Q1 2006-Q1 2007-Q1 2008-Q1 2009-Q1 2010-Q1 2011-Q1 2012-Q1 2013-Q1 -10000 Source: National Bank of Ukraine, Arbat Capital 5
  • 6. After 2008 Ukrainian banks lost their ability of healthy credit expansion Ukraine domestic banking lending, $ mln 140 120 100 Pre-crisis rapid expansion 70-80% p.a. Post-crisis "new normal" 0-10% p.a. 80 Households 100 60 Non-financial corporations Financial corporations 80 Government 40 Banking lending 12-months growth rate, % (r.h.s.) 60 20 40 0 20 -20 0 Jan-06 -40 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Source: National Bank of Ukraine, Arbat Capital 6
  • 7. Ukraine’s economic growth became very sensitive to capital flows. Lack of funding in 2011-2013 is the main reason of today’s crisis. Ukraine capital inflows/outflows, $ mln 8000 20 6000 15 10 4000 5 2000 0 0 2000-Q1 2001-Q1 2002-Q1 2003-Q1 2004-Q1 2005-Q1 2006-Q1 2007-Q1 2008-Q1 2009-Q1 2010-Q1 2011-Q1 2012-Q1 2013-Q1-5 -2000 -10 Non-financial sector -4000 Banks -15 Government Real GDP growth, % yoy (r.h.s.) -6000 -20 -8000 -25 Source: National Bank of Ukraine, Arbat Capital 7
  • 8. Association Agreement with the EU will increase foreign direct investments to Ukraine, but mostly in longer-term  More than 40% of current foreign direct investments to Ukraine are made by Ukrainian investors through European entities (mainly Cyprus)  Weak macroeconomic picture, poor legal system, severe corruption and rumors about forthcoming state default are main obstacles that withhold foreign investors from investing to Ukraine  Association Agreement with the EU can improve only economic aspects of Ukraine’s investment climate, that is not enough. Further reforms are required to strengthen investors confidence and boost foreign direct investments  Nevertheless, closer Ukraine and the EU economic integration after Agreement ratification should result in modest foreign capital inflows from main Ukraine’s trade partners (Italy, Germany, Poland) 8
  • 9. Foreign direct investments grew almost tenfold over last ten years. 2011-2013 stagnation is a result of weak banks and lack of confidence. Foreign direct investments to Ukraine in 2002-2013 60 Foreign Direct Investments, mln. USD 50 40 30 20 10 0 Source: State statistics services of Ukraine, Arbat Capital 9
  • 10. Cyprus, Germany and Netherlands are accounted for 2/3 of total Foreign Direct Investments from the EU to Ukraine Main EU contributors of foreign direct investments to Ukraine* 2.1% 2.4% 1.3% 1.6% 1.1% 2.9% Cyprus 3.7% 40.2% 4.1% Germany Netherlands Austria 6.0% United Kingdom France 7.9% Sweden Italy Poland Hungary Luxembourg 12.0% Greece 14.7% * % of total foreign direct investments from EU to Ukraine Other EU states Source: State statistics services of Ukraine, Arbat Capital 10
  • 11. Financial services, real estate, trade and production of metals consumed nearly 70% of cumulated FDI from the EU to Ukraine Industrial structure of foreign direct investments from the EU to Ukraine* Financial 1.7% 2.6% 2.1% Real estate 3.0% 1.8% 1.6% 29.6% Production of metals and metal products Trade 3.4% Transport and communication 3.6% 4.8% Food industry Chemical industry Production and distribution of electricity, gas and water Mining 5.7% 10.1% Production of other mineral products 16.1% Engineering Construction 13.9% Agriculture Others * % of total foreign direct investments from EU to Ukraine Source: State statistics services of Ukraine, Arbat Capital 11
  • 12. Nearly 70% of total FDI to Ukraine are made only in three regions: City of Kyiv, Dnipropetrovsk oblast and Donetsk oblast Regional structure of foreign direct investments from the EU to Ukraine* City of Kyiv 10.6% Dnipropetrovsk oblast 1.9% 2.0% 2.7% 3.0% 3.0% Donetsk oblast Kharkiv oblast 47.7% Kyiv oblast Lviv oblast 3.4% Odesa oblast 4.0% Autonomous Republic of Crimea Zaporizhya oblast 5.9% Poltava oblast 15.9% * % of total foreign direct investments from EU to Ukraine Other regions Source: State statistics services of Ukraine, Arbat Capital 12
  • 13. Association Agreement with the EU may have negative impact on Ukraine’s trade balance. What is the right strategy to minimize it?  Association Agreement with the EU means no import tariffs for Ukrainian manufactured goods (including metals) and higher quotes for Ukrainian agriculture products in Europe that will boost Ukraine-EU export  The same time the Agreement implies no import tariffs for EU manufactured goods in Ukraine that will result in Ukraine-EU import rise and hurt seriously domestic producers in a number of industries  The positive effect of the Agreement for Ukraine’s trade balance is at risk, as export increase will be negated by import growth  Moreover, conventions with the EU carries significant risk of trade relations with Russia worsening, while CIS is a #1 export market for Ukrainian producers WINNING STRATEGY: To motivate moving of production facilities to Ukraine from the EU countries and Russia. 13
  • 14. However Ukraine’s trade balance deterioration won’t be terrible, esp. if Ukraine has a plan of devaluation  Russia will decrease import of Ukrainian agricultural products and foodstuff, but not very significantly. In case of economic stagnation in Russia, the population will boost demand for relatively cheap Ukrainian food products. So a new trade agreement between Russia and Ukraine is a matter of time.  Russia will continue to import machines & equipments from Ukraine due to well-established processing chains (e.g. aircraft or nuclear power industry). This will keep roughly $7 bn of Ukrainian export to Russia unchanged.  Coming 2014 year will be a real challenge for Ukraine as GDP will decline and Ukrainian Hryvnia will be devalued with high probability to defend local producers and local markets. 14
  • 15. Europe is accounted for 25-30% of Ukraine export and 30-40% of Ukraine import. Russia takes 35-40% and 40-45% respectively. Ukraine goods export / import structure 100 25.9 26.9 27.0 25.3 27.6 33.9 36.4 38.3 36.8 35.9 35.0 40.2 36.6 34.8 37.9 36.5 25.1 20.9 23.1 22.2 26.8 28.9 39.2 43.3 44.0 45.0 40.7 34.0 EXPORT, % 36.0 31.8 32.9 30.0 29.5 26.2 31.3 33.0 37.8 35.6 34.1 37.8 36.9 34.1 32.2 14.5 80 14.2 17.8 17.9 19.8 47.1 44.8 42.2 39.7 60 26.2 40 20 IMPORT, % 0 20 40 50.0 51.3 60 80 35.5 34.5 35.1 37.3 38.0 35.6 35.7 32.9 32.8 32.5 37.2 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Jan-Jun'13 100 Europe CIS Other regions Source: State statistics services of Ukraine, Arbat Capital 15
  • 16. Ukraine exports to the EU two main groups of goods: 1) base metals & mineral raw materials and 2) agricultural products & foodstuffs Geographical pattern of Ukraine's export to the EU 13.5% 16.2% 3.3% 3.3% 3.4% 15.2% 3.4% 3.9% 5.1% 10.5% 5.8% 6.7% 9.9% Italy Poland Hungary Germany Spain Netherlands Czech Republic France Romania Bulgaria Austria United Kingdom Other EU states Source: State Statistics Service of Ukraine, Arbat Capital Commodity pattern of Ukraine's export to the EU 4.7% 2.5%1.4% 4.0% 6.0% 9.6% 11.1% 13.7% Base metals and metal products Agricultural products Mineral raw materials Machines & Equipments Foodstuffs Chemicals Light industry products Wood & paper products 19.3% Other industrial products Transport vehicles 16 Source: State Statistics Service of Ukraine, Arbat Capital 27.9%
  • 17. Ukraine imports from the EU mostly engineering products (machines, equipments, transport vehicles) and chemicals products Main EU importers of Ukraine's goods 13.0% 25.8% 2.5% 2.7% 2.9% 3.2% 3.4% 3.7% 14.6% 3.9% 4.2% 5.1% 7.2% 7.7% Germany Poland Italy France Hungary United Kingdom Netherlands Czech Republic Switzerland Spain Lithuania Austria Romania Other EU states Source: State Statistics Service of Ukraine, Arbat Capital Commodity pattern of Ukraine's import from the EU 5.4% 3.2% 5.6% Chemicals Machines & Equipments Transport vehicles Agricultural products Mineral raw materials Other industrial products Base metals and metal products Wood & paper products 19.6% Foodstuffs Light industry products 17 Source: State Statistics Service of Ukraine, Arbat Capital 26.3% 5.8% 6.8% 8.1% 8.3% 11.0%
  • 18. Contacts One Baltic Group Limited Global Vision Advisory Services Ltd GVAS, Room 207 Mortlake Business Centre 20 Mortlake High Street London SW14 8JN UK 18

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