360° Coverage : Eastern Promises: Ukrainian Angst, Russian Influence And Market...

1 Updates
Eastern Promises: Ukrainian Angst, Russian Influence And Market Reactions
Photo Credit: Forbes Business

Eastern Promises: Ukrainian Angst, Russian Influence And Market Reactions

Dec 23 2013, 4:47pm CST | by

On November 22nd of this year, Ukrainian President, Viktor Yanokovych, backed out of a financial cooperation and support agreement with the European Union. Since that time, large-scale protests in...

Filed under: news

 
 
 

35 weeks ago

Eastern Promises: Ukrainian Angst, Russian Influence And Market Reactions

Dec 23 2013, 4:47pm CST | by

On November 22nd of this year, Ukrainian President, Viktor Yanokovych, backed out of a financial cooperation and support agreement with the European Union. Since that time, large-scale protests in Ukraine’s capital city of Kiev have gained international attention as the country’s 46 million people publicly debate the state of their government and its relationships with Russia and the EU. On December 17th, a deal between Ukraine and Russia was signed giving financial support in the form of Russian purchases of $15 billion of Ukrainian government bonds and significant discounts on Russian natural gas. In essence, Ukraine is deciding which sphere of influence it will be beholden to in the near future – that of “Mother Russia” or a move away from Warsaw Pact times and into greater European dominance of Ukrainian domestic affairs. This has broad implications for Europe, markets, and for the idea of austerity.

The original negotiation between Ukraine and the EU was a way to deal with a sovereign debt problem and general economic malaise in Ukraine. Although Ukrainian debt to GDP ratios look to be reasonable, domestic growth is lacking, industrial and corporate development is non-existent, and wages have not kept up with bouts of inflation. Third quarter GDP fell by 0.4% after having fallen the previous quarter by 0.5%. Forecasts for next year’s growth in the Ukraine are tepid at best with the average of a 1.5% growth rate.

Ukraine has limited foreign reserves on hand and is currently in its third recession in five years which is why Fitch Ratings recently lowered its foreign and local currency debt rating to B- with a negative outlook. With global investors awash in liquidity courtesy of central banks, higher yielding Ukrainian bonds looked attractive as did the Ukrainian stock market. From January 2009 to May 2011 the Ukrainian PFTS stock index gained 250%. However, the Ukraine now has to pay back $15 billion of sovereign debt in the next two years which would be very problematic absent new external liquidity flows or a rescue package.

Enter the Russians to their generous cash! Prior to the Russian deal, Ukraine sought assistance in the form of financing from the EU, just like the European PIGS (Portugal, Ireland, Greece and Spain). However, the EU’s offered terms came with strict repayment conditions, structural economic reform, and IMF involvement. All of these terms seemed bitter pills for a President and political party that have tended towards their Russian relations and where corporate cronyism between Russian and Ukrainian elites is embedded.

The backdrop to Ukraine’s current plight is geopolitics. Russia desperately wants to exert its control in a westerly direction. Losing Ukraine to further EU influence would certainly hurt Russian pride and would be thought of as an unwanted economic incursion. Russia views western meddling in its geographically closest former Soviet Union countries as interloping which is why Russia masterfully offered Ukraine a bailout program at the last minute. The idea of expanding NATO further east is the one thing that brings disparate Russians to the table in denunciation of the west and EU. In addition, to enjoying Ukraine as the “bread basket” of Eastern Europe and holidays at fine resorts, Russian politicians are worried about Russian domestic unrest especially with the Sochi Olympics approaching and President Putin’s somewhat weaker popularity at home. Preventing unrest in Ukraine from becoming a template for internecine Russian squabbles is tantamount to actually helping an old Soviet ally.

While emerging market investments are obviously fraught with risks, Ukraine is a perfect illustration of the theoretical becoming the actual risk. When Ukrainian GDP was growing or stable (far too infrequently) and the political landscape of Ukraine was more hospitable towards closer relations with Europe, there were logical reasons to own Ukrainian assets. That was especially true of carry trades funded by generous central bank liquidity. Those investment notions of high yield, but “safe” emerging market bonds have been severely eroded by Federal Reserve tapering and in the case of Ukraine, intensely messy domestic politics.

In the last ten days, credit traders have profited handsomely by selling Ukrainian credit default swap protection or buying Ukrainian bonds as the snap-back on prices was dramatic after the Russian agreement was announced. For example, Ukrainian dollar-denominated bonds saw their yields go from more than 15% to less than 9% in a handful of trading sessions. That type of volatility is likely to dissipate as the market re-prices sovereign default risk and traders focus on next steps in Ukrainian politics.

Ukraine is a country with massive agricultural potential. It has a special type of black soil which makes agribusiness efficient and profitable when run on industrial scales. In addition to farming and other agribusiness, Ukraine has tremendous industrial potential and is frequently thought of a type of a type of “Poland in waiting” for further industrial-manufacturing development.

Notwithstanding Ukraine’s potential, it is the political atmosphere including the rule of law, corporate transparency, and electioneering that must change if Ukraine is to attract more emerging market investment managers and greater foreign direct investment. Year to date, Ukrainian stocks are down almost 10% and have returned almost nothing over the past five years. That negative performance indicates investor nervousness about future volatility in financial and real Ukrainian assets.

Until Ukraine aligns itself closer to Europe or until a strong rule of law is established, retail investors are probably wise to avoid Ukrainian financial assets. For large institutions or hedge funds, there may be some justification to owning Ukrainian bonds at these levels as a future deal with the EU, although not imminent, is also not outside of the realm of possibility. To a certain extent, the EU needs Ukraine to “play nicely in the sandbox” with Russia as EU countries nervously receive huge quantities of Russian natural gas through Ukrainian pipelines. The best case scenario for Ukraine is snap elections (not likely), immediately political reform (also not likely) and the implementation of business-friendly and investor-friendly laws (possible). The upside-optionality trade is that Ukrainian politicians will embrace the EU much sooner than consensus believes.

Macro style investors seeking longer term exposure to Eastern Europe, would do well to investigate, Polish real assets instead of trying to thread the economic and political environment of Ukraine. Polish real assets seem moderately attractive, especially if the Polish Zloty strengthens. Alternatively, if investment managers must put money to work in Ukraine, highly liquid and transparent assets should be the first choice, even if they trade at a premium.

Disclaimer: Nothing herein should be relied upon to make an investment decision and nothing herein is intended as investment advice or a recommendation.

Source: Forbes Business

 
Update
1

5 hours ago

MAS posts loss of RM307m for Q2

Aug 28 2014 5:00pm CDT | Source: Business Times Singapore

August 29, 2014 1:13 AMMALAYSIA Airlines (MAS) registered a loss of RM307 million (S$122 million) for the second quarter to end-June, but warned of worse to come in the second half when the "full financial impact of the double tragedies of MH370 and MH17" hits ho ...
Source: Business Times Singapore   Full article at: Business Times Singapore
 

 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

Human trials of Ebola vaccine to start next week
Washinton, Aug 29 (IANS) The US government announced Thursday that it will start initial human trials of Ebola vaccine next week.
 
 
4,000 Gaza fishermen go fishing in six-mile area
Gaza, Aug 28 (IANS) As many as 4,000 fishermen in the Gaza Strip Thursday were able to go fishing in a expanded zone, previously restricted to just three miles by Israel, a senior Palestinian official said.
 
 
Number of Ebola cases may reach 20,000: WHO
Geneva, Aug 28 (IANS/EFE) The number of people infected with the Ebola virus in Western Africa could reach 20,000, six times more than the current estimates, the World Health Organisation (WHO) warned Thursday.
 
 
Trim down your 'side fat'
Los Angeles, Aug 28 (IANS) Eliminate that extra padding on the sides of your waist by doing the right moves, eating well and moving around.
 
 
 

Latest from the Network

Udinese sign Brazilian midfielder Evangelista
Rio de Janeiro, Aug 29 (IANS) Udinese have completed the signing of midfielder Lucas Evangelista from Brazil's Sao Paulo. The 19-year-old was sold to the Italian Serie A outfit for 4,000,000 euros, Xinhua cited from...
Read more on Sport Balla
 
Ed Sheeran finds Miley Cyrus 'fantastic'
Los Angeles, Aug 29 (IANS) Singer Ed Sheeran says he finds pop star Miley Cyrus "fantastic" even though she was captured on camera mouthing an expletive at him at a recent music awards ceremony. She called him "a...
Read more on Celebrity Balla
 
Lana Del Rey to record Bond theme?
Los Angeles, Aug 29 (IANS) Singer Lana Del Rey is in talks to record the next James Bond theme. Producers of the franchise are reportedly considering the "West Coast" singer to provide vocals for the next "James Bond...
Read more on Celebrity Balla
 
100 immigration activists arrested in front of White House
Washington, Aug 29 (IANS/EFE) Police arrested more than 100 immigration reform activists Thursday in front of the White House as they demanded the relief for the country's 11 million undocumented foreigners, who are at...
Read more on Politics Balla
 
Tracy Morgan having 'tough time' after car crash
Tracy Morgan is having a ''tough time'' recovering from his injuries following his car crash in June. The 45-year-old actor suffered a broken femur, broken nose and broken ribs when a Walmart truck crashed into the...
Read more on Celebrity Balla
 
Nicole Kidman and Keith Urban filmed daughter's birth
Nicole Kidman has revealed Keith Urban filmed the birth of their first child. The 47-year-old actress admits her spouse, whom she married in 2006, captured their six-year-old daughter Sunday's first cry as she entered...
Read more on Celebrity Balla
 
Jennifer Aniston tastes Jimmy Kimmel's wife's breast milk
Jennifer Aniston has tasted Jimmy Kimmel's wife's breast milk. The 45-year-old actress and the TV host were talking about his new baby daughter Jane on his show 'Jimmy Kimmel Live!' when the former 'Friends' star...
Read more on Celebrity Balla
 
Joan Rivers in 'good spirits' night before respiratory arrest
Joan Rivers was in ''good spirits'' the night before she was rushed to hospital following respiratory arrest. The 81-year-old comedienne appeared ''absolutely fine'' as she attended a meal at the Amaranth Restaurant in...
Read more on Celebrity Balla
 
Areas under militants control in Iraq needs immediate aid
United Nations, Aug 29 (IANS) The United Nations Thursday said that there is an urgent need for humanitarian assistance in Iraqi areas sieged by the Islamic State militants. "The World Food Programme (WFP), which has...
Read more on Politics Balla
 
Martin Scorsese to helm Ramones documentary
Los Angeles, Aug 29 (IANS) Oscar-winning filmmaker Martin Scorsese has been tapped to direct a documentary about the US punk band Ramones. To celebrate the upcoming 40th anniversary of the band's debut album, the...
Read more on Celebrity Balla