Andre Kuusvek is the European Bank of Reconstruction and Development director in Ukraine. He oversees the EBRD’s investment portfolio in Ukraine of $3.5 billion since taking over as country manager last September. Mr. Kuusvek has over seventeen years experience in project management in the banking and corporate sectors in the EBRD’s countries of operations.
He earlier coordinated the EBRD activities with capital markets and stock exchanges in the EBRD region from the bank’s headquarters in London. Mr. Kuusvek also was financial sector coordinator for the Bank in various countries in the CIS and Eastern Europe. Kuusvek started his banking career in his home country of Estonia. He has served as a board director in nearly 30 banks, insurance companies, equity funds and pension funds.
KP: How serious do you see the situation in Ukraine with the recession and relentless political mayhem? Is the country heading towards a financial meltdown? And can Ukraine’s troubles spill over into Europe?
AK: It’s not the only country that is in the crisis. I’ve been traveling recently and have seen a number of countries that are in the same GDP decline. I was attending a conference in Tallinn earlier this week. Estonia, Latvia and Lithuania … their GDP declines are also between -8.5 to –12. Ukraine is likely to end up in the same category.
KP: But Ukraine seems to have been portrayed worse by media, and some are forecasting a default, in part because of unstable politics.
AK: The lack of political consensus is not helping. In the past six months almost all news about Ukraine has been bad. And if you look at credit default swaps, then the latest price for Ukrainian CDS is 22 percent. This is vastly exaggerated. There is very low liquidity in that market. People are putting too much on these figures, and putting Ukraine in the same category with Equator, Venezuela and Argentina.
KP: So what is your assessment of the situation?
AK: I would say there is no economic risk for Ukraine to default on the sovereign [debt].
In the more developed countries, GDP is falling from +3 to -2 percent in annual terms, which in relative terms is almost as big of an adjustment, [given the size of Ukraine’s economy.] I think in countries like Ukraine [business] can adjust a lot faster than enterprises in the EU, where there are lots of regulations, there are trade unions, and its very difficult to either fire people, or get then on unpaid leave.
KP: Do you think Ukraine’s economic problems can spill over to Europe?
AK: An approach where each country is left out to survive for itself is not going to work, and I think the EU understands that. History shows that better economic integration, open trade, helps prop up GDP growth on both sides of the border. Take for example Sweden. It was already a well developed country before joining the EU. Since it joined, their GDP growth levels have doubled.
KP: So can Ukraine’s economic troubles influence other countries?
AK: This is true. And this is true for the investments that the Western European companies and banks have made here.
In the short-term dimension, a lot of people are talking about burden sharing. Some are asking if it is too expensive; why do we need to pay for this. But in the long-term dimension, its makes sense for the EU and its more developed markets to have Ukraine as a partner.
KP: What needs to be done to stabilize and improve the situation? How urgently does Ukraine need fresh financing from the IMF?
AK: The country needs all political forces to work together and pull in the same direction. We all understand that it is difficult in an election year. But I’m not naïve. I do not have overly high expectations, in thinking that things will get a lot better in the short-run.
But it is clear that the government understands that IMF money is absolutely necessary. In the big picture, countries like Ukraine have three choices when it comes to fixing budget and debt problems.
The first is to devalue the currency, which has already happened in Ukraine. And in fact this has taken care of a lot of problems. It has taken care of the trade balance, current account deficit. Imported goods are more expensive. In the long-run Ukrainian producers will have better export capability.
The second solution is significant cost cutting at the government level. Budget cuts have to happen. At the company level, expenses have to be cut to adjust to what’s happening. Some of it is taking place, probably not enough.
The third option is the most scandalous: printing money. This is what Western governments are doing these days. It will bring currency movements, and some inflation. As a short-term measure it could stimulate the economy. But it is also clear that the EU and US have always said, themselves, that printing money is bad. The US has been doing this since November, Japan since January, and the UK started in March. The label it differently, some calling it quantitative easing. But it essentially increases the monetary supply in economies that don’t have the economic reserves for it.
KP: What will happen if for some reason Ukraine won’t get IMF funding?
AK: That will be hard. A lot of debt needs to be serviced. Most of it is in the private sector. A part of IMF funding is supposed to go to recapitalize banks, etc. If the IMF money is not forthcoming, then the problem will drag on. And it will become more than a monetary and fiscal issue. It will be more of a trust issue. People will lose confidence, both foreign investors that already invested here, and maybe those that are looking at Ukraine. It could trigger another storm of people withdrawing funds from banks, and changing their hryvnia into dollars, and possibly some political demonstrations and social unease.
KP: And maybe as default?
AK: There is no economic reason for a sovereign default, now. But even if [Ukraine defaults], sovereign default can be taken care of. There are still $25 billion in national bank reserves. Total public debt is less than $20 million, somewhere around 18. That could be taken care of. The problem is on the private sector side.
KP: So why are CDS so pessimistic on Ukraine?
AK: It’s a very illiquid and desperate market. These are people that have very little Ukrainian exposure left. They would rather sell it off, get rid of it. From a standpoint of publicity, they are making a statement: ‘look we have nothing to do with Ukraine.’ And nowadays its considered good news to not have anything to do with Ukraine, especially for stock exchange listed companies.
KP: In watching Ukraine’s politicians, it seems they are only busy trying to win short-sighted tactical victories over opponents? From your correspondence with them, do you think Ukraine’s leaders are serious and capable of handling the dire economic challenges facing Ukraine?
AK: I think [Ukraine’s politicians] are well educated. They know what needs to be done. Meeting with government authorities, the presidential administration, central bank, parliamentarians, by in large they say the right things. The problems are more on the implementation side. It is also very important that they forget about political and personality differences in order to pull the country out of crisis.
The first good news is that the political forces managed to consolidate early enough to ask for IMF money, ahead of many other countries that are now queuing up. Recent tax increases on tobacco and alcohol is probably the right way to go, because it will help a bit to fix the short-term budget problem. It will also have a positive impact on nation’s health. There is also some good news from the National Bank. They are now restructuring loans, extending maturity.
But more needs to be done in parliament. The IMF is still requiring certain laws be passed. The government and National Bank need to do more.
KP: More is needed, but are they able to implement it?
AK: We will see. This year is very hard. As I said, the intellectual capacity is there. What is lacking is implementation because there is no political consensus. And this is partially caused by the fact that this is an election year.
KP: So you have big doubts if they are able to actually implement?
AK: I would say it is a question mark. But as far as business is concerned – as far as the macroeconomic picture today – I am more optimistic than I was two months ago. The macroeconomic picture has improved, thanks to devaluations, though it is hard on the nation.
KP: What will be the role of the EBRD and other western lenders in helping Ukraine ride through these economic woes? How much will the EBRD provide to recapitalize banks and finance infrastructure investments?
AK: We do play an important role. We are the largest institutional investor in the country. We invested a record $1.2 billion last year. We are targeting at least the same level, maybe even a small increase, for this year. We might be able to attract some other financing partners to do it with us. We think half of that billion would go into the financial sector, banking largely. We believe we can this year invest 200 million euros into infrastructure, transportation, the power sector, municipalities. And the remaining – 250 maybe 300 million euros – will be invested into the corporate sector: manufacturing, service industries, agricultural, food processing and retail.
Jointly, with other players, we will be enabling Ukraine to turn the curve, and to get out of the crisis. But our [investments will be made in line with general business principles,] as they always were. We are not going to give soft loans. The sole exception to that rule is the 135 million euro grant that we gave to the Chornobyl shelter funds in February. This is the largest grant ever given by the EBRD to any single project.
KP: Economists often say that the key to building a healthy economy is a thriving small- and medium-enterprise? Is this true and what improvements does Ukraine need in this regard?
AK: SME is always the big foundation for a strong economy. We always provided funding to SMEs through the local banking sector, and will continue to do so.
I think for the SME sector to take off in Ukraine, its needs three things from the government. First, simplify the rules of doing business. Create a fair playground for everybody.
Rule number two: government must get away from private business.
Thirdly, stay away from private business.
SMEs always find themselves the right business line. They adjust quickly, but they don’t take bureaucracy very well. There are big problems with customs and trade, all sorts of inspections, be it tax, environmental, or whatever. If the government could keep the SME sector as lightly regulated as possible, that would be very helpful.
KP: You said that the EBRD funds SME through the banking sector. Can you elaborate? There are people that complain that the EBRD, in large, funds only big and foreign businesses.
AK: The reason why we can’t do it directly is: We are an international financial institution owned by governments; SMEs will not survive our very strict technical, legal and financial due diligence. Therefore, we have an unwritten rule that we do not fund individual projects that are less than 5 million euros. We have done smaller projects, sometimes with enterprises that we know from the past. But it is not always economical to do so.
We try to stimulate the economy by offering funding and offering incentives to set up proper business practices, to be able to get our funding. And that is why we use local banking sector, as an intermediary of EBRD funds to the real businesses. We give credit lines. We set the key criteria and eligibility criteria for businesses to borrow under those credit lines. But we leave it to the bank to decide who gets how much, at what rate, etc. There are specific programs, like micro lending, which we are involved in within many countries. We have created micro lending institutions, ProCredit Bank in Ukraine, for instance.
