Firms raise capital and get treated as kings when they list in Poland.
Dmytro Tarabakin, managing partner at Ukraine’s Dragon Capital investment bank, returned to Kyiv fazed last month after attending a conference focused on initial public offerings at the Warsaw Stock Exchange.
While in Warsaw, he saw something happen that is unthinkable in his native Ukraine.
The president of Poland gave a clear message: If you come [and list] here, we will love you, we will kiss you everywhere we can.
– Dmytro Tarabakin, managing partner at Ukraine’s Dragon Capital investment bank
The Polish president and entire government showed up in person to hand out an award to the best company to list on the Warsaw exchange through an IPO.
It was even more painful to Tarabakin to see that the company receiving the award was Kernel, a leading Ukrainian sunflower oil producer.
“The president of Poland gave a clear message: If you come [and list] here, we will love you, we will kiss you everywhere we can,” recalled Tarabakin.
It is a stark contrast to how many investors are treated just outside the European Union borders in Ukraine. In this nation notorious for its terrible investment climate, investors often get the opposite treatment, including shakedowns by corrupt officials.
In this homegrown culture of keeping investors out and roughing up those brave enough to arrive, even fast-growing domestic businesses whose owners have political clout no longer dare to raise fresh investment by listing on the local stock market.
Who, instead, is getting exposure to the huge upside of Ukraine’s agribusiness companies?
Not Ukrainians, because their shares are not even listed in Ukraine, and Ukrainian private pension laws prohibit citizens from investing a sizable part of their savings abroad.
The investors capitalizing on hot Ukrainian stocks are foreigners buying up stocks on European exchanges – a mix of high-net worth individuals and average citizens building up their retirement savings through private pension funds.
During the last three years, virtually all of Ukraine’s agriculture blue chips raised capital – tens to hundreds of millions of dollars each – by listing their stocks abroad, mostly via IPOs in Warsaw or on the London Stock Exchange. Take for example Ukraine’s top poultry producer, MHP, sunflower giant Kernel, sugar group Astarta and egg producer Avangard.
“Apart from [agribusiness company] Creative Group, which recently listed on the Ukrainian Exchange, the domestic stock market has no other attractive agro companies,” said Tarabakin.
The big tragedy of this trend, investment bankers say, is still to be felt in future years.
Ukraine’s government pledges to finally fix the nation’s pension system this year, introducing a three-pillar system which will encourage citizens to break their dependence on a state-mismanaged, get-what-you-pay-for system and place savings into private pension funds instead.
The idea is that private pension fund managers, namely investment banks, will invest the money into Ukrainian stocks and other ventures, in turn helping to fuel the domestic economy.
But if companies continue to list abroad only, there will be no domestic stock market at home to invest into.
“Ukraine does not have long-term money. For it you have to go for Warsaw or London stock exchanges,” said Vadym Samar, head of equity sales in Kyiv for BG Capital.
Average daily turnover on the Ukrainian Exchange is $15.6 million, 27 times less than the $428 million in daily deals on the Warsaw Stock Exchange, and tiny compared to the same figure for the London Stock Exchange.
90 percent of people here do not understand what a commodity is.
– Vadym Samar, head of equity sales in Kyiv for BG Capital.
Even if liquidity and trading volumes were to get big enough, many major foreign investors simply would not trust the stock market of Ukraine, where minority shareholder rights are routinely violated, explains Rostyslav Sedlachyk, general director of Concorde Asset management.
Sedlachyk pointed to a recent episode where many investors got cheated.
Earlier in June, the state securities commission surprised the market by freezing trades on one of the more liquid equities on the market, shares in Yasynivsky Coke Plant. The action was apparently triggered by a bitter legal dispute between major shareholders in the company.
Details remained hazy, but in the aftermath, the market panicked.
And although the company’s stock has since recovered, a few insiders stood to have profited handsomely, leaving a bitter aftertaste for the other market participants. It is a story that stockbrokers and investors in Ukraine have experienced all too many times.
“Who is to guarantee that it won’t happen again tomorrow to other equities?” asked Sedlachyk.
Such incident send a very “negative message to investors. Good stock markets don’t allow such things,” he added.
Government officials say they want to change all this for the better, reform the pension system and convince citizens to take their cash out from under their pillows, putting it into domestic stocks and bonds instead.
Dmytro Tevelev, head of Ukraine’s securities commission, said legislation changes currently under review in parliament will likely make private pension funds more popular, in turn giving a boost to the domestic stock market.
Oleg Tkachenko, CEO of the Ukrainian Exchange, is eagerly waiting.
“According to estimates, Ukrainians have savings of approximately 50–90 billion euro under their mattresses, not working anywhere,” he said.
Some investment funds in Ukraine have provided strong annual returns, in the 20-30 percent range. While such returns are far from guaranteed, they can be attractive considering the 10-12 percent annual deposit returns offered by banks usually don’t even cover yearly inflation levels.
According to estimates, Ukrainians have savings of approximately 50–90 billion euro under their mattresses, not working anywhere.
– Oleg Tkachenko, CEO of the Ukrainian Exchange
But when Ukrainians start investing into domestic stocks, it won’t take long for many of them to figure out how deeply rooted the market’s problems are.
Their chances could be better at the local slot machines.
Many investors are shocked to find out that listed companies often don’t provide public information about themselves, such as their quarterly profits, sales and management changes.
Trying to find out who owns a company can take investors as far away as offshore islands in the Atlantic or Pacific Oceans.
BG Capital’s Samar has serious doubts that Ukrainians will trust and rush to put their cash into domestic stocks. “90 percent of people here do not understand what a commodity is,” Samar said.
Moreover, said Concorde’s Sedlachyk, “Ukrainians remember well the 1990s and the 2008 crisis, when capital markets collapsed.”
If Ukraine is to preserve its stock market and give citizens a chance to fuel domestic growth by pumping money into private pension funds, it faces a huge uphill battle to rebuild trust and attracting a new wave of investors that will share the risk.
Lessons can be learned from Poland, which embarked down this path more than a decade ago.
“Ten years ago in Warsaw, half of the city light boxes were advertising private pension funds. Television channels were informing citizens about the importance of private pension funds. More than half a billion dollars was spent on promotion,” Dragon Capital’s Tarabakin said, recalling his recent visit to Warsaw.
Now, with a population of 38 million people, Poland has more than 1 million private pension accounts with more than 90 billion euros under management in total. Experts said this money helped cushion Poland from the recent 2009 recession, which hit Ukraine’s commodity export-oriented economy hard.
Kyiv Post staff writer Kateryna Panova can be contacted at [email protected]
