As Ukraine-Russia relations undergo a fresh burst of momentum under President Viktor Yanukovych, Russian businesses are coveting Ukraine’s assets.
As Ukraine-Russia relations undergo a fresh burst of momentum under President Viktor Yanukovych, Russian businesses are coveting Ukraine’s assets.
But there is no reason for panic, say many experts, who see a lot of benefits in the two neighbors deepening ties at all levels.
Russian foreign direct investment officially accounts for only about 6.7 percent of the Ukrainian economy. Though a lot of unrecorded Russian investment flows in via offshore zones such as Cyprus, the overall level of investment activity into Ukraine from all parts of the world, including Russia, is considered small.
“Ukraine is still much under-invested,” said Oleksiy Blinov, an analyst with Astrum Investment Management. “And the Russian part in foreign direct investment is also relevantly small. It is absolutely natural that Russian capital is expanding borders. It is our largest partner.”
After the breakup of the Soviet Union, Russia remained involved in Ukraine’s vast energy sector, then strengthened their presence in other areas, such as mechanical engineering and information technology.
Even under the supposedly Kremlin-unfriendly Orange Revolution team of Viktor Yushchenko and Yulia Tymoshenko, the Russians gained strong positions in shipbuilding, metallurgy, telecommunications and banking sector with giants like VTB bank, Alfa group, Sberbank and Prominvestbank moving in.
Today, Yanukovych and his Russian counterpart, Dmitry Medvedev, want to triple bilateral trade between both nations. That trade figure stood at $25.8 billion in 2009 and is expected to reach up to $35 billion this year, on its way to $100 billion annually to reach the presidents’ goals announced during Medvedev’s May 17-18 trip to Kyiv.
Russian investors are sniffing all around Ukraine, looking for everything from giant steel mills, smaller assets, to construction and supply dealings in the nuclear power business. Top Russian bank managers expect to provide significant financing to enterprises in Ukraine in coming years. The Cabinet of Ministers also expects Russian capital participating and possibly winning privatization tenders for state telephone company Ukrtelecom, as well as electricity generators and regional supply companies.
Russian advances are being made in all sectors of Ukraine’s economy. Recently, both of Ukraine’s securities exchanges became Russian-owned: first, Ukraine Stock Exchange was originally Russian-launched and, recently, the PFTS trading system was also purchased by Russia’s MICEX Stock Exchange.
More bilateral deals are expected in machine-building, agriculture and retail.
Deals getting done
“The International Monetary Fund views the expansion of Russian business positively,” said Vitaliy Fisher, deputy chairman of Russian-owned VTB bank in Ukraine, one of the top 10 banks in the nation. But the resurgence of Russian activity in Ukraine’s economy also has its dark side.
Recently, a group of secretive Russian investors backed by state-controlled Russian banks moved to acquire control over three large Ukrainian metallurgical enterprises, including Industrial Union of Donbas, Zaporizhstal and Mariupol’s Illich.
Despite the murkiness and ownership disputes brewing over these deals, consolidation was needed nonetheless and should be beneficial in the end.
“Even if these are Russian investors, only the ownership and top management will change,” Blinov said. “Take a look at Russian-owned oil-refining plants in Ukraine. The workers are local and raw materials are also often local, and taxes are paid to Ukraine.”
He also added that, for example, Zaporizhstal desperately needs modernization, something current owners have not provided.
“Finally we cannot ignore global tendencies. Steel enterprises all over the world merge. Small players don’t tend to survive,” Blinov added. “The presence of the steel production chain in the CIS [Commonwealth of Independent States] is obvious and we probably won’t survive separately.”
Fisher, deputy chairman of VTB bank, said: “It’s obvious that demand for our products predominantly lies in the CIS region. It is obvious that separation of the enterprises, which used to be one whole [in Soviet days], is inefficient.” He also thinks it would be beneficial if hryvnia and ruble transactions replace dollar ones, a step that will build confidence in both currencies.
Pitfalls
VTB bank’s Fisher said long-term investors had a hard time following the logic of the previous government of Yulia Tymoshenko, who changed priorities frequently.
“When the new leadership demonstrated the intention to get the economic situation under control and not to hold another election in three months, the market reacted: trust in the hryvnia returned, Ukraine went up in the ratings, interest of investors came back,” Fisher added.
VTB, as well as other Russian banks, is planning to actively take part in the growing bilateral trade as the economic and political thaw deepens.
Russians are a privileged group of foreign investors, given the centuries of ethnic, linguistic and governing similarities. Still, even Russian investors trip up on many exclusively Ukrainian pitfalls.
“Telecommunication companies in Ukraine must pay 7.5 percent of profit to the pension fund. Such regulation exists neither in Russia, nor in other countries,” said Andrey Dubovskov, general manager in Ukraine for MTS, the Russian mobile telecommunications giant.
Ukraine is woefully behind the times in many sectors, including telecommunications. For instance, Ukraine is one of the last European countries where the question of 3G – or third-generation – technologies remains open.
Russia, in 2007, issued 3G licenses. Europe issued licenses even earlier. And the business is now not only generating profits for investors, but additional revenues for the budgets of these nations. Currently, the state fixed-line telephone monopoly Ukrtelecom holds the monopoly on 3G licenses, but has been slow to develop the sector.
Together or apart
Given their intertwined histories, bolstering economic ties with Russia is probably inevitable for Ukraine. However, many Ukrainians are wary about getting too close to their former overlord. A rebalancing of interests is clearly under way by the new administration.
“Indeed, it’s hard to say what a golden mean is,” VTB bank’s Fisher said. “On one side, it puts more pressure on the national currency. On the other, if the internal market has not produced anything to nurture the economy, without external nurturing, the country cannot move forward.”
Kyiv Post staff writer Nataliya Bugayova can be reached at [email protected].
