FT SPECIAL REPORT

Tuesday 18 September 2012 www.ft.com/ukraine2012 | twitter.com/reports

State in a Inside » Reforms needed Neil Buckley and Roman Olearchyk struggle for consider prospects for recovery Page 2 identity and Good relations with EU/CIS vital Neil Buckley talks to Prime minister direction Mykola Azarov Page 2

Attractive state Despite the risks, Overview Kiev finds itself caught between there is still the east and the west as elections loom, much to draw write Neil Buckley and Roman Olearchyk investors Political rivalry: President Viktor Yanukovich has been criticised by the west for the jailing of Yulia Tymoshenko, below Corbis Page 3

s 60,000 fans filled Kiev’s Mykola Azarov, the prime minister. and free trade agreement – even In return, Vladimir Putin, Russia’s office has isolated Ukraine,” says newly modernised Olympic But while impressed by their warm though all negotiations are complete. president, wants Ukraine to join a Arseniy Yatseniuk, co-leader of the Lviv, a jewel of Stadium in July for the reception, visiting fans were not in Signing that deal would have been common economic space Russia is Fatherland . Euro 2012 football champi- Ukraine long enough to be aware of the most decisive step towards Euro- creating with Belarus and Kaza- The situation is far short of the Habsburg empire onship final, it appeared in the retreat on democracy and human pean integration since Ukraine gained khstan, and to hand Russia control of hopes aroused by the 2004 Orange Jakub Parusinski someA ways to cement Ukraine’s mem- rights that has driven a wedge independence from the Soviet Union the gas export pipeline across Ukraine uprising of a democratic, west-orien- bership of the European “family” of between Kiev, and the EU and the US. 20 years ago. Without it, the country to western Europe. For Mr Yanukov- tated Ukraine. Some blame the EU for finds a historic nations. Euro 2012 was marred by personal remains locked in a two decades-old ich, that appears to be a step too far. being slow to offer Ukraine the genu- survivor intact The country’s co-hosting of the tour- boycotts by some EU leaders in identity crisis over whether it wants All that has left Ukraine not just ine prospect of membership. nament with Poland – the first time protest at what they saw as the politi- to move towards Europe or re-estab- searching for its identity, but looking Others blame the revolu- Page 4 two former socialist bloc states have cally motivated imprisonment last lish closer ties with Russia. unusually friendless. tion’s co-leaders, former done so since the Berlin Wall fell – year of Yulia Tymoshenko, co-leader Yet, confounding suspicions when “The guy sitting in the presidential president Viktor Yush- was widely deemed a success. It of Ukraine’s Orange Revolution. he came to power that Mr Yanukovich chenko and Ms Black earth attracted hundreds of thousands of The former premier’s conviction on would shift the country back into Tymoshenko. The two visitors, while the estimated $5bn charges of exceeding her powers, Russia’s orbit, he and his government quickly fell out, and Bread basket of Ukraine poured into infrastructure when she signed a gas deal with have had tetchy relations with The country suffered one their feuding under- Europe has great investments and other preparations Russia in 2009, has become a symbol Moscow. They have clashed over of the deepest slumps on mined progress on des- will give the country a lasting boost. of what the west sees as a partial Ukraine’s pressure to revise the gas perately needed reforms. potential, says “Everything we built for the cham- rollback of freedoms since Viktor deal signed by Ms Tymoshenko and the planet, its economy In the 2009 global reces- Mark Rackevych pionship will remain; new highways, Yanukovich beat her to become presi- reduce the high import price that is sion, Ukraine suffered one of airports, high-speed trains – all this dent in 2010. It has frozen the signing penalising the country’s energy- shrinking by 15 per cent Page 4 will work for our economy,” says of a landmark EU-Ukraine political guzzling heavy industry. Continued on Page 2 Ballot under scrutiny

Democracy There is intense international pressure for the parliamentary poll to be conducted fairly, writes Roman Olearchyk

Ukraine’s October 28 parlia- nitely not with the EU and The opposition claim that an-speakers in western mentary election is gearing western world, nor is there the authorities are unwill- regions fear boosting Rus- up to be more than just the clear dialogue with Russia, ing to risk losing power sian language usage will latest twist in a notoriously with whom relations are through a fair vote and are undermine Ukrainian, and noisy and dramatic political often a one-way street – calling upon the west to deepen the political and cul- saga. with them pressing to a introduce travel bans on Mr tural divide between the President Viktor Yanuko- point where you have to Yanukovich’s inner circle. country’s east and west. vich is under pressure to agree,” he adds. Ms Tymoshenko, who has Though opinion polls sug- respect western values by Split into two main par- been in prison for more gest the appetite for protest holding a democratic vote. ties, Tymoshenko’s Father- than a year, addressed EU among Ukrainians is high, Failure could affect his land and heavyweight box- leaders in a letter this trust in the opposition is domestic and international ing champion Vitali month, saying: “Make a weak. If protests against standing – and Ukraine’s Klitschko’s Udar [Punch], statement right now that vote fraud materialise, they geopolitical trajectory. the opposition pledge to these elections are illegiti- could be smaller than dur- In the run-up to the vote, unite after the election and mate. After the elections ing the Orange Revolution – Washington and Brussels reverse what they describe are over it will be too late. not enough to play a game- have repeatedly warned Mr as Mr Yanukovich’s U-turn The dictatorship in Ukraine changing role. Yanukovich’s administra- on democracy, to combat has practically been built.” “These elections will not, tion that Ukraine’s western cronyism and kleptocracy Polls show citizens in themselves, be a break- integration aspirations and put Ukraine back on largely disapprove of Mr through, but could prevent hang in the balance. the Euro-integration path. a deeper slide into authori- With Yulia Tymoshenko, “If we get a majority in tarianism,” says Mr Chaly. the ex-prime minister, and parliament, we can restore “It’s more of a warm-up for some of her allies jailed on the balance of power... ‘If we get a bigger battles, including the what western leaders see as restore parliament, which is majority . . . we [2015] presidential election.” politically motivated currently a [rubber-stamp- The road ahead is long, charges, scrutiny of the poll ing] subsidiary of the presi- can restore the Mr Yatseniuk concedes. will be intense. dent,” Mr Yatseniuk says. “The opposition is 2 per Valeriy Chaly, a senior Mr Yanukovich has balance of power’ cent ahead in the polls, but analyst at Kiev’s Razumkov pledged to hold fair elec- Arseniy Yatseniuk there is a huge number of Centre think-tank, says: tions, but opposition groups Fatherland co-leader swing voters seeking new “There are already point out that it was his faces, about 20 per cent. I questions about the fairness allegedly rigged victory in don’t think they will back of the vote – it’s clearly not 2004 that prompted the the government, but they a normal situation when Orange Revolution. Yanukovich’s handling of could back other political the top opposition leaders Opora, an election watch- domestic politics and the forces [backed by] the gov- are in jail. dog, says the pre-election economy. Attempting to ernment – so-called spoiler “At issue will not only be atmosphere has been bolster support, his ruling parties,” he says. how people vote, but how marked by intimidation, parliamentary majority has “The simple answer is to the votes are counted, and voter manipulation and been prepared to wade into topple Yanukovich. The the fairness of the pre-elec- muzzling of the media. a particularly divisive issue. realistic answer is to tion process.” TVi, the only television In an attempt to woo vot- restore the balance of The west is pulling channel that dares to ers in the country’s mainly power, democracy, and together large election mon- investigate government Russian-speaking east and restore credibility. You itoring missions. corruption, is being pulled south, it passed a law this can’t steer the country Ms Tymoshenko’s camp off the air by many regional summer upgrading the sta- without people’s trust,” Mr claims Mr Yanukovich has cable TV operators. Its man- tus of Russian language. Yatseniuk adds. purposely sidelined his agement has faced investi- The controversial move But an opposition victory main rivals through politi- gations by prosecutors. triggered protests. Ukraini- in the parliamentary poll cally motivated prosecu- could also create problems. tions, and this alone is Voting intentions It could intensify the politi- enough to judge the contest cal stand-off with the presi- unfair. August 2012 (%) dent, and trigger deadlock Should the vote be judged in a nation that faces seri- undemocratic, Mr Yanukov- Communists ous economic challenges. ich’s administration could Pro-presidential A divided leadership find itself alienated from could be vulnerable to Rus- the west. This, in turn, Undecided voters/ Vitali Klitschko’s sia, keen to limit Kiev’s could make him more 8.2 other parties UDAR Party western integration and vulnerable to pressure from Yulia Opposition pull it into an economic Russia, still keen to reassert 26.6 Tymoshenko’s union of former Soviet itself over Ukraine. Viktor Fatherland Party republics. “Ukraine is now Yanukovich’s United Opposition “It’s not acceptable for nowhere,” says Arseniy 25.6 Ukraine... to fall further Yatseniuk, former parlia- Pro-presidential under Russia’s influence. ment speaker and the co- 28.1 11.5 This will put off European leader of Tymoshenko’s integration for many years. Batkivshchyna [Fatherland] All sides need to avoid this Source: Kyiv’s Razumkov Centre opposition bloc. “[It’s] defi- scenario,” says Mr Chaly. 2 ★ FINANCIAL TIMES TUESDAY SEPTEMBER 18 2012 Ukraine Reforms will Good relations with EU and be needed CIS are ‘vital’

Interview abusing her power as to stimulate prime minister when nego- Mykola Azarov tiating a 2009 Russian gas Ukraine Prime Minister deal. “[Tymoshenko] abso- lutely illegally concluded an agreement that was The right-hand man extremely unequal,” he growth to President Viktor says. “It caused us not only great economic losses Yanukovich talks to – and we are talking Neil Buckley billions of dollars – but goods produced in our country lost Ask Mykola Azarov competitiveness.” whether Ukraine is moving He adds he had never back towards Russia and before seen an agreement the prime minister chooses “in which the position of his words carefully. Ukraine was so unequal – “About one-third of our and which it could not trade is with the European even exit. This agreement Union; about 40 per cent of gave Russia huge leverage our trade is with countries to influence Ukraine.” of the [ex-Soviet] Common- Ms Tymoshenko’s camp wealth of Independent claims Mr Yanukovich’s States,” says the silver- party, with Ukraine’s haired chairman of then-president Viktor Ukraine’s Regions party. Yushchenko, sabotaged an “For us, it is vital to have earlier deal she had good relations, both with brokered with lower prices. the EU and with the CIS.” Mr Azarov suggests some Ukraine has moved for- European countries have ward on both fronts in the been happy to use Ms past year. It completed Tymoshenko’s imprison- negotiations on a political ment as a pretext to freeze co-operation and trade deal the signing of the EU deal. with the EU – but that “It wasn’t us who Economy Recession has hit the nation remains unsigned because created this obstacle,” he of the imprisonment of says. “We know that in the hard. Neil Buckley and Roman Olearchyk former prime minister EU there are supporters of Yulia Tymoshenko. Kiev the integration of Ukraine consider why and look at hopes for recovery has also signed a free-trade into the EU and there are agreement coming into opponents.” force on September 23 with Some countries, he ive years ago, Europe’s banks But the weakening eurozone Price drop: Kiev Allowing the currency to depreciate Again, once next month’s the CIS, of which Ukraine notes, did not even want a were rushing into Ukraine, environment has taken its toll, with residents walk in the run-up to next month’s parlia- parliamentary election is past, the is an observer member. reference to Ukraine’s paying billion-dollar prices to industrial production growth slowing past a sale sign. mentary elections would be politically government may have a period when Given the frosty EU rela- “European perspective” – buy its banks in a push into sharply in recent months, prompting The country has a sensitive. However, many economists it could push through reforms that tions, might Ukraine go or possibility of future what was considered one of the many economists to cut their fore- more uncertain believe that, once the election is the IMF has long demanded, including beyond its CIS deal and membership – in the text. Fmost promising emerging markets. casts for this year. Russia, Ukraine’s economic outlook past, the central bank will allow some raising gas prices towards interna- join the customs union Today, many of those banks are other big market, is showing some compared with devaluation and move to a more tional levels. That would reduce the Russia has created with drowning in bad debt, and winding signs of slowing too. that of the years flexible rate, possibly a gradually subsidy to Naftogaz, the gas monop- Belarus and Kazakhstan, down once-aggressive retail banking “We have found that Ukraine is before the global widening “corridor” against a basket oly, which sells gas to households for as Moscow is urging? ‘If you are against operations; the European parent very responsive both to developments financial crisis of currencies. less than it pays for Russian imports. “It is very important for falsification, why banks are deleveraging and, in some in Russia and in the eurozone. If euro- Bloomberg That could allow interest rates to Barring further global economic us to find our own cases, exiting Ukraine altogether. zone gross domestic product goes fall and stimulate credit growth, help- deterioration, Ukraine seems set to approach, our own for- are you against Germany’s Commerzbank, for exam- down by 1 per cent, for example, ing fuel a growth rebound next year – muddle through. mula, for our relationship ple, sold its Ukrainian subsidiary Ukraine’s goes down by 2 per cent,” provided the external environment However, in the long term, putting with the customs union,” webcams in the Forum bank this summer to a says Alexander Pivovarsky, economist does not deteriorate still further. its economy on a more stable footing says Mr Azarov delicately. polling stations?’ domestic oligarch at an undisclosed at the European Bank for Reconstruc- Lower-than-projected 2012 growth will require boosting investment from Wanting to maintain price, after paying about $1bn for it tion and Development. means the budget deficit will be levels that, for example, are only a good relations with former five years earlier. The EBRD is expected to cut its fraction of what neighbouring Poland Soviet republics is perhaps Troubles in the eurozone played current 2.5 per cent growth forecast has accumulated. natural for Mr Azarov, Future relations with the their part. But the exodus also reflects for Ukraine this autumn. “It’s no secret that we feel Ukraine born in Kaluga in Soviet EU will depend in part on a more uncertain economic outlook Other factors are contributing to ‘If eurozone GDP goes has strong potential for volatility,” Russia in 1947. He received how next month’s parlia- compared with that of the years the slowdown, including a worse down by 1 per cent, for says Mr Pivovarsky of the EBRD. “It a geology doctorate from mentary elections are before the global financial crisis. agricultural harvest than last year needs to completely revamp its indus- Moscow State University, judged – and Mr Azarov After a decade of impressive and the end of a government-financed example, Ukraine’s goes trial base. It needs to attract invest- and settled in Donetsk, in insists they will be free growth, Ukraine’s economy was one construction boom in preparation for ments that are going into new sectors. the then Soviet republic of and fair. Numerous Euro- of the hardest-hit in the 2009 reces- hosting the Euro 2012 football champi- down by 2 per cent’ There is a three-year EBRD strategy Ukraine, only in 1984. pean observers will get sion, and contracted by 15 per cent. onship. to support all these things over the He became an MP 10 unfettered access, he says. That level of decline was worse only Iryna Piontkivska, an economist at medium-term horizon, but it is very years later, and from 1996 Ukraine, adds Mr Azarov, in the much smaller former Soviet Troika Dialog, an investment bank in difficult in a weak business environ- headed the state tax has even equipped all poll- Baltic republics which, unlike Kiev, says Troika has already higher than the 1.8 per cent of GDP ment, with slightly unpredictable administration. ing stations with webcams. Ukraine, implemented stiff austerity trimmed its 2012 forecast to 1.5 per originally planned, though there may macroeconomic policies.” For the past decade, he “The most interesting measures while they kept their cur- cent and may cut it further. She adds be scope to reduce some planned Economists and businesses say the has been seen as right- thing is that whatever we rencies pegged to the euro. that growth is being held back by an discretionary spending before the country needs to reduce the influence hand man to Viktor Yanu- do to conduct really free Ukraine has returned to moderate unfavourable policy mix. year-end. of profit-skimming domestic oligarchs, kovich, today’s president, and fair elections is met growth since then, but has still not In common with many economists Sovereign debt, at about 35 per cent and cut red tape and bureaucracy, to twice serving as finance with resistance by our regained all the ground it lost in 2009. Ms Piontkivska cites an exchange rate of GDP, is not problematic. But, with attract both more foreign investment minister and first deputy opposition,” he says. “They With steel accounting for about 40 policy that aims to keep the hryvnia Ukraine due to repay $5.6bn to the and stimulate domestic small busi- prime minister when Mr are already announcing per cent of exports and frozen credit stable against the dollar, despite pres- International Monetary Fund during nesses. Yanukovich was premier. ahead of time that the keeping domestic growth at depressed sure on the currency. That has led to next year – and a $1bn eurobond But after some initial achievements, He headed Mr Yanukov- elections will be fake. So I levels, Ukraine’s economy remains very high interest rates and largely maturing in June – many economists progress on an ambitious government ich’s presidential campaign ask a very simple question. highly vulnerable to external shocks. choked off credit growth this year. believe it will have to renew co-opera- package to improve the business envi- in 2010, and was rewarded If you are against Growth bounced back to 4.2 per cent The policy also means that since tion with the IMF. That will probably ronment has largely stalled. with the premiership. falsification, why are you in 2010 and accelerated to 5.2 per cent much trade is with the eurozone and be in the form of a new stabilisation The fear is that only another round That has left him closely against webcams in the last year, helped by recovering indus- Russia, if the dollar strengthens the programme since the existing but of crisis could release the political will associated with subsequent polling stations?” trial exports and a pick-up in domes- euro and rouble weaken, making suspended $15.6bn programme expires to deal with the underlying issues developments that have The Regions party-led tic demand and investment. Ukraine’s exports less competitive. at the end of this year. holding back Ukraine’s economy. driven a wedge between coalition, he believes, will the EU and Kiev, including emerge with its majority Ms Tymoshenko’s jailing. intact – despite close-run He insists Ukraine is opinion polls – because of misunderstood. Ms its record of economic Tymoshenko, he says, is recovery since 2010. Struggle for identity guilty as charged of “We have something to be proud of,” he says. “In [the past] two and a half years we have done some- Continued from Page 1 the former EU ambassador his worth at $99m. thing in just about every to Kiev, said Mr Yanukov- In written answers to the town and village.” the deepest slumps on the ich had re-established “ver- FT this summer, Ukraine’s Without progress on the planet, its economy shrink- tical power”. Washington- president said his family’s Tymoshenko issue, better ing by 15 per cent. Little based Freedom House has property had been publicly relations with the EU seem surprise, perhaps, that Mr called Ukraine one of only declared and appointments a distant prospect. But Mr Yanukovich – whose initial, two European countries – were entirely merit-based. Azarov says Ukraine is disputed, presidential vic- with Hungary – that is “I have always empha- prepared to wait until tory in 2004 was overturned becoming less democratic. sised competency, technical Europe is more ready to by the Orange uprising – Though the government capabilities and dedication embrace its neighbour. was able to beat Ms in 2010 launched an ambi- to hard work,” said Mr “For us, relations with Tymoshenko in the next tious business reform pro- Yanukovich. “My appoint- the EU have a strategic election in 2010. gramme, the World Bank ments reflect these stand- nature,” he says. “This is Senior members of his ranked Ukraine 152nd out ards. Whom the appoint- our long-term perspective. administration insist his of 183 countries in its Ease ments know is not relevant. It’s not a sprint, it’s a rule has since been misper- of Doing Business index in This is no different from the long-distance race. And in ceived and misrepresented. 2011, down three places. approach [of] any modern the course of this, all sorts Allegations of democratic Mr Yanukovich was origi- democratic government.” PM Mykola Azarov of situations can arise.” backsliding are, they insist, nally seen as a tool of Oleksandr Yanukovich propaganda put out by the certain oligarchs, who has denied his wealth or opposition. helped finance his election business success has any They add the imprison- campaign. But since 2010, connection with his father. ment of the former prime there are signs he has tried Ukrainians will deliver a Future report » minister and several one- to turn the tables and put verdict on the ruling coali- time allies results from a himself at the top of the tion led by Mr Yanukov- clampdown on corruption pyramid – as Russia’s Mr ich’s Regions party in elec- that has caught politicians Putin did in the early 2000s. tions next month – a test of Investing in Russia from all parties in its net. The remaining independ- relations with the west. “For 20 years almost ent media and many With the two leading par- The addiction to volatility every government official Ukrainians have begun ties running close in opin- and the need for change presumed they would never speaking of the “family”, a ion polls, the government is be asked to answer ques- group around the president under international pres- FT Special Report tions about their actions,” seen to have installed sen- sure not to resort to manip- on October 19 says Ukraine’s foreign min- ior loyalists in several min- ulation. Many citizens ister, Kostyantyn Grysh- istries and key public bod- doubt assurances the poll chenko. “This is now chang- ies. Anders Aslund of the will be fair. ing . . . and in [Ms Tymosh- Peterson Institute for Inter- But Mr Aslund says the enko’s] case there was a fla- national Economics, a long- 2004 Orange uprising grant breach of the law.” time Ukraine-watcher, says proved Ukrainians are not But the only top-level pol- an “oligarchic regime” has as ready as Russians to iticians so far convicted are become a “family regime”. accept undemocratic rule. all from Ms Tymoshenko’s Ukrainian media have “The big hope for Ukraine circle, making this appear highlighted the expanding is the parliamentary elec- to be “selective justice”. business interests of Mr tions,” he says. “Ukrainian External assessments of Yanukovich’s eldest son, voters have repeatedly sur- Ukraine’s development Oleksandr, with the Ukrain- prised by their clear insight have also been negative. ian edition of Forbes maga- and courage to stand up to Jose Manuel Pinto Teixeira, zine this year estimating the incumbent power.” FINANCIAL TIMES TUESDAY SEPTEMBER 18 2012 ★ 3 Ukraine ‘Risky’ state also has its attractions

Foreign Direct Investment Widespread corruption and weak investor protection by a f lawed judiciary has left the country in 152nd place of 183 countries in a World Bank ranking, but the nation has much to draw investors, says Roman Olearchyk

t is little surprise that Ukraine has “Over 2008-2010 Kraft Foods has attracted only a quarter of the more doubled the business in Ukraine and than $200bn of foreign investment new markets in eastern Europe and that has poured into neighbouring central Asia,” said Taras Lukachuk, a Poland. The former Soviet repub- vice-president at the food company Ilic’s investment environment can be who heads operations in Ukraine and intimidating. Domestic and foreign also oversees 11 other markets in east- businesses are often choked by ern Europe and central Asia. Mr Luk- bureaucracy and the past two years achuk said that 2011 turnover in this have seen a resurgence of mafia-style broad region increased to $610m from “raider” attacks. $500m in 2010. He says that for Kraft: A combination of widespread “Ukraine is one of the top 10 priority corruption and weak investor protec- markets – on a par with Brazil, China tion by a flawed judiciary has left and India.” Ukraine at 152nd out of 183 countries So what is the secret to succeeding in the World Bank’s most recent Ease in Ukraine? “The country is a high- of Doing Business ranking. beta economy; the timing of entry as Yet on the ground, investors’ experi- well as the length of the investment ence in this vast and promising econ- horizon is important,” says Mr Fiala. omy of 45m consumers on the EU’s He adds: “Over the long term, most eastern border is not all doom and investors do well, as long as they gloom. remain conservative during the boom Ukraine looks “risky” from the times and do not abuse leverage. In standpoint of “high fiscal pressure, general, the market is less developed taxes, corruption and the malfunc- and competitive than central Europe, tioning court system”, says Anna allowing for better growth rates and Derevyanko, managing director of the margins.” Kiev-based European Business Mr Lukachuk says: “Issues arise, Association. “Nevertheless, attractive but they are not big enough to review margin rates that are much higher investment plans; long-term planning than in other developed countries is critical. You cannot enter Ukraine make Ukraine an alluring destination, and expect to have a very profitable despite all the risks.” and promising business in a year or Investors “have done well in less two . . . We didn’t cut staff [in the 2009 regulated sectors” such as fast- economic crisis] but rather exploited this opportunity to make additional investment, and when the crisis was over we turned out to be stronger.” ‘For Kraft, Ukraine is one Jorge Zukoski, president of the of the top 10 priority American Chamber of Commerce in Ukraine, says smart companies under- markets – on a par with stand that there are “certain rules of the game that need to be followed to Brazil, China and India’ be successful”. Mr Zukoski’s “must” list includes: not paying bribes and building posi- moving consumer goods, construction Appetite for expanding, it is so far the only inter- group in eastern Europe. One Ukrain- than €500m into opening more than 30 tive relationships with partners, regu- materials, manufacturing, retail and investment: national fast-food giant to have estab- ian restaurant ranks as the chain’s stores. It plans to open two more by lators and policy makers. Also, find- banking,” she adds. a McDonald’s lished itself. A weak franchising tradi- 2nd in the world – two more are in the the end of this year. ing sectors more amenable to foreign “Generally the strategic investors in Kiev. The tion and lack of reliable logistics and top 20 of more than 33,500 restaurants. Since 1995, Kraft Foods has pumped investors, such as “fast-moving con- that entered the market already in the fast-food standards have kept competitors out, “In 2011, McDonald’s restaurants in $200m into domestic food sector acqui- sumer goods, telecommunications and 1990s or early 2000s . . . have done very company has though insiders say KFC and Ukraine were visited by 10m visitors sitions and green field investments. data transmission, banking and finan- well along with the economy that spent more than other big companies are about to more than in 2010. In the coming It is now represented in Ukraine by cial services, agriculture, audit and expanded 6 times over the past decade $200m on outlets make a move. years we plan to open several restau- more than 13 brands in five legal services, as well as retail”. in US dollar terms,” adds Tomas in the country, McDonald’s more than $200m invest- rants per year,” he adds. product categories, from potato chips Tax breaks introduced this summer Fiala, chief executive of Kiev-based and rivals such as ment has shown that the appetite of Furniture seller Ikea failed to enter to coffee, chocolates and biscuits. for the IT sector are attractive, Ms investment bank Dragon Capital. KFC could soon Ukrainians is among the highest Ukraine after struggling for nearly a Success in Ukraine has led to its Derevyanko says, adding that invest- Take the experience of burger chain follow Bloomberg worldwide. “Ukrainian restaurants decade to purchase land rights, but Kiev office being designated as a local ment-hungry sectors also include McDonald's. Launching 72 restaurants are among the busiest in the world,” during the same period Germany’s hub for 11 countries, spanning eastern infrastructure projects, green and nationwide since 1997 and still says Ian Borden, vice-president for the Metro Cash & Carry has pumped more Europe and central Asia. renewable energy, and tourism. Outsiders boost power sector

shore project have pledged has decided to attract repu- “Closer collaboration . . . Energy to pay a $300m upfront pre- table foreign investors to will allow Western inves- mium upon signing of a develop its hydrocarbon tors to tap an emerging Kiev is heading for production-sharing agree- potential through open and market...and strengthen independence from ment within one year. The transparent tenders.” Europe’s connections with investors have pledged to The long-delayed tenders eastern Europe to balance Russian supplies, invest $200m in the initial show Kiev’s leadership is the region’s complex rela- writes exploration phase, but bil- keen to break national tionship with Russia.” Roman lions more could flow in dependence on Russian gas With Russian imports Olearchyk should commercially viable imports, and that it is not flowing at 40bcm annually, reserves be found. entirely turning its back on Ukraine’s gas bill in recent News that Ukraine has the west. years has reached $12bn Ukraine has seen some posi- brought in two of the Andriy Klyuyev, and above. tive foreign investment world’s largest energy com- Ukraine’s national security That is a tall order for a news this year, with Kiev panies to help unlock off- chief, made this point clear nation with a vulnerable opening up an underin- shore oil and gas comes just in a September 5 Beyond- economy and shaky budget vested but promising months after Kiev’s govern- brics column published by revenues. Ukraine produces energy sector that has long ment picked Shell and the Financial Times: a further 20bcm domesti- dominated by domestic Chevron of the US to lead “Ukraine holds a vital role cally. A 5bcm annual contri- oligarchs. large-scale onshore explora- in powering Europe by pro- bution from the Black Sea If successful, the projects tion using fracking and viding reliable access to combined with fresh could bring in badly needed other non-conventional current sources, exploring onshore finds would be billion-dollar investments, means. Estimated to have new shale and offshore most welcome. and wean a natural gas guz- Europe’s fourth-largest reserves, and helping to In addition to stabilising zling economy off increas- shale gas reserves, Ukraine transition to renewable. Ukraine’s domestic energy ingly expensive Russian has until this year kept The commitment of the balance, big hydrocarbon imports. Last month, offi- international energy majors energy majors shows that finds could improve the sta- cials granted a consortium at a distance. Production Ukraine is open for busi- bility of Russian gas flows led by ExxonMobil of the sharing agreements for ness and is a testament to through Ukraine’s vast US, Royal Dutch Shell and both the onshore and Black our efforts to transform our transit pipeline to Europe. Romania’s OMV Petrom Sea projects are expected to economy,” Mr Klyuyev said. Price disputes between Kiev rights to sign a production- be signed within a year. and Moscow have twice sharing agreement for “We have studied since 2006 disrupted Euro- hydrocarbon exploration in Ukraine’s hydrocarbon pean supplies. a vast territory off its Black potential in some detail and Disputes between In refusing Viktor Yanuk- Sea coast. believe the country can pro- Kiev and Moscow ovich’s repeated requests to Ukraine’s environment vide more energy resources reduce gas import prices to and natural resources min- from its domestic produc- have twice since lower levels, Gazprom ister Eduard Stavitsky says tion,” says Graham Tiley, appears, ironically, to have the Skifska field holds general manager of Shell 2006 disrupted helped to change Ukraine’s reserves of 200bn-250bn Ukraine Exploration and European supplies investment policy for the cubic metres (bcm) of gas, Production. “We are pleased better. and could eventually pro- the Ukrainian government “A new and very impor- duce 5bcm a year. Industry tant industry sector has experts say the deep water been opened for foreign project could reach com- investors on a large scale,” mercial production in seven says Jorge Zukoski, presi- years. dent of the American “We have a unique under- Chamber of Commerce in standing of the Black Sea Ukraine. geology,” ExxonMobil, a He adds: “These projects, newcomer to Ukraine, said if successful, will be a big in a statement. “We are paradigm shift for Ukraine actively working in the helping the country to take Romanian sector of the a giant stride towards Black Sea where, jointly energy independence while with OMV Petrom, we at the same time providing announced a gas discovery an opportunity for the gov- earlier this year.” ernment to prove to the Ukrainian officials say world that they can attract ExxonMobil, Shell and and retain multibillion- other partners in the off- Dig deep: experts hunt for Ukrainian shale gas sites Bloomberg dollar investment projects.”

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Neil Buckley Adam Jezard To advertise, please contact Follow us on Twitter at Eastern Europe Editor Commissioning Editor Jim Swarbrick +44 (0)20 twitter.com/ft.reports 7775 6200, email: Roman Olearchyk Andy Mears [email protected], or All editorial content in this Kiev Correspondent Picture Editor your usual representative supplement is produced by the FT. Our advertisers have Mark Rackevych Chris Tosic All FT Reports are available no influence over, or prior Jakub Parusinski Designer on FT.com. Go to sight of, the articles or online FT Contributors ft.com/reports material. 4 ★ FINANCIAL TIMES TUESDAY SEPTEMBER 18 2012 Ukraine Companies still look westward for cash

IPOs London has been a top destination for initial public offerings, writes Jakub Parusinski, but Warsaw is also proving popular, while expectations from a decade ago that Moscow could see companies f locking there to list still have yet to bear fruit

kraine risks swinging east- there are relatively higher valuations. McKenzie Ukraine, the international advises several Ukrainian companies. companies, argues Marek Buczak, Buczak says. “The elections are ward geopolitically if In 2011 Warsaw topped Europe’s stock law firm is working on six Warsaw “But they sowed the seeds for a long foreign markets director at Quercus clearly not helping.” relations with the EU con- exchange ranking, hosting almost half IPOs – covering such sectors as heavy time, and started reaping in 2010.” TFI fund, which manages about Communication is also a problem, tinue to deteriorate, but even of all of the continent’s IPOs and com- machinery, construction materials Jacek Piechota, head of the Polish $500m. London-listed agribusinesses experts say. Lawsuits over the most such a scenario is not likely ing in third worldwide. and real estate – and two deals for Ukrainian Chamber of Commerce and such MHP or egg producer Avangard valuable asset of London-listed Fer- Uto end a steady westward course Smaller average deals mean the London’s alternative market. Poland’s former economy minister, fail to stand out. rexpo spooked investors, particularly taken by the country’s companies exchange still trails in terms of “Basically, Ukrainian companies says: “Poland has had a special inter- They do not get the stable invest- since the risk was downplayed in the searching for capital. volume, but the Warsaw Stock can choose from three markets – Lon- est in Ukraine for 20 years now. ments of Poland’s pension funds. As a prospectus. There were expectations a decade Exchange has clearly emerged as the don, Frankfurt and Warsaw. But “Part of this is about cultural and result, they usually get stuck at price But tight-lipped executives, unreal- ago that a tepid home market would region’s leader, outgrowing the Frankfurt doesn’t have the liquidity, historical ties, but it’s also about how to earning ratios of 3 or 4, while their istic promises, failures to meet dead- drive Ukrainian companies to list in Vienna-based CEE-SEG Group of cen- and if you don’t go for alternative big the potential rewards are.” Warsaw-listed counterparts can climb lines, and, in one case, the inability to Moscow, but Russia’s markets have tral European exchanges. markets, London requires bigger IMC’s Mr Osypov says: “Warsaw is to 7 or 8, Mr Buczak says. explain the source of $66m in revenue, yet to land a single Ukrainian Ukraine is part of the reason why. companies,” says Ievgen Osypov, chief very active in Ukraine. There is a “When we invest in Ukrainian com- have also bruised the reputation of company listing. Though small by western standards – executive of IMC, a grain farmer and representative office in Kiev, it’s easy panies, we avoid Frankfurt – the Ukrainian companies in Warsaw. London, the listing place of choice typical IPOs range from $30m to $90m one of six Ukrainian companies to to communicate or get information. liquidity is too low – while in London The first debuts were not so bad, for Russian companies, has also – some names have grown into decent debut in Warsaw last year. No other stock exchange has this kind there are too many aggressive hedge said Mr Piechota, but recurring prob- became the top destination for targets even for large buyers. Sun- Tailoring its offer to Ukrainian of presence.” funds and other big commodity com- lems at two or three companies hurt Ukraine’s largest businesses seeking flower oil producer and grain trader issuers, the WSE spent years spread- Warsaw may better suit Ukrainian panies,” he adds. the nation’s image. To change this, to raise capital. In the past seven Kernel set the record, raising $160m in ing the word and opened a representa- Both platforms, however, continue seven WSE-listed firms came together years, domestic giants such as iron 2007, but continued issuing and now tive office in Kiev in 2011, the first to discount Ukrainian companies last month to set up the Ukrainian ore producer Ferrexpo and chicken boosts a free float worth more than and only of its kind. significantly. Mr Buczak names fear Issuer’s Club, which aims to improve king MHP have cashed in by listing $950m. Ukraine now accounts for 12 of 47 Ukrainian companies of economic instability, notably investor relations and put some pres- on the London Stock Exchange. Moreover, the trend is clear as foreign companies on the WSE. continue to sign up for currency devaluation, and political sure on the underperformers. The bulk of the initial public offer- Ukrainian companies continue to sign “At first it was difficult to get risk as the culprits. “We can see a growing polarisation. ings action in more recent years has up for public offerings despite the Ukrainian companies even thinking share offerings despite “Unofficially, many analysts also On one side there is a group which is involved mid-cap companies flocking uncertain situation. about going public,” says Andrzej say they fear potential interventions, trying, recovering losses and growing, to Warsaw, where conditions can be According to Serhiy Chorny, Szurek, head of new markets at inves- the uncertain situation export restrictions, and so on, if the but others are just scraping the better tailored to meet their needs and co-managing partner of Baker & tor relations firm Inner Value, which government feels it needs them,” Mr bottom,” Mr Szurek says.

Stanislaw Ulam, who pro- vided the maths behind the Manhattan Project and Habsburg invented the Monte Carlo method used in genetics and option pricing. Yet solving some prob- lems may be beyond the city’s reach. Technical inno- jewel is a vations and new infrastruc- ture have eased pressure on the borders, but coming in by car remains a problem. A study by the Batory historic Foundation, a Warsaw think-tank, found queues to leave Ukraine could last for 14 hours, with corruption weighing on inefficient survivor organisation. “Ukrainian customs officers don’t see taking bribes as a shameful act, do not fear penalties, and usually themselves indicate who should be paid and how much,” it says. Booming private trade is also adding to the lines. Estimates by Poland’s Cen- charm. Farmers’ markets tral Statistical Office put Tourism: Lviv appear each morning, trams the level of “private export” run through the city’s cob- by Ukrainians at $500m Jakub Parusinski bled streets and the faithful compared with $2.4bn in finds a destination still fill its 104 churches of official trade. numerous denominations. According to Mr Beyzyk, buoyed by Euro The city is now seeking to VAT refunds make Polish 2012 and hoping to move into the big league, products more interesting. buoyed by its experience as Mr Sadovyi concedes cor- reach the big league a host city for the Euro 2012 ruption is a problem but football championship. says he is doing what he A new airport and high can to minimise it. Prague and Krakow, over- speed train to Ukraine’s Lowering costs is another run by tourists, may soon capital Kiev make it more A land time forgot: despite its population of 750,000 – on a par with Kraków – the city has maintained its quiet, idyllic charm Michal Parusinski challenge. An overpriced find a competitor in Lviv. accessible to foreign tour- hryvnia – the result of gov- just across Ukraine’s border ists, 150,000 of whom came Cultural and Historical agement Consulting, which cleansed of foreign influ- founder of the Austrian ernment policy ahead of with Poland. The Unesco during the tournament. Cities. His other plan, to advises foreign investors. ence, Lviv was simply School of economics. Mean- upcoming parliamentary World Heritage site is gear- Lviv has a long way to go. turn Lviv into a regional “People have more contact draped in a veil of greyness, while, the mayor says, his- elections – and low econo- ing up to become the next The city attracts 800,000 to outsourcing and IT hub, is with western entrepre- with the occasional coat of torically themed cafés such mies of scale keep prices hot destination for those in 1m tourists a year com- starting to pay off. Invest- neurs, who find it more tawdry paint. as the Jewish Pub and high, says Mr Kobzarev. search of Habsburg splen- pared with 8m to 9m for ment has poured in, says comfortable to work here But as the paint peels, Masonic Lodge have mush- Despite average monthly dour and good, cheap beer. Krakow, says Oleksandr Mr Kobzarev, and major [than in Eastern Ukraine],” revealing old signs in Ger- roomed. Sadly, no signs salaries of about $340, four Among the cities of the Kobzarev, head of the City employers are working with he adds. man, Polish and Yiddish, so adorn the building of the times lower than in Kra- former Austro-Hungarian Institute, a think-tank. Kra- universities to turn out pro- Just 60 kilometres from too the city is rediscovering former Scottish Café, where kow, overall expenses are Empire, Lviv stands apart. kow has 20,000 beds, while fessionals fast enough to the EU border, Lviv is by its multicultural past, and members of Poland’s inter- similar. Central Europe’s steps Lviv has 6,000, or 10,000 meet expansion plans. far Ukraine’s most Euro- capitalising on famous war Lwów School of Mathe- Yet Mr Kobzarev insists toward the EU came with a including hostels, he adds. A new airport and Unlike other parts of pean city. Following centu- former residents. Tourists matics solved problems that the city remains a steal flood of travellers seeking City mayor Andriy high speed train to Ukraine, Lviv has a thriv- ries of Polish and Austrian drop in for an espresso and would define today’s soci- compared to Ukraine’s capi- medieval town squares, his- Sadovyi hopes to increase ing small and middle busi- rule, it did not fall under a public whipping at the ety, winning what were tal, Kiev, or even other tory and café culture. tourist flows fivefold. “Not Ukraine’s capital ness sector, largely founded Russian domination until Leopold von Sacher Masoch then expensive prizes – regional centres, such as But in Lviv, time stood everyone is aware of the by people who worked in 1939, making its Soviet café, named after the 19th wine, a goose or a bottle of Dnepropetrovsk or Donetsk still. Despite its population pearl of the east,” he wrote make it accessible the west, earning capital experience closer to that of century journalist who gave fine brandy. – tourism markets the city of 750,000 – on a par with by email from China, where to tourists and valuable experience, the Baltics. While other cit- his name to a perversion. They included Stefan hopes to tap. “And com- Kraków – the city has main- he represented Lviv at the says Andriy Beyzyk, head ies saw their centres A plaque marks the home Banach, father of modern pared to Moscow, it’s practi- tained its quiet, idyllic Nanjing World Forum of of Western Ukrainian Man- warped by communism and of Ludwig von Mises, a functional analysis, and cally free,” he adds. Room for profitable growth in the fields of black earth Future report » Investing in Poland Agriculture of Ukrainian Agrarian opment and the Interna- president of the Ukrainian only leased, it cannot be sector with the land policy, route. Oleksiy Vadaturskyy, Investments, owned by tional Finance Corporation, Agribusiness Club, adding: used as a commodity or col- with interventions on the Nibulon’s president told the How the euro Moscow-based Renaissance have driven up agricultural “Plus there are some 100 lateral, which affects house- export markets and wide- Financial Times that, The bread basket of Group, which farms production. farmers working in Ukraine hold and small farms. spread corruption.” despite the absence of gov- crisis is affecting Europe produces 240,000ha on 62 estates. “It’s the only economic from Europe and the US Mr Lissitsa says this lim- However, since Ukraine ernment support, he has the nation “It’s a farmer’s heaven, sector that showed positive introducing and producing its the availability of afford- became a full member of still managed to expand his just a fraction of its the (ideal) climate...and gains during and after the goods using high technol- able loans in an environ- the World Trade Organisa- business “building on our FT Special Report potential yield, says phenomenally productively global financial crisis that ogy.” ment where banks do not tion in May 2008, the gov- own experience which has land,” says Mr Thomson. hit in late 2008,” says But Concorde says the trust or understand farm- ernment has interfered to a made us stronger”. on October 22 Mark Rackevych Its proximity to export Bohdan Chomiak, a partner sector as a whole suffers ers. He adds that educa- lesser degree in the agricul- Mr Vadaturskyy says: markets in north Africa and with Kiev’s UkrAgroCon- from poor land manage- tional institutes are not pre- tural industry than it did in “Ukraine’s leaders always Europe, well- sult consultancy. ment practices, lower appli- paring students for the the past when, periodically, say the right thing. But the Ukraine’s “black earth” – developed rail network and And there is much more cation of fertilisers and out- modern age or offering it restricted exports, says people around them and the chernozem – is an amaz- warm sea ports offer strong to come. Estimates vary, dated machinery, 70-80 per them practical skills. Oleksiy Demyanenko, an those on the ground that ingly deep, fertile soil logistical advantages. Pro- but agriculture experts say cent of which is fully depre- Mr Chomiak says another associate at Asters, a lead- implement policies do whose prodigiously produc- duction and labour costs new agribusinesses with ciated and harms yields constraint is an incoherent, ing Ukrainian law firm. everything completely the tive capacity led the coun- are also lower than in the more than 50,000ha farm Mr Chomiak adds that, inconsistent agricultural Put together, Mr Chomiak opposite, and they are the try to be christened “the EU and land lease rates just 10-25 per cent of the because the farmland policy. “Government poli- estimates that the sector is main threat to business bread basket of Europe”. range from $35 to $90 a hec- nation’s arable land. cannot be bought or sold, cies are holding back the working at only 40 per cent development.” The country has close to tare, a fraction of Latin They use modern farming capacity, though he adds: However, it is only a a third of the arable land America’s averages of $250 techniques and methods “World capital is ready to matter of time before more area of the whole EU, some –$400, Kiev-based invest- such as up-to-date genetics, mobilise and invest in expansion takes place, one 34m hectares, 70 per cent of ment bank Concorde Capi- plant protection and Ukraine, especially private European farmer in which is black earth up to tal says. machinery to implement a equity and sovereign wealth Ukraine says. six metres deep. Production fell sharply variety of business models funds.” Jens Bruno, a business In the past two years after the USSR’s collapse. from pure grain and oil In spite of the hurdles, controller for Grain Alli- Ukraine has matched or The resurgence began later seed farming to vertically companies such as the ance, a private corn, sun- topped yields of the Soviet in the 1990s when multina- integrated operations that domestic agriculture group flower and soy grower era, reaping 40m-50m tionals such as Cargill of produce eggs, poultry, and Nibulon have found ways backed by US and Swedish tonnes of grain and oil-bear- the US entered, investing meat. to cash in on Ukraine’s investments, says those ing crops a year. It is one of vast sums to set up trading, Mr Chomiak says: “The natural endowments. who take a long-term strat- the top producers and production and logistics. upside is there’s enormous Nibulon is a large egy with a strict focus on exporters of sunflower seed But in the past decade, local opportunity to improve the exporter of grains. It has productivity and efficiency and oil, barley, wheat and agribusinesses, fuelled with scale of business models in built up a storage and logis- will win out. corn. cash from initial public any agricultural sector.” tics network, complete with Mr Bruno says: “And the But in a decade or so, offerings in London, Frank- Then there are the dis- inland and river silos, transportation network of investment and knowhow furt and Warsaw, combined trict kings with smaller shipment ports and tug storage facilities, ports and could double grain and oil with affordable loans from farms of 10,000-15,000ha that fleets to transport grain rail – they’re all expanding. harvests, says Peter Thom- the European Bank for are also improving effi- down the river Dnipro, He adds: “It’s only a son, deputy chief executive Reconstruction and Devel- ciency, says Alex Lissitsa, Spade work: Ukranians still work family land by hand Reuters Ukraine’s historic trade question of time.”