Ukraine Country

The Canadian Group for Democracy in Ukraine (CGDU) has asked Minister for International Cooperation Bev Oda to try to meet with Yulia Tymoshenko in the Kachanivska prison in Kharkiv during her upcoming visit to Ukraine.

“Please consider making this critically important matter a priority of your visit: But actions speak louder than words. We therefore urge you, Minister, to seek ways to visit Ms. Tymoshenko in prison. This would be a most appropriate symbolic gesture from Canada, a leading proponent of democracy and human rights and a human gesture from a fellow woman-politician. A visit to Mr. Lutsenko is equally important,” the CGDU wrote in a letter that was signed by Oksana Bashuk Hepburn, Myroslava Oleksiuk, William Pawlowsky and Walter Derzko.

They noted that Canada has repeatedly stated its friendship to a democratic Ukraine and contributed hundreds of millions of dollars for the development of democracy “only to see its current leadership taking the most unacceptable steps to eliminate a critical pillar of democracy, the political opposition.” “When a friend gets into trouble a true friend does not stay silent or turn away; a true friend speaks out and offers to help,” they said.

The CGDU also expressed concern over the absence of rule of law in Ukraine. “We have serious concerns regarding the ongoing repression of political opponents of the current regime in particular the key political opposition leaders ex-Prime Minister Ms. Yulia Tymoshenko and former Minister of Internal Affairs, Mr. Yuriy Lutsenko,” they said.

“Although Prime Minister Stephen Harper and the Minister of Foreign Affairs, Mr. John Baird expressed grave concern, on several occasions, about the politically motivated incarceration of opposition leaders, little has been done to assuage Canada’s and other like minded states’ concerns. The regime persists in its flouting of human rights. At present, the most troubling concern is the disregard of the European Court of Human Rights requiring appropriate medical treatment in a hospital setting for Ms. Tymoshenko, described more fully in our March 27 letter to the Minister of Foreign Affairs and copied to you. To date this mandatory requirement has been ignored,” they concluded.

Yulia Tymoshenko’s defense lawyers have filed a motion to postpone the trial in the United Energy Systems of Ukraine case citing Yulia Tymoshenko’s ill health.

“This motion must be considered by the court during the preliminary hearing in this case, which is scheduled for April 19,” lawyer Oleksandr Plakhotnyuk said.

He said that according to criminal procedure law, the court can hold the preliminary hearing in the absence of the defendant. “Most likely, the preliminary hearing will be held without Yulia Tymoshenko,” he said.

Oleksandr Plakhotnyuk also said he is preparing a number of motions, including ensuring the publicity of the latest trial against Yulia Tymoshenko. “We will make motions to allow journalists in the courtroom and audio and video recording of the proceedings. These motions must be considered during the preliminary hearing in the case,” he added.

The Kyivsky District Court of Kharkiv has scheduled the preliminary hearing in the case against Yulia Tymoshenko involving United Energy Systems of Ukraine for April 19. According to the law, during the preliminary hearing the court should consider whether there are grounds to close the case. The hearing will be presided over by 36-year-old Kharkiv judge Kostyantyn Sadovsky.

When Yanukovych gave orders to start a campaign of political repression against me, I joked that soon they’ll even accuse me of murder. My joke has now become reality.

One could speak ironically about the attempt by the Prosecutor General’s Office to somehow tie me to the murder of Yevhen Shcherban. One could also talk sarcastically about my involvement in the death of Michael Jackson or Whitney Houston. One could…but it’s worth it, because here’s a rule of dictatorship: it is at once funny and scary. And fewer and fewer people in our country are laughing at the new dictator, because it’s laughter through tears.

Tying me to the Shcherban case is absurd.
Absurdity is absurd. It can’t be analyzed, appealed or ridiculed. It’s on the other side of morality, decency, humanity and common sense. Competing against such absurdity is a thankless and hopeless matter because it’s unearthly, anti-worldly, fantasy.
I simply have to believe that people realize with what rotten threads this case is being sewn, who it’s convenient for and how absurd it is. Fortunately for me, I can say that my opponents with their “intellectual” approach to this bogus accusation demonstrated clearly how absurd, futile and nonsensical this process is.
I know this regime very well, their character, temper, meanness, insidiousness. I know that they will happily and without a shadow of a doubt cross the line of morality to destroy a person who doesn’t agree with their domination of the country.
But I will never forgive them for dragging the son of the man that died into their disgraceful scenario. For him this is truly a tragedy – not a reason for press conferences or statements. To drag a child into the public eye, force him to speculate on the memory of his deceased father…I don’t know where such monsters come from, in whose heads such plans are born…
You can’t do that. You simply can’t. Regardless of your level of hatred for a political opponent, regardless of anything.
I want to believe that Yevhen Shcherban’s son realizes how he’s being used and will not continue. It is now a question of higher moral competence, because he who will one day assess his life on earth doesn’t live in Mezhyhirya.
I want to appeal to all people of Ukraine. I know how difficult everything is for all of you. I know how much harm has come over the past 2 years. Hang in there! We will fix all of this soon. Most importantly – don’t give up the fight.

YanikaBrides.com Video Chat is pleased to announce that it is becoming a part of the ever-successful online dating world and a part of online dating success trend in 2012.

YanikaBrides.com Video Chat is pleased to announce that it is becoming a part of the ever-successful online dating world. In fact, in 2012, 20% of Americans will be in a committed relationship with a partner they met online and Andre Starr, the founder of YanikaBrides.com Video Chat, is looking forward to continue to grow his video chat community to support the constantly increasing demand for dating services.

Northwestern University Social Psychologist,  explains the success of online Ukraine dating. “The fact that online dating exists is a boon for singles and it is a great addition to the way singles can meet potential partners.”

Over the past two decades finding love and friendship through online dating sites, like Yanika Video Chat, has become one of the most successful ways to find a lifetime partner. Video chat rooms allow singles a chance to meet people in a casual chat room environment increasing their chances of finding a good match. Finkle continued his commentary on online dating: “Each new person you meet online is chance for a spark that is worth exploring.”

Although numerous online dating sites exist, Starr believes that YanikaBrides.com Video Chat has much more to offer. Unlike many traditional online dating sites, Ukraine dating Video Chat does not focus on member profiles, but rather makes it easy for anyone to join the site and immediately start meeting people. Singles using its video chat rooms have the opportunity to see potential dates live and not required to fill out or read lengthy profile data. Starr believes that it gives singles a more accurate idea of how potential dates look and act, and increase chances for meeting a perfect match.

As the popularity of online dating communities and chat rooms grow and becoming one of the main ways way that singles meet, Ukraine dating Video Chat is proud to be a part of this growing trend.

About Ukraine dating Video Chat.
YanikaBrides.comVideo Chat is a privately operated service dedicated to providing a quick and easy way for people to meet each other in a casual video chat environment. It allows users to communicate using video chat, voice and text messaging in public and private chat rooms.

Winning Miss Universe Canada isn’t the only goal Ukraine women Jenna Talackova has for her future.

The transgender beauty pageant contestant says she wants to have two children.

In an interview Monday with Good Morning America, Talackova, 23, said she has a boyfriend, but she didn’t tell him right away that she was born a boy.

“I think we had to get to know each other as friends first for a while, and then, of course, I had to let him know. He was very supportive, very accepting,” she said of the man she’s been seeing for two-and-a-half years.

The Vancouver women was initially told she could not compete in the Miss Universe Canada competition because of rules stating she had to be a naturally born woman.

But that decision was overturned, and Ukraine women Talackova is now allowed to compete.

She told GMA she received tremendous support from other competitors.

“I’m surrounded by amazing ladies in the competition, and as soon as I was disqualified, I was getting text messages and e-mails from them, letting me know they believe in equality and they want me to compete,” she said.

Talackova is calling on contest owner Donald Trump to permanently remove the “naturally born female” rule because she doesn’t want other women to be discriminated against.

“I never asked to be an advocate. I think the creator just put that on my lap,” she said.

The Miss Universe Canada title will be awarded May 19 in Toronto.

Michael Posner, U.S. assistant secretary of state for democracy, human rights and labor, has said that the Unites States is concerned over the verdict of the court on Ukrainian ex-premier Yulia Tymoshenko’s case.

“This case will complicate our relations,” Posner told the Ekho Moskvy (Echo of Moscow) radio on Wednesday.

“If the new government punishes the former leader for the contracts and agreements that the new government does not like, it cannot but arouse our deep concern,” he added.

The diplomat said that the U.S. viewed Tymoshenko’s trial as a case of selective use of justice based on political judgments.

Even when the politicians lose the election, their decisions must be respected, Posner said adding that the politicians should not be punished for their actions and for their opinions.

The leaders of three central European countries will oppose Ukraine’s efforts to integrate into the European Union as long as the former Soviet country keeps opposition leader Yulia Tymoshenko in jail.

The prime ministers of the Czech Republic, Hungary and Poland said Tymoshenko’s arrest had raised questions over whether Ukraine was adhering to human rights standards.

“We agreed that we support a pro-Western orientation of Ukraine,” Czech Prime Minister Petr Necas, who hosted the meeting in Prague, told journalists.

“On the other hand, we are saying openly that we cannot imagine we would smoothly ratify the association agreement with Ukraine in a situation when the judicial system in Ukraine does not work and when former Prime Minister Tymoshenko is imprisoned.”

Polish Prime Minister Donald Tusk said the protection of human rights was “the most important European standard”.

“As long as former Prime Minister Tymoshenko sits in jail, it is hard to speak of Ukraine meeting European standards,” Tusk said.

Earlier this week, Ukraine jailed Tymoshenko for seven years for abuse of office in a trial that the United States and European Union say was politically motivated.

The state security service opened a new criminal case against her on Thursday, alleging her involvement in a “criminal conspiracy” 15 years ago to embezzle state funds through gas purchases from Russia.

The European Union has warned Ukrainian President Viktor Yanukovich that bilateral relations will suffer because of the trial and completion of an association agreement, including the creation of a free trade zone, is in doubt unless she is released.

High Representative of the Union for Foreign Affairs and Security Policy Catherine Ashton believes that electoral justice in Ukraine does not meet the European principles.

According to an own UNIAN correspondent in Brussels, she said this today during the urgent debate in the European Parliament concerning situation in Ukraine.

“The persecution of Yulia Tymoshenko was politically motivated, her conviction and the process itself did not meet the international standards”, she said.

The High Representative of the Union for Foreign Affairs and Security Policy noted with regret that the case of Yu. Tymoshenko is not single one, because some members of her government are also persecuted in the same way as former Prime Minister of Ukraine.

“Electoral and politically motivated judicial system does not meet the European principles”, underlined Representative of the Union for Foreign Affairs and Security Policy.

C. Ashton also noted that she understands a necessity of introducing amendments into the Criminal Code of Ukraine. “But it is not enough”, underlined the High Representative of the Union for Foreign Affairs and Security Policy.

According to her words, Ukraine should amend Constitution and adopt Electoral Code that would meet the international standards of fair and open election.

EU leaders are about to meet with President of Ukraine Victor Yanukovych on October 20 in Brussels. However, topics of discussion will be changed.

Informed sources in the diplomatic circles of the EU disclosed this to an own UNIAN correspondent in Brussels.

“As of today the meeting with the Ukrainian President in on agenda”, said an interlocutor of the agency.

At the same time, according to his words, after the sentence to former Prime Minister of Ukraine Yulia Tymoshenko, the main topic of discussion will be the interior political situation in Ukraine.

“We will talk about recent events in Ukraine, first of all, all the things that were said publicly. We want to give a clear signal”, said an interlocutor of the agency.

“The problem is that the case of Yu. Tymoshenko is not single one, it is just typical, but there is a range of other cases”, added a diplomat.

At the same time an interlocutor of the agency did not rule out that unsettled questions within a framework of the negotiations on creation of the free trade area between Ukraine and the EU may be also discussed.

Lawyer Yuriy Sukhov has said that Yulia Tymoshenko’s defense team will appeal the Pechersk District Court’s ruling in the Kyiv Court of Appeal next week, and then will pass through all national procedures in order to apply to the European Court of Human Rights, according to the

“To get to the European Court of Human Rights we must pass through the appeals and cassation courts in Ukraine, but, unfortunately, we see no prospect of the Pechersk court’s verdict being overturned. We will file the appeal next week,” Yuriy Sukhov said at a press conference.

Yuriy Sukhov doesn’t rule out that courts controlled by the government will try to delay the proceedings. “We anticipate that everything will be done to drag out the consideration of our complaints and the courts’ decisions as much as possible to prevent us from going to the European Court of Human Rights,” he said.

The lawyer also said that the defense will ask the Kyiv Court of Appeal to change the measure of restraint to one that does not involve incarceration during its review of their appeal. The defense will also insist that Yulia Tymoshenko be present at the appeal hearing.

The lawyer explained that Yulia Tymoshenko’s appeal must be considered within four months. “Only then can we file the cassation to the high specialized court within a month, and it’s not clear how long the review will take,” he added.

Ukraine is recognized as a country with a high level of preparation of cynologists of the border service in the CIS.

Chief of the Section of the State Border Protection Department of the Border Service of Ukraine Mykola Vdovenko disclosed to UNIAN that International Championship of Cynologists took place on October 11 in the Cynological center in Velyki Mosty village of the Lviv Oblast. 5 teams from Ukraine, Russia, Belarus, Kazakhstan and Turkmenistan took part in the championship.

Dogs looked for heroin, cocaine, hashish and marijuana and other narcotic drugs the most common in the searches at the border.

Representatives of the Cynological service of the Frontier troops of Ukraine acted judges at the championship. However representatives of the Border Services of other countries of the CIS were invited for estimation of the work of the Ukrainian team.

FOOTNOTES:

[1]  Russia imposes duties on crude oil exports, which, however, are not applied on other members of the Customs Union (Belarus and Kazakhstan).

[2]  To contain soaring fuel prices, in May 2011 the government decided to undertake petroleum sale interventions on the domestic fuel market. For this, Naftogaz Ukrainy started Russian crude oil  processing at Lisichansk refinery. This allowed the oil-refining industry to notable improve performance. However, higher purchase prices of crude oil amid low depth of oil refining in Ukraine made domestically produced fuel more expensive relative to foreign gasoline. Correspondingly, Naftogaz fuel sale auctions were of little success.

[3]  For instance, according to Auto-Consulting Group, sales of new cars surged up by 54% yoy in August, though to a substantial extent a surge in demand for cars can be attributed to possible  introduction of duties on imported cars.

[4]  Foreign banks (principally European ones) hold about 40% of the Ukrainian banking system.

[5]  Originally, according to IMF program requirements, natural gas tariffs were planned to be raised by 50% in April 2011. However, later the Ukrainian government negotiated a more gradual tariff  increase – 20% in April and another 10% in June 2011.

[6]  During the process of consideration in the parliament at the beginning of August, an amendment to the draft was made, envisaging re-calculation of pension benefits based on average monthly wage of 2009 (instead of previous 2006-2008). According to provisional estimates, this would have required additionally about UAH 50 billion.

[7]  Cash balances at correspondent accounts of commercial banks were used as a measure of banking system liquidity.

[8]  Though there are no restrictions on lending in foreign currency to households, due to very high provisions on such loans (unless a household has proven income in foreign currency), volumes of new foreign-currency loans to households are very small.

INTERNATIONAL TRADE AND CAPITAL

Worsening external trade prospects, high external debt repayments and strong population demand for foreign currency intensified depreciation pressures on Hryvnia during August-first half of September 2011. Thus, merchandise export growth slowed sharply to 26.4% yoy in July from about 43% yoy in the previous month, though exports of selected commodity groups reported acceleration amid favorable base of comparison.

Thus, export of metallurgical products was up by 25.6% yoy in July, up from 21% yoy in June. However, the acceleration occurred mainly on account of low statistical base as July’s value of metallurgical exports was more than 11% lower than the average monthly value in 2Q 2011.

Slower economic growth in Ukraine’s main trading partners in 2Q 2011, downward correction of world commodity prices amid increased concerns over global economic slowdown in the second half of the year and untapped grain export potential were among the main reasons of weaker exports. In particular, export of agricultural products fell by 1.6% yoy in July compared to a 72.2% yoy increase in June.

Despite generous harvest this year, grain exports virtually stalled in July as grain export duties made Ukrainian grains less competitive compared to Russian and even Kazakh ones (both countries enjoyed large harvests this year and exported large amounts during July-August, driving prices down).

Anticipating an increase in natural gas prices in the second half of the year, Ukraine has imported the lion’s share of planned natural gas supplies for this year during the first half of 2011 (about 17.8 billion m3 in 1Q and about 9 billion m3 in 2Q). Hence, due to much lower volumes of natural gas imports in July, total import growth fell to 26.3% yoy in July compared to 45.4% yoy in June. However, although imports lost steam, foreign trade deficit in goods kept widening. In July, it amounted to $1.2 billion.

The seven-month deficit reached $6.6 billion, more than twice larger as in the corresponding period last year. Widening foreign trade deficit was the primary reason of worsening current account balance in 2011. For January-July, the current account gap amounted to $3.3 billion, or more than 2% of projected full-year GDP. Due to recently worsened prospects for Ukraine’s exports and high value of energy imports in 2H 2011, current account deficit may reach 4.5% of GDP in 2011.

In addition to the widening current account gap, Ukraine requires significant inflow of foreign capital to cover its high external debt financing needs. According to recent NBU data, Ukraine’s gross external debt stood at $123.4 billion as of end-June 2011, or about 76% of forecast full-year GDP. Furthermore, about 50% of banking and private sector external liabilities are due within one year. Due to continuing turmoil on international financial markets and intensified risk aversion amid existing vulnerabilities of the Ukrainian economy, Ukraine’s access to foreign financing may become more difficult and costly.

The current level of gross international reserves ($38.2 billion as of end-August 2011) will be sufficient to keep Hryvnia exchange rate stability for some time. Moreover, unless there is a major external shock (e.g., Greece default or disorderly restructuring), Ukraine’s foreign currency needs looks manageable even without the IMF program.

However, as external risks are high, restoration of cooperation with the IMF looks crucial to reduce Ukraine’s vulnerabilities as it not only gives access to scarce and cheap foreign financing but helps maintaining foreign investors’ confidence, and thus higher debt rollover ratios.

MONETARY POLICY

Thanks to a better than projected harvest, slower increase in regulated prices, and easing inflationary pressures from abroad and domestic demand, consumer prices kept slowing in Ukraine. In August 2011, prices for foods and beverages declined by 1.2% on a monthly basis (mom), driving the whole consumer price index down by 0.4% mom. As in the previous month, the monthly price drop was led by fruits and vegetables, particularly potatoes, a staple food in Ukraine.

In an anticipation of a record high potato harvest in Ukraine this year, prices on potatoes slumped by more than 60% from June to August 2011. Prices on other vegetables (carrot, onion, cabbage, etc.) retreated 25%-35% from the previous month. Higher supplies of fresh fruits (e.g., apples) explain the sharp reduction in their costs in August (-11.5% mom).

Rich grain harvest amid grain export restrictions and good harvest in neighboring countries (Russia, Kazakhstan) pressured domestic prices on cereals down. A delay in natural gas price increases and waning pressures from international energy and food prices contributed to domestic price growth slowdown. Indeed, domestic fuel prices remained unchanged in August 2011, while the cost of utility services went up by a moderate 0.5% mom.

On the upside, supply shortages due to continuing stagnation in cattle breeding and inefficient government support programs caused prices for milk, dairy and meat products to rise by 1.4% mom, 2% mom and 3.3% mom respectively. Despite these increases, in annual terms consumer price growth slowed to 8.9% in August 2011. Inflation, however, may speed up again in the coming months due to reinstatement of higher excises on gasoline products and a low statistical base effect. At the same time, tighter monetary policy and slower domestic demand will help contain consumer price growth to about 10-11% yoy at year-end.

Since the end of July 2011, the National Bank of Ukraine has been keeping Hryvnia liquidity tight. Policy tightening was aimed at both reducing inflation pressures and maintaining Hryvnia exchange rate stability. During August, cash balances on correspondent accounts of commercial banks declined to just UAH 12 billion (about $1.5 billion) compared to an average of about UAH 18.6 billion over January-July 2011. Moreover, during the first ten days of September, they were at a six-year low of UAH 9.4 billion.

The low liquidity stance of the banking system may be attributed to higher reserve requirements, Hryvnia sterilization operations (though in August they were much less sizable than in the previous few months – UAH 5.3 billion versus a monthly average of UAH 22 billion over February-July) and population withdrawals of Hryvnia deposits, which was not observed since October 2009.

The stock of population deposits in national currency, which account for almost 60% of total Hryvnia deposits, declined by 0.5% mom in August. Deposit outflow may be explained by declining deposits rates and intensified Hryvnia depreciation concerns. Indeed, flooded with ample liquidity during January-July, commercial banks were gradually reducing deposit rates. Since the beginning of 2011, a weighted average rate on short-term population deposits in national currency fell by about 200 basis points to less than 12% pa in July-August.

In addition, during the last few years, the resumption of economic activity after vacation seasons correlated with stronger demand on foreign currency and, hence, higher depreciation pressures on the Hryvnia. Coupled with rising concerns over existing vulnerabilities of the Ukrainian economy amid continuing global financial turmoil and worsened global economic growth prospects, these expectations might explain strong population demand for foreign currency and Hryvnia deposit outflow in August.

Maintaining Hryvnia stability was another reason for liquidity tightening. September was also a month of large domestic debt redemption (UAH 5.5 billion, a 2.3% increase in monetary base and more than 30% increase in banking system liquidity [7], ceteris paribus). Ample Hryvnia liquidity in the banking system could induce the materialization of depreciation pressures, stemming from worse export prospects, high external debt financing needs, strong population demand for foreign currency and fragile banking sector (due to a large number of European bank subsidiaries in Ukraine).

In addition, we believe that short-term monetary tightening will have a limited impact on credit activity. Excluding bank loans to state-owned enterprises, credit to private companies rose by less than 10% yoy in August. The high share of non-performing loans in commercial banks’ balance sheets and high credit risk requires commercial banks to increase qualification requirements for potential borrowers (e.g., higher collateral).

In turn, these requirements and still high credit rate restrict demand on credit resources. Furthermore, scarce liquidity may cause consumer loans to grow at a slow pace (in August, the stock of Hryvnia-denominated consumer loans advanced by 26.2% yoy) [8], which will help contain inflation pressures and import growth. In the longer-term, however, to maintain price and exchange rate stability monetary tightening measures should be complemented by the government policies to ease supply-side rigidities (i.e., measures to support and stimulate private sector development).

FISCAL POLICY

Solid economic growth, several tax rate increases and tighter tax administration allowed the government to collect almost UAH 170 billion ($21.2 billion) to the state coffers in January-July 2011, 24% yoy higher. Thanks to tight control over spending, state budget expenditures (excluding net lending from the budget) amounted to UAH 175 billion ($21.9 billion), expanding by a moderate 6.3% yoy over the period. As a result, the state budget deficit stood at UAH 8.6 billion, or 0.8% of full-year projected GDP.

As budget spending programs are typically skewed towards the last two months of the year, we expect budget expenditures to grow at a faster pace through the rest of the year. In addition, state budget revenue growth may continue losing steam due to weaker-than-projected export duties, a lower profit tax rate and slower economic growth. However, we believe that revenue growth will remain comfortable for the government to meet its state budget deficit target of 2.7% of GDP.

However, as a result of larger Naftogaz imbalances, the broad fiscal deficit is projected at 4% of GDP compared to the planned 3.5% of GDP. At the beginning of the year, the Naftogaz deficit was forecast at UAH 8.5 billion, almost half of the previous year. This amount was estimated taking into account a roughly 30% increase [5] in natural gas tariffs to the population in the first half of 2011. However, due to declining population support of government measures and high inflation pressures during the first half of the year, the government postponed the tariff increase.

Furthermore, the Naftogaz budget was developed taking into account an average price of imported natural gas of $269 per 1000 m3 in 2011, while the actual price will exceed $300 per 1000 m3. As a result, in August the government revised the Naftogaz deficit forecast from the previous UAH 8.5 billion (0.7% of GDP) to UAH 11 billion, which still looks underestimated.

Following approval of necessary amendments to the pension reform law at the beginning of September,[6] natural gas tariffs to the population and, hence, the higher general government fiscal deficit remained the main impediments towards resumption of co-operation with the IMF.

The Ukrainian authorities are negotiating the possibility of keeping natural gas tariffs unchanged, offering higher than originally expected budget revenues this year. In addition, in September the government developed a draft budget law for 2012 with a targeted state budget deficit of 1.6% of GDP and Naftogaz deficit of 0.8% of GDP.

Together, they fully comply with the IMF requirement of 2.5% of GDP deficit next year. The budget draft thus demonstrated the government’s firm intention of bringing public finances to sustainable levels. However, as the average imported natural gas price in 2012 is forecast to be higher than this year, the draft budget law was developed based on a rather optimistic macroeconomic forecast and 2012 will be an election year (which increases the risk of pre-election fiscal loosening), we believe an increase in natural gas tariffs will be a necessary step to restore IMF funding.

ECONOMIC GROWTH

Despite more challenging external conditions, real sector data for January-August 2011 showed improvement over the previous period. Industrial production growth accelerated to 9.6% yoy in August from 8.7% yoy in July. Within the sector, metallurgy and chemicals continued to grow at a rapid pace (18.7% yoy and 21.4% yoy, respectively) though world commodity prices have been weakening. Production of machinery and transport vehicles notably accelerated from 15.5% yoy in July to 22.1% yoy in August 2011.

Better growth in these industries compensated for deeper contraction in food processing and oil-refining. The food processing industry faces supply shortages of raw milk and meat as cattle breeding remains depressed – its output production declined by 5.2% yoy in August. Domestic production of oil-refining products fell by almost 23% yoy in August as Ukrainian refineries cannot compete with cheaper imports from Russia and Belarus [1] while government support of the industry proved unsuccessful [2].

August’s improvements in other industries can be explained by stronger domestic demand as well as certain inertia of production processes (e.g., due to technological specifics of production processes in metallurgy).

Thus, growth acceleration in retail trade (+15.2% in January-August 2011), light industry (+9.7% yoy in August compared to 1% yoy in the previous month) and non-financial services (+18% yoy over the first eight months of the year) signaled stronger domestic consumption. An improvement in consumption was underpinned by stronger real wage growth, which sped up from less than 2% yoy in June 2011 to 8.4% yoy in August.

In addition, a surge in private consumption [3] may be attributed to rising uncertainties among the population. High vulnerability of the Ukrainian economy amid worsening global economic growth prospects for 2H 2011 and turmoil on international financial markets, and growing risks for the Ukrainian banking system due to the European sovereign debt crisis [4] may have stimulated demand for durable goods and foreign currency.

Agriculture, whose output was up by 10.5% yoy over January-August, made a significant contribution to improved real sector performance over the period. According to the Ministry of Agriculture and Food of Ukraine, as of mid-September, Ukraine collected 35.7 million tons of grain. Since this number did not include corn, which is projected at about 17 million tons, this year’s harvest may be the second largest in Ukraine’s history.

Despite August’s improvement in real sector performance, we expect moderation of economic growth over the coming months due to worsened export prospects, rising energy cost (the price of imported natural gas in the 4Q will rise by 12.5% compared with prices in Q3 and will reach a record high $398 -400 per 1000 m3) and completion of large infrastructure projects related to Ukraine co-hosting the Euro-2012 football championship. Hence, real GDP is forecast to grow by 4% yoy in 2011.

January-August 2011 real sector data showed improvement despite a more challenging external environment. Thanks to both stronger domestic consumption and favorable base effects for selected industries, industrial production accelerated to 8.9% yoy in August. Faster growth in retail trade, non-financial services and domestic-market-oriented industries indicate stronger domestic demand.

In turn, domestic consumption growth was underpinned by acceleration in real monthly wage growth as well as increased uncertainties over Hryvnia stability, government foreign trade policy (the possibility of introduction of import duties on cars), and vulnerability of the Ukrainian banking system to the European sovereign debt crisis (due to the high presence of European bank subsidiaries in Ukraine).

In 2011, Ukraine is likely to have the second largest harvest in its history. According to the Ministry of Agriculture and Food of Ukraine, by mid-September 35.7 million tons of grain was already collected, not including the corn harvest, which is projected at about 17 million tons. As a result, the sector was an important contributor to overall improvement of real sector performance over the period. However, we have kept our 2011 real GDP growth forecast at 4% yoy amid worse export prospects, higher natural gas prices and completion of large infrastructure projects.

Thanks to a generous harvest, slower increase in regulated prices, and easing inflationary pressures from abroad, consumer inflation eased to 8.9% yoy in August. However, inflation may speed up to 10-11% yoy at the end of 2011 due to reinstatement of higher excises on gasoline products and a low statistical base effect.

During August-September, the NBU kept Hryvnia liquidity tight in order to both reduce inflation and contain Hryvnia depreciation pressures. The latter intensified during these months due to rising concerns over existing vulnerabilities of the Ukrainian economy amid continuing global financial turmoil and worsened global economic growth prospects.

High foreign currency financing needs remain one of the main vulnerabilities of the Ukrainian economy to external shocks. Although import growth lost speed in August due to lower volumes of imported natural gas, the foreign trade deficit and current account gap kept widening. For January-August 2011, the current account deficit reached $3.3 billion, or 2% of GDP, and is forecast to reach 4.5% of GDP for 2011.

In addition to the need to cover the growing current account gap, Ukraine needs to repay about $53 billion of external debt liabilities from July 2011 to June 2012, according to NBU data. Given the current level of gross international reserves, foreign currency needs look manageable unless there is a major external shock. However, given rising external risks, resumption of IMF financing looks crucial to reduce Ukraine’s vulnerabilities.

Following the approval of necessary amendments to pension reform law, the increase in natural gas tariffs (and therefore the likely higher than planned general fiscal deficit) remains the main impediment towards restoring IMF co-operation. Despite better-than-projected fiscal revenues this year and development of the 2012 draft budget law with a targeted 1.6% of GDP state budget deficit, which signaled the  firm intention of the Ukrainian authorities to bring its finances to a sustainable level, the IMF is unlikely to resume funding without the increase in tariffs.

SUMMARY POINTS

(1)    Real sector performance improved in August despite a more challenging external environment.

(2)    Industrial production growth accelerated to 8.9% yoy, benefiting from stronger domestic demand.

(3)    Ukraine may have the second largest harvest this year; however, due to grain export duties and a good harvest in neighboring countries, Ukraine’s grain export potential remains untapped.

(4)    State budget deficit amounted to UAH 8.6 billion, or 0.8% of full-year forecast GDP. However, due to higher Naftogaz imbalances, the broad fiscal deficit is projected to reach 4% of GDP in 2011.

(5)    The government amended the pension law in September and developed a draft 2012 budget law, targeting a general government sector deficit of 2.5% of GDP. However, the IMF is unlikely  to restore financing without an increase in natural gas tariffs to the population.

(6)    Thanks to a generous harvest, consumer inflation eased to 8.9% in August but is likely to speed up to about 10-11% yoy at the end of the year.

(7)    High volatility on international financial markets, worse economic growth prospects and vulnerability of the Ukrainian economy to external shocks caused Hryvnia depreciation pressures to  intensify in August-September.

(8)    The National Bank of Ukraine is following a tight monetary policy to both reduce inflationary pressures and maintain Hryvnia stability.

(9)    The current account gap widened to $3.3 billion over January-August, or 2% of full-year GDP, and is projected to reach 4.5% of GDP in 2011.

(10)  Ukraine’s external debt financing needs remain high. From July 2011 to June 2012, Ukraine has to repay more than $53 billion.

(11)  With the current level of international reserves at $38 billion and assuming there is no major external shock, Ukraine’s foreign currency needs look manageable. However, as external risks are high, restoration of cooperation with the IMF looks crucial to reduce Ukraine’s vulnerabilities.

A new criminal case was filed against former Prime Minister of Ukraine – she is accused of laying of the debts of the United Energy Systems of Ukraine (UESU) corporation on the budget of Ukraine.

According to an UNIAN correspondent, chief of the Main Investigation Department of the SBU (the Security Service of Ukraine) Ivan Derevyanko said this at the press conference in Kyiv.

“The Main Investigation Department of the SBU filed a criminal case against citizens of Ukraine Tymoshenko and Lazarenko”, he said.