Positioning Ukraine for further growth

  • 16 Apr 2004
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Mykola Azarov - Ukraine's finance minister
Mykola Azarov is Ukraine's minister of finance and first vice prime minister, serving in the government of Viktor Yanukovich. Azarov has held the post since November 2002, when president Leonid Kuchma appointed Yanukovich to replace the previous prime minister, Anatoly Kinakh.
Before heading the Ukrainian finance ministry, Azarov spent six years as chief of the state tax administration. From 1994 until 1996, he was a member of the presidium of the Verkhovna Rada, Ukraine's parliament, as well as head of the budget committee from September 1995 until October 1997.
He is a member of numerous organisations including the Coordination Committee on Anti-Corruption and the Fight Against Organised Crime, the Supreme Economic Council, the Intergovernmental Commission on the Regulation of the Food Market, the Coordination Council on Issues of Financial Sector Policy, and the National Security and Defence Council of Ukraine.
Azarov was educated as a geologist, and today he is a professor of geology and mineralogy and a member of the National Academy of Sciences of Ukraine.  Azarov is a prolific author, having written more than 100 publications on taxation and on geology. 

Ukraine's impressive performance in the international debt markets has reflected the country's economic progress since 2000. Ukrainian minister of finance Mykola Azarov talks to Kathryn Wells about the sovereign's borrowing strategy and the importance of implementing structural reforms to continue Ukraine's economic development.

How would you describe Ukraine's progress in the international debt markets since 2000?
Our progress has been significant since 2000, when Ukraine announced a technical default. We had to negotiate a restructuring of our debt with the Paris Club, and foreign reserves with the national bank were very low. We had a negative balance of payments. It is fair to say that the economy was stagnating.

In the period since that time, Ukraine has been a reliable payer of its debt, and the economy has developed at a stable pace.

Now we want to pave the way for the country's corporate borrowers to access the international debt markets, by providing benchmarks for them to borrow against. Our internal/external debt to GDP ratio is very low, which makes borrowing practically risk free. Right now, market conditions are favourable and we are recommending that Ukrainian banks and corporates take advantage. Naturally, this favourable environment cannot continue forever, so it makes sense to access the markets now.

Ukraine is in the fortunate position of not needing to raise funds on the international capital markets, so we can issue strategically. At the same time, we're not ruling out a tap of our existing bonds or a new issue, depending on market conditions.

What are the factors behind Ukraine's impressive economic growth?
GDP growth in 2003 was 9.3%, and reached as much as 11.6% month-on-month in the first two months of 2004. Today, we have a positive balance of payments, and the National Bank of Ukraine foreign currency reserves stand at more than $8.5bn.

Market conditions for our traditional exporters, such as those in the chemicals sector, are very favourable. Sectors such as machine building are also growing.

The most important factor in Ukraine's development is that the population's real income is growing steadily, so the internal market is also experiencing rapid growth. In 2003, banking deposits grew by 1.7 times, which is an important characteristic. This means that the Ukrainian people not only have money, but are also putting it aside. It also allows the banking system to extend credits to our companies.

In terms of political strategy, we are focused on seeing real income growing faster than GDP.

One example I can give of this trend is in the automobile sector. In 2003 alone, we saw a record 220,000 new cars imported into Ukraine, and a further 50,000 produced domestically. This is a clear sign of how the population's wealth is increasing, and the trend has continued so far into 2004. Retail trade also grew by 36% in 2003.

So it is important for Ukraine to provide for investment into the country, and that is why the government is working very carefully on the international capital markets. We have a balanced budget, so we do not need the money that we raise. Our main aim is to refinance our more expensive debt with less costly borrowings.

Can you describe the structural reforms that you are undertaking in more detail?
We have set ourselves the task of at least doubling foreign direct investment (FDI) this year, and are targeting FDI of at least $10bn-$15bn in each of the next five years. This target is actually conservative and in fact, could be much higher. The Ukrainian market is developing at a fast rate, at levels not seen in most European countries.

This is a result of the deep structural reforms that we have been implementing. We have brought about a liberalisation of tax legislation, encompassing a reduction of tax rates to what are now very low levels.

Income tax stands at 13%, general corporate tax at 25% - which will fall further to 20% in 2005 - and we are now working on decreasing the VAT rate.

We are shifting to a principle of individual responsibility for pensions, which will lead to the creation of non-government pension funds.

From January 1 next year land can be freely bought and sold, which explains why we are working so closely on mortgage laws.

The government's main aim is to provide for growth by creating a very stable tax policy.

Our target for 2004 is GDP growth of 9.5%. We plan to double GDP over the next 10 years, creating a favourable environment for international investors.

America borrowed $100bn in February alone, and America is a very rich and well developed economy. What prevents us from doing the same? We have no deficit. I am very worried about the future of the US Treasury, because they have such a huge deficit.

At the same time, we would very much like to believe in the Treasury's reliability, as we know the value of US stability for the world.

Ukraine cannot allow itself to build up a deficit of that size. Our starting point is a balanced budget. We have wider tasks in the field of economic development to focus on. This is why it is important for private companies and banks to issue.

Ukraine has previously guaranteed a Eurobond issue of state owned company Yuzhmash. Do you anticipate extending guarantees to any other Ukrainian corporate issuers?
We don't plan to give out any further guarantees. We only gave the guarantee to Yuzhmash [a space rocket manufacturer] because of an inter-governmental agreement between Ukraine and Brazil about building a site for satellite launches in Brazil, and we wanted to fulfil the agreement.

We see no reason to support those banks looking to issue as they have sufficient assets to ensure that deals go ahead.

Will Ukraine continue to issue internationally purely in dollars or would you consider other currencies?
That is a difficult question. Our reserves are in dollars, so it has made sense to issue in that currency. As long as the National Bank pursues that policy, we would expect to continue to issue in dollars.

At present, Ukraine's domestic sovereign debt market holds only limited attraction to foreign investors, because of obstacles such as low liquidity and limited convertibility. How important do you consider the domestic market to be and what steps do you plan on taking to develop it further?
Our first priority is to develop our stock market. This is a field that neither the government nor Ukrainian companies have paid enough attention to in the past.

Ukrainian enterprises have very low capitalisations. Most companies do not have international accounts, so there is a paradoxical situation in which companies might in practice have huge assets, and carry out projects worth hundreds of millions of dollars, but theoretically they continue to have low capitalisations.

Because of this, Ukrainian companies have low liquidity on the stock market. They are not known or trusted on the international markets, while on the domestic market they do not offer a high enough yield to be interesting to domestic investors.

This is a complex problem. Firstly it is down to the absence of qualified staff and secondly it is because when those companies went through the privatisation process, their assets were deliberately undervalued. Right now, we need to initiate a process of recapitalisation.

These problems can be solved and this is something that we are working on. We will be reviewing the senior management at the Securities Commission, and we are hopeful that the new senior management will work more actively on this once in place.

There are some recent examples of progress. Firstly, non-residents have been buying T-Bills in 2004, and so far have already bought around Hrn65m ($12.5m). Secondly, we recently introduced Hrn2bn of VAT bonds [VAT rebates to companies in the form of bonds that are tradable], and these are helping to increase liquidity.

How is Ukraine placed to respond to an outside shock, such as a sudden global downturn in metals' prices, or a sharp decrease in demand from Russia or Europe?
The government takes all risks relating to a downturn into account. We do not believe there will be a significant shift in demand for metals, nor a downturn in demand from Russia. On the contrary, the Russian market will develop dynamically. So we don't plan any change relative to a downturn in metals' prices or Russian demand.

Because internal consumption of many of our main products is growing very fast, the government is confident that in the event of a downturn demand can be shifted internally. We have seen the construction industry grow by 27% in the last year and the machine building industry by 18% over the same period, and everything points to our internal market developing very favourably, even if external conditions should worsen.

Our positive balance of payments will allow us to deal with any downturn. The foreign currency reserves of both the government and the population are very comfortable.

What is being done to overcome Ukraine's traditionally poor reputation for corruption and political infighting?
This is a very complex problem. We are fighting corruption, for example by raising salaries for state officials. In 2003, average salaries for judges and policemen were increased. Judges now earn around $1,000 a month, which is more than sufficient for honest people.

It is impossible to exterminate the problem of corruption tomorrow - it exists in many western countries too. Openness and transparency of all state and government procedures are very important.

I would advise any investors who find themselves asked for a bribe to report this to representatives of the media. I would also tell all those who complain of corruption, firstly, not to pay these bribes, and secondly, not to wait until they have left Ukraine to complain, but to issue a complaint immediately so that it can be investigated. This will show corrupt officials that they should be scared and that they should expect punishment.

If you look at our government's period in power - 15 months - there have been none of the corruption scandals that took place in the past. 

  • 16 Apr 2004

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 24 Oct 2016
1 JPMorgan 317,793.98 1355 8.72%
2 Citi 301,114.13 1092 8.26%
3 Barclays 259,580.63 846 7.12%
4 Bank of America Merrill Lynch 258,842.43 934 7.10%
5 HSBC 224,273.23 905 6.15%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 25 Oct 2016
1 JPMorgan 32,854.00 58 6.73%
2 BNP Paribas 31,678.29 142 6.49%
3 UniCredit 31,604.22 138 6.47%
4 HSBC 25,798.87 114 5.29%
5 ING 21,769.65 121 4.46%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 25 Oct 2016
1 JPMorgan 14,633.71 80 10.23%
2 Goldman Sachs 11,731.14 63 8.20%
3 Morgan Stanley 9,435.23 48 6.60%
4 Bank of America Merrill Lynch 9,229.95 42 6.45%
5 UBS 8,781.68 42 6.14%