The boys from Donetsk, eastern Ukraine’s steel and coal hub, are back in Kiev. They are running most ministries again, and making life easier for their businessmen friends. But don’t worry too much, investors in Kiev advise, the Donetsk clan is market-friendly. And the economy will grow, whatever it does.
Of 52 deputy ministers appointed since Viktor Yanukovich returned to the prime minister’s office last month, 40 are from Donetsk, where he was governor from 1997 to 2001. And the region’s richest businessman, SCM majority owner Rinat Akhmetov, who is in the new parliament representing Yanukovich’s Party of Regions, is seen as the new power behind the throne.
Most business people in Kiev welcomed Yanukovich’s appointment on August 10 by president Viktor Yushchenko, which ended four months of uncertainty as parliamentarians haggled over possible coalitions after the parliamentary elections in March.
The crisis ended two hours after the constitutional deadline by which Yushchenko should have called new elections. A deal was struck for Yanukovich to return as prime minister – the job he held for two years up to the Orange Revolution of December 2004 – with the support of Yushchenko’s own Our Ukraine party and Aleksandr Moroz’s Socialists.
Promise of stability
The combination promises a stability that Yulia Timoshenko, Yanukovich’s main rival for the premier’s job, could not. But observers warn that if Yanukovich leans too far towards supporting Donetsk business interests, that could upset Ukraine’s economic upswing, which has caused analysts to revive their GDP growth forecasts up from 2-3% to 5-6% for this year.
Yevhen Hrebeniuk, political analyst at investment house Millennium Capital, says that Akhmetov’s lobbying powers are evident in Yanukovich’s early announcement of plans to privatize coking coal plants, and in the appointment of Ihor Hlushchenko, former CEO of SCM subsidiary Skhid Energo, as boss of the State Energy Company, and of Anatoliy Lutsyshyn, a director of SCM affiliate Service Invest, as chairman of Energorynok, the state-owned wholesale energy trader.
“On the one hand, it’s normal for the prime minister to rely on people he trusts, but there is a big question as to whether these people are able to separate their business interests and public activity in the new administration,” Hrebeniuk says. “It is to be hoped that Akhmetov’s interests will be kept in check by the relatively free press, so far the only real gain of the Orange Revolution.”
Olena Prytula, editor of the Ukrayinska Pravda website, the country’s prime source of political news, has some concerns on that score. “Yes, we still have freedom of speech,” she says, “but there are some very worrying and unpleasant signs of change.” Foremost of these was the physical assault by Party of Regions parliamentarians on television journalists Margarita Sitnik and Volodimir Novosad in July.
Among western bankers in Kiev, concern about the Donetsk lobby is tempered by a belief that the political shifts will not significantly impact the economic revival, which is boosted by strong export prices for steel and other metals, and by growing consumer spending power.
Bank Confidence
“Business is good, notwithstanding the political changes,” Nadir Shaikh, Ukraine country manager for Citigroup, says. He noted that the bank had successfully completed its $300 million loan deal with Ukravtodor, the state road repair service, under the caretaker government of Yuri Yekhanurov.
Jacques Mounier, senior country officer of Calyon, says: “The political appointments made in recent weeks, and the perpetuation of links between politics and businesses, mostly from Donetsk region, make us wonder about the short-term perspective. But it is a mistake for foreign investors to look at Ukraine on a day-to-day basis. Long term, the convergence with Europe will continue, and the consumer boom will continue.”
Millennium’s Hreveniuk agrees that Ukraine will keep its pro-western orientation – not only because foreign and defence policy remains under President Yushchenko’s supervision, but also because the steelmakers and other business interests linked to Yanukovich “need western markets”.
It is the consumer boom that has engendered most optimism in Kiev business circles. The volume of retail loans more than doubled, from $3.0 billion to $7.7 billion, in the year to March 2006, helping to keep banking sector growth at 40% per year for the third year running. Four of the top five banks are now foreign-owned, and more purchases are expected.
The effects of the consumer boom don’t stop there, Natalie Jaresko of Horizon Capital, a veteran Ukrainian portfolio investor, says. With consumer spending higher than ever, and fully 56% of the population already identifying itself as middle class in a 2003 survey, “This translates into very exciting investment opportunities.” In 2005, food processing industries grew 13.7% year on year. Horizon bought Shostka, Ukraine’s leading hard cheese maker, and doubled earnings (Ebitda) within the year to mid-2005. And the best is yet to come, Jaresko believes.
There are clouds on the horizon, the most obvious being possible further gas price hikes after mid-October. Gazprom is unlikely to hold export prices at $95 per thousand cubic metres, and Yanukovich will be no more able to prevent an increase than Timoshenko was. Timoshenko herself is not a spent force, either. Watch this space.