Ukraine before the crash
"TOMORROW". Valentin Yurievich, politics basically begins with the economy. Please characterize the economic and financial situation in Ukraine before the so-called “Victory of Maidan”.
Valentin KATASONOV. Let's start with the real priorities of Ukraine and foreign investment. Objectively, taking into account the real trade relations and cooperation ties of enterprises of Ukraine, Ukraine turns to the east. In 2012, the share of the CIS countries in the export of Ukraine amounted to 36,8%. The share of the countries participating in the Customs Union was as follows (%): Russia - 26,5; Belarus - 3,3; Kazakhstan - 3,6. By the way, all European countries (excluding CIS countries) accounted for only 25,3%, including the EU countries - 24,8%. In the import of Ukraine, the share of CIS countries in 2012 was even higher - 40,7%. The share of the countries participating in the Customs Union was as follows (%): Russia - 32,4; Belarus - 6,0; Kazakhstan - 2,2. The share of all European countries (excluding CIS countries) in the import of Ukraine amounted to 32,5%, including the EU countries - 30,9%.
The main partner of Ukraine was and remains the Russian Federation. All other countries, including Germany and other European countries, lag behind many times in terms of foreign trade turnover. So in Germany, in 2012, only 8% of Ukraine’s imports were accounted for, i.e. 4 times less than in Russia. It is noteworthy that, despite the often pronounced statements by the leadership of Kiev about rapprochement with the European Union, Russia's share in the foreign trade turnover of the country of Ukraine not only did not decrease, but continued to grow. Over 2009-2012 Russia's share in the export of Ukraine increased from 21,4% to 26,5%, and in import from 29,1% to 32,4%.
Obviously, if the association agreement between Ukraine and the European Union were signed, Ukraine would lose a significant part of the markets in the east, but it would not have access to the market of the European Union. Supporters of rapprochement with the European Union could not deny this obvious fact. Moreover, even Brussels did not deny it, stating through clenched teeth, that in the short and medium term Ukraine will not receive any “gingerbread” from signing an agreement with the EU.
"TOMORROW". It turned out that Kiev’s decision on association with the EU programmed a national catastrophe?
Valentin KATASONOV. I tried to find logic in the political line of Kiev, or at least some justification and justification of this line. I will not speak about the real driving forces and motives of the supporters of the Western vector of Ukrainian politics. But about the justification of this vector I want to say something. The main argument of the defenders of the course to Europe was foreign investment, which allegedly had to come from Europe and “breathe life” into the dying economy of Ukraine.
The argument about foreign investment is more than strange. Firstly, because for many years already, foreign investors have almost no formal restrictions for entering the economy of Ukraine. If the association agreement between Ukraine and the EU were signed in Vilnius, it would have little effect on the behavior of foreign investors. Perhaps, it would even weaken the incentives for companies from Europe to invest their capital in enterprises of the Ukrainian economy, since there would already be no customs barriers for European goods. Ukraine would be easier to win with the help of goods than investment. Secondly, because the policy of attracting foreign investment, which Kiev pursued before, at least did not improve the economic situation of the country. And maybe even worsened him.
"TOMORROW". So what's all the same thing?
Valentin KATASONOV. Let's try to understand this issue. First we turn to the official statistics. The most general picture of Ukraine’s participation in international investment exchanges (export and import of capital) can be found in the country's balance of payments, which is compiled and published by the National Bank of Ukraine. His analysis allows us to draw the following conclusions.
The volume of foreign investment, since the middle of the last decade, has increased dramatically compared with the beginning of the last decade. At the same time, fluctuations in the annual volume of foreign capital inflow to Ukraine were very significant. For example, the inflow of all types of foreign investment in 2012 was in 2,4 times lower than in 2008. However, the volume of other investments (loan capital) in 2012 was lower than the level of 2008 in 9 times. It is obvious that such sharp drops negatively affected the state of the balance of payments, the exchange rate of the national monetary unit (hryvnia), and the general economic situation of the country.
The structure of capital imports by type of investment changed. Alternately, the first place among foreign investments was occupied by direct and other INVESTMENTS. In just a five year period 2008-2012. investments in the Ukrainian economy in the amount of $ 97,3 billion. Total over the period 2008-2012. The volume of foreign direct investment in the economy of Ukraine amounted to 37,3 billion (38% of all foreign investment), portfolio investment - 7,9 billion (8%), other investments - 52,1 billion (54%).
In some years, for some types of investments, repatriation of foreign capital from Ukraine was observed. Sometimes this repatriation took the form of capital flight from the country. For example, during the global financial crisis there was no inflow of portfolio investment into the country; on the contrary, foreign portfolio investors were withdrawing their capital from the country. In two years, 2,84 billion of portfolio investment was repatriated.
But even the temporary positive impact of foreign capital inflows on the balance of payments was neutralized by the export of capital from the Ukrainian economy. Over the period 2008-2012. the export of capital from Ukraine amounted to 66,7 billion, which amounted to more than 2 / 3 in relation to the volume of foreign capital in the same period. In 2009, the export of capital even exceeded its imports, which resulted in a negative balance on capital transactions (minus 4,9 billion dollars). In fact, the export of capital from Ukraine exceeded the volumes that were reflected in the section of capital operations of the country's balance of payments (we are talking about various forms of smuggling of capital). Capital exports from the country were particularly active in the form of other investments (40,5 billion dollars over the period 2008-2012). Without going into details, we can say that behind the official figures of Ukraine’s foreign investment is the banal flight of capital from the country.
"TOMORROW". And where did a significant part of the exported capital go?
Valentin Katasonov. Offshore or countries that had signs of offshore territories (Cyprus, Switzerland, Liechtenstein, the Netherlands, etc.). It is obvious that if the leadership of Ukraine managed to block the channels of capital flight from the country, Ukraine would have a positive balance of payments and the task of attracting foreign investment would not be so urgent.
"TOMORROW". Tell us about foreign direct investment in the economy of Ukraine.
Valentin KATASONOV. To begin with, I will say that in Ukraine in recent years there have been many cases in which creditors have become co-owners or even full owners of Ukrainian enterprises. After all, direct investment, by definition, implies full or partial investor ownership of the assets of an enterprise. Again, as follows from the data of the State Statistics Committee of Ukraine, the accumulated direct investment in the form of participation in the share capital of Ukrainian companies and organizations has steadily increased. Over 1995-2013 their volume has grown 113 times. Accumulated at the end of 2012, investment in the amount of 50,3 billion was a fairly impressive amount. For comparison, we note that according to the State Statistics Committee of Ukraine in 2012, the gross domestic product (GDP) in currency equivalent was equal to 176 billion. That is, the accumulated direct investment amounted to 28,5% of GDP.
The growth of foreign direct investment continued last year. As of 1 in October, 2013 accumulated direct investments in equity investments amounted to 56.566 million dollars, an increase from the beginning of the year to 2,1 billion dollars, or 3,8%.
True, one should not think that the acquisition by foreign investors of the assets of the Ukrainian economy necessarily took place through the transfer of foreign currency from abroad. Foreign investors carried out an increasing part of their acquisitions through reinvestment of the income they received from investments previously made in the Ukrainian economy. Such foreign investments did not improve the state of Ukraine’s balance of payments.
"TOMORROW". Readers will be interested to learn about the sectoral priorities of direct investors in the Ukrainian economy?
Valentin KATASONOV. The sectors related to the real sector of the economy accounted for approximately 40% of the accumulated foreign direct investment. The most priority area of direct investment turned out to be the financial sector, and 1 / 3 of all investments fell on it. Financial activity, trade, real estate transactions accounted for 55,2% of all accumulated direct investments. These activities, in fact, do not create social wealth, but only redistribute it. The rate of capital turnover and profitability there is much higher than in industry and agriculture. High-tech industries were interested to some extent in foreign capital in the 1990-s. Investors bought on the cheap actually not the enterprises, but those advanced technologies which were created or introduced at these enterprises in the Soviet time. Incentives to invest in industrial enterprises fell sharply after Ukraine joined the WTO. Customs barriers have been drastically reduced. It has become more profitable to Ukraine to supply industrial products from more competitive countries than to export capital to organize the production of such goods in Ukraine itself.
"TOMORROW". And what is the geography of foreign direct investment
Valentin KATASONOV. In the first place among the countries of origin of foreign investment was Cyprus. The situation is very similar to the Russian picture. Most likely, individuals and legal entities of Ukraine are hiding behind “Cyprus” investors. “Cyprus” INVESTMENTS are an integral part of the intricate and non-transparent mechanism for legalizing income of dubious origin, a way to reduce investment risks, avoid taxes, etc. However, after the well-known events in Cyprus (the confiscation of deposits in the banks of the island) it was possible to assume that the position of Cyprus as the country of origin of foreign investment will decline. In the list of countries-exporters of capital to Ukraine, one can see a number of other jurisdictions with signs of offshore zones: the Netherlands, the Virgin Islands, Belize.
Interestingly, Russia in terms of the volume of accumulated investments in the share capital of Ukrainian companies ranked only fourth after Cyprus, Germany and the Netherlands. Unlike Cyprus and the Netherlands, Russia represents real Russian capital exporters. First of all, these are Russian companies that supply Ukraine with natural gas, oil and petroleum products. In addition, these are Russian enterprises that have traditional cooperative and industrial ties with Ukraine since Soviet times (including enterprises of the military-industrial complex). Also in Ukraine, Russian banks had fairly strong positions. Foreign capital in the banking system of Ukraine was represented by 26-th countries. The largest foreign investors (in the form of participation in the authorized capital) of banks in Ukraine are Russia (19%), Cyprus (14%), the Netherlands (12%), Austria (9%), France (7%).
"TOMORROW". And what are the results of attracting foreign investment?
Valentin KATASONOV. For foreign investments have to pay. Firstly, because foreign investors establish control over individual enterprises and entire industries, the country is gradually losing its economic sovereignty. Secondly, because after a while foreign investments turn into a “pump”, which pumps out financial resources from the country. We are talking about revenues that are either reinvested locally, strengthening control over the country's economy, or being taken out of the country, worsening the state of the balance of payments with all the ensuing negative consequences.
Again, we turn to the statistics of the balance of payments (PB) of Ukraine. The income of foreign investors is almost an order of magnitude higher than the income of Ukrainian investors abroad. The balance of investment income of Ukraine is persistently negative with a tendency to increase.
Export of investment income from the country for the period 2008-2012. amounted to 39.991 million. Ukrainian capital exporters during this time received 5.857 million dollars from their foreign investments. The balance of investment income of Ukraine over the five-year period was:
- 39, 99 billion. + 5,86 billion. = - 34,13 billion.
Round it turns out minus 34,1 billion.
We will carry out simple calculations. The balance of international capital movement in Ukraine for the period 2008-2012. amounted to 30,6 billion.
To estimate the net effect of Ukraine’s participation in the international investment exchange over a five-year period, we need to add up the balance of international capital movements and the balance of investment income (billion dollars):
30,6 - 34,1 = - 3,5.
So, the net effect of Ukraine from participation in international capital operations for the period 2008 - 2012. equal to minus 3,5 billion dollars. This is the result that we obtained on the basis of the official statistics of the balance of payments of Ukraine. And if we take into account the "gray" (smuggling) capital outflow, then the net negative result will be immeasurably greater.
"TOMORROW". But there are also medium and long-term consequences of the “attraction” of capital by Ukraine.
Valentin KATASONOV. Of course. The above calculation shows only the current losses of the country. But it is possible and necessary to talk also about the medium- and long-term consequences of the arrival and presence of foreign investors in the economy of Ukraine. First of all, I would like to stress once again that foreign INVESTMENTS have not and will not have any visible positive effect on the development of the real sector of the economy. Foreign investments provided only 2-3 with a percentage of capital investments in the country’s economy (the overwhelming majority of sources of financing for capital investments came from enterprises ’own funds - about 60%; the rest - bank loans, state and regional budgets, etc.). It can be assumed that foreign exchange funds that flowed into the Ukrainian economy under the guise of direct investment were not used for the acquisition, creation, expansion or reconstruction of fixed assets of the Ukrainian economy, but for the formation of working capital. The economy of Ukraine was experiencing a rather pronounced “money hunger”, currency funds were primarily used to purchase energy and raw materials, wages, purchases of goods (in retail and wholesale trade) and components (in industry), etc. Capital construction, the purchase of machinery and equipment, research and development were of little interest to foreign investors due to the long payback periods and high risks.
During the five-year period we are considering, 2008-2012. The relative well-being of the Ukrainian economy was maintained by foreign investors, who not only pumped resources out of the country, but also tightened the loop of debt and investment dependence around Ukraine’s neck.
As for all the external debt of Ukraine, at the beginning of 2008 its level was equal to 56,7% of GDP, and by the middle of 2013, the external debt had grown to 75,7% of GDP.
"TOMORROW". What is the debt burden of Ukraine?
Valentin Katasonov. Perhaps, by European standards, the level of public and total external debt of Ukraine was not so great. And the Ukrainian authorities urged the public not to worry about the country's debt. They say that Ukraine looks very decent against the background of such countries as Greece (let me remind you that Greece’s national debt varies in the 160-170% of GDP range). However, it should be borne in mind that Ukraine’s investment and credit ratings are prohibitively low. Even lower than that of Greece. This led to the fact that interest rates on debt obligations of the government, companies and organizations of Ukraine are much higher than the market average values. Consequently, debt servicing costs are very high.
Analysts at Standard & Poor's increased the chances of a Ukrainian default from 34,8% in the summer of 2012 to 44,25% in the summer of 2013. Back in February of this year, Bloomberg published its estimates of a possible default in Ukraine. The probability of default was determined at the level of such “problem” countries as Argentina and Venezuela.
After the failure of the negotiations in Vilnius and the riots in Kiev in the first days of December 2013, the risk assessments were revised upwards. A sensitive indicator of risk is the quotations of securities, which are called “credit default swaps” (CDS). The higher the quotes (prices) of these market instruments of insurance against the risk of defaults, the higher the risks. And vice versa. Quotes CDS in Ukraine has always been high. But in late November - early December, they jumped right away to the 100 percent. points and reached the 1071 value. What does such a quote mean? That when buying five-year debt securities of the government of Ukraine for 10 million dollars, the investor has to pay extra for insurance CDS 1.071 million dollars. This is only in the first year. And for 5 years (the period to maturity of the paper), insurance payments will be 5,3 million dollars. paper for the investor is more than one and a half times more expensive than its face value. The above quotes on insurance risk defaults only in Argentina and Venezuela. For comparison: for Russia on 02.12.2013 the CDS quotes were equal to 173,8. According to the accepted methods, the probability of default in Ukraine over the next 5 years is estimated at 53,3%. Investors can be prepared for such a step as buying debt securities of Ukraine only with extremely high interest on loans. The yield of government bonds today is simply "going wild". The rates on new issues of ten-year bonds denominated in US dollars jumped to 10,6% in early December. The rates for some securities, which are to be redeemed in 2014, jumped to 19%. This is frankly usury interest. They signal that Ukraine will have to spend a significant part of its budget on servicing existing debts.
"TOMORROW". Thus, Ukraine had less and less time to choose from.
Valentin KATASONOV. At the end of 2013, the debt loop around Ukraine’s neck was dragged out to the limit. According to various estimates, in 2014, Kiev was to pay off its foreign debt from 8 to 10 in XNUMX. There was no money from the government for such repayment. But you still need to service those debts for which the maturity has not come. Behind our analysis, we leave the corporate sector of the Ukrainian economy, in which every second enterprise, in fact, was bankrupt.
"TOMORROW". What happened after Ukraine joined the WTO?
Valentin KATASONOV. Ukraine’s trade balance has become sharply in short supply. At the same time, Ukraine never received access to the markets of other countries due to the low competitiveness of its products.
And before that, Ukraine’s low investment attractiveness plummeted after the first riots in Kiev. Lenders, who previously practiced revolving loans (lines of credit) for Ukrainian companies, began to demand a final repayment of loans, and to close lines of credit. Foreign capital, in anticipation of default, began to leave the banking sector of Ukraine. The share of foreign capital in the banking sector of Ukraine has decreased.
The international reserves of Ukraine two or three years ago showed a vigorous growth. If at the beginning of 2010 there were 26,5 billion dollars in reserves, by the beginning of 2011, it was already 34,6. Note that during this period, the growth in reserves was not due to the improvement in the country's trade balance, but to a significant inflow of foreign capital (as can be seen from the 1 table, in 2010, imports of all types of capital amounted to 21,4 billion operations - 9,9 billion.). During 2011, foreign exchange reserves declined to $ 31,8 billion. Then, over the course of 2012, reserves “lost” immediately by $ 7,3 billion. ., and only in November - for 11 billion dollars. At the beginning of December, only 5,7 billion dollars remained in currency bins of the National Bank of Ukraine. This is equivalent to the import of goods for 1,8 - 18,8 months. The NBU also continued to spend currency from reserves to maintain a falling hryvnia rate. Only in November 2 million dollars was spent for these purposes. According to estimates, the Central Bank of the country can spend at least 2,5-800 billion dollars to maintain the hryvnia exchange rate for the next few months.
To prevent a default, the government urgently needs to find at least 10 billion dollars. Negotiations with the IMF on a new loan have come to a standstill, since the Fund’s conditions are absolutely unacceptable for Kiev. It was about further reducing budget expenditures, including for social purposes. In addition, the Fund demanded an increase in prices and tariffs for energy carriers for companies and the public. All this is fraught with an aggravation of the social situation in the country.
Even less promising to get the necessary money from Brussels. Even before the meeting in Vilnius, the European Union did not promise Kiev loans of more than 1 billion euros. And after refusing to sign an association agreement between Ukraine and the EU, the “offended” Brussels in general ceased to promise anything definite. This is not surprising, since the European Union is extremely offended by Kiev. In addition, the European Union itself was in a state of debt crisis.
"TOMORROW". Did Russia remain?
Valentin KATASONOV. Yes, there was an option to negotiate with Russia. This option logically assumed the entry of Ukraine into the Customs Union. Membership in the Customs Union would allow Kiev to restore its trade and payment balance. First, due to additional customs preferences for the export of Ukrainian goods to the markets of its eastern neighbors. Secondly, by getting Kiev preferential prices for natural gas.
It is no longer necessary to say that Moscow, in the event of a reversal of Kiev to the east, was ready to discuss the issue of granting Ukraine loans, both bank and commercial. Including in the form of deferred payments for the supply of natural gas. One should not forget that Russia is not only the main trade and economic partner of Ukraine, but also its main creditor. At the end of November 2013, Russian President V. Putin, speaking to journalists about Russian-Ukrainian relations, said that the debt on loans that had provided Gazprombank, Sberbank, VEB, VTB to Ukrainian banks amounted to a total of 20 billion. and 280 billion rubles. In addition, Russia made an advance payment for the transit of natural gas through the territory of Ukraine until January 2015 in the amount of 4 billion dollars. The Russian Federation, as the President of the Russian Federation has repeatedly stated, was ready to discuss the issue of Ukraine’s membership in the Customs Union and the Eurasian Economic Union and continue to provide it as a member of these unions with new loans.
The real and quickly achievable benefits that Ukraine receives as a result of integration with Russia and other eastern partners seemed obvious to Kiev. The Ukrainian people could only hope that economic considerations, when the authorities of Ukraine were looking for a way out of the current impasse, would be stronger than political intrigues.
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