Bernard Casey noted that Ukraine had thoroughly prepared for 2014. Important agreements were reached with Russian government on support of industrial modernization and activation of key programs of Ukrainian industry development. During the visit of President Victor Yanukovich to China, he signed agreements important for the Ukrainian economy for the total cost of 30 billion USD. The government made own efforts to stabilize economy: programs on introducing the energy efficiency and support of energy independence were approved (Energy Strategy of Ukraine till 2030, Concept of creating a system for state support of Ukrainian exports until 2015 aimed to increase the capacity of local exporters and raising the standards of their work up to European level) as well as many other programs, provisions, concepts, and laws based on powerful impulse to development of the economy.
However, apart from agreements achieved with Russia, Ukraine received the terms subject to special attention, namely a possibility for quarterly review of gas prices. Thus, according to Bernard Casey, Ukrainian government should sign agreements with major international companies involved in hydrocarbon exploration.
As noted before, following the first 3 tenders for award of production sharing agreement on Yuzovsky (Kharkiv and Donetsk region), Olessky (Lviv and Ivano-Frankovsk region), and Skyfsky (deep-water Black Sea shelf) areas, the winners were major international oil and gas companies — Shell, Chevron, ExxonMobil, OMV, Eni, and Electricite de France. Scope of investment in exploration of deposits can reach tens of billions of USD.
The recent trends apparent on European markets and in Ukraine’s nearest neighbor — Russia, show Ukraine the need to take actions preventing the impact of these trends on Ukrainian economy.
International experts say that economic challenges can stimulate the government to intensify reforms, to update legislation and to enhance efforts on elimination of tax barriers, and suggest that, in the near future, Ukrainian economy will make a certain progress.
Participation of American Chamber of Commerce in tactical steps aimed to improve the tax, customs, and other regulations within the framework of joint workgroups formed by business and state bodies, has a positive effect on government agencies. As a result of such cooperation, analysts believe, Ukrainian reforms will more accurately meet the current challenges and contribute to active dialogue with foreign investors, which is a priority for the government, note the analysts.
Cabinet of Ministers expands opportunities for public-private partnership
The Cabinet of Ministers at its meeting amended the List of state-owned property, which can be used for a concession.
Experts from the Ministry of Industrial Policy of Ukraine say the proposed amendments allow to begin preparations for the implementation of public-private partnership (PPP) with the participation of the State Enterprise Plant 410 CA. This company specializes in overhaul of Antonov aircrafts and repair of aircraft engines D-36.
Ministry experts note that currently SOE Plant 410 CA is on the list of enterprises not subject to privatization. At the same time, despite its status as a leading aircraft repair enterprise, it needs investment for substantial modernization and development. Opportunities for investment in this enterprise from the state budget are objectively limited. Therefore, the only possible investment approach is PPP. Under the concession agreement it is supposed to document the condition to attract significant private investment in the upgrade and development of the enterprise. In addition, the private partner will have to make a commitment to strengthen the company’s position on the domestic market, to increase its export capacity and production, to preserve existing and to create new jobs.
Experts emphasize the role of the Plant 410 CA as a basis for Antonov aircrafts overhaul. This powerful aircraft repair company is one of the leading enterprises on the post- Soviet space, having a reputation of a stable and reliable partner. To date, it has overhauled over 6,000 planes and 40,000 aircraft engines.
Now Plant 410 CA successfully completes the largest contract in the history of Ukraine- India relations signed in 2009. Under the agreement, Ukrainian specialists need to renovate and modernize 105 An-32 Air India aircrafts.
The AN-32 aircraft is tailored and adapted to the peculiarities of the Indian climate and high mountains. For its reliability pilots nicknamed the machine «silver horse». Modernization of aircraft in service instead of buying new ones means suitable savings for the Indian side, and it’s a guaranteed job for several years for the Ukrainian side. Simultaneously with the overhaul, the aircraft has been upgraded, as a result it has gained new capacities. In fact, it is a new aircraft whose index is AN –32RE.
«Modernization and extension of service life of such aircraft is a vivid indicator of product quality and reliability of Ukrainian aviation industry, and essentially an image program, which confirms the development of mutually beneficial cooperation,» experts of Plant 410 CA say. They expressed confidence that for the new An-32, now with the index RE, the factory will receive a lot of new orders.
Experts remind that since the inception of Antonov, over 100 types and modifications of aircraft of various types and purposes have been created. A special pride of aircraft designers are freight giants Ruslan and Mriya, which are the hallmark of the company. Over 1,500 aircrafts were exported to more than 50 countries. In total over 22,000 Antonovs have been built.
In general, aviation market experts positively view PPPs as a tool for Plant 410 CA development. According to them, it allows to create synergy of the state opportunities and initiatives, experience, and efficiency of private capital.
Experts note that the PPP is an alternative to the privatization of state property of vital strategic importance. Given the lack of public funds, PPP is an effective way of introducing new innovative mechanisms for cooperation between the state, local governments and the private sector to attract private investment in the traditionally public spheres of economic activity.
By developing the PPP, the government, on the one hand, retains control over enterprises that have critical importance to ensure stability of the economy, and on the other hand, attracts private capital for their development, whose interests will be taken into account and protected by law.
It is also important to involve in PPP reputable foreign companies with a good reputation and successful experience in the implementation of projects, management of industrial enterprises, the implementation of scientific research and development (R&D).
Ukraine plans to increase metal exports in 2014
According to the Ministry of Economic Development and Trade of Ukraine, Ukrainian metal producers have every reason to increase exports on the markets of their strategic partners in 2014.
«According to the analysis of foreign metal roll markets performed by SE Ukrpromvneshekspertiza, the economic situation in developed countries (the U.S. and the European Union) will moderately improve in 2014, which will result in an increase in steel consumption by 3.1% (up 50 million tons) compared with 2013,» Anatoly Maksyuta, First Deputy Minister of Economic Development and Trade, declared.
Among the main reasons that may positively affect exports of metal products by Ukraine, experts call a recovery of demand on the Middle East and EU markets, who have been partners of Ukraine in the industry and active consumers of Ukrainian metal.
During the first quarter of 2014, according to analytical forecasts, the main factor that drives metal sales on the world market, will be a high demand for metal in spring related to the general acceleration of global economic growth, which would entail a slight increase of global consumption of steel.
Experts point out that the Ukrainian steel exports totaled 23.1 million tons in 2013, which is up 0.5 million tons year-on-year, according to preliminary data. The EU, Asia and the CIS are the main consumers of Ukrainian steel.
Experts predict that the exports of Ukrainian steel will grow by 0.5 million tons in 2014, and the revenue growth of the Ukrainian metal producers is expected to be 5–7%. According to experts, that will be largely helped by an increase in the contract value of steel by 7–8%.
On the domestic market, experts predict growth in consumption by 300–400 thousand tons in 2014. The loading of the Ukrainian metallurgical enterprises will go up by 2%, from 76 to 78%.
The activation of road construction in the country and upgrading of heating networks will help increase the supply of products to the domestic market. This forecast is also shaped by expectations of growth in the industrial production in Ukraine in general. The development of industries, like aviation, where Ukraine signed several strategic international agreements can boost the domestic demand for steel.
Moderate devaluation stimulates growth of exports
According to experts, the total revenue of exporters will grow by 5% in 2014.
Setting the flexible exchange rate of hryvnia and growth of its official rate ensure the tangible benefits for Ukrainian exporters. In particular, avoiding the risk of sudden devaluation will ensure the raised confidence of investors in the Ukrainian economy. So, the moderate devaluation policy of National Bank of Ukraine (NBU) will result in GDP growth, believe the government experts.
Falling hryvnia will be the additional positive factor for exporters against the improved trends of global economy in current year. Better competitiveness of exporters is possible on markets of those countries, which cover the largest share of foreign supplies (for example, Russia, EU, etc.), as production cost of exported product is reduced because of devaluation.
Basic share of Ukrainian export is formed by metal goods and agro-industrial complex (AIC). Last year, it was possible to observe the growth in foreign supplies of steel, and a simultaneous reduction in profit of exporters. This year, by the most conservative estimates, the profit may grow by 5%. This year, compared to 2013, Ukrainian enterprises will increase the export of rolled metal by 2.6% (or by 500,000 tons) YOY, up to 23.700 tons.
And forecast of grain exports in the current marketing year was raised to 33 million tons. According to the latest data, over 20 million tons of grain has been sent to foreign markets. November and December were record-breaking in terms of exports, over 4.6 million tons monthly. Such a high exports rate was achieved due to systematic actions of the government to optimize domestic grain logistics.
In general, experts tend to consider two more factors of influence on Ukrainian exporters — improved situation on the world market and expectation of its stability within a year, as well as 1–2% growth of Russian and European economy.
According to government analysts, a moderate hryvnia devaluation policy taken by NBU also creates a delayed effect for domestic market, which can be assessed at the end of the year. Indeed, previously, investors had the risk of sudden UAH devaluation, which hampered their extension plans. Now, investors are more optimistic towards the markets in countries with undervalued currency. Besides, there is an expected decrease of interest rates by UAH loans, as banks will not include the devaluation risks in them. Thus, cheap currency will create the impulse for restart of economy, while attracting the investors and improving the business activity.
Let us remind that, on Feb. 6, 2014, the NBU decided to reduce the UAH rate against USD: from 7.993 UAH/USD to 8.708 UAH/USD. By switching to flexible rate, the National Bank changed the approach to setting of official exchange rate and rejected the allowed rate band (+2%). So, since Feb. 7, 2014, parameters have been set, according to which, official exchange rate of UAH will be determined by weighted average interbank rate.
Government is finalizing talks with investors on GTS upgrade by end of year
Over the year, the government will finally define a financial model for upgrade of Ukrainian gas-transportation system and membership of investors in a consortium for GTS upgrade. The announcement was made by Eduard Stavitsky, Acting Minister of Energy and Coal Industry, during a working visit in Vienna, Austria.
According Stavitsky, in 2014, following the acceptance of chairmanship in the Energy Community of Europe, Ukraine, with the help of European colleagues, will be able to find the best option for an optimal GTS upgrade. He also noted that our country consistently follows the Energy Strategy, which proclaims the principles of energy efficiency and energy independence. Therefore, the government is open for establishment of efficient management body on upgrade of gas-transportation system.
Today, the option of establishing a consortium with Russian Gazprom and involvement of the third (European, according to experts) investor is under review. «In view of positive decisions made last December, we just enhance the cooperation with our strategic partner Gazprom,» Stavitsky said. Meanwhile, the final format of the consortium is uncertain: it can be arranged both as trilateral and bilateral option. So, Ukraine is open and ready for negotiations.
In Vienna, Stavitsky had a working meeting with Janusz Kopacz, Director of Energy Community Secretariat, where they signed a Memorandum of Understanding, which will facilitate the arrangement of efficient mechanism for implementation of European energy standards in the legal system of Ukraine.
In particular, consolidation of efforts made by representatives of Energy Community in Europe and Ukraine will be aimed to support the Ukrainian projects under the relevant EU mechanisms, on upgrade of Ukrainian oil/gas transportation systems. Janusz Kopacz supported the Ukrainian initiative on establishment of Eastern gas hub, due to which, gas infrastructure of Ukraine will be deeper integrated with European gas-transporting organizations, gas traders, stock exchanges, clearing houses, and regulators.
Experts note that Ukraine is a very convenient platform for a stock-exchange gas trade, as underground gas storages are located close to transit nodes. Location of our country makes it a convenient link between the markets of Eastern Europe. In general, Ukrainian underground storages can hold up to 31 billion m3 of gas.
Let us remind that, in the end of last year, Eduard Stavitsky said that the cost estimate for a Ukrainian gas-transportation system (conducted by Baker Tilly Company) will be disclosed in early 2014 — on completion of all necessary legal procedures. Earlier, the EU representatives announced that they provide funds and on comprehensive support of upgrade of Ukrainian GTS.
According to experts, Ukrainian gas-transportation system can support the energy security of Europe, and create the efficient mechanism for management of GTS upgrade. This requires a full participation of the European Union in management of the consortium, as, according to Third Energy Package, company (in this case, Gazprom) supplying gas and managing the gas-transportation supply system cannot be one and the same company.
To avoid the rigid application of Energy Package actions (for Gazprom entering into consortium), it is possible to apply the experience, which was already used during full activation of OPAL section of Nord Stream gas pipeline in Germany, when it was taken from under the Third Energy Package.
Last year, Ukrainian GTS transported to Europe 86.1 billion m3 of gas, up 3.2% YOY. And the volume of imported Russian gas to Ukraine was cut by 4.9 billion m3, i. e., by 15.1%.
Ukraine ramps up exports of pig iron and ferroalloys
Total exports of Ukrainian pig iron and ferroalloys totaled 1.7 billion USD in 2013
The Ministry of Revenue and Duties has reported on performance of domestic pig iron and ferroalloy producers in 2013. Thus, in 2013, Ukrainian companies exported those products for 1.7 billion USD. In particular, 823 million USD worth of iron, 906 million USD worth of ferroalloys. Also, according to Ministry of Revenue, Ukraine imported those products for 6 million USD and 318 million USD respectively.
According to the ministry, last year Ukrainian export/import operations of those products were conducted with 8 countries. The major users of Ukrainian steel products are Turkey, the Netherlands, USA, Italy and Russia. The total exports to these countries alone amounted to 1.2 billion USD.
Despite a minor growth of these exports year-on-year (up 1.1%), manufacturers envision good prospects in 2014, experts believe. Thus, in January 2014, domestic companies increased production of ferroalloys by 41.1% year-on-year. The total production of ferroalloys by Ukrainian enterprises amounted to 83,000 tons in January 2014.
According to the Ukrainian Association of Ferroalloys, silicon manganese production this month has grown by 29%, to 62,300 tons, ferromanganese — by 8.5%, to 7,700 tons, production of ferrosilicon quadrupled — to 13,000 tons.
Experts point out that such a start in January sets a good pace for the entire 2014. Manufacturers increase pig production, expecting growth of exports. Thus, demand for steel products in the first half of 2014 is expected to grow, especially in the second quarter. In fact, this applies not only to pig iron and ferroalloys, but to the entire range of steel products in general.
Experts also note that ferroalloys and iron of domestic production have been substituting imports on internal markets. Imports of these products in Ukraine have fallen year-on-year. The largest import operations occurred with Russia, Brazil and India. Import volumes of imports of pig iron and ferroalloys from these countries totaled 152 million USD, of which 50.2% came from Russia.
In 2013, ferroalloy imports fell on average by 16.5%, iron imports — fell by 52.5%. This is a positive sign, which demonstrates the increasing coverage of the internal market by domestic producers.
Ministry of Economic Development plans to develop industrial parks
Industrial parks of Ukraine can attract 7–8 billion USD of direct investment in the next 3–5 years
Permanent Inter-Ministerial Commission on preparing recommendations for the inclusion of industrial parks in the appropriate Registry made a decision to include three parks: Dolyna (Ivano-Frankivsk region), Slavuta (Khmelnitsky region), and Ryasne-2 (Lviv).
The ministry is confident that industrial parks will stimulate regional development and help attract investment. «Establishment of industrial parks in Ukraine will ensure economic development and enhance competitiveness of territories, will activate investment activities contributing to the creation of new jobs, development of modern production and market infrastructure in the regions,» Victor Kovalenko, Director of Investment and Innovation Policy and Development of Public/Private Partnership of the Ministry of Economic Development, said.
According to him, the state has all the necessary tools to develop industrial parks. The law envisages allocation of funds from the state budget to arrange parks if such an assistance is grounded.
«With the decision to add industrial parks to the Registry, the respective costs may be envisaged in revising the state budget for this year or in calculating expenditures for the next year. Equipment lists and their import volumes must be approved by the Cabinet of Ministers of Ukraine,» Kovalenko explains.
For example, in accordance with the presented concepts, the budget envisages the following amounts for arrangement of industrial parks: 10.4 million UAH for Ryasne-2, 6.25 million UAH for Valley, and 594 thousand UAH Slavuta.
According to the Industrial Parks National Project, the government intends to create 10 such formations in Ukraine in the next few years. Today, there are four more parks in the country including New Crimea, Central, Svema and an industrial park in Rivne region in addition to the three parks above. According to analysts, parks can draw 8.7 billion USD of direct investment for their development over 3–5 years.
The Customs Code of Ukraine envisages exemption from import duties on importation of equipment into the country for arranging of industrial parks and realization of related projects to attract potential investors to the development of industrial parks.
Ukrainian meat market shows stable growth
Agricultural analysts note the growing interest of investors to development of pig farming in Ukraine.
Thus, agricultural holding BEZRK-Belgrankorm (RF) announced its plans to build a pig farm for 15,000 heads/25,000 tons annually at Belgrankorm-Poltavschina Ltd. (Poltava region). The decision was made by the Russian agricultural holding on the basis of performance of its Ukrainian subsidiary. In 2013, Poltava facilities of the Russian agricultural holding became the most profitable. Ukraine hosts three companies of the agricultural holding: Belgrankorm-Poltavschina (pig farming complex), Yasnye Zori-Poltavschina (processing plant), and Gromada-Agro (plant growing).
The profits of the Ukrainian subsidiary of the Russian agricultural holding from pig farming (10.300 tons annually) was over 300 million rubles (about 8.5 million USD), taking into account compensations and subsidies provided by Ukrainian authorities. For comparison, the same profit was received by Belgorod enterprises from producing 38,400 tons of pork.
Much more extensive plans are made by Seaboard Foods Company (agricultural unit of Seaboard Corporation included in Fortune 500), the second largest pork producer in the United States. The revenue of Seaboard Foods in 2012 was over 2 billion USD annually.
Seaboard Foods intends to work with Kernel holding and build the largest pig farm in Kharkiv region.
Investors are planning to invest 600 million USD in a pig farm and 100 million USD in a meat-packing plant.
Based on the amount of investment, the pig farm will be designed for simultaneous housing of about 400,000 heads and annual production of 800 tons of meat.
Analysts remind that, by 2015, when the largest Ukrainian pig farm APK-Invest gets into top gear, it plans the simultaneous housing of 300,000 heads (600 tons of meat).
Experts from Ministry of Agrarian Policy and Food say Ukraine has established a powerful poultry industry. Each year shows a growth of chicken and egg production. Poultry products have been actively exported.
The next stage of agricultural sector development will be represented by high yield pig farms. The potential of Ukrainian pork market is not yet fully tapped. There is an ongoing process — similar to that observed on the poultry market about 10 years ago — of gradual transition from household to industrial production. So, there is a reason to believe that Ukrainian pig breeding will be supported by tens of billions UAH of investment.
Experts of Ministry of Agrarian Policy believe that Ukraine has a great potential for production and exports of meat. This is especially true for pork and beef. Until now, we have been importing meat and meat products for over 600 million USD. And half of this amount is paid for pork. So, the government will encourage building of new, high-yield pig farms and cattle production complexes.
According to analysts, active investing in pig farming reflects the efficiency and prospects for development of this agricultural sector in Ukraine. Pig farming still has a great potential for development. This, note analysts, will increase the output and exports of pork and pork products.
According to State Statistics Committee, as of January 1, 2014, the pig population in Ukraine was 7.89 million heads. Compared to early 2013, the pig population grew by 313,700 heads or 4.1%. Meat production from January to December 2013 (live weight) was 3.376 million tons, which is up 8.2%. or 255,500 tons year-on-year.