Crimea Deadlock Sends Ukraine Executives to Calm Markets

Viktor Ivanchyk left barricaded Kiev yesterday on a mission of shuttle diplomacy.

With shares of his farming company Astarta Holdings NV down 30 percent since Oct. 21, when investors still looked forward to a European Union trade deal, Chief Executive Officer Ivanchyk will meet shareholders in Warsaw. His message: keep faith in the company and its managers and don’t desert it during the political upheaval that threatens to tear up Ukraine.

“I’m all for maximum transparency and I plan to explain to investors all our strategic and tactical decisions,” Ivanchyk, 57, said in an interview in his wood-paneled office near Kiev’s Dnieper River, before leaving to investor meetings in Poland. “We hope we can make this a turning point in people’s minds about the situation in Ukraine.”

As political leaders across the nation of 45 million people try to quell growing unrest and fend off Russia’s military might, executives are locked in their own battle.

Keeping businesses ticking over and share prices from plummeting is proving tough as the prospects of unfettered markets on either side of Ukraine dim with Russia and the EU facing off over the Crimean peninsula.

Conflict Cost

The Ukrainska Birzha stock exchange, which soared 30 percent after the ouster of pro-Russian Viktor Yanukovych, is slumping again. The hryvnia weakened as much as 27 percent in February and bond yields rose along with the cost of insuring the country’s debt against default. Even companies like Astarta, among 11 Ukrainian companies traded in Poland, are not immune.

“We believe Yanukovych wasn’t good for share prices and his government did very few positive things on the macro level for equity investors,” said Steffen Gruschka, the founder of SG Alpha, an equity boutique focusing on Ukraine, Russia and Emerging Europe with $20 million under management. “Of course, we ought to see what a new government will bring. But of course, I think, that for most investors, it can only be better than what it’s been.”

Still, tensions escalated yesterday when the Crimean local legislature approved in a non-binding vote to join Russia and called a referendum for March 16 on whether the region should remain a part of Ukraine. Crimea was annexed to Ukraine in 1954 by Soviet leader Nikita Khrushchev.

The loss of Crimea would close access to some of Ukraine’s Black Sea ports and rich farm land that stretches from Kerch on the Russia border to Yevpatoria on the peninsula’s west coast.

Business Concerns

Whatever decision Crimeans make about their future, the government of Prime Minister Arseniy Yatsenyuk, which took power after the pro-Kremlin Yanukovych fled, will need to make the concerns of business owners a priority to spur the economy.

“As long as we are at the edge of a Cold War with Russia, our company is in a risk zone,” said Anatoliy Yurkevych, the CEO of dairy producer Milkiland NV. “Things were impossible when Yanukovych’s team was ruling.”

Yatsenyuk also needs to pass laws that will stamp down on corruption, cut red tape to help companies operate more efficiently and convince investors to renew trust in the country.

Ukraine needs “safety and security on the streets,” Economy Minister Pavlo Sheremeta said yesterday. “It’s hard to have an economic life, fully-fledged business activity, without security on the streets. The cancer of corruption eats our country from the inside. We need to get rid of corruption.”

Priorities also include reaching a quick accord with the International Monetary Fund and renewing talks on an EU trade treaty, called an association agreement.

Billions Offered

The administration is being offered billions of euros by the EU and the association agreement is still on offer to Ukraine after it was rejected on Nov. 21 by Yanukovych.

That accord would lower tariffs for Ukrainian goods, including machinery, agricultural products and metals, coming into the EU, promising increased revenue as markets widen and Ukraine comes under stricter EU scrutiny.

“This would be a great push for economic, political and financial stability and for the creation of an efficient, liquid and broad financial market,” said Oleksandr Valchyshen, the head of research at Investment Capital Ukraine. “If an EU deal is signed, this would be a great institutional step to quickly establish the kind of financial market we need.”

The years following the 2004 Orange Revolution saw an inflow of new capital from abroad as local companies began selling shares in cities such as Warsaw and London in their search for transparency and financing.

Buying Opportunity

Templeton Emerging Markets Group Chairman Mark Mobius said on his blog today that Templeton is still interested in Ukrainian equities, “seeing opportunities on an individual company level.”

Others are not as bullish.

Creative Group, one of Ukraine’s biggest producers of refined oils, modified fats and margarine, canceled a planned $400 million Eurobond sale this year to finance operations because of “unfavorable market conditions,” said CEO Yuri Davydov. He said it would be impossible to even price the securities under the present situation.

“Today’s capital markets are still deeply negative for Ukrainian companies,” he said on March 5. “Investors are ignoring investments in local securities as a class and will continue doing it until we revive out political stability.”

Dead Market

Even before the current crisis, which left 100 pro-EU demonstrators dead, the Kiev exchange was the victim of unclear economic policies under Yanukovych, said Alexander Karpov, a native Russian who is co-owner of Geneva-based investment company GAIA Capital Adviser.

“This market hasn’t existed for the last two years,” he said. “There is no liquidity here.” The share of Ukrainian stocks in GAIA’s portfolio has been trimmed to no more than 5 percent from as much as 15 percent “historically,” he said.

Karpov said that investors can forget Ukrainian stocks for the next three to six months, until authorities sort out who is in power and presidential elections are held.

“Transparent stock market will be able to bring money here,” Oleg Tkachenko, the chief executive officer of Ukrainska Birzha, said in an interview in Kiev today. “It’s small now but it can grow very fast. Ukraine is one of the most underestimated markets in the world.”

At Astarta, CEO Ivanchyk says that the producer of sugar, soybeans and other crops has seen no disruption in its far-flung operations that cover the Russian-speaking east to the Ukrainian dominated west by the Polish border.

To keep the economy stable and allow his business to continue unhindered, Ivanchyk said the new government needs to show clean hands, from the president on down. Anything less risks a return to the failures of the Orange Revolution.

The shares fell today 2.1 percent on the Warsaw Stock Exchange to 44.94 zloty as of 3:59 p.m.

“We try to be transparent and predictable and to meet investors’ requirements,” Ivanchyk said. “This is what the government also has to do with its own citizens.”

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