Dear Friends, Colleagues and Investors,
Not all trips get a trip report. Besides, we are long term investors, so week-to-week or trip-to-trip, we might not observe enough that merits a report. But this trip we can report some “worthy” comments and events.
During my latest visit, I met with politicians, CEOs from banks, agricultural companies, IT and industrial businesses. First, as we have believed all along, Ukraine has a long way to go to become “Poland”, a country that grew 132% over 1993-2013 (in constant 2005 USD, per World Bank), compared to Ukraine’s… 0.1%. But Ukraine IS making some significant steps in the right direction. As Christine Lagarde said in her press release, “Ukraine has shown a commitment to reform”. We believe that the turning point was the election when Ukrainians convincingly and resoundingly elected a pro-EU government. Now 6 months later, the government has negotiated a “frozen conflict”, advanced on some reforms (deregulation and steps toward market prices for energy), received a stamp of approval from the IMF, and obtained much needed funds. The government’s agenda of change (and real implementation thereof to date) is a response to the wishes of its population, global political forces (well, at least those in the west) and international financial concerns. We are challenged to think of another recent historical example where all these parties share substantially the same objectives.
Today Ukraine has earned some credibility with international financial and political actors. Permitting procedures and taxes have been reduced in number and complexity. The parliament passed a draft bill on investors’ rights protection. It increased accountability of a company’s management if their actions result in a significant loss to the company (penalties include clawback of profits and invalidation of certain transactions). Legislation was also passed to create conditions for the transition of quasi-public companies to private status (through squeeze-out of minority investors). The Ukrainian government has also made significant changes in energy policy, specifically towards improving the transparency and improving the financial condition of the state gas company, Naftogaz. Citizens will soon have access to data on the use of public funds allocated to including public enterprises and local and state governments. The government also allowed public access to property registries and geological licenses. Not least, some very significant financial reform was passed that will increase the criminal liability of bank managers and beneficiaries for actions that lead to bankruptcy of a financial institution.
Let’s be perfectly clear: today Ukraine has enormous issues, such as a still-very bureaucratic government, significant corruption, liquidity problems, and a simmering military conflict with Russia. We could go on. But we like the trend.
The changes are very high level, but there seems to be a palpable sense of emergence.
I met with the CEO of a medium-sized bank. He said that while his bank was in good shape, recent bank reform might lead to the restructuring of weaker competitors. As a result, he was looking to buy assets on the secondary market at stressed prices. He was also interested in increasing lending in the ag sector. He said that he could do a lot with an additional USD 20m of capital.
Similarly, the owner of agricultural company I met with was looking for USD 10-20m to acquire land from distressed operators. Low commodity prices and limited financing was squeezing small and poorly managed operators. He said that recent changes to EU trade policies and UAH depreciation has made for competitive export opportunities, and the time was now to expand his footprint.
Perhaps the most surprising anecdotes I heard were from a real estate developer. He was interested in developing new housing and consumer properties. According to him there is substantial pent-up demand for non-commercial residential properties; that despite recent economic travails, there are substantial resources, in the form of dollars-stuffed-under-mattresses and the like, that would be extremely attracted towards buying quality housing property. He believes that once lending conditions approach a semblance of normality, real estate prices will climb substantially.
Throughout my trip, I ONLY heard about the need for capital to acquire, develop, buyback, invest... Ukrainians are looking to bet on the future of Ukraine. Meanwhile, we at ESCP continue to debate the following dilemmas:
The pending sovereign refinancing: We believe that Ukraine, as demonstrated by the Minister of Finance, Natalie Jaresko, has the right attitude going in and we expect negotiations in general to be amical and fair.
The currency: it is hard to determine the proper value for the UAH. Is it 25, 40, or somewhere in between? There are various theories about how to value a currency. Mine, a version of purchasing power parity, is likely too simplistic and unsophisticated, but through my years of dealing with crises in EM countries I’ve found that when I find very cheap products in USD (food, movie tickets, taxis, tailor made suits), then there is something there.
Rodolfo E.C. Amoresano
Chief Investment Officer, Empire State Capital Asset Management | Kiev, Ukraine-New York, USA