KYIV BLOG: Ukraine falling off investment map

By bne IntelliNews September 26, 2012

bne -

Ukraine continues its side into irrelevance as major Russian investment bank Alfa terminated its coverage of the market on September 25.

"We terminate coverage of the following Ukrainian stocks due to lack of liquidity in the Ukrainian stock market and/or changes in personnel: AVDK UK, ALMK UK, AST PW, AZST UK, CAD LN, ENMZ UK, JKX LN, KER PW, MSICH UK, RPT LN, TATM UK, UTLM UK, YASK UK and ZPST UK (Bloomberg tickers). Our latest research on these stocks, in particular the investment recommendation, should not be relied upon going forward," the bank said in a note emailed to its investors.

Ukraine's stock market was amongst the best performing in the world several times over the last few years, soaring on optimism that major change was coming following the 2004 Orange Revolution. However, since current President Viktor Yanukovych and his party took the reins of power in 2010 the country has stagnated, with little happening on the reform front as the government refuses to meet the International Monetary Fund's (IMF) demands that would release the badly need next tranche of a $15.15bn stand-by facility.

Instead, the government has chosen to try and muddle through, but only has slightly more than three months of import cover as hard currency reserves - the minimum to ensure currency stability - and is coming under increasing pressure form both the EU and the US - nominally supporters of Ukraine - thanks to the PR debacle that followed Kyiv's decision to jail opposition leader Yulia Tymoshenko for seven years on abuse of office charges.

The country has been on the edge of an economic crisis for more than a year and with the government revving up to steal the vote in the general election on October 28 it could well be headed into a political crisis too. And this is without considering what would happen if there were a serious crash in Western Europe.

The country has lost its way. After Yanukovych became president, there was a lot of discussion in the press wondering if the formally pro-Russian leader would move his country closer to Moscow. However, as time passed it became clear that one of his more popular policies was to tie Ukraine to the EU. However, the oppression of opposition parties and failure to make any notable changes have meant that while an association agreement with the EU has been negotiated, it is highly unlikely that it will be signed unless Tymoshenko is freed for starters.

But asking which way Ukraine is going to turn - east or west - is to give Yanukovych too much credit. There is no plan. He is total focused on securing his position and his friends are grabbing everything they can get their hands on. "This is a grab fest. Most of these guys think that when Yanukovych eventually goes they will be forced to give at least half of what they are stealing back. So the plan is to grab as much as you can now, so you have a decent amount left over later," says one senior investment banker in Kyiv, who didn't want to be named.

To be fair, the Ukraine store is not uniformly black, as several sectors remain interesting for investors. There are several great agricultural companies like MHP and Avangard; the consumer sector is flourishing (within the constraints imposed by bad government); and there is actually some new action in the energy sector as the government finally makes an effort to wean itself off Russian imported gas by developing its own limited hydrocarbon reserves.

But as far as investment banks are concerned it is not worth going to the expense of formally covering the local equity market where daily trading volumes remain on the order of a few million dollars a day at best. You can buy these individual names without covering the country and increasingly you can buy the best Ukrainian stocks on the Warsaw Stock Exchange where they are covered by Polish brokers.

The results of the general election at the end of October will be crucial. The current consensus view in Kyiv is that Yanukovych and his Party of Regions will hang on to its majority by hook or by crook, but the people have become so weary of politics that another coloured revolution is unlikely. There will be a 10-20% devaluation of the hryvna in November and then the country will sink back into a torpor of inaction.

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