August 23, 2007

KIEV'S BOOM
Despite Turmoil, Ukrainian Economy Roars
By Jason Bush

Despite a major power struggle among its top politicians, economic growth in Ukraine is roaring. Foreign investments are pouring in and the economy grew by 8 percent in the first half of 2007.

Ukrainian President Victor Yushchenko is locked in a fierce political struggle while business goes on better than usual.

Stroll around downtown Kiev these days, and it's hard to miss the signs of growing prosperity. The Ukrainian capital's golden-domed cathedrals share the skyline with towering cranes and snazzy apartment complexes. Giant billboards plug the latest Samsung MP3 players and Nokia phones. Diners spill onto the street from posh new eateries on Independence Square, where three years ago hundreds of thousands of Ukrainians staged the so-called Orange Revolution that propelled President Viktor Yushchenko to power.

To look at the scene, you'd never know that Yushchenko and his bitter rival, Prime Minister Viktor Yanukovych, remain locked in a fierce power struggle that is unlikely to be resolved even after parliamentary elections on Sept. 30.

The lesson: Political instability and economic crisis don't always go hand in hand, at least not in the former Soviet Union. Despite the standoff among Ukraine's politicians, the economy is booming and foreign investments continue to pour in.

Politics Stays Out of Business

Gross domestic product powered ahead by an impressive 8% during the first half of 2007, and economists expect the strength to continue, boosted by a surprisingly diverse economy of services, manufacturing, and raw materials. Metals, mainly steel, account for 40% of exports, but most of the growth is coming from manufacturing and services. Production of heavy equipment rose 22% in 2006. And Ukraine's software houses saw their exports jump by 50% last year, to some $250 million.

Investors see promise in the growth. The Kiev stock exchange has more than doubled in size this year, and now boasts a market capitalization of $76 billion-a sixfold increase since late 2004. And a real estate boom has pushed up housing prices by 60% in 12 months. "We joke that as long as all these disputes are going on, [politicians] don't have time to interfere in business," says Taras Kutovyy, chief financial officer at XXI Century Investments, a leading developer that in May raised $175 million in Eurobonds to finance new apartments, hotels, and hypermarkets.

The boom is being fueled by Ukraine's 46 million consumers, who are opening their wallets for everything from houses to washing machines to big screen TVs. Consumption has been growing by double digits since 2003, as roughly 70% of Ukrainians can now afford new cars, furniture, and other big-ticket items, up from 40% in 2003, according to market researcher GfK Group.

Luxury Mall

"It's clear that there is a growing Ukrainian middle class," says Tetiana Sytnik, GfK's senior researcher in Kiev. That has attracted multinationals seeking to sell to them. In June, PepsiCo plunked down $542 million for Ukrainian fruit juice maker Sandora, which has 50% of the local juice market. Two months earlier, French supermarket chain Auchan entered the country via a joint venture with local retailer Furshet, with a view to constructing 10 hypermarkets over the next two years.

Ukraine's new wealth is on display at Arena City, a six-story shopping and entertainment complex that opened in 2005. The mall's 60 boutiques stock expensive French and Italian clothing, furniture, and jewelry, and it features dealers for Porsche, Bentley, and Mercedes. "People are earning more money, and demand for exclusive cars and real estate is rising. We can see it everywhere," says Sergei Korolyov, sales manager at the Kiev showroom for Porsche, which is on target to sell 350 cars this year, at an average price of $140,000-up from 100 in 2005.

And it isn't just the premium nameplates flying out of showrooms: Sales of all new cars jumped 40% last year-the highest rate of increase in Europe-to 370,000, as Ukrainians traded-in cheap Russian imports for pricier Western models. The market is tipped to grow by an additional 25% this year.

Booming Bank Sector

The buying binge is being fueled by an explosion in consumer credit. Shiny new bank branches are sprouting around town. And in downtown Kiev, rows of portrait artists and old women hawking souvenirs are flanked by young people in boxy costumes shaped like houses, promoting a mortgage bank. Last year, the volume of retail loans surged by 137%, to $15.5 billion.

Previously almost nonexistent, Ukraine's banking sector-the fastest-growing in Europe-hasn't gone unnoticed farther west. Over the past two years, foreigners have bought four of Ukraine's top five banks. In the most recent deal, Italian bank UniCredit in July announced plans to acquire Ukrsotsbank, the second-largest Ukrainian financial institution, for $2.2 billion.

Of course, not everyone is benefiting from the economic boom. "We thought that things would get better, and now we've lost faith," says Nataliya Kolesnikova, a 32-year-old artist. She and her husband, a photographer, enthusiastically joined the protests during the Orange Revolution. But they complain that now corrupt tycoons and officials remain at liberty while ordinary folk struggle to get by and are forced to pay endless bribes demanded by policemen, doctors, and even teachers.

Ukraine still has a lot of catching up to do with more advanced economies in the region. It remains one of Europe's poorest countries, with an average income of just $3,000-half Russia's level and only 8% of Britain's. And despite average annual growth rates of more than 7% stretching back to 2000, national output still hasn't recovered from the chaotic economic transition of the 1990s and remains below the levels achieved in the Soviet era. "If you compare the situation today to 10 years ago, the progress is absolutely obvious," says Finance Minister Mykola Azarov. "But it isn't fast enough to satisfy people."

Business-Friendly Standoff

There's also a risk that the political standoff in Kiev could start to take a toll on growth if it delays passage of key legislation. "The political crisis has derailed structural economic reforms: pension reform, tax reform, judicial reform-which Ukraine badly needs as a post-Soviet state," Azarov says. Still, in some areas Ukraine's government is plowing ahead.

In early July, Parliament approved laws that lower export tariffs on metals and toughen copyright protection. Those measures, plus others enacted over the past year or so, should help pave the way for Ukraine's entry into the World Trade Organization, now expected by next year.

Indeed, for all their feuding, Ukraine's leading politicians seem to share a sense of purpose when it comes to improving the environment for business. That's not surprising since many are closely allied with Big Business interests. Although both the government and private companies continue to be dominated by wealthy oligarchs, the adoption of market economics has also fueled rapid development of new businesses in telecommunications, real estate, and software.

Corporate managers, meanwhile, are too busy making money to lose sleep over the long-term need for tax or pension reform. Says Porsche salesman Korolyov, "I think people have now started to understand that politics is politics, and business is business."

http://www.spiegel.de/international/business/0,1518,501570,00.html