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Monday, July 15

Naftogaz Places $1 billion in Eurobonds at Rates Near Sovereign...Ze Promises Odesa Port Shakeup...Ukraine Port Cargo Up 13% in H1 2019...Big Mac Index: Hryvnia Undervalued by 61%...Ze Promises $115 million Runway, Terminal for Kolomoisky’s Dnipro Airport
James Brooke
by James Brooke
UBN Morning News is reported and written by James Brooke, a former New York Times foreign correspondent and Bloomberg Moscow Bureau Chief

Riding the wave of foreign investor demand for Ukraine bonds, Naftogaz placed two tranches of Eurobonds for the equivalent of $1 billion, at rates just above the sovereign. On Friday, Naftogaz placed €600 million of Eurobonds for five years at 7.125% and $335 million for 7.375% for three years. Bids exceeded supply by a factor of 2.5. Bookrunners were Citibank and Deutsche Bank. Much of the money is to be spent on buying natural gas this summer to fill storage tanks in advance of negotiations this September with Gazprom to renew the Russian gas transit contract that expires Jan. 1.

By comparison, one month ago Ukraine placed €1 billion worth of seven-year Eurobonds at 6.75%. Earlier this month, Ukrzaliznytsia placed $500 million worth of five year Eurobonds at 8.25%. Reflecting the dramatically improved borrowing environment, Naftogaz tried last November to borrow up to $1 billion at rates up to 10.9%. On Friday, Naftogaz placed the bonds below its initial benchmark yield of dollar Eurobonds at about 7.75% of euro Eurobonds at about 7.5%.

Germany was the EU country hardest hit by contamination of oil flowing from Russia on the Druzhba pipeline, the Paris-based International Energy Association reports. Oil supplies to Germany fell by 110,000 barrels a day, or 6.5%. Supplies to Slovakia fell by 70,000 barrels a day and supplies to Poland fell by 30,000 barrels a day. The oil contamination problem started in mid-April and initially was covered up by Russia’s Transneft. It comes as Russia seeks to portray itself as a reliable energy supplier to Germany and the EU, capable of meeting European gas import needs with two Russia-Germany pipelines, dropping Ukraine as a backup route.

    Citing corruption and poor performance at Odesa port, President Zelenskiy promised Saturday a major shake-up of port administration. He said smuggling costs the treasury $1 million a day and private control of the main port entrance blocks growth. As a result of corruption, Danish shipping giant Maersk stopped docking in Odesa last year. Two months ago, P & O Maritime Ukraine’s entry into the port was blocked for weeks, held up by what the unit of DP World Group called “sabotage by port authorities.” Over the last three years, Odesa’s cargo has dropped by 15%, falling behind that of nearby Chornomorsk and Pivdennii (Yuzhne). Compared to 2015, the port’s net profit dropped 21-fold to $700,000 – but salaries paid to port directors increased 14-fold, to $7.5 million.

    Zelenskiy suspended environmental tests on the quality of water used in ship ballast. He was responding to complaints by the European Business Association that state environmental inspectors were demanding bribes from ship captains on a weekly basis. When port officials said water quality will suffer, Zelenskiy replied that if port waters were swimmable, he would worry about it. By September, he said, his team will elaborate a corruption-proof system for testing ballast water. He asked Odesa Mayor Gennadiy Trukhanov “to urgently resolve the issue of allocating land” for free entry to the port, UNIAN reports.

    Oleksandr Vlasov, head of the State Fiscal Service, agreed to resign Saturday after Zelenskiy charged him with failing to fire last week the heads of the four customs offices bordering the EU. Vlasov wrote on Facebook that he suspended two officials and placed two others on leave due to the poor health of their close relatives. Instead of firing, Zelenskiy complained to Vlasov, “you have placed people on leave.”

    During the first half of this year, Ukraine’s ports handled 13.2% more cargo than during the same period last year. Of the 72 million tons, exports grew by 20%, to 55 million tons. Imports were flat at nearly 11 million tons. Transshipment dropped by 15% to just under 5 million tons. Highlights were: grain up 35%, to 24.5 million tons; ore up 27%, to 16.5 million tons; vegetable oil up 12.4%, to 3.2 million tons; and containers up 18.4%, to almost half a million TEU.

    The top four ports were: Pivdennii – 23.4 million tons, up 20.3%; Mykolaiv – 15.3 million tons, up 19.5%; Chornomorsk – 12.3 million tons, up 21.1%; and Odessa – 12.1 million tons, up 12.3%.

    Ukraine’s off the books ‘shadow’ economy was 30% of the nation’s GDP last year, two percentage points below the 2017 level, asserts the Ministry of Economic Development and Trade. Growing cashless electronic transactions helped push the estimated shadow economy to its lowest level in a decade, the ministry reports. This year, Ukraine’s official GDP is to hit $150 billion.

    The hryvnia is undervalued by 61%, according to the latest ‘Big Mac Index’ maintained by The Economist magazine. Based on the hamburger price, the real purchasing power rate of the currency should be about 10 hryvnia to dollar, not the current 26 hryvnia to the dollar.

    Sigma Bleyzer economist Edi Segura writes: “This is just one indicator that the hryvnia could retain its FX stability for a while. A Big Mac is not representative of all the goods in the country. Also, the exchange rate could be affected by events such as difficulties in servicing Ukraine’s large foreign debt or an invasion by Russia.”

    President Zelenskiy submitted to the Rada Friday a bill that would expand Ukraine’s ‘lustration’ of Yanukovych government to ban all officials who served during the five-year Poroshenko government from serving in government for 10 years. The ban would include the top leadership of the National Bank of Ukraine, the Antimonopoly Committee of Ukraine, the State Property Fund, and the National Commission for Securities and the Stock Market. Within hours,  ambassadors of the G7 nations – Britain, Canada, France, Germany, Italy, Japan, and the US – tweeted a joint protest: “Electoral change and political rotation are the norms in democracies. Indiscriminate bans on all participants in executive and legislative governance are not.”

    With Rada elections, this Sunday, bills not approved by the current Rada have to be resubmitted to the new Rada, probably in September. With the new lustration bill banning existing Rada members from serving again, the bill is expected to die without a vote. Timothy Ash writes from London: “Idiotic move by Zelenskiy and his first big gaffe thus far since taking office.

    Kyiv’s Sikorsky (Zhuliany) airport was closed for 14 hours Saturday after a Belavia Boeing 737-3Q8 rolled 100 meters off the airport’s sole runway near midnight. No one was injured, but the airport’s lights and signaling system was damaged. Almost 40 flights were delayed, canceled or rerouted to Kyiv Boryspil. In mid-July, Sikorksy handles 10,000 passengers a day.

    Zelenskiy promises to build a $115 million new runway and terminal for Dnipro, the nation’s laggard airport. A tender for the airport project is to be posted next week, according to the President’s website. “We will help you. We will allocate funds because we understand what the airport is for a ‘millionaire’ city,” he said on a visit Friday to Dnipro, referring to the city’s population. The airport is controlled by Igor Kolomoisky, a media backer of the president and owner of UIA. Despite anemic passenger numbers — 149,000 for the first half of 2019 – Dnipro airport officials have refused to allow flights by Turkish Airlines and SkyUp, Ukraine’s discount airline.

    Editorial Note: Ukraine needs skilled public administrators — like Maxim Nefyodov who implemented  ProZorro against bureaucratic resistance. By banning all top officials from the last government, Zelenskiy seems unaware of the skills shortage handicapping Ukraine’s government. Hopefully, his pre-election bid to purge everyone who served in the Poroshenko government will get lost in the weeds of August. Jim Brooke jbrooke@ubn.news