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Monday, December 30

Gazprom Pays Ukraine $2.9 billion...Gas Talks Continue in Vienna...Central Bank Buys $500 million, Ending 2019 with Biggest Dollar Buys in 12 Years...UK-Ukraine FTA ‘75% Ready’....Kyiv-Boryspil Train to Plane Doubles Capacity
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

With Russia-Ukraine gas transit talks stretching into today, Gazprom showed its seriousness Friday by paying Naftogaz $2.9 billion. The money was paid in full – principal plus 10-months interest — for the Stockholm arbitration award of Feb. 28. “Yes, Ukraine received $2.918 billion from Gazprom in pursuance of the Stockholm arbitration decision,” Yuriy Vitrenko, Naftogaz executive director, wrote Saturday on Facebook.

In tandem on Friday, Ukraine’s Cabinet approved an agreement with Gazprom to settle an unrelated antitrust dispute. In that case, a Kyiv court in 2017 imposed a $7.2 billion fine on Russia’s state gas company. In Friday’s Cabinet decree, terms of the settlement were not disclosed.

In Vienna, Russian and Ukrainian teams negotiated Saturday and Sunday the details of a 5-year, 225 billion cubic meter gas transit pact.  Late Saturday, Naftogaz CEO Andriy Kobolev reported progress, but added: “The struggle is for every comma.” A key sticking point is a tariff. Ukraine wants to retain transit fees near the current level of $3 billion a year. The current 10-year transit contract expires at 10 a.m. on Wednesday.

Removing one hurdle, the EU has certified the Gas Transmission System Operator of Ukraine, a Naftogaz spinoff company created this month. “The newly created operator of the gas transmission system of Ukraine is separated and configured to work in accordance with EU law,” Maroš Šefčovič, the lead EU negotiator on the gas transmission talks, tweeted Friday. In recent days, Ukraine’s new gas line operator signed an interconnection agreement with pipeline operators of Hungary, Moldova, Poland, and Romania. Now, it is talking with Slovakia’s Eustream and Russia’s Gazprom.

Russia’s Energy Minister Alexander Novak predicted Nord Stream 2 gas pipeline will be launched by the end of 2020, Deutsche Welle reported Friday from Moscow. The work can be completed by a Russian pipelaying ship, Academician Chersky, he said. The vessel is currently in Nakhodka, Russian Far East, 12,000 nautical miles from the Nord Stream worksite in the Baltic. It will take two months to move the ship to the Baltic and more time to equip it to finish the job. Allseas, a Swiss company, stopped work Dec. 20, immediately after President Trump signed into law a bill sanctioning the Ukraine-bypass line.

Easing tensions between Russia and Ukraine, 200 prisoners were exchanged Sunday between Ukraine and the Russia-controlled sections of Donetsk and Luhansk. Ukraine sent 124 people to the Russia-controlled Donbas and received 76 prisoners in return. Four months earlier, in a direct Russia-Ukraine prisoner swap, each side repatriated 35 prisoners. The exchanges are seen as a step toward implementing a real cease-fire in 2020.

Intervening aggressively to weaken the hryvnia, the central bank bought half a billion dollars net Saturday. Coupled with Thursday’s net purchase of $700 million, the National Bank of Ukraine’s net currency purchases in 2019 were $8 billion, a record high since 2007. With last week’s purchases, Ukraine’s foreign currency reserves are about $23.5 billion.

The official exchange rate set through Jan. 7 is 23.69 hryvnia to the dollar. This is a 15.5% gain over the 28.03 rate of Jan. 10, 2019.

No economist forecast in January that the hryvnia would end 2019 as the fastest appreciating currency against the dollar in the world. But this does not stop the prognosticators from trying again.

Oleg Pendzin, a financial analyst, tells UNIAN: “Surely we will see a certain rollback of the dollar, a drop in the hryvnia. At least to the level of 27 hryvnias per dollar, since this figure is actually in the budget of 2020.” Another financial analyst, Alexander Savchenko, forecasts a more modest weakening of the hryvnia: “I expect the dollar to strengthen around January, insignificantly, to the level of 24-25 hryvnias per dollar.”

By contrast, experts interviewed by Interfax-Ukraine predict that the hryvnia will continue to strengthen in the New Year. Oleg Kurinnoy, Credit Dnepr Bank’s Treasury Director, says: “With the continued demand for government bonds from non-residents, the rate can not only stabilize but also begin to strengthen.”

Natalia Shishatskaya, Forward Bank’s Head of Treasury, agrees, saying: “Given the budget deficit, the Ministry of Finance is likely to continue to place OVDPs [government bonds] at auctions next year, which means that the inflow of currency from non-residents for the purchase of government securities will remain one of the main factors affecting the strengthening of the hryvnia.”

Ukraine is preparing 530 state companies for privatization, with auctions to take place on ProZorro in 2020, Prime Minister Honacharuk wrote Friday on his Telegram account. With the sales expected to draw about $500 million, these companies are between the ‘small privatizations’ — $10,000 – and the big multi-million dollar privatizations that are expected to draw political resistance. Ukraine has about 3,500 state companies.

With Brexit expected to take place in 2020, a UK-Ukraine free trade deal is “75% ready,” Ukraine’s Ambassador to the UK, Natalia Galibarenko, tells Ukrinform. “This is a matter of several months,” she said of a document that would regulate trade between the two nations through the 2020s. Some negotiations revolve around extending British visa-free access to Ukraine, which expires next December with the end of Britain’s transition period. In the spirit of reciprocity, the ambassador wants visa liberalization for Ukrainians visiting the UK

Ireland plans to open an embassy in Kyiv in 2020, reports Ukraine’s Foreign Ministry. The timing and location was decided at a recent meeting between Simon Coveney, Irish Minister for Foreign Affairs and Trade, Vadym Prystaiko, Ukraine’s Foreign Minister.  Dublin-based Ryanair started flying three times a week between Dublin and Kyiv Boryspil.

With the Boryspil express train to Kyiv increasingly popular, Ukrzaliznytsia is doubling capacity during peak hours, running a 3-car train with 170 seats between the capital and the nation’s busiest airport. From 9 am to 6 pm, the new train will supplement service by the existing one-car, self-propelled train. With passenger flow topping 1 million in the first year, Evhen Kravtsov, CEO of the state railroad, is studying electrifying the 35 km route.

Lease tenders for restaurants, duty-free shops, and ATMs at Boryspil are to go through ProZorro, Infrastructure Minister Vladislav Krykliy, tells the Center for Transportation Strategies. “I definitely want ProZorro to have all our leases and sales next year,” he said after a Ministry meeting on the issue Thursday. “For aviation, I want McDonalds to go to Boryspil airport. And they enter only when everything is super transparent.”

From the Editor: It’s forecast season again. Keep in mind: last December, no one predicted the hryvnia appreciating by 15.5% against the dollar, inflation falling to 5%. and growth rising topping 4% for two quarters. Oh, well. Forecasting a national economy is a bit like forecasting the weather. There are unknown events: the Ze euphoria boosting retail sales by 10%; Clearstream helping to inject $4 billion in foreign money into Ukrainian government bonds; wage remittances boosting construction by 20%; low gas prices and a strong hryvnia driving down inflation; and, oddly, Russia paying a fine. Looking ahead, remember: Ukrainian economists feel safe predicting: ‘Cloudy with a chance of rain.’ With best regards, Jim Brooke jbrooke@ubn.news

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Friday, December 27

Poll: Optimism Outbreaks Detected Across Ukraine...Battling Mighty Hryvnia, Central Bank Makes Biggest Dollar Buy of the Year...Outgoing US Ambassador Cites Western Investor Interest in Motor Sich and 2020 Privatizations...Chinese Buy Into Odesa Port...Euro Banks to Loan Ukrposhta $100 Million
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

Ukrainians’ optimism about their country’s future has hit a 15-year high, according to a nationwide poll released yesterday by the Ilko Kucheriv Democratic Initiatives Foundation. For the first time since June 2005, more Ukrainians – 44% — believe the country is heading in the right direction than think the country is headed in the wrong direction – 36%. In June 2005, the last time optimists outnumbered pessimists, the ratio was 42% – 31%. One year ago, 70% of respondents to the same poll said the country was going in the wrong direction.

Eight months after winning the second round of the presidential election, Zelenskiy enjoys the trust of 62% of respondents. This approval rating should further grow after a Russia-Ukraine prisoner release scheduled for Sunday. In a separate survey, released Monday by Rating Group Ukraine, respondents chose the September prisoner release as ‘the event of the year.’

Looking at 2020, 52% of Thursday’s poll respondents believe the hryvnia will remain stable and 47% believe that investments will grow. Looking beyond, 38% of Thursday’s poll respondents believe that Ukraine’s economy and their family’s finances will improve through 2022. In conclusion, the Ilko Kucheriv pollsters write: “The main feelings people think about the future of Ukraine are hope (56%), optimism (38%) and anxiety (26%).” 

Trying to break the hryvnia’s rise, the central bank bought $700 million worth of foreign exchange on Thursday – its largest purchase of the year. In one day, the National Bank of Ukraine bought the equivalent of 10% of all currency bought to date, raising net purchases to $7.5 billion. The operation succeeded in weakening the hryvnia by three kopiyok, to today’s rate of 23.29 to the dollar.

Oleg Churiy, first deputy governor of the central bank, writes on the NBU Facebook page: “Strengthening of the hryvnia is a completely logical phenomenon in the context of accelerated economic growth, a rapid slowdown in inflation. and a decline in government debt to GDP. Taking advantage of the favorable situation, the National Bank continues to replenish international reserves.”

With yields depressed and tenors short, investors bought the dollar equivalent of $228 million in Ukraine treasuries at Tuesday’s auction – slightly less than half the amount of one week earlier.

For 2-year dollar-denominated bonds, investors bought $100 million worth, accepting a 3.86% interest rate, 22 bps below three weeks earlier. For hryvnia denominated bonds, investors accepted a weighted average interest rate of 11.75% for 6-month bonds, and 11% for 3-year bonds.

Concorde Capital’s Evgeniya Akhtyrko writes: “Apparently, the last auction of 2019 occurred with minimal or no participation of non-resident investors, who have been the most active buyers of UAH-denominated bonds with terms of maturity exceeding three years in recent months.”

Western companies are showing serious interest in buying into Motor Sich, the aircraft motor factory, in 2020, outgoing acting US Ambassador William B. Taylor Jr. told a group of journalists Thursday in a farewell interview. “They are looking for investors,” he said of Motor Sich which is an acquisition target for two Chinese companies. “There are a couple of investors — American and others — who are very interested. They’re doing some due diligence, checking balance sheets, visiting the plant, talking to the owners. They’re doing some serious evaluation.”

Noting that 55% of prosecutors recently failed a vetting process, Taylor stressed that creating a rule of law is fundamental for Ukraine to attract Western investment. “As the evidence builds that there is a change in the investment climate, based on more respect for the rule of law, courts, judges, prosecutors, that will encourage people to come,” he said Thursday.  When investors look for other opportunities, they look around the world and don’t see all that many attractive places. Ukraine could be a very attractive place to invest — a big population — the privatization could be very exciting.”

In 2020, at least 300 ‘small and medium’ state companies are to be auctioned on ProZorro.Sales, Dmitry Sennichenko, head of the State Property Fund, tells LB.ua. In advance, information on 500 companies are being uploaded on the Property Fund website. In addition, the Fund plans to auction up to five ‘big’ companies, notably Kyiv’s President Hotel, Krasnolimanska, and Odesa Port Plant. The national budget forecasts earnings of $500 million through sales of state companies in 2020.

Hong Kong’s China Merchants Port is to buy the stakes of France’s CMA CGM in Odesa’s container terminal and nine other ports around the world. Valued at nearly $1 billion, the deal is to close this spring. Based in Marseille, CMA CGM S.A. is one of the world’s top five container transportation and shipping companies.

Ukrposhta is preparing to launch 500 mobile post offices in a program to be financed largely by a $100 million loan from “leading European banks,” Ihor Smilianskyigeneral director of the state postal service, tells the Center for Transportation Strategies. Separately, Ukrposhta is to increase its capital investment program in 2020 18-fold, to $70 million. The money is to go to IT and to the start of the construction of seven new sorting centers across the nation.

Revenue is to be boosted by about $10 million from rentals or sales sale of surplus postal property. In addition, Ukrposhta’s goal is to increase parcel handling in 2020 by 30-40%. If the Rada votes this winter to allow Ukrposhta to operate a European-style postal bank, Ukrposhta would start opening accounts this fall. Smilianskyi says this would earn the post office $85 million a year and draw into the banking system the one-third of the population that are ‘unbanked.”

In 2020, the government plans to implement 10 public-private concession projects, largely in infrastructure, said Yulia Svyrydenko, Deputy Economy Minister. Addressing a public-private partnership conference in Kyiv, she said international tenders are underway for two projects – Kherson seaport and Olvia port stevedoring.

Tourist visitors to Lviv fell by 10% last year, to 2.5 million, reports the city’s Tourism Department. As Ukrainians visited new destinations in the EU, the foreign portion of visitors to Lviv rose to 63%. With direct flights to 25 EU cities, the portion of visitors arriving by plane increased to 31%. Other modes were: train – 48%; car –11.8%; and bus – 11.6%. Top foreign groups were: Poland — 18.3%; Belarus – 6.6%; Turkey – 6.2%; Germany – 5.4%; and UK – 3%.

From the Editor: As any retailer will tell you, consumer confidence moves goods off the shelves. Feel good can also prompt dithering foreign investors to make their move. If all goes to plan, Ukrainians should get a lot of feel good this Sunday – the release of ‘all’ prisoners in the Donbas and an $18 billion gas transit pact with Russia that should last the Zelenskiy presidency. With best regards, Jim Brooke jbrooke@ubn.news