Ukraine's Yushchenko, Fighting for Government, to Woo Investors

KIEV, Ukraine -- Ukraine's embattled President Viktor Yushchenko today will seek to convince international investors that the $6.4 billion they pumped into the former Soviet republic during his tenure are safe.

Embattled President Viktor Yushchenko

Yushchenko, whose government was ousted by lawmakers this month following a dispute over natural gas prices with Russia, is campaigning for a second parliamentary vote. Presidential aide Mykola Poludennyi said Yushchenko, who will speak at a conference in Kiev today, will emphasize investment opportunities.

The stakes are high. Margarete Strasser, who helps manage $423 million in central and eastern European bonds for Capital Invest in Vienna, says she will sell her Ukrainian Eurobonds ``within days'' unless Yushchenko, who took office a year ago today, delivers the assurances she seeks.

``The prognosis for Ukraine is really bad, compared with other countries in the region,'' she said in a telephone interview on Jan. 19. ``The most important factor is political stability for investors and Ukraine has to solve this crisis soon.''

Legislators have resisted the president's demands to rescind the ouster of the government three months before parliamentary elections. Yushchenko on Jan. 19 took the case to the Constitutional Court. Meanwhile, the premier and the cabinet have stayed in office.

Yushchenko's rise to power in the Orange Revolution of 2004 raised optimism he would change Ukraine's international image from a corrupt former communist nation under Russia's sway to a country aligned with the European Union and western economic policies.

Political Decline

Instead, he fired his first prime minister, Yulia Timoshenko, amid accusations she failed to stamp out graft in government and bolster economic growth. His second premier, Yuriy Yekhanurov, was dismissed by a parliamentary vote because of the Russian gas dispute.

``Everything will be stabilized and Yushchenko guarantees it,'' said Poludennyi, the aide. ``Investors will not lose their money.''

The biggest investments in Ukraine's post-communist history have taken place during Yushchenko's tenure. Mittal Steel Co., the world's biggest steel company, agreed to pay $4.8 billion for Ukraine's VAT Kryvorizhstal on Nov. 25 and Vienna-based Raiffeisen International Bank-Holding AG bought Bank Aval for $1 billion on Oct. 20.

Yushchenko, 51, needs to win more foreign capital to catch up with other former communist countries in eastern Europe. Since its 1991 break from the Soviet Union, Ukraine attracted $9.5 billion, compared with about $50 billion by the Czech Republic and $47 billion that have flowed into Hungary since communism collapsed in 1989.

Declining Inflows

The inflow of cash from abroad will decline to about $2.1 billion in 2006, compared with about $6.4 billion in 2005, Capital Invest's Strasser said, citing Bank Austria Creditanstalt research.

Yushchenko said on Nov. 29 he will try to sell more of the country's biggest companies to investors this year, including phone company VAT UkrTelecom, whose sale has been delayed for a decade.

``Instability is very high,'' said Katya Malofeeva, an economist at Renaissance Capital in Moscow. ``While some big companies, with strong government connections and a better understanding of what's going on, may still invest, smaller companies remain very cautious.''

Ukraine's opposition Regions Party, whose leader Viktor Yanukovych lost the disputed presidential vote in 2004 to Yushchenko, has the backing of 24.7 percent of voters before the March 26 parliamentary election, according to a Jan. 12-17 survey of 2,290 people by the Kiev-based Razumkov Center for Economy and Politics Studies. The poll had a margin of error of 2.1 percent.

Slowing Economic Growth

Yushchenko's Our Ukraine party has the backing of 15.4 percent, while former Prime Minister Timoshenko's alliance is ranked third with 12 percent, the poll showed. Yushchenko is losing voter support as the economy slows.

The $65 billion economy expanded 2.4 percent last year, the State Statistics Committee said Jan. 19, from 12.1 percent in 2004.

The outlook for economic growth worsened after Russia raised gas prices. The World Bank in Washington said on Dec. 16 that the government's forecast of growth between 5.5 percent and 7 percent will have to be lowered by at least 4 percentage points.

The Ukrainian government agreed on Jan. 4 to pay an average $95 per 1,000 cubic meters of Russian gas in the first half of 2006, compared with the $50 Ukraine paid previously and the $230 demanded by Russia's state-controlled gas company, OAO Gazprom.

``The key issue is politics and the relationship with Russia,'' said Timothy Ash, managing director at Bear Stearns International in London. ``Ukraine needs a stable government and a clear strategy in terms of its relationship with Russia.''

Source: Bloomberg