President of Ukraine Viktor Yanukovych and President of Russia Dmitriy Medvedev agreed to apply a 30% discount to the price formula for gas imported to Ukraine from Russia. However, according to Astrum investment management experts, the absolute amount of this discount is capped by USD 100 per 1,000 cubic meters. The discount comes into effect as of 2Q10. The parties agreed that Ukraine will import 30 bln cubic meters of natural gas in 2Q10-4Q10 and 40 bln cubic meters in 2011. According to our estimates, the discount for the price formula essentially means that Ukraine will obtain imported gas for USD 233 per 1,000 cubic meters in 2Q10, for USD 245-255 in 3Q10, and for USD 255-265 per 1,000 cubic meters in 4Q10. As Ukraine has already imported as much as 6.5 bln cubic meters of natural gas in 1Q10 at a price of USD 305 per 1,000 cubic meters, the average price for imported natural gas in 2010 should be close to USD 260 per 1,000 cubic meters, up 24% compared to the average 2009 price of USD 210 per 1,000 cubic meters.

What remains less clear is the physical volumes of gas to be imported in 2010. The parties agreed that Ukraine will import 36.5 bln cubic meters in 2010, including the 6.5 bln cubic meters already imported in 1Q10. However, our estimates show that 33 bln cubic meters of imports will be enough for the economy. If the 33 bln cubic meters option materializes, then Naftogaz will have to pay USD 2.3bln less for the imported gas. However, if Ukraine indeed does import 36.5 bln cubic meters of gas in 2010, the total 2010 imported gas bill should amount to USD 9.3-9.4 bln, which is only USD 1.4-1.5bln less than the scenario envisaged according to the previous agreement although Ukraine will import an additional 3.5 bln cubic meters. We think that the latter scenario is more probable and downgrade our external trade deficit forecast for 2010 from USD 2.3bln to just USD 0.9bln. We also adjust our current account forecast for 2010 from a deficit of USD 0.5bln to a surplus of USD 1bln.

The impact of the new gas accords on internal gas prices remains unclear. As the average 2010 imported gas price should still be 24% higher than the 2009 price, we expect that there will not be any significant gas price cuts for industrial consumers. We see the most likely scenario is the freeze of these prices throughout 2010. At the same time, the issue of gas price increases for households and municipal utilities is still high on the agenda. We maintain our view that the government will still have to increase these prices in 2010. However, the government is likely to negotiate with the IMF about a residential tariff increase in 2010 which should be much less than the 95% cumulative growth we previously envisaged. Thus, we put our inflation forecast for 2010 under review.

It is second day of unprecedented growth of Ukrainian stock market. While European indexes were moving lower, Ukrainian ones were setting new record highs for 2009-10. As experts of Astrum investment management company point out, Ukrainian stock market continued on its winning streak setting fresh records on solid gains in steel, electricity generation and machinery shares.

At the end of the day, the UX index jumped a whopping 3.8% setting a new record at 2,022 points, while the PFTS index also added 3.8% to close at 782 points. Equity volume on the UX totaled strong UAH 70m. Motors Sich (+6.3%) was among the biggest growth catalysts on the news about new future contracts for aircraft and helicopter engines. The biggest outsider was Bank Forum, down 3.2% on the unwinding of speculative long positions.

FX market is quiet under tight control of NBU. The hryvnia continued to stand firm at the UAH/USD 7.98 mark. The NBU made its regular pro-dollar intervention at this rate and market players continued to stick to this reference point.

Of course it is necessary to mention CDS that are cheaper now. Is it Yanukovich’s arrival or Timoshenko’s departure?

S&P raised Ukraine’s foreign currency sovereign credit rating by one notch to ‘B-/C’ from ‘CCC+/C’ and the local currency rating to ‘B/B’ from ‘B-/C’, with a positive outlook on the country. The agency said the new governing coalition and cabinet pave the way for a renewal of relations with the IMF and better policy coordination that will allow Ukraine to restore economic and fiscal sustainability. S&P noted the positive outlook on Ukraine indicates “upward pressure on the ratings building this year and next if fiscal and external pressures abate.” Additionally, the agency noted greater investor confidence post-election will favour a higher external debt rollover rate and larger FDI inflows to the country, thus improving Ukraine’s financial account balance in 2010. Ukraine was downgraded to ‘CCC+/C’ in February 2009 on the back of risks to IMF funding to the country.

As Ukraine is prepared to meet its new president experts and diplomats chat deciding where Mr Yanukovich, the most likely candidate, will go for the first international visit. Certainly, the most likely win destinations are Brussels and Moscow. Previous president Yushchenko went first to Moscow to turn Ukrainian-Russian relations in a 5 year confrontation and misunderstanding. Some say that Yanukovich will go first to Brussels. To do the same to Ukraine-EU relations? We think that it is not that important where the president will go first. It will be rather important what follows. However, we would like the new president to consider an alternative destination to the Moscow-Brussels axis.

Just consider Ukraine’s neighbours Moldova and Belarus and their recent successes with Beijing. China last July signed a memorandum of understanding to lend Moldova $1 billion — equal to a tenth of the east European country’s gross domestic product, and easily the biggest loan it will have received from anywhere. Last June, it agreed to invest more than $1 billion to build power plants and roads in Tajikistan, an impoverished ex-Soviet state with limited natural resources. In March, China’s central bank agreed a three-year currency swap worth 20 billion yuan ($2.93 billion) with another former Soviet republic, Belarus.

Victor Yanukovich, possibly next president of Ukraine, made a statement regarding so-called gas consortium. According to Interfax news agency he said that he will make a proposal to create a consortium to manage existing gas transit system in Ukraine, and to conduct system’s reconstruction in order to raise the volumes of gas transit.

These goals for the consortium seem to have little to do with reality. First, raising volumes of gas transit doesn’t depend on Ukrainians’ efforts now. Due to economic downturn, the demand for Russian gas in Europe is falling. In 2009, only 95 billions of cubic meters of gas was transported from Russia through Ukraine towards EU, which is 24.4 bns lower than in previous year. Total capacity of Ukrainian gas transit system is at least 140 bns per year. Obviously, it is not necessary to expand these capacities, especially if we consider that Gazprom’s gas production is falling down.

Second. The funniest thing here is that the consortium had already been created long time ago, during late Kuchma’s era. Literally the goal for it was the same. However, the child was born dead – the consortium didn’t manage to fulfill the role of operating center for Ukrainian gas pipeline system.

Standard & Poor’s Ratings Services said today that although recovery rates for creditors of defaulted banks in Kazakhstan, Russia, and Ukraine (KRU) have historically been muted, they could improve with support from the state.
“We believe that recoveries could be restricted and unpredictable, largely because of limited bank supervision and what we see as arbitrary frameworks for bankruptcy and bank restructuring in KRU,” said Standard & Poor’s credit analyst Sergey Voronenko. “In our view, this situation may be exacerbated by the approach of the banks’ management and what appears to be asset stripping before default, as has been alleged in some recent bank liquidations. These aspects together with other factors have historically constrained our ratings on KRU banks.”

“We expect the average recovery prospects for creditors to be less than 40% through the cycle, with strong disparities in individual cases,” added Standard & Poor’s credit analyst Ekaterina Trofimova. “This is despite some progress, most notably in Russia, from the previous decade. Recoveries may be even lower in 2010 and 2011, owing to the likely continuation of weak economic conditions in KRU.” 

KRU banking systems have retained their somewhat unusual and shifting logic, rooted in personalities, politics, and what we regard as opportunistic funding policies. This, together with factors such as what we regard as structural weaknesses in the banking systems, unpredictable insolvency regimes, and underdeveloped corporate governance could leave the creditors of many defaulted KRU banks with only meager recoveries.

KRU governments’ initiatives to enhance banking supervision and the bankruptcy framework are critical factors for the future recovery prospects of KRU bank creditors, but progress is still hesitant, in our view. Government support and intervention depend on market circumstances in KRU and would likely aim to reassure depositors and investors.

“We see better recovery prospects for creditors if problem KRU banks are restructured rather than liquidated, as demonstrated by recent cases involving sizable amounts,” said Mr. Voronenko.

“Still, we believe restructuring would only be effective if this process is amicable, relatively rapid, and adequately managed, with cooperation among creditors, bank shareholders, management, and regulators,” said Ms. Trofimova.

Ukrainian steelmakers’ 2009 preliminary net loss reached UAH 5bln (USD 600mln), down from the 2008 net income of UAH 17bln (approx. USD 3bln), according to Vasiliy Kharahulah, CEO of the Metallurgprom Association. We consider this a comparatively good result, taking to account the fact that 2009 sales dramaticall dropped (almost by 37%).

According to opinion of Astrum investment company, the drop of rolled steel output by 16% and rolled steel prices by 24% (in hryvnia terms) will result in a 36% drop of Ukrainian steelmakers’ net sales in 2009. Expert expect Azovstal, ArcelorMittal Kryvyi Rih and Mariupol Illich will be the only profitable steelmakers in 2009 in terms of net income.

In 2010, growth is predicted: net sales should grow by 39%, driven by output growth by 11% and prices growth of 25%. The 2010 net income margin should be 4%-6% on average.

We would like to outline that it is sharp devaluation of grivna gave a nice chance to steelmakers to increase their profitability and keep the losses low. Ukrainian currency lost almost 40% of its value since the beginning of financial crisis, softening the effect global downturn on local exporters.

Steelmakers are number one Ukraine’s exporting sector, traditionally accounting for about 40% export sales. This is compatible to share of oil in Russia’s exports.