Two Ways to Invest in Ukraine

Ukraine is ranked 72 out of 134 countries in the 2009 Global Competitiveness Index, showing little improvement over the previous year. Ukraine falls right in between Morocco and the Philippines as far as the index is concerned. The areas Ukraine is the weakest in are institutional environment, infrastructure, macroeconomic stability, and goods market efficiency.

Not being sure how the rankings in this index are tabulated, I have to say the new Ukraine presents a different picture. Of course, there are still negatives such as poor legal protection of investments, corruption and double standards, and contradictory legislature. However, there are so many good things coming out of Ukraine recently. And there is so much geographical potential.

The report also states that Ukraine is in line with the major European countries as far as secondary education, and outperforms these countries when it comes down to market size. In addition, the Ukrainian economy is expanding at a rate well above the European average. With 47 million consumers it is the greatest market in Eastern Europe. The new generation has produced a highly competitive, educated, and skilled workforce taking advantage of the country's university system. The location is a key location intersecting the major railways, ports, and roadways in Europe. It is a prime location for manufacturing with easy exporting to Russia and the EU. It boasts strong technical capabilities with specialized knowledge. Also, the country is considered to be in the top 10 by the prospects of retail development. The recent decrease in exports and the Hryvnia drop against main currencies created a favorable environment for Ukrainian production development to replace imports and increase exports. Though the negatives make investing in Ukraine a bit unpredictable and some analysts will warn you to stay away until the politics calm down, the positives make this country a great investment opportunity.

A great way to indirectly invest in the Ukraine is through Central European Media Enterprises (CETV). This media broadcasting company owns and operates television channels and stations in Central and Eastern Europe. CETV generates most of its revenue from advertising. The company maintains an above average revenue growth in comparison to the industry. The stock price dipped in line with the market late last year and though it is now experiencing consistent growth, it still has a long way to go before it returns to its previous highs. CETV penetrates, or monopolizes if you will, their market to reach an impressive 88 million of about 97 million total citizens. If you are in the market for a long-term holding, this should prove a great time to get in on this stock.

Another solid Eastern European company serving the Ukraine market is Vimpel-Communications (VIP). This wireless communications company has more than 57 million active mobile subscribers, resulting in $331, 977 million in sales compared to its top competitor Mobile Telesystems (MBT) that reported just $9,062 million in sales. VIP definitely has a corner on the market. The corporate agenda includes consolidating the Russian market, exploring opportunities to enter adjacent businesses, and expanding geographically both inside and outside the CIS. The stock split 5:1 in 2007 and still maintains a consistent growth pattern in line with what is seen in CETV's growth.

It is nearly impossible to find Ukraine-based companies that are listed on US. exchanges. Most Ukrainian companies are listed on European exchanges such as London or Berlin, or else they are available as pink sheets. The country itself is still torn between Western and Russian loyalties. Emerging markets ETFs such as EEM and others only have slim holdings in Ukraine. This is still considered by most analysts a frontier market. The best way to invest and also avoid the unpredictability and legal confusion with investing in this country is to look for companies based elsewhere that operate in Ukraine, such as CETV and VIP which I have mentioned here. Hopefully with the now skilled and educated workforce we can see a change in legislation that will lead to more Ukrainian companies listed on Western exchanges so that investors can more readily optimize on Ukraine's positive attributes.

Disclosure: No positions.

Comments

[SergeiD:]

VIP 2008 sales were $10,245Mln, not $331,977Mln as reported in the article.

Sep 09 10:42 AM

[Mary Daniel:]

Yes, I'm sorry. Should have made it clearer. The revenue numbers I gathered were year-to-date figures.

Sep 09 10:43 AM

[manuel:]

Do you have Information about P/E ratios?

Sep 09 03:00 PM

[Joseph Sherman:]

Mary L Daniel writes that "The new generation has produced a highly competitive, educated, and skilled workforce taking advantage of the country's university system." Perhaps investments should be based on these strengths.

Sep 09 04:22 PM

[joseph78:]

I am not sure how investing into VIP is investing into Ukraine. There are 2 major Mobile Operators in Ukraine and none belongs to Vimpel. Although Golden Telecom has some business in Ukraine, most of its revenues are coming from Russia. I dought that VIP has more then 3% exposure to Ukraine.

Sep 10 12:09 AM

[Peter Medved:]

joseph78 wrote:
"I am not sure how investing into VIP is investing into Ukraine."

Joseph, you may want to do some more research on Ukraine Telecom market ? VIP operates under Beeline brand in both Russia & Ukraine, it holds 100% of what was Ukrainian RadioSystems. VIP operates Golden Telecom (fixed line business) in both Russia & Ukraine as well.

Ms Daniels, nice to see someone writing on Eastern Europe, however, Ukraine is a basket case economically, I would not look to put money there for a long time. (Not just national differences talking)

Sep 10 05:49 AM

[Mary Daniel:]

Thanks Peter. And yes, Ukraine's economy is still fledgling. Not sure I would quite describe it as a basket case, though. Their main problem at the moment keeping the skilled, educated workforce there. Seems that a lot of them are going to Russia or Europe.

Sep 10 08:51 AM

[Alan Young:]

It's great to see discussion of such lesser-known areas of the market; please continue.

Correct me if I'm wrong, but I seem to recall Ukraine prospering a year ago when commodity prices were up. Isn't it noteworthy mainly for wheat production?

If its prosperity is driven (up or down) by grain production, I don't see how investing in media or telecom will capture that, even assuming a near-term recovery.

Sep 10 10:45 AM

[Mary Daniel:]

Yes, grain production is one factor driving Ukraine's economy right now. However, from a US investor standpoint, it is hard to get in on that. Most of the larger companies in Ukraine are traded through Pinksheets only or are listed on European and Russian exchanges. You certainly do have a point. I was only trying to focus on routes that were more feasible for US investors. And as grain production provides to build up the infrastructure, then tech and telecom will increase as a result. Not just grains, but Ukraine boasts some great natural resources. Thanks for the input.

Sep 10 11:18 AM

[Martel:]

One problem with Ukraine is that it is torn between Europe and Russia in terms of economy, culture and language. Russia does not want to let go its former satellite, and also many Ukrainians feel close kinship towards Russia. Then again, many would like Ukraine to become 'a normal European country'. An additional hurdle is the Soviet mentality, which is unfortunately still present everywhere in Eastern Europe. That will change, but it will take longer than many expect. There is a lot of potential, but that market is not for widows & orphans.

The Ukrainian market is relatively big in terms of people, but not yet in terms of purchasing power. With its 45M people Ukraine generates a GDP similar in size to Sweden (9 million people).

"Most of the larger companies in Ukraine are traded through Pinksheets only or are listed on European and Russian exchanges."

True. Talking about grain operation companies, if you have access to Scandinavian stocks in the OMX Nordic Exchange, you could buy agribusiness companies like Trigon Agri and Black Earth Farming. Both are Western companies, with Western management. Trigon Agri operates in Ukraine, Russia and Estonia, while Black Earth Farming only in Russia.

Sep 11 03:17 AM

[Paul Harper:]

the weakening Hyrvina may help the Ukrainian economy in the short term, as it will make exports more attarctive. But they have serious issues in bridging their deficit gap, with the IMF seemingly reluctant to pour more money in what seems to be a black hole.

Added to this is the intercinine political infighting within the government, which will not help settle investors. Ukraine has a lot going for it in the long term, especially in agriculture, but for me, I would rather look elsewehere for the risk component of my prtfolio right now.

Sep 11 08:11 AM

[Mary Daniel:]

Martel: Thanks for the additional input. And yes, the company is torn between Western and Russian ideals. Part of its current struggle is finding its true identity. I think once that happens, we will see great things from this nation.

Paul Harper: I believe the political infighting has much to do with the torn loyalties between Europe and Russia. There is a lot of risk here now, but do keep an eye on it. Once these issues are resolved (and yes that could take quite some time) I am quite optimistic here.

Sep 11 09:37 AM

[buyitcheap:]

What are your thoughts on EUROX as a an eastern europe play?

Sep 11 10:55 AM

[Peter Medved:]

Ms Daniels,
imo,neither of the two factions are pro-Russia. This is more an ideological split between Tymoschenko & Yuschenko.

Although Tymoschenko made her fortune as "gas princess", importing Russian gas to Ukraine. She has burned her boats since when she wrote her "Containing Russia" article in 2007. Putin hates her.
www.foreignaffairs.com...
Yuschenko is more populist & actively pro Western, this is the real trigger for Russia's "energy war" against Ukraine the last two winters.

Sep 11 11:13 AM

[Mary Daniel:]

Mr. Medved: Thanks for the input. Sounds like you have a strong insight into the area.

Sep 11 11:33 AM

[Peter Medved:]

Ha ... I am Slovak, my mother lives on border with Ukraine, so I am maybe a little more up to speed ? Glad I can bring some local insight to the conversation.
I have one other point, if I may. Having looked through EEM holdings, I could see no Ukranian company listed. Can you clarify for me ?

also, I think we may call each other Peter & Mary, no ?

Sep 11 11:50 AM

[Mary Daniel:]

Certainly Peter. Local insight is always welcome. What I always say when discussing emerging or frontier markets is that you have to believe in the people. And you are right, I am not finding any specific Ukrainian companies. A few small holdings in some general Eastern European companies is all.

Sep 11 11:59 AM

[Duff Kovacs:]

Mary - I am very pleased to see someone like you blogging investment opportunities in Ukraine on Yahoo! I am the head of Sales for KBC Securities Ukraine and based in Kyiv. KBC is a Belgian based investment bank with operations throughout CEE. I have lived in Kyiv for 2 years now and seen the boom (back half of 2007) and the bust (crisis that began in 2008 and, hopefully, ending now). For exposure to the telecom market in Ukraine you can certainly buy Russian companies MTS (MBT:NY) which runs one of the largest cell phone networks in the country as well as Vimpelkom (VIP:NY) which owns a large stake in main cell provider Kyivstar (and battling with its norwegian company Kyivstar partner over ownership/money). Also, Turkcell (TKC:NY) owns Ukraine discount mobile brand 'Life :)' and is a rumored candidate to buy the government's large stake in landline monopoly Ukrtelekom (UTLM UK) which will give Turkcell large market share in Ukrainian telecom going forward.

Ukraine is a heavy industrial economy with mining and metals and the steel industry representing about 40% of GDP. After that it's agriculture and heavy machinery and engineering as the main industries - so basically the economy has the most leverage to steel and agricultural commodities....and the crisis has smacked this economy very hard - but the economy now appears to be turning the corner with GDP growth expected in 2010 after a massive ~20% contraction in 2009. In 2007 the local PFTS index was one of the best performing in the globe with ~130% gain...and then among the worst performing in 2008! After peaking at the 1200 level in Jan 2008, the PFTS index fell all the way to the 200 level, but since march has rebounded to the ~400 level.....so there is still a triple from here to get back to the pre-crisis days.

There are about 20 investable equities/stocks of ukrainian companies listed on the local Ukrainian stock exchange (UX), sister exchange to the Russian RTS exchange, which is has this year replaced the PFTS to be the main securities exchange. While there are many listed securities, there are only about 20 that trade with at least US$100k per day of volume/liquidity up to US$1M per day. The most liquid are steels like Azovstal (bberg: AZST UK) and Enakievo (ENMZ UK); banks like Raffeissen Aval (BAVL UK) and Unicredit/Ukrsotsbank (USCB UK); utilities like Donbasenergo (DOEN UK), Centerenergo (CEEN UK), Ukrnafta (UNAF UK) and Ukrtelekom (UTLM UK); heavy engineering companies like Motor Sich (MSICH UK) and Sumy Frunze (SMASH UK).

There are more liquid and more transparent companies listed on London, Warsaw and Frankfurt. Ferrexpo is a large iron ore producer (FXPO LN), Kernel (KER PW) is a vegetable oil producer on Warsaw and Astarta (AST PW) is a large sugar producer - more and more ukrainian companies will be listing on these western exchanges when the IPO market returns, hopefully in 2010.

Ukraine is a 'frontier market' with huge potential to grow as the world emerges from the financial crisis. Investors with stronger risk appetite can look at the local stock exchange to get involved with companies before they move onto the larger, western exchanges.

Sep 13 12:03 PM

[user278494:]

I agree with you.Many smart portfolio investors(having quite a substantial investing experience in Russia and in the CIS) still have positions in the Ukraine. Though they prefer mostly utilities(looking very cheap) and agricultural companies(Astarta,Mria... Khleboproduct).


On Sep 13 12:03 PM Duff Kovacs wrote:

> Mary - I am very pleased to see someone like you blogging investment
> opportunities in Ukraine on Yahoo! I am the head of Sales for KBC
> Securities Ukraine and based in Kyiv. KBC is a Belgian based investment
> bank with operations throughout CEE. I have lived in Kyiv for 2 years
> now and seen the boom (back half of 2007) and the bust (crisis that
> began in 2008 and, hopefully, ending now). For exposure to the telecom
> market in Ukraine you can certainly buy Russian companies MTS (MBT:seekingalpha.com/symbo...)
> which runs one of the largest cell phone networks in the country
> as well as Vimpelkom (VIP:seekingalpha.com/symbo...) which
> owns a large stake in main cell provider Kyivstar (and battling with
> its norwegian company Kyivstar partner over ownership/money). Also,
> Turkcell (TKC:seekingalpha.com/symbo...) owns Ukraine discount
> mobile brand 'Life :)' and is a rumored candidate to buy the government's
> large stake in landline monopoly Ukrtelekom (UTLM UK) which will
> give Turkcell large market share in Ukrainian telecom going forward.
>
>
> Ukraine is a heavy industrial economy with mining and metals and
> the steel industry representing about 40% of GDP. After that it's
> agriculture and heavy machinery and engineering as the main industries
> - so basically the economy has the most leverage to steel and agricultural
> commodities....and the crisis has smacked this economy very hard
> - but the economy now appears to be turning the corner with GDP growth
> expected in 2010 after a massive ~20% contraction in 2009. In 2007
> the local PFTS index was one of the best performing in the globe
> with ~130% gain...and then among the worst performing in 2008! After
> peaking at the 1200 level in Jan 2008, the PFTS index fell all the
> way to the 200 level, but since march has rebounded to the ~400 level.....so
> there is still a triple from here to get back to the pre-crisis days.
>
>
> There are about 20 investable equities/stocks of ukrainian companies
> listed on the local Ukrainian stock exchange (seekingalpha.com/symbo...),
> sister exchange to the Russian RTS exchange, which is has this year
> replaced the PFTS to be the main securities exchange. While there
> are many listed securities, there are only about 20 that trade with
> at least US$100k per day of volume/liquidity up to US$1M per day.
> The most liquid are steels like Azovstal (bberg: AZST UK) and Enakievo
> (ENMZ UK); banks like Raffeissen Aval (BAVL UK) and Unicredit/Ukrsotsbank
> (USCB UK); utilities like Donbasenergo (DOEN UK), Centerenergo (CEEN
> UK), Ukrnafta (UNAF UK) and Ukrtelekom (UTLM UK); heavy engineering
> companies like Motor Sich (MSICH UK) and Sumy Frunze (SMASH UK).
>
>
> There are more liquid and more transparent companies listed on London,
> Warsaw and Frankfurt. Ferrexpo is a large iron ore producer (FXPO
> LN), Kernel (KER PW) is a vegetable oil producer on Warsaw and Astarta
> (AST PW) is a large sugar producer - more and more ukrainian companies
> will be listing on these western exchanges when the IPO market returns,
> hopefully in 2010.
>
> Ukraine is a 'frontier market' with huge potential to grow as the
> world emerges from the financial crisis. Investors with stronger
> risk appetite can look at the local stock exchange to get involved
> with companies before they move onto the larger, western exchanges.

Sep 15 01:41 PM