CI VIEW: Severstal’s Mordashov says sanctions “lose-lose” for West, Ukraine and Russia: UPDATE

 

CERNOBBIO, Italy — (CI UKRAINE) -[Update on June 16, 2016 with Ukranian Prime Minister Volodmyr Groysman at National Press Club in Washington, DC]

Russia, Ukraine and the West are all in a “lose-lose” situation as Russia becomes increasingly economically isolated with the current crisis, Alexei Mordashov, owner and chief executive of Moscow- and London-listed OAO Severstal (LSE:SVST), said.

[Severstal CEO Alexey Mordashov speaks with Capitol Intelligence using CI Glass during the annual Forum Ambrosetti held at Villa D’Este in Cernobbio, Italy on September 5, 2014.]

Speaking to Capitol Intelligence shortly before the announcement of a ceasefire in the east of Ukraine, Mordashov described the ongoing conflict and the resulting cycle of mutual sanctions between the developed world and Russia as “lose-lose” for everyone. Mordashov said Western sanctions against Russia are not doing anything to help bring economic stability to the Ukraine which was already unstable even before the Maidan protests and the forceful removal of Viktor Yanukovych.

In fact, the sanctions are creating increasingly serious problems for Ukraine as much of its industry and larger economy is intra-dependent on Russia.

The steel and iron ore production facilities of Ukrainian oligarch, Donetsk, Ukraine-based System Capital Management owner Rinat Akhemotov, are close to collapse and risk sending thousands upon thousands of unemployed metal workers to join the separatists, a SCM management source said.

“The condition of the steel and iron plants, which are old and outdated, was not good before any of this started to happen,” the source said.

Mordashov said it is critical that Ukrainian President Petro Poroshenko and Russian President Vladimir Putin sit down with each other and hammer out a comprehensive agreement to end the crisis once and for all.

“No one is wining anything from this entire crisis. Everyone is losing,” he said.

Answering a question from Capitol Intelligence at the White House following his Oval Office meeting with President Obama, Ukrainian Poroshenko said Ukraine has set-up a political risk insurance fund for US and other foreign direct investment into the country.

However, he said that peace needs to be reached between Russia and Ukraine before foreign investors will commit new capital to the country. Prior to meeting President Obama, Poroshenko addressed a Joint Session of the United States Congress, the rarest and highest  honor for a foreign head of state.

 

[Ukrainian President Petro Poroshenko answering a question from Capitol Intelligence following meeting with President Obama in the Oval Office on September 18, 2014.]

One positive sign in this direction are current talks by Wayzata, Minnesota-based Cargill to build out massive grain silos in the Ukraine. It is understood that US Commerce Secretary Penny Pritzker personally reached out to the United States’ largest privately held company to begin making direct investments in Europe’s breadbasket, Ukraine.

Atlantic Group, the privately-held Bahamas registered Ukrainian advertising group, has attracted the interest of giant US investment PE fund Franklin Templeton Emerging Markets Group.

FTEMG Chairman Mark Mobius told this news service that Atlantic Group, with its billboard and television advertising activities, is an interesting target for group.

Separately, FTEMG is in talks to acquire a USD 100m Ukrainian food group from an unnamed local oligarch, a source familiar the situation said.  It is understood that US Commerce Secretary Pritzker personally reached out to the heads of major US investment banks such as JP Morgan CEO Jamie Dimon, Citigroup CEO Ed Corbat and Goldman Sachs CEO Lloyd Blankfein to push their investment bankers to originate of US deals in the Ukraine.

Goldman Sachs is currently pushing for US government backed loan guarantees for US and other non-Russian gas imports through the controversial Ukrainian state controlled natural oil and gas group Naftogaz. 

Ukrainian Prime Minister Volodmyr Groysman told a news conference at the National Press Club in Washington, DC that foreign direct investment is the top priority for the country and was pleased with a meeting with US CEOs at the US Chamber of Commerce. 

However, the newly appointed Prime Minister Groysman did acknowledge that currency exchange restrictions and the repatriation of dividends remains an obstacle for foreign investment in the country.

[Ukraine Prime Minister Volodmyr Groysman answers question from Capitol Intelligence/CI Ukraine using CI Glass on currency exchange restrictions and dividend controls harming Foreign Direct Investment. National Press Club Washington, DC. June 16, 2016]

Pavlo Sheremeta, the former Ukrainian Economy Minister told this news service during an interview at the European Bank for Reconstruction and Development (EBRD) Annual Meeting in Warsaw that the economy is over-monopolized and that new entrants are needed to rebuild the Ukrainian economy.

National Bank of Ukraine Acting Deputy Governor Vladyslav Rashkovan said he is doing his utmost to ensure that Ukraine is both open for new foreign investment and its commitment for long/term economic reform.

In an interview with Capitol Intelligence at the Euromoney’s The Central and Eastern European Forum in Vienna, Rashkovan said he is also working hard to convince investors that Ukraine will not default on its sovereign debt.

[National Bank of Ukraine Acting Deputy Governor Vladyslav Rashkovan speaks to Capitol Intelligence using CI Glass at the Euromoney The Central & Eastern European Forum at the Hilton Vienna. January 20, 2015] 

Originally from Odessa, Rashkovan was previously the chief financial officer of Uncredit Bank and is currently the go to person for the IMF and major banks such as Bank of America, Citigroup and Societe Generale.

Franklin Templeton — which now owns USD 8.8bn, or about half, of Ukrainian international bonds — is becoming one of the largest private sector investor as well as creditor to the new Ukraine.

Bankers argue that Ukraine will have no choice but to default on its debt if it cannot attract significant new foreign direct investment. While a default would have an almost disastrous effect on Franklin’s fixed income fund, many US and European hedge funds are preparing to acquire defaulted Ukrainian debt.

“One of the best financial plays in history was buying defaulted Russian debt and we expect the same with Ukranian debt,” said an aggressive Chicago-based hedge fund manager.

Franklin Templeton Managing Director of Investment Solutions David Smart said he had little to say regarding Franklin Templeton’s Ukrainian debt exposure.

[Franklin Templeton Managing Director for Investment Solutions questions by Capitol Intellignece using CI Glass at Euromoney The Central and & Eastern European Forum in Vienna on January 20, 2015]

The US government’s Overseas Private Investment Corporation (OPIC), which can finance up to USD 400m in project finance or political risk guarantees for investments in emerging markets, is interested in helping Templeton in any deal for Atlantic Group.

An OPIC source said the agency is very interested in helping any US investor willing to invest in the Ukraine and that the only restriction is that a US investor has at least 25% in any deal or project. OPIC participated as part of the US delegation at the EBRD meeting in Warsaw

EBRD president Suma Chakrabarti told this news service that its earmarked EUR 1bn in new investments to Ukraine is meant to curb corruption in the Ukrainian economy and give support to “clean businessmen.”

Also attending Forum Ambrosetti, US Senator John McCain (R-AZ) said that the West must continue and even increase the amount of economic sanctions against Russia and Russian companies.

In an interview at the Forum Ambrosetti that took place just after Senator McCain traveled to Kiev, McCain said any talk of relaxing sanctions or rewarding “good players” in Russia is tantamount to European appeasement towards Adolph Hitler and Nazi Germany in the 1930s.

[US Senator John McCain speaks to Capitol Intelligence using CI Glass at the Forum Ambrosetti held at Villa D’Este in Cernobbio on Sept. 5, 2014.]

The current sanctions against Russia has already taken a great toll on the Italian fruit and agriculture sector, which government experts already calculate has cost the Italian economy some EUR 200m in lost sales to Russia out of an estimated total EU-wide loss of EUR 5bn.

Russian President Vladimir Putin used the opportunity for his speech at the Russian National Day at the Milan Universal Exposition on June 10, 2015 to remind everyone that Russia’s ties to Italy date back more than 500 years.

Immediately following Putin’s speech,  the youthful Italian Prime Minister Matteo Renzi used the occasion to lower already high tensions between the Russia and the West.

The meeting between Putin and Renzi occurred only two weeks following a summit between Renzi and US President Barack Obama at the Oval Office and joint news conference in the East Room of the White House.

The economic costs for European and Russian small and medium size companies has been high, Russian Economic Development Alexey Ulyukaev told Capitol Intelligence in an interview.

Minister Ulyukaev said that there has been already a 10% drop this year in Italian-Russian cross-border trade and 28% in the first four months of 2015 for the same period a year earlier.

[Russian Economic Development Minister Alexey Ulyukaev speaks to Capitol Intelligence using CI Glass at Russian National during the Milan Universal Exposition. Milan, Italy. June 10, 2015]

In fact, US and EU sanctions which are meant to target specific individuals behind the Russian annexation of Crimea have had the unintended consequences of shoring support among those with the least economic interest in helping those under sanctions: Russian private sector business owners and workers with little or not ties with big state-owned enterprises.

EU and US sanctions has surprisingly given an important boost to some Russian small and medium enterprises, especially in the agriculture sector as the sanctions have had the positive effect of diminishing predominance of state affiliated business in the Russian economy.

The Rostov, Russia-based family owned Bank Center-Invest is seeing a return on equity of over 13 percent as local businesses continue to expand production and increase market share, Center-Invest chairman Dr. Vasily V. Vysokov said in an interview during the Euromoney The Central & Eastern European Forum in Vienna on January 20, 2015.

 

[Bank Center-Invest Chairman Dr. Vasily V. Vysokov speaks to Capitol Intelligence using CI Glass at Euromoney The Central & Eastern European Forum in Vienna. January 20, 2015]

Center-Invest, which has assets of Rub 91.5bn is also unique in that it reports number of children born of employees. For example, the bank reported 75 births in 2014 compared to 83 in 2013 and 71 in 2012.

Dr. Vysokov said the employee birth rate is an important metric as it measures the sense of optimism and security that bank employees have of the future.

Moscow-based Rossiysky Kredit Bank, Russia’s 50th largest bank, is also doing well in the present climate and benefiting from the increased competitive lending environment opened up by a curtailed Sberbank, VTB, Gazprombank, Bank of Moscow and Russian Agriculture Bank, BRK Senior Vice President Alexey Ivanov said.

A source at French banking giant Societe Generale Moscow-based subsidiary Rosbank is also doing surprisingly well.

“Russian corporates are coming to us for loans as Sberbank and VTB can no longer operate in the international markets,” the Socgen banker said.

A significant increase of foreign direct investment to the Ukraine by the west would have a much greater impact on Russia as a whole rather than punitive sanctions that end up hurting almost everyone equally, Mordashov said.

US Commerce Secretary Penny Pritzker’s recent call for a Marshall plan for the Ukraine seems to be bearing the first fruits with a potential USD 160m investment by Wayzata, Minnesota-based Cargill.

It is understood that the US privately-held group is talks with Ukraine’s so-called Egg king, Urkland owner and CEO Oleg Bakmatyuk to build grain drying silos across the former Soviet Republic.

Another large potential investor for Ukraine is the Duluth, Geogia-based AGCO (NYSE:AGCO) agriculture equipment concern that already operates in the Russian and Ukrainian market through its Brescia, Italy-based joint venture partner SAME Deutz Fahr.

An Agco source said the company is seeking new acquisition targets and one potential target could be the Brno, Czech Republic-based Zetor tractor manufacturer. Zetor sells about 5,000 vehicles a year and has a turnover of about EUR 50m.

A Zetor source said the company has an important market share i Poland and that setting up a manufacturing plant in Ukraine would make strategic sense.

[Ukrainian Prime Minister Volodmyr Groysman speaks to Capitol Intelligence/CI Ukraine using CI Glass leaving National Press Club of Washington, DC. June 16, 2016]

During a brief visit to Crimea’s capital city Simferopol it is clear there a few winners here. One could not to see any visible signs of Russian state investment in the city and Simferopol seems be in the same deplorable condition under Russia as it was under Ukraine.

While Crimea was the center of intellectual and cultural activity of Imperial Russia under the Czars, today the peninsula is a favorite destination for Soviet era nostalgists with little, or no, feelings for either pre- nor post-Communist Russia.

IMG_20150618_104148

“These Soviets are nationalists for a country that does not exist,” a Moscow banker who owns a Dacha in Crimea said.

In fact, young people in Crimea complain that the same group of “business owners” in Crimea when it was part of Ukraine are the exact same owners in Crimea under Russia.

By PK Semler in Washington, DC: Cernobbio and Milan, Italy and Simferopol, Crimea.

For more information please call +1-202-549-3399 or email pks@capitolintelgroup.com

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