In most countries, an event like President Viktor Yushchenko’s April 2 decree dissolving the Verkhovna Rada and calling early elections would have sent shockwaves through the economy and the market. But investors in Ukraine have become immune to such things, having become accustomed to continued political turmoil over the past three years and the impact of the latest crisis has, thus far at least, been happily very limited.
Last week, the market grew very strongly and stock indexes soared to new record highs on the news that Prime Minister Viktor Yanukovych, who had previously rejected the President’s call for fresh elections, had agreed in principle to back an early ballot.
A negative initial reponse...
This is not to say, however, that the crisis has had no impact at all on the market - after all, the PFTS index fell by 7% on April 3, the day after the President’s original decree was announced. "The political turmoil had a significant impact on the market and we believe that if the situation had been stable the market would have been much more bullish," says Denis Matsuyev, deputy head of sales at Dragon Capital in Kyiv. "Looking back, I think we might be another 10-15% up on where we are now if there hadn't been the turmoil. The first reaction was negative not because of the decree in itself was not harmful for the market or negative for society, but everyone understood that the [parliamentary] majority and Yanukovych would resist, which would lead to a confrontation. The reaction of the market was therefore not to the decree but rather to the confrontation that it knew would follow."
Analyst Stanislav Kartavykh at Foyil Securities says the initial drop was mainly due to foreign investors reactions to the political storm. "They were worried and didn't know how it would develop. Then they saw that it would not have much impact, that there were no fights in the streets and only peaceful protests, they realised the crisis was purely political," he explains.
...And a fast recovery
The market stayed low for a week but quickly resumed growth until on April 21st the PFTS was back at the 810 points seen before the President’s announcement. "The market recovered mostly on the part of local investors which have been supporting the market all along. Also, institutional foreign investors tried bottom feeding," Matsuyev says.
The fast recovery after the initial PFTS drop and reduction in trading was also down to investors continuing to rely on company news, Kartavyhk says - news that was generally positive.
There were other non-political factors at play, Matsuykov explains. "The announcement by Azovstal of placing the cancellation of 26% of its treasury stocks onto the agenda of its general meeting was positive. In the subsequent two days, Azovstal's shares went up 30%, which boosted metallurgy sector stocks.”
The fact that the warring Viktors have thus far only agreed in principle to elections without actually setting a date has not put off investors at all. Kartavykh believes the prospect of elections coming sooner rather than later is very good news following initial market expectations of late summer or early autumn. "This will allow the market to reach new heights, also supported also by corporate news. Once the date is set for new elections, the crisis will officially be over," he says.
Renewed focus on privatisation
Market attention has now shifted away from politics, but on this front the ongoing political battle between the parties could well have a considerable impact. "The State Property Fund (SPF) has scheduled the launch of two privatisations on May 22nd - 1% of Ukrtelecom and 2.48% of the Krivoy Rih Iron and Ore Plant, Matsuvey says. "The market is interested in this auction going smoothly with good supervision and the reaction would be negative if the SPF cancels these."
Kartavykh at Foyil Securities however cautions against investors fretting over political interference in these transactions. "Privatisation will not be strongly affected by the upcoming elections or a change of government - the state needs financing and the SPF badly needs to meet its privatisation budget this year after it failed to do so in 2006. Without privatisation revenues the government can’t achieve its goals, so privatisation will go ahead in any scenario."
Nevertheless, Ukrainian politicians are not unknown to make surprise moves and Matsuyev at Dragon Capital points out that the SPF takes its orders from the Cabinet of
Ministers. "If they don’t wish a deal to go through, they can give the instruction. So far there have been no signs of this happening, but you never know which weapons politicians will use - remember that the start of the Ukrtelecom privatisation has already been delayed several times."
