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Ukrainian Equivalence Rejected

We’re big believers in first-hand information. So we’re happy to pass on this email from a reader who is a bond trader in New York, and who rejects the claim of equivalence between Yuschenko and Yanukovych asserted in the Chronicles article we linked to yesterday. It’s lengthy, but worth reading in full:

I read with interest the Ukraine alternative view you linked to. I trade emerging markets securities for a large hedge fund in New York, and I have a decent amount of exposure to Ukraine. Based on what I’ve seen in my seat, drawing moral equivalence between Yuschenko and Yanukovych is idiotic. Let me give a couple of vignettes.
- Last year, after years of stalling, Ukraine finally moved ahead with the privatization of Krivorozhstal, the country’s largest steelmaking concern. Several western companies were bidding, along with a local consortium operating on behalf of Mr. Akhmetov (the oligarch mostly closely linked with Yanukovych) and Mr. Pinchuk (Kuchma’s son-in-low). A Swiss bank that shall remain nameless tried to interest us in participating in a syndicate to make an acquisition loan to this consortium. Their team paid us a visit a few weeks before the auction. The guy delivering the pitch was Ihor Yushko, a former finance minister of the country. The weird thing about the presentation is that they figured they were going to be able to buy Krivorozhstal for $800mio; it was pretty well known that the western companies were planning to bid north of $2bio. I challenged Mr. Yushko on this point. Without a hint of shame, he replied that we shouldn’t worry about that, the consortium was sure to win the auction at its price. How, I asked. Again, with remarkable forthrightness, he pointed to the constituents of the consortium. Mr. Akhmetov and Mr. Pinchuk, he said, are too well-connected to lose. Needless to say, we passed on such a dodgy deal. A few weeks later, the Ukraine privitization board announced a new condition for bidders. Only those bidders who had purchased more than a certain quantity of coking coal from Ukrainian sources in the past two years would be eligible. Surprise, surprise. Which bidder do you think was the only one that had existing steel operations in Ukraine and therefore satisfied the criterion? The crooks won the auction at the ludicrously low price of approx $800mio.
- In September I got a call from a German bank who shall remain nameless. Would we consider lending to Ukraine via a somewhat unorthodox channel? Instead of a bond in the public markets in the name of Government of Ukraine or National Bank of Ukraine (the central bank), this security would be a promissory note issued by the Ministry of Transport, with some sort of letter of comfort from the Finance Ministry. The ostensible purpose was to fund some specific highway project. As it turned out, it became clear later that the highway project was a sham. The money would indeed be disbursed to a contractor who would keep a small amount and pass on the rest to the Yanukovych campaign. The loan came several hundred bps wide to Ukraine government bonds. I am sad to report that my colleagues in the industry snapped up this loan with eagerness. The Yanukovych camp was so happy with this little scheme that they repeated it three more times in the space of a month, pulling in something like $500mio.
- We’ve invested very actively in the Russian oil sector. I heard from more than one of these companies that the Kremlin “encouraged” them to find ways to siphon money to the Yanukovych campaign. After the Yukos conflict, no Russian oil company will lightly say no to the Kremlin. Notwithstanding that powerful threat, the Kremlin also hinted at rewards. Yanukovych had promised Putin, it was said, that should he win, he would show his gratitude to the Russian oil sector by agreeing to reverse the direction of the Odessa-Brody pipeline.
I’m sure Yuschenko isn’t a choir-boy. And I realize that the people of Eastern Ukraine have legitimate aspirations to be full participants in Ukrainian society in spite of their felt closeness to Russia. However, the scale of corruption in the Yanukovych campaign must be very great if it is so smackingly obvious even to a humble bond trader sitting in New York.

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