1/13/2007

Poland banks on Ukraine as former Soviet state looks westward

As thousands of Poles head west in search of jobs, Polish companies are looking east for profits.

Bank Pekao, a lender, plans to spend $100 million in 2007 to open branches in Ukraine, where fewer than one in 10 people have bank accounts. Grupa Kety, a maker of aluminum pipes, will open a factory in the former Soviet republic to take advantage of wages that are 70 percent of those in Poland.

Executives expect Ukraine to prosper as the government aligns itself more closely with Western Europe and builds a market economy. They point to Poland as an example of what can happen when capitalism takes hold. Poland's gross domestic product has quadrupled to more than $300 billion, giving it the largest GDP in Eastern Europe, during the 17 years since communism collapsed.

Ukraine "offers incredible opportunity for development, similar to what we have seen in Poland," said Piotr Stepniak, chief executive officer of Getin Holding, a financial services company owned by Leszek Czarnecki, one of Poland's new multimillionaires.

Polish companies' investment in Ukraine rose almost fivefold to $106.5 million in the first 10 months of 2006, according to the Ukrainian statistics office in Kiev. Getin agreed in December to buy Prikarpattya Bank, which has 30 branches in western Ukraine, for an undisclosed price.

"Polish companies have grown up," said Cezary Iwanski, vice president of Pioneer Pekao Investment Management, the biggest fund manager in Poland. "The Polish market will continue to grow, but in order to grow faster than the competition, companies need to build operations abroad."

Poland's development has had its problems. It has the highest unemployment rate in the European Union, at 14.8 percent in November, and the figure is declining mainly because of an exodus of workers to places like Britain and Ireland. More than 800,000 of Poland's 39 million people emigrated in the past year, according to official statistics.

Even as joblessness remains high, wages are rising at an annual rate of about 5 percent. Companies like Grupa Kety and Polski Koncern Miesny Duda, a meat packer, blame rising labor costs for their decision to go abroad.

"Polish companies haven't been that aggressive in the expansion into the east before," said Mark Mobius, who oversees investments in emerging markets at Templeton Asset Management in Singapore. "The companies are diversifying their earnings and they have a very good human resources base that they can use."

Western Ukraine and southern Lithuania, including the capital, Vilnius, were part of Poland before World War II, and large communities of ethnic Poles still live in the two countries. The links with Lithuania go back to the 14th century and lasted intermittently until the Soviet period.

PKN Orlen, the biggest oil company in Poland, completed its purchase of a Lithuanian refiner, Mazeikiu Nafta, for $2.34 billion last month, the largest international investment by a Polish company.

The population of Ukraine, at 47 million, is about one-fifth larger than that of Poland, while the $89 billion Ukrainian economy is less than a third as big as the Polish one. The Polish economy is expanding more than 5 percent a year; the government of Ukraine forecasts growth of 7 percent for 2006 and 2007.

Some investors are concerned that the battle between President Viktor Yushchenko and Prime Minister Viktor Yanukovich for control of foreign and domestic policies may undermine political stability. The Ukrainian 7.65 percent dollar-denominated bond due June 2013 yields 6.08 percent, 0.84 percentage point more than the Polish 6.25 percent dollar-denominated bond of similar maturity. The higher yield is an indication that investors consider Ukraine a riskier place.

"Ukraine has enormous growth potential, but it's also a very risky market," said Sebastian Buczek, a fund manager at ING Investment Management Polska.

Duda, the meatpacker based in Jutrosin, Poland, wants to become as big in Ukraine as it is in Poland and is earmarking 100 million zloty, or $33 million, for acquisitions. The company, which started operating in Ukraine this year, plans to buy a meat producer and pork farms in coming months.

"Huge profitability and growth prospects make our investments there justified," said Maciej Duda, the chief executive.

Pekao is owned by UniCredit, the biggest bank in Italy, and is responsible for the bank's expansion in Ukraine. It is challenging lenders like OTP Bank of Hungary, which started making acquisitions abroad more than five years ago.

About 7 percent of adults in Ukraine have bank accounts, less than the proportion in Poland about a decade ago, according to Pekao. Now about 60 percent of Poles have accounts.

LOT makes plans for IPO

Poland's government expects LOT, the national airline, to sell new shares in an initial public offering late this year or early next year.

The IPO would leave about 30 percent of the company traded on the stock exchange, cutting the government's stake to about 50 percent from its current holding of 68 percent, Deputy Treasury Minister Ireneusz Dabrowski said in Warsaw on Thursday.

"The investment adviser who will bring LOT to the market will be selected by March," Dabrowski said.

LOT is fighting to win back customers after the rise of low-cost carriers cut its market share to 35 percent in the first half of 2006 from 47 percent a year earlier.

Source: By Marta Waldoch and Katarzyna Klimasinska, iht.com



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