Posts filed under 'Ukraine'
Recession-Resistant Microfinance
In the western world, “political tensions” essentially mean that 24-hour cable networks switch to all politics, all the time. In Ukraine, due to “political tensions” between local officials, last week many districts of the capital city of Kiev lost heat and hot water. These are government-controlled commodities – the local goverment can literally shut off your apartment building’s gas heating at a whim. In sub-zero temperatures and bitter continental winter conditions, losing heat for a week is a hardship to pale at. People couldn’t even wash dishes, because the water was literally freezing out of the tap. Even now, three days after the heat was turned back on by these same officials, radiators are merely lukewarm, homes are still freezing, and people are sick with colds and flu.
In addition, the value of the UAH (or “grivna”) has fallen from 5.05gr to $1 on October 1 to 9.45 to $1 on December 17 – a loss of nearly 50% of its value in two and a half months. This has a direct impact on many citizens, since half of all bank loans and most rents are denominated in either dollars or euro, but most people get paid in grivnas. Imagine that your rent was 2,525 grivnas ($500) per month on October 1. At current exchange rates, your rent due on January 1 is now 4,725 grivnas.
Banks are feeling the crunch most keenly, since most of their own debts are denominated in foreign currency as well. Informal reports from Kiev state that it is nearly impossible for individuals or businesses to get dollars out of ATMs or money changers – banks are holding on to all foreign currency reserves and refusing to sell them. One source attempted to find USD from over 20 different ATMs and exchange kiosks, with no luck.
Add to the mix the near-collapse of Prominvest Bank, one of the largest in Ukraine, earlier this fall. To prevent a bank run, they froze all depositor accounts until at least January. People and companies can see their money sitting in their account, but cannot withdraw it, and cannot use the bank to transfer funds or make payments. As of December 16 a Russian bank has been in negotiations to buy the troubled bank. Many Ukrainians view this nervously as Russian attempt at economic, rather than military, takeover of their country. Ukraine is in a vulnerable position, as its GDP is expected to decline by up to 10% in 2009. Consider that the predicted 3.4% decline in the US is considered a deep recession, while a generally accepted definition of a “depression” is a GDP decline of more than 10%.
This is particularly hard on financial institutions – like Kiva’s field partners.
Kiva’s business model is more complex than it appears at first glance. When a lender sends $25 through Kiva to an entrepreneur, that money is received and disbursed by our field partner in that country – in this case, HOPE Ukraine. The field partner is a microfinance bank which is authorized as a financial institution in that country. They do the leg-work of finding clients, performing due diligence to ensure the borrower is solvent, writing profiles, and handling the transactions between Kiva’s lending community and the local entrepreneur. Critically, they also handle foreign exchange risk.
When Kiva sends $300 to an entrepreneur, it’s exactly that: $300. So we’re expecting that same $300 back, regardless of the value of the local currency. Imagine that HOPE Ukraine had raised $300 on Kiva on October 17 for an entrepreneur named Tanya. They would have converted it into grivnas at 5.05, and given Tanya 1,515 grivnas on a 10-month term. Her principle payments are 152 grivnas, which is what she gives to HOPE Ukraine each month, and HOPE Ukraine promises to convert it and send it back as $30. However, when HOPE Ukraine converted Tanya’s monthly payment back into dollars on December 17, that 152 grivnas is no longer worth $30 – now it’s worth only $16. HOPE Ukraine must then pay $14 out of its own pocket in order to send Kiva lenders a $30 repayment.
That sounds pretty grim for HOPE Ukraine, doesn’t it? But we promised you a silver lining, and here it is:
Due to the crisis, none of the big traditional banks will give out loans anymore, so everyone is coming to HOPE Ukraine. They have as much business as they can handle, and more. And because the grivna is worth less, they can lend out in higher amounts. Since Kiva has a $1200 per entrepreneur loan cap, back in October no Kiva clients could borrow more than 6,060 grivnas. Today that $1200 loan cap is worth 11,340 grivnas – so they can service clients who have a greater range of financial need. And they can use the extra income they’re generating on all these new loans to pay that $14 on Tanya’s loan.
Microfinance institutions in these circumstances begin to seem, if not recession-proof, at least recession resistant. Even as the value of their loan portfolio declines on international markets, the volume of loans they service can increase, because traditional banks tighten their lending habits. This is particularly true for loan-only microfinance banks like HOPE Ukraine. Because they don’t take deposits, only give out loans, they did not have money sitting idly in their coffers to be used for foreign investments. They stayed out of the mortgage-backed securities and the short selling, and were thus insulated from many of the shocks that traditional financial institutions suffered.
Conditions on the ground, particularly for the poor, are still harsh and uncertain. Unemployment is skyrocketing, inflation is at 25% and rising, and the government is deadlocked in political infighting. Tanya, and everyone else in Ukraine, may or may not have hot water, or a job, or a savings account tomorrow. But despite the gloom and instability, and in some cases because of it, Kiva’s field partners are standing strong.
8 comments 17 December 2008
Ukrainian Perspectives on the US Presidential Election
The top news story today around the world is the US Presidential Election. Here in Ukraine, the banner headline on the English-language newspaper Kyiv Post is “US Voters Go to the Polls.” Ukraine has its own specific interest in the election results; the citizens here believe that the next President can either save or damn their country – and will probably do so without him ever even noticing it.
Ukraine has two major issues: the economy, and Russia.
Along with the rest of the world, starting in September 2008 the Ukrainian financial sector suffered major shocks. One of the largest banks was turned over to a rescue administration, and many deposit accounts were frozen or withdrawls capped. This resulted in many companies being unable to access their funds, including operational capital, payroll, and accounts receivables/payables. Many individual depositors were similarly affected. Many banks have followed suit and limited withdrawls, and some assets are still frozen until roughly February 2009; as there is no FDIC in Ukraine, this measure was intended to prevent rampant bank runs.
Consequently, the value of the grivna fell from 5.05 to $1 to a low of 7.02 to $1 – in less than a month. After the IMF announced a $16.5 billion bailout, approved by Parliament last Friday, the currency stabilized around 6 to $1. The country’s primary export, steel, has also been in a drastic decline since 2007, leading to increasing unemployment and unrest. Repeatedly in international headlines for the past month, the countries shown as most dramatically affected by the crisis are Iceland, Hungary, and Ukraine.
Meanwhile, Russia has been encroaching on territories it lost in the collapse of the USSR. The conflict over neighboring Georgia is watched closely by Ukrainians, as a bellwether of Russia’s goals for expansion. The West-leaning Prime Minister, Yulia Tymoshenko, has openly pleaded with the EU to check Russia’s power. “The West must seek to create counterweights to Russia’s expansionism and not place all its chips on Russian domestic reform,” she wrote last year. As a neighbor to Russia, home to a sizeable Russian population, and possessor of tension-filled state of Crimea, Ukraine is in all too vulnerable a position.
There is an underlying sense of unease in this country. I spoke to a humanitarian worker in Crimean Simferopol who lived through unannounced practice bombings and urban warfare taking place outside her apartment building last month. Russia was reportedly issuing Russian passports to citizens there last week. The Ukrainian economy is walking a tightrope between politics and solvency, and is dependent upon the US-funded IMF.
Today, as November 4th began here 7 hours ahead of Eastern Standard Time, many Ukrainians were informally polling their friends about the US election. The news coverage was reporting and translating every political and polling story. Despite Obama’s campaign slogan, there seems to be more fear than hope.
I spoke to a staff member at HOPE Ukraine, Kiva’s field partner in this region, about the information she’d gathered from friends, family, and coworkers that morning. (HOPE Ukraine is an evangelical Christian organization, which uses the proceeds from its microfinance mission to fund Tomorrow Clubs children’s ministries.)
“Neither is a good candidate,” she said, summarizing the conversations. “Obama supports abortion and gay marriage, which we oppose, so we would never vote for him if it was our country. But John McCain’s policies on Russia are so militaristic and so dangerous. He wants to try to isolate Russia, to kick it out of G8 and to take a hard line. But Russia will not react well to that. That is the spark that could start a war.”
A war that would play out right here in Ukraine.
A war that the West, busy with its own troubles and perhaps hoisted by its own petard in Georgia, might either ignore, or (diplomatic assertions aside) be too weak to fight. And if that happens, what’s to become of Ukraine?
Economically, my Ukrainian friends have been tight-lipped. The US is the major backer and brain trust for the IMF. Ukraine is widely believed to be financially devastated if not for the IMF bailout, so Ukraine (like Iceland and Hungary) need the US to still be in enough of an economic and superpower position to keep funding and sinking brainpower into it. But the candidates’ specific economic policies haven’t been discussed in any news that I can read, or talked about in any conversation I can access. When I ask I get almost no answer at all, perhaps because I am both an outsider and an American.
The fear of further economic, diplomatic, and even military strife has most Ukrainian news sources watching the American polls with a wary eye. Their lives depend on a future most American voters won’t consider when they cast their ballots today.
5 comments 4 November 2008
The Global Financial Crisis in Ukraine
On a recent trip into the Ukrainian countryside, I spoke to a woman named Yelena. She’s a Kiva client who sells office supplies to local businesses, and has been in business for herself for nine years. The top worry in her mind, she said, was the global financial crisis.
This woman was confident, well educated, and witty. She spoke of her business with pride and determination, and joked that she’d allow me to film because it gave her free marketing in the USA. But when I asked Yelena about the hardships she’d had to overcome in order to make her business as successful as it is, she got serious. “Economics. It’s always economics and stability.”
Ukraine has called for an IMF bailout for their crisis. Dominique Strauss-Kahn, Managing Director of the IMF, said Friday, “Many countries seem to be experiencing problems because of the repatriation of private capital by foreign investors or the reduction of credit lines from foreign banks.” This is basically what caused the Asian Economic Crisis of ten years ago. It is a very dry way to report the fear and hearteach of millions of entrepreneurs and private citizens.
A brief parable, to explain the economics jargon:
Imagine that you live in Ohio, and want to buy a little summer home on the beach in Crimea. You give the current owner US Dollars, and she gives you the deed to the property.
During the winter, you rent out the little home to locals while you have family holidays back in Ohio. The locals give you UAH (“grivnas” in local slang) and you give them a place to stay.
Now there’s a wad of US Dollars sitting in a bank in Ukraine, and a wad of UAH sitting in a bank in the US. The Ukrainian bank can use these US Dollars until the dollars’ owner goes to the ATM and wants them back. Likewise, the US bank gets to use the UAH until its owner wants them back.
Now, imagine a few million of these little retirement homes (or businesses, factories, apartment buildings, stocks, etc) have been purchased by people sitting in the US. There’s now a great big wad of US Dollars sitting in Ukrainian banks.
Until two weeks ago, when one of the biggest and most established Ukrainian banks went under.
You won’t hear about this collapse on the news. It’s been officially called a re-structuring, just as Washington Mutual went through this past summer. The bank still exists, and the buildings are still there, but all of its activity has been shut down. For the past two weeks, the ATMs have not worked. Businesses who bank there have been unable to send out payroll checks; they can see the money sitting in their account, but cannot access it. The bank’s customers have been told that they will have access to their money sometime in December.
There is no FDIC in Ukraine. People who put their money into a bank here must trust that the bank is stable, because if it collapses, they lose everything. That has happened here, not once but twice in a generation.
This is understandably scary, and it’s not widely reported in local news media. People here learn the financial news around the water cooler, playing an intricate and country-wide game of Telephone to figure out what happened to the money and what might happen next. There are major industrial cities in the country that have cut back to entirely part-time labor; factories have told their employees that they cannot afford to pay for more than 4 workdays per week. Whispers up and down the chain of command seem to say that the extra money is being used for the 700 million UAH “emergency election“ fund, called for by the President apparently out of political spite. “We don’t want another election,” I was told. “We want the financial crisis averted and unemployment lowered.”
Now you sit in your chair in Ohio and watch the news about banking and political crisis in Ukraine, so you decide to sell your little vacation home and get out of Dodge. You also don’t want anything to do with the grivnas you’ve got sitting in the bank, so you convert them back to US Dollars. This is a perfectly rational thing to do, from your perspective. You pull out and put your money at home.
So does every other person in the world, at the same time.
Suddenly, everyone in the world gives Ukraine back their grivnas, and takes out their dollars, pounds, euro, and yen. Ukraine already has grivnas in its local money supply, and the addition of a such huge amount of it drives the value down overnight. Inflation skyrockets, and keeps going up as the foreign investors keep pulling out.
And that big, shaky Ukrainian bank gets even shakier, so none of the other banks in the world want to do business with it; the bank cannot trade, get loans, or get a stable supply of foreign currency. The other banks all take their football and go home.
And Yelena is watching the news and the stock tickers. She goes to the ATM to get money to keep the lights on in her store, and the ATM doesn’t work. Her employee may not get a paycheck, because it’s siting in limbo somewhere as useless 1s and 0s. Her Kiva loan through HOPE Ukraine has already been used to purchase the inventory she’d specified, but Ukrainian banks have been known to call loans immediately when they get into trouble, and so she does not entirely trust HOPE’s reassurances. She is very nervous.
“I am confident that God will see us through, and will take care of His people,” a HOPE staff member told me in a quiet and wistful voice, looking at the floor. “But what will happen… I don’t know.”
6 comments 22 October 2008
A Problem of Success
We went to interview 3 of the 5 Kiva clients at this brand-new office. They’ve been in business for 2 months and have gathered 11 clients total. The loan officer, Vitalik, took us through a marketplace that looks just the same as cloth-covered market kiosks around the world. You could see it at a farmer’s market in Seattle or the Chatachung Market in Bangkok. (The knock-off Prada handbags were, I admit, more reminiscent of Thailand than of Washington. None of the Kiva clients were selling such things.) All three clients had opened two locations and had at least one employee, two were widows who had raised children by themselves, and all of them originally went into business because they lost their jobs during perestroika and had no way to feed their families. All had been in business for more than 9 years.
The interviews were quick, painless, and eye-opening. It really did give me a good sense of what kind of entrepreneurs microfinance works with, and what kind it doesn’t.
Yet her loan, for purchasing several months’ inventory in bulk, was for only $1200. That’s a substantial amount of money in her town but is too small for most banks, and thus she qualifies as a microfinance client and has been able to really benefit from loans. She started out from scratch, twice, being an unemployed widow with kids and grandkids. At one point her store was robbed of everything, and she had no insurance. Through microfinance loans she rebuilt her business and now has ambitions of opening a while network of stores. That’s absolutely a success story of microfinance substantially improving someone’s life.
I also saw little old ladies that lay out bedsheets on the sidewalk and pile fruit on them, and sell it with the help of a small, old scale. They are too poor to be microfinance clients, because they live so close to the edge of poverty that they’re not generally able to repay loans. Which is a smart decision on HOPE Ukraine’s part; the bank has to be self-sustaining in order to be able to continue their work, and so must select their clients carefully. Because the loans are not collateralized, the loan officer must spend a good deal of time assessing the business. He checks through the entrepreneur’s inventory to ensure that the business is stable and active, visits her home to verify that her standard of living supports business expansion, speaks to her neighbors to gauge her credibility. One loan officer might serve up to 150 clients this way. It’s an enormous workload. And it keeps the microfinance bank – indeed, the entire microfinance industry – afloat.
This system still leaves a whole class of poverty totally unaddressed. I knew in advance of coming here that microfinance is applicable to only a particular subset of the poor. At risk of belaboring the obvious, microfinance only works with business owners. Even more precisely, it works with business owners who are successful enough to want to expand their business. Just subsisting is not enough, any more than it would be enough for a small business owner in the States. A homeless, destitute, starving person is not a microfinance client. A wealthy business owner in a developing country is not a microfinance client. Rather, a lower-middle class to middle-class entrepreneur in a developing or former communist country is a microfinance client.
The answer is that she was poor in the way we think of abject poverty, and is now a member of the middle class. The exchange rate means that she’s still qualifying for loans that are very small by Western standards, but her lifestyle takes her out of the standard mission of “eliminating poverty.” We have already eliminated her poverty. She’s the “after” picture.
But she is still working and expanding her business. She is still too small to interest an international bank, or even a national bank headquartered in an expensive capital city. A little bit of money still goes a long way, and her alternative is still local moneylenders who vastly inflate interest rates.
A business owner in her position, a success story such as Galena, is now living in a gap in the system. Too wealthy to qualify for international aid, too poor to qualify for traditional bank loans, too successful to utilize the social safety net (even if it existed in her country), too struggling to enter the global business class – she is the perfect microfinance client. And yet as philanthropic Westerners, our first instinct is to look at Galena and think, “She isn’t poor enough to need my help.” I had this thought upon meeting her, and I’m sure I’m not alone, so I’ll reiterate the thought:
We want to help eliminate poverty. That’s what I’ve dedicated a year of my life to doing, and what many people have dedicated vast sums of their own money to doing. But once we’ve done that, the very people we’ve helped become, somehow, less deserving than they were when we started. Because microfinance works, because we have succeeded in our task, Galena is now less deserving than the little babushka who sells fruit off a bedsheet. So what is she to do? If we turn away from her when she has entered this gap in the system, we risk letting her slide back into poverty.
Where do the boundaries of poverty begin and end? And within those boundaries, where does our reponsibility lie? Once you have helped someone overcome one obstacle, do you abandon them before they encounter the next? At what point does Kiva, as midwife to small businesses, step back and let them succeed or fail on their own? When do we tell Galena that we’ll no longer be a partner for her?
I have no answers to this, only more questions. But if the questions serve to spark debate, perhaps the community can find answers. When you speak to friends about poverty and microfinance, please remember Galena. She is real. Your answers affect her life.
7 comments 19 October 2008
Why Ukraine Needs Microfinance
As a former Soviet state, home of the Orange Revolution, and under-journalized European backwater, Ukraine certainly has an image problem. It brings to mind images of inscrutable bureaucracy, frozen winters, and monotonous apartment blocks. Except to those of us who have visited the country or known citizens of Ukraine, it does not bring to mind the sorts of struggling poor that microfinance institutions typically serve.
Indeed, in the capital of Kyiv (aka Kiev), microfinance banks don’t operate. The cost of living is too high, and the living standards are those of a middle-income country. You can buy a pizza or condo or a Mercedes in Kyiv. But even here, life is harsher than it is in the West. Public transit, while ubiquitous and cheap, is slow, crowded, unmarked, and in poor repair. The bathroom in an apartment, often as not, is a post-remodel afterthought located in the kitchen. Tall buildings do not necessarily contain elevators. Internet access is in stunningly scarce supply, even in the capital.
Yet despite an average per-capita income of less than $20,000 a year in Kyiv, an apartment that nine years ago cost $4,000 now costs $100,000. Banks no longer give mortgages, partly in reaction to the 30% inflation rate, partly as a ripple effect of the US subprime mortgage crisis. The Producer Price Index is well over 40%. (Imagine that McDonalds’ beef suppliers raised the price of a pound of beef from $1 to $1.40. Quite reasonably, you might expect that last year’s $4 Big Mac is now this year’s $5.60 Big Mac. The beef price hike is Producer Price Index, and the Big Mac price hike is Consumer Price Index. Roughly.)
Outside the capital, life is closer to the edge. Per capita income is down into the $10,000 range (estimated; 2008 figures haven’t been released yet), and agricultural land is still impossible to legally purchase – a holdover from communist times. Corruption is ubiquitous. Unemployment is roughly 7%. With badly tended roads, few successful industries, and little communications infrastructure, there is essentially nothing to do and few prospects for prosperity. Never underestimate the economic power of abject boredom.
2003 figures estimate that poverty levels are 37.7%; it’s difficult to say what the intervening years and the weakened dollar (to which the hryvnia had been de facto pegged) have done to this number. As late as 2001, Ukrainians were still working without pay under a half-collapsed central planning system that left many of them unequipped to transition to a new market economy. Anyone over the age of 35 grew up without banks, credit, or business as part of their existence. Entrepreneurship was stamped out during the twentieth century, and the working poor, no longer secure in even an inefficient social safety net, have had to teach themselves new skills.
They make their living where they can, often in small shops reminiscent of those found throughout the developing world. While walking through a tumble-down market above a subway stop in Kyiv, the director of the HOPE Ukraine microfinance bank gestured to a woman selling cigarettes from a tiny glassed-in kiosk. “Microfinance client,” he said with an ironic tone. “Or she would be if we operated in Kyiv. All the market sellers would be.”
The picture is bleak, but into the infrastructure gap has emerged the Ukrainian microfinance industry. MixMarket lists three active microfinance institutions in the country, with a combined total of about 55,000 current borrowers. These small business loans average around $1,600, and can provide for several months’ worth of inventory, repair costs, or household expenses. Additionally, HOPE sponsors business education camps for the children of their borrowers, giving the next generation the tools they need to survive in the new Eastern Europe.
Learn more about Kiva’s field partner, HOPE Ukraine, here. And consider lending to these entrepreneurs for your next Kiva loan.
HOPE Ukraine serves clients like Tatyana all over the country
10 comments 10 October 2008
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