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Poland banks on Ukraine as ex-Soviet republic builds EU ties

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

Bank Pekao SA, the country's second-largest lender, plans to spend $100 million in 2007 to open branches in Ukraine, where fewer than one in 10 people have a bank account. Aluminum pipemaker Grupa Kety SA will open a factory in the former Soviet republic, to take advantage of 30% lower wage costs. 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 exceed $300 billion, (€231 billion) the most 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, CEO of Getin Holding SA, 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 SA, 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 SA, Poland's biggest fund manager, with assets of 23.3 billion zloty ($7.8 billion). „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 hasn't been problem-free. Unemployment remains the highest in the European Union, at 14.8% in November, and is declining mainly because of an exodus of young workers to places such as the UK 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%. Companies such as Grupa Kety and Polski Koncern Miesny Duda SA, the third-biggest Polish 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 $30 billion invested in emerging markets at Templeton Asset Management Ltd. in Singapore. „The companies are diversifying their earnings and they have a very good human resources base that they can use.”

Western Ukraine and Lithuania were part of Poland before World War II, and large communities of ethnic Poles still live in the two countries. PKN Orlen SA, Poland's biggest oil company, completed its purchase of Lithuanian refiner Mazeikiu Nafta AB for $2.34 billion last month, the largest international investment by a Polish company. Ukraine's population of 47 million is about a fifth larger than Poland's, while the $89 billion economy is less than a third of the size. The Polish economy is expanding more than 5% a year, while Ukraine's government forecast growth of 7% for 2006 and 2007.

Some investors are concerned the battle between President Viktor Yushchenko and Prime Minister Viktor Yanukovych for control of foreign and domestic policies may undermine political stability. Ukraine's 7.65% dollar-denominated bond due June 2013 yields 6.08%, 84 basis points more than Poland's 6.25% dollar-denominated bond of similar maturity. A basis point is 0.01 percentage point. „Ukraine has enormous growth potential, but it's also a very risky market,” said Sebastian Buczek, a fund manager at ING Investment Management Polska SA, which has 13.4 billion zloty under management.

Duda, the meatpacker based in Jutrosin, wants to become as big in Ukraine as it is in Poland and is earmarking 100 million zloty 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 CEO Maciej Duda. Pekao is owned by Milan-based UniCredit SpA, Italy's biggest bank, and is responsible for the bank's expansion in Ukraine. It's challenging lenders such as Hungary's OTP Bank Nyrt, which started making acquisitions abroad more than five years ago. „The market is certainly very well located, and geography matters,” said CEO Jan Krzysztof Bielecki. „The level of penetration is low.”

About 7% of adults in Ukraine have a bank account, less than the proportion in Poland about a decade ago, according to Pekao. Now about 60% of Poles have accounts. Grupa Kety has spent 50 million zloty on opening an aluminum products plant in Borodianka. It may spend an additional 30 million zloty if the company keeps attracting new Ukrainian clients, CEO Dariusz Manko said. „It's trendy to go eastward,” said Buczek, the fund manager at ING in Warsaw. „It took these companies several years to build their position in the Polish market, and now it will require some time to repeat the success abroad.” (Bloomberg)