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Business New Europe: A Ukrainian engine of growth

Despite Ukraine suffering one of the most punishing recessions in Europe last year, one company is still flying high. Motor Sich, a Zaporizhiya-based manufacturer of engines for aeroplanes and helicopters, posted net profits for 2009 of UAH755m (€69m) – a whopping 196 times higher than the previous year.

This shaft of light in the gloom of the Ukrainian economy's estimated 15% plunge last year came in part because of the crisis. While the 45% drop in the value of the hryvnia left banks and importers in the doldrums, exporters were rubbing their hands. Motor Sich exports 80% of its products to Russia, Asia and the Middle East, where it receives payment in rubles and dollars, while 60% of costs, such as raw materials and manpower, are in the national currency. "The further the hryvnia devalues, the greater the margins," notes Ruslan Patlavskiy of Foyil Securities.

Not only did margins grow, but a slew of business from Russia, China, India and the Middle East boosted the order book. The government also lent a hand. It helped to get domestic aircraft production rolling again by issuing government-backed bonds. Ukraine's parliament also pushed through a law – signed in February by the president – that exempts Motor Sich and other aviation producers from VAT on imports and land tax until 2016. Motor Sich CEO Vyacheslav Bohuslayev says the tax breaks could save it 7% of costs. It helps, of course, that the company's chairman, Vyacheslav Boguslayev, is a deputy in the parliament.

Plus ca change…

Prime Minister Yulia Tymoshenko, the driving force behind support to the aviation sector, lost out to opposition leader Viktor Yanukovych in the presidential runoff in February, meaning her days as premier are numbered. But this isn't bad news for Motor Sich - on the contrary, Boguslayev is a deputy in Yanukovych's Party of Regions, which could form the new government.

Moreover, president-elect Yanukovych is pro-Russian and so likely to keep relations with Ukraine's northeastern neighbour stable and predictable – critical for a company like Motor Sich that relies on Russia for 60% of its order book. The election of Yanukovych "is a good thing for companies oriented towards Russia, and for Motor Sich in particular," reckons Astrum Investment Management's Ihor Bilyk. "Before the election, the company was not sure about the stability of relations with Russia, but now it can be sure of good and stable relations."

Political support from Tymoshenko and Russian Prime Minister Vladimir Putin has been strong enough to consolidate and develop ties in an industry that relies heavily on decades of cooperation and research, as well as Soviet manufacturing potential. For example, a number of planes designed by Ukraine's famed Antonov Design Bureau are constructed in Russia and Ukraine using Motor Sich engines. The Russian government resumed financing the Russian-Ukrainian An-70 project in December after disputes over intellectual property rights and alleged Russian debts on the project. This is good news for Motor Sich, which is the sole supplier of engines for that project.

Russian producers of aircraft and helicopters also depend on the Ukrainian company for their engines, a trade which will benefit from closer ties between the two countries. "For years, Russia has been talking about switching to locally produced engines, but nothing has happened," says Patlavskiy. Better relations give Russia less reason to push through its plans.

Asian relations

Motor Sich isn't resting on its laurels. As well as seeking to maintain its position on the Russian market, it has expanded into Asia and the Middle East, where its recipe of high quality at a reasonable price has proved popular. The An-70, a medium-range transport aircraft, is expected to be priced around 70-80% lower than its main competitors, the Boeing C-17 and the Airbus A400M. As well as the Russian and Ukrainian defence ministries, buyers are expected among Asian, Middle Eastern and African air forces.

Other orders from new partners have already been flooding in. Work on modernizing aircraft engines for India's armed forces worth about $80m was started in December. Egypt, Laos and the United Arab Emirates are set to order Antonov aircraft, which should bring in another $30m, according to Dragon Capital. It's a positive trend that analysts expect to continue growing. "This mitigates a potential risk related to decreased orders from Russia in the long term as the country develops domestic engine production capabilities," say analysts from BG Capital.

As well as pushing into new markets, Motor Sich is also diversifying into new products, using its expertise as aviation engine producers to build compressor turbines for gas pipelines. With European loans on the table for modernizing Ukraine's gas transport system, which brings 80% of Russian gas to Europe, and Yanukovych promising to involve Russia in a consortium to invest in the pipelines, Motor Sich looks set to continue to prosper, even as the crisis subsides.

This article was republished from Business new europe

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