2018/Q3 Ukraine Newsletter


Dear Friends and Partners,

VI2 Partners is happy to share with you our recent newsletter on the most important developments and economic trends in Ukraine.

VI2 Partners Ukraine Newsletter Q3 2018

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The New Pre-Fascist World Order


Mind September/October for a serious stock market correction


The World is developing fast from a post WW2 liberal world order into a Nationalist Pre-Fascist World Order. Unfortunately, the President of the United States has hijacked the GOP and is leading this movement with an evil determination; the US has effectively stopped to be an advocate of human rights, a liberal world order, free speech, and media, strengthening of the rule of law.


This changing US role in the World will have dramatic consequences in the coming years and decades, and we should be prepared that we are heading into a post-democratic age. It gives an excellent pretext for other political leaders/movements to abolish inconvenient democratic standards. And it will have a significant impact on global trade and investment flows. These developments happen slowly but steadily while being blurred by the amount and speed of new scandals and while societies wrongly and dangerously get accustomed to the new normal.


Typical signs of a Pre-Fascist political order (and recent examples) are:

  • Undermining the Rule of Law and Independence of Courts
    Mueller investigation is a witch hunt, Judges against immigration orders are a shame
  • Abuse of Immigrants/Foreigners as Scapegoats
    Walls shall be built to friendly neighbors, Mexicans are labeled as drug dealers and rapists
  • Use of Aggressive Language and Threats
    Un-cooperative nations shall be erased, former allies are labeled as foes
  • Bashing of Media/Press
    Unpleasant facts become Fake News, Reputable media institutions are the Enemies of the People, journalists are singled out and publicly insulted or humiliated
  • Incriminating/Criminalization of Political Opponents
    Lock her up chants against Hillary Clinton and other opponents
  • Authoritarian Leadership
    Promotion of North Korean Public Administration Culture as the new benchmark for the White House
  • Promotion of Nationalist Framework
    Mega MAGA, US First and Only, Cancellation of Multinational Agreements/Contracts, Undermining WTO, NATO, EU, G7
  • Jeopardizing Due Political Processes
    Governing by Decrees, Inciting Public Pressure via Twitter
  • Direct Communication with Masses
    Using agitation of masses to avoid parliamentary/political discourse


This erosion of global democratic norms and safeguards takes place, while the economy is booming – watch out for the looming recession. On a populist foundation, where masses have smelled blood and have been whipped for aggression against media, foreigners, political opponents, worse developments might happen. Pre-Fascist World Order implies that we are on the verge to a Fascist World Order. Unfortunately, the next recession is written on the wall:

  • We are approaching the end of a nearly decade-long economic and financial market boom-cycle, fueled by excess liquidity from central banks and historically low interests rates;
  • Interest rates are rising across the globe and will pose a real-life stress test to many business and investment models, the liquidity bubble might burst;
  • The US has started an extended trade war with China out of a long-term strategic interest to dominate future core technologies;
  • Energy prices have risen fast over the last 12 months and might continue to rise on the basis of a potential escalation with Iran;
  • Decreasing risk appetite on the basis of stronger US dollar and higher interest rates will deepen a beginning emerging market crisis;
  • Record debt levels on Government, corporate and private level might prove unsustainable;
  • Energy prices, Tariffs, interest rates will start an inflation cycle, that will require an even faster increase in interests5 rates;


Mind September/October for a serious financial market correction. Cash is king. An un-orderly Brexit caused by an incompetent UK Government and a reckless Tory party will only be an additional footnote in this scenario.

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2018/Q2 Ukraine Newsletter


Dear Friends and Partners, 

Kindly find attached our VI2 Partners Q2 2018 newsletter on recent developments in Ukraine.

This quarter was rich in political and economic highlights, with the approval of the bill on the anti-corruption court and securing another € 1 bln from the European Council to cover Ukraine’s financial needs being, undoubtedly, among the most important ones for further progress and meeting up the expectations of the international community.

Slowly, but consistently, Ukraine sees retail trade grow by 7% and a 37% increase in capital investments Year-over-Year in Q1 2018. There is a reason to look optimistically into the coming quarters.

Read more in our latest newsletter!

VI2 Partners Ukraine Newsletter Q2 2018


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Smart Debt Restructuring


How to break the deadlock between lender and debtor – experiences from the negotiation front in the non-performing loan arena

By Marc-Milo Lube and Alexei Chernyshov
VI2 Partners GmbH

When John Wayne entered the Saloon in his famous Hollywood Western movies, the gangsters knew he was ready to shoot first and ask questions later. Consequently, in most situations, he did not have to shoot at all. Bad debt business is like a real-life Western movie: exciting, nothing for the faint-hearted, sometimes dirty. And when your opponents arrive with knives, you better have your gun ready and unlocked.

The Non-Peforming-Loan (NPL) Saloon in Ukraine is wide open. With a 56% NPL ratio of the total countrywide loan book and a volume of close to USD 20 billion, the Ukrainian NPL market deserves an in-depth investigation from institutional investors as well as workout companies. Most of the NPL volume is concentrated within the corporate sector (> 80% of the NPL volume) and is highly covered with underlying assets, and therefore interesting for a workout. Both for the Government, the National bank, and supranational institutions, the clean-up of the NPL portfolio is a priority, as it acts as a congestion to the credit system and slows down new loan issuing and economic growth. Dynamics in the sector will be high in the coming 2-3 years and rewards high for the successful players.

Bad debt business is very simple. A debtor is not able or does not want to pay back the principal and/or interest to his lender(s). The cheapest and easiest way out is most of the time not taken, namely a co-operative agreement on a restructuring of the debt or the forfeiture and subsequent sale of an asset covering the total of the debt. The modern game theory has many explanations for this situation: it is a mixture of greed, misplaced morality, chicken run, compliance frameworks, criminal behavior and personal egos.

Enters the outside (who is sometimes inside!) investor and buys the debt from the lender to go for the extra yield, either interested in a fast cash payback of the debt or in an appropriation of underlying assets. This is the big greed game, where yields are over-proportional but difficult to realize. Having fought on all fronts of the spectrum, there are some lessons learned to share for lenders, investors, and debtors. Here are some general observations in the field of bad debt business, which are relevant for all players.

Exit Strategy – think from the end

All successful wars start with thinking through the end-game. It is astonishing to see even with experienced market players, how a) banks start lengthy court proceedings and appropriation processes without knowing what to do at a later stage with an asset, how b) investors are led by a superficial yield calculation/greed without being clear how and when to ever realize any gain and c) debtors believe they can avoid or ignore proceedings and commercial necessities in the long-term.

Measuring the True Value of the Debt

Both investors and lenders are constantly over-estimating the true value of bad debts. A different view would lead many lenders to sell assets earlier, and at lower prices, and investors to take a much more selective approach to bad debt transactions. Realistic valuations need to

  • thoroughly assess the legal situation of the debt and underlying asset, taking the country-specific situation and escape mechanisms of the debtor into account;
  • fully understand the enforceability of any claim, and also counterclaims from other lenders, business partners, and the debtor;
  • make a realistic assessment of the value of the underlying assets, taking into account any expected time delays, run-down of assets, negative publicity, etc.;
  • estimate the time to market, comprising negotiations, enforcement, selling of claims and assets. In our experience, the time needed is practically always two times higher than initially planned;
  • understand any additional investment need for legal proceedings, appropriation, subsequent asset management incl. additional CAPEX/OPEX, asset sale, etc.

Understanding the Assets

For any debt investment, the same wisdom holds true as for equity transactions. Only invest in debt, when you understand the underlying business, industry, and country of the debtor, otherwise do not touch it, even if the price and yield appeal to the greed factor. Too many debt investors and banks who appropriate assets from bad loans treat bad debt transactions as a pure financial game. Rough awakening guaranteed.

Beware of Poison Pills / Install Poison Pills

Take is as granted, that the debtor does not want to pay back the debt and accumulated interests. Depending on the legal seat of the debtor and the location of any pledged assets and the nature of the assets, there are plenty of obstacles that can be built to render the task of appropriating an asset extremely costly and lengthy or to devaluate the asset. We have seen many surprises and unlimited creativity in this area.

Junk vs. Value Strategies

The ever-interesting question in this field. Both strategies can work, junk strategies will need the extra stamina from the investor and require a very strong understanding of the local market conditions and powerful local boots on the ground. Nothing for the new-comer to the market. Also, beware of the debt market life cycle.

Timing Traps

Debt investors need to have the financial power to live through years of legal proceedings and commercial negotiations. Expecting the unexpected, especially in timing, is quintessential to survival.

Compliance Tag

Debt recovery and enforcement can be a dirty business. And opponents will fight back, with legal, half-legal and sometimes criminal means. Legal and commercial loop-holes in some countries allow for situations, unthinkable in others. In case that the reporting, legal or compliance regulatory frame is too strict or in case that one is not ready to answer the knife attack of opponents with a gun, it is better to stay outside of the Saloon.


Open and transparent negotiations, ideally moderated by a neutral party, tend to be in most of the cases the best, most efficient and fastest way for conflict resolution. However, sometimes both parties have to get bloody noses before a real negotiation process can start, sometimes it never happens. In these cases, the winner will collect the whole lot, but often the value is then already negligible. Yet, over and over again, players are overestimating their bargaining position and enforcement or obstruction options or do not dare to tell the ugly truth of losses to their superiors – which lead in turn to unrealistic expectations, vast time delays and a further destruction of value.

Moral Hazard and Inflated Egos

Last but not least, one of the most important factors in bad debt deals – the human factor. The success of bad debt deals is not decided by spreadsheets, but by human beings, and the negotiation processes are highly sophisticated interactions in which psychology and the right tactics often make the difference between make and break. Both for lenders/investors and debtors there is one very common attribute that we observe and that often proves to be disastrous and very costly for the respective party: lenders and investors lean towards punishing debtors for not willing to pay back the debt (also as deterrent for other failing debtors) or towards envying them realizing a profitable debt restructuring. Debtors lean towards overestimating their own power and control position and are often driven by personal ego and pride vis-à-vis lenders, employees and business partners, not recognizing the need for drastic changes.

Bad debt deals can be highly rewarding, especially in highly volatile economies like Ukraine. The investors and debtors, who are ready to invest in appropriate planning, who are disciplined in their execution and ready to test unchartered waters are in for the extra yield.

On VI2 Partners

VI2 Partners is an independent investment company that invests on its own books and provides a full range of investment banking services. The activities of VI2 Partners are aimed at ensuring economic growth, efficiency and increasing customers’ profitability. Our qualified and experienced team plans, scouts and executes investment opportunities, performing customers’ tasks on a high-quality level, above the accepted standards.

VI2 Partners specializes in portfolio assets management, direct investments, investment banking, ICO, capital raising and debt restructuring, services for investors to enter new markets (Ukraine and Eastern European counties, EU). We also provide services for the assets acquisition and protection in Ukraine for international investors, develop mechanisms for the complex structured transactions’ regulation, provide services for the problematic assets’ management and their transformation into sellable investment products, M&A.

Founded by Mr. Alexei Chernyshov and Dr. Marc-Milo Lube, the company operates in CEE and Western Europe markets, with registered offices in Vienna (Austria) and Kyiv (Ukraine). VI2 Partners actively cooperates with commercial, government structures and investors around the globe, with whom we built long-term relationships based on the principles of transparency, trust, effectiveness, and confidentiality.


Tuchlauben 7, A 1010 Vienna, Austria
+43 1 925 7575

KYIV Office
4, Volodymyrska Str., Kyiv, 01001, Ukraine
+38 044 364 5203

Contacts for media

Background Reading Comments Off on Smart Debt Restructuring

Professore Nebuloso – A comment on the Italian Political Drama


or How to Realize Fast that You Cannot Eat the Pasta and Have It.

The Trumpist revolution of narcissism, denial of reality, national egocentrism, and pre-dominance of lies has reached a new climax in Italy – although admittedly briefly outshined by Trump’s letter to cancel the nuclear summit with North Korea. It looks like Italy did not study the Greek adventures of Professor Varoufakis, another case where a self-declared expert wanted to save the country by denying basic economic laws. Alas, we will take front seats in the Colosseum, watching how Professor Conte – whom a French magazine already attested to show all characteristics of a professional crook – will explain, how Italy can avoid bankruptcy while spending additional billions of Euros on the back of an already bursting deficit and debt status of its public finances. While the German Hausfrau is developing an immediate allergic reaction, even the French are scared big time now. Given this situation, the political life of the Professor might be as short-lived as his academic visits to the US.


Following bigger footsteps from across the Atlantic, the Italy First Movement wants to eat the Pasta and make the World (first Europe) pay for it. This undertaking is doomed to fail dramatically. Obviously, the Italians do not have the USD, the strongest military in the World and also not the consumption power of the US. The bullying potential is limited in this case. Remember the Greek experience of trying to enforce on Europe and the Euro-System a carte blanche spending spree for Greece. It ended in an economic disaster that left the Greeks with a prolonged crisis, a humiliated Government, stronger controls, more unemployment and additional lost years. They had to swallow the savings dictate from Brussels and Frankfurt.


The real choices for Italy are very simple. Restructure profoundly or leave the Euro and devaluate. All else is another aria, that nobody wants to listen to anymore: the French have to look for themselves, the Brits are no more interested, the Germans do not want to pay, and the Spanish have run through the painful experience, why spare the Italians the same? And all Governments face at home the identical outcries of Germany, France, England, Dutch, Whoever First. Nobody is willing or able to come to the rescue. Perhaps the Italian drama will finally enforce on the EU to have the discussion that Macron started, but nobody wanted to lead and decide on: further integration or looser association.


The real scary part of the story is, that the Italian voters wanted to have exactly the Government, that they have received now, implementing the very same agenda, that is now promoted. This is contrary to Brexit, where one could argue, whether voters were just tricked by BoJo and alike. No, this time, all was clear and stated during the campaign, and the announced political program reflects a soft version of the election promises. Here are the main reasons for this situation:


  • The political bunga bunga elite failed completely over the last 20 years to reform the country and work for the long-term success of Italy. This has led to a lost generation of 18/35-year-old people without job, experience, and perspective. A perfect breeding ground for the extremists.
  • The credibility level of traditional parties and established politicians after 20 years of complete mismanagement was below zero. Many Italians preferred to vote for a journey into the unknown than to live on with their un-performing status quo system leading to a slow but steady decline. And they were right.
  • The EU showed no(!) solidarity with Italy to control and manage the refugee invasion on Italian coasts. Colorful declarations to strengthen European maritime commandos or threats to close down the Brenner border, the over-arching symbol of European free movement, have not helped, but have been taken understandably as cynical in Italy.
  • The Italians have a top-line mentality and a tendency to bend rules (in a positive way!), they are revenue, not cost-driven. In this mentality, the system and philosophy of a common, strictly rule-based currency with frugal Dutch and German Protestants, is completely counter-productive; austerity not compatible with Italian lifestyle and drama.


All this has led to a profound change of the political landscape, the Government will stay longer than many expect and implement the will of the voter. However, Italians cannot expect other nations to pay for this emotional overreaction and the following political experiment. What does this all mean for the EU and Italy in specific:


  • ECB directors get nervous in Frankfurt. Their overly relaxed willingness to buy Italian bonds without guarantees for sound state finances is in severe danger of backfiring, it has rendered the ECB too dependent on national Governments and prone to financial blackmailing. The falcons have started to take off their hoods. In case that the situation with Italy would escalate, it could herald an inglorious departure of Mr. Draghi.
  • The new Italian Government will start to implement their program and raise spending levels, putting huge pressure on both the EU Commission and the ECB to relax budget restrictions and grant debt relief/write-offs. Finally, we will see a show-down on the Euro. And while Greece had to surrender, Italy has a much stronger bargaining position: they are a founding member of the EU, they are the third strongest European economy and the ECB has an Italian debt stock-pile on its books. Nevertheless, it is inconceivable that other countries, the commission and the ECB would open the Pandora box of further softening debt ceilings and/or financing Italy through ECB debt write-offs.
  • This situation has all potential for big drama with only two potential outcomes: Italy leaves the Euro or faces new elections very fast. Renzi and Berlusconi could celebrate a surprise comeback in the latter case.

Italians voted for change. They are sick of their political elites. They are sick of the most inefficient public service in Europe. But they lack the strength and perseverance to go through radical reform programs. Spending the way out of this crisis does not work within the Euro System. The departure from this system is, therefore, the only credible, viable and productive way forward. Everything else is a lie and illusion. A devaluated Italy leads to a restructuring of the country through lower standards of living for a certain period (less German cars), a relative reduction of wealth and pain for the old and poor in the country. But after this period of pain and the revaluation of the Italian asset base, it would also lead to much stronger competitiveness, an orientation towards the future and attract big streams of foreign investment into the country, which would, in turn, reduce unemployment.

Other Governments and the ECB need to wake up to this new political reality. If not now, at a certain point in the near future, the economic development of Italy and/or financial markets will force a decision on them. As Turkey and President Erdogan are currently realizing: economic laws cannot be denied ad infinitum. Professore Nebuloso and his masters will soon have to decide, whether they surrender, lead the EU to an institutional crisis or their country out of the Euro. We bet they will first try with the crisis.

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Why Europe will Shine in a Robot Future


Investment Climate and Opportunities in Good Old (New) Europe

This analysis was presented and discussed in a different format by VI2 Partners at the

NUS (National University of Singapore) Medicine International Council Berlin Conference: New Europe and Germany on April 23, 2018


Many political and financial analysts believe, that Europe is doomed to fall behind in the competition with the new economic and technological powerhouse China and the massive talent hoover and technology breeding ground US. We want to argue in a different direction and explain why we believe more in a next level European Renaissance than in Europe turning into a Museum for the World. The reasoning will start on a global level, move on to European developments and give an outlook, on which industries we are particularly bullish for the future.


The Global Arena – War is in the Air


The World is moving fast into diverse armed conflicts, without any power showing significant interest or activity to stop or contain these developments. The political post WWII order is trembling and shuttering and will ultimately make room for a new world order following a big earthquake. War is in the Air everywhere and in multiple dimensions:


  • Twitterman versus Rocketman Saga: Do not trust the fog bombs that both parties are throwing around. While Trump has changed the quality of the North Korean leader from insane to honorable in a minute, and Kim Jong Un is reflecting on de-nuclearization, both players are lying big time. Hangover more probable, than honeymoon (Macron might also be jealous, in case that Trump would start to kiss Kim during their encounter). In any case: good marketing show for both actors.
  • Isolation and Radicalization of Russia: Russia has overplayed his hand and gets punished for this on all levels. Pushed into the corner of the ill-mannered child, more chaos and disruptions in Europe and the Middle East will be targeted. Alienation between NATO and Turkey, sowing disaccord in the EU, conflict between Israel and Iran, and escalation in Syria. The resulting side effect of higher oil prices will over compensate for the sanctions of the West.
  • Iran, Israel and the JCPOA: It is only a question of time, when the Syrian mess will also lead to a bigger clash between Israel and Iran. Israel in this case can be expected to also inflict material damage to the ballistic and nuclear program of Iran. On the JCPOA, we believe that Netanjahu, Pompeo, Bolton and the conservative establishment will win over the European attempt to save the Iran nuclear deal. If not in May, the plan might soon be history.
  • Trade War: As we have discussed in earlier contributions, China will be punished by the US. It is in the long-term economic, political and military interest of the US, to weaken or at least decelerate the economic rise of China. Trade war is coming.
  • Cyber War: is already taking place. All capable countries are increasing their defensive and attack capabilities. More battles to be seen soon.
  • Authoritarian Tendencies: In times of fundamental global and societal changes, people are voting for authoritarian leaders. This can be observed around the globe. With the free press being in recline, political parties as power buffers dissolving, war memories of the population fading and the nation state back in fashion, water temperature is rising in the risk pot of leaders going wild or rogue.


Europe – Renaissance or Museum?


To Europe. Given the global percussions, Europe feels like a safe haven of stability, which will be rewarded. There are signs, that Europe can stay a main player in the future and enjoy a bright economic future:


  • Broad based recovery: finally, after nearly 10 years of disappointing growth, all major EU economies have started last year a broad-based recovery. We will experience over the next 24 months stronger wage growth, decreasing unemployment, reduction of budget deficits, and rise in inflation in all major EU economies.
  • Diversity and Innovation are elements that mutually support each other. Mixed with a tradition and culture of sciences and invention, Europe has the best natural breeding biotope for game changing technologies and research. And the countries in Eastern Europe from Poland to Romania and Ukraine are only starting to join the game by returning to their roots of scientific excellence in engineering, mathematics, information technology, aviation and others. A young generation of scientists and entrepreneurs take over and will lead Europe to a new level of innovation. Check out where the game changing innovations in most natural sciences and technology areas originated over the last 50 years. No wonder the Chinese are out hunting.
  • Re-industrialization: The peak globalization is behind us and the big move of production to Asia is over. Many companies in Europe are considering to re-locate at least parts of the production back to Central Europe. Automatization and robotisation favor excellent skills, rule of law, IP protection. Labor cost becomes close to irrelevant. Increased protectionism, changing tax regimes, and the political will to re-industrialize are increasing this trend.
  • New social models: Europe will be the first region to test new social models of general income and/or general pension. As certain professions will soon become obsolete on a large scale and faster than many can imagine, new social models and contracts will be a necessity, and Europe will profit from its lead.
  • Quality of Life: Europe is the place to be. In a world of robots, VR and constant information and communication, people will long for a place of serenity, nature and pleasure. To offer quality of life will be key to attracting talent in the global arena in the future. Top talent will choose to live in the best places. From the top 10 cities in the world in the latest Mercer Report on Quality of life, eight cities are located in Europe.


Certainly, there are risks around. Brexit, Catalonia secession and traditional Italian political chaos will keep the European capitals and Brussels busy. But in our view the economic impact of Brexit will only be short lived (on the EU side of the Channel), and in the mid-term already prove beneficial to the continent. The constant aging of the population is cause for concern and will require a massive overhaul of social security systems and massive attraction of qualified foreign immigrants against the general mood in the population. Alone in Germany 500.000 qualified immigrants will be needed per year, to keep the pension age at its current level. Europe is falling back in patent applications and industrial production in comparison to Asia, but do not mix up quantity and quality of patents and innovations.


Key Investment Areas – Go and No-Go Zones

Looking to the key investment sectors in Europe for future investments and why we have chosen those:


  • Fashion, Design and Luxury FMCG: The world wants to consume European and mirror European taste. Wherever you travel in the World these days, luxury brands are dominated by European players. The new affluent population and middle classes of the world want to drive Mercedes, wear Prada and Gucci and drink Bordeaux wines. Rising global wealth in China, Russia, the Middle East and other regions will lead to higher demand.
  • Defense: Higher independence from the US, the growing insight that European governments allowed the run-down of their military, the accepted NATO doctrine of 2%-defense spending relative to the GDP, and new global threats, lead to significant modernization and increase of defense spending of all major European countries. Gone are the times, when it was en vogue to decrease the national defense budgets.
  • IT/Cyber: Corporates, Governments and Privates are waking up to the cyber threat in all areas. Huge need to catch up with reality leads to an investment wave into devices, services and processes. No trust into US, Israeli or Russian solutions. Big chance for European players.
  • Clean/Blue/Green Tech: It is the continent of environment freaks, where train tracks and motorways are not built because of rare species, the population turns maniac about nuclear, GMO, pesticides and any type of emission. Innovation in this area will be developed and tested here.
  • MedTech: The fusing of medical technology, IT, robotics and nano engines and machines will prove to be a key sector of European development, bringing together historical key strengths and skills of the continent.
  • Agriculture and Bio-Food: The westernization of eating patterns, increase in wealth and concentration of population in the cities lead to increased demand of animal farming as well as traditional crops, while at the same time fertile agricultural land is shrinking globally. Central Europe from France to Germany via Poland, Russia, Romania and Ukraine has by far the largest black soil agricultural surfaces in the world, and the potential in some Eastern European countries in terms of professional agro management, output efficiency and logistics is by far not fully utilized. We believe in strong price growth both in agro products and land in the near future, especially in the high-end segments of non-GMO food and low pesticide and bioorganic production processes.


NO-GO: Banking (weak capital base and legacy systems in a fintech world) and car Industry (emission scandals, new ownership models, electric vehicles).


COUNTRIES: We would overweigh France, Netherlands, Germany, Austria, Poland and Romania. The risk-takers should have a look into Albania, Serbia and Ukraine.


State of the Nation Comments Off on Why Europe will Shine in a Robot Future

2018/Q1 Ukraine Newsletter


Dear Partners and Friends,

kindly find attached VI2 Partners newsletter on the recent developments in Ukraine as well as a quick overview of the latest important news and some statistics contributing to the whole dynamics of Q1 2018. We are experiencing positive developments from Tesla’s Hyperloop test site project in Dnipro to traditional industry players from US and Asia investigating or entering the market in Ukraine. Industrial and agricultural assets are still valued at very low levels, the time has come for the strategic investors.

Read more in our latest newsletter!

UA NewsL 118

VI2Partners Ukraine Newsletter Q12018

Background Reading, Ukraine Newsletter Comments Off on 2018/Q1 Ukraine Newsletter

Xi Jinping – The Dragon Rider


During the next decade we will experience the technological, political and military rise and transformation of China to a real super-power. And most probably also its first major economic crisis. Constitutional changes in China will enable its current leader Xi Jinping to stay longer in power than the currently foreseen maximum of two Presidential terms. We reflect on the current situation and potential in China, the reasons why a prolonged reign of Xi Jinping is a blessing for China and the World, and the reasons, why the Western world has difficulties to accept this.


Even after 30 years of an incredible economic boom, we still tend to underestimate the power and energy of the Chinese dragon. We take for granted that China is a giant workbench for cheap mass products, not reaching the technological level, design optics, and reliability of Western, i.e. US and European products and services. Just recently, being in Romania, a senior banker told me, they are not interested in leasing offers for Chinese investment goods – because of the risk, that they would have to take these goods to their balance sheet later. Guess what, now the Chinese arrive with their own leasing offers, at much better rates than any Romanian player can offer, of course cross-subsidized by Chinese producers and export-financing agencies. China is slowly, but steadily conquering key markets, through clever and orchestrated market entries and selective acquisitions. Together with the clear path of China to technology leadership in many areas, this entrenchment in other markets will also make China much more resilient for any future domestic downturn. For the fatal under-estimation of the Dragon’s firepower, the next generations of the Western World will pay dearly, some food for thought:


Economic Situation and Development Potential


  • Chinese Universities are graduating more engineers than any other nation, on top more than 300.000 Chinese students are attending leading international universities, concentrating on the subjects that will shape the World of tomorrow. Chinese technical universities, mere underdogs twenty years ago, are counted among the leading academic institutions today.
  • This week, it was announced, that Geely has bought an important stake into the leading luxury car manufacturer Mercedes/Germany, which is one of the innovation powerhouses in the automotive industry. This is only the highly visible tip of the iceberg. Every day transactions take place, that secure critical knowhow and technologies, strategic market shares and key resources. And services are following. Chinese commercial and investment banks are starting to expand rapidly outside of China.
  • WeChat, Tencent, Alibaba and others are transforming the Chinese business and consumer world into themost mobile society in the World, with an unprecedented innovation power in applications.
  • The World’s fastest super-computers are today located in China, built entirely from Chinese components, in stark contrast to a decade ago.
  • While in the US and the EU infrastructure is rotting away, China is building new infrastructure at the speed of light (or nearly) and connecting itself to the World (New Silk Road): With more than 12.000 miles of existing high-speed train tracks, China has more tracks than the rest of the World combined. And it will add a further 16.000 miles over the next decade. Meanwhile California is struggling to put 600 miles between San Francisco and Los Angeles into operation, over a period of 20 years.
  • The challenges for China are well-known to its leadership and they are discussed: transformation of society, countryside vs. cities, pollution and ecological balance, social services, fight against corruption. Better count on these challenges being addressed and solved within Xi’s reign.
  • The managed growth of a tightly interwoven political and business network for the key industries has proven to be very successful and efficient – enabling much faster economic evolution and transformation than traditional free market social economies with a tendency to over-protect minority interests, especially given the size and complexity of the country. This model will be further developed and professionalized under Xi and be a cornerstone of the next level transformation of China into a global super power.


Xi Jinping is the leader of a new global super-power


  • China is rapidly developing into a global super power, the only credible contestant to the US. Following specs:
    economic powerhouse with huge home market, technology leadership, educational excellence, clear political vision and ambition, build-up of economic and financial dependencies, strategic bridgeheads in other countries.
  • Some challenges are so big and important, that they can only be solved by one. China is in front of many internal and external challenges. It will help to have a proven, stable and experienced leader like Xi in charge, who will not have to look at an end-date of his term, but who can embark on the next level evolution of the country. Xi has demonstrated a determined but calm and thoughtful hand in dealing with all sorts of unexpected problems. Although being one of the prime bashing targets during the US election, he was one of the first to build a personal relationship with Donald Trump; and was not following other politicians’ examples to enter into a useless counter-bashing exercise. He used the alienation of Trump with continental Europe to step in as the best friend in town.
  • China is blessed by an absence of raw materials. This is forcing China to promote an open and peaceful world order to keep the country and its economy running, and it is not a miracle that China today is recognized as main promoter of free trade and liberalization of markets (just watch again Xi’s speech in Davos this year). China also has a clear anti-interventionist political and military doctrine, which kept it out of global military conflicts in the past.
  • China does not have any dominating religion or radical evangelist movements that want to act as missionaries or jihadists. It does not want to make the World copy its own model – but concentrates on the maximum success of itself.
  • We should not be naïve: Xi is by far the most strong and powerful leader of China since Mao, and he leads an economic powerhouse. China will use this power to push its agenda selfishly and with enormous self-confidence and work on its global objectives with a clear direction and strong perseverance, but cool-headed. As any nation would in a similar situation.


The envy of Western leaders

  • Western media, commentators and politicians were fast to criticize the additional power for Xi, not taking into account the differences between China and Western democracies.
  • At the same time, it looks like Western democracies are much more on the verge of losing their societal balance: social and generational contracts are no more working, regulatory frameworks are much too complicated for the needs of fast transformation in a tech world, all major countries are experiencing and welcoming authoritarian tendencies with strong leaders.
  • Parliamentary democracies reach their limits in today’s fast changing environments, opinions are easily influenced and pushed into certain directions. Movements replace parties and lead to partially bizarre results. Just watch the current UK tragedy.
  • The US as a guiding torch for human rights, liberal rights and democratic values is awfully missing on the World stage. This void will have long-term implications for the World order and benefit China’s rise.
  • Strong leaders in secret envy the power and possibilities of Xi to follow through on his vision and transformation plans. They struggle with media, unions, minorities in their countries. And while they criticize China and Xi, they slowly try to copy parts of this model to their own countries, results open.


So, despite wide-spread criticism: The signal that the reign of XI Jinping will go beyond the current Government cycle is good news for China – and for the World, at least for all who believe in the sake of a multi-polar World. China will be a stabilizing factor in today’s epic of Twitterman and Rocketman and a strong contributor to global growth and technological progress: The World needs a strong dragon rider.


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Merkel did it again. Another grand coalition between Conservatives and Social Democrats is sealed and will rule Germany for the coming 4 years – should not the youth organization of the Social Democrats be able to mobilize members to reject the coalition contract. While most political commentators are proclaiming the victory of the Social Democrats and the beginning descent of Angela Merkel, I would recommend not to write her off, yet. It is not the first time, that observers and commentators are underestimating her political skills and her brutal instinct for power. Like it or not, Germany has developed into the European powerhouse over the last 12 years of Merkel’s rule with by far the strongest economy and industrial basis, practically no unemployment, budget surplus, and a high reputation in the World. And while Trump and Macron will enter into the competition of the biggest military parade (chased by Putin and Kim), she will continue to do her job, perhaps not at high speed, but silently and steadily. Here are the takeaways what this Government will mean for Germany and the World:



  • Tax Inertia: Do not expect any tax improvements for corporations or the middle class. All will stay as is. Luckily positive economic development in Germany with higher salaries and record employment will make the giant exploitation of the performers less obvious. And Germany can save some fiscal ammunition for tougher times.
  • Spendaholics: Social Democrats have pushed and will further bloat a costly social spending program, that will reach nothing but appease their traditional clientele, that is dreaming of more money for less work. What a pity that this money will not be spent on infrastructure developments, universities, and future industry clusters. Good news for private consumption.
  • Reflation: Germany will be one of the first countries in the EU to experience wage-driven inflation. With record employment and high growth, Germany is finally set to adjust its salary levels (Goldman Sachs is recommending 9% increase!). Less competitive neighbors will welcome this development. But beware an already stretched real estate market, and a possible simultaneous increase of interest rates, stronger dollar or energy prices, and we will experience a dangerous cocktail.
  • Survival:  Bravo! With Mutti’s help, the Left in Germany survived and has a new lifeline. It will keep key power positions in the new Government. However, it has to be seen, whether the Left will use this opportunity for renewal or whether the deadly embrace of Merkel will deal them the final blow within the next four years.
  • Strength: The new Cabinet of Ministers is strong and experienced. It will do a better job than many expect. Against all odds, it was a great move of Merkel to give the Social democrats the Finance ministry (this will restrain the spending spree of their own party) and the Interior Ministry to the Bavarian Conservatives (this will put them in charge on the controversial refugee topic).
  • Stability: Germany will see a stable Government for the coming years. There is a solid majority in Parliament, the actors know each other well from many years of political work, and in major political areas they share identical views. Potential disruptive elements will be the youth organization of the Social Democrats (who are closer to Corbyn than Schulz), the liberal-conservative and business wing of the conservative party, which will cry for innovation, tax reform and liberalization and finally the far right AFD, which will exploit all problems around the critical refugee and immigration agenda.
  • Nationalism: Nationalism and new conservatism have grown stronger, and more people follow the lead of other countries, this time shouting “Germany First”. The German People have elected a Bundestag with 60% members from conservative/liberal parties. The traditional left has been badly beaten. The new Government does not represent this, neither in its composition nor in its policies. It has made losers to victors. This is a dangerous game. The German people, like many other nations, are asking and have voted for stronger national identity, less immigration, more sovereignty, new social balance, guidance, and leadership. In case that the Government cannot or does not want to deliver on these demands, a conservative revolution will be on its way, shaking up the German party system faster than many will consider possible today.



  • The youth and energy of Macron in combination with the cheques appeal and political cleverness of Merkel will lead to a powerful revival of the Axis Berlin-Paris. In an EU without the UK, this Duo will wield the power and seek selective alliances on a case-by-case basis. Romance.
  • Brexit will become even more ugly, as Paris and Berlin will obstruct any easy farewell or special treatment of the Brits. A warm welcome party for UK bankers is prepared in Frankfurt and Paris, there will be no way London will keep unlimited, open access for its services to the EU markets. Illusion.
  • The EU will be braced for more integration and new centralization, and if smaller or Eastern countries will not jump on the train, the famous two-speed EU (which already does exist) will happen. Good news: cash loaded Germany will be ready with its new Government to shoulder the additional cost, investments, and guarantees for the EU. Noise.
  • The dynamics for easing on Russia sanctions will receive a new drive. Trump is keeping them up against his will, but forced by Congress, France is against them, German Social Democrats will convince Merkel to move, and then there is the resurrection of the Italian Cavaliere which could happen in March; he is known to be strongly against the sanctions. The UK as currently the strongest opponent of Russia will be sidelined and marginalized after leaving the EU. The economy, stupid!
  • Trump will have to acknowledge that he will have a strong opponent in the EU (France/Germany/Commission) in case that he will impose any trade measures against Europe. The growing mistrust between the US and the EU will also lead to stronger borderlines in the military and intelligence spheres, the more as the UK is falling away as a bridging factor. From Iran to North Korea, Syria, Palestinians and China, there are now fundamental differences in political strategies and objectives. The transatlantic axis is and will be more weakened, the US will lose influence. Not good!
  • If it plays its game well, China has the potential to develop into a real partner for the EU. All countries are keen to service this giant export market while being hungry for Chinese investments at home (except for high tech). On a global stage, Chinese interests are in many economic areas and even in political areas similar to EU interests. Good Game.
  • Turkey might be the big loser. It has alienated France, Germany and the Netherlands with direct involvement in elections, politicizing the local communities and in prosecuting EU journalists. There is no chance that any Government in Europe would take a battle for getting closer to Turkey at this time, and it would be suicidal given the current nationalist tendencies in Europe. Moreover, Turkey’s former strong supporter US is angered with its military role in Syria/Iraq and has anyway lost its political clout in Europe. Overplayed.


Or in a nutshell: Germany will continue to be a stabilizing factor, for now. The Government is not what the population would prefer today, but it could prove stronger or more popular than expected. European integration will benefit. US and UK relations will be challenging.


Bizarre Year 2017 leading to a Journey into the Unknown

A bizarre year is coming (luckily) to an end. It still feels like attending a high speed, absurd theater play. Some of the most prominent topics of 2017 will (unfortunately) be shaping our world also in the coming year and beyond:
  • Twitterman hits Rocketman: the US cannot and will not allow North Korea to develop the capability of reaching US soil with nuclear, biologic or other dirty warheads. Escalation can happen anytime.
  • The Rise of the Great Narcissist Leader: New leaders are putting the political landscapes upside-down and render political parties obsolete. Brexit, Trump, Macron and now even Kurz in tiny little Austria have proven, that the time for „great“ leaders in Western democracies is back, their behavioral patterns well-known: nationalism, bashing/blaming of others, strong security, centralization of power, control of media, me and my country first and alone. Combine this with a tendency to blur facts with fake and to bypass parliamentary discussion processes and media. We have been there before in history.
  • British Self Flagellation: In admirable self-humiliation the British Government is trying hard to make the Brexit process as chaotic and costly as possible for its population. For the sake of the unity of the Conservative Party the leadership is sacrificing the UK economy. Torys will have to shoulder historic blame if this will push a communist Prime Minister into office.
  • Middle East Hazard: Local and global powers are successfully steering the most explosive region of the World from bad to worse. It doesn’t need much to ignite a fire, that would belittle the Syrian and Yemen civil wars. Energy rollercoaster included.
Other interesting developments in 2017:
  • Diesel Obituary: Thanks to criminal and industry-wide cheating in combination with cities choking from pollution, a steep decline of the Diesel engine has started, which will shake up the industry
  • #metoo: The sick behavior of maniacs leads to a crazy over-regulation of human interaction, both at the workplace and in private interactions
  • Cryptocurrency frenzy: People are putting money into the unknown in an investment frenzy last seen during the great internet bubble.
  • Bubble Party goes on: Central Bank ecstasy injections to markets are still showing effect. No hangover yet – despite warnings on the wall and interest rates rising.
  • Spanish Bullfights: Royal Matadors are trying to tame the Catalan bull from breaking free. Who will go down first? Injuries on both sides to be expected.
More to come. We dare to forecast the following for 2018:
  • The Return of the Dollar: Global uncertainties, the smell of war and the tax present of Santa Donald strengthen the USD
  • US turning against China: Frustrated with not being able to solve the Korean problem, Trump delivers on a further election promise and starts hostile trade activities against China
  • Energy Price Surge: Smart OPEC, Middle east explosions and strong economic growth in EU and US lead to a further increase of energy prices
  • Inflation Reloaded: All of the above in concert with strong growth, rising interest rates and stronger employment bring back inflation, possibly stronger and faster than many believe
  • Cryptocurrency breakdown: Crypto Heists, regulation and taxation and the issuing of cryptocurrencies by asset backed national banks lead to a steep loss of early cryptocurrencies
  • The Bears go Hunting: The bears are back for the big fish, as economic realism is coming back to the investment table and all the good news are already priced into the market
  • King BoJo playing Hamlet: “To Brexit or not To Brexit“ is the question of the year, which will be raised louder and louder. Dramatic showdowns and changes of main actors included
  • French Renaissance: King Macron further takes the lead on the European and global stage and delivers in France. New strength of the French economy, resurrection of the Grande Nation
We wish to all our partners and friends a joyful and peaceful start into a sparkling, successful and healthy 2018! We would be honored and glad to help you grow your businesses successfully in the New Year. Stay out of trouble and try to watch less TV than the US President.
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