The Ukraine Economy
The Next Coca-Cola
Last week I told you about a wedding in Buchach, Ukraine. Today, we begin with a little history about that town, which is located in western Ukraine.
The first written mention of the town was in 1260; the town celebrated its 750th anniversary last year.
In 1772, its region became part of Austria, as part of the First Partition of Poland, designed in part to compensate Austria for growing Russian power, and it remained a part of Austria and its successor states until the end of the First World War in 1918.
For a brief period in 1919 it was part of the independent West Ukrainian People’s Republic.
But in 1920, the Republic of Poland captured it.
Two decades later came World War II, which was hard on everyone, but fatal for most of the region’s Jews.
In 1921, there were 3,858 Jews in Buchach, representing slightly more than half of the total population.
But World War II saw first the Russians and then the Germans sweep into town. Some Jews were sent to work/death camps. Most were killed in the area.
When Soviet forces retook the town in July 1944, there were fewer than 100 Jewish survivors. About 400 Jews found their way back from the U.S.S.R., but most of them, with no property and no family, saw no reason to stay. So they emigrated west, mainly to Israel and the U.S. Today there is no Jewish community in Buchach.
But there are stories, and this is one of them, told to me by the bride’s father, Ehor.
As the war swept the region, people, particularly the Jews, hid their valuables to protect them from the invaders. Many of them buried money in basements and yards, planning to dig it up when the invaders were gone. Instead, it was the buriers who were soon gone, taking with them the knowledge of the location of their treasures. As a result today, 70 years later (less than one-tenth the town’s lifespan), residents still occasionally discover caches of buried coins.
But no one tells the authorities.
Because the risk is too great that the authorities will “appropriate” the money ... and the finder will never see it again.
Which brings me to a brief analysis of the Ukrainian government and economy.
Even though it has great natural advantages in its size, its soil and its climate, as well as its port on the Black Sea, Ukraine’s economic output is far beneath its potential.
According to NationMaster, Ukraine’s per capita GDP ranks 39th out of the 44 European countries, topping only Belarus, Bosnia and Herzegovina, Albania, Serbia and Montenegro and Moldova.
Per capita GDP is $6,700, while in neighboring Poland it’s more than double that at $18,800, and in strongman Germany it’s nearly four times as high at $35,900.
The reasons for this underperformance, of course, are numerous. The fact that Ukraine has been free from the Soviet Union for only 20 years is not to be forgotten.
And Ukraine is still not free from the influence of Russia. While people in the western half of the country are eager to embrace capitalism, people in the eastern half yearn for the good old days when Russia was a big help. The current President, Viktor Yanukovych, is one of these people.
As a result, according to the Heritage Foundation, Ukraine’s economic freedom rank is last in the European region, and its overall score is lower than the world average.
Notable in the organization’s evaluation is a lowly score of 22 out of 100 for “freedom from corruption,” noting that, “Corruption pervades all levels of society and government and all spheres of economic activity and is a major obstacle to foreign investment. Low public-sector salaries fuel corruption in such local bodies as the highway police and tax administration, as well as in the education system.”
Now, I was only in the country for four days, but I have three anecdotes that support that conclusion.
First was the woman who granted us entrance to the Optymistychna Cave, whose labyrinthine 230 kilometers of mapped passageways make it the longest gypsum cave in the world and perhaps the third-longest cave in the world.
In short, the woman took our money and we got nothing back. No ticket, and no receipt. We simply got to enter the cave, and which of her pockets the money went into was up to her. More disturbingly for us amateur spelunkers, she didn’t count how many people entered the cave (I counted 33) and she didn’t count how many came out!
Second was the gate attendant at the famous Lychakiv Cemetery in L’viv, final resting place of the city’s intelligentsia. We arrived after the official closing time of 6 p.m., but Andriy (the groom from the wedding) had a little chat with the attendant, slipped her a small bill or two, and in we went. “That’s how things work in Ukraine,” he explained.
Third was our close encounter with the police.
In other countries, I’m happy to rent a car and drive. But Andriy had warned me against that in Ukraine for two reasons, the rotten roads (mainly potholes) and the rotten police, who can stop a car for any reason and make life difficult for the driver, who often finds that a few bills can smooth his return to the road.
In our case, our driver Victor (a cousin of the bride), had stopped to gas up his Lada, and when he made a left turn out of the station, a waiting policeman signaled him to pull over. The policeman’s partner was already processing another driver, who had committed exactly the same offense!
As the processing evolved, at what seemed a glacial pace, Andriy explained that the “No Left Turn” sign was not only new and totally unnecessary--traffic barely exists in Buchach--but also hard to see, and the policemen were taking advantage of that to raise some money.
In the photo here, one policeman is ticketing the other driver at the trunk, while Victor is sitting in the front seat with the second policeman. In the end, he was given a fine, which he paid in town a few days later.
Admittedly, by taking this picture with my iPhone, I risked exacerbating the situation--or even getting the phone confiscated--but I rationalized that the risk was low because the officers were so focused on their paperwork.
And I wanted a reminder--admittedly subtle--of the power that a corrupt police force has in not only instilling the habit of subterfuge in the populace but ultimately in hampering economic growth. It makes me appreciate the power of good rules, well enforced.
(Finally, I want you to know that this police car was in better condition than at least 95% of the cars I saw in Ukraine.)
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On the investing side, what’s interesting today is this; even though the popular market indexes have weakened in recent weeks, the broad market’s health still looks good. And there are still a lot of great growth stocks to choose from.
One that might fit very well in your portfolio is Green Mountain Coffee Roasters (GMCR).
Green Mountain is the dominant manufacturer of single-cup coffee brewers, a business with a classic recurring income element. Once you buy (or receive as a gift) the company’s Keurig brewer, you must buy the K-cups of coffee, over and over again. And no matter whom you buy them from, Green Mountain gets a piece of the cash flow.
Green Mountain had spent years doing deals with brewers like Timothy’s, Tully’s, Caribou, Celestial Seasonings and Newman’s Own, but two months ago it hit a home run by locking in a deal with Starbucks. And then early in May it released an excellent quarterly report; revenues surged 101% to $648 million, while earnings exploded 129% to $0.48 per share. Also, the after-tax profit margin was a record 11.0%, superb for a “food” provider.
So the fundamentals are great.
But what makes me call the stock “The Next Coca-Cola” is the behavior of the stock.
Since the announcement of the Starbucks deal, the stock has been trading very tightly. That tells me institutional investors are taking control, as they slowly move into the stock. And that tells me that in the future, this stock will trade more and more like Coca-Cola (KO) did in its best growth decades; it will become a stock that institutions lock up for the long term. (In fact, Wellington and Fidelity together owned 33 million GMCR shares at the end of the first quarter, up from 17 million the quarter before.)
Also, it appears to me that as the forces attempting to reduce the epidemic of obesity in our culture increasingly demonize soft drinks, coffee drinks are likely to become even more popular than they are today.
Now, that doesn’t mean that I recommend you hold GMCR long-term. But it does mean that the current uptrend is one you can take advantage of. Today, the stock was trading at 78, at an all-time high. I’d wait for a pullback to get on board, ideally to the 50-day moving average, which is now at 68.
Alternatively, for regular advice on dealing with the stock’s movements, you could take a no-risk trial subscription to Cabot Market Letter, whose subscribers bought Green Mountain in late March at 64 and are now looking at a two-month profit of 22%.
If all goes well, it could be the start of a very rewarding relationship, in which Green Mountain comes to dominate a global coffee-brewing business, initiates a dividend, and becomes respected far and wide as a safe long-term holding.
You could buy GMCR here and hope for the best or you could get Cabot Market Letter Editor Mike Cintolo’s latest recommendation on this and other leading stocks by clicking here.
Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory