Independence Day 2004: a country counting down to an election
Thirteen years after the referendum, Ukraine marks its national day in the middle of the best growth year it has ever recorded — and three months before the vote that will define the decade.
Ukraine marks the thirteenth anniversary of its declaration of independence today, and the mood on Khreshchatyk is louder than the numbers alone would explain. The economy is having its best year since 1991. It is also three months away from a presidential election that almost everyone here expects to be contested rather than merely held.
The growth story is real and worth stating plainly, because it is easy to forget later. Industrial output has been expanding at double-digit rates for most of the year, and full-year GDP growth is heading for something above eleven per cent. That is not a statistical artefact of a weak base — this is the fourth consecutive year of expansion, and it follows a decade in which the economy shrank by more than half.
What is actually driving it
Almost all of it comes from outside. World steel prices have roughly doubled since 2002, and Ukraine's metallurgical combines — Kryvorizhstal, Azovstal, Mariupol Illich, the Zaporizhzhia works — sell into that market with a cost base denominated in a currency pegged near 5.3 to the dollar. Chemicals, particularly nitrogen fertiliser, benefit from the same arithmetic against cheap imported gas. Add machine-building orders from russia and the picture is complete.
For anyone selling into Ukraine, this creates a specific and temporary condition: eastern industrial cities have cash. Dnipropetrovsk, Donetsk and Zaporizhzhia are buying capital equipment, cars, construction materials and consumer goods at a pace that surprises suppliers who last looked at this market in 1999. Retail turnover is growing faster than wages, which usually means credit is arriving — and it is, in the form of the first serious wave of consumer lending from banks that were, until recently, treasury operations with a branch network attached.
The parts that do not survive a shock
The vulnerabilities are equally clear, and they are the same ones that will matter in four years. The dollar peg is doing a great deal of work: it anchors inflation expectations, it makes foreign-currency borrowing look cheap to companies earning hryvnia, and it will be defended long past the point where defending it is sensible. Gas is imported at a price far below the European level under an arrangement whose durability depends entirely on politics rather than contracts. And the export basket is concentrated in one commodity whose price cycle is not controlled from Kyiv.
None of this is a forecast of trouble. It is a description of leverage. A country that grows eleven per cent on steel will contract on steel too, and the only question is what else is standing when that happens.
The political calendar is now the economic calendar
The election on 31 October is being treated by every serious business here as a scheduling problem rather than a spectacle. Contracts are being written with completion dates in September or in January, not in November. Customs behaviour is expected to become unpredictable in the autumn — it usually does before a vote, in both directions, depending on which importers are close to which candidate. Several large privatisation transactions have been quietly accelerated so that they close before the campaign proper begins.
The structural issue behind the campaign is worth separating from the personalities. The presidency as currently constituted holds enormous discretionary power over regulation, tax administration and the courts. Constitutional amendments that would move some of that power to parliament have been drafted and are being traded as a bargaining chip. Whether they pass, and in what form, will matter more to the operating environment in 2007 than the name of the winner.
What to watch between now and December
Three indicators are worth more than the campaign coverage. The first is the National Bank's reserve position: a sustained drawdown means the peg is under pressure and the currency assumption in your pricing model is wrong. The second is the pace of VAT refunds to exporters, which is the most reliable single measure of whether the fiscal authorities are being used politically. The third is the spread on Ukraine's sovereign eurobonds, which will tell you what people with money at risk think about the election outcome long before the commentary catches up.
There is a version of this Independence Day in which the anniversary is the story: a functioning state, a growing economy, a currency people trust more than they did five years ago. That version is not wrong. But the useful reading today is that Ukraine has accumulated something worth arguing over, and in the autumn it will find out how it settles arguments.
The archive will return to this year repeatedly. Most of what happens in 2005 and 2006 — the re-privatisation reviews, the gas dispute, the constitutional confusion — is already present in the conditions described above, waiting for a trigger.
Related in this archive
Share this analysis
Comments