Independence Day 2008: the last good summer
Ukraine marks seventeen years with WTO membership secured, steel prices at record highs, a war in the neighbourhood two weeks old — and a credit structure that will not survive what is coming.
Seventeen years. This has been, by most measures, the best year Ukraine has had: World Trade Organization membership completed in May after fourteen years of negotiation, steel prices at levels nobody forecast, record grain harvest coming in, foreign banks competing to lend. It is worth recording the mood accurately, because in six months nobody will remember it.
The WTO accession is the durable achievement and deserves the anniversary attention. It binds Ukraine's tariffs, subjects its trade policy to a dispute mechanism it cannot ignore, and — the point that matters most — removes the last legal obstacle to negotiating a deep and comprehensive free trade area with the European Union. Those negotiations open this autumn. Everything that happens between Ukraine and Brussels for the next decade runs through the door that opened in May.
What the numbers are hiding
Growth is running above six per cent and the current account deficit is heading for something close to seven per cent of GDP. That second number is the one to hold on to. It is being financed by capital inflows into the banking system — foreign parent banks funding their Ukrainian subsidiaries, which lend the money on in dollars and francs to households and companies earning hryvnia.
The stock of foreign-currency loans to unhedged borrowers now exceeds half of all bank lending. The exchange rate has been held at 5.05 to the dollar by a central bank that treats the peg as a commitment rather than a policy instrument. Reserves look comfortable at around 38 billion dollars, and they are comfortable — against a normal shock.
Put those three facts in one sentence and the structure is obvious: an economy running a large external deficit, financed by short-term foreign borrowing, on-lent in foreign currency to borrowers with no foreign-currency income, under a fixed exchange rate. That is not a Ukrainian invention. It is the standard emerging-market vulnerability, and it has produced the same outcome everywhere it has been assembled.
The August war and what it changed
The fighting in Georgia this month has done something to Ukraine that no domestic event has managed. It has made the security question concrete for people who had treated it as abstract. The Bucharest summit in April had already declined to offer a Membership Action Plan while stating that both countries would eventually become NATO members — a formula that gave Ukraine the political liability of a commitment without the protection of one.
The commercial consequence is immediate. Sovereign spreads have widened, and several planned eurobond placements by Ukrainian banks and corporates have been shelved. Insurance and financing costs for anything with a Ukrainian address are being repriced. This is happening before the global credit event, and it will compound with it.
What to do with the remaining months
For anyone with exposure here, the practical steps are unglamorous and time-sensitive. Match currencies: if your revenue is hryvnia, your debt should be too, whatever the rate differential says. Shorten receivables. Check which of your Ukrainian counterparties have foreign-currency debt on their balance sheets, because their solvency is your credit risk. Do not assume the peg holds; price at least one scenario at eight to the dollar and see what survives.
These recommendations will read as obvious in eighteen months. Right now they cost real money to implement, and the majority of businesses here will not implement them — because the last four years have rewarded exactly the opposite behaviour.
Seventeen years in
The anniversary is being celebrated in a country that has, for the first time, a genuine external anchor within reach: WTO membership behind it, EU free trade negotiations ahead, and an economy integrated into global markets in a way that would have been unimaginable in 1998.
Integration cuts both ways, and the second half of that lesson arrives shortly. But the anchor is real and it survives the crisis. Ten years from now, the WTO accession will look more important than anything else that happened in 2008 — including the things that hurt.
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