Independence Day 2014: a smaller map and a rewritten balance sheet
Twenty-three years, and for the first time the anniversary is marked by a country that controls less territory than it did the year before. What that does to trade, contracts and currency, stated plainly.
The twenty-third anniversary is the first marked by a Ukraine smaller than the one that existed twelve months earlier. Crimea was annexed in March. Fighting continues in parts of Donetsk and Luhansk oblasts. A military parade replaced the usual civic programme on Khreshchatyk today, and the symbolism needs no explanation.
This entry sets aside everything except what can be stated concretely, because in a year like this the analytical value of restraint is high and the supply of it is low.
What has been lost, measured
Crimea accounted for roughly three per cent of Ukrainian GDP, a shipbuilding cluster at Kerch and Feodosia, substantial tourism receipts, and — most consequentially for the long term — the maritime zone associated with the peninsula, including Black Sea hydrocarbon licences that had just been awarded to international operators.
The Donbas is a much larger number. Donetsk and Luhansk oblasts together produced around fifteen per cent of GDP and a far higher share of export earnings: coking coal, coke, steel, heavy machinery, chemicals. Several of the country's largest industrial enterprises are in or near the conflict zone. Rail links have been cut repeatedly. Where plants continue operating, they do so with unreliable inputs and no functioning legal environment.
The macro consequences follow arithmetically. GDP will contract by something in the range of six to seven per cent this year. The hryvnia, released from its peg in February, has moved from eight to around thirteen and will move further. Reserves fell below fifteen billion dollars in the spring. Inflation is heading toward twenty-five per cent.
What was signed in June
Against that, the economic chapters of the Association Agreement with the European Union were signed on 27 June. The EU has applied its tariff reductions unilaterally since April; Ukraine's own liberalisation is deferred to the end of 2015 under pressure from Moscow and Brussels alike.
It is worth being precise about what this document is, because it will be described in political language for years and its actual content is technical. It is a schedule for adopting a large body of EU regulation — product safety, food and veterinary standards, competition rules, public procurement, customs procedure, energy market design — with deadlines attached. Compliance is what produces market access. Nothing is granted for signing.
For businesses this is the single most useful planning document available. It tells you, chapter by chapter, what Ukrainian law will look like in three, five and ten years. Companies that treat it as a specification rather than a diplomatic gesture will spend the next decade ahead of their competitors.
The commercial reality this autumn
Practical points that matter more than commentary. Force majeure clauses are being tested in real time; if your contracts with Ukrainian counterparties do not define the territorial scope of performance, they will need amending. Cargo insurance for eastern destinations is either unavailable or priced prohibitively. Banking relationships in the affected oblasts are disrupted, and payment routing needs checking transaction by transaction.
Capital controls introduced this year restrict dividend repatriation and foreign-currency purchase. They will remain in some form for several years. Assume that money entering Ukraine now cannot be freely removed for the medium term, and size the exposure accordingly.
On the other side of the ledger: labour cost in dollar terms has fallen by close to half. For export-oriented manufacturing, software services and agriculture, Ukraine has become dramatically cheaper as a production base at the same time as it has become more legally aligned with the EU. That combination is the reason the IT sector will more than double over the next five years despite everything else in this entry.
Twenty-three years in
The country marking this anniversary has fewer square kilometres, a much weaker currency and a war it did not plan for. It also has, for the first time since 1991, an unambiguous external direction and a legal framework describing what it must become to get there.
Those two facts are not in tension. Most of the states that built durable institutions did so under pressure rather than in comfort. Whether Ukraine is one of them is the open question of the next decade, and this year is where the answer starts.
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