Ukraine Annual Review 2004: the best year and the wrong lesson
The strongest growth of the independence period, a record external position, and a political crisis at the end of it. The year is most useful as an illustration of how a commodity cycle can be mistaken for an economic achievement.
The year in one paragraph
Ukraine recorded the strongest economic growth of its independent history, driven almost entirely by a global steel price cycle, while simultaneously producing a contested privatisation that damaged its investment reputation and a disputed election that changed its government. The economic and political stories of the year were largely unconnected, and both were misread at the time.
The four quarters
Q1 — industrial acceleration on external steel demand; election-year fiscal expansion begins.
Q2 — record export earnings and the most comfortable external position of the decade; the privatisation of the largest steel asset demonstrates how the largest transactions actually work.
Q3 — output holds while political risk begins deferring commercial decisions; the first deposit outflows appear.
Q4 — election crisis, protest, repeat vote, change of administration; reserves spent defending the currency; no bank failure and no payments interruption.
What actually drove the year
Steel and iron ore prices, set in global markets by demand the country had no influence over. Ukrainian mills were profitable because the price was high, not because they had become efficient. Capacity utilisation rose; productivity did not.
Secondary drivers were a good harvest, a construction upturn financed from retained earnings, and consumer demand supported by pre-election wage and pension increases.
Of those, only the harvest and the consumer expansion were domestic in origin, and the consumer expansion was fiscal rather than earned.
What the year exposed
The banking sector. Loose underwriting, thin capital, related-party lending, and a deposit base that fled at the first political shock. Everything that would fail in 2008 and 2014 was already visible in 2004.
The privatisation process. The demonstration that a competitive process could be shaped to a predetermined outcome cost the country more in foregone foreign investment over the following decade than the discount on the asset itself.
The fixed exchange rate. Defended successfully because reserves were high, which concealed the structural question of whether the rate was correct.
What carried into 2005
A new administration with a reform mandate and no administrative machinery. An unresolved privatisation dispute. An inflation problem created by the election-year fiscal expansion. And a steel price cycle that would not stay high indefinitely.
The commercial reading
For a company assessing Ukraine at the end of 2004, three conclusions were available and only the third was widely drawn.
The consumer market was real and growing, and largely independent of the steel cycle that dominated the headlines.
The export-industrial base was profitable for reasons that would not persist and was not being modernised while it was.
And anything requiring a discretionary state decision carried a risk that the year had made explicit rather than theoretical.
A business built on the first, insulated from the second and structured to avoid the third would have performed well through the entire following decade. Very few were.
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