Ukraine Annual Review 2005: a mandate spent and a precedent set
Growth fell to a fraction of the previous year, a reform government dissolved inside eight months, and one transparent auction demonstrated what the country was capable of when it chose to be.
The year in one paragraph
Growth collapsed from the exceptional 2004 rate to low single digits as the steel cycle turned, a reform administration arrived with an overwhelming mandate and dissolved within eight months, an ill-defined reprivatisation threat suppressed investment for most of the year, and a single open auction in October produced the strongest positive signal to foreign investors of the entire decade.
The four quarters
Q1 — new administration, reprivatisation threat, currency revaluation, sharp industrial deceleration.
Q2 — administrative price interventions in food markets; confirmation that 2004 had been a price effect.
Q3 — government dismissed; preparation for an open privatisation proceeds in parallel.
Q4 — the open auction delivers a multiple of the previous year's price; the gas pricing dispute escalates toward interruption.
What drove the year
Downward: the steel price cycle turning, the currency revaluation compressing exporter margins, and investment deferred by title uncertainty.
Upward: consumer demand, supported by the wage and pension increases carried in from the election year and by rapidly expanding consumer credit as foreign-owned banks pushed into retail lending.
That second driver is the year's most consequential and least noticed development. The consumer credit expansion that would end badly in 2008 began in earnest in 2005, financed by foreign parent banks and denominated substantially in foreign currency.
What the year demonstrated
That political change and institutional quality are separate variables. The government failed politically while running the most credible privatisation in the country's history.
That undefined policy is worse than bad policy. The reprivatisation threat cost more in deferred investment than any actual reversal would have cost, because the undefined scope made every asset holder a potential target.
That the industrial base rested on a negotiated input price. The year ended with that price in dispute and the sector's entire cost structure in question.
What carried into 2006
An unresolved gas price negotiation with an interruption already under way. A parliamentary election in March. A banking sector transformed by foreign acquisition and expanding credit at a pace nobody was supervising closely. And a consumer economy that had proven resilient through two consecutive years of political disruption.
The commercial reading
The lesson of 2005 for a company assessing this market is that Ukraine's variance is high in both directions. The same year produced the worst investor signal of the decade and the best one.
A firm that had written the market off after the first quarter would have missed the auction; a firm that entered on the auction alone would have been unprepared for what followed. The correct posture in a market with this much variance is a position sized to survive the bad quarters and structured to benefit from the good ones — which is a different thing from timing them.
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