Ukraine Annual Review 2007: the last good year, and why it was the most dangerous
Growth near eight percent, record investment, a booming property market and a banking sector expanding faster than any in the region. Everything that made 2007 look successful was the same thing that made the following year severe.
The year in one paragraph
Ukraine grew at close to eight percent, ran a constitutional crisis and an early election without commercial disruption, watched inflation climb into the mid-teens, and completed the assembly of a currency, credit and commodity exposure that would produce one of the deepest recessions in Europe eighteen months later.
The four quarters
Q1 — strong output; grain export restrictions demonstrate where regulatory risk sits.
Q2 — constitutional standoff alongside eight percent growth; credit cycle at its fastest.
Q3 — early election; international credit markets begin tightening, largely unremarked locally.
Q4 — record year closes with record imbalances and a new government.
What drove the year
Global steel prices near an all-time peak, which funded the export earnings.
Credit expansion, funded from abroad, which drove consumption, construction and property.
And an investment cycle in retail, logistics and manufacturing capacity built on the assumption that both of the above would continue.
The structural position at year end
Household debt substantially in foreign currency, owed by borrowers with hryvnia income. Bank funding substantially short-term and external. Export earnings substantially from a single volatile commodity. Property prices detached from rental yields. An external deficit requiring continuous refinancing.
None of these was hidden. All were in published data, and several were noted in international assessments during the year. The reason nothing changed is the ordinary one: while conditions are good, the cost of acting is immediate and the benefit is hypothetical.
What carried into 2008
Everything above, plus a global financial system already repricing risk, plus a new government committed to further social spending increases, plus WTO accession in prospect.
The commercial reading
2007 is the most instructive year in this archive for one reason: it is the clearest available case of an economy that looked excellent on every headline indicator while carrying a structure that could not survive one adverse price movement.
The transferable exercise is simple and few companies perform it. Take your market's three largest favourable conditions — in Ukraine's case steel prices, cheap external funding and currency stability — and ask what happens to your business if all three reverse in the same quarter.
They did, in the autumn of 2008, and the companies that had asked the question in 2007 were the ones still operating in 2010.
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