Ukraine Annual Review 2010: recovery on two channels
A change of administration, a gas price agreement, a new IMF programme and an export-led recovery that never reached the domestic economy. The year's decisions postponed an adjustment that came due in 2014.
The year in one paragraph
Ukraine changed administration in February, secured a lower gas import price in April in exchange for a naval base lease extension to 2042, agreed a new IMF programme in July, restricted grain exports in the autumn as world prices rose, passed a contested tax code in December, and recovered economically on exports alone while its credit system remained impaired.
The four quarters
Q1 — election concluded, new government, recovery from a very low base.
Q2 — the gas agreement and the IMF programme; both financing routes taken.
Q3 — world grain prices rise; export restrictions repeat the 2007 pattern.
Q4 — tax code protests; the year closes with a narrow recovery.
The decision that mattered
The April gas agreement is the year's consequential decision, and its significance is in what it removed rather than what it provided.
The 2006 price increase had begun forcing Ukrainian industry and households toward energy efficiency, and had begun making the household tariff subsidy fiscally unaffordable. Both processes were painful and both were working.
A restored discount stopped them. Efficiency investment lost its commercial case. The subsidy became affordable again. The state gas company's losses shrank without any operational change.
By 2014, when the arrangement ended, none of the adaptation had occurred and all of it had to happen at once, in the worst possible year to attempt it.
What carried into 2011
An IMF programme with tariff conditions the government did not want to meet. An export-dependent recovery vulnerable to any softening in commodity prices. A banking sector not yet lending. A construction cycle tied to a football tournament with a fixed end date. And a political system with executive authority newly reconcentrated.
The commercial reading
2010 is the archive's clearest example of a defensible short-term decision with a compounding long-term cost.
Nothing about the gas agreement was irrational in the conditions of early 2010. The economy had just contracted severely, the political capital for tariff increases did not exist, and the cheaper input restarted idled chemical capacity within months.
The cost was that it bought four years during which nothing adapted. When a business or a country takes a subsidy that removes a pressure, the question worth asking is what the pressure was going to force, and whether that thing still needs to happen. In this case it did, and it happened in 2014 under conditions where every option was worse.
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