Ukraine Market Report — Q1 2007
Strong output, accelerating credit, and grain export restrictions that taught the agricultural sector a lesson about where regulatory risk actually sits.
Overview
Output was strong across industry, construction and retail. The quarter's defining commercial event was in agriculture, where export restrictions imposed after the previous year's weak harvest were tightened.
The export restriction question
Faced with rising domestic bread prices, the government restricted grain exports through quotas and licensing.
The measures achieved their stated aim partially and produced three costs. Farmers received lower prices than the world market offered, which reduced their planting incentive for the following season. Traders with forward contracts faced delivery failure through no commercial fault. And the country's reliability as a supplier was damaged in markets that had begun treating Ukraine as a dependable origin.
The third cost was the largest and the least visible. A grain buyer in North Africa or the Middle East selecting an origin for the following season factors in the probability of an administrative interruption, and that probability had just been demonstrated to be non-trivial.
For any company in agricultural trade, the lesson was that Ukrainian regulatory risk concentrates at the export boundary and appears fastest when domestic food prices rise.
Macro position
Growth strong. Inflation rising, driven by food and by the credit-fuelled demand expansion. The external deficit widening.
Credit growth continued at a multiple of output growth, with the foreign-currency share of new household lending still increasing.
Sectors
Agriculture — constrained by policy rather than by production or logistics for the first time in years.
Metals — strong external demand and prices.
Construction and real estate — the boom continuing, with Kyiv prices at levels that had detached from local incomes.
Banking — growing rapidly; several further foreign acquisitions completed.
What the quarter settled
That the state's response to consumer price pressure would be administrative and would fall on exporters, and that this is a predictable feature rather than a one-off.
Every subsequent episode of food price inflation in this market has produced the same policy reflex, and a company trading agricultural commodities here should price that probability into every forward position it takes.
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