Ukraine Market Report — Q1 2009
A two-week gas interruption that reached European customers, industrial output down by a third, and the deepest point of the contraction. The quarter also permanently changed how Europe thought about its energy routes.
Overview
Gas supply through Ukraine was interrupted for roughly two weeks in January, and for the first time the interruption reached customers in south-eastern Europe in the middle of winter.
Industrial output was down by around a third year on year at the trough. This quarter is the deepest point of the contraction.
The transit interruption and its consequences
The commercial and political consequences of those two weeks were larger and longer-lasting than the volumes involved.
European buyers concluded that the transit route through Ukraine carried a delivery risk they had not previously priced. Every alternative pipeline project of the following decade — bypassing Ukraine to the north and to the south — traces its political momentum to January 2009.
For Ukraine the consequence was the gradual loss of transit revenue and, more importantly, the loss of transit as a source of leverage. That was a strategic cost incurred in a fortnight and paid out over fifteen years.
The general lesson for any country or company whose position rests on being an indispensable intermediary: the moment the intermediary demonstrates it can interrupt the flow, the customers begin building a route around it.
Macro position
Output collapsing across industry. The currency stabilising at its post-devaluation level. Inflation still high in nominal terms while demand was collapsing.
The banking sector in acute distress — non-performing loans rising rapidly as devalued foreign-currency borrowers stopped paying, and recapitalisation proceeding slowly against political resistance.
Sectors
Metals and chemicals — output at the trough; plants idled and workforces cut.
Construction — stopped.
Agriculture — the only sector growing, helped by the devaluation making Ukrainian grain highly competitive in world markets.
Retail — sharp contraction in durables; food volumes broadly held.
What the quarter settled
That the sectors with domestic costs and export revenue were the winners of a devaluation, and the sectors with foreign-currency costs or debt were its losers — and that this divides an economy far more sharply than any policy could.
Ukrainian agriculture's rise to global significance over the following decade begins here, with a currency move that made it structurally cheap.
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