Ukraine Market Report — Q1 2011
Recovery continuing on external demand, an IMF programme running into its first conditionality problem, and a currency held fixed at a level the central bank was beginning to pay to defend.
Overview
The recovery continued, driven by external demand for metals and by agricultural exports. Domestic investment remained weak and bank lending restricted.
Macro position
Output growing year on year. Inflation moderate. The exchange rate held at its administered level.
The IMF programme agreed the previous July carried conditions on household gas and heating tariffs. Meeting them meant raising prices that had been held below cost for two decades; not meeting them meant the programme stalling.
The government did not raise the tariffs, and the programme moved toward suspension during the year.
The recurring choice
This is the same decision that appears in 2005, 2010 and 2013, and its structure never changes.
Raising household energy tariffs is immediately and visibly costly to a very large number of voters. Not raising them is costly to the state gas company, to the fiscal position and to the country's access to external financing — all of which are diffuse and delayed.
Every Ukrainian government of the period faced this choice, and every one of them made the same decision until the alternative became impossible in 2015.
The commercial implication for a company is worth stating directly: any Ukrainian reform programme whose conditions include household tariff increases should be assumed to stall, unless the fiscal position has already deteriorated to the point where there is no alternative.
Sectors
Metals — solid external demand.
Agriculture — strong; export restrictions from the previous autumn were being phased out.
Chemicals — operating on the discounted gas price.
Construction — active on tournament infrastructure with a fixed completion deadline in mid-2012.
Banking — still not lending meaningfully to enterprises.
What the quarter settled
That the recovery had no domestic engine. Exports and a time-limited infrastructure programme were carrying the whole of it, and both had visible end points.
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