Ukraine Market Report — Q1 2014
A change of government in February, the end of the fixed exchange rate, the annexation of Crimea in March. The quarter contains more structural change than most decades.
Overview
The quarter contained a change of government in late February, the abandonment of the fixed exchange rate, and the annexation of Crimea in March.
Any one of these would define an ordinary quarter. Their commercial consequences are separable and worth separating.
The exchange rate
The central bank moved to a flexible exchange rate in February, ending the arrangement that had been defended since 2008 with reserves and rationing.
The hryvnia depreciated substantially over the following weeks.
The commercial effects were immediate and followed the 2008 pattern exactly. Exporters with domestic cost bases gained. Importers and companies with foreign-currency debt and domestic revenue lost. Banks absorbed the credit losses of the second group.
The difference from 2008 was that household foreign-currency lending had been restricted after the previous crisis, so household balance sheets were less exposed than they had been.
Crimea
The annexation removed a region from Ukrainian economic statistics, jurisdiction and tax base.
The direct commercial consequences for companies operating nationally were: loss of assets and operations located there, loss of a tourism market, loss of port and shipbuilding capacity, and the immediate practical problem of what to do with staff, contracts and receivables in a territory that had left the legal system in which they were written.
The indirect consequence was larger. Country risk was repriced by every insurer, lender and investment committee with Ukrainian exposure, and financing costs rose accordingly for companies with no connection to the region at all.
Macro position
Output contracting. The currency depreciating. Reserves at very low levels. Inflation beginning to rise with the exchange rate pass-through.
Negotiations opened with the IMF for a new programme, agreed in April.
Sectors
Agriculture — competitiveness improved sharply by the currency move.
Metals — mixed: export competitiveness improved, but assets and demand in the east were becoming uncertain.
Banking — the beginning of a severe asset quality problem.
IT services — competitiveness improved; the sector's costs are domestic and its revenue is foreign.
What the quarter settled
That the exchange rate question, deferred since 2011, had been resolved by events rather than by policy — which is how it is always resolved when policy declines to.
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