Ukraine Market Report — Q1 2020
A pandemic quarantine from March, a rapid reversal of the portfolio inflows that had strengthened the currency, and a land market law passed at the end of the quarter that had been blocked for two decades.
Overview
Quarantine measures were introduced from March. Global financial conditions changed abruptly, and the portfolio capital that had strengthened the hryvnia through 2019 reversed within weeks.
Legislation opening a market in agricultural land was adopted at the end of March, with effect from July 2021.
The capital reversal
The 2019 report noted that carry positions in local-currency debt can reverse in days. They did.
Foreign holders of hryvnia bonds sold, converted and left. The currency weakened, reserves were used to smooth the movement, and the strength that had compressed exporter margins through 2019 unwound.
The lesson is worth restating because it recurs in every emerging market: portfolio capital is not a source of resilience. It arrives when conditions are favourable, amplifies whatever is already happening, and departs at the first sign that conditions have changed. A country that has come to rely on it for currency stability has borrowed that stability rather than earned it.
The offsetting observation is that Ukraine's banking system, cleaned up between 2015 and 2016, absorbed the reversal without difficulty. In 2008 the same movement would have produced a banking crisis.
The land market law
Agricultural land sales had been prohibited by a moratorium renewed repeatedly since 2001. The law adopted in March opened a market with limits on purchaser type and holding size, to take effect the following year.
Its commercial significance is covered elsewhere in this archive. In summary: it converted land from an asset that could only be leased into one that could be owned, mortgaged and used as collateral, which changes the financing capacity of the entire agricultural sector.
Macro position
Output contracting from March. Currency weakening. Reserves used to manage the movement. Inflation low.
Sectors
Agriculture — largely unaffected by quarantine; planting proceeded.
IT services — unaffected, and the sector best suited to remote working.
Retail and services — the sectors bearing the quarantine cost.
Transport and logistics — disrupted by border measures.
What the quarter settled
That the reforms of 2015 and 2016 had produced a financial system that could absorb an external shock without becoming the shock.
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