Ukraine Market Report — Q2 2004
Record export earnings, a contested privatisation of the country's largest steel asset, and the beginning of a political contest that would dominate everything after it.
Overview
The quarter delivered the strongest export earnings in the country's independent history. It also produced the single transaction that would define the politics of the following two years.
Macro position
The external accounts were in unusually good shape. Export receipts exceeded imports comfortably, reserves rose, and the fixed exchange rate required no defence. This was the most comfortable external position Ukraine would hold for the next decade.
The fiscal side moved the other way. Pre-election increases in wages and pensions were legislated and began flowing, expanding domestic demand into an economy already running hot.
The privatisation question
The sale of the country's largest steel producer to a domestic consortium at a price far below what international bidders had signalled they would pay became the quarter's defining commercial event.
For a foreign investor the significance was not the asset. It was the demonstration that a competitive process could be structured to produce a predetermined outcome, and that the terms of participation in the largest transactions were not the published ones.
That single observation shaped foreign investor behaviour for years afterwards, and it did more damage to the country's investment reputation than any macroeconomic weakness.
Sectors
Metals — running at capacity with export prices still climbing.
Agriculture — harvest prospects had improved substantially on the previous year. Storage and port capacity were again the constraint, and the sector's traders were forward-selling against uncertain logistics.
Banking — deposits growing, lending expanding, and underwriting standards visibly loose. Foreign banks were beginning to look seriously at acquisition targets.
What the quarter settled
That the commercial environment and the macroeconomic environment could move in opposite directions. The numbers were the best on record while the rules governing the largest transactions were demonstrably not what they appeared.
A company reading only the macro data would have concluded the market was excellent. A company reading the privatisation would have concluded that anything requiring a state decision carried a risk no financial model could price.
Both readings were correct, and the second mattered more.
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