Ukraine Market Report — Q2 2007
A constitutional standoff over the dissolution of parliament ran through the quarter. The economy grew at close to eight percent while it happened.
Overview
A dispute over the president's dissolution of parliament occupied the political system for the entire quarter, with competing claims about the legality of the decree and an unresolved question about which institution had the final say.
Output grew at close to eight percent annualised throughout.
Macro position
Growth broad-based across industry, construction, retail and services. Inflation accelerating, and now driven by domestic demand rather than by food prices alone.
The external deficit continued widening. It remained easily financed because international credit conditions were still loose, and Ukrainian banks were borrowing abroad at spreads that would look extraordinary eighteen months later.
The pattern repeating
This is the third consecutive year in which a serious political disruption produced no measurable interruption to commercial activity.
The reason is structural and worth naming. Ukrainian output is dominated by export industry selling into external markets at external prices, and by domestic consumption funded by wages and credit. Neither depends on a functioning legislature in the short run.
What the political system does affect is anything requiring new legislation, a regulatory decision or a state contract — and in a period of political conflict those simply do not happen.
The practical guidance that follows is consistent across the archive: assess your business against the question of whether it needs a decision from anyone in Kyiv. If it does not, Ukrainian political turbulence is largely noise. If it does, it is the primary risk in the model.
Sectors
Construction and real estate — at what would prove to be near the cycle peak, with prices, transaction volumes and mortgage origination all at records.
Banking — credit growth at its fastest, with loan-to-deposit ratios rising as foreign wholesale funding filled the gap.
Metals — strong on global prices.
Retail — international chains expanding into second-tier cities.
What the quarter settled
That the credit cycle had reached the point where its continuation depended entirely on external funding conditions remaining favourable.
No domestic institution had either the mandate or the instruments to slow it, and the political system was fully occupied with a constitutional dispute.
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