Ukraine Market Report — Q2 2014
The association agreement's economic chapters were signed in June, an IMF programme began in April, gas supply from the east stopped in June, and armed conflict started in the industrial east.
Overview
Four developments in one quarter, each with distinct commercial consequences.
A presidential election was held in May. The economic chapters of the association agreement with the EU were signed in June. A new IMF programme was approved in April. Gas supply from the eastern direction was halted in June over a payment dispute, and russian-backed armed conflict began in the Donbas.
The agreement
Signature ended the question that had suspended business planning since mid-2013.
Its commercial content took effect gradually: tariff reductions applied provisionally, and the technical regulation and certification work that would determine actual market access began.
The three-year delay caused in 2011 meant Ukrainian producers started that certification work three years later than they could have, in a year when they had considerably less capacity to invest.
The gas halt
Supply from the east stopped in June and did not resume that year.
Ukraine covered the gap through reverse flow from Europe — the route first tested in small volumes in late 2012 — combined with domestic production and a sharp reduction in consumption.
This is the point at which the alternative demonstrated in 2012 became the primary supply route. A dependency that had appeared structural for two decades was broken in one heating season, under the worst possible circumstances, because the technical alternative had already been proven.
The war
The fighting was concentrated in the industrial regions that contained a substantial share of Ukrainian metallurgical and coal capacity.
The commercial consequences were the loss of production capacity, disrupted rail and logistics, and the loss of coal supply to power stations designed for it.
Macro position
Output contracting sharply. Currency depreciating. Inflation rising. Reserves supported by the IMF disbursement.
Sectors
Agriculture — a good year, with the weak currency improving margins.
Metals and coal — severely disrupted.
Banking — deteriorating rapidly.
IT services — continuing to grow.
What the quarter settled
That the trade orientation was decided, that the energy dependency was breakable, and that the industrial east — the sector the eastern trade route had been intended to protect — was the part of the economy that the year damaged most.
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