Ukraine Market Report — Q3 2013
A record grain harvest, a contracting industrial base, and a decision approaching in November on which trade regime the country would adopt. Business planning stopped until the answer was known.
Overview
The grain harvest was among the largest recorded to that point. Industrial output continued contracting. The reserve position weakened further.
The quarter's dominant commercial variable was the approaching decision on the association agreement, scheduled for signature at a summit in late November.
The decision and its commercial content
The two options were incompatible, and their incompatibility was technical rather than political.
The EU agreement's free trade area required Ukraine to set its own external tariff schedule and to adopt a large body of EU technical regulation.
The customs union alternative required a common external tariff set collectively, which is arithmetically impossible alongside an independent tariff schedule.
The commercial content of the choice was equally specific. The EU route imposed compliance costs first and delivered market access later, and favoured agriculture, food processing and anything that could meet a European standard. The eastern route preserved existing markets for the industrial base without requiring change.
What businesses did
They stopped deciding.
Capital expenditure was deferred, hiring paused, and any investment whose returns depended on which market the product would be sold into was postponed until the answer was known.
That is the rational response to a binary decision with a known date, and it is why the quarter's investment figures were weak independently of the underlying economic conditions.
Sectors
Agriculture — an exceptional harvest, with logistics and storage capacity the constraint on exporting it.
Metals and machine building — contracting.
Chemicals — weak.
IT services — growing, and largely indifferent to the trade question because its market was already global.
What the quarter settled
That the entire economy was waiting on a single decision with a fixed date — which is the least productive configuration a market can be in, regardless of which way the decision goes.
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