Ukraine Market Report — Q3 2018
Steady growth, an IT sector that had quietly become one of the country's largest export earners, and a gas transit contract expiring at the end of the following year with no replacement agreed.
Overview
Growth continued steadily. The IT services sector had by this point become one of Ukraine's largest sources of export earnings after agriculture and metals — a position it had reached without any state programme, subsidy or industrial policy.
How the IT sector was built
Worth setting out because it is the clearest case in this archive of a sector that grew because nothing was done to it.
Its inputs were a large supply of technical graduates from an education system inherited from the Soviet period, English-language capability that improved with each cohort, and a cost base that the 2008 and 2014 devaluations made extremely competitive in dollar terms.
Its structure was outsourced service delivery to foreign clients — initially body-shopping, progressively moving toward product development and dedicated teams.
Its regulatory treatment was the simplified tax regime, under which individual developers registered as sole traders. That arrangement was periodically criticised and repeatedly targeted for change, and its stability was the single most important policy variable for the sector.
The general lesson: the sector grew fastest in the years when the state's attention was elsewhere. Sectors that depend on nothing from the state are the ones that compound through political disruption, and in Ukraine that has been the decisive characteristic.
The transit question
The contract governing gas transit through Ukraine to Europe was due to expire at the end of 2019. No replacement had been agreed.
Transit revenue was a significant contributor to the current account. Its loss without replacement would have been a material external shock.
Macro position
Growth moderate. Inflation above target. Currency stable. Labour shortage persistent.
Sectors
IT services — among the largest export earners.
Agriculture — strong.
Metals — steady, with the Azov constraint affecting part of the sector.
Construction — labour-constrained.
What the quarter settled
That Ukraine's most successful export sector of the decade owed nothing to industrial policy, and that its principal risk was a change to the tax treatment that had let it develop unnoticed.
Related in this archive
Share this analysis
Comments