Ukraine Market Report — Q4 2005
An open international auction sold the country's largest steel asset for several times the previous year's price, and a gas supply dispute at the very end of the quarter set the agenda for the next decade.
Overview
Two events, three weeks apart, defined the quarter and pointed in opposite directions.
In October, the country's largest steel producer was sold at open international auction, broadcast live, for a price several times what the same asset had fetched in the previous year's closed process.
At the end of December, a dispute over gas supply pricing escalated toward the interruption that would open the following year.
The auction
This was the single most valuable signal the country sent to international investors in the decade. A competitive, transparent process, conducted publicly, with the asset going to the highest bidder and the proceeds going to the budget.
The commercial significance was not the money. It was the demonstration that the outcome of a large Ukrainian transaction could be determined by the bid rather than by the relationship, and that the difference between the two processes was measured in multiples of the sale price.
Foreign investor sentiment improved measurably in the weeks after. That improvement was subsequently undone by other events, but the episode remains the clearest available evidence of what an open process is worth to a country.
The gas dispute
The pricing arrangement under which Ukraine had bought gas was being renegotiated, and the gap between the positions was very large. By the end of the quarter an interruption of supply was a live possibility rather than a negotiating threat.
The commercial implications reached far beyond energy. Ukrainian heavy industry was competitive largely because of the input price under dispute. A step change in gas costs would remove the basis of the chemical sector's economics and a substantial part of metallurgy's.
Sectors
Metals — a weak year ending, with the auction as the one bright spot.
Chemicals — facing an existential input cost question.
Banking — continued foreign acquisition; the sector's transformation was the quarter's quiet structural story.
Consumer — steady.
What the quarter settled
That the country's industrial model rested on an input price negotiated politically with a single supplier, and that this had always been the case even when it was not visible.
Every subsequent energy policy decision of the following twenty years traces back to the question posed at the end of this quarter.
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