Ukraine Market Report — Q4 2010
A tax code passed in December brought small business onto the streets, and the recovery closed its first full year led entirely by exports.
Overview
A new tax code was adopted in December. Its provisions on the simplified taxation regime used by small businesses and sole traders produced sustained street protests in Kyiv and regional cities, and parts of it were subsequently amended.
What the episode showed
The simplified tax regime was, and remains, the framework under which a very large number of Ukrainian small businesses operate — retail traders, service providers, individual professionals and a substantial part of the IT sector.
Its economic significance is larger than its revenue contribution. It is the mechanism through which small-scale enterprise remains formal rather than informal, and changing it affects a broader constituency than almost any other tax measure.
The protests were notable for being economic rather than political in origin, and for succeeding partially. That combination was unusual in this period and it demonstrated that a sufficiently broad and specific commercial constituency could obtain amendments where general political opposition could not.
Macro position
The year closed with output recovering but well below the pre-crisis level. Growth was led by exports; domestic investment remained weak.
Inflation moderate. Currency stable. The IMF programme in place and disbursing, with fiscal and tariff conditions attached that would become contentious during the following year.
Sectors
Agriculture — a strong year despite the export restrictions, with high world prices supporting the sector.
Metals — recovered substantially from the 2009 trough but below 2007 volumes.
Chemicals — assisted by the gas price arrangement.
Construction — the beginning of a Euro 2012 related build-out in stadiums, airports and roads, which supported the sector through the following eighteen months.
Banking — lending still restricted; the sector had stabilised without returning to its intermediary function.
What the quarter settled
That the recovery would be narrow. Exports were rising, infrastructure spending associated with the football tournament was creating construction demand, and neither of those reached the broad domestic economy.
An economy recovering on two narrow channels while its credit system remains impaired grows on paper and feels stagnant on the ground, which is an accurate description of Ukraine between 2010 and 2013.
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