Ukraine Market Report — Q4 2014
A parliamentary election in October, a heating season covered without eastern gas, and a year closing with the deepest contraction since 2009 and the currency at a fraction of its January level.
Overview
A parliamentary election was held in October. The heating season began without gas supply from the eastern direction.
The year closed with a severe contraction in output and a currency substantially weaker than it had been in January.
The heating season
Covering winter demand without the supply route that had provided the majority of imports for two decades was the quarter's most significant operational achievement.
It was managed through three things: reverse-flow imports from Europe, domestic production, and a substantial reduction in consumption achieved partly through price and partly through administrative measures affecting industrial users.
The consumption reduction is the part that matters most. Ukraine had been among the most energy-intensive economies in Europe per unit of output, a direct consequence of two decades of below-cost pricing. When the price became real, consumption fell — which is what the 2006 price increase had begun and the 2010 discount had stopped.
Macro position
The year's output contraction was severe, concentrated in the industrial regions and in construction.
Inflation accelerated substantially with the currency pass-through.
The banking sector's condition deteriorated throughout the quarter as the scale of impaired assets became clearer.
The IMF programme agreed in April was proving insufficient to the scale of the shock, and negotiations on a larger replacement began.
Sectors
Agriculture — a strong year in a bad year for everything else. The weak currency made Ukrainian grain highly competitive and the harvest was good.
Metals and coal — severe losses.
Banking — the sector where the crisis was concentrating.
IT services — grew through the year.
Retail — sharp contraction in real terms as inflation outpaced wages.
What the quarter settled
That the energy dependency was over as a structural fact, and that it had ended not through policy but because a supply halt removed the option of continuing.
The efficiency gains achieved under compulsion in this heating season were larger than anything a decade of energy policy had produced.
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