Ukraine Market Report — Q4 2019
A five-year gas transit agreement was concluded at the end of December alongside a settlement of the outstanding arbitration, removing the largest single external uncertainty going into the new decade.
Overview
A five-year gas transit agreement covering 2020 to 2024 was concluded at the very end of December, together with a settlement of the arbitration proceedings between the two state companies.
Inflation ended the year within the central bank's target range for the first time under the inflation targeting framework.
Why the transit agreement mattered
The expiring contract had been the largest identifiable external risk in the Ukrainian outlook. Transit revenue was a meaningful contributor to the current account, and its loss without replacement would have required an adjustment elsewhere.
The agreement removed that risk for five years and confirmed a defined volume schedule, which allowed the transmission system operator to plan and allowed the state budget to forecast.
The arbitration settlement resolved a long-running dispute and converted a contingent claim into a concluded matter.
The general point for a company: an unresolved contractual dispute with a large counterparty is not a neutral position. It consumes management attention, complicates financing, and prices into every valuation of the business until it is settled. Concluding it — even on terms short of the best possible outcome — has value beyond the money.
Inflation reaching target
This deserves more attention than it received. Ukraine had adopted inflation targeting in the mid-2010s and had missed the target every year since.
Reaching it demonstrated that the framework worked and that the central bank's independence had produced a measurable result. For businesses, low and predictable inflation changes what can be planned: multi-year contracts become possible in local currency, and long-term hryvnia lending becomes conceivable.
Macro position
Growth for the fourth consecutive year. Inflation in target range. Currency strong. Reserves at their highest level in years.
Sectors
Agriculture — a strong year with compressed local-currency margins.
IT services — growing.
Metals — weak on global prices.
Energy — transit secured; the electricity market bedding in.
What the quarter settled
That Ukraine entered 2020 in the strongest macroeconomic position it had held since 2007 — growth, target inflation, high reserves, a stable currency and the transit question resolved.
What it could not settle was the labour constraint, the unreformed judiciary, or anything that would arrive from outside.
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