Ukraine Country Report May21 - May, 2021

May 5, 2021

Summary:

Ukraine’s economy contracted by 2.8% in January and February, compared to the first two months of last year, estimated the Ministry of Economic Development and Trade. Except for retail trade, all sectors were down. Consensus forecasts put Ukraine’s 2021 GDP growth at 4%. These forecasts were made before the April coronavirus lockdown in Kyiv and half of the regions. War jitters about Russia’s military threats also may dampen investment.

The IMF has updated its World Economic Outlook database in which it forecasts Ukraine’s real GDP will increase 4.0% in 2021 and about 3.4% in the next two years, but go slower than global growth of 6.0% in 2021 and 4.4% in 2022.

The economy did better than expected in 2020, largely thanks to the rapid growth in commodity prices that began in the fourth quarter (Ukraine is a big producer and exporter of steel), and wages have been rising strongly that in turn is driving consumption. With business activity improving big international retailers have begun to move in and construction is also showing the first green shoots with investment funds buying shopping malls and IKEA has launched its first store in Ukraine.

Key sectors of the Ukrainian economy improved in March, with better dynamics in industrial production, retail turnover and agricultural output. Industrial production climbed 2.1% y/y versus a 4.6% drop in February, primarily driven by manufacturing (up 2.5% versus a 6.7% drop in February). However, the economy is still only stepping off square one as in the 1Q21 industrial output contracted 2.0% year-on-year, dragged down by the negative results in the first two months. The outlook for the second quarter is much brighter.

There is some uncertainty caused by the pandemic, but Ukraine has finally started to receive deliveries of vaccines from India and China and as bne IntelliNews country report went to press another 10mn doses were promised by Pfizer that should help the process along.

April saw tensions flare again as Russia moved some 40,000 troops up to Ukraine’s border for “exercises.” The Kremlin claimed it was only reacting to Ukraine’s decision to move troops up to the line of contact in Donbas over the prior two months as part of the spring rotation in preparation of the new campaigning season, and there are some reports that Ukrainian troops were on the move to bring up heavier artillery too.

Some have speculated that this was a move by Ukrainian president Volodymyr Zelenskiy to provoke exactly the response he got from Russia as a way of pressuring the west for more aid. It's still unclear exactly what just happened, but whatever the truth, Russia’s response was overkill and designed to send a clear message to the White House that the Kremlin can, and will, make serious trouble if its demands are not taken seriously.

Zelenskiy took the opportunity of the tension to call on both the EU and Nato to finally commit themselves to Ukraine's eventual accession process to both bodies. While Ukraine has turned to the west, it has received no formal, or even informal, promises of membership. Indeed, it is widely assumed that it will never be offered membership as Ukrainian membership of Nato is a red line for the Kremlin – although it is more ambivalent about membership of the EU.

Zelenskiy asked the question of both saying “we can’t stay in the waiting room forever,” but again received no response.

The Russian tension has proven a boon for Zelenskiy who mounted a diplomatic campaign and has been touring Europe to drum up support for Ukraine’s plight with some success. Turkey in particular came out strongly for Ukraine and Turkish president Recep Tayyip Erdogan disavowed Russia’s claim on Crimea, causing the Kremlin to ban commercial flights to the country that will cost Turkey billions in lost revenues as punishment.

The Ukrainian president came to power on the promise of ending the conflict in Donbas, but no progress has been made. Indeed, with the Minsk II process stalled and the Kremlin happy with the status quo any progress is very unlikely. However, Zelenskiy has looked like he has made a big effort and with the EU rebuffs and Russia’s intransigence he can effectively pass the blame for the lack of progress onto others. His poll rating has been falling in the last months, but recovered somewhat in March.

As soon as tensions faded the Ministry of Finance managed to get a $1.25bn Eurobond away to high demand that was three times oversubscribed and carried a coupon of under 7%. The timing was perfect and eases some of the pressure on the government that faces a heavy debt redemption schedule this autumn.

But in typical fashion the mood was quickly spoiled after the Prime Minister sacked the widely respected head of the national gas company Naftogaz, who has been a key figure in pushing through the very successful energy sector reforms in the last five years. The decision brought down condemnation of undermining corporate governance and a rebuke from the International Monetary Fund (IMF) which is still not happy with Ukraine’s commitment to the reform effort.

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