The last time Ukraine’s economy avoided disaster was a year ago, when Russia’s RosUkrEnergo almost trebled gas prices to Ukraine. As President Putin put it: “Our western friends very actively supported the Orange events in Ukraine, and we can perfectly see what has been happening there all this time. If you want to support everything that is happening there, you pay for it. Why should we do that?”
Many analysts thought a gas price that rose from $50 per 1,000 cubic metres to $130 in July 2006 would hit the economy hard. After all, around 40% of GDP was accounted for by enormous chemical and steel companies whose profits relied on cheap gas. As Kamen Zahariev of the EBRD puts it: “Ukraine was probably the least efficient energy country in the world.”
And yet, somehow, the economy managed not only to survive but to grow last year, with GDP up by 7%. How did it do this? In part, GDP was up because 2005 was a year of low investment, as Ukrainian big business hesitantly found its feet after the Orange Revolution. It was frightened in particular by former prime minister Yulia Timoshenko’s threats to reprivatize large parts of the economy.
Also, the economy was given a big boost by metal prices last year. Andrei Ysachev, manager of the Moscow fund Vector Capital, says: “Ukraine is similar to Russia in some respects. Our economy is supported by oil and gas, theirs by metals.” Metals exports grew by around 40% year-on-year, while exports from the chemicals sector, which has been particularly hit by gas price hikes, also grew strongly.
Forced change
These sectors are being forced to adapt, or be taken over. The chemicals sector is increasingly being bought by Russian companies, says Kamen Zahariev. Metals companies are also being bought – Mittal bought the Krivorizhstal steel mill in 2005, and there are reports that the Industrial Union of Donbass (IUD) may merge with Russia’s Gazmetal.
Industrial units are rapidly undergoing large modernization programmes to make themselves more energy efficient. IUD is one example. It signed a $400 million deal with the EBRD to use waste gases from the Alchevsk steel mill as an alternate source of energy.
Ukraine is also looking for independent sources of energy. Last year, Vanco and the Rothschild Family’s JNR Eastern Investments agreed to invest at least $60 million to explore a 13,000 square kilometre expanse in the Black Sea.
But the economy is also being given a push thanks to two other factors. First, its banking sector is very liberalized, and is likely to be over 50% owned by foreign capital by the end of this year. That’s helping to pump a lot of capital into the banking system, and releasing the economy from the capital adequacy problems and lending inefficiencies that are holding back Russian banks.
Secondly, the economy has a booming consumer sector, with supermarket chains like Furshet or DIY stores like Nova Liniya seeing very strong revenue growth. Again, foreign capital is flooding into the sector – the brewery business, for example, is now majority foreign-owned. So the economy’s openness to foreign capital and the strong domestic consumer market are helping drive GDP forward. —J.E.