Country Report Ukraine February 2009

Outlook for 2009-10

• The domestic political scene will remain highly uncertain and prone to instability in the run-up to the presidential election that is due in early 2010.
• Relations with Russia are expected to remain tense until the presidential election. The two leading contenders, Viktor Yanukovych and Yuliya Tymoshenko, are likely to adopt a friendlier position than the incumbent.
• We assume that the authorities will take sufficient policy steps to trigger the release of further tranches of IMF support in 2009-10. However, the risks to this outlook are considerable, given the lack of political consensus.
• There will be a deep recession in 2009, with real GDP forecast to contract by 6%, and to recover only slowly in 2010. The main downside risks to this outlook stem from the uncertain picture for the hryvnya.
• The currency will weaken sharply in 2009. The current-account deficit is forecast to narrow as a result of reduced import demand.

Monthly review

• A bitter row with Russia over gas supplies for 2009 erupted into a Europe-wide energy crisis in January 2009. A large number of European countries suffered severe gas shortages because of the interruption to transit flows.
• On January 19th the prime minister, Ms Tymoshenko, signed a deal with her Russian counterpart, Vladimir Putin, to allow gas to begin flowing again.
• Under the deal, from 2009 onwards Ukraine will pay a price linked to the so-called European gas price, with a 20% discount in 2009, followed by application of the full rate in 2010.
• We estimate that the deal will translate into an average gas import price of US$235 per 1,000 cu meters in 2009.
• Although there have so far been few signs of social unrest in the country, there are signs that the dire economic situation is beginning to erode Ms Tymoshenko's popular support.
• The governor of the National Bank of Ukraine (NBU, the central bank), Volodymyr Stelmakh, has taken a leave of absence, amid growing political pressure for his resignation.
• Real GDP slowed to a preliminary 2.1% in 2008, with output contracting by 10% year on year in December. Inflation averaged 25% in 2008.
• The domestic banking sector has suffered from a rise in bad loans and a shrinking deposit base.

Source: Country Report

This report covers the following industry codes:
SIC Code: 49;60;37
NAICS Code: 22;52;336