Ukraine Food and Drink Report Q2 2008

Ukraine received a green light for World Trade Organisation accession in early February 2008, a process which should be completed in the coming months. For Ukraine's export oriented food and beverage producers and multinationals in the retail and processing sector, WTO membership is a major positive step, easing access to both raw materials and promising better access to Western markets in the future.

For most mass grocery retail (MGR) players, the move has less immediate impact, but is a very important and welcome sign that the government can actually deliver on policy and join multi-lateral institutions.

After the political chaos of the last few years, accession underlines, for big business at least, that the newly installed government under Prime Minister Yulia Tymoshenko is capable of delivering on trade and economic policy.

At this point, Ukraine needs a measure of competent intervention in the economy. Food price inflation is a major issue, as in other CIS markets. Unlike in Russia, there is little likelihood the government will be able to extract a voluntary price freeze from retailers, nor should it. Still, the government needs to act to tame consumer price inflation (CPI), which reached a six-year high in December 2007, at 16.6% year-onyear (y-o-y). The price of flour (up 36.9% y-o-y) and edible oils (up 70.4% y-o-y) were major culprits, with seasonal factors exacerbating the situation. Tearing down trade barriers is a good start, as high global food prices are exacerbated by a hugely dysfunctional and sheltered agricultural sector. At the moment, BMI is forecasting CPI to average 12.6% in 2008, but then decline towards single digits later in the year.

Attempts to tame inflation could imperil Ukraine's ongoing consumer spending boom, itself one of the drivers of current growth. Official statistics showed that overall retail spending jumped 28.8% in 2007, with Kiev growing a full 34.0% and even poorer regions such as Chernovitsk posting strong growth. As Russia's Gazprom and the Ukrainian government squared off in early February 2008 over gas prices, Ukraine's consumers appear to be shaking off worries about spiking energy and food prices and continuing to spend. Despite these worries, Denmark's Netto discount chain made a striking endorsement of the market's prospects, with the announcement in January of a hugely ambitious plan to open an initial 30 stores simultaneously in 2010, with plans for perhaps as many as 1,000 others. January also saw announcements by nearly all of the local chains of major investments in new stores. These plans require financing and 2008 may see local and international stock and bond market debuts for Ukrainian MGRs.

Conditions in Ukraine remain delicate, as reflected by the country's continued poor overall showing in BMI's Business Environment Rankings. Strains between the prime minister and her sometime ally, President Yushchenko, were already apparent in early 2008. The current flurry of activity by the government could be read as leaders acting in a hurry before the country lurches into another constitutional crisis. However, for the moment, to the relief of retailers and food and drink makers, consumers are keeping their pocketbooks open.