Ukraine Freight Transport Report 2007

After high drama and uncertainty early in 2006, Ukraine's oil and gas pipeline business now looks a little more stable. On the political front, Kiev has appeared to settle into a form of negotiated cohabitation between pro-Western President Viktor Yushchenko and pro-Russian Prime Minister Viktor Yanukovich. The 'two Viktors' pull in different directions on a number of key issues, but seem to have agreed to keep their conflict within certain parameters. Yanukovich's friendly relations with Russia have already paid off. Russia has agreed not to raise gas export prices as much as was feared in 2007. That means that gas pipeline throughput is less likely to face a sudden Russian cut-off, as it did in the winter of 2005-06. In fact, Kiev was able to watch the 2006-07 'gas war', which was fought between Moscow and Minsk, from the sidelines. On the oil front, Ukrainian plans to reverse the flow of the Odessa-Brody pipeline seem to be on hold for the moment because there is not enough Caspian crude on the market to make the proposal viable. In our latest Ukraine Freight Transport Report, BMI concludes that, despite the uncertainties, oil and gas pipeline throughput will grow at an annual average rate of 4.8% over the next five years. Various factors support this prediction. As mentioned, for the moment political forces seem to have reduced the risk of a new Moscow-Kiev pipeline confrontation. Additionally, the country's economic outlook is less gloomy than it was at the beginning of 2006. BMI predicts average annual GDP expansion of 5.0% in 2007-2011. Ukraine's transport sector has been lagging rather than leading economic growth. Between 2002 and 2006, freight transport, measured in total tonnage transported, grew by an annual average of 4.5%, compared to a GDP growth rate of 7.1%. Despite the advent of a new government, we do not now expect a radical transformation of the situation. Under our current forecasts for 2007-2011, GDP growth will average about 5.0% and freight transport growth will push out only a little way in front with average growth of 5.3%.

Ukraine retains great potential as an important transport link between East and West. Against the backdrop of the economic growth expected in the next few years, we believe air cargo will lead the way, boosted by the establishment of closer links with Europe and the expansion of low-cost airlines (LCCs). We are now forecasting average annual growth in airfreight tonnage of 11.9% in 2007-2011. Road haulage will grow at an annual rate of 5.8% during the forecast period. We believe there is strong potential for road haulage growth, but it will take some time to gather pace, as it is dependent on greater investment in the country's highway network and modernisation of the vehicle fleet. Cargo carried by water (both maritime and inland waterways freight) will grow by 4.5% per annum. Rail freight growth will be 5.3% per annum, with the poor financial state of the railway system acting as a constraining factor. Ukraine has a composite freight transport business environment ranking of 33 (out of a theoretical maximum of 70.0, and in the context of a regional European average of just over 39). Its relative strength lies in its transport intensity index (a measure of the dynamism of foreign trade); it also has potential in terms of relatively low long-term political and economic risk and the regulatory environment. Areas of current weakness include freight growth rates, infrastructure and the competitive environment.. The total value of transport and communications GDP will rise to US$25.56bn in nominal terms by 2011, representing 14.5% of Ukraine's GDP. The transport and communications sector employed 1.17mn people (6.8% of the labour force) in 2005. We see that figure falling marginally to 1.12mn by 2011, although it will remain unchanged in relative terms, at 6.8% of the total labour force.