Euro Exim Bank

Ukraine; You Saw; You Invested…

ImageIs it time to start looking to emerging markets once more?  Judging by official stats recently released in Ukraine it is.  Investment is flowing into the Ukraine faster than the mighty Dnieper river flows into the Black Sea. 
According to a new report from the nation’s State Statistics Committee, foreign investors poured nearly a billion dollars ($ 925.7 million) into the Ukrainian economy, which is a whopping 29.1% more than in January-March last year.  According to Goskomstat, EU based investors provided the bulk of investment.

In March 2011, Ukraine enjoyed solid economic growth, prompting the World Bank Global Economic Prospects released in June 2011 to forecast annual economic growth of 4.3%.  The World Bank undercut it’s optimism with one caveat, however, warning that “Ukraine is susceptible to external shocks from higher energy prices.”  The World Bank explains that medium-term growth is expected to be constrained to around 4.3 percent “because of weak productivity growth tied in part to the un-diversified nature of the economy and lack of competition".

In March 2011, Ukraine enjoyed solid economic growth, prompting the World Bank Global Economic Prospects released in June 2011, to forecast annual economic growth of 4.3%.

The World Bank notes that the annual figures will run thus: in 2011 the Ukrainian economy will grow by 4.0% in 2012 – 4.5% in 2013 – 4.6%. "Globally, GDP is expected to grow 3.2 percent in 2011 before edging up to 3.6 percent in 2012," said the World Bank’s chief economist, Justin Yifu Lin.
ImageIndeed, since March 2011, natural gas imported for chemical industry cost $170 per m3, while the ‘regular’ price for imported natural gas stood at $264 per m3 in 1Q 2011 and grew to about $295.6 per m3 in 2Q 2011.  A natural gas price discount and stronger seasonal demand for fertilisers may have a positive impact on industry performance in the coming months. 
Weaknesses in the Ukrainian industrial sector have been compensated for by better performance of domestic trade – namely construction and non-financial services. Given the remarkable start of the Ukrainian economy in the first two months of the 2011, the Government’s economists expect GDP to grow by more than 5% year-on-year in the first quarter of 2011.
Of course, Ukraine’s rising stock is being lifted by external forces – mainly through renewed vigour in select EU countries which are beginning to reinvest in places like Ukraine.  But strong growth in domestic demand supported solid growth of the Ukrainian economy in the first quarter of 2011, is also a major driving force behind the nation’s revival. 
ImageAccording to official stats, the growth was led by the industrial sector, as industrial production grew by 9.7% over the first three months of the year.  In March, the World Bank’s fears were realised when growth in the industrial sector slipped back one point – but this still polls an 8% year on year growth, which isn’t to be sniffed at. 
Any underperformance in the industrial sector can largely be blamed on slight negative growth in export-oriented metallurgy, machinery and chemicals.  This fall in demand was compensated for by positive performance in retail, construction, and services.
However, a closer look at the figures and trends shows that the Ukrainian agribusiness is one sector that investors should be keeping a keen eye on – though this does come with one gentle caution.  But more of that later…



Ukraine’s famously fertile soil – long seen as the ‘breadbasket of Russia’ is fast becoming the breadbasket of Europe.  The grain industry generates 15 percent of Ukraine’s exports – $7.5 billion.  The nation has benefited from recent investment in agriculture.  This year, the country planted a record 3.4 million hectares (8.4 million acres) of corn, 600,000 more than a year earlier, according to First Deputy Agriculture Minister Mykola Bezuhlyi. 
ImageUkraine is projected to have a slightly better grain harvest than in 2010.  In fact, the government is predicting that the Ukraine will produce more than twice as much grain as it harvested on average for the last five years.  As such agriculture could potentially become the driver of economic growth in Ukraine.
This prediction will be particularly prescient if global food shortages prove accurate over the coming decades.  In short, the nation’s abundance of improbably good fertile land could easily equate to big money to be earned from food production.  The fly in the ointment here, as far as investors are concerned lies in Ukraine’s contradictory agricultural policy, according to a written report by Olga Pogarska of the U.S.-Ukraine Business Council (USUBC).
“On the one hand, there are a number of state support programs to stimulate agricultural development in Ukraine,” Pogarska says.  “On the other hand, the government set narrow grain export quotas despite a sufficient grain stock amid an above-average harvest in 2010 and introduced non-transparent export quota distribution schemes”
ImageAnother problem agribusiness investors already operating in Ukraine have experienced is that most of the agricultural land in Ukraine is divided into tiny plots, each allocated to a family.
Vasili Pryza, a regional head of Ukraine’s farmers’ union, explained in a recent BBC report on the region that he is not against foreign investment, but that ultimately it must be for the good of the Ukrainian people, not for overseas corporations:
Image"In this region we are looking for people who will treat the land properly. We are looking for investors who will invest in things that are in our interest.
"It doesn’t matter to me if you are English, Chinese or American, if foreigners do what is good for this place. That is just my personal opinion."
Ukraine is actually the largest contiguous country on the European continent – an irony that isn’t lost on Pogarska.  “Restrictions on land ownership are often cited as one of the main impediments for the development of Ukraine’s agricultural sector,” her report explains.  “The abolishment of the moratorium is in principle, a desirable step.”