Elections are driving greater uncertainty in Ukraine this year

After the drastic drop in economic growth since the 2014 Maidan Revolution, businesses have still yet to see a solid bounce back – and, to be sure, a stronger bounce back still won’t be coming. But this doesn’t mean there aren’t growing opportunities for investment. Ukraine should still be viewed as an appealing market with lots of potential in the coming years. To win in this environment, firms need to segment by geography and income while planning for hryvnia and demand volatility in light of political concerns, particularly between now and through presidential and parliamentary elections by late 2019.


Since 2014, the nation’s political situation has defined its growth, and it will continue to do so in the coming years. After significant macroeconomic and political achievements in improving efficiency and reducing corruption in the energy sector, closing down dozens of banks, rebuilding forex reserves, developing a strong civil society, among other successes, the country has now hit an impasse as campaigning has begun in advance of elections in 2019. Very few, if any, politicians want to enact additional reforms and measures that further burden the citizens or otherwise upset those elite vested interests who are also the primary backers of so many politicians. In particular, the primary reform left notably unaddressed – and in recent months openly attacked – remains the fight against corruption, which would naturally target the oligarch class that maintains control over the nation’s economy and politics.

Impact on the Economy

The lack of political will and reversion back to some of the political ways of the old Ukraine is not without effect on the economy. Continued progress against corruption – as well as other notable reforms – are required in order to boost the economy, attract stronger investment levels, and obtain critical Western funds to finance the budget and fulfill reserves in the years to come. Recently, the World Bank’s Ukraine director sent a letter to the government warning that a bill on the anti-corruption court must be brought into line with international expectations or Ukraine would lose US$ 800 million in World Bank aid this year. The letter followed a similar one from the IMF country director warning that the court would not be independent.

The lack of financing threatens the nation’s ability to pay debts: from 2018 to 2021, Ukraine must repay more than US$ 7 billion each year, and its forex reserves of US$ 18.6 billion are not sufficient to repay these debts. The lack of Western donor funds will cause financial stress in 2018, despite plans to issue US$ 3 billion in Eurobonds, whose rate depends greatly on IMF cooperation and the political situation. Likewise, investor confidence has fallen over the past several months in light of renewed concerns over corruption and the courts, according to the European Business Administration (EBA). Some 58% of CEOs responded that they are “not satisfied” with the business climate, and the overall rating of the operating environment fell in H2 2017 for the first time since the Maidan revolution in 2014.

Thus, after roughly 2% YOY GDP growth in 2017, we have recently revised down Ukraine’s growth from 3% YOY to 2.5% YOY in light of weaker investment levels resulting from an adverse political climate.

It is not all doom and gloom. Ukrainians themselves are more optimistic about the economy (according to a poll by the International Republican Institute): in October 2017, 42% of the 4,500 respondents predicted the economy would improve or stay the same over the next year, compared to 41% who said it would worsen, while one year earlier, 32% of respondents to the same poll predicted economic improvements, compared to 54% who predicted a worsening. The country continues to grow and consumer spending remains a strong part of that. Retail sales grew by 9% YOY in 2017 as real incomes rose by 20% YOY, in part thanks to a doubling of the minimum wage in January 2017. With the minimum wage again increased this past January (by nearly 20%), wages will continue to see a boost particularly as inflation levels moderate over time.

Meanwhile, industrial production struggled in 2017 – falling by 0.1% YOY – primarily as a result of the blockade imposed on imports of coal and other resources from the Donbas. At a national level, increased trade with the EU, Russia, and other countries will help industrial output recover a bit more strongly this year. More pointedly, B2B MNCs should focus strongly on Western regions, which are seeing incomparably stronger performance: in 2017, Ternopil saw output rise by 23% YOY; Rivne by 14%: and Ivano-Frankivsk by 14%. These imbalances in production between the east and the west will continue throughout 2018, which in turn is likewise driving stronger wage growth in those regions seeing improved business activity.

The Maidan Revolution of 2014 incited a long and gradual process that slowly moves the nation in a more investor friendly direction over time. During the transition, the economy and operating environment will continue to improve and attract greater investment, drive up wages, and increase trade. Firms with a more strategic view of the market should stay the course, embrace a nuanced regional strategy, and segment customers to not only outperform in the market in 2018 and 2019, but also to get ahead of the competition to set themselves up for stronger opportunities that present themselves over time.

For our latest updates and insights FSG clients can access the 2018 CIS Regional Outlook.

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