UKRAINE: August country report by Credo Line 

The present report is a product of an independent analysis conducted by the Analytical Team of Information & Rating Agency Credo Line.  The report presents the Agency’s opinion only and thus bears a subjective character.  The Agency regards the given product as the thorough research carried by inside analysts and recommends it for clarifying and advising purposes.  The whole contents of the report or any part of it separately can be published or reproduced in various sources with Credo Line Agency copyright notice. Should you have any comments or questions as for the present report, please feel free to contact the responsible Financial Analyst of the Agency: Evgeniy Savchuk,office@credo-line.com

Main economic tendencies

Economic activity during August 2014 as in previous periods continued to be negatively affected by political unrest, especially in Eastern Ukraine and related uncertainties. The first half of 2014 Ukraine has finished with 4.6% GDP decrease.

Currently significant improvement in Ukrainian industry performance is not expected. This is due to the fact that there are still factors that contribute to the decline of production. Among them, it is worth noting the situation in the east of the country, the recession in foreign markets and the reduction in domestic demand. Military operation in Donetsk and Luhansk regions not only disrupts the activities of large enterprises, but also breaks production chains. For example, many iron businesses are situated in Dnipropetrovsk and Poltava regions. However, they are directly dependent on supplies from the east. At the same time, the situation on foreign markets also worsens. Since the beginning of the year, prices for Ukrainian products and demand volumes have been reduced. For the period January-July 2014 exports decreased by 5.3% (to USD 33.4 bln) compared to January-July 2013. However, trade surplus (USD 880.4 mln) during the first seven months was saved. This was caused by significant imports decrease. During January-July 2014 import declined by 20.5% yoy. At the same time, exports of some commodity groups, such as ferrous metals, crops and other food products remained rather high. Crops export increased by 22.3% compared to the same period last year.

Domestic demand directly depends on the income of citizens. At the same time, real wages in July decreased by 2.3% compared to the previous month. Currently, the state does not have resources to stimulate domestic demand. It should be noted that despite all the external factors, the observed decline in production is quite natural. This activity is the most undeveloped in Ukraine. Outdated technologies and equipment have led to a decrease in the share of industrial production in GDP to 25%.

Industrial production index in Ukraine in August 2014 was equal to 78.6% compared to August 2013. Compared to July 2014, industrial output in August 2014 decreased by 12.7%. Extractive industry demonstrated the most rapid decline. In August 2014 it fell by 27.4%. At the same time, processing industry volume decreased by 19.2% yoy.

Output reduction in Ukraine’s industrial production in January-August 2014 was mainly attributed to falling of the Ukrainian currency and also with the ongoing hostilities in the east of Ukraine. As in previous months Donetsk and Luhansk regions were the leaders in industrial production rates reduction. The territory controlled by pro-Russian rebels includes a large part of Donetsk coal basin which is the largest in Ukraine. Thus, coal extraction in this region is currently impossible. This results in problems with functioning of thermal power plants, metallurgical production, machine building and many other industries. Destroyed railroads in Donetsk region also make it impossible to transport energy carriers.

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