The collapse of demand in Ukraine reduced the country’s trade imbalance

The collapse of demand in Ukraine reduced the country’s trade imbalance
Ukrainian agrarians are now responsible not only for harvests, but also the country’s balance of payments
Photo: Reuters

The deficit in the current account fell 3.4 times over nine months to US $3.3 bn and more than six times to US $900 mn over Q3 2014, the National Bank of Ukraine informed. A reduction in the domestic demand of consumers and businesses will help balance the current account. In August-September, when the resistance in the eastern regions of Ukraine was exacerbated and the devaluation of the hryvnia went through a second wave, the fall in import considerably accelerated compared to the previous months. In September, the decrease in the import of goods and services reached 38%. Due to this the savings of hard currency amounted to US $3.7 bn in the first month of autumn alone.

Weak appetite

Devaluation of the hryvnia the rate of which dropped in value on the interbank market by 69-80% over the period January-September this year and 19-27% in Q3 2014 alone to UAH 14-15/USD forced Ukrainians to reorient themselves on domestically produced goods or totally refuse to make major purchases of goods. Over September non-energy import fell by one third. Also, foreign deliveries declined in connection with the decrease in the purchase of gas. For example, while in September of last year Ukraine imported a record-high 4.4 bn cu m of gas, in September 2014 it only purchased 1 bn cu m of gas from Europe.

In its turn, the war in the east of the country dealt a blow to investment import. The decline in industrial production in September reached 16.6%. Moreover, this indicator in the Donetsk and Luhansk oblasts fell by 60% and 85% respectively, which can be equated with the dynamics in August. As a result, the delivery of machinery, equipment and means of transport from abroad fell by 29% in September and by 37.3% since the beginning of the year on aggregate. The import of industrial goods fell by 26% and 18.5% accordingly.

The trend of the decrease in imports will continue in the foreseeable future, mainly due to the prolongation of combat actions in the east. “Production in the country’s key sectors is not likely to improve in the nearest six-nine months,” Director of the Analytical Department of SP Advisors Vitaliy Vavryshchuk believes. Agreeing to these assumptions, Chief Economist at Dragon Capital Olena Belan notes: “Taking into account that the improvement of industrial production in September was dictated mainly by temporary factors and that the conflict in the east continues, we confirm our recently reviewed forecast of a decline in industrial production in 2014-2015 of 13% and 10% respectively.

Over nine months industrial production fell by only 8.6%. This means that the Ukrainian economy can expect a deepening in decline, which will be accompanied by a further reduction in the import of products necessary for production.”

Agrarian merits

The gains from the reduction in import would be more significant for the Ukrainian economy with a growth in export. However, this is not happening. Since the start of the year, the export of goods and services fell by 15.9%, including by one fourth over the last quarter. In September alone Ukraine fell US $1.9 bn short of proceeds from exports.

Ukraine’s agricultural sector basically accounts for the majority of export. For the second month in a row the output of the country’s agro-industrial complex is the strongest export group and the only sector showing growth (8.3% in September). “This is mainly thanks to the increase in shipments of grain crops of the new harvest (by 19.4%), oil and fats (by 58.3%) predominantly to the markets of the EU, India and Egypt and meat products (by 46.4%) to the EU and Iraq,” the NBU calculated.

At the same time, the sale of all other types of Ukrainian products abroad continues to fall. The delivery of machine-building products in September fell by 35.6% due to the destruction of production capacities and the reduction in deliveries to Russia. In addition, the export of railway transport fell 75%. The export of metallurgical products also fell in September by 28.9% due to the shortage of raw material and difficulties delivering products to enterprises in the eastern part of the country, the NBU explained.

At the moment, it is premature to expect the revival of export with the exception of Ukrainian agricultural commodities. Vavryshchuk believes the decline in export will accelerate in connection with the situation in the Donbas region. Until it is not resolved, Ukraine’s main exporters will not be able to regain their previous volumes of output.

Besides that, Russia’s restrictions will continue to undermine deliveries of Ukrainian domestic products. The EU trade preferences so far do not compensate for Ukraine’s losses on the Russian market.

As Capital wrote earlier, in January-August 2014 the volume of export of Ukrainian products to 28 EU member countries grew by 13% compared to the same period in 2013, while the shipment of Ukrainian commodities to Russia fell by 25.5%.

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