Embarking on a New Growth Cycle

UKRAINE - Report 06 Sep 2017 by Vladimir Dubrovskiy and Dmytro Boyarchuk

The economy is performing far better than expected. Derzhstat, the statistics agency, reported a 2.4% y/y GDP increase in Q2, twice faster than we initially projected. Booming local investment — +22.5% y/y for H1 — and recovering consumption are the drivers. Remarkably, this result was achieved despite a slight drop in industrial output, and a break in relations with occupied Donbas.

This upward trend, coupled with a new wave in price growth among exports, tells us that the economy is beginning a new growth cycle. We may be able to forget about crisis aftermath: the main discussion could be about new heights in growth potential.

Still, political developments are worrisome. Pre-election jockeying has already started, and President Petro Poroshenko’s first steps in this game have been really disappointing. First, he stripped Mikheil Saakashvili, the ex-president of Georgia and now leader of the new opposition party “The Movement of New Forces,” of his Ukrainian citizenship. This has caused a serious stir: many observers compared it to ex-president Viktor Yanukovych’s imprisonment of Yulia Tymoshenko. Oddly, this makes little sense, since Saakashvili lost popularity among Ukrainians long ago.

Another scandal has hit the Poroshenko administration, over efforts to neutralize anti-corruption activist and head of the board of the Anti-Corruption Center Vitaliy Shabunin, who has been focusing on matters very sensitive to rent-seekers. Official efforts were made to draft him into the army, complete with fake journalists tracking him to search for information that would discredit him. When Shabunin punched a stalker in the face, he was accused of “inflicting severe injuries” on a “journalist,” and threatened with up to three years in jail.

Finance Minister Oleksandr Danyliuk is also under attack. Among his “crimes,” are abolishing the tax police, shutting down VAT-refund schemes and streamlining tax reporting. MPs and Prosecutor General Yuriy Lutsenko called for his dismissal, and even opened a criminal case on him. Tension has eased, probably due to approaching talks with the IMF. But we should expect the story to resume as elections near.

The privatization process has finally restarted. At the end of July, the State Property Fund announced the sale of shares in eight power companies. As of this writing, 25% stakes in four utilities have been sold, generating UAH 2.9 billion – more than the combined privatization revenues for the last four years. DTEK Energy, owned by Ukrainian oligarch Rinat Akhmetov, bought all four companies.

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