Our comprehensive assessment of Ukraine's operating environment and the outlook for its leading sectors are formed by bringing together a wealth of data on global markets that affect Ukraine, as well as the latest industry developments that could impact Ukraine's industries. This unique integrated approach has given us an impeccable track-record for predicting important shifts in the markets, ensuring you’re aware of the latest market opportunities and risks in Ukraine before your competitors.

Country Risk

Ukraine Country Risk

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Core Views:

  • Ukraine's economy is headed for a major recession which it is unlikely to emerge from until 2016. Ongoing fighting between the Ukrainian army and pro-Russia forces in the east, and the persistent threat of a military invasion by Russia, raises huge challenges to our ability to forecast the economic outlook over the coming quarters to any meaningful degree of confidence.

  • EU/IMF financing package will require reforms, including: FX liberalisation (although this is likely to be implemented in stages), partial removal of gas subsidies and potentially pension reform.

  • Despite the new IMF package, Ukraine's fiscal position remains poor and is likely to deteriorate over the coming quarters. FX shocks, extended fighting and the growing risk of a banking sector bailout all pose significant challenges to the sovereign debt profile....

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Ukraine Operational Risk Coverage (9)

Ukraine Operational Risk

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Ukraine presents severe operational risks to incoming businesses and potential investors. The country is riven by violent domestic unrest and secessionist regions threatening to break away entirely. Moreover, Russian involvement poses significant risks, not only of interstate conflict, but also of power cuts and gas shortages, as Ukraine relies on Russian gas imports for its energy sector. The utilities sector is also the source of further issues with regards to the potential water shortages in the eastern regions and Crimea if the central government does not renew water supplies to these areas. In addition, the logistics infrastructure faces the permanent loss of a major port, and if the Eastern regions secede, the western side of country faces the loss of overland trans-border connections with Russia. The east would face a similar cessation of connections with Western Europe. This has serious connotations for trade flows and the bureaucratic requirements for...

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Ukraine Crime & Security

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As of June 2014, Ukraine had been experiencing a low-level separatist conflict in the east of the country since March, when it also lost control of Crimea as Russia annexed the peninsula. Crimean and other separatist rebels are backed by Russia, which deployed tens of thousands of troops along Ukraine's eastern border in the spring of 2014. Unsurprisingly, the conflict, along with Ukraine's presidential election on May 25, has completely dominated the country's domestic political and international discourse. All assessments of criminal, terrorism, and interstate security risks faced by Ukraine must take into account the possibility of extended fighting in the east of the country.

The Ukrainian government considers separatists in the east of the country as terrorists and depicts its military action against them as anti-terrorist operations. In practice, however, the conflict in Eastern Ukraine resembles an interstate conflict, given that the...

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Ukraine Labour Market

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The evolution of the Ukrainian labour market has been a gradual one, moving from an agrarian state to an industrial one under the Soviets, before finally making steps towards a service-oriented economy. The structure of Ukraine's workforce provides an indication of how the economy is developing. Around 40% of the population have jobs in the service sector, another 40% work in industry and 20% work in agriculture and forestry.

The balance can be expected to shift towards the service sector over the long term as Ukraine shifts towards higher value added industrial outputs and greater growth in retail and financial services occurs. In the near term, there is a shortage of skilled technical managers and engineers, whereas the market for lawyers, economists and financial services specialists is well catered for.

Ukraine has an advantage with relatively low unit labour costs and a highly skilled and educated workforce (with a...

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Ukraine Logistics

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The 2014 Ukrainian Crisis has increased the risk  level for companies operating in Ukraine and made the country less attractive to investors. The BMI Logistics Risk score for Ukraine highlights this, but also takes into account the entrenched challenges that go beyond the current crisis and damage investor interest in the longer term. Ukraine scores 45.5 out of 100 in the BMI Logistics Risk Index, below the global average, ranking the country in 99th place out of 170 states globally and 19th out of 30 emerging Europe states. The 2014 Ukraine Crisis has placed downward pressure on this score, but we note that a lack of diversity and an overreliance on Russia, across all pillars of the BMI Logistics Risk Index, increases the threat of operational risks and deters investment.

Ukraine's economy is inextricably linked to Russia, with its neighbour its...

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Ukraine Trade & Investment

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Ukraine's investment environment remains hostile and unpredictable. The ousting of former President Viktor Yanukovych during the 2014 Ukrainian revolution, followed by the annexation of Crimea by Russia and increasingly violent secessionist activity in south-eastern Ukraine, has severely heighted political risks, and the country still possesses significant macroeconomic imbalances. We maintain that Ukraine will remain attractive only for the most risk-tolerant investors for the foreseeable future. Overall, Ukraine scores 44.4 in our Trade and Investment Risk Index, worse than Belarus (48.0) and Russia (48.7), ranking it 98th globally.

Some positive developments have occurred: the threat of renationalisation and stalled privatisations, which until recently loomed over the investment climate, seems to have receded, and property rights have become more secure. Issues of transparency, corruption and red tape are also being addressed, albeit...

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Ukraine Industry Coverage (20)

Agribusiness

Ukraine Agribusiness

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BMI View:  Despite ongoing tensions with Russia, Ukraine will see another strong grain harvest in 2014/15, although it will experience year-on-year decline due to the record harvests of 2013/14. In our view, ongoing tensions between Russia and Ukraine will pose downside risks to exports as we could see disruption in transportation for the crop. Also, we see downside risks to our production outlook for grain, livestock and dairy on the back of deteriorating credit conditions in the country.

Agribusiness Market Value
BMI Market Value By Commodity (2010-2018)
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Autos

Ukraine Autos

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Total vehicle production in Ukraine was reported at 28,247 units in 11M14, a drop of 35.9% y-o-y. BMI expects a decrease in production over the remainder of 2014 and into 2015 as trade with Russia, Ukraine's largest export destination, is likely to be curtailed in the coming months on the back of ongoing political tensions. We retain a bearish view on the country's macro picture, which we expect this to deteriorate further. BMI holds the view that the country's manufacturing activity and business environment in general will further deteriorate and believe this will weigh on output growth.

The political and economic crisis will curtail exports as factories in the more industrial East Ukraine slow production due to lack of supplies caused by the instable security situation. Low consumer confidence will cause shrinking demand for passenger vehicles. We expect these dynamics to continue into 2015....

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Commercial Banking

Ukraine Commercial Banking

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Commercial Banking Sector Indicators
Date Total assets Client loans Bond portfolio Other Liabilities and capital Capital Client deposits

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Defence & Security

Ukraine Defence & Security

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BMI View: We expect Ukraine to spend USD3.2bn on defence in 2015, a noticeable decline from previous years, despite the ongoing security situation. We expect Ukraine to spend less than USD4bn a year on defence through to 2018, rising to USD4.2bn in 2019.

As a result of Ukraine's political crisis and civil war, in 2014 Kiev decided to spend up to USD697mn on modernising the military. The conflict has exposed failings in the Ukrainian armed forces, including a lack of sophistication of the country's military equipment and the training levels of its troops.

We have given Ukraine an overall security risk index score of 49 out of 100 for 2015. On average, the country has had an overall security risk index of 58 for the period November 2007 up to and including 2015. We believe Ukraine has a high chance of becoming involved in a major interstate conflict, as well as a...

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Food & Drink

Ukraine Food & Drink

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BMI View: The outlook for Ukraine's economy has deteriorated rapidly since the publication of our previous quarterly Food & Drink reports. Our Country Risk team believes that Ukraine will experience a deep recession in 2014 and 2015, and forecasts near-stagnant economic growth through to 2018. Recession in 2014 will be driven by the devaluation of the hryvnia and major trade disruption due to the elevated risk of a military escalation with Russia. Soaring inflation, substantially tighter government spending, diminished purchasing power and extremely tight credit conditions will also contribute to the dismal economic outlook.

The economic slowdown has intensified over the course of 2014. The National Bank of Ukraine estimates that real GDP...

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Freight Transport

Ukraine Freight Transport

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The Ukrainian freight industry is facing headwinds in 2015 as Ukraine's economy is set to remain in a deep recession throughout 2015 as the conflict in the east rages on. Soaring inflation, a crippled banking sector and severely weakened currency will keep the wider economy close to the brink of collapse over the coming quarters.

The disruption to industrial activity in the east - where the bulk of Ukraine's main industrial exports including steel are produced - has led to a decline in exports, posing problems for the freight industry going forward. Capital controls implemented by the authorities in order to cap exchange rate pressure are also hampering currency convertibility and by extension, international trade. Real export volumes fell by 7.4% year-on-year (y-o-y) in Q2 2014, from 2.3% y-o-y in the previous quarter, and we estimate a full year contraction of 15% in 2014, followed by a further 3.0% in 2015, before growing very modestly by...

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Infrastructure

Ukraine Infrastructure

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BMI View: As the political and economic crisis in Ukraine continues, the construction sector is expected to contract by a forecasted 5.1% in 2015. Primary victim to increasing fiscal, economic and investment problems remains the infrastructure sector, being inherently dependent on governmental spending. Also, joint ventures with Russia in the transport and energy segments are subject to high uncertainty as political tensions continue. Value growth has been revised downward again for 2015, with only the residential and non-residential sub-sector potentially showing some form of minor growth.

Resurfacing violent unrest in the eastern and southern regions of the Ukraine and worsening relations with Russia keep a firm grip of Ukrainian politics and the economy.

Key Trends And Developments

  • The country remains in...

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Insurance

Ukraine Insurance

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BMI View: The situation of Ukraine's insurance sector has deteriorated over the last year. The prospects remain bleak.

The assessment and transfer of risk is the essence of insurance. Many of the emerging markets that are surveyed by BMI are countries with a (very) difficult geo-political or security situation and/or very significant economic problems. Yet it is still common to find insurance companies that are thriving, thanks to their profound understanding of the local situation, ability to develop innovative solutions, strong brands and access to finance.

Ukraine is a rare example of an emerging market where the insurance sector appears to be struggling with the challenges. The development of premiums through 2014 (and 2015) in USD and EUR terms has been and will continue be constrained by the...

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Medical Devices

Ukraine Medical Devices

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BMI Industry View: The Ukrainian medical device market is expected to grow by a CAGR of 1.5% over the 2013-2018 period, a large fall compared with previous forecasts, caused by poor economic performance that has resulted from increasing political tensions with Russia. Demand for expensive medical equipment is largely met by imports, although the domestic industry is gradually accounting for a larger share. Diagnostic imaging exports have increased by five times since 2005...

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Metals

Ukraine Metals

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After back-to-back years of contraction in both production and consumption in the metals sector in the Ukraine between 2012 and 2013, the sector turned a corner last year. Despite being rocked by the ongoing conflict with Russia and the subsequent political and economic uncertainty BMI estimates that the sector bounced back to post a 3.5% y-o-y gain in output and a 3.1% y-o-y increase in use. Going forward,, Ukraine's metals sector will see modest growth over our forecast period to the end of 2018, with a handful of new projects to increase production growth. Production will not return to pre-crisis highs, however, due to global overcapacity and steel prices not making substantive gains over 2013 - they have, however, since improved. There are no major expansions on the cards, and no major players in either the aluminium or steel industries have announced substantial investment plans.  

Figures recorded during the...

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Mining

Ukraine Mining

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BMI View : We forecast modest growth Ukraine's mining sector output over our forecast period to 2018. Coal and iron ore will be the main drivers of volume growth. Nevertheless, Ukraine's mining industry value will stagnate over coming years as increases in coal and iron ore output will be counterbalanced by our forecast for a weakening of prices for these commodities. We anticipate Ukraine's mining industry value to grow on average 0.7% y-o-y from USD10.3bn in 2014 to USD10.6bn in 2018. The mining sector will decline from contributing 6.3% of GDP in 2014, to 4.6% of GDP in 2018.

Ukraine - Key Mines
...

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Oil & Gas

Ukraine Oil & Gas

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BMI View: While sustained interest from major international companies in Ukraine's gas reserves illustrates substantial underground potential, a worsening security situation and continuing political instability negatively affects exploration and production (E&P) activities. Recent tax hikes on oil, gas and mineral fuels are expected to act as a further deterrent to investment in Ukraine's oil and gas sector.

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Headline Forecasts (Ukraine 2012-2018)
2012 2013 2014f

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Petrochemicals

Ukraine Petrochemicals

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Ukraine is faced with civil war and economic meltdown and the souring of relations with Russia has cut off a major source of trade. For the country's petrochemicals industry, this is fatal in that it severely limits feedstock imports as well as finished product exports, according to BMI's latest Ukraine Petrochemicals Report.

In the first nine months of 2014, Ukraine saw declines in both rubber production down 13.7% year-on-year (y-o-y) and plastic production down 10.2% y-o-y. Ukrainian chemicals output declined by 12.5% y-o-y to UAH34.3bn. This followed a 10.6% decline in 2014. Conflict has damaged infrastructure and factories in the eastern oblasts, undermining power supply and petrochemicals production. The petrochemicals industry may not recover over the forecast period as the legacy of conflict weighs down the country's industrial base and the destruction of essential infrastructure.

Several...

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Pharmaceuticals & Healthcare

Ukraine Pharmaceuticals & Healthcare

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BMI View:  In line with our view, price inflation is contributing to pharmaceutical volume drop-off in Ukraine. Sales have risen in local currency terms, but declined in real terms. We see the remainder of 2014 and 2015 as being particularly challenging within Ukraine owing to upcoming headwinds and distressed market conditions.

Headline Expenditure Projections

  • Pharmaceuticals: UAH36.20bn (USD4.44bn) in 2013 to UAH40.80bn (USD3.55bn) in 2014; +12.7% in local currency terms and -20.1% in US dollar terms. 

  • Healthcare: UAH109.92bn (USD13.48bn) in 2013 to UAH118.47bn (USD10.30bn) in 2014; 7.8% in local currency terms and -23.6% in US...

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Power

Ukraine Power

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BMI View: The immediate outlook for electricity generation is poor with the country in an official state of energy emergency. Fighting in the east of Ukraine has halted coal production in many mines and blocked transport lines to power stations. At the same time, Russia and Ukraine are in dispute about the price to be paid for gas deliveries, which will limit Ukraine's ability to fire its gas-powered stations. Although Ukraine is increasing its generation of nuclear energy, we still forecast a decline in generation to 168.5TWh in 2015, down from 179.8TWh in 2013.

Longer term, both production and consumption will rise as the economy starts to recover and processes of integration with the EU bring about a partial liberalisation of the power sector and...

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Real Estate

Ukraine Real Estate

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BMI View: With no end in sight for the political and economic crisis that shook Ukraine in 2014, we forecast the commercial real estate sector to continue to suffer. Economic and political uncertainty remain a decisive obstacle for investors to enter the market while growth is contracting or stagnating.

As the political crisis will remain finely balanced between a renewed ceasefire and escalation in 2015 Ukraine is attempting to emerge from the economic depression that have seen rental prices tumble in all three sub-sector in BMI's Real Estate report - office, retail and industrial. Industrial has the lowest rental rates of the three, with previously reported industrial cooperation between Ukraine and Russia being highly unlikely due to the current circumstances. The proposed free-trade agreement with the EU from September...

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Shipping

Ukraine Shipping

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Hostility with Russia, a second consecutive year of recession and a poor grain harvest are all risks to the downside that will make 2015 a difficult year for Ukraine's shipping sector. BMI is predicting declines in throughput at Ukraine's main ports of Odessa and Illichivsk.

From a total tonnage standpoint, the projected decline in grain production will be a major driver in the throughput decline at both ports, with the two facilities both participating in the country's grain export supply chain. The ports will also witness a declining role in the coal export supply chain. Ukraine's coal supply chains and to some extent mining activities, which mostly take place in the east of the country have been negatively impacted by the fighting between Ukrainian forces and separatist groups supported by Russia.

Such is the decline in coal deliveries, a key fuel source for Ukraine's power sector that the...

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Telecommunications

Ukraine Telecommunications

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BMI View: After a year of crisis, Ukraine's telecoms sector enters 2015 focused on the likelihood that 3G mobile licences will finally be auctioned. At least three concessions will be offered, potentially allowing all three of the principal operators to transition away from their low-value 2G businesses. However, a major complication is that the government will block the participation of Russia-backed players, which would include market leaders MTS and VimpelCom . It is unlikely that they will accept this decision, meaning that protracted legal challenges could be on the horizon, potentially delaying the auction indefinitely. With smartphone penetration reaching 21% for MTS and VimpelCom and 34% for Life as of Q314, it is clear that there is pent-up demand for advanced...

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Tourism

Ukraine Tourism

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The Ukrainian tourism industry suffered significantly in 2014 as a result of regional tensions and conflict in the east of the country. The instability has severely damaged the country's already poor reputation as a tourist destination, leading to plunging tourist arrivals figures alongside contractions across all of the other key market indicators for the Ukrainian tourism industry.

Previous forecasts provide an insight into the damage caused by the crisis: in 2013, before indications of the crisis to come, BMI was forecasting tourist arrivals of 32mn by 2018. In light of the recent destabilising event, we have drastically reduced our expectations to 8.4mn arrivals in 2018, down from an estimated 24.7mn in 2013. There will be knock-on effects on Ukraine's tourism industry value and hotel numbers, which are set to fall by 58% and 30% respectively in 2014, as well as tourism-related receipts, which will lose around...

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Water

Ukraine Water

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Our forecasts for the Ukrainian water sector have been substantially revised and expanded over the past quarter. We now cover extraction by water source, non mains consumption, water losses and wastewater treatment methods. Although we anticipate a number of longer-term opportunities in the sector, particularly in the east of the country where the domestic conflict has caused widespread damage to existing water infrastructure, at present the severe shortages and arid water reservoirs highlight the difficulties suffered by the regional water utilities. Moreover, the continued postponement and even cancellation of meetings and agreements for Kiev to share water with Crimea leaves us with little optimism with regards to the water sector's short-term outlook. We expect shortages and rationing to continue in the east. We also expect fuel shortages in the west of the country to remain an impediment the utilities'...

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