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 2017. The potential for a resumption of 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 major structural 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...

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Ukraine Operational Risk Coverage (9)

Ukraine Operational Risk

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: All agricultural markets will be negatively affected by recent Russian military intervention and poor macroeconomic fundamentals in Ukraine. There will be limited investment into the country over the coming quarters given the unstable situation, which will affect agricultural production over our forecast period. Particularly for the dairy and livestock industry, Russia's ban on imports from Ukraine will negatively weigh on production as Russia represents one of Ukraine's largest agricultural export markets. Furthermore, significant currency depreciation will limit imports into the country, which will affect agricultural input usage and domestic investment. That said, we hold a positive view for the long term production of corn in the country as the use of GMO seeds will become more widespread. The weak currency will also incentivise exports of...

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Autos

Ukraine Autos

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Vehicle sales in Ukraine dropped 54.5% in 2014, to 105,957 units. We forecast an 8.1% drop in the market in 2015, mostly due to low base effects tempering the rate of decline. Downside risks to this outlook remain firmly to the downside, as a further deterioration in the political and economic outlook could severely impact vehicle sales.

We estimate there was a 37% decrease in production in 2014 to 31,578 vehicles, and we expect a decrease in production 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.

Into 2015, 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.

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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

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: The outlook remains dim for Ukraine's construction sector, with a fourth consecutive year of decline expected in 2015. Political and security unrest in the country continues, and it remains to be seen whether the ceasefire agreed in February 2015 will gain any traction. Regardless of the progress made in the peace process the country's economy continues to face significant headwinds including a weak currency and lack of international investment, and the threat of a total economic collapse remains. Public spending on...

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Insurance

Ukraine Insurance

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BMI View: The outlook for Ukraine's underdeveloped insurance market remains weak, with a poor structural and regulatory environment exacerbated by a weak domestic economy and a lack of investor confidence. Penetration remains very low and the collapse of the hryvnia against the dollar has resulted in substantial contractions in the value of gross premiums written. With Ukraine's GDP expected to decline by a further 5.2% in 2015, the short-term prospects for growth in the insurance sector are extremely limited.

Early reports from some of the leading insurers in Ukraine are indicating growth in 2014, despite the difficult security, economic and political conditions in the country. This growth is primarily in local currency terms only, with all showing a decline...

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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 the Ukraine crisis. 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, and they accounted for over...

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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

Petrochemicals

Ukraine Petrochemicals

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BMI View: The promised relaunch of Karpatneftekhim's polyethylene (PE) and polyvinyl chloride (PVC) facilities could boost Ukraine's petrochemicals industry in 2015, but with end markets likely to be lacklustre in the face of political and economic crisis it may take until 2016 before the plants reach high levels of capacity utilisation, according to BMI's latest Ukraine Petrochemicals Report.

In 2014, Ukrainian chemicals output declined by 5.1% year-on-year (y-o-y) to UAH46.6bn. Production grew sharply in the final two months, helping to end the year on a more positive note in an otherwise depressed 2014 and a decline of 10.6% in 2013. Meanwhile, rubber output declined 15.3%. The decline in plastic production was partly related to the closure of Karpatneftekhim.

Karpatneftekhim closed its 110,000 tpa polyethylene (PE) and 300,000tpa suspension...

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Pharmaceuticals & Healthcare

Ukraine Pharmaceuticals & Healthcare

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BMI View: In the short-term, Ukraine's pharmaceutical market will continue to suffer from the impact of its tenuous economic position, the civil unrest in the economic heartlands of Eastern Ukraine and the severe erosion of consumer purchasing power resulting from a significant depreciation in the hryvnia. With consumer-spending the driving force behind pharmaceutical sales, the political and economic situation in Ukraine will need to stabilise before the pharmaceutical sector experiences any positive development.

Headline Expenditure Projections

Pharmaceuticals: UAH40.01bn (USD3.48bn) in 2014 to UAH45.49bn (USD3.14bn) in 2015; +13.7% in local currency terms and -9.8% in US dollar terms.

Healthcare: UAH118.47bn (USD10.30bn) in 2014 to UAH128....

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Power

Ukraine Power

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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BMI View: A second consecutive year of recession will make 2015 a difficult year for Ukraine's shipping sector, with BMI predicting declines in container throughput at Ukraine's main ports of Odessa and Illichivsk.

In terms of total tonnage, freight volumes at Ukraine's main ports of Odessa and Illichivsk will be supported by the projected increase in grain production, with the two facilities both participating in the country's grain export supply chain. Ukraine's ports also stand to benefit from new cargo opportunities opening up, to develop their role in Ukraine's coal import logistics, as the country's domestic coal supply chains have been interrupted by the fighting in eastern Ukraine. Such is the decline in coal deliveries, a key fuel source for Ukraine's power sector that the country now has to import from South Africa. The...

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Telecommunications

Ukraine Telecommunications

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BMI View: Successful 3G licence auctions early 2015 after a year of crisis brought optimism to the Ukrainian telecommunications market. Ukraine's three largest operators MTS Ukraine, Kyivstar and Life:) acquired licences in a long-awaited 3G spectrum auction. Given the expected launch of 3G services by the three major operators in 2015, BMI has revised the outlook for 3G/4G sector higher. 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 services. Despite potential higher data revenues, ongoing crisis is still having an impact on the operators' revenues with two out of...

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Tourism

Ukraine Tourism

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BMI View: The crisis in eastern Ukraine has severely damaged the tourism industry in the country, and will continue to do so as long as there is instability and uncertainty in the region. Even though the country is expect to slowly recover over the coming years, the recovery will not be sufficient enough to come near pre-crisis levels. Combined with economic issues, this makes Ukraine a risky proposition for investment.

Prior to the ongoing crisis, Ukraine boasted a diverse and year-round tourism market. Since the crisis, however, there has been an alarming drop in the number of inbound arrivals, hotel occupancy, and the value of international tourism-...

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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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