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

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BMI View: Ukraine's political crisis, which began in 2014, its deteriorating economic outlook and hostile relations with Russia are heightening logistics risk in the country. The BMI Logistics Risk score for Ukraine highlights this but also takes in to account the entrenched challenges that go beyond the current crisis and which are likely to damage investor interest in the longer term. Ukraine scores 45.7 out of 100 in the BMI Logistics Risk Index (below the global average), ranking the country in 111th place out of 201 states globally and...

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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: All agricultural markets will be negatively affected by 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 yields come from a low base and the government is keen...

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Autos

Ukraine Autos

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Vehicle sales in Ukraine dropped 54.5% in 2014, to 105,957 units. BMI forecasts a 62.8% drop in the market in 2015, as the conflict continuation of conflict weighs on consumer and business spending over the year. Risks to this outlook remain firmly weighted to the downside, as a further deterioration in the political and economic outlook could severely impact vehicle sales.

Similarly, we estimated that Ukrainian automobile manufacturers registered a 40.3% decline in vehicle production to 30,065 vehicles in 2014. We expect a further decrease in production in 2015 by 62.7% 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.

In 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...

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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 continued to deteriorate rapidly since the publication of our previous quarterly Food & Drink reports. The economy continued its rapid implosion in the first quarter of 2015, contracting by 17.6% year-on-year. Our Country Risk team forecasts a recession of 5.3% in 2015 and growth of 0.6% in 2016. Like in 2014, recession in 2015 will be driven by the depreciation of the hryvnia and major trade disruption due to the risk of a military escalation with Russia, which remains high despite the ceasefire signed on February 12. Soaring inflation, substantially tighter government spending, diminished purchasing power and extremely tight credit conditions will also contribute to the dismal economic outlook. We forecast a sharp rise in food consumption in Ukraine in local currency terms, but this has been heavily impacted by inflation and currency...

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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: With the prospect of a major recession looming, the local currency depreciating sharply and the potential for a re-escalation of conflict in the east of Ukraine lingering there is little to instil confidence amongst investors in the country's declining infrastructure sector. With major projects put on hold due to a lack of private investment and huge pressure on public spending, we therefore expect to see the fourth consecutive year of contraction in construction industry value in 2015, with transport in particular underperforming. In light of the weak domestic economy and lack of investor interest we do not expect to see any return to growth prior to 2017 with the entire infrastructure sector remaining subdued throughout the forecast period.

Key Trends And Developments

  • ...

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Insurance

Ukraine Insurance

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BMI View: The outlook for Ukraine's insurance market is heavily undermined by the current political and security unrest which is deterring investors, particularly in the life segment. The sharp fall in the UAH in 2014 led to a contraction in total premiums in US dollar terms, and this trend is expected to continue in 2015. Even prior to the current conflict the insurance market in Ukraine was small and underdeveloped, with low density and penetration rates. With Ukraine's real GDP expected to decline 5.25% in 2015, short-term prospects for growth in the insurance sector remain extremely limited.

In 2014 currency movements caused by the deteriorating security situation in Ukraine led to a plunge in total premiums in USD terms. Overall, the sector is small by most standards and quite slowly growing. The fact that life insurance accounts for less than 10% of total activity in the...

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Medical Devices

Ukraine Medical Devices

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BMI Industry View: We expect the Ukrainian medical device market 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 : Ukraine's mining output growth will contract as ongoing hostilities between the Ukrainian government and pro-Kremlin separatists have significantly damaged mining infrastructure and the country's investment outlook. Despite these dynamics, Ukraine's mining sector holds significant growth potential due to the country's vast mineral reserves.

The economic and political situation in Ukraine is extremely volatile and considerable downside risks remain with regards to the country's mining sector. As a result, we expect Ukraine's mining sector growth will contract by 1.0 y-o-y over 2015-2019. Despite this, the country's mining industry value will grow from USD6.8bn in 2015 to...

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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 volatile security situation and continuing political instability negatively affects exploration and production (E&P) activities. Regulatory challenges, illustrated by recent tax hikes for oil, gas and mineral production are expected to act as a further deterrent to investment in Ukraine's oil and gas sector.

Headline Forecasts (Ukraine 2013-2019)
2013 2014e ...

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Petrochemicals

Ukraine Petrochemicals

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Like the rest of Ukraine's industry, the petrochemicals sector is in a state of collapse as a result of the country's economic and political crisis. BMI's Ukraine Petrochemicals Report argues that the impossibility of doing business in Ukraine and the government's painful restructuring policies could lead to permanent capacity closures.

In Q115, both the rubber and plastic output took a big hit, both collapsing from already historic lows. The decline in plastic production was partly related to the closure of Karpatneftekhim. The complex, which has capacities of 110,000 tpa polyethylene (PE) and 300,000tpa suspension polyvinyl chloride (SPVC), is owned by Russia's Lukoil, which closed the facility temporarily in Q214. Even before the current crisis, the facility was facing serious long-term concerns over profitability.

Ukraine&#39...

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Pharmaceuticals & Healthcare

Ukraine Pharmaceuticals & Healthcare

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BMI View: The Ukrainian pharmaceutical market will continue to feel the impact of the country's parlous economic state in 2015. Local currency growth in the Ukrainian pharmaceutical market during the year will be driven by price inflation rather than actual volume demand growth. Ukrainian consumers will see their incomes squeezed from every direction and we expect pharmaceutical market share to shift towards domestic drugmakers as imported medicines become even more unaffordable. As a result, Ukraine's attractiveness to multinational drugmakers will decline significantly in the short-term.

Headline Expenditure Projections

Pharmaceuticals: UAH40.24bn (USD3.35bn) in 2014 to UAH46.84bn (USD1.95bn) in 2015; +16.4% in...

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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 has blocked transport lines to power stations. On the upside, BMI understands Ukraine has managed to make payments for gas in March and May 2015 and the negotiations for a long-term solution, mediated by the EU, are ongoing. Although Ukraine is increasing its generation of nuclear energy, we still forecast a decline in generation to 152.9TWh in 2015, down from 173.8TWh in 2013.

Longer term, both production and consumption will rise as the economy starts to recover 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 16...

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Shipping

Ukraine Shipping

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BMI View: As Ukraine's economy is headed for a second consecutive year of a major recession, 2015 will be a tough year for Ukraine's shipping sector, with BMI predicting declines in container throughput at Ukraine's main ports of Odessa and Illichivsk.

Box volumes in 2015 will be negatively impacted by a projected second year of recession in Ukraine, with BMI forecasting real GDP to drop 7.2% following the estimated 6.8% decline in 2014. The increase in traffic is unlikely to materialise in at least the medium term, with BMI forecasting Ukraine's economy to grow by an average of 0.5% per year between 2015 and 2019. Meanwhile, at the port of Illichivsk, a long-running legal dispute resumed, threatening operations of privately-owned container...

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Telecommunications

Ukraine Telecommunications

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BMI View: 3G has finally come to Ukraine with the launch of commercial services by Astelit and Kyivstar. This is a huge opportunity for operators to turnaround their fortunes with higher revenues from mobile data services. The telecoms sector has been artificially held back for many years as a result of the lack of 3G and fierce competition for data subscribers will help with innovation and VAS. Ukraine has one of the lowest ARPUs in Europe and we expect this will begin to improve as a result.

Key Data

  • The uptake of broadband services is low, with penetration estimated to have reached just 17.7% at the end of 2014.

  • MTS Ukraine reported 180,000 3G users since it signed a partnership with TriMob in February 2015...

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Tourism

Ukraine Tourism

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2014 proved to be a seriously damaging year for the Ukrainian tourism industry, with inbound arrivals and occupancy rates falling to unseen depths, putting high amounts of pressure on hoteliers in the country and the industry as a whole. While 2015 so far has been slightly better, it is unlikely that the industry will recover to pre-crisis levels by 2019, especially given that the Crimean Peninsula, which is now considered part of Russia, was one of Ukraine's leading tourism destinations. Ultimately the country represents a significantly higher risk for investors than other countries in the region.

With geopolitical tensions in the region still high, the risks facing Ukraine cannot be underestimated. Despite improved transport links, the travel industry in the country is likely to face a difficult five years, especially as the previously important Russian source market is unlikely to recover to levels seen in 2013, and there is not...

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Water

Ukraine Water

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BMI View: The Ukrainian water sector is in dire straits. The continued domestic conflict in the east, in conjunction with the annexation of Crimea by Russia, the consequent shutting off of supplies and destruction of water infrastructure in much of these regions, has resulted in severe water shortages. We expect these to continue over the second half of 2015. In addition, the central and western regions of Ukraine are facing issues with regards to the powering of their treatment facilities, owing to the shutting off of gas supplies from Russia.

The volatile political situation in Ukraine continues, as violent conflict between separatist and governmental parties resumed in late 2014. It remains to be seen if the Minsk II ceasefire agreement from early 2015 will gain any sort of significant traction - at present reports suggest the ceasefire is being...

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