FEDERATION OF EURO-ASIAN STOCK EXCHANGES
SEMI ANNUAL REPORT OCTOBER 2006
UKRAINIAN STOCK EXCHANGE
ECONOMIC AND POLITICAL DEVELOPMENTS
Economic and Political Environment
Mr. Yanukovych–the former presidential
candidate implicated in the vote fraud that
sparked the "Orange Revolution" in late
2004–is poised to return to the prime
minister's post. This surprise development
followed the defection in early July of a junior
partner from the "orange" coalition, which had
formed in June and seemed set to govern.
It represents a clear setback for
Mr. Yushchenko, who now faces the return of
many of the old elites that his presidential
election victory had appeared to sweep from
power. These elites are clustered in
Mr. Yanukovych's Party of Regions, which has
formed a governing coalition alongside two
small, left-wing factions. Representatives of
the old order will now dominate the cabinet
and parliamentary committees, and could
prove difficult to dislodge: the Party of
Regions is disciplined and wealthy, which will
allow it to ensure the support of a majority of
parliamentary deputies even if the current
composition of the governing coalition
changes.
The Yanukovych cabinet is expected to adopt
a generally pro-Western tone, and the country
will continue implementing the EU-Ukraine
Action Plan. This will reflect the Party of
Regions' interest in appearing legitimate in the
eyes of the West (not least because the
party's business wing is keen to expand its
ties within the EU). It will also reflect the fact
that a pro-Western president remains in
charge of foreign policy and will continue to
appoint the foreign and defence ministers.
compared with the first half of 2006. This will
reflect the further rise expected in gas prices,
as well as the loose fiscal stance. It will also
be a function of the adjustments to
administered utility and passenger
transportation prices, as well as to fixed-line
telephone tariffs, that are already under way.
Moreover, currency inflows resulting from
increased investment are expected to rise.
This will offset part of the reduction in trade-
related currency inflows, ensuring that the
money supply continues to expand
moderately quickly, which will limit the extent
of disinflation possible.
Although a sharp shift away from generally
pro-reform policies seems unlikely, the
formation of a governing alliance between the
"oligarchic" centre and the anti-market left
gives cause for concern. Although Our
Ukraine could still join the government, at
present it is in opposition, having been at the
center of policy formulation since early 2005.
So too is the eponymous bloc led by Yuliya
Tymoshenko, who, among Ukraine's political
leaders, would have been most serious about
bringing the shadow economy into the open.
Although the left will have limited leverage
owing to its small size, it will succeed in
slowing certain reforms that it has long
opposed–such as lifting the moratorium on
agricultural land sales.
The National Bank of Ukraine (NBU, the
central bank) has kept the hryvnya steady
against the US dollar since April 2005. It has
indicated that it intends to prevent the
currency diverging much from its current rate.
This will translate into a gradual real effective
appreciation. However, the risk of greater
currency weakening against the US dollar has
recently increased. In 2005 the trade balance
posted a large deficit, which widened rapidly
towards the end of the year and is set to
expand further now that the price paid for
Russian gas imports has doubled. Political
pressure on behalf of exporters seeking a
weaker currency is likely to rise, and the
supply of foreign currency is now less likely
than in the past to exceed demand.
Economic Performance
The economy has recently shown signs of
picking up, with real GDP growth in the first
half of the year accelerating to 5% year on
year, up from 2.6% in 2005 and 2.4% in the
first quarter of 2006.
Year-on-year consumer price inflation proved
less considerable in the second quarter of the
year than had previously been expected, but
is still forecast to accelerate in the second half
of 2006. In part, the slower price rises
reflected Russia's restrictions on livestock
imports from Ukraine, which kept food prices
down on the domestic Ukrainian market.
Consumer prices are nevertheless expected
to rise moderately over the remainder of the
year and to remain higher in 2007 as well,
* Economic Intelligence Unit Ltd., July 2006
Key Information Contacts
Securities and Stock Market State Commission www.ssmsc.gov.ua
Ministry of Finance www.minfin.gov.ua
State Property Fund of Ukraine www.spfu.gov.ua
State Committee of Financial Monitoring www.sdfm.gov.ua
State Commission for Regulation of Financial Services’ Market in Ukraine www.dfp.gov.ua
2001-ORIGIN OF GROSS DOMESTIC PRODUCT (%)
Industry
Agriculture
2003-COMPONENTS OF GROSS DOMESTIC PRODUCT (%)
Services
Private consumption
Gross fixed investment
70
35.1
Public consumption
Increase in stocks
68.3
60
41.5
50
40
30
23.4
10
0
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19.6
20
7.8
0.1
2.6
Net exports