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Ukraine war hits economy hard

Reuters reported that in November, Ukrainian Trade Guild Consulting fielded calls from retailers including Abercrombie & Fitch and Japan’s Uniqlo about leasing space before this year’s opening of the country’s biggest shopping mall.

Now, as deadly battles rage in the east, the 30 hectare Respublika concept, planned to include eastern Europe’s largest entertainment complex on Kiev’s busiest road, sits unfinished behind sagging chain link and wooden fences, the project abandoned by foreign investors.

Mr Vitaliy Boyko managing partner UTG said that “Investors are simply afraid and they’re asking how safe it is. We explain that it’s very safe in Kiev, but they still keep cancelling meetings.”

As the former Soviet republic enters a ninth month of war and political turbulence, executives across the country of 43 million people are struggling to keep their companies afloat as capital from abroad dries up, markets sink, sanctions against Russia threaten to spill over the embattled border and the country remains Europe’s riskiest place to do business.

The government in Kiev, about 600 kilometers from the conflict in the east, is already saddled with a legacy of corruption and cronyism and mired in the deepest recession on the continent. The effect of the contraction is spreading across society, damping retail and real estate sales, as well as construction and infrastructure upgrades, a staple of industrial growth.

Mr Alexander Valchyshen head of research at Investment Capital Ukraine said that “The war is demolishing the domestic market. In other words, sectors that cater to domestic consumers, including businesses are suffering the most.”

Investors pulling money out of Ukraine sent its sovereign and company bonds tumbling 4.4% this month through, the worst loss for the period among 77 nations tracked by the Bloomberg dollar emerging market composite bond index.

The yield on the nation’s July 2017 dollar notes rose 34 basis points on Thursday to 10.83 percent, the highest in 11 weeks. The hryvnia, the second worst performing currency this year, depreciated as much as 2.6% on Thursday to 12.68 per dollar, its weakest intraday level in almost four months.

According to government and International Monetary Fund, the country’s economy shrank 4.7% in the Q2 from a year ago, the biggest contraction since 2009. Gross domestic product will drop by 6.5% this year. At the same time, industrial output fell 5% in June from a year ago led by machine building and chemical production.

Analysts including Ms Elena Bilan at Kiev based Dragon Capital said that from steelmakers, such as billionaire Mr Rinat Akhmetov’s Metinvest, to food producers such as Ukrlandfarming, the country’s largest agricultural company, industrial companies are taking the brunt of the conflict and EU sanctions against Russia.

Mr Yuriy Ryzhenkov CEO of Metinvest said that “One of the biggest risks for the company was a mass exodus of its workers, especially from unsettled areas. More than 1 000 employees from the 14 000 strong workforce at Metinvest’s Krasnodonvugillya plant had quit, while the Avdiyivsky coke producing plant was running at one third capacity.

DMK Dzerzhinsky, part of the Industrial Union of Donbass, said that it only had one furnace operating out of three because the railway line for coke coal delivery was mined with explosives.

As heavy industry feels the pain, the retail sector is the most visibly hit, with shopping centres devoid of customers across Kiev and international retailers, including Marks & Spencer and Gap, either cutting back on outlets or shutting up shop.

Mr Daniil Vladov head of DCH Real Estate said that “Ukraine’s leadership “forced business to play by its rules for years and it’s going to take more than a year to overcome the existing system of corruption. The winter demonstrations that led to Yanukovych’s government collapse were sparked in part by a grassroots effort to end corruption in administrative offices.”

Mr Dmitry Sennychenko the head of JLL’s Kiev office, said that “The government had been unable to change that perception, leaving investors unwilling to spend money on Ukrainian assets. The transparency of the market and predictability are things so far not associated with Ukraine. Implementation of reforms in economic policy has been talked about a lot and now needs to be done.”

Source – Reuters


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