How will the Iraq War affect Ukraine’s economy?
Meanwhile, the Ministry for the Economy has named only shrinking exports to the Middle East among the possible economic losses for Ukraine directly resulting from the Iraq War. Minister Valery Khoroshovsky spoke about a shortfall of $300 million that Ukrainian exporters would otherwise earn in 2003. Incidentally, before the war broke out the Ministry for the Economy forecast losses of $800 million for Ukrainian exporters, but now — for whatever reason — it is viewing the situation more optimistically. However, to be on the safe side the minister stressed that the forecast was made with a view to a fast war. As usual, the Ministry for the Economy tries to remain optimistic no matter what.
Speaking about the exporters’ interests on the Middle East market, more damage has been done not so much on markets where Ukrainians have gained a firm foothold as to projects planned earlier. Half a year ago the Ukrainian government held talks with Iraq on joint investment projects in the construction, oil production, transportation, power- generating, and machine-building sectors. The Iraqi side then expressed readiness to invest billions of dollars in the projects of Ukrainian companies. But these plans were never destined to bear fruit, for political considerations outweighed economic expediency. Last year’s estimates suggest that Ukrainian exports to Iraq shrank more than twofold to $120 million, while this year it is obvious that only builders have a chance to get some orders in Iraq.
“We want and are able to participate in the reconstruction of Iraq, but whether we will be allowed to is anyone’s guess,” said President Kuchma. He is confident though that Ukrainian companies will receive part of the orders, but the major contracts will go to companies from the countries directly involved in the conflict. At the same time, Minister for the Economy Valery Khoroshovsky believes as befits an optimist that the form of Ukraine’s participation in the Iraq War is the most acceptable for the Ukrainian economy. “The chemical warfare defense battalion is only protecting civilians,” says Mr. Khoroshovsky, believing that this way Ukraine both satisfied Washington’s political appetites and saved face with Middle East countries that openly or covertly sympathize with Baghdad. This must have been the reason behind the downgrading of the forecast of exporters’ losses from $800 to 300 million.
As for Ukraine’s domestic markets, the situation here is even more complicated. Farmers intently watch news reports from Iraq hoping that rising oil prices will not cause fuel price hikes in Ukraine in the heat of the sowing season. Ukraine imports 80% of its oil from Russia and Kazakhstan. Oleksiy Bielienky, deputy board chairman of Lukoil-Ukraine, a subsidiary of the Russian giant, forecasts oil price hikes as a result of the Iraq War. As he put it, higher prices will be simultaneously caused by the higher oil export tariffs imposed by Moscow as of April 1. The week before last, Premier Yanukovych held talks with his Russian counterpart Mikhail Kasyanov. They failed, however, to agree to defer the tariff increases. Coupled with the Iraq War this spells problems for agricultural producers. Thus far, diesel fuel prices have not risen in Ukraine, while the Fuel and Energy Ministry is actively jawboning oil traders.
The uncertainty concerning the effect the war is having on the economy is manifested on the foreign exchange market. Although a tinge of khaki is beginning to show through the dollar, its trading on the foreign exchange market is surprisingly calm. The dollar exchange rate on the interbank exchange remains within the range of UAH 5.3335-5.3375. To all appearances, the American currency is not going to depreciate as a result of the Iraq War. Meanwhile, the euro is rising. And this trend is governed not only by international foreign exchange markets but also by the demand for euros by Ukrainians. News reports and hearsay convince our compatriots to convert their savings into the European currency. The Thursday before last, some banks even posted an exchange rate of UAH 6 to the euro. NBU Governor Serhiy Tihipko rules out the destabilization of the hryvnia as a result of the Iraq War. According to him, should oil prices surge, the NBU has resources and instruments to maintain a stable exchange rate. To remain on the safe side, the NBU has shelved its plans to lift the obligation binding on Ukrainian exporters to sell 50% of their currency revenue on the interbank market.
The Ukrainian securities market — which in theory should be most susceptible to such factors — has shown the quietest reaction to the Iraq War either. Certain blue chip companies lost their Iraq contracts, but this did not affect their stock prices. This market in Ukraine is too small to react to the hostilities. Only Ukrnafta stock quotations changed slightly, but the reason was far from the Iraq War. It is even annoying that nobody has panicked in Ukraine, for in this sense the country is completely isolated from world securities exchanges.
Ukrainian business expects the country leadership to continue doing in the immediate future at least what it has been doing thus far, that is, to try not to break with the Middle East states and discreetly support the US war on terrorism on their territories. Meanwhile, since the beginning of the military incursion in Iraq, Washington has suspended one antidumping investigation into metal exports from Ukraine and promised to support Ukraine’s accession to the WTO.
