Export Traps for Hryvnia
The growth rate of the Ukrainian economy is going to notably slow in the near future. This is an obvious forecast of the observers who follow a series of antidumping investigations against Ukrainian producers on the best supplied US and EU markets, as well as the worsening conditions for exports to Russia. Against this backdrop, the National Bank’s bold steps to increase the hryvnia circulation mass can only be described as very risky. The expected reduction in hard currency earnings and increase in the foreign-held national debt next year harbor the danger of a hryvnia exchange rate destabilization.
Ukrainian exporters, who have burst onto foreign markets with cheap products, now have to increasingly give up their newly won positions under the pressure of antidumping investigations. Steel mills, now largely responsible for the balance of demand and supply on the hard-currency market, are losing one country after another. One of the latest pieces of antidumping news is that the US has again filed suit over the import of rolled metal from Ukraine. A tentative duty of 83.4% has been imposed this month. This will result in considerable losses by the Kryvorizhstal, Makiyivka and Yenakiyevo Metal Plants. There is a standing expert group in the Ministry of the Economy working to forestall antidumping investigations against Ukrainian enterprises, but no tangible results of its work are so far in sight.
As a result, alarming news is already coming in from this country’s largest steel mills. Mariupol-based Azovstal produced in August 23,000 tons of steel less than in July. Plant specialists explain this primarily by falling export sales. Zaporizhstal, although still afloat, is also preparing for hard times. This plant’s marketing and foreign economic activity manager, Volodymyr Lytvyn, has announced that mana6gement has set a goal of increasing its supplies of metal products on the domestic market by up to 50%. This will make it possible to be independent of the worsening situation on foreign markets, Mr. Lytvyn told a meeting of the CIS Council of Ferrous Metal Exporters, held in Zaporizhzhia. In other words, while losing ground on foreign markets, exporters are trying to find at least kind of safe haven on the domestic one.
Meanwhile, exports to the markets of our eastern neighbor is also headed south. This year Ukraine has almost fully met the Russian Federation pipe export quotas set by agreements of the two countries, so deliveries could come to a halt in November. Moreover, a law approved by the Russian government will take effect on January 1, 2002, whereby a 40% duty is being imposed on the import of Ukrainian pipes, which will make their export a completely losing proposition.
The new procedure of VAT assessment introduced by Russia is also bringing closer the peak of its negative impact on the Ukrainian export. The Donetsk- based Silur Co. has lost about 70% of its customers because Russia imposed on July 1, 2001, a 20% VAT on goods imported from Ukraine. This was disclosed by Silur General Manager Volodymyr Zubanov during his meeting with Viktor Chernomyrdin, Ambassador Extraordinary and Plenipotentiary of Russia to Ukraine.
As Mr. Zubanov noted, Silur used to export up to 40% of its products to Russia, but now that Russia has imposed the VAT, it has had to shelve its over $1 million a month contracts. Nord Group, the largest manufacturer of refrigerators, has cut its exports to Russia by almost 40% due to the imposition of VAT on Ukrainian goods on July 1, company president Valentyn Landyk announced.
Such an abrupt deterioration of the export situation as early as in mid-autumn could upset the current balance of hard-currency demand and supply. In any case, Ukraine is unlikely to continue to show a positive trade balance. The NBU’s latest steps to reduce monetary indicators look rather dubious against this background. National Bank Governor Volodymyr Stelmakh has said he hopes the growing economy will absorb the hryvnia mass surpluses that have piled up on the market. But the trouble is this decision was made against the indicators of the successful first six months of 2001. The next six months, by all accounts, are not going to be so optimistic, especially for exporters. Accordingly, instead of promoting economic growth, the surplus money mass may just stir up nervousness on financial and then commodity markets.
On September 10, the National Bank reduced its discount rate from 17% to 15%. An NBU telegram says this decision was made after analyzing the monetary market situation after taking into account the economic development trends, money mass growth, and inflation rate. The NBU plans that reducing the discount rate will make the hryvnia cheaper on the credit market. This should further boost the mass of money in circulation, which is again disturbing. The expected reduction of exports coupled with an increased hryvnia mass should not necessarily become an inevitable backdrop for a crisis. But let us hope the National Bank will be very cautious in its further steps to weaken monetary indicators.
