According to the information, published by State Statistics Service of Ukraine, consumer prices index reached 100.5 in December, 2014. Therefore, inflation in Ukraine reached 7.3% for the fourth quarter of 2014. Annual inflation level reached 24.9%, which is 2.6% higher than recession year of 2008. However, recession in 2008 was global in its nature, while 2014 recession is local, or regional to be more precise.

According to UkrAgroConsult, the main reason for rapid growth of price in the country was devaluation of Hryvnya (UAH) – national currency of Ukraine. Fixed exchange rate, previously set by National Bank of Ukraine over several past years was replaced with free floating in the beginning of 2014, which was one of the IMF requirements for receiving funding. Decision to implement floating exchange rate was made in one of the most difficult periods of country’s history. Political instability, which grew into geopolitical crisis, involving Russian Federation and local conflicts played a “red flag” role for capitals, which started fleeing the country. Influx of investment funds in 2014 was carried out mainly by international organizations either at the state level or at the level of largest companies (usually with foreign capital in their structure). These issues were coupled with loss of exports revenue, partially from loss of Russian Federation markets, partially due to ceasing of operations for many companies in the East of the country. Factors, listed above lead to high demand for foreign currency, and loss of value of Ukrainian currency as the result: from 7.99 UAH/USD in the beginning of the year to 15.71 UAH/USD in the end of the year.

Inflation, which was held under control previously reacted with 3% increase in the first quarter of 2014 and 8.1% increase in the second quarter. For the first time in several years trade balance of Ukraine indicated prevalence of exports over imports – unfortunately as the result of deeper drop of the latter. We expect approximately USD 57.4 billion revenue from exports in 2014 and net of USD 56.9 billion imports expenses.

Inflation processes, which are sometimes seen as beneficial to country’s economy as an exports stimulus, are not having positive effects when they take place sharply, at high pace. Population income growth rate cannot catch up to growth of prices, which leads to decline of purchasing ability of the population, therefore lower interest on behalf of investors. At the same, exporting companies are usually the ones that should benefit from deep devaluation and inflation processes, however, given geopolitical issues Ukraine is facing, we do not see immediate recovery in the short term.

What is there to expect from 2015? Another inflation increase is almost inevitable, since most factors that affect prices are still in place. Actual devaluation reached 100% in 2014, while inflation reached 24.9%, thus difference between value of UAH and prices of goods is still significant. Depending on UAH exchange rate to foreign currency, inflation might reach 2014 level, or even top it, in case the gap between prices and value of currency widens. In case there is stability reached in the country, recovering processes in Ukrainian economy are expected to take place. Agrarian companies, which export, will continue increasing exports volume, especially to the EU region that kindly lowered import tariffs and quotas. In this regard, agrarian sector will be playing safe heaven role for Ukrainian economy.

UkrAgroConsult