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Cablegate: Ukraine Trade Deficit Shrinks in H1 2009

VZCZCXRO6695
PP RUEHDBU RUEHIK RUEHLN RUEHPOD RUEHSK RUEHSL RUEHVK RUEHYG
DE RUEHKV #1495/01 2450903
ZNR UUUUU ZZH
P 020903Z SEP 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 8346
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE

UNCLAS SECTION 01 OF 02 KYIV 001495

SENSITIVE
SIPDIS

STATE FOR EUR/UMB, EEB/OMA
STATE PLEASE PASS TO USTR

E.O. 12958: N/A
TAGS: ECON ETRD EFIN PGOV UP XH UP
SUBJECT: UKRAINE TRADE DEFICIT SHRINKS IN H1 2009

REF: KYIV 1086

SENSITIVE BUT UNCLASSIFIED, NOT FOR INTERNET DISTRIBUTION

1. (U) Summary and comment: Recently released government of Ukraine
(GOU) statistics show the trade deficit narrowing 93% in the first
half of 2009, with exports falling by 46.8% and imports by 53.4%.
The government reported that the hardest hit import sector continues
to be automotive, declining 89.9% in the first half of the year.
Imports are expected to pick up in the second half of the year due
to increased gas purchases. How much imports outpace exports in the
months to come will depend as much on external demand for Ukraine's
commodities as it will on the domestic appetite for consumption.
End summary and comment.

Trade Deficit Narrowed on Low Imports
-------------------------------------

2. (U) Ukraine's trade deficit narrowed 93% year-on-year (yoy) in
the first half of 2009 from $7.07 billion to $472 million. Although
exports fell 46.8%, imports fell even more sharply at 53.4% yoy.
Imports of machinery and vehicles showed particularly strong
declines: 65.1% and 89.9%, respectively. Imports have suffered from
hryvnia depreciation, import restrictions, and falling domestic
demand. In coming months, analysts expect this trend to reverse and
the trade deficit to widen somewhat. Resumed growth in energy
prices and expected larger volumes of natural gas imports, along
with the need to replenish inventories that have not been restocked
due to the crisis and ensuing credit crunch, should push up imports
in the second half. However, the rate of export decline is also
likely to slow as the global economy shows signs of improvement and
demand for Ukraine's steel and other commodities improves.

Case Study: Autos -- Hardest Hit Import Sector
--------------------------------------------- -

3. (SBU) Representing almost 14% by value of Ukraine's merchandise
imports in mid-2008 and only about 5% now, the automobile import
sector has suffered significantly from the economic downturn. Car
dealers have been forced to sell goods far below cost to maintain
cash flows and meet payroll. One foreign car importer commented to
us on August 29 that he expected to lose $5 million in 2009. He
said that his company had met its foreign financial obligations in
the year to date, only because it had been willing to take
short-term losses and shed costly inventory. Other car companies
that had not taken the same measures, he said, still had a glut of
unsold inventory and could not make advanced orders for 2010
product. The fact that some importers were making plans to build
new inventory, while others remained stuck with 2009 models, would
continue to undermine import growth for the remainder of 2009, he
said.

4. (SBU) The car importer also told us that premium brand vehicles,
such as Porsche, had maintained their popularity during the crisis,
though more than 60% of such vehicles had been illegally imported in
2009, far higher than the 20% tacitly allowed by the government in
previous years. The dealer cited heightened corruption among border
and customs officials, who, he said, were signing falsified
documents in the absence of other profit opportunities.

5. (SBU) The GOU's 13% import tariff surcharge on automobiles had
not dramatically reduced car imports, given that thousands of unsold
2009 vehicles had been ordered before the crisis and remained for
months in open lots on the periphery of Ukraine's major cities,
according to the car importer. Now that many inventories had been
lowered, with sales of vehicles at or below cost, some car importers
were preparing to bring new stock into the country. Unsure whether
to trust the August 3 statement of Deputy Minister of Economy
Valeriy Pyatnytskiy that the 13% tariff surcharge would not extend
beyond its expiration date on September 7 (reftel), importers were
lining up cars at staging areas near Ukraine's border crossings,
from which they planned to bring vehicles into Ukraine in a single
bold rush at the end of the week.

Credit Crunch Mitigated by Rollovers
------------------------------------

6. (SBU) Importers have told us that dollar or euro-denominated
external loan obligations caused the biggest drag on foreign trade
in 2009, due to a 40% currency devaluation and the closure of
international financial markets to Ukrainian borrowers.
Nonetheless, most short-term loans were refinanced with local banks
in the first half of the year, according to the National Bank of
Ukraine (NBU). The overall roll-over rate for commercial loans in
the first seven months of 2009 was 79 percent. Despite the fact
that commercial bankers have complained to us that they were "over a
barrel" with potential non-performing loans held by both exporters

KYIV 00001495 002 OF 002


and importers, the NBU has touted the fact that corporations were
able to roll over roughly 99% of their obligations through July.


PETTIT

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