2006

WHEN SHADOW PROVIDES SAFETY

Creation of parliamentary 'Anti-crisis coalition' renewed talks about crisis in general and economic crisis in particular. However, contrary to widespread opinion, Ukrainian economy is now not in crisis - it has almost recovered since March 2006 - despite a lot of experts suggested that namely this period will be start of decline caused by new higher prices of natural gas and other energy sources. Meanwhile, starting from May 2006 there is complete recovery in metallurgy and almost no decline in chemical industry, two most energy consuming industrial branches. There is a clue to some part of decline of export-targeted industries: a solid part of their operations came into shadow. The biggest example is metallurgy, with increase of share of exports of its products via or to off-shore jurisdictions to over 18%. Then most of such money goes back as investments. As a result, the large business groups avoid paying taxes and got extra profits, which can (still) compensate natural gas price increase. However such increase of shadow operations concerns just about 2%, at most 3% of GDP. It was not enough to provide full-scale recovery, which Ukraine's economy demonstrates today. The most serious troubles that Ukraine's economy faces in near future are higher prices for natural gas, domestic factors of increasing export costs (and production in whole), more competition of import with domestic production (including deficit of current accounts as one of results), perspectives of higher inflation, both for consumer and producer prices, outflows of capitals out of Ukraine, and risks of financial instability. The real reason behind recovery is sharp increase of the shadow part in consumer markets (actually, not only shadow, but synergy of shadow and official parts gave exciting outcome). There is rocketing, 30% - 50% in average in some branches of the consumer market, which are good indicators of now rising consumer demand. That concern spending for real estate, new cars, mobile communications and tours abroad - such purchases were considered as luxury just not too long ago. Also there is still high, from a quarter to a third, growth in retail trade. This growth is seen in all regions, regardless positive or even negative industrial or agricultural outcomes there, what once again supports statement of importance of the shadow part of mass consumer markets. Moreover, namely those branches, which are strongly depend on effectiveness and growth in the shadow sector, are the key reasons of current GDP growth, having the highest volumes of added value (construction (8,2%), transportation (7,3%) and domestic trade (6,7%)). Shadow sector has grown thanks no interruptions from the state power. Current political fighting means that there will not be such an interruption in near months. That gives the economy one more chance for further recovery.