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Thursday, February 7, 2008

Ukraine Inflation January 2008

Inflation in Ukraine shot up to an incredible annual rate of 19.4% in January 2008, as compared with January 2007, and rose in January when compared with December 2007 by a whopping 2.9% according to data from the State Statistics Committee of Ukraine, released today.

Annual inflation in Ukraine in in 2007 - January-December 2007 compared with January-December 2006 – was 12.8%. This, as can be seen below, is well down on 2000, but is a sharp acceleration on 2006, and just at a time when more sophistocated techniques of demand management and monetary policy should be containing inflation within acceptable limits. It would seem that Ukraine is now on some sort of ramp or other.

Ukraine’s strong economic growth, increased demand for skilled laborers, and workforce migration abroad are all combining to drive up labor costs, and this is pushing inflation to ever newer heights. Naturally it is not clear at this point how this will end.

A number of recent studies have found the rate of expansion in Ukraine’s economy is giving business growing headaches in finding qualified labor. Observers repeatedly state that quality professionals are scarce, and demand for highly trained employees has grown significantly faster than their availability. According to labour market experts those most in demand at the present time are financial specialists, such as chief accountants, analysts, directors, and logistics controllers.

Meantime the population ageing and decline mean that Ukraine's labor force dropped by 83,400, to 28.1 million betwen 2005 and 2007, according to data from Ukraine’s State Statistics Committee.

And at the same time the numbers registering as unemployed steadily declined during 2007.

The Ukrainian office of manpower firm Brain Source International report having received an unprecedented number of requests in recent months to fill accounting positions. Demand for marketing and sales directors is also strong. Ukraine’s rapidly developing construction and real estate sectors have also boosted demand for other highly skilled professionals, such as certified architects, engineers, project managers, and property lawyers.

The burst in foreign investment that followed the Orange Revolution of 2004 has not only increased demand for labor, but increased competition for labour within sectors. The increasing number of Ukrainian companies pursuing initial public offerings (IPOs) has naturally enough boosted demand for IPO preparation consultants, of whom in the past there have been relatively few.

Due to the growing labour scarcity in the capital, many companies are now moving out of Kyiv and into the regions in the search for staff. Retailers are also increasingly opening supermarkets and hypermarkets in the regions due to increased competition in Kyiv. Retail banking is also developing rapidly in the regions, driving up the demand for employees.

Naturally such labor pressures have turned the Ukraine labour market to the workforce’s advantage. Kyiv has virtually no unemployment, in the sense that anyone wanting a job can find one, according to Yuriy Perch, general director of the Ancor Ukraine recruitment agency. Positions are available in both the blue-collar and white-collar sectors, he is quoted as saying.

Job seeker counter offers have significantly increased lately, Perch said. Retention costs are up too, many employers are raising salaries and benefits in an effort to stabilize their workforce. In the past, employers set compensation levels, but today’s qualified and experienced job seekers are establishing their own price to an increasing extent.

According to survey results published recently by Big Four auditor Ernst & Young, attractive compensation packages, not just salary increases, are being used more regularly by medium- and large-sized foreign and domestic businesses in Ukraine to offset soaring inflation and fierce competition for qualified employees.

The Ukraine Compensation and Benefits Survey 2007/2008, an annual survey of business practices conducted over the past six years, reported base salaries increased an average of 17 percent between August 2006 and July 2007. Meanwhile, 83 percent of companies also paid additional annual bonuses.

Perch also pointed out that in the near future the rate of out-migration might even increase, as labor migration from Ukraine to Poland (and of course other EU10 states) may well start to accelerate as a result of recent Polish legislation aimed to address Poland's own labour shortages by attracting workers from Ukraine and points further East.

At the amse time the WTO General Council endorsed on 5 Feb a protocol on Ukraine's accession to the EU. Clearly Ukrainian exporters and consumers will benefit from joining the WTO, but local small-scale manufacturers may well suffer as a result of the decision.

The big winners will undoubtedly be members of Ukraine's growing middle class who, due to the country's pre-WTO import tariffs on consumer goods and processed foods, pay as much as 40 per cent more for things like washing machines and smoked sausage than in neighbouring countries who are inside the European Union. Ukrainian car prices are predicted to be likely to fall anywhere between 10 and 20 per cent, household appliances some 20 per cent, and processed foods between 10 and 40 per cent.

"Right now, Ukrainian consumers pay more than any one else in Europe for inferior quality milk" Mykola Vernitsky, an agricultural consulting company director is quoted as saying, "Meat is going to fall in price some 30 to 40 per cent".

And the move will be welcomed by millions of low-income Ukrainians who, over the last five tears, have been steadily striking regular meat purchases and non-essential foodstuffs off the family shopping list, as a result of spiralling prices spurred by a GDP growth rate exceeding 6 per cent every year since 2000.

In the short term these price reductuctions will be welcomed by Ukraine's pro-Europe government, given the problem of the inflation rate, but given that the underlying problem in Ukraine is structural rather than short term excess demand, the arrival of cheap manufactured products may not be such an unqualified boon in the longer run as it will put a lot of struggling domestic manufacturers out of business, while it is not clear which activities will really serve Ukraine as the basis of long run export growth to pay for the new flow of imports.

Everything from Ukrainian livestock and paper products to medical supples, clothing, and shoes will soon face an onslaught of competition from China and other WTO members, they said. Particularly hard-hit could be small Ukrainian farms and agricultural businesses which, besides now facing unfettered foreign competition for the first time, will lose a cherished tax benefit of not having to pay a 20 per cent Value Added Tax, as do all other businesses in the country, WTO opponents predicted. Even if small-scale Ukrainian agricultural producers manage to absorb the lost tax benefit, they are unlikely to be able to improve their goods to meet WTO quality standards, noted Yury Mel'nik, Agriculture Minister, according to a Korrespondent magazine report.

But the story will be dramatically better for large-scale agriculture and other substantial industry, able to produce an export-quality product, most observers said.

Commodities like wheat, sunflower seed, steel, and chemicals, for years the pillars of Ukrainian trade surpluses, all can expect to benefit from WTO membership, as the already-cheap Ukrainian products will become even more affordable abroad, once foreign markets are obliged to remove excise barriers.

Ukraine's steel industry, in the past often hit with anti-dumping sanctions including taxes and quotas, should according to observers especially gain from WTO membership, as WTO rules prohibit the imposition of such measures by a WTO signee against another member. The advantages of WTO membership to Ukraine's powerful industrial magnates, most operating in the Russian-speaking east, have not been lost on the Kiev government's generally Ukrainian-speaking leaders.

'The mere fact we are entering the WTO will increase our economy by 1.5 to 1.7 per cent in one year alone,' said President Viktor Yushchenko in a 1+1 television interview, hours before travelling to Geneva for the treaty signing. 'That kind of growth is something I think few Ukrainians can oppose.'

It took 15 years for the World Trade Organisation (WTO) to finally approve Ukraine's membership, the first step in what Ukrainian officials hope is the country's inevitable journey towards the European Union (EU).

Formal talks for joining a free trade zone with the EU, a pre-requisite being membership of the WTO, could start as early as Feb. 17, Ukrainian President Viktor Yushchenko said shortly after Ukraine joined the WTO.