Petrochemicals: Russia and Ukraine

Russia

BMI has reported that the outlook for Russian petrochemicals industry has changed markedly since the previous quarter due to the effects of tensions between Russia and the West over Ukraine on business and consumer confidence. The drive to import substitution in the Russian market will expose the industry to poor domestic demand, while the impact of the Ukraine crisis on European market growth will limit export opportunities. BMI believe that this year domestic Russian demand will stagnate and following a modest rebound next year, driven by subsidising geopolitical tensions, expect a declaration in private consumption growth and subdued pace of fixed investment growth over the next few years.

BMI have also said as Russia is now facing the threat of international sanctions over its involvement in Ukraine’s domestic crisis with the government’s foreign critics calling for the petrochemicals industry to be one of the economic sectors targeted. The demand for strong action is reportedly stronger in the US, while Europe is reticent about taking actions that could cut many countries off from their main source of energy. BMI has said that one of the most pressing concerns in the relation to Russia’s external relations is risk aversion within the financial sector. Most of the credit approvals agreed by lenders before the Ukraine crisis have now expired for deals that did not complete. Western banks are also reducing their exposure to the Russian syndicated loan market as a result of the Ukraine crisis, with some bankers fearing it could be 12 months before they can lend to Russian companies again.

BMI believe that domestic demand in the country is likely to stagnate this year. BMI have also revised down Russia real GDP growth from 2.0% to 1.0%, this drops from 3.4% in 2012.

Ukraine

BMI has said that the Ukraine’s petrochemical industry will fail to come out of recession this year due to the impact of the country’s political crisis, which threatens to deteriorate into a civil war and even a conflict with Russia, the sector’s main export market as well as its main source of feedstock. Political crises has exacerbated the weakness within the petrochemical industry in the country, while denying the chance for growth for as long as the civil unrest and rift with Russia continues.

This year, BMI expects a severe decline in output and potential for permanent closure of the country’s largest petrochemical plant. In the first quarter of this year, value of chemical output fell 18.1% year on year. The petrochemicals industry was already facing a tough outlook with the domestic economy in recession, compounded by a weak export base and currency instability before the political crisis led to the break away of Russian majority regions. Russia has also threatened to decrease its supplies of natural gas to Ukraine after claiming the country owed it billions in unpaid bills and as Russia provides 1/3 of the EU’s gas imports through Ukraine this could affect the regional economy. Considering the above, BMI has said that along with poor sector performance and an absence of both foreign and domestic private sector investment, the Ukrainian petrochemicals industry is likely to see contraction this year.

With domestic petrochemicals consumption not expected to return to pre recession levels in the medium term, BMI believes that Ukrainian production will reply heavily on export led demand. BMI has downgraded its outlook for real GDP growth this year, and now expects GDP to contract by 1.9%.

Adapted for web by Claira Lloyd

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