The Verkhovna Rada approved amendments to the 2018 state budget law, reallocating some spending while keeping the deficit target unchanged at UAH 81bn (2.3% of GDP). In particular, the legislature supported the government’s proposal to increase transfers to the Pension Fund by UAH 10.8bn (to UAH 150bn) while cutting selected social transfers to local budgets by UAH 7.2bn, lowering debt service outlays by UAH 2.5bn (to UAH 130bn), and reallocating smaller spending items.

Parliament overwhelmingly endorsed a bill to terminate the 1997 friendship and cooperation treaty with Russia.

Farmak, the largest pharmaceuticals producer in Ukraine, has put into operation a new production line for tablet medicines, doubling its tablet production capacity to 3 billion pieces p.a. Investments totaled EUR 20m.

NBU gross foreign reserves rose by 5.8% m-o-m (+$1.0bn) to $17.7bn in November, equivalent to an est. 3.0 months of 12-month trailing goods and services imports, remaining down 5.8% (-$1.1bn) YTD.

LSE-listed iron ore pellet producer Ferrexpo announced a special interim dividend of 6.6 US cents/share ($40m in absolute terms), to be paid on Jan. 14, 2019, to shareholders on the register at the close of business on Dec. 14, 2018. The company Board will consider the final 2018 dividend on March 20.

Ukraine has exported 19.1 Mt of grain since July 1, the start of the marketing year 2018/19 (MY; July 2018-June 2019), up 9% y-o-y and including 9.5 Mt of wheat, 6.2 Mt of corn and 3.0 Mt of barley.

The Finance Ministry sold at an auction yesterday UAH 65m of hryvnia-denominated bonds, including UAH 54m of 3-month paper at 19.0% and UAH 10m of 6-month bonds at 18.5% p.a., with yields being flat w-o-w. FinMin also sold a tiny $2m of F/X-denominated bonds, keeping yields unchanged at 6.7-7.5% p.a.

Metinvest published its monthly financial results for September and trading update for 9M18. September sales totaled $911m (+2% m-o-m and +10% y-o-y), with volume sales of steel and merchant pig iron up 3% m-o-m and down 1% y-o-y to 1.1 Mt and sales of iron ore products down 6% m-o-m and up 9% y-o-y to 1.3 Mt. EBITDA rose by 19% m-o-m and 12% y-o-y to $243m, with metallurgical EBITDA up 33% m-o-m and 48% y-o-y to $149m and mining EBITDA up 5% m-o-m and down 16% y-o-y to $105m. Net operating cash flow stood at $141m, up from $8m in August and $25m in August 2017. Investing cash outflow increased by 187% m-o-m and 428% y-o-y to $132m and financing cash outflow stood at $40m (-27% m-o-m and -47% y-o-y) though the company reported $42m of dividends received.

WSE-listed Ukrainian agricultural producer IMC finished harvesting corn, reporting a record high gross yield of 11.1 t/ha, up 22% y-o-y. The harvest totaled 762 kt in absolute terms, gathered from 68,400 ha.

WSE-listed Kernel Holding, Ukraine’s largest sunflower oil producer and one of the largest grain exporters, reported that Namsen Limited, a company directly controlled by Chairman of the Board Andriy Verevskyy, acquired, on Nov. 29, a total of 56,744 shares in Kernel Holding S.A. at an average price of PLN 52.72 per share. As of Dec. 4, Namsen Limited held 32,716,775 shares in the company, representing 39.93% of the total share capital, having increased its stake from 32,660,031 shares (39.86%).

An attack by Russian naval vessels on Ukrainian combat ships in the Kerch Strait on Nov. 25 made the headlines globally and led Ukrainian authorities to impose a 30-day martial law in selected regions. The martial law, while coming as a negative surprise, will have limited adverse impact on the economy, in our view. The F/X market’s reaction was muted; the 2019 election schedule was unaffected; and overall, day-to-day business and private life is set to continue as usual barring a major military flare-up. Russia’s potential blockade of shipments via the Azov Sea would cause only limited and temporary export losses for Ukraine, estimated at up to $125m monthly ($1.5bn or 1.2% of GDP annualized), as exports can be rerouted via Black Sea ports. Overall, the recent events confirmed our long-held view that Russia-related risks are likely to increase ahead of Ukraine’s 2019 elections. On a positive note, Russia’s adversarial actions will keep Ukraine high on the EU/US agenda, facilitating quicker and possibly larger financial aid from official creditors. The latest statements from the IMF and other creditors suggest Ukraine is on track to receive up to $3.0bn by the end of the year, half of the currently allocated amount.

The State Treasury reported the central and local budgets’ combined UAH balances in the unified Treasury account stood at UAH 17.2bn as of end-November, up 17% m-o-m. Accounting for local governments’ deposits at commercial banks, estimated at close to UAH 13bn (flat m-o-m), and factoring in the proceeds from a $2.0bn sovereign placement, we estimate general government disposable leftovers almost doubled m-o-m to $2.1bn as of end-November but remained around half their level a year ago ($4.3bn in November 2017).

Crude steel production in Ukraine dropped by 2.5% m-o-m and 9% y-o-y to 1.7 Mt in November, bringing 11M18 output to 19.3 Mt (-1% y-o-y). Production of finished steel fell 4% m-o-m and 8% y-o-y to 1.5 Mt, remaining up 0.6% y-o-y in 11M18 at 16.8 Mt. Production of hot metal was down 5% m-o-m and 9% y-o-y to 1.7 Mt, bringing 11M18 output to 18.8 Mt (+2.8% y-o-y).

Although global equities recovered strongly last week (see below), Ukraine performed poorly due to disturbing local news flow (Russian naval aggression and introduction of martial law). The KP-Dragon index lost 4.0% w-o-w and the local PFTS index fell 1.2% in USD terms but rose 0.4% in UAH. In November, the KP-Dragon index dropped by 3.6% m-o-m but was up 2.4% q-o-q (quite the opposite of global stocks’ performance). Most Ukrainian stocks traded abroad suffered heavy losses. The worst performer was Milkiland, very illiquid and with an already tiny capitalization, plunging by 37% w-o-w. IMC lost 15% w-o-w, JKX was down 13%, Ferrexpo, the volume leader, shed almost 9%, Astarta was off 7.6%, Kernel declined by 4.1%, and MHP managed to close flat. Among domestically traded stocks, Centrenergo rebounded by 6.1%, probably on news of its upcoming privatization auction attracting a number of potential bidders and remaining on track despite the imposition of martial law. Raiffeisen Bank Aval lost 2.5% and Donbasenergo fell 2.1%. Kernel completed the latest round of quarterly results from local agricultural stocks, reporting strong financials. Sales more than doubled y-o-y to $1,140m on record high grain sales, EBITDA swelled to $101m (+119%) on stronger grain & infrastructure and farming segments. Quarterly net profit jumped by 231% y-o-y to $75m, supported by EBITDA growth. Kernel also confirmed its 2019FY farming EBITDA target of $160m, up 80% y-o-y on record crop yields, as well as 2019FY and 2020FY CAPEX targets of $330m and $200m, respectively (incl. maintenance).

As the imposition of martial law proved to have limited negative impact on the F/X market and overall economy, the market’s focus will likely shift to the implementation of prior actions required for the IMF Board to approve a $3.9bn 14-month Stand-by Agreement later this month. Following a phone call with President Petro Poroshenko, IMF Managing Director Christine Lagarde said the Fund expected the prior actions to be completed by Dec. 10 (see details below). Our understanding is that these steps include signing of the 2019 budget bill into law, for which parliament needs to remove technical hurdles tomorrow, and official publication of 16-19% heating tariff hikes by the sector regulator. On upcoming macro data releases, we estimate NBU reserves (Dec. 5) rose by 6.1% m-o-m ($1.0bn) to $17.8bn in November (-5.6% YTD), driven by net proceeds of $1.3bn from a recent sovereign Eurobond placement. Headline inflation (Dec. 10) accelerated to an est. 9.7% y-o-y last month (vs. 9.5% in October) on a 23% m-o-m gas tariff hike (partially offset by declining gasoline prices).

Ukraine’s current account (C/A) deficit narrowed to $0.9bn in October from $1.6bn in September, bringing the 10M18 deficit to $4.6bn (vs. a $1.7bn gap in 10M17). Still, the 12-month trailing gap widened to an est. 4.2% of GDP ($5.3bn) from 3.7% in September and 2.2% in 2017. At the same time, the financial and capital account (F/A) surplus, incl. IMF financing, stood at $1.0bn in October, in line with the September reading and bringing the 10M18 F/A surplus to $2.7bn. The 12-month trailing F/A surplus improved to 2.7% of GDP from 2.2% in October (still lower than 4.6% surplus in 2017).