Disrupting the corridor to Crimea
The battle for the South remains a primary focus. As of this writing, Ukrainian forces are advancing at a measured pace, having breached the Russians' first line of defense, and are currently making progress through the main fortifications near Tokmak. To observers, this pace might seem underwhelming, but the key takeaway is that the Ukrainian Army is maintaining significant assault capabilities, even after three months of counteroffensive.
Moreover, this approach is inflicting much higher casualties on the invaders compared to its own losses, even while on the offensive. Reports suggest that Ukrainian forces are poised to liberate Tokmak soon. While this may not represent a major territorial gain on the surface, capturing Tokmak could prove pivotal in undermining Russian defenses in the South.
From just the northern outskirts of Tokmak, Ukrainian artillery could potentially control the so-called '”land corridor to Crimea,” posing significant logistical challenges for Russian forces in the South of Ukraine. The onset of autumn and its accompanying weather is unlikely to hinder these efforts. Given the extensive minefields, Ukrainian forces have been restrained in deploying armored vehicles and tanks. Instead, the primary work is being carried out by small assault squads, which aren't significantly affected by autumnal rains.
In other words, even if the counteroffensive isn't progressing as rapidly as some might hope, it's poised to yield tangible results this year. The end of summer doesn't appear likely to hamper the liberation efforts in the South, given the tactics the General Staff is employing in this operation.
The primary economic update is a revised 2023 forecast for grain crops. The Ministry of Agricultural Policy and Food now projects a 5.5% increase in crop yields for 2023, amounting to 58.8 mmt, compared to the previously projected 10% decline. A better grain harvest is certainly positive news. However, it poses additional logistical challenges, given the suspension of the grain corridor. The existing transshipment capacities through railways and alternative routes should facilitate the export of a significant portion of the new crops, and farmers don't seem overly concerned about the availability of these routes. The more pressing issue, however, is the decline in prices for agro-products combined with rising transportation costs, which is diminishing the sector's profit margins.
The retail FX market experienced some volatility due to changes introduced by the NBU for FX participants. However, this instability appears to be temporary. Bolstered by substantial foreign financial support, gross international reserves continue to rise. By the end of July, these reserves amounted to $41.7 billion, equivalent to 5.6 months of future imports. The balance of payments remains in surplus, even in the face of a growing trade deficit. This deficit is expanding due to surging imports amidst stagnant exports. Given these circumstances, the NBU is displaying confidence and has even begun discussions on easing FX restrictions.
Inflation continues to ease, with the CPI reported at -0.6% m/m or +11.3% y/y in July. The rate of disinflation is surpassing projections, prompting the NBU to once again revise its 2023 CPI forecast downward, now expecting +10.6% ytd, compared to the previously projected +14.8% ytd.
In July, the NBU began its easing cycle, reducing the prime rate by 3 ppts to 22%. The prime rate had been at 25% since June 2022. A strong inflow of foreign currency, decelerating inflation and overall macro-stabilization have made the NBU quite optimistic about Ukraine’s prospects. The NBU even expects the prime rate to drop to 18%-19% by the end of 2023.
Budget revenues remain robust, though a significant portion of public spending is covered by international support (grants and loans). This trend is unlikely to change even in 2024.
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