Previous Quarterly Editions
Expropriation Risk: 64 64 62 59 Political Violence Risk: 36 36 34 32 Terrorism Risk: 38 38 36 36 Exchange Transfer and Trade Sanction Risk: 76 74 70 68 Sovereign Default Risk: 65 62 62 60
TREND ▼ OUTLOOK ►
The parliamentary elections that were brought forward to July following Volodymyr Zelensky’s unlikely but emphatic presidential victory in April produced another extraordinary and sweeping success for the president’s nascent political party, Servant of the People (SOP). Zelensky’s grip on power is now complete. A party that had barely existed at the start of the year has secured the first absolute parliamentary majority since independence. In the new session of the Verkhovna Rada, Ukraine’s parliament, that opened at the end of August, SOP has 254 out of the 450 seats, far outweighing the four main opposition parties. These are the pro-Russian Opposition Platform for Life (43 seats), the Yulia Tymoshenko-led Batkyvschina (26), the freshly rebranded European Solidarity of ex-President Petro Poroshenko (25) and another newcomer, the Holos party, fronted by rock-star-turned-politician Vyacheslav Vakarchuk (20). President Zelensky and his party can now govern the way they deem necessary, leaving the opposition split into bitterly divided ideological camps. However, the speed with which they seized the reins of government means that it is not clear what they intend to do with this power, as Zelensky and his team have continued with their successful election tactic of avoiding a clear stance on many issues. On the central issue of the ongoing conflict in Donbas, Zelensky can be expected to maintain the previous administration’s reliance on a diplomatic approach based on the existing framework of the Minsk 2.0 agreements. These are once again being championed by France and will be helped by a low-key but discernible thaw between Kyiv and Moscow. On the other major issue, managing the economy, the new government will be keen to regain access to multilateral funding from the IMF. This means accepting conditions and reforms that will set the political agenda for the remainder of the year and into 2020. Another good harvest looks likely to surpass last year’s record figures, but little is being done to ease the shortage of railway wagons, and more recently locomotives, that are needed to transport the grain to the ports on the Black Sea coast.
Although Zelensky still remains an unknown quantity in many areas, those around him seem keen to minimise the role of the state in the economy wherever possible. In practical terms, this means a re-launched and re-invigorated privatisation campaign. Plans have already been announced for a major push in the banking sector, where previous plans to sell all state-owned banks by 2022 have stalled. However, the future of Privatbank, the country’s largest lender, presents the new government with an immediate problem. In April, an administrative court ruled that the Privatbank nationalisation in 2016 had been conducted unnecessarily and was therefore unlawful. As a result, the bank could be returned to its former private owners who happen to include Ihor Kolomoisky, the oligarch who, Zelensky’s opponents claim, has the president in his pocket.
For a country that has been through two very contentious elections in recent months, the lack of street protests or demonstrations was surprising. This was partly due to an unusually short parliamentary campaign falling during mid-summer, but perhaps mostly to the fact that, for both the presidential and legislative elections, a heated campaign took place online rather than in the streets. Overall, since the demise of the Mikheil Saakashvili-led opposition movement in mid-2018, political demonstrations have declined. However, this trend could be reversed at any point in the event of a major policy change by the Zelensky administration on a short list of key issues that includes the war in Donbas, relations with Russia, or Ukraine’s integration into NATO and the EU.
TREND ► OUTLOOK ▼
The threat of terrorist attacks in Ukraine, already relatively low, has continued to fall, with no incidents during the elections in the spring and summer. Even the hoax bomb threats that have been a feature of recent elections were rare. As a phenomenon, terrorism only came to Ukraine in 2014 with the war against Russian-backed separatists in the east. The most recent major incident in which Ukrainian authorities suspect Russian involvement was in October 2018, when a series of explosions hit a munitions depot near the northern city of Chernihiv. There have been no instances of cyberattacks so far this year.
TREND ▼ OUTLOOK ▲
The local currency proved remarkably resilient throughout the two election campaigns, even reaching a three-year high against major currencies in late July. The hryvnya usually fairs well in the summer months as seasonal exports accelerate, and grain exports in July alone were up by 60% year-on-year. But it has also been helped this year by increased foreign-currency inflows attracted by the government’s active and large-scale sales of domestic treasury bonds offering yields above 15%. The central bank’s rate cut in April from 18% to 17.5% was followed by similar cuts in July and September to reach 16.5%. Inflation is now in single digits and the bank expects it to continue moving down towards its target of 5% for 2020. In April, Ukraine extended its embargo on imports from Russia until 2020, with Russia responding by banning coal exports to Ukraine. In August, Ukraine also banned imports of Russia-produced cars, buses, tractors, lorries and motorcycles.
Although still challenging, Ukraine’s debt situation has improved somewhat following a Eurobond issue worth one billion euros in June. This borrowing helped compensate for the IMF’s decision to postpone a loan tranche in June after President Zelensky brought forward the legislative elections, and it also strengthened the government’s ability to meet a repayment crunch in September. As soon as his new administration is up and running in September, Zelensky plans to reopen talks with the IMF with the aim of securing a totally new lending facility to replace the current programme, which expires early next year. If the talks take longer than he hopes then Ukraine is likely to revisit the Eurobond market before the end of the year, even if borrowing conditions worsen. According to the government’s estimates, it needs to pay a total of 2.7 billion dollars to external creditors during the second half of 2019.
Return to contents Next Chapter