Previous Quarterly Editions
Expropriation Risk: 62 62 58 57 Political Violence Risk: 36 32 32 32 Terrorism Risk: 36 36 35 34 Exchange Transfer and Trade Sanction Risk: 70 68 65 67 Sovereign Default Risk: 62 60 59 60
TREND ▲ OUTLOOK ▲
The COVID-19 pandemic forced the authorities to introduce stringent quarantine measures from the middle of March 2020, with the initial period of three weeks being quickly extended. One consequence has been suspension of the normal political process, with country’s parliament only holding extraordinary sessions to adopt crisis-related legislation. However, President Zelensky’s administration has continued to pursue some controversial policies, notably the loosening of the rules governing the sale of agricultural land, even while battling the virus. This has encouraged sharp criticism of the government’s handling of the situation from an opposition that senses the vulnerability of Zelensky’s Servant of the People party, which has enjoyed unquestioned political dominance since last year’s election victory. In fact, the Zelensky administration was already in trouble before the virus crisis. At the start of the year, its slow and uncoordinated response to the accidental shooting down of a Ukrainian airliner by the Iranian military over Tehran resulted in the first significant drop in the president’s approval rating. This was followed by a scandal involving Zelensky’s prime minister, Oleksiy Honcharuk, who ended up resigning twice in a matter of weeks as the president’s confidence in him vacillated. By March 2020, the administration appeared to be having trouble in filling some financial posts in the cabinet as the economy headed for a downturn caused initially by falling growth in the industrial sector before being amplified by the virus crisis. It also came under fire for appearing to secretly approve plans with the new Russian negotiator for a new consultative council that would bring together Ukrainian government and rebel representatives, leaving it open to a sustained attack for apparently legitimising the rebel entities in Donetsk and Luhansk. Zelinsky’s new prime minister, Denys Shmihal, was left to tackle these problems as well as the stalled discussions with the IMF. The Fund had made it clear that, before it will open a new five-year extended financing facility, it needs Ukraine to enact legislation to ensure that bankrupt banks are not returned to their former owners, which is a reference to the outstanding PrivatBank issue. Businessman Ihor Kolomoisky has engaged in a series of lawsuits to try to regain the assets of PrivatBank, which was nationalised by the central bank in 2016. The bank's future had become a test of Zelensky's reformist credentials because of his past links to Kolomoisky. At the end of March 2020, the government managed to overcome an intense lobbying campaign orchestrated by Kolomoisky to pass the legislation necessary for the IMF to consider an extension to the country’s loan facility, which is the only realistic way to cover a fiscal deficit that the government now expects to be around 7.5%.
TREND ▼ OUTLOOK ▼
Although it has now met the IMF’s requirement for legislation that specifically prevents PrivatBank from being re-privatised, the Zelensky administration has yet to show any determination to recover assets that were allegedly taken out of PrivatBank by its former owners, including Ihor Kolomoisky, prior to its nationalisation. The government will be hoping that the struggle against the virus distracts attention from this, but an apparent reluctance to go after the oligarch may re-emerge as a political issue later in the year. After prolonged protests, new legislation designed to overturn a 2001 moratorium on agricultural land sales and create a land market in 2020 will apply only to Ukrainians, at least initially. President Zelinsky is now expected to put the question of whether foreigners, taken to mean large foreign companies, should be allowed to buy land after 2024 to a referendum. More generally, investors will note that the way is now open to a new deal with the IMF but will be worried by the extent of the changes in senior government posts during March 2020.
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The current quarantine regime across the country effectively precludes street protests or other demonstrations. In the years since the 2014 revolution, Ukraine has generally avoided outbursts of political protest and most political exchanges now take place online. Significant protests are only likely if the Zelensky administration makes major changes to the country’s position on a handful of truly sensitive issues. These include the war in Donbas, relations with Russia, and Ukraine’s integration into NATO and the EU, and no change in these area looks to be under serious consideration in the medium term.
TREND ▼ OUTLOOK ►
As a phenomenon, terrorism only came to Ukraine in 2014 with the war against Russian-backed separatists in the east, and the current stalemate there appears to have reduced rather than raised the risk of random attacks on government-controlled areas. However, the risk may rise in the event of a major escalation of fighting or a complete breakdown of Donbas peace talks. Elsewhere, any external risks should remain minimal.
The hryvnya was unusually strong during 2019, rising 12% against the dollar (USD), and it continued to strengthen in the first weeks of 2020. However, this was primarily due to massive sales of domestic treasury bonds last year and when interest in the bonds waned in February 2020 as the yield they offered fell, the currency market instantly felt the impact. The slide was accelerated by the government reshuffle in March 2020 and then the virus crisis. By the end of March 2020, it had lost the gains of the previous twelve months and was still headed downward. Somewhat surprisingly, in mid-March 2020 the central bank chose to cut its interest rate by another percentage point to 10%, citing a fall in inflation during February 2020. At the end of 2019, Ukraine extended its embargo on imports from Russia for another year, with Russia responding by extending its own import ban on Ukrainian goods. More significantly, in April 2020, Ukraine introduced a special duty of 65% on imports of electricity from Russia.
Ukraine began the second quarter by finally passing the banking legislation required by the IMF before it would consider a new five-year loan programme. This will help the government to deal with the financial and social strains of COVID-19 and the related demands on the country’s healthcare system. Having begun 2020 with projected growth of 3.7%, the government now expects a contraction of almost 5.0%. However, while serious, the country’s debt situation is not yet unmanageable. During the remainder of 2020 it will need to pay around 4 billion USD in sovereign debt remittance and servicing but foreign reserves are still above 25 billion USD even after the central bank used 1.5 billion USD during March 2020 in its efforts to slow the slide of the hryvnya.
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