Previous Quarterly Editions
Expropriation Risk: 62 62 62 69 ▲ Political Violence Risk: 66 66 66 79 ▲ Terrorism Risk: 33 33 33 24 ▼ Exchange Transfer and Trade Sanction Risk: 64 55 55 64 ▲ Sovereign Default Risk: 57 57 66 75 ▲
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Government's commitment on climate policy Weakest 1 2 3 4 5 Strongest
Ukraine is a party to the international efforts against climate change but, as with many developing economies, its contribution has been relatively modest. In July 2021, the government submitted a revised plan for the Nationally Determined Contribution to the Paris Agreement, envisaging a significant improvement in the country’s emissions target -- to a 65% reduction below 1990 levels by 2030, up from a 40% reduction (in respect of the same baseline and period) that was aimed at five years earlier. The use of the 1990 baseline
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may make these targets look impressive, but in the 1990s Ukraine suffered a large and prolonged economic decline caused by the Soviet Union’s disintegration.
The government also announced last year, at the COP26 international climate meetings in Glasgow, that as part of decarbonisation efforts it aimed to phase-out the use of coal by 2035, rather than 2050 as was the previous plan. This new target is sufficiently challenging, with Ukraine’s electricity generation from renewable sources accounting by now for less than
10% of the total generation (in comparison to the European Union’s average of about 40%).
The late-February onset of conflict has abruptly changed every major aspect of life in Ukraine -- political, economic, and social. In politics, the crisis has revealed Moscow’s determination to bring about a wholesale regime change within Ukraine, meaning a replacement of the current administration in Kyiv with pro-Russian puppets. However, almost a full month into the crisis, Ukrainian authorities are still very much in control, both in the capital and across most regions, including major cities.
Moreover, the crisis appears to have sharply boosted popular support for the country’s leadership, and President Volodymyr Zelensky in particular. All the main domestic political parties – except for the pro-Russian opposition, whose activities are now suspended -- have set aside their differences and are rallying behind the president in resisting Russia. Assuming Ukraine survives as an independent state, Zelensky is poised to attain a kind of political longevity that was hard to imagine before the crisis.
The period that followed the early 2021 conflict over the aircraft enginemaker Motor Sych and preceded the onset of violence witnessed no new cases that might fall under the category of expropriation risks. At the time, there was just one publicly known conflict unfolding between the Ukrainian state and a foreign investor, a German-registered steel giant ArcelorMittal Kryvyi Rih (AMKR), but that conflict arose from some alleged tax irregularities, resulting in heavy fines and blocked accounts, and never contained a hint of asset seizure. The AMKR issue went to court before the crisis effectively interrupted the legal process.
On the other hand, the crisis has increased the risk of expropriation regarding assets owned by the Russian state and its citizens. A special law that was adopted by parliament on March 3 and signed by the Ukrainian president a week later allows the government to nationalise such assets, without making any compensation or reimbursement, based on proposals to be submitted by the National Security and Defence Council. However, it is not known yet whether this law could already be realised in practice or will still need to be backed by a supporting legal infrastructure.
The crisis has for now effectively precluded any political street activism across Ukraine. The martial law that was introduced inside the country immediately- upon the Russian conflict- has been extended.
Prior to the current conflict, politics in Ukraine could have been characterised as quite lively but normally devoid of significant outbursts of political violence. Even when the political temperature used to rise or look particularly high, the observed street activism would not grow into violent acts. To give a recent example, such was the case with large-scale but invariably peaceful protests and rallies staged by the domestic opposition throughout December-January against alleged political persecution of the previous Ukrainian president.
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This risk has traditionally been low. The country has only experienced terrorist attacks that were associated with the post-2014 situation in the east; those attacks proved sufficiently random and occurred for the most part during the first year of the crisis in Donbas.
The Ukraine/Russia conflict since late February essentially returns the situation to where it was back in the ‘hot’ phase of the Donbas crisis, but on a far more serious scale now. As the Russian military struggles to advance, government-controlled areas are at risk of attacks by all sorts of saboteurs and infiltrators; their capture in large cities and towns has been reported on an almost daily basis.
The Russia/Ukraine crisis has eventually dented the kind of relative currency stability seen in Ukraine for much of the past year. Until about early to mid-January, the hryvnia on the whole defied increased devaluation pressures, themselves mainly of psychological nature -- due to the tension over the then Russian troop build-up near the Ukrainian border rather than any market factors (which remained unchanged). The hryvnia’s’s subsequent slide downwards was arrested by Ukraine/Russia crisis, upon which the central bank effectively suspended trading on the domestic currency market by setting a fixed exchange rate.
The regulator has also continued to raise its interest rates, last time by a whole percentage point to 10% in late January. As earlier, the raise was designed to contain inflation that nevertheless soared further, to 10.7% in February. Already far above the bank’s target, inflation is highly likely to keep accelerating as it has yet to reflect the crisis in full.
At the end of 2021, the government renewed its long-standing trade sanctions against Russia. This included another one-year extension of a 2016 resolution cancelling all trade preferences for Russian goods, introduced in response to Russia’s suspension of free trade with Ukraine. Also in December and also for a year, the government extended special duties, originally introduced in August 2019, on imports of such Russian energy carriers as diesel fuel, liquefied gas and most types of coal. Currently, Ukraine has been calling, so far unsuccessfully, for an international trade embargo on Russia as a result of the conflict.
Ukraine should be able to avoid a sovereign default. The crisis may have effectively cut it off from international financial markets, but the country looks set to receive external support in the way of state-to-state and multinational financing. Besides, Ukraine does not face particularly large debt payments this year, with their largest monthly chunk, of about 900 million dollars, due in September and other monthly payments to come within the 100-150 million dollar range, according to the latest update from the finance minister.
In early March, the government and the International Monetary Fund (IMF) agreed to terminate ahead of time the Fund’s current stand-by facility (which was extended in November until June). Instead, the IMF pledged and subsequently released what it formally referred to as a Rapid Financing Instrument, valuing USD1.4 billion, to cover the budget deficit.
Reports suggest that the sides are also working on a totally new financing programme that would involve a transfer to Ukraine of some of the IMF-distributed reserves among other member countries. In terms of financial assistance from individual states, the government expects to receive financial guarantees from the United States for issuance of Ukrainian Eurobonds -- which is what had successfully been done between the two countries back in 2015-17.
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