Previous Quarterly Editions
Expropriation Risk: 62 58 57 54 Political Violence Risk: 32 32 32 36 Terrorism Risk: 36 35 34 33 Exchange Transfer and Trade Sanction Risk: 68 65 67 65 Sovereign Default Risk: 60 59 60 58
TREND ▼ OUTLOOK ►
At the end of May 2020, some two and a half months after introducing a stringent quarantine regime to fight the COVID-19 pandemic, Ukraine began to gradually ease its restrictions. Since then, despite some subsequent surges in the number of infections, life has been slowly returning to normal in most areas. This includes politics, with the Verkhovna Rada (VR), the parliament, resuming its regular plenary sessions from June 2020. However, the VR never really stopped working during the first months of the pandemic, holding extraordinary sessions that proved remarkably active and productive. It adopted two crucial laws, one on agricultural land sales in March 2020 and the second preventing the return of bankrupt banks to their former owners in May 2020. These legislative changes have allowed Ukraine to regain access to IMF financing, and in June 2020 the Fund approved a programme that makes five billion USD available through a standby facility for 18 months. Although the two sides had initially been negotiating an extensive package involving eight billion USD over three years, Kyiv was glad to take the current deal as it unlocks other multilateral lending to the country, not least from the EU. The IMF promptly disbursed the first tranche of 2.1 billion USD, which was immediately used to help finance a ballooning fiscal deficit caused by the need to respond to COVID-19. However, the IMF made clear its concern when central bank head Yakiv Smoly resigned at the start of July 2020, claiming "systematic political pressure" prevented him from doing his job as governor. Both Smoly and the bank have been seen as major drivers of reform in recent years but have come under fire for prioritising inflation control above stimulating growth. He explained that the bank had experienced pressure from the executive, and the legislature, to pump money into the economy, devalue the hryvnia, and adjust exchange and inflation rates to fit the government's budget plans. He added that he was told to resign by President Zelensky. His reluctant departure does much to undermine the Zelensky administration’s claim to be championing change and good governance by protecting the bank’s independence. In June 2020, the recently formed government under prime minster Denis Shmihal failed to win VR approval for its action programme. Losing the vote does not require the government to resign but it does prevent it from enjoying a guaranteed year in office. This leaves it vulnerable to being voted out of office by the VR at any moment. This is a real possibility as the ruling Servant of the People party now lacks a stable majority within the VR and has no obvious coalition partner to help it survive similar votes. Despite this situation, the administration is unlikely to take a risk and opt for extraordinary parliamentary elections anytime soon. Although Zelensky’s public support still remains extraordinarily high, it would be impossible for him to repeat the kind of electoral triumph that he and his party enjoyed last year in 2019. Instead, the next electoral test for the ruling party should come with the nationwide local elections that are still scheduled for late October 2020. By then, the outcome will depend on the state of the economy and the state of efforts to resolve the conflict in Donbas. The domestic economic downturn, which began well before the COVID-19 outbreak, could now produce a contraction approaching double figures in 2020. On the Donbas issue, progress depends on whether- after a protracted pause- the Normandy peace talks can be re-activated at some point in the coming months.
TREND ▼ OUTLOOK ▼
Although it has now met the IMF’s requirement for legislation to specifically prevent PrivatBank from being re-privatised, the Zelensky administration has not yet shown any determination to recover assets that were allegedly taken out from PrivatBank by its former owners, including Ihor Kolomoisky, prior to its nationalisation. It is not likely to do so any time soon as the legal change in May 2020 provides Kolomoisky and others with the option (if a court rules the liquidation of a bank to be unlawful), to claim monetary compensation rather than a return of the assets- which is an option the former owners, PrivatBank, look ready to pursue. More generally, investors will note that the way is now open to a new deal with the IMF but will worry about the uncertainty created by the vulnerability of the current Shmihal government.
TREND ▲ OUTLOOK ▲
The loosening of lockdown provisions has increased the potential for demonstrations, and June 2020 saw a series of large-scale street protests in Kyiv against the government’s apparent determination to pursue a legally dubious prosecution of Petro Poroshenko, Zelensky’s predecessor as president. Protesters also called for the removal of the powerful interior minister, Arsen Avakov, over allegations of police brutality. However, none of these came anywhere close to violence. Since the 2014 revolution, Ukraine has generally avoided outbursts of political protest and most political exchanges now take place online. Significant anti-government protests are only likely if the Zelensky administration makes major changes to the country’s position on a handful of truly sensitive issues, such as the war in Donbas, relations with Russia, or Ukraine’s integration into NATO and the EU.
As a phenomenon, terrorism only came to Ukraine in 2014 with the war against Russian-backed separatists in the east. 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.
TREND ▼ OUTLOOK ▲
Following a slide throughout March 2020 amid concerns about the economy, the hryvnia regained some of the lost ground in April 2020 and has remained fairly steady since then. To stimulate economic activity, the central bank has cut interest rates twice since the start of the COVID-19 pandemic, bringing it to a record low of 6% in June 2020. At the end of 2019, Ukraine extended its embargo on imports from Russia for another year, and Russia responded by extending its own import ban on Ukrainian goods. In April 2020, Ukraine introduced a special duty of 65% on imports of electricity from Russia and extended that duty to Russian coal in May 2020.
Although the first tranche of the new IMF loan went straight into the current budget, the follow-up tranches should go to boost central bank reserves, which were around 24 billion USD in June 2020 after meeting large-scale debt and service payments in the first half of 2020. This leaves the government and the central bank now needing to pay less than three billion USD to external creditors during the remainder of 2020, but the level of private sector debt, particularly that of the giant DTEK power corporation, is an increasing concern.
Return to contents Next Chapter