Previous Quarterly Editions
Expropriation Risk: 61 61 61 62 Political Violence Risk: 66 66 66 66 Terrorism Risk: 34 34 33 33 Exchange Transfer and Trade Sanction Risk: 64 64 64 64 Sovereign Default Risk: 66 66 66 57
TREND ▼
The political situation inside Ukraine has reached something of a plateau following the October 2020 local elections, which proved a sobering experience to the ruling presidential party, Servant of the People (SP). The party failed to win a mayoral seat in any city or large town, and won only modest representation in local assemblies, relative to the party’s electoral triumph one year ago.
With no new nationwide polls scheduled until 2024, President Volodymyr Zelensky’s administration in Kyiv does not face any major electoral tests soon- unless there is a crisis that triggers an extraordinary parliamentary or presidential election. The risk of the latter happening remains minimal as the Verkhovna Rada (parliament)- where the SP technically has a majority (sometimes, the party fails to hang together in votes)- continues to adopt decisions whenever critically necessary.
Besides, given a predicted precipitous slide in popularity of both the President and his party, neither of them would like to try their luck before 2024. Instead, Zelensky’s waning popularity may have prompted him to undertake actions to try to reverse the trend; this consideration appears to have stood behind his much-heralded curbs on pro-Russia politician Viktor Medvedchuk and his media and business interests in February 2021.
The adoption of an expressly tougher line on pro-Russian domestic opposition has coincided with a military escalation in the zone of the Donbas conflict, in the form of more frequent sporadic crossfire along the frontline dividing Ukraine’s army and Russia-backed separatists. The escalation has nearly destroyed the truce that was agreed in July 2020. More recently, reports have come in about Russian troops being concentrated near the border with Ukraine, generating speculation over a possible direct incursion. However, such an outcome still looks unlikely since Russia has also pulled back some of its troops from the area.
For Zelensky, who is eager to be seen as a peacemaker, the situation is further complicated by his futile attempts to revive the peace process within the ‘Normandy Four’ (Germany, France, Ukraine and Russia). Negotiations within this format are ongoing but have yet to result in a subsequent summit since the one in December 2019, when it was agreed to meet next at the highest level in four to five months.
In terms of other pressing issues facing Ukraine, the authorities have struggled to contain COVID-19, a third wave of which is sweeping Ukraine, with new highs in infections and deaths. The government has only recently (late February 2021) been able to launch vaccinations, after obtaining initial vaccine shipments from India, which are still to be complemented by additional larger-scale supplies.
On a more positive note, although COVID-19 has hit the local economy hard, the impact has not been as disastrous as feared, with real GDP falling in 2020 by ‘just’ 4%. Regarding Ukraine’s economic outlook, much will depend on how tight and prolonged domestic quarantine restrictions are. So far, most observers have predicted that 2021 should see a resumed real GDP growth of 4-5%.
TREND ►
The expropriation risk has increased, reflecting Ukrainian authorities’ intention to nationalise a local aircraft engine-maker, Motor Sich. Originally privatised in the 1990s, the company was effectively re-sold in recent years to Chinese investors, who by then had acquired a majority stake but whose take-over was never approved by Ukrainian regulators.
In early March 2021, Ukraine’s National Security and Defence Council (NSDC) resolved to return Motor Sich to the state, promising to compensate for investments made into the company’s factory. The NSDC decision was subsequently activated by Zelensky’s decree and all assets and shares in Motor Sich are now reportedly under a court arrest, with the company being managed by a specialised state agency.
Overall, the Motor Sich nationalisation case is an exceptional one-off arising from state security concerns rather than anything else and should not be viewed as an indication of the administration’s attitude towards foreign investment overall.
COVID-19 has only temporarily precluded street protests and rallies. Since the start of the second half of 2020, large-scale protests of political nature have resumed, mostly due to changes in, and a poor enforcement of, coronavirus quarantine restrictions. New protests range from actions against government decisions or policies on specific issues to those staged against the regime in principle by opposition forces, predominantly of pro-Maidan nationalist orientation.
As yet, none of these protests has come to violence. This is true even for one particularly loud and visible mid-March 2021 rally held next to Zelensky’s office, which the administration denounced as vandalism. The rally was in defence of pro-Maidan activist Serhiy Sternenko, sentenced to seven years in prison for assaulting a political opponent. More broadly, the trend towards peaceful actions is likely to persist but may be reversed if the Zelensky administration is seen crossing what the opposition regards as ‘red lines’.
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 the risk of random attacks on government-controlled areas. However, the risk may rise with any major escalation of fighting or a complete breakdown of stalled Donbas peace talks. Elsewhere, any external risks should remain minimal.
The local currency (hryvnya) has so far survived the COVID-19 crisis relatively unscathed. Following a slide throughout March 2020 amid concerns about the economy, the hryvnia subsequently regained some lost ground and in the last several weeks has even tended to appreciate, however gradually, amid pandemic-compressed demand for foreign currency.
To stimulate economic activity, the central bank cut interest rates during 2020 to a record low of 6% in June 2021, before needing to raise them slightly, to 6.5% in March 2021, due to higher-than-expected inflation. In late March 2021, the government enlarged the range of goods not to be imported from Russia by 25 new items, including wheat, sunflower oil, detergents and cellulose. In response to Russia’s initial own ban on Ukrainian imports, Kyiv introduced its embargo against Russian goods in 2016, which has since been regularly extended in time and expanded in terms of listed items.
TREND ▼
Ukraine needs to pay up to around USD5bn to external creditors in the remainder of 2021, of which almost USD3bn is due in September 2021 alone. Given the current level of the central bank’s foreign reserves (USD28.6bn as of March 2021) this should be achievable even without multilateral financing, such as from the International Monetary Fund (IMF).
Ukraine agreed a new USD5bn lending programme with the IMF for 18 months in June 2020, but following the IMF’s kick-off disbursement of USD2.1bn the same month, has been unable to receive any further scheduled tranches due to outstanding issues. The government is keen to regain access to IMF financing, not only for servicing debt owed but because Kyiv reasonably believes that resumed cooperation with the IMF should send a positive signal to potential investors in Ukraine’s debt instruments.
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