Previous Quarterly Editions
Expropriation Risk: 64 62 62 58 Political Violence Risk: 36 36 32 32 Terrorism Risk: 38 36 36 35 Exchange Transfer and Trade Sanction Risk: 74 70 68 65 Sovereign Default Risk: 62 62 60 59
TREND ▼ OUTLOOK ▲
During the second half of 2019, Ukraine benefited from the extraordinary triumph of Volodymyr Zelensky in the April presidential election and then the success of his new Servant of the People (SP) in parliamentary elections in July, which is now able to govern without the need for any coalition arrangement. The country now has a unified and effective government that was able to pass a series of legislative initiatives in quick succession. Given how small and fragmented the current opposition is, the only threat to the SP is from the possibility of internal conflicts over policy or from scandals involving its members. The latter concern is a real one, with the party experiencing several scandals towards the end of 2019 that may put its popularity at some risk in 2020. This would have been even more of a challenge if the December meeting of leaders from the so-called Normandy group of Russia, Ukraine, France and Germany had produced an agreement on the situation in the Donbas region that Zelensky would have needed to sell to the Ukrainian public. However, despite Zelensky’s readiness to make concessions for peace, President Putin appeared to have little interest in agreement once it was clear that the French priority is improving relations with Russia rather than penalising it, and that Germany has ceded its role as driver of these negotiations to France. As a result, the central disagreement about the Minsk 2.0 process remains, with Kyiv continuing to insist that elections and devolution in the rebel-controlled zone are impossible unless it controls the entire border after pro-Russian paramilitary forces disarm or leave, while Russia maintains that the Minsk agreement means that elections must be held in the region before Kyiv resumes control. Another summit is to be held in April, but the lack of a definite outcome in December represents a medium-term setback for Zelensky. However, he did manage to make progress on the pressing issue of a new deal to buy gas from Russia. The previous ten-year contract finished on December 31 and Kyiv wanted another ten-year deal while Moscow only offered a one-year agreement, but a resolution reached at the eleventh hour will see a five-year deal and compromise in ongoing litigation between the two sides. With no direct movement on the Donbas situation, the government at least has some time to concentrate on the economy. A statement from Finance Minister Oksana Markarova that the new three-year lending programme agreed with the IMF in December will be the last Ukraine will need is widely seen as credible, and there is an expectation that the country will manage to get its debt burden under control. However, the IMF will expect to see the country continue efforts to address concerns about its shaky rule of law, judicial integrity, and oligarchic control of the economy, and will be watching for an indication of backsliding in banking reform.
TREND ▼ OUTLOOK ▼
The new government has announced ambitious privatisation plans but remains enmeshed in a number of earlier ownership controversies. The main one involves telecommunications giant Ukrtelecom, whose privatisation in 2011 had been contested through the courts by the State Property Fund (SPF) under the previous administration. Prime Minister Oleksiy Honcharuk has said that it does not want to re-privatise the company, but its position remains unclear. Perhaps more significantly, the Zelensky administration has yet to show any determination to recover assets that were allegedly taken out from PrivatBank by its former owners, including an oligarch regarded as close to the president, prior to its 2016 nationalisation. After prolonged protests, new legislation designed to overturn a 2001 moratorium on agricultural land sales and create a land market in 2020 will initially apply only to Ukrainians, with foreigners allowed to buy land after 2024.
TREND ► OUTLOOK ▲
In the years since the 2014 revolution, Ukraine has generally avoided outbursts of political violence. There were very few incidents during the 2019 elections, with most political exchanges taking place online. There were some demonstrations urging Zelensky to take a firm line against Russia at the Normandy meeting in December, but again these were peaceful. 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.
TREND ▼ OUTLOOK ►
Traditionally low, the threat of terrorist attacks in Ukraine has subsided slightly over the last few months. 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.
Despite expectation that the hryvnia would experience a fall against major currencies this autumn, as it has in recent years, it managed to stay strong and ended the year up 12% against the dollar, its de-facto peg. This is primarily due to massive and ongoing sales of domestic treasury bonds throughout 2019. Denominated in hryvnia, the bonds have become a particularly popular vehicle among non-residents for their high yields. With a stronger hryvnia and moderating inflation, the central bank cut its interest rate in late October from 16.5% to 15.5%. Ukraine’s embargo on imports from Russia and the Russian ban on coal exports to Ukraine are both likely to be extended if there is no progress at the next Normandy talks in April.
Despite continuing fiscal pressures, Ukraine has been able to meet all its maturing external debt obligations, including a crunch remittance of almost 2 billion dollars that fell due in September. Although it needs to pay out about 5 billion dollars to foreign creditors during 2020, it should be able to handle this, especially with a new IMF loan of five billion dollars in place. At the end of 2019, foreign reserves stood at about 21.5 billion dollars, buoyed by the bond sales that have allowed the central bank to buy foreign currency on the interbank exchange and thus replenish reserves.
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