Previous Quarterly Editions
Expropriation Risk: 61 61 62 62 ► Political Violence Risk: 66 66 66 66 ► Terrorism Risk: 34 33 33 33 ► Exchange Transfer and Trade Sanction Risk: 64 64 64 55 ▼ Sovereign Default Risk: 66 66 57 66 ▲
TREND ►
The last couple of months have proved relatively quiet in terms of the intensity of the political process inside Ukraine, due largely to the legislature’s recess for most of July-August. There is also a sense of somewhat increased domestic political stability, thanks to what appears to be a favourable turn of fortunes for the ruling camp over recent months.
Following the imposition of sanctions by Ukraine’s National Security and Defence Council against pro-Russian opposition leader Viktor Medvedchuk earlier this year, the ratings of both President Volodymyr Zelensky and his political party, Servant of the People (SP), stopped sliding and have even begun to grow.
Moreover, the incidences of the ruling SP majority needing to seek support from some other factions and independents have decreased. This has resulted in the almost guaranteed passage of any president or cabinet-initiated legislative proposals, which was not the case earlier this year.
The next nationwide election is the early 2024 regular presidential election. Zelensky could decide to run again; his opinion poll ratings would inform that decision. He probably will run again, despite earlier pledging not to.
The rest of this year is likely to be quite lively in terms of politics and politicking. The opposition will try to make the most out of perceived policy failures and such already looming economic challenges as the soaring cost of energy and related hikes in utility tariffs.
There is also the unresolved Donbas conflict in the east -- prospects for its settlement look dim, despite Zelensky’s apparent determination to agree a deal. While the tensions that flared-up on the border with Russia in April in connection with its massive troop concentration have eventually disappeared, there are still almost daily ceasefire violations along the front line dividing government forces and the pro-Russian separatists. On the diplomatic front, the main peace talks remain stalled, with no new Normandy summits held since December 2019.
In terms of the macroeconomic situation, the government has been lucky enough to preside over the local economy’s natural return to growth after the worst of the COVID-19-induced crisis has passed. Thanks in large part to an extremely low base recorded during the initial lockdown, real Gross Domestic Product (GDP) grew by 5.4% in the second quarter of 2021, though it is now predicted to decelerate to around 4% by year-end.
Despite the fallout from a recent conflict between the Ukrainian state and Chinese investors over the aircraft engine-maker Motor Sich, expropriation risks have decreased slightly in the absence of any new or potential cases of asset expropriation by the state in the past few months. Expropriation risks will weaken further, at least with respect to assets belonging to foreign investors. The last few months have also seen some conflicts between the state and other foreign companies resolved by local appeal courts in favour of the latter.
In the years that followed the 2014 revolution, Ukraine has generally been spared serious outbursts of political violence. Even though the country has displayed a relatively high level of political street activism, this does not at present seem to translate into mass-like violent actions.
A gradual easing of COVID-related restrictions since mid-2020 has brought various activists and demonstrators back on to the street, but with no visible consequences in the shape of pre-meditated acts of violence. So far, all major protests and street actions staged this year by various opposition forces have ended peacefully.
Although there is a good chance that the incidence of protests will only grow in the new 2021-22 political season, the trend towards peaceful actions is likely to persist -- unless the Zelensky administration is seen crossing what the pro-Maidan opposition regards as ‘red lines’. The latter scenario, however, looks least likely, as the ‘red lines’ in this context are normally meant to relate to Ukraine’s resistance to Russia and pursued integration with the West.
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.
The recent death of a Belorussian political activist (Vitaly Shishov, who was found hanged after jogging in a park) in the Ukrainian capital has prompted suspicion that there may also be a risk of attacks being targeted specifically against some fugitive opponents of the current regime in Minsk. Elsewhere, any external risks should remain minimal.
TREND ▼
The local currency (hryvnia) has remained roughly steady in recent months. Following a slide throughout March 2020 amid concerns about the economy, the hryvnia subsequently regained some lost ground and for the most part has even tended to appreciate, however gradually and in waves, amid pandemic-compressed demand for foreign currency. The latest wave of gradual appreciation came in the early summer and appears to be continuing to date, but there are common predictions that a largely seasonal reversal of trend can be expected for the autumn-winter period.
To stimulate economic activity, the central bank cut interest rates during 2020 to a record low of 6% in June, before needing to raise them three times so far this year, eventually to 8% as of July, due to higher-than-expected inflation. With inflation already reaching double-digit values and not expected to peak until October-November, the bank itself has indicated that it might raise rates one more time by year-end.
In late March, the government enlarged the range of goods not to be imported from Russia by 25 new items, including wheat, sunflower oil, detergents and cellulose. Russia reciprocated with similar measures in early July, adding to its ‘black’ list such items as sugar, barley and ice cream. In response to Russia’s initial own ban on Ukrainian imports, Kyiv introduced its embargo against Russian goods back in 2016, which has since been regularly extended in time and expanded in terms of listed items.
TREND ▲
In late August, Ukraine received USD2.7bn from the International Monetary Fund (IMF) as part of a Special Drawing Rights re-allocation to help member countries cope with the COVID-19 pandemic’s implications. This was essentially a gift that could not have come at a better time: in September, the government needs to pay to external creditors around USD3bn, with a little over USD650mn payable in the remainder of the year.
Next year, Ukraine will need to make sovereign debt remittances for a somewhat lesser total than in 2021 -- of about USD4.8bn -- which should be achievable as well, especially if the government succeeds in regaining access to the IMF’s ‘usual’ financing. The Fund’s current lending programme -- a USD5bn standby facility, from which only USD2.1bn was dispersed thus far -- has been effectively put on hold due to outstanding issues. As the 18-month programme expires in December, the sides are reportedly considering now the possibility of extending it for another six months.
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