Previous Quarterly Editions
Expropriation Risk: 62 69 69 71 ▲Political Violence Risk:68 79 90 90 ►Terrorism Risk:33 33 24 24 ▼Exchange Transfer and Trade Sanction Risk: 55 64 64 64 ►Sovereign Default Risk:66 75 75 74 ►
TREND ►
Geopolitical alignmentEast 1 2 3 4 5 West
Alignment five years agoEast 1 2 3 4 5 West
Degree of contestationSettled 1 2 3 Contested
Ukraine remains in many ways a cross between East and West: the country still displays a mix of the Russian and U.S./European influences, but the balance between the two is changing in favour of the latter. The escalation of conflict in Ukraine in February 2022 has hugely accelerated that change, causing authorities in Kyiv to break diplomatic relations with Russia and wrap up all bilateral economic ties and trade.
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While Russian influence may still be relatively strong amongst individuals, especially in the east and south of the country, something Russia hoped to exploit in launching the invasion. Overall, however, the pro-Russian sentiment has receded greatly, including amongst the Russian-speaking population, with open expression by individuals favouring Russia now only possible in Russian-occupied territories of Ukraine.
In terms of its geopolitical alignment, Ukraine shows little of the kind of ambivalence that characterized its official policies before the 2010s. No longer ready to pursue the ‘multi-vector’ policies
after the Russian 2014 annexation of Crimea, Ukraine has been leaning further in the direction of the West, with its two strategic goals of gaining membership of the European Union and NATO cemented in the country’s constitution since 2019.
The war appears to have affected the setting here, too. The prospect of Ukraine ever becoming an EU member has suddenly improved with the European Union’s late-June decision to grant Ukraine a candidate country status. While the EU membership goal enjoys unequivocal support within the domestic polity, Kyiv’s active insistence on the need to be
accepted into NATO appeared to be abandoned in the early days of the war, although some of the more recent indications suggest that this departure was just a temporary step back from the otherwise unchanged long-term aspiration. In any case, with the war still raging inside Ukraine, and much reform work to be done after the war is over, each goal is unlikely to be met soon.
In large part due to the war, domestic politics have undergone little change over the last few months. The current administration, of President Volodymyr Zelensky, remains firmly in control of the situation, with the
president himself perceived by many Ukrainians as a war hero, keeping all his potential political rivals far behind in popularity ratings. The liquidation of pro-Russian political parties that began in March is now complete, following a mid-September court ruling to reject an appeal by the main such party against its formal ban. At the other end of the political spectrum, the pro-European opposition can be seen generally sticking to the principle of maintaining internal unity on defence and foreign policy issues.
TREND ▲
The war has increased the risk of expropriation but mostly, if not exclusively, regarding assets owned by the Russian state and its citizens. A special law passed in March 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. In addition, in May, legislators passed a law that opened the way for confiscation of assets belonging to Russian legal entities and physical persons through non-criminal proceedings in court. That law was to be applied based on a verdict of Ukraine’s High Anti-Corruption Court, following a respective suit filing by the Justice Ministry. However, at the time of writing, it has only been used once.
The war continues to preclude any political street activism across Ukraine. Mass gatherings and manifestations are forbidden under the martial law introduced inside the country immediately upon the Russian invasion, as of February 24, and has since been extended three times, most recently until November 21. Given past experience, however, post-war domestic politics can be expected to return to their normal functioning, which in Ukraine means whilst animated would not involve significant outbursts of political violence.
TREND ▼
This risk has traditionally been low. The country has only experienced terrorist attacks 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 war in Donbas. A situation similar to what had occurred during the ‘hot’ phase of the Donbas war began to develop – and on a far more serious scale – in the first two months from February. At that point, there was a constant stream of reports about Ukrainian police and territorial defence units capturing various saboteurs and infiltrators in large cities and towns under government control. However, the subsequent period has seen less of such reports, apparently reflecting the changing war dynamic in the wake of the Russian army’s forced retreat from areas to the north of the capital Kyiv.
The local currency, the hryvnya, has been under renewed devaluation pressures since the beginning of the Russia/Ukraine crisis. To fend these pressures off, the central bank immediately, on the very first day of the Russian invasion, fixed the hryvnya against a de-facto peg, the U.S. dollar, in the official exchange rate. At the same time, commercial banks and non-bank exchange points could still buy and sell currency at their own rates, normally exceeding the official one by 10%-20%.
This situation of multiple exchange rates persists, with the only principal recent change coming from an effective one-off devaluation of the official hryvnya-dollar exchange rate in late July. As a result, the hryvnya was quick to devaluate in the other rates, too, albeit less sharply, where it remains prone to further weakening amid stubbornly strong demand for foreign currency.
In terms of trade sanctions, the respective risk concerns only Russia again and arose even before its late-February invasion. 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. In December the government extended special duties on imports of such Russian energy carriers as diesel fuel, liquefied gas, and most types of coal, originally introduced in August 2019 and extended for a year.
For much of 2022, the sovereign default risk tended to increase before being reduced considerably by Ukraine’s debt restructuring measures undertaken over the last two months. In early August, the government announced a restructuring deal with holders of Eurobonds worth a total of USD22.6 billion. The deal covers government-issued Eurobonds presently in circulation and postpones their servicing for two years.
In mid-September, the government reported signing a memorandum on debt restructuring with a group of official creditors from the Paris Club. This document seals the creditors’ consent, initially announced in late July, to suspend until the end of 2023 remittance and servicing of loans provided to Ukraine for the sum of around USD3.1 billion, with a possibility of extending the suspension for another year.
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