Index Trend Previous Quarterly Editions
Expropriation Risk: 64 Political Violence Risk: 36 36 Terrorism Risk: 38 Exchange Transfer and Trade Sanction Risk: 74 Sovereign Default Risk: 62
Risk Temperature 60 (Medium-High) -1
TREND ▼ ▲
Ukraine faced a fresh security problem when, in late November, Russia seized three Ukrainian navy vessels and 24 crew members as they were trying to pass through the Kerch Straits to the Azov Sea. This was the first use of direct force by Russia against Ukrainian servicemen and it prompted Kyiv to impose martial law for 30 days in some parts of the country. The martial law provision expired at the end of December without being extended even though the crews were still held by Russia, but the incident has added significantly to the tension between the two countries. The naval incident came at a time of continuing stalemate in the Donbas region of eastern Ukraine, perhaps the most obvious place for a large-scale confrontation with Russia. With regular exchanges of artillery and sniper fire, there is still no real truce along the front line dividing the Ukrainian army and the separatists who want closer relations with Russia. At the same time, diplomatic efforts to resolve the Donbas conflict appear firmly stalled, with Moscow waiting to see the outcomes of the two sets of Ukrainian elections this year. The result of the presidential election on March 31 is far from certain. Recent polling suggests that President Petro Poroshenko’s prospects of re-election remain dim despite an uptick at the turn of the year. His long-time rival, Yulia Tymoshenko, retains a substantial lead and is all but guaranteed to proceed to a second round. However, if Poroshenko manages to outflank his challengers to join her in the second round, he is expected to win. Even after the presidential election is completed, a significant degree of political uncertainty is likely to persist until after the parliamentary elections in October, the outcome of which is even more unpredictable. Assuming no major external shocks, the economy should continue its gradual recovery during 2019, but weaker global demand for metals could see growth fall back to around 2.5% from well over 3% in 2018.
Expropriation Risk 64 (Medium-High) TREND ► ▲
There is now only one major effort still ongoing by the authorities to nationalise assets that they say were acquired illegally under the former regime, and this has received another setback. In November, a Kyiv economic court declined a lawsuit by the State Property Fund, the government’s main privatisation arm, that sought to cancel the earlier privatisation of telecoms giant Ukrtelecom and establish its return to state ownership. Meanwhile, Ukraine’s state-owned gas distributor Naftogaz continues to seek seizures of foreign assets belonging to Russian energy giant Gazprom as it tries to recover the 2.6 billion dollars it was awarded by a Stockholm arbitration court in February 2018. It has been encouraged by the decision of a Swedish appeals court in September to lift the suspension it had imposed on the award while considering the case. The high court in Amsterdam that is hearing the Naftogaz lawsuit regarding the execution of the arbitration ruling is expected to issue its decision by mid-year.
In November, a Kyiv economic court declined a lawsuit by the State Property Fund that sought to cancel the earlier privatisation of telecoms giant Ukrtelecom and establish its return to state ownership
Political Violence Risk 36 (Medium-Low) TREND ► ▲
Since mid-2018, there have been few large-scale political demonstrations, and none that have produced violence. The wave of political street activism that rose quickly in late 2017 and early 2018 proved relatively short-lived and was mostly limited to protests by supporters of opposition leader Mikheil Saakashvili. Following Saakashvili’s deportation to Poland in February 2018 and the clearing by police of his movement’s tent camp in the capital a month later, such protests ended and have not resumed. The final weeks of the presidential campaign are not expected to produce any major demonstrations, but the immediate aftermath could see protests if the results are controversial.
Terrorism Risk 38 (Medium-Low) TREND ► ►
The threat of terrorist attacks in Ukraine remains relatively low, although escalating tensions with Russia raise concerns in this area. Ukrainian authorities attempted to highlight a possible Russian connection to a number of recent murders of Kremlin critics in Kyiv by staging the faked murder of Russian fugitive journalist Arkadiy Babchenko in Kyiv in late May 2018. In October, suspicions of Russian sabotage arose from a series of explosions at a munitions depot near the northern city of Chernihiv. That incident was the sixth time that the Ukrainian army has experienced such explosions since the start of the war in Donbas in 2014. However, unless there is a large-scale military escalation in the east, the risk of random terrorist attacks should not rise above present levels.
Ukrainian authorities attempted to highlight a possible Russian connection to a number of recent murders of Kremlin critics in Kyiv by staging the faked murder of Russian fugitive journalist Arkadiy Babchenko in Kyiv in late May 2018
Exchange Transfer and Trade Sanctions Risk 74 (High) TREND ▼ ▼
The local currency has been remarkably steady since October, even though it traditionally weakens in the winter months. The hryvnya’s recent resilience reflects an improving balance of payments resulting from growing exports and active borrowing abroad. For the same reasons, however, the current stability may end quickly once the balance of payments situation starts to worsen. Moreover, it remains extremely vulnerable to domestic political crises, which could well prove a feature of 2019. In December, Ukraine once again extended its reciprocal trade sanctions on Russia for another year, after which Russia extended its own list of sanctions. This now includes a range of agricultural, food and industrial products.
Sovereign Default Risk 65 (Medium-High) TREND ▼ ►
Even though Ukraine’s debt situation has recently improved, it still remains challenging. In 2019 the country needs to pay a total of 6.4 billion dollars on its external debt obligations. Fortunately, in December the IMF finally approved a new lending programme for the country that provides a stand-by credit line of 3.9 billion dollars within the next 14 months. The first tranche of 1.4 billion was disbursed quickly, with two more to follow at half-year intervals so long as the government meets the Fund’s conditions. The IMF move has also re-opened lending from other sources, such as the Word Bank and the European Union. As a result, the central bank’s foreign reserves began 2019 at a five-year high of almost 21 billion dollars, although this remains much below the record of 38 billion dollars reached before the 2008 crisis.
