Previous Quarterly Editions
Expropriation Risk: 66 67 67 64 Political Violence Risk: 44 40 38 36 Terrorism Risk: 40 38 36 38 Exchange Transfer and Trade Sanction Risk: 82 79 78 76 Sovereign Default Risk: 65 64 65 65
TREND ▼ OUTLOOK ▲
The last few months have seen little, if any, progress in resolving the Donbas conflict in the east of the country, which is now in its fifth year. A meeting of foreign ministers from the Normandy Four countries in June, the first since early 2017, held an inconclusive discussion about the provision of international peacekeepers but did little else. Nor have there been significant changes in the situation on the ground, where a ceasefire is technically in place across the whole frontline dividing the Ukrainian army and Russia-backed separatists from the two self-declared 'republics'. The first half of 2018 saw a similar period of tense calm now that the threat of a snap legislative election has receded, the second half will be dominated by the looming and potentially pivotal presidential election due in March 2019. The results of that vote will have a significant impact on the regular parliamentary elections six months later. Even if the current president, Petro Poroshenko, is re-elected for a second term, this will not guarantee electoral success for his own party or its coalition partner. However, if he loses, they will have very little chance of retaining power and the political complexion of the country will have changed by late next year. With the presidential vote more than six months ahead, polls suggest that Poroshenko is no longer one of two front-runners and so would not reach the second round. His main rival, Yulia Tymoshenko, appears to head a large field but most voters remain undecided amid continuing claims of political corruption. The economy is strengthening on growing domestic demand helped by rising remittance levels and greater manufacturing output, especially in the auto sector. Growth should be around 3.3% for 2018, up from 2.5% last year, and inflation is currently in single digits. However, growth remains fragile and vulnerable to external shocks.
TREND ▼ OUTLOOK ►
Ukrainian gas distributor Naftogaz said in June that a Netherlands court had approved the seizure of local assets belonging to Russian energy giant Gazprom. Naftogaz is trying to seize Gazprom assets outside Russia to cover a 2.6-billion-dollar award by a Stockholm arbitration court in February. The money is the net sum owing from awards made to both Naftogaz and Gazprom in mutual legal claims. Although legal claims, counter-claims and appeals will drag on, the two sides are still quietly seeking a workable transit arrangement for gas. There have been no new moves by the authorities so far this year to nationalise assets that they say were acquired illegally under the former regime. In June, a local economic court of review suspended the case that would cancel the privatisation of telecoms giant Ukrtelecom and return it to state ownership.
Except for a few minor provocations during the Victory Day celebrations in May, outbursts of political violence have been rare in recent months. Large-scale political street activism has waned since the wave of marches and rallies against President Poroshenko in late 2017 and early 2018 that involved supporters of opposition leader Mikheil Saakashvili, who was deported to Poland in February. After that move, police cleared the opposition tent camp near the parliament building and the protests ceased. More demonstrations are probable as the presidential election approaches, but they are more likely to be peaceful than violent.
TREND ▲ OUTLOOK ►
In so far as Ukraine faces the threat of terrorism, it is in connection with its all-round conflict with Russia. The seriousness of this threat was supposed to be underlined by the faked murder of Russian fugitive journalist Arkadiy Babchenko in Kyiv in late May. The Ukrainian security service says it needed to stage his death in order to uncover terrorist links, but the case has so far produced more questions than answers. The current stalemate in the eastern region seems to have reduced the risk of more random acts of terrorism, but the government is aware of the vulnerability of the country’s infrastructure to both physical damage and, more worryingly, cyberattacks.
Currency volatility in Ukraine remains an ever-present issue. Helped by the renewed growth in exports, the hryvnya held steady against the major currencies for much of the first half of the year. When it suddenly began to slide again in July, it was not clear whether its seasonal weakening had simply begun early or if other factors were involved. As if anticipating the currency’s reversal, after a four-month pause in July the central bank once again resorted to raising interest rates, albeit only marginally thus far. At the end of 2017, Ukraine extended its reciprocal trade sanctions on Russia, imposed following Moscow’s embargo on Ukrainian agricultural exports, for another year. In late May, the Ukrainian National Security and Defence Council adopted a new package of sanctions against Russian individuals and companies engaged in several financial sectors.
TREND ► OUTLOOK ▲
Although Ukraine has managed to reduce the level of public debt from 81% to 66% of GDP over the last three years, it continues to face significant payment pressures. As of mid-July, the country needed to make total payments of around 3.7 billion dollars on its external obligations (debt remittance and service payments included) before the end of the year, with a further 5.7 billion falling due during 2019. Neither figure looks insurmountable, even with the recent fall of foreign reserves to 17.7 billion dollars in August, but the government is hoping to avoid spending reserves by regaining access to multilateral financing. The next tranche of its 17.5 billion dollar IMF Extended Finance Facility (EFF) loan programme has been delayed since mid-2017 because the Fund has not seen sufficient progress on fighting corruption or raising domestic gas prices to import levels. If there is no progress in talks with the IMF, the government will probably revisit the Eurobond market but at a considerably greater cost than when it last did so in September 2017.
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