Ukraine: Risk Assessment
Due to the ongoing political unrest and annexation of Crimea by Russia, the information on these pages may not reflect current conditions in the country.
Country Risk Rating
Business Climate Rating
- Strategic position in Europe: transit point for 40% of Russian gas shipments to the EU
- Association and Free Trade Agreement with the European Union (2016), enabling a reorientation of foreign trade
- Significant potential in agriculture, with 55% arable land (wheat, maize, barley, rapeseed, sunflower, beet, soybeans), and in metallurgy (iron)
- Skilled and low-cost labor force
- Rigorous fiscal and monetary policy
- Low debt levels among economic participants (except the State)
- International financial and political support although conditional on reforms
- Conflict with Russia and Russian-speaking populations in the Donbass region, affecting territorial integrity and preventing EU entry, but reopening of negotiations in “Normandy” format
- Business environment marred by corruption (notably in the justice system), oligarchy and monopolies, weak property rights, a lack of competition and inefficient public services
- Low economic diversification; sensitivity to weather and commodity prices
- Declining demographics; regional inequalities featuring poverty and the informal sector
- Credit constrained by doubtful loans (49%) and high real interest rates
- Managed float of the hryvnya; continued restrictions on capital movements
Firm growth based on consumption
As in 2019, activity will be driven primarily by household consumption (3/4 of GDP). Against a backdrop of emigration and a shortage of skilled labor, but also because of a continued (albeit smaller) increase in the minimum wage, wages will continue to rise. Households will also benefit from expatriate remittances, which make up 10% of their income. An estimated 5 million Ukrainians, or one-quarter of the labor force, work abroad, mainly in Poland, but also in Hungary, the Czech Republic and other countries. Inflation may be lower due to the easing of energy and food prices linked to the decline in world prices, while the hryvnya is expected to be resilient. Consumption will again benefit trade and freight transport. Investment is expected to grow again, but its GDP share (17%) is stagnating due to the conflict with Russia, the poor business climate and credit, which is constrained by high cost and the amount of impaired loans (49% of outstanding loans, although 90% covered by provisions). Despite monetary policy easing in 2019, with the key rate reduced to 15.5%, the average interest rate on hryvnya loans was 20.6% in October 2019 compared with 4% for those in foreign currencies, which still make up 40% of the outstanding amount, despite a decrease in their distribution. The contribution of trade is set to remain negative. Exports will continue to be affected by low prices for agricultural products (40% of total exports), iron and steel (25%) caused by sluggish global demand. However, this price effect should be partially offset by an upturn in shipments due to a further sharp increase in harvests for the 2019/2020 season that will benefit agriculture (12% of GDP). Conversely, strong domestic demand will drive imports, particularly of consumer goods and machinery.
Debt relief but external vulnerability
Thanks to strong growth, inflation and the primary budget surplus (i.e. excluding interest on debt), public debt (53% external and 67% in foreign currencies at the end of September 2019) is expected to decline further in 2020 as a % of GDP. However, the reduction, which was very pronounced in 2018 and 2019, may be smaller, as the hryvnya could depreciate slightly. The overall deficit is expected to remain slightly above 2%, in line with the recommendations of international organizations. With the conflict in the eastern regions (Donetsk and Lugansk), which are controlled by Russian-backed separatists, military spending will remain high (1/5 of spending and 8% of GDP). Combined with wages, pensions and social transfers (50% of expenditure between them), little room is left for investment, especially as public revenues represent just 26% of GDP.
If its private share (63% of the total) is added in, the external debt to GDP ratio stood at 76% at the end of 2019. Private debt has declined significantly in parallel with the decrease in the public portion. In 2019, debt repayments could amount to USD 14 billion (9% of GDP). The current account deficit is expected to increase slightly in 2020, as expatriates’ employee compensations and remittances (9% of total GDP) coupled with road and gas transit revenues (2%) are not enough to offset debt interest and the trade deficit (10%). Meanwhile, foreign exchange reserves cover just 3 months of imports. FDI inflows amounted to only 1.5% of GDP and, moreover, 20% of this is round-tripping capital. Accordingly, covering the financing requirement will depend on market involvement and the execution of the new agreement with the IMF. Market interest will be maintained by high-interest rates, while a USD 5.5 billion Extended Credit Facility over three years was concluded with the IMF at end-2019.
Reforms and conflict in the east of the country
In April 2019, Volodymyr Zelensky, a 41-year-old actor and TV producer, won the presidential election with more than 73% of the vote, after entering politics four months earlier. He was previously known for his self-written role in the TV series “Servant of the People”, where he played a history teacher thrust into the presidency to rid his country of corruption. Voters and donors expect him to make progress in fighting corruption and resolving the Donbass conflict. The absolute majority (251 seats out of 450) obtained by his Servant of the People Party in the July 2019 legislative elections may make this task easier. In the area of corruption, MP immunity has been abolished and a procedure for impeaching the President has been introduced. As regards the conflict, relations have warmed somewhat. Provided the withdrawal of Russian troops and the restoration of control over the international border, the President has agreed to the Steinmeier Formula established under the 2015 Minsk II agreements, which specify elections and autonomy in the Donbass region. However, disagreement persists on the sequencing of these stages. This conflict, as well as the opening of the Turkstream and Nord Stream 2 pipelines by 2020-2021, could jeopardize the transit of Russian gas to the EU already reduced by the new five-year agreement signed between Gazprom and Naftogaz at the end of 2019 under the EU aegis. These issues, along with the sale to foreigners of farmland, represent risks for the President. He has also become embroiled, despite himself, in American domestic politics after his telephone conversation with Donald Trump, while there are questions over his relationship with billionaire Ihor Kolomoisky, who supported his rise to power and who wants compensation for the nationalization of Privatbank (cost: USD 5.5 billion).