Country risk reference rating: level 7 (7/9)
Country Risk Outlook: Negative
◆Political Risk
Ukraine is facing internal and external difficulties. Externally, it is caught in serious conflicts and confrontations between Russia and the West. Internally, pro-Russian and pro-Western forces are deeply divided, and national stability, security and unity are facing threats. Ukraine’s future political direction depends not only on compromise between the major external forces, Russia, the United States and Europe, but also on internal political reconciliation to deal with the current comprehensive crisis. Ukraine’s future trend is still full of uncertainty and political risks are extremely high.
Historically, successive Ukrainian governments have sought to expropriate the assets of supporters of political opponents and then re-privatize them. If foreign investors fail to meet conditions in certain aspects, including liquidation of debts, salary arrears, wage increases, asset management, etc., the government has the power to renationalize.
Ukraine’s currency originally adopted a policy of pegging to the U.S. dollar. In order to curb capital flight and currency depreciation, the Central Bank of Ukraine was forced to abandon the pegging of its currency to the U.S. dollar in early 2014, adopt a flexible exchange rate approach, and implement capital controls, including restrictions on private capital. flow overseas, prohibiting the use of foreign currencies for acquisitions in overseas investments, etc.
◆Economic Risk
In the short term, Ukraine’s economic risks are still rising. Actively seeking external assistance is an important guarantee for Ukraine to implement stable economic and structural reform policies.
Ukraine’s economic structure and economic development model are imperfect, rely heavily on the external market, and have a relatively single source of export revenue. Political fluctuations have had a great impact on the Ukrainian financial market, and the monetary policy of the Central Bank of Ukraine has gradually shifted from easing to substantial tightening. The most important goal of Ukrainian monetary policy in recent years has been to support a real fixed exchange rate of the hryvnia pegged to the U.S. dollar. In April 2014, the National Bank of Ukraine sharply raised the benchmark interest rate in order to curb the continued depreciation of the hryvnia.
From the perspective of macroeconomics, financial system, fiscal situation, international balance of payments, sovereign debt and bilateral economic and trade, the tightening fiscal and monetary policies adopted by the Ukrainian government after the domestic unrest are conducive to reducing the deficit and stabilizing the economy. However, due to the high proportion of short-term foreign debt, Ukraine’s economy will fall into recession in the short term, and there will still be certain vulnerabilities in the long term.
◆Business environment
Ukraine is a country with foreign exchange controls, and remittances of funds from foreign exchange accounts abroad must be reviewed by the National Bank of Ukraine. Foreign enterprises registered in Ukraine can freely open foreign exchange accounts in designated banks for business activities, import and export, and capital settlement. There are also corresponding restrictive regulations on the import and export settlement of foreign exchange by enterprises and the carrying of foreign exchange cash.
Article 20 of Ukraine’s foreign investment system stipulates that foreign-invested enterprises pay taxes in accordance with Ukrainian laws, but imported fixed assets are exempt from customs duties. The ongoing chaos has led to a decline in Ukraine’s ability to attract foreign investment.
The Ukrainian labor force generally has a good education level, workers work hard and have high production efficiency. Due to the low wage level in Ukraine, many intellectuals and technicians have to work abroad or immigrate abroad, resulting in serious brain drain.
In 2014, Ukraine’s business environment will deteriorate under the politically turbulent social environment. The new government formed after the presidential election will make plans to improve the business environment and attract foreign investment, but the effect is still unclear, so the risk outlook for the country’s business environment is negative.
◆Policy suggestions
In view of the unstable situation in Ukraine, it seems difficult for Russia and the West to find a compromise out of the crisis in the short term, and the chaos in the eastern region will continue. Suggestions for the direction of Ukraine include: closely tracking the unrest in eastern Ukraine. The military conflict between the government and pro-Russian armed forces in the east continues and is likely to worsen. We should pay close attention to the changes in the situation, especially the policy trends of the EU, the United States and Russia on the Ukraine issue.
Since 2013, domestic unrest in Ukraine has triggered political turmoil and economic recession. The government has tried to adopt fiscal and monetary policies to protect the economy while seeking assistance from the international community. Balancing the interests of the country’s pro-Western and pro-Russian factions is key to ending the internal unrest.
The Ukrainian government has formulated a series of stabilizing macroeconomic policies and reform plans. Whether these policies can produce results is very critical for Ukraine to get out of the crisis. In addition, attention should also be paid to whether assistance from international organizations or European and American countries can effectively alleviate the debt pressure and economic difficulties faced by Ukraine.
The “National Risk Reference Rating” is divided into levels 1 to 9 (9 levels in total), with risk levels increasing in sequence.
