Ukraine: Political, Economic, and Social Risk

Ukraine is an independent nation in Eastern Europe bordering Russia to the east. Previously, the country was part of the Soviet Union before it became a sovereign country in 1991. At this time, the country was one of the poorest countries in the Soviet Republics (Kukuła, 2016). In the early 1990s, the state started its economic transformation with a comparatively high stock of capital and better infrastructure. Therefore, it was hoped that Ukraine would attain a liberal market democracy with its entry into the European Union (EU). Ukraine modern culture is the production of two civilizational and cultural traditions, which were related politically with the Western World and Russia. Each of these traditions played a critical part in the identity of the citizens of these lands. After the development of an independent country on the ruins of the Soviet Union, it discovered itself on the crossroads of powers of the West and Russia (Howell, 2008). However, the country has experienced a wide range of political, economic, and social crisis. The primary challenge for the integration of the country in the West is due to the oligarchic structure and lower level of transparency, reforms and real democracy in the civil community. The effort to “Westernize” the country caused widespread protests on Maidan and the coup d'état of Yanukovych’s regime leading to severe intra-state crisis and international confrontation between Russia and the West (Thomson et al., 2014). The paper will examine the political, economic, and social risk of Ukraine.

Social risk status

Ukraine has over 45 million persons. It is the twentieth largest producer of greenhouse gases due to cement production and consumption of fossil fuel in the planet. However, high population density increases the emission of CO2. Precisely, 366 metric tons of CO2 was released in 2012. The carbon concentration of the nation’s economy is nearly five times the global mean (Haukkala, 2015). The infant mortality rate in the country has registered a significant decline over the past decades. In 2015, the country recorded 7.77 deaths per thousand live births as compared to 24.8 deaths per thousand live births in 1965. The life expectancy in the country is 72.5 years where females have a life expectancy of 77.1 years while males have 67.6 years. Ukraine has a high literacy rate. In 2015, 99.8 percent of adults had above average literacy rate, which means a significant number of people above 15 years can write or read and understand a short or straightforward statement in the daily life (Cordero & Simón, 2016).

Over the past decade, the rate of unemployment in the country has remained high in spite of a well-educated population. In 2017, the rate of joblessness was nearly 9.5 percent of the entire labor force as compared to 6.35 percent in 2007. Due to the economic and political crisis, the rate of unemployment is increasing which will reduce the GDP (Kukuła, 2016). Based on the rating of ease of doing business report by the World Bank, the country was position 80 globally in 2017. It has initiated various measures to facilitate enabling conditions for growth of private investments and businesses (Thomson et al., 2014).

Ukraine is also a hub for organized crime because the nation is a transit region for drug trafficking, human trafficking, and illegal migration. The country creates a profitable local market for cannabis (Howell, (Ed.) 2001). The national cocaine or heroin market is restricted to larger cities because of the reasonable prices for these products. Besides, businesses experience a threat of cybercrime. Notably, deep-rooted corruption marks the country to be an attractive habitation for organized offenders (Leitner et al., 2015).

Ukraine is categorized by regional and linguistic cleavages, which are evident in regional polarization in local elections. The splits have been a source of unending civil wars and violence. It also contributes to secessionist groups (Simmons, Stokes & Poushter, 2015). Xenophobia is Ukraine is a serious problem especially among people of color, the LGBT community, international students, displaced and homeless people (D'anieri, 2007). The socially susceptible persons are at risk of discrimination in the country.

The nation’s judicial system is based on the Soviet legal system which mostly ineffective and lacks transparency. The independence of the judiciary is not guaranteed. It is essential for the government to develop a judicial system that is corruption-free and autonomous from political influence (Cordero & Simón, 2016). Nepotism is a widespread administrative, economic and political practice in the country. The vice is contributing to the rise in corruption.

In 2008, Ukraine joined the World Trade Organization (WTO). As a result, the intellectual property law has been enacted and matched with the international treaties (Trenin, 2014). The new amendments adhere to the requirements of the WTO to safeguard property rights in accordance with the structure of the Agreement on Trade-related Aspects of Intellectual Property Rights (TRIPS agreement). It also ensures the protection of patent rights (Thomson et al., 2014). Ukraine is a nation, which faces a high risk of workers strike especially due to poor remuneration and working conditions. In the recent past, miners were involved in industrial actions where thousands of employees in a coal company owned by the state demanded unpaid salaries (Hutchings & Szostek, 2015). There is a build-up in arrears, which has increased uncertainty on the viability of the coal industry. Selidivvugillya Company has frequently failed to remunerate its staff. Strikes have ensued in this industry since 2017 due to political, economic and military complications in the country. In Donbas and Crimea, most of the Ukrainian Jewish, Muslims and Christians are facing ‘orthodox extremism’, which is driven by headship of Russian Orthodox Church (Simmons, Stokes & Poushter, 2015). Subsequently, many people suffer from atrocities.

Economic risk status

Ukraine has suffered from the financial crisis of 2011 coupled with the recession from 2012-2015. The violent conflict witnessed in the country between separatist groups and government forces in 2014 and 2015 worsened the financial crisis in the nation (Delcour & Wolczuk, 2015). At the same time, the nation was engaged in severe disputes with Russia after the latter seized Crimea and backed the pro-self-rule groups. Following the signing of the second ceasefire treaty in 2016, the fighting reduced but later re-emerged (Haukkala, 2015). In 2014, the economic recession greatly affected the economic growth causing -6.6 percent and -9.8 percent growth. In 2016, the slowdown in the economy has dramatically reduced since the country has registered a +1.5 percent growth in the GDP and +2 percent in 2017. Moreover, the annual GDP level in 2017 was -13 percent and -22 percent below the mark in 2012 and 2008 which were period prior to the global financial crisis that greatly affected the country. Furthermore, the downside risk to experts forecast exists, comprising disturbances to global funding programs and political instability intensification (Cordero & Simón, 2016).

The risk in Ukraine’s exchange rate continues to be relatively high. Since 2014, the nation’s currency has significantly lost its value. The currency has been rated at 1:30 against the US dollar as the central bank stopped FX interferences since its FX reserves had dropped significantly (Arslan et al., 2015). Following the recovering from that overextending, the UAH has continued to decline from mid-2015 due to the lasting disturbance in the IMF lending program. Essentially, after losing more than 50 percent of its worth against the US dollar in 2014, 33 percent in 2015, and 12 percent in 2016, the UAH status is at a ratio of 1USD:27 UAH. Therefore, it has lost approximately 71 percent of its value from the end of 2013 (Leitner et al., 2015). Despite the narrowing of the gap between middle rate on the FX cash market and the formal exchange rate in 2016, experts anticipate downward forces on the currency and the continuation of depreciation in 2018, although at a more restrained rate (approximately -10 percent) with spells of instability being highly likely (Wolff, 2015).

The country still suffers from high public debt levels. In 2016, the federal debt hit 81.2 percent of the GDP while in 2017; the public debt reached 86.2 percent of the GDP before reducing to 83.5 percent in 2018. The Ukrainian authorities forecast the level of public debt will be 71 percent of the GDP by 2020 (Simmons, Stokes & Poushter, 2015). In addition, the fiscal balance of the country is anticipated to remain negative (-3 percent) in 2018 down from -3.3 in 2017 (Thomson et al., 2014). Since the public debt is over 81 percent of the gross domestic product while 49 percent of it is from the international financial institution, the fee of repaying the debt is rising because of depreciation of the local currency. For this reason, the public capitals are in a delicate state (Haukkala, 2015). In 2018, the trade deficit was anticipated to decline to approximately 4 percent of GDP. The recovery in exports of agro-food products and the growth in machinery, metal, and mineral, to both the Commonwealth of Independent States (CIS) and the European Union (EU), will also have an effect (Wolff, 2015). Revenues from remittances and transport from emigrant employees in Poland and Russia will balance Ukrainian tourist expenditure and the dividends repatriation. The existing account deficit could be funded via IMF loans, multilateral loans and foreign direct investment (which have reduced due to political reservations). The external debt is expected to reach 110 percent of the gross domestic product (Cordero & Simón, 2016). The local currency depreciation is likely to carry on, with the magnitude based on the rate of reforms and the environment in eastern regions. Limitations on movements of capital will likely remain in operation (Howell, 2008).

Ukraine has also experienced rising level of inflation, which has hit a double digit. High inflation caused the severe UAH depreciation in 2015 and 2016 of up to 60 percent. In 2017, the inflation rate as recorded at 12 percent (Delcour & Wolczuk, 2015). Experts forecast that the inflation rate will continue to be high in 2018 and beyond which will force the central bank to hike its interests rate based on the monetary policy to 30 percent. The financial system has recorded a very high risk. For instance, the banking sector hurts because of the extremely high level of non-performing loans and demands additional recapitalization (Arslan et al., 2015). Furthermore, dollarization also creates a problem because it will increase pressure on liability-asset mismatches. The government has up-surged external exchange funds, but their levels remain quite low.

Furthermore, the risk of external liquidity has remained high. A crisis on balance-of-payments emerged in 2014 as the present deficit on account of -3.4 percent of the gross domestic product was joined by a considerable capital deficit account of -7.1 percent of the GDP because of capital flight (Mearsheimer, 2014). Consequently, FX reserves reduced to $4.7 billion in 2015 notwithstanding the global financial support. Furthermore, in 2016, the existing deficit of account increased to -4 percent of the GDP, but the net inflows of FDI entirely covered it while the capital account tilted back to a surplus of +5 percent of GDP. Therefore, it helped in the mitigation of the balance-of-payments challenges to some degree (Wolff, 2015).

Uneven IMF program performance left public funds in the precarious stage. Therefore, public finances have quickly worsened since 2012, with the fiscal deficit rising to -10.1 percent of the GDP in 2014 (Kukuła, 2016). Subsequently, the country witnessed losses in the national company of gas (Naftogaz Company), unpaid imports of gases, and arrears in VAT refunds (Kuzio, 2016). In 2015, the government entered a contract on a fresh IMF Extended Fund Facility (EFF) project for $17.5 billion, which was expected to run for four years. However, the agreement increased the total obligation to fund and other resources from the global community to more than $32 billion. The internal wrangles within the government and build-up of foreign payment arrears have delayed the disbursement of $1 billion tranche by over one year (Thomson et al., 2014). Consequently, the fiscal deficit has reduced in 2015 to -2.1 percent of the GDP but increased again in 2016 to over -4 percent and was expected to increase further in 2017 and 2018. Primarily, the level of public debt rose from 37 percent to 93 percent between 2011 and 2016. For this reason, public finances continue to be a severe risk and threat to the economic recovery efforts (Wolff, 2015).

Political risks status

Studies have indicated that the political risks in Ukraine remain high due to ongoing conflicts with neighboring nations such as Russia (Sakwa, 2014). In 2014, Petro Poroshenko, a renowned Ukrainian politician, and businessperson, won the presidential elections. His victory followed the removals of former President Yanukovych due to bloody suppression on the “Euro-Maidan” protest of 2013-14. The protests were prompted by the decision of Yanukovych not to ratify the EU Association Agreement in 2013, which widened their attention to comprise provisions of fighting corruption and promotion of transparency (Cordero & Simón, 2016). Since 2014, the Ukrainian government has been led by pro-EU political under coalition administration who expressed their commitment to perform detailed economic and political reforms. The coalition government has encounter instability after several parties, which were part of the government, formed the opposition. Consequently, they established an unstable majority in the ruling coalition that has hindered the ability of government to enact new legislation (Kuzio, 2016).

Ukraine is presently grappling with a myriad of problems such as military action in Donbas region (Van de Graaf & Colgan, 2017). Although the coalition government led by Groysman and Yatsenuk has prioritized reforms, the paces have been quite slow and are experiencing distress from prolonged internal political disputes (Mearsheimer, 2014). For instance, de-oligarchisation, deregulation, decentralization, judiciary reforms, and dealing with corruption are some of the issues contributing to the tense political environment. Corruption levels in Ukraine are incredibly high. Recently, the IMF has encouraged the government to step-up the fight against corruption. The nation is placed in position 131 out of 176 countries in terms of the index of corruption perceptions (Arslan et al., 2015).

The unlawful invasion of Crimea has created a political dispute between Russia and Ukraine. In 2014, Russia illegitimately occupied Crimea after a ‘referendum’ on the region, which contravened the Ukrainian law. Subsequently, the area has witnessed serious decline in access to justice, human rights violation and severe economic deterioration. The EU and other G7 countries have not acknowledged the annexation of the area terming the exercise as an abuse of international obligations and commitment, which Russia is a party (Thomson et al., 2014). For instance, Russia breached the OSCE Helsinki Final Act, UN Charter, and the Partition Agreement on Conditions and Status of the Black Sea Fleet of 1997. As a result, the EU has enacted sanctions against the Russian government for its actions (Lehne, 2015). Moreover, the armed conflicts observed in the area increase the risk of national security. In recent times, the Russian government has supported the separatist group and created a new nation in Ukraine referred to as Malorossiya (Kuzio, 2016). 

The southern and eastern parts of Ukraine have been under the control of pro-Russian separatists, which have generated unrest in the region since 2014. The government of Ukraine has initiated an anti-terrorist program aiming to regain control of the areas. The Ukrainian government has succeeded in its efforts in the southern parts of the nation especially in areas such as Odesa that is currently non-violent (Mearsheimer, 2014). However, violence is ongoing in the eastern regions especially Luhansk and Donestsk areas, which has stayed under the control of separatists groups. The government introduced the Minsk Package of Measures intending to conclude the menace but the efforts have been prolonged further (Wilson, 2014). Therefore, the security conditions of Luhansk and Donestsk continue to be most unstable with constant conflicts between armed separatist groups and Ukrainian defense forces.

Conclusion

Ukraine is facing severe challenges, which poses high political, social, and economic risks. The economy is gradually improving after an extended period of recession. The recovery recorded improvement in 2016. The level of public debt continues to be a significant problem although the administration has reduced the budget deficit. The annexation of the eastern parts of Ukraine (Crimea) by Russia negatively affects the growth of the economy (Kukuła, 2016). It has also increased the political instability of the country. The country experiences high levels of corruption, unemployment, and national insecurity as well as inflation. Therefore, Ukraine has a highly risky business environment.

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