Ukraine’s East vs. West Problem Confounds Investors

The Eastern European country is trying to get its economic footing with help from anyone but Russia.

Ukraine is dangling precariously between a Western-oriented, idealist future and its Soviet past. The next year is likely to prove pivotal in determining which way the country swings.

When president Viktor Yanukovych, at Moscow’s behest, pulled the plug on an Association Agreement with the EU in November 2013, protesters who regard Europe as vital to the country’s safety and prosperity took to the streets by the tens of thousands. The so-called Maidan Revolution forced the president to flee three months later. His successor, Petro Poroshenko, revived the EU agreement but has yet to deliver the kind of economic and political reforms that the uprising’s backers had envisaged. The collapse in early April of the reform-minded government of prime minister Arseniy Yatsenyuk cast a fresh cloud over the reform outlook.


Endemic corruption continues to plague Ukraine. In February, Aivaras Abromavicius resigned as minister of Economy and Trade, saying he had no desire to provide cover for “covert corruption” by people who “are trying to exercise control over the flow of public funds.” The subsequent disclosure in the Panama Papers leak that Poroshenko had set up an offshore holding company for his candy business drew criticism from opposition parties and fanned concerns about the government’s commitment to reform. After months of rising tensions, Yatsenyuk and his high-profile Finance minister, U.S.-born Natalie Jaresko, resigned in early April. Parliamentary speaker Volodymyr Groysman quickly took over as prime minister, but he will have to work quickly to reassure foreign creditors. “It will be very difficult to form an economic team as respected and as committed to reform as the one that worked under Minister Jaresko,” says Nicolas Jaquier, emerging-markets economist at Standard Life Investments in London.


The top priority will be to persuade the International Monetary Fund to resume disbursements under its $17.5 billion loan package. That deal, agreed upon last year, helped stabilize finances and enabled the government to restructure $15 billion in foreign debt. But the IMF has put a hold on the next planned disbursement, of $1.7 billion, because of “slow progress in improving governance and fighting corruption, and reducing the influence of vested interests in policymaking,” managing director Christine Lagarde said in a statement in February. Despite the delay, “investors remain confident that funding will resume with the new government, so that bond prices have not reacted overly negatively to the governability crisis,” says Jaquier.

Meanwhile, the conflict with Russia-backed separatists in eastern Ukraine has sapped government resources and deterred investment, notwithstanding a cease-fire agreed to last September. “There were more recorded cease-fire violations in the first week of March than at any time since August 2015,” Victoria Nuland, head of the U.S. State Department’s Bureau of European and Eurasian Affairs, told the Senate Foreign Relations Committee in March.

Earlier this year Ukraine and the EU provisionally put into effect a free-trade deal under the Association Agreement, only to see Russia suspend its own free-trade treaty with Kiev. Ukraine also faces resistance in the West. In early April nearly two thirds of Dutch voters rejected the Association Agreement with Ukraine. Poroshenko and EU leaders vowed to deepen their relationship despite the nonbinding referendum, but the vote is likely to at least slow implementation of the deal.

Amid all the problems there are some early signs of recovery. The IMF projects the economy will grow by 1.5 percent this year compared with a decline of nearly 10 percent in 2015. Inflation, which hit a peak of 60 percent last year, dropped to 20.9 percent in March. The hryvnia, which lost about one third of its value against the dollar in 2015, has recovered 6 percent since early March, benefiting from the recent rally in emerging-markets assets.

To sustain the nascent recovery, the new government will need to reassure Western governments and investors of its commitment to a reformed, Euro-friendly government.