Economically things in Ukraine are not doing too badly. Politically they have been a disaster in the last two months.

Ukraine GDP rebounded by 8.5% q/q in Q3, which pulled the year-on-year growth rate up to -3.5% as the economy started to recover from the shocks earlier in the year.

At the same time both nominal and real incomes have been rising as inflation stays low and trade recovers.


The National Bank of Ukraine (NBU) continues its success at controlling inflation – one of the outstanding achievements of the last year. Price pressures in Ukraine remain weak, with the headline rate at just 2.6% y/y in November – a post Soviet low.

The central bank is likely to keep the policy rate unchanged for now and the outlook is highly contingent on the IMF deal remaining intact. Nonetheless, Ukraine’s financial markets still benefited from the broad recovery in global risk appetite as dollar bond spreads have fallen sharply and in the first days of December there was even talk to tapping the international capital markets for another Eurobond issue.

The latest activity data point to the recovery continuing at the start of Q4. This has been largely driven by a strong recovery in retail sales, which shows no sign of letting up. In contrast, industrial production remains well below its pre-virus peak due to the lagging manufacturing sector.

The coronavirus epidemic second wave gathered momentum in the last two months threatening to derail the recovery story as infection levels soared to record highs and threatened to overwhelm the health system. At the end of November the government had more or less committed to another lockdown, despite the economic damage that will do.

But lockdowns will be very hard to enforce as regional governors already defied an order for the highly unpopular weekend lockdown.

The main political problem was caused by the Constitution Court decision to nix several key anti-corruption laws, including a mandatory requirement for all public officials to electronically declare their income and assets, and to decriminalise the consequences for ignoring this mandate.

As one of the key strings attached to the International Monetary Fund (IMF) $5bn Stand by agreement (SBA) programme the fund has de facto suspended the SBA until those laws are returned to the books. A $700mn tranche due this autumn will not definitely not arrive.

The government is fairly sanguine about the situation as with just over $26bn in reserves, or some 4.4 months of import cover, and little debt to pay in the near term it can cope without the IMF money for now.

But next year will be a lot more difficult. With a total of $14.5bn to redeem in 2021, of which $11bn comes due in the third quarter, and a circa 6% of GDP budget deficit to finance the government simply does not have enough cash to get through the year without the IMF’s help or seriously depleting its reserves which would cause a financial and currency crisis.

As this is Ukraine and the government usually cobbles together some sort of deal in the face of an emergency the same is likely to happen next year, but the uncertainty will further damage Ukraine’s already very poor investment image.